A Retrospective On Financial Mistakes In Your Life
November 4th, 2006
The Simple Dollar has a series I recommend reading on his life up to now and the financial mistakes he’s made in it. It’s called “The Road to Financial Armageddon,” and while it’s not finished, my guess is it isn’t going anywhere pleasant. You can read the first five parts here: Part One, Part Two, Part Three, Part Four, and Part Five. Essentially what he’s done is outlined the various stages in his life and what financial mistakes he was making at the time. I think that’s probably a good exercise for anyone who isn’t where they want to be financially to do, even if they aren’t a blogger. There’s a reason that while younger people can be smart, generally it’s only older people who are wise. They’ve gone through life, made mistakes, and learned from them. But you can’t become wiser just by aging. You’ve got to sit back and reflect on what you were doing and why it didn’t work out. I particularly like the style in the posts of bolding all the general mistakes he made – it makes them obvious for anyone reading and for the writer, rather than forcing you to read between the lines. If you don’t have enough years under your belt to have made your own mistakes, it’s a good read to see how someone else has gone wrong – and hopefully you can keep yourself from following that path.
One of the particularly useful tidbits of wisdom these posts have is something I haven’t seen mentioned as clearly elsewhere with regards to the negative effects of overspending using credit cards:
“Perhaps the biggest problem was that I allowed myself to appear much richer to my family in friends than I actually was. They began to have this impression that I was just made of money – and it just wasn’t true. But I felt this desire to keep up the charade because… well, because it made me feel good.”
This is a key point that I’m guessing will be the source of some problems in the future posts in the series (and was already mentioned again as the basis for overspending on his honeymoon, as he led his wife to believe he had more money than he did). Nobody else sees your finances. And it’s actually very common for people to “posture” towards each other – the only things that the Jones’s see are your house, your car, your clothes, and your stuff. If you’ve got it, you’re assumed to have money – because they don’t see your bills, your credit card balance, or your brokerage account. Too many people end up setting up a Potemkin life filled with stuff they can’t afford, teetering on the edge of collapse from the slightest financial difficulty. But those deceiving appearances have consequences beyond your balance sheet. If other people start to think you’ve got money you don’t have, they may expect you to share the wealth. Family members may not understand why you aren’t willing to help them out of a bind – because they don’t understand that you really don’t have the kind of money you project. That can lead to serious consequences for your relationship with them if things go sour – and if you’ve faked how much money you have, that’s virtually guaranteed to happen. Think about it – if you really did have tons of money, you wouldn’t care too much about making a loan to your loved ones. You might not even want it back. But if you don’t have much money and are deeply in debt yourself – you’ll need that money, and you’ll want the loan repaid. Your family members may not understand, however – if they see you as a greedy miser, when you’re really a desperate debtor, both of you are going to get angry if the loan isn’t paid on time.
And it isn’t just limited to loans. Friends who do have money may expect you to go out to expensive places. You won’t want to let the facade you’ve built up break down. You’ll have to spend – and you’ll only be digging the hole deeper.
That’s the kind of thing you can learn about through a retrospective. If you’ve got a blog, doing one is easy. If you don’t, just get out a pad of paper and divide your life up into stages. The Simple Dollar posts are a good outline, but you can also go by year or by decade. What mistakes did you make? What were you doing with your money? What would you do differently? Sit down and think about it, and reflect. Hopefully you can think of at least a few things to do differently in the future.
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Want To Be Smarter? Take Up Multiple Hobbies
November 1st, 2006
Via Consumerism Commentary comes this article on why a diverse set of interests can increase your performance in all your activities by stimulating brain growth. How can that be possible? Because when you learn new skills, different parts of your brain are forced to develop in response, even into adulthood. Speaking Spanish and managing your stocks may not use the same part of your brain – but there’s overlap, and learning one can make you slightly better at pretty much everything. Sound ridiculous? Then check out this study of London cab drivers – London is known as being particularly difficult to navigate, with tons of side streets and extremely complicated roads. Cab drivers basically have to intern for years to learn them all.
The job is complicated, and people who become London cab drivers have physical changes to the structure of their brains as a result. They get better at navigation and better at pathfinding, and they grow new neural pathways that they didn’t have before.
