What’s happened to the Social Contract?

There’s a great blog post over at IT Toolbox, on the Original Thinking blog by Dennis Stevenson on The Myth of Job Security- Employer Version, with a promise for a follow up giving the employee’s point of view. I was going to comment, but because my comment was so long, I thought a separate blog post was more appropriate.

Job security is largely seen as old fashioned these days. People are downsized as soon as their salaries get too large and the business feels they can be easily replaced with a cheaper and less expensive worker-widget. Likewise, employees are just as likely to jump ship as soon as a more attractive offer comes along. But what is the fall out from all this movement, seeking out the better, cheaper and faster ways to accomplish everything?

I think the interesting contrast here is when there is no longer any “job security”, there is no reason for employees to have any loyalty to the greater mission or goals of the enterprise, no matter what the size. Therefore, their only core motivation has to be what is best for them and their families- a mercenary “available to highest bidder” mentality. And why should it be different? With no social contract between the employee and employer anymore, other than that of health care and any remaining employee benefits, there is no reason to stick around and keep your money on the table, so to speak, with your employer, since they are just as likely to terminate you without any warning at their earliest convenience. And should you bother to “do the right thing” and provide notice? Why? The favor is rarely returned in kind. The social contract is (has) disintegrated over time- there are no more rules as to what is appropriate.

I grew up in Rochester NY, a company town with Kodak, Xerox and more for many years. The decline of “cradle to grave” job security has changed the nature of the community, now making the town more transient than ever before. People go where the job is more and more rather than stay in their current situation if a job is terminated. Families rarely live in the same town where one or both parents grew up. The social ties of living in a place where everyone knows your name is becoming an anachronism more and more.

This means less long term investment in social infrastructure in real life communities, like museums, art galleries, churches, charitable organizations, etc. Why should people spend their precious time and resources supporting the community when they are just transient residents in nature, and will never personally benefit from any of the good they are doing? Regular towns and cities are becoming mere way stations along a pathway of jobs, and people have no more incentive to make a long term investment in the success of schools or civic organizations than summer time residents of beach communities do in making sure those towns are sustainable 365 days of the year. They only care that their needs are met at a price they can afford during their brief stint to pump some money into the local economy, and then their contribution is over.

This is true just about everywhere- we are seeing the same transition happen in Wilmington, DE now that MBNA has been bought out by Bank of America. The lack of job security means lack of loyalty on both the part of the employer and employee, and people speak of just doing what they have to to get by, not investing in any sort of larger sense of contributing to a company- they are just collecting a paycheck, nothing more.

I agree businesses can’t necessarily be job charities, but by totally forgoing the social contract of employment, they gain no loyalty and thus the same people who businesses have invested time and money to train and educate have no reason to stay in that position if they can get a better deal elsewhere. I’m not sure this is necessarily a long-term success strategy for helping all boats to rise, so to speak, but it does create cut throat competition where people become more isolated and only concerned for themselves. You can’t expect people to “take one for the team” and act altruistically if the team is unlikely to return the favor.

What do you think? How do we balance efficiency and economics with the importance of building sustainable communities for the long term? Is it possible?

Being Smart With Money

One of the things I think we do REALLY poorly in this country is teaching our kids how money works. I didn’t get a course in economics until college, but most of the best lessons I learned about money were through various jobs. One was working as a customer service rep for Citibank Student Loans during college, as a summer job. Another was working for a law firm that did a large amount of collections. If you want to see what happens to people and the bad choices they make, look at someone who is getting a home foreclosed, evicted from an apartment, or having various possessions seized for not paying their bills.

Since I know many people starting small businesses, I thought I would lay out some of the basics of money and business I’ve learned over the years, hoping it can help you avoid learning some painful lessons.

1. If you can’t pay for it in cash, now or in the next month, don’t charge it.
People get into trouble with credit all the time, because whipping out a plastic card doesn’t “feel” like paying for something. This is why I make my kids pay for things in cash, or immediately on returning to the house, pay me in cash for whatever I have “fronted” for them at the store. Anything you don’t feel the pain for at the moment of purchase is likely to be forgotten, and then it’s easy to end up with a surprising and overwhelming credit card bill at the end of the month.

