Debt as a hedge against inflation?

Flexo (at Consumerism Commentary) wrote an interesting piece on debt reduction; in promoting his Debt Avalanche over the Dave Ramsey’s Debt Snowball, Flexo said:

One major problem I have with the snowball approach is that your largest balance may be significantly more expensive than your smallest balance. Today it is not difficult to find a default interest rate on a credit card north of 30%. There is no way in good conscience I could recommend holding off on eliminating a debt this expensive in favor of paying off a small balance with a 7.9% interest rate. The same goes for payday loans, whose fees can border on usurious if interpreted as interest rates.

I agree totally, but then reminded Flexo that there is a third method – one that I humbly invented – called The Cash Cascade which encourages you to consider what you will do AFTER you have paid off your debt … and, perhaps do some of that instead!

Flexo sent me an e-mail and asked me to to “describe at least a summary of [my] method in the comment”, which I did as follows:

We are all familiar with the concept of ‘good debt’ and ‘bad debt’, but most don’t realize that this is only a way of avoiding getting INTO (bad) debt … once we have acquired the debt, then we need to start thinking of debt simply as ‘cheap debt’ or ‘expensive debt’. The Debt Avalanche is clearly ideally suited to attacking the ‘expensive debt’ first.

However, there is another part to this: our ultimate financial goal is usually not to become ‘debt free’ (although, that may be a tactic that some would choose … not me!), rather to achieve financial independence, or wealth, or [insert your life-supporting goal, here], and often a part of the strategy will be to acquire SOME debt in order to get there while you are still young enough to enjoy life e.g. you might decide to take out a mortgage on an investment property, or a margin loan on stocks, or a small business start-up loan, etc.

Clearly, it would make NO sense to delay investing just so that you can pay off relatively cheap debt (e.g. student loan, mortgage, etc.) i.e. just to take out more expensive debt later (e.g. the small business loan) … instead, leave the cheaper loan in place and “pay off’ the more expensive loan by not taking it out in the first place!

Once you think about debt and investment as ‘cheap’ v ‘expensive’, it becomes easier to apply the principles of the Debt Avalanche to both debts AND investments

Not sure if my thought process was very clear, but it certainly stimulated an unbelievably clear comment, from another reader – Kitty – who said:

I would like to second 7million7years in that keeping fixed low interest debt around instead of repaying could be a valid investment strategy. One thing to keep in mind always is the possibility of future inflation and/or higher interest rates – a reasonable expectation nowadays.

If your debt is at 4.5% now, it may seem like higher than you can get on a normal CD. But what about 5 years from now? During the early 80s where you could get double digit returns on normal bank CDs people who had 30-year fixed mortgages at 9% were feeling very lucky… Long term fixed low interest debt is as much a hedge against inflation as buying commodities or TIPs. In fact I have a couple of multi-millionaire friends who took a mortgage on their vacation home when they could’ve paid for it in cash.

I don’t know if I would finance my vacation home – unless, I had something MUCH better to do with the money – but: “long term fixed low interest debt is as much a hedge against inflation as buying commodities or TIPs” …

… using debt as a Making Money 301 tool? Brilliant, Kitty!!

I only wish that I had thought of it, first

Playing the ‘System’

This post first appeared on my personal blog at Share Your Number, but I thought it was worth repeating here …

_____________________

MoneyNing acts surprised when he found out that “Steal-$50-Billion-From-Charity” Bernie Madoff’s wife gets to keep her house:

“Out of all the coverage of the Bernard Madoff fraud, the one headline that really puzzled me was the point in time when they were negotiating a house that the lawyers claim belonged to Madoff’s wife. It would seem to me that every asset the family owns came from the ponzi scheme, especially since the coupled was married for more than 50 years. However, the court ruled that Ruth (the wife) can keep the house when his husband destroyed so many people’s homes.

How is that fair?”

Well, it’s not fair … but, it’s the law and every person going into business SHOULD take advantage of the protection from liability (but, not criminal liability, as in Bernie’s case … I’m talking about commercial liability, when things simply go wrong in your business) that the law provides … in fact, the laws in Australia – as an example – make it very simple:

1. Put ALL of your personal (non-business) assets into your wife’s name … in the event of a divorce it makes NO difference how your assets are structured.

