Love and Marriage and Money. Partnership or Trauma Reenactment?

Marriage and money is a very rich topic where anything can go really wrong. There are all kinds of statistics out there that say money is the number one cause of divorce. Let’s take a look at the just some of the amazing ways money can wreak havoc on a relationship.

1. One person takes control of the money.
This is power move. One person in the marriage will assume responsibility for the finances, take over all the control. This can go so far as to denying the other partner, let’s say the wife, an ATM card or a credit card, and doling out cash on a weekly basis. The wife may have no idea where the bank accounts are, how much money the couple has, and no concept of how the retirement funds are being invested. No idea if there is a college fund for the children, no idea if the mortgage is being paid on time. Nada. This obviously, is not a marriage between two adults.  This is a relationship between an adult and a child, where the child gets an allowance. Not ideal. Couples counseling is recommended for marriages that work like this.

At the less extreme end, one person will say, “Trust me, I’ll take care of it. I’m good at this stuff.” Over time, as one person makes more and more decisions independently of their partner, one person loses financial skills as the other gains them. The financial knowledge gets skewed, and if heaven forbid if the spouse with more financial knowledge suddenly dies. Then the spouse who is left doesn’t know where the accounts are, how to pay the bills, how financially safe or vulnerable they are. The surviving spouse no longer has the financial skills or knowledge to survive alone. Ideally, both spouses have equal knowledge of the household financial profile, and work together towards a secure future.

2. Spouse who makes more money is aggressive in getting their way.
Oy. This is no fun. This is actually abusive. A twist to this scenario is that the spouse that makes less money is compensates and becomes an emotional aggressor. Some people’s marriages devolve into a power game, constant effort to have the upper hand emotionally. It doesn’t have to be this way. Instead of competition, try partnership. Two words – marriage counseling.

3. Skewed views on retirement.
I definitely know people who don’t believe they will live very long. There may be a history of early death in the family, or somehow this notion just lodged in their mind. This belief may drive one person’s “live for today” spending, and cause much anxiety for a partner who is trying to save for retirement or college for children. Work it out. Get on the same page.

I once had a conversation about retirement investing, when it dawned on me that that this guy was only concerned for his own retirement, and not his wife’s. Part of the retirement plan was to loose her somewhere along the way. Forehead slap! Oh my God.

4. My spouse is not financially trustworthy, but it’s OK.
If you feel like your fiancee or spouse is not financially trustworthy, you are going to be the one to suffer from your spouse’s problems. There may be some weird codependent thing going on here – your spouse needs to be with someone responsible, and you need to be with someone irresponsible. Or you may have low self esteem issues and you are tolerating a lot of weird stuff in the relationship. Look this problem straight on. It’s relationship counseling for the both of you, or a lifetime of stress is going to be your fate.

5. Maintaining completely separate financial lives.
Prior to marriage, some people feel safer if they have a separate accounting of the assets they came into a marriage with. A lake house you inherited from your grandfather or a valuable painting or jewelry should remain yours if the marriage dissolves. Couples can sign a document listing separate assets that will not be divided in the event of a divorce.

I know of couples who split household expenses and have no idea how much money their spouse makes! They also have no idea how much debt their spouse has. I really don’t understand how a mutually assured retirement works in this situation.

It certainly is possible to maintain a bank account and investment accounts that your spouse does not have access to. But sooner or later, paying bills, sticking to a household budget, planning for retirement and other goals becomes easier with combined accounts. It is truly difficult to plan for a retirement together when two people are doing it completely separately.

Any individual bank account or non-retirement individual investment account can be changed into a joint account with some simple paperwork. There are a couple of different kinds of joint accounts. The easiest and simplest account is “joint tenants with rights of survivorship.” This means that if one person dies, the account will go to the survivor. Another kind of joint account is “Tenant in Common” means that if one person dies, half of the assets go to the survivor while the other half goes to the deceased estate. This is more typical when there is a lot of wealth involved, and could safeguard against a spouse being sued by estate beneficiaries such as stepchildren or other relatives. The bank or financial institution will present your options for joint accounts. Discuss with your partner the right option for you.

If you are not married, do not combine accounts! Your partner may have debts you don’t know about, and creditors can suck all the money out of the joint account without you giving consent. Or your partner can just empty the account and disappear. If your partner is pressuring you, run away!

6. Making your spouse feel bad for not earning more.
This definitely erodes the trust and safety in a relationship. Oh yeah. Comparing your partner to other people who make more money, stressing your partner out about asking for raises. Even going so far as saying, “I wish I could have a new fill_in_the_blank,” can make your partner feel terrible.

7. Saver vs Spender
This is an age old issue. A source of great tension between married couples. Some spouses do not try to rein in the other spouse’s spending. They do not feel comfortable being assertive and saying “your spending really bothers me” or they feel like since they don’t earn as much money, they don’t have a voice. It just silently drives them insane and the resentment grows. Or one partner may feel suffocated by the other’s miserly ways, and feel trapped where they cannot spend any money. Another option, is that couples can fight it out with screaming and violence. There are deep issues at play here. Once again, two words – marriage counseling.

There is also a practical answer to this spender saver tension, these reoccurring dramas. Make a household budget with monthly savings goals and each person gets an allotment of their own money to spend however they wish. It’s not easy to sit down and sort out a budget, but the peace a budget can bring may be nothing short of miraculous!

8. I’ll fly into a rage whenever we talk about money.
Amazingly, being angry doesn’t improve communication around money, or solve the outstanding money issues. The issue here isn’t even money, it is the quality of your marriage and your safety. If you don’t feel safe around your partner’s anger, get in touch with the local domestic violence resources in your area ASAP. If you believe this is something you can address together, seek out marriage counseling. 

Years ago a friend of mine told me, “Make sure you understand your partner’s financial situation before you get married.” ummm. What? I can hardly be honest with myself about my financial situation! But seriously, marriage can be the first time in a person’s life where they had support and motivation in getting the money issues in order.

Here are some pointers on how to partner up on the money issue.

1. If you have not already done so, take a big step and create a household budget based on the combined incomes. See prior post on how to budget. Be completely transparent with your partner in all debts and all income sources.

2. Pay bills together at the end of each month, review balances in the credit card and bank accounts, discuss any budgetary goals for the next month. Congratulations! You are adults! It takes about half and hour. The deepened trust and partnership this monthly commitment makes is wonderful. You’re a team, you’re going to make it!

3. Make a list of all the financial accounts and keep it in a safe place. Bank accounts, retirement accounts, investment accounts, credit cards, anything that requires a monthly payment such as electricity or rent/mortgage, car lease/loan, car insurance, phone bill, school loans. Make sure each person knows how to pay the bills and the internet access to each account. Make a back up copy of the list of accounts, store it somewhere safe, and where each person knows where it is.

