Personal Financial Rachel Siegel Carol Yacht

download

https://ebookbell.com/product/personal-financial-rachel-siegel-
carol-yacht-10719566

Explore and download more ebooks at ebookbell.com

Here are some recommended products that we believe you will be
interested in. You can click the link to download.

Personal Financial Planning Theory And Practice Debbie Harrison

https://ebookbell.com/product/personal-financial-planning-theory-and-
practice-debbie-harrison-2184902

Personal Financial Planning 14th Edition Randy Billingsley Lawrence J

Gitman

https://ebookbell.com/product/personal-financial-planning-14th-
edition-randy-billingsley-lawrence-j-gitman-22852600

Personal Financial Planning 11th Edition Lawrence J Gitman Michael D

Joehnk

https://ebookbell.com/product/personal-financial-planning-11th-
edition-lawrence-j-gitman-michael-d-joehnk-2434428

Personal Financial Literacy 1st Edition Joan Ryan

https://ebookbell.com/product/personal-financial-literacy-1st-edition-
joan-ryan-2440136
Personal Financial Planning 12th Edition Lawrence J Gitman Michael D
Joehnk

https://ebookbell.com/product/personal-financial-planning-12th-
edition-lawrence-j-gitman-michael-d-joehnk-2473528

Personal Financial Services Essentials For Lawyers 1st Edition Michael

Miller

https://ebookbell.com/product/personal-financial-services-essentials-
for-lawyers-1st-edition-michael-miller-32835506

Personal Financial Planning For Executives And Entrepreneurs The Path

To Financial Peace Of Mind 1st Ed Michael J Nathanson

https://ebookbell.com/product/personal-financial-planning-for-
executives-and-entrepreneurs-the-path-to-financial-peace-of-mind-1st-
ed-michael-j-nathanson-7325056

Personal Financial Planning For Divorce Jeffrey H Rattiner

https://ebookbell.com/product/personal-financial-planning-for-divorce-
jeffrey-h-rattiner-48902002

Personal Financial Planning For Executives And Entrepreneurs The Path

To Financial Peace Of Mind Michael J Nathanson

https://ebookbell.com/product/personal-financial-planning-for-
executives-and-entrepreneurs-the-path-to-financial-peace-of-mind-
michael-j-nathanson-51720252
 This text was adapted by The Saylor Foundation under a Creative
Commons Attribution-NonCommercial-ShareAlike 3.0 License without
attribution as requested by the work’s original creator or licensee.

Saylor URL: http://www.saylor.org/books Saylor.org

1
Preface
This text has an attitude: that in addition to providing sources of practical information,
it should introduce you to a way of thinking about your personal financial decisions.
This should lead you to thinking harder and farther about the larger and longer
consequences of your decisions. Many of the more practical aspects of personal finance
will change over time, as practices, technologies, intermediaries, customs, and laws
change, but a fundamental awareness of ways to think well about solving financial
questions can always be useful. Some of the more practical ideas may be obviously and
immediately relevant—and some not—but decision-making and research skills are
lasting.

You may be enrolled in a traditional two- or four-year degree program or may just be
taking the course for personal growth. You may be of any age and may have already
done more or less academic and experiential learning. You may be a business major,
with some prerequisite knowledge of economics or level of accounting or math skills, or
you may be filling in an elective and have no such skills. In fact, although they enhance
personal finance decisions, such skills are not necessary. Software, downloadable
applications, and calculators perform ever more sophisticated functions with ever more
approachable interfaces. The emphasis in this text is on understanding the fundamental
relationships behind the math and being able to use that understanding to make better
decisions about your personal finances.

Entire tomes, both academic texts and trade books, have been and will be written about
any of the subjects featured in each chapter of this text. The idea here is to introduce you
to the practical and conceptual framework for making personal financial decisions in the
larger context of your life, and in the even larger context of your individual life as part of
a greater economy of financial participants.

Structure
The text may be divided into five sections:

1. Learning Basic Skills, Knowledge, and Context (Chapter 1 "Personal Financial

Planning"–Chapter 6 "Taxes and Tax Planning")
2. Getting What You Want (Chapter 7 "Financial Management"–Chapter 9 "Buying
a Home")
3. Protecting What You’ve Got (Chapter 10 "Personal Risk Management:
Insurance"–Chapter 11 "Personal Risk Management: Retirement and Estate
Planning")
4. Building Wealth (Chapter 12 "Investing"–Chapter 17 "Investing in Mutual Funds,
Commodities, Real Estate, and Collectibles")
5. How to Get Started (Chapter 18 "Career Planning")

Saylor URL: http://www.saylor.org/books Saylor.org

2
This structure is based on the typical life cycle of personal financial decisions, which in
turn is based on the premise that in a market economy, an individual participates by
trading something of value: labor or capital. Most of us start with nothing to trade but
labor. We hope to sustain our desired lifestyle on the earnings from labor and to
gradually (or quickly) amass capital that will then provide additional earnings.

Learning Basic Skills, Knowledge, and Context (Chapter 1 "Personal

Financial Planning"–Chapter 6 "Taxes and Tax Planning")

Chapter 1 "Personal Financial Planning" introduces four of its major themes:

• Financial decisions are individual-specific (Section 1.1 "Individual or “Micro”

Factors That Affect Financial Thinking").
• Financial decisions are economic decisions (Section 1.2 "Systemic or “Macro”
Factors That Affect Financial Thinking").
• Financial decision making is a continuous process (Section 1.3 "The Planning
Process").
• Professional advisors work for financial decision makers (Section 1.4 "Financial
Planning Professionals").

These themes emphasize the idiosyncratic, systemic, and continuous nature of personal
finance, putting decisions within the larger contexts of an entire lifetime and an
economy.

Chapter 2 "Basic Ideas of Finance" introduces the basic financial and accounting
categories of revenues, expenses, assets, liabilities, and net worth as tools to understand
the relationships between them as a way, in turn, of organizing financial thinking. It also
introduces the concepts of opportunity costs and sunk costs as implicit but critical
considerations in financial thinking.

Chapter 3 "Financial Statements" continues with the discussion of organizing financial

data to help in decision making and introduces basic analytical tools that can be used to
clarify the situation portrayed in financial statements.

Chapter 4 "Evaluating Choices: Time, Risk, and Value" introduces the critical
relationships of time and risk to value. It demonstrates the math but focuses on the role
that those relationships play in financial thinking, especially in comparing and
evaluating choices in making financial decisions.

Chapter 5 "Financial Plans: Budgets" demonstrates how organized financial data can be
used to create a plan, monitor progress, and adjust goals.

Chapter 6 "Taxes and Tax Planning" discusses the role of taxation in personal finance
and its effects on earnings and on accumulating wealth. The chapter emphasizes the

Saylor URL: http://www.saylor.org/books Saylor.org

3
types, purposes, and impacts of taxes; the organization of resources for information; and
the areas of controversy that lead to changes in the tax rules.

Getting What You Want (Chapter 7 "Financial Management"–Chapter 9

"Buying a Home")

Chapter 7 "Financial Management" focuses on financing consumption using current

earnings and/or credit, and financing longer-term assets with debt.

Chapter 8 "Consumer Strategies" discusses purchasing decisions, starting with recurring

consumption, and then goes into detail on the purchase of a car, a more significant and
longer-term purchase both in terms of its use and financing.

Chapter 9 "Buying a Home" applies the ideas developed in the previous chapter to what,
for most people, will be the major purchase: a home. The chapter discusses its role both
as a living expense and an investment, as well as the financing and financial
consequences of the purchase.

Protecting What You’ve Got (Chapter 10 "Personal Risk Management:

Insurance"–Chapter 11 "Personal Risk Management: Retirement and Estate
Planning")

Chapter 10 "Personal Risk Management: Insurance" introduces the idea of

incorporating risk management into financial planning. An awareness of the need for
risk management often comes with age and experience. This chapter focuses on
planning for the unexpected. It progresses from the more obvious risks to property to
the less obvious risks, such as the possible inability to earn due to temporary ill health,
permanent disability, or death.

Chapter 11 "Personal Risk Management: Retirement and Estate Planning" focuses on

planning for the expected: retirement, loss of income from wages, and the subsequent
distribution of assets after death. Retirement planning discusses ways to develop
alternative sources of income from capital that can eventually substitute for wages.
Estate planning also touches on the considerations and mechanics of distributing
accumulated wealth.

Building Wealth (Chapter 12 "Investing"–Chapter 17 "Investing in Mutual

Funds, Commodities, Real Estate, and Collectibles")

Saylor URL: http://www.saylor.org/books Saylor.org

4
Chapter 12 "Investing" presents basic information about investment instruments and
markets and explains the classic relationships of risk and return developed in modern
portfolio theory.

Chapter 13 "Behavioral Finance and Market Behavior" then digresses from classical
theory to take a look at how both personal and market behavior can deviate from the
classic risk-return relationships and the consequences for personal financial planning
and thinking.

Chapter 14 "The Practice of Investment" looks at the mechanics of the investment

process, discussing issues of technology, the investor-broker relationship, and the
differences between domestic and international investing.

Chapter 15 "Owning Stocks", Chapter 16 "Owning Bonds", and Chapter 17 "Investing in

Mutual Funds, Commodities, Real Estate, and Collectibles" look at investments
commonly made by individual investors and their use in and risks for building wealth as
part of a diverse investment strategy.

How to Get Started (Chapter 18 "Career Planning")

Chapter 18 "Career Planning" brings the planning process full circle with a discussion on
how to think about getting started, that is, deciding how to approach the process of
selling your labor. The chapter introduces the idea of selling labor as a consumable
commodity to employers in the labor market and explores how to search and apply for a
job in light of its strategic as well as immediate potential.

Saylor URL: http://www.saylor.org/books Saylor.org

5
 Chapter 1
Personal Financial Planning
Introduction
Bryon and Tomika are just one semester shy of graduating from a state college. Bryon is
getting a degree in protective services and is thinking of going for certification as a fire
protection engineer, which would cost an additional $4,500. With his protective services
degree many other fields will be open to him as well—from first responder to game
warden or correctional officer. Bryon will have to specialize immediately and wants a job
in his state that comes with some occupational safety and a lot of job security.

Tomika is getting a Bachelor of Science degree in medical technology and hopes to

parlay that into a job as a lab technician. She has interviews lined up at a nearby
regional hospital and a local pharmaceutical firm. She hopes she gets the hospital job
because it pays a little better and offers additional training on site. Both Bryon and
Tomika will need additional training to have the jobs they want, and they are already in
debt for their educations.

Tomika qualified for a Stafford loan, and the federal government subsidizes her loan by
paying the interest on it until six months after she graduates. She will owe about
$40,000 of principal plus interest at a fixed annual rate of 6.8 percent. Tomika plans to
start working immediately on graduation and to take classes on the job or at night for as
long as it takes to get the extra certification she needs. Unsubsidized, the extra training
would cost about $3,500. She presently earns about $5,000 a year working weekends as
a home health aide and could easily double that after she graduates. Tomika also
qualified for a Pell grant of around $5,000 each year she was a full-time student, which
has paid for her rooms in an off-campus student co-op housing unit. Bryon also lives
there, and that’s how they met.

Bryon would like to get to a point in his life where he can propose marriage to Tomika
and looks forward to being a family man one day. He was awarded a service scholarship
from his hometown and received windfall money from his grandmother’s estate after
she died in his sophomore year. He also borrowed $30,000 for five years at only 2.25
percent interest from his local bank through a family circle savings plan. He has been
attending classes part-time year-round so he can work to earn money for college and
living expenses. He earns about $19,000 a year working for catering services. Bryon
feels very strongly about repaying his relatives who have helped finance his education
and also is willing to help Tomika pay off her Stafford loan after they marry.

Tomika has $3,000 in U.S. Treasury Series EE savings bonds, which mature in two
years, and has managed to put aside $600 in a savings account earmarked for clothes
and gifts. Bryon has sunk all his savings into tuition and books, and his only other asset

Saylor URL: http://www.saylor.org/books Saylor.org

6
is his trusty old pickup truck, which has no liens and a trade-in value of $3,900. For
both Tomika and Bryon, having reliable transportation to their jobs is a concern.
Tomika hopes to continue using public transportation to get to a new job after
graduation. Both Bryon and Tomika are smart enough about money to have avoided
getting into credit card debt. Each keeps only one major credit card and a debit card and
with rare exceptions pays statements in full each month.

Bryon and Tomika will have to find new housing after they graduate. They could look for
another cooperative housing opportunity or rent apartments, or they could get married
now instead of waiting. Bryon also has a rent-free option of moving in temporarily with
his brother. Tomika feels very strongly about saving money to buy a home and wants to
wait until her career is well established before having a child. Tomika is concerned about
getting good job benefits, especially medical insurance and family leave. Although still
young, Bryon is concerned about being able to retire, the sooner the better, but he has
no idea how that would be possible. He thinks he would enjoy running his own catering
firm as a retirement business some day.

Tomika’s starting salary as a lab technician will be about $30,000, and as a fire
protection engineer, Bryon would have a starting salary of about $38,000. Both have the
potential to double their salaries after fifteen years on the job, but they are worried
about the economy. Their graduations are coinciding with a downturn. Aside from
Tomika’s savings bonds, she and Bryon are not in the investment market, although as
soon as he can Bryon wants to invest in a diversified portfolio of money market funds
that include corporate stocks and municipal bonds. Nevertheless, the state of the
economy affects their situation. Money is tight and loans are hard to get, jobs are scarce
and highly competitive, purchasing power and interest rates are rising, and pension
plans and retirement funds are at risk of losing value. It’s uncertain how long it will be
before the trend reverses, so for the short term, they need to play it safe. What if they
can’t land the jobs they’re preparing for?

Tomika and Bryon certainly have a lot of decisions to make, and some of those decisions
have high-stakes consequences for their lives. In making those decisions, they will have
to answer some questions, such as the following:

1. What individual or personal factors will affect Tomika’s and Bryon’s financial
thinking and decision making?
2. What are Bryon’s best options for job specializations in protective services? What
are Tomika’s best options for job placement in the field of medical technology?
3. When should Bryon and Tomika invest in the additional job training each will
need, and how can they finance that training?
4. How will Tomika pay off her college loan, and how much will it cost? How soon
can she get out of debt?
5. How will Bryon repay his loan reflecting his family’s investment in his education?
6. What are Tomika’s short-term and long-term goals? What are Bryon’s? If they
marry, how well will their goals mesh or need to adjust?
7. What should they do about medical insurance and retirement needs?
8. What should they do about saving and investing?

Saylor URL: http://www.saylor.org/books Saylor.org

7
 9. What should they do about getting married and starting a family?
10. What should they do about buying a home and a car?
11. What is Bryon’s present and projected income from all sources? What is
Tomika’s?
12. What is the tax liability on their present incomes as singles? What would their tax
liability be on their future incomes if they filed jointly as a married couple?
13. What budget categories would you create for Tomika’s and Bryon’s expenses and
expenditures over time?
14. How could Tomika and Bryon adjust their budgets to meet their short-term and
long-term goals?
15. On the basis of your analysis and investigations, what five-year financial plan
would you develop for Tomika and Bryon?
16. How will larger economic factors affect the decisions Bryon and Tomika make
and the outcomes of those decisions?

You will make financial decisions all your life. Sometimes you can see those decisions
coming and plan deliberately; sometimes, well, stuff happens, and you are faced with a
more sudden decision. Personal financial planning is about making deliberate decisions
that allow you to get closer to your goals or sudden decisions that allow you to stay on
track, even when things take an unexpected turn.

The idea of personal financial planning is really no different from the idea of planning
most anything: you figure out where you’d like to be, where you are, and how to go from
here to there. The process is complicated by the number of factors to consider, by their
complex relationships to each other, and by the profound nature of these decisions,
because how you finance your life will, to a large extent, determine the life that you live.
The process is also, often enormously, complicated by risk: you are often making
decisions with plenty of information, but little certainty or even predictability.

