Wednesday, February 29, 2012

Shit Happens

Accidents happen.   People drive poorly.   Expect this and don't act shocked.  Take steps to minimize your own risk.


If you go through life being perpetually surprised by bad things, life will suck for you.  Expect the worst and plan for it.  If it doesn't happen, then good for you.  If it does, you can at least ameliorate the outcomes.

I was perusing YouTube the other day, and bicyclists like to post videos of themselves being hit by "inconsiderate" drivers, even though, in many of these videos, the bicyclist is running stop signs, red lights, zooming across crowded crosswalks, etc.  And in a couple, at least, it appears the bicyclist intentionally rams into the car in question, without any attempt to slow down or swerve.

And yes, in many cases, the car is "at fault" because they did not see the cyclist.  But the cyclist is also "at fault" for not expecting the car to not see them.  Driving well means to drive defensively.  What does this mean?

It means that at every intersection, you should expect someone to run the red light.  At every driveway, you should expect someone to pull out in front of you.  In a crowded residential neighborhood, you should expect a small child to dart out in front of your car.

And you should slow down and have a "plan B" - an escape route or sufficient stopping distance.  Because if you rely on other drivers being perfect all the time you will get into accident after accident.

If you prepare for these things, you may be able to avert a horrible accident - most of the time.

But many people prefer the other course - when it comes to driving and to life.   They want to blame things on others in a causation model.  "If the other guy had looked out, the accident wouldn't have happened!" they cry.  But then again, if you had seen the other guy and thought, "Gee, I'll bet he just pulls out in front of me, what would I do them?" - and have a contingency plan - you could have avoided the accident as well.

And in many States, this indeed is the law - the concept of only one person being "at fault" is disregarded for the spurious nonsense that it is.  The person who had the last chance to avoid the accident - and failed to do so - is also partially to blame.

So in these videos, where cyclists zoom through crowded city streets at high rates of speed, is it entirely the car driver's fault there is a collision?  Or perhaps if the bicyclist slowed down and anticipated the other fellow doing something stupid, they could have avoided the accident?  Or maybe, just maybe, riding a bicycle in a crowded city is just not a very smart idea - the law of probability will catch up with you over time, and it won't make a rat's ass of difference whose "fault" it is, when you are in a wheelchair.

"But I was in the right!" they scream.  And that is a very immature attitude toward life.  Because, as the saying goes, you can be right - dead right - and it doesn't matter, because you are dead.  And after decades of riding motorcycles and bicycles, I realize that whining about how bad people drive is sort of stupid.  You have to expect them to be bad drivers - because let's face it, they give anyone a license these days.  And that means you have to expect that dude to change lanes or make a turn without signalling - and not ride in his blind spot where you will plow into him.

In your financial life, shit will happen also, and I have commented on this before.  Bad things happen, and yea, you can argue it is "someone Else's fault" or you "had a patch of bad luck."  In all these financial sob stories you see on TeeVee, the Clem they are interviewing always has a laundry list of reasons why his financial situation is beyond his control.   But then they pull back and you see that this guy who wants our sympathy has a monster truck and a bass boat parked in his yard - and no savings in the bank.

Driving defensively can keep you out of accidents.  When you approach an intersection, a driveway, or whatever, expect someone to pull out or fail to stop or break the law, or whatever.  If you expect the probable then you are less likely to get into an accident, regardless of the other guy being "at fault".   Similarly, in economics, if you set up your finances so they can survive various random disasters and setbacks, you are more likely to survive financially.  Diversify your portfolio, minimize debt.  Don't buy a lot of overpriced junk you don't need.

Unfortunately, most people in this country life "paycheck to paycheck" - and are proud of it (at least from the way they love to go on TeeVee and brag about this).  Every penny they earn is spent, and most of it on stuff they don't really need.   When that paycheck goes away (which is someone else's "fault" of course) then the whole carefully balanced machine wipes out.

It is akin to driving the speed limit down a busy street lined with cars and just hoping that everyone obeys the laws, looks both ways, and no one pulls out in front of you or does something stupid.  You are putting your fate in the hands of others, and the outcome is all-too-predictable.

And whose "fault" is that, really?



Portlandia has a great video spoofing these aggressive bikers.   It also pokes fun of the whole "Fixie" trend, which is idiotic (style over substance).   Riding a bicycle and then acting shocked that there are cars out there is rather foolish.  Expect the expected.

I miss my Kodachrome

Digital Cameras are a technical improvement over film processing.  But from a social and interactive standpoint, they are a disaster.

As I noted in an earlier posting, one thing I realized, over time, was that trying to "record" events for posterity is an utter waste of time.  I realized this years ago after buying an 8mm Camcorder and discovering that I was experiencing my vacations through a viewfinder.  Moreover, no one really wanted to see the resultant videos, and they sat on a shelf.  And thanks to annual format changes, I am not sure I could even view them, without investing in some hardware - if the electronic images are not already lost for good.

What I realized is that it is better and easier to just experience things and thus enjoy real life, rather than try to record them and re-experience them later on.

My Mother left behind a closet full of 35 mm slides, taken all through her life.  During my youth, she would occasionally show the slides on a projector screen, and she and my Dad (and my siblings) would try to remember who was in the picture, what the event was, and why.  And like family photo albums or photos that are not labeled, once the principals in the photos die off, they become meaningless artifacts.  If you are going to keep this crap, at least label it.

Whatever happened to her 35mm slides and our old 8mm home movies, I do not know.   Does anyone watch them?  Probably not.  Does anyone care?  Doubtful.  After so many years, everyone's home movies look alike.

And in my lifetime, I have accumulated photo albums of old-fashioned photos, which document a lot of trivial events in my life.  No one looks at them, and I doubt even I will.  Once you've gotten over the "Gee, you weren't so fat" and "Gee, you had more hair" and "Were we ever that young?" the fun kind of wears off.  And these albums occupy an entire storage tote as large as a child's coffin.

Enter digital cameras.  Initially, these seemed like a great thing - freeing us from the hassle and expense of buying film.  And now we could store these images digitally, which would take up a lot less space.  But instead, other things have happened.

To begin with, since there are no film costs and there is no incremental cost to taking a picture, we end up taking five or six of the same shots, hoping to get "a good one" out of the bunch.  As a result, taking a photo, particularly a group photo, is an ordeal of "hold it" and then pressing the button (and not the wrong button, that turns off the camera) and then waiting for the exposure and hoping no one moves in the interim.

"Wait!  Let me do that again!" is a phrase that is sure to elicit groans from the crowd.

And you don't want to use the flash.  It takes forever to charge, drains the batteries within a few shots, and tends to produce pasty-white, washed out photos that are staggeringly unattractive.

But then you get the camera home and the fun begins.  Uploading the photos is a chore - and many folks have no idea how to do this.  Photos end up being stored in hard-to-find directories with cryptic titles, like ECD465821290 which of course, was your family vacation photos from last July (You didn't know that?  Idiot!).

And of course with Windows, you have to figure out whether they are stored in "Pictures" under your user name or in the "Public" directory.  The net result is you can't find a damn thing and are left with this vague feeling that there are lost photos somewhere on your hard drive.

Many folks, of course, do not make copies onto other hard drives or back up their hard drives, or upload their photos to the Internet (about half of all Americans, make that 70% don't know how to do any of these things - even how to copy a directory from one location to another!).  So when the hard drive fails (and they all fail, eventually) they lose all their photos.

Now you've got your photos on your hard drive.  How do you view and edit them?  Use Windows' poorly thought out and planned photo editor?  Or use some other proprietary program?   Of course, the first thing you have to do is go in and manually rotate all the photos you took in portrait mode, because most digital cameras don't figure this out automatically (geez, you'd think a simple microswitch could deal with that - it works on an iPad!).

