Yip yip yip yip yip yip yip yip/Mum mum mum mum mum mum/Get a job

Doo-wop singer. Another legitimate job that doesn't require a college education.

Meet us back here on Election Day 2012, and tell us that “the college crisis” didn’t become an issue in the 33 months since this post appeared.

We’ve already heard how the domestic automotive industry is the unseverable spinal cord of the American economy, and that it’s our duty to our fellow man (if he’s a UAW member) to spend $50 billion propping up this radiant pulsar of American commerce.

In 2008, you had to go all the way down to the presidential candidate with the 5^th-most votes (the Constitution Party’s Chuck Baldwin) before finding one who didn’t spout off some variation on how crucial it was to “keep Americans in their homes”, even if those Americans borrowed too much money and assumed that a steady increase in their homes’ values was a cosmological constant.

And as we heard from a prior presidential administration, doling out 700 billion taxpayer dollars (that’s $233 for each of us) was necessary to keep some of the nation’s largest investment banks in the business of lending money, otherwise “the whole system would collapse”, which presumably means we’d be reduced to collecting animal pelts in exchange for our mp3s and bedroom linens. “I’ve abandoned free-market principles to save the free market” was the quote. To paraphrase a ‘60s-era t-shirt and bumper sticker, that’s like (having sex) for virginity.

Meet the next bubble – post-secondary education.

The problem is this: despite the recession, our society has gotten so absurdly rich that today, young adults loaded with potential can postpone any worthwhile work and ring up debts in the process, all in the name of getting an education. How “education” became more important than “productivity” or “fulfillment” or “not being a drain on society” is unclear.

Yes, we’ve all seen the studies say that college graduates make more money than high school graduates – somewhere around $15,000 annually. This is a mantra people take to heart without examining in any detail. It sounds logical, as many jobs require applicants to have college degrees. But like many bromides that attempt to persuade you of a fact in as pithy a fashion as possible, the $15,000 allegation tells only a minute part of the story.

The median salary for petroleum engineers is around $108,000. For a physician who’s been out of school for a couple of years, it’s reasonable to assume he’ll make anywhere from $170,000 or so for a pediatrician to more than $500,000 for a neurosurgeon.

What about philosophy graduates? English majors? People who think a sociology degree is worth anything? We don’t have figures for them, because the Bureau of Labor Statistics doesn’t list “barista” and “street musician” as employment categories. Sure, the average college graduate makes a better salary than the average high school graduate. But the average college graduate is part doctor and part engineer. The students who major in the hard sciences are dragging the political science and journalism majors up with them.

This statistic puts the cart before the horse, and puts passivity ahead of activity. For many college graduates who inherently know, just know, that the last 4 or 5 years were worth it, they assume that that diploma is the negotiable equivalent of a $15,000 annuity. God forbid they actually go to the trouble of applying it.

The University of Hawai’i’s spring semester enrollment is up 9.4% over last year. Instead of working harder than ever to find jobs in a weak economy, people are willfully deferring life – and paying money they don’t have for the privilege. And it’s not like UH is creating more engineers and scientists. A college vice president says “They tend to be all over the place. We have graduate students seeking their master’s, students in areas where there’s a shortage, such as teaching, nursing and social work, and business is popular, but so is psychology.”

And parents, don’t leave the room. We’re not done with you, either. The following is your financial obligation to your kids: food, clothing and shelter until they reach the age of majority. That’s it. No one owes anybody a college education, just like no one owes anyone a house or regular doctor visits. Your kid is far better off becoming a welding technician straight out of high school than wasting four years earning a degree in gender & women’s studies and beginning the income-earning years tens of thousands of dollars in debt. Economically speaking it’s better yet that he become a neurosurgeon, of course, but the world still needs welding technicians.

On the macro level, everyone from your neighbor to the president is talking up post-secondary education. The neighbor does it because he doesn’t know any better, the president for the same reason any elected official advocates anything.* The talking points are familiar: the next generation of Americans needs to be prepared in an ever more competitive world, education is a fundamental right, do you really want America to be a nation of blathering idiots, etc., etc.
This obscures the truth by shrouding it in catchphrases. This may be indelicate, but that doesn’t make it false: things cost money.

An investment, even in one’s own education, is a deferment of resources for an expected return. The majority of college kids don’t know a damn thing about what they’ll do when they get out of college. Therefore for them college isn’t an investment, it’s an expense.

That’s not to say that finishing high school is all you need to do to enter the workforce with a minimum of debt. There’s still a thing called motivation. Completing school, at whatever level, shows that you had the diligence to sit quietly and take some tests. There are a million ways to earn a respectable living out of high school – carpentry apprentice, garbageman, junior lab technician – but taking a random selection of undemanding college courses is not one of them.

Yet the government, true to its misguided principles, subsidizes education. President Obama proposes, in public and behind a live microphone, that no college graduate should have to fork over more than 10% of his income in student loan payments. This is what commerce has come to in 2010 – the terms of an agreement are dictated by future occurrences. Of course no one wants to pay 10% of his income on debt obligations, or on anything else for that matter. Not that 10% is an insurmountable number, but if the government mandates that it’s too high, pretty soon people will agree that it is too high, and that no $40,000-a-year junior account executive should suffer the inconvenience of paying more than $333 a month toward her student loans.

It gets better. (Or worse, if this kind of thing bothers you, which it should.) The president adds that student loans should be forgiven after 20 years – 10 if the borrower “enters into a life of public service.”

His definition of public service goes beyond Green Berets and SEALs. Say you want to take your forestry degree and be a National Park Service ranger, which offers room and board and pays $35,000 annually. Thanks to the time value of money, you’d be getting close to a complimentary education while doing nothing that makes a measurable impact on America’s gross national product.

But after the 10 (or 20) years, the unpaid part of your education doesn’t suddenly become “free”. Services were still rendered, the college still paid its professors and maintained its classrooms and grounds. Who makes up the difference? (Hint: the same generous soul who already bailed out Chrysler, GM, AIG, Lehman, your deadbeat neighbor who didn’t know how to sign a loan document, etc.)

People respond to incentives. If the government declares that the price you pay for your education will be arbitrarily lowered, more people will go to college. And earn useless degrees. And take their sweet time paying them back, if at all. But at least our elected officials can brag that a higher percentage of Americans go to college than do the Irish or the Icelandic.

*To get elected.  (And in this particular case, to distract attention from more pressing matters, such as the ever-closer destruction of Social Security.)

Almost certainly not how Carl Icahn got started

Can you handle another story that features a bad example? We had a feeling you might.

There are thousands of women like this, which is a problem unto itself, but introducing her leads to a larger point.

Not pictured: Kids #2, 3, 4, 6, and 9, and Baby Daddies #1, 2, 3, 4, and possibly 5 and 6

The well-fed 35-year old woman in the middle of the picture is Tessa Savicki (anagrams include “Avast, Sickies” and “Cake Ass Vista”), a Massachusetts welfare queen. Her oldest kid is, ahem, 21. She has another adult kid. She’s “planning on getting her GED next month”, not unlike the stripper who’s working on her Ph.D. or the fat girl who’s definitely going to start going to the gym. A chronic plaintiff, Miss Savicki (That’s “Miss”, guys! She’s available!) once sued a major drugstore chain for selling her an expired spermicide. (She might have a case. That spermicide looks like it went bad sometime around Reconstruction.) The remainder of what you need to know about Miss Savicki is captured in the caption, with one exception.

