Attenzione: Traduzione tramite elaboratore: Amici benvenuti a petrolio.blogosfere.it/. Se parlassi la lingua deliziosa di italiano, Tradurrei questo blog io stesso. Per ora, tatto liberamente per trasmettere le vostre storia, in italiano, e li invierò per i nostri lettori italiani, o i vostri traduttori, e lavorerò felice con loro. Chao!
In the USA, making money off of other people’s debt has become big business. So big, in fact, that Ford has become a credit financing agency that makes cars and General Electric has become a credit financing agency that makes light bulbs and appliances. We have heard the former Chairman of the Federal Reserve Board, Alan Greenspan, recommend variable mortgage rates to people when the fix mortgage rates were some of the lowest in history. We see the US government printing money to pay bills and offering IOU’s to pay for imports from other countries. Is it any wonder that many Americans are confused about finances?
If the cost of fossil fuel is likely to climb in the future, getting a better handle on our understanding of money may be a smart first step in attempting to make sense of what to do. In this article, I want to cover a few “sacred cows” that turn out many times to be “false prophets” (and false profits) of economic success; namely, (1) education about finances and investment; (2) the economics of owning your home and the housing bubble; (3) the uses and abuses of credit cards; (4) economic life support for grown children; and (5) educational attainment as an automatic road to financial success.
This won’t be an advanced course, but a few things to encourage you to reconsider some of the messages you might have gotten about money from the media and encourage you to read more.
Wealth accumulation isn’t dependent on how much money you make. Wealth is the amount you have left over after your expenses are paid.
Most people miss this most basic financial fact. Whether you earn $100 or $100,000 a week, income doesn’t make you wealthy. Wealth is what you have left over. Therefore, a person earning a million dollars a year but spending 1.2 million is an accident waiting to happen. Instead of focusing on what your income is, look instead at how it squares with your expenses.
In other words, there are two ways to have more money: Make it or don’t spend it. As Alan Wartes has said:
Everything I don’t buy didn’t consume oil to mine, process, package, transport, and warehouse. It didn’t pour tons of carbon dioxide into the atmosphere. It didn’t outgas toxins into my home, or clog a landfill once I’m done with it…Seriously, stop spending.
Your Home is not an Asset or an ‘Investment.’
Your house, no matter how wonderful, is not an asset. An asset is something that puts money INTO your pocket. A liability takes money OUT of your pocket. Your mortgage takes money OUT of your pocket, and puts it INTO the bank’s pocket. When your home is totally paid for, you will still be taking money out of your pocket for property taxes, home repairs, etc. Your home is also not an “investment” because an “investment” is when you put money into something with the intent of making a profit.
Of course it is true that some people make a profit after selling their homes, and some people buy homes strictly with the intent of selling them to make a profit. However, most people buy homes to live in them, not to make a profit from them. It is true that most people hope that their homes will be worth more tomorrow than they paid for them today. Nevertheless, unless you bought your home temporarily with plans to sell it, it is not an investment. It is a liability that costs you money, not makes you money.
Using Your Home as an ATM is Risky Business
For those of you who have been taking large amounts of money out of your houses in the form of second mortgages or refinancing, the assumption has been that you will be able to, if necessary, sell your home and repay off that large mortgage. “Refinancing” one’s home used to be a rare event, engaged in reluctantly and only for the most dire of circumstances. Banks were responsible for the loans they made, and were reluctant to “bet” on an uncertain future. All of this changed when bankers no longer had to “hold” mortgage debt, and instead could package it and sell it off to governmental and retirement investors. A banker’s enthusiasm for making new loans changed attitudes. Now, it was “easy” to refinance and commercials on TV encouraged it as a solution to any kind of debt.
A giddiness seemed to take over, as housing prices continued to rise and mortgage rates fell in many areas and homeowners began to think of themselves as “rich” because they could have access to tens of thousands of dollars previously “doing nothing” as “equity,” either real (money paid toward the mortgage) or imagined (increased value of houses in a neighborhood). People began to rely on mortgage lenders to tell them whether or not they could afford huge mortgage payments. New “creative financing” emerged including mortgage loans with “no principle payments,” which meant lower monthly payments (at least for a while) and therefore greater “affordability.” Home mortgage assessors eagerly agreed that more and more homes were worth the inflated prices and therefore “credit worthy.” The house of cards continued to be built. People stopped thinking of debt as a “bad thing” and instead expected to remain in debt their entire lives. The question was no longer “Would this put me into greater debt?” and instead became “Can I cover this payment with my weekly paycheck?”
