Category Archives: Finance

Pondering investment options

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I find myself in a rather odd position financially.  Debra and I have finally saved enough money that we have to think about what to do with it.  I won’t be quitting my job any time soon, but we have managed to put together a few dollars that could grow into quite a tidy sum if we invest it reasonably.  Oh, but where to invest it?

I’m not a complete novice when it comes to investing.  I’ve invested in mutual funds with varying success and opened an E-Trade account a few years back, again with varying success.  I got lucky with a few stocks, blundered badly on others, and managed to make it through the last three years with most of my initial capital intact.  But just keeping the cash doesn’t really qualify as “success” in my book.  So lately I’ve been reading a bit about investing in general, and stocks in particular.  I can’t say that I’ve learned a lot yet about where to put my money, but I’m sure learning where not to put it. Not that I’ve ever been a sucker for the latest stock tip or real estate deal.  More importantly, I’m gaining some insight into my own thoughts about money and investing.

The two most difficult things for me to do are to get started and to just sit and watch.  It takes a lot of prodding to get me going on something, but once I’ve started I want to fiddle with it, optimize it, make it work better or faster.  Sitting on the sidelines waiting for results is torture.  I think a lot of people are this way.  Once they start a savings plan, they’re not content to just buy an investment and watch it grow.  They want to see results right now.  This plays right into the hands of brokers (even online discount brokers) who make piles of money from people buying and selling stocks.  This also explains my absurd desire to buy a piece of rental property:  it’s a tangible thing.  I can see money coming in every month and I can try to find ways to improve the bottom line.  So far I’ve been able to remind myself of the headaches I had in the past, trying to rent a place and then chasing the tenants around for the rent check every month.

I haven’t yet figured out where I’m going to invest for the long term.  Right now most of our little stash is squirreled away in reasonably safe no-load mutual funds, waiting for me to decide what to do next.

Another unsolicited credit line increase

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Time again for my annual credit line increase.  Every year, courtesy of my credit card company, I get an unsolicited increase in my credit limit.  Two years ago they raised my limit to the extent that I could replace my truck if I wanted to.  This year it’s only a few hundred dollars less than the annual salary for my first programming job.  I just don’t understand why they do these things.  I use the card for convenience, not for credit.  I pay the balance every month.  There is no evidence that I’m going to start spending irresponsibly, and yet the credit card company keeps trying to entice me.  I still haven’t figured this one out.

Governments are incapable of fiscal responsibility

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It struck me today as I was listening reports of budget debates on the car radio, that government—at least our form of representative government—cannot be fiscally responsible in the long term.  My reasoning is simple.  The people in power want to stay in power, and others want to be elected in their place.  Both groups attempt to win votes by making promises with other people’s money (OPM).  To be fair (or equally critical), it’s not just elected officials that suffer from OPM disease.  Career bureaucrats have a vested interest in growing their organizations, and use a variety of means to ensure that their budgets are increased every year.  As the years go by and people get accustomed to more and more things, the only way to promise more is to raise taxes and spend more.  At some point, the whole house of cards has to come crumbling down.

Not that I can think of any other workable form of government that is any more fiscally responsible.  On a small scale, a loose organization similar to a homeowner’s association would work, but such a thing doesn’t scale well.  Anarchy (or what the wacko Libertarians like to call “pure Capitalism”) can’t work because it makes the flawed assumption that all people share the same belief system and are equally capable of understanding the consequences of their actions.  A benign dictatorship might work for a short period, although there are no examples of such a workable system ruling a large number of people.

What frightens me most about this is that government inefficiency (and thus the citizens’ displeasure with increasing taxes) appears to increase with the square of the government’s size.  And the results of an unhappy populace are not pretty.

The fallacy of affordable health insurance

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The idea behind insurance is simple.  A group of people agree to pool their funds to protect individuals in the group from financial ruin in the case of a catastrophic loss.  The group’s premium payments are invested, ideally at a profit, and any excess funds over what is reserved for future losses is paid back to the group members (in the case of a mutual insurance company), or distributed to the company’s stock holders.  This works quite well in many situations because catastrophic losses are relatively rare.  Life insurance works slightly differently in that everybody dies at some point.  Insurance companies use well-researched statistics to project the insured’s life expectancy and then structure a payment plan so that the insured’s premiums, when invested at a reasonable rate, will return more than the policy’s face value before the insured person dies.  The reason you buy life insurance isn’t to insure that your estate will have $100,000 (or whatever sum) when you die at age 80, but rather that if you kick the bucket in your 50’s, your dependents will have something to fall back on.  If you could guarantee that you’d live to be 80, there would be no need for life insurance.  No, you can do much better by investing the money yourself.

One other thing.  Insurers base the price of the premiums (what individuals must pay) on two things:  the computed probability of a loss, and the cost to fund the loss should it happen.  That is, a 22-year-old with a drunk driving conviction and an $80,000 Porsche will pay a higher premium than a 40-year-old mother of three with a minivan and a clean driving record.

Okay, that’s how insurance works.  So what’s my point?

