Wednesday, December 28, 2011

Word Wednesdays

In addition to Movie Mondays, I'll be posting Word Wednesdays. Once a week I'll post a snippet focused on one word. I'll post a definition, fun quote and whatever I can find to help clarify and expound on the word. Comments are very welcome.

Monday, December 26, 2011

Movie Mondays Starting in 2012

One of my favorite authors has been posting what he calls Movie Mondays to twitter. He posts clips, mainly that he's recorded. I liked his idea and decided I would find a movie clip to post every Monday in 2012. They may be short or long. They may be funny or thought provoking. However, these are clips that, if you watch every one of them, by the end of 2012, you will be affected for the better.

I am not producing a single one of these but am selecting them from people, ideas and topics from all over. They range in topics from politics to money to people skills to leadership. I do not claim to be an expert in any of these areas, but these videos have touched me or made me think. I also do not necessarily agree with everything in these clips. However, I chose them because they made me think or they made me feel.

I invite you on this journey of 52 video clips and challenge you to look in yourself for the best you. If you have a video clip you feel belongs on Movie Monday's, please let me know.

Tuesday, April 26, 2011

Not All Inflations Are Created Equal

The United States Federal Government measures what they call the Consumer Price Index (CPI). The use this measure to determine the inflation rate. They then have several costs (to the government) that are adjusted by the inflation rate, or cost of living. When you look at the historical inflation rates, it looks like things have slowed down dramatically. To the right, we can see the rate of inflation according to the CPI. Things have looked pretty calm since 1985. However, when you look at what $1 bought in 1914, and then compare it to what it would cost in 2010 (according to the government CPI data), it would cost $22.32.

It appears that sometime in the early seventies inflation really took off and hasn't really slowed until around 2005. The really scary part is that CPI does not really reflect the true cost of living. They exclude certain items from their calculations. There are certain things that have a much higher inflation rate.

For instance, college tuition inflation has been anywhere from 50% higher to twice as high as the CPI based inflation. It doesn't seem like that would be a big deal, 6% instead of 3%, but that gets compounded over time.

For instance, in our CPI 1914 dollars, in 1958 was worth $12.86. However if we start with $1 in 1958 for college tuition, by 2007 the $1 college tuition is now $27.79 while our 1914 CPI dollar is worth $21.22, or in other words CPI inflation almost doubled ($12.86 -> $21.22) while college inflation was almost 28 times higher.

In the chart to the right, you can see the comparison of college inflation since 1958 vs government reported CPI inflation since 1958.

This is just one of the curious items that seems to greatly outpace general inflation by quite a bit.

Tuesday, April 19, 2011

The Rich Are Getting Richer, But Are The Poor Really Getting Poorer?

The census data is in, and we now have household incomes over the last decade. Here you can see the incomes of each 5th of the population's household income (adjusted for inflation in 2009 dollars). They also break out the top 5%, which allows us to calculate with the near top 15% (top 5th minus top 5%) make.

You'll remember that in Robert Kiyosaki's book Cashflow Quadrant, he puts forth the idea that the Business Owners and Investors make up the top 5% and hold 95% of the wealth. This graph shows household income not wealth, but there are two components to accumulating wealth: first, spending less than is coming in, and second, time. Some people who make "a lot of money" spend even more. The less you can spend than you make, over time, will accumulate wealth. There is, however, a limit as to how much you can decrease your spending. This is where the larger incomes make it easier to accumulate wealth.

Looking at the graph, we can see that the top 5% had tremendous gains, over 85% more income in 2009 than in 1967, or an average of 1.6% increase per year. That is a 1.6% raise per year, every year, above inflation. Doesn't sound like all that much, does it. The top 5th, taking out the top 5%, had a gain of 60% in income over the same 42 years, which is a 1.2% increase per year over inflation.

Where it gets really interesting is looking at the next four 5ths, which grew, from highest to lowest: 42%, 25%, 18% and 29% (or 0.85%/year, 0.55%/year, 0.41%/year and 0.64%/year). The poorest 5th actually grew faster than the next higher 40%. In other words, those who make up to $20,000/year got bigger raises, on average, than those making between $20,000/year and $65,000/year.

Another interesting note is that only the top 5% are really affected by downturns, at least dollar wise. As far as biggest one year drop, the top 5% have it the hardest, with a 6% drop in income. The next hardest hit is actually the lower 5th (orange line in the graph, not bottom 5th), those making between $20,000/year and $40,000/year. Their biggest drop was 4.5%, you just can't see it very well, because it's not as big of a dollar drop. Everyone else's biggest drop was between 3% and 3.4%.

So what are the income ranges?

Household Income Ranges
2009 Low2009 HighBiggest
Top 5%$200,000/year6.1%17.3%1.6%
Top 5th - Top 5%$100,000/year$200,000/year3%5.9%1.2%
Higher 5th$65,000/year$100,000/year2.9%5.3%0.9%
Middle 5th$40,000/year$65,000/year3.4%4.4%0.6%
Lower 5th$20,000/year$40,000/year4.5%5.1%0.4%
Bottom 5th$20,000/year3.4%8.6%0.6%

So the poor aren't actually getting poorer (unless the government is not reporting real inflation), it's just that the rich are getting richer so much faster. Of course they take bigger risks also.

