Darwin's Finance

Is the McMansion Dead?

Darwin — Mon, 30 Aug 2010 11:33:54 +0000

Over the past few weeks, there have been several headlines declaring the death of the McMansion. Depending on how you define the “McMansion”, there may be some merit to the argument, but other aspects of the American desire to have things that are “big” are alive and well. I mean, didn’t we declare the death of SUVs when oil prices hit $140/barrel only to see sales come roaring back when oil then dropped 70% the following year?

What is a McMansion?

To some, a McMansion is just a large home. Anything exceeding 2500 square feet or so probably qualifies to them. To others, there are some more discerning criteria. When a developer comes in a clears a 5 acre lot and plops as many 3000 square foot homes as possible into the development leaving little room for anything other than a driveway, that’s another story. In these cases, the lots are often .2 acre or less, there’s no yard and no trees as far as the eye can see. Then, to others, even estate-type developments with 2+ acre lots qualify. I guess it depends on your perspective. You probably consider other peoples’ homes to be a McMansion, but not yours.

Is the McMansion Dead?

It probably depends on your personal perspective on what a McMansion is. Let’s focus on the key criteria then, to answer this question. Size. According to CNN, the median new home size fell to 2,135 square feet in 2009 after peaking at over 2,300 earlier in the decade. So, to me, (and I’m glad they used median instead of mean ), it does sound as though people are settling for smaller new homes. But is this really because that’s what they want? Many articles go on to say that people’s attitudes have somehow changed, as if they’re now repulsed by large homes. I don’t think this is the case at all - it’s the economy stupid!

The economy is so uncertain right now, that

a) people aren’t able to use their existing home as a piggybank to pull out unlimited equity,
b) people don’t have a lot of liquid cash since they’re paying down debt and other obligations and
c) they are afraid to take on a larger monthly cost in the form of mortgage and taxes than they may have been 3 years ago.

Therefore, let’s say (totally unrealistic but bear with me) that the economy miraculously recovers over the next year, business is booming, and incomes are up. People are feeling better about their current and future financial outlook. Under these circumstances, I would fully expect to see the median home size start to increase again.
Americans like big things. We had to have big SUVs with the seat very high off the ground. Big, flashy engagement rings, designer clothes and bags, anything to show your neighbor and friends and family how well-off you are. This is the American way. Personally, I view this phenomena as solely an economy issue and not a change in attitudes toward larger homes. Whenever the economy does actually recover, come back and let me know if I was right.

What do you think?

Are Americans really content in smaller homes? Or scared of the economy?

Tutoring Gone Wild in America

Darwin — Mon, 23 Aug 2010 23:49:11 +0000

While I always knew tutors existed and my wife even considered doing it for some time since she was a teacher before opting to stay home with the kids, I didn’t realize the extent to which tutoring and costly tutoring at that, occurs in America. There was a NYTimes article this weekend outlining not only the prevalence of private tutors, but also the exorbitant costs and what the expectations are from parents. Based on the article and on comments from readers on their experiences, I was shocked to learn that in many districts, the MAJORITY of students have their own private tutors, there are tutors for 4 year-olds to get into the top elementary schools, and some parents actually EXPECT entrance to a top ivy league school eventually if they employ high-priced tutors.

I was a tutor myself in college and I understood why these people were there (at the free university tutoring sessions). These people simply needed some help to get them over the hump or perhaps they didn’t have a great understanding of the basic concepts from highschool and they found the college curriculum to be challenging. I even tutored a guy I worked with a while back who was working on a college degree that needed some help with basic chemistry. But I don’t understand the notion of high performing kids in top schools needing additional tutoring to fine-tune their test-taking abilities to tack on a 1% edge over the kid next to them who isn’t getting the tutoring.

Is Paid Tutoring Creating a New Class Warfare?

