How to Teach Kids to Save When Interest Rates are Low

I was thinking about how I started learning to save money when I was a kid. At some point, my parents opened a savings account in my name, and I had a nice little bank book. No ATMs back then-- you had to bring your bank book to the teller, who would record your transactions in it. When I got money as a gift, or from my first babysitting jobs, some of it went into that savings account. 

I understood how savings accounts worked: you put money in the bank and the bank paid you interest. I was a kid in the late 1970s/ early 1980s when interest rates were high-- as far as I can remember, my savings account earned about 8%, and knowing that I could be paid 8 cents a year for every dollar in my account was actually meaningful to me-- I was earning money just for letting it sit there!

8% savings account interest seems outlandish today, and I wondered if my memory was correct. I think I am right-- the prime rate back then was between 10% and 21.5%! Today it is only 3.25%, where it has been since 2008. The average interest rate on a savings account today is only a fraction of a percentage point.  You might see a teaser rate of 1% or so, touted as if it's the best thing ever, but it will only be for a limited time, and only for opening a new account. 

So how do you get a kid to see the value of saving if you have to tell them that they will only get a fraction of a penny for every dollar they put away? You could try to teach them about investing in the stock market instead, and I do believe there is value in that, but it is a lot more complicated, and involves so much more risk. 

I would love to hear from readers with kids abut how they've handled this with their own families!

Yowza, the Stock Market!

Normally I'm a very hands-off investor. I go for long periods without paying much attention while my various holdings drift up and down in value-- hopefully, mostly up! But in the last year or so, I've been putting more cash into the market, and paying a bit more attention. This is largely because I've had more cash to invest-- my own savings and the proceeds from selling my condo, and more recently, my mother's trusts.
I continue to mostly invest in a mix mutual funds, some just index funds and some with other mixes of assets-- nothing really sector-specialized, just some bond funds and others that are supposed to maximize dividend income. Then I have a few stocks that I've bought a few shares of here and there.

The last couple of days have been one of those times where I can't really sit by and ignore what's going on. I've been checking the S&P 500 multiple times throughout the day. As mentioned in the posts about my mom, I now have to worry that she'll think I'm mis-managing her money if the markets go down, and they've gone down a LOT in the past few days! I can handle seeing my own net worth plunge by $60,000 or more in the space of a few days, but that's nothing compared to dealing with my mother! :)
For my own investments, I'm trying to be strategic and cool-headed, so as Monday's big plunge was happening, I moved $25,000 into my E*Trade account so I'd be ready to act if it seemed like I could take advantage of buying low. At the end of the day, I thought things were down enough that it made sense to do some bargain-hunting, so I invested all the $25k. Tuesday morning, the markets opened higher and I was feeling like a genius! But as the day progressed on Tuesday, I began to wish that I'd waited another day as the markets ended up closing down even further. Oh well! Maybe not so genius after all...

I still try to keep an eye on the long term. I didn't sell off anything after the 2008 crash and my investments mostly recovered. I've had some things do very well in the last few years. But it's a bit depressing to see those gains wiped out again, and I do wonder what's in store for the next few years. A lot of people are saying stocks are generally over-valued, and I'm pretty exposed to that through a lot of my mutual funds. But interestingly, my individual stock picks don't seem particularly over-valued, at least not after Tuesday's close. I have shares in Ford, Bristol-Myers Squibb, Kroger, Xerox and KKR. The P/E ratios on these are mostly pretty reasonable-- all under 15 except Kroger at 18 and BMY at 54! BMY is up 113% from when I bought it in 2011, so I'm thinking I may sell it now. Kroger is up 197% from when I bought it so it's tempting to sell that one too. Whenever I've bought individual stocks, I've tried to find things that had a low P/E ratio and projected earnings that would suggest the price could rise-- that approach has worked well for me. Xerox was bought based on advice from a friend, the one time I've ever acted on that sort of stock tip-- that approach definitely did not work for me! Xerox has been down pretty much ever since.
I also like it when stocks pay dividends-- I figured out that I've reinvested almost $30,000 worth of dividends on my main E*Trade portfolio over the years. KKR is something I just purchased this week because the P/E ratio was very low and dividend quite high. I've never invested in a private equity company, or any sort of financial services company-- my other stock picking rule having been that I choose companies whose businesses seem more tangible and familiar to me. My most detailed knowledge of KKR has been from reading Barbarians at the Gate-- a fascinating book which I highly recommend, though it's not exactly flattering to KKR. So this pick goes a little against my grain but these private equity guys always seem to be raking it in like bandits, and I'm willing to try to ride along a bit!

Here's the current holdings in my main E*Trade portfolio if you want to follow along... this doesn't include a smaller Roth IRA portfolio or my 401K.

Symbol	Qty
BMY	30
BRLIX	3,082.075
BRSIX	605.537
BVEFX	277.961
F	300
ICENX	875.547
KKR	200
KR	200
NOSIX	383.203
PFODX	602.65
PGNDX	674.272
POMIX	427.673
PONDX	1,000.777
PRGTX	361.533
RYTRX	326.781
SFLNX	2,268.278
SFSNX	601.965
TINRX	604.23
TRVLX	137.817
VDIGX	437.085
VEIEX	396.939
VNYTX	787.866
VWELX	1,155.685
VWINX	1,129.674
XRX	75

