Jun 20

Income Diversity is Essential to Financial (and Moral) Success

By NickNo Comments

At one time or another most children are asked what it is they want to do when they grow up.  Consensus is building that the answer to that question is not a single answer anymore. 

Financial planners consistently tell us that we should have diversity in our investment portfolios.  Diversity, they say, provides a hedge against the risk of a single investment failing.  I am a strong supporter of diversity in income sources.  Multiple streams of income can provide a hedge against an interruption of a one income stream.  It is a reality of the global economy that almost everyone is vulnerable to a layoff.  If your current job is your only source of income, a layoff is potentially devastating to your family’s financial health. If you are a business owner and one sales market suffers a setback, your business can quickly fall apart.  Multiple income sources protect you and your family from financial catastrophe.

But there are other advantages to having multiple income streams.  First, not all income sources require significant active management.  Many of them are passive or semi-active, meaning that you can create them and they enrich you without significant effort.  Among all the types of income, earning from working a job is the most time consuming and often the lowest paid.  Passive income sources, such as investing in dividend producing stocks, or semi active sources, such as rental real estate or options trading, can be very lucrative with only a few hours of your time a month.  Even the most motivated person cannot work more than 2 or 3 jobs, but one can manage dozens of passive and semi-active income sources with proper care and investment.  Over time, by the mathematic force of multiplication, it is possible to eclipse your active income sources with the passive and semi-active sources.  This is the dream of the investor–becoming one who can safely afford to retire from work life with no sacrifice in lifestyle.  Indeed, with the increase in free time, you will be free to realize ever larger increases in income because you will be able to devote yourself entirely to building new income sources. 

More importantly, there is a huge difference in the type of person you can be when you have multiple sources of income.  In times of financial stress or insecurity, people often find themselves in ethical dilemmas.  Your employer may ask you to cut corners to increase the company bottom line.  You may find yourself having to choose between eating and falsifying your tax return.  You may even be tempted to steal from those closest to you.  Financial stress may drive you to do things that you would never have considered doing if you didn’t feel the stress.  Actions that you resort to in times of great stress may haunt you for the rest of your life, either physically in the case of imprisonment or psychologically with regret and shame. 

Multiple income streams, therefore, help you build a firewall to protect your moral and ethical self.  They allow you to always do things on your terms and empower you to say “No!” when your conscience tells you to do so.

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Jun 15

Raising interest rates is the quickest way to move the economy forward

By NickNo Comments
Housing
Image by james.thompson via Flickr

Suppose you buy a valuable piece of art for $15,000.  Further suppose that a month later a major economic slowdown occurs and as a result, the amount of money art buyers are paying drops substantially.  Perhaps today, if you wanted to sell the art, you might be able to sell the painting for $10,000.  If you intended to sell the painting, what would you do?  Most likely, you would try to wait for the market to correct and try to recoup the initial investment.  You aren’t motivated to sell the piece of art.  It’s not costing you anything not to sell it, so why not hang on to it.

But what if you bought that piece of art on credit?  Even at a relatively good interest rate of 5 percent, you would still be losing over $60 a month in interest and spending about $300 per month in total payments.  Having that piece of art costs you money every month.  In this case, you are much more motivated to sell the art for $10,000.

However, what if you had a credit card that carried zero interest (or in the range of 0 to 0.25%) and if you can borrow money on that card at will without fees.  In this case, you are not losing substantial money to interest and you can borrow more money whenever cash flow gets tight.  In this case, your debt no longer pressures you to move the problem forward.  Although the market has priced your painting at $10,000, you are behaving as if it is still worth $15,000.  You are arguably denying or deferring reality. 

Now I don’t think there is anything particularly wrong with this delusion.  Everyone can bury their head in the sand, but these people should be penalized to clinging to delusions.  But these days, banks do not feel the pinch.

In a market correction, asset holders need to substantially mark down the price of their assets to get them sold.  In a macroeconomic sense this is called “finding the bottom” where prices come down to a point where sufficient buyers are available to meet demand.  Once the market finds its bottom, new growth occurs. 

