As featured in The Wall Street Journal, Money Magazine, and more!

August 2012

The middle class fared the worst in terms of job losses throughout the recession. The National Employment Law Project has consolidated findings from its studies and found that while there has been some economic recovery in the employment sector following the recession, the recovery changed the nature of the job market.

Jobs with a mid-tier range of wages, from $13.84 to $21.13 per hour, have only recovered about one quarter of their losses. Lower-wage jobs, those with wages from $7.69 to $13.83 per hour, gained back more jobs than this group lost by a factor of about 33 percent. Higher-wage jobs, in this study those classified with wages from $21.14 to $54.55, have recovered almost all of their losses during the recession.

Politicians talk about job gains and losses in big numbers and in totals, but this masks the reality of the employment situation. Both political opponents have numbers they like to share about the economy in terms of recovery in the employment sector, but not only are the calculations easily manipulated lending to numbers that are designed for marketing rather than fact, but the sound-bite-style approach to discussions precludes people’s ability and willingness to look deeper at the situation.

Middle-class jobs are being replaced by low-income opportunities, like jobs in food preparation, retail sales, and office clerks. Here are some more observations from the study:

  • Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.
  • Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.
  • Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.

The shifting of the labor force is not a new occurrence. The industrial revolution created middle class jobs. Machines replaced some labor, but created an entirely new marketplace for middle class jobs because machines needed skilled operators. Two world wars created new opportunities for workers to fill low-income and middle class jobs. With the digital revolution, computers replaced more low-wage jobs, making an education significantly more important in finding and keeping middle class jobs. Perhaps not to the same extent but still significant, the recent recession has undone the progress of the middle class over the past one hundred and fifty years.

It’s hard to say what’s in store for the middle class moving forward. Economic forces that permanently shift the economy in this manner are bigger than any one President of the United States. Seventy years of great expansion for all classes in the United States, from the very rich to the very poor, followed the Great Depression, accelerated at times and slowed at times by public policy, but the driving force was technological advancement, and technology seems to be continuing to evolve at an accelerating pace and spread to developing nations, so there is hope, even if you need to take a global perspective in order to see it.

But this doesn’t matter much to the mid-level corporate employees losing their jobs, finding only menial service positions for significantly less money. This reality, frustrating as it is, forces us as individuals to re-evaluate long-term approaches — and by long-term I mean multi-generational — to living in the world. It could change the nature of financial independence. A shift away from middle class jobs changes the type of education and skill-building necessary to live a comfortable life without risk of falling into the lower working class or even poverty.

If you want to survive this shift away from middle-income jobs, which might get more pronounced in the future and could well be permanent, here are a few approaches or strategies to consider. The goal, of course, is to move towards financial independence in a world where there is a wider gap between the rich and the poor.

1. Be flexible with your industry. Middle-income jobs were available for people who studied in college or became an apprentice in some fields, then pursued the same type of job for a lifetime. It wasn’t a rich lifestyle, but this approach allowed for some financial comfort. Industries change much more quickly now than they did in previous centuries. For hundreds of years, the job of tailoring was much the same. Machines and computers changed the face of tailoring, but that’s very recent in the history of the industry.

You may find that you need to react to industry changes quickly as the middle class disappears, either to become a leader in the industry or to find another way to generate income.

2. Be flexible with location. For most of history, families didn’t move much. Even with nomadic tribes, moving a society from one location to another was very slow. Transportation and technology allow today’s families to change locations almost instantly. This is going to become more important as the best or the most opportunities for middle class financial independence appear in locations that are not already overdeveloped from an economic perspective.

Would you move to Jakarta, Manila, São Paulo, or New Delhi? A century ago, job opportunities drove American settlers west, and that migration took fortitude. The opportunities for financial independence in the upcoming centuries might be beyond this country’s shores.

