How's the economy looking

As Boston Gal put it.  It's just fraking bad.

Keep on pumping - FEDS CUT RATE 0.50%

Keep on adding water into a sinking ship. The US economy is toast ...buh-bye!

WHOPEE $500 from the government

Tax rebate to help simulate the economy. Instead of controlling inflation - they choose to pump more funny money. Can't wait till it all boils over.

THE MARKET DROPS, THE MARKET RISES

Same old news. Markets move up and markets move down. If you don't know what you are doing - stay away from the market.
If you think you know what you are doing - stay away from the market - you don't know.
If you know what you are doing - be very cautious.

Thank God for $800 from Mr. Bush - whopee - that'll save my retirement - or help me buy an iPod -

MONEY CRUNCH - THE SKY IS FALLING

What's a money crunch? This term is current mentioned over and over in the media - yet it isn't clearly defined anywhere.

Quite simply, a money crunch (or crisis if you want to call it that) occurs when you "feel" that you are short of money. In simpler terms, money is simply a mode for doing trade. Thus, if you want to buy something, you give money in return. Simple laws of supply and demand. So a crunch occurs when the money you have isn't enough to get the item you need/want. Well how do you solve a crunch? A few ways actually:

1. Don't do the trade (i.e. don't buy what you wanted to buy in the first place). Happens all the time - just be more open to not getting everything you think you need/want.
2. Increase your money - which simply means increase your skills so you can produce more.
3. Make sure you get more for your money. E.g. if you are renting, negotiate a better deal with your landlord. If you have a mortgage, try and refinance (assuming you have have good credit rating).

Banks and the US government

Citibank announced another $10 billion write-off in their portfolio attributing the mortgage meltdown. I am starting to believe that the next big entity to default on their loans will be the US government. The trade deficit (which doesn't include numbers for Social Security and Medicare by the way) continues to grow. The national debt is just funny money business to me anyway.

Also, depending on who you ask some see the debt as too high whereas others will compare it as a ratio of the GDP and claim that it is within limits. See the following as an example. Others claim that simply raising taxes by 3% for one year is enough to wipe off the current debt (again I haven't done the math yet to prove/disprove this).

Further, from what I've read, others claim that historically, the stock markets have done rather well in years where we had a debt as opposed to a surplus.

So in short, the national debt is just that ... a big number.

What worries me is economy slowdowns, recessions, unemployment, diminishing company profits and inflation because these things can wipe off significant percentages of savings of individuals. When this gets reflected back as less tax collections, the government changes the laws to raise taxes when what they should be doing is lowering the taxes.

One alternative (yes you may laugh at this) to clear the national debt is that the lenders to the US (Japan/China) will one day have to just write off the entire amount. Yes, just like that ... whoosh ... the US is debt free.
They might have to do this because it will be a cleaner/less painful alternative then having a global long recession period. Imagine, China/Japan producing their goods with no buyers :-) --- so what do they do? Forgive prior debts, let us borrow more money and then make us buy their goods with the money we just borrowed ... world goes on ... everyone is happy ;-)

Banks are doing it right now with the shady sub-prime loans that they made. Actually we don't have numbers that it's only people with poor credit who are defaulting only - but that's another story. We're seeing this in the US Housing Sector already. Wait till it bubbles over to a national level!

The biggest problem I see with the national debt is that about half the $9 trillion amount in the national debt is the Social Security trust fund which isn't money the government has borrowed from investors but where it notionally parks the surplus social security taxes. This is government borrowing from itself and in effect from future taxpayers - i.e. it gives IOUs to the social security trust fund and then spends the money it receives from the fund in return.

The Social Security and Medicare IOU fiasco is a disaster waiting to happen! It's going to take a few generations of suffering to clear it all up.

TO INVEST OR NOT TO INVEST - THAT IS THE QUESTION

My employer offers 401k. They match 50% of the contributions dollar for dollar. I'd be "stupid" NOT to participate in such a plan!
I've heard this argument for investing in 401k over and over again. The "so called" financial gurus tout 401k as the best thing since sliced bread and the best way for the common Aamerican to get rich. Suze ORMAN has been bombarding the airwaves (wire-waves for internet) with this message. See here, here and here
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The financial experts say, "you're stupid" if you don't participate in the 401k plan. You're stupid to leave that employer match out on the table.

Don't get me wrong, I don't have any problem with the employer match. Also the tax benefit of investing in a 401k are astounding. I ask the following simple questions to anyone participating in 401k plans.

