Minimalism vs. Simplicity – Are You Missing the Point?

A recent stay at a “Boutique Country Hotel” got me thinking about the meaning of minimalism vs. simplicity and how they relate to personal finance.

It all began with our hotel room. It was a renovated riverside hotel from the 1800′s, with a curious mix of old and modern. The floor boards were the wide, plank floor boards common in 19th century construction, while the bathroom featured a state of the art Jacuzzi.

This is what our shower looked like, only ours had no shower head.

The decor was sparse, yet modern too. There was a flat panel television and one piece of post-modern art on the wall that consisted of one-quarter of an old tire, a piece of chicken wire mesh, and various other castaway everyday items all fused together in a loosely triangular shape and painted black.

But what really made an impression was the shower.

It was a standing rectangle large enough for a single person and was comprised of an Italian marble wall on two sides, and glass on the remaining two sides. It was, quite simply, a beautiful shower and elegant in its minimalism. Until I tried to use it, that is.

Once I stepped inside I realized just how minimal the design truly was. There was no shelf for holding soap or shampoo, and the faucet control only turned one way, from lukewarm to hot. There was also no showerhead. The water simply fell from a perforated plate in the ceiling. I had no place to stand out of the way of the water to lather with soap or shampoo.

It was at this point that I thought, minimalism is one thing, but what good is it if it’s not useful too?

This is when I realized I really favor simplicity over minimalism. Our modern lives have become so clutter and full or noise and distraction that there truly is a psychological benefit from simplify our lives. There’s also a financial benefit too.

Here are a few financial benefits to simplifying your life.

• One retirement account means less fees and less time spent managing various options. It also means that all your available funds are better focused, which magnifies the effect of compounding interest and dividends.
• Fewer retirement funds in a single retirement account means even less time managing the account, less fees and more focused returned.
• Fewer savings and checking accounts means less overhead and time in managing them and keeping track of your money. It also means your money is more focused and earning even more compound interest.
• Rolling all your insurance needs into one provider makes tracking your policies easier, and usually gives you a multi-policy discount on the premiums.

Are you sensing a theme here?

Generally speaking, simplifying your life makes you more efficient and frees up more time to do what you love.

Many people seem to be focusing on minimizing their lifestyle, standard of living, etc.. but that may be missing the point. I think it’s far better to streamline and simplify your life – make it easier to do the things you really want – than it is to simply downgrade your life.

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Robert Kiyosaki Plays Loose With His Math in Financial I.Q.

Robert Kiyosaki, Financial IQ

I’ve been reading Rich Dad’s Increase Your Financial IQ: Get Smarter with Your Money, by Robert Kiyosaki and while I like the general gist of the book (especially the first half), Kiyosaki rubs me wrong way in several places. One of these is in his use of math to support his opinions on real estate.

Much of the second half of the book focuses on real estate as a means to grow wealth, but Kiyosaki does make an important distinction between speculating for growth or flipping a house, and buying property as an investment. In other words, Kiyosaki espouses buying real estate for the purpose of renting it out and creating a cash flow, not hoping for the market to rise and create capital gains. I’m not really interested in becoming a renter, but his approach makes a lot of sense to me, especially with the current economy, housing market and demographic changes.

The problem with Robert Kiyosaki’s math in Financial IQ

Where I have problems is when he gets into things like OPM (Other People’s Money). Here is one of his examples:

• He buys a rental property for $100,000 in cash.
• He is able to rent this property for an annual income of $10,000.
• He has made a 10% return on his investment.

So far, so good. He’s using very simple math and ignoring taxes, repairs, etc.. but that’s fine – he states that in the example. His problem is in his comparison to the same scenario but using OPM. Here’s his example using OPM (i.e. money from the bank – a mortgage):

• He buys a rental property for $100,000.
• He puts $50,000 down and the bank loans him the other $50,000 at 6% interest.
• He is able to rent this property for an annual income of $10,000.
• He has made a 20% return on his investment.

