The American Dream

The following is a guest post by Ryan of PortfolioBalancer. This week and next I am running a number of guest posts while I am vacationing with my family in Costa Rica. I will resume posting my own original content after the first of the new year. Speaking about new years and new year resolutions, Ryan's guest post is all about making decisions and taking some action. Here goes:

You can achieve anything in this country, or by extension, anywhere. That is the American dream. The American Dream has nothing to do with homeownership. That is a nice goal, but too shortsighted to truly hold the title THE American Dream. Homeownership seems like an easy goal designed to make you relax, feeling that you have accomplished something. Well, I don’t want to relax, pacified, and neither should you. I want to see what one can accomplish in such a free society, that is my goal.

Ah, there lies the true American dream: freedom. Freedom of mobility, across the country, out of social classes, above the norm. There is a beaten path of a standard life, laid out before us. If you follow the path, and convention, you will achieve a reward of comfortable years without work in the future. But what if. . . I always wonder, inserting the financial or health catastrophe of the moment. You only live once, why not impress yourself, let go of the fears. Insure against disaster and move on. You can do anything. You never have to settle, you are never beaten. Time and action can fix all.

You are blessed, to live in a country this free. You can achieve anything, but it will not be given to you. Whatever you want your life to be, it can be. But you must take action. I can attest to the fact that many small steps over time begin to turn into something extraordinary. You simply need to persevere until the achievement becomes clear to you. Time does not stop, and the amount you have on your clock is finite. So, take a concrete step. Decide where you want to be in five years. Is this goal attainable? If not, then you must change something, or face reality. Think where you would be today if you had acted five years ago.

What effect does a one degree change in your life’s path equate to ten years out? How far apart would these two paths be at the end?

What are you afraid of? Failure? Do you think that everything always works out for everybody? You can decide on your level of commitment, but there is no limit, anything you can think of can be done. Maybe you don't have enough income to achieve your goal. How would you survive? Figure out a solution. Maybe you can build investments that produce income, so that you do not need to work, only live beneath the income level. There is a way around every obstacle, so focus on solutions not on excuses.

Reach. Turn off the T.V. and do one thing. Start with one action, one phone call, one budget. The dream is different for everyone, but each is just as relevant and as attainable. Life is a game, and there are some rules, but as long as you follow these rules you can play freely within their confines. Play.

I am nobody special, just someone inspired to attempt what this country is so proud of. Something that the masses seem so disillusioned with the possibility of attaining. Holistic freedom. I am nobody, yet I did one thing today, I wrote this post. What about you?

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How to be a Millionaire... Not!

Every personal finance, business and self help shelf in your local book store is filled with books that offer to tell you the secrets of how to become [insert desirable attribute here]. Good to Great offers to unlock the secrets of how to build the next great company; The Millionaire Mind promises to teach you to think like a millionaire, and so on and so on. I would like to direct your attention to another book I recently finished reading, called The Black Swan. I must admit that The Black Swan is written in a rather annoying way, but it contains a number of highly valuable concepts and ideas. One such concept, "looking at the graveyard", does a lot to discredit a vast range of self-help and "instant insight" books.

To understand this concept, let's discuss a non-existent book whose ambition is to teach readers how to become rich by looking at millionaires and identifying the characteristics that all of these individuals share. Let's say the author does a great job of collecting and sorting through information and comes up with a list of three critical attributes shared by all of these individuals: frugality, education and generosity. One of the points Nassim Taleb makes in The Black Swan is that this information is insufficient to draw the conclusion that the way to become a millionaire is to be frugal, educated and generous. Why? Taleb explains that to validate your theory, you would need to look at the population of non-millionaires and make sure that it does not contain a large percentage of individuals who share the exact same attribute, i.e. look at the population of "failed experiments" that does not support your theory. Taleb points out that people rarely do this - for example in trying to identify what made a certain company successful they fail to look at all the companies who did the exact same thing and failed miserably...

That's not to say that in my example above frugality is not a worthwhile pursuit. All I am saying is that in that hypothetical experiment the data collected is not sufficient to draw the conclusion that if you are frugal you will become wealthy. There are plenty of frugal people who never become rich.

So what's Taleb's point? Unfortunately his conclusion is somewhat discouraging. His book is primarily about the role that luck plays in the outcome of the game of life. We all like to think that we control our destiny, but Taleb points out that the real control we exercise is very limited... a sobering thoughts.

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Do You Cheat Yourself? Apparently I Do...

CNN-Money recently offered it's readers the opportunity to take a financial risk tolerance test. I am a sucker for personal evaluation tests, so I went ahead and clicked on the link. The test is comprised of 25 questions designed to ascertain how risk averse you are as an investor. Unlike most tests that give you two or three pretty transparent questions and then throw your answers back at you, this test is fairly sophisticated. As I was taking the test I was noticing something very strange about myself: I was cheating. Even though I was the only person who was ever going to know or care about the results, I was trying to game my answers to make sure that the test score came out the way I wanted it to come out.