One has to wonder if we’re creating the new front in class warfare. Decades ago, only the rich could afford to go to college until grants, loans, subsidies and college endowments went to great lengths to level the playing field. Now, can only the rich afford the tutors needed to push kids into the funnel of the top echelon, further squeezing out the middle class and leaving low-income students in the dust? Most middle-class and low income families either can’t afford tutoring or would never even consider a private tutor for a decent performer. Apparently, in the upper side, imagine the horror of NOT having a private tutor?

When Is Tutoring Reasonable?

Tutoring is of course reasonable when your child is not performing to their potential and you can’t fill in the gaps. Perhaps you just never got geometry either and they’re struggling. Perhaps they get Bs in everything, but they’re getting a C in History and History was just not your thing. Sometimes, that’s the best expression of love, when you admit that you’ve taken your child as far as you can and you need to ask for help to make them better. Everyone has a different way of thinking and often times, a teacher or a curriculum just may not jive with your child’s style. A tutor can sometimes break that cycle and get through to them or provide them with the additional firepower needed to form those connections and realize their potential.

So, I don’t frown on tutoring at all; I just question whether it’s something everyone in the rich cohorts should really be subject to when they already enjoy the top public and private schools head and shoulders above the rest of the country. Do they really need to boost that GPA an extra .05 and add 6 points to the SAT score that badly?

Are we really creating well-rounded happy kids?
Or just great test-takers that feel entitled?

Who Would Make the Best Use of $Billions – Bill Gates or US Govt?

Darwin — Wed, 18 Aug 2010 02:30:54 +0000

As the saying goes, “No good deed goes unpunished”, with the recent announcement that several billionaires will end up donating much of their wealth to philanthropy before they die rather than passing it on to heirs (along with a substantial portion to US coffers by way of the estate tax), many prominent Europeans are coming out against this move and calling it “Undemocratic”. So, people who are willing to give away BILLIONS of dollars in generational wealth rather than spend it or pass it all on to their heirs are being criticized. Per a recent article in the Wall Street Journal, here’s some of the criticism:

“If the rich really wish to create a better world, they can sign another pledge: to pay their taxes on time and in full; to stop lobbying against taxation and regulation; to avoid creating monopolies; to give their employees better wages, pensions, job protection and working conditions; to make goods and use production methods that don’t kill or maim or damage the environment or make people ill.
“The rich make a choice: Would I rather donate or pay taxes? The donors are taking the place of the state. That’s unacceptable.”
“It would have been a greater deed on the part of Mr. Gates or Mr. Buffet if they had given the money to small communities in the US so that they can fulfill public duties.”

These are typical socialist responses frankly, which rely more on big government and high taxes to redistribute the wealth, as opposed to relying on smaller government to fund necessities and provide a protective web for a minority of citizens that have no other means to do so themselves. The basic question becomes, who is the most efficient distributor of funds – Bill Gates or the US Government? Based on what I’ve seen from the Gates Foundation and other NGOs (note they like to make sure they’re clearly designated as NON-government organizations), they are much more efficient at identifying true problems, solutions and attacking a problem as opposed to burdening organizations with layers of bureaucracy. With NGOs and private philanthropists, generally:

There’s no politics and special interest groups.
No health care reform with a special side deal for union members and special payoffs to entice a holdout senator to vote for a bill.
No layers of bureaucrats.
It’s basic decision-making.

While some would argue that money made by someone like Gates should stay in the US, etc., the counterargument could be that Us citizens were born with a huge gap in opportunities over people in the developing world. And while some argue that he and his brethren should fork over their billions in wealth to the US government to disburse as they please, it’s as easy as pointing to how the government spends other peoples’ money with wanton abandon and no accountability.

Personally, I’d trust a philanthropist over Washington to distribute charitable fuding in an efficient and effective manner.

Who Would You Trust More?

For-Profit College Scams – Really Think Before Enrolling

Darwin — Wed, 11 Aug 2010 19:49:05 +0000

The GAO released a damning study of the for-profit college industry which showed outright lying and deceptive tactics by personnel in order to dupe prospective students into enrolling in their programs when it was questionable as to whether doing so was in their best interest. Many of the personnel used high pressure sales tactics and provided erroneous information in order to get undercover prospective students to sign up.

