~ Andrew Beattie
Economic conditions can be as temperamental as the weather. In this article we’ll look at some simple steps that can help keep the financial boat afloat during an economic tempest.
Batten Down the Hatches
Warren Buffet derides management that embarks on cost cutting, as good management shouldn’t need to be prompted to control costs – that should be second nature. People are less strict with their personal finances than Buffet is on management, but a downturn quickly provides the motivation needed for cost consciousness. There is always room for cutting frivolous expenses, or at least substituting them with cheaper alternatives. This applies to everything from the morning coffee to landscaping the backyard.
Set in Stores
Even if you have creditors banging on your door and ringing you at work, your first priority should be building or augmenting your emergency fund. When money is consistently flowing out of your bank account leaving a near-zero balance, there is no cushion for unexpected and unavoidable expenses – like a root canal or a new radiator. This forces people to take on yet more debt to make ends meet, and the outflow of cash worsens until it seems like they are working just to satisfy their creditors. The better alternative is to make minimum payments on your debt while building a cushion of at least one month’s wages, but preferably 3-6 months.
The larger the emergency fund, the more secure you’ll be mentally and financially. With three or more months in reserve, it takes a pretty big emergency to shake things up. Building the fund should take precedence over investment as well as debt payments. Any automatic investment plan should be put temporarily on hold and that money funneled towards the emergency fund to help speed up the building. It may feel like you’re dodging creditors and robbing from your golden years, but with a proper emergency fund, you’ll be in a better situation to consistently make payments on your debts and regularly invest no matter what happens in the future.
Patch the Hull
When the general market is choppy, there is almost daily coverage of where the hot money is going. Investors rush out of cash and into bonds; out of bonds and into stocks; out of stocks and back into cash and bonds, and on and on. Rather than getting caught up in the stutter-step of fast money, most people would benefit far more from paying down existing debt than finding safe havens to park idle funds.
If you are holding debt during a downturn, paying it back is one of the few places where you can put your money that will guarantee a return no matter what the market is doing. The return on paying off a 5% loan is, of course, the 5% you are no longer being charged. With some credit companies charging in the high teens and twenties, you’ll likely outstrip the S&P 500 and your own portfolio simply by getting that future interest off your books.
Check the Charts
When the economy is disrupted, the value of stocks in your portfolio will also be whipsawing. Although you don’t want to make rash decisions during economic downturns, recessions and slumps are very informative on the whole. In good times, mediocre and even weak companies can prosper, so hard times act as a baptism of fire for all stocks. Therefore, there’s a lot to be learned from how a company reacts to a downturn. Companies that continue to profit – or at least lose money at a slower rate – in a downturn can often take advantage of depressed prices to expand their businesses and snap up assets on the cheap.
Cash on hand, much like your personal emergency fund, is one measure of how vulnerable a company is when profits slump. Companies that perpetually overextend themselves in good times are easy to spot, as they languish and burn up their cash reserves in hard times. If you already have a regular schedule for checking into your holdings, don’t change it because of an economic dip. Do, however, note how they are handling things and whether or not cash reserves are being used up. If you still like how a company is acting, it’s a good time to get more on the cheap. If the downturn has uncovered some dogs, then why hold on when you could do better things with the cash that’s tied up?
Conclusion
One of the biggest temptations is to reverse all your preparation when the economy recovers. Economists sometimes call this spending binge “pent up demand.” As things improve, there seems to be less need to have large amounts of cash in reserve, or to keep to a strict budget. There is also a tendency to mindlessly push money back into the market to make up for lost time and value, sometimes leading to an echo bubble. If, however, you can continue to run a tight financial ship, you’ll find that your superior reserves, cost consciousness and contrarian thinking will keep you sailing smoothly in all manner of economic seas.
Here is the original:
Four Ways to Weather an Economic Storm
Robert Kiyosaki is a master when it comes to explaining things in simple terms. This is a review on the book Cash Flow Quadrant. I learned 3 major things from reading this book. The biggest is the importance of leveraging a system.
Couples frequently avoid talking about money before marriage. That’s unfortunate, because sharing perspectives about money can help couples resolve the financial issues that doom many marriages.
