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From a utilitarian perspective, giving gifts makes no sense. Generally speaking, you buy gifts for people who are likely to buy you gifts – hence the term “exchanging”. Receive a gift from someone you had no intention of buying anything for, and you’re selfish and inconsiderate. Do the opposite and you’re a sucker or a suck-up. And if you do buy something for someone who buys something for you, custom dictates that the gifts can’t be of disparate value: hence the ludicrous practice of removing price labels. After all, nothing ruins the joy of receiving a thoughtful and apposite gift than finding out the donor spent too little on it.

Think about it: you spend money to get people things that you hope they’ll like. If they don’t, you’ve wasted your time and resources. Thus the most useful possible gift is the one perfectly adaptable one: cash. But again, the suitability of cash runs into the brick wall of decorum. ‘Tis the season to be gauche. And again, if the recipient adopts the same logic about gift-giving, you end up exchanging cash for cash. Reduced to its fundamentals, the transaction is easy if quotidian: instead of you buying me a $150 gift and me buying you a $160 one, I should just give you $10. Then we can spend the next year discussing how I’m tacky and you’re cheap.

If you’re the parent of a young adult, or otherwise have someone in your life whose net worth isn’t yet where yours is, here’s a mutually beneficial idea for a decidedly American gift that isn’t cash: the next best thing, credit.

The average college graduate receives that bachelor’s degree with a five-digit Sallie Mae obligation. As for the prudent and responsible students who manage to graduate with no or minimal student loans, doing so usually means there’s hardly enough money remaining to create any kind of nest egg. The wealth-building years have begun in earnest, but there’s almost nothing to lay a foundation with. Renting an apartment for the next few years (an investment with a guaranteed rate of return of -100%) wipes away much of the equity a young person could be building.

If you can afford it, lend your upwardly mobile kid enough to cover the down payment on a modest little domicile. Even buying the tiniest of townhomes gives him or her the opportunity to build equity, and to exercise the care and consideration for one’s things that renters have no incentive to.

Say you find an $80,000 condo that requires a 20% down payment to avoid private mortgage insurance costs. Financing the remaining $64,000 at today’s 4.24% 15-year rates means your kid would write monthly checks for $481.13, which makes far more sense than spending $800 on a larger rental house in a fancier part of town.

Remember, this isn’t a gift in the traditional sense. As the giver, you’re expecting something in return – regular payments, with interest. If you can give your kid a 100-basis point break on market rates, she could pay back that $16,000 loan back to you in $112.35 monthly installments. Which should be pretty easy to do, especially if she’s collecting rent from a roommate. Of course, we’re assuming she’ll be making gradually more money throughout the life of her concurrent loans.

The real “gift” in this situation is something intangible but vital: an introduction to real-world finance, and a chance to exercise responsibility. It’s the ideal meeting of a recipient whose ambitions outweigh her wherewithal, and a donor with the ability to make the recipient’s transition into the world of commerce run a little more smoothly.

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According to this site:

“Your tax dollars pay for Wal-Mart’s greed
The estimated total amount of federal assistance for which Wal-Mart employees were eligible in 2004 was $2.5 billion.
One 200-employee Wal-Mart store may cost federal taxpayers $420,750 per year. This cost comes from the following, on average:
$36,000 a year for free and reduced lunches for just 50 qualifying Wal-Mart families.
$42,000 a year for low-income housing assistance.
$125,000 a year for federal tax credits and deductions for low-income families.
$100,000 a year for the additional expenses for programs for students.
$108,000 a year for the additional federal health care costs of moving into state children’s health insurance programs (S-CHIP)
$9,750 a year for the additional costs for low income energy assistance.

[The Hidden Price We All Pay For Wal-Mart, A Report By The Democratic Staff Of The Committee On Education And The Workforce, 2/16/04] “

If you’re a fan of government running your life, you probably support legislation to force Wal-Mart to raise wages & offer health care coverage.

Wal-Mart is a business not a charity. Their job is to create profit by giving value to the customer. Wal-Mart’s value propisition is an easy one-low prices.

To create that value, they must buy low (usually not American-made goods) sell higher (but lower then the competition) and keep their overhead low (you’ve been in their stores right?)

Employees know the salary and benefits (or lack thereof) when they apply and accept the job. And, make no mistake, they are lining up to work for Wal-Mart.

Wal-Mart’s choices represent good business.

On the other hand, the US Government has no concern for cutting costs, holding people responsible and creating value.

