The key question is how long would a certain wealth last? Ongoing withdrawal research has sustainable withdrawal rates anywhere between approximately 3 percent and 8 percent, depending on the research’s assumptions. Time, how long wealth might last, then becomes a function of how many times does the percentage withdrawal rate go into all the assets.

Example: withdrawing 3 percent a year into 100 percent equals 33.3 years; 4 percent equals 25 years; 8 percent equals 12.5 years, etc. This ignores any growth, which presumably would be used to offset the effects of inflation. Growth greater than the withdrawal rate would extend the time assets may last, while negative growth would reduce the time assets may last. Clearly a lower withdrawal rate is more conservative. Knowing this helps you determine how much wealth you need also.

Example: you know you will need $40,000 a year and use a 4 percent withdrawal rate, then you need to use 5 percent and therefore need $800,000, etc. This simple “wealth rule” helps you estimate both the time and the amount.”

Clearly we should not ignore growth - it makes the calculation a bit more complicated, however this is a great way of calculating what is wealth for you.  You may be closer that you think. Or at best you have a concrete number to shoot for.  R Begley
 

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 ”Should I wait until I get rich to give back”?

 This continues the discussion we were having early last month regarding the “Gospel of Wealth” - the idea that as we become wealthy, we need to give back in order to “appease” the “wealth gods”, or achieve good karma.

As usual, Tim’s got an interesting perspective on the topic.  Read his post, then tell us what you think of his perspective.

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Bottom line.  Pay your bills on time, never use more than 30% of the balance on any one card.  Better still, cut them up but don’t close the account.  Pay attention to your FICO score; check your credit report and FICO score at least once a year for inaccuracies. 

Note:  WaMu Bank the largest savings and loan in the country offers credit cards with a built in FICO score from Trans Union - comes for free with the card… very handy.

You can’t “fix” your credit if it accurate.  Only time will do that.  Bad credit stays on your report for 7 years from the date of last activity (payment) - but the months will fly by if you pay on time and your credit will slowly improve…so never pay that creditor a token amount… you will have reset the clock for another 7 years.  Negotate a settlement and ask for a deletion letter.  R Begley 

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If food, gold and oil continue rising in price the Fed will really be screwed - it will have to start raising rates to starve off the inflation it created.  Rate cuts have quite the lag effect.  Short term it’s euphoria but it will take a while to see if the move was correct.  The bond market will let you know.

The inflation numbers came out today and inflation was negative (do these people eat and drive!?)  Do they really think we are this stupid to believe that last month prices across the board went down?  They are making funny with the numbers again.

On with the economy article…

6.   Asset bubbles a bursting – the place where many Americans hold their wealth: their home… not certain to always rise in value and actually may lose value.  Ouch especially for retiring baby boomers.

7.  US dollar is plunging in value against all major currencies.  Can the Government reel in spending?  Will the Fed protect the dollar?  High inflation brings despair to a country.  If you believe the government’s inflation figures I have an old beautiful bridge spanning  over the Hudson River I would like to sell you.  And it may get worse than the 1970’s with our do nothing politicians - inflation is an insidious tax perpetrated on a populace by an overspending government.  The Fed causes inflation by printing too much money – then they say they will fight it by raising rates – who are they kidding?

8.  About 50 trillion (no one really knows) of derivative paper.  Exotic investments used to spread risk around.  Interest rate hedges.  What happens when the smarty pants mangers guess wrong about rates and their high flying investments turn sour? 

9.  High energy and food prices worldwide.  Oil at $80 a barrel and using corn (a food) as a fuel (ethanol) for cars and not people.  The backbone of the world economy is the US consumer.  When there is no more consumable income for the US consumer who is forced to pull back who is going to pick up the slack and buy all those Chinese trinkets?

10.  Retiring Baby Boomers.  Demographic time bomb where there will be less workers supporting the social programs for the retiring baby boomers as there are workers producing in the economy.  Think sky high taxes, baby boomers and pissed off younger workers clashing for dominance. 

There is more but I’ll give it a rest…. Not pretty eh?

How to protect yourself?  Own physical gold and silver – not mining stocks or gold certificates.  They Hard Stuff in your hand.  Get a bigger safety deposit box or a safe in your house.   Have at least 5% of your wealth stored here.  Metals have for centuries represented real wealth.  Get out of debt and save. 