Secondly on this point, the interest charged by credit card companies is enormous. It would be usury, except most credit card companies have located themselves in states like Delaware and South Dakota where there are virtually no caps on the interest that can be charged on consumer loans.

If you need help getting this under control, remind yourself that taking anything from a store without paying for it would be stealing. Also consider how many months it would take you to pay off said item, add the interest you pay on your credit card to the purchase price, and decide then and there, whether that price is such a bargain.

2. Understand how Companies Calculate Interest, and How Your Payment is Applied.
When you send in a mortgage payment, loan payment, or credit card payment, the interest balance gets paid off first, and whatever is left over gets applied to the principal. So if you want to reduce you debt the fastest way possible, consider doubling up payments on that student loan, for example, or tossing a little more money towards your mortgage every month. All that extra money goes directly against the principal, meaning the interest charge is less in the long run (it’s being calculated against the principal owed each month) and you make faster progress paying off that loan.

We used this process to accelerate the pay off of our student loans. Between my husband and myself, we had about $40,000 worth of loans for college and graduate school. By doing this for one loan at a time, we gradually managed to have more monthly money to then pay down the next loan, with the process leading to paying off the loans within three years rather than 10. we are currently planning to start the same process to keep our mortgage balance decreasing at an expedited rate as well.

3. Understand What You Need and What You Want (and how to tell the difference).
I do like nice things, like Coach handbags. The leather ones are pretty attractive and very well made. But I frequently get items like these from consignment shops and ebay- gently used items in good condition. I can have the luxury goods I want at a fraction of the price. And spending $40 for a bag that may have originally cost someone $250 or more works for me- I get what I want, for a fraction of the price. And even if I want a “new one”, I make sure I save up for it- a few dollars each week in the “mad money” jar. Surprisingly, even when I reach the goal, I have a hard time converting that money into one item, and I rethink the purchase, avoiding buyer’s remorse in the meantime. When I do buy it, I feel it’s well earned and value the subsequent purchase more than I might have had I just whipped out the credit card at the time.

Do I need a fancy handbag? Maybe, but unlikely- it may help me feel polished at client meetings, but mostly it’s utilitarian. I may want one, but other bags can fill the need just as well. So if you can merge the want and need and find a cheaper alternative to the want part, you win on both fronts. You get a want and need satisfied.

4. Understanding Necessity.
People get this one wrong all the time. I once had to evict a college student out of an apartment when they were three months behind on the rent. Instead, they were paying credit card bills, the electric, etc. Well, the credit card company will not give you a roof over your head. Having paid the electric won’t help you much if you can’t live in the place where the electric is turned on. So you need to prioritize your spending, big and small. Priorities should be Food & shelter, then other items on the list.

a) Having a roof over your head. Pay the rent and mortgage first. Without a roof over your head, then you have no where to put the other stuff you might want to buy. Owning a house or condo rather than renting means those monthly payments are giving you an ownership interest in your home, so to speak- it’s investing money you may get a return on in the future, as well as the privilege of living in a place. So when you get ready to move, you get money you can use towards buying your next place to live, rather than having to save up for first, last and security on a new rental somewhere.
b) Next, pay utilities. You need electric, gas, water, etc. they make your home livable. Not optional expenses.
c) Food and clothing. Buy reasonable groceries- you can eat at home for less than you can eat out. You need to be able to buy clothes for work, but consider things that don’t cost you after the purchase, such as things that you can launder at home versus dry cleaning, which is expensive.
d) health insurance. If you have kids, you need health insurance. No way around this one. That next snotty nose could cost you big time.
e) Cash flow and Income Stream.
Before you quit your comfy job because you are bored or want to try something new, make sure you have a way to afford health insurance. I would rather moonlight on a new project and be tired than give up something that is guaranteed to pay the bills. You have got to make sure all the basics are covered, month after month, before you can even consider moving to a job with a more speculative income stream. Being your own boss seems like a great thing, but if you get sick, you can’t work and there’s no money coming in. And bad things happen.

In addition, the escalating costs for fuel and its downstream effect on food and consumer goods means everyone’s budget is in flux. Your budget may not be constant now, and you need to have some “play” in your cash flow to be able to compensate for this moving target. Without a savings cushion, or enough room in your budget to allow for “cost over-runs”, you will quickly find yourself in deep doo-doo.