The policies (welfare, WIC, medicaid, etc) created by the Government allow Wal-Mart to be profitable. If the government didn’t provide free medical care, daycare, subsidized food, rent, etc. then the workers would demand higher wages & better benefits. The market would force companies like Wal-Mart to compete for the labor.

Just another example of how a free market creates value and independence in companies and individuals and government interference creates complacency and a sense of entitlement.

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comfessions_of_shopaholic

“They used to call me valued customer, now they are sending me hate mail.”

Becky Bloomwood Confessions of a Shopaholic

Every year, 1½ million Americans file for bankruptcy.

Imagine a widow with infant triplets who renews her health insurance policy the minute her old policy expires. She can’t get an internet connection, and she doesn’t want to risk being uninsured, so she gets up from the chair, only to trip over the power cord and fall headfirst onto a hardwood floor. She breaks 8 teeth and dislodges her lower vertebrae, requiring tens of thousands of dollars of dental work, surgery and rehab. She works as a model, so now she can’t draw a paycheck for the year. Two years ago, her husband died when he happened to be driving along a faultline as an 8.0 earthquake hit, so his life insurance didn’t pay out because it was an Act of God. The triplets’ grandparents all live in the Czech Republic, and the woman lives on a ranch in southern Oregon, miles from any neighbor who could help her get back on her feet. So she declares bankruptcy.

How many of last year’s bankruptcy claimants have similar stories, and how many bought too much junk on credit and never bothered to budget?

This might not sound kind, but most people in bad financial straits are there because they chose to be. Not in the sense that they said “I can’t wait to be broke,” but in that when they were buying cars with 8.9% financing and spending $100 a week on cigarettes, they didn’t think about where it would inevitably lead.

No one wants to die in a car accident, but if you drive through enough stop signs while talking on the phone, you can’t be surprised if it happens. (Of course you can’t be surprised, the part of your brain that senses surprise[1] is now on the asphalt next to your cerebrum and your hippocampus.)

Personal responsibility is neither quaint nor outmoded. When enough people fail to exercise it, it leads to macroeconomic calamity. Of all the financial disasters of the last few years – the subprime mortgage crisis, the monster budget deficit, the stock market losing half its value, centuries-old investment banks going out of business – every last one happened because people who could have taken responsibility for their money chose to do something else instead.

“People tell you life is short. Life is long. Especially if you make the wrong decisions.”

-Chris Rock

Come check out Control Your Cash for one reason: your relationship with money is almost certainly dysfunctional. You don’t know what you don’t know, probably because nobody ever taught you.

Join, read, comment, share ideas. You can stop letting money act on you – and actually take charge of it.


[1] The amygdala, if you care.

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The moment you step through the gate of The Grand Canyon Deer Farm you’re inundated by does and their fawns hoping for a treat. When they realize you didn’t pay $5 for a souvenir cup containing 2¢ worth of corn, they turn away and have nothing more to do with you.

However, you can snicker when the deer greet the next suckers (I mean, visitors) who show up holding corn.

At Old McDonald’s Petting Farm just outside of Mount Rushmore, the goats congregate around the machine that dispenses feed and look at you with hungry, soulful eyes. Even the pot-bellied pigs rouse from their midday naps, lumbering over to the food chute on the chance that an altruistic tourist might be packing apples.

To see a stark example of the major difference between captive animals and wild ones, drive a few dozen miles west to Wyoming. Offer some grain to a wild pronghorn. Not only will it reject your gift, it’ll turn tail and show you why it’s the fastest mammal in the Americas.

Captive animals equate people with food. They forget to instinctively forage for food and fear predators, making it impossible for them to survive in the wild for very long.

The same thing goes for humans. Like Sharon Jasper of New Orleans, who complained that the taxpayer-funded Section 8 apartment she moved into after Hurricane Katrina is a “slum.” Instead of thanking those taxpayers for saving her from sleeping in the park, she complains that she still has to pay her utilities and security deposit.

Jasper’s newly renovated apartment features wood floors. And that big TV must cost as much as a year of utility bills.

How about the Harper family from Georgia? They were chosen from thousands of applicants to appear on the ABC show Extreme Makeover: Home Edition. They received a new $450,000 home (their old house was razed) – plus a scholarship fund for their kids and a home maintenance fund, totaling $250,000. They also got an all-expenses-paid week in Disneyland while other people built their house.