WASHINGTON - APRIL 17: Federal Reserve Chairm...
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For years now, banks have reaped the benefits of policy based on monetary theory.  After making loans to millions of people who couldn’t afford them, banks should have been suffering from huge cash flow issues due to the lack of payments and loss of principal on these assets.  However, since banks can borrow money at will from the Federal Reserve at essentially no cost to them, banks have plenty of cash to meet their needs.  Banks have little motivation to turn around their growing foreclosure inventories by reducing prices. 

Because of this false support of overvalued properties, real estate property values continue to fall, not in a quick fashion, but a slow laborious multi-year fashion. When the correction could have taken a year or two, real estate values are still falling.  Wise potential home buyers see this and are choosing not to buy.  It is important to note that record low mortgage rates also played a huge role in driving home sale prices up.  Home buyers realize that once interest prices do rise, there will be even more downward pressure on home prices. 

These phenomena add up to one conclusion, sellers are hesitant to sell and buyers are hesitant to buy.  Raising interest rates, though painful in the short term, may offer the best hope for escaping the economic holding pattern we’ve been in for years.

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May 26

I Remember when Michael Jordan was Terrible

By NickNo Comments
Former basketball player Michael Jordan
Image via Wikipedia

Michael Jordan was probably the best athlete to ever play the game of basketball.  Not only was he naturally talented, he consistently worked hard to improve his game.  He was a legendary competitor.  In every facet of the game, he outthought, outfoxed and outworked his opponents.  Then, at the peak of his success, he decided to switch sports. 

Michael Jordan’s 2 year effort to become a professional baseball player was a terrible experience to watch.  Many of the things that brought him success playing basketball did not desert him.  The work ethic, the physical skill, the competitive spirit were all still there, but he languished playing in the minor leagues.  So why didn’t he succeed, where success followed him before?  He couldn’t hit a breaking ball.

Financial success is the net result of a series of good actions and smart decisions made over time.  It requires work ethic, talent, persistence and smart decision making.  Take one of these things away and it becomes a much longer and uncertain road to success. 

Explosive earning power comes from working in your talents, doing things you love and doing them over a long period of time so others come to appreciate your work.  If you don’t love what you are doing, even if you are talented at it, the quality of the work will suffer and/or you will become so burnt out you will not succeed.  If you aren’t talented in what you do, the quality of the work will never be high enough to generate large wealth.  Without persistence, you will never develop a following that is a key driver of creating that wealth.  

We parents are always watching our children.  We often see their flaws and we try to correct them. We sometimes can see their talents and we are grateful that at least that is one area where I can take more of a “hands off” role.  Maybe we look at the marketplace and try to steer our children into the roles that we think will bring them security and success.  This is the wrong approach.  People don’t outgrow who they are.  A child who struggles with math probably won’t make a good actuary.  Another child may be very talented at math, but becomes exhausted by doing a problem set.  People have many talents, but only a few of the talents really allow us to experience a life we love.

Parents have enormous influence over their children.  Sometimes a simple throwaway comment given at a critical time may set a child on a wrong course that may take years to correct.  There are millions of people who currently work in careers which began because a well-meaning father said something like, “I think you would make a great architect.” 

Work ethic, persistence and brainpower can take a young person very far.  But she will only thrive if she is working in the right field.  We parents have a responsibility to be careful observers of our children.  Our children need to be allowed to discover their gifts and ultimately their calling.  Be mindful of what you are saying to your children.  Talk frequently about their talents, what they enjoy doing and, as they grow, what they could see themselves loving to do every day of their adult lives.  Nurture your child’s talents and find the ones that he really enjoys exercising.  These will be the key to not only wealth, but self esteem and general happiness.  As they get into adolescence, start working on a career path.  Perhaps visit a career counselor. Encourage your child to experiment with a few opportunities.  The choice of a career is one of the most important choices a person faces.  Careful work, great deliberation and time will create the best chance that your child will make the best choice. 

Michael Jordan eventually went back to basketball, where he returned to winning form, but he lost the chance to do what he loved for 3 years.  Do what you can to help your child do what they love as soon as possible.  Three years is a long time.

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May 24

Asked and Answered: How are Middle Class Americans Going to Survive?

By NickNo Comments

I ran across this question on LinkedIn and felt I had to respond.

How are middle class Americans supposed to survive these economic times? With high prices on everything, health insurance, gasoline and the salaries not going up as high as they used to, it seems that for the middle class, single parents and other Americans is getting harder and harder to save. How are we supposed to overcome this period?

