Jonathan Clements's Blog, page 218
April 12, 2022
Ride of a Lifetime
In almost 50 years of owning vehicles, I have bought just one car that was almost fully impractical. It had a shallow shelf of a trunk. My wife couldn���t drive it because it had a stick shift. More than a few times, I had to start it by pushing it down a hill, jumping in and popping the clutch. It was frequently at the mechanic���s shop.
But it was all worth it when the thing was running. My 1984 Volkswagen Rabbit convertible, also called a Cabriolet, had a peppy five-speed transmission with a 1.8-liter engine. It was a cool car���one you might see a young person drive.
I turned age 39 the year I bought it, but I wasn���t in the midst of a midlife crisis. I was a year into a new job and a new city. My wife was expecting our second child. It was an exciting and fulfilling time in my life.
We needed a second car after spending a year managing with just one vehicle, a fairly new Honda Accord. We had paid off the Accord with proceeds from the sale of our previous house. I wanted to continue to avoid car payments, so I had just $2,500 to spend.
I don���t recall how I found it, but I soon owned the German-built Cabriolet Wolfsburg edition. The seats were cloth and leather. The steering wheel and the gear shift were wrapped in black leather.
During the five years I owned it, the car often had engine problems. A mechanic told me it was because my Cabriolet was among the first to have fuel-injection instead of a diesel engine. I don���t know if that was true, but I know it was a lot of fun to drive���when there were no problems.
Being relatively light and with good horsepower, the car could accelerate quickly with the help of the five speeds. This was my fifth car with a standard transmission, so I knew how to get it to perform.
Five years after I purchased the Cabriolet, we bought a slightly used Dodge minivan, and we didn���t need three vehicles. It was time to let go of my sporty ride. I sold it for $2,500, what I had paid five years prior. Of course, over those five years, there were lots of repair bills. Still, I have no regrets. We should all own at least one vehicle in our life that���s more fun than practical.
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Our Chosen Road
We favor a different strategy���one that suits our family but certainly isn���t for everybody.
My wife���s No. 1 priority is that her vehicle be reliable. She insists that every time she gets in the car, it starts and delivers her to where she needs to be, with no worries along the way. To maximize the chances of that happening, we buy her a new car every eight to 10 years. She gets to drive a car largely under the manufacturer���s warranty, plus today���s cars are very reliable over their first decade.
I then get her old car, and continue to drive it until some major mechanical problem crops up or the body rusts such that it���s no longer structurally safe. Once one of those things happen, she gets a new car and I once again take over her old car.
This system certainly isn���t for everybody. The second driver of the car ends up with a car that���s eight to 20 years old. The final few years can be rough. The driver of the older vehicle better view a car as transportation only���because some of the amenities will stop working and won���t be worth replacing. If my wife���s heated seats stop functioning, we���ll get them fixed. If they stop working in year 10 or 12, they���re liable to stay not working.
The second person also has to be willing to live with the occasional minor malfunction, like the fuel pump failing or a radiator hose bursting. I can almost guarantee that these things will happen on a dark road at 2 a.m. or when you���re running late for an important meeting. They virtually never happen just as you pull into the garage after grocery shopping.
A 16- to 20-year-old car with major mechanical issues has low or no resale value. Still, buying a new $40,000 car and driving it 20 years comes out to a reasonable $2,000 per year. That���s the same as buying a $35,000 used car, driving it for seven years and then selling it for $21,000.
My brother Larry has calculated the savings I���d get by buying my wife a three-year-old car and driving it until it���s 16 to 20 years old. He tells me that I could have saved tens of thousands of dollars doing that instead of buying a new car. My response: Buying a new car makes my wife happy, and we���ve been happily married for 37 years, so I���m okay with the math.
The only time I���ve ever been slightly apprehensive about our car-buying strategy was when I was a young engineer. We were returning from a plant review, which involved several vice presidents. There was an extra seat on the company jet, and they asked me if I���d like a lift home. I jumped at the opportunity.
As we landed, two vice presidents mentioned that they'd gotten a ride to the airport and needed a lift back to the office to retrieve their cars. Everybody else on the flight was going in a different direction, so I reluctantly volunteered.
