Posts Tagged ‘investments’

The Coming Collapse of China

Protect your finances if China's debt bubble implodes. Don't let the trade war ruin your retirement plans.

Protect your finances if China’s debt bubble implodes.

When the Western economic world collapsed in 2008 there was only one beacon of light: China.

For decades China has grown at nose-bleed speeds and looked like an unstoppable economic miracle. Now the foundations of that miracle are exposed and the house of cards is in peril. Shadow banks and ghost cities are only the tip of the ice berg.

Speculation over the years of fudged official economic numbers coming out of Beijing is starting to haunt the government there. As 2018 came to a close the government reported the slowest growth in 28 years. This was still a bit north of 6%.

Unfortunately, these slower growth numbers are probably a wildly exaggerated lie. Recently, a former chief economist for the Agricultural Bank of China mentioned a report that two recent studies show China’s economy growing at a mere 1.67% and another showing the economy actually declined.

While there is no doubt China has made massive economic leaps over the past several decades, much of the recent growth is built on a shaky foundation.

In many Western nations an economic crisis can ensue from excessive indebtedness. The difference between Western nations and China is what the debt funding was used for. In the U.S., for example, corporations can over-extend themselves, causing over-production and an inventory hangover. Household debt might be wasted on stuff that has virtually no value. But homes and autos have at least some value and a good amount of utility. Something we will see China wasn’t spending on.

 

Dangerous Foundation

China is mired in a massive amount of debt. Trustworthy numbers are hard to come by, but many reports claim China’s government and municipal debt are several times larger than the annual economic output of the country.

What China spent the money on is a bigger problem than the excessive debt! The growing mountain of debt is difficult to manage. However, if the debt was used to produce something of value it would be possible to work through the financial problems with only modest economic pain.

China did some of that (spending on productive investments) and a whole lot more creating rubble. 

People inside China have captured videos of buildings built in the last decade tipping over and put them on YouTube. Ghost cities in China are well known outside the country. Whole cities with virtually no people living there. 

What is worse is the quality of construction. A large number (based upon information from people living in China a long time) of buildings only a few years old look like they are more than a century old! It is hard to imagine the crumbling facade and disrepair huge parts of these cities can fall into after only two or three years. Again, YouTube videos allow you to glimpse the slow moving disaster in the works.

The layers of debt these unlivable buildings have is equally ill-constructed. Municipalities borrow so they can encourage growth which generates tax revenue. (The tax system in China is untenable as local governments frequently find the greatest source of funds though the crazy financial deals with developers.) 

Builders, which are frequently state-owned and very inefficient, pile on more debt to build the structures.

Then the final layer of debt is added when individuals buy, believing real estate never goes down in value. People in China buy real estate because they consider it a good investment even when they don’t live there or rent it out.

Renting is also far cheaper than buying a property in the populated areas of China. Rents frequently only cover a fraction of the mortgage payment so ownership is even more financially demanding.

 

Inside Information

A year-and-a-half ago this blog was one of the few websites allowed inside China by the government. Today it is officially banned!

My oldest daughter spent time in China last year and was able to pull up this blog. She taught English as a second language and lived with a host family. That is no longer possible.

Are you prepared for the collapse of China and the debt bubble? Protect your finances with these 3 simple steps.Many foreigners teaching English as a second language in China are sheltered from the worst parts of China. My daughter, Heather, sought the real experience and got it. Fortunately she had a host family who considered themselves unconventional and enjoyed Heather’s presence. Her friend stayed with a family that wasn’t unconventional and had a miserable experience.

When Heather returned home she stayed in contact with her host family. She grew a bond with the host mom and their 5 year old daughter. 

In the last few months contact has been more difficult. We actually lost contact for over a month and feared the worst. These are good people and we worry about them because they are friends. 

As we started to give up hope of ever hearing from our extended Chinese family the host mom made contact. The story was grim.

This family had another foreign teacher and they had to send her home early over safety concerns. From the inside China has already started to implode.

The government’s solution to the stagnant economy was to set off another round of debt spending. With state-owned firms extremely inefficient and getting a large portion of the additional spending it is like doubling down on stupid.

 

Reality Test

You can hide fiscal malfeasance for a very long time if the government want the facts hidden. However, the natural laws of economics still apply and eventually assert themselves. 

The growing mountain of debt will eventually cause a crisis. The longer the delay before appropriate remedial action is taken the more pain will be measured out. 

China had started steps to resolve the issues. It would have taken a long time to fix the worst of the financial problems. However, the risk was high China would implode before they resolved the worst of the imbalances. The world community, knowing the approximate depth of the problems, quietly played along. What other choice did they have.

Unfortunately for China, the new American president had no patience for such slow resolutions. The trade spat exposed the underlying weakness of China’s economy quicker than expected and might be the trigger to set off the avalanche. 

The Los Angeles Times recently reported China announced more than $600 billion of economic stimulus. The goal is to fix the problem as fast as possible before catastrophe strikes. More debt seems a poor choice of ointment.

China’s history in not encouraging if the slowdown is too fast and/or a currency or debt crisis occurs before adequate safeguards are in place. 

The debt may be too large for an economy the size of China’s to navigate to calm waters. Many Chinese banks are insolvent because they can hide behind government censors. In a true capitalist economy these banks and other companies would have been shuttered long ago. So the inefficiency of the system trudges on and deepens.

Normally I would have an optimistic option at this point. And while I think this could be the next financial crisis to strike, I don’t think it will be the end of good times forever. All I’m saying is there will be a few moments when people get really scared if China collapses.

