Posted: January 22nd, 2008 | Author: Joe | Filed under: Economy | Tags: Economy, Recession | 4 Comments »
As you all know, the United States economy is now in a full blown recession. The likes of which has not been seen since the Great Depression of the 1930s.
Or is it?
Ben Stein had a great piece over at his How Not to Ruin Your Life column at Yahoo Finance last week. It’s titled ‘Rethinking the Recession’ and you can read it here.
It’s basically a calming piece in which he uses facts and perspective to counter the hysteria in the over-emotional, over-hyped media. He applies logic and his brand of humor to dissect the impression of recession and imminent return of the great depression as supplied by the US media on a daily basis for about 6 months now. But enough of my fumbling preamble… I should just let Ben speak…
“Are we in a recession? No one knows. Indeed, it’s literally impossible to know.
A recession is six consecutive months of negative economic growth. At most, December 2007 would be our first month, so we wouldn’t know until sometime in June 2008 if, by the end of May 2008, we’d been in a decline for six straight months. So no matter what anyone tells you, we can’t know if we’re in a recession yet”
This is in stark contrast to the impression the media has been generating for months now. Indeed, only last October Jim Rogers was telling Reuters that the U.S. was “undoubtedly in recession.” Next time you hear a “news source” comment on the “current recession”, just ask yourself when was the last time they defined a recession. Chances are they haven’t. This is the age of the 24-hour news cycle and more competition than ever before. They’re not in the business of informing the public any more – they’re in the business of selling ratings, fear and panic.
“There have been 10 recessions in the last 63 years. The average length of these downturns has been about 10 months. The average decline in economic activity from peak to trough was about 2.5 percent. No decline has been worse than about 3.7 percent.”
To listen to the media, we haven’t had a recession since 1929 just before the Great Depression!
“In the past 25 years, there have only been 2 recessions, which is an extremely good record. The two recessions — in the early 1990s and the 2000-2001 correction — have been extremely brief. The really severe recessions of the postwar era have been engineered by the Fed to fight inflation — in the early 1970s and early ’80s.”
This is good news indeed. However, we should consider that through those 2 recessions we had Alan Greenspan at the helm and Ben Bernanke seems to either lack Greenspan’s measured pace or has not yet found his own. Let’s hope he finds it. Soon.
“Unemployment always rises in recessions. The degree of the rise is usually modest, generally only about 2 percentage points, although some — like the one engineered by the Fed in the early Reagan years — have gone as high as 4 points. The average length of involuntary unemployment during recessions is about six weeks.”
This too is less of a negative than I was expecting. How many of you thought unemployment would have been up 5 or 6 or even more points during an average recession?
He goes on to make some more points about how best to survive this rise in unemployment, as well as the Federal Reserve’s role in recession creation and elimination. Well worth the read.
So what should you do?
What you should always do. Pay down and avoid debt. Invest wisely (the markets are having a big sale as I write this). Keep your job skills marketable, sharp and in demand. Work hard, play hard and enjoy life – it’s not as bad as they want you to believe!
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Posted: January 18th, 2008 | Author: Joe | Filed under: Saving | 1 Comment »
A lot has been written and a lot is often said about putting your money to work for you, but what does that mean in practical terms?
Investing is one thing that comes to mind for a lot of people when they hear the phrase “stop working for money, and make your money work for you”, but that doesn’t only pertain to investing. In the simplest case, it’s really no more than stashing your cash where it can earn more cash over time. Often times this makes use of the miracle of compounding interest.
So, clearly the mattress is not the place to be, but where should your money be?
In the simplest case, a bank account (either checking or savings) that pays you interest for the money you let them hold would be one place to put your money to work for you. Online savings accounts garner the most in today’s environment, but it can often take days to get money out again.
You Don’t Get Something for Nothing.
Yield (return) is a function of risk vs. reward. Savings accounts yield less than stocks over the long term because stocks are more volatile and prone to large fluctuations in value. In other words, you risk losing money in the stock market. But you also pay a price in savings accounts vs. checking accounts. The biggest risk is that inflation will be greater than the yield on your bank account, and you’ll actually end up losing money after considering the effect of inflation.
With savings accounts, you often get a higher yield but have less flexibility over how soon you can access that money when you want it. Conversely, checking accounts provide fast access to your money, but don’t often pay much, if any interest.
As of the writing of this post:
ING Direct online savings: 4.10%
HSBC Direct online savings: 4.25%
Those are my online banks. Follow this link if you’re looking for a free $25 for opening an ING Direct Savings Account.
Here’s a handy reference for the latest run down of online savings account rates.
Personally, I’m wary of banks that yield significantly more than the Federal Funds Rate.
