Tag Archives: economics

The Privileged Argument – An Evil Cycle Repeats

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They say that if you don’t learn from history, you’re doomed to repeat it.  We’re seeing a dark history start to repeat in its newest form, the Privilege Argument.  The cycle goes something like this:

  1.  People are unhappy because they don’t feel they make enough money.
  2. People wanting to gain power tell the unhappy people that the reason they don’t have enough money is that some other group of people are wealthy and keeping them down.
  3. Other people, who think that the people who want to gain power are super cool and really smart with all of the answers, repeat their rhetoric.  The term, “useful idiots,” was coined for this group of people since they have been fooled by the people who want to gain power and are therefore useful for obtaining their aims.
  4. The people who think they don’t have enough money rise up against the group of people who have been demonized, either physically through riots or by electing the ones who want to get power because of their promises to take the money from the demonized group and give it to the poor group.
  5. The demonized people are imprisoned, banished, or killed in gruesome ways and their property stolen.  Much of their wealth is destroyed very quickly, making everyone poorer.
  6. The people who wanted power become dictators, oppress the people, and lots of people are shot or starve.

Examples of this pattern are:

The Bolshevics, Russia, early 20th century:

The Marxists, under Lenin, convince the Russian people that the Czars and Russian Elite are the cause of their problems.  They rise up against the leaders with violence and put the Bolsheviks in power.  Lenin isn’t too bad to start, but eventually Stalin rises to power and kills millions of people.  The Russian people live a sad life with long lines for necessities and scarcities of things like toilet paper.  Eventually, the USSR falls, but the corruption left from the remains of the old Soviet party remain today.

The Nazis, Germany, mid-20th century:

The German people are unhappy after the loss of WW1 and the severe restrictions placed upon them by the nations who conquered them.  Inflation is rampant with wheelbarrows full of cash being needed to buy groceries.  The Nazis, under Adolf Hitler, convince the people that the Jewish people, who run many of the shops and banks, are the cause of their plight.  (Note, the Nazis were Socialists, not right-wingers.) The people put Hitler in charge, who proceeds to try to take over the world.  Millions of Jews, Poles, homosexuals, and Gypsies are put to death in concentration camps.  Millions of people are killed in WW2.  Today some neo-nazi groups remain, still spreading a rhetoric of hate.

Hugo Chavez, Venezuela, Early 21st century:

Hugo Chavez convinces the population of Venezuela that the wealthy white farmers and foreign oil companies are the cause of their problems.  The people rise up and put Hugo Chavez in power.  The farmers are chased off of their land and the farms are given to squatters who have no idea of how to run a farm or have any desire to do so.  The foreign oil companies are chased away and the wells taken over by a corrupt government-owned oil company.  Today the country is starving to death and those who oppose the dictator in charge have their meager food rations withheld.  One of the effects of centralizing distribution of necessities is that those who oppose the leaders can have necessities withheld.  No need to send in troops with guns to control the population when you can just turn off the supplies to them.

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The sad thing is that despite these examples (and there are a lot of other examples), the cycle keeps repeating.  This is because this philosophy, take money from the wealthy (who must have become wealthy by oppressing others) and give it out to people who aren’t wealthy (because it must be that they are being oppressed), sounds good to people.  Often a government is put in between since that insolates the people who are taking the money from the ones that they are robbing:

We need the poor to have food.  Let’s have the government provide food. 

The government is seen as a limitless source of funds that can be used for whatever social good is needed.  This is separated from the other side of the coin, which is required for the “government” to provide the food since the government itself produces nothing:

The government is running out of money.  We need to raise taxes so that the government doesn’t run out of money.  Wealthy people can afford to pay more since they don’t need all of that money.  In fact, the wealthier you are, the greater the percentage of your wealth you should pay since you have obviously done evil to become that wealthy.

Even if the taxes become burdensome to the point where less food (and everything else) is being produced since those who are most productive decide to leave the society or simply do less, taxes are held high because the goal has gone from feeding people to punishing the wealthy.  If you try to cut programs back, you get the argument:

 How dare you not support programs that are providing food to the poor.  You’re taking food away from poor people.

For some reason, these ideas tend to be promoted not by the poor but by individuals who have been successful.  Perhaps this is out of a sense of guilt because they have succeeded while others have not.  They do not feel guilty enough to take on the whole problem by themselves, however, by giving away a good share of their wealth.  Instead, they demand that others give away their wealth and use the force of government to cause this.

