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You are here: Home / Archives for smack down!

Don’t Be the Emperor With No Emergency Fund

August 7, 2012 by Average Joe 43 Comments

Before we start, minions: Today’s post features a word beginning with “S” AND a reference to horses and pornography. If that bothers you, it might be a good day to check out this website instead.

We all know the old story: emperor surrounds himself with yes men. His posse tells him he’s awesome. Some dude comes along to rip him off and tells him that he’s designing clothes only super brilliant people can see. Emperor is shocked he can’t see the new threads, so he pretends like he can. His homies, not wanting to look stupid, all say “great clothes, dude!” while their favorite ruler runs around buck-naked.

Don’t be that guy.

Two blogs I respect ran pieces about how emergency funds are overrated. While I can see portions of their point, you should think closely before following any advice to ditch your emergency fund.

Sure, interest rates are low and you can garner higher returns elsewhere. Big deal. My life isn’t about squeezing another $10 out of my $5k emergency fund. I’m not staying up at night thinking about how those $%#!ing nickels in my piggy bank are earning 0% when they could be cashing in on October hog futures. (that’s not an endorsement of October hog futures)

No, my life is about avoiding the worry around what the hell I’m gonna do when I’m dragging my muffler behind the car.

I know what I’m gonna do. I’ll attack my fund. I also might just float it on a credit card because it isn’t a big deal.

Then I worry about, “what if I lose my job?”

Hmm…..

What an emergency fund accomplishes is nothing short of amazing. A few thousand dollars in the bank can:

– ensure you don’t have to worry when shit hits the fan (and it will…you KNOW it will!).

– allow you to pay off your credit card without stopping the plan (the reserve covers all your emergencies along the way).

– lets you take that hog futures flier with your investment portfolio without having to take your money out before you reach the right time to pull the trigger and giggle all the way to the bank.

The first two points won’t stop the snoring sound from non-believers. Only the last point: investing without having to take the money out, commands the attention of emergency-fund naysayers.

 

And now, minions, Uncle Joe’s Story Time

 

Let’s say Sally decides that the #5 horse in race three is the perfect investment for her money. Screw the emergency fund. Sally wants the big cash payout, not a few Abe Lincolns. Those are for suckers. The race starts and JUST THEN she gets a call from her boss.

“Hey, Sally? We found that porn on your computer. You’re fired.”

The #5 horse is in the middle of the pack. It might win or it might lose. But Sally doesn’t have time to care. She has a mortgage, utility bills, groceries to buy, and it’s all now riding on the #5 horse. She needs that money out of the race NOW!

Oh boy. Sally’s got a problem, and not just with horses and porn…she’s got severe money issues.

Now, if Sally had an emergency reserve, she could have bet the farm on the #5 horse and watched the race in harmony. Sure, she still has some social problems and maybe a gambling habit, but her reserve will carry the day.

Now, you aren’t Sally, you don’t have those issues, and your #5 horse is called a Roth IRA. I hope you understand my parable: where are you going to go for money if you lose your job?

Probably breaking the Roth.

An emergency fund isn’t about the little bit of money in the fund. It’s about the HUGE gains you can make on the money outside the fund if you DON’T HAVE TO TAKE IT OUT AT THE WRONG TIME. Do you want to be a great investor? IF so, here’s your ticket to greatness: Don’t need your money early.

 

Why “No Emergency Fund” Won’t Fly

 

Sometimes things sound like a great idea. Clothing that only smart people can see. However, in practice, when you meet hundreds of families, you begin to see all the outliers that might happen out there.

“Oh, Joe, that’ll never happen to me!”

Maybe not. But that’s why people paid me good money…and thanked me when life happened to their goals. People did lose their jobs. Because they had an emergency fund they were able to:

– Eat

– Sleep

– Start a new business

– Build contacts by going to lunch and networking events

– Keep a car to go to interviews

Call me crazy, but when bad stuff happens, I don’t want to have to touch my investments AND I want to be able to do those things.

Worse yet, on one of the two sites (of course, the uber-popular one), the author points to having good credit as a way of avoiding the need for a large emergency fund.

Huh? Let’s think this through:

Let’s say I lost my job. How much does good credit help me? How am I going to make the payments on my debt while I look for another job?

I’ve written before about having nearly no income for twelve months. My good credit at the beginning was shot. If I’d had a six month reserve, I might have been able to squeeze through….I’m not buying the “good credit” argument.

 

I’m Not Ripping Other Bloggers

 

This isn’t meant to rip the two bloggers who wrote on the other side of this topic. Both of those guys know that I have huge respect for their blogs and love their work. I’ll keep reading their advice, because they’re real people with knowledgeable and well researched opinions. If you know who I’m referring to in this post, you should keep reading their blogs, too.