Then....what?  Displaying photos on your computer is OK, if you have a good sized monitor.  But suppose you want to show others?  So you go out and buy a digital photo frame, select pictures, upload them, and then create a slideshow.  That's fun, I guess.   Or you can go online to webshots, Picasa, or even facebook, and create albums to share with friends.

What ends up happening, of course, is that 3/4 of the photos you take, you end up throwing out.  And you lose interest in editing,  cropping, and color adjusting the rest of them.  Photography, as a hobby, really has been killed off by the digital camera.  And what kills it, is sheer boredom.

So you want to print out a photo.  Well, the inkjet printer is to the rescue - making photo-quality copies at only 2-3 times the price of photo processing.  But if you are an artist, you can make incredible art with these things.  Problem is, everyone seems to have "done" the "color adjusted" inkjet photo with the weird super-chroma colors.  It is a tired trope at this point - having oranges, reds, greens, and blues "pop out" of a photo like a cartoon.  What ever happened to Black and White?

The old model of film-and-camera, even with Polaroid, was, in some aspects, better.  Why?  Because we didn't have so many choices.    You aimed the camera, pressed the button, and hope you got a good shot.  Even professional photographers had little to do, other than to set aperture and exposure, select film speed, and perhaps do some work on the developing side.

About the only upside of the whole thing is this:  I don't have to add any more physical photos to that tomb in my garage.  They can all go on the hard drive and then evaporate from there.  And perhaps they will continue on, into eternity, on webshots or Picasa, long after I am gone.  Not that anyone will look at them then, either.

Tuesday, February 28, 2012

Shopping for a Living

Question (a simple question):

If chasing after discounts, coupons, cash-back bonuses, frequent flyer miles and all that other junk was such a good deal, why not quit your job?

Think about it.  If you get 10% off on a purchase, then it would make sense to purchase $100,000 of goods, sell it for $95,000 (a discount off market value) and then pocket $5000.   You'd be rich in no time!  Do this once a week, and you'd make $250,000 a year.

If this were true, we'd all quit our jobs and then shop for a living, living off our bonus coupon discounts and such.

The Answer?

Well, the goods are not worth $100,000.   They were only worth $90,000 - which is their actual market value.  You could not re-sell them for even a 5% profit.

The price you pay, with Bogos, rebates, coupons, and all that other crap is just the market price.  You only think you are saving money by comparing your "discounted" price to some fake "retail price" that no one pays.


However, the psychological inducement of the "bargain" does encourage you to spend more and also make purchases you might not otherwise make - which negates any real savings.

Don't let the carnival distract you.

Pay the lowest possible price, of course.   But don't think for a minute that these gimmicks are anything but gimmicks. 

90% OFF SAVINGS!

When someone tells you that by spending money, you are SAVING!!!! (usually with exclamation points) you should be skeptical.

You can't spend your way to wealth.   You cannot eat your way to slimness.

This article on MSNBC illustrates an extreme example of this concept.

A retailer can show "90% off SAVINGS!!!" on a bottle of ketchup by claiming that the retail price on a bottle of ketchup is over $100.

But it is just using a specious price point as a reference.

Savings - in terms of discounts from fake target prices (that no one ever pays) are not savings.

Just remember:  Savings are something you put in the bank.  Anything else is SPENDING.

Don't be deceived.   You cannot spend your way to wealth

 How you spend is not going to make you wealthy, just as how you invest is not going to make you wealthy.

Saving makes you wealthy.

Predicable Outcomes

When you see a kid riding down the street at 80 mph on one of these, with no helmet and no protection, other than a t-shirt and sandals, you have a pretty good idea of what the predicable outcome is.

Predictable outcomes.  This is, perhaps the difference between youth and old age.  As a youth, we tend to look at events in our lives as a series of causational chains.  "But for" some intervening event, bad things would not happen.

So to a kid riding his crotch rocket at 70 mph in the city, with no protection other than a t-shirt (which is riding up to show that all-so-important lower-back tattoo), the cause of the accident is the lady who turned left in front of them.  In the intensive care ward - or at the funeral - the kid (or his friends) will say, "Gee, didn't that lady SEE the motorcycle?  She is to blame for little Joey's death and/or dismemberment!"

But an older person, having ridden enough motorcycles, fallen off of them, or having been hit by a cop (yes, it happens), realizes that the old-lady-turning-left-in-front-of-the-motorcycle is not some weird unpredictable outcome but rather almost a preordained conclusion.  You ride a motorcycle, someone in a car will hit you, plain and simple.  Maybe today, maybe tomorrow, but eventually and surely.  The law of probability must be obeyed.  The beast must be fed, often with blood.

But youth says, "It's OK, I'll be careful!" as if driving skill were the issue at hand.  And this reflects the mindset that causational chains are what determines outcomes.  But the only causational event that could affect the outcome would be to go back in time to the point where the youth signs the loan papers on the crotch rocket at the Jap Bike Dealership.

True enough, you can try to ameliorate the outcome by wearing full leathers and a helmet and taking other precautions.   This reduces risk, but does not eliminate it.  And the risk of death or injury on a motorcycle remains, alas, very high.  And this is a shame, as riding a motorcycle is a lot of fun, but the cars out there really are a buzz-kill.

One sure way to avoid a predictable outcome is to avoid engaging in that kind of behavior.  For example, if you go into a casino, a predictable outcome is that you will lose money.  If you go to a bar and get drunk, a predictable outcome is that you will get a DUI.

One sure way to avoid such outcomes is to not go into a casino at all - ever.  Or to go to a bar, without a designated driver.  Or to not ride a crotch-rocket motorcycle at 100 mph at age 17 with no protection whatsoever.  If you simply don't do these things the bad outcomes are guaranteed 100% not to happen.

And when the outcomes are particularly nasty, such as being a paraplegic, or spending months in intensive care, or gambling your life's savings away, or getting into a DUI accident and killing an entire family, then maybe just not doing the activity at all is a pretty smart idea.  The risk/reward balance just doesn't make any sense.

No on plans on bad outcomes.  No one buys a crotch-rocket with the idea of spending a year in painful rehabilitation therapy.  No one goes into a casino with the idea of spending their children's college fund.  No one goes into a bar, thinking, "Gee, let's get drunk, drive the car and kill people!"

And no one gets a credit card with the idea, "Hey, let's rack up a lot of high-interest debt and go bankrupt and spend a decade paying it all off!  Wheeee!"

And yet, that is a predicable outcome of having a high-interest rate "rewards" card, and one that happens to a staggeringly large number of Americans.   And the best way to avoid this predicable outcome is to just not play that game.

And yet, many readers write me and say, "Yea, well, but I'll be safe and drive carefully!  Because I made $500 in rewards miles already!"

And like the kid with crotch rocket motorcycle, they think that the credit card thing is a causational chain of events.   That "but for" someone being fiscally irresponsible, the whole deal would be just fine.  Those people who got into trouble just didn't drive their credit cards carefully enough!

But the reality is, life takes unexpected turns, and fiscal responsibility is in being prepared for those turns, and not putting yourself into a situation where you are so leveraged that the slightest unexpected event bankrupts you.

For example, say you have a miles credit card and  a motorcycle.  You get into that motorcycle accident and spend months in the hospital.  Regardless of your "best intentions" to pay off the balance every month, your credit card balance creeps up over time.  Medical bills are the number one cause of bankruptcy in this country, but what is unstated is that amount of credit card debt that accompanies this.