There also seems to be a feeling of superiority by this group of do-gooders over the people they want to help.  It is true that many of the do-gooders are highly educated and very intelligent, but they lock themselves into an echo chamber and never allow their idea that “government” can just do it all to be questioned.  (Many of the useful idiots tend to be highly educated and taught by professors who themselves have been isolated from the need to work in a real economy where costs must be balanced by revenues and where raising prices reduces the amount of revenue collected.  Because they have tenure, they are isolated from economics, so they are free to advocate for their theories without any real effects coming to them.)  The do-gooders, because they believe they are superior to those they wish to help, believe that others cannot make a better life for themselves through the path that the do-gooders themselves have taken – education, learning of skills, hard work, seeing to the needs of others – because others are inferior and not capable of taking their path.  Racism also often enters in here, with the do-gooders telling themselves that those of other races can’t make it due to racism by others (even though the do-gooders control most of the necessities for success like at least half of corporate board seats and all of university admissions), but deep-down the do-gooders believe that those of other races cannot make it due to a defect in their race.

Today the argument has resurrected itself in the idea of privilege.  The idea is that certain individuals have privilege, and therefore are able to be successful.  Those who are not privileged cannot improve their lot.  If someone does not have privilege but succeeds anyway, it is chalked up to blind luck that could not be replicated.  White males, in particular, have been singled out as privileged, although virtually anyone whose family has saved and worked to earn money to provide things like a college education or a stable home-life is seen as privileged.  Nevermind that the reason they are “privileged” is usually that their parents sacrificed and worked hard, spending a great deal of time providing things of need to others, to put them in that position.  Those who are seen as privileged are the ones being demonized in this journey through the old cycle of demonize, take, then oppress.  This is the way in which those who want to gain power this time are trying to convince the poor and middle class to put them into power:

People who are privileged have an unfair advantage and there is no way someone who is not privileged can succeed.  Put me in office and I’ll tax and punish the privileged to level the playing field.  If you have succeeded, you must have been successful or lucky, so you should feel guilty and support the righting of this great wrong.

To see an example of this philosophy, read The Funnel of Privilege by Bridget Casey.  Note that she talks first about how some are privileged and her envy of them when she was younger (envy is a powerful tool used by those seeking power), then describes how she was able to make it and get a degree despite not being privileged.  One would think that this would negate her whole argument and she would be advocating for free markets and encouraging others to follow her path.   Instead, she inexplicably concludes that others who are not privileged probably won’t be able to make it without special assistance.  For some reason she thinks that the path she chose is closed to others, either because things have changed or because she was somehow special – maybe she had the privilege of intelligence or just good fortune or something.  Note the arguments that emerge when I challenge her on this on Twitter, suggesting that others could improve their lives and move into the middle class and even the leagues of the wealthy by spending time trying to serve the needs of others through education and work like she did:

Notice that she first demonizes me, saying that my secret goal is to keep those in the middle class and those who are poor working as slaves for the wealthy.  (Somehow I’m part of this secret society trying to keep the poor down because I’m not for large, incentive robbing government programs that encourage people not to produce and thereby make society as a whole poorer.)  Again, the wealthy are seen as oppressors of the poor, only becoming wealthy because they took advantage of the poor.  My personal observations are that those who become wealthy tend to be very giving people who spend a great deal of effort creating businesses and things that greatly improve our lives.  They also make great sacrifices in order to build their businesses and provide for others.  I don’t know of anyone who became wealthy through a business who didn’t spend 12-hour days in the office at least.  (If you want to learn how to become wealthy without starting a business, but through investing, pick up a copy of The SmallIvy Book of Investing where I lay out the game plan needed that anyone with a middle-class income can follow.)

She also can’t understand why those in the middle-class would be against things like universal healthcare.  The reason if you use a little bit of logic is simple:  It is because those who aren’t wealthy can’t afford to pay for other healthcare if the public healthcare is of poor quality, so they lose their ability to choose their healthcare if they are taxed to pay for a public system.  Those who are wealthy can just buy better healthcare, education, etc… if they don’t like the public system.  They are free to travel the world if needed to get better things.  Those in the middle-class and the poor are not.

Certainly, those whose parents worked hard and put money away so that their children could go to college debt-free start out their adult lives on a better footing than those who didn’t and therefore start with a large student loan.  Certainly, those who grew up in a home where their parents made sure they did their homework and helped teach the lessons they didn’t understand from the classroom had an advantage over those who came home to an empty house.  Certainly, those who grew up in a mansion and were given a car when they turned 16 had an advantage.

But the things that will make those who were disadvantaged successful is the same things that will make those who are advantaged successful:  Gaining skills, working hard, choosing a good career path, meeting the needs of others, and spending less money than they make so that they can put money away and invest.  To do otherwise would make those who are advantaged fail just as it will make those who are disadvantaged fail.  If advantage were a guarantee of success, the wealthy families would always be wealthy, but more than half of second-generation wealthy lose their wealth and more than 80% of third-generation wealthy do.  It is behavior, not your starting point, that is the greatest factor in your success or failure.