To be fair, this wasn't a completely premeditated act of deceit. In a couple of places, after I chose one answer, I noticed that this wasn't really a truthful answer. I went back and changed the answers I had first given. In the end, the answers I submitted were sincere, but I am not sure why my initial reactions were not honest. I have been thinking about this for a couple of days and I think I have a good theory. I believe I know myself very well, especially in matters of personal finance. I also think that I understand my tolerance for risk and my behavior under pressure. Here I was, taking a test that was supposed to tell me something about myself that I did not already know. Damn arrogant test. It thinks it knows me better than I do? I'll show it. I'll give the answers that will generate the results as I know them to be.

Not very smart or mature, I admit.

Still, I did catch myself and fix the erroneous answers, so give me small credit please.

The bottom line is that I scored a 68 on that test, with the following description for my risk tolerance:

"Most commonly they think of "risk" as "opportunity". They have a great deal of confidence, if not complete confidence, in their ability to make good financial decisions and usually feel very, or at least somewhat, optimistic about their major financial decisions after they make them.

They are prepared to take a large degree of risk with their financial decisions and are usually, if not always, more concerned about the possible gains than the possible losses.

When faced with a major financial decision you are usually, more concerned about the possible losses."

Actually, that's pretty good. This is very close to the view I have of myself and my tolerance for financial risk. In the end, after trying to cheat the test, I have to admit that it did a pretty good job at what it was designed to do.

A final word on my risk tolerance and our asset allocation. The best measure of your correct asset allocation, in my opinion is this: if you went through the most recent crisis and held onto your asset allocation strategy, you have a good understanding of your tolerance for risk. If you bailed out when things got rough, you are probably taking on more risk than you can handle. Remember that next time the market turns up and you are tempted to jump back into stocks (as in, now, for example). If you want the ups, you have to be able to live with the downs.

So, dear readers, let me know what you think of this test and let me know what your test scores turn out to be. I am also curious to know if anyone else finds themselves cheating on personal assessment tests that only they will ever see the results to. Humans are strange beasts.

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Even for 401(k) - Vigilance Pays

This week we got proof again - as if we needed it - that you should always be vigilant where your finances are involved. I manage our finances using Quicken. It's my way of keeping an eye on all our accounts in one place and making sure that mistakes or even dishonesty don't whittle away at our resources.

Two examples from the past week:

Our dry cleaner charged us $40 to clean a single shirt. $4 was the agreed upon price, and somehow a zero got added to the mix.

A bigger mistake appeared in my 401(k) account. I noticed last week that my mid-month 401(k) contribution never showed up in my account. I waited a few days to make sure that no simple technical glitch was involved, and over the weekend I sent an e-mail to our HR person. Turns out that the company simply did not fund employees' 401(k) accounts since the HR person was on vacation. Hmmmm. Err, OK. That makes sense. Actually, it doesn't. They made the deduction from my salary but sat on the cash? That doesn't strike me as particularly fair.

Still, since this doesn't typically happen, I'll let it slide, I guess.

Our VP of Finance asked me how I found out that the account was never funded. He was pretty surprised to hear that I keep an eye on all my accounts through the magic of Quicken. I got my eye on you, dude. Stay away from my cash.

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You Gotta Know Who to Divorce...

Last week I met an old colleague and friend for dinner. This guy moved from California to Florida with his family, but subsequently he and his wife started what is turning out to be a fairly messy divorce. This story would have little to do with a personal finance blog, except for the fact that my friend recently discovered that his soon to be ex-wife has been collecting rent paid on the couple's California house, but has not been paying the mortgage on it. Apparently this has been going on for about five months. The house is now in foreclosure proceedings and my friend's credit is shot.

Of course, if he was half way responsible, my friend would be checking to make sure all was going well with the couple's various financial assets, if for no other reason than to make sure that nothing untoward was going on in the midst of a nasty divorce. But, that's who my friend is. He is a very lively, slightly less than responsible, very fun kind of guy. He is a "big picture guy" and this type of thing is too detail oriented for him.

My friend is taking this all with amazing calm and composure. Certainly more composure than I would exhibit under the circumstances. He is very much aware that his credit is essentially ruined, but doesn't feel like there is much sense in going crazy. He is now trying to work with the lenders to avert foreclosure...

It just goes to show you, you need to know who to divorce.

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Travel Protection Insurance - What a Scam...

