Friday, January 30, 2009

Asking for a Raise? Now?

In tough economic times many companies are resorting to aggressive cost cutting measures, including pay freezes, benefit reductions and lay-offs. However, some folks still feel that they need or deserve a raise, and one such anonymous reader recently found his way to Money and Such. So here is my take on the reader's query: how should you ask for a raise in a tough market? I'll break the question down into several topics:

Should you ask for a raise when the economy is in decline?

The short answer is "probably not". The more detailed and nuanced answer is that it depends on your specific circumstances. Obviously, not all companies are cut from the same cloth. While some are struggling to survive, others are actually thriving in this kind of market. If your company is one of the ones struggling, asking for a raise is the equivalent of wandering around a firing range with a target on your back: prepare to lose your job. However, if your company is one of those who is doing well in the current conditions, asking for a raise might not be a bad idea. Even if that's the case, be aware that when unemployment is high and headed higher, companies feel that they can easily replace team members who decide to leave. They also consider it less likely that employees will quit over compensation issues. After all, it's going to be difficult to find another job. Bottom line - your negotiating power in this kind of market is pretty limited.

Consider Your Specific Situation

Before you hit the boss for an increase, you should consider your specific situation. If you are well respected in your organization and are considered a star-performer, your chances of getting a raise are obviously better. If you are a marginal player? Forget about it. Unfortunately, I find that many marginal players have an over-inflated sense of personal worth (this is one of the things that makes them marginal players to begin with) - so try to be honest with yourself.

Other cases where I would consider asking for a raise are if it was previously promised to you; if a compensation review is part of your employment contract; or if you were recently promoted.  Even so, think twice before insisting on a salary increase. This may backfire.

How to ask for a raise if you decide to do so?

If you decide to ask for a raise, remember that your chances will improve if you build your case well, and if you are tactically sophisticated in how you go about getting that increase. Here is some advice on how to ask for a raise and how not to ask for a raise. Finally, here are some suggestions about what to do if you don't get the raise you wanted.   

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Thursday, January 29, 2009

iPhone: It's Worth Every Dime

Last summer I bought me a brand new and shiny iPhone 3G - and even though I paid $300 for my cool new phone - I think I am absolutely getting my money's worth. This only goes to show you that value is not so much a question of price as it is of cost effectiveness. A couple of weeks ago when we went shopping for furniture on a random Sunday, I too note of what I was using my phone for and here's the full list:

eMail - big deal. Pretty much any smart phone will do that for you.

Real Time Traffic Reports - checking google maps while on our way to San Francisco, I decided to take an alternate route when I noticed some congestion up ahead. Unlike many GPS devices that charge you a monthly fee for integrating real time traffic, traffic data comes free with the iPhone.

Finding Lunch - when we stopped for lunch at a local TGIF that we have been visiting for years, only to find out that the place was out of business, it took us all of 30 seconds to find a new family restaurant in the area, using an iPhone application called "Around Me".

Furniture Pictures - out shopping? Taking pictures of the furniture and sending it to folks for their opinion or to yourself to remind you what you've seen or what you actually purchased, is very useful.

Identify Music - sometimes when I am out or simply driving around I hear a cool song and I tell myself I have to buy it next time I go on iTunes. Of course, I always forget. No more. While shopping at Macy's two fun songs came on the store speakers. I didn't recognize them, but "Shazam", an iPhone application that identifies songs it hears, sure did. Songs purchased on the spot, while still in the store.

Keep Up on the News - standing around in the store waiting for my wife to finish browsing I can check out the NY Times or some other newspaper. No more being bored.

Free Pod Casts - there is a tremendous amount of free audio and video content available on iTunes, including many university lectures, and personal finance podcasts, including a monthly podcast from Bill Gross of Pimco, which I listen to regularly.

Did I mention that thing also works as a phone? Although I do have to admit that I still suffer from dropped calls and periodically I have to restart the device to make sure it works properly. Another downside is battery life - the phone needs to be recharged daily. My service plan costs about $80 a month, but happily, my monthly cell phone bill is covered by my employer. Can you tell I really love this machine?

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Wednesday, January 28, 2009

Future Concern: Run on the Dollar

The current global economic crisis is causing governments around the world to take aggressive measures to mitigate the downside risk. One of the most aggressive is the US government which has basically thrown the kitchen sink at the problem. What didn't we have? Bank bailouts; auto bailouts; reduction of interest rates to 0%; massive stimulus packages and tax rebates; you name it, we got it. AND we're not done yet. The problem is that all the money for the bail-out needs to come from somewhere, and the main sources for spending? Debt and good ol' fashioned money printers. All of this leads me to be concerned about the value of the greenback. 

