Tag Archives: personal finance

the CFPB

Simon Johnson says the Consumer Financial Protection Bureau has actually been doing a good job up until now of, well, protecting consumer finances.

The CFPB was established by the 2010 Dodd-Frank financial-reform legislation to do exactly what its name implies: protect consumers in their various financial transactions. A new agency was needed because existing regulators, including the Board of Governors of the Federal Reserve System, had manifestly and repeatedly failed to protect consumers from abuses, such as deceptive and fraudulent mortgage-lending practices, some of which were at the heart of what went wrong in 2007-08.

As Elizabeth Warren (then a consumer advocate, now a US senator from Massachusetts) powerfully pointed out, there was a lot more protection for people buying toasters than for someone taking out a 25-year mortgage. Finance is complex, and a lot of devils could be, and were, hidden in the details. The CFPB was designed, above all, to bring greater transparency to consumers’ financial transactions – actually a very pro-market contribution.

And the CFPB has done exactly what Congress designed it to do. So far, the Bureau has arranged for the return of almost $12 billion to 29 million consumers. At the same time, banks are reporting record profits – on the order of $171 billion, according to the latest data. The CFPB is good for business, or at least for the straightforward, transparent business of traditional lending.

Unfortunately, all this seems likely to end as Trump has appointed someone to head the agency who is actually against the agency’s existence, not unlike his approach to the environment, housing, and education. Johnson seems to think the public will catch on to this and punish the Republicans politically when the little guy starts to get hurt by it. I don’t know, it probably depends on the timing. Nobody wants to see another financial blow-up, but if it has to happen mid-2020 seems as good a time as any.

buy or rent?

This academic study says that people who own houses are richer on average than people who do not. But generally, renting costs less per month than buying, so the answer must be the build-up of home equity and price appreciation, right? Well, one conclusion of this paper is that theoretically, if you rented a house for a long period of time, and invested the amount of money you saved compared to paying a mortgage diligently every month, you would come out ahead in the long term over most periods of recent U.S. history. But this doesn’t happen, so maybe the answer is that the type of people who rent homes are not the type who invest, on average, and vice versa.

I wonder if they factored in my mortgage and property tax deductions, which I am hoping do not go away. I’ve always wondered – if two friends bought equally priced houses, rented them to each other, and paid taxes as landlords rather than homeowners, would they come out ahead or behind? As a landlord you can deduct all your maintenance and repair costs, plus depreciation which is just a weird thing that only exists on paper. Would there be anything illegal about this? Could family members do it? If so, why don’t they?

I’ve owned, and rented, and been a landlord and a tenant at the same time, because I’ve moved around and been in some weird situations with a growing family and that was the easiest thing to do. The best thing about renting is how easy it is. If you want to rent a place and really put some effort into it, you can live there just a few days later. I did that once although I had to clean it myself when I got there. The best thing about owning a place is you can mess with it if you want to. Especially the yard if that is your thing. And if that is your thing, it’s a little hard to put a financial price on.

Financially speaking, the man puts money in one of your pockets and takes it out of the other, as far as I can tell, and if you play it just right you have a few pennies left to save for a rainy day. Then you eat, sleep, shit, and do it again, and that is how the financial part of the world works, so it is best to look for meaning in other parts of the world.

browser extensions to get cheaper stuff

This blog is not about how to get more stuff. It’s not about how to get cheaper stuff. For the most part, I am almost totally against stuff and the idea that life is about getting more of it.

But there is in fact some stuff I need and even some I want. So I might occasionally mention a story about browser extensions that help us get more stuff cheaper. But we have to be disciplined! Just because we can get cheaper stuff does not mean we should get more of it. Try to get used stuff if you can, and try to get rid of some when you get some new stuff. But if there is a thing you are absolutely going to buy new, no matter what, whether you have any of these browser extensions are not, then go ahead and see if they will help you get it cheaper.

Mr. Money Mustache on medical tourism

Mr. Money Mustache discusses medical insurance in general in this post. His first suggestion is to consider going without. I suppose it could be rational for a young person with no assets to take this gamble, especially if they can minimize time spent in and around motor vehicles. Beyond that, yes, retiring abroad or medical tourism are both options. I used to get an annual checkup in Singapore for $69. And in an experience I would not wish on anyone else, I had a child hospitalized in Thailand for 8 days including 2 in intensive care. The total bill was $2500 including take-home medication, probably a tenth the U.S. cost. I had to pay up front but my U.S. insurance is more than happy to pay me back. Of course, you don’t want to get a plane when you are desperately ill, but you could easily combine routine checkups and dental cleanings with travel you are planning anyway.

When Your Shitty Health Insurance Doubles in Price

 

annuities

Annuities – I admit they sound like a boring topic. But what is not boring us thinking about you might want to do with your relatively short life of earth, and thinking outside the box about the tools available to you. Annuities are one of those tools.

Fixed SPIAs make retirement planning easier in exactly the same way that traditional pensions do: They’re predictable. If you know that you need $X of income each year in retirement, you can go to an online annuity quote provider, put in $X as the payout, check “yes” for inflation adjustments, and you’ll get an answer: “For $Y, you can purchase an annuity that will pay you $X per year, adjusted for inflation, for the rest of your life — no matter how long you might live.”

Pretty easy, right? You now have a specific figure for the minimum amount of savings necessary to retire safely. With a traditional stock and bond portfolio, retirement planning is more of a guessing game.

