Fix the economy - Step #1b more retirement

OK, so I've asked our older populace to take a hit and accept a later start to SS. What about the younger populace?

Well, I think the first big thing to recognize is that we're looking to live even longer than our parents. (I'm 30) So if 65 is too young for our parents to retire, then it's going to be way too young for us to retire. Fortunately, I know lots of people my age who seem to inherently understand this conundrum.

But understanding doesn't necessarily solve the problem. Lots of people my age are also graduating with record student debts and have spent a decade being priced out of homes. Retirement savings are not just low with 60-somethings, it's low with 20-somethings.

There have already been proposed plans for "mandatory retirement accounts" to be offered by employers and I think this is a step in the right direction. However, I think it's "too little" in a couple of directions.

Mandatory Retirement Accounts - Improvement One

First off, the proposed plan creates forced IRA accounts to be set up by employers. These are not the people you want managing this process. Employers are already over-burdened with major benefits like healthcare, dental, disability, etc. On top of that, the average worker will cycle through multiple employers in their lifetime, especially with my generation. If each employer is setting up a new IRA with their provider of choice, you create a giant paperwork mess.

In fact, it's already a paperwork mess. I still haven't rolled over my 401k from 2 jobs ago and pulled it in with the current one. It's all just a pain, shouldn't I just own the 401k and let the employers plug in to my provider of choice? Why does my employer choose my 401k provider?

So this needs to go the other way.

Each person needs to "own" their 401k and government-mandated transfers should happen directly to those portfolios. If the employee doesn't have an IRA, then those dollars are thrown into a government account in their name/SSN to be invested in government notes.

In the electronic era, this whole process is relatively simple.

Mandatory Retirement Accounts - Improvement Two

The second fix here is really to fix the whole [Roth] IRA / 401k / Defined Benefit mess. Why do we have these all of these confusing options? Why do we have the choice between Roth or non-Roth? Do we really want people guess between "tax now" and "tax later"? Does it make anything better?

I think the US needs to look towards a system like the Canadian RRSP for retirement savings. The RRSP system is simple to set up and simple to envision / manage.

The basic premise is that you have two investment "buckets", one bucket registered for retirements and the other bucket for "regular" investments. Money going in to the retirement bucket goes in un-taxed and gets taxed on the way out. To avoid people from "churning" money, the RRSP bucket has a growing lifetime max based on your income. To avoid tax cheaters, withdrawals have some %  held back.

And yes, we should have the usual "out of work" or "back to school" allowances for withdrawals.

In either case, the tax retirement mess should not require a book to explain. It all be explainable in a 5-minute video. In fact, the government should actually produce this 5-minute video :)

Isn't this all Socialist?

Did I mention I'm from Canada? It depends on your take here. Isn't Social Security socialist?

Yes, my whole proposal is "government meddling".

But there's a clear trade-off here. People are notoriously bad at thinking for the long-term and saving for a rainy day. We currently have a entire generation of voters who don't have anywhere near enough money for retirement, so we have living proof of our capacities here.

The goal of my proposal is to set small measures now to prevent larger problems later. If you don't think this is a good thing, then it's easy to call this socialist. But that same measure could apply to lots of existing programs that help provide stability.

I firmly believe that what the public seeks from government programs is some basic form of stability. This program is the type of program that actively promotes that stability, which is why I think it's important.

Fix the economy - Step #1: Retirement

So we know the US economy has major problems. High unemployment, likely structural, definitely hurting the youth. Aging infrastructure. Large debts + a large deficit. Very large unfunded liabilities like medicare and social security.

Oh yeah, and let's not forget that whole housing thing. The one where the banks are only solvent because they changed the accounting rules while they slowly liquidate their losses. It's clear that stuff needs to change, but where do we start?

Obviously, the Tea Party has made this whole "brouha" about a "balanced budget", but there's no clear plan to deal with any of the issues above. So it's time to start making some serious decisions. So this is the first of several steps I suggest for repairing the US economy.

Why trust me? Well you are reading my blog :) But frankly, I just live here. I can't vote, don't make campaign contributions and will probably leave in a few years (bad economy or no).

My only vested interest is that I don't like to see people suffer needlessly. Don't get me wrong, people are going to suffer as part of "fix the economy", I'm just trying to avoid the "needlessly" part.

Step #1: Retirement

Here's the deal, we cannot all retire at 65 if we plan to die at 85. We cannot have a population that spends 20+ years getting educated and 20 years "doing nothing" with only 40 years in between. 20 years of "nothing" is far too long for the average person, it's just too much "unproductivity".

It especially won't work with the upcoming Baby Boomer crisis. We can't have a giant chunk of people are retiring at once and we can't have them retiring for 20 years. The economy will suffer heavily from the productivity loss and the social security system will simply "run out" of money (i.e.: need to print money).

Of course, we may avoid the "rush of retirees" simply because many people near their sixties are nowhere close to retirement. We're talking about boomers with $50-110k to their name (including home equity). That either means stretching social security and praying for the best with inflation, or it means working longer.

For the country as a whole though, we don't have enough money to support Social Security at current levels. Especially when the big boat of baby boomers beat a path to the SS offices. So let's fix a couple of problems.

#1a: increase Social Security age

The US should definitely push this back to 67 or 68 ASAP. Several other countries have already done this, so it's not really ground-breaking.

Yep, this is going to be unpopular, but I think it's the least painful way to curtail the debt crisis.  It's also kind of fair. The people who are losing a few years of SS are also the same people who voted throughout the period leading up to the whole crisis. They were an entire generation born into and raised with the possibility of receiving SS. The current under-funding is the result of years and decades of poor fiscal planning, so at the least the planners are "reaping what they sow" here.

#1b:  consider "rolling down" SS

SS is a neat concept, but it's basically a pyramid scam. It's unlikely that my 20 & 30-something will ever see any SS payments come our way, the whole system is going to implode long before then. Most of my peers have already accepted that.

So maybe it's time to draw a line and start a new program for people under 40... but that's the next post :)

Any thoughts on changing retirement / SS age? Should it be higher (70)?

Is inflation the answer?

The Curious Capitalist explores the Fed's options, including having the Fed raise "target inflation" from 2% to 4% or even 6%.

So pushing up "target inflation" rates may seem like a good idea, but there are definitely a few hazards here.

Hazard #1: Seniors

Pushing up inflation means raiding those who have cash. The goal is to raid the coffers of big companies just enough to push them into spending that cash. You're basically trying to "scare" people into spending to produce.

The side effect here is that inflation affects all cash.

Targeting 5% inflation hurts people planning to retire soon (i.e.: baby boomers), but it also really hurts those who are already retired. These people already live off of cash and they've stopped producing. They have way to counter the effects of such growth, they cannot grow their income.

It also sucks for the unemployed who were already falling behind.

Hazard #2: Anger investors

Investors are not stupid, they can calculate the effect of inflation. The 10-year treasuries are currently under 3%. Investors are honestly accepting that this is basically zero growth. You're not moving forward much, but at least you're not losing ground.

Changing the inflation plan to 5% means that 3% investment is effectively losing ground. What's more, everyone who bought these sub-3% bonds in the last 3 years is going to end their 10-year holding at a real loss.

China will not be happy about this move. Forcing inflation is raiding cash. This would be raiding China's coffers in a very real way.

Hazard #3: The gig is up

The long term plan has always been to inflate away some portion of the debt. Everyone is doing it, but there's definitely an aspect of "chicken" going on. No one wants to inflate too much.

Well jumping inflation to 4% or 6% on purpose pretty much ends the game. Then everybody knows the plan. Fiat currency is all about trust. Raiding the savings of hundreds of millions of people is not a great way to engender further trust.

Maybe I should buy gold... or bitcoins... or both :)

Irrational Pessimism

This is in reply to a post on MillionDollarJourney.

