I didn’t get into studying finance until I was in my 30s, but when I did I studied hard and tried to make myself an expert in it. I had to, because I had to teach it. One of the things I latched onto early was the balance sheet. It fascinated me and continues to command my attention. Predictably, when I learned to look at my own personal balance sheet, my personal financial life literally started to come into balance. Continue reading “The Net Worth Mindset”
Get a peak at one of my high school finance lessons through SlideShare:
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, wrote a startling article on “the economic side effects of the student loan crisis.”
1. Homeownership is on the Decline
2. More Student Loan Debt Among Older Age Groups
3. College Education is Still Key to Employment and Earnings
So you have to have a college education to earn decent income and steady employment, but the cost of that degree makes it nearly impossible to purchase a home, save for retirement, etc.
Rieder offers some excellent perspective on why this is some seriously alarming data for the economy.
I spend a lot of time talking about the importance of paying off debt and investing for long-term goals. I preach it to my high school personal finance class every day. However, the real struggle for most Americans is making room in their monthly budget to pay for it. The “pay yourself first” strategy is helpful, but still involves making room for saving or paying off debt in your budget. In the end, it always seems to come back to earning more money and spending less of it.
Both are easier said than done. Asking for a raise is a joke in many industries, and there are only so many hours in a week that you can spend laboring. When it comes to spending, almost everyone could read off a list of things he or she would like to have or even need to have but sacrifice to keep the budget in line.
For me, I don’t pay for television. I mooch off a family member’s account for one subscription service, and I buy an occasional DVD. That’s it. I have never paid for live or on-demand video entertainment of any kind. I watch an occasional sporting event or PBS series, and the rest of the time I spend reading. This is one of many things I do to keep excess expenses down.
Despite that and many other efforts I make to save money, I still feel like Sisyphus pushing student loan payments up the hill, only to have the next statement roll down over me, showing that at age 32 I’m nowhere near done paying for the college degree I finished at age 22. And I still feel like I need to save more for retirement and for a downpayment on a house.
If you feel that way too, here are 2 easy tips that have helped me recently:
- If you can’t make a huge increase in debt repayment, at least round up what you pay on your higher-interest debt payments. Within a few months, you will notice improvement in your statements and even see the minimum statement payments decrease. It gets quick results, and that feels good.
- Track your spending by recording it, using your bank’s expense-tracker for your debit card, or using an app like Mint, Personal Capital, Tiller, or Wally.
Consumer sector corporations are brilliant at getting you to develop bad spending habits: café coffee, gas station soda and candy, eating out too much, not sticking to your grocery list, or impulse-buying at discount stores, department stores, or online. You can probably relate to more than one of those. I certainly can.
For my wife and I, the biggest spending problem right now is food. We are both teachers, and we both have some health problems that rob us of energy. At the end of the school day, we often feel too tired to cook, and are tempted to eat an easy processed meal, grab a pizza, or stop at a quick service restaurant, all of which are usually more expensive than a home-cooked meal, and not great for your health either. To make matters worse, I have a gluten allergy. Those easy processed meals like mac-n-cheese, TV dinners, or frozen pizza cost about 3 times as much when you have to get them gluten free. Putting together 5 gluten-free sack lunches per week is not cheap or easy for me either.
This summer, we came up with a plan to solve our food spending issues, and we were able to get most of it done in one weekend. Continue reading “Bringing Spending Down to a Low Boil”
Seeing some recent chatter about Japanese equities being undervalued, I spent some time today looking into it. There is an interesting value opportunity on the Pacific coast if you are willing to take on some risk.
A simple indicator of an company’s value is its stock’s P/E ratio (price-to-earnings). It is the price that you are paying for the company’s earnings. A very general benchmark for value is a P/E ratio below 20, which means you are paying less than 20 times the company’s earnings. I believe I read that figure in Security Analysis by Benjamin Graham. As you can see on the chart below, the US markets, currently around record highs, are somewhat overvalued.