More on Being a Trustee

Ok, so we left off with the big package of legal documents arriving for me to sign.
First, there was the irrevocable trust document. This spelled out that my mother was putting $350,000 in this trust and waiving all rights and title to the principal forever. It names me as trustee, and talks about various ways I’m allowed to make decisions about investing the money. It says I have to distribute net income quarterly to my mother, and provide a full accounting of the trust’s transactions annually. There’s also a lot of stuff about how a the trustee can be changed later if necessary, and what happens if I die, etc. It names my sister and me as the beneficiaries and that the principal will be paid to us equally after my mother’s death.
Then there’s the revocable trust. This money still belongs to my mother during her lifetime, but I am the trustee managing it. My sister and I are the beneficiaries after she dies. This trust is just to simplify things and avoid probate when my mother dies. But it’s also a very good thing to have a trustee in control so that my mother can’t just spend all the money without consulting someone else. This may become awkward in the future if my mother wants to spend money and I don’t think she should.
The final documents in the package were my mother’s last will and testament, and a durable power of attorney authorizing me to act as her agent. The will will cover any property of hers that is not held in the name of the revocable trust. If those assets are less than $25,000, then it goes through a “simple probate” process that is easier than for a larger estate. So we’re supposed to keep my mother’s assets under her own name at less than $25,000 but of course she had last minute cold feet about putting the full amount she’d intended into the revocable trust, so she actually has more like $40,000 in her own account— or at least she did when this all happened. Who knows how much of it she’s spent by now! I keep reminding her that the revocable trust funds can be paid out to her any time but she still doesn’t want to transfer her extra cash. I asked a couple of times then decided to let it go for a while as she seemed to be starting to think I was being morbid about it!
The final item in the package was two checks from my mother’s account, one for $350,000 made out to the irrevocable trust (“The [Madame X’s Mom] Irrevocable Trust of 2015”) and one for $100,000 made out to the revocable trust “The [Madame X’s Mom] Trust of 2015.”

The irrevocable trust has its own tax ID number, which the lawyer also sent to me a few days later. Once I had that, I went to the bank to set up checking accounts for each trust. It took about an hour and a half to do all the set-up paperwork at the bank— they had to fax the documents to their legal department to make sure everything was in order, in addition to all the usual account paperwork.  But once that irrevocable trust check was deposited, it started the clock ticking for Medicaid’s 5-year look-back period, in the event that my mother ever needs to apply for it.

After the checks cleared and I’d received new checkbooks in the name of each trust, I opened a Vanguard account for each trust. I picked a variety of mutual funds, including some that have the goal of maximizing dividend income. I did put some of the money in funds that seek growth and have higher levels of risk, but I steered away from the riskiest ones, and also put some money into lower-risk bond funds. I do want to make the principal grow, but I also want to make sure the investments generate some income for my mom. I am a little worried about how the first few months will go— it’s unfortunate that the stock market has taken some plunges exactly after I invested this money, so my returns are somewhat negative so far. I personally am a pretty calm investor— I always try to look at the long term and not panic during down times, but I’m worried about how this will appear to my mom and anyone else whom she might tell. If I say “ok, mom, I took $450,000 of your money and invested it, and all I have to show is a $5,000 loss after 6 months,” she may just think I don’t know what I’m doing, regardless of whether I point out that the entire market is down, and that any other financial advisor would have been likely to have similar results. I am kind of wishing I’d weighted the portfolio even more towards the bond funds vs. the others, given that the stock market was at historic highs when I was putting all this money in. Perhaps that is what a professional advisor would have counseled… but perhaps not, and I have to keep reminding myself, and my mom if necessary, that we’re still ahead by a percentage point or two just by not having to pay someone else’s fees to manage the money.

There will be more to talk about in the coming months, as I figure out whether and when to distribute income to my mother, how to deal with tax issues for the trust, and other questions. I’ll keep you posted!

Income Mobility by Region

Such an interesting NYT story about how different various US regions can be in terms of people being able to rise above the economic status they're born to:

In Climbing Income Ladder, Location Matters


Their sub-head makes it sound like New York and Boston have the highest chances for income mobility, but based on the map, it looks like the Dakotas and Nebraska area is actually the best of all? Odd... maybe some of these areas have had a boom in a particular industry that accounts for it. In any case, the stagnancy of incomes in the southeast is pretty dramatic...

From the article:

“Where you grow up matters,” said Nathaniel Hendren, a Harvard economist and one of the study’s authors. “There is tremendous variation across the U.S. in the extent to which kids can rise out of poverty.”

That variation does not stem simply from the fact that some areas have higher average incomes: upward mobility rates, Mr. Hendren added, often differ sharply in areas where average income is similar, like Atlanta and Seattle.

The gaps can be stark. On average, fairly poor children in Seattle — those who grew up in the 25th percentile of the national income distribution — do as well financially when they grow up as middle-class children — those who grew up at the 50th percentile — from Atlanta.

Geography mattered much less for well-off children than for middle-class and poor children, according to the results. In an economic echo of Tolstoy’s line about happy families being alike, the chances that affluent children grow up to be affluent are broadly similar across metropolitan areas.

The Employee/Employer Relationship

I've been thinking a lot about this issue lately, for a number of reasons.

I'll start off with a story about a friend of mine who I'll call Karen. She has someone who comes in and cleans her apartment every week. Let's call the cleaning lady Tracy. Karen first hired Tracy about 15 years ago. At the time, she only had Tracy come every other week. As is typical for this kind of situation in New York, Karen paid Tracy in cash. Over the years, Karen raised Tracy's pay a few times, and when Tracy lost some of her other clients, Karen started having her come in every week so she'd have more work. Tracy has rarely missed a week due to being sick, but when she has, Karen pays her anyway. Karen also gives her a Christmas bonus every year. Tracy takes a couple of weeks off every year, which Karen doesn't pay her for, but if Karen is going to be away and doesn't need Tracy to come, she still pays her for the weeks she's canceled.