The Housing Bubble
The “housing bubble” is the belief that the price of housing has risen beyond its reasonable value and that when it “adjusts” itself back downward (when the bubble “pops,”) you will find yourself “upside down” on your mortgage, meaning that you will now have to pay money back to your bank in order to sell your home. After the price adjustment (a cycle that has happened repeatedly in the USA, even if it has not happened in your lifetime) will leave many Baby Boomers who were hoping to use cash made on their houses for retirement, going into their aging years owing more than ever with fewer resources to pay for them.
Secured Debt, Unsecured Debt, and Changes in the Bankruptcy Laws
Mortgage is a SECURED debt. Credit card debt is an UNSECURED debt, or at least it used to be. If you don’t pay your mortgage, you will lose your home. If you don’t pay your credit card, the right to USE your credit cards are removed. There was a time when a person who got into debt over their heads, could file for bankruptcy and make a fresh start. For most Americans, that time is over. Debt is such big business now, that powerful lobbying interests have changed the law to prevent anyone making more than a nominal amount from doing anything but debt repayment over time (Chapter 13). What does this mean? It means that those large credit card, hospital, car loans, house loans you took out, that you cannot repay will hang around anyway until they are paid, and the courts will decide how much of your cash in the future goes to pay off your creditors. There’s more to it, of course, but you get the idea.
Credit Card “Offers” and Credit Card Debt
Credit card offers for low or no interest rate for some period of time works on the optimism of human beings: “Tomorrow I will have more money to spend than I do today.” If you are wrong, you pay off not only what you owe, but you pay for all the time you were optimistically hoping that you’d have the cash to pay it off on time.
Don’t use credit cards for emergency purchases. Use them only for everyday items, and make sure your limit doesn’t exceed what you plan to spend each month. Put away “savings” for emergency needs. Every person has unexpected expenses and expenses that arise once a year or quarterly. Make sure your savings plan takes these types of expenses into account. Christmas or other holiday and gift giving shopping is one of those anticipated expenses. There was a time, as a little girl, when the people in my town used our hometown bank’s “Christmas Club.” A “Christmas Club” allowed you, expense free, to put away a few dollars every week or month for gift-giving. In December, you withdrew the cash and had fun shopping for loved ones. Most people today have never heard of such a plan. It may also sound odd to a lot of people today not to use credit cards to pay for large purchases you can’t afford, or to put money away in order to buy something you want. This is the power of a culture that now has no savings and lives on borrowed money.
Read a book like “Your Money or Your Life” and learn how other people save on a limited budget. Ask yourself if all of your “necessary expenses” like cell phone (or land line and cell phone) and cable television are really all that “necessary.”
If you are in credit card debt, try this: List every card you own, putting at the top the one with the largest interest rate. Pay that one off first, with the largest payments you can manage, paying the minimum on all others. When you have finished paying off this card, take this same amount and now put it toward the card next on your list. Continue until all cards are completely paid off. If you have money in the bank in savings, ask yourself if you are paying more out in credit card debt than you are making in interest. Some people are paying 18-32% in credit card debt and 1/2% interest on their savings account. Does that make financial sense?
If You are Smart Enough to Save it, You are Smart Enough to Learn to Invest It
The people investing the time and energy to learn about investments and wealth accumulation will take the lion’s share of the profits. Do not assume that you need to be an “expert” to decide on what to do with your money. During the Dot.com boom, investors were told that it was a “new economy” and the old rules of company’s needing to make a profit no longer applied. It didn’t make sense then, and it doesn’t make sense now. Use your common sense and don’t rely on “experts.” Read up on money and how it works. If you were smart enough to make the money, you are smart enough to learn how to invest it. If you use financial consultants, remember the rule of those spending the time investigating the investments will take the lion’s share of the profits. Do they recommend buys where they take no commissions? Unless they take a percentage, it’s doubtful. Maybe even if they do take a percentage. Use them as “consultants” if you must, but make your own decisions.