 

Preparing for the Storm

Dinny McMahon in his book, China’s Great Wall of Debt, does a better job digging deeper into the debt issues in China. This short post can’t cover the details the way a book can. The issues are deeper than I mention with shadow banks and incredible debt loads even greater than the government in China understands since they also know much of their data is faulty. I recommend reading this book. 

The risks posed by China should not cause undue alarm. Planning for the possibility is wise, but no one knows when, or even if (the miracle could actually be a miracle), the boom will drop. 

Is China's debt bubble about to burst? Learn how to protect your investments before it's too late.Since timing a crisis of this nature is impossible you can’t sell all your investments and hope it is the right move. The investments you sell might benefit from the Chinese crisis or the market could rally for years before the flood of Chinese debt consumes the news feeds.

There are some steps you can take to protect yourself if China implodes and if it doesn’t will bolster your financial situation regardless.

The 2008 financial crisis that started in the U.S. was a debt crisis. Home lending was out of control. Appraisals were based on fantasy and fake documents. Almost sounds like what China is dealing with today. 

Debt crisis are always painful events. Companies fail and jobs are lost. People with money hold it tight for fear things will never improve. 

As we saw in 2008, a financial crisis in a major world economy spreads. Very few parts of the world went unscathed by the 2008 events in the U.S. Even China was affected. 2008 set China on a massive borrowing for growth scheme they can’t seem to get off. Once the lie starts you need bigger and bigger lies to keep the charade going. 

Since debt is the cause of so many financial crisis I suggest you insulate yourself by reducing or eliminating debt. (I prefer the elimination of debt because the seriousness of the China issue is large enough to harm virtually anyone holding debt.)

Reducing debt is an easy (relatively) and simple (relatively, again) way to insure your fiscal soundness if China stumbles. Like all debt, it takes time to pay off. Today is the best day to start the process. When the tsunami is visible on the horizon it’s too late; there will only be time to grab something solid and hold tight.

A second security procedure is to keep some of your finances liquid. Most of your money should probably be invested in broad-based index funds all the time. Market timing just doesn’t work. Having two years of spending in a money market fund might also be a good idea. This is a similar tactic people in or near retirement use so they don’t have to dip into investments when the market is down.

 

Final Planning Tips

I wish I could share more, but I fear if I was totally blunt it might harm my friends in China. 

This is a serious issue China works hard to keep from the press around the world. It is easy to think China is loaded with cash since they hold so many U.S. Treasuries. In a crisis China may have to sell large amounts of these Treasuries to defend their currency causing an interest rate spike in the U.S. This would be economically disruptive even if the Federal Reserve fights to counter the effects of such a liquidation. 

The most serious issue happened when we lost contact with Heather’s host family for over a month. They only contacted us because they were traveling outside China. This is very concerning. When things get really bad (and usually just before), totalitarian governments clamp down hard. Foreigners in China have been learning this. The security alert for Americans traveling in China is elevated and travel there is not recommended. This is not a warning to be disregarded.

If the same thing happened in Russia it would be less an issue since their economy is so much smaller. Even with inflated numbers, China’s economy is still one of the largest on the planet. If China stumbles we will all feel the ground quake, especially since some of the debt is in U.S. denominations.

This post is not about inciting panic, rather the opposite. Risk is high and even the U.S economy looks to be softening. Smaller refund checks this tax season means people were enjoying a slightly higher take-home pay during the previous year. That could lead to a softer U.S. economy for a while.

You can weather almost any economic storm without debt. Even in good times debt can be a burden. 

I worry because a family in China close to my heart is living dead center of where the storm will strike. I wish them and all of China well. 

We are all in this together. So take precautions, reduce debt, increase your financial cushion and be well.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

Do You Need an Investment Adviser/Financial Planner?

Your personality determines your investment success. Understanding your relationship with money can make the difference between outstanding and sub-par results.

Your personality determines your investment success. Understanding your relationship with money can make the difference between outstanding and sub-par results.

Once again we see the market throwing a temper tantrum. On the way up it was tempting to handle your investments on your own. Now with the horizon less clear and a modest correction in the books as I write, you wonder if professional help might be worth the extra expense.

Those most knowledgeable about money resist the advice of commissioned (or fee-based) professionals. As everyone know, fees have serious consequences over long periods of time. The lower the fees the more you’ll have 10 years down the road.

But when the market gets schizophrenic confidence in one’s abilities declines. Worse, you can make serious mistakes well in excess of what you would pay a financial professional.

The stereotypical financial planner or investment adviser is history. Commission based compensation still exists but on a much more limited scale as fee-based planning has taken over, hitching the client’s performance to the adviser’s income. Annual fees typically run around 1% of assets per year. While this fee is lower than many mutual fund expense ratios from decades ago, 1% annually starts to add up. And remember, you not only lose the 1% fee, but all the future gains that 1% would have earned.

Readers of this blog generally forgo advisers since they are well versed in the details of money management. Some readers apologize when they call me for a consulting session as they pay investment management fees to an adviser. It doesn’t bother me if you use an adviser because there are good reasons to hire an adviser which we’ll cover shortly.

Normally people in the FI (financial independence) community would want to pass on an article suggesting you might benefit from a financial adviser. This should be the exception. After careful consideration I decided to share 3 reasons a financial adviser could be a good idea for you.

Actually, I personally believe there is only one true duty of a financial professional. Don’t cheat and skip ahead. There are other minor duties a financial planner should provide should you decide to hire one.