@Ed:This recession is, of course, not over yet and may deepen, but none of these statistics are expected to get as bad as the prior recessions.

There are several logical flaws in the comparisons here:

#1: The interest rate on today's mortgages cannot reach the level of those previous recessions. There is already an excess of available homes and lots of people still on ARMs. Interest rates that high would absolutely destroy the economy.

#2: The interest number in 1981 was high b/c of inflation. Volcker, the Fed Chairman, wanted to wring out inflation by slowing the growth of money. He basically raised interest rates until the stagflation stopped.

#3: Your S&P 500 and TSX lines are both based on nominal differences. For a fair comparison you should calculate net change plus inflation. Either way, it's still pretty clear that the drops last year are in line with the drops in the other to recessions.

#4: Inflation, what models do we have stating that this isn't going to sky-rocket?

Clearly, the 0% inflation is due to the fact that the gvmt "printed" money approximately equal to the amount of money that was simply lost via bankruptcies. Of course, the 0.1% number dates back to January, but the most recent number that we have is from February.

Since the end of February, Obama has agreed to a trillion dollars.

The US is likely going to run a $2,000,000,000,000 deficit this year. That's two Canadian GDPs. Much of that money is going to come from Quantitative Easing, i.e: simply inventing money. In fact, that's the goal, the government wants to create inflation. From Paul Krugman of the NYT:

...having some inflationary effect — is what the policy is all about

So we're going to have inflation. We have to, but you haven't seen it yet b/c the money is being invented right now.

What's more, Obama has promised more trillion dollar deficits. Without a dramatic increase in US production, these deficits are going to cause significant inflation.

#5: The numbers are still getting worse.
An average of 55 forecasters in the January 15 Wall Street Journal survey expect real GDP to eventually reach only -2.1%

January 15 predates the enstatement of the Obama administration. Obama has likely seen the most active 100 first days of any president ever. He has produced several plans that simply did not exist in any way on January 15. You need to get more recent data than this.

Industrial production appears to have bottomed in September 2008.
Industrial production in 2009 has been down for 4 months.

The numbers I'm reading are even lower: From February 2008, industrial production has declined by 11.2%.

The news is full of stories of massive lay-offs, but unemployment is only expected to rise to 8.9%
Unemployment numbers are currently at 8.1% (from 7.6% the previous month). And across all sectors:
In February, job losses were large and widespread across nearly all major industry sectors.

The US national debt is into record highs outside of WWII.

The US is operating a tremendous trade deficit and has been for 25+ years. That number will not turn around.

The only politically feasible way out of the mess is (sadly) the printing of money combined with real economic growth. Of course, China's not really happy about the part where the government prints away its debt (and Canadians should be pretty peeved as well).

But the US has to find a way to convert their dollars into real assets and frankly they have some of the most expensive assets in the world, so they're not doing really well in that category.

#6: Everyone is wondering how low the stock market will get, while trillions of dollars sit in cash on the sidelines waiting for the right time to jump back in.

Where does this data come from?

From what I can see, the banks and insurance companies are tragically under-capitalized (i.e.: lacking in cash). The banks don't want to mark their assets to real market values b/c they're complaining that there is a lack of liquidity in the market. The current US plan with the "private/public partnership" is founded on the concept that these assets would be under-valued if sold at current market prices b/c of a lack of competition and liquidity. So the US government is betting a 500 to 1,000 billion bucks and providing massive leverage to private investors in an attempt to heal the banks. And while this is happening you're claiming that many trillions of dollars are sitting around just waiting to be invested.

If these trillions are waiting to be invested, why does the US government have to cook up plans with 12:1 leverage?

@ED, I don't think that you've made a very good case for yourself with one chart, old data and zero hyperlinks. It's obvious that your data doesn't add up. It's also clear that you're missing something really key about the US economy.

If they do not reverse the trade deficit, the economy will collapse. It's very key that we understand the size of the deficit. The US has been on a 25-year credit card spending spree and they don't have an easy way to even start paying back the money without dramatically "tightening their belts".

Even then a trillion dollars represents $33,000 for every US citizen. That's one median income here in Kansas City. That's a lot of debt, it's not going to be easy to pay off.

I'm going to posit that we're actually under-estimating the breadth of this financial crisis but that we'll have to wait until 2010 for it to widely understood.

The "Time" has yet to come

Last week Time Magazine ran a special on the US financial crisis.  The first article is House of Cards: The Faces Behind Foreclosures. The article is centered on two Kansas City homeowners both facing foreclosures. I think that a few choice quotes from the article really speak to the root of this US financial crisis.  People simply don't get "it".

The crisis is fundamentally about wanting too much at once.  But the face it has consistently shown is one of over-leverage. Over-leveraged people, over-leveraged companies and an over-leveraged government (ostensibly all the same thing).  

This article tries to paint a picture of those getting those getting the short end of the stick, but all I see are over-leveraged people out of time.

A few choice quotes:

We have entered the one-strike-and-you're-out era. One lost job. One medical emergency. One bad risk or misjudgment of the heart...

We're geared to believe that risk begets reward and our tomorrows are brighter than our todays. One-strike-and-you're-out is a neck-snapping reversal for a culture accustomed to assuming that fate is a welcome friend...

People like Paula Stevens and Joseph Zachery weren't flipping houses or lying on their loan applications. They didn't pile up mountains of credit-card debt. They worked hard for what they had and shared their modest portions with others...Their bitterness stems from a feeling that they've held up their end of the social contract, but now the terms of the deal have been rewritten by malign forces....

Not everyone who has fallen behind on a mortgage is a loser complicit in the housing collapse.

That last line is from the closing paragraph. (emphasis mine) So the big question here is "are these two people 'losers'?"  Are these two really innocent bystanders in the housing collapse? I think the answer is no and the reason should be clear simply by analyzing the risks under-taken by both parties.

Joseph Zachery

Occupation: Firefighter from 1986 to recent. Ended at $60k / year.  

House:  $100k house, needed renovations

Worked a second job: Like most firefighters, he always had a second job...he started his own business, demolishing houses condemned by the city.

He used the equity from his house to buy demolition equipment, resulting in a mortage where "he owed nearly twice the original purchase price."

Crisis: he gets into an accident on the job.

He's shuttled around between hospitals, he gets full disability from the fire department (plus some electroshock treatment?) and he's now living on pension. He get $50k / year. It costs him $800 / month for medical, leaving him with $2,400 for everything else.  But get this, his mortgage is $1,600! On a 100k loan that doesn't make any sense.  But the problem here is that he actually owes 190k which he's paying off at 9%.

So why did he end up here? Was it the work accident? What did he do wrong? What are the risks he took?

1. Leveraging non-existing home equity:
   He didn't pull out just the home equity he "actually had" from his down payment or his mortgage payment.  He pulled out "speculative" equity that the bank extended based on the prevalent housing prices at the time.  He wasn't borrowing "his own" equity, he was borrowing equity that he hoped the house would have.
   Rather than taking out a business loan for his small business, he took out a loan against his home meaning that a crisis in his life would likely cause his to lose his home.
   
2. Leveraging his ability to fix the home:
   As stated, the home was a fixer-upper. He was banking on his ability to fix the house in order to prop up the value of the house.  Of course if he wasn't able to fix the house for some reason, it's value would bleed from lack of maintenance.
3. Leveraging his second job:
   He knew his pension income and he knew his medical payments, he knew the money he had to work with. Based on the fact that he's losing his home, it's pretty obvious that he wasn't going to be able to keep his home on just his pension.  He needed that second job to keep him going.
4. Under-insuring:
   This is a really big point.
   There is no indication that he has disability insurance on his second job.  Here he has a second job that he needs to keep in order to remain solvent. He's dependent on his own mobility and capacities. But he's not insured if he loses them.
   Yes he had disability from the fire department, but that was only for his fire department salary.  Where's his insurance for his other business?
   He buys 100k in equipment, but doesn't buy 100k+ in disability to cover his potentially catastrophic liabilities.