1. Is it possible for you to lose 50% of your money in a 401k plan? What steps are you taking (or can you take) to ensure that it doesn't happen to you? Does the saying "easy come easy go" sound eerily applicable to you
2. Is it possible for the 401k administrators of your plan to conspire so that they maximize their own profits?
3. Does it cost your anything to re-balance your 401k portfolio? Can you buy and sell funds in your 401k on a daily basis with no penalties?
4. How sure are you that the prices of the funds that you are buying are not over-inflated? How sure are you that you are getting a good deal?
5. Could you do better with the "after-tax" money minus the employer match than investing it in a 401k?

On a side note, it is interesting to note that most (if not all) government agencies still stick to the good ol' pension plan. Your senator, for example, are eligible for a full pension with 5 years of service after 62 years of age (source).

I used to contribute religiously to a 401k plan. I soon decided that the 401k plan was not for me. I've first hand seen my account drop 2%-3% on a daily basis. Of course I've also seen it go up a few percent points in a day. The part I don't like is that lack of control I have over such events. Do I know when the market is going to go up or down? HECK NO. Do I know whether we are in a recession or not? Do I know if the dollar will continue to fall or inflation will rise or fall? HELL NO! Do I know if the new president will wage a costly war against IRAN? I DON'T KNOW? With so many factors that "may" be influencing the markets and with the uncertainty in the US market, I'd much rather not take the risk. I strongly believe that I can do better with the money that I would have otherwise contributed to my 401k and have stopped adding into the plan since.

So in short, be very CAREFUL with what you do with your money. Don't follow the crowds. The best that you can do is learn to hold onto your money and don't let anyone tell you what to do with it!

401k - LIVING IN A HOUSE OF CARDS

In 1978, the US congress amended the taxes laws to include a brand new section 401(k). Companies quickly realized that there were tremendous advantages in offering 401k plans in lieu of pension plans to their employees. While, I don't have exact numbers, I believe that a significant portion of the current USA population does contribute religiously into this program. Also, a significant portion have high hopes that 401k will form one of their main finance pillar in their retirement period.

A primary reason for the explosion of 401(k) plans is that such plans are cheaper for employers to maintain than a pension for every retired worker. With a 401(k) plan, instead of required pension contributions, the employer only has to pay plan administration and support costs if they elect not to match employee contributions or make profit sharing contributions. In addition, some or all of the plan administration costs can be passed on to plan participants. In years with strong profits employers can make matching or profit sharing contributions, and reduce or eliminate them in poor years. Thus 401(k) plans create a predictable cost for employers, while the cost of defined benefit plans can vary unpredictably from year to year. 1

It is to a company's advantage to offer 401k as opposed to pension.

So onwards to my main point. The entire 401k scheme is equivalent to living in a house of cards. We're waiting for a slight breeze from the wrong direction and the program collapses. Why so? Well lets look at the following points:

1. There is a large influx of money being contributed into 401k every paycheck. Just look at any company as an example. Pick Microsoft. Let's say Microsoft has 20K employees. Lets further assume that approximately half the employees at Microsoft invest into 401k. Let's also assume that on average the 10K employees contribute half the IRS yearly max (so that's $7750). Let's say Microsoft matches half of this bring the average, per employee to just above $11,000. So $11,000 X 10,000 (employees) is $110,000,000. In other words $110M is invested into the stock market from just one large company!
   What this does is artificially bump up the price of stocks and companies.
   
   
2. People don't have choices on where to put their 401k money. They are forced to pick the administrator of the company - which in turn scrapes off a few % points off of the money every year. This is regardless of how the funds/market performs.
   
   
3. After a certain age, participants are required to take distributions from their "tax deferred" accounts. If you do not withdraw the required minimum, the IRS can claim 50% of this money in fines. Yes you read that right - 50%. In other words, after a certain age, you don't get a say on when you can sell your funds (or how).
   

BUILDING A SAFE RETIREMENT PORTFOLIO IN 10 YEARS

My prior posts have all been about how my parents history and how it played into the money crisis that they are currently in. Looking back, you always start thinking if you had done things differently then you might not be in the current situation. But life doesn't quite work this way. As the saying goes "there is no use crying over spilled (spoiled) milk".