4. Trust, but verify. Get a credit report from one of the three major agencies (Equifax, Experian, TransUnion) for you and your partner.  This way, you can be sure there are no hidden debts and your financial profile is like an open book to each other. Review each report for accuracy. Order credit reports on the first month of every year and check for accuracy.

5. Review beneficiaries on all accounts where you do not have joint ownership, such as retirement accounts and investment accounts. Always have a bead on your combined net worth.

6. Go pro! With your spouse, do a little research and find 3 reputable Certified Financial Planners (CFP) in your community. Meet with each one of them and select the one that is right for you. Before you go, make sure you read Erik Tyson’s “Personal Finance for Dummies” so you have a foundation from which to assess the trustworthiness of the advisor. For a couple hundred bucks, this person should be able to help you with your asset allocations in your 401K, give insight on ways to save and prepare for retirement and other financial goals. Meet with this advisor annually to keep yourself on track. If you have investments with this advisor, meet quarterly (every three months).

The purpose of a CFP is not to sell you insurance and investment products, but to help you come up with a game plan for the most secure retirement possible. If the CFP does try to sell you a product, do your own research online and in the library and see if this is the right investment for you. Ask trusted friends of family members if they have experience with this product.

7. For the sake of your children and close relatives, get a Trust and Will. Again, do some research in your community and meet with 3 Trust and Estate lawyers. Understand their fees and assess their experience in the field. Ask a business owner in the community, your doctor, or a friend who is a lawyer if they know of a good Trust and Estate Attorney. This is going to cost over a thousand dollars, but if you have a lot of assets this will definitely be worth it. You shouldn’t have to make changes too frequently. During the first month of each New Year, review your Trust documents together, to make sure you both didn’t forget what is in there.

8. Be kind to each other and have faith in the strong team that you are together.

This list isn’t comprehensive, but it’s a start. Every situation is different. As you become informed, you’ll discover what resources work for you. It’s a bit of a learning curve to being a financially competent adult and couple. Nobody ever talks about it or gives us tips on how to make it work.  It is a tremendous stress reliever to have all the ducks lined up as well as possible. We can only do the best we can in this crazy world.

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Lottery Winner Syndrome versus REALITY. Yes, you need a budget.

You’ve seen those people show up on the talk shows. People who have won millions in the lottery, only to be poor again a few years later? Amazingly, they blew it all. They thought they had a bottomless barrel of money, but they end up with nothing, and maybe even a lot of debt.

The problem with the lottery winners, is that they didn’t have any idea of how to restrain their spending. (Another problem is unscrupulous financial advisors, but that is a different story.) People like you and me can sit in our armchairs and go “tsk tsk, I would have found a way to hold onto it.” But is that really true?

Take a look at how you deal with a paycheck. Do you have lottery winner syndrome with your paycheck? Once you get your hands on it, do you blow it all? So many people get their paycheck and spend spend spend. They go out to dinners, pick up tabs for drinks, buy stuff, and then have to hold their breath to make it to the next paycheck. This binge starve cycle would be rudely interrupted by inconveniences such as rent money due, credit card bill, electricity bill, cell phone bill. There always seems to be something owed that ruins the paycheck party. One of my friends used to say when she was getting short on funds, “I’m going to sit very very still and not spend any money.”

There is a cure of lottery winner syndrome. It’s called a budget.

YOU need a budget. No matter how rich or poor you are, you need a budget. This is what the lottery winners have shown us. If you have years and years of earning a paycheck and not much to show for it, you need a budget. If you are a millionaire, you need a budget. If you are broke, you especially need a budget.

How to make a budget.

1. Get your courage up, and get ready for REALITY.
This is one of the hardest and most fundamental truths you are going to have to face in your life. It is the truth of what you can afford, and what you cannot afford. It is really hard, because if the numbers don’t fall out right, you have to make some very big life changing decisions. You may have to move to a cheaper place, you may have to get a second job, you may have to sell some stuff.

If you are someone who hid from financial reality, this is a very hard thing to do. Your self esteem may be affected, you may even feel a deep sense of shame. I’m telling you, a lot of people don’t have a budget because they don’t have the spiritual strength to face the reality of their lives. They just muddle along, hoping for the best, but then stress out every time the rent is due or the have to pay the credit card bill. These monthly shocks to the system are a signal to your inner self, that it is time to face reality. It’s time apply courage, and look at the numbers.

2. Find the absolute must have amount you need to survive monthly
The first thing to do when making a budget is to make a list of all of your monthly expenses you need to survive. These are the payments you must make in order to maintain a functioning home for yourself and cover your requirements. These fixed expenses are your “must haves” and they typically include:

Health Insurance
Car Payment & Car Insurance
Utilities (Electricity, Gas, Water)
Internet Bill
Cell Phone Bill
Telephone Bill
Public Transportation
Gas (Estimate $70 to start)
Food (Estimate $450 for one person)

On a sheet of paper, list our your “must haves” and what you typically pay. Add them up, and you have to make this nut in order to live. It’s a pretty big and scary number for most people! Wow!

As you start tracking expenses, you will get a more accurate idea of what you spend on food, gas, and transportation. Notice I didn’t put here other monthly payments such as cable TV, gym memberships, or other monthly payments that don’t have anything to do with food, shelter, communication, and getting around. You will notice that most of the numbers here are fixed or fairly stable – like your rent, utilities. The big variable figure here is the food expenses. Just a couple of more dinners out a month can cause your food budget to ballon by a hundred or more dollars, which can add up to a thousand plus dollars a year.

Take your “must haves” total and see how much of salary covers these expenses. Ideally, your “must haves” are covered by 50% of your take home pay. Half of your monthly salary should go into paying for all of life’s necessities. What about the rest of your paycheck? 30% of your paycheck goes to “fun money” and 20% to savings or debt repayment.

You may be wondering where these percentages come from. They are recommended by current Massachusetts Senator Elizabeth Warren, founder of the Consumer Finance Protection Bureau. She wrote a personal finance book with her daughter, Amelia Tyagi, called, “All Your Worth.” I have been living by this budget since 2005. Although 50% for “must have” seems a little low, it is amazing how incidental expenses suck away at the remaining 30% allocated to “fun money”.  Going out to movies, new winter coat, haircut, new sneakers, clothing, gym membership, anything and everything you can think of that eventually gets hauled in through your front door. Saving that 20% just isn’t possible unless that 50% is lined up and that 30% is restrained. I’ve lived by this budget since 2005. The 50/30/20 plan is based on good sense. It is difficult, but it works.