What is a "run" on a currency? Much like a run on a bank, where investors all try to take their money out while the bank does not have enough liquid assets to satisfy everyone, a run on a currency is a case where investors panic and try to quickly pull their investments out of a particular currency and move to a currency that is perceived as being stronger.

How could a "run" begin? The government is raising incredible amounts of money by selling its debt to individuals, corporations and foreign governments. Essentially, our government is taking a huge mortgage on our future. But here is where it gets scary: what if people start to get scared about lending to the US government? What if folks suddenly realize that we Americans are living well beyond our means and maybe our IOUs are not worth all that much? What if they decide that the US is too risky of an investment and that all this money that's being pumped into the economy and printed up by the Fed is going to cause inflation and erode the value of their investments? If that happens, they might decide to get the hell out of the market, while their investment is still valuable. If enough investors attempt this at once and head for the exits simultaneously, all trying to sell their dollar denominated investments in favor of other currencies, we could see a sharp drop in the value of the Dollar.

What would a run on the Dollar mean for you? A dramatic weakening of the Dollar could have some alarming consequences. For one, the government would feel obliged to try to defend the currency. It may be able to do so by offering significantly higher interest rates which will encourage folks to stay in the market. Unfortunately, higher interest rates tend have a weakening effect on the economy, since consumers and businesses find it harder to borrow money at higher costs and therefore need to scale back consumption and investment. At the same time, a weakening of the dollar would make imported goods more expensive in the US. For example, if the Dollar falls compared to the Euro, and European exporters do not reduce their price in Euros, American buyers will need to pay more in Dollars to meet the same price. Our purchasing power abroad, and therefore our standard of living, will decline. 

More ominously, one of the key things about the US currency is that many governments around the globe use the Dollar as a reserve currency - i.e. they save their spare cash in Dollar denominated investments or simply hold large amounts of US currency. If the Dollar weakens, it is very possible that some countries will decide that this is no longer a good solution and that it may be better to diversify into other currencies. This would have implications that go well beyond the scope of this post, but they are not good.

The good side of a weak Dollar. As the Dollar gets weaker, American goods and services become more competitive in the international markets. This can lead to an export led recovery, and reinvigorate such sectors as manufacturing, which have been steadily losing jobs to foreign competition. So, it's not all bad, but let's try to not go there anyway...

Is this a likely scenario? God knows. I don't. However, there is increasing chatter from economists who expect that the Dollar will weaken significantly once the global economy stabilizes, unless the US government is aggressive about soaking up any superfluous liquidity and vigilantly combats inflation and deficit spending.

How you can protect yourself from a worst case scenario. Well, a relatively easy solution is to diversify your portfolio into foreign denominated investments. For example, E*Trade offers investors the opportunity to open up brokerage accounts in one of several foreign subsidiaries and these accounts are denominated in the local currency. If you are not into opening up such an account, a simpler solution may be to invest a significant chunk of your portfolio in foreign stocks, or the stocks of American companies that get much of their revenue internationally. This is our preferred solution: we try to maintain 25% to 30% of our portfolio in international funds.

I sure hope such a scenario will not come to pass, but with the dramatic global economic turmoil, nothing seems impossible these days. 

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Monday, January 26, 2009

Life is Short, Precious and Often Sad

Last week I got another piece of news that reminded me that life is short, precious and often sad. A friend of mine was killed in a traffic accident. Jason and I weren't close friends - we worked for the same start-up several years ago. Even though we did not stay in close touch, we did talk several times in recent years and I last saw him during one of my business trips to Denver last year. I will remember Jason as a smart, talented, humble, kind and good natured person. He was an educated and open minded individual. He was someone that folks liked to be with.

Today Jason is being put to rest. He is survived by his wife and two small kids, and my heart goes out to them.

Such events always remind me how fragile and delicate life really is. You could be saying goodbye to one of your loved-ones in the morning only to never return or never see them again. Thankfully, and I mean that, I am quickly able to get back to my normal way of thinking and forget the knife's edge we are all balanced on every day. People are not meant to live in constant fear and worry. However, while this perspective remains, it is important to do everything in your power to ensure that if the unthinkable happens, your loved ones are well taken care of:

1. Is your life sufficiently insured to support the needs of your family?
2. Do you have a will? We don't.  We need to get one.
3. Does your spouse know where all important documents are located and sufficiently understands the family finances? 

Thinking about the worst case scenario is not something any sane human enjoys, but it is simply something that needs to be done.

I will not be able to attend Jason's funeral today, but Jason and his family will be in my thoughts. If I believed in god, I would offer a prayer. Since I don't, all I can offer are my condolences and my modest contribution to Jason's kids' newly opened college fund. 

Rest in piece, buddy.

