Do you remember the movie “Back To The Future?” Wouldn’t it be nice to have a DeLorean equipped with a Flux Capacitor that would allow you to go back in time and live a part of your life over again? Maybe you would just make a minor adjustment or two regarding some decisions you made that could make things dramatically better today? If you are like me you probably dream of all the things you could have “invented” because you knew what was coming and you could be on the forefront to all the new technology. Do you remember in the sequel where Biff was able to bet on every major sporting event and made millions because he already knew the outcome? How nice would that be to have a sure thing.

Since none of us have a DeLorean time machine and it’s probably not going to be available in our lifetime the only thing we have available to us is comparing what we have done to what we could have done. What would you have done different with all the money you have made over your lifetime?

I think one of the biggest mistakes made in the world, from a financial perspective, is that we spend more time trying to understand and being involved in “investing” rather than “financing.” In reality financing plays a much greater role to our economic wealth than investing does. Yet we take what little extra we have at the end of the month and invest in an IRA or a 401(k) or maybe we put in money every month in a mutual fund. Meanwhile we are spending and wasting more money on financing or paying cash for things than most investments could ever return.

Every once in a while, as an adult, I kind of like to do some retrospection and contemplate what I would have done differently if I could go back. Unfortunately the list is long. Looking back on our lives as a young married couple,  and then as new parents, and now as grandparents, I think if my kids and grandkids wanted financial advice from me what I would say to them? Here is what I’ve come up with: “Control the banking or financing equation in your life and it will have a much greater impact on your wealth than investing will.”

What do I mean by that? Have you thought about what a typical teenager, growing to a middle aged adult, and what they will deal with when it comes to financing? For some it’s much worse for others not quite as extensive, but here is a short list of what is typically borrowed or financed (or paid cash for, which is another method of financing, but we’ll discuss that in a future article):

School (Education)

Several Cars – maybe 7-10 cars by the time they are 45 years old

One or more homes

Medical Expenses

Dental Expenses – Braces for the kids

Repairs (car, home)

Appliances

Vacations

Remodel

Credit Cards – clothes, food, gas, entertainment

And the list goes on and on….

My best guess is that it can easily add up to 60-80% of all their after tax income went to some form of payment……financing.

So what if you could recapture some if not all of that money? The 60%-80% is typically spent or given to someone else for them to increase their wealth….right? So why not increase yours?

Think about a wage earner making $50,000 a year after taxes. If he/she/they are spending or paying $2,000-$4,000 per month to someone else, that is lost money and lost opportunity…..forever! It would be an incredible wealth builder to recapture and be able to put in their account the majority of those financing costs…..wouldn’t it? What if you were paying yourself $2,000 to $4,000 per month and building your wealth.

So as a grandparent, I want all of my grandkids, and their parents too for that matter, to understand that if they can control the financing in their lives (debt to others) and create a private banking system for themselves in which they borrow and pay back loans and finance all their needs with the “family bank,” they will do more to create wealth, without the risk of investing, than otherwise would be lost by financing through others.

One of the things that I will be doing is setting up a banking system for each one of our grandchildren as they are born. After just a few short years of funding, they will never, EVER have to borrow a single dollar from anyone else throughout their entire life.

Think about this…… what if the $2,000-$4,000 per month in our example above was coming directly back to them each month! You can’t offset the cost of financing by investing, investing is just not predictable enough or without significant risk!

That is how you build wealth.

Grandparents! Let’s not let our kids and grandkids make the same mistakes we did. We can make a huge difference in their lives by teaching them a lifetime skill to control the financing equation in their lives by creating their own private banking systems.

I was driving across Southern Idaho the other day and was searching for something to listen to on the radio when I came across a financial planner talking about the current economy.

As a “recovering and reformed” financial planner I was interested in what he had to say.

I remember back in the mid eighties when we did research on mutual funds we would go back 3-5 years and we could show some pretty descent double digit averages.  Then we could put together an analysis showing the client a very nice return over the past 3-5 years.

As the economy progressed into the nineties it was easy to show 3, 5 and even 10 years of descent growth. There were a few glitches along the way, Black Monday in 1987, the 1994 recession, and a stalled economy here and there, but for the most part showing clients 5 years of reasonable return was easy to do.

Then came the turn of the century. As you know the Y-2k scare had many investors tucking away their capital in fear of losing all their money, not from a drop off in the economy as much as from a computer error. Then the dreaded day of September 11^th attack in 2001.

