Chicken Little is in true form this week as the election in the States surprised many. The headlines this morning on CNBC echo and increasing level of alarm: Anti-Trump Portland Protest Turns Into a Riot; Op-Ed: I’m not worried about a US recession, I’m worried about another Great Depression; Trump’s enemies are already paying the price; Donald Trump tweets about unfair protests — then has second thoughts; An ‘ugly period’ for the market is drawing near: Saxo Bank economist.
I haven’t seen such overreacting since, well, I don’t know when. There is certainly a lot not to like about Trump, but overreacting will not make it better. The stock market is rallying on higher interest rates. Financials are doing well while much of the market is down. Overall we saw a nice rally and it might, or might not, be overdone. Over at CNBC again we hear: Cramer warns the rally is ‘getting out of hand’ —better deals found in the trash. Really! Yeah, the market will pull back at some point and there is no reason for stocks to be higher due to a guy winning an election who hasn’t even started his first day on the job.
Interest rates rising rapidly bear watching and could be a problem for housing and the economy as a whole, but as of now the SKY IS NOT FALLING! There are reasons for concern. Unless you are a white man there has been vitriol spewed toward you from the President-elect over the past few years.
Overreacting solves nothing. Rioting certainly doesn’t. Playing into the hand of violence never works. Taking a proactive approach is the only solution. The people most shocked are the ones who worked so hard campaigning for another candidate. I get it. I’ve worked hard for a long period to watch a project utterly fail. But it wasn’t the end. I learned a lot throughout the process. You need to focus your efforts, using what you learned to facilitate change.
People make America great. The guy with the second highest tally of votes won the Electoral College and the election. It isn’t the first time it has happened. And I bet you have experience working with people of less than the highest caliber. We all have. As frustrating as it can be at times, we need to engage our Stoic training. Complaining and whining is not allowed!
In a crisis, the person who panics is more likely to die. The screaming lunatic is at a disadvantage to the calm individual assessing the situation and working within the confines of the crisis. A calm mind doesn’t react, it responds using the situation as a framework to get out of the crisis in one piece.
Trump is the President-elect and in January will be sworn in as the 45th President of the United States. This is reality. There is nothing you can do to control the situation in politics at this very moment. So what can you do?
First you acknowledge the only thing you can control: your mind, your response, and your feelings. We have time to look around and assess the situation. If a CNBC commentator is right and we are headed for another Great Depression the only thing you or I can do is take care of ourselves and plan accordingly.
Second, eliminating most debt is now a priority. We do know interest rates are going up because they already have. A CNBC article yesterday said the interest rate increase over the last two days increased the cost of a $200,000 mortgage $28 per month. On a 30 year mortgage that means it now costs $10,080 more to buy a home with a $200,000 mortgage. If you don’t pay it off early. Read the last sentence again. We have known for a long time interest rates would eventually go up. The Federal Reserve printed plenty of money to spark inflation. The likely increased spending under a Trump administration could provide just the spark. Soon we will look back on the good ‘ol days of low inflation and low interest rates. Look on the bright side; your bank balances will earn a return for the first time in years. Debtors will lose. They always do.
Investing in business is the only way to win in the long run. Even business can suffer short-term. People are worried the Affordable Care Act (Obamacare) will go away and worry about paying medical bills and health insurance premiums. Savers find this a minor inconvenience; debtors have some real problems to resolve.
No matter where you stand in life you can take steps to make a difference in your sphere of influence. We must refuse to go to war with ourselves. We are not the enemy! Rioting and violence will make the situation worse. Rioting and violence will not solve the problem; it will give us three dead in Ohio.
A plan requires some information first. We know there will probably be significantly more government spending in the next few years. This means the economy will expand at first. We also know there is a high probability inflation will ignite and the hangover will be painful. Here is the action plan I am using:
Step 1: No panicking allowed. And no rioting, for Christ’s sake!
Step 2: Stop spending. In this environment you are playing defense. All unnecessary spending is out. Don’t worry about the economy; Trump assures us the federal government will spend plenty enough to make up for any spending cuts we make. Trump is not a fiscal conservative; he is further to the left than Clinton on most issues, except taxation.
Step 3: If interest rates are going up, bond have got to go. Holders of large bond portfolios are going to suffer as they can’t unload huge volumes of bonds in a timely manner. Avoid the rush; get out of bonds now. (Note: Bond prices move inverse to interest rates. When interest rates go down, bonds go up. The reverse also applies. The only bond I would consider holding here in limited quantity are TIPS, inflation adjusted Treasury bonds. I said limited quantity.)
Step 4: The real risk to the US and the economy is a trade war. If Trump causes a trade war there will be few places to hide. But you can’t worry about things that have not happened and you can’t control the outcome anyway. So step 4 is to take a deep breath and stop worrying about all the crazy newscasts. They have to say crazy stuff to get viewer. Don’t waste your life on it. Focus on your behavior and thoughts; it’s the only thing you have control over.
Step 5: Stay the course. Investing excess funds in a diversified index fund is the best way to preserve and grow wealth. Short-term declines are just that, short-term. It is easy to stay true to the program when things look rosy. It is trying times like these that determine your ultimate success. An emotional step now is usually a bad move.
Step 6: Keep a slightly larger emergency fund. I don’t carry an official emergency fund in my financial plan. I usually keep the bulk of my money fully invested at all times. My liquid funds will be slightly higher now and will eventually reach a year’s worth of spending. This is similar to what you do in retirement. Your index funds throw off around 2% in dividends and the liquid cash holding will take you a long time to work through. You can weather a really bad storm for a long time. If you are already retired, a larger portion of your portfolio should be in liquid funds, i.e. money markets or guaranteed bank products. I usually recommend two years of spending as a minimum for people in retirement. A side hustle with income allows you to ease up on the defensive cash investments.
Step 7: Now is the time to channel Mr. Money Mustache and your favorite accountant. Keep your spending low ($30,000 or less annually) so you have resources if things go very wrong.
Step 8: Avoid mass media. The talking heads will cause you undue angst. Most news is disguised commentary with an agenda. Then they break for a commercial. Take a defensive financial posture and then go out and enjoy the weather. It has been awesome lately!
