Bubbling Assets Are Not Good Investments

A recent column by Gail MarksJarvis in the Chicago Tribune warned that “Investors Should Be Wary of Bitcoin.” She warns that while Bitcoin has seen 358% gain this year, it’s probably approaching the peak of its asset bubble, and newer investors will get caught holding the hot potato when the bubble pops. They’ll be just like the losers from the 2008 housing crash, the 2000 tech bubble crash, and the Nikkei crash in the 1980s.

I’d like to add a separate warning that also applies to many other alternative investments, like gold or real estate. Often, the rationale for these investments is that they have “real” value or they’re more stable because they don’t rely on the financial system. Really? NOTHING has inherent value unless it can feed you, clothe you, or provide shelter for you. Everything else only has value because people agree on its value.

Take gold, for example. It’s a nice, non-corroding, malleable metal that’s also a good conductor of electricity. What good is it when the economy crashes and the zombie apocalypse starts? You’ll have hunks of metal. That won’t help you grow food or even buy food if there’s none available. It only has value if you find people willing to accept it in exchange for whatever they’re willing to sell.

One of the arguments people use for Bitcoin is that it’s independent of governments and central banks, so it’s more stable than fiat currencies and will survive the pending banking collapse from all the debt problems. Sorry, but nothing that grows at 300% per year is stable. Again, consider the worst case zombie-apocalypse scenario: if the “system” goes and there’s no power generation, what good is cryptocurrency when no one can use a computer to verify you have any?

If you’re really concerned about doomsday economic scenarios, build up a stockpile of food, water, and essential living supplies. If you’re looking for solid financial investments, jumping on an asset bubble is not a long-term strategy.

Financial Discipline Begins with Personal Discipline

You’ve heard the saying, you can’t love others until you first love yourself. The same can be said of your personal finance: You can’t have financial discipline if you don’t have personal discipline.

A new study by CareerBuilder shows that 78% of Americans live paycheck to paycheck. Their survey of 3,462 full-time workers and 2,369 full-time employers showed people struggle to make ends meet even at higher wages. People earning over $100,000 (9%) were living paycheck to paycheck; 28% of those making $50K to $99K do too.

The big problem is behaviors that lead to debt. 71% of those surveyed had some kind of debt and 56% said they would never pay off their debts. The same percentage (56%) save less than $100 per month.

Brittany Jones-Cooper at Yahoo Finance reported on the survey and interviewed a financial planner. He said the first step is to look at non-monetary factors like shopping and drinking in bars to “relieve stress.” The Yahoo story offers a bulleted list of ideas to consider, but it boils down to take personal responsibility. For the most part people don’t live paycheck to paycheck because someone else is not paying them enough. It’s because they are spending too much.

The solution is to create a budget to understand where your money is going. Then develop a plan to cut back the bad habits. You need to have personal discipline to stick to that plan. In time, you’ll learn to live within your means and save at least 10% of your income for the future. It’s all covered in Chapter 3 of Basic Personal Finance.

College Earnings

Georgetown University’s Center on Education and the Workforce has a bunch of reports “to better articulate links between education, career preparation, and workplace demands.” That means they attempt to determine the value of various college degrees and majors based on employment opportunities and wages.

My last post talked about AA degrees that earn more than BA degrees (based on a Chicago Tribune column that referenced a Georgetown study). The Cashlorette.com also used Georgetown data to rank 173 majors based on median income and unemployment rates.

The top 5:
1. Petroleum Engineering
2. Pharmacy Pharmaceutical Sciences/Administration
3. Geological/Geophysical Engineering
4. Mining/Mineral Engineering
5. Naval Architecture/Marine Engineering

The bottom 5:
169. Studio Arts
170. Human Services/Community Organization
171. Composition/Rhetoric
172. Miscellaneous Fine Arts
173. Clinical Psychology

For perspective, number 1 earns more than three times more than last place: $135K vs. $43K. (Remember those are median incomes.)

Think about the future earnings and jobs potential of your academic major, not just how entertaining (or easy) it might be just to get a diploma. The more you earn, the more you can save.

4-Year Degree Isn’t Only Path to a Good Job

I tweeted this, but I wanted to add a link to the blog so it would be searchable on the site. Gail MarksJarvis had a great column in the Chicago Tribune talking about all the good jobs available without a 4-year college degree. It’s based on a Georgetown University study that found 30 million jobs that don’t require a bachelor’s degree and pay an average of $55K a year.

A great line from the column: “28 percent of people who get associate degrees from community colleges end up with better jobs than those with bachelor’s degrees.” I suspect a lot of that has to do with what these people studied in the bachelor’s programs.