The 50% “must have” figure contains a very important number. The amount of money you can spend on rent or mortgage is tucked into the 50% number. People think that if their rent or mortgage is a little less than half of their take home, they are going to make it. This just isn’t true, and what happens is people start hitting their credit cards to cover must haves, they cannot save anything out of their paycheck, and a downward spiral starts.

3. Now that you have a 50/30/20 budget, here is the plan.
Start tracking every expense you have. Save EVERY receipt and make note of every payment you make. Develop a method that works for you. I’ve been using an excel spreadsheet since 2005 to track all expenses. Some people prefer paper and pencil. The name of the game here is to get a handle on actual spending for a month or two, and see how close you are to the 50/30/20 plan. Examine if saving that 20% is feasible and possible, and what it is going to take to get there. If you are every fortunate, you will be able to save much more than 20% of your take home pay a month. Maybe you can shrink the 50% and 30% and make the 20% bigger without going insane. If you are like most people, sacrifices and changes are going to have to be made in order to just make 50/30/2o happen. One you have a handle on your budget and the percentages, you can start to strategize. If you have credit card debt or other debts, you can strategize – how much of that 30% and that 20% can I put towards debt repayment? Here is a framework for a lifetime financial plan:

1) Save $1000 cash as a baseline emergency fund
2) Get out of Credit Card Debt and pay off any store credit cards.
3) Save 3 – 5 months of “must have” living expenses in cash. You know what this is because of your budget.
4) Save 15% of household income in a company 401K or Vanguard IRA plan. This is your retirement savings. You will never withdraw money from this plan until your retirement.
5) If you have kids, open up a Vanguard 529 plan and start saving for your kids college education.
6) Save for other goals with the remaining monthly funds. Such as a new car, or vacation, or put more towards the mortgage. You can also create an investment account outside your 401K.

If you have credit card debt, you may be in for a long road. If you have $4,000 worth of credit card debt and $500 in that 20%, it is going to take you 9 months to get out of debt if you throw all of your 20% savings in getting out of debt. If you an squeeze back on your 30% fun money and throw more at your debt, you can get out sooner. Just think of how amazing it will feel to not have to deal with that scary bill every month.

For great encouragement and information on getting out of debt, I recommend you read “Dave Ramsey’s Total Money Makeover” book.  His great strength is being a support when you need to get out of debt. Some people may find his evangelical Christianity and political conservatism offensive, and there are much better sources for investment advice. However, for getting out of debt, Dave is the man.

While you are working on your budget and getting out of debt, I highly recommend you read the most recent edition of Erik Tyson’s “Personal Finance for Dummies”, “The Bogleheads Guide to Investing,” and Elizabeth Warren’s “All Your Worth.” With these books, you can access more knowledge of budgeting and investing.

It almost sounds a little bit crazy, but I think employers who hire students right out of college should have basic personal finance workshops as a part of job orientation training. I think people will be able to work with much clearer minds without all of that financial stress nagging at them.

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Investment Advisors and zany investment products. Caveat Emptor!

Caveat Emptor. Let the buyer beware.

I encourage anyone about to embark in a huge financial decision to do some research to gain confidence. For instance, if you want to buy real estate for the first time, go to the public library and look up books on mortgages and home ownership. Look at the blurbs on the back cover of the books and see who is recommending the book. If you need help with investment advisors or doing your own investing, again  – get to the public library. Also, go on and look at the book reviews of investment guides. Do research, it can save you a lot of tears and is absolutely worth your time and focus.  After all, this is your financial security we are talking about.

One thing to NOT do is to go on Yelp and try to find a five star investment advisor. “My guy is really great! He’s super nice.” How many financial advisors are total jerks and treat their clients like crap? ZERO. Their job is to kiss your ass.  What does that have anything to do with investment performance or fees? I would invest with Attila the Hun if I thought he constructed the soundest asset allocations with the lowest fees. Do these Yelp reviewers benchmark their advisor’s performance against well known indexes? I’ve never seen a single yelp review of an advisor post their realized performance vs a benchmark.

Meeting an investment advisor is very intimidating. There is dramatic information asymmetry out there. They seem to know a lot, and you feel like you don’t know much. It’s a terrible awful powerless kind of feeling. At the end of the day, you just may throw up your hands and give this person your life’s savings because they seemed trustworthy enough and you don’t have a clue. This is why I encourage you to read up on investing from books such as “Dummies guide to Personal Finance” or any Dummies book written by Eric Tyson, or “Bogleheads Guide to Investing”. However, even if you read such books, you can meet with an advisor and get totally thrown for a curve,. This advisor may recommend products that these books never mentioned. Now what do you do? Maybe these products are better than what was mentioned in the Dummies books?

No. They aren’t better. They are worse. (no) Surprise!

A friend of mine met with an investment advisor. Wow, Wall Street just keeps churning out all kinds of new fangled bad tasting sausage. Whoever said, “there is nothing new under the sun” has never meet with an investment advisor! Let’s take a gander at some of the options.

1. “40 Act funds” Long/Short, Global Macro, Total Return Funds.
A 40 Act fund refers to the Investment Company Act of 1940 which regulates mutual funds. This is just a fancy way of saying that you are getting kinda sorta hedge fund type exposures but in a mutual fund. In a regular hedge fund, the investment minimums are huge. They can be $500,000, $1 million, $5 million, even up to $25 million or $50 million. There are very very few people who can afford to invest in a variety of hedge funds to diversify their exposure. You never EVER want to put all your money in a single hedge fund – remember Madoff and his (newly) poor clients? Also, to invest in a hedge fund, you have to be a “qualified investor” or “accredited investor” meaning you have investible assets of greater than a million dollars or make more that $200K/year. This is probably not you.

Furthermore, it is very difficult to get into the best hedge funds. The managers actually don’t want the burden of managing too much money. Believe it or not, is harder to go fishing for wins and get performance gains when there is too much money to manage. Also, there is a lot of turnover (buying and selling)  in hedge funds – which creates short term capital gains and are taxed at 35% federally.  The entities best positioned to take advantage of hedge funds are non-taxable entities like endowments and pensions, not you, even if you are worth a hundred million dollars.

These “40 Act” funds still aren’t real hedge funds. They don’t make leveraged bets and they are not, in fact, hedged against downside risks. Also, these funds NEVER outperform the equity indexes when equities are going up and up, and their fees are unreasonably high. I’ve seen some of them that charge 5% a year! Even a “normal” hedge fund only charges 1% or 2% a year (they also take 20% of the gains, but that’s a different story). I think advisors pitch these funds to investors because they sound exotic and sophisticated, when in fact they typically underperform equity indexes in a 3 year horse race. Just as an exercise, if this ever happens to you, ask for the ticker symbol of the recommended “40 act” funds. Take a look at the total AUM or Assets Under Management of the suggested fund, and also look at the historical performance vs the S&P 500 Index. The fund isn’t very big huh? Just a couple million in it, or a couple hundred million. The smart money just isn’t going there. If there was an iota of gain to be had from these funds, the endowments and pension funds would be flooding these funds and they would be billions of dollars. But they aren’t. So neither should you.