So is this a mutually beneficial, fair relationship? Tracy offered to do the work on her own terms, and I don't think anyone would describe Karen's treatment of her as in any way exploitative or mean. Of course there's a tax evasion issue-- as you might be assuming, Tracy wanted to be paid cash because she wasn't a citizen-- at first. But now she is a US citizen and could presumably get another job where she and her employer would have to pay taxes. She's already past the age when most people want to retire, and Karen is wondering what to do about it if Tracy does want to stop working-- she's never paid any Social Security taxes for Tracy, so it's unclear what, if anything, Tracy would be able to collect. Tracy's children might or might not be able to help look after her. Karen is thinking about whether she should give Tracy some sort of pension, out of a sense of what's right and also just because she and Tracy have an affectionate relationship and she genuinely cares about what happens to her. That's more than can be said for a lot of people you read about who feel they have to economize by cutting the hours for the hired help just because their mutual funds are down.

Do you think most people feel this sense of responsibility towards those whom they employ? Is this kind of arrangement between two individuals a fair way to decide terms of employment, or should the government always be involved in setting the rules and collecting taxes and providing benefits? Should there always be an obligation to take care of an long-serving employee after the employment has ended?

The other thing that's had me pondering these issues is the TV series Downton Abbey, which everyone seems to be talking about lately. Thanks to streaming Season 1 from Netflix, I can count myself among the fans! It's set at a point when the sun is starting to set on the British empire and the old ways of life for the aristocracy are starting to change. But amongst the servants on this big estate, you have a variety of attitudes towards their situation and the people who employ them. There's a rigid class system, but there's also a sense that master and servant consider each other family, at least in some ways. Of course, sometimes this turns into the masters telling the servants what's best for them, which usually involves their continuing to be servants-- it's a paternalistic relationship where the servants have no real dignity or autonomy or choice.

And then there's what's going on in the US in current times. Some politicians are trying to make laws against collective bargaining, more and more people have to work as "independent contractors" rather than as actual employees of corporations, pensions are underfunded, and some benefit packages have been so aggressively negotiated as to be unsustainable. People are yelling "get a job!" at Occupy Wall Street protesters one minute, and saying Obama doesn't deserve re-election because of astronomical unemployment numbers the next.

If there's anything I take away from all this, it's that ideally, we'd all work for ourselves... but that just isn't possible. How can we best maintain our dignity as equals when some of us have to work for the rest of us? How can people without much power be protected from those who do have power? Would most employers actually treat people fairly if they weren't forced to? What are the best ways for government to be involved? We live in a complicated world, and wishful thinking won't make it any simpler.

And to come back to Karen and Tracy, what would you do? Would you refuse to pay someone cash under the table, employ only legal workers and pay all the taxes so they could collect Social Security? Or would you pay someone cash and just figure they knew benefits were never going to be part of the deal? Or would you feel obligated to help take care of someone who'd worked for you after they'd retired?

Net Worth Jan-June 2011

I've been very bad about keeping up with my monthly updates, but here's some summary numbers I ran a while back looking at net worth shifts for the first half of this year:


I moved some cash into my investment account in March, which explains cash going down so much that month. (Though cash went down by less than investments went up because I also received my bonus that month.) My credit card balance is fairly consistent most months, except in March-- not sure what happened then, I don't remember being particularly frugal that month! (Just as a reminder, I do pay my credit card in full every month, but I count whatever's outstanding at the end of the month as a liability.) My overall net worth rose nicely over the 6 months, but you can see that May and June were tough, due to the stock market.
I'll be posting another update soon to bring things up to date for the 3rd quarter. It's not going to be pretty, I'm afraid. Back in April I was thinking I could hit $600k by the end of this year, but the market has been crazy and I don't think I'll even be close...

That Crazy Stock Market

How are you riding all these bumps in the road? I was appalled to see the huge drops in the market last week and yesterday, but I also tried to view them as an opportunity to invest at a lower cost. I pulled the trigger this morning and bought some shares of Ford, Kroger and Bristol Meyers Squibb. In the last few years, I've generally stayed away from individual stocks and kept to various mutual funds, mostly the low-cost Vanguard index funds. But I guess I was feeling a little reckless this week, so I used the E*Trade screening tools to find myself some companies with lower P/E ratios and some earnings growth, and then picked these three. We'll see how it goes-- I bought first thing this morning, and by the end of the day, Ford was up almost 4%, while the others were down more than 1%, but my net for the day was a slight gain-- maybe $20! But I'm not trying to be a day trader-- I'll hang onto these for a while and see how they go.

David Cameron's "Big Society"

I found this New Yorker magazine article fascinating: "All Together Now!"
The topic is Britain's new conservative Prime Minister David Cameron, and his plan to solve the country's budget woes by having average people pitch in to help in small ways with things the government can no longer afford to do. Say the government can't afford to keep a playground well-maintained-- his concept is that local residents would get together in some sort of committee and assign each other tasks like raking, sweeping, painting, etc.

The article points out all sorts of weirdnesses to this-- why is a Conservative politician championing collective labor that sounds like it belongs in a Communist country? How does the Government expect to just totally back off from responsibility and not even provide any funds for getting these community schemes set up? Who's going to take charge of these local programs, and do people really want it to be the neighborhood busybody with too much time on his hands?

There's something to be said for the "niceness" of community participation but a lot of people just don't want to deal with the reality of it. As one man comments, more or less, he doesn't have time and prefers to pay other people to do this stuff-- the payments are called "taxes," and the "other people" are called "the Government."

But here's what didn't come up in the article that I'm curious about. Many of the the sorts of things the Government is looking to crowd-source are the kinds of programs that don't even get a lot of public funding in the US, like arts programs. Here, they get a lot of funding from rich people who want nothing more in return than social prestige and the satisfaction of doing something for others, and often, their name etched in stone on some building.

