Too Frugal For Your Own Good

By: Roshawn Watson


There are a plethora of articles telling us to be more frugal. Some tell us to get rid of our lattes and gym memberships. Some even tout “frugality” for “frugality” sake, essentially arguing the perils of consumerism. While I am an advocate for frugality, as I think we should be financially responsible, the dangers of frugality often slip under the radar.


Here’s my question to you (and nearly every author of a frugality article):

When is a $10 coffee worth more than a $10 buffet meal?

Frugality Hindering Economic Productivity

This is perhaps the most salacious out of all the topics that we’ll cover today.To be honest, I’m hesitant to bring it up because it may send a  duplicitous message: frugality is good except when it’s not. Huh?  


Here’s the key consideration though: if you spend an inordinate amount of time at your job and are extremely economically productive, will slashing your grocery bill by 15% be financially beneficial if it takes you 2 hours a week to achieve? It is quite possible that the two hours would be much better spent polishing that presentation, project, report, etc, so that you can continue focusing your efforts on earning money.


Consider the partner at the law firm or the cardiologist at the prestigious hospital. They can all build substantial net worth even without being particularly frugal. The data show that these careers have a higher income; for example, a whopping 38% and 24% of physicians and attorneys are high-income producers (income greater than $200,000), respectively. They also comprise of a high percent of millionaires if you look at the occupational groups as a whole: 10% of physicians and ~9% of attorneys are millionaires.  If people in these types of positions are purchasing certain conveniences that ultimately enhance their economic productivity by advancing their careers, this could potentially be a better financial plan, given their orientation to produce high incomes, than expending extra energy on marginal decreases in expenses.


That’s precisely why I personally struggle with this: sometimes career and financial objectives conflict with each other, at least temporarily. For example, it’s true I can save money by not purchasing membership to some trade publications and organizations, but I would ultimately suffer career-wise by neglecting pertinent intellectual capital important to my vocation. Cutting important expenses in the name of frugality is really just being penny-wise but pound-foolish. I still don’t relish in paying for expensive memberships, but that’s part of being a professional in this knowledge-based economy.


My primary caution is that it is easy to use this same rationale as a license to purchase things that are clearly to one’s financial detriment all in the name of improving oneself. Moreover, some apply this same logic to justify purchases solely for “image sake” instead of improvement sake: if I feel better, I make more. If you are going to become “less frugal” to increase your economic productivity, be careful that the purchases are really necessary and that pendulum doesn’t swing too far in the wrong direction.


Frugality Decreasing Quality of Life

If frugality truly decreases the quality of your life, consider whether the foregone purchases SHOULD be in your budget. I’m not suggesting spending beyond the constraints of your budget. However, there are some conveniences that should be in your life even if they don’t directly increase your bottom line. For example, although some of the data is conflicting, it is generally believed that eating healthy requires more money than eating unhealthy. This is not just about paying premium prices at stores such as Whole Foods either. For example, I know that I get much more food if I get an Angus Burger Extra Value meal from Micky D’s compared with their Southwest Chicken Salad. Also, the grilled chicken sandwich at my local Micky’s D’s is also more expensive than both their fried chicken sandwiches and their delectable Angus burgers. Simply put, the price per pound of healthier options tends to be more, but that doesn’t negate the benefit of the healthier options.  Another example is traveling:  saving money is less important than other considerations (i.e. time, safety, and comfort). Of course, it makes more sense to fly rather than take a bus from Chicago to LA. The lost time would likely cost you. Also, there is a time value to money, and your time may be more valuable than the money spent on plane tickets. Hence, you fly.


Frugality for Frugality Sake

Some people genuinely don’t like to spend money. The carefully scrutinize their purchases. They derive joy from getting a good deal. It’s like a game. As long as this is healthy, then it’s okay. The danger is when cheap people disguise themselves as being frugal. Frugality is concerned with getting good value for your money. That means you sometimes pay more for certain items because of higher perceived quality. In contrast, cheapness primarily is concerned with final price. It’s really born out of stinginess and miserly behavior. Often cheap individuals have a scarcity mentality: they have to protect what they have because they fear running out. Whereas a frugal individual wants to be a good steward over his money, a cheap person is afraid of losing it all and will spend as little of it as possible.


