Income for Life

The importance of systems

Posted by Rob Minton
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Just yesterday, I read a newspaper story about how the government's "Clash for Clunkers" program was a big hit with auto dealers and consumers.

And why wouldn't it be? Part of the government's stimulus package, it gave rebates up to $4,500 for trading in gas guzzlers for more fuel-efficient models. Good for consumers, who got even more attractive deals on cars, and good for the auto industry, which is struggling. On top of it, better fuel economy is good for the environment and might make us less dependent on oil.

Of course, the program now appears to be over. Just a week after it started. When it was one of the few stimulus items that was evidently effective.

The program is apparently being suspended over concern that funding is already running out. So many consumers have taken advantage of the offer that there is a backlog of transactions the government hasn't processed yet, and the $1 billion for the program might not be enough to cover what has already been promised. It appears the program was TOO successful for the government to handle all the transactions.

Now, I don't want to make any political statements, so don't take this the wrong way, but this is kind of typical of a government enterprise. They get an idea, they implement it, but then the execution gets kind of messed up. No matter what your opinion is of the whole stimulus idea, you should be able to see that something that appeared to be working has now gone awry.

The same thing happened with the loan modification program that was supposed to slow down foreclosures. The program was in place, the money was available, but banks didn't seem to all understand the requirements and there was a backlog of applications -- similar to the CARS situation -- big enough that, for a while, nobody could really put together enough data to tell whether the program was working.

From an article earlier this week from the Sun Times News Group:

A Government Accountability Office report released last week, for example, found “The lack of adequate documentation and specification of the assumptions makes it difficult to assess the reliability of Treasury’s estimates and, going forward, may hinder efforts to evaluate how well the program is meeting its objectives.”

There are two main lessons we can find these two programs' stumblings:

1. No matter how good a plan you have, how much money you have committed to it, or how fast you implement it, you have to have a system to execute it. It's true if you're running a business, or a government or your investments.

2. You have to track your results. The loan modification program for mortgages is a mess right now in part because there are hints that it isn't working, but not enough hard data to determine whether that's the case. So money is being spent continously on something that may or may not work. That's called "guessing." Systems are betting than guessing.

Often business, or investing or whatever, is about trial-and-error. That's fine, but without systems to execute or systems to track results, you can end up not having enough money committed to something that works and have a ton of money committed to something you are not sure of whether it works.

And that's where we are today.

Don't ignore signs this time around

Post written by Rob Minton
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A while back, I wrote a post about there being some signs of life in some real estate markets here in the United States, a possible sign that a market "bottom" might be in sight in some areas.

I wrote then that if you were thinking about trying to "time the bottom" in your market and invest in real estate, then it was time to get off the fence and get into action.

Well, the median home price nationwide has been creeping up a bit, and inventory levels are dropping, which could signal a coming price stabilization. I wouldn't go so far as to say it's here yet, as markets vary and some probably have a ways to go before bottom. But the fact that home sales have increased for three straight months is at the very least an indicator that buyers have, indeed, "gotten off the fence" to a degree.

In today's news, the Associated Press reported that a survey of Federal Reserve regions showed that there are signs of overall financial stabilization in some areas of the country. Is that anything to get excited about? Not really, but it's at least something to pay attention to.

But I wonder how many people will.

It's weird that during the real estate boom, when speculation and the euphoria of crazy rates of appreciation were wild, that people didn't seem to want to listen to those who were predicting a crash.

Some analysts saw the signs early and tried to warn people. Did everybody listen? No. Same goes for the stock market, as renegade analysts called the financial sector crash long before it happened. Did investors listen? Not really. Naysayers were brushed off, and it was as if the good times would last forever.

Had every investor paid attention to the signs then, not nearly as many people would have lost as much as they did. And here's the thing: If people don't heed the signs now, they will lose again.

Just as the doomsayers who predicted the crash were scoffed at back then, those who are pointing to signs of recovery now do so at the risk of sounding foolish. That's what I don't get.

When things were going well, nobody wanted to listen to anything that wasn't positive. Nobody wanted to believe that things could turn for the worse. But now that things are bad, it's as though nobody wants to listen to anything positive; nobody wants to believe that things are going to get better. It doesn't make sense to me.

It must be some kind of human nature thing -- when things are good we roll around in positivity. And when things are bad, we wallow in negativity. It seems as though we'd be better off if the opposite were true, and the best investors are the ones who are guarded when everybody else is giddy, and see the positive while everyone else sees the negative.