Why is David Cameron trying to get all the "little people" to volunteer to rake parks instead of getting a billionaire to pay the salaries of park-rakers in exchange for some warm fuzzy feelings and a bench with his name on it? Perhaps that sort of thing just doesn't play as well for P.R., especially in a country like the U.K., which has such long-standing class issues. Cameron is from the upper class himself, so I suppose he thinks he has to take this "we're all in it together" attitude rather than a top-down approach... but it doesn't sound very efficient to me.

It's not that I think the answer is for everyone to live off the charity of rich people whose whims dictate what services and enrichments the rest of us are allowed to enjoy. We'd probably end up with free eco-friendly dog-grooming salons on every corner (of terribly pot-holed roads) in some states, and free gun-shooting lessons for toddlers (but no public K-12 education) in others. As far as I'm concerned, taxes and government and elections are a pretty good way to provide the basic standard of living we've all come to expect as Americans living in the 21st century, with some private funding icing the cake. But I do wonder why the U.K. seems to have such a different approach to these things...

E*Trade Investment Gains

I did an interesting project the other day-- I went back through my E*Trade investment transactions to trace all the cash I put in and took out. This goes back to sometime in 2001 or even a bit earlier, I think, when I first deposited about $1,000 in order to start doing some investing outside of my 401k. Other than that, all my money had been in savings accounts and CDs up to that point.

When I totaled everything up, my net contributions to my E*Trade account were about $33,875. This was never done on a regular basis-- I'd sometimes put in a couple thousand dollars at a time, sometimes more. And there was a period in 2005 and 2006 where I cashed in some funds and took out money in order to pay the down-payment and closing costs on my condo.

As of the day I did this, the current value of my E*Trade account was $49,779. So my net investment gains were $15,904, or a total return of about 47%. It's interesting to compare this to how E*Trade shows my current portfolio gains as an increase of about $2,960 or 6.3%.

Obviously, two very different calculations are being done here. E*Trade considers every reinvested dividend as part of the cost basis the gain is calculated against, so as shares go up in price, those incremental purchases have gained less in relation to the current price. By either method, it's hard to really say how much my annual rate of return has been overall because I've bought and sold various funds at various times, and it's all a bit complicated, at least for someone like me whose math expertise hits a brick wall at a certain point!

Since I put money in and took it out over 10 years, I can't really compare my performance to an initial investment of $10,000 that was just put into a fund and left sitting there with all gains reinvested, which is the standard way funds are compared on E*Trade. But just to look at a few examples, the first of which seems to have the highest average annual return over the 10-year period of any mutual fund offered on E*Trade:

Symbol	$10k invested 10 years ago now worth	Avg. Annual 10 Year Return
INIVX	$134,996	27.46%
BGEIX	$89,987	22.91%
EITEX	$51,714	16.79%
DPCAX	$48,578	16.60%
AAFPX	$9,097	-0.99%

INIVX and BGEIX are gold/precious metals funds (that I really wish I'd invested in!), EITEX is an emerging markets fund, DPCAX is a China fund, and AAFPX is an S&P 500 index fund.


Anyway, to me, the bottom line is that I have $15,904 that I didn't have before, and that's quite a lot better than just looking at my current E*Trade balance. I've invested in a variety of stocks and mutual funds without any cohesive strategy other than to have a blend of aggressive and conservative investments and not put all my eggs in one basket. Given that we've been going through an extraordinary economic crisis, with the S&P 500 about 20% below where it was 10 years ago, and the Dow about flat over that period, I think I've done ok.

Wall Street Pay

Today's reading from the NY Times website: On Wall Street: All Reward, No Risk by William D. Cohan.

For the life of me, I can’t figure out why Wall Street bankers, traders and executives get paid so much money year after year for doing jobs that rarely require them to innovate, enlighten or put their own capital at risk, and have the nasty habit of periodically sinking our economy.

After a two-year stint as a reporter on a daily paper in the early 1980s, I worked on Wall Street for nearly two decades, and quickly discovered that I could make more money in one year as a banker than I could in a lifetime as a journalist. And that was when I was a relatively junior banker. By the time I was a managing director, the pay — and the pay spread — was astronomical.

Curiously, though, the amount of time and energy I devoted to the two professions on a daily basis wasn’t all that different; both were totally demanding. While it was true that as a banker I generated revenue, or helped to generate revenue, and as a journalist, the publisher likely figured I was part of a cost problem, the discrepancy in pay never made much sense to me since I always had trouble imagining a newspaper without writers.

Now, after six years of writing about Wall Street — including two lengthy books — I remain at a total loss to explain the pay phenomenon. What’s worse, even the most modest slights when it comes to pay on Wall Street — “The guy next to me got a $2 million bonus, why did I only get $1.9 million?!” — is enough to reduce someone to tears. Indeed, I have yet to encounter a person on Wall Street who can, with a straight face, justify his compensation on other than the most painfully tone-deaf grounds, usually along the lines of how they “add value” for their clients....

This was a key paragraph for me:

Do Wall Street firms exist for the benefit of their shareholders, like other public companies, or do they exist primarily for the benefit of the people who happen to work there? The answer to this rhetorical question is painfully, and sadly, obvious. No other large public companies pay out anywhere near as high a percentage of revenue to their employees. But where is it written that this madness has to continue? Why does a financial engineer have to get paid exponentially more than a real engineer?

It does fascinate me how we value different kinds of work...

My Stimulus Tax Cuts

Did you get a tax cut in 2009? No? Are you sure? According to this article, a lot of people don't realize they got a tax cut: From Obama, the Tax Cut Nobody Heard Of.

At Pig Pickin’ and Politickin’, a barbecue-fed rally organized here last week by a Republican women’s club, a half-dozen guests were asked by a reporter what had happened to their taxes since President Obama took office.

