"CIGX is the formula for wealth"

Budgeting

Posted by on Mar 19, 2014 in Financial Planning | 0 comments

In my experience, the budget, is the single most difficult part of the financial planning process. Everything we do in financial planning is based on it, and yet, it is nearly impossible to derive, let alone maintain.

The first problem with budgeting is that top line. We often mis-characterize our income. When business owners tell me how much money they make, we clarify if we are talking about revenues or net income, or something in-between. When we talk about salary, we always talk about “gross” salary. We say, “I make 50k or 100k a year”. We can start there, but then taxes and other payroll deductions need to be accounted for in the budget.

The other problem is that expenses are difficult to predict. We all have unexpected expenses that ruin our budget every month. But, it is still better to have a budget than not. It is difficult to make, let alone reach goals, when you don’t know where your money is going. Taking a step back let’s you know what you are prioritizing today and allows you to change those priorities for tomorrow. Even if you start with one line on your budget, titled miscellaneous, and then put your entire income in that line, it is a start.

Then, specify your fixed costs of rent/mortgage, car note, insurance. Your utilities and groceries are variable and can be managed. However, they still fall within a range. I take the highest amount in utilities I have ever paid, and that is my utilities budget. Then I work hard to keep my utilities as low as possible. Groceries work the same way. It is a fixed cost. You have to eat. But it is also a variable cost. We can buy less or buy differently. We can use coupons. I have a cap on my grocery expenses. When we hit the max, we get very creative in the kitchen, but I don’t go back to the grocery store until next month…. Some essentials excluded.

Importantly, for many of us, savings and investments are not a part of the budget at all. The planner’s job then is to carve out a small piece to put towards savings and investments to help create financial security. In an ideal world, we would figure out our saving and investment targets first, and then figure out how much house and/or car we can afford. In other words, remember to pay yourself first in the form of savings and investments. A wise saying comes to mind: “a penny saved is a penny earned”.

Extras:

  • the average US home has increased in value by 14% over the past two years (Office of Federal Housing Enterprise Oversight)
  • the wealthiest 10% of US households own 80% of all US stocks (census bureau)
  • the 6 largest banks in the US held $9.67 trillion of assets as of 12/31/2013, which is 66% of the total assets in the entire banking industry (FDIC)
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Why Bitcoin is Newsworthy

Posted by on Feb 1, 2014 in Economy | 0 comments

Bitcoin has been in the news lately, but the anchors themselves ask after every bit, why is this in the news, since it only concerns a few people and has nothing to do with the greater economy. Well, Bitcoin is relevant, and is an important issue for the general public.

Economic activity started with the barter system. Individuals would agree to trade two cows for four goats or whatever. Generally speaking, currency is any medium of exchange, meaning cows and goats could be currency.

However, modern currency, those bank notes or coins that we use today, derive from the receipt system in ancient Egypt. In ancient China and the ancient Middle East, various negotiable instruments were created to facilitate commerce. The problem with this was that there was no legal framework with which to regulate printing and acceptance of currency. This would lead to bubbles and huge fluctuations in the value of the currency.

Enter “Specie”, which required currency to be convertible into a fixed hard asset, usually gold or silver. You could on demand exchange your cash for gold or silver coins. The use of gold as currency began in Asia minor. In Europe, silver was used, and in Scandinavia, it was copper. Again, this form of currency did not work. It was not economically feasible to allow exchange and currency value fluctuated drastically based on the constant change in reserves.

The gold exchange standard allowed countries to peg their currency to the value of gold or silver. This gold exchange standard lasted from the early 1800’s to the early 1900’s. World War I caused a run on the banks in Britain, forcing abandonment of the gold standard and leading to severe inflation. While many countries attempted to return to the gold standard, the great depression resulted in its permanent demise.

“Fiat” money was introduced. Countries could print money that was backed simply by the monetary authority. Monetary policy, the ability to print money not backed by a hard asset, was used throughout Europe and North America to end the depression by inflating asset prices.

However, Fiat money has problems of its own. Rather, monetary policy does. John Maynard Keynes is reported as saying: ”By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily, and while the process impoverishes many, it actually enriches some” (Keynes, John Maynard, “Economic Consequences of the Peace (1920)).

A brief return to the gold standard was attempted in 1944, when the US agreed to a fixed value of $35 per troy ounce of Gold. Other currencies were pegged to the US dollar, and the US dollar became the world’s reserve currency. However, this ended abruptly in 1971 when President Nixon ended the international convertibility of the dollar to gold.

Since then, all currency around the world has been fiat money, and today, no country uses the gold standard. Fiat money has no intrinsic value and is backed solely by the full faith and credit of the authorizing country and its empowered central bank. Fiat money can also be created by non-governmental groups or communities to facilitate trades that would not otherwise be possible. One immediately thinks of illicit trades, but the points and credit systems for airlines, credit cards, and other services are a type of currency.

