Control Your Cash’s 6 Axioms For Building Wealth And Thus Saving You The Trouble Of Buying Our Book.

June 22, 2012

 

Why is he smiling? No debt. You should be so diligent.

 

We’re going to go an entire week without writing about what a waste a college education (almost always) is. Don’t worry, we’ll beat that drum again soon enough, probably next Wednesday.

It’s time for us to embrace that old standby of the uninspired blogger – the list post! 5 Ways to Save At The Grocery Store. 8 Financial Mistakes First-Time Parents Make. 17 Cheap Graduation Gifts. 432 Tired Ways To Write A Blog Post.

We’ll call this one Control Your Cash’s 6 Axioms For Building Wealth And Thus Saving You The Trouble Of Buying Our Book.

1. Don’t Have A Budget, Have A Ledger.

Creating a household budget is a waste of time. If you earmark $423 for groceries in a given month, and you’re at $454 with 2 days to go, are you going to starve yourself just to prove a point?

Or, if you happen to be under budget as the month is ending, then what? Do you replace the tilapia in your cart with Chinook salmon just because your numbers allow you to? Even if you’d rather eat tilapia?

We hear this constantly: “I can’t believe how big my VISA bill is. What happened? There must be some sort of mistake.” But VISA didn’t make a mistake. You did. You bought too much and you didn’t think about how you were going to pay for it.

Have a ledger means be conscious of every dollar you’re spending. Track them. There are smartphone apps for this, Mint has a good one. Don’t have a smartphone? Buy a pocketbook, they’re like 49¢ or something. Doing this eliminates the possibility of seemingly insurmountable expenses “creeping up on you”. They can’t, not if you know that they’re coming. Even if you’re not so meticulous that you enter every expense in said app, that monthly credit card statement should never, ever make your jaw drop.

2. Stop rationalizing.

You really wanted that Croatian vacation and/or theme wedding? You feel like you’re entitled because you hate your job and your mom’s being a bitch? Wow. It’s like you and we are different species.

Your finances should be the least emotional facet of your existence. Save the emotion for the non-financial parts of your life.

It’s fine to want (and even to buy) extravagant stuff. An otherwise prudent friend of ours dropped $2,462.35 for a couple of nosebleed seats to Game 4 of the Stanley Cup Final. A lifelong L.A. Kings fan (a legitimate one, not a bandwagoner), it was perhaps his only-ever chance to see his team clinch the Stanley Cup at home.

They lost. No big deal, they ended up winning the Cup anyway, but our friend didn’t get to watch the clinching moment live. (Had he wanted to, he could have spent a similar amount, probably a little more, for tickets to Game 6. And flown across the country for Game 5, just to cover every base.)

Was that a waste of $2,462.35? Maybe to us, but not to him. This story isn’t an argument for spending extravagant amounts on ephemeral things. Our friend is a smart guy with a big cushion who could withstand the loss. He weighed the risk of the New Jersey Devils winning, paid cash, and still enjoyed 3 hours’ worth of Stanley Cup Final action. He’s not going to be spending the next 7 years financing his tickets at 19.9% interest, which would be unequivocally dumb.

3. Unless you’re going to major in the hardest of hard sciences, pure or applied, or possibly in corporate finance, don’t go to college.

Sorry, we had to mention it. We’ve broken it down in greater detail before, but not only is college a colossal financial expenditure, it’s an enormous time commitment. 4 years of your life and tens of thousands of your (or your parents’, or the taxpayers’) dollars? So you can spend decades paying off the loans? Which brings us to our next point:

4. Only incur debt if you have a plan behind it. A plan that pencils out.

Borrowing $200,000 might sound like a bad idea in and of itself, but what are you borrowing it for? To have a stable place to live for a fixed period (and simultaneously avoid paying rent)? Going into debt to buy a house makes sense, most of the time. Look at the alternatives. Borrowing money might set off a frugality switch in your head, but would you rather spend 30 years renting and knowing that you won’t recoup a penny of your housing costs? While enriching the person who does own the place where you live?

And that’s shelter: as high as #2 on the hit parade of necessities behind food, maybe #3 behind clothing unless you live in the tropics.

