Pyramids Versus Networks

Lee Roy, your brother-in-law, calls out of the blue. You haven’t spoken with Lee Roy since last Christmas, but now he’s excited and wants to meet you for lunch. You ask what it’s about and he’s kind of vague, but you gather he’s started a new business and wants to get you involved.

Uh oh. It’s probably one of those multi-level marketing deals. He’s probably going to call it something different, like network marketing or social marketing or referral marketing, but aren’t they all just pyramid schemes? And aren’t they illegal?

Admittedly, you have been wondering lately, ”How much would it cost to start my own business?” But scheme, scam, or legitimate business opportunity – how do you know for sure what your brother-in-law has gotten himself into?

Without spending thousands of dollars on an investigation by experts, the best way to detect a fraud is the smell test. If it smells fishy, or sounds too good to be true, it probably is.

But here’s another test: If Lee Roy says he’s a distributor, but most of his commissions come from the sale of memberships, startup fees or training materials, rather than from the sale of useful products or services, it’s a pyramid scheme. And yes, pyramid schemes are illegal.

(By the way, one of the objections to pyramids is that the people at the top make all the money and the people at the bottom do all the work. Sounds like a typical corporation to me.)

Okay then, how does a legitimate multi-level/network/social/referral marketing business model work?

First, all of Lee Roy’s commissions would be based on the sale of products or services that customers find useful. If he just sold memberships and no products or services, he wouldn’t make a dime.

Second, Lee Roy is not at the bottom of a pyramid, even if the company he represents has been around for fifty years. Sure, there are lots of people in his upline who benefit from his sales, but the important thing is that Lee Roy is at the head of his own organization. And everyone he brings into the business is at the head of his or her own organization.

But didn’t the people who got in on the ground floor, when the company was new, have a great advantage? Not when you consider the fact that they had to sell new products that no one ever heard of, made by a company with no track record. You think the pioneers had it easy, breaking new ground in strange territory?

Okay, but after fifty years, is there really any room for more distributors?

Are you kidding? With a growing population, and people dying (literally) to get to this land of opportunity every year, experts see a market expanding to the horizon and beyond.

Feel free to take these distinctions to your lunch with Lee Roy.

The Rise of the Machines

Employees are a headache. Benefits, insurance, workers’ comp, safety regulations, citizenship questions…all good reasons, corporations say, to avoid hiring.

Alana Semuels reports in the The Los Angeles Times that, just as machines can replace laborers, so kiosks can replace cashiers and software can replace administrative assistants. Such structural changes mean that some jobs lost to the recession may stay lost forever.

“If cheap technology is available, you substitute technology for people,” says Allen Sinai, chief global economist at Decision Economics in Boston.

Of course, this has been going on since the beginning of the Industrial Revolution. But recessions give corporations a motive to ratchet up the process. Then, when sales pick up, they can hold down hiring and see quick profits.

With corporations counting employees as liabilities, not as assets, how can an individual survive these macroeconomic forces?

Whether you’re a millennial or a baby boomer, wanting a career change or forced into early retirement, stay ahead of the forces you can’t control by creating something you can. Start a Plan B.

Five Mistakes to Avoid Before Retirement

Catey Hill in SmartMoney takes on the old adage that you’ll only need 70% of your pre-retirement income to fund your present lifestyle in your golden years. She presents five issues that might spur you to re-calculate how much you need to retire:

1. Not paying off your mortgage
The “biggest pothole” in the 70% adage “is that it assumes your home is paid for in retirement… but today many retirees still have mortgages,” says Manisha Thakor, a Houston-based CFA and the author of “On My Own Two Feet,” a personal finance guide for women.

2. Underestimating health-care costs
According to the Employee Benefit Research Institute, a typical 65 year-old male in 2009 could need as much as $378,000 in savings to cover health insurance premiums and out-of-pocket health expenses in retirement. A typical woman of the same age could need as much as $450,000.

3. Giving too much money to adult children
A 2009 study published in the Journal of Marriage and Family says that four out of five parents regularly give money to their adult kids. And a survey by CreditCards.com found that 42% of parents had paid off a debt for an adult child, such as an auto loan, medical expenses or utility bills.