3. Pay attention to the cost of living, thinking globally. I’ve remained in New Jersey longer than I intended because I determined I like it here. But I can’t get around the fact that it’s so expensive. The cost of living is incredibly high, and for someone who can generate income from anywhere, it doesn’t make too much sense to live in one of the most expensive locations aside from “liking it here.” Telecommuting is just one facet of technology that has the potential to create significant abundance. Earning a New York City salary while living in Arkansas, Costa Rica, or Dushanbe, Tajikistan (the city with the lowest cost of living in 2011) is a sure way to grow wealth. It’s risky though; distance makes it easier for your boss to feel no remorse about finding a cheaper replacement.

4. Get more education. With the middle class disappearing, you need to set your sights on bigger goals. Education is inflationary. First a high school education was required for middle-income jobs, then a college degree. Higher paying jobs generally require even more education, and for financial independence in a world where jobs for those with just a college degree is disappearing, you cannot let yourself be left behind. Graduate degrees don’t always pay off, but in some industries, they do. In other industries, these degrees are required just to get a foot in the door. When some of the top jobs you’re interested in seem to go only to members of a certain subset of graduates, say Harvard Law or Business School graduates, consider finding a way to join that club, keeping in mind that you need some way to recover the costs of that education.

5. Be an entrepreneur, and succeed. The quickest way to get to the point where you don’t need to mourn the loss of middle-class jobs is to build your own business. If you have the skills and the opportunity, fulfilling a need is the best way to create financial independence for yourself and your family. It’s not easy, though. Millions of small business owners are not financially independent, let alone wealthy. With a fast-moving economy, a volatile employment marketplace, and technology that seems to advance by the minute, there is a world of opportunity out there for someone who discovers how to take advantage of the situation.

Every business idea is worth exploring, and you never know which one has the potential to catch on. Most ideas fail, and most of the failures go unnoticed. Who likes to talk about failure, particularly when there’s a new idea to promote? They key is to stay engaged and push through failures until you find what works.

If the current trends that are helping eliminate middle-wage jobs, broadening the gap between the wealthy and the poor continue, and I expect they will regardless of who is elected as the President of the United States, you can forget about living comfortably on pensions, 401(k) payments, and Social Security in retirement. You can forget about comfortable suburban living on a decent but not great corporate salary. You’ll need to make some changes to the way you’re living and consider a new way of designing your future if you’re interested in not having to worry about money from one paycheck to the next and about whether that next paycheck will come.

As I wrote earlier, this has the potential to be a multi-generational shift. Not only do you need to think about the future of your own financial independence in these terms, you should consider doing what is necessary to ensure the financial independence of your children for the rest of their lives as well as the lives of their descendants. That doesn’t necessarily mean building wealth to such a level that you can keep it in the family for generations to come, but instilling a philosophy that takes the long-view and moves in the direction of somewhat permanent or at least consisten financial independence. A healthy attitude and approach to building wealth and its prerequisites like education, lateral and creative thinking, and flexibility, can help families be immune to the loss of the middle class over the long term.

Photo: ndecam
National Employment Low Project [pdf] via New York Times


I suppose I don’t understand Silicon Valley hype. I do, however, understand frustrations with the traditional banking system, and one techie start-up and one former start-up engulfed by one of the largest companies in personal finance management are taking the opportunity to see if they can replace some aspects of the financial industry.

SmartyPig started a similar concept a few years ago. The concept was that if people don’t like dealing with banks, perhaps they’d prefer dealing with an intermediary. The third party could negotiate a better rate on deposit accounts, for example, and pass those rates to its customers, with a few restrictions. Where banks focus on fee-driven profits, SmartyPig gave its customers a goal-based system. SmartyPig handles all the banking behind the scenes, and all customers need to see is how quickly they are achieving their savings goals.

Banking Deal: Earn 1.30% APY on an FDIC-insured savings account at Synchrony Bank.