Incurring debt for other reasons is – we’re running out of synonyms for “idiotic”. All your life, you dreamed of having a storybook wedding. Great. Do you want to spend the next 10 years paying off one memorable afternoon?

Some people are going to take that literally. Of course no one wants to spend an extended period paying for something fleeting (and that has a 50% chance of ending in failure), but if you incur the expense, you have to pay it. We come out of the womb understanding this inherently, but the sophisticated and rationalizing brain knows better.

5. Look at each transaction from the other party’s perspective.

Your humble blogger had a (dumb) high school finance teacher who believed that for someone to make money, someone else had to lose money. Were that true, it would mean that all of human civilization has been one big zero-sum game. And that the accumulation of wealth in the world today – all the ocean freighters, skyscrapers, communications satellites, power plants etc. – is no greater than it was when the only items of value in existence were Smilodon pelts.

Not to turn this into an Economics 101 lecture, but exchanges benefit everyone. However, they don’t necessarily benefit everyone uniformly. Sometimes you run into a seller who’s desperate to do a deal, or a buyer with the same problem. In that case, enjoy your bargain. Other times, the one who needs to make a deal and has time or other circumstances working against him is…you. Don’t be that person.

6, the big one. Buy assets, sell liabilities.

Do this consistently and you’ll build wealth no matter how stupid or lazy you are.

401(k) contributions are assets, defining them as we do as something that will help your wealth grow. Extravagant dinners are liabilities.

We should elaborate. You can’t sell extravagant dinners unless you own the restaurant, but from a consumer’s perspective you can avoid buying them.

That doesn’t mean you shouldn’t cut loose and enjoy what life has to offer, every once in a while. It just means that if you do so, you’ll be forgoing future wealth and investment potential. You need to weigh this stuff, assess it intelligently. Don’t buy what you can’t afford, which is so fundamental it barely counts as advice. Mark Zuckerberg gets to spend more than you do. No offense, but at least at this point he’s entitled to more Caribbean cruises and country club memberships than you are.

But don’t fret. In turn, you get to spend more than that hobo who stands on the street corner every morning.

Unless you’re in debt. Then the hobo (assuming his net worth is 0) gets to spend more than you.

STOP.

If you read that last couple of paragraphs and your internal monologue is:

“Who are they to tell me what to do? I deserve it. Life’s too short”,

send us a request and we’ll fix it so that your IP can’t access our site anymore.

There are a million analogies we could make here, but people hate to face reality. If you want to spend profligately, and then complain about your financial situation, you’re no different than a chain-smoker who considers it a random tear in the cosmos that he’s the unlucky stiff who ended up with lung cancer.

One more time: build assets. Sell liabilities. Get in the other person’s head. Attack debt like the household pest it is. Don’t take on expenses with only an unformed (and uninformed) idea of how you’ll profit from them. And buy our book.

Filed Under: Consumer Debt, Economics, Making Smart Choices, Net Worth Tagged With: , , , , ,

How Are We Still Having This Conversation?

March 28, 2012

 

Speaking of children working in inhumane conditions, how much did he pay the 5-year-old who created that sign?

 

Sometimes, avoiding the first-person voice on this blog is impractical. But we try, and will continue to. Here’s a recent conversation with a Lexus-driving business owner who lives in one of the ritziest gated communities in town, if not the ritziest:

Him: You shop at Walmart? (harrumph)

Yes, he harrumphed. An onomatopoeic expression that sums up his indignation with our choice of grocery purveyor far more effectively than any words could. Our relationship will never be the same.

It doesn’t matter what the low-cost provider is. Could be WinCo, Food4Less, or whichever discounter in your town sells in bulk and doesn’t waste money on décor. But Walmart gets most of the notoriety, and will serve as our example. It’s notorious because it isn’t unionized, and was founded in a part of the country that some people equate with a punchline. Boiled down to their essence, the reasons most commonly given for not buying groceries at Walmart (and passing judgment on those who do) are:

  1. The people who shop there are comically unfashionable, which should make it obvious to you that the food itself is awful.
  2. The company exploits workers, somehow.
  3. It runs mom-and-pop stores out of business.

 

Grocery shopping is not a social statement, or at least it shouldn’t be. It’s simply something you do to avoid starvation.