2. Tangible Assets – commodities as an inflation hedge, REITs
Whooo boy. Now we’re playing with fire. Commodities, in and of themselves, do not produce any income. A piece of gold, unlike a stock, does not make earnings and return dividends. The investment philosophy here is that as inflation rises, the intrinsic value of commodities will also rise. But if you have been paying attention, you will see that commodities are mainly for speculators, and certain commodities move in and out of favor. Furthermore, not many commodities players make the front page of the Wall Street Journal as the master of the markets. In fact, the most recent commodities guy who made the front page was Jon Corzine of MF Global Holdings, whose company made the wrong bets and then stole from client accounts to cover their losses. There’s the occasional hedge fund commodity player who hits big and makes the news, but this performance is not commonly repeated in the intervening years. Regardless, this was a hedge fund, and not the instrument your advisor was pitching you.

For sure, you can get exposure to commodities through an ETF, the favored instrument of speculators everywhere. You will go for an almighty ride. Commodities are also seen as a counterpoint to equities. When the chips are down in stocks, investors tend to flee to commodities (and Treasury Bonds) as their value is seen as more stable, and then the speculators move in too. Some commodities exposure can be helpful from a rebalancing standpoint. Commodities may help your overall portfolio hold on to value if you rebalance regularly, but it is not essential. You will see that in environments of rising inflation, stock prices also nudge upwards and dividends increase. Bond funds can also play the yield curve and extract performance that keeps pace with inflation.

Real Estate Investment Trusts, or REITs, are a nice addition to a portfolio. REITs make money because the real estate the trust owns collects rents from tenants, and also owns the underlying real estate. Rents and real estate values go up with inflation, and responsibly managed REITs are a nice diversifier in an asset allocation. There are as many different kinds of REIT strategies as there are types of real estate (hospital, shopping mall, housing, etc). Just make sure you get a REIT that does not have expense ratio over 2% or a front end load, has been around for more than a decade, and doesn’t have a tiny AUM of just a couple of hundred million dollars. A good REIT will have staying power, and investors will have been attracted to that REIT. Vanguard has a REIT, and it’s all right.

3. Individual Bonds.
Bonds are more stable, make slow and steady gains, and offset the risk in your portfolio. Every well managed asset allocation will have some exposure to bonds. People nearing retirement and looking to lock in value will lean towards 80% fixed income or 90%. A simple rule of thumb is to have as many bonds as the decade of your age. If you are 43, have 40% bonds in your portfolio, etc. It is a fine idea to have some bond mutual funds in your portfolio run by a very big fixed income asset manager, such as PIMCO, Vanguard, BlackRock, or JP Morgan.

You should never EVER own an single individual bond issuance. Unless you are worth over $250 million dollars, seriously, you should never be sold individual bonds for any reason, whatsoever. The fees advisors charge in individual bonds can be as high as 20%. This fee is disguised as the difference between what the advisor paid for the bond, and what you bought it for. It is hidden. you will never know how ripped off you were. Unlike the stock prices, price discovery on individual bond issuances is not easily accessible by the individual investor. Bonds are sold in a decentralized over-the-counter manner. For instance, if trading institution has a large lot of bonds to sell, they will alert institutional purchasers and have an auction. This collection of purchasers will submit their bid for that bond, and the highest bidder wins. It is not like the stock market where you can see the stock price and just buy that stock for the listed price.

And if you ever try to sell that bond, you will be ripped off again. No one should own a collection of a $10,000 muni bond here and a $5,000 muni bond there, etc. No individual should ever own a single corporate bond. If you have this, you were paying hidden commission fees. Honestly, does your investment advisor think he can do a better job of managing a bond portfolio than Bill Gross of PIMCO and meet/beat the bond indexes? If your advisor could do this consistently, he/she would be on the cover of the Wall Street Journal and as rich as Midas.

4. Separately Managed Accounts.
Goodness. The fun never ends! There are all kinds of separately managed accounts. This is where your money is managed like its own mini mutual fund. If you have an equity separately managed account, basically your advisor is picking stocks for you. If you have a fixed income separately managed account – didn’t I already tell you not to have one since the fees are outrageous?

When your advisor picks stocks or bonds for you in a separately managed account, they make a commission on every trade. Oftentimes, the commission your advisor makes on individual stock trades far outstrips the expense ratio of a mutual fund. If you invested $1,000 in the Vanguard S&P 500 Index fund, the expense ratio is 8 basis points. Or, you are paying 80 cents a year to Vanguard for investing in the fund. I promise you, if your advisor buys $1,000 worth of stock for you, you will be charged far more than 80 cents. You may be charged $50, or 5%. Think of it this way, if the stock market ever fell 5% in one day, it would be a worldwide calamity that would hit the front page of every newspaper in the world, and this calamity just happened to you because you have a separate account.

If your advisor does manage separate accounts, just for fun, ask for the actual historical performance of the separate accounts against an appropriate benchmark. They probably won’t give it to you. And honestly, if someone had the midas touch as a stock picking separate account manager, they wouldn’t be an investment advisor. They would take that performance record and be picking stocks for a huge insurance company, pension fund, or endowment and making a paycheck in the millions of dollars. Or they would be named Warren Buffett.

Some separate accounts try to mimic the performance of an index, such as the S&P 500. They say that you’ll get approximate S&P 500 performance, but they’ll sell the stocks that lost value and you’ll be able to have a tax write off on those losses.  Some managers will do a separate account for a flat fee, which tend to be very high. The managers that say they’ll do it “for free” are the ones that are taking commissions on each trade. Don’t be fooled. Always follow the money. The best of them only charge around 30 basis points and are run by specialty firms that cater to wealthy families. However, the tax losses peter out over time as your separate account becomes bloated with stocks that have only increased in value. And then, this overweight of bloated stocks doesn’t always keep pace when the market goes on an upward tear. If you like to make a lot of charitable donations, one strategy is to take the stocks that have increased in value and donate them to charity, and you can get a tax deduction. But this strategy is really only for people who have more than $25 million to invest in a separate account equity strategy.

What you should do.

