How To Improve Your Finances

Preamble. In what follows I make assumptions that do not hold for many people. Among the most glaring is that my intended audience is gainfully employed and/or they have enough passive income each month to meet basic needs with some left over. Another assumption is that everyone can improve their finances. If I’m wrong about you, I bet you know someone, maybe a young adult child of yours for example, who could use some help building wealth. Consider forwarding this to them if you think it merits it. Thank you.

Official start. Ever wonder why don’t more moderate to high earner families have more long-term financial security to show for all their hard work? In part because financial analysts and advisors make things more complex than they have to so that people will hire them to manage their money.

As a result of needless complexity, and the associated pursuit of the perfect portfolio, people loose focus on what matters most when it comes to building wealth over time, that is, how much they make and spend month-to-month. If asked, how much do you spend on average each month, how precise would your answer be?

Not nearly as precise as it would be if you backward mapped your expenses. Backward mapping, in contrast to budgeting, entails spending regularly without much attention to detail, then totaling everything up after the fact, or more specifically, at the end of each month. Think of it as an x-ray of current spending.

My expense spreadsheet has 7 columns and 12 rows. The columns are for 1) our primary credit card; 2-3) secondary credit cards used less often; 4) cash/checks/wired payments; 5) one-time expenses divided by 12 which include property taxes, home/auto/umbrella insurance premiums, and professional tax preparation; and 6) medical and dental insurance premiums; and 7) a column where I write what the largest expense of the month was in order to see the most expensive outlays of the year in-a-glance. The 12 rows are for each month of the year.

How to build in one-time expenses like a car purchase or new roof? If I buy a $36k car and sell a $12k one, at the end of the year I’ll increase the average monthly total for that calendar year by $2k.* Or maybe I’ll increase it $1k for two consecutive years.

We’re super lucky that we don’t have to budget. With backward mapping though, which doesn’t require much time with credit card statements and most other financial records on-line, I can tell you within a couple percent what our annual burn rate or overhead is. That’s half the battle.

Then comes income. Probably the younger you are, the simpler it is to tabulate. In my advanced age, my income spreadsheet has several columns because in addition to my salary, my university contributes to my retirement fund each month, and then there’s monthly interest from cash and bond investments, and quarterly dividends from stock investments. The wider your income spreadsheet the better. I know, I know, I need a “side hustle” column. I feel younger just for having written that.

Same as with expenses, I keep a running total month-by-month. Here I can be even more accurate than with expenses, even to the dollar. As a result of these monthly calculations, in two weeks, it will take me about 15 minutes to solve for “C” knowing “A” is expenses and “B” is income. If my income exceeds my expenses, “C” will be a positive number. If my expenses exceed my income, like for the federal government, “C” will be negative. Whichever it is, I will carry the number forward and keep a running total from year-to-year.

Building wealth depends upon creating savings on a month-by-month basis much more than fretting about what the market is going to do tomorrow and trying to craft the world’s most perfect portfolio. By far the best way to increase your net worth by $1,200 a year is to make sure your income exceeds your expenses by $100 month-after-month. By far the best way to increase your net worth by $12,000 a year is to do everything in your power to make sure your income exceeds your expenses by $1,000 month-after-month. By far the best way to increase your net worth by $120,000 a year is to make sure your income exceeds your expenses by $10,000 month-after-month.

If that’s so obvious, why do people spend way more time studying stock market gyrations than figuring out how to limit their expenses and increase their income?

If you do well and end up with a surplus of $1,200, $12,000, or $120,000 at the end of the year, invest 50% of it in low cost bond index funds and 50% in low cost stock index funds (+/- 25% based upon your age and risk tolerance). And repeat.

Invest knowing that the most credible analysts in the financial sector seem to be in agreement that future returns will likely pale in comparison to historical ones. For example, here’s Vanguard on 2019 and beyond:

“U.S. fixed income returns are most likely to be in the 2.5%–4.5% range, driven by rising policy rates and higher yields across the maturity curve as policy normalizes. This results in a modestly higher outlook compared with last year’s outlook of 1.5%–3.5%—albeit still more muted than the historical precedent of 4.7%. Returns in global equity markets are likely to be about 4.5%–6.5% for U.S.-dollar-based investors. This remains significantly lower than the experience of previous decades and of the postcrisis years, when global equities have risen 12.6% a year since the trough of the market downturn.”

Subtract 2-2.5% for inflation and another percent for taxes and returns may be 1-3% above inflation. And that’s not factoring in people’s tendency to trade too much with the associated costs that brings. Good luck depending upon your investment smarts to grow wealth.

Building wealth depends upon maximizing income and minimizing expenses a little or a lot. Of course, that depends upon more than using my suggested spreadsheets. Most likely, among other things, it depends upon the degree to which you grew up with role models who lived below their means; how specialized your knowledge and skills are; whether you live in a modest neighborhood; and ultimately, your capacity to delay purchases.

Lastly, one thing your financial planner won’t tell you. Personal wealth won’t amount to much if we don’t revive the Common Good. For us to flourish we need a federal government that can pass budgets without threatening to shut down. We need political leadership that young people can aspire to. We need labor unions to protect workers’ interests. We need health care that doesn’t penalize people of limited means or those with preexisting conditions. We need to partner with other countries to reduce greenhouse gases and global poverty.

Absent commitment to those things, wealth will elude us.

*get a load of this story

The Sorry State of Social Studies Education

These are tough times for myself and other past and present social studies educators.