With SmartyPig, the interest rate was high enough to attract a bit of attention, though there were initially a few setbacks. Withdrawing your funds in cash form, just as you had deposited the money, prior to reaching a goal was neither easy nor free. While SmartyPig compared its rates with those of traditional banks’ savings accounts, the lack of liquidity made certificates of deposit a more apt comparison. They worked out some of the bugs, found a new partner bank, and proved that the world was ready for next generation banking.

A start-up called Simple aimed first at creating an experience that allows consumers to analyze budgets and spending activity with rich detail. This is something that other software, like, has done with varying levels of success., Yodlee, and a dozen other web or mobile applications aggregate your financial transactions by downloading them directly from your banks and credit cards.

While Simple claims to be different, it isn’t. It, like Mint and other companies offering similar services, is also an intermediary between you and your bank. Simple does not eliminate your need to make use of the traditional banking system, it just hides the relationship and packages it in pretty wrapping.

But Simple has taken this a step further. It is now offering its own debit card, implying that users can now leave traditional banking behind. Only it’s not true. Again, the debit card requires a real, linked bank account to operate. The bank account may be masked behind a Simple account, but it’s there, and it needs to be there. Simple can’t take consumers’ money directly and hold it on deposit — that would make it a bank, competing among other banks, bound by the same regulations that affect the entire banking industry.

So there is always a bank behind the scenes, and in Simple’s case, the bank is The Bancorp Bank, based in Delaware. Deposits held at The Bancorp Bank are FDIC insured, so while you can be sure you won’t lose money on deposit through Simple, the company you deal with has no responsibility. I would be wary of these types of relationships. Bank that package mortgages to sell to investors seem to get off the hook for their responsibilities; I am concerned that a problem might arise some day and you’d have an intermediary blaming the bank, the bank blaming the intermediary, and resulting headaches.

Now Simple is offering a debit card, further confusing the relationship between consumer and bank. Banks have offered branded cards for a long time, so there’s nothing strange about that. What’s strange is that it’s marketed as something new. Your favorite techies and friends of Simple are celebrating the delivery of these debit cards with “unboxings.” Rather than receiving the new debit card in a plain, nondescript envelope — probably safer from a fraud prevention perspective — the debit card arrives in a fancy package, making the recipient feel special. (In fact, these cards are available by invitation only, further heightening the false sense of being special.)

Mint, Simple’s competitor from a budget-analysis-lite angle, is planning to launch its own debit card, TechCrunch revealed. Its goal, like Simple’s debit card, is just to help consumers better analyze, track, and adjust spending. It’s a worthy goal, and I certainly applaud both Simple’s and Mint’s attempts at heightening awareness to the fact that households often spend more than they need to and often don’t realize that they’re spending more than necessary unless the information is presented to them constantly in with immediate feedback. This is a good thing.

Let me make this clear, as marketing seems to have confused some consumers. Nothing proposed by these companies reduces consumers’ reliance on the banking industry. Banks are still there, just lurking in the background. This is not a banking revolution. This is merely the emperor wearing new clothes. Pretty clothes, with charts and graphs — bells and whistles with limited relevance and accuracy, but with nice colors and patterns. Don’t get me wrong. Visualization is very important to helping consumers understand data, and allowing online software to handle the visualization is much easier than aggregating your financial accounts, categorizing your spending, and building your own charts yourself. But it’s not revolutionary. You’re still relying on the same old Wall Street industry.

Usually, adding layers between the consumer and the ultimate servicer is a bad thing. has the benefit of aggregation, bringing many accounts together in one view. Simple gives an incomplete picture and criticizes other companies for being middle-men while serves the same function. With both of these companies offering debit cards where your spending is analyzed before going to the bank rather than relying on pulling the information later, there’s a possibility of improving the analysis — of activity in that one account, anyway. At the same time, the companies put distance between consumers and banks, and while it might feel good to not need to log into your bank account online, walk into a branch, or maintain your transaction records in Quicken or other reconciliation software, the bank is still an integral piece.