When this human gumball dispenser jettisoned her most recent kid, the attending physicians, God bless them, finally tied her tubes before she could create a designated hitter for the Savicki family softball team.  She’s suing the hospital, and her attorney says the hatred his client is spawning engendering “blows your mind, because you see how ingrained the bigotry is against poor people.”

Wait right there, attorney Max Borten [(781) 890-9095, inquiry@GBMedLaw.com]. But thank you for leading to this week’s topic: the difference between poor and deadbeat.

The Control Your Cash authors have been poor. They’ve been rich. (Sophie Tucker: “Rich is better.”) But every step of the way, they’ve been unaware of any bigotry against poor people in the United States, at least unaware of any practiced by adults. The kid who wears tattered clothes to school might get laughed at by his peers, but the adult who openly pokes fun at someone for not having sufficient material luxuries in his life is either rare or nonexistent.

There’s no shame, none whatsoever, in being poor. Most of us have been there, making very little money and living in the rustic apartment immediately out of college or high school, furnishings courtesy of the Home Depot particleboard collection. Poverty, or at least extreme modesty, is usually a necessary step before you can earn your place among the middle class.

Being deadbeat is something else. Denuded of its buzzwords (“great society”, “hand, not a handout”, “living with dignity”, “economic security”), it’s theft. Taking money from industrious taxpayers, even if it’s for food, clothing and shelter, is stealing if the recipient offers nothing in return. Receiving the money through the conduit of a government agency doesn’t make the recipient any less culpable.

-Artie Lange completing a triathlon.
-A Libertarian candidate becoming President.
-Nauru taking home Olympic gold in speed skating.

These are things that will occur millennia before a welfare queen (or king, or princess) Controls His or Her Cash.

Few of us start life with the advantages of a Jennifer Gates or a George W. Bush, but that’s not the point. If you’re born healthy enough to have your faculties, your senses, to be able to speak (and sue drugstore chains), and to make it to the age of 35 and counting, then you can theoretically someday make your way to comfort if not affluence. Here’s how not to do so, with a virtually guaranteed rate of success:

-Jump from relationship to relationship
-Spread your legs, repeat ad nauseam (or for you guys reading, plant that seed in any warm place it’ll land)
-Drop out of school, again more than tangentially related to the previous two points

If you do the above, you’ll have less chance to get a job. You’ll all but eliminate your chance at getting a job with vertical room to progress. But thanks to the largesse of an increasingly squeezed public, you’ll get enough money to live and keep cranking out babies. Unless a surgeon with some foresight decides to throw the rest of us a bone.

We preach discipline at Control Your Cash, which should be neither hard nor painful for you. Spend less, save more, keep your mind open, learn how investments work before committing to them. Know what an investment is, and don’t confuse it with an expense. In short, show up here every week and get yourself informed.

But you’ve got to at least want to. It’s clear that lots of people can’t be bothered to.

Last month we awarded the golden Control Your Cash Man of the Year chalice to a guy with no debt, growing investments, and a reasonably well-spending lifestyle who would sooner rob a bank than suck at the taxpayer teat. In Control Your Cash Bizarro World, we’d have a prize for Tessa Savicki. Maybe a platinum-coated IUD.

Sacre bleu

Economic opportunity comes in odd forms, including this one.

Even a catastrophe can demonstrate how important it is to think as someone who Controls His or Her Cash. If doing so can dispel some class warfare misconceptions too, then all the better.

Unfortunately, for some the Haiti earthquake is more than just a colossal tragedy, since it’s possible to attach a moral component to some benign human behavior in the earthquake’s aftermath.

Haiti is the size of Massachusetts, with more people than Michigan. And since people started keeping records, Haiti has been the poorest country in the Western Hemisphere. The citizenry has endured uninterrupted horrible government since independence two centuries ago, unless you count bloody coups as “interruptions”. As you’ve probably heard, shortly after Haiti fell to rubble Royal Caribbean cruises’ Independence of the Seas made a scheduled stop 2 miles from the major northern city of Cap-Haitien. Never an industry to look beyond the surface, the media helped matters by using loaded terms like “frolic” and “frivolity” to describe the pampered passengers on board, who allegedly sipped mai tais and played shuffleboard while thousands of people died relatively close by. While you’re welcome to bash people who vacation on cruise ships as emblematic of indulgence and sloth, that isn’t the point.

If you glean one piece of knowledge from Control Your Cash, let it be this: alternatives must exist. Given that cruise ships exist, and that that existence is somewhat permanent, exactly what is supposed to happen if the Independence of the Seas cancels its visit to Cap-Haitien? The ship has to go somewhere. Were the Independence of the Seas to drop anchor a few miles off the coast of Hispaniola, or continue uninterrupted to San Juan, perhaps that would somehow mitigate the carnage around Port-a-Prince. Out of sight, out of mind, right?

Circumstances placed the passengers on board the Independence of the Seas in an awkward situation (yes, it’s all relative. “Awkward” compared to the passengers who took the same cruise the previous month, not compared to the Haitians waiting for the International Building Code inspectors to come by and slap a giant “Condemned” sign on the entire western half of the island.) If it’s distasteful to play on waterslides and sample the breakfast buffet while docked in Haiti, would it be any less so to do the exact same thing a few dozen miles offshore, where the locals couldn’t see the ship? Do you really believe the poor dark-skinned unfortunates can be that easily fooled?

Refusing to dock by Cap-Haitien won’t alleviate anyone’s suffering, unless you count assuaging the partially developed consciences of a few uptight and unthinking people. Furthermore, Cap-Haitien was 50 miles from the epicenter of the quake and is relatively unscathed. So naturally, the logical thing to do would be to bypass the port and keep tourist dollars from entering the country when they’re needed most.

Haitians, by virtue of being poor and rendered poorer by tectonics, don’t have the luxury of concerning themselves with such secondary cares as etiquette and propriety. While the spectators can debate the merits of hybrid subcompacts vs. SUVs, or refuse to eat food grown 101 miles away from their homes, the Haitians themselves have more pressing problems. Such as getting fed and sheltered.

It shouldn’t take a natural disaster to illustrate this point: while ordinary modern humans don’t live at the beck and call of rich people, it sure is handy having them around. Because once someone elevates from mere comfort to affluence, the difference between the two is measured by money that needs to be spent or invested. That money will almost always be spent or invested with people poorer than that rich person.

Liquidity of money is everything. Liquidity means the speed at which funds get spent in the economy as they move from lower-valued uses (sitting in a tourist’s pocket) to higher-valued ones (being exchanged for food and shelter, by a Haitian selling whatever goods or services.)

The irony is that cruises, despite being synonymous with ostentation, are anything but ostentatious. 75 years ago, the average person had as much chance of going on a cruise as she did of traveling in space. Today, cruises have been democratized to the point where Royal Caribbean offers 4-day junkets from Miami to the Bahamas (and back, presumably) for $247. That’s not per night, either.

