Last week I was in Nashville, and the friends I was with took us on a tour of Belle Meade, which is the high rent district of Nashville. We passed mansion after mansion. Acres of perfectly groomed landscaping. Then we passed the Belle Meade Country Club. My friends insisted that only “old money” could belong. No parvenu with only a couple of hit country albums need apply.
This started me thinking on the subject of wealth (admittedly, a topic never too far from my thoughts).
How do define wealth? How would you know if you are wealthy? If you are not yet wealthy, but hope to be, how do you define the goal?
A lot of people would define it in terms of your possessions and entertainment. If you have the biggest house, the fanciest car, the most toys, you’re wealthy. Similarly, if you fly to Europe on vacation, or dine out at the most expensive restaurants, you’re wealthy.
I’m not sure I agree with that stance. Consider the real estate bubble, now collapsing. There were plenty of people, especially in the more overheated markets of California and Florida, who repeatedly refinanced their houses, cashing out the equity. They then spent the cash on the very things listed above. But now that the boom has come to a halt, those people are losing their lifestyle, along with the ability to refinance.
If your lifestyle has that little security, I would not consider that as true wealth.
Other people might define wealth in terms of the income that someone earns. “He’s a doctor, they’re all rich.” “CEO’s make the big bucks.”
I think the problem with that definition is that you have to stay on the treadmill to keep earning that money. It’s kind of like a shark: if you stop swimming, you sink to the bottom and die.
So for me, wealth is an issue of how much passive income you have. Passive income is money that comes to you without your having to work for it. The source of the money is something you own, or even who you are. Dividends. Profits from a business that someone else manages. Interest on bonds. Even capital gains from selling appreciated assets (after all, somebody had to make money in California real estate). All of those are examples of passive income.
Passive income can also come from pensions and social security. Even though you had to work to pay into the system, you aren’t working for the money now. As long as you can manage to stay warmer than room temperature, they are going to continue sending you checks.
So, by my definition, if you want to be wealthy, you need to develop sources of passive income.
Wednesday, May 28, 2008
Thursday, May 22, 2008
Card Wars
I realized something today. I don’t know the interest rate on either of my two credit cards. I use an American Express card for most purchases, and I have a Visa for the places that do not accept Amex.
The topic came up because I was talking about personal finance with a coworker at lunch today. We were discussing how people can get in over their heads with credit cards, and how that can force people into bankruptcy. She told me that she didn’t understand that, because she had a low rate on her credit card. “It’s only 2.9%, but I don’t even pay that because I pay off my balance every month.”
I also pay off my balances in full every month. And because I have been doing that for as long as I can remember, the interest rate on the card is irrelevant to me. What is relevant to me is that I get air line miles from my credit card.
The important thing to remember about the credit card industry is that they make money from two income sources. First, they make money from the interest charges paid by cardholders. But a more reliable source of income is the fees they charge merchants to process the transaction. These charges can be upwards of 2% of the cost of the item being charged.
So let’s say you’re American Express. Most Amex users are businesses who pay their bills in full every month. When I charge something using my card, Amex pays the merchant 98% of the purchase price right away. I pay Amex 100% back, on average a month after I buy the item. If you are getting 2% a month for the use of your money, that becomes a 24% rate of return on an annual basis.
Since American Express is raising capital in the public markets, their cost of capital is (just a guess) around 6% a year. With borrowing money at 6%, and getting a return of 24%, the differential is an 18% return. If you are making that kind of return, you can offer considerable rewards as part of your marketing plan.
But not considerable cash back. If Amex offered 1% cash back, that would lower the differential to 6% a year, which doesn’t leave a lot left over after operating and marketing costs are taken out. So the card companies that offer that kind of cash back are depending on the first source of income: interest charges paid by cardholders.
So far, I know of only one credit card company that would let me check out the tradeoffs involved in getting rewards such as cash back. So I checked out the Capital One Card Lab, which you can find here. With excellent credit, a menu of options pops up. Choosing one option, like 1% cash back, removes other options, like some of the interest rate choices.
Ohhhh, a game! Let’s play!
After playing a few rounds, I settled in on 2% cash back on gas & groceries, with no annual fee. If I agreed to a 20% APR, they’ll set the APR at zero for the first year. So I could use their money for a year, while my cash was earning interest in a money market account. All I have to do is remember to pay it off in full at the end of the year, and every month thereafter, and I never have to pay that 20%.