It is like running or rolling stop signs.  You can do this, for years and years, and never get into an accident (but likely have a lot of close calls and have people honk at you).  But because of the A-pillar phenomenon, eventually, you will hit someone.    It is a predictable, and perhaps inevitable outcome.  There is a persistent, yet low probability, which added over time, comes to 1.0.   And yet, there is an easy way to 100% avoid this kind of accident - come to a full and complete stop at every stop sign.  So why not do it?  The benefit (saving 2.5 seconds) certainly does not outweigh the outcome (major accident, insurance increase, etc.).

And that is the whole deal, I think, in personal finances - looking at the probabilistic model or quantum economics, and not at your personal economic situation as a causational chains - a series of individual decision tree actions.    You cannot be perfect all the time, that is a given.  Not all of your investments will pan out, that is a given.  You will waste money on stupid things - that is a given.

What you can do is, look at the statistical model and say to yourself, "What can I do, in general terms, that will prevent bad possible outcomes which are quite predictable, statistically?"

And the answer you get is things like:  Diversify your portfolio.  Statistically, you come out ahead, as some investments do well, and others will tank.  It is the safest and best bet.

What the financial gurus and stock channels say is the opposite.  They follow the causational chain theory and promote stock and investment picking.  If only you make the right individual decisions, over time, you will become wealthy beyond your dreams!  The problem with that model is that one mistake can sink you, just as a moment's inattention at a traffic light puts little Joey in intensive care as his crotch-rocket slams into the side of Martha's Buick.

Most financial books, advice columns, and the like tout this decision-tree theory.  As if individual decision could be held accountable for trends that span decades. 

But a better approach is to not to rely on individual decisions and events to keep your financial house afloat.  Paying off the balance on a credit card every month is a fine idea, provided you do it 12 times a year for 50 years.  Just do that 600 times without fail and you will be just fine, right?  And so far, you've done it, what?  12 times?  Good plan.

Doing things that avoid risk or at least balance risk and reward is a better quantum approach.  And yes, this means just "not doing" a whole host of dumb things which usually lead to financial ruin.

So when I say, "Never Co-Sign A Loan!" I mean NEVER.  Not, "Well, unless it is for a really good reason."   Why?  Simple.  The predicable outcome is financial ruin, and no "really good reason" justified that.

When I say, "Never get a 22% interest credit card" I mean NEVER.  Not, "Well, unless you pay off the balance every month."   Why?  Simple.  The predicable outcome is that you will not pay off the balance one month, and the high interest will make it impossible to do so and very quickly, the interest charges will negate years of cash-back bonuses.  It can take a decade to pay off such credit cards.   Why risk it?

Engaging in any financial behavior which relies on such decision trees is something to be avoided.   Borrowing money presents such decision trees - a continuous stream of debt payments that need to be serviced, which assume you will keep your job and have a steady income (things that people are finding out, are not assured!).  So you have to limit these to where it is really necessary or worth the risk.   A mortgage?  Yes.  A car loan?  Maybe not.   A credit card?  Hell no.

Monday, February 27, 2012

Appraising a House

A home appraisal is an inexact science.  Yet, everyone should know how the process works and what an appraisal does and doesn't mean.

How do you determine the value of a home?  It is a very relevant question in an age when home values can soar one year and then tank the next.  And even if you never own a home, knowing home values in your area can tell you whether or not it makes sense to rent or own.  If you can't do that math, then renting could indeed be a mistake.

An appraisal is usually done for the bank and for that reason, many appraisers are more and more reluctant to hand out copies of appraisals to homeowners.  One appraiser I know was sued by his wealthy investment banker client, who decided to buy a vacation home on Maine's trendy coast.  The client paid three million dollars for the house, at a time when houses in the area were selling for that much.  But then the market tanked, and the wealthy investment banker decided that he wasn't going to take a loss, so he sued my friend for providing a "faulty appraisal."

A load of horse-hockey?  You bet.  But after much legal wrangling, my friend's "Errors and Omissions" insurance company paid out several hundred thousand dollars to ameliorate the investment banker's loss.  Rich people get away with this shit, too.  You and I can't, as the amounts we lose would be dwarfed by legal fees.

But, in case you weren't paying attention, an appraisal is not a guarantee of home value.  It is just a scientific guess as to what the home may be worth, and in most cases, this guess is based on what other people are willing to pay, at the time, for similar properties.  And this is the most unscientific way to figure out the value of anything.  And in most cases, it is a guess prepared specifically for the bank, not you.

Like a hyped-up "dot com" stock, what the "last person in" paid is hardly an indication of the real value of anything.  And usually such amped-up valuations tend to correct (i.e., plummet) over time.

How is a home or property appraised?  Well, there are basically three ways, of which only the last (market value) is used for residential properties.  The other two are often included in commercial property appraisals (which can cost $1000 as a result, compared to say, $300 for a home) but are often no more accurate than market value appraisals, as they depend on market values themselves.

Let's explore these three appraisal techniques, as well as some ways you can use appraisals to your advantage, as well as how to work with your appraiser to make sure you get the value you are looking for.

Note that tax assessments or evaluations have little or no bearing on real value.   When the tax assessor says your house is assessed at $150,000, that does not mean the house is worth that much.  Usually, tax assessment values are 1/2 to 2/3 actual value.  They are just a placeholder number to value your home relative to other homes in the area.  Why this is so, is difficult to understand, other than if assessors used real numbers, they would have to reassess every home in the area on a yearly basis - or more often - which would be problematic.

But when you see someone saying, "Well the assessed tax value is X, so why is the house priced at Y?" you know you are dealing with a real rocket scientist.

There are three basic types of valuation:  Construction Cost, Income Model, and Market Valuation (Comps).


1.  Construction Cost:  At first, this would seem like a very concrete way to evaluate a property.  You look at a house, measure its square footage, and then come up with a number that represents the cost to build the house.  In most cases, however, this number is arrived at by multiplying the square footage with a "cost per square foot" to build, which is a number bantered about by builders and is only a rough estimate of construction costs.

A home comprises a foundation, framing, sheathing, roof, wiring, rough plumbing, insulation, interior sheet rock, flooring and trim, finish wiring and plumbing, appliances, HVAC, and paint and finish.  And each area of a house has a different cost per square foot.  A kitchen is more expensive to build than a closet, for example, due to the cost of cabinets and appliances and tile and finish work.  So these "cost per square foot" estimates are anything but accurate.  And they vary all over the place, as labor costs in some areas are much higher than others.

But even assuming this cost estimate is ballpark, the big wildcard factor is evaluating the land.  For a sample $300,000 house, the cost of construction might be $150,000 and the land value might be $150,000.  And this is not atypical, except in areas where land is cheap, such as very rural areas.

How do they come up with the land value?  Well, they use market values, or "comps".  So right off the bat, in our construction cost model, they end up going back to the market to determine prices of half the property, even if there is some "science" behind the valuation of the home.

And market values represent what people are willing to pay for the privilege of occupying a piece of land.  Near a major city, where people have high incomes and can pay more per month in mortgage payments, land values rise.  And if interest rates and tax rates are low, land values rise.  But if interest rates and tax rates go up, land values can go down, as people can only afford so much per month.  And right there is the problem with the "market valuation" or "Comps" technique of valuation, as we shall see.


2.  Income Model:  The income model is useful for commercial properties but also a calculation you should make as a potential homeowner or renter.  Simply stated, the appraiser looks to market values for rents (again, relying on that old bugaboo, market value) and then backs out the costs of ownership to determine what price the property will support.

For example, suppose a 2-bedroom house in River City sells for $300,000 and rents for $1500 a month (plus utilities).  The taxes are $3000 a year and the insurance another $1000.  If the homeowner puts down 20% ($60,0000) and finances $240,000 at 5%, the monthly payment for Principle and Interest is $1288 plus $333 for insurance and taxes, making a total of about $1621.