Why is the GAO Involved?

Well, based on the exploding student enrollment at these colleges, the government has issued Pell Grants totaling $4 Billion in 2009 and over $20 Billion in loans to students. Therefore, our taxpayer dollars are paying for/subsidizing these programs. In order to conduct their study, the GAO used undercover investigators at 15 for profit colleges. The GAO was very careful to not name the schools (so neither have I, ehem, lawyers) and claimed that this is not a portrayal of the whole industry, but surely you can for your own opinion after reading the report in its entirety:

GAO Findings

The findings were numerous, but here were some of the most egregious from the report:

Undercover applicant was falsely told that the college was accredited
by the same organization that accredits Harvard and the University
of Florida.
Admissions representative said that barbers can earn up to
$150,000 to $250,000 a year, an exceptional figure for the industry.
The Bureau of Labor Statistics reports that 90 percent of barbers
make less than $43,000 a year.
Admission representative told an undercover applicant that student
loans were not like a car payment and that no one would “come
after” the applicant if she did not pay back her loans.
Admissions or financial aid representatives at all 15 for-profit colleges
provided our undercover applicants with deceptive or otherwise
questionable statements. These deceptive and questionable statements
included information about the college’s accreditation, graduation rates
and its student’s prospective employment and salary qualifications,
duration and cost of the program, or financial aid. Representatives at
schools also employed hard-sell sales and marketing techniques to
encourage students to enroll.

First of all, I’m not surprised by this at all. Many of these statements by admissions officers are outright lies, especially by people IN the industry who know the truth. This is completely outrageous. From what I’ve read, this is often preying on the poor as well because they are lured into these programs and haven’t conducted thorough research nor had other college opportunities. I had read this article in BusinessWeek all the way back in April, indicating that these schools were actually recruiting the HOMELESS! – yes, homeless, to attend their schools so they could inflate their bottom line. Since these folks are often qualified to receive grants and loans in federal money, some of these unscrupulous colleges target them. How this went on for so long is beyond me; perhaps it was the BusinessWeek article that spurred the GAO to finally act.

While I’m a free market guy and I believe virtually all services are best provided in a for-profit free market environment, based on the preponderance of evidence in this report and what I’ve read elsewhere, I really have to question why anyone would use one of these outfits over a typical local, state or community college. You can get a quality degree there without the stain of this behavior on your resume.

Do You Have Any Experiences with For Profit Colleges?

Social Security Tipping Point in 2010 – IN THE RED

Darwin — Mon, 09 Aug 2010 11:21:20 +0000

Social Security will actually pay out more benefits this year than it will take in which is a pretty shocking wakeup call. While I’d been hearing about skepticism over the solvency of Social Security ever since I was a little kid, 2010 marks a year when the payouts don’t match the intake and given our aging demographic and low birth rate, there’s no plausible expectation of the situation reversing itself without a major overhaul (reduction) in benefits or increase payroll contribution (tax increase, which Obama promised wouldn’t happen to those making less than $250,000 per family).

The Future of Social Security

While this phenomena did actually occur in the 1970s for a few years, the remedy at that time was to increase the Social Security holding rate from 2% to a whopping 6.15%. So, the question is whether we’ll see further increases to the contribution rate or whether we’ll have to increase the Social Security retirement age which has been gaining traction in political circles. What’s been especially challenging for the fund this year is the massive layoffs we’ve seen in the recent economic downturn. Since the Social Security coffers are funded via payroll taxes and since the real unemployment rate is well over 10% (reported rate excludes may who are not actually employed due to nuances of terms and definitions), the fund is hit especially hard.