A 2% reduction in gas and grocery costs, paid for by someone else? This is a game I just might play.
The topic came up because I was talking about personal finance with a coworker at lunch today. We were discussing how people can get in over their heads with credit cards, and how that can force people into bankruptcy. She told me that she didn’t understand that, because she had a low rate on her credit card. “It’s only 2.9%, but I don’t even pay that because I pay off my balance every month.”
I also pay off my balances in full every month. And because I have been doing that for as long as I can remember, the interest rate on the card is irrelevant to me. What is relevant to me is that I get air line miles from my credit card.
The important thing to remember about the credit card industry is that they make money from two income sources. First, they make money from the interest charges paid by cardholders. But a more reliable source of income is the fees they charge merchants to process the transaction. These charges can be upwards of 2% of the cost of the item being charged.
So let’s say you’re American Express. Most Amex users are businesses who pay their bills in full every month. When I charge something using my card, Amex pays the merchant 98% of the purchase price right away. I pay Amex 100% back, on average a month after I buy the item. If you are getting 2% a month for the use of your money, that becomes a 24% rate of return on an annual basis.
Since American Express is raising capital in the public markets, their cost of capital is (just a guess) around 6% a year. With borrowing money at 6%, and getting a return of 24%, the differential is an 18% return. If you are making that kind of return, you can offer considerable rewards as part of your marketing plan.
But not considerable cash back. If Amex offered 1% cash back, that would lower the differential to 6% a year, which doesn’t leave a lot left over after operating and marketing costs are taken out. So the card companies that offer that kind of cash back are depending on the first source of income: interest charges paid by cardholders.
So far, I know of only one credit card company that would let me check out the tradeoffs involved in getting rewards such as cash back. So I checked out the Capital One Card Lab, which you can find here. With excellent credit, a menu of options pops up. Choosing one option, like 1% cash back, removes other options, like some of the interest rate choices.
Ohhhh, a game! Let’s play!
After playing a few rounds, I settled in on 2% cash back on gas & groceries, with no annual fee. If I agreed to a 20% APR, they’ll set the APR at zero for the first year. So I could use their money for a year, while my cash was earning interest in a money market account. All I have to do is remember to pay it off in full at the end of the year, and every month thereafter, and I never have to pay that 20%.
A 2% reduction in gas and grocery costs, paid for by someone else? This is a game I just might play.
Wednesday, May 14, 2008
Politicians are the same all over the world.
There was an article in the New York Times today, regarding the reaction by Indian economists and politicians to comments made by President Bush about the increase in global food prices. In a news conference in Missouri on May 2, part of the President's answer to one question was the following, referring to the growing middle class in India:
“When you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.”
This has apparently ignited a storm of criticism in India. You can read the article here. The comments cited by the Times ranged from insulting President Bush's intelligence (nothing new there) to claims that Americans are causing food shortages in Africa by overeating. This puts me in mind of those dinner time conversations growing up. You know the one:
"Billy, you clean your plate. Think of the starving children in Africa." "But ma, I already weigh 190 pounds, and I'm only 12."
That the Indians have taken umbrage with the President's remarks shows that they have collapsed the distinction between explaining an event, and placing blame for the same event. Globally, grain prices have risen significantly in the last year or so. Why?
Part of the answer is that demand for grain is up. Not from Americans. We're huge overeaters, but we've been the most obese people in the world for at least a decade now. Well, with the rapid development in China and India over the last decade, meat consumption in those countries has gone up, right along with rising incomes. Not to American levels, but higher than it has been. The increase in meat consumption helps explain why global demand for grain has increased.
The situation in India and China has changed, and knowing that helps our understanding of the situation. That's a long way from blaming them. Americans are the last people in the world to blame anyone for wanting to eat better. If anything, we're more likely to start sharing recipes. Still, the Indians are insulted, and their politicians have turned around and started blaming us for the rise in food prices.
And in an odd way, that gives me some hope for a better world. Their politicians are just as capable of knee jerk reactions that make them sound like idiots as ours are. Maybe by focusing on our similarities (even the embarassing ones) instead of our differences, we can build bridges of understanding to other parts of the world. This incident may help us to realize that despite our surface differences, we're really all the same inside.
Nah!
“When you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.”
