Become An Owner Instead of a Worker

When we’re young, we trade our health for money.  We work long hours.  We lift heavy things and wear down our tendons. We spend hours typing or doing other repetitive motions that cause carpal tunnel syndrome.  We spend hours on our feet and wear down the disks in our backs and develop heel spurs.

We trade this wonderful gift of youth and health that we’ve been given, the ability to keep pushing it for may hours, to bounce back when we fall down and heal fast when we get cut, for cash by working way too many hours.  We go in before dawn and leave after dark, never getting out to see the sun and the woods and the oceans.  We work hard to go on a vacation, which is then rushed and filled with work thoughts and emails back to the office the whole time.  We buy large, beautiful homes that we spend all of our free time maintaining and cleaning when we aren’t working to pay the mortgage.  We buy things on credit and then spend a quarter to half of our time working to pay interest payments.

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While we’re young we can make extra money by just pushing it a little harder.  We can make that car payment if we work overtime on weekends so we can drive that shiny new car to work and have it sit in the parking lot all day, slowly decaying away.   We can take on that second job and get all of the cable packages and five different web streaming services.  We can keep buying clothes to impress people we don’t like and buying all of the latest gadgets to look good for people we don’t even know.

When we get old, we trade our money for health.  Any money we’ve saved up through those long hours of work goes to treatments, surgeries, and drugs to reduce the pain our weary bodies feel.  We spend money to try to have the ability to walk and run and jump and heal like we did so easily while we were young.  We get surgeries to be able to walk after long hours of carrying heavy loads have destroyed our knees.  We buy prescriptions to lower our blood pressure after years of sitting idle at a desk, eating poorly, and letting our health decay.

Stop.  Stop today.  Stop right this minute and change your life.

Become an owner instead of a worker.  Instead of getting that new car, drive your old one for a few more years and send those car payments you would have made into a stock mutual fund and become an owner in a group of companies.  Buy a smaller house for cash and invest the money you save on interest.  Stop buying things to impress people and just buy what you need so that you can spend time with your family who don’t care what the label on your blouse or jeans says.

Start building a portfolio so that you will be getting dividend payments and capital gains instead of paying interest payments and penalties.  Let others work for you so that you don’t need to work those extra hours.  Expand your lifestyle by waiting a little while to buy things, instead investing the money in mutual funds, then using the distributions from those mutual funds to add to your income.  Direct some of that money back into buy more mutual funds, and your income will expand on its own.

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Everybody can become an owner.  You can start a mutual fund account with Schwab for only $1.  You can start investing through Vanguard funds for only $3,000 ($1,000 if you start a retirement account).  Start an account and start sending a little of your paycheck in each month to build your wealth.  Own things.  Build things.  Stop just using all of your effort to generate entropy.  Stop having your money flow into your back account through direct deposit and then back out again to bills through auto pay without your even seeing it.

The next SmallIvy book, Cash Flow Your Way to Wealth, will be coming out in about a month.  It gives the game plan to go from worker to owner.  Subscribe to this blog to make sure you get your copy when the time comes and don’t miss out.

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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.

A Missed Chance to Change American Healthcare History


Regular readers to the blog will remember the “Parable of the Pipeline,” which was created by Burke Hedges.  This is an excellent analogy to show how the rich become wealthy and why the “normal” person doesn’t.  (You can buy your own copy by clicking on the book cover below.)

To paraphrase:

Once in a town in Spain there were two brothers who were paid for each bucket of water they carried from the spring to the village.  They each worked hard and made a reasonable living.

One brother went out at night and had big meals and wine with friends, spending any money he had left after paying for his basic needs.  He saw a lot of money go through his hands with little to show for it, but he was not concerned because he was young and healthy.  Whenever he needed more money he simply worked harder, carrying more buckets.

The other brother also worked hard, but he spent his nights building a pipeline from the spring.  He spent any surplus money he had on materials for the pipeline.  While his brother was spending his money on fancy meals and good wine, he was eating a simple dinner he brought from home in the field.  While this brother was buying fancy clothes, he was content to buy durable, functional clothes that would last a long time.

The Parable of the Pipeline: How Anyone Can Build a Pipeline of Ongoing Residual Income in the New Economy – Get your copy of the original!

The first brother ridiculed the second brother, saying that he was wasting his time and not enjoying life.  He and the other men and women in town laughed at his simple clothes and pipe dream.  “We have always carried buckets from that well,” they would say.  “Our parents were bucket carriers, and their parents before them.  Quit wasting your time on this fancy.”

But the second brother continued to work on his pipeline each chance that he got.  Finally, he completed the pipeline all the way to town.  The second brother was now able to bring as much water to the village as he ever could in his youngest days simply by turning a valve.  If he also carried buckets, how could easily sell twice as many buckets as his brother could. 

When he was sick, his income did not decline.  He would travel and still have the same steady income.  He could now buy nicer clothes, using the income from his pipeline, and still have his whole salary to pay for his needs and materials.

Because he did not need to work as hard to provide for his needs, the second brother could now spend more time working on his pipelines.  Because he had even more surplus money, he could also hire others to help.  As time passed he used his wealth to build more pipelines, eventually becoming very wealthy.

As they grew older, the number of buckets each brother could carry each day decreased.  The first brother, no longer able to work, saw his income decline, making it tough to pay for necessities.    The second brother, however, was able to live comfortably on his income from the pipelines.

Note in this parable no one was cheated.  The second brother did not build his fortune by taking advantage of his workers – he paid them what they considered a fair wage for their efforts.  It is true that he worked harder for his income when carrying buckets than when he was using the pipeline he built, but he certainly worked very hard when building the pipelines and he delayed using the fruits of his labor in order to build them.  He was using his income in a smarter way than the first brother was using his – something the first brother could have done had he chosen to do so.