There’s a long-running debate about how to succeed in life that this has implications for – the metaphor of the hedgehog, who knows one big thing, versus the fox, who knows many little things. I’ve always sided with the fox, but there are people who are ardent hedgehogs. The fox theory is the same as above – learn a lot about many things, and you have a lot to draw on when you run into new problems. For example, in academia, some of the most insightful people have been those whose work straddled two fields of study – often creating entirely new ones as a result. The understanding of one field, say psychology, can be applied to problems in another field, say economics. People who just study one or the other don’t benefit from the insights the other field has to offer, even though they may be experts in their own field. Structural growth of your brain is an added benefit that can help you in life across the board.
People who are hedgehogs point to those like Warren Buffet, who was wildly successful in understanding just a few kinds of companies (for example, insurance companies). Whenever he went outside his area of expertise or tried to broaden it, he didn’t do as well. There are also lots of fields where you can carve out a tiny niche for yourself that no one else is an expert in – and use your near-complete knowledge of that subject to make yourself the go-to guy for that area.
Even though I lean towards the fox end of things, I think a lot of it is about personality as well. I get bored if I try to focus all my efforts on one thing – but some people are great at doing that and it works better for them. I’d suggest taking a look at these studies, however – you may not need to broaden your efforts at work. But learning something entirely new and different at home might help you out in ways you don’t expect.
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Rebalancing A Portfolio Away From Real Estate
November 1st, 2006
CNN has a profile of a couple who they suggest are far too heavy in real estate, and need to fix up their investments so that they’ve got a more diversified set of assets. If you’re not familiar with this, it’s called “rebalancing,” and the basic idea is just that if you’ve got too much money in any one thing (i.e. real estate), you need to put some of it into something else so that you can’t have all your money blown away if there are economic problems affecting one type of asset. The employees who had all their money in Enron stock are an extreme example of why you need to do this.
I’m not so sure this couple have as big a problem as the article suggests, however. While I agree with the general recommendations it makes about their non-real estate assets, it doesn’t treat a $40,000 pension from the U.S. military as what it is – as safe an investment as you can come by. That pension is an asset, and it’s not real estate. In fact, it’s probably worth close to the value of their properties – which means they’ve only got about half their money in real estate. Moreover, the rental properties are in two states, which is in itself diversification – it insulates you from the problem of one state market going south.
I say this because many people follow this strategy, and it’s a good one – buy up a few rentals, let them pay the mortgage, and in 30 years you own them outright and reap the income for yourself. If that’s your retirement plan, I wouldn’t sell one of the houses to put the money elsewhere (a common rebalancing move). Having all your money in one house would be risky – but spread it over several, and you can take a hit. The mistake this couple made in my book? Not taking advantage of 401(k)’s and the military equivalent. The tax savings are free money. There’s just no reason not to be maxing out those contributions if you can. And over time, if you put that money in a good fund (the article suggests several), you won’t be relying on real estate alone.
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The Worst Halloween Costumes
October 31st, 2006
Getting ready to go out tonight? Better run your costume through this list of the worst halloween costumes for this year. I think they forgot to consider these costumes, however.
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What Do You Do If You Suddenly Come Into Money?
October 31st, 2006
Get Rich Slowly has a good post on what you should do if you suddenly find yourself with a windfall of some kind – an inheritance, a lottery win, other random gambling winnings, or the like. It’s good advice to read over because there’s one big windfall not on his list that most people get, every year – a tax refund. You may not be the lottery winner, but come tax season, most people take that money and blow it on something fun instead of doing something boring and responsible with it. The post has some good advice on how to make it feel like you’ve enjoyed the money, even when you haven’t spent much of it. It’s an interesting subject – another blog points out that when people win multimillion dollar jackpots, 70% spend it all. Every penny. And one third of those people end up bankrupt. That’s not to mention the other problems you can get if your windfall is very big – from third-cousins twice removed who suddenly pop out of your family tree to people calling you up with sob stories. People have a sense that if you got the money by luck, they’ve got just as strong a claim to it as you do. Couple this with the fact that many people don’t know how to manage their money, and winning the lottery can end up ruining people’s lives. I think the single best piece of advice in the post is to wait. If you can hold off on spending it, and you still want that vintage guitar a month or two later – maybe that’s the most important thing to you. Hopefully reason will kick in instead, after you’ve had time to think about the practical benefits of saving it.
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Carnivals 10/30/06
October 31st, 2006
Today Free the Drones is participating in the following carnivals:
Carnival of Personal Finance at It’s Just Money
Update:
Carnival of the Simple Dollar at the Simple Dollar. Didn’t notice this one at first because it’s not something I entered, but it looks like a good idea – a compilation of various posts from the numerous carnivals that stood out that week.
