Cobb on Money

Make Your Money Way More Interest-ing: Put it in a Kiva account

2009-06-21T09:59:00.001-07:00

Instead of leaving money sit in a zero interest checking account, why not put it in a Kiva account. Kiva accounts generate loads of interest, of the human kind. Consider this:

I just loaned some money to a woman in Ghana who is seeking to expand her business. She makes rice and stew and sells it by the side of the road to help pay for her children's education. By borrowing money from a community bank she can buy ingredients in bulk and get a better price and thus a better margin. With that margin she can hire another person and double the output and revenue. How interesting is THAT!

When she repays the loan then my money is available to me for withdrawal or I can choose to loan it to someone else. I don't earn financial interest on this money, but it makes my money way more interesting. Consider this:

I opened up a business account with Bank of America about 5 years ago. For the last 8 months there has been about $500 in the account because that business does not do much business these days (these days I have a day job). So each month Bank of America charges me $13.00 simply for operating the account. On an annual basis that's more than 30% interest, just for letting money sit there. They don't even have to send me paper accounts. So now I'm taking half that money and putting it into Kiva (the other half is paying down a credit card balance).

During these tough economic times it's easy to think that we have no spare cash, no extra money. But I bet a lot of people have small amounts of money lying dormant, either earning no interest or actually costing interest in the form of maintenance fees. How much more interesting to lend that money to someone who can put it to work. Your money is relatively safe, is not incurring fees, and is potentially transforming lives.

Go Kiva!

How Bad Are House Prices? Down 45% at least in North Florida

2009-05-13T18:35:00.000-07:00

I have argued long and hard with myself about posting this post, but finally decided it had to be done. I don't want to spook the tentative recovery that may be putting up green shoots, but here's a depressing real life story about how badly the housing market crashed and is still ailing.

On Tuesday, May 19, there will be an auction of foreclosed property on the steps of the St. John's County courthouse. One item is 3.5 acres of prime land within the city limits of St. Augustine, widely considered to be one of the most desirable locations in the country during the first half of this decade, during which time St. John's County--home to The Players Championship, superb beaches, and "the nation's oldest city"--was one of the fastest growing counties in America.

The land was bought for $1.1 million in 2005 which most people considered a bargain (the bank's appraisal put the value at $1.25 million). It is probably the largest piece of undeveloped land within the city limits. About $30,000 of improvements were carried out. The bank is owed about $865,000. The land has been offered for sale since 2007, for as low as $750,000. The only offer there has been on it was for $225,00. Obviously the bank rejected that. You can see pictures of the land here.

On Tuesday, June 9, there will be another auction of foreclosed property on the steps of the St. John's County courthouse. One item is a 5 bedroom house with pool and marsh view, sitting on 1.5 acres of prime land within the city limits of St. Augustine. This property was purchased for $320,000 in 2001. Some $145,000 worth of improvements were carried out ($25,000 kitchen, $6,000 AC upgrade, $80,000 pool, $29,000 2-car garage, $4,000 studio, $1,000 tiling work).

In 2007 this property was appraised at $890,000. It has been offered for sale as low as $525,000. There have been no offers. Several people have wanted to buy it but, as the saying goes: "the banks aren't lending." In other words, right now banks aren't prepared to lend the money that honest, money-earning people need to borrow to buy property. Ergo, the banks end up owning the property. In this case the bank is owed $548,000 in principal, $583,000 with interest and fees. You can see pictures of the property here.

So, what will these two properties fetch at foreclosure auction? The answer will tell us a lot about property prices. Right now it looks like they are down at least 45% from their highs. The fact that these properties have not received a single sensible offer suggests the number may be worse, forced down by tight credit on top of all the other factors. The 5 bedroom house could sell for a price below 2001 levels when you consider what the owner has invested in it.

Stay tuned for the results.
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What Happened to 2008?

2008-12-31T18:25:00.000-08:00

I was just going to post a big picture here, a big rectangle full of black paint, or maybe red ink, because 2008 was a TERRIBLE year.

If the queen of England hadn't used the phrase already, for her own worst year, I would pronounce 2008 annus horribilis. (Seriously, I'm not a fan of the British monarchy and don't like using their leftovers.) Instead, I have made a link to a Google search that says it all. The search term in "2008 worst year on record" and needless to say there are hundreds of hits.