Exhibit A. Kathryn Schulz’s cogent explanation of everything that’s wrong with Netflix’s 10 hour long documentary “Making A Murderer”. Thanks Alison for the link, you saved me 9 hours and 20 minutes. Not quite sure how to spend those savings, maybe an extra hour of sleep for nine straight nights!

Excerpt 1, “. . . we still have not thought seriously about what it means when a private investigative project—bound by no rules of procedure, answerable to nothing but ratings, shaped only by the ethics and aptitude of its makers—comes to serve as our court of last resort.”

Excerpt 2, “. . . the documentary consistently leads its viewers to the conclusion that Avery was framed by the Manitowoc County Sheriff’s Department, and it contains striking elisions that bolster that theory. The filmmakers minimize or leave out many aspects of Avery’s less than savory past, including multiple alleged incidents of physical and sexual violence. They also omit important evidence against him, including the fact that Brendan Dassey confessed to helping Avery move Halbach’s S.U.V. into his junk yard, where Avery lifted the hood and removed the battery cable. Investigators subsequently found DNA from Avery’s perspiration on the hood latch—evidence that would be nearly impossible to plant.

Perhaps because they are dodging inconvenient facts, Ricciardi and Demos are never able to present a coherent account of Halbach’s death, let alone multiple competing ones. Although “Making a Murderer” is structured chronologically, it fails to provide a clear time line of events, and it never answers such basic questions as when, where, and how Halbach died. Potentially critical issues are raised and summarily dropped; we hear about suspicious calls to and messages on Halbach’s cell phone, but these are never explored or even raised again. In the end, despite ten hours of running time, the story at the heart of “Making a Murderer” remains a muddle. Granted, real life is often a muddle, too, especially where crime is involved—but good reporters delineate the facts rather than contribute to the confusion.

Despite all this, “Making a Murderer” has left many viewers entirely convinced that Avery was framed. After the documentary aired, everyone from high-school students to celebrities jumped on the “Free Avery and Dassey” bandwagon.

Excerpt 3, “As of January 12th, more than four hundred thousand people had signed a petition to President Obama demanding that “Steven Avery should be exonerated at once by pardon.” That outrage could scarcely have been more misdirected. For one thing, it was addressed to the wrong person: Avery was convicted of state crimes, not federal ones, and the President does not have the power to pardon him. For another, it was the wrong demand. “Making a Murderer” may have presented a compelling case that Avery (and, more convincingly, Dassey) deserved a new trial, but it did not get anywhere close to establishing that either one should be exonerated.”

Exhibit B. The Republican frontrunner (tRf) repeatedly says we don’t win anymore and he promises to make America great again. His strategy of playing on people’s zenophobia, fears, and ethnocentrism is working. Most disheartening, few ask how a simplistic, single-minded focus on the U.S., will end up benefiting the U.S. in the medium and long-term. Similarly, few ask why international competition holds more promise than international cooperation.

Because his name wasn’t in the headline, tRf probably skipped this news story from last week titled “Slow Growth Clouds Progress on Global Poverty.”

“Unprecedented global economic growth over the past quarter century has lifted an estimated 1.25 billion people out of poverty, in one of the greatest recent achievements in human history.

. . . . In 1990, 37% of the world’s population lived in extreme poverty, which the World Bank defines as living on less than $1.90 a day. Today, the bank estimates that 9.6% of the world is in this destitute state—agricultural workers and others who live in rural mud huts with no electricity or running water, work others’ land, and spend nearly all of their resources on food, often going hungry.”

We don’t win anymore only if “we” is defined in the most narrow of ways. Social studies education has failed when so many are so taken with someone who thinks so narrowly. If we had done a better job as social studies educators everyone reading about the stupifying progress on global poverty would immediately realize the positive ripple effects including slower population growth, reduced regional and international violence, increased security, military savings, and increased global trade.

Instead nationalism and demagoguery are winning the day. Given that, the profession and I get a big fat “F”.

The Decade’s First Global News Story

Paul Collier in a January 17th Guardian story.

“Humanitarian crises around the world have shown that, while disaster response is often fast, effective and well-funded, reconstruction attracts fewer resources and, in many instances, fails to deliver an opportunity for a better future. Aceh, on the tip of the Indonesian island of Sumatra and a region often taken as a model for focused development efforts after the 2004 tsunami, now faces new challenges as aid agencies reduce cash handouts and a lack of employment opportunities threatens stability.”

The media spotlight is shining brightly on Haiti just as it did Aceh in 2004. What are the odds that in six years, we will read that Haiti “now faces new challenges as aid agencies reduce cash handouts and a lack of employment opportunities threatens stability.”?

People’s recent generosity towards Haiti strikes me as odd given how little attention most people typically pay to desperately poor people and places.

In the medium and long-term, what impact can we expect an “ignore, give generously, and ignore again” style of philanthropy to make?

We need to commit to more serious and sustained global citizenship that rests on historical knowledge of colonialism, of specific places like Haiti, of globalization and neo-liberal economics, and less on one-off, media-inspired, charitable giving.

I would be more optimistic about Haiti’s future if people checked out books by Sachs, Collier, and other experts on global poverty and formed groups to debate the merits of their proposals for reducing global poverty.

If we don’t press our government to give more generously and intelligently, and we don’t consider changes in our own lifestyles, I can’t help but wonder if we give at times like this out of a sense of guilt.