Based on that number, you might think the home is a little overpriced - and worth perhaps $250,000.  If you were to be a landlord and buy the home at $300,000, you might have a negative cash-flow, particularly after repairs are factored in.  Of course, another factor to factor in is the tax deductions for mortgage interest and depreciation, which could make this a positive-cash-flow deal.

But regardless, oftentimes the Income Model paints a bleaker picture of home value than competing prices would suggest.  Oftentimes, but not always - all the investment Real Estate that I bought had a positive cash-flow from the get-go.   But that was in 1998, not in 2008.  Perhaps  today this is again the case - in some markets.  Perhaps not.

Note how small things like tax rates, interest rates, and even insurance costs can tip the balance.  $333 a month might not sound like a lot, but a 10% increase in these costs can turn a break-even property into a money-loser.  And it illustrates why shopping your homeowners insurance is so important.

If you are buying a home or renting, you should do your own income model evaluation, before buying.  Chances are, in most markets, you may be shocked to discover that owning is more expensive than renting.  And often this reflects a "forward-looking" view of the market.  People pay more for a home, as they are locked into a fixed price structure (they think, anyway) moving forward, and over time, their cost of home ownership maybe far less than renting.

Many folks also look at the other side of the equation - appreciation - and figure that even if the home is a break-even prospect, they will make lots of money in appreciation as the home rises in value.  This may or may not be true.   In a normal market, homes rise in value only 2-3% a year, making the appreciation argument rather weak.  In crazy markets, housing prices may skyrocket - but then plummet - leaving the homeowner bankrupt.

Owning a property and paying more than rent (or renting it out with a negative cash-flow) on the premise that you will "make a lot of money" on resale, is to me, a short-sighted strategy.



3.  Market Value:  99% of home appraisals use market value, or "Comps" which is short for comparables.  It arguably is the least scientific valuation of a property, as it basically states what other people are willing to pay for a specific property at the time the valuation was made.  That may be fine and all, but a mortgage is 30 years, and if a property drops in value due to people's perception of its value then you and the bank are screwed.

And Market Values are just that - perceptions.  The "invisible hand" of the marketplace is often blind as well, and tends to value things based on emotions, hoopla, fear, and greed.  And we see this in every aspect of the market.  Gold is shooting up in price because of fear and hoopla.  It has no "fundamental" value other than people's perception of its value.  You can't do an income model on Gold as it has no income.\

Similarly, IPOs and dot-com stocks are wildly overvalued because people get greedy and "want in" on the "next big thing" and frankly have no idea what they are doing.  Facebook stock will be bid through the stratosphere right after it drops its IPO.  But then, people will likely pull back and think, "Where is the money?" and the price will drop back.  Does that mean the company increased and decreased in real value?  No, only that the price the last yahoo was willing to pay for 10 shares of the stock went up - and then down.

So market value is how appraisers work.  They measure your house, look at its condition, and then compare it to other, similar sized and type houses in the area that recently sold.  And then they sort of average together a few comparables and come up with a price.  Scientific?  Perhaps a little.  Accurate?  In a stable market, perhaps.  Reliable?  Not really.  It only tells you what others were willing to pay for similar homes in similar areas in a similar time frame.

And to some extent, these prices become self-fulfilling predictions.  When you buy a house, you look at houses "in your price range" and then look to comparables that recently sold to see what others paid for similar houses before making your own offer on the house you want to buy.  You are not making a judgement on absolute value, only your value relative to other people - the great unwashed masses of Lemmings and how much debt they decided to get themselves into.

But, it is all we have to work with.  So we use it.  But don't think for a minute that an Appraisal is the word handed down from God on the value of your home.

* * *


There are some things it helps to understand when getting an appraisal and also scenarios where you might want to pay to have your own home appraised, prior to sale.


Drive-By Appraisal:  These are falling from favor, as banks are finding they need to do their "Due Diligence" again.  But during the height of the Real Estate madness, many banks would do "Drive-By" appraisals or "Zip Code" appraisals on houses.

Houses were changing hands so often, and appraisers were so backed up, that doing a detailed appraisal with a measuring wheel and comps, often seemed a waste of time.  If you owned the "Jefferson" model townhome in Happy Meadows Mews development, chances are, it was worth what another "Jefferson" sold for six months earlier.  Why bother spending $300 to find out what a few clicks on a keyboard could tell you?

Some banks took this further, using the zip code to determine average home prices in the area, and then using a formula to determine whether the home price was within one or two standard deviations of the mean.  This really saved a lot of time.

And the upshot?  While it may have made Mortgage Fraud easier to do, the net effect, compared to hiring an appraiser and having a physical appraisal and report done, was basically nil.  Appraisers appraise to market values.  And if market values go berserk, well their appraised values will as well.

Again, an Appraisal is just sort of a "Cover Your Ass" (CYA) document for the bank, and is generally not intended for the homeowner.  A detailed appraisal and a drive-by or zip-code type are not necessarily accurate reflections of current or future market values, nor is one type inherently more accurate than another.

In the market environment today, however, you are less likely to see drive-by or zip-code appraisals anymore.



Helping your Appraiser:  If you are having an appraisal done, you need to be there when the appraiser arrives.  And you need to do your homework, in more than one sense, if you want the house to appraise.  First, clean the house and fix any broken stuff you can.   If you are selling your house, you need to do this, anyway.  If you are getting an appraisal for a refinance, you can make the house look its best.   If it is a property you are buying, obviously, you can't do this.

But more importantly, go online and pull some "Sold" listings for comparables for the area.  Your Real Estate Agent (or their assistant) can help you with this.  Remember, Comps are SOLD properties, not listings.  Pick homes that are close to yours in terms of distance, style, and price range.

Some appraisers are lazy when picking comps, and will pick homes that are wildly different than yours or in far worse neighborhoods.  As a result, your property may under-appraise.

When the appraiser arrives, be nice and friendly and helpful.  Hand him the printouts of the comps you found to be helpful.  You can't insist he use them.   Then be sure to mention, offhand, in the discussion, the target price you are looking to appraise at.  Many appraisers will end up centering on that price, as they are only human.  If they are not aware that the house needs to come in at a certain price, your appraisal may end up being too low.

Be sure to point out improvements and upgrades to the appraiser.  Hardwood floors, upgraded kitchen, newer appliances and physical plant, roof, windows, etc.  These affect value somewhat, and in many cases, some appraisers miss these things.

If you work with your appraiser, you can help get the house to appraise at the market value needed to get that mortgage, for you or your buyer.

One might argue that the opposite can be done - to try to spike the appraisal to get a lower home price.   If a house fails to appraise (see below) you might be able to go back and argue that the sales price is too high, and thus force a lowering of the price.  My gut reaction to this, as well as home-inspection games, is that it is underhanded and sneaky, and the Great Wheel of Karma catches up with people who play that way.

As a seller, I would walk away from a buyer who makes an offer and then tries to use an appraisal or home inspection to force a concession in price later on.  But then again, as a seller, I realistically price my properties.  Games are just a waste of time, so I don't bother playing them.


Using an Appraisal to Sell a Home:  If you are trying to sell your house in a slow or crowded market, having an appraisal done can be a good way to find a price point for your home.  And if you want to move a property, it can help to have it appraised and then list it for "below appraised value!"

If the house sells quickly, the bank the buyer uses may even accept the appraisal for their purposes (in the past, anyway, an appraisal less than six months old was usually accepted) and thus save your buyer the $300 to $500 appraisal fee.

Of course, this tactic is a little disingenuous, as appraised values are all over the map, and you can "tweak" an appraisal by suggesting values to your appraiser as well as suggesting comps.   But then again, most people have this idea that appraisals are the word of God handed down by Moses himself, and engraved on stone tablets.  But an appraisal is just that - an estimate of worth.