About the best thing you can say about 2008 is that it's over. Oh, and the people who perpetrated the failed policies of the last eight years are pretty much out of office. There is that. Sadly,. nowhere near enough of them are in jail.
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In Corporations We Trust ? Not!

2007-06-09T08:17:00.000-07:00

An interesting piece by Paul Brown in the New York Times today suggests that "maybe senior executives really do not have a clue." He reports that a study in the McKinsey Quarterly, the business journal of McKinsey & Company, found “a trust gap between consumers and global corporations, as well as a lack of understanding among business leaders about what consumers really expect from companies.”

As an example he cites the finding that, while 68 percent of executives said that large corporations made a “generally” or “somewhat” positive contribution to the public good, fewer than half (48 percent) of consumers worldwide agreed. The number was just 40 percent in the United States.

The study also found--no surprise here as far as I'm concerned--that executives were out of touch with people. For example, when asked what three concerns would be most important to them over the next five years, “Executives predicted consumers would put job losses and offshoring first, followed by privacy and data security, and the environment...[whereas]...almost half of the consumers picked environmental issues, followed by pension and other retirement benefits, and health care.”

I wonder how the average annual compensation of the 4,000 global business executives interviewed for the survey compared to that of the 4,000 consumers they failed to understand. So, when asked to rank different institutions in terms of being trusted to act in the best interest of society, consumers not surprisingly placed large global corporations below all the other choices, including nongovernmental organizations, small regional companies, the United Nations, labor unions, the media.

I bet those global corporate executives are crying all the way to the bank [off-shore no doubt, in the corporate Gulfstream probably].
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Housing Market Coming Back? Non-scientific survey says "Yes!"

2007-03-25T08:31:00.000-07:00

Here's the short version: My partner and I completed construction of six "affordable" houses about August of 2006 and last week we had our first sale (March 21 to be precise). We now have another under contract and serious inquiries are on the rise.

In other words, after six nail-biting months of zero activity, we are seeing a sustained up-tick in activity. Bear in mind that this is at the low end of the market. Our houses were, and the remaining ones remain, the lowest priced new homes in the area (zip code 32084). Right now they are priced at $135,000 which is down from the original price of $145,000 set in September of last year. But if interest continues at the current level the last couple of houses may go up to $140,000 or even $145,000, which is still below the "affordable" threshold of $150,000 for this area (as in 80% of median single family home price).

Not to get too 'punny' about what is, after all, a serious situation for many people, including buyers, sellers, and builders, but this up-tick could be a sign of trickle-up, a real estate phenomenon in which sales at the low end start a market recovery that moves to the mid- and high-end, as named and described by Trecia Crews, a Jacksonville Realtor with The Legends of Real Estate. According to Crews, who has been in real estate sales for 20 years, 10 of those in the Jacksonville market:

"When more houses move in the $200,000 to $400,000 range, the people who lived in those homes are able to move up to the $400,000 to $600,000 range, and it permeates upward through to the million dollar homes and above."

You can read more in this story at jacksonville.com.

(According to some investment strategies that makes now the time to invest in real estate, not later.)
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Have Banks Screwed the Pouch in the Affordable (Sub-Prime) Housing Market?

2007-02-19T19:54:00.000-08:00

Of course, I am using "screw the pouch" in the technical sense of "really made a rotten mess of." Here's the Washington Post waving a warning flag a few days ago:

Is a blowout taking shape in the impaired-credit mortgage market? Could lax underwriting standards during the housing boom years--no verification of applicants' incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy consumer debt--finally be coming home to roost? Post article.

I think the answer is going to be yes. And who will pay the price? The people who need the banks the most right now, people who are trying to buy an affordable place to live before prices take another up-tick. Already we are seeing the negative impact on people's lives (in this case "we" is me and my construction business partner, master builder Don Davino). And here's what we see: People come and look at the homes we are selling (you can look here).

Quite a lot of these people like the houses and ask the real estate agent what kind of income they will need to pay the mortgage. Many figure out they can afford it and head to the bank. And the bank would love to help BUT, oh dear, there is now huge pressure on banks to avoid loans with anything but perfect credentials. So people who can afford a relatively small mortgage--and have a huge incentive to keep current with their payments--can't get one because they don't have unblemished credit.

