Failing Health Insurance Cooperatives and the Future of Obamacare

Utah’s nonprofit health insurance cooperative, Arches Health Plan, recently announced it is shutting down.  This is the 10th health insurance cooperative (10 out of 23) to close their doors, citing lower than expected enrollment as the culprit. Billions in federal loans were made to these health insurance cooperatives for the purpose of providing a non-profit, credit union-like alternative to profit centered health insurance companies, under the theory that by removing the profit motive, health insurance cooperatives would be able to pass on their savings to policyholders. Unfortunately, those funds loaned to the now  shuttered co-ops are gone forever. (These failed co-ops should not be confused with the very successful health care sharing ministries (HCSM’s)). These closures were highly predictable. When the Affordable Care Act (ACA) was signed into law on March 23, 2010, it was a political victory but an economic disaster. Now that we are entering Obamacare’s third year, the full weight of what happens when policymakers ignore the tenets of basic economics are unfortunately starting to appear.

Because we understand the law of gravity, we know if we drop an object from a height it will fall towards the Earth. Similarly, because we understand the principle of adverse selection and the laws of supply and demand, we know that if not repealed or drastically adjusted, the ACA will ultimately end in failure.  Here is the sequence of events I wrote about in another blog back in July of 2012 before the implementation of the ACA that predicted some of the outcomes we are observing today:

(1) The ACA will increase the per unit cost of healthcare for everyone.
(2)  Some fortunate Americans will see their increased premiums subsidized by their neighbors, giving those subsidized the illusion of a cost reduction.
(3) Some unfortunate Americans will see astronomical increases in their health insurance premiums and income taxes.
(4) Healthy middle class Americans will eventually drop their expensive coverage and opt to pay the less expensive “tax.”
(5)  Insurance companies will incrementally leave the health insurance market until the whole scheme fails.

While governments can pass laws to suspend gravity or change the speed of light, they will fail because physical laws are unaffected by human desire. Health Insurance operates by certain economic laws in the same way matter follows physical laws in the natural world. According to the economic laws of supply and demand, if you increase the demand for a good or service and the supply remains constant (or decreases), the unit cost for that good or service will increase.  Good intentions can’t change this economic reality. Predictably, the ACA is increasing  demand for health care by entitling unhealthy, expensive patients to unlimited access. With state insurance commissioners  recently announcing premium increases of 5-35% across the nation, we will begin seeing rational, healthy, and inexpensive patients dropping their expensive health insurance policies by opting to exercise one of the several insurance mandate exemptions  allowed by law, or by paying the cheaper “tax” instead. The ACA magnifies the insurance problem known as “adverse selection,” where only people needing immediate health insurance buy it. Adverse selection is pushing  the cost of health insurance to astronomical levels. Using price controls and federal subsidies, the ACA attempts to prevent insurance companies from raising their premiums, making the sale of health insurance a losing proposition (too few healthy people paying in, and too many sick people making claims). As we are seeing with health insurance cooperatives, for profit health insurance companies are also exiting the market due to their inability to run profitable businesses under the ACA. Losing health insurance providers will eventually lead to reductions of quality as well as access to health care.
When governments violate economic laws by artificially holding down the price of a good or service, they inadvertently reduce the supply of that good or service. In the early 1970’s the government set the price of gasoline below market equilibrium, and the supply dropped overnight because gas station owners refused to sell gas at a loss. The same thing has happened historically with rent control. Whenever government uses its coercive powers to hold down rent prices below market equilibrium you get a predictable reduction in the number of landlords willing to rent property at a loss. We are now observing the identical experience with health care; governmental price controls are reducing the number of health care providers resulting in rationing and an erosion of health care quality and access.

