Finishing a Degree

Undertaking a degree program is a serious decision that requires careful thought before beginning and an unyielding commitment to finish.  While I believe strongly that human beings should pursue their passions and be willing to change course when changes are necessary, I believe that education programs should be finished once they are begun.

The Bureau of Labor Statistics published a report in 2021 showing the median weekly earnings and unemployment rate for people with various educational backgrounds.  The report presented data that indicates that high school graduates earn 26.7% more than people who have not obtained a high school diploma.  Likewise, an associate’s degree adds 19.0% to the average salary of someone who has graduated from high school.  And someone with a four-year degree can expect to make an average of 38.5% more than someone with an associate’s degree and 64.9% more than someone with a high school diploma.  However, someone who has taken college classes without graduating with any degree can only expect to make 11.1% more than a high school graduate.  The report data indicates similar differences in median unemployment rates of people with various degrees.

I know several people who have enrolled in universities, changed majors multiple times and then quit without a complete degree after 5 or 6 years.  One person started out as a computer science major.  After 2 years, he had 64 credit hours left to graduate with a Bachelor in Computer Science.  But, then he switched to music because he could not see himself working in front of a computer for the rest of his life.  He loves music.  So, he switched to music.  Since he had not taken any introductory music classes, he had 90 hours left for a music degree.  He worked on the music degree for 60 hours and then decided that the job prospects were not lucrative enough and that he preferred to be outdoors.  So, he switched majors to marine biology.  The marine biology degree would require another 60 hours to complete.  After another year in the university, he had earned 154 credit hours and had racked up almost $60,000 of student loan debt.  He realized that he would have difficulty completing the “summer at sea” part of the program because he easily got motion sickness on boats.  The prospect of changing majors again and his large student debt drove him to quit the university.  After spending several months unemployed, he finally got a job as a barista in a coffee shop.  His salary was, arguably, somewhat more than a barista with a high school diploma.  But, after student loan payments, his take-home salary was less.  He feels that he wasted 5 years taking university classes and has little to show for it besides a large debt.

I agree.  Obviously, median salaries and unemployment rates are only one measure of success.  But, I believe that they are excellent indicators of value.  To me, they indicate that completing a degree program is critical and that simply completing a high school diploma before entering the workforce is better than starting a degree and not finishing it.

Leaving the Country to Escape Student Loan Debt

There are so many things wrong with this report that it leaves me speechless.

For starters, if a person is only willing to pay $50 per month for a hammock in the jungle in India, similar accommodations are available in the United States.

Secondly, note the article discusses loans with payments that are $700 per month or less.  I bet these same people paid at least that much between their unnecessary car payments, cell phones, internet access, etc.

And thirdly, $700 per month (the maximum amount mentioned in this article) is only $8400 per year.  Yet the average starting salary for the LOWEST paying college degree (elementary education) is $14000 per year more than the average salary of a plain old high school graduate.

I could go on and on.  It is sad that these types of articles are written because, unfortunately, there are people who read articles like this and then decide to commit to a lifetime of minimum wage jobs after high school.

Notes from Robert Kaplan’s Presentation to Rice Alumni (19-Feb-2019)

On February 19, 2019, I went to a Rice Alumni event at the Federal Reserve Bank in Dallas.  The Dallas Fed is one of twelve Federal Reserve Banks in the United States.  The CEO’s of the Fed banks meet every six weeks or so to set national monetary policy.

Robert Kaplan, the CEO of the Dallas Fed was speaking about the state of the economy.  Peter Rodriguez, the Dean of the Jones School of Business at Rice University, was asking Dr. Kaplan questions.  Late in the presentation, Rice Alumni and their guests asked questions.