There is currently an assault on those who have built their pipelines and are now receiving the fruits of their efforts.  Jealousy and envy are being used as tools to divide.  So that people will not notice the political promises that have not been kept (because the economics made it impossible to do so), the blame is being placed on those who saved and invested.

Other books by Burke Hedges that you should read:

This nation is great because of those who have built the pipelines.  Henry Ford created a way that would allow average people to own an automobile and in doing so created the factory, employing thousands.  Sam Walton filled the need for a greater selection of products at prices the average person in rural communities could afford and in doing so raised the standard of living for thousands.

Even those who did not found multibillion dollar corporations, but who did save and invest so that they had a few million dollars by their 50’s benefit society.  They ensure that they will not be a burden on others as they age.  They also have the means to help individuals and organizations in their communities (as many do).

If we are all bucket carriers who spend every dime we will not be able to take care of ourselves in old age.  If we tear down all of the pipelines out of envy there will be less for everyone.  Less money, less taxes, fewer jobs, and fewer goods.

We will be like a lake full of frogs who find that the pond is dry.  As an old Texan once told me, when the pond runs dry, frogs eat frogs.

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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.

Picture Credits:  Kevin Abbott , downloaded from stock.xchng.

Seven Simple Financial Truths


OLYMPUS DIGITAL CAMERAIn America, we see places like Detroit that should stand as lessons on why Socialism does not work, and yet they seem to go ignored.  Detroit has been under staunch Liberal control for decades.  It has been turned from one of the strongest American cities with a population of 1.8 M into an urban wasteland with a population of less than 800 thousand.  Houses go for a few thousand each, but no one dares to buy because they know the city will swoop in to extract any taxes they can if any money flows into the city.

The issue with Socialist plans is that they ignore fundamental economic principles.  You create the most wealth when most people are working.  The way you get most people to work is to require them to so in order to get basic necessities.  The more people who are working, the more there is to go around.  Because Socialists ignore these principles, they end up making things worse for everyone except for, ironically, the very wealthy.  (The very wealthy generally have enough wealth to continue living as they were or they have enough influence to get favors from government officials.)

Here are these basic economic principles, which are self-evident.  For any economic system to succeed, it must take them into account and build.  Ignoring them is like trying to fly by ignoring gravity.  When politicians ignore these principles it results in a fiscal mess and undesirable outcomes.   The best course at that point would be to stop and try a different approach that observed the principle.  Instead a politician’s nature is to try to make things better by enacting new policies, usually causing more problems.   It is like a person trying to clean up a mess with a dirty rag, where the more they do the worse it gets.

1.  A business cannot, on average, pay employees more than they produce.

2.  If everyone produces as much as they can, you’ll have more than if only a few people are producing.

3.  Rewarding people in proportion to what they produce will result in more production because you align their self-interest with the interests of society.

4.  Providing for people without requiring effort from them will result in a lot of able-bodied people not working.

5.  Few people will produce more than they need if there is no reward for doing so.

6.  People who gain experience and improve their skills can produce more.

7.  The more production there is, the easier it is to take care of those who cannot take care of themselves.

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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.

Money Equals Work



What is money?  I don’t mean the bills and the coins, or the little numbers on the screen when you log into your bank’s electronic banking website.   mean what is it really, and why do people want it so much?

Money = Work

Money is a little IOU that you get for some work that you have done.  (OK, it may also be an IOU for something you find on the ground, if you’re lucky enough to find a chunk of gold just sitting there, but most people aren’t that lucky.  Usually, even getting gold often takes substantial work as well).  For example, if you are a farmer, you spend several months growing corn  – a few weeks plowing the fields, a few days putting seeds in the ground, a few months from sun-up to sundown pulling weeds, spraying for pests, and fixing fences, hoses, and equipment, and then several days picking it, and several days packaging it.  Then you bring it to market, and someone who wants that corn to eat gives you a dollar for five ears or something else you both agree is reasonable.

You can then take that IOU and give it out to someone else to do work for you, such as cut your hair, make a pair of shoes for you (or you buy a pair they have already put the time into making), or maybe make a cup of coffee for you while you sit in the air conditioning and listen to cool jazz.  You have used your work to produce corn, but you can trade the results of your work for the results of the work of other people.  The beauty of this system is that people get to concentrate on the work they do best.  Many people would simply die if they had to grow and preserve their own food, find and gather their own water, build and maintain their own shelter, gather resources to produce their own heat, and make their own clothes.  With a free enterprise society, they can simply paint people’s nails and in exchange have all of these things done for them.  When everyone is doing what they do best, everyone does better.

Money does not come from your boss or your company.  They just create an environment where it is easy for you to trade your work for money and take a small amount of the value of the products you produce in exchange.  Note that if you produce something worth $15, like maybe an hour of service at a counter, taking orders, your company may keep $2, use $5 to pay for the building, lights, and inventory, and pay you $8.  (How exactly would they be able to pay you $15 per hour in this case, even if you really needed it, to live where you live?)

Money does not come from the government.  Many people think that the government can just pay for things, as if they have an unlimited amount of money.  But all of the money they have is from taking a portion of the work people in the country produce, or wealth given to them by other countries or taken in wars.  Sure, the government can print more money, but if there is no work behind those bills, where exactly do you think that the goods will come from that you want to buy with those bills?  If there is one bushel of corn, will printing vouchers for two bushels of corn allow two people to get a bushel each?

Money and Retirement

So you’re ready to retire and you still want to eat and have a roof over your head,  You also might want to take a cruise to Alaska and drive around the country in an RV.  How exactly do you pay for these things when you are not working?  The answer is that the younger you is working for you in retirement (unless you don’t save enough, in which case you are then having the government go out and forcing other people to do work for you).  When you were younger, you had the ability to do more work than you needed to simply meet your needs at that time.  If you were wise, you stored up those extra IOUs you collected to exchange for work when you were older and couldn’t provide for yourself anymore (or didn’t want to provide for yourself anymore).

