Tuesday, December 29, 2009

My Experiences with NML (as a customer) after Two Decades

Your life insurance agent will stop returning your calls when you stop buying policies.

Note: this was an epinions piece I wrote about my experiences with Northwestern Mutual Life Insurance (NML) after having policies for nearly two decades.

For more information on insurance in general, see my entry "Are You Over-Insured?"

* * *

When I was 29 I bought a $100,000 whole life policy from NML for about $100 a month. I figured it was a good adjunct to my investment portfolio and a good way of spreading risk.

For the first 10 years of my relationship with NML things went swimmingly. My agent contacted me every year and even offered to do free financial analysis on my investment portfolios (NML and others). This was useful information in retirement planning.

He also kept trying to sell me policies. I bought a term life policy from NML and a few years later, he suggested I convert part of it to an Adjustable Whole Life Policy, which I did. I was making more money and figured this was yet another good investment vehicle.

A few years after that, I converted the remainder into a variable whole life policy. As you may have read, there is come controversy regarding these polices from around that time period.

Over the years, the policies have done OK and as a way of diversifying your portfolio, a whole life policy is not a bad idea - but not a good idea as a SOLE investment.

I would recommend a simple whole life policy if you get one, for about $100,000. I would not recommend the adjustable and variable products. I did not feel these were explained to me sufficiently at the time or since. Moreover, I feel that the primary motivation for the agent to recommend these policies was commissions. From what I read on the web, agents are basically salesmen, and they are on a 100% commission basis, so they SELL.

When I started my own business, he sold me a disability policy. I also set up a SEP plan through his office (although it is not a NML product from what I can tell, but it is hard to tell).

Then he tried to sell me a nursing home policy for $500 a month. It simply wasn't affordable, and I told him no thanks on more than one occasion. Finally I put my foot down and said I could not afford to buy any more life insurance products.

A weird thing started happening then. He would have his wife call me to arrange an "annual policy review" weeks in advance. I would have to arrange a phone call for a specific time and date, as though he was the Queen of England. I think this was a cheap psychological plot to make me feel that he was important and I was dirt.

Anyway, when this call would occur, it would quickly devolve into another pitch for nursing home insurance. Gone were the days when he would do financial analysis of my portfolio for me. It was like he stopped caring - all he wanted to do was sell, sell, sell, and if I wasn't buying, well I was no use to him.

With the economic downturn, I started reviewing my policies which by now were a major cash flow burden every month. All my policies were set to use dividends to buy more insurance, which was good for him, but didn't really help me. When I asked him to apply dividends to reduce premiums, he said it could only be done on the anniversary date of the policy or that it was a bad idea. I kept pushing, pushing, pushing, to get this changed, and he fought me every inch of the way.

Finally, I contacted the home office. The people there were fairly helpful and suggested a number of options, including converting policies to "Paid up" status, meaning that no further premiums would be needed. At this point, I was horribly over-insured and it was a good idea, at least for two of the policies.

The policies are old enough that money invested increases in value  I still pay the premiums on the original whole life policy, but apply dividends to reduce premiums. The policy is almost self-funding at this point. The adjustable and variable policies I converted to paid up whole life policies. 

I also discovered that it is possible to have the dividends on the polices paid out to you every year as CASH. Again, they don't make this information readily available and discourage you from doing it. And again, you are told that you need to make the request on the "anniversary" of the policy, (is that a window or what?).

So I made the request the other day, filling out the correct forms and sending them in. This morning, I found a sizable deposit in my bank account. For some reason, they liquidated one of my polices, cancelled my insurance and deposited the whole sum in my bank account.

I called the main office and they agreed it was a mistake on their part. "Just send the money back" they said, not realizing what a hassle this is for me to do - to fix their mistake. The agent on the phone who made the mistake said she'd look into it, but would be out of the office for the next few days.

It seems that no one takes responsibility there, and after reading some of the comments here from people trying to cash out on deceased loved one's policies, I am a bit scared.

BTW, NML monitors the Internet for negative comments about the company and has actually sued people who say negative things about the company. There was a website NMLCOMPLAINTS which NML was successful in getting shut down. They claimed it was a scam to extort money from the company. There does not seem to be any information on the web other than NML's position on the matter, which is a bit chilling.

There are several postings here that are so cheer-leading that they would appear to be from agents or agents of the company. Sorry, but ordinary consumers don't write reviews like the ones I have read here. I cannot believe they are spontaneous endorsements from anyone but NML. Again, this is sort of chilling and makes me wonder if they are trying to groom their image - and if so, if perhaps they are hiding something. I have a gut feeling on this, and my gut usually is right about these sort of things.

Have my policies done well? Well, for the first decade, they were all worth less than what you pay into them. This is normal for most life insurance. Many people bail out at this point and take a huge loss. After 20 years, there is some investment value now, but it takes a long time. And it is not guaranteed. As I noted, a small whole life policy is not a bad idea. Buying a number of policies is probably not a good idea for the average middle to upper-middle-class American.

Also, they recently decreased the dividend rate. They said this was done because of the economy, which is plausible. I noticed an article on-line, though, that in December of 2008, they were caught up on the Lehman Bros. debacle, as guarantors of some funds. I thought this was an odd "investment" for a life insurance company to be in. I wonder what else they are invested in?