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The post also draws comments from others who question their own success, thinking that maybe it is only because they are privileged.  (See Krista G’s comment below, where despite her coming from a modest background and working hard for her success, believes now that she somehow must have been privileged or she would not have been successful.)  Note also that they attack my narrative, that people who work to improve themselves and commit themselves to doing useful things for others can better their position in life.  My narrative is seen as keeping us from “making reforms that will make life better for EVERYONE,” where “making reforms” mean they wish to give the government more control and allow them to take money from the wealthy to fund public programs and my ideas are standing in their way.  Again, the demonization of those who object to their plan.  This is the useful idiots pushing the agenda of those who want to seize power by centralizing authority:

Hopefully, people won’t be fooled again this time.  People who are free are able to improve their lives.  There are thousands of people who are first-generation wealthy in free countries like the US.  There are millions of others who have entered the middle class despite a meager start.  The secret is spending time providing for the needs of others, spending less than you make, and investing to increase the rate of your wealth growth.  The way to do this last item is covered in The SmallIvy Book of Investing   for those interested.  The way to stay where you are is to become obsessed over things like privilege to the point where you give up and don’t try to succeed.  People who are successful will tell you, the harder you work the luckier you become.  

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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.

It’s Time for the Public Sector to Follow the Private in Retirement Plans

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Let’s say that you went to a bed and breakfast, checked in, and went up to your room.  The room was a mess with bed-clothes strewn on the floor, breakfast dishes piled up on the table, and a big black ring around the whirlpool tub and soap suds near the drain at the bottom.  You are then told that you owe a $100 cleaning fee to get the room back in shape so that you can enjoy it.  At least, you might get to enjoy it, but then again they may need to raise the rates after you pay the cleaning fee, or maybe they’ll just shut the place down entirely.

You protest, saying that you were not the ones who used the room last and that the ones who did should pay the fee.  The host replies that the last people have gone, that someone needs to pay to have the room cleaned, and that the someone is you.  You try to back out of your reservation, but you’re told that you must pay the fee or they are calling the cops.

How would you feel?  Would you feel that you had a responsibility to pay the fee?  Would you begrudgingly do so, hoping that the next person would pick up the tab for you?  If you paid the fee, would you then feel entitled to having the fee paid for you by the next guest?  A guest who, just like you, hasn’t stayed in the room yet and had nothing to do with any bargain you make with the inn keeper.

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The same thing happens with things like public pension plans and Social Security.  People long ago made agreements with politicians long since gone to receive something far in the future in exchange for their services or tax money.  In the case of public workers, voters and residents forty years ago received services for which they paid some taxes, but salaries were low in exchange for promises of generous retirement pensions, free healthcare for life, and other benefits.  Those benefits were not paid for by the residents who hired the politicians who made those deals.  They only paid for the salaries of the workers and in exchange they received various city, state, and federal services. Now that the workers are retiring or have been retired, the next generation is expected to pay for those retirement benefits.  This next generation is paying for the retirement of workers from which they received no benefit based on agreements they did not make.  Kind of like needing to pay for a room to be cleaned that you did not use.

Social Security is the same way.  Back in the 1930’s, people voted for President Roosevelt and a Congress who created Social Security, originally charging about 2% of pay in exchange for just enough retirement income to avoid starvation and to keep the lights on.  Voters at the time agreed to pay these taxes and pay out benefits to people who were starting their retirement at that point even though those people had paid next to nothing into the system, in exchange for the promise that they would receive a payment in the future.  As it looked like more people were going to retire than the system could sustain, the tax rates were raised in anticipation of needing more money, eventually reaching more than 12% of pay even though benefits remained flat.  This would have helped, but all of the extra money was spent as soon as it was collected, leading to the current situation where benefits will need to be cut in the near future unless taxes are raised further.  Again, people who had no part in the agreement are expected to pay up.

What if they say, “No?”  What if they decide to cancel Social Security, or cancel public pensions?  If they are forced to pay for these items because they are in the minority, what if they just decide to work minimal amounts, or quit work and raise a garden, producing just enough to feed themselves?  What if they move away to other countries or simply stop working and go on the public dole themselves?  What then?  Are you going to try to force them to work?  Isn’t that called, “slavery?”

Sorry, but those in the next generation are no more morally obligated to pay these bills than you would be if you would be obligated to pay for the cleaning of a room if you showed up to a bed and breakfast with a dirty room.  They did not make this agreement.  They did not continue to vote the politicians in who made these arrangements.  They did not look the other way while all of the extra money raised for Social Security was blown on battleships and public rail lines.  It is neither their agreement nor their responsibility.

“But someone needs to pay the bill,” you say.  There is no good answer for this.  Somebody will feel some pain because of bad agreements made years ago.  Perhaps the pain should be spread around a bit, but perhaps those who made the deals should take a greater share of the pain.

