Saturday, July 16, 2016

Borrowing Money from Yourself at Interest

It's good to have a budget, as you can read elsewhere on this blog.  It's also good to include saving in that budget.  If you save carefully, you can do some pretty cool things later on in life.  I've been saving for 15 years including paying down my previous mortgage so that it was almost paid off in 13 years before we sold the house.  Combining these two disciplines created opportunities I want to share with you so that you might catch the bug and become more disciplined yourself.

Between our savings, and the equity in our old house, we wound up with some pretty healthy deposits after we moved into our new house.  Due to the healthy amount, and my credit union having a special rate the day I showed up with our check, we are getting above average returns for the duration of the certificate.  How much isn't important, if you find yourself with a large sum in savings not making much interest, shop frequently for good deals on CD's, especially those that don't penalize you for partial withdrawals so that the CD can function as a safety net should you need the money in an emergency. Whatever you get, make sure you pick something with the best interest rate you can find.

This provides you a little swagger if you go shopping for a newer (used of course) vehicle.  Allow me to explain.  I had decided last winter that the small and efficient car I had got a great deal on last summer was just too small for me.  The wheelbase was making for a rough ride and my neck was having trouble as a result of a blow to the head on the same vehicles hatchback. So I decided I would need something with a smoother ride.  This summer, I finally settled on a 2014 half-ton pickup truck.  The money in my CD more than covered the price of the vehicle, so when I got to the dealership, I simply told the sales manager: I can pay cash for this truck today, or I'll let you loan me the money if you can get me an interest rate like this: and I gave him a number a half percent below what my CD is paying.

Naturally, they wanted to write the loan and make the sale, so they were able to find an interest rate exactly like I requested.  It just happened to be with my Credit Union, but I could have guessed that knowing they had been running competitive specials on car loans all summer.  The important thing is, I walked in with nothing more than what I wanted to put down on the truck to get the payments I wanted, and drove off with the truck, while my safety net money is still sitting in my CD.  The best part: I'm making interest, half a percent, while paying back the car loan.  I'm practically borrowing my own money, and making interest while doing so.  Pretty sweet deal.

I mentioned at the beginning of this article that it's good to have a budget that includes saving.  Currently, I'm not saving all that much because of one other neat thing I was able to do due to years of discipline. To make my monthly truck payment, all I had to do was reallocate my budgeted savings, which comes out of checking automatically every month, to my truck loan.  My net operational income that I pay bills, tithe, and use as play money hasn't gone down at all, all I have done was started saving at a lower level than I had been.

This isn't rocket science, it's delayed gratification and honestly a great way to experience financial freedom as a direct result of financial discipline.  You can do it, you just have to start with the basics and keep cracking on until you are where you want to be financially.  You might wonder if this violates my first principle in my Basics series: don't have debt.  Actually, if you go back and read that, you'll note that this lines up precisely with points 1 and 2. I'm not spending money that I don't have, and I'm making money on the money I borrowed. Happy budgeting!

Thursday, April 28, 2016

Level Billing on CNG a good deal?

Brought over from my G+...

Did you get an offer in the mail for level billing on your monthly gas bill that promises to save you money?  It just might, this year.

According to the US Energy Information Administration, we are on the tail end of a slide to historic low prices for dollars per million BTU's delivered gas.

You might look at this chart and conclude that level billing would be a losing proposition for you, which would be true if the price continues to slide.  But, there are signs it can't, and so to determine if this is a good deal for you or not, you'll need to do a little math.

First those 'signs' I mention.  With prices so low, the industry is feeling pinched.  Their operating capital and profit comes from the price they can charge customers for their product.  The lower the market price (more supply) the less profit for them.  Eventually, apart from what might be (wrongly) ascribed to greed, the basic economics in a very mechanical sense provide a buffer on production due to the cost to operate wells, compress and transport the fuel.  Put another way, I can't run at full production output when the profit only pays for half production output.  So it is likely that production will decline this year, decreasing supply towards late fall, and making the prices next fall and winter begin to climb out of this trough.

Now the math you'll want to do is pretty simple but you need to get all of your gas bills for the past 12 months together.  You want to figure out the total ccf you purchased and the total dollars you spent on all of these.  Then you will want to compute your personal average cost per ccf.  You want to look at a year's worth of data because any given month you may have paid more or less per ccf.  If the level billing (sometimes called flat billing) offer you get is a nickle or more less than what you paid last year, you are in a good position.  You will certainly save money over last year.  The worst you can do is not save as much if the market prices stay at historic lows, which isn't terribly likely.

