Are Your Adult Children Destroying Your Retirement?

This website receives compensation for products or services you obtain through the links on this site.

I can still remember the days when the term “generation gap” was all the rage. Back in the late 1960s and early 1970s, that term was bandied about to describe the yawning philosophical chasm between Baby Boomers and their parents on topics as diverse as the Vietnam War, the length of one’s hair, and different attitudes toward sex.

Over the years, though, the term has faded from widespread use. But another gap in inter-generational thinking grew steadily more evident when it came to saving and spending. The folks Tom Brokaw called “The Greatest Generation” grew up in Depression-era America, fought World War II, then scrimped,  saved, and made their way through college on the GI Bill, somehow managing to land jobs that enabled them to squirrel away enough scratch for an FHA-financed suburban starter home.

They might have arrived in Eisenhower-era prosperity. But having seen how tough a dollar could be to come by, they learned the value of every greenback they earned.

Around the same time, the dawn of TV and its benefactor, the Great American Marketing Machine, ushered in the idea that saving, budgeting and spending wisely were as passe as Zoot suits. “Why Wait? Buy now!” became the catchphrase of the Pepsi Generation. Their parents, who had experienced hardship in the gritty, teeming urban enclaves of the 1930s, weren’t easily hoodwinked by the hype. Not so their kids, who knew little other than full stomachs and leafy suburban idylls.

This two-cent history lesson easily explains a phenomenon that got its start about six years ago. It’s one that worries a great many financial advisers.

Once a parent . . .

Please note that reference to six years ago, the year that ushered in the Great Recession. Suddenly the generation that had rarely denied themselves anything began to find themselves in straits seen infrequently since the Great Depression.

As they lost their marriages, their jobs and in many cases their homes, those in their 40s and 50s turned to the only people they knew would be able to provide financial assistance. Those were the same people who, scarred by early exposure to deprivation, never lost the belief that you save for a rainy day.

Now you had the 70- and 80-year-olds of the Greatest Generation, folks who had been careful about finances to the point of always searching for the best savings account rates (crude as their methods were back then), being called upon to help bail out their overindulgent middle-aged sons and daughters.

Among the financial advisers who have flagged for me this lamentable state is Gregory De Jong, a Certified Financial Planner with Savant Capital Management in Naperville, Illinois. He estimates one quarter to one third of his retirement clients are providing some form of financial assistance to their adult offspring.

“It’s a bitter irony that the children who have treated themselves to larger homes, fancier cars and more lavish vacations than their parents ever had are now relying on mom and dad to bail them out, ” he told me, adding the parents’ desire to help their sons and daughters is jeopardizing their own retirement security.

Of particular concern to De Jong is that some elderly moms and dads may actually be enabling the poor fiscal habits of their sons and daughters.

“They would not think of pulling $20, 000 out of their IRA to take a vacation for themselves, ” he points out. “But they won’t hesitate to pull that much out to pay off their children’s credit card debts… It keeps the child from getting the financial advice they need regarding debt management.”

Also observing the trend is Gary Marriage, Jr., founder and CEO of Nature Coast Financial Advisors in Crystal River, Florida. “It’s like the parents are coming in to bail out their kids, ” he says. “Parents will always bend over backward for their children. But if they don’t set it up right, they’re going to go broke themselves.”

Involve third parties

The big problem with elderly parents aiding their middle-aged daughters and sons is emotion, experts say. When faced with the choice of giving aid or jeopardizing relationships with children and grandchildren, the older adult often falls victim to emotion and gives in to the pleas of his or her offspring.

Marriage and De Jong both strongly urge third parties to get involved in the loan of money from older to younger family members. “We tell them, ‘Bring in your adult children and let’s all sit down and see if this can be worked out, ‘” Marriage says. “I want to show the kids the effect on their parents of getting this loan.”

The loan terms should be agreed to by parent, offspring and third party, whom De Jong says can also be an accountant or business-savvy family friend. If the issue was caused by poor financial decision-making or debt management, the offer of financial assistance should be contingent on the younger adult taking credit counseling or a course on debt management, De Jong says.

Adds Marriage: “I tell my clients this is not a 100 percent foolproof plan. But at least it’s a structure, and they have something in writing everyone will follow. Just as you get a contract from the bank, you should give your child a contract, and make sure they follow it.”

I say it’s time to close the “generation gap” separating elderly parents from middle-age kids on issues of financial responsibility — and that should happen before the elderly are separated from their life savings.

10 Negotiation Tips for Introverts

This website receives compensation for products or services you obtain through the links on this site.

After our home, our next major purchase will be a car. I am an introvert and I hate conflicts, so naturally negotiation is stressful for me. But if I don’t speak up, I know I will get the short end of the stick and pay a lot more money for the car. Last time I bought a car, I handled the entire negotiation via email; I only went to the dealership to pick up the car. I am not sure if I can do the same thing this time. I am going to assume the haggling will be harder this time and be prepared. As a result, I compiled a list of tips to help me develop a strategy whenever I need to negotiate.

1. Knowledge is power: Do your research. An introvert’s strength is listening and staying focused; use it. Collect as much information as possible so that, when needed, you can immediately decide what a fair offer is. It is also helpful to carry a printout of all the information that you have collected to support what you think is fair. This serves two purposes:

  • It gives you something to focus on when you are overwhelmed.
  • If you are tired of saying the same thing over and over again, showing the evidence on paper to the salesman might kick things up a notch.