Come on! Who does? Particularly in a sector of the market where buyers often lack credit history altogether or are emerging from a period of financial strain. So, because some banks screwed up in their greed for business, consumers are penalized. And the economy, which could use an up-tick in home sales, suffers too.

You might think "negative impact on people's lives" is a bit over-dramatic. I don't. Renting is still more expensive than buying and buying is a great way for families to cement their long-term financial security. If the next rising tide in property prices does not raise everyone's fortunes, including those suffering from the "sub-prime pouch screwing fallout," potentially dangerous gaps in social equity will continue to widen.

Vacations: The good news and the bad news

2006-12-05T19:41:00.000-08:00

With holidays in full swing I was struck by this eWeek headline: The Vanishing Veg-out Vacation. Seems that less and less employees are taking time off and, when time off is taken, less and less relaxing is being done.

Is this bad? Well, all of us have probably encountered employees whose attitude could use some improvement, and a vacation--a proper vacation--might bring about that improvement. And burn out is definitely a risk if you don't take time to clear your head. Furthermore, I have bemoaned America's stingy approach to vacation days ever since I emigrated here over 30 years ago. I think of my sister-in-law and her seven weeks of annual vacation working for Surrey County. Or my cousin who works for the BBC and has just completed a year's career break (unpaid time off to clear your head and grow your self, with full benefits and position reinstated upon your return).

But there may be good news hidden here. Many office jobs are transitioning to a more fluid, organic structure. Less emphasis on time in the office, more emphasis on results, regardless of where you put in your time, at home or at Starbucks. If picking up groceries is something you can do when you feel like it and not something to be jammed into lunch hour or rush hour, then maybe you will feel less need to leave the job behind for weeks at a time. Jobs are becoming more a way of life for some people, whether in a startup where you live the job because you have to, or in an enlightened enterprise where you live the job because you enjoy it. If you do enjoy your job then setting it aside to spend time on a beach might not be a good idea, unless you are feeling burned out (which, just FYI, can happen at jobs you enjoy as well as at jobs you don't).

And here is another thing about vacations: They cost money, particularly the ones you spend somewhere outside your own back yard. Sounds like a statement of the obvious, and it is, but it's an obvious fact that is often overlooked in financial planning. Money spent on traveling leaves little residual evidence except in your heart and soul and your memories. There have been several times in my life when I have found myself asking "Where did all my money go?" And I have always been surprised by how much of the answer is made up of travel, air fares, hotels, restaurants, stuff that leaves few tangible assets behind as evidence (aside from the souvenirs and snapshots you bring home).

I'm not saying don't travel. I think it is a wonderful thing to do and I have reaped huge inner rewards from my journeying. But bear in mind it narrows the gap between outflow and inflow, the gap that is the wealth you create.
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Millionz: Right and wrong ways to think about your financial future

2006-12-04T17:36:00.000-08:00

I'm sure that, at one time or another, we have all dreamed of "making a million." This dream often includes a time factor that can be described as: fast, overnight, instant.

Unfortunately, too much focus on that sort of time frame can lead you to miss the time frame that worked for most millionaires in our country's history, namely "slow and steady." As the landmark studies done by the guys who wrote the Millionaire Next Door series make clear, most millionaires become millionaires by spending less than they earn. The difference between the two, between what you earn and what you spend, is known as wealth.

The tough part is to get to a point where what you earn is far enough ahead of what you spend for the difference--known as wealth--to accumulate. For many people, the earning side of the equation is the tough one. Wages at the lower end of the earnings scale have not increased in real terms at anything like the rate they have grown at the upper end. (When was the last time the fat cats in Washington voted to increase in the Federal minimum wage which sets the base line for wages in most states?)

Yet many people, through hard work and constant striving, do get to the point where they are earning enough to cover their essential expenses. Sadly, that is the point at which some people fail in their efforts to accumulate wealth, and thus achieve financial security, right at the point where their earnings rise above the cost of paying for their basic needs. Spending on frivolous or unnecessary items is a huge temptation, especially when you've gone a long time without any spare cash. And there is that voice--I think most of us have heard it--that says: "What the heck, now you've got some cash, why not splurge a little?" And a little splurging may be okay if it boosts our drive to do better, strive harder. But too often we go one splurge too far, or two splurges too far, until we have splurged away that gap between income and expenditure.