Photo: Images_of_Money


According to a recent study by the National Bureau for Economic Research, 46.1 percent of retirees die with a net worth of less than $10,000.

There are two ways to achieve this outcome. The first is for those with a comfortable level of wealth in retirement. Wealth does an individual no good after he or she is dead, and some people would feel content with distributing their wealth in their last few years. The second path is more common in the study’s findings. Most people simply have a low level of wealth going into retirement, and with a lack of strong income-generating opportunities, wealth continues at the same level or is further depleted.

That isn’t to say that everyone who dies with less than $10,000 to their names are struggling during retirement. Social securities, pensions, and proceeds from retirement savings can cover living expenses, and as one ages, there is less of a need to save for long-term personal goals. A low level of savings puts one at danger for financial trouble in the event of an emergency, however, and certain types of emergencies, like medical bills, might be more common past a certain age.

Retirees without families to pass on inheritances might not see any purpose to dying with wealth, and would therefore endeavor to give much of it away. From a tax perspective, it might be better to donate a significant amount to charity before death, taking advantage of an income tax break in addition to a reduction of the value of the estate, than to bequest the same amount. That depends on earning enough income during retirement for the tax break to have an effect, and it requires having enough assets in the estate for a reduction in value to make a tax difference. Estate taxes always seem to be in flux, but in 2012, the first $5,125,000 in an estate is exempt from tax.

And that’s not the retiree this study is referring to. The study is focusing on those with $10,000 or less, ruling out this particular path of reducing wealth — perhaps. It doesn’t rule out the possibility, however, of individuals, perhaps those who are comfortable but do not consider themselves wealthy, spending down or giving away their wealth in order to avoid the rest of the world’s hassles with dealing with an estate.

Perhaps an indicator that most of the study participants are in fact not in this category — that those dying with $10,000 or less in net worth are those who did not have wealth and choose to give it away in their last days, weeks, months or years — is the finding that health is the poorest among these individuals. Conversely, wealth at the end of retirement has high correlations to other aspects of living. Those with higher levels of net worth live longer. That should be strong enough motivation to build wealth throughout one’s lifetime.

People who were never married have a higher probability of dying with less than $10,000. The same is true for those who are divorced. The study doesn’t claim there is a cause and effect relationships between marriage and wealth, but the correlation is important. The same factors might produce both results — such as a confident personality.

The study goes on to evaluate retirees at death based on three pathways. One-person households are identified as those who were never married, two-person to one-person households are retirees whose spouse had previous died, and two-person households are those where the spouse survives past the person in the study. The results show that the spouse who dies first generally dies with more wealth and better health, and for the surviving spouse, income, wealth, and health drop off quickly.

While this new study looks at wealth at the end of retirement (that is, death), most prior studies evaluated a retiree’s wealth at the beginning of this period. There’s a good reason for the ex ante analysis. A retiree’s financial condition at the onset of retirement, the choices made based on that condition, and the situations that affect that starting position determine how one lives one’s life in retirement.

The ex post analysis, where the quality of life in retirement is determined by the final outcome — wealth at the time of death — doesn’t reveal as much without context that reveals more information about the path to $10,000 or less. That isn’t to say the study isn’t relevant or interesting; it is, if just by virtue of being a different way to look at the overall picture of retirement in the United States.

There may be a few things to take away from this study pertaining to the correlation between wealth at the end of retirement and quality of life, but it also reminds me of my core philosophy of building wealth. A high net worth is not a real goal. Money is meaningless in life except for what it can be used for. Accumulating wealth is important so you have a better chance of meeting real life goals without interference.

People, but not everyone, whom I’ve asked about their personal life goals have said to me that their primary purpose in life is to die with $1 million (or $10 million, or $100 million). This isn’t a line of thinking that I would recomment. Sure, you can do a lot of good with a large sum of money in your estate, if that money goes to worthy causes or even to your relatives, but those activities — what you do with the money, not the collection of the money itself — should be defined as goals.

