Weekly Blog | Financial Literacy | Timeless concepts to turn financial chaos into clarity

How decisive is your decision-making?

Want to predict whether someone’s life will be more toward a path of achievements or mis-steps? A large portion of that can be determined by analyzing how they make decisions. People only have a few ways to make decisions and we use these to make every decision in our life. Some decision-making tactics that we use are effective, and others, much less so. Here is a little self-evaluation questionnaire for your decision-making:

a) Do you need more time than others to:

  • Select from the menu at a restaurant?
  • Select furniture or a car to purchase?
  • Choose a name for a pet?
  • Decide where to go for a vacation?

b) In general, do you quickly sour on:

  • Jobs, career tracks, friends, relationships, living situations – so you soon flit to the next one?

c) Do you find yourself with more regrets than the average person?

  • Making poor choices
  • Leaving situations far too soon or far too late

d) Do you struggle to stay-the-course with your long-term goals?

In my opinion, people experiencing these traits are living the side-effects of poor decision-making strategies. Our decision-making is automatic and mostly unconscious, but effects how we move through life. (If you’re interested in improving your decision-making strategies, I suggest finding an expert in Neuro-Linguistic Programming (NLP) specializing in this area. Changing how you go about making decisions requires dissecting how you make them now, and then determining if there are more optimal improvements that you could incorporate and turn into a habit. The biggest change for most people is incorporating long-term consequences up front – before any choice is made).

Some very successful people that I know have decision-making unlike the traits from the list above. For example, they:

  • Perform far more research than others before making important decisions
  • Always think about the very long term
  • Never look back, let alone ruminate about past what-ifs
  • Do NOT want advice from others (unless he or she is a proven expert)
  • Make decisions very quickly and then act immediately, moving forward

Stable investments before speculative investments

A colleague’s son is four years out of college and now has $5,300 in a new stock brokerage account. Like many kids under age 30, he has followed the herd into every problematic financial fad, such as: buying $100 in bitcoin at its peak only to watch it fall by 80%; lost $425 on a bad-credit peer-to-peer loan; opened an $250 Robinhood brokerage account (with hidden fees) to buy a weed stock after it had already tripled; and now he wants to put all of his money into Tesla shares.

Anytime a casual and uninformed investor thinks something is a good idea, it is highly likely to be a very bad idea that destroys your hard-earned money instead.  

A prudent portfolio should have a mix of investments, starting at the base with the most stable investments. These could be FDIC insured savings accounts, bank CDs, or U.S. Treasury Bills. These are locations that only go up in value with interest payments. Your portfolio will not be stable if it can be wiped out with an average-sized stock market downturn, some financial volatility, or a single investment going to zero. Only after you have this durable financial base do you consider adding a next layer that may have some small risk, such as a short-term bond with a high credit rating. Layer by layer, your portfolio is a pyramid with much of your money in stable or very-low risk assets. An imprudent portfolio is jumping straight into a single stock (let alone Tesla, a company that has never earned a penny from business operations and relies heavily upon fickle government subsidies).

Until you have saved up a meaningful amount of money, say $50,000, you do not have enough capital to make a reckless gamble with a small amount of, say $500. A recent finance Phd. concept in investing is called “Core and Satellite.” This refers to having a core portfolio of a few stock and bond index funds and maybe a couple tiny satellites which are individual speculations. The bulk of your money is prudently invested while only a small percentage is allocated to higher risk opportunities. However, if your speculative plays are generally unprofitable, then it is best to just run with a core portfolio.

There is a favorite story told by a commodity futures broker. A new potential client asked a broker if trading futures was appropriate for him. The broker responded, “Well, take the garbage disposal test. Withdraw $5,000 out of your bank account in cash. Think about how hard you worked for that money, what you missed out on to save that money, and finally how long it took you to save up that $5,000. Now, bring that cash to your kitchen garbage disposal, stuff the money in and shred it as it goes down the drain. If you and your wife are totally Ok and at ease with that, then yes, you have the capital and temperament for the volatility and risk of losing all of your money by trading a small account of commodity futures.” The same could be said of cryptocurrencies, penny stocks, option trading, and more.

If this young man had put his money into a simple savings account, he would probably have over twice the amount of money that he has right now. So before you run out and put all your money into the latest stock fad at a price peak, establish a base of stable income producing investments and then a simple core investment portfolio.

