The President’s Budget and the Home Budget – Lessons to be Learned

In presenting his proposed budget to Congress and the nation, President Obama said that while various cuts were needed due to the size of the deficit and national debt, investments were needed as well.  Today I will look at various aspects of that budget as they relate to saving and investing and see what can be learned for preparation of the home budget.

Currently the US Government is in debt by about $14 T dollars.  While that is an incomprehensible number, broken down on a per capita basis to pay off the debt would require each man, woman, and child in the United States to contribute $35,000.  In dollar bills laid end-to-end, the sum would stretch around the Earth over 31,000 times.  While the debt of the average household would not even make it into the round-off error of the national debt, many families also carry a considerable amount of debt.

Generally it is true that investing is the way to become wealthy, but getting out of debt is needed before investing for most individuals.  The reason is though the US Government can (for the time being) borrow at very low interest rates, much of the debt Americans hold is in credit card accounts.  The interest rates charged by these cards are so large that there is no way one could make enough of a return from stocks or other investments to outpace the interest paid.  It makes no sense to gain a 10% return in stocks while paying 20% to a credit card company.  Just think of each dollar used to retire this debt as an investment making 20%.

As with the federal debt, the way to stop building up debt and get to the point where one can invest is to cut expenses to the point where the amount of income received is less than expenses.  The surplus can then be applied to the debt.  In particular, one would want to reduce recurring expenses since these tie up cash flow, reducing the amount available each month to reduce debt and eventually invest.  For the Federal Government this means reducing things like the federal workforce, retirement benefits, and entitlement programs – things that require funding year-after-year.  For the household this means eliminating cell phone bills, subscriptions, car leases and/or payments, and other clubs and services which hit the credit card each month on autopilot.  One wants to get control and make a conscious purchasing decision each month (there is a reason companies and businesses like auto-pay).

The second aspect to look at is the “investments” presented.  An investment, also known as an “asset,” is something that will provide income in the future, thus increasing the amount of money coming into the household.  Often people believe things to be investments which really either tread water, neither going up or down in value, or actually are expenses.  The three investments specified by the President are education, high-speed rail, and green energy.

It is true that having a population that is reasonably educated will possess the skills needed to perform various useful functions.  That in turn can build wealth for the country in the form of increased business activity and therefore increase income taxes.  Increased spending on education so far, however, has not resulted in on improvement in results.  For example, since the 1970’s spending per student has more than doubled, yet student achievement has not increased (see, for example).  Increased spending on education therefore appears to be an expense rather than an investment unless the monies could somehow be used differently to provide better results.

In the household, many see going back to school as a way to increase income.  While this can be true, particularly for individuals who have only a high school education or who wish to get into a field requiring specific certifications, many continually return to school, paying large amounts of money while never actually increasing income levels.  Before starting a new program, check with those who actually work in the industry about what diplomas and education are required.  Also ask where they tend to find people to hire.  If the school you are looking at attending is not regarded well by those hiring, returning to school will be a waste of time and money.  Also note that most entrepreneurs – those who tend to make the most money in the country – were only C students and only completed high school.  Providing more effort and taking a bit more risk may prove to be better than more education.

High speed rail also appears to be an expense and a luxury rather than an investment.  Once purchased the system will decline in value each year and require constant maintenance.   While it is true that some cities are congested and there is an opportunity loss due to people sitting in traffic, it is unclear how moving people between cities by train would lead to increased economic activity.  In particular, with more and more business going online and teleconferencing becoming more popular, it seems like investing in more bandwidth capacity would make more sense that investing in the movement of people.

The household equivalent to buying high speed rail is the purchase of a new car.  If one buys a new car it will go down in value very rapidly in the first few years.  It will also require constant maintenance – a recurring expense – and never actually add income.  When buying a car, buy one that is at least a few years old so that the depreciation loss is less per year and only buy as much car as is really needed.   Always limit the amount of money spent on things that go down in value.

If renewable energy production methods were found that would allow power to be produced at lower rates than traditional methods, that would result in increased activity.  By lowering the cost of power and thereby the cost of doing business, businesses that are not currently economically feasible could be started, leading to all sorts of opportunities.  Unfortunately most of the spending is being targeted at rolling out green power using current methods.  These methods cost more per unit of power produced than traditional methods.  Doing this and then forcing people to use this more expensive power will result in a slowdown in business activity, and thereby a loss to the government in tax receipts.  A better investment would therefore be in research to develop less expensive ways of making power.  This must be possible since renewable sources don’t have the expense of findign and processing fuel.  Once these improved techniques were discovered, market forces would lead to their widespread use without further government spending.

In summary, the household can learn from the Federal Budget.  In particular, 1)Put investing on hold until debts are paid off, and 2) Be careful when choosing investments.  Make sure that they will actually lead to increased income in the future. 

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

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