Perhaps the distaste and second-guessing stems from the level of pampering the passengers on board the Independence of the Seas enjoy. If she had only one whirlpool instead of two, or served off-brand ice cream in her coffee bar instead of Ben & Jerry’s, that might mitigate the protocol horror.

Kudos to Royal Caribbean CEO Adam Goldstein for putting practicality ahead of public relations. He unapologetically made the economic case for docking in Haiti, hoping to persuade the holdouts who think it’s bad to patronize the hundreds of local merchants who rely on moneyed Americans to indirectly feed their families.

Just ask the merchants along Front Street in Lahaina, Hawai’i, who salivate when a cruise ship docks at the nearby terminal and passengers disembark, ready to spend. The people running those shops are Americans. If it’s a slow day at the shop, the merchants and their employees still have warm beds inside structurally sound dwellings to sleep in that night.

But for a Haitian local, the $15 he can earn for a day’s worth of tour guiding can mean the difference between going home, and going home hungry. The alternative (there’s that word again) would be for the cruise ship passenger to keep that money to spend it at the next port of call, which is certain to enjoy a higher standard of living than anywhere in Haiti does.

If the passengers are “uncomfortable” with coming within 50 miles of a disaster zone, or if people with no vested interest in the situation are uncomfortable, suck it up. Or you could ask a Haitian who just lost his house, his income, and a family member or two if there’s anything he can do to salve your discomfort.

One way to solve the problem of naked income disparities would be to have Royal Caribbean only cruise to ports with substantial per capita incomes. Luxembourg, for instance. That way, neither the cruisers nor the locals will perceive any inequality.  Alas, Luxembourg is landlocked.

As to the finger-pointers who decry the Independence of the Seas’ passengers as representing all that is unholy with the festering white underbelly of globalization? If those naysayers really gave a damn about Haitians, they’d buy a cabin, dock at Cap-Haitien, ask for the deluxe tour from whichever Jean-Michel or Rene greets them at the port, tip generously, then head into a local café and order as much tassot et banane pesé as their well-fed First World stomachs could hold.

“Rich”, “out-of-touch” and “pampered” are perfect descriptors for anyone who recommends essentially forbidding poor Haitians from earning a livelihood. Especially now. A physical distance from the problem doesn’t exonerate you, either. If you’re ready to chastise Royal Caribbean and its customers, while you’re spending even a nickel on non-necessities of your own, you’re far more loathsome than the cruise passengers you condemn.

Think your lek can kick my colón? Get riyal.

I haven't seen this many Indochinese dong since Sunee Plaza. Hi-oh!

Strong dollar, weak dollar, what does it mean?

It means the price of the dollar, as quoted in foreign currencies. (It doesn’t make a lot of sense to quote the dollar in terms of domestic currency. It’s always going to be worth $1.) There are 182 national currencies in circulation across the planet, but for this post we don’t need to concern ourselves with sparsely traded ones like the Botswanan pula or the Kyrgyz som (no offense to our readers in Gaborone or Bishkek. Control Your Cash is huge in Bishkek.)

Most of the world’s large cross-currency financial transactions are undertaken in just a handful of currencies: among them the euro, the pound sterling, the Japanese yen, the Canadian dollar, the Australian dollar, the New Zealand dollar… and the U.S. dollar. In the world financial markets, the U.S. dollar’s value is expressed relative to the prices of these other currencies. And around the world, that can be vital. One Control Your Cash author had the perspective of growing up in Canada, where the value of the Canadian dollar (quoted in U.S. cents) is at least as prominent a financial indicator as the Dow is in the U.S. Given that the U.S. dollar has historically been the most widely held stable (and most stable widely held) currency in the world, it makes sense that it’d be the one that other countries would choose to quote their currency in terms of. In many parts of the world not referred to above, three particular (foreign) currencies carry equal importance when measuring their relative strengths. In South Africa, for instance, the U.S. dollar, pound, and euro are quoted in terms of each other, making for 3 daily rate quotes (6 if you count each quoted in terms of South Africa’s own rand.)

We do this – quoting euros in dollars, or dollars in pounds, or pounds in euros – because there’s no pure, objective measure of wealth: no commodity whose value always stays the same with respect to everything else. There can’t be, as the economy is dynamic and accelerating. Millennia ago, it might have made sense to count, say, a suckling pig as a unit of currency. My hog is worth 4 of your sucklings. My horse is worth 20. My cow, maybe 8. Oh, wait, it’s a bull? Fine, you can have it for 3. When consumer electronics and decorative tiles and golf clubs don’t yet exist and therefore can’t be quoted in terms of suckling pigs, no problem. But the moment an economy advances even a little, you need something uniform and readily transferable to conduct business in. Even cigarettes work better than piglets, but that implies that your economy has already advanced to the point where cigarettes can be manufactured. Gold works to some extent, as we discussed here, but there are myriad reasons – mostly nationalism and conspicuity – why each nation insists on printing its own money.

If everything has a value – and if anything should, money should – it stands to reason that currencies can be traded for each other. And what makes a currency worth buying? Well, considering money isn’t edible, what makes it valuable is its potential for growth. It’s an investment, like anything else people trade in the financial markets.

If I buy ExxonMobil stock, I’m betting that the stock will increase in value – or in other words, that each dollar I’m buying the stock with will one day be worth less stock.

Yes! Breakthrough.

But currencies are different. If I buy pounds, doesn’t that mean I’m betting that my dollars will one day be worth fewer pounds?

Yes.

Does that make me a traitor to my country?

No, it makes you an investor. Indeed, currency transactions differ from most transactions in that when you deal in currency, you’re exchanging two abstract quantities whose only practical purpose – whose primary purpose – is ultimately to buy other things with. But if the currency you do business in (and if you’re American, that’s largely going to be U.S. dollars) is in danger of losing value relative to other currencies, there’s no point in waiting for it to happen while watching your dollars get weaker.

A “weak” dollar only means weak relative to other currencies. A currency can also lose value relative to itself over time (and almost always will), but that’s a different phenomenon – inflation, which can occur without respect to what’s happening in the rest of the world.

There are plenty of reasons why currencies fluctuate in value, a big one being interest rates. Let’s use the U.S. dollar and the pound as examples. The United Kingdom’s central bank*, the Bank of England, recently set its bank rate (the rate at which commercial and investment banks can borrow money from it) at ½%.  Every few months the Federal Reserve sets the American equivalent, the federal funds rate. Instead of a number, it’s a range, which is currently 0–¼%. (The more a bank borrows, the lower the rate it pays.) The effective federal funds rate, which is a weighted average of the money borrowed by banks, is .11%.

The U.K. rate is unequivocally higher, and not by a little. Which means that ever since those rates were set, the pound has promised higher returns than the dollar. Which makes the pound more desirable than the dollar, which is why the pound is worth more dollars now than it was a few months ago.

(The Bank of Japan’s rate is .1%. The European Central Bank’s is ¼%**, as is the Bank of Canada’s.) We’re not recommending currency investing, nor discouraging it. We’re just trying to explain how it works, which is better than you understanding it retroactively.