You could have also used some of those IOUs to buy things called assets that cause others to trade you some of their work.  These are things like apartments, which others pay you to use, shares of stock, which support companies others work in and provide you a portion of the work they do in exchange for an efficient way to trade labor for money, or you let others use your money directly in a loan in exchange for them paying you back and giving you a little extra money for use of your money. 

If you use assets to save for retirement in addition to your own labor, it means you don’t need to do all of the work for both your younger self and older self.  You can actually exchange your work for more work than you did.  Start when you’re 18 and you can get others to do about 16 hours of work for each hour you did! 

Assets also help protect you from the effect of what happens when the government does print more money than they take from those who work – inflation.  If you simply trade an hour’s worth of work for cash when you’re 18 and stick it under your mattress, you’ll be lucky to trade it for half an hour when you retire.  Buy shares of stock with it, and the price of the stock will increase with inflation so you’ll still get your hour back, even if the company in which you invest does not grow.

So remember, money is just an IOU for work.  You collect IOUs when you’re young and able to do more work than you need to provide for yourself when you’re old an unable to work.  If you collect money from the government, you’re having the government go out and take work from other people to provide for you.  Finally, you can purchase assets with some of the IOUs you collect, and other will willingly trade their work of use of those assets, such that you can receive many hours of work from other in exchange for a few hours of work you do yourself. 

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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.

How to Get a Raise Above Minimum Wage

There is currently a strong drive to raise the minimum wage.  Perhaps this is an effort to take people’s eyes off of the Affordable Care Act, or maybe it is to get people’s minds off of the economy that continues to slowly turn six years after the “Great Recession” started despite trillions of dollars being spent on stimulus.  Unfortunately, raising the minimum wage will just result in jobs being cut.  There is really not enough profit in businesses that employ minimum wage workers to raise wages by much and still make the investment worth the risk that is being taken.

You see, you cannot pay a worker more than he makes for the business in profit.  If a person sitting at a counter, taking orders creates on average $15 per hour in business, and providing the service costs $8 per hour, you can’t pay more than $7 per hour without losing money and eventually going broke.  In fact, it is unlikely that you would pay more than $5-$6 per hour because otherwise you wouldn’t be making any money for your efforts in running the business.  If you are forced to pay no less than $10 per hour, you will lay people off until you are making at least $12 for each worker remaining.  If you can’t do that, you’ll just close the businesses down, change the business so you can charge more and likely hire more highly trained workers, or move it elsewhere.

It really doesn’t matter how much the worker needs to make to afford expenses.  Pay is limited by how much a worker can produce for the business.  If you raise the minimum wage beyond that, you are going to hurt the low-income workers since they’ll lose their entire paycheck and not be able to get the experience to move beyond that first job.

So how do you increase your pay if increasing the minimum wage won’t do so?  You need to increase the amount you make per hour for the business.  If you are able to work more efficiently and make $12 per hour for the business, the owner might be able to pay you $10 per hour.  Likewise, if you are a stellar salesman and cause more people to come to the business, the owner can pay you more.  Likewise, if you learn to use tools that make you more efficient and you can therefore produce more per unit of time, you can get paid more.  To really make money, you need to be able to create more business for the owner through your ideas and capabilities.  Your mind will pay a lot more than your hands.

Note that this may not be easy.  It is easy to just sit there and do what you are told, but if there are fifteen others guys in line who can do your job with little training, you’ll never make much.  It is also easy to just do the things you know, but it is the guy who learns new skills that create more business that is truly valuable.  It is easy not to need to deal with other people, but a person who can manage others to get a lot of work accomplished is far more valuable than a person who can only do what he can do with his own two hands.

Remember also that you make money by providing more in service than you receive in payment.  You make lots of money by meeting the needs of lots of people.  A person who cooks a meal for another person will never make as much as a person who opens a chain of restaurants and serves meals to a thousand people a day.  It is all about serving others.

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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.

Things to Do When You Start Your First Job

There are many decisions that come with a first job.  Your life is suddenly transitioned from one of school to one of the working world.  Making the right financial decisions at this point will set you up for a life of financial security.  Here are some things you’ll want to do:

1.  Set up an emergency fund.  The first thing you should do is save up enough cash to pay for three months-worth of living expenses.  This will give you time to find a new job if you get laid off without moving back in with mom and dad and also give you the cash you need for little emergencies like a car repair or a broken arm.  These expenses would otherwise be put on a credit card, starting the cycle of debt you do not want to enter.  Being able to pay for emergencies will save you millions of dollars in interest over your working lifetime.

2.  Develop a budget and an envelope system.  Without a plan, money will be spent on junk until your expenses equal your income each month, leaving no money to save and invest.  Most people who start a budget say they feel like they have more money to spend than the had without the budget since they aren’t wasting so much.  Develop a budget with income, expenses, and then money directed to saving and investing.  Allocate every dollar to something.  Then, put cash in envelopes for things like food, clothing, and entertainment/meals out to keep you honest.  Once the envelope is empty, you’re done spending on that category for the month.  If it is a criticalexpense, like you run out of food money a week early, go back to the budget, determine where the money will come from, and make the change so you see the effect of your choices.  Don’t forget to account for things like insurance premiums and retirement accounts.

3.  Fund your 401K.  Every dollar you put into a 401k in your twenties will be worth $64-$124 when you are ready to retire.  Make sure you direct at least 10% of each paycheck into your 401k (15% is better).  If you start immediately, you’ll never miss a payment and be set for retirement.  Never, ever take money out of a 401k unless you owe taxes you can’t pay or you’ll be out on the streets.  The taxes and penalties on early withdrawals will take more than half of the money you take out, plus you’ll be putting your retirement in jeopardy.  The words that really get my blood boiling are “I decided to cash out my 401k” since I know that millions of dollars are being given up when people do that.  This is usually something people who have never saved money do when they are looking to start a business later in life and need cash.  If the business fails, you’ll be in dire straights.