Broken Confidence

Before we begin I want to share why I’m writing this post. This blog has a presence on several social media platforms. I also follow several groups and pages in the genre on Facebook. Recently a few people confessed they were willing to sell because the pain was too great since they lost maybe 10% or so of their portfolio value from the market top a few months back.

This confused me since these same people exuded tremendous confidence in their personal investing habits without the help of a professional. How could a run-of-the-mill correction have people screaming? How would they react in a real down market? A bear market?

Further digging showed many were investing in individual stocks such as Apple, which is down is bit more than the broad market averages.

Of course selling after the decline is in full swing is rarely a good idea. The time to sell is when the market is up, not after it drops 10% – 25%.

People comfortable spending less than they earn and investing the difference consistently do fine when the market is climbing. But when the ride gets bumpy or a bear market growls loud, these same people consider making the largest mistake of their financial life: selling at a market low.

I see this whip-sawing with clients all the time. It breaks my heart to see a client bust her tail to build a sizable nest egg only to lose money in one impetuous panic trade.

And that is where professional help comes in. While fees are always a concern since we know it hurts long-term performance, we need to weight the costs against real world results.

So here are the 3 things a financial planner or investment adviser must do to earn your business:

3. Asset Allocation

Index funds get all the press, but index funds are not the answer to every problem. (Have halitosis? A healthy dose of a Vanguard index fund will clear that right up! If only.)

Index funds are an important part of almost every financial plan. A financial professional should help you (or keep looking until you find one who does) determine how much should be in bonds, equities and cash. (If the adviser recommends Bitcoin, commodities, options, or other esoteric investments, especially if commission based, run like the wind while you still have a chance. And hold your wallet tight as you run!)

A financial planner should understand you and your goals with consideration for your investment temperament. The only investment that works is one you stick with. Here are the tricks financial professionals use to win the money game.

A financial planner should understand you and your goals with consideration for your investment temperament. The only investment that works is one you stick with. Here are the tricks financial professionals use to win the money game.

My personal portfolio has very few bonds. I certainly don’t follow the traditional investment philosophy of subtracting your age from 100 and having that much in bonds, or some such advice. (Yeah, I know I mangled that. The point is I don’t follow traditional investing advice.)

This brings up an interesting point. Your portfolio will look different from mine even if we are exactly the same age, in the same health, and have the same amount of money! The reason is that your personality will be different from mine. I’m willing to ride out any storm (for real!) while you might lose sleep at night if your investment/s decline temporarily.

When the market drops I start licking my chops. Where some people get scared and want to sell to protect from additional declines, I’m thinking about—and usually carrying out—purchases of more shares of companies or index funds.

Down markets are where the real money is made! The same applies to an individual stock if it is a quality company in most cases. (Apple is down hard recently and may drop more. I added a small amount to my portfolio and if the decline continues I’ll add more. Apple is a well run company with superb management. Temporary setbacks are part of investing and usually a time to invest in more shares of great companies and always a good time to buy broad-based index funds.)

A good adviser/planner will help you build a portfolio that allows you to sleep at night. For some it might be all cash, ie. bank deposits. (I actually have a neighbor who has it all in the bank and is happy as a clam in his retirement. He sleeps at night! No index fund gains would be worth the loss of security to him so it is the right thing to do. . .  for him.)

2. Goals

The financial professional is more than a product pusher. The professional will know his client (that’s you) before making any recommendations. If an adviser prescribes before diagnosis, walk. Keep looking until you find an adviser who wants to work for you.

Investing isn’t about “more money”. Well, not completely, at least.

Investing needs a reason, a purpose, for it to be something you’ll be consistent with. Financial independence can be a solid goal since once you reach FI it opens your view to the horizon rather than working a job because you must. You may stay working in your current environment if you enjoy the work after reaching FI. There is nothing wrong with that! You might want to start a business or explore an idea. That is good, as well, as that is where all progress comes from.

Early retirement is an honorable goal. So is building a nest egg so you can work less and spend more time with family is a goal that motivates. Growing your portfolio to leave an adequate legacy is also an important consideration. So is growing your portfolio so you have the resources to fund philanthropic causes dear to your heart.

Goals are endless. An adviser or planner must be willing to listen to your goals, even help you formulate clear financial goals that will serve your needs.

Often times we don’t even know what we want. Just wanting more money isn’t reason enough! With only a vague, undefined goal, that SUV looks mighty tempting fast. Only goals you fully subscribe to will keep you on course and fill you with joy.

So, advisers and planners need to understand who you are and what makes you tick and work with you to discover your real financial life goals. It might sound like a detailed job; it is.

When I work with clients I practically give them a tax and financial proctology exam. You might be laughing now over my choice of words, but I’m dead serious. I need to know my client when dealing only with taxes. My advise is based on what I discover about my client and her goals. If it’s important with taxes; it’s tremendously more important when it involves your financial plan.

1. Panic and Greed

Two very important traits a financial adviser must have before you work with them is they must understand who you are and how it affects your asset allocation and a determination to help you reach your financial goals. But those traits are nothing compared to what I consider the only true value a financial professional has: dealing with your emotions: fear and greed.

It might seem like a total waste of money to pay a financial planner 1% of your portfolio annually when all the money is tucked safely into index funds. The whole low-cost benefit of index funds is partly removed with the advisory fee. So how can it be worth it to hire a professional for such a simple (and appropriate, I might add) investment portfolio?

On the surface the fees might seem like a waste until you remember how we entered this post: people freaking out on social media over a mild market correction.

If a 10% correction has you running for cover you made the wrong investment! Or at least you didn’t adequately prepare yourself for the reality of your investment choices.