In the last 10 months, the pound has gained 20% on the dollar. Does that mean the entire American economy is weak relative to the Brits’? No. If your U.S.-based business buys a lot of British materials (labor, capital, whatever), it’s gotten more expensive to operate, because your business is taking in money in dollars and paying it out in pounds. If your U.S.-based business exports a lot to the U.K., then life is magical. You might not have noticed a thing regarding the price of what your company sells, or what it costs to make it, but from the perspective of a British consumer, your products got cheaper (in pounds.) Which is a big advantage over any British competitors of yours.

There are other criteria that determine currencies’ relative strengths, of course. A country with a lot of debt relative to its size (e.g. Venezuela) might have a crazy person in charge (which it does.) That crazy person (Hugo Chavez) can keep printing currency to settle the country’s debts, making the currency worthless and vaporizing the wealth of all the Venezuelans who earn and save money in that currency. But a country with a vibrant economy, little debt, and lots of imports relative to its size (e.g. Singapore) will usually have a stable currency. Singapore has to buy goods from other countries in order to survive, which means Singapore has a vested interest in keeping its currency worth something. It doesn’t have a lot of financial obligations, so there’s no incentive to weaken its currency by inflation.

Where do we fit on this scale? The United States has a tremendously vibrant economy, at least relative to the rest of the world, regardless of what’s been happening the last 18 months. The U.S. also has a lot of debt. However, we import a lot in absolute terms (although in relative terms, it’s nothing compared to Singapore. Plus we export a lot, too.) And while our chief executive isn’t crazy, it’s not a stretch to call him an opportunist who’d think nothing of ordering the Federal Reserve to help accomplish certain political goals that might not be economically sound.

Where to find currency rates? Yahoo! Finance is our favorite all-purpose financial site: it’s clean, comprehensive and easy to navigate. Scroll down to “Currency Investing” on the left column and have at it.

*You do a blog post, and then you realize halfway through that you might introduce an unfamiliar term. A country’s central bank – most every country of decent size has one – isn’t a bank in the sense that it has branches you walk into and make deposits in. A central bank exists to lend a country’s government its currency. The central bank actually creates the money the government borrows, which is why the dollar bills in your pocket carry the phrase “Federal Reserve Note”.

**You can choose between decimals and vulgar fractions on your own blog. We’re using both.

**This post is featured at Compounding Life**

Needless expenses, expelled

You're going to need a bigger cart

This week, a nontechnical but nevertheless effective way to build wealth, or at least increase cash flow by reducing outflow.

The Census Bureau claims that the median household income in the United States was $50,233 in 2005. Other sources claim that the average household spends 7.5% of its income of groceries. Yes, there’s a danger in mixing “average” with “median”, but it shouldn’t affect our calculations too much here: besides, there’s a larger point to be made. The average household makes more than the median, because there’s a lower bound to household income (which is of course $50,233 less than the median), but no such upper bound. Just as obviously, the less money a household earns, the greater the share of that income it’ll spend on groceries. Regardless, the average household spends somewhere around $4000 a year on groceries.

Would it be worth your while to cut that number by, say, $1600? As there’s no way to escape having to eat, you could almost think of it as a 40% return on a $4000 annuity.

Which brings us to Costco, one of the quietly great successes in American retailing. Control Your Cash got to the party late on this one, but that doesn’t make Costco any less amazing.

Stop buying your groceries at Safeway. Or Albertson’s. Or Ralph’s. Or Lucky. Or Vons. Despite its mellifluous slogan, Vons is not value. Nor is Publix nor Piggly Wiggly nor Wegman’s nor Pamida. Fine companies all, to be sure, but not committed to the principle of Controlling one’s Cash.

Pay $50 and buy a Costco membership instead. If you’re a human who enjoys eating things, it’ll pay for itself 40-fold. This is not an exaggeration.

Quick recap, if you’ve only driven by a Costco and have no idea what goes on inside: that membership entitles people to buy groceries and other stuff at prices around 30-40% lower than you’ll find elsewhere, with much of the merchandise stacked to the ceiling in aisles wide enough to hold chariot races in. This leads to the perception that Costco only sells in colossal lots, requiring you to buy, say, a year’s supply of cereal at a time. This is false.

Costco and its competitor, Sam’s Club, represent the zenith of human achievement, on a par with space travel and sanitation. With every dollar these retailer/wholesalers reduce prices by, customers have to expend ever less incremental effort to earn money to feed themselves with. Costco performs wonders by exploiting a fundamental economic truth: the more a seller can sell to a buyer, the more likely the seller is to discount what he’s selling. Therefore, the more you buy, even if it’s in concert with other members, the cheaper each unit becomes.

Costco and Sam’s Club have 90 million members between them, so it’s not as though either company is operating in the shadows.

Costco doesn’t just sell groceries. The displays are loaded with everything from vacuum cleaners to tires to flat-screen TVs to books. Even hearing aids and prescription glasses.  Another misconception is that Costco only deals in minor brands, which is also false. A look at digital SLR cameras at Costco.com, for instance, shows Canon, Nikon and Pentax offered, among others.

Downsides to buying at Costco:

-Parking is scarce on weekends.
-They keep standard retail hours, closing around 8:30 on weekdays and 6:00 on weekends.
-You have to bring your own bags, or boxes.
-There’s little variety among brands. Costco typically carries only one brand of a particular item (e.g. NutriSystem but not Alli.) But this isn’t necessarily a negative.

When you’re torn between the Prego and the Ragu, or the Coke and the Pepsi, what criteria do you typically weigh when you buy? Be honest with yourself and ask: is there really that much difference between one and the next? And if price isn’t a criterion for you, would it become one if the differences among brands were large enough?

“I would never dream of shopping there.”

Some people find the idea of deciding to save lots of money on groceries to be gauche, a step up from collecting soda cans or beachcombing. Often, these people will justify it by assuming that no retailer could set its prices so low without exploiting its employees. Fine. If you’re wealthy enough to have such a limiting grocery-buying philosophy, or if overpaying somehow makes you feel rich, have at it. Have your kippers and water biscuits shipped over from the Marks & Spencer flagship store at Marble Arch. The rest of us will save money, thank you very much. And hopefully use it to buy assets with.

Man of the Year

Bob enjoying his Man of the Year trophy (reenactment)

Lately, we’ve been guilty of accentuating the negative, poking fun at people who refuse to foster their money while not giving enough positive examples of what to do and who’s done it. This week, that changes. Sports Illustrated announces its Sportsman of the Year about a month in advance. Time names its Person of the Year around the same time, and as often as not awards it to multiple people, a symbolic person, or whomever happened to see the magazine on a newsstand.

At Control Your Cash, we actually wait until the earth completes its lap around the sun before handing out honors. And so, our inaugural Man of the Year: a person who exemplifies adopting the habits we’ve been trying to avail you of for the last few months. Anonymity precludes us giving our honoree’s full name, but here he is: Bob G., a 44-year old radio personality who lives in Las Vegas. For a decade, Bob worked for a particular station where he and a series of co-hosts did a morning show that was consistently both lucrative and popular. But because Bob works in the least rational industry in all of commerce, 2 years ago he was fired and replaced by a tardy borderline illiterate who commands half Bob’s salary. Even worse, Bob’s contract included a 6-month noncompete clause – the rationale presumably being that Bob is no longer talented enough to work for that employer, yet still so talented that he’d indirectly cost that employer money were he to work for a rival. You figure it out.