I was driving a rusty Chevy station wagon at the time. I threw the two child car seats into the back and swept the loose Cheerios onto the floor mats. These two VPs didn���t come up through the engineering department. They came up through marketing. They wore Armani suits and had watches that cost more than my car. They both hopped in. We talked business the whole way to the office. They both thanked me profusely for the ride���and never gave me a hard time about the car. For that, I am eternally grateful.
The best story I���ve heard about driving an older vehicle is from the brilliant actor and filmmaker Mel Brooks in his book All About Me! Brooks was parking his beat-up Honda Civic in the studio lot when Frank Yablans, who had run Paramount Studios and was now a producer, pulled in next to Brooks. Yablans was driving a Rolls-Royce with a leather interior. He looked over at Mel and said, ���Mel��� I���ll never be big enough to drive a car like that.���
Our car-buying system isn���t designed to minimize costs���and it certainly isn���t for the couple where both spouses dislike uncertainty. But it can be a reasonable compromise that allows a family to purchase a new car every so often.
Kenyon Sayler is a retired mechanical engineer. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. Kenyon's brother Larry also writes for HumbleDollar. Check our Kenyon's earlier articles.The post Our Chosen Road appeared first on HumbleDollar.
April 11, 2022
Time to Settle Up
Back in the days before technology made transferring money so convenient, did you ever let a tab run both ways with a friend? Perhaps you were traveling and decided to take turns paying for meals, and then settled up any difference at the end of the trip. Just by looking at the cash that changes hands when it���s time to settle up, you wouldn���t know whether every meal had been a pricey fine-dining experience or gas station sushi. All you would know is whether you did a good job of taking turns paying and keeping the difference low.
Ditto for your tax refund or the sum owed.
Your total tax liability is a convoluted function of many factors���certainly the amount of income and the deductions that reduce it, but also the types of income, the corresponding tax rates that apply, and the credits that reduce your tax bill dollar for dollar. In many cases, the applicability of these factors depends on your income level���because some of them gradually phase in or out.
The big question is, how well have you been taking turns paying throughout the year with your friend, the IRS? How did you complete your Form W-4 Employee���s Withholding Certificate? How much withholding did you have on retirement plan withdrawals or annuity payments? If you had income from investments, asset sales or self-employment, did you make quarterly estimated tax payments and, if so, how much?
It���s tempting to look at the tax brackets, find your marginal ordinary rate and think that tells your tax story. But even tax brackets tell an incomplete story. The only way to know your true tax burden is to divide your total tax minus any credits (Form 1040's line 24 less any credits included on line 32) by your taxable income (line 15). That'll give you your effective tax rate.
April 15th���18th this year���is simply the one day each year that you settle up with the IRS. If the cash flow on this day is small, that means you accurately predicted how things would fall out. That���s great but not always possible. If it���s large, maybe there were surprises or maybe you chose to wait as long as possible to pay. My approach: I try to get my withholding reasonably close to my total tax owed. But I don���t sweat it.
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What Gold Watch?
I have several friends and colleagues who are bucking that trend and instead delaying their retirement. They���re financially set but concerned about the transition from fulltime work to ���doing nothing.��� Yet some of these same workers are also struggling with changes in their companies and industries. The stress is making them feel as if they���ve had enough.
My wife has two former colleagues in this situation. Both women are successful executives in health care. Both are retirement age and trying to figure out if they���re ready to quit. One tried to switch her schedule to part-time. She found she never actually stopped working fulltime, so she went back to fulltime status. Both women are married and their husbands are already retired.
Their employer has gone through significant change in the past five years, including acquisitions, mergers, teaming with a private equity firm and leadership changes. They���re finding that their experience, skills and knowledge are less valued by the new leadership.
This can create a quandary for someone close to retirement. You may be financially ready to retire, but not mentally, and yet your job situation is hinting it���s time to get out.
I saw this happen numerous times over my last decade at my former employer, Lockheed Martin. New leadership brings in new ideas and organizational structures. Some of it was driven by the government, which was our primary customer. Some of it was driven by changes in technology.
The result was that many successful senior employees quietly left. They weren���t as valued any longer. It was sad to watch a successful colleague leave under less than glorious circumstances.
