A recent survey conducted by CareerBuilder.com seems to indicate that 61% of American workers are living paycheck to paycheck, a figured that has increased each of the last three years. Granted that a survey done by CareerBuilder is not on par with studies done by a government institution such as the Bureau of Labor Statistics, but all the same, that is a staggering figure (at least I was staggered).
Even more crazy is the results showing that nearly a third of people making over $100,000 a year live paycheck to paycheck. I didn’t see anything that indicated that these values were adjusted for single vs dual income homes, or adults with dependents, or adjusted for cost of living, but still.
A troubling result of this trend indicated by CareerBuilder is the number of people either cutting back on 401(k) contributions, or even taking money out of their accounts. Obviously this is not the ideal situation, but we all know people who have done this. The tax implications are huge, plus the fact that you’re losing out on all future profits from the investments that you’re cashing out make it a potentially disastrous decision. It feels a little bit like robbing Peter to pay Paul. You can catch up, but it isn’t easy. Most likely those gains you would have had are gone and aren’t coming back. But sometimes you have no choice.
The advice given in the article is pretty boilerplate (keep a budget, boost your income, talk to your employer). However, that doesn’t mean that it’s worthless. Managing finances is an on-going task, and sometimes it’s useful to be reminded of what we need to do to stay on track.
I’ve been very blessed in my life to not have to live paycheck to paycheck. Since moving out on my own after college, there has been a few close calls however. I moved out here with just enough money to cover my security deposits and a couple bills. I wasn’t making much at my first job, but it wasn’t a big deal. Until the fuel pump on my car broke. All of a sudden I have one massive bill that needs to be paid off and I’m barely a month into my first job out of college. My finances were razor thin for a couple months as I worked to build my bank account back to a comfortable level. And although I did bounce one check (very embarrassing) it wasn’t long before I was able to get back on my feet and make everything ok (and I’m very fortunate to have people in my life that I could have turned to if I wasn’t able to turn things around).
I can’t make a comparison between that situation and those people who live paycheck to paycheck continuously. But for a brief moment, I did understand what it was like to look at a bank statement and see that there’s only $30 bucks in there and it needs to last until the next pay period. The stress was intense for me in just that short period of time; I can’t imagine doing it month after month, stressing over every bill, every paycheck; worried about where the next unexpected bill is going to come from.
So what can be done about it? There are the obvious answers everyone gives: cut down on your expenses, move to a cheaper area, find a better paying job, etc… But sometimes there isn’t anything that can be done to reverse a bad situation like that, especially with the unemployment rating flirting at around 10%. If you have the ability to, though, live frugal and use the savings to build wealth for the even “tougher” times that could come our way.
Readers: Have any of you experienced the paycheck to paycheck life? How did you cope with the stress? What was/is your plan for digging yourself out?
Our posts have been educational recently. This one has more of a practical bent. Here are four things we’re doing to build and create wealth. You can do all of them are relatively painless and can be implemented without a whole lot of time commitment.
1) Selling Blog Links. As you’ve probably gathered by now, this blog is a moneymaking venture for us DINKs. One of the ways we make money blogging is by selling links on this blog to finance related companies who are looking to improve their search rankings. Well, we decided to start selling link on Miel’s travel blog as well. We don’t anticipate much more than 5 or 10 bucks a month, but that’s way better than nothing. Her blog is here. Of course, you need a blog to do this, but you if you are up for it it can be a great money making opportunity. Miel updates hers once per month, so there isn’t a ton of effort put into it.
2) Moved some cash from savings into bonds. We had $500 bucks sitting in a savings account. While savings accounts are great for liquidity and convenience, interest rates are absolutely the pits these days. So, I moved the funds over to our brokerage accounts and bought a batch of General Electric Baby Bonds. These are essentially bonds that have been “cut” to act like preferred stock. The upside is they only cost $25 – hence the term “baby bond”. They also yield 6.68% and being bonds are safer than stocks. If you’re interested, the ticker symbol for these little babies is GEA. Another bonus is they trade like a stock, so they aren’t complicated to buy.