Sunday, November 29, 2015

Peeling the Onion: The Mexican Oil Boom

I was driving my oldest down to stay the night with the grand parents and we had some time to talk.  As usually happens, the conversation turned to economics.  This happens with surprising frequency when I have time for discussion with the kids.  In this case, the issue of government control versus the free market came up.  Wanting to present a look at both with an pretty even hand, I chose the Mexican oil boom and subsequent collapse of the Peso.

The first stop on our journey was an example from this case history where government regulation can be helpful.  Mexico bet heavily on oil, so much so that there were no production limits.  With no production limits in place, producers produced as much oil as they could pump out of the ground.  This had the effect of lowering the global price of oil, which harmed every economy that relied on oil as a source of income, but was particularly hard on Mexico which had borrowed to finance their rapid expansion of production capacity.

So in this simplified but accurate example, we can see a need for government regulation.

But, peeling the onion a bit, let us back up and look at what really was happening.  Was free market exuberance really to blame for the troubles Mexico faced once the price of oil began to react to the nearly doubled rate of production?

Let's consider the source of the money used to finance the expansion.  In this case, Mexico borrowed from other countries.  This created a scenario where the value of the currency used in an economy, generally correlated to the GDP of the given economy, was dependent upon the return on investment of the money borrowed that must be repaid in that same currency.   Said more simply, the notes Mexico took and promised to repay would be directly affected in terms of value by the ability of the Mexican economy to remain stable.  Mexico, under this scenario, had an incentive to weaken their own currency as it would tend to reduce the impact of paying back these loans.  For governments, this is no problem except for the fact that it is most certainly a problem for people living under said government trying to live on said currency.  When currency values slide, the cost of living goes up.

So, broadly, government intervention was the root cause of the bust that followed the Mexican oil boom.  More to the point, government abuse of the power to borrow and then poorly manage things was the root cause.  What this helps us to see is the destabilizing influence a government can have on free market activities.  Let's suppose Mexico had never borrowed money to finance the expansion of oil production capacity? What limiting factor would have existed on their natural expansion rate?  Market Demand.  The free market with its ability to self regulate through supply and demand would have prevented both the oil production boom in mexico, which drove oil prices downward globally, and would have prevented the subsequent bust caused by a resulting inability to repay debts, because there would have been no debt.

The full series of mechanical linkages that caused the collapse of the Mexican economy are more detailed and complex than presented here, but as an example of whether we should look to more government regulation or less, this helps give a clear view that some regulation is needed, but usually as a direct result of some other influencing factor, like government subsidies, interest rates set by central banks, or other decisions made outside the natural bounds of the free market.

This is not to say that all decisions made by the free market, collectively, are always good and wise.  But the one thing the free market has going for it that no government will ever be able to duplicate is the speed with which the market self corrects and adjusts to new circumstances.  It may be very messy, large businesses may go bankrupt, but that is the cost of freedom that must be accepted as a risk factor if we are going to invest in large businesses which we have no real direct control over.  So, we can have very little regulation and assured ups and downs, or government regulation and assuredly see wide sweeping unintended consequences affecting huge sectors of the economy across many nations.

Thursday, April 16, 2015

Algorithmic Impact: Aggregation

Reposted from my G+ page once I realized it belonged here.  And, my apologies for the lack of posts to this blog over the last few years.  Life has been keeping me busy!

I awoke this morning with a simple half dream where a list of numbers was shown to me, representing an aggregate score.  I immediately recognized upon waking that there was a problem represented in this dream and my mind ran down through several scenarios where data aggregation has been misused by accident, and abused by design.  But it's not all bad.

First, what's the problem with data aggregation?  You might easily see that it obscures the details.  While that is the point, the obscuring of supporting details can hide valuable and meaningful information.  I have a project under development presently that provides some good examples of this: time entry and reporting.

Let's say I have two employees who have both logged 40 hours this week.  Just looking at that aggregate number, 40, I can't tell much about how that time was spent.  Did one employee come in late every day but then stay late to make it up?  Did the other work late to meet a deadline Wednesday and then knock off early on Friday?  Do these things matter?  They might matter, they might not, but the point is simply that their meaning is lost through the process of aggregation.  