In my last management position, I oversaw the winding down of one of our largest systems engineering programs. It took a few years and, by the end, we had let about 50 people go. Some were able to find new jobs within the company, some found new jobs outside and many quietly retired.
For about 12 months, we held a weekly goodbye luncheon for those leaving that week. We all got farewell fatigue. The mood was somber.
Having watched my friends and colleagues leave, I tried to prepare myself for my turn. My last day was March 31, 2017. I was one of the last to leave the program. They scraped together a mix of employees for a brief farewell lunch.
When I had a chance to say a few words, I expressed gratitude for the interesting and challenging work, and for the many wonderful, intelligent people I���d worked with. And I sincerely meant every word of it. But later, it was hard not to think of it as an inglorious way to exit. I honestly would have preferred to leave quietly.
I have no solutions to offer for this quandary, except to recommend that folks start preparing for their retirement as early as possible. I put lots of time and energy into making sure my wife and I were financially ready. But I put much less effort into preparing mentally and physically for retirement.
One important step is to make an honest assessment of your job, your skills and the likelihood of working for as long as you want at your current employer. Stopping work���especially work that you enjoyed���is a big transition. When it comes about not because of your choice, but because of someone else���s assessment of your value, it can be doubly hard to accept. My advice: Prepare as best you can���and do so as early as you can.
Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.The post What Gold Watch? appeared first on HumbleDollar.
April 10, 2022
Yielding to Reality
Meanwhile, over the past 12 months, home prices are up 19.2%, as measured by the S&P Case-Shiller U.S. National Home Price Index. That figure doesn���t reflect price changes since January, so we need to use other data to gauge whether the real estate market is cooling.
Both Zillow and Redfin report robust home-price appreciation for the 12 months through February. At 20.3% and 15.8%, respectively, those barometers still don���t capture the dramatic rise in borrowing rates over the past handful of weeks.
Conventional 30-year fixed-rate mortgages are priced off the 10-year Treasury yield. Currently, the 10-year note is at 2.71%. Historically, the 30-year mortgage rate averages about 1.7 percentage points above the yield on the 10-year note. That implies an expected home loan interest rate of 4.5%. The spread is higher than normal right now, much to the chagrin of those in the market for a mortgage. The rapid rise in market interest rates might be spooking lenders. Also driving the higher spread could be the Federal Reserve���s plan to shrink its mortgage-backed securities portfolio.
The 10-year Treasury yield was near 1.7% on March 4. In just 25 trading days, it has skyrocketed to above 2.7%. On a percentage basis, that���s the most dramatic move in at least 40 years. Real estate price trends should be fascinating���and sobering���over the next few months.
All of this, of course, means a big hit to housing affordability. Hot off the presses on Friday was February���s housing affordability index from the National Association of Realtors (NAR). Affordability is the worst since 2008. Imagine what the report will look like two months from now when the surge in mortgage rates gets factored in. Bank of America Global Research expects the NAR affordability index to post a record 30% year-over-year drop.
What will this mean for the consumer? Perhaps retail sales will be pressured by the rising cost of servicing mortgages, though presumably those higher costs will only affect current home buyers and those with adjustable-rate mortgages. We���ll get a fresh read on consumer spending in Thursday���s retail sales report. Another potential shift is an increase in renting, as the cost of owning continues to march higher.
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Wrong Number
One reason: The stakes are often high, so mistakes can be costly. A second reason: By definition, all data are historical, but all decisions are about the future. To the extent that the future doesn���t look like the past, we have a problem.
Those two factors are very real. But there���s a third reason financial decisions can be frustrating: Many of the numbers that we rely on to guide our decisions can be confusing, inconsistent and sometimes downright misleading. Below are the five instances I���ve encountered most often.
1. IRA distributions (Part I).��I remember speaking with a fellow who had recently turned age 70. His plan, he said, was to delay collecting Social Security until age 72 so he could maximize his benefit. This revealed a key source of confusion for retirees. Until a few years ago, investors were required to begin taking distributions from tax-deferred retirement accounts at age 70��. That aligned, more or less, with the age at which Social Security benefits hit their maximum, which is age 70.