2. Decide on a budget: Know how much you want to spend on a particular item and stick to it. This should be self-explanatory. Knowing this will let you decide whether it is even worth spending your energy negotiating or if you have to save more cash to make your offer more attractive.

3. Negotiate one thing at a time: A lot of times, the salesman will try to talk you into thinking about the price of the car differently; if you are not prepared it might overwhelm you. For example, when we went shopping for my husband’s car, we had a dollar amount we wanted to pay for the car. But the salesman kept trying to steer us into thinking about the monthly payment vs. the price of the car. He kept increasing the loan period to reduce the monthly payment, which meant he essentially increased the price of the car without making us think about it. If we had not stuck to just negotiating the price, we would have paid a lot more for that car.

4. Know what you want (and don’t): This goes hand in hand with tip No. 3. Write down the exact product you want and any accessories you might like and how much you are willing to pay for those. This will help you avoid confusion when there are too many unnecessary accessories thrown into the mix.

5. Have the script ready: I started following the script strategy after reading it on Ramit Sethi’s site and it has served me well. I have scripts for pretty much everything – negotiating the rate down with the cable company every three months, negotiating to get lower rent and negotiating a telecommuting arrangement with my previous company.

6. Do it all via email (or other social media channels): I like working via email. It lets me put down all my thoughts without someone interrupting me and re-read/edit it as many times as I want before sending it. It also helps me to bring the conversation back to one focused topic if it gets distracting. Personally, it helps me avoid the anxiety I get with face-to-face haggling.

7. Have a list of options you can offer to make the deal better: What are you bringing to the table? Having this list right in front of you will help you steer the conversation to highlight the options you have to make the transaction more attractive to the other party. Can you pay cash? Can you buy right away? Do you have an excellent credit score? Why should they agree to the deal you are offering?

8. Go for the win-win: You are having this conversation only because each of you has something the other person wants. If you go with the mentality to “win” the negotiation, you might probably walk away empty-handed. This might not be the style of negotiation for everyone, but for me it works best when both parties reach a happy medium.

9. Don’t make it personal: Not all negotiation ends with a transaction. Just because you didn’t get the deal you wanted doesn’t mean something is wrong with you or that the other person had something personally against you. It just was not the best deal for both parties. Keep your bottom line – your budget, in mind and be ready to walk away if the deal doesn’t work out. You don’t have to buy something just because you want to be the nicer person.

10. Walk away: Walk away from the deal if it is not what you wanted. Sometimes, walking away is part of the negotiation to show you are not desperate, other times you really have to give up the deal; be prepared to do that.

Negotiation is a difficult skill to master even for experts who deal with people a lot. For introverts, we just have to prepare, play our strengths and plan wisely.

Are you an expert negotiator? What are your strategies?

The End of Two Buck Chuck?

This website receives compensation for products or services you obtain through the links on this site.

two buck chuck display

photo: Wikimedia Commons

We were at the Seattle airport a few years ago, my wife and I, checking in our baggage at the counter. We had some work to do in Chelan and were on our way back to Denver. As we made our way to the airport, we stopped at a Trader Joe’s to buy a case of their Charles Shaw Merlot. Everyone knows it as Two Buck Chuck because Trader Joe’s sold it for $1.99 a bottle for years in California (where they don’t tax wine). Because we didn’t have any Trader Joe’s stores in Colorado until earlier this year, it was a standard item on our shopping list whenever we visited another state. It was such a regular purchase when either of us traveled, we went so far as to buy one of those hard-sided file boxes with wheels and pull-out handle so it trundled behind you just like your carry-on luggage. A case of wine fits snugly, so it doesn’t move around as you haul it, and the hard sides protected the glass from breaking when it flies in the belly of the plane.

We expected the check-in to be routine, as it had been many times before. Not this time, though. Our attendant turned out to be an extreme rules person. She demanded to know what was inside the box. Wine, we told her. Brusque turned to hostile: Nope, she informed us firmly, the airline cannot accept a case of wine as checked baggage. We were speechless, because you never expect something to be denied when it’s been done routinely tens of times by tens of colleagues around the country. Never a question, never a word, just “Thank you for flying with us.” But not this time. No, Siree.

My wife’s recovery was quicker. My mouth still opened and closed soundlessly, like a fish on dry ground, when she pointed out, very politely, that we’ve done this many times before, with this exact file case and this exact airline. She might as well have addressed an iceberg. Mouth corners down, lips pressed firmly together, the ground attendant let my wife finish, but was neither impressed nor swayed. Clearly, those other employees did not attend her permissible baggage classes. All my wife got was a quick, firm, shake of the head. “Anything else to check in?”

After a few desperate seconds, my wife, said, more to herself than to the attendant, “Oh no! We’re from Colorado, and there are no Trader Joe’s there. This was our only chance to get in some TJ shopping.”

The iceberg melted faster than you could say “Chuck.” You’ve never seen a change so swift, or so complete. “You have no Trader Joe’s?” Mortification and horror dripped from every syllable. “Well, that’s just terrible! Here, Honey, let me help you get that checked in.” And we were on our way.

