Friday, July 29, 2011

Raising the (Debt) Roof

Unless you are living in a cave, you've probably heard something about this debt ceiling, how it needs to be raised before August 2nd, and how it is causing much angst among politicians.  I've been refraining from posting about the debt ceiling - mainly because I've beaten the whole National Debt horse pretty much to the point where the ASPCA is knocking on my door.  However, the whole situation has reached a whole new low that I feel compelled to speak my mind on this.

For those who are living under a rock, the debt ceiling is sort of like the credit limit for the Federal Government.  It is the total amount of debt which the U.S. Treasury is allowed to borrow.  Currently the debt ceiling is $14.3 trillion.  For those who are numerically challenged, a trillion is one million million.  In other words, it is a lot of money!  However, it isn't enough for our government because it is projected that on August 2nd, they will max out this credit limit.  When that happens, they will no longer be able to borrow money to pay their bills.  They won't be able to pay the salaries of government employees (including our troops).  They won't be able to pay our seniors their Social Security.  They won't be able to pay interest on the money they have already borrowed.  In other words, we'll be a deadbeat country. 

Some people argue that not paying our bills won't be that bad.  However, think about how you would react if somebody who owed you money didn't pay you back.  You probably wouldn't loan that person money again, or at the very least, you'd demand a higher rate of interest.  This is the fate that faces our country.  Imagine if our creditors demanded that the Government pay a higher rate of interest on its bonds.  That's more money out of your pocket and mine.  In other words, the debt ceiling isn't something to mess around with.

Now the problem I have with our politicians holding the debt ceiling hostage is that the whole concept of the debt ceiling is flawed.  Our politicians, including some of the same ones who refuse to raise the debt ceiling, voted for the various Federal Budgets over the years.  They okayed the spending, the entitlements, and the tax cuts which caused us to rack up all of this debt.  If you are going to vote in favor of lower taxes and higher spending and you don't raise the debt ceiling, you are talking out of both sides of your mouth.  In my opinion, if you are going to pass a budget where you are spending more than you making, then you are implicitly approving of borrowing the money.  To come back at a later date and say that you can't borrow the money after you approved of the spending is irresponsible.

Consider this analogy:

You decide that you are going to remodel your kitchen.  You go out and buy the flooring, the cabinets, the flooring, the appliances, and you hire somebody to install it all.  Since you are short on cash, you decide to put it all on your credit card.  A month later, the credit card bill comes, you open it up, and you see that you spent too much.  At this point, the kitchen is done.  The cabinets are installed, the appliances are hooked up, the tile is grouted.  You can't now decide that you shouldn't have bought those oak cabinets and those stainless steel appliances.  That ship has sailed.  The only thing you can do is pay the bill and maybe in the future when you are remodeling your bathroom, you'll pay more attention to the bottom line.

The same thing holds with the debt ceiling.  Our politicians have already voted to spend the money.  Those promises have been made already.  The right thing to do is to pay our debts for our past budget mistakes and consider spending more wisely in the future.  Some politicians feel that maybe they don't have to live up to the promises that we made in our past budgets.  That is wrong.  Yes, our spending is out of control.  Yes, we've cut taxes to the point where our revenue is suffering.  However, that is a problem we need to solve for the future.  What is done is done.  We've already spend the money so now we have to make good on our debts.

Many politicians say that the Government needs to balance its books like any business or any family.  Part of that is making good on your debts just like any business or any family needs to do.

Okay, so we've established that we, as a country, need to pay our bills for our past budget transgressions.  The next step of that is to fix things so that in the future we can keep our debt under control.  If you pay attention to the debt ceiling, you would think that we have $14.3 trillion of debt (and growing).  However, if we were really doing the accounting like a business, our debt would be much, much higher.

The $14.3 trillion number reflects only the amounts that the Government had to borrow in the form of issuing various bonds.  However, the Government also has a debt in the form of other promises that we've made which aren't captured in the form of debt.  Consider the promise of Social Security.  Under the current law, future retirees are promised a certain amount of money a month for the rest of their lives.  We aren't actually paying these future retirees yet, but the law says that we will have to pay these people.  The amount that we have to pay these people is a promise that we owe.  The same thing goes for Medicare heath insurance for future seniors.  The law says that future seniors are entitled to health insurance through the Medicare program which will costs us money.  We aren't paying the money yet, but it is a promise that we owe.