So if you look at the risks, he was basically gambling that this wouldn't happen.  He's unmarried, he's supporting his mother, his kid is in college, he's has no "backup support". 

He's a firefighter, he runs into burning buildings for a living and he's gambling his livelihood and his home on the fact that he won't be injured.

So he got injured and lost his home.

Paula Stevens

Occupation: Gateway tech support. No college degree, serial "entry-level" worker. In her best year she grossed 42k  

House:  3,000 sq ft, purchased in 1994. Re-financed 3 times, now owes 159k (@ 9%!)

Crisis: lost her job at Gateway and can't find one that pays as much.

So the obvious risks:

1. Living without a buffer:
   "It takes $14 per hour for me to meet my bills...That's what I was making at Gateway when I was laid off. But no one wants to pay that much..."
   If you're making $14 / hour, you need to be living off $11 or $12. How else are you going to save up cash for retirement or even just emergency expenses like job losses?
2. No professional development:
   She made it to 56 and somehow doesn't have the skills that she can market for $14. There's no sign that she took college night courses or professional training.
3. Where did the equity go? the savings?:
   She's 14 years into a mortgage and she owes 159k. The median home price in Kansas City during the last recent peaks was just under 190k.
   But she bought in 1994, close to the bottom, 14 years ago.  She most likely owes more on the house than its original asking price. And she's paying 9% on it to the tune of $1,400 / month.
   And where are her savings? It doesn't seem like she had retirement plans of she would have money right now.
4. Family Obligations: 
   ...but her oldest daughter, Maggie, 28, has a new baby and is enrolled in nursing school. "I just have to get her through that," Stevens explained

To put #4 in context.  I am currently living in the heart of Kansas City in a luxury apartment in a premium location. I have 1100 square feet, 2 bedrooms and 2 full baths. In-suite washer/dryer/dishwasher and a few other luxuries.  You could very comfortably have two people and child here.

I pay less than $1,400 after utilities.  That's less than her mortgage and this is a luxury suite. You can get an older apartment or a townhouse down the street for $600 to $900.  That would make it a lot easier to balance the bills.

So where does that leave Paula?  She's obviously over-extended, but all of the signs are pointing to her basically not having savings.  Her telling quote is this defeatist line: "That's how it works. You just keep starting over."  Rather than spending her life accumulating, she just kept starting over.

My personal opinion (because it's my blog): neither of these people should be in their homes.  They should both be renting, either really close to family or really close to public transit.

Disagree? I'd love to hear other thoughts.

The US labour problem

Here's a great quote from the founder of Mint.com on the mint blog.

While the downturn in the economy has meant a flood of resumes for sales, marketing, and general business positions, the engineers, scientists, and researchers who actually make the next innovations possible are still in very short supply.

I think that he really captures the fundamental US problem.  All of the job futures are in sciences & engineering.  But the US has been a services economy for decades. Bankers and financial analysts don't actually "make" anything.  Lawyers and Accountants don't really "make" anything.  They are fundamentally just business overhead. Sales people help connect people and products, but a year in the US will show that we clearly already have more than enough people in Sales and Marketing.

Yeah, maybe I'm biased b/c I work in the computer industry.  But if you look around at the "future jobs" boards, they're all centered around "making stuff".  And that's what the US needs to do become financially solvent again.  They need to "make stuff" that they can export.  You can build a better battery and export that to China.  You can build windmills and power stations and ship them across the world.  You can train great scientists and have other countries license their technology.  But you can't export Lawyers and Accountants.  And you certainly can't export US bankers :)

Of course, the US has had some serious educational issues over the last couple of decades, especially in the realms of education in "Math and Sciences".  So we have a populace that's ill-prepared to tackle the new problems.

The mint.com founder (Aaron Paatzer) suggests an increase in the H1Bs and other foreign visas. And he has a point.  Smart people from around the world can migrate to the US and enjoy a US quality of life. It would make a lot of US citizens unhappy and importing "the rich" would definitely "make the poor poorer", but I strongly suspect that's going to happen anyways.

Maybe making the US into a mecca for brains will provide it a means of conquering its financial crisis. It's not a great deal for the "average American" who will still see a decrease in quality of life, but they're going to see that anyways.  Maybe salvaging lifestyles for the top 20% of earners will at least provide reason for continued US solvency.

Enough to Retire?

Just came across the 10/10/4 model as presented at Mint.com. It demonstrates a pretty tenuous grasp of reality.

Comments below.

Jess:the life expectancy in the US is only 77 years according the the CDC

Is the current life expectancy or the life expectancy for people who are currently 20 and won't hit 77 for another 50+ years? Do we have a link for this?

Even if we change the model to 80 years (let's give medical science a little credit), that still leaves us with 45 years of working to 35 years of not working. That leaves us with 45 people working for 35 people not working.

Imagine that you're living in a (global) village with 80 people. 45 of those people do all of the hunting / gathering / farming / house-building. The other 35 people are either non-productive children or old people who sit around smoking pipes and eating food brought in by the other 45 people.

Either way.

If you save 10% / year for 45 years, and receive no effective pay raise between 20 & 65 (i.e.: pay raise = inflation). Then you would need ~3.25% real returns (that's returns above inflation) for basically the entire 45 years to meet the goal of having 10x your annual income. That doesn't sound like much, but here's some perspective.

Right now TIPS bonds are offering 0.7% real returns (they were offering 0.0% returns just a few months ago). Real Stock market returns over the last decade are into the negative. If you earn 0% real returns one year you have to make 7.5%+ real returns the next, just to make it up, that's not easy.

What's more, you're subject to a very critical period. At year 30 you have about 5x of your 10x. From year 30 to 45, you're only going to save 1.5x (putting you at 6.5x), which means that you're relying on 15 years of solid returns to make up that other 3.5x. If you have a 5 or 10-year drought, you could end up way short. And a 5 or 10-year drought is going to happen somewhere in those 45 years.

Finally, we made the very unsafe assumption that your "real income" doesn't change. Realistically, your income increases over time.

According to the 10/10/4 model: "...by the time you are 65, you will need 10x your income immediately prior to retirement to retire at the level you want.."

So you need 10x your final income, not your starting or even your average income.

Let's say you're 20 and making 30k today. Your "10x" number is 300k. You save 10% for 10 years and save just over 1 year's worth of income (say 31k). At the end of 10 years you make the big switch and find a new job earning 45k (again, no inflation). Awesome for you!

However, now your "10x" number is 450k, but you only have 31k in the bank. You're behind, right? You're at year 10, you should have at least 10% of your target number, but you only have 6.8%. So what if you continue to plow along for another 10 years and then get another pay raise to 60k? Now your 10x number is at 600k, you're 20 years in to the plan but you're way behind the curve. You should have saved 120k (+ interest), but you're nowhere close to that number.

And then you have to account for medical. If you're earning 60k but receiving 10k in medical benefits (may be low-balling in the US), you now need 700k in savings (not 600k).

You can see where I'm going with this. If you follow the 10% savings route and you also follow a normal pattern of increasing income throughout your career, the 10x goal is very difficult.
- Your increasing income makes previous savings insufficient.
- High medical expenses inflate your "10x" number.
- You need consistent returns well above inflation and you need them at the right times.

Don't get me wrong, I'm a savings advocate. I save 10% and then some in tax-advantaged accounts.

But I make no pretenses of making it to 10x without saving more, getting lucky or making some savvy investments.

Again, the model presented above is very broken. Readers can follow this at their own risk.

Housing illusions

MillionDollarJourney had a post about Cash Back Mortgages.

Instead of the usual comment, I've devolved into one my blog replies, original comments included.