The Fed Funds Rate is essentially the rate at which a bank can borrow money. So if they pay you more money in interest than it costs them to borrow the money from the government you have to ask yourself how they can afford that. It may be that they invest in junk bonds or mortgages or subprime mortgages. Who knows? The point is that any amount under the Fed Funds Rate should be considered ‘safe’ because the bank is still making money paying you the interest. Also, make sure the account is FDIC insured, which means the government will bail them out enough for you to get your money back if they go under. You can find out the current Federal Funds Rate here.
Money Markets are similar to savings accounts, but don’t carry the FDIC insurance. Money Market accounts are relatively safe (I think there have only been 2 that have ever failed), but they’re not as safe as FDIC insured accounts.
The next safest place to stash your cash is a CD, or Certificate of deposit. You can think of this as a contract with your bank that says you’ll lend them your money for a set period of time (you agree not to touch it) and they pay you a set interest rate for the term of the agreement. This is nice if you lock in a high rate as the Fed is cutting its rate, i.e.: savings account rates are declining. The catch of course is that you can’t touch it for the duration. Terms run anywhere from 3 months to 5 years, the longer the term yielding more interest.
After that, you’re pretty much looking at bonds and stocks but that’s a topic for another post. 
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Posted: January 14th, 2008 | Author: Joe | Filed under: Saving | No Comments »
These 5 rules are taken from The 5 Laws of Gold, which is a chapter in the book, The Richest Man In Babylon, by George S. Clason.
In the book, these rules (or laws) serve to illustrate how one of the characters moved from debt to wealth in 10 short years. It also examines the eternal question of whether it is better to earn money today, or learn the wisdom needed to earn more money for the rest of your life. This is the story of Nomasir, the son of Arkad (the richest man in Babylon) and his choice of wisdom or gold.
“Given the choice [most] ignore the wisdom and waste the gold”
This chapter also conjures up the familiar proverb, “Give a man a fish and he eats for the day. Teach a man to fish and he will eat for a lifetime.”
“Gold is reserved for those who know its laws and abide by them”
This is the real reason why the rich get richer, and the poor get poorer; the rich know how to manage wealth while the poor know only how to spend the wealth they haven’t made and accumulate debt. It’s that simple.
The story goes like this: Arkad, the richest man in Babylon, gives his son, Nomasir, a bag of gold and a tablet of the 5 laws of gold and sent him out on his own to build his wealth in 10 years. If he returned in 10 years time wealthier than he left, then he would inherit his father’s great wealth. Otherwise, he was out on his own.
After 10 years, Nomasir returns. He tells the story of how he lost all his money on a foolish gamble on a fixed horse race. It was then that he realized the importance of the laws of gold (wisdom over money) and rebuilds a bigger fortune that the one he began with.
He then relates each of the 5 laws to those gathered before him at his father’s house.
- Law I: Gold cometh gladly and in increasing quantity to any man who will put by not less than 1 tenth of his earnings to create an estate for his future and that of his family.
- Law II: Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
- Law III: Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
- Law IV: Gold slipeth away from a man who invests it in businesses or purposes with which he is not familiar or which are not approved by those who are skilled in its keep.
- Law V: Gold flees the man who would force it to impossible earnings or who fellow the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.
There is much overlap between these 5 laws and the 7 cures for a lean purse that are also laid out in the book. Specifically Law I and Cure I are both about paying yourself first That said, and even though the book is decades old and the events in the characters lives are set thousands of years ago, these are still sound principles and food for thought.
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Posted: January 10th, 2008 | Author: Joe | Filed under: Debt, Saving | 3 Comments »
“Thy desires must be strong and definite. General desires are but weak longings. For a man to wish to be rich is of little purpose. For a man to desire 5 pieces of gold is a tangible desire which he can press to fulfillment.”
-Arkad, the Richest Man in Babylon.
Translation: Set tangible goals and define the steps required to reach them.
This is the 7th of the 7 cures for a lean purse as detailed in George S. Clason’s The Richest Man in Babylon.
Far too many people fail to create a financial plan of any kind. I’m talking about retirement planning, but also planning for emergencies and rainy days as well. Many people live paycheck to paycheck and count on credit cards to cover any unexpected (or emergency) expenses that come up. This is not a plan.
If you do not take the time to think about how much cash you may need to cover unexpected expenses and create a plan towards that goal amount, then you will quickly find yourself racking up credit card debt when your car suddenly needs more than routine maintenance, or an appliance needs replacing.
Personal Experience.
