Personal Finance Blog


Minimum Wage is a Bigger Issue than you Think.

If you’re working today, then there’s a good chance that at least one of the places you’ve worked has only offered to pay you minimum wage. Maybe you took the job, and maybe you didn’t. Either way, that probably means that you’ve got an opinion about whether there should even be one, much less whether it should be raised or not. Of course, in today’s political climate, it’s safe to say that just about everyone who has ever given wages a thought or commented on an online news article has an opinion one way or another.

Frankly, both sides of the argument have got a good point, because minimum wage is one of those things that defies the categories that politicians attempt to put it into. For instance- for some workers, it’s more than adequate for the amount of work done. For others, it’s a short-sighted look at what employers believe that employees do on a daily basis. Additionally, it doesn’t always reflect market forces the way that it should. Sometimes, it’s just indicative of an employer looking to fill a position for the lowest price possible, and not caring particularly how much turnover they incur because of that wage.

You might be asking what I mean by “market forces.” After all, isn’t the minimum wage determined by a complicated mathematical formula that takes into account the average cost of living and basic necessities? Well, yes and no. The formula itself is outdated, and if held to today’s standard of living, would yield a figure quite a bit higher even than the number politicians like to throw around. “Market forces” are what some people feel should be the indicator for minimum wage. It’s the absolute lowest amount which people will take to accept a position and work in that job for a defined period of time. This would take the federal government out of the picture, and essentially free up small businesses from another tiring aspect of regulation that diverts attention and funds away from the work of building and expanding the business.

What market forces won’t do, at least at this rudimentary level of explanation, is discern between two very important “types” of minimum-wage employees. The first, and arguably the one to whom the minimum wage is best applied at its current level, is the entry-level employee, right out of high school, with no skills to speak of, and no experience in the work world at all. These employees typically still live at home, don’t have much in the way of bills, and for the most part, aren’t expected to stay with the company they’re working for for very long at all. Some might make it through college with that same job, but even this is atypical.

The second type of employee can only be described as disadvantaged. You can use whatever name you want to describe them, but at the end of the day, they’re people who just haven’t been able to catch a break. They might be recent parolees, single parents forced out of better-paying jobs to care for their families, or people who simply live too far from higher-paying work to attempt to take a better paying job. It’s wrong to call them lazy, since the jobs that they typically do are some of the most difficult jobs on the market. Make no mistake. If you’ve never spent eight hours in one spot, doing the same mindless task over and over again, you can’t understand how hard it can be.

I’m not trying to convince anyone to one side or the other here- just reminding you that the issue of minimum wage is a multi-faceted one, and at its core, it is a much deeper issue than our politicians would have us believe. It would behoove us as Americans to avoid letting the pundits take control of our thinking in this regard, and instead consider carefully the implications of our individual beliefs, regardless of what side those beliefs tend to fall toward.

Posted in:  jobs
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Should You Invest, or Pay off Debt?

There’s a certain level of trickery that goes on in the investing world, and whether consumers choose to ignore the outward signs of it or just aren’t aware of it at all is questionable. Those who make a living from financial counseling and advice seem to want to make finance an egregiously difficult thing to deal with. From saving to spending and making money, we are led to believe that it’s next to impossible to deal with the financial aspects of our lives without assistance from some overly-smart, college-educated person in a fancy suit and a Mercedes-Benz in the parking lot. The truth is that finances are not at all that complicated. Once you break down exactly what it means to maintain your finances, you’ll find yourself wondering just how it was that you had trouble dealing with debt, paying bills, or any of the other things that trouble us in our modern, daily financial lives.

The benefits of paying off debt are multiple. Obviously, there’s the benefit of having extra disposable income that you can then invest. There’s the psychological benefit of not being beholden to others for your lifestyle, and the reduced stress of knowing that you only have a few bills here and there to take care of every month, rather than the servicing of a mountain of debt such as credit card bills, student loans, doctor’s bills, car payments, and yes, even mortgages.

Now, to the question concerning whether you should take on an investment or put money toward debt payment, it depends on the debt. There are some types of debt that benefit from early repayment, some that should be paid off as soon as possible any way you can, and some that might just be counterproductive to be paid off too soon.