What I am REALLY disappointed in is the lack of real financial advice from the Northwestern FINANCIAL NETWORK - advice other than "buy another policy please". As I noted above, when I started with NML, they provided a lot of free investment counseling for policyholders (who are also owners of the company, as it is a mutual company). I felt that NML was providing some good overall financial advice. I feel less so in the last 5 years.

I am not sure whether I am doing the right thing with my policies in this economy. I am not sure whether I should maintain them, cash them in, or what. I am not sure what to do with them when I retire - borrow against them, covert them to annuities, cash them out, or what?

When I ask my agent I get no advice. When I ask the people at the home office, I sometimes get options (not all agents seem to know all the features of their products) but no advice. No one seems able to say "well, for someone in your position, we would recommend doing X".

In other words, I want someone on MY SIDE helping me out here, not just a company selling me products and then providing lackluster service when I stop buying.

With all the problems in the financial sector in recent years, I am beginning to worry about the insurance sector. We also have four policies with State Farm (also now a "financial network" or "bank" or something).

If these companies go belly up, what happens to my money? It is not insured, of course.

Again, there seems to be a lot of cheer-leading on the Internet for NML, but little in the way of real data. I am not sure ratings agencies are worth anything anymore (they all said Enron was a good buy, right?).

Maybe the person at NML who "cashed out" my policy and put the money in my bank account was trying to tell me something - take the money and run before it is too late!

Maybe. I am starting to wonder.

Again, my advice to any young person starting out is that a small whole life policy that is affordable might not be a bad idea - pick a simple policy with a premium you can afford. This should be after you have a TERM LIFE policy to cover your family, should you die.

Then, stop buying. Remember that the agent is not your friend or your buddy, nor does he have your best interests at heart. He is on 100% commission and often gets a big chunk of that first year's premiums (sometimes more than 100% for variable products).

Frankly, I am skeptical that any "financial counselor" who is also selling financial products can be trusted at all. In our 401(k) era, I wonder how most people, who are not sophisticated with investments, figure all this stuff out.

Supposedly Highly rated
Claims to have lot of money
rate of return WAS good
Great service initially

Agents interested only in selling
Poor customer service from agents and phone
mistakenly canceled policy

The Bottom Line: 
Put your money in your 401(k) first.

Buy a term policy next.

Then, if you have extra cash, consider a small whole life policy.

Overall Product Rating: 
Product Rating: 3.0 Average


UPDATE:  Read this thread from a former NMFN agent as to his experience with the company.  It explains a lot of what  went through with my agent and why he stopped returning my calls, once I stopped buying policies or providing him with referrals.

Selling life insurance to college students?  I'll bet 90% of them stop paying on the policies within a year - that's free money to NMFN.

I am more than disappointed after reading this....

Sunday, December 27, 2009

Being Self-Reliant in a Technological World

Primitive "Cargo Cults" in the South Pacific worshiped technology without understanding how it worked. Have we devolved into a modern version of the "Cargo Cult" with regard to our electronic technology?

Living in the Western World today is to live in a world of increasingly complex high technology. We have communications devices that would boggle the mind of a citizen of just a decade ago. We heat and cool our houses with increasingly complex and efficient heating systems. Even the most primitive personal computer today has more power and speed than a "supercomputer" of just a few decades past. Our cars are becoming increasingly complex in terms of drive-train and electronic accessories. And as costs for these electronic gadgets continues to drop, we end up owning more and more technology.

The average middle-class American family has three, possibly four cars, two or three refrigerators, a microwave (or two), at least one computer, if not one for every adult in the household, several cell phones, televisions, video games, and the like. It is a mountain of technology. Even a typical family living "below the poverty line" has many of these items - a car, television, microwave, air conditioning, and the like.

And yet as our lives become increasingly complex and reliant on electronic technology, as individuals, we have become less and less technically sophisticated. Enrollment in Engineering and other technological studies has dropped over the years, for domestic citizens, with these slots being increasingly filled by foreign students. We have become a nation of dummies - and a library of books has been generated just for us. Every piece of technology, science, or the law can be explained to you in dumbed-down terms in a "(fill in the blank) for Dummies" book.

While millions struggle with unemployment during our recession, technological jobs go unfilled, and many high-tech companies look overseas for applicants. Even technician positions to repair and maintain equipment remain vacant. We all want to be highly paid office managers, it seems, but few want to be HVAC, automobile, or computer repair persons.

It is ironic. We are a technically sophisticated society but a technically ignorant populace. Americans, it seems, have become like cargo-cult savages, picking up and using technology, with little thought as to how it works or why. Our ignorance is costly, too. Many throw away or squander technological resources needlessly, from lack of knowledge on how to use such technology, fear that such technology will break, or from the desire to have the latest-and-greatest electronic toys.

Over the years, many movements have come and gone, trying to get back to the concept of self-reliance. This started more than a century ago, with the creation of religious communities (Amish, Oneida) or philosophical pursuits (Thoreau). It never died out over the years. The resurgence of the "commune" in the 1960's was just a latest iteration and reaction to the increasingly technical nature of our society.

Many folks, it seems, want to "get back to simplicity" and it is not hard to understand why. Technology can take control of our lives and end up dictating to us how we live, rather than the other way around. Moreover, as a largely technically ignorant society, we cannot cope with the technology itself, on a self-reliant basis, and thus are helpless when confronting it. Like the savages in a cargo cult, or the proto-humanoids in 2001 A Space Odyssey, we can do little more than scream out our frustration and chant prayers to these technological Gods.

