I bet this whole financial mess has made everyone of you open your eyes and question your wants, question your income, question your money management (or the lack of it), question your expenses, question your investment strategies, question your job security, question your $10-per-workday lunches, question your credit card statements, question your insurance coverages ….. sort of made you question your attitude towards money.

For those of you who still have your jobs, I bet you feel fortunate (and generally crib less about being less paid, etc.) - and I bet you are putting in extra efforts to make sure that someone higher up notices your hard work before you get into the to-be-laid-off list.

It has made people question their governments, and governments question their respective policies.

On my part, I have convinced at least half a dozen young people (close friends and relatives) to open their minds about saving more and/or investing in the stock market (on the argument that it’s a good time to buy stocks, develop good money saving habits, etc.). It’s a happy feeling (almost a proud feeling) when these guys and gals discuss interest rates, stocks, ETFs, and portfolio diversification over lunches and other casual meetings.

Of course there is much suffering and stress, but hopefully most of us will come out of it with several lessons for life. Hopefully, adversity will bring out the best of our efficiency and adaptability.

As it is, we have to read/hear bad news everyday … just thought I should throw in a pinch of positive out there.

When you are poor you would like someone to share your financial burdens; you want to someone to give you some tax relief; you want someone to give your kids financial assistance to get through college; you want someone to bail you out of the financial crisis; it seems logical for you that the “rich” are taxed more - you call that graduated tax; you consider it fair that there are incentives/affirmative-action for the economically and socially challenged; the growing disparity between the quality of life in the rich and the poor bothers you; the concept of “free market” doesn’t always work in your interest; you find it surprising that CEOs are paid several million dollars a year while you can barely make your ends meet; you generally don’t like that the fact that health insurance is controlled by for-profit companies; and you want the government to have some control over banks/firms who handle your retirement money; you generally envy the “capitalists”.

When you are rich you want to enjoy all your wealth by yourselves; you think “poor” people are “poor” because they aren’t working hard enough to get “rich”; you think it’s unfair that you are taxed at a higher rate than the “poor” - you call that “spreading the wealth”; for you “charity” is only a means of reducing your taxable income - you generally don’t believe that “wealth should be spread around” so the concept of “charity” doesn’t really appeal to you; you are a staunch supporter of “free market” (but you still want the government to bail you out of financial mess - I don’t know what’s up with that); you recoil in horror because some plumber who earns more than $250,000 a year will pay about $3500 more per year in taxes; you think it’s draconian to limit profits or pay of any company or individual; you don’t care about the fact that health insurance is offered by for-profit companies - because you can basically afford anything they charge; you want minimum government involvement in anything that you are associated with financially; you believe that lack of government control leads to a “self-correcting” market; you generally hate the “socialist”.

The world isn’t black and white.

Here is an excerpt from an interesting article I read a few days ago:

Says Anthea Butler, an expert in Pentecostalism at the University of Rochester in New York: “The pastor’s not gonna say, ‘Go down to Wachovia and get a loan,’ but I have heard, ‘Even if you have a poor credit rating, God can still bless you ? if you put some faith out there [that is, make a big donation to the church], you’ll get that house or that car or that apartment.’ ” Adds J. Lee Grady, editor of the magazine Charisma: “It definitely goes on, that a preacher might say, ‘If you give this offering, God will give you a house.’ And if they did get the house, people did think that it was an answer to prayer, when in fact it was really bad banking policy.” If so, the situation offers a look at how a native-born faith built partially on American economic optimism entered into a toxic symbiosis with a pathological market.  …

“Narratives of how ‘God blessed me with my first house despite my credit’ were common. Sermons declaring ‘It’s your season to overflow’ supplanted messages of economic sobriety,” and “little attention was paid to … the dangers of using one’s home equity as an ATM to subsidize cars, clothes and vacations.”

Read the rest of it here.

In addition to Wall Street, it looks like the faith business also needs a little more scrutiny. Apart from that, I am always surprised at how gullible people can be when it comes to being sold out divine rhetoric.

If we keep up with this even God will need a bailout someday!

Finally, God helps those who help themselves, for everybody else there is Mastercard everybody else needs to clearly understand the meaning of the words “deliquency” and “foreclosure”.