Here is a guy who is trustworthy and knows what he is doing. He manages the endowment of Yale University and his name is David Swenson. Swenson has won the respect of Warren Buffet – not an easy thing to for a portfolio manager to do. This guy has been a great success for Yale. He could have been a billionaire private equity guy or hedge fund manager. Instead, Swenson has a job, collects a salary, and writes books giving sound investment advice. He occasionally pops up on NPR. Like all the best guys, he recommends low fee Vanguard Index funds. Here is an example that he gave of an asset allocation. It has global exposure to the stocks, some real estate, and bonds. You get inflation protection embedded in the portfolio, and any upside the markets provide. You can open an account at Vanguard, and get going. DISCLAIMER – I am not your financial advisor and I am not responsible for your losses if you invest in the below funds. You are reading this blog at your own risk. As for the below funds, past performance is no indication of future results.

30% Domestic Equity. Vanguard Total Stock Market Index Fund (VTSMX)
15% Foreign Developed Market Equity. Vanguard Total Intl Stock Index Fund (VGTSX)
5% Emerging Market Equity. Vanguard Emerging Market Stock Index (VEIEX)
20% Real Estate Investment Trusts, aka REITs. Vanguard REIT Index Fund (VGSIX)
15% US Treasury Notes and Bonds. Vanguard Intermediate Term Treasury Fund (VFITX)
15% US Treasury Inflation Protected Securities. Vanguard Inflation Protected Securities Funds (VIPSX)

If you’re going to invest, first make get out of all credit card debt, save 6 months of living expenses as an emergency fund, and then max out your 401K or IRA tax deferred investing. Here is a link to the NPR article on David Swenson, and it also says a little something about his book.

Good luck to you. This is a risky game. It is terrible that we Americans have only our 401K contributions, other investments, uncertain investment savvy and scraps of social security to keep us afloat in our retirement years. Each one of us has to be an investment professional, and a lucky one at that! Many Americans cannot afford to set aside money for retirement and will rely on social security alone. Who said that investing the maximum amount in a 401K year after year will even lead to a secure retirement? The market could fall 40% like it did in 2008, and if you weren’t a psychic with a keen sense of timing, you would be out of luck. We invest because we have no choice. Our cash savings won’t get us to a dignified retirement. We need those compounded returns to get us there, on a wing and a prayer.

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Robert Reich’s “Inequality for All”. US richer than ever, but not you.

If you are wondering why your paycheck isn’t going far, and you are blaming yourself for not working harder or earning more, this movie is a real eye opener. There was a lot of surprising information in this film:

1. The US is doing better than ever, just not you personally.
Wealth has continued to grow in America, reaching higher and higher levels. Only thing is, it’s not going to you. While wealth has grown in the US, wages have flatlined since the 1970’s. Your wages have flatlined in an environment of ever increasing costs for housing, healthcare, and education.

If wages for the working stiffs like you and me have flatlined, but wealth is increasing in the country, where is it all going? It is going to the very wealthy. 400 Americans now have the same amount of wealth as the bottom 150 million Americans. 150 million, that’s half the country. How did that happen? It’s because they paid themselves more as their taxes fell, and your wages have not went up.

Reich’s movie reviews how taxes on the wealthy have grown progressively lower and lower as the decades ticked by. As taxes were lowered on the highest income brackets, their compensation increased sky high. It was not unusual to see CEO’s of large firms getting paid $85 million dollars a year, over $100 million dollars a year. People in charge of companies rewarded themselves with higher and higher salaries, cut pensions, and let wages flatline.

There is plenty of wealth in America. The country is doing great. It’s just that you aren’t getting any of it. If you work for a large company, the wealth of your company is going to executive salaries and dividends to shareholders.

Part of the problem is, as America moved off its manufacturing base, organized labor unions didn’t follow workers out of the factories and into the offices. Organized labor was associated with people who worked with their hands for a living. People who worked in offices believed they didn’t need to unionize because they were educated and skilled, they were valued employees. They were wrong.

As taxes were lowered, there was less money available to fund public universities, schools, and other public initiatives that use taxes benefit the greater good. An example of this was in our own recent past, when after going to war in Iraq and Afghanistan, taxes were lowered on the wealthy. Typically, wartime is a time for austerity, when the entire country bands together to pay for the war initiative. Remember the war bonds raised during WWII, and rationing? There were no new cars being built in America during WWII, all the materials went towards the war effort. Cutting taxes during wartime was a very bad move fiscally, as the country went into debt to pay for the war.

2. There is no where left to turn. Wages must go up.

As the big ticket costs of healthcare, education, and housing went up, Americans dealt with this by sending women to work. If you were a kid in the 50’s or 60’s, chances are you were raised in a one income family. Go ahead, ask your parents or grandparents. Ask them how they made ends meet. It is likely only one adult in the household worked. If the family owned the house they lived in, it is also likely the price of the home was similar to the annual salary of the working adult. A new car was around $2,000 to $3,000, much less than a working person’s annual salary.  Nowadays, instead of a house costing as much as an annual salary, a car cost as much as an annual salary.

Sending kids to college in the 50’s and 60’s wasn’t a problem as state college cost a couple hundred bucks a year. Kids could easily earn the cost of a year’s tuition with a summer job and a job during the school year. They graduated with no debt. 

As Helaine Olen wrote in Pound Foolish, “What we considered the halcyon days of financially responsible Americans in the 1950s and 1960s was, in reality, a golden era of corporate and government support, ranging from pensions to the G.I. Bill, which allowed veterans to go to college and buy low-cost housing at fixed and minimal interest rates. As these supports dried up, replaced by more complicated and less effective vehicles like the 401(k), no-money-down mortgages, student loans, and high-interest credit cards, our finances dried up as well.”

It is true. In the 1970’s as prices rose and wages did not also rise, families felt squeezed and two incomes became necessary. The 1990’s saw the end of the pension and the beginning of the 401(k) era. People observed that home prices were rising faster than wages. Many saw home ownership as seen as the ticket to wealth building since their jobs were not paying more and it was so difficult to get a raise. So people stretched and bought homes they actually could not afford. As prices continued to rise without wages rising, people started borrowing against the value of their homes with home equity loans, and starting using credit cards as a means of survival.

There is no where else to go now. We have all adults in a household working and even the kids, we have borrowed against the value of our home, we have maxed out our credit cards. As Robert Reich’s movie so eloquently argues, it is time for wages to go up because there is no where else for households to turn. As households feel squeezed, there is no way to save in a 401(k) or IRA. Wages must go up. Food and shelter and old age have become unaffordable for even middle class americans. Economic fear is pervading the country, all because wages have not risen with the cost of being alive. 