Government budget trick: pension bombs

Over 40 states have underfunded pensions for government employees. Instead of setting up reasonable obligations or switching to employee contribution funds like most companies, politicians look for the easy solution first and so they’ve started to fall for financial gimmicks. For readers that do not watch government finances, whenever Wall Street “comes to the rescue” to a government entity, it always ends in a larger and faster bankruptcy with taxpayers owing a lot more money. The latest Wall Street “solution” to underfunded government pensions is called Pension Bonds, and is sold as a “free fix without raising taxes.”

The pension bond method consists of raising money with bonds, say $1-to-10 billion, and placing that money into the pension to reduce its underfunded level. Then, the pension fund will “magically” earn so much more than any investment fund ever has. This new pension money will routinely earn unrealistic profits to not only make the bond payments, but make additional payments to reduce the underfunded amount of the pension. “Everybody wins” is the argument being pitched by the people selling this high-risk and unlikely arbitrage.

Pension bond programs are so likely to fail that the Government Finance Officers Association issued an advisory report warning against pension obligation bonds with 5 grave reasons; https://www.gfoa.org/pension-obligation-bonds But you cannot stop politicians from employing reckless ideas that leave everyone poorer. Local governments (like Houston and Muskegon) have already issued pension bonds. A couple states have jumped in while several are attempting to pass legislation to do it, such as Alaska, Illinois, California, Michigan, and Kansas.

What happens when the unrealistic investment returns do not materialize? Hence the term ‘pension bombs.’ The pension defaults on the bonds and the pension’s financial position becomes worse than if they hadn’t rolled the dice on this program. (This is what exacerbated Detroit’s financial position when a complicated Wall Street debt product went against them in 2009; it became a huge additional debt that helped force the city into bankruptcy in 2014). Per usual, the taxpayers end up with higher taxes to fund the mistakes of the politicians and their Wall Street buddies with their latest high-risk gimmick.

Rent control side-effects

Economics is simply the supply and demand for goods and services, along with the price discovery where people agree to transact. Anything that artificially caps or supports price above or below the free-market amount makes everyone worse off. Normally, it is the government creating false prices that backfire with unintended consequences (as with every socialist effort). In spite of rent control disasters and not a single economist in favor of them, “free” and “cheap” never goes out of style with politicians to buy votes. The latest price control becoming popular again is rent control. Although rent control for limited buildings has been around forever to create welfare housing, two states just passed state-wide rent control programs: Oregon and Illinois.

Before I get to those two states, let me mention Detroit. Detroit began intervening in the rental market 6 months ago and it is having a big impact. The city wanted to address the small number of horrible slumlords renting junkers with a new government bureaucracy. Officials decided that rentals must have a certification, and part of the application, is that the property must have passed a physical inspection with a long list of requirements. Now, Detroit is very poor where 32% of households live below the poverty line. Where people are poor, rents are low, and where there are low rents – there is very little money for a high level of maintenance and repairs. So far, Detroit rentals have a 97% failure rate to meet the inspection requirements. To sustain all of the required elements is far too expensive to be supported by the average affordable rent to Detroit tenants. So landlords can either operate without a certification or they abandon their rental properties. Both of these are occurring in a big way: only a tiny percentage are applying for certification, and property managers across the city say owners are abandoning huge swaths of rentals; creating more blight for Detroit. I have also spoken with landlords selling their Detroit properties to buy rentals outside the city limits. Instead of improving a tiny number of rentals, Detroit is actively destroying their rental stock. Plus, the added bonus of raising rents for the niche neighborhoods that can support a higher rates.

This same phenomenon occurs every time government intervenes in a heavy-handed manner into the rental market:

  1. The number of available rentals plummets (converted to other uses, new development slows).
  2. Quality of rentals plummets as profits are reduced due to lower revenue.
  3. Rents increase far more than normal before the caps are introduced, and even after the caps over time because landlords will be eager to maximize any rent increase windows.
  4. Rental homes fall in relative value from the drop in potential profit, reducing income to the county from property taxes.
  5. Trailer park rent rates near these cities has been going up by 15% for the last two years.
  6. The outcome of the government intervention is usually the opposite of the policy intent of the politicians.