Going forward there is a better way.  Public employees and public retirement plans should follow the lead of private employers.  Rather than a future promise, retirement should be paid for as-you-go.  If a politician promises a lavish retirement in the future, the city, state, or Federal government should pay for their share of it right away by putting money away into an account owned by the employee.  Future governments are free to stop putting money into the account, just as the employee is free to leave and find another job if the retirement benefits being funded are not to his/her liking.  When the employee retires, his/her retirement is paid for and there is no need to rely on future taxpayers.

Likewise, money for Social Security should be paid into private accounts.  These could be invested automatically in broad stock and bond market index funds to eliminate the risk of poor personal management.  When individuals are ready to retire, they would have their own account and not need to rely on future workers contributing in order to continue to receive a check.  Isn’t that a better way?

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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.

Become An Owner Instead of a Worker

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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.

How to Fund Everything without Filling Out Tax Forms

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A while back, probably right after I’d finished filling out my income tax forms for 2010, I made a post about a tax idea called the Fair Tax.  The beauty of the Fair Tax is that it would eliminate all of the hassles involved in paying taxes.  Income taxes, Social Security, and other Federal taxes would be replaced by a single sales tax on goods and services when purchased (a national sales tax).  Because taxes would be figured out and charged automatically when you purchased something, you would no longer need to keep track of expenses, have tax-deferred accounts, set up medical savings accounts, 401ks, IRAs, etc… and go through other hassles.

You would simply receive your whole paycheck each month and then spend or save as you choose.  One benefit beyond the simplification of tax compliance is that saving would be rewarded while spending would be penalized.  The current system encourages spending and borrowing, through tax breaks for things like business expenses and the mortgage deduction, and penalizes earning.  This means that under the current system there is a disincentive to grow businesses or work harder because more of your income is taken the more you earn.

The Fair Tax is prevented from being regressive, or level in any case, through the use of a prebate.  In the prebate, a certain amount is refunded to each person each year at the beginning of the year.  For example, if the sales tax is 10%, and $3000 were prefunded to everyone each year, then no one earning less than $30,000 would pay any taxes that year ($30,000*10% = $3000), even if they spent their entire paycheck on taxable goods and services.

One issue with implementing the Fair Tax is the radical change to the tax system.  We have spent so many years having taxes taken from our paychecks and doing things to reduce income taxes that it would be a big shock to the system to see it changed overnight.  Imagine the shock of going to buy a new car and seeing a 20% tax added to the top of it!  Never mind that you have 20% more cash in you pockets – you still see that big tax on the car.  You were paying that big tax before, but it was taken in small increments so you did not see it all at once.  There is a way, however, to implement the tax in a way that will be a smaller shock on the system.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Currently about 50% of people pay no income tax at all.  In fact, many get cash given to them by the tax system since they receive a refund through the Earned Income Tax Credit.  This means that implementing the Fair Tax to replace the tax payments of the lower 50% of earners would not require a large sales tax since the amount of revenue collected from them is mainly Social Security and Medicare, which aren’t large amounts of money.  Also, implementing the Fair Tax would enable taxes to be collected from those who currently don’t pay taxes – those who get paid under the table and/or have illegal sources of income (drug sales, prostitution, illegal labor) – since they would also be charged the sales tax when they spent the ill-gotten money.

If the Fair Tax were implemented only on people making $60,000 per year or less say, it would only be necessary to have a sales tax of about 5% or less.  This means that everyone would see a prefund each year of $2000 (5% x $40,000) and see their sales taxes increase by about 5%, assuming that it is desirable to continue to see 50% of the people pay no income taxes.

After a few years of seeing those at the low-income levels not need to file taxes and also seeing how the system worked, those in the middle and upper-middle classes would probably want to join the system.  The threshold for the Fair tax could be then be ratcheted upwards as political winds allowed.  The prefund would need to be ratcheted upwards as well since the level of the sales tax would need to increase as the income level of the Fair Tax threshold increased.  This is because in order to generate the same level of revenues the sales tax percentage would need to increase since those at the higher income levels are paying a larger portion of the taxes.  If the Fair Tax were ever to fully replace the income tax, including for those in the top 1% of earners, the rate would be about 23%.  It is thought, however, that the drop in the expenses paid by businesses for tax compliance and tax avoidance would allow them to charge less for the goods and services; therefore, the actual price of the goods might stay about the same.

If you like this idea, please tell a friend – let’s get rid of the IRS!

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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.

The Evil of Income Taxes

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When America was founded, there were no income taxes – just taxes on goods and on trade.  It wasn’t until about 150 years after the country’s founding, there was no income tax.  And there is a good reason for it.

Have you ever really thought about income taxes, and what a country is doing by imposing an income tax?  Most other taxes involve doing something.  You want to buy something, so you pay a tax when you make the purchase.  The tax helps fund the protections that allowed that marketplace to function.  You want to travel somewhere, so you pay a tax when you make the trip.  The taxes help cover the cost of the roads and protections along the route.  In both cases you want something that involves help from the government and use of government services.

