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


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.

An Easy Way to Make College Affordable


Paying for college is a concern of many parents, and well it should be.  College debt is a concern of many graduates, and well it should be.  An issue is that the children of parents who decide to do something about paying for college by saving up money and doing without some things so that they will have at least some of the money needed for room and tuition end up with about the same amount of debt as those whose parents save nothing.  This is because colleges just raise the tuition for those children whose parents have saved.  OK, they actually reduce the tuition for those whose parents have not saved, but it is really the same thing.  Go into college with $50,000 in a college savings account and the college will figure that you can pay $50,000 more than someone without a savings account.
Now if the child with the $50,000 account came from parents who made $250,000 per year while the child without anything came from a family making $30,000 per year, the difference in tuition is understandable.  But often both families may make $80,000 per year.  One family just choose to maybe drive older cars or vacation locally so that they could put a few thousand dollars away each year into an Educational IRA, while the other family was trading in cars every few years and vacationing at Club Med, living for today and figuring that they would worry about college later.

              

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The issue with this system is that it encourages exactly the kind of behavior you don’t want.  It encourages spending and penalizes savings.  This means that more people show up at the financial aid office with no savings.  People are not foolish — they will find ways to go to college for less or for free if they can.  Why save up if there is no advantage?  As a result, not only do only children from poor backgrounds show up with nothing to contribute.  Many children of middle-class families who could have paid a significant portion of their own tuition and room-and-board show up as well without any savings.

Because colleges need to provide a lot of grants (as does the Federal Government) to prevent their colleges from being full of only the children of the wealthy who can float the tuition with their yearly income, they raise the base tuition so that those who can pay, pay more.  This provides more money for grants and scholarships, so long as people don’t decide it isn’t worth the cost and as long as all colleges do the same thing.  Because the cost is higher, however, it means fewer people are able to pay full tuition from income, which means more student debt and less people saving up since when the amount they can saved is dwarfed by the cost, they figure, “Why bother?”

So what is the easy solution to fix his issue?  Simple – stop using college savings when determining eligibility for tuition reductions and other grants.  Instead, base tuition rates purely on income.  Children who come from families with little income would still find a lower tuition bill that they can afford, but those from a family with a higher income will need to put away more money, use more of that income to cover tuition, and/or take out student loans.  Because tuition would be lower for everyone (since the colleges would be giving out less tuition aid because more people would be paying most or all of their bill), the cost would actually be lower for everyone.

Several colleges could also band together and establish a birth-to-college saving plan where parents could contribute an amount each year based on their income as their children grow with the guarantee that tuition and a certain portion of room-and-board would be covered for any of the colleges in the network.  This would eliminate the uncertainty we currently see when it comes to college tuition and also means that everyone will be paying what they can.  Parents whose children decide not to attend college could have their money returned with a reasonable interest rate applied.

So what do you think?  Would it work?  Do you have a better idea?  Let’s hear it!

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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.

Revisited: Why Do Soup Kitchens Need Volunteer Servers?


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A couple of weeks ago I posted the question, “Why do soup kitchens need volunteer servers?”  It seems like if the only issue were that people needed food, all you would need to do is to provide the food and the space and those who were eating could fix the food and clean up when they were done.  The issue is that, generally, those who are in need of a soup kitchen have other issues going on.  It isn’t just a matter of them needing food – they need food because they have an addiction, mental disorder, or another issue. That same issue also makes it necessary to staff the soup kitchen and have volunteers prepare and serve the food.


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But today I also had another realization, or I should really say, revelation:  The reason that soup kitchens need volunteers is that it is good to have the volunteers and the patrons interact.  People who volunteer for serving at soup kitchens and other activities are generally the best of the best in a community.  They are often business and community leaders or future business and community leaders.  They are people who work to produce things and services – they are builders and doers.  They often have a great attitude, always looking to the bright side.  They are givers, which is what makes them successful in their business life.  They also generally have their priorities in order and a good plan for life.