When I talk to people my age, they generally dismiss Social Security as something that they’ll never see so people shouldn’t even count on it. On one hand, I tend to agree that nobody should “count on” Social Security payments to fund their retirement. It was really meant to be a safety net for people that encountered extreme situations entering retirement like loss of wages, a personal tragedy, death of a spouse or some other circumstance that will help to keep people fed, warm and housed in their golden years. It wasn’t meant to be a 401(k) Match. However, it would be rather frustrating to have paid into a system for decades, in many cases, at a rate higher than you’re funding your own retirement account (6.15% is nothing to sneeze at and 43% of Americans have LESS Than $10,000 in their retirement accounts) only to get back nothing in retirement. So, I can understand the cynicism of the current generation of young workers. The generation entering retirement doesn’t have much to worry about in terms of cuts to future benefits. Any talk of benefit reductions or retirement age increases wouldn’t occur for several years. First of all, no politician would alienate such a huge voting block, right or wrong. But also, the thinking is that projecting changes several years into the future would allow people ample time to prepare.

Other Crises on the Horizon

Unfortunately, Social Security solvency is just one of many challenges facing the country that our children are ultimately going to have to deal with. While the EU is embarking on a path to Austerity, the US is passing new costly and burdensome legislation, a massive new entitlement in Health Care Reform and then there’s the pension crisis brewing. We may also have a bailout of many states underway as well. After all, is the administration really going to let California and Illinois default?

So, we have our work cut out for us, and with everything else going on in the world and so many jobless, it’s tough to put this topic at the front of the line. It’s easier to just continue to kick that can down the road.

Are you worried about these brewing crises?

401K Match: Is This Employee Perk Going Away or Coming Back?

Darwin — Thu, 05 Aug 2010 02:49:18 +0000

The 401(k) match has been something employees like myself just took for granted for decades now. While the benefit varies company to company, the conventional wisdom had always been to make sure you contribute at least enough to max out the company match since it’s free money. In essence, if your company provides a 50% match on the first 6% of your contributions, that’s a free 3% boost every year (tax free until retirement). What we saw throughout 2008 and 2009 though, was many companies ceasing to match employer contributions. While viewed as temporary, it begs the question as to whether we’ll see a resurgence in the 401(k) match or actually see more of them going away.

Why 401(k) Matches are Coming Back

There was a recent piece on CNBC outlining the companies that are bringing back the 401(k) match. Now, they cited companies such as American Express and JPMorgan as examples of companies reinstating the plans as evidence that there’s a rebirth of the 401(k) match by employers. What they failed to mention is that these are firms that were on the brink of extinction and they were basically forced to throw out everything but the kitchen sink in order to preserve capital due to their dumb bets on real estate and consumer debt. Now that the companies are flush with cash from government bailouts and a modest recovery, it’s not a stretch to reinstate the matches. While the emploment expert cited in the article estimates that between 40 percent and 60 percent of the companies that took out the match have restored it, he also qualified his statement with the fact that his data is very limited and it’s not clear what’s going on throughout the whole country.

There are some logical reasons to expect employee 401(k) matches to return of course. Namely, it’s a great employee talent acquisition and retention tool. If you were confronted with two similar job offers and one had a company match, wouldn’t you logically choose the one with the match, all other things being equal? Taking this a step further, even if you had an offer for a modest pay increase at another firm, if they weren’t offering a match and generous 401(k) program, would you be as apt to jump ship?

Another aggregate observation is that companies are flush with cash right now from massive productivity improvements and employee separations. Basically, they’re doing more with less. So, an optimist might suggest that with more cash on hand and fewer employees, companies would be more generous with their cash hoardes. Unfortunately for the working stiff, that’s not how business works. Companies pay the bare minimum to retain the talent they need, just like as an employee, you seek the maximum amount of compensation for a given job.

Why 401(k) Matches are Going Away

Personally, I’m surprised more companies aren’t doing away with them and I wouldn’t be shocked to see companies either scaling back matches or doing away with them altogether even during this modest economic recovery. Why? Because they can. Employees are freaking out. The real unemployment/underemployment rate is around 15-16% right now. That’s 1 in 6 people in the US. If your company cut the much vaunted 401(k) match right now, would you leave? Heck, the company you move to may very well do the same, or let you go.