Given that Walmart has the most employees of any corporation in the United States, and doesn’t keep any of them shackled, is there any chance that maybe the employees don’t feel they’re being exploited?

You could argue that they’re too dumb to know it, as many a wag does. At that point it becomes less about the principals and more about the observer.

Day-to-day buying and selling of goods and services in a relatively free economy like the United States’ is a series of voluntary exchanges. Ideally, the cheapest provider not only ought to win (in a logical sense), but should win (in a moral sense). You take possession of whatever it is you wanted regardless of whom you buy from, but when patronizing the lowest bidder you end up with more money in your pocket. You’d think this is so obvious that it doesn’t warrant mentioning, but it does. Again and again and again. In the same respect, when selling something – and what most of us sell is ourselves, on a regular schedule 5 days a week – we’re looking for the opposite and will only do business with the highest bidder.

When buying anything, and we used groceries because they’re as much of a necessity as anything, you’re welcome to pay a premium for proximity, for perceived quality, or even for guilt. But the sensible thing to do is to buy as cheaply as possible. When operating as a seller (see above), you’re again welcome to offer a discount. But you’d need a compelling reason to. Two jobs with the same requirements, equidistant from your home, but you’d choose the one that pays less? Maybe if your ex-spouse sits by the door at the better-paying one, but it’s hard to think of many other reasons why you’d refuse an opportunity to make more money with no incremental effort.

Back to the buying side. Clearly, the Cheerios and celery at Safeway are of much higher quality than those sold by the Bentonville Bruiser. And the canard about running family businesses out of operation doesn’t stand up to any kind of scrutiny. How Kroger, SuperValu, and the Delhaize Group stores (Food Lion, et al.), each multibillion-dollar concerns, managed to avoid that same accusation is a mystery. The “mom-and-pop” grocery store is, to almost all of us, laughably inapplicable and obsolete. Family-owned food merchants are as much a part of 2012’s landscape as dry goods stores and blacksmiths are.

There are trillions of ways to waste money, and future generations will find further ways that we could never conceive of. But with respect to gambling, smoking, drinking, taking out permanent life insurance, and incurring credit card debt, it’d seem that paying extra just for the sake of paying extra would be an easy one to omit. For many, it isn’t.

Speaking out of self-interest, we can make an argument that that’s good: when other people are willingly spending more than they need to, it makes it easier for the rest of us to make offers on assets. After all, there are now fewer viable bidders in the marketplace. On the other hand, a society full of financial dimwits is a weak one. There are two major reasons why China went from economic wasteland to powerhouse in barely a generation. One is a government policy of economic liberalization, the other is a cultural propensity to bargain and save. (Cf. Mark Steyn, “Culture trumps economics.” When you’ve got both on your side, seismic shifts occur.) Westerners who do dumb things with their money indirectly hurt all of us, their cumulative effects making our society that much weaker.

Maybe the economic truths that we hold to be self-evident, aren’t. Buying an item at Store X when Store Y sells it more cheaply means putting your own financial interest in a position of relative unimportance. Caring about the plight of the non-unionized Walmart employee is a job for…the non-unionized Walmart employee. Respect that, and we won’t tell you to eat your vegetables and straighten your tie.

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Filed Under: Capitalism, Economics, Economy, Making Smart Choices Tagged With: , ,

DOW HITS 7634! What now?

February 24, 2012

The father of irrational exuberance. If Bush had just yanked his hands down, a lot of problems could have been avoided

 

Huge, breaking, earth-shattering, paradigm-shifting, cliché-inspiring news this week, as the Dow Jones Industrial Average finally pawed its way back over the critical 7634 mark. No longer will we have to suffer in a world where the sum of the prices of 30 blue-chip stocks multiplied by a constant will begin with 7-6-2 or some lesser string of digits. Instead, let’s all stop at this milestone and take a needed respite.

Oh, sorry. Yeah, we were using base-12. Would you prefer we used base-10? Fine, but we’re going to use a different currency, euros. Which would make the Dow level 9807. No wait – let’s use base-12 and euros. That’d make the Dow level 5813. Isn’t this fun?