But under new rules, required minimum distributions (RMDs) from retirement accounts don���t need to begin until age 72. Meanwhile, the Social Security rules are unchanged. Benefits still hit their maximum at 70. While the change to the RMD starting age benefited many investors, it also introduced confusion. And the rules may change yet again: Congress is now considering moving the RMD starting age to 75. If you���re in your late 60s or early 70s, you'll want to keep an eye on these rules.
2. IRA distributions (Part II).��For investors who dread RMDs, there���s a handful of solutions. One is a qualified charitable��distribution��(QCD). This allows you to make a contribution to a charity directly from you IRA. You don���t receive a tax deduction for your generosity. But it counts toward your RMD���up to $100,000 per year���without registering as income on your tax return.
Those features all make QCDs a great strategy for investors with sizable IRAs. But there���s a quirk in the rules: As noted above, RMDs don���t need to begin until age 72. But you can start QCDs, if you wish, at age 70��. You don���t have to wait until 72. Why would you make a QCD earlier? One reason: If you have significant tax-deferred IRA balances and charitable intentions, this would trim the size of your IRA, thus reducing future RMDs.
3. Life insurance premiums.��If you���re like most people, when you receive a bill, you pay it. There can be a wrinkle, though, with whole-life insurance policies. It may be that the premium shown on the invoice is not the actual amount due. This could be for one of two reasons.
First, the amount on the invoice might be an artificial number chosen by the insurance agent, at the inception of the policy, to help build up the policy���s cash value. If that���s the case, you might be able to pay less than the amount shown on your invoice.
A second possibility: If you���ve been making extra payments like that for a period of years, it may be that your policy is now at a point where it���s self-sustaining. In other words, the dividends from your accumulated cash value might be sufficient to cover all of your future premiums. That would allow you to stop making payments entirely. Every policy differs, of course, so you���ll want to consult your agent and check the numbers carefully. But it���s important to keep in mind this possibility���that the amount ���due��� may not actually be due.
4. Marginal tax brackets.��Some financial decisions hinge on an evaluation of your marginal tax bracket���if, say, you���re considering making a large charitable contribution or a Roth conversion. But unfortunately, our tax code is so immensely complex that a taxpayer���s marginal tax bracket isn���t necessarily the income-tax rate that applies to the last dollar of income. This is an inconsistency that can bedevil both working people and retirees.
For retirees, the key drivers are Social Security and Medicare. Social Security benefits are only taxed above certain income thresholds. Similarly, Medicare���s income-related monthly adjustment amount (IRMAA) surcharges only apply above certain income thresholds. But the effect is the same: As your income approaches various levels, the next dollar of income can cause a very significant jump in a retiree���s overall tax rate. In certain cases, just an��extra penny��of income can cost you far more than that in taxes.
For those in their working years, the tax thicket is even worse, thanks to the mix of tax credits and deductions that phase out as income rises. As a taxpayer���s income hits those phaseout levels, the effective marginal rate can jump significantly���far in excess of what a simple tax bracket analysis would suggest. The solution: If you���re doing tax planning, I suggest using a comprehensive tax calculator or a tool like TurboTax that will factor in the myriad variables. If you���d like to learn more about this topic, CPA and author Mike Piper provides more detail in��this article.
5. Bond rates.��Suppose you were choosing between two bonds from the same issuer���identical in every way except that one carried an interest rate of 5% and the other 3%. Which would you choose? The answer: It depends. At issue is the distinction between a bond���s coupon rate and its yield.
A bond���s coupon is the amount that it will pay in reference to its par value. In general, a bond���s par value is $1,000, so a bond with a 5% coupon rate would pay a bondholder $50 of interest each year. By contrast, yield describes the��total��investment return that an investor would realize if the bond were held to maturity. In addition to the coupon payments, yield also takes into account the price at which a bond is purchased.
To understand yield, let���s look at two examples. In the first case, suppose you paid $1,000 for a bond with a 5% coupon. In that case, since the value of the bond at maturity���$1,000���will be the same as the purchase price, the investment return will consist of only the 5% coupons. The yield on this bond will thus be 5%.