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Friday, January 23, 2009

What to Do with Old Furniture

Yesterday I wrote a post about all the new furniture that we purchased last weekend. Our furniture will be delivered in about two weeks, and to make room for it, we need to clear away our old stuff. There are five options that come to mind:

Selling - financially this is the most attractive option. It is conceivable that we could sell the furniture for a few hundred dollars. Even though our sofa has a big hole clawed by our cat, the sofa is structurally sound and is very comfortable. My wife thinks that someone could buy it, cover it with a low cost slip-cover and give it a whole new lease on life. I am not a believer. On the other hand, our armchair and dining room table and chairs are in good condition and are of decent quality. It is conceivable that these can be sold. To be honest, I don't have the patience to try to sell used stuff. I guess I am too lazy to go through the hassle.

Donating - we could donate most of the furniture, but I am not sure whether charities would consider the sofa good enough to take. Then there is the question of transportation. Some charities, including Goodwill are typically willing to pick-up donations, but if they don't accept the sofa we need to come up with another solution. Donating would give us a tax credit worth a few hundred dollars, so there is that upside to consider.

Giving - with Craig's List giving stuff away has never been easier. Typically if you advertise free furniture, someone will e-mail you within minutes and agree to pick up the thing. The advantage here is that we don't need to worry about transportation and clearing out the stuff.

Curb-Siding - similar to giving, we could turn our furniture into curb-side freebies, by putting it out on the street with a big sign saying "FREE". Of course, it would be pretty embarrassing if no one bothered to collect them, in which case we would also have to figure out a different way to accomplish the goal.

Dumping - that's not a very green approach to take, but we could always call the local waste management company and ask them to pick up the items. This may require us to pay for the benefit of having the furniture removed, which seems like a waste given that selling or donating the items can actually make us some money and giving the items away is cost free.

Anyway, I asked my wife to lead the charge and figure out the strategy. I'll keep you posted. Regardless, I will be very happy to see this old furniture go and the brand new, shiny furniture being delivered. We kept this old furniture well past its time to go. Frankly, it was embarrassing to me to have people come over and see the sorry state of our living room. This will be a big improvement.

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Thursday, January 22, 2009

Spending Time: We're Buying New Furniture

For ten years we have abused our living room furniture. Our kids spilled juice and milk on it, our cat clawed a huge hole at its side. It now looks positively horrible. We have been looking for new furniture on and off for the past year, but could never agree on something that we both liked. Last autumn as the economy collapsed we put the search on hold, but last weekend we jumped back into the market and made a purchase. We are now the proud owners of a brand new leather sofa and chair (see picture from the store on left).

But wait, there's more. We also decided to buy a new dining table and chairs. Our 10 year old IKEA set was too small for our family of five and our twins are now ready to move from their high-chairs to sitting around the table. We found a set we liked, which was being offered on clearance in a local furniture store and decided to go for it. The total cost for both the living room and dining room furniture came out to approximately $4,200, including the delivery charges.

Here are a few thoughts about this whole affair:

Negotiating the Contract - when purchasing our new furniture, I was asked to sign an order form. While it may be called an "order form" it is nothing short of a binding contract between us and the store. The sales person expected me to sign this contract without reading it and without making any changes to it: "all I need is your signature at the bottom". Not very likely. Whenever I am asked to blindly sign a form, I insist on reading it in detail, and I am glad I did the same this time. The form stipulated that sales of clearance items are final and items are sold "as is", with no return or refund permitted. I refused to accept this. While we got clearance pricing for our dining room set, I insisted that the store amend the form to specifically state that our sale was not final and items were not being sold as is. I also insisted that the form specify the color of the furniture. The sales person pointed to a model number (A2) and explained that this designation stood for Dark Cherry, but what do I know or care about the accuracy of her statement? I insisted that the items would be described as "Dark Cherry" on the actual order form. Accepting the word of a sales person who tries to explain away the specific words of a contract is not a strategy that will hold up in court. 

Payment Terms - we paid for both purchases using credit cards - don't worry, we intend to pay off the entire amount immediately. We do not carry a balance, ever. We purchased the living room set using our American Express Blue card - we prefer this card because it offers a substantial cash-back reward. However, the local furniture store did not accept American Express, citing high transaction charges. We used our Citibank Dividend card to make that purchase instead. In this economy it is to be expected that many retailers will go into bankruptcy. While we paid the full purchase price in advance, using our credit cards, we do have the right to cancel the order until actual delivery. This means that if either store fails, we will not lose our money. Many stores offer to customize your furniture to your exact specifications - with a lead time of several months. In such cases, they expect you to pay for the furniture when placing the order and such orders are typically non-cancellable. Even though both companies seem pretty solid to me, I don't think I would want to take a 4 to 6 month bet on their continued solvency by placing a custom order... I think that "better safe than sorry" is the slogan of the hour. 