Let's look at something that impacts nearly every American, your credit score.  How is this score derived?  What rules and measures are used?  If I rely upon your credit score as a measure of your credit worthiness, is that a good thing?  The abstraction of details into an aggregate score means I don't know a great deal about you.  The credit score provides a fairly anonymized way of presenting you as a number that I can infer my own value judgments upon.  But is this a good thing?  Are you comfortable with that?  You may say yes when your score is good, and no when it is bad.  Whether it is just or not, it is computed by rules set by someone, perhaps kept secret, and rightly or wrongly provided as a service to those who need to get to know you quickly to decide whether to do business with you.  It's the cost of doing business if your business includes taking out loans establishing credit cards.  But it has also been used to screen renters, students and customers to decide if there is some bias free way to weed out bad customers.  Here, the judgment of the aggregate data has a real impact on human life, just or not. 

So as a merit, aggregation provides an abridgment of tedium.  In doing so, as with the case of the credit score, it buys for us expediency in commerce, but it comes at the cost of clarity  which is an imperfect, impersonal representation of data lacking in deep understanding of our circumstances and recent efforts to perhaps repair damaged credit.  We can't tell from a timesheet how hard someone worked and we can't tell from a budget how well it has been followed.  We can't tell from a savings account balance how frugal or unlucky someone is. 

Aggregation, to be sure, is a shortcut with real value, but it slips neatly into a category of summary knowledge that enables lazy thinking.  It provides a seemingly scientific footing for ill founded assumptions that lack a cognisance of the detailed algorithm used to arrive at a particular aggregate number.  A wholly ignorant man can speak with authority and mastery he does not possess, and nevertheless be correct in the speaking of the number itself, and yet completely wrong in what merits or demerits he attributes to or derives from said number... and horrifically, an uninformed and dispassionate audience would be none-the-wiser.  And therein lies the danger of aggregation.  In seeking to provide a good by publishing such information, we enable evil by the looming masses of idle minds, desperate for some measure of recognition of their imagined intelligence.  

So, use great caution in both the creation, presentation and consumption of statistics and data presented to tell a narrative.  As we tell our children when they go to put something in their mouth they found on the floor: "you don't know where that's been", or the implicit reason for not accepting candy from a stranger: "you don't know where it's from or what it contains".

Wednesday, January 28, 2015

Insured Deposit Accounts (FDIC)

It seems that many folks these days confuse the presence of a promise with the ability of that promise to be kept.  Just because I tell you we're going out to lunch doesn't mean I can pay the bill.

A more commonly accepted-at-face-value promise is the FDIC, or the Federal Deposit Insurance Corporation. FDIC was created to negate panic triggered runs on banks.  Since all modern banking is fractional, if we all asked for our total deposits at one time, there would not be enough currency in circulation to pay everyone back.  To prevent this sort of mass hysteria, the government implement the FDIC, which at the time sounded like a good idea and in fact was a stop gap for consumers against banks failing.

However, the FDIC was in crisis mode just a few short years ago when a number of banks were on the cusp of failing.  It could perhaps absorb the failure of a few regional banks, and did back in 2008, but the strain placed on the system then led FDIC to establish stress-testing standards for banks of all kinds that places a further cost burden on those banks, forcing some of them to deleverage their fractional lending and reinforce their cash liquidity.   Meanwhile, the Fed has so retarded interest rates, notably the prime lending rate, that Banks can't pay any reasonable savings to depositors, and their margins on what they lend out are the slimmest they have been in some time, making their failure more likely, or at least diminish their ability to provide that cash to depositors.

Credit Unions are viewed as a better choice, but they have the same mechanism, a federally backed insurance program, the National Credit Union Administration.  Same program, same pitfalls, same guarantees.

But most people don't need to worry about this since your average person lives from one paycheck to the next, never setting aside any emergency funds of any kind.  Only the frugal and the farsighted need be concerned, and if you're one of those, you probably know enough not to put all of your proverbial eggs in one basket.  Diversify your wealth and any single tremendous upset will only perturb a portion of your estate.

A good personal plan for diversification, if your means allow would look like:

- Cash on hand: Enough to cover a month or two of living expenses at market rates

- Cash in the bank: just enough to cover your insurance deductibles and one months worth of bills.

- Physical commodities on hand - that which you or those in your immediate geographic area will need (and that you can use for barter).  Think beans, bullets and bandaids.

- Own your home, or some land, clear of any mortgage or lien if possible.

- Reliable foreign currency, preferably in cash.

If you choose to invest, you choose to gamble, which is foolish, but if you want to and can't think of anything else to do wiht your money, mix it up.  