Personal financial planning is a lifelong process. Your time horizon is as long as can be—
until the very end of your life—and during that time your circumstances will change in
predictable and unpredictable ways. A financial plan has to be re-evaluated, adjusted,
and re-adjusted. It has to be flexible enough to be responsive to unanticipated needs and
desires, robust enough to advance toward goals, and all the while be able to protect from
unimagined risks.

One of the most critical resources in the planning process is information. We live in a
world awash in information—and no shortage of advice—but to use that information
well you have to understand what it is telling you, why it matters, where it comes from,
and how to use it in the planning process. You need to be able to put that information in
context, before you can use it wisely. That context includes factors in your individual
situation that affect your financial thinking, and factors in the wider economy that affect
your financial decision making.

Saylor URL: http://www.saylor.org/books Saylor.org

8
1.1 Individual or “Micro” Factors That Affect
Financial Thinking

LEARNING OBJECTIVES

1. List individual factors that strongly influence financial thinking.

2. Discuss how income, income needs, risk tolerance, and wealth are affected by individual factors.

3. Explain how life stages affect financial decision making.

4. Summarize the basis of sound financial planning.

The circumstances or characteristics of your life influence your financial concerns and
plans. What you want and need—and how and to what extent you want to protect the
satisfaction of your wants and needs—all depend on how you live and how you’d like to
live in the future. While everyone is different, there are common circumstances of life
that affect personal financial concerns and thus affect everyone’s financial planning.
Factors that affect personal financial concerns are family structure, health, career
choices, and age.

Family Structure
Marital status and dependents, such as children, parents, or siblings, determine whether
you are planning only for yourself or for others as well. If you have a spouse or
dependents, you have a financial responsibility to someone else, and that includes a
responsibility to include them in your financial thinking. You may expect the
dependence of a family member to end at some point, as with children or elderly
parents, or you may have lifelong responsibilities to and for another person.

Partners and dependents affect your financial planning as you seek to provide for them,
such as paying for children’s education. Parents typically want to protect or improve the
quality of life for their children and may choose to limit their own fulfillment to achieve
that end.

Providing for others increases income needs. Being responsible for others also affects
your attitudes toward and tolerance of risk. Typically, both the willingness and ability to
assume risk diminishes with dependents, and a desire for more financial protection
grows. People often seek protection for their income or assets even past their own
lifetimes to ensure the continued well-being of partners and dependents. An example is
a life insurance policy naming a spouse or dependents as beneficiaries.

Health

Saylor URL: http://www.saylor.org/books Saylor.org

9
Your health is another defining circumstance that will affect your expected income
needs and risk tolerance and thus your personal financial planning. Personal financial
planning should include some protection against the risk of chronic illness, accident, or
long-term disability and some provision for short-term events, such as pregnancy and
birth. If your health limits your earnings or ability to work or adds significantly to your
expenditures, your income needs may increase. The need to protect yourself against
further limitations or increased costs may also increase. At the same time your tolerance
for risk may decrease, further affecting your financial decisions.

Career Choice
Your career choices affect your financial planning, especially through educational
requirements, income potential, and characteristics of the occupation or profession you
choose. Careers have different hours, pay, benefits, risk factors, and patterns of
advancement over time. Thus, your financial planning will reflect the realities of being a
postal worker, professional athlete, commissioned sales representative, corporate
lawyer, freelance photographer, librarian, building contractor, tax preparer, professor,
Web site designer, and so on. For example, the careers of most athletes end before
middle age, have higher risk of injury, and command steady, higher-than-average
incomes, while the careers of most sales representatives last longer with greater risk of
unpredictable income fluctuations. Figure 1.1 "Median Salary Comparisons by
Profession" compares the median salaries of certain careers.

Figure 1.1 Median Salary Comparisons by Profession[1]

Saylor URL: http://www.saylor.org/books Saylor.org

10
Most people begin their independent financial lives by selling their labor to create an
income by working. Over time they may choose to change careers, develop additional
sources of concurrent income, move between employment and self-employment, or
become unemployed or reemployed. Along with career choices, all these changes affect
personal financial management and planning.

Age
Needs, desires, values, and priorities all change over a lifetime, and financial concerns
change accordingly. Ideally, personal finance is a process of management and planning
that anticipates or keeps abreast with changes. Although everyone is different, some
financial concerns are common to or typical of the different stages of adult life. Analysis
of life stages is part of financial planning.

At the beginning of your adult life, you are more likely to have no dependents, little if
any accumulated wealth, and few assets. (Assets are resources that can be used to
create income, decrease expenses, or store wealth as an investment.) As a young adult
you also are likely to have comparatively small income needs, especially if you are
providing only for yourself. Your employment income is probably your primary or sole
source of income. Having no one and almost nothing to protect, your willingness to
assume risk is usually high. At this point in your life, you are focused on developing your
career and increasing your earned income. Any investments you may have are geared
toward growth.

As your career progresses, income increases but so does spending. Lifestyle expectations
increase. If you now have a spouse and dependents and elderly parents to look after, you
have additional needs to manage. In middle adulthood you may also be acquiring more
assets, such as a house, a retirement account, or an inheritance.

As income, spending, and asset base grow, ability to assume risk grows, but willingness
to do so typically decreases. Now you have things that need protection: dependents and
assets. As you age, you realize that you require more protection. You may want to stop
working one day, or you may suffer a decline in health. As an older adult you may want
to create alternative sources of income, perhaps a retirement fund, as insurance against
a loss of employment or income. Figure 1.3 "Financial Decisions Related to Life Stages"
suggests the effects of life stages on financial decision making.

Saylor URL: http://www.saylor.org/books Saylor.org

11
Figure 1.3 Financial Decisions Related to Life Stages

Early and middle adulthoods are periods of building up: building a family, building a
career, increasing earned income, and accumulating assets. Spending needs increase,
but so do investments and alternative sources of income.

Later adulthood is a period of spending down. There is less reliance on earned income
and more on the accumulated wealth of assets and investments. You are likely to be
without dependents, as your children have grown up or your parents passed on, and so
without the responsibility of providing for them, your expenses are lower. You are likely
to have more leisure time, especially after retirement.

Without dependents, spending needs decrease. On the other hand, you may feel free to
finally indulge in those things that you’ve “always wanted.” There are no longer
dependents to protect, but assets demand even more protection as, without
employment, they are your only source of income. Typically, your ability to assume risk
is high because of your accumulated assets, but your willingness to assume risk is low,
as you are now dependent on those assets for income. As a result, risk tolerance
decreases: you are less concerned with increasing wealth than you are with protecting it.

Effective financial planning depends largely on an awareness of how your current and
future stages in life may influence your financial decisions.

KEY TAKEAWAYS

• Personal circumstances that influence financial thinking include family structure, health, career

choice, and age.

• Family structure and health affect income needs and risk tolerance.

• Career choice affects income and wealth or asset accumulation.

Saylor URL: http://www.saylor.org/books Saylor.org

12
• Age and stage of life affect sources of income, asset accumulation, spending needs, and risk

tolerance.

• Sound personal financial planning is based on a thorough understanding of your personal

circumstances and goals.

EXERCISES

1. You may be surprised at what you discover. In the process, consider how information in this text

specifically relates to your observations and insights. Reading this chapter, for example, identify

and describe your current life stage. How does your current age or life stage affect your financial

thinking and behavior? To what extent and in what ways does your financial thinking anticipate

your next stage of life? What financial goals are you aware of that you have set? How are your

current experiences informing your financial planning for the future?

2. Continue your personal financial journal by describing how other micro factors, such as your

present family structure, health, career choices, and other individual factors, are affecting your

financial planning. The My Notes feature allows you to share given entries or to keep them

private. You can save your notes. You also can highlight and right click on your notes to copy and

paste them into a word document on your computer.

3. Find the age range for your stage of life and read the advice at

http://financialplan.about.com/od/moneybyageorlifestage/Money_and_Personal_Finance_by_

Age_Life_Stage.htm. According to the articles on this page, what should be your top priorities in

financial planning right now? Read the articles on the next life stage. How are your financial

planning priorities likely to change?

[1] Based on data from http://www.careeroverview.com/salary-benefits.html (accessed November 21,

2009).

Saylor URL: http://www.saylor.org/books Saylor.org

13
1.2 Systemic or “Macro” Factors That Affect
Financial Thinking
LEARNING OBJECTIVES

1. Identify the systemic or macro factors that affect personal financial planning.

2. Describe the impact of inflation or deflation on disposable income.

3. Describe the effect of rising unemployment on disposable income.

4. Explain how economic indicators can have an impact on personal finances.

Financial planning has to take into account conditions in the wider economy and in the
markets that make up the economy. The labor market, for example, is where labor is
traded through hiring or employment. Workers compete for jobs and employers
compete for workers. In the capital market, capital (cash or assets) is traded, most
commonly in the form of stocks and bonds (along with other ways to package capital).
In the credit market, a part of the capital market, capital is loaned and borrowed
rather than bought and sold. These and other markets exist in a dynamic economic
environment, and those environmental realities are part of sound financial planning.

In the long term, history has proven that an economy can grow over time, that
investments can earn returns, and that the value of currency can remain relatively
stable. In the short term, however, that is not continuously true. Contrary or unsettled
periods can upset financial plans, especially if they last long enough or happen at just
the wrong time in your life. Understanding large-scale economic patterns and factors
that indicate the health of an economy can help you make better financial decisions.
These systemic factors include, for example, business cycles and employment rates.

Business Cycles
An economy tends to be productive enough to provide for the wants of its members.
Normally, economic output increases as population increases or as people’s expectations
grow. An economy’s output or productivity is measured by its
gross domestic product or GDP, the value of what is produced in a period. When the
GDP is increasing, the economy is in an expansion, and when it is decreasing, the
economy is in a contraction. An economy that contracts for half a year is said to be in
recession; a prolonged recession is a depression. The GDP is a closely watched
barometer of the economy (see Figure 1.4 "GDP Percent Change (Based on Current
Dollars)").

Saylor URL: http://www.saylor.org/books Saylor.org

14
Figure 1.4 GDP Percent Change (Based on Current Dollars)[1]

Over time, the economy tends to be cyclical, usually expanding but sometimes
contracting. This is called the business cycle. Periods of contraction are generally seen
as market corrections, or the market regaining its equilibrium, after periods of growth.
Growth is never perfectly smooth, so sometimes certain markets become unbalanced
and need to correct themselves. Over time, the periods of contraction seem to have
become less frequent, as you can see in Figure 1.4 "GDP Percent Change (Based on
Current Dollars)". The business cycles still occur nevertheless.

There are many metaphors to describe the cyclical nature of market economies: “peaks
and troughs,” “boom and bust,” “growth and contraction,” “expansion and correction,”
and so on. While each cycle is born in a unique combination of circumstances, cycles
occur because things change and upset economic equilibrium. That is, events change the
balance between supply and demand in the economy overall. Sometimes demand grows
too fast and supply can’t keep up, and sometimes supply grows too fast for demand.
There are many reasons that this could happen, but whatever the reasons, buyers and
sellers react to this imbalance, which then creates a change.

Employment Rate
An economy produces not just goods and services to satisfy its members but also jobs,
because most people participate in the market economy by trading their labor, and most
rely on wages as their primary source of income. The economy therefore must provide
opportunity to earn wages so more people can participate in the economy through the
market. Otherwise, more people must be provided for in some other way, such as a
private or public subsidy (charity or welfare).

The unemployment rate is a measure of an economy’s shortcomings, because it

shows the proportion of people who want to work but don’t because the economy cannot
provide them jobs. There is always some so-called natural rate of unemployment as
people move in and out of the workforce as the circumstances of their lives change—for
example, as they retrain for a new career or take time out for family. But natural
unemployment should be consistently low and not affect the productivity of the
economy.

Saylor URL: http://www.saylor.org/books Saylor.org

15
Unemployment also shows that the economy is not efficient, because it is not able to put
all its productive human resources to work.

The employment rate, or the participation rate of the labor force, shows how
successful an economy is at creating opportunities to sell labor and efficiently using its
human resources. A healthy market economy uses its labor productively, is productive,
and provides employment opportunities as well as consumer satisfaction through its
markets. Figure 1.6 "Cyclical Economic Effects" shows the relationship between GDP
and unemployment and each stage of the business cycle.

Figure 1.6 Cyclical Economic Effects

At either end of this scale of growth, the economy is in an unsustainable position: either
growing too fast, with too much demand for labor, or shrinking, with too little demand
for labor.

If there is too much demand for labor—more jobs than workers to fill them—then wages
will rise, pushing up the cost of everything and causing prices to rise. Prices usually rise
faster than wages, for many reasons, which would discourage consumption that would
eventually discourage production and cause the economy to slow down from its “boom”
condition into a more manageable rate of growth.

If there is too little demand for labor—more workers than jobs—then wages will fall or,
more typically, there will be people without jobs, or unemployment. If wages become
low enough, employers theoretically will be encouraged to hire more labor, which would
bring employment levels back up. However, it doesn’t always work that way, because
people have job mobility—they are willing and able to move between economies to seek
employment.

If unemployment is high and prolonged, then too many people are without wages for too
long, and they are not able to participate in the economy because they have nothing to
trade. In that case, the market economy is just not working for too many people, and
they will eventually demand a change (which is how most revolutions have started).

Other Indicators of Economic Health

Other economic indicators give us clues as to how “successful” our economy is, how well
it is growing, or how well positioned it is for future growth. These indicators include
statistics, such as the number of houses being built or existing home sales, orders for

Saylor URL: http://www.saylor.org/books Saylor.org

16
durable goods (e.g., appliances and automobiles), consumer confidence, producer
prices, and so on. However, GDP growth and unemployment are the two most closely
watched indicators, because they get at the heart of what our economy is supposed to
accomplish: to provide diverse opportunities for the most people to participate in the
economy, to create jobs, and to satisfy the consumption needs of the most people by
enabling them to get what they want.

An expanding and healthy economy will offer more choices to participants: more choices
for trading labor and for trading capital. It offers more opportunities to earn a return or
an income and therefore also offers more diversification and less risk.

Naturally, everyone would rather operate in a healthier economy at all times, but this is
not always possible. Financial planning must include planning for the risk that
economic factors will affect financial realities. A recession may increase unemployment,
lowering the return on labor—wages—or making it harder to anticipate an increase in
income. Wage income could be lost altogether. Such temporary involuntary loss of wage
income probably will happen to you during your lifetime, as you inevitably will endure
economic cycles.

A hedge against lost wages is investment to create other forms of income. In a period of
economic contraction, however, the usefulness of capital, and thus its value, may decline
as well. Some businesses and industries are considered immune to economic cycles
(e.g., public education and health care), but overall, investment returns may suffer.
Thus, during your lifetime business cycles will likely affect your participation in the
capital markets as well.

Currency Value
Stable currency value is another important indicator of a healthy economy and a critical
element in financial planning. Like anything else, the value of a currency is based on its
usefulness. We use currency as a medium of exchange, so the value of a currency is
based on how it can be used in trade, which in turn is based on what is produced in the
economy. If an economy produces little that anyone wants, then its currency has little
value relative to other currencies, because there is little use for it in trade. So a
currency’s value is an indicator of how productive an economy is.

A currency’s usefulness is based on what it can buy, or its purchasing power. The
more a currency can buy, the more useful and valuable it is. When prices rise or when
things cost more, purchasing power decreases; the currency buys less and its value
decreases.

When the value of a currency decreases, an economy has inflation. Its currency has
less value because it is less useful; that is, less can be bought with it. Prices are rising. It
takes more units of currency to buy the same amount of goods. When the value of a
currency increases, on the other hand, an economy has deflation. Prices are falling; the
currency is worth more and buys more.

Saylor URL: http://www.saylor.org/books Saylor.org

17
For example, say you can buy five video games for $20. Each game is worth $4, or each
dollar buys ¼ of a game. Then we have inflation, and prices—including the price of
video games—rise. A year later you want to buy games, but now your $20 only buys two
games. Each one costs $10, or each dollar only buys one-tenth of a game. Rising prices
have eroded the purchasing power of your dollars.

