Weekly Blog - Financial Literacy

Are you winning or losing the Debt Game?

The banking industry would like you to borrow money from them, as much as possible and in as many ways as possible, and then make payments to them for as long as you live. This is how they can maximize earning interest from you. It is your role in this Debt Game to minimize the number and amount of loans, and making the interest rate charge as low as possible.

The banking industry wants you to believe:

  • It is fine to borrow money to purchase a car.
  • It is Ok to borrow a colossal amount for a bachelor’s degree.
  • It is normal not to pay your credit cards off each month.
  • Everybody borrows for boats, jewelry, and vacations.

The only way for you to win the Debt Game is:

  • Never borrow money for anything but an affordable home.
  • Maintain the highest credit rating to qualify for the lowest interest rates.
  • The only favorable scenario to borrow money is when purchasing a business or asset that earns enough money to make all of the debt payments for you.

The money that you have to pay in interest is money that you have earned but can never: spend, save, invest, or donate. It is your financial assignment to perform better in the Debt Game so that you possess more of your money at the end of each month, and not your lender. So how are your relatives and friends doing in the Debt Game so far? (A family friend with an average income leased a brand new car right after I showed her precisely how much money is wasted by doing that.) How are you doing in the Debt Game so far? What can you start doing this month to improve your performance in the Debt Game?

Government error ripples throughout your finances

Each year, the U.S. Social Security Administration (SSA) erroneously declares 5,000 Americans deceased, who are actually alive and well. The result quickly cascades across your finances, creating a paperwork mess that needs to be reversed. (The rate used to be 12,000 a year but system checks have reduced it to 5,000 a year).

So what happens when the government declares you dead? They automatically notify:

  • Credit Bureaus
  • Banks
  • Credit Card Companies
  • Health Insurance Providers
  • Life Insurance Providers
  • Medical Doctors
  • Social Security Retirement and Disability
  • Medicare
  • Medicaid

Your first sign of trouble may be that your credit cards and ATM card no longer work. If SSA has erroneously classified you as deceased, you’ll need to go to an SSA office in person. You’ll need to bring your: birth certificate, passport, driver’s license, or other IDs to prove who you are. You need a written letter from SSA stating that you are NOT deceased. Make many copies of the letter because you’ll need to present it to all of the institutions listed above, or any other that is denying that you are alive. Going forward, you will likely need this letter for any new institutions that you may want to deal with, because they may also have the erroneous notice that you are deceased. So you need to be able to prove that you are not some scammer or identity thief.

What is your book-reading quota?

The average worker reads less than 1 book a year while top business CEOs read 60 books a year. These CEOs make 319 times more money than entry-level workers. Is there any correlation?

33% of high school graduates never read another book in their lifetime. Meanwhile, it is common for multi-millionaires to read dozens books on self-improvement topics, such as:

  • Career development and advancement
  • Business development
  • Societal trends
  • Biographies of remarkable people
  • Leadership and psychology
  • Learning and memory
  • History
  • “How to” titles
  • Future forecasts

Success is dependent on increasing your skills and knowledge. Is your current book reading closer to the average worker or the top CEO? Do you have a daily habit of learning? Or are you leaving improvement to your competitors and colleagues that may be leaving you behind?

What’s the big deal about saving money?

Everyone says money doesn’t make you happy – so why do financial planners push it so much? That is easy to answer: sooner or later, something will occur for which you’ll have a critical need for money. And if you haven’t saved for this expense, there will likely be some unpleasant or expensive consequences. Let’s go through a few common ones:

  • A relationship can be challenging, being broke can break it.
  • Losing your job can be tough, being broke makes it a crisis.
  • Your car breaking down is inconvenient, being broke makes you immobile.
  • Needing some dental work can be painful, being broke makes you toothless.
  • An illness is a bad break, being broke prolongs it or allows it to worsen.
  • Having children can be expensive, being broke reduces their opportunity.
  • Sometimes family members need financial assistance, being broke means you cannot help.
  • Losing a loved-one is a tragedy, being broke can make it more difficult.
  • Having a talent or aptitude is a blessing, being broke may prevent you from expressing it.
  • Most people want to retire at some point, being broke makes that nearly impossible.
  • Getting accepted to a great university is fantastic, being broke may mean you’ll have to turn them down for a cheaper school.
  • Having a business idea is great, being broke may mean watching others profit from it.
  • Needing money is stressful, being broke means you may have to borrow it and become poorer.
  • Requiring a nursing home is disappointing, being broke means your only option is the worst state-run institutions.

Whatever your situation, having savings set aside is the best source of funds for:

  • Necessary maintenance
  • Repairs
  • Opportunity
  • Financial support
  • Or for any unexpected event that requires money

Whenever something adverse occurs, being broke makes it worse. Having extra money may not make you any happier, but having some savings can solve your financial problems.

Do you have any financial red alarms going off?