Under the ACA, the unit cost of health care is rising for everyone; but, the cost increase of insurance premiums for lower income citizens is paid by someone else, giving the voting poor the illusion that the ACA has driven down costs.  If Citizen A is currently paying $400/month for health insurance that costs $400/month, but on 1/1/2016 he is charged $200/month for insurance that costs $500/month, Citizen A will think the ACA reduced the cost of health insurance when in reality someone else will be saddled with the increase. Unfortunately for Citizen B, he will experience a health insurance cost of $800/month; $500 for his own insurance and a $300  tax increase to subsidize his neighbor.
pull quote 2Whereas government subsidies and price controls almost always lead to increases in the unit costs of regulated goods and services, free markets allow unit costs to drop for all Americans. The unregulated costs of Lasik surgery, laptops, digital watches, and flat screen TV’s have dropped in unit price for EVERYONE. There has been no cost shifting for the aforementioned items, but instead universally experienced cost reductions in real terms for all Americans.  Poor people and rich people can buy a flat screen TV for prices much lower today than they could 10 years ago. The same can’t be said for the over-regulated health care market. The free market brings unit costs down and drives quality up for ALL consumers. Because the ACA has removed most of the free market forces that drive costs down and quality up, nearly everyone is experiencing higher costs per unit of health care and a simultaneous reduction in access and quality.

Many of the ACA’s supporters are claiming the law is a resounding success. They state that millions of people who once were denied health insurance because of pre-existing conditions or expensive premiums now have access to it. What the ACA’s supporters don’t admit is that millions of different Americans are rapidly finding health insurance so unaffordable they and/or their employers are dropping coverages due to unaffordability. Insurance programs don’t survive when unhealthy, expensive people sign up to buy at the same time healthy, inexpensive people are leaving.

While it is true the American health care system is in need of a complete overhaul, the Affordable Care Act is not the answer. Due to the immutable economic laws of adverse selection and supply and demand, the ACA, is failing, When the ACA does fail, I hope we learn from our mistakes and consider using free market solutions that have reduced prices and increased quality and access wherever free markets have been allowed to operate.

Investing in Real Estate

I have been in the finance business for 20 years, and I personally own rental properties.  I understand the concept of using real estate to help save for retirement, but I would caution anyone before using leverage to accumulate wealth, whatever the investment may be.

Real-Estate-Investment-Principles-KeyI know several people near retirement age who own investment properties with mortgages that are “underwater,” meaning the owner owes more on the mortgage than the property is worth.  As a result, their prospects for retirement look grim.  In the early 2000’s, many people bought real estate with borrowed money, either as their primary residence or as an investment property.  Even though home prices have bounced back since the real estate market crash of the late 2000’s, many mortgages, and not just those on investment properties, are now “underwater,”

That leaves many people who own investment properties in an unenviable situation: sell the property at a loss and pay the difference in cash if they can afford it, or rent it out at monthly rates that in many cases are lower than the mortgage payment.  Both options lead to a financial loss.

One third ruleWhen asked about rental property as an investment, I tell clients to consider the “1/3 Rule”: no more than 1/3 of your net worth in your residence(s), no more than 1/3 of your net worth in rental real estate or illiquid businesses, and at least 1/3 of your net worth in liquid assets like cash, stocks, bonds, mutual funds, etc.  Like stocks and other investments, real estate can experience dramatic price declines. It is nearly impossible to buy only a small amount of real estate (i.e., $10,000 or so), and selling property isn’t as quick and easy as calling your financial advisor and placing a stock trade.  If you decide to buy investment real estate be careful not to become “real estate rich” and “cash poor.”  When the economy goes sour, cash is king, so always keep a little hay in the barn for emergencies. With proper diversification, an investor has options and won’t be forced to sell real estate and other investments at a time not of their own choosing.

I discourage investors from using borrowed money to buy real estate unless they are sure they can make the necessary payments or pay off the mortgage. Could your spouse go back to work if you lose your job? Did you make a large enough down payment (20% for a home, 30% for investment property) that you could sell the property without being underwater on the mortgage? Leveraged real estate deals have a way of being perfect storm magnets. I know folks who not only made their living in real estate, they also speculated on real estate deals, losing both their jobs and future retirement funds in the 2008 real estate crisis. Inevitably, the same time real estate values are dropping, both you and your tenant are bound to lose your jobs.
If you are interested in buying investment real estate, then I urge you to follow the 1/3 Rule  as well as the WealthMasters Milestones.  Be mindful of not owning too much of any one type of investment, or using excessive leverage to reach your retirement goals.  Buying rental properties with borrowed money can easily become a nightmare if you find yourself pinched. If your properties lose value, the lenders are going to expect you, not the renter, to make good on your mortgage payments.

There Is No Such Thing As Free Tuition: Who Then Must Pay For It?