Which other wine elicits such a strong emotional response (even from the Gestapo)? That’s not the only emotional response Two Buck Chuck provokes. Shoppers on a budget just love the stuff and can’t get enough — which other label has sold 800 million bottles in the past 12 years? That’s almost $2 billion — through a single retailer, one without total national coverage. If that’s not “loves the stuff, ” what is?

Another strong emotional response is derision and scorn, with perhaps not a little hate thrown in. Wine makers in the famed Napa region of California despise Charles Shaw’s maker and pass up no opportunity to say so. Who would like someone who drops the average price for your product, in a recession, when everyone is hurting?

Who is this Charles Shaw fellow, anyway? (He is none other, of course, than probably the most famous incognito man in the country.) Actually, it’s a tale of two people. In 1974, Charles F. Shaw and his wife Lucy bought 70 acres in the heart of the Napa Valley with her inheritance and started a winery. This was before buying wine farms in Napa Valley became the thing to do for the idle rich. Unfortunately,  the winery didn’t do well financially, and neither did the marriage. In 1991, the couple divorced and Lucy kept the winery. Charles left town and started a vineyard in Michigan. The winery bearing his name went bankrupt soon after he left, at which point the “other” Charles Shaw appeared.

Only his name wasn’t Charles Shaw. It is Fred Franzia, head of Bronco Wine Company, based near Salinas, in California’s Central Valley. Mr. Franzia bought the Charles Shaw label and sat on it for almost a decade.

The recession following the dot-com bust provided the perfect opportunity for Mr. Franzia. Don’t believe the many urban legends surrounding the absurdly low price. No, Mr. Franzia did not have a divorce and a need to devalue the winery, and no, airlines were not forced to dump wine on the market. Bronco Wine simply bought up large quantities of good quality wine in the recession, bottled it with the new label, and offered it to Trader Joe’s for a low enough price to enable the retailer to sell it for $1.99 a bottle in 2002.

The timing was perfect, and the quality was surprising. In 2004 and 2005, Charles Shaw wines won several prizes. The wine flew off the shelves — so much so that Trader Joe’s simply stacked the cases on the floor and cut a few open for a display. If you can get an entire case for the price of a bottle of medium-quality wine, why not buy the whole case?

Good things never last, do they? In 2013, Trader Joe’s announced what everyone had been waiting for for many years: the price of Two Buck Chuck was raised by fifty cents a bottle. How would the market react? Outside of California, the price had always been $3 a bottle or more, because of taxes and transportation.

From all accounts, the price hike of 25 percent, on a brand so famous the news made “Time” magazine and most of the major TV networks, hardly registered. Isn’t that amazing?

Okay, so what’s the moral or point of this post? A few:

1. The good things in life aren’t always the most expensive. Nobody would confuse Charles Shaw wine with those labels which win gold medals year after year … but those labels don’t generate billions of dollars from rabidly loyal fans, either. Remember this the next time you go shopping for … just about anything. Learn to identify quality — and a good bargain — when you see one!

2. There is life after failure. Charles Shaw, the one with the real name, no doubt faced some bitter feelings of disappointment when his winery and marriage failed. But he’s remarried and is making another go of it. And running another winery, specializing in riesling.

Oh, one more: If you wait long enough, you, too, will eventually have a Trader Joe’s near you. Then perhaps you won’t rankle overworked airline employees trying to make a buck or two. 🙂

5 Reasons to be Optimistic About the Economy

This website receives compensation for products or services you obtain through the links on this site.

I find that defaulting to pessimism about the economy is a great way to hedge your emotional bets. If things turn out well, then I can count it a pleasant surprise. If things turn out badly, at least I have the satisfaction of having been right.

Lately though, there have been some cracks in my gloomy facade. I look at economic data every day, and there is so much information that there is bound to be a mix of bad and good. (You can pretty much always spin the economy however you please.) Still, beyond the usual week-to-week gyration of data points, there are a number of trends that seem to have real significance for the economy — and many of these happen to be positive.

So, coming from a confirmed skeptic, it should mean something that I can find five reasons to be optimistic about the economy:

  1. Job growth is up. First, some stats, then a discussion of what it all means. Job growth for the first half of 2014 reached nearly 1.4 million, the best first half to any year since 1999. Through July, employment growth had topped 200, 000 for six consecutive months, the first time that has happened since 1997. People argue about the significance of the unemployment rate, because it does not capture the extent to which people who cannot find a job have stopped looking, or are underemployed in low-paying jobs. However, whatever the real unemployment rate is, if the economy keeps creating significant amounts of jobs month after month, eventually people are going to be encouraged enough to get back into the workforce, and wages will grow as demand for labor rises. Beyond that, though, job growth is the fuel that can help the rest of the economy run. Put those much-needed paychecks back into the economy, and it should have a magnifier effect from the resulting increase in spending.
  2. Economic growth bounced back beautifully from a bad first quarter. The economy actually shrunk in the first quarter of 2014, at an inflation-adjusted annual rate of 2.1 percent. Everybody blamed the weather, but since GDP statistics are seasonally-adjusted, one had to wonder whether last winter was really that much worse than the norm. Plus, even if the contraction of economic activity were due entirely to the weather, that kind of setback can have a lingering effect. So, second quarter GDP became a key economic release to watch. Real GDP growth for the second quarter was estimated at an annual rate of 4.0 percent initially, and was recently revised upward to 4.2 percent. Growth for 2014 may still come up short of original expectations because of the contraction in the first quarter, but the important thing going forward is that the economy seems to have recovered completely from that setback.
  3. Mortgage rates remain low. Despite reduced Federal Reserve intervention,  mortgage rates have remained in a holding pattern at just over 4 percent. Can they stay that low forever? Probably not, but they don’t need to. This was always going to be a timing game — the goal was to have low mortgage rates support the housing market just long enough for the economy to gather its momentum, at which point stronger growth could provide enough demand to keep the housing market healthy even once mortgage rates started to rise. The key was for the economy to come around before mortgage rates rose significantly, and it looks like that may be happening.
  4. Housing prices continue to recover. Home prices have been rising since the beginning of 2012, which not only reflects a restoration of housing demand, but also has allowed more and more homeowners to get their mortgages out from under water. This gives those homeowners an opportunity to take advantage of still-low mortgage rates by refinancing, which in turn makes more money available to be put back into the economy.
  5. Inflation remains low. Janet Yellen and the Fed have worried that inflation might be too low, but that seems like a nice problem to have. After all, it’s not as if deflation has taken hold; instead, we have had a slow and steady inflation rate of 2 percent over the past year. That has allowed interest rates to remain low, which in turn has made many of the developments listed above possible.

You may notice I didn’t mention the record high the stock market recently reached. While I’m certainly happy with the gains, investing is a forward-looking exercise, and after five years of a rising market, one has to wonder where the market can go from here.

The irony might be that after five years of a strong stock market and a mediocre economy, we might be in for a few years of a mediocre stock market and a strong economy. It’s an example of why, no matter how optimistic you choose to be about your finances and investments, optimism should always be tempered by caution.

5 Questions to Ask Yourself Before Considering Homeownership

This website receives compensation for products or services you obtain through the links on this site.

This post comes from Sean T. Johnston at our partner site Zing!

Being a renter has its advantages. For the most part, you don’t need to concern yourself with costly indoor or outdoor maintenance. When your lease is up, you can just leave. You don’t have to worry about selling the property.

But as convenient as renting is, you are, in essence, paying someone else’s mortgage. While the responsibilities of being a homeowner are greater, so are the rewards. You can make whatever modifications you’d like without having to worry about a landlord. In addition, there are lots of tax deduction options available to homeowners that aren’t there for renters.

But perhaps the most important distinction is the fact that, when you pay your mortgage, you’re building equity in something that has value. You can borrow against this equity to pay for important purchases, giving you credit options not available to renters. You own the property too, and you can sell it whenever you want.

If homeownership sounds like something you see in your future, here are a few financial questions you need to make sure you have the right answer to.

Do You Have a Steady Income?

You probably already know this, but buying a home is a pretty sizable financial commitment. If you’re like most of us, you’ll be paying off the house for fifteen to thirty years after you sign the paperwork. To do this, you’re going to need a steady,  reliable stream of income.

One of the first steps of the underwriting process will be income verification. You’ll need to submit your paystubs and verify your income history. Mortgage underwriters would like to see steady income; gaps or fluctuations could raise red flags.

It’s not just about how much you make, but how much you owe as well. This relationship is called your debt-to-income ratio (DTI). Take the amount that you make each month and divide it by the total of the minimum payments on your debt. Your DTI is like your golf score – the lower, the better. While each person’s financial circumstances are different, if your DTI is 75% or lower, you can probably qualify.

How Much House Can You Afford?

This is one of the most important and fundamental questions when considering whether you should buy a home. Since you could conceivably be paying your house off for decades, you want to make sure the monthly payments are something you can fit into your budget.

The first thing you need to do is get a list together with all of your monthly expenses. Include everything that you pay each month and everything that you make each month.

Take a look at what’s left over each month and figure out what a comfortable mortgage payment would be. Just because you have $2, 000 left over doesn’t mean you want to shoot for a $2, 000 mortgage payment. First of all, you’ll also need to include taxes and insurance,  plus a good savings pad for yourself to pay for unanticipated home expenses or surprises that come up.

It’s better to have a lot of money left over each month than to have a house that you’re struggling to make payments on.

How’s Your Credit Looking?

In addition to your DTI, your credit score is going to be a major factor in determining your eligibility to get a mortgage on a new house.

Fair or not, your credit score essentially tells banks and lending institutions what kind of risk is involved in lending money to you. There are a lot of factors that go into your credit score including how much credit you use, how much you currently owe and your payment history.

If your credit score is 620 or above, you’re probably in decent shape to get a mortgage. If you’re unsure or you know that your credit score could use some work, you have options. Check out Quizzle. There, you can receive a free credit report and credit score and take advantage of tools and tips to help you improve your score and help you achieve your goals of homeownership.

Are You Ready to Put Down Roots?

In addition to the financial commitment you make when you buy a house, you’re also making a commitment to your neighborhood. Purchasing a home means you’re looking to stay in that area for a while, if for no other reason than the expense and complicated nature of selling a house.

If you have a job that requires you to relocate frequently, you might want to consider renting until you feel confident that you’ll be able to stay in one location for a few years.

Can You Handle the Maintenance Costs?