Cheapness can strain relationships, can cause you to buy inferior products, and can limit your growth all in the name of saving a buck.


Short tangent: Personally, I wish all cheap people would own their cheapness. You don’t have to continue giving crappy gifts, ducking out when it is time to pay for a group meal, making excuses as to why you won’t participate. If you are truly cheap (and not just broke), own your cheapness, and stop giving frugality a bad name.


Parting Thoughts

Frugality when practiced judiciously is not bad in itself. Deciding on whether a purchase is worthwhile relies on your analytical skills as well as possessing a clear appreciation for what you value. However, when frugality is more broadly applied to any form of cost-savings (regardless of value of quality), it can be a double-edged sword.


When is a $10 coffee greater than a $10 buffet? According to J Paul Getty, if he were down to his last dollars, he would rather have an expensive cup of coffee in a swanky hotel with the movers and shakers than go to an all you eat buffet. His rationale is the people that he wants in his future are more likely to be at that hotel.

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Carnival of Financial Planning - Edition #208 - October 29, 2011

Welcome to the October 29, 2011 Edition #208 of the Carnival of Financial Planning.

The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security.

This edition is arranged by subject heading, so that you can browse efficiently.

Enjoy!

The Skilled Investor, Editor

Budgeting and Economics

Lazy Man and Money presents Reviewing My Necessary Expenses posted at Lazy Man and Money, saying, "Some ask why one would want to review their necessary expenses. I have three reasons:"

BIFS presents Tipping after a Bad Experience posted at Budgeting In the Fun Stuff, saying, "What is the proper way to handle tipping when service sucked but they tried to correct it?"


Roshawn @ Watson Inc presents Did Americans Get Poorer or is USA Today Wrong? posted at Watson Inc, saying, "USA Today suggests the typical American family got poorer, but does the data support their story?

Everything Finance presents 4 Tips to Help You Save Your Budget this Christmas posted at Everything Finance, saying, "Yeah, I know: We’re not to Halloween yet, so why are we talking about Christmas? Well, if you’re like the average consumer, Christmas represents a huge change to your budget. Many of us see things spiraling out of control during the time between Thanksgiving and Christmas."

Mike @ Green Panda presents What Are The Best Ways to Save For Major Purchases as a Married Couple? posted at Green Panda Treehouse, saying, "Are you planning for the major expenses?"

Philip presents It's Okay to Spend Your Money on Things You Really Want posted at PT Money Personal Finance, saying, "A little discipline never hurt anyone, but the thought of depriving yourself of everything, every kind of spending, leads many people to just give up."

Rogan Seager presents Retirement Savings Calculator posted at Retirement Savings Calculator, saying, "Valuable future investment portfolio assets and future investment returns slip through many people's fingers at the checkout stand every day, because they spend beyond their long-term means."

David Leeman presents Envelope Budgeting Software - Best Budget Software for Financial Freedom posted at Financial Freedom Advantage, saying, "Are you familiar with the traditional envelope budget system? Envelope budgeting software takes this successful method into the 21st century, enabling proactive control of spending in order to achieve financial freedom."

Jason@LiveRealNow presents 53 Percent | Live Real, Now posted at Live Real, Now, saying, "Some day, I’ll be out of debt, and that will also be due to hard work, not charity. I love my family. I pay my taxes. I give to charity. I am the 53%."

Estate Planning

DJ presents Estate Planning 101 posted at The Family Wallet, saying, "No matter what your age or the amount and nature of your property, having an estate plan is a good idea. Here are answers to some of the basic questions often asked in regard to estate planning."

