The Real Debate about Raising the Federal Minimum Wage

In July 2009, the federal minimum wage was increased to $7.25 from $6.55.[1] In his 2015 State of the Union, President Obama called on Congress to raise the minimum wage.[2] The minimum wage debate has caused protests and, like all topics, is hard split by the two parties. Most of the debate revolved around raising the federal minimum wage to $15 from $7.25. This is more than doubling the previous wage increase in just six years. The intent of this blog is not to discuss politics but to address personal finance concerns. So this blog post won’t be discussing whether we should or should not increase the minimum wage; but rather, it will focus on what you can learn from what the true debate should be on.

If you’re mathematically or economically inclined, then your first question should or probably is why isn’t $7.25 enough anymore? What’s changed from 2009 to 2015 requiring an increase of over 100%? The real answer and one of the biggest problems in our economy is the damaging impact of inflation. The debate isn’t centered on reducing the cost of Consumer Prices though; it’s simply based on increasing the wage.

If you just analyze simple inflation, using the Consumer Price Index from 2009-2015, then $7.25 is equal to $8 in today’s dollars.[3] So why is the current administration and federal minimum wage supporters asking for $15 instead of $8? The answer and another problem in our country is way we handle of our current income (regardless of what we’re currently making).

• Inflation: Every adult has experienced inflation in almost every commodity. College tuition, health care costs, movie prices, gas, food, utilities, etc. Most of us aren’t seeing our income keep pace with this inflation either. So even in times of low Consumer Price Index (which doesn’t capture all commodities) increases, inflation is still outpacing our incomes. To protect yourself, you need to start saving money for your short-to-long term goals, retirement and long-term health care costs. The economic principles of time value of money and compounding interest relies on timing to help protect you against inflation. The sooner you start saving, the better protected you’ll be against inflation.
• Handling of our current income: One of the main reasons that people want it increased to $15 versus the inflation adjusted $8 is because we don’t know how to handle our current income. People can become financially independent by making $8 an hour or by making $200 an hour. Conversely, people can be in extreme debt and financial ruin while making $15 an hour or $200 an hour. There is too much focus on how much we make and not what we’re doing with the money we’re currently making. When I help people with their finances, the first thing I do is track expenses. By raising the minimum wage to $15 we’re not solving the problem of helping people financially. To help protect yourself, you need to track your expenses and maximize the income you currently earn. I’ve always recommended to people that before you seek and pay for professional financial guidance, you need to track all expenses for 30 days. About 60% of people I’ve dealt with quickly saw where they could make life changes without earning more income.

So regardless of whether you oppose or support a federal minimum wage increase, you can still implement changes in your life to protect yourself from the real problem.

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[1] http://www.dol.gov/whd/minwage/chart.htm

[2] https://www.whitehouse.gov/the-press-office/2015/01/20/remarks-president-state-union-address-january-20-2015

[3] http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2015

Should I Be Concerned About High Frequency Trading (HFT)?

What is High Frequency Trading (HFT) and should you be concerned? I’m sure you’ve recently seen some news reports about HFT and depending on your news sources’ political bias it may oppose or support HFT. The audience of this blog is primarily military members E1-O6 and knowing that, my personal opinion, is that High Frequency Trading should not concern you, from a threat to your financial goals perspective. HFT doesn’t prevent you from reaching your financial goals nor is it “stealing” from you as some articles suggest. It may impact your ideologies, in terms of right and wrong, fair or unfair, to tax or not to tax; but as far as your financial goals, HFT should be irrelevant to you.

High Frequency Trading (HFT) is a term used for computer programs that execute millions of trades within minutes. The HFT you are currently reading about is used by Stock Exchanges to match buyers of stocks will sellers of stocks and vice versa. For each trade, the HFT earns $.0015[1] or somewhere around there, but multiplied my millions of traders per day. Your first thought should be quoting the “Office Space” movie where the protagonist is explaining that he is “taking” a fraction of a penny, so it’s not really stealing and Jennifer Aniston rightly rebuts, saying it is “stealing.” The difference between the Office Space movie and the recent HFT articles is Accounting principles actually account for those fractions of pennies, so taking them is really stealing. The HFT you are reading about is actually part of the system, right or wrong, it is a necessary “evil” for our stock exchanges.  For every buyer there has to be a seller and these HFT machines provide that service. The problem is now we have HFT machines placing buy and sell orders a million times a day and other HFT machines placing those purchases. If the market moves in a way different than the HFT is programmed to handle, the market could swing wildly, affecting our 401(k)s, TSPs, IRAs, and investment accounts. On May 6th, 2010 this scenario happened and the DOW Jones lost 1,000 points or 9% in less than an hour[2]; but, it was the same HFT computer programs that enabled the market to bounce back to normal. NOTE – I was at work when this “flash crash” occurred and would have loved to buy stocks during that hour and get some quick returns.

