Enslaved by Consumption author, Dominico Johnston, sits down and discusses his newly released work. Engage your mind and your pocket book.
It’s a Wonderful Life is a classic Christmas movie. It was filmed in 1946 and is set in the teens and twenties of the 1900’s. This past weekend I watched It’s a Wonderful Life again, but this time it was in color and high-definition (HD).
As a result of the color and HD, I found myself paying more attention to everything in the movie. It was if I never had watched it before. Reflecting back on the experience, I see a number of great investment and general fiscal management lessons that appear in the movie.
If you’ve watched the movie before, you know a large part of the movie revolves around the town’s savings and loan business (bank). During the movie a run on the bank occurs. The lobby is packed with customers demanding their money. In an attempt to convince and educate the customers as to why they don’t want to with draw all their funds, George Bailey (main character), appeals to the groups communal senses. Within a few short breaths he conveys key fundamental principles about how banking works. The saver’s dollar is in the loan of another borrower. The savings aren’t static, they are dynamic and at work throughout the community in new housing construction and business operations. It’s amazing to see that which could be explained in a very complex manner be explained with such clarity and simplicity.
The point above hit me like a breath of fresh air. Not so much that the message was simple, passionate and informative, but it put in proper perspective the role and need of the saver within society. Today the idea of saving is too often vilified and painted as the activity that’s holding down economic progress. Outside of firing up the printing press and dropping money from helicopters, where do lenders find the capital to borrow? Savers.
The second part of the movie that stuck with me was the conclusion. In the end George Bailey is provided the opportunity to see the world as if he never existed. The change screams opportunity. You, whether it be investing, or some other area in your life have the ability to take action. You have the ability to craft your future. Doing so takes work, but it’s possible.
Investing in the market isn’t easy. Beating the market is a feat even most ‘experts’ have trouble with. Yet, it can be done. Through research, observation and most importantly being disciplined, you can overcome that which impairs you.
Where do you start? Well, find a good resource. Let’s say for example Barron’s online or Investors.com and dedicate yourself to reading a certain number of article or specific section every day. Every day that passes you’ll not only learn more, but you’ll start putting more aspects together. That which was so daunting at first will seem less with each passing day.
How do you eat an elephant? One bite at a time.
Having healthy personal finances is a pivotal component for every family and society. The small, taken together, ultimately becomes the large. Our collective body ultimately becomes what we call our society. Whether it be for yourself or society, understanding what constitutes healthy personal finances is critical to creating and maintaining an environment in which we can economically thrive.
Three parts are needed to be in good order for a person/family’s personal finances to be considered in good health. The first component, and most important, is ones ’emergency’ savings. The second is the ratio of spending to take home pay per month. The third concerns ongoing savings.
The importance of having some form of emergency savings on hand cannot be stressed enough. The term emergency is a loose term that applies to any savings held that are not designated for some other purpose. To exhibit health in this first area of your personal finances, it is necessary to have a minimum of six months of savings on hand.
Establishing a reserve of six months or more provides protection against a number of potential maladies that can occur. The most frequently cited is job loss. The loss of a job means for most people the loss of their regular occurring income. Since the ability to reduce expenses is not directly tied to whether you receive all, some or no income per month, savings must exist to service the expenses when your regular income is no longer present.
What we have experienced since the Great Recession is the fact that regaining employment is not often a fast transition. It may take months and involve relocation before one gets back to establishing a regular form of employment. Six months should be your minimum emergency savings set-aside.
If you’re earning above $60,000 annually, then a threshold above six months would strongly be suggested. Generally speaking, higher level jobs in organizations are fewer in number than lower level jobs. Therefore, establishing employment again as a higher earner would be more difficult, especially in a time when the economy is experiencing a contraction.
The second pillar is built upon establishing a sustainable ratio of monthly spending to monthly take home pay. The first step is to establish what your monthly expenses are. An average must be identified. With the average, certain non-frequent payments should be incorporated. Examples of ‘non-frequent’ expenses are DMV registration and insurance. These events do not occur monthly, but are regular and need to be identified.
Once you have arrived at a reasonable figure of what your monthly expenses are, then the expense can be compared to monthly take home pay. In doing the comparison, the initial goal is to establish a portion of ‘slack’. The slack that is needed between expenses and pay serves as a buffer. The buffer serves as protection against monthly spending that swings above the determined average. The minimum amount of slack needed in the establishment and maintenance of a health spending to pay ratio is 10%. If you lack control of your spending habits, then the amount of slack would need to be higher; say 20% or 30%.