So ignoring the signs on the way down cost investors money. But I can tell you this: Ignoring the signs on the way up, and not participating in the recovery, will cost investors again.

Don't pay twice. Pay attention to the signs this time.

Five magical words

Posted by Rob Minton
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Now, it's no reason to celebrate just yet, but an Associated Press article today had an encouraging quote from the chief economist for the National Association of Realtors.

"The housing market is healing."

Five magical words.

The article reported that existing home sales nationwide were up 3.6 percent in June, ahead of what was projected, and the third straight month that sales rose. Three straight months of increases haven't happened since 2004, when the market was nearing its peak.

And Wall Street noticed the report. The Dow streaked past 9,000 points this morning for the first time since January 6.

It's no secret that the struggling housing market is one of two major keys to pulling out of this recession (the other is the unemployment rate). So the surge in investor confidence, especially since we're in the midst of a stock-market rally anyway, could have been expected.

What's unexpected to me is Yun's comment about healing. Even when there has been positive housing news to report in recent months, it's always been accompanied by a "yeah, but..." tone of caution. Considering that he's already come under fire from the media lately because of comments he made regarding "faulty" appraisals, it's a good sign that he's willing to make that statement.

Two other good signs from the report this morning:

1. The national median home price rose from about $174,000 in May to about $181,000 in June.

2. The inventory of homes on the market, which had hovered near an 11-month supply at one point, is down to about 9.4 months. Stability in the market is expected when it's at about seven months.

Do we have a long way to go before the market is healed? Probably. But the news today -- and the willingness of someone to issue those five magical words -- mean we're headed in the right direction.

The Creature from Jekyll Island

Posted by Rob Minton
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If you are an Income for Life Member, you probably read in your monthly newsletter that I believe inflation is a real problem we are facing. I wrote an article on this problem in the May issue.

Since then, I have had a fantastic book recommended to me: "The Creature from Jekyll Island," by G. Edward Griffin. The book explains the Federal Reserve system, which many Americans probably don't understand. The book's title comes from the island off the coast of Georgia, where the system was created in secrecy by some of the most powerful men in the financial world in 1910.

Here is a video I found, with Griffin explaining the Federal Reserve system and the problems it causes. It's long, but worth spending the time watching:

When the Federal Reserve basically prints money, which it is doing now, it devalues the money that is already in the economy. Griffin points out in the video that "The creation of money out of nothing has had a devastating impact on the purchasing power of the American dollar."

That's really what "inflation" is. It's not rising prices; it's a reduction in the value of currency that occurs when you have the same number of goods and services and a growing supply of money to go after them. As the U.S. government attempts to spend its way out of this recession, the money supply is expanding. Rapidly.

Griffin also explains fractional reserve banking, which is the term used to describe banks' reserve requirements. Since banks only have to hold one-tenth of the money they loan in reserves, the money that the Federal Reserve creates out of thin air is then multiplied when banks make new loans, further creating money out of thin air.

I believe inflation is going to be a dangerous byproduct of this recession. In fact, the aftermath of all this government stimulus -- the decreased value of the dollar -- could very well be the next financial disaster we face.

Scarcity strategy for wealth-building

Posted by Rob Minton
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Have you ever received a large check or deposited a lot of money into your bank account? Maybe you got a large tax refund, inherited a lot of money, or collected a nice profit selling an investment. What usually happens when this money gets deposited into your bank account?

IT MAGICALLY DISAPPEARS

I don’t know how it happens, but it always does. Things pop up that swallow your money. Your car may need to be repaired. Or some large medical bill arrives. Or a big flat-screen TV arrives on your doorstep.

I remember not to long ago, when I had paid off one of my rental properties. I decided to apply for an equity line on this property. I wanted to have the ability to buy good deals without going to a bank for financing. With the equity line on this property, I could simply write an equity line check instead of applying for a new loan. Sounds good, right?

Well, since this property was an investment property, the bank required me to draw a minimum of $15,000 on the credit line when it was issued. The title company sent us a check for the $15,000. This $15,000 was deposited into our checking account. Guess what happened?

IT MAGICALLY DISAPPEARED

I’m probably better than average with money, and it still disappeared.

This is a classic mistake and I’m kicking myself for making it. Yes, I’m human too. It's not a mistake I usually make, and there's at least one strategy I use to avoid it.