Do you have the right financial plan? The right investment adviser can help you create, set up and implement the appropriate investment strategy for success and then work with you to stay the course.

Do you have the right financial plan? The right investment adviser can help you create, set up and implement the appropriate investment strategy for success and then work with you to stay the course.

And this isn’t a blame game either. Most people have no idea how risk adverse they are until the proverbial manure starts hitting the fan. Then Katy-bar the door, boys. It’s about to get real.

And for this reason a financial professional can earn her keep.

People who build a large portfolio do so by ignoring short-term market moves. It’s easier said than done. Most people need a steady hand to see them through. Enter the investment adviser/financial planner.

If the current market volatility concerns you then you either made the wrong investments for your personality or you need a professional to smooth the emotional peaks and valleys, maybe both.

The same applies to bull markets. If you’re tempted to use margin (borrowed money) when the market is hot you need a professional to talk you down.

My decades of experience makes it clear to me many people need professional help with their money. Everyone wants to go it alone because we all think we’re smarter than we really are, and as the market rises (as it usually does) it masks our deficiencies. Blue skies lull us into a false sense of security. Then the storm arises.

If you are considering a financial professional after reading this then I want you to do it right. Interview several financial professionals. If they aren’t interested in you, really want to know and understand you, move on. The adviser you hire (you’re paying them so you are hiring them so they darn well better do their job!) must take an interest in your goals. In fact, they should naturally gravitate toward questions bent to learn about you and what most motivates you.

Make it clear to any adviser you consider that you want a steady hand, not exotic investments. She must help you deal with the emotions in a down market so you don’t crush your financial dreams with impetuous trades; she must hone your desire to take a flyer when the world is getting rich in FAANG stocks.

A good adviser does those kinds of thing because they are responsible and looking out for you, her client. Anything less and you’re better off with the security of a bank.

A Parting Story

The mid and late 1980s were an incredible time to be invested. A long-time client with experience managing his own money added religiously to his portfolio. From 1982 to 1992 the market churned out an annual return well into the double digits. It was a good time to be invested in equity mutual funds.

During this decade my client invested in Fidelity’s Magellan Fund. During a good portion of this investment period the legendary Peter Lynch managed Magellan. Returns were in nose-bleed territory.

My client was a steady investing hand. An up market didn’t turn him greedy. He added funds steadily as he earned them.

Mild downturns were also okay for my client. But the 1987 stock market crash turned him into a sleep-deprived zombie. He couldn’t take the market volatility so he sold. At the bottom! Then the market recovered and blue skies returned so he moved back into Magellan.

Then in 1990 the market once again declined. Not nearly as bad as 1987, but enough to shake our good friend. As you may have guessed, he sold. A short while later when the market returned to new highs he felt safe enough to push all his money back into Magellan.

During this period the Magellan Fund was up an over 20% per year on average if you never sold. Our hero managed a measly 2% because he sold twice in decade out of fear, less than money market funds would have earned back then. Our hero went from mouth-watering investment returns to performing worse than money market funds over two stupid decisions.

Moral of the story: It only takes one or two stupid investing mistakes to sabotage your financial goals.

Now be honest: Do you need a financial professional to see you through the storm clouds?

Now for the bad news. If you do, they are as hard to find as a good under-priced stock.

Good luck.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 

If You Love Spending Money This Will Make You Rich

5 spending habits that can make you wealthy. How you spend your money determines how rich you will be. Right spending habits increase your wealth. #wealthyaccountant #spending #spendinghabits #investing #debt ##indexfunds #incomeproperties #rentalproperty #guilty #guiltyfeelings #buyersremorse“Should I feel guilty when spending money?” It’s a common question when I consult with clients. They are so tuned into frugality they sometimes start associating negative feelings with money. It’s a bad thing to start feeling.

Spending money is NOT an evil activity! In modern society we have it so easy that we tend to either overspend (the vast majority) or become hyper-frugal (a significant percentage of the demographic reading this blog). Both lifestyles are unhealthy. Overspending leads to serious problems when the bills come due and income might not keep up. Debt is a serious issue I ask clients (and readers) to consider purging. The opposite of overspending is the hyper-frugal drive. This can suck the pleasure out of life as fast as a heavy debt burden.

I tend toward the frugal side of the equation and get called out on it periodically, too. Sometimes I do things just because it’s the cheaper choice. If I were as smart as I think I am I would reconsider such decision-making. Frugal isn’t always the best answer.

Frugality for me is more about my hate for shopping. When I spend I know exactly what I want and side purchases are never a distraction.

Buying a good or service feels good even for a frugal accountant like me. I needed a longer breaker bar (torque bar) to get the lug nuts off a tractor tire so I can take it in for repair. The breaker bar I have is only 14 inches; the one I bought is 30. By the time you read this I might have that tire off with my new piece of equipment. Yes, I’ll save money on a service call by getting the tire to the shop, but it still feels kind of good knowing I have a shiny new tool in the garage.

But spending is a problem for many people. Frugality is a forced habit at best for the majority. Economically enforced austerity gives way to bad spending habits when normalcy returns. The cycle is familiar and we know it while we do it. If only we could stop.

Since most people enjoy spending money I thought I’d share 5 ways you should spend because this kind of spending makes you richer. In fact, if you don’t adopt these spending habits I outline below you will suffer serious personal finance issues. Those who have money will realize they were already spending this way. For the rest of you, please come along. I’m going to show how you will want to spend that money burning a hole in your pocket.

Maintenance

This may sound like common sense, but too many people defer spending to their detriment. Every so often you should change the oil in the car. It runs better and lasts longer when you do. When the roof needs replacement frugality is not your friend. The structural damage follows shortly after and gets very expensive. Then you get to spend a lot of money for no additional value. That is not a good spending habit.