The way the spending to pay ratio works is simple. In the case that you determine the average amount spent per month is $3,000 and take home pay is $3,500, then your spending to pay ratio would be .86 (divided the two dollar amounts). For every dollar you bring home per month, .86 cents is spent. The amount of slack you have per dollar is .14 cents or 14%. In a situation where ones control on spending is relatively strong, the 14% amount of slack would be a suitable buffer.
The third component is ongoing savings. Ongoing savings can be established in multiple ways. Depending on the avenue chosen, the re-evaluation of the spending to pay ratio might be necessary.
Ongoing savings will constitute something different for everyone. Retirement is often a binding theme, but people save for many other items. Someone might save for a TV, while another might save for a boat and another might save to start their own business. Even amongst the multitude of possibilities, general guidance can be established.
When a pre-defined contribution is being made out of ones paycheck for retirement purposes (401k, 403b or another tax sheltered account), then that money is not part of ones take home pay. In most cases, when payroll is run, the contribution to the tax sheltered account is diverted directly to the account and not included as part of the final paycheck. In such cases, the take home pay amount is not inflated by the inclusion of retirement funds. If this is not the case, then the amount dedicated to retirement pay needs to be deducted from the take home pay amount being used to establish the spending to pay ratio.
Other items that are being saved for (car, boat, house, business, etc.) need to be deducted from the amount of take home pay per month. The savings in such an instance is a savings to serve a future expense. The savings is not to serve as protection against an unknown event, retirement, or what would be considered ‘slack’ in the amount you spent this month versus what you brought home.
An example of the principal above would be a situation where you were saving $300 per month for a new television. If we go back to our example of having $3,000 in expenses per month and $3,500 of take home pay, we would need to deduct the $300 from our $3,500 take home pay. In this instance the $3,500 would fall to $3,200 and our spend to pay ratio would become .94. A ratio of .94 means our ‘slack’ would be .06 or 6%, which puts us below the 10% threshold.
Savings is paramount to establishing and maintaining a healthy personal finance system. Each of the three components outline above is structured via the establishment of savings. This is done to preserve the quality of life we’ve come to know and ensure the financial goals we’ve set forth are realized. Without being aware of our personal finances and establishing controls we are feathers in the wind hoping that fate blows us in the right direction.
For the good of yourself, your family and society, don’t reduce yourself to a feather in the wind.
If you frequent personal finance sites, you probably have run across an article or two advocating the development of an annual budget to manage your personal finances. After reflecting about the topic and thinking about my own personal finances, I don’t think the focus on a full fledged budgeting process is the best method.
Here’s what I’ve come to believe…Most people will not dedicate the time to developing a budget and sticking with the budget set. Typically, the budgeting process and the up-keep to track actual activity versus the original budget is more than your average person is willing to deal with. So, if budgeting is beyond what most people want to do in terms of personal finances, then what alternative exists that will help promote and maintain fiscal control?
The alternative I’ve used for many years looks at budgeting as a secondary consideration and savings as the primary. Let me explain…When you get paid, you take home say $4,000 per month or $48,000 annually. Based on what you’re bringing home you need to set a savings percentage. If you’re only looking at retirement and have 30+ years ahead of yourself, then a savings rate of 10% is a decent minimum. In dollars that’s $400 per month or $4,800 annually.
Side note: If you save $400 a month and are able to average a rate of return around 7% annually, over a 30 year period, you’d end up with around $500,000 in savings.
What placing savings at the paramount of your personal finance decisions does is it creates a hierarchy in which all other activity must adhere. Everything is seen through your savings lens. If you want a new car you must ask yourself how will it fit within the goal of saving for retirement or some other goal you have. You will still need to “budget” for the expense, but you won’t have to incorporate it into some grand budget.
I understand that the idea posed above might sound a little too simplistic. It’s not. Take a look at your bills over the past month or two. Have you been able to save anything? What costs can you adjust? What costs cant you adjust within the next month or next quarter? The costs you can adjust are variable and they are you biggest asset to crafting a saving percentage into your personal finance regimen.
