The FIRE is Still Burning

Reading the retirement issue of the New York Times Magazine this weekend reminded me that I still have things to say on these topics, despite the lack of posting! The "FIRE" acronym has been around for years, but now, beyond just "Financial Independence Retire Early," there are subgroups like Fat-FIRE for people who retire early and have luxurious lifestyles, and Lean-FIRE for people who are managing their early retirement by being extremely frugal. Coast-FIRE means you save a lot early on so you can kick back later. Barista-FIRE means you are sort of retired but working part time in some sort of job to get health insurance.

Now I feel like I'm at the supermarket looking at all the different types of yogurt. I guess it wouldn't be America if we didn't figure out a way to expand every concept into a million different flavors!

I guess my FIRE flavor is a bit of a smorgasbord. I'm probably least aligned with the Lean people. While I have always valued fragility and spent many years trying to live well below my means, I've never felt really hard core about that approach, as I allowed myself plenty of little splurges. Coast sounds a lot like me: I wouldn't be in my current financial position if I hadn't saved big chunks of my earnings starting in my 20s and 30s. Barista doesn't seem like quite the right word for my current work status, but I do feel like I'm off the career track, working rather lightly so I can feel productive and get benefits. 

How about Fat? I've never felt particularly fat. But now there's that pandemic and perimenopausal weight gain that has forced me to buy more new clothes than usual in the last few years. I'm NOT enjoying THAT kind of fat. But I'm feeling a little chubby in the other way too, in terms of living well. In the last couple of years, I've felt secure enough to start spending more money. Some of those new clothes were at price ranges I never would have even imagined before. If I told my 35-year old self I'd someday spend $350 on a scarf, she'd have been horrified. But I did, and it's a gorgeous and unique scarf that goes with everything and elevates any outfit and I wear it a lot and feel like it's worth every penny for how happy it makes me. Maybe it even makes me look thinner??? 

And Sweetie and I have decided that when we do our next big trip, hopefully to Asia sometime next year, we're going to stop torturing our bodies and fly business class. We're also going to upgrade one of our cars sometime soon-- not to a Maserati or anything, but something with more comfortable, power-adjustable seats for both driver and passenger. It's shocking how hard it is to find a sub-compact SUV with a power-adjustable passenger seat-- many brands just don't offer it, even in the top-level models. So it looks like an Audi, BMW, Lexus or Volvo is in our future, for probably somewhere between $40,000-50,000. This feels so splurgy to me, but then I found out that my sister and her husband have two new (bigger) cars that have each cost more than that, all while they have two kids in college who will be graduating with some big debts, it sounds like. Auntie X will try to reserve some funds to help the kiddos out, of course, but I'm prioritizing my spinal health for the moment! Being able to do this feels like true luxury to me. But I don't think I'll ever quite fit in with the true Fat-FIRE adherents, as they seem to mainly be Silicon Valley entrepreneur types who cash out of a start-up and have more extreme lifestyle goals. (Or else, as one person in the NY Times article points out, they are people who are raising kids in expensive places like San Francisco, and therefore have huge budgets for lifestyles that might seem not that fancy elsewhere.) I still have a lot of Lean moments of watching for what's on sale in the supermarket, using coupons, and picking up coins whenever I spot them!

Anyway, that is my little flicker of FIRE for today! I haven't posted in forever but life is good! I continually resolve to dump all my money thoughts in this blog where they belong, so maybe one of these days I'll start posting more again. Thank you to those of you who still stop by and leave comments!

A Millionaire Can Get Medicaid

So here’s an interesting development: I just found out I qualify for Medicaid, at least for the moment.

Now before you jump all over me saying I’m a greedy conniving cheat who shouldn’t be leeching services from the government, I will just say that it is very likely that I will never actually cost the government any money for using Medicaid. I’ll explain below. But I do think this is a great example of some of the perversity built into our current healthcare system.

I currently pay over $750 a month for COBRA coverage from my former job but in a few months, it will run out and I’ll have to buy my own insurance. I’ve been researching the plans offered through NY State’s marketplace under the ACA, otherwise known as Obamacare. I was going back and forth about what kind of plan to get and which insurance company to choose, but then realized that I shouldn’t be agonizing over it for just the last month of 2018— I could just pick the cheapest Bronze plan for that month since it was unlikely that I’d use medical care that month other than in an emergency, and then I could wait until the 2019 open enrollment period to decide on a plan for next year.

 I decided to see what the application process was like— I didn’t think I’d finalize and submit it right away, but I wanted to see what info was needed. The process is actually pretty straightforward, though if you aren’t sure what all the lines on your tax return mean, you might want to get some help. You basically have to give identifying information to be sure you qualify, and then income and deduction estimates for the year of coverage to see if you are eligible for any subsidies.

 The system is linked into NY State government data, so it knew I wasn’t earning any wages (via a paycheck with withholding) this year. For my estimated income for 2018, I just used the business income, interest, dividend and capital gains numbers from my 2017 tax return. (The business income is a little trickle from blogging, plus a consulting project I did last year, which is unlikely to be repeated this year.) They then ask about certain deductions that affect your adjusted gross income— again, I pulled this information from my 2017 tax return and extrapolated for what they would be in 2018. One of those deductions is what you pay for health insurance premiums if you are self- (or un-) employed.