“Federal and state have both gone up,” said Bob Paratore, 59, from nearby Charlotte, echoing the comments of others.

After further prodding — including a reminder that a provision of the stimulus bill had cut taxes for 95 percent of working families by changing withholding rates — Mr. Paratore’s memory was jogged.

“You’re right, you’re right,” he said. “I’ll be honest with you: it was so subtle that personally, I didn’t notice it.”

That was kind of the point: economists hoped people would be more likely to spend small amounts of money they got each month, as opposed to a lump-sum payment that they might just sock away in the bank. Whether or not that strategy was right is debatable, but politically, an invisible tax cut doesn't help the current administration's reputation.

I did realize that something was going on with my taxes because I had to adjust the repeating paycheck deduction transactions I enter in Quicken, but I'd never stopped to think about how much it came to. I just checked: in January, February and March of 2009, I was having $935.56 in Federal taxes withheld from each paycheck. After the Obama tax cut kicked in, that dropped to $891.14 in April 2009 and beyond, a decrease of $44.42 per month, or 4.7%. It's hard to calculate the total effect for all of 2009 because I maxed out my 401k before the end of the year, and of course taxes withheld are not the same as actual taxes paid after you factor in refunds, but I'd guess it might have totaled a couple hundred dollars in the end. I don't have the energy to dig up my tax returns and do all the math right now, but the actual terms of the tax credit are basically this:

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

More details here.

Compare that to back in 2008, when Bush issued his one-time stimulus checks: I got $19.70.

Neither of these windfalls was enough to make me change my behavior-- I'm fortunate enough to be able to save a good chunk of my income, and my spending decisions are made within an overall sense of what I want my budget to be, and other random factors of whatever I happen to want to spend money on at various times. But if I was living paycheck to paycheck and spending all the money I had, Obama's tax cut would have stimulated consumer spending more than Bush's.

Of course there are much larger debates going on about what's going to help our economy and whether tax cuts are a good idea, who should get them, etc. etc.-- I won't get into all that, but regardless of the bigger picture it's frustrating that so many people either aren't aware of facts or actively spread disinformation about Obama's actions on tax cuts.

Changes in Household Spending

This graph appeared in yesterday's New York Times and I found it fascinating:


Look how much the share spent on food and clothing increased during World War II, and how much lower they are now than at any time since. And I was surprised to see the share spent on education being quite low, and not showing as much of a spike in recent years, despite other stats that show the price of college skyrocketing. This could be because not everyone goes to college, and because although the rack rates for tuition have skyrocketed, more and more people get financial aid in various forms to cover a lot of it. And of course health care costs have risen hugely, after being quite stable through the '30s and '40s-- but it still surprises me that on average we spend more on health care than we do on housing.

The article the chart accompanied mainly focused on the housing part of the budget, and whether this data suggests housing prices have stabilized or are still likely to fall. David Leonhardt says:

I can’t claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?

If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.

The difference between these two views ends up being huge, and it’s become the subject of an intriguing debate.

After digging into it, I come down closer to the luxury good side, which is to say the less bearish one. To me, housing does not rank with unemployment, the trade deficit, the budget deficit or consumer debt as one of the economy’s biggest problems. But you may disagree.

What do you think?

Monthly Recap: June 2010

Finally getting around to another "monthly" net worth update! June was not a great month in many ways-- my investments lost some value, and I also decided to lower my home value by another $10,000 based on some comparable sales. (I had lowered it by $10,000 in September 2009 also.) My cash on hand increased nicely, but I had a bigger than usual credit card bill to pay off at the end of the month. Here's the details from NetWorthIQ:

Assets		$ Diff	% Diff
Cash	$64,186	$3,115	5.1%
Stocks	$20,237	-$502	-2.4%
Bonds	$5,091	$0	0.0%
Retirement	$240,608	-$10,221	-4.1%
Home	$80,404	-$9,641	-10.7%
Total Assets	$410,526	-$17,249	-4.0%
Debts		$ Diff	% Diff
Credit Card	$3,347	$1,676	100.3%
Total Debts	$3,347	$1,676	100.3%
Net Worth	$407,179	-$18,925	-4.4%

Whenever I look at this chart lately, I'm struck by the jagged ups and downs starting in 2007-- there's a huge dip, as you'd expect with a worldwide economic meltdown, but even aside from that, it's been pretty bumpy month to month when you compare it to the earlier dates. Part of the reason is the frequency of updates-- in 2005 I did about 6 entries, and went to almost monthly in 2006 and later. Years prior to 2005 are represented in annual entries. But when I look at Quicken, where my data has been updated religiously every month since 2002, I see the same pattern-- a nice, gradual upward slope until I bought my condo, then a giant spike in my assets and liabilities, then a series of monthly ups and downs. You'd think having a big chunk of net worth tied up in a home would stabilize those ups and downs... but not in today's world!

Brief Notes

Here's a few quick notes about money matters I've been thinking about. I suppose I should be using Twitter more actively if I'm going to write like this instead of managing to finish longer posts!

I used to track all my miscellaneous foreign currency in Quicken as part of my net worth. I kept a separate account for each currency, and occasionally adjusted the US dollar value to account for exchange rate fluctuations. There were times when I was traveling a lot and these accounts might have totaled over $100, but that's not the case any more, so I decided it was a stupid waste of time and just deleted those accounts! I still have the money in my jewelry box and will take it with me the next time I visit Canada, the UK, Europe, Mexico or New Zealand! I think I have a few Botswanan Pula and South African Rand too, though I never set up an account for those.

One of the best things you can do for under a dollar is to write a good, old-fashioned postcard and send it to a friend. I came across a whole shoebox full of cards from 15-20 years ago and they are gems. I'm still friends with many of the senders and we've started sending cards again, having been reminded that email and Facebook just aren't the same!