With an income tax, you really aren’t doing anything or asking anything from anyone.  All you are doing is producing things.  And you have not even necessarily gotten anything for the items you produced yet – you just have a bunch of IOU’s that will allow you to purchase things later.  People just come to your home (symbolically, unless you don’t pay your taxes), see that you have produced something, and demand that you give up a share of what you have made.

Imagine if you had spent all summer growing corn.  In the Spring you dig up the ground and get everything ready.  You plant the seeds and spread fertilizer out.  All summer long you water, pull weeds, and chase off crows.  Finally, in the fall, you spend hot afternoons and evenings picking the corn and storing it away, until your barn or silo is full.

Then someone comes along and says, “You owe me 15% of that corn.”

Now I’ll agree that part of your money goes towards things that government provides that enable you to make an income.  The government provides the protections that are needed to allow you to focus on running a business or working in a factory.  The government provides roads and infrastructure that allow you to ship goods and travel to and from work.

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And actually, my example isn’t quite right.  If you just grew the corn and then stored it away, I don’t believe you would owe income taxes.  Things you produce for yourself are generally not taxed.  And that’s the really strange thing.  When you do things selfishly for yourself – build a home for yourself, grow food for yourself (and you family), or make clothes for yourself, you pay no taxes.  You could even make yourself a yacht or a private plane, and you would owe no taxes (if you produced all of the materials yourself).

If you do things for other people, however, like grow food for them, build houses for them, or make clothes for them, you are taxed.  And the more you do for other people, the more you are taxed!  If you make a few clothes per week and maybe provide clothes for 100 families during the year, you’ll be taxed at 10%  If you manage a group of people, making clothing for 10,000 families a year,  you are taxed at 25%.  If you run a company that provides clothes for hundreds of thousands of people, you’re taxed at 40%!

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So think about that – the more you do for others, the more you produce, the more you make the lives of others better, the more you are taxed.  Does that sound like a good system?

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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.

How to Live Like a Millionaire

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Many would love to live the millionaire lifestyle.  Spending each day at the beach, on the golf course, or in exotic resorts around the world.  Each night would be parties and galas.  Perhaps a random trip to the office to check on things and grab some cash from the safe.

Sadly, that is not the normal lifestyle of the typical millionaire.  As chronicled in The Millionaire Next Door, the flashy lifestyles seen are those of people who have a large income, but probably would be on the streets within six months of losing that income.  Most millionaires work a lot harder than most other people.  They forego a flashy lifestyle, instead saving religiously and judiciously buying things that will increase in value rather than drop.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Millionaires could afford to buy new cars every few years, but they choose not to because they know they are a wasting asset.  Likewise they could buy big, flashy mansions in new subdivisions, but instead they chose to buy modest houses in older neighborhoods since they cost less to maintain and the rate of appreciation for the neighborhood can be judged from its history.  Whenever they make a big purchase, it is something that will grow in value such as fine furniture, works of art, or properties.  They minimize the amount of money they put into things that go down in value (such as cars).Millionaires also tend to own their own businesses.  It is much easier to become wealthy when doing something that allows each of your hours spent at work to be multiplied.  For example, if you work for someone, you may get paid $30 per hour.  You can earn more by working more hours, but you still only get $30 per hour.   If you work for yourself and use the time to design and market a product, you can get paid each time someone then buys the product.  If you write a novel, you get paid each time someone buys a copy of the novel.  If you own a movie theater, you get paid more if more customers attend the movies and buy popcorn.

Having people working for you also multiplies your time since for each hour you spend supervising, several other people are working to increase the money your business earns.  If you hire effective people and manage well (eventually hiring other effective managers), the more people who work for you the more money you can make for each hour of your time.  Note that even doctors and lawyers don’t make a lot of money because of their salaries.  They make a lot of money because most of them own a practice or are partners in a law firm with people working under them.   They are business owners.

      

So, if you wish to become a millionaire, here are some tips:

1) Spend less than you make, and religiously put money away into assets – things that grow in value and eventually provide an income.  Note that investing in your own business can be an asset.

2) Start your own business, or find something to do that multiplies the value of your time.  This is a tough step for many to take and requires a certain type of personality, but it definitely makes becoming rich a lot easier.

3) Cut down on expenses and payments as much as possible – it is easier to invest and save if you do not have every dollar spoken for before you earn it.

4) Live below your means.  Have a smaller house, older cars, and take less exotic vacations than your level of wealth and income will allow.

5) Make smart purchasing choices.  Bring in drinks from home rather than hitting the vending machine every day.  Bring a lunch in rather than eating out all the time.   When you do eat out, have a water and save $2.50 plus taxes per meal.