The following financial compatibility quiz can help couples planning to tie the knot discuss financial issues. Answer “true” or “false” to each of the following statements.
1. We are aware of and comfortable with each other’s money personalities.
2. We have discussed our short- and long-term financial goals.
3. My spouse and I are well versed in personal finance.
4. My spouse and I have discussed a plan to structure our finances.
5. We have planned for the impact that marriage will have on our taxes.
6. We have decided how to divide up the money management tasks.
7. We understand the importance of establishing a realistic budget.
8. I know my future spouse’s investment personality and risk tolerance.
9. I know how much debt my spouse is bringing into our marriage.
10. We have made a commitment to discuss money regularly.
Answering “true” to eight or more statements indicates that you and your spouse are on your way to a stable financial future. However, it’s still a good idea to continue to communicate and work together.
If you answered “true” to between five and seven of the above statements, you and your spouse need to devote more time to planning your financial future together. With a little luck, you can achieve financial compatibility.
If you answered true to fewer than five questions, don’t call off the wedding yet. Instead, make a sincere commitment to discuss these issues and consider meeting with an experienced financial planner who can help you start your marriage on firm financial footing.
Read on to learn more about the importance of each question.
We are aware of and comfortable with each other’s money personalities.
Some of us grew up in families where parents watched every dime; in other families money flowed easily. Some people measure self worth in terms of money and possessions. Some people are natural spenders; others are savers. Understanding your future spouse’s background and values can help avert problems down the road.
We have discussed our short- and long-term financial goals.
Setting financial goals helps you develop priorities and define the type of lifestyle you will lead. Break down your goals into manageable pieces. If you want to buy a house in five years, determine how much you need to save monthly to meet the down payment.
My spouse and I are well versed in personal finance.
Parents and schools rarely provide training in personal finance. Work together to develop your financial knowledge and build confidence by taking a course, meeting with a financial planner, or purchasing a reputable book.
My spouse and I have discussed a plan to structure our finances.
Will you pool all your resources into joint accounts, maintain separate accounts, or devise some combination of the two? There is no right or wrong answer; the key is to come up with a plan that works for you both.
We have planned for the impact that marriage will have on our taxes.
The marriage “penalty” means that you and your spouse together are likely to pay more taxes than you each did as singles. Check with a CPA or tax professional to ensure that you are prepared to meet your tax responsibilities and aware of any tax law changes in this area.
We have decided how to divide the money management tasks.
Decide who will be responsible for balancing the checkbook, filing taxes, and tracking investments, or better yet, set up a plan for rotating these and other financial tasks.
We understand the importance of establishing a realistic budget.
Couples without a budget tend to live and spend from day-to-day. A valuable budget helps you save regularly, utilize income wisely, and avoid misunderstandings about how money is spent.
I know my future spouse’s investment personality and risk tolerance.
Investing styles are different, ranging from conservative to risky. Take the time to arrive at a level of risk where you both feel comfortable.
I know how much debt my spouse is bringing into our relationship.
Couples must enter marriage knowing how much debt they each carry and how it will be paid.
We have made a commitment to discuss money regularly.
Differences are inevitable. How you handle them is important to your marriage.
Whatever your answers, honest communication is the key to a lifetime of financial compatibility.
Jack M. Guttentag
As the unemployment rate rises, more mortgage borrowers must choose between default and making the payment out of savings. That can be an agonizing decision. See the letter below:
“I was laid off recently but am reasonably hopeful of finding another position soon… We have stayed current by drawing down our IRAs, but there is only about $4,000 left, enough to cover us for one more month…Our family is counseling us to keep the $4K left in our IRAs and not make the next monthly mortgage payments. Do you agree?”
Not making the payment will hurt your credit, but if the choice is between missing the payment this month and missing it next month, I would miss it this month and keep the cash. I would only use the rest of your cash to make the payment if you manage to get a job before 30 days after the payment due date. In that event, you have a reasonable hope of being able to work your way out of the jam you are in, so using your remaining money to save your credit makes sense.