If there is deflation, prices fall, so maybe a year later you could buy ten video games with
your same $20. Now each game costs only $2, and each dollar buys half a game. The
same amount of currency buys more games: its purchasing power has increased, as has
its usefulness and its value (Figure 1.7 "Dynamics of Currency Value").

Figure 1.7 Dynamics of Currency Value

Inflation is most commonly measured by the consumer price indexA measure of

inflation or deflation based on a national average of prices for a “basket” of common
goods and services purchased by the average consumer. (CPI), an index created and
tracked by the federal government. It measures the average nationwide prices of a
“basket” of goods and services purchased by the average consumer. It is an accepted way
of tracking rising or falling price levels, indicative of inflation or deflation. Figure 1.9
"Inflation, 1979–2008" shows the percent change in the consumer price index as a
measure of inflation during the period from 1979 to 2008.

Figure 1.9 Inflation, 1979–2008[2]

Saylor URL: http://www.saylor.org/books Saylor.org

18
Currency instabilities can also affect investment values, because the dollars that
investments return don’t have the same value as the dollars that the investment was
expected to return. Say you lend $100 to your sister, who is supposed to pay you back
one year from now. There is inflation, so over the next year, the value of the dollar
decreases (it buys less as prices rise). Your sister does indeed pay you back on time, but
now the $100 that she gives back to you is worth less (because it buys less) than the
$100 you gave her. Your investment, although nominally returned, has lost value: you
have your $100 back, but you can’t do as much with it; it is less useful.

If the value of currency—the units in which wealth is measured and stored—is unstable,
then investment returns are harder to predict. In those circumstances, investment
involves more risk. Both inflation and deflation are currency instabilities that are
troublesome for an economy and also for the financial planning process. An unstable
currency affects the value or purchasing power of income. Price changes affect
consumption decisions, and changes in currency value affect investing decisions.

It is human nature to assume that things will stay the same, but financial planning must
include the assumption that over a lifetime you will encounter and endure economic
cycles. You should try to anticipate the risks of an economic downturn and the possible
loss of wage income and/or investment income. At the same time, you should not
assume or rely on the windfalls of an economic expansion.

KEY TAKEAWAYS

• Business cycles include periods of expansion and contraction (including recessions), as measured

by the economy’s productivity (gross domestic product).

• An economy is in an unsustainable situation when it grows too fast or too slowly, as each situation

causes too much stress in the economy’s markets.

• In addition to GDP, measures of the health of an economy include

o the rates of employment and unemployment,

o the value of currency (the consumer price index).

• Financial planning should take into account the fact that periods of inflation or deflation change

the value of currency, affecting purchasing power and investment values.

• Thus, personal financial planning should take into account

o business cycles,

o changes in the economy’s productivity,

o changes in the currency value,

o changes in other economic indicators.

Saylor URL: http://www.saylor.org/books Saylor.org

19
 EXERCISES

1. Go to http://www.nber.org/cycles.html to see a chart published by the National Bureau of

Economic Research. The chart shows business cycles in the United States and their durations

between 1854 and 2001. What patterns and trends do you see in these historical data? Which

years saw the longest recessions? How can you tell that the U.S. economy has tended to become

more stable over the decades?

2. Record in your personal financial journal or in My Notes the macroeconomic factors that are

influencing your financial thinking and behavior today. What are some specific examples? How

have large-scale economic changes or cycles, such as the economic recession of 2008–2009,

affected your financial planning and decision making?

3. How does the health of the economy affect your financial health? How healthy is the U.S.

economy right now? On what measures do you base your judgments? How will your appreciation

of the big picture help you in planning for your future?

4. How do business cycles and the health of the economy affect the value of your labor? In terms of

supply and demand, what are the optimal conditions in which to sell your labor? How might

further education increase your mobility in the labor market (the value of your labor)?

5. Brainstorm with others taking this course on effective personal financial strategies for

a. protecting against recession,

b. hedging against inflation,

c. mitigating the effects of deflation,

d. taking realistic advantage of periods of expansion.

[1] Based on data from the Bureau of Economic Analysis, U.S. Department of
Commerce, http://www.bea.gov/national/ (accessed November 21, 2009).

[2] Based on data from the Bureau of Labor Statistics, U.S. Department of Labor,
http://www.bls.gov (accessed November 21, 2009).

Saylor URL: http://www.saylor.org/books Saylor.org

20
1.3 The Planning Process
LEARNING OBJECTIVES

1. Trace the steps of the financial planning process and explain why that process needs to be

repeated over time.

2. Characterize effective goals and differentiate goals in terms of timing.

3. Explain and illustrate the relationships among costs, benefits, and risks.

4. Analyze cases of financial decision making by applying the planning process.

A financial planning process involves figuring out where you’d like to be, where you are,
and how to go from here to there. More formally, a financial planning process means the
following:

• Defining goals
• Assessing the current situation
• Identifying choices
• Evaluating choices
• Choosing
• Assessing the resulting situation
• Redefining goals
• Identifying new choices
• Evaluating new choices
• Choosing
• Assessing the resulting situation over and over again

Personal circumstances change, and the economy changes, so your plans must be
flexible enough to adapt to those changes, yet be steady enough to eventually achieve
long-term goals. You must be constantly alert to those changes but “have a strong
foundation when the winds of changes shift.”[1]

Defining Goals
Figuring out where you want to go is a process of defining goals. You have shorter-term
(1–2 years), intermediate (2–10 years), and longer-term goals that are quite realistic and
goals that are more wishful. Setting goals is a skill that usually improves with
experience. According to a popular model, to be truly useful goals must be Specific,
Measurable, Attainable, Realistic, and Timely (S.M.A.R.T.). Goals change over time, and
certainly over a lifetime. Whatever your goals, however, life is complicated and risky,
and having a plan and a method to reach your goals increases the odds of doing so.

For example, after graduating from college, Alice has an immediate focus on earning
income to provide for living expenses and debt (student loan) obligations. Within the

Saylor URL: http://www.saylor.org/books Saylor.org

21
next decade, she foresees having a family; if so, she will want to purchase a house and
perhaps start saving for her children’s educations. Her income will have to provide for
her increased expenses and also generate a surplus that can be saved to accumulate
these assets.

In the long term, she will want to be able to retire and derive all her income from her
accumulated assets, and perhaps travel around the world in a sailboat. She will have to
have accumulated enough assets to provide for her retirement income and for the travel.
Figure 1.10 "Timing, Goals, and Income" shows the relationship between timing, goals,
and sources of income.

Figure 1.10 Timing, Goals, and Income

Alice’s income will be used to meet her goals, so it’s important for her to understand
where her income will be coming from and how it will help in achieving her goals. She
needs to assess her current situation.

Assessing the Current Situation

Figuring out where you are or assessing the current situation involves understanding
what your present situation is and the choices that it creates. There may be many
choices, but you want to identify those that will be most useful in reaching your goals.

Assessing the current situation is a matter of organizing personal financial information

into summaries that can clearly show different and important aspects of financial life—
your assets, debts, incomes, and expenses. These numbers are expressed in financial
statements—in an income statement, balance sheet, and cash flow statement (topics
discussed in Chapter 3 "Financial Statements"). Businesses also use these three types of
statements in their financial planning.

For now, we can assess Alice’s simple situation by identifying her assets and debts and
by listing her annual incomes and expenses. That will show if she can expect a budget
surplus or deficit, but more important, it will show how possible her goals are and

Saylor URL: http://www.saylor.org/books Saylor.org

22
whether she is making progress toward them. Even a ballpark assessment of the current
situation can be illuminating.

Alice’s assets may be a car worth about $5,000 and a savings account with a balance of
$250. Debts include a student loan with a balance of $53,000 and a car loan with a
balance of $2,700; these are shown in Figure 1.11 "Alice’s Financial Situation".

Figure 1.11 Alice’s Financial Situation

Her annual disposable income (after-tax income or take-home pay) may be $35,720,
and annual expenses are expected to be $10,800 for rent and $14,400 for living
expenses—food, gas, entertainment, clothing, and so on. Her annual loan payments are
$2,400 for the car loan and $7,720 for the student loan, as shown in Figure 1.12 "Alice’s
Income and Expenses".

Figure 1.12 Alice’s Income and Expenses

Saylor URL: http://www.saylor.org/books Saylor.org

23
Alice will have an annual budget surplus of just $400 (income = $35,720 − $35,320
[total expenses + loan repayments]). She will be achieving her short-term goal of
reducing debt, but with a small annual budget surplus, it will be difficult for her to begin
to achieve her goal of accumulating assets.

To reach that intermediate goal, she will have to increase income or decrease expenses
to create more of an annual surplus. When her car loan is paid off next year, she hopes
to buy another car, but she will have at most only $650 (250 + 400) in savings for a
down payment for the car, and that assumes she can save all her surplus. When her
student loans are paid off in about five years, she will no longer have student loan
payments, and that will increase her surplus significantly (by $7,720 per year) and allow
her to put that money toward asset accumulation.

Alice’s long-term goals also depend on her ability to accumulate productive assets, as
she wants to be able to quit working and live on the income from her assets in
retirement. Alice is making progress toward meeting her short-term goals of reducing
debt, which she must do before being able to work toward her intermediate and long-
term goals. Until she reduces her debt, which would reduce her expenses and increase
her income, she will not make progress toward her intermediate and long-term goals.

Assessing her current situation allows Alice to see that she has to delay accumulating
assets until she can reduce expenses by reducing debt (and thus her student loan
payments). She is now reducing debt, and as she continues to do so, her financial
situation will begin to look different, and new choices will be available to her.

Alice learned about her current situation from two simple lists: one of her assets and
debts and the other of her income and expenses. Even in this simple example it is clear
that the process of articulating the current situation can put information into a very
useful context. It can reveal the critical paths to achieving goals.

Evaluating Alternatives and Making Choices

Figuring out how to go from here to there is a process of identifying immediate choices
and longer-term strategies or series of choices. To do this, you have to be realistic and
yet imaginative about your current situation to see the choices it presents and the future
choices that current choices may create. The characteristics of your living situation—
family structure, age, career choice, health—and the larger context of the economic
environment will affect or define the relative value of your choices.

After you have identified alternatives, you evaluate each one. The obvious things to look
for and assess are its costs and benefits, but you also want to think about its risks, where
it will leave you, and how well positioned it will leave you to make the next decision. You
want to have as many choices as you can at any point in the process, and you want your
choices to be well diversified. That way, you can choose with an understanding of how
this choice will affect the next choices and the next. The further along in the process you
can think, the better you can plan.

Saylor URL: http://www.saylor.org/books Saylor.org

24
In her current situation, Alice is reducing debt, so one choice would be to continue. She
could begin to accumulate assets sooner, and thus perhaps more of them, if she could
reduce expenses to create more of a budget surplus. Alice looks over her expenses and
decides she really can’t cut them back much. She decides that the alternative of reducing
expenses is not feasible. She could increase income, however. She has two choices: work
a second job or go to Las Vegas to play poker.

Alice could work a second, part-time job that would increase her after-tax income but
leave her more tired and with less time for other interests. The economy is in a bit of a
slump too—unemployment is up a bit—so her second job probably wouldn’t pay much.
She could go to Vegas and win big, with the cost of the trip as her only expense. To
evaluate her alternatives, Alice needs to calculate the benefits and costs of each (Figure
1.13 "Alice’s Choices: Benefits and Costs").

Figure 1.13 Alice’s Choices: Benefits and Costs

Laying out Alice’s choices in this way shows their consequences more clearly. The
alternative with the biggest benefit is the trip to Vegas, but that also has the biggest cost
because it has the biggest risk: if she loses, she could have even more debt. That would
put her further from her goal of beginning to accumulate assets, which would have to be
postponed until she could eliminate that new debt as well as her existing debt.

Thus, she would have to increase her income and decrease her expenses. Simply
continuing as she does now would no longer be an option because the new debt
increases her expenses and creates a budget deficit. Her only remaining alternative to
increase income would be to take the second job that she had initially rejected because
of its implicit cost. She would probably have to reduce expenses as well, an idea she
initially rejected as not even being a reasonable choice. Thus, the risk of the Vegas
option is that it could force her to “choose” alternatives that she had initially rejected as
too costly.

Saylor URL: http://www.saylor.org/books Saylor.org

25
Figure 1.15 Considering Risk in Alice’s Choice

The Vegas option becomes least desirable when its risk is included in the calculations of
its costs, especially as they compare with its benefits.

Its obvious risk is that Alice will lose wealth, but its even costlier risk is that it will limit
her future choices. Without including risk as a cost, the Vegas option looks attractive,
which is, of course, why Vegas exists. But when risk is included, and when the decision
involves thinking strategically not only about immediate consequences but also about
the choices it will preserve or eliminate, that option can be seen in a very different light
(Figure 1.16 "Alice’s Choices: Benefits and More Costs").

Figure 1.16 Alice’s Choices: Benefits and More Costs

You may sometimes choose an alternative with less apparent benefit than another but
also with less risk. You may sometimes choose an alternative that provides less

Saylor URL: http://www.saylor.org/books Saylor.org

26
immediate benefit but more choices later. Risk itself is a cost, and choice a benefit, and
they should be included in your assessment.

KEY TAKEAWAYS

• Financial planning is a recursive process that involves

o defining goals,

o assessing the current situation,

o identifying choices,

o evaluating choices,

o choosing.

• Choosing further involves assessing the resulting situation, redefining goals, identifying new

choices, evaluating new choices, and so on.

• Goals are shaped by current and expected circumstances, family structure, career, health, and

larger economic forces.

• Depending on the factors shaping them, goals are short-term, intermediate, and long-term.

• Choices will allow faster or slower progress toward goals and may digress or regress from goals;

goals can be eliminated.

• You should evaluate your feasible choices by calculating the benefits, explicit costs, implicit costs,

and the strategic costs of each one.

EXERCISES

1. Assess and summarize your current financial situation. What measures are you using to describe

where you are? Your assessment should include an appreciation of your financial assets, debts,

incomes, and expenses.

2. Use the S.M.A.R.T. planning model and information in this section to evaluate Alice’s goals.

Write your answers in your financial planning journal or My Notes and discuss your

evaluations with classmates.

a. Pay off student loan

b. Buy a house and save for children’s education

c. Accumulate assets

Saylor URL: http://www.saylor.org/books Saylor.org

27
 d. Retire

e. Travel around the world in a sailboat

Identify and prioritize your immediate, short-term, and long-term goals at this time in your

life. Why will you need different strategies to achieve these goals? For each goal identify a range

of alternatives for achieving it. How will you evaluate each alternative before making a decision?

4. In your personal financial journal or My Notes record specific examples of your use of the

following kinds of strategies in making financial decisions:

a. Weigh costs and benefits

b. Respond to incentives

c. Learn from experience

d. Avoid a feared consequence or loss

e. Avoid risk

f. Throw caution to the wind

On average, would you rate yourself as more of a rational than nonrational financial decision

maker?

[1] “Forever Young,” music and lyrics by Bob Dylan.

1.4 Financial Planning Professionals

LEARNING OBJECTIVES

1. Identify the professions of financial advisors.

2. Discuss how training and compensation may affect your choice of advisor.

3. Describe the differences between objective and subjective advice and how that may affect your

choice of advisor.

4. Discuss how the kind of advice you need may affect your choice of advisor.

Even after reading this book, or perhaps especially after reading this book, you may
want some help from a professional who specializes in financial planning. As with any
professional that you go to for advice, you want expertise to help make your decisions,
but in the end, you are the one who will certainly have to live with the consequences of
your decisions, and you should make your own decisions.

Saylor URL: http://www.saylor.org/books Saylor.org

28
There are a multitude of financial advisors to help with financial planning, such as
accountants, investment advisors, tax advisors, estate planners, or insurance agents.
They have different kinds of training and qualifications, different educations and
backgrounds, and different approaches to financial planning. To have a set of initials
after their name, all have met educational and professional experience requirements
and have passed exams administered by professional organizations, testing their
knowledge in the field. Figure 1.17 "Professional Classifications" provides a perspective
on the industry classifications of financial planning professionals.