The problem is that he has not made a 20% return on his investment – unless he is a deadbeat and doesn’t pay his mortgage! While it is true that $10,000 in profit would be a 20% return on $50,000 invested he is ignoring the mortgage payment entirely!

Using the Mortgage loan payment calculator at BankRate.com, I plugged in a $50,000 mortgage over 30 years (I’m being generous in giving him a low monthly payment) at 6% (his figure in the book) I determined the monthly mortgage payment to be :

$299.78

This works out to be $3,597.36 annually, which makes his actually profit in the OPM example $6,402.64 not $10,000. That means his return on investment (ROI) in that example is 12.8% not 20%.

Granted, 12.8% is better than 10% but it’s a far cry from 20%!

This makes me wonder about the rest of his examples and stories. What if the mortgage were larger or the rent less? Someone reading this book may think it’s a slam dunk only to find that his property and mortgage alter the numbers to a point where he’s not profitable. Kiyosaki neglects to mention that part of the financial equation altogether.

Still, Robert Kiyosaki’s Financial IQ  book is quite motivating and offers much food for thought and for that alone it is worth the read in my opinion.

Related Posts:

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How (and Why) I Added Gold to my IRA.

Why invest in gold?

Photo by covilha

Gold is a well known hedge against inflation, uncertainty and a falling dollar. Since this pretty much sums up the environment we’ve been living in for the past decade, it’s easy to see why the value of gold has been on the rise. But that’s past performance and as we all know, past performance is no guarantee of future results. So is gold still a good investment?

I’m not going to pretend to know the answer to where gold is going in the future, but here are some things to consider. Quite frankly, they are no small part of why I was convinced to invest in gold in my IRA a few months back when the price dipped.

Budget busting entitlement programs.

Unfunded entitlement programs will force future income earners (you, your children and grandchildren) to keep less of their income after taxes, thereby shrinking available wealth.

U.S. funding for future promises lags by trillions:

“The government added $5.3 trillion in new financial obligations in 2010… that brings to a record $61.6 trillion the total of financial promises not paid for.”

The United States credit rating is in jeopardy.

Fitch may cut rating:

“Fitch said it would first place ratings on “watch negative” if lawmakers failed to enact an increase in the debt ceiling by August 2, when the Treasury will have run out of extraordinary measures to avoid a default.”

This could lead to the U. S. paying a higher interest rate on its debt, which means more tax revenue goes toward the interest payments of past over-spending, leaving less for current spending. The result, of course, is higher taxes, lower incomes and less wealth.

Inflation. Hyperinflation. Deflation.

Inflation and deflation have a big impact on the value of your wealth. After all, if you have $1,000 in the bank, but each dollar goes down in value (inflation) to .70 cents, then your $1,000 is now the same as $700 before inflation. Gold on the other hand, holds its value and can even rise in value during inflationary times which makes it the perfect place to store your wealth.

Some people think The Time to Prepare for Hyper-Inflation is BEFORE It EXPLODES , while others only see Hyperinflation Nonsense in Multiple Places

I happen to believe that an ounce of prevention can spare much pain and with gold trading in the $1,500 to $1,600 an ounce range it may seem like a costly ounce of prevention, but I’d still ratherbe prepared for stagflation or inflation or even deflation.

The trick isn’t so much in figuring out whether we’re going to experience inflation, hyperinflation, deflation or stagflation because any one of these situations will keep the demand for gold high, and keep the price high.

In the end, the one major risk to the price of gold is a sound fiscal policy in Washington D. C., a balanced budget and a robust economy.

I believe these factors are years away, and so is any big drop in the price of gold.

How to hold gold in an IRA or 401(k).

You basically have two choices when it comes to investing in gold in your IRA or 401(k):

1) Physical gold
2) Gold stock

I suppose you could add mining stocks and other precious metal related stocks, but that’s moving away from gold a bit too much, and I’m sure there are those who would say that even a gold index ETF is too far removed from gold. That’s a debate for another time..