It is good for the patrons to meet people who are making good choices.  Such individuals can serve as examples of people making good choices and doing things to both better their lives and the lives of those in their communities.  They are often successful, and show that good choices lead to success, happiness, and security.  Hopefully, some of the patrons will see their example and start to get themselves out of the hole into which they have put themselves.  They can also see how making better choices can lead to a better life.

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It is also good for those who are succeeding to interact with those eating at shelters and soup kitchens.  Often it is difficult to continue to make the difficult choices that help you succeed financially when everyone else around you is spending with wild abandonment.  It is good to see where you could be if you don’t prepare and have contingencies like an emergency fund, life and disability insurance, and a paid-off home.  It is also good to remind yourself often of the blessings you have, because most people are just one major medical event or a job loss away from being on the other side of the counter.

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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.

Why Do Soup Kitchens Need Volunteer Servers?


Do you ever wonder why soup kitchens need people to volunteer to cook and serve the meals?  If the real issue were just providing food to people who were just down on their luck, you could just drop the food off and provide a kitchen.  Those patronizing soup kitchens rarely have anything pressing to do, so they could take it from there: prepare the meals, dish everything out, and then clean up the kitchen when they were done.

Yet soup kitchen usually use volunteers for all of the food preparation, serving, and cleaning.  And the volunteers are often people with a lot of things going on in their lives, including their work, family commitments, home maintenance, and volunteer activities.  As they say in any volunteer organization, if you want to get something done, find the people who are busy.


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The reason volunteers are needed is that there are normally reasons why those patronizing the shelters don’t have food, and it goes way beyond food not being available or being priced too high.  Many people have addiction issues.  Others may have mental conditions or personality disorders.  A few may have physical conditions that severely limit them.  In any case, it is normally the behaviors of those using the shelters that both causes them to be short of food and the necessity for volunteers to get the meals cooked and served.  If you were to just leave a pile of food and the keys to the kitchen, it is unlikely that the results would be desirable.

While many of us regularly do what is necessary to provide food and shelter for our families, we don’t do what is necessary to protect ourselves beyond the basics.  We get the unlimited data plan on our phones instead of putting away money for an emergency fund.   We buy meals out several times per week but put away nothing for retirement.  We buy our kids the latest fashions but don’t buy life insurance to protect their future should something happen to us.  We have cable but no disability insurance.

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As a result, we have no financial security should anything disrupts our lives.  If we get into a car accident and have medical bills, we need to go into debt and possibly start on the road to bankruptcy.  If we are disabled or die early, our family’s financial future is irrevocably changed and they may struggle for the rest of their lives.   When we get to retirement age, we don’t have the resources needed to pay for basic expenses and need to rely on others.

Suze Orman said it best in an interview in Money Magazine this month:

“Money is about security. It’s there to make you feel safe when everything is going well and to protect you if the worst happens.”  

Hopefully, you protect yourself against homelessness by doing things like getting and keeping a good job and staying off of drugs.  But sometimes things that are bigger than the normal day-to-day expenses come along like a hurricane, medical crisis, or an earthquake.  Sometimes the heater breaks in the middle of winter or a sinkhole opens up under our home.  Sometimes we get laid off or are forced to retire earlier than expected.  And retirement will come at some point and then you’ll need to have enough stored up to last you 20-30 years, even if Social Security and Medicare disappear.

If we have an addiction to shopping, or hobbies, or games, or stuff to the point where we are not preparing for if the worst happens while we have the opportunity, we are similar to the drug addict stopping in at the soup kitchen for a meal because he can’t hold a job.  In both cases while we may feel that we are unfortunate by circumstance, it is what we do and what we fail to do that makes us vulnerable.  Our choices stack firewood, just waiting for a spark to start the blaze.

Suze Orman also said something else that is true when you have saved and invested, such that you have money:

“I can use my money now to try to help as many people as I possibly can. I love that,” she says. “When you have money, you should never live a life where you isolate yourself from others and just use it for yourself. Money is there to make the world a better place and to help those who really can’t help themselves.”