One of the biggest bummers associated with homeownership is the cost of maintaining your property. It’s kind of nice being a renter. Most of the time, if something breaks, you just have to call your landlord. When you buy a home, you are the landlord, so you’d better be ready.

It’s not always the big stuff like a furnace or a roof that can cost thousands of dollars. The little things, stuff that maybe you never even thought about before, can add up. Random items like lighting sconces, landscape edging, garage storage, brick pavers and furnace filters are all your responsibility.

I’m not trying to paint a bleak picture, but the responsibilities of maintaining a property can quickly overwhelm new homeowners. Make sure you know exactly what’s involved before you sign on that dotted line. A thorough inspection by a good home inspector is always a worthwhile investment before you buy a house.

If you’ve carefully considered the questions above and feel confident that homeownership is in your future,  click here to get started.

More stories from Zing:

How to Maximize Your Summer on a Minimal Budget

Are Timeshares Worth the Money?

Get Around Town with These Taxi Apps

Meet the Enemy of Retirement Security: Procrastination

This website receives compensation for products or services you obtain through the links on this site.

Last year, I signed up for a program called “Connections” through my college alma mater. The program is designed to bring a group of the college’s current juniors and seniors to the big city, for a pow-wow with both recent graduates and ancient grads like myself, who work in the students’ prospective career fields.

On the day of the confab, a handful of us alumni sat on the dais, facing a dozen fresh-faced undergrads. After we alums painted a verbal picture for the kids of the work world we inhabit on a daily basis, it was time for the question-and-answer session. It took a while, but then one coed held up her hand and asked, “What do you wish you knew when you were our age that you know now?”

It was the question I’d waited for, the one that allowed me to make what I hoped would be a significant contribution to the collective joy of the student group, not then but approximately four to five decades into the future.

“This isn’t so much a career issue as it is a life issue, ” I intoned. “But when I got handed my sheepskin with the rest of the Class of 1976 one sunny May Sunday afternoon in that bicentennial year, I wish I’d known this above all:

“I wish I’d known that my youth was a tool — a golden, glistening, priceless instrument of wealth accumulation — that I could leverage to accumulate vast financial assets, and do so fairly effortlessly. It took me a dozen years after graduation to grasp that lesson, and even that late in the game I still managed to parlay the wisdom into a nice, tidy sum. But I can only imagine what I’d been able to accomplish had I been hip to this truth a decade earlier.”

Off 180 degrees

Most college grads leave academia with a view of the future stretching to infinity. It’s so far off they can’t fathom turning 40, let alone picture their retirement years. Having spent 17 years — almost their entire lives — toiling away in the classroom to reach college graduate status, they’re convinced of one thing: They can start saving a lot later for the day seemingly centuries off when they retire. For right now, it’s time to reward themselves for all that work by spending, not saving.

In making that assumption, they’ve got it wrong — exactly 180 degrees wrong. That’s because the most important, powerful savings they will ever put away are the savings they bank the very first day they are ever paid. The second most powerful savings? The savings banked the day after the first day they are paid.

By the time paychecks are handed to people in their 50s or even their fairly youthful 40s, some of the power to grow savings those folks once enjoyed has been sapped. There are fewer years left until they retire, or are forced out the workforce by a younger boss who doesn’t much care for older workers.

That means there are fewer years for savings to compound. Compounding was once referred to by Albert Einstein as the “Eighth Wonder of the World, ” because of its amazing way of growing savings over long periods.

“Compound interest is the Eighth Wonder of the World, ” remarked the Great One. “He who understands it earns it. He who doesn’t understand it pays it.”

Put savings into a tax-advantaged account, such as a 401(k), if offered one at work, or an Individual Retirement Account, and you have the Eighth Wonder of the World on steroids. It’s not only that your principal is making interest every year, and your interest is making interest every year, and your reinvested dividends are making interest every year.

It’s not even that all that together is building and building, year after year. In a tax-privileged account all of those gains are not taxed year to year, so they grow at an even faster clip. Wait even one paycheck to start saving, and you have a two-week shorter time frame for that miracle to weave its magic. The result is that the most powerful two-week period you’ll ever have to save has been wasted. Think two weeks of savings probably won’t amount to much? Try compounding them in a tax-deferred savings vehicle for 45 years and you may reassess the notion.

Dramatic evidence

A few years ago, a study looked at two groups of savers. One group started saving at 25, saved x number of dollars a year until 35, and never saved again. This group just let those savings build through the power of compounding.

A second group of savers started the day after the first group stopped saving. Starting at 35, they saved the same x number of dollars a year for not 10 years but 30 years, all the way to traditional retirement age at 65.

What group came out ahead at 65? That’s right. It’s the first group. The fact they saved earlier more than compensated for the fact that they saved much less.

If you’re starting off fresh from college, you too have a golden, gleaming tool called at your disposal. No it’s not zero-percent balance transfer credit cards or knowing how to save on car insurance. It’s what Einstein called the Eighth Wonder of the World.

Don’t leave that tool in a closet and pull it out when you’re middle-aged. Use it from the very first day, when it has the most power.

After leveraging the Eighth Wonder of the World for four or five decades, you just might be able to take the rest of your life off, feeling free to visit the first seven.

Should You Spend Your Money or Your Time?

This website receives compensation for products or services you obtain through the links on this site.

We’ve all heard that time is money. It can mean various things to various people.

