Or Go Read Man Vs. Debt Instead

You're going to need one of these

Why can’t you be like other sites?

It’s the one complaint about Control Your Cash that we receive most often: where are the first-person stories about your struggles with income and debt?

1) There are several thousand other blogs that already memorized that riff and can play it by heart. We wouldn’t be bringing anything original to the party. Besides, this isn’t a place for self-indulgence. We don’t give a damn about the details of your finances*, and don’t expect you to care about ours. Or anyone else’s but your own.

We used to think that other people’s Facebook photos were the Ultima Thule of human boredom. But they’re captivating compared to hearing a personal finance blogger yammer about how he’ll now pay off his student loans 3 nanoseconds faster thanks to this handy new money-saving method he discovered for making your own duct tape. Also, the Sunday paper is full of coupons for your next grocery shopping trip.

2) No struggles to speak of.

Oh, does that sound condescending? Then would you feel inadequate if Danica Patrick told you she has no trouble negotiating traffic at 160 mph? How about if the chick from Evanescence said she could easily hit notes in the whistle register?

We’ve spent our adulthoods doing the prudent, common sense thing and seeing where it leads. So far, it’s working. At least more so than buying pet clothing and paying for tax refund anticipation loans might have.

You want commiseration? Start drinking or become a sex addict. Meetings in the church basement, Tuesdays at noon. No crosstalk, please.

Good. Now that we’ve got the children out of the room, join us for something worthwhile. Two things we try to do here:

-explain financial concepts that people presumably want to know about, or should, but don’t.
-show how not being financially idiotic can pay tangible rewards. And occasionally, show instances where you might think you’re doing the smart thing but aren’t.

If this sounds dictatorial, it isn’t. No more than your 3rd grade teacher was when she explained how multiplication works. Look, there’s no secret to gaining wealth. The mantra, again:

Buy assets, sell liabilities. Do this often enough, measure the results, and if you do nothing else you’ll get rich in spite of yourself.

Financial self-sufficiency is nowhere near as simple as “spend less than you earn”, but it’s not as complex as you think, either. That wedding you’ve been fantasizing about since you were a little girl? Unless it involves only you, the groom, a justice of the peace and a visit to IHOP afterwards, it’s a liability. Sell (i.e. don’t buy) it. The matching funds your employer offers for your 401(k), which will give you more tax-free income when you retire in exchange for a few seconds of incremental effort today? That’s an asset. Buy it.

Almost everything in your financial life fits into one category or the other – if not individually, then cumulatively. The bachelor’s degree in women’s studies is a liability. The interest-bearing student loan to pay for it is a meta-liability, and an obscene waste of money. The used DSLR camera that you can pick up from a highly rated eBay seller and is indistinguishable from a new one that’s twice as expensive? That might not be an asset by our definition, but the difference in their prices is. Buy the camera, assuming you’ll use it.

If you want patently obvious advice and feel-good pabulum, Google “personal finance blog” and you’ll find it. If you want to be challenged and inspired, stay here. Read the archives. And let us teach you how as much as you’re willing to digest about how money works (and how it doesn’t.)

*Dang. That should have been the subtitle for the book.

**This post is featured in the Carnival of Wealth #5**

Trial and Error are Rotten Teachers

Almost as bad as her

The folks at Go Banking Rates are holding a contest among personal finance bloggers: write a post on the topic of education and wealth, and the lucky winner takes home the Readers’ Choice winner of Favorite PF Blog Writer! (exclamation point theirs.) Thanks to Go Banking Rates for accepting our entry, and may the most interesting and worthwhile post win.

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April, 1976. 7-year old me, returning home from school. The teachers had set up a lunchtime hot dog cart. (It was a Catholic school, they raised funds however they could. This predates school-supply drives and the Department of Education.) I eat my lifeless baloney sandwich in silence, jealous of the moneyed kids waiting in line, flashing their quarters like so many engagement rings. Tube steak in a bun, 25¢. And as much as I can remember, my first practical exposure to the idea of money.

Me (trying to determine the family’s net worth in hot dogs): Mom, how much money does Dad make?
Her: (silence)
Me: MOM?!
Her: Don’t you have homework?

And so began a typical North American financial education.

Cannibalism. Atheism. My female teenage cousin’s illegitimate child. In my house, these were just a few of the topics considered more appropriate dinner-table conversation than was money.

Every transaction was a secret. Every dollar figure carried with it the potential for embarrassment. Give a kid even a general idea of his family’s finances, and the next thing you know he’ll be blabbing to the neighbors. We can’t have that. Etiquette should always trump knowledge, shouldn’t it?

1979. I have never read the money section of the newspaper, but the sports section is all mine. Nolan Ryan signs with the Houston Astros for an unprecedented $1 million annually. We have a baseline! My father must make less than that, so…$700,000, maybe? (NB: in his best year he probably made 5% of that.)

