Given the posts I made earlier tonight, I’ve been thinking that instead of just outlining the problems of today (and how much worse it’s going to get) I should talk a bit about what to do with your money to allow you to keep more if it during this downturn – or worse – of the economy. So shooting from the hip, here are my thoughts.
1) Pay down debt. If you’re one of the idiots who bought more house than you could afford, or who took out HELOC’s and second mortgages to “access your home equity” this doesn’t apply to you. You’re toast. You’re the problem. For anyone who has a reasonable amount of debt – which I’ll arbitrarily define as totaling no more than 50% of your gross annual pay – I suggest paying it down as fast as possible.
When the shit hits the fan, you need to be able to live as long as possible on your savings. Just imagine how much money you’d have each month if you didn’t have any payments! If you’ve got a car payment, sell the freaking car to get rid of the debt and payments. Buy a cheap car that runs good. Build up a small emergency fund by making minimum payments on everything and saving every dime you can. You need at least one month’s worth of expenses saved up.
Then (as Dave Ramsey would say) “act your wage”. Live on less than you make so you can start paying off the debts. Stop eating out, stop renting movies, get rid of your cable or satellite service, collect coupons, etc. Cut your bills to a minimum and get out of debt.
2) Pile up cash. Continue your frugal budget and save at least 6 months worth of expenses. This money needs to be in your local FDIC insured bank in a simple savings account. I don’t care about the interest rate – the object here is to save money, not grow it. It needs to be easily accessible, so that means no CD’s or other investments. This is your cushion for the dismal day when you don’t have a job.
That 6 months of expenses you save gives you time to plan, to look for a better job, to avoid despair, if and when you don’t have an income.
3) Fund your retirement. Save at least 10% (and you’re much better off if you can save 15 or 20%) of your gross pay in an IRA. Use your 401k at work if you have one. Most employers have some sort of matching program, so be sure to contribute enough to get the full employer match. Put the rest into a self funded IRA – you can open an account online with for as little as $50. I use Scottrade and TD Ameritrade, but there are dozens of others. Just do it!
I think a Roth IRA is best – taxes WILL be going up over the coming decades. A Roth IRA is funded with after tax dollars, and the earnings are tax free. That might not be much difference right now, but it will when tax rates hit 50 and 60%. (If that seems extreme and alarmist to you, just wait. I’ll have more to say later!)
If you’re putting in a big pile of money, be sure to spread it out among various large funds. Be sure to include international funds (to take advantage of the tanking dollar) and I don’t think you can go wrong in the long run by putting a decent chunk (say 10%) into a gold or silver fund. 10 years from now you’ll be glad you did.
Personally, I’d stay away from Asia, as the tightly regulated economy (and zero transparency in the numbers the governments provide) will eventually drag them down. The China bubble may be popping now – although most “experts” say that the Chinese government will keep things propped up through the Olympic games later this year.
If you’re just starting out, pick a few good index funds and contribute each month. You’ll be automatically dollar cost averaging, which in effect allows you to buy at a lower average price.
4) Invest in staples. No, not the office supply company (I don’t have an opinion on them) I mean consumer staples – the things everyone needs regardless of the economy or job situation. This is stuff like food and clothing. As times get tougher, people will spend as little as possible on everything – but they have to eat.
Where’s the cheapest place to buy food and clothing? Wal Mart. As sales go down at the Gap, Dillards, Kroger, etc, look for them to go up at Wal Mart. Target might be ok as well, but I think Wal Mart sales will grow faster – so the stock price should rise more over time. McDonalds and other cheap fast food should also do better than average.
5) Stuff. I don’t have time to get into this in the detail it deserves right now, but “stuff” will become more valuable as the dollar is inflated away. By stuff I mean things like farm land, apartment buildings, and rental property. We’re nowhere near the bottom yet in the real estate market, so there’s no hurry on this one. But in a year or two you should be able (if you’ve saved and invested) to pick up valuable property for 50 to 60% off today’s prices.
Look for property in retirement areas, such as Florida, southern California, and Arizona. Look for farm land in Nebraska and Kansas – possibly areas of Texas and Oklahoma that receive adequate rain. If it’s in a windy area, so much the better, as you may be able to lease small sections to energy companies for wind turbines. It may sound crazy right now, but there will be fortunes made in wind energy over the next 20 years. There’s too much to go into here, but Google “peak oil” sometime. We’ll need energy, and wind is relatively cheap.
6) Tin foil hat stuff. I don’t know what the price of gold or silver will be next month or next year. But in my opinion, we are watching an epic devaluation of the dollar. Until we stop spending more than we make (at the personal, local, state, and federal levels) the dollar will continue to lose value. Conversely, things priced in dollars will continue to rise long term. Things like gold and silver and oil. It’ll be a bumpy ride, but 20 years from now, all of these will be much higher than they are today.
1/10 oz gold coins on eBay are going for about $100, while 1 oz silver coins are about $20. Pick one and buy a coin or two every month. This isn’t something to turn around for a quick profit – this is your insurance against a 1930’s type depression, or (more likely IMHO) hyperinflation like 1930’s Germany, or Argentina in the 1980’s. We’re inflating the money supply faster than ever, and the law of supply and demand hasn’t been repealed.
Remind me to talk more about inflation, deflation, and peak oil sometime. It involves M3 and the huge unfunded Social Security and Medicare mandates – which are the major reasons the dollar will continue down. Deficit? You ain’t seen nothing yet!
gk
Effor's Blog 