This has apparently ignited a storm of criticism in India. You can read the article here. The comments cited by the Times ranged from insulting President Bush's intelligence (nothing new there) to claims that Americans are causing food shortages in Africa by overeating. This puts me in mind of those dinner time conversations growing up. You know the one:
"Billy, you clean your plate. Think of the starving children in Africa." "But ma, I already weigh 190 pounds, and I'm only 12."
That the Indians have taken umbrage with the President's remarks shows that they have collapsed the distinction between explaining an event, and placing blame for the same event. Globally, grain prices have risen significantly in the last year or so. Why?
Part of the answer is that demand for grain is up. Not from Americans. We're huge overeaters, but we've been the most obese people in the world for at least a decade now. Well, with the rapid development in China and India over the last decade, meat consumption in those countries has gone up, right along with rising incomes. Not to American levels, but higher than it has been. The increase in meat consumption helps explain why global demand for grain has increased.
The situation in India and China has changed, and knowing that helps our understanding of the situation. That's a long way from blaming them. Americans are the last people in the world to blame anyone for wanting to eat better. If anything, we're more likely to start sharing recipes. Still, the Indians are insulted, and their politicians have turned around and started blaming us for the rise in food prices.
And in an odd way, that gives me some hope for a better world. Their politicians are just as capable of knee jerk reactions that make them sound like idiots as ours are. Maybe by focusing on our similarities (even the embarassing ones) instead of our differences, we can build bridges of understanding to other parts of the world. This incident may help us to realize that despite our surface differences, we're really all the same inside.
Nah!
Sunday, May 11, 2008
Pennies From Heaven: An Update
In the weeks since I first posted about picking up pennies off the ground, I've managed to find one penny lying around. Then on Friday I picked up a dime outside of the movie theater, and Saturday morning I spotted a quarter in a public park. That got me thinking about the subject again.
For the last month I'm up about forty cents. Clearly picking up change is not going to make a meaningful difference in one's financial status, whether you make the effort to bend over and grab, or not. So if there is going to be any value to the practice, it lies in the metaphorical realm. That is to say, that picking up loose change becomes a shorthand expression, an encapsulation if you will, of your entire outlook towards your finances. By defining who you are, the metaphor can then influence your financial behavior in other areas of your life.
The simplest way of expressing the metaphor is "I'm so cheap I pick up pennies in the street." Viewed that way, the practice becomes a physical reminder of the importance of frugality. If the memory of the effort expended to gain every penny is actually imprinted in into your muscles, you are less likely to be extravagent with your dollars.
I want to take the metaphor to another level, however, and view the practice as a expression of how we look for opportunity. I think there is a risk for searching for pennies on the ground. That risk is that we can become focused on looking on the ground, to the exclusion of keeping our eyes looking at where we want to go.
I prefer to take a more positive take on the situation. I like to think that although my focus remains on where I'm going, I have expanded my attention to take in more of what's going on around me. This expanded focus allows me to spot opportunities that might otherwise seem to humble to be worth pursuing. Sometimes those opportunities pay off bigger than you expect.
Like looking for pennies, and spotting a quarter.
For the last month I'm up about forty cents. Clearly picking up change is not going to make a meaningful difference in one's financial status, whether you make the effort to bend over and grab, or not. So if there is going to be any value to the practice, it lies in the metaphorical realm. That is to say, that picking up loose change becomes a shorthand expression, an encapsulation if you will, of your entire outlook towards your finances. By defining who you are, the metaphor can then influence your financial behavior in other areas of your life.
The simplest way of expressing the metaphor is "I'm so cheap I pick up pennies in the street." Viewed that way, the practice becomes a physical reminder of the importance of frugality. If the memory of the effort expended to gain every penny is actually imprinted in into your muscles, you are less likely to be extravagent with your dollars.
I want to take the metaphor to another level, however, and view the practice as a expression of how we look for opportunity. I think there is a risk for searching for pennies on the ground. That risk is that we can become focused on looking on the ground, to the exclusion of keeping our eyes looking at where we want to go.
I prefer to take a more positive take on the situation. I like to think that although my focus remains on where I'm going, I have expanded my attention to take in more of what's going on around me. This expanded focus allows me to spot opportunities that might otherwise seem to humble to be worth pursuing. Sometimes those opportunities pay off bigger than you expect.
Like looking for pennies, and spotting a quarter.
