Advanced Personal Finance

Undoubtedly, the most appealing feature of money market funds is their extremely low risk.  For all intents and purposes, it’s nil.  But last week the SEC proposed new rules that would allow money market managers to take greater risks with investors’ money.  More risk isn’t exactly what you’re looking for in a money market, so how might this new rule affect you?

Grading debt

First let’s take a look at the proposed new rule.  Last Wednesday, the SEC put forth a proposal that would allow money market fund managers to invest in debt not rated by one of the major ratings firms.  Moody’s, S&P, and Fitch make their money rating, among other things, bonds.  But with everything that’s been happening lately in CDOs, people are wondering just how relevant those ratings are.  Stuff that was rated AAA has completely blown up, soaking the holders of those debt instruments.

Money market funds generally must buy only short term, investment grade debt.  The new rule would allow fund managers to determine just what is and is not ‘investment grade.’

This is not a defense of the ratings firms by any means (the whole ratings system is pretty warped to begin with), but is it a good idea just now to give fund managers a greater ability to ratchet up risk?  Money market managers are probably pretty decent guys and girls, by and large.  But their pay is aligned with greater return and as we all know greater return usually involves crime or greater risk.

Is your money market at risk?

Keep in mind the SEC only proposed this new rule.  It’s not law yet. 

Secondly, nothing says the management of your money market fund will take on greater risk.  But the pressure’s sure going to be there.  I mean, a money market is a money market right?  Safe and stodgy.  Why not put your money in the one with the best return?

I don’t think there’s anything to worry about, though.  The bottom line is that if a money fund ever ‘breaks the buck,’ there’s going to be hell to pay.  Only a very serious incident would give rise to that happening and even as pessimistic as I tend to be, I don’t think any major fund will ever do that.

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If you’re sued and lose, can they take your IRA?

That was the question a reader posed on one of my older posts, Who Needs an Umbrella, about umbrella insurance policies.  Here’s the question from J. Brown:

“The majority of my assets are in retirement accounts (IRA’s, specifically). I used to have an umbrella policy, but was told that if I were sued, the money in my IRA could not be looked at to satisfy any judgment. Is this true? Where can I go to find additional info on this?”

What’s an umbrella policy?

Before I get to the answer, let me quickly review what an umbrella policy is.  An umbrella policy is an insurance policy that provides liability protection beyond that offered by other policies.  The ‘other policies’ are usually homeowners and auto insurance.  If you look at your auto policy, you’ll see a maximum liability amount.  If a judgment is entered against you beyond that amount, you’re on the hook for it (assuming you have that level of assets).

That’s kind of confusing, so let me use an example.  Let’s say I have $100/$300 coverage through my auto policy and don’t own a house.  I have assets of $150,000 and cause a serious accident that results in a lawsuit.  I lose and the plaintiff is awarded damages of $140,000.  My insurance company pays $100,000 of that award and I’m on the hook for the rest.

Now if I had an umbrella policy, I wouldn’t be writing that $40,000 check.  For a few hundred bucks a year, an umbrella ups your liability coverage to $500,000 and up.  You can get millions of dollars of coverage if you want.  But remember you only need an umbrella if you have a lot of assets - enough to warrant the coverage.

So can they get my IRA?

So this brings us to the question.  Is your IRA included in your assets?  In my example, what if all of my $150,000 in assets is in an IRA.  Can it be seized?

The answer, as with everything law, is “it depends.”

It depends on where you live.  State law determines whether these assets are included or not.  That’s not very helpful, so here’s a great resource that gives the answer for all 50 states and DC.  Look for ‘IRA and Pension Plans.’ 

I didn’t look at all 50 states, but in every case I checked, the answer was, No - IRAs are not counted and cannot be taken in a lawsuit.  If you live in California, hire an attorney - I couldn’t figure out the answer.

Now let’s all hope this never comes up for us.

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I can’t help myself.  Whenever I see a Hummer on the road, I’m compelled to look at the driver to see what kind of a douche would drive such a thing.  I have done this for years, long before gas cost $4 a gallon.  I have no idea why.

But it now seems that the smart thing to do if you own one of these abominations is not to sell it.  Apparently the market for used large SUVs is, to use a great phrase I read in the Wall Street Journal, “continuing to bore a hole to the center of the earth.”  Predictably, with gas prices as they are, nobody wants to own a large SUV.  And since car makers can’t move their inventory easily, they’re giving incentives and cutting deals.  That makes it that much harder to sell a used one.