Figure 1.17 Professional Classifications

Certifications are useful because they indicate training and experience in a particular
aspect of financial planning. When looking for advice, however, it is important to

Saylor URL: http://www.saylor.org/books Saylor.org

29
understand where the advisor’s interests lie (as well as your own). It is always important
to know where your information and advice come from and what that means for the
quality of that information and advice. Specifically, how is the advisor compensated?

Some advisors just give, and get paid for, advice; some are selling a product, such as a
particular investment or mutual fund or life insurance policy, and get paid when it gets
sold. Others are selling a service, such as brokerage or mortgage servicing, and get paid
when the service is used. All may be highly ethical and well intentioned, but when
choosing a financial planning advisor, it is important to be able to distinguish among
them.

Sometimes a friend or family member who knows you well and has your personal
interests in mind may be a great resource for information and advice, but perhaps not as
objective or knowledgeable as a disinterested professional. It is good to diversify your
sources of information and advice, using professional and “amateur,” subjective and
objective advisors. As always, diversification decreases risk.

Now you know a bit about the planning process, the personal factors that affect it, the
larger economic contexts, and the business of financial advising. The next steps in
financial planning get down to details, especially how to organize your financial
information to see your current situation and how to begin to evaluate your alternatives.

References to Professional Organizations

The references that follow provide information for further research on the professionals and professional

organizations mentioned in the chapter.

• American Institute of Certified Public Accountants (AICPA):http://www.aicpa.org.

• Canadian Institute of Chartered Accountants (CICA):http://www.cica.ca.

• Association of Chartered Certified Accountants (ACCA):http://www.accaglobal.com.

• Chartered Financial Analyst Institute: http://www.cfainstitute.org.

• Certified Financial Planner Board of Standards: http://www.cfp.net.

• Financial Planners Standards Council of Canada:http://www.fpsccanada.org.

• The American College: http://www.theamericancollege.edu.

• The Association for Financial Counseling and Planning Education:http://www.afcpe.org.

• The National Association of Estate Planners and Councils:http://www.naepc.org.

• U.S. Securities and Exchange Commission: http://www.sec.gov.

• Internal Revenue Service, U.S. Treasury Department:http://www.irs.gov.

KEY TAKEAWAYS

Saylor URL: http://www.saylor.org/books Saylor.org

30
• Financial advisors may be working as accountants, investment advisors, tax advisors, estate

planners, or insurance agents.

• You should always understand how your advisor is trained and how that may be related to the

kind of advice that you receive.

• You should always understand how your advisor is compensated and how that may be related to

the kind of advice that you receive.

• You should diversify your sources of information and advice by using subjective advisors—friends

and family—as well as objective, professional advisors. Diversification, as always, reduces risk.

EXERCISES

1. Where do you get your financial advice? Identify all the sources. In what circumstances might you

seek a professional financial advisor?

2. View the video “Choosing a Financial Planner”

athttp://videos.howstuffworks.com/marketplace/4105-choosing-a-financial-planner-video.htm.

Which advice about getting financial advice do you find most valuable? Share your views with

classmates. Also view the MSN Money video on when people should consider getting a financial

advisor:http://video.msn.com/?mkt=en-us&brand=money&vid=6f22019c-db6e-45de-984b-

a447f52dc4db&playlist=videoByTag:tag:

money_top_investing:ns:MSNmoney_Gallery:mk:us:vs:1&from=MSNmoney_8ThinsYourFinani

cal PlannerWontTellYou&tab=s216. According to the featured speaker, is financial planning

advice for everyone? How do you know when you need a financial planner?

3. Explore the following links for more information on financial advisors:

a. National Association of Personal Financial Advisors (http://www.napfa.org)

b. U.S. Department of Labor Bureau of Labor Statistics on the job descriptions, training

requirements, and earnings of financial analysts and personal financial advisors

(http://www.bls.gov/oco/ocos259.htm)

c. The Motley Fool’s guidelines for choosing a financial advisor

(http://www.fool.com/fa/finadvice.htm)

Saylor URL: http://www.saylor.org/books Saylor.org

31
 Chapter 2
Basic Ideas of Finance
Introduction
Money, says the proverb, makes money. When you have got a little, it is often easy to get
more. The great difficulty is to get that little.

Adam Smith, The Wealth of Nations[1]

Personal finance addresses the “great difficulty” of getting a little money. It is about
learning to manage income and wealth to satisfy desires in life or to create more income
and more wealth. It is about creating productive assetsResources that can be used to
create future economic benefit, such as increasing income, decreasing expenses, or
storing wealth, as an investment. and about protecting existing and expected value in
those assets. In other words, personal finance is about learning how to get what you
want and how to protect what you’ve got.

There is no trick to managing personal finances. Making good financial decisions is

largely a matter of understanding how the economy works, how money flows through it,
and how people make financial decisions. The better your understanding, the better
your ability to plan, take advantage of opportunities, and avoid disappointments. Life
can never be planned entirely, of course, and the best-laid plans do go awry, but
anticipating risks and protecting against them can minimize exposure to the inevitable
mistakes and “the hazards and vicissitudes”[2] of life.

[1] Adam Smith, The Wealth of Nations (New York: The Modern Library, 2000), Book I,
Chapter ix. Originally published in 1776.

[2] Franklin D. Roosevelt, remarks when signing the Social Security Act, August 14,
1935. Retrieved from the Social Security Administration archives,
http://www.socialsecurity.gov/history/fdrstmts.html#signing (accessed November 23,
2009).

2.1 Income and Expenses

LEARNING OBJECTIVES

1. Identify and compare the sources and uses of income.

2. Define and illustrate the budget balances that result from the uses of income.

3. Outline the remedies for budget deficits and surpluses.

Saylor URL: http://www.saylor.org/books Saylor.org

32
4. Define opportunity and sunk costs and discuss their effects on financial decision making.

Personal finance is the process of paying for or financing a life and a way of living. Just
as a business must be financed—its buildings, equipment, use of labor and materials,
and operating costs must be paid for—so must a person’s possessions and living
expenses. Just as a business relies on its revenues from selling goods or services to
finance its costs, so a person relies on income earned from selling labor or capital to
finance costs. You need to understand this financing process and the terms used to
describe it. In the next chapter, you’ll look at how to account for it.

Where Does Income Come From?

Income is what is earned or received in a given period. There are various terms for
income because there are various ways of earning income. Income from employment or
self-employment is wages or salary. Deposit accounts, like savings accounts, earn
interest, which could also come from lending. Owning stock entitles the shareholder to a
dividend, if there is one. Owning a piece of a partnership or a privately held corporation
entitles one to a draw.

The two fundamental ways of earning income in a market-based economy are by selling
labor or selling capital. Selling labor means working, either for someone else or for
yourself. Income comes in the form of a paycheck. Total compensation may include
other benefits, such as retirement contributions, health insurance, or life insurance.
Labor is sold in the labor market.

Selling capital means investing: taking excess cash and selling it or renting it to someone
who needs liquidity (access to cash). Lending is renting out capital; the interest is the
rent. You can lend privately by direct arrangement with a borrower, or you can lend
through a public debt exchange by buying corporate, government, or government
agency bonds. Investing in or buying corporate stock is an example of selling capital in
exchange for a share of the company’s future value.

You can invest in many other kinds of assets, like antiques, art, coins, land, or
commodities such as soybeans, live cattle, platinum, or light crude oil. The principle is
the same: investing is renting capital or selling it for an asset that can be resold later, or
that can create future income, or both. Capital is sold in the capital market and lent in
the credit market—a specific part of the capital market (just like the dairy section is a
specific part of the supermarket). Figure 2.2 "Sources of Income" shows the sources of
income.

Saylor URL: http://www.saylor.org/books Saylor.org

33
Figure 2.2 Sources of Income

In the labor market, the price of labor is the wage that an employer (buyer of labor) is
willing to pay to the employee (seller of labor). For any given job, that price is
determined by many factors. The nature of the work defines the education and skills
required, and the price may reflect other factors as well, such as the status or desirability
of the job.

In turn, the skills needed and the attractiveness of the work determine the supply of
labor for that particular job—the number of people who could and would want to do the
job. If the supply of labor is greater than the demand, if there are more people to work at
a job than are needed, then employers will have more hiring choices. That labor market
is a buyers’ market, and the buyers can hire labor at lower prices. If there are fewer
people willing and able to do a job than there are jobs, then that labor market is a sellers’
market, and workers can sell their labor at higher prices.

Similarly, the fewer skills required for the job, the more people there will be who are
able to do it, creating a buyers’ market. The more skills required for a job, the fewer
people there will be to do it, and the more leverage or advantage the seller has in
negotiating a price. People pursue education to make themselves more highly skilled
and therefore able to compete in a sellers’ labor market.

When you are starting your career, you are usually in a buyers’ market (unless you have
some unusual gift or talent), if only because of your lack of experience. As your career
progresses, you have more, and perhaps more varied, experience and presumably more
skills, and so can sell your labor in more of a sellers’ market. You may change careers or
jobs more than once, but you would hope to be doing so to your advantage, that is,
always to be gaining bargaining power in the labor market.

Many people love their work for many reasons other than the pay, however, and choose
it for those rewards. Labor is more than a source of income; it is also a source of many
intellectual, social, and other personal gratifications. Your labor nevertheless is also a
tradable commodity and has a market value. The personal rewards of your work may
ultimately determine your choices, but you should be aware of the market value of those
choices as you make them.

Saylor URL: http://www.saylor.org/books Saylor.org

34
Your ability to sell labor and earn income reflects your situation in your labor market.
Earlier in your career, you can expect to earn less than you will as your career
progresses. Most people would like to reach a point where they don’t have to sell labor at
all. They hope to retire someday and pursue other hobbies or interests. They can retire if
they have alternative sources of income—if they can earn income from savings and from
selling capital.

Capital markets exist so that buyers can buy capital. Businesses always need capital and
have limited ways of raising it. Sellers and lenders (investors), on the other hand, have
many more choices of how to invest their excess cash in the capital and credit markets,
so those markets are much more like sellers’ markets. The following are examples of
ways to invest in the capital and credit markets:

• Buying stocks
• Buying government or corporate bonds
• Lending a mortgage

The market for any particular investment or asset may be a sellers’ or buyers’ market at
any particular time, depending on economic conditions. For example, the market for
real estate, modern art, sports memorabilia, or vintage cars can be a buyers’ market if
there are more sellers than buyers. Typically, however, there is as much or more
demand for capital as there is supply. The more capital you have to sell, the more ways
you can sell it to more kinds of buyers, and the more those buyers may be willing to pay.
At first, however, for most people, selling labor is their only practical source of income.

Where Does Income Go?

Expenses are costs for items or resources that are used up or consumed in the course
of daily living. Expenses recur (i.e., they happen over and over again) because food,
housing, clothing, energy, and so on are used up on a daily basis.

When income is less than expenses, you have a budget deficit too little cash to provide
for your wants or needs. A budget deficit is not sustainable; it is not financially viable.
The only choices are to eliminate the deficit by (1) increasing income, (2) reducing
expenses, or (3) borrowing to make up the difference. Borrowing may seem like the
easiest and quickest solution, but borrowing also increases expenses, because it creates
an additional expense: interest. Unless income can also be increased, borrowing to cover
a deficit will only increase it.

Better, although usually harder, choices are to increase income or decrease expenses.
Figure 2.3 "Budget Deficit" shows the choices created by a budget deficit.

Saylor URL: http://www.saylor.org/books Saylor.org

35
Figure 2.3 Budget Deficit

When income for a period is greater than expenses, there is a budget surplus. That
situation is sustainable and remains financially viable. You could choose to decrease
income by, say, working less. More likely, you would use the surplus in one of two ways:
consume more or save it. If consumed, the income is gone, although presumably you
enjoyed it.

If saved, however, the income can be stored, perhaps in a piggy bank or cookie jar, and
used later. A more profitable way to save is to invest it in some way—deposit in a bank
account, lend it with interest, or trade it for an asset, such as a stock or a bond or real
estate. Those ways of saving are ways of selling your excess capital in the capital markets
to increase your wealth. The following are examples of savings:

1. Depositing into a statement savings account at a bank

2. Contributing to a retirement account
3. Purchasing a certificate of deposit (CD)
4. Purchasing a government savings bond
5. Depositing into a money market account

Figure 2.5 "Budget Surplus" shows the choices created by a budget surplus.

Figure 2.5 Budget Surplus

Opportunity Costs and Sunk Costs

Saylor URL: http://www.saylor.org/books Saylor.org

36
There are two other important kinds of costs aside from expenses that affect your
financial life. Suppose you can afford a new jacket or new boots, but not both, because
your resources—the income you can use to buy clothing—are limited. If you buy the
jacket, you cannot also buy the boots. Not getting the boots is an opportunity cost of
buying the jacket; it is cost of sacrificing your next best choice.

In personal finance, there is always an opportunity cost. You always want to make a
choice that will create more value than cost, and so you always want the opportunity
cost to be less than the benefit from trade. You bought the jacket instead of the boots
because you decided that having the jacket would bring more benefit than the cost of not
having the boots. You believed your benefit would be greater than your opportunity cost.

In personal finance, opportunity costs affect not only consumption decisions but also
financing decisions, such as whether to borrow or to pay cash. Borrowing has obvious
costs, whereas paying with your own cash or savings seems costless. Using your cash
does have an opportunity cost, however. You lose whatever interest you may have had
on your savings, and you lose liquidity—that is, if you need cash for something else, like
a better choice or an emergency, you no longer have it and may even have to borrow it at
a higher cost.

When buyers and sellers make choices, they weigh opportunity costs, and sometimes
regret them, especially when the benefits from trade are disappointing. Regret can color
future choices. Sometimes regret can keep us from recognizing sunk costs.

Sunk costs are costs that have already been spent; that is, whatever resources you traded
are gone, and there is no way to recover them. Decisions, by definition, can be made
only about the future, not about the past. A trade, when it’s over, is over and done, so
recognizing that sunk costs are truly sunk can help you make better decisions.

For example, the money you spent on your jacket is a sunk cost. If it snows next week
and you decide you really do need boots, too, that money is gone, and you cannot use it
to buy boots. If you really want the boots, you will have to find another way to pay for
them.

Unlike a price tag, opportunity cost is not obvious. You tend to focus on what you are
getting in the trade, not on what you are not getting. This tendency is a cheerful aspect
of human nature, but it can be a weakness in the kind of strategic decision making that
is so essential in financial planning. Human nature also may make you focus too much
on sunk costs, but all the relish or regret in the world cannot change past decisions.
Learning to recognize sunk costs is important in making good financial decisions.

KEY TAKEAWAYS

• It is important to understand the sources (incomes) and uses (expenses) of funds, and the budget

deficit or budget surplus that may result.

Saylor URL: http://www.saylor.org/books Saylor.org

37
• Wages or salary is income from employment or self-employment; interest is earned by lending; a

dividend is the income from owning corporate stock; and a draw is income from a partnership.

• Deficits or surpluses need to be addressed, and that means making decisions about what to do

with them.

• Increasing income, reducing expenses, and borrowing are three ways to deal with budget deficits.

• Spending more, saving, and investing are three ways to deal with budget surpluses.

• Opportunity costs and sunk costs are hidden expenses that affect financial decision making.

EXERCISES

1. Where does your income come from, and where does it go? Analyze your inflows of income from

all sources and outgoes of income through expenditures in a month, quarter, or year. After

analyzing your numbers and converting them to percentages, show your results in two figures,

using proportions of a dollar bill to show where your income comes from and proportions of

another dollar bill to show how you spend your income. How would you like your income to

change? How would you like your distribution of expenses to change? Use your investigation to

develop a rough personal budget.

2. Examine your budget and distinguish between wants and needs. How do you define a financial

need? What are your fixed expenses, or costs you must pay regularly each week, month, or year?

Which of your budget categories must you provide for first before satisfying others? To what

extent is each of your expenses discretionary—under your control in terms of spending more or

less for that item or resource? Which of your expenses could you reduce if you had to or wanted to

for any reason?