Should you be concerned? As of now, no, you shouldn’t be concerned. HFT trades makes up 50%[3] of the daily activity on the New York Stock Exchange and some articles use that number to scare you; however, the large investment banks still hold a majority of the stocks in mutual funds providing a balance to the market. So until something changes, HFT provides both a scary volatility and a scary balance to the stock markets. You should continue applying sound financial principles and HFT won’t affect you. 1) Establish an emergency fund 2) Eliminate or Reduce Debt 3) Max out tax-advantaged accounts TSP, IRAs, 401(k)s, 529 plans, 4) Save and invest everything else. HFT sounds scary, but for us normal investors, it doesn’t affect us. If another flash crash happens, it could provide an opportunity to buy. If a flash increase happens, it could provide a solid selling opportunity.

Final Thought:  Values of anything have increased wildly in a massive bubble creating winners and then popped, leaving losers, even before computers were invented. One of the first examples of this is the prices of Tulips in the Netherlands in the 1600s and High Frequency Trading was not around then. Getting rid of HFT won’t stop bubbles from forming and won’t collapse the whole financial system. Until something changes, keep investing smartly by diversifying and avoiding fees and taxes. 

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[1] http://www.investopedia.com/terms/h/high-frequency-trading.asp

[2] http://blogs.wsj.com/marketbeat/2010/05/11/nasdaq-heres-our-timeline-of-the-flash-crash/

[3] http://www.investopedia.com/terms/h/high-frequency-trading.asp

3 Steps to Reduce the Impacts of the Military Retirement Cuts

As you may have read in the news, a two-year budget deal was proposed by Rep Paul Ryan (R) and Senator Patty Murray (D). The deal proposes to reduce the Cost of Living Adjustment (COLA) by 1% from the Consumer Price Index for military retirees under 62. The proposal enraged the public and may be taken out of the bill this month. The political fallout was too much and was exasperated when Mr. Ryan said that military retirement reform was supported by all the Secretary Chiefs; however, none of the Chiefs knew nor did they, later we found out, agree with the COLA reduction. But if this is/was as concerning to you, as it was for me, then this blog post will explain what the reduction would mean to your retirement and how to reduce those impacts.

How would or does this COLA decrease affect you?

First of all, this would start in 2015 for only those currently receiving a military retirement check and for those under the age of 62. The Consumer Price Index (CPI) measures the price changes for different goods and services and basically tracks if prices of the stuff we purchase everyday is increasing or decreasing. The CPI is measured by the Bureau of Labor and Statistics and more information can be found here: http://www.bls.gov/cpi/.  Currently, at the start of every year, your military retirement is adjusted for inflation based off the CPI change.  Your military retirement is “fixed” and is based on the retirement plan you retired with.  It only changes with inflation, but once it is adjusted for inflation, then you are still getting paid the same.  Inflation is a slow, often invisible killer and is the biggest risk to anyone’s financial plan.  Inflation reduces your purchasing power and you have to pay more to purchase the same goods or services (i.e. movie theatre tickets, gas, food, electricity, etc.)  This is one of the major reasons that the military retirement system is highly coveted and we sacrifice so much for it.

This budget deal proposes to reduce the annual COLA by 1% of the CPI.  So, if implemented, every year your retirement check would always lag the CPI by 1%.  Over a long period of time, this “decoupling” from CPI would have a huge, negative-compounding effect.  If this deal were to be passed, here are some steps that would have stopped the negative-compounding problem and should be considered by retirees regardless.

Steps to reduce the impacts of the proposed military retirement budget cuts.

