12 Dec 2009

Personal Financial Advice

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You know how every once in a while MTV actually plays a music video? Well I thought it appropriate that I dispense some free financial advice to guide you through these choppy waters, which is what I originally started the blog for.

A reader asks:

I’m curious what flavor of personal finance advice you give about debt management/elimination/control, and savings accumulation? I’ve been a listener of Dave Ramsey, who I think provides an excellent service for the completely ignorant and completely buried-in-debt folks who don’t have discipline in their lives. He even offers decent advice for those of us who are disciplined but don’t always see things from “all the angles.”

But he doesn’t believe in investing in gold. He only believes in term life insurance. And I’m coming across investment advisors (I work in a retail store and meet many customers who come in for training, and so I get to know them a bit more personally) who don’t recommend using extra money to “throw at the house” and pay the mortgage down early.

Anyway, I’m curious where you fall on some of these things. Personally, I’m debt-free but the house, school is paid for (and being paid for in cash), and all our cars are paid for. No gold yet. Still on the fence about that.

Here are my quick thoughts:

(1) You should SAVE more than you used to. I don’t have a magic number but I think it’s safe to say that however much you have been saving in the last few months, is too low. Save more. That means, out of your disposable income each month, devote a little less of it to going out to eat, gas (i.e. drive your car less), and other things that leave you with nothing to show for. Instead devote more of your monthly income to investments, which can include paying down debt. The rest of the items discuss how best to allocate your (larger) savings each month.

(2) If you are currently carrying credit card balances that are based on the prime rate (i.e. you don’t have a locked-in balance transfer deal), then I think your objective should be to knock it out ASAP. The credit card companies have been dropping the hammer lately, even on their customers in good standing. For example I have never missed a payment (except a year ago because of traveling and it just slipped) but a few months ago they jacked up the minimum payment. The same happened to my friend, who is paying down law school debt and so he is fine financially. He had moved a bunch of his student loans onto credit cards because it was a better rate, but recently they upped his repayment schedule and it’s chafing him.

Why are the credit cards doing this? I’m not sure. I think part of it is due to “helpful” government regulations that force you to pay back your loans more quickly, but I think it also might be as simple as the credit card companies needing to call in the loans from their good customers because they’re getting killed on delinquencies from their bad customers. In any event, the good times are over. If you’re queasy about a balance rolling over at 15% but you’re hoping any day now a new 0%-through-October-2010 offer will show up in your mailbox, I suggest you stop hoping and start paying.

To motivate yourself, think of it like this: If you have a balance rolling over at 15%, that’s a guaranteed 15% return you make for every dollar you “invest” in knocking down your principal.

NOTE: If you are seriously awash in credit card debt, at some point you might decide it makes more sense to give up and declare bankruptcy. I personally would hate if that happened, because not only would it ruin my credit but, to the extent it was a conscious decision, I would feel somewhat unethical about it. But I mention it because some people may be seriously deep in credit card debt, and perhaps trying to pay it down before serious inflation kicks in would be pointless.

(3) As long as your mortgage, car loans, and other debts are fixed-rate, then I would NOT do anything except the minimum payments. (And if they are variable rate, I think on Monday you should call the bank and find out what you need to do to get into a fixed rate loan.) The one thing that keeps me fairly calm in the face of Bernanke’s money madness is that he will basically give me my house. Right now I think I’m probably underwater, but a few more cranks of the printing press and my monthly mortgage payments might be equal to how much I get for writing an op ed.

(4) If you still have a few decades working years ahead of you, I would plan on dealing with the threat of hyperinflation by stockpiling in your physical possession enough gold and silver coins to tide your household over the hump when it hits. For example, if the dollar crashes 80% in January, and prices at Wal-Mart end up rising by 50% within the next few months, while gas shoots up to $9 $15, your salary is probably not going to instantly accommodate you. So that’s what the stockpile of coins is for, that you start drawing it down (through ebay or something) until the point at which your paycheck has adjusted to the depreciated dollar. I personally cleaned out the local coin shop of his “junk silver” collection, meaning actual US coins (quarters, dimes, nickels) before 1962 when they had silver in them. So this way other Americans know what they are, and they can google to find out how much they’re worth, given that day’s spot price of silver. I also have some gold coins, but if it ever came to actual “barter” (in quotes because it’s not really barter if you’re using silver!) I feel more comfortable with old-school US coins that everybody recognizes, as opposed to American eagles or something.

(5) In terms of just hyperinflation, the only long-term assets that would truly be awful are dollar-denominated ones. So that obviously means bonds, but also life insurance policies. (However, if you have a whole life, dividend paying policy with a mutual company–as Carlos and I will recommend in our forthcoming book–there’s still a lot you can do to position yourself. In particular, you can pump your extra cash flow into your policy, then borrow it right back to invest in gold coins or real estate or whatever.) If it were just the fall in the dollar per se, then your retirement would be OK if it consisted of stocks because share prices would rise with prices in general.

(6) However, I think overlaid on the dollar’s collapse will be an awful “real” US economy. So once you’ve built up a cushion of gold and silver, if you are looking for long-term investments that will protect you from a dollar collapse, you might consider things like an ETF that exposes you to global stock markets, or Asian markets if you think they’re the wave of the future.

(7) Last point, you should try to develop more than one source of income. If and when things get bad, you don’t want to lose your job and then wonder where your next check will come from. Ideally you’d want two or three things in motion at 10% strength, say, that you could ramp up if you really had to. For some people, that might mean buying a small rental unit right now, and learning the ropes of how to find a tenant, how to replace a toilet, etc. Then after a layoff, with enough savings that person could buy eight more units and be a landlord full time.

Or I know a former student who, on the side, used to go to garage sales and find stuff to resell on ebay. If you’re racking your brain trying to figure out ways to make money, you could try doing that a few Saturdays to see how much you can make per hour.

Obviously I can’t give everyone a magic answer; the way you earn money in a market economy is by spotting an unfulfilled consumer need and then satisfying it. What I’m saying is that you should START LOOKING NOW so that you can experiment with a few things, or at least do a bunch of research, while you still have your regular job. If and when things get awful, regular companies are going to lock up. Nobody is going to be hiring at that point, so you will need to be able to be an entrepreneur at least for a few months.

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