Category Archives: Building Wealth

Eric Ripert on building a timeless brand

From Inc. magazine, this is worth a read.

The best meal I’ve ever had in a restaurant was at Le Bernardin.  Everything was right.

 

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Explosion of inequality? Depends on how you look at it.

Fantastic new study from the AEI looks at consumption.. you know, the stuff we buy and use every day, and finds things haven’t changed much in the last 20 years, and in fact, we’re all richer.

First, instead of looking at income inequality, Hassett and Mathur look at consumption inequality, which represents a broader look at the economic resources a person can summon. Looking just at income ignores how individuals are generally able to smooth consumption by borrowing in the low-income years — such as during retirement or when they are just entering the workforce — and saving in the high-income years. Studies of income alone often exclude things like Social Security, Medicare, and food stamps.

Additionally, tax return data of the sort Piketty and Saez discuss can be influenced by changes in tax rates, giving a highly distorted picture of income inequality. For example, the personal tax rate reductions of the 1980s and the early 2000s caused businesses to shift income out of the corporate form and into the personal tax, thus raising reported incomes at the top.

So what does the consumption data tell us?

In 1984, households in the top income quintile, or top 20%, accounted for 37% of total consumption spending. Households in the bottom quintile accounted for only 10 percent of total spending. So the ratio of top-to-bottom consumption was approximately 3.8.

By 2010, that ratio had increased to just 4.4. This hardly represents an explosion in inequality. As measured by this ratio, consumption inequality has increased marginally over time, averaging 4.21 between 1984 and 1990, 4.29 between 1991 and 2000, and 4.46 between 2000 and 2010.

The graphs and charts tell quite a story, but not the narrative politicians want you to hear (click to enlarge):

I often mention seeing folks paying for food with “Independence” cards at the local grocery store while talking on an iPhone.  Those people are far richer than the poor of 20+ years ago.  Maybe we need to look at why they are richer now, instead of using force to take my stuff.

 


Mark Cuban probably knows more than I do

And he says to hold your cash and stay out of the stock market.

I haven’t been doing that, in fact we’ve increased the amount of mutual funds in our portfolio.  We do keep more cash than most people think we should, though.

Might want to take his advice seriously, though.  The market has been really unstable lately.  I happen to think what happens in November might help settle it down, assuming Republicans regain control of the house.  Gridlock is good for the market.


70? Try ‘Not At Any Age’

The Miami Herald reports today on consideration among Economists and members of Congress of raising the minimum age for Social Security benefits to 70.

No one who’s slated to receive benefits in the next decade or two is likely to be affected, but there’s a gentle, growing and unusually bipartisan push to raise the retirement age for full Social Security benefits for people born in the 1960s and after.

The suggestions are being taken seriously after decades when they were politically impossible because officials – and, increasingly, their constituents – are confronting the inescapable challenge of the nation’s enormous debt.

Social Security was created in 1935 with a retirement age of 65, but since then life expectancy at that age has increased by about six years, according to the National Center for Health Statistics.

Today the full Social Security benefit retirement age is 66 for people born from 1943 to 1954. It then increases by two months for each birth year (66 years and two months for those born in 1955, 66 and four months for those born in 1956 and so forth), until those born in 1960 or later get full benefits at age 67.

Raising the age eventually to 70 could prove to be politically acceptable because it wouldn’t have an immediate social impact, but it would demonstrate that politicians are resolute enough to mend one of the government’s most popular social programs and to tackle the national debt.

To borrow a phrase from The One:  Let me be clear.  I was born in 1970.  I guarantee I will not get Social Security.  Ever.  By the time I hit 65, there will be means testing, and Social Security will be open about the fact that it is simply a wealth redistribution scheme from people who work to people who don’t, with a new twist that people who don’t work who don’t need Social Security (and all of my financial planning is done with the assumption that Social Security will not be available) also pay for those who do.  I’ll be 69 in 2039, the year they admit they won’t have enough money.

Last week the CBO issued a report suggesting that some adjustments must be made to Social Security’s financing. It projected that under the current rules, the system won’t be able to pay scheduled benefits starting in 2039.

However, the CBO also found that raising the full retirement age to 68 starting with workers born after 1966, or to 70 for workers born after 1978, and raising it gradually before that wouldn’t significantly improve the system’s financial outlook.

The CBO said that raising the age to 68 would reduce Social Security spending by only 3 percent, or 0.2 percent of the GDP, in 2040. A retirement age of 70 would save 6 percent, or 0.4 percent of the GDP.

