This morning at the Central Iowa Blogger Breakfast, I was talking with graphic designer, Justin Brady about how to communicate complex financial ideas to people who are more prone to thinking with the right side of their brain. Justin asked if I'd seen this video about the credit crisis. I had seen it referenced on several blogs that I read but hadn't had the time to watch it. Anyway, I took the time today and it was well worth it. I actually have a much clearer picture of what is going on and how everything works together.
The truth is that for the most part, they are designed to sell you something under the guise of giving you peace of mind. The truth is that you should have peace of mind if you followed the recommendations because you are most likely over-saving or over-insured. Think about it for a minute. Life insurance needs calculators are created by insurance companies and retirement savings calculators are created by companies who offer some form of investment or savings plan.
Life insurance: What is it that you are actually trying to protect? It is your family's living standard in the event of your premature death. If you over-insure, I guess it's technically not a bad thing for your survivors but, what could you have enjoyed while you were alive with the money you could have saved?
Retirement: The problem with over-saving is that you squander your youth pinching pennies and keeping your nose to the grindstone and then after you retire, you've got more money than you know what to do with and you've got 65 years of penny-pinching habits that you can't let go.
The bigger problem is what these calculators do for those who can't afford to save or insure at that level is that they simply do nothing to plan for the future. The cost is prohibitive, they feel helpless, so they opt to do nothing when in reality, their living standard could have been protected possibly at a fraction of what the little 4 or 5 question calculator suggested for them. (I'll save that for another post but, would you follow the advice of a professional who only asked 4 or 5 questions?)
Shopping for individual health insurance can be challenging and confusing. Here are five questions that I recommend you be able to answer before you shop to help you or an insurance agent narrow down the options available to you:
Is maternity coverage important to you? This question isn't just about whether or not you are planning to start a family. If there is any chance that you may become or cause someone else to become pregnant, it's at least worth looking into the difference in the cost. They don't call them "Oops! babies" because they're not loved.
Is it mental health and chemical dependency coverage important to you? This can make at least some difference in the premium because it's not just about the mental health and chemical dependency treatment. It's about other health issues that may arise as a result.
Aside from your annual physical, how many doctor visits do you typically make in a year (per person)? There are some very affordable plans out there that cover say up to 3 visits per year without meeting your deductible. Families with children may opt for a plan that covers unlimited visits per year for those little things that come up.
How interested are you in plans that can be paired with a tax advantaged Health Savings Account (HSA)? The big advantage here is that, if you have the income to max fund the HSA every year and don't actually use the money, it carries forward to the next year...and the next...and the next and can eventually be taken out as income in retirement if it's not fully depleted.
How would you prefer to plan financially for your health care. Is it more important to have it be predictable as in a higher monthly premium in exchange for lower co-pays when you do use it or would you like to have it the other way around?
As I said, whether you are shopping yourself or working with an agent, these questions will help you to narrow your focus and zero in on the plan that makes the most sense to you.
"This is America. How many of you people wanna pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills? raise your hand!"
This video went nuts on YouTube yesterday and with good reason. The Homeowner Affordability and Stability Plan is just nuts on every level.
The first and biggest misconception is that you have to be delinquent to benefit. No, even if you are current on your mortgage, there is a provision to allow you to refinance to a lower rate even if your home value has decreased. Sounds good on the surface. Right? Wrong!! You are current on your mortgage. You are a responsible person who's made good decisions and you don't need help. But who in their right mind would not take advantage of this? You're being forced as a responsible citizen to subsidize this program through higher taxes. So, why not get your piece of the pie? This is a complete waste of time and money.
The second part of the program is aimed at the subprime market. 92% of us are paying our mortgages on time because we bought within our means. We get nothing but the privilege of getting to keep our home. Under this provision, the lender renegotiates the mortgage and gets $1,000 for every year that the borrower stays current. The borrower receives incentives for every month that they stay current. Draw your own conclusion here but a responsible lender or homeowner doesn't need to be rewarded.
Part three is supposed to "keep rates low for new homeowners by restoring confidence in Fannie Mae and Freddie Mac". Honestly, I have no idea what that means but, in context, I'd say it's an obscure waste of time and money.