It’s one of those “deep-thought” days when I switch myself into a philosophical mode. Sometimes, this results in some extreme contemplation about the things I have been generally doing in my life. This time it was all about financial contemplation. The choice of the title is obviously inspired by the book “Zen and The Art of Motorcycle Maintenance” by Robert Pirsig.

Before I start my rant, let me give you a very brief summary of what is the concept of Zen. It essentially means going back to the basic fundamentals, starting from zero, and building your way up (Robert Pirsig’s Zen, not the original Zen). This much knowledge is sufficient for the purpose of this article. If you want to read more about this concept click here and here.

Your financial life is a big machine with a lot of odds and ends thrown into it. To maintain this beast, you require some kind of financial prudence. Now, if there is a problem with this machine, the *Zen* way is to start looking at some fundamental issues. To do that, you have to take it apart and try to put it back together. In doing so, you will realize the significance of each component. This is exactly what I will attempt to do in the following.

I have listed some potential fundamental roadblocks that defeat financial prudence. Along each factor, there is a short line of description that sort of adds financial relevance (it’s deep…you could apply this to many other issues in life). Please note that these are from my personal experiences. I will encourage readers to find some peaceful time and do this exercise for themselves at least once.

Except “Type 2″ circumstances, there is a scope for improvement in all of the above. We just need to look into ourselves before point fingers for our financial mess. Once you do that, you will be an expert in the art of financial prudence, and hopefully stay out of trouble for a long time to come. This is more philosophy than practicality, but you can give it a try..it may work for some of you.

In all humility, I am guilty of some (almost all) of them at some point or other, but I am learning.

This is not a political blog, but perhaps I am a bit cranky after losing electricity and water for 5 days, so I will let this one slip by.

So here goes:

Image source: http://codenameblogtastica.blogspot.com/

…. he killed a helicopter with a car, and then he walked bare-foot on broken glass, and then he fired a few people, and then he suspended whatever that was going on and proceeded to Capitol Hill to beat the crap out of bad dudes and to rescue the economy.

Oh wait… it’s McClane not McCain you idiot. Oops! it’s probably the uncanny similarity between the looks of Mr. Willis and Mr. McClane Mr. McCain that confused me.

I don’t mean any disrespect, but I had to get this out because I actually had a dream of John McCain hanging “suspended” upside down in New York’s Central Park right above a huge pile of money (that looked like it was about $700 billion). I woke up a little scared and then realized that it’s because I read about David Blaine’s stunt before going to sleep last night - while I was being constantly bombarded by television commentary on McCain’s suspension of his campaign (or whatever - didn’t look much of a campaign anyways) and the $700 billion bailout.

You can imagine the kind of maverick-ish impact Mr. McClane Mr. McCain is having on me.

Anyways, with that out of the way, there is something else I need to say. It has recently come to my attention that some people don’t really know how many zeroes are there in a billion! That calls for a little bit of elaboration on the numbers you might hear in the next few months.

$700 billion = $700,000,000,000

300 million = 300,000,000 (as per Google search, the actual number is close to 301,139,947 - go figure what this number is)

Now, $700,000,000,000/300,000,000 = $2333.33 per person

As per 2006 tax figures, there were 135,660,228 tax returns filed.

Now, $700,000,000,000/135,660,228 = $5159.95 per tax return

Some other numbers to put things into perspective.

For the year 2007, AIG CEO’s (Martin Sullivan) monetary compensation was $13.9 million ($13.9 million = $13,900,000)

Earlier this year, most people I know received economic stimulus payments that ranged between $600 and $1200

It’s probably just a few more hours before we lose electric power, and have trees flying around. I don’t know long it will be before we have electricity back up, so I just thought of dropping a line here.

If you don’t have anything better to do, follow the eye of the storm closely and you would be able to zero in on my current geographical location.

Anyways, about TV reporters - man, those guys get so animated (even when other people in background are going about peacefully doing whatever they are doing). Interestingly, this afternoon, one of them even suggested this as a part of “survival tips for hurricane”:

People who use electric toothbrush should buy manual ones, and people who use electric shaving machines should get manual ones …

Ha ha.. I couldn’t stop laughing.

The only other funnier thing I heard this week was some other reporter dude suggesting that the CERN Particle Accelerator/Collider may create a black hole that would destroy the earth!