4.  Start an individual IRA.  If you’ve directed enough of your salary to your employer’s 401k to get the full match, it makes sense to then max out an IRA before putting the rest of your 10-15% into the 401k.  You have more investment options in an IRA, plus it is totally disconnected from your work.  If you have a Roth 401k at work, you can do a traditional IRA and get a tax deduction or vice-versa.  Mathematically, it makes more sense to do everything with a ROTH, but you are then depending on the government not to change the rules and tax Roth IRAs and 401k’s (or raise sales tax or other taxes when you spend the money, which has the same effect), so it may make sense to get some tax breaks now and then pay the taxes now and get tax-free growth with the rest.

With an IRA, you’ll need to have the discipline to send in a check each month or every few months.  Waiting until the end of the year is a bad idea since you’ll miss out on growth during the year and also you may not have the cash you need when the time comes.  Regular, monthly contributions are best.  You can probably setup an automatic draft each month from your checking account.

5.  Focus on paying off your student loans before you shop for a house.  A lot of people come out of college owing $40,000 or more in student loans. It is better if you can do without loans, or minimize them as much as possible.  If not, at least get the loan out-of-the-way before you have all kinds of other expenses that cause you to keep the loan for 30 years or more.  With aggressive payments, you should be able to knock that loan out in 3-5 years if you keep living like a college student for a little while longer.  Plan to kill that loan off before getting a home and a mortgage.

6.  Avoid the new car.  Instead, save up and buy a good used car.  If you keep a car payment your whole life, you’ll have a million dollars (or more) less at retirement.  That could be a really nice vacation home on a beach in Hawaii while your friends with their car payments are scrimping to pay for a dilapidated apartment.  Save up $2000, (about 3 months of car payments) and buy a well-running car with a lot of miles.  Drive that for a few months, save up another  $3000, and you can get a good used car with maybe 80,000 that will run great for another 100,000 miles or more.  Even if you have a $500 repair a couple of times a year, you be saving thousand on interest and depreciation.

7.  Save up 20% for a home, then get a 15 year fixed rate mortgage requiring no more than 25% of your take-home pay.  Many people buy too much home and then struggle to save and invest.  Buy a home you can easily afford and pay it off before the kids get to college.  If you are investing, you should be able to add another $100,000 to $200,000 in your early 40’s and either buy your dream home or upgrade the one you’re in.  You’ll end up paying a lot less than the person who bought the McMansion at 25 in interest, meaning you’ll have a lot more money to spend later.  At 45, you may have a nicer house than the McMansionite and still have a half million dollars in investments while he has no savings.

8.  Think about term life insurance.  No one likes to think about death, but tragedies do happen.  They are all the more worse if those you leave behind need to find a way to make an income to replace yours.  While you’re alone, term life makes little sense unless you just want a modest burial policy to pay for a funeral.  When you have a family who depend on your income, it’s critical.  Buy 10 times your salary in a 15 to 20 year level term policy.  It will  only cost a couple of hundred dollars a month if you buy it while you’re young and will prevent a lot of hardship for your family should something happen to you.  If you have kids at home, also look at getting insurance for the spouse who stays home so you can hire a nanny should something happen to them.  If you are saving and investing, you should have the house paid off and plenty of money by the time the policies expire in 15-20 years if nothing happens.

7.  Get involved in professional societies and trade groups.  It is important to get to know others in your industry.  These can be contacts for your next job, experts who help you with a problem, or suppliers you’ll rely on to get your work done.  Join the local professional society if you’re a professional, or join a trade group if you work in the trades.  Then, don’t just sit back and wait for things to come to you.  Get involved and help out planning events and activities.  You’ll often find higher-ups in your company and elsewhere working alongside you.  If you show you can do great work organizing events, your boss might pick you to organize big projects at work.

Contact me at, or leave a comment.

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.

Why Capitalism Works, and Other Systems Don’t

People, in general, are self-serving.  Much as we would like to be fully selfless, spending all of our time doing for others, the fact is most people are first concerned with themselves and their families, then extended family and friends, then finally people they don’t know.  This is necessary for survival, since people would be unable to have enough of the necessities – food, water, shelter, clothing, etc… if they spent all of their time doing things solely for others.

And yet that is what many see as good and noble.  Ayn Rand uses a good example of this in her “perfect man,”John Galt’s, speech about two-thirds of the way through her classic work of Objectivism, Atlas Shrugged.  John Galt notes that a mother who gave the food for her own baby to another’s baby would be considered noble.  Yet her baby would starve, so the process is in fact suicidal.

One would think that with this selfish, every-man-for-himself behavior, capitalist societies where the government does not step in to take resources from those who produce a lot and provide for those who do not, we’d have only very wealthy and very poor.  You would also think that the poor would be absolutely destitute since the wealthy would be selfish and keep everything.  And yet, places like America do have a thriving middle class driving SUVs, living in 3000 square foot houses and taking nice vacations.  Even the poor i the United States are rich compared to many other places, most having shelter, at least one car, several televisions, ample food, at least one cell phone, and ample clothing.

Other places like China are also seeing the virtues of Capitalism.  After the Tienimen Square protests and massacre, the Communist Party realized that they could not continue repressing their people through force and also that under Communism they were not able to provide enough resources to their people because few were working.  They therefore began to allow some capitalism, albeit with the understanding that the government was still in charge and could step in and take your business if they felt like it.  As a result, China is seeing a manufacturing boom and an increase in the wealth of its people.  Some of the manufacturing is even shifting to other countries and away from China because the people are doing so well that they are demanding higher wages.  As with America, the way to keep manufacturing in China would be to increase the quality of the goods produced and the skill of the workforce to make the higher wages worth the cost.

