The Salaryman Trap

A salary job can be a real trap - in more ways than other jobs!

I wrote before, in the Job Trap, how having a "job" to earn a living can be a dead-end, in that it encourages you to view money in terms of monthly cash-flow instead of real wealth you can own.

Salary jobs are even worse.   Back in the day, I used to fly out to Silicon Valley once a month, having a standing reservation on United Airlines, Business Class.  Oh, the frequent flyer miles!  Oh the credit card debt!  It was fun while it lasted - I only wished I saved more of that money!

But what was interesting, visiting these companies (Cirrus Logic, Sun Microsystems, Samsung)  was the people I would meet.   Most were young Engineers, a few years out of school, working in a cubicle on a SPARC workstation (remember those?) using Matlab to design integrated circuits, or perhaps writing code.

There were a smaller number of middle-aged people in management - the department heads, legal, human resources, and the like.   At at the very top, there were a few silver-back gorillas, with white hair on the temples, running the whole show - the CEO, the CFO, the COO, and the like.

It was, in a way, a pyramid scheme.  If you looked at the age distribution and the number of years of service, some things became abundantly clear.  Like with a law firm, there was room for a very few at the top, more in the middle, and at the bottom, a large number of young folks, in constant churn.

And the promise - not explicitly made, but implied - was that somehow, over time, if you stayed with the company, you would work your way up this ladder and make more and more money.

And as young Lawyers, or young Engineers, we never thought too much about the details of that implied promise - or whether or not in fact, it was practical.   Not everyone could just continue to advance and make more money.  In fact, due to the pyramidal nature of these types of organizations,  few would.

What happens to the rest?

What happens to a 40-year-old C+ programmer or circuit designer?  What happens to the Associate at the law firm if he doesn't "make partner".   What happens to the vast majority of people who work at these places?

Well, they go off and do other things, often for a lot less money.   And we don't like to talk about it, because, hey, we're young hot-shots, making the "good money" with promises of more, and we're not going to be "that loser" who we see going down the elevator with the picture of his wife and kids and his coffee mug in a cardboard copy-paper box.

Right?

Wrong.

The image above is of an Acura coupe - an overpriced Honda that appeals to young people who just "got a good job" and want to show off.  I met a young Engineer once, and we went out to the obligatory Chinese Lunch Buffet in Fremont in his new Acura.  He had traded his BMW in on it, and he was excited as to what a nice car it was.

Some of his older cohorts were smiling and nodding.   They knew the score - a young turk going out and immediately getting himself into debt up to his eyeballs, taking his bi-weekly paycheck and chopping it up into tiny little payments, until pretty soon, he was "living paycheck to paycheck".

And of course, the inevitable happened - the company downsized, and he found himself out of a job.   Of course, he is young and in demand, right?  So he can find a new job, in a matter of months.   And in the meantime, he can cash in part of his 401(k) to make the payments on the house and cars and credit cards.  Right?

After all, he is making good money!  And the future is so bright, he has to wear shades.  From here on out, it is nothing but prosperity and good times!

That was 15 years ago.  I wonder where he is today? I suspect the Acura is in a salvage yard somewhere near the bay.

Salaries for Engineers and programmers are still doing OK, but in some markets have stalled, as many companies have cut back or gone under, and thus put a lot of people on the street.

And while you might make "good money" at such a job, it never will be really good money unless you decide to accumulate some of it.

Going into debt for consumer goods, cell phones, cable TV, cars, jet skis, fancy houses, and all that crap means that when adversity strikes, you will lose it all and end up broke.

It also means missed opportunities.   When your friends tell you they want to start a new company making an exciting new product - and need a good circuit designer, but can pay you only in stock - what are you going to do?  "I need to make $100,000 a year to service my debts!" you say.   So you let opportunity go by, because you traded it for a jet-ski.

And opportunity does knock in your life.   A friend of mine decided to start a bank.  Yes, give me all that bullshit whiny American crap about how bank stocks are a bad bet.   You might think that, listening to the media.   I was able to only scrape up $10,000 to invest in the bank.   That has since morphed into more than $50,000, in only a few short years (and pays $1000 a year in dividends!).   Imagine if I had been able to invest $100,000.   Yea.

I was able to invest in Real Estate, though, and cash-out when the music stopped, with a seven-figure number.   But, the only reason I was able to do that was because I had a modest house and not a huge debt-load, thus qualifying me to buy those investment properties.

It is temping, as a salaryman, to think, "I am making so much money, my time is worth a lot to me!" - so you buy convenience foods, take-out designer coffees, eat in restaurants, and hire a lawn service.   After all, if you are making $100,000 a year, that is like $50 an hour, right?  So why bother doing it yourself?