Your house is not an investment.  It’s just where you live.  Expect home prices to be flat for a few years.  Diversify away from the US dollar.  An out of control government with massive unfunded liabilities including Medicare and Social Security and the funded ones like foreign wars against nobody and feeding the Military Industrial Complex, etc has backed itself into a corner.  No politician has the balls to do what is needed to do.  Instead they just add more debt with pet projects and distract us with “issues” (like flag burning, gay marriage, making laws for victimless crimes etc) that have little consequence for most folks.  If you acted the same way as the US government with your finances, not only would you be bankrupt, but you would probably be put in jail for cooking the books.  No more funny (fiat) money.  Let’s get real. R Begley

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A recession is defined as zero or lower economic growth on a yearly basis.  A Depression is a 10% slump however it really refers to the despair the population must endure.  A recession is actually a natural part of the boom and bust nature of the business cycle.  In good times, money is flowing; folks invest more and build their businesses.  Naturally there becomes excess in the system because everyone wants to get involved in the good times but when the cycle turns the weaker players go bust or get bought.  This is grossly simplified but pretty standard for profit oriented businesses.  Many things in nature have cycles – and seasons.  Winter (recession with little growth) happens.

Think of housing.  When house prices were going up everyone and his brother was getting into the house flipping business and trying to make a killing.  When there became an excess of housing on the market - the flippers had a difficult time flipping, the business became more difficult in certain markets, and the amateurs soon disappeared.   This is normal and occurs simultaneously in all industries with different cycles… Now along comes the government (specifically that private bank - not federal and certainly no reserves) known as the Federal Reserve and they are going to smooth out the business cycle so we never have to have a recession again!  Sounds terrific right.  With their meddling they have only prolonged the inevitable cycle and when old man winter does return – think the “D” word.  Here are 10 reasons for concern:

1.  Subprime mortgage lending in the US – the ATM Americans called “refinance the house” that was once used for consumption of granite counter tops, lovely vacations and automobiles has dried up and (hopefully) gone the way of the dodo.  As of September, 2007 only one third of the subprime loans have reset.  We have only seen the tip of this iceberg.  Expect average US home prices to drop considerably (30-50%) over the next 5 years.  Unless your credit is perfect and can meet stringent standards, don’t expect to get a mortgage or possibly even refinance. 

2.  Indebtedness in US, Britain, Australia etc. – British per capita debt is actually higher than the US (source Taipan Financial News) there was an old fashioned bank run recently at 2^nd tier UK bank called Northern Rock – folks standing in line to get their money out of the bank – this bank made lots and lots of subprime loans…

3.  About a trillion dollars of bad debt in China not surfacing now but wait…  till after the summer 2008 Olympics and the building boom experiences a hangover and slows down coupled with the debt exposure. – subprime is a drop in the bucket compared to this one.

4.  Bond market blow up – this is another biggie.  As I write today the Fed meets and is expected to lower the federal funds and maybe the discount  rates.  If it does, it is thumbing its nose at international investors by giving them less of a return and helping the domestic consumer – great but there are other players.  This could cause international buyers of US bonds (50%) of buyers to stay away and not buy or worse yet, sell their bonds on the open market.  The Fed would be forced to raise interest rates to protect the dollar.  Any recovery for the US economy would be squashed by the high interest rates.  The Fed is truly screwed.  Damned if they lower rates, damned if they raise and scorned as weak if they do nothing.

5.  US debt owed by foreign individuals and governments – some hostile.  See above.  China holds the 2^nd most amount of our US debt (behind Japan).  In case anyone forgot, this is a Communist country.  They could invoke what is called the economic nuclear bomb by getting rid of its US dollars.  If the US government wants to borrow any more money (for foreign wars for example?) interest rates will have to be raised killing the goose that laid the economic golden egg. (The American Consumer) … tune in tomorrow for part 2 R Begley

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1.  Taking a cash advance on the credit card to pay another bill. The interest rate is abominable.  Interest accrues on most of these advances daily.  I should have used my emergency fund and avoided the interest charges.

2.  Making the minimum payments on the credit card at any time.  Why am I going into debt for a trinket?  Do I really need this item?  Once you can justify to yourself the payment of minimum payments the first time, the cycle starts.   I’m not referring to the strategy of paying off your debts rapidly by paying the minimums on all but the highest interest card you are looking to eliminate.  It’s like the first drag of a cigarette.  You cough and sputter and say yuk; your body is trying to tell you something.

3.  Purchasing a large ticket item on credit with no really strategy of paying it off quickly.  Stuff happens – appliances break and must be replaced.  Watch the “don’t pay until 2010 deals”; interest accrues and they are counting on you forgetting to pay.  Pay for the item in 90 days or save until you can replace it without occurring interest. 

4.  Making “investments” and paying with your credit card.  Trying to make a killing in the market killed my finances and I still had the credit card bill.  Use money you have already earned for your investments.

