Everybody Loves Your Money

It’s days like this that I can’t help but walk around the house smiling from ear to ear.  Why?  You may ask.  Well, it just so happens that I recently cashed out over $100,000 in investments to use for an alternative investment.  Let me explain.

A couple weeks ago I got an email from a nice man in Nigeria.  He found himself in quite a pickle.  He recently discovered that he is the sole heir to a massive inheritance from an uncle he barely knew.  Due to the unstable economy in Nigeria he isn’t able to take delivery of the funds.  That’s where I come in.  Since I’m in the U.S., I’m considered a suitable entity to receive the funds.  I know what you are thinking though.  What kind of a moron sends $$ millions of dollars to a guy in the U.S. that he hasn’t even met.  I was thinking the same thing.  Just when I thought it was probably hopeless, my friend in Nigeria had a plan.  I could build his trust by sending some money to him before he sends all the other money to me.  He has to send me the money anyway, so just adding my funds back in, along with his, would be no sweat.

So, a couple of weeks ago, I liquidated my investment accounts and sent the money electronically to my friend in Nigeria.  You can see why I’m smiling.  The market has it’s biggest one day loss EVER, and I’m just sitting here smugly waiting for the big payoff from Nigeria.

At this point, I’d say my great choice puts me at about the same risk as not having sold my investments in the first place!

My wife, daughter and I were sitting at the breakfast table this morning when my daughter, who’s 5, randomly told my wife, "There are a lot of advertisements that are just trying to take our money."  Over the last year or so when we are reading the paper and looking at advertisements I’ve tried to make a point to our daughter that sometimes you can find a good deal in an advertisement on something you NEED, but normally ads are only good for one thing and that is to convince you to give some of your money to someone else.  Apparently it’s starting to sink in.

After my daughter said that, we decided to play a little game.  We created fake credit cards out of small chunks of paper and started talking about the concept of credit.  My wife was the "store", I was the "bank" and my daughter was the consumer.  I explained to my daughter that I was going to give her a credit card that was worth $10.  She could do anything she wanted with that $10 on the credit card but if she spent it on something at the "store", she needed to be prepared to pay me back the $10.  Since she is 5 years old, the concepts took a little while to sink in.  The first time she went to the store, she opted to buy something for $10 and then she expressed that she was happy because she bought it.  After she bought it I looked at her and said, "I’d like to have my $10 back please".  She looked at me with wide eyes for a second until I said, "Oh, you don’t have $10?  Please give me your item from the store then.  You obviously can’t afford it."  She gave it to me and you could just see the wheels turning in her head.  We did this a few times until she kind of got the point and then we had a discussion about what it means to be able to afford something.  We pointed out that when we buy something, we always pay with money that we already have.  We don’t like to borrow from other people because then we would have to pay them back.  She really got that point and then we talked about other situations where people might have made bad choices by borrowing someone else’s money to buy things that they didn’t really need.  As she gets a little older, we’ll introduce concepts like interest, and how it actually costs MORE money to buy something when you borrow someone else’s money.

During the discussion we also talked a little bit about why mommy and daddy have jobs.  She quickly jumped in and said, "You and mommy work because they pay you!".  I smiled and told her she was right.  It was a perfect opening to start talking about the desire of mommy and daddy to stop working some day so that we can spend more time with each other and her.  She really liked the idea of spending even more time with us and was glad to hear that by saving some of our money each month, we’d be able to do that some day.  We’ll definitely have more conversations like that in the future.  As she begins to understand basic math and other logic, we’ll explain in more and more detail.

Anyway, it was a very rewarding breakfast table chat this morning for a geek like me that loves to think and talk about basic financial concepts.  My hope is that my daughter will begin to start using her own judgement on when it’s a good idea to spend some of her money and when it might be smarter to save it.

I have to admit I’m spending a lot of time reading the latest news about the potential bailout on Wall Street.  The latest is that they are considering adding executive compensation caps to the proposal.  I still haven’t read anything about limiting the power and scope that this proposal would give to the executive branch.  The two things that bother me most about this potential bailout are the total dollars that they are considering giving to financial firms with very little guidelines, and the wording in the plan that talks about the treasury wielding this authority with no judicial or any other type of oversight.

I think what makes me even more nervous about this plan is seeing data like this:

http://abcnews.go.com/Business/Economy/story?id=5876413

In this article they highlight the huge salaries and bonuses that these CEO’s are being paid.  If you look down the page you’ll see that one of the highest paid people on the list was the same person that is calling for this massive taxpayer bailout, Henry Paulson.  Prior to working in the administration he was the CEO of Goldman Sachs.  Paulson made nearly $180 million dollars over 3 years from 2004-2006.  Now, he is asking all of us to trust him to use $700,000,000,000 of our money (or should I say our future debt) to save some of the very same firms that he has been involved in.  It all smells like a large garbage can of rotten fish.