On this issue, though, I think that my public needs to hear my point of view on this subject, and it definitely is on the other side of the fence.

Really, its just that I don’t want you running around naked.

Not for you….for me. Thank you ahead of time.

 

Photos: Horse Race: You As a Machine, Starving Piggy Bank: Nieve44/Luz

Filed Under: Cash Reserve, smack down!

7 Financial Hacks to Avoid

June 7, 2012 by Average Joe 29 Comments

I spend all day on the internet.

I was moaning with a friend yesterday at lunch about the COUNTLESS posts on your budget and being thrifty. Everything from the Latte Factor to How Stupid Is the Latte Factor? and I’ve Got David Bach’s Latte Factor Right Here.

Yawn.

I was thinking this morning that I’m searching for something new. Something meaningful. Something that helps me walk the straight and narrow financial path.

What would this post look like?

I think it’d be a little negative. It would be a post about all the quick roads to frugal you SHOULDN’T pursue. People are often motivated by fear, it’s said.

This post would help people avoid some of the big problems out there.

Folks from all parts would line up for this type of post, I’d think.

I couldn’t find it, so I created it.

Welcome to:

 

7 Financial Hacks to Avoid….the list.

 

1) Underwear is expensive. Why buy it? Nobody can see the stuff anyway, unless you want them to (and in that case it’s going to end up wadded up on the floor pretty soon). Get rid of underwear. You’ll feel more free and casual all day. A four pack of Haines tidy whitees costs $15.50.  Imagine how many smokes that’ll buy.

2) McDonalds dumpster dive. McDonalds throws away food that’s still incredibly edible. Why not sit in your Ford Pinto and wait for the trash to go out? When I worked at McD’s back in the day, the food they threw out was all still wrapped up. You could get a McDouble, take it home and microwave it…and it’s almost good as new!

3) Disconnect your internet. Everyone complains about cable and how expensive it is. What about internet access? Uggg. That’s a bundle. Are you really making any money on that blog anyway? Let’s be realistic. You’d save time AND money by just pulling the plug right now. …money you could be spending on your cable bill and time you could have been doing something useful instead of reading this post. Double threat.

Very happy. Know why? No underwear.

4) Sell your bicycle and weight set. Who needs gym equipment and a bike when you’ve got only so much time in a day? If you weren’t worried so much about how you look, you’d finally be able to get in all that extra overtime your boss wants from you. Plus, imagine the sick days you’ll get off when you’re feeling lousy? Time Off + Daytime Television = Heaven.

5) Do you have kids? What have they done for you lately? Forget allowances: Let’s talk quotas. Bring $30/week to Papa Joe or I’m sendin’ you packin’. Give them clear warning and direction, though. You don’t want to seem heartless.

6) Shampoo? Soap? Dish soap is nearly the same and is far less expensive per fluid ounce. Use dish soap for all of your personal health needs. You’ll have a lemon-fresh scent and will never have to worry about dishwater hands with Palmolive. And, if you don’t care about how your hands look, just go unbranded. Ubersavings!

7) Finally, I know that food is expensive and my second tip above might be impractical, so here’s another: Why not find creative ways to invite yourself over to dinner at someone else’s house? Offer to bring a few hamburgers with you if you think you can pull off tip #2 in a combo deal. If not, offer to bring drinks and fill a pitcher with ice cold water. They’ll thank you with their health later, no matter what they say today.

 

See? I think that’s a marvelous list, don’t you? No lattes or practical “how to’s.”

This list in itself is a huge timesaver.

In fact, another hack would be: forget about writing lists. You don’t follow them anyway.

I feel compelled to follow absolutely nothing that’s written above and don’t feel bad if you don’t either. I don’t have time for that nonsense….or rather lack of nonsense.

What tips have I forgotten? Let’s add a few in the comments. Ready? Go!

Filed Under: irrelevant stories, smack down!

Facebook and Morgan Stanley: Who is To Blame?

May 30, 2012 by The Other Guy 15 Comments

Whose responsibility is it when your investment in Facebook or Morgan Stanley declines in value? The company? A broker?

Certainly you’re not to blame.

The current proliferation of lawsuits against these companies makes me ask a straightforward question. Should there be lawsuits against Facebook and Morgan Stanley? (See these articles for more information if you don’t know what I’m talking about: Forbes: Facebook Lawsuits Piling Up.)