My point is that “health insurance” as we’ve come to know it can’t possibly work.  It’s a huge Ponzi scheme that at some time has to crumble in on itself.  Remember, insurance works by spreading the cost of infrequent catastrophic losses over a large group of individuals.  Critical care insurance can work in this way.  But you can’t fund day-to-day health care, which is what today’s “health insurance” has become, using any kind of insurance scheme.  The theory is that younger members of the group, who are supposedly in better health and need less medical care, help subsidize the payment of care for older members of the group.  This all works fine as long as health care costs remain relatively fixed.  But several things happen:  better and more expensive medical technology (tests, treatments, drugs) becomes available, younger members insist on more coverage (lower deductibles, lower co-payments, wider coverage of services), life expectancies get longer, and an increased scrutiny by an ever more litigious society requires that every possible test be run in every possible circumstance.  Oh, and insurance companies don’t have free reign to adjust their premiums based on an individual’s health history, age, or habits.  (Yes, smokers pay the same premiums as non-smokers.)  Prices increase, soar, and then skyrocket.

Until relatively recently, employers have been picking up most of the increasing costs of health care “insurance.”  But employers are starting to realize that they can’t continue to pay the ever-increasing premiums, and they’re expecting employees to pay a little more out of their own pockets.  This will work for a short while, but individual employees won’t be able to afford it for long.  At some point, government will step in and take over the whole health insurance Ponzi scheme.  But even the Federal government has finite resources, which soon will be overwhelmed by the cost of everybody insisting on the absolute best possible care right now.

Do I have an answer?  Of course I do.  Scale back expectations, insist that people take responsibility for their own health (that is, eat right, exercise, cease self-destructive behaviors), shoulder the costs of your own day-to-day medical care, and use insurance as it’s intended—to cover catastrophic losses like broken legs and serious diseases.  It’s a workable plan, in theory.  Sadly, it requires more restraint and personal responsibility than most people today can manage.

Refinancing with a hometown bank

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There’s something to be said for hometown banks.  After all the crap we went through trying to refinance our mortgage with the big banks, we finally went to our local bank where we’ve had our checking and savings accounts for the last 6 years.  30 minutes after sitting down with the loan officer, we had a verbal commitment for a home equity loan to pay off the mortgage, plus a little cash out to help finance our remodeling.  The Board has to approve the loan, of course, but it’s likely they will considering that we’re borrowing much less than 50% of the property’s market value.  Better yet, closing costs are limited to a title policy and a few filing fees—the bank is doing all the documents in-house so there’s no silly “document processing fees.”  And no appraisal, again because the relatively small amount that we’re borrowing.  The rate’s not bad, either:  7%.  Not as low as a real mortgage loan, but better than most of the home equity loans I’ve seen, especially considering the homestead law weirdness.  And it’s better than the 8.375% we’ve been paying.

Perhaps best of all, the local bank will be keeping the loan rather than selling it to some huge conglomerate bank.  We’ll have a real live person we can contact if we have any questions about or problems with our loan.  Given the troubles we’ve had being shuttled through Chemical Bank, Citibank, and Wells Fargo in the last 7 years, that’s going to be a huge relief.

Refinancing woes

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I never thought it’d be so difficult to refinance my mortgage loan.  Debra and I have spent the last 5 years putting large chunks of discretionary income against the mortgage in order to pay it off.  We now owe less than 1/4 of the property’s value and we want to refinance the loan for two reasons:  1) to lower the payment; and 2) get some cash out so that we can finish remodeling.  In any other state I’ve ever lived this wouldn’t be a problem, but Texas?  I’m fit to spit.

The Texas homestead law which until recently (1998 or so) prevented Texans from obtaining home equity loans, still prevents us from doing a cash out refinance using a normal mortgage loan.  Although it’s not required that you file a homestead, everybody recommends it when you buy a house because it protects your house from most liens and judgments.  What they didn’t tell me in 1995 was that filing a homestead also locks up my equity.

There’s a way around the problem, but it’s less than ideal.  A bank here will write me a home equity loan that covers the mortgage plus whatever cash I want to take out, but the interest rate is less than ideal; ranging from 7.25% to slightly above 7.5%.  Mortgage loan rates are 6.5% for fixed rate loans, and as low as 5.25% for adjustable rate loans.  I could refinance the balance as a regular mortgage and then take out a home equity loan for the improvements.  But that would entail two sets of closing costs (!), and the idea of paying $3,000 in closing costs for a loan of less than $50,000 just rubs me the wrong way.

What a mess.

Drawbacks of increased credit line

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Several people wrote to remind me that a negative effect of having your credit card limits increased (see yesterday’s entry) is that you can be denied credit–a car loan, for example–if you have too many credit accounts or too much available credit.  Excess available credit raises a flag because lenders fear that you might actually draw against those lines and dig yourself into a hole from which you can’t extricate yourself.  Just another reason to keep track of and control your available credit.