Tuesday, April 12, 2011

Why Do the Rich Get Richer and the Poor Get Poorer?

Robert Kiyosaki first introduced the idea of the Cash Flow Quadrants in his book Rich Dad, Poor Dad, but fully expanded the idea in his book Cash Flow Quadrant. The idea is that there are four ways of making money, as an Employee, Self-Employed, Business Owner or Investor.

Employee: Employees generate their income by trading their time for money, usually for someone else's business. If you get a W2 at tax time, and that signifies the majority of your income, you are an Employee. Employees generally get benefits, like health insurance, vacation, sick leave, etc. They usually work a certain number of hours a week and get a fixed income for that time.

Self-employed: The self employed is actually a very broad spectrum of careers. There are independent tradesman like plumbers and electricians as well as what many call professionals like doctors and lawyers. For tax treatment they can be a Schedule C, C-Corp, S-Corp, LLC or various forms of partnerships. They generate their money by providing goods and services to as many clients/customers as they can.

The Employed and Self-employed make up around 95% of the people, but they control only 5% of the wealth. They make their money by trading time for money.

Business owner: Business owners are often confused with the self-employed. The distinguishing factor is what happens to your income when you go on vacation. The self-employed are the business. A business owner's  business is run by a system, that works whether he is there or not. For instance, if you spend millions to buy a McDonalds, go to Hamburger University and then hire your managers, you're pretty much done spending time on your McDonalds business. You can go on vacation and the McDonalds' system keeps the business running.

Investor: Many people think they are an investor. They way you can tell is how you react when you lose $200 million in a transaction. Investors aren't phased. Investor's generally do not invest in mutual funds, and generally not in stocks like that average person does. There are even laws that favor the Investor, which prevent others from investing in some of the riskiest (and highest return) investments.

The Business owner and the Investor do not trade their time for money, but trade their time for raises. We all have the same 24 hours in a day, but the Employed and Self-employed are limited in their income because they trade their time for money, while the Business owner and the Investor trade their time for raises. Same 24 hours, but the Rich get Richer for every hour they invest.

Now you might think that the Poor (and shrinking middle class) would just maintain. Well, there are two things that are against them: inflation and thinking. Inflation makes the money that you have worth less. That means each year you have to increase the value of an hour more than the increase in inflation.

Robert Kiyosaki describe the thinking of the Poor, Middle Class and Rich in this way:

Poor: Every dollar they get goes to expenses. They trade their time for money and then trade their money for stuff. Robert calls this turning their cash into trash.

Middle Class: While some of their money is spent on stuff (expenses), a large portion of their money is spent on taxes and debt. The Middle Class buy what they think are assets (houses, cars, etc.), and the debt ends up sucking the money right out of their wallet before they really see it.

Rich: The rich invest their money in true assets. Robert Kiyosaki considers a liability anything that takes money out of your pocket (mortgage, loan, expenses, etc.) and an asset anything that puts money in your pocket. It's a simple test to see if it is an asset or a liability, and doesn't head-fake you into think you are doing great because you have lots of "assets." The Rich also pay less in taxes, due to how they earn their income. The income tax structure favors them. The Poor and Middle Class earn, are taxed and then spend the rest, while the rich earn, spend and then are taxed. Some of those tax advantages are available to the Self Employed.

I hope I've challenged your thinking on income, debt, taxes and finance. I think the more we can improve our thinking about money, and then act on that thinking, the better off we'll be.

Tuesday, April 5, 2011

Are you on the 45 year plan?

Since college I've always heard that 95% of the people end of dead, broke or dead broke by their 65th birthday. I've also heard touted around that your income grows until your mid-thirties, then you flatline until 65 and then your income drops. Well, I decided to put it to the test.

I've used data from the United States Deparment of Labor's Median Weekly Household Earning (US wages by age),'s Historical Inflation data and my 2010 Social Security report (for my incomes).

In the chart to the right, I've graphed my income and the average income by age over the last ten years. The actual income numbers have been scaled, so the dollar amounts don't mean anything. I just wanted to see the shape of the graph. Sure enough, it looks pretty much like I've been told, ramp up to 40, flatline until 65, drop in income (about 75%-85% of what they were making before).

At first, I just graphed the numbers on my Social Security statement (you know, that two-page, fold-out, green-ink brochure they mail you every year). I thought, "This looks pretty good!" Then I remembered inflation.

Now inflation is a funny thing. The government keeps track of it. They use it to make sure certain government costs (government employees, tax exemptions, etc.) rise with inflation. So the government actually has an incentive to low-ball inflation numbers. You can read more about that, but I'll use the government numbers, and just understand that the situation is a lot worse.

After looking at the inflation adjusted graph, it looks like I hit my flatline at around 26. If you look closely at the "Everybody" on the first chart, you'll see there is a slight bump again around 40. While I might see that, inflation could eat all of that up.

It is interesting to look at the national wages by age. In the last decade, things have gotten a bit better for people nearing retirement, but the shape of the data is pretty much still the same.

The bottom line is, if you do what the average people do, you will get what the average people have. Don't just sit at home and watch Dancing With The Stars or American Idle (misspelling intended). Don't fritter your time away playing games. Take a risk. Venture out. Dare to dream of a way to beat the system. And the sooner, the better.