@Nolan: However it does not change the fact that if you buy a house to live in it, and the payments are reasonable for your income, then you are better off owning than renting in the long run.

This has been hashed and re-hashed on this forum and elsewhere. The data in no way supports your thesis and I would urge not to spread such dangerous information.

At best, owning a home is a lifestyle decision with a set of associated risks. We can argue this elsewhere, but there are a dozen guys who've run the spreadsheets. You've successfully listed a few of the risks:
... the ones who can’t afford their payments, speculators (like you said), and the ones who panic and sell when housing prices fall.
but there are more:

• Risk - People with jobs that are heavily dependent on some local resource (mill-towns, mining towns, etc). This is actually doubly risky, b/c if you're losing your job it's likely that nobody else is moving in which means that your housing "investment" won't be doing well at the very time you need to sell.
• Risk - People working in highly transient / mobile fields. If you're in IT and changing jobs every 3-5 years (quite common), being tied to a location can be quite costly. If you're an athlete, a long-haul trucker, etc. similar logic would apply.
• Risk - purchasing a high-maintenance house. Even if you can "reasonably afford the payments", you still need to afford the maintenance. A 20k basement repair on a 120k house is a realistic risk and would definitely wreck your financial plans.
• Risk - property tax increases. As independent homeowners you're still on the hook for these taxes, Yes there are processes, but it takes personal time (read "money") and you don't necessarily have a lobbyist group on your side.
• Risk - school district changes: This is primarily in the US where people pay premium home prices for "top-rated" school districts. A certain % of value is actually tied to the continued school district prosperity. Buying a house for your 5-year old could be a liability by the time they're 18 and it's time to "downsize".
• Risk - Energy Costs: once you buy a place you're locked in to paying the energy required to keep that place running. If your rental place sucks up too much energy (due to size or just poor maintenance), you can move at the end of the lease or request changes (you're income, you have a good bargaining chip). If your own home leaks heat (or cold), you're on the hook for this cost. I don't know if you've noticed, but energy costs are going up almost universally. Right now, 50% of the earth's population is using about 4% of the world's energy, and we still haven't figured out that whole "cold fusion" thing. That's a lot of pressure for energy costs to continue to rise.
• Risk - Politics: don't like that new factory that's being built just around the corner? Think it will influence your house price? Well, the ball's in your court now, b/c it won't be easy to move, especially with that factory weighing down on your home value. (also, see property taxes)

I want to echo one of Jordan's comments here: ...ignorant customers just desperate to get in before they’re “priced out forever” or other such non-sense.

If you are making above-average income you will not be "priced-out forever". The rules of supply & demand still apply. Either house prices will deflate drastically or the salary prices will rise to match the growing cost of living. House prices do tend to be stubborn, but since 1990 we've since house prices grow well beyond the rate of inflation, with people re-investing the money from their first place into the second (and third and so on). Barring government interference they're going to dip like every other investment.

Personal aside: I expect this dip to happen when the average baby boomer retires and "downsizes". But it may be happening sooner, check out this blog on Edmonton housing market (with lots of pretty charts). Notice the Supply vs. Demand and the Price and Inventory Comparisons?

If you want a home and can't afford one, just keep saving your ducats and investing elsewhere. Especially the 20-somethings and 30-somethings with "good jobs" (i.e. average or above-average income).

Did I miss any home-owner risks?
There are definitely some renters risks, but that's a different post.

Consumer confidence vs House Prices

I for one believe that most housing in the US is way over-priced. I'm currently living in KC and I'm seeing some "reasonable" prices. But I think it's worth noting that I'm making twice the median income and I can't see buying anything out here.

That's right, my wife doesn't work, so together, we make the median income for a two-person family and the cost of owning our own place is prohibitive. Of course, house prices are dropping, which makes me feel great, maybe I'll be able to afford one soon, but it looks like people aren't. I just found this graph on swivel (which is a pretty cool site BTW).



Of course, in the grand world of causation vs correlation, I'm going to chalk up the drop in confidence to more factors than just dropping house prices. If anything, it's likely the economy in general mixed with a healthy dose of "back-to-reality". For great helping of "back-to-reality", check out this post on MDJ:

California couple, family of 8, 100k / year:

• No medical insurance for the themselves OR the kids.
• $135,000 in credit card debt.
• Two mortgages totaling $658,000.
• Large mortgage with payments of $1800/month, but payments will increase to $3300/month in a few months.
• They have 3 cars, 2 of which are leased, the other one they own. The cost is $1700/month.
• Wife spends $300-$400/month at Starbucks (It was the wifes morning routine).
• $60/week on tanning and manicures
• $4k on hair extensions in the past 2 years.
• Constantly shopping.
• The wife would regularly buy brand new clothes for the kids, then have a garage sale a month later to sell the “used” items at pennies to the dollar. (This one blew me away)

Scary stuff.

Maybe it's time to practice "positive cash-flow techniques". Of course, YMMV.

What That Car Really Costs to Own

Wow, MSN Money actually has a decent piece about Money... Oh look, it's sponsored by Consumer Reports.org. That helps with the explanation:
What That Car Really Costs to Own - MSN Autos

I can't really argue with many of their points. Consumer Reports seems to know what they're doing. I am annoyed with one thing, though it's purely philosophical. It's the concept of factoring in the resale value of the car.

Yes we have historical data, but who wants to be the one trying to sell a Honda on the year they start making lemons? Plus the resale value is only good if you plan on selling the car. Otherwise, you just drive all cars until they're worth some irrelevant amount of money and you call it a day. At that point you want the car that cost you th least to get to the end of the line. Of course, the cars that require the least repair also tend to be the cars the highest resale value.

So you're kind of "double-dinging" certain cars. Especially when they all become basically worthless after a certain time.

4 Pillars Reply: Dave Ramsey

Quest for 4 Pillars, just put up an interesting post about Dave Ramsey Methods.

The main points are simple

1. Make a commitment to get out of debt
2. Start a cash emergency fund
3. Pay off debt using a debt snowball
4. Save 3-6 months of expenses in savings
5. Save 15% of household income into retirement savings accounts
6. College funding for children
7. Pay down mortgage quickly
8. Build wealth and give

And the conclusion from a Financial blogger's perspective is equally simple:
...these things that I do go against the “Ramsey” way but that’s ok because I’m not in need of any kind of financial rescue...I believe that for a lot of people, Ramsey’s methods can be very beneficial.

But I personally think that we're missing something really big here: Dave Ramsey is pimping a diet change and not a lifestyle change. This thing reads like a draconian weight loss plan and asks you to do things based on what he believes. He's imposing his lifestyle beliefs and telling people to save vast sums of money b/c that's what they should do.

Really, why should you save 15% into retirement savings (#5)? What if you don't plan to retire? What if you want to take mini-retirements? What if you want to invest that 15% into educating yourself? If you don't have a college degree, shouldn't that be a priority before retirement savings, how about before saving for your kids' education (#6)?

Paying down your mortgage quickly (#7) could turn out to be a horrible decision. What if you live in a mining town or a factory town? Throwing money at your home could leave you light on cash and investment money when the plant closes down and crisis hits.

Making a commitment to get out of debt (#1), is like making a commitment to losing weight without making a commitment to keep it off. The commitment here to live within your means.

This sounds like the "Wealthy Barber" plan of "Save lots of money so you won't be poor." The only two novel concepts here are #3 and #8. Giving, addresses the karmic nature of money which seems to be that those who give don't have trouble finding. And the debt snowball addresses the psychological aspects of debt payoff that some number-crunchers seem to forget.

But really, this is all just a diet plan for debtors. I know several people in debt and I wouldn't package up this advice with my name on it.

Of course, YMMV.

