Imaginary Personal Finance Cages

Once again I am on a business trip, this time I am visiting Texas. Yesterday I went out to dinner with a colleague in a local restaurant and we got into a conversation with our waitress - who happened to be on her first day on the job. The conversation lasted about 5 minutes, but we learned some very interesting thing about her which I wanted to share with all of you.

Our waitress, a nice woman in her late 20's, whose name I don't remember, is an Illinois native, but she lived in many places around the country, including South Carolina and now, Texas. She has a college degree in "culinary arts" and a passion for wine. Before moving to Texas, she was thinking of moving to California and to work in the wine industry but decided that this was too risky, and instead moved to Texas where she "has some family". Her dream is to go to Italy, travel the country and experience the culture and the people. I don't know this for a fact, but I got the impression that our waitress is not married, and I am pretty sure that she does not have kids.

My colleague and I were perplexed. I asked her why she's not chasing her dream? Why not go to Italy? Her reason: she doesn't have the money. My response to that was "why don't you go to Italy and work there?" After all, if she can be a waitress in Texas, she can be a waitress in Italy as well. She explained that she wants to go to Italy when she has enough money to experience the country and its culture without being worried about every dime she spends. In a different part of the conversation, she mentioned that the restaurant was paying her a salary of $2.25 / hour, not including tips.

I am not going to sit in judgement on a hard working waitress, but both my colleague and I were amused by her attitude. I am in my late thirties and my colleague in his early forties. Both of us traveled the world extensively, on tiny sums of money. Backpacking and hitch hiking our way across continents, when we were more or less the waitress' age. I didn't work during these extended trips, but I met many backpackers who did. And what better way to experience the land and its people than to live among them? We both recall those times as some of the happiest in our lives. For me these were times of adventure. Of freedom. Of peace of mind. Imagine waking up in the morning in a strange part of the world, for months at a time, with the only thing on your mind being the next big surprise that is waiting for you around the corner.

I compare those times to the life I lead today, tightly constrained by the daily necessities of raising a family and nurturing a career, and I marvel at the adventures I had. I am tempted to look at our waitress and wonder at the imaginary personal finance cage that she put herself in. Not pursuing your dream until you have the money!? "Break free", I want to shout at her. From my vantage point it looks like the barriers standing between her and her dream are all in her mind. But then I wonder whether someone with a different vantage point could say the exact same thing about me. Even though those cages exist only in our heads, the barriers we set-up for ourselves govern our lives.

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Home Insurance: The Big Picture

As part of our ill fated house purchase late this summer, we did a lot of thinking about home insurance policies. A truly riveting topic, to be sure. Nevertheless, we discovered a few interesting things about the subject:

Most home insurance companies offer about the same rates for the same coverage. This is not terribly surprising when you think about it. These guys' jobs is to estimate risk and then to price their plans a bit higher than the expected pay-out, such that they generate a profit for their companies. Since this is an extremely competitive market, prices should gravitate to more or less the same level, and they more or less do.

The biggest impact on your home insurance premium seems to be your deductible... that stands to reason as well. The insurance companies are in the business of making money. If you can sue them for every little thing that goes wrong with the house two things happen: one, you are more likely to sue. Small things go wrong all the time. Second, when you sue, they not only incur the cost of paying you for your loss, they also have a considerable administrative cost. However, if you are willing to take a higher deductible, things look much brighter from the insurance company's perspective: you are less likely to sue and you are less likely to be able to manufacture false claims. In addition, the insurance company knows that you are motivated to reduce the likelihood of damage, since you bear a larger percentage of the cost.

The difference in insurance premiums is dramatic. We found that by increasing our deductible from $2,500 to $5,000 we could roughly double our liability coverage for the same premium.

My philosophy about insurance is a simple one: you insure only risks you cannot afford to bear yourself. The window is broken? No problem. Repair it yourself. You don't need insurance coverage for that, and you certainly don't need to pay for the insurance company's profits. However, most people (ourselves included) can't afford to replace a entire house lost to major disaster. That's what insurance is for.