Here are some key points that I took away:

  1. Business Pricing Power:  In the current market, consumers have real-time access to prices of products.  They have never had such comprehensive access before.  Because of this, price competition is extremely stiff and businesses are not able to pass on cost increases to consumers.  Dr. Kaplan specifically mentioned the recent steel and aluminum tariffs as costs that businesses are not able to pass on to consumers.
  2. The number of people in the labor force and productivity are the primary drivers of GDP growth.  More people in the labor force yields higher GDP growth.  Likewise, higher productivity yields higher GDP growth.  Technology and education drive productivity increases.  Education is a big problem for Texas because Texas lags the US in general.  And, likewise, the US lags many countries in the developed world.  (More on this below.) Texas’ growth looks positive for at least the short and medium term, however, because Texas is experiencing large population growth.  This is dampening the education disadvantage that Texas has.  Likewise, Texas’ population growth – which results in higher GDP – allows Texas to solve its education problem in the future easier than states with stagnant or declining populations.  Dr. Kaplan specifically mentioned Kansas, where he is originally from, and Illinois.Dr. Kaplan mentioned immigration as a component of population growth in Texas.  But, he did not explore the subject.
  3. Technology helps people with post-secondary educations or specialized training in the trades.  It hurts those with a high school (or less) education.  This is the biggest driver of the growing divide between the wealthy and the poor.  Dr. Kaplan mentioned STEM many times as the path to growth.
  4. Dr. Kaplan specifically mentioned Khan Academy and edX as potentially disruptive forces in the post-secondary education arena.  He stated that education delivery needs to be significantly revamped.  He believes this should be done with steps such as busting teachers’ unions, eliminating tenure for college professors, and financially separating teaching from research at the university level.
  5. The media concentrates on the U3 unemployment rate.  However, the Fed primarily looks like the U6 unemployment rate which considers people who have given up looking for work and part-time workers who would prefer to be full-time.  The U6 unemployment rate is about 8%.  This paints a much less positive picture of the economy than the U3 rate that the media reports.
  6. The US owes $54 Trillion in unfunded entitlements such as social security, medicare, and retiree pensions.  This is a ticking time bomb.  It does not show up in the deficit or national debt numbers that we hear.
  7. 2018 saw GDP grow at a rate of 3%.  That was largely due to the tax overhaul and increases in government spending.  The effects of the tax overhaul are likely over for individuals.  The effects of the tax overhaul for businesses may be longer lasting.  But, that is not clear.  The effects of increases in government spending last year are probably over.  Therefore, GDP will likely grow at 2% or less in 2019.
  8. Dr. Kaplan believes that education spending will yield productivity increases (which will yield GDP increases).  He specifically mentioned early childhood education and that 60% of children who enter 1st Grade behind will never catch up.  He also believes that college prep should have more emphasis at the high school level.
  9. Shale oil/fracking:   The petroleum yield from this kind of oil production is short-lived.  That likely means that the US’ production levels will struggle to maintain their historic high levels and that the oil industry will profit from high oil prices in the future.

Short Commentary

During the question and answer session from Rice Alumni and their guests, one gentleman told Dr. Kaplan that there is either no correlation, or negative correlation, between spending on education and educational achievement levels.  If you think about it, such an assertion is absurd because, if true, the best thing for society (including individuals) would be to spend absolutely nothing on literacy.  Obviously, Dr. Kaplan disagreed.

After the presentation, I spoke with Dr. Rodriguez, the Jones Business School Dean.  I told Dr. Rodriguez that I was surprised by this question and was also surprised that Robert Kaplan did not point out that much of the spending labeled as “education” spending really goes for athletic programs which do not increase literacy.  Dr. Rodriguez agreed and mentioned the huge high school stadium in Allen as a great example.

I told Dr. Rodriguez that I would like to understand the research about the relative effect of employment growth and productivity on GDP.  For example, immigration increases the number of workers in the workforce.  But, immigrants come with various educational levels depending on their circumstances.  So, more immigrants cause GDP to grow.  And highly educated immigrants increase productively and that causes GDP to grow too.  But, illiterate immigrants have the opposite effect on productivity – at least initially.  That means that the positive effects of increased workers are dampened if those workers have lower than average productivity.  Unfortunately, Dr. Rodriguez seemed to take this as a political question and brushed it aside.  It was not meant to be.  I am sure that the Fed has data on this question.  I would love to see it.


Cost of Goods (COGS) – or Cost of Sales

The terms Cost of Goods Sold (COGS), Cost of Sales, and Cost of Revenue are synonymous.  They describe the direct costs of producing a good or service that is sold to customers.   In this post, let’s just refer to this as COGS.

Direct costs include direct labor and materials, and facility or plant overhead that is directly tied to producing the good or service.  For example, the salary of a person assembling a television would be a direct cost.  Extra electricity used to run a machine used only to produce the good or service would also be included.