To high school. Where the extent of financial instruction consisted of an introductory bookkeeping course, in which we measured the debits and credits of fictional XYZ company and its competitor, ABC company. You know, because terms like “cost of goods sold” and “depreciation” were so relevant to the everyday life of an overloaded teenager who’s already dealing with acne, introduction to beer, football roster cuts, and watching girls’ breasts develop.

14, first job. Washing dishes in a restaurant for minimum wage. Mom exercises her parental right and keeps every check, possibly as partial payment for a lifetime of free room and board.

Fast forward to graduation, and an unsentimental introduction to the real world. Rent? Insurance? 401(k)? IRA? CD? FICA? ARM? S&P? P&L? Drowning in acronyms without a lifeline.

I’m one rung above poverty, which is fine for someone 17 and living on his own for the first time. Wages barely cover necessities, which include a futon and not much else. My one extravagance is books, organized on a bookshelf composed of air. Air, and a floorboard.

And then, those naïve unfortunates at American Express ease the pressure by sending me a credit card I didn’t solicit. The symbolism is overwhelming: plastic signifies my passage into adulthood far more convincingly than any driver’s license or wispy sideburns could. I can buy real furniture! Pick up some new clothes! Dig up the fake ID I’ve been using since the age of 15 and conceivably, rent a car!

Instinctively, I understand that addition is cumulative. A plus B, added to C = A+B+C. It’s one thing to know that in theory, another in practice. Yesterday’s purchase plus this morning’s plus this afternoon’s will look quite different 30 days from now than it does today.

The bill comes. $749.23, which might as well be a quadrillion. The statement contains a caveat that turned out to be a blessing: “PAYMENT MUST BE MADE IN FULL.” I knew this. It was in the agreement I signed and presumably read. No excuses, even though I was a minor.

My right brain tries to convince my left brain that I should become the first person in history to pretend he no longer lives at the address the creditor has on file. An airtight plan that D.B. Cooper himself would be proud of. Fortunately, the left brain wins.

How to get covered? Everyone I know (and who will take my calls) is as poor as me. The right brain thinks about requesting a payment plan, but gets outvoted by reality: a collection letter typed in boldface, immediate interest charges, and the destruction of a nascent credit rating before it even had a chance to grow legs.

Buying a car would have to wait (several years, it turned out.) Same thing for any kind of social life or vacation. A credit counseling company got American Express to take 70 or so cents on the dollar, and I got to start again at zero. Older but still not old, and wiser but still not wise.

What would I change? Nothing and everything (he said in Zen-like fashion.) Nothing, in the sense that I’m grateful that I got the inevitable mistakes out of the way early. Everything, in that sending a young adult out into the world with zero financial knowledge is irresponsible on the part of parents and teachers alike. I might have been one of millions in that situation, but that didn’t make it any easier.

Oh, and parents? Keeping your kids in the dark about finances really helps them out when it comes time to negotiate wages and prices.

It should be effortless to know what things cost – including one’s own labor. No one should have to enter adulthood without knowing the fundamentals of finance – how and where to spend, when and why to invest. If you can understand a savings account, then you can understand a checking account, a money-market account, and ultimately how to buy a car, buy a house, do your taxes and assemble your own S corporation. None of this is that complicated. Our blog proves it.

Epilog: Today, hot dogs cost about $2.69/lb. wholesale. That’s 34¢ a dog, and they retail for at least 79¢, meaning pay a 135% markup or cook your own.

Meet your new role model, Part III of III

Believed to be negotiating with Brandon. 12 rounds, food money

This is the last installment in our series on Brandon, the $32,000-a-year tycoon who’s the new favorite to be Control Your Cash 2010 Man of the Year. Read the previous couple of posts to find out how he pays his car loans off early, lives in a decent home with positive cash flow, and spends strategically to get the most out of life (which, last we checked, still requires money.) Today, Brandon explains just how he receives that money and what he does with it.

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In sum, I take advantage of cost-savings overlaps, and try to kill a few birds with one stone.  I’ve discovered that I don’t need to buy to be happy. I have never taken advantage of charity, welfare, food stamps, etc. despite being qualified a few times. I never needed them, even when I was 21 and lived out of my car for 6 months.  I was raised middle class (slightly lower to start, then solid middle, slightly upper middle the last bit.) My mother and stepfather were frugal. I never wanted, but they didn’t overspend.  My mom used to talk about how she used to go out with friends and sip a Diet Coke the entire night, and that would be her only expense.* My parents are solidly upper-middle class now, perhaps upper here in the Midwest. Their financial help comes mainly in the form of hand-me-downs, but more recently a new bedroom set and couch when I bought my house (I didn’t need them, but it was nice), and the recent minor vacation stuff.