Preschool Costs More Than College?
October 28th, 2006
Apparently that’s true in pricey parts of California – preschool costs range up to nearly $25,000 for more exclusive private schools. I think at that rate it’s nearly certain you’re wasting your money. $25,000 a year times about 15 years of school before college – that’s $375,000 blown on your kids before they even start higher education. Unless you’re a billionaire, that’s likely a bad idea. What happens if your kid grows up to want to be an artist or a park ranger? You’re not getting any return on that money. And even if you want them to be a plastic surgeon or investment banker, that preschool probably isn’t going to do much besides impress the neighbors. If your kid is smart, your kid is smart, and you can only push them so much further with education. Stick that $25,000 in a basic index fund every year and what do you get? My calculations say $800,000 by the time your kid is 18. And if you do that for 15 years, then make them wait until they’re 30 to get it – they’d have around $2.5 million. No offense to the elite preschools, but if I were your kid I’d rather have the money.
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What Use Is Personal Finance Advice If You’re Making Minimum Wage?
October 27th, 2006
Ask Uncle Bill has a series of posts prompted by a reader who notes that much of the advice found in personal finance books and blogs is hard to follow if you’re making a lot less than the average American salary. The response is in multiple parts here, here, here, here, and here. It’s a long and interesting back-and-forth that essentially concludes with a well-meaning “Get off your duff.” I think it should be noted, however, that you really do need to follow different advice if you are in a lower-income job than if you’re making an average income. My suggestions:
1) You don’t need as much money to guarantee $15,000 a year in retirement as you do to get $100,000 a year. So if you make less, and you think you can live on that in retirement – set your targets lower.
2) The best way for you to solve your problem is not going to be to try to wring a few more pennies out of your budget. It’s going to be to earn more.
3) Remember that as people age, they tend to make more. The reader Uncle Bill refers to is atypical in that he’s still in a lower income job at age 50. It looks like health problems have been at least partially to blame. But you need to keep this principle in mind if you’re young and making minimum wage – you’ll have to work at it, but you WILL be able to find a higher paying job if you try. Focus on that (I mean seriously focus) and in a few years you should have a higher salary – then you can focus on saving.
4) If you’re not making much money, switch careers. Sound harsh? Yes, but it’s the only good advice you’re going to get. If you’re in the Peace Corps, that’s one thing – taking a lower salary for a few years to do good at a nonprofit or something isn’t going to kill you. But in the example given by Uncle Bill, a convenience store position where the only path to advancement is as manager of the same store, you’re probably going to have to go somewhere else. I’d bet that even the manager doesn’t make all that much more. Where can you go to make better money? With no education, it might mean taking a job no one else wants to do. At the extreme of this would be something like an embalmer / funeral director, a horrible job no one wants – that pays above average wages as a result. But you don’t have to go that far. In high school, I worked a summer job delivering Dr. Pepper – doesn’t sound that bad, but it was exhausting and a lot of work, causing high turnover among the drivers. The result? They made around $50,000 or so (more even than the embalmers – and above the average COMBINED household income of Americans of $44,000 or so). There are lots of jobs in this category – truck driver, prison guard, security guard, cops in bad areas, teachers in bad areas. These jobs either don’t require much in the way of credentials or will be willing to waive them just to get you to take it.
Is it awful that you have to go be a prison guard somewhere just to be able to have the money to retire? Yes, but I’m not trying to tell you what it should be like or reform the system or whatever. I’m telling you how it might have to be. You might have to make tough choices where there’s a downside either way – either stay in the low income, easy job that won’t let you retire – or go work a horrible job that will pay more.
You can also move to a different area, and that will often solve your problem entirely. If you’re living in New York City and you have a low income – again, I’m sorry to have to tell you, but your best solution is to get out and move to Wyoming or somewhere else with a low cost of living. Yes, it will cost you money. Yes, you will move from friends and family. Yes, it won’t be as fun. But you WILL improve your financial situation. You’ll be able to get a job with similar pay but won’t have to blow as much money on your expenses. If your area is in economic decline (think Michigan), then the same applies to you. You should go where the jobs are.