This year, rent control is being tried at the state level in Oregon and Illinois (using 6 regional rent control boards across the state). Oregon is suffering from self-inflicted governance. When the government forbids housing development to keep up with the influx of people (exactly like Seattle), then rent and housing prices soar. Now to “solve” the housing problem that the government created, they need more government interference in the form of rent control. In Oregon’s case, they are limiting rent increases to 7% per year. Sounds reasonable, but this rule basically applies solely to Portland where rent and home prices have been increasing far more than that rate from the growing population. I predict that all of Oregon rents will be increasing. Why? A landlord may keep rent low for many reasons, and due to new costs or regulations, need to raise them quite a bit in one year. But this is no longer allowed with rent control. Since landlords are now forbidden from “catching up on rent increases,” they are highly likely to make certain they get an increase each year to stay ahead of possible cost increases instead of being behind after they actually occur. Going forward, it is nearly certain that rent inflation across the state of Oregon and Illinois will be higher than their neighboring states.

*Oh, I nearly forgot to mention the corruption. Anytime you have rent control, you also get politicians, bureaucrats, and inspectors ripe for bribes, kickbacks, extortion scams, and more. Sadly, all of this tempting corruption is an ongoing issue that never goes away: higher rent rate increases, special exemptions, bribes for certifications and inspections, etc.

Retirees with student loans

Student loans, in general, cannot be discharged through declaring personal bankruptcy. Today, there are $86 billion in student loans owed by people aged 60 and older, with an average amount of $33,811 (according to Mark Kantrowitz of SavingForCollege.com). Every couple months, there is a news feature article about someone living solely on Social Security Retirement and it is being garnished for student loans. The story will then detail the financial struggles that they face. Today, the rule for Social Security garnishment is that it cannot exceed 15% of your monthly payment and the garnishment must leave at least $750 per month for the retiree.

To end up in retirement with student loan balances, several very poor financial decisions have occurred. A few of these may include:

  1. Not mapping out tuition and other costs of attendance compared to the savings you or your family have dedicated for this degree.
  2. Selecting a college where starting salaries cannot support the level of debt you will have taken out to complete the degree.
  3. Needlessly lengthening the number of years in school by switching majors; often or near graduation (or worse, after graduation so you have to return for additional course work). Hint: get involved in your industry and talk to people to learn as early as possible which field of study is the best path for you.
  4. Selecting a field of study with little or no market demand or a shrinking industry.
  5. Choosing to defer paying your loans, allowing the balances to grow exponentially.
  6. Co-signing on loans for other people or your children who have a poor track record of managing money or following through with commitments.
  7. Did little or nothing to secure grants, scholarships, or part-time jobs to reduce student loan amounts.
  8. Did not fund any retirement accounts for an additional source of retirement income

Yes, of course there are people that have fallen ill and are unable to work. But outside of a rare set of unusual circumstances; many poor decisions have to be made in order to wind up in the middle of a student debt horror story. Every retiree story that I have read or heard about with student loans had made several reckless financial choices that created their financial situation. All decisions with a large financial consequence need to be thought through, planned, and managed until the very end – and student loans are no different.

Rewards must be earned first

Who wouldn’t want to live a spoiled life?

Unfortunately, there is a life lesson about earning that most people need to learn the hard way. Earning does not just refer to money; it is also what you gain from putting in focused effort such as experience, practice, training, creativity, grit and more. The lesson is simple: earn first and then reap the rewards later if you want them to be sustainable. A family friend continually rejects this lesson and I fear for the struggles she will face as the consequences pile up. She wants it all, now, and is not interested in earning anything up front. Sadly, the slightest push back of advice prompts defensive anger from her.

Below are some variations of this lesson:

  • Study first, play later
  • Work first, play later
  • Earn first, spend later
  • Date first, romance later
  • Stability first, family later
  • Battle first, relax later
  • Plan first, act later
  • Your reap what you sow
  • Do the work, then enjoy the results
  • And of course: No pain, no gain

However you want to phrase the lesson, effort must be expended upfront for there to be sustainable or reliable results on the other side.

Major vs. minor financial infidelity

Financial infidelity is the term for hiding financial details from your spouse or partner. These secrets can include debts, an extravagant purchase, an investment loss, missed payments, a low credit score, and repossession. For example, a survey from Money magazine found that 22% of respondents admitted to spending money they did not want their spouse to know about.

Financial transparency is a sizable portion of relationship trust. You cannot make sober joint decisions unless you both know all of the details of your real financial situation. Problems arise when partners have very different financial spending priorities. One common method to bridge this gap is to allow each partner to have their own discretionary (or off-books) money as a “relief valve” to spend money without accountability or anyone judging over their shoulder. This must be a known and limited amount to each partner, say $20-$250 per month (depending upon your level of income) that is added into each partner’s off-books fund. Whatever this amount is, it must be a budgeted and an affordable amount that you both agree upon.   

