On Mortality and Wealth

I’ve already talked about the link between work and wealth but what about the ties between death and wealth?

A buddy in New York used to tell me that the right way to manage your money is to have just enough to cover your bills until the day you die, and then bounce the check to the funeral home. He was kidding, I think. That poor funeral director! But there’s real wisdom in his joke.

One Definition of Wealthy

One of my ways of defining ‘being wealthy’ is similar to my buddy’s joke. I think we should measure whether we have enough money to cover our lifestyle costs up until the day we die. If you can, then you’re wealthy.

In my definition, taken to the extreme, we can see how we are all ‘wealthy’ at least a few minutes before we die, since we no longer need to spend money to maintain our lifestyle. “I’ll never have to work for the rest of my life!” the dying person could think, and that is true. So, you’re wealthy!

Less absurdly, if you knew you had just a year to live, and no particular concern for your heirs, would you have enough saved to cover your lifestyle costs? If you own your own time, to spend exactly as you like – again, I think that makes you wealthy, by one sort of definition.

(Note that my definition of wealthy never considers heirs, because in my experience children really don’t deserve the money.)

Ideally, of course, we arrive at that level of ‘wealthy’ before the moment of death or a year of terminal illness. We get there, ideally, with many more years of our lifestyle costs covered. This is generally the goal of most of us as we approach retirement – that we can own our own time without having to work to earn more money.

A fewer number of fortunates manage to acquire enough, quickly enough, to allow them to maintain their lifestyle even after retiring at a young enough age. This conforms more to our typical societal view of a ‘wealthy’ person, who can choose to quit working relatively early.

Where’s the luxury?

In my idiosyncratic definition of ‘being wealthy,’ you may have noticed that there’s not a single Maybach mentioned. I’m not considering dinner with my girl on a G5 as an “update.” There’s no drinking Mai Tais, sitting courtside, Knicks and Nets giving me high fives.

Nicki_Minaj_UPDate
Nicki Minaj and her ‘UpDate’

In fact, since covering my costs until death is the goal, all of those expensive luxuries put my chance of being wealthy at risk. Realistically, if I buy a second home, then I need to make or have that much more money to cover my costs. When I upgrade my car, I’ve got to either have that in the bank or take on higher monthly debt costs. That may mean I have to work harder, or longer, just to cover my lifestyle costs.

 

So ironically, all the ‘stuff’ that helps make me look wealthy in reality raises the difficulty of actually being wealthy. You may in fact be ‘wealthier’ than a person making five times what you make, or boasting ten times your bank account. If that other person still needs to work nights and weekends to pay for the trip to Bhutan and the four-car garage – and you don’t – then who’s wealthy now?

Did the chorus for “Luckenbach Texas” by Waylon Jennings just pop into your head as you read this paragraph?

Being Mortal

I’ve been thinking about death after recently finishing Atul Gawande’s Being Mortal. which I highly recommend, by the way.

Gawande’s lesson – that “more” is not necessarily “better” when it comes to medical interventions at the end of life – has its analog in lifestyle costs and my definition of being wealthy. If we have enough, and we have control over how we spend our precious time until death, then we’re better off than the more costly way of living.

Death and Meaning

In a deeper sense, of course, meditating on death may be the key to feeling content with one’s level of material possessions. Being in the presence of a sick or dying person can point us closer to the relative importance of time, possessions, money, experiences, feelings of contentment, and relationships.

Considering our mortality, how much would I pay to experience the sunset at low tide with my daughters? While we still enjoy good health and pain-free bodies, a quiet dinner with my wife has immeasurable value. Could a king’s ransom buy this if we’d lost it? In these fleeting moments of insight, I feel extraordinarily wealthy.
A version of this ran in the San Antonio Express News

 

Please see related posts:

Work and Wealth

What is Wealthy?

Post read (121) times.

The Link Between Wealth and Work

I’ve been struggling for a while now on defining what I think ‘being wealthy’ means. So far what I’ve come up with is that ‘being wealthy’ has something to do with embracing two realities we tend to want to avoid: work, and death.

I’ll talk about death later, but for today I think that one of the keys to wealth is enjoying your work.