Financial Planning

Bill Smith presents Making the Right Decision for Your 401k Investments is Important posted at 2008 Taxes, saying, "One really important thing to consider regarding your 401k investments would be that the IRS, throughout the tax code 401k, deliver all qualifying employees a direct tax reduction alongside an upside market potential for your savings."

Flexo presents What I Learned as a Financial Planner posted at Consumerism Commentary, saying, "Neal provided a fantastic guest post on the life of a financial planner."

Dough Roller presents Social Security Increase (COLA) for 2012–3.6% posted at Dough Roller, saying, "HOORAY! For the first time in three years, social security COLA benefits are on the rise."

Larry Russell presents Identity theft protection and prevention posted at Personal Investment Management and Financial Planning, saying, "As a threat to your financial security, you should take the potential for identity theft very seriously. Identity theft sometimes entails a loss of your money, but whether or not you lose money, it can take a very large amount of your time to rectify. Taking these steps to prevent an occurrence is prudent."

FMF presents Economic Lessons from Chess posted at Free Money Finance, saying, "Chess encourages a long,strategic approach, something that also works well in financial planning."

Frank Knight presents Investment Asset Allocation posted at Retirement Planning Software, saying, "When you are already there and invested in an asset class, you are following a passive asset allocation strategy. Tactical asset allocation strategy advocates suggest that you can anticipate the crowd, but flow-of-funds studies show that almost all tactical asset allocation fund flows are late money flows that chase performance after valuations have already moved."

Dave@50plusfinance presents How To Move Your Checking Account In 7 Easy Steps posted at 50 Plus Finance.

David J presents Top 10 Rewards Checking Accounts posted at CardViews Blog, saying, "With all the banks now that are offering rewards programs, how do you know which one to sign up for? Who offers the best “bang for your buck”? Here’s a breakdown of the top 10 banks and credit unions across the country."

Financing Education

N.W. Journey presents College Savings 529 Plans posted at Networth Journey, saying, "Learn basic and important information about 529 plans."

Charles Chua C K presents 10 Poverty Ways to Avoid posted at All About Living with Life.

Health Care

Money Beagle presents Help!!! Do You Think Families Benefit From HDHP/HSA Plans? posted at Money Beagle, saying, "Looking for insurance advice. What do you think"?"

Income

The Financial Blogger presents What My 6 Yr Old Told Me About Running a Company posted at The Financial Blogger, saying, "What kids can teach us about running a business."

Hank presents How To Make Money With eBay Arbitrage posted at Money Q&A, saying, "Have you ever wondered where people get the things that they sell on eBay or Half.com? Learn how you can make money from arbitrage."

Kevin presents Getting Laid Off for the First Time: What I Learned from the Experience posted at Invest It Wisely, saying, "The first time I was laid off, I wondered what I was going to do for money. It wasn’t even that great of a job, but it was paying the bills and I had made friends there. I felt like I had been punched in the face. However, I learned three important things:"

Matt presents 083 Financial Excellence: Mystery Shopping and Other Extra Income Opportunities posted at Living In Financial Excellence, saying, "Over the last few months I’ve been taking on some side hustles to earn extra income and see if they’re legitimate ways for our listeners to earn some extra cash. Today I unwrap the mystery behind mystery shopping and discuss whether it’s really worth your time."

Marie presents Saving for Your Self-Employment Taxes posted at Money Spending Mommy, saying, "eing self-employed has numerous benefits. But when it comes time to pay taxes, self-employment might seem slightly less attractive."

Investing

Dividend Growth Investor presents Enterprise Product Partners (EPD) – quietly building wealth for unitholders posted at Dividend Growth Investor, saying, "Enterprise Products Partners is a dividend achiever which has increased distributions in every year since 1999. As a unitholder, it pays well to get paid a high yield while also having my income increased over time."