Relationship-financial bumps occur when a partner discovers that the other spent money without notifying or asking the other partner. I separate these into minor or major issues. A minor issue might be an annoyance – some hundreds or low thousands on a selfish item. Examples of this would are likely (for women) clothing, shoes, handbags, and jewelry, and (for men) electronics, hobby/sports gear. Handling this may include discussions about what is underlying the behavior and how possibly both parties may be contributing to the issues. The next level in financial deception is ongoing behavior with secret bank accounts and credit cards.

A major issue would be a significant financial move that derails future plans. The most common examples I find are: a couple is thwarted from buying a new home when it is revealed that there is a hidden credit card maxed out or an unexpectedly low credit score from secret unpaid bills. Another example is when you open the mail to discover past-due notices for your rent, mortgage, or car payment that you thought were current. Or, the Sheriff’s Deputy rings the doorbell to repossess some items that you didn’t know were financed and past-due. I know two different people that became suspicious and looked up their home at the County Clerk’s office to discover that their husbands had secretly taken out large second mortgages to fund secret addictions (one was gambling and the other was drugs). Both families were left in financial ruin with crushing debts to pay down.

Marriage and communication problems can leach into financial problems. Plus, these minor and major financial issues can be the side-effect or symptom of other problems, such as: fallout from expensive hobbies, addictions, a problem within the relationship, or a psychological issue. Some secret debts may begin small (a drop in pay that a partner hopes is temporary), then snowballs when business doesn’t turn around, and is now too large to come clean to the other partner. Therapist Carleton Kendrick says the chief reasons people lie about money to their partners are pragmatism (secretly planning to divorce), control (revenge spending), guilt (from irresponsible behavior), and fear (afraid of partner’s reaction to the truth).

When someone has been “busted” on financial infidelity there is a common prescription: fully coming clean, address deeper issues by both parties, come to a resolution, make a plan to pay off the debt and the commitment for transparency in the future. (Of course, this can take many days and several thoughtful conversations when both can be calm). However, if a partner continues making infractions, there is a deeper issue that may require professional counseling to work through emotions – a shopping addiction, sexual infidelity, an emotional outlet of stress spending, self-image issues, differing expectations on lifestyle, etc. When there is a major financial issue, or many repeat incidents, it is time to pause and evaluate – is this person “relationship worthy?” Do I want to spend the time, effort, and money to turn this relationship around? There are marriage counselors that specialize in financial issues, but that may not be enough if the spender is unwilling to change or address their issues. At that point, it is time to consider separation options or divorce in order to financially protect yourself.

Prolonged low-interest rates

60 Years of Fed Funds Rates

After 2008, the U.S. Federal Reserve lowered short-term interest rates to zero; responding to the largest U.S. banks becoming insolvent during the financial crisis. Over 10 years later and interest rates still haven’t moved up much. Meanwhile, some interest rates are negative in Europe as they continue efforts to stimulate their economy as well. Unfortunately, maintaining artificially low interest rates for so long is causing problems; such as individuals and institutions are forced to gamble on high-risk assets to meet their investment return objectives. Some of the unintended consequences of prolonged low interest include:

  1. Pension funds have doubled their allocations to riskier stocks, private equity, and hedge funds.
  2. Insurance companies have had to raise premiums and lower annuity returns.
  3. Retirees have not been able to get decent yields on bank CDs, so they have migrated into dangerous junk bonds and lower-credit preferred stocks. CD rates fell by over 80% from 2007 to 2010, so anyone relying upon normal rates has suffered greatly (a wealth transfer from savers to banks).   
  4. Both the bond and stock markets have been pumped up to over-valued levels – greatly increasing everyone’s risk in them. Not everyone has been invested in them for the ride up, but everyone would be impacted by their downfall.
  5. Trillions in derivative financial instruments cannot be accurately priced with negative interest rates.
  6. As low as rates have been in the U.S., they are high compared to Europe and Japan, so money has been flowing into the U.S. stock market and real estate, creating asset price bubbles.
  7. Another side-effect has been that all government debt became artificially cheap, pushing back their day-of-reckoning for cutting spending and addressing large liabilities.
  8. Inflation-adjusted yields this low have historically only occurred during periods of war, reflecting an autocratic repression of free-market interest rates.

