Friday, November 30, 2007

"Stop the Shopocalypse!"

It looks like Morgan Spurlock (of "Supersize Me" fame) has come out with a new movie titled What Would Jesus Buy? It sounds interesting, and I would love see it, but there are limited screenings at this time. Check out the trailer (QuickTime or QuickTime Alternative required). If you happen to catch it, please report back with a review. Here's a brief description from the web site:

What Would Jesus Buy? follows Reverend Billy and the Church of Stop Shopping Gospel Choir as they go on a cross-country mission to save Christmas from the Shopocalypse: the end of mankind from consumerism, over-consumption and the fires of eternal debt!

From producer Morgan Spurlock (SUPER SIZE ME) and director Rob VanAlkemade comes a serious docu-comedy about the commercialization of Christmas. Bill Talen (aka Reverend Billy) was a lost idealist who hitchhiked to New York City only to find that Times Square was becoming a mall. Spurred on by the loss of his neighborhood and inspired by the sidewalk preachers around him, Bill bought a collar to match his white caterer's jacket, bleached his hair and became the Reverend Billy of the Church of Stop Shopping. Since 1999, Reverend Billy has gone from being a lone preacher with a portable pulpit preaching on subways, to the leader of a congregation and a movement whose numbers are well into the thousands.

Through retail interventions, corporate exorcisms, and some good old-fashioned preaching, Reverend Billy reminds us that we have lost the true meaning of Christmas. What Would Jesus Buy? is a journey into the heart of America – from exorcising the demons at the Wal-Mart headquarters to taking over the center stage at the Mall of America and then ultimately heading to the Promised Land … Disneyland.

Will we be led like Sheeple to the Christmas slaughter, or will we find a new way to give a gift this Christmas? What Would Jesus Buy? may just be the divine intervention we’ve all been searching for.

The Shopocalypse is upon us … Who will be $aved?

Thursday, November 29, 2007

Work: It will literally kill you

I watched the Oprah show on the extreme weight losers yesterday, and it got me thinking about how this issue has gotten so out of control in our society.

I think work is a big factor in the obesity epidemic in America, and it really is killing us. How many people do you know fall into this trap? You are so tired from your workday that you don't have time to cook or exercise. Instead, you pick up food from a fast food restaurant, then head home and plop yourselves in front of the TV until you get sleepy from your meal or an energy low, at which point you either doze off on the couch or go to bed (often without brushing and flossing your teeth, leading to dental problems down the road). You wake up at the sound of your alarm feeling tired and unrested, but drag yourself out of bed and stop by Starbucks for a caffeine fix to get you going for the day. Then, on the weekends, you cram all your household chores and shopping, leaving little time to recoup and re-energize. You go to work on Monday feeling tired and depressed, wondering why the weekend went by so quickly.

Year after year, your pant size increases, you develop bags under your eyes, and you get winded from simple tasks such as going up the stairs. You become unhappy with yourself, so you buy things or turn comfort foods to (temporarily) make you feel better. You might try a diet or two here and there, or buy a gym membership as part of a new year resolution, but after a little while you quit the diet and the gym because other things take priority.

I see this happening all around me, and I think it's becoming more and more difficult to avoid the work trap and the kind of lifestyle that it creates, especially as it becomes embraced by society as the accepted norm.

I don't want to fall into this trap. I want to quit work as soon as possible because:

  • It makes us inactive. We sit in a car getting to and from work, and once we get to work, we sit in front of a desk staring at a computer screen for most of the day.
  • It adds to our stress levels. We have to deal with artificial stress inducers such as office politics, deadlines, and pointless meetings, that sap our strength and energy, leaving us cranky and miserable.
  • It prevents us from developing healthy habits. We go out for lunch, and eat portions that are too large for us. Or we get vending machine food because we can't make time for a healthy meal break. Or we give into temptations in the form of cookies, cakes, and doughnuts left over from office functions. Work robs us of the most productive time of our day, when we have the most energy to do things that are good for us like working out and cooking meals from scratch. It keeps us from getting restful and sufficient sleep because we're trying to cram other things into what's left of our busy days.
My primary motivation for wanting to quit the rat race is not so I can pursue other interests (although that is certainly a big reason), but so that I have the time to lead a healthy and active lifestyle. My health is the number one priority in my life, and I find it sad that Americans have put it on the bottom of their list.