I used iShares ETFs for the above comparison so that the methods of calculating the P/E ratio would be consistent from one to the other. P/E ratios for ETFs do not necessarily reflect the P/Es of their underlying indices exactly (though there is debate about that), but nothing in these appeared out of the ordinary, and I checked 2 sources. The US markets, hovering around record highs over the last few months, have a P/E ratio around 21.42, while the global markets are around 17.04. The Pacific region, excluding Japan, is at 16.64. And Japan is down at 14.92.
The question of course is, why are investors not willing to pay as much for earnings from Japanese companies right now? A hedge fund analyst who contributes to Seeking Alpha shares some ideas in an article today:
Purely from a macroeconomic perspective, Japan’s economy is not in the best shape due to slow growth and a massive debt load. But the Bank of Japan’s (“BOJ”) benchmark policy rate of minus 10 bps and $60 billion equivalent worth of asset purchases per month have created a relatively sound environment for the country’s stock market, especially as economic data have returned higher-than-expected growth and inflation levels.
So growth and debt are the concerns.
Jesper Koll, Head of Japan for WisdomTree, reported yesterday that Japan’s GDP grew by 2.2% (annualized) in the 1st quarter of 2017, beating expectations of 1.7%. That should assuage growth concerns, at least in the short term.
As for debt, there is some concern here. Japan has been running budget deficits each year, building up debt that is 250% of GDP. However, their budget deficits have declined steadily from 9.5% in 2013 to 4.5% in 2016. Progress is being made.
There are a lot of alarmists saying Japan’s debt will collapse its economy. I share their concern, but perhaps not their urgency. People are always saying that about the U.S., which has seen its share of recessions, but keeps chugging along and growing in the long term. Japan is the world’s 3rd largest economy, and it has a culture that has created some fantastic companies. The Japanese deficit may hurt their currency, but a weak Yen can be good for exports, which are the big driver of Japan’s GDP. With the rest of the developed world’s economies doing so well, and with the 11 members of the TTP pursuing their trade deal without the U.S. at an upcoming forum, exports should continue to benefit. Japan has some struggles ahead, but I’m not about to bet a “big short” against it.
I am not advocating going all-in on Japan right now. However, in a business cycle where values are getting harder and harder to find, an index with a P/E below 15 looks very attractive right now. If my 403(b) to IRA rollover goes through in a timely manner, I am considering putting a small percentage of it into one of Charles Schwab’s commission-free Japan ETFs, DXJS, JHDG, or HFXJ, or maybe even eat the transaction fee and invest in DXJ, EWJ, or JPMV. The growing ETF market offers many options for investors to explore opportunities like this one. On summer break and waiting around 2 weeks for this account rollover, I have plenty of time to research and compare them.
2016-2017 has been one of the craziest years in my teaching career. My principal texted me last July to ask me to teach Personal Financial Responsibility, a course encouraged, but not required, for high school students by the state of Indiana. I accepted the challenge and immediately delved into learning as much as I could to help my students. Nearly a year later, after teaching two sections of the course, I have learned a great deal about finance and about myself. In this article, I would like to share with you what I have learned this year.
Continue reading “10 Things I Learned From Teaching a Personal Finance Class”
Most financial advisors will probably tell you to establish an emergency savings account. I personally am a fan of the emergency fund strategy, but it is different for every person, depending on what kinds of risks they have in their lives. I talk with my finance classes about different types of risk we are exposed to:
- Concentration risk
- Income risk
- Inflation risk
- Interest rate risk
- Liquidity risk
- Personal risk
Emergency savings can help with some of these risks, like a medical emergency or job loss, but they lose buying power to inflation, and they have an opportunity cost. The question is which of the risk factors above carries the most weight for you. If you work in a highly volatile industry, income risk may be a major concern. If you are a contracted teacher like me, maybe not so much. This is why it is important to “play devil’s advocate” and make arguments against conventional wisdom in finance. Let’s examine the argument against establishing the infamous emergency savings account. Continue reading “The Case Against Emergency Funds”