3. If you had a budget deficit, what could you do about it? What would be the best solution for the

long term? If you had a budget surplus, what could you do about it? What would be your best

choice, and why?

4. You need a jacket, boots, and gloves, but the jacket you want will use up all the money you have

available for outerwear. What is your opportunity cost if you buy the jacket? What is your sunk

cost if you buy the jacket? How could you modify your consumption to reduce opportunity cost?

If you buy the jacket but find that you need the boots and gloves, how could you modify your

budget to compensate for your sunk cost?

Saylor URL: http://www.saylor.org/books Saylor.org

38
2.2 Assets
LEARNING OBJECTIVES

1. Identify the purposes and uses of assets.

2. Identify the types of assets.

3. Explain the role of assets in personal finance.

4. Explain how a capital gain or loss is created.

As defined earlier in this chapter, an asset is any item with economic value that can be
converted to cash. Assets are resources that can be used to create income or reduce
expenses and to store value. The following are examples of tangible (material) assets:

• Car
• Savings account
• Wind-up toy collection
• Money market account
• Shares of stock
• Forty acres of farmland
• Home

When you sell excess capital in the capital markets in exchange for an asset, it is a way of
storing wealth, and hopefully of generating income as well. The asset is your
investment—a use of your liquidity. Some assets are more liquid than others. For
example, you can probably sell your car more quickly than you can sell your house. As
an investor, you assume that when you want your liquidity back, you can sell the asset.
This assumes that it has some liquidity and market value (some use and value to
someone else) and that it trades in a reasonably efficient market. Otherwise, the asset is
not an investment, but merely a possession, which may bring great happiness but will
not serve as a store of wealth.

Assets may be used to store wealth, create income, and reduce future expenses.

Assets Store Wealth

If the asset is worth more when it is resold than it was when it was bought, then you
have earned a capital gain: the investment has not only stored wealth but also
increased it. Of course, things can go the other way too: the investment can decrease in
value while owned and be worth less when resold than it was when bought. In that case,
you have a capital loss. The investment not only did not store wealth, it lost some.
Figure 2.7 "Gains and Losses" shows how capital gains and losses are created.

Figure 2.7 Gains and Losses

Saylor URL: http://www.saylor.org/books Saylor.org

39
The better investment asset is the one that increases in value—creates a capital gain—
during the time you are storing it.

Assets Create Income

Some assets not only store wealth but also create income. An investment in an
apartment house stores wealth and creates rental income, for example. An investment in
a share of stock stores wealth and also perhaps creates dividend income. A deposit in a
savings account stores wealth and creates interest income.

Some investors care more about increasing asset value than about income. For example,
an investment in a share of corporate stock may produce a dividend, which is a share of
the corporation’s profit, or the company may keep all its profit rather than pay
dividends to shareholders. Reinvesting that profit in the company may help the
company to increase in value. If the company increases in value, the stock increases in
value, increasing investors’ wealth. Further, increases in wealth through capital gains
are taxed differently than income, making capital gains more valuable than an increase
in income for some investors.

On the other hand, other investors care more about receiving income from their
investments. For example, retirees who no longer have employment income may be
relying on investments to provide income for living expenses. Being older and having a
shorter horizon, retirees may be less concerned with growing wealth than with creating
income.

Assets Reduce Expenses

Some assets are used to reduce living expenses. Purchasing an asset and using it may be
cheaper than arranging for an alternative. For example, buying a car to drive to work
may be cheaper, in the long run, than renting one or using public transportation. The
car typically will not increase in value, so it cannot be expected to be a store of wealth;
its only role is to reduce future expenses.

Sometimes an asset may be expected to both store wealth and reduce future expenses.
For example, buying a house to live in may be cheaper, in the long run, than renting one.
In addition, real estate may appreciate in value, allowing you to realize a gain when you
sell the asset. In this case, the house has effectively stored wealth. Appreciation in value
depends on the real estate market and demand for housing when the asset is sold,

Saylor URL: http://www.saylor.org/books Saylor.org

40
however, so you cannot count on it. Still, a house usually can reduce living expenses and
be a potential store of wealth.

Figure 2.8 "Assets and the Roles of Assets" shows the roles of assets in reducing
expenses, increasing income, and storing wealth.

Figure 2.8 Assets and the Roles of Assets

The choice of investment asset, then, depends on your belief in its ability to store and
increase wealth, create income, or reduce expenses. Ideally, your assets will store and
increase wealth while increasing income or reducing expenses. Otherwise, acquiring the
asset will not be a productive use of liquidity. Also, in that case the opportunity cost will
be greater than the benefit from the investment, since there are many assets to choose
from.

KEY TAKEAWAYS

• Assets are items with economic value that can be converted to cash. You use excess liquidity or

surplus cash to buy an asset and store wealth until you resell the asset.

• An asset can create income, reduce expenses, and store wealth.

• To have value as an investment, an asset must either store wealth or create income (reduce

expenses); ideally, an asset can do both.

Saylor URL: http://www.saylor.org/books Saylor.org

41
• Whatever the type of asset you choose, investing in assets or selling capital can be more profitable

than selling labor.

• Selling an asset can result in a capital gain or capital loss.

• Selling capital means trading in the capital markets, which is a sellers’ market. You can do this

only if you have a budget surplus, or an excess of income over expenses.

EXERCISES

1. Record your answers to the following questions in your personal finance journal or My Notes.

What are your assets? How do your assets store your wealth? How do your assets make income

for you? How do your assets help you reduce your expenses?

2. List your assets in the order of their cash or market value (most valuable to least valuable). Then

list them in terms of their degree of liquidity. Which assets do you think you might sell in the next

ten years? Why? What new assets do you think you would like to acquire and why? How could

you reorganize your budget to make it possible to invest in new assets?

2.3 Debt and Equity

LEARNING OBJECTIVES

1. Define equity and debt.

2. Compare and contrast the benefits and costs of debt and equity.

3. Illustrate the uses of debt and equity.

4. Analyze the costs of debt and of equity.

Buying capital, that is, borrowing enables you to invest without first owning capital. By
using other people’s money to finance the investment, you get to use an asset before
actually owning it, free and clear, assuming you can repay out of future earnings.

Borrowing capital has costs, however, so the asset will have to increase wealth, increase
earnings, or decrease expenses enough to compensate for its costs. In other words, the
asset will have to be more productive to earn enough to cover its financing costs—the
cost of buying or borrowing capital to buy the asset.

Buying capital gives you equity, borrowing capital gives you debt, and both kinds of
financing have costs and benefits. When you buy or borrow liquidity or cash, you
become a buyer in the capital market.

Saylor URL: http://www.saylor.org/books Saylor.org

42
The Costs of Debt and Equity
You can buy capital from other investors in exchange for an ownership share or equity,
which represents your claim on any future gains or future income. If the asset is
productive in storing wealth, generating income, or reducing expenses, the equity holder
or shareholder or owner enjoys that benefit in proportion to the share of the asset
owned. If the asset actually loses value, the owner bears a portion of the loss in
proportion to the share of the asset owned. The cost of equity is in having to share the
benefits from the investment.

For example, in 2004 Google, a company that produced a very successful Internet
search engine, decided to buy capital by selling shares of the company (shares of stock
or equity securities) in exchange for cash. Google sold over 19 million shares for a total
of $1.67 billion. Those who bought the shares were then owners or shareholders of
Google, Inc. Each shareholder has equity in Google, and as long as they own the shares
they will share in the profits and value of Google, Inc. The original founders and owners
of Google, Larry Page and Sergey Brin, have since had to share their company’s gains (or
income) or losses with all those shareholders. In this case, the cost of equity is the
minimum rate of return Google must offer its shareholders to compensate them for
waiting for their returns and for bearing some risk that the company might not do as
well in the future.

Borrowing is renting someone else’s money for a period of time, and the result is debt.
During that period of time, rent or interest be paid, which is a cost of debt. When that
period of time expires, all the capital (the principal amount borrowed) must be given
back. The investment’s earnings must be enough to cover the interest, and its growth in
value must be enough to return the principal. Thus, debt is a liability, an obligation for
which the borrower is liable.

In contrast, the cost of equity may need to be paid only if there is an increase in income
or wealth, and even then can be deferred. So, from the buyer’s point of view, purchasing
liquidity by borrowing (debt) has a more immediate effect on income and expenses.
Interest must be added as an expense, and repayment must be anticipated.

Figure 2.9 "Sources of Capital" shows the implications of equity and debt as the sources
of capital.

Figure 2.9 Sources of Capital

Saylor URL: http://www.saylor.org/books Saylor.org

43
The Uses of Debt and Equity
Debt is a way to make an investment that could not otherwise be made, to buy an asset
(e.g., house, car, corporate stock) that you couldn’t buy without borrowing. If that asset
is expected to provide enough benefit (i.e., increase value or create income or reduce
expense) to compensate for its additional costs, then the debt is worth it. However, if
debt creates additional expense without enough additional benefit, then it is not worth
it. The trouble is, while the costs are usually known up front, the benefits are not. That
adds a dimension of risk to debt, which is another factor in assessing whether it’s
desirable.

For example, after the housing boom began to go bust in 2008, homeowners began
losing value in their homes as housing prices dropped. Some homeowners are in the
unfortunate position of owing more on their mortgage than their house is currently
worth. The costs of their debt were knowable upfront, but the consequences—the house
losing value and becoming worth less than the debt—were not.

Debt may also be used to cover a budget deficit, or the excess of expenses over income.
As mentioned previously, however, in the long run the cost of the debt will increase
expenses that are already too big, which is what created the deficit in the first place.
Unless income can also be increased, debt can only aggravate a deficit.

The Value of Debt

The value of debt includes the benefits of having the asset sooner rather than later,
something that debt financing enables. For example, many people want to buy a house
when they have children, perhaps because they want bedrooms and bathrooms and
maybe a yard for their children. Not far into adulthood, would-be homebuyers may not
have had enough time to save enough to buy the house outright, so they borrow to make
up the difference. Over the length of their mortgage (real estate loan), they pay the
interest.

The alternative would be to rent a living space. If the rent on a comparable home were
more than the mortgage interest (which it often is, because a landlord usually wants the

Saylor URL: http://www.saylor.org/books Saylor.org

44
rent to cover the mortgage and create a profit), it would make more sense, if possible, to
borrow and buy a home and be able to live in it. And, extra bedrooms and bathrooms
and a yard are valuable while children are young and live at home. If you wait until you
have saved enough to buy a home, you may be much older, and your children may be off
on their own.

Another example of the value of debt is using debt to finance an education. Education is
valuable because it has many benefits that can be enjoyed over a lifetime. One benefit is
an increase in potential earnings in wages and salaries. Demand for the educated or
more skilled employee is generally greater than for the uneducated or less-skilled
employee. So education creates a more valuable and thus higher-priced employee.

It makes sense to be able to maximize value by becoming educated as soon as possible

so that you have as long as possible to benefit from increased income. It even makes
sense to invest in an education before you sell your labor because your opportunity cost
of going to school—in this case, the “lost” wages of not working—is lowest. Without
income or savings (or very little) to finance your education, typically, you borrow. Debt
enables you to use the value of the education to enhance your income, out of which you
can pay back the debt.

The alternative would be to work and save and then get an education, but you would be
earning income less efficiently until you completed your education, and then you would
have less time to earn your return. Waiting decreases the value of your education, that
is, its usefulness, over your lifetime.

In these examples (Figure 2.11 "Debt: Uses, Value, and Cost"), debt creates a cost, but it
reduces expenses or increases income to offset that cost. Debt allows this to happen
sooner than it otherwise could, which allows you to realize the maximum benefit for the
investment. In such cases, debt is “worth” it.

Figure 2.11 Debt: Uses, Value, and Cost

KEY TAKEAWAYS

Saylor URL: http://www.saylor.org/books Saylor.org

45
• Financing assets through equity means sharing ownership and whatever gains or losses that

brings.

• Financing assets through borrowing and creating debt means taking on a financial obligation that

must be repaid.

• Both equity and debt have costs and value.

• Both equity and debt enable you to use an asset sooner than you otherwise could and therefore to

reap more of its rewards.

EXERCISES

1. Research the founding of Google online—for example,

athttp://www.ubergizmo.com/15/archives/2008/09/googles_first_steps.htmland http://www.te

d.com/index.php/speakers/sergey_brin_and_ larry_page.html. How did the young

entrepreneurs Larry Page and Sergey Brin use equity and debt to make their business successful

and increase their personal wealth? Discuss your findings with classmates.

2. Record your answers to the following questions in your personal finance journal or My Notes.

What equity do you own? What debt do you owe? In each case what do your equity and debt

finance? What do they cost you? How do they benefit you?

3. View the video “Paying Off Student

Loans”:http://videos.howstuffworks.com/marketplace/4099-paying-off-student-loans-

video.htm. Students fear going into debt for their education or later have difficulty paying off

student loans. This video presents personal financial planning strategies for addressing this

issue.

a. What are four practical financial planning tips to take advantage of debt financing of your

education?

b. If payments on student loans become overwhelming, what should you do to avoid default?

Saylor URL: http://www.saylor.org/books Saylor.org

46
2.4 Income and Risk
LEARNING OBJECTIVES

1. Describe how sources of income may be diversified.

2. Describe how investments in assets may be diversified.

3. Explain the use of diversification as a risk management strategy.

Personal finance is not just about getting what you want; it is also about protecting what
you have. Since the way to accumulate assets is to create surplus capital by having an
income larger than expenses, and since you rely on income to provide for living
expenses, you also need to think about protecting your income. One way to do so is
through diversification, or spreading the risk.

You already know not to put all your eggs in one basket, because if something happens
to that basket, all the eggs are gone. If the eggs are in many baskets, on the other hand,
the loss of any one basket would mean the loss of just a fraction of the eggs. The more
baskets, the smaller your proportional loss would be. Then if you put many different
baskets in many different places, your eggs are diversified even more effectively, because
all the baskets aren’t exposed to the same environmental or systematic risks.

Diversification is more often discussed in terms of investment decisions, but

diversification of sources of income works the same way and makes the same kind of
sense for the same reasons. If sources of income are diverse—in number and kind—and
one source of income ceases to be productive, then you still have others to rely on.

If you sell your labor to only one buyer, then you are exposed to more risk than if you
can generate income by selling your labor to more than one buyer. You have only so
much time you can devote to working, however. Having more than one employer could
be exhausting and perhaps impossible. Selling your labor to more than one buyer also
means that you are still dependent on the labor market, which could suffer from an
economic cycle such as a recession affecting many buyers (employers).

Mark, for example, works as a school counselor, tutors on the side, paints houses in the
summers, and buys and sells sports memorabilia on the Internet. If he got laid off from
his counseling job, he would lose his paycheck but still be able to create income by
tutoring, painting, and trading memorabilia.

Similarly, if you sell your capital to only one buyer—invest in only one asset—then you
are exposed to more risk than if you generate income by investing in a variety of assets.
Diversifying investments means you are dependent on trade in the capital markets,
however, which likewise could suffer from unfavorable economic conditions.

Saylor URL: http://www.saylor.org/books Saylor.org

47
Mark has a checking account, an online money market account, and a balanced portfolio
of stocks. If his stock portfolio lost value, he would still have the value in his money
market account.

A better way to diversify sources of income is to sell both labor and capital. Then you are
trading in different markets, and are not totally exposed to risks in either one. In Mark’s
case, if all his incomes dried up, he would still have his investments, and if all his
investments lost value, he would still have his paycheck and other incomes. To diversify
to that extent, you need surplus capital to trade. This brings us full circle to Adam
Smith, quoted at the beginning of this chapter, who said, essentially, “It takes money to
make money.”

KEY TAKEAWAY

Diversifying sources of income in both the labor market and the capital markets is the best hedge

against risks in any one market.

EXERCISE

Record your answers to the following questions in your personal finance journal or My Notes.

How can you diversify your sources of income to spread the risk of losing income? How can you

diversify your investments to spread the risk of losing return on investment?

Saylor URL: http://www.saylor.org/books Saylor.org

48
 Chapter 3
Financial Statements
Introduction
Man is the measure of all things; of that which is, that it is; of that which is not, that it is
not.