My home value just dropped by about $25,000 yesterday according to Mint.com. When I first signed up for Mint, I thought their valuation seemed pretty accurate, but now that it's around $40,000 lower than it was a few months ago, I'm not so sure! Wishful thinking may be playing a part, but I also think they must be basing this on some comp sales that aren't truly comparable.
I've also been paying close attention to rents in my neighborhood, and I think I could rent out my apartment for at least a couple hundred dollars more per month than it costs me. This has been on my mind more lately, as Sweetie and I seem to be talking more and more about the possibility of cohabitation.

Remember my friend Richard, the successful business owner who got a big bonus this year? I saw him again recently and was very pleased to hear that he put a huge chunk of his $2 million bonus towards paying off and refinancing the mortgages on his two homes. Richard seems to enjoy luxuries more and more as he gets more accustomed to the level of income he's been earning, and I've heard him say he's never been much of a saver, so it wouldn't have surprised me to hear that he'd spent money on a new car or some incredible piece of art, or a big vacation. I'm sure he's treating himself to some nice things, but it's good to know that he also has his eye on the long term picture and used his windfall to lower his monthly expenses in case he hits a rough spot in the future.

More bills set up on auto-pay: utilities and condo maintenance. I think I will now only write one paper check every 5 weeks, when I pay for my French lessons. Sometimes I even pay that with cash, so who knows how long it will take me to use up all the old checks with my previous address still on them!

December 2009 Net Worth

I am finally getting around to posting my year-end net worth. Drumroll please...

$408,490

Yes, I finally crossed the $400k mark! That is a good feeling... though it is slightly diminshed when I remember that in January 2008 I was hoping to hit $410k by the end of that year!

During 2009, my net worth increased by 37%-- a pretty nice recovery from last year's dismal performance. The NetWorthIQ graph says it all:


December 2009: $408,490, up 37% from '08, up 13% from '07
December 2008: $298,700, down 17% from '07
December 2007: $360,008

If you just extrapolate the trend I was on until 2007, I'm still not quite back on track, but the economy isn't the only factor affecting that, as I've had higher housing costs since then. And who knows, if I hadn't bought my condo, I probably would have been even more exposed to the crash in the stock market-- I think my home value has actually held up better than some of my investments.

Here's the breakdown for year-end 2009:

Cash & Bank Accts	$56,442
Retirement	$241,708
Stocks	$20,898
Bonds	$5,091
Home Equity	$86,318
Credit Card	-$1,967

My cash and bank accounts are almost $18,000 higher than they were a year ago, so it's not just investment performance that has bounced back-- I've saved cash, too. One thing that's actually lower than in December '08 is my home equity, as I took that down by $10,000 a few months ago due to sales data on comparable apartments in my area. My credit card balance is slightly less than it was a year ago, which I guess means I spent less on holiday gifts!

I'll post my 2009 expenses and income soon... and after I get my head around that, I will have to tackle setting some goals for the rest of 2009. Stay tuned!

Economic Indicators

So, what's the mood out there? Do you find yourself noticing little things that might be signs of the recession?
Here's one I've been thinking about over the last week or so: crowds at the gym.
I remember last year at this time, when it seemed like people were really panicking about the economy. So many companies in New York had been laying people off and things looked pretty dire. For me, my gym membership seems like one of the easiest expenses that could be cut if I had to economize, so I wondered if I'd notice a decline in the attendance at my gym.
As it turned out, I didn't. Last January, my gym always seemed to be packed. January is always a busy time in gyms, when people make New Year's resolutions and are still sticking to them. And the bad economy even increased that effect: when people lose their jobs, they have more time to go to the gym, and perhaps more desire to feel successful in weight loss and fitness goals, since their career goals are undergoing a setback. Also, many people probably pre-pay for a year's membership since it's cheaper than going month to month. The gym allows you to suspend your membership, but most people probably figured that the money was already spent, so they might as well just keep going.

So what about this year? When I returned to the gym on January 4th, I was dreading the crowds-- I'm always rushing to get a spot in the pool without having to wait, so having to compete with even more people beyond the usual regulars was not appealing. But the pool was no more crowded than usual, and the locker room seemed quieter than usual. And it's been that way every day since-- I keep waiting for the crowds of people to be jostling each other for lockers, waiting in line for showers, searching for empty treadmills... but it's just been pretty quiet and relatively empty.
Is it because people have found new jobs and don't have time to work out? Or is it because more and more people have let their memberships expire as they remain unemployed longer and longer? Somehow, I suspect it's the latter. New York just doesn't feel like it's bouncing back from the recession anytime soon... How about you? What sorts of economic signs do you see in your everyday life?

Bail-out Bankers' Compensation

This is a fascinating-- and infuriating-- article from last Sunday's New York Times Magazine:
What's a Bailed-Out Banker Really Worth?

Here's a few outtakes from this story, which details how Kenneth Feinberg went about negotiating (rather than czar-ishly dictating) compensation packages for top executives at companies bailed out under the TARP program:

Citigroup and Bank of America, for example, concluded that everyone in their executive suites [deserved multi-million dollar compensation packages because they were] above average when compared with peers at other giant banks that didn’t need a bailout. Or there was A.I.G.’s behind-closed-doors argument against Feinberg’s directive to pay its top people in large part with A.I.G. stock. The company’s reasoning? That the stock — trading briskly at the time at around $40 on the New York Stock Exchange — was actually worthless.

How does anyone actually say that with a straight face? "I want my $10 million bonus in cash from the US government, because the stock of the company I'm running has no value!"