But suppose you got a bargain and only paid $950 for this same bond. This can easily happen. Bonds don���t always sell at par. For simplicity, let���s assume the bond matures in one year. In that case, you���d still receive your 5% coupon payments. But in addition, you���d realize a gain on the price of the bond itself. At maturity, the bond���s issuer will pay you $1,000. Since you only paid $950, you���ll enjoy an additional gain of 5.3% ($1,000 divided by $950). In total, then, this bond would end up yielding more than 10%, even though its coupon was just 5%.
The lesson: When evaluating bonds, don���t dismiss bonds with low coupons and don���t be deceived by bonds with high coupons. Always look at��yield. That���s the more important measure.
Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.The post Wrong Number appeared first on HumbleDollar.
April 9, 2022
Fair Enough
A recent article by Kelly Phillips Erb addresses this contentious topic. Erb, who tweets as @TaxGirl, is the team lead for insights and commentary at Bloomberg Tax and Accounting. Her article was titled, ���Did you pay your ���fair share��� of federal income tax this year?���
The piece discusses the history and current state of U.S. income taxes. When the federal income tax was introduced in 1913, tax returns only had to be filed by those with a net income in excess of $3,000. That���s about $86,000 in today���s dollars. That first year, the tax hit just 1% of the population. During the Second World War, the government needed to raise revenue, so the personal exemption was effectively reduced to the point where nearly 70% of the population paid income taxes.
More recently, 2017's tax law brought significant change. Personal exemptions were eliminated and the standard deduction was increased to today���s higher level. The standard deduction now effectively sets the threshold for who has to pay income taxes.
Erb includes an interesting quote from a Tax Policy Center study on the impact of 2017���s tax law: ���The large percentage of people who don���t owe federal income tax is a feature, not a bug, of the revenue code. By design, the federal income tax always has excluded a significant fraction of households through a combination of personal exemptions, the standard deduction, zero bracket amounts, and more recently, tax credits.���
The percentage of taxpayers paying no federal income tax is typically in the low- to mid-40s. The Tax Policy Center study, written in 2018, indicated that the 2017 tax law would increase the percentage of taxpayers who pay no income tax by about two percentage points. The majority of those who don���t pay income taxes still pay payroll taxes and state taxes. Pennsylvania, for instance, taxes the first dollar of earned income.
The number of taxpayers not paying federal income taxes was 60% in 2020 and 57% in 2021. These high levels were due to pandemic-related factors, and the numbers should fall back to more normal levels.
According to 2019 IRS data, the average effective income tax rate was 14.1%. That was based on 158 million tax returns, of which 104 million were taxable. Erb notes that, ���In 2019, the top 1% of taxpayers paid 38.8% of all federal income taxes. According to the Tax Foundation, the top 1% paid more income taxes than the bottom 90% combined.���
As I suggested at the start, tax fairness is in the eye of the beholder. We certainly don���t know how to define���much less measure���it. We can���t even agree on the terms of the debate. Are we discussing income taxes, payroll taxes, consumption taxes, excise taxes, estate taxes, wealth taxes or total tax burden? As Erb opines, it���s unlikely we���ll resolve this issue any time soon. But tax time is as good a time as any to understand what your personal tax burden really is���and ponder whether it strikes you as fair.
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April 8, 2022
Wrote and Grew Rich
Truly helpful business analysis requires the reader to pay attention to evidence backed by boring data, a formula that���s hard to sell to the masses. Books like Think and Grow Rich or Jim Collins���s Good to Great offer the reader questionable��assumptions built on anecdotal evidence, but these books satisfy our human preference for stories over data.
Think and Grow Rich posits that if you persistently visualize becoming wealthy, the power of your subconscious mind will help make it so. Napoleon Hill claimed he wrote his 1937 book at the behest of Andrew Carnegie, who purportedly challenged Hill to interview wealthy folks with the goal of discovering a simple formula for success. This claim was made after Carnegie���s death, so it���s impossible to refute. Still, Carnegie���s biographer says that there���s no evidence the two ever met.
Also, it turns out Napoleon Hill had serious grifter-like��issues prior to writing his book. Thirty years before the publication of Think and Grow Rich, Hill cofounded a lumber company that would be subject to bankruptcy proceedings and allegations of mail fraud. Hill would then go on to found businesses in the automobile education and advertising industries, both of which failed. The former was effectively a multilevel marketing scheme, which collapsed, and the latter resulted in two warrants for Hill���s arrest.