Step 9: Stay alert. In a crisis the hysterical get killed. Those who assess their surroundings can make better decisions. Watch as policy is made in Washington and adjust your financial posture accordingly. There is nothing that should cause you to go 100% cash. You will weather bear markets and be just fine. Interest rates spiking too high or too fast should cause you to lighten up on equities and keep a higher cash level. A trade war is the biggest concern. Most economic issues are transitory, but a trade war could do real damage for an extended period. If bond rates are high enough, some money could find a home if a trade war erupts. Otherwise a money market fund may be the best choice.
Step 10: Get some sleep. You make poor decision when fatigued. I have noticed clients and reader’s emails are stressed lately. The most common comment I get the last few days are: I haven’t slept or I am sleeping poorly. Let it go. It is the only way to relax and get the sleep you need. Cut caffeine from your diet if necessary.
This is not the end. If it is, then it is over. I say that with all seriousness. If the nukes fly there is nothing you or I can do about it. Your worst fear could come true, but the odds are long. Stop comparing Trump to Hitler. There is a major difference. Hitler had a hunger for power; Trump has a hunger for recognition. There is a difference. He might make better decisions to save his own skin than you think. Whether people want to face it or not, Trump is further to left than Clinton on virtually all issues, save taxes. That Democrats are upsets is understandable due to the rhetoric. Why the Republicans are so excited is less obvious. Neither case matters. This is what we have.
Warren Buffett has been a voice of calm when he said this morning the market will be up 10, 20, and 30 years from now if Clinton won the election. It will still be up even with a President Trump. If you want humor you have to reread earlier blog posts here. Now is the time to roll up our sleeves and get serious. Okay, I might drop a joke now and again. Life is too short not to, regardless the situation.
It is 3:30 in the morning and I just discovered who our next president will be. I had a nice nap earlier, but tend to sleep in fits and starts which is great for quiet writing time in the middle of the night. I’ll probably take another nap later this morning so I will be awake and alert. Back to the election.
The news reports say the Canadian immigration website collapsed from the deluge of visitors. Stock markets are down around the planet, but from what I read it is better than what it was earlier. One newsfeed had pictures of crying Hillary Clinton fans. It seems like the world is ending for people who worked so hard for their candidate.
There will be pain in the weeks and months ahead. There would be pain in the weeks and months ahead regardless who won the election. This is reality. America is undertaking a grand experiment. It isn’t the first time we walked the road less traveled. My political position is unimportant, but I will share my vote so you understand I am not writing this from the victor’s side. I voted for Hillary and had my reasons. None of that matters now. Trump will be the next President of the United States.
The Root of Panic
There is plenty to be concerned with. An untested politician jumps straight to the top. What could go wrong? Well, lots can go wrong. But a lot is always going wrong. We lived through a Civil War, two world wars, victories and defeats. And life kept chugging along. Now is not the time to panic. (There is never a good time to panic.)
Talk of leaving the country will solve nothing. Do you really think a major disaster within the U.S. would not affect every other nation on Earth? Running is not what we do around here (unless it is for exercise). And we damn sure don’t panic!
There is a primal fear of the unknown. America has waded deep into the waters of the unknown since its founding. There have been a few bloody noses and sure to be a few more. The unknown increases anxiety until we get comfortable with the new condition. There is no guarantee this will end in disaster. It could, but there is no guarantee it will.
A Story to Sooth the Soul
Back in the 90s every tax office was supposed to get into the securities business. It was a perfect fit for accounting offices and complemented the services we already provided our client. Your favorite accountant took the plunge.
I was a top 100 producer within six months of joining H.D. Vest Financial Services. Each year there were two major conferences organized by Vest. One year they had Nick Murray as a keynote speaker. He was a top producing mutual fund salesman in the 60s and early 70s when mutual funds were not the cool investment. Nick told us several stories. The one that stuck with me the most was a phrase he used when selling to clients. Murray said, “I can’t guarantee you the next 10% move in the market, up or down. I can’t tell you the direction of the next 20%, 30%, 50%, even 90% move in the market. But I can guarantee you the next 100% move in the stock market will be up, not down.” He was telling his clients the risk is being out of the market, not living through a temporary down market. Murray continued, “The stock market has always doubled and then doubled again. If it stops doubling, it means the world came to an end.”
There is another story I remember from my high school days about the Cuban Missile Crisis. Two stock brokers, an old seasoned broker and a young broker, watched as President Kennedy came on the air and informed the public the U.S. has target 50 Soviet cities with our nuclear weapons. The stock market collapsed. The young broker started yelling to sell. The old broker held him back and said, “Buy!” “Why?” the young broker asked. “We could be destroyed in a nuclear holocaust.” The old broker smiled and nodded. “If the crisis ends well,” the old broker said, “stocks will rally smartly. If the missiles are launched, our world comes to an end. The trades will never clear.”
The point is important for every reader: DO NOT PANIC! I know there is loads of fear. Never give in to fear. A decision made at the height of fear comes back to bite you in the ass with rare exception. Like Murray, I have no idea where the market is going. The only thing I can say with absolute confidence is that the next 100% move will be up, not down. If I am wrong there will be no civilized world around to hold me accountable.
Who Really Wins?
No matter the economy there are always winners and losers. During the Great Depression some people managed to excel. During the boom of the 1990s a large number of people managed to build no net worth at all. Go figure!
Now is the time to take a deep breath and assess the situation. We are in a challenging economic environment, as always. Markets go up and down, as always. Yes, we are in new territory, but so was the country after the Federalists lost the Presidency after only two Presidents. I think history agrees with me when I say President Thomas Jefferson did okay as the third President.
Winning the game of financial independence or your goals toward early retirement (or any retirement, for that matter) has not changed. They will not change. What worked in the past is all that still works. Reduce (or better yet, eliminate) debt. Save like crazy. Saving half your income is more powerful now than ever. You build financial security and can buy lots of juicy index funds at a discount if the markets panic. (I love sales on Wall Street.)
Nothing has changed yet. For all we know this could be a great opportunity for America. If not, and all goes wrong, your frugal behavior has prepared you for the worst. By learning to live happily on less and with an ample nest egg, you can live as you always have without much problem. Heck, economic calamity just means a lot of stuff is sold cheap by people less frugal.