Credit Card Purchases - interestingly, our Citibank MasterCard purchase went through smoothly. Our American Express purchase was declined. When I called American Express to see what the problem was, they told me that their fraud department flagged the transaction. After putting me through the hassle of talking to two separate service representatives they unblocked the card. I found this particularly annoying - this is not the first time I run into American Express' brand of idiotic security policies.

Taking Pictures - as you may have gathered from reading this post, I am a suspicious consumer. I follow Ronald Reagan's old doctrine: "trust but verify". I respect the words of sales representatives, but have no inclination to rely on their words. Whatever verbal commitments they make will be pretty darn hard to prove. Instead, I gather as much evidence as I can, and make sure that we are protected contractually. One of the measures which I have started taking ever since cameras became standard cell-phone equipment, is to take pictures of whatever it is that I am buying, if I am not taking it home with me on the spot. If there is later a disagreement about color, shape or model, referring to the picture makes the discussion much easier...

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Wednesday, January 21, 2009

How Much Did Your Car Cost Last Year?

Last week I went out to lunch with a few of my colleagues: our VP of Finance, our Director of Channel Sales and our Director of Integration. All smart and successful people, and all of which I respect. Somehow the conversation got around to the poor excuse of a vehicle that I call my car. I conceded without question that my 12 year Geo Prism is certainly no luxury vehicle, but I told my friends that for my 12 mile round trip commute (a total of 30 minutes per day), I really need nothing better. I also explained that driving this junker is extremely cost effective and told them exactly how much money I spent on maintaining my ride last year. This drew two distinct reactions:  the first was amazement - folks were shocked at how little money I spend on my car. The second was surprise that I actually know how much money I spent on my car.

I don't particularly value cars. If my commute was longer and I had to spend much time in my car every day, I suppose I would feel otherwise. However, I live 15 minutes away from the office, and we do have a more respectable Toyota Sienna 2005 which we use when the whole family is going somewhere. For me, the Prism is simply a cost effective way to get to work and back. The one time I felt uncomfortable about owning such an old car was when my son started kindergarten, and I noticed all the shiny BMW's and Lexus's the other parents were driving. I have since gotten over this embarrassment and never looked back.

Now the real question: why is it that smart, successful people - including a VP of Finance, who does budgets as part of his day job - are surprised that I know how much money I spent on my car last year? How can you control and manage your spending and savings if you have no idea where your money goes? This is beyond me.

One more thought - once we got into the whole budgeting discussion, I told the guys about the fact that our third largest expense last year, after rent and childcare, was medical spending, this in spite the fact that we have medical insurance and in addition to the insurance premiums which we pay. We all agreed that this is completely screwed up. None of the others had more than a general sense about how their money was being  spent. Strange.

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Monday, January 19, 2009

Is Your Job the Right One for You?

My job is the right one for me. This realization dawned on me a few weeks ago, and I can't tell you what a relief that was. I mean, I have been pretty happy in my job ever since I joined the company about 10 months ago, but there is more to it than that. The job that's right for you does all of the following: makes you happy, takes you to the next step in your career, teaches you new things, expands your options, rewards you financially and more. Let's discuss a few of those and how they relate to my current position:

The Job Makes You Happy - everyone has their good days and bad days at work, but if your job is right for you, the good days are much more frequent than the other kind. A good sign that you are happy in your work is that you find it easy to go to work in the morning and you don't mind working hard. I have never been someone who is in love with their job to the exclusion of all else, but my current position makes me happy.

The Job Takes You to the Next Stage - career path is one of the most important things about a job. If your position is not taking you in the direction you want to go, it is not the right job for you. Don't get me wrong - many people find their jobs completely satisfying knowing full well that their positions don't offer too many opportunities for advancement. That's a very legitimate attitude, however, for career oriented professionals such as I, taking a job that doesn't move your career in the right direction is simply a bad choice. In this sense, my current position is superb: I am getting a great deal of exposure, I have been given a great deal of responsibility and I have no doubt that come the time, if I perform my job well, I will be able to use my current position as a springboard to my next executive position. That's probably several years in the future, but I am certainly getting properly trained.

Your Job Teaches You New Things - here is my philosophy: if you don't feel at least a little like a fraud each day at work, you are not in the right position for you. The right position for you is one that makes you stretch and do things you have never done before. When you get up in the morning to go to work, you should be feeling at least a little nervous. One of my business school professors used to say "knowledge makes a bloody entrance". I say, bring it on. At least several times a month, when I am on my way to work, I wonder if I will be able to pull off the task I am expected to accomplish that day. For example, over the past few weeks I have been negotiating a deal that is critical to the survival of my company. If I make a serious mistake,  my company will be in big trouble. How's that for pressure? I love it. However, it is important not to take this to the extreme. Never take a position for which you do not have the qualifications to succeed. Utter failure does not exactly advance your career.