 So here’s the thing— my taxable income this year is only likely to be around $20,000. When you subtract from that what I’ll pay in 2018 for my health insurance, which is over $8,000, boom, suddenly I’m at poverty level. Assets are not taken into consideration at all. It is also worth pointing out that the dividends and capital gains produced by my 401k and Roth IRA accounts are not taxable, so while I factor those in as “income” in my planning for the future, they don’t affect my eligibility for Medicaid. While I hadn’t originally planned to finalize my application, I sort of inadvertently did: a screen popped up saying I qualified for Medicaid, and that it would be effective as of July 1! I was very confused by this so I called the helpline and talked the whole thing through with someone to see what it would mean.

 Since I will still be paying for my COBRA coverage through November, any medical costs I have will still be covered by that primary insurance, but apparently Medicaid will become secondary coverage, if the provider I use accepts Medicaid. (That's a big if-- one of my doctors stopped being in-network for any insurance companies, so I’m sure she won’t accept Medicaid.) I’ll probably get a physical and maybe see another doctor or two before my COBRA runs out, but I’m guessing it may not be anything that Medicaid would cover.  There is also a slight possibility that I’ll get some work later this year— in that case I’ll have to go back into the application and update my projected income, and presumably that would put me back in the position of buying a bronze plan, with maybe a small subsidy towards the premium for 2018. And in 2019, without all those COBRA payments, I’ll probably no longer be eligible for Medicaid and will just get a subsidy for purchasing a plan. And depending on my actual income, I may end up paying all or some of the subsidy back when I do my 2019 taxes.

 I really wonder how many people fall into a situation like mine. I didn’t do anything to “game the system.” I just happen to benefit from a quirk in how the laws are currently designed (and yes, they should fix that quirk). If I had more investible assets, my dividends and capital gains would probably be high enough to disqualify me. And if I wasn’t paying for my platinum level COBRA, my adjusted gross income would be too high for me to qualify-- that, to me, is the most bizarre detail. But for the next couple of months at least, I am a millionaire who qualifies for Medicaid.

Another Down-to-Earth Heiress

Consider this a sequel to my last post, in which a woman's family money seemed to be funding some luxuries for an otherwise frugal couple.

This time, the story is about a childhood friend of mine. I hadn't really kept in touch with him for years, but some years ago I was at a party in my home town and met his wife. She was a lovely person who taught in a local nursery school, just really sweet and friendly and exactly the sort of person you'd want your child's teacher to be. My old friend worked in what sounded like a mid-level corporate marketing job. They had a child and another on the way at that point. They were renting a house and hoping to find one to buy. It all sounded totally typical for a young married couple of my general world, which I'll again describe as mostly people who have had a stable, middle-class to upper-middle class upbringing, college grads-- people with many advantages in life but who would not be seen as particularly rich. People who probably aren't living paycheck-to-paycheck, but who have worries about the bigger financial goals in life such as helping kids pay for college, and retirement. People who can't take money for granted.

As in my last story, an offhand remark by the wife made my head spin-- I was telling a story about my own job, with an example of a regular task I had at that time, and I referred to a company name. The wife said "oh! That's my family's business! [Things associated with this company, one of which I had just cited,] are named after my sisters and cousins and me!" This company is not a household name but it's one of those things that is actually pretty major in a behind-the-scenes way, which you notice everywhere once you know where to look. I didn't pry into all the family tree, but from doing a little research afterwards, it appeared that the wife's grandfather was at that time the richest man in the country where this company was founded.

Being the richest man in that country is not like being the richest man in the US-- our billionaires are way richer. But still... he's a billionaire! I guess there is no law that says grandparents have to provide money to their grandchildren, and maybe this woman doesn't get a thing, but even if she is one of lots and lots of grandchildren, she would surely inherit something someday. And at that level of wealth, I'd be surprised if there wasn't some sort of trust fund distributing some money already.

At some point after that party, I asked a mutual friend if he knew about the wife's background. He was aware that she came from money, as apparently a group of this guy's friends always joked about how he must have sold his soul to the devil because he'd gone from being kind of a nerd in high school to marrying this beautiful and wealthy woman! But they didn't even realize exactly how wealthy her family was.

I was just looking up this couple to see what they are up to lately, as I haven't seen them in a while and don't know much more about them other than what their kids are doing in photos posted on Facebook. The wife is no longer a teacher, and has what sounds like a management job at a tech company. My friend seems to still have more or less the same job. When the wife was a teacher, I thought "ok, that is the sort of job that is emotionally rewarding if not remunerative, so it makes sense that she would do that." Obviously I don't know any details about her current job, but it sounds more like the kind of thing people do when they need to make money-- she may find it satisfying in other ways, but I guess it is my own bias showing that I think anyone who has some family money would want to be an entrepreneur, or work for a non-profit, or teach-- in general, do things that are too risky or low-paying to do if you really need a steady income. I wish I could ask her a lot of questions....

