Enablers

Is it possible to pay off debts too quickly? Anyone who has student loan or credit card debt, or really any kind of debt at all, has a ready answer for this question. He or she wants to be out of debt as soon as possible!

Today, again, we face a headline that, for most of us, is hard to understand: IMF Cutting Budget Deficits Too Quickly. Apparently, the US is getting carried away with its budget austerity drive, according to Carlo Cottarelli, head of the International Monetary Fund’s Fiscal Affairs Division.

Actually, the headline is even harder to understand than one might first think: In fact, the US is not paying down its debt, it has merely slowed the rate of increase in the debt. This deceleration is the trouble the IMF is pointing out, not the fact that debt is still increasing.

Try to personalize this: Suppose my uncle has been unable to meet his monthly expenses, and has been unable to meet them for the last several years. His credit card balances, home equity line, and personally guaranteed loan balances keep going up. Finally, my uncle seems to be getting things together, at least a bit: he is making a little more money, and has just gone on a spending plan to slowly dial back his expenses. His credit card balances are still going up, but just not as rapidly as last year.

Now, my uncle’s banker has said that he’s cut his standard of living too quickly, and he should start spending more!  Moreover, this banker is someone who has helped others, but in the end, they always seem to be in debt and can’t get their finances on track. But the banker friend is always there to help arrange more financing.

What can we learn from this?

First, being in debt always attracts the interest of others in our affairs. Payments have to be made, and we are at the mercy of interest rates and earning enough money to keep it all going.

Second, and more importantly, there will always be enablers.  Whether the enablers are the payday loan or credit card company, or the IMF, they are there to “help” us with our finances.  Yet, their “help” never seems to resolve our debt problem.  These people always seem to dress very well, too.

Most of us can only watch in sadness and terror at what is happening to the United States.  But in our own lives, we can certainly heed the lesson here,  and get out, or stay out, of debt.

Staying Focused

No matter what else is happening around us, it is always possible to choose our own thoughts.

Accurate and effective thinking is a rare skill, and well worth the effort to learn.

By taking a few quiet minutes every day to reflect on what is most important to us, we can gradually gain control of our own thoughts.

From our thoughts, our actions follow. If we don’t control what we think about, others end up controlling our thoughts and ultimately control our actions as well. Stop several times each day and ask yourself what you have been thinking, and why you have been thinking it, or where these ideas are coming from.

Try it: you’ll be amazed at where this leads!

On Diversification

Are your investments diversified?  Many people are quite confident they have diversified investments.  They own multiple mutual funds in their 401(k), some stocks they’ve picked, and maybe a sector ETF.

Diversification means reducing risk by investing in a variety of assets.  The idea is to have assets whose prices movements are not correlated to each other.  Over time, some increase, while some decrease in value, and in other market conditions, the opposite happens.

Investing in a few stocks in a hot sector is not proper diversification. I remember clearly hearing someone say that 80% of his portfolio was invested in just four core holdings: Cisco, Broadcom, Nortel and Corning.  He said “these stocks are ones to hold forever.”  All four of these stocks would experience catastrophic declines in the next two years.  To mention just two: Cisco dropped from 77 to 10.  Nortel dropped from over 800 (adjusted) to 9, and ultimately went bankrupt.  You get the idea. Today, Apple and Google are in favor. What will they be worth in 10 years?

For this reason, research the mutual funds you have.  Do they all own the same short list of stocks?  If so, you might think you are diversified, only to find out that they all go down together in the next market collapse.  A lot of people learned this the hard way in the 2001-2003 market collapse, and again in 2008-2009.

Do some research:  just how many different stocks do you own, either directly or indirectly through mutual funds or ETFs?  Is it 10, 100, 1000?

And then, how many of your mutual funds own the same stocks?  This Forbes article claims that in 2011, 26% of the top US and Global equity mutual funds held Apple as one of their top ten holdings.

Most experts say that it is not possible to beat the market through skill.  Although some fund managers have had incredible runs, their success is within the limits projected by statistics. Efforts to predict which managers will succeed over the long run have proven fruitless. Better results come to people who try to hold as many different stocks as possible: thousands of different companies, in all regions of the globe.

Diversification goes beyond just stocks.  There are many other types of assets. Today’s investment products allow incredibly broad diversification at low costs, for those who will take the time to manage their investments.

Broke, But For Other Reasons

Have you purchased any of the following in the last year?  Then you may be miserable and broke, according to Silicon Valley technology strategist Steve Tobak, in a recent FoxBusiness article.