My response:

Your question contains within it a solution.

If you think about it, what are the things that even the strained middle class, continue to struggle to pay despite the difficulty. Why do people continue to pay for health insurance, food, gasoline, etc. Simply put, these things are valuable to everyone.

Americans live in a freer market than nearly anywhere else of the planet, which means that people spend their money on items which they find to be of value. People who struggle right now are having difficulty in showing their potential customers (including employers) that they are valuable. Every day wealth is being created. Productive energy is constantly creating wealth. This means that money and wealth are NOT dwindling resources. Our task is just to find the ways we can encourage others to share it us. This is only going to happen when we convince those that have or those who make that we are of value to them.

Too many of us walk through life focusing on what we do. We have been paid in the past by doing what we have done, so we think that by continuing to do these things, we will continue to be paid for doing them. But the world is always changing.

Consider the world of tax preparation, H&R Block and Jackson Hewitt have been hit very hard by TaxCut and TurboTax. Many people no longer see $100 to $300 of value in tax preparation. They see $0 to $25 of value in these activities due to the prevalence of cheap, easy to use software. The world is changing for all of us and what may have been valuable in the past may be of lessor or no value now and in the future.

Our task is to look inward to see how we can use our own individual strengths, experiences, resources and talents to generate value for others. By marrying that value to a business case, each of us can find personal wealth and prosperity.

 

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Apr 22

Cultivating Work Ethic

By NickNo Comments

I had the pleasure of listening to a recent lecture by a researcher in child psychology. One of the most interesting findings involved an experiment of 7th grade students.  All students were asked to perform a set of some moderate difficulty math problems.  After completion of the problems, one-half of the students were complimented on how smart they were for being able to solve the problems.  The other half were complimented on how hard they worked to get to the solutions.  Though the problems that each group worked on were unchanged, those kids who were complimented by the effort they exerted as opposed to some innate intelligence were substantially more likely to choose to do a more complex set of math problems when given a choice of a new assignment.

This finding is fascinating to me.  It demonstrates that work ethic and the willingness to work hard and take on new challenges can be cultivated in children.

Wealth creation is the result of a collection of habits founded on fundamental premises.  Habits such as spending less than you earn, performing due diligence and managing risk can be brought about by education and practice.  But if the fundamental premises behind wealth creation are not observed or not believed, no amount of education and training can help your child down the road to success.  This means that one of the most important tasks for any caring parent must be to instill a strong work ethic and cultivate a belief that usually hard work dedicated to a good purpose over time is a great recipe for success. 

We have the benefit of living in a time in history where our society can afford a great deal.  Not long ago, young boys and girls of age 10 were busy planting and harvesting crops or performing the household laundry.  Families needing to eat had to hunt or fish or grow their own food.  Our lives of convenience are truly blessed, but with our increased time for ourselves, what do we do with this time.   Our children in many cases live lives of comfortable privilege free from the cares of daily life.  As a parent, I wish that my children never know pain or hardship, but we forget that pain is an important part of the learning process.  When my son hits his head on the edge of a table and he cries, he will know next time to be more careful and mind where the table’s edge is.  Similarly, nearly all families and individual at one time or another will suffer some financial hardship.  But hardship is not permanent condition.  I, myself, learned the hardest financial lessons in a time of hardship.  These lessons have only tempered my resolve to pursue success and the hardship itself has forced me to make decisions that have propelled me further down the road. 

Parents, to cultivate a strong work ethic in your children it is important to keep in mind several items

  • Money must be tied to effort – Reject the concept of an allowance.  Demand that your children perform some of the household tasks in exchange for any money you provide them.
  • Encouragement – Periodically, be sure to encourage your children to continue to work hard by recognizing the effort they put in.  Reinforce that success is a pattern of reward that follows achievement.
  • Share how the family works through hardship – Whether you realize it or not, your kids are watching and they know when things are tough for mom and dad.  So let them know, to the extent that they can understand, what is happening and how you are working to resolve the problem.  You may be working longer hours or doing extra jobs or giving up on luxuries that you used to enjoy.  Explain these things with a smile.  Let your children know that work is one of the best companions you have on the road to success, because work can help you solve nearly all financial problems.
  • Work is life – Most importantly, it is important that your children learn early on that it is only through our contributions that we make the world a better place.  Anything of value ever created throughout human history has been brought about by the efforts of individuals working in solitude or in concert with others. 

