Spending Retirement Income Can Be Risky (2010-05-31)

by David John Marotta

Calculating safe spending rates in retirement is challenging. Everyone wants to be conservative and be sure they will have enough money. But understanding what numbers to use is not simple.

The most common request we get is for a back-of-the-napkin calculation of future yield, interest or income. People assume they can safely spend the income and thus refrain from touching the principal. But rather than being conservative, this strategy may actually lead people to spend too much.

Consider Michael and Jennifer Madison, a newly retired 65-year-old couple who want to play it safe. They have $1 million that they invest entirely in bonds paying 6%. They believe if they can live off the interest, they won't need any of the principal. Every year they spend $60,000, confident about their conservative choices. But after several years, they begin to feel strapped for cash. They have not provided for the inevitable increase in the cost of living. Too late they realize that inflation is eroding their buying power. The idea of leaving their principal intact is not working.

In just 10 years, the couple's $60,000 only has the purchasing power of $36,000. Their lifestyle has dwindled to 60% of what it used to be. With inflation averaging 4.5% over long periods of time, they need their principal to appreciate. Each year their dollars stay constant, they lose their buying power.

Additionally, although their bond portfolio was getting a 6% return when they started the process, bond yields fluctuate as much as stocks do. When the Madisons find themselves in a low-yield environment like today, they don't know what to do. Inflation has eaten the principal. The Fed has swallowed the yields.

Leaving the principal untouched is even more difficult to interpret when you consider the difference between stocks and bonds. If your investments are in bonds, your principal has no growth to help keep up with inflation. But the interest payment may be higher than you should be spending.

If your investments are in growth-oriented stocks, however, they may pay no dividend at all even if they double in value. Without a dividend it isn't clear what keeping the principal intact means. We don't distinguish between more value from income and more value from appreciation. In either case, spending all of your growth leaves nothing to keep up with inflation.

From an investment point of view, a stock that appreciates 6%, a stock that provides a 6% dividend and a bond that pays 6% interest are equal. Some companies provide a better return by reinvesting earnings in the business. For others it is better to distribute those earnings to shareholders. Attempting to live off the income and preserve the principal often leads people to create asset allocations that are all income and no appreciation. They mistakenly believe this is the best of all worlds. It seems like both overly conservative investing and overly conservative withdrawal rates, when in fact it is neither.

Because retirement may last more than 35 years, you need significant appreciation just to keep pace with rising costs. With inflation averaging 4.5%, spending at age 100 will be more than 4.5 times what it is at 65. So if you get no interest or appreciation on your portfolio, you can spend only a tiny fraction the first year. You will have to save 4.5 times the dollar amount to have the same lifestyle your final year.

Put another way, if Michael and Jennifer stuff their million dollars in the mattress, they will only be able to spend 1.16%, or $11,606, the first year. They must save the remainder for the $54,168 that same standard of living will cost if they live to 100.

Note that because no interest is paid in your mattress, even this ultraconservative 1.16% withdrawal rate is depleting the principal. And any higher withdrawal rate depends on some level of income or appreciation.

Also bear in mind that any specific asset allocation including an allocation entirely to U.S. Treasuries will produce fluctuating returns. Sometimes even bonds drop in value. Long-term government bonds lost 7.03% in 1994 and another 8.6% in 1999. Even short-term Treasuries lost 0.58% in 1994.

Given these shifting returns, the rate of return we assume for our projections is critical. Even if you are ultraconservative, put no money at risk and have a withdrawal rate of 1.16%, you may still run out of money. You may live to be 101 or older. And inflation may exceed 4.5%. There is always a chance of failure in the infinite combinations and permutations of returns, inflation and longevity.

For this reason, financial planning doesn't guarantee with 100% certainty that you can withdraw a certain amount of purchasing power for 35 years and not outlive your money. Instead, astute financial planning seeks an 80% chance and then relies on annual course corrections over the next 35 years to adjust your spending to cover the remaining 20%.

This is an excellent approach. First, keeping 80% of the wild scatterplot of returns exceeding your safe withdrawal needs means the average is much higher than you need. Most of the time, returns that fall in the bottom 20% are more than compensated by the 80% that do not. And because the average return is higher than you need, your portfolio will most often be able to make up for poor returns early in retirement.

Second, if 80% exceeds the needs of your safe withdrawal rate, it produces a lot of excess returns. So although you are planning to deplete the portfolio, 80% of the time you will leave a significant legacy. What you are trying to accomplish is your best chance at enjoying your preferred lifestyle. And your best chance of achieving it is aiming to deplete the portfolio in less than 20% of the wild scatterplot of returns.

This 80% success rate sounds more threatening than it actually is. In truth, it means you will be able to increase your spending rate by more than inflation 80% of the time. But 20% of the time, you will have to defer any spending rate increases by inflation until excess returns have helped your portfolio rebound. These annual adjustments allow a near 100% success rate by adjusting your standard of living by a small amount based on how your portfolio has actually performed.

At age 65 the safe withdrawal rates using this method are 4.36%, or about $43,600 for a million-dollar portfolio.

from http://www.emarotta.com/article.php?ID=393

Avoid the "Ring-of-Fire" Countries (2010-05-24)

by David John Marotta

A few months ago Bill Gross, co-founder of PIMCO and the country's most prominent bond expert, wrote a provocative monthly newsletter. He evaluated countries based on their total public sector debt as a percentage of gross domestic product (GDP) as well as their annual deficit, which is making matters worse. Gross singled out those countries heaping significant deficits on their mountain of debt and called them "The Ring of Fire."

The eight countries he identified were Japan, Italy, Greece, France, the United States, the United Kingdom, Ireland and Spain. The International Monetary Fund (IMF) cautioned that rising government debt has replaced financial industry stress as the biggest threat to the global economy. Gross warned his readers to watch "the U.S. with its large deficits and exploding entitlements." We recommend that you reduce your investments in these countries.

Our own government spending spree was not necessary. A Heritage Foundation study concluded that the stimulus money spent by countries had a negative short-term correlation with that country's GDP. In other words, stimulus money may even have had a slight negative short-term effect as well as a stronger negative longer term effect.

The IMF study agreed, stating, "Longer-run solvency concerns could translate into short-term strains in funding markets as investors require higher yields to compensate for future risks." In other words, we've taken short-term financial illiquidity and turned it into a long-term government deficit, which in turn raises the cost of short-term liquidity.

If you've lost your job or are struggling to live within your budget, running up your credit card never helps. It may make you feel better momentarily, but it doesn't even really help your situation in the short term. Spending beyond your means only makes matters worse. And government spending is making everyone miserable.

A small amount of government spending is necessary for infrastructure, which appears to boost economic activity. Successfully funding the rule of law provides the economic freedom necessary for economic activity. The optimum amount of spending appears to be relatively small, perhaps about 18% of GDP.

In every economic analysis, greater government spending is associated with weaker economic growth. The Keynesian views of economic stimulus have been largely discredited, although its ideas continue to be misused politically to support massive government-spending programs.

Government intervention continues to do more harm than good. This past year it took a common recession and prolonged it into a more permanent malaise. GDP growth, which has historically averaged 6.5%, is liable to slow to a more European rate of 3 to 4%. Official unemployment numbers will lower but only as people drop out and are no longer counted. Real unemployment is likely to remain high for some time.

Lest you think these policies don't affect you, they do. Part of Greece's austerity measures include raising the retirement age 14 years. Lower U.S. stock returns could have the same impact on your ability to leave the workplace. For each 1% less in return over your working career, you will have to retire seven years later to achieve the same retirement lifestyle.

Countries obligated to impose austerity measures illustrate the natural consequences of spending money you don't have while taxing and regulating wealth creation. Politicians take the credit for enacting feel-good programs they can't pay for, and then they scapegoat private enterprise to cover their misguided thinking.

Reduce your investment in these countries. Put your money where the entrepreneurial spirit is rewarded and the welfare state is discouraged, not the other way around. We suggest lightening up on foreign investments that primarily just follow the MSCI EAFE index.

EAFE stands for Europe, Australasia and the Far East. It represents all the developed countries outside of the United States and Canada. This includes large investments in all seven of the non-U.S. ring-of-fire countries. The EAFE consists of 22% Japan, 21% United Kingdom, 10% France, 4% Spain, 3% Italy and 1% Ireland and Greece. In total, 61% of the EAFE index is invested in ring-of-fire countries.

But before you stop investing in foreign stocks altogether, remember that 100% of domestic stocks are invested in the eighth ring-of-fire country, the United States. And we need our own austerity measures. The total compensation package for federal workers in the United States is $108,476--a full 55% higher than workers in private industry whose total compensation amounts to only $69,928. Going forward may be one of the times when a strong tilt toward specific foreign countries may provide superior long-term returns.

Gross advises seeking return where "national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come." This suggests investing more in emerging markets such as Chile, China, India and Brazil.

It also includes emphasizing countries with economic freedom such as Hong Kong, Singapore, Australia, Switzerland and Canada. Or mostly free countries with lower debt such as Denmark, The Netherlands, Finland, Sweden, Austria, Germany or even Norway. These countries should outperform their debt-laden counterparts.

As Gross ended his newsletter, "Beware the ring of fire!"

from http://www.emarotta.com/article.php?ID=391

Should you invest IRA Funds in Real Estate? (2010-05-21)

by Matthew Illian

<i>Q: I am looking for a way to get into the distressed real estate market. What do you know about using the money in my IRA or 401(k) money to invest in real estate?