Things not to study (BA with poor pay) : communications, art, psychology

Things to study (AA with good pay): nursing, computer specialist, mechanical technician

Other good fields (didn’t mention pay): welder, plumber, HVAC maintenance, electrician, carpenter, bookkeeper, food service manager, security guard, industrial production manager

Classes just started again across the country. Make sure you’re studying something that’s good for your financial future.

Car Buying vs. Leasing

Are you looking to buy or lease a car and wondering what the best decision is from a financial perspective? Car and Driver just posted an article based on an interview with Daniel Blinn, a Connecticut lawyer who specializes in automotive financing. Of course, the best way to get a car is to have someone else buy it for you. If that doesn’t work, the next best way (from a financial perspective) is to get a reliable used car that’s as cheap as possible… as long as it’s also a good track car, but that’s for a different blog.

If you must have new car smell, read the C/D post to help decide on buying versus leasing.

How’s Your Financial Wisdom?

After my last post on baby boomers failing their retirement planning, you might have some smug thoughts that you’re doing much better than them. Here’s a little test, thanks to The Atlantic:

  1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.
  2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.
  3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

The correct answers are 1-A; 2-C; and 3-B.

Based on a survey by economists Annamaria Lusardi and Olivia Mitchell, only 30 percent of Americans answered all three questions correctly. Their findings are published by American Economic Association (subscription required).

The Atlantic author warns that financial ignorance becomes more devastating in a modern economy. Fortunately, the study authors found that basic financial education can boost someone’s economic situation (by 82% of initial wealth for people with low levels of formal education and 56% for college graduates).

If you’re reading a personal finance blog (or read my book), you probably did pretty well on the test. Try to share your financial knowledge with someone you know who needs the help. They might not even know it. Start with the quiz.

Learn From Boomer Mistakes

A MarketWatch article over the weekend pointed out some important facts about baby boomers being unprepared for retirement. The article claims baby boomers will need $658K in their retirement funds, but the average employer-sponsored defined-contribution plan for boomers only has $263K.

The article goes into specifics on asset allocation, but that’s not important. Let’s look at the numbers to put them in context. Let’s assume these retirees will live 20 years beyond age 65. A $658K nest egg, growing at a conservative 3% real return, will provide $44,228 per year, or $3686 per month. Add the average monthly Social Security benefit of $1,341, and you’re looking at living on about $5K a month. That’s just below the BLS average income for all households, which would give you a fairly comfortable retirement.

The boomers who only have $263K saved up will be living on $2,814 a month (including Social Security). Can you handle living on $2,800?

It’s an important lesson to the rest of us. I’ve never met a retiree who said, “You know what? I wish I’d spent more when I was younger because I have too much money now.”

The article warns that “the typical middle-aged American couple only has $5,000 saved for the future.”

Use this article to learn from the mistakes of others. Plan for your future now. If you’re not saving at least 10% of your income now, you’ll be the example used as a warning to others in the future.

Get Your Kids Ready For College

A new study in England shows incoming college students are woefully unprepared, both for the “reality of life” and for school. Two news articles (Daily Mail and BBC) are based on a Higher Education Policy Institute (HEPI) study of 2,000 incoming university students (incorrectly labeled as millennials by Daily Mail). The study found 61% of respondents are anxious about heading to college, and 27% have panic attacks.

Parents really need to prepare their kids for the realities of college academics. The study says almost half (46%) expect more one-on-one support in college than in high school. A large majority (78%) expect career-planning support. These kids are in for a rude awakening. While students are the stated reason for a university’s existence, many schools receive far more money from research grants, athletic events, and alumni donations than they do from tuition. That means students and their education are rarely the primary focus of a university. The study also says 60% of students expect to spend more time in class in college than in high school. They do not grasp how little time they’ll actually be in class and that they are responsible for their own learning. Professors will not handhold them and “teach the tests” (unlike high schools that have standardized tests linked to teacher pay, for better or worse). The standard rule of thumb is that students should expect to spend at least three hours studying for each one hour in class. I can tell you, from experience, that most students do not follow that advice. Maybe if they’re told to expect to do that work beforehand, they will… call me an optimist.

Since this is a finance blog, I’d like to focus on the fact that more than half the respondents admitted they don’t know how to pay a bill. Over half said they don’t understand student finances, and many underestimate essential expenses. Less than half recognize that rent is likely to be their biggest expense after tuition. Some thought “nights out” or “student societies” would be their biggest expense. Ironically, 78% expect to get more financial advice from their university than they did in high school.