Looking at socialist and communist countries, just the opposite is seen.  The USSR was extremely poor under communist rule.  There were chronic shortages of goods with famously long lines for bread and milk.  Corruption ran wild, as it still does today in Russia.  There was also a general atmosphere of hopelessness and despair.  Indeed, event he architecture reflects this with buildings being built during the Soviet period being boxy and grey without ornament; purely functional with no spirit or life.  Conditions in Cuba, North Korea, and Vietnam are similar, if not more desperate.

Monarchies and dictatorships see similar poverty among the people.  The king may live in a palace and have large amounts of wealth, particularly if the United States and other countries provide aid to try to help the poor in the country, but overall the country is far poorer than are Capitalist nations.

Beyond just the level of wealth in capitalist societies is the availability of goods and services.  Rather than having one brand of corn flakes some of the time, there are three or four varieties with different quality levels and different prices.  There are ten brands of toilet paper rather than not even having one.  A socialist may see this as wasteful, to have so many different brands of products, but obviously people are buying the different brands or they would not be there, given the fierce competition for shelf space.  The competition also motivates companies to do things better and find less expensive ways to produce their products.

The difference between capitalist nations and those with central control – communist, socialist, monarchies, oligarchies and dictatorships is three things:

1)  Personal interest is aligned with common interest.  Free enterprise provides motivation for people to identify the needs of others and do something to meet those needs.  Individuals who are willing to get up in the morning, dress appropriately,and spend 8-10 hours a day doing something that helps someone else can easily earn enough to provide for their basic needs.  Those that identify a need and work to provide for that need get rewarded for doing so in proportion to the criticality of the need being met and the number of people they help.  A hotdog vendor on a street with a dozen other vendors makes enough to eek out a living.  One in a crowded place with no other vendors does quite well.  One who sets up a chain of hotdog stands in locations where a lot of people need something to eat gets very wealthy.  One that sets up a hotdog stand where people do not like hotdogs just because he wants to goes out of business.

In the other systems, the incentive to meet the needs of others is quashed by limitations on how much reward you can get.  If you make a lot of money in a socialist society or a monarchy, people from the government will confiscate a lot of it – either for the King or for others who did not make as much money.  In the case of Socialism and Communism, people can also get enough to survive upon without doing anything for anyone.  Indeed, those who have greater need receive more and those who provide for their own needs are taxed to provide for the needs of those who do not.  Both of these factors motivate people to do only as much as they must and in many cases to do less than needed to provide for themselves.

2)  Capitalism involves individuals trying to meet local needs.  Stores in New York City sell different things and sell them in a different way than do stores in El Paso, Texas.   All over the country, individuals are looking at their local communities and determining what is needed and how to best provide for those needs.  This is not out of civic duty but because it brings the most profit.  In large cities, delivery services may be critical so the cost may be included in the price, while in rural areas many will have a truck and would rather save the cost of delivery.

With centrally planned economies a central group must decide what is best for everyone.  Even if they have the best intentions, it is impossible for a small group to decide what is best for so many different people in so many different situations.  For this reason, what ends up happening is that blanket processes and blanket rules are created that fit few people well.  You end up with snow tires in Phoenix and beach chairs in North Dakota because it is easier to create one list than it is to create one for every area.  It is also difficult for a small group to create and control the logistics for getting goods to everyone, causing shortages and surpluses.

3)  Capitalism limits the effect of corruption.  In a Capitalist society, while there can be some bad actors, the effects of corruption are generally limited.  Store owners who cheat their customers generally lose customers and go out of business.  Likewise, employers who mistreat their employees lose the better employees and fail in business.  Because there is choice, both in where to buy things and where to work, corruption is limited.

Corruption is rampant with central management.  Because there is scarcities and because there is generally only one choice, individuals use the system to solicit bribes.  Individuals are also chosen for high positions not because of competence but because of political connections (see the roll-out of Obamacare, as an example).   Finally, the ability for officials to choose who gets what contracts and goods allows them to setup system where those who help them get rewarded and those who don’t get penalized.  In some cases some of the public money ends up coming back to the leader.

Contact me at, or leave a comment.

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.

Why You Need to Care About the Affordable Care Act

My intent in writing this blog has never been to make it political.  I’m sure some of my readers are probably saying “Enough about the Affordable Care Act, already.  Just get back to information about stocks and bonds.”  I’m sure that many of my readers have different political views and would love to have a single payer healthcare system.

The reason I have written so many posts, however, is that the Affordable Care Act will make the central theme of this blog, providing information on how to grow financially independent by working and saving, pointless.  As I have stated, under the current level of taxes an individual in the middle class has the ability to save and invest.  In doing so, one can become financially independent by the time one is 45 to 50, and be fairly wealthy by the time one retires.  If this continues for a couple of generations where the children build on the wealth of the parents, very wealthy families could be produced.

This is done by sacrificing and avoiding debt when you are young to allow you to invest and increase your income later.  This involves doing things like not buying new cars, eating in or bring a lunch most days, and keeping vacations modest (and paid for with cash) until you have assets generating enough income to have more lavish vacations.  These simple steps can allow a middle class family to save the $200-$500 per month needed to build assets and generate investment income.

The Affordable Care Act, however, requires those who are young and healthy to pay $200-$800 more per month for health insurance.  It is not that they are suddenly sicker or will be receiving better quality healthcare.  It is so those that are older and sicker will be able to pay less because young people who use little healthcare will be paying for part of the sicker person’s care.  The idea is that you will pay a lot and use little healthcare when you are young in return for paying less and receiving more tcare han you have paid for later in life.  Like Social Security, however, this requires those being born now and ten years from now to agree to this bargain and keep paying these high premiums when you need the care.