Many want to "unplug" from this technological madness, or "live off the grid". Ironically, such efforts often lead to more technology, not less (ever tried to wire up a bank of solar panels?). Going "back to nature" or "living off the land" has been proven over and over again not to be a practical way of life. Communes fail, religious communities die out. Even the Amish use cell phones now.

It is possible, however, to be more self-reliant in a technological age, without resorting to living on a commune or sleeping in a yurt.

The first step is to utilize an appropriate level of technology for your personal life. Many young people (the target market) have to have the latest and greatest technology, particularly when it comes to cell phones and the like. While such toys can be fun, as I have noted in other blog entries, being "plugged in" to technology all the time can be stressful and also disconnect you from real life. Yes, the iPhone is a cool toy. But do you really need it? Or more succinctly, how many toys like that do you need?

In other words, you can simplify your life not by avoiding technology, but by limiting the amount of it you use to that which you really need. If you own several computers, cell phones, televisions, audio equipment, and the like, then it will be more and more burden on yourself to maintain all of these items. Simplify by using less.

Incidentally, this may be one reason the home stereo business has taken a hit lately. Traditional stereo systems have been supplanted by the "surround sound" home theater or by the home computer or iPod. It is not that people don't want a traditional stereo, but that maintaining all these separate appliances ends up being too much for most folks.

The second thing is to take care of your equipment. This sounds self-explanatory, but really isn't. Many people think they take care of equipment while actually abusing it horribly. Most consumer-grade equipment and technology is cheaply made to a price point. As a result, much of it can easily break and end up in the trash heap long before its time. If you treat consumer grade equipment like the cheap junk that it is, it will last a long time. Dropping things, manhandling them, aggressively using them, and neglecting them can destroy such items in short order.

For example, our cleaning lady utterly destroyed an Electrolux vacuum cleaner in a matter of a year. In the old days, these cleaners were made of steel with rubber trim, and could withstand being dropped down the stairs with little wear. Today they are made of plastic. They are just as servicable, but perhaps not as robust. Her approach to vacuum cleaners was to yank them across the floor, and if they caught on something to jam, pull, kick, and curse them. When finished, she would unplug the cord by yanking it from across the room, as if cracking a whip. Needless to say, the cleaner took a beating. And yet many folks treat equipment this way.

It takes extra effort and work to use equipment more carefully, but the payoff can be in a service life that is two to three times normal. That $500 Electrolux went to an early grave unnecessarily. We fired the cleaning lady and bought a $75 GE vacuum cleaner at Wal-Mart. It has lasted five years with careful use.

When I visit many people's homes, I see their home computers or other electronics set up in awkward locations - teetering on tiny desks or tables, haphazardly set up on the floor, covered with dirt and dust bunnies. Dirt and dust bunnies get sucked into electronics and can layer themselves on temperature-sensitive microchips, causing them to overheat. I did this myself the other day, frying a perfectly good video card by allowing it to get dirty. I was fortunate that I could find a replacement on eBay for $25 and clean the computer (carefully) with compressed air and a vacuum cleaner.

But lesson learned, I took the computer off the floor from under my desk (where it was also getting kicked) and placed it on top of the desk, where it was accessible and easier to clean, and also less likely to get dirty. I now clean it at least once a year, using compressed air and a vacuum to blow dust out of the housing, keyboard, etc.

Most modern electronics makes use of membrane-type pressure switches, whether it be for keyboards, remote control devices, or even controls on your stove or microwave. These switch pads are cheap to make but usually the first thing to wear out. And yet I see people "mash"these types of buttons without realizing that they may be breaking the most delicate (and impossible to replace) part of the machine.

We've had a stove and a microwave "wear out" this way (and it happened to a friend of ours, too). The "stop" or "end" button guess the most use, and guess which button wears out? I found that we were hitting "stop" or "end" two or three times, when once would suffice. I guess we had a Cargo Cult like superstition that the machine would somehow not stop unless the button was mashed repeatedly. And guess what? Once the "stop" button is broken, the stove is basically useless. Replacing the control panel is the only solution, and that cost nearly as much as a new stove. Of course, buying an "old school" stove with mechanical controls is one alternative, but increasingly, these are getting harder to find.

Similarly, connectors and power supplies are two major sources of failure for most electronic equipment. How many cell phones or other electronic toys have you had to discard over the years because the plug-in jack breaks or gets "intermittent". An MP3 player with a broken output jack is a broken MP3 player, period and ready for the trash. Unless you have tiny hands, are skilled with a soldering iron and have lots spare time, most modern electronics are trash once they break.

These are just some ideas I've had concerning this phenomenon. I will add to this posting as other ideas occur to me.

Friday, December 18, 2009

New SCAMS from the Credit Card Companies

Credit Card companies are not your friends!

Two things to watch out for lately from our friends at the Credit Card Companies and some thoughts on Credit Card Habits.

Two SCAMS to watch out for lately:

1. The Check is In the Mail: Credit Card companies mail you these nice checks, sometimes bound in a checkbook, encouraging you to rollover debt or spend more money. Shred them! In most cases, they have huge interest rates attached to them and will get you in real trouble. Want to do a zero percent balance rollover? Call the company directly - chances are you can negotiate a better deal than these checks.

These are being sent out like mad right now. People have weaknesses around the holidays and may be tempted to spend more than they should. Also, with the new credit card law going into effect in February 2010, they are trying to get a last bite at the apple.