A lot of people say that they don't want to quit work because it gives meaning to their lives, and cite references to people who die shortly after retirement because they have nothing to do. My question is, have you thought about what work is taking away from you?

Wednesday, November 28, 2007

3 steps to achieve financial success

I believe that most Americans can achieve financial success. I am living proof that it's possible. Granted, I have a well paying job, but I don't make an obscene income. Besides, I know plenty of people in my income range that have little to show for their years of working. And I think that even if my income was more modest, I would still be well on my way to financial independence; I just wouldn't have accumulated as much.

Here are the three steps that I feel are necessary to achieve financial success:

1. Live below your means. I realized that to make money, I needed capital, and to generate it I had two options: reduce my expenses or increase my income. I increased my income by gaining valuable work skills and hopping jobs, but that may not always be possible depending on the stage of your career. I also kept my overhead low, and that is something that everyone can do.

For one thing, I never tried to keep up with the Joneses. I knew from reading "The Millionaire Next Door" that self-made millionaires lead pretty modest lives, and people who flaunt extravagant lifestyles are financing those lifestyles at enormous opportunity cost. I kept my focus on becoming debt free and saving for early retirement.

I differentiated my needs from my wants, and carefully evaluated each expense that fell into the "wants" category. If it didn't match my priorities, then I opted to forgo it or found cheaper alternatives. That meant no luxuries like designer clothing, Starbucks, BMWs, concerts, etc., but I really didn't care about those things anyway. That doesn't mean I always deprived myself, I just made sure that any money spent on non-necessities was used to buy things that brought real, lasting happiness. I bargain shopped to find the best deals, and I made sure that I could pay off the credit card bills when they arrived. I also understood the eroding effect of taxes on my money: the combined impact of income tax and sales tax meant that only about half of every dollar I earned was available for me to use, so I spent them very sparingly.

2. Save. I knew my ability to work was finite, and I wanted to have the option of not having to work as soon as possible, so I treated my earnings like lottery winnings. I socked away the max into my 401(k) plan immediately upon starting my first job, and continued to do so as I changed jobs (and never cashed out). I figured I wouldn't miss 15% of my salary, and even if I did I could always scale it back. I survived just fine though, and because I kept my expenses low, I was able to save a significant portion of my take home pay and use it to pay off my first house early. I also started a ROTH IRA as soon as I was eligible, and maxed it out every year.

3. Invest.I learned about the amazing power of compounding, and the risk of inflation. Because I started early and had a long time horizon, I was able to invest aggressively. So far it has worked out pretty well for me.

There you have it, the three key steps to building wealth. These aren't new ideas, and it takes time and patience to see the results, but as someone who has done it I can confirm that they will work for you--unlike most get rich quick schemes. I think the most difficult part is the first step, where you have to make the paradigm shift from instant gratification to delayed gratification. Think of robbing your future self when you spend your money in the present, and perhaps that will help you resist the temptation to buy stuff you don't really need.

So if you want to do something to get started on the road to wealth, here is a simple action you can take now: log into your employer's 401(k) plan, and bump up your contribution amount. Remember, if you find that you can't live without the reduction in take home pay, you can always change it back, but I'm betting that you'll learn to live without it, and you'll be thanking yourself later.

Monday, November 26, 2007

Open enrollment reminder: sign up for disability insurance

Open enrollment is wrapping up at my workplace, and one thing that I find people often neglect to think about is disability insurance. Unless you work in a state that is covered by a mandatory disability insurance plan, I strongly urge you to consider signing up for Short Term Disability insurance--especially if you don't have a sufficient emergency fund established. Statistics show the odds of becoming disabled are higher than most people realize, and Social Security and Workers' Comp (which only covers on-the-job injuries) may not be adequate to replace all lost income, so I recommend opting for Long Term Disability insurance as well, if your employer offers it.

I found a more in-depth writeup about disability insurance here, and unfortunately I personally know of two coworkers who have had to leave their jobs due to serious off-the-job injuries. One of them was a promising young employee who suffered debilitating injuries as the result of a motorcycle accident, and to make matters worse, he hadn't bothered to enroll in LTD insurance coverage because he didn't think he needed it at his age. His parents ended up caring for him, but it was a significant burden that they had never planned for. Your ability to work is your biggest asset--especially when you're young, so protect it.