 In most cases, I create scarcity in all of my bank accounts. This includes my personal bank account, or rental property accounts and my business bank accounts. Each week, our bookkeeper sends me an e-mail indicating that our bank accounts are about to be negative. This is normal operating procedure for me.

I create scarcity in our bank accounts by sucking the money out of the accounts and storing it in interest-bearing money market accounts. OK, I admit, these accounts are not paying very good interest rates right now. But it's still a benefit, and it's simple In most cases, you can transfer money from your bank accounts to these savings accounts online in seconds.

Why do I do this?

For two reasons.

1. Obviously, the interest income is nice to receive. Even 1.5% is better than 0%.
2. To stop the money from disappearing.

If I were to leave the money in my bank accounts, it would magically disappear. Once the money is out of my accounts, it is safe and sound. I can’t spend it. Now, I do realize that I’m the reason the money disappears. You have probably heard the old saying …

We are our own worst enemy!

Well, it’s true. If you’re trying to lose weight, don’t put a chocolate cake on your counter. Same goes with money. If you’re trying to build wealth, don’t leave excess funds in your checking account.
When I first starting working in the public accounting firm, I got some really good advice from one of my mentors. He said, “Every time you get a raise, increase your 401k contribution.”

Now, I would rather put the money into real estate than a 401k; however, his lesson is very valuable. He basically was saying to invest ALL extra income. 

A raise should be a way to increase your wealth, not your standard of living.

What do you do with your raise? Do you spend it? Do you increase your standard of living by purchasing something on payments?

Don’t be like the majority of other people by spending all the money that hits your bank account. Suck that money out of your account and protect it —keep it out of your hands. Use scarcity in your bank accounts to keep your expenses down.

This might be a particularly important strategy in an economy like this one, when you're trying to keep expenses down.

She said what?

Posted by Rob Minton
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Have you ever heard of Meredith Whitney?

If you follow stocks, particularly financials, chances are you have. Whitney is now famous for "calling" the financial crisis, back before the big banks all crashed and burned. She first became well-known for writing a scathing, pessimistic report on Citigroup back in 2007.

She has stayed well-known -- recognition in Forbes, and Fortune, among others -- for her extremely bearish view on banks. Today, she shocked Wall Street by making a bullish call on Goldman Sachs, upgrading the firm to "buy." As I have written before, in this day and age of instant media, her comments sent the market surging.

Here is CNBC video of her comments:

Now, I'm not saying to go and run out and by Goldman stock, but I am saying that this is a telling sign of a possible economic recovery. Healthy banks will pull this economy out of recession, and to hear one of the biggest bank bears utter some optimistic words on banks is refreshing.

And if you are incredulous that one analyst's comments can move the market (the Dow is up over 1.9 percent for the day as I write this) check out her feature article in Fortune from August of last year.

What do you see?

Posted by Rob Minton
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In the county where I live, near the home of a person on my team, is a pretty visible symbol of this real estate downturn we're in.

It's a development that was to be three dozen or so residential lots, many of them desirable lakefront properties. Where homes were going to start in the $700,000 range and most likely surpass $1 million in some instances. "Villa Grande," it was to be called -- a gated community with lake views and access to a private beach club.

Today, it is little more than a sparse patch of land overgrown with weeds. Only two houses were ever built, builders' models, and only one was sold. The entire development is in foreclosure, and the developer went bankrupt. The once-glorious project is now a victim of the real estate bubble burst.

Here is what the development looks like today (click on the photo to see larger size):

     

The question is: When you look at these pictures, what do you see?

Many will answer that you see a deserted piece of once-prime real estate. Others might say it's a sad sight. But a few will look at this property and see opportunity.

Yes, things went awry for this project. Yes, it's in a bit of disrepair. But it's still lakefront property in an area where lakefront property is at a premium. It's going to take work and money, but somebody is going to purchase this property at a deep discount, and that somebody will be rewarded eventually. There are rumors, in fact, that the original owner of the land is attempting to buy it from the banks ... for less than what he sold it to the developer for a few years ago.

That is the kind of opportunity that is out there in this real estate market. It's opportunity for all of us, whether we're buying a nice single-family home or an entire gated community.

The question is do you see the opportunity when it's there?

Nine steps to financial independence

Posted by Rob Minton
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In the past, I have written about the book "Your Money or Your Life," by Joe Dominguez and Vicki Robin. The book is about how people trade their time -- their lives, piece by piece -- for money.