5 ways spending can make you rich. Spending habits can lead to debt or wealth. Here are the secret spending habits of the wealthy.. #wealthyaccountant #secrets #wealthy #spending #spendinghabits #habits #debt #moneyDo-it-yourself (DIY) projects are a good opportunity to spend. One of the cables broke on my garage door recently. I bought new cables and discovered I didn’t have tools or the recommended bars to loosen and tighten the spring. I broke down a bought a pair (you need two) to finish the job. Now I need to keep them safe for a distant future event when I need to work on a garage door again. The cost was only $15, but it is spending. The spending saved me the cost of a service call which would have been significantly more. Some spending is good spending and increases your wealth.

The same situation occurred at the office this summer when I wanted to do some light landscaping. The place really needed it. Clients have a better opinion of an establishment with appealing décor. I acquired several quotes which all came in over $10,000. (And it wasn’t that big of a job!) I decided to do the job in-house. The cost of dirt and river rock and some seed money for some extra helping hands was under $2,000. I have several huge rolls of felt in the barn I used and unused treated fence posts from a previous farm project so that cost nothing extra. In the end I spent a couple thousand, assuaging my spending itch, and created over $10,000 in value; more if you count the added business an attractive building can bring in.

Maintenance and DIY projects are a perfect way to spend money in a way that creates value. If I would have written a check for $10,000 to landscape the office it wouldn’t have felt as good. I got the satisfaction of a job well done and the opportunity to order 10 yards of top soil and two orders of river rock. There were multiple spending opportunities for the same job. For people with an itch to spend, this might be a good way to kill two birds with one stone.

Pay Down Debt

I’ve preached this line often before. Loan payments are not completely new spending. The interest is, but it doesn’t feel like fun spending. You get nothing for the interest spending: no pretty baubles or service or vacation. Nothing. Your wealth just disappears.

The act of spending is addicting to many. Rather than spend on more stuff and putting it on the credit card at 18%, consider tricking your brain into spending the right way. Here is what I propose. Spending is about wanting something. Some people enjoy the shopping experience. Either way, turn these desires into a wealth creating machine. For the shopping addict, lay out all your debt and obsessively review your balances. Create an aggressive spending payoff habit. Set your payments up on automatic, but also send in extra whenever an extra nickel crosses your path. Turn it into a game! Have fun with this. Instead of building debt, turn debt elimination into an exciting adventure.

If shopping doesn’t trip your trigger then you probably spend just to have something new. I have something shiny and new you’re going to want: a debt free balance sheet! I mean it. Instead of a new boat, roll up your sleeves and butcher those bills. Remember, it is easier to enjoy a new toy when you don’t have to work to pay off the toy, plus interest.

Investing

Once you pay down debt you might be tempted to return to old habits which caused the financial problems. I say, “Nyet!”

The newfound habit you used to eliminate debt is a good behavior for proper future spending habits. Turn investing into an automatic wealth creating machine. Automating investing doesn’t always satisfy the itch to spend. There is a solution.

It may be hard to believe, but there was a time when I enjoyed spending a bit more than I tend to nowadays. Money was rolling in and times were good in the 1990s. I was smart enough to know good times don’t last forever so I devised a plan to satiate my spending desires with intelligent cash allocation.

These are the 5 things you need to spend on if you want to be rich. The 5 secret spending habits wealthy people use are available to anyone. Frugality isn't the entire game. The wealthy spend. They spend right. #wealthyaccountant #frugality #frugalliving #wealth #money #passiveincome #spending #spendinghabitsTax season was always a good time of year. My mutual funds were automated, but I needed a home for my excess cash so I wouldn’t be tempted to spend it. My solution: dividend re-investment plans (DRIPs). I wrote checks to all my DRIPs. It gave me great pleasure to finish my day with a spending splurge. I’d write a check to JNJ, Aflac, Phillip Morris, Wrigley (damn you, Warren) and more. As fast as it came in I sent it out. I don’t know what you spend your money on, but I have a nasty habit of buying as much stock as I can get my hands on. For the record, it’s a good habit to have.

DRIPs aren’t what they used to be. Brokerage accounts generally automate re-investment of dividends and many DRIPs now have fees. There is still a solution. Set a minimum amount you can easily invest every month. Automate the process. Then either write a check every time money comes in or log in and set up a transfer. Trust me, you’ll have so much fun spending on your index fund. The best part? Instead of paying interest on your purchase you’ll be paid dividends instead. Oh, the joy!

Turn investing into a game. Real wealth creation is built on the proper allocation of capital. The bank is fine for short-term and emergency funds. But your serious money needs to be working hard building a better world and the only way to do that is to own a piece of great businesses.

Another spending game to consider is investing funds you planned on spending foolishly. Excessive dining out or drinking in bars can be swapped out for an index fund investment. I’m not telling you to forgo a pleasurable life. God forbid! All I’m suggesting is that you switch some consumer spending for investment spending. And besides, you know as well as I you will enjoy those dividend checks more than interest payments.

Income Properties

If you have an itch to spend, income properties are for you. Many moons ago I owned a city of real estate in my portfolio. From personal experience I can attest you get plenty of spending opportunities when you own real estate.

Your primary residence is different from income property. Money you spend on your primary residence (or second home) comes from another source and can run dry. Income properties have—wait for it—their own income stream to fund expenses. If you have a serious spending itch, real estate done properly can scratch that itch raw.