Powerball

So, how crazy is it that the Powerball jackpot is $1.3 billion? Sometimes it seems like all anyone is talking about, though David Bowie's unfortunate death has managed to change the subject this week, at least among most of my friends on social media...
Anyway, for all that I try to be a creature of logic when it comes to finances, I had my little moment of madness last weekend when I decided to drop $10 on Powerball, when the jackpot was "only" $900 million. I of course knew I wouldn't win, but it's hard not to fantasize about these things, and while the odds of winning are incredibly tiny, even incredibly tiny odds are better than the absolute certainty of not winning if you don't enter. And since my lottery spending pattern is to spend about $10 every few years when the whim strikes me, I don't feel like I'm throwing away too much money.
It's funny to read some of these articles that try to tell you the best times to play the lottery-- actually, I should say "try to read," as I feel my brain getting numb pretty quickly. I guess the ideas fall into various categories-- since the winning numbers themselves are totally random, the best you can hope for is to strategize about not having to share the prize, or doing some sort of analysis of the cost/benefit of buying a ticket at different jackpot levels. No matter what, you are working with odds of winning that comparable to odds of being hit by lightning while standing on your head while serving as the first democratically elected president of the United Kingdom.
What struck me after I read the back of my Powerball ticket more closely is how relatively worthless the secondary prizes are for getting a few of the numbers right. After the jackpot, it drops to $1,000,000 (5 numbers right), and then $50,000 (4 numbers plus the powerball number), and then $100 (if you get 4 numbers, or 3 numbers plus the powerball number right). $1 million would be amazing and pretty life changing for most people, even if it's only about half that by the time you take out taxes, and even less if you take it all in cash up front. But I'm not sure it would be enough to make me feel comfortable quitting my job and changing careers. $50,000 definitely wouldn't be enough.

The other thing that interests me about lottery fever is how people talk about what they'd do with the money. at this huge a jackpot level, most people can't even get their heads around it. But they usually seem to start with thoughts of giving a lot of money to friends and family, which is nice. It makes you wonder about people who are billionaires already-- there are plenty of extremely expensive luxuries they can spend their riches on, and lots of charitable ventures, but even they must struggle to put a dent in it sometimes. I can only hope I someday have the problem of figuring that out myself!

If you've bought a ticket, good luck!

Wealth by Age

I found this chart fascinating-- so much so that I had to take a shaky pic of it on the subway with my phone!

Why did older people's wealth skyrocket then while others were stagnant?

Refinancing a Mortgage

As you've no doubt heard, mortgage rates once again at historic lows. I've thought about refinancing, but I think I may just leave it alone for now, as it just may be too much trouble. The background on why relates to the story below.

A friend of mine, who I'll call Maud, is currently in the process of refinancing a property. In the course of talking to her about this, she told me all this interesting stuff about the history of her home-ownership. This all starts about 30 years ago, when Maud's parents sold their share of a small business and suddenly had some cash to invest. They decided to buy an apartment in NYC, figuring that their kids might rent it from them while they were students, and they could rent it to other tenants as well. After one of those other tenants left, Maud decided she wanted to settle in the apartment long term, but the problem was that she wanted to buy rather than rent, but the apartment was too expensive for her at that time. Meanwhile, her parents had also decided to buy another property elsewhere as a vacation home. They ended up inviting Maud to buy a share in the vacation home at a level she could afford.
Now this sounds weird, but it all ended up being part of some complicated tax shelter scheme, which allowed Maud to swap her part-ownership in the vacation home for shares in the NYC apartment over time. There was a big tax advantage for her parents, and for Maud the advantage was that she borrowed privately from her parents and stretched out the purchase in a way that made it more affordable. Over time, Maud's income increased and she was able to pay off the loan from her parents early, leaving her in full possession of her apartment. This all sounds kind of odd, but Maud insisted that she paid her parents the full appraised value of the apartment plus interest. As a real estate investment, it didn't turn out that well for her parents since the market crashed after they first bought the place, but I guess they at least saved on paying some capital gains taxes. This would be an example of the sort-of-rich getting sort-of-richer based on hiring good lawyers!

Anyway, a few years after Maud paid off the apartment, she was doing very well in her career and had saved a lot of money, since her monthly costs were quite low without the mortgage. She started thinking about real estate investments herself. She looked at properties outside the city and came across an inexpensive, very small, but charming house. It was so charming, in fact, that she decided she wanted it for herself and bought it to use on the weekends. She admitted that it was a rash decision and not exactly the kind of "investment" she'd had in mind! But she loves having the house as a retreat, especially since her city apartment is also fairly small and she can use the extra space, which seems cheap compared to buying a bigger apartment in the city.
When she bought the place, she got a fixed-rate mortgage of about 6.5%. So of course the rates we've been seeing in the last few months were very attractive to her, and she decided to refinance. But here's the reality of what's happened in the last couple of years: banks are actually being a lot more picky about who they'll lend to these days. Because the market value of her house was down since she bought it and because there were some other complicating factors, the bank that held her existing mortgage didn't want to refinance it, and it was unlikely any other bank would either.
(At this point, my question to Maud was why the same bank would ever want to voluntarily lower the rate on a mortgage from 6.5% to 4.5%-- sounds weird, doesn't it? But aside from not wanting to drive you to their competition, and benefiting from the fees that the refinance transaction generates, Maud pointed out that the rate itself is a wash for the bank, as they are always pricing the mortgage as a spread from the prevailing rate set by the Federal Reserve.)
Back to the problem with refinancing: Maud was a bit dismayed, but her very sharp loan officer came up with a great solution: instead of refinancing the weekend house itself, why not take out a new mortgage against the paid-off apartment and use that cash to pay off the house in full? The apartment had gained a lot in value over the years, so she had way more equity there than the value of the house. She'd be nowhere near the usual loan-to-value ratios banks would require for a mortgage. All in all, it was a brilliant solution, so Maud forged ahead with the application.
As the process went along, I began to compare her updates with the process I'd gone through to get my mortgage at the height of the real estate boom. It was amazing to me how exacting they were being about every little detail, verifying addresses she'd lived at 30 years ago, asking for all kinds of documentation on the monthly costs of both her homes and the finances of the co-op. An appraiser came and did a whole report with photos and floor plans of every room attached. And this is all for someone with a high income and a perfect credit score, whose apartment is in an established building with other recent sales. This was definintely not a "liar loan!"
Maud also said that the good faith estimate and other application paperwork she received was very clear in its disclosures of the terms. So if anything good has come out of the economic crisis, it may indeed be that our real estate market will now have more stable underpinnings, with mortgages only given to people who can afford them, for properties that are actually worth it.