Since reading some comments on my last post, I had been thinking about what this whole deal with “personal finance” is about; is it about making the most amount of money? or is it about saving the most amount of money? or is it about spending the least amount of money? or is it about reducing stress due to money matters? or is it about this obscure concept called “financial freedom”?

The more I think about it, the less specific I get about possible “correct” answers to that question. In fact, looking back at my life, it seems that at different times, a different answer suited me depending on my financial and personal situation at that time.

What came out of this thought process was the realization that personal finance is not just about “maximizing money” - as I used to think earlier - and like most people probably think about it.

It’s not about maximizing. It’s about optimizing.

Given a financial situation, personal finance is about making the best of that situation. Sometimes it means trying to make as much money as you can, and at other times it means trying to make your money work to make you more efficient by reducing your stress, and at some other times it means that you save every penny to make sure that your children don’t inherit your burden of debt.

There is nothing wrong in trying to “maximize money”, but it is important to realize that, depending on your personal situation, there are costs (in terms of stress and time) associated with trying to do that.

Examples are numerous (but vague and difficult to explain) in this area, but a simple one would be to think of a job in which you are paid overtime. Every extra hour you work might mean that you will become richer than the previous hour, but it does not mean that you would be stress-free - or that you would be able to devote enough time to your family. If you overdo it, it wouldn’t be too hard to make yourself and your family feel miserable even with the extra money you earn.

Working your ass off for a few extra bucks might be a good idea when you are a bachelor with hardly any cares in the world, but if you are a family man, then you might be better off by working a little less in lieu of spending a little more time with your family. Now, just because you gave up that little extra money to spend time with your family or to reduce your stress, it does not mean that you are careless or frivolous with your personal finances. In other words, just because you chase every penny, it does not mean that you are an epitome of financially astute people.

In general, for the sake of the betterment of the whole universe and your own self, try optimizing your money instead of maximizing it. It also helps to reevaluate our understanding of “personal finance” in perspective of our changing personal situation and revise our money-chasing efforts accordingly.

Duh!

Since a little more than seven months ago, I made some adjustments to the path in which my career was taking me and took up a job instead of pursuing PhD. One of the main reasons for going that route was that I was so narrowly focused for so long that I forgot why I was doing PhD in the first place (of course, there is more to that story that just that, but I won’t go into that with this post).

Anyways, our household income increased by about four times after I took up the job. Initially, things were taking a deflating turn for the first couple of months - I guess this was in part because I was a relatively “newly employed” and was undergoing training without any major responsibilities (plus,  I apparently hadn’t discovered new ways of spending the increased income). However, our spending took a turn for the worse right after I published this post in early February.

Additionally, I have now started paying a lot less attention to our financial details (”details” is the key word here). There are only two fundamental concepts that I have been keeping in front of me: 1. to not spend more than what we earn (look at #7 in the linked post), and 2. to not time the market. Everything else is just falling in its place automatically.

The rest of our life is now governed primarily by convenience. Here are just a few changes in our spending habits and financial attitudes that occurred over the last few months.

1. Paradigm shift in the way I manage credit cards: I no longer have the time or the patience to follow those balance transfer offers and research/keep track of how our income would be increased by juggling such offers. I don’t care about optimizing the rewards anymore, and just use credit cards for the simple reason that I get an itemized list of where we spend our money at the end of the month.

As such, I am not using all my credit cards anymore. The fact that I have so many of them seems a bit ridiculous to me at present (this is an interesting development). Plus, I have discovered other practical problems in having too many credit cards (more on this later), so I am down to using just two credit cards at present.

2. Preferences for schedules rather than prices. We have flown thrice since February and every time, we went for flights that were more “convenient” instead of flights that were cheaper. On one of those three occasions, we had the option to drive (which would have been a whole lot cheaper), but again, the time spent in driving didn’t seem worth money saved. Interestingly, in the past, we have driven to that very location twice and at that time, the money saved seemed a lot more worth than amount the time spent in driving.

3. Buying what we “like” rather than buying what is “cheap”. Affordability is still in our minds but we don’t kill ourselves trying to save a few cents (or even a few dollars at times). For example, earlier, for cereals, it was usually “Great Value” from Walmart - now, it’s Kellogg’s or whatever brand that seems better - from a store that is closest to home.