Now they’re getting a foreclosure notice from the bank that gave them a $450,000 line of credit without asking them what they were going to use the money for or how they planned to repay it. Darn that ABC, why didn’t they tell us we’d have to pay back any money we might borrow?*

Evelyn Adams won the New Jersey lottery in consecutive years and managed to squander $5.4 million. She donated much of the money to slot machines in Atlantic City, and actually said “I wish I had the chance to do it all over again.”

Apparently her financial strategy is to win the lottery a third time.

These are the deer (or goats, or pigs) we create when we give people what we think they need instead of expecting them to work for what they want.

People are not forged by their circumstances so much as they are by their choices. If circumstances dictates destiny, there would never be a Sheldon Adelson, J.K. Rowling, Chris Gardner nor Oprah Winfrey, all of whom rose from modest beginnings. And all of whom chose to change their circumstances and accept the sacrifices that go along with that choice.

Self-sufficient people don’t have the luxury of being victims. They take responsibility for their actions, choices and life – and get freedom in return.

*ABC did arrange for the Harpers to meet with a financial planner.

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Update:

Now the 1st amendment is under attack as the battle for health insurance reform heats up.  Hey, Washington…free speech means we can lie, hurt your feelings and communicate with our fellow Americans in any way we choose.

In the Declaration of Independence, Thomas Jefferson created a manifesto that transcends temporality and continues to inspire each generation to greatness.

Among the three famous inalienable Rights of Man, Life is self-evident.  We have the right to be born and the right to defend our children as well as ourselves from harm.

This basic right is at the locus of the two most debated policies of recent history; abortion & gun control.

Do you have an inalienable right to life?

The question is obviously rhetorical, but how does the answer reconcile a federal government that condones abortion?

Recent polls show most Americans oppose abortion, meaning that 2 generations removed from Roe v. Wade, maybe people are becoming aware of what an inalienable right to life means.  Even Americans who support abortion in the first trimester lose their enthusiasm for killing after the 3rd month, once an unborn baby starts to look “real”.

15 years after Jefferson wrote about the cardinality of life, his fellow Virginian James Madison introduced the concept of the Bill of Rights and its then-uncontroversial 2nd amendment.  Madison (inspired by his mentor George Mason) knew that any right to life is worthless if it can’t be defended nor preserved.

Unless each member of your family has his own 24-hour bodyguard detail, or you can somehow persuade an assailant to do whatever you tell him, you need to learn how to use a firearm.  Failing to do so is an abdication of your duty as a human. This nation would be exponentially safer if everyone took responsibility for their own safety, and developed the skill to protect themselves and their families.

Every right implies a responsibility.  (Which, according to George Bernard Shaw, is why so many people dread freedom.)

Don’t let yourself be scared into becoming a disarmed ward of the state.

Here are some excuses for not owning a firearm, all of which are easily dismissed:

Guns are dangerous

Yes.  They kill people.  That’s what they were created for, which is sort of the point when a bad guy is trying to hurt you or your family.

In the hands of a responsible (there’s that word again) person, a gun is a tool, just like a car.   If you use a car improperly, you can easily kill. But we take it for granted that the overwhelming majority of the tens of millions of car owners in this country are responsible enough not to.

Guns are illegal

No, but some states have made it difficult to buy, carry & store them. Every state allows you to keep a weapon for your home.  Why? Because it’s a constitutional right, and this isn’t the United Kingdom yet.

If you live in one of the 48 states that issue concealed carry permits*, get one once you’ve determined you know how to use a gun. It takes a few hours of ridiculously simply classroom work, along with a shooting test.

With a concealed weapons permit, you can carry a gun inconspicuously (except in those few places where it’s expressly prohibited.) Or just hope you won’t be a victim. Because that works, sometimes.

Most states’ permits are honored in multiple states. (They should be honored in all 50, like driver’s licenses are, but that’s a topic for a different post.)

My gun will be used against me

No, unless you’re an idiot. If you want to take full advantage of your God-given freedom (and the responsibility that entails), take a defensive weapon class and practice a lot.

According to GunFacts.org , “For every accidental death, suicide, or homicide with a firearm, 10 lives are saved.” Even with most Americans walking around unarmed and unaware, “the rate of defensive gun use is 6 times that of criminal gun use.” (Again, according to GunFacts.org.) The criminals are there, but fortunately, the rest of us still outnumber them.

If a preponderance of weapons leads to violence, why not disarm the cops along with the rest of the citizens?