2. Put ALL of your business (non-personal) assets into a company name (e.g. equivalent of an LLC, S-, or C-corp) … that’s all that you can lose if your business/investments go broke

3. Sign as many personal guarantees as you need to (in YOUR name only) because you should have a ZERO net worth … no need to declare bankruptcy because nobody will bother you when they find out that there’s nothing to get and you then make a ‘generous’ offer to pay, say, 10 cents in the dollar.

[AJC: It's true; I have a ZERO personal Net Worth ... well HAD ... I've recently broken my own rule because the house is now 50% in my name ... not even sure why I did that?! ]

Scummy, but it works

What makes you wealthy may not KEEP you wealthy …

It may be OK to choose an activity that some would consider ‘gambling’ to make your money: trading stocks and options; trading options; flipping real-estate …

… or, in this case, it’s Phil Ivey who many consider to be the ‘Tiger Woods of Poker’ a.k.a. The World’s Greatest Poker Player.

But, listen closely, in the 10 seconds from 5:00 you will hear the likely source of his eventual demise – Phil Ivey’s Financial Archilles Heel.

If this is you, seek help now … if you want to reach your Number by your Date, you may need to take a few chances to make your money, but once it’s in your hands you don’t want to risk just throwing away a penny of it!

The root of all evil?

I’ve been meaning to get around to writing this post for a while, but it kept slipping my mind, until I saw Trent’s Tweet (?) on Twitter:

“A wise man should have money in his head, but not in his heart.” – Jonathan Swift

I haven’t heard that specific saying before, but I have heard that “money is the root of all evil” …

… ooh, hasn’t this stopped many a person from living their Life’s Purpose?!

Well, if money is an evil, it’s a necessary evil – as even our resident chaplain (ret.) would be quick to tell you as he heads to his own “number of $4,000,000 by 20019″!

You see, the correct biblical reference is from Timothy 6:9-11 and, it actually says:

For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.

The “love of money”, not money itself … and, that to me, sounds a whole lot like what Jonathan Swift was trying to say …

… what say you?

The MOST important Making Money 101 tool of them all …

I don’t invest in mutual funds, but I know that many of my poor, deluded readers do For you, The Dough Roller provides some tips … and, for the rest of us, he mentions this blog. Thanks, Dough Roller!
____________________

I posed a seemingly simple question: What is the MOST important Making Money 101 tool of all?

After all, this is basically the subject of almost all of the 2,500+ personal finance blogs in the blogosphere … how to save your way to wealth. We know that it can’t be done, but that doesn’t stop all of those poor blighters from trying … and, worse, writing about it

But, it is an important part of making money, which is why we devote a whole subject to it …

[AJC: Which gives me the fleeting idea for yet another reader poll: which is the most important Making Money stage of them all: MM101, MM201, or MM301? But, you would all too quickly see right through the question: making lots of money (MM201) is useless if you (a) spend it before you get it (MM101) and/or (b) let it slip right out of your fingers once you have it (MM301) ... ergo, they are clearly ALL important!]

Now, I thought that I would be pretty smart and ask questions that would lead you away from the ‘hidden gem’, and I could then glide in on my blogging-white-charger and whisk you right off your financial feet with a princely nugget of wisdom, just as you were nodding in agreement with the poor misguided fools who submitted non-optimum answers …

… but, ‘ask the audience’ came bloody close to winning the 7 million dollar question!

Although the majority response was split nearly 50/50 between the ‘common wisdom’ answer and the one that I thought (hoped!) would slide right under the radar, nobody said it better than Ryan:

Without delayed gratification, why would we save money at all? We’d just live paycheck to paycheck and hope we never…didn’t get a paycheck!

And, what pees me off even more is that the general comments, covering all of these choices and more, were so on-the-mark that I could stop writing this blog … but, will instead just have to shift into higher gear [AJC: hang on tight!].

So, yes …

…. this was another almost-trick question in that they are ALL clearly important, but, this is an experiential blog, in that my financial advice is largely shaped by my own experience (much more so than somebody else’s ‘theory’) and, when I looked back it was delayed gratification more than anything else that seemed to keep me out of the poor house … then and now.

