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Personal Finance

PF Notecard #3: Live Below Your Means

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Advice on a card 2On the index card that lists everything you need to know about personal finance, point #3 is “Live Below Your Means.” But what the heck does that mean?

In my notecard stack, it means more than live “within” your means, which suggests you live up to the limit of what your income will support. Living below your means is spending significantly less than you earn, and doing so in a meaningful, strategized way.

The primary way to accomplish this is to automatically set aside a portion of your income for savings. Most employers that direct deposit can deposit portions of a paycheck to different accounts. If yours will do that, arrange to have, say, 10 percent of your take-home pay deposited to a savings account. Alternatively, you can set up your bank account to do an automatic transfer from checking to savings on a certain day of the month. If you have a side gig, you may be able to put the most or all of that net paycheck into savings and live on the income from your main job.

That’s after you’ve had a specific amount withheld for a 401(k) or 403(b). If your employer doesn’t provide a savings plan, then set up an investment savings fund and have 15% of your pay deposited to that, right off the top. IMHO the preferred device for this is probably an index fund with a low-overhead mutual fund company such as Vanguard or Fidelity. At least part of this amount should go into a Roth IRA, which will protect you from the onerous and tax-heavy Required Minimum Distribution rule after you retire. Keep the rest of it in regular funds, if you think there’s any chance at all that your income after retirement is likely to be close to what you get while working.

So: 15% of your pay should go to an employer retirement plan or, if contributions are not matched, to your own long-term investment savings. THEN at least another 10% (up to 20%) of the remainder goes into savings in a bank.

What’s left is what you live on. That’s living below your means.

And how do you accomplish this frugal lifestyle on the few pennies you have left? Any number of ways…

  • Buy a smaller house than you can actually afford.
  • Buy in a lesser neighborhood than you could in theory afford.
  • Buy less expensive cars than you can afford.
  • Eat in most of the time. Learning to cook is one of the biggest moneysavers out there.
  • Never charge more than you can afford to pay out of pocket in a given billing cycle.
  • Stay out of debt. If you can’t pay for something in cash, don’t buy it.
  • Never pay full price for anything. Buy clothing on sale, at outlet stores, or in thrift stores.
  • Vacation frugally. Consider a camping trip instead of a flight across the globe.
  • Break the “Stuff” habit: don’t buy things you don’t need. Pass on a clothing purchase if you already have something that will do.  And refrain from collecting bric-a-brac and useless items, be it piggy banks, comic books, computer games, or old CDs. Think minimalist.
  • Choose a hobby that doesn’t break the bank. If it requires pricey equipment or supplies, find another way to pass the time.
  • Learn to do things yourself.

None of these is very hard.

What about that 10% you put into the bank? Before long enough will accrue to provide a decent emergency savings stash. If you’re lucky and two or three years pass without a really big unplanned bill, you may have enough to skim off some to contribute to your retirement savings.

I have three sets of savings: short-term emergency savings (enough to cover a routine plumbing or car repair, for example); long-term emergency savings (major repairs, non-routine dental bills), and retirement savings. A bank account will do for the first two; retirement savings, of course, should go into some kind of investment. Back in the day when CDs paid a little interest, I used to have long-term emergency savings in a credit-union CD. Now it’s all in the same savings account. My retirement savings are professionally managed; most of it is with Fidelity.

All You Need to Know about Personal Finance Fits on a Notecard
#1 Get an Education
#2 Get a Job

PF Notecard #2: Get a Job

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Advice on a card 2The second item on the notecard that holds all the personal finance advice worth giving is “Get a job!” To that I’ve added “Get a side job if need be.”

Well, obviously unless you’re independently wealthy, you’re gonna have to get a job in order to have anything resembling personal finance at all. Even if you are independently wealthy, get a job: it’s good for your morals.

In America, a job may (or may not) contribute to your savings plan (item 5) by offering matching contributions to a 401(k) or 403(b). In any event, you’ll not be doing much saving unless you have a job.

But what I suggest is that you not stop there. In addition to a real job, you may be well advised to have a side gig, or at least a hobby that can, without much difficulty, be turned into a paying concern. If you’re trying to pay down debt (item 4), a side income is especially useful.