Sincerely, Cash Poor and IRA Rich</i>

Dear Cash Poor,

You have good financial instincts. Real estate could be a great investment right now, and we are currently increasing exposure to this sector. But the risks and accounting red tape when making direct investments using IRA or 401(k) money should be avoided.

Cashing out a traditional individual retirement account (IRA) or 401(k) will trigger a taxable distribution and usually an additional 10% early-withdrawal penalty for people younger than 59 1/2. I don’t recommend this approach because the penalty is high and the investment results unpredictable. One recent belief that I hope has been forever scorched from the American consciousness by the recent recession is the idea that real estate investments always increase in value.

Another ill-advised option would be to transfer your IRA to a self directed custodian that allows for real estate purchases. These transactions have been gaining popularity, but I believe most investors should avoid these complex techniques. You will likely lose the power of leverage because few banks lend money to an IRA. Additionally, you can’t deduct property taxes and you can’t use depreciation. When an IRA holds the property, an individual is not allowed to cover an expense--like buying paint or new granite countertops-- out of personal funds or it will likely be deemed a prohibited transaction in the eyes of the IRS and could cause your entire IRA to be taxed.

Many 401(k) plans allow you to take a loan of 50% of the vested account balance up to $50,000. Borrowing from your 401(k) is penalty free, unless you don’t pay the money back. Then the usual early withdrawal penalties apply. You are charged interest on the loan because your 401(k) is the bank, and the interest gets added to your account. Most plans also require you to repay the loan within five years and definitely before you change employers. I would suggest not tapping your 401(k) plan.

Don’t get me wrong. I believe this is a good time to invest a portion of your portfolio in real estate. In fact, after being out of the real estate markets for several years, our firm is now recommending a 4% allocation in diversified portfolios. If you don’t have the cash or financing available to purchase directly, consider investing your IRA or 401(k) money in a real estate investment trust (REIT). These investment pools are typically publicly traded and run by real estate investment professionals. You can invest directly in specific REITs or indirectly through diversified mutual funds and exchange-traded funds (ETFs). If you are looking for an easy recommendation for an investment vehicle, try the Vanguard REIT ETF (symbol is VNQ). The expense ratio is only 0.15%, and the effective yield is 3.5%. This is by far the simplest and most cost effective way to take advantage of this trend. If you do invest in real estate, remember it is a long-term investment, and like all such investments, you will have to give it time.

from http://www.emarotta.com/article.php?ID=392

Stop-Loss Orders Can Lose Money Quickly (2010-05-17)

by David John Marotta

After investors and their advisors experienced the precipitous market drop during the fall of 2008, many people searched for ways to protect their assets. After a year-long review of possible ideas, I decided to stay the course and not change our investment strategy. Every technique I reviewed would have put such a drag on portfolios as to erase gains over the last 10 years.

Although the S&P 500 had a flat or down decade, even my simple gone-fishing portfolio had satisfying gains over that same time period. I write every year or so about how this diversified portfolio is doing. Although they aren't even the best funds to select today, they remain popular funds with low expense ratios.

The portfolio consists of 20% Vanguard Total Bond Index (VBMFX), 21% Vanguard 500 Index (VFINX), 10% Vanguard Small Cap Index (NAESX), 21% Vanguard Total International Stock (VGTSX), 10% Vanguard Emerging Market Index (VEIEX) and the final 18% in T. Rowe Price New Era Fund (PRNEX).

Through the end of April 2010, that portfolio has a 6.05% 10-year annual return versus 0.19% for the S&P 500 alone. Over 10 years, that's the difference between being up 79.93% and down 1.88%. Diversification over the last decade boosted returns significantly. It doesn't always safeguard you from market losses, but as I said, anything you do to protect yourself from losses can weigh down portfolio returns significantly.

My favorite quote last year was from former Fed chairman Paul Volcker: "You can't hedge the world." If you try too hard to avoid volatility, you will probably just dampen your returns and may still experience some other unexpected event (the so-called black swan), like the defaulting of municipal bonds you thought were secured.

One strategy we rejected as a hedge against a precipitous market drop is a technique called a stop-loss order. After purchasing a stock or exchange-traded fund (ETF), an investor can place an additional order with instructions on when to stop holding the security and sell it. Stop orders are triggered when the security reaches a specific price.

Sell limit orders are placed above the current market and execute when the security reaches that price. Sell stop orders are placed below the current market with the objective of limiting losses if the market value drops.

We recommend avoiding these types of orders for downside protection. Getting out of the markets at a 15% loss doesn't help you know when to get back in. Most investors who get out remain there until the markets rise well above the triggering values. Getting out is also the exact opposite of rebalancing. When the market drops, rebalancing your portfolio would mean selling bonds and investing more in the markets, not getting out of the market.

We think these are good reasons to avoid stop-loss orders, but many others disagreed. Thousands of investment advisors recommended this technique to their clients. Now it looks like this advice may have been the cause of the market plummet.

For example, take Vanguard Value ETF (VTV), which was trading at around $50 per share on May 6. Investors or advisors who wanted to protect their investment from a catastrophic drop in the markets may have wanted to sell if the markets dropped by 15%. This would mean placing a stop-loss order that would be triggered at $42.50.

Just because a market move sets off a stop-loss order doesn't mean the investor will get the trigger price. The trigger submits the sell order as a market order, meaning it gets whatever the next market price is. Under normal conditions this might mean the stock would be sold at most for a nickel below the trigger price (i.e., $42.45).

Unfortunately, May 6 wasn't normal conditions.

Possibly some large sale of Procter & Gamble caused a drop in the Dow. That may have triggered some automatic stop-loss orders in Dow index funds, which may then have caused other Dow stocks to drop in value.

The drop in Dow stocks could easily have triggered additional stop-loss orders. Each sell pushed stock values lower, triggering more stop-loss orders set at even lower levels. This cascade of stop-loss orders caused the May 6 free fall.

But it gets worse. The stock exchange has speed bumps in place to slow the market when it appears to be moving too fast. These curbs limited transactions from market makers at exactly the time when higher liquidity was needed. A market maker is a firm that stands ready to buy or sell a particular stock on a regular and continuous basis at a publicly quoted price. Market makers move that price gradually, which keeps the market orderly.

Without market makers, when there are more sellers than buyers, a stock has no price. Some of these market orders got picked up by exchanges linked to the New York Stock Exchange. Others got picked up by stub orders for a penny a share.

Between 2:40 pm and 3:00 pm, at some points no one knew what certain stocks or ETFs were worth. Consequently, the value of many ETFs hit virtual zero. Stop-loss orders for VTV set at $42.50 got executed for $0.10 a share. Then after every stop-loss order was finally triggered, the plunge came to a halt.

After the last of the stop-loss orders was cleared for pennies a share, the automatic selling stopped. At that point many institutional investors or their automated systems stepped in to bargain hunt and pick up shares for fractions of what they were worth. The market quickly rebounded, recovering most of its value in the next 20 minutes.

You can see this effect on Google finance, where it looks like the stock price for VTV bounces off zero that day at 2:52 pm. These trades were not an isolated event. Many stocks sold for just a penny per share. These trades show a market in free fall with a snowball of cascading stop orders and no market makers stepping in to set a reasonable price.

The statistics are already being cleaned up to erase this trading anomaly. Some sites still show the year low of these ETFs as $0.10 or even $0.00. But other sites now have the edited low of VTV as $18.58 or $19.32 that day.

After the close of trading on May 6 and numerous investor and advisor inquiries, the NASDAQ mandated canceling these clearly erroneous trades. But they insisted these were legitimate market orders executed in a reasonable manner and were not aberrations or mistakes in the system. In other words, you have been warned that the events of May 6 were a natural consequence of using stop-loss orders during a market free fall.

Thus the stop-loss order technique failed at the very moment it was supposed to save the average investor. It tried to sell in a free-falling market and only succeeded in dumping valuable stocks on a dime and for a dime. Even after adjustment, some investors lost 63% on a day where the stock market only closed down 3.62%. I doubt investors or financial advisors will be advocating the widespread use of stop-loss orders again in the near future.

But if they do, I suggest putting in a series of limit orders to buy stocks or ETFs at half their current value. If investors ever want to dump their shares for half their value, I'm more than willing to buy at that price.

Be a contrarian. Buy when people are selling. Especially when they have automated their panic with stop-loss orders.

from http://www.emarotta.com/article.php?ID=390

Now's Still the Time to Buy a House (2010-05-10)

by David John Marotta

Between 2005 and 2009 I annoyed local realtors by claiming that <a href="http://www.emarotta.com/article.php?ID=269" target=_blank>real estate values were headed lower</a>. Then in a <a href="http://www.emarotta.com/article.php?ID=346" target=_blank>column in July 2009</a>, I said it was the time to buy a house. And now in the spring of 2010, it is still the time to buy a house.

<a href="http://www.emarotta.com/article.php?ID=109" target=_blank>Early in 2005</a> my father George Marotta and I explained the coming subprime debacle and predicted "the bubble, if it is a bubble, could pop as late as 2006 or 2007." Our projection was accurate. Real estate continued to rise that year. But it was relatively flat in 2006, underperforming the markets that appreciated over 15%.

<a href="http://www.emarotta.com/article.php?ID=226" target=_blank>Two years later</a>, I wrote, "Many homeowners with adjustable rate mortgages have seen their monthly payments increase 50%, due to the higher rates. With the sudden jump in monthly mortgage payments, many are finding they can no longer afford to stay in their homes. The rate of late payments and foreclosures has continued to rise, leaving many lenders on the brink of bankruptcy themselves."