Children want to change the world; but the world has never changed by itself.  It changed because of the desire and effort of the former 7th grader who once chose the harder set of math problems.

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Feb 16

Great First Jobs for Kids

By Nick1 Comment

I have long recommended that no parents give their children an allowance, rather I recommend they provide them commissions for certain household chores to help teach your kids that money comes from effort.  At some point, many children begin to look for work outside the home to help augment their earnings and start to earn income that isn’t reliant on Mom and Dad.  First jobs are also great ways to learn about oneself and  begin to learn about business.  Here are several ideas for great first jobs for kids under age 16.

Paper Route – Many children cut their teeth waking up before dawn to deliver papers prior to going to school.   Young people performing this work learn many of the mechanics and hiccups concerning the flow of goods from the factory to the consumer.  One learns to push through challenges such as poor weather and supply problems to get the job done. 

Babysitting – One of the most common first jobs for many (but not exclusively) girls is babysitting.  Babysitting teaches responsibility, preparation, patience and safety not to mention dealing with the highly emotional expectations of customers (parents).  These skills are extremely valuable in all aspects of working life.

Park League Official – My first job was as an official at the park league where I had previously been a player.  A year round program I had the opportunity to be a referee and umpire for several sports.  As an official I learned to make quick decisions, how to handle authority, peacemaking, and how to deal with difficult people.   I found it one of the most challenging jobs I have ever held, because at the time I suffered from a great deal of self-doubt.  The confidence that I learned through learning to wield these skills have paid dividends throughout my life.

Repetitive overhead throwing motions, like tho...
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Camp Counselor – Another great job I had at an early age was that of a camp counselor.  Many of the same skills that one gains as a park league official are learned here as well, but often at a greater rate simply because one is learning for more hours in a day.  Some opportunities are for day camps while others are for resident camps.  I had the opportunity to work at a resident camp, which not only gave my parents a break from me, it gave me opportunities to experiment with independence as well as make stronger friendships, many of which thrive to this day.  Two other great aspect of being a camp counselor is working as part of a team and being silly.  I have found both skills to be invaluable in working with others and making my workplaces fun.

Staff Orientation Week 2008
Image by Camp ASCCA via Flickr

Tutor – Smart kids blessed with patience and good communication skills could be great tutors.  Tutoring challenges young people to find different ways to convey information to students who are often reached in different ways.  In addition, like all teachers can relate, dealing with personal frustration involved with turning on the light of understanding can be very challenging.  Patience, understanding, and encouragement skills are gained through tutoring.

Entrepreneurship – Finally, more industrious kids can actually try to create the whole endeavor.   There are numerous ways kids can find ways to practice entrepreneurship.  World famous personal finance author, Robert Kiyosaki writes about how he and his best friend, at a young age, opened a comic book store for neighborhood kids and managed to secure a source of comics for free.  Typical new businesses consist of lemonade stands, lawn mowing services and snow shoveling services.  There is not better way to learn a wide variety of skills quickly than by starting a business.  Children learn sales, managing equipment, customer service, procurement and a host of other concepts.  In addition, much like in adulthood, often the rewards of being an young entrepreneur are much greater than a young employee. 

There are undoubtedly other ways for children to enter the workforce.  Getting children involved in earning money not only allows them to begin the process of financial liberation from Mom and Day, it also allows them to learn valuable skills that will help them throughout their lives.

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Nov 29

Book Review: The Total Money Makeover

By NickNo Comments

This book offers the simplest and most down to earth approach to financial success I have ever read. 

Having been reading financial books for nearly a decade, I had continually struggled to find one who’s philosophy would be accepted by my wife.  I exposed her to various experts, even took her to a couple of conferences.  Nothing every stuck, until we started watching the Dave Ramsey show.  She was impressed by his common sense, tough love, and simple ideas delivered with a Christian perspective. 

Seeing that we’ve finally stumbled on something that she was able to embrace, we picked up the Total Money Makeover.  