We have used this technique twice, not only to help us price a property, but to sell it.  And in both cases, we listed the property for slightly less than appraised value and watched it sell in a matter of weeks.

Some folks might argue this misses out on that last few thousand dollars in sales price that you could get.   But I disagree.   When a home is costing you $1500 to $4000 a month in carrying costs, is it really worthwhile to let it sit on the market for 10 months to get an additional $10,000 to $20,000?  I think not.



When Your House fails to Appraise:  Sometimes a house fails to meet its target value for appraisal.  And the reasons for this are many and often have nothing to do with the value of the home.

1.  The house is overpriced:  Clearly overpriced homes won't appraise, unless you have a particularly stupid or crooked appraiser.  If you are a buyer, and a place comes in way below asking price, then maybe this is a blessing  in disguise.

2.  The Appraiser Spikes One:  If an appraiser always meets the bank target for appraisal, then someone down the road could argue that all they are doing is validating the proposed transaction and not really valuating the house.  And for this reason, sometimes you get an appraiser who gives a low appraisal - below the target the bank is willing to lend on - just to show he isn't anyone's patsy.  They literally may "spike" 1 out of every 20 appraisals.  It is a delicate game, as an appraiser who doesn't "play ball" stops getting phone calls from Real Estate Agents and Banks.

3.  Bad Comps:  If you don't suggest comps and also present the home in its best form (and point out upgrades, new roof, etc.) the appraiser may come in low.  He shows up at the house, and no one is home.  He is pissed off, so he pulls some "comps" from a nearby ghetto, including a foreclosure sale and a "fixer-upper".  He underestimates your square footage, and puts down the house is in "average" condition, when in fact you have a new bath and kitchen, as well as brand-new roof and HVAC.  This is why it is important to BE THERE when the appraisal is done (even if the appraiser says it is unnecessary) to help steer him in the right direction.  The appraiser wants to give you the number you are looking for - but you have to give him the supporting evidence (the comps, condition) to validate that conclusion.


4.  Grudge:  Real Estate Agents have their favorite appraisers and tend to use certain ones.  If an agent hires a stranger, they may be less inclined to do a good job on the appraisal, and if they have to "spike" one to show they are independent, they are more likely to do it for a stranger than for a good customer.  In addition, if you piss them off by failing to show up at the appointed time, they may take it out on your appraisal.  Unprofessional?  Perhaps.  Humans are only human.  But I have been to an appraisal where the appraiser came out of the car with a clear chip on his shoulder, and only later was it revealed that he and the Real Estate Agent had a history and some disputes.  He came in below price and the homeowner was screwed in the process.

If the house fails to appraise, the sales contract (or Re-Fi or whatever) may be null and void.  This means, as a buyer, you have a way out (no financing) or you aren't going to get your home equity loan.  Both may be a blessing.

In some instances, the buyer, if they want the house badly enough, may come up with more down payment to lower the mortgage amount to a point where the bank is happy.  In other cases, the seller may have to lower their price.   Or both parties agree to meet in the middle.  Since, by this point, the house has been off the market for a few weeks, it makes sense to try to salvage the contract, rather than have to re-list the house and find a new buyer.

If you do re-list the house, do you have to disclose the low appraisal to a new buyer?  Good question, and I would talk to the Real Estate Agent in your State for specific advice.  To me, this does not constitute a "material defect" in the property like a leaky roof or asbestos, but rather a market valuation by one person.  But it never hurts to check local laws.

* * * 

As you can see, an appraisal is important, and yet means nothing.  It merely states what the market says a house is worth at the time a sale is made.   It is no guarantee of price or determination of underlying value.  It is just a number, puled out of the air.  And while the appraisal system may help validate the bank's decision to loan and your decision to buy or sell, in most instances, the appraised value merely bootstraps decisions that are already made.

Knowing how the system works can help you understand what an appraisal means and moreover, help you to make sure your appraisal will come in at the optimal price for your property.

Sunday, February 26, 2012

Chess King (Shitty Clothes)

Chess King was a chain of clothing stores that sold pretty mediocre and trendy clothes, such as this split-leather jacket, to gullible young people.   Today, we have Aeropostal and Abercrombie & Fitch.

Shitty clothes.  Our malls abound in them, and they sell like hotcakes.  Clueless teens and 20-somethings buy this stuff, usually made in China, and pay top dollar for it.  It rarely lasts, goes out of style in 20 minutes, and usually is covered with logos and brand names.

I was in a "vintage" clothing store the other day, and was chagrined to see some Chess King jackets for sale.  This brought back memories, as there was a Chess King in the Godforsaken Suburban Mall ("Where the FUN is!") where I worked as a dishwasher in the Olde Tyme Gaslight Restaurant.

(By the way, nothing makes you feel old more than seeing the stuff from your childhood, your adolescence, and even your young adulthood, in an antique or "vintage" store.  Well, maybe reading about events from your lifetime in a child's "history" textbook comes close.)

I used to go to Chess King after work and look at the crap they sold and get a chuckle out of it.  At the time, I had a motorcycle and had a leather jacket, which is a very good idea to have, if you ride a motorcycle.  The split-leather pieces of crap (sold as "bomber jackets") were poorly made, but designed to appeal to the Disco crowd.

Embarrassingly, later in life, I actually did go there and buy a "Miami Vice" style suit, when that was all the rage, and of course, it was a poorly made piece of shit and I don't have it today.  It went out of style faster than it fell apart.

The chain closed in the 1990's, as styles and fashions changed.  And over the years, I bought similar crap at other stores, such as trench coat (it was so 1990's) from Britches of Georgetown (remember them?) which also went under.

I can proudly say, I never bought a "Benetton" sweater, at least.

Today, the malls have Abercrombie and Aeropostal, and teens and twenty-somethings wear this crap, as we did back in the day.   For many young kids, having the "right" clothes means everything, lest they be mocked in school.  And retailers thrive on this, which is one reason why they put the labels on the outside of the clothes now, so that everyone can be sure you bought the correct merchandise.

This is, of course, a really sick thing.  It teaches kids, from an early age, that having the right accessories and "things" is so important in life - more important than real values.  And these are the same kids who grow up to lease a Lexus or buy a mini-mansion, or flaunt their smart phones, as they are convinced that life is just one long High School, and the key to success is to be one of the "popular kids" with all the right toys.

And these values are taught earlier and earlier today.  When I was a grade-schooler, no one really gave a rat's ass if your sneakers were Redball Keds or Converse All-Stars.   After all, you only wore your "Gym Shoes" in gym class, and the rest of the time, no one cared whether you wore Hush-Puppies or Florsheims.

In short, clothing brand awareness was basically nonexistent in 1970, but by the early 1980's, it took off like a rocket.  And today, having the "right" clothes - which are often poorly made pieces of crap from China - is all-so-important to kids.

In the 1990's, I did some work for Nike, the sneaker maker, and it was disturbing that kids back then were killing each other over $200 sneakers.  Worse yet, very poor kids were striving to buy these expensive sneakers, and most of these kids were black.  Nike is not exactly an all-white company, but let's just say that Beaverton, Oregon ain't all hip-hop and ghetto.  Black people killing each other so the man can make money selling them overpriced Korean-made sneakers - pretty stupid, no?  But today, in a "flashback" to the 1990's, Nike has managed to re-create the hoopla and cause riots in stores when they sell variations of these same sneakers.

Don't people ever learn?

But again, to kids, particularly poor kids, having the right brand and model sneaker or other clothes makes all the difference in the world.