Again, the prediction was accurate. In 2007 the Cohen & Steers Realty Majors Index turned negative, losing 18.03%. Residential real estate did even worse. Apartments suffered one of the largest declines, down 25.4%. In February 2008 in my column "For Now, Avoid Real Estate Investment Trusts," I warned again to stay out.

It wasn't until <a href="http://www.emarotta.com/article.php?ID=346" target=_blank>well after the financial implosion</a> that I suggested to readers it was the time to buy a house. I said, "Nathan Rothschild offered the contrarian advice to 'Buy when there's blood in the streets and sell to the sound of trumpets.' It is time to consider buying residential real estate. The bottom is forming, although it may continue to do so through early 2011."

I believe that advice will also prove accurate. Comparing last month's statistics from the Charlottesville Area Association of Realtors, the median home price has dropped from $247,000 last July to $238,000, but the rate of decline has slowed. The average days on the market have risen from 125 to 153. And although the number of active listings is still high at 3,312, the number of houses actually selling has started to pick up.

Home prices are well below 2005 averages, and time on the market is well above the healthy market average of 90 days. Sellers have been slow to realize that their home isn't necessarily worth the appraised value or what they paid for it or even what they owe. Houses are simply worth whatever the market will bear, which is a lot less than it was at the peak of the market three years ago. National trends have followed a similar cycle.

Half the advisors at our firm have purchased real estate in the last year, and I'm personally still looking for investment opportunities. It isn't too late because the recession has been prolonged and the recovery delayed.

Investment real estate isn't for everyone. You shouldn't have more than a third of your net worth bound up in real estate. For many families the home they live in provides them with more than enough real estate exposure.

Also, you don't need to buy and manage individual properties to get an exposure to real estate. Publicly priced and traded real estate investment trusts (REITs) offer an easy way to get in and out of real estate for the average investor. In a favorable climate, up to 8% of your portfolio might be invested in REITs this way.

We got out of REITs entirely and are only looking to get back in recently. My father would always say, "Make half a mistake," which suggests putting perhaps 4% of your portfolio back in REITs now and waiting until early 2011 for the other half.

If you are looking for an easy recommendation for an investment vehicle, try the Vanguard REIT exchange-traded fund (symbol is VNQ). The expense ratio is only 0.15%, and the yield is 7.8%. This is by far the simplest way to take advantage of this trend.

Specific individual real estate holdings offer investors the opportunity to leverage their investments by holding a mortgage on the property. Lending requirements are very tight right now, so for investors who can still get credit, there is real opportunity.

Investors could invest $1 million in appreciating securities, or they could invest $700,000 in appreciating securities and put $300,000 down on a $1 million commercial real estate holding. Assuming normal conditions, the second arrangement will produce a better return. The danger is that you do not want to be highly leveraged in a falling real estate market. Borrowing the money you are investing amplifies the gains, but it also amplifies the losses.

I've heard a number of bleak predictions for the housing market recently. Everyone is expecting real estate to underperform the stock market for many years going forward. Maybe they are right.

With the $8,000 first-time homebuyer tax credit expiring, demand may shrink. Starting your search now may be the perfect time. And there will be another opportunity at the end of the summer when buyers shrink even further. But maybe they are wrong. By this time next year, I expect the markets to turn positive. And I think it is time to make half a mistake and invest a little back into real estate.

It was only a few years ago that everyone was boasting about how real estate was appreciating by 1% every month. They made us feel like fools to be out of the market. With only a handful of listings out there, we were told that even if a glut of houses came on the market it would take years to satisfy the demand. But markets can turn quickly. Now we are contrarians again, looking at the trends and trying to gauge if there will be a second precipitous drop before the bottom. I don't think so. I think that we are near the bottom and brighter days lie ahead.

In the meantime, there's still blood in the street. Don't miss this opportunity to look for a great real estate deal.

from http://www.emarotta.com/article.php?ID=389

Should You "Sell in May and Stay Away"? (2010-05-03)

by David John Marotta

The old stock market adage "Sell in May and stay away" suggests you can avoid risk and increase return by getting out of the markets during the summer.

This advice appears this time of year whenever the markets have appreciated over the previous six months. Sometimes it's right, adding anecdotal evidence that you ignore the advice only at the risk of your equity.

But it's a slippery claim to evaluate and consequently a difficult trend to capitalize on. Let's begin by pinning down the exact days you would exit and then reenter the market.

The saying originated in Britain as "Sell in May and go away, stay away till St. Leger Day." The final horse race of the British equivalent of the Triple Crown takes place on St. Leger Day, in the second week of September. In the United States, September and October historically are considered dangerous months to invest. In addition, St. Leger Day is unknown here. So the date of reentering the markets has been pushed to the end of October, causing the rule to also be known as the "Halloween indicator."

Buying in mid-September or at the end of October is a significant choice. Since 1950, September has been the only month averaging a negative return. The S&P 500 has appreciated an average of 0.97% each month. But the September average is -0.37%, due to severe losses in 1974 and 2002.

October, contrary to popular opinion, is a typical month with an average return of +0.82%, despite the 21.5% loss in 1987 (Black Friday) and the 16.8% loss in 2008. Prior to two years ago, the average for October was 1.17, well above the 0.97% monthly average.

Mark Twain commented wryly on October, saying, "This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

For the purposes of our analysis, I will use October 31, Halloween, as the day we would buy back into the markets.

The date to sell stocks is equally challenging. The traditional wisdom suggests selling May 1. But since 1950, May has performed well with an average return of 0.80%.

The problem with the data is what time period you use to back-test it. My data are from 1950 through the end of last month. But when the saying first circulated, May was flat. Since 1987, however, May has done phenomenally well, averaging 2.11%. May's recent streak of luck has raised its average substantially.

Yale Hirsch popularized this approach of investing in his "Stock Trader's Almanac" starting in 1986. He found that investing in November through April produced better returns than May through October.

Mark Vakkur refined Hirsch's approach to cherry-pick the best months. He suggested alternating between being fully invested, half invested, and out of the markets entirely depending on the month. September has the worst returns, but February has the second worst.

Historical patterns can be correlated to an infinite number of future predictions. Others would suggest that price per earnings ratios or the yield spread between long- and short-term bonds are a better indicator of stock returns. To suggest that each month is a reliable indicator of future results requires more than past statistical anomalies. Even if those statistics are taken from 60 years, they still represent a limited data sample.

I tried a simple thought experiment taking 720 imaginary pennies and flipping groups of 60 in 12 different categories, each labeled with a different month. In total I flipped 40 more tails than heads. But one month alone contributed 24 of the extra tails. Flipping 42 tails and only 18 heads in one month certainly seems meaningful. Simulating penny flips with a spreadsheet, I repeated the experiment multiple times. Each time at least one random month produced an anomalous result.

Here's another saying I like better: "Stocks go up and stocks go down." The markets are inherently volatile. Sometimes most of the tails can land in one month over a 60-year sample.

Seasonal investing hit the height of its support in Sven Bouman and Ben Jacobsen's 2002 study. The drop in the markets that summer heavily contributed to the trend. Between 1950 and 2002, returns for November through March averaged 9.06% versus only 3.18% between May and October.

Since 2002, however, the trend has been much more muted. The recent difference between these numbers is statistically small for the wide range of returns.

In 2009 May through October went against the trend and was up 20.10%. But in 2008 that same time period was down 25.84%. The past five months, November through March, are following the trend and up 13.87. But a year ago, November through April was down 8.53%.

Even in the last two years, this volatility can be made to fit the trend. Adding the two years together, November through April was more up, and May through October was more down. Although the markets have gone nowhere, blindly following the strategy would have produced a 5.74% gain.

As this column has repeatedly advised, rebalancing and diversification are clearly a better long-term approach.

Larry Swedroe of Bogleheads.org, an indexing discussion site, did an analysis starting in 1926 that switched to U.S. Treasuries every May 1 and moved back into the S&P 500 on November 1. The strategy produced an annualized return of 8.3% versus 10.25% for just holding the S&P 500.

By cherry-picking the right years, he found periods when the strategy might outperform a buy-and-hold strategy. This held true specifically for 1987 through 2002, the very period in which the saying received national attention.

Given the volatility of the markets and the strength of seasonal psychology, there may be a period of months when markets will perform better. But that doesn't mean Treasuries can outperform May through October.

My own study shows that since 1950, May through October has contributed a 3.16% return; November through April has contributed 8.44% for an annual return of 11.60%. If you sell in May, you have to be able to get a six-month Treasury return better than 3.16%. Considering trading costs and capital gains taxes, that's difficult.

If a seasonal ebb and flow to market returns really exists, it may be as simple as observing when cash is tight and not flowing into the markets. In February bills from the holidays arrive, and many people are gathering cash to pay their taxes. Summer vacations strap many families, resulting in high expenses in September. Only after bills are paid can money flow back into the markets.

In contrast, December sees large profit-sharing bonuses put into the markets, and pension funds are often invested in January. In the early spring, people are funding their retirement accounts.

These are just speculations. It could just as easily be the amount of sun in the Northern Hemisphere affecting people's emotions. Or it could just be that a lot of random tails fell in the September portion of the carpet.

Thus we provide a thoughtful compromise between jumping in and out of the markets and ignoring the seasonal effect entirely. If the markets are up, as they are now, and we are approaching the summer months, it is a good time to take some profits off the table. I'd like to replace the adage with the following advice: "Rebalance in May and call it a day."

from http://www.emarotta.com/article.php?ID=388

Your top-level asset allocation determines both the ultimate return you will receive and the volatility you will experience. Your investments should be working for you, appreciating more than inflation to become an engine of growth that pays you money and provides some measure of financial freedom. A combination of stocks and bonds with low expense ratios and a tilt toward stocks provides the best tuned engine of growth.