Your Job Should Expand Your Options - when you finish school you have a huge number of options open to you. You can choose to become a doctor, an actress, a yacht captain. Hell, you could decide that juggling is your life's calling. The further you progress in your career, the fewer options remain open. I mean, if you have been working as a chemical engineer or as a nurse for 20 years, you are very unlikely to be hired as a museum curator in your next gig... so what do I mean by "expand your options"? I mean that specialization is good, but pigeon holing is bad. If you are a marketing professional that has been doing only PR for your last three jobs, your options aren't expanding very much. Chances are your next job will be limited to PR as well. In that sense, my current job has opened up a sea of options for me. My career has been mostly in business development and law. In my last position, I used my business development expertise to grow into a marketing role and eventually led my company's outbound marketing activities. In my current position I get to use every business skill I ever developed. I negotiate large contracts, I have a central role in business strategy, I own our outbound marketing efforts. I am also involved in many areas which I have never dealt with before, such as finance and operations. In this sense I am becoming a more rounded executive and this will allow me to fit into a larger number of future positions.

Your Job Should Reward You Financially - duh! But there's more to it than that. Even if everything else fits, taking a position that does not offer the financial rewards you need, is not smart. I am not advocating that job seekers never accept a lower paying job. However I am suggesting that for better or for worse, most of us use our paycheck as a measure of our success. It may be an imperfect measure, but it is the only objective way for us to compare our position to that of our peers. I also believe that if people don't feel that they are being properly compensated for their efforts they find the experience de-motivating, and ultimately there is a good chance that their performance will be impacted. On paper, my compensation in my current position is about 20% higher than it was in my previous position. However, in practice my cash compensation is roughly the same as it was previously even though my responsibilities and title are substantially increased compared to my last job (that, however, is a topic for another post). 

I would like to acknowledge Brip Blap, whose post "How to Succeed in Your Job" has inspired me to write this post. 

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Thursday, January 15, 2009

Worse News for Retail?

Last week I called one of my former CEOs, a serial entrepreneur named Dave, to wish him a happy new year and to shoot the breeze. I like keeping in touch with old colleagues and friends, and especially ones that I respect and appreciate, and this gentleman is such a person. Dave is a Harvard Business School MBA and a highly intelligent guy. He has been in retail and retail concept development for pretty much his entire career. His most recent venture is an 8 store personal care retail chain - similar to Body Shop - which he had apparently acquired in the past year.

Unfortunately, Dave's business update was all bad. According to him sales pretty much collapsed in December. He wasn't talking about a 4% - 5% decline, he was talking about a complete route. According to him the chain's flagship store that until recently was averaging about $1,000 in sales per day, saw average sales numbers of about $300 per day in December. Dave told me that unless things turn around in a hurry, the chain will have to fold in the next two months...

Dave explained to me that Department of Commerce statistics regarding retail sales, which have recently been showing consistent but relatively mild declines, are misleading. He claims that these numbers are greatly skewed by such retail behemoths as Wal-Mart and Target. People still have to buy the basics and they are apparently flocking to discounters. However, he says that any retail business that relies on anything that is remotely considered a luxury has been in complete collapse. That's not encouraging, but it's understandable from a personal finance perspective - hell, we've been cutting back ourselves.

With respect to the economy as a whole, I continue to believe that we are pretty close to the bottom of the cycle. I believe that massive fiscal and monetary stimuli will work their way through the economy and ultimately lead to a recovery. With respect to the stock market, I still believe that we are within 10% to 15% of a market bottom - which we may have already seen. The job market will no doubt continue to see a painful contraction for the next year. 

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Tuesday, January 13, 2009

could gambling be rational?

This post was inspired by a comment Plonkee left on one of my previous posts. In my post I was commenting on the fact that the Casinos in Lake Tahoe where I was vacationing were doing OK, in spite of the poor economic situation, to which Plonkee replied that:
"I'd expect gambling to go up in a recession. Who wouldn't want to win lots of money for very little outlay?"
That got me thinking. What if gambling is a very rational thing to do. I am going to resort to a little economics 101 here, so bear with me. 

In economics there is a concept called decreasing marginal utility. To understand what it is, consider the following example: if you are hungry, the first few bites of your food are very important to you. These bites give you the fuel that you need to live. As you keep eating however, you get less and less benefit from the food, until eventually you are stuffed and want no more. This is the decreasing marginal utility: as you get more of something, the extra that you get is of less value to you.