What can you do? If you have or know someone about to start college, take the time to give them some advice on what to expect, both in terms of academics and student life. On the financial side, make sure they know what things cost and how much they have available to them (i.e., make a budget). I’m biased, but I think they should read Basic Personal Finance and realize that a student loan should be treated as an investment (i.e., don’t get one if your degree won’t increase your lifetime earnings).

“Refresh our Recollections of These Rights”

Happy Independence Day. Whatever you do today to celebrate our nation’s birth, take time to follow the advice of Thomas Jefferson and reflect on the document that gives this day its meaning:

[M]ay [the Declaration of Independence] be to the world, what I believe it will be… the Signal of arousing men to burst the chains, under which monkish ignorance and superstition had persuaded them to bind themselves, and to assume the blessings & security of self-government. [T]hat form which we have substituted, restores the free right to the unbounded exercise of reason and freedom of opinion. [A]ll eyes are opened, or opening, to the rights of man… that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride them legitimately, by the grace of God. [T]hese are grounds of hope for others. [F]or ourselves, let the annual return of this day forever refresh our recollections of these rights, and an undiminished devotion to them.

Jefferson wrote that in a letter on June 24, 1826, respectfully declining an invitation to the fiftieth anniversary celebration of the signing of the Declaration of Independence, because of poor health. He passed away ten days later, on the 4th of July.

If you don’t have time to read the full text of the Declaration of Independence (available here), at least think about the most important part: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, “

These words were so powerful that Abraham Lincoln credited its authors with foresight and wisdom and used their words to condemn slavery. During a campaign speech on August 17, 1858, while running for the U.S. Senate, Lincoln said:

In their enlightened belief, nothing stamped with the Divine image and likeness was sent into the world to be trodden on, and degraded, and imbruted by its fellows. They grasped not only the whole race of man then living, but they reached forward and seized upon the farthest posterity. They erected a beacon to guide their children and their children’s children, and the countless myriads who should inhabit the earth in other ages. Wise statesmen as they were, they knew the tendency of prosperity to breed tyrants, and so they established these great self-evident truths, that when in the distant future some man, some faction, some interest should set up the doctrine that none but rich men, or none but white men, were entitled to life, liberty and the pursuit of happiness, their posterity might look up again to the Declaration of Independence and take course to renew the battle which their fathers began.

At least for today, put aside any petty squabbles among political factions (the government’s closed today anyway). Reflect on the blessings of liberty, and celebrate the truly unique document that created our nation and acknowledged our freedoms as gifts from God, not government.

Student Loans Can Be an Albatross

A recent Washington Examiner article quoted some data from the 2017 Student Loan Report, and the results are disturbing:

  • 27% believe the Department of Education will forgive all or part of their loan balance
  • 20% believe there are no negative consequences for the cosigner if they make late payments
  • 22% didn’t know their debt balance within $500
  • 36% didn’t know their monthly payment within $20

The average loan amount is nearly $28K. For that much money, you’d think they’d pay attention to the forms they signed. Worse, many didn’t even know what they were going in debt for. From the survey, almost 55% regret borrowing as much as they did, and almost a quarter plan to have parents help pay the loans.

The survey was based on 400 students polled after a screener question to ensure participants met the requirements (four-year college graduates from class of 2017). We can only hope they’re not representative of the 44M+ student loan borrowers out there… those cosigners really better hope.

Chapter 3 of my book, Basic Personal Finance, opens with “The easiest way to get in trouble with money is to not pay attention to it.” The book also covers the concept of good and bad debt. While student loans can be considered good debt, students really need to consider the benefits relative to the costs incurred. Sadly, only the latter is known up front. (Judging from the survey, some students might not even know that!) Many students go into college without a plan of what to study or what career they want to pursue, making it difficult to really quantify the benefit of college. They’re likely to incur debt with little or no benefit to future earnings.

Here’s a short list of what bachelor’s degrees are worth by major (2016 average annual salary):

Engineering                                     $64,891
Computer Science                           $61,321
Math and Sciences                          $55,087
Business                                            $52,236
Agriculture/Natural Resources     $48,729
Healthcare                                        $48,712
Communications                             $47,047
Social Sciences                                $46,585
Humanities                                      $46,065
Education                                         $34,891

Those are salaries for people who actually get jobs. For comparison, the Bureau of Labor Statistics reports the average annual salary (2015) for workers with a high school diploma was $35,256 (workers over 25 years old in full-time jobs, not starting salaries). So, when thinking about a school loan, consider the difference between your expected salary in your chosen field and a salary with no college. That’s what your investment in education is buying you. From this data, you shouldn’t go into debt if you’re planning to get a degree in education.