I’m reminded of society’s lack of personal responsibility each and every time I drive up the highway to see my mom.  I haven’t added all the advertisements up, but there is a certain personal injury lawyer in our town who advertises everywhere.  I don’t know this lawyer intimately, but my wife works in the same office building and sees the people who come in and out of the front door.  There are all sorts of people trying to sue for anything under the sun.  Instead of trying to take over the world, they’ll just take it from someone else, because somehow, they’re “owed” something.

One of my favorite books is The Road Less Traveled by M. Scott Peck, M.D.  That book contains my favorite quote from any book:

We cannot solve life’s problems except by solving them. This statement may seem idiotically tautological or self-evident, yet it is seemingly beyond the comprehension of much of the human race. This is because we must accept responsibility for a problem before we can solve it. We cannot solve a problem by saying “It’s not my problem.” We cannot solve a problem by hoping that someone else will solve it for us. I can solve a problem only when I say “This is my problem and it’s up to me to solve it.”  But many, so many, seek to avoid the pain of their problems by saying to themselves: “This problem was caused me by other people, or social circumstances beyond my control, and therefore it is up to other people or society to solve this problem for me. It is not really my personal problem.”

This is as true in the investment world as anywhere. As an investor, you must accept responsibility for your own investing decisions.  You cannot blame others for your decisions (or indecisions).  You won’t help your cause with a “I’m mad I made a bad decision in investing so I wanna sue everyone” mentality.  Recent lawsuits against Facebook and Morgan Stanley make me crazy – I don’t believe for a second that if some magical prospectus would’ve fallen from the sky that all these people wouldn’t have bought Facebook stock.  There’s all this talk about how Morgan Stanley screwed everyone and how Facebook lied — why didn’t these people do their own research?  Take some personal responsibility!  I’m pretty sure that had Facebook stock gone from $38 to $75 in one day, Morgan Stanley would not have called all the new shareholders and said “Oops, we priced this incorrectly so we need to sue you to find a more correct price.”

As an investor, you and you alone are responsible for the actions and outcomes of your investing decisions.  Whether you have an advisor, a consultant, or are a DIY’er, remember one thing: it’s your money.

Be accountable for it.

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Filed Under: Meandering, smack down!, successful investing Tagged With: Business, Facebook, Initial public offering, investing, M. Scott Peck, Morgan Stanley, personal accountability, Wall Street

Beware Charts, Graphs and Snake Oil

May 24, 2012 by Average Joe 15 Comments

I did away with my Boner of the Week! series that called out stupidity in financial media and blogs because I didn’t want to be that guy. Well, at least not be that guy not every week.

But this site is called the Free Financial Advisor for a reason. My task is to show people the difference between the truth and lunacy; to dole out useful tips that you can apply, sprinkled with my own quirky sense of humor.

Buy the doughnut, the frosting comes free. Bargain!

What I also drag along is a HUGE sense of anger when I see absolute baloney (polite terminology) on the internets.

I fought it as an advisor, and I’ll fight it here for you.

So, this week I’m going to un-bury the Boner of the Week! segment, along with the prerequisite, er, uncomfortable picture. Because I’m too lazy to find a new one, you’re treated to my favorite from the old series.

You’re welcome.

Let’s rant:

 

A Tip For New Investors:

 

If someone shows off a chart with a couple squiggly lines and points at them BUT REFUSES TO TELL YOU WHAT THEY MEAN it isn’t “analysis.”

It’s smoke and mirrors.

That’s why I like the DQYDJ blog and ws fired up when PK agreed to join our little podcast. He presents a chart or concept and then explains it. I’m a little smarter for visiting DQYDJ. Check out How Do You Know You’re Ready For Active Investing? Sure, I get PK’s returns, but I also get books to read, a chart on his personal progress and the story of how he began. Good story, good tips, good times.

Onboard?

Don’t try to just show me a chart and tell me “I predicted the financial markets would decline, and see, I’m right.” No reference to how the chart works. No rationale behind the prediction. Just “I’m right. Deal with it.”

Even if the chart is flippin’ brilliant, do you treat financial sites like the circus? Do you come here to see my dogs and ponies? My smoke AND mirrors? Do you want me to flash you a quick glimpse of my 12 inch wealth of knowledge so you can swoon over it?

Hell, no!

Like you, I visit sites for tips and tricks THAT I CAN USE. I don’t want to be shown stuff that I don’t understand.

If you hand me a shovel and I don’t know how to dig, all you gave me was a stick with a funny metal end.

Our “Boner of the Week!” target post (which I no longer point to directly, because that’s not the point of the piece….the point is to help you make better, more informed decisions. If you visited this bloggers site this week, I’ll apologize on his behalf), told us this week that “Mr. Brilliant” called the exact day the market was going to decline. He then advised us to stay out of stocks because it’s a bad, bad time for the market which will correct to (AND THEN HE BESTOWED UPON US THE EXACT RANGE!!!!).