If people in their 20’s and 30’s start paying another $300 per month for healthcare, that will make it even more difficult to save and invest.  Indeed, many people may start eating in and buying used cars just to pay their health insurance bills, rather than to save and invest.  This will cause a drop-off in sales at restaurants, stores, and car dealerships, likely leading to job losses and an even smaller economy from which to support this massive healthcare program.  It will also take investment capital away since fewer individuals will be investing, reducing the pace of innovation and making fewer new services be provided and fewer jobs be created.

A better plan for healthcare is to eliminate pre-paid healthcare entirely, instead making medical costs more transparent and allowing the market to drive down costs and make the system more efficient.  This would be coupled with mandatory contributions to Health Savings Accounts (or making the consequence of not having money saved severe enough that most people would chose to do so on their own) so that individuals have money to pay for care when required.  Insurance would still be needed to spread the risk for expensive procedures, but having people pay out-of-pocket for most care would reduce costs, result in better care, and allow individuals to save while they are young to pay for their own care when they are older.

We also need to get away from the notion that individuals should not pay for their healthcare.  Few people would take charity when they are able to provide food and shelter for themselves, but most people are more than willing to use a government program to pay for their nursing home care.  In fact, many people spend down their savings in retirement just so they can go on Medicaid rather than spend the money on their own care.  It is fine to leave an inheritance when you die with money left over, but shouldn’t we first use that money to take care of ourselves while we are alive rather than burdening others?  Not only is this fair, but the quality of care we receive will be better and we will have more choices.

Contact me at, or leave a comment.

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.

Two Paths on Healthcare

Sometimes in order to get to a different place, you need to upset the norm.  People will continue to sail in a leaky rowboat indefinitely, bailing while their shoes get wet, so long as the boat doesn’t actually sink.  Sometimes it takes someone to come along and knock a big hole in that boat before people will get out and construct a better boat.  President Obama and the Democrats have certainly knocked a big hole in the healthcare boat.   Unfortunately some may drown before we build a more sea-worthy craft.

It’s clear that we can’t (and shouldn’t) return to the system we had.  While those of you on employer-based healthcare probably haven’t seen any big changes yet, be ready to be thrown into the water with those who currently buy their health plans in the individual market.  They have seen their rates doubling while deductibles have risen dramatically to the point where the chances of the insurance company ever paying anything for most people is remote.  The reason many employer-based plans are staying in place is that implementation of the employer mandate portion of the Affordable Care Act (ACA) was delayed by (a questionably legal) Executive Order.  Next year when the mandate starts to kick in, requiring employers to expand what they cover, and making many existing plans “illegal,” expect many employers to opt to pay the $2,000 per employee fine and send you packing to the exchanges.  Many employers may provide a little money to help with premiums when they do, but don’t expect that assistance to keep pace with premium increases in the future.  Worse still, many employers may simply lay people off or cut their hours to part-time (29 hours or less) to avoid the fine.  It is expected that about 150 million Americans will lose their coverage when the employer mandate starts – nearly half of the population.

Before about 1960, most individuals just paid for their healthcare and there wasn’t any great burden.  I don’t know how many doctors actually took chickens or preserves for payment in the early twentieth century, but certainly they charged rates that their patients could generally afford.  If not, they would have gone out of business quickly.  Likewise, while there can be no doubt that a long hospital stay would burden a family even then – both because of the loss of income and because of medical expenses – I doubt that the fees were anywhere near the $2000 emergency room visits we see today.  I would put the fair price of a night in the hospital around $150, given the cost of the building and the nursing staff.  I doubt that is anywhere close to what a hospital’s list price is for a night.

The pre-ACA method of healthcare payment grew out of the auto industry where the automakers started paying for employee healthcare rather than increase wages to the point the unions were demanding.  This practice spread to other industries and became an expected benefit of working.  At first people used little healthcare, so the cost was relatively low and the companies would cover it fully.  As people discovered that their cost was the same no matter how much healthcare they used, however, and as the population aged, the norm urning from twenty-something invincibles who rarely go to the doctor to fifty and sixty-year-olds who use a lot of healthcare, healthcare usage increased and so did costs.  This caused employers to start requiring their employees to pay a share of the cost, which then caused employees to use more healthcare since they were now “paying for it anyway.”

The ACA does have one thing right – it requires everyone to start putting in money for healthcare through the individual mandate which requires that everyone get health insurance.  By having everyone who could pay for their own care do so, it would eliminate many situations where individuals need healthcare but have no money to pay for it.  The ACA has three fatal flaws, however:

1) It is really a huge, unaffordable tax on the middle-class, where those who make about $60,000 and more pay for those who make less.  This makes health insurance rates skyrocket and benefits fall since those who are actually paying are paying not just for their own healthcare, but for several others who don’t pay.  Many of the individuals who the system wants to enroll – those who are young and healthy, and who therefore will use little healthcare – will wisely look at the cost of buying the new health insurance versus paying the fine and opt for the fine.  This makes perfect economic sense since for the cost of the premiums they could easily pay for their medical expenses and have a lot left over for emergencies (if they actually saved).  Some may also choose to make less income to avoid the fines as well.

2)  The ACA is a pre-pay, Ponzi scheme-like system, much like Social Security.  Young, healthy individuals pay for elderly, sick individuals with the assumption that when they are elderly others will pay for them.  This is very risky for the young individuals since it gives up control of a critical necessity in their lives and makes them hope the ACA turns out better than Social Security, where excess proceeds were spent by the government and now the system is running out of money.

3)  The ACA does nothing to address the critical need, connecting individuals with the cost of their healthcare so that they can make better choices and bring down costs.  Instead it tries to bring down costs through regulation on healthcare providers, who will either find ways to make up the losses elsewhere or simply leave the profession.  Would you rather have a Summa Cum Laude graduate with 12 years of training taking care of you, or a C-student with a four-year degree from the community college?  The regulations will chase the best and brightest out of the profession.