Call the company and tell them to stop sending these checks - if they are lost or stolen, it could create a nightmare for you to straighten out. Some companies (Citicard) send them almost weekly. If someone stole your mail, you'd be in a world of woe.

2. Do you want to OPT OUT? A recent phone call from one company asks whether I want to opt out of the new credit card protection law. Well, they didn't say that directly. What they said was, wouldn't I like the convenience of being able to occasionally go over my credit limit? And pay a $100 overlimit fee? Well, they didn't say the second part.

Gee, no thanks on several grounds. The new law protects consumers by declining charges that go over your limit. This prevents you from spending too much and prevents you from paying overlimit fees if you do. It also prevents a fraudster who steals your card from going on a huge spending spree far over your limit. Yes, they will refund the fraudulent charges, but what about the overlimit fee?

With the new law, you can reduce your credit limit to a reasonable amount and never have to worry about paying "overlimit fees" as you physically cannot go over the limit - the card will be declined.

The problem with this phone call, is that the person making it was totally disingenuous. I said "No Thanks" and he said "You mean no thanks, you don't want your credit card to be limited?" And I said "No, I don't want to pay over-limit fees" and he said "Well, you won't, if you never go over your limit, but may of our customers prefer the safety and convenience of not being limited by a credit limit!"

It was like a Monty Python routine. I finally said "I DO want the protection of the new law, and NO, I don't want to be charged any overlimit fees ever, ever, ever!"

I still am not sure that he didn't record me saying the word "YES" and changed my credit card. And YES, Credit Card companies and other fraudsters do this all the time.

It goes to show you the lengths the Credit Card companies are going to, to trick people these days. It will be interesting to see how things play out on March 1st. You can bet they will try every dirty, nasty, underhanded trick in the book between now and then - raising rates, closing accounts, you name it.

PAYING OFF YOUR BALANCE EVERY MONTH - is this possible for the long term?

70% of people surveyed say they pay off their credit card balance every month. 70% of people actually carry a balance, according to the credit card companies. 40% of the people are lying.

It is possible to pay off your balance every month and still end up in trouble - fast.

As I have stated before, having a Credit Card is like having a pet Velicoraptor. It looks all cute and cuddly at first, until it decides to rip your bowels out.

Be very, very careful and vigilant with credit cards. It is all too easy to end up with a ton of debt at an interest rate so high you will never pay it off - ever! Even those who "pay off the balance every month" can get into trouble!

For example, Joe Black uses his VISA card to pay for all his purchases. He gets airline miles and he figures, why not? So everything in his life is paid for on the VISA. He charges a few grand every month for everything from groceries to restaurant meals, to gasoline, to his cable bill, and he gets airline miles. He pays off the balance every month. At least for a while.

Then one month, there is an unexpected expense. His Mother dies, and he needs to fly to the funeral. The car needs a new transmission. His son calls from jail and says he needs a lawyer.

Shit happens, as they say. And it will, in your life, eventually. You can count on that.

Suddenly, this month, he can't pay off the balance. So he makes a partial payment and lets the balance "roll over" to next month - at 22% interest or more. Suddenly, the whole scheme of "pay off the balance every month" has gone sour, because of ONE incident!

Next month, the bill is now nearly twice what it was last month. There is no way he can physically pay this off, so he rolls it over again - at 22% interest for another month. And the month after that? Same thing. It can take a year or more to pay this off - if he's lucky.

The problem gets worse and worse. At the high interest rate charged by airline miles cards, it is very hard to get ahead of the game. Interest can be $100, $200 or even $500 a month, depending on your balance and the interest rate. If you miss one payment, your default rate can go to 30%! Try paying that off.

Joe eventually gets a home equity loan to pay off the debt, paying thousands in closing costs in addition to the interest on the credit card. So much for "Pay it off every month"!

Think it can't happen to you? Think again. If you run up charges in the thousands every month and pay them off every month, that's great - until the ONE TIME you drop the ball, and then it all goes horribly wrong.

One solution is to not use credit cards, but use DEBIT CARDS instead.

Another is to pay CASH.

Yet another is to shop for your card based on LOWEST INTEREST RATE, not on rewards miles or whether they put the name of your school on the card. LOWEST INTEREST RATE is the best deal, because if you ever drop the ball, at the very least you have a realistic chance of paying back the debt at a reasonable interest rate.

You see, a CREDIT CARD is a LOAN, plain and simple. You would not willingly negotiate a loan at 22% interest, would you? And yet many people do just that with Credit Cards, picking a high interest rate in exchange for rewards miles.

Free Airline miles and all that are fine and all. But if you ever, ever carry a credit card balance, those "free" miles are not free. You've paid for them, many times over.

Moreover, in most cases, there are so many restrictions attached to the use of airline miles that it is nearly impossible to use them for anything but upgrades. And the miles expire over time if you don't use them.

And with the low cost of airfare these days, is a free airline trip such a big deal anymore? When you can fly for $99? Sure, some flights are more expensive than that - those are the ones "blacked out" from your airline miles.

It is a loser's game. Get the lowest interest rate you can. If an emergency ever occurs, you have a low-interest line of credit available to you that you at least have a stab at paying back.


Thursday, December 17, 2009

Water, Water, Everywhere....

Water, Water, Everywhere...

And all the boards did shrink ;
Water, water, every where,
Nor any drop to drink.

- The Rime of the Ancient Mariner

In recent years we have become more conscious of water consumption in a way we never thought of decades ago.  We are dehydrated, we are told. Americans don't drink enough water.   We should drink quarts and quarts of water every day.