3) Buying stock. Speaking of stock, we’ve set the goal of saving up $4,200 to invest by the end of the year. We have $2,600 hundred banked right now. We are considering taking the positions in the following companies:
1) Centurytel, Inc.
2) Nokia Corp.
3) Exxon Mobil Corp.
4) Ruddick Corp.
Right now we are favoring Ruddick Corporation. They own the popular brand of Harris Teeter grocery stores. The company is profitable, pays a modest dividend (1.78%) and we’ve found their stores to be clean, well stocked and generally offering fresh and high quality food. The downside is Ruddick has a pretty high debt to assets ratio, so we’ll have to do some analysis before we commit to buying.
If you want to get into stocks and don’t have a lot of money, try going here, here and here.
4) Misc. As always we’re still maxing out our 401ks, buying savings bonds and silver bullion! You can purchase these sorts of assets for a minimum of $25. They’re great if you’re broke.
Hope some of this helps. If you are doing anything you feel is particularly helpful in building wealth, please don’t hesitate to drop us a note. I for one, will read them with great interest.
Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body – the producers and consumers themselves.
The topic of different stock classes, subclasses, qualifications and the like is very complicated topic, but it’s good to know the difference between the two basic classes (especially considering many companies offered a preferred stock purchase program as an employment benefit).
There are two main classes of stock out there, common and preferred, each with its own set of benefits and detriments. Most people are familiar with common stock, whereas preferred stock are subject to its own subset of regulations and carries with it its own subset of benefits, rights, and obligations.
Common Stock
Common stock is what most people are referring to when they talk about buying or selling stock. Purchasing a share of common stock affords the holder a share of the ownership of that company, complete with voting rights when the Board of Directors is to be elected and when certain corporate policies are up for a vote.
Readers: Have any of you voted in a corporate election are shareholders? I usually get a few ballots every year that I fill out (most firms have online voting as well). My vote is certainly statistically insignificant, but it’s one of the few rights you have as a voting share owner, and it’s best to exercise that right.
In addition to the value appreciation of the share, common stock holders can also earn money on their investment through dividends, although there are different dividend payout rules for the holders of common stock than there are for the holders of preferred stock, most notably the fact that dividend payments aren’t guaranteed to holders of common stock.
Common stock is considered a more volatile investment vehicle (as compared to bonds, savings accounts and stuffing your cash in a mattress, that is) but it remains one of the most popular, and colloquially when someone tells you that they bought stock, it is common stock that they are most often referring to.
Preferred Stock
Preferred stock is a different animal than common stock, with certain benefits and rights that make it attractive. The terms of the issuance of a share of preferred stock is spelled out in a document called the “Certificate of Designation”. Those terms are negotiated between the corporation and the shareholders and in reality can encompass any sort of right imaginable.
Most Certificate of Designations, however, cover the same basic set of rights. One of those basic rights is the right to preferential payout treatment during liquidation. This means that in the event that a company is forced to liquidate their assets, preferred stock holders have a higher priority of access to those assets than common stock holders.
Another right that is commonly afforded preferred stock holders is the preferential treatment in the payment of dividends. Often those dividend payments are deferred, but any dividend payment not made is set aside and accumulated until the payout is made.
Preferred stock holders usually have no voting rights (unless explicitly agreed upon in the Certificate of Designation) but the other rights that they are afforded offset the loss in voting privileges. Again, the rights associated with a share of preferred stock are negotiable and vary from corporation to corporation.
Differing Benefits
The main point to remember is both give you ownership of a company and give you the opportunity of wealth creation. Although very similar, common stock and preferred stock offer the shareholder a variety of different benefits.
Common stock is mostly used for capital appreciation, dividend payment and company control (the right to vote at shareholder meetings).
Preferred stock can also be used for capital appreciation and dividend payment.
Preferred stock owners are more likely to receive company assets during a bankruptcy than you would be if you own common stock and your dividend payments are guaranteed.
Preferred stocks have a rate of return closer to a corporate bond than common stock (as such, they are less volatile), and are often used as a more conservative, fixed-income investment.