4. Outsourcing clothes for ironing. Ironing is one activity I hate - it may be because I never ironed my clothes (over several years) when I was a student. It either took 10 minutes of my time every morning, or about an hour every weekend. Now that’s replaced by 5 minutes of detour every other week and $25.

5. Eating out more. This is again a product of optimizing convenience rather than costs. If we are too tired or not in a mood to cook, we just eat out without worrying too much about it. And, when we eat out, the choice of restaurant is usually dictated by time (and sometimes by what we feel like eating) rather than by how cheap or expensive it is.

6. Using toll roads instead of regular roads. I tried using regular roads (read as traffic-light-infested-roads) for the first couple of months. However, as the stress at work started growing, I started using toll roads more frequently. The toll costs me a lot more than I would like, but using toll roads has reduced a lot of stress in my life. I am now happy when I reach my workplace in the morning, and I am happy when I reach home in the evening, and I don’t have to bitch about how horrible my luck is to catch all the red lights on the way.

Also, the drive that used to take me 30 minutes via regular road now takes about 10 minutes via toll road. That much time saved everyday is just priceless.

7. If the market bothers me, I just don’t look at it. Out of sight, out of mind is what probably works with me in this case. I have some set investing goals this year (in terms of how much I should invest and where) and I just stick with that without really worrying too much about what the market is doing at any given time.

Come to think of it, the increased income is working towards making our lives a bit easier. Call it lifestyle inflation or improvement in the quality of life, or call it just sheer laziness (I am sure there will be different perspectives), or whatever. All we care about is that there is a lot less stress in our lives by spending a little more  money.

As long as we avoid these problems with lifestyle inflation, I think we are okay.

After debating with myself on whether to use the BS word in the title or not, I finally decided not to censor myself on my own blog and went ahead with it. Censoring the BS word on a BS topic is actually some BS in itself; and using BS instead of bullshit is also bullshit … so what gives.

Anyways, the point of discussion is that, recently, it has come to my attention that one of our “highly decorated” acquaintances might have misled a number of scholarship organisers with her “powerful” essays and personal statements. We (me and my wife) happened to figure this out over a dinner meeting when we heard of some extraordinary high-flying crap (unreasonably lofty ideals, fake “personal life experiences”, etc.) from this person. A few things just jumped out at us as pretty obvious discrepancies (when you have been through a similar experience, you can very easily tell when the other person is exaggerating/lying - sort of) and a few other odd things we figured out after pondering over the entire story all over again.

I was thinking over it for a while and then realized that she is just playing the scholarship system to her advantage. Almost every scholarship/award that I have seen in seven years of graduate school asked for an essay or a personal experience statement, or some document of that sort. Many of the scholarships/organizers specifically state (verbally or otherwise) that, generally, very similar academic profiles of graduate students, scholarship decisions will ultimately boil down to a contest between personal statements. “Powerful” personal statements will have a better chance of getting the scholarship.

Now, I haven’t really understood this obsession with “powerful” personal statements and essays .. and with preferences for people with “powerful life experiences”. Sounds very “Miss America” like. This obsession for larger-than-life idiocy encourages words over deeds, lofty ideas over achievable targets, and bullshit over plain old simple truth.

Why should something dramatic happen in your life to make you eligible for a scholarship? Why is it necessary to relate your success to obscure words that your mom/dad (or a dead relative) said 20 years ago? Why is it necessary to “boast” about your far-fetched “noble” intentions in future (which are not really “noble” the moment you start boasting about them)?

Interestingly enough, almost none of the scholarships will actually take the pains to verify any of your “personal” events. So whatever you throw at them will be accepted - and even glorified. So where is the motivation to be honest and straightforward about who you are, why you want the scholarship, and what you want to do with the money you will get from the award?

As educational expenses rise, we will probably see more such bullshit floating around in future.

I wonder what else we will do for money.

Is it too much to ask for a very little tiny bit of personal honor? Or is that some kind of bullshit too?

I guess by now nobody cares if I am around … so this would be just to motivate myself to write a little more.

Looks like the site was down for a couple of months after some screwup with Wordpress/Hostmonster/Upgrade/That-Kind-of-Crap; so it took quite some efforts to get it back on track. Now, it looks all messed up so it will be a while before it looks pretty again.

Hoping to see some old friends again.

