Archives For April 2010

My neighbors’ son is getting married in June. Thinking about his wedding, made me think of all the “advice” I have for this couple.

I have a few things I can share from my own experience of being married nearly 17 years:

1. PATIENCE! It takes time for your finances to grow. When I moved to Texas in 1992, the ONLY stuff I brought with me was what I was able to fit in my 1988 Buick Skyhawk. Nearly 18 years later, we have a house full of stuff!

2. Don’t rush into any large purchases. Give yourselves time to adjust to married life before you decide where to live or what to drive.

3. DON’T GET INTO CREDIT CARD DEBT! Avoid it like the plague. You’ll be thankful you did.

4. Create and stick to a BUDGET! It doesn’t have to be super-detailed and it doesn’t have to ruin your life. However, you need to have a grasp on where your money is going.

5. Put money aside for emergencies—even if it’s a small amount. It’s amazing how even a small cushion of a few hundred dollars can help in times of need.

6. Start saving for a down payment on a house as soon as possible.

7. Start saving for retirement as soon as possible. DON’T LET THE ASSET OF TIME GET AWAY FROM YOU. Even if you can only afford to save a small amount each month, save it.

8. If your finances are tight, cut out what you don’t need. My wife and I went without cable for many years.

9. Give each of you an allowance that can be spent on anything you wish and don’t criticize each other’s purchases.

10. Have a grocery budget and plan meal menus.

11. Take your lunch to work.

12. Buy some term life insurance.

13. Sit down together and write out a list of financial goals and talk through the prioritizing of those goals.

14. Decide whether or not you’re going to tithe or give to charity.

15. Seek financial advice from your parents (as long as they are good role models).

16. Read some basic books on financial planning and investing. A great place to start is Jeff Opdyke’s Financially Ever After: The Couples’ Guide to Managing Money and Bill Schultheis’ The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life*. I have not read Opdyke’s book but am very familiar with his style, having read his columns in the Wall Street Journal.

Thoughts? What would you like to offer?

*Affiliate links

Yesterday I received an email from a guy who needed help with figuring out his personal rate of return using Excel’s XIRR formula. He had just started contributing to his 401(k):

3/26/2010 – $188.50
4/8/2010 – $377.02
4/16/2010 – Balance of $593.54

The XIRR formula requires both negative and positive numbers in order for it to work. So, the best thing to do is to enter contributions as negative numbers since they are “outflows” to you. Like this:

Then, the ending balance would be a positive number. I explained this to the reader and this morning he sent me back an email telling me that he did it but got a return of 314%, which didn’t seem correct because his company was telling him the answer was 8.53%.

Both answers are correct. This is because the XIRR formula is annualized. To get the personal rate of return for the this time period, we have to adjust the annualized number. It’s easy enough to do. You just use this formula:

PRR (Personal Rate of Return) = [(1 + 3.148)# of days/365] – 1

To get the number of days you simply subtract 3/26/2010 from 4/16/2010 to get 21 days.

PRR (Personal Rate of Return) = [4.14821/365] – 1

PRR (Personal Rate of Return) = [4.148.0575] – 1

PRR (Personal Rate of Return) = [1.08524] – 1

PRR (Personal Rate of Return) = .08524 or 8.52% (different due to rounding)

In other words, his personal rate of return over that 21-dayperiod was 8.53% but if you annualize the number, it’s 314%.

Anyway, I hope this was helpful. The XIRR formula can be confusing.

Consumer spending has always been an important part of our nation’s GDP. In fact, consumer spending currently makes up about 70% of the GDP. That’s a lot.

Has it always been that way? I wanted to find out so I did some research and found the GDP and Other Major NIPA Series, 1929–2009: II (PDF) on the Burreau of Economic Analysis’ website. The numbers are in that report but I still had to do some calculations to find out the relationship between the GDP and Consumer Spending. Once I ran the calculations, I created this graphic:

Although it’s hard to tell, consumer spending has grown to become a bigger slice of the GDP.

Here are the hard numbers if you’re interested:

From 1929 through 2008…

• the GDP has an annual growth rate of 3.32% (through 2008)

• consumer spending has grown at 3.22%.


From 1979 through 2008…

• the GDP has an annual growth rate of 2.79% (through 2008)

• consumer spending has grown at 3.06%.

So, in recent years, the gap has narrowed and consumer spending has become a more significant part of our GDP. This is due to the fact that manufacturing jobs are moving overseas and are being replaced by service jobs.