But, the salary of the janitor at a plant that makes televisions, phones, and alarm clocks would be an indirect cost.   The reason is that the cost of the janitor does not increase or decrease as a result of making more or less televisions.  The amount of floor space to sweep in the facility is the same regardless of the number of televisions produced (within reason.)  The janitor’s salary is an example of SG&A costs.  SG&A stands for selling, general, and administrative.  SG&A expenses occur when the company incurs an expense for

  • Promoting, selling, or delivering products and services
  • Managing the overall company

These types of costs will appear on the company’s quarterly (or annual) income statement for the period they were incurred.  More specific examples of indirect SG&A costs include sales commissions, advertising and promotional materials, management compensation, compensation for support staff, rent, utilities, and office supplies.

The general rule is that direct costs do not include general overhead or administrative expenses.  These expenses are not part of the COGS calculation.

COGS is key metric for cost analysis because shows the operational costs of producing a good and service. If cost of sales is rising while gross revenue is flat, net earnings (gross profit) will decrease.  Remember that:

(Gross Revenue) – (COGS) = (Gross Profit)

Note that for a service business without a tangible, physical, product, COGS is a bit of a misnomer since there is not a “good.”  That is why the term Cost of Sales is often used.  But, the terms mean the same thing.


World GDP by Top Ten Countries – 1961 to 2017

This video is fascinating.  To me, the interesting parts are

  1. The US is on top.  Growth is steady and consistent.
  2. Japan has blossomed and then dramatically crashed.
  3. China’s rise is amazing.   Can it continue?

It would be interesting to know what policies of these countries contribute the most to the end results.


How Did Stocks Really Do in 2015?

How did your investments do in 2015?

Any of you who know me know that I am a big fan of investing in stock market index fund. These funds mirror the performance of the stock market as a whole and do not seek to pick and choose winners. Historically, most people who invest in index funds make more money than the people who try to gamble on the performance of a specific company or industry.

One of my favorite index funds mirrors the performance of the S&P 500 Index. The S&P 500 Index measures the performance of the 500 largest companies in the United States. Let’s see how it did in 2015 by way of examples:

In 2015, if you invested $1000 at the end of each month, you would have $11933.78 at the end of the year. In other words, you would have lost $66.22 out of the $12000 you invested.

Or… If you had invested $12000 on the first business day of January 2015, you would have had $11907.37 at the end of the year. In other words, you would have lost $92.63 out of the $12000 you invested. That’s less than 1%.

To put that in perspective, it is interesting to note that if you had sold such a hypothetical investment just 2 days ago, you would have gained more than 1% for 2015.

Remember that stocks are long term investments. It is normal for them to change day by day and from month to month or year to year. Economists have studied stock fluctuations for many decades and have found that there is no real pattern to day to day movements in stocks. If stocks go up one day, that does not mean that the economy is getting better. And if they go down one day, that does not mean that the economy is doing worse.

But, one thing we can say is that, in general, stocks increase in value over 10 or more years.

It is also important to remember that 2015 was the first year in 7 years that stocks went down over the course of the year. (And that was just barely). Where were stocks 7 years ago?

Well… if you had invested $12000 seven years ago, then you would have almost $18000 today.

Things are not so bad after all. And today begins a new year. Good things are in store for those who invest regularly in a diverse portfolio of investments.

How do I know? It has always been that way and there is no reason to believe that things are different now. 🙂

Happy New Year!

Funding a New Business with a 401K

A few years ago, Intuit did a study showing that 72% of people would prefer to be self-employed. (1)

But, starting a business is costly. According to Forbes, the cost of starting one of the 20 top franchises ranges from just over $60K to almost $1.5M. (2)  Such figures are staggering for most  aspiring entrepreneurs and cause the idea of opening an independent business to be quickly dismissed.  However, there are options open to many people.