Even with a college degree (Wisconsin, communications, 1988), Bob was now rendered legally unemployable in his chosen field in the city he’d called home for most of his professional life. For most people placed in such a situation, the strategy would be simple:

-eat potato shavings while tallying the days until the noncompete expires;
-ask the wife to pull a double shift at the medical clinic;
-set fire to the credit rating;
-hop around the nation from medium-sized city to medium-sized city, a/k/a the transient career path of the doleful would-be radio star.

Instead, Bob descended to the figurative basement shelter and hooked up with a competing station shortly thereafter. Although he of course missed the $2,000 biweekly direct deposits, practically speaking, Bob and his household barely felt a breeze. Bob spent the previous decade contributing to his 401(k), automatically sending monthly payments without even thinking about it. He transferred it over to an IRA that’s now worth $165,000, and after getting fired set up a Roth IRA.* He also cut a regular monthly check to Vanguard, his mutual fund company. Today, that mutual fund is approaching $170,000. When the market dove, losing almost 40% of its value, Bob didn’t flinch. Instead, he took the drop in stocks as the buying opportunity it is, knowing they were bound to rebound. He started writing bigger checks, and watched his fund rise 30% over the year. And, while temporarily barred from earning income (yes, he signed a contract with draconian restrictions, but that’s another topic), Bob could at least reduce his expenses.

Except Bob barely had expenses to reduce. Credit card debt? Please. Bob carries a single MasterCard, using it for household expenses as a matter of course. He pays the balance in full every month, subscribing to the quaint notion that the price on the tag is what the buyer should pay. Bob would rather eat his groceries than spend years financing them.

Those household expenses aren’t particularly exorbitant, either. Dog food. Cable. An occasional night out with the fellas and a beer or two. A quarterly lovers’ junket to San Diego. Bob has yet to pay $300 for bottle service at a nightclub, and his next clothes-buying spree will be his first.

Bob, his gal pal “Susie” and their Rottweiler “Pinto” live in a house Bob bought new 7 years ago for $185,000. Even though Pinto’s had a health problem or two, his care runs about $800 a year, which is several times cheaper than a child would be. Bob caught the housing market before it exploded – which it did in Las Vegas in a more pronounced fashion than it did in most places. So was his home purchase a strategic decision, bought when it was bought because Bob predicted what market forces would soon do to the value of his property?

No, he bought because he needed a permanent place to live. He was tired of living in an apartment, wanted to build equity, and finally had a worthwhile partner to share his life (and expenses) with. Bob’s house shot up in value in the ensuing years, through no intrinsic reason. Buyers were just bidding prices up faster than builders could build, and Chez Bob went along for the ride. In theory, Bob’s functional house was worth $300,000 in early 2007. That fell as quickly as it rose. An identical house across the street sold 2 months ago for $172,000. Retroactively, it’d seem that early 2007 would have been the ideal time for Bob to have sold and enjoyed the $115,000 gain he’d spent 4 years building.

So did Bob cost himself $13,000 by buying when he did, instead of this past November? If he were a real estate investor with thousands of other options, maybe. But as a human who needs shelter, Bob made out just fine. Yes, his home depreciated. However:
-he and his home still have plenty of years left. In Bob’s case, to live. In his house’s case, to regain value. There’s no such thing as a permanent price level of any kind.
-what was he supposed to do instead, keep renting an apartment? He still had to have lived somewhere. Say he found one for $850/month. Instead of being down $13,000, he’d have been down $71,400.

Bob’s built equity in the house. He deducts the mortgage interest payments from his annual tax bill. Oh, and that mortgage? Its rate is fixed at 6¼%. Always has been. No nasty surprises that way: the nasty surprise of paying for his professional success by getting fired was plenty, thank you very much. If Bob were reckless, when the home reached its maximum value he’d have opened a home equity line of credit – also known as a second mortgage, it’s a loan from the mortgage company that’s tied to the new, enhanced value of the home. At the height of the market, some people did this, which is risky if you want to use the lent money to buy assets with. It’s ultrasonically risky if you want to buy jetskis and vacations with it, yet people did. And then cried about the heartless bastards at the mortgage companies when the bills came due. Not Bob. He just continued cutting the mortgage company checks without thinking about it.

He drives a 2000 Maxima with 120,000 miles on it. Bob signed a 5-year deal, always overpaid what was due and paid it off 2 years early. He gets the oil changed every 3000 miles and has yet to add aftermarket bumper canards or tinted windows. Every Thanksgiving and every summer, Bob and Susie visit his family in the upper Midwest. They buy the tickets months in advance, saving them a few dollars more for no incremental effort.

Bob’s not wealthy, not does he have any particular desire to be. However, he has a fanatical desire to avoid being poor. While putting that into practice, he’s managed to remain in the 90-somethingth percentile of net worth in this country despite getting fired. He didn’t, and doesn’t, even have to work more than 30 hours a week to get where he and Susie are today.

When informed of his honor, Bob celebrated the news by announcing that he was on his way to a movie. With Susie. And complimentary tickets. Controlling His Cash yet again.

*Real quick: whatever you contribute to a traditional IRA is deducted from your income for tax purposes, with the interest and appreciation taxed years later when you start collecting payments. With a Roth IRA, you pay taxes on the income when you earn it, but those payments, interest and appreciation in the future will be tax-free. You can only get a Roth if you make under $95,000. Bob’s salary of 0 thus qualified him.

**This post is featured at Funny about Money**

3 Investments for the next decade

Received honorable mention. Put on own socks. Enjoys lists.

Disclaimer:

Posting in list form is for the lazy and the epistolarily challenged. However, in an attempt to get more readers than the tens of thousands who already stop at Control Your Cash regularly, we’re following the edicts laid down by the people at ProBlogger. They recommend a different daily exercise for a month. Today is Day 3, and the exercise is…a post in list form. It’s embarrassing to even reference this contrived method of indirectly canvassing new readers, but in a couple of lines we’ll move from self-flagellation back to financial advice. Let the form of this week’s post be a lesson in the virtue of seeing a commitment through, no matter how dumb parts of it seem.

So here’s our list. Of investments it’ll be OK to make for the foreseeable future:

1. Commodities.

These are the protoplasm of the market, the most fundamental securities of all.

What are most institutional investments, really? A bank account sounds simple, but on its surface it’s somewhat intangible – it’s really a bet you’re making on the credibility of the bank and its officers. In a sense, you’re wagering that the bank’s lending and borrowing policies are conservative enough that the bank will pay you back with interest.
Say you advance to a slightly more sophisticated investment – 100 shares of Ford Motor Company. Ford, somewhat unsurprisingly, makes cars. They also make parts and lend money, but their primary business is the creation of Mustangs and F-150s.  When you become a shareholder, your investment doesn’t directly correspond to a particular car, or part of a car. What you’re really buying is another intangibility – the future prospects of the company. You’re hoping that Ford management is adept enough at its primary business and its ancillary businesses that the $1013 you invest today will appreciate.