Having lived life where he had to deal with apparent success, a long and painful collapse, immense financial stress, and eventually bankruptcy, I feel a kinship with Dave Ramsey.  So do many who have had to endure or are enduring financial hardship and now sing his praises.  Through the simple 7 step formula outlined in his book The Total Money Makeover, he has created a path that has led hundreds of thousands of people onto the road to financial success.

As married devotees of Dave Ramsey come to understand, as I have, when life partners do not have a common set of financial goals or objectives, financial success is elusive for both of them.  Each partner follows his or her own heart and most often they work against each other—usually not by malice or deliberate contrarianism, but just because two people joined at the hip, moving in different directions, makes sure that neither party goes anywhere.

There are 2 distinct differences to the Ramsey approach that differentiate it from all the others I have examined.  First, Dave’s approach does not bank on speculation what-so-ever.  He works with financials that exist today.  He does not advocate gambling on getting involved with speculative ventures or starting businesses except those that are small enough that encompass low overhead and making money quickly.  He doesn’t believe in starting businesses that you must subsidize for a lengthy period of time for them to get off the ground. 

The second distinctive aspect of his philosophy pertains to his opinion of debt.  Having gone bankrupt, he believes that no debt is worth taking on.  On his radio show, he is fond of saying that of the homes that have gone through foreclosure, 100% of them had a mortgage on it.  He believes in a life without debt.  While other experts advocate borrowing money to put it toward money making ventures or investments, Ramsey rejects this.  Although, leveraged returns on investments appear to be more profitable, he contends that once you account for risk of the investments falling and the potential to be on the hook for the borrowed funds, those returns are much less lucrative then they appear. 

After my own experiences with leveraged investments failing I am inclined to agree with him.

Dave Ramsey’s unapologetically Christian approach to personal finance and investing is also quite refreshing.  In a field that for too long has been dominated by secularists and by those whose ethical choices have worsened by the decade, Ramsey provides learning and education about money in a way that is without moral ambiguity.  He fearlessly makes value judgments all the time.  His readers and listeners love him because he is right. 

Dave Ramsey’s program is a blessing to those who chose to follow his wise advice.  The Total Money Makeover is the step-by-step instruction booklet to financial freedom.  The steps he lays out are simple.  Notice I did not say they were easy.  But it is true, that a family that follows his recipe for success will achieve it.  And the sooner you start it, the sooner you will become a success. 

Total Money Makeover

 

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Nov 26

Supply, Demand and the Higher Education Bubble

By NickNo Comments

In the mid 2000’s, our society saw the largest asset bubble in modern history.  Low interest rates spurred loosening of credit which propelled home sale prices upward.  Operating by simple laws of supply and demand, the abundance of cheap and loose credit meant that there was an abundance of money.  Without a strong constraint on the availability of funds with which to buy homes, there price of homes increases to match the supply.  The crash that began in 2008 was driven in large part of the well of credit drying up.  This caused the supply of money to shrink rapidly.  Again, operating under the simple laws of supply and demand, home prices plummeted. 

For decades, we have been seeing the same process at work in education.  Driven by easy access to low interest credit in the form of Federally backed student loans, the prices of post-secondary education has risen unchecked.  According to inflationdata.com, in 1986, average costs of a 4-year degree was $10,000.  By 2015, costs of a 4-year degree is anticipated to be $120,000.   Between 1985 and 2010, the total cost of education increased more than 485 percent, while the average of all consumer prices increased about 107 percent.

Based on this information, it is apparent to me that higher education costs are a major bubble.  The only reason that bubble hadn’t burst years ago is because the Federal Government has been willing  to continue to lend with reckless abandon.  In 2010, in the wake of ever increasing student loan defaults, combined with a widespread cry for fiscal accountability in government, there finally started some discussions about limited the pool of government funds to be used for new loans.  If and when that pool dries up, finally, there will be a reversal in the cost of a college education.

Unfortunately, this will come too late for those students who will be laboring for decades under the load of loans that in many cases will not result in a large enough income stream to pay them off in a reasonable period of time.

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Nov 25

Nick is an Expert Author!

By NickNo Comments

I am proud to report that I have been awarded Expert status over at EzineArticles.com.

 

Nick Wolff, EzineArticles.com Basic Author

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