personal finance secrets: have a plan

Earlier today, I was talking with a colleague of mine about saving for college. Our children are still very young — my older child is five, and his is two — but we both know that college will be here in the blink of an eye, and if costs continue rising as they are, we have no time to lose.

Of course, that’s the catch, isn’t it? “If costs continue rising as they are.” Does anyone really think that college education’s current 7-8% rate of inflation is sustainable? Surely, something has to give soon, right? (Edit: Check out this article — written the same week as the one you’re currently reading! — for more on the subject.)

Well, maybe. Probably. But maybe not. What, then, do we do? Sit back and hope that things have changed by the time our children are college-bound? Hardly. I’ve seen what happens when a cavalier attitude is taken towards college finances — bright kids go to a prestigious, expensive university, only to discover that the work they’re passionate about can’t support the student loans they’ve had to take. And so begins the debt spiral.

So we can’t do nothing. But we can’t create a plan that relies on things staying as they are, either; setting up an auto-withdrawal into a 529 plan and then ignoring it for the next couple decades is, while marginally better than doing nothing, still sub-optimal. The middle ground is this: make a plan that has some assumptions and some flexibility, and make course corrections as time goes by. It’s fairly certain that you’re going to have a wide margin of error at the beginning, but that’s OK — at least you’re travelling in the right direction. As your target date approaches, and as your information becomes more accurate, you can adjust your plan accordingly.

I know what you’re thinking, being the smart person you are: “Hmm…this probably applies to more than just college, doesn’t it?” That’s very insightful of you!

This concept applies to just about any long-term financial goal; retirement is another great example. You can create a super-complex formula for determining how much you need to save, but change just one or two variables — how much social security you get, how the tax code changes between now and then, how much you average returns are — heck, even whether the bulk of your high-return years are now or close to retirement — and you’ll get completely different answers. All you can do is make some assumptions, use those assumptions to make a plan, execute on that plan, and revisit and re-evaluate periodically. Again, your initial plan will almost certainly be very, very wrong, but that doesn’t make it worthless! Rather, it gives you a decent starting point, which will gradually become closer and closer to reality as time goes by and you make the necessary course corrections.

Sure, it takes some work — but it beats waiting until the last minute.

gold buyers: please be careful!

I read an article today that frightens me: apparently, SPDR’s gold ETF (GLD) now has more money invested in it than their S&P500 ETF (SPY). What this means is that investors are, in mass quantities, pulling out of stocks and investing in gold. I understand the lack of confidence in both the stock market and the US government, but this is a bad idea on many levels:

  • Stocks are shares in companies that (in theory) produce something of value. Gold’s value is mostly arbitrary.
    • As a side note: I say “mostly” because there are some useful applications of gold, such as in semiconductor bond wires. As an engineer in the semiconductor industry, I’m greatly irritated that those who are buying gold just to sit on it are driving up prices for those who actually want to use it.
  • Gold is highly volatile, and over the long term, has had very poor returns. Compare this chart with this chart. Consider the fact that gold is just now coming back up to what it was in the late 70’s-early 80’s — and that’s not even accounting for inflation. Also consider the fact that the stock market chart above is logarithmic!
  • This is a story that has played out over and over again throughout history. This has happened before, and it will happen again. This is not the first time consumer confidence has been shot. This is not the first time that the media has gone ballistic over the economy. And every time, we have recovered. Every time, the people who flew to “safety” have lost their shirts.(And gold, as the charts above indicate, is anything but safe!) Those of you who lived through the 70’s should know better. Hell, those of us who lived through 2009 should know better!

If you’re still insistent on buying gold, fine. But please, be careful. There’s a word for the kind of run-up gold is experiencing right now: a bubble.


the power of discretionary spending

 I have to admit, I had some trouble with the title to this post. “The power of discretionary spending?” What does that even mean? Well, read on, and you’ll see. (And if you come up with a better idea for a title, feel free to leave it in the comments.)