Income earned on preferred stock is taxed at the same rate as income, which can mean higher taxes paid on those preferred stock dividend payments.
Readers: Do any readers hold any preferred stock, and if you do, what are your thoughts?
With the recession a full year underway, how is it that places like DC can remain largely untouched?
The scene here in terms of real estate feels a bit surreal. DC homes for sale are simply off the hook.
Back several months ago we happened upon a couple of open houses one weekend and we were a bit surprised to see that prices really didn’t seem to have gone down, in fact overall they may have gone up. Real estate agents that we chatted with mentioned the multiple bids that were dominating the real estate market in DC. I took some stock in all of this, but I was still largely skeptical.
Now several months later my observations of the real estate market continue to confound me. To speak in practicalities, I’ll give a few examples:
First I have a colleague who is purchasing a first home with her husband and quickly figured out that they had to be ready to pounce, as they were out bid or maneuvered on the first three or four bids they put in on places. By the time they made an offer on the place that they are closing on next week, she wasn’t willing to get too attached to the place in case things didn’t pan out.
My second example is another colleague who is purchasing a first home with her husband and they are looking for a foreclosed place to get something within their range. They have toured many houses in DC and have seen the horrors of everything from what can go badly with inexperienced flipping of houses to foreclosures gone wrong as the tenant leaves a parting gift of flooding an entire floor to show their resentment.
Lastly we have a good friend who is finally ready to buy a place on her own and she still can’t find what she wants within her price range. Thus the search continues in hopes of finding something right out there.
This weekend we went around on open houses to five places (some with multiple listings) in the Dupont area of DC, so all are in a good location. To paint a clear picture of what was seen, here we have the stats:
$450k – 1 bedroom basement apartment (low light, not renovated, bad layout – what is going is on here people?)
$500k – 2 bedroom (this is really a master suite, as the second bedroom couldn’t actually fit a bed into it), completely dark, must enter from an alleyway.
Townhouse renovated into four larger apartments (nicely done in many ways but huge wasted space and odd layouts for with functionality). For two bedrooms, prices ranged between $784k and $848k with condo fees between $336 and $423. This makes the building, quite ugly from the outside, worth $3.1 Million.
Townhouse renovated into four apartments (gorgeous in every way). Prices ranged from $600k for the basement to $1.5 Million for the two level penthouse that was custom made by the owner. This makes the entire townhouse, pictured above, worth over $3.3 Million!
Another was a townhouse broken into three apartments, but sold as a multi-unit building rather than as individual condos. This was by far and away the most reasonable at $1.3 Million for the 3.5 story plus basement. Part of the “bargain” here was that it wasn’t entirely renovated, but still in good shape.
I imagine most readers will read those numbers and wonder if there is something wrong with this picture. We’d certainly have to agree. Looking further at a quick listing search last night we had our suspicions further confirmed that real estate prices are still crazy in this town. It’s tough to find a good deal and save money when trying to buy a house in this area.
One change with the recession is that on the townhouse pictured above. While it went on the market on Wednesday of last week and had all but the basement sold by Thursday, they accepted five offers for each place but did not accept escalation clauses. I think this was really wise and reasonable for the agent, as while there might have been great demand for the units, it would be unrealistic to price things at higher than the already outrageous costs.
So what is happening with DC? There are a couple of things.
1) Unemployment is still relatively low for the country, with many having more safe and secure jobs such as the good ol’ gov.
2) Space is limited – the District simply has finite space when it comes to all of the advantages of living within the diamond.
3) Quality and luxury can also often be the case. Townhouses such as those that we were looking at have longevity and aren’t the same as new build construction. They’ve also been done, like the last example, to impeccable standards. This obviously drives the price further up.
Readers: We’d love to hear how things are in your area. If you have any info on your local markets and how they compare, we would love to hear.
A previously little known financial instrument has made a lot of news lately, as it has become the poster child for those calling on Congress to impose stricter regulations on the kinds of exotic financial structures that contributed to our recent economic collapse. Those financial instruments are of course “derivatives”, a term most people are used to hearing a lot about, but perhaps not something that is well understood by the individual investor.