In personal finance, there are numerous ways to fall behind, get into trouble, make mistakes, or incur expenses that you could not avoid. You can’t do anything about the past, but you can start putting out your current financial fires before larger troubles arise on the horizon.

What are a few red alarms that your finances are headed toward serious trouble?

  • A credit card is maxed out
  • Fail to pay-off your credit card balance each month
  • Have not opened a Roth IRA, even though you are working
  • There are people financially relying up you, but you have no life insurance
  • Routinely use payday or car-title lenders
  • Getting divorced without a financial expert to split pensions and assets
  • Have borrowed money from family and friends
  • Student loans have gone into forbearance
  • Your bad credit rating requires that someone else co-signs for your loan
  • You have a variable interest-rate mortgage
  • Prematurely taking money from retirement accounts
  • Routinely gamble or buy lottery tickets
  • Have clothing, shoes, or accessories that you never wear
  • Overspend at restaurants and bars
  • Do not monitor risky investments, doing nothing as they collapse in value
  • Have money secrets that you keep from your spouse
  • When you refinance your mortgage, you take out extra money
  • Borrowing money from your 401(k) account
  • Fail to set aside money for income taxes
  • Have no estate planning – Will, Power of Attorney, or trusts

Some of these arise from not knowing what you can afford or living above your means, and others are from a lack of financial literacy. However, if you have run into anything similar to what is on this list, please use it as a trigger that you need to actively make some immediate changes in your life to create financially stability.

High and low cost-of-living states

The state where you reside has an incredible impact on your lifetime expenses. The total tax burden on residents varies greatly between the states. But that is only a part of the cost-of-living equation. Housing, food, and even the price of gasoline, has prompted many people to move to a cheaper location. Of course, most people are tethered to their extended family or current job, but you may want to make the evaluation anyway. The cost of living between different states is so large it can make the difference between retiring early and never being able to retire.

GoBankingRates performs an annual study for retirees that are over age 65 and indexed the states for cost of living. In general, the Southeast, the band from Texas to Georgia is cheaper to live than the Northeast or Farwest states. Here are the top 5 most expensive states in which to live; along with the average annual expense:

  1. Hawaii $83,887
  2. California $60,887
  3. Alaska $58,733
  4. New York $58,264
  5. Massachusetts $57,795

The cheapest 5 states for retirees are:

  1. Mississippi $37,984
  2. Arkansas $39,260
  3. Oklahoma $39,820
  4. Michigan $39,974
  5. Tennessee $40,084

Although some cities (like New York City and San Francisco) have salary inflation to help compensate for their high cost of living, most areas do not. As a result, the money available for saving and investing is consumed by high rent and food costs. It is a lifestyle decision for you to make, but be aware that if you have financial goals, they will be delayed and impaired in high-cost of living areas.

Central bankers want cashless banking – what could possibly go wrong?

When a hurricane hit Puerto Rico a few weeks ago, the north west side of the island didn’t have electricity for many weeks. How can you buy anything in a cashless world without electricity?

  • Banks are closed
  • ATMs are down
  • Credit cards couldn’t be used
  • No internet access
  • No cellphone service
  • No access to cryptocurrencies

There were only two ways to purchase anything: cash or barter.

The only people with cash had it prior to the hurricane.

In barter transactions, people were only getting 5-10 cents on the dollar; meaning you will lose 90-95% of the fair value of your items that you sell. Only gold and silver at coin shops had the smallest discount from fair market value.

When backup generators eventually powered the ATM machines, banks limited withdrawals to just $50/day per person.

When the electricity went down, items that suddenly became very valuable:

  • Candles
  • Gasoline and Gas containers
  • Water (for example, 30 avocados for 1 gallon of water)
  • Cigarettes (2 packs of cigarettes for labor/help)
  • Canned food
  • Chainsaws

Another note for emergency preparation:

  1. Unarmed elderly were the first targets of theft and looting.
  2. The second targets for theft were gun-free zones like schools and daycare centers.
  3. Portable generators were frequently stolen – they must be chained or guarded.
  4. Most of the casualties from the hurricane were at the hospitals due to no electricity: people needing emergency care (no dialysis, no insulin, no electrical life support machines, anything requiring refrigeration or freezing, etc.)

So when disasters strike and the electricity goes out, if you’re cashless then you are broke!

Please use this article to prepare for what you may need to survive for a month if the electricity goes out.

Are you improving your money management?

When it comes to personal finance, most people are on the two extremes; either a Money Fumbler or a Money Manager. Which one are you currently closer to?

Money Managers are people that map out their cash flows for the entire year. Money Fumblers are people that have no idea how to map out their financial life and so they take unexpected expenses on the chin. As a general rule, Money Fumblers turn anything financially favorable into a financial calamity and Money Managers use them to permanently increase their financial stability.

You must first become an adequate Money Manager before you can take advantage of:

  • Borrowing money of any kind for any reason
  • Maximize credit card points
  • Building a higher credit score to access lower interest rates
  • Juggling favorable-leverage transactions (cost of money lower than return on money)
  • Starting a business of any kind
  • No-money-down real estate
  • Even something as easy as earning a higher salary

If you fail to become an adequate money manager, then something as simple as earning more money or borrowing a little money can setup a financial catastrophe. This is because having access to more money means your bad financial habits will be exaggerated as well. I have watched Money Fumblers implode their net worth when they get a big promotion or inheritance. Some people ask me for advice on advanced financial topics even though they are uninterested in learning the financial basics. For example, a retired acquaintance lost nearly $90,000 this summer because he refused to manage the cash flow of a relatively simple real estate transaction. In another example, a neighbor’s son ruined his credit rating because he tried to pay off his car loan early but: he didn’t understand how to do it; he failed to follow-up; and he refused to ask for help. If you’re unable to pay off your car loan, how in the world could you be trusted to handle a more complex transaction?

There are financial arrangements that only benefit people who know how to manage their money. The Money Fumblers can’t help but turn victory into financial defeat. They need to work on understanding and improving their personal finances. The answer to most any financial question can likely be learned for free at your own bank or by doing a little homework of your own. The payoff for financial literacy is worthwhile: peace of mind, increasing financial stability, and increasing net worth.

More state pensions heading off the financial cliff

Accounting standards for more realistic assessments of state government pension funding have revealed that more states are in financial trouble. For example, all of the Minnesota State Pensions (including municipalities) were 80% funded last year; which is terrible, but could be turned around. However, using the new accounting standards for this year, they are just 35% funded and on the path to insolvency in just 35 years. Three years ago, David Bergstrom, the executive director of the Minnesota State Retirement System dismissed any concerns as “alarmist.” (Similar to Banking Committee Chairman, Senator Barney Frank, declaring Fannie Mae and Freddie Mac as financially sound just 4 years before they became insolvent and plunged the world into the 2008 financial crisis).

As bad as the funding is for Minnesota’s pensions, there are several states with a lower funding rate:

  • 9% New Jersey
  • 4% Kentucky
  • 6% Illinois
  • 1% Connecticut
  • 0% Colorado

The main factors contributing to pension shortfalls are:

  1. States had been wildly overestimating their investment returns in the artificially-low interest rate environment that we’ve had for the last decade.
  2. States with budget pressure have been underfunding the pensions for years.
  3. Life expectancies have been increasing.
  4. Continually adding new union members with pensions instead of affordable 403(b) retirement plans

The bad news is that, at some point, one of two things must occur: either state retirees won’t get paid their promised pensions, or taxes will have to skyrocket in a over a dozen states. Well, unless there are recessions that further impair the state budgets and pension investments that accelerate the time horizon to pension insolvency. Ok, how many states have a fully funded state pension system? Just one: Wisconsin.

Like all financial matters, you’re really on your own to create your own retirement fund.

The U.S. Government blows past $20 trillion in debt

There is a great website showing all kinds of economic statistics at usdebtclock.org. The website also shows the current level of public debts including U.S. federal debt that just passed the $20 trillion threshold.

What does that mean, if anything?

From the website, that means that that the U.S. debt per citizen is an unaffordable $62,422; or an ultra-unaffordable $168,671 per taxpayer (check back in a month to see how fast these numbers are increasing!).

A question someone might ask is: Is there any plan to dramatically reduce government spending?

Unfortunately, Trump’s presidency has revealed that the swamp in Washington DC really is in charge and they have zero interest in change, let alone a reduction in government spending or staffing.

Well, if there is no reduction in spending, what are we facing?

There are several reference points and a common one is the Debt-GDP ratio. This is a measurement of the size of the economy to the debt that the government needs to support. Today, the debt-to-GDP ratio is 105%. So the debt owed by the government is 5% larger than the U.S. economy. This is not sustainable. There are several studies on debt-to-GDP going back hundreds of years on dozens of countries. Depending on the study, anytime the debt-to-GDP goes over 70-90%, then there is a 100% certainty that the government WILL default on its debt obligations. So the U.S. is well past the point of no-return for defaulting on its debt. There is a wide time frame for this default, so it could be 10 years or 40 years, depending on the rate of spending growth and interest rates. As the debt default nears, it will be painful for people – as witnessed recently in Greece, Venezuela, Argentina, Puerto Rico, Brazil, and other countries that could not pay their debt. (Since 1975, 17 currencies have gone to zero and were replaced. Since the founding of the latest U.S. Federal Reserve in 1913, the U.S. dollar has lost 98.8% of its value already.)

Is there any financial opportunity?

Whichever temporary band-aid the government uses to delay debt default, it will become obvious as it must involve creating inflation by some kind of money printing. Printing more money weakens the U.S. dollar and strengthens other currencies, including the two financial metals, gold and silver.

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