When I was laid off my job at the height of the late Recession-That-Was-Not-a-Depression, I was very glad I had been teaching adjunct off and on. That  made it easy to land another gig: two sections in the months before my job ended allowed me to shore up emergency savings, fast. And I also was very glad I’d kept the copyediting business alive on the side. Once I was no longer working full time, it was relatively easy to prime that pump, so money started coming in my home-office door even before I walked out the door at the Great Desert University.

A side gig can be, by itself, a de facto emergency fund. It represents a cash flow source that doesn’t go away if you lose your primary job.

It’s also useful for a working couple who decide to have a baby. A side job may make it possible for one partner to become a stay-at-home parent while the kid is small. And a home-based business could even make the SAHP gig permanent.

Certain kinds of hobbies can be turned into sideline enterprises. I know a woman who makes hand-crafted greeting cards, for example.  She’s amazingly good at it, and in turn people pay amazing prices for the things. And really: I was surprised at what people would pay for the beaded jewelry I was making for a time. If you’re willing to work hard enough at it, you can turn almost anything into a paying enterprise.

And you may be mighty glad you did…

All You Need to Know about Personal Finance Fits on a Notecard
#1 Get an Education

PF Notecard #1: Get an Education

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Advice on a card 2So I looked at the list of 11 points on the notecard that we’re told will contain all you need to know about personal finance and realized each of those would make a fine personal-finance post. 🙂 Voilà! Blogging on a notecard!

And that’s what I propose to do: 11 posts on personal finance, only with a twist. I’d like to actually think about these things, rather than just emit pragmatic advice. So we come to point #1: Get an education…that will help you get a job.

What that really means for most of us is not education. It means vocational training. There’s a difference.

Education furnishes your mind. It prepares you to meet the world with strong logical thinking skills, with depth of perception, and with some understanding of what came before you. It teaches you how to find out things you don’t know, and how to communicate what you do know in an effective way to a wide array of audiences.

Vocational training teaches you job skills. It focuses on specific job-related tasks. To the extent that it asks you to think, it leads you to think only about a specific set of skills in a specific context. Where education is outward, voc-ed is inward. Where education expands the mind, voc-ed limits it.

Colleges and universities used to be sites of education. That has become less and less true, and indeed some universities seek to limit colleges of liberal arts, which dispense real education, by tacking on extra fees (essentially penalties) to students who major in those disciplines. The idea is to funnel as many students into more lucrative vocationally targeted majors as possible. And of course, because students mistakenly think “education” should get them a job, university administrators (and the legislators and donors who support them) measure “success” by the number of graduates who land decently paying jobs right out of school.

So…what happened? How did these things become conflated?

First off, businesses used to provide vocational training. If you went to work in a large corporation after you finished college, you arrived with a furnished mind but few job skills. You learned those as you worked. This was called “on-the-job training,” and it was considered to be, by far, a superior way to learn these skills than in the classroom.

Second, unions provided vocational training for those who went into the trades. You didn’t have to get a college degree to make a living wage. Here, too, you had on-the-job training, and you learned from journeymen tradesmen who knew how to do the job and could see that you learned how to do it, too.

Businesses simply abdicated this function. Corporations have foisted the task of vocational training onto higher education. And the killing of the unions has meant the demise of on-the-job training in the trades.

Third, the democratization of higher education, while in many ways a good thing, has dumbed-down the university’s role in education and accentuated its voc-ed role. In my opinion, that is not such a good thing: it creates the impression that hundreds of thousands of young people graduating with bachelor’s and even master’s degrees are “educated,” when in fact they are not. It also has devalued degrees in the liberal arts and the fine arts.

That notwithstanding, we know that most people who finish a four-year degree will earn more than most people who do not. Most people who finish a two-year degree will earn more than most people with just a high-school diploma or GED.

So, what’s the take-away here?

Go to college, yes. Get a two- or four-year degree. But think carefully about the subject matter. Choose something you can tolerate, but make sure it will open doors to the work world.

If I were to do it again, I would never major in French (B.A.) or English (M.A. and Ph.D.). I wanted an academic job, and today  it still might make sense to get a doctorate and aim for that kind of career. It might not, too: full-time faculty are steadily being replaced with underpaid part-time contractors. And academia, between you and me, is a crazy place to work. Too often it represents a fast track to a nervous breakdown, especially if you are a member of a minority group.

