Ramsey Reflections, Part 2

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #2: Don't Go Hysteric!

At this point, we're not looking at a full-blown depression. So we have 4% more people out of work. Granted, many are hurting, and we don't want to minimize that. But we're not all standing in soup lines, the stock market hasn't tanked nearly as much as in the Great Depression, and the worst of the foreclosures are restricted to five states.

Ramsey's point? Employment is well over 90%. Scramble around and find work! Get new training for new jobs! As Solomon said three thousand years ago, "The diligent prosper." Sitting around sulking and watching negative news doesn't qualify as "diligent." Get out and make something happen. That's what Americans are known for.

Takeaway #3: Look for the Silver Lining

Yes, it's a storm. But storms often have silver linings.

First, recessions and depressions have a way of shaking us up and re-ordering our priorities. Our grandparents, who experienced The Great Depression, might pull out an old nail and use it again. Many of us have become wasteful and flabby.

Second, recessions weed out the slackers in our fields. Some serious realtors are selling properties again, and have less competition.

Third, recessions make us work harder at serving our customers. A restaurant that fails to provide great food while making customers feel special deserves to die. Money is simply a certificate of appreciation for a great service or a great product. If you're providing neither, prepare to be run over by those who do.

Fourth, a recession can bring us back to our senses about wise money management. Now is a great time to reintroduce a lost word in the English language: "No!"

So someone wants you to loan them money to buy a house. But they're broke. You say, "No. You're broke. You can't afford a house." When broke people buy houses, they become broker. That's why they call the people who seal the deals "brokers."

So your teenager doesn't have a decent job but wants you to buy him a Corvette. You say, "No. You can't afford a Corvette. Why should I help you to buy one?"

More to come...

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 1

Last night I attended Dave Ramsey's Town Hall for Hope. I figured that since some people are looking to me as some kind of money expert, I should be up on an event of this magnitude.

What's the occasion? Why would Ramsey go to all the trouble to do a free telecast and do enough advertising to attract over 1,000,000 people to personally attend at the 6,000 locations? He wasn't announcing a new product. He wasn't running for office. He seemed to just have a passion to do all in his power to snap America out of despondency over the economy. Over the next several blogs, I'll try to summarize my main reflections and takeaways.

Takeaway #1: Don't Allow Bad News to Immobilize You!

Bad news travels through a lightning fast T2 line; good news through snail mail. I've noticed that, even during good times, the news is quick to print how many jobs were lost in any given month, but fail to report that the new jobs created during that month more than made up for the losses. Bad news sells. As a result, everyone is soaking up reports of dismal job markets, retirement funds disappearing, businesses going under. Ramsey example: the stock market went up 20% in recent weeks. How many saw that in the headlines?

Ramsey's fear is that many are immobilized by bad news. So you lose your job or your hours are cut back. Rather than learning new skills to start a new job or beating the bushes to see who's hiring, you sit at home, watch Oprah, and complain to your friends about the dismal market.

The Ramsey remedy? Choose Tigger over Eeyore. Be an optimist instead of a pessimist. Be proactive rather than reactive. If you've just been thrown off a cliff, you've got a choice: either allow your body to bounce along the cliff, or spread your wings and fly. Perhaps you've been thrown out of the nest for a reason. Don't despair! Move on to the next thing.

(More Next Blog)

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Why Save Money?

That's the question a student asked of our panel at KSU Thursday night. I appreciated her candor. Her parents keep nagging her to save, but she simply couldn't see why they made such a big deal about it. Although other interesting questions involved the best places to put investment money and the future of interest rates, I felt, in retrospect, that the question about saving might have been the most significant. Why save? Because:

1) Saving breeds more savings.

The more you save, the more you can take advantage of bulk purchases. If you save up for items rather than making payments on credit cards over time, you save tons. Saving up for a car and buying it outright (instead of making payments) can save many tens of thousands of dollars over a lifetime. By paying for things outright, you avoid expensive payments and can invest more each month for future needs.