You still need to buy properties right! Stupid income property purchases will force really bad spending even when you discover how bad the spending is and want to stop. Sometimes you can’t. But a small portfolio of investment property can give you plenty of opportunity to shop and buy. Researching the right property should be a priority. Once you own the property there are always things that need to be paid for: property taxes, utilities, insurance, repairs and maintenance. A property manager can do all this for you, but you can write the check yourself if you insist. Even still, you can review your monthly statement from the manger which will show all the spending. It should serve as a powerful ointment for your spending itch.

Small Business/Side Hustle

Okay, hustlers! Nothing beats spending opportunities than a small business or side gig. Even a frugal guy like me still manages many hundreds of thousands of dollars in annual spending just by owning a small accounting practice. Every two weeks payday comes around and I get ample reminders on how to spend my money.

These smart spending habits can put serious money in your pocket. Spending on the right things can increase your wealth rather than build debt. Spend your way to riches! #wealthyaccountant #smart #spending #happiness #dreams #frugality #frugalA side gig or business is an easy way to alleviate the desire to spend. Maybe too easy. While I can brag I spend $250,000 in my business, it needs to be brought into perspective. I’ve seen too many people over the years start a business, spending like mad to get it up and running. It soon becomes apparent my client isn’t ever going to make a sale. He’s going to keep spending until he’s broke without ever actually starting the business. Then he asks if it’s deductible. (Not if it was a hobby or you treated it as such.)

Still, business owners are spending daily. At home my wallet has moths. At the office money is moving constantly. Office supplies are replenished, utilities are paid, property taxes come due, employees get paid, IT needs money. The list goes on and on. A frugal habit goes a long way toward profitability in a business. It’s easy to spend; not so easy to bring it in.

Spending/shopping addiction is a serious problem with many consequences. Shopping is a waste of time compared to time spent with family and friends. Shopping has its place as long as it doesn’t rise to addiction. Business has a natural built-in need to allocate money. If you can run a “real” business or side hustle you have my blessing. Before long you will lose that desire to spend. Take it from a three decade business owner. Spending gets old real fast when it becomes a job. (You know; a job. That thing you want to take early retirement from.)

Coda

Spending in and of itself is not wrong! Overspending is a bad habit and even a sickness. Excessive frugality is a bit of a sickness too. Careful readers may have noticed that from a certain unnamed accountant over the past few years.

I’m not here to tell you to never spend. What I want for you, kind readers, is a healthy relationship with money and spending. Reducing debt to background noise is important. Investing for your future and that of your family is imperative.

Spending easily becomes a job! Money is a powerful tool to help you live a quality life. Too much or too little is a problem. Using the 5 ways to spend listed above will make you wealthier. That is what we are about around here: quality of life which is the true meaning of wealth.

Finally, can you do me a favor? If you think this is as important as I do, go back to the top of this post and use the buttons to share on social media. You can pin the placards to Pinterest, as well. Help me spread the word. Let’s make the world a better place where people control their spending and build powerful, nurturing money habits.

Thank you.

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

How Actively Managed Funds Legally Lie about Performance

Past performance is no guarantee of future performance.

I’m going to start an investment company. Actually, I’m going to start a whole bunch of’em. Anyone interested in throwing in with the Wealthy Accountant? Read on if you think I am a good investment risk.

As an accountant I don’t want to leave anything to chance. People invest in firms with proven track records that exceed the norms. Therefore, my investment company will start several investments with only my money at risk. Several different strategies will be used to see which ones outperform. Underperformers will be closed without any investor money put at risk.

Before you start shedding tears for me, know I only invested a token amount into each fund. My loses were small and so were the gains. I just needed to know which ideas worked best.

Only the winners will be offered to the public. That means you, kind reader. Only the finest for those reading my blog.

Once the deadbeats are eliminated I can provide paperwork showing the wonderful returns on the winning investments. In fact, every investor from now on will see investments returns that include the numbers when the investment was really small and unavailable to the public.

Since the early, and unavailable to you, outperformance carries the same weight as the future returns when the fund is larger, the investment might have lost money overall and still claim a positive long-term return to investors. In other words, results are not weighted.

Oh, but the Wealthy Accountant knows future returns eventually catch up to a guy. So, I will close funds that take’er on the chin. Nobody wants to see that kind of thing in this investment company. Only survivors get to live on around here. For the laggards: OFF WITH THEIR HEADS!

Hey! Look Everybody. Darwin’s back

How many want to invest in my company now? Thought so.

First I salted the mine, if you will, by only allowing winners out of the test phase and then I killed the losers so you only saw outperformance. I look like a genius! I top the market by several percentage points after all those pesky fees I have to report in the prospectus. Call me Smarticus!

Survival of the fittest is the rule in the investment arena. Only outperformance is rewarded. To keep things going I will need a few baby funds in the incubation stage at all times in case too many in the public view take a shellacking.

Before you start insulting me, I never had any intention of misleading you! I had these great investing ideas and back tested them to see if they would work. Those working well on paper were taken to the incubation phase. Finally, the investments excelling in a real world situation were introduced into the world so everyone could partake of my intelligent investing skills. I would never ask you to invest in a loser. Fingers crossed.

As for the investments showing strain as the years roll by, well, you wouldn’t expect me to keep an old idea past its moment in the sun, would you?. You are my people. Only the best for you guys! When the numbers sour, out it goes!

Of course, I get paid fees for managing the investments. Nobody wants to invest in a loser so why should I waste my time on an investment not churning out enough fees for your favorite accountant. Geesh!