If I were young(ish) today and I seriously wanted an academic job (this would assume I didn’t know any better), I would do one of two things:

• Either get a degree in educational administration and go directly into an administrative position…
• Or get the doctorate in a discipline where universities are still hiring.

The second is highly problematic. First, many fields where you would think you could easily find entrée are not hiring. And second, the landscape shifts so fast that a discipline might be open when you start the Ph.D. program but closed by the time you finish the degree. STEM fields, for example, are not very promising for young academics anymore. Once I met a young woman fresh out of grad school who walked into an assistant professorship in accountancy at a six figure-salary. But I wouldn’t bet on that still being the case.

As for jobs in the real world? Get a degree — NOT a J.D.! — in a field will get you into a business or nonprofit and put you on the fast track to upper management. For example, an MBA in economics from an Ivy-League school or a public school with similar clout, such as Michigan or even UC Berkeley, can set you up for a career in banking or government. Keep the cost down by getting the undergraduate work out of the way in your state’s public university, and then aim high for graduate school.

And what if you’re silly enough to want to be educated? As in really educated educated?

Well, in four years you’ll have time to take at least some courses in history, art, language, and literature. They may fill some of your university’s gen-ed requirements. But you should also look at MOOCs: free or nearly free online courses that you can take in your own time. These are now offered by some very high-powered universities, including Stanford, Princeton, the Art Institute of Chicago, Oxford, the University of Michigan, UC Berkeley…and many more. You still can furnish your mind: you just have to do it yourself.

PF Blogging: All Our Advice on a Notecard?

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Here’s a fine revelation from PBS NewsHour: All the financial advice anyone needs fits on a 3×5 notecard!

Just so. Herein lies the great mystification of the personal-finance blogging boom. There’s only so much you can say when you assay to advise and pontificate about dealing with money. Yet there are still hundreds of us, all nattering on and on about…yeah. The contents of an index card.

Advice on a card 2Really, how many ways can you say these things? After awhile, if you’re a PF blogger you realize you’re repeating yourself ad nauseam. Many of the original bunch tired of it and sold their sites, sometimes for a decent price.  Others, like FaM, started writing about new topics. I see Frugal Scholar has announced that her site will no longer focus on frugality but “other things I’m writing about.”

There are so many other things. And most of them are far more interesting. Than money, I mean.

Politics, for example. Cultural issues…especially in a culture that really doesn’t regard caring for children and a home as productive work. Books. Food. Travel. Real estate. Gardening. Dogs. Cats. The hilarious folly of the passing scene. Life, the universe, and all that.

 

Check Up on Your Financial Adviser

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What do you know, really, about your financial adviser? Did you realize that America has more than 650,000 registered financial advisers, of whom 7% were disciplined for misconduct between 2005 and 2015, to the tune of a median repayment to customers of $40,000? About a third of these were repeat offenders, who are five times more prone to misconduct than average (Mark Egan, Gregor Matvos, and Amit Seru, “The Market for Financial Adviser Misconduct“).

It’s hard to know how to assess a financial adviser, at least not without using the person’s services over a lengthy period. But you can check up on a prospective adviser’s track record: FINRA runs a website called BrokerCheck. The site reports on whether a broker or brokerage firm is registered with FINRA, information that has been disclosed to regulators, the person’s work history and the brokerage firm’s history, and what the broker or firm is qualified to do based on exams and state licenses.

As financial tools go, this one falls into the don’t-leave-home-without-it category.

Naturally, as soon as I found out about it, I looked my guy up. Squeaky clean. His firm: a congregation of saints. His boss: platinum-plated.

So that’s good.

Out of idle curiosity, I looked up a friend who’s a financial adviser. I don’t  use his services because he’s paid by commission only and because he also sells insurance, both circumstances that invite conflicts of interest.

Lo! Up pops mention of bankruptcy proceedings. In the context it looks like a Black Blot. One wonders, though. There’s nothing like a divorce in the middle of the worst recession since the Great Depression to run you into the hole. So it hardly seems fair to assess the guy on that criterion.

