Previous articles have discussed various aspects of debt management, including changing one’s approach to debt. Those changes can included reducing the total amount of debt, reducing the number of debts, looking at different financing options, and understanding the difference between a positive debt that leads to long term positive financial results, and negative debt that only produces expensed and creates no benefits.
One of the golden rules of debt is related to the last distinction of a positive or a negative debt. A positive debt incudes debt that is finances an asset that produces income that exceeds the costs of debt service and the other costs associated with that asset. An investment in an apartment building that produces a positive cash flow each month is an example of a positive debt.
Another kind of positive debt would include an educational loan that allows someone to find employment that produces a higher income, even after taking the educational debt payment into account. These very same debts could become a negative debt if the investment has a negative cash flow or if the educational loan doesn’t lead to a job or a pay raise.
While managing or reducing debt can be a primary financial goal, sustainable financial stability is much more likely to happen when you have assets working for you. Your assets can range from cash in a savings account or other low-risk paper asset, or a business or real estate investment that provides a positive cash flow every month.
If you don’t have any assets at all, it is probably smartest to start with a low risk asset like a savings account or precious metals. If you are going to use some kind of paper asset, it may be best to put it into an account that is not easily accessed to keep you from being tempted to spend it quickly.
Precious metals may fit into this kind of strategy, since you can’t just take a silver bar or a gold coin link 1 oz gold american eagle to the store and use it like a common currency. You have to first take it to a coin dealer and exchange it for regular money before you can spend it. Gold and silver have an additional advantage as it can be used as a hedge against currency fluctuations and inflation.
Even if your debts are far larger than your assets, having even a tiny amount of assets to your name could do wonders to make you feel better about your financial situation and your prospects for the future.
Previous posts on this site discussed how various online tools such as virtual databases and podcasts can be an important component of any business or project. The key advantages are often lower costs compared to how such tasks were accomplished before the widespread adoption of the Internet, and the flexibility that the web-based processes offer.
While these advantages are obvious for things that were first created online, for example tools like Twitter, the advantages exist for decidedly low tech products business cards. In spite of the wealth of online methods for connecting with potential clients, customers, or partners, including very popular social media platforms like Facebook and LinkedIn, success in business still often hinges on personal relationships. When meeting face-to-face, it may be second nature to exchange emails or phone numbers, but it always helps to back that up with something tangible like a business card.
No online description in the world can substitute for the feedback you get when you look at a new stack of your business cards for the first time. You often know, without having to put it into words, whether those cards will work for you. The logical conclusion is that the average person may have to try several different designs from different sources before settling on one that will work.
If you are planning to make several attempts at finding the right card, you should be systematic in your search for the best quality and the best value. It is easy to find low cost business cards online, and with a little bit of effort on a search engine it is easy to find where to find the cheapest business cards on the web. However, it isn’t so easy to find what business cards will work for you.
Once do find that perfect combination of price and quality, by all means keep using that company. If the price is low enough, get two or three different designs and use them all.
When traveling with a large amount of cash, or other monetary instruments like travelers checks, money orders, and bearer bonds, you should take common sense steps to protect yourself from unwanted attention, and you should also be aware of what legal issues you may have to address.
Travel within the United States
The US has some odd rules about traveling with money. While it is legal for anyone to travel with as much money on their person as they please, there are a variety of laws that were designed to stop criminal transfers of money that may put you at risk to having your money confiscated. Basically, many law enforcement authorities can confiscate cash is they believe that it may be involved with a criminal transaction. It does not matter if there is no real evidence of a crime, it is up to the opinion of the law enforcement representative. The only ways to avoid this kind of hassle is to either avoid traveling with large amounts of cash, or to have along with the cash documentation, for example business receipts from US Money Reserve, or banking transaction records, with you that provides a reasonable explanation for the cash.
Travel to or from the United States
If you are departing or arriving the US, there are no limits as to the amount of money a passenger can carry. However, passengers who are carrying currency, endorsed personal checks, travelers checks, gold or silver coins or bars, or securities that are valued at $10,000 or more must report the amount that they are carrying to US customs officials. Failure to do so can result in fines or confiscation of the money. This reporting requirement applies all the travelers in your group, for example a family. For example, if a family of three is traveling together, and they have $10,000 or more between them, they must to report these amounts.
Travel outside of the United States
When leaving the US, review the customs requirements of your destination country before you travel. Rules will vary by country, so be sure to check those laws and regulations before you fly, and if necessary make alternative plans before you fly.
Protecting your money from theft or other losses
When you carry cash with you on an airline trip, you should take some very basic steps to keep from becoming a victim of theft, or from losing your money by accident.
In days gone by, taking a holiday overseas meant changing dollars for another currency or ordering a stack of travelers’ checks to cash in while on vacation.
However, consumers are increasingly opting to use credit cards while abroad to save the hassle of having to preorder currency, as well as to avoid the greater risks involved with loss or theft.
For those who opt to use a credit card while on vacation, it is advisable to take a couple of precautionary steps before leaving the US.