Stocks average 6.5% over inflation. Bonds average 3% over inflation. Thus after 25 years, $100,000 invested in stocks will have a buying power of $483,000. And $100,000 invested in bonds will have a buying power of $209,000.

Many other assets fare worse than these two categories. Understanding the average appreciation of these assets can help you model retirement projections and decide to invest or not.

Commercial real estate barely appreciates at the rate of inflation. Actually, it depreciates against inflation by about 1% a year. Fortunately, it should produce enough income to overcome this depreciation and produce a real return of about 4.9% over inflation. We invest in Real Estate Investment Trusts (REITs) that are publicly priced and traded as equities on the stock exchanges.

Handling a private commercial real estate requires more work. If private commercial real estate isn't generating a lot more income than it costs to maintain it--including depreciation--it isn't pulling its weight. Only if it can produce significant income and grow at a real return of 4.9% over inflation will a $100,000 investment in real estate grow to $331,000 after 25 years.

Similar equations can be used for residential real estate. On average it produces slightly less income, giving a real return of 4.1% and growing to have a buying power of $273,000. Obviously all real estate is subject to the increasing desirability of the area where it is located. Some excellent school districts have experienced appreciation significantly greater than inflation. But many rural communities have barely kept up.

A few years ago real estate was the darling that appreciated at over 1% a month. Now in parts of Michigan, Florida and California, those same homes are going for 20 cents on the dollar in foreclosure sales.

Remember that the house you are living in is an expense, not an investment. An investment pays you money. Although the principal portion of your mortgage payment is forced savings that will nearly keep up with inflation, it doesn't grow and work for you. Because you are occupying the house, you forgo the rental income that would provide the real return above inflation.

Gold is even worse than real estate. There is never any possible income from gold, so it just holds its value. And gold can be extremely volatile, losing 69% of its value in a 21-year decline from $850 an ounce in 1980 to $260 an ounce in 2001.

At least gold holds its value. Cash loses its buying power by the rate of inflation. After 25 years, although you might still have $100,000 in cash, it will only have the buying power of about $32,000. An inflation rate of 4.5% is devastating over the long term.

Fixed annuities act like cash. They lose their buying power quickly over time. Even if you could get an immediate annuity paying 7% at age 65, it would still be a bad deal. Seven percent sounds good only because you fail to take into account the immediate loss of 100% of your principal. If you die any time during the first 14 years, your return would be zero. You would only have received your own money back.

Assuming you live an average lifespan, your return would be 3.06%, not even keeping up with inflation. And even if you and your spouse both lived to be 100, your annual return would only reach 6.35% or a 1.85% real return, which is worse than an all-bond portfolio.

Immediate annuities initially seem like sufficient spending money, but that's only because they are front-loaded with buying power. If you want to maintain a certain standard of living, you should save some of the initial payout to supplement purchasing power at the end.

Even if you could purchase a $100,000 fixed annuity paying 7%, or $7,000 a year, you should only spend half of that amount. You would need to save the other half to supplement your spending later when you need more money to keep the same lifestyle.

Social Security is a little like a fixed annuity. Because it is indexed to the government's official inflation numbers, it doesn't keep up with real inflation. As a result, Social Security has a real return of about -2%

At this rate, over 25 years your Social Security payments will drop to about 60% of their initial purchasing power. Consequently, at the full retirement age of 66, we recommend only spending 84% of your Social Security income on your standard of living. Save the other 16% and invest it in equities to supplement your lifestyle later when the buying power of your Social Security payment dwindles because of inflation.

No one should count on Social Security. Had the money we've paid into Social Security been saved and invested in almost anything, every senior would be retiring as a multimillionaire. Until our Social Security system is privatized--like the one in Chile--it is not an investment you own. It is completely subject to the political risk of the next stroke of the pen. Inevitably Social Security benefits will be means tested so that people with more than a certain amount of assets, say a half million dollars, will no longer receive benefits.

We pencil Social Security payments into retirement equations tentatively and then see where we are without considering them. The younger the client, the less chance of collecting even the smallest fraction of what was contributed.

Many other expensive items should not be considered an investment. Just because it costs a lot doesn't mean it is an investment. For example, art is not an investment. Neither is furniture or a new roof. Neither is installing solar or geothermal. It may save you money, but that doesn't make it an investment. If it saves you money, you should be able to reduce your standard of living accordingly and put more money into your real investments. If that is the case, I would call putting more money into your real investments the "savings" and not consider the energy efficiency an investment.

If you can't put more money into your savings, then your purchase simply allowed you to increase your spending someplace else and was neither an investment nor did it save you any money. This principle should be applied toward anything that salespeople are apt to call an "investment," such as energy-efficient cars or time-share rental property.

Just calling something an investment doesn't make it so. Investments should appreciate at a rate that grows faster than inflation and gains purchasing power. And spending your money on non-investments can jeopardize a plan to reach your goals of financial freedom. Investments should work for you, paying you money that you can spend or reinvest elsewhere.

from http://www.emarotta.com/article.php?ID=387

He predicted that as the percentage of society that owes a portion of their livelihood to government spending increases, the ability to limit the growth of government will decrease. At some tipping point, attempts to reduce the size and scope of government become too difficult. Welfare statism sets in as a permanent malaise and drags on the growth of the economy.

Friedman said, "We still have some ruin in us, but pretty soon we are going to be forced to face up to the issue." We did a good job of keeping government spending relatively constant as a percentage of gross domestic product (GDP) for the next 30 years. Total government spending was at 33% in 1977 and had risen to only 35% by 2007. But since 2007 we've expanded the scope of government from 35% of GDP to 45%.

This overspending is certainly severe, but the cumulative deficit spending is even more critical. When Friedman warned us about the fragility of freedom, the gross public debt was at 47% of GDP. After three decades of deficits it had risen to 81%. Today it is at 120%. In just three short years we've added more to the deficit as a percentage of GDP than in the three decades before.

We don't have much ruin left. We have to face up to the issue. We are in danger of crossing a line we dare not cross.

Every time government spends money to provide security to a few, it destabilizes the rest of society. Shore up one sector and you risk impoverishing other sectors. Soon catastrophes in those sectors that are left free of government support are perceived as further evidence of the failure of the free market. Each crisis becomes an opportunity to expand the scope and power of government.

Most government spending consists of benefits given to the few while the costs are borne by the many. Thus a small minority has a large vested interest in seeing the legislation passed, and for the large majority it isn't worth the time and effort to try and defeat it.

Imagine there are 100 people in society and each earns $100 a day. Now imagine for just $5 a day from each person you could support five people so their income was secure and they could do public good. For the five people involved, it is a great deal. Everyone else is too busy to organize and fight against funding them. After all, it is only worth $5 to fight against it, but it is worth $100 each for those five to organize and agitate for it.

Perhaps there are another 10 people who benefit most from the good being done. It will only cost them $5 a day, and they might get $20 a day worth of benefit. Under the free market they could have purchased the benefit directly, but it would have cost them more. Never mind that they are middle class and could have afforded it. Why should they be obliged to pay when they can vote for the government to provide it for "free"?

The other 85 people only get $1 worth of benefit and it costs them $5 in taxes, but it isn't worth fighting, so they end up paying it. The cost to society is $500, and the benefit to society is only $285. The rest is lost opportunity costs. Most people, had they kept their $5, would have spent it on exactly what they valued at $5, and there would have been no waste. But because society pooled its money, few got what they really wanted.

And now that everyone only has $95 left to spend, everyone's businesses will collect 5% less in revenue. Society as a whole will be poorer as a result. In our example the level of missed opportunity costs was only 40% of what was collected plus an additional 5% less in GDP. In reality, the level of waste is much higher. Compliance and collection are costly. Federal monopolies are rife with enormous inefficiencies.

Ultimately the five individuals who are on public support have secure jobs, better pay, superior benefits and guaranteed pensions. In fact, we are there already. A Bureau of Labor Statistics study this month showed that federal jobs paid better than the exact same job in the private sector 83% of the time.

The difference is striking. The average salary in the private sector is $60,046, whereas the average federal worker earns $67,691. That's 12.7% more pay for the public servant. And the difference was even more pronounced in benefits. Health, pension and other benefits total $40,785 per federal worker but only $9,882 per private worker. So the total compensation package for the federal worker is $108,476--a full 55% higher than the worker in private industry whose total compensation amounts to only $69,928.

There is also the inevitable building of government fiefdoms and use it or lose it budgeting. Government bureaucrats each serve their own private interests. Many are seeking to further their careers or salaries. Others are seeking to extend their power and prestige. The legislation and regulations they put in place uses force to implement their interests.

An example from Friedman describes the problem succinctly. In a political decision, if 51% vote for red neckties and 49% vote for green, 100% of the people get red neckties. Each individual vote counts for very little in the political process. Contrast that with the free market where every vote counts and people get exactly the color they want.

The strategy for building a politically powerful coalition is to find a dozen such minorities who are willing to support you if you vote for their pet project regardless of what else you may do. This aggregate spending may be burdensome to society as a whole, but each item by itself will have a strong advocate. Although there may be popular support for cutting government spending in general, people will be reluctant to cut any specific programs because of the vehement support by an emotionally vested minority.

Friedman asked this very important question: Is there anybody in the vast American electorate who would take his or her vote away from a representative because that person voted to keep some small special-interest project? We need people like that. We need people who are against society specifying tie color even if they want red ties.

We need government employees who are willing to vote for limited government. We need middle-class families who are willing to let entitlement programs stop after funding the truly needy. And we need liberals who are willing to join with libertarians to say "Enough."