Buying physical gold.

It’s possible to hold gold in IRAs (traditional and Roth), simplified employee pension (SEP) and simplified incentive match plans for employees (SIMPLE). Most IRA plans do not allow for this option though, so the first thing you’ll want to do is check with the custodian of your IRA and see if they allow holding physical gold in your account.

If your current IRA does not offer the option to buy gold coins and bullion, you’ll need to open a gold and silver IRA.

Why I chose paper.

My IRA does not offer gold coins and bullion, and I have chosen not to open a new gold and silver IRA. Instead, I invested in the PowerShares DB Precious Metals (DBP). Here’s why….

Fees

Gold and silver IRA’s have more fees than traditional IRA’s because of added regulatory overhead. The IRS stipulates that the gold must be stored at an approved depository. This depository is a separate entity from the IRA custodian, and the require a fee for storage.

The IRS also requires that Gold coins be 99.5% pure gold, and must be approved by the IRS and be legal tender to qualify.

This is all good, because you want some assurance you’re not dealing with some fly-by-night con-artist who’s going to sell you some gold plated junk.

But this does limit the field of qualified vendors. Here are some of the most popular qualified gold coin providers:

• American Gold Eagle
• Perth Mint Lunar series (from Australia)
• Kangaroo-Nuggets (from Australia)
• Canadian Gold Maple Leaf
• Austrian Philharmonics coins

The way this breaks down is that you end up paying for two services:

• The custodial service
• The depository service

The custodian (IRA administrator) usually charges a fixed annual fee or a percentage of the IRA’s value. The depository will also charge its own fee. Transaction fees may be applied to each contribution you make to your IRA.

Simplicity

I’m a big fan of keeping things as simple as possible, and to be honest I don’t really need another retirement account to keep track of.

I’m very happy with my Fidelity account. I can invest in Mutual funds with no transaction costs, and no load. I can invest in ETF’s like DBP for $7 a trade. It’s all good. I don’t need the hassle of another, specialized IRA for gold.

Liquidity and yield

Physical gold is great for holding value, and in times of uncertainty, appreciating in value. But gold pays no dividends. When times are stable or prosperous and relatively peaceful (think mid to late 1990′s) gold doesn’t do much. In fact, you’re lucky if you don’t lose value in that kind of environment.

Buying gold in a tax deferred account doesn’t get you the same tax advantage that holding interest generating assets does.

The big reason I chose paper is that it’s far more liquid than physical gold.

Gold bugs will tell you that the real deal is far better than paper, because if the excrement really hits the fan, your paper is worthless while physical gold still holds value.

I am of the opinion that in those kinds of scenarios, where the entire monetary system of the western world collapses, bullets will be the new currency, not a shiny metal with no real industrial use.

Why I chose PowerShares DB Precious Metals

I wanted an ETF or mutual fund because it would be easier (and quicker) to sell than physical gold if the price of gold starts to drop. I can also hold those shares in my existing IRA, which means less fees, and more flexibility.

In the end, I chose the PowerShares DB Precious metals ETF over the SPDR Gold Shares (GLD) ETF because I wanted more diversification. I was watching the price of silver rocket ever higher at a rate greater than gold, and wasn’t prepared to make a call on one or the other. I also wanted to get some exposure to other metals which are precious but have industrial uses, like platinum. So, DBP was a basket of indexes that track multiple precious metals, which should give a smoother ride than focuses purely on gold (or silver).

Related Posts:

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How to Survive (and Possibly Thrive during) Stagflation.

Stagflation. The dreaded “S” word. Stagflation is loosely defined as an economic environment in which inflation is rising, while economic growth (or wage growth) is stagnant or declining. It’s often characterized by high unemployment, and rising prices (high inflation) – the worst of both worlds.

Stagflation, 70′s style.