Protagoras (ca. 490–421 BC), in Plato’s Protagoras

Man is also the measurer of all things. Measuring by counting, by adding it all up, by
taking stock, is probably as old as any human activity. In recorded history, there are
“accounts” on clay tablets from ancient Sumeria dating from ca. 3,700 BC.[1]

Since the first shepherd counted his sheep, there has been accounting.

In financial planning, assessing the current situation, or figuring out where you are at
present, is crucial to determining any sort of financial plan. This assessment becomes
the point of departure for any strategy. It becomes the mark from which any progress is
measured, the principal from which any return is calculated. It can determine the
practical or realistic goals to have and the strategies to achieve them. Eventually, the
current situation becomes a time forgotten with the pride of success, or remembered
with the regret of failure.

Understanding the current situation is not just a matter of measuring it, but also of
putting it in perspective and in context, relative to your own past performance and
future goals, and relative to the realities in the economic world around you. Tools for
understanding your current situation are your accounting and financial statements.

[1] Gary Giroux, http://acct.tamu.edu/giroux/AncientWorld.html (accessed January 19,

2009).

3.1 Accounting and Financial Statements

LEARNING OBJECTIVES

1. Distinguish accrual and cash accounting.

2. Compare and contrast the three common financial statements.

3. Identify the results shown on the income statement, balance sheet, and cash flow statement.

4. Explain the calculation and meaning of net worth.

Saylor URL: http://www.saylor.org/books Saylor.org

49
5. Trace how a bankruptcy can occur.

Clay tablets interested Sumerian traders because the records gave them a way to see
their financial situation and to use that insight to measure progress and plan for the
future. The method of accounting universally used in business today is known as
accrual accounting, in which events are accounted for even if cash does not change
hands. That is, transactions are recorded at the time they occur rather than when
payment is actually made or received. Anticipated or preceding payments and receipts
(cash flows) are recorded as accrued or deferred. Accrual accounting is the opposite of
cash accounting, in which transactions are recognized only when cash is exchanged.

Accrual accounting defines earning as an economic event signified by an exchange of

goods rather than by an exchange of cash. In this way, accrual accounting allows for the
separation in time of the exchange of goods and the exchange of cash. A transaction can
be completed over time and distance, which allows for extended—and extensive—trade.
Another advantage of accrual accounting is that it gives a business a more accurate
picture of its present situation in reality.

Modern accounting techniques developed during the European Age of Discovery, which
was motivated by ever-expanding trade. Both the principles and the methods of modern
accrual accounting were first published in a text by Luca Pacioli in 1494,[1] although
they were probably developed even before that. These methods of “keeping the books”
can be applied to personal finance today as they were to trading in the age of long
voyages for pepper and cloves, and with equally valuable results.

Nevertheless, in personal finance it almost always makes more sense to use cash
accounting, to define and account for events when the cash changes hands. So in
personal finance, incomes and expenses are noted when the cash is received or paid, or
when the cash flows.

The Accounting Process

Financial decisions result in transactions, actual trades that buy or sell, invest or
borrow. In the market economy, something is given up in order to get something, so
each trade involves at least one thing given up and one thing gotten—two things flowing
in at least two directions. The process of accounting records these transactions and
records what has been gotten and what has been given up to get it, what flows in and
what flows out.

In business, accounting journals and ledgers are set up to record transactions as they
happen. In personal finance, a checkbook records most transactions, with statements
from banks or investment accounts providing records of the rest. Periodically, the
transaction information is summarized in financial statements so it can be read most
efficiently.

Saylor URL: http://www.saylor.org/books Saylor.org

50
Other documents randomly have
different content
 "Camp Two is west of here," muttered the boy. "I guess the men
were part of Slue Foot's crew, and he went over to the camp with
'em." Darkness prevented him from noting that the trail that led to
the westward was a clumsier trail than Saginaw would have made,
or he never would have dismissed the matter so lightly from his
mind. As it was, he continued upon his course for Camp One, where
he arrived nearly an hour later to find the camp in a turmoil. The
boy hastened, unnoticed, to the edge of a crowd of men that
encircled Frenchy Lamar, who talked as fast as he could in an almost
unintelligible jargon, which he punctuated with shrugs, and wild-
flung motions of his arms.

"Oui, dat be'n w'en de las' of de Camp Two tote teams be'n pass
'bout de half hour. We com' 'long by de place w'er de road she twis'
'roun an' slant down de steep ravine. Woof! Rat on de trail stan' de
leetle black bear, an', Sacre! Ma leaders git so scare dey stan' oop on
de hine leg lak dey gon for dance. Dey keek, dey jomp, dey plonge,
an', Voila! Dem wheelers git crazy too. I'm got ma han' full, an'
plenty mor', too, an' de nex' t'ing I'm fin' out dey jomp de wagon
oop on de beeg stomp an' she teep ovaire so queek lak you kin say
Jac Robinshon. Crack! Ma reach she brek in two an' ma front ax' she
git jerk loose from de wagon an' de nex' t'ing I'm drag by de lines
'cross de creek so fas' dat tear ma coat, ma shirt, ma pants mos' lak
de ribbon. I'm bomp ma head, an' lose ma cap, an' scratch ma face,
but by gar, I'm hang holt de lines, an' by-m-by dem horse dey git
tire to haul me roun' by de mout', and dey stan' still a minute on top
de odder side. I'm look back an', Sacre! Hurley is lay on de groun'
an' de boss I. W. W. is hit heem on de head wit' de gon. De res' is
cuttin' loose deir han's. I'm yell on dem to queet poun' on de boss
head, wit de rifle, an' de nex' t'ing I'm know: Zing! de bullet com' so
clos' eet mak de win' on ma face, an' de nex' t'ing, Zing! Dat bullet
she sting de horse an' I'm just got tam to jomp oop on de front ax',
an' de horses start out lak she got far business away from here
queek. Dey ron so fas' I'm got to hol' on wit' ma han's, wit' ma feet!
Dem horses ron so fas' lak de train, dem wheels jomp feefty feet
high, an' dey only com' on de groun' 'bout once every half a mile an'
den I'm git poun', an' bomp, an' rattle, 'til I'm so black lak de, w'at
you call, de niggaire!
"De neares' doctaire, she down to Birch Lak'. I'm leave ma team
een de store-keeper stable, an' Ol' Man Niles she say de train don'
stop no mor' today, so I can't go to Birch Lak' 'til mornin'. I t'ink, by
gar, I'm mak' de train stop, so I'm push de beeg log on de track an'
lay on ma belly in de weeds, an' pret' soon de train com' long an'
she see de beeg log an' she stop queek, an' dey all ron opp front an'
I'm climb on an' tak' de seat in de smokaire. De train go 'long w'en
dey git de log shov' off, an' de conductaire, he com' long an' seen
me sit dere. 'We're you git on dis train?' she say, an' I'm tell heem
I'm git on to Dogfish, w'en de train stop. 'I'm goin' to Birch Lak' for
git de doctaire for man w'at git keel,' I'm say, an' he say de train
don' stop to Birch Lak', neider. She t'rough train, an' we'n we git to
de firs' stop, she gon' for hav' me arres'. I ain' say no mor' an' I'm
look out de window, an' de conductaire she go an' set down in de
back of de car. De train she gon' ver' fas' an' by-m-by she com' to de
breege, an' Birch Lak' is wan half mile.
"I'm travel on de car before, an' I'm see dem stop de train mor'
as once to put off de lumbaire-jack w'en dey git to fightin' Voila! I'm
jomp oop on ma feet ver' queek an' pull two, t'ree tam on de leetle
rope, an' de las' tam I'm pull so hard she bre'k in two. De train she
stop so queek she mak' fellers bomp 'roun' in de seat, an' de
conductaire she so mad she lak to bus', an' she holler ver' mooch,
an' com' ronnin' down de middle. She ain' ver' beeg man, an' I'm
reach down queek, de nex' t'ing she know she light on de head in de
middle w'ere four fellers is playin' cards. Den, I'm ron an' jomp off
de car an' fin' de doctaire. Dat gittin' dark, now, an' she startin' to
snow, an' de doctaire she say we can't go to Dogfish 'til mornin', day
ain' no mor' train. I'm see de han' car down by de track, but de
doctaire she say we ain' can tak' dat for 'cause we git arres'. But I'm
laugh on heem, an' I'm say I'm tak' dat han' car, 'cause I'm got to git
arres' anyhow—but firs' dey got to ketch—eh? So I'm tak' a rock an'
bus' de lock an' we lif' her on de track an' com' to Dogfish. Ol' Man
Niles she tak' hees team an' gon' oop an' got Hurley an' de cookee,
an' breeng heem to de store. De doctaire she feex de boss oop, an'
she say eef eet ain' for dat cookee stay 'roun' an' mak' de blood quit
comin', Hurley she would be dead befor' we com' long. Dis mornin'
I'm tak' ma team an' Ol Man Niles's wagon an' com' to de camp.
Hurley she won' go to de hospital, lak de doctaire say, so de doctaire
she com' 'long. Eet tak' me all day long, de snow she so d'ep, an' by
gar——"
Connie left in the middle of the Frenchman's discourse and
hurried into the office. In his bunk, with his head swathed in
bandages, lay Hurley. The doctor stood beside the stove and
watched Steve feed the injured man gruel from a spoon. The big
boss opened his eyes as the boy entered. He smiled faintly, and with
ever so slight a motion of his head indicated Steve: "An' I said they
wasn't the worth of a lath in his hide," he muttered and nodded
weakly as Connie crossed swiftly to the boy's side and shook his
hand. Hurley's voice dropped almost to a whisper: "I'll be laid up fer
a couple of days. Tell Saginaw to—keep—things—goin'."
"I'll tell him," answered Connie, grimly, and, as the boss's eyes
closed, stepped to his own bunk and, catching up the service
revolver from beneath the blankets, hurried from the room.
 Connie Morgan was a boy that experience and training had
taught to think quickly. When he left the office it was with the idea
of heading a posse of lumberjacks in the capture of the three I. W.
W.'s, for from the moment he heard of their escape the boy realized
that these were the three men who had intercepted Saginaw Ed on
his return from Willow River. His one thought was to rescue the
captive, for well he knew that, having Saginaw in their power, the
thugs would stop at nothing in venting their hatred upon the
helpless man. As he hurried toward the crowd in front of the men's
camp his brain worked rapidly. Fifty men in the woods at night would
make fifty times as much noise as one man. Then again, what would
the men do if they should catch the three? The boy paused for a
moment at the corner of the oat house. There was only one answer
to that question. The answer had been plain even before the added
outrage of the attack upon Hurley—and Hurley was liked by his men.
Stronger than ever became the boy's determination to have the I. W.
W.'s dealt with by the law. There must be no posse.
His mind swung to the other alternative. If he went alone he
could follow swiftly and silently. The odds would be three against
one—but the three had only one gun between them. He fingered the
butt of his revolver confidently. "I can wing the man with the gun,
and then cover the others," he muttered, "and besides, I'll have all
the advantage of knowing what I'm up against while they think
they're safe. Dan McKeever was strong for that. I guess I'll go it
alone."
Having arrived at this decision the boy crossed the clearing to
the men's camp where he singled out Swede Larson from the edge
of the crowd. "Saginaw and I've got some special work to do," he
whispered; "you keep the men going 'til we get back." Without
waiting for a reply, he hastened to the oat house, fastened on his
snow-shoes, and slipped into the timber.
It was no hardship, even in the darkness, for him to follow the
snow-shoe trail, and to the point where the others had left it his
progress was rapid. The snow had stopped falling, and great rifts
appeared in the wind-driven clouds. Without hesitation Connie
swung into the trail of the four men. He reasoned that they would
not travel far because when they had intercepted Saginaw there
could not have been more than two or three hours of daylight left.
The boy followed swiftly along the trail, pausing frequently to listen,
and as he walked he puzzled over the fact that the men had
returned to the vicinity of the camp, when obviously they should
have made for the railway and placed as much distance as possible
between themselves and the scene of their crimes. He dismissed the
thought of their being lost, for all three were woodsmen. Why, then,
had they returned?
Suddenly he halted and shrank into the shelter of a windfall.
Upon the branches of the pine trees some distance ahead his eye
caught the faint reflection of a fire.
Very cautiously he left the trail and, circling among the trees,
approached the light from the opposite direction. Nearer and nearer
he crept until he could distinctly see the faces of the four men.
Crouching behind a thick tree trunk, he could see that the men had
no blankets, and that they huddled close about the fire. He could
see Saginaw with his hands tied, seated between two of the others.
Suddenly, beyond the fire, apparently upon the back trail of the
men, a twig snapped. Instantly one of the three leaped up, rifle in
hand, and disappeared in the woods. Connie waited in breathless
suspense. Had Swede Larson followed him? Or had someone else
taken up the trail? In a few moments the man returned and, taking
Saginaw by the arm, jerked him roughly to his feet and, still gripping
the rifle, hurried him into the woods away from the trail. They
passed close to Connie, and the boy thanked his lucky star that he
had circled to the north instead of the south, or they would have
immediately blundered onto his trail. A short distance further on,
and just out of sight of the camp fire, they halted, and the man gave
a low whistle. Instantly another man stepped into the circle of the
firelight—a man bearing upon his back a heavily laden pack
surmounted by several pairs of folded blankets. He tossed the pack
into the snow and greeted the two men who remained at the fire
with a grin. Then he produced a short black pipe, and, as he
stooped to pick up a brand from the fire, Connie stared at him in
open-mouthed amazement.
The newcomer was the boss of Camp Two!
 CHAPTER XI