First, contact your credit card provider and let them know you will be going to a different country and plan on using your card. There have been instances of accounts being frozen after they were flagged up as possibly fraudulent due to transactions outside the US.
Second, ensure that you have your lender’s contact details, including the hotline for lost or stolen cards, and that you have written your card number and expiration date down. While this isn’t essential, it may help save time when you are in the midst of a crisis.
Credit cards are undoubtedly a very convenient way to pay for items when traveling overseas, but there are some downsides that need to be taken into consideration before using your plastic.
At home in the US, cardholders may be used to paying for purchases on plastic without any additional charges unless the retailer specifies otherwise, but while overseas, there are a number of different charges that can make any transaction more expensive than its cash equivalent.
Interest rates are often hiked up for any overseas credit card use and some firms can charge as much as 2% more in interest, just for the privilege of using the card abroad. This may not seem that much, but this is in addition to the other charges that firms may levy.
Two of the biggest names in credit cards, Visa and MasterCard, both add an additional handling charge onto any international purchases. This is usually in the region of 1% and is on top of the interest rate applicable to the account.
Withdrawing cash from a credit card is seldom a good idea and a policy best reserved for absolute emergencies, as it tends to attract a higher rate of interest or charges from the credit card firm.
However, using your flexible friend to get money from a foreign ATM is even more expensive than back home.
Cardholders can be hit with two sets of ATM fees - one lot from the ATM provider, which is usually in the region of $1 to $3 per withdrawal - and the other from the credit card firm who tend to charge around $2 to $7 for a cash advance from an overseas ATM.
It is not unusual to find the total charges from a foreign ATM amounting to between $5-10 per withdrawal - a hefty sum that soon adds up.
If all of the above weren’t weighty enough, cardholders are often penalized with poor exchange rates.
When an item in a foreign currency is purchased with a credit card, the currency must be converted back into dollars. The exchange rates applied to credit card transactions are notoriously low and usually among the worst conversion rates on the market.
Although credit cards are a convenient choice when going abroad and worth considering for not only their ease of use, but security, it is essential that the additional charges and interest are added onto the holiday budget to prevent a nasty shock when the bill arrives as the suntan is fading.
This problem is usually having a point of view on an investment situation where you may have taken someone else’s word on it or never really given the question serious thought. One common financial example of this the use of a financial advisor to assist you in buying and selling stocks, mutual funds, or other investments. Whenever I consider that advice from this kind of source, I ask several questions about the source of the advice. Some basic ones may include the following:
- Does this advisor have anything to gain or lose by my decision?
- Is this advice based on the advisors own expertise or on someone else’s?
- Is this person following their on advice on that issue?
- Is the advice based on a fair analysis or a biased analysis?
- Is it to my advantage to even consider taking this advice?
- If the advisor makes any performance claim, can the claim be backed up?
- Does the advice make sense?
- After further investigation and research on my part, does the advice still make sense?
- Does not following the advice make better sense?
The current rash of mortgage problems in the US, issues like short sales because of underwater mortgages and foreclosures, is one example of this kind of decision problem in action. Many people got into this situation because they didn’t think about the consequences of taking out a home equity loan to buy expensive toys, or the possible negative consequences of an adjustable rate loan.
There are many more questions that one can ask, but the basic point is that every decision can be looked at in more than one way. It is to your advantage to ask a few questions and do at least a little work to understand what may be behind a piece of advice.
Next Lesson: Being Overconfident In Your Predictions
You can have the greatest system in the world for analyzing and solving your personal or business money problems, but you would be wasting your time if you were solving the wrong problem. This usually happens if you do not think through a problem before you start to solve it. To understand how to approach a particular problem you should understand at least these things about the problem:
A Mutual Fund Example
One example of solving the wrong problem is to pursue a high rate of return from a mutual fund investments without first deciding what kind of comparison or benchmark you should use to determine if the return is high enough. For example, index mutual funds that are designed to mirror the results of the Standard and Poor’s 500 index consistently outperform rough 80% of all mutual funds. The original problem may have been how to choose mutual funds with high returns. A better problem to solve would be how choose mutual funds which consistently perform better than the S&P 500.
Remember that most problems involving money usually involve something else besides money or mathematics. If you focus on the parts of the problem that are objective and that can be measured or solved with common with equations and spreadsheets, you may miss the most important part of the problem.
Next Lesson: Not Looking at All Sides of a Problem
Money Decision Problem 1: Not Taking the Time to Think About the Problem and the Decisions that Must Be Made
Before you make a financial decision, you have to know something about your needs, the effect your decision may have, and how you go about making a decision. Some common money decisions that often happens too quickly is what credit card you should have, whether to buy or sell a stock, or whether to go into debt to replace your boring old (and paid off) car for a shiny new one. Taking the time to make a proper decision can save you a lot of frustration and regret, especially if you do it consistently.