Monday, May 5, 2008
Energy Saving Tip: Wash Your Car
I washed and waxed my car this weekend for the first time in months. The weather finally cooperated, with clear skies and a warm sunny day. When I finished, I felt extra virtuous: not only did the car need a bath, but I improved my fuel efficiency at the same time.
Here's the science part: A dirty car has a rougher surface finish than a clean, freshly waxed car. That rougher surface finish creates more wind resistance, forcing the engine to work harder to overcome the drag. Hence, washing your car gives you better mileage.
Frankly, I'm not sure that the gain is all that significant. You probably get a much bigger mileage boost by driving with the windows closed. Driving with the windows down turns your car into a giant wind scoop, which can increase drag by up to 10%. But every little bit helps.
Besides, I was going to wash the car anyway. I think that one of the keys to saving money is to find ways to save by moving in a direction you were headed anyway. If you see a coupon for something you use regularly, cut it out. You don't have to be looking for pennies on the ground, but if you spot one, pick it up. (I picked up a penny today on the floor of my gym.) Saving money doesn't always have to be about sacrifice or struggle. Sometimes it can be about spending a pleasant hour or two outdoors on a spring day.
By the way, my ride looks great.
Here's the science part: A dirty car has a rougher surface finish than a clean, freshly waxed car. That rougher surface finish creates more wind resistance, forcing the engine to work harder to overcome the drag. Hence, washing your car gives you better mileage.
Frankly, I'm not sure that the gain is all that significant. You probably get a much bigger mileage boost by driving with the windows closed. Driving with the windows down turns your car into a giant wind scoop, which can increase drag by up to 10%. But every little bit helps.
Besides, I was going to wash the car anyway. I think that one of the keys to saving money is to find ways to save by moving in a direction you were headed anyway. If you see a coupon for something you use regularly, cut it out. You don't have to be looking for pennies on the ground, but if you spot one, pick it up. (I picked up a penny today on the floor of my gym.) Saving money doesn't always have to be about sacrifice or struggle. Sometimes it can be about spending a pleasant hour or two outdoors on a spring day.
By the way, my ride looks great.
Thursday, May 1, 2008
Great Moments in "Duh"
Here’s a headline from today’s New York Times:
As Pump Prices Soar, Buyers Flock to Small Cars
Repeat after me: “When man bites dog, that’s news. When dog bites man, that’s not news.”
There was one piece of interesting information in the article, however. Last April, four cylinder engines outsold six cylinder engines in the US. What is interesting is that the milestone was reached, not that the market share of smaller engines increased.
The market share effect is simply a rational response to changed market conditions. When gas prices go up and consume a larger share of income, people find ways to consume less gas. In the short run, they try and drive less. You eliminate unnecessary trips; combine multiple errands into one drive. These are behavioral changes.
Longer term, people make bigger structural changes, like buying smaller cars that get better mileage. For many families, the cars they drive are either the first or second largest concentration of capital they have, after their houses. As that capital is fully depreciated, and comes up for replacement, people are buying more efficient vehicles.
Despite all the complaining about high gas prices, however, I haven’t seen any increase in carpooling. This indicates to me that people are more willing to devote higher percentages of their income to gas, rather than make that big a behavioral change. At least so far.
So when we see a shift in the number of carpoolers, that will be news.
As Pump Prices Soar, Buyers Flock to Small Cars
Repeat after me: “When man bites dog, that’s news. When dog bites man, that’s not news.”
There was one piece of interesting information in the article, however. Last April, four cylinder engines outsold six cylinder engines in the US. What is interesting is that the milestone was reached, not that the market share of smaller engines increased.
The market share effect is simply a rational response to changed market conditions. When gas prices go up and consume a larger share of income, people find ways to consume less gas. In the short run, they try and drive less. You eliminate unnecessary trips; combine multiple errands into one drive. These are behavioral changes.
Longer term, people make bigger structural changes, like buying smaller cars that get better mileage. For many families, the cars they drive are either the first or second largest concentration of capital they have, after their houses. As that capital is fully depreciated, and comes up for replacement, people are buying more efficient vehicles.
Despite all the complaining about high gas prices, however, I haven’t seen any increase in carpooling. This indicates to me that people are more willing to devote higher percentages of their income to gas, rather than make that big a behavioral change. At least so far.
So when we see a shift in the number of carpoolers, that will be news.
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