Not long after 2001 many advisors found that they needed to go back 10 years to show any kind of return enticing enough for an investor to risk his/her capital. In the eighties and nineties it wasn’t hard to show 9-12% over 3 to 5 years, but after 9/11 you had to look back for 10 years to find the same reasonable risk reward ratios, but make no mistake it was getting more and more difficult to justify the risk for the return.

Fast forward through the downturn in the markets and the economy freefalling since 2007 and here we are now. Listening to this financial advisor on the radio shocked me. He was trying to peddle the same old information about diversification and asset allocation and how over time your money does just fine in the stock market. However, something had dramatically changed. Where we use to have to look back 10 years to show a descent average rate of return to prove this out, this financial advisor was telling investors that they need to look back 35 YEARS now! Come on, 35 years? Who can wait 35 years for their portfolio to perform? It’s crazy. And what if you happen to hit a 35 years span where there was very little if any return? A lifetime of waiting could be wasted.

The average American doesn’t start saving for retirement until they are in their mid to late forties. Which means, in this advisors example, an investor would save, invest, and wait from say age 45 to age 80, hoping his/her patience will pay off.  This “typical” investor is suppose to let this portfolio go without worrying or making changes to their investment course..……is that possible? Could you do that? I know I couldn’t.

Whereas the eighties and nineties provided ample opportunity to achieve a reasonable rate of return in a 3, 5 or even 10 year time frame, it appears that a 35 year time frame is what an investor needs to look at in order to be satisfied with the return. That is unacceptable to me, but it’s the world we live in, and it’s why I have elected to steer away from risk and stick with those strategies that work over time and put you in control.

I took several tours seeing everything from “Old Town” to castles and cathedrals. Prague has a very rich history that dates back as much as 2000 years ago. Most of the modern day Prague still dates 1500 years or more.

What I found most interesting was the history regarding the last 60-80 years, which includes the World War, the Jewish “Final Solution” and communism in general. It’s no secret there that the people under communist rule are extremely happy to be in a free and democratic society again. The 40 years of communist rule was a literal living nightmare for those people. There are still those from the communist party who long for the old days, but by a far majority the Czech people are more than happy to be free again.

One of our guides was a well educated girl named Hanna. I’m guessing she is about 28-30 years old. In order for her to get the job of tour guide she had to learn volumes of history, including dates, names, and events. She had been a guide for nearly 5 years and was a wealth of information. At nearly every site she described what happened in a particular building or castle before, during, and after the war, and how the building was used during communist rule. It was quite an education for me as to how devastating communism can be to a country. She remarked several times how communism makes people lazy, helpless, uncaring, unkind, and in all a very unhappy people. She described how people were “assigned” jobs and it became your life whether you liked it or not. It was rare to choose a profession. She went on to talk about construction during communist rule and what shoddy work was done. She said that the maintenance and care for the entire country dwindled considerably and things fell apart and repairs were rarely done properly. Even today the buildings that were built during the communist era are falling apart and the buildings built 1000 years ago are still standing. Pride in the country barely existed. You were indoctrinated into communist life as a child and relied solely upon the state for your existence. There was no motivation to be the best at anything. Why? Because there was no reward for being the best at anything. All you did was spend your life working and being spoon fed by the government. You could not be fired so being and uncaring employee was typical and normal. Even your boss had little motivation to do anything but the minimum.

It’s hard for me to convey the feeling Hanna gave me as she spoke with such passion about democracy and freedom. How the country has pride again. Building and expansion is happening again. Technology and growth has been expanding rapidly. How devastating 40 years of communism took the life-blood out of the people. She admits that there are some older people who are suffering financially. These are they who lived their life under communism and was expecting the government to continue to provide for them in their older years. Some are bitter, but most are willing to sacrifice for the generations to come who will be able to live under capitalism and freedom. They love being Czech’s and love being free.

I explained what was happening here in America, particularly with health-care, and although she had heard most of it, she was still taken aback again that capitalism and free markets were even being questioned in of all places America. That our country has been the symbol of freedom and democracy in the world and that everyone wants to be like America. They long for capitalism, they long to be as far away from government rule as possible, yet we are being drawn into just such a system. It’s hard for a Czech to understand why we don’t fight and stand up against the government while we have the freedom to do so, because the day will come that if we don’t, then it may be unlawful to have such a protest, if we are not proactive, and all will be lost.