Business accountants use the concept of liabilities to account for future debts like this.  This allows the company to account for the fact that this is money that they probably will have to pay out in the future.  An example of this might be money that will be owed to future retirees for their pension.  If the value of the future pension payments is $1 billion, this gets included on the company's balance sheet as a liability for all to see.  Another example might be money which is expected to be paid out as part of a lawsuit.  When BP spilled oil into the Gulf, they set up a $20 billion fund to cover expected claims against them.  They didn't pay out the $20 billion right away; it stayed in their bank account.  However, they had to account for the fact that they would pay out that money in the future.

Unfortunately, the Government does not have include its future promises on their balance sheet as a liability.  Social Security alone has a liability of $7.7 trillion.  This is the value of future Social Security payments that won't be covered by the Social Security payroll deduction.  This isn't included in the national debt anywhere, but it is money that will be owed by law to future retirees.  The bottom line is that the debt problem goes way beyond the $14.3 trillion that we owe to bondholders.  We've got a spending problem that we have to address for the future.  The debt ceiling is the past; we have to make good on our past promises.  It is the future that we have to be concerned with.

Saturday, July 23, 2011

Paying For Quality

Recently, I got an email in my inbox from a eye doctor offering Lasik vision correction "starting as low as $299 per eye."  While I have no interest in getting Lasik surgery at any price, this email got me wondering about what the price says about the doctor.  I know people who have paid several thousand dollars per eye, so a price as ridiculously low made me think of two possible scenarios:

Scenario One:

I walk into some back alley on the wrong side of town and enter a dark, dingy office (possibly a flourescent light buzzing and strobing).  The doctor walks in wearing a tattered lab coat and a demonic smile.  As he is about to perform the procedure, his hand starts to shake.  I ask him if he's okay.  He pulls out a flask from his coat pocket, unscrews the top, takes a swig, and says that he just needed a little nip to calm his nerves.

Scenario Two:

I sit down with the "sales consultant" and ask about the $299 special.  The sales consultant looks at me and says that, yes, they offer that deal.  That is their bronze package.  However, if I want, I can get the silver package which includes anethesia for "only" $999.  On the other hand, if I want a pre-op examination, post-op followups, eye drops for the inevitable redness and soreness, and a two-year waranty which covers subsequent procedures if they are necessary, I can either pay for those a la carte, or I can order their gold package for only $2999.

Now it could be that this doctor could be the greatest thing since sliced bread.  However, by advertising a cut rate price so prominently, I am left with the impression that he is either low-quality or there is a serious catch.  Neither impression is very good for business.

Economics 101 teaches the demand for a product increases as the price decreases.  This makes perfect sense.  A rational person is always going to want to pay as little as possible for a particular item.  When somebody offers the same product for less than the next guy, that person is going to generate more sales.  However, as my experience with the $299 Lasik offer shows, the real world isn't so simple as it is in a textbook.  A ridiculously low price can be just as detrimental to sales as a ridiculously high price.

How can that be?  Wouldn't you want to pay less?  After all, we all like to get a good deal, right?  Maybe not.  Many people associate price with quality.  We assume that a $100 shirt is more expensive than a seemingly identical $10 shirt because the $100 is a better quality product.  Thus, we might justify the extra expense because we believe that the $100 shirt is going to fit better, not shrink, last longer, etc.

In a large number of cases, this is a facade.  There are some products which cost more but may be just as good as the cheaper item.  However, it is hard to determine which are actually better quality, and which aren't.  Therefore, in some cases, we just assume that the higher price means higher quality.

This $299 Lasik procedure may be just as good as the $2999 procedure from another doctor.  However, who is going to risk their vision to find out.  In the case of the shirt example, I might try the $10 shirt to see if it is really as good as the $100 one.  If it is, then great.  I've found a new deal.  If it isn't, I toss the shirt out.  No harm no foul.