Your fear comes from an anxiety about something that may never happen, from the desire to control something you have no control over. In the Stoic philosophy, Epictetus tells us some things are in our power and others not. From the Enchiridion: In our power are opinion, movement toward a thing, desire, aversion (turning from a thing); and in a word, whatever are our own acts: not in our power are the body, property, reputation, offices (magisterial power), and in a word, whatever are not our own acts.
Nearly 2,000 years ago Epictetus foresaw the recent election. He warned us “offices (magisterial powers)” are not in our power. We did what we could, what we had control over; we voted. For most readers there is nothing else to be done. Maybe someone in power will read this and engage their position to facilitate a positive outcome. You never know. I do what I can.
Epictetus continued: And the things in our power are by nature free, not subject to restraint nor hindrance: but the things not in our power are weak, slavish, subject to restraint, in the power of other. Epictetus went on to explain that confusing the things you can control with the things you can’t control causes you to blame others for your misfortune. Marcus Aurelius said it best when he said if you choose not to feel harmed, you haven’t been.
You need to relax if the election has caused you mental distress. Let it go. You can control how you live and spend. Your job could change tomorrow, but how you interpret the world around you is 100% in your control. The next 100% move in the stock market is up, not down, maybe. I could be wrong. Your life will be just as blessed by making the investment even if you never get a chance to use it later or if the world ends. By wanting less you find happiness in the moment. It matters not who is in a political office. It is only interesting background noise at best.
George Carlin said, “When you’re born, you get a ticket to the freak show; when you’re born in the U. S., you get a front row seat.” He was right. We are but actors on a stage, as the great Bard said. Most of our roles are small on the national or world stage, one fraction of a millionth percent. All pain begins with an elevated sense of self. You can control your opinion, therefore you control if you are offended or harmed by recent events. If you choose not to feel harmed, you haven’t been harmed.
Sometimes we think we are making such an awesome difference. Most of you know Pete from the Mr. Money Mustache blog. When I visited him the first time I thought he would be a well known character in his small town since his blog had so many readers. Of course many people did know Pete, but many more did not. It was a reality check. No matter how much good you do it will only scratch the surface. Most of our efforts will fall to dust over the years or eons. Understanding this allows us to put all events into perspective. All that matters is how we live, how we think, how we feel. It is our interactions with each other that give life value, meaning. I for one am glad you are with me. My life is brighter because our lives passed like two ships in the night. That is my worldview. For a brief moment we are able to communicate a message of hope. It is all any of us have.
Let go of trying to control things outside your power. Control you, control your mind. It is the only way to happiness; the only way to be free.
We think of credit cards as those things which allow us to manage our financial lives without carrying money around. Bills are easy to automate with credit cards and paying the card at the end of the month is a simple, one-time, setup online and it is paid in full on the due date without any further action on your part. Even if you don’t record your spending, a credit card has a nice list of all your spending in one neat, compact location for future review.
Those crisp pieces of plastic come with a dark side also. Without constraint, you can dig a financial hole difficult to crawl out of. Make no mistake; credit cards are debt, even if you pay them in full monthly. Debit cards serve the same purpose and are not debt because it comes out of your bank account; when the money runs out, the purchases are declined.*
Previous posts discussed bonuses, cash-back credit cards, and interest free/fee free loans. I consider those the easy benefit of credit cards. Debit cards offer limited bonuses and cash back, but credit cards take it to a whole new level.
There are a lot more benefits to credit cards most people either don’t know about or never take advantage of. I seek to end that problem now. These benefits are worth anywhere from a few hundred dollars a year to thousands, depending on your level of spending and the items/services purchased with the card.
The Fine Print
I carry several cards at one time. I use a specific card for certain purchases depending on the underlying benefits the card offers on such purchases. You should have received a booklet describing your benefits when you opened the account. If you tossed it because it was all fine print, you can review the benefits online for most cards.
This review is with a credit card I currently use. I will not name the bank/credit card because benefits can change and differ between products. The benefits are similar across credit cards with a few notable exceptions. These exceptions are generally used as an inducement to acquire more card holders for the bank. I will focus on the common benefits. When you are done reading this post I encourage you to print out a copy of all your credit card’s benefits and keep them with you. They are money in the bank.
Most credit cards include some form of rental auto insurance when you use their card to rent the vehicle. Read the fine print! There are a few exceptions. Really expensive cars, like a Bentley, are excluded. The insurance on the card I am using covers physical damage, theft, loss-of-use charges assessed by the rental company, and towing. If you have auto insurance for a personal vehicle, check if your liability protection covers you while driving a rented auto. It usually does.
The car rental companies push hard to get you to buy their insurance. It’s a good deal for them with a high profit margin, frequently more profitable than renting the car! The insurance at the rental company is very expensive for what you get and because you may already be covered. By checking with your regular auto insurance company and reading the credit card fine print you can save a bundle.
Before I move on I want to point out a few caveats. If you buy insurance at the rental company that insurance pays before credit card coverage. The credit card does not cover injury, items not original to the vehicle, war, impaired driving (drugs or alcohol), off-road use, or loss of personal belongings. Long term rental periods (31 consecutive days or longer) are frequently excluded, also.
Here is one benefit you have passed on without knowing it. On the card I am reviewing they cover theft, damage or involuntary and accidental parting. Purchase protection replaces, repairs, or reimburses you at their discretion. The maximum is $500 per claim and $50,000 per account. Think of the value! The kids get a new toy and break it accidentally or it is stolen. You file a claim and should be covered if the terms of the agreement are met. Of course, you had to buy the item using the credit card you file the claim with.
A few things are generally excluded, and include: animals/plants, antiques/collectibles, boats, cars, aircraft, computer software, items purchased for resale, mysterious disappearance, fraud, abuse, war (this shows up a lot, it must be an issue), medical equipment, and perishables. As always, a few minutes of reading the fine print and keeping it handy when needed can be financially rewarding.
My card extends the manufacturer’s warranty of three years or less for an additional year without cost. The maximum claim is $10,000 with a lifetime cap per account of $50,000. This includes gift purchased with the card! Once again a few items are excluded: cars, boats, aircraft, items for resale, computer software, medical equipment, or used items. The manufacturer’s warranty applies first.