At the same time, water fountains have gone the way of pay phones.  If you want a drink of this precious water, you'd better be prepared to pay for it.  Bottled water, purified water, even designer waters are sold at prices that are as high as, if not higher than soft drinks or even beer.

We found ourselves in a pattern of buying water like everyone else.  At the gas station, we would spend $2 on a couple of bottled waters.  At the wholesale club we would buy bottled water by the case. Quickly, our budget for water went from zero to hundreds of dollars a year in no time.

Many folks buy at least one bottled water a day at a convenience store or fast-food restaurant for at least a dollar a bottle.  Think about that, that's $365 a year, right off the bat - for something that used to be free.

The seltzer craze was no big improvement. Starting in the 1980's in New York, the idea of drinking seltzer water exploded across the continent.  Mixing fruit juices with seltzer water became the new craze. The soft drink companies jumped in, offering seltzer water, flavored seltzer waters and sugar-added seltzer drinks.

During the recent economic downturn we started scrutinize our spending more closely.   Bottled water was one area we targeted for savings.   In order to kick the bottled water habit, however, you have to take on new habits, otherwise you may end up spending more on bottled water than before.

Just as cigarette smokers try to "quit" by not buying cartons of cigarettes and end up paying even more by purchasing them by the pack, not buying cases of bottled water and buying more 99-cent bottles at the convenience store is no solution to the problem.

Since drinking fountains are few and far between, you have to get into the habit of bringing your own water with you, and this may mean having to find some sort of container or canteen and remembering to clean and fill it on a regular basis.

Spending $30 on a water bottle is not solving anything. I found some inexpensive water containers at garage sales which worked well after a good cleaning.  A neighbor gave us a gallon Coleman water jug for free.   For a long day at the beach or on the road, such a jug, with cups, can provide water for the whole family.

I got into the habit of spying drinking fountains and making a mental note of the best of them along my daily route.  They are fewer and far between, but still out there.

While you can spend a lot of money on water purifying jugs, filters, and the like, I for one do not think they are necessary.  Most American tap water is perfectly drinkable, and most of these filters take out only large particles in water and do little to take out any chemicals that might be present.   Bottled waters are not much safer than tap water as many contain bacteria and also the plastic used the bottles can leach into the water.

Here's the deal. Other than cholera, most bacteria in water is not bad for you.   Get over the idea that the city tap water is going to give you "germs" unless the municipal water supply has advised you otherwise.

Another reason not to bother buying a water filter jug or sink filter is that you may already own such a filter in your refrigerator.   Many modern refrigerators with water dispensers, either inside or through the door, have built-in filters similar to the filter jugs or sink filters.  Why buy what you already own?

Kicking the bottled water habit has reduce the amount of recycling containers we have to handle as well.

The best things in life are free, they say, and water is nearly so.   In fact, we are lucky to live in one of the few countries where tap water is drinkable, cheap, and readily available.   We take water for granted, but in most places of the world, drinking what comes out of the tap is a bad idea.

The bottled water industry wants you to think that is true in America as well, as it would mean huge profits to them if you paid 99 cents for every pint of water you drank.   And perhaps this same industry has a vested interest in allowing our tap water system to become degraded and contaminated.  Time will tell in that regard.

In the meantime, drink up!   And not from a bottle....

Tracking Expenses for a Year

Amazon.com: QuickBooks Pro 2000
Since January of last year, I have tried to track, on Quickbooks, every expense I have had.

This is an interesting experiment and something I would highly recommend to anyone to do - perhaps on a regular basis, for several reasons:

1. You can figure out "where all the money is going" and take steps to cut back on expenses.

2. You can figure out what you will actually need to live on, once you retire.

3. You can see the benefits of various cost-cutting measures over time.

After a year, the data is rather interesting. Of all the expense items the following are the largest 12 categories, with the last being "other" of 3%:

  1. Taxes - 36.53%
  2. Interest Expense 21.04%
  3. Insurance 8.56%
  4. Automobile Expense 8.35%
  5. Food and Beverage 7.74%
  6. Maintenance & Repairs 6.66%
  7. Travel & Entertainment 2.89%
  8. Utilities 2.70%
  9. Medical 1.96%
  10. Pets 0.64%
  11. Other 3.04%
I do not submit that this breakdown is TYPICAL of anyone else's lifestyle, other than the first two items.

Taxes, including Federal, State, Social Security, Medicare, property, etc. take a lion's share of one's income. There is little one can do to reduce this burden, other than to take every legitimate deduction you are entitled to and to legitimately structure your finances to minimize your tax burden. But for most people, this is largely an unavoidable, fixed expense. We will minimize our property tax burden down the road by selling our vacation home prior to retirement. After "doing the math" we realized that we can rent a vacation home for nearly a month in the summer, for the price of the annual taxes on our existing vacation home.

Interest Expense is rather large as it reflects mortgage interest payments, which constitute the bulk of most folk's mortgage payments. Until you are about 10 years into a mortgage, the payments you make don't really put much of a dent into the principal of the loan. So interest expense is the bulk of it.

This year, we had some credit card interest payments, due to my business, and also because I had a last-minute Capital Gains tax bill to pay. But I have since paid down some of that debt and rolled over the rest to low interest or no interest credit cards. Next year should see a small reduction in this slice of the pie.