Most people who are familiar with the term stagflation will no doubt think of the 1970′s when they hear the word. The 1970′s in America was defined by stagflation, and oil shocks.

There is a common belief among many that stagflation in the 1970′s was caused by oil shocks – rapid spikes in oil price, caused by the OPEC nations, and as this article points out:

In desperation, President Jimmy Carter (1977-1981) tried to combat economic weakness and unemployment by increasing government spending, and he established voluntary wage and price guidelines to control inflation. Both were largely unsuccessful.

Others argue that the very reason those efforts were unsuccessful was because they were in fact the cause of much of the problem. Lutz Kilian points out that 1970′s stagflation was caused by poor monetary policy. Oil shocks didn’t help the situation any, but neither did they cause it.

Increasing government spending, lax monetary policy and rising oil prices… sound familiar?

Stagflation, 21st century style.

Despite Ben Bernenke’s claims to the contrary, real inflation has risen quite sharply over the past year. Gasoline prices alone have risen over 10%, food prices aren’t far behind.

Up until now, Bernenke and company have focused only on “core inflation” which excludes “volatile” areas of spending like food and gas. The problem is that while these expenses are volatile and prone to high degrees of fluctuation, they also happen to be things that people need to buy.

It’s one thing to exclude volatile spikes in situations like 2007-2008, when fuel prices spiked, but then receded. However, when real inflation takes hold, the core inflation numbers become misleading at best, and insulting to the general public at worst. As I write this, inflation by some counts is closer to 10% than the official 2.6%.

Everybody knows they’re paying more for food and fuel, so Bernenke only loses credibility with the general populace when he comes out with statements about inflation being “mild” or “tame.”

The Federal Reserve’s liquidity policy is spurring inflation and even leading some states to seek alternative currency.

John Boland, financial adviser at Maple Capital Management sees inflation as high as 6% by the end of 2011 – and that’s the “official number”, not counting food and gas prices!

Some have sounded the alarm over hyperinflation, but personal incomes are flat , at best and declining at worst. This coupled with high unemployment seems to suggest either depression or stagflation.

It looks to me like we have a little of both: depression in the things we want, inflation in the things we need. Things like cell phones, televisions and computers are getting cheaper while food, gas and clothing are getting more expensive.

So, the stage looks set for a potential encore presentation of 70′s style stagflation. How do you survive stagflation and can you possibly thrive during such a time?

Thriving through stagflation

Looking back at the 1970′s makes it pretty clear that very, very few people got rich after accounting for inflation. In fact, it was considered a victory just to keep pace with inflation and not lose “too much” of your wealth.

The average American was much worse off by the time stagflation ended in the early 1980′s.

Here are some of the ways people were able to maintain their savings, if not prosper at least a little.

Investing

Bonds

Seeking Alpha sums up investing in bonds during stagflation like so:

“During the last stagflation, bonds were called “certificates of confiscation” by many professionals in fixed income. It paid to have your fixed income assets as short as possible.”

Because inflation results in each dollar being worth less than previously and a bond is an agreement to pay back a debt today in tomorrow’s dollars, the bond holder is paid back in dollars worth less than he lent. In effect, having his wealth confiscated.

Treasuries are pretty much in the same boat as traditional bonds here, although you can now buy TIPS (Treasury Inflation-Protected Securities). TIPS didn’t exist in the 1970′s, and they were created as a means to protect the value of your savings from inflation. You can learn more about TIPS and buy TIPS at TreasuryDirect.com. Of course, TIPS are indexed to the official government inflation rate and as we’ve seen above, that’s much lower than the real rate. So your savings are still likely to lose value if held in TIPS.

If you have an investment account, you can also buy shares of the iShares Barclays TIPS Bond (TIP) ETF.

If you do hold bonds, keep your domestic bond duration to maturity short. You may also want to diversify into foreign currency bonds.