The extended warranty covers a lot of stuff. Cell phones come to mind. The fear of loss, damage, or defect is a major concern if it is not covered by the manufacturer. Most smart phones have a one-year warranty. They try to sell you expensive insurance with fear factors (broken glass or theft) which your credit card covers under the purchase protection and extended warranty benefits. No need to worry about a financial hit if you pass on the insurance which rarely, if ever, gets used. That is why credit cards offer it as a free benefit. But if you are the lucky winner, the coverage is a real benefit if you know to file a claim.
When you purchase a vacation package or tour they always encourage trip cancellation insurance, except it is unnecessary since your credit card probably covers you for free if purchased with their card. It also covers family members on my card in review. The cancellation coverage is up to $5,000 per trip on my card. The part I like is you are covered if the trip is one or more miles from your residence. Really! Just one mile? A trip to the store doesn’t count?
There are a few restrictions as with any insurance. “Change of plans” is one excluded item, which makes sense. I’ll let you read the additional details in the fine print of your card which is similar to the coverage offered by trip cancellation/interruption coverage offered at the travel agency.
Bet you missed this one. Many cards, including the one reviewed here, offer price protection. On my card I am covered if I find an advertised price lower within 90 days of original purchase. This includes non-auction online sites like Amazon.
The limits are $500 per item for an annual limit of $2,500 per account. You are even covered for $50 per item/$150 annual for cash-only advertisements, close-outs, liquidation, and going-out-of-business sales! With my card you only need to pay for part of the purchase to be covered. Nice.
There are a few restrictions. Advertised items excluded are: flea markets, fire sales, limited quantity promotions, season sales, and auctions. Seasonal and discontinued items are also excluded, including: holiday decorations, clothes, and costumes.
After you get done tearing the airline a new one you might want to check with your credit card. The benefit reimburses you for repair or replacements costs. The nice thing about this coverage is that my card’s benefit is up to $500 for jewelry, watches, cameras, camcorders, and other electronic devices, with a $3,000 limit on all covered items for each trip. Money, securities, tickets, money orders, traveler’s checks, and furs are not covered.
A perfect vacation can be ruined by lost or delayed luggage. My card says if my luggage is delayed more than six hours I will be reimbursed for emergency purchases of essential items. The benefit extends to family members and frequent flyer travel rewards when some portion of the trip is paid with the credit card. My card reimburses up to $100 per day for three days maximum. After six hours, go enjoy your vacation. It’s covered.
Trip Accident Insurance
This animal is really an Accidental Death and Dismemberment policy. My card provides $500,000 of life coverage if I die while traveling with the common carrier and $100,000 if I die within 24 hours of an accident on the carrier. I’ll save you the morbid details of the benefits if you suffer loss of speech or body parts. My guess is if you ever need this benefit you will not care much about the lost/delayed luggage benefit. (Bet you were waiting to see how long it would take me to be a smartass.)
Travel and Emergency Assistance Services
Traveling is stressful so I avoid it like the plague. When I do travel it is nice to know I have a help line at my fingertips. There is a list of services attached to this benefit, including: emergency message service, medical referral assistance, legal referral assistance (you would think a crazy accountant could use this fairly often), emergency transportation assistance, emergency ticket replacement (a real stress reducer), lost luggage locator service, pre-trip assistance, and prescription and valuable document delivery arrangements.
My auto insurance automatically covers me for this if I have collision on the car, which I don’t. They also charge for the benefit. Not my credit card! They love me. They give me the toll-free number of a motor club I can call 24/7 for help. If you are driving a rental car you need to call the rental company first.
The cross-section here is only the start. Your credit card may offer more or fewer benefits. Your lifestyle will determine the right credit card for you. These benefits are often unused. That is too bad. Lost or delayed luggage is stressful, but if you knew you were covered it might make the situation a bit more bearable. Price protection and extended warranties are also valuable benefits.
When is the last time you filed a claim with your credit card company? Thought so. Bet a dollar to one you never filed the claim because you were unaware of the benefit. That needs to change. Credit cards offer a wide range of value. The bonuses, cash-back, and travel rewards are only the beginning. Come to think of it, traveling seems more appealing all of a sudden. Think I’ll book a flight for the missus and me.
You can review and compare the litany of credit cards here.
* Some banks and credit unions have decided it is okay to let people overdraw their account rather than decline a purchase to maximize overdraft fees. Financial independence requires discipline on your part regardless the method of payment you choose.
Note: Check the TWA Recommends page for all the latest best credit card rewards programs.
Credit cards were always a powerful cash management tool for business owners. Individuals can harness the same power, but frequently use credit cards wrong, piling on high interest debt, and suffering financially. In times past, credit cards allowed for easy payment and tracking of expenses. As banks grew more competitive, the opportunities also grew. Most people are familiar with cash-back and bonus offers when opening a new credit card, but there is so much more.
There is a whole additional universe of value available from credit cards missed because it is buried in fine print. In this post we will focus on one of those benefits: interest free loans. Tomorrow I will focus on the litany of advantages you can use to make your life simpler.
Interest free loans from credit cards are not for everyone. I will focus on three groups who should find value in the strategy I will soon outline. The three groups are: people digging out of debt, people interested in accelerating their investments in index funds, and individuals and business with seasonal revenue.
How it Works
If you have a credit card you are aware of those checks they send you for cash advances at a 0% interest rate. That is not what we are talking about here. Those cash advance checks are junk because they charge a 2%-4% fee upfront. When I say interest free, I also mean fee free.
Many banks offer credit cards with a 0% interest rate on purchases the first 12-20 months you have the card. This provides a limited opportunity to cut some spending on interest. The strategy is as follows: You get two credit cards per year and use them like this: The first card is used for six months and the second card (acquired six months later) the next six months. See where I am going with this?
Okay, if you put every possible purchase on your credit card to max out cash, bonus, and travel benefits, you can also reduce your interest expense should you still be working out of debt. The goal is to never pay credit card interest ever! You have 12-20 months to pay off the card in full. By paying the minimum the first six months and then paying the card off over the next six months you effectively keep around half your spending available for investment or debt reduction.
It looks something like this:
Since you should be paying your current spending in full each month, you are never spending more than you have available to pay off the credit card. I used 10 months as an example, but you can expand this to any duration, depending on the 0% grace period of the cards involved.