I still believe the right answer here is to let the chips fall where they may.  Either way we are going to experience a large impact in our lives.  At least, without the bailout, we’ll have $700 billion more of other people’s money to take care of individuals until the economy improves.

David at My Two Dollars has a couple of posts that I was going to do myself but he did a fine job so I’m just going to link to him.  I am finding myself more and more angry that we are looking at more than a Trillion dollar bailout for Wall Street.  If they enact this, at the minimum I’d like to see:

-Drastically reduced executive compensation packages

Why in the hell would we reward their performance when, we the taxpayers, are bailing them out for their poor business decisions?  I’d like to see them in jail.  It’s too bad what they did wasn’t illegal.  If we are going to reduce the regulations over the last eight years then we shouldn’t come to their aid when they screw up.  I don’t see the Bush administration or Congress coming to my door offering to bail me out for stupid decisions.  All that being said, I recognize that they want to do this to avoid a massive impact to our economy and citizens.  I’m not sure which is worse though.  I wonder whether they should just stay the hell out of it and let the chips fall.  Either way we are getting screwed.  With the bailout, we can ensure our children get screwed too.

-Drastically increase government regulation

If we are going to bail these people out, we damn well better create a full set of regulations that will keep people from going down this path, or anything like it again.  This bailout feels an awful lot like a socialized rescue.  Where the hell were these rescuers when 42 million people in our country needed help with their health care.  Where the hell have these people been when social security and medicare have needed rescuing?  Do we have to wait for those to completely fail and the checks stop showing up in retired people’s mailboxes?

Okay.  I’ll stop.  Whether you agree with me or not, this whole thing is of historic proportions.  This is HUGE.  It is certainly causing me to bring my spending to a halt.  I want to have as much saved as possible when things get a lot worse.

I couldn’t resist pointing this out.  There is a grand opening of a new H&M store in Seattle today.  People waited in line for hours to get in to this store.  Never mind the fact that there is an existing store 10 miles south of this location.  What really made me shake my head was this quote from the article:

"I have way too many clothes in my closet. My boyfriend hates it," said Lydia Glassman, 23, of Capitol Hill, who was first in line. "I promised him I’d get rid of all my clothes and start fresh."

Let me get this straight.  You have too many clothes in your closet so your solution is to go shopping and buy more?  How is that a good idea?  Hmmmmm

Here’s a link to the article

Well, here we are.  We’ve been talking about it for months on blogs all around the Internet.  All of us that are managing our money in a responsible way have been wondering how much of an impact the irresponsible could have on our financial well being.  It seems to be slowly coming clear now and it doesn’t look good.

Who am I talking about?  Well, I’d lump people in to a couple of categories when it comes to being fiscally responsible or not.  There are those of us that spend less than we earn and save for the future and for emergencies.  On the other end of the spectrum there are those people that are spending far more than they earn with no plan to recover.  Certainly there are people along the spectrum between these two extremes and each of them are either contributing to the problem or are doing the things they should to remain financially secure.

First, lets look at the responsible people out there.  Month in and month out, you spend less money than you bring in.  You have secured a mortgage that is affordable and you live in a home that is within your means.  You don’t worry about whether you’ll get some overtime to help cover the basic necessities and you always know where your next meal is coming from.  You drive cars you can afford to put gas in and can repair them when they break.  You don’t owe more money on those cars than they are worth.  In general, you have a plan and you stick to it.  You don’t normally worry about money because you, long ago, learned that it’s better to own money than to have money own you.

Then there are the other people out there.  They bought houses that were unaffordable through creative mortgage loans with terms like "interest only" and adjustable rate subprime loans that allowed for small payments in the early years of the loan only to have the payment balloon up a couple years later.  Take a drive through your neighborhood.  I don’t care where you live, I think you’ll be hard pressed not to find a few houses that seem to be vacant, for sale, and most likely owned by a bank or financial institution.  The people that lost these houses are the same people that owe thousands and thousands of dollars on their credit cards and drive cars that cost more than their annual income with little ability to cover the payments.  Sure there are exceptions to this.  Sometimes people lose their homes due to situations completely outside their control such as medical bankruptcies or job losses that crush a person’s financial situation.  I’m not talking about those people.  I’m talking about the people that wear the latest designer clothes that they won’t own for years.  These people are oblivious to basic financial management and have definitely been a major part of the macro level problems we are facing today.

So, it is the second set of people that have helped drive this latest crisis.  I don’t put all the blame on this set of consumers though.  Another part of the blame goes to the institutions that were lending money to all of these people.  Through creative financial packaging of loans and the resale of those loans to greedy, hungry Wall Street firms, pretty much anybody could get a loan for a home, or anything else, with little ability to afford the payments.  Need a great example of this?  Read about the Spanish speaking farm workers that were able to qualify for a $720,000 house with a payment of $5375 per month.  Needless to say, it didn’t take long for them to get in to trouble.

Now, after the party has come crashing to an end, we are left to pick up the pieces.  We, as citizens of this country, are facing trillions of dollars of debt to save many of these institutions.  That is not capitalism.  Capitalism would call for the failure of these firms and others would rush in to pick up the left over bits.  Consumers that didn’t play by the rules would face the consequences of their actions without bailouts.  The whole idea of capitalism is that some people win and some people lose.  If people believe they’ll be saved when they "lose", they will learn to take bigger and bigger risks.  This just doesn’t make sense.  I understand what our government is trying to do by bailing all of these companies out.  They believe that by doing this it might prevent a massive failure in our society that would make the depression look like a Sweet 16 party.  If this did happen, the impact to responsible citizens like you and me would be much different.  In a sense we get two choices here.  We either face the impact of massive debt to try to stabilize an incredibly crappy financial market, or we let capitalism play out and we all end up sitting on our porches with guns protecting what little we have left.  Either way, we all end up getting screwed by the irresponsible people in both our local communities and in our financial communities.

As I watch the meltdown of major financial firms I’m paying particularly close attention to WAMU.  They have a huge presence where I’m at and many thousands of people work for them around here.  At one point I considered being a customer of Washington Mutual before I discovered credit unions.

A few years ago, a friend of mine worked at my company and was concerned he could be facing a layoff.  He never actually got the layoff notice but the stress of knowing it might be around the corner finally drove him to look for another job.  He ended up taking a job at Washington Mutual.  Ironically, he was laid off from there after roughly one year.  He ended up taking a second job at WAMU but quickly found himself wondering if that had been the right choice.  In the end, he took a new job back at my company and is very happy here now.  I learned a valuable lesson from his experience.  Sometimes the grass looks greener on the other side of the fence.  Unfortunately when you get over to the other side of the fence you find that it has been spray painted green and isn’t quite as green as you thought.

He is very glad he came back to our company.  If he had stayed there he most certainly would be facing a layoff or would have already been laid off.  While our company does have layoffs sometimes he is in a much more secure environment for now.

What a horrendous market this week.  I guess it’s not really a surprise that things are headed south.  I’ve been worrying about the overall economy and all of our country’s debt for a long time.  So, if a simple guy like me is worrying about it, there must be a real problem.

I’m actually not all that terribly worried about the market.  I have $10,000 sitting on the sidelines in cash that I’m just dying to put in to the market.  My strategy is to invest this lump sum once I feel like most of the bad news is over.  By doing this, I think I’ll be averaging my overall cost in the market down and as the market comes back should be able to make a solid return.  I know, I know, you shouldn’t try to time the market.  In times like this though, it seems prudent to wait out the hype cycle and watch for the lowest price to buy in.

Another aspect of this for me is that I’m continuing to invest in my 401k every other week.  All of these dollars are targeted at index funds and I’m excited that I’m getting to buy the shares at a lower price during this downturn.  Sure, I’m seeing a loss on paper for some of the money that I’ve invested so far, but I still believe the market will come back at some point in the future.  Hopefully that happens before I retire in 18 years.

Luckily I’m not interested in buying a new house right now.  We are happy to stay where we are at for the long term so I don’t have to worry about getting a new mortgage.  We also plan to pay cash for any vehicle upgrades in the future so I shouldn’t have to worry about needing a car loan either.  I think it’s really a pretty good time to be living a "pay as you go" lifestyle.  Funding your own day to day existence yourself is very empowering.

Last night I found myself wanting to test out some software.  I’ve been playing around with various DJ software.  Most of the versions that I’ve downloaded are demos and I really didn’t want to fill up my Vista machine with a bunch of junky software.  The solution for this was to download Microsoft Virtual PC 2007.  It WORKS GREAT!  If you aren’t familiar with virtual machine software it basically lets you load an entirely different operating system on your computer by letting you virtually run the additional OS on top of the main operating system.  In this case I’m running Vista as the main or "host" operating system and have installed a virtual copy of Windows XP on top of that.  The Virtual PC software is free but I had to have an existing license for the copy of XP that I installed.  If you wanted to play around with Linux, you wouldn’t need to worry about the license for the virtual OS.

It was amazing how easy it was to install the Virtual PC software.  While I’m probably considered a more advanced PC user than the average Joe (It’s what I do for a living), I think pretty much anyone with a basic understanding of computers could also install this.

So, now I have a second "virtual" PC that I can use to try out new software.  I may even install another virtual machine that runs Linux.  I’m curious how the latest iteration of Linux is working these days.  The best part about all of this is that it didn’t cost me anything.  I love free software!  It’s nice to have a hobby that allows me to play without costing a ton of money!

This isn’t very surprising to me but it’s definitely interesting to look at.  People in the US spend more of their discretionary income than anyone.

This is well worth looking at.  You can definitely deduce one thing from the recreation chart.  People in other countries tend to focus on experiences more than they focus on physical items.  Sure, the US also spends a lot on recreation but we also spend a TON on material goods.

Anyway, go check it out: http://www.nytimes.com/interactive/2008/09/04/business/20080907-metrics-graphic.html?th&emc=th