Some short-term bond ETFs you could use are the Vanguard Short-Term Bond ETF (BSV) and the iShares Barclays 1-3 Year Credit Bond (CSJ). Similarly, there are a number of International bond fund ETFs to choose from as well.

Stocks

When it comes to picking stocks for inflationary or stagflationary times, pricing power is all important. Pricing power simply refers to a company’s ability to raise prices to maintain profit, and not lose sales in the process.

These are the kinds of companies that produce things people need, or are most reluctant to give up. Think: utilities, energy, healthcare and consumer staples.

Commodities

Gold, silver, oil precious metals and agriculture all tend to rise with inflation.

Most commodities have already risen due to anticipated spikes in inflation with excess government spending and have continued to rise with inflation. Precious metals, for example, are probably not likely to be a money maker this late in the game, but they may be one of the few wealth preserving investments this time around.

Other commodities, like oil and agriculture are less of a pure inflation hedge and probably make sense as long term holdings even without high inflation.

You can buy gold coins, and coffee futures on there own, but you can also invest in broad indexes of these and more through ETFs. This provides added diversification, and will let you capture most of the gains with a bit less risk.

To be clear, ETFs that focus on one type of holding are not really diversified. For example, the ETF GLD is focused solely on gold, while DBP is a broader index in the precious metals category. DBP will reward you for gold rising as well as silver and copper, and punish you less if silver takes a tumble but gold and copper remain stable.

There are also a number of good mutual funds for investing in sector stocks, bonds and commodities. I recommend anyone who is interested in those take a look at the fund on Morningstar and find a highly rated (4 or 5 star) fund.

Housing

Traditionally, housing is a go-to place for protecting your money and riding out inflationary waves. Unfortunately, the bursting of the housing bubble has made it difficult to ride that wave this time around. It’s likely to take along time before housing prices begin to rise enough to alleviate inflation, much less keep up with it.

Real estate will likely be sitting this round of inflation out, so people should buy a house only if it makes sense for them to do so – i.e.: it fits their lifestyle and long term goals – not as an investment.

Cash is king

Cash is king when interest rates rise. This will likely be the case toward the end of this inflation cycle, as it was at the end of the last bought of stagflation. In the late 1970′s – 1982, money market accounts were fairly new and proved to be one of the few safe havens.

The problem is that the Fed has kept rates so low, that your savings will actually lose value in a money market now. Eventually though, even the Fed will have to recognize inflation has risen too far too fast and will be forced to do something about it. What they do is raise rates. Quite possibly, very quickly and quite high. This is bad news for people with variable rate debt (mortgages and credit cards) but great news for people with cash on hand to stash in a money market account.

The trick of course is to make it to these final stages with enough money left to preserve in a money market account.

What if I’m wrong?

Whenever I play fortune teller and try to predict the future, I always ask myself: What if I’m wrong?

I’m no expert, but I do know enough to know I don’t know it all and that puts me ahead of many so called experts. So, here’s what you should do if I’m wrong about my views and opinions on stagflation over the next few years:

DIVERSIFY.

That’s what I plan on doing with my money.

Life is full of “what-if”‘s, the only way to get through those moments is to plan for as many possibilities as we can. I still have much of my portfolio in more traditional growth stocks and bonds. I’m not “all in” on gold. I’m simply leaning more toward the types of investments outline in this article so that in the event that these predictions come true, at least in part, I will be in a position to be less negatively impacted.

As I said, I’m no expert and you should speak with a financial planner before making any big decisions. Gold looks great and oil seems like a no brainer, but their prices have been bid up in anticipation of inflation and you may get caught buying high at this point.

I just think you should be aware of the specter of stagflation as being just as possible as rampant inflation or the “gold bubble” bursting.

Related Posts:

• Inflation Winners And Losers.
• Minimalism vs. Simplicity – Are You Missing the Point?
• Robert Kiyosaki Plays Loose With His Math in Financial I.Q.
• How (and Why) I Added Gold to my IRA.
• CD Rate Roundup for March. (video)