  • Over time, if you save and invest, you will have more money.
  • If you waste time, the money you earn will be less.
  • The clock is ticking, and every moment you aren’t earning is money lost. Every moment you aren’t enjoying life is life forever lost.

If we spend our time instead of our money, we miss other opportunities. If we spend our money instead of our time, we lose the money.

When we first start out in life, we often don’t have a lot of money and don’t have much choice other than to spend the time. After we have been at it for a while, however, we often do have a choice. We can decide when we want to do something ourselves and when we want to spend the money to hire someone.

But how do people decide whether to spend money or time?

Spend time when you don’t have the money

It is a pretty easy choice if you don’t have the money. Either you do without or you do it yourself. It isn’t necessarily a bad thing to be forced to try new tasks. You may find that you actually enjoy whatever it is you feel you have to get done. There are so many resources available now that make it easy to figure out how to do things: You Tube videos abound with people showing you how to do everything from sewing a seam to building a house; Internet searches yield many options on things others have tried and used to get a job done; and of course, the library and mentors are also available to assist.

Spend time when you want to learn a new skill or have a new experience

People are curious. We like to explore and try new things — just to see if we can. You don’t have to limit yourself to trying new fun things like skydiving or surfing; you can find satisfaction in learning how to change a toilet flapper valve or refinishing a piece of furniture.

I think we are the sum of our biology and our experiences in life. Learning new things adds to our individuality and uniqueness (and sometimes our resume).

Spend time when you want to teach someone else a new skill

This one is especially true with your children or grandchildren. Teaching someone else a skill or concept can be very enriching for both of you. You get the thrill of seeing someone else benefit from your knowledge and experience as well as the joy of building a deeper relationship. They get the benefit of a hands-on mentor, showing and telling them how to do something and guiding them step by step to independently performing the task.

Spend time when you enjoy doing the thing in question

Why pay someone else to do the things you enjoy? Life should be filled with enjoyable experiences and many of the things we need to do will fit that category. If you enjoy the outdoors and like exercise, perhaps you should cut your own lawn or do your own gardening. If you like puzzles, fixing a broken item may be a nice little puzzle for you to solve.

Spend money when it is more profitable for you to do something other than the task at hand

Business 101 advice is to hire someone to do the things that you don’t do well and that take your time away from more productive tasks (when your business reaches the point where you can afford to do so). The same can apply to your personal life: If your life experience benefits more from running the local charity drive, then go ahead and free up your time to do so by hiring a house cleaner or lawn service.

Spend money when you don’t have the expertise and aren’t interested to acquire it

Some things just never appeal to us. We avoid trying to learn about them. If you have the money and are presented with such a task, consider delegating it to someone for pay. I’ve never been very interested in learning how to work on a car engine or install new shocks and the like. I don’t really want the expertise. I can’t imagine needing it very frequently, and it would take me a long time to learn. Since I have the money, I farm out that kind of work to others that are trained for it.

Spend money if safety is an issue if you did the task

I would not cut down a large tree close to my house. Climbing up to chop off the limbs would be dangerous for both me and my house. I would not represent myself in a lawsuit. Doing so could be dangerous to my money and my freedom.

How do you decide when to hire it out to get it done and when to do it yourself?

Fannie Mae is Ending the Home Path Program

This website receives compensation for products or services you obtain through the links on this site.

This post comes from Mike Nickele at our partner site Zing!

I’ve got some good news and some bad news on the housing front. First, the good news: The market is ticking up and the inventory of foreclosed homes is dwindling. The bad news: For just that reason, Fannie Mae is ending its HomePath program.

Fannie Mae’s HomePath program helps buyers of foreclosed properties get cost-effective mortgages, including cash for repairs and remodeling on homes owned by Fannie Mae. The HomePath program currently offers a number of incentives for home buyers: You can put down as little as 5%, there’s no mortgage insurance requirement, and you don’t have to get an appraisal.

Also to end is Fannie’s HomePath Renovation Mortgage, which allows buyers to borrow extra cash – up to 35% of the purchase price, with a maximum of $35, 000 – for light to moderate repairs and updates to a foreclosed property.

You can check out the HomePath program at, but be forewarned that it all comes to an end on October 6, 2014 – so you better act fast if you still want to get in on it!

But don’t be forlorn, as Fannie’s making up for these program withdrawals with a number of financing flexibilities. Fannie Mae will allow interested-party contributions (contributions from the seller, the lender or anyone who stands to benefit from the sale) of up to 6% of the selling price, up from 3%. And, it also now allows properties with Fannie Mae-imposed resale restrictions – restrictions which require a length of time before reselling the property – to qualify for Fannie Mae-backed mortgages.

More stories from Zing:

How to Maximize Your Summer on a Minimal Budget

Are Timeshares Worth the Money?

Get Around Town with These Taxi Apps

Is Burger King Guilty of Tax Inversion?

This website receives compensation for products or services you obtain through the links on this site.

“Burger King abdicates US citizenship, ” shouted the normally staid BBC. Burger King seems to be vilified everywhere for its plan to merge with Tim Hortons, the Canadian breakfast giant. Why? This thing called tax inversion.

The goal of this post is simply to break through the rhetoric and lay out the basic issues of the deal.