3. Middle class spending creates jobs. The middle class are the true job creators.

The movie shows that 75% of the Gross Domestic Product (GDP), the market value of all the goods and services sold in the United States, is driven by consumer purchases. We are all a part of the economy, and the spending of the entire population of the country drives its growth. If you watch the news around Christmas, the reports from retailers are a vital sign of the health of the American household. If people buy a lot, it suggests household incomes are strong. It’s pretty obvious that 400 rich Americans cannot buy as many holiday presents as 150 million people. There is just no way. A healthy middle class drives the spending that creates the jobs.

The return of the labor union may be one way back. If labor unions can increase wages where they have influence, a rising tide may lift all boats. Companies have got to start paying their employees more and their shareholders less. The federally mandated minimum wage must go up. The minimum wage must be a living wage, and not a salary that has to be augmented with food stamps, housing allowances, and charity.

4. It’s on us.

A stronger America is not going to happen without more participation from the citizens. Occupy Wall Street was an interesting start. It woke people up, but it didn’t change anything. I’m thinking about how to become a better citizen and participate in a country with a strong middle class.

photograph by Celso Flores, taken September 21, 2009.

photograph by Celso Flores, taken September 21, 2009.

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John Bogle, the guy who could have been the world’s richest man.

John Bogle could easily have been the richest man in the world. He is the founder of Vanguard, the least glamorous company in finance. Vanguard is among the world’s largest money management companies, with over two trillion dollars under management. TWO TRILLION! A little bit of two trillion dollars is a whole lot! He could have all it all, but instead he had integrity.

Before John Bogle came around, the S&P 500 Index was just a concept. The index existed only as a reporting methodology for the grouped performance of the 500 largest publicly traded companies. There was no index fund, there was only the index. Standard and Poor’s started recording performance of their S&P 500 Index in 1923, and has done so ever since!

Money managers have long compared their own investment performance against the index. The index was the benchmark they measured themselves against. The S&P 500 index let them know if they were successful or not, and by how much. When Vanguard was just getting started in the 1970’s, Bogle said, “Why not just have a mutual fund of the index, and clients could get the index return?” (Not a direct quote, just my own conjecture of what he was thinking.) It was a completely radical idea. Why would anyone want just the index return? The point of money management was to try to beat the index, not match the index.

Allow me to digress for a moment. Any person who can consistently outperform the index on a regular basis will achieve worldwide fame and unimaginable wealth, such as Warren Buffett. Do you know any other investment guru? No. It’s because there hasn’t been anybody else who could beat the market year after year. There have been a couple of one hit wonders here and there. Pro tip: the next time some someone says that they have a great investment idea, just say you’ll wait it out. If they really are that good, they will really become that rich and famous, and they will be able to repeat their success. In the meanwhile, invest in the Vanguard S&P 500 Index because at least you know you’ll be getting the market return.

Back to Bogle. Bogle saw that managers were charging around 2% for a management fee. He calculated that the index fund would cost around 0.3% to manage. You could say the index fund was already outperforming the other funds by 1.7%. Analysis has shown time after time, the S&P 500 Index will outperform most large cap funds on an after-tax after-fee basis in a 3 year horse race, and ALL large cap funds after a seven year time period. So why not just invest in the simple index? Despite all of Wall Street’s obfuscation, sophisticated investors know that the lowest fee S&P 500 Index fund is the wisest place for large cap equity exposure. This is how Vanguard’s S&P 500 Index fund became the largest equity mutual fund in the world. All the smart money invested in the fund, and they stayed there. As Vanguard expanded its offerings into other index funds, the smart money went there too.

During the creation of Vanguard, John Bogle did something truly remarkable. He decided that the moral purpose of a money management company was to make money for the investor. And acting on this morality, Bogle organized Vanguard as a mutual company. Every shareholder of a Vanguard mutual fund is also a shareholder of Vanguard. John Bogle does not actually have any special equity ownership in the firm, and during his career at Vanguard he collected a salary like everybody else.

The fees that Vanguard charges on the mutual funds go into the management of the firm. The fees pay the salaries, the office supplies, the electricity, the technology, and etc. Vanguard is very well known for keeping firm expenses as low as possible. If there is any money left over after expenses are paid, money is returned to the fund investors not in the form of a check, but in the form of reduced mutual fund expenses. Remember, the lower the fees, the better the performance. Vanguard’s fees are the rock bottom lowest in the industry.

In a “regular” company, fees are set as high as possible, and excess earnings are put straight into the pockets of the owners of the firm. Fidelity Investments, a competitor of Vanguard, is privately owned by the Johnson family. The Johnson’s make regular appearances on the Forbes magazine list of wealthiest families in America. They have enriched themselves beyond belief on the backs of investors in Fidelity mutual funds. You’ll never see John Bogle on any of the “top wealthiest” lists.

There are plenty of publicly traded companies that also sell mutual funds. There are Goldman Sachs mutual funds, Citibank has a fund line, so does Morgan Stanley and so on. The fees of mutual funds produced by publicly traded companies are typically much higher than private companies. A publicly traded firm has to serve two masters: the clients of the firm and also the shareholders. Therefore, in addition to operating expenses, fund fees of publicly traded companies must also support shareholder dividends and retained earnings. Guess which mutual funds are among the poorest performing in the industry? That’s right, the high fee funds run by the publicly traded banks. Goldman Sachs has frequently been among the worst performing.

If not for John Bogle and Vanguard, fees on Wall Street would be a race to the top. You know how much those bankers just love charging the highest fees possible. But Bogle took a stand and decided that an investment firm should exist to serve the investor. Strangely, this seems to be an entirely unique and foreign concept on Wall Street.

John Bogle, American saint and founder of Vanguard. He is truly one of my heroes. Open a Vanguard account, and invest in the S&P 500 Index fund!

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401K Fear and Loathing

On Saturday, I adjusted the asset allocation in my 401K plan. It was nerve wracking. I was putting down 25% for this fund, 15% for that fund, and so on. I truly believed that my retirement depended on my ability to do this right, or else I would be totally screwed. Which is true, actually. None of us little people are ever going to save enough money in a bank account to retire. We need to have the magic of compounding returns in tax-deferred retirement accounts to have a prayer of a dignified, self-sufficient old age.

For 2013, the maximum you can set aside in 401K plans is $17,500. (This amount adjusts upward every year or so, according to inflation and the whims of the IRS.) That is A LOT of money. It is a huge privilege to be able to max out your 401K. The truly privileged put the entirety of their retirement contribution in a Roth 401K. With Roth 401Ks, retirement contributions are made from after tax income. You pay taxes on contributions now, and you do not have to pay ordinary income taxes when money is withdrawn later.

