To Get Out of the Recession, We Need to Get Back to Work.


The current recession officially ended a couple of quarters ago, yet to many it seems as though it continues to drag on.  The jobless rate has fallen back to 8% unemployment, yet that is mainly because people have quit looking.  Indeed, compared to the recessions of the early 1990’s and early 2000’s, it seems like this recession will never end.  This is despite the Federal Reserve lowering interest rates to nothing, which is normally like putting gasoline on a fire.

This issue may in fact be the long extensions to unemployment benefits that have allowed individuals to not return to work, instead waiting for their dream job rather than settling for what is available.  College students have also chosen often to return home and work minimal hours rather than take an open position that does not fit their field of study, or that doesn’t have the pay they were expecting.  Ironically, it may be the large number of people out of work who are causing there to be a lack of jobs.  Here’s how:

Picture an economy where there are eight people.  Let’s say that one person can grow enough food to feed four people.  So long as two people are growing food, there is enough food to feed everyone, allowing the others to provide other useful things like fuel and clothing.  Let’s therefore say that three of the remaining individuals provide fuel and the remaining three provide clothing.

Now let’s say that a recession hits and those providing fuel and clothing stop.  Those growing food used to trade their food for fuel and clothing, but now since the others are not producing anything, their food is simply being taken from them and given to the others in the form of unemployment benefits.  The food producers are being paid in credits, but they know that they will eventually be taxed to pay for the credits.

If those who were producing fuel would do so again, they would have something to trade for food, and the food producers in turn would be receiving something for their efforts and be able to buy clothing, causing demand for clothing to increase.  Because they are not producing anything, however, the amount of wealth being created is reduced from the levels at which it was created during normal times.  Instead of the population splitting food, fuel, and clothing, they only have food to split.

The more people who start producing useful things through work, the more items and services there would be available for trade.  This would feed on itself, causing more demand since having more things to trade for would cause more people to create something of value with which to trade.

People need to stop being as choosy about jobs and pick something.  Staying on unemployment should not be seen as an alternative because while it may seem attractive to make almost as much sitting home as one could make working, things will get much better in the long run if more people start producing something for the money they receive.  If there truly are no jobs, find a need that people have and find a way to fill it.  That is how you make money in a free economy – find a way to fill the need held by a lot of people.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Stages of the Financial Life of a Future Millionaire


Millionaires are not normal.  They are not special.  They are not lucky.  But they are not normal.

They don’t accept the “truths” of life.  That you must always have a car payment.  That you should buy the biggest house you can afford.  That you need to use a credit card to build your credit.  That you need to go to an expensive school and take out student loans to succeed.  That rich people have some special connections and that no one in the middle-class can ever become wealthy.

Future millionaires are weird.  They drive old cars and just don’t care what people think.  They bring their lunch and eat at their desks.  They buy modest, unremarkable houses in the established part of town and when they buy them they put down a big down-payment, or pay cash for the whole thing.  They don’t care about having the latest electronic gadgets.  They don’t play golf.  They don’t dress for success.

They know that the way to become wealthy is to spend less than you make and to earn money from their savings.  They receive extra income from investing, rather than paying extra money to credit cards and car finance firms.

The weirdest thing about future millionaires is that they have a plan.  They know where their money goes each month because they tell it where to go.

The stages of the life of a “normal” person and a future millionaire are as follows:

Eighteen:

Joe Normal: Goes to the expensive college, taking out student loans to do so.  Takes out extra loans to pay for meals and an apartment.  Has difficulty choosing a major, so spends 5 or 6 years getting a degree.  Graduates with $50,000 in loans.

Sam Millionaire:  Could go to an expensive school, but chooses a state school because of the low tuition.  Gets as many little scholarships as possible the summer before starting.  Works a part-time job during school and full-time during summers to pay tuition.  Graduates in 3 1/2 to 4 years with a practical degree in something like engineering or business.

Mid-Twenties:

Joe Normal:  Starts his first job.  Buys a new car and a new house with 0% down.  Starts paying student loan debt.  Gets premium cable with NFL Sunday ticket.  Has a phone with the full data plan.  Eats out all lunches and most dinners.  Goes to the bars on the weekends and buys several expensive drinks.  Has no idea where his money goes.  Has no savings and spends every dollar he earns.

Sam Millionaire:  Starts his first job.  Buys a used car and rents a room in a home or gets a small apartment.  Saves up money for an emergency fund and then start putting 15% of his pay into the company 401k plan and an IRA.  Brings most lunches in and eats out about once a week.  Splits the meal and eats the rest for lunch when he does go out.  Starts an investment account once his emergency fund is formed and starts putting extra money into stocks a little at a time.  Knows and tracks and plans for where each dollar goes.