A Slashdot reply: Young IT Workers Disillusioned, Hard to Retain

So off the Slashdot wire, via Network World comes: Young IT Workers Disillusioned, Hard to Retain

The lead-in quote: Young IT employees pose a challenge to many managers who say the Millennial generation holds employers up to unrealistic expectations and makes unreasonable demands for their services.

*Sigh*

It's a good read, it's nice to hear one side reported; but I feel there's a whole other side to this that's not understood. Most "millenials" that I've met have very little concept of business and business finances.

The average worker expects to sit around and do as they are told and basically "be taken care of". The average worker never sits down with their boss and says "I'm making X and I want to be worth X+10%, what do I need to do?". There's an expectation that simply showing up will get you there. Most workers I've met simply let the company decide their next step. I've even met tons of smart and skilled developers who simply don't know the math behind their salary. They can't ask for a pay raise or different benefits or some other employer concession, they don't even know how much they're worth. They don't know what income they generated last year or the typical overhead cost on their time.

Meanwhile, from the other side, most companies I've known are simply terrible at managing workers and projects and growing their #1 assets. They set up win/lose pay structures that heavily reward management instead of the workers. They ask for more work hours instead of more project deliverables. They expect employees to train outside of work instead of accounting for the cost of "in-the-week" training time. They ignore the concept of "apprenticeships" and the time required and just add juniors to the team as a single unit of time (instead of the .2 units of time they actually generate). They fail to build progression plans (including scheduled pay increases for young workers) and then wonder why they get caught with their pants down when the best young workers leave for more money and the bad ones hang around.

It's a two-way street and there are ample examples of failure on both sides. There are tons of "sweatshop" workplaces and tons of workplace Princesses.

Of course, YMMV.

The annual Gift Card debate

So the war is now raging, Violent Acres has weighed in:
Fuck the Cheerleader; Buy a Gift Card, Save the World - Violent Acres

And so has Liz Pulliam Weston, already the reason I don't read MSN money, she now claims to know that Gifts cards are not gifts. Now I don't think she's totally off-base, here's a great quote:
A gift, ideally, says, "I thought about you. I considered your likes and dislikes, your needs and wants, your dreams and desires, and found you this token of my esteem that I hope will delight you."

But she really takes the whole thing one too far with some other notable quotes:

Would a lover, in the flush of romance, lean close to the object of his affection and present . . . a gift card?...

Heaven forbid that givers use their own judgment and spend a little time picking out small items that might give the recipients pleasure. Just give us the cash and get out of the way.

Followed-up by some interesting advice:
1. Make certain events off limits.
2. Combine a card with a real gift.
3. Think twice before giving one to someone you love.
4. Don't add to the recipient's burdens.

V of course has some strong views the other way:
Every year for my birthday, I always get a gift or two in the mail from someone I haven’t spoken to in months. I find it incredibly insulting. All year long, these people couldn’t be bothered to call me on the telephone, shoot me an email, or meet me for dinner. Yet, they feel as long as they mail me a fucking candle on my birthday, our friendship status will remain.
...
And yes, I’m giving out gift cards this holiday season. Merely because I know most people aren’t yet at a place in their life where they can look into a box and simply say, “This is just an object. It doesn’t mean anything.”

Idea #4 is actually pretty key to giving a gift card, giving a $50 gift card to Banana Republic is like saying: here have a pair of expensive socks. But it's really no better or worse than just buying a bad pair of socks from BR and giving them as a gift.

Idea #1 is tainted by the adding that weddings should always receive gifts, which is exactly the opposite of what couples want. Most modern couples are paying for their own weddings and they're already living together long before they wed. So why do they need another toaster? Weddings are expensive gatherings, so basically every couple that I've known that married in the last 5 years (and that's like 10 of them) would have preferred cash or a good gift card over anything else.

Heck the fiancé and I were saving up about 10k to pay for our wedding expenses, the best gift (other than something hand-made and personal) would've been straight cash to help pay for the catering and the rental. Of course, this isn't true for everyone, some couples really are moving out right after marriage and for these guys, I'll buy a gift off the registry.

As to the rest of the advice and the raging debates, I figure that Liz has some useful advice it's just mixed in with being a little extreme. V of course, is practical as always (if a little evil), but doesn't always think highly of people.

I'll draw a line in the middle and say that gift cards are a fine gift as long as they're as thoughtful as the gift you would've purchased. Buying a GC is like buying a night out for friends or buying a week of morning Starbucks or a freebie nail job or a couple of reams of fabric for your next quilt. Buying a $50 GC to a $50 / plate restaurant is just as bad as buying diamond studded earrings for a girl who doesn't have pierced ears or giving a crisp, red $50 to your independently wealthy friend.

The nature of the GC is not inherently that it's a bad gift, it's that it's gift that requires thought just as much as any other gift. Bad gifts are bad gifts, cash, cash-equivalent or wrapped in a big box. So just buy gifts that are appreciated (and take the time to wrap them, it shows that you care)

Of course, YMMV

What is Your Tipping Policy?

This one is in reply to a post on Million Dollar Journey:

Ask the Readers: What is Your Tipping Policy? Million Dollar Journey

Wow man, didn't you read the MyMoneyBlog post on this thing? It was a S***storm, you've just opened a giant can of worms :)

Cabs
As a guy who's never owned a car, I've taken a few cab rides in my life. I talk to all of them, most of them don't own their cab (in Winnipeg or Edmonton). It's typically closer to one guy who owns 5-10 cabs and all of the cab drivers are on for 12 hours b/c they can't make a living wage on 8 hours shifts. This may be different in TO or Montreal, but I always give a good 10-15% (sometimes more for short rides). You're trusting your life to these guys and they don't get paid very much.

Fast-food
The standard McPolicy is that tips go in the charity bin. The only exception is when the patron insists, then you can take the tip just to get rid of them.

Me I don't tip my Starbucks baristas, but when I go to the Gourmet Cup across the street, the one that charges me a buck less for my latte and always has top-notch fresh-baked goodies and is clearly run by the guy who serves me... well he and his staff will get a tip. Often I'll just give them the buck they saved me :)

Delivery Drivers
Are intentionally underpaid, so I throw them a couple of bucks. Around here, the pizza place tacks on like $2 for delivery which is clearly not paying the driver very well, so I throw him a few extra. If the delivery charge were $5, then he'd get nothing.

Waitresses
Waitresses are like the annoying black hole of tipping. My sister's a waitress and she makes great money (her best gigs made more per hour than I did as a computer consultant!), of course, I've watched her work and she's amazing... most waitresses don't meet that quality bar. But I'm still iffy on the tipping thing.

What annoys me at a deep level, is that I don't really go to a restaurant just to be waited on, I go there to talk and to eat great food. For my night to be good, I don't really need a good waitress, I just need one that isn't inept. Heck, if I could replace the waitress with a computer ordering system and just have someone drop off drinks, that would be just fine.

Personally, what makes my night is great food, and if anyone deserves the tip for great food, it's the cooks. At least around here, the people I know working the kitchens don't make great money. Unless they're independent or "high end", they're pushing just above 30k and they're working weekends and holidays and all kinds of crappy shifts. If anything, these are the people that make my night, why don't they get the tip?

And (400 words in) this is where things get really complicated. Different restaurants and chains have different procedures for tips and tip distribution. Now to start, if it were up to me, everyone involved in the services industry would make a fair working wage and the managers would simply be responsible for paying more money to good waitresses (just like everyone else does in every other industry). But barring legislation, that's pretty much just a pipe dream, so here are the details.

Waitresses at most places are required to "tip-out" based on their total receipts. Cooks will get 2% and the bar will get 2% and hostesses will get 1% at like a typical Earl's, Montana's, Boston Pizza, etc. This may or may not be after total receipts after taxes based on who's calling the shots (of course including the taxes just dilutes the tip even more and it's pretty shady). So the passive-aggressive 1-cent tip is not just insulting, it's financially damaging (yet somehow legal).