Insurance was one area where I have cut expenses ruthlessly. I was very over-insured, having many life policies, excessive coverage on home policies, and too much coverage on car policies. I have trimmed this expense more than half, by converting some life policies to paid-up status (so they require no future payments) and also dropped excess coverage and raised deductibles for car and homeowners coverage.

Automobile Expense here includes storage fees for my boat ($3000 a year) so that is also rather high. I plan on selling this boat in the spring, so the storage fees should drop to zero next year and cut auto expenses by at least a third.

Gasoline represents another third of this expense. With one less boat to feed (at 1.5 mpg) and also less lawn to mow (See my post, The Great American Lawn) we will probably cut gas expenses as well. I also have been experimenting with gas mileage on my existing cars, which have gas mileage meters built-in. You can increase gas mileage by nearly 50% merely by changing the way you drive. One of my convertibles averages 28 mpg with reasonable driving. But you can bring that down to under 20 quite easily, by changing your driving style.

Food and Beverage is another expense that is impossible to avoid, but easy to trim. We have already cut this in half over previous years, I estimate (I do not have data from previous years to compare, unfortunately). We have taken to shopping at Wal-Mart or Tops, as opposed to Wegmans, and carefully tried to utilize the wholesale club (while avoiding the temptation to over-consume). I am not sure much can be done to cut this further, other than to consume less. I could stand to lose some weight. But frankly, food is one area where you do not want to sacrifice quality for price.

Liquor, including beer and wine, makes up a sizable portion of this slice of the pie. We have been more aggressive in shopping prices on liquor. We no longer buy as much New York State wines (at $20 a bottle, often no bargain) and instead take advantage of the worldwide wine glut - many excellent bottles of wine can be had for not a lot of money, if you shop around. Of course, cutting back on drinking or eliminating it entirely would save even more money.

Maintenance & Repairs includes trips to Home Depot for projects around the house. This year, we finished off a basement room, which should add value to our home. But I have been avoiding the temptation to "shop" at Lowes or Home Depot and buy things we don't really need. Many consumers come home from there with armloads of tchotchke stuff to decorate their gardens with. Most of it is plastic or painted metal from China, and it rusts and falls apart before credit card bill is paid. Our big expense next year for maintenance will probably be a new boiler for our vacation home, so this may actually go up.

Travel & Entertainment: Since we travel by RV a lot at the present time, much of this expense is covered under automotive. I am hoping that down the road, we can travel more and see more of the world. We do not eat out at restaurants a lot, so this portion is relatively small. Most Americans spend an alarming amount of money on restaurant food, and it shows.

Utilities: This would be larger, but a portion of them can be written off to my business. We are fortunate to have two homes that are inexpensive to heat and cool - they are both well insulated and have modern heating and cooling systems.

Medical: is also low because we are pretty much in good health. This does NOT include our health insurance (under "insurance") but does include doctor's co-pays, one MRI scan, and dentist visits. Again, we have a high ($10,000) deductible health insurance policy. Some of these expenses might have been covered by a lower deductible policy, but our premiums for the insurance would be much, much more than the amount paid here in cash. I think we came out ahead.

Pets: Veterinary bills are the culprit here. Our dog had some medical issues last year. Nothing major, but veterinarians charge a lot of money, compared to doctors. We love our dog, but my advice to someone living on a budget is to think long and hard before getting a pet - if you are struggling to make ends meet, can you really afford to spend hundreds of dollars a year on pet food, shots, and a vet? See my blog, the Pet Trap.

Some Observations:

This exercise validates my previous post about Disposable Income and Cost Cutting. Note that more than half my expenses are for taxes and mortgage interest. As a result, the amount of "disposable" income is a mere fraction of overall income.

Thus, cutting even small amounts of unnecessary expenses, or getting better deals on things can make a huge difference in your usable disposable income. In other words, saving $10 here and there does matter, and it does add up over time.

Never let someone convince you than squandering small amounts of money "doesn't matter".

How Do You Track Expenses?

It is not easy, to be sure. And we have not 100% tracked every expense, either, but are getting better at it.

First, you have to monitor your bank and credit card accounts regularly - almost daily in fact. We have computers and websites now, and this takes a few minutes a day to log on, enter data into Quickbooks, and reconcile your accounts. As an added bonus, it means that any attempted fraud on your account will be more readily spotted. And of course, if you check your finances this way, you will never bounce a check or go over your credit card limit.

We have tried to use the debit card more (running it as credit for transactions) despite the fear-mongering tactics of the Credit Card industry. Thus, as each transaction appears on the bank website, I can enter it in Quickbooks and categorize it. Quickbooks automatically categorizes transactions based on the last transaction. So once you enter a transaction from Exxon as "Automobile Expense, Gasoline" the next entry for Exxon will be categorized as such, unless you change it.

Cash was a problem we approached from two directions. First, I save all receipts and enter them into a "Petty Cash" account on Quickbooks (Quicken might work for you and is usually provided free with new computers). Second, we take out less cash than before, to force us to use the debit card more (which has the side effect of discouraging spending).

By the time we approach retirement, we should have a good handle on nearly every penny spent. At that point, we will understand better what our financial needs are and how much money we can comfortably spend for the remainder of our years.

You'd be surprised how many people never do this exercise. In the past, one could excuse them, as with nothing more than a checkbook register, it would be hard to figure out where the money goes. But today, with computers, you have no excuse not to track your expenses more closely.