Mid-Thirties:

Joe Normal:  Continues to climb the corporate ladder and make more money.  He buys new cars every couple of years and has made some renovations to his house.  He has also acquired a timeshare that he never seems to be able to visit.  He has two children and spends most meals eating out, feeling too busy to cook.  Despite making almost $100 thousand per year, he has only a couple of thousand dollars in the bank.  He has amassed $20,000 in credit card debt due to all of the unplanned expenses like car repairs and home repairs, along with a few vacations and meals out he has put on the cards.  He also still has $35,000 in student loan debt, owes $30,0000 more on his home than it is worth due to a HELOC he used to pay for the renovations.  Any equity he has amassed has been used to pay down credit cards.  He has also cashed out his 401K to pay down debt and take a vacation, despite the 50% in taxes and penalties he paid to do so.

Sam Millionaire:  Sam moved into his first house five years ago, paying a 50% down-payment and taking out a 15 year loan that he can easily afford.  He has already amassed about $100,000 in his 401k.  He still drives used cars, although the quality has increased considerably, having enough income beyond his expenses to easily pay for four-year old cars out of his savings.  He also has about $100,000 in investment accounts, from which he can float home repairs and other expenses.  He also has two children, and has created college savings accounts for them into which he puts the maximum each year.

Fifty:

Joe Normal:  Despite making a couple of million dollars in earnings, has no real savings to show for it.  Still has some student loan debt, and continues to have credit card, mortgage, and car debt which are taking about $15,000 per year from his income in interest payments.  Both children have completed college and are coming out with tens of thousands of dollars in student loan debt.  At this point Joe Normal is starting to get a little worried about retirement and start contributing what he can to his 401K, which has been decimated a couple of times and therefore only has about $20,000 in it.

Sam Millionaire:  Sam made his first million at about 43 and has since doubled that split roughly between retirement savings and his other investments and assets.  He has no debt and his earnings from investments are more than enough to pay for all of his expenses, although he continues to work anyway because he likes his job (or alternatively, he starts a different career, using the freedom gained from his investments).  He paid off his first home loan at 39, several years early, and continued to save.  Deciding he wants to have home in a different location with more amenities, he buys a more expensive home, paying cash.  He also buys a cabin as a weekend getaway.  He thinks about renting it out but decides that it is not worth the hassle.

Because of the educational IRAs and other investments his children have graduated without student loans.  In fact, he was able to provide money as gifts during their high school years and set up investment portfolios for them that allowed them to pay for a lot of their college expenses with the earnings.  When they graduate, they already have a good cushion that provides a more than adequate emergency fund and will give them money for a down payment on a house.  Because they have become accustomed to investing they naturally contribute funds from their jobs to grow the investment account.

Sixty:

Joe Normal:  Joe realizes that the best he can hope for in retirement is a savings of about $200,000, which will only provide about $12,000 per year in income, and realizes that this will require a drastic reduction in his lifestyle.  He works all of the extra hours he can to save as much as possible.  He takes much more risk in investing that he should because of the small amount of time left.  He decides he will need to work until he is at least 70, and possibly beyond, and hopes that he is healthy enough to do so.

Sam Millionaire:  Sam is now worth about $5 million and knows that he will be worth about $15 million by the time he is seventy.  His wealth is split among the properties he owns, a stock account, a bond portfolio, and a couple of savings accounts.  The earnings from his work seem trivial compared to his investment earnings, but he keeps working because he really likes his work.  He has also found that not worrying about his income has allowed him to pick the work he likes rather than doing what is needed to climb the ladder.  He takes a nice vacation each year, paying cash generated by an investment account he has set up specifically for travel, and also spend weekends frequently at his cabin.  He has also made several improvements to his home, again paying cash each time which has allowed him to get discounts from contractors.  He also gives generously to charities and individuals.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

My Stock Got Creamed Today. Now What?


Today my shares of BJ’s Restaurants Incorporated got obliterated by the market, losing more than 15%.  The opinion on the Motley Fool is that the stock should be avoided because the sector has slowed.  I have a relatively large position in the stock that I have been acquiring little-by-little for a while.

What will I do now?  Call my broker in a panic and sell everything?  Buy more to average down?  It is times like this that rattle the confidence of even the most seasoned investor.  Everyone knows what to do when the market is going up.  What about when it’s going down?

The answer is that I am going to stand pat.  The news on the stock is that earnings increased – the shares only fell because the earnings were not as strong as the market was expecting.  The company is still expanding and doing well.  The whole restaurant sector is just doing poorly – probably because the “recovery” is not really a recovery, and increases in gas and food prices are starting to take their toll on the restaurant going public.  Everyone is having trouble – not just BJ’s.

There is no reason to sell just because the price fell. I didn’t feel it was overpriced at $38, so there is no reason to think it is overpriced at $32.  I wouldn’t sell my home just because someone offered me $20,000 less for it than I paid.  Unless I’m looking to sell, the current price really doesn’t matter.

Likewise, I have as many shares as I want to have, so there is no reason to buy more just because I want to lower my cost basis.  Who is to say also that it won’t fall further?  Buying when a stock is falling is called “catching a falling knife” for obvious reasons.

I think the company still has a lot of room to expand.  Because I am buying the business, and not trading the stock, these fluctuations don’t bother me.  So long as I still like the company, I’ll hold on.  IF BJ’s is strong like I expect, it will last through any sector weakness.  When the sector rebounds, it will have fewer competitors and be in an even better position.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.