(Save money by bringing your own water bottle and skipping the vending machines. Shown: CamelBak Eddy Water Bottle, 0.75-Liter, Cardinal.)

6) Plan your success.  Don’t simply hope your investments will grow.  Make a budget, plan how much you will invest each month, then stick to that plan.  Good luck generally comes to those who have set themselves up for success.

7) Work hard.  Whether you own your own business or work for someone else, you can plan on working harder than most other people if you want to become wealthy.  Additional money earned generally is available for investments since other expenses have been taken care of.

8.) Hire people to perform tasks you are not skilled at doing.  Most millionaires would not work on their own cars, repair their own sinks, or cut their own grass unless it was a leisure activity for them.   Millionaires would rather spend the time doing what they do best or with their families than doing tasks that they can hire someone to do who will do a better, faster job.  If you will take 8 hours to fix a sink and could make $400 in those eight hours at work, it makes sense to hire a plumber at $150 and instead work the extra hours.  Even if it only takes him 1 hour because of his experience and tools, you come out ahead.

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.

A Missed Chance to Change American Healthcare History

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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.

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.

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

A Missed Chance to Change American Healthcare History

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I’m extremely disappointed that one of our Senators, Lamar Alexander (R-TN), went along with nine other Republicans and all of the Democrats and voted against the straight Affordable Care Act  repeal bill put forth in the Senate the other day.  The repeal would have been phased in over two years, giving plenty of time for people to shift to new health plans (that would become available once the markets were freed to sell insurance plans that people wanted, rather than those mandated by the government) and for Congress to pass free-market measures that would reduce the cost of healthcare such as mandated Health Savings Accounts, transparent pricing,  and portable health insurance, sold to individuals instead of through work.

When I wrote to Senator Alexander about the repeal of the ACA, he said that he would not vote for any bill that caused people to lose access to health insurance.  Yet Obamacare is imploding as we speak, and it is likely that many insurance markets will have no providers, so people will lose coverage.  Others will have only one or two providers, and those ones will charge so much that those who can’t afford standard health insurance won’t be able to afford the Obamacare plans anyway, so people are losing their health insurance even if Congress does nothing.  And even if people have insurance, that doesn’t mean they have access to healthcare through their insurance.  Many people right now need to pay thousands in premiums and thousands for their deductible even with the Obamacare plans, so they end up needing to spend $10,000 or more per year before their insurance covers anything.  How is this helping them?

And what about Senator Alexander’s other constituents?  How can he vote to protect a small subset of the people in Tennessee while forcing the majority to pay for their protection.  I strongly believe that individuals should voluntarily provide for those who they find in need due to circumstances.  Certainly we need to care for the 21-year old who gets brain cancer and needs expensive treatments.  We need to help the young single mother who has a child who need round-the-clock care.

But think about what we’re doing by enacting forced welfare.  We’re telling productive members of society that they must surrender a portion of their income to us to give to someone else, either through taxes or by forcing them to purchase subsidized health insurance on a sliding payment scale, or we will go to their homes and seize their property and/or throw them in jail.  We are taking people’s money by force and giving it to other people, some who truly have no other way, some who simply choose not to produce, and some  who are unable to take care of themselves because they always have made bad choices and continue to do so.

In many ways, forcing everyone to contribute to what is effectively a public healthcare system, which is poorly run, has an inferior product, and is way over-priced as all public systems are (see public schools for another example) is worse than simply having taxes and providing overpriced, poor quality benefits (see Medicaid) to those who qualify for them.  At least with just taxes people can take whatever money is left over and maybe get better healthcare than what is available in the public system.  By forcing people to buy into the public system (which is what you’re doing when the government fully controls the insurance offered and the prices that can be charged, even if private companies are providing the insurance), you take away that ability for all but the very wealthy to find better healthcare since they have no resources left with which to do so.  Note the similarity with public education, where because people are already paying for the public system through property taxes, only the very wealthy are able to afford private schools, even in places where the private schools are far superior.

But what about the people being helped by public welfare programs?  At least it is a good thing for them, right?  Maybe not.  Think about people in your family who could get a full-time job and take care of themselves, but choose not to.  This is different from a family member who loses a job and needs to move in for a couple of months or needs some help with the rent until they get back on their feet.  This is someone who always has an excuse about why they can’t work here or work there.  Often there is someone in your family who is an enabler – a very sweet person who pays for the food, apartment, and lifestyle of the non-working family member.  In doing so, the needy family member never gets a job or makes anything out of their life.

When we give through private charities, the charity is normally able to do a better job of figuring out who truly needs help and who would be better served with a kick in the pants.  Public programs often give money out blindly, and often even encourage individuals to not work or do anything or the hand-outs would decline.  Get a job, you see your housing allowance cut.  Have another child, see your food stamps payments increase.  If you’re religious, imagine needing to stand before God, having had two good arms, two good legs, and a good brain and having done nothing with the gifts He had given you.  If you’re not, just imagine spending your whole life and doing nothing of value.  How kind is it to encourage others to face that fate?