On the face of it, that’s an obvious statement, since we get paid money to do work, and you need money to get wealthy. Or if not get wealthy, to at least pay your bills to avoid getting poorer.

Dig a bit more, however, and the picture muddies.

What about people who dislike their jobs, but they get paid well to do it? Can they be wealthy? I have an idiosyncratic view on what ‘being wealthy’ means. I’d answer no to that question.

Once upon a time I worked at a well-paid job. I wasn’t particularly happy doing it, but it paid far better than it should have. What kind of simpleton walks away from that situation? I think what I learned, after I walked away, is that there’s no way you can actually ‘be wealthy’ while you work at a job that makes you unhappy.

make_the_money_dont_let_the_money_make_you
Irish-American poet

As the Irish-American poet Macklemore reminds us, “Make the money, don’t let the money make you.

We may ‘earn’ a lot of money in any given job, but if we are doing work that fundamentally leaves us feeling ill, or bored, or unfulfilled (in my case, a combination of all three) then we’re probably doing the wrong kind of work, regardless of the pay. If you need the money that badly, you’re not wealthy, no matter how fat the payday seems.

On the other hand, if you do work that you would continue to do regardless of what it pays, then I think that’s approaching my definition of ‘being wealthy.’

I’ll be the first to say that “follow your passion” is the theme of every Hollywood movie ever made, and is also terrible advice for people looking to get rich. (Sadly, you are not a unique snowflake either. I’m all about crushing dreams today.)

On the other hand, people who absolutely love their work tend to excel at it, which could maybe in the long run pay off monetarily through excellence, advancement, and longevity on the job.

I have a couple of other thoughts on the link between work and being wealthy.

The Lottery Test

Lotteries are terrible. That giant Powerball lottery two months ago, however, reminded me of the important ‘lottery test’ we should all give ourselves at least once a year.

The lottery test, as maybe you already know, asks us what we would do about our present day job if we won the lottery. Assuming you won the lottery and no longer needed the money, would you make like Johnny Paycheck and say: “Take this job and shove it?”

The lottery test lets you know, every year, whether you’re doing a job that you enjoy. If you would ‘take this job and shove it,’ then you know you’ve got to keep looking further in order to be wealthy, by my definition.

I bought a few tickets to that huge Powerball lottery (Pro Tip: Never buy lottery tickets!) and I literally suffered agita at the thought that I might win. Seriously, I got scared.

lottery_test

Now, obviously, that tells you I’m worse at math than I had previously led you to believe. But it also told me that I’m probably somewhat on the right path professionally. I wouldn’t want to walk away from what I do.

Because anyone who wins the Powerball gets immediately disqualified to do what I’m doing. You can’t be a dispenser of reasonable finance wisdom and simultaneously someone who is outed publically as playing, or worse winning, the lottery. Personally I would never admit to buying a lottery ticket. I would be exposed forever as an idiot and a hypocrite. Also, any recipient of reasonable financial advice I ever gave in the future would immediately respond with “Easy for you to say, wise guy, you won the lottery.”

Inheritance

Speaking of the lottery, what about winning the lottery of birth through inheritance? Can’t we, like nineteenth century English nobility, be wealthy without ever working? The gentlewomen in Jane Austen novels seek suitable marriages in part to avoid the fate of actually having to, you know, work.

Our culture, however, is different when it comes to valuing work. Our heroes are different. We revere Zuckerberg and Gates in part for their wealth, but primarily because they worked hard to create useful software that happened to make their fortunes. We don’t value the heirs to fortunes the same way we honor the original creators of fortunes.

I don’t know if the following is true, but it feels like it might be: Our own appreciation for our money, our ability to ‘feel wealthy,’ depends on working hard to get what we had. It’s not enough to win the lottery of birth, or the actual lottery. We have to work at it to really feel it. But I’m open to being disabused of my assumption. If you’re a lottery winner (either the ticket-buying type or the heir), does it feel the same? Do you feel wealthy enough?

Disregarding the pay

An advantage of having money – inherited, won, or acquired – is that it would allow us to choose whatever work most suits our interests and talents regardless of what it pays. My sense is that it’s the doing of the work – not the having of the money – that supplies meaning to our lives.