I highly recommend this book and cannot give it justice here. But I do want to share with you the nine steps for financial independence that were outlined in this book. If you are concerned about being dependent on a job, you need to read these nine steps.

Step One: Make Peace with the Past
Calculate how much you have earned in your life. Find out your total lifetime earnings — the sum of your gross income, from the first penny you ever earned to your most recent paycheck. What have you got to show for it? Find out your net worth by creating a personal balance sheet of assets and liabilities — everything you own and everything you owe.

Step Two: Being in the Present — Tracking Your Life Energy
How much are you trading your life for? Establish the actual costs in time and money required to maintain your job, and compute your real hourly wage. Keep track of every cent that comes into or goes out of your life.

Step Three: Where is it All Going? (The Monthly Tabulation)
Every month create a table of all income and expenses within categories generated by your own unique spending pattern. Balance your monthly income and outgo totals. Convert dollars spent in each category to hours of life energy, using your real hourly wage as computed in Step 2.

Step Four: Three Questions that Will Transform Your Life
Ask these questions on each expenditure category expressed in hours of life energy:

1. Did I receive fulfillment, satisfaction and value in proportion to life energy spent?
2. Is this expenditure of life energy in alignment with my values and life purpose?
3. How might this expenditure change if I didn’t have to work for a living?

Step Five: Make Life Energy Visible
Create a large wall chart plotting the total monthly income and total monthly expenses from your monthly tabulation. Put it where you will see it every day.

Step Six: Valuing Your Life Energy — Minimizing Spending
Learn and practice intelligent use of your life energy (money), which will result in lowering your expenses and increasing your savings. This will create greater fulfillment, integrity and alignment in your life.

Step Seven: Valuing Your Life Energy — Maximizing Income
Respect the life energy you are putting into your job. Money is simply something you trade your life energy for. Trade it with purpose and integrity for increased earnings.

Step Eight: Capital and The Crossover Point
Each month, determine what your monthly net passive income is from your investments. Post the monthly independence income as a separate line on your Wall Chart.

Step Nine: Managing Your Finances
The final step to financial independence: Become knowledgeable and sophisticated about long-term income-producing investments. Invest your capital in such a way as to provide an absolute safe income, sufficient to meet your basic needs for the rest of your life.

Feel-good story of the week

Posted by Rob Minton
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As I write this, I am looking at the Dow "ticker" on a financial web site. It's down 183 points right now, mostly because of news this morning that the unemployment rate in the U.S. rose to 9.5 percent in June, after a month of higher-than-expected unemployment claims.

To balance this downer, I am going to share with you a recession story that is more uplifting.

Where I live, in Northeast Ohio, one of the few bright spots in our economy is our vast and renowned health care system. The world-famous Cleveland Clinic is the City of Cleveland's largest employer. Last December, it announced a wage freeze and restricted hiring. The president and CEO even asked employees to do what they could to save the Clinic money, as that, in turn, would save jobs.

According to a Cleveland.com article this morning, the belt-tightening worked. The Clinic announced that beginning in August, it would start issuing pay raises to its employees. The move will amount to $60 million in salary increases, and it comes after a concerted effort by the company's employees to cut costs.

From the article:

Physicians began booking more appointments during the day, giving up research and office time. Catered lunches turned into brown-bag gatherings. Overtime was cut, positions went unfilled and vendor contracts were renegotiated, a Clinic spokeswoman said.

On Wednesday, [Clinic CEO Toby] Cosgrove said it was "a pleasure to recognize those efforts."

"I am incredibly proud of each employee and physician who committed themselves personally, to doing what was necessary to reduce expenses so we could preserve jobs and provide great care to patients," he said in an e-mailed statement.

The company also restricted travel and delayed expansion projects on two buildings. In an era of recent corporate excess, this is a true company success story.

Not long ago, we had to read about private jet trips that CEOs of bailed-out automakers made, and about the huge bonuses Wall Street heads accepted while their companies either went under or were propped up by our tax dollars. So, to me, this news of a concerted effort by this region's largest employer to cut costs TOGETHER, from the top to the bottom, is truly inspiring.

Everybody made an effort -- brown-bagging lunches, working harder during business hours without overtime -- and the company flourished. Revenues went up even as costs went down, and now Cleveland's struggling economy should benefit as the largest employer's personnel all receive a little more money in their pockets.

Who says a business can't prosper in this economy?