Still: forewarned is forearmed. If you actually were in the market to do business with a financial adviser whose record included a bankruptcy or default, it would be worth asking about it.

Be sure to check the person’s employer or firm as well: My friend’s firm has had 22 “disclosure events” and 11 arbitrations. Some of these are very serious. Example:

WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT SINCE AT LEAST JULY 1, 2009, IT HAS DISADVANTAGED CERTAIN RETIREMENT PLAN AND CHARITABLE ORGANIZATION CUSTOMERS WHO WERE ELIGIBLE TO PURCHASE CLASS A SHARES IN CERTAIN MUTUAL FUNDS WITHOUT A FRONT-END SALES CHARGE. THE FINDINGS STATED THAT NOTWITHSTANDING THE AVAILABILITY OF THE WAIVERS, THE FIRM FAILED TO APPLY THE WAIVERS TO MUTUAL FUND PURCHASES MADE BY ELIGIBLE CUSTOMERS AND INSTEAD SOLD TO THEM CLASS A SHARES WITH A FRONT-END SALES CHARGE OR CLASS B OR C SHARES WITH BACK-END SALES CHARGES AND HIGHER ONGOING FEES AND EXPENSES. THESE SALES DISADVANTAGED ELIGIBLE CUSTOMERS BY CAUSING SUCH CUSTOMERS TO PAY HIGHER FEES THAN THEY WERE ACTUALLY REQUIRED TO PAY….

THE FIRM WAS CENSURED AND REQUIRED TO PAY $602,322, INCLUDING INTEREST, IN RESTITUTION TO ELIGIBLE CUSTOMERS.

 Holy sh!t. That’s just one of the 22 disclosures…

FINRA RULE 2010, NASD RULES 2110, 3010: THE FIRM FAILED REASONABLY TO SUPERVISE, A REGISTERED REPRESENTATIVE ASSOCIATED WITH THE FIRM. THE FIRM HAD PLACED THE REGISTERED REPRESENTATIVE ON HEIGHTENED SUPERVISION WHEN HE REGISTERED WITH THE FIRM. DURING THE TIME HE WAS ON HEIGHTENED SUPERVISION, THE REGISTERED REPRESENTATIVE MISAPPROPRIATED APPROXIMATELY $122,000 FROM A CUSTOMER ACCOUNT. THE FIRM FAILED TO CONDUCT A MEANINGFUL REVIEW OF THE REPRESENTATIVE’S ACTIVITIES IN CONNECTION WITH THIS CUSTOMER’S ACCOUNT…

CENSURE
MONETERY/FINE: $50,000

Wow!
And Great Galloping Poorhouse Residents, Batman! It gets better!

NASD RULES 2210, 2211, 2110 AND 3010: RESPONDENT FIRM OFFERED ITS CUSTOMERS A FEE-BASED BROKERAGE ACCOUNT, AND RATHER THAN PAYING A COMMISSION ON EVERY TRADE MADE IN THE ACCOUNT, CUSTOMERS PAID AN ANNUAL FEE BASED ON THE TOTAL VALUE OF ASSETS IN THE ACCOUNT. RESPONDENT FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM REASONABLY DESIGNED TO REVIEW AND MONITOR ITS FEE-BASED BROKERAGE BUSINESS. NEITHER RESPONDENT’S PRACTICES IN SUPERVISING ACCOUNT, NOR ITS WRITTEN PROCEDURES FOR A FEE-BASED BROKERAGE ACCOUNTS WERE ADEQUATE. AS A RESULT OF DEFICIENCIES IN THE FIRM’S SUPERVISORY SYSTEMS AND PROCEDURES, RESPONDENT ALLOWED CUSTOMERS TO OPEN AND CONTINUE IN A FEE-BASED ACCOUNTS EVEN IF THE ACCOUNTS WERE INAPPROPRIATE FOR THE INVESTORS IN LIGHT OF THE FEE-IN-LIEU OF COMMISSION STRUCTURE, THE $1,000 MINIMUM ANNUAL FEE, OR THE REQUIRED $50,000 MINIMUM IN ASSETS. AXA COLLECTED FEES FROM THOSE ACCOUNTS AFTER THE ACCOUNTS WENT A FULL YEAR WITH NO TRANSACTIONS, IMPOSED FEES EVEN IF THE ACCOUNT STAYED BELOW THE MINIMUM ASSET LEVEL FOR A YEAR, AND CHARGED ASSET-BASED FEES FOR THOSE ACCOUNTS BEFORE THE ACCOUNTS EVER REACHED THE MINIMUM VALUE THAT WAS SUPPOSED TO TRIGGER THE ASSET-BASED FEE. AXA DISTRIBUTED INACCURATE AND MISLEADING SALES LITERATURE, PUBLIC COMMUNICATIONS, INSTITUTIONAL SALES MATERIAL, AND INTERNAL COMMUNICATIONS IN VIOLATIONS OF NASD RULES 2210(D) AND 2211(D).