Don’t invest in “instruments,” but instead, know something about the companies and people that the “instrument” invests in. Learn about the economy as it is today, and read divergent points of view. Ask yourself what the wealthiest investors on the planet are doing right now, and ask yourself what they know that you don’t. Read the philosophies of successful investors such as Warren Buffet. Probably they have access to a lot more “inside” information than you ever will, but also there are different “levels” of investment opportunity. Before you invest or de-vest in anything, learn as much as you can from competing points of view. Know the difference between stocks, bonds, precious metals, T-bills, and what the US deficit has to do with you and your investment decisions. Search out traditional avenues such as the Wall Street Journal, as well as other writers such as Catherine Austin Fitts or Jim Rogers. Read about boom and bust times and how a national economy goes through booms and busts. Check out those who see the world as you do, as well as become familiar with those whose opinions you don’t share. Know what you agree with and why. Make sure you ask yourself “what is this person’s stake in convincing me of their opinion?” “Follow the money.”
It takes time to develop a savvy view on money. If you say “I don’t have the time,” pull out a TV program guide and count up the hours you spent last week watching TV shows. Devoting just 1⁄2 that time next week in your financial education will be an eye-opener. And don’t stop at one book. The Wealthy Barber, Young, Fabulous & Broke, Rich Dad, Poor Dad and so many more will give you points of view on wealth. Read, read, read and form your own opinions.
The Stock Market and a “Sure Thing”
Right before the stock market crash of 1929, a wealthy investor got a ‘tip’ that was a ‘sure thing’ from a lad shining his shoes. He sold his stocks that day because he believed when ‘everyone’ believed that the market was a ‘sure thing,’ it was clearly in trouble. Many people buy stocks after ‘everyone else’ has (at the ”top” of the market) and delay selling them until most others have (at the “bottom” of the market.) This tendency to be cautious about buying until it looks like a ‘sure thing,’ and the reluctance to lose money on that investment until it has dramatically lost much of its value is human nature. Stocks are investment “risks,” (which translates into money you can stand to lose.) Many of us can make 10%, 14%, even 20-30% a year on our money by paying off our credit cards and other debts or even our mortgages. These “savings” in interest payments are “sure things.”
Many intelligent people have been asking themselves “how can the stock market be at all-time highs when the economy is in such rough shape? iTulip.com provided me with one answer: International investors putting all their US debt to work. What will happen when their own faith in the US dollar begins to weaken?
A Millionaire’s Mindset
One can learn a lot by studying the habits of millionaires, as Thomas Stanley has done. One thing he learned was that most of them made their money learning how to ‘serve’ people better than others in businesses few of us would consider ‘glamorous.’ They worked hard, lived in modest homes, sent their kids to public schools, and tended to buy their cars by the pound, often used cars. They were more likely to have a JC Penny card than one from Neiman Marcus. They take time each month to look at their spending habits, spend more on trips to the tax accountant than trips to Europe, and shared one credit card between the spouses. They were exceptionally frugal people. They were often married to the same spouse throughout the lean years. One story told of a millionaire selling his business. He found his wife clipping coupons at the kitchen table. He handed her a check, her portion of the sales, for 3 million dollars. His wife took the check, said “Thank you. I really appreciate this. I really do…” and returned to her coupons. If you think people get rich by spending a lot of money, look into Dr. Stanley’s work and be prepared to be surprised.
“A fool without money becomes a bigger fool with a lot of money.” to paraphrase Robert T. Kiyosaki, author of the “Rich Dad, Poor Dad” series. Lottery winners often believe that now their problems are solved, as they have no more “money problems.” What most learn is how easy it is to get into greater debt if patterns of consumption and debt accumulation increase. Soon, they find themselves out of money, with huge outstanding loans on cars, real estate, and other purchases bought during the ‘gravy days.’
Higher Education: The Ticket to Success?
Check your premises. All of them. One belief we’ve come to rely on is that college and graduate school education is a ticket to success. Yet, many college graduates today are surprised to find no jobs or low paying jobs upon graduation. Pride and hubris can be a huge hurdle to overcome when times get tough. Those of us with advanced degrees might feel it “below us” to take a job outside of our field, even when no jobs in our field are available.