Many politicians view the world through a  “normative” lens. Normative statements often include the words “ought” or “should.” This is in contrast to viewing the world through a “descriptive” lens, which explains how things actually are. Case in point is higher education.  Several candidates are hitting the campaign trail stumping for “free” college education. While it would be nice to offer “free” college, the reality is there are no free educations in the natural world. Someone must pay, and the challenge is determining who will ultimately be handed the bill.

History has demonstrated that whenever the federal government provides citizens something for “free,” the actual cost of that good or service rises faster than the rate of inflation. Additionally, the quality of that good or service tends to go down commensurate with the level of government subsidy received. Public education, health care, and even the food we buy at the grocery store are all heavily subsidized, and their costs have risen much faster than the rate of overall inflation.

Young people who support the idea of universal college should also ask themselves whom should be saddled with the responsibility to pay for it. Historically, the most productive people have been those between the ages of 25 and 55, so it isn’t a stretch to assume they are the ones who will be saddled with tax burdens to pay for other people’s “free” educations.

It doesn’t make sense to support programs that unnecessarily raise the cost of education, which must then be paid primarily by 25-55 year olds. It stands to reason that when governments offer 18-22 year olds “free” college, they will eventually pay for their artificially raised tuition via a lifetime of increased taxes. It is economically wiser for young people to support policies that will keep their current college expenses AND future taxes lower, as they will eventually leave the ranks of the subsidized and enter the ranks of tax payer.


I enjoy debating ideas on social media, and a topic of particular interest is economic inequality. A surprising number of people are convinced the economy is rigged in favor of the wealthy class.  I believe this is an inaccurate depiction of reality. Having professionally helped hundreds of people over the last two decades move from the lowest wealth quintile to the highest quintiles, I have observed the game IS rigged: in favor of those who don’t think poor. In this article, I’ll explain exactly what it means to “think poor” and how to stop.


The majority of the people I encounter who struggle financially are perfectly capable of being prosperous, but they have the wrong mindset about money and their personal finances.  They “think poor.” And, to paraphrase René Descartes, they think, therefore they are. In fact, for the person of average intelligence and ability, I believe prosperity is 80% mental attitude and only 20% mental aptitude.

EXCUSE TENNISA crippling effect of thinking poor is fixating on obstacles rather than opportunities. When I counsel poor-thinking people, they often prefer playing the game I call “excuse tennis.” Excuse tennis is played whenever someone shares with me their goals, but every time I offer a suggestion to increase their odds of achieving them, they knock down the suggestion with an excuse. For example, let’s say someone wants to increase their income, so I recommend they seek different employment that offers higher income opportunities. Once I send my recommendation “over the net,” they volley it back with an excuse such as: “I really like my current job,” “I don’t want to move,”  or “I would need to go back to school first, and I don’t have the money.”  When I return their excuse with a recommendation to sell some toys, get a temporary part-time job, or start a small business to come up with extra money, they declare their toys too important to be sold, they don’t want to be a slave to work, or their health or pride won’t allow them to engage in physical labor. People must stop playing excuse tennis if they want to escape poverty.   Focusing exclusively on problems prevents us from dedicating our full attention on solutions resulting in lost opportunities. .

Another trap of poor-thinking is trying to achieve immediate prosperity with borrowed money. Benjamin Franklin once said: “The second vice is lying, the first is running in debt.”  Debt is not now, nor will it ever be, your friend.  When you are in debt, the money you earn does not belong to you. You simply work for two masters rather than one, and you keep less of your earnings for doing so.

A third trap of poor-thinking is comparing one’s circumstances to others instead of  contending with one’s own circumstances. The person who fixates on the man who has more is wasting valuable time and energy that could be better spent on activities capable of creating and obtaining financial security. I have a friend I see regularly who is frustrated by how much others have, and his envy makes it virtually impossible for him to see his own opportunities for improving his economic situation. When one man makes $20,000 per month and another only one-tenth as much, it does the lower paid man no good to concern himself with the higher paid man’s income, how he spends it, and thWealthMasters Milestonese level of the higher paid man’s compassion and generosity. By following the WealthMasters Milestones of avoiding debt, and staying gainfully employed, even the modestly paid person can achieve financial security over time.