Contact me at vtsioriginal@yahoo.com, 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.

Fixing the US Health Payment System: Repeal and Remove

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Many say the US healthcare system is broken, but they are wrong.  To see a broken healthcare system, go places like Vietnam and see people dying on gurneys in hospital corridors, or even Great Britain  to see people waiting months for critical procedures.  See also cases like Charlie Gard, where the government of Great Britain is basically telling the parents that they must just watch their child die, forbidding them from going and get care elsewhere.  Because the waits are so long, “good” Canadian insurance includes a clause that allows for treatment in the US if the lines are too long in Canada.  In the US you can almost always get into see a doctor the same day or at least within a couple of days, which is not true in many countries.  Even if you don’t have the money required to pay for care, you can still get the care needed to preserve and even better your life through the emergency room.  You may get a bill, but the hospital will just write the cost off and pass it on to other patients who have insurance.  No one is dying in the streets for lack of care.
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The issue in the US is not healthcare, but the effects of health insurance and government programs on the healthcare markets.  Because most people get insurance through work, and because each insurance company has their own deals cut with providers, it is virtually impossible to figure out how much you will pay for a procedure ahead of time.  You might get the list price:  “Popping that pimple will cost $20,000 plus doctor’s fees, billed separately,” but the actual price you and the insurance will pay will be maybe 10-20% of the list price.  The trouble is that the person who goes in without insurance will need to fight to get a better rate, and that rate usually depends on how much the hospital thinks they can get out of them.  If you can pay $20,000, you’ll pay $20,000.  If you can only pay $200, you’ll pay $200.

Health insurance also distorts the cost of routine care at your doctor’s office.  They charge $120 for the visit and $500 for x-rays and screenings, but they know they’ll actually get $60 for the visit and $150 for the screenings from the insurance company.  If you knew you would be paying $60 for a visit and $150 for x-rays, you wouldn’t be willing to pay $1200 per month for health insurance – you would just pocket the $1200 and write the doctor’s office a check during the half dozen times your family went in during the year.  Put the rest of that $1200 away each month and you’d have the money needed for the times you did end up with a hospital stay or more serious issues.

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The issue is that you don’t know what things will cost and what you will pay because insurance has distorted the prices so much.  As a personal example, after a family member spent a couple of weeks in the hospital recently, we received a bill for $60,000.  Insurance reduced the amount down to $15,000, then we paid $3,000.    A $60,000 bill is scary.  A $15,000 bill is significant, but manageable with some savings and perhaps a payment plan, particularly if we weren’t paying $12,000 per year or so in health insurance.  Without insurance, however, we would have needed to fight the hospital to reduce the bill, and perhaps seen it cut to $20,000 to $30,000 after a significant back-and-forth since we don’t have the negotiating power the insurance company does.  If insurance did not exist at all, however, the hospital bill would have been $15,000 to start with since no one would go to a hospital charging $60,000 when another one across town was charging $15,000.  There would probably be a phone app that you could use from the waiting room to compare prices at local hospitals and you would transfer for a $45,000 savings.

The Affordable Care Act (Obamacare) has not brought healthcare to millions of people as some advertise.  Instead it has just amplified the issues caused by the insurance market by making all plans cover the same thing (everything) and forcing everyone to pay with insurance instead of paying out-of-pocket.  It has also added government subsidies, which have the effect of making health insurance cost “whatever you are able to pay” rather than being based on the value of what you receive in return.

In addition, while you may have insurance through Obamacare, it doesn’t mean you’ll actually get healthcare.  Customers are stuck with insurance policies that they cannot use since the deductibles are so high.  It doesn’t do anyone any good to have a policy with a $9,000 deductible since very few people would ever reach that level in a given year.  Even if they did, how many would have the $9,000 to pay?  They would be better off just saving the $4,000 to $8,000 they spent on the insurance policy and just paying for healthcare out-of-pocket.

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Even those who are now on Medicaid, which covers all of the costs, are having trouble getting care since the government is not reimbursing providers enough to make them want to treat Medicaid patients.  In California the free and reduced price clinics have gone away due to the ACA, but doctors are not accepting Medicaid patients.  One individual was quoted in a recent Wall Street Journal article who went to mexico for a critical gull bladder operation after waiting for months in the US for the surgery needed to save her life.