Working at something we love while disregarding the pay – I think that’s approaching the definition of wealthy.

 

A version of this post ran in the San Antonio Express News

Please see related post:

What is Wealthy?

Death and Being Wealthy

 

 

Post read (168) times.

Kooky and Good Idea To Address Inequality

UK economist Anthony Atkinson published a book “Inequality: What Can Be Done?” in May of this year in which he proposes radical solutions to the most pressing financial problem of our time.

I thought I’d heard all the important arguments on the topic, and then this economist comes along with a totally bonkers idea that will never work.

“Hahaha, that Atkinson, what a goofy dreamer” I said to myself.

And then, over the next few days, I kept thinking about one of his totally bonkers ideas. It gnawed at me. And I realized that – practical and political objections be damned! – that is a pretty awesome idea.

That’s the way I feel about Atkinson’s ‘Universal Inheritance,’ which goes something like this.

Every eighteen year-old, upon gaining the right to vote, automatically receives an ‘inheritance’ from the federal government of some amount of money. Atkinson proposes a universal inheritance in the UK of 5,000 pounds, or about US$8,100 per kid.

Now, as a father I’ll be the first one to say, instinctually, kids shouldn’t inherit money. I mean, their brains have under-developed frontal lobes! They’re undeserving and can’t handle that kind of responsibility.

money_for_nothing

Also, as an American deeply immersed in the dominant financial paradigm that ‘Money for Nothing’ works as a Dire Straights anthem but not as social policy, my first grumbly thought about this idea was ‘those kids will probably just squander their $8,100!’

I can already picture the insidious marketing campaigns launched by Las Vegas casinos as soon my legislation for ‘universal inheritance’ for 18 year-olds passes Congress.

Because of curmudgeonly American fathers like me and similarly grumpy readers like you, clearly Atkinson’s universal inheritance has ZERO chance of happening anytime soon in the United States. Yet I’m intrigued by the thought experiment so let me tell you why I see this as an interesting, possibly awesome, idea.

And by the way, for those of you reading this, who picture a Red Socialist hammer and sickle above my head, I really don’t see this in bleeding-heart liberal terms. I see it as an affordable solution to a failure of the free market, the under-development of talent in an economy.

For the poor but ambitious, could a universal inheritance be the key to continuing their education?

For a huge number of 18 year-olds today, a lack of capital will prevent their enrollment in the next educational program beyond high school, whether that’s an apprenticeship/internship at a business, an associate’s degree, a state college, or an elite four-year private university.

Yes, scholarships exist in limited form to help some of those kids, and yes, some of the ambitious poor will manage to bootstrap their way to educational success. But even those lucky few will find financial roadblocks that scholarships don’t cover, like SAT prep courses, application fees, book fees, and transportation costs.

Clearly, with the cost of higher education these days, a $8,100 inheritance doesn’t get you very far along in a multi-year degree program. But it might be enough to make a start possible.

inequality_in_america
Who Owns What In America?

Why do I like the idea of a ‘universal inheritance’ rather than just further federal subsidies for student loans? I think because the universal inheritance is more flexible – it allows for more solutions than simply more ‘higher education.’

In my optimistic imagination the starter funds of a universal inheritance prevent the national tragedy of young people stuck in an economically-inefficient rut.

For a cohort of eighteen year-olds, a lack of capital may prevent their move from one employment backwater (a small town, a one-company suburb, a dying inner-city) to a more vibrant economy, in need of young workers.

In Queens, New York last month the young woman helping us at the car rental counter mentioned that “If I could just get $5,000 together somehow, someway, I could finally pursue my dream of moving down to Florida and becoming a designer. But until then, I’m stuck here.”

The way she described it, her $5,000 dream in life seemed like it might be years away. I’m picturing this universal inheritance as a one-time opportunity, if used wisely, to fulfill a dream otherwise impossible for children who come from poorer households.

I obviously don’t know what household situation the counter worker at Budget Rental comes from. I do know $5,000 doesn’t hold back other children, who drew a luckier lottery ticket by virtue of their birth family, from pursuing their life’s dream.

For the poor and entrepreneurially ambitious, could a universal inheritance be the key to starting a business?