A derivative is a umbrella term that covers a variety of investment assets. As its name implies, a derivative is a financial structure whose value is dependent on an underlying good or equity. The asset from which the derivative is derived is called the underlying asset.
The most common and basic example of a derivative is a futures contract, where an agreement is made to exchange a commodity at a specified point in time in the future for a market-determined price. A derivative can be based off of anything; from the price of corn to the S&P 500 Index. In addition to futures contracts, common derivative classes are options and swaps.
An option is a contract that allows the holder to buy or sell an asset at a future date. The price at which the sale takes place – referred to as the “strike price” – is set at the time in which the contract is entered. Also set at the time at which the contract is set is the maturity date, a point of time in the future when the contract expires. At any point of time after the contract is initiated but before the maturity date is met, the owner may call in the option, and the transaction contractually must take place.
A swap is a similar maneuver, where two parties agree to exchange cash flows (referred to as “legs”) before a specified maturity date. Again, the swap has a tie-in to an underlying asset. For example, the most common types of swaps are interest rate, currently and commodity swaps. As you can see with both options and swaps, the contracts are tied back in to an underlying asset that determines its value. One of the more controversial derivatives are referred to as complex derivatives, where the derivative is made up of a mixture of options, swaps or futures.
Essentially, derivatives can be thought of as the buying and trading of risk. On one hand, derivatives can be used as a hedging mechanism. In the most common example, a company that drills for oil enters into a futures contract with a company that refines the oil. In this example, both parties are assuming risk and transferring risk. The risk is in the price of oil. Obviously the oil driller wants to sell their oil at the highest price possible, but they are risking the chance the oil prices could drop by the time their product gets to market. Conversely, the oil refiner wants to pay as little as possible for the oil, but they are risking an increase in the price of oil by the time they are able to purchase. By entering in a futures contract that specifies a price at which the oil will sell, each is hedging their risk that the worse case scenario for each will happen.
However, it is clear that one party will benefit, while the other will be hurt (i.e. the market value of the oil will mostly likely be either higher or lower than the price specified in the contract). With that being the case, derivatives are generally considered zero-sum investments, and the benefit and detriment of the contract is equally balanced between each party, and thus the energy sector as a whole (in this example) is not hurt or helped by the end result seen by either party.
On the other hand, derivatives can be considered a speculation mechanism. As is often the case with options, a buyer may enter into a contract betting that the other party is wrong about the direction in which the underlying asset’s value is heading. In those instances, the buyer is assuming a great amount of risk (the option could reach its maturation date without being exercised and become worthless) but if they bet correctly, the payout could be significant. This high risk/high reward structure makes options very enticing to certain individual investors.
But this behavior can hardly be qualified as true investing. It is more like gambling, and should taken very seriously, as the level of risk is high, and the resulting losses can be significant. This fact has prompted Warren Buffet to say the following about derivatives: “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Derivatives are very complex investment vehicles, and I’ve only given a very high level overview of them here. A lot of research has been devoted to them; in fact a Nobel Prize was even awarded to an economist whose work focused on how to price derivatives. When I first started investing, I was encouraged to use options (which I never did), as the person advising me had fallen in love with the high potential profits. However, the associated risk is quite significant, and should be understood before partaking in such an investment.
As some of you may know, Inuit (the makers of Quicken) have acquired Mint.com (an online money management service); see press release.
Mint claims to be the #1 money management service in the U.S. and it’s hard to not believe them due to the high quality of their service. Their interface is nice and clean, very modern and the application functionality is (in my opinion at least) excellent. Overall a great product to use when managing your wealth.
I had a Mint.com account pretty soon after they launched and it was great, even if they didn’t provide a service for each of the institutions where I held my money initially.
Intuit’s Quicken has dominated the desktop-application market, pushing out the previously popular Microsoft Money and offering a powerful alternative to the standard paper ledger or spreadsheets.
Quicken and Quicken Online has faced a lot of the criticisms. People complain about its learning curve and cluttered interface. Also, Quicken has continued to have a hard time squashing all the bugs with certain features such as automatically downloading transactions. I have Quicken 2009 and love it to create all sorts of fun graphs, but I’m definitely not a fan of Quicken Online.