Hanna said, that she hopes that America will not stand for socialism and certainly not communism because it will in a sense affect the entire world. And the Czechs are one people who do not want to go back

Why can’t we as a people, if our government won’t, see the results worldwide of the devastating effects of socialism and communism and do all in our power to run the other way? Maybe it’s time to stand up and fight while we still have a chance! To see what can happen to an entire country and an entire people was certainly more eye-opening than I’d ever have expected it to be. I thought I understood, maybe I still don’t get it all, but I’m more enlightened and educated then I have ever been before. Where our country is heading and where are politicians are trying to lead us is not a place that I want to go. It makes me wonder if the politicians are just stupid or if they really do want that much power and control over us. If it’s the latter then heaven help us! If it’s the former than we have some really ignorant leaders and we need to replace them, and fast.

Everyone should talk to someone who’s been through communism and socialism….I think we’d all wake up after that discussion and maybe actually do something about it, I for one cannot sit idly any more.

Its only out of our ignorance that we could eventually lose our freedoms.

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men ate at the sandwich shop everyday and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily lunch by $20.” Lunch for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six men; the paying customers? How could they divide the $20 windfall so that everyone would get his fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to eat his lunch.

So, the owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man, like the first four, now paid nothing (100% savings)

The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,”declared the sixth man. He pointed to the tenth man,” but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a Dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up.

The next day the tenth man didn’t show up to eat, so the nine sat down and had lunches without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible

An economics professor at a local college made a statement that he had never failed a single student before but had once failed an entire class. That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, "OK, we will have an experiment in this class on socialism. All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A. The Class agreed!

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy.

As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little. The second test average was a D! No one was happy.
When the 3rd test rolled around, the average was an F. The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

Years ago young Chuck moved to Texas and bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day.

The next day the farmer drove up and said, “Sorry son, but I have some bad news, the donkey died.”

Chuck replied, “Well, then just give me my money back.”

The farmer said, “Can’t do that. I went and spent it already.”

Chuck said, “Okay, then, just bring me the dead donkey.”

The farmer asked, “What ya’ gonna’ do with him?”

Chuck said, “I’m going to raffle him off!”

The farmer said, “You can’t raffle off a dead donkey!”

Chuck said, “Sure I can. Watch me. I just won’t tell anybody he’s dead.”

A month later, the farmer met up with Chuck and asked, “What happened with that dead donkey?”

Chuck said, “I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of $898 bucks.”

The farmer said, “Didn’t anyone complain?”

Chuck said, “Just the guy who won, so I gave him back his two dollars.”

Chuck went on to manage the sub-prime mortgage securities at Goldman, Sachs.

Currently, Chuck is a consultant to the government on how to “sell” the American people on incurring more debt to stimulate the economy, one of the biggest shell games ever perpetrated in America.

Is it just me or do you get the feeling that the feds rewrite their money policy almost on a daily basis? It seems reactionary at times, but it’s the reaction caused by a previous policy blunder that creates a different reaction and a different blunder to follow….it’s a vicious circle!

So what do the feds actually want? It appears now that they want INFLATION! What? I thought inflation was bad. Well it is if it takes off at ground level, but the economist say we are now experiencing deflation, so the feds need inflation to compensate.

Maybe a short economics discussion is in order. Let’s look at the variables in very basic terms.

M=money supply – how much money is available

V=Velocity of money – how fast money moves through the system

P=Price of money – either inflation or deflation

Q=Quantity of Production – GDP

If you reduce V velocity (which is happening today) and if you don’t increase the M supply of money, you are going to have deflation. We are watching the velocity of money slow. People are getting nervous, they are not borrowing and spending as much, either because they can’t or for obvious reasons are using discretionary income to pay off debt or increase their savings. You would think this is a good thing for the family, reduce debt and save more, but not if you’re the government. This entire economy has been based on credit, borrowing, and spending…..velocity….which increases GDP, but this growth has been fictitious because we weren’t spending our money, we were spending our future earnings through debt. You knew it was just a  matter of time before we would “max-out” our borrowing power.

The probability of deflation is ever increasing. When we increase M the supply of money and V, velocity stays the same, and if GDP does not grow, that means we’ll have inflation. More money chasing fewer goods…..it’s the old supply and demand equation.