One of these options is using an existing 401K from your employer to fund the start-up or acquisition costs of a new business.  This option is called a Rollover as Business Start-up, or ROBS.   Here’s how it works:

  1. Form a Corporation.  In order to meet IRS requirements, the corporation must be a C Corporation – not a Limited Liability Corporation (LLC) or S Corporation (S Corp).  For sake of example, let us call the corporation “VCSCO, Inc.”
  2. New Corporation Sponsors a 401K Plan.  A CPA or an expert in setting up a ROBS creates a 401K for VCSCO, Inc., and agrees to be the plan administrator.
  3. Rollover Your Existing 401K Plan.  Rollover the funds from your present 401K plan into the new VCSCO, Inc., 401K plan.  Rolling funds from one 401K to another creates no tax liability.
  4. New 401K Plan Invests in the New Corporation Stock.  VCSCO, Inc., issues shares of stock and your new 401K plan buys them.  The proceeds from the sale of the stock to your 401K plan is deposited into the VCSCO, Inc., bank account.  It can be used to pay for franchise fees, start-up costs, and working capital to start a business or purchase an existing business.

When applying for bank or SBA loans, lenders consider such cash to be unencumbered funds.  In other words, there are no loans made against it and no debt associated with it.   Since business loans for many types of businesses are routinely made with 25% down payment, an entrepreneur can realistically afford to purchase a business that costs 3 or 4 times as much as the value of the 401K.   With average 401K balances of over $75K, a surprisingly large number of people have access to the money needed to start an average franchise with initial investments of $300K.

What kind of franchise can a person purchase for $300K?  A tax service like Liberty Tax.   A Merry Maids franchise.  A Supercuts franchise.  Or a fitness center franchise like Anytime Fitness.  For the more confident entrepreneur, $300K is more than enough to buy a small car wash, a dryer cleaners, or a laundromat.

In order to use a ROBS for funding, the entrepreneur must be a salaried employee of the business.  The salary that the entrepreneur makes should not come from the ROBS funding – but only from operational revenues generated once the new business opens its doors.


The biggest drawback of using a ROBS for funding a new business adventure is that there is significant risk of losing retirement savings.  The entrepreneur is solely responsible if the business spirals into bankruptcy.

Other drawbacks include the IRS requirement that all full time employees of the business be offered the same 401K plan.  In other words, if your new business has full time employees, you will be required to offer them shares in the venture.  Obviously, if this is undesirable or unfeasible, only part-time workers can be hired.

Finally, the IRS wants to make sure that ROBS are not used as a backdoor method of withdrawing money tax-free from a 401K.  Therefore, it is important that your business opportunity be valued by a professional appraiser before the ROBS funding is secured as well as on a yearly basis thereafter.  And be prepared for an IRS audit – especially if your new enterprise is a cash business where money laundering could be a concern for the government.







Poway Unified School District and the Power of Compound Interest

In the past few days, Fox News and other organizations have reported about bonds that Poway Unified School District, near San Diego, CA, has issued.  The bonds were issued almost a year ago, in September 2011; their issue was approved by the school board almost two years ago (in October 2010).

The reports have centered around the assertion, or at least implication, that tax payers have been totally ripped off by the bond offering.  Here is a link to the Fox News article as it appeared on August 10, 2012:

California School District Will Spend $1 Billion to Borrow $100 Million

These bonds were issued after approval of voters of Proposition C on February 5, 2008.  The proposition that appeared on voters’ ballots read:

PROPOSITION C: “To provide safe and modern school facilities, improve student learning, and qualify for approximately $20 million in State matching money, shall School Facilities Improvement District No. 2007-1 of the Poway Unified School District issue $179 million in bonds at legal interest rates to upgrade aging classrooms, libraries, science & computer labs; replace roofs, plumbing, heating, ventilation and electrical systems; improve fire alarms and school security; remove hazardous materials; fund needed facilities, subject to mandatory audits, independent citizens’ oversight and without an estimated increase in tax rates?”

The proposition passed with 63.9% of the voters approving.

The article makes some strange assertions and presents many facts that are either incorrect or misleading.  This post discusses some of these inaccuracies and then discusses the financial aspects of the bonds.