A Guy Named Ron

Earlier this year Jim Collins (jlcollinsnh), Carl (1500 Days) and I got together at Conclave to hammer out all the pressing problems of the world. Things have been a darn sight better ever since. Even the sun shines brighter. So it goes.

Two very intelligent women were there. The guys knew a thing or two, too. (Ah, who am I kidding?) It was a rainy Wisconsin weekend for our get-together. We enjoyed a Spotted Cow beer or three and talked shop. Very relaxing and informative.

When you have three personal finance bloggers in a room you can expect one to open his laptop and check his statistics eventually. When one goes, they all go. Call it a weakness.

Jim Collins is noted for his incredible work in his Stock Series. I highly recommend reading his work. Don’t worry! I’ll still be here when you get back.

On the last day of Conclave an interesting comment appeared on Jim’s blog from a guy named Ron. He seemed nice enough, but soon showed a thin skin. Before long you couldn’t help wondering if he was a paid spokesman for the actively managed mutual fund industry.

What Ron doesn’t know is I was in the room as Carl and Jim responded to him. I stayed out of the conversation online while we discussed among ourselves the best way to handle the painfully inaccurate comment from Ron. The worry was readers would see his comments and come away with false knowledge and suffer the consequences.

Ron had a love affair with American Funds. For a fund house of actively managed funds they are pretty good. Ron would not accept “good for an actively managed fund.” He was right and everyone else was wrong! He kept going back to past performance.

First, American Funds does have some impressive numbers. I have no idea how many funds made it out of the incubator or how much survivor bias plays a role. Not every American Fund investment outperformed, though some did by a small amount.

Fund performance rarely includes the load fee paid up front and sometimes also excludes trailing load fees with only a footnote for those who notice.

Ron’s argument actively managed funds are better than index funds is proven wrong by every broad survey of investment returns. Some actively managed funds do outperform their benchmark! With the number of funds out there it is mathematically very likely some will do that as background noise. It’s a statistical certainly a few will beat their benchmark by sheer probability. Still, there are a few that keep pumping out good numbers for a long time. Peter Lynch and Warren Buffett come to mind.

Past performance is not a guarantee of future returns. The outperforming manager of the last twenty to thirty years is enjoying his retirement now. The new guy has a much larger fund to navigate through the investment minefield. Plus, it is harder to outperform the bigger you get. By default a really large fund becomes a de facto index fund. By its sheer size it has to buy a lot of everything to stay fully invested or reasonably so.

Ron was wrong and he knew it. He is a smart guy running around the blogosphere preaching half-truths that put the less informed at risk. If Ron thinks actively managed funds do well he should see how some of the guys perform in their mad money account in personal finance blog arena. Some of those numbers are impressive. Ron would have to be impressed with double digit outperformance! But small accounts can do that a lot easier than any account of significant size. Probability dictates somebody will win big if enough play, like the lottery. Still, it’s a bad financial decision.

Follow the Breadcrumbs

Ron had no way of knowing the people responding to his comments on Jim’s blog were sitting together in a room and discussing their response. He also had no way of knowing I was also in the room. He had no way of knowing how concerned we were as a group how much damage he could do to a reader early in her journey toward financial independence. Ron could do real harm with his misinformation.

All that said it is no surprise Ron made his way to this blog with the exact same agenda. If he isn’t paid a huge salary by American Funds he is an idiot considering how much work and time he puts in plugging them.

Carl (1500 Days) checking his stats and trying to talk sense into Ron.

I set the poor boy back. He only commented once and followed it up with an email. I have no problem with personal opinions in comments. Material misinformation is another story. Don’t tell readers actively managed funds are better without a link to a reputable source proving your point.

You know, I would have left Ron’s comment alone if it weren’t for my earlier experience with the guy on Jim’s blog. Poor Ron is upset with me and for good reason. However, this blog is here to help people, to make a difference in the lives of people who happen to wander in. An opinion here, even if I think it is wrong, is allowable. If I discover it is a pattern to mislead and misinform, I have a moral obligation to step in.

This blog is about money, taxes and financial independence. The road to success is straightforward. But there is room to wander a bit, too. Some things make no sense at all. Overspending, gas guzzling vehicles, high interest debt and a low savings rate are not part of this agenda. With rare exception, a very rare exception, actively managed funds might play a modest role in your portfolio.

If I had to choose an actively managed mutual fund, American Funds would be on my list.

But I still won’t do it and I have more than enough money to weather an actively managed mutual fund’s underperformance.

Crowdsourcing Experience

There are advantages to writing a personal finance blog that go beyond the love of writing and meeting new people. Few things in life bring as much pleasure as sharing knowledge gleaned over decades of experience. Stories are the best. Sharing stories with friends is a time honored pleasure handed down to us through countless generations.

The old adage about the teacher learning more than the student applies in blog writing as well as in formalized education settings. Additional research and looking at a situation considering perspectives wider than just your own is an eye opening experience.

The constant search for a story idea and angle is hard, yet rewarding, work. Topics I would never think of digging deeper into eventually reach the front burner. Unexpected paths are taken. I always have a plan. It never ends up the way I anticipate. Stories have a habit of taking on a life of their own. (At least I started with good intentions.)

Hurt My Feelings, Please

The original working title of this post was: Hurt My Feelings, Please. The original intent of this post was to encourage people to share their thoughts in the comments section.

Over the last few years I have learned so much from you, kind readers, I can scarcely contain my gratitude. The original premise of this blog was to allow people to step behind my desk and see the world from my point of view. Accountants get the opportunity to see the good, bad and ugly of life up close and personal.