5.  Taking out a car loan more for more than a 3 year term.   Cars are depreciating assets.  With a long term car loan you are going to be upside down (owing more on the car than it’s worth) for most of the term.  Just like a mortgage loan, your first few years of payments are mostly interest.  And who knows where your income will be in 4-7 years from now?  But you will still have that payment and your car will be worth less.  Buying a car that you really can’t afford is the 3^rd greatest cause of bankruptcy in the US – medical and credit card debt take the number 1 and 2 dubious honors.  Drive a turd if you have to until you can save and pay for a decent one with cash or less than a 3 year note.  If you have to have a newer car then leasing may be the best strategy.

6.  Not having an emergency fund or using my credit card as an emergency fund.  The car breaks at the worst possible time, I need money for that flight right now – we all have been there, cash flow crunch – however, relying on your credit card companies to bail you out is nutty.  In a crunch, if you must use your card, immediately calculate when you can pay off the item… and stick to it.  Better yet, have an emergency fund set up equal to at least 6 months gross income if you are single, 3 months minimum if you are married (calculate the 3 months if the higher bread winner were to lose all income).  Now, you have your real credit limit established by you, and not the bank.  How did we live before credit cards were invented?  Just 30 years ago… we saved and bought with cash.

7.  Borrowing money from family and friends.  No need to explain here — the potentially most painful of all.  Just don’t go there.

8. I have not been there on this issue, however, this is a biggie in today’s market and may bring the economy crashing down: violating standard (1980’s) underwriting procedures for buying a home; 28/36 those are the numbers for your mortgage.  Never pay more than 28% of your gross income for the PITI mortgage payment and no more than 36% including all your debts.  If you can’t buy a home within in these standards, then rent.  These were standard numbers in the 80’s – now with subprime loans, the standards were lost in the ether and many folks are in over their heads.  It’s quite sad and could easily have been avoided with good advice.

If any of these signs apply to you maybe it’s time for a wake up call.  Start saving and live below your means.  Chip away at your debt.  It’s amazing how fast you can pay down debt when you start to pay attention. R Begley

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Why do I tell you that credit cards are a (necessary) evil?   What is this all about?  Am I just bitter old pontificating poop?  Please let 2 of my bank’s user agreements explain.  Here is a quote from my WaMu (A major 2^nd tier US bank) terms of agreement:  You know, that agreement that nobody bothers to read, and is often quoted by their alleged customer service reps:

                9. Account Changes.  We have the right to change any part of this Agreement or add or remove any term, condition, or requirement.  If permitted by law, the change may be applied to any account balance existing at the time of the change.  We will give you written notice prior to the effective date of any such change, if required by law. (Emphasis added)

Just in case you think this is just WaMu, here is the same type of clause quoted from my HSBC card:

                7.1 Amendments to this agreement  We may amend or delete any term of this Agreement or add new terms anytime, without limitation.  We have the right to change your APR’s, fees and other terms at any time, for any reason, including, but not limited to, any change in your credit history, credit obligations, account performance, use of your credit lines with us or any other creditor, or our     financial return.  … Any change in terms will govern your Account as of the stated effective date and will.   As permitted by law and at our option, apply to transactions made on or after the effective date and to any outstanding balances. (Emphasis added)

Bottom line:  Your great APR can be changed at any time for any reason and applied to your outstanding balances!  Who in their right mind would enter into a contract with another party where the terms can be changed at anytime?  This type of contract does not exist anywhere else in common law.  Its pro bank and anti consumer.  Too bad you don’t have lobbyists that are this good.  

Hiding in plain sight in the bottom of your file draw, in 6pt writing, the contract you have with your credit card company says it all.  I rest my case calling the only defence as my witness.

Now you know why running credit card balances can be hazardous to your wealth.  So here’s to our “friends” the credit card loan sharks who have lovely commercials offering you instant gratification and anything you want right now even you can’t afford it by just putting it on the plastic at 19.8% interest, if you pay on time that is, and calling you a freeloader if you pay your bill each month.  May you have many new freeloader customers.  With “friends” like these, who needs enemies?

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First:  Do you have enough financial pain?  Does it really hurt and you are F***ing sick of it?  Sick enough to choose to change.  If yes follow the plan, if no go back to sleep, keep playing the lottery and watching the harbour and lots of TV for your ship.  It’s coming in really soon.  Trust me; the government will take care of you in your old age.  Aliens will land and fix all the world’s problems and cancel all debts including yours. 