And that's where things get funny: financially damaging. Where I live in Edmonton, there is no minimum wage (or at least nobody works for it) as we have a massive boom and a big people shortage. So even with a 10% tip, the waitress can still take home $2.50 on my $50 order and she makes $11/hr (base) + $2.50 * number of tables which can easily push her into $25 range for handling like 6 tables (of which $14 is marginally taxed). Now that's just an average joint, even in Winnipeg, renowned for its cheapness (not frugality, just outright cheapness), a quality waitress can make $23+ / hour even with a base wage of $7.

Of course, once you factor in that $16+ of those hourly dollars are cash tips and are mostly untaxed, then your waitresses end up making the equivalent salary in the $30+ range. That's $30+ dollars / hour for an entry-level job with a small amount of responsibility. A lot of waitresses are making more than the guys who prep and cook the food.

So we come back to my previous thought, don't the guys cooking the food deserve most of the money? I mean, isn't their job just a little bit harder? So here's the math:

• Your meal cost: $100
• Waitress salary: $7
• Cook salary: $15

If you tip 15%, the waitress keeps 10% and ends up with $17, the cook gets 2% and ends up with the same number. As you add money to the cost of the meal, the waitress makes more and more relative to the cook. In fact, the only salvo here is that the cook should be able to cook more tables than the waitress is waiting and will therefore catch up (a little). But you're still throwing a lot of money at the person who didn't really do much that you couldn't have done yourself...

If you're like one of the crazy MSN writers and you figure that 20% is the new 15%, then the waitress ends up with $22 and the cook is still stuck at $17. (Of course, she's writing from the US where the minimum wage for wait staff is typically 50% of the regular minimum wage)

*sigh*

After this whole bit, I basically don't want to starve anybody, so when I'm tipping for a night out, I tip 12-15% and that's it. If I get really good food (better than expected for the price), then I'll add tip money specifically for the cooking staff (as written on the receipt), but this seems to happen pretty rarely.

It's not a perfect system and I have to vary slightly for specific places (i.e.: family-owned joints), or for when I'm sucking up a table for a long time (i.e.: watching a football game at the Boston Pizza). However, I think that it correctly accounts for the way services staff are paid and the amount that I feel they should be paid.

Of course, YMMV.

A reply: Why Isn’t There Universal Personal Financial Education?

Why Isn’t There Universal Personal Financial Education?

I think that there's something else here to consider Tim. And I think that it's the fact that we can't all save 10% or 20% of our income.

Picture a world where everyone saved just 10% of what they made and lived completely within their means. And I mean everyone. What happens?

Nothing... in a literal sense. If everyone has money and nobody needs it (b/c they don't borrow, they live within their means), then who pays out the interest? I mean, maybe a mortgage or an education might be funded in the first generation, but after that, everyone would just be able to gift their money down, so who's paying interest in a world where nobody is borrowing money...

So have I got you thinking here?

So what do you do to get ahead in this world? Well you run out and borrow tons of money, then you start building businesses and paying it back. Of course, so do other people, so the interest rates move up, but only to some equilibrium point.

Of course, now these high-rollers either go broke or make it big and at some point they stop, b/c they need to do something with their money. So the wealth gets shifted down or around and everyone but the businessmen are saving their pennies and living "risk-free". Well at some point, people in the middle (not broke or rich) are bound to say "Heck, I want a bigger car, so I'm just going to save 5% instead of 10% what do I need all of this money for."

And this is where we get "keeping up with the Joneses". Eventually the people in the middle all fight to be like the rich guys and the other people in the middle and then everything just churns at a higher rate.

Is it good or bad? Well short-term we produce more (don't know that this holds longer term), but people living check to check are definitely the lifeblood of the economy. These are the grunts who need to show up each day or they won't make the rent, these are the producers. For the rich to be "independently" wealthy, they need to leverage all of these grunts. Our stock dividends are built on the back of these people.

If the grunts all had enough money that they didn't need to go back to work, then they probably wouldn't. And of course, stuff would stop. The economy, to some extent, is driven by consumables. Now admitedly, we've created a lot of consumables in our "disposable society", but even under the cruft, we still need food and new shelters and medecines and condoms and tools and replacement parts, etc.

We PF bloggers are wrecking the curve, we're trying to to break the paycheque to paycheque lifestyle. But what we do simply does not scale infinitely.

So this:
in the end we need stupid people to make money off of so you and I are the reason there is no universal financial education
is basically correct, but it ignores two "big-picture" issues.

#1. More knowledgeable citizens are capable of making more fiscally responsible decisions. If the populace in general had a better understanding of monetary issues, our government would be held to a much higher standard. As it stands right now, I can't trust most people to understand an RRSP let alone understand the vast implications of inflation, the central banking system and just government spending in general.

#2. Productivity Lost to Overhead
If you consider many banks, insurance cos and mutual fund salesmen as useless overhead, then increased financial knowledge would lead to overall increases in productivity. Instead of selling unnecessary contract, these people could build more roads or research new products.

End of the day, I figure that Canadian Dream would agree with me that it would be nice to provide more people with the personal finance knowledge that they need. Of course, the very people suffering from this lack of knowledge are the people that don't know what they're missing. And of course, it will never become part of the public school system, b/c the voters don't know that it should be there.

Of course, as always, YMMV.

Save big on a tiny income ???

So maybe I'm just an eternal critic, but I caught this one off the wire and I had a good laugh, though there are few gems here too:

Save big on a tiny income - Savings & Debt Insight - Sympatico / MSN Finance

FTA: When I wrote an article describing how some of us could save more, I got an earful from frustrated readers, many of whom don't earn as much as the rest of us.

"If I had that kind of income I could save easily. Try (saving) on the incomes of most of us working, single moms, which is more like $2,500 a month! Cut our expenses? How???"
Carrie Bowers, 29, of Colorado, added: "How would the average service worker go about saving for retirement, a child's education (or even (her) own in hopes of moving up in the world) on less than $18,000 a year? Some financial advice for the public-transit set would be appreciated more than you know."

Now I read the original Dunleavy article for which she received the "earful" and it was pretty prissy. Of course, now she tackles a far more complex issue and basically fails to satisfy needs. I mean, imagine that you are making $18,000 / year. That's less than $9.40 / hour, that's $1500 / month to feed you and a kid (and pay taxes).

Now here's the advice that you're given:
- Stash a dollar in a jar every time you do the laundry
- Save all your $5 bills in a coffee can.
- Create bank errors in your favour. "If I spend $2.16 on a coffee, I deduct $3 (in my check register),"
-Switch from paper to plastic

Because you somehow have these "extra" dollars sitting around with 18k / year, right. And I doubt that the plastic will be necessary (if the 29-year old making 18k actually qualifies), the truth is, she probably makes like 8 purchases / month: 4 grocery runs, 1 rent cheque, 1 "bills run", 1 bus pass, 1 misc shop. She doesn't need a credit card to control spending, she doesn't have any money to spend! ($3*20 on coffee = 4% of pre-tax income!)

This one sounds like a great idea:
-"Don't forget gardening as a money-saving venture,"
Until you realize that single Moms making 25k/year don't exactly have houses with gardens. At the least she could suggest some public programs that offer free "gardening space" for families in need (and yes these do exist).

And spoken like a true "rich kid":
-"Look at the Pottery Barn catalogue, shop at Goodwill,"
-Buy generic instead of brand-name products.
-Buy non-perishables in bulk

Like anyone living on less that $400/week hasn't figured this out already. I'm pretty sure this strategy is part and parcel with keeping our two commenters off the street. Of course, when you can't afford a car (and on 18k, you can't), buying bulk goods is really a pain unless you're really lucky and the bus happens to go to your local Costco (which doesn't tend to happen b/c buses and warehouse districts don't tend to cross paths). The only saver here is this:
-Share the savings. ... buy toiletries and such at a warehouse store and divvy the spoils up with friends.