But back to my situation: I put 20% down when I bought, and I've paid off some extra principal over the last couple of years, but I'm not confident that my apartment would be appraised high enough if I tried to refinance now. It might also be a concern that the developer still owns some of the units in the building. I'm also wondering about selling the apartment in the next few years-- I think I'll be renting it out soon and moving in with Sweetie, but I don't want to be a landlord forever. So it's a dilemma... I may make some inquiries anyway, so I can assess this based on real info rather than my own gut feelings. I'll of course keep you posted when I do!

Income and Poverty Statistics

I love looking at data about income and wealth and poverty levels. I feel like we're so inundated with misleading information when people start talking about "the middle class" in relation to politics and taxes.

A report was just released of Census Bureau Stats about real income before taxes-- it's good to note that this is different from the Adjusted Gross Income stats often reported when people are referring to IRS data. Since weathy people tend to take more deductions for mortgage interest, charitable giving, 401k contributions, etc., it's important to remember that their real income is much higher than their adjusted gross income-- so when politicians talk about taxes that might affect someone whose income is above $200,000, they mean someone whose real income could actually be much higher.



But here's a few stats I found most interesting:



Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445.

That is for all households. Breaking it down a bit more:


Married couple households $58,036
Non-family, aka individual male $35,627
Non-family female $25,456

Median income of full-time, year-round workers:
Men $47,715
Women $36,931

15.1% of people are below the poverty threshold. Kind of an arbitrary line in the sand, as someone making a dollar more than the threshold isn't in great shape either. It's also interesting to note that about 34% of people are below 2X the poverty level. The poverty thresholds by household size are below:

# of people in household	48 states &DC	Alaska	Hawaii
1	$10,890	$13,600	$12,540
2	$14,710	$18,380	$16,930
3	$18,530	$23,160	$21,320
4	$22,350	$27,940	$25,710
5	$26,170	$32,720	$30,100
6	$29,990	$37,500	$34,490
7	$33,810	$42,280	$38,880
8	$37,630	$47,060	$43,270

211,492,000 Americans over the age of 15 earned money in 2010, or 67% of total population.



Interesting that it corresponds very closely to the total number of people age 15-64, presumably the ages of people you'd expect to work. But a lot more people are working past the age of 65-- about 8% of people over 65 had income in 2010.

Total popluation of US: 312,222,000

0-14 years: 20.2% (male 31,639,127/female 30,305,704)
15–64 years: 67% (male 102,665,043/female 103,129,321)
65 years and over: 12.8% (male 16,901,232/female 22,571,696) (2010 est.)




What this says to me is that almost half of all working individuals in the US couldn't support a family of 4 at more than poverty level. Two-income families have become a necessity... as has debt. The graphic below, which accompanied an article by Robert Reich, highlights this nicely:




All stats are from this Census Bureau report and Wikipedia citations of Census data.

Overheard at the Gym

The women's locker room at my gym is the best place to overhear interesting money-related conversations. (Actually, I suppose the men's locker room could also be a good place, but I haven't had the chance to find out!)
This morning, I caught snippets of a chat between two women who seemed to be discussing the boyfriend of one of them, or perhaps of a friend of theirs. They were saying that the boyfriend always seemed to brag about his money and status, even in the most unlikely situations, for example saying his office had had a leak during Hurricane Irene, but having to specify that it was some kind of executive suite office, not just "my office." But though they seemed to be saying the guy was sort of an insecure jerk, I caught the phrase "Marry him! Marry him!" I guess because he had money.
Then one of the women seemed to be bemoaning the fact that she'd never have a rich boyfriend. The other woman tried to console her by saying "but at least you're already living the life! I mean, Florida, the Hamptons, here [NYC]..." The first woman responded, "yeah, well, I do a good job looking like it," or something like that, saying that she worked in book publishing, where no one gets rich, so she was just keeping up appearances while being broke.

The whole thing was sort of funny, but also really depressing. I'm embarrassed on behalf of all women when I hear people like that talking about their plots to hook a rich husband, and off-handedly acknowledging that it's more important to them to look rich than to save any money in the hopes of actually being rich, or at least financially stable someday.