Especially for those of us who have found great success in educational achievement, “going back to school” might be a knee-jerk reaction to a weak job market. We sign on for more advanced training and educational debt when we cannot pay our current student loans in the dreamy hope that the next degree will give us a unique advantage over others in finding the right job. Yes, education has always been considered the ticket to success in the USA, but it isn’t universally so. Investigate what that degree will actually provide you vs the amount of time, money, lost wages and life experience you’ll spend getting it. Ask yourself whether that expensive private college or university will really pay for itself over time, and be realistic. Can you fit your degree program in after work in ‘night school,’ while still supporting your family? Is work-study an option? Student loans are also now a source of big revenues for financial institutions, and once educational loans accumulate, they cannot be gotten rid of.
One of our sacred cows is education, and I teach in a University and believe that it is a great opportunity for many people. However, I’ve also had students crying in my classroom, unable to pay their current student loans, busy accumulating more, and looking forward to a bleak low-wage job market. In spending money for education, as well as all other purchases, “buyer beware.” Base your decisions on future educational attainment on solid research, not platitudes and vague hopes. Talk to people in the field you want to enter BEFORE you apply to school. Ask them about job prospects and whether they see the field expanding or contracting. You may decide to enter a field with dwindling job opportunities, anyway, but you might do it AFTER you’ve saved up your resources (instead of getting deeper in debt) or AFTER you’ve spent six months trying to live off the rest of your income after the new student loan payments are deducted.
Adult Children on Economic Life Suport
For some people, “necessary expenses” include providing “supplementary income” to grown children, what Thomas Stanley calls “economic life support.” Are you really doing them a favor? Have your adult children come to rely on you for essential payments of rent, transportation or other basic living expenses? What will happen to them when you are no longer around to help them out financially or their inheritance runs out? The most valuable lesson a parent can teach is how to live within one’s means or how to generate more income when that becomes impossible. Handouts, no matter how well intentioned, can often backfire and teach financial dependency and irresponsibility, or reflect the parent’s needs to see their adult child “doing well” or “keeping up appearances.” An occasional gift or handout is one thing. Economic life support is another.
The Psychology of Money
There are many writers that believe that money is one of the avenues through which people can learn about themselves and their values. It is one of the most vitriolic arguments couples bring into psychotherapy. Differences about how to handle money are differences in worldviews and values. They are battles about whether a person can control anxiety and impulses or is willing to try. They are battles over whether someone else owes us a living, what our dreams are all about, who we imagine ourselves to be and to be worth. Many confuse these issues with the green paper itself. During hard times, or financial ruin, they commit suicide, abuse drugs, initiate divorce or refuse to face up to their financial trouble until they are forced to do so. Their “face to the world” becomes more important than the financial facts, and they misinterpret financial trouble with personal failings or self-worth. It is a mistake, especially considering that the most successful among us have faced financial ruin repeatedly before succeeding. The difference between how they handled it, and others might be summed up in the following: “I don’t have any money, but I’m not poor.” They looked financial ruin straight in the face before they had to, admitted temporary defeat and salvaged what they could, and went on.
Money, Peak Oil and The Future
With the debt we have in the USA right now, we are now utterly dependent on the goodwill of Countries such as Japan and China. In a complex web of relationship, they continue to support our debt, and, in the case of China, we continue to buy their stuff. That could change as our own heavy debt load, need to preserve our housing market from collapse with artificially low mortgage rates (and conversely low interest payment on our national bonds) makes other investments more attractive. One of the common sentiments among those in the Peak Oil Community is that each of us has to get out of debt, because Peak Oil is going to bring a sea of change. It is easier to shift your values voluntarily than to have those changes forced on you by the outside. If you can’t afford your lifestyle now, during these ‘gravy days,’ make the necessary changes now. If you do not see a bright future for fossil fuel, do the “unsexy” thing of getting out of debt and staying out of debt. At the very least, it will free up your income to pay for increased transportation and heating costs, recession and higher prices for all goods and give you greater choices and freedom of movement. That, by itself, is a smart move.