Hamilton’s Blessing

Interest in the U.S. national debt seems to have diminished. Its importance has not.

Even with extraordinarily low interest rates, interest on the debt takes up one out of ten dollars of federal expenditures. If rates rise to more normal levels, even if the debt stabilizes, interest on the debt could easily double or triple.

Recently we came across a book titled Hamilton’s Blessing about the history of America’s debt going back to the founding fathers. It’s instructive that in earlier years the debt ran up during wars and crises and in between times was paid down.

Except for three years at the end of President Clinton’s term, that hasn’t happened in more than half a century.

While not an imminent danger, no initiative in Washington shows promise for getting this problem under control. The Tea Party made some noise but disappeared during the great budget compromise of 2015, when spending ramped up again.

At the least, the government should be extending the term of the outstanding debt while rates remain extraordinarily low.

The debt need not be a crushing burden but needs to be dealt with in all its dimensions in an intelligent way before it becomes an insoluble problem.


Contingency Plans

The Sun Doesn’t Always Shine
We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.

Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.

Many of these people are do it your selfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away.

What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like. What happens to a couple who are living together for many years when the storms finally roll in?

Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?

I told him the question is wrong. We know the market always goes up and down. The long-term trend for a century has been up but we know the market will go down and we need to plan for that.

We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy. We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.


Robert’s Rule

An Important Move

My friend Bob has an important rule that comes out of the school of hard knocks. He says that if you can do a transaction that is life-changing, you must do it. It’s not optional; it’s mandatory.

Most of us never have a chance to grasp the brass ring. How tragic is it for someone to have the opportunity and let it slip away.

With the economy in lousy shape for the last five years, most of us didn’t have to worry about what happens if fortune smiles on us. But a select few do and even for them, success is not assured.

Recently, Terrell Owens, the great football star, filed for bankruptcy despite earning $80,000,000 in his professional football career. Ok, you say, pro athletes have difficulty adapting to sudden riches. But this happens in all walks of life.

Donald Trump was saved from bankruptcy in the early 1990s because he owed the banks so much that it would have cost them more to put him out of business. Owe a little and you are a borrower. Owe a lot and you are a partner.

If you have made a fortune, protect those paper profits. You owe it to yourself to get a good advisor and work out a good plan.


Aging and Financial Skills


Diminished Ability to Handle Personal Finances

As people age, they gradually lose their ability to handle their own finances. Often, this process is so gradual that the person himself and those around him are unaware of what’s happening until something serious happens. The elderly control the most assets and are the most susceptible to financial scams and poor choices. As people get older, their financial affairs often get more complex. They must deal with complex choices on healthcare, long-term care, taxes, life insurance, pensions, Social Security and estate planning. Often just handling the routine chores of daily financial affairs become beyond reach. Recently The New York Times had an article discussing the research behind the loss of cognitive skills needed for personal finance. Steps to mitigate these inevitable problems include striving to simplify your financial affairs — consolidating your holdings in a small number of financial institutions, trimming your actual number of holdings, avoiding complex or exotic instruments. Another common solution is to use automatic bill paying where possible. People should also find trusted family members, friends or professionals who can step in when needed. Appropriate advanced directives such as powers of attorney and health care proxies also need to be in place. Planning for the inevitable will help avoid many of the worst potential pitfalls.


False Precision in Financial Planning

Craving Certainty

Recently The New York Times published an article about financial planning and how much people crave certainty. The result is that many financial plans have page after page of numbers and graphs and charts. The more numbers, the more confident people feel about the future.

But these plans can be so overwhelming that many go unused. In the Times article, author  and planner Carl Richards deplores this kind of false precision. He argues that for most people, the future is impossible to predict and plans must be flexible to account for the vagaries of life.

The planning process itself forces people to think hard about their goals and priorities. Often, latching onto a firm goal, even if it’s one that’s difficult to attain, might make success more likely than having a vague but less lofty goal.

Being disciplined and thorough in planning can yield significant results even if the ultimate destination is far removed. Identifying the key variables and options during the planning process can provide a clarity of purpose and a route to get there.

Planning and adapting the plans from time to time are a valuable exercise. Just don’t get too caught up in the details and miss the big picture.


Financial Affairs — Much More Complex Than Most People Realize

Do it Yourself? — Not!

I run into a lot of do it yourselfers who manage their financial affairs adequately, even capably.

But many run into issues and by the time I am called in, it is often too late or significant damage has already been done.

Recently, I’ve been brought it to work on the financial affairs of several people where the need arose unexpectedly. I had to guess the clients’ wishes and scramble for clues to piece together their financial pictures. If we’d had the opportunity to talk for even a short time, the process would have been much more successful and much easier. Other times I’ve come across mistakes where the do it yourselfer didn’t realize he was in over his head.

There’s no buzzer that goes off telling you that you have to make a significant decision or you should look into something that hadn’t occurred to you.

Most people manage their financial affairs one piece at a time without even a list of all the pieces that are required. Each piece, in and of itself may be fine, but the overall structure can collapse if even one critical piece is missing.

Personal finance is much more complex than most people realize. I encourage everyone to learn and be involved with their financial affairs. But I also strongly recommend calling in professionals before the crisis hits.