It's summer and many of us are planning trips and vacations. As we are making our plans, and trying to find the best possible deals on those vacations, some of us may be tempted to purchase travel protection insurance. Such insurance is supposed to refund the cost of travel if you are unable to go on your vacation for a reason which is covered by the plan. Before you are tempted to purchase such insurance, check out this article in the NY Times describing one couple's experience in trying to claim the supposed benefit offered by their travel protection plan. Here is a brief excerpt:

"All told, my parents paid Vantage $9,688 for the trip and an additional $978 for the travel protection. One month before the planned departure, my father suffered a heart attack. My mother canceled the trip and requested a refund.

However, Vantage Travel responded by sending my parents vouchers for credit for future travel with Vantage. Apparently, in one of the many mailings there was fine print indicating that the “refund” would be in the form of credit."

I think that there are two issues here. First, the specific case being discussed in the article is borderline fraud - in fact, as described in the article the company was making an effort to mislead its customers without actually going on the record with anything that customers could use to sue them. The second issue is the value of travel protection. Even if it worked exactly as expected, why buy insurance for something which is not critical? In addition, the couple in the article paid an extra 10% of the total cost of the trip to cover the travel protection... that's simply preposterous in my opinion.

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Why I Want to Be Rich

I read a post on the Simple Dollar about the connection between money and power. Trent was making the point that many people want to be wealthy to gain respect and influence. That's obviously true, but my reasons are different. To me wealth equals freedom. It's not so much that I want to buy stuff, or own things or spend my money like a drunken sailor. There are certainly things that I would buy or do if I had the money to do so (buying a trip to the international space station is probably the most expensive of these), but my real drive to wealth comes from insecurity.

I am worried. I am worried that I will one day lose my job and won't be able to get another. I am worried that I will not be able to provide for my family. I am worried that my kids will have to support me in old age. I am worried that one of my family members will become chronically ill and that my medical insurance will not be sufficient to treat them. I am simply worried. Wealth would create security and remove these concerns.

It's not that I walk around constantly obsessing about these things. I consider myself a well adjusted human being. I am simply very cognizant of the fact that bad things happen to good people, and if bad things happen to me or to my family, I want to have the resources to deal with them. Wealth for me represents freedom from worry. Peace of mind.

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Gambling Your Finances

We all like to think that our lives are well planned and well thought out. I certainly like to think that I do everything in my power to mitigate the risks and protect myself and my family against the vicissitudes of modern life. From time to time we all make major life decisions which potentially have major financial implications. However, as we make these life changing moves, we rarely consider or care about the financial impact of those decisions. Here are a few examples:

Having Kids - when my wife and I were thinking about starting a family, my main concern was whether I was ready for what everyone described as a major life change. I didn't really consider the financial implications. We have three healthy and fun loving boys - a major expense, but one that we are well equipped to handle. Some of my friends are not as fortunate. One of my friends has a child with down syndrome, another has a child with a mild form of autism, and many others that I know have a kids with a variety of other challenges. When you are planning to have a child, you rarely consider that you are also taking a financial gamble.

Getting Married - talk about taking a financial gamble. Never mind the fact that a large percentage of marriages end divorce, entitling your spouse to half of what you jointly own. The bigger gamble is the fact that from the minute you get married, your financial fate is essentially in the hands of another human being. Their bad financial decisions will reflect poorly on you. Your financial plans may not suit them. That's a big bet you are taking. Luckily, someone else is taking that bet with you. I am fortunate in that my wife and I see eye to eye on most financial decisions. We are both careful with our money and both take our credit and spending decisions very seriously. Having lived with my wife for a few years before we got married, I knew exactly what I was signing up for.

Switching Jobs - now that's one where the financial implications are very clear, and most people switch jobs primarily for financial reasons. However, even where the primary motivation for the decision is financial, I find that many people don't consider the possible implications of their decision. For example, I often meet individuals that take a job that pays more in the short term but that does not offer promising career prospects. There is also considerable risk in the very act of switching a job - e.g. there is always the risk that you will not get along with the new boss. Regardless of how well you think you understand the opportunity, you must recognize that you are taking a risk.

Getting an Education - yes, yes, getting an education is not only about improving your career prospects, and I agree that studying philosophy may be good for the soul, but I find it difficult to understand folks that choose an undergrad major (for example) without due consideration for the financial implications and career implications of their decisions. True, you may be able to find a job outside of your chosen field of study, but you must recognize that there is some level of risk here.

Now here is my point. I am not advocating that decisions must always be made for financial reasons. That would make for a very dull and sad life. However, what I am saying is that many times our decisions have very large potential financial implications which we choose to ignore.

When I moved to my current job in March 2008, I was very conscious that I was placing a financial bet. So far, I seem to be winning this bet. Back in 1999, I was very aware that by going to business school I was placing a bet on the health of the economy two years later. I lost that bet, at least in the short term, with the dot com crash. When we decided to have kids I was aware of the financial implications of having a healthy child, but did not even want to contemplate what having a child with special needs would to do our life, never mind to our finances. We all make financial gambles, more often than we would like to admit.