Grifters use aspects of the truth to gain the trust of the consumer. Think and Grow Rich uses the power of positive thinking, a valid concept that aids in everyday well-being, and repurposes it as a powerful tool to manifest better results in the form of lots of money.
While Think and Grow Rich purports to be a business book, it���s actually a self-help book. Self-help books appeal to us because our egos enjoy the fantasy of imagining what life would be like if we could be the person that the book envisions us to be: confident, strong, popular or, in this case, rich.
To top the Google search for ���best business books of all time,��� it���s reasonable to assume that hundreds of thousands of people have read Think and Grow Rich���probably millions. Yet I would wager that only a tiny fraction of the book���s readers ever became truly rich. After all, fantasizing about getting rich isn't the same as working very hard and enjoying some measure of luck, both of which are required to become wealthy.
Self-help books can offer escapes from reality that insidiously stroke our egos at the expense of our pocketbooks. In the case of Napoleon Hill, he indeed became very rich���after countless people bought his book, not before.
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A Bad Business
IF YOU ASKED ME about my financial life, I could regale you with stories about working the swing shift at the local chemical plant, or the rental properties I���ve invested in, or my efforts to make a living as a professional wrestler. But instead, I���m going to tell you about the coffee shop���so perhaps you can learn from my biggest financial blunder.
In 2009, as the financial world was falling apart around us, I saw a classified ad describing a small business for sale. A drive-through coffee shop had recently closed. The owner of the equipment and the landlord were both trying to find a buyer who would operate the business. I was intrigued.
At the time, I already owned a fourplex apartment and two single-family homes, and was renting them out. Thanks to my forays into rental real estate, I felt I could accurately evaluate business deals. Indeed, I���d also looked at laundromats, small apartments, foreclosures and other small deals���and didn���t bite on any of those.
Still, I was looking for my next business challenge. I had married in 2007, and our daughter was born in 2008. I���d held off buying anything during that first year as a parent, as I adjusted to the change. But after a while, I felt that���between my rental properties, my job at the chemical plant and my young family���I was managing my time well.
As I got details about the coffee shop from the landlord, huge red flags emerged. Books I had read over the years about Warren Buffett���s teachings, coupled with my experience as a landlord looking at properties, were warning me: ���Danger ahead.���
The biggest red flag: The landlord was a fantastic local lawyer and business mogul, and yet he told me he couldn���t provide the shop���s sales figures. I was looking at buying a business despite lacking key data and knowing nothing about the industry. But hubris led me to ignore such warning signs.
I sat down and did some back-of-the-envelope math. The shop���s rent was modest: $300 a month plus utilities. It was solely a drive-through, with no inside seating. It was in the industrial part of our Iowa town. I drove by it every workday, and I knew that the level of passing traffic was tremendous. It was one city block from the Hardee���s franchise where I had worked as a teenager. I had been employed at Hardee���s on and off over the years, becoming an assistant manager, so operating a restaurant-type business didn���t intimidate me. I felt that this was within my circle of competence.
Boy, was I wrong.
My wife was supportive of buying the equipment and trying to make a go of it. She had worked in retail, and done some bartending and waitressing. We felt confident that we could operate the shop. It would only be open from 6 a.m. to noon, so it wouldn���t take up our whole day. My basic numbers said that sales of $100 a day would produce a profit.
I knew that the previous owner had done well with the shop for a few years when it was on the north end of town, the site of most of the city���s restaurants and stores. Development by the local mall had forced the owner to move, however, and the shop reopened on the south end of town. Why the previous owner had given up the shop wasn���t clear. We were told that it might have been personal reasons, not necessarily that the shop was losing money.
We settled on a purchase price of $9,000 for the equipment. We bought a few more items that we felt we needed, such as an industrial blender, as well as some inventory. Because we didn���t know how to operate the espresso machine, we hired a trainer who had owned a shop in Canada. She was fantastic, and trained my wife and me on the ins and outs of making great lattes. It���s embarrassing to recall now that I had had a latte only a handful of times. I had never visited Starbucks in the nearby bigger cities. Despite having driven by the shop on my daily commute, I had stopped to try it just once.