Holding the line on the growth of government is challenging, but there is a line we dare not cross. Just because something is good for most people doesn't mean it is good for everyone. Society is interconnected. We must cooperate in nearly every component of the economy.

We can either allow that cooperation to be voluntary or coerce behaviors through force. The first spreads a multitude of small benefits over many people. The second gives larger benefits to a privileged minority. One leads to freedom and prosperity. The other leads to tyranny and misery.

from http://www.emarotta.com/article.php?ID=386

Social Security Loopholes (2010-04-12)

by David John Marotta and Matthew Illian

Had you simply saved and invested, you would probably be retiring as a multimillionaire. But because you were required to pay into Social Security, now you have to figure out how best to get back some of your money. Being aware of some Social Security loopholes will help you choose between options that differ by as much as a quarter of a million dollars.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have been added. A worker's Social Security contributions can total up to $440,000. So you want to make sure you have done your homework when beginning to pull this money out. And to make the best decision, you must consider health, income before retirement, income during retirement and taxes. By learning about three Social Security loopholes, you may be able to recoup thousands of dollars.

Three strategies for maximizing your Social Security dollars are available to married couples. You won't find them by reading the government's printed literature or general web pages. And in a time when many families are stretching to make every dollar count, the extra income can go a long way.

The first loophole comes in the form of an interest-free loan provided by Uncle Sam. Many retirees are not aware that they are eligible to repay their Social Security benefits at any time and for any reason in order to claim a higher deferred benefit and at no interest. This ability to undo your selection will raise your monthly payment by 33% at full retirement age and by 76% at age 70. As you can imagine, this payment can be quite hefty if you've waited years before repaying and refiling your benefits. Some savvy retirees have found a benefit by claiming Social Security early and stashing this money in a CD or other fixed-income account. That way they can earn eight years of interest on the money.

Those unsure of Social Security's viability and solvency can use this method to play both options. If benefits are reduced, you will be happy to have filed early. If not, just repay and refile.

This money may be free, but it's not easy. This "File, Repay and Refile" strategy requires you to amend each year of tax filings to recoup the extra taxes and lost interest applied to those earnings. Interested retirees will need to fill out a Withdrawal of Application to begin the repayment process.

The Senior Citizens' Freedom to Work Act of 2000 provides a second loophole that can boost total benefits payments for retirees by as much as 15%. This option is called "File and Suspend." It works well for couples who have a large disparity in their earnings history.

Consider the dilemma of James and Susan who are fast approaching their retirement. James is coming to the end of a long career as an executive in a carpet factory. Susan's earnings history was cut short when she decided to stay home to raise their children leaving a limited personal Social Security benefit.

A loving husband, James would like to maximize the survivor benefit that he leaves Susan. He can accomplish this by delaying his Social Security filing. But neither are sure they will make ends meet during the ensuing years on Susan's limited monthly payment.

Thanks to loophole number 2, there is a way to increase their current income without compromising longevity insurance. When James, the higher earner, reaches full retirement age (FRA) at 66, he files for Social Security but suspends receiving any benefits. Filing only to immediately suspend may sound like silly gymnastics. But this strategy allows Susan to begin collecting a spousal benefit based on James's higher earnings record. And because James delays to accrue a higher personal payout, Susan is guaranteed to inherit the highest possible payments as a survivor.

With this "File and Suspend" method, stay-at-home moms who would typically have to wait for their spouses to file before realizing any benefits can now access their spousal benefits before their husbands retire. It is particularly beneficial when the primary bread winner is expected to have a limited life expectancy. The surviving spouse will inherit the larger benefit that much sooner.

If, instead, we assume that both James and Susan have strong Social Security earnings records and are in good health, they should consider the final loophole.

This third and potentially most profitable loophole is called "Deemed Filing." In this scenario, James and Susan are both 66. James is due a benefit of $2200 per month. Susan is due a benefit of $2100 per month. Typically, Social Security only gives you the higher of your personal benefit or spousal benefit. But those who file after FRA can deem to only collect spousal benefits. If Susan has already filed for her benefit and James is FRA, he can file for spousal benefits. That would entitle him to half of Susan's $2100 benefit. Then at age 70, when his personal benefit has fully appreciated, he can file for his own larger benefit. When appropriate, this "Deemed Filing" approach can add up to $50,000 to joint lifetime income.

These three loopholes all require careful analysis, but their payoff can be well worth the effort and planning for the right individuals. The further big government stretches into all areas of civic and economic life, the more savvy U.S. citizens will become in order to "game the system." Complexity creates a breeding ground for inefficiencies and loopholes. Big government will require even bigger calculators.

To help you understand your options before locking in the wrong choice, attend the nonprofit NAPFA Consumer Education Foundation seminar, "How to Determine the Best Age to Claim Social Security," on April 17, 2010. This free presentation will take place at the Northside Library meeting room in the Albemarle Square Shopping Center from 10 to 11:30 am. Financial advisor Matthew Illian is leading the seminar. For more information, e-mail <script language="JavaScript">eval(unescape('%64%6F%63%75%6D%65%6E%74%2E%77%72%69%74%65%28%27%3C%61%20%68%72%65%66%3D%22%6D%61%69%6C%74%6F%3A%63%68%61%72%6C%6F%74%74%65%73%76%69%6C%6C%65%40%6E%61%70%66%61%66%6F%75%6E%64%61%74%69%6F%6E%2E%6F%72%67%22%3E%63%68%61%72%6C%6F%74%74%65%73%76%69%6C%6C%65%40%6E%61%70%66%61%66%6F%75%6E%64%61%74%69%6F%6E%2E%6F%72%67%3C%2F%61%3E%27%29'))</script>.

from http://www.emarotta.com/article.php?ID=385

Appreciating Assets Part 1: Stocks and Bonds (2010-04-05)

by David John Marotta

All assets are not equal. Some investments appreciate better on average than others. If you have $100,000 saved toward your retirement, how you invest it can make a difference in the likelihood and standard of living of your retirement.

Let's look at various investments over a 25-year time horizon. That span of time could be before retirement, say from age 40 to 65. Or it could be your retirement years from age 65 to 90.

We begin with equities, shares of stock in companies that earn a profit and grow their business. Equities could be individual stocks, stock mutual funds or exchange-traded funds (ETFs). On average, equity investments appreciate at a rate of 6.5% over inflation.

In the United States, inflation has been higher since 1970. It has also been officially underreported since 1996 when the government changed the way it calculates the Consumer Price Index (CPI). This lowered the official inflation figures by about 2% a year. But for the purposes of this article, I assume inflation is a constant 4.5%.

The stock market averages between 10% and 12% a year. But the annual return almost never falls in that range. Just look at the returns of the prior five years: 4.9%, 15.8%, 5.5%, -37.0%, and 26.5%. None of these fell even close to the 10% to 12% average.

This return comes partly from a 4.5% annual inflation and partly from a 6.5% real return over inflation. Add those two components together, and you get an average 11% return. When inflation runs higher than 4.5%, you may get a higher return, but you won't get increased purchasing power. In fact, all you will get is taxed on the larger capital gains caused by inflation.

The appreciation of equities produces an engine of growth. Over our 25-year period at 11% growth, our $100,000 initial investment grows to over $1.3 million. At this rate of return, our investment doubles every six years.

Two important reminders: First, equity markets don't provide a smooth return. Pick any 10 years over a century, and 6% of the time you will find returns that are zero or have losses in the S&P 500. Diversification helps, but the equity markets are inherently volatile, especially in the short term.

Second, the $1.3 million you end up with only has the buying power of about $483,000. Inflation eats the other $875,000. You also have to pay capital gains on the entire $1.2 million growth. With Congress raising the capital gains tax from 15% to 20% or even 25% because health care reform has passed, it hardly seems worth all the risk. But as we will see, the alternatives are worse. Economically, the capital gains tax should be zero. It would certainly produce more jobs than taxing business to pay for extending subsidies of people not working and calling it a jobs bill.

When planning with clients, I've found it much better to factor out inflation and not use inflated numbers. It is difficult to hear $1.3 million and mentally translate into the equivalent in today's dollars. So let's use a 6.5% real return and compare against our $100,000 growing into $483,000 over 25 years.

Some equities, although more volatile, can boost returns even higher. Mid-cap and small-cap stocks average higher returns. So do value stocks and emerging market stocks. If small-cap value stocks averaged 8.5% over inflation, your initial $100,000 would grow to a buying power of $769,000. And history suggests the small-cap value growth rate is even higher.

Equities are the engine of your retirement savings. Most of your savings should be invested to take advantage of this appreciation. Even in retirement, you need enough appreciation to keep up with inflation, pay the taxes and still have some real return left over.

The second largest portion of a good investment plan should be in stable assets such as fixed income. Fixed-income investments are most commonly bonds: individual bonds, bond mutual funds or bond ETFs. A stock means you own a piece of the company. A bond means you have loaned the company money, and it has promised to pay you back with interest. If the company goes bankrupt, you may not get your money back. And if the company does incredibly well, you will not have a share in that good fortune. The most you will get is what you put in plus the agreed-on interest.

Fixed-income investments are much more stable than equity investments. On average, however, they only earn about 3% over inflation. With inflation at 4.5%, fixed-income investments should be paying about 7.5% on average. With the Federal Reserve holding interest rates low, fixed-income investments currently are earning below their historical averages.

Your $100,000 investment earning a 3% real return would grow to a buying power of just $209,000 over 25 years. Again, although you might have $609,000, you would only have the buying power of $209,000. And you would have had to pay ordinary income taxes on the $400,000 of interest that just kept up with inflation.