As I said earlier we currently have slower velocity of money and thus slower growth of GDP. Keep this in mind: earnings equal growth. Without spending companies have little to no earnings which results in slower or stagnant growth or what we are experiencing now…..deflation. This scares the FED, so what is there answer? They have to keep printing money M until V velocity kicks in and we begin to see inflation. The feds are calling it "quantitative easing." They announced $300 billion of easing last week. This will happen every quarter, $300 billion, $500 billion etc….until their achieve their desired result…..inflation. This could become a really big number and a side effect may be another asset bubble in the stock market. One economist said it may take $2 trillion of “easing” to achieve the desired result. However, will this cause the pendulum to swing in the opposite direction and double digit inflation will rear its ugly head? There has to be such a supply of cheap money to encourage lenders to lend and borrowers to borrow to induce a spending to produce inflation. This could take years to accomplish……and I don’t think we’ve hit bottom yet. Bill Fleckenstein is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn’t have as many good opportunities, and basically he’s scared of being short with so much stimulus going on.

Another unintended consequence of printing so much money will be a weaker dollar…..this is an entirely different discussion but can we afford to have a weaker dollar globally? Who will buy our debt?

The real answer is staring us in the face, but we seem to overlook it. We have to get the FED’s out of the equation. Let the markets dictate interest rates, velocity, price, and growth. We can’t keep manipulating the country’s economy. It doesn’t work, hasn’t worked and will not work long term. This stimulus “fix” will probably end up being more of a disaster and make for a harder landing then would have otherwise been by letting the markets run their course. We will experience deflation followed by inflation followed by more manipulation so put on your neck brace because this economy is going to make your head spin!

What’s a Trillion Dollars?

Most of us are hearing about the government spending a Trillion Dollars, but to the average American it’s just a word.

Some of you may have seen these graphics floating around the internet lately, but if you haven’t you need to take a visual look at a Trillion dollars.

First off a Trillion is a 1 with 12 zeros, it looks like this: $1,000,000,000,000. Okay, so it’s a big number, but let’s put it into perspective.

Before we get to what a trillion dollars looks like visually, here are a couple of interesting statistics:

1. If the printing presses ran from 8-5 every working day, 5 days a week, it would take 72 years to print 1 trillion dollar bills.

2. Stacked on top of one another a trillion dollar bills would be $70,000 MILES high.

3. If you could have spent 1 million dollars per day since the birth of Christ (2009 years ago) you would still need another 740 years to spend a Trillion dollars.

4. If you spend 20 billion per year or about 54 million per day you could spend a trillion in 50 years.

5. One million seconds ago was 10 or 11 days ago
One billion seconds ago was during the Nixon administration
One trillion seconds ago was 30,000 years BC…..wow!

6. To count out One Trillion ($1,000,000,000,000) dollars nonstop without sleeping or eating it would take Thirty-Nine Thousand (39,000) years.

7. If your annual salary or wage is $50,000 it would take you 20 million years to earn a trillion dollars.

8. We could wrap the earth about 4700 times with a trillion one-dollar bills laid end to end around the globe.

9. Assuming there was a roll of 1 trillion –  $1 dollar bills, it would take a military jet flying at the speed of sound, reeling out dollar bills behind it, 14 years before it reeled out one trillion dollar bills.

So there’s a little “Trillion Dollar Trivia” for you!

Okay, now let’s look at a Trillion dollars visually.

Here we have a man standing next to 1,000,000 (1 million bucks!) You could put a million in your backpack and have lots of fun!

Notice how small it is compared to an average man.

Next we have $100 million dollars. This can be neatly stacked on a pallet about 4 feet high.

Now we have $1 Billion dollars. This is 10 pallets of $100 million each. This used to be a lot of money…..but to congress a billion dollars falls out of Uncle Sam’s pockets like change.

Although a billion would be a lot of fun to spend……how does it look compared to 1 trillion?

HERE IS 1 TRILLION DOLLARS!

Look at this……what we have here is 10,000 pallets (double stacked so they are about 8 feet high) and each pallet has 100 million dollars on it.

Can you see the little man now in the bottom left corner?

So maybe now we can get a glimpse of the burden government is putting on us in terms of long term debt for this “stimulus” package. Anyone want to run a credit check on the borrower? Oh I forgot, most of the borrowers aren’t even born yet!

Has the economy taken away years of gains in your retirement plan? Is there a better way?

I read a report in US News that over 2 TRILLION dollars have been lost within retirement plans. Most 401K’s and other retirement plans have seen better days to say the least. Not only do they tie up your money until you are 59 ½, but you or someone else needs to constantly manage the investments they are in and then hope that the markets perform.

Company matching has always been the lure to participating in the company retirement plan. Lately though, many companies have reduced and even eliminated the company match. If this has happened to you should you continue to contribute?

And what about taxes on retirement plans?

For years we’ve been under the assumption that we would put money in our retirement plans at a higher tax bracket than when we take it out, after all that is the only way to really come out ahead. However, that does not seem to be the case with most retirees.