Unsolicited credit line increase

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Inserted in my credit card statement this month, along with all of the other junk, was a letter informing me that my credit limit had been increased.  “Congratulations,” it reads, “because of your excellent account status, you’ve earned a credit line increase.  Now that your credit line has increased, you can make those purchases you may have been putting off.  Take a vacation, or get something special for yourself.  Whatever you choose, your higher credit line gives you more of the buying power you deserve.”

I got a good chuckle out of this one.  Although it’s nice to know that I could buy a new car if I had to, I just can’t understand why the bank keeps raising my limit.  It’s been years since I carried a balance on the card, so they have to know that I won’t even come close to charging the amount they’ve given me access to.  Do they think that if the limit is high enough I’ll start spending irresponsibly?  Weird.

What to do with a budget surplus?

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Much talk lately of President Bush’s proposed tax cut.  $1.6 trillion, $1.3 trillion, whatever.  The numbers are big enough to be almost incomprehensible.  The discussion has ranged all over the map, from “cutting necessary programs” to “a giveaway for the rich” and “a boost for the economy.”  You see alternatives every day, and reasons why the alternatives either won’t work or are a bad idea.  Every special interest group has an axe to grind, and few people step back and look at the situation objectively.

The most important thing to note is that the surplus everybody talks about doesn’t exist.  It’s not like the Treasury department is sitting on a trillion dollars that it doesn’t know how to spend.  On the contrary, the Treasury is sitting on a debt of over five trillion dollars that it doesn’t know how to pay off, but I’m getting ahead of myself.  This tax cut is based on a projected surplus of some two trillion dollars over the next ten years, and is conditional on revenues actually meeting expectations (among other things).  Even if Congress passes it–which seems likely at this point–I won’t hold my breath waiting for an actual decrease in my income tax.

What surprises me more than anything else is the whole debate about what to do with a surplus.  Let’s see, we’re five trillion dollars in the hole?  Interest payments alone are costing us $350 billion per year, or close to 20% of the annual federal budget.  Given a population of about 290 million, that’s about $1,200 per person per year.  The most effective use of any surplus would be to pay off that debt.  In less than 40 years, we could lower taxes and have $350 billion more for our Congressmen to squander on pork barrel projects and stupid social programs.

I know, the idea smacks of fiscal responsibility, so the thought is anathema in Washington.  Oh well.

Simplify your life: get out of debt!

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Want to simplify your life, reduce stress, and regain some control over your financial future?  Get out of debt and don’t borrow money again.  No joke.  And I’m not going to ask you to give me any money or even call a toll-free number for important information.  It’s a simple process, but takes discipline.

First, stop living beyond your means.  Cut up your credit cards and don’t sign up for any new ones.  Then, stop indulging in luxuries that you don’t need and hardly even want.  Hang on to your old car for a little longer, and when you have to replace it, go for what you need rather than what you want.  Cook an extra serving or two for dinner and take the leftovers to work rather than going out for lunch.  Pay your taxes on time.  Stop smoking.  Stop buying that double chocolate mocha latté at Starbucks every morning.  Cancel your cable TV subscription.  Buy paperbacks instead of hardcover books.  There are hundreds of little things you can do that, when combined, add up to real money.  For example, eliminating the morning stop at Starbucks and lunch at McDonalds will probably save you $200 a month, which you can apply straight to your outstanding credit card balance.  If you smoke a pack a day, quitting will net you another $100 or so, and you’ll feel a helluva lot better too.  Cable TV, digital phone, that second phone line at home, and other conveniences probably run another $200.  You might find that, not only are you saving money, but you’re also calmer because you’re not constantly worrying about all the gadgets you’ve let take over your life.

If you go this route, don’t get too obsessive about it.  Be sure to reward yourself with a nice dinner out from time to time, or treat yourself to something special periodically.  Sure, you’re working toward a larger goal, but enjoy yourself sometimes.  Just don’t over do it or you’ll end up right back where you started.

If you find yourself working harder and harder, earning more money but falling further behind, stop and examine your lifestyle.  It’s very possible that you’re letting your lifestyle control your life.  And no matter how much you make, you’ll never get ahead.  I’m speaking from experience here.  Five years ago, Debra and I owed a year’s salary in consumer debt.  The minimum monthly payments were darned near as much as our house payment!  We crawled out from under by watching what we spend, and by putting every spare dollar against what we owed.  We managed to have a little fun along the way, thanks to my writing, but almost all of our debt reduction came from eliminating frivolous spending.

Today we owe money only on the house, and that’s going down fast.  Sure, I could probably invest and earn more than the 8% that my mortgage costs, but I’d still have the mortgage and I’d have to worry about the investment, too.  Looked at in strictly financial terms, paying off the mortgage is a bad move.  But in terms of cash flow, paying off the mortgage is preferable simply because with the house paid off, I have the freedom to take some time off without pay, or even change careers, without having to worry about where the next house payment will come from.

If you’re looking to be a multi-millionaire, I can’t help you.  But if you want financial freedom and a lot less stress, pay off your debts, and remain debt-free.  You’ll be surprised at how liberating it can be.