CONNIE FINDS AN ALLY

W HER'S Pierce?" asked Slue Foot Magee, as he glanced down

upon the two figures that crouched close about the little fire.
"He went on ahead to hunt a place to camp. We waited to pack
the stuff," lied the man, nodding toward the pack sack that the boss
of Camp Two had deposited in the snow.
"I sure was surprised when Sam, here, popped out of the woods
an' told me ye'd got away an' needed blankets an' grub. Wha'd ye do
to Hurley? An' how come ye didn't hit fer the railroad an' make yer
git-away?"
"We beat Hurley up a-plenty so'st he won't be in no hurry to
take no I. W. W.'s nowheres ag'in. An' as fer hittin' fer the railroad,
it's too cold fer to ride the rods or the bumpers, an' we hain't got a
dollar between us. You'll have to stake us fer the git-away."
Slue Foot frowned: "I hain't got a cent, neither. Come into the
woods on credick—an' hain't draw'd none."
"That's a fine mess we're in!" exclaimed the leader angrily. "How
fer d' ye figger we're a-goin' to git on what little grub ye fetched in
that pack? An' wher' we goin' to—bein' as we're broke? We hit back
fer you 'cause we know'd ye stood strong in the organization an' we
had a right to think ye'd see us through."
"I'll see ye through!" growled Slue Foot, impatiently. "But I can't
give ye nawthin' I hain't got, kin I?" He stood for a few moments
staring into the fire, apparently in deep thought. "I've got it!" he
exclaimed. "The Syndicate's got a camp 'bout ten mile north of here
on Willer River. They're short handed an' the boss'll hire anything he
kin git. Seen him in town 'fore I come out, an' he wanted to hire me,
but I was already hired to Hurley—got a boss's job, too, an' that's
better'n what I'd got out of him. If youse fellers hadn't of be'n in
such a hurry to pull somethin' an' had of waited 'til I come, ye
wouldn't of botched the job an' got caught."
"Is that so!" flared the leader. "I s'pose we'd ort to know'd ye
was goin' to be hired on this job! An' I s'pose our instructions is not
to pull no rough stuff onless you're along to see it's done right!"
"They hain't nawthin' in standin' 'round argerin'," interrupted
Slue Foot. "What I was a-goin' on to say is that youse better hike on
up to Willer River an' git ye a job. There's grub enough in the pack
to last ye twict that fer."
"Wher'll we tell the boss we come from? 'Taint in reason we'd hit
that fer into the woods huntin' a job."
"Tell him ye got sore on me an' quit. If they's any questions
asked I'll back ye up."
The leader of the I. W. W.'s looked at Sam, and Sam looked at
the leader. They were in a quandary. For reasons of their own they
had not told Slue Foot that they had picked up Saginaw—and with
Saginaw on their hands, how were they going to follow out the
boss's suggestion?
Behind his big tree, Connie Morgan had been an interested
listener. He knew why the men stared blankly at each other, and
chuckled to himself at their predicament.
"What's to hinder someone from Camp One a-trailin' us up
there?" suggested Sam.
"Trailin' ye! How they goin' to trail ye? It was a-snowin' clean up
to the time ye got to Camp Two, an' if any one sees yer tracks
around there I'll say I sent some men up that way fer somethin'. An'
besides," he continued, glancing upward where the clouds that had
thinned into flying scuds had thickened again, obliterating the stars,
"this storm hain't over yet. It'll be snowin' ag'in 'fore long an' ye
won't leave no more trail'n a canoe. Anyways, that's the best way I
kin think of. If you've got a better one go to it—I've done all I kin fer
ye." There was finality in Slue Foot's voice as he drew on his
mittens, and turned from the fire. "So long, an' good luck to ye."
"So long," was the rather surly rejoinder. "If that's the best we
kin do, I s'pose we gotta do it. Mebbe if it starts snowin' we're all
right, an' if we make it, we'll be safer up there than what we would
down along the railroad, anyways. They won't be no one a-huntin'
us in the woods."
"Sure they won't," agreed Slue Foot, as he passed from sight
into the timber.
The two beside the fire sat in silence until the sound of Slue
Foot's footsteps was swallowed up in the distance. Then Sam spoke:
"What we goin' to do with this here Saginaw?" he asked.
The leader glanced skyward. "It's startin' to snow—" he leered
and, stopping abruptly, rose to his feet. "Wait till we git Pierce in
here." Producing some pieces of rope from his pocket, he grinned.
"Lucky I fetched these along when I cut 'em off my hands. We'll give
him a chanct to see how it feels to be tied up onct." The man
stepped into the timber and a few minutes later returned
accompanied by Pierce, to whom they immediately began to relate
what had passed between them and the boss of Camp Two.
The moment they seated themselves about the fire, Connie
slipped from his hiding place behind the tree and stole noiselessly
toward the spot where the men had left Saginaw. Snow was falling
furiously now, adding the bewildering effect of its whirling flakes to
the intense blackness of the woods. Removing his snow-shoes to
avoid leaving a wide, flat trail, the boy stepped into the tracks of the
two who had returned to the fire and, a few moments later, was
bending over a dark form that sat motionless with its back against
the trunk of a tree.
"It's me, Saginaw," he whispered, as the keen edge of his knife
blade severed the ropes that bound the man's hands and feet.
 "WHAT IN THE NAME OF TIME BE YOU DOIN'
HERE?" EXCLAIMED SAGINAW.

The man thrust his face close to Connie's in the darkness. "What
in the name of time be you doin' here?" he exclaimed.
"Sh-sh-sh," whispered the boy. "Come on, we've got to get away
in a hurry. There's no tellin' how soon those fellows will finish their
powwow."
"What do you mean—git away? When we git away from here we
take them birds along, er my name ain't Saginaw Ed! On top of tryin'
to burn up the camp they've up an' murdered Hurley, an' they'd of
done the like by me, if they'd be'n give time to!"
"We'll get them, later. I know where they're going. What we've
got to do is to beat it. Step in my tracks so they won't know there
were two of us. They'll think you cut yourself loose and they won't
try to follow in the dark, especially if the storm holds."
"But them hounds has got my rackets."
"I've got mine, and when we get away from here I'll put 'em on
and break trail for you."
 "Look a here, you give me yer gun an' I'll go in an' clean up on
them desperadoes. I'll show 'em if the I. W. W.'s is goin' to run the
woods! I'll——"
"Come on! I tell you we can get 'em whenever we want 'em——"
"I'll never want 'em no worse'n I do right now."
"Hurley's all right, I saw him a little while ago."
"They said they——"
"I don't care what they said. Hurley's down in the office, right
now. Come on, and when we put a few miles behind us, I'll tell you
all you want to know."
"You'll tell a-plenty, then," growled Saginaw, only half convinced.
"An' here's another thing—if you're double crossin' me, you're a-goin'
to wish you never seen the woods."
The boy's only answer was a laugh, and he led, swiftly as the
intense darkness would permit, into the woods. They had gone but a
short distance when he stopped and put on his rackets. After that
progress was faster, and Saginaw Ed, mushing along behind,
wondered at the accuracy with which the boy held his course in the
blackness and the whirling snow. A couple of hours later, Connie
halted in the shelter of a thick windfall. "We can rest up for a while,
now," he said, "and I'll tell you some of things you want to know."
"Where do you figger we're at?" asked Saginaw, regarding the
boy shrewdly.
"We're just off the tote road between the two camps," answered
the boy without hesitation.
A moment of silence followed the words and when he spoke the
voice of Saginaw sounded hard: "I've be'n in the woods all my life,
an' it would of bothered me to hit straight fer camp on a night like
this. They's somethin' wrong here somewheres, kid—an' the time's
come fer a showdown. I don't git you, at all! You be'n passin' yerself
off fer a greener. Ever sence you went out an' got that deer I've
know'd you wasn't—but I figgered it worn't none of my business.
Then when you out-figgered them hounds—that worn't no greener's
job, an' I know'd that—but, I figgered you was all to the good. But
things has happened sence, that ain't all to the good—by a long
shot. You've got some explainin' to do, an' seein' we're so clost to
camp, we better go on to the office an' do it around the stove."
"We wouldn't get much chance to powwow in the office tonight.
Hurley's there, and the doctor, and Steve, and Lon Camden."
"The doctor?"
"Yes, those fellows beat Hurley up pretty bad, but he's coming
along all right. Steve stayed by him, and the doctor said it saved his
life."
"You don't mean that sneakin' cookee that throw'd in with the I.
W. W.?"
"Yup."
"Well, I'll be doggoned! But, them bein' in the office don't alter
the case none. We might's well have things open an' above board."
Connie leaned forward and placed his hand on the man's arm.
"What I've got to say, I want to say to you, and to no one else. I
wanted to play the game alone, but while I was trailing you down
from Willow River, I decided I'd have to let you in on it."
"You know'd I follered you up there?"
"Of course I knew it. Didn't I help you string that racket?"
Saginaw shook his head in resignation. "We might's well have it
out right here," he said. "I don't git you. First off, you figger how to
catch them jaspers with the goods an' lock 'em up. Then you throw
in with Slue Foot. Then you hike up to the Syndicate camp an' is
thicker'n thieves with the boss. Then you pop up in a blizzard in the
middle of the night an' cut me loose. Then you turn 'round an' let
them hounds go when we could of nailed 'em where they set—
seems like you've bit off quite a contract to make all them things
jibe. Go ahead an' spit 'er out—an' believe me, it'll be an earful!
First, though, you tell me where them I. W. W.'s is goin' an' how you
know. If I ain't satisfied, I'm a-goin' to hit right back an' git 'em
while the gittin's good."
 "They're going up to work for the Syndicate in the Willow River
Camp."
"Know'd they was loose an' slipped up to git 'em a job, did you?"
asked Saginaw sarcastically.
Connie grinned. "No. But there's a big job ahead of you and me
this winter—to save the timber and clear Hurley's name."
"What do you know about Hurley an' the timber?"
"Not as much as I will by spring. But I do know that we lost
$14,000 on this job last winter. You see, I'm one of the owners."
"One of the owners!" Saginaw exclaimed incredulously.
"Yes. I've got the papers here to prove it. You couldn't read 'em
in the dark, so you'll have to take my word for it 'til we get where
you can read 'em. Waseche Bill is my partner and we live in Ten
Bow, Alaska. Soon after Hurley's report reached us, showing the
loss, a letter came from Mike Gillum, saying that Hurley was in the
pay of the Syndicate——"
"He's a liar!" cried Saginaw wrathfully shaking his mittened fist in
Connie's face. "I've know'd Hurley, man an' boy, an' they never was
a squarer feller ever swung an axe. Who is this here Mike Gillum?
Lead me to him! I'll tell him to his face he's a liar, an' then I'll prove
it by givin' him the doggonest lickin' he ever got—an' I don't care if
he's big as a meetin' house door, neither!"
"Wait a minute, Saginaw, and listen. I know Hurley's square. But
I didn't know it until I got acquainted with him. I came clear down
from Alaska to catch him with the goods, and that's why I hired out
to him. But, Mike Gillum is square, too. He's boss of the Syndicate
camp on Willow River. A clerk in the Syndicate office told him that
the Syndicate was paying Hurley, and Mike wrote to Waseche Bill.
He's a friend of Waseche's—used to prospect in Alaska——"
"I don't care if he used to prospeck in heaven! He's a liar if he
says Hurley ever double crossed any one!"
"Hold on, I think I've got an idea of what's going on here and it
will be up to us to prove it. The man that's doing the double crossing
is Slue Foot Magee. I didn't like his looks from the minute I first saw
him. Then he began to hint that there were ways a forty-dollar-a-
month clerk could double his wages, and when I pretended to fall in
with his scheme he said that when they begin laying 'em down he'll
show me how to shade the cut. And more than that, he said he had
something big he'd let me in on later, provided I kept my eyes and
ears open to what went on in the office."
"An' you say you an' yer pardner owns this here timber?"
"That's just what I said."
"Then Slue Foot's ondertook to show you a couple of schemes
where you kin steal consider'ble money off yerself?"
Connie laughed. "That's it, exactly."
Saginaw Ed remained silent for several moments. "Pervidin' you
kin show them papers, an' from what I've saw of you, I ain't none
surprised if you kin, how come it that yer pardner sent a kid like you
way down here on what any one ort to know would turn out to be a
rough job anyways you look at it?"
"He didn't send me—I came. He wanted to come himself, but at
that time we thought it was Hurley we were after, and Hurley knows
Waseche so he could never have found out anything, even if he had
come down. And besides, I've had quite a lot of experience in jobs
like this. I served a year with the Mounted."
"The Mounted! You don't mean the Canady Mounted Police!"
"Yes, I do."
There was another long silence, then the voice of Saginaw
rumbled almost plaintively through the dark, "Say, kid, you ain't
never be'n President, have you?"
Connie snickered. "No, I've never been President. And if there's
nothing else you want to know right now, let's hit the hay. We've
both done some man's size mushing today."
"You spoke a word, kid," answered Saginaw, rising to his feet; "I
wouldn't put no crookedness whatever past Slue Foot. But that didn't
give this here Gillum no license to blackguard Hurley in no letter."
 "Has Hurley ever worked for the Syndicate?" asked Connie.
"No, he ain't. I know every job he's had in Minnesoty an'
Westconsin. Then he went out West to Idyho, or Montany, or
somewheres, an' this here's the first job he's had sence he come
back."
"What I've been thinking is that Slue Foot has passed himself off
to the Syndicate as Hurley. They know that Hurley is boss of this
camp, but they don't know him by sight. It's a risky thing to do, but
I believe Slue Foot has done it."
"Well, jumpin' Jerushelam! D'you s'pose he'd of dared?"
"That's what we've got to find out—and we've got to do it alone.
You know Hurley better than I do, and you know that he's hot-
headed, and you know that if he suspected Slue Foot of doing that,
he couldn't wait to get the evidence so we could get him with the
goods. He'd just naturally sail into him and beat him to a pulp."
Saginaw chuckled. "Yes, an' then he'd squeeze the juice out of
the pulp to finish off with. I guess yer right, kid. It's up to me an'
you. But how'd you know them I. W. W.'s is headin' fer Willer River?"
"Because I heard Slue Foot tell them to."
"Slue Foot!"
"Yes, I forgot to tell you that Slue Foot is an I. W. W., too. I
didn't know it myself 'til tonight. You see, when I got back to camp
and found that Hurley's prisoners had made a get-away, I knew right
then why you had turned off the back trail from Willow River. I knew
they'd treat you like they did Hurley, or worse, so I hit the trail."
"Wasn't they no one else handy you could of brung along?"
asked Saginaw, drily.
"The whole camp would have jumped at the chance—and you
know it! And you know what they'd have done when they caught
'em. I knew I could travel faster and make less noise than a big
gang, and I knew I could handle the job when I got there. I had
slipped up and was watching when Pierce took you into the timber.
He did that because they heard someone coming. It was Slue Foot,
and he brought 'em a grub stake and some blankets. They knew he
was an I. W. W., and they'd managed to slip him the word that they
were loose. They wanted him to stake them to some money, too, but
Slue Foot said he didn't have any, and told them to get a job up on
Willow River. He told them they'd be safer there than they would
anywhere down along the railroad."
"Yes, but how'd you know they'll go there?"
"They can't go any place else," laughed the boy. "They're broke,
and they've only got a little bit of grub."
"When we goin' up an' git 'em?" persisted Saginaw.
"We'll let the sheriff do that for us, then the whole thing will be
according to law."
"I guess that's right," assented the man, as the two swung down
the tote road.
"We'd better roll in in the men's camp," suggested Connie, as
they reached the clearing. A little square of light from the office
window showed dimly through the whirling snow, and, approaching
noiselessly, the two peeked in. Mounded blankets covered the
sleeping forms of the doctor and Lon Camden; Hurley's bandaged
head was visible upon his coarse pillow, and beside him sat Steve,
wide awake, with the bottles of medicine within easy reach.
"Half past one!" exclaimed Saginaw, glancing at the little clock.
"By jiminetty, kid, it's time we was to bed!"
 CHAPTER XII