In the case of the Lasik, I doubt that a lot of people are going to take the risk.  I think more people value their vision enough that they probably would feel more comfortable with the $2999 procedure.  Yes, it is more expensive, but the perception that you are going to get a quality surgery for that price is probably going to sway a lot of people to spend the money. 

My advice to the Lasik doctor advertising the $299 surgery is this:  raise your price.  You'll probably get more business.

Wednesday, July 20, 2011

Insurance Is... Insurance!

When I did my series of articles on life insurance, the piece of advice that I stressed was that most people should consider term insurance over all of the other varieties.  The main reasons were that term insurance was the simplest to understand, and it fits the needs of most people.  Many people counter this advice with an argument that goes along the following lines:

If you buy term life insurance and you end up not needing it, you end up with nothing.  On the other hand, if you buy whole life/universal life/variable universal life and you don't need it, you still end up with some cash value.  Therefore, your premiums aren't totally wasted.

To those people I respond with the following:  repeat after me.... 

Insurance is...

(wait for it)


That may seem self-evident, but some people don't seem to get it.  You don't buy insurance as an investment.  You buy it in order to protect yourself financially from some unlikely but catastrophic event.  In the case of life insurance, that catastrophic event is your premature death.  If you die early, you want to leave your beneficiaries the means to carry on without out.  You want to make sure that your spouse is able to pay the mortgage or your kids are able to go to college if you leave this Earth before your time.  The premium that you are paying isn't supposed to accumulate wealth for your retirement; it is supposed to give you the peace of mind that your family will be provided for when you are gone.

The other fact that many neglect to mention is that you are paying extra for the cash value accumulation that occurs when you buy whole life.  Part of the premium goes towards paying for the insurance and part goes into your cash value fund.  If you pay a premium of $100, $20 might go towards insurance and only $80 of the $100 might go towards cash value (these numbers will vary by policy but you get the idea).  In essence, you are buying insurance AND an investment at the same time. 

You can accomplish the same thing by taking $100, using $20 for term insurance on your own and then investing the leftover $80 on your own.  In fact, you might come out ahead since you might be able to invest in a lower cost fund than what the insurance company would charge you.

If you still aren't convinced, think about car insurance.  Why do you buy car insurance?  You don't buy it as an investment.  You buy it because you probably couldn't afford to pay tens of thousands of dollars to settle a claim for an accident that you caused.  You pay a little bit each month to the insurance company (which you can afford) to protect yourself from the catastrophic event (which you cannot afford).  If you don't get into any accidents, then you don't get anything back.  However, who can guarantee that they won't get into any accidents?

The bottom line is that you don't purchase insurance to make money.  You buy it to protect yourself from losing money if some terrible, rare event happens.  Whole life insurance is a anomaly because it isn't really insurance.  It is insurance plus investment.  That's the only reason why you end up with money if you don't need it.

Sunday, July 10, 2011

Sales: It's a Numbers Game

I was talking with a bunch of co-workers about jobs that we had when we were in school.  One of them mentioned that he worked as a telemarketer for a major metropolitan newspaper.  His job was to call up people and convince them to subscribe to the paper (obviously this was awhile ago when a) there was not a do-not-call list, and b) people actually bought newspapers).  Thinking about my own experiences with telemarketers, I commented that this must have been tough to be hung up on by random strangers.  He said that, on the contrary, he actually appreciated it when people hung up on him.  I gave him a strange look and asked him why he would say that.  He started off his explanation by saying the following:

You have to understand that sales is a numbers game

He continued by saying that when you call up random people to try and sell them something (cold calling in the telemarketing vernacular), something like 98% of the people will be totally disinterested.  No matter what you say to them, they are not going to buy a thing.  If you are tele-sales, ideally, you would want to spend as little time as possible with that 98%.  You want to move as quickly as possible to the 2% of the people who are going to give you your commission.  He said that all those people who hung up on him did him a favor.  He probably wasn't going to sell them anything anyway, so those hang ups allowed him to keep going.