But commodities are as tangible as it gets. You buy a commodity, you’re actually buying cotton, hay, milk, heating oil, light sweet crude, gold, whatever. Take the unassuming soybean, available for about $1000 per metric ton. Soybeans fill bellies, thus taking care of the most basic human requirement. Soybeans trade in a more sophisticated manner on today’s Chicago Board of Trade than they did in the Sumerian marketplace of 6000 BC, but the principle is the same.

Remember the hierarchy of human endeavor. With apologies to Abraham Maslow, mankind’s highest occupations are, in descending order:

1. agriculture
2. engineering
3. medicine.

First, we need to eat. Second, we need devices that free our labor for other uses. Third, this all loses meaning if we get sick and die. The farmers, engineers, doctors and their related professions do all the productive work on this planet, while the rest of us just emit carbon dioxide. There’s nothing wrong with this, as we all benefit from the symbiotic relationship among the 3 categories above. The engineers create the axial-flow combine and develop superphosphated fertilizers, making the farmers more productive, which makes food cheaper, which frees the remaining 98% of us up to become investment bankers and bloggers.

2. Single-family homes.

Good Lord, there’s never been a better time to buy a house.

Even if you’re as unobservant as a TSA official, you might have noticed that home prices have dropped in the last couple of years. A desultory look online can show you graphs that demonstrate how 2009 median home prices are essentially what they were in 2001. You can find other graphs that seem to state that the recent bust has lowered home prices to levels not seen in 100 years.

“Median” doesn’t mean “average”.  “Median” means this: say you ranked all 110 million houses in America in order of price – starting with the $20 house in Detroit we mentioned a few weeks ago and ending with Susan Saperstein’s $125 million home in Beverly Hills. The median home would be the 55,000,000^th on the list.

There’s no question that a median home in 2009 is more valuable than its 2001 (or 1890) counterpart. That 2001 house probably wasn’t wired with a flat-panel TV and a wireless router, or even an iPod dock. The 1890 house didn’t have a flushing toilet, let alone a fridge with a vegetable crisper.

Building materials have improved – everything from fiberglass insulation to your decorative cedar accents and maintenance-free exteriors. So…

-the quality of the median house has doubtless improved;
-the median house fulfills its function as well as ever. You can still live in it, and it’ll still protect you from the elements.
-yet the price has tumbled.

And houses are necessities. Economists talk about substitutes – if chicken gets too expensive, you’ll buy turkey. But there’s no substitute for shelter.

Now if builders are creating a product that’s superior to its predecessors, and the prices have shrunk in constant dollars, what does that mean?

It means there are too many houses and too few buyers. There are too few buyers because a lot of people either can’t get credit or can’t make enough money. Which means that if you can get credit (which you should, if you have a job and Control Your Cash), and if you make enough money (if you Control Your Cash), you should be making offers on whatever houses you can find. Not necessarily to live in, but to invest in. You’re supposed to buy at the bottom of the market. The market will never be (much) lower.

Don’t take our word for it. Listen to the clueless brass at the National Association of Realtors, while keeping in mind that that organization’s main agenda isn’t to increase home ownership, or to educate homebuyers, or to increase stakeholder value, or any of that nonsense. Their goal is to maximize the number of real estate transactions. If home prices stayed unchanged for the next century, realtors would still hope that people would want to move across the street to have the sun hit their windows from a different angle, and would gratefully take a 3% commission on every sale.

The NAR’s latest TV and radio campaign stridently reminds us “affordability has improved” (Corporatespeak for “houses have gotten cheaper”.)

Read between the lines. What they’re not talking about is how attractive an investment a house is. They’re (not) doing this for a couple of reasons. First, half the realtors’ clients are sellers, who don’t want to hear the inevitable truth that this is a horrible time to sell a house.

Second and more importantly, people are idiots and only assume an investment is worthwhile if it appreciated in the past, rather than the future. They see a graph of median home prices that points in a southeasterly direction, and they assume the pattern will hold – even though as we’ve shown above, that’s untenable. Prices can’t get much lower, or they’ll barely cover the labor and materials.

3. Your own judgment.

This isn’t any of that Jiminy Cricket personal motivation talk. We’re being practical here, as always.

Using your judgment means that when you’re confronted with an investment that sounds uncommonly good, look at what could possibly go wrong and ask the most challenging questions you can think of. Of all the people who’ve ever lost money investing, how many were merely the victims of haphazard market conditions, and how many refused to look at the economic reality that was staring them in the face rather than the heart?

The penny stock of a company that’s created a transcendent product, yet refuses to demonstrate the prototype. The cheap rural land that will soon sit adjacent to a burgeoning new development, except there are no roads and no water and no means of getting it there. The inert icon of American commerce that still trades on the New York Stock Exchange, even though it’s been losing market share to efficient foreign companies for decades and relies on government largesse to pay its suppliers. The clothing store that your friend is opening up, even though she has no experience handling a payroll nor a budget and only got the lease because the last tenant absconded and the landlord figures it’s better to set a few hundred dollars on fire every month than a few thousand.

Buy into any of those and you’re selling, metaphorically speaking, your judgment short. Think of the downside – even the surest things have a downside. If it’s as easy to visualize as the scenarios above, step back and let another pioneer take those arrows.

Wow, three items. That hardly counts as a “list”, but given that this week’s post is even longer than our average post (or our median post), it solidifies Control Your Cash’s position as the most comprehensive blog of its kind.

Our non-endorsement of the week.

Little Boy : Penny Stock Chaser :: Hiroshima : Your portfolio

(“Undorsement”? “Exdorsement”?)

Put your money on the keno board at the Red Lion casino in Elko, Nevada before you do business with Penny Stock Chaser. Unless you’re the kind of person who’s dumb enough to be swayed by exclamation points and graphics of money on trees, in which case you should give this company a try.

At least their name is fairly expository. Penny Stock Chaser recommends cheap equities for its customers, in the hopes that said companies will increase in value. At least the company’s one discernible product – its newsletter – is free. As best we can tell, Penny Stock Chaser makes all its money from the companies that allow Penny Stock Chaser to promote their stock.

A penny stock is one that trades for under a dollar a share – that is, its price is quoted in cents. Understandably, the cheaper a stock, the greater its potential to grow – both in absolute and relative terms. Holdings of a stock that trades at 3¢ could easily double tomorrow. Berkshire Hathaway, which traded at $100,899 Friday, is not going to reach $201,798 today.

This makes inherent sense. Take the hypothetical company whose stock trades at 3¢. Let’s even assume it’s a legitimate business, as opposed to an accounting construct developed by a wayward promoter, which is what many a penny stock represents. Say the stock is just a tiny bit desirable, in that some potential buyer is willing to offer more than the current asking price.  Even if that bidder expresses his interest by augmenting his bid by the smallest amount possible – one penny – the stock will rise 33%.  That’s not going to happen with a stock that trades in dollars or tens of dollars, at least not instantly.

The flip side, of course, is that to attract buyers to his holdings of a stagnant 3¢ stock, a seller would have to lower his price by…well, there’s not much room for him to maneuver here. The smallest possible lowering of the price results in a 33% loss in the company’s value, which means the stock has moved 1/3 of the way toward being completely worthless. Again, that’s not going to happen with any established company whose stock trades for a decently high price.

