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Retirement Planning: No More Fine Print November 6, 2008

Posted by retirementwithaplan in Uncategorized.
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What if there was no more fine print?  The whole idea behind unnoticeably small font sizes is, by its very nature, designed to deceive.  The deception is smugly offered right in front of your eyes and yet, if we fall victim to too much risk, too many claims or too little understanding about what it is we are involving ourselves in, it is the fine print – that you didn’t read that is often the blame.

110608fineSo what do we need it for?  At the heart of our current financial crisis is fine print, written so small and ignored so completely, even the authors of such microscopic script failed to realize what it said.  The old adage of “past results is no promise of future returns” was kicked to the wayside in favor of risk.  Describing that risk was relegated to miniscule paragraphs laden with potential consequences that contain incredibly pertinent information about the deal.  Who understood derivatives, credit-default swaps and other ingenious, “oh that computer is so smart” factoids?

Imagine for a moment what the world would be like if all of the information you need to invest was contained in three basic bullet points.  For instance: “this investment contains risk; this investment can cause you to lose money if the markets fail to perform historically or in the same way you hope and dream it would; and if you are planning on using this investment for your retirement, you might be shocked by the results of what can happen if you have not shored up the rest of your financial world”.

Steven Forbes still champions his postcard sized tax returns, a flat tax that spelled out, in clear language what you were being taxed on. Income would be income that you worked for.  Not mystery stock returns or investments or even some piece of artwork you found in your grandmother’s attic.  The interest you paid, the doctor bills you incurred, and number of kids you had would be no longer relevant. Just pay a tax on what you earn.  Make more than $250,000 and pay this percentage; make less and pay another.

You could buy a house in the same way.  There would be only three things you would need to know: “you will need twenty percent down; you will need a job with a provable net income that takes into account the rising cost of taxes and insurance, upkeep and other relatively easy-to-estimate occurrences over the course of the loan; and you will need to pay this loan back every month for the next thirty years”.  Would knowing this ahead of time give you pause?  Would we sell fewer homes to under qualified buyers and more to those who could afford it?  No reams of paper to sign.  No hidden increases.  You knew going in what the cost was and could make a sound financial judgment about whether or not it was affordable.

Could we do the same with a car? This car is worth more than the sticker price after you add interest in and take the depreciated cost off.  Would you still be willing to purchase an automobile that was worth much more than the price you were quoted?

What about a college loan? Can the cost of your education be described as potential earning power in your chosen profession and your ability to pay for it ten years down the road be considered worthwhile disclosure?

Spelled out in clear, easy to understand terms, financial contracts would become a simple agreement between lender and borrower, taxpayer and the government/civilization they supported.  This would lead to numerous job losses in the personal finance advice area while bringing the need for brokers or mortgage analysts or even bankers into question. Innumerable trees would be spared the fate of being turned into reams of endless, mind-boggling paper that we don’t read but which, because of the fine print, we can be held accountable for.

Fine print makes us stupid in ways we had not imagined.  This coffee is hot!  Direct TV in a recent ad using the Poltergeist movie as a backdrop even suggests that the commercial does not depict the average cable viewers experience as the television comes to life emitting bluish lights and disturbing winds.

As the line from Quadrophenia, the classic Who rock opera suggests: “You were under the impression, that when you were moving forward, you end up further onward, but things ain’t quite that simple.” Eliminating fine print would bring our impression of where we are into clearer view and by default, we would know what further onward meant.



1. back to basics - November 16, 2008

This is a silly post – you are basically writing the fine print (i.e., gobblygook) that you want others to disavow. Americans should just get back to the basic rules of thumb that have worked for years: your mortgage, taxes and insurance should not exceed 25% of your monthly take home pay. All your loans (mortgage plus cars, school, etc) should not exceed 33% of your monthly take home pay. If everyone followed this advice, we wouldn’t be in this mess. But of course, we would not need any more financial books from people like you. To bad!

Lastly, this paragraph has left me in your vernacular “utterly confused” – Could we do the same with a car? This car is worth more than the sticker price after you add interest in and take the depreciated cost off. Would you still be willing to purchase an automobile that was worth much more than the price you were quoted? QUESTION – How is the car worth more? it does cost more than the sticker price when you add in interest, but it is not worth more – the effect of depreciation reduces the value! Man, you need to go back to some more finance classes that you have collected over the years

2. retirementwithaplan - November 17, 2008

You are right. The world would be a better place if there were no need for financial books such as mine. In a perfect world, all consumers would be born smarter and the choices that they make would all be grounded in clarity, common sense, and above all, prudence. And I agree that the total household debt should not exceed 33% – yet it does and part of the reason is the confusion between worth and cost.

Cost is: the difference between what you paid and what it is worth.

If you ask someone how much they paid for the car they are driving, few if any would “do the math” necessary to give an accurate portrayal of what they are paying. The car’s worth is a mental determination of what they paid – not what they would sell the car for after they drove it until the loan was satisfied, the need and necessity they placed on that ownership, or the cost (of hardship and inconvenience) of doing without.

Worth is: the relationship between cost and purpose.

Suppose you paid cash for your car and another person financed the same type of vehicle. Would you offer the true value of the car when asked about “what you paid” or would you immediately offer the perceived cost and worth? No and neither would the person who financed the auto.

The cost of a car increases when you borrow to purchase it. A $20,000 car financed for 60 months at 7.5% would increase the real cost of the car by $4,000. Would the person who financed the car be more truthful when asked what the car was worth if they gave you only the possible resale value and not the cost of the loan? Of course. Would they ever finance a purchase on anything that has a real depreciated value if we were all honest with ourselves about this kind of financial arrangement? Of course not. We know what the car is worth!

Value is: the amount money we consider to be fair when we pay for goods – or when we try to sell them.

The fine print makes life more palatable for the borrower. It simply masks the reality and that is what I was attempting to portray. Driving off the lot with the understanding that, by financing the auto you would be paying an additional $66 a month is much easier to swallow than say, adding in the depreciated cost with the interest payment – which could drive the real cost of the loan up by $150 or more which, as we all lnow does not increase the value of the car one iota.

Cost and worth are, in the fine print and in most folk’s way of thinking, the same. Without the fine print, we would all stop short of borrowing or paying cash for a certain kind of good like a car when we ask: Is there any value?

3. Back to Basics - December 27, 2008

Pure and simple: What something is worth is what someone will pay for it. That’s it. Stop the obfuscation and booblygook about worth = this or that. And furthermore, if you studied finance,you would understand the calculation around discounted cash flow, which is relevant to this discussion.

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