UPDATE:  I am still using Quickbooks Pro 2000 in 2020 - twenty years later!  It is still available for sale on Amazon, too.    But any accounting software will do, including shareware or whatever, so long as you log each purchase you make - that is the key.  Fancy pie charts and crap are far less helpful and meaningless without proper independent logging of your spending and income.

Monday, December 14, 2009

LIVE like a 20-year-old!

I got to thinking the other day (I do that sometimes) and it occurred to me that approaching 50 years of age, some of the "fun" seems to be lost in life. I watch my friends and acquaintances, most of whom are much older than me, and it seems they worry a lot about things. What happened to the good old days?

The few friends who don't seem to have this problem also seem to have no worries. They sort of drift through life, taking it as it comes, and don't waste a lot of time and effort on worry. Maybe they drink too much. I don't know.

But it occurs to me that what they have found (or never lost) is the ability to think and live young and to stop worrying so much about "things" or their "past" and "future". They are living for today and not worrying so much.

Do you remember what it was like to be 20? I do. At that age, just having a working car was a big deal, as was having food on the table and a six-pack in the icebox. We didn't have much, so we didn't have much to worry about. We didn't worry so much about the future, as that was a far-off event that we had plenty of time to deal with later.

Car insurance was expensive, so we bought a car for cash, if we could, and didn't bother with collision insurance - who needs it? If you wrecked your car (a highly probable event) we would just go and buy a another used clunker. Big deal.

And things like savings and life insurance? Well, you might be putting some money in your 401(k) but you never bothered much to look at it or worry about how it was doing.

Now granted, 20-year-olds do have a lot of bad habits and squander money on a grand scale. But they don't worry too much about things. They take it as it comes. If you can get back to that kind of mindset, it can eliminate a lot of worry from your life.

As we get older, the cost of things like collision insurance drop way off. Why? Because we are less of a risk. So we think, "this is a bargain now, I'll get it!" But what we fail to realize is that even at a bargain price, it is still not a good bet (and insurance is a bet - a gamble). You are far more likely to pay more in premiums than you get paid out in damages. Otherwise the insurance companies would be bankrupt.

We become more and more risk-averse as we get older. To some extent this is a good thing. We need to marshal our assets and protect them, as our capacity to earn money drops off with age. But many of us over-do it and become so risk averse that we end up spending more money than before and go broke in increments. We play it so safe, we end up in the poorhouse.

There really is no point in worrying too much about the future. Your future is pretty much planned out already. You will get older, if you are lucky, and you will get sicker and sicker and then die. Sorry to be the bearer of bad tidings, but that's how it plays out - every time. Worrying only accelerates the process, it does not enhance it.

My insurance agent tried to play on this fear. "You need disability insurance" he said, "And you should buy a nursing home policy."   The cost of these polices would have bankrupted me eventually, and likely never paid off. Yes, there is a risk bad things can happen. But lots of people have no such policies and do just fine. They figure something out. Yes, it means you have to tap into your savings. But when you get old, what are savings for? The disability and nursing home policies were more protection for my "things" (so I would not have to sell my home and investments) than protection for ME. It was fear-mongering and risk-aversion at its worst -and all for what? To protect a ranch home and a couple of cars?

So stop worrying whether you left the iron on. Stop worrying about getting old - it will happen whether you like it or not. Learn to get back some of that 20-something feeling. The folks who live the longest or live the happiest are the ones that never stop being a kid at heart.

Wednesday, December 9, 2009

Wither the LUXURY CAR?

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What is a Luxury Car anymore? And why do people buy them?

Historically, and by that I mean the dawn of the automotive age, automobiles were largely hand-built affairs, reserved for the very rich.

Cars were built to last, and often custom-built to the owner's specifications. A chassis would be purchased and then custom coachwork made to order. Owners were known to change coachwork on the car, sometimes seasonably ("Jeeves, put the roadster body on the Silver Ghost for the season!").

That all changed with the likes of Henry Ford and the assembly line, and the introduction of the disposable car. The Model T was not a bad car for its era. The genius of it lay in the fact that it could be bought, driven for a number of years, and then junked, all at a price that was affordable to the consumer.

Rather that pay mechanics high prices for repairs, the owners simply bought new cars. Cars can be assembled far more cheaply at the factory, on the assembly line, than they can be hand re-assembled in a mechanic's shop.

Initially, the luxury car market was not affected. If anything the profusion of cheap cars enhanced the luxury car market further. A rich person could still distinguish themselves from the unwashed masses by the sheer size, cost, and quality of their ride. Pierce Arrows, Duesenbergs, Packards, Rolls Royces, and the like were quality "investment" automobiles that were built for the ages.

But a funny thing happened. The automobile market changed and technology advanced. Driving a five or ten year old car did not convey much status, even if it was a high-end hand-built luxury car.

And as luxury car owners discovered, the unwashed masses were enjoying modern conveniences and also high reliability with their mass-market cars. A pedestrian Chevrolet was a far more reliable ride than a hand-built Rolls, and required a lot less maintenance. When the Chevy got worn and tired, you just junked it and bought a new one. And for the price of the Rolls, you could buy 10 Chevys. And moreover, you could own such a car and not have to worry or fuss over it.

Luxury car makers started to go out of business or merge with the mass-market makers. Today, only a few of the ultra-high-end makers survive as niche producers - and many of those cars use the pedestrian underpinnings of more mass-market vehicles. Depending on the era, a Rolls Royce might have Chevrolet or BMW parts in it, which is not a bad thing, as they can be very reliable parts - moreso than something hand-made in limited quantities.