Now I'm not saying that accumulating wealth is the one true path in life. There are many ways to be happy without being wealthy. And being wealthy is not all about driving flashy cars and living in huge mansions. One of the joys of wealth is that you can share it with others. Another is that you can make a difference in the shape and direction of society. But one thing I have learned after thirty years of living in America, is that there are precious few "fall-back" positions in this country for people who have not accumulated some wealth by the time they reach a certain age or run into a sudden need.

A significant percentage of the needs that people cannot meet by themselves are met by people who have accumulated wealth. So the art of accumulating wealth is well worth studying, for everyone's sake.

The Money Gap Gets Wider: Rich Folks Should Start to Worry

2006-12-01T09:59:00.000-08:00

After some of the interesting comments on my remarks about a million dollars, I did some digging and found this staggering fact in an interesting piece by Jeanne Sahadi, CNNMoney.com senior writer, from July:

Last year, the average CEO of a company with at least $1 billion in annual revenue made $10,982,000, or 262 times what the average worker made, according to an analysis by the Economic Policy Institute (EPI) released Wednesday....Put another way, the average worker--who earned $41,861 in 2005--made about $400 less last year than what the average large-company CEO made in one day. That assumes 260 days of pay (52 weeks x 5 days a week).

Now, as a business person who gets some of his business from other business persons, it might be wise of me to keep my thoughts on these numbers to myself. After all, at times I have been hired by companies with at least $1 billion in annual revenues and I might like to work for them again. But 262x?!* Come on! That is just too much. (I'd love to hear from a CEO who truly believes he or she is worth that much.)

To picture the size of this disparity I created the bar chart that you see on the left. The black bar is the average big company CEO income. The red bar, more like a tiny red strip is the average employee's income.

And that 262 is an average. Which means some CEOs are taking home an annual salary of even more than 262 times the annual earnings of the average worker. In all my study of economics and all my years in business, I don't see a way to rationalize that. Sure, a CEO might make some amazing deals and lead the company into huge profits, but what about the employees? Any company doing more than $1Bn a year has to have several thousand employees, some of whom must have helped in the earning of those profits. Spreading the wealth is not only morally right but good business, in the long run.

So, dare I say that CEOs who pocket megabucks lack long term vision? I certainly think there is a good case for saying that sustainable prosperity depends on social equity. Sure, several generations of the mega-rich few may enjoy life conscience-free in the stratosphere of luxury, but how long can that last if the poverty gap keeps gnawing away at social stability?

And yes, I started this blog by saying that $1 million is not what it used to be. But surely there is still such a thing as too much money. I think a salary 262x that of the average worker might be it.
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Where to Begin? How about some financial perspective?

2006-11-16T20:42:00.001-08:00

If there is one word that permeates talk about people and money it is millionaire. If there is one amount of money that is synonymous with "rich" and "wealthy" it is: a million dollars.

Well, I have good news and bad news about millionaires and a million dollars. The bad news is that a million dollars is not what it used to be. The people that most Americans think of as rich live in houses that cost at least a million dollars. So for the average working person whose paycheck just about covers expenses and doesn't leave much room for saving--in fact probably has less that three months of mortgage payments in savings--the idea of a million dollars sounds great. If it were to do so then obviously it would be a big boost one's finances. Now you can afford a million dollar house. But can you afford to heat it--or if it's in Florida--can you afford to keep it cool? Maybe not.

When you set aside fantasies and lottery tickets, the best way to look at a million dollars is in terms of the income it can earn. Suppose you use the $1 million to buy tax-free municipal bonds that pay 5.00% per year. These are very safe so you have little chance of losing your million. They would earn you $50,000 per year, about the same as your after-tax income if you have a job that pays $30 an hour (and have a few dependents to claim on your taxes). Not bad, but it hardly fits the 'lifestyles of the rich and famous' bill. Indeed, it is slightly below the US median income for a household of four.

So the next time you say "I want to make million" try adding a Z at the end, as in "I want to make millionz."

And don't fool yourself that even two or three million will sustain a lifetime full of jet-setting and bling-bling.