While we can plan and do our best to be ready for disasters, there are times when we need help no matter how prepared we are.  We need to put ourselves into the position where we can help others when disaster strikes.

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.

Would you Rather Have a Million Dollars, or a New Car Every Three Years?


Would you drive a used car until you were 55 if someone would pay you a million dollars to do so?  Understand this doesn’t mean driving a junker – just driving a four-year-old car until it was eight years old and then trading for another four-year-old car.  If you would take this deal – and I think that most people would – why would you go on buying new cars anyway?

The fact is, if you can save up and buy used cars for cash every four years, rather than taking on a new payment schedule and dropping deeper underwater with each new car loan, you can invest the savings and have over $1 million by the time you are 55 just from the savings on the car loans.  Even more insane, that $1 million will turn into $2 million by the time you are 62, $4 million by the time you are 69, and a cool $8 million by the time you are 76 (which will probably be the new retirement age, given current life expectancies).

How could this be so?  Two reasons: depreciation and interest.

Basically, any car will drop in value by 50% in four years.  This means that a new car which cost $30,000 will be worth about $15,000 in four years.  This means that the car will lose an average of $3750 per year during each of the first four years.  This, by the way, is if you sell it to another individual.  If you trade it in, you’ll be lucky if the dealer will give you $10,000 (because he wants to make a profit from the sale of your used car to someone else).

 

              

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The same depreciation rate is true when you buy a used car – it will still lose about 50% of its value over four years –  but because the price of the car is less, the depreciation loss per year will be less.  Let’s say you pick up that car someone else bought new for $30,000 after four years when it was worth $15,000.  Even if it drops in value to $7500 over the next four years, you’ll still only be losing $1,875 per year.  This means that you will save $1,875 per year, which you can invest.

The second reason that what seems like a small amount of savings can turn into a large amount of money in 35 years is compound interest.  Specifically, while you are paying interest when buying a car on payments, you are being paid interest when you are able to save money that would have been going to a car payment and invest.  If you were going to be paying 8% interest on a car loan, but instead pay cash for the car and invest the rest, you will be getting an effective interest rate of 20% on your money, assuming a 12% return on stocks.  This means that instead of working extra hours to pay the interest on your car loan, you will be making money for simply letting others use your money to build their businesses.

So before you fall into the trap of endless car payments, think about what that car payment is really costing you – millions of dollars over your lifetime.  Is that new car smell and 32,000-mile warranty really worth that?

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in 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.

Is Amazon’s Deal for the Needy a Good Thing?


Recently Amazon announced that they will offer Amazon Prime for a special discounted price for those on EBT cards:

EBT card holders get Amazon Prime for $5.99 per month: Prime Discounted Monthly Offering

Now, Amazon is a private business and they can do whatever they want to do with their pricing, but in some ways this seems like a dangerous precedent to set.  Most things are priced based on the value of the good or service to the consumer, the number of competing sellers, the location where it is being sold,  and other factors.  As long as there is enough competition, the price of goods will drop to the point where the seller receives the minimum amount of profit needed to justify the effort of providing the good or product for sale.

By selling the same goods to different consumers at different prices, based on the life situation of the consumer rather than how they buy the goods (retail, online, with coupons, etc…) as is normally done, Amazon is changing the way things are priced.  They are means testing their customers, which will inevitably result in customers who make more money paying a premium to cover the people who are making and paying less.

 


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If Amazon is the only one who does this, it really won’t matter for the average consumer because the system will simply not work.  If you go to Amazon and it costs $30 for a month of free shipping and videos because others are only paying $5.00 or even getting the service free, but then there is another service that offers the same service to everyone for $19.99, consumers with means can just switch to the lower cost service.  As Amazon loses customers to the other service, they’ll need to increase the price they charge the remaining people paying full price or quit offering the discount.  If they raise prices, that will chase more people off, until Amazon will be forced to change or cease to operate.