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How I Almost Lost My Job

About 18 months ago I got a new job. I left a large, established technology company, for a small start-up in the same field. There was a certain amount of trepidation involved in leaving a solid company for a tiny one with only a few months of cash in the bank. Last week my decision was vindicated, in the most nasty of ways. My former company eliminated my old position. In fact, they eliminated the entire team that I ran.

OK. I admit it. That wasn't even close to my losing my job. Still those cuts hit close to home. Some good friends of mine lost their jobs, in what is a very nasty job market.

I believe that I would have kept my job, had I stayed with the company. I had very good relationships with my management and I believe that they would have found a new role for me in some sort of a re-org scenario, but I can't help but feel that I made the right decision to take a risk and move to my current position.

There are a couple of lessons to be had here. First, no job is safe in today's corporate culture. Next time you have any feelings of loyalty or warmth towards your employer, remember that those feelings only go in one direction. If the need arises, your company will let you go in the blink of an eye. I am not saying this in a pejorative way. In fact, just a few weeks ago I had to let someone go in my company. However, what I am trying to say is that "every man for himself" is the reality in today's business climate, and I don't know that it was ever different.

Second, job security is a very ephemeral thing. Some of the financially strongest companies in the world are laying people off, left and right. Some small businesses and companies are retaining their employees and are even hiring. Big business is such an impersonal thing. You could be doing a phenomenal job, but if someone at the top decides to lop-off a business unit, you would lose your livelihood just as the slacker in the next cube would.

At the end of the day job security exists no-where in corporate america today. I believe that a new term is needed: Career Security. It's not about keeping your current job, it's about making sure that if you do lose your job your long term earning prospects are not diminished. Career security is about recovery and resiliency more than it is about maintaining a specific employer.

I think there's a book in there somewhere.

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Are You an Up Day Addict?

I have noticed something interesting about myself: I am more likely to go into Quicken and check the state of our finances on days on which the stock market does well. I am an up day addict. It's not that I make investment decisions or change our financial strategy based on the vagaries of the market, but I am just loathe to look at the paper losses that accumulate on days in which the market goes down.

During the height of the financial meltdown, I kept myself away from Quicken for days at a time. I would check stock quotes online semi-obsessively, but I would not go into Quicken to tally up the damages. Since the market started heading back north in March, I have been turning to Quicken more often, taking pleasure from the fact that the losses were diminishing at a breath-taking pace.

You could look at this in two ways, one good, the other not so flattering. You could say that I am reducing my level of anxiety by not checking the Quicken tally on down days, and thereby lessening the risk of impulsive action that would hurt us in the long term. You could also say that I am too squeamish to face reality. I suppose you would be right in both cases. Nevertheless, at the end of the day, what counts are the real steps that I take (or not take) in response to the data which Quicken so graciously gathers for me, and on that front I am proud to say that squeamish or not, I was able to stick to my plan so far.

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Credit Buyers are Undisciplined Consumers

Buying things on payment plans is an insane idea. I know, what I am saying is practically un-American, but nevertheless that's where I stand. A great example of that all prevalent insanity is car payments. A car is the classic depreciating asset - you buy it today and it's value can only go in one direction: down. However, tens of millions of Americans buy their shiny, cash draining machines on credit, burdening themselves with financing changes and negative cash flows. Some would say that they have to buy a car on credit because they can't afford to buy it straight out. If you can't afford to buy your car with cash, you can't afford to buy it on credit either. You can't afford to buy that Lexus? Spend $8K and buy a second hand compact car. Believe me, it will get you to work and back, just like that fancy car would. Yes, I know, you won't look as cool, but think of all that cash rattling in your piggy bank.

Are all payments bad? Of course not. Credit is a good thing if it is used for the right things, and there are primarily two types of things that are worth buying on credit: (i) appreciating assets (or at least ones that are not expected to lose value) - a house is a great example that falls into this category; and (ii) assets that generate a positive cash flow after the financing charges - for example, a profitable business.

Financing consumption through credit payments does not make your consumption more affordable, it simply robs your future self to pay for things you want today. Show me a payment buyer and I will show you an undisciplined consumer.

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