Insanity is often defined as doing the same thing over and over again and expecting different results. To improve one’s situation it is important to adopt a lifestyle of self-improvement. It’s easy to see what’s wrong with others, but self-improvement is much more difficult. The first step in shedding poor-thinking is committing to make tomorrow better than today. Once this commitment is made, goals can be established for improving one’s spirituality, physical health and nutrition, relationships, intellectual growth, and personal finances, and an action plan can be developed to ensure activities are completed in pursuit of these established goals.

Self-improvement requires courage, especially if one’s most intimate social circles are also caught in the traps of poor-thinking. Successful people tend to enjoy assisting others who are pursuing success, and most communities have more mentors than there are people seeking their help. Good mentors can be found in most churches, local chambers of commerce, or even within one’s family, but it takes courage to ask for help.   I have mentored dozens of young people over the years, and I am often frustrated that more haven’t been interested in being mentored.

Anytime someone embarks on a path of self-improvement and personal growth, there will be hardships and challenges. Poor thinkers succumb to these hardships, even though most obstacles can be overcome with perseverance.  By enduring difficult times, we become stronger and more experienced, and over time the obstacles seem smaller and less obstructive. When times get tough, seek out mentors who have endured similar challenges on their own paths to success.

poor thinkingMost success takes place between the ears. For those who are tired of the trappings of poor-thinking: 1) stop playing “excuse tennis; 2) avoid debt; 3) stop fixating on what others have; 4) commit to a plan of self-improvement; 5) seek out mentors; and 6) practice endurance when things get difficult. When we stop “thinking poor” and start actively working towards positively change in our lives, we position ourselves to obtain financial security and human flourishing.

Can Bookkeepers Live With Spenders?

166008950 [Converted]-editIn a typical marriage, there are usually two types of people: one spender and one bookkeeper.  This is not always the case, but since we tend to marry our opposites, chances are if you’re a spender, you married a bookkeeper, and vice versa.

Spenders, see financial security differently than bookkeepers.  To the spender, earning a regular income is seen as financial security.  As long as there is a paycheck and someone else pays the bills, they are content to keep spending. .

The bookkeeper is the opposite.  To them, financial security is money in the bank.  Each bill is carefully analyzed to minimize the effect it might have on their bank account.  The bookkeeper wants to protect the balance in the account at all costs, and marriage to a spender-who shows no appreciation for the mathematics of spending less than is earned-can be extremely stressful.

When a bookkeeper is married to a spender, the spender often spends money or assumes a financial obligation, and then drops the bill off with the bookkeeper for them to deal with it.  The bookkeeper at some point feels pressure to confront the spender to stop them from spending, but they oftentimes prefer to avoid such confrontations. Spenders often incorrectly assume they are earning more than they are spending, and when confronted about excessive spending, they can accuse the bookkeeper of poor bookkeeping.

Much of the time, the two different philosophies balance each other out.  The spender gets what they want and the bookkeeper gets what they want, so long as there is a working relationship between the two.

But when that working relationship breaks down, financial chaos can—and most likely will—ensue.

So what can be done to maintain a healthy working relationship?  The spender needs to sit down with the bookkeeper and understand the finances.  Typically, the spender just knows when the money comes in and then spends it.  The bookkeeper then has to make sense of that spending and make sure it’s sustainable.

Ultimately, there needs to be a calm, rational conversation about savings goals and what level of spending will support those goals.  I recommend spender and bookkeeper spouses sit down with one another at least once a month to discuss the family finances. This will ensure the spender sees what the bookkeeper is seeing. WARNING: The spender needs to maintain a level of interest and empathy for the bookkeeper’s role during the meeting; bookkeeping is more stressful and important than the spender usually realizes. The bookkeeper shouldn’t attack the spender, and the spender shouldn’t accuse the bookkeeper of being a financial “buzz kill”.

Remember, if you’re married to your financial opposite, it’s a partnership, not a war zone.  Bookkeepers aren’t magicians; they can’t create money out of thin air to cover the spender’s expenses. Make a budget that allows for spending but also allows for savings.  I also recommend that both the spender and bookkeeper be allocated monthly Mad Money that allows each spouse the ability to spend (or save) without acquiring the permission or involvement of the other.  Mad money alleviates a lot of marital financial tension; make sure it is large enough to alleviate stress but small enough to ensure all family financial goals and obligations are met.