Why delayed gratification?

Because it is a habit for a lifetime; it will keep you from spending all of your money:

- when you don’t yet have enough of it

- while you are still struggling to get more of it

- when you have what should already be enough of it

… and, for those whom ‘delayed gratification’ has not yet become habit, we broke new ground by inventing 7million7year’s Patented Delayed Gratifier [AJC: no, it's not something most commonly found in an Adult Store ] a.k.a. The Power of 10-1-1-1-1

There you have it: delayed gratification, what I – and, you – believe to be the most important Making Money 101 tool of them all

More from the "if I can do it, so can you" file …

You know by now that I am a “look if these ‘losers‘ can do it, surely so can you and I” junkie

So, here’s a question for you: how tall do you have to be to play basketball … particularly to be a world-class dunker?

7 foot? 6 foot 5? Less? More?

Watch the first 45 seconds of this video (unless you’re also a “I love watching repetitive basketball dunking videos” junkie, in which case watch the whole thing and tell me if I’ve missed anything good!) and guess how tall the guy is …

…. OK, so you’ve read this then watched the video, so I’ll tell you: he’s just 5′ 8″, and he’s from my home town (Melbourne, Australia).

Chicago Bulls, watch out! So, what’s holding you back?

Speaking of child entrepreneurs …

Speaking of child entrepreneurs, here is Cameron Johnson, who started his ‘selling career’ at 5 years old …

… when are YOU gonna start?

Don't ask "if" … ask "how"!

I got home very late last night to see this e-mail from my son – we live in the same house, but he is 14 years old, so that is now his preferred mode of communication -

i have decided that this is gonna be my car, i dont know how but somehow …eventually : http://www.carpoint.com.au/used-car/NISSAN/GT-R/Victoria/csn6641299.aspx?State=VIC

You have no idea how proud that made me feel …

To explain, let me give you some background:

I was a ‘late bloomer’ in that I was always willing and able to work, and never stood in line for a handout … but, I didn’t really get hit by the entrepreneurial bug until my late 20′s (even though I always had that vague “make my first million by 30″ idea in the back of my mind. Oh, I missed by about 15 years … then retired at 49).

On the other hand, my son has had his own eBay business for about 2 years (off and on due to various accidental – and minor, in my opinion – account ‘oversights’); we are used to the idea of seeing packages on our doorstep in the morning (left by our son for the postman to deliver to his customers) and in the evening (packages left for my son, containing stock from overseas … usually China).

Right now, he is instant messaging (i.e. in ‘live’ conversation) with various suppliers in China looking for more genuine Bose headsets (he has just imported 2 at about $150 each).

Now, to put this in perspective:

- he was 12 when he started his business

- he researched and set it up totally on his own

- he found and negotiated with his own domestic and foreign suppliers (mainly communicating via e-mail)

- he downloaded Quicken (accounting software), integrated it with eBay’s software, and worked out how to set it up (including opening balances)

- his allowance is twice his age (currently $28 per month) and easily outstrips that rate with his eBay profits per week

… and, he did all of this with NO outside help (I have no idea how to do ANY of this).

So, I am proud of my son, not just for his entrepreneurial spirit (he is self-starting 10 to 15 years before I did), but that he has discovered something important:

Don’t ask “if” or “I wish I could have this car” … ask, “HOW can I get this car“; as I said in my e-mail back to him  – I think I need to make an appointment in his busy schedule to speak to him about this   -

This car is WAY too powerful for you to drive until you are at least 25 years old … but, after then, the world is your oyster (that means: go for it!) …

BTW: You are asking the right question: How can I get this car? Not: IF I can get this car? Once you ask yourself HOW, your subconscious starts to work on providing the answer and eventually it will come! Good Luck!

Notice that I did NOT say ” good boy, now rich dad will buy it for you” and, notice how he didn’t ask? That’s MY boy

How do I invest with only twenty dollars to spare each month?

This is actually a very common question: How do I invest with only twenty dollars to spare each month?