Most of the stock market “news” results from humans having 5 fingers on each hand and needing a way to count things. There isn’t any appreciable difference between a Dow at 12,999 and a Dow at 13,000, except that the latter burns a different array of bulbs in a digital readout and gives mathematically challenged journalists a chance to write headline fodder. Stop believing that this is in any way important.

From our favorite purveyors of loaded rhetoric, the Associated Press:

The Dow passed 13,000 about two hours into the trading day.

And from another AP story:

The average was above 13,000 for about 30 seconds before dropping back. It reclaimed the mark just after noon.

In the words of Anti-Nowhere League, “So (expletive) what?” They’re talking about this like it’s the moon landing, calibrating the event by time and duration so future generations will have a historical record of it.

Furthermore, the mere addition of one point to the Dow then becomes the catalyst for everything that follows. One more AP story, and a stunning example of why reading the news with a trusting eye is worse than not reading it at all:

The 13,000 level is a psychological milepost, but in a market built on perception, it could influence more cautious investors to pump more money back into the stock market, analysts said.

“You need notches along the way to measure things, and that’s as good as any,” said John Manley, chief equity strategist for Wells Fargo’s funds group…

Dan McMahon, director of equity trading at Raymond James, called the 13,000 marker a “positive catalyst, and that’s what we need to get us through the next range.”

Sounds like these Wall Street guys are as susceptible to “decimal bias” as the rest of us, right? No. McMahon continues:

In the end, he said, it’s just “a big round number.”

Which shows that the claims that “analysts said…it could influence more cautious investors to pump more money back into the stock market” is an unmitigated lie. Or if not a lie, then at least an unprovable assumption. Sure, Dow 13000 “might” influence investors to buy stocks. It also “might” turn the milk in your fridge sour. You don’t think so? Then show why it can’t.

CBS News has a video clip with the wonderfully objective title: “Dow 13,000: Time to Invest?”, which itself summarizes why financial illiteracy is pandemic. Yes, first let’s overpublicize a rise, however modest, in the Dow level. Then, let’s imply that people should buy stocks. Because that’s when you want to buy, when prices are rising.

You want superlatives? The Dow is now at its highest level since May 2008. When the Dow was at 12,990, that was its highest level since…May of 2008. Add the inexorable effects of inflation, however modest, not to mention whatever fees you paid for your index fund, and if you’d bought before May of 2008 you’d still be behind. If, however, you were dollar-cost averaging and buying units regularly since then, including when the market hit a local nadir of 6627 in March 2009, you’d be ahead. The Dow’s most recent movements, i.e. what it’s done in the past week, mean nothing.

We’ve talked early and often about the need to handle your financial transactions in a cold, calculating manner. Save the emotion and the irrationality for your personal, non-monetary life. When everyone else is chasing something, step back and ask why. When everyone else is fleeing something, same thing. And when a numerical quirk becomes front-page news, bumping Iranian oil embargoes to the second line, think about what that really means. To the extent that it means anything.

Yet another reason why our use of exclamation points on this site is so judicious. If a bunch of talking empty heads filling time in a TV studio have somehow convinced you that a .06% rise in the Dow is a reason to get your money out of your beer fund and put it towards stocks, we can’t help you. Besides, you don’t want to be helped.

There’s a time to get going, and a time to sit back (apologies to St. Francis.) If you don’t have an investment plan yet, run to the nearest brokerage house, bank, or human resources office and get one. It’s never too early to start.

But once you’ve invested, which we’re presuming you have, don’t drown in the details. Try to look at your portfolio quarterly. That recommendation is like Tolstoy’s challenge to not think of a white bear, but if you can do it, you’ll not only have greater peace of mind, you’ll be able to notice measurable differences in your portfolio more easily. It’s the same reason why parents marvel at how quickly their nieces and nephews grow, rather than how quickly their own kids do.

Getting excited, depressed, or even having an opinion about Dow 13,000 is mayfly syndrome. But you’re a human, with a lifespan tens of thousands of times longer than your typical mayfly. Even a giant daily swing in the Dow is utterly irrelevant, let alone one of just a few points.

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Filed Under: Capitalism, Economics, Education, Math, Newsflash Tagged With: , , ,
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