And the last part stipulates that bankruptcy judges can reduce the balance of your mortgage based on fair market value. Who determines fair market value? Is it the appraisers who contributed to this mess by "juicing" appraisals so that lenders could loan $150,000 on a house that could sell for maybe 80 grand on a perfect sunny day in June? They could just do the reverse and say that your $150,000 home is only worth $80,000 and the $70,000 difference get distributed evenly to your neighbors.
There seems to be no shortage of opinions out there about how effective the New Deal was. The consensus seems to be that the war was what finally bailed out our economy and not government intervention. Forget politics. Forget spending vs. tax cuts. Either qualifies as government intervention. Here's how it's worked in the past.
I've been doing a lot of reading lately on investing. I'm currently reading 'The Intelligent Investor' by Benjamin Graham, Warren Buffett's mentor. He talks in depth about two types of investors. The defensive (passive) investor is one who takes the safe route and just invests in the overall market. The aggressive (active) investor is one who knows how to read a company's financial statement and make decisions as if he were actually buying the business. Basically, you don't buy anything that you don't understand. When the active investor finds the business he wants to own at the price he wants to pay, he buys it planning to hold it indefinitely. He has bought into a business and not a number on a ticker somewhere.
I found a great blog today that I will be referring to often. It is called the Behavior Gap by a financial planner named Carl Richards. I just want to highlight a couple posts for now. The first post describes why the average investor does considerably worse than the average investment over time. In short, you can outperform 99% of your neighbors simply by changing your behavior. The role of a financial planner is not to find great investments but to develop better investors. The second post describes what happens by the time that you find out that something is a great investment. I mean, think about it. What happens when you do exceptionally well at your job? You are given more responsibility, more money, and so forth until eventually, you have reached a plateau. Then the excellence turns to mediocrity and pretty soon, if you're "too big to fail", you end up asking Congress and the taxpayers for bailout money but, I digress. These hot fund managers do well when they are small enough to fly under the radar but then, when more and more money gets dumped into the fund, the manager can perform about as effectively as the Hindenburg in a dog fight. Then you, the investor, are back to square one looking for the next hot manager based on what? His historical performance.
I wrote in an earlier post about advisors needing to manage their clients expectations and, Carl does an excellent job of showing how you can take control of the situation by managing your own behavior.
It's a little amusing to me how a lot of guys in my business, whether they call themselves an insurance agent or a financial advisor, feel the need to tether their level of professionalism to something totally unrelated to the task at hand. They say things like:
"It's like when you go to the doctor..."
"You wouldn't want the doctor to just walk in and write a prescription without asking you a few questions."
There's a lot more but, you get the point. A lot of the statements made have some validity but, we really are nothing like a doctor. First off, we don't have a cot in the office where we sleep just in case you need us. If you paged us in the middle of the night, there'd be no point in responding outside of normal business hours. There are no lives in the balance. Last but not least, do you really want us to act like a doctor, lawyer, or anything else that requires more than an undergraduate degree? We could talk over your head and use big confusing words that you'd never hear anywhere else. We could make you feel like our time is so valuable that you're lucky you've got a few minutes of it. Do you really want to worry about the outcome of our next or last meeting?
I don't think so. Financial planning can be very intimidating. Since they don't teach financial literacy in school (yet), it's a topic with which many of us are unfamiliar. It's kinda like going to a major city that you've not been to before or maybe you have been there, but you don't really know your way around. You arrive at the airport and you can do one of two things. You can rent a car or hail a cab. Remember, it's a big city where the natives drive like maniacs, parking's a bear, and you're not real sure where you're going. So, you opt for the cab because everything you plan to do is just another short cab ride from your hotel. What are you really looking for at that point? You wantsomeone who you can count on to get you where you want to go, get you there in one piece, and speaks your language.
With unemployment hitting a 15-year high last month and mounting uncertainty about when things are going to get better, I just wanted to share a few links that I've stumbled across that may help you get an edge if you happen to be in the market for a new job.
If you're out there hitting job fairs or making a lot of in-person contacts, this may be a useful idea to make your resume' stand out. Use this Power Point template to create a unique and attractive resume' that may get more than just a cursory glance
Top Ten Tips for Getting a New Gig from Business Pundit. Just don't bring that fancy new resume' to a Super Bowl party. That's just weird.
And finally, I recently read Keith Ferrazzi's book Never Eat Alone. It is arguably the best book ever written on networking, and the most powerful thought for those who are still gainfully employed is"Build it before you need it." (your network). Don't try to start networking just 'cause you're desperate. It's like that family member who only calls when they need money.