The bus or the airplane ticket out of town. The first few months’ rent away from home. The new clothes for work, or for a job interview. The tools of a trade. The instruction manuals or training software and laptop. The initial inventory for a sales project. Partial tuition to a computer coding school.

codeup

With approximately 4.3 million 17 year-olds in the US, the annual cost of the universal inheritance program could be around 35 billion.

Clearly, the universal inheritance would make little difference to 18 year-olds from the top 10 percent of households, who control over 70 percent of the nation’s wealth, and even less difference to the top 1 percent of households who control close to 35 percent of the nation’s wealth. For them, this universal inheritance is just a lovely perk, a nice trip to Europe or an extra cushion for college expenses.

The bottom fifty percent of US households, by contrast, control 1% of the total wealth in the United States.

What that means, in practical terms, is that half of all teenagers become adults with no capital from their families at all to assist their next move in life, whether it’s work or further education.

In my optimistic imagination this one-time infusion of capital for everyone could create some opportunities.

 

See upcoming post:

The only feasible way ‘Universal Inheritance’ happens

 

See related posts on inequality

The WSJ video on inequality

Great video on inequality

Washington Post interactive map showing inequality

Post read (656) times.

Dueling Mortgage Gurus and Uncertainty

uncertaintyOne of the things that makes finance endlessly fascinating (to me!) is that perfectly sound logic for one situation turns out to be perfect madness in another situation.

In my best moments I appreciate the ironies and contradictions. In my worst moments I despair for people whipsawed by the seeming complexities of financial choices.

Most middle-class folks grapple with one of these important choices – a home mortgage – at least once in their life. I’m a big fan of the choice to buy a home with a mortgage but even there, a controversial battle rages.

Anti-debt

dave_ramsey
Dave Ramsey

On one side of the ring stand the anti-debt gurus like Dave Ramsey. While Ramsey really wants his followers to pay cash for their homes (which is fairly absurd), he has strong rules about what to do if you decide to borrow. For example, Ramsey says

  1. Always make at least a 20% down payment, to avoid high interest charges and expensive private mortgage insurance.
  2. Always get a 15-year mortgage rather than a 30-year mortgage because you will pay it off sooner, typically enjoy a lower interest rate, and you’ll pay significantly less interest over the life of the loan.
  3. Never take on mortgage debt with a monthly payment that will command more than 25% of your take-home pay.
  4. Always avoid adjustable rate mortgages which shift the risk of higher interest rates from the lender to you.
  5. Never borrow additional home equity in the form of a home equity loan or line of credit.1

Ramsey – who built a real estate fortune and then went bankrupt by the age of 30 – preaches a low-debt or (preferably) no-debt financial lifestyle as a curative for people with past debt problems. He knows of what he speaks, and he has a certain strong logic for his points.

On the other hand, personally, I’ve broken each and every one of his rules. So I can’t actually advocate following his advice.

Pro-debt

On the opposite side of the ring, another financial guru Ric Edelman advocates the opposite approach.

ric_edelman
Ric Edelman

Since Edelman’s contrarian position flies in the face of conventional wisdom, I enjoy presenting his points even more.

  1. Only make the bare minimum down payment on your house – thereby freeing up your remaining capital for investing in the market, where you can earn an annual return higher than what you pay on your mortgage debt.
  2. Always get a 30-year mortgage rather than a 15-year mortgage, to take advantage of the tax deduction on mortgage interest.
  3. Never pay off your mortgage early or at all, because mortgages are the best way to borrow extremely cheaply. Again, use the borrowed money to invest profitably in the market.
  4. If the value of your house rises, consider freeing up the equity to invest, through a home equity loan or line, rather then let your net worth stay locked up and unused in the form of your house. That way, Edelman says, if the value of your house drops you’ll at least have withdrawn the money and have use of it for emergencies.
  5. Quickly paying down and eliminating your monthly mortgage payment is not an important goal because, as a homeowner, you’ll always have to pay insurance and real estate taxes anyway. Since you can’t eliminate those obligations, why bother trying to eliminate your mortgage payment?

You get the idea. When Ramsey says “Zig” Edelman says “Zag.”