I spoke with a 71 year old single woman the other day who said her income, at just under $40,000 per year plus social security, is putting her near a 33% tax bracket with federal and state. In addition 85% of her social security is taxed because of her income. The majority of the problem is caused because she has no deductions, no kids, no mortgage, no business, and most of her income is coming from retirement plans that have never been taxed. The result is she wishes she had never put money in a retirement plan and had paid the tax years ago at a lower tax bracket. Its cost her more to “postpone” the tax and pay it today than it would have to pay it years ago.

Maybe now is the time to change the way you are preparing for retirement. There are alternatives that may be more attractive than the traditional retirement plans created by the government. It’s funny, in a sick sort of way, that the government who created this massive and confusing tax system is the same government who created the “retirement plan” loopholes such as 401(k)’s and IRA’s. Should we trust them? At any time those who make the rules can change the rules.

Do you think taxes are going to go up? How are we going to make our way out of an 11 Trillion dollar national debt? Take a look at the National Debt Clock: http://www.brillig.com/debt_clock/ and it grows by $3.71 billion per day.

The bottom line is that if tax rates are on the rise, which seems inevitable, than why do we want to wait and postpone the tax to pay later at a higher tax rate? It doesn’t make much since does it?

Is there a better way? I think there is!

We’ll talk about an alternative to traditional retirement plans later.

Here is the link to the US NEWS article referred to above: http://www.usnews.com/blogs/planning-to-retire/2008/10/08/retirement-savers-lost-2-trillion-in-the-stock-market.html

]]> http://danthompson.wordpress.com/2009/04/01/is-your-401k-a-201k/feed/ 0 dant61 http://danthompson.wordpress.com/2009/03/28/interest-rates/ http://danthompson.wordpress.com/2009/03/28/interest-rates/#comments Sat, 28 Mar 2009 19:58:00 +0000 dant61 http://danthompson.wordpress.com/2009/03/28/interest-rates/ ]]>

Are interest rates being held artificially low?

Currently the feds have elected to flood the market with additional funds for mortgages and in particular for refinancing current mortgages. Rates are as low as 4.5%.

But how long can this last?

Let’s look at the junk bond market as a potential indicator of what could happen.

First off what makes a bond a “junk” bond? Think of it as a risk reward proposition. If I were to offer you a very safe, stable, predictable bond with little to no risk, I would be able to offer this bond at a very low rate because the probability of this bond being paid out at maturity is very high. On the other hand if I offer you a more risky bond that has the probability of defaulting, in order to attract you to purchase such a bond I will have to offer you a higher rate for you to accept the risk. Simply put the higher the risk the higher the reward should be.

As our government continues to print money without any real backing and as we auction off more and more debt through the treasury department. The time may soon come when those who are investing in our government bonds will demand a higher rate for those bonds as the probability of default looms ever higher. In other words we are printing money and debt that we simply cannot pay back with our current budget and taxes. Something will have to give at some point.

China is one of the largest purchasers of our debt. As they see our inability to repay these debts increase they will likely demand a more attractive interest rate to continue purchasing our debt. The US Treasury Bonds could soon become a “junk bond” in the investment world. The result could be dramatic. In all probability we would have to increase interest rates to attract new buyers or to keep current buyers investing at maturity.

If this scenario plays out you can be assured that all interest rates will rise. How high? Who knows. But remember we did this once before in the late 70’s and early 80’s. You may want to assess your portfolio and determine how much interest rate risk you are actually taking, maybe even unknowingly.

Remember the general rule; bond values decrease as interest rates increase and vice versa. The longer the duration of the bond the more widely the fluctuation can be. Although the interest rate remains the same, the underlying “market value” of the bond can fluctuate until the bond matures at face value.

For example. Let’s assume I purchase a 20 year bond for $1,000 (par value) today and the interest rate is 4%. Now let’s fast forward 2-3 years and interest rates have climbed to 7%. Now a bond buyer could purchase a $1,000 bond (par value) and get 7%.  For my valuation purposes a calculation is made which discounts my $1,000 bond in order to equal the current 7% rates. I won’t go into that yield calculation here, but suffice it to say in order for me to attract someone to buy my 4% bond, when they can buy a 7% bond today, I will have to discount my $1,000 par value in order for them to essentially achieve the same return as they would by buying the 7% bond today.

If interest rates are being held artificially low, and if the chance of interest rate hikes are on the horizon, what are your options?

]]> http://danthompson.wordpress.com/2009/03/28/interest-rates/feed/ 0 dant61