The Dilemma of Asking For and Accepting Help

I keep thinking about a friend I'll call Edna. Edna is a divorced mother of two. Because she's had to juggle child care, her job history over the past 15 or so years has been rather checkered-- nothing bad has happened, but she's had to stitch together various part time jobs that would allow her to be there for her kids. She'll do pretty much anything, from cleaning out someone's basement to cold-call selling on a commission-only basis to bartending, but many of her jobs have been temporary so she's never had a chance to really establish herself in a career. Her husband has paid child support, but she's just barely made ends meet-- one of the kids is now old enough to have her own part time job, and she made more money last year than Edna did. I learned this fact during a dinner when another friend of Edna's urged her to apply for food stamps, which Edna did not want to do.

The friend's argument was that these government assistance programs exist precisely for people like Edna-- she does her best to find sources of income but is trying to look after her kids without being a burden to anyone. Her income in some years is basically at or below poverty level though there are times when she manages to do better. Shouldn't she accept some help?
But Edna hates to ask for help, which leads us to another fascinating aspect of her situation: Edna's parents are quite wealthy.
They have several other children. Some of those children have been given quite a bit of financial assistance-- particulary the male children: there seems to be just enough of a generational gap that girls were seen as needing only to find a husband, while boys needed education... and cars and clothes and apartments and so on. But although they've occasionally paid Edna to do work for them, they are otherwise very stingy with her. They barely even give gifts to Edna's kids, and when they do, there's often a whiff of goodie-bag re-gifting about it. Edna hates to ask them for anything, and rarely does, but at one point she reluctantly reminded them of an offhand promise they'd once made to chip in when it came time to pay for sending Edna's kids to college-- this time they kind of winced and alluded to money being tight for them... but of course this is in the context of them having two luxurious homes where they do lots of entertaining, and other trappings of an upper-class life.

I'm way over-simplifying the situation here to avoid too many identifying details, not to mention writing a mile-long post, but it's an interesting dilemma, isn't it? Should someone who is not wealthy herself but has a wealthy family turn to government for assistance? Is it the family's obligation to help her first? Some will no doubt say "neither" but what is someone in such a situation supposed to do? Leave her kids unattended? Pay money she doesn't have for day care programs? Edna's ex-husband is a mess, so he's not much help. It's hard to imagine anyone being more responsible and less prima-donna-ish than Edna... but she just can't seem to make all this work on her own.
Within a few years, both of her kids will be in college, and whether or not they get financial aid, that will be another drain on her resources, even if it does free up her time for a full-time job. But she's already been looking, and it's tough-- with the resume of a stay-at-home-mom who's fit odd jobs in around child-rearing, she's not going to be the most attractive job candidate in a climate like today's, where employers can probably be more picky. But she did mention that she will be going on a second interview for a job that pays about $40,000 a year, an amount she referred to as "life-changing."

Interestingly enough, she told me about the potential job while we were both at the home of another friend who has become something of an art collector. As I was listening to Edna, I was looking up at a painting above the fireplace that supposedly cost $50,000. It was such a collision of worlds... and it leads me to one more facet of these kinds of situations among friends:

Whenever Sweetie and I have dinner with Edna, we'll often cook something at home in order to avoid the issue of whether Edna can afford to go out. Sometimes we do end up going out, and sometimes we'll just pick up the check ourselves and tell Edna it's our treat-- but again, Edna has a lot of pride and won't always let us do that. The art collector friend hadn't seen Edna in a long time and invited us all to visit for a weekend in the country. I had thought we'd just be barbequeing, but we went out to dinner one night, and when the check came, we all split it evenly. I guess on one level that's totally fair, and just because one person makes 10 (or 20 or 100) times more than another doesn't mean it's their obligation to pay. But I personally think that if you invite someone to spend the weekend with you, they are your guest for the whole weekend, which means the host should cover the dinner bill, while the guest will hold up their end of the bargain by bringing wine or some sort of gift and offering to chip in for dinner but not arguing too much when the hosts insist that they'll get it. That rule doesn't have to be set in stone-- maybe going out to dinner one night is the thank-you gift to the host/hostess, to show your appreciation and relieve them from having to cook so you can all just relax and talk. But in this situation it seemed a little insensitive...

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...

2010's Highest Paid Authors

Here's a juicy little tidbit for anyone who's ever hoped to write a bestseller! Forbes has posted a list of the authors who made the most money over the past 12 months:

James Patterson ($70 million)
Stephenie Meyer ($40 million)
Stephen King ($34 million)
Danielle Steel ($32 million)
Ken Follett ($20 million)
Dean Koontz ($18 million)
Janet Evanovich ($16 million)
John Grisham ($15 million)
Nicholas Sparks ($14 million)
JK Rowling ($10 million)

Of course, this is just an isolated 12-month period, so it's not a good indicator of how much these authors might make on average over a few years. And though James Patterson is by far the highest-paid author, he freely admits that he doesn't do that much writing of his own books any more-- he basically outlines them and has other people write them, so you'd have to deduct what he pays his staff! But still, he's doing just fine.

What I'd love to see would be broader stats about how much writers make, sliced and diced by fiction/non-fiction, and showing income deciles. There are only a tiny handful of authors who make the big bucks, and many more who make pretty much nothing... but I wonder how many in between are making a pretty good living?

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!