Someone alert Jim Cramer. There’s a new sheriff in town.

Why the hell isn’t this guy working for a huge Wall Street firm or being paid the big bucks by wealthy investors who eat these gurus up? I used to ask my clients this question when they’d bring in what I’d call “miracle fliers” from their mailbox. Some dude telling them that he has all the answers.

I was a good financial advisor. I knew one thing: I didn’t have all the answers. Ta-Da!!!

Oh, my friends, that alone wouldn’t raise my ire. Ready for the next one?

Then he tells us to subscribe so we can find out what stocks we should buy when the time is right.

Thank you, your lordship Mr. Merlin soothsayer.

I don’t want a magical list of stocks. IF I did, I wouldn’t be looking for them on your free internet site.

Here’s what I want: tell me the criteria you used and I want to be taught to use it.

 

What I’m Railing Against

 

Did the dude call the market?

Yup. It appears he did.

Could he know how market conditions work?

Yup, he maybe can.

Are you just whining, Joe?

No.

I want this dude to tell me why, not what! A site like this is dangerous because you become dependent on the author. What happens if Mr. Brilliant has a Philly cheesesteak sandwich that doesn’t agree with him tomorrow and his indigestion decides that you should go 100 percent into Zynga stock? Or he tells you that the end of the world is coming and you should sell everything? Would you just follow like a lemming off the cliff?

  • Don’t follow someone blindly.
  • Learn to do your homework.

I naturally mistrust when ANYONE tells me they can call the market (after 16 years as a financial pro I saw professional gurus get beaten down by the financial markets time and time again).

One of my favorite stock trading books is called Trading Rules: Strategies for Success’ target=_blank>Trading Rules, by William F. Eng. The basic tenant of the book is that you do yourself a huge favor when you quit pretending you know anything about the financial markets. Once you realize that it’s a freakin’ scary-ass place, you’ll start protecting yourself and making money.

One of Mr. Eng’s fundamental rules: Tips Don’t Make You Money (Rule 7).

William F. Eng is a wealthy trader. I understand his background. I know nothing about wonderboy Mr. “I called it” dude.

Set stop losses. Learn how fundamental analysis works. Explore technical analysis.

But don’t let someone tell you when it’s the time to buy and the time to sell JUST BECAUSE THEY TOLD YOU SO!

They won’t lose the money, you will. And then you’ll be cursing the blogger, who won’t hear you over the dance music he’s playing for the rest of the suckers who hang on every word he says.

Rant over.

Filed Under: Meandering, risk management, smack down!, successful investing

5 Fees I Hate More Than The New Spirit Airlines B.S. Bag Charge: Our Cuppa Joe Discussion

May 10, 2012 by Average Joe 22 Comments

It’s Thursday! That means we’re grabbin’ a cup of coffee and talking about my opinion on anything I find amusing that particular day (my favorite topic).

Spirit Airlines, who should really just change their name to “We Will Do Anything To Alienate Our Customers,” announced last week that they plan to charge $100 to give you the pleasure of placing a bag in the overhead bin.

If it’ll fit under your seat or on your body, you’re still good.

Now I’ll have to wear six layers of clothing on the plane instead of three.

Like cars, I feel an airplane ride is a way to get from point A to point B. That makes me a low-cost whore. If Spirit’s fees are still less than everyone else when you include the $100 bag fee, you’ll find me on the first flight out of Dodge. I’ll be the guy with the big, fat happy (and because of all the clothing…sweaty) grin on my face.

Spirit’s goal is to keep costs low. I understand that, so I’m taking this one in stride. As the above USA Today article states, other airlines are quietly following behind the Spirit-hatred shield. Other fees fill me with rage FAR more than this particular nuisance, because they make zero sense to me, except “this is an easy way for us to piss you off while we rip money out of your pocket.”

5) Credit card application or annual fees. There may be more on the way. On a recent Consumerism Commentary podcast, Flexo and Matt Schultz interview Jay Frosting of InvestingAnswers.com,about some alarming news around credit card application fees. The executive summary: Watch your credit card statements carefully. Fees might be rising soon.

4) Piled on mortgage fees. Origination charges? Appraisal fee of $350? Ouch. Ask for a complete list of mortgage expenses before signing on the dotted line.

3) Ticketmaster “convenience” charges. This one is awesome in a “you must be joking but you totally aren’t” kind of way. Ticketmaster charges me a CONVENIENCE FEE for printing tickets at my house. I made it more convenient for them (they don’t have to do anything at all) and they charge me more. There’s a bean counter at headquarters giggling to himself while I’m buying tickets.