That was supposed to be sarcasm, but sometimes the more cloistered among us have a tough time with that. Let’s hear from an academic on this issue. Val Moeller, president of Columbia State Community College**, says “…when someone comes on campus and sees armed public safety officers, it indicates that the campus is not safe.”

Which, of course, is why bloody massacres occur daily on every army base throughout the country. Ms. Moeller is not alone in her ludicrous beliefs. According to ArmedCampus.com, lots of campus police departments are unarmed.

Here’s CSCC Chief of Police Mike Stritenberg, who manages to give a lucid argument despite being hog-tied:

“Of course there are risks inherent to being an armed police officer, including attacks that result in your weapon being used against you and armed encounters that result in legally challenged shootings but that’s part of police work.  To say that because there are risks associated with being armed, police officers shouldn’t carry guns seems mind-boggling,”

You can substitute “citizens” for “police officers” in that last sentence.

Guns are loud and look scary.

Yes. This paragraph is for the ladies:

Remember the first time you went to the gym?  It’s loud, sweaty, smelly and filled with men who clearly know what they’re doing, leaving you to stand around feeling out of place.

Your first time at the range will be the same.  And, because you’ve been bombarded with messages telling you how dangerous and bad guns are, you’ll be nervous.  The first time you shoot, your hands will shake.

You’ll then notice that it takes some applied force to pull a trigger.  Guns don’t just “go off.”

Keep going to the range.  Keep practicing.  You’ll eventually get used to the noise, the gun & the feeling of shooting.  Don’t let fear stop you.

I don’t need a gun because the police will keep me safe

No. Whether you live in the city or the country, there aren’t enough cops to prevent crimes in progress.  95% of the time, an officer arrives on the scene too late.  Response times in some cities are over 45 minutes.

Freedom means you can live where you want, speak your mind without fear of reprisal, attend the church (or not) of our choice, write critical articles about your government (or anyone else) and know your home is our castle.

If you think these rights are common throughout the world, you’ve obviously never written about Muslims in Canada, tried to Google “Tiananmen Square” in China or attempted to attend Sunday mass in Saudi Arabia.

Why do so many Americans gladly relinquish their freedoms?

They become prisoners of dependency and fear because freedom comes at a price, a cost paid both by your nation and yourself.   You’ll make bad decisions on occasion. If they’re bad enough, you might go to jail, declare bankruptcy or lose your home.

When James Madison wrote the Bill of Rights, Americans who made bad decisions had not choice but to live with the consequences of their actions.  Today, everyone wants to be free to make poor choices detached from consequences.

If you’re truly free, then you’re free to succeed or fail.  Failure is the mechanism through which we grow & learn.  For every bad decision made, you learn and correct course.

If you allow someone (e.g. the government) to control your failures, that caretaker will also limit your successes.

Are we guaranteed happiness?

Jefferson would never have imagined today’s Americans who expect society (government) to make them happy.  Many believe that they have a right to own a house, work at a high paying job, obtain a college education and receive health care.

And you do.

You have the right to an equal opportunity to earn those things for yourself.

Equal access to the system of capitalism (get a job, live within your means, invest the difference) is sufficient.  The rest is up to you.

Equal access is not the same as equal outcome.

According to the Department of Labor these are the 3 jobs in which the highest proportion of people doing it are women: 1) secretarial; 2) nursing and 3) teaching (elementary school level).

For men: 1) Construction (including steelworkers & electricians); 2) logging and 3) heavy equipment operator.

Male secretaries, nurses or teachers (and female electricians, loggers and heavy equipment operators) prove we have the freedom to work wherever we fit best.

Why are most secretaries and nurses female?  Those careers require levels of education and experience that fit with a working mother’s lifestyle.

Teaching is the ultimate mother’s job: you work when (and sometimes where) your children are in school.

Salaries in these professions are low because a lot of people can (and want) to do them.

Why don’t more women become electricians, loggers or heavy equipment operators?

Becoming an electrician requires a 4 years of apprenticeship, consisting of 144 hours of classroom training and 2,000 hours of on-the-job training.  The apprenticeships are hard to get and if you drop out in the middle, you won’t get another chance. Also, seniority dictates that you need a consistent work history to become an electrician.  Mothers are more likely to start and stop their education, call in sick and miss work.

You don’t need a lot of education to become a logger, but you might have to move, live onsite or drive long distances to get to the logging site.  The weather can be awful, and the job is physically demanding, in addition to being about the most dangerous one in existence.

Most heavy equipment operators are high school graduates with a farming, commercial vehicle or military background. In some parts of the country (e.g. Alaska), work might be seasonal.