SHADING THE CUT

I T was nine o'clock the following morning when Connie was

awakened by someone bending over him. It was Saginaw, and
the boy noticed that his cap and mackinaw were powdered with
snow.
"Still snowing, eh? Why didn't you wake me up before?"
"It's 'bout quit, an' as fer wakin' you up," he grinned, "I didn't
hardly dast to. If I was the owner of an outfit an' any doggone
lumberjack woke me up 'fore I was good an' ready I'd fire him."
"Oh, you want to see my papers, do you?" grinned Connie.
"Well, I might take a squint at 'em. But that ain't what I come
fer. The boss is a whole lot better, an' the doctor's a-goin' back.
What I want to know is, why can't he swear out them warrants ag'in
them three I. W. W.'s an' have it over with? I didn't say nothin' to
Hurley 'bout them bein' located, er he'd of riz up an' be'n half ways
to Willer River by now."
"Sure, he can swear out the warrants! I'll slip over to the office
and get their names out of the time book, and while I'm gone you
might look over these." The boy selected several papers from a
waterproof wallet which he drew from an inner pocket and passed
them over to Saginaw, then he finished dressing and hurried over to
the office. Hurley was asleep, and, copying the names from the
book, Connie returned to the men's camp.
 "You're the goods all right," said Saginaw, admiringly, as he
handed back the papers. "From now on I'm with you 'til the last gap,
as the feller says. You've got more right down nerve than I ever
know'd a kid could have, an' you've got the head on you to back it.
Yer good enough fer me—you say the word, an' I go the limit." He
stuck out his hand, which Connie gripped strongly.
"You didn't have to tell me that, Saginaw," answered the boy,
gravely, "if you had, you would never have had the chance."
Saginaw Ed removed his hat and scratched his head
thoughtfully. "That there'll strike through 'bout dinner time, I guess.
But I suspicion what you mean, an'—I'm obliged."
"Here are the names for the doctor—better tell him to swear out
warrants both for arson and for attempted murder."
"Yes, sir," answered Saginaw, respectfully.
"Yes, what!"
The man grinned sheepishly. "Why—I guess—bein' I was talkin'
to the owner——"
"Look here, Saginaw," interrupted the boy, wrathfully, "you just
forget this 'owner' business, and don't you start 'siring' me! What do
you want to do—give this whole thing away? Up where I live they
don't call a man 'sir' just because he happens to have a little more
dust than somebody else. It ain't the 'Misters' and the 'Sirs' that are
the big men up there; it's the 'Bills' and the 'Jacks' and the 'Scotties'
and the 'Petes'—men that would get out and mush a hundred miles
to carry grub to a scurvy camp instead of sitting around the stove
and hiring someone else to do it—men that have gouged gravel and
stayed with the game, bucking the hardest winters in the world,
sometimes with only half enough to eat—men with millions, and
men that don't own the tools they work with! My own father was
one of 'em. 'The unluckiest man in Alaska,' they called him! He never
made a strike, but you bet he was a man! There isn't a man that
knew him, from Skagway to Candle, and from Candle to Dawson and
beyond, that isn't proud to call him friend. Sam Morgan they call him
—and they don't put any 'Mister' in front of it, either!"
 Saginaw Ed nodded slowly, and once more he seized the boy's
hand in a mighty grip. "I git you, kid. I know they's a lot of good
men up in your country—but, somehow, I've got a hunch they kind
of overlooked a bet when they're callin' your pa onlucky." He took
the slip of paper upon which Connie had written the names. At the
door he turned. "We begin layin' 'em down today," he said.
"Shouldn't wonder an' what Slue Foot'll be down 'fore very long fer
to give you yer first lesson."
"Hurley will think I'm a dandy, showing up at ten o'clock in the
morning."
"Never you mind that," said Saginaw; "I fixed that part up all
right—told him you was up 'til after one o'clock helpin' me git things
strung out fer to begin work today."
Connie bolted a hasty breakfast, and, as he made his way from
the cook's camp to the office, sounds came from the woods beyond
the clearing—the voices of men calling loudly to each other as they
worked, the ring of axes, and the long crash of falling trees. The
winter's real work had begun, and Connie smiled grimly as he
thought of the cauldron of plot and counter-plot that was seething
behind the scenes in the peaceful logging camp.
The boy found Hurley much improved, although still weak from
the effects of the terrible beating he had received at the hands of
the escaped prisoners. The big boss fumed and fretted at his
enforced inactivity, and bewailed the fact that he had given the
doctor his word that he would stay in his bunk for at least two days
longer. "An' ut's partly yer fault, wid yer talk av th' law—an' partly
mine fer listenin' to yez," he complained fiercely, in rich brogue, as
Connie sat at his desk. The boy's shoulders drooped slightly under
the rebuke, but he answered nothing. Suddenly Hurley propped
himself up on his elbow. "Phy don't yez tell me Oi'm a big liar?" he
roared. "Ye was right, an' Oi know ut. Don't pay no heed to me, kid.
Oi've got a grouch fer lettin' them shpalpeens git away. Furst Oi was
thryin' to lay ut on Frinchy, an' him the bist teamster in th' woods!
Ut's loike a sp'ilt b'y Oi am, thryin' to blame somewan f'r what
c'udn't be helped at all. Ut was an accident all togither, an' a piece
av bad luck—an' there's an end to ut. Bring me over yer book, now,
an' Oi'll show ye about kaypin' thim logs."

"PHY DON'T YEZ TELL ME OI'M A BIG LIAR?" HE

ROARED.

Connie soon learned the simple process of bookkeeping, and

hardly had he finished when the door opened and Slue Foot Magee
entered.
"Well, well! They sure beat ye up bad, boss. I heerd about it on
my way down. I'd like to lay hands on them crooks, an' I bet they'd
think twict before they beat another man up! But yer a fightin' man,
Hurley; they must of got ye foul."
"Foul is the word. When the wagon tipped over my head hit a
tree an' that's the last I remember 'til I come to an' the boy, Steve,
was bathin' my head with snow an' tyin' up my cuts with strips of his
shirt."
"Too bad," condoled Slue Foot, shaking his head sympathetically;
"an' they got plumb away?"
"Sure they did. It wasn't so far to the railroad, an' the snow
fallin' to cover their tracks. But, Oi'll lay holt av 'em sometime!" he
cried, relapsing into his brogue. "An' whin Oi do, law er no law, Oi'll
bust 'em woide open clane to their dirty gizzards!"
"Sure ye will!" soothed Slue Foot. "But, it's better ye don't go
worryin' about it now. They're miles away, chances is, mixed up with
a hundred like 'em in some town er nother. I started the cuttin' this
mornin'. I'm workin' to the north boundary, an' then swing back from
the river."
Hurley nodded: "That's right. We want to make as good a
showin' as we kin this year, Slue Foot. Keep 'em on the jump, but
don't crowd 'em too hard."
Slue Foot turned to Connie: "An' now, if ye hain't got nawthin'
better to do than set there an' beaver that pencil, ye kin come on up
to Camp Two an' I'll give ye the names of the men."
"If you didn't have anything better to do than hike down here,
why didn't you stick a list of the names in your pocket?" flashed the
boy, who had found it hard to sit and listen to the words of the
double-dealing boss of Camp Two.
"Kind of sassy, hain't ye?" sneered Slue Foot. "We'll take that out
of ye, 'fore yer hair turns grey. D'ye ever walk on rackets?"
"Some," answered Connie. "I guess I can manage to make it."
Slue Foot went out, and Hurley motioned the boy to his side.
"Don't pay no heed to his growlin' an' grumblin', it was born in him,"
he whispered.
"I'll show him one of these days I ain't afraid of him," answered
the boy, so quickly that Hurley laughed.
"Hurry along, then," he said. "An' if ye git back in time I've a
notion to send ye out after a pa'tridge. Saginaw says yer quite some
sport with a rifle."
"That's the way to work it, kid," commended Slue Foot, as
Connie bent over the fastenings of his snow-shoes. "I'll growl an'
you sass every time we're ketched together. 'Twasn't that I'd of
made ye hike way up to my camp jest fer to copy them names, but
the time's came fer to begin to git lined up on shadin' the cut, an'
we jest nachelly had to git away from the office. Anyways it won't
hurt none to git a good trail broke between the camps."
"There ain't any chance of getting caught at this graft, is there?"
asked the boy.
 "Naw; that is, 'tain't one chanct in a thousan'. Course, it stan's to
reason if a man's playin' fer big stakes he's got to take a chanct. Say,
where'd you learn to walk on rackets? You said you hadn't never
be'n in the woods before."
"I said I'd never worked in the woods—I've hunted some."
The talk drifted to other things as the two plodded along the
tote road, but once within the little office at Camp Two, Slue Foot
plunged immediately into his scheme. "It's like this: The sawyers gits
paid by the piece—the more they cut, the more pay they git. The
logs is scaled after they're on the skidways. Each pair of sawyers has
their mark they put on the logs they cut, an' the scaler puts down
every day what each pair lays down. Then every night he turns in
the report to you, an' you copy it in the log book. The total cut has
got to come out right—the scaler knows all the time how many feet
is banked on the rollways. I've got three pair of sawyers that's new
to the game, an' they hain't a-goin' to cut as much as the rest. The
scaler won't never look at your books, 'cause it hain't none of his
funeral if the men don't git what's a-comin' to 'em. He keeps his own
tally of the total cut. Same with the walkin' boss—that's Hurley. All
he cares is to make a big showin'. He'll have an eye on the total cut,
an' he'll leave it to Saginaw an' me to see that the men gits what's
comin' to 'em in our own camps. Now, what you got to do is to
shade a little off each pair of sawyers' cut an' add it onto what's
turned in fer them three pair I told you about. Then, in the spring,
when these birds cashes their vouchers in town, I'm right there to
collect the overage."
"But," objected Connie, "won't the others set up a howl? Surely,
they will know that these men are not cutting as much as they are."
"How they goin' to find out what vouchers them six turns in?
They hain't a-goin' to show no one their vouchers."
"But, won't the others know they're being credited with a short
cut?"
"That's where you come in. You got to take off so little that they
won't notice it. Sawyers only knows about how much they got
comin'. They only guess at the cut. A little offen each one comes to
quite a bit by spring."
"But, what if these men that get the overage credited to 'em
refuse to come across?"
Slue Foot grinned evilly: "I'll give 'em a little bonus fer the use of
their names," he said. "But, they hain't a-goin' to refuse to kick in.
I've got their number. They hain't a one of the hull six of 'em that I
hain't got somethin' on, an' they know it."
"All right," said Connie, as he arose to go. "I'm on. And don't
forget that you promised to let me in on something bigger, later on."
"I won't fergit. It looks from here like me an' you had a good
thing."
An hour later Connie once more entered the office at Camp One.
Steve sat beside Hurley, and Saginaw Ed stood warming himself with
his back to the stove.
"Back ag'in," greeted the big boss. "How about it, ye too tired to
swing out into the brush with the rifle? Seems like they wouldn't
nothin' in the world taste so good as a nice fat pa'tridge. An' you tell
the cook if he dries it up when he roasts it, he better have his turkey
packed an' handy to grab."
"I'm not tired at all," smiled Connie, as he took Saginaw's rifle
from the wall. "It's too bad those fellows swiped your gun, but I
guess I can manage to pop off a couple of heads with this."
"You'd better run along with him, Steve," said Hurley, as he
noted that the other boy eyed Connie wistfully. "The walk'll do ye
good. Ye hain't hardly stretched a leg sense I got hurt. The kid don't
mind, do ye, kid?"
"You bet I don't!" exclaimed Connie heartily. "Come on, Steve,
we'll tree a bunch of 'em and then take turns popping their heads
off."
As the two boys made their way across the clearing, Hurley
raised himself on his elbow, and stared after them through the
window: "Say, Saginaw," he said, "d'ye know there's a doggone
smart kid."
"Who?" asked the other, as he spat indifferently into the wood
box.
"Why, this here Connie. Fer a greener, I never see his beat."
"Yeh," answered Saginaw, drily, his eyes also upon the retreating
backs, "he's middlin' smart, all right. Quite some of a kid—fer a
greener."
 CHAPTER XIII

SAGINAW ED HUNTS A CLUE

"HELLO!" cried Saginaw Ed, as he stared in surprise at a wide, flat

trail in the snow. The exclamation brought Connie Morgan to
his side. The two were hunting partridges and rabbits, and their
wanderings had carried them to the extreme western edge of the
timber tract, several miles distant from the camps that were located
upon the Dogfish River, which formed its eastern boundary. Despite
the fact that the work of both camps was in full swing, these two
found frequent opportunity to slip out into the timber for a few
hours' hunt, which answered the twofold purpose of giving them a
chance to perfect their plans for the undoing of Slue Foot Magee,
and providing a welcome addition to the salt meat bill of fare.
"Wonder who's be'n along here? 'Tain't no one from the camps—
them's Injun snow-shoes. An' they ain't no one got a right to hunt
here, neither. Hurley posted the hull trac' account of not wantin' no
permiscu's shootin' goin' on with the men workin' in the timber.
Them tracks is middlin' fresh, too."
"Made yesterday," opined Connie, as he examined the trail
closely. "Travelling slow, and following his own back trail."
Saginaw nodded approval. "Yup," he agreed. "An', bein' as he
was travellin' slow, he must of went quite a little piece. He wasn't
carryin' no pack."
"Travelling light," corroborated the boy. "And he went up and
came back the same day."
 "Bein' as he headed north and come back from there, it ain't
goin' to do us no hurt to kind of find out if he's hangin' 'round clost
by. They ain't nothing north of us, in a day's walk an' back, except
the Syndicate's Willer River camp. An', spite of yer stickin' up fer
him, I don't trust that there Mike Gillum, nor no one else that would
claim Hurley throw'd in with the Syndicate." The man struck into the
trail, and Connie followed. They had covered scarcely half a mile
when Saginaw once more halted in surprise.
"Well, I'll be doggoned if there ain't a dugout! An' onless I'm
quite a bit off my reckonin', it's inside our line." For several moments
the two scrutinized the structure, which was half cabin, half dugout.
From the side of a steep bank the log front of the little building
protruded into the ravine. Smoke curled lazily from a stovepipe that
stuck up through the snow-covered roof. The single window was
heavily frosted, and a deep path had been shovelled through a huge
drift that reached nearly to the top of the door. The trail the two had
been following began and ended at that door, and without hesitation
they approached and knocked loudly. The door opened, and in the
dark oblong of the interior stood the grotesque figure of a little old
man. A pair of bright, watery eyes regarded them from above a
tangle of grey beard, and long grey hair curled from beneath a cap
of muskrat skin from which the fur was worn in irregular patches.
"Phwat d'yez want?" he whined, in a voice cracked and thin. "Is ut
about me money?"
 "PHWAT D'YEZ WANT?" HE WHINED.

"Yer money?" asked Saginaw. "We don't know nothin' about no

money. We're from the log camps over on Dogfish. What we want to
know is what ye're doin' here?"
"Doin' here!" exclaimed the little old man. "Oi'm livin' here, that's
what Oi'm doin'—jest like Oi've done f'r fifteen year. Come on in av
ye want to palaver. Oi'm owld an' like to freeze standin' here in th'
dure, an' if ye won't come in, g'wan away, an' bad cess to yez f'r not
bringin' me back me money."
Saginaw glanced at Connie and touched his forehead
significantly. As they stepped into the stuffy interior, the old man
closed the door and fastened it with an oak bar. Little light filtered
through the heavily frosted window, and in the semi-darkness the
two found difficulty picking their way amid the litter of traps, nets,
and firewood that covered the floor. The little room boasted no chair,
but, seating himself upon an upturned keg, the owner motioned his
visitors to the bunk that was built along the wall within easy reach of
the little cast iron cooking stove that served also to heat the room.
"Ye say ye've lived here for fifteen years?" asked Saginaw, as he
drew off his heavy mittens.
"Oi have thot."
"Ye wasn't here last winter."
"Thot's whut Oi'm afther tellin' yez. Last winter I wuz to the
city."
"This here shack looks like it's old, all right," admitted Saginaw.
"Funny no one run acrost it last winter."
"Ut snowed airly," cut in the little man, "an' if they ain't no wan
here to dig her out, she'd drift plumb under on th' furst wind."
"Who are you?" asked Connie. "And what do you do for a living?
And what did you mean about your money?"
"Who sh'd Oi be but Dinny O'Sullivan? 'An' phwat do Oi do fer a
livin'?' sez ye. 'Til last winter Oi worked f'r Timothy McClusky, thot
owned this trac' an' w'd died befoor he'd av sold ut to th' Syndicate.
Good wages, he paid me, an' Oi kep' off th' timber thayves, an' put
out foires, an' what not. An' Oi thrapped an' fished betoimes an' Oi
made me a livin'. Thin, McClusky sold th' timber. 'Ye betther come on
back wid me, Dinny,' sez he. 'Back to the owld sod. Ut's rich Oi'll be
over there, Dinny, an' Oi'll see ye'll niver want.'
"But, ut's foorty year an' more since Oi come to Amurica, an'
Oi'd be a stranger back yon. 'Oi'll stay,' Oi sez, 'f'r Oi've got used to
th' woods, an' whin they cut down th' timber, Oi'll move on till
somewheres they ain't cut.' 'Ut's hatin' Oi am to lave yez behind,
Dinny,' sez he, 'but, Oi won't lave ye poor, fer ye've served me well,'
an' wid thot, he puts his hand in his pocket loike, an' pulls out some
bills, an' he hands 'em to me. 'Put 'em by f'r a rainy day, Dinny,' he
sez, an' thin he wuz gone. Oi come insoide an' barred th' dure, an'
Oi counted th' money in me hand. Tin bills they wuz, all bright an'
new an' clane, an' aich bill wuz foive hunder' dollars. 'Twas more
Welcome to our website – the perfect destination for book lovers and
knowledge seekers. We believe that every book holds a new world,
offering opportunities for learning, discovery, and personal growth.
That’s why we are dedicated to bringing you a diverse collection of
books, ranging from classic literature and specialized publications to
self-development guides and children's books.

More than just a book-buying platform, we strive to be a bridge

connecting you with timeless cultural and intellectual values. With an
elegant, user-friendly interface and a smart search system, you can
quickly find the books that best suit your interests. Additionally,
our special promotions and home delivery services help you save time
and fully enjoy the joy of reading.

Join us on a journey of knowledge exploration, passion nurturing, and

personal growth every day!

ebookbell.com