It sounds like a lot of horsing around to avoid interest if you are on your way to financial security. It is. For many years I worked as a Dave Ramsey endorsed local provider. If I felt the client was disciplined enough to handle this strategy, I would teach it. By utilizing two new credit cards per year we could accelerate high interest debt reduction. In the above example we could reduce debt by nearly ten grand before we started paying off the new card.
During the 0% grace period, all funds used to pay the new card would be funneled to high interest debt. Then payments would be turned back to the new card so the balance was retired before the 0% grace period ended.
There are serious issues surrounding this strategy. First, if you have lots of debt you might also have a bad credit score. Getting a new credit card every six months could be an issue. Second, and this is the big one, it takes discipline. People with loads of debt have not been good in the past with money. Their discipline is suspect before we start.
If you have the discipline you can reduce some of that high interest debt so you can start investing toward financial independence. Once you have reduced your debt burden the rotating credit card strategy can be used to funnel cash into investments, but the returns are diminishing.
It is important when you are adding debt interest free to the new card that all funds to pay for that spending is allocated to high interest debt payments. Ten thousand dollars of payments shifted to a credit card at 18% is a $1,800 in annual savings. This snowballs (using Dave Ramsey’s term) into faster and faster debt reduction.
Another problem is not considering alternatives. Refinancing debt at a lower rate might be an easier and better solution.
Moving six months of spending payments to high interest debt adds to serious interest savings. Discipline is the hardest part. Delaying high interest expenses six months to a year still leaves you in debt! Bad spending habits in the past got you here; financial discipline is the only way out. Rolling up your sleeves and slashing spending is required, applying the reduced spending to debt reduction. It isn’t easy. If it was you would not be in this position.
Remember, you are not spending more than you normally would. You only shift your spending to a new credit card for half the 0% grace period and then use a new card while paying off the first. You are still accelerating your other debt reduction at the same time.
I don’t like this idea, but I will share it for informational purposes only. When debt is eliminated you can keep using the same strategy to funnel six months of spending into index funds. I think it is a lot of extra work once you are building your net worth to invest a half year of spending a bit sooner. You make the call.
A Personal Story
The third group benefiting from this strategy is owners of seasonal businesses. We will use my tax office as a guinea pig. As a tax office I am flush with cash April 15th. Year-end spending challenges the business finances while revenue tends to be lower than any other time of the year.
Up front, I never carry a credit card balance, but use credit cards for every possible business and personal expense. The business does have a line of credit which rarely gets used except as a tax management tool. If I can allocate funds in a way that reduces taxes I will use the LOC for a short period of time.
Due to the seasonal nature of my business (it isn’t so seasonal lately) we can apply the above strategy to manage cash flow. As the guinea pig, I acquired a credit card with a cash-back bonus and travel rewards. I will put every possible expense on the card until tax season when I will pay it in full. I’ve never done this before.
I really don’t need the extra funding this year for any major projects or tax reduction strategies, but it is a kick in the pants to harvest a few more bonuses.
Seasonal businesses can use this credit card strategy to avoid interest expenses while maintaining the business between busy times. Once again discipline is required. It is too easy to build debt. If you have problems handling money, this isn’t for you.
A large number of readers here are well on their way to financial independence or are already retired. I get enough requests from people starting out to make this post a valuable addition to the herd. Use it as you see fit. Also consider modifying it to your needs. The most important point is to think differently. If you act like everyone else, you will have what everyone else has. Better yet, if you tend to follow the crowd, hook up with a frugal group. It makes it easier when people around you tend to spend less.
Tomorrow I will dig deeper into credit card advantages everyone can use.
Use this link to help you research credit cards. There are a lot of choices. I recommend a card with a bonus and ample cash back. I did not include any of these benefits in the illustration above, but they increase the value. Finally, if you order a credit card and receive approval when you use the banner below, I will receive compensation. I thank you if you do. If you prefer to avoid such arrangements you can go straight to www.cardratings.com. You get the same exact thing, but I do not receive compensation. No hard feeling either way.
Note: Check the TWA Recommends page for all the latest best credit card rewards programs.
It had to happen sometime and now was that time. As soon as traffic reached a certain level someone would finally say what was on everyone’s mind: Why are you doing it, Mr. Accountant? If you are so damn rich, why do you bust your ass running a tax practice and writing more copy than Stephen King on meth? The answer seems so simple to me, but I have seen this sickness before.
My buddy, Pete, over at Mr. Money Mustache faced similar comments in the past. Now that the guy publishes around two times a month no one is talking, but they all wish he did write more. (Way to go guys!) Recent comments on The Wealthy Accountant have now touched on the subject. The comments are very polite and not derogatory by any means. That is not always the case. The comment in question casts doubt on all personal finance bloggers claiming to have made it. There was doubt the bloggers are really retired. Between the lines you can read “the blogger needs the blog to pay bills”. There were also a few comments protesting the need for a side hustle. I want to set the record straight.
I have no problem as apologist for the “retire early” community of bloggers. I have met many of these fine people and find them to be genuine. There is no fraud, folks. You don’t go into blogging for the money! First you spend a year or more writing your tail off and then only a microscopic number actually turn a profit or any revenue at all. Even fewer make real money. Real world, dear readers. The people writing these blogs are doing it to share their experiences. No more. If it doesn’t hit big it does not mean back to the cubicle; it means, see ya in Tahiti. They are really retired and travel the hell out of the planet.
Side hustles fall into the same category. Filling the day with something you enjoy doesn’t change the fact you are retired. You can only grab yourself for ten, maybe twelve hours a day. After that it’s time to do something else. Rosy has a callus. There is no fraud here either! Turning some coin after you hand in your punch card does not mean you are pulling the wool over everyone’s eyes. (When was the last time you heard that expression? Think they used that one back in the Dark Ages.)
No Apology Needed
When PayPal was sold to eBay, Elon Musk received $180 million for his portion of the company as co-founder. I think we can all agree $180 million is enough to have fun for a few weeks before heading back to the grind. Right? So why in the blazes did Musk start not one, but three companies: Tesla, Solar City, and SpaceX? The scariest part is he has put his entire net worth on the line.