This is how these boom/bust cycles go. During the good times, employers are struggling attract top talent and keep their top performers from jumping ship. Benefits are generous and bonuses are high. Then during the downturn, business ratchets down and squeezes all the productivity they can out of as few employees as possible to conserve cash and remain profitable. Seeing as how it’s unlikely that we’ll see a (reported) unemployment rate below 9% over the next few quarters, if you were a company looking to increase the bottom line and “look out for shareholder interests”, wouldn’t you at least think about cutting out the 401(k) match knowing full-well that it would probably have no impact on employee retention? I mean, sure, it could affect morale, but they’re not leaving. You could cite increasing healthcare costs, the recession, fear of a takeover and the need to conserve cash or whatever…all while saving a substantial amount of money for your shareholders (and increasing your options account balance!).

Has Your Company Cut Your 401(k) Match?
Do You Think Matches are Coming or Going?

You’re an Impulse Buyer. Blame Yourself? Or This Chemical in Your Brain?

Darwin — Tue, 03 Aug 2010 03:43:10 +0000

I read an interesting story in NPR this weekend showing how impulsiveness is tied to the chemical content in your brain. Akin to how plaintiffs attorneys have tried to use genetic makeup to explain why criminals do what they do, I wonder if people knew what their dopamine levels were in their brain, if they would rationalize the poor financial shape their in due to this genetic “burden”.

According to the study, people who behave impulsively tend to have higher than normal levels of dopamine in their brain. While the study was relatively small at 32 subjects, what they were able to show was that by scanning the brain images of the subjects and performing tests, the people who scored highest on the impulsivity test were releasing 4 times as much dopamine as the other subjects.

Are You Impulsive? How to Deal

It’s probably difficult to classify yourself as impulsive in a vacuum since you only have your own mind to compare with. However, if you compare your behavior to that of others, without an expensive brain scan, perhaps you can reasonably discern that you fall into this camp. Rather than blaming poor money habits on dopamine levels though, consider yourself to now be self-aware of this issue and act in ways that counteract it. By setting limits and rules for yourself, you can turn the switch off altogether that perhaps would have sent you down the wrong road of impulsive behavior. For instance, if impulse buying after seeing a crafty infomercial is your problem, admit that that’s a problem for you and set a rule – you are to NEVER buy anything from a TV infomercial again. (This is probably good advice even for the non-impulsive). But seriously, if there’s a new gadget out that you really need, chances are, you could take the proper time to research it further, save for it, factor it into your budget by dropping something else for the month, perhaps buying an equivalent or cheaper version of the same thing in a store, or just not buying it at all – with these steps being a much better method of approaching this impulse than just buying it. If it’s credit card spending that’s killing you, switch to cash or debit.

How I Set Rules, Goals and Use Systems

Similar to some goals I set and the tools I’m using to do everything from losing weight to increasing my income and paying college for my children, you can mentally erect barriers and rules and just force yourself to follow them. Make these rules reasonable, use the tools you’ve considered, and don’t deviate. I have certain impulses like eating lousy food in the company caf or drinking cafe mochas, but I’ve cut it out with my rules and barriers, save for very rare exceptions. Financially, by paying myself first via automatic 401(k) contributions and monthly outflows to the kids’ 529s, I’m forced into compliance. And if these rules seem too rigid to ensure compliance, have a fallback position. In the case of my diet approach, I CAN eat something lousy now and then, as long as my daily caloric intake goal is still met. That might mean taking a jog at night or just eating a smaller meal elsewhere to offset. From a financial standpoint, if there’s a month where I make some extra money blogging, perhaps it’s OK to splurge on a big night out with the wife or a new gadget – as long as I hit my other goals first.

But to have no goals, no rules and no systems…and act impulsively? That’s a recipe for disaster.

What are Your Thoughts?
Is Dopamine Just an Excuse?
Or Valid Explanation for Someone’s Predicament?