Aussie Investor presents Highest Dividend Paying Shares - The Micro-Caps posted at Australian Investing, saying, "Over the long term dividends make up a large part of a share portfolio's returns. With that in mind, lets see what attractive dividend yields are available to us at the moment. We've already looked at the large caps and the small caps, so now it's time for the micro caps."

Martha presents 12 Must-See TED Talks on the Recession posted at onlinemba.com, saying, "TED Talks have become a go-to resource for finding thoughtful discussion on global issues from some of the world’s biggest and best thinkers."

Intelligent Speculator presents Are You A Forex Trader Wannabe? posted at Intelligent Speculator, saying, "Are you into Forex?"

Janet Russell presents The illusion of superior professional mutual fund manager performance posted at Personal Investment Management, saying, "If investment mutual fund managers were truly skilled at beating the market, then you would expect mutual fund manager performance prowess to persist over time. The effort to find those few supposedly superior money managers willing to sell their services sufficiently cheaply is a costly, time consuming, and futile, “Where’s Waldo?,” searching exercise for the individual investor."

Corey presents What Should Your First Investment Be? posted at 20's Finances, saying, "Asking where to invest your money first may seem like a challenging question, but there is an obvious place to start investing."

Mike Piper presents ETFs vs. Index Funds (revisited) posted at The Oblivious Investor, saying, "As recently as last year, the ETF vs index fund question was about commissions and expense ratios. Now that those are (mostly) moot points, how should investors choose?"

Frank Bertin presents Index Funds posted at Top Index Funds, saying, "Top ten no load index funds that track the Standard and Poors 500 composite index in terms of lowest costs."

Dividends4Life presents 13 Higher Yielding, Lower Debt Dividend Stocks With A Reasonable Payout posted at Dividend Growth Stocks, saying, "New income investors naturally focus on yield, but the highest yielding stocks aren't always the best investments. To find the very best dividend growth stocks an investor must identify companies that will not just sustain their dividends, but increase them every year. To find these jewels in the rough, there are two very important things the investor must look for."

Mirelle Rowden presents Fixed Income Funds posted at Best Bond Mutual Funds, saying, "Vanguard dominates this low cost United States bond mutual funds marketplace for direct purchase accounts with both low and high minimum deposits."

DGB presents Dear Investor, Why Are You Paying Those Fees? posted at The Dividend Guy Blog, saying, "Why pay the fees?"

Managing Credit and Debt

Nathan Richardson presents What is a Good Credit Score: 2011 Range, Credit Score Scale & Chart posted at Deals & Tips, saying, "We've created a consumer's guide to credit scores including what are good scores, how to raise your score, how scores are calculated and more."

Jason Price presents How to Get Your Debt Snowball Rolling posted at One Money Design, saying, "Essential tips to get your debt snowball rolling again."

Paul Vachon presents Personal Financial Ratios Everyone Should Know posted at The Frugal Toad, saying, "Do you now what your household debt ratio is? It is an important factor in determining the amount of credit you are offered and plays an import role in your credit rating."

Glen Craig presents Find the Money to Pay Down Debt posted at Free From Broke, saying, "Debt will make you feel overwhelmed. What do you do? You need to find the money to pay down debt. See this author's story and choices she made to pay down debt."

Odysseas presents Down with Default Rates! posted at Wallet Blog, saying, "Usury laws, which cap interest rates for lenders, completely fail to serve their intended purpose of forcing banks to deliver affordable loans -- but there may be one feature of our contemporary lending industry that could actually benefit from usury laws: Penalty rates."

Chelsea Prescotti presents Is Credit Repair a Do-It-Yourself Job or Not? | CreditScore.net posted at CreditScore.net, saying, "Depending on the individual, credit repair is a task that people may or may not want to take on alone. While the general idea behind a credit score is simple, the exact way a credit score is repaired can be tricky. Repairing damaged credit cannot happen overnight, but there are steps that can be taken today to work toward a better credit score tomorrow."