Click here for a CNN Money article with other open enrollment tips.

Saturday, November 24, 2007

Those Black Friday deals

Well, another Black Friday has come and gone. I'm sure there were some good deals for people who needed them, and were willing to fight the crowds. However, if you didn't need the items, then they probably weren't a good deal. For one thing, things like consumer electronics tend to get better and cheaper over time, so what seems like a good deal today probably won't seem that way a few months from now. Secondly, if you watched the Oprah show on hoarders, you know that keeping stuff has associated costs: making space for it, keeping track of it, and opportunity cost.

Although I enjoy a good deal as anyone else (and I do bargain shop when I need something), I value my time too much to spend it waiting in line battling the elements (it was interesting to drive around and see all the people who were willing to do that, however). Instead, I spent my Thanksgiving evening with family, followed up with an enjoyable experience at the movies.

Enjoy the rest of the holiday weekend, and as you browse through the ads, think about whether you own your stuff, or your stuff owns you.

Thursday, November 8, 2007

Making money in stocks: The only 6 things you need to know

I recently ran across an old issue of Family Money Magazine from 2000 that I saved. It featured an article (the title of this post) on investing in the stock market, and I think the advice is still pretty valid today.

Here are the six principles discussed in the article:

1. Systematic investing can improve your results dramatically. The author says that investing on a regular basis helps you to develop the discipline to stay in the market for the long term. She also mentions dollar cost averaging, which enables you to buy more shares when prices are low, and fewer shares when prices are high, but it's a strategy not without criticisms. I think simply getting started can often be the most challenging step, and systematic (or automatic) investing can lessen the pain because you are buying a little chunk of the market at a time, rather than taking a big bite at once. If you do decide to use the DCA approach and choose to invest in index funds, be aware of the impact that trading fees can have on your investments.

2. How you diversify is the most important determinant of your investment return. Yahoo! Finance featured an article before Halloween about personal finance horror stories, and one of the tales involved an investor who, over the course of four years, lost 98% of an $8 million portfolio that was invested in seven or eight stocks. Clearly diversification is important, and I would add that including international stocks in your investment portfolio is a good diversification strategy as well.

3. No money manager can beat the market over the long run. Neglecting the fact that even pros are unable to consistently predict how the market will move, the author points out that trading costs erode returns by about 0.81% a year, and management expenses further eats into returns. Large company funds have an average expense ratio of 1.23% a year, compared to 0.43% for the average index fund (according to Morningstar, 2000). If you think of money managers as middlemen who take their cut of the profit, and it's easy to understand why they have to outperform the market just to break even. I usually prefer ETFs or index funds to actively managed funds for this reason.

4. Over the years, growth stocks are your best bet. The author says you want to buy companies that are growing consistently and steadily, and that it's harder for investors to predict which value stocks (whose shares are cheap compared to the company's current earnings) are going to take off. I suppose from a risk perspective, it makes sense to buy companies that have proven track records than to gamble on newcomers, although I think owning value stocks can be part of a diversified portfolio.

5. A good stock is a bad investment if it's overpriced. Look at the P/E (price-to-earnings) ratio. If the stock is trading at a high P/E compared to historical values, you may want to wait, according to the author. I think there's more to determining the worth of a company or stock than simply looking at its P/E ratio, but it's certainly one factor to consider.

6. Trying to time the market is futile. Market timing is an investment strategy that never pays off in the long run, because the likelihood that you'll enter and exit at the right time is slim. It's better to buy and hold, which also prevents commissions and taxes from eroding your returns.

If you're a beginner investor, these six simple rules may help you to get started in the right direction.

Karen Cheney
Family Money Magazine
October 2000 issue

Wednesday, November 7, 2007

Renting vs. Buying: which is the better choice for you?

Mommy Millionaire Next Door has been shaking up the PF blog community with the unconventional wisdom that renting is better than buying a house, and revealed herself as someone who has managed to become a millionaire due (in part) to this fact. Given the current state of the post-bubble real estate market, this may seem like a no-brainer, but she runs the numbers to show that it could hold true at any time. You can read her well articulated posts on this topic here.