To help you determine where you are and where you want to be, I have available a Monthly Budget Worksheet. It identifies what your fixed and variable expenses are and shows graphically how the items measure compared to your monthly income. (It’s completely free, you don’t have to sign up for anything)
To conclude, putting your savings goal at the pinnacle of your personal finances (That means the piggy bank eats before any other need…) makes the rest of your personal finance choices take a subservient role. If you’re able to keep your focus on your savings goal and not falter, then the act of creating a full scale annual budget is not something you need.
It’s estimated that over 38 million American households have no liquid cash set aside for an unexpected financial calamity (That means about 1 in 3 fall into this category…38 / 115 million total households = 33%). Of this 38 million, 25 million of them cannot be classified as poor. This is a disparaging thought that 25 million households are choosing to live hand-to-mouth (Hand-to-mouth = Spending all your earnings and not saving.). This choice not only has personal ramifications, but national, as well.
The reason choosing to live hand-to-mouth is such a disparaging thought is the same reason acrobats are heavily discouraged from performing stunts without a safety net. If your stunt goes awry and a net is there, you have an accident. If something goes wrong and you have no net, a tragedy occurs. As we experienced in the last recession, economic calamity can strike fast and hard. If you do not have savings to fall back on, you can find your household in a rather compromised situation. This situation is likely to impact not only your household, but your family and the entire society, if you must turn to some form of government assistance to recover.
When statistics are thrown out alerting the rest of society that a good portion (33%) of households are performing their personal finance routine without a net, not many solutions are provided to cure the problem. One reason stems from the fact that financial choices are not really ‘surface’ decisions. By ‘surface’ I mean that the decisions are not often lightly held beliefs. The way we spend and save our money is often the outworking of a deeply entrenched pattern of behavior that governs our lives.
For example cars, homes, clothing, technology and other tangible goods are purchased not simply for their functional value; they are purchased in part for the status they bring. For example, such purchases go beyond a decision to secure shelter with adequate space in a safe area. These decisions are made to establish a perception in one’s mind and the mind of others. This isn’t to deride such motivations. The issue becomes a problem when the superficiality suffocates practicality. In such cases, the safety net becomes a thing of scorn because it takes away from the splendor of materialism.
The wager made not to save causes society the same problem created when families forgo purchasing health insurance. Without health insurance the cost you might incur from an injury has not been hedged. No ‘net’ via insurance has been purchased to shield society from the burden of your health costs you cannot afford. A parallel situation exists when saving is foregone. Economic calamity strikes and society is left holding the bag. Food, housing and other subsidies are given to assuage the fiscal pain, while the bill is shouldered on the backs of others.
The reality is that we live in a consumer-centric society. Most outlets of influence whether it’s from the government, mainstream news, or entertainment push the idea that purchasing is one of the greatest goods. “You’re helping the economy when you…”, “You’re supporting a worker each time you…”, “The top ten fashion trends for fall are…”…The list is endless. The one message that holds true is that consumption is a virtue. The other side of the coin, saving, is like the dark side of the moon; hardly seen, sometimes spoken of, and far less glamorous.
To cure the ill that has fallen some 38 million families in the U.S., priorities and perception must change. The way we see the world must be reshaped. The only way I see this occurring is from rhetoric (talking about this issue), education and examples from the top. By the top I mean people that have visibility and those that are influencers. I do not see the modern family or the Protestant work ethic that Max Weber wrote about in the early 1900’s coming to the rescue. The former has disintegrated compared to what it once was and the latter has been largely filtered out of society over the last four generations.
For me to realize that we might be at a point where society must rely on politicians, movie stars, sports heroes and reality TV to encourage society to save its money is enough to make me want to move to the dark side of the moon.
A recent study from Tilburg University and the University of Chicago (see link below), estimate that American’s waste $44 billion annually on the purchase of name brands, while they could buy the exact same product via a store brand alternative.
On average, store brand products run 50% less than name brand. If you’re looking to find a quick way to cut the cost of your expenses, it might be easily found in changing from name brand to generic items. If you’re financially savvy, you likely already practice this approach when shopping. For example, if you go to Costco, they carry Aleve in a generic form, which sells for less than the name branded product and provides you with a greater quantity of pills.