So what is a luxury car today? In the 1950's and 1960's, makers such as Cadillac tried to distinguish their vehicles from the more pedestrian Chevies and Pontiacs and Buicks (which often shared the same chassis and major components) by adding more options and features. things like air conditioning, power windows and door locks were considered "high end" options that were usually standard on a Cadillac, but rarely found on the more basic makes.

Of course, that started to change as these features found their way into more mainstream cars. Like the heater, radio, and electric starter, which were once considered state-of-the art high-tech features, the power window, door lock, and air conditioning have become de facto standard features on all but the most basic of automobiles. Power seats, once a feature only of high-end cars, have made their way into basic transportation.

Makers like Cadillac tried to go to ever increasing extremes with gadgets and gimmicks. Twilight sentinal light sensors and outside temperature sensors. Most of these things were poorly made and broke easily. But today even such esoteric (and arguably less useful) features have been incorporated into basic cars. The cost of electronics is such that they are not difficult to install or add.

For the last three decades, overseas makers such as BMW and Mercedes have positioned themselves as "luxury" car makers in the US, often charging more for their cars here than they do in their home countries, where the cars are viewed less as exotic luxury marques than as everyday forms of transportation - even police cars or taxi cabs.

This trend started in the late 1970's. Until that time, in America, there were American cars, and "the imports". Companies like GM tried to sell their cars in graduated increments, "a car for every purse and person". You would start with a Chevrolet and work your way up through Buick and eventually, Cadillac. Or that was the theory, anyway.

Imports were largely grouped into one lump. Most were sold after the war to generate needed hard cash. By the 1970's however, the market had striated into two groups - the Japanese, who sold cars based on reliability and price (often accused of "dumping" to boost market share) and the Europeans, who struggled on both counts. By the early 1980's, most European makers were pushing "luxury" and status, or sporting ability over price and quality, as they could not compete with the Japanese on those levels.

So the Jaguar went from sports car to luxury car. And BMW went from "Sports Sedan" to "Yuppie-mobile". Even Fiat tried to trim their cars in leather and push the vehicle upmarket (with prices higher than a Cadillac for their tiny two-seat roadster!) - and failed. The French and Italians could not compete on the low end with the Japanese and in the high end with the Germans, and left the market entirely.

Those who did not move up-market got creamed. Volkswagen tried to compete with Japan with its "People's Car" Rabbit, only to see margins drop. The company acquired one of the worst quality reputations of any maker when they opened a plant in Pennsylvania (to try to trim shipping costs). It took them decades to recover, and when they did, they found that pushing the upscale Audi brand was a better move than competing on the low end. And even the low-end VW brand started selling larger and larger vehicles.

Quality became the new luxury. People started to complain about spending tens of thousands of dollars on upscale cars, only to see them incur thousands more in repairs. Meanwhile, their "poor" neighbors drove mile after mile in trouble-free Japanese cars that cost little to buy.

Thus, the Japanese jumped on the luxury bandwagon in the 1990's by offering "Luxury" versions of their products - some of which were merely thinly re-badged versions of existing cars. You can buy a Camry from Toyota, or the same car from Lexus, for thousands more.

Even the Koreans are getting into the act. Hyundai, once viewed as the ultimate purveyor of junk - warmed over Mitsubishis - has introduced a line of cars that should give BMW pause. As it turns out, there is no mystique to "German Engineering" and often Asian products are more reliable.

Even the most basic car these days has power everything and is available with alloy wheels and a leather interior.

So what is the point of the "Luxury Car" anymore? It begs the question. Spending $50,000 or $75,000 or even $100,000 on a car which has little in the way to distinguish it from a car costing half as much seems like a pointless waste.

But of course, that is part of the attraction. Many folks spend that kind of money simply to show that they can spend that kind of money (and imply, wrongly, that they have that kind of money to spend). It is a way of validating one's self-worth by trying to impress people you don't even know.

The German car makers are headed for trouble down the road, I think. One problem is that resale value on their cars is dropping rapidly, as the general public, while appreciating these vehicles, does not place a high premium on their value. As older cars, they can be staggeringly expensive for the average person to repair. As resale values drop, it becomes harder to get people into the new cars with attractive lease agreements.

And as our population ages, people will place less value on status and more emphasis on reliability. One neighbor of mine already has done this, trading in his BMW for a Toyota. He felt that at his age, the last thing he wanted to be doing is screwing around with esoteric car repairs. And I think he may be onto something.

Electronic gadgets may be fun to play with, but their attraction wanes rather quickly. And what was "state of the art" in electronics, ages rapidly. Trying to repair a 10-year-old built-in Nav system is an expensive nightmare. Meanwhile, the local big box store sells them as add-on units for $250. So what's the point of having all these electronic toys built-in to your car? Getting back to simplicity and reliability might be the trend of the next decade.

So, perhaps it is time to sell the BMW stock. The world's most profitable car company may be headed for some hard times ahead.

UPDATE:  We bought a fully loaded Kia Soul (Exclaim trim with the "whole shebang" package and nappa leather) for 25 grand.  Our friend with a used E-class coupe was blathering on about all the features of his car - panoramic sunroof, sound system, heated and air-conditioned seats, and so on and so forth.  He got madder and madder, as with each recitation, I said, "Oh, our Kia has that as well!"

So... what is a "luxury" car anymore anyway?  Just a status symbol that says you paid a lot for a car, is all, I guess.