But a salary job, as the name implies, does not pay you more money to work more.  So it is not like mowing your own lawn is taking away an hour of work, and thus $50 out of your pocket.   On the other hand, if you do this instead of watching "Jersey Shore" - you will definitely profit and be in better health.

But the second problem for the salaryman is normative cues - and salary jobs are chock full of them.   As I noted in cubicle survival tips, salary jobs are horrific as they place you in contact with a lot of other brain-dead salary people all day long.   And most of them on well entrenched on the consumerist bandwagon, buying crap on time and trying to outdo one another with their status.   And that is where one hears arguments like, "Well, my time is worth a lot, so I hire someone to breast-feed my children" and that sort of crap.

And of course, in the parking garage is the inevitable escalating war of cars - who has the fancier ride and who spent more in an apparent display of wealth.   And when lunchtime rolls around, these same brain-dead drones will encourage you to go out lunch, spend $20 of your hard earned money (even at $100,000 a year, this represents nearly an hour  of your after-tax income) on Chinese or Indian buffet.   And don't forget a designer coffee from the Starbucks in the lobby!  It's only five bucks and you can afford it because you're well off, right?

Right?  And if you say you can't afford it, well, then they will think you are poor or something - even though you both make basically the same salary.

Salary jobs are a trap, as while you may have a good income you may not be getting ahead in terms of increasing your net worth over time.   In the past, most salary people anesthetized themselves by looking to their rapidly appreciating homes as an indicia of their increasing wealth.   Today, that phoney wealth-on-paper has evaporated.   As a result, our nation's savings rate has actually gone up, as people are starting to catch on that we are not as wealthy as we thought we were.

So how do you avoid this trap?  It ain't easy, as the pressures from your peers and the media will be intense.  Your own spouse may be against you - in a big way - over this.   He or She will want - no, demand - that you keep up with the neighbors, in terms of spending.  Suddenly, you have to buy luxury cars and put the kids in private pre-school, and do all sorts of silly shit, financing most of it on time.

The secret, of course, is no secret.  Spend less than you make, max out that 401(k) plan, stop borrowing money for things, pay cash for cars, pay down debt, live within your means, and save up your money for the very real possibility that the "dream job" will go away long before you want it to.

And when that happens, well, you will be prepared.   And if it doesn't?  Well, you will be fantastically rich, then.   And if opportunity comes along, you will be able to jump on it, instead of saying, "No, I'll sit this one out, I have credit card debt and car payments to make."

Sad Sack

There are a lot of Sad Sacks in the world.  Are they depressed, or evil, or what?

On some news sites, you see interesting comments, some of which are clearly trolls.   No matter what the topic of the story is (e.g., fuzzy kittens) some folks jump in and tie it to Obama or Romney ("these kittens would be fuzzier if not for OBUMA!" one says, while another whines, "If Romney is elected, those kittens would starve to death!").

It is, of course, ridiculous.

But with financial news stories, a number of comments are sure to appear, like clockwork, from the Sad Sacks of the world.   And these may be trolls, too, I don't know.   It could be some subtle campaign to get us all depressed and thinking the economy is worse than it is.  I dunno.

But the comments run along a number of lines:

1.  "Saving money?  Who can afford to save money in this economy?  Only rich people can afford to save money!"

2. "My wife and I are living paycheck-to-paycheck every since I lost my job at the old mill.  My car just broke down and my dog died.   Oh woe is me!"

3.  "Saving or investing is just for chumps, anyway.  The whole game is rigged.  You might as well just SPEND IT ALL, because inflation will eat up your savings anyway!  Might as well enjoy your money!"

4.  "Finding a Job?  Make me laugh!  I've been laid off for three years now and I haven't found anything even close to what I used to make.  Yea, sure, there are lots of low-paying jobs out there, but I'm worth more than that!  I'd rather stay home than take a pay cut!"

It is hard to parse these comments.   Are these people depressed?  Poor?  Stupid?  All three?  Probably. The mentality expressed is somewhat alarming - alarming in the sense that we enacted these 401(k) and IRA plans on the premise that people will make rational choices in retirement.   But given these sorts of attitudes, one wonders if the whole concept is sort of flawed - at least with regard to a lot of folks.

The common denominator is this:  life is too hard, so why bother even trying.  Just go out and spend it all now, and forget about tomorrow.

This is sad - and a sad outlook on life.   And why it is sad is that these folks will end up on a bad place, sure as the sun rises.  They are wallowing in self-pity and engaging in weak thinking, which, when you think about it, are really the same thing.