My Money Weekend

I was out and about in Brooklyn this weekend, and that always provides fodder for thoughts about money.

On Sunday, I went out for brunch with Sweetie and Mortimer. Brunch is something I always have problems with-- I think it's a nice time to have a social meal with friends, and I always enjoy the food, but it pisses me off that it's so expensive! Brunch has to be the restaurant meal with the least value for the customer and the most profit for the restaurant.
We went to Sidecar, a great restaurant in Park Slope, where I paid $11 for "migas," which is scrambled eggs with guacamole, chilis, cheddar cheese, tomatoes and tortillas. It was absolutely delicious, but spending $11 for gussied up scrambled eggs just seems crazy!

After brunch, we went strolling through Park Slope for a while. At one point, we ducked into Ollie's cafe so I could use the bathroom. We didn't buy anything, but on the way out, I found a $5 bill on the floor. It wasn't obvious who it might belong to and I was tempted to keep it, but instead I stuck it in the tip jar.

Our next stop was the Brooklyn Flea, which has moved indoors for the winter, at the fabulous location of One Hanson Place. This is the old Williamsburg Savings Bank building, a striking landmark when you see it from the exterior, and even more fabulous within. The main lobby of the old bank seems to have been almost completely preserved and the flea market wares are spread out in front of and behind the old teller windows, and on thick glass counters that still have holes for inkwells, where people used to endorse their checks and fill out deposit slips. It's just a gorgeous space, with cathedral-like ceilings and elaborate windows. The rest of the building has been converted into condos, but I'm not sure what they do with the lobby space when the flea market isn't there.

Once you get past the architectural appreciation, the flea market is a blast. There are lots of great vendors with jewelry, vintage clothes, records, books, art, furniture and all sorts of random stuff. And "random stuff" is my favorite! I ended up spending $32 on a variety of old tobacco and medicine tins, which I collect. In a way, this seems just as crazy as spending $11 on scrambled eggs. I mean, what am I going to do with these tins? They'll just sit on my shelf with the rest of my collection, making it even more of a pain in the ass to dust. It's so purely materialistic to buy stuff that has absolutely no purpose... but I just love them. I love looking at them and wondering where they've been and who owned them, and I love the old-fashioned designs. In the larger scheme of things, $32 for a bit of decorative pleasure seems quite reasonable. Which makes $11 for the pleasure of eating a yummy brunch pretty easy to rationalize too!

Speaking of food, that's the other fun thing about the Flea-- there are quite a few food vendors. I don't know how Mortimer managed to be hungry again after his omelette, but he got a plate of pupusas. I found myself wishing I had room for a lobster roll, or some Greek pastry, but only managed to sample a bit of a pickle and some salted caramels, and Sweetie and I each had one mini chocolate-pistachio cupcake, which cost $1 each.

After the Flea, we walked along 4th Avenue to get home. I am always amazed at how much new construction there is along there-- over the last few years, it's changed enormously as they've knocked down some smaller tenement-style apartment buildings and replaced them with these massive high-rises. Every time I go by there, I feel like I notice something new that looks almost ready for people to move in... and I wonder how long it will take for all these buildings to fill up. I have no illusions about selling my apartment easily in the next few years-- hopefully I won't need to. I still think I could rent out my condo for a little more than it costs me each month, but seeing all these big empty buildings reminds me I'll have more and more competition, closer to Manhattan than I am.

The latter part of my Sunday, of course, was spent watching the SuperBowl. And for the first time, I wondered if any of the shots of the crowd would show some friends of mine, Richard and his partner. Are they big Saints or Colts fans? No, quite the opposite. They don't care about football at all, but one of their fabulously wealthy clients invited them to the game and even flew them down to Miami in a private jet. One of our other friends said Richard made over $2 million from his business last year, and I don't doubt it. It's kind of fun to observe the way he lives and the luxuries he enjoys, some paid for out of his own pocket and some by his clients. I'm happy for him, but sometimes it makes me smack myself and wonder why I don't have his life! I realized recently that I'm not jealous of his lifestyle per se-- I'm jealous of the fact that he is so successful precisely because he is doing exactly what he loves and is passionate about. That's what gives him his drive and makes him good at what he does. I think he would do it no matter how much he was paid. I am fairly content with my job, but I don't love it the way he loves his-- I wish I could find that perfect combination of satisfaction and financial success.

Whew-- all that squeezed into one Sunday! Now back to my Monday...

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.

Friends at Both Extremes

Here's a story about a relatively new friend of mine, someone I don't think I've mentioned here before. Let's call her Bella.
Bella is a divorced mom with two teenage kids. She gets child support payments from her ex-husband, but money is tight. She works at least two part time jobs at any given moment, and is always hustling for other little projects. That is what I love about her-- the hustle. She will literally do pretty much any honest job, from bartending to babysitting, to hauling garbage out of someone's basement. Her oldest child obviously picked up on this enterprising attitude, and has already started working, not just for her own pocket money, but realizing that her earnings will help support the household. Things are that tight.

Interestingly, Bella's parents are quite well off. They seem to be a bit oblivious to money matters and don't realize how much of a struggle it is for Bella to make ends meet. And Bella doesn't want to ask for handouts. Their wealth means her kids get nice gifts once in a while, and go to their house in the Hamptons once or twice each summer, but Bella isn't yet desperate enough to ask them for cash support, even though they've given big handouts to her siblings in the past.