The idea is relatively simple, almost to the point of “well, duh”: the more discretionary spending and the less mandatory spending you have in your budget, the better off you are. That is, the less money you must spend per month relative to your income, the brighter your financial outlook will be. It’s the difference between paying monthly bills and contributing towards monthly savings goals. Again, this might sound painfully obvious to the most casual observer, but I argue that while this may be so, we don’t actually prioritize it as much as we should.

What do I mean? Let me give you some examples.

You can better handle sudden emergencies. Say your car breaks down, or you have to make a trip to the emergency room, or you have to take a short-notice plane trip. The more discretionary spending you have, the better able you are to temporarily shift your spending and saving to handle this new thing. For example, you can put a little less money this month towards saving for your next car in order to repair your current one. If you’re still paying off your current car, however, you don’t have that option.

Your budget can change with your priorities. Our budget reflects our priorities; how much we spend on food, clothing, retirement, etc., reflects how much we value these things. (Or at least, it should.) And  these priorities change over time — especially when starting a family! However, if you’re stuck paying mandatory bills, you don’t have the flexibility to shift your budget more towards your new priorities, like saving for a house or for college.

You can take advantage of opportunities. If you’re saving up for a new PC and it suddenly goes on sale, you can shift your budget around to take advantage of the opportunity. Oftentimes, though, people use sales as an excuse to whip out the credit card, and the interest cancels out any discount they may have gotten!

You can lower your income. In America, this is pretty much a foreign concept. Why on earth would you want to lower your income? Well, don’t tell Capitalism, but there’s more to life than spending. Having even the option of lowering your income means you can work part-time if you want more free time, or take a lower-paying job if your current one is giving you heartburn, or if you find a new one that fits your life’s passion. But if you don’t have the discretionary spending, you’re stuck.

“OK, OK,” you say. “I get the picture. But it’s not like there’s anything I can do about it.” Actually, that’s not true, if you make it a priority. Here are two very specific things you can do.

Avoid debt. When deciding whether to put something on your credit card or whether to take out a loan, consider the fact that you’re lowering your discretionary spending by doing so. If you take out a loan, you have to pay it back; it doesn’t matter if your priorities change, or your car gets totaled, or housing prices crater — you’re taking on an obligation that is very, very hard to get rid of. If you save up for the future, rather than taking on debt and paying for the past, it will go a long way towards maximizing your discretionary spending. Sometimes debt is still the right choice — but think carefully before pulling the trigger. (As a corollary: parents, start saving for your children’s college education the minute you find out your pregnant, and you’ll do wonders for their future finances. Don’t know if you’ve noticed, but student loans are eating graduates alive these days.)

Avoid investment vehicles that require mandatory spending. While the idea of “forcing yourself to save” by investing in something like a whole life or VUL insurance policy may sound appealing on the surface, the problem is that they impose heavy penalties if you change your mind. (CD’s have a similar problem, though they are of course a one-time expenditure rather than a monthly one.) I’ll go into more detail on insurance policies that also act as investments in another post, but for now simply consider the fact that they reduce your discretionary spending, which can be a huge disadvantage if you find down the line that you’re going into credit card debt in order to avoid having your VUL collapse! If you want to force yourself to save, just set up an automatic withdrawal into the appropriate account. It’s just as effective, it’s less complicated, and it lets you change your mind down the line!

So: the next time you’re making a financial decision, don’t just look at the numbers. Think about the effect it will have on your discretionary spending. Your future self will thank you!

this just in: sky not falling


OK, I get that the US and Europe are having a rough time of it. Yes, we have a ton of debt. Yes, our politicians are being, well, politicians. Yes, something needs be done about it. And yes, American’s debt rating just got downgraded by S&P. But…seriously, what is up with investors? From the way the market tanked today, this is the scene that’s playing out in my head:

Panicked Rich Guy: “Did you hear that S&P downgraded the US debt rating?”

Patient Financial Advisor: “Yes, sir, it was kind of hard to miss.”

Rich: “This is terrible! Pull all of my money out of stocks!”

Advisor: “Actually, now that stock prices have already dropped, it’s a bit too–”

Rich: “I’m just thankful they haven’t dropped any further yet! Quick, sell it!”