If other companies follow suit, however, that would set up a socialist system, where people pay according to their means and take according to their needs.  Prices would rise for the people who had more since they would now be subsidizing those who made less.  Because the goal in such a system is to produce the least amount possible, since producing more simply means you pay more.  Plus, you “win” when you get more than you pay for in a Socialist system, but you “lose” when you provide more than you get.  For examples of this, look at how people will avoid paying student loans back when possible, even choosing a low paying job to keep their income low rather than taking a better job and getting on the path to doing well.

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So what are your thoughts?  Is this a great marketing idea that will just bring Amazon customers it wouldn’t have anyway?  Do you think it is a great way to help the poor?  Are you resentful that you need to pay full price while others get a discount for the same thing?  Let me know your thoughts.

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.

What NFL Players Can Really Do to Help the Inner-Cities


One has to wonder if the NFL players who are upsetting fans and driving down TV ratings ever took an economics class while they were in college.  Perhaps then they might understand that regardless of what their contract says, unless there are people willing to pay to go to their games, buy their jerseys, and watch their games on TV, they will not be making the millions of dollars per year that they have in the past.  They only command a high salary because the demand for their services is high.  If that demand decreases, so will the amount of money they can make.

Hopefully, while they were in college, they received a real degree, instead of just getting credit while they never actually attended classes as it seems some college athletes do.   If things continue as they are now, with NFL revenues imploding, the players may need to use whatever skills they learned in college to find a different line of work.

While political expression is fine, people don’t generally want to have your political views thrust upon them while they are at your place of business.  You would not want your server in a restaurant giving you a speech on the need for single-payer healthcare while you were trying to order your meal.  You would not want your accountant going on about right-to-carry while you were handing in your tax paperwork.  And you would not want your doctor lobbying for a larger military while you were getting your yearly physical.  There is a place for protests and there is a time for speeches, but it is not when customers have decided to use your services.

People watching a football game want to be entertained.  They want an escape.  Even if they agree with your points, they do not want to be lectured when they have come to watch a game.  The game is held for the entertainment of the fans, not so that football players would have a place to play a game.  Certainly not so that players could use their captive audience to lecture them.

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Just by virtue of being on a big stage each week with a big audience, NFL players have a big microphone.  Players could call a press conference whenever they wished and have TV crews show up, eager to hear what they have to say.  Sports Illustrated would probably publish their comments on whatever they wished to talk about.  They could do a lot of good for the inner-cities, and do so in a manner that would not hack off a lot of their fans.

If players really want to help those in inner-city neighborhoods – places where they would not dream of living once they become stars – there are many ways they could help using their celebrity.  Things they could say include:

1.  Most people won’t get into the NFL or NBA, so kids had better make sure they get a good education.  Of the tens of thousands of kids who play in Pop Warner football or grade school teams, only a couple of dozen will make it to the pros.  NFL starts could encourage kids to make sure they go to class, do their homework, and go to college or a good trade school after high school, just in case the Raiders don’t call.

2.  Parents should demand teachers teach, principals maintain order and safety in their schools, and that students are respectful and put in the work needed to learn.  Inner-city school, despite costing thousands of dollars more per pupil than many of their suburban counterparts, have dismal records when it comes to the number of students who can read and write by the time they graduate.   NFL players should encourage parents to get involved with their school and if they are going to protest something, they should demand a better learning environment.  That will often require that other parents do their job when it comes to raising their kids.

3.  Clean up your communities.  Rather than attacking the police officers who patrol inner-city neighborhoods, NFL players could work with residents and law enforcement to get rid of the crime and violence that causes residents to come into contact with law enforcement in an adversarial fashion so often.  The more often police are called in to investigate a shooting or remove drug dealers, the more likely it is that innocent people will be swept up in the confusion (or non-innocent, but minor offenders will perform an action that causes them to be shot or hurt during the excitement).