Switch gears for a minute, to a dinner I had recently with another friend, who's met Bella many times and known her for years, though they aren't close. This friend, who I'll call Henri, is very successfully self-employed. Though he was worried that the economic downturn could put him in the position of having to lay off some of his small staff, he's actually landed some great deals recently and his business seems to be booming. He mentioned that he needed to hire a new bookkeeper and someone immediately mentioned Bella. Bookkeeping turned out to be among her many past jobs, so it seemed perfect. Since Henri and Bella don't talk that often, someone else said they'd tell her about it and have her call him, and then asked "how much is the pay?" Henri answered "$90,000 plus bonus."

At that point, my jaw dropped, and I wondered if I should apply for the job myself! I make slightly more than that now, but given the kind of growth Henri's business has been having, I wondered if it would be worth riding his coattails! (And hey, I like counting money! And I even worked for a bookkeeper when I was about 13.) In reality, I'm not sure I want to be a bookkeeper-- I think I was just shocked to realize how truly successful he must be if he can employ a whole group of people, many of whom are probably equally (or more) well-paid. I heard later that Bella was also a bit shocked-- when she was told about the job and the potential salary, she seems to have gone into a sort of reverie, saying "$90,000? Do you know how much that would change my life right now? $90,000....."

I would like to say that this story had a happy ending in which Bella and Henri were an employer/employee match made in heaven. But alas, Henri's other bookkeeper might not be leaving after all. And Bella would have a hard time doing the commute into the city for a full-time job-- her kids are at a tricky age to have to fend for themselves in a suburb without good public transportation. And who knows, maybe there was some awkwardness there? It can be weird to mix friendship and business, especially when there is such a disparity in circumstances. Bella is probably my poorest friend right now, and Henri is probably the wealthiest. It's strange-- but they both give me a lot to think about for this blog!

Rich Kids on TV: NYC Prep

Yesterday, I was reading about a new TV show called NYC Prep. It's supposed to be a sort of real world Gossip Girl, looking behind the scenes at the lives of wealthy New York teenagers:

These six swaggering rich kids — four girls and two boys — dutifully spend and text their way around the Upper East Side like their fictional counterparts on “Gossip Girl,” only they do it haltingly. Like real-life adolescents, their arrogance is dotted with hesitation, nervous laughter and assertions put in question form.

“Everything in New York City is about pulling connections,” PC, an 18-year-old who is cast as the spoiled, manipulative Chuck Bass figure, explains. “It’s who you know, and how much money you have. And it’s really sad? And I’m not saying I’m like that? But that’s what New York is: money is power.”

All the money in the world cannot change the sexual politics of high school or the pull of the herd. The show doesn’t name the schools, but Web sites found out fast. Taylor, 15, who goes to the highly selective Stuyvesant, a public high school, worries that wealthier students from places like Nightingale-Bamford and Dwight could look down on her. To improve her status, she decides to throw a party at a chic Japanese restaurant downtown....

As I always do when reading about reality TV shows, I found myself wondering why anyone would agree to participate in something that is designed to make them look ridiculous. Even if the kids didn't realize how obnoxious they'd appear, you'd think the parents would. Robert Frank at The Wealth Report apparently wondered the same thing, and unlike me, he could just call up the producer of the show and ask him!

RF: What did you say to get the parents to agree?
[Lenid Rolov, executive producer]: We used an honest approach. We had two producers who came from this world and we said we wanted to present these kids as they really are. These kids are dealing with the same issues that other kids are dealing with, but maybe they’re growing up a little faster. These kids don’t flaunt their wealth and they want to be seen as everyone else. The parents want to have their kids work for their money and have the same opportunities as everyone else.

I guess this tells me two things: that people in the upper echelons of wealth really have no idea how the rest of the world live, and that parents are easily blinded by the idea of anyone paying attention to their very special, very wonderful children.

Has anyone actually watched the show? What did you think of it?

Don't Read the Car Reviews

Here's something I stumbled on while browsing the New York Times website, which kind of just made me groan:

TESTED 2009 Mercedes-Benz SL63 AMG

WHAT IS IT? Mercedes and AMG have taken the V-8 version of the SL luxury sports car in a more aggressive direction.

HOW MUCH? $138,475 including the $2,600 gas guzzler tax, which is a third more than the basic SL550 ($99,375) or about half the price of an SL65 AMG Black Series ($299,000).

WHAT MAKES IT RUN? 6.2-liter V-8; 7-speed automatic transmission with manual shift mode.

IS IT THIRSTY? The E.P.A. thinks so, rating its consumption at 12 m.p.g. in town and 19 on the highway.

THERE is good news for anyone who has $135,000 to spend on a sporty luxury car. First of all, you’re rich, so congratulations on that. Second, it’s hard to find a bad car for $135,000.

Perhaps your tastes run toward an Aston Martin V8 Vantage, an Audi R8 or a Maserati GranTurismo. Or maybe you’re more of a Porsche 911 Turbo person. For $135,000, you could surely find the keys to a gently used Bentley Continental. In any case, you’d have a fast, flashy testament to your personal success (or at least, that of your ancestors).