Another man who could not stop after pushing a stack of cash together was Steve Jobs. In 1985 Jobs was for all intents and purposes forced out of his own company. If they did that to me I’d piss on the grass when I left and would not look back. I would have a serious attitude, to say the least. But not our buddy, Steve! He started a company called Next Inc. which was to eventually be in direct competition with Apple. Sure beats pissing on the grass and never looking back. It gets better. Apple fell on hard times and bought out Next Inc. to get our boy wonder back in the company. What Steve Jobs did from that point until his death is nothing short of miraculous.
Warren Buffett is one of the richest men alive and he still keeps hunting for good companies to buy and expects to turn an above average profit. Bill Gates, good friends with Buffett, stepped back a foot and a half from his company, Microsoft, and dedicated his life to making the world a better place. That’s hard work. So why do it?
I could fill a bookshelf with examples. But the point is already made. Imagine a world where everyone who has had modest success and was able to retire decided to never be productive again. No more Apple, Tesla, or Gates Foundation. It would be a very different world if these people took early retirement as the starting gun to spending a lifetime with Rosy.
When you listen to these people speak it always boils down to the same thing. They enjoy what they do. If early retirement is the goal then why are you not allowed to do what makes you happy once you retire just because if it might make you some money? See how sick this argument gets? I keep running my practice and writing because I like to do it and it makes me happy. There is no fraud or misrepresentation. But there is more.
They say karma is a bitch. I wouldn’t know. I do know there is no mysterious force watching our every move waiting to reward or punish us for every single behavior we have. Karma is more subtle. Karma is not out there; it is in here. She bites you in the ass when you do stupid stuff and rewards you when you take the high road because it is your subconscious working. You do it to you!
I recently wrote a post on my daughter retiring at 22. I expected some traffic from the post, but nothing extraordinary. My goal was to pat my oldest daughter on the back for a job well done. She still looks for a “normal” job; she wants the experience and working in dad’s office a few years did not do it for her. (I wouldn’t work for me either.) Since she was a wee tyke I took virtually every dollar she made and tucked it away in retirement accounts, mostly Roth IRAs. If she earned money working around the farm, in it went. If she worked at the office, in it went. When she worked at my office a few years I demanded she max out the retirement account. We have a SIMPLE plan which allows $13,000 in contributions per year.
Heather has no real expenses. A bit of rent to dad for living at home. (Yeah, I’m an A-hole for charging my kid to live at home. Must need the money so I can’t be retired.) She pays car expenses and any food she wants that we don’t buy. Oh, and she pays for her own cell phone. In short, she lives on almost no money. She does like the library.
Over the years those invested dollars have really grown. She has low living expenses, no student loans or any other debt, and a net worth in the six figures. She is retired. She is a substitute teacher for disabled kids usually one day per week. She volunteers for the same work at other times. And she loves her art. Slowly she is finding a market and a way to grow her art business. You can read that post, linked above, for more details.
Karma was Watching; Karma Strikes
A few days ago a journalist from MarketWatch contacted me. She wanted to interview my daughter. Heather did not believe me at first. (You would think I joke about this kind of stuff around the house to cause such a response. I am offended by such an accusation.) It took a day to convince Heather to do the interview. Today at 11 a.m. Heather will be interviewed by MarketWatch with me in the room for moral support.
Heather was nervous about what people would think if they knew she had some serious health issues. She also worried about the world finding out about her art. It’s a great dream until somebody notices! Then it gets real. I encouraged Heather to just lay it on the line. You don’t have to say everything, but you can still tell your story. And it’s a good story. How many 22 year old kids can say they don’t have to work because they saved like crazy, have no debt, and the market went up? (The same market you could have been invested in at the same time Heather was.) How many 22 year old kids can follow their dream of creating beautiful art? Now you know why she is special.
Heather is worried about the questions. She doesn’t know exactly how she built her nest egg because I taught (and dictated) from above. She had no choice when she was twelve. I explained what I was doing and only now, at 22, do I see a small glimmer of acknowledgement from her. All part of parenting. Investing is boring, but simple. You drop your money in an index fund and go do something else. You come back when you have more money to add. Back to the art project.
I have a confession. I wanted to scream, “That is my interview!” Well, for about three or four seconds. Then I had to smile. This is not about me; this is about Heather. My girl, my baby, was going to be interviewed by a national press. I wanted to use the interview as another launching board for my blog. So self-centered. And a natural and normal response. But the right thing to do is step back and provide support for Heather and let her take the stage. She is going on 22. Now is the perfect time to learn the skill. Karma is a kind gal when you do the right thing.
Heather has her own blog: Stormy Eye Design. Go check it out. You will find a young woman searching for meaning in life through her art. She can explore that path because I helped her do the right things financially when she was a pre-teen to now. It still doesn’t all make sense to her yet, but she has plenty of time to find her way.
And she has one thing I will never have. Patience. I am always jumping around and hyper. Heather has the patience of an angel. That is why she works with disadvantaged kids. She wants to make a difference. A positive one.
Now you know why it is so important to reach financial independence. Now you know why you need to reach retirement quickly. So you can start working on the important things you have to do. And only you can do it.
After lifting a set at the gym I pace back and forth gathering my thoughts, focusing on the next set. As I look around the gym all the other people are staring at the TVs plastered along the wall or playing on their cell phone. At the traffic light I take a deep breath and relax. I look over at the car next to me and notice the driver is texting. At the office I always have books on taxes and finance at arm’s length. My free time is filled with learning. During the lunch hour the office is dead quiet as everyone checks their personal email or Facebook.
The above scenes are common. I am certain you have experienced the same thing and more. Our society has devolved into information overload. As a society we can’t sit still for a moment unless we are distracted by some form of mass media. I wonder what Blaise Pascal would think of modern society. Pascal once said, “All of humanities problems stem from man’s inability to sit quietly in a room alone.” Hell, people can’t stand twenty seconds without checking their smartphone at a crowded party. There are people who actually admit to pollsters they have checked their email during sex. What the fuck is the matter with people!
The More We Get the More We Want
The problem only grows. The more we satisfy this inane hunger the more it demands. Our attention spans continue to shrink. If my math skills were really bad and I applied a straight line to our collective attention span over time, at some point in the very near future our collective attention span would be negative. In other words, we would be distracted to some other pretty light before we even satisfied the first impulse. Oops! Sorry. We already crossed that point.