My personal life experiences, and those of my clients, I was sure would provide powerful insights into living the good life. They have, in my opinion. I never dreamed I would get an education like I did. Decades of experience pale in comparison to the life experiences of thousands of readers. The group collective of knowledge trumps anything I can spew onto the page. I’m one guy and you, readers, as a group can outdo anything I can. There is potential power in large numbers of people working together toward a common goal.

Some examples are in order. Back in March I wrote about a novel way to get awesome internet service you can take anywhere at a low cost and get a tax deduction too. It all started when I struggled for years to get any kind of acceptable internet quality where I live out in the backwoods of Wisconsin. I tried everything to no avail. And it was expensive. If you know me it all you know how deeply the pain drove when I had to pay for a crappy product and terrible results/service.

Then I ran across a Wi-Fi hotspot that promised real results at a really good price point. Loving value as I do, I did my research and wrote about it. You can read the details of the internet service with the above link. What I want to point out here is my original post fell short. What I wrote about was still too expensive! Michael left a comment with a link for the very same product for about half the price of what I suggested! Thank you, Michael. No really. Thank You.

The tax deduction is what I felt readers here would cling to. Instead, readers pointed out the charitable deduction was negligible and even possibly questionable. What can I say? I’m an easily excitable accountant.

The tax deduction wasn’t the shtick! Backwoods of Wisconsin or no, many readers hungered for quality internet service all over the country at a reasonable price. Then Michael one-upped me. And thank God he did. I ended up buying the service he suggested. (Be sure to read the comments on the linked post above on this. I did not change my post, opting to allow Michael’s comment to carry the day. I may need to update that if people start missing the real value of that post.)

My neighbors, hearing the rumor of my internet nirvana, started to call. For a while I enjoyed a burst of popularity with my community. I would visit neighbor after neighbor with my Wi-Fi hotspot and my youngest daughter in tow who knows how to set it up. We tested the service at neighbors’ homes to make sure it worked for them and gave them the info to buy their own service.

Neighbors talked to each other as more and more opted for the service. People in my small community were getting internet service like never before at a price 70% cheaper! Imagine a prosecutor trying to seat a jury against me in my county now with so many people benefiting from my simple blog post and the ensuing comment from Michael.

Michael sounds like a nice guy. He must be. Look at all the smiles he caused. Imagine if he would have said to himself, as a nice guy, “Awe, I can’t comment that there is a better deal. It could hurt the Wealthy Accountant’s feeling.”

HURT MY FEELING, PLEASE!!!

I mean it. The working title was only changed because I didn’t feel it reflected the content of this post. I like the working title better, however, and may change it back at some point in the future if I think it will help reach more people in need of the information.

The only reason this blog should consume electricity is if it provides value. This whole project is a waste of time if the only information comes from me. Some farm boy from the boondocks doesn’t have all the answers just because he has three plus decades running an accounting office. Not good enough.

Three is Not a Big Enough Crowd

There are plenty of additional examples where readers provided better information than I did. I’m learning more now than ever before. Even an old dog can pick up a tip or two now and again.

A few days ago I wrote about my experience helping my oldest daughter get a good car below Blue Book from the dealer. I thought I discovered the greatest thing since sliced bread. It appears sliced bread was not all that great an invention.

My car buying idea in this instance was solid, filled with good advice. But Wes commented a few links where you could get even better deals! Once again, thank God Wes didn’t refrain over fear of hurting my feelings!

Crowdsourcing is all the rage today. Ideas that would never have seen the light of day now have a chance at life. Medical expenses can be crowd sourced; non-profit organizations can build and grow programs to make our communities better; artists can fund projects. The list of opportunities is endless in the new world paradigm.

But crowdsourcing doesn’t end with financial projects! Blogs like The Wealth Accountant start a dialog on a variety of ideas. More personal finance bloggers means more ideas get aired. The blogger only starts the conversation. The readers are the real story. The comments section can be livelier and provide more information than the actual post! I never expected that.

Growth only happens when evolution takes place. This blog is no different. I have seen subtle changes over the last year and a half as I grow my audience and find my voice for this venue. The blog evolves as I grow. And you are the reason I grow and this blog evolves.

Your ideas make all the difference. Many crowdsourcing projects require a cash commitment on your part. If the project is completed you may get some compensation for your contribution. Sharing your ideas in the comments section doesn’t cost you a dime. The rewards are immense because when you share it encourages others to do the same. As a group we are more powerful, wiser and more knowledgeable than any individual of this group, this author included.

Zig Ziglar told a story about how much a horse could pull. I may get a few details wrong in the story—it has been a while—but you will get the message. Zig said, “A single horse hooked to a wagon can pull 4,000 pounds. If you hook two horses to the wagon and train them to work together they can pull 12,000 pounds.” The lesson is clear: the sum is greater than the parts working alone.

We are that team of horses.

Together we can make a difference in our communities, family and personal life. Crowdfunding is more than raising funds. It is possible to crowd source and crowd fund knowledge and experience. We live in a brave new world with more opportunities than any other time in human history.

Never be afraid to share your thoughts in the comments section of this blog. What you may consider unimportant may change another reader life in a fundamental way. It might change the author’s life too.

Everyone has plenty to share. The forum started with a bang and has slowed lately. I encourage greater use of the forum. I added a section for accountants who read this blog and share my philosophy to share their contact information. Just like I don’t know everything, I can’t prepare, or even consult, with every deserving reader.

Together we will create a better world. We will, and are, making a difference. Never be afraid to share. Your unique thoughts and experiences must be shared with the world or we are all irrevocably harmed. You are part of this community, you are friends.

We are a family (if we have the courage).