4.  Choose your partners well and wait for the situation where you would welcome children before having sex.  (This is something that people in virtually all communities could learn.)  One of the greatest causes of poverty is having a child before finishing an education.  The lack of a parent in the home leads to children who grow up unsupervised, making them targets for gangs and trouble, and leading to future generations of uneducated, single-parent homes.  NFL players could encourage girls to wait for a male partner who is willing and able to support a family.  They could encourage boys to be “real men,” wait to have sex until they are in a position to raise children, and be there for their wives and their children.

 


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5.  Become teachers, firemen, police officers, military personnel, and business owners.  If the police departments truly are racist, the easiest way to change things is for those in inner-city communities to join the force.  They could also take on roles that would enrich their lives and their communities.  Instead of complaining about “the man,” open a business yourself and serve others.  Instead of disrespecting those who sacrificed themselves to protect the freedom the NFL players enjoy, the players could encourage youth to join the military and protect their country.

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.

What Can Whites Learn from Blacks? And Why Would It Help?


In an oped in our local newspaper, the writer stated that “white folks should learn to listen when black people speak.”  She then went onto gave her story of how, as a young grad student TA who grew up in a white neighborhood with mainly white friends, she was surprised by what she learned in a sociology class she was assisting on the issues facing black Americans.  She then went on to become an adjunct professor and teach a similar class.

She talked about things like how people frequently touch black people’s hair without asking.  About how there are schools in black neighborhoods where they are lucky if one teacher shows up to teach.  About how housing discrimination that benefited whites has had a lasting impact on the ability of black families to build wealth.  And also about how she was unaffected by the unintentional racist comments that students in her class expressed because she was white, but how black professionals are affected by similar comments, but need to pretend like they aren’t.  Her conclusion was that whites need to listen when blacks speak, and that they should not get defensive when they kneel for the national anthem or talk about discrimination.


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Personally, I am all for hearing different views and from people with different experiences.  Being a libertarian, I particularly like to hear the viewpoint of liberal individuals since the proposals they make seem senseless to me.  I want to understand their beliefs and see the evidence that supports their beliefs so that I can understand why they feel the way that they do and understand why they think the ideas they express will work.  Since I feel that government control leads to waste, high costs, and poor quality products, based on my experience, expanding social programs makes little sense to me.  When you realize that liberals feel most individuals have the intelligence of moss, however, suddenly having everyone (except for the liberal elite) put their healthcare in the hands of government bureaucrats makes some sense.   The question then becomes who is right about the capabilities of the average person and average government worker/agency to do what is best when deciding which course to take, private control or government control.

In the case of the oped, however, when you get past the racist ideas that you can lump all blacks together as victims and all whites together as privileged, I still don’t know why having “white folks listen to blacks” would be helpful.  What exactly are whites supposed to do, and what makes the writer think that blacks would need whites to do anything for them?  I think that whites already know that things are bad, and dangerous, in many inner city black neighborhoods.  The issue is that the solution to those issues will come from people within those neighborhoods, not from whites in suburbs and penthouses.

From my understanding, which granted is based on documentaries and newspaper articles since I have never lived in places like Compton, CA or South Chicago, most of the issues that blacks in those areas face aren’t due to their race or something whites are doing to them.  I don’t think there are white people working to keep blacks locked into those areas, or even taking resources from them and leaving them disadvantaged.  In fact, in the case of schools, I actually think a great deal of money is being funneled from the suburban areas into the inner city schools.  Conservatives groups, which are majority white, are also working to offer alternatives to inner-city kids such as private school tuition and charter schools.  It isn’t like whites could do something, or stop doing something, that would cause the lives of inner-city blacks (and whites, and Hispanics) to become better unless inner-city residents are willing to do what is needed to change their lives.  In fact, I think you could swap the populations of Compton and Beverly Hills and within a year Compton would start looking like Beverly Hills and Beverly Hills would start looking like Compton.

