Last week Mike Shedlock made a comment in passing about people being economically and financially illiterate. Collectively we do not know as much as we should and maybe illiterate is the best word.
We should all know how credit card interest works, know enough to only take out a mortgage we understand, know that we have to save money, have some idea what to do with those savings and that our bills should not add up to more than our income. Beyond that some understanding of macro economics to understand some of the basics of what has happened in the last couple of years would be nice and maybe people do have the requisite understanding, I don't know.
I do think that a lot more needs to be done to teach people more about everything. On the investing front the basics need to include, among other things, how markets work, how investment products work and how numbers work. One more that I would add will not be a new concept but the wording might be a little different.
One problem that I see, or at least I think I see, pertains to how people spend their money. Specifically I think that too many people fail to respect whatever it was that they did to accumulate what they have. A common behavior is a willingness to spend in such a way with a belief that it can be made up later (somehow). This sort of thing has been ascribed to the baby boomers and the manner in which they came of age and maybe this is why but either way the lack of regard for the fragility of the nest egg strikes me as a colossal problem looming out there that may be unquantifiable.
Someone like Fidelity or Schwab could probably do a study to figure out what the average nest egg is today and how much the average was three years ago but it seems like it would be difficult to assess how much of the average shrinkage is from the market going down and how much from stupid spending decisions.
How many people do you suppose (this is going to offend some people) spent $200,000 or more on an RV because they were convinced they would love it only to find out they don't? Instead of dipping a toe in the water by renting one for a couple of months (I got quoted a two month summer rental rate from Cruise America of $5600 and I think they would charge for miles on top of that) people like to go out, buy first and ask questions later. Maybe I am wrong but I don't think $200,000 gets you the Cadillac of RVs either. Additionally you could get a lot of two month rentals, that you don't have to maintain, in before you begin to challenge economics of buying an RV. Some folks make the correct decision buying an RV but I doubt that is the case the majority of the time, I'd say not even close.
From my experience this type of example can be applied to countless things people spend money on and I've learned there is no having this conversation with someone. Or at least I have not figured out how to have this type of conversation be productive. Hopefully you have the introspection that I think is needed for an objective analysis before making a huge financial commitment at a point in life that you want to stop working.
Very glad, for several reasons that the Saints won last night. My favorite commercials were the eTrade one after the game had just ended where the tag line was "saved me a pantload" and the Snickers commercial with Betty White and Fish from Barney Miller (or Tessio depending on your reference point).
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33 comments:
"Things are not what they appear to be"
I am by nature very cynical. Imagine my shock when my neighbor, retired pro athlete and real estate developer, lost it all. My first clue was when the repo man showed up for his Escalade. He left overnight with nary a good-bye to anyone. New owner picked up the property for less than half of the previous first mortgage. The pained look in some of the other neighbor's faces tells me that it's not over yet.
Great question/post Roger. I think yet another question is how does this happen in the USA with the world's best educational system? Why do we only seem to learn by trial and ERROR?
P.S. - Being from Indiana, the McDonald's commercial was clearly the best of the night! LeBron, Dwight Howard and Larry Legend in the same spot, priceless. Although the Snickers ad was good - who knew Betty White or Abe Vigoda was even alive after the "Great Celebrity Massacre of 2009"?
Roger,
You buy an extravagance, a house in Hawaii, around the height of the housing bubble. There is really no nice way to get there either.
Yet you choose to lecture others for our indulgences. I assume you can afford the paper loss you have taken on your indulgence. I know I can afford to totally write off the cost of my indulgences and it has to have some residual value.
Paul,
Apparently you do not realize the American educational system is mediocre at best. Many nations kids score higher than ours, even though they pay their teachers much less and spend less on the other expenses as well
I did not buy at the height of the housing bubble I bought three weeks later (humor attempt).
Seriously I figured someone would ask about this. As far as being able to afford the paper loss, I have to imagine the the value has dropped but how can I know unless someone buys the house from me. what i do know is that I have a small mortgage payment that i can afford.
we fund our lifestyle, including the house in HI with about 40% of our income which i think reasonably constitutes living below our means. further my financial plan is not pointed to retiring at some point, i have said many times that I hope to do what i do forever but i save as though i won't be able to.
and while the HI house was timed poorly wrt to the market it was the right time for us financially to fulfill a dream of ours and we did so when i was 41 not 60.
Yep. Fully aware of the inadequacies of our educational system, yet we (collectively) still seem to be the educational system of choice when it comes to higher learning. We can and should do better though.
40% is an amazing number Roger. Congratulations. I have too many hands in my pockets to be anywhere near that number. Lucky to even think about 80%.