4. Being overly conservative with investments
Over the last decade, the stock market has scared many investors away. But over long time periods, stocks have outperformed bonds. The average annual gain of the S&P 500 (.SPX ) from 1926 to 2010 was 9.8% but only 5.4% for long-term U.S. Treasuries.

5. Thinking you’ll enjoy all that free time
Some men who have worked hard all their lives don’t know how to do anything else. “Most people are social creatures,” says Thakor. An unstructured retirement can lead to “everything from overspending – so many hours to fill, so many places to shop – to depression,” she says.

Actually, this last item may hold the key to all the others, when you’re re-calculating how much you need to retire. Developing a strong Plan B now that carries over into semi-retirement can help pay off your mortgage, generate extra cash flow for health costs and supplement your investment income.

With the right business model, it could even provide a way for your adult children to take care of themselves!

The Management Gap

Everyone knows about the wage gap between men and women, but that’s not the only hurdle women face in the workplace. Last week, the Government Accountability Office released a report showing that women hold 49% of the jobs but only 40% of the management positions.

The latter figure is up only 1% over the previous seven years, according to the report commissioned by the Joint Economic Council of Congress.

Analyzing the report in The New York Times, Catherine Rampell wrote that women have a smaller share of management positions in 10 of the13 industries covered. Their pay ranged from 87% to 78% of what male managers received.

Rampell notes, “Across the workforce, the pay gap was also slightly wider for managers who had children.” After adjusting for factors like age and education, managers who were mothers earned 79% of the salaries paid to managers who were fathers.

No wonder only 59% of female managers are married (compared to 74% of males) and only 37% have children (versus 43% of males).

What’s a working mother to do?

If she wants to reach the top, and be paid the same as her male counterparts, she might want to make a career change. She might even consider jumping off the corporate ladder, starting her own business, being her own boss, and having no limits on her income.

A successful work at home career beats a frustrating rat race any day.

Where the Money Isn’t

Remember the principle of supply and demand? If a store owner has a shelf full of widgets and more in the stockroom, but nobody is buying them at the regular price, he puts them on sale. That’s good for the customer.

Likewise, if he has one opening for a sales clerk and a hundred people apply for the job, he can hire someone for less than his regular wage. Not so good for the new employee.

This is how the post-meltdown labor market works. David Rosenberg, chief economist at wealth management firm Gluskin Sheff, calls it wage deflation. And because the excess labor capacity is so high today, and wage rates are so low, he also calls it uncharted territory.

Although the official unemployment rate is (barely) under 10%, it is estimated that the rate is double for men between the ages of 25 and 54. That’s one in every five not working.

But things will turn around, won’t they?

I’m sure they will. However, a 2009 study of the 1982 recession by researchers at Columbia University, the Congressional Budget Office and the Social Security Administration, found that losing a job during a rough economy can have a lifelong impact on earnings. Mass layoffs back then resulted in short term pay cuts averaging 30%. That’s bad enough in itself, but 15 to 20 years later, those who were let go were still making 20% less than similar workers who weren’t laid off!

So, how can people avoid becoming statistics? How can moms and dads, and young people just out of school, and baby boomers approaching retirement, make sure they don’t end up on the wrong page of some research report?

I mean, besides hanging on to a job you hate, with an idiot for a boss, just because it’s better than nothing.

You may ask yourself, “Is it too late to make a career change after 40? After 50? Should baby boomers consider a career change as a semi-retirement plan?”

I say, “No, no, and yes.”

“How much would it cost to start my own business? Can I start a business with bad credit?”

Contact me.

Recession’s Over. Really?

The Great Recession is over. Oh happy day.

They say it ended in June of 2009, over a year ago. You didn’t notice? Neither did any of the millions who’ve lost jobs since then.

That’s because the only thing that ended was the slide in our gross domestic product output. So companies are producing more goods and services now. In fact, many companies are doing very well, thank you.

People, not so much.

In their article in The Dallas Morning News on September 5th, Sheryl Jean and Melissa Repko report that, while companies have cut jobs, increased profits and boosted bonuses to executives, the remaining workers have put in more hours for less pay and fewer benefits.

These “survivor workers” tend to have high anxiety and low self-esteem. They don’t trust their companies anymore, but don’t feel they can complain to friends who are unemployed. They feel stuck.