- municipal bonds

- penny stocks if you want to day trade, fortune 500 if you want to invest for the long term

- sovereign debt

- commodity contracts

Some safe-guards:

Obviously, don't put it all in one place.

If you can't stand in front of it and physically defend it with a gun, you don't really own it, so anything fitting that description should be considered gambling if you choose to engage in that.

Don't mouth off about what you've got.  I only tell people what they can discover in public records. I own land, I almost own my home, I have bank accounts.  If you make it known you're a prepper of any description, you're making yourself a target.  Not wise unless you relish the prospect of the above.

Thursday, October 9, 2014

Recommended Reading: Long Wave Cycles

If you're interested in a bit more historical take on finance, and would like to understand more about our current situation economically, this is a lengthy but interesting read.  I'm not through it myself yet but at about a third of the way through, it became clear that it's something to be shared.  I'm indebted to Jeffrey Schwartz for sharing the link via Google+.

The consequences of the economic peace

Monday, April 21, 2014

The Free Market Wins

My family partook of the typical Easter egg hunt yesterday at the request of the children.  We usually do not setup this event around our house unless we're at the Grand parents where it was a tradition.  In our home, my wife and I have tried to shed some of the trappings around the holidays that distract from the meaning of the event being observed.  Two things motivate this, an aversion to things that create clutter and a desire to elevate meaning and reflection over things that promote greed and consumption based happiness.  We are firm believers that joy is found in Christ, and that happiness is fleeting.  The emphasis is on a strong foundation which provides a joyful outlook which produces conditions for happiness. Teaching our children to follow this path is not without challenges, but often the challenges provide opportunities to educate.

My usual anxiety with an Easter egg hunt is the emotions that swell when children are sent out to scavenge on the day of our Lord's resurrection to find the most loot.  Bickering, complaining, crying... bleh!  But I decided this year, since the children put the work into coloring the eggs with only a tiny bit of help on mixing the dies, and since they requested it, we would have an egg hunt.  My wife even hid the eggs and some sweets in the front yard so all I had to do was sit back and observe.

It wasn't long before the youngest had found about 9 of the dozen dyed eggs and the oldest had found 7 of the 8 sweets.  Tears flowed at the injustice and the oldest proposed a limit on how many eggs you could gather.  My ears perked up.  I asked: "do you propose forced equality?"  It took a while for that question to process on the receiving end and the sentiment took even longer to fade, but the desired effect was had.

Shortly after that, the youngest was bemoaning the injustice that the oldest had the majority of the sweets.  I re-framed the situation to help them think it through. "So you're competing in the market place and your opponent is better than you at finding sweets.  What is it you would propose to make things better for you?"  I got a quick reply (our youngest human-in-training is a sharp one) "Make a rule that [oldest] can't stay out in the yard as long."  

My somewhat triumphant reply came quickly: "Do you know that you just embraced crony capitalism?"  Blank stare. "You just petitioned the government to make a law that favors you and punishes your competition.  Is that what you want?" Deep thought ensued.

Both of these exchanges turned tearful wailing into some personal reflection, which was better than I had hoped. The best part, in my mind, was the last exchange we had.  

Sitting in the living room, the issue of who had how much of what came up again.  So I proposed a scenario to put it in perspective for them.  To both: "When you have an oversupply of something, you have more than you need.  That means you can sell some of it for something you want or need."  Eyes lit up.  To the youngest: "what price would you set on your surplus eggs?"  The oldest piped up with an offer "I'll trade you 1 sweet for 3 eggs". Hastily, the youngest accepted the deal.

I pointed out that they had just negotiated and executed a contract. Whatever, Dad.  My wife was delighted that I inserted some economics education into the midst of the moaning and whining. 

I'm starting to see two things as I get older.  As a parent, every struggle our kids face is an opportunity to learn.  What they learn from their struggles is up to us to provide and shapes their character.  The second is as the title suggests - the free market provides the answers to a lot of struggles.  Moreover, when you apply Biblical truth in how we should treat one another - Love God with all your heart mind and strength and love your neighbor as yourself - you can derive good, fair answers that are the right answers from free market principles.  

I believe this goes to show that we can apply the same approach to more issues with broader scope if we could let go of the things we cling to, like overly large and complex legal codes and behemoth governments to execute them.  The Bible and the free market provide simple and straight forward approaches to dealing with life.  If we all were committed to peaceful coexistence and creative problem solving, I think the need for many of the burdens and shackles we willingly accept would diminish greatly.