Here's another gem:

That Dodd led the attacks on A.I.G. when what came to be called the retention bonuses were revealed infuriates [an unnamed friend of the author's, who works at A.I.G.]. He says that his boss asked everyone at A.I.G. Financial Products “to contribute the maximum to Dodd, because he was so important in Washington in terms of regulating the products we sell.” My friend went on to say: “Before he attacked us, Dodd was in our office” — in Wilton, Conn. — “giving a speech telling us how great we were. And our checks were in envelopes stacked up right there.”

Federal Election Commission filings show 31 maximum $2,100 contributions to Dodd during the last quarter of 2006 from employees of A.I.G. Financial Products. My friend’s former boss, A.I.G. Financial Products’ head, Joseph Cassano, who is listed as giving $2,100, did not return calls to his home, nor did his lawyer return calls seeking comment.

Asked about the event, and about checks stacked on a table, Dodd said: “Yes, it happened. I remember having a fund-raiser there. . . . I can’t finance my own campaigns. I have to raise money,” he added. “But what does this guy think? That if they give me money I have to do what they want me to do? That tells you something about them.”

Of course this sense of entitlement isn't just an issue at TARP companies-- almost all big corporations now operate in this rather closed world where all their top executives sit on each other's boards and reinforce the idea that they "deserve" more and more money:

“The boards of these companies just don’t have an arm’s-length relationship with these executives,” says Lucian Bebchuk, a Harvard Law School expert on executive compensation who advised Feinberg. Board members are frequently executives or board members at other big corporations, Bebchuk explains, and therefore are likely to be steeped in the same entitlement culture. Indeed, they are lavishly paid, too; in 2008, A.I.G. board members earned an average of about $300,000 for their work in 2007, the year when apparently unsupervised trading in toxic financial products destroyed the company.

“No director wants to be the skunk at the garden party,” says Sonnenfeld, the Yale Management School associate dean. “And the headhunters, whose compensation, by the way, is based on how much executives make, won’t pick them for boards if they’re going to be dissenters.”

Which leaves us with this stat:

Over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1). That’s more pay in one workday for the chief executive than his average employee makes in a year.

Are top executives really working that much harder these days? Are they really delivering that much more value to shareholders? I don't think so, and I just don't understand why more people aren't furious about it. Everyone who holds shares in public companies, in the form of stock or through mutual funds in your 401k, is affected by this-- this is millions and millions of dollars that could be paid out in dividends to shareholders, or invested in more workers and new technology to help the company and the economy grow. Instead, it's going into the pockets of a tiny, well-connected group of people who think they can use that money to buy politicians and elections, not to mention an awful lot of personal luxury (not all of which is necessarily stimulating the economy within our borders).

I have no problem with people getting rich. There will always be a small number of people at the top of the pyramid, and many of them will have done something extraordinary to get there, something that will have provided value to millions of other people, in the form of money or convenience or entertainment, etc. But something is seriously screwed up when executives who have destroyed value, destroyed livelihoods and nearly destroyed an economy still think they deserve to earn more every single year than 90% of Americans will ever earn in a lifetime-- even when their big paycheck is coming straight out of taxpayers' pockets.

The article ends on a slightly optimistic note, hoping, as I do, that there's a way to use the ideas of people like Kenneth Feinberg and Warren Buffett and others to more fairly structure compensation on a broader scale, to appropriately reward good performance and encourage innovation while curbing the kind of risk-taking that leaves taxpayers holding the bag when things go wrong. But a lot of attitudes are going to have to change for that to happen.

An Avatar's Open Wallet

Here's an interesting concept: spending virtual dollars to live an online live that is much more luxurious than your real one: No Budget, No Boundaries: It’s the Real You

It may be raining pink slips, and some people may be hard-pressed to make the rent, much less splash out on a pagoda-shoulder jacket from Balmain, but Vixie Rayna is hardly feeling the pinch. Not a month goes by in which she isn’t spending as much as $50,000 on housing, furniture or her special weakness: multistrap platform sandals, tricked out in feathers and beads.

Recession or no, Ms. Rayna isn’t reining in her fantasies, or her expenditures — at least not in the virtual world. In a simulated universe like There.com, IMVU.com or Second Life.com, the granddaddy of avatar-driven social networking sites, Ms. Rayna, an avatar on Second Life, and her free-spending cohort can quaff Champagne, teleport to private islands and splurge on luxury brands that are the cyber equivalent of Prada waders or a Rolex watch. Real-world consumers may have snapped shut their wallets. But in these lavishly appointed realms it is still 2007, and conspicuous consumption is all the rage.

All this is not to say that online spending is purely virtual: people spend real money on this, albeit not as much as these things would cost in real life:

In most virtual worlds, memberships are free, but players trade real money for virtual currencies, used to buy products, save up in an account or eventually redeem for real money. About 70,000 Therebucks on There.com, or 10,000 Lindens in Second Life, each about $40, can buy a choice of simulated wares, from several pairs of thigh-high boots to a plot of land. What’s more, as Mr. Wilson pointed out: “Everything fits; things don’t wear out. The virtual world represents a different value proposition.”

In their day-to-day lives, shoppers like Mandy Cocke, Vixie Rayna’s real-life alter ego, have sharply trimmed their spending. When times were flush, Ms. Cocke, a nurse in Virginia, parted with as much as $1,000 a month on designer shoes and clothing. Lately, though, “pretty much every possible expense makes me ask, ‘Do I really need this?’ ” she said.

But online, their acquisitive lust rages unabated, fueling a robust economy driven mostly by avatar-to-avatar transactions estimated at between $1 billion and $2 billion a year in real dollars. Second Life, the most successful and most familiar of such sites, does not disclose retail revenues. But it reported a 94 percent surge in its overall economy in this year’s second quarter over the same period a year ago.

