Question Everything

I don’t mean to speak for anyone but I’d like to think that we work hard for our money and we would like to keep it. That’s why I discussed fraudulent investments earlier and some of their tell-tale signs to help you recognize and avoid them. But people can be really crafty when it’s time to con you out of some cash.

If the proposed investment initially passes the smell test, here are three questions you can ask to further pull back some layers and determine the merits of the deal:

Does the dealer have a license? Even with the best of intention, the market has shown that it cannot be trusted to regulate itself. The best way of ensuring that people and organizations are doing the right thing is to have the threat of severe penalties (usually financial) hanging over their head. Unlicensed advisers are illegal and accountable to no one. Furthermore, we do not know what their qualifications are.

Does the risk/reward structure make sense? “High risk, high reward” is a common cliche, but it is true. If someone is offering a low risk guaranteed investment, the returns will likely be very low. The opposite applies if the rewards are significant. The risk is likely to be high and the returns will not be guaranteed. Anything different is likely a scam, or at best it is misrepresented.

Is the investment registered? It is similar to an unlicensed dealer. Who is tracking and regulating the security if it is unregistered? Personally, I do not like to rely on a company that is financially invested in me being uninformed for the truth. Registering a security ensures that the SEC, an independent government organization will ensure transparency by providing you with the necessary information to make good choices.

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No Rest for Dead Presidents: My Dollars aren’t Lazy Bastards

What an awful headline. But I’m not feeling particularly creative today so it will have to do.

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In an introductory investment post, I liken dollars to employees who must work to make my life better. Money has a significant advantage over us when it comes to working and earning potential. We get tired, we need sleep, our loved ones want our attention. Money has none of those conflicts so what reason is there for it to not be working tirelessly to free you from the rat race? In my case, my little dead presidents’ only duty is to slave away to improve my quality of life. Here are some of the ways I make sure they aren’t being lazy little bastards.

I structure my bank accounts deliberately: Some days I can’t even keep track of how many accounts I have. But the complexities of both life and banking regulations do not allow me to simply have a checking and a savings. While I have a checking account for my every day use, that is the lowest yielding account there is. I can’t keep all my money in a checking account. However, the highest yielding bank account is a CD (learn more about CD’s here and here) and there are penalties for early withdrawals. Since emergencies do not wait for CDs to mature, I also have a money market account which provides me with quick access to cash at a much higher rate than a checking but without the potential for a penalty.

I only use cash back credit cards: Your bank is making money off your use of the card, shouldn’t you do the same? My credit card gives me 1.5% cash back on everything I buy and on a monthly basis, the bank runs some specials at various merchants where I get an additional 5-15% cash back. For example, my tail lights went out a few weeks ago. We have both an Auto Zone and an Advanced Auto Parts in our area. However, our credit card company was running a 10% cash back special at Advanced Auto Parts. When it was time for my husband to replace the tail lights, I told him to make sure he went there. He spent $40 and we ended up getting $4.60 back (10% special + the 1.5% we would normally get). Of course, since there is no annual fee and we pay the balance in full every month to avoid interest, we are being paid to use our card.

I get educated: It’s hard to make or save money when you don’t know what benefits or features are available to you. I’ve discussed my solar adventures in the past. We got thousands of dollars in rebates courtesy of the U.S. Government for our investment in solar panels (if you pay taxes, thank you!). Although we would have eventually taken the plunge, we might have missed the opportunity for our big tax credit if we waited too long. There is no guarantee that the program will be available indefinitely or even beyond 2020. We also learned about the energy credits which we are on track to receive quarterly for 10 years. While they are small amounts, they will be offsetting nearly half of the cost of the system. So not only did we get a 30% subsidy, we are also selling some of the credits we produce over a period of time to offset the remaining 70% of the cost. That does not include our actual energy savings which have been pretty substantial (my March 2017 electric bill was $38. I live in a 3,100 square foot house in New England).

I pay debt aggressively: Debt is slavery. It’s crippling because it’s expensive. The best way to handle debt is to get rid of it as quickly as possible. My student loan interest is 5.16%. It makes no sense for me to carry that balance for 10 years (standard repayment) if it’s costing me as much as a moderate investment portfolio would cost. So when I graduated from an MBA program with a balance of $47k and change, I was determine to get rid of it by any means necessary. Two years later, my balance is  $11,600. I have saved myself thousands in interest and the amount that I did have to pay, I have able to deduct it from my taxes. So I have used the money I have in the bank and the money I earned working both my regular job and real estate to cut my balance and reduce my interest.