Fixed SPIAs are also helpful because they allow you to retire on less money than you would need with a typical stock/bond portfolio.

You could work hard and live frugally while you are young, then turn over your savings to an insurance company at some point and continue to live without working hard. People typically do this at retirement age (i.e. when they are old), but you could do it at a younger age and continue to live frugally without working hard, or you could work part time and pursue a passion part time, or you could spend more time with young children than hard working middle aged parents typically do, or you could take the risk of starting a business knowing that failure wouldn’t ruin you. You could turn over part of your savings, continue to work somewhat hard, and pursue some combination of any of the things on my list above. You could make gradual transitions from one mix of activities to another.

Now, do I really practice what I am preaching here? No. I work like a dog to support a family. I’m a conservative person, and I particularly worry about my ability to meet the costs of health care and education in the future. But I also ask myself each day what choices I am making right now that I might regret when I am looking back some day.

 

do we want a strong or weak dollar

This Economist article tries to explain whether a stronger or weaker dollar is better. The answer is both or possibly neither. A strong dollar makes imported stuff at the store cheaper for consumers, but it lowers the demand for exports and makes it hard for those same consumers to get well-paying jobs making stuff to export. It encourages trade deficits (more imports than exports) for this reason. Because it holds down wages for the working and middle classes, it makes income inequality worse. All other things being equal, the value of the currency should fall relative to foreign currencies in this situation until things are in balance again. This doesn’t happen to the U.S. dollar because it is the world’s reserve currency, meaning other countries are always willing to buy it – people consider it a safe investment even if it is paying very little interest. So this is one thing that is holding our interest rates artificially low. The author concludes that being the only reserve currency is actually not in the country’s long-term interests.

An overvalued currency and persistent trade deficits are fine for America’s consumers, but painful for its producers. The reserve accumulation of the past two decades has gone hand-in-hand with a soaring current-account deficit in America. Imports have grown faster than exports; new jobs in exporting industries have not appeared in numbers great enough to absorb workers displaced by increased foreign competition. Tariffs cannot fix this problem. The current-account gap is a product of underlying financial flows, and taxing imports will simply cause the dollar to rise in an offsetting fashion.

America’s privilege also increases inequality, since lost jobs in factories hurt workers while outsize investment performance benefits richer Americans with big portfolios. Because the rich are less inclined to spend an extra dollar than the typical worker, this shift in resources creates weakness in American demand—and sluggish economic growth—except when consumer debt rises as the rich lend their purchasing power to the rest.

Chalk the headaches generated by low interest rates up to the dollar standard, too. Some economists reckon they reflect global appetite outstripping the supply of the safe assets America is uniquely equipped to provide—dollar-denominated government bonds. As the price of safe bonds rises, rates on those bonds fall close to zero, leaving central banks with ever less room to stimulate their economies when they run into trouble.

One thing I know from painful experience is that when you live abroad, a falling dollar can hurt, because I was getting paid in U.S. dollars and had to pay my rent in Singapore dollars. So my rent was going up every month in U.S. dollar terms, and also going up every year in Singapore dollar terms. Ouch. Well, the life experience gained had a certain value I suppose. That was one of the only times lately that the U.S. dollar has been falling relative to Asian currencies, so I am just unlucky.

Venn Diagram your work-life balance

This is a very simple idea but I like it.

The second good idea is to use a Venn Diagram to improve your practice and/or your life. Basically, the circle on the left is your ideal practice/life. The circle on the right is your current practice/life…

The amount of overlap determines how happy you are. Drummond says if the overlap is 60% or more, you are likely very happy and unlikely to burn out. If it is 20% or less, watch out! You are very likely to burn out very soon.

The first good idea, by the way, is to create a “transition ritual” between your work and personal lives. I like that idea to, and have actually been doing it for many years without having such a good name for what I was doing.

bill negotiators

I just learned of two companies that will negotiate with your cable company on your behalf, in exchange for a share of the savings. Shrinkabill.com and BillFixers.com.

There should be a lot of business opportunities out there like this because we have so many subscriptions and bills now and they are so complex and screwed up. Beyond utilities, you have screwed up medical bills obviously. Shopping around for homeowners and car insurance periodically can really pay off. Then there are simple repairs and maintenance that can lower energy and water bills. Property tax assessments can sometimes be challenged successfully. Mortgage and other lending terms can be negotiated, and if companies are not willing to negotiate they can be refinanced or consolidated. And yet most of us are too busy to spend time doing all this. It wouldn’t make sense to take time off work to do it, and we don’t want to give up our limited family and leisure time. But if there are businesses out there who will do it for you and it puts a little money in both your pockets that wasn’t there before, it’s a win-win.

 

how to think about human capital

Here is a Morningstar study on how to think about your personal human capital in investment and retirement planning decisions.

Financial assets such as stocks and bonds are only one component of an investor’s total economic worth. Other assets, such as human capital, real estate, and pensions (e.g., Social Security retirement benefits) often represent a significant portion of an investor’s total wealth. These assets, however, are frequently ignored by practitioners when building portfolios, despite the fact that they share common risks with financial assets. This paper provides evidence that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to different asset classes and risk factors. Through a series of portfolio optimizations we determine that the optimal allocation for an investor’s financial assets varies materially for different compositions of total wealth. These findings suggest that narrowly focused portfolio optimization routines that ignore human capital and outside wealth are insufficient, and that a holistic definition of wealth is necessary to build truly efficient portfolios.