It aint purdy:

Click to see larger version

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When my wife and I bought our house in 1999, we put down 5%, which we thought was a lot (back in those days it was a lot!). Well, according to Emma Johnson’s piece over on MoneyCentral, the 20% down payment and 30-year fixed mortage is coming back in style.

I think this is a good thing!

I know, it seems a bit hypocritical of me to welcome back 20% down payments when my wife and I only put down 5%. The difference is that we had a nice 401(k) balance at the time so we did have some savings—even though it was for retirement. We also bought a modest home and we have lived in it for over nine years now. Although our payments seemed high when we purchased our home, they’re a cakewalk nowadays!

If indeed 20% down payments are the new norm, how long will it take people to save up a down payment? I guess the answer depends on how much they save and how much they plan on spending. A 20% down payment on a $90,000 house (about what we paid for our home in 1999) is a lot less than 20% down on a $300,000 house.

It’s going to be tough for people to save up that kind of money. But, I think this is a good thing because we, as a nation, need to get back to prudent financial practices. We need to stop buying things we cannot afford and we need to learn what it means to sacrifice. Let’s face it, we’ve been spoiled the last fifteen years.

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This is unprecedented in the history of the S&P:

If this were to hold up for the rest of the year, it would be the worst 1-year performance in the history of the S&P Index*.

Now, I’d like to know your opinion:

Has this been overblown?

I’m starting to think it has been overblown, which makes these times an excellent buying opportunity. We may very well stay low for awhile but eventually this things gonna turn.

*Remember the S&P 500 began trading in March of 1957. Prior to 1957 it was an index composed of 90 stocks.

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The other night I could sleep so I got up, looked through my books, picked up Common Sense Economics*, and started reading.

Page 77 of the book contains a list titled Ten Elements of Clear Thinking About Economic Progress and the Role of Government:

1. Government promotes economic progress by protecting the rights of individuals and supplying goods that cannot be provided through markets.

2. Government is not a corrective device.

3. The costs of government are not only taxes.

4. Unless restrained by constitutional rules, special-interest groups will use the democratic political precess to fleece taxpayers and consumers.

5. Unless restrained by constitutional rules, legislators will run budget deficits and spend excessively.

6. Goverment slows economic progress when it becomes heavily involved in trying to help some people at the expense of others.

7. The costs of government income transfers are far greater than the net gain to the intended beneficiaries.

8. Central planning replaces markets with politics, which wastes resources and retards economic progress.

9. Competition is just as important in government as in markets.

10. Constitutional rules that bring the political process and sound economics into harmony will promote economic progress.

While reading through those ten items I couldn’t help but think about the situation we’re in as a country. It seems we have violated (or are about to violate) nearly every one elements listed above.

I was curious to see what the one of the books authors, James Gwartney, thought about the credit crisis and the potential bailout of the big three so I sent him an email. This is his response:

I do not believe that political decision-making is good at directing resources toward productive activities and away from counter-productive ones. Thus, substitution of Congressional votes for the profit and loss system will almost surely reduce the income of Americans.

With regard to the recent upheval in credit markets, several factors played a key role. The regulations imposed by HUD on Fannie Mae and Freddie Mac during 1995 an 1999 mandated an expansion in credit to those with lower incomes and reduced the required down payments for that credit. Along with the short-term low interest rate policies of the Fed during 2002-2004, this led to an increase in demand for housing, the housing boom and eventually the higher mortgage default rates and the housing bust. A 2004 regulatory change permitting mortgage banks to leverage their equity by a larger amount also played a role.

It was not a good idea to bail out Wall Street bankers and it is not a good idea to bail out inefficient auto producers. If we do so, state governments (California, New York, and others) will be right behind asking for a bail out. So will other industries (e.g. airlines and construction) currently experiencing difficult times. Business executives will be spending more time in Washington seeking favors and less time focusing on the production of quality goods and making them available at economical prices. This is not the recipe for long-term growth and economic progress.

We are currently coming off of a spending binge financed by debt, including both government and household debt. The solution is to cut back on spending and increase our saving. Part 4 of Common Sense Economics* highlights this point. However, it is more difficult to follow this course when the government uses borrowing and stimulus packages to encourage households to spend more and save less.