Don’t get duped into having your emotions played with via such marketing messages as “Choosy mom’s choose jif!” Please, if you’re a choosy mom and care about your child’s college fund, you’re going to buy the generic at a discount. While you’re at it, you can teach your child/children a personal finance lesson. Killing two birds with one stone.
If you’re a brand name addict, take a step back and reevaluate what you’re doing and why you’re doing it. Your financial future matters more than the financial future of General Mills or Pfizer drug company. If a generic exists, give it a try and make sure to think about what you’re saving in percentage terms, not just dollars. Paying $5 rather than $7 means you just saved nearly 30%!
I remember reading a little over 10 years ago Pat Buchanan’s political and demographic book titled The Death of the West. The book focused heavily on demographic trends in Europe and America, but also touched on Japan’s abysmal situation regarding their rate of reproduction. As it turns out the trend has not changed in the decade that has passed.
Japan, as you can easily see in the charts below, has hit a tipping point. A few years ago, the tip happened in its population growth. The population began shirking because the number of deaths began to outpace the number of births. This shift wasn’t the result of war, famine or disease.
To an investor, why does this matter? This trend matters because, while similar trends may not be as pronounced in the US and many European countries, we all have similar ‘social security’ nets in place to provide assistance to the population during their retirement years. In the case of Japan, if their future workforce is continually shirking compared to the workforce group that they follow, the social security model will become a giant albatross for the entire society and economy.
If this sounds like fear mongering, it isn’t. Take California’s CALSTRS teacher retirement system. Recent projections have the program going broke by 2046. As a result the State of California is likely to move to raise contribution rates by employees and employers over the next 7 years (The amount of money current employees and their employers must pay at each pay period to the CALSTRS coffers.). For employers, it is proposed that rates would go up from 8.25% to over 19% annually over the phase in period. For employees the phased in rate hike would increase their current contribution rate by a little over 2%. This translates into fewer dollars going to educate future generations of workers and fewer dollars in the pockets of current workers to spend in the economic or save. There’s no free lunch here.
Below is Japan’s reality…which isn’t all that far from our trajectory.
In the latest sign Americans are increasingly comfortable taking on more debt, auto buyers borrowed a record amount in the first quarter with the average monthly payment climbing to an all-time high of $474.
Not only that, buyers also continued to spread payments out over a longer period of time, with 24.8 percent of auto loans now coming with payment terms between six and seven years according to a new report from Experian Automotive.
Ten years ago, it was just four years and two months.
We’re living high on the debt hog.
Owning a vacation home is an aspiration that appeals to many people. In the region of the world where I reside, Lake Tahoe is a high profile vacation destination. People flock there year around, but primarily in the winters and summers. In 2012 USA Today named it “America’s Best Lake” and Rand McNally and Orbitz have dubbed it the number one ski destination in America. An area with so much to offer seems like a great place to own a vacation home.
Does owning a vacation property in the Tahoe area make financial sense?
For our example we’ll look to the north eastern shore of the lake. The town of Incline Village was recently ranked as the best place to live in Nevada by the Movoto Real Estate blog. It’s a pristine area with some, if not the best, beaches that Lake Tahoe has to offer. In the winter it has access to a number of skiing areas around the northern side of the lake and in summer it’s home to every warm weather activity you can associate with a lake.
To purchase a single family home that is around 2,000 square feet and has at least 3 bedrooms, 2 bathrooms and a garage, which is located a block or two away from the shoreline of Incline Village, will cost around $850,000 based on my market research. Given that price tag, the 20% down payment will come in around $170,000 and the financing would need to be based on the remaining $680,000. At 4.22% the monthly payment would be $3,331.67 (30 year fixed). If we assume taxes and insurance would cost around 1.3% of the sales price, an additional $920.83 should be budgeted per month. This would take the monthly cost to please the bank, government and insurance company to $4,252.50. Annually that equates to $51,030.04.
Using VRBO.com as a gauge, an average of $230 per night of rental income is a reasonable estimate for our conceptual house in the location of Incline Village described above. If we assume that summer and winter occupancy run 80% and spring and fall run 35%, we can extrapolate how our rental income will cover our annual expense of $51k.
As we see, the estimated income generated, less our assumed 15% expense to cover cleaning and regular maintenance, leaves us with roughly 40% of our annual loan, tax and insurance costs. This isn’t exactly ideal. Heck, it isn’t even half way to covering the baseline expense with buying the property.