Regarding the education of Americans, twenty years ago I too thought the problem was with the "system." To a limited degree it is. During the last twenty years, I have sent two kids through the public school system and half way through the public university system. There is no doubt in my mind that the problem with underachievement lies squarely with parents. Most teachers/professors/administrators we encountered were very professional and wanted to do a good job. Parents on the other hand were completely detached from the learning process and had very low expectations from their children. Unfortunately, the apathy extends to the college level. The broken part of the system is the obscene amount of money we throw to fix a problem that can only be idenified by all of us collectively looking in the mirror and taking responsibility for our own.
I think this is in a way related to Roger's original point.
Paul we live in a cabin that cost $87000 in 1998 that we had to put $30,000 down to buy. How long would it take anyone here to payoff a $57000 mort? we paid it off about six years ago. We have no car payments and no credit card debt.
Take away a mortgage and car payments, and no kids, and there is not much left over.
Roger,
You absolutely correct in your example of RV buying. People spend $300K to $400k for RV, go out 2 months and find they can not stand to be in that close of contact for 60 days. FYI, RV's drop 25% the day you buy and 10% of remaining value each year.
We bought a simple 5th wheel, enjoyed it for 3 years and wrote it off after that. I can stand a loss of $9k/yr for the enjoyment.
PS, 42 years of living below means.
i thought about using $400k in my example as i know some are that much but figured $200k made the idea "appear" to be more accessible to more people.
Um, I know someone that married
a "teacher". Keeps repeating the
same mistakes over and over again
....expecting a different outcome.
Maybe this could be part of our
problem with the educational
system. Just a thought.
(Also, I was told common sense
can not be taught...but rather
learned.) I think learning by
someone elses EXAMPLE is an
excellent way to learn....
thanks Roger:-)
Money doesn't come with a set of instructions, does it?
I was fortunate enough to be raised by Depression parents who knew the value of a dollar and to have a college education with economics and finance courses. With all that, I still have made less than smart decisions with money, particularly with stock picking.
I now view stocks as a consumer good that should have some sort of utility (e.g. an income stream) to justify purchase and not for the emotional rush like one would get from a big screen TV or whatever.
Pleased the Saints won, it will be a boon for a city that needs it.
Mark from L-Ville
BTW, that's Lewisville TX (near D/FW Airport), enjoyed the Pitino story, though...
RV can be bought for 75% of MSRP. How much they depreciate the day you drive off the lot is closer to 15% assuming you did not pay 85% of MSRP. Yes they can cost 1 million but they can be a lot less.
I know you can buy for less than $150k. A rental from cruise america for 2 months is $5940 + $1920 est mileage + $550 sales tax or $8410
But you may not like it if you prefer a diesel class A with 4 slides compared to the large class C in Rogers example. To rent the $150k version would likely cost more than double the $8410 for the class C. Yes it is advised to rent first, but I chose to go after your own indulgences first even though I though your numbers were flawed.
I Think we live on 30 to 70% of our income. Our income and expenses fluctuate a lot, but we live within our means.
"Many nations kids score higher than ours, even though they pay their teachers much less and spend less on the other expenses as well"
I hear this kind of stuff a lot but had never seen it backed up by hard data so I searched and, surprise, surprise, discovered it was mostly bullshit: Many developed countries and some developing countries spend more per capita on education than the US but, more to the point, virtually every country experiencing any success in the global market place, developing and developed alike, spends a greater percentage of their GDP on education than the US, virtually without exception.
They also respect education a lot more too. Think that might have something to do with it.
I've updated the portfolios I track. I've added a Sharpe ratio for the first time for the portolios that have 10 years of data using a "risk free" return of 1% based on the 90 day T bill.
I looked around at housing a bit while on vacation in Hawaii in, I dunno, 2005. I'll be honest, while I've read that Oahu was overpriced, I didn't get the idea that real estate on the Big Island was overpriced by much, esp. compared to something like California or Florida or Phoenix.
the swings in price on the big island have definitely been smaller. i was not trying to imply that our price has not dropped in value but how can anyone really know the value of their own house until they agree on price with someone else?
one can probably have a good idea i suppose but something is only worth what someone else will pay for it.
I'm not questioning you - hah. I'm commenting on the poster who is complaining about your spending. Given what little I know about your finanacial life, it seems obvious that the Hawaii home is well within your means.
it was a little more than two donkeys and a sack of rice, but not much more.
Roger,
shiller's Animal spirit mentioned that houses and land have been poor investments. I agree with participant's comment that stocks are consumer utility and not something you purchase for the hec.
Roger,
in this blog I had an exchange with SEG, MikeC and RW regarding if this is a correction or a leg down to prev march/2009 low. I have looked at the indicators that I follow and one of the long term indicator has not even budged down a bit. So, we may get a correction and then go up again. I can tell as we get closer to the end of this move.
Best,
Jeff from Milan, Italy
Jeff,
Which indicator has not budged down?
Roger,
It is what you should be doing all the time. Estimating the price of an asset and trying to buy it when it is a good value not just what they may be asking on a particular day. You should be much better at this than most.