FIRM IS CENSURED, FINED $1,200,000, ORDERED TO PAY $1,391,427, PLUS INTEREST IN RESTITUTION AND REQUIRED: WITHIN 90 DAYS TO COMPLETE THE REMEDIATION PROCESS TO CUSTOMERS REQUIRING REFUNDS; WITHIN 120 DAYS FILE A REPORT PROVIDING A DETAILED LISTING OF ALL QUALIFYING CUSTOMERS; AND TO DISCONTINUE OF ALL OF ITS FEE-BASED BROKERAGE BUSINESS….

This stuff goes on and on and on.

And how about my guy’s firm?

Nothing. Zero. Nil. Nada. No complaints.

A Little Luck, A Little Smart$

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lightrail-Phoenix_Exterior_7417.2008This morning as I drove through the ‘hood toward the freeway, there to connect with points north and west, it crossed my mind that in the years after my son’s father and I divorced, I’ve benefited by a strange confluence of raw luck and moderately smart financial decisions. Most of these have had to do with real estate, though some are more directly tied to the economy.

After I’d had a couple of years to recover from the Parting of the Ways, I decided to buy a house — mostly by way of putting some distance between myself and the drive-by shootings near the place where I was renting. By sheer chance, the Realtor I hired, brother to a former City of Phoenix mayor, came across a house about two and a half blocks from the present Funny Farm.

Also by chance, the economy happened to be in the doldrums of the most recent savings and loan fiasco. Arizona was one of several epicenters and so was experiencing a major real estate crash, with borrowers defaulting, banking institutions collapsing, the federal government taking over property…and on and familiarly on.

My guy looked at the house in question, a single-owner property craving updates but not needing any truly major, bone-surgery-type repairs, and calculated. The owner, a widow, had died, leaving the house as part of an estate that needed curating. The place had been on the market for three months: nary a sign of moving. Meanwhile, the estate was having to pay taxes and utility bills, as time ticked on and property values continued to plummet.

He mulled this over for a day or so, after he’d shown me all the other properties on his list he thought I could (marginally) afford and watched me reject them one after another, then took me back there for comparison. I said welllll… it was better than any of the other dumps we’d looked at.

Forthwith he made an offer to the seller: 30 grand under the sale price.

Forth-forthwith, the seller grabbed it, and I was the happy owner of an aging tract house on the fringe of North Central that needed a new kitchen, new flooring, and new landscaping. Most of the stuff, SDXB (who moved in with me) and I could live with. Soon I had new countertops installed; eventually I had the floors tiled and the front and back yards xeriscaped.

Incredible luck.

The house turned out to be sturdily built; the neighborhood mostly pretty good except for a questionable area across Conduit of Blight Boulevard, the main drag to the west.

Day came when I was cruising up a freeway with the brain in idle. Through that twilight state, a thought dawned: when the alimony ran out, as it would soon, the mortgage on that house would consume slightly more than half of an entire month of my pay, which was more than I’d ever earned in my life and slightly more than the county’s median family income. By then I’d concluded it was time to eject SDXB. Without his contribution to the mortgage in the form of “rent,” I would not have enough to eat on after I’d paid the lender.

So, over my financial advisor’s strenuous objections, I combined a small inheritance with a chunk of my savings and paid off the $80,000 mortgage in full, getting rid of an 8.5% interest rate.

Surprisingly smart move.

The house was paid for. That allowed me to throw out the boyfriend and replace him with a German shepherd. And I lived there happily for quite a while, if not ever after.