The same can be said for money. If you are making very little, every little bit of extra cash means a lot. However, if you are a billionaire, making a few more thousands of dollars should matter very little to you. It's not that this additional money you earn has less value objectively, only that it is less important to you personally. This little additional money doesn't do much for you.

Back to our gambling discussion. Could it be, that gambling is an opposite case? A case of increasing marginal utility? Consider a person who makes enough money to live on and stash a few more dollars in a savings account every month. That person can use this additional money, but he knows that those few extra dollars will not dramatically change his life. However, if he uses a dollar or two to buy a lottery ticket, and he happens to win, his life will change completely over night. Now, it's true that on average playing the lottery is a losing proposition for this person - his expected payoff is negative, he needs to spend more money than he can expect to win - however, perhaps the microscopic chance of winning, combined with the dramatic impact of such a win, is worth more than the money he is giving up by playing. 

In that sense, is it possible that gamblers are being completely rational in the economic sense of the word? Personally, I think they just like the thrill of the game, but who knows?

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Monday, January 12, 2009

Credit Card Lost and Found Again...

On Friday I went to a business lunch with a customer, and as expected I picked up the tab using my American Express Blue card. The surprise came that evening when I was looking for my card to make another purchase... gone! I immediately made the connection since the restaurant where we had lunch was the only credit card purchase I made all day.

Using the credit card receipt I called the restaurant and was reassured to discover that they did indeed find the card and that they would be holding it for me so I could pick it up the next day. Just to be sure that everything was honky-dory, I did called American Express to place a hold on the card until I could get it back. The American Express representative assured me that no other purchases were made using the card and placed a 24 hour hold on it. He told me that if I did not call back within the allotted 24 hour period, the card would be automatically cancelled and a replacement card would be sent to me immediately - the downside being that a new card number would thus be created, and I would need to make changes to all the places where my card number is currently used (iTunes, Quicken, Amazon etc.)

But, all's well that ends well. On Saturday afternoon I drove back to the restaurant and collected my card from the register where it was being held for safe keeping. It's not the first time that I had walked away from credit cards and ATM cards after making a transaction (but it's the first in several years). This typically happens to me when I am in the middle of an animated discussion with someone, talking on the phone or otherwise distracted. Apparently I am not very good at multitasking...

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Saturday, January 10, 2009

The Value of Two Incomes

Yesterday an anonymous reader left a comment on my recent post about our 2008 spending
"Does your wife actually make enough marginal income to pay for your childcare expenses? Given your marginal tax rate you might save more on child care, transportation, and dining out than she makes working part time."
I have previously written that stay at home parents pay a professional price, in more ways than one, but there are other serious considerations at play. In addition to losing years of work experience and potential career progression, becoming rusty in their professional skills and facing serious obstacles to moving back into the work force, stay at home parents also face other economic and personal challenges:

1. Increased Economic Risk - in this age of economic uncertainty and massive corporate lay-offs, my opinion is that a family's economic risk is reduced if both parents are working. For example, if I were to lose my job (something which I don't expect to happen in the next 12 months), we would still have one source of income. By both working we are diversifying our income sources;

2. Personal Hardship - I don't know about others, by I know for a fact that I could not be happy staying at home with three small kids as my main occupation. I need the company of adults and the mental stimulation of a dynamic business environment. I love my kids, but being a full time parent is simply not something that would be satisfying for me. I think that my wife is the same way. While she wants more time with the kids than would be afforded by the more than full time marketing position she previously held, that does not mean that she wants the job of a full time parent.

3. Kids Happiness - our kids love school and they love their after school programs. Often when we come to pick them up from day care, one or more of them beg to stay some more, to finish a game or finish listening to a story. They love being with their friends in a rich stimulating environment. We don't want to pull them out of this environment.

So in answer to my reader, my wife's current income is roughly equal to the amount that we spend on day care. However, the long term economic impact of leaving the work force, our personal interests and the need to diversify our income sources mean that even if from a short term cash flow perspective we don't benefit much from my wife's part-time work, in the long run this is absolutely the smart economic and personal decision for us.

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Friday, January 09, 2009

Where Did Our Money Go in 2008?

Now that the holidays are over and all the credit card transactions have been processed and checks from last year have been cashed, it's time to see how we spent our income last year. As background information, my wife and I have three kids: a 6 year old son who attends public school and an after school programs; and three year old twins that go to pre-school. My wife has been fully employed until October, but has been working part-time since, while I am an executive in a technology company. We have medical insurance (PPO). Although we do not have a formal budget, we are careful about our spending and lead a modest life style. We live in the San Francisco Bay Area in good ol' California. So where did our money go last year?