The lust for another distraction is pervasive. What ever happened to quiet time? Do we take naps anymore? Probably not. The same people willing to interrupt sex for a quick check on the email also check their email overnight. It’s the first thing they do in the morning. Before the emails are finished it is off to check the news and check out some videos and Facebook. How many emails did you respond to? Yeah. Thought so. Too busy moving on to the next distraction.
What We Lose
Before I act all innocent and self-righteous, I confess I am far from perfect. I don’t check email from bed and it will be a cold day in hell before I check email or any social media while Mrs. Accountant and I are, ah, well you know, the thing. My innocence ends there. At the gym I can’t avoid the TVs. They are everywhere. So I often find my head tilted up between sets staring with a blank face at the talking heads. At the office (and at home) I tend to read way too much news. Most of it is crap or outright wrong. Still, the addiction is firmly in place.
And it bothers the hell out of me. I’m not so stupid (close, but not quite) as to believe I am not giving something up for all this entertainment overload. When I work out I generally keep to myself, focused on-task. Sometimes I talk to other sweaty people at the gym, but at least I don’t pull out ear plugs before I can hear them. I am so much better than they are. It is a dirty shame. There are a lot of good people over there and I really don’t know them well at all. Too busy catching up on important stuff uttered by the talking heads on the TVs during recovery time.
It goes a lot further. Some of us have crossed over into the twilight zone it is so bad; we don’t have a firm grasp on reality anymore. Our whole worldview comes from a screen. First we lose intimacy and close relationships to feed the entertainment/distraction addiction. We think we are masters at multi-tasking when studies have shown this is an illusion.
When we should be focused on our goals we quickly turn to social media and email. The greatest loss we all face when we allow entertainment overload to control our lives is the loss of thinking. Quiet, undisturbed thinking time. Every successful person I know spends time every day in quiet contemplation, thinking. Elon Musk does it, so does Warren Buffett, and even your favorite accountant imbibes in the quiet time ritual. How do you think I come up with all this stuff?
Loss of relationships is bad enough, but now you are robbed of even having a dream! Let me put the fear of god in you. Most people reading this blog are interested in financial independence (FI) and early retirement (RE). Well, when you are consistently distracted you are not working toward those important goals! How does checking your email 3,764 times a day help you reach FIRE? It doesn’t! Who do you expect will send you an email? The Secretary of State? You’re not that important; neither am I. Get over yourself.
And if you don’t get over yourself you will get what the vast majority of people get: a lifetime of forced servitude and nothing to show for in a retirement brought on by age, not financial security. You also lose love and intimacy. Yeah, the President of the United States might want to take a call during sex. Nukes could be on the way and an immediate response is necessary. You are not the POTUS! So knock it off. (My apologies to the President if he/she is reading this.)
When is the last time you read a book to your child? Kissed your significant other passionately? Hugged your mom or dad? Thought so. Do you know how fucked up you are? Do you really think, as you rest on your death bed, you will regret not checking your email or social media more often? Or will you regret not talking with your children more? Making love with your significant other more? Holding your spouse’s hand during a slow walk daily?
It’s not too late! There is still time. You can end the insanity and regain your life. Unlike hard drugs, you don’t have to go cold turkey. Have a set time to check email and social media. Also demand ample time daily to spend in meaning conversation with people you care about: significant other, your children, parents (if they are still alive), and friends.
You also need to demand quite time each day to think. Nothing is possible until you think it first. Once you have the thought you need to spend time working out the details. This is not worry; this is actually reviewing if the idea will really bring you happiness. Working through an idea is not worry; it is planning. The only way to choreograph the life of your dreams is to first dream. And dreams only become real in the quiet spaces.
According to National Geographic, our National Parks had record attendance in 2015. But the visitors were staying on the beaten path. They are viewing the parks from their car. The number of people backpacking has declined and has been for a while. It is thought many people don’t want to travel somewhere where they are disconnected even for a few days. Once again, they are waiting for that important email from the Secretary of State.
Brave New World
In The Tempest, Shakespeare put these words into Miranda’s mouth:
How many goodly creatures are there here!
How beauteous mankind is! Oh, brave new world,
That hath such people in ‘t!
How would we know today if the world is so wondrous? We are too busy looking at a screen. I cannot encourage strong enough turning off electronics and unpluging for a portion of each day. I recommend four hours of quite time daily, but that can be a lot to start with. This is in addition to sleep time. You need ample sleep; don’t short change it. There is no reason to check emails or social media from bed. I’m a crazy accountant from Wisconsin and even I have never crossed that line. There is no way you can possibly be more nuts than me.
Quiet time means alone time, but it also means uninterrupted time with loved ones. You can do this guys. You can hold your wife’s hand as you walk for thirty minutes, then face her and just gaze into her eyes. Trust me, ladies like that. For at least a few moments each day make her your entire world, no distractions or interruptions. Don’t even think about the other crazy stuff in the world. Just her. You will not believe how awesome that woman you are holding is. Before you break away, pull her in for a gentle embrace. Hold it just a moment longer than necessary. That is the only moment that counts, but you have to travel the whole distance to get there. Oh, and BTW, you will like it too.
Entertainment overload is everywhere. Real happiness is destroyed when everything has to be entertaining. Even The Wealthy Accountant is a form of entertainment. I tell stories to illustrate a point and work hard to keep it entertaining. If I don’t you guys leave and make me sad.
You have to turn it off! A social media and email sabbatical will not kill you. Trust me. (Nothing bad ever happens when you are told “Trust me”.) Take a day off from all the blogs, too; they’ll still be there when you get back. Regain your life and relationships. The Wealthy Accountant is exempt, of course. Spend as much time here as you want. In fact, I demand you stay here, distracted and entertained. It’s my ego we are talking about.
Insurance is for the mathematically challenged. Insurance companies have the largest buildings in town for a reason. What other company do you write a check to for a thousand dollars and get nothing more than a promise to cover some bills in the event of certain losses? Commissions to the salesperson can reach or exceed 100% of premiums in the early years of some life insurance policies. Many credit card companies offer free extended warranty insurance at no additional cost when you buy with their card. You can guess the real value of the extended warrantee offered at Wal-Mart on $88 headphones.