Does another option exist? Yes, it does.
The other option that could make this investment ‘work’ would be to have a situation in which you live in the house for the general period when vacation occupancy is at its lower levels. In our model, we assumed that fall and spring would be the seasons where occupancy would be at its lowest. If your need or want puts you in Incline Village for two seasons of the year, then you could factor in your occupancy as a cost you would incur, if you didn’t have the house (A sunk cost). This method isn’t so much ‘investment minded’ as it is ‘living minded’, but still keeps your situation in a financial perspective. Consider the following…
Surprisingly, looking at our living cost as a sunk cost with the combination of the vacation rental during the high season, brings us to a total slightly above our estimated annual baseline cost of ownership.
So, does owning a vacation property in Tahoe make financial sense? If you’re looking at the property as a pure vacation home that must generate enough rental income to cover your fiscal costs, then the answer is no. If the property is used partially as a primary residence during the “off season” and a vacation property during “peak season”, then the answer moves to maybe.
What’s your situation? What are your goals? Where and how do you want to live? What can you afford? There are so many questions to answer when considering to buy a home, let alone a home that is fully or partially a vacation property.
Last week I had the opportunity with my girlfriend to be propositioned for a timeshare purchase. If you’re not familiar, in areas where tourism thrives, a number of solicitors will be stationed in shops or hotel lobbies with pitches on how you can get X gift if you listen to a 90 minute ‘talk’ about their vacation offer. In the case of my girlfriend and I, we were offered a $100 Visa gift card for attending. The location for us was Tahoe (south shore) and the property was a former Embassy Suites resort that Diamond Resorts International had recently purchased. The property is under renovation and will be completely finished in a couple months (August).
In short, the 90 minute presentation was actually 4 hours and 45 minutes (285 minutes). The initial sales person offered us about 4 different sales packages. None of these interested us. I told them that through sites like VRBO and Hotwire I could find vacation rentals and hotel rooms at comparable rates or lower rates. They didn’t take my rational too well and more or less scoffed at the thought. That’s fine, their job is to sell a product, so they need to stand behind it.
After I told them no, then a much more pleasant sales person came over did some closing paper work and threw out one last offer. The offer wasn’t for a timeshare purchase. It was for a 18-month introductory sampler package. The package included a much larger number of points than what was previously discussed and the points were at a much lower cost per point, too. The catch was that it was limited in terms of time (18 months) and the properties you have access to. The selection of properties, given our travel desires in the next 18 months was actually pretty good.
We initially signed on for the deal (We have since canceled…see below for more information). Afterwards I did some comparison shopping to see if I could beat the package and, if I could, by how much. Below are a few tables that illustrate the original offer with the places we thought we’d visit and how the cost measured up with my comparison shopping using Hotwire and VRBO.
The ‘Sampler Package” deal.
Diamond Resort Travel Breakdown
Note – As you see, the total point amount to pull off the travel arrangement goes over the 15,000 by 500 points. For sake of this analysis, I’m going to assume the total of $2,795 stays as is and 15,000 would suffice.
Hotwire.com Travel Breakdown
Vacation Rental By Owner (VRBO.com) Analysis
In the end, when you put Diamond’s promotional sampler package up against competitive travel sources they cannot compete. The power of communication (the Internet) has opened up avenues that simply did not exist before in terms of hotels and especially vacation property rentals. As you can see from above, a little bit of shopping around can easily shave off upwards of 30% from what Diamond had to offer. (I did the comparison in less than 1 hour.)
In terms of cancellation, the policy included a 7 day period in which you can receive a full refund if you either mail or fax a cancellation request to the company.
On a final note, if you are ever in the market for buying a timeshare, please consider the future value of your money that you’re going to put down for the ‘share’. The lowest offer we received was $11,000 to buy in. If you took that $11,000 and assumed you were to earn an average of 8% annually for the next 30 years, you would end up with nearly $110,700. That’s your opportunity cost! That alone should make you pause. Then add the fact that you’re paying an annual maintenance fee per year.
What I’ve said above isn’t an indictment against timeshares. It’s just a few points to consider, if you’re ever presented with a sales pitch that is focused on grabbing a serious chunk of cash out of your wallet.
For the record, we ended up getting $150, not $100, for our time listening to their sales talk. For the amount of time spent, we should have received more like $300.