P.S. If you've recently left a job, don't forget to roll over your 401k to an IRA. There are lots of reasons why which I will cover in another post.
I laughed along with the rest of America when Tina Fey (or was it Sarah Palin?) said "I can see Russia from my house." but the quote that sticks in my head and resurfaces about every other day was back in September when Warren Buffet said
“You see, the economy is like a bathtub - you can’t have cold water in the front, and hot water at the back!”
"The first lesson of economics is that we live in a universe of scarcity, and we face tradeoffs. The first lesson of politics is to ignore the first lesson of economics."
and
"You want the impossible? You got it. Politicians don't get elected by
saying "No" to voters. People can get the possible on their own.
Politicians have to be able to offer the voters something that they
cannot get on their own. The impossible fills that bill perfectly."
Scale these quotes down to your personal economic security plan and you get "There is no free lunch.", "If something sounds too good to be true, it probably is.", and "You can't have your cake and eat it too." You get the picture.
I believe that too many people who call themselves financial planners have become nothing more that "yes" men to their clients. They lack the courage to politely inform their clients that their expectations may be a little unrealistic. This opens the door for guys like Bernie Madoff to run giant Ponzi schemes and market them freely through reputable brokers and investment firms.
Consequently, 81% of high net worth investors are now considering taking money away from their current advisors and 86% of them plan to tell others to avoid their advisor altogether while only 2% of them would recommend him or her to someone they care about. The advisor really didn't do anything wrong other than try to meet rather than mange their clients' expectations.
If you happen to be among those who are considering changing advisors, make sure you don't end up with another "yes" man or you'll be shopping around again when the next bear market comes around.
Remember: A portfolio without a plan is really just a bunch of accounts.
Image via WikipediaCox is Chairman of the SEC and hears that an old buddy who used to be Chairman of the Nasdaq is suspected of engaging in some questionable business practices in his second career running an investment business. No one really knows what Bernie's business does or invests in, only that his investors are happy (in fact honored) to be earning a tad over 10% per year with no down years. Cox decides that rather than launch a full investigation, he will fly to Palm Beach himself and handle the matter as quietly as possible and preserve his old buddy's impeccable image. He walks into Bernie's office and here's how it unfolds:
Cox: Hey Bern! How's the golf game?
( Bernie looks up from his paperwork over the top of his reading glasses and breaks into a huge grin.)
Bernie: It's been a while. What brings you to the Sunshine State?
Cox: Bern, we gotta talk. I'm sure it's probably nothing.
Bernie: Sure. What's on your mind?
Cox: Well, people are starting to ask questions about your investment practices. You know, my job is to protect consumers and I just want to make sure your doing things right and we're not going to end up on opposite sides of a courtroom at some point.
Bernie: Well Chris, I gotta be honest. I expected a lot more when I started this business but, as it stands right now, I've only got 23 clients.
Cox: Well, like I said, I was sure it was nothing. I just had to be sure but, with only 23 clients, anyone can see there's no massive Ponzi scheme here. Can I just get you to type up and sign something to that effect so I can put it in your file? That way no one can question whether I actually looked into this.
I asked my friend, Drew McLellan, who I consider an absolute marketing genius, for a few ideas to show my appreciation for my family, friends, and clients this holiday season. If you've ever met Drew, you know that he is always using Disney as an example of what a true brand is. Anyway, I don't know how he pulled this one off but, here is my gift to you.
Don't thank me. Thank Drew.
I've seen a lot of shady stuff go on in the mortgage business, but one prospect in particular really stood out. He was a nice guy, going through a divorce, and refinancing to get cash out to get on with his life. He was very honest with me and told me that he was shopping around. I told him that I'd give him the most fair deal I could right up front and if someone else offered him a better deal, I'd be happy to review their offer to make sure it was better than what I could do. Sure enough, another broker offered him a loan and he was beating me by 1/10th of a point. This was a $200,000 loan and 1/10th of a point comes to $8.39/month difference in the payment. I asked him to fax me the Good Faith Estimate from the other broker so I could compare the fees. He asked "What's that?". Well, it's required by law to be sent to a borrower within 3 days of the application but, I gave the other guy the benefit of the doubt. Maybe our borrower just missed it in the mail. I told him to go ahead and close the other loan but to get me the Settlement Statement within his 3-day rescission period and I would show him how the other guy beat me. He could then rescind the loan and go with me. I didn't hear from him until about two months later. He said "I finally closed on that loan. What's your fax number?" He faxed over the settlement statement and "Oh My God!". The other broker had charged him a total of $9,000 to do the loan. My total fees were $2,000. So, at $8.39/month, what is the break-even point on $7,000? It's sixty-nine and a half years! If there is one silver lining to the current economic crisis, it's that these jerks who do five or six loans a year and rip people's heads off via ridiculous fees will be looking for another line of work in a diminishing pool of jobs.