Did you catch that last sentence? Unless you can Roth it, you have to pay the prevailing tax rate on withdrawals from your 401K plan when you are in retirement. If you pull out $32,000 during a calendar year, you have to pay the IRS the same taxes you would owe if you had a job that paid you $32,000. So, the amount you have in your 401K isn’t really the amount you have available for retirement! However, you don’t have to pay FICA (social security and medicare) taxes on 401K withdrawals. You have already paid into social security and medicare during your working years, so you can supposedly reap the benefits of those contributions in your golden years.

It is a privilege to even have a 401K plan. According to Vanguard, only half the workplaces in America have a 401K plan. Companies are not legally required to have them! If company owners want to participate in a 401K themselves, they have to offer it to all employees. Without a 401K, the other option a company owner would have for retirement is an IRA, and contributions are limited to $5,500/year for 2013. This is far less than $17,500. (Remember, the name of the game is to put away as much as you can for as long as you can and experience the miracle of compounding returns!) Of course, if a company wants to attract talented employees with a shred of self esteem, a 401K plan is a standard benefit, as is health insurance.

Interestingly, company owners and “highly compensated employees” of a company cannot contribute the maximum annual amount into a 401K unless the plan passes certain nondiscrimination standards. This means, non-highly compensated employees must also contribute to their 410K plans, and if they don’t contribute enough, the big shots cannot squirrel away the maximum $17,500. Of course, there are ways around this. An obvious one is that companies could pay their employees more, so rank and file staff have some money left over at the end of the month for 401K contributions. Or companies can refund a portion of 401K contributions back to highly compensated employees, so the ratio of highly compensated employee contributions versus staff contributions fall back into a nondiscriminatory ratio.

The common option that most companies take is to give a bonus paid directly into non-highly compensated employee 401K plans, and the size of that bonus fulfills the ratio requirements necessary so the big shots can max out their $17,5000. I promise you, the bonus is small because the ratio requirement sucks. Interestingly, as underling employees scrimp and put as much into their 401K as they can, this erodes the size of the so called “bonus” they get in their 401K. There are other ways employers can find safe harbor from 401K compliance hurdles, such as mandatory 401K participation or matching contributions. 401K compliance is complex, but it is designed to make sure there is equitable participation in 401K plans. These nondiscrimination compliance standards exist because the 401K plan has replaced pensions, which were available to all full-time employees of a firm. You cannot eliminate pensions and then have a retirement benefits plan solely used by the executives of the company. The peasants would revolt.

There are a number of reasons why I really hate the 401K system:

1. Can I trust the mutual funds in my 401K plan?
Honestly, how many of us have any experience in mutual fund selection? ZERO. It’s because we’ve never learned anything in K-12 about investing or financial literacy or personal finance. And for those of us with company stock as one of the options in the 401K plan, how are we supposed to decide if it is better to invest in the company stock versus the funds? Pro tip, DO NOT purchase company stock in your 401K plan. This is what Enron employees did and look what happened to them! Enron stock became worthless and their life savings were lost.

Do you know how many investment professionals typically work in a company’s HR department, which makes decisions on company benefits like the 401K plan administrator and mutual fund selection? ZERO. The number is zero. So how do these HR professionals choose who administers the plan and the mutual fund selection? They ask their colleagues, they hire consultants, they interview various plan administrators. But they really cannot profess to have backgrounds in investments in order find a worthy fiduciary for the plan with low fees and responsible fund selection.

You can rest a little easy if your firm’s 401K plan has an S&P500 Index Fund AND the expense ratio on the S&P 500 Index Fund is less than 10 basis points (0.10%, if you invest $100 the fee is ten cents). At least you’ve got that going for you. Every retirement plan should give investors large cap US exposure for the lowest fee possible. If your firm doesn’t have this, write the plan sponsor and ask for the Vanguard S&P 500 Index fund to be included in your plan. Don’t be a hero and try to tell Human Resources or your boss that the options in the 401K plan are lousy. You will be insulting those that approved the plan. You will be seen as a trouble maker or whistle blower. And you will probably get laid-off or fired.

Many 401K plans are entirely made up of “actively managed mutual funds”. This is a big no-no, and a decent plan will always include a couple of index funds, such as the aforementioned S&P500 Index Fund. Some 401K plans are heavy on “blended funds” which are part bond and part equity, and it is pretty much impossible to benchmark these funds effectively to assess if they are performing well or poorly. You know how many blended funds your 401K should have? ZERO. You should always be able to see and control how much bond and how much equity you have in your asset allocation.

The only semi-responsible blended funds are the “target date retirement” funds that were required by the Pension Protection Act of 2006 to be included in 401Ks. Because nobody knew anything about asset allocation, people were screwing up their investment options and target date retirements funds are supposed to be the answer. Note, there are no mandatory guidelines for how targeted date asset allocation is supposed to work, but they are supposed to become more bond heavy the closer a person gets to retirement.

2. How do I decide my asset allocation in my 401K plan?
I really love it when I read, “past performance is no indication of future results.” This is not a confidence builder! I’m supposed to forego part of my hard-earned salary for something that I kind of don’t even believe in and have no experience with? Say what? But invest you must, because you’ll never make it on savings alone. You really do need those returns to compound over time, and that doesn’t happen if you leave it all in cash.

Here is a stress relieving tip. Contact a certified financial planner and ask them if you could meet for an hour to discuss your 401K plan. There are many planners that charge by the hour and will give you great advice. If you cannot do this, invest in the target date retirement fund available in your plan, and the expense ratio of this fund should be under 40 basis points. If the expense ratio is anywhere near 1% or above, you are getting ripped off and just put your money in the US Large Cap fund as a placeholder as you educate yourself.

If you are willing to do the homework, get “The Bogleheads Guide to Retirement Planning” and read the chapter “Basic Investment Principles”. Heck, read the entire book. You will learn that it is good to have a mix of equity exposures such as US large Cap, US Small-Mid Cap, International and Emerging Markets, REITs, and then some bonds.

You do not have to invest in every fund in your firm’s 401K plan. It is difficult for me to suggest an asset allocation here because 401K plans have investment choices that are all over the map, literally.

I’m just going to come out and say it right here. Vanguard is the best place for your firm’s 401K plan and your IRA if you have one. They have the lowest fees, and a broad array of Index Funds.

 3. What if the year before I retire, the stock market falls 40% like it did in 2008?
Yes, you are even supposed to know how to adjust your asset allocation more bonds over time so you don’t loose it all in the end. And how are you supposed to know this if you’ve never received any education on it? A very simple rule of thumb is that you should have as many bonds as the decade of your age. If you are 34 years old, 30% bonds. 

4. How do I know if the fees are reasonable? 
You have no idea. You have no idea because you were never given a proper education during K-12 for Things That Matter.