Whoa.  Wait a minute.   Now you see why we are called the Prozac generation. The media, the corporate advertisers, the corporations - they all want you to be depressed.  They want you to adopt learned helplessness and just be a quiet and good little consumer.  Watch TeeVee, order that delivery pizza, think about which shitbox econo-car you are going to buy, or worse yet, lease, brand-friggin'-new, so you will be perpetually in debt, powerless, and weak.

Wow.  Pretty slick system for enslaving the masses.

Of course, in order for it to work, you have to get them to watch about five hours of TeeVee a day, eat all that horribly bad chain-restaurant food, and get 100 lbs overweight with a blood-sugar problem.

Um, I guess that describes about half the United States.

You do have choices in life.   You can choose to be a Sad Sack of Shit - wallowing in your own self-pity and anesthetizing your self-inflicted pain with consumer purchases and a lot of unhealthy and shitty food.

Or, you can choose to do otherwise.   Cutting out that five hours of television a day, is a good first start.   Call the cable company and disconnect.

Or maybe you like being a Sad Sack?

When "What If" Becomes "What Is"

Shit happens, as they say - and often unexpectedly.  Are your finances prepared for unforeseen events - or even foreseen ones?  Think about this before buying some new toy like a car or a cell phone.

In a recent "Oh Woe is Us!" piece on MSNBC, they report gleefully that about 1/4 of Americans have no rainy day savings.  And while they tried to couch this in terms of the "current recession" (which technically is over) the reality of the matter is, in the last 20-30 years, this has pretty much been the case with Americans - a large percentage of us are living hand-to-mouth, not because we have to, but often because we choose to.

And I can say this with authority as I was this way once - spending every dime that came on on payments and bills of one sort or another.   I had little saved for a "rainy day" - but then again, most people in their 20's don't have much saved - they haven't had time to.

And of course, a certain percentage of the population is being rained on, at any given time, and thus might have depleted these savings - and is trying to rebuild them.   So it is not hard to come up with a 25% number at all.   And as the MSNBC article noted, these days, people are saving more than they were five years ago.   Recent events have a lot of people spooked, and rightfully so.   And more and more folks are thinking it is a good idea to own money rather than be constantly renting it.

But of course, this does not bode well for "the economy".   When you stop buying Jet Skis and other stupid purchases, the guy selling Jet Skis lays off a salesman, and maybe a mechanic.   And the guy selling ice and cold beer down by the dock maybe goes out of business.   Saving money, we are told by some folks, is a bad idea - for the economy.

But the economy is not a thing, and moreover, it is not your patriotic duty to spend money, when it is not in your best interests.   You have to look out for your own interests, and in most cases, this means being fiscally responsible.  Let the other fellow buy Jet Skis.

The problem with hollowing out your own finances - levering yourself into debt for houses, cars, credit cards, and whatnot, is that if something bad ever happens, well, you are totally screwed.

What bad things could happen?  Ask around, a few folks could tell you.    You could lose your job, have a medical issue, have a child having a medical issue, wreck your car, whatever.  Shit happens, as they say, and if you life is so leveraged that every penny you make goes to pay off loans, well, then what do you do when either (a) the income dries up, or (b) sudden unexpected expenses crop up?

And I say "foreseen events" in the caption above, as many of these events can be foreseen, either as probabilistic likelihoods, or as inevitable consequences.   It is likely you will have a health crises at some time or another in your life.   It is predictable that you will DIE eventually, and should plan on this.

But beyond hospitals and mortuaries, there are other likely or foreseen events that people should plan on, but fail to do so.    One reader recently asked me if he should cash in his 401(k) or borrow money in a home equity loan to put a new roof on his house.

In his world, I guess, a roof leaking is some wildcard, unforeseen event, like the comet that took out the Dinosaurs.  One minute you have a roof, and then the next, BAM!  Meteorite.

But in reality, a asphalt shingle roof on a home has a design life of about 15-20 years, depending on the quality of the shingles used and the quality of installation.  Many contractors use "15-year" shingles, which rarely last that long, while others may use 30-year shingles - but don't count on them being around over 20.

Ditto for home appliances - which last 10-15 years at best.   If you are out shopping for new cars and have 12-year-old appliances in your kitchen, ask yourself if you've set aside enough money to replace them, down the road.

Most people don't think like this - and thus just borrow more and more money and spend it.  When an appliance breaks or their roof leaks, they just borrow more money to cover the contingency.