Tax inversion: what they say

The way critics present it, it’s nothing less than outright treason. Pres. Obama, speaking at a college in Los Angeles,  called them “corporate deserters … technically renouncing their U.S. citizenship … fleeing the country to get out of paying their fair share of taxes.” Ouch. Sen. Sherrod Brown of Ohio went further, urging a boycott of Burger King in favor of competitors like Wendy’s and White Castle, because they “… haven’t abandoned their country or customers.”

In other words, corporations guilty of this thing called tax inversion are not going to get ticker tape parades in their honor anytime soon. Congress has responded to the practice with legislation likened to an “iron curtain, ” keeping those corporations in the USA by legislative force. In 2004, they passed a law which stopped the growing trend of tax inversions in its tracks, as this chart from Bloomberg clearly shows. However, the law had to leave an opening for genuine mergers, and this is the opening an increasing number of companies have jumped through in the past two or three years. So, they tightened up those iron curtain laws again in 2012.

And now this. First it was the highly publicized Pfizer/AstraZeneca merger. Congress, frustrated at the impertinence of these corporate traitors, is throwing up yet another iron curtain: laws with inflammatory titles like the Stop Corporate Inversions Act and the No Federal Contracts for Corporate Deserters Act.

On the other side of the debate, you have capitalist apologists who think it’s the divine right of every corporation to pursue the almighty dollar, the heck with money-grubbing politicos and bureaucrats.

What exactly is tax inversion?

Is tax inversion really an American corporation fleeing its country like the draft dodgers of a few decades ago, and abandoning its employees and customers as the good senator from Ohio called it? Is a company firing all its U.S. staff, packing everything in a U-Haul convoy, and hightailing it across the border to set up shop all afresh, all so they don’t have to pay a nickel of taxes while they reap the benefits of doing business in America?

The truth is far more mundane. Tax inverting corporations don’t leave, they don’t lay people off, they don’t move offices, and they can’t renounce any citizenship because they don’t have such a thing as a citizenship. So, in reality, nothing happens, nobody abandons anybody.

Really? Yes. The central issue surrounding tax inversion is America’s quirky requirement that corporations headquartered in America pay tax on money they earn in other countries.

Why is that quirky? Recognizing that we all live in a global village, most countries have tax codes which tax corporations only for income earned in that country. In other words, they don’t tax income earned in other countries. America is different. We tax corporations on all income they make everywhere. We give them a credit for the income taxes they pay in Canada, Ireland, or wherever — but, in total, they still have to pay the American corporate income tax rate on all worldwide income, no matter where they earned the income.

An example

Imagine two identical companies, Canadian Tim and American King. Both earn $1 million in profits. Therefore:

  • American King pays $350, 000 in income tax, while
  • Canadian Tim only pays $250, 000, because Canada’s corporate tax rate is a bit lower.

In total, both companies pay $600, 000 in taxes to their respective governments. Now let’s say the two want to merge. There are two ways they can do it:

Option 1: Canadian Tim buys American King. Their new tax bill will look like this:

  • Pay $250, 000 to Canada on its Canadian operations.
  • Pay $350, 000 to the IRS on its U.S. operations.

The total comes to $600, 000 — no different than it was before, when the two companies were separate.

Option 2: American King buys Canadian Tim. Now their new tax bill will grow:

  • Pay $250, 000 to the Canadian tax authorities on Canadian operations (as before)
  • Pay $350, 000 to the IRS on American operations (as before)
  • Pay $100, 000 to the IRS on Canadian profits (the difference between the U.S. 35 percent and the Canadian 25 percent)

So, the Option 2 total tax adds up to $700, 000 — for the exact same operations in the exact same countries.

The “Super Tax”

That last $100, 000 in Option 2 above, then, amounts to a “super tax” on non-American earnings for corporations headquartered in America.

In the example, the new merged entity’s tax bills stay the same as before the merger. There are no savings, reductions, escapes or dodges. All there is, is no increase.

And that, as you probably guessed from the example, is what’s about to happen with the Tim Hortons / Burger King merger: Burger King’s 70 percent owner is going to create an entirely new corporation in Canada. That corporation (as yet unnamed) will purchase both Burger King and Tim Hortons.

After the merger, Tim Hortons will continue its Canadian dominance (it’s bigger than McDonald’s there, despite being primarily a breakfast destination). Burger King will continue to operate from its Miami headquarters, employ the same American workers, serve the same American customers and pay the same American taxes it paid until now. It is not fleeing the country, it’s not dodging any of the taxes it has been paying on its American operations, and it’s not doing anything illegal or even “wrong.”

Its only crime is that the new entity will avoid paying the American “super tax” on its Tim Hortons earnings. Lost in the rhetoric is the fact that Tim Hortons has twice the revenues and earnings of Burger King. They’re a dominant Canadian institution, like Starbucks and McDonald’s are here in America. Why would America feel cheated that those earnings are not going to be “super taxed” in America? Does it make sense to you now that they’re structuring the merger to have the new HQ in Canada?

Unfortunately, because the super tax compelled them to base the company in Canada (all the major players are American), it doesn’t take a rocket scientist to guess that all Burger King’s existing foreign operations will be moved to Canada as well. Because of that, the USA will lose the super tax it received on BK’s existing foreign operations in the past.