Yes Virginia, spenders and bookkeepers can live under the same roof, and truth be known, they probably should.

Image credit

Mad Money: Spending Money Without Getting Permission From your Spouse

marriage money-saidaonline“I am 40 years old; I don’t need to get permission to spend money on myself!”

Over the years, I have seen marriages fall apart as both spouses spend money on expensive items the family can ill afford.

We know one couple where the husband went out and bought an expensive home entertainment system and the wife retaliated by buying fine bone china and a complete dining room set; they aren’t married any more.

Every family’s income is finite, and most couples agree on the majority of their expenses (i.e., mortgage, gas, groceries, etc.); however, couples will often fight over items where they don’t share passion. The husband may want a hunting rifle, but the wife might enjoy buying clothes. It can be stressful to ask your spouse to allow you to spend family money on things they don’t find valuable. The solution to this challenge is “mad money.”

Mad money is a line item in your family budget, and every month it gets funded in the same way as  food, housing, utilities, etc.. Think of Mad Money as an allowance.  Each month, you fund, say, $100 each.  That money can be spent  by each spouse on anything, no questions asked.  If the wife wants to buy an expensive pair of shoes or wants to go out to eat with friends, so be it.  If the husband wants to use part of that money getting a sports pay-per-view channel or upgrades for the engine of his muscle car, that’s no problem.

Money carries with it great emotional weight.  We see money as our key to doing just about everything, and not having money essentially means we can’t do the things we want, be that buying new shoes, eating out at a restaurant, or seeing a movie with friends. When your budget does not allow for these impulse purchases, it can lead to stress.  I’m sure any married couple can recall at least one argument over the number of shoes a wife continues to buy, the amount of money a husband spends hunting trips, etc.  These often result from one spouse seeing the other spouse’s purchase as frivolous.  Mad Money solves this issue.

That’s the beauty of Mad Money.  It forces people to prioritize what they actually want, while letting them “waste” a little on trivial things that we all are guilty of wanting.  And the best part is, since Mad Money is in the family budget, you can spend every penny without any guilt and without having to justify your purchase to anyone else.Getting-married-Dont-fall-for-money-myths-BN106A2H-x-large

In short, buying things we want can be cathartic, but without planning, it can easily break the most carefully-planned budget.  Mad Money ensures you are spending within your means while giving you all the emotional release of getting things we want without having to get permission.

Aristotle And The Friendship Of Virtue

One of my favorite books is Aristotle’s Nichomachean Ethics, and it is second only to the Holy Bible as my most often used reference for how to live an excellent life.  Awhile ago the weather was particularly nasty,  so I spent the afternoon thumbing through Book VIII, which is Aristotle’s treatise on friendship, and I jotted down a few notes. Recently a friend remarked on Facebook he is doing a study on friendship and he was soliciting for some resources, so I sent him the following.

Aristotle believed that friendships could be broken into three different types: (1) friendships of pleasure; (2) friendships of utility; and (3) friendships of virtue. While each type of friendship involves individuals displaying goodwill and decency towards each other, the reason why each type exists differs greatly.  Aristotle suggests that  understanding what a friendship of virtue is and how to experience one is an important element of a life well lived.

Children_marblesThe first type of friendship is that of pleasure. The friendship of pleasure is based on the foundation that some individuals simply enjoy each other’s company. As children, it is much more fun to play in the sandbox with someone else that it is by yourself. Adolescents and young adults enjoy spending time with one another, and mutual interests are often the magnets that draw them into a relationship. Sometimes it is a sports activity, a school club, a particular genre of music, or simply two individuals who feel better in each other’s company that draws two people together. The single purpose of friendships of pleasure is the enjoyment each party takes from the relationship. Because this type of friendship requires both parties to experience satisfaction, friendships of pleasure usually end when the pleasure diminishes. Aristotle suggested that friendships of pleasure are often found in adolescents, but I believe many adult friendships are centered on pleasure alone. This is a major reason why so many American marriages end in divorce.