• Move to a lower cost area – Except for the annual COLA, your retirement is fixed based on your basic pay.  If you move to a high cost of living area then your retirement check would be worth “less” than someone who chose to move to a lower cost area.  The COLA is adjusted to the national CPI and is applied equally to all retirees regardless of location.  If these budget cuts were imposed, then moving to a lower cost of living area would give you a “theoretical” increase in purchasing power that could limit the impact of a COLA reduction.  This is something all retirees and those close to retirement should consider.  Most civilian pensions operate the same way as the military retirement and living in a higher cost of living area takes more of your “fixed” retirement income.
• Reduce debt levels – Reducing your debt is always a quick way to “increase” your income whether you pay something off and now you have that payment back as disposable income or you reduce your debt levels and your minimum payment is decreased.  Either way, when facing a potential decrease in your “fixed” income, paying off debt is always a good way to have more money.
• Purchase inflation-protected investments – There are several investments you can make that would help bridge the gap from a 1% loss of your retirement compared to the CPI.  The first is dividend-paying stocks.  You could modify your current portfolio and increase the yield by 1% by investing in higher-paying dividend stocks.  If you stick to “blue-chip” stocks then you would also be better protected against violent volatility as dividend-paying stocks tend to weather market volatility better.  Another option is to invest in Inflation-protected bonds through major mutual fund companies like Fidelity or Vanguard.  These types of bonds have a yield that goes up as inflation goes up and would protect you against inflation increases.  Both of these strategies should be considered for retirees, but not really for younger people as they are more conservative and wouldn’t have as much capital appreciation.

What do you think about the potential COLA cuts?  Should we reform the military retirement?

Opinion: Military Pay and Benefits To Be Cut?

During a recent keynote address at the Global Security Forum, Defense Secretary Chuck Hagel warned that we need to look at cuts in military pay and benefits so we don't have a military that is, "well-compensated, but poorly trained and equipped, with limited readiness and capability."  This is a very emotional, politically-charged and uncomfortable conversation to have and any politician looking to support this viewpoint would be facing certain election death.  This may surprise many of my readers, but I support this viewpoint.

There are many reactions that you may have against cutting military pay and benefits and they are understandable.  As a Finance Officer in the United State Air Force, I admittedly am suggesting that my pay and benefits get cut.  But this country and our culture has a problem with overspending.  We do it as a population and it bleeds into our political policy. The Department of Defense (DoD) is the largest expenditure of taxpayers' dollars so it makes mathematical sense that the DoD should bear a large portion of the reductions.

According to Secretary Hagel, over 50% of our costs come from military pay and benefits and while budgets have decreased our pay and benefits have increased.  Our pay and benefits are a prime target until the DoD can learn to be fiscally responsible with their contract over runs, a horrible fiscal-year process and reducing the normal "fraud" that has become part of our culture.  Our pay should be normalized to the rest of the country.  Politicians are too scared to reduce our pay like a civilian corporation would which leads to the opposite of not increasing our pay like a civilian corporation would.  Our pay should match the ebb and flow of our civilian population and the economy since it is taxpayers' that fund the DoD.

The military offers the best benefits package of any civilian corporation.  At the end of a 20-year career, people can become theoretical millionaires.  Our health-care costs have skyrocketed past the civilian populations.  Take a sample size of your lowest-level unit and see how many aren't even using the amount of benefits that we get as military members.  Our fitness centers are becoming larger and larger at every base while we have flying operations that can't fly and soldiers that can't be equipped properly.  These are all additional costs that can be reduced.

Many people would argue that we should cut CEOs' pay and celebrities' pay before we touch an Airmen's pay currently serving in Iraq protecting our freedoms.  Now, while that example brings up emotional truths, we must realize that the consumer funds CEO and celebrities' pay while the taxpayer funds the DoD.  Right or wrong, our civilian population has voted with their dollars to keep CEOs and celebrities' pay at the levels they are at now, but they did not choose to pay for the large military industrial complex.

Many people would also argue that we shouldn't touch the pay and benefits and we should stop spending all the money on our broken end-of-year process that encourages a soft level of fraud to ensure we zero out the books so we don't get cuts the next year.  While this is infuriating to me in my career, the amount of money that is actually spent wouldn't come close to a meaningful percentage enough to make significant changes to our force.  I've personally seen the process and while I'll admit it's broken, leadership from the lowest levels to the highest levels can reduce and stop it.