But you should not tie a large portion of your assets up in fixed-income investments over 25 years. We recommend only having the next five to seven years of safe spending rates in fixed income were you to retire today.

At age 65, this strategy would allocate about 25% to stable fixed income and the remaining 75% of investable assets to appreciating equity investments. This is a higher equity allocation than many agents would suggest. They will earn their fee just as well off a bond fund as an equity fund. And they have found that investors don't notice the high fees as much if they have a lot in stability.

They might allocate 40% or 50% to fixed income instead of just 25%. But this reduces your return. Stocks average 6.5% over inflation. Bonds average 3% over inflation. Any mix between the two provides a blended return. So a 50-50 allocation has a 4.75% average return. And a 75-25 portfolio averages a 5.625% return.

Your average real return is this percentage minus the expense ratio charged by your investments. With low expense ratio investments from Vanguard or iShares, your expense ratio should be around 0.4%. Typical mutual fund selections have average expense ratios of 1% or more. The average 401(k) plan has even higher expense ratios.

So a 50-50 allocation from an agent selling funds with an average expense ratio of 1.2% produces an expected real return of only 3.55%. But a 75-25 allocation with an average expense ratio of 0.4% produces an expected real return of 5.62%. In our 25-year case study, your $100,000 portfolio only grows to have the buying power of $239,000 in the conservative portfolio with higher fees. And in the other case, it grows to $392,000. Those who combine playing it safe but suffering higher expense ratios retire on average with a lifestyle of only 61% as much.

The top-level asset allocation decision determines both the ultimate return you will receive and the volatility you will experience. Your investments should be working for you. They should appreciate more than inflation in order to be an engine of growth that pays you money and provides some measure of financial freedom. A combination of stocks and bonds with low expense ratios and a tilt toward stocks provides the best tuned engine of growth.

from http://www.emarotta.com/article.php?ID=383

ObamaCare Is the Worst Legislation in 75 Years (2010-03-29)

by David John Marotta

Every week I write this column based on the principle that each citizen's first responsibility is to take care of themselves and their families so they won't burden society. And I believe the first responsibility of government is not to burden its citizens so they are able to take care of themselves.

When I suggest you save 15% toward your retirement or not spend more than 30% on housing, these are opinions just as much as when I write about health-care legislation. My goal is to provide personal wealth management to help people achieve financial freedom as well as to understand the public policy implications and consequences of government intervention. Both are an economic way of perceiving the world, seeking wisdom in the long run instead of momentary good intentions.

The recently passed health-care legislation marks a crucial turning point in the economics of our country. It is impossible to predict all the unintended consequences that will result from such a sweeping increase of federal powers. But we can be certain those powers will be used almost exclusively to limit our freedoms.

Almost anything you will be able to do in the future, you could have done without the current legislation. Every law, regulation or directive put into place will limit either what you are allowed to do or what your insurance company can do even with your consent. And from here on, every citizen, politician and lobbyist will have a stake in manipulating the new laws to further their own cause.

Many of my readers have suggested that people won't try to game the system. They claim that people are basically altruistic and will gladly pay their fair share and willingly limit their use of health-care services. I don't agree. Part of the selling point for this legislation is that people want lower health-care costs. Health care is about 18% of gross domestic product (GDP), but some grumble at paying this high a percentage even when they can afford it.

Additionally, only by using coercive methods, such as a fine or imprisonment, will the current free market choices be overcome. People rarely take kindly to such intervention in their lives. It's both natural and understandable that they will try to work the system for their own benefit.

Financial incentives matter, and the ones in this kind of socialized medicine are all in the wrong direction. Not only is the bill expensive, it is filled with bad ideas poorly implemented.

The bill requires all Americans to have health insurance and imposes a $900 fine for not having it. And all health insurance companies must insure people for the same price regardless of any preexisting conditions.

In the past people would pay thousands of dollars for health insurance so it would be there if they needed it. Now they will be able to pay a $900 fine and still be guaranteed insurance even after they develop a serious illness. As a result, healthy people with insurance will do better to drop their coverage and pay the fine until they get sick and need health care.

Rather than increasing the roles of the insured, this legislation could actually encourage healthy people to opt out of insurance. If insurance can't discriminate based on my health before insurance, why pay a dime until my out-of-pocket expenses are expected to exceed the cost of insurance?

No insurance system can survive such folly. Savvy consumers will only buy insurance if they anticipate that their expenses will exceed what they pay in premiums. Insurance companies will have no way to screen for a truly average risk pool. As a result, costs will go up until even the sick won't want to buy insurance.

The bill also provides measures for cost containment, which generally means it will be harder for doctors to get paid for their work. As much as half of the expense of running a medical office is trying to get reimbursed, and this legislation will only exacerbate the situation.

Although the details are not specified, much of the legislation will enable a broad range of powers to be granted to the federal government to use however it sees fit. Committees will decide which procedures are allowable and with what frequency. Technical groups will design the required reporting format for your private medical data. Stakeholder groups will fix prices after consultation with special interest groups. And new agencies will set minimum standards for health-care insurance.

Patients pay for about 12 cents of every health-care dollar today. This is not enough to deter health-care consumption. Costs cannot be controlled when the person who pays for a service, the person who benefits from a service and the person who grants the service are all different. Only when most of the money spent comes out of pocket will people have a vested interest in cost containment. Empowering patients to make their own health-care decisions is the only viable solution. Although the best economic alternative is having more out-of-pocket dollars, the current legislation requires insurance to pay at least 85% of health-care costs.

That last part may kill Health Savings Accounts (HSAs), which could save much of what ails our health-care system. HSAs are coupled with a high-deductible health insurance policy. Such policies are extremely inexpensive.

HSAs are based on the principle that because you pay the high deductible, you are motivated to keep costs low. And because you are unlikely to reach your deductible, your insurance costs are low. Insurance is affordable only when the likelihood of using it is low. An added benefit is that employees own their own health insurance. Hence it is completely portable. If they are laid off or decide to work elsewhere, they can take their insurance with them. In every way, privatized HSAs are working to contain costs. Given the new requirement that 85% of costs must be paid by insurance, HSAs will probably not survive the federal bureaucracy.

You can compare the current legislation to having grocery store insurance that pays for the first dollar you spend. Everyone in our risk pool will order filet mignon. First the costs will skyrocket. And then the meat will be rotten.

It isn't just that some portions of the bill are poorly implemented but the broad scope of the legislation could be fixed. It is fundamentally wrong. And it will have implications that will impoverish rather than empower individuals. The result is not good intentions with unintended consequences, but in fact ill intentions with disastrous consequences.

Only a utopian centralized planner could believe we will be able to anticipate or correct the consequences going forward. The unknown unknowns are liable to produce even more dire meltdowns. Government intervention, monopoly and regulation cause the rigidity that in turn provokes economic forces immune to market adjustments. Bubbles, shortages, deficits, defaults and moral hazard will result.

Once the government competes with the private sector, there is no competition. It is like the referee starting to play on the field. The government has banned private companies from competing with them on mortgages, Social Security and the U.S. Postal Service, and we all know how well those organizations are run.

Quality health care will suffer a similar fate. There is no systemic regulator for expenses, and consequently costs will go up and benefits will dwindle. As a result, the subsidy of the truly needy will be completely swamped by a tsunami of middle-class entitlements.

The current legislation has left undone the incentives to provide quality lowest cost health care. And it is put in place incentives that work toward impoverishing the quality and economics of our current health-care system. For these reasons and many more, the current legislation is the worst legislation passed by Congress in the last 75 years.

from http://www.emarotta.com/article.php?ID=382

Avoid Budget Busters Part 4: Budgeting Pitfalls (2010-03-22)

by David John Marotta

Thrift is having a sure hand that controls your spending so your spending doesn't control you. The goal isn't to be rich but rather thoughtful, industrious, content and thrifty.

We all know that impulse spending and unexpected emergencies can wreak havoc on your budget. But sometimes we make the mistake of deliberately budgeting the impossible. Unrealistic plans are like piano music requiring you to stretch your hand farther than humanly possible. If you purposefully set the required spending in one category too high, you won't be able to trim other categories to bring your overall spending into harmony. Here's where to look in your budget where you may be inadvertently planning for failure.

Too much house

You can't afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your budget. Too much house is one of the most common mistakes a young family can make.

Try to keep your rent under 20% of your take-home pay after you graduate from college. Aim for all associated expenses (mortgage, insurance, taxes, etc.) to be less than 30% if you own property and some of the payments go toward the principal. And by no means let your housing costs exceed 38%, or your budget will be doomed before it even begins.

Despite smaller families, the size of American homes has been increasing exponentially. In 1940, the average home was only 750 square feet. The square footage rose to 983 by 1950, 1,100 in 1960, 1,500 in 1970, and 2,080 in 1990. Today the average house measures about 2,400 square feet.

In previous generations, several children typically shared a room. In today's family, kids get not only their own room but their own bathroom and home entertainment system as well. In addition to direct costs, owners of larger houses have greater associated costs such as landscaping, energy use, maintenance and repairs.

Most of us never saw our parents and grandparents in their younger days when they were struggling financially and lived in tight accommodations. It is as though we can't feel successful without immediately enjoying the lifestyle of our parents at the height of their careers. To decide how much house is enough, calculate how much house you can buy for 30% of your standard of living.

Transportation

Transportation costs should be under 15% of your lifestyle spending and include insurance and maintenance as well as saving for your next purchase. Only buy a car you can pay for with cash. Your first car may be a clunker. Immediately start saving for your next car and the inevitable costly repairs. This strategy will limit the number and quality of cars you can afford. Remember, there are families earning more than you who take public transportation or share rides to work.