Aristotle called the second type the friendship of utility, but I will call it the friendship of “usefulness.” The friendship of usefulness is based on the mutual profit both individuals gain from the relationship. This is the type of friendship we often experience in the marketplace, where we are gracious with the city clerk because we believe civility will encourage the clerk to help us, and the clerk is pleasant in return so we won’t complain to her superior. We also practice friendships of usefulness with our co-workers, believing it is better for all parties when we act decently towards one another. While we 1024px-Zonaspace-coworking-collaborationmay actually enjoy each other’s company, friendships of usefulness only last as long as the need for mutual gain. If the city clerk retires and no longer provides us service, we don’t go out of our way to maintain the relationship. Likewise, while many of us like our co-workers, we don’t usually spend our leisure time with them in addition to our work hours. Aristotle believed friendships of usefulness were demonstrated most often by older adults such as, individuals entwined in a business deal, neighbors sharing a common property line, or the relationships between supervisors and employees. Like that of pleasure, friendships of usefulness are based on what individuals take from the relationship.

The last type of friendship Aristotle describes is the friendship of virtue. Friendships of virtue are experienced when two individuals enter into a relationship for the single purpose of bringing good to one another. Unlike friendships of pleasure, where the goal is to experience enjoyment, or friendships of usefulness, where the goal is to achieve mutual profit or peace, friendships of virtue focus on the well-being of the other person. Pleasure and usefulness are often experienced in friendships of virtue, but they are merely incidental. Friendships of virtue are focused on what the parties bring, rather than take, from the friendship.

It's_all_about_loveAristotle explained that friendships of virtue can only be practiced by people of excellent character.  He believed that at least one person in the relationship had to be habitually virtuous and the other person must possess the potential and willingness to be virtuous.  Even in friendships where the virtue of the parties is unequal, the willingness of the more virtuous to teach and share with the less virtuous results in the increased happiness of both.  Like parents who love their children, or mentors who guide their protégés, the givers profit from the relationship as much as the receivers.

Friendships of virtue are the highest form of friendship.   When two individuals covenant to help one another towards excellence, the benefits are extraordinary. While friendships of virtue are certainly magnificent, Aristotle laments that they are also extremely rare.  People are lucky in their lifetimes to experience even one friendship of virtue. This is due in part because most people regrettably are not virtuous.

Although rare, friendships of virtue are not nonexistent.  In my community I am surrounded by excellent people who are engaging in friendships of virtue.  There are husbands and wives striving to out-serve one another. I know mentors who selflessly teach their charges to be excellent, and I worship with people who give more than they take from their relationships.  While it appears at first glance that such relationships are drudgery, the result is the exact opposite.  Excellent people engaging in friendships of virtue are happier and more content.  I consider myself fortunate to have so many examples of friendships of virtue to observe and emulate.

Years ago I had a pastor who regularly taught us that:

“Love is the demonstrated preference for the well- being of another, above ourselves, even at great personal expense, with the help of the Holy Spirit.”

This definition of love I believe is the quintessence of the friendship of virtue, and I believe Aristotle would approve.

The 1/3 Rule: How to Organize Your Estate For A Stress Free Retirement

Too much of a good thing can rapidly become a bad thing, and  I have noticed investors entering retirement with too many assets they like and not enough assets they need. This is why I created my “1/3 Rule” for helping clients identify a target allocation for their retirement assets.

Here is the 1/3 Rule:One third rule

1) No more than 1/3 of estate’s value in “user assets.”
2) No more than 1/3 of estate’s value in illiquid assets like rental properties and/or business holdings; 3) At least 1/3 of estate’s value in liquid investments like cash, stocks, bonds, mutual funds, retirement plans, annuities, etc..