Advisor: “Sir, I am compelled to remind you that the basic objective of investing is to ‘buy low, sell high’. This is precisely the opposite –”

Rich: “Sell, or I’ll find someone who will!”

Advisor: *sigh* “Very well. And will we be putting that money into your FDIC-insured bank account or into Treasuries?”

Rich: “Oh, either one. As long as it’s safe!”

See what I mean? I keep expecting US bonds — you know, those loans that are supposedly more likely to default now — to tank, or at least decline in price a little bit, but they haven’t; in fact, they’ve gone up! Apparently no one actually thinks the US will default, so everyone’s still holding on to their bonds. Moreover, S&P’s reputation isn’t exactly stellar; yes, the White House has a few choice words for them, but other intelligent folk like Nate Silver also think that the initials should stand for Substandard and Porous.

So given all this…Mr. Stock Market, could you please take a deep breath and relax? You haven’t heard anything you didn’t already know, so please stop panicking as if you had.

(Edit: seems that Morningstar feels the same way.)

how to craigslist

(First off, I’d like to apologize to the grammar nazis who wince whenever someone verbs nouns. Welcome to twenty-first century English, and descriptive linguistics.)

In the course of Sunday nights’ workshop, the topic came up of selling one’s unneeded items to raise money for a cash buffer and/or emergency reserve. As Craigslist is a fantastic resource for this, I figured it would be worthwhile to write up a post, both on the basics of Craigslist and on tips for selling stuff on it effectively.

First, the basics. Craigslist is a completely free website that essentially serves as a big, online classifieds section.  (Yes, you can post “help wanted” ads on it, but for this article, I’m going to focus on selling items.) There’s a separate Craigslist site for each major US city; Austin’s is at

In case you’re wondering: you can sell anything (legal) on Craigslist. My wife sold her car on it (and this is not uncommon), and for a better price than she would have gotten at a dealer or Carmax!

Putting up an ad for something you want to sell is relatively simple; click on “post to classifieds”, then “for sale”, then the category of the item. You’ll then be presented with several boxes to fill in: a title, the price, your location (e.g. Tarrytown, Round Rock), your e-mail address (which by default is “anonymized” so that spambots don’t see your real e-mail address), a description, and a button for uploading images. Fill it out, click “continue”, and your ad is posted. If you don’t do anything, your ad automatically comes down in 45 days (less in some cities), though you can easily “renew” your ad once every few days, re-setting the 45-day timer.

A few things to know about Craigslist:

1) When figuring out how to price your item, do a simple Google search to figure out what other people are selling similar items for. Prepend your search with “craigslist” or “ebay” to see what the going price is on those services. If your item doesn’t sell quickly enough, adjust the price downward (say, by 5-10%). That may be all it takes.

2) Take pictures and attach them to your ad. If you don’t have a digital camera, you can almost certainly borrow one. If the item you’re selling has a visual defect, include a picture. You don’t want the buyer to find out when they come to pick up the item, and you are open and upfront about any blemishes, people will actually sometimes feel less uncomfortable about buying from you, as they’ll already know what the “catch” is.

3) Take some time to work on the title and description of your item. Again, a Google search will help you quickly find out what information is often posted on a for-sale ad. For technical items, people want detail: make, model, year, specs, all that. Also, let people know why you’re selling the item; again, if they already know the “catch”, they’ll feel more comfortable about contacting you.

4) It helps a great deal to have a phone number listed; again, this helps people feel more comfortable about contacting you. Of course, you might not feel comfortable giving your number out to the world! This is where Google Voice comes in handy. With Google Voice, you can create a free phone number that forwards to any of your existing numbers. (You can only have one Google Voice number per Google account, but there’s nothing keeping you from creating multiple Google accounts…like, for instance, an account for online buying/selling!) You can then customize this number’s behavior; for example, you can have it automatically block calls from certain numbers, or you can leave it on “do not disturb” to automatically send all callers to voice mail (all the time, or during certain times of day), or you can screen calls on-the-fly, etc. etc. Check out the video for a tour.

Now, some of the folks following this blog are doubtless better Craigslisters than I am. So, spill: what tips do you have for selling your stuff online?