Monday, July 6, 2015

Pound Foolish

In her book, Pound Foolish, Helaine Olen fulfills her promise of her sub-title Exposing the Dark Side of the Personal Finance Industry. It’s important to approach all big financial decisions carefully, and Olen shows us what awaits the unwary.

Olen takes well-aimed shots at big names such as Jim Cramer and Robert Kiyosaki. She says Suze Orman “has gone from selling subpar pancakes to peddling financial platitudes.” But the book isn’t just a set of amusing quotes. Olen digs into how these people make money and how their words are at odds with their actions.

The author covers the many problems with the financial advice industry. One of the more profitable financial products for advisors to sell is the variable annuity. On the subject of mandating a fiduciary standard, one former branch chief for the SEC said “if you need to act in the customers’ best interest, you can’t sell this crap.”

The most interesting part of the book in my estimation was the detailed reporting on the financial seminar industry. In some cases free meals are used for “scaring and pressuring the mostly elderly audience with half-truths and distortions” to “pressure them into high-commission products.” Other seminars appeal to financial desperation and greed to sell a series of progressively more expensive real estate “courses.”

There are professionally run organizations that offer slickly packaged services to help financial salespeople increase sales through seminars. These services include a designation such as being one of “America’s Top Planners.” In one case, a financial planner got such a designation for his dachshund.

Other seminars are devoted to “teaching” how to trade stocks, options, and currencies for profit. Olen paints a picture of the financially desperate and gullible attending such seminars and paying for more advanced courses.

One criticism I found puzzling was Olen’s portrayal of the book, The Millionaire Next Door, as a how-to guide for getting rich. I saw this book as a search for the rich to try to sell them goods and services. In any case, there are many other examples of books saying we should emulate rich people. This is generally a bad idea because so many people get rich by taking big chances and getting lucky. What we don’t see is the much larger number of people who took big chances and got wiped out.

Olen casts doubt on the conventional wisdom of owning stocks because “During the thirty-year period between 1981 and 2011, in the United States bonds beat stocks by almost a full percentage point.” This is actually a pretty slim margin considering that interest rates were in free fall during that time. The future is always cloudy, but a longer view of history tells us that stocks are expected to beat bonds most of the time.

I have to agree with Olen when it comes to teaching financial literacy: “when it comes to money, the vast majority of us are nuts. Bonkers. Batshit crazy. We are natural born fuckups. We engage in so many self-defeating behaviors it’s impossible to list them all.” “No amount of financial literacy will ever do as much good as straightforward government regulation designed to protect consumers.”

Many efforts to teach financial literacy have been infiltrated by financial organizations that have an interest in having people remain financially illiterate. For many people, financial problems come not from poor spending habits but from low pay and difficulty getting enough paid work hours. But I think there is still value in teaching financial concepts to the masses as long as we pursue regulations at the same time.

Olen says that “the latte is a lie,” meaning that our financial problems don’t come from small indulgences. But this is too simple. There are many factors that go into how people get into financial trouble and small frequent indulgences are one of them. Others are houses and cars. Root causes include poorly-regulated predatory lending by banks, ignorant consumers, and low pay.

I don’t see the point in denying that many people spend foolishly because it is obviously true. What we can say is that the better path to fixing the problem is through regulations rather than trying to change the habits of the masses.

Friday, July 3, 2015

Short Takes: Fee for Service, 100% Mortgage Financing, and more

Here are my posts for the past two weeks:

Guilt-Free Spending Through Planning

I Don’t Want to Go into Debt for This

Here are some short takes and some weekend reading:

Jason Zweig explains why you’re paying too much in financial advisor fees. He says we should be paying fees for service rather than paying a percentage of our assets. Another article from Zweig clearly explains why you should be skeptical of investment strategies that worked in the past.

Canadian Mortgage Trends report that one form of 100% mortgage financing will no longer be available after the end of June, but that combining an unsecured line of credit with a mortgage to get 100% financing will still be possible.

Gail Vaz-Oxlade does a great job of answering many questions from her readers, but I found the last question and answer in this post particularly interesting. It illustrates how banks have more power than some people realize and that some forms of protest are just self-destructive.

John Robertson at Blessed by the Potato reviews the book Wealthing Like Rabbits. He was pleasantly surprised, but did find some problems.

Forbes told Frugal Trader’s story of his Million Dollar Journey.

Boomer and Echo explain how customer loyalty programs have evolved to collect ever more information about us.

Big Cajun Man offers some signs that your debt load is getting out of control.

My Own Advisor explains why he still drives his 15-year old car. Until recently, I was saying the same thing. But then a cluster of needed expensive repairs forced me to get another car.

Thursday, June 25, 2015

“I Don’t Want to Go into Debt for This”

Decades ago, it was common for people used to say “I can’t afford it” when discussions came to big things like houses or cars and even for small things like going out to dinner. However, as Mark at My Own Advisor observed, we don’t often say we can’t afford things any more. I think the culprit is easy access to debt.

When people used to say they couldn’t afford things, what they meant was that they didn’t have enough cash in their wallets or bank accounts right now. However, today’s salespeople are well-trained on how to get past this objection by steering you towards debt.

Try telling a car salesperson you can’t afford a certain car. He’ll scramble to work out lease details to get the payments down to an amount you can afford. You’ll end up with a debt and a stream of payments you don’t want. Even a dinner out may go on your credit card and become debt if you can’t pay it off at the end of the month.