2) Bank fees. Teller fees. Statement fees. ATM charges. I know. Enough already. We all know that banks don’t get it.

I love this series of Ally Bank commercials and their discussion of fees and bad customer service. These say it all:

Just one example of Ally’s campaign railing on bad customer service, fine print and baloney fees.

 

1) …and my most hated fee of all….hidden financial product fees, like 12b1 fees (mutual funds), mortality and expense charges (annuities), sales loads (funds and variable insurance products).

I know, I know. Mutual fund and insurance companies have to make money somehow. Just be brave like Spirit and tell me upfront how you’re going to skewer me to make a profit.

 

What are your least-favorite bullshit fees?

Filed Under: Cuppa Joe, Feature, money management, smack down!

Allowances and Overprotective Parents: Our Cuppa Joe Thursday Discussion

April 12, 2012 by Average Joe 26 Comments

A recent headline in USA Today, Aggressive ‘Helicopter’ Parents Force Easter Egg Hunt Cancellation spurred today’s topic. Some overbearing parents were so worried that their little kiddos couldn’t Easter egg hunt on their own and wouldn’t get their “fair share” of prizes that they violated the hunt rules and “helped” their children claim eggs…

….all while parents who had the fortitude to follow the rules watched as their kids came back with baskets empty.

 

My opinion:

 

We all want our kids to succeed and don’t want to see them cry. But sometimes, sending little Timmy out to play without his helmet can help him learn valuable life lessons.

We all learn from failure.

I’ve failed more often than the average person has tried. – Donald Trump

Back in my advising days, I’d ask parents how they were teaching their kids financial responsibility. I don’t think many advisors ask this question, because so many were surprised when I asked.

Often, they’d ask what I’d recommend.

One of my favorite recommendations was that they hand little Timmy or Tina an allowance.  I’d make it a big one, too.

One of my favorite pastimes was to watch their faces when I told them just how big I’d make it. I’m not talking “break the bank” big, but I am suggesting you hand them enough to make them go “wow!”

Here’s the deal:

 

You can trust your kids with a little money today or send them off to college later without a clue how to manage cash in their hand.

Let Timmy screw up. Have the guts to let him fall on his face.

Then, once he’s stepped in it the first time, be a parent enough to discuss his mistake. Do it a few days after he’s broken the new iTouch he bought, or when G.I. Joe is missing an arm.

Teach him how he could have bought security by saving or investing that money. Ask him if the toy really made him happier.

Stop sheltering your kids from real life until they show up as adults with no training and you’re not there to do it for them.

I’ll bet giving them $10 a few times will teach them well over $1,000 in lessons over their lifetime.  What a great investment!

Here’s what I did. I paid my kids a large allowance. Then I stopped buying popcorn at movies when we’d go. I wouldn’t by them books at the bookstore. There were no video games. They could buy that stuff, but it was their choice. Then we’d talk about the impact of those choices.

Today my kids both run websites at age 16 and own stocks on their own. They both have healthy savings accounts from jobs. I stopped paying an allowance years ago.

I’m not patting myself on the back. We’ve messed up our fair share and will in the future.  I’m just showing you that it’s possible to teach your kids about life without doing everything for them.

(photo credits: C’mon Kid, finish up: I’ve got work to do: Ed Yourdon, Flickr;  Kids and Money: GoodNCrazy, Flickr)

 

Thoughts anyone? Bueller?

Filed Under: money management, smack down! Tagged With: allowance, kids and money, money lessons for children

Are Senior Workers As Respected As They Should Be?–A Cuppa Joe Discussion

March 29, 2012 by Average Joe 21 Comments

My dad is a GM retiree.

Where do your thoughts jump when you read that statement?

I was in a coffee shop recently where two men were talking about legacy costs…paid out to people like my dad. These were both younger workers, and the opinion seemed to be that people like my dad are an unnecessary tax on the system.

One guy said, “Those people should have saved more money. If they’d saved, they wouldn’t need that pension.”

I know that immediately many people who read this will think my dad is part of the reason GM went bankrupt. He receives a generous pension, has health care coverage and lives comfortably. He’s relatively young still and I hope he lives for a long time. That means that his benefits will continue to weigh on the company.

 

No Savings? Why Not?

 

My uncle also is a GM retiree. Around the year 2001, as the stock market experienced day after day of unnerving free fall, I happened to be standing next to him at a funeral.

Uncle: The stock market sure is all over the place. Your job can’t be easy right now.

Me: No, it’s not. Lots of people with 401k plans out there taking a beating and looking for advice.

Uncle: 401k plans?

Me: Yeah, like the one you have at GM.