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This issue has nothing to do with race, but of culture.  And this is not black culture or white culture.  It has nothing to do with soul food or African headdresses, or with boiled meats and kilts.  It has to do with the inner city culture and the suburban culture.  With the culture of poverty and with the culture of self-sufficiency.  The primarily white culture centered around meth and welfare found in some rural areas is equally destructive as the primarily black culture centered around crack and welfare found in inner cities.  It is more a function of the cultures of the communities than of skin color or racism.

From my limited understanding, again based on documentaries and news stories, the issues in inner cities, which are primarily populated by blacks and Hispanics, are things like gang violence, a lack of parents in the home (particularly male parents), and drugs like crack and meth.  I agree that it would be difficult to get a good education in a school with constant disruptions, teachers that are not present and not motivated to teach while they are there, and the danger of getting stabbed or shot in the hallways or on the way home from school.  But the typical family currently living in the suburbs today would not accept those types of schools.  The parents would be down at the school in the principal’s office every day.  They would be at the school board meetings too, or voting to replace the school board.  If those options did not work, they would move somewhere else with better schools, because their culture places a high value on education.

Note the flight, of mainly whites, from the urban centers to the suburbs during the 1960’s through the 1980’s when schools and communities in general started to decay.  Granted, some of the reason was based on racism as the number of blacks and Hispanics in these areas grew, but there was also the feeling that the values and culture of the neighborhoods were changing, and the residents who historically occupied those neighborhoods were not willing to live under the new conditions.  There were also factors that further affected the inner cities in the 1970’s and 1980’s, which by that time were mainly occupied by blacks and minorities, like the loss of factories and the rise of drugs.  These factors affected the culture of those neighborhoods, which became “The Hood,” where power, money, and drugs became more important than education and family stability.

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It is true that there were a lot of factors that affected those neighborhoods.  That was then, however, and this is now.  Most of the wealth middle-class individuals accumulate during their lifetimes comes from their own work – not inheritance.  Most people buy their own homes, pay for their own children’s college (or the kids pay for their own school through loans), and buy their own cars.  There is no secret society for white that provides jobs, access to schools, and other perks.  If anything, minorities have an easier time due to affirmative action at colleges and companies wanting to increase diversity, which never means hiring more whites.  Poor people have it easier since they do not need to pay for anything – they just need to put forth the effort to apply and then apply themselves.  The inner-city communities can continue to complain about the past and live day-to-day, or they can change their culture and make things better.  It will take a large number of people in those communities to decide to make a change since a few individuals cannot make the change.

As a white person growing up and living in suburbs most of my life, except for about six years during college, I don’t think there is anything I could do to help inner-city communities.  All I can do is say what I would do, since perhaps that would be helpful, but those living in those communities really need to chart their own path and help themselves.  If I woke up in the Southside of Chicago today, and there were a large number of other people who wanted to make a change, the first thing I would do is form a community improvement council to work together since I could not do it alone.  I would work to make the streets safe, which would require a lot of help from the police.  And chasing the police out, as Black Lives Matter is trying to do, is exactly the wrong action since the police are the solution, not the problem.  If the police really were the problem, I would work to replace the city government, who hire the police, and I would encourage people in the community whom I trusted to go into law enforcement.  (Realize that the black residents of Furgeson, MO, could easily replace the entire city board and mayor at the next election, and then form whatever sort of police force they wanted.  This makes more sense than burning their town down, if they really want change.)  Because the drug dealers and the criminals would likely not go quietly, I would make sure I was regularly armed and that those in the neighborhood watched out for each other since the police take time to arrive.

Once the streets were safe, I would then work to improve the schools by getting rid of the students who weren’t there to learn (setting up alternative schools with strict discipline to help turn those around that could be saved).  I would also work to elect a good school board, which in turn would hire good superintendents, who would hire good teachers and improve the schools.  As the interest and work-ethic of students increased, many teachers would improve on their own as they became more motivated by being teachers and not babysitters.


