Without sounding like an all out advertising for Motley Fool, I’m a big fan. Somehow, I stumbled across them back in 1999. maybe even earlier, 1996.  I don’t remember exactly.  Then, I read a couple of their books which are both great learning tools and entertaining.  I wanted to highlight one of their older Articles that is buried in their archives and not even viewable in my browser.

Retire on $125,000

Basically, the premise is this.

Your money will double every seven years if it compounds at the stock market’s average return of nearly 11% annualized over its lifetime.

Now, I know during these bear markets and the worst recession since the great depression, 11% return is unheard of.  The key here is over its lifetime.  Long Term. Not now.

The idea is if you can save $125,000 by the time you are 40, then you can theoretically stop saving, although I wouldn’t recommend it.

Why?  The power of compound interest.  The more money you save, the more money is compounded over a longer period of time which then allows you to get a good return.  Now, How do you get a 11% return?  Well, the stock market averages that return, then you add in if you save 10% of your income every year.  You’ll easily be able to get an 11% return.

Let’s look at a table for this double your money every 7 years.

Now, if you are like me, and you look at this and see age 19, $15,000 saved? Are you kidding me? I’m a college student and I have student loan debt bigger than that.  I totally understand you.  I think its very difficult for someone who is 19 to have that much saved.  However, I think it is very reasonable to think that by the time you are 40, you can save $125,000.  Think about it.  That’s 21 years, or roughly $6,000/year.  Now, you might think that is still unreachable.  Let’s calculate it.  If you started at $30,000/year income at age 22, and receive average 5% increases (some years will be less than that, some years will be more) in salary for 18 years, here’s how your savings could look:

Now that looks feasible.  I know 14% is aggressive.  I am not including in this calculation any compound interest gains from the stock market.  So, if you were to save only 10% a year and invest it.  You’d get more money.  Still, then we theoretically could stop saving for retirement, because if we left our money in the stock market from age 40 to age 61, we’d be millionaires.

Can I do that?  I think I can.  Can you do that?  I think you can.

Catch 22: describing a set of rules, regulations or procedures, or situation which presents the illusion of choice while preventing any real choice. source: wikipedia.org

Before we get to the Government Budget Catch 22, let’s talk Aesop.

Photo By Cindy47452 http://www.flickr.com/photos/cindy47452/

One of Aesop’s fables: The Ant and the Grasshopper teaches the moral of hardwork and saving our food during the summer feast-time to support ourselves during the winter famine time.

Now let’s apply this moral to our Personal Finances.  Personal Finance experts everywhere all recommend to pay yourself 10% first at the very least.  In other words, if you make $1000 for that week, you should save $100 into an account for either emergency purposes or wealth creation.  So, during the economic boom-time (Summer growth), you’ll grow your savings.  When the inevitable recession cycle hits the economy (Winter famine) and your income slows or worse you lose your income, you can use your emergency fund to live comfortably while you wait for the next summer growing season or economic recovery.

It’s great, but many Americans have not practiced this fable, and consequently, have instead of saving during the feast of the recent economic bubbles, been spending even more money than they had.

How does this apply to government budgets?

What is a Government Budget Catch 22?

First off, How does the Government get money?  What’s the income?  In general, income is from taxes.  Whether it’s the local township offices or the federal government, they make money by taxing us.  Now, taxes could be in the form of income taxes, property taxes, sales taxes, but they could also be in the form of speeding tickets, fines, and other legal enforcement opportunities.

So, if the government wants to increase income, they need to increase taxes. Where do they spend these taxes?  What is the Government budget expenses?  Well, the government provides services.  For example, the government may contract out the snowplowing of your streets or clean-up of downed trees.  There’s also taxes for schools and for research and development.

Now, during boom-time, the businesses start making more money.  They in turn often pay their employees more money.  So, the government, as a percentage, starts to make more money.  What do governments do with that more money?  Often times, they spend it on new services or projects that may or may not need funding.  Occasionally, the governments will give tax breaks, tax cuts, or other incentives back to the taxpayers.

Here’s the government budget catch 22: Governments are usually not able to save income for rainy days.  So, during the economic bull market, when Aesop’s ants will be saving.  The government can’t.  It’s either against the law, or its politically difficult to take what is perceived as unnecessary tax moneys.  Surpluses in the government is not accepted.

So, what happens?  During a recession as all capital markets follow the economic life-cycle, money tightens up.  Businesses stop spending and lay-off employees to cut expenses.  These newly unemployed now have to cut their spending.  The GDP retracts.  It’s famine time in the winter, the government’s income is now smaller, and all those great programs and services everyone fully expects to take advantage of like say social security, medicare, or just plain picking up the trash twice a week at the curb now need to be cut back to once a week.  The problem with this is the average citizen wants, no, expects these services to continue.  So, governments, instead of being fiscally responsible and upsetting constituents, will cut back only minimal services and begin to go into debt or deficit spending.  Governments mortgage the future to keep services running now, all because the Government can not follow the moral of the Ant and Grasshopper fable. Of course, the governments state during the next summer feast economic recovery, we’ll pay off that debt, but newly elected officials with newly elected promises to their constituents often times forgo the debt reduction in favor of pleasing their electorate.

What’s the solution?  Good question.  I hate to criticize without offering some soft of solutions.  I think I get that from my Solution oriented business upbringing throughout my career.

Solving the government budget catch 22.

Photo by: No Middle Name, www.flickr.com/photos/93444913@N00/355588920

We act as ants instead of the grasshopper in Aesop’s fable.

We could force deficit reduction policies that require surplus income in feast times to reduce our government deficits and debts.

We could learn to do for ourselves rather than blaming others and expecting the government to provide the services.

We could require funding of programs to support the planned expenditures and prevent swiping funds from one “over-funded” program for funds in an area that is “under-funded” pork project.

We could encourage savings rather than spending. Although, we have to be careful about that, because capitalism is not built on saving.  It’s built on spending at least right now it is.

Obviously, it is a complex question and requires more thought and time than my few sentences above.

What I do know is if we continue this current vicious cycle, we’ll just continue to get taxed more and continue to grow government services, and continue to dig deeper and deeper and deeper until we get so deep that we’ll just have to pay the piper.

What do you think?  Any solutions to the government budget catch 22?

I sure did. I decided to start my blog over once again. I deleted all my content, I moved it out of a stand-alone wordpress and back into a wpmu set-up. The fun about being a technologist and working on your own work, is you can blow things up, start over and experiment anew.

My voice

I haven’t found my blog voice.

One day in the future I plan to do a social test. Can a regular middle-class citizen such as myself get elected to a state-wide elected office? I was very tempted to set this website up as a 2010 IL US Senator campaign site, but I have decided to delay that so I can spend more time with my family.

I often feel that we’re currently in a state of taxation without representation. What I mean by that in order to get elected to public office, one needs to raise millions of dollars to be able to effectively reach the public with your views. Consequently, it is only those individuals who are wealthy, know wealthy individuals, or sell-out to wealthy individuals that actually reach public office.

With the advent of social media tools, can we democratize our own system? We will see. More thought experiments to come.