Ever heard of Zillow? I know it is wrong for my house to but it is a start. You rattled off numbers for an RV quick enough
Anon 8:54 AM. "I hear this kind of stuff a lot but had never seen it backed up by hard data so I searched and, surprise, surprise, discovered it was mostly bullshit: Many developed countries and some developing countries spend more per capita on education than the US but, more to the point, virtually every country experiencing any success in the global market place, developing and developed alike, spends a greater percentage of their GDP on education than the US, virtually without exception. They also respect education a lot more too. Think that might have something to do with it."
How about disclosing your profession. I suspect you are an education professional and probably a member of public employees' union. Also, could you site the sources you found that support your assertions?
For the record, I think public employee unions are the primary cause of excessive spending on pretty much everything they are associated with and also poor performance on the part of many of their members. Elected officials are going to have to get tough, or at least real, with public employee unions in order to get budgets in alignment with the new reality (CA is the worst example).
Disclosure: I am not a public employee, but I pay a lot of taxes to support those who are.
When you look at purchasing power parity the USA teachers are over paid.
http://www.worldsalaries.org/teacher.shtml
Do not worry US teachers make up for it by having the students with poorest test scores.
anon 10:59,
had i zillowed my house when i bought would it have told me what would happen in the future?
or if you are saying i should zillow my house now, ok then what? Is it down (based on comps) 5%? or maybe 25%? then what? I still have a small mortgage that thnkafully i do not have to sweat.
Roger,
There is no question in my mind that you live within your means and that you can choose to blow some of your money on a second home if you want. You are a responsible individual, you earned it, and you deserve it.
But, the buying an RV example did not hold water to me. the rv you spoke of is worth 50 to 75k, you under priced the rental and over priced a reasonable Class A diesel pusher. You made it look dumb financially to buy the rv, but you were not comparing apples. You took an aw shucks I couldn't possibly guess how much I lost on my vacation home attitude.
I know my RV is an expensive toy or indulgence, as is your vacation home. If you can blow money on a whim you can afford why are you making my whim look dumb if I can afford it?
Sorry but I just think you were not judging yourself by the standards you set for me. Usually you are much fairer.
some people don't want to learn about finances....
I have an ex-wife who always would say.."why save, what if we die tomorrow"
...and I would counter with "but what if we don't die young"
Needless to say, I could not get through to her, hence she is now the ex and my financial plan is in order.
Anon 8:54 AM
You must be confusing me with someone who cares what your beliefs are but since you describe your background as if it gave you some authority on the subject I’ll add that I am not a public employee and not a member of a union but have consulted on development of science curricula and teacher training.
Anon 11:42 AM
Find a study showing that higher labor PPP inversely correlates to output quality and maybe your point will be more interesting but the purchasing power of individuals or groups doesn’t seem to have much to do with overall system cost, efficiency or product (educated citizens in this case).
Does the US spend more on education as a percentage of GDP than other countries? No. Ranked at #37 it’s not the worst either.
Does the US system produce better results? No there too but not the worst either; see http://tinyurl.com/y86jwlz
Could it use improvement? Sure, but confusing bullshit with analysis won't get that job done.
At Anon 11:50 - sounds like Roger hit a sore spot with his comment on RVs.
I don't speak for Roger, but I don't think he was categorically saying RVs were a bad investment. He was saying that Americans, particularly Baby Boomers, spend inordinate amounts of money only to discover they don't like the item purchased. It could be a timeshare, convertible, boat, etc.
Most people have no idea what it really takes to retire financially, yet they spend large sums of money indiscriminately assuming they will be fine. After 2008, many of these people might be discovering they are not fine.
This probably doesn't apply to you as you obviously spend time thinking about money since you read this blog, but most Americans need to become more financially educated. I think that is Roger's point.
anon 1:15--I think I'm married to her sister.
THAT is funny
LOL....someone told me the best
way to judge a woman's spending
habits = check her closet...
the number of pairs of shoes
she owns!!!
I live with the male version
of those two women mentioned...
maybe we could fix them up;-)
Better knowledge of finance is certainly critical but so also is the need for better consumer protection: We're not trading in an old-fashioned, barter market like the Kasbah any more and information asymmetry between sell-side and buy-side can be significant even for investors who know what they are doing.
And when the bank you deposit in runs their own book and owns the brokerage you use that adds yet another layer of information they have that you don't; they may adhere to the letter of the law by not front-running individual clients but they can sure front-run the aggregate trend of all clients so you are pretty likely to be in there somewhere unless you're 100% contrarian.
When the financial sector successfully seeks rents on top of even that -- gaining further advantage in regulation or law, in contractual obligations or disclosures then can evade -- no amount of education the individual could acquire is adequate ...except in hindsight after being cleaned out of course.
Forgot to add we have one additional conundrum to face: Both the NO Saints and Indie Colts qualify as 'old NFL' so a victory by either according to the Super Bowl Indicator should be positive for the markets ...unless they exactly cancel each other out.
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