2) Saving protects us from debt.

Most people run into serious debt because of an emergency, like a job loss or medical issue. Had they saved up enough ahead of time, many of these could have weathered the storm without incurring crippling debt.

3) Savings can grow into millions.

As we've said before, just $20 per week stashed away in long-term investments can multiply into well over $1 million by retirement.

Money guru Ron Blue spend a lifetime studying, writing about, and counseling people about their personal finances. One day someone asked him to sum up in a sentence what he'd learned. He thought about it and responded,

"Spend less than you earn, and do it for a long time."

As Solomon wrote thousands of years ago:

"There is precious treasure and oil in the dwelling of the wise,
But a foolish man swallows it up."

It's foolish to swallow up all that we make before the next paycheck. Perhaps savings could be considered the cornerstone to successful money management.

The questioner bought a copy of my book (Enjoy Your Money! How to Make It, Save It, Invest It and Give It) after the discussion. I hope that reading it helps motivate her start the most powerful habit she could adopt: living way beneath her means in order to find financial freedom.

The Power of "Making Do"

Frugality is in! And long overdue, in my opinion. Many major newspapers include columns and blogs about how to cut back and save money. But frugality isn't just about surviving the recession. It's about wise money management.

When Professor Stanley (The Millionaire Next Door) studied self-made millionaires, he was surprised to find them living in normal houses, driving normal cars, and saving money any way they could. One of his chapters described them as "Frugal, Frugal, Frugal."

And it makes sense. To amass wealth, you've got to live beneath your means. And since savings aren't taxed, $1000 saved may net you just as much as a $2000 earned. And when you think about it, $1000 is simply a year of $20 weekly savings. Invest $20 a week starting after high school graduation and invest it wisely to retire with over $1,000,000. Don't believe me? Google "interest calculator" and put in $1000 per year at 10% interest (average stock market gain) and see what you've got in 50 years.

That sure does simplify things. All young people have to do is to come up with $20 at the end of each week. If all our earnings are gone by the next paycheck, we can either earn an extra $20 by mowing a yard or babysitting, or, we can find ways to cut back. That's where "making do" comes in.

My brother works as an engineer for a large company. He recently walked into the coffee room to find that, apparently, the coffee machine carafe (the glass container that the coffee drips into) had broken and his engineer friend had "made do" instead of purchasing a new machine. To the right is his fix looked.

Now most of us would have gone right out and bought a new coffee maker for about $20. Former generations were more innovative and not embarrassed in the least to "make do" with what they had.

I've noticed that my grandad often replaced a tool handle with his own piece of wood rather than throw it away and buy a new one. I watch mom tear off a tattered collar, turn it over, and sew it back on to keep a comfortable shirt she liked. No wonder she saved plenty to retire comfortably.

The next time something breaks, don't immediately replace it. See if there's a way to make do. Make do every week and invest your savings and you just might become wealthy.

Lessons from Warren Buffett's 2009 Shareholder's Letter

Why Listen to Buffett?

What can we learn from Warren Buffett about our personal finances and running our businesses? Much more than I can mention in a brief blog, but I'd like to at least reflect on some practical lessons from his most recent report to his shareholders.

Warren Buffett, the world's richest man (worth over $50 billion), didn't inherit his money - he earned it starting at age 6 selling Chicklets (candy-coated chewing gum) in his front yard. He added to this money from other rather ordinary jobs - caddying, finding and selling golf balls, paper routes, etc. Rather than spending his money, he saved it and began investing at age 11. Fascinated with business and investing, he had read over 100 books on the subjects by high school graduation. So he learned business by both running them and studying them.

In the 44 years that he's invested his money (and other fortunate investor's money) through Berkshire Hathaway, he's averaged yearly returns of over 20%, more than doubling the gain of the S & P 500 during the same time period.

From my study of Buffett, his extraordinary returns come, not so much from his knowledge of movements in the stock market (which he claims are rather unpredictable, particularly in the short term), but from his unsurpassed understanding of businesses. He knows what extraordinary businesses look like; that's how he knows which businesses to buy. So what can we learn from such a financial wizard?