May your gambles pay off more often than not.

Here are a few other interesting posts about financial gambles that I spotted around the web:

My blogger friend Frugal recently wrote about a financial gamble that paid off. OK, it wasn't really a financial gamble, but she got some money in an unexpected way. It's nice when nice things happen.

Brip Blap talks about the differences between his old neighborhood and his new and about how taking some financial gambles and starting a business may have a nice pay-out.

Talk about the financial gamble of having kids. Clever Dude has a post (and video) about a man who is completely disregarding the cost of childcare. Some people should not be allowed to have kids.

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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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Life Insurance Company Stability - More Concerns

In recent weeks I have written a couple of times regarding my concerns about the financial stability of my life insurance company, Protective Life. It seems like there may be new reasons for concern. After Protective Life was downgraded by some rating agencies recently,  it seems that the company is now seeking the status of a bank holding company, so that it can receive some Federal bail-out money... 

I have conflicting feelings about this whole thing. First, can anyone now get federal bail-out money? You simply need to be declared a bank holding company? That seems seriously wrong. However, I am concerned about the status of my life insurance policy and I am not quite sure what the appropriate response may be. Should I be out looking for a new policy from another insurer? How can I tell if the new insurer is any better? I mean, when I did my due diligence, Protective Life seemed stable enough too. Finally, I am not clear whether my life insurance policy is at risk here or not.

Life insurance policies are typically guaranteed by state guarantee associations. However, in last week's issue of Business Week, there was an article about the fact that those associations have very few assets to back-up those guarantees (sorry I couldn't find a link to the article itself). Here is a quote:

"When Executive Life went belly up in 1991, states couldn't raise enough to cover its obligations. Annuity and life insurance policyholders in California recovered as little as 70 cents on the dollar or were forced to accept modified terms with alternative providers. "I wouldn't put tremendous amount of credence in the guarantee funds," says Adam Sherman, president of advisory firm Firstrust Financial Resources in Philadelphia."

Wonderful. Another quote:

"Insurance customers need to be more vigilant. Stop focusing only on cost and service and start worrying about solvency. Check such agencies as Standard & Poor's, Fitch Ratings, Moody's and A.M. Best to find the highest-rated companies, and be alert for downgrades."

Yes, but I did all that. What do you do if there is a downgrade? I don't have an answer yet. Still trying to figure this all out.

In any case, if you would like to find out about the current strength of your own life insurance company,  the Insurance Information Institute offers detailed explanations on how to find and interpret ratings from each of the four rating agencies listed in my quote above (the links are close to the bottom of the page).

I'll keep you posted when I decide how to address this issue, but in the meantime, let me know if you have any suggestions.

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Life Insurance Company Stability: More Info

A few weeks ago I wrote about about how I was starting to become concerned about the stability of my life insurance company - Protective Life. Last week I got more information on the subject. It appears that Protective Life was downgraded by a couple of credit rating agencies, however according to the language of the downgrade the situation appears to be stable. From the downgrade announcement: 

"This rating action reflects Fitch's view that the risk-based capital level of PL's primary life insurance subsidiaries has deteriorated in 2008 and will continue to be pressured over the near term due to investment losses and reserve strain associated with the company's term life insurance business. The ongoing turmoil in the credit markets has limited PL's financial flexibility and put pressure on its ability to access funding to improve its capital position...

...Importantly, Fitch believes that PL's liquidity position is sound. The company has no significant debt maturing until 2013 and has cash and liquid assets to meet maturing obligations at the holding company and operating company levels. Further, PL has below-average equity market exposure given the company's relatively modest variable annuity business and negligible exposure to unaffiliated common stock. Equity-adjusted leverage remains within expectations, and interest coverage, while down from prior quarters, is reasonable."

The way I read this, my life insurance company is hurting because their portfolio is down, but they are not under any imminent threat of insolvency or any burning need to raise cash. 

I will continue to monitor the situation, but it looks like there is no cause for immediate alarm.

Insurance You Need, Insurance You Don't

The post I wrote last week about reducing your car insurance bill got me thinking about other kinds of insurance, and how useful they are. As I have written before, insurance should be reserved for potentially devastating costs - as a way to reduce your risk to manageable levels. If the risk is something you can handle without a third party (who makes money by charging you more in premiums than they pay-out in claims), you should handle that risk on your own.

With that in mind here are some of the types of insurance that I think are well worth the money:

Life Insurance - that's a big one. If you die, you want to make sure that your loved ones are well taken care of. However, even here it is important to understand that if you don't have dependents, you probably don't need life insurance.