If you look at your life in terms of these predictable, foreseeable events, as well as the likely probable events, you realize you are not as wealthy as you thought you were.   The cost of a new stove is hanging out there over your head just as sure as a car payment, even if the current one is "only" ten years old.  If you save up and set aside money, then when the control panel finally blows out, you can go out and buy a new one, instead of just scrambling to see which appliance company will finance you on onerous terms.

Rainy days are not something that happens to other people - it is something that happens to you and will happen with regularity.   If you don't put aside money for a rainy day, you always end up chasing your tail, feeling put-upon, and complain about "living paycheck to paycheck".

Sorry, but poor financial planning is not something I feel sorry for.   These same people who complain about living 'paycheck to paycheck' often have smart phones, cable TV, and a new car in the driveway.  And I know this, because some of them are friends of mine...

OPM - Other People's Money and Why It Doesn't Apply to You....

Many consumers banter about financial terms like "Opportunity Cost" without knowing what they mean.  The phrase "Other People's Money" is another phrase that likely doesn't apply to you.

In my posting Opportunity Cost, I pointed out how that phrase (and concept) has no application to the average consumer.  People like to think they sound smart when they say, "Well, I could have paid cash for this car, but what with the opportunity cost and all, it was better to finance."

It is an argument that makes no sense, as the guaranteed savings of not paying 5% or more interest is far greater than what you would get on a CD in the bank - and those are the comparable "investments", not stocks or some other speculative investment.

Opportunity Cost really only makes sense for businesses - where for them, borrowing money means freeing up more capital to pursue a business project that will generate income for them.  Buying cars and other consumer goods, on the other hand, is just spending money and there is no "opportunity" that you are taking advantage of by financing a car, other than an opportunity lost.

As one helpful reader noted, when you spend $25,000 on a brand new car, and then pay interest financing it (and please, don't tell me about "0% financing" - you really aren't that stupid are you?  The 0% financing gag means you forgo a $2000 rebate - there's your interest right there) the real opportunity you are losing is the chance to invest $27,000 and get some rate of return, and keep your old clunker in the driveway.

Not Spending provides the opportunity.  Spending and financing is not creating opportunity.  But car salesmen (and all salesmen) will throw out phrases like "opportunity cost" to confuse you and to get you to think that an odious new car purchase and loan agreement is not a stupid idea, but in fact a smart one.  It is not.

The same is true with the phrase "Other People's Money" - which was bandied about a lot in the late 1990's and early 2000's, as we all, well, spent other people's money.

The phrase is similar to opportunity cost and makes sense in a business context only.  The complete phrase was something along the lines of, "Always use other peoples money, instead of your own!" and what this meant was, when you are starting or running a business, you can leverage yourself and hedge risk by borrowing money ("OPM") and thus risk less of your own capital.

For example, you start a restaurant.  You borrow money from investors or a bank to pay for renovations and start-up expenses, and to cover the overhead for the first few months (to a year) until the business is solvent and profitable.   If you are successful, you pay back the investors their money, plus interest.  If you are not, you declare bankruptcy, walk away, and leave the lenders holding the short end of the stick.

Since it is a business bankruptcy, and not a personal one, you lose little in the aftermath, unless you did something really stupid like personally guaranteeing the notes.

For a businessman, who does not have emotional panic when the word "bankruptcy" is bandied about, this makes sense.  And it is how businesses work and how business is conducted.  And lenders know this, which is why interest rates on business loans are so high.

But OPM doesn't make any sense for you, as a consumer buying consumer goods or a personal residence with OPM.   All you are doing is borrowing and paying back, with interest, and there is little or no chance of making a "profit" on a Jet Ski or even your personal home.  As I noted, over time, you get back what you pay in to your personal residence, with the cost of insurance, taxes, repairs, and interest.  This is not to say that buying a home is a bad deal - far from it.   But the reason why home sales are tax-free is mostly because you really aren't making money on your home (But you do get that money back, at least).

On the other hand, if you can buy an investment property using borrowed money, and then pay back the loan from the rental proceeds and leave yourself a hundred bucks at the end of the month, you can use "OPM" to leverage a business proposition that you could not otherwise pay cash for.   Over time, as rents increase, you will make more and more money, and eventually, you pay off the loan and own the property free and clear, without having paid a nickel of your own money for it (and yes, I did this).   And presumably, it has appreciated in value by then.  You can make a lot of money this way, but of course it requires that you own and know how to use, a calculator.