Which can at least mitigate the transportation and storage issues ('cause you don't have a lot of square footage when your monthly rent budget is under $600).

Am I being overly critical? Well OK, I'll throw out a couple of bouquets: "Make your savings automatic". is a good, if standard piece of advice. I guess if you pretend that you only have $1400 instead of $1500 each month that you may be able to parlay that $1200/ year into both a retirement fund and a university education (but good luck). She also suggests making "trades" (i.e.: bartering your time: cleaning for daycare time), which actually has useful applications but obviously doesn't scale.

Ok, so I can hear the readers now bored with my criticism: What would you do, oh GatesVP the smarty-pants???

Simple answer? Find a way to make more money.

What? What kind of answer is that?

It's a realistic answer, if you're 29 & single, with a kid and you haven't cracked $10/hour then the only way you're going to get ahead is to find a better paying job or move up in the job you're working. You can try all of Dunleavy's silly tricks, but all you're going to be doing is cutting more corners. You're not putting your kid through expensive American college, you're not "quitting work at 65".

At some point you have to figure that you're not going to make ends meet, and I think that 18k has hit that point. I mean really, even a 30k single mom with multiple kids has probably hit that point.

I know a guy who started managing his own McDonald's at 23, making 30k+. In fact corporate McDonald's stores have good family health coverage, good training, good benefits plans and managers even get a car after a few years. Now 23 is young, but I have met tons of McManagers under 30 (even some with kids) and I've even met a district manager under 30 (50k+ bigger car).

These are not prestigious positions, these are entry-level, show-up-to-work-and-we'll-train-you positions. These aren't kids with university degrees (those ones are working elsewhere), these are the ones who put in their 40 hours, go to paid McSchool and work their way up the chain is 5 years or less.

So at some point you have to ask yourself when are you going to start running your own McDonald's (insert career here) and build yourself a future?

Yeah I know you can't save for your own education, but if haven't noticed, we have tons of government programs and funding for single mothers in just this situation. Maybe it's just a Canadian thing, but you certainly don't have to starve to get an education, you just have to put in the time and pass your courses. And we also have nearly draconian laws when it comes to child support, so hearing about mothers not getting child support, while others are receiving money they're not supposed to (yes I've heard both), just burns my bacon.

Now I want to be clear here... I make 54k/year (18k * 3) and I don't own a car and I don't own a place (I rent an apartment with my fiancé) and that's how I (we) get ahead. I live close to work and do all of my grocery shopping on foot. We bus to the mall on weekends for "stuff" runs, but we've mostly cut that out now that we're done furnishing the apartment.

I'm cutting a bunch of big corners to help me get ahead, but at 18k / year, you're just not cutting it. There's simply not enough money there to live a healthy lifestyle and save.

It's cute that Dunleavy tries to help, but I think she missed the point of what it means to feed multiple mouths on 30k/year. It has nothing to do with cutting corners b/c you're already cutting tons of corners. It has everything to do with making enough money to support your needs and then making a little bit more.

Getting Defensive About Spending Habits » My Money Blog

Jonathan at My Money Blog, just posted up a little piece about the flack that "frugal financial bloggers" have received lately.

Here's the link: Getting Defensive About Spending Habits » My Money Blog

And of course, the reply:

OK two points:

1. As an aside, the culture of people who save tons of money are benefiting from those who don't. Don't get me wrong, we could probably double the number of Jonathans in the world and still not notice. But when you buy stock or bonds, or rent real estate, you are benefiting from someone else's sweat. I'm OK with that.

2. We hit this vein when we talked about "frugal tips" and "lifestyle" a while back. At some point you have have to "do something" with the money that you're earning, and there are two sides to this.

Some people don't "get" that people do all of this saving b/c they don't have their own savings goals. But by the same measure, many people in the PF blogosphere are absolute horrible role models for showing off their savings achievements. They save all kinds of "retirement money" but then never talk about what they actually want to do in retirement.

How the heck can you be sure that you're saving enough for retirement if you haven't even defined what retirement means to you? Why are people saving all of this money when they don't have anything they want to do with the money? Most PF bloggers don't even list their interests anywhere in their Bios, it's like the only thing they do is "work and save money".

The typical PF blogger makes almost zero posts about the things they do buy, they just keep throwing out money savings tips and net worth updates, but they don't give us pics of the new rental property or the x-mas toys they bought the kids or the new car they bought in cash(!).

To the outside world, the average young PF blogger just looks like a freak. Like some money-saving hole with 100k in the bank and no dreams outside of owning a home. They post up these stupid "Net Worth IQ" plug-ins, but they don't actually have top-level links to the posts where they talk about their "dreams for the money".

Now, the two sites that are linked to? Yeah, they're probably taking some undeserved flak. But check out the "About me" pages on both of them. Not a word about what they do with their money, not a word about their financial goals, or their dreams or what they want to during retirement or where they want to be in the next 10 years.

That's horrible! That stuff should be front and center! Many bloggers actually do have them "sitting around", but that's not enough, that's not real, it need to be front and center.

David and Trent (the bloggers being linked to) are evangelists for the Frugal Lifestyle (tm), but they're not doing anything that makes me want to be like them. They've put frugality front and center as if saving money were some type of self-fulfilling cult. Check out Trent's post here. He puts like 1000 words into explaining his investment portfolio but at no point does he mention what he's actually planning to do with the money! He's just templating some "savings plan" and saying "this is good, it works", while completely ignoring the purpose of the money he's saving.

I'm sure that his aims are valiant, but "regular joes" simply can't buy into this concept. These uber-savers simply don't seem human, they don't have any desire connections (material or philosophical). They're not "saving money to buy their XBox 360" or "saving their money to help save the whales", they're just "saving money". And average people don't buy that b/c it's not really rational, you don't save money "just because", you save money "for something".

When you're writing a blog about frugal living you have to put the goals front and center. People have to see that you have something other than just numbers on a ledger. They have to see you saving money AND spending money. Otherwise you just look like some kind of freak.

American economics and the USD

This whole post started with the following post on MyMoneyBlog.
Hedging Against The Dollar: Opening A Foreign Currency Bank Account vs. Buying A Currency ETF » My Money Blog

Look guys, I've mentioned this before and there are some great links already posted. The US economy has some serious issues and barring a massive war to claim vast booty and slaves, the purchasing power of the dollar will decline.

What does this mean? It means that means that more Chinese people will be able to afford the 10th generation iPod and less American people will be able to afford the same iPod. Peter Schiff pretty much nails it: as the value of the USD goes down and goods become relatively more expensive, other buyers with stronger currencies will swoop in and buy those goods.

Why is this happening? That's very complex, but here's a very simple explanation: You are fat and in debt. (same thing) You import more goods than you export and you've been doing it for years. You bring in 10 bananas each worth a dime but you're only bringing 90 cents to the deal. You then give out an IOU for the other 10 cents.

This basically means that you owe people lots of money (40% of the US national debt is foreign-held), but people aren't going to just take cash, b/c the value of that cash keeps dropping. They want stuff. They want oil, gold, food, they want services (skilled american workers), etc.

Cash is just trust. The US handed out a bunch of IOUs for cash, but they're not worth anything if nobody can cash them in for stuff. Of course, the world has been accumulating these IOUs, but they haven't been able to cash in b/c all of the American stuff is so expensive. But that's part and parcel with the whole import/export thing. For USD $100 I can buy 2 Russian programmers for 3 days or I can buy one american programmer for one hour. I can buy one bottle of "American pharmaceutical" or 10 bottles of "Indian Pharmaceutical" (both made from the same stuff).