The next time someone is trying get you to spend money you don’t want to spend, instead of saying “I can’t afford it,” try something like “I don’t want to go into debt for this” or “I don’t want to go any further into debt.”

Monday, June 22, 2015

Guilt-Free Spending Through Planning

Most people’s personal finances don’t measure up to the typical advice from experts. This is particularly true for young people who haven’t had a chance to build up retirement savings or an emergency fund. Knowing that your finances need improvement can make you feel guilty and worried every time you spend some money. The remedy for this is some planning and setting yourself on the right path.

I think of my savings as three categories: long-term savings, medium-term savings, and an emergency fund. Each serves a different purpose in keeping your finances on track.

Long-Term Savings

Most experts call this “retirement savings,” but I prefer “long-term savings” for a couple of reasons. For one, it can be difficult to motivate people to save for their much older selves. Another reason is that you may end up using the money for some other purpose. You shouldn’t use it for consumer purchases like cars, but you may use some of it to fund a career change or a move to another country. Building a pot of money gives you choices during your working years and funds your lifestyle after you retire.

Each person should decide how much to save for the long term. My default recommendation for young people is 20% of take-home pay. But individual circumstances can make higher or lower percentages make sense. It’s reasonable to count company-sponsored pension plans toward this percentage.

Medium-Term Savings

Medium-term savings are for covering any large purchase you can anticipate that is outside your usual monthly spending. Suppose you want $15,000 to buy a car in 5 years and you get paid every 2 weeks. You have 130 pays to save up and should add $115 per pay to your medium-term savings. If you want to take a $4000 vacation in two years, that’s another $77 per pay to save. If you’re planning to get married in 3 years and have to pay $10,000 of it yourself, you need to save another $128 per pay.

It can be scary to add up all the things you hope to spend money on: what if it’s all too much? Go ahead and add it all up anyway. Maybe you’ll get lucky and the total savings per pay will be manageable. If not, you’ll have to scale some plans back. Whatever happens, it’s better to figure it all out now as best you can instead of never being sure whether you can have the things you want in the future.

Emergency Savings

No financial plan can anticipate everything. That’s where an emergency fund covers you. Maybe you’ll lose your job and it will take a while to find a new one. Maybe the cat will need an operation. Going further into debt each time life knocks you down is a formula for financial disaster.

Experts usually recommend that your emergency fund be enough to cover essential expenses for 3 to 6 months. Figure out how much you could cut back if you were out of work and add up the essential expenses such as rent, food, and clothing. This will give you a target amount to save.

The next thing to decide is how much you’ll save from each pay toward your emergency fund. Even as little as $50 every two weeks will give you $10,000 in less than 8 years. Once the emergency fund is full, you can add that $50 to your day-to-day spending. But, if you’re ever forced to dip into your emergency fund, the $50 per pay savings has to start up again.

High-Interest Debt

When you don’t have enough long-term and medium-term savings or your emergency fund isn’t full, you need to cut back a little from day-to-day spending to carve out some of your pay for saving. However, having high-interest debt such as a credit card balance is a more serious situation. You may have to put off other saving to focus on killing off the expensive debt as quickly as possible.

Some lifestyle changes to reduce spending should be automatic if you owe on credit cards. Eliminate non-essentials like eating out and other indulgences. This can be difficult, but the pain should only be for a short time. Once the credit cards are paid off, the large payments you made can be split between various categories of saving and increased day-to-day spending.

Automate the Savings

A key to making a plan like this work is to automate the saving. When your pay lands in your bank account, the amounts you’ve decided should go into savings should be set up to go automatically. It’s far too easy to skip the saving one pay or stop altogether.

Benefits of this Plan

Once you’ve made a plan and you know that while your finances aren’t perfect right now, they are on the right track. The direct benefit of having a plan and following through is that you’ll have solid personal finances. But there is an indirect benefit. After your automated saving amount and your fixed expenses come off your pay, whatever is left over you can spend in any way you see fit, guilt-free.

Friday, June 19, 2015

Short Takes: Mutual Fund Investor Confusion, Long-Term Care Insurance, and more

Here are my posts for the past two weeks:

“Household Savings Rate” is Highly Misleading

Test Your Debt Savvy

Tax-Free Contributions to a Group RRSP are not a Special Tax Break

Crappy Retirement

Here are some short takes and some weekend reading:

Kerry Taylor explains mutual fund fees for investors who think they don’t pay any fees. The challenges she describes in helping people understand the fees they pay is something I’ve encountered myself.

Can I Retire Yet? has some clear thinking on long-term care insurance. He analyzes the important parts of policies and shows how he made his decision of whether to buy or not.

Preet Banerjee explains why you should calculate your net worth annually in his latest Drawing Conclusions video.

Canadian Couch Potato explains the recent changes to Vanguard’s All-World ex Canada (VXC) ETF to include mid and small cap stocks.

The Blunt Bean Counter takes on the questions of whether rich people will leave Canada or cut back on how hard they work if income tax rates go over the psychological 50% barrier. His 25 years of working with high net worth people gives him useful insights on these questions.

Gail Vaz-Oxlade explains the top 5 reasons why people fail at budgeting.

Boomer and Echo say that having multiple income streams is better than having an emergency fund. This is true, but until you have those multiple income streams in place, you should have an emergency fund.

Big Cajun Man has a very different take on how to indulge yourself by splurging.

My Own Advisor offers advice to millennials on saving and investing.