I keep cash to a minimum: ‘Minimum’ is relative.  It doesn’t mean I only have $1,500 in the bank. I keep a fat emergency fund which correlates with my low risk appetite. The more risk adverse you are, the more money you want available to weather unpleasant unforeseen events. For me that number is a year’s worth of living expenses. Before the recession, the recommended amount was 3 months. After 2008, financial experts were recommending 6 months. I like to be cautious, maybe overly so, thus, I choose 12 months. Anything above that number is invested in various types of projects (or debt payments) that are meant to increase cash flow (or cut my interest expense).

Think of the ways you can make your money work for you. Idle funds are being eaten away by inflation and are not doing anything to improve your bottom line and get you closer to financial freedom. This is the value equivalent of throwing your money away.

Knowing the Investment Products

Investing can be overwhelming. The key is knowing what is available and where to start. There are many investment products. I will list them below and provide a high level overview of some of their features and inherent risks.

INVESTMENT TYPE FEATURES COMPANY BENEFITS BENEFITS RISKS
Stocks Capital appreciation & Dividend payments Capital & Market expansion Growth potential Volatility
Bonds Steady income & Capital preservation Capital investments Predictable returns Interest Rate Risk
Certificates of Deposits Steady income & Insured balances Low cost access to liquidity No risk Low returns
Real Estate Investment Trust Investing in commercial real estate Access to capital Diversification & real estate income Lack of transparency

Introduction to Investing

Investing

I often talk about the importance of financial independence; at least to me. However you can’t achieve that through working only. Your earning potential is limited as a wage earner and only the most exceptional and/or connected will ever get to a salary level where their earnings alone will make them independently wealthy. So the rest of us turn to investments.

The approach that I take to investment is to look at every dollar I have as an employee. They are supposed to work and be productive. If they aren’t working they are costing me and I need to find an activity for them. But the drawback is finding the right “work site”. I believe that diversification is extremely important. Some of my dollars are doing heavy lifting in the real estate market, some are doing lazy work in CDs and savings and others are doing risky work in the stock market. That is my way of diversifying.

Diversification is an old and basic investment concept. It is a tool used to spread out your risk to ensure that you don’t have all your eggs in one basket. In my case, I use real estate as a mechanism to provide me with guaranteed cash flow since people will always need a place to live. I use my CD and savings accounts to provide me with flexibility and liquidity. Meanwhile, I use my stock market investments as a tax tool since they are work sponsored retirement plans.

My husband finds humor in me saying that investing is fun. But the truth is, the fun doesn’t stem from the process of learning to navigate the market or feeling my stomach drop every time a bad political move causes the DOW to fluctuate or mortgage rates to spike. The fun comes in knowing that even when I sleep, I’m still earning money. When I’m working, I’m earning my wage was well as money from all of my investments. I don’t have to work as hard but I can make more money than the person sitting next to me for the same amount of work.

However, as much fun as it is when you’re performing well, investing can be tricky. A lot of investments, particularly stock market investments are volatile. Not only that, they are also not backed by the full faith of the U.S. government. My CDs are in a banking institution that carries insurance on my deposit up to $250,000. If I put that same amount in the stock market today, I could wake up tomorrow and have it disappear with no recourse. In a best case scenario, I will retire at 62 or 67 with a million dollar portfolio that will give me enough dividends to live on until I die. The goal is to not outlive my investments. But there are no guarantees. And even when I get my way, I’m still going to be subject to both emotional and financial roller coaster rides over the next 30 years.

None of this means that the industry is unregulated. The Securities and Exchange Commission is the agency that oversees investment advisers and enforces securities laws. But they are just there to make sure that the companies don’t get away with committing fraud, not to guarantee your investments. And even with the regulations in place, even the law enforcement safeguards in place do not guarantee safety as you know by Bernie Madoff’s actions. So it is best to know what you are doing and how to protect yourself by being informed. There is a plethora of resources available and I hope to share them with you here.

De-clutter Challenge

are-you-up-for-the-challenge

In a previous post I briefly discussed money challenges and how people use them as extra motivators to either boost savings or pay down debt. Whether you’re saving for a vacation, a house or just want to improve your money management skills, you can never have too many tools or tricks at your disposal. This is why I encourage people to get creative about improving their financial behaviors. Not everyone gets as excited about personal finances as I do, so it doesn’t hurt to find a way to spice it up.

Today’s post is dedicated to the de-clutter challenge.

What is it: This challenge requires a little bit of elbow grease, but besides needing some motivation and patience, it  is not very difficult. We tend to acquire a lot of things over the years and the less we move the more we accumulate. Given that spring is in full swing, I think this timing is appropriate. Regardless of your financial goals, I think anyone can benefit from this activity.