I've never tried out Second Life and don't really have any desire to, but this has made me very curious about it! What fascinates me is that if these online avatar worlds are booming exactly when the rest of the economy is tanking, it has to be because people need to spend less money in order to buy an equal or greater feeling of spending money! Some people just enjoy the idea of spending money and having stuff, even if it's totally imaginary. They'd rather spend $50 a month on the equivalent of $20,000 worth of virtual clothes than $50 worth of real clothes. Personally, I don't get this, especially with clothing-- to me, half the pleasure of good quality, expensive clothes is how they feel against your skin, not just how they look. If you're just seeing something in pixels, the whole concept of a high-end brand vs. a knockoff is totally meaningless.

Readers, I'd love to hear comments from you if you've tried this-- how much money are you willing to spend on an online avatar as opposed to your real self?

Coping with a Pay Cut

A poignant article from the Times: Still on the Job, But at Half the Pay.

The dark blue captain’s hat, with its golden oak-leaf clusters, sits atop a bookcase in Bryan Lawlor’s home, out of reach of the children. The uniform their father wears still displays the four stripes of a commercial airline captain, but the hat stays home. The rules forbid that extra display of authority, now that Mr. Lawlor has been downgraded to first officer. He is now in the co-pilot’s seat in the 50-seat commuter jets he flies, not for any failure in skill. He wears his captain’s stripes, he explains, to make that point. But with air travel down, his employer cut costs by downgrading 130 captains, those with the lowest seniority, to first officers, automatically cutting the wage of each by roughly 50 percent — to $34,000 in Mr. Lawlor’s case.

But here's some bits that disturbed me:

“I don’t want to be a 50-year-old pilot earning $40,000 a year,” he said, adding that his wife does not want to be married to a pilot with so little earning power.

That seems a bit harsh, don't you think? From the rest of the article, the wife doesn't really seem to be taking that view-- she's worried about their loss of income but she also gives her husband kudos for helping out more around the house when he's working less. They're stressed out, as anyone would be, but it's not sounding like she's ready to divorce him if he doesn't get a raise.

Another quote that bothered me:

Bryan and Tracy Lawlor, who is also 34, have hidden their straitened circumstances from their four young children, mainly at his insistence. But as their savings dwindle, Christmas, a key indicator in the Lawlor family, will mean fewer presents this year. The Lawlors have made a practice of piling on toys and new clothes for their children at Christmas, buying relatively less the rest of the year. That will make a cutback noticeable this holiday season, and the parents are concerned that their children will begin to realize why.

“You don’t want to see disappointment on their faces; that makes me feel horrible,” Mr. Lawlor said. “You can be the best pilot in the airline and make the best landings, and in their eyes, I am not going to be as important as I was.”

I don't mean to criticize this guy-- he's in a tough spot, one that I can't claim to have been in myself. I do know how much fun it can be to give my niece and nephew presents, and I can imagine how my heart would sink if they seemed disappointed. But it's just sad that he seems to place all his self-esteem in his earning power and ability to shower his children with presents. I hope he doesn't really think his kids and his wife only respect and love him because of his rank and salary.

How Fast Can You Adjust?

A while back, I posted "Do You Have a Crisis Plan," asking what you would do if you were laid off or had some other sort of financial crisis. But sometimes the question is not just "what will you give up," but "how quickly will you give things up."

An example drawn from real life: a couple in which the husband has just lost his job. The wife is a stay at home mom. They have a lot of home equity, and pretty good savings due to an inheritance, but they have a pretty expensive lifestyle. They also have a few significant one-time expenses planned for later this year: a vacation and a bat mitzvah.

Their savings might last a couple of years if they stay in their current home and make some cutbacks, like taking the kids out of private school. They could also refinance their mortgage to lower their monthly costs a bit, though that could be problematic if no one has a job. They could sell their house and move to a much smaller place with lower maintenance costs. They could cancel the vacation and scale back the bat mitzvah, but they don't want to, for the sake of the kids, and probably, to some extent, keeping up appearances.

The question about these changes is, how much? How fast? People often talk about having a 6-month emergency fund, or a 1-year emergency fund, but what if that isn't long enough? In this particular situation, and in this economy in general, I'd be extremely worried that it could take a very, very long time for the husband to find another job, and it may not be for anything near his previous salary level. If they just coast along trying to economize in minor ways, they could end up in big trouble. But if they were able to sell their house quickly, they'd free up a lot of cash that could significantly extend the time they can survive without anyone working.

Losing a job is a traumatic thing. People are scared and angry. They might feel a lot of self-doubt and shame. They want to put a good face on things, for themselves and for their kids, but also for the world around them: they don't want to admit they're in trouble. Each person's situation will be different, but I think it's important to take a hard, realistic look at your savings and budget and your prospects for getting another job, and then plan for the worst. I don't mean to downplay the significance of a family having to sell their home and turn their lives upside down-- it's not the sort of thing you should or can do at the drop of a hat. But sometimes you just have to act sooner rather than later.

Back to my crisis plan: if I lost my job today, I'd probably give myself a week or two before I tried to find a short-term roommate, given that back-to-school timing would be key-- at another time of year, I might let myself wait a little longer. I would immediately be emailing everyone I'd ever worked with to try to network my way into a new job or at least some consulting work, and based on some connections I have, I think I'd have a pretty good chance at getting at least some part-time income based on that. I'd also be keeping an eye out for any other job I thought I could do. If I saw a retail store with a "we're hiring" sign, I'd apply, even if the money was far less than my current income. I'd probably take the first job I could get, and just keep looking for a better one. If I was unemployed for more than a couple of months, I'd also probably be talking about moving in with Sweetie and renting out my entire apartment. I'd rather make short-term sacrifices right away than have to make more drastic sacrifices after running out of money later. We'll see if the family I mentioned above make the same choice.