A Credit Card Example
Let’s look at the credit card situation more closely. There could be dozens of reasons why you suddenly decide that you need a new credit card. You might not have one at all, but one day you decide to rent a car and find out that you need a credit card. You might have a card already, but you find a way to transfer balances and reduce your interest rate for the first six months. Even if you think you need to take action right now, it always makes sense to think it through to see if it is the right decision for you. The following are just some of the questions you should ask yourself before you sign on the dotted line:
Once the background questions are settled and you have a good understanding of your overall situation, you have to start dealing with the decision making process. You should finish gathering any information that you need to make a decision. For credit cards, this would be things like late fees or other penalties, how much interest you will be charged, and what kind of no-interest grace period you have. These kinds of details should be spelled out in the agreement. If you don’t understand it, don’t sign it. If you don’t see it in the agreement, then it’s not part of the deal.
The next big steps are making the decision and carrying it out. If you decide to do something, then follow through. If you decide to do nothing, then take no action, no matter how tempting it may be. If you decide to change your mind, go through the same decision process. Don’t make the mistake of being logical and systematic the first time through and then being very informal the second time you wrestle with the same decision. Every decision is a combination of your analysis and your judgment. If you have a consistent process, you’ll likely improve the quality of both your analysis and your judgment.
Keep in mind that a credit card can turn out to be a long-term relationship. If you pay your bills in full every month, it can be a very happy and harmonious relationship. If you fall behind, it can turn real ugly real quick.
Next Lesson: Solving the Wrong Problem
If you’ve never had to budget before it can sometimes seem like an overwhelming task. There are all kinds of elaborate methods to create very exact budgets that track everything. For most of us, this is probably overkill and prevents us from getting to the task of actually saving money. To get started today you can do something very simple. Take all of your absolute necessary expenses. We’ll call these our fixed expenses. These are the things that we can’t stop paying without making some major life changes.
The next step is to list out your monthly income
Spouse Salary $2,000
Next you will need to think about how much you would like to save. You’ll need a cash buffer and to save for retirement. You may want to think about other goals such as your next car and whether or not you will save for your kids college education. This is the whole idea of pay yourself first. It represents a way to make sure you put your savings goal first.
The difference is then the amount you can spend on all the other things.
Obviously, you need to think about groceries, gas and everything else that you need day to day. I purposefully lump all of these items into one big general fund. Because they involve a large range of trade offs that you will need to think about. This is the opportunity to get creative.
You can think about what you truly value and use to make your life fulfilling. Personally, there is no way I could actually live without Internet access, but I could live without my NetFlix account. To save on gas I started carpooling and got a special fuel perks card. If I really want some purchase that I can’t afford perhaps I’ll find some coupons or cut back in other spots.
A great one we have started is cooking with our kids. We save money by not going out and our kids really enjoy it. I’m sure you can think of similar examples to help you cut back spending, but still enjoy life.
I’ve heard financial planning experts talk about cutting up credit cards and telling people to use a cash based system to manage their finances. I’ve typically thought didn’t apply to me. I always paid off my balance every month and had an excellent credit score. Recently, I wanted to tighten down how much my family spends on various purchases. We’ve always used credit cards for every day purchases, but the credit card bill tended to fluctuate every month based on the families desires. I’ve tried various mechanisms for tracking. I’ve said that we’re only going to spend X dollars a day etc. It seems there was always some special 1 time event or purchase that ended up on the card.
The problem is that the mental accounting the family had to do to stay on track just wasn’t working. Instead we switched to a complete cash based system. Each family member was given an envelope with a certain amount of cash for everything. If my wife finds bargains at the grocery store she can have a little extra the next time she goes to the beauty salon. If she decides she has to have that certain something at the grocery store and doesn’t have enough money for the salon then she will just have to live with a few of the grey hairs a little longer before her next color treatment.
After using the system for a month it has worked well for us and allowed us to stay on budget.
If you don’t currently own your the place you live in you may be missing out on one of the greatest opportunities in your life. Most of us are well aware that it is a buyers market and that homes are being sold dirt cheap. The other opportunity is the incredibly low prices on 30 year fixed mortgages. The last time they were even close was March of 2004 at 5.45%. If you look at the charts since 1971 this has rarely happenned and could truly be a once in a lifetime opportunity to have a low monthly payment on a loan. Even if you already have a home loan your payback period to refinance could be less than 2 years. The reason for that is you typically have to pay some fees to refinance your home. Let’s say you save $100 a month in mortgage payments by refinancing, but the fee is $2,400. Even with the lower payment it will take you 2 years to make up for the difference. If you plan on staying in your current home for more than 2 years it should certainly be considered. Over the next 30 years you would save $36,000.
Last night 20/20 featured an interesting segment on homes in foreclosure. They interviewed some urban pioneers in Michigan who are rebuilding an entire neighborhood one house at a time. The homes sold for $100-$500. They were in terrible shape. Most of them were either burned and partially destroyed. While it will probably take 10’s of thousands to repair them and the area is awful the pioneers were doing something very interesting. They were building a community. Instead of trying to go it alone they found other people that wanted to renovate this area. One by one they began attracting friends and family to come join them in their quest to rebuild this area.
I have no doubt that in ten years this will be some cool, hip part of Detroit that everyone wants to visit. An interesting example of creativity during a tough patch in our economy.