The really good news is that including our retirement savings, last year we saved 29.3% of our after-tax income.  The remainder of our after-tax income was spent as follows:

Childcare 35.1%
Rent 20.4%
Medical 6.93%
Groceries 5.87%
Dining 4.4%
Utilities 3.98%
Vacation 3.69%
Household 3.33%
Auto 3.22%
Recreation 3.07%
Clothing 3.04%
Cash 1.78%
Insurance 1.25%
Gifts 1.2%
Charity 1%

A few comments on the numbers: 

First, careful readers will notice that the numbers do not add up to 100% - there are a few other categories that I track, each of which accounts for under 1% of our spending. Nothing too exciting.

Medical - What struck me as amazing is that our third largest expense was health care, which accounted for about 7% of our spending, and this does not include the fact that I pay another $200 per pay period, or $4,800 a year, to cover my family under my company's PPO. This is insane! What do people WITHOUT insurance pay? We are pretty healthy and have decent medical insurance and still pay a very large amount of money for coverage. This system is truly broken.

Auto - note how little we spend on our two cars. We purchased each with a lump sum cash payment, and my 1997 Geo Prism - or as I lovingly call it: crap-on-wheels - is serving me well for my 12 mile round trip commute every day.

Vacation - normally we spend more of our money on vacations, but this year we were more modest given the economic situation.

Charity - we gave too little to charity last year. This is a spending category that we need to increase for sure.

All in all, I think that we save and spend very reasonably and I hope we can repeat this performance in 2009. Incidentally, to gather this report that I shared with you, I used Quicken software.

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Wednesday, January 07, 2009

Good Things I Learned from Bad Bosses

I have had my share of bad bosses over the years (and my share of really good ones too), but I have found that even though bad bosses can make your life miserable and take all the fun out of work, even they can teach you some useful skills and good lessons. So with that in mind, here are a few of the lessons I have learned.

Caring for Individuals - My most recent boss prior to my current company was the worst that I have ever had. She was disrespectful of her team and of others in the organization, dismissive of ideas and opinions (except her own), rude, incredibly political and worst of all had zero respect for other people's time. She would schedule meetings and simply fail to show without cancelling, or even worse, show up for the meeting and then constantly take calls and answer e-mails while others waited. However, even such a horrible boss had many good things to teach me. In a crisis she was always supportive of her team, and at the personal level she truly cared about her staff. If you had a personal problem, she would go to extraordinary lengths to help you find a solution. She was also extremely competent and insightful in dealing with customers, and I learned a great deal from her about running projects and about getting things done. Incidentally, a few weeks ago I learned that she was recently demoted in all but title and this is what gave me the idea for this post.

Tenacity, Will Power and Projecting the Right Image - The CEO at another start-up I worked for was a completely different kind of bad boss. He was very personable, extremely smart and a Harvard MBA to boot. He was a true visionary. His problem was that he was such a visionary - always seeing seven steps ahead - that he neglected to see what was immediately in front of his face. He made a series of bad hiring decisions, undercut the authority of his management team by tasking their staff directly, and constantly changed the company's strategy. He ran the company into the ground and was eventually ousted. That, however, was long after I resigned my position and moved on. Nevertheless, from this gentleman I learned the importance of business vision. I also learned that sheer will power and an unshakable refusal to fail can bring an organization very far indeed. This boss also taught me that you can do a lot with very limited resources and that how your company projects its image to the outside world makes a huge difference on your ability to land new business. So much so, that this small company was able to land a contract worth tens of millions of dollars with a huge  multinational company.

Delegating and Taking Chances - Another of my bosses was an infuriating individual. He was disorganized, had a ridiculously inflated opinion of himself and worst of all had less than questionable ethics. Lying was not beneath him. However, this CEO was extremely good at hiring top notch people, and once he hired them he trusted them completely and gave them full authority to complete their projects in the best way they could. He listened to his executives. He also had an amazing ability to find his way into the right business niches. He had a sort of sixth sense for landing the right deal, even when others told him he was crazy to pursue such long odds.

My point is that there is something to learn from practically everyone, even from your worst bosses. The business skills and ideas that I have gained from my worst bosses are at least as important and useful as the ones that I learned from my best ones. That's not to say that working for these people was a pleasure. It most certainly wasn't. However, even if you find yourself working for a jerk, an incompetent manager or someone who is otherwise a hopelessly bad manager, don't give up on advancing your career. Look for what makes that manager bad and learn from his or her mistakes. These folks inevitably have some useful skills that they can teach you, after all somehow they were able to become your bosses...