Last point on the merger: Remember those new laws Congress is furiously working on now? The Burger King / Tim Hortons merger would still be legal, because of how big Tim Hortons is. The fact remains: Any legislation has to allow for legitimate business combinations across borders.

Is there a solution?

That losing of the super tax on foreign operations,  that is the main conflict between corporations and government. Pfizer’s proposed purchase of British drugmaker AstraZeneca could have led to a significant reduction in the $4 billion of income taxes Pfizer currently pays (25 percent of their pretax income). When compared, the less than $90 million Burger King pays is a pittance.

In theory, all Congress has to do is lower the corporate tax rate to something in line with most other countries, which would seem to be in the 20 to 25 percent neighborhood. Corporate income tax at present makes up only about 11 percent of U.S. income taxes:

US Tax revenue by source 2013
U.S. Tax revenues, 2012 (in $’ billion)

Of the corporate tax revenues, the super tax probably doesn’t add up to more than around 1 to 2 percent. (It’s only on foreign earnings, after all.) However, it is well known that both parties in Congress have hardened their ideological battle lines, so the odds of a sensible tax code change are slim.

The goal of this post was to lay out the issues behind the proposed Burger King/Tim Hortons merger in order that you can judge for yourself how much is rhetoric. Then, when the next tax inversion deal is announced or rumored, you’ll be able to figure out what’s really happening.

Moral of the story?

When you look for companies to invest in, look for those which derive a growing portion of their income from overseas. It’s only a matter of time before they escape the “super tax, ” either through tax reform or finding a way to restructure the business in a way that removes the “super tax” burden.

What do you think of the “super tax”?

Saving for Retirement: How to Avoid the Roads to Ruin

This website receives compensation for products or services you obtain through the links on this site.

They say there are many paths to financial success, but if you accept the idea that these are two-way streets, that means there are also many paths to financial ruin.

Maybe my view is skewed by the fact that people tend to come to me for financial advice once they are already in serious trouble. Then again, my interactions may just be representative of the national condition. A recent study by the Urban Institute estimated that some 77 million Americans have outstanding debt which has been reported to a collection agency, with an average amount owed of $5, 200.

That amount owed isn’t even the real problem. The real problem is that if they are not keeping up with their bills, these people almost certainly are not saving enough for retirement. That will lead to even bigger problems later on.

How do these people get into such bad financial condition? There are many pathways, but some you see taken over and over. Examining how people got into financial difficulty should not be an exercise in criticism or pity; it should be a learning experience about the nature of financial risk.

Roads to ruin

Here are some of the roads to financial ruin that seem all-too-frequently traveled:

  1. Overspending. This has classically been attributed to a keeping-up-with-the-Joneses mentality, but there may be an even more sinister form of peer pressure at work here. As Americans sink further and further into debt, it has become commonplace to know someone with tens of thousands of dollars in credit card balances. That can make a person feel better if he only owes a few thousand. Do not measure yourself by today’s debt standards; those standards are dangerously low.
  2. Job setbacks. The economy in recent years has made periods of unemployment or underemployment commonplace, and the mistake I see most often is people trying to carry on their previous lifestyle, in the belief the setback is only temporary. A drop in pay may not be temporary, and even if it is, why get yourself into a debt hole in the meantime?
  3. Inadequate retirement savings. The problem is that retirement savings is easy to ignore, right up to the point where you run out of money. This is just one of those things that requires willpower and a long-term outlook — and a no-excuses mentality.
  4. An investment setback in retirement. The saddest cases I’ve seen have been people who thought they had done all the right things, and made it to retirement with a decent nest egg only to suddenly suffer major investment losses. Bad luck can happen to anyone, but there seems to be a desire among people accustomed to making a good living to still to be getting ahead after they retire. This can lead to excessive risk-taking and, if it backfires, it is tough to recover from in retirement.

It would be all too easy to look at these as examples of individual mistakes that people have made, except that the same type of mistakes occur so frequently that it might be more instructive to look at each of these as a form of financial risk.

Omnipresent risk

You can probably cite additional examples of ways people you have known have found themselves facing financial ruin, and the fault is often not their own. That’s the most sobering thing about this. The number of setbacks possible on the road to retirement is a reminder of just how multifaceted and omnipresent risk is.

In turn, that realization puts retirement planning in perspective. We generate our assumptions, we crunch our numbers, and we spit out detailed results. That detail can give this all the illusion of precision, but it is an illusion. It is not an exact science, and if any one of those assumptions is off by a little bit, the results will be very different when you project them out thirty years or so.

That doesn’t mean retirement planning is futile. It just has to be approached as a hands-on process where you take nothing for granted. The omnipresence of risk means four things:

  1. Regularly check your assumptions. There are a lot of moving parts to retirement planning, so keeping them in line is a constant effort.
  2. Don’t spend your lead. If your investment portfolio gets a little ahead of where you thought it would be, don’t view it as a bonus to be spent. View it as a cushion against the next setback.
  3. Don’t take a contribution holiday. Several big-time pension plans did this in the 1990s, with disastrous results. Just because investment results have been good doesn’t mean you should ease back on your retirement plan contributions.
  4. Retirement is not the finish line. If you make it to retirement with your savings in good shape, congratulations, but remember you have years of work still to do.

Sadly, there are many roads to financial ruin, but avoiding complacency is your best approach to staying off those roads.