It was most recently asked by Jacqueline Robinson of TX in response to a US News article that I contributed to:

Basically, I would have to put back pennies at a time and hope that one day it will add up to a nice saving for me in the future. Ok, yes I would like to have that special person to come onto my job at Sobway and say, I read your story on the us news and how I feel that this money would benefit you more than it would me at the moment, or that you are the lucky winner today. Well, that would be living in a fantasy world, so if I could get some good, strong suggestions on how to save money and invest at the same time for my future I would leave El Centro College in Dallas TX with a smile on my face.

Well, Jacqui, I’m certainly not going to come into your ‘Sobway’ for a sandwich and write you a check for $150,000 as a ‘tip’ as you will no doubt lose it pretty quickly because you need to first learn the lessons of money before you make your money so that you can keep your money

The question is normally asked in a manner that suggests: “$20 is such a small amount, what possible difference can it make if I save it instead of spend it?”

Well, in some respects I understand the ‘losing attitude’ because even if you faithfully save $20 each month and somehow manage to match the 30 year ‘guaranteed’ stock market return of 8.5% compound (ignoring fees), after 30 years Jacqui will have saved less than $30,000 (which is worth less than $9,000 in today’s money if inflation averages just 4%).

But, Jacqui will no doubt be receiving better and better jobs and at least increasing the $20 monthly savings with inflation (won’t you, Jacqui?), so she should end up with something approaching $45,000 (or, less than $14,000 after inflation) …

… so, I share her implied pain.

But, with $20 a month you can rent a stall at a market and sell on consignment seconds from local manufacturers (that means that local manufacturers will gladly let you have a bit of their not-quite-right stock on ‘loan’ until you can sell it and pay them a pretty cheap price) … or, one of a hundred other ‘micro businesses‘ that require little to no start-up funds.

With the couple of hundred dollars a month that you might make from that activity, you might be able to build up a ‘nest egg’ 10 times larger than before …

… better yet (because, who can live the rest of their lives off the equivalent of $140,000 after inflation … total?!) use that money to gain a higher education and/or start an internet-based business that might make you an extra few hundred dollars a month.

With, say, an extra $700 a month you could ‘retire’ after 30 years with the princely sum of $450,000 (in today’s ‘after inflation’ dollars) or use that few extra hundred dollars a month to start a ‘real’ business … one that can …

… well, you know the rest: it’s how I went from $30k in debt to over $7 million in the bank in just 7 years.

Jacqui, you’re already $30k – and, $20 a month – better off than I was when I started my journey, so suck it up and get to it!

Please cough, sir …

This is a neat little tool produced by CNNMoney to check your ‘financial health’ … it asks a few simple questions and gives you a diagnosis, highlighting problem areas in the red ‘bubbles’ (the blue ones are all OK).

The one shown here has been done for somebody who certainly seems to have some financial problems, having scored only a C+; this person is:

1. Paying too much for housing

2. Not diversified enough

3. Has too much of their stock portfolio in company stock

4. Has no life insurance

The problem is, this person is me

CNNMoney thinks that a multimillionaire scores a C+ on their finances, but somebody who can’t rub two sticks together scores an A+ as long as they:

- Are diversified,

- Have life insurance,

- Pay too much for their house

[AJC: CNNMoney recommends no more than 38% of your gross income; we would say no more than 25% of net income]

… and, so on.

A common-wisdom tool with a common-wisdom result for a common-wisdom (work for 40 years, retire on minimum wage at 65) outcome. At least you won’t be broke.

BTW: Why did I [almost] fail?

a) We are renting a house ($35k a year) while renovations on our new one are underway, and we have not yet sold our US home, so land taxes ($30k a year) still have to be paid; both temporary costs

b) We fail diversification because it doesn’t ask about real-estate and we have too much in cash at the moment; the way I look at it, we pass on the ‘emergency fund’ bit because we have at least 20 years living expenses on hand right now

c) We failed on company stock because we had a few mill. in bonus shares [AJC: now worth two-tenths-of-f**k-all as they say in Aus] and are waiting for some semblance of a ‘rebound’ before we sell … could be a loooonnnngggg wait

d) Life insurance? see b)

Try the tool and let me know what you think ….