Enter Bitcoin: “Bitcoin is a peer-to-peer payment system and digital currency, introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto” (Wikipedia). Bitcoins have gained popularity globally, and not just in illicit circles. While there is a speculative element to the use of bitcoins, it does have supranational uses, making transfers of funds easier across countries. It also has value as a set currency. Unlike national currencies, Bitcoin’s money supply is predefined by the protocol. The total supply of bitcoin is capped at 21 million, with 25 bitcoins created every ten minutes (Id.). While the current protocol will not work, a modification of the protocol could result in a true extra-national hard currency that cannot be manipulated to weaken the currency, inflate asset prices, or in other ways manipulate what could be sound economic principles. That would result in a universal single currency that would level the global economic playing field.

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Shipping and the Economy

Posted by on Oct 19, 2013 in Economy | 0 comments

Shipping and the Economy

I love going to Savannah to watch those huge container ships glide down the river on their way to the ocean and their next port of call. I always wonder what is in those containers? What came off the boat, and what went on the boat? Who is producing what, and who is consuming what? It turns out, we could not find any of that information. Statistics are totaled and combined and we could not find separate numbers detailing the difference in value between what came in versus what went out. I am sure they are out there.

But, we did learn something.

US exports in 2012 were just over $1.5 Trillion. US imports were just over $2.75 Trillion (id).

Trade and Investment, Arc Atlantic:

IN 2011, 7,662 oceangoing vessels made 67,929 calls at US ports. Vessel calls were up 8% from five years earlier. Tonnage had also increased dramatically. The top 10 US ports in 2011 were: Houston, Los Angeles/Long Beach, New York, San Francisco, the Virginia Ports, New Orleans, Columbia River, Savannah, Philadelphia, and Baltimore. US Flag vessels accounted for 11% of all US port calls. In 2011, South Atlantic ports (Virginia to Florida) accounted for 12.4% of calls by Jones Act Vessels (registered in US) and North Atlantic ports (Maryland to Maine) accounted for 3.4% of Jones Act Vessel calls (US DOT, Maritime Administration, Vessel Call Snapshot 2011, printed: March of 2013).

The ports of Los Angeles and Long Beach are the largest in the US. However, Atlantic coast seaports are preparing for an expected increase in cargo generated by an expansion of the Panama Canal scheduled for completion in 2014. The Port of NY/NJ is the second largest US port and the largest on the east coast, based on tonnage date from 2008. Savannah was the second largest Atlantic coast container port in 2008. Containerships accounted for over 77% of the vessel calls. Other types of vessels include Tanker, Dry Bulk, and Roll On/Roll Off (US Army Corps of Engineers, Navigation Data Center, “Waterborne Container Traffic by Port/Waterway, Available at http://www.iwr.usace.army.mil). Georgia and South Carolina are jointly developing a new bi-state marine terminal in Jasper County, SC, along the Savannah River (Jasper County, SC. Progress Update: Program Management for the Jasper Ocean Terminal, 7/19/09. Available at http://www.jaspercountysc.org). Plans are in the works to develop a double-stack rail to operate between the port of Virginia and Chicago, IL (“The Port of Virginia, Heartland Corridor on Target for Summer”; Available at http://blog.portofvirginia.com).

Global competition:

China has grown at an annual rate of 9.3% since 1978. Since 2000, China’s portion of global GDP has been larger than that of the United States. China/US trade will mostly play out on the Pacific coast, but Atlantic ports will also benefit with the expansion of the Panama Canal. China’s growth has been noticeable in global economies primarily due to its use of natural resources. North American and South American timber, oil and gas, and industrial metals will have to be shipped to China. Another region rich in natural resources is Africa. China has taken the lead in investing in sub-Saharan Africa, especially in oil rich nations, like Nigeria, but also elsewhere, where timber, minerals, and metals are in great supply (JFQ, issue 45, Q2, 2007; available at http://www.ndupress.ndu.edu). With natural resources going East from Africa rather than West, Atlantic ports may see a decline in imports of natural resources. In 2011, China had almost double the port calls of the US (US DOT, Maritime Administration, Vessel Call Snapshot 2011, printed: March of 2013). However, this effect should be minimal, as the US, and other countries in the Americas, emphasize production of these resources rather than consumption.

Ultimately, the thing to remember is that trade is beneficial for everyone, the exporter and the importer, the producer, and the consumer. The American Association of Port Authorities published an info sheet on November 18, 2008, titled “Seaports and the US Economy”. In it, they reported that each of the 50 states relies on at least 15 seaports to handle its imports and exports, which total more than $3.8 billion worth of goods each day. Each year, US seaports handle about 2 billion tons of cargo and international trade via US seaports account for more than 32% of US GDP. That value is expected to increase to 37% by 2015 and 60% by 2030 (Available at http://www.aapa-ports.org).

Another thing to remember is that the US remains primarily a service economy, despite the growth in manufacturing and natural resource development. Exports in services do not go in a container and on a ship.

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