Miscellaneous

Sustainable PF presents Autumn Home Maintenance posted at Sustainable Personal Finance, saying, "While I wrote here earlier in the year about spring time home maintenance I still consider myself a newbie to home ownership, but I know the key to saving money on costly home maintenance is prevention! Do yourself a favor and check out my suggestions below for fall home maintenance."

Irene Beckerr presents 25 Great Q&A Sites to Learn About Human Resources Careers posted at Business Resource Master, saying, "For human resources students, it's helpful to have resources to turn to when you want more information about the field and various careers. With these excellent Q&A sites you'll learn about HR in various environments, as well as personal insight and expertise from experts themselves."

The Skilled Investor presents Market Timing Does Not Work posted at Personal Financial Management, saying, "Always stay invested to earn risk premiums. You must have your money invested and at risk to get risk premium returns. Jumping out and in or "timing the markets" doesn't work."

Suba presents Steps to Be Your Own Boss posted at Broke Professionals, saying, "Self employment means taking a calculated risk to hopefully make more money, be happier, or both. Here are a few steps to self employment when transitioning from a full time job."

Tripp Danner presents No Load Funds posted at No Load Fund, saying, "There are over 60,000 different mutual fund investment share classes sold worldwide. Some mutual funds and ETFs must be better than others, but which ones are they? How can you tell before the fact?"

Jeri Ford presents 2 Simple Steps to Go from Zero Miles to a Free Business Class Ticket to Europe posted at Help Me Travel Cheap, saying, "Learn how to get a free business class ticket to europe in two easy steps."

Retirement Planning

Roger White presents 401k Contribution Limits in 2011 and 2012 posted at 401k Calculator, saying, "This posts lets you know about your 401k contribution limits for 2011 and 2012."

MoneyCone presents HOWTO Do A 401K Rollover Correctly posted at Money Cone, saying, "When you leave behind your old job for a better opportunity, in your excitement, don’t forget your 401K! Consolidation will make your life a lot easier."

SB presents When is the right time to retire posted at One Cent at a Time, saying, "Every one of us think about retirement. Depending on your age and saving situation you might ponder on taking early retirement. When we work we postpone many good things for post retirement life hence, it's important that you thoroughly plan your retirement to decide on when to start retired life."

Brockton Eaton presents Long Term Investment Strategies posted at Retirement Investment Strategy, saying, "The investment research literature repeatedly demonstrates that a fully diversified, low cost investment strategy is superior."

FMF presents Two Ways You Could Be Sabotaging Your Retirement posted at Free Money Finance, saying, "Two things you could be doing (or planning on doing) that could severely impact your retirement."

Walter Binkle presents Large Cap Mutual Funds posted at Mutual Funds, saying, "Retirees can save a lot by paying attention to mutual fund expenses. Each of these S & P 500 index funds is among the least costly on the market."

Risk Management

Evan presents Is Paying Car Insurance in Full Really Worth the Savings? posted at My Journey to Millions, saying, "One way you can save significant money is by paying your car insurance in full. While this is a much larger up front cost, it can add up to hundreds of dollars in savings over a policy period."

Savings

SavingMentor presents 11 Car Buying Tips To Get The Best New Car Price posted at HowToSaveMoney.ca, saying, "Over the years I’ve learned many car buying tips and tricks from various friends and relatives as well as from my own online and offline research. I have been buying vehicles for about 18 years and these tips can and do work very well. Some are easier to use then others, but if it means saving a few hundred or thousands of dollars, it’s worth it!"

Jonathan presents Six Secrets to Better Coupon Clipping posted at Wallet Watcher, saying, "In order to make the most effective use of your time and stretch your budget, the following are several helpful tips to simplify the coupon clipping process."

Mike Holman presents Long Distance Voice Plan vs Skype With Roaming Data Plan posted at Money Smarts Blog, saying, "I recently got burned on roaming data charges on my iPhone because I used Skype for some long distance calls back home. In retrospect I should have signed up for a long distance voice plan."