Lessons

I'm extrapolating here, so don't put this in Buffett's mouth. When he talks of a business doing things right, I'm applying it to individuals.

1. Don't give up. The economy's in shambles, and will probably remain that way for some time. But don't assume life as we know it is disappearing. Plan toward a bright economic future. Over the past 100 years, the free market economic system has worked wonderfully, increasing our standard of living seven-times in the 1900's, while the Dow rose from 66 to 11,497. In his opinion, "America's best days lie ahead."

2. Plan for inflation. The battered economy and bailout by the government will probably result in inflation. (Steve's note: houses rise in value with inflation. If you live in a relatively stable area, like us in metro Atlanta, owning your house and a rental house, if you don't have to incur debt, might be a good idea.)

3. Save massively during the good times, so that you'll have cash during difficult times. Birkshire is in great shape to weather extended hard times, since they stored up huge cash reserves during the good times. Now they can purchase great businesses at bargain prices and help their existing businesses to weather the hard times.

4. Keep your near-term obligations modest. Don't overborrow. Don't live beyond your means.

5. Continue to develop "new and varied streams of earnings."

6. Invest in great leadership. Being the manager of my family and a small business, that means, first of all, increasing my own skills and productivity, as well as my children.

7. Do the basics right. Speaking of Birkshire principles, he praises one of his CEO's for focusing on "blocking and tackling, day by day doing the little things right and never getting off course."

8. Don't buy a house unless you can afford one. If you can't put down at least 10% and if you can't comfortably make the payments on your current income, don't buy it. As basic as this sounds, those ignoring it both from the borrowing and lending side, were major players in the present crisis.

Your ideas? Share them below.

On Predicting the Economy

To make business plans or retirement plans or even plan for a summer vacation, we'd like to take into account the future of the economy. If things are to get worse, we need to go conservative. If they'll pick up in six months, we'd like to start paddling out into the surf so that we're ready to catch the next wave of growth and prosperity.

Since we're not economic experts, we rely on the opinions of those who spend their days researching the economy, interviewing people on the economy, and helping to set government policy concerning the economy. That's probably why CNBC has record ratings during this economic crisis. We crave expert advice.

Which brings up an important point: can the experts be trusted when they make pronouncements like, "The next six months will be rough, but I see us getting back to steady, albeit slow growth in the last half of the year."?

Unfortunately, I don't believe there's adequate evidence that the experts can predict the future of the economy. Here's why...

1) Governmental figures and most heads of companies have every reason to bias their reports toward the positive. This is shown on a smaller scale by how CEO's of failing companies keep giving hope to their employees and stockholders, even when all the facts in their grasp tell them that the company will fold completely in six months. If they were to admit that the company's failing, stockholders would immediately sell all their shares and employees would bail for other jobs.

Aren't government officials in the same position? If they felt the evidence led them to think we were headed for a depression that history would label "The Greater Depression," they couldn't speak out about it, lest everyone lose confidence in the economy and sell off all their stocks, thus ushering in an even worse recession.

2) Studies show that experts do a poor job of predicting the economy. Professor Philip Tetlock teaches at the University of California-Berkeley. He's an expert on top experts. For about 19 years (culminating in 2003), he studied 300 academics, economists, policymakers and journalists, to find out how they made their economic forecasts and chart how often they were right. According to Tetlock, "we found that our experts' predictions barely beat random guesses - the statistical equivalent of a dart-throwing chimp.... Ironically the more famous the expert, the less accurate his or her predictions tended to be."(1) Thus, odds are, that expert you heard forecasting the economy on the evening news, if you were to chart his past predictions, would probably have been wrong as often as he was right.

My guess as to their inability to conjure up an accurate picture of our economic future is that, in order to predict it, they'd have know many facts that nobody can possibly know. For example:

• If our economy did better after government intervention following the last depression, how can we know for certain that the government intervention was the cause of the recovery.
• Since no two economies are ever identical (in a sense, a visit to the past is a visit to a foreign country), how can we know that what worked then will work now?
  