He recalled that most of his telemarketing co-workers would get angry at all those hang ups.  They would do anything to keep the call going in the hope that somehow they will find that magical sales pitch that will lead to a sale.  My co-worker, however, would pick up on the fact that the person at the other end wasn't interested and would seek to end those calls as quickly as possible.  To him, a hang up meant that he didn't have to figure out a way to end the call (note that the rules of his employer did not allow him to hang up - only the customer could do that). 

He said that he churned through about twice as many numbers as many of his fellow workers.  If the average person called 50 people an hour, he would call 100.  However, he was rewarded by twice as many sales.  With a 2% "hit rate", he would make two sales an hour, where the average person would only get one.  Nevertheless, many of his co-workers never picked up on this trick.  They continued with the hard sell even when the person on the other end had little chance of saying yes.  He said that human nature is to keep trying in order to avoid the embarrassment of rejection and failure.  However, in sales where failure is common, the best salespeople have to embrace failure as an opportunity to move on to the next prospect.

I tried to impart this lesson to a intrepid door-to-door salesperson this past weekend.  With the advent of the aforementioned do-not-call registry, our local cable company has taken to sending its salespeople door-to-door in order to sell their wares.  At least once a month, we are visited with promises of great deals if we only switch.  Unfortunately, we have a bundled package from our phone company (Verizon) which includes phone service, Internet service, and DirecTV television service.  I am quite happy with the price I am paying and the service that I am getting, so I have no intentions of switching.

Previously, when I was visited by the local cable company representative, I politely tried to decline their offer.  Nevertheless, they kept going on and on about what a great deal they were offering, how it was only available through the salesperson, what great service they have, etc.  Normally, after about 15 minutes, I would make up an excuse to end the conversation, the salesperson would give me his card, and that was that.  However, on this occasion, I really did not have the patience to sit through 15 minutes of reasons why I need to switch.  It was a beautiful Saturday morning, and I was anxious to continue with my day.  When I opened the door and saw that it was my local cable company calling on me again, I immediately cut him off and said:

Look, I know that you are going to try to sell me on your cable service.  I am a happy subscriber to another service, so I have no intention of switching.  You could stand here for 15 minutes and try and convince me but it isn't going to work.  You would just be wasting your time, and I don't want you to do that.  You are better off just giving me your card, saying goodbye, and going on your way to the next house.  That way, you can make more effective use of your time.

This person obviously wasn't an experienced salesperson because, unlike my co-worker, he did not accept failure so easily.  He responding by saying that if I was done talking, he wanted to say something.  I said, "Sure.  Go for it."  He said that the last thing he wants to do is waste my time and especially not his, but his company had some great deals that he wanted to share with me. 


Obviously, he wasn't going to last in sales very long.  I replied:

Look, in a minute I am going to close the door.  I am not going to do it to be rude.  I am trying to do you a favor.  I could let you stand here for 15 minutes and talk to me about your great service, but it isn't going to do any good because I am not buying.  I would just be wasting your time - time that you could spend finding somebody who might be interested.  Instead, I am going to end the conversation.  That way, you don't waste your time on a prospect who isn't going to buy.

He gave me a look as if I had somehow violated some social contract by being brutally honest.  He said, well I am sorry you feel that way but if you would just listen...

At that point, I told him that I wished him luck, and that I hoped he had a nice day.  I closed the door.  As the door was closing, I heard him say "Fine, sir" as he walked away in a huff.  He isn't going to last long in this business.

If you are in sales and you want to be a success, there are two things to remember:

1. Sales is a numbers game:   If you want to make a lot of sales, you need to talk to a lot of prospects.  It's that simple.

2.  Accept failure gracefully:  It goes against human nature to accept failure.  However, in sales where only a small percentage of prospects will become buyers, you need to accept failure so you can move on to the next person (see rule #1).  If you try to hold out against hope that you will turn a no into a yes, you'll only slow yourself down in your goal of talking to as many people as possible.  In addition, you will only prolong the agony for both you and your prospect.  Better to just smile, say thank you for your time, and move on to the next person.

If you follow these two simple rules, you will be well on your way to sales success!