I mention that last example because just such a thing has happened to me in the past week. Our washing machine has worked itself into an early (and most unexpected) grave. So we’re going to have to go out and purchase a new washing machine. That sucks, but it really sucks so soon after Christmas. It sucks that I’m going to have to dip into savings to pay for a new washer. What hurts the most is that we’re not quite at our target amount for emergency savings, so this episode of unexpected expense will delay our reaching that goal. But the good news is that we do have that savings to fall back on. Just 4 years ago, we would have been racking up a couple hundred dollars on the credit card and hoping to pay it off in 6 months to a year.
So, while my intent for the emergency savings was to use it in the event of a loss of employment and not really unexpected appliance replacement, the fact remains that the money is there and we can tap into it without accruing interest.
So, how did we get to this point?
As I mentioned, a few years ago we had no savings and routinely used credit cards to fill in the gaps between paychecks. It started out simply enough, but a string of back luck (read: consistent failure to create a plan) left us with several months of credit purchases and a balance we couldn’t pay off at a leisurely pace.
The Breaking Point.
The breaking point came when our cat came down with some freakish illness the day we were leaving for a long weekend. We awoke to find her lying in the middle of the kitchen floor, shaking. She didn’t even meow. She could only look up at us with the saddest pair of eyes I’d ever seen. When she tried to walk, she would take two steps, and then keel over.
Our plans were made and it would have cost too much to break them, but it was obvious that we couldn’t leave our beloved pet to suffer (and maybe die) while we were gone. Since this was a weekend, our regular vet was closed and our only course of action was an emergency animal hospital. You think health care is expensive for people; it’s absolutely ridiculous for animals!
So, after a very long weekend of constant phone updates on her status and a $495 vet bill for who knows what (they never found a cause for her symptoms, and basically gave her “bed rest” and I.V. fluids) we had reached the breaking point: $7,320 in credit card debt.
It didn’t take long for me to realize that, since we were a single income family of 3, if I lost my job we’d be in a serious pinch. This was at a time when the U.S. economy was still not yet out of a recession, so while I felt pretty secure in my job it wasn’t hard to imagine being laid off.
So what could I do?
After lying awake in bed at night for the next week straight, I finally decided things needed to change. We needed to take action. Step 1 was to look back and see how and why we ended up with over $7k in credit card debt in the first place. Only then could we correct our behavior to avoid the same traps again.
We did this, and realized that it wasn’t any single big expense, but many little ones that created a snowball effect: $50 for dinner out; a couple hundred at the end of the year for generous Christmas gifts; some car repair, a new battery; and so on… it was clear that our behavior needed to change, and we needed to anticipate car repairs and the like better.
Step 2 was to deal with the past – the debt we had already accumulated. I thought briefly about paying off the credit card with a personal loan, or credit counseling or other such method. I even contemplated borrowing money from my 401k at one point, but soon realized I would just be playing a shell game with my debt and not doing anything to eliminate it. We became resolved to get out from under this debt without credit consolidation or other 3rd party assistance. My wife and I got into this ourselves, and we would get out of it the same way.
The Plan.
“In working to secure 5 gold pieces he can then attain 10, 20 etc… in learning to secure his 1 definite, small desire he hath trained himself to secure a larger one.”
Start small and build. All too often, people set unattainable goals and doom them selves to failure. The key to accomplishing your goal is to plan the steps necessary to reach the goal, and then set smaller attainable goals for each step.
We started small. We started to pay ourselves first every month by opening up an ING Direct Orange Savings account and set up an automatic savings plan to putting aside $50/ month. Then we resolved ourselves to eating out less, consolidating our phone and cable bills, shopping around for less expensive car insurance and took the money we saved from cutting our expenses and paid at least twice the monthly minimum on our credit car bills.
Once we had paid off the credit card, we took a moment to see where we should go next. It was very satisfying to have no more credit card debt and we had even managed to save a little over $1,000 in the process. It was nice, but clearly not enough. So we set out to build our emergency savings. Standard advice is 3-6 months of living expenses, but since we were a single income family of 4 now I though 6 months of income would be better.
With that idea in mind, we set out to determine what that is in a dollar amount, and what it would take to get there in a year. We soon realized a year was too aggressive and we didn’t want to doom ourselves to failure with an unattainable goal. So, we again started small and built big. We increased our savings to $100/month, then 200, 300 and so on until we found we could not make it through a month without tapping some of our savings. Then we dialed it back again ever so slowly. This became our maximum comfortable savings amount. We’ve stuck with it ever since and were 1 month away from reaching that goal… now we’re about 2 months and a new washer away. Not a bad place to be after all.
Epilogue.
“The more of wisdom we know, the more we may command.”
Learn all you can about finances and building wealth. Invest in yourself and your knowledge of the way things work. Your financial future is in your hands. The best way to anticipate the future is to create it, so out and make of your future what you truly desire!
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