Learning the business. On the first day, I handed a lovely customer a caramel latte. She was so happy that we were open, and I was proud of our drinks. After completing her order, I had a moment of dread, though. I could see why the previous owner had done so well on the north end of town but struggled at the new location. This woman was clearly an affluent professional, our target demographic. But I also knew from my five years of working at Hardee���s that affluent, professional women were scarce in the neighborhood. Almost all the passing drivers���and we saw lots of them���were men on their way to the nearby factories. There, they drank regular coffee, not lattes. For many of them, that coffee was provided free by their employer. Those men also worked shifts, in some cases starting before we opened each day.
We had a few promising Fridays and Saturdays when we broke $100 in sales. One Saturday, during fantastic weather, we took in $153. I realized our prices were too low, but changing them would have required paying for new menu signs.
As days of operation turned into months, we began to learn the business. We found a good roaster of excellent espresso and drip coffee. We made a deal with a local grocery store to buy half-and-half and milk at low prices. We cut out supplies that I had thought we would need but that turned out to be unnecessary. For instance, our espresso machine filtered our water, so I didn���t need to pay for filtered water.
Also, I thought I was buying a coffee shop, but what I bought was a latte shop. Lattes were 90% of our business, and I had been blind to that when I purchased the equipment. If I had worked two weeks at a Starbucks, I would have known so much more about the coffee business and how it operates. In short, I wouldn���t have bought the shop���or, at a minimum, I would have had the knowledge and experience needed to have some chance of success.
Within three months of opening, we were bleeding money. My wife wisely suggested that we cut our losses and eat the monthly rent on the one-year lease we had signed. That way, we wouldn���t lose additional money every month, and we wouldn���t be tied to the shop seven days a week. We had been trying to have another baby, and we got the good news that my wife was pregnant. But my stubbornness couldn���t get past the money we had invested. I didn���t foresee the business improving dramatically, but I wanted at least to finish the lease.
That was a mistake. The business was doomed. Our target customers weren���t in our part of town. Even if the business had been more successful, the time we were spending at the shop wasn���t worth the small profit we might have made.
As my wife���s pregnancy progressed, her time at the shop dwindled and then ended. All the while, sales declined as summer ended and cold weather arrived. I had assumed that people drink more coffee in the winter, but the opposite is true. It was no different from my days in fast food: Summer was the busiest time. By contrast, my buddies who worked for grocery stores said winter and holidays were their biggest sales periods.
Meanwhile, thanks to the 2008-09 financial crisis, my 401(k)���which had performed so well���plummeted from a high of $147,000 in spring 2008 to $90,000 by the time I bought the shop in May 2009. I had a sizable portion of my 401(k) in my employer���s stock, and the company was hit that summer by bad news and Chinese competition. My 401(k) sank further, to $75,000.
Just as my retirement portfolio hit a low, my wife���s pregnancy became challenging. She developed kidney stones. My losses from the coffee shop meant I couldn���t pay all our bills. I was falling behind on the groceries, my electricity bill and my mortgage payment. I had no choice. I took money from my 401(k) at the worst possible time, when its value was down. I was confident that my investments would rebound, but I didn���t have the luxury of time���because the bills kept piling up.
When my son was born in January 2010, we knew that we would sell or close the shop when our lease ran out at the end of April. We were fortunate to find a young buyer who was willing to pay half what we had paid. I was honest about the shop���s failure to turn a profit in the year we operated it.
Long road back. My wife sees the positives in our year of owning the coffee shop. We met some wonderful people. But to me, the financial repercussions seemed to last for the next decade. I���ve come to terms with the fact that almost everyone who launches a business suffers setbacks and failures. Still, being humbled by your mistakes, ignorance and blind spots is tough. It's painful to know your family and loved ones suffered because of your poor judgment.
In 1965, before I was born, my mom and dad had moved to Iowa. Every Hispanic family we knew in the area had the same story: Head north to a cold city where little to no Spanish was spoken. Most arrived from South Texas or Mexico. All were seeking a job and an opportunity to improve their family���s future. Many in our community had found that opportunity in Iowa���opportunity that had been kept from their families for generations. They bought homes, raised families and lived the American dream. Now that I was a husband and father, I marveled at all of them and the hardships they must have endured. Now, I also had to accept my share of hard times.