Most women won’t make the sacrifices to go after these well-paying jobs, but that’s hardly a failure of opportunity.  Women choose a less-demanding way, and the compromise is in the compensation.

Don’t expect anyone to hand you your future.  It’s your responsibility to fight for your happiness. Thousands have died to give you the right to life, liberty and the pursuit of happiness.  In return, the least you can do is not surrender it.

*Illinois and Wisconsin don’t allow concealed weapons. Which works beautifully, because both states reported exactly 0 violent crimes last year.

**Last year sanity & common sense prevailed and the CSCC trustees voted to arm the campus police.

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3351670683_7aa80b2415**This post has been featured on the Calvacade of Risk carnival**

Have you ever missed out on a great investment because you didn’t know how to quantify its risk and return? Or even worse, because you didn’t even know what to ask to make an informed decision?

If you fancy yourself an investor, you need written investment criteria you can refer to when someone offers you an opportunity.  Here’s a sample.  Once you fill it out, answer these questions:

What type of investment is it?
Real estate

If I buy it, how will it affect my allocation distribution?
Negligibly.

But what if it didn’t? Will you sell an asset? Buy other assets?

Estimated Return on Investment:
4½%-8%, plus appreciation (estimated to be 0 for the next 3-5 years.)

Description:
A 2nd floor, 1-bedroom/1-bath 770 ft2 condo in southwest Las Vegas.  It’s listed at $50,000 and approved for a short sale.  Monthly rents in the area are $650-$750.  Annual expenses are per the attached Annual Property Operating Data worksheet.

The APOD lists multiple scenarios that affect the ROI, including varying rents and whether you (or your business partner) plans to live in the condo. If you do, you can include the federal $8,000 first-time homeowner credit if you buy before December 1.

Here are 2 ways you can construct a joint venture between you and whomever’s bringing you the proposal:

#1: Bought by owner-occupant. This is perfect for a parent who wants to help her kid buy a home, yet still reap an ROI.

You lend the entire price of the condo, without interest.
Say the monthly market rent is $700. You’d charge 80% of that to your daughter, which is $560.

-$490 goes to you
-$70 goes to a reserve account for property maintenance.

Your daughter saves 20% off fair market rent. In return, you get to write the property expenses off on your tax return instead of she.

#2: Bought by LLC. Investment partners would use this proposal when one partner (the Finder) has the time & expertise to find the property and the other (you) has the money to finance it.

Again, you lend the entire price of the condo, without interest. However, you’ll rent it out to some stranger at the full market price of $700.

-$490 goes to you
-$70 goes to a reserve account for property maintenance.
-$140 goes to the Finder.

Describe the worst-case scenario:

-Property values may continue to fall. You might have to hold the condo for 5 years to break even.
-If the condo doesn’t rent immediately, the return will decline.
-The condo could get damaged. (So you need a security deposit.)
-You and your partner might disagree on management or sale of the property. (So you need a properly worded operating agreement.)

Since you’re creating a partnership, I recommend an operating agreement clarifying these issues:
•    Whose name will the condo be in? (You can own it outright, your partner can own it outright, you can own 63% and your partner 37%, etc.)
•    When you sell, how will you split the profits?
•    Who will manage the condo and rent it out?

The answers depend on whether your partner will be your kid or someone else.
If you’re setting this up as a business arrangement, create an LLC to hold title to the property.  In the LLC’s operating agreement, you can set out details such as who gets to write the property expenses off and what each partner’s duties are.  The LLC also protects against liability if your tenant or a visitor gets litigious.

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foreclosureI’ve suspected this all along but didn’t have the information or the math skills to prove my theory.

Barclays Capital’s latest Securitized Products Weekly includes a six-page research article titled Re-default rates for modified loans that’s probably as dry a read as it sounds.  Thankfully, we have Ira Artman to give us the Reader’s Digest version:

Here’s the good part:

“The Administration’s “plan” – such as it is – will only reduce the default rate “to 70-75% from 80-85% pre-modification.”

“In other words, the average cost per averted default exceeds the average size of recently originated loans. How does this make any sense?

Wouldn’t the money and effort be better spent if it were devoted to income tax cuts, tax credits and more broad-based stimulative macro-policies? Isn’t this the sort of national discussion we should be conducting?”

Substantive discussions on issues of importance?  Critically thinking through issues instead of just throwing money at our problems?

Nah…it can’t be that easy can it?

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