It’s tough to qualify greed. If you volunteer for an extra shift at your job, thus earning more money, does that make you “greedy”? Only in the eyes of the least repentant Marxist. But if you expect exponential riches for doing nothing more demanding than being lucky, then yes, you’re greedy. Just because it’s slightly more respectable (and credible) to admit to being a “stock ‘investor’” than a “roulette player”, doesn’t make the former any nobler. Most of us are cognizant enough to keep the human penchant for laziness in check. For the rest of us, there’s Penny Stock Chaser. Everything about this company is loathsome, including their radio commercials in which they exclaim that every month, some companies’ stocks “literally explode!”

Check out the company’s disclaimer, which confirms our worst suspicions. Penny Stock Chaser admits, albeit under penalty of law, that it receives payment (in stock) from several of the companies it touts. A legitimate firm (Vanguard, Smith Barney) doesn’t pull that kind of crap.

Penny Stock Chaser brags that its site has been “featured on MSN and Google”. Yes, because nothing advances the credibility of a company than being visible on a search engine. You know whom else you can find on Google?
Hitler!

Penny Stock Chaser also brags that it’s been featured on XM and Sirius. Apparently Penny Stock Chaser never noticed that the companies merged, nor that the merged companies’ logo is something a little more stylized than a hand-drawn dog.

We’re not convinced that Penny Stock Chaser isn’t really an experiment in public gullibility being conducted by a graduate sociology student somewhere. However, one giveaway is the company’s verbiage. Spend enough time on PennyStockChaser.com, and it’s clear that the web copy is being written by someone with the English skills of UFC commissioner Dana White. Either that, or the World Grammar Board changed the plural of company to “companys” and didn’t tell anyone. Here’s a grammatically correct but situationally erratic gem from the company’s “About” page:

“Our team has a total of 40 years experience in the stock market…”

4 lines later, just in case you weren’t paying attention:

“Combined we have over 40 years experience in the market.”

This has nothing to do with money, but here’s a gigantic red flag: any time a company brags that it has x combined years of experience, step back. Does that mean two career veterans, or 40 rookies? All it means is that someone in your company’s HR department knows how to add. Gold star.

Your local Wal-Mart has around 700 employees. With a conservative average of 3 years’ experience per employee, that means…wow, they’ve been selling discount items since before Christ was born!

Patronizing Penny Stock Chaser will give you the equivalent of “40 years experience in the market” faster than you wanted.

Making money is easy and fun! To wit, “We don’t waste time trying to uncover ideas that might move a wimpy 5-10% in a few months like most other guys. No, we’re looking at stocks that can explode 50+% or more in a matter of days!”

Look, no one likes being financially conservative. Of course a 50% return is more attractive than a 5% return. But in the same way, no one likes being unable to fly, either. We live in something called a real world.  The chance of you losing money by dabbling in penny stocks is far, far greater than the chance of you profiting. Just because something’s possible doesn’t mean that a) it’s likely or b) you can do anything to improve your odds. Some people jump out of planes with malfunctioning parachutes and survive. Which is to be marveled at from a distance, rather than emulated.

Should the SEC step in and dismantle Penny Stock Chaser for promising flying unicorns and edible rainbows? No. Our society is still largely free, and it’s up to each individual idiot to decide how badly he wants to get screwed over.  Should Howard Stern show a little self-respect and not voice Penny Stock Chaser’s embarrassing radio commercials? Yes, but that’s his business. You can assume he at least insists on being paid in something more fungible than stock tips.

Fortune favors the brave, not the idiotic.

(Looking forward to Penny Stock Chaser bragging that it’s now been “featured on Control Your Cash!”)

Zero shopping days til Christmas

You too can test the limits of "it's the thought that counts".

What’s the perfect Christmas gift for 2009? Nothing. Or cash. But to be safe, nothing.

This is an old Economics 101 nugget. The logic goes like this: you can’t be 100% sure what another person wants as a gift. Only the recipient knows exactly what she might want. The primary thing stopping her from buying it is scarcity: having a finite income means having to prioritize and choose what you want and what you can forgo.

Therefore the only logical gift is cash, which she can convert into whatever she wants. If everyone followed this rule, no one would be disappointed with a thoughtless or ineffectual gift. But this is where economic sense runs into societal expectation. Cash can be perfectly quantified, of course: it comes in dollars. Say you have two people: a purely rational boyfriend and girlfriend who decide to do the utilitarian thing and give each other cash. (This scenario is a stretch, but it does lead somewhere.) The boyfriend gives the girlfriend $500, the girlfriend gives the boyfriend $450. The net result, aside from the boyfriend giving the girlfriend $50, is that the boyfriend now feels insufficiently loved and the girlfriend feels miserly.

So the sensible thing to do is to give cash gifts of equal value, which means you might as well keep the cash in your respective pockets. This sounds silly, but similar situations arise every Christmas. Until this year, a Control Your Cash author and her mother engaged in the same nonsensical dance. Mom’s annual Christmas gift to daughter was a $100 gift card to a particular restaurant. Daughter’s gift to mom was a $100 gift card to a different restaurant. The result, of course, is that mother and daughter each eventually spend the scrip. However, there’s the added inconvenience of feeling obligated to use the card (especially if it expires.) Plus there’s the feeling of frustration every time the cardholder passes by said restaurant with a potential dining partner at dinnertime, only without the card handy. And there’s the temptation to spend more than one normally would at the restaurant, in order to use up the $100. After all, if a meal ends up costing $93, is the cardholder going to bother keeping $7 worth of scrip in her wallet? The biggest beneficiaries of this exchange end up being the restaurants. At least mother and daughter weren’t so absurd as to have used the gift cards on each other.

So we’ve established that there’s an implicit fear of giving a gift of unequal value than the gift received. But if you want to alleviate that fear, and thus exchange gifts of identical value with someone, isn’t that all the more reason not to exchange gifts? Me giving you $100 and you giving me $100 means we might as well just smile at each other. Me giving you a gift worth $100 and you giving me a gift worth $95 (or $105) just has the potential to cause bad feelings.

By the way, putting a dollar figure on a gift is no sillier than the standard practice of removing the price tag on a gift. Why do we do the latter? Because we’ve decided as a society that it’s classless and tasteless to keep the price tag on, as if a recipient will think, “Sure, this Amazon Kindle will save me the trouble of lugging different books around everywhere and let me buy more books at the touch of a button, but more to the point, am I really only worth $440 plus 8% sales tax?” And if you bought the gift from a wholesaler at a steep discount, some exceedingly sensitive gift recipient might take that as an affront. (Instead of saluting you for Controlling Your Cash.)

Removing a price tag is a manifestation, however slight, of the debilitating mindset that says money should never be spoken about nor acknowledged. Even though it doesn’t appear anyone’s willing to take the first step, we need to be more frank about money. A world in which people would broadcast their salaries, net worths and credit-card balances would encourage prudence and responsibility. Shame is a big motivator.