These unintended consequences will continue for U.S., Canada, Europe, and Japan until interest rates return to a normal level without Central Bank interference. In the meantime, do not be lured into gambling with risky investments or imprudent behavior to reach for a slightly higher yield. This will place you into a very precarious financial position if there is an adverse market move, creating potentially catastrophic losses.

Use a rental to fund your retirement housing

Housing is one of your largest expenses, so it is important to have your mortgage paid off before any expected date of retirement. This dramatically increases your financial stability to enter retirement and reduce the odds that you may have to go back to work for additional income.

I first learned about using a rental property for retirement housing in a magazine article. A couple wanted to retire on the beach overlooking the ocean. While they both lived and worked a state away from the ocean, it was their retirement dream. They formulated a plan in their late 30s: buy their retirement home today with a relatively small down payment, and then rent it out to pay off the mortgage over time. Their goal was not investment profit, but targeting the accelerated pay down on this beach-front mortgage. Once the mortgage was paid off for this house, the couple had more financial flexibility for their retirement housing. First, as planned, they could move into the beach house when they retire. They would be able to do so comfortably because they would also have the proceeds from selling their current home (hopefully, by this time, the home has no mortgage or a small balance). Second, if their retirement location plans changed, they could sell the beach house to financially support whatever their new retirement plans may be.

I now know a few couples that are or have already employed this retirement-housing strategy for where they want to live when they retire. We did this ourselves by accident: not with a spectacular vacation house, but a rental property with a 30-year mortgage that was paid off in 18 years. This rental home is in a town with a very low cost-of-living. So in the worst financial case, we can always move into this home after the month-to-month lease ends with the current tenants. Without any mortgage, we could move in and have a very affordable housing expense that is just $106/month (for both property taxes and insurance). For a comparison, this is cheaper than any 10’ X 10’ storage unit rental in my current city! This is the power of employing both leverage and inflation over time, using them to your advantage instead of being victimized by inflation.

Using rental platforms like AirBnB and VRBO, it has never been easier to get this strategy up and running as a landlord. You can use a normal property management company or manage it yourself. All that is needed is some rental education and a reserve fund for maintenance and repairs. I recently acquired another rental for just $28,000. If you are going for your beach/mountain access for retirement, you can also use this home for some weekend vacations yourself each year (the tax law changes on this, be sure you are using the current rules).

For your retirement, you can cover one of your largest expenses – housing – for far less money by allowing renters to pay off a mortgage for you.

85% of federal taxes are consumed by entitlements

In the 70s, former U.S. Treasury Secretary, William Simon, said something like: Washington is like a train running at full throttle while officials are mindlessly partying it up in the caboose. In my opinion, those were the good old days of fiscal responsibility. Today, there are many budget-busting programs and departments, let alone colossal boondoggles like the transportation spending. To highlight what is happening today, for the fiscal month of February, here are some notable statistics:

$167 billion Total Federal Government Tax Receipts  

-$ 87 billion Social Security Spending                           

-$ 52 billion Medicare Spending

-$ 25 billion Interest on the Federal Debt

– – – – – –

$    3 billion remaining for ALL other federal spending

$231 billion in other federal spending in February

$234 billion in additional debt created in February

So, outside of entitlements and interest, the federal government spent 40% more that it took in, and this ratio will increase over the next 30 years as the Baby Boomer generation consumes an increasing amount of Social Security and Medicare. Yes, February results were a little more unfavorable than usual, but the trend of increasing entitlements and increasing borrowing will continue to degrade.

Note that the economy couldn’t be doing any better than today. What would happen if there were a severe or even slight recession? Tax receipts would fall and government spending needs would increase, and the federal debt of $22.2 trillion is already larger than the U.S. economy at $20.4 trillion.

To me, this financial calamity-in-the-making means one thing: soon, we will all be on our own for retirement. Either the government will be forced to dramatically reduce Medicare and Social Security benefits, or they will ignite a Venezuelan-style hyperinflation. If you are mostly on your own for retirement, then it is time to become diligent about saving money. If, at some point, the government goes down the inflationary money-printing path to “solve” the problem, then your savings need to avoid U.S. dollars and be held in:

  • Inflation-adjusted securities
  • Stronger currencies than the U.S. dollar or whichever currency is being inflated
  • Physical assets such as real estate and possibly gold.
Menu Title