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As the streets became safe and schools improved, these neighborhoods would start to see people move back in who would improve things.  There would be entrepreneurs, restauranteurs, and wealthy individuals who want to live in urban areas close to lots of customers and entertainment.  These individuals would not only bring jobs, but also the work ethic and the culture of success.  They would be mentors for people growing up in those areas who today are mentored by gang leaders and drug dealers.

So that is what I would do.  I would love to hear from Black Lives Matters individuals to understand their viewpoint.  Would your lives be better without police officers in your neighborhoods?  Why can’t you just elect a different city council and make changes in the police force?  Why don’t your sons and daughters join the police to make things better?  What do you think would make your lives better?  I’m listening – what do you have to say?

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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.

Why Health Insurance isn’t Working


Health insurance is somewhat different from other forms of insurance.  Really, what we call health insurance today is part insurance and part prepaid healthcare, which is why it isn’t working very well.  Today I thought I’d discuss how insurance works, and how health insurance is different.

Most forms of insurance are used to reduce risk.  For example, let’s say that there are 100 homes in an area, all valued at about the same price.  The homeowners decide that if they had a fire, they would not be able to pay to rebuild their home since it takes them 20-30 years to build up enough money to buy one.  They therefore decide to each chip in some money into a pool that they could then use to rebuild homes if there is a fire.  In doing so, they eliminate the risk that they would need to come up with a lot of money at one time to rebuild their home.

The first thing they would do is to determine how much money they would need to contribute to cover the costs of rebuilding homes.  Let’s say that they look through data and discover there is a home fire that destroys a home about once each ten years, and that the value of each home is about $100,000.  The amount they would need to contribute is:

(Value of Home x Frequency of Fires)/(Number of Insured)

= ($100,000x 1/10 years)/100 homes = $100 per year

Now, there is a chance that they could have two fires in a year or have a fire relatively early before they had built up enough money to cover the expenses, so they may choose to increase that a little, maybe to $110 per home until they built up enough funds to cover a fire or two, and then reduce the premiums back down to $100 until there was a fire and they needed to replenish the funds.  If a fire occurred and their funds were depleted, they might raise the premium rates back up for a time to build up a reserve.


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Note that everyone is actually paying the cost of replacing his/her own home as often as he/she was likely to have a fire.  He/she could also just save up the money and replace the home himself/herself if a fire did not happen for a long period of time.  There is a risk, however, that a fire could happen right away before savings had built up – hence the need for insurance.  If he/she had enough money in the bank to just pay to rebuild the home, he/she could just be self-insured and save the insurance premiums.

After a little while without a fire, the homeowners in the insurance pool would start to build up some funds in the pool.  Rather than just leave the money in cash, they might want to get a better return for their money.  For example, if they had built up enough to cover 5 houses – $500,000 – they might choose to invest $300,000 of the money in stocks where they could get a good return over long periods of time, keeping $200,000 in cash so that they could cover at least 2 home fires without needing to sell stock.  If the market swooned right when there were a couple of fires, they would still be covered.

An insurance company is no different.  They figure out how often a fire will occur and charge enough to rebuild homes at that frequency.  They also charge more for people who are more likely to have a fire, based on things like neighborhood and the age of the home, and based on how much damage they expect a fire at the residence to cost.  They would therefore charge more for homes that cost more, and less for homes that are close to fire hydrants and maybe those which have sprinklers and other measures to reduce the damage from a fire.  They also charge a little extra to pay for the salaries of the insurance company workers and executives, advertising, and other costs of running the insurance company.  If there is enough competition they will reduce these costs as much as possible to keep their premiums in line with those of the other companies.

The insurance company makes money by charging a little more than they pay out and by investing the money that they have stored from premiums during the periods between events.  If there is a big event they may raise premiums for a while to rebuild their savings to reduce the risk that they will not have the funds to pay for the next event.  If there are changes in their risk – for example, the value of the homes increases or there is an increased risk of fires because the town authorizes the use of fireworks – they may increase their premiums to cover the additional risk.  Likewise, if people start using the insurance more often, they raise premiums to cover the additional costs.