What this study says to me is that there are not enough people making lofty goals that require money, perhaps focusing on nothing more than the comfortability of their own selves and families, that they are unfortunately not reaching their goals, or, possibly in a few cases, are reaching their goals and no longer see a need for the accumulation of wealth.

Photo: HooLengSiong
National Bureau for Economic Research, via MarketWatch/Yahoo


A few days ago, I asked if you were better off now than you were at the start of the recession. I mentioned that I considered myself in a better financial position today — overall, there wouldn’t even be an argument — but there are small details that still bother me. Not every piece of my portfolio has recovered.

At the height of the economy, I worked for a large, historied corporation in the financial industry. I took advantage of every benefit the company offered that was appropriate for my situation, assisted by additional income from extravocational activities such as operating this website and others, easing cash flow while allowing me to invest a little more aggressively. I took full advantage of the company’s discounted stock purchase program. The maximum I could invest was 10 percent of my salary, and I enrolled as soon as the program was announced.

The benefit included one purchase opportunity every three months, and the price offered for company stock was discounted 15 percent from the price at either the first day or the last day of the quarter, which ever price was lower. It was a great way to get an immediate 17.6 percent return on an investment. I decided, in an effort to take advantage of the lower long-term capital gains rate, to hang onto the stock for at least two years before selling each lot.

That plan worked for some time, but then the stock price fell sharply, coordinated with the rest of the financial industry. The company was not in trouble, at least not like other companies that were in danger of bankruptcy or needed bailout loans from the public or government investment to survive. Perhaps it was my bias as an employee at the time, but I decided to stop selling in a way that ensured I’d lose money. In fact, I used the recession as a time to buy more shares at an extreme discount — the discounted market price with the additional 15 percent discount.

After leaving the company in 2010, I sold about half of my company stock, but the lots I sold were those purchased at a price that allowed me to cash in a profit overall. The stock is sitting at about half of the price it was at the top of the market (not taking the 15 percent discount into account). I have about $9,000 worth of my former employer’s stock sitting in a E*TRADE account, waiting for the stock price to recover. The lots remaining were purchased after the stock price had crashed during the recession, so even though I could sell now at a profit, I’m holding on.

Here is my reasoning, even if it may be irrational:

  • I’ve seen the stock price at double what it is today, and that seems to imply a return is possible. Of course, this is a somewhat irrational thought.
  • It’s a high-quality company with a long history. It probably isn’t going away any time soon — but then again, the same might have been said about Bear Stearns just prior to its collapse.
  • The company is in an industry of which I am not a fan. I’ve complained about insurance companies loudly, but I can’t deny their profit potential.
  • I invested 10 percent of my salary in company stock, but what’s remaining is a very small percentage of my overall net worth. Today, at least, I can afford to keep $9,000 — or twice that amount, if the stock price recovers fully — in one company.

I can afford the risk, so having this amount of money in one investment is not keeping me up at night. I’m not holding onto the stock because I miss working there — I do not one bit — but because I still think it’s a good investment. I do miss seeing my former co-workers — working at home by myself all day can be unsatisfying from a social perspective — but I try to limit my emotional attachment to the company to just that.

In fact, I may be looking to take on significantly more risk in the future by investing a larger percentage of my net worth in opportunities where I could be more than just one of one million shareholders. My investing philosophy in the past has been to put as much as possible into broad stock market funds, giving me the greatest chance of somewhat predictable long-term growth, but I may be at a position where I can adjust my approach by diversifying even more, with different goals for different portions of my investable net worth. If that’s the case, I would keep a significant percentage in a less volatile investment than the stock market, to ensure a minimum of income or growth each year (barring another recession), while dedicating a larger percentage of my net worth to business opportunities requiring a more direct involvement from me.


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