My mortgage rate is 5¾%. I bought at the worst possible moment in the last 2 years. It goes down to ~4.32% with the credit, although it’s a bit higher due to the delay in receiving the credit. I pencil it in as 4.4%.

I have a Sears credit card, for the credit limit and the very rare Craftsman lifetime warranty tool coupons and sales. I also have a Citi Driver’s Edge card, which Citi no longer offers, but it refunds 3% on gas, groceries and drugs, 1% on everything else, and 1¢/mile on my car).

I’d like to add 2 more cards, for what that’ll do to my FICO score and to avoid having all my eggs in one basket.  One of the likely candidates is a Pentagon Federal Credit Union Promise card, which carries no fees and is useful for foreign travel. I’m also looking for a 2% cash back card. Charles Schwab offered one, then rescinded the offer in April. Fidelity offers one, but I don’t like the way they set it up. Then there’s PerkStreet, which requires me to keep $5000 in my current account. I don’t care for the American Express Blue Cash** structure, so I’m waiting for something else: maybe a rewards card if I do more traveling, e.g. a Starwood American Express.

As for my investments, I’m a fan of Harry Browne and the Permanent Portfolio.

STOP.

Harry Browne (1933-2006) was an investment analyst and the Libertarian candidate for president in 1996 and 2000 (in other words, our kind of guy.) His brainchild, the Permanent Portfolio, involves putting equal amounts of your money in:

I.  an index fund
II. the longest T-bonds you can find, or AAA corporate bonds
III. gold
IV. cash (or its equivalent, short-term T-bills)

Ignore for 3 months. Then, if any class over- or underperformed by 10%, redistribute to maintain the balance.

CONTINUE.

I’m with Vanguard, but they charge a lot to buy bonds and non-Vanguard exchange-traded funds, so I’m looking at Wells Fargo. I have $4k in my Indiana Public Employees Retirement Fund account and $14k in my Roth IRA.  That’s allocated as:

I.  70% Standard & Poor’s 500 index fund
15% small cap value fund
15% emerging markets fund

II. 70% special stable income fund in state plan
30% Vanguard Extended Duration Treasury Exchange-Traded fund.

(Ed. Note: That latter item tracks the value of the Barclays Capital U.S. Treasury STRIPS 20-30 Year Equal Par Bond index. That fund invests >80% of its assets in U.S. Treasury securities held in the index. The fund weighs the maturity of each dollar, and tries to keep pace with the index, which usually means maturities of 20-30 years.

U.S. Treasury STRIPS [Separate Trading of Registered Interest and Principal Securities] are notes, bonds and inflation-protected securities whose interest and principal portions have been separated [“stripped”.] STRIPS work like bonds, selling at a discount and then maturing at face value. They’re formed by investment banks and brokerage firms, rather than sold by the Treasury.)

III. 80% iShares commodity exchange gold trust, which lets you trade gold throughout the day and not have to take physical possession of it.
20% physical.

My cash reserve is the IV leg.  I think we’ll see deflation for the next few years, maybe longer.***

Finally, between my roommate and work, I collect enough cans to pay the utilities. With regard to taxes, I haven’t looked into how to minimize my return, but considering I collect the rent and foreclosure income without having taxes taken out, I have a virtual head start on doing so.

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*The Control Your Cash authors always do this, despite not having to. Enriching taverns ≠ Controlling Your Cash.

**Even though Blue Cash only refunds you annually, Control Your Cash: Making Money Make Sense recommends it. At press time, Blue Cash gave you ½% cash back on the first $6500 you spent, 1½% beyond that.

But that was then. Today, that 1½% is 1¼%. Blue Cash does give 5% back on groceries and gasoline, which might only sway you if you categorize your spending to mesh with your card rewards. But groceries and gasoline are reasonably constant expenses for most of us.

Still, this brings up a worthwhile tangent. Would we still recommend Blue Cash?
Discover gives 1% back, in $50 increments. You’d have to spend $19,500 before Blue Cash gives you more cash back than Discover does. That could take well over a year, which is how long it takes Blue Cash to cut you a check anyway.

If that doesn’t give you a satisfactory answer, the next criterion should be convenience. (Notice we’re not even looking at interest rates. They don’t matter.) More American merchants accept Discover than American Express, but around the world, a Discover card is largely useless.

Ready for a little disclosure? Your blogger has an American Express Hilton Honors card, because a) there’s no annual fee and b) he stays in Hampton Inns a few times a month anyway. Which means I’m getting rewarded without changing my behavior to accommodate the card. (Lots of people do it the other way around.) In other words, if American Express offered a Celibacy Card or an US Weekly Subscriber’s Card, I wouldn’t be interested.

***Not sure if he’s right. Deflation is easy for the Fed to negate – just put more money in circulation. Inflation is harder to negate. And, of course, it’s open-ended. Practically speaking, deflation is limited to a few percentage points. Inflation can visit the exosphere.