Not everyone is a Quicken fan, and that has lead to some backlash towards this announcement that Intuit has acquired Mint.com. A couple friends of mine have vowed to close their Mint.com accounts due to their previously negative experiences with Quicken.
Readers: Does anyone have an opinion one way or the other on this issue? Any positive or negative experiences with either Mint.com or Quicken?
I certainly hope that whatever product is released as of the result of this merger resembles Mint.com rather than Quicken Online. If we could have the best of both worlds that would be fabulous indeed.
Back when MySpace and Friendster were the start ups of online social networking, I doubt that many of us thought that such forms of social networking and marketing would soon be a norm of society. We certainly didn’t imagine everyone from news broadcasters to congressional representatives talking about how we should tweet them.
Despite the relatively recent advent of online social networking, the majority of the US has been hooked in one way or another. We are also in the camp that believes they are here to stay.
We DINKs have started Twittering lately and are still getting the hang of how everything works. It reminds me a bit of when I started blogging and had never been on a blog at that time. I would have never thought it would become such a part of my life.
So now in addition to blogging daily, we also provide information and resources to our readers through Twitter and Facebook as well. We encourage our readers to sign up for our RSS feeds, follow us on Twitter and friend us on Facebook to stay in touch.
Ok, stay with me for a minute. For the most part, I’m pretty ambivalent towards 50 Cent. I’m familiar with a couple of his songs, but I haven’t followed his career. However, after watching this video of him on CNBC, I came away equally surprised and impressed with his financial intelligence.
Say what you will about his music, but 50 Cent (born Curtis Jackson) has a very impressive financial record. His highlights include being given the highest sign-on bonus of any artist by a record label (reportedly over $1 million), becoming an initial investor in Vitamin Water (which later sold to Coca-Cola, netting him a post-tax profit of around $100 million), a successful personal marketing campaign that has yielded for him movies, video games and television appearances as well as enough personal wealth to be recognized by Forbes, listing him as a second richest rapper, behind only Jay-Z, a man who has been in the industry much longer than he has.
Watching the video, three things in particular impressed me. First was his strategy for marketing himself, second was his desire to surround himself with people who are experts in their field, and third is his willingness to abandon fear and take risks.
As most people are aware, the record industry has been hit hard by piracy. It wasn’t long ago that Metallica was suing Napster; when access to music for free was easy and widespread. Ever since then, the record companies have fought a very public (and from a public relations standpoint, a very nightmarish) war against pirating music. We’ve all heard the stories about people being sued for hundreds of thousands of dollars and the like. But despite these heavy-handed methods, the record companies are losing this battle, and it’s going to take some innovative thinking for them to start making the kind of money they’re used to again. But 50 Cent has a very enlightened perspective on piracy. He knows that it can’t be stopped, only slowed and even then you can’t do a very good job of it. He talks in the video about not getting mad when people pirate his music. He understands the power of a brand, and the fact the he himself is a brand, and any way that you can put your brand out there is good. He talks about how people might steal his songs but go to his concerts (where musicians make most of their money anyway), plus he’s been able to leverage the power of his brand into other money-making ventures, such as the aforementioned video game and movie. That willingness to be flexible enough to adapt to a changing environment is something that we all can take a lesson from. He properly assessed a situation (the current state of the recording industry) and changed his actions to put himself in a better place to deal with that situation (by leveraging that changing environment into an opportunity to expand his brand). He knows that when he builds his brand, he is able to build his wealth.
The desire to surround himself with experts is such a huge thing, and really shows a lot about a person’s intelligence and humility. Speaking for myself, I sometimes find it hard to reach out to others who are better at something than I am. I may recognize their superiority, but nevertheless, I try to do it on my own. And in doing so, I deprive myself of an important learning moment. Failing to leverage the skills and experiences of others only hurts you. In 50 Cent’s case, he sought out author Robert Greene after reading one of his books in an effort to collaborate on a new project.