Other than moving or taking a bad job, your best option is to plan for a few years down the road and try to get training or education that will get you into a better job. My suggestion for lower income workers is to look at teaching, technical trades if you think you’d be good at them (plumbing, electricians, air conditioner repair in the South, auto repair, etc.), nursing, and pharmacy work. Why? Because those are all fields that have high demand. My sense is that a lot of people who get an education and end up with a lower income have this happen because they try for something that is too popular – too many people want a job there. Hairdressing, for example, or court reporting – you see ads on TV all the time for schools that will teach you how to do that. But because so many people try, a lot of them end up with a credential that won’t really get them a job. If you get a teaching certificate, you’re going to find a job SOMEWHERE – and while it won’t pay what a doctor makes, you’ll be able to retire on that salary. Being a nurse takes a little more education, but it pays more – and again, you will never lack for a job. And again, the answer isn’t pleasant – you’ll have to work yourself through school and wait several years to actually increase your salary. Sorry – but there aren’t easy answers to your problem. If there were, there wouldn’t be people in low income jobs.
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Books on Retiring in Thailand
October 27th, 2006
Following the lead on the previous series on investigating a retirement in Costa Rica, the first thing you should do is look for books on the subject. With Thailand, it turns out to be a little more difficult – because it isn’t as popular a destination, nobody has turned out to be the “guru” on retiring there (if you’re a writer – there’s an opening for you). You can still find some useful information that will help you out, however. First up is Fodor’s Thailand, which is a travel guide, not a retirement guide. There are a couple of other ones, but this is the most recently updated available (2005) and has the most information. Another one is from about the same time period but got mixed reviews – Lonely Planet Thailand. Lots of the stuff in these would be utterly useless to you – but it’s worth a trip to the library if you’re considering this because there are a couple of things you can get out of a travel guide. First, they’ve got a lot of information on the various regions – Bangkok isn’t the only place to live, and from looking at various online real estate sites there are quite a few beachfront property areas targeted to foreigners, and a lot of them sort it by province (with some being sort of like New York – a big city surrounded by an outlying area of the same name). Second, you’ll have to travel there to check it out, probably a few times. So if you’re thinking about retiring there, the first thing to do is to plan a vaction there.
While I couldn’t find any books specifically geared towards retirees, there are some that are designed to help expatriates. There’s a lot of issues retirees face that a 30 year old wouldn’t – but it’s still helpful to have this kind of guide because even though it’s not comprehensive, it covers a lot of situations that anyone moving there would encounter. The Bangkok Survivor’s Guide is a good start, but focused on one city and not the country as a whole. There’s some stuff that would overlap, but my guess is it’s more of a book to check out from the library, copy what you need, and return it. Finally, in the useless but interesting category, there was a book called Traveler’s Tales Thailand. It’s a collection of interesting stories from people traveling there – technically it’s not really “useless” because it would help you get a sense of the country and what to expect. But you’re not going to find the phone number for the U.S. embassy here.
I was a little disappointed, frankly, with the few available printed materials. I ran across other books, but they were either focused on specific topics like learning the language or had some other reason they weren’t particularly useful. Nothing was really geared towards retirees, even though it’s a popular retirement destination. I have seen a lot of good online resources, however, and I’ll be collecting those next.
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Another Great Real Estate Blog
October 26th, 2006
Buying a house has been on my mind lately, because I’m planning to do it in 9 months or so and am busily saving up the down payment. After running across some great blogs about real estate and finance just through following links in other blogs, I decided to search for blogs specific to areas I was looking at. It turns out it’s becoming increasingly common among real estate agents to start blogs to try to cater to customers, and that’s definitely a good thing – it both gives you free access to expert advice and lets you get an idea of the personality (and competence) of an agent before dealing with them. I was looking through blogs in the Austin, TX area and ran across this blog that is sort of a combination of general real estate information and local analysis of the Austin market. That stuff most people will want to skip – but there’s a lot of useful information in here, too. For example, this post on what you should do if you encounter a stubborn seller who won’t pay for minor repairs – or this one on how comissions work (which suggests that if you’re a seller, how much you’re willing to set aside as a buyer’s commission makes a big difference). This post offering a number of tips from the perspective of an interior designer on how to stage your home is also a good one. If you’re interested in it at all, I recommend a look around – ignore the Austin stuff and look for the good general posts that apply everywhere.
And I’d think about reading blogs as a way to find an agent. It’s kind of strange to have it replace word-of-mouth or recommendations from friends, but you can get a pretty good idea of how knowledgeable someone is about their work by reading what they write about it. It’s hard to figure out whether they’re a crook or some of the other potential pitfalls, but those are a lot easier to figure out in other ways than whether someone knows their job. All it took me was a quick Google search for Austin real estate blog to find this one.
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