6 posts categorized "personal finance"


The Art of Microbudgeting



If you’ve used micro budgeting before it was probably on a long vacation.  Perhaps backpacking through Europe, perhaps a trek across country or maybe just a week long spring break venture.  Vacation or not, microbudeting is an excellent way to keep your spending under control.


Most folks create a monthly budget because most bills (electric bill, cell phone, rent and mortgage) are paid monthly.  But the monthly format is hardly set in stone.  Why not make a budget for a week?  Or a day?  Even a night of just a few hours?  This is the essence of microbudgeting. 


When I traveled to Viertnam I had a budget of about $100 per day.  Why not do the same in your every day life?  Set a daily budget be it $20 a day, $40 or whatever.  As you go throughout the day subtract in your head every time you buy a coffee, hit the vending machine, or take a cab home.  If you go over by $10 one day then next day’s budget is $10 less.  Or if you conserve on Thursday you are more than welcome to splurge on Friday.


Some folks make microbudgeting easy on themselves by leaving their house with their ID and the amount of their daily budget in cash.  No credit cards, no ATM cards.  When the cash is gone that’s it.  (Yeah yeah I know, what about emergencies?  Well doing this for a day or two isn’t going to kill you.  Before you do it, tell a coworker your plan and that if emergency breaks out you might need an emergency loan.)  Once you’ve weaned yourself off the plastic you can start carrying it again.


The key to budgeting is not writing it but sticking to it.  Sometimes trying to stick to a budget for a month is tough.  Try instead sticking to a budget for just a few hours and see how well you do.


The ULTIMATE Inflation Hedge

In the financial world nothing is better than a good old fashion hedge.  Hedges are those financial moves you take just in case, oh I don’t know the market loses 40% of its value in one year.  Hedging usually consists of only limiting your downside risk; not eliminating it altogether.  Rare indeed is the chance to bet on both teams at the same time, but they do exist.  Permit me to outline one.


If I were to sum it up in two words I would say “silver coins.”  Silver coins, like all precious metals, are an inflation hedge.  Their price tag increases with inflation in two ways.  One happens because when inflation takes hold, dollars become worth less and less.   It takes more dollars to buy an ounce of silver than it did last month.  So the price rises.  But the value of the silver isn’t really going up; it’s more that the value of the dollar is going down. 


The other way silver climbs in price is through good old supply and demand.  When demand goes up prices usually go up, unless the economy can easily resupply the item.  We’re probably mining silver as fast as we can (and if we are not, what are we waiting for?)  So the problem cannot be solved on the supply side.  When people fear inflation (whether they are right or not) they usually try to convert their soon-to-be worth-less dollars into something with “intrinsic value.”  In short they purchase gold and silver.  So silver can provide the double whammy (whatever a whammy is) payoff by offering a return from both greater demand and plummeting dollars. 


But gold and real estate can do this as well, so why is silver the ULTIMATE inflation hedge?  It has to do with something that I rarely concern myself with in the investment world: price.  Price, except in a few cases, means almost nothing in the investment world.  What matters is value.  A stock priced at one penny could be a rip off, a $40 million home could be a bargain.  But the current price of silver (again forget for a moment about value) is such that it has a great investment hedge.  The reason? 


It can be given as a gift.


Say I buy a $15 silver coin right now (www.apmex.com allows modest investors to buy small amounts of coins.)   (No I don’t work for them.  No I’ve never had dinner with the CEO.  No I am not an affiliate.)  If inflation increases then my coin does well for reasons previously stated above.  But suppose it doesn’t?  Suppose the price of the silver coin drops to $10?  Most people would say I have two options:  sell it or hold it and hope it goes back up.  But the silver coin offers a third option.  Give it away.


A silver coin is an ideal gift for sons, daughters, graduates, newlyweds, nieces, nephews, anyone really.  If your speculation in silver goes the wrong way you’ve still saved yourself the time and trouble of shopping for a gift.  No need to tell the IRS either since gifts under $13,000 are exempt from reporting.  (And if you are giving your friends gifts over $13,000… let’s be friends!)


The Biggest Mistake People Make With Student Loans

The Biggest Mistake People Make With Student Loans


After giving over 60 presentations at colleges and universities across the country for the last 5 years, I’ve heard more than a few student loan horror stories.  While these tales of woe are sad (I mean what tale of woe isn’t) many student debt disasters can be avoided by paying attention to one simple number.


Students can tell me everything about their student loans except the most important thing.  They can tell me how much money they have borrowed.  They can tell me how much money they are short each semester.  Some of them can even tell me their interest rates.  But none of these are what I need to hear in order to help them.


Here it is folks, the most important number when it comes to student loans:  the monthly payment.  Quite frankly I don’t really care how much money you borrow.  (That’s only half; true but stick with me for a moment.)  The interest rates on most student loans are decent so that’s not much of a concern either.  What matters is whether or not you will be able to cover what you borrow on a month to month basis.  $20,000 in debt is essentially an imaginary number.  What affects your day to day financial life are those monthly payments.  Payments which will dictate which apartment you live in, which car you drive and even if you should switch majors.


Staying on top of this number is easy.  Simply visit the financial aid office every semester and ask this one question: “Based on the amount of money I have borrowed so far, what will my monthly payments be when I graduate?”  The financial aid office can easily calculate this.  When they reveal the magic number, be sure it is in line with your career choice.  If they tell you that you’re on the hook for $2000 a month and you’re studying to be a social worker, some adjustments need to be made.


Where does socialism start and capitalism end? And where does capitalism end and socialism start?