Bradson Oakley presents Bond Mutual Funds posted at Best Bond Funds, saying, "Higher bond fund expenses tend to mean lower net returns to individual investors. It is not worth paying higher bond fund fees."

Suba presents Illusion of saving money posted at Wealth Informatics, saying, "Frugality doesn't always save money and not all frugal tips are applicable to everyone. Do the math and do what works for you."

Jonathan presents "Free Money" Frenzy! posted at Frugal Living, saying, "Making that decision is fine at times, but there is a time and place for everything, and sometimes when we save money or get extra money, we need to use it carefully and wisely."

Ciana Locke presents Market Index Funds posted at Best Index Mutual Funds, saying, "The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 is that securities industry management and trading fees are all over the map from reasonably low to shockingly high."

YFS presents How to shop for the holidays like a boss posted at YourFinancesSimplified, saying, "This shows you how to shop for the holidays like a boss! (debt free)."

Peter presents Perkstreet Financial Is Paying Me To Use My Debit Card Instead Of Charging Extra Fees Like The Big Banks posted at Bible Money Matters, saying, "I signed up for my Perkstreet Financial free checking account earlier this summer. What did I discover once I signed up? Not only is the checking account free of charge – with no fees for debit card usage – but Perkstreet also pays you 2% cash back!"

Jon Elder presents Ultimate Guide to Grocery Store Savings posted at Free Money Wisdom, saying, "So, here are some tips for those of you who are looking to save money every time you go to fill up your pantry"

Taxes

Gemma Flannery presents Your Tax Code For 2011 posted at Tax Codes, saying, "Your tax code is used by your employer to calculate the amount of tax to deduct. Each year this changes with as tax brackets change. This posts explains the tax code for 2011."

Amanda presents More Time from the IRS for Innocent Spouses posted at My Dollar Plan, saying, "If you are filing your deductions and income on the same tax form as your spouse and he/she fudges information, evades taxes, etc. then you are held liable for any taxes and penalties owed due to this mistake. However, you can apply for spousal relief - read on for more info."

Finley Merriwether presents Retirement Planning Calculator posted at Retirement Plan Calculator, saying, "Tax-advantaged retirement savings plans give you the opportunity to make investments with deferred taxes in 401k, 403b, 457, Keogh, Simple, or other employer sponsored retirement plans."

Al Peters presents 4 Things You Should Know About Your Self Assessment Tax Return 2011 posted at TaxFix Feed Update, saying, "There are many things that you should know about completing your tax return but this post higlights 4 of the top things to remember."

That concludes this edition. Submit your blog article to the next edition of Carnival of Financial Planning using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Is Saving More Important Than Investing?

By: Roshawn Watson


A recent US News article suggests that a) investing is sold as a panaceas to all of our financial ailments and b) that this undermines more important efforts, namely “educating investors on establishing goals and making tough budgeting decisions.” Although the issue is complex, the article made me ask the following question: could we have it entirely backwards - should our efforts center on savings rather than investing?


Saving Is A Lost Art


I want it, and I want it now!


Delayed gratification: two words that few enjoy. In fact, many of us can’t imagine a life without credit. Before you dismiss that notion, consider how many people you know who purchase their cars, pay for tuition, pay large medical bills, and even purchase their homes without ANY debt. All too often, we hear that credit is just how we purchase things while we completely discount the fact that there was life before credit became so abundant.

Let me be clear: Debt is among the most aggressively marketed products in the world.

Thus, it is unsurprising that as a society we tend to a) worship at the altar of the great FICO score and b) have completely disavowed all knowledge of saving. After all, anything less than immediate is far too slow in our culture, or is it? Anyone who offers you debt is NOT giving you a true gift. Along with the debt comes bondage, a nasty little fact that we readily discount all too easily. Moreover, Henry Ford once commented that debt is the lazy man’s method to purchase items. In other words, there can be  gain in the struggle, and I’m not just referring to the lessons learned. The process of working through something difficult can actually be more enjoyable than getting what’s you are aiming towards. There’s power in anticipation and focusing all of your available resources on a singular goal: whether it be a car, a flat-screen, a home, or an investment.


