New Financial Paradigm

Turning 30 is a big milestone in your life.  It is kind of a point at which you should change from a guy into a man.  I know you graduate college in your early 20’s, but society allows you some time to go from college graduate to a responsible man.  I think that by the time you turn the big 3-0, society expects you to be grown up. 

I am going to list some things you should have accomplished by the time you turn 30. 

1) Cut back on the credit card use

The average 30 yr old has $20,000 in college debt and over $5,000 in credit card debt.  By the time you turn 30, you ought to have a handle on credit and you ought to know about its evils.  You should know that paying 20% a yr on new electronics is not a smart thing to do. 

At this point in your life you should not be living paycheck to paycheck and you should not be racking up credit card debt.  All credit card purchases should be paid in full at the end of every month.  [Read more →]

Tags: Credit, Debt, Money Management, Planning, Real Estate, Retirement, Saving, Spending // Add Comment »

A friend of mine sent me a good analogy to the US tax code.  It is pasted below. 

Many think that the wealthy producers of the economy should pay more than what they currently pay.  But those people have no idea how much the high earning population already pays.  I’m hoping the below helps put it in context. 

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Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: [Read more →]

Tags: Government, Taxes // 2 Comments »

When people first graduate from college/high school, they make a humble salary and find a way to make ends meet.  Maybe they don’t save very much, but they do alright.  Along the way their salary likely doubles, triples, or quadruples.  With their salary increasing by such a huge amount, there ought to be some money left over to be put into savings.  Sadly, that is rarely the case.  Most people spend as much as they can. 

There is no correlation between how much people spend and how much they need to spend.  You’d think if you were one day living fine on $30,000 a yr and that eventually morphed into $90,000 you’d be able to save some money.  But that is not the case.  We are not good at saving. 

I’m going to list some reasons why we’re not rich, and its not because we don’t make enough.  Like the literature says, “we are very good at offense (making money), but very bad at defense (saving money).”  [Read more →]

Tags: Budget, Debt, Money Management, Saving, Spending, Transportation // 1 Comment »

Yesterdays prose was very simplistic and did not take into account many of the variables involved in the home buying process.  Some of them play a big part in the equation and account for large swings in dollar amounts. 

Below is the math which should include all of the variables involved.  My thinking may not be perfect so please comment and let me know what thoughts you have.

I think in the end it is very clear which investment is the better one financially.  But many people like to own their own home.  Can’t do that if you rent your whole life.  And many people would not save the difference between rent and buying so in a way it is a forced savings plan.  And if buying a home can force people to save nearly $1M dollars, then they are likely much better off than if they rented (b/c they wouldn’t have saved that $1M).  If you are disciplined and can save, I think you can do better with your money than the forced saving plan of buying a home. [Read more →]

Tags: Debt, Real Estate, Taxes // 5 Comments »

In Jeremy Siegel’s book, “Stocks For the Long Run”, he finds that real returns of stocks have averaged 7% since 1870.  Real returns are returns after inflation is taken into account.  For example, if inflation is 3% and a stock returns 10% in a given yr, then the real return would be 7% (10% - 3%).  And real returns are the only returns that matter, because they measure an increase in spending power.  If inflation is 3% and a stock returns 3%, then you haven’t improved your position at all.  You can purchase exactly what you could purchase the yr prior.  In conclusion, stocks increase in value 7% per yr because that is how fast companies tend to grow their profits. 

Houses have their own version of profits: rents.  These rents are profits, either realized if someone is paying you to rent the house or implied if you are not paying rent to live there.  House prices and rents have been closely correlated throughout history, both increasing at the rate of inflation or about 3% a yr.  This number is low because it is hard for a house to think up ways to increase its profits.  Robert Shiller, the Yale economist who successfully predicted the stock market crash of 2000 in his book “Irrational Exuberance”, has found that home returns since 1900 would have been zero if not for 2 brief periods in history.  Even if the two periods, one immediately following WWII and the other from 2000 to 2005, are included they would only boost real returns to 1% per annum.  If you’d like to see his data sets, they can be found here: http://www.econ.yale.edu/~shiller/data.htm.  [Read more →]

Tags: Investing, Real Estate, Taxes // Add Comment »

Many people have trouble determining if they’ve gone over the edge as far as spending goes.  They get used to spending a certain amount and that amount creeps higher with every raise or bit of additional income.  Ultimately, it doesn’t matter at all how much they earn, their spending is tied to their potential to spend not to their need to spend.  After spending yrs in this mindset, it is difficult to determine if you are on the verge of financial turmoil.

Here are a couple easy questions that will help you determine if you’re in trouble. [Read more →]

Tags: Budget, Credit, Debt, Money Management // 2 Comments »

In a recent survey about basic financial concepts, only 48% of high school seniors and 65% of college students answered 50% of the questions right.  This is a sad state of affairs as far as financial literacy goes.  I think that many parents assume their kids know what they need about money and don’t pass on the information that their kids will need in the real world. 

Here are some ideas of things you can do to help your teenagers be financially prepared for adulthood. [Read more →]

Tags: Budget, Debt, Education, Frugality, Planning, Retirement, Saving, Spending // 1 Comment »

Last week, I wrote about the tough times investors are experiencing right now.  Huge Wall St companies are going under or being bought for pennies on the dollar right now (Lehman Brothers, Merrill Lynch, Washington Mutual, Fannie Mae, Freddie Mac, etc).  Stocks are getting pummeled left and right.  But in these times, it is important to keep the faith and not make some common mistakes because of emotions.  [Read more →]

Tags: Investing, Money Management, Retirement, Saving // 1 Comment »

The current investing environment is a very tricky one filled with very volatile stocks and extreme price movements.  Much of the price movements don’t make any sense.  Today the price of oil hit $100.10 on the exchange.  This despite Hurricane Ike bearing down on the TX coast and OPEC cutting the production of oil by 500,000 barrels per day earlier in the week.  Less oil should lead to higher oil prices.  But not in this market. 

I thoguht I’d go through some of Warren Buffett’s writings, the worlds greatest investor and richest person, and try and see if I could find any insight from his wisdom.

So here are 5 Buffett quotes that I thought were pertinant to today’s dreary markets.  [Read more →]

Tags: Investing, Money Management, Motivation/Inspiration, Saving // Add Comment »

The housing situation in the US is a mess.  No one can argument with that.  Yale Professor Robert Shiller claims in his new book, The Subprime Solution, that this housing market could be worse than the Great Depression.  You may have heard of Mr Shiller before from

1 ) His previous book, Irrational Exuberance, which successfully forecasted the top of the stock market in 2000/2001

2 ) The nations authoritative residential housing market index Standard and Poors Case-Shiller Index, which he developed with Wellesley College economist Karl Case [Read more →]

Tags: Real Estate // 1 Comment »