The other day I was listing to talk radio. Just as the show’s topic drifted to Obama’s health care plan, my car passed through the I-93 Boston Tunnel, notoriously known as the Big Dig. The tunnel swallowed the radio’s reception and I was left with a few quiet minutes to reflect.

No doubt you have heard that many are nervous about Obama’s plan; specifically that the quality of medical care will decline and that there won’t be any money to pay for it. Critics often site the Big Dig, with its cost overruns and flawed construction as a concrete example (no pun intended) of the dangers of letting the government run the show. An interesting question, is where to draw the line between capitalism and socialism.

John Stewart asked this question when he had Bill O’Reilly on the Daily Show. Forgive the paraphrase, but Stewart asked O’Reilly at which tax bracket do we cross into socialism? Is 30% a capitalist tax rate but 32% socialist? Or 34%?

Or consider this. Many hard core capitalists argue we shouldn’t subsidize wind or solar power, when nuclear is already a profitable venture (and a carbon cutter too.) But ‘twas it not the government that financed the original research for nuclear power? If the government funds the first X billion of a capitalist project, is that socialism or capitalism?

How about the Panama Canal? There’s a huge government project that has boosted capitalism by making oceanic trade easier. Hasn’t Eisenhower’s highway system, another mammoth government project, allowed millions of businesses to flourish? Or even a small business that receives a government loan. Is that capitalism or socialism?

This is not an argument for capitalism. Nor is it an argument for socialism. It isn’t even an argument at all. It’s a question:

Where does one draw the line? Send me your thoughts.


The Stock Market Doesn't Repeat Itself But It Does Ryhme

The short answer is kind of.  There is a saying on Wall Street that the market never repeats itself but it often rhymes.  While the media loves to preach the doom and gloom sermon when the market takes a plunge, Wall Street is no stranger to scams, plummets and reckless greed.  Join me for a stroll down memory lane:

·         2000 The internet bubble bursts.  Many people claim it is the end of college kids starting billion dollar corporations in their dorm room.  Of course a few years later we have YouTube, facebook and twitter.

·         1998 The hedge fund Long Term Capital Management collapses.  Treasury Secretary Robert Rubin calls it the worst financial crisis in 50 years (perhaps he was in a coma for 50 years?)  Many demand it should be the end of hedge funds.  What happened?  A roaring market and more hedge funds. 

·         1997 The Asian currency crisis sends a hammer stroke to the financial world.  One that lasts only two years.  Afterwards Asia explodes into an economic boom.

·         1987 On October 19th the stock market has its largest single day loss in history.  The well respected economist John Kenneth Galbraith worried we were headed to another Great Depression.  Many experts believe the crash was due to the freshly popular computerized trading, a form of trading that some argued should be illegal.  What happened?  The market quickly recovered and computerized trading became common place.

·         1970 In June the railroad conglomerate collapses creating at the time the largest bankruptcy in US history.  Years later we have quasi government run Amtrak and the private commercial shipping company Conrail.  Did the sky fall?  (Yes, yes I know Amtrak is always late but it still runs.)

·         1938 For those who think Madoff has never happened before check this out.  In 1938 NYSE Chairman Dick Whitney (known as the “White Knight” of Wall Street) is convicted in one of Wall Street’s most notorious scandals.  President Roosevelt himself, upon hearing the news cries out “Not Dick Whitney!” 

There are plenty of other dates in Wall Street’s history where experts and journalists have cried that the sky is falling.  But we are still here.  By the way, scams, plummets and reckless greed will all happen again.  And we’ll still be here. 


What do inflation and swing flu have in common?


Inflation is a bit like swine flu.  There’s a lot of talk about it but no real solutions as to what average Joes and Janes can do about it.  When it comes to swine flu you can’t follow Joe Biden’s advice and not interact with crowds (damn hermits have the upper hand again!)  And when it comes to inflation you can’t vote out Ben Bernanke (Fed Reserve Chairs, with their immense amount of power are appointed.  A scary thought for another blog.)  My advice for swine flu?  Dammit Jim I’m a financial author not a doctor.  But I do have some simple steps to protect your pocket book from the seemingly inevitable rise in the cost of goods.  As prices go up, your dollars get less and less valuable since more dollars are needed to purchase that IPod. 


At the end of it all there are three basic ways to protect yourself from inflation.  You can buy real estate, you can buy precious metals, or you can buy an investment that comes with some sort of inflation protection built in (and there ain’t many of these.)  Let’s forget real estate.  If you can afford to buy it you would have done so already.  Real estate’s pricey, even in a down market, so I don’t consider that a “simple” solution to inflation.  Let’s also forget gold for the moment.  Indeed it is the precious metal everyone thinks about, but at $1000 an ounce, that’s not really simple either (though we’re getting closer.)  Instead consider owning a few silver coins (maybe selling for around $15 as I write this.)  Historically silver has done a bit better than gold and it requires less of a commitment.  While stocks have beaten precious metals over the long term, silver has never gone to zero (I’m looking at you GM). Worst case you can give your niece a coin or two for her birthday (now that’s a hedge.)  Where does one buy small quantities of silver coins?  Your local jeweler is happy to rip you off, so check his prices against www.apmex.com, which is happy to fulfill small orders.


Another rarely mentioned investment that’s essentially inflation proof is the I bond.  These are the new generation of savings bonds like grandma used to give.  You can buy them at your local bank for as little as $50, no commission, no fees.  They pay an interest rate AND an inflation adjusted rate, so the value of these bonds rises with the inflation tide. 


You won’t get rich buying a few silver coins or an I Bond every month.  But you won’t go broke either.  Those who didn’t read this may not be able to make the same claim.