Some 401K plans have mutual funds with front-end loads, a huge rip off which only erodes your investment performance. A front-end load is a fee you pay just to invest in a mutual fund. This is completely unnecessary as there are a world of great no-load mutual funds out there. This fee is just another way that Wall Street lines its pockets at your expense. A typical front-end load is 4.75%. I guarantee you, when the S&P 500 falls 4.75% this is headline news all over the world! It is a stock market calamity, and it happens to YOU every time you invest in a front-end load mutual fund. Believe me, Wall Street is making plenty enough money off of you in the regular annual management of the fund. If your 401K only includes front-end load funds, absolutely write your plan sponsor and demand that the front-end loads be waived AND low fee index funds be added to your plan. Actually, just look for another job, you work for morons.

The annual management fee of the fund is expressed in the expense ratio. This is the percentage of your investment that goes to pay the fund manager every year. Most of the mutual fund expenses in your 401K plan should fall below 40 basis points, with only a few of them costing more.  Emerging Market funds and REITs are more expensive to manage, but if you see a lot of funds that cost almost 1% or more, something is definitely wrong.

5. The 401K just hasn’t worked out for a lot of people.
How is your 401K? How is your IRA? Yeah, I thought so. It’s not going so great, is it?

Friends, it is not your fault. Since American employers have mostly let go of corporate pensions and embraced the 401K, wages have not kept up to enable workers to save in a 401K. Pensions have been eliminated, wages have flatlined, and where have company profits gone? Those profits were paid out as dividends to people who own the publicly traded stock in your company and ever increasing executive salaries and useless acquisitions, but not to you. The switch over to 401K plans and elimination of pensions created a huge cash surplus in corporate America. The 401K plan was the best thing that ever happened to those at the top.

In America, if things haven’t worked out, we tend to blame ourselves. We say to ourselves, “It’s my fault for not making enough money,” or “It’s my fault for not planning better.” There is this puritanical guilt associated with financial failure. I’m telling you, the cards were stacked against you, the system is bigger than you. The entire 401K industry is a fee generating machine for Wall Street and service providers. In any business where there is information asymmetry and a lot of middle men, the consumer is going to lose.

Quinn Curtis of University of Virginia Law School and Ian Ayres of Yale Law School argue that plan fiduciaries have failed in their responsibility towards the individual investor, and the majority of bad performance in 401K plans is from excessive fees.

With all of the conflicting information out there and the lack of education in personal finance, you could not have had a clue. You had no idea how to make investment decisions in your 401K, or even how to know if the fees in your 401K plan were excessively high.

6. If the market doesn’t provide the performance, you are screwed anyway.
Despite all of the saving and squirreling away, if the stock market doesn’t perform well and give you the compounding you need to grow that nest egg, you are screwed. You can only pray that Social Security can cover your needs.

These are just some of the reasons why I hate the 401K system. Let me know if you have any questions!

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Financial literacy education mandatory in Australia and UK. How about USA?

Remember being baffled by your first credit card? What is this, how does it work? Remember being intimidated the first time you opened a bank account?

In February, 2013, the U.K. announced that personal finance instruction will be mandatory in throughout the school system beginning in 2014!  Australia developed its national financial literacy strategy in 2011 ( and has rolled out its program to their public schools. WOW!

These countries got their acts together, and developed these programs for the good of their citizens in the aftermath of the global financial crisis of 2008.  Singapore has been way ahead of the game, they created MoneySense, their national financial education program, way back in 2003.

A quick look at reveals that the Singapore program covers the three essential tiers of financial literacy, and it is pretty freaking great:

Tier I: Basic Money Management. Budgeting and saving, with tips on responsible use of credit.
Tier II. Financial Planning. Skills and knowledge to plan for long term financial needs.
Tier III. Investment Know-How. Knowledge about different investment products and skills for investing.

Tier III is the big one, the most challenging to teach. But, you know, high school students are are old enough to have babies and create the miracle of life. I would argue that they should also have the ability to do asset allocation in investment portfolios and know the miracle of compound interest.

As of July, 2013, Virginia, Utah, Tennessee and Missouri are the only states that require a one semester standalone course in personal finance as a graduation requirement. I don’t know what the curriculum requirements are, but I would be very happy if the programs went from how to open a bank account and budgeting basics, all the way through insurance, mortgages, credit, taxes, up to how to manage an investment account and asset allocation.

Wouldn’t it be truly amazing if we knew all this stuff before we got out of high school? We would feel confidence we had the knowledge to manage our financial lives for our lifetime. (Getting the money is another matter.)

America’s Gen X’s have shown that they have not been able to live better than their parent’s generation, the Baby Boomers. Our educations cost far more than our parents’ educations, and our housing and healthcare costs are also must higher. If you can, talk to your parents or a relative about how much things cost back in their day compared to their salary. Gen Xers also don’t have pensions, they are the first of the 401K generation. But did our country prepare Gen Xers with the knowledge of how to manage their 401Ks? Noooo. Things are looking even more grim for Gen Y’s who are struggling to find jobs. God help the Millennials coming next. America’s citizens just seem to be getting weaker and weaker.

Did you know the US formed the Financial Literacy and Education Commission in 2003, the same year Singapore did their MoneySense? They are known as FLEC and they have done FLEC-all for the American people. FLEC is the organization behind Ever heard of it? I haven’t either. This is one of the worst looking websites I have ever seen, which means it is a government website. Those financially literate Australian high school students could have built a better website.

A month ago, on June 25, 2013, President Obama signed an Executive Order establishing the President’s Advisory Council on Financial Capability for Young Americans. This is good. The Secretary of Education is on the council and there are plans to pilot financial capability programs in schools. I’m concerned because Executive Order is set to terminate in two years unless extended. Let’s try not to mess this one up, OK? was “recommended as an initiative” from the Council on Financial Capability. The website is a resource for teachers, giving guidelines on how to incorporate financial concepts in the common core curriculum. The website looks good, but as you click through, there are a lot of blank links. And honestly, it places the burden of incorporation on the individual teacher. No materials are provided except the advice on the website. Is this the best our country can do for teachers and young citizens? is a companion website, also recommended by the council, and provides good discussions for parents to have with their kids as they reach various ages. I like this website a lot. I believe parents do need tips and guidance on how to talk to their kids about money. However, this website does not in any way prepare a kid for the financial literacy necessary for a lifetime. It really is just the bare bones basics.

The FDIC, the government organization that insures our bank accounts up to $250,000, has an educational program called MoneySmart, same name as Singapore’s program. Our MoneySmart is aimed at the 12-20 set. It’s free, available for order on the web (, and I just ordered a copy to check it out.

Financial literacy as required curriculum in K-12 is the best answer. Wouldn’t it be great if we had financial skills for a lifetime by the time we graduated from high school?

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