So it's time to digress from history and look into the future. I have one very simple (but tough) goal for my parents. I plan on helping them build a "safe" retirement portfolio that they can then use to supplement their income. I only have 10 years to do this realistically, as the parents can't keep on working forever. I hope that the portfolio provides at least 60% of their current living expenses - of course adjusted for inflation.

Since I have such a short window, I have to set forth a few key items that I need to keep in mind.
1. No stocks. No mutual funds. No ETF's
2. No 401k.
3. Don't rely on social security.

I'll elaborate on each rule in future posts.

Of course the list above is a moving target and I'll modify it as I go along.

IT'S A HARD KNOCK LIFE (Part 3)

Part 3
My Mum and Dad had sold their home/business and moved to a larger city where the accounting opportunities were better. Dad moved onto a salaried job. The home sale brought in approximately $10,000 (a large sum in East Africa).

The finances took the biggest hit due to a medical emergency. My Mum came to visit me in the US (where I was then studying in college) and was diagnosed with breast cancer. She felt a lump in her breast and I took here in for a checkup. The doctor recommended a mastectomy followed by six months of chemotherapy.
24 hours in the hospital: Cost $16,000
6 months of chemotherapy: Cost $35,000

The hospital in the US was kind enough to let me make installment payments with 0% interest. My Dad paid in around $6000 of the costs and I paid off the rest over the course of several years.
My Mum opted to do her chemotherapy in England where we had a bigger family support. The hospitals in the UK were not so accommodating. They demanded payments for therapy up front. This was despite the fact that my Mum still held onto a British Passport. She didn't qualify for the benefits because she hadn't lived in the country.
All told, my Mum is a proud cancer survivor still going strong. The therapy left her weak and scarred emotionally. Nonetheless, she keeps on going strong.

The retirement plans were all thrown off course. The finances took a big hit and it has forced my parents to start back out (almost) from scratch. It's an uphill battle from this point on.

IT'S A HARD KNOCK LIFE (Part 2)

Part 2
The cold drink business started out great as initially we were the only few in town who owned a refrigerator and sold cold drinks. On peak days, we probably sold close to a 1000 bottles of drinks a day. I remember spending evenings cleaning down the bottles (yes they were transported on open trucks and got very dusty and muddy) stocking up the 3 refrigerators with drinks. Soon the cold drinks factories figured out that to boost their sales they needed more people with refrigerators. So the factories started giving out free refrigerators to all who asked. Our sales tumbled. My dad started focusing more on the accounting part time business and picked up more new clients.

Life was good in East Africa but there were a few key things lacking. The first was higher education. High school and below in the East African country was on par with any other world education system (if not better). After high school, you were out of luck. Again I am referring to the late 80s and early 90s so things "may" have improved now.

My parents, both graduates, wanted us (my brother and I) to study in college so they took on the bold decision of sending us abroad to the UK to study after we finished high school. Here is where things got interesting. Fees for overseas students in the UK are really high. If you further do the conversion between the 3rd world East African currency and the British Pounds, you took a big hit. So most of my parents money was spent in paying for school fees for their children.

Remember now, there is no concept of 401k in East Africa (at least not yet) and further the inflation rate hovered above the 10% mark. Further, in earlier years, it was illegal for citizens to hold onto to foreign currency. The only options available were: spend the money, buy gold, spend it on legal expenses (like pay school fees in a foreign country) or hold onto a depreciating currency. Another alternative (of course) was to break the law and cheat but my parents refused to do. Given the choices, my parents picked paying school fees and also buying gold jewelery (as a hedge against inflation). Parents were still well on target despite of all the so-called setbacks.

My parents savings took the biggest hit when my Mum was diagnosed with breast cancer. More about that in Part 3.

IT'S A HARD KNOCK LIFE (Part 1)

Part 1

I promised to post more about my parents and the reasons why they have so little saved up for retirement. Both my parents have college degrees from the 70s so it wasn't an issue of education . The main issue (I think) was the lack of opportunities in East Africa where they were born and spent their adulthood lives. Also, it is excruciatingly difficult for someone in a "3rd world " country to immigrate to better "1st world" countries if this is what they choose to do.