Simple plan version:

Increase income

Decrease outcome (expenses)

Save 10% minimum of your gross

Go Debtless (including mortgage)

Invest for yourself and your family’s future

Details to the simple plan

1.  Stop spending and cut up your credit cards.  Yes, cut them up – unless you have tremendous willpower and can keep them in your wallet and not listen to them when you open up your wallet – “use me – use me, I feel lonely and have some credit left on me”  - then cut them up.  Studies have been done which show the average person spends 15% more in the store using credit cards.  Most people don’t view them as money - it’s just plastic - so it’s just too damn easy.   Make it stick.  If you have issues with credit cards now with the usury interest rates banks charge, you will never get out of debt unless you really increase your income or lower your expenses dramatically.  If you feel really naked without your cards, keep one in your wallet for emergencies only.  And use it for emergencies only… when you break down on S1 motoring through the Anza Borrego Desert State Park and after waiting 5 hours the tow truck driver only takes VISA… not for those must gotta have on sale shoes. 

Tip:  You are never going to credit again unless you pay them off in full each month or you determine before had how to pay it off and stick to it.  Example: the dryer goes on the fritz and is toast.  You determine it is best to replace both the dryer and the ancient washer.  You negotiate a good price but $2,000 is not in your monthly budget.  You decide to stretch it out over a maximum of 90 days.  Before you buy you determine how and when to pay off your card.  Never buy without having a plan to pay it off exactly before you buy.

Strategy:  From now on no new loans unless an emergency or to increase your income (education or business expansion), until you pay off all other loans except your mortgage.

2.  Find out where you are now.  Write up a balance sheet for yourself – list all your assets and their approximate value – assets minus liabilities will give you your net worth.  Find your credit cards with the highest interest – we will whack them first.

Strategy:  Do the B word.  Yes, and you will have to stick with it until you are out – pre mortgage.  First, keep track of every penny spent for at least a week; write the results in a journal.  You gotta know where you are before you can choose a new direction. In Your Budget find frivolous expenses and cut them out – see how much you can save just by cutting out Starbucks, eating out, drinking buzzahol, ATM charges. The gym membership you never use?  Check your phone bills.  Are you paying for services that you rarely use?  How about the cable bill? Get vicious and get cracking – this is your financial life.  The pain will soon pass – only if you raise your head out of the sand.

Tip:  Keep TV watching to a minimum per week and find yourself a home based business.  You will save money with legitimate tax savings and increase your income.  Check with your local authorities and accountant.

3.  Determine how much money you have now saved for debt.  Pick the highest interest card and pay on it till it is gone.  Pay the minimums on the other cards.  Next take that payment, and add it to the next highest one until it’s gone.  You are now used to these payments and are seeing some progress – have a party when you get to a zero balance (don’t go into further debt – Ok – the object here is to own your own home free and clear, and spending only for regular monthly expenses)

4.  Put away into a savings account at regular intervals some money from each pay cheque.  Direct Deposit yourself.  Even if it’s $20 per pay cheque you must do this – you must see progress.  It adds up fast.  Our goal here is to build a safety net fund – a totally safe investment.  Your object is to get to 3 months total expenses if married and 6 months if single.  Look at that, you have now made your own credit card limit.  Instead of running to your cards for emergencies, you run to yourself. 

Tip:  Save money by renting a small apartment.  We lived (3 of us) in a lovely 500 sq ft apartment for 3.5 years paying off debt and saving for our down payment keeping expenses low before we bought our first home.  

Strategy:  You are going to pay off debt and save money at the same time!  Each month you are going to get a little richer:  having more in the bank and less in the debt. 

I didn’t say it was easy; however, it can be done.  Do your best to understand yourself and how you got where you are in the first place.  Read books on personal finance.  It’s your life.  Next time we will discuss the credit card industry – with friends like these who needs enemies?

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With the water at chin high, a helicopter throws down a ladder and they tell him to get in, mumbling with the water in his mouth, he again turns down the request for help for the faith of God. He arrives at the gates of heaven with broken faith and says to Peter, I thought God would grand me a miracle and I have been let down.” St. Peter chuckles and responds, “I don’t know what you’re complaining about, we sent you three boats and a helicopter.”

So many times I hear friends of mine (mostly devout Christians) talking about how they will become wealthy if it’s “the will of God”. And often times, it’s just used as an excuse to do nothing to further their acquisition of wealth. If God want’s them to be wealthy, he’ll provide… right?

At this point, it would be easy to throw in “God helps those who help themselves”. Only - the bible doesn’t say that. It was Benjamin Franklin! Still, I think ole’ Ben had a point - you can’t take it with you, nor will you be judged on material wealth when you die - but as long as you live your life in your faith, why not attain wealth as you go?

Don’t wait for the helicopter… jump in the first boat and start building your wealthy life!

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