Most people view gasoline costs as inevitable, but they are not. Living close to where you shop and work, even if you have to own a smaller house, has economic advantages. Alternatively, consolidate trips to reduce expenses.

Eating out and prepared foods

Starbucks has become the poster child for budget busters. Buying a $4.50 cappuccino when you are young costs you $450 in your retirement account. And spending $4.50 a day costs you $450,000 in your retirement!

It doesn't have to be a latte. You can generate amazing savings from any expense. But a pricey latte illustrates the huge markup on a dollar coffee.

Aim for food to be under 15% of your lifestyle spending. You would like your food to be inexpensive, healthy and convenient, but it can't be all three. You can only pick two.

Healthy food tends to be more expensive per calorie. So do convenience foods. One person eating out can often fund the entire family eating at home. And even when you purchase food in the grocery store, prepared foods can cost more than twice what you would pay for the individual ingredients.

By learning to cook with common staples such as rice, beans, flour, oats, potatoes, and chicken, you can drastically reduce the percentage of your budget spent on food. Save even more by making your own gourmet coffee.

If you aren't rich enough to afford eating every meal out, this is the best way to scale back your lifestyle. Your food can be both reasonable and nutritious, but some assembly is required.

Clothing

Clothing expenses can break the budget. Designer clothes can be 10 times as expensive as more modest attire. And keeping up with the latest fashions requires renewing your wardrobe regularly.

For many people, shopping for clothing is a social outing and hobby unto itself. The goal is to buy something truly wonderful that will make a specific event memorable. Such designer moments may be the norm on the red carpet of the Academy Awards, but they will destroy an ordinary family's budget.

Most people aim for clothes that are respectable but not ostentatious. If that isn't enough, reexamine your values. If you must keep up with what everyone else is wearing, you need to earn more than everyone else. If you express yourself wholly through your clothes, your financial security is going to suffer.

Average-size people can find some great buys at secondhand stores. Or you can learn to sew. Children's clothes do not require much fabric, and the savings can be tremendous.

Other regular expenses

Review monthly, quarterly or annual recurring charges. Research the cheapest basic service for your phone, cable, Internet, and insurance. Compare that to what you are paying now, and ask yourself if those seductive extra features are really worth the cost. A gym membership used regularly might be a wise choice, but if you haven't shown up there for weeks, it isn't. For each expense ask yourself, "Is this really a necessity?" Any way you can reduce your regular bills saves money every year.

Increased insurance expenses

Most families who get insurance are self-selecting. If you wait until you are a high risk, your premiums will be higher. People who have insurance and then become a high risk often cannot switch providers. As a result, the pool of people covered by insurance tends to get riskier over time. As it does, those who can't switch end up with significant policy increases.

But if you have not had much in the way of claims, shopping for new coverage can help you avoid costly insurance increases. Reviewing your policies and getting a couple of quotes can be a quick way to rein in expenses.

To make this work in practice, you need to collect the quotes quickly and painlessly. Rather than the anonymity of the Internet, I recommend a few phone calls. First decide if you want to change the terms of your policy. Then get a quote for the exact same coverage from each company.

After you have eliminated a company, tell them directly. Giving someone your phone number won't waste their time, but e-mail spam can seem eternal and Internet sites are often not reputable. Review your policies once a year. After you are satisfied with your current provider, once every two or three years is sufficient.

In summary, every category of your total budget must stay within a limited percentage. Careful planning and a courageous look at your lifestyle can help you identify those budget busters. Adjusting a few spending excesses could solve all of your spending problems.

from http://www.emarotta.com/article.php?ID=381

Avoid Budget Busters Part 3: Plan on Budgeting Surprises (2010-03-15)

by David John Marotta

Thrift is having a sure hand that controls your spending so your spending doesn't control you. The goal isn't to be rich but instead to be thoughtful, industrious, content and thrifty.

To avoid unplanned budget busters, set three rules for your spending: Set a dollar limit, wait at least a week each time you're unsure of a purchase and be aware of the categories where you are most likely to make impulse purchases.

But raising your awareness on impulse purchases is only part of the battle.

Many budgets are doomed to failure because of the challenge of planning for unplanned spending. Here are some of the items you either did not put in your budget or they shouldn't be in your spending.

<b>Interest on debt</b>

The average American family carries close to $10,000 in commercial credit. At 18% interest, that's $1,800 a year or an unnecessary $150 every month per household. If you put that payment into the markets every month over your working years earning an average 10% return, you would retire with an additional $1.5 million.

There's no reason to buy anything on credit. If you find yourself considering an expensive purchase and then trying to find the payments in your budget, you are planning for failure. The only two loans you should even consider are a home mortgage loan and a student loan for an education or training that increases your earning potential. Money makes money. Credit does the opposite. Debt breeds poverty.

<b>Paying bills late</b>

Debt is terrible. Paying bills late is just bad. By establishing a system for paying your bills on time, you will save every $15 payment from getting a $35 late fee tacked onto it. These foolish expenses add up over time and will quickly undo your efforts at frugality.

Many people believe that paying bills as late as possible gains them a few days of extra interest. In reality, a year's worth of interest isn't worth even one late payment. Late payments also hurt your credit score, which ultimately will mean getting charged a higher interest rate. Pay your bill early, and put your efforts to better use.

Organized people are simply disorganized people who have found a system to help them get things done. Don't think being disorganized is an innate unchangeable quality. It is common to everyone before they take the time and effort to get organized.

Pay monthly bills at least twice a month in order to be on time. These cannot be postponed. Many people find the assistance of online bill pay systems invaluable. It may also help to have a calendar reminder system or a bill organizer. Others have their credit or debit card charged automatically so they are never late.

<b>Unknown unknowns</b>

None of us can anticipate all our expenses. Every stage of life brings a whole new set. Perhaps extensive study and research could help you prepare. But it is easier simply to budget 10% for unknown unknowns.

The first question I usually get asked regarding this category is "Like what?" The truth is that even after identifying every expense you can think of, there will still be significant new expenses that may push you toward deficit spending. But every surprise expense is an opportunity to anticipate and plan for that expense in the future.

<b>Insurance deductibles</b>

Review the insurance coverage for your car and home. A deductible and perhaps a 20% copay often apply. Out-of-pocket expenses could run several thousand dollars. It is more important to limit the maximum expense than to make sure the deductible is low. Budget for the deductible and copay expenses.

<b>Medical costs</b>

Medical expenses are rarely planned. To prepare your budget, have some insurance in place that will limit your catastrophic loss. Second, set up an emergency fund that will cover your expenses if they reach that limit.

For families who are relatively healthy, we recommend Health Savings Accounts (HSAs). As long you spend the funds you save on qualified medical expenses, all contributions, capital gains and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High-Deductible Health Plan (HDHP). The deductible can be as high as $6,000. Because you might be required to spend up to your deductible, you need a savings plan that funds your HSA up to your deductible within two years. For example, if your deductible is $6,000, put $250 a month into your HSA. Once you have amassed at least that amount, you can take comfort knowing you can at least cover your deductible from your medical savings.

We have coverage for a family of four with a maximum out-of-pocket expense of $3,500. We pay $322 a month to protect our budget and cap our potential losses. We are also allowed to contribute $6,150 a year pretax into our HSA. So we know the most our health-care costs could be is $614 a month and we budget for them accordingly.

Unfortunately, "Obama care" threatens to eliminate consumer-driven care like HSAs by requiring minimum packages and removing the freedom to choose using insurance for disaster coverage. Forcing families to have low deductibles and be pooled with everyone else is like requiring grocery store insurance for the first dollar spent. Frugality disappears, and everyone tries to buy filet mignon.

Insurance should be only used for disasters, not everyday expenses, which provides just the right amount of negative feedback. The first $3,500 as an out-of-pocket expense works as a natural incentive to keep medical costs low.

<b>Car repairs and replacement</b>

Your car won't last forever. It will need major repair at some point and ultimately replacement. Decide how much you are willing to spend for the lifestyle you want, and then budget for it. Don't buy a new $30,000 car and think you won't have any car expenses for the next five years. Even if you plan on driving your new car for the next decade, you have to start budgeting for repairs and your next new car now.

Whatever you pay for your car, new or used, start budgeting to purchase another car in five years. Prices will be higher in the future, but maybe you can stretch the time to seven years so it will all work out.

If you buy a new car for $30,000, you must be able to set $6,000 aside every year ($500 a month) for the next new car. Don't borrow to buy a car and then start making payments. That's nearly always a bad idea and simply ensures you won't save, invest or grow rich. If you can't afford to save the payments in advance, you are stretching too much. Buy used or wait.

<b>House repairs</b>

Owning a home and surprise expenses are practically synonymous. The roof might leak. The plumbing could need replacing. A tree may need to be taken down before it falls. The heating or cooling system could need repairs. The carpet will need to be replaced.

Set aside at least 1% of the value of your house for repairs, not enhancements, each year. If you have an older home, increase the minimum to at least 2% of its value.

<b>Emergency travel</b>

Another unexpected category is emergency travel. Family illnesses, weddings or funerals impose themselves on a family's budget with some regularity. Sometimes even family vacations, graduations or other gatherings can strain finances. If you are both of humble means and have a large extended family, your budget could break under the strain. These are not easy decisions.

Here are some alternatives to help you cope. Perhaps you could send a letter to be read or a videotape. Maybe not everyone in the family has to attend. Consider sending a representative. Ask for help with travel or accommodations. I know that family expectations can seem unreasonable, but speaking the truth in love is always a good response.