After graduating with a Bachelor's degree in Chemistry from India, my dad began his career as school teacher in a high school in East Africa. At this point in life, he could have chosen to immigrate to other distant lands based on his qualifications. However, he chose to stay back in the small rural town that he was born in to help support his mum and dad bring up his younger siblings. He was the second oldest of four brothers and four sisters. He was the oldest boy and he dutifully took on the task of helping his brothers and sisters move forward. His teacher salary was modest one - but he religiously saved it and used it to help his brothers and sisters move to the UK. His father (my grandfather) approaching 60 worked as a priest earning very little. In fact, the entire salary was used to pay for rent. He also suffered from asthma. His mother (my grandmother) catered for 50 - 200 people daily. This money was used for day to day expenses and saved to help prepare for future costs. In fact, I attribute this single act of kindness as crucial in helping his brothers and sisters rise out of poverty.

In a cruel act of fate, the British government (at that time) refused entry to my grandfather into the United Kingdom on the grounds that he had neutralized his citizenship a while back. This was despite the fact that all his children (including my father) had UK passports. The government also changed their law requiring my father to choose his citizenship between the East African country and UK. Again my father chose to stay behind with his Mum and Dad and gave up his British colonial rights that could have granted him entry into a first world economy.

Soon my father got married and a few years later (5 to be more precise) he was the proud father of two boys. He had duly been promoted to the head master (principle) of the school. However, the teacher salary was barely enough to scrape by and inflation was soaring making things harder. Based on the hardships, my father decided to give up his teaching career and venture into small businesses. He began by selling cloth pieces (a lucrative business in the late 70s) but this business quickly grew competitive. So my father switched gears and invested in two refrigerators. He then started selling cold colas. A "Double Cola" factory had just opened up. This was a great move on his part as he was able to improve his savings. With the newfound money, he was able to send off my brother and I to a far off Missionary school. We lived with my aunt during the school semesters and traveled back to visit our parents every four odd months. The train journey took approximately 18 hours (if all went well). I'll post more on the trains later.


So life was good - or so it seemed. Kids were in good school (which is probably what all parents want) - my Dad's business was moving along well. In time, he self-taught himself accounting and started book-keeping for many other small businesses in the town. This brought in additional income. My Dad was able to build a nice house with the money he saved up in 1980 (there was no concept of mortgage in East Africa - all properties were built with cash) and continued to save.

Part 2 will follow on later

HELP! MY PARENTS (and MY WIFE's) ARE BROKE!

Ok, before you start slinging mud at them or at me saying that it's their own damn fault for not saving for retirement, please bear with me while I clarify the situation. All four parents are hard working individuals who worked their entire lives and sacrificed a lot for others. They are all very giving. In what I call a "true test of times", it just so happens currently if I were to evaluate their savings, they are not in a situation where they can stop working and rely on savings to support their current expenses.

My Mum and Dad are recent US immigrants. After obtaining my US citizenship - I sponsored them so that I could be closer to them. My Dad is still working hard and meeting his own monthly expenses and also managing to save half his salary. He will turn 60 in a few months time. My Mum is breast cancer survivor. She is a diabetic and also suffers from high blood pressure. More on them in later posts.

My wife's parents live in London. They've lived there since 1987 - worked extremely hard and managed to finally pay off their home which had a whooping 18% mortgage interest rate. My father-in-law is approaching 65 and continues to work 3rd shift in a "Walmart" owned 24 hour grocery chain. He has been working the same job for an incredible 20 years! My mother in law recently just retired from a 15 year hard labor factory position. My mother in law suffers from bad knees. My in-laws will probably need to move from their current home soon as the stairs are becoming unmanageable at their current residence. My in-laws position is slightly better as the UK government has free health care and also provides some form of retirement/pension income to the elderly. Again more detailed profiles will follow in later posts.

So here I am, caught in the middle. On one hand, I want to provide the best for my wife and newborn son. At the other end, as a dutiful son(son in law) I also wish that I could do something/anythings to make their lives a little more easier. I'll also highlight a few of the goals that I have for my parents in later posts to define "little more easier".

So here are my thoughts, actions, findings all blogged away for the world to see and share. I hope that you see some common things in this blog, help me get through my goals and participate in this journey. I also hope that this blog inspires you to spend time with your parents, reform long lost bonds and maybe discover a new purpose for your own life. The "HELP" in the title of this post is not a call to help to the general public. Rather, it is a message for me to engage myself into action.

I am sure that the situation I face is not unique to me nor to just our generation. This is the age old law of time. The current generation will eventually become the older generation. Sooner or later, the current generation has to step up and provide for the elder generation - whether they acknowledge it or not! We are who we are and where we are because of the foundations laid forth by the older generations and our ancestors. It is high time that we give back to the people who have given the most.