Nobody wants to buy American stuff b/c it's too expensive; but everyone has these American IOUs that they want to cash in. Of course, everyone's in on the deal now and nobody thinks that these American IOUs are any good. So the solution is simple: the American economy will suffer until they can start paying off the debts and letting people cash in their IOUs. Again, money is just trust. It's pieces of paper or computer bytes with promises attached. The world does not trust the American economy, it does not trust that the American IOUs are worth anything. Until the dollar drops to the point where other countries can "get their money's worth" when they cash in the IOUs, then the dollar will continue to drop.

Jonathan: you said: As long as I can still buy what I need with the dollar, I don’t care if it trade 3:1 with the Euro.

But this is what you're missing, if the Euro goes 3:1 you won't be able to buy what you need with your dollars. Your salary will be the same, but the cost of the iPod will double. Your food will be more expensive as foreign markets start buying your produce with the money you owe them.

Yeah, yeah, this is happening right now on a small scale, we call it inflation. But you've just seen minor inflation, almost a side effect of the reserve banking system. Underneath all of this, the citizens of the US (whose very birth certificates back the money that is printed) are in debt to the world and they continue to live beyond their means. The US consumes more energy and gas than it can produce, while hinging its entire economy on those very resources. US labour is too expensive for all but the western european countries and manufactured goods are likewise too expensive. The only thing the US can "afford" to export is the food, but nobody else really needs the food at American prices.

When the whole thing falls, then you'll see real inflation, gas & food will suddenly cost twice as much and you won't be making any more money. Once it's fallen, you won't be able to "buy what you need with your dollars", your purchasing power will be drastically reduced. This is the cost of globalization, the world is catching up and the US is at the top of the ladder, so the only place left to go is down.

The US is the richest country in the world living a lifestyle on credit. Take all of these "credit card debt ruined my life" stories and scale that out to a whole country. That's what going to happen to the US. We're already seeing record foreclosures which means that people are being forced to sell their biggest asset/investment, in some cases their only real investment. People are skipping vacations to make extra money, they have their kids working at 16, then 15, then 13 & 12 just to keep up the pace. Elderly people are coming back to work greeter jobs at Wal-Mart and the workforce continues to churn harder and harder to keep up.

These are not the signs of prosperity, prosperous people work less not more. These are the signs of a people stretched too thin and ready to pop.

Frugal Tips from the Farm?

Found a neat link from Rather-be-shopping.Com, where he talks about his father's "neat" frugal ideas.

http://www.rather-be-shopping.com/blog/2007/08/31/dad-frugal-living/
http://www.rather-be-shopping.com/blog/2007/09/16/more-frugal-tips/

FTA:
-He puts a brick in the back of the toilet tank...
- He puts a five gallon bucket in the shower and when it gets filled he uses the water in the bucket to water his garden..
- He has a wood burning stove and the furnace is NEVER to be turned on...

Our place has a metal farm gate which we open and close each time we leave and return home. I timed it and it takes about 30 seconds to get out of the car, close or open the gate, then return to the car. Since I leave home on the average of twice each day that is four opens/closes of the gate each day. That is 120 seconds or 2 minutes per day. Two times 350 days per year (I am not home every day) is 700 minutes or 11.7 hours that my car idles needlessly. I believe it would require 9 gallons of gas to idle that long. At $3 per gallon that is $27 per year I save by turning the the engine off when opening and closing the gate

The reply:
Wow, I don't know what to say man, I'm just kind of baffled from reading both. But maybe I have a strange sense of Frugality with a very big bent on "my time is important".

Why don't you just install a remote opener and save yourself 11.7 hours/year + part of the overall energy? You're worried about saving $27/year, I'd be worried about saving 11.7 hours/year.

Brick in the toilet? That's basically just saying "Hey my toilet uses too much water" and all things considered the brick is pretty imprecise. Why not just install a toilet that's built to use less water / flush? Then you'll save water and you'll get a correct flush every time. In fact, why not just find/build a toilet with 2 flush buttons (cleverly named #1 and #2) so that you can get a variable amount of water / flush?

The wood burning stove is only "cheaper" if he can chop the wood himself (and his time is worth very little) and he has the place to put the wood. Depending on location, electric heating may be more efficient (such as in Manitoba, Canada, land of Hydroelectric dams). Again, if he wanted to be really efficient he would move over to a high-efficiency pellet stove which is currently getting the most heat/$. A buddy of mine is involved in the manufacture of these (pellet, gas and wood stoves) and he says that the pellet ones are efficient enough that greenhouses have actually started buying them to maintain heat.

As to the "bucket in the shower", well I can't argue with that for utility. However (and this is a personal beef), I really wish that this wasn't actually efficient. I'd really like to see a day where homes had more efficient use of their own water, such as an in-home filtration unit. Right now we basically have "in" pipes and "out" pipes, so water that could be reused isn't being reused. By the same measure we could be capturing rain run-off into our own filters (if we had them) and then we wouldn't need to use as much "public water".

I mean, if you have a roof and a lawn that are about the same size, then every time it rains, you could actually "water" twice. However, right now we're just sending that extra water into the storm sewers. We already have eaves, if we could pipe the stuff into a reservoir, then we can water the lawn two days later using the water we were just going to send away. If we wanted to get fancy, we could run the bath water through the filters and send part down the sewers and part into the reservoir, so now it costs less to water the plants and the lawn.

Don't get me wrong, you and your father are definitely "frugal", but it's worth looking at the old "penny-wise / pound-foolish" deal. You spent 250 words talking about conserving $27 in gas; but didn't seem to care that you were "wasting" nearly 12 hours of your time. At what point do we start talking about the efficiency wonders of driving a manual transmission and when do we finally cave in and say "I was sick of trying to save small money, so I just bought a Toyota Prius (or other Toyota Hybrid) and decided to save big money for the rest of the life of the car". These are all neat ways to "squeak out" a little more efficiency, but the tips are actually just capitalizing on the poorly-designed inefficiencies of the existing systems.

Why not just make a better system?

10 Clichés to live by

Here's quick link to some good material:
10 Clichés to live by :: Discursive Monologue :: Blog Archive

I don't think that I could describe my existence as eloquently.

#2 (Pick your battles) has been a long-term challenge for me, I'm still learning to pick my battles. Of course, being a perfectionist is the direct cause of the difficulty.

#4 (Don't be a hog) has also been a big issue on my list. Which is funny b/c I think that the whole "global warming" deal is just bad math and I firmly believe that most "environmentalists" are pretty clueless (the whole "save endangered species, but only if they're cute or useful" thing). I'm just a follower of the mentality b/c it's simpler and fairer :) This one paragraph starkly reminds me of Violent Acres and her Americans are Fat because they're broke concept. I live in Canada, but my region (Edmonton) is the land of the truck, with city-slickers driving F250s to and from work. We're one of the least dense major north american cities which means that we spend lots of resources just getting around town.

#8 (Never stop learning) is one of my personal rallying calls and one of the reasons I love to blog. You learn a lot of stuff reading blogs, writing blogs and jockeying back and forth in the comments.

#10 (Don’t do something that you will regret) is probably the strangest but most simply useful piece of advice. Consider the whole is the key component that's generally just missed. We makes lots of decisions without regarding as much relevant information as we can. So you see people who take up sub-prime mortgages and really don't know that won't be able to afford them when interest rates go up. You see people start up unhealthy diets or go to the gym to lift weights and then do it completely wrong (i.e.: dangerously). You see smart people putting their RRSP investments in all of the wrong things. You get people who walk into the Welfare office complaining that they can't buy milk for their kids while they hold an over-priced pop that they just bought in lobby vending maching (true story).

People make all of these bad decisions, sometimes by lack of planning and sometimes just by default (I have nothing better to do, guess I should...), and then they spend time lamenting all of their failed actions and "missed opportunities". Yeah, don't do shit that you know you'll regret; you'll probably end up regretting enough stuff already, why aggravate the situation?