How can you jump off this bandwagon?  It ain't easy.  If you are a parent, likely your kids will nag you to buy this shit - lest they be ostracized for not having it.  And they will be convinced, too, that owning an ugly "Aeropostal" t-shirt was really their idea and their style choice, which was in no way influenced by their peers, advertising, or the hype in the mall.

And denying them this junk only sets you up as the bad guy and gets you blamed for the supposed mockery and ostracism they get from their classmates.  They are too young and immature to realized that (a) being popular in high school is a false value, (b) that having the right clothes isn't going to make you popular, and (c) being yourself doesn't mean copying everyone else.

Sadly, they have to learn this for themselves.  But you might be able to give the lesson a little more sting, if you make them pay for the crappy clothes with their own money (from a job or allowance, for example).  Then, at least, they can balance the costs with the benefits and learn something.

But of course, some never learn, and when you see a college kid wearing this crap - or worse, someone well into their 20's or 30's, it is sort of embarrassing.  It's like seeing the kids in rural areas wearing their pants low with the boxer shorts sticking out - not realizing that the style is already so-last-year in the big cities, at least three years ago.

As an adult, clothing serves a more pedestrian role - to keep you warm and cover your shame.  And since you don't outgrow clothing and since you tend to buy less trendy stuff, most of your wardrobe lasts a long time.   Durability and value outweigh trendy stylishness.  And in this regard, it can be downright hard to shop for clothing, in some stores.  They aren't marketing to you.

For example, we went to Target the other day to buy a pair of blue jeans.  Yes, the duct-tape was finally peeling off my old pair, which was ready to disintegrate.  But the only styles they had at Target were jeans that were "pre-distressed" and looked more like the pair I was throwing away.  I am not quite ready to model the homeless look just yet - at least not in a new pair of jeans.  Other models were "low waist" cuts for skinny kids, or the saggy-butt "rapper" look pants.  In fact, they had everything in stock except regular blue jeans.

Thus, it came as a surprise to find a regular pair of standard-fit, non-distressed, regular-colored blue jeans in a department store in Atlanta, at a fairly reasonable price.  Looks like we're all done clothing shopping for another decade.  And that right there is why they aren't marketing to the likes of me, and why Target doesn't carry regular old blue jeans anymore.

And don't get me started on underwear!  A trip to the men's underwear aisle at Target is like ladies night in the strip club.  When did underwear become so sexy?  And what do those models stuff in those briefs?  It is downright intimidating.  And no, these "sexy" briefs and boxers don't look sexy on most of us, just ridiculous.   You don't look like the guy on the package - and you don't have his "package", either.

To tell you the truth, I think most of the clothing I wear these days is stuff given to me (promotional t-shirts or gifts from friends) or things I bought at the thrift shop, including some of my best Hawaiian shirts, which is my only sartorial vice.  I have a couple of suits, but I rarely wear these.  And since they sit in the closet, they will likely last me the rest of my life.

Not having enough clothes has rarely been a problem, and indeed, in this country, it is akin to starving to death.  We are a awash in a sea of cheap Chinese clothes, and most people throw away a shirt or shorts when a button comes loose.  No one sews anymore, it seems.

So, in order to make money on clothing, the marketers had to create demand.  And one way to do this is to sell people on the idea that clothing is obsolete because it is "out of style" and that without the correct brand name plastered across the front, you are hopelessly not "with it."

And the drones buy into this, too.

Stealing the Cheese

Mouse Ethan Hunt tries to steal the cheese.  In real life this does not work out well.

Stealing the cheese.  A reader tells me he likes to do this - to look at these promotional gags and figure out a way to run off with the "bait" without setting the trap.  Super-couponers do this all the time, too, setting up websites that tout deals that combined coupons with rebates, with super-bonus-days, to get away with free stuff, or in some cases, free product and cash-back!

Can it be done?  Yes, sometimes.  Is it a valid strategy for getting ahead in life?  No.

As I noted in What's the Name of Your Yacht?, the people who engage in couponing and other techniques for skimming money from corporate enterprises, rarely end up well off.  If there was really "free money" in this sort of thing, then someone would be doing it for a living - and have a yacht.  But tellingly, the people who do this are poor, or at best, middle-class, and never seem to get ahead.

Why is this?  Well, for starters, there are just not very many deals like this - where you can combine a coupon with a rebate, and whatever, and come out ahead.  "Limit one per customer" usually means that you can't make more than a few dollars at this.

Yes, once in a while, someone scores big with airline miles, like the pudding guy.  But no one gets free fighter jets or free cars out of these deals.  And those carts of free food?  Mostly stunts - you can't do that on a weekly basis, without securing a steady stream of manufacturer's coupons in advance.

The second problem with this technique is that it is a time-bandit and distracts you from the real financial issues in your life.  And this is by design.  The powers-that-be don't want you to think too long and hard about the fundamentals of the daily financial transactions you are engaging in.  It is a good idea to be in so much debt?  Is using a credit card for every purchase such a swell idea?  Do you really need to be consuming as much as you are?  Are you saving enough?

They don't want you thinking that way.  Because if you do, you might start making financial decisions that make sense - for you.  And you will stop just buying whatever piece of crap they are hawking on the TeeVee all day long.  Bad food,  trendy and poorly-made clothes, trendy electronics, poorly made gas-hog cars, gaudy and overpriced mini-mansions - all crap you don't need, or really want, if you stopped to think about it.

But they don't want you to stop and think.  And to prevent you from thinking, the Carnival is coming to town!  Wheee!   Corporate America puts on a perpetual Circus to distract you from life - loud television and radio advertisements, as well as product-placements in the programs themselves, to sell you on the idea that buying a new car every three years is a societal "norm" and that not saving money and accumulating wealth is OK, too.

And part of this Circus environment is the idea that "smart consumers!" will take advantage of "special deals!" offered by Corporate America in the form of free installation, rebates, coupons, BoGos and the like.  And the more odious the deal, the more it is loaded up with free cheese.

Credit cards offer every sort of cheese, from frequent flyer miles, to cash-back bonuses, to supposed special VIP back-stage passes (for you and a select group of a million other card-holders) if only you will sign on to a 22% interest rate card.  Lots of bait, because the trap is very deadly.  Again, and this is the Reader's Digest version:  If you get caught in this trap, you will have to gnaw a leg off to escape.

Cable and Satellite TeeVee offers "free installation" and free set-top DVR boxes.  Is this expensive?  You bet.  I had HughesNet satellite Internet service at the lake (no cable modem, no DSL) and the cost of "installation" was about $800, for the dish, the satellite modem, and the setup and aiming.  Since they have so few customers, they don't offer "free" installation or free equipment.

So, when a company offers to put four set-top boxes in your house, and run the coax and set up and aim a dish, that is a lot of free cheese.  And that is why they charge $100 a month or more, which over 30 years will run to $80,000 in service fees, with interest.  Huge trap, big cheese.   And the worse part of that trap is the fire-hose spray of poor normative cues blasting into your living room every night.

Chasing after these cheese deals distracts you from the fundamentals of your financial life.  When someone offers you a free toaster for setting up a savings account, and you start chasing free toasters, you forget about the basics of the transaction.  Is the interest rate on the savings account any good?  Why are you buying your toasters at a bank?

The third - and major - problem with this technique is that eventually, Mouse Ethan Hunt gets caught in the trap.  You can't keep disarming bombs forever, before one goes off in your face.  You may think you are Lucky Mouse - and can go steal the cheese that other mice are too stupid to get.  But all you are doing is walking into a well-baited and well-designed trap.  And traps inevitably catch their prey, over time.

So you get the fancy credit card deal, and "pay off the balance every month".  Everyone says they will do this.   No one gets a 22.5% interest-rate credit card and thinks, "Gee, I think I'll carry a balance at loan-shark rates!"    Everyone thinks they will beat the system, get the free flyer miles or cash-back bonuses, and pay off the balance every month.