The actions needed to fix the US health payment system are actually quite simple and could be summarized as follows:

  1.  Repeal the ACA in its entirety.
  2.  Eliminate the tax deduction for companies that provide health insurance to their employees.  This would incentivize them to stop providing employer healthcare and just pay higher salaries instead.
  3.  Create a tax deduction for individuals who buy insurance.  This would further create the incentive for insurance to be something individuals buy instead of the norm to be to get health insurance through work.
  4.  Outlaw insurance with deductibles of less than $3000 per year for a family of four.  This would cause most people to pay for routine care out-of-pocket, which means they would be more sensitive to prices and shop around.
  5. Require that all doctors and hospitals publish their rates for procedures online and outlaw charging different people different rates.  Pricing transparency is critical to an effective, efficient market.  Prices would fall as people sought out the best deals for healthcare just as they do for everything else.
  6. Require that everyone put 10% of pay into an HSA.  This would ensure people had the money to pay for healthcare as needed instead of buying a bunch of other things and then not having money for the doctor.
  7.  Provide a direct tax credit for donations made to organizations like free clinics and hospitals.  This would provide a safety net for those between jobs or who were unable to work.  Individuals would be funding these causes directly instead of the money filtering through the government first.

Take these actions and the issue would virtually disappear.

Contact me at vtsioriginal@yahoo.com, 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.

How to Save for Retirement with Coffee

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Coffee drinks are all the rage ever since Starbucks expanded to every corner and convinced everyone that they should pay $6.00 for a cup of coffee on the way into work.  Being a graduate of UC Berkeley, which I consider to be the center of the coffee-house universe, I can’t stand Starbucks.  You see, a coffee-house is supposed to be an experience.  You go and order coffee drinks made with machinery that you could not afford to possess, get served in fancy glasses and cups, and then sit for an hour or two, sipping your beverage and pondering life.  You can also get together with friends and relax on a nice couch and play a board game or two over a latte and scones.    When Starbucks came along, they doubled the price you would normally pay for coffee, plus everything was suddenly served in paper cups instead of a real glass or mug.  Now the experience is like going and paying for a movie, only to be handed a DVD to take home and watch.  Totally missing the point!  (Starbucks likes to think of themselves as environmental, but now thanks to their influence instead of people reusing glasses and mugs each time they get a cup, everyone is getting a paper cup, a cardboard wrapper so they don’t burn their hands, and a plastic lid.  Not very green!)

Still, everyone around me seems to be stopping off at Starbucks on their way into work.  I’ve also started to see people with bottles of Starbucks iced coffee in the refrigerator or at their desk.  At least in this case Starbucks put the drinks in a nice bottle.  I’m surprised they don’t come in a plastic soda bottle, given how much Starbucks degraded the coffee shop experience.

  

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That got me thinking.  Here is a great way that people could save a lot of money, perhaps so that they could start to contribute to a retirement account, with very little if any sacrifice on their part.  Let’s say you drink 2-3 of those Starbucks iced coffees per day.  The Starbucks website lists their suggested retail price at $4.99 to $5.99 for a pack of four.  That’s about  $3-$4.50 per day if you drink 2-3 of them.  If you do this each work week, that’s $720-$1,080 in coffee per year.  Invested in growth stocks, getting 12% per year from age 22 to age 70, that’s between $1.5 M and $2.3 M for retirement.  (You can check my numbers in the investment calculator here, and play around with your own numbers of you like.  Note the most amazing thing about that calculation is that you only contribute something like $32,000 yourself – it is investing and compounding that takes care of the rest!)

But wait – what about your coffee fix?  Well, those bottles are totally washable and reusable.  Start off by buying a couple of 4-packs, then save and wash out the bottles.  You could even use the dishwasher if you’re lazy.  Then, get some good coffee (check out some of the selections below if you wish).  You can get something like 50 cups of coffee from each pound of coffee, so with a quality coffee selling for about $10 per pound, you can make about 50 iced coffee bottles for about 20 cents each from a pound of coffee beans.

 

The recipe would be something like:

  • While still hot, dissolve 1/2 cup sugar in 4 cups of coffee.  If desired, add a flavoring.
  • Once cool, in a pitcher, add 1 cup milk, or half milk and half cream, and mix.
  • Divide between 4 cleaned bottles, using a funnel.  Add milk to fill bottles as desired.
  • Cap and store in the refrigerator until ready to take to work or drink at home.

Note you could make 8 cups of coffee and make eight bottles by doubling the recipe, or even make more at the start of the week if desired to save time later in the week.  The cost for everything will be something like $0.30-$0.40, depending on whether you use only milk or milk and cream, how strong you make the coffee, and how much sugar you add.  You could also make it lower calorie by using skim milk and less sugar.

      

So there you have it.  You can save for retirement, still have your coffee, and even reduce the amount of waste you generate by reusing bottles over-and-over.  You can have better coffee, be able to reduce the calories you’re consuming if desired, or even make it especially decadent by using more cream and extra sugar and flavorings if desired for a special treat now and then.  It’s really a win-win for everyone except perhaps Starbucks.  If you feel bad for them, you could use Starbucks coffee beans.

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.