An adjacent article by Scott Farwell describes how, for young people trying to break into the job market, the old Catch 22 of “can’t get a job without experience and can’t get experience without a job” is especially restrictive these days because they are competing with so many experienced ex-workers.

Future prospects are so bleak for that age group that many have given up and decided to fall back on their Plan B: military service.

That’s good news for our defenders, but what does it say about our country when fighting shooting wars overseas is preferable to fighting the job wars at home?

That particular Plan B won’t work for everyone. Instead, many of those both under 40 and over 40 who don’t like feeling stuck are thinking about a career change. They’re looking for something that will give them more say about their circumstances. More control over their futures.

They’re deciding to work for themselves and their families, not for their employers.

Eight Steps to Starting Your Own Business

Excerpts from an article by Jeff Wuorio on the Fidelity Investments web site (Review remarks follow):

Karl Miller, a veteran of the finance industry was about to start work at AIG when the you-know-what hit the fan. “That told me I should do something different.”

What he did was start his own company, selling custom-crafted furniture online, a process the 51-year-old called both unsettling and exhilarating.

Though the popular image of an entrepreneur is probably a 20-something cooking up some new technology in his parent’s garage, Miller’s middle-age venture is becoming the norm.

In the study “The Coming Entrepreneurship Boom,” the nonprofit research group Kauffman Foundation reports that, from 1996 to 2007, Americans aged 55 to 64 had a significantly higher rate of entrepreneurial activity than those aged 20 to 34.

“The United States might be on the cusp of an entrepreneurship boom—not in spite of an aging population but because of it,” the report concludes, citing longer life expectancy and other factors.

But, experts and older entrepreneurs say, it’s critical to map out a solid financial plan to give your business the best chance to succeed. A recent Labor Department study found that less than one in three new businesses lasted seven years.

Wuorio lists eight steps you should consider to help assure personal and financial success:

1. Set up emergency savings you can use for anything from business expenses to unexpected medical bills. Oregon financial planner Glen Clemans recommends that older entrepreneurs target as much as a year’s worth of savings to account for the uncertainty of a new business.

2. Develop a business plan, one that examines the start-up costs, market research, inventory, marketing, advertising and so on. If you know someone who started a similar business, pick their brain on costs, strategy and other issues. Then bump up the anticipated costs 25% to 50% more.

3. Review your personal budget. If you run out of money in your personal life, your business is gone. Cut where you can.

4. Find the money. Since loans are often unavailable to entrepreneurs with great ideas but zero operating history, Wuorio suggests personal savings, home equity, life insurance cash value, borrowing from family or friends, or using low interest rate credit cards. The Small Business Administration has more information at http://www.sba.gov/.

5. Don’t sacrifice your retirement. Not only can you jeopardize the financial solvency of your retirement, you’ll also be hit by taxes and penalties should you withdraw retirement funds prior to age 59-1/2.

6. To hedge your bets, adjust your portfolio. Since any start-up business carries a certain element of risk, consider notching down your retirement portfolio into less aggressive options.

7. Don’t overextend. Startups often collapse from early and unnecessary spending, so hold off on expenses wherever you can. For instance, stick with a home office until your business income can support leasing outside office space.

8. Enjoy the experience. Although starting a new business at any age is challenging, balancing sound judgment with a healthy enthusiasm will help steady things as a new chapter in your life unfolds.

REVIEW REMARKS:
This covers the ground very well, especially for anyone thinking about jumping in with both feet. Needless to say, get-out-of-debt guru Dave Ramsey (www.daveramsey.com) has a different opinion on item four. In his newspaper column earlier this month, he says, “When you borrow money to start a business, you’re introducing a huge risk factor into the equation. Saving up and paying cash is the best way to go. The only other thing I would consider would be an owner-financed deal. The current owner finances the transaction, and your pay to him is based on the profitability of the business. If there’s no profitability, you’re not bankrupt.”

Of course, for those who would rather start with a toe in the water, part-time, item four would not be a huge consideration. Would-be entrepreneurs shouldn’t let themselves get stopped by the question, “How much would it cost to start my own business?” Or even, “How can I start a business with bad credit?”

As Mama used to say, “Where there’s a will, there’s a way.”