I’ve even heard stories of car dealers simply turning away large SUV trade-ins.  They won’t buy them, period.  As it is, 36% of SUV trade-ins are upside down.  That is, the loan is larger than the current value.

But back to the point.  Large SUVs are going for $1,000 - $3,000 less than they were last year.  So even with gas at $4 a gallon, the incremental cost of fueling that thing for the year is still a better deal than selling into this market.  So I guess when I take a look at that Hummer driver now, I can say they’re making the economically smart choice.  What a laugh.

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Sometimes I get carried away on this blog.  I fall into the trap of living in a narrowly defined world.  I read lots of personal finance blogs and the Wall Street Journal.  I think about money too much and other topics not enough.  I sometimes fail to step away from things I’m comfortable with and look past alternative views and new areas of interest.  Of this I am guilty.

All the information about writing blogs tells you to stay on topic and write great content.  If you do that, people will read what you write. 

Stay on topic. 

The problem with that is you begin to focus too much on your topic.  You think too much about personal finance, or politics, or cats, or your kids - whatever it is you write about.

So I read personal finance blogs too much and other topics not enough.  And sometimes I come upon a post in a PF blog that really gets to me.  And when I say “gets to me,” I mean “drives me nuts.”  Today I read such a post.  It was a post on All Financial Matters written by a semi-regular contributor who has her own PF blog.  Almost invariably when I read something by this author, I disagree.  Sometimes I disagree vehemently.  This was such a time.

When writing elicits a strong emotional response, it is the definition of good writing.  I have to concede her that - she gets an emotional response from me most all the time.  Good for her.

The subject of this person’s post is how many people her age are “dumber” (her word, not mine) than previous generations.  Her proximate concern is financial, but she extrapolates how these “uneducated” and “ignorant masses” (again, her words not mine) signal the end of American greatness.

This, in a single word, is crap.

Maybe, just maybe, “every single one of [her] friends and peers” that are so ignorant of how to calculate compound interest place a higher priority on things other than getting rich.  Maybe, instead of teaching their kids the beauty of the all-important dollar, these people are more focused on teaching their kids to be good people.  Maybe, just maybe, these poor, stupid fools not maxing out their Roth IRAs are living presently.

In this blog, and in my conversations with friends and family, I have been guilty of being preachy.  There’s a fine line between educating and being a jerk and I’ve crossed it numerous times.  I apologize.  If you read the comments on the AFM post, Jeremy of Gen X Finance seems to get it right better than me.  He didn’t cross that line when he spoke to someone he came in contact with on the subject.

So here’s the news. 

America’s kids aren’t all going to turn out to be indulged dullards.  The US economy won’t turn into a flaming wreck.  Gold isn’t going to $10,000 per troy ounce.  Old people aren’t all geniuses who are brilliant with their money.  Lots of kids know how to read and can do advanced math, and some of them are even American kids.  And video games, iPods, and cell phones won’t bring down the Republic.

It’s not “The End of the World as We Know It.”  Get a grip.

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I just discovered a great plus side to the inflation we’re all experiencing (well, the inflation regular gas and grocery-buying people are experiencing) - easy weight loss!

I’m nothing if not predictable.  A couple of months ago, I was on a business trip for about a week.  I generally ate dinner at the same couple of places every night.  Moreover, I ate the same thing each time I visited each respective restaurant.  Like I said, painfully predictable.  (To the good, I didn’t ever have the same waiter or waitress.  That’s something, I guess.)

Flash forward a couple of months and I go on another trip to the same place.  I noticed something interesting when I went out to dinner.  The prices were the same, but the portion sizes had shrunk noticeably.  Not just at one restaurant - at all of them.

I guess it’s a nice side-effect of inflation.  Food costs are rising rapidly, which puts a double hurting on restaurants.  People are eating out less because they’re having trouble filling their own pantries and gas tanks.  Compounding the problem from the restaurant’s point of view is that they have their own food cost worries.

It’s an easy weight loss plan for the millions of Americans who don’t eat at home each week.

On a somewhat related note, I read that childhood obesity isn’t as bad as had been previously reported.  It turns out the rate of increase since 2003 has slowed.  Hey, great!  The US has plateaued at only 32% of little kids being overweight or obese.  That’s awesome news.  Kids still have it over adults in the US, though, since 66% of adults are overweight or obese.  Something to aspire to I suppose.

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