Disability Insurance - possibly even more important than life insurance (although, I must admit I only have the inadequate coverage offered by my employer). You want to make sure that if you are unable to continue doing your job, you are still able to maintain a decent standard of living.

Home Insurance - unless you are a multi-millionaire (and I mean MULTI), losing your home to a fire or hurricane without insurance could completely devastate your financials.

Health Insurance - if your employer does not offer health insurance, you should make every effort to buy your own. If you can't afford a complete plan, at least get catastrophic coverage with a large deductible, to make sure that you have some backing in case of a major illness.

Car Insurance - we can argue about collision damage, but making sure that you have enough liability coverage is key. Getting sued for all you are worth by someone injured in a collision with you is really something you want to avoid...

There are many other types of good insurance, but the important thing is to understand that what they all have in common is this: they protect you from risks that while relatively small, would devastate you financially if you don't have sufficient coverage.

Now, let's talk about some types of insurance that are useless in my opinion:

Extended Warranties - every time I buy anything at Best Buy, the sales clerks try to convince me to get an extended warranty. But why? Very simply: the company makes money on the policies they sell. Conversely, the cost of the insurance is higher than what they expect to pay me in repair costs. I don't know about you, but if my iPod dies, I don't expect to be devastated financially. Worst case scenario, I'll need to live without portable music for a while.

Life Insurance for Children - your kids do not need life insurance. No one is depending on them for income (unless your child happens to be a famous movie star or fashion model, I guess). If the unthinkable happened and your child passed away, your income would not be effected. In fact, although it is sad to say, your expenses would actually go down. The risk here is not financial, it is emotional, and that cannot be off-set by life insurance.

Vision Coverage - if your employer did not provide vision coverage, would you get it yourself? I wouldn't. Again, the same logic applies: your vision coverage covers the cost of your annual exams and purchasing prescription glasses and such. Most people would probably be better off foregoing the insurance and buying the glasses on their own. Remember - the insurance company needs to make money, so they are charging you more than they expect to pay for your check-ups and prescriptions.

Vacation Insurance - unless we are talking about your dream vacation that you have been saving for for the past decade, insuring your vacation makes very little sense to me. If your vacation gets cancelled for some unforeseen reason, worst case scenario, you get no vacation that year. You are not financially devastated. Your life continues along its normal course.

Again, there are many other types of insurance that do not make economic sense, the common denominator is that even if the worst case scenario occurs, your financial condition is largely unchanged. In such cases, it is best to save your money rather than spending it on buying unimportant coverage.

You can also check out my previous article about buying insurance in your 20's.

Preparing for a Layoff

Last week I wrote a very popular post about how to avoid getting laid-off. However, recognizing that in some cases whatever you do will not spare you the pink slip, this article is all about preparing for the worst case scenario. If you get wind of an upcoming lay-off, know that your company may be in trouble, or simply want to take some precautionary measures, here is a series of steps that you should think about taking:

Update Your Resume - whether or not you think that you are at risk of losing your job, keeping your resume up to date is a good idea. You never know when you'll get a call from a headhunter or come across an opportunity that you want to respond to immediately. The idea is being ready to hit the ground running. Even though I feel very secure in my current position, my resume is up to date and ready to go.

Stay in Touch - its a cliche in job hunting circles that most people find a job by networking. Forget for a minute about formal networking - be sure you renew your contacts with old friends, colleagues and acquaintances. I have previously written that your colleagues and former colleagues are important career assets - so be sure to stay in touch or reconnect with some of your former colleagues who have moved on to other companies. This is not only good advice for prospective job hunters - it's also nice to reconnect with old friends. 

To get started, make a list of people you need to reconnect with, and make it a point to give a call or shoot an e-mail to one person a day. This will also make transitioning to formal networking or job hunting mode much easier to do when the time comes, because your relationships will already be fresh and up to date.

Spread Your Name - being easy to find by prospective employers and headhunters is a good strategy in good times and in bad. Your action items here are limited only by your imagination - have a prominent profile on major social networking websites, give talks at industry events, write papers for your industry publications, write white papers or presentations that can be published on your company website etc. The important thing is to have your name attached to some impressive professional achievements and to make sure that these are easy to find online.

Make Discreet Inquiries - don't wait for the pink slip. If you think you are likely to be let go, start looking for a job preemptively. However, be sure to do so discreetly, because if your employer finds out that you are looking, it is very possible that you will find yourself on the lay-off list even if you were previously safe. In this context, I never felt secure about putting up my resume on the online job boards, since I am always concerned that my employer will somehow find out about this in spite of my precautions. Instead, I prefer more discreet job hunting avenues such as very specific headhunters, and job referrals through LinkedIn. 

Emergency Fund - others have written extensively about the need to build an emergency cash fund for use in case of financial emergencies, so I will not belabor the point. However, if you suspect a lay-off is imminent, and you don't have a sufficient emergency stash built up, move quickly to correct the problem.