Warren Buffett built an empire funded by insurance premiums at Geico. Some insurance is required by law. In the U.S., auto insurance is required for liability. Health insurance is also required since the Affordable Care Act passed.
Insurance is about risk management. Insurance companies are masters at it. The goal for the insurance company is to bring in as much as possible in premiums and pay out as little as possible in claims. Insurance always has a built-in profit for the insurance company. This is the house advantage.
Most insurance claims are for stupid small stuff. The cost of insurance to cover claims under $10,000 is massive. The processing of a claim is expensive. That is why higher deductible can save so much. But even better is not buying insurance at all and pocketing the cash.
When Insurance is Important
Auto insurance is required on the vehicle itself if you have a loan on said vehicle. Required auto insurance is for liability only, regardless of loans. The liability portion of the auto insurance bill is small compared to the cost of collision. This should tell you something. Liability claims are rare. Most auto insurance claims are for fender benders. The reason liability insurance is so important is because when the rare occurrence arises, the claim gets really big.
A new trend is emerging among the FIRE (financial independence, retire early) crowd. To cut spending to the bone, these people pay off their mortgage and then forego homeowners insurance. I understand the concept, but worry about the consequences. Homeowners insurance runs from $500 a year into the thousands. As long as you have the financial resources to manage any physical loss the insurance is an elective, maybe.
I agree that all small claims should be handled without the help of an insurance company. Even a higher deductible homeowners policy doesn’t save all that much. Claims on a home are rare and the claims that do come in are related to smaller issues rather than a complete loss of the structure on the property. Still, homeowners insurance premiums have skyrocketed.
My office building is in a floodplain. Actually I am surrounded by a flood plain so I am considered an island and if I had a loan on the property I would be required to carry flood insurance. Flood insurance would set me back over $2,000 per year. Insane! My office building has no encumbrances and no flood insurance either. I have owned the building 21 years. That means I saved at least $42,000 in premiums. In the last 21 years there was only one incident where there was a flood. The sump pump died at the same time and some old books were destroyed. Value: $0. I did have an afternoon of cleaning out the office basement so I guess if you count my time as worth something there was some out of pocket cost in 21 years.
I still have insurance on my building, however. And that is where this story is going.
The Old Reliable HO-3
The HO-3 homeowners policy is the most commonly sold today and is required by most lenders. It covers all the things you would expect: fire, tornado, or any direct damage to the home or surrounding buildings. The insured is covered for replacement value without depreciation. There are a few notable exceptions to the HO-3. Flood and earthquake, for example, are not covered; additional insurance purchase is required to insure against loss from these events.
Having casualty insurance increases your costs. Many years ago I hit a deer coming home from work during tax season. Back then my attitude was to have collision coverage if the car was valued over $5,000. (Today I only carry liability regardless the value of the vehicle.) I filed a claim and started looking for a shop to repair my car. All the quotes kept coming in around $4,000 and I had a $1,000 deductible. This was crazy. Finally I decided to get a few more quotes and tell the shop I was uninsured. Now the quotes were all under $1,000! The final bill was $800 and the guy gave me a $50 discount for paying cash. It was the last time I had collision coverage on my autos.
All this is good and well. But, since you know the odds of making a major claim are small, bypassing insurance is a calculated risk insurance companies take every day. The cost of repairing or replacing a vehicle is rather small when you think of it. If you can’t afford to replace the car, you can’t afford the car. I have pocketed a small fortune since I dropped all but the liability coverage on my autos.
Back on the farm I have homeowners insurance. I have to. My only debt in the world is the farm mortgage and I could easily pay it off in cash, but I am reluctant since the interest rate is under 2 ½% and my investments do better than 2 ½. That isn’t a problem at the office. The office building is debt free and I still carry insurance. Why?
You are Liable
The real value (the only value) insurance has is protecting you from the big one, the one that would destroy you financially. A $10,000 loss is an inconvenience; a multi-million dollar lawsuit could easily change your life for the worse. Even if you win the lawsuit, the legal bills to win could reach into the six figures. A family member was caught uninsured and paid over $75,000 to fight a lawsuit he eventually won. He was still out 75 grand. I’m a fast learner. Lawsuits are the real risk. Especially frivolous ones.
The office is covered by an insurance policy. No one requires I carry the insurance. There is no mortgage on the building. However, my office is on a corner where a lot of moms and kids cross my parking lot on the way to a park and beach. Drivers sometimes cut through my parking lot to avoid the stop sign. If a driver broke the law by racing through my parking lot and injured or killed one of those kids I would also be sued. In Wisconsin wrongful death is $500,000 for children and $350,000 for adults. That means even if I am not at fault, maybe it was just an accident or the driver’s brakes failed, I would be on the hook for a minimum of half a million dollars for wrongful death if a child is killed. Then the attorneys can get serious about getting the rest of my net worth.
The HO-3 policy covers liability. (Always check with your insurance company or agent to understand what coverage you really have. The blanket statements I make here are for illustration only. Also read your policy and ask questions if you don’t understand something.) That is the one reason why I recommend homeowners insurance even when you are not required to have it.
Piddly claims don’t concern me; I can handle those on my own. The big, take’em out behind the woodshed lawsuits, is what I want protection from. Even if I am so rich I can write a check and walk away, it isn’t that easy in a lawsuit. Lawsuits take time and money. It’s the time I have a limited supply of. Living without money is fine if it ever came to that; I grew up poor and am none the worse for it. But spending years fighting a mega-lawsuit would damage the one thing I value: time.
There are bloggers out there acknowledging they have no homeowners insurance because they reached FI and can easily handle a complete physical loss of their home. I agree on that part. Besides, it will cost the insurance company a lot more than it will me to rebuild my home. I disagree because of the liability protections involved. I never encourage a client to go without homeowners insurance. Extended warranty, auto collision, disability, and life insurance are all things you can take a pass on and still get my blessing. Not the homeowners insurance.
Frugality and responsible spending are quality traits. If taken too far it can cause more harm than good. At some point you cross the line from frugal into becoming cheap at the risk of spending serious amounts of time and money defending yourself.
Life is too short to fight those kinds of battles. A small amount of insurance assures you can keep living the quiet comfortable life you have grown accustomed to.