Let’s look for example at a big debt- your mortgage. If you’re paying a little over 4% on that mortgage, you’re getting a pretty good deal, but at over $100,000, it’s a huge debt that, regardless of how you go about it, is going to take some time to pay off. Balance that against putting your 401-k investment on hold, and you’re doing yourself a disservice to miss out on that potential 8-15% return, as well as the tax benefits of both. If this is the question, then don’t do it! Keep adding to your 401-k, and if you want to pay off your mortgage early, kick an extra $100-$200 per month at your mortgage principle, and it’ll be paid off years in advance.

Now, the second side of the coin is the credit card debt, student loans, and all the other drudging debts that drag us down every month. If you’ve got more than $500 in debt servicing going on every month, then you really do need a change. Try putting those investments on hold for a while to get your debt paid down. That way, later on, you’ll be able to add still more to those investment accounts, and avoid having all those debts hanging around your neck for the rest of your days! This is extra important when it comes to servicing credit card debt. The problem with that form of debt is that regardless of how much you throw at it, the compounding interest will eat your finances alive, even if it’s a relatively small amount of debt.

Sure, investing is a great idea, and for the most part, preparing for your future shouldn’t be put aside for debt. However, as part of a solid plan for your future, it’s a good idea to get rid of your existing debt before you make any investments outside your 401-k. If you do, you might find yourself doing nothing but running around in circles.

Posted in:  Budget & Savings, Financial Planning
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Do I need a Longevity Annuity or a Fixed Annuity?

Medical advances in the last hundred years have left most of us with what will end up being a much longer life span than some of our recent ancestors could enjoy. Some scientists are even saying that cancer will be all but wiped out in the next fifty years, and that our children could see the most significant increase in life span humanity has ever seen. That leaves many with a particular problem, though. With Social Security sitting on a somewhat precarious perch, the cost of medical care rising at astronomical rates, and a relatively stagnant job market for the 65+ set, there is the very real need to find some sort of income after retirement that will maintain your standard of living.

First, let’s dismiss some of the more useless drivel that politicians tend to spew all over the headlines. The program is not solvent necessarily, but will still be viable at 100% payout till 2037, when it is projected that a drop to a ~75% payout will be necessary to allow for continued payments. Chances are good that the next twenty years will see a change, though, particularly as the baby boomers begin to pass away. The SSA itself has noted that the decline in birth rates is important in maintaining the program, since the previous generations’ typical birth rate was three children per woman, whereas that has fallen to two children per woman now. Put simply, social security isn’t going to go away any time soon, but it would be foolish for anyone to put too much faith in its being able to cover all post-retirement expenses.

Typically, it’s the 401-k that gets all the press when it comes to post-retirement savings, but it isn’t the only vehicle you can drive into your golden years and beyond. The program is inherently limited, currently to an investment level of $18,000 per year. This certainly isn’t bad, considering that a 30-year old could potentially sock away about five million dollars for retirement with that level of investment, but what if you need more?

Now, that’s not to say that you’re going to be driving a Rolls-Royce when you turn 80, but the specter of high-cost medical procedures and advanced age care could swallow up that savings in no time at all, particularly if your insurance doesn’t cover as much as you need. Even if you can put back that five million dollar number, what is the best option for putting away an extra $5,000 per year you’ve got laying around? Shoot, you could make a big push toward retirement (and help pay for that trip to Europe at the same time) with less than $1,000 per year with a fixed Annuity.

Fixed annuities are great financial products for folks who have already topped out their 401-k contributions, and want another tax-deferred vehicle for the future that isn’t an insurance plan that would essentially leave beneficiaries out in the cold should you kick the bucket before you’re ready. They’re convenient, predictable, and easy to maintain, and don’t have the drawbacks of some other, more complicated retirement products.

Now, let’s talk about when you actually need to consider a product like this for a moment, because it isn’t for everyone. First, you don’t need to fool with it if you’ve got a ton of student debt. You don’t need to fool with it if you’ve got a big car payment, and are putting less than the IRS’ maximum amount in your 401-k or individual IRA every year. Once you’re maxing out that contribution, you can go ahead and look into one of these, because they’re a great deal if you aren’t dealing with paying off debt and trying to get yourself solvent. They aren’t necessarily for rich people, but it’s a waste of time and money to worry about them before you can pay into them without worrying about your other financial issues along the way!

Posted in:  Budget & Savings, Financial Planning, Retirement
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