• An extra car
• Gym membership or diet system
• Gourmet pet food or pet toys
• Self help or the latest management book
• Vitamins or specialty nutritional products
• A lottery ticket
• Extra shoes for fashion or exercise
• Sporting goods
• Kitchen gadget
• Specialty wine, beer or spirits
• Bottled water or sports drinks
• The latest smart phone or tablet

Mr. Tobak’s article lists expenses on items such as those above as the reason many people are unable to live within their means.  He’s partly right: there are people who have bought these things without being able to afford them.  This is a good checklist for all of us, because we have an obligation to ourselves and to those we support, to spend less than we take in.

But then, shouldn’t people be individually responsible for their choices?  On the other hand, if my income is enough to afford some or all of these things, who is Mr. Tobak to say I shouldn’t buy them.

The main sources of bankruptcy aren’t “too much stuff” but things like unplanned medical expenses and job insecurity.  Saving more so that we can cover these expenses, replace a car without borrowing or help the kids pay for college expenses is a good idea, and cutting back on luxuries is a good way to save.

But people are mostly broke and miserable because the inflation rate for things they really buy, like food, fuel, medical and education expenses, continue to increase at 8-10% per year, when wages are stagnant.  These aren’t optional expenses.

Real earnings from employment have declined for high school graduates, and stayed flat for the past 10 years.  If people are broke, there are lots of other reasons for it than buying too much “cheap junk.”  US policies under both parties have supported the export of jobs for decades, and conditions will not improve until there are new policies.

Until then, keep cutting back.

Why Save At All?

One question I hear a lot these days: “With interest rates so low, why save at all?” 

It certainly is frustrating to see savings rates less than a half a percent, and quite often, approximately zero.  It smarts even more to realize that inflation, on the things we buy most often (food and fuel) has been running at closer to 9% of the past several years.  Finally, many people are losing their trust in banks.  After all, these are the people who managed wealth so well, that in 2008 they had to be given emergency funding of nearly a trillion dollars.

Traditional FDIC-insured bank accounts, or equivalent credit union accounts are insured, have no fees, and are convenient.

But even more important, we all need to have an emergency fund.  With a ready cash reserve (held in a savings account), we can avoid borrowing for things like home repairs and medical bills.

I’ve seen many cases where disaster strikes in multiple ways, such as a job loss coupled with illness, or at the same time a a child goes off to college.  Life can be very messy at times, and having savings means we have the ability to stay in control, even when life is spinning out of control.

Saving money, by spending less than we take in, is a financial necessity, and the more we can save, the more personal freedom we can keep, when storms of life hit us.

Is it worth enduring the real negative yields on savings these days?  Saving is the price of admission to a life of freedom, of not having others control us. If saving means avoiding bankruptcy or sliding into high-interest debt, the foregone interest is an acceptable price to pay.

 

Tell the Truth on your Tax Filing, Or Else!

The Internal Revenue Service has greatly expanded its surveillance capabilities in recent years. According to a recent US News & World Report article posted on Yahoo Finance, now everything we do online can – and will – be monitored to ensure compliance with US tax laws.

This chilling article explains how the IRS now uses advanced artificial intelligence techniques to monitor credit card purchases, EBay auctions, and posts on Facebook, and correlate our activities with our tax returns.

Did you take a business trip last year, and combine it with personal travel?  The IRS might audit you based on what you told your friends about the trip on Facebook.  Auction off a few items on EBay to pay some bills?  If you have reportable income as the IRS defines it, you may be audited unless you filed the correct forms and kept records.

Have a joyful tax season, and be sure to file on time. If requesting an extension, make sure you have paid all the taxes due by April 15.  And be sure to comply with the entire IRS code.

California Dreaming

On Friday afternoon, heading into a holiday weekend, the California State Auditor’s office saw fit to release it annual financial report.  The report covers the most recent fiscal year ending June 30, 2012.

Unsurprisingly, the state’s net worth is a negative $127 billion, or approximately $3600 per person in the state. Also unsurprising, the report fails to mention the estimated $60 billion in unfunded pension liabilities for state employees.  If the estimate is correct, this brings the negative net worth to about $5300 per person in the state.

Surprisingly, however, and despite Governor Brown’s statements to the contrary, the state’s financial condition deteriorated significantly during the last year.  Expenses exceeded revenues by $1.7 billion, and accumulated deficits are now $23 billion.  Assets for government activities dropped by 81%.

The state can probably run for a long time with negative net worth, since future taxes can be raised, but we have to reduce the accumulated deficits.  Proposition 30 is supposed to help, but firms are already relocating to avoid the higher taxes.  This means it will be hard to raise taxes even further.  And spending cuts have been turned down for years.

What is likely to happen?  It’s easy to predict that taxes will be increased again, as needed to cover expenses.  The dream?  Repeal Proposition 13.  If you own property in California, this would mean that the tax rate and overall valuation of your property could again be raised without limit.