About 70% fail at this, at any one given time, according to industry statistics.   Over time, I suspect the failure rate is close to 100%.  Yes, most people in America carry a balance on their credit cards, despite their "best intentions" not to do so.  Shit happens.  People are weak.  Balances don't get paid off - just one month - and it snowballs from there, at 22.5% interest, into a pretty big snowball.

Is that risk worth the free toaster?  Think about it.

Real and astute financial planning requires you balance risks and rewards - the way the major corporations do.  Faux Financial Acumen involves chasing after coupons and rebates.  And in most cases, the people playing the Faux Financial Acumen game end up missing the big picture and end up screwed, big-time, and often fail to even realize it.  They will be sure to mention to you their free toaster and show it off with pride!

If you are going to take a risk, there has to be a commensurate reward.  And in most cases, these "deals" offered to consumers don't pass the risk/reward test.  Is it worth risking bankruptcy to get frequent flyer miles?  It sounds like a silly question, but if you look at the track record of most consumers, you realize that most folks who sign on for these credit card deals eventually get into a credit card debt problem later in life which is made intractable by high interest rates.

And once you get stuck with a high interest rate card, and get behind on the payments, it is very hard to "roll over" that debt into a lower card, as your credit rating is shot.   And moreover, they usually charge a hefty fee of 4% or more do to this.

It is as logical an argument as the folks who took out toxic ARM mortgages and then said, "Well, I'll just refinance if the rates go up!"   But since they couldn't afford the 30-year-fixed rates anyway, they can't afford to refinance, particularly once the house is underwater and their credit rating is shot due to late payments.

So, how do you best balance the risk and rewards in these deals?  The simplest and easiest way is to just walk away from all of them.   Yes, you will be tempted to say, "Well, Bob, maybe one of these deals ain't so bad!"  But chances are, that ain't the case.  And exposing yourself to so much risk and wasting your time trying to comb through them, is just not worth it.

You are better off walking away from all the free cheese and to not look back or think about the one possible good deal you are missing.  Because likely, it wasn't such a big deal.  And you are better off concentrating your energies on being really financially astute, as opposed to the pretend-kind.

Stay out of the Casino, and you are guaranteed to never, ever lose.  You can't just "gamble a little bit" - it never works out well in the end.

Realize that these baited traps are not really "deals" in the first place - just promotional come-ons.  And that is the "deal" right there.  If you want to be astute financially, you have to recognize the difference between real financial acumen and consumerism.  Trying to "spend smart" or spend-your-way-to-wealth is not being a "smart consumer" - it is merely being a consumer.  You are not "saving" by spending, despite what the coupon or Bogo says.

Getting out of that mindset is so important to getting ahead.  Because if you keep looking for financial redemption in the coupons and offers, you will never find it.

Saturday, February 25, 2012

Live Off the Interest? Not Likely!


One fantasy that people have is that you can save up money and just live off the earnings or interest and 'never touch the principal' - but this is just a fantasy for most people.


You've heard the expression before - "never touch your principal" and by that, I don't mean not fondling the man in charge of your local high school.

And you've heard people talk about the fantasy of "living off the interest" of their investments.  But this rarely happens.

Why is this?  Because it is a fantasy, after all.  For most people, we will never in our lives accumulate enough money to do this.  And even when interest rates rise, living off the income from your investments is tricky.

Why is this?  Let's explore.

I recently logged onto my Treasury Direct account.  I have only a few thousand dollars in this account, as the return on investment on savings bonds and treasury bills is, well, pathetic.  The maximum interest I get on a savings bond today is 3.7% for a bond I bought back in 2005.  My T-bill cranks out a whopping 2%, which is good for a 5-year bill (compared to today's rates).  Interest rates for "safe" investments like his will always be low, and today, they are almost non-existent.

And when interest rates rise, so does inflation.  And thus, you might think you are making more money if rates go to 5% or so, but since inflation is higher, you are really just staying in place - if not falling behind.

At a 2% rate of return, for every $1000 you invest, you make $20 a year.  Even if you invested $100,000 in such a vehicle, the most you would get is $2000 a year - hardly enough to live on.

Suppose rates went to 5%  - which would be among the highest they've ever been - you would still only get $5000 a year out of your hundred-grand investment.

OK, so you put in a Million bucks!  Now you are talking $50,000 return on investment. Not bad - the median income in the USA these days.  Add Social Security and you could live on that.  But that does not take into account inflation, and of course, interest rates are nowhere near 5% these days.

Oh, and one other little problem.   You ain't got a million bucks.  Few people do.  About 1% in fact.

Yea, that problem.  An entire generation is lurching toward retirement with little or nothing in the bank.    How much?  It is hard to tell, as a lot of surveys rely on self-reporting of data, which is never accurate.  And of course, people with defined benefit pensions may not have a lot in savings - and don't need it, either, if they have a secure pension to rely on.  But for the most part, average retirement savings look pretty pathetic, across the board, with most people crowing about having a couple hundred thousand dollars in the bank, if that.

Yea, ouch.

So the fantasy of living off the interest is just that - a fantasy - for most people.  Even if you won a million bucks in the lottery, the money you'd make "living off the interest" would not be much of an income.

But what about higher-yield investments?  Yes, you can make more money - potentially an unlimited amount, by investing in riskier things.   But the emphasis here is on the word "riskier" - which means although you might make 10% or even 20% on your investment, you might also make -100% and end up broke.  It is just a risk we can't take.

The best approach is to diversify your portfolio, to balance risk and return, and go more conservative over time.

And then, when you retire, spend your money - including the principle.  Using the 4% rule or other technique, you have to dip into your savings, over time, in order to withdraw enough income to live on.  But it's OK, because you DIE in the end, and you won't need the money in the next world.

Even if you could get a lot of money AND get a good guaranteed rate of return in a safe investment, there is one more bugaboo that clogs up the works of the "live off the interest" gambit - inflation.  Inflation decreases your buying power every year.  So if you spend the interest, say, on a million dollars, then every year, your effective buying power decreases, unless your interest rate keeps up with inflation.

The only way around this, of course, is to spend LESS than the interest, and keep investing so that your nest egg gets bigger and bigger.   That way, your income will rise over time to keep pace with inflation.   But of course, that means you need an even bigger nest egg to keep up with this scheme, as you might be able to spend, say, only half the interest.   So, now you need $2 Million instead of a measly $1 Million.

And you ain't even got the $1 Million, am I right?

This article, on CNN, sums it up nicely.  Gee, CNN uses to have good stuff, before it went all-celebrity-gossip and breathless reporting on the Facebook IPO.  What happened to CNN financial reporting?  Oh, well.


So what does this mean?
 
1.  The whole idea of 'living off the interest' and 'never touch your principal' are cute phrases but are irrelevant for most of us, or indeed, all of us.

2.  Spending your principal in retirement is OK - why leave an inheritance, anyway?  Besides, in order to get Medicaide, you will have to show you spent it all, so don't sweat it.

3.  Your retirement income will consist mostly of the money you SAVED, not money you earn from interest while in retirement.   So, the more you save, the better off you will be.  Trying to conjure strategies to make money from your money is a largely pointless exercise.  You got what you saved, that's about it.  Spend it.

4.  Interest DOES have one positive effect - it compounds over your working life and adds to your savings, potentially doubling or tripling them, over time.  But you have to save, and save early on, and not panic and make stupid decisions.  Once you retire, though, interest is not a big part of the picture.

So, once you are ready to retire, spend the money - in a planned and orderly manner.   Spend as little as you need, of course.   But attempting to "live off the interest" likely won't work out, in the long-term.  So don't feel too guilty, if you have to tap into the principal.  It will likely happen.