Expect the ACA to collapse as sick people pile in and healthy people opt out.  Ironically, this does what could not be done before:  Change the system where the norm was for people to pre-pay for healthcare, largely through work, and then have medical expenses paid through those health insurance plans, into one where most individuals will be paying for things directly out-of-pocket.  The question is whether we as a nation will choose to continue on that path or choose instead to make the government the insurer, pay for healthcare through taxes, and then have a single-payer system.

The first path – paying for things as individuals – leads to a much better place.  By simply enacting a couple of reforms:  1) requiring individuals to put aside a portion of their pay to save for healthcare and 2) allowing insurance companies to again offer major medical plans that pay for expensive medical procedures that most people will likely not need in any given year, we can move to a system as I outlined in A Better Plan for Healthcare in America.  Under this plan the cost of healthcare will drop since the cost of insurance billing and other wasteful procedures will vanish and healthcare providers will seek out efficiencies to compete for customers.  There will always be some people who are either unfortunate and won’t be able to pay for their healthcare, or those who behave foolishly who will need to be rescued, but the costs for these individuals will be manageable since most people will be saving and paying.

The second path – a single payer system – will create what any government-run system creates:  Higher costs, lower quality, poor customer service, and fraud and abuse.  While there are certainly many ethical and well-intentioned individuals in the government, it is impossible for any centrally managed system at a scale of the national healthcare system to do a good job of meeting the needs of citizens in all sorts of different localized situations.  Instead, a set of one-size-fits-all policies are created that only work for a small percentage of the population.  The inability to police at the local level will lead to abuse, which will lead to scarcity and administrative barriers (hoops to jump through) that don’t stop the fraud but make it very difficult for honest individuals to get the services they deserve.  This in turn will lead to bribes and political favors, as does any system which does not work if the rules are followed (see getting doing business in Russia or legally immigrating to America, as examples).

Let’s hope people choose the path that leads to prosperity and excellent healthcare for all.  To get there, request 1) mandatory personal health savings accounts, possibly subsidized for low-wage workers and 2) remove rules requiring insurance companies to cover routine care and restricting where insurance can be sold.

Contact me at, or leave a comment.

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.

A Better Plan for Healthcare in America

Certainly the Affordable Care Act is a terrible plan for healthcare in the US.  It makes people deal with the bureaucratic nightmare that is the US Government to get health insurance (dealing with them once a year on April 15th should be enough).  It eliminates variety in health plans, reducing the choice down to four, one-size-fit-all plans with all sorts of deals and favors for special interest included.  It has regulations that force health insurers to drop plans that people rely on, forcing individuals who buy their own insurance to go to the health exchanges and generally pay more for plans with higher deductibles with fewer doctors.  It encourages employers to cut people to part-time, lay people off, or not grow beyond 50 people since doing so requires the employer provide expensive health coverage.  Next year, as the employer mandate kicks in (it was delayed by Presidential decree for a year on questionable Constitutional grounds), you can expect more layoffs and people shifted to part-time work.  You can also expect a lot of big employers to drop health coverage entirely, opting instead to pay the $2000 per employee fine and send employees to the exchanges, perhaps with a little funding for premiums.

Rather than do what was promised – reduce costs and get everyone insured – it is increasing costs and millions of people are losing their health coverage.  It will also add dramatically to the deficit as the costs for the subsidies grow and strain the government which is already spending about 30% more than it takes in each year.  If current obligations are included (Social Security, Medicare) with the current debt of $17T, each taxpayer would need to pay an average of $1.1 M to pay off the debt.  This is before the costs of the Affordable Care Act are included.

There is a better way and it uses the same tactics promoted by this website for growing wealth.  It involves saving while one is young and healthy to pay for costs when one needs more medical care.  It also involves the free enterprise concepts of competition and innovation (and no, the Affordable Care Act does not use free enterprise competition because it specifies what the products must be and sets prices for them).

The first step in devising a good plan is to look at the issues with the current system.  Note this issue really isn’t healthcare – America has the best healthcare in the world – it is the method of payment for healthcare.  The issues are:

1.  A lot of people do not pay for their healthcare.  Instead, they go to a doctor or hospital when they need treatment, leaving those who do pay to foot the bill.  Some health insurance (government insurance, in particular) also pays little, perhaps below the costs of services provided.   A dinner at a restaurant would also be very expensive if you needed to pay for three other tables in addition to your own.

2.  Patients have no incentive to keep costs down since they are paying the same amount no matter what.  Likewise, doctors have an incentive to order lots of tests because they may be sued if they don’t order a test and there is an issue.

3.  People aren’t saving their resources for healthcare.  A lot of money is being paid into health plans, but this money is gone at the end of the year.  Few people actually put money away for medical expenses.

4.  True prices aren’t given for services.  Instead, list prices are dramatically inflated by doctors and hospitals because they know they will not be paid in full by insurance companies or most patients who pay themselves.  This makes it difficult for patients to compare prices and value shop, resulting in prices that are radically different within a specific area.

5.  Health insurance is normally tied to a job, unlike auto insurance which is purchased by individuals.  This means that people are tied to their jobs because of health insurance.  Also, insurance is sold state-by-state, meaning that there is less competition and less economy of scale  for health insurance than for other insurance such as car or life insurance.

All of these issues can be solved by simply changing the way healthcare is paid for and requiring individuals to take responsibility.  Specifically:

1.  Require all individuals/families who are working to divert a portion of their pay to a healthcare account (e.g., an HSA).  As with Social Security, the employer could also be required to provide a portion, but as with Social Security this would probably just result in a reduction in pay and wash.