The troubling part to all this (at least to me) is that if consumers are up to their ears in debt and are working to pay down their debts, how can they keep up their spending? Not only that, but if consumers were borrowing in the past in order to fuel consumption, where are we headed for the future?


I have heard of this little exercise before but I’m going to use the one found on pages 55-57 in Bill Schulteis’ book, The New Coffeehouse Investor.

Imagine you’re a contestant. There are ten boxes. Each box has an amount of money in it ($1,000 to $10,000), like this:

You are asked to choose a box. Which box would you choose?

The obvious answer is the box with $10,000! Duh!

Now let’s change the game up a bit…

Now there are ten boxes. Each box contains the same amount of money as before except this time you only know the amount in one box and the rest of the boxes are covered up like this:

You can choose the box with $8,000 or you can take a change and choose another box. Now which box would you choose?

Most likely, you would choose the $8,000 because the chances of picking a box with an amount greater than $8,000 is pretty slim (2 out of 9 chance or 22%).

To put this game in perspective, Schulteis writes the following:

With the stock market average consistently outperforming 75 percent ot 85 percent of all managed mutual funds, it is a tribute to the massive marketing machine of Wall Street that so many investors spend so much time and effort trying to select top mutual funds instead of following the lead of state pension fund administrators who have a vested interest in choosing the $8,000 box instead of gambling.

It’s important to keep this silly little game in mind when dealing with Wall Street, because Wall Street loves to criticize the concept of indexing as a boring approach to investing in which you forego all opportunity to beat the stock market.

Notice he’s not saying that certain mutual funds can’t beat the index. Rather, he’s saying the chance of picking one of those funds is rather slim.


I like looking at numbers. I like taking situations and looking at them differently. One of the areas I have been thinking about lately is social security. A lot of us just dismiss social security as something that we pay into over a career and then the government will pay us back when we retire. This little exercise is an excerise in “what if…” analysis.

Imagine had you began a 30-year career in 1980, making $25,900 (the maximum amount of income subject to social security withholding). Imagine over your career you were always subject to maximum withholding. How much would you have paid into social security over those 30 years? Well, the graphic below will show you:

The wages subject to social security withholding rose 4.84% per year (geometric average) while the maximum amount paid in rose 5.53% per year (due to the increase in the withholding percentage). Over a 30-year career, you would have paid in over $115,000 and your employer would have paid in another $115,000. Your total contributions would have been over $230,000.

Of course this only tells part of the story because had you not paid social security, the money could have been invested elsewhere. Over the last thirty years (through 2009), the total return for the S&P 500 Index has been over 11.24% per year (.89% per month). If we assume fees of .50% per year, that brings the average annual total return down to 10.69% per year (.85% per month)*. Based on that, the account could have been worth over $739,000 at the end of 2009 (including the employer match). At a 4% withdrawal rate, the account would kick off nearly $30,000 in income the first year ($2,500 per month). Keep in mind that this is only for one person. Had your spouse also worked, the “account” would be much larger. According to the Social Security website, the maximum benefit in 2010 is $2,346 per month (at age 66).

I understand that social security is just that…SOCIAL SECURITY. Meaning, it’s supposed to fund a minimum retirement for people and is not actual accounts for those who make annual contributions (though the social security statement you receive makes it seem like you do have an account). This program could have been so much better had they stuck with a bare bones plan that took care of the indigent instead of everyone.

*My numbers may not appear to match up properly. The difference is due to rounding and the compounding of fees.

I found an interesting article, Incentives Not to Work, which contained this quote by Larry Summers in a book he published on economics:

“The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer.”

It’s a clear cut case of how something done to help people has unintentional consequences. People are going to do what’s in their best interest. If they can earn more in unemployment benefits than they can from working, then they will stay on unemployment. As long as we keep extending unemployment benefits, unemployment will continue to be a problem. If we don’t extend benefits and the benefits run out, people will find jobs—even if they are lower-paying jobs.

This is why it’s not the government’s job to be compassionate (yeah, a term President Bush used).

It’s been such a long time…

The last time the Dow Jones Industrial Average closed above 11,000 was September 26, 2008. That was 563 days ago.

It took the Dow 164 days to lose 41.25% of its value to close at a low of 6,547.05 on March 9, 2009. From there, it took 399 days to rise 68.11% to get back to a 11,000. What a ride.

Investing’s not for the faint of heart.