For many Americans, their most valuable retirement assets  are their “user assets,” which include primary homes, vacation homes, automobiles, campers, boats, etc.. User assets are things we own and use, they have values and can be sold, but they generally don’t create income for us in retirement. In fact, I usually treat user assets as liabilities because they cost money to own and operate them.   There are several reasons why people tend to accumulate too many user assets in retirement, and here are just a few: 1) it is preferable to eventually own our homes than be lifelong renters; 2) the tax code provides several  incentives for owning a home but none for renting; 3) HOMEhome prices have appreciated over the last several decades as interest rates have been falling; and 4) we have more time and money on our hands when the kids grow up and leave the nest, and we can quickly accumulate campers, boats, snowmobiles, vacation properties to fill the void.  If we are not careful, we could end up in retirement with 80% or more of our net worth tied up in user assets. This can cause a real retirement pinch if we are living on a fixed income of social security and a possible pension but our property taxes, insurance, and maintenance costs continue to increase while the values of our toys decrease.   In order to enter retirement with minimal stress, I  recommend clients  aim for no more than 1/3 of their net worth allocated to their homes and toys.
Some of my clients have successfully owned small businesses and rental properties during their working years, and because they are familiar with both, they often end up having a large percentage of their net worth in these mollys_front_w_wraptypes of enterprises. This  can cause problems if the economy turns sour near a planned retirement date , especially if a business or a rental property must be sold in a hurry.  Additionally, businesses and rental properties can be a real hassle to pass on to heirs who must manage or sell them, especially if the investments and/or heirs are located outside your state of domicile.  Because these types of investments can be illiquid, (difficult to sell),  I often recommend retired clients  keep no more than 1/3 of their net worth in businesses or rentals.

Finally, I encourage clients to shoot for having no less than 1/3 of their assets in liquid (easy to sell) investments such as cash, stocks, bonds, mutual  funds, etc. by the time they retire.  I suspect the main reason why people retire with too little in liquid assets is they are too easy to convert into cash in a pinch. When people need money for a kitchen remodel or a daughter’s wedding, it is much easier to sell $30,000 of stock than it is to sell $30,000 of a rental property or a piece of your home.  If people are not careful, they can end up with too much money invested in their homes or savingsbusinesses and not enough in income producing liquid assets. Unfortunately, many people got caught up in the real estate bubble in the early 2000’s, and they found out in 2008 how dangerous it could be having most of their net worth invested in businesses and real estate and too little in liquid assets.  To avoid this danger, be sure to invest in your employer’s retirement plan,  your own IRA’s, or in self-directed investment accounts such as those offered at Coco Enterprises.

For young investors, it is not unusual to have most of their net worth in their homes or their businesses; however, I recommend they keep an eye on their net worth statements to ensure they  don’t become under-invested in liquid investments. Like steering an aircraft carrier into a harbor, it is easier to steer your retirement assets towards the 1/3 rule if you start making your adjustments well before you are at your destination.  If you are a business owner, start planning an exit strategy, and if you own rental properties, be sure you aren’t too heavily invested.   If you need guidance on how to use the 1/3 rule to reduce stress and uncertainty in retirement,  give us a call to schedule an appointment.  We can help you develop a plan to organize your assets to ensure your retirement will be as good as you imagine.

Incorporate a Healthy Diet into your Healthy Budget

USDA food costsIf you are one who follows a monthly budget, no doubt a majority of your expenses come from the food items in your grocery cart. Monthly stock up trips are punctuated by weekly if not daily grocery runs for the forgotten item or the perishable items that need to be used right away.

The USDA publishes a monthly food cost report, which provides a snapshot of the typical cost of food for households of different sizes, individuals, and spending levels.

You can use this report as a guideline for setting your food spending level.

When buying food you need to keep your priorities in check. If you stick to these 4 guidelines you will have a healthier wallet and waistline:

Priority 1: Nutrition: your food choices should focus on nutrient dense foods consisting of high quality proteins, vegetables, fruits, whole grain carbohydrates, good fats ( those with polyunsaturated and monounsaturated fatty acids) fiber, vitamins and minerals. The USDA recommends making ½ your plate fruits and vegetables at each meal, at least ½ of your daily intake of grains whole, and choosing from a variety of protein sources including seafood, beans and peas, and nuts as well as lean meats, poultry, and eggs.

Priority 2: Cost versus Value. Be careful where you put your money. That bag of chips or 16 pack of soda on sale is a marketing tool known as a loss leader used by stores to bring you inside. Keep in mind buying nutrition is your first priority; therefore, put your dollars towards getting the most bang for your buck nutrition wise. To fight the urge to splurge on junk food when you see it on sale, have a list of nutritious alternatives with you when you go grocery shopping that will give you the will power to resist the marketing pressure.

seasonal eatsPriority 3: Flavor. Being cost-conscious does not necessarily mean sacrificing flavor. Fresh is best. Buying fresh fruit and vegetable items that are seasonal will deliver the most flavor to your tastebuds with the lowest impact on your wallet. Go in with another family and buy a whole cow, or if you enjoy fishing, bring home your fresh catch. With a little bit of imagination, anyone can eat great tasting food that is packed with nutrition void of additives.