Inaccurate Information in the Fox News Report

The Fox News report makes the following untrue statements:

  1. “Its being called a loan that not even a subprime lender would make.”  Who calls it that?  If the details of the loan make it such a raw deal for tax payers and such a good deal for banks, then why would a subprime lender not be interested?  Likewise, if the deal is such a bad investment for a lender, wouldn’t it be a good deal for the tax payers?  From either angle, this assertion makes no sense.
  2. “…they can’t be paid off early or refinanced.”  Yes, it’s true that non-callable bonds cannot be paid off early.  But, they can certainly be refinanced at the end of the term.
  3. “And the Poway district has already borrowed millions of dollars at nosebleed 12.6% interest rates.”  When?  In the 1980’s?  Poway’s CPA certified financial statements do not show any evidence of loans at such rates.  See for CPA certified audit reports of Poway’s budget, debts, etc.  In addition, even the lowest rated municipal bonds do not pay interest this high.  Remember that the market, not the school district, sets the interest rate.  The market sets the interest rate based on the credit worthiness of the school district.  Moody’s rates Poway’s credit as Aa2.  This is an investment grade rating.  In addition, Poway has had a Aa2 or better rating for at least the last 15 years.  Municipal bonds with such high credit ratings have never yielded interest rates at levels even close to 12.6% in the recent past.
  4. The article states that the underwriters of the bond issue will get $1.4 million in fees which, according to the article is a “sweet deal”.   The implication is that the underwriters are ripping off the tax payer.  In truth, these fees are less than 1.5% of the value of the bond offering.  While this amount may sound high, there is much more to underwriting a bond offering than meets the eye.  1.5% is within the range of “reasonable and customary” fees for bond underwriting.  This is not some sort of unusual “sweet deal”.
  5. The article states that school administration and teacher compensation chew up 85% of the school’s budget.  This is not true.  According to the certified financial statements from the school district, the district spent $244,737,036 on teacher compensation and administration in the 2010-2011 school year.   The total school budget was $337,800,038.  So, the real number is 72.45%.

It should be pointed out that the district budget for 2012 is $10 million less than it was for 2009 and that spending per pupil is less than $10000 per student, despite the fact that the San Diego area has a high cost of living.  $10000 per student is within the average range for primary and secondary public education cost in the United States.  Compare this to the many districts in New York that spend more than $20000 per student.

There are other inaccuracies and misrepesentations of facts in the article.  The reader of this blog is encouraged to dig into the financial reports of the district.

The True Financial Implications of Poway Unified School District’s Bond Offering

Interest on the $105 million bonds will accrue, but not be paid, for 20 years.  After 20 years, interest will be paid on the $105 million principle as well as the interest that will have built up over the first 20 years.  These types of bonds are called convertible zero coupon bonds.  The intricate workings of them can be difficult to understand.  However, it is easy to make an excellent approximation.

Over 40 years, Poway Unified School District will pay $981 million to pay off these bonds.  This is equivalent to the interest rate on a common bond or loan of approximately 5.75%.

Looking at this another way:  If you were to deposit $105 million into a bank CD promising to pay you 5.75% interest each year for the next 40 years, you would have just over $981 million in 2052!  This is the power of compound interest.

How does a 5.75% interest rate compare to other municipal bonds?  Well, as stated above, Poway Unified School District has a Aa2 credit rating.  This is not an uncommon credit rating for municipalities in the United States.  A quick check of today’s yields on 40 year municipal bonds with Aa2 credit ratings shows yields are right around 5% today.  Rates last fall for 40 year bonds were approximately 0.75% higher.  As expected, Poway paid the market rate based on its credit rating.

Closing Thoughts

Poway’s Unified School District’s credit worthiness is not any different than hundreds of municipalities around the country.  It is investment grade; meaning that buying its bonds is a fairly low risk investment.  The bonds were issued by the district with the approval of taxpayers.  The interest rate is at the market rate.

The bonds will not result in a tax increase for at least 20 years.  After 20 years, the interest paid will be a small percentage of the district’s budget.  In addition, inflation over the next 20 years significantly decreases the impact of the interest payments that will have to be made.  It is not unreasonable to envision a situation where minor budget cuts would completely offset the interest payments.

Instead of focusing on a fairly low risk scenario that is common to local governments throughout the country, and instead of misreporting a vast majority of the facts about this bond issue, news organizations could better serve the public by reporting on real dangers to future taxpayers.  One example of such a real danger is the chronic under funding of government pension plans, including Poway Unified School District’s teacher retirement plan.  Without significant tax increases in the future, its probable that drastic cuts in government services will be necessary for governments to meet their pension obligations.