So why do people in the cul-de-sac of Foreclosure Mews Estates all like to banter about terms like "Opportunity Cost" and "OPM" and the weekly cocktail parties and Barbecues?   Well, for starters, it is a way of trying to look sophisticated and worldly, and financially astute.   But moreover, it is a way that the suburban middle-class poor reinforce each other's normative cues.   Joe and Suzie homeowner might feel rightfully nervous about doing a cash-out re-fi on their split level, so they can pay off their credit cards.  But when their neighbor, after a few drinks, makes a joke about "OPM" they feel better - and even feel they have made a smart move and are now part of the smart set.   Hey, maybe now they can buy that Acura like their neighbor has, using their home equity line of credit.

But no, it is not a "smart" idea.   Using Other People's Money to just buy rapidly depreciating consumer goods is never a good idea.   And using the OPM mentality to bootstrap bad decisions is even worse.

Renting Money Versus Owning Money

Do you own money, or just rent it?

In my posting Owning Money, I put forth the proposition that money is something you should think about as owning rather than passing through your hands every month.

Owning Money is real wealth - making a lot of money and then spending it, is just upper-class poverty.  Real wealth is measured by how much money you have not how much you spend.

But most people never get this concept - and the media doesn't, either.  When the media talks about "rich people" they do so in terms of annual income not their net worth.   You can be a Millionaire, and yet make less than $50,000 a year.  And I'm living proof of that.  By the media's standards, I am dirt poor.  Yet by measure of real wealth, I am in the top 3% for the nation.  Go Figure.

One way to end up income-rich and wealth-poor is to spend a lot of your income renting money. 

The concept of renting money, of course, would seem alien to most people - yet most people do it.   Yes, when you borrow money, you are, in effect, renting it.   Like an apartment that you rent, you never own it outright.  You merely have the right to use it.   You pay a monthly rent (interest) and then have the right to use the place.  When you vacate, well, you have to give the apartment back (pay the principal).   You never own anything, but pay extra for the right to use it.

Borrowing money is basically renting it for a fee.  You get the money, to be sure, but you have to give it all back, plus interest (your rent) on top of that.   So you can see, it is more expensive to rent money than to own it outright.

Because if you own money you can do fun things - like rent it out to other people, and make money that way.  It is a pretty sweet deal, as you basically use money to make money.  The chump paying rent, on the other hand, is just squandering what little he has, so he can pretend to own something for a while.

This is a profound shift in philosophy, if you think about it - and most of us don't want to think about it.  We are trained from birth to think of money as something "other people have" - rich people, not us.  So we don't bother trying to accumulate it, and in fact, resign ourselves to a life of perpetual money renting as we think this is all we deserve.

For the very poor, this mean renting money all the time - even for minor purchases.   A friend of mine needed a new dishwasher recently.   I told him that what I do, is look on Craigslist or in the local Pennysaver to find someone who is moving, who is selling a used machine a couple of years old, and then pay cash for it.  Maybe $100 gets you a nice working machine.

He looked at me like I was from planet Mars.   And, of course, he went out, bought a brand-new machine for $599 and financed it at 21% interest.  And why did he do this?  Because throughout his life, he financed nearly everything he owned.  No purchase was too small to put "on time" or on a credit card, to be paid off in increments, plus interest.

And this, to him, seemed as natural as breathing.

But it is not.  And if you want to accumulate wealth you have to break free of this mindset.  Some folks do, and we get mad at them and call them the evil 1%ers - or use ethnic slurs.  How is it "those people" are so smart with money and make so much, while we struggle to make payments?

Simple - they are the ones loaning us the money.  They respect money - they understand money - and they don't rent money unless it makes business sense to do so, such as investing in a business that will pay back the rented money with interest.

Only stupid consumers rent money to buy consumer goods which are worth less and less with each passing day.  Only consumers fail to "get it" with regard to money, and think that borrowing is a privilege and moreover a way of life.

There are a few things in life that are worth renting money for.   Getting an education - provided it is not overpriced and worthless.  Buying a house - that costs less to own than it would to rent.   Investing in a business, such as a rental property or your own company - provided it will make enough profit to pay back the loan and interest and leave a profit leftover for you.

Money-making enterprises are worth renting money for.  Buying crap for yourself, isn't.

Avoid renting money when you don't have to.

And think about borrowing in terms of renting money - it will seem a lot less attractive when you put it that way.

See also:

http://livingstingy.blogspot.com/2008/12/owning-money-concept-to-think-about.html

http://livingstingy.blogspot.com/2011/10/downside-to-owning-money.html

http://livingstingy.blogspot.com/2012/06/renting-money-versus-owning-money.html

http://livingstingy.blogspot.com/2011/10/money-as-commodity.html