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Monday, January 05, 2009

GMAC Bail-Out: My Personal Share

It's no news by now, the government is bailing out those Detroit dinosaurs known as the auto companies, in spite of my sound advice. Don't those slackers in D.C. read Money and Such? One part of this bail-out is the rescue of GMAC - GM's financing arm - to the tune of $6 billion. I decided that it would be interesting to figure out how much of my own personal money the government is handing over to the shareholders of GM, the private equity firm Cerberus (which owns Chrysler)  and to the United Auto Workers... Bear with me as I run the numbers on the back of this handy envelope (which I also use to accept bribes for appointing U.S. Senators):

There are approximately 330 million people living in the U.S., which means that each of us is paying about $18 to this failing company. There are five people in my household, and since our three kids are not currently paying taxes (living at the expense of the working class), my wife and I would be paying about $90 to stave of the evil creditors of that noble establishment. But wait! Not all U.S. residents pay a similar share of this nifty Christmas bonus to GMAC owners, I happen to be a bigger tax benefactor than most. 

According to Kiplinger's our household income places us in the top 5% of tax payers. Good for us. However, we are not quite lucky enough to be in the top 1% of the pyramid. The same article suggests that the top 1% of tax payers account for 40% of taxes (yikes) and the top 5% accounts for 60% of taxes. This means that excluding the top 1% my income group accounts for 20% of all income taxes paid. Now we are ready for some real action: there are about 100 million households in the U.S. - 4% of us or a total of 4 million account for 20% of the bills paid, which means that our personal share in the GMAC bail-out comes to a tidy sum of about $1,500. Sweet. Will that be cash or credit?

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Sunday, January 04, 2009

Apparently, Things Aren't THAT Bad

My family and I spent this extended weekend skiing at the Heavenly Ski Resort, located in South Lake Tahoe on the border between California and Nevada. If you think that the economic situation would reduce attendance at this peak time of the year, you would be wrong. The resort was crowded during the day and at night the casinos were packed (I am not a gambler, but my brother in-law said the place was full).

Things may be bad economically, but apparently there are many thousands of people who are willing and able to shell out $75 or more a day for a lift ticket and $20 for some bad food.

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Friday, January 02, 2009

We Need a Carbon Tax Now!

If you thought that the spike in oil prices would have a lasting effect on people's energy use habits, think again. No sooner had gas prices retreated from their historic highs, and in the middle of the toughest recession in recent memory, American are back to their ol' tricks: buying gas gulping monster trucks for their daily drive to the office. A couple of days ago CNN reported that SUV and truck sales are going to account for more than half of all vehicle sales in December - reversing a recent trend.   

This will simply not do. At a time when the world seems to finally be getting ready to do something about global warming, it is clear that high gas prices had a profound impact on people's driving and car buying habits. The best way to ensure that such good habits are maintained in what is destined to be a temporary (but possibly not a short) period of oil price collapse, is for government to impose a carbon tax - possibly in the form of gas taxes, with the objective of getting gas prices closer to about $4 per gallon.

Now before you all come screaming at me about the stupidity of raising taxes in a recession, there is no reason why this increase should impact consumers. For example, government could pass the funds raised by this tax back to taxpayers, in the form of an income tax reduction, sales tax reduction or some form of rebate. The trick is that we should not be causing financial hardship for those who can least afford expensive gas, but gas itself must become dearer so that folks will continue to have an incentive to save energy, buy reasonable vehicles and reduce carbon emissions. To read more about why I think a carbon is necessary, see this previous post

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Thursday, January 01, 2009

Taking an Expensive Vacation in a Tough Economy

My company has been shut down for the holidays since December 23, and I have been trying to make the most of that time. Last week the family and I went to Disneyland and later this week we will be going up to Tahoe for a couple of days of skiing. All this traveling costs quite a bit of cash, probably in the neighborhood of $2,000 when all is said and done, but the final tally will only be available when we return.

This is a fair amount of change to be spending in this type of economic climate, but I think this is money well spent. First of all, we are a family of 5 so the cost per person is pretty modest when you think about. While visiting Disney we stayed at a reasonably priced Holiday Inn, and the kids got only $25 each for souvenirs. At Tahoe, we are renting a vacation house, with my wife's entire family. Since our vacation is all in California, we are driving everywhere and have no expensive air travel to deal with.

I think that my wife is bit more concerned about spending all this money on a vacation, but I am not terribly concerned. First, now that my company has completed its second round of fund raising, we have enough cash for over a year of operations, and I believe that my position within the company is very stable (unless I somehow cause a major blunder - which I am not currently planning to do...). Second, our emergency cash reserves are fully funded. We have over one year of living expenses in cash and equivalents. So, while I am nervous about the economic situation (who isn't), I don't intend to hide under the covers until the sun comes out. We'll be reasonable, prudent and frugal, but we are not going to stop living. The holidays are a good time to relax and enjoy life, and that's what we intend to do.

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