These are tough economic times, but luck favors the prepared mind, and much can be done to avert the worst consequences of a lay-off. The important thing is to actively engage the situation, rather than to wait passively for events to unfold. Make a plan, and start executing today.

Is Your Life Insurance Company Stable?

This question never occurred to me in the context of the current economic tumult. When I got my life insurance policy I checked the status of my company - Protective Life - with all the rating agencies, but it never occurred to me that there might be a reason to revisit the issue in light of the market turmoil. Well, the Wall Street Journal ran an article this weekend saying that some life insurance companies are seeking federal bailout funds. Which leads me to ask a couple of important questions: (i) how would a life insurance company be impacted by the financial crisis? (ii) is my life insurance company safe?

With respect to the first question, here is a quote from the WSJ article:

"Most insurance companies are financially sound but have seen their long-term investments and stock prices fall in value. Some have holdings of riskier alt-A and subprime-mortgage backed securities. Insurers have suffered losses in bond and preferred-stock holdings from the collapse of companies including Lehman Brothers Holdings Inc. Insurers also have been hit with billions of dollars in unrealized losses as corporate bonds of all stripes suffered big declines. Low interest rates have damped interest income and a prolonged economic slump could dent the variable-annuity business and even hurt sales of core life-insurance policies.

Insurers would normally tap capital markets to raise money. But many are loath to attempt selling common stock because their share prices have been so battered. That's one reason many insurers have been pushing the expansion of Treasury's equity-stake program to raise capital."

With respect to the second question, I went to Protective's website and checked their current agency ratings, all of which appear to be excellent. However, when I ran a Google search on recent changes to the ratings, it appears that a couple of agencies are re-examining Protective's ratings for a possible downgrade. So, while it doesn't look like there is any imminent danger, this is a situation that I will be monitoring in the coming months. I mean, if there is one thing you absolutely want to be certain about it is that your family's financial future is 100% secure if the worst case scenario comes to pass.

Economics from the Coffee Shop

The other day I went with a couple of colleagues to grab a cup of coffee at Starbucks - actually, they went to grab some coffee and I tagged along - for one thing I am not a big fan of coffee, for another $4 coffee seems even less tasty to me - but I digress. I didn't know this, but apparently Starbucks is now in the publishing business and they had a little free hand-out titled "Good - The Economy", which offered a whole bunch of factoids about the economy. I figured it would be fun to bring up a few of those factoids and comment on them a bit, so here goes:

"In 2000, the median American family made about $61,000. In 2007 it made $60,500 (both numbers in inflation adjusted 2007 Dollars)" - this brings up a couple of interesting points. First, the George W. Bush years have been really grand for the typical American haven't they? Note that the statistic is talking about the median, not the average. I have no doubt that on average we are better off, it's just that the economically weaker members of society have been getting a real lousy bargain from the current administration.

"In 2007, the median annual income for Americans aged 65 and older was $16,770." - do you need a better reason to start planning for retirement?

"43% of Americans households spend more than they earn annually" - wow! Surprisingly, this statistics is very well correlated with the fact that 43% of American households are complete financial morons... before you judge me harshly, I am sure that there are some folks who have it really rough, and that due to circumstances beyond their control must move deeper and deeper into debt to survive. But 43%?! Most of these folks simply feel that they deserve a richer lifestyle than they can afford. It's those Venti Lattes and fancy cars. Here's a thought: if you don't have it, don't spend it...

"The average American household has $8,565 in credit card debt, which is 15% higher than it was in 2000" - the really scary thing about this statistic is that there are many of us responsible adults who do not carry a credit card balance at all, so those that do carry a balance have, on average, an even bigger debt load that they are serving.

"Approximately 42% of American households lack enough liquid assets to support themselves for three months" - I have a feeling that the current downturn is making many people re-visit their lack of financial preparedness. Let's hope that they are able to get themselves in financial shape before economic disaster strikes.

I don't know about you, but I find these statistics to be really discouraging. It seems like folks either don't know what they are doing, don't care about consequences or are simply unable to get themselves in shape. I believe that ignorance is the most probable culprit, but I am not sure most people even realize that their financial situation is a problem. Read personal finance blogs people!

Running a Small Business in Difficult Times

During the previous recession, a.k.a the dotcom bust, I was running my own small business (a business development consultancy), and let me tell you something: running a small business in a recession is not an easy thing to do. Here a few of the lessons I learned as a business owner during those rough years:

1. Fight for Every Customer - in a tough environment no project is too small, and no customer should be allowed to escape. If that means being flexible on price, so be it. Of course, taking projects that would lose you money is never a good idea.