This is spring cleaning with a purpose! Make a pile of everything you have not used in 12 months and separate the pile into 2 more categories. One is what you think you will use in the near future (maybe you broke your arm this winter and that’s why you haven’t used your skis, but you’ll be done with rehab soon and will be hitting the slopes for sure in 2018). The other pile what you don’t foresee yourself using, or anything that you have 2 of (newly weds, this is where you will shine! When I got married, I suddenly ended up with 2, if not 3, of everything. Seriously… I have 2 microwaves & 3 toasters). Take very good pictures from various angles (the more valuable, the better the pictures should be) and post your items on various sites for sale. I use Facebook, Amazon and Letgo. While I generally don’t mind ebay, I do not like that their listings expire every 7 days, making me a slave to continuously have to go back and relist the items.

Outcome: Results will vary, but the more items you have and the better the quality, the higher your revenue will be.

Variations: If you’ve already done that, try the same challenge with unused furniture. This will work well if you live in a college town where young students cannot always afford new furniture.

Why I like it: This is a great way to hit two birds with one stone.

If you love cash and your messy garage has been driving you crazy, this is the challenge for you.

How Minorities can close the Wealth Gap

chart-household-wealth-top

In America we always hear about the wealth gap along color lines. Whether we hear it all year from activists or during election season from politicians pretending to care, we all have some level of familiarity with the concept that, minorities, particularly black people, in this country are far behind white families when it comes to wealth building, accumulation and retention. There is no denying the facts or ignoring the systemic policies and practices that keep the divide alive. You can’t enslave a particular group of people for centuries, marginalize them for decades and vilify  them in the media and still expect them to thrive. However, there is a point where people of color have to make an effort to improve their situations.

I will acknowledge that  I know very well that the gap will not close in my lifetime. Furthermore, as a black daughter of immigrant parents, I face sexism, racism and other forms of prejudices because of my family’s background. So I want to be clear that this is not a “blame the victim” bash-fest. I am not ignoring the very real biases that are woven into the fabric of American society. On the other hand, I also don’t think it makes any sense for people to throw their hands up and simply give up on putting forth any effort because the system wasn’t design for them. Is it fair that you have to work twice as hard to see half of the result? No. It also doesn’t mean that you should throw in the towel and stop playing the game. Fighting to see a change in the way things work and working towards self-improvement are not mutually exclusive. You can hate the rules of the game and still participate. A second place trophy is better than being disqualified. So I will continue to advocate for accountability as much as I do for equality.

With that said, I am going to list some of the things that middle class black people can do to ensure that their children are better off in the future.

Get life insurance – Often times, people die and leave their young children with nothing. Sometimes, they die and become a burden to adult children who now have to bear the costs of burials. Unless you are terribly old or ill, life insurance is relatively inexpensive. It’s not tremendously risky given the fact that we will all die eventually. Should you die unexpectedly, your young children can have sufficient funds to ensure they are provided for, and if you die at a more advanced age, your older children will have somewhat of an inheritance.

Stop kicking your kids out at a young age – No one expects you to have your bum do-nothing children mooching off you for the rest of your life. However, regardless of what the government says about their adult status, 18 year-olds are still clueless about life. They do not have the maturity or the earning potential to have a full life outside of your home. They do not have any skills to get an adequate job, they are likely still in school and lack the experience to avoid life-ruining mistakes. There is a reason why the drinking age is 21. They are not done growing. I have heard plenty of stories of young black children being kicked out at 16 or even as young as 14. That is absurd. Give your children a chance to thrive. They did not ask to be born. You brought them into this world and it is your responsibility to provide for them and care for them until they have all the necessary tools to brave the world with high likelihood of success. Don’t be surprise that your child is not thriving if they’ve had to pay rent since they were 18. They will never have sufficient savings or good enough credit to get ahead in life.

Give your children meaningful gifts – Struggle does not build character. There is no glory is struggle. It may build resentment, snowball into more struggle, reduce quality of life, but it doesn’t build character. Knowing the value of a $1 and the importance of hard work are not the same thing as struggling. Building character is making your children do chores. Building character is making them get a full-time job in the summer. Not letting them suffer because you didn’t have anyone to take care of you. Help them buy their college books so they don’t rack up credit card debts they can’t afford. Put money away for them over the course of their lives so when they get married and/or buy their first house, you can have something substantial to give them.

Help build your child’s credit – Black parents are so notorious for misusing their children’s social security number that it has become a joke that the light bill is in the 3-year old’s name. You are responsible for you child’s well-being. That does not stop at the physical state of making sure they don’t fall down the stairs and aren’t hungry. You are responsible for nurturing their mind as well as their socio-economic status. This means, that responsible parents do not damage their children’s economic standing in life by ruining their credit at birth. Instead, protect your child’s identity and when they are old enough, help them build their credit. You can contact your credit card company by asking what the minimum age is for adding an authorized user to your account. Some companies will allow someone as young as 16 to be added. Pay the bill in full every month, don’t carry a balance and make no late payments. That will not only teach your child how to use credit responsibly, it will also start to help build their history. Granted, the boost for being an authorized user will not be very big. FICO changed their scoring model to drastically cut back on the effect joint history can have on an authorized user’s score because some people with questionable credit were exploiting that feature. However, if you are responsible yourself, it certainly can’t hurt. Not to mention, it will teach them the proper behaviors for when they are allowed to strike out on their own.

Be open about money – There is often this secretive relationship with money. We tend to not discuss money in general. However,  your child is not a nosy relative or a stranger or even someone who will look to exploit you. They are part of your household. Most importantly, they can’t learn anything about proper personal finance management if they don’t know how money works. They are certainly bound to repeat your mistakes if you never share them. You shouldn’t see a financial mistake as an embarrassing failure but as a teachable moment. My parents did not talk to me about money. My money management skills developed as a result of my natural inclination to be risk adverse. I grew up afraid of financial insecurity. I grew up worrying about retiring in squalor, on the verge of eviction or having my car repo’d. That is who I am. It wasn’t a particular incident that caused me to be this way. That’s how I’ve always been in all aspects of my life. Risk adverse nearly to the point of risk avoidance. So I spent my life reading up about money, personal finance, the state of the economy and how it affects my life. But that is not most people’s nature. For many, they grow up modeling behaviors they witness. Sometimes they are “live in the moment” type of personalities and don’t put much thought into how today’s actions can have a butterfly effect on their long term financial future. I’ve had many conversations with young people who said: “My parents never taught me this. No one told me about money. I had to figure it out on my own.” You can’t teach them good habits if there is not an honest conversation happening.

Be honest – This is something I have seen in my own family. Dishonesty that sets unreasonable expectations. Your children rub elbows with peers of all walks of life. If they aren’t clear about what their socio-economic status is, they may have unreasonable expectations about what you can and cannot afford. If you spent your whole life misleading them, you might feel guilt or pressure to extend yourself and provide things you really have no business buying. I have personally witness relatives of mine buying their children luxury vehicles in high school while their cable went unpaid and their gas bills piled up. These people spent their entire lives living the lie that they could afford anything. However, as the children got older, their taste became more expensive and the parents weren’t just sacrificing savings to make things happen, but basic necessities. Those children then grow up being used to a living standard that is above their means and they have to choose between maintaining that standard they’re familiar with to keep up their peers and cutting back to something more realistic. Needless to say it’s extremely difficult and they end up on a financial hamster wheel until they can change their habits.

These are some of the ways I think black parents in America can work to improve the lives of their children. Certainly, it doesn’t guarantee success or even that the descendants of the slaves will be as wealthy as the heir of the slave-owners. But if you can’t commit to doing everything within your power to improve the lives of the children you birth, you have no business being a parent. Your job is to make sure your kids are better off than you were, and their job is to do the same for your grandchildren. Anything less is a race to become a permanent underclass.

Small Habits that will Cost You Over Time

The devil is in the details. That is also true when it comes to money. My own mother has a terrible approach to money which often frustrates me. Most of my attitude towards money comes from watching what she does and being committed to doing the complete opposite. For example, she will often say: “it’s just $10, it’s just $20.” However, it takes 50,000 $20 bills to make $1,000,000.00 While this might sound ridiculous, the point is to show that you have to start somewhere. If you can’t manage to keep control over 1 or 2 $20 bills, how will you ever get to 50 thousand? So pay attention to the details to position yourself for success. Here are some seemingly small details that could change your life if you start paying attention.

  1. Buying lunch every day
  2. Not saving for retirement
  3. Not having an emergency fund
  4. Buying more house than you need
  5. Owning a luxury car
  6. Having less than stellar credit
  7. Not knowing the difference between a need and a want
  8. Being under insured
  9. Not having a budget
  10. Not having short term disability
  11. Failing to network
  12. Failing to avoid late fees
  13. Failing to renegotiate with your providers
  14. Paying full price
  15. Not learning to DIY

These are some of the things that I have found were costing me over time. The small things add up, yet they are the easiest habits to change. What small tweaks can you make today to improve your finances?