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5 posts from August 2009


The One Piece Of Financial Advice No One Ever Tells You


I have read close to 500 books on personal finance and investing.  I’ve written two books on that very subject.  But never have I come across the piece of advice I am about to give you now.  It wasn’t it any of the books I read.  It was never told to me but any of the money management experts I interviewed.  You won’t even find this piece of advice in my books. 




The advice is to save money for other peoples’ weddings.  I’d say I’ve blown an easy 10 grand on other peoples’ weddings.  I mean ya add the bachelor parties (from what I can remember) the tux rental if I was drafted to be in the wedding party (and I deliberately choose the word drafted) the airfare and hotels for destination weddings (those are brutal on the old wallet) and the gift (the cheap ones are always the first to go off the registry) I easily spent $10,000.  Women have it worse with dress purchases and the bridal shower.  (BTW someone write me back and tell me the TRUE difference between a bridal shower and bachelorette party.  Can’t we just combine them?)


But I never budgeted for a dime of it.  I knew to save for the big things like a car, a house, my retirement and perhaps my own wedding (though if Ivanka Trump ever returns my calls I won’t have to worry about that.)  But I never thought of saving for another person’s wedding.  Just one wedding is a small purchase so perhaps that is why you don’t think of it.  But add them all together and throw in a few Vegas bachelorette/bachelor parties and you’re spending a BMW lease payment every month on weddings (that are not yours!)


So if you are in late 20’s and early 30’s you want to put a little aside in the budget for other people’s perfect day, not just your own.  And perhaps part of that budget plan includes turning down a few offers.    


The Best Way To Budget…EVER

People often ask me, “Haven’t I ever seen your picture in the post office?”

But people also often ask me, “What is the best way to do my budget?”  “How do you budget Pete?”

First let me answer the last question.  I like to keep my budget simple.  Budgeting for me is more difficult than most since, as a self employed person I get paid in various amounts.  Sometimes payments can be MONTHS overdue so I really need to plan ahead. 

Basically I like to take the old “eat that frog” strategy and do the tough stuff first.  So once I had $10,000 saved up in an emergency account, I begin every year by maxing out my retirement accounts as quick as I can.  Then I think about large purchases that I might HAVE to buy that year.  (For instance, a few years ago, Old Pete, never the diligent flosser, spent a bit too much time with his dentist.  About $1500 too much time.  My dentist told me in advance of the beating, so I had time to plan ahead.) 

Also in this economy I have a rental property that falls about $100 a month short of its mortgage.  While I could budget to pay the $100 every month I prefer at the start of the year to pay the full $1200 into the operating account and not have to worry about it the rest of the year. 

I do this because come say…April-ish I’ve wiped out almost all my big expenses so for the most part I can spend money like a drunken sailor.  Not a “wild turkey” drunken sailor (because I still have bills to pay) but kinda like an Amstel light drunken sailor.  It’s easy for me to have fun since the big stuff is already out of the way.  If speeches/book sales/go go dancing doesn’t bring in the money I hoped well I have less fun for the year but I have paid myself first. 

So that’s how I do it.  Now onto the other question (not the post office question, the other question.)  What is the best way?  Quickbooks?  Mint.com (shame on me I have YET to check these dudes out.  Write back and tell me what you think of them.)  Excel?  The old yellow paper and pencil (typically also yellow?) 

The short answer is, and I mean this, do what works for you.  That is the BEST way to budget whatever your system is.  I like to get all my big problems out of the way.  Not only is it easy for me it relieves a lot of stress throughout the year.  But others especially when money is tight, really need to do something month to month or even week to week.  Whether that is a software program an online program or just on paper, create a system that works for you and STICK TO IT! 


Seriously Pete, how did Bear Stearns collapse so quickly?


I get this question a lot in my speeches.  How could a giant, multi-billion dollar company, run by smart people, with $18 billion in cash suddenly fall apart?  I mean who can burn through that kind of money (besides Elliot Spitzer at ½ price night at the Bunny Ranch?)

Permit me to reveal one of Wall Street’s dirty little secrets (and there are many.)  For the past 30 or so years, investment banks have been funding many of their operations with short term loans.  One such form of financing is the overnight “repo” market.  Here loans are backed by the firm’s own assets (it stocks, investments and cash.)  This overnight borrowing practice was huge, with firms like Bear Stearns borrowing $75 billion a day and borrowing it for only one day.  Literally Wall Street suits would hit the phones at 6:30 in the morning.  They’d ask big companies, like Fidelity Investments, to borrow say $6 billion, for just 24 hours.  They’d negotiate a daily rate and perhaps on one particular day, Bear Stearns would have to pledge more assets or pay a higher rate if the markets were down.  But for 30 years this worked just fine.


Well you can already see the danger.  Suppose a firm like Fidelity said, after 30 years of straight lending, “we’ll like to hold off for today.”  (Perhaps cause they heard a rumor two about Bear Stearns.  No proof, just rumors.)  Now it’s just one day, but it has a catastrophic effect.  The Bear Stearns dude who usually gets his $6 billion from Fidelity now has to call one of his other lenders, say maybe Federated Investors, and try to get an extra $6 billion from them.  Now if you answered the phone at Federated Investors and a Bear Stearns dude asked for an extra $6 billion, what’s the first question that would pop into your mind?  “Hmmmm…why does this guy need more money from me today?  It must mean that he couldn’t get it from someone else, which means someone might know something I don’t.  Which means I better be extra careful.  I’ll hold my funding for a day too just to investigate this a little more.”

Now if these were not overnight loans it really wouldn’t be a problem.  If the Fidelity dude said, “I can’t lend you the money,” then the Bear Stearns dude could say, “Let’s meet for $18 martinis, I’ll bring over our balance sheet and I can address all your concerns.”  But because it is overnight there is no time. 

Indeed Bear Stearns was a leader in underwriting mortgage backed securities.  These securities and their dwindling reputation may have been the match, but I’d argue it was the overnight lending that was the gasoline that lit the house on fire. 



The Complexities of Tax Breaks

I could write something brilliant here, but someone else already did:



Where does socialism start and capitalism end? And where does capitalism end and socialism start?

The other day I was listing to talk radio. Just as the show’s topic drifted to Obama’s health care plan, my car passed through the I-93 Boston Tunnel, notoriously known as the Big Dig. The tunnel swallowed the radio’s reception and I was left with a few quiet minutes to reflect.

No doubt you have heard that many are nervous about Obama’s plan; specifically that the quality of medical care will decline and that there won’t be any money to pay for it. Critics often site the Big Dig, with its cost overruns and flawed construction as a concrete example (no pun intended) of the dangers of letting the government run the show. An interesting question, is where to draw the line between capitalism and socialism.

John Stewart asked this question when he had Bill O’Reilly on the Daily Show. Forgive the paraphrase, but Stewart asked O’Reilly at which tax bracket do we cross into socialism? Is 30% a capitalist tax rate but 32% socialist? Or 34%?

Or consider this. Many hard core capitalists argue we shouldn’t subsidize wind or solar power, when nuclear is already a profitable venture (and a carbon cutter too.) But ‘twas it not the government that financed the original research for nuclear power? If the government funds the first X billion of a capitalist project, is that socialism or capitalism?

How about the Panama Canal? There’s a huge government project that has boosted capitalism by making oceanic trade easier. Hasn’t Eisenhower’s highway system, another mammoth government project, allowed millions of businesses to flourish? Or even a small business that receives a government loan. Is that capitalism or socialism?

This is not an argument for capitalism. Nor is it an argument for socialism. It isn’t even an argument at all. It’s a question:

Where does one draw the line? Send me your thoughts.