Edelman presents some compelling math for his arguments. If you accept his assumptions then you could end up wealthier in the long run.

However, Edelman does not account for the psychological difficulty of saving money. Specifically, many of us benefit from the ‘forced savings’ of paying a mortgage, and few will have the discipline to take the extra monthly cash flow as a result of a 30 year mortgage and invest it for the long run, rather than squander it on iced latte frappuccinos.

As a result, I’m pretty sure some portion of people who take Edelman’s advice to heart will end up like the proverbial broke guy having to wear a barrel for pants. It kind of all depends on your specific situation.

My choices

In my own life I’ve had both adjustable rate mortgages and fixed rate mortgages. I’ve borrowed more than the conventional 80% limit. I’ve had 15-year and 30-year loans. I’ve paid extra principal on a biweekly basis, and I’ve also borrowed heavily against my home equity line of credit. I’d like to think I had compelling logic for each decision, or at least a sober mind for understanding what I was doing.

How to decide

I think my point is that the more wholly convinced a guru is, the less certain you should be. The stronger they lean in, the less likely they are to be correct in all circumstances, for all people. Ramsey’s got a great plan, for example, for people who’ve been bankrupt in the past or who have a history of debt problems. Edelman’s approach is closer to my own experience because he’s linking some risk-taking to long-term wealth creation, which I tend to do in my own life. But where you fall on the risk spectrum is a key determinant of their relevancy to your own situation.

Big Ideas vs Little Ideas

Nate Silver’s 2012 book The Signal And The Noise presents the dichotomy of a guru or pundit’s ‘big idea’ vs. ‘small ideas.’ While punditry rewards people who have ‘big ideas’ and ‘hot takes’ on topics, the reality is that certainty and big ideas come at a cost. Predicting the future – one of Nate Silver’s specialties – is a difficult business for people with big ideas. They rarely get it right. Instead, Silver advocates adopting a nimbler approach to observing the world.
When I read gurus like Ramsey and Edelman, I remind myself that their certainty is a sign of the ‘big idea’ thinking that Silver warns against, when we might be served better by smaller ideas, more responsive to changing conditions.

The more certain I am, the less likely I am to be wholly right.

 

A version of this post ran in the San Antonio Express News.

Please see related posts:

Book Review: The Signal And The Noise by Nate Silver

My 15-year mortgage – I am a Golden God

Rent vs. Buy a house

Home Equity Lines of Credit are awesome

The Latte Effect in my own life

 

 

 

Post read (2131) times.

  1. I have strong pro-HELOC views, as I’ve written about in the past.

Video: WSJ on Wealth Inequality – Causes and Solutions

wealth_inequalityI happened upon this excellent little video put out by the Red Communists who run the Wall Street Journal today. Since I think:

1. Wealth Inequality is a Top 3 issue facing the US and the World;

2. I’m in favor of everything that adds helpfully to the discussion;

3. We all have a hard time agreeing on basic facts about the causes and extent of wealth inequality (never mind the solutions!) and calm presentations like this are therefore particularly welcome!

 

Please see related posts

Video: Visualizing inequality

Inequality in America – The Map

Video: A Ted Talk by a Plutocrat on Inequality

Book Review: Plutocrats by Chrystia Freelander

Video: Chrystia Freeland Ted Talk on Inequality

Book Review: The Price of Inequality by Joseph Stiglitz

 

wealth_inequality

Post read (2093) times.

Entrepreneurship And Its Discontents

Note: A version of this post appeared in the San Antonio Express News

Here’s one of my first principles:

Everybody who works in the for-profit world should own or start a business.

Now that I’ve said that, I’d like to spend most of the rest of this post describing all of the terrible things about starting or owning your own business. Entrepreneurship requires ignorance. Entrepreneurship induces anxiety and insomnia. It attracts terrible students. Entrepreneurs are people who are clearly running away from something.

Interestingly, entrepreneurs are the only people who have a chance to get super-duper rich.

Ignorance

A friend who started his business during the first Dot-Com boom and bust told me the most important key to starting a business is ignorance. Specifically, you have to be really clueless about how difficult starting and building a business will be. If first-time entrepreneurs knew how hard it would be, they would never start in the first place! Ignorance truly is bliss.