2.   Require all individuals/families to purchase catastrophic health insurance with a deductible based on the savings in their HSA,  For example, an employee starting out with no savings might need to purchase a plan with a $5000 deductible.  Once they have $5000 in an HSA, this could be raised to $10,000, and then eventually to $20,000 or more since the employee would have cash to cover smaller expenses.  Insurance prices would fall as the deductible is raised, encouraging individuals to fund their HSA’s quickly and not spend more than is truly needed.  Employees who have substantial resources ($2 M or more, say) could be allowed to self-insure.

3.  Require medical providers to post a list of prices to allow patients to see what they will pay at different places and shop around.

4.  Allow insurance policies to be sold nationwide to increase competition and to allow insurers to offset high risk customers in one area with low risk customers  in others.

5.  Have the government involved in ensuring health insurers honor policies.  For example, an individual who has a claim denied could send the denial to a government agency which would investigate and fine the insurance company if they were denied incorrectly.

6.  Set limits on malpractice suits and have cases settled by judges rather than juries.  Remove bad/unethical doctors by pulling their licenses after a review by their peers.

7.  Create government-funded clinics as a safety net for those who don’t work and those who spend all of their HSA savings and still need more treatment.

8.  Create a national insurance pool for individuals who exhaust their insurance and require substantial care (for example, the twenty-year old cancer patient).

The first clause, requiring that all individuals put money away in an HSA for healthcare, would deal with the main problem seen today – that people don’t save money when they are healthy and therefore don’t have money to pay for procedures when they get sick.  It also removes all of the expense of filing insurance claims for every pill and doctor’s visit.  Most people would simply swipe their HSA card and be done, reducing the cost for the doctor and thereby reducing the cost of healthcare.  This would also eliminate the game of charging $1000 in hopes of getting $200.

There would be incentive to allow the balances in the HSAs to build over time to reduce the chances of needing to pay for expenses out-of-pocket, so many individuals would be more sensitive to the costs of procedures and visits.  Healthy, young individuals would build balances so that they would be able to pay for more expensive procedures later in life.  If you are spending $9000 per year (between you and your employer) for a health policy now, that money is all gone at the end of the year whether you use it or not.  Put into an HSA, and you’ll have $90,000 in ten years if you stay healthy (even without investment) – enough to cover a major procedure.

The second clause, the requirement to buy catastrophic health coverage, would take care of those with bad luck.  The people who get into accidents, need a major surgery, or get hospitalized due to illness, for example.  Because the price would drop as people were able to raise their deductible, allowing people to spend less of their money on insurance as the deductible went up, there would be incentive to preserve the money in their HSAs.  Again, the individual would have incentive to reduce spending.  Note also that this is true insurance – where individuals buy a policy to reduce risk – rather than prepaid healthcare as is the existing health insurance.  Few people get into accidents to use their auto insurance each year, but many people currently get procedures done because they are paying for it anyway with health insurance.

The third clause would cause competition for patients.  Because prices currently are not easily available, one hospital may change two or three times what another hospital charges across town.  The true price is also often a mystery (just ask your doctor’s staff what you will owe for a procedure and they will often say they have no idea, saying it depends on the insurance company).  Putting prices out in the open would lower prices as patients went to the low-cost option, pushing those who charge more to lower their prices.

The fourth clause, allowing insurance to be sold nationwide, would lower insurance prices since there would be more competition.  When there is a monopoly or a near monopoly, prices rise to the level of the most individuals are willing to pay rather than the least a seller is willing to accept based on  costs and profit.  More competition is always better for the customer.

The fifth clause uses the power of the government in a role for which it is well suited – enforcing contracts.  Currently there is incentive for insurance companies to simply deny all claims the first time since many individuals will then simply pay the bill rather than putting up fight.  The government should shelter individuals who are sick from needing to deal with this type of abuse.

The sixth clause, to limit malpractice suits and have a judge decide cases rather than a jury, will also help reduce costs.  Currently juries award large sums of money to individuals even when the doctor or hospital isn’t at fault because they feel someone needs to help the plaintiff and they see the doctor and hospital as an endless source of money.  This causes malpractice insurance to cost hundreds of thousands of dollars per year, which drives up costs of medical procedures.  Bad and unethical doctors could be removed, protecting patients, and just compensation could be dispensed by a judge in the case of malpractice.

The seventh clause, to setup government clinics and hospitals for those who don’t work or spend all of their HSA funds, deals with the reality that everyone will not be able to support their medical costs.  In some cases, despite the protections, some people will waste their HSA dollars and then have nothing when they need it.  Other individuals will not work and therefore won’t have an income to direct to an HSA.  Rather than having these individuals flood emergency rooms, forcing others to pay higher rates to cover them, the government could setup clinics and hospitals for them.

These government clinics could charge based on what people were able to pay, such that those who had HSAs could go there as well if desired.  They could hire doctors for a salary and would get a mixture of those doctors who wanted to help the poor in their community and those who simply preferred the security and simplicity of a government salary to the uncertainty and administrative burdens of a private practice.

If those who believe in a single-payer system are right, these government clinics and hospitals would offer great care at good prices and take all of the business away from the private market and we’d end up with a single-payer system.  Past history has not shown this to be the case for other government endeavors, however, where a general lack of motivation to provide superior service prevails or to work efficiently has caused poorer results than is seen in the private sector.  Perhaps medicine will be different, however.  If not, there will be further motivation to work and put money into an HSA to avoid the government clinics.

The final clause deals with the reality that some individuals will simply exhaust insurance and require further treatment.  The number of individuals in this category will be low since most people will be saving for medical expenses and have insurance that covers most conditions.  Here some tough choices might be necessary – if it if worth $1 M to keep someone alive for three months, for example.  A small tax on everyone would be able to fund most of the expenses in this unfortunate group.

Certainly this plan is not perfect, but it solves many of the issues with existing health insurance and is far better than the Affordable Care Act.  I open the floor up to comments and improvements.

Contact me at, or leave a comment.

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.