During this period, I often thought of my father and the example he set. ���Keep moving forward,��� he would tell us. I tried to focus on what I had going for me. Though I had gained 30 pounds from neglecting my workouts and diet, I had my health. My wife had fully recovered from delivering our son a month early. Alex was healthy and doing well. I had my steady, good-paying job at the chemical plant, which I now appreciated more than ever. If I worked an hour, I got paid for an hour. Regardless of my company���s latest quarterly results, I got paid for my work.
Time would be my friend as I licked my wounds and ate my humble pie. ���I could dig myself out of this,��� I would tell myself as I went to work.
Slowly, my 401(k) recovered. I try not to think of where it���d be today if I had left it alone during the depths of the Great Financial Crisis. I remember reading somewhere that it���s too bad that losers don���t write books because you learn a lot from mistakes. I���m not a loser. But I feel the same way about the coffee shop that I feel about my professional wrestling career. I didn���t ���make it.���
Today, I define my circle of competency narrowly. I recently drove by a carwash that was for sale and kept driving. My job is my main source of income. We now have a good real estate business consisting of a fourplex and eight single-family homes. I don���t manage any of my properties, allowing me to focus on my family, my job and enjoying my workouts and monthly professional wrestling matches. My property managers are far more skilled and have a better temperament for the job. We own two of the rental homes free and clear. My long-term goal is to have six paid-off rental homes to help fund our retirement.
I hope to retire from my job at the chemical plant six years from now, at age 55. In addition to my 401(k), I have a Roth IRA and a brokerage account. These two accounts should help pay for my early retirement years until I claim Social Security. We���ll also have the rental income, which should provide around $3,000 a month, and my pension, which will amount to $800 a month.
If I hadn���t blundered with the coffee shop and had to tap my 401(k), I would have been able to retire even earlier than 55. On the other hand, I���m certain that if I hadn���t made that foolish investment, my arrogance would have led me to make an even bigger blunder, one that might have wiped me out. We all make financial missteps. I���m grateful that my financial fall came earlier rather than later���and that I learned from my costly mistake.
Juan Fourneau���s goal is to retire at age 55. When he isn���t at his manufacturing job, he enjoys reading about personal finance and investing. Juan, who is married with two children, can still be seen in the ring on the independent professional wrestling circuit. He wrestles as a Mexican
Luchador
under the name
Latin Thunder
. Follow him on Twitter
@LatinThunder1
. Juan's previous articles were Wrestling for Money,��Why I Won't Wait and��Taking on Tenants.The post A Bad Business appeared first on HumbleDollar.
It’s Up to You
Many of the best to ever play basketball went to the University of Tennessee and to the University of California, Los Angeles, to work with these legendary coaches. When players like Candace Parker and Kareem Abdul-Jabbar (then Lew Alcindor) stepped onto the floor, they contributed their talent and athleticism to their coach's success. They���re great basketball players���blessed with a God-given gift that players don't come by any other way.
Summitt and Wooden taught them how to find their place on the team, build productive habits, and embrace a lifestyle of diligence and hard work���helping them realize the glory of their grace-supplied greatness.
On the other hand, the tactics and strategy supplied by their coaches were���I���d argue���just the cherry on top. Make no mistake: Summitt and Wooden knew how to teach offensive and defensive sets, and they could draw up the right play for pivotal moments. By no means was strategy irrelevant.
Still, strategy alone wouldn���t have won championships without players like Parker and Abdul-Jabbar. As long as players of that caliber have a reasonable working knowledge of the game, that'll do. Give me a Candace or Kareem-led team, playing with any offensive or defensive strategy in the book, and I���d bet on their success.
It's the same with money. Strategy is an integral part of success, but strategy doesn't cause success. Is strategy important? Yes. Is it interesting? Yes. Learn it. Study it. Craft it. Have fun debating it. But keep it in perspective. Stop asking it to give you financial freedom. It won't���because it can't.
Strategy is one section of the playbook, but you won���t achieve financial freedom if you neglect the others: the emotional, psychological and spiritual factors. What you know is important, but who you are matters more. I���m talking about whether you can control your spending, how you react to market turmoil���and the values that motivate you.
The post It’s Up to You appeared first on HumbleDollar.