Anxiety

Anxiety

Anxiety appears to run in my family genetic code, although that ailment mostly missed me.

Genetic predispositions, we learn more and more, often need an environmental trigger. Well, for me, starting my own business in 2004 induced my first panic attack.

Meeting for lunch with friends one afternoon, I could not stop blurting out about all of the things that might go wrong with my business. I couldn’t read the menu, I could hardly sit down. No eating. Twitching. I don’t remember what my friends planned to talk about. All I could do was tell them how freaked out I was.

Insomnia

Insomnia, another thing I had hardly ever experienced, also kicked in after I started my business. It’s 2:45AM and I’m wide-awake.

You know, somebody should really start an Entrepreneur’s Insomnia Late-Night Diner.

Sweet Mercy let me sleep
Sweet Mercy let me sleep

Hey, that’s a good idea. Should I do it? Like, right now? Let’s see, first I should…Wait, no, just stop. Try again to sleep.

Goodnight Room. Goodnight Moon. Goodnight Nobody. Goodnight Mush. Ugh. Please, Sweet Mercy, let me sleep.

I mention the insomnia and anxiety because a friend sent me a text recently “Hey, can we meet for coffee? I’m kind of freaking out right now.”

Unfortunately, I diagnosed her problem before we even spoke: she’s an entrepreneur.

Weaker students

One of the most memorable parts of Thomas Stanley’s book The Millionaire Mind is his thesis that most successful entrepreneurs suffered as mediocre students. Students who achieve all As throughout their school years gravitate to highly academically selective professions such as medicine and law.

The C students, meanwhile, are forced to struggle. Without a clear path to academic success and a prestigious well-paid profession, the C students rely on a more improvisational approach that may lead them to start their own sandwich shop, out of desperation. Ten franchises later, they’re the ones hiring the straight-A Harvard Law attorney to work through the weekend to prepare the documents for their next business acquisition.

For that C student, entrepreneurship may be a decision forced by circumstance rather than a fully formed plan.

Unhappy and running from something

Speaking of forced circumstances, I can’t prove the following claim, but it seems anecdotally true in my life.

Before launching, all entrepreneurs are unhappy about something, and that something forces them to start their business.

Do you hate your boss? Are you desperate for a better work-life balance? Are you dying to be rich and its just killing you that you’ll never be paid more in your current job?

Contented people, the people happy to go to work and collect a paycheck, never feel the urge to jump into the parachute-less abyss of entrepreneurship.

Before I started my business, I was desperately unhappy and I said to my Dot-Com friend that it must be great not to work for The Man. He replied that most days he wished he could count on The Man for a paycheck.

Ok, fine then. But still, I didn’t listen to him.

 

The key to extraordinary wealth

For all its drawbacks, business ownership is not one path to riches.

It’s the only path.

All of the folks in the Forbes 400 list are business owners.[1]  None of them got there by performing a large number of open-heart surgeries or preparing the legal documents for a leveraged buyout – as highly compensated and academically exclusive as the top of the medical and legal professions may be.

I’m not saying getting filthy rich is the most important life goal, nor am I saying it will make you happy. And, I also think there are more reasons to start a business than simply to get rich.

But! I do think people should understand that all of the most wealthy folks in this country are entrepreneurs.[2]

The steep path to extraordinary wealth goes to one group only: The ignorant, the anxious, the insomniacs, the C students, the discontented ones.

In short, the entrepreneurs.

Please see related posts:

On Entrepreneurship Part I – Equity v. Fixed Income

On Entrepreneurship Part II – Ownership v Salary

On Entrepreneurship Part III – The Air, The Taxes, The Retirement

Book Review of The Millionaire Mind

Book Review of The Millionaire Next Door

Video for Entrepreneurs – Personal Financial Statement

 

[1] Or heirs to business owners. Because inheriting wealth is increasingly a great tax-advantaged way to get wealthy.

[2] If you don’t own your own business, the next best thing to do – in order to be wealthy – is to start purchasing public stocks with any of your excess cash, and never sell. Pouring excess cash from your salary into the business ownership of stocks provides some wealth-building for the world’s employees.

 

 

Post read (2686) times.