The lawmakers stress that raising the full-retirement age should be only one of a series of Social Security changes.

Their views represent a subtle but important shift. Traditionally, Social Security was considered “the third rail” of politics – touch it and you die – because people cherished their benefits so much.

That changed only once, in 1983, when a bipartisan Social Security commission’s recommendations led to increases in payroll taxes and a gradual rise in the retirement age, putting the system on a path to solvency for decades.

In the years since, however, proposals for more changes have gone nowhere, but the debt threat is forcing another look.

No one in Congress has the courage to stand up and say what is true, that Social Security needs a complete overhaul (or, if I had my way, needs to be eliminated).  We can not continue to make promises like this, and we can’t afford to keep the ones already made.  So plan like I am, assume Social Security will be gone when you retire.


Repost: Value is more than dollars

This is post from July of last year that fits in nicely with my usual Friday series on building wealth.  It’s been a busy week, and I haven’t had time to write anything new.  I should be back with original content next week.  If you want to read more in my series on building wealth, please click on that category in the sidebar.

The Simple Dollar has a nice post up on the value of frugality, I thought I might add a bit on the subject of value, dollars, and time.

The writer at The Simple Dollar was asked:

I don’t see why I should spend fifteen minutes making a batch of homemade laundry detergent just to save a few bucks when I could spend that fifteen minutes building my career. Most “frugality tips” seem like a waste of time.

There’s a pretty simple way to look at this, and the poster points it out pretty well. If the value of the 15 minutes is higher than the value of the laundry detergent + the cost of purchasing detergent, then certainly your time is better spent doing something else.  (BTW, the cost of homemade detergent is higher than just 15 minutes of time!)

Another example:  My employer pays me about $50 an hour (it’s more complicated than that, as I don’t ‘do’, but rather ‘manage’ and ‘think’ and ‘plan’, so my employer is paying me more for my work product than my time, but time is the simplest way to look at things for our purposes). That’s as good a starting point as any to value my time.  I hire someone to clean my house every two weeks, and pay her $80. $160 a month just on housecleaning to some is an extravagant expenditure… but do the math. It would take me about 3 hours to clean my house.  Thats $150 of value of my time, assuming I like cleaning as much as I like my job, which isn’t true at all.  I would charge you $100 an hour to clean your house (which is why I don’t run a housecleaning business).  So $160 a month to get back 6 hours to do something I want to do, is a huge bargain for me.

It isn’t all about dollars, frugality of time is as important, isn’t it?

If that’s the case, be honest with yourself about it. It’s not just about earning money, it’s about personal enjoyment, and you’re accepting that the return is less (or possibly nonexistent) because you enjoy doing it. That’s great, but it doesn’t mean that the frugal task has any less value.

Here’s an example. One of my cousins is a meticulous housekeeper, to the point of being obsessive. Yet she enjoys it. She’d far rather be doing that than engaging in other activities. Sure, it serves as great maintenance on her home, but it doesn’t put much financial value in her pocket. What it does do is make her feel good when she sees her sparkling clean house. She often chooses that for a Saturday afternoon instead of networking within her career.

Everyone has different values for time, as well as values for enjoyment.  I was making small talk with a friend’s husband a couple of weeks ago, and we got on the subject of wine (to his credit, we were meandering around for something to talk about other than the weather, and even though he’s not into wine, he at least sounded interested so we could not stand there in silence while the ladies were inside going on about weddings or shoes or whatever).  We were discussing the cost of wine, and how hard it is for me to spend more than $30 on a bottle for something I’m just going to drink.  I was a bit uncomfortable, as I had recently purchased a $70 bottle of wine.  He pointed out he would regularly spend $200 on 4 hours of golf, and that it’s worth it because he loves it.  He then just asked me if I really liked the wine.

Made that $70 look like a value play.

Don’t focus on the numbers, focus on the value.  Sure, the basics still apply – if you are in debt and want to build your net worth, you may need to give up golf and wine for a while.  But once you are comfortable and on track with your goals, use more than just dollars to measure value.  You’ll find bargains everywhere.


Setting Goals

This is part of a weekly series on personal finance and wealth building.  If you care to read them all, please click on the ‘Building Wealth’ category on the right.

Goals are a critical first step on the path to wealth. Without goals, you are unable to build plans, budgets, or schedules. Without goals, you don’t know what success is, much less how to get there.  While the words in this article are mine, the structure (SMART) and ideas are not.  I’m not sure where they originated, or even where I heard it first, but here I make it as much my own as I can.  (If you own or know who owns the copyrighted or original material on SMART goals, please let me know).