Health insurance is different.  In the past, what was called “major medical insurance,” which only covered hospitalization, was similar to fire insurance.  Most people would not go to the hospital in a given year, and therefore money would build up in the insurance pool which could be invested.  Modern health insurance, however, is really just prepaid healthcare.  Because it covers doctors visits, shots, and other things that most people do each year, most of the money that people pay into health insurance is paid out in claims each year.  Also, unlike homeowners insurance that most people do not use and would not use unless there was a major event, many people will go to the doctor for the least thing because they have the sense, correctly, that they are paying for it anyway.  Likewise, they might choose the expensive medicine over the cheap medicine because they like the color of the pill or the box it comes in.  If they had to pay $100 more themselves, they likely would not think the color or the box was worth the extra price.

So with health insurance, you are just paying the cost of your likely medical expenses each year to an insurance company, which then turns around and pays the doctors, in addition to paying into a risk pool for major events.  The portion going to the risk pool for the very serious conditions that require hospitalization may be building up and being invested, but the portion going to general healthcare like doctor’s visits is spent each year.  Because the money is being spent each year, the cost is equal to the amount you would pay the doctor when you went plus the cost of the insurance company administration, advertising, and a fee to make it worth their while.  So you end up paying more for healthcare than you would if everyone just went to the doctor and paid cash and only used insurance for hospitalization.

In addition, because the natural tendency is for people to use more healthcare since it costs the same whether they use it or not and because the most expensive treatment and the least expensive treatment generally cost the same to the patient, insurance costs are higher than they would be if people were limiting their visits and choosing the low-cost treatment because they were paying out of their own pockets.  This feeds on itself, with premiums increasing, causing people to be more likely to go to the doctor and “get their money’s worth.”  We would be paying less and be in a much better situation if health insurance were like auto insurance, where you pay for the tune-ups and the oil changes yourself, reserving the insurance for only unexpected accidents.


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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.

Is It Possible to Save for College?


About 16 years ago I sat down and predicted the growth of my son’s college savings account.  I was planning to put away $2,000 each year into an Educational Savings Account (ESA).  Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I’d have about $140,000 by the time my son was ready to go to college.  With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school.  He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close.  That was the plan.

              

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Unfortunately, then came the 2001-2003 stock market, where returns were low or negative.  Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash.  Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire.  Despite the fairly good markets from 2009 – 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.

So, sitting here with about two years until the first tuition bills come in, my son’s account has a little over $52,000 in it today, instead of the $108,000 I predicted.  This is enough to pay for about two years’-worth of college expenses, but not four.  Alternatively, it is enough to pay for tuition, but not for room-and-board.  This has left me with a big dilemma:

How should I invest for the next couple of years, if at all?

With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs.  I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today,  There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000.  Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives.  Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.

Another question this raises, however, is

Is it possible for a middle-class family to really save up and pay for college?

Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA.   But I don’t see how most families who don’t make $150,000 per year could afford that.  I mean, we have been very disciplined compared to many people our age.  Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don’t have.  Frankly, I don’t know how families who keep a mortgage are able to pay for the things they buy.  (Maybe they don’t, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.)  Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I’m really glad we don’t have that $1,000 or $1500 mortgage payment each month.

I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible.  Once our son gets into college, we could direct some of our regular income towards his room-and-board.  He is also likely to get scholarships that will cover most or all of his tuition.  If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board.  Still, it does make you wonder why college prices are so high that many people need to get loans to get through.

Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college.  Because of this, I will probably keep the ESA fully invested in stocks, hoping that we’ll see a couple of good years to boost the account balance.  If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit.  Really we don’t need to assume we’ll need to tap the account right away.

So what do you think?  Is it possible for families making $80,000 per year to save up for college?  Are tuition costs worth the value of the product they provide?  Is it worth it to run up loans to pay for college?

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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.