After reading the articles, the takeaway is that 1) renting is cheaper than buying when supply is greater demand, and 2) from an investment perspective, renting (and investing the difference) beats home ownership over the long haul. This shouldn't be mind blowing news, and prior to the recent housing boom people didn't view their homes as ATMs or stock-beating investment vehicles. People traditionally bought residences to live in, not to get rich with.

The idea of houses as get-rich-quick vehicles is a recent phenomenon. Real estate investors generated artificial demand driving up home prices, and ordinary people got caught up in the frenzy. However, as incomes failed to keep up with the rising home prices, the trend has come to a screeching halt and even started to reverse itself, leaving latecomers holding the bag. The problem has been compounded by buyers who stretched themselves or used creative financing to pay more than they could conventionally afford.

Except for the lucky few (myself included, see update below) who managed to cash out during the height of the housing rush, most people won't experience gains that approach anywhere near historical long term stock market returns. The primary purpose of housing is to provide shelter, not to make you rich. So if your top priority is maximizing return on investment, then renting and investing is probably your best bet. To help make this determination, you can run the Rent vs. Buy calculator as explained by Millionaire Mommy Next Door.

That said, there are valid reasons (financial and otherwise) that can make home ownership a rewarding experience once the housing market stabilizes. Here are some that I came up with:

  • Home as a forced savings vehicle. Let's face it, most Americans are terrible savers. They tend to spend every penny they make, and live paycheck to paycheck. Often times, a home is the only asset many people will ever have to show for all the years they spend working. For the financially savvy, renting can make sense if they have the discipline to invest the savings. For others, they will most likely spend the difference and wind up with nothing to show for it.
  • You're not at the whim of a landlord. Some people get really attached to their homes and the memories created there, and being forced to move can cause significant emotional tolls that outweigh the financial gains. Other people find that being able to customize and improve their living space provides a level of personal satisfaction that cannot be measured in dollars.
  • Homestead protection. All states afford some kind of homestead exemption to home owners, with Texas, Florida, Iowa, Kansas, and Oklahoma offering some of the broadest protection levels. Besides retirement plans, a person's house is the only asset that cannot be seized for the payment of court judgments (ever wonder why OJ Simpson lives in Florida?). With today's litigious society, this can be an important point to consider. While umbrella insurance can also provide cheap asset protection, it can be difficult to get a policy if you've had an accident, lawsuit, or other significant insurance claims in the past 5 years. Homestead protection is also a completely legal means of asset protection, as opposed to other questionable asset protection methods offered by some companies.
  • Pride of ownership. It's true, people tend to take better care of their own stuff than that of others. This is why many people won't buy used cars (I personally won't buy used rental cars), and some people dislike having renters as neighbors. You can usually distinguish the rental houses from the owner occupied homes in most neighborhoods, particularly those without HOAs. Of course some peoples are just slobs, but the likelihood is that people will take better care of their homes if they own them.
  • A house is a tangible asset. There is something rewarding about being able to physically see and touch an asset that you own. Perhaps I'm more of a visual person, but when my first house was paid off and I was buying stocks with my disposable income, it just didn't provide the same fuzzy feeling. When you own shares of a company, you cannot walk into the company headquarters and claim a piece as your own. While it may not seem like that big of a deal, my motivation to keep working and saving was reduced because I was physically disconnected from what I was working for.
  • A house is usually a safe investment. It might not beat stock market gains, but a house can be a smart purchase because it's likely to keep its value over time. You can't say that about most other consumer goods such as cars, boats, etc.
I think Mommy Millionaire Next Door has done a great service by dispelling the notion that home ownership is the path to wealth. Unfortunately, it's a lesson that has come too late for some. However, hopefully it will prevent others from making the same error.

Update: I calculated the rate of return on my first home using this CNN Money calculator. I purchased the house (and added some improvements) for $102.50 per sqft. in 1997, and sold it for $206 per sqft. in 2005. My result:

Return on investment:
Annualized return: 9.18%
Return for the entire period: 101.18%

Note: does not include Realtor fees (which I avoided by using FSBO), taxes, insurance(although the difference between homeowner and renter insurance is nominal in my case) and upkeep costs.