Priority 4: Convenience: Rely less on preservatives, hidden sugar, and fat-laden prepackaged and frozen foods. While quick and convenient, you are paying for the processing more than the actual nutrients derived from the food. Cook from scratch more often; control your ingredients; and cook in batches that you can freeze and save for another meal later.

Many Americans have their priorities inverted. They choose foods that are convenient and tasty, yet they sacrifice their finances and health in the process; however, with the above priorities in mind and your nutrition needs forefront, you can be assured you are feeding yourself and your family optimally.

How Does Greece’s Money Problems Affect US?

1628271-1424185220617286-AlphaIdeasIt seems like every day I come to the office and look at the news there is a story about Greece and how it is affecting our markets. With an economy only 1.4% the size of the United States, how does Greece obtain so much interest? Today I want to illustrate three reasons why tiny Greece has become so important in market news lately.

The first reason why Greece’s financial woes are affecting world markets (including U.S. markets) is because of fractional reserve banking.  Most of the world’s financial systems operate using fractional reserve banking. This is a complex system where central banks actually create money out of thin air.  For example, If you were to deposit $100,000 into your local bank, through fractional reserve banking,  potentially $900,000 of new money could be lent out to borrowers. If the bankers were to loan this new $900,000 out to borrowers who don’t pay back the loans, the prudent depositor would be justifiably concerned about his $100,000 deposit.  Similarly, this is what has happened throughout the European banking community. Millions of European citizens have made deposits into European banks, and the banks lent some of those funds created through fractional reserve banking to Greece. If Greece doesn’t pay back their loans, it can have a catastrophic cascading effect on the safety of millions of European deposits.

While Greece isn’t alone in having a national debt problem, their situation appears to be worse  than most other western 1200x630_298422_greece-peaceful-anti-austerity-rally-icountries. With an annual economic output of approximately $238 billion, the Greek government owes over $360 billion to various lenders, such as the International Monetary Fund (IMF), The European Central Bank (ECB), the European Financial Stability Facility (EFSF), and various other European financial institutions. Since the global financial crisis of 2008, Greece has been pressured by its many lenders to adopt austerity programs, which is a fancy term for:  “Stop spending more than you collect in taxes!” The lenders want to get paid, so they are demanding Greece reduce its public spending and raise taxes on their citizens. The Greek government is arguing that prolonged austerity will lead to a reduction in  their economic output making tax collection more difficult. The citizens of Greece have been less than enthusiastic about reductions to their government pension checks or liberal social entitlements, and being a social democracy, they are voting accordingly. As a result, Greece has threatened to default on its loans. If they do, it will have a catastrophic cascading effect on the integrity of the European banking system.


The second reason why Greece is so important is there is little consensus on how Greece should be treated if they default on their loans. If they are treated with kid gloves, other countries (such as Italy, Spain, and Portugal) operating under similar lender imposed austerity programs, may choose to default as well.  While the European banking system might be able to absorb Greece’s default, it might not be able to absorb multiple defaults by nations whose citizens have grown weary of living under austerity. The final concern of a Greek default is the strengthening of the U.S. dollar relative to the euro. As investors and governments continue to lose faith in the Euro out of fear of a Greek default, they have been flocking to buy U.S. dollars. When the demand for U.S. dollars increases, so does its price in currency exchanges. While a strong dollar is good for tourists vacationing in Europe, it is horrible for any American company that wants to sell their goods and services there. All other things being equal, American companies will find their prices less competitive in Europe if the dollar continues to get stronger relative to the euro. If American companies see a decline in their exports to Europe they will experience lower profits and declining stock prices.
Investment markets hate uncertainty, and the actual impact of a Greek default is difficult to predict. Whenever markets experience uncertainty they tend to react with pessimism.  In the short-term, Greece’s financial problems could have a negative effect on U.S. stock prices; however, history has shown that individuals and nations rarely focus their attentions on fixing small problems until they become big ones, and it isn’t usually until big problems become crises that we actually demonstrate the resolve necessary to implement distasteful solutions.  Therefore, a Greek default might actually be the catalyst for long-term positive change in central banking protocols.