But there’s another car in this price class that is aimed at the quietly wealthy, the kind of people who can spend a lot on a toy but don’t much care if every valet at Chez Pretentious can rattle off the sticker price. The Mercedes SL63 AMG, oddly enough, is a 518-horsepower retractable-roof two-seater for people who don’t need to show off....

The writer at least seems to have a healthy sense of irony about people's motivations for buying such vehicles.
It's hard for me to imagine spending $138k on a car, even if I did have money to burn. Expensive things like this often make me wish I could just try them out once, though. Cars, wine, food, etc-- up to a point, it's understandable that you get what you pay for, but after a point, does it really make a difference? $40k or $50k will buy you a very nice car, so how much better is one that costs $138k? Or more to the point, perhaps, how will you manage to enjoy what's so much better about it without getting speeding tickets all the time?

Overheard at BookExpo

As usual, I attended Book Expo America this past weekend. I didn't have a chance to do much scouting for new personal finance books, but I did manage to score a free copy of Chris Anderson's new book, appropriately titled "Free: The Future of a Radical Price."

The most interesting money-related moment of the show for me actually occurred in the bathroom. There was a very friendly attendant working there who was chatting with all of us waiting in line. Here's what she was saying while I was there, more or less:

I'm working here from 7 AM to 7 at night. No, I don't mind at all. I have another job too!
I go home after this job, I sleep for 2 hours, then I get up and go to my other job, cleaning offices at night. It's ok-- hey, my kids are all grown and out of the house.
I thank God that I have even one job in this economy. Nowadays, I laugh to see all these rich people who are scared! I see it in their faces, they're scared.
And to think, I used to feel intimidated by rich people. That's why they build all those tall buildings, so they can sit in them and look down on everybody...

Contrast this to another conversation I overheard, between two well-dressed young women who worked for publishers.They had obviously just run into each other after not seeing each other for a while:

Woman A: Hey, we have to get together! We still haven't done our Brooklyn thing!
Woman B: I know, I know! But I'm really broke again.
A: And I'm really busy...
B: Well, we have to find a time. Around the 15th of the month is a good time for me.
A: Ok, we'll find a time...

I guess Woman B was scheduling her social activities around payday. It's just fascinating how different people can be in their attitudes towards money and time!

The Rich Are Still Rich

On the Wall Street Journal blog The Wealth Report, Robert Frank makes a good point:

There is a growing consensus that the rich have lost about a third of their wealth. First came the U.S. surveys, which show millionaires down about 30%–both in wealth and population–as a result of the global financial crisis. Over the weekend comes news that the Sunday Times Rich List shows that the crisis has wiped out about 155 billion pounds ($227 billion), or a third of the wealth of Britain’s 1,000 people. Sir Elton John, for instance, is down 26%.

So if we were to “reset” the world of wealth, we should just knock off about a third....

As Frank points out, wealth isn't the only thing that has declined: prices are going down. And much of what defines wealth is relative anyway.

If your wealth has fallen 30%, and everyone else’s stayed the same, you would feel poorer. But if your wealth fell 30% along with everyone else’s, wouldn’t you still feel as wealthy as before?

And if the prices of things you buy also have fallen 30% or more, wouldn’t your experience of being wealthy stay the same?

It is accepted wisdom that a rising tide lifts all boats. Wouldn’t a sinking tide, when all boats are falling, still leave the yachts on top?

I hope someone will tell this to some of the Wall Streeters profiled in this recent New York Magazine cover story:

“I’m not giving to charity this year!” one hedge-fund analyst shouts into the phone, when I ask about Obama’s planned tax increases. “When people ask me for money, I tell them, ‘If you want me to give you money, send a letter to my senator asking for my taxes to be lowered.’ I feel so much less generous right now. If I have to adopt twenty poor families, I want a thank-you note and an update on their lives. At least Sally Struthers gives you an update.”

Jerk.

My Dinner with Richard

I had a nice meal last night with a friend who I'll call Richard. He owns a small business which has been very successful in the last few years, catering to a very wealthy clientele. Richard himself seems pretty wealthy these days, and it's gotten to the point where arranging to have dinner with him makes me a little anxious, as he sometimes suggests rather expensive restaurants!

It's not always a problem-- sometimes we just order cheap Indian food and eat at his apartment. But last night we went to a place where the entrees ranged from about $27-40, and Richard ordered an $18 appetizer. He also picked the wine without my seeing the list, and when I did the math in my head afterward, I think it must have been between $40-50 for the bottle. And who knows, maybe that was the cheapest bottle! The total bill with tip ended up being about $80 per person-- you could certainly do far worse in New York, and the meal really was very good, but I couldn't help thinking it was the kind of thing I should only be doing for a special occasion, not just a routine dinner with friends.

The other thing about the dinner that made me laugh was that just before we were about to leave, Richard's eyes suddenly opened wide as he was looking behind the other friend who was sitting next to me. "Don't look, don't turn around!" he said. At first I thought, ooh, what celebrity is sitting behind us at this swanky place... but there was only a wall behind us-- a wall upon which a giant cockroach was crawling! I reached over and swatted it away with a napkin and an attentive waiter immediately stomped on it with a big crunch. And that is one of the great truths of life in NYC-- no amount of money will ever make you totally immune to cockroach encounters!