Many people would argue that the DoD is not the problem and it's all the entitlement spending our country gives out.  This is a politically-charged emotion and indeed, this country's entitlement spending is out of control.  But to achieve the amount of reductions we would need to reduce the deficit and control the national debt, we would have to totally eliminate our social safety net in America and in real economics that is as dangerous as spending too much on entitlements.  A country must have a strong social safety net to encourage and support massive growth.  That being said, a compromise could be worked out for a matching reduction.  So for every dollar that we reduce in military pay and benefits we should also reduce entitlement spending by a dollar.  I don't know if that has been recommended by any politician yet, but if it hasn't, I would like the credit :)

Our personal debt, national deficit and the national debt are becoming too large too ignore.  We must reduce spending and we must lower our dependence on foreign credit.  In my opinion, our national debt is more of a security threat than any terrorist group in the world.  In my opinion, everyone in America believes we should reduce spending as long as it doesn't affect their own lifestyle.  They want cuts to everyone else.  It's the "not my bubble" theory.  By percentages, the majority of the spending comes from the DoD hence a proportional amount of cuts should come from the DoD.  And if 50% of the DoD's costs come from military pay and benefits, then mathematically the cuts should also come from pay and benefits.  Although it's a difficult position to take, I support Secretary Hagel's decision on reducing military pay and benefits.

The Federal Budget and You

The Federal Budget is comprised of four components: 1) Tax Revenue (or Receipts) 2) Spending (or Outlays) 3) the difference between the two known as a Surplus or a Deficit and 4) The National Debt.  You are part of all four and here is how each one affects you on a daily basis.

• Taxes - The top three sources of income for the government is the Income Tax, Social Security Tax and the Corporate Income Tax.  Your attitude towards these taxes depends on your political ideologies.  But for financial planning purposes your goal should be to minimize the taxes you pay.  One of the advantages of a being a military member is that only your Base Pay is taxed; our BAS, BAH, deployment and travel entitlements are not taxed.  Another way to minimize taxes is to contribute to a Traditional or ROTH Thrift Savings Plan (TSP) and/or an Individual Retirement Account (IRA).  For the difference between the two, please read my article here: Should I Invest in Traditional or ROTH TSP?  In fact, every decision you make should be to pay the least amount of taxes throughout your lifetime to maximize your earnings.  Each year the government spends more than it gets in tax revenue, which increases our national debt, and we can assume that your income taxes will go up in the next 1-50 years so you need to do what you can to take advantage of today's tax rates. 

• Spending - The top four sources of spending in order or most amount spent is Department of Health and Human Services (includes Medicare/Medicaid), the Social Security Administration, the Department of Defense, and the Interest on our National Debt.  Again, your attitude on the importance you place on the different reasons for spending depends on your political ideologies.  But one thing in common is that both main political parties have been/are increasing the size of the government.  This increased spending compared to tax revenue generates a National Deficit (often confused with the National Debt).

• Surplus/Deficit - The difference between Spending and Revenue is what generates a Deficit or Surplus condition.  It's common knowledge that the U.S. Government has ran a Deficit almost every fiscal year (1 Oct - 30 Sep) for several Presidential terms.  At the end of the fiscal year the Deficit is added to our National Debt.

• National Debt - The National Debt has become a common discussion and worry for our current generation.  Large National Debts that become unsustainable have been one of the causes of civilization collapses since the Roman Times.  The interest on the national debt is the fourth largest expenditure for the federal government.  If our financial uncertainty becomes worse, the interest rate at which we pay for the National Debt will go up and every dollar we pay on the national debt is either one dollar that can be returned to a taxpayer or the federal government can spend elsewhere.

You are a taxpayer and are critical to these four components.  The only way to stop generating a Deficit is to cut spending or raise taxes.  Over the last two decades it seems that only increasing taxes has been approved and thus we all face higher taxes in the future if spending can't be cut.  It is important to see your role in this process and watch it carefully because it directly impacts your personal finances. (Q99VSR8GSWXG)