A paid-off roof and a reasonably frugal lifestyle allowed me to stash substantial amounts of cash into savings. This worked out well.

Eventually I grew restless. Two houses across the street acquired problem owners: A single woman bought the place across the street from me. Her son had inherited his father’s vicious personality, and while he left the neighbors alone, he was seen beating up a girlfriend and terrorizing his grandparents. Then the people next door to them sold and that house was acquired by a single batshit man with two teenaged sons. He also was radically abusive, given to throwing furniture through the front windows. When he got into a fistfight in the driveway, screaming obscenities to the moon, that was when I decided it was time to move out.

Started looking around the city. The late, great Real Estate Bubble was just starting to inflate. With demand at astronomical heights, finding a comparable place that I could cover in cash was a challenge.

SDXB, who by then lived just up the road, happened to know a couple in the ‘hood who had just put their house on the market — two houses down the street from his.

It was still the same neighborhood about whose stability I felt profoundly ambiguous. But it was a half-mile from where I’d been living and well south of the war zone at the intersection of Conduit of Blight and Slum Borderline E/W. Although I would surely have liked to move further east, a mile or two away from Conduit of Blight, the price was right: I knew I could sell my house for what I would pay for this one. Plus the owners had cherried it out with all new kitchen cabinetry, nice bathroom fixtures, a pretty new covered deck with new sliding doors opening onto it, and a (supposedly functional) new watering system. And it had a pool, which I coveted.

Although the watering system was a joke and much of Former Owner’s DYI renovation was out of code, the place turned out to be a good buy. Real estate values continued to run amok, and within a few months the house was valued at $150,000 more than I’d paid for it.

Raw luck!

During the Great Recession, the value dropped to less than I’d paid for it, but since I wasn’t paying a loan and so wasn’t paying interest on a make-believe value, it didn’t matter: you don’t realize a loss until you sell. Today the house is now once again valued at about $125,000 more than I paid for it.

Luck.

As I drove toward Conduit of Blight this morning, I noted how much better the houses look. The place has gentrified mightily as the Lightrail Boondoggle has neared completion. Young urban types want to live near a lightrail. Not that any of them would commute on it: it’s just the politically correct, environmentally correct principle of the thing, I guess.

A whole raft of young marrieds has discovered the ‘hood — the only remaining middle-class neighborhood in North Central with even marginally affordable prices — and they’re gentrifying like mad.

Luck.

O.K. I’m glad I decided to stay in the neighborhood.

But soooo glad I moved a little further from Conduit of Blight. The tenements along that road are definitively NOT improved by the city’s shiny new train project. The train brings more noise and more characters you’d just as soon not have know about your neighborhood, more impossible traffic lights and more crazy-making traffic. So I’m happy to be mostly out of earshot from that thing and enough of a hike to discourage most of the drug dealers, prostitutes, and flakes it brings to us. And very, very happy for the young people who think the presence of a commuter train makes these houses worth buying and fixing up. 🙂

Very smart. I guess.

This afternoon a cop helicopter began to buzz the corner where my old house resides. It practically grazed the roofs, and the cops were hollering through a loudspeakers for people to get inside and stay out of the way. This went on for an hour or 90 minutes.

It’s not an uncommon occurrence. When I lived in that house, I could set my clocks every Friday and Saturday night by the 11 p.m. fly-over. The cops would park over my house right about 11 o’clock, almost every Friday and every Saturday evening. It was mildly annoying, because of course it would keep me awake. But with a German shepherd habitually described by my son as “batshit” parked at the foot of the bed, I figured WGAS? And honi soit (or legless soit) qui has the nerve to mal y pense.

And of course, it was in my present house that the Great Garage Invasion Episode occurred. So being a half-mile or more from the war zone does not necessarily make one any safer.

Raw Luck? Or Smarts?

It’s kind of a toss-up, I guess. Given a show-down, I’d say Raw Luck has beat out Smarts here. Nothing that happened, except maybe paying off the mortgage, was especially calculated. Everything that has been good probably has been a matter of chance or of being in the right place at the right time.

Isn’t that just like life?

Image: By KINKISHARYO – Phoenix_Exterior_7417, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=31119699