But we live in the real world. If you’re going to do like 99.8% of the people reading this post and give standard tangible gifts anyway, at least leave the price tag on, just this once. But if you really want to Control Your Cash, go to SomeEcards.com and send each other funny wishes instead. Better yet, send emails out to everyone on your list and lie about how you donated in their name to Armenian earthquake relief or the Spina Bifida Association. Better still, really do donate on their behalf to Best Friends Animal Sanctuary. Animals make the perfect gift recipients: they’re eternally grateful, they can actually use the gesture, they won’t hold it against you at future family gatherings, they won’t read anything into it, and best of all, they can’t pay you back.

The single dumbest industry in the universe.

Of course, if you've devised a "system", then this blog post is void.

Dumb from the customers’ perspective, that is. Ingenious from that of the industry itself.

Gambling. Dumber than alcohol, dumber than tobacco, dumber than network TV. At least drinking gives the user an inflated feeling of self-worth, and at least cigarettes make a statement (“I enjoy slowly killing myself while rendering the radius around me uninhabitable.”)

As for gambling, however, it just impoverishes its practitioners. Nothing else.

We’re not counting football bets between friends here, or a night of poker with the fellas. Those are zero-sum games. Unless you’re exceedingly horrible at reading an injury report or you insist on drawing to inside straights, you’ll end up neither making nor losing money in the long run when you bet among your friends. You’re essentially moving bills back and forth as a form of camaraderie.

Casino gambling is different, thanks to vig. That’s the cut the casino takes from every wager, which will ultimately bleed you dry. On the roulette wheel, the casino takes 3% of every bet. On straight sports wagering (i.e. a single game per bet), the casino takes 5%.

If someone offers you an investment that pays, say, 10%, would you take it?

The correct answer is “I don’t know.” A rate of return needs to be quoted with a time period for it to mean anything. If the investment takes 20 years to pay 10%, that’s .5% annually. You might as well leave your money in a savings account.

What if the investment pays 10% per day?

Say you invest $1. You’d have $1.95 by the end of the week, $17.45 by the end of the month, and $28 million in half a year’s time. Within 11 months you’d be earning more money than the rest of the world combined.

(That being said, when you read an interest rate quoted in a financial publication – or on any Control Your Cash post other than this one – assume the rate is annual unless otherwise specified.)

So an investment’s duration is always as important as the interest rate, with one exception – negative interest rates. These are always bad, for obvious reasons. If the reasons aren’t obvious, understand that having less money today than you did yesterday is something you want to discourage.

So let’s rephrase that earlier question:

If someone offers you an investment that pays, say, -3%, would you take it?

Which returns us to casino gambling. And for today’s example, the casino mainstay of keno. Keno, if you’re not familiar, is a type of lottery. Some states even incorporate it into their idiot impoverishment plans official lotteries.

In keno you pick up to twenty numbers from 1 to 80. The casino then draws twenty numbers, and you get paid depending on how many you got right. The game appeals to idiots for several reasons:

-it requires zero skill.
-it offers an outlet for superstition (“My granddaughter was born on the 17^th day of the 11^th month. I was 48 when I joined Oprah’s Book Club. I have 2 eyes on my head, which are currently looking at 77 collectible miniatures,” etc.)
-it provides a margin for error (for instance, if you mark 6 numbers on your ticket, you get paid even if you get only 3 right. If you mark as many as 15 numbers, you get paid if you get only 6 right. What’s not to love about a game that still pays you even if you get more numbers wrong than right?

The vig on keno would be criminal, except that keno players engage in voluntary exchange with the casino and know the rules going in.

Say you play the simplest possible keno ticket; one where you select just one number. The chance of you getting it right is 4-to-1. Most casinos pay 3-to-1.

Which means you just found an investment that pays -25%.

We showed how an investment that pays 10% every 24 hours can make you legitimately rich within a few months, and richer than the rest of the world in less than a year.

Meanwhile, a keno ticket pays -25% in about 7 minutes. (The length of time the casino takes to draw its numbers, then set up for the next game.)

By the way, that one-number ticket is the safest (well, “least dangerous”) keno bet in existence.

Say you play a two-number ticket. The chance of getting both numbers right is about 17-to-1, and pays 12-to-1. Here the casino takes a 28% cut.

Like any good (for the casino) game, the dumber players are, the worse they get punished. Take the average keno player, who isn’t there to win a lousy $4 on a $1 one-number ticket, or even $12 on a $1 two-number ticket. Not when she can WIN UP TO $50,000!!!

One Nevada casino doesn’t require players to perform the toughest feat in keno – correctly picking all 20 numbers on a 20-number ticket – to claim its biggest prize. Instead, in a nod to ease and simplicity, this casino offers its biggest prize even to anyone who can just pick all 14 numbers on a 14-number ticket. Again, for a sweet $50,000 prize.

Care to guess what the odds are on getting 14 numbers right out of 14?

“Well,” you’re thinking, “Control Your Cash has already demonstrated that the casino takes a gigantic cut, somewhere in the 25-28% range. So the odds are probably around…65,000-to-1.”

Higher.

100,000-to-1?

Higher.

You’re telling me the casino actually keeps most of the money wagered on said tickets, paying the player less than half? That’s horrible.

Yeah, we know. Back to the original question: what do you think the odds are?

110,000-to-1?

Look, we try to keep these posts down to a reasonable length. Stop pussyfooting. The chance of getting all 14 numbers right is…

38,910,016,282-to-1.

It’s as if the casino said, “We chose a random person, somewhere on the planet, and got that person to roll a die. Who did we pick, and what number came up?” In other words, you’re going to lose.

We understand that the casino must take some cut for its expenses, like say the 3% it takes on roulette bets. If the casino were taking a similar cut here, then a winning $1 ticket should entitle you to Warren Buffett’s net worth. Or the entire market capitalization of Ford Motor Company. Or the gross domestic product of Costa Rica.

But instead, you get $50,000. Which makes the vig 99.9999%.

But hey, it’s only a buck. And you could win $50,000!!! Which is a big number! And aren’t all big numbers basically the same?

Below is the vig the casino takes on each keno bet. The Roman numerals refer to how many numbers you chose on your ticket. So for instance, if you play an 8-number ticket and get 5 right, the casino keeps 84% of your money. Happy reading.

I	Vig (%)
1 right	25
II
2 right	28
III
2 right	86
3 right	43
IV
2 right	79
3 right	87
4 right	63
V
3 right	92
4 right	90
5 right	47
VI
3 right	87
4 right	91
5 right	71
6 right	81
VII
4 right	95
5 right	84
6 right	70
7 right	80
VIII
5 right	84
6 right	78
7 right	76
8 right	92
IX
5 right	90
6 right	76
7 right	80
8 right	85
9 right	99
X
5 right	90
6 right	79
7 right	77
8 right	86
9 right	97
10 right	100
XI
6 right	80
7 right	73
8 right	84
9 right	94
10 right	99
11 right	100
XII
6 right	68
7 right	79
8 right	80
9 right	92
10 right	99
11 right	100
12 right	100
XIII
6 right	86
7 right	84
8 right	83
9 right	82
10 right	96
11 right	99
12 right	100
13 right	100
XIV
6 right	87
7 right	82
8 right	85
9 right	82
10 right	95
11 right	99
12 right	100
13 right	100
14 right	100
XV
6 right	91
7 right	76
8 right	85
9 right	87
10 right	94
11 right	97
12 right	99
13 right	100
14 right	100
15 right	100