Uncle: You know, I’m glad I never bothered with that. Look at all the money those people lost. I’ll stick with the pension.

At first, I thought poorly of my uncle. But for him and many others working in industry, a 401k plan was always considered “icing on the cake.” He also receives a generous pension and has health care coverage. Why should he risk hard won dollars in investments that could tank?

Because he didn’t invest online, mainly to practice internet safety for seniors, he’ll now be a burden on the system for years to come. However, the course he chose was a viable option at the time.

 

Reworking the Implicit Deal

 

This article at Timeless Finance recommends (among other things) that older Canadians should be forced into retirement by age 60. According to the author, this will energize the workforce and help young people get jobs….all at the expense of older workers.

Would this really work as intended? Will it help?

Before we tackle that argument, let’s evaluate the historical situation: it was a different game for my dad than it is for many of you and I. He worked in an era of “work for a large company to care for your family for 30 years, and then the company will take care of you.”

It was an implicit deal.

Now the deal has changed, and there’s a push to change it further. I’m sure many older workers wish the deal had been explicit.

You have to be a moron to not understand the shaky economics of our world financial situation.

  • There’s more fallout to come from the housing crisis.
  • The student loan bubble is about to pop.
  • European states are ready to topple like dominos.

But do we have to immediately jump to changing the deal for people who played the game “correctly” only to find the rules changed later?

 

Will Eliminating Older Workers Help?

 

I only told you half of the story about my dad and uncle. The other half is that both my uncle and dad are gainfully employed at the moment. They both play by the rules (their income is low enough that it doesn’t affect their guaranteed income stream from Social Security or their pension plans).

It isn’t just good for my relatives; it seems it’s good for business. According to this Entrepreneur magazine article, companies that hire older workers reap benefits as wide-ranging as:

  • Higher quality work
  • Punctuality
  • Listening skills
  • Organizational skils
  • Honesty

According to the Timeless Finance author, both my dad’s and uncle’s part time jobs should be handed to younger workers.

But I’ve seen my uncle and dad work at their jobs. Young coworkers ask their opinion frequently. In fact, the owner of the golf course where my dad works often consults him about overall operations. Customers gravitate toward them, thinking these men know what they’re doing. Both of these men possess tons of insight and knowledge help their employers succeed.

My opinion: If I still had my boner of the week segments, this Timeless Finance article would have been on it. While some of the suggestions make sense to me, and we clearly need change, I believe that we should look elsewhere for money rather than eliminate experience for youth. I also think it’s a mistake to penalize people who played by the rules as they knew them until we’ve looked under other stones.

Okay, everyone….your thoughts? Do we treat seniors fairly? Should we have a mandatory retirement age?

(photo credit: Hubert Elliot in the Rowan County Maintenance Yard Office: NCDOT Communications, Flickr)

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Filed Under: Cuppa Joe, Feature, Meandering, smack down! Tagged With: 401(k), free advice, free financial advice, Individual Retirement Account, Mandatory retirement, Pension

The Roth IRA–Playing Games with Tax Brackets

March 23, 2012 by Average Joe 11 Comments

Our normal Friday Blog Post of the Week! segment will return next week.

 

The Roth IRA is a Swiss Army knife for financial success.

In our past wildly exciting posts about the Roth IRA here and here, some of the commenters on these stories have discussed the efficacy of the strategies presented by the Other Guy.

In short: is it worth all the trouble jumping through hoops to get as much money into the Roth IRA as possible?

In a word: indubitably (I’ve wanted to use that word since I heard it in Mary Poppins. 10 points!)

While I’ll agree that if the only upside to these strategies are immediate returns on a few exotic Roth IRA gyrations, you’ll only gain a few extra dollars in your pocket for what seems like a lot of work.

…and I get exhausted switching television channels, so let’s not talk about work.

I prefer easy and exciting.

The Roth IRA has one exciting feature beyond those we’ve listed previously—flexibility later in your planning.

 

The problem with financial planning

 

When I read well-meaning blog posts about retirement or education planning (including my own), the writer always discusses assumptions.

You know what happens when you assume…but what choice do we have?

We’ll have to assume that the tax rate will go up/down/stay level.

We have to project inflation rates.

Finally, we have to decide when we’re going to die. (Well, at least you do…I’ve got my cryogenic tank next to Walt Disney ready to go. I’m gonna live forever.)

Back on point: Roth IRA plans, for those of you uncomfortable with this type of tax shelter, give you no tax break today but offers tax free income down the line. Many (yawn) dissenters say that tax treatment of a Roth IRA is irrelevant. You’ll pay the tax today or tomorrow. It’s all the same.

No it isn’t.