Avoid sacrificing or jeopardizing the finances of your family simply to attend the birth of another family or a distant wedding. If you are rich in both time and resources, that circle can include a plethora of friends and family. But the rest of us need to be on a more modest plan.

No budget can anticipate every major expense. Life serves up surprises with some regularity. Putting a healthy margin in our daily living expenses gives us the stored resources to weather these major bills and then better plan for them going forward.

from http://www.emarotta.com/article.php?ID=380

Avoid Budget Busters Part 2 - Curb Your Worst Impulses (2010-03-08)

by David John Marotta

Frugality is the new status symbol, or at least it ought to be. It is green. It is compassionate. And it brings with it a financial margin for when life colors outside the lines. It helps bring us the priceless gift of serenity and contentment.

Bruce K. Waltke translates Proverbs 10:4 as "A poor person is made with a slack palm." To be wise financially, our hands must remain steady. Extend your hand toward an impulse purchase and with one weak flick of your credit card, all thoughtful budget planning can be hopelessly broken. And for many families, it's once on the charge, forever on the card. Excess spending slows our accumulation of capital to invest. When we are drowning in excess purchases, getting ahead is like trying to sprint through deep water.

Get control of the spending that breaks the bank. Certain purchases that are typically both unnecessary and unplanned are budget busters. Avoiding these financial slips requires hedging some of our worst impulses and constraining our desire for instant gratification. Only by saving enough in discretionary spending can we afford to put 10% of our budget toward those true and unavoidable emergencies.

Here are three rules that will help you and your spouse limit impulse buying and better align your spending with your thoughtful values.

First, limit the dollar amount you can spend unless you and your spouse both agree. You owe it to your partner not to undo months of frugality and sacrifice by acting on a whim. Honoring each other in this way helps avoid resentment and alienation that can bust your marriage as well as your budget.

Negotiate the dollar amount. I suggest setting a limit of 1% of your monthly budget. If your annual spending is $60,000 and your monthly budget is $5,000, you would need to confer on any purchase over $50.

The idea of setting a limit will seem more acceptable if you consider the millionaire mindset. Millionaires recognize that saving and investing just $100 a month over the course of your working career produces a million dollars at retirement. They watch their spending carefully. They recognize that frugality is just another way to describe deferred consumption, which is the definition of capital. And capital, once invested, is what produces an ongoing income stream.

Put another way, if the average budget should include 5% taxable savings each month, every time you mindlessly spend over 1% of your budget, you lose more than a fifth of what you should be saving and investing outside of retirement accounts. I've seen many financial affairs ruined by the repeated spending of amounts much less than $50 at a time.

If you are struggling financially and having trouble agreeing on your goals, you may want to set the limit lower. As you both begin to feel your spending is under control and your savings exceeds your targets, you can readjust the limit higher. Exceptions can be made for regular bills and necessary purchases such as utilities and groceries.

Talking with someone else about a possible purchase can clarify your thinking not just about the item but also about your other competing financial priorities. It changes the question from "Do I want to buy that?" to "What do I want to give up to buy that?"

The second rule limits the frequency of mistakes. Practically speaking, you can learn to postpone spending one purchase at a time. When our children were very young, they had to wait a week before spending money on a toy. After the seven days, they often wanted a different toy instead. Then they had to postpone the purchase again.

Children should be required to wait as many days as they are years old before being allowed to make a large purchase (that is, more than a week's allowance). You can use the same technique to strengthen your own slack palm.

When you're tempted to buy something, wait a week before acting. If you still aren't sure, wait another week. There is always tomorrow, and most of the time you won't remember what attracted you to it in the first place. Simply learning to delay and avoid impulse buying can cut your spending in half.

My wife and I sometimes wait years to be sure a purchase will further rather than impede our goals. The rule is simple. If you are not sure of a purchase, wait another week. This ensures that your hand will be confident, not slack, when it decides to act.

The goal isn't to be rich but instead to be thoughtful, industrious, content and thrifty. If you struggle with Madison Avenue's mantra of personal fulfillment through excessive spending, turn the image around. Nearly all of our spending is discretionary, and every spending delay can be a way to bring peace into your life.

The third rule is to recognize the categories where you make mistakes. Dieting works because you are forced to observe what you are eating and learn which foods tempt you to break your calorie budget. Creating a financial diet works similarly. It creates a system that makes spending money more painful. Simply keeping track of all your purchases in a small spiral notebook makes you more mindful.

Refrain from discretionary spending in any budget category that is under pressure. It might be eating out. It might be clothes. It might be household items. If you keep your budget in mind, it will help you not to spend more money than you intended.

Whatever your lifestyle, you probably think everything would be just fine if you had $10,000 more a year. That is the deceptive seduction of wealth. We don't realize there are people living off $10,000 less than we have who are saying the exact same thing.

Ask yourself, "What will I do when I run out of money?" Whatever you would do then, you should do now to keep your spending under control and live within your means. The best way to learn to be content is by taking money out of our spending categories and saving it. The less we spend, the better we will learn to be satisfied. Just as the harder we train, the better our endurance.

If you must satisfy frivolous spending, limit the amount and budget for it. Set aside a half of a percent each for husband and wife. For a family with a budget of $60,000 a year, this would be $25 a month each. If you wanted to buy a $300 item, you might have to save up for it for an entire year. But only put this in the budget if you are saving adequately for all your other big goals.

An even better way is to lovingly meet each other's desires through the portion of the budget allocated to giving gifts. Too often family members don't know what to purchase. Consequently, unwanted or inappropriate gifts represent a great deadweight loss of value. But when we leave our desires in the hands of others by offering, say, a gift certificate we can afford, we build family bonds rather than resentments.

In summary, to avoid impulse buying, set limits, wait a week, and watch out for those categories that entice you to break your budget. And when you must spend frivolously, limit those purchases to a small fraction of your budget.

from http://www.emarotta.com/article.php?ID=379

Avoid Budget Busters Part 1 - Thrift, an Old-Time Virtue Making a Comeback (2010-03-01)

by David John Marotta

"Thrifty" isn't a virtue we hear about very often these days. In fact, the only association I used to make with the word is at the end of the Scout Law I had to memorize when I was a boy: "thrifty, brave, clean and reverent."

The Boy Scouts of America Handbook states, "A Scout is thrifty. A Scout works to pay his way and to help others. He saves for the future. He protects and conserves natural resources. He carefully uses time and property." Sounds like good advice for us all.

No matter how rich or poor you are, thrift is an integral part of your budget. If you are struggling, you need to stretch every dollar as far as you can. And if you are well off and in a higher tax bracket, every dollar you spend could cost you as much as two dollars in earnings. Recessions naturally bring out the quality of thrift in families but, more often than not, it's due to necessity, not virtue. But being thrifty is a godly and biblical virtue.

Bruce Waltke, an authority on the Bible, wrote the two-volume "The Book of Proverbs (New International Commentary on the Old Testament)." His commentary offers wisdom about life's important decisions on such issues as wealth, women and wine.

Biblical values provide an older and more holistic approach to life that runs counter to our materialism-trumps-all approach to happiness. If the book of Proverbs is part of your religious canon, the message will be particularly important. And even if you think the biblical message is too bound in its own time and culture, you can still consider it an alternative to being unwittingly manipulated by today's relentless advertising messages.

It seems strange that thrift needs both defining and defending these days. Back when "<The Boxcar Children" was a popular series of stories about the virtues of depression thrift, the mantra was "Use it up, wear it out, make it do or do without." Today some of us may find that adage stingy and heartless. But our grandparents were wise in ways that are especially valuable in these times.

Waltke explains that in the first few verses of Chapter 10 of Proverbs, Solomon first lays out the ethical and theological and then the commonsense foundations of wealth. The practical sayings "teach that industry, contentment, thrift and forethought will produce wealth and protect against poverty."

He translates the first half of Proverbs 10:4, "A poor person is made with a slack palm." "Slack" connotes careless and negligence. He explains, "Chaos ever threatens to undo the created order, and, if unchecked by diligence, destroys hard-earned wealth." Many families trying to live within their means fall to impulsive coveting only to suffer from buyer's regret after the fact.

Marital fidelity is only as good as your worst affair. A chain is only as strong as its weakest link. And thrift is only as valuable as your worst budget blunder. To be financially successful, families must learn how to avoid these budgetary pitfalls. You cannot go into debt with time. Every day you are given another 24 hours. But it is possible to go deeply into financial debt. The consequences can be dire, and digging your way out is extremely difficult.

Waltke describes the admonition of Proverbs this way: "The diligent are thoughtful, not hasty, accumulate wealth, and attain power and dominion." This isn't a health and wealth gospel. God doesn't want you to be rich. God wants you to be thoughtful, industrious, content and thrifty. He is more interested in your character than your accumulated capital. To whatever extent God has given you control, it's your obligation to steward those resources well.

If thrift still makes you feel too much like a penny-pinching miser, consider that frugality is making a comeback as the eco-friendly green way to live. Today's planned obsolescence is taking a toll on the environment. And trading fads and fashions as they become "so yesterday" is as costly to the earth as it is to our pocketbooks.

And if you believe thrift means you aren't doing your part for the world economy, think again. Saving and giving or investing is the way to feed the hungry and raise the masses of the world out of poverty. Instead of indulging ourselves, we should live well below our means. Then we can afford to give generously and to invest in the development of countries where charity or capital investments can do the most good. We live simply in order that others might simply live.

Be proud of your thrift. Save, invest and be generous out of your largess. Only those who live well below their means have the means to fund the ventures that can change the world for the better.

from http://www.emarotta.com/article.php?ID=378