I’m reminded of a 60 Minutes story I saw a while back with LeBron James where he talked about his friendship with Warren Buffet. Far from a superficial friendship, Lebron has stated (and Buffet confirmed) that he has frequently called Buffet to get his take on certain projects or investment opportunities (in fact, LeBron James’ financial/marketing smarts are so well developed he probably deserves his own post). The music, sports and film industries are very similar in the sense that a lucky break here or there can take you from very poor to very rich in a heartbeat, and it says a lot about an individual willing to recognize the craziness of that situation and seek out advice from those who can grant a little perspective. Unfortunately, not all of these instant millionaires do this; a recent study conducted by the NBA Players Association estimated that 60% of retired NBA players are broke only five years after retiring from the league (average NBA salary: around $5 million).
In the video 50 Cent talks about how he’s not afraid to take on risky investments because he’s already been through much worse. And that is definitely true. He lost his mother when he was young, he grew up in one of the toughest ghettos in New York City, he started selling drugs at a very young age leading to multiple run-ins with the police, and he was shot multiple shot (once in the jaw, causing his trademark slur). After going through that and being a successful musician, he has to feel like he’s playing with house money at this point. What if he had invested in Vitamin Water and they had tanked, losing him a bunch of his money? Is that really worse than what’s he’s already been through? But by taking those risks he’s managed to put himself in a position to maximize his earning potential. Granted, I’m sure he has a team of financial advisers working for him but 1.) he has to be smart enough to hire good ones and listen to them and 2.) if it was that easy, every rapper/actor/musician/artist who made it big would continue to grow their wealth. Which we know isn’t true, as we hear about a multitude of rich celebrities declaring bankruptcy all the time.
He may not have an economics degree from Harvard, but it’s hard to look at 50 Cent and not take away some solid lessons. In the video he talks about living below his means, about how waking up every morning in Mike Tyson’s old house (which he’s trying to sell) is a daily reminder that money can be lost as quick as it can be made. Despite the hosts of the show not giving him 30 consecutive seconds to express his thoughts, I came away very impressed. It seems like he is a man who is not only money-conscious, but the type of person willing to put in the work to ensure that he wealthy status stays that way.
I read an interesting article on msn.com today about the Five Lowest Paying Majors. Those majors are:
Social Work
Special Education
Elementary Education
Home Economics
Music and Dance
Home Economics is the only one I don’t understand. I don’t remember any classes like that being offered any place I’ve been, so I can’t really speak to what that’s about, but I did find it interesting that the first three majors listed were professions that require a decent amount of self sacrifice performed in service to others. Music and Dance isn’t much of a surprise, as most of the arts lead to jobs that are in all likelihood very fulfilling on a personal level, but not so much on the bank account level.
An interesting facet of the list of lowest paying majors is that most of them are in areas that are considered “callings” more so than careers (i.e. an actress is more likely to be passionate about her acting than an accountant is about accounting). This is important for anyone interested in one of those professions, because with the money as limited as it is, it’s important to feel like you’re doing what you’re doing for a reason.
The author of this article offers many suggestions for those interested in an area that typically has lower paying jobs, such as minor in something to round out your education, go to graduate school and be selective about the internships you take, but probably the best piece of advice that he gives is to be passionate. He points out that you can be financially successful in those areas, but doing so requires being very passionate, having a high risk tolerance and the ability to get up and work harder every time you get knocked down. Most importantly, you have to love what you do; if you do, then the extra work necessary to be successful (financially or otherwise) will all be worth it – advice fitting for anyone in pretty much any career.
I have a couple friends who have eschewed the opportunity to make money in a traditional career for the opportunity to do what they love for a living, fate be what it may. They may not be able to build a ton of wealth, but if they are frugal and and make wise choices, they will be fine. Although initially hearing those decisions gave me heartburn (health insurance! retirement! money! stability!) I’m not only extremely proud to be friends with such passionate and driven individuals, I also admire their courage and am a little jealous of the strength that they’ve demonstrated in choosing to take the riskier path in the hopes of carving an existence out of doing what they love for a living.
