Posted: June 29th, 2009 | Author: Joe | Filed under: Debt | Tags: Credit Cards, Debt, getting out of debt | 4 Comments »
We’ve been hearing a great deal in the news lately about debt. I know a lot of people are in various kinds of debt. Common causes highlighted by the media are the death of a family provider, job loss and medical emergency. I suspect this is because those causes are very dramatic. But what about more mundane and widespread causes?
What about lifestyle creep?
That’s how my wife and I found ourselves in over $12,000 of credit card debt. It happened before we knew it, and once we had a minor medical emergency (sick pet) we realized how bad things were.
Eventually we resolved to take care of our lifestyle issue and dig ourselves out of the debt hole we dug.
So, there you have our problem: Lifestyle creep. What’s yours?
Also, that was mostly credit card debt. We also had car loans, a mortgage and student loans. So, what kind of debt do you have? Is it student loan debt, tax debt, credit card debt?
I’m interested in a general idea of the kind and cause of debt of my readers – even if you’re out of debt now. It’s ok, you can use a fake name and we won’t know. 
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Posted: June 25th, 2009 | Author: Joe | Filed under: Debt | Tags: Debt | 2 Comments »
The folks at BankRate.com have come up with their list of the top 10 causes of debt, based on reader emails.
- Reduced income/same expenses.
- Divorce.
- Poor money management.
- Underemployment.
- Gambling.
- Medical expenses.
- Saving too little or not at all.
- No money communication skills.
- Banking on a windfall.
- Financial illiteracy
I don’t know about you, but I think this list could be trimmed down to 7 because Financial illiteracy encompasses #’s 3,7 and 8 in my mind.
Control what you can and accept what you can’t
One of the most powerful realizations that can come from a list like this is seeing what you can control, and accepting the things that you cannot control.
You alone have the power over your life to control 3, 7, 8, 9 and 10! Begin with becoming financially literate, and the rest will fall into place.
While you cannot always control your state of employment or whether a spouse is going to seek a divorce, you can plan for such event, and mitigate their effects. For example, maintaining an emergency fund in a high yield savings account will provide you a cushion between your lifestyle and sinking into debt should your income vanish. Likewise, you could work to get extra sources of income on the side, so you will still have some money coming in if your primary source of income is lost.
Medical expenses and Gambling are the sort that you mostly have to accept, at least in the sense that you cannot entirely prevent such things from plunging you into debt. Still, there are coping techniques and other actions that can mitigate their effect.
In the end, I think most people end up in debt because of a lack of planning and generally not paying attention to their finances. It’s a shame, but it’s also preventable.
This is what happened to me. And I eventually woke up, took control of my financial life and got out of debt – and you can too!
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Posted: June 22nd, 2009 | Author: Joe | Filed under: Investing | Tags: Alternative Energy, Bonds, Pharma, Stocks | 2 Comments »
Remember that old adage, “If you can’t beat them, join them”?
Well, a lot of people have come around to that line of thinking when it comes to the stimulus and bailout madness gripping Washington D.C. these days. Hey – we’re paying for it, why not profit from it, right?
Well, profiting from it may not be as straightforward as it seems…
Bonds.
Freddie and Fannie, not ‘private’ banks.
Avoid banks, since their profitability is suspect for the foreseeable future. Instead, buy Fannie and Freddie since they are directly backed (controlled) by the federal government whereas the banks are managed through TARP. Best buy for Freddie Mac and Fannie May Debt bonds is Vanguard Short-Term Federal Fund (VSGBX) This fund has beaten 89% of its peers over the past 3 years with returns of 6.3%.
Munis, not Infrastructure.
It’s easy to see why many investors would be tempted to buy infrastructure bonds, since much of the press surrounding Obama’s stimulus spending has been focused on infrastructure spending on roads and bridges. But the problem is that many states are deeply in the red and much of the stimulus spending will only offset the construction costs and not produce any real return. A better stimulus play is to invest directly in municipal bonds. Municipalities are getting a quarter of the stimulus on top of a federal bailout. The effect is to prop up the repayment of the municipal bonds, which have been yielding quite high lately. Best bet here is the diversified Vanguard Intermediate Term Tax Exempt fund (VWITX)
Stocks.
Big Pharma, not Health-Care IT.
Much has been made of the increased spending in the push to modernize hospital record processing and the like, resulting in a rise in the price of health care IT stock. At the same time, shares of big pharma companies like Pfizer, Merck and Johnson and Johnson have been hammered due to the fears that the Obama administration will seek to severely curtail their profitability. The result is over sold stocks of solid companies – just don’t expect eye popping returns for the next 4 years. Best play here is the iShares Dow Jones US Pharmaceuticals (IHE)
Old Energy, not Green energy.
The green energy market is over populated with tiny companies all competing for the Stimulus funding, so it’s going to be difficult to pick the winners. And that’s if green energy becomes profitable! The better play is fossil fuels, for 2 reasons – 1) They’re oversold, 2) they will likely be the ones to profit once green energy becomes sustainable.
They’re oversold for the same reason big Pharma is oversold – perception that Obama and the Democrat control congress will seek punitive measures on oil companies. This may or may not come to pass, but it is likely these stocks have been beat up too much. The other reason is what my post Why Investing in Alternative Energy Companies is a Bad Idea is all about.
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Posted: June 18th, 2009 | Author: Joe | Filed under: Investing | Tags: 529 savings plan, college savings | 1 Comment »
Many people who invest in a 529 college saving plan for future college costs, took a big hit in the 2008 market crash – some more than they should have!
Many 529 plans offer the age-based option, which is supposed gradually shift from stocks to bonds to cash as the target college date nears. The problem, as discussed in this Boomberg article , is that some 529 plans got greedy and kept too much in stocks:
“Irresponsible age-based funds gamble on earning higher returns. They continue to hold a large proportion of stocks and risky bonds, even for 19- and 20-year-olds. These are the funds that get parents into trouble. If you are paying tuition this year, 20 percent or more of your college money might be gone. “
Yikes!
It just goes to show that with 529 plans, as with 401(k) plans, those super simple lifestyle or age-based funds are only as good as the managers. This is a big reason why I skipped these funds in the 529 accounts for my children. The oldest is only 5, so I have the bulk of the account assets in stocks, but will adjust the allocation myself as they make their way through the school system.
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