Posts from — January 2009

Last week Susie Gharib of PBS interviewed Warren Buffett, the following was an answer of his I found interesting.  Not necessarily because I agree that the government should intervene, but more because it shows a candor and the admission that we don’t know what’s going to happen when we start tweaking a free, or semi-free market.  Hat tip to Marginal Revolution.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?

WB: Always

Popularity: 1% [?]

No doubt about it, last year was atrocious when it came to the world of finance.  If you’re like me you watched your investments magically get cut in half like a Ginsu knife commercial.  It was a year that brought high costs, pay cuts, slow business and even layoffs.  So what can the average guy do to turn things around in 2009?  What new strategy can be implemented to see rapid gains and a replenishing of one’s finances?

Unfortunately, nothing too sexy, just the same dusty principles that many great men of finance have taught for ages — principles that all revolve around one grand idea: make less money go out and/or more money come in.

The reality is there’s no secret or magical formula when it comes to personal finance…it’s boring! No one knows the next hot stock, no matