Weekly Blog - Financial Literacy

Hiring succeeding generations

Adults complaining about the following generation have been going on for thousands of years. Even Socrates had some comments. So this perspective seems to be normal human nature. When it comes to business, I’m old enough to remember several iterations of consulting companies offering “how differently you need to address the new generation being hired now.” The new generation entering the workforce is somehow “totally different,” and so their particularities need to be catered to for both hiring and retaining them.

For a hundred years there have been slight differences between current workers and new hires in regard to expectations and behaviors. Most of these differences can be summed up by saying: You need to be extra sensitive and lower your expectations.

The latest generational label is Millennials and human resource directors read articles every month about how this generation is so very different than prior few generations. This is nonsense. Recruiting and retaining top talent hasn’t changed, ever. What are some timeless tactics for successful recruiting?

  1. Outline paths to advancement
  2. Go over the desirable characteristics of the company and position
  3. Detail the vision, purpose, and values of the business
  4. Never permit a slacker or critic in the door (or once discovered, remove immediately)
  5. Fairly fulfill your promises to employees

While the exact benefits package will slowly shift over time, these 5 tactics will not. Each generation has a wide variety of talent and if you sort for the best then you have a chance of hiring the best. Each generation entering the workforce will trigger a new avalanche of consulting presentations. As long as you stick to the timeless 5 tactics, when the next “totally different generation” comes along, you won’t have to modify to your recruiting program.

Your credit rating isn’t just for loans

There are several ways that your credit rating impacts your finances, so it is very important to maintain the best score that you can. A new study showed that a whopping 76% of personal loan applicants are denied. Among the people who do get approved for loans, 35% of them reject the loan because the interest rate or loan amount is not what they want. Presumably this is because their credit rating wasn’t good enough for the best loan terms.

Getting a personal loan comes down to creditworthiness and the average American’s credit score is 687. This is well below the average 741 FICO score of those getting approved for personal loans.

Although states have differing regulations on what your credit score can be used for, it is commonly used in decision-making for:

  1. Loans and mortgages
  2. Insurance rates
  3. Apartment rental
  4. Employment screening
  5. Car lease rate
  6. Utility services

Some banks and credit card companies provide your credit score for free. The four ratings agencies (Esperion, TransUnion, Equifax, and Innovis) also offer your credit score for free, once a year. If you have average or poor credit (under 750), you may take steps to improve it from many online resources, books, and courses.

Before you become a whistleblower

In every profession, there is ample opportunity for complaint. Before you contact human resources or the press, though there are career considerations you need to assess. Likely, your action will kill your career at your place of employment, and possibly follow you anywhere that you go.

There could be a long general discussion on ethics and beliefs, and since each case is unique, I want to illustrate a starting point for your consideration. This is because I have friends, relatives, and colleagues that have ruined their careers for minor complaints or whistleblowing actions that they later regret. Most were warned about the backlash, and never expected any consequences to hit them personally, but they did. Plus, you’ve likely read or heard about numerous similar cases or very public ones that occur every day.

There is an old saying: “There is no such thing as a smart mob.” This also applies to employers, both public and private. Once you’ve been labeled as “a trouble maker” or “traitor/disloyal” then you become radioactive to your supervisor, manager, union, or anyone else with hiring authority. It is a permanent stigma that taints your reputation, no matter how justified the reason may have been. Perhaps you’re a hero for getting a policy changed for the better, but you will personally pay the price in lost career opportunity. The consequences for going to human resources, regulators, the press, or anyone with your complaint could be immediate dismissal (in spite of any state or federal rules to the contrary), or finding yourself demoted to the bottom rung of the career ladder for the remainder of your career. The more public your whistleblowing escalates, the higher your risk for smear campaigns, harassment to you and your family, blacklisted, death threats, and more by anyone else threatened by your actions.

If you are aware of imminent harm to befall others, that is a different level of issue than the person in the next cubical getting a slightly larger office that has less seniority than you. In this context, where on the spectrum of concern or consequences does your issue fall:

  • Is the public unknowingly putting their lives or health at risk?
  • Are customers being defrauded?
  • Is there systematic unfair treatment against a group?
  • Is this a personality issue between individuals?

Of course, if the public or people are being put at health or financial risk, action must be taken. But must it be taken by you? Could others already be aware of the situation and working on actions that you may not know about? Today, there are many ways to make an anonymous notification to regulators or law enforcement without anyone figuring out that you alerted them. Inside a large organization, it is possible in some scenarios to make anonymous accusations about issues. But be aware that without courtroom proof from someone coming forward to interrogate, human resources or regulators cannot do much or anything about it.

The big question you have to decide is: is this issue so important to you that it is worth ending or stunting my career? If it is, that is fine. But few people think through all of the career and financial consequences and are blindsided when their colleagues, supervisors, and others begin cutting you out of their lives. If there is an issue that is a big problem, but just for you personally and not worth potentially ending your career, it is time to get another job. If you’re working for a large company, perhaps you can move to a different department, division, or group. But for most, it means seeking employment with a different company or organization.

Profit from your own self-insurance program

When some people hear the term self-insurance, they think of millionaires with piles of cash so they don’t have to buy any insurance. In reality, you can start your own self-insurance program with only $500. Here’s how:

First, a little background on insurance with an example: If you had a car wreck that involved other people with physical injuries, it could be catastrophically expensive. Let’s say $100,000 in potential financial liability. Of this $100,000 of risk exposure, you take on the first $100 of that risk and pass the rest on to an insurance company with a policy that has a $100 deductible. The insurance company may not want all of that risk, and so they may re-insure part of the policy risk with another insurance company called a re-insurer. You are actually self-insured now – the first $100 risk is yours to fund.

But there is a financial opportunity. If you could save up $500 into a savings account dedicated to self-insurance, then you would be able to afford cheaper insurance with a higher $250 deductible. Your account will now allow you to pay for 2 potential insurance claims within a year, $250 X 2 = $500. Since your insurance premium will go down with a higher deductible at $250, you can then add that premium savings to your self-insurance account each year. As your self-insurance account grows, you can raise the deductibles on your insurance coverages (health, auto, homeowners, renters, business, disability, long-term care, etc.).

In this manner, you can lower your out-of-pocket expense for insurance and the savings is piling up in one of your savings accounts. The key concept for self-insurance is: you do not need to take on 100% of the total financial risk exposure, just a small part of the risk, the cheapest and most expensive part of the risk. As was mentioned, insurance companies only accept certain risks and pass on some of the risk to others through buying re-insurance. Start small with your self-insurance account, but keep adding your premium savings into your self-insurance account so that it will grow over time. As your self-insurance account keeps growing, you can raise your deductibles over time to save even more money. Your self-insurance account is actually working hard for you. Having this dedicated fund allows you to lower your insurance premiums, and this savings is your investment return on your account, it is providing you a decent return on your money besides earning a little interest.

Anecdotal story: last week, an old colleague told me of a neighbor whose house just burned down. It was a very old farmhouse and the family had lived in it for over 40 years. Some structural defects preventing them from getting homeowner’s insurance, so they have no funds to recover or rebuild. They also have no money to replace any of their furnishings or personal effects. Instead, if they had acted as their own self-insurer, say setting aside $1,000 per year, in a 2% savings account over the last 40 years, they’d have accumulated $61,000. When this family was turned down for homeowner’s insurance, if they had been financially literate, they would have funded their own self-insurance reserve and saved themselves.

Stock market still powering upward

The National Association of Active Investment Managers currently has their highest exposure to equities in the last dozen years. They are extremely optimistic. This is partially fueled by:

  1. U.S. manufacturing is running flat out and is limited by not being able to hire more workers.
  2. Small business optimism index is at an all-time record high.
  3. Washington’s cuts in regulations along with personal and corporate income tax.
  4. The U.S. Federal Reserve not reducing their balance sheet, however, this news isn’t widely known.

After the financial crisis of 2008, the U.S. Federal Reserve increased its balance sheet by $4.5 trillion. This added liquidity to the economy and boosted all kinds of asset prices. Well, the time has come to reduce their balance sheet which will put downward pressure on all kinds of assets: stocks, bonds, real estate, etc. In September, the Federal Reserve announced the details of reducing their balance sheet starting in October 2017. I wrote about this at the time and recommended lightening up on your stock and bond exposure over the next 6 months.

Well, the Federal Reserve has NOT followed through with their plan. They were supposed to have sold off $30 billion already and an additional $50 billion by the end of January. Instead of this $80 billion reduction in their balance sheet, they’ve only sold $5.9 billion. Four months into their reduction plan and they are already 93% behind schedule.

Since the Fed isn’t putting on the brakes, along with all of the business and consumer optimism, plus the huge tax cut that will play out over the next 6 months, it’s my opinion that the stock market uptrend is far more likely to continue this year. But of course, there are always a dozen exogenous potential events to spoil the party (such as: China holds $3.1 trillion in U.S. bonds and the Chinese Central Bank is recommending slowing or halting future purchases). So ride the current stock market trend a little longer.

How much did you borrow for holiday gifts this season?

According to a survey by MagnifyMoney.com, half of American shoppers borrowed between $1,000 and $5,000 on holiday gifts (and 64% of borrowers did NOT plan on going into debt for gifts). While 60% claimed that they plan to pay their debt off within 5 months, if a borrower paid the minimum on a credit card balance of $1,000, it would take 6 years to pay it off! To add further financial damage, half of these borrowers are paying an interest rate over 10%.

These are sad statistics and point to a lack of financial literacy. The holidays don’t’ randomly show up on your calendar! Yet, these borrowers failed to save money in anticipation of an expected expense. Since they did not save money, they now have to live further below their means to pay it off, plus afford the interest expense.

The better way to go about buying holiday gifts is to plan for them:

  1. Whatever you spent on gifts in 2017, divide that amount by 12 and set it aside each month so you don’t find yourself going into debt at the end of 2018.
  2. Buying items during the year when you can get a good price, rather than November and December when they are at a peak price.
  3. There is seasonality pricing for all kinds of items, and one tactic is to purchase items immediately after Christmas for the next year when items are on sale. Many people buy holiday cards, lights, and other known expenses right after the holidays when they are 50% off.

If you fail to do these, then you may be joining the borrowers paying unnecessary interest; hopefully taking less than 6 years to pay it all off.

A million dollar portfolio is not impossible

Today, a little over 4% of Americans are millionaires; meaning that they have invested assets over a million dollars. Fidelity and the Spectrum Group put together some information about the average millionaire. A few of their findings include:

  1. Median annual income was just $125,000
  2. The majority are married (76%)
  3. The majority have a Bachelor’s degree (83%), or a graduate degree

Their investment mix is:

  • 44% stocks
  • 15% fixed investments (like bonds)
  • 15% short-term investments (like CDs)
  • 26% other (real estate, gold, privately-held businesses)

Given their medium income is only twice the national average income, it is likely that two working professionals (each earning just $62,500) could be earning the same or more money than many millionaires. We can deduce that the average millionaire keeps their cost-of-living low so that they can pile up money and invest it. And that is how they eventually became millionaires.

Have debtors’ prisons returned?

 

A few hundred years ago, it was common practice in Europe to limit the freedom of debtors who were behind on their payments until they paid it back. Some debtors were housed in actual prisons plus forced to pay for their incarcerations and pay back their debt by working. Many countries have a specific debtors’ prison history, even the U.S., but most countries abandoned the practice 100-200 years ago.

However, lenders need some kind of mechanism to compel re-payment and governments give themselves the most leeway in collecting on past-due bills.

Expected actions by the state include:

  • Garnishing wages
  • Seizing money in bank accounts
  • Liens on cars, homes, or property

But there are more aggressive collection options that are available to government, depending on the state. For example, past due child support or federal student loans can result in in the state revoking your:

  1. Driver’s license
  2. Professional license (teaching, nursing, doctors, etc.)
  3. Camping or state parks license
  4. Fishing and hunting license
  5. Garnishing social security payments

Budget constraints have prompted some municipalities to charge high fees, fines, and surcharges for misdemeanors; more than doubling their cost. If a defendant is unable to pay the fine, they are jailed even though they were found innocent of the criminal offense. Defendants are also being billed for more of the costs of their own trials. According to an ACLU lawsuit, 25% of misdemeanor defendants in Benton County, Washington, serve jail time for unpaid fines. These fines can be hundreds to several thousands of dollars, accruing interest at a rate of 12% per year.

Even a debt to a business can cascade into an arrest. A woman driving in Illinois with her children was pulled over for a broken tail light and was arrested for an outstanding warrant. She had failed to appear in court for a $2,200 judgment against her from a finance company. Another person In New York did not receive a state tax hearing notice because it was mailed to an incorrect address. Luckily, she had enough money in her bank account, that the state seized, to cover the disputed amount (which was later reversed), or she could have ended up being arrested as well.

All of these debt-collection laws are additional reasons for financial literacy, financial stability, and proactively managing all aspects of your financial life.

Are you a reasonable seller?

When you choose to sell an item of value, there is a natural tendency to over value its worth to others.  If you reject reasonable offers and refuse to make a counter offer, then you’re likely to be left without any buyer. Without a buyer, you may watch your item fall in value from age, obsolescence, or market changes.

I have observed this phenomenon on countless occasions, even among professionals:

  • A friend rejected a $31,000 offer for her car, only to accept a $23,000 offer a year later. A needless loss of 25%
  • An acquaintance rejected a $120,000 offer for her home, only to accept a $79,000 offer 18 months later. A needless loss of 34%
  • A friend is a business analyst. One of his clients has been actively trying to sell his business for a long time. Three years ago, the owner rejected an offer for his business of $128 million, and has not received an offer since then. My analyst friend doesn’t think anyone would offer more than $45 million today because of increased competition. A needless loss of 65%
  • A relative priced his used car worth $3,000 at $6,000 so he didn’t get a single offer in 2 years. Then the engine-timing belt failed, breaking all of the engine valves. With a useless engine, the most he could recover for his car was $400 from the junkyard, minus the tow fee. A needless loss of 88%

I could list many more stories like these with different assets, but hope that you are beginning to see the pattern. An overly optimistic valuation leads to rejecting reasonable offers. Rejecting reasonable offers likely leads to giant financial losses and delays. The delay is the time period it takes for the seller to accept the reality of the marketplace. But this is unnecessary – if you do this work upfront. Instead of being offended by a perceived low offer, make a counter offer. I know one couple unwilling to accept reality for 17 years and going. Every few years they put their home on the market at a price 30-40% higher than what it is worth. After a year of no offers, they take it off the market. They have done this many, many times and just removed their “For Sale” sign after no interest for 10 months. Meanwhile, the homes around them have been selling like hot cakes.

Please do not create your own similar story of needless financial loss to this list. Price your item reasonably and always make a counter-offer; which includes considering how long it might be before you receive another offer.

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?

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