These are difficult times and few people understand what is going on. As we noted in the preface of CSE, a nation of economic illiterates is unlikely to follow policies conducive with future prosperity. Best wishes with your work to improve the economic literacy of Americans.

Jim Gwartney

Why can’t we get people like this in Washington? Or, why can’t we get the people in Washington to listen to people like this?

Thanks to Dr. Gwartney for taking the time to respond to my email and giving me permission to post it here on AFM.

*Affiliate Link

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Frank Caliendo is one of the best impersonators I have ever seen. My brother sent me a link to this video last night.

Take your mind off the all the crap going on around us and…

Enjoy:

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Reading Assignment: Why GM Deserves Support by Rick Wagoner

If I understand his editorial correctly, GM should be bailed out because:

1. They are going to build cars that are efficient, that will help reduce our dependence on foreign oil.

2. They have plants all over the U. S.

3. The health of domestic auto business is critical to the health of the U.S.

I remember GM talking about electric cars back when I was a kid. They keep dangling that carrot on a stick but they have yet to come through with anything. I understand that when gas prices are low, there’s little incentive to produce electric cars or cars that run on alternative fuels. But, companies also must plan for the future.

The health of the domestic auto business is critical to the health of the U.S.? I’m not so sure about this one. Yes, if GM were to shut down all their plants, it would hurt. It would hurt a lot. But, how are we hurting ourselves if we continue to support a failing business?

I’m against a bailout. I would be open to a loan of some sort but I wonder if that would even help, or would it just prolong the inevitable? Once credit starts flowing again, will people buy domestic cars?

These are tough times. I don’t have the answers.

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I received this email yesterday from a reader named Joe:

Hi JLP,

I have been a big daily reader for some time.

Last week at the company meeting (I work at a non profit church in California - 8 years) it was announced that the endowment has been reduced due to the economy.

So, there will be across the board for a staff of 19 no salary increases.

Now, am I being unrealistic?

Since I have been there for some time, and a lot of other folks have arrived in the past three years, their salaries are much higher, so they can ride out this wave.

I really, really depend on the 3% each year. So for the folks making 100,000+ versus my salary which is about 60% lower - why must we all share this sacrifice?

Am I being unrealistic or should I be thankful to have a job in the current economy?

Just wondering and would be interested in what other folks have to say.

Joe,

Yes, I think you’re being unrealistic given the circumstances.

I think you should be thankful you have a job and then I think you should ask yourself why you’re making so much less than the others. Maybe you should start making preparations to go work somewhere else or make yourself more valuable to your church.

Perhaps you could take on another job to make up the difference of $100 per month (3% of $40,000 is $1,200).

What do you guys think? Is Joe being unrealistic?

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Jeremy from Generation X Finance sent me an email this afternoon pointing out Lehman Brothers’ Mission Statement, which he found on Man on a Mission:

Our mission is to build unrivaled partnerships
with and value for our clients, through the
knowledge, creativity, and dedication of our people,
leading to superior results for our shareholders.

Lehman Brothers stock now trades for a WHOPPING $0.045 per share on the pink sheets.

OOPS!

I wonder how many of those on the Lehman Brothers management team were aware of their company’s mission statement?

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Here’s something new for all you personal finance and investing junkies out there.

It’s called Tip’d (tipd.com).

What is Tip’d?

If I understand it correctly, it’s Digg for personal finance and investing sites. Users submit finance-related articles that they like and the other users either vote them up or down based on whether or not they like them.

According to the latest stats, Tip’d now has nearly 1,800 members and is growing.

Will I use Tip’d?

Hard to say because I’m soooooooo bad with stuff like this. I signed up for an account a few minutes ago and I do like the layout…so we’ll see.

I do hope it’s better than Reddit, which seems to be full of ten-year old boys with zits. I HATE Reddit!

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UPDATE: I forgot to mention that I found this list in the Appendix of Jeremy Siegel’s The Future for Investors*. The companies are ranked in order of their return over the years, according to Siegel’s findings.

Here is the list of the original stocks in the S&P 500 Index, which began it’s existence as a 500-stock index on March 4, 1957.

Some interesting findings:

12 - Sugar Companies
4 - Cigar Companies (at least there are 4 companies with the word “Cigar” in their name)
Some companies like Cream of Wheat that are now just brands of a larger company.

The Original S&P 500 Index:

*Affiliate Link

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