2. Repeat Business is the Best Kind of Business - getting your old customers to come back for more is key to success in a tough market. In a difficult economy customers are apprehensive about hiring new vendors, and are less inclined to take risks. They spend their money with the people they already know. All of which means that the first place to look for new business is with your old customers.

3. Prepare for Lean Times - big businesses all over the country are laying off employees, cutting spending and generally tightening their belts. They have the right idea. What works for big business is doubly true for a small business with much more limited reserves and resources. Cut all unnecessary expenses and push back any capital spending. However, there is one exception to the rule: sales and marketing efforts should be maintained or even increased. It makes no sense to save a few dollars on advertising, for example, if those savings will cost you thousands in lost projects.

4. Develop Financial Flexibility - in tough times you can be sure that customers will pay you late, that you will suffer some bad debts and that there will be some lean months. You can make sure that these expected set-backs don't kill your business by developing some financial flexibility. Get to know your bank manager (actually, being on a first name basis with your bank manager is something every business owner should do regardless of the economy), make sure that you have a credit line that is sufficient for your needs, and just in case, make sure that you have a couple of good Business credit cards that you can use in case of an emergency, and if you find yourself in financial difficulty, it may not be a bad idea find some good Transfer Credit Cards if you need to move a balance.

The good thing about tough economic times - if there is anything good about them - is that if your business emerges intact on the other side, you know good times are bound to follow.

iPhone and the Road to Financial Ruin

A week ago on Sunday the family and I took my folks - who are visiting from out of town - to lunch in Palo Alto. The restaurant we went to was close to an Apple store, where a line of about 100 people snaked out the door and around the corner. Californians in their multitude stood around for hours in line to get themselves a brand new iPhone. On Monday, I witnessed the same phenomenon at the Stanford Shopping Mall, where another Apple store is located. It occurs to me that the line for the iPhone symbolizes much that is bad about U.S. consumers and the reason for why our economy is in such dire straights these days.

To be pointed about it, the American consumer is akin to a five year old who is unable to delay gratification for even a few days. They want their toys, and they want them now. Tomorrow will simply not do and next year is completely out of the question. How is this a problem, you ask? It's not that I have any problems with the iPhone- in fact, when the lines disappear I will probably get one myself - it's just that the willingness of people to stand for hours in line just to get the latest toy - be it an iPhone, a Wii console, a Harry Potter book or a ticket to the newest blockbuster - is simply irrational. Guys, those toys are not in short supply. Go to your nearest book store and ask for a Harry Potter and you'll no doubt get one. Wait for a few weeks and the same will be true for the iPhone. Why the rush?

This is probably not a major issue when you are talking about relatively low cost items, but the same phenomenon is what got us into our current economic malaise. I can't afford to buy a house - never mind, I'll take a crazy loan that I can't repay and get one anyway. I can't delay my satisfaction. I can't afford to take a Caribbean vacation. Never mind, I'll just put it on my credit card and pay it off twice over with interest. I can't save for retirement because I have a burning desire to buy a new pair of shoes, car, big screen TV, whatever. My immediate wants far outweigh my future needs.

Many Americans have apparently lost their capacity for rational thought and delayed gratification in the face of consumer culture. So, get it all now if you must, but remember that the time will come when the Piper will demand payment in full.

On an unrelated note, check out the latest Carnival of Personal Finance where my recent post about the benefit of the long bear market is also included.

Get a Retirement "Quota"

This evening I asked one of my colleagues a simple question: "when do you want to retire?". Once again I am on a business trip, this time in good ol' Florida. I am traveling with one of my colleagues, a Director of Sales in his late 40's. When I asked the retirement question, I got a very thoughtful and encouraging answer. Here is what my colleague said (loosely paraphrased):

"Retirement is like sales. You have to meet a certain quota, and that quota is the amount of money you will need to fund your retirement. Just like in sales, to meet your quota you have to shoot for a higher number than you really need and build some safety margins into your plan. I am shooting for retirement at 58, but I know that I want to retire by 63. As far as I am concerned, if you don't plan for a specific retirement date, you will have to continue working for the rest of your life. I have plan, but I have built some flexibility into it. At the end of the day, being able to retire doesn't mean that I will actually retire. As long as I enjoy my work, I will continue do it."

Amen to that. A well thought-out and well explained retirement plan AND from a sales guy no less (sorry, I couldn't resist the dig at sales folks, being a marketing guy myself). I don't yet have a target retirement date myself, but I do have a target "quota" of $4 million. This is a stretch goal but I think that my wife and I can achieve it by developing our careers and living modest and balanced lives.

What about you? Do you have a target retirement age and "quota"? If so, are you on track to achieving those goals?

Personal Finance Nightmares

In honor of Halloween, I thought I would share my top six personal finance nightmares. Some of these are far fetched, others a real possibility. All of them are very scary to me.