So, how do you know you got a good deal? I just met someone who has started "Loanzen —
the community-driven mortgage information site". I think it's a great resource because your getting your questions answered by people whose sole motivation is transparency in the mortgage business.
I have a dream that one day every high school in America will have a financial literacy program. It is the one subject that impacts every one and yet is never addressed. You enter your adult life with the only financial savvy you have being what you may have learned from your parents. I purchased a Cash Flow 101 game this year and meet with a group of adults once a month to play the game and learn together. The game is rated ages 10 and up and provides an engaging and fun way to not only teach your children about how money works but, you may learn a thing or two about money yourself. It doesn't end there either. If your children enjoy the game, they invite their friends over to play and the financial literacy bug starts to spread. The Game is available in my bookstore.
Just wanted to announce a new addition to my website. I am an avid reader. My New Year's resolution for 2008 was to read 2 books per month and I'm happy to say that I reached my goal ahead of schedule. 9 of those books were about money and finance. I've added a small bookstore to my site to share these books with you. I promise to never share a book that I haven't read myself. Wanna see what I'm reading, there's a tab in the navigation bar or you can click here.
So, GM has said that they are taking a pass on advertising during the Super Bowl. So, that means that Kate Walsh's Cadillac commercials will probably not be airing as much either. Maybe she could do a short take on our economy. It might sound something like this:
"In today's economic game, the real question isn't about the "Big Three", the "Big Two", or the "Big One". It's not about "too big to fail" or what type of a company you are. It isn't about whether you are a bank or a candy store. No. The real question is "If you buy from other countries, do they return the favor?""
Well not if your trade deficit is negative and going lower every year.
Here's a video of Peter Schiff on CNBC last night. Peter Schiff is the man who called this economic collapse.
This is a blog post. Not a thesis on the economy. So, I'll keep it short. How can you describe the current financial crisis on the back of a napkin? Let's start with a concept that everyone hopefully understands. If you spend more money than you make, you are in for a head-on collision with reality and bankruptcy. The only other solution is to increase your cash flow to the point it exceeds your spending.
So, how does it work if you're a country? Well, your exports are your income and your imports are your spending. So, if you continually import more than you export, something's gotta give. In his book "Crash Proof: How to Profit from the Coming Economic Collapse", Peter Schiff starts out by illustrating how, as a country, we've been consuming more than we produce for the last three decades. Written in 2006, the book predicted everything that is happening right now and then outlines what you can do about it.
So, what allows you to spend more than you earn? It's called credit. Just like in your personal finances, there's a tipping point where credit is no longer available. That's why everyone's talking about a credit crisis. But it's about more than just credit. It's about more than what companies are "too big to fail". Anything that Congress does at this point will only push the problem forward. What we need, painful as it may be, is to start producing and exporting more than we import.
Hello everyone. Up until this point, this site has kinda been my soapbox and as such, offered only one point of view. A few months back, I had the pleasure of meeting Jeff Williams. We meet the last Thursday evening of every month to play Robert Kiyosaki's game, Cash Flow 101. We also meet the first, second, and third Thursday of every month at noon to discuss Cash Flow investing. I feel that Jeff and I share a kindred spirit and after reading some of his emails, I invited him to be a guest author here. The last post was the first of what I feel will be a valuable addition to this site.
rev-o-lu-tion [rev-uh-loo-shuhn] noun: a sudden, complete or marked change in something
Challenging or, at least questioning, conventional planning methods, online calculators, and turning what may have worked for a few people into a "rule of thumb"
Derek Bough|Bridges Financial - (515) 274-8998
Consumption smoothing is a concept which refers to balancing out spending and saving to attain and maintain the highest possible living standard over the course of one's life.
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