This question is heavily value-laden, which is why I answered it in terms of what I would do, which is not necessarily what someone else with different values might elect to do. Some, especially investors, could take the position that a borrower is morally obliged to make the payment if there is any possible way to do it. This is a defensible argument, but it assumes that the borrower’s only duty is to the investor. The borrower in question has a family to consider as well.
The issue of a borrower’s obligation to continue making payments out of savings after their income-generating capacity has been impaired arises in connection with the government’s Home Affordability Modification Program. See another letter from a reader:
“I have applied to have my loan modified, and am in process of filling out the financial questionnaire that my servicer sent me. It asks for the amounts in my bank accounts. Although my income has dropped, I have enough money in the bank to cover the mortgage payment for three years. Should I take it out, and where should I put it?”
To be eligible to have your payment reduced under this program, you must document not only that your income is insufficient to meet the payment but also that you do not have “sufficient liquid assets” to make the payment. I have scrutinized the specs for this program issued by Treasury, and could not find a definition of either “sufficient” or “liquid assets.” It is a thorny issue that Treasury elected not to deal with. In effect, this leaves it up to the servicers to decide, raising the prospect of widely divergent approaches.
Don’t expect me to advise you on how to avoid the intent of this regulation, but I am willing to advise Treasury on how it might have created greater certainty in the rule by defining terms. I would define “liquid assets” as deposits without a specific term plus money market funds, and “sufficient” as an amount exceeding six months of payments.
My guess is that few if any borrowers are going to get caught by the “sufficient liquid assets” rule, that Treasury knows this and put the rule in to cover its backside. It does not want to read press reports about a borrower with millions in the bank successfully obtaining a rate reduction. If it happens, it can be blamed on the servicer. From this standpoint, leaving the rule undefined makes perfect sense.
More:
How Deep Must You Dig to Pay the Mortgage?
When Edward Miller recently applied for a Charles Schwab Corp. credit card, a company representative asked him to fax in copies of his bank-account statements to verify his net worth.
It was “a bit of a hassle,” says the 64-year-old retired economics and finance professor from Bethesda, Md. He complied and was eventually approved for the card with a $5,000 limit.
After years of mailing cards out to just about anybody, banks are suddenly freezing out all but the most creditworthy customers. Those who do get cards have to jump through more hoops, such as sending in copies of their pay stubs. And they’re being hit with higher rates and fees.
Banks always tighten credit standards in an economic slowdown. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the play book it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.
Banks have until February 2010 to comply with the act’s key provisions, although some parts of the law have earlier deadlines. Beginning in August, for example, issuers have to mail bills at least 21 days before the due date and provide at least 45 days’ notice before changing any significant terms on a card.
The result: Many banks are tightening things up now before many of the restrictions go into effect.
For consumers, the tougher underwriting standards by banks may seem like a pendulum shift back to an earlier era when credit cards sported annual fees and double-digit interest rates.
In recent years, issuers cast as wide a net as possible by offering credit to millions of customers, knowing they could always raise rates on those who turned out to be bad bets. That pricing flexibility helped firms rapidly expand their operations, as those with less-than-stellar credit many of whom carried a balance or paid late fees and penalty rates generated millions of dollars in revenue.
Now, the industry is scrambling to figure out who its new profitable customer is. “Without the ability to reprice customers, raise fees or rates, the old profitability calculation won’t apply,” says Alan Mattei, managing director at Novantas LLC, a bank consulting firm.
In recent months, banks including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts. Credit Suisse Group’s Moshe Orenbuch expects credit-card balances could shrink by 10% to 15% through 2012 as banks drop their teaser-rate offers and cut back on offering credit to riskier customers.
Charles Crawford of Grand Prairie, Texas, says that Bank of America raised the interest rate on his $19,000 balance to 23.2% from 12.2% starting with his June statement, citing his high balances. Mr. Crawford says the move nearly doubled his monthly finance charges to about $420 from about $220. “I feel so upset with them that I was thinking about not paying them,” says the 58-year-old engineer.
Excerpt from:
Banks Get Picky in Doling Out Credit Cards