Goal setting became an interest of mine several years ago in the context of powerlifting.  Building short and long-term plans around short-term goals that all fed in to longer term goals is an important part of training and diet for performance.  I found using the SMART framework works very well for any goal setting, and certainly moving towards building wealth requires setting goals.

All goals should be SMART.  Specific, Measurable, Attainable (Actionable), Realistic, and Time-bound. Continue reading


Frugality tips

This is part of a weekly series on personal finance and wealth building.  If you care to read them all, please click on the ‘Building Wealth’ category on the right.

I’m not a huge champion of frugality.  I happen to think that once you’ve gotten out of debt and are moving towards your goals, you need to take advantage of the freedom that gives you and live a little.  But while you’re digging out of debt, if you want to do that as quickly as possible, I do have a couple of quick, easy, and relatively painless ideas for you.  Again, our goal here is to maximize your monthly contribution to your creditors.

Stop paying ATM fees.

When I sat down to build my budget to get out of credit card debt, my (now) wife pointed out how often I went to the ATM to pull out $20 (often because that was all I had), and paid $1, $2, or more for the privilege.  I was easily going to a foreign ATM once a week, and often more, we found an easy $10 a month (sometimes more), I could stop spending.  How?  On a given day of the month, pull out the cash you’ll need for the month.  Do that at your (fee free) bank.  Alternatively, if like me you have issues with cash flow and maybe don’t have all the cash you’ll need for the month in your account on any given day, simply adhere to the rule that you do not, ever, go to foreign ATM.  It’s a habit I carry with me to this day. Continue reading


The Emergency Fund Fallacy

This is a repost of a post from last year.  I’ve been in all day meetings in Philadelphia, commuting back and forth, so if you are reading this, I haven’t had time to write a new post, and this one has appeared through the magic of post scheduling.   We’ll be back to our normal programming next Friday.

I saw a post on a blog a couple of days ago from a self proclaimed expert explaining the need for an ‘Emergency Fund’, and I thought a post might be in order.

In plain language: if you have any consumer debt (credit cards, car loans, etc), you should not have an Emergency Fund if your goal is to increase your net worth. There is no reason to pay interest to save money.

Lets say you have $10k in credit card debt, and you are paying 20% interest on that debt. You decide you need 6 months after tax in the bank as an emergency fund, in case you get laid off, or hit by a bus, or mauled by a dog, whatever. You make $60k a year, so you need about $20k in the bank.

Think about that for a minute. How long would it take you to save $20K? And you want to not pay off your credit cards for that long? A significant “EF” is a huge mistake if your goal is to increase your net worth. Continue reading


Debt Repayment Strategy

This is part of a weekly series on personal finance and wealth building.  If you care to read them all, please click on the ‘Building Wealth’ category on the right.

If you’ve followed along for the last several weeks, you’ve gotten to the point that you are ready to develop and implement a debt repayment strategy.  You’ve seen the five basic steps to maximizing wealth, you’ve built your balance sheet, income statement, and your budget.  Now it’s time to get you out of debt.

How you got into this mess is largely irrelevant.  I’m not judging, and you shouldn’t beat yourself up.  I know I made a lot of poor choices when I was younger when it came to money, and I paid for it.  The good news for you is that, like with almost anything, if you put your mind to it, stick to a plan, and work hard, you can get out of overwhelming debt faster than you think.  Continue reading


Financial Friday: Budgeting and Debt Repayment

This is part of a weekly series on personal finance and wealth building.  If you care to read them all, please click on the ‘Building Wealth’ category on the right.

Most people giving and taking financial advice focus on the budget as the key to building wealth.  I disagree, but budgeting is a very important tool in the process of paying off debt, and can play a role in building your net worth by helping you live beneath your means and effectively plan and meet your savings goals.  I don’t think having a budget is a requirement if you aren’t in debt; I don’t use one, although I do track some of my spending.

One of the running themes in this series is to keep things as simple as possible to meet the requirements of the process.  My approach to budgeting is no different (and if you’ve known me for a while or remember anything I’ve written on lifting, you’ll see some similarities).

To build your budget, you first need to know how much money is coming in during a period of time.  Most people use a month, and that’s just fine with me.  We discussed how to get a good picture of your income and expenses last week.  We also need a detailed list of every bit of spending for the month.  It’s a bit of a record keeping hassle, but for this one month, it is absolutely critical that you know exactly how much you spend and what you spend it on.  As we get in to budgeting, you’ll find that you spend a lot of money on stuff you don’t need, and you’ll find a lot of waste. Continue reading


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