We’re working for maximum tax flexibility, not a few random bucks. Because I can’t predict income tax rates, capital gains rates, or estate tax rates, I’m going to create a financial future that is as flexible as possible, as soon as two current criteria are met:

– I’ve done what I can to maximize deductions today. I know what tax rates are right now, so I’ll take my tax break, thank you.

– I’m not locking up money unnecessarily for down the road when I’m experiencing short term needs for cash.

 

Here’s the Roth IRA Game

 

When you reach retirement, let’s pretend you want to live on $60,000. Tax brackets in America are tiered, meaning that you’ll pay 10 percent on the first dollars you make, until you hit the 15 percent bracket, which is what you’ll pay beginning with the first dollar in that bracket, until you reach the 25 percent bracket…..

Because we don’t know what tax brackets will be in the future, let’s pretend the 25 percent line will be at $50,000.

 

You Have Two Pots of Money

 

Most people have a pre-tax retirement plan. As I mentioned, I like my current pretax deductions, so I’ve maximum funded those. Therefore, I have monster amounts of money (otherwise known as oodles) inside of them. These dollars must come out of the plan and get taxed.

I’ll remove $50,000 per year from this plan. Some of it will be taxed at the 15 percent bracket and some at the 10 percent bracket.

 

Here’s Where the Roth IRA Comes In

 

Finally, I remove $10,000 from my Roth IRA. Now I’m living in the 25 percent tax bracket but the government is taxing us at the top of the 15 percent bracket.

 

Lots of Work for Big Payoffs

 

Now, I’ve avoided a 25 percent tax each year (or whatever my top tax rate would be….) on $10,000, or $2,500 in taxes. Of course, I paid those taxes already, but remember, if I’m worried about the HUGE AMOUNT OF WORK this takes, I’m only investing money after I’ve already secured current tax breaks.

(photo credit: Swiss Army Knife: IK’s World Trip, Flickr; License Plate: Gamma Man, Flickr)

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Filed Under: Planning, smack down!, tax tips Tagged With: Roth, Roth IRA, Tax, Tax bracket

When Charts & Graphs Lie

February 7, 2012 by Average Joe 13 Comments

Today is Part II of our discussion on charts and graphs. For Part One, you’ll want this link to:

Boner of the Week: Have You Been Lied To By Charts and Graphs

Sometimes, before jumping into an argument on how you feel about data presented in a graph or chart, it’s a good idea to focus on whether the data presented is actually showing you something truthful.

Our friend PK at dqydj.net (which is a fantastic blog on economics, politics and investing), helped us out with his wizard-ly chart skills and created a graph that hid four lies.

Here it is again:

DQYDJ1UnemploymentRate

There are FOUR lies PK is telling in this graph. Did you guess all four?

Okay, let’s reveal them:

 

Lie #1: Long Trend Line

 

Marketers are funny. They’ll draw some pretty long-range conclusions from very short term data. That’s true in this case. PK has taken the general line from October 2011 to December 2011 and—as if using a ruler—decided the next several months would follow similarly.

How does this apply to your financial picture?

– According to Bloomberg Businessweek, the stock market has had it’s best run in 23 years to begin a year. It’s a mistake to think that less than 40 days of good news will create 365 days of stock market bliss.

– Often, government statistics are revised. Basing any financial move on short-term and possibly short-lived data could wreak havoc on your financial life.

Lie #2: Small Sample Size

 

Check out PK’s graph again. He’s basing the entire graph on FOUR MONTHS of data before he gives you the equally tragic long trend line. In politics, where trends seem to change every three minutes, people often draw conclusions about an election many months into the future based on short term data:

– After Huffington Post (among others) reported on Rick Perry’s quick surge in the polls, articles such as this one that appeared in The New Republic—declaring that Rick Perry is going to be hard to beat—dominated editorial pages. There were only 15 days between the Huffington Post “surge” article and the “he’s probably gonna win” New Republic story. I wonder if any of these writers ever go back and read how reactive this seems several months later? Probably not, because using a small sample size to predict future results sells subscriptions.

– In the financial world, marketers of securities predict the bottom of an investment based on short-term data. It also holds with bloggers. Check out these predictions from the website Trading Authority. In the commentary, the “expert” uses short term data to predict an upswing in these stocks, predicting they “Could Jump 50 Percent”. Wow! Sounds like returns I’d love to have in my portfolio.

 

How did he do? Let’s look:

 

 

TradingAuthority Predictions on 6/3/2011
Ticker Price 6/3/11 Price 2/5/12 Change % Loss
SCHW 16.76 12.74 -4.02 -24%
WFR 9.64 5.39 -4.25 -44%
GHL 51.55 47.61 -3.39 -6%

 

Ouch.