• The world's economies are more entertwined than ever before. How can we know what may happen in another country to either delay or speed our recovery?
  

Those are just three of the difficulties that I see springing up from a veritable Pandora's Box of economic possibilities.

So what do I do in the present economic climate? Despair?

No, I simply do what everyone should have been doing when most economists were predicting more cheery economic futures - don't believe them. Nobody knows. Realize that at any time, things could turn around and we'd be off to a prosperous decade, so that whoever bought up the cheap stocks would look brilliant in retrospect. Alternately realize that at any time, the economy could go to hell and we'll see a repeat of the Great Depression. Then again, things may continue as they are now for some time, neither getting better nor worse.

As author Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

In other words, we don't know the future. Once we accept that, we can go about our plans with that in mind. That's why we major on the basics that work in any economy:

• work hard. You never know when you might get sick or your services might no longer be required.
  
• keep sharpening your skills so that you'll be the last one fired in a downturn and the first promoted in good times.
• save all you can.
• keep a large emergency fund on hand in case you lose a job for an extended time.
• don't live beyond your means. Debt is always scary, good times or bad.
  
• diversify your investments. Since the past isn't prologue, we can't know if the long-term gains of stocks or bonds or CD's or real estate will be the same as the past. Since we can't know which will do better, we diversify.
  

Disagree? Agree? Want to add to the discussion? Feel free to post your opinion below.

End Note

1) Eric Schurenberg, Why the Experts Missed the Crash, Money Magazine, February 18, 2009, 4:10 PM, ET.

Recent Interview: 5000 Years of Money Experience

In my ongoing interviews (100 people over 50 years of age), I spoke to a lady in L.A. and a man in Atlanta.

L.A. Lady: "Understand Your Investments"

She looked to be about 70 years (I never ask women their age), and she was distraught about her retirement. She normally goes to Mammoth Mountain every year to enjoy the wilderness, but she couldn't go this year. Due to the fall in the stock market, things were too tight.

I asked what she would advise the younger generation about the money and she responded, "Don't fall in love with your investments. I should have sold my stocks earlier this year, but my financial adviser kept telling me to 'stay on course.' As a result, I lost 2/3 of the value of my stock funds. When my son studied my situation, he told me I should sell my stocks to avoid losing more. After all, I could live several years on that money. So I sold."

She was so distraught at her huge loss that she didn't want to think about it. So I refrained from asking her any more questions. But here are my thoughts:

#1 - Since she was so close to retirement, why did she have such a large proportion of her retirement in stocks, seeing that she thought she would need the money soon? My mother's investments (she's well over 70) weren't really affected by the current crash, since she's not invested heavily in stocks.

#2 - She did what "the herd" always seems to do: sell low. When the stock market's this low, Warren Buffett's on a buying frenzy. In general, I don't want to be selling when Buffett's buying.

#3 - People simply must understand their investments. I feel really badly for her. People need to understand that stock funds can go down 2/3 and not bounce back for some time. If you don't want that kind of volatility, don't be in stocks.

Atlanta Man: Just Walk In and Ask People for Jobs

He's 72 years old and driving the shuttle from the Atlanta Airport. His advice to the younger generations:

#1 - Working is better than not working, even if it's at a low-paying job. You can't get ahead while you're not working. Sometimes he worked more than one job, just to see which one turned out better before dumping the worse job.

#2 - If you need a job, just walk up to people and ask them for a job, whether they say they're hiring or not. Employers seem to respect that kind of initiative. If they don't have a job, ask if they know anyone else who's hiring. (This advice jives with studies of those looking for jobs. Advertised job openings are flooded with applicants, making your odds on getting the job slim. Instead, decide what kind of job you want and approach those companies for a job, whether they are hiring or not. Maybe they just lost someone and you're the answer to their prayers. The last thing many companies want to do is to take time off from profitable work to start interviewing scores of people.)