Have you deprived yourself of the benefits of the struggle?


There Is More To Investing Than Rate Of Return


One of the reasons learning to plan purchases and budgeting is so important is because the three basic variables that greatly impact the total investment return are:

1. Amount Invested - Your contributions
2. Time Horizon - How long you hold the investment
3. Rate of Return - The percentage by which your money grows

Although these variables are intuitive, I mention them to lay the following foundation: while the financial services industry spends an inordinate amount of time maximizing the return, it may be more meaningful to embrace a more complete approach. Consistent investing over the long term in diversified and solid investment vehicles may ultimately do the masses better than getting an extra half percent. Note, this isn’t to say that a half of percent is trivial, but to emphasize that rate of return is only one part of the puzzle. If you invest in paper assets (i.e., stocks, bonds, ETFs, mutual funds, etc.) over the long term, most of your portfolio will theoretically be growth anyway, provided that you have allocated appropriately for portfolio growth. Since only a fraction of your total portfolio is what you actually put in,  adequate time and putting enough starting capital are essential for your portfolio to become sizable. Stated differently, a 30% return on $10 over 5 years is not much.


Most of us Don’t Systematically Invest


That last example emphasizes why financial literacy is so important, which brings me to some very troubling news. However, first let me state the positive. While earlier last decade the savings rate was negative, it has rebounded since 2008-2009 and has been hovering around 5-6% ever since. Retirement assets are up too (10% compared to last year according to CNN Money) and just shy of the all time high in 2007. Anyone making investing a priority should be applauded.

That said, the sad truth is most Americans do not systematically invest, and even when we do invest, many of us are pretty crappy!

Research from a leading human resources firm tracked the financial acumen of the masses. The studies indicated that most Americans don't know what they are doing (USA Today). Moreover, “the general public tends to play up their investing success(es) while ignoring the lessons of their losses..." According to LaSalle St. Securities, “nine times out of 10, investors' long-term performance lags behind the market by a wide margin.” (People wonder why I index!)

Some basic considerations for investors are:

1. What’s your investment strategy?
2. What’s your risk tolerance?
3. What’s your exit strategy?
4. Are you especially adept to a specific type of investing?
5. What’s your time horizon?
6. What are the tax implications of different types of investments?
7. How will you diversify?
8. How often will you rebalance?
9. What kind of lifestyle do you want to live when you retire?
10. Feel free to add others below in comments :)

Parting Thoughts

My opinion is that both saving and investing are important. Saving is for the short-term: when one needs his or her money within 5 years or less. Investing is for the long-term. One’s investing efforts are aided by the discipline of saving and budgeting consistently. The original article’s comment about financial services’ overemphasis on the rate of return, almost to the exclusion of anything else, seems valid. Clearly, both savings and investing are generally critical elements to healthy financial plans.

So what do you think: which is more important saving or investing?

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE. 

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Did Americans Get Poorer or is USA Today Wrong?

By: Roshawn Watson

A recent USA Today article suggests that the typical American family got poorer in the last 10 years. They cite the following as their rationale:

• According to the Census Bureau, the median household income decreased by 2.3% to $49,445 last year and has fallen 7% since 2000 after adjusting for inflation.
• Inflation adjusted-income is the lowest since 1996.
• Poverty has risen too. Now, 15.1% of people live in poverty, the highest level since 1993.
• This decline in income is particularly prominent among minorities and the young; many have chosen to move in with parents as a result.

My initial impression from reading this article was "Yuck!" However, upon further review, I realized there were some important confounders to the data presented and underlying assumptions being made that I don't necessarily agree with. Let's explore this article critically, and you tell me afterward whether YOU CAN DECIDE WHETHER AMERICANS GOT POORER.