These results weren’t graphed, but both the “Rick Perry is Uncatchable” and “These Stocks Are Going to the Moon” cases could easily have been presented to an unaware public in chart or graph form to make a bigger (untrue) statement.

(By the way, finding this site wasn’t hard. I just performed a Bing search for “Upturn in Stock That Failed” and clicked on the first link that matched what I was looking for.)

The point? Don’t take short-term results and use them to predict long-term trends.

 

Lie #3: X Axis Compression

 

If you want to take fairly small results and turn them into “Wow!” returns, just compress the graph. Look at how thin PK has made this graph by squeezing months together across the X (bottom) axis. That “black diamond super difficult ski hill” drop would look more like a “bunny hill” if he’d stretched the graph across the page. Since your eye is drawn to the slope, a skilled marketer will change the degree of descent to reiterate whatever point she’s making.

 

Lie #4: Y Axis Stretch

 

Similar to lie #3 above, marketers will stretch data across the Y Axis (up/down) further to prove that there is far more movement than there truly should be.

– Beware people showing a stock “bouncing around” and then showing a chart which stretches the distance between prices.

– Remember, the inverse is also true: If a marketer wants to show a position as safe, they’ll compress the numbers to reduce the perceived volatility.

 

Here’s the Actual Chart PK Started From

 

DQYDJ2natlunemployment

 

 

The actual Bureau of Labor Statistics-derived chart has little in common with the “trend” chart we displayed above. But because PK wanted to show you quickly declining unemployment, he was able to manipulate this (true) graph to create a very, very wicked lie.

Want more on avoiding manipulative charts and graphs? Try this book: How to Lie With Statistics.

 

Okay, that’s my story, now it’s your turn. Have you had to create graphs you knew were “untrue” in your work? Have you been presented with graphs that weren’t completely accurate? How many of PK’s tricks were you able to find before reading today’s post?

(I’d like to again thank http://www.dqydj.netfor his help on this two-part series. I wish I had his ability to show timely and accurate charts like he and his partners have at dqydj.net. For more great charts, graphs, politics, economics and investment discussions, visit his website.)

Filed Under: money management, Planning, smack down!, successful investing Tagged With: charts, charts lie, graphs, graphs lie, inaccurate

Boner of the Week: Nearly Fooled By Charts and Graphs

February 6, 2012 by Average Joe 13 Comments

Sure, I like making up measurements, facts and figures as much as the next guy. But when the numbers aren’t real, we award The Boner of the Week! to the most outrageous news I read during the last seven days.

So, I’m researching content last week and stumble across this attention-grabbing headline: Gallup State Numbers Predict Huge Obama Loss.

I’m a political junkie, so I bite on the link.

And it’s our Boner of the Week.

Know why? This chart doesn’t state that the President will lose. This states that the editorial writer (and the board that allowed this garbage to pass as news) is apparently hoping President Obama will lose.

As both of my readers already know, this isn’t a political post and this certainly isn’t a political blog. I’d love to get my hands on a similar graph from the other side (I’m sure they exist). My goal isn’t politics at all. It’s just to teach an important lesson:

Dear Minions,

It’s important to know that professional people use charts and graphs ….err… creatively…. to lure away your money, your votes, or your trust. We can “prove” lots of points with a misleading chart.

 

What Does This Graph Really Prove?

 

  • The President’s approval rating ain’t high. (alert the press)
  • If the election were against his approval rating instead of against an actual opponent, he’d get his ass kicked.

 

Not quite the hard-hitting news originally implied by Senior Editorial Writer, Conn Carroll (Conn’s name might have been more apropos if it had just been Con).

 

Let’s Show You a Magic Trick

 

I’ve asked PK from DQYDJ.net, a charts and graphs wizard and fellow political junkie (AND you WILL get political discussion galore on his awesome site), to build us some clever graphs.

The chart below shows CBO data on unemployment numbers (a hot topic right now and relates to overall financial health of the United States economy). This graph projects unemployment for the next several months.

PK, how about a magic graph from DQYDJ:

 

DQYDJ1UnemploymentRate

 

Awesome.

Any guesses why this graph is misleading? Use the “comment” section below to fill in your answer.

((PK has included at least FOUR techniques to mislead you here. We’ll show them all in tomorrow’s thrilling conclusion!))

Thanks again to PK from DQYDJ.NET: Personal Finance, Economics, Politics, Investing and the Offbeat for the Night and Weekend Crowd. 

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Filed Under: irrelevant stories, Meandering, smack down! Tagged With: bad graph assumptions, Boner of Week, incorrect graphs

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