Here they are, in no particular order:

1. Disability - not being able to take care of myself, financially or otherwise, is one of my biggest nightmares. I am a very independently minded person, who deeply values his freedom and autonomy.

2. Persistent Joblessness - I have never really been unemployed, but I am very much aware of this possibility. I am a well educated, highly skilled and eminently employable individual, but bad things happen to good people. It's a fact. I have invested a great deal of time and money in my career and the thought of seeing that investment go down the drain is tough to confront. If I found myself in a state of long term joblessness, I would probably start my own business. However, I would like to do something like that on my own terms, rather than be forced to take such action.

3. Health Emergency - last year I got a small taste of what a health scare feels like. I felt unwell for several months, and despite a battery of tests, doctors could find nothing wrong with me. To my deep relief, the condition simply dissipated, gradually and slowly. Someone once told me that we are all one major health crisis away from bankruptcy, health coverage or no. I can believe him.

4. Major Natural Disaster - last week's California wild fires are one such example. A colleague of mine from San Diego was evacuated from her home due to the fires, and was allowed to return two days later only to discover very minor fire damage to a portion of her house. Unfortunately, her next door neighbors were not as lucky. Their house burned to the ground.

We live in earth-quake prone, fire prone, mud-slide prone California. The prospect of a natural disaster is something we have to live with, but that does not mean I am comfortable with the thought.

In fact, after writing these lines, I found out that Northern California was struck by a 5.6 magnitude earth quake tonight. Talk about a potential nightmare - a strong earthquake while I am on the other side of the continent and my wife is alone with the kids. Thankfully, all is well.

5. Complete Stock Market Meltdown - yes, it's unlikely, but a global 1929 style market crash could happen again. As someone who has a very considerable portion of his net worth invested in the markets, that would be one massively scary turn of events. What could trigger such a crash? Who knows? But it is possible that if we had a massive terrorist attack, such as nuclear terrorism, we could face a very different economic reality.

6. Homelessness - I have repeatedly spoken out against treating houses as an investment. I prefer to rent rather than buy, at least for now. However, homelessness is a very scary prospect for me. Can you imagine not being able to provide basic shelter for your family? Well, there are many homeless families out there. I believe that one of our greatest failures as a society, is our inability to eradicate homelessness and hunger in this country.

Those are my personal big, bad, six nightmares. I would love to hear about your own personal finance fears and concerns.

In an upcoming series of posts I will discuss personal finance crises, and ways to prepare for them and to mitigate their most adverse consequences. Let me know if there are any specific topics you would like me to cover.

Personal Finance: Intentions & Reality

A couple of days ago I ran across this interesting article. The article outlines the often huge distance between intentions and actions as far as personal finance is concerned. Here is a summary of one section that I thought was especially informative:

Attendees at a retirement planning seminar all claimed that they would be joining their company's 401K plan. In reality, only 14% of un-enrolled seminar participants actually joined the plan. For comparison it should be noted that only 7% of those that did not attend the seminar joined the same plan. This information could lead you to the conclusion that the seminar helped motivate people to take action, however, it could also be argued that there is selection bias at work: i.e. people that chose to attend the seminar did so because they were more serious about taking action regarding their retirement planning. This means that the seminar itself may not have influenced people's actions at all, rather it simply provided a gathering venue for those more serious about retirement planning.

The article also shows that a large majority of people who were already enrolled in their 401K but needed to take certain actions, such as increasing their contribution rate also failed to follow up on their intentions after the seminar.

Here is what I take from this article: people procrastinate. It is in our very nature. We mean well, but our intentions do not always translate into action. Take me for example. I have been meaning to take my car in for an oil change for the past three weeks, but somehow I just can't seem to get it done. I have many good excuses: work has been crazy; my brother is in town for a visit; I have to pick up the kids and so forth. All excellent reasons. Still, no oil change.

What does that mean for people who care about personal finance? A couple of things: first, recognize your tendency to procrastinate, and combat it by building a plan and attaching schedules and goals to it. You want to do something? When are you going to do it? Second, don't develop personal finance plans that require too much activity or that rely on perfect timing. Those would be the most susceptible to procrastination damage.

What does this mean for public policy planners? If you think people are going to plan for their own retirement or make provisions for their long term economic well-being, there is a very strong chance that a majority of the population, while very well intentioned, will never actually get around to doing so. In fact, Congress and regulators are trying to use people's procrastination and laziness as tools to promote healthy retirement savings. One of the ways to achieve this is automatic enrollment of people in their 401K plans. Congress ok'd auto-enrollment in the Pension Protection Act of 2006. Hopefully procrastination now becomes a tool for good, as people who otherwise would never have saved now don't actually get around to opting-out of their retirement plans.

I hope you enjoyed this post. I was actually planning to write it last week, but never got around to it...