Net Worth Changes?
We love to discuss income; clearly it is important. The size of the shovel determines the speed and efficiency with which one can get out of any hole. However, income is merely a singular component of our overall financial pictures. Net worth is also important: to many, it is more important, especially over the long term. If you don't believe me, consider the median income of the typical American household: $50,000. At this income, a household will bring in approximately $2 million over a working lifetime (not including taxes nor adjusted for inflation). Now if this household invests $900 monthly, it would end up with at least $2 million WITHOUT EVER GETTING A SINGLE RAISE (assuming 10% rate of return and 30 year time horizon). Here's the rub, even if I am half wrong, this household would have a net worth in excess of 11 times the median net worth.

Problem with the USA Today article #1: Why wasn't there any mention of median net worth? Note total household wealth in America increased by $10 trillion (this could be skewed by unequal distribution of wealth).

Investable Assets?
Of course, the net worth isn't perfect. Perhaps, among the biggest criticisms with using net worth as a metric is that it is often inflated (or at least inaccurate): our perceived value of our assets differs from their true market value. For example, if you purchased a house for $750,000 in 2004, that doesn't necessarily mean that you should list the value of the house in your balance sheet as $750,000 today. It is possible that your real estate agent would list the house for $500,000 (or $950,000). Similarly, it is arguably more difficult to determine the "proper valuation" for a privately-owned business. Sentiment and "good will" often obscure an objective valuation. All to often, we hear tales of the illiquid business owner having cash flow problems or the family having to sell their inheritance in order to pay for the death tax due to lack of cash (note the death tax laws have temporarily changed). Thus, this is why I suspect wealth research is increasingly focusing on "investable assets."

Problem with the USA Today article #2: There was no mention of investible assets despite the fact that savings rates are UP (from negative during the pre-recession to 5.7% in 2009; the highest in 14 years).

Debt to Income Changes?
Americans are shedding debt. Debit card usage now surpasses credit card usage. Credit card balances have gone down. Unfortunately, recent news suggests that BOA and Wells Fargo (and other large banks) may reverse this trend by charging a $3-5 fee monthly fee to those using debit cards to make up for the $2 billion loss in revenue from the Dodd Frank bill (necessitates that banks charge businesses less for debit transactions).

Problem with the USA Today article #3: There was no mention of Debt-to-Income (or any other pertinent financial) ratios despite the fact that debt to income ratios have also gone down since 2007. Incidentally, had the article include this ratio, it would have supported their argument (Debt-to-income ration was 100% in 2001 and peaked at 133% in 2007).

Closing Thoughts

My point is the USA Today article may be misrepresenting the issue. The author asks one to assume that income is the only determinant of wealth and poverty. If your income stagnated or went down by 5%, but your wealth increased by $250,000 (certainly possible over a 10 year period), you are poorer according to the article. Is that how you would classify people in that situation? Suppose your income went from $60,000 to $50,000 because you retired: that is you went from earned income to solely portfolio and passive income. Are you worst off financially for doing this considering that your expenses (i.e. gas from a commute, clothes, etc.) likely have also decreased? You can see the flaw associated with their oversimplification. Anyone can cherry pick a few statistics to support a point, which is why an article looking at the aggregate of pertinent ratios (i.e., Debt-to-income, quick ratio), financial statements (i.e net worth and income), and other key metrics (i.e., liquidity) would yield a more fruitful discussion of American finances. Perhaps such an article won't provide you a sensationalistic title or talking points in line with a particular agenda. However, it would be the TRUTH.

More broadly, you should NOT be force fed your opinions about the economy, investing or personal finance in general. I am certainly not representing the current economic climate as anything but challenging. However, the hyperbole surrounding its discussion is thwarting our chances at having an honest discussion about macroeconomics that might effect any real change.

I SIMPLY REFUSE TO FEAR.

Image was adapted from Aldrin Muya

So Tell Me, How Is Your Economy Doing?

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