Why stuff is ruining your finances

Posted on September 9, 2013September 9, 2013 by Danielle

I spent Sunday sewing on a blue suede jacket. Now, you may ask, what on earth does this have to do with financial planning? Well, sewing gives you lots of time to think and obsess about other things, and this particular jacket was a perfect launch pad. Mainly, because I realized that I purchased this fabric when my daughter was an infant, and she’s in college now. I’ve been a) hoarding it because it was expensive; b) never found the perfect use for it; and c) kinda forgot about it. And therein lay three principals for wasting a lot of money.

Hoarding

If you’re not using what you have, have no clear use for what you’ve acquired, or think something is “too good to use” (ask me about those indigo fabrics I bought in in Japan in 1998), you’ve invested a lot of money in something that has no returns. Do you own wedding china? How many sets of bed linens do you use? Any clothes with tags still on hanging in your closet?

Not only does this stuff represent tons of money invested with no return, but in many cases it costs you money—in depreciation, at least, but sometimes in storage costs (I have a fortune in plastic tubs) and maybe even in insurance. If your possessions have outgrown your house, caused you to buy a bigger house to store it all, or (the ultimate) you are paying a monthly fee for a storage locker somewhere, it’s time to de-acquisition (errrr, sounds better than de-junk).

Sell it on E-bay and put the money in your Roth where it will actually do some good. People who start down this path find that they can raise a lot of cash from stuff that will soon junk up someone else’s house. Go ahead, walk through one room and estimate the amount of money you actually spent on stuff you don’t use. Any musical instruments nobody plays? Okay, go take a pepto.

“Perfect use”

Not everything can be quantified in dollars. If you still want to keep a lot of stuff that’s precious to you, then promise me you’ll at least use it. My aunt, too, was a fabriholic and when she died, I inherited enough fabric to clothe my daughter for the first two years of her life. But that was a small fraction of what she had. A lot of it was polyester double knit (yes, it was once popular), and there was a significant amount of avocado green and harvest gold. Even once-wonderful things go out of fashion. Unless you keep them long enough to become vintage. And beat the moths and silverfish.

And if you do love it, why aren’t you using it? In a month, that blue suede will be on my back, the Japanese fabric is next up, and I’m selling the teddy bear fur from a long-ago (and misguided) business attempt as soon as dear daughter comes home for fall break and puts it up on her eBay account.

Forgot about it

Here’s a secret: don’t buy anything unless you really have time for it on the schedule. If everyone followed this principle, there would be virtually no boats sold and no one would have more than one car per person. People with hobbies (whether carpentry or knitting or computers) are particularly guilty here. I know more than one friend with a computer boxed under their desk that has never been opened. Can you work all the electronics in your home? How many tools do you have whose manual is still in the plastic baggie?

Don’t buy stuff ahead of need just in case it might come in handy one day (you’ll never be able to find it at that point), because it’s a great deal (I have perhaps 100 metal zippers my aunt bought for $1) or because you may never see it again (c’mon, this is the era of web shopping, where you can buy all the stuff someone else has stored for you all these years).

Ask yourself:

when am I going to get time to use this,
am I afraid to use it,
where am I going to put it, and
what else can I give up to make room for this?

No good answer? You’ve just saved yourself a lot of investable cash.

Does Your 401(k) Stink? Do You Know?

Posted on August 2, 2013August 2, 2013 by Danielle

Really, I’m not always angry. I’m pretty calm when I’m petting my dog. But reviewing peoples’ finances does tend to show you a million ways someone has figured out how to cheat people out of their money. Recently, I’ve started to wonder whether corporate 401(k) sponsors are better at it than Bernie Madoff. Or Fabrice Torre. Or whoever is the crook of the day.

One of the ways financial crooks operate is that they count on no one paying attention, or people not understanding investments well enough to question anything. So take a moment—do you know what you invested in in that 401(k)? (I could also ask, do you have any old ones laying around from previous jobs that you’ve forgotten about, or, are you even contributing, but those are subjects for another post.) Typically, people pick investments that are labeled “growth”—who doesn’t want growth?—and to those I say, remember the adage, “Give a dog a good name”. Or maybe it’s a Target Date Fund—often I see several different target dates, because who knows when you’ll actually retire. Ugh.

But even setting aside our own individual dumbness, if you work with any number of companies (even the Fortune 100, who should know better), you’re still stuck, even if you know what you’d like to invest in. The choices are limited, the funds offered are often load, actively managed, and with high management fees. Even if the plan has negotiated a lower rate, it’s still the same lousy fund. Yes, you’re supposed to be given more information nowadays on what those fees actually are, but there’s no requirement to offer you a wider selection of funds.

So, pull out that plan document or go to your employee benefits website. Look for the following:

Are there index funds available in large (S&P 500), mid-cap, and small-cap funds; corporate, government, and international bonds; international developed and emerging markets; and some alternatives (such as real estate, commodities, or, if you must, gold)? It’s pretty hard to build diversification if you don’t have many choices. And if all the choices are stocks, it’s going to be impossible for you to make truly tax-savvy choices as your account builds.
Is it sponsored by an entity with “private banking” in the name? You’re probably being screwed. Law firms and medical practices are particularly vulnerable to pitches that sound elite. The only thing elite about this is the much higher fees and much poorer investment choices—elite for the “private bankers”.
Does Morningstar list the funds? If the funds aren’t publicly traded, good luck trying to get a prospectus or even any statement about what investments are actually in the fund. And forget any ability to actually get an independent opinion, rating, or comparison of them. Oh wait, maybe that’s what they wanted. Some of the descriptions I’ve seen of these private investments can only be described as wishful thinking, er, pipe dreams, er, misrepresentation, er…
Do you recognize any of the funds? Vanguard, Fidelity, American Century, TIAA-CREF—not all have my favorite investments, but at least you’re working with well-observed entitites. You probably haven’t heard of the “Maximize Growth Special-situations Fund”–guess why?

Here’s an issue where well-paid executives are just about as vulnerable as the average receptionist–perhaps more so because their account balances are likely to be larger investments in crummy funds. And even if you’re smart about investments, you still may be trapped without choices.

So, what to do? If you get an employer match, it’s still usually worth contributing. But contributing up to the full legal limit to get the tax benefits? Well, it depends—and for that one, you do need a financial advisor to take a personal look. And, radical thought though it is, you could actually save money outside of your 401(k), where you control the investment choices.

For a really excellent article on what you can do about a lousy 401(k), run out to the newsstand (or subscribe online) to the latest issue of Consumer Reports. They sound pretty angry, too.

Investment Advice or, why the Wall Street Journal makes me crazy

Posted on July 25, 2013July 25, 2013 by Danielle

Really, I don’t know why I subscribe at all. Except, maybe, that it wakes me up better than two stiff mugs of French Roast. Here’s why:

The editorial and op-ed pages make me chew the scenery. Aaaargh, I could live with the relentlessly right wing editorials and the tired Milton Friedman economics. After all, it’s Murdoch’s paper. But Op-Ed is supposed to provide alternative views, ya know? Like a think tank other than the Hoover Institute or the American Enterprise? Like maybe Brookings? The last time I saw an author from Brookings I was so surprised I spewed my coffee on the page and had to read it online.
It’s relentlessly downbeat. I mean, there’s NEVER positive news. Great jobs data? Well, it ONLY improved X%. 75% of people will pay less for health care? Headline is: 25% of [the richest] people will pay more. Consumer confidence up? Oh yeah, those guys must be reading USA Today.
They have never once published a flattering picture of Barack Obama. When I worked in Washington, my organization’s lobbyist used to make a hobby of photographing members of Congress biting sandwiches. (He started out with photos of them picking their noses, but gave it up as too easy to get.) The pictures he had of our eminent legislators baring their fangs adorned a whole wall of our offices. But seriously, couldn’t they get a decent picture once a year of our Prez? After all, it must be a challenge to get a photo of Mitch McConnell that doesn’t look like a fly just went up his nose, and they’ve managed that. According to WSJ, Barack Obama has never, ever done a single thing right in his entire life, much less the presidency. And Michelle only appears when she’s spending money.
The proofreading is terrible.

But now for the top reason, and the point of the post:

5. No matter what investment you’ve made, it’s the wrong one at the wrong time. For years I’ve been reading about the demise of the bond market, the crisis in TIPS, how great gold is, emerging markets up, emerging markets down. Listen to this and you can be sure of one thing—the fat cat traders and bankers that support WSJ will make plenty of dough off the trading costs of churning your account. And here’s some headline news: Investments Go Up and Down.

For an awfully long time I kept reading how it was dangerous to invest because who knew how low stocks could go? Then it was, Europe is down the tubes. Now it’s TIPS that will be tanking forever. That’s why you hold an appropriate asset market basket—some will always be “going down” while others are “going up”—or at least tanking less if we’re talking about 2008-2009. And yes, right after you invest some of them will take a turn south—it’s inevitable. You’re balancing risk with reward, and it’s average total return over the long term, not this month or this quarter. Want to benefit from the wisdom of WSJ? Go read Jonathan Clements’ book The Little Book of Main Street Money. He used to be their personal finance columnist.

And my advice? Stick to the last section. They have pretty good drink recipes and book reviews.