The deep, dark secret about money is that it is a tool. When you have more of it, it actually becomes harder to make financial errors- you get preferential treatment at the bank, over-draft protection, and the like. When you don’t, you get nailed for a ridiculous amount of added costs penalizing you for not handling your money well- bounced check fees, higher interest rates, etc.

You can’t afford not to understand how money works. Little mistakes will cost you financially, and put your road towards security in jeopardy. Understanding money, budget priorities, and how to get ahead will make it infinitely easier to do.

Take it from someone who used to have to collect money from people, or find legal ways to make them pay what they owed. You can’t avoid the debt collector forever- and if you manage things well, you’ll never have to talk to one of these people ever.

The Cost/Benefit Ratio of Staying At Home

Julien Smith has a great video posted on his blog, featuring a lecture by Elizabeth Warren ,a law professor at Harvard Law School, discussing the gradual erosion of the American Middle Class over time. The most important points she makes (to me) are the financial costs and safety net costs families face as a two income family.

When there are two wage earners in the home (mom and dad), the first dollar of that second income is taxed at the higher rate in our graduated rate system. That means if Spouse A earns $65,000 a year, the tax of each additional income dollar brought in by Spouse B bears a 25% tax rate; if that amount brings taxable family income over $128,500, each additional dollar above that will be taxed at 28%, and over $195,850, 33% of each dollar. So for every dollar the second wage earner brings in, the tax rate is higher for them than if they were single.

When the second spouse goes to work, you then have to take into account child care expenses. Assuming there are young children in the household, tuition for preschool alone, and quality day care can be expensive. A few years ago, we paid $7,000 a year for preschool; I cannot imagine that it is any cheaper now. If two kids are in school, that’s $14,000 off the top. So the second wage earner is required to earn over $14,000 just to break even, not to mention all the costs attendant with working, such as commuting costs, eating out more often, dry cleaning, cell phones, etc. So from the very beginning, the second worker is required to have more than a minimum wage job just to cover costs.

Next, when a family has two incomes, they depend on both of those incomes to make ends meet. They don;t have any backup. If someone gets laid off, if a child or family member gets sick, with a partner at home, there’s someone to take care of that person. If no one is at home, one spouse has to leave work to care for the sick person; often it’s mom, and if the illness is serious, she stays out of work until basically she loses her job. Then the family is down an income, and ends become increasingly hard to meet. Enter the mortgage crisis, and escalating housing costs, and you see why so many families are in trouble. When families are more spread out than ever before geographically, there’s not even an option for another relative to step in and help. Our family has developed an extended network of neighbors to help sometimes when these circumstances come up, but this feels like a stop-gap and inadequate solution to a long term problem.

Families are becoming more and more like little fragile island ecosystems, and all it takes in one big storm to sink the whole boat.

I think everyone has to look not only at whether Moms should stay at home with kids, not only as a lifestyle choice, but as an economic choice that has a long term impact on the family and it’s ability to scale during times of trouble as well as in times of plenty. It’s not just a political choice- it’s an economic choice that has real long term impact not only on each individual family unit but culturally.

As a mom of two boys, I have decided that having it all is possible, only if you don’t want it all at the same time. You can have a career and kids, but both being maximally successful may not happen concurrently. The division of limited attention and resources is becoming more serious than ever before, and we all have to make the best choices we can, but with zero safety nets and backup, we are playing a risky game.

The question is, how do we change the dynamic?   How do we make sure families can survive the bumps that life throws us without disintegrating,?  How do we create the “village” that helps sustain families through tough times when blood relatives are not nearby? How can women keep a finger in the career track, yet raise children without feeling like an anachronism? Is being at home a cop-out for professional women, or a luxury?

There are so many questions faced by the “new family” vs “old family” models that  go beyond the family itself.  Traditional volunteer jobs, formerly populated by at home moms are now becoming almost the sole province of retirees.  It seems like the volunteer jobs (around my area, at least) are no longer populated with moms whose kids are in schools, but older men and women who are looking for something to do and give back to the community after retirement.  Can we depend on this group to run all of the volunteer efforts at hospitals, churches,  the United Way, schools and other institutions that have historically relied on volunteer labor?  Sure, the baby boom generation may be aging, but sooner or later, this volunteer labor pool will dry up completely, and then how will businesses and civic organizations manage?