UPDATE April 2014:   One aspect of this fantasy stems from "Old Money" tales like that of Louis Auchincloss, who wrote about the old monied families of New York City.  The idea was, that a family could exist for generations by living off the interest alone, while their Principal increased over time.

However, as I noted in Death of Dynastic Wealth, simple mathematics makes this impossible.  If you have two children, your Principal will be divided in half when you die, giving them each less than half to live on.   Their children, half of that.  And so on.   Pretty soon, even Carnegies and Mellons go broke - even without inheritance taxes taking their toll.

The other problem with this model, for middle-class Americans is that if you become incapacitated in your old age, you will have to spend all your money on nursing home care, before Medicaid will kick in.   So you protect your Principal, and a big nursing home company thanks you for that.

Spend the money in an orderly way such that it will last you until you die.  As one reader noted, if you can spend the last penny with your last breath, you've optimized your life experience.

And leaving money for heirs?   They likely won't appreciate it - and instead of going out and making their own way, they will simply wait around for you to die.  It saps them of the will to live and the motivation to go out and do things.   But it does allow you to play the sick game of trying to get them to curry favor with you, right?

Coke Heads

Drug users can be annoying as friends, employees, fellow workers, or family members.  Coke heads are probably the most annoying of all.

Cocaine is an interesting drug.  The main problem with it (and methamphetamine) is that it strokes the ego so much that the person taking it thinks they are a bloody genius, and moreover, whatever they decide to do is just fine.

And of course, it is addictive.  A hit of coke makes you feel like a new man, the saying goes, and the first thing a new man wants, is another hit of coke.

Coke turns people into first-class assholes, and worse, they create a trail of wreckage wherever they go, and the rest of the world has to clean it up.

When I was growing up, drugs were pretty freely available.  About 80% of the Senior class of my high school had at least tried marijuana, and I suspect about 30% were regular users.  At about this time, the Disco era started, and cocaine use started to take off.

Cocaine was and is, staggeringly expensive, which leads to the first problem. The users will bankrupt themselves to get it - and then go about trying to bankrupt you - or their company or business, or wherever else there is money to be found.

I had a friend who was a carpenter, and he owned his own business and owned a home (which was pretty impressive for a 23-year-old) which was a duplex, so he rented out the upper level and actually had a pretty good gig going.  He smoked pot and drank beer, but it never interfered too much with his life.

And he had a sweet girlfriend, who was a nurse, and we all assumed they would settle down and get married and have kids and do that whole "happily ever after" thing.

Cocaine had other ideas.

He got into coke through some other friends.  He liked to go to bars and such, and it was available there.  He tried it, and it made him feel like a million dollars.  He was a genius, suddenly, full of great ideas and business plans, and nothing - nothing - could possibly go wrong.

Of course, the cost of the drug was a problem.  He and his tenant (who was also into it, and possibly the one who turned him onto it) started holding weekly poker games.  They would invite over other folks, such as myself, and then try to get us drunk and take us for everything we had.  I saw this going down and bowed out of it quickly.  Others were not so lucky and I saw one of his "friends" writing checks for hundreds of dollars for gambling debts.   Some fun.

He dumped his girlfriend shortly thereafter.  She was alarmed about the coke use and wanted him to stop.  Her ideas of settling down and getting married didn't include coke.  And my friend decided it was easier to marry coke and dump the girlfriend.  Besides, he was a hot young dude, and could pick up "girls" whenever he wanted to!

And by "girls" I mean 15- and 16-year-old girls from the country who thought that this guy "from the big city" who owned his own pickup truck, was pretty cool.  At that point, he and I went separate ways.  Underage girls is a line that I don't cross.

But before that, the signs were there for everyone to see.  I recall he had a party once, and within a hour, he and several of his friends disappeared.  I stayed on for a while, but slowly, everyone filed out.  I was the last one left. I finally found them all, in the back stairwell - him and his three coke friends, all talking 100 miles a minute right in each other's faces.

Cokeheads do weird shit like that - they will hang out in the least desirable places, just to do their drug.  Restrooms and the like seem to be popular.  Icky.

Whatever happened to my friend, I do not know.  He lost his business, over time, and he seems to have disappeared from the face of the earth.   I'm not sure I want to find out, or care.

In the workplace, cokeheads are very good at disguising themselves.  Management (particularly the inept kind) initially is enthusiastic about the coke head.  "What a go-getter!" they say, so pleased to see an employee brimming over with ideas and enthusiasm.  But beneath the veneer of cheer-leading for themselves, the coke head really has no real concrete ideas, and nothing to offer other than general enthusiasm and an aptitude for taking credit for other people's ideas. They are brimming over with bullshit and not much else.

Unfortunately, many companies look at drug use as something only lower-level employees engage in.  But cocaine use can spread to upper management, professionals, and the like.  Drug-testing is one good way of preventing this problem, of course.  But while companies are willing to drug-test truck drivers and hourly workers, they often are more reluctant to test CEOs and COOs, even if they represent more of a risk to the company and may in fact me more likely to be abusing drugs.

So what's the harm of the coke head?  Well, at first, they may appear to be creative, funny, and dynamic.  Indeed, in Hollywood, cocaine use was a real problem - but not recognized as such - for a long time, and even today.  Entertainers and writers would argue that cocaine would make them more creative and provide them with more energy.  And in the early stages of the drug's use, this might even be the case.

But over time, the cokehead has less and less to contribute, and starts "phoning it in" big time.  And you can tell when a Hollywood movie, or an entertainer, or a comedy skit, is being done by coke heads, over time.  It stops being funny in short order.  And eventually, the coke head's life starts to spiral out of control.

But few want to admit to this, of course.  Because the number one problem with cocaine, is that you feel you are not only in control, but in super-control of your life.  The drug fogs the part of the brain that is telling you to get off the drug.

To non-drug users, cokeheads are annoying as shit.  They are so buzzy all the time, but contribute little or nothing to work or family life, and eventually end up dragging everyone down.  And eventually, they resort to thievery - on a petty or grand scale - to fuel their drug habit.

How do you deal with a coke head?   You don't.  You have to walk away - completely.  If you have friends or family members that are into coke, just leave, period.  Even if it is a spouse or friend, the best thing you can do is to salvage your own life and not sacrifice it on the altar of saving someone else's.  Interventions and other techniques simply don't work - and only feed the attention-whore with more of what they really want.

It is only when people desert the coke-head do they ever realize (if ever) that the drug is doing them harm.  By sticking around - and being a target for their various forms of abuse - you are not "helping" them, but enabling. Just leave.

If you work for a coke-head or have a coke-head fellow worker, it is tougher.  You have to find a new job, plain and simple.  The problem is, management, as I noted before, may view the coke head as a "real go-getter" and view your complaints about the coke head as sour grapes.  And in fact, management may be doing coke as well.  It happens.  Either way, you work for a company with very shitty management, and things will go South eventually.  So finding a new job is not a bad idea. Find one where they drug-test.  Everyone.

Of course, it goes without saying that crack is just more of the same, only worse.  I recall another friend going down that road - sacrificing a marriage, with children, for a crack pipe and a series of brief highs.

And yes, all of these people started out smoking pot.  But Marijuana is not a gateway drug and donchuforgetit!  And of course, po-theads are never annoying in the workplace or as family members, right? 

Drugs in general - and that includes alcohol - are a dead-end.  People like to say that they have their drug habit under control, and that they just need their drug to "relax" or "be creative".   But that argument sort of negates itself.  If you need a drug in order to function, then by definition, you are not functioning very well.  Maybe a better approach is to figure out why you are stressed and uncreative in the first place.

Just a thought.

See Also: