Optimize everything?

Posted on August 10, 2012August 10, 2012 by Danielle

Hamster on Wheel (Photo credit: Wikipedia)

One of the benefits to the flood of information available on the web, and the self-publishing industry that the web makes possible, is that in two seconds or less, you can learn the ultimate best way to pick stocks (so they say), paint your porch, or manage your office work flow. Not a day goes by that I don’t get calls or a dozen emails from people pitching me to optimize my insurance recommendations, my archival backup, or my time management. Have a senior in high school? If they don’t know how to write a college admissions essay, hundreds of books and consultants will drum it into their slacker little heads.

But should we? Maybe even Harvard can’t transform Junior from a slack-ass into a star. Of course, if Junior’s last name is Bush, it won’t much matter in the slacker department. If not, he better be knocking himself silly from seventh grade on. In the rush for college admissions that consumes the better part of all day, every day from September to January for parents and high school seniors, I’m bemused (horrified, actually) at the number of kids I know with eating disorders, super-sensitivities, self-harming behavior, can’t be touched, not interested in the opposite sex—all the same issues as stressed lab rats in too small cages. In “my day” we just smoked dope, hated our parents, and went to protest rallies. And didn’t think the world would end if we didn’t go to Ivie U.

So let me ask you, have you had anything like these conversations lately?

“So, how have you been?” “Really busy, as always.”

“I’m sorry I haven’t gotten back to you, I’ve just been so BUSY.”

“Is now a good time to talk?” “There’s not really ever a good time.”

Yeah, me too. Regrettably. And I keep picturing a future when things are sure to “slow down”.

Then there’s the endless financial and job advice.

Are you saving enough for retirement? (the answer is always no).
Is this a good time to buy ______? (No, but whenever you didn’t, THAT was the good time)
Is this the optimal mix of investments? (let’s argue about whether you should have 8% or 11.5% in internationals).
Should I buy Apple? (Even if you did, you won’t be happy. Because then you should have bought it in 1985, when it was $15 and your ex-husband wouldn’t let you. Or you did buy 25 shares at $200, but why didn’t you buy 100? Both of those would be me.)

So, my financial advice for today is, go live your life! Go slurp down a frappucino without thinking about the calories or the cost. Your kid will survive a few rejection letters. Don’t have a virtual life.

Maybe, just maybe, financial planning advice could set some of these things to rest. As to the optimal mix of investments, we do know what “works” and it’s pretty simple—keep costs down, don’t churn your account, have a decent mix of types of investments, save and live below your means. A financial advisor can certainly help with a plan, set it in motion, and help you manage it. Professional advice can do much of the fine-tuning (and worrying) for you. But really, lighten up. You can only control your decisions, not every possible outcome. Make a sensible plan and let go.

Pricing luxury–what should you spend on a hobby?

Posted on July 25, 2012August 2, 2012 by Danielle

Singer sewing machine - 31K32 (detail 1)

Singer sewing machine (Photo credit: Wikipedia)

How much should you pay for something that is purely a “want”, not a need? There are formulas for what house you can afford, how much of your budget should go to utilities, etc. but what if it’s something you just plain want?

Recently my sewing machine went kaput. Seventeen years ago it was top of the line, and since I’ve been sewing since I was 10, I figured I’d replace it with whatever was currently tops—I’ve earned it, no? When I was in my chocolate-chip-cookies-Mommy phase, I made all of dear daughter’s clothing for about her first five years of life. It was “free” because I’d inherited a closetful of fabric from my aunt in the nick of time. The machine at the time cost me $3,600, so clothing my daughter cost me about $720/year if I amortize it over those years. And of course I got 12 more years of use out of it, and the joy of having something really, really fine. Totally worth it.

Fast forward to about a month ago. I remember when machines lasted forever, but apparently not so with the new super duper computerized models. Like every other computer I’m forced to wrestle, eventually they have a nervous breakdown and fail spectacularly and totally, throwing all plans and projects into complete disarray. Sound familiar? I’ll just go get another one—computers have gotten far cheaper in the past 17 years.

Whoa, baby. Replacing my machine with an equivalent model is now about $7,500. A top of the line model (a Bernina red job) clocks in at $13,000. For that, I think it ought to drive you to the store to buy more fabric. It’s particularly a shock compared to the cheaper (in real terms) prices of other big ticket items like cars and the aforementioned computers. I wish Wall Street had done as well in the same time period.

So how do you assign a price to what you “should” pay? Well, for $7,500 I could be in head to toe Armani and bag the sewing entirely. For $13,000 I could buy my kid a crappy used car but since she won’t learn to drive I can probably put that one off. Unless you’re Bill Gates, there are always tradeoffs (and he probably doesn’t have time for hobbies anyway. Actually, neither do I.)

Let’s not kid ourselves that our hobbies save money. I know I spend more cooking organic food with fresh herbs than I would eating out every day at Subway. I get an excellent quality garment when I sew, but I’d probably never buy that level of retail—my clothes tend to be Eileen Fisher, not Armani, and you still have to pay for fabric. Whether it’s a boat, or new golf clubs, or a sewing machine, how can you pick a price?

What will it cost per year over its expected life? Let’s take 10 years for a sewing machine. Even though it comes with a 25 year warranty, I don’t expect anything electronic to last that long—computer technology just moves too fast. Working with my $7,500 example, the thing will cost me $750 a year, or $62.50 a month. Will I save that much? Borderline—if I made 2 suits, a shirt, and a pair of silk pants, maybe.
Does it have maintenance or corollary costs? For a boat, gas, maintenance, a place to dock or store it, maybe a trailer to haul it, bigger car—there’s a reason why people say a boat is a black hole in the water where you pour money. For a sewing machine, it’s a question of restraining yourself from buying more and more fabric, books with cool ideas, new gadgets, a yearly tune up ($100), etc. That’s what a hobby is, but you need to consider that one purchase will likely make you spend on more purchases. For me, the books, gadgets and tune up probably add $300 a year. I’m not telling on the fabric.
What’s the entertainment value worth? The 750 bucks is about the same cost as season tickets to the opera and a movie a month. I’d rather have the sewing machine than the movies, and now that dear daughter is off to college, I’ll probably cut down on the number of operas. Or think of it as a weekend away—definitely worth it for me by this measure.
Have you wanted it for a long while, and scoped out what’s available? Impulse or crisis purchases tend to be less satisfactory. Even if money is no problem, I recommend connoisseurship—if you really know what you’re buying, and know it’s perfect for you, you’ll get far more value and satisfaction from your purchase.
Drill down. Once I started sitting in the driver’s seat, I discovered that there are some cachet issues—some brands have a tremendous snob value (what a surprise). Even if you know what you want your purchase to do, there are so many improvements that you may discover you can do stuff you never even knew you wanted to do. But the less advertised brands may be trying harder, and offer a lot more.
Check out warranties and trade in value. Maybe you don’t have to go quite so large immediately if you can get good trade-in in the future. Get used to the new offerings and changes and see if you really value or use them.
Is there a resale or pass-it-on value? If you upgrade before the wheels fall off, there might be enough resale value to make a big purchase be a smaller net purchase. Or your child may be salivating to steal the darn thing right off your desk.

So what have I ended up with? After test-driving a bewildering array of brands, reading a lot of reviews on the internet that I really didn’t have time for, and making a chart of features and cost per year (what did you expect? I’m a financial planner), I finally popped for a $1,600 Brother “pre-loved” with full warranty and trade-in value. My kid figures she’ll sweet-talk me out of it in about 2 years.

Is Your Home an Investment?

Posted on July 11, 2012July 11, 2012 by Danielle

(Photo credit: mharrsch)

Yup, that’s what we all believed for so many years. But the gyrations in the housing market, and the huge amount of “wealth” lost by so many of us, are making a lot of people question just exactly what home-buying is worth, as well as their own homes. I’d like to propose that we re-consider just what kind of investment a home actually is: IMHO, it’s actually more like a collectible—closer to a coin or doll or maybe even a wine collection. And a lot of people would be happier with their “investment” if they re-cast their thinking along those lines. How so?

Buy a collectible or house only if you’ve taken care of the basics. You shouldn’t be buying either one if you have huge credit card bills, no emergency fund, and no significant retirement savings (appropriate to your age). Otherwise, you really can’t afford either.

Realize you can’t easily convert to cash. Of course, a Jumeau doll, a bottle of Chateau Something, or a stucco four-square in Evanston can eventually be converted to cash. But you might have to wait for the right buyer, and selling costs for the auction premium or the broker’s commission can take a healthy bite out of the proceeds.

You have to be prepared to hold them for a long time to see a profit over purchasing costs, and ride out bad markets and changes in fashion. Beanie Babies, Cabbage Patch dolls and McMansions aren’t really the top of the value heap right now.

You can see the market take surprising dips. The stock-in-trade at Antiques Roadshow is the person gasping at how much their ugly vase or over-wrought china cabinet is worth compared to what they paid. Yes, it’s my favorite show too—everyone would like to pick up a piece of junk at a yard sale and make a cool $100K. In a recent show, they re-priced items that had originally appeared on the show in the 1990s. It was a shocker—many, many items had gone down in value significantly, and many more were static. Even a crummy but diversified portfolio did better than that. I probably don’t need to draw the parallels with the housing market. There’s no investment that can guarantee steady appreciation.

Neither a housing investment nor collectibles pay you any income. I’m excluding rental property here. You can sell either one to raise cash, but you may need to overcome some emotional attachment to something you love. When you retire, at least some of your wealth needs to be generating income. If most of your net worth is tied up in something that produces no income, well, I hope your Social Security is adequate for your needs. Rich on paper doesn’t necessarily mean rich income.

Significant ongoing costs continue throughout ownership. Both cost you insurance. For collectibles, you might need to maintain ideal storage conditions. For your house, there are property taxes, ongoing maintenance, periodic major repairs, and the seemingly endless bills from the phalanx of tradespeople who are my on-going “best friends”.

Part of the fun is continuous upgrading. No, no, no.

And the one good comparison I can think of…

Both collectibles and your home can provide significant enjoyment while you own them.

Normally I don’t advise on collectibles, but for them and for a house, people can have very good reasons to own them. Sinking part of your worth into either requires more thought and less “givens” than most of us considered prior to 2008. My suggested rules of thumb: the equity in your home should constitute no more than 1/3 of your total net worth, and an investment in collectibles no more than 5% (and that’s pretty generous), and only if you actively participate and understand whatever you’re buying. We can argue about those figures, but you’d probably agree that most of your friends have way more house than they can afford. Right?