Working part time and on project-based work, both paid and volunteer, has let me try to balance both issues, personally, but  this isn’t always available for everyone.

Is it up to the paid and volunteer workplace to create more flex work to allow women (primarily) to be both parents and workers?    Can we make all of this work when time and money are in tighter supply than ever?

What do you think?

Financial Disparities and Inequities

One of the things that always strikes me as unfair in our capitalist system is the disparate impact problem.

If you have money in this country, things actually get cheaper and more affordable. If you don’t have very much money, you are much more vulnerable to any economic swing. Let me explain.

A rise in gas prices from $2.50 to $3.00 a gallon means for a 15 gallon tank refill, this is a net $7.50 per tank increase; assuming you fill up the tank for your commute only twice a week, this is a fifteen dollar increase in your expenses, totally out of your control. If you make $150,000 a year, cutting back on a latte or two can make up for this; if you are only making $30,000 a year, this $60 a month and $720 a year takes a much bigger bite out of your salary, requiring much more corner-cutting, economizing, and sacrifice.

Banks have changed their policies on check cashing, removing the float or grace period people used to depend on. Banks have also raised penalties for things like bounced checks. If you bounce a check for your electric bill, that usually carries a penalty that can be as high as $30. If you didn’t have the money for the electric bill, that extra $30 puts you behind the eightball; couple that with an increase in gas prices, and things are going from bad to worse quickly. Yet, if you have money, you can often get preferred checking privileges and overdraft protection, making it essentially impossible to bounce a check. This means even if you have to economize a little in inflationary times, you are still okay and don’t take extra economic hits from the bank, if money gets a bit tight paycheck to paycheck.

Then there’s the problem with easy credit, allowing people to mortgage themselves up to their eyeballs, until their economic house collapses under the weight.

To this point, I saw Tucker Carlson speaking with a representative from John Edward’s campaign this weekend. They were discussing Edward’s plans to make credit card terms more reasonable for consumers. You can see the clip here. (Many thanks to Jim McCusker and red Lasso for making this possible).

The mistake the Edward’s campaign representative made was not telling Tucker Carlson that the real problem here is based on the lack of economic education we give people in school. We don’t teach kids about budgeting and how credit works. We are more than willing to tempt people with short term gains for long term pain, but that is not really disclosed, and it helps people accelerate a dive off a financial cliff.

Credit card companies send my nine year old solicitations for cards; they offer toys and prizes to sign up at airports and sporting events, not to mention on campus inducements for college students. I don’t think I’ve been to a bricks and mortar store recently that hasn’t asked me to sign up for their credit card, often with a substantial discount on current purchases if I sign up then and there. The credit game involves the drug dealer mentality- the first taste is free, but then, it’s gonna cost you, and cost you huge if you don’t understand the game as well as the banks. And people are looking at the thing they want then and there, not thinking about the long term affect n their credit score, whether this get today, pay tomorrow plan is really in their best interest. (And I know very few people who call their financial advisor or spouse before accepting one of these very tempting offers.)

I know I learned very little about financial management at home, and less in school. Money seemed to be a topic you just didn’t talk about in our home, and it meant I knew very little about managing my own money before leaving home. And I learned a few painful lessons early on in my life on my own as a result. They were important lessons in fiscal responsibility, one of the most important being short term gain needs to be carefully balanced against long term ability to pay, and the sacrifices it will entail.

During law school, I met with a financial planner with my husband; we set out long term goals for savings, investing, money management and the like. As a result, today, our financial ship is sound. We don’t live past our means, and we do what we can afford. We’re conservative in this way, and are unconcerned about keeping up with the neighbors. We research our big purchases with consumer reports, and are as cautious as if we had far less resources at our disposal, and we’re willing to spend a little bit more if there’s a big quality difference- quality lasts longer, and it’s worth the extra up-front cost.

Economic education is something we need to make a priority in this Country. If we don’t make it a natural part of growing up, we will continue to have problems with low savings rates, foreclosures and defaults on student loans and credit cards. Each economic sway, up or down, will continue to claim more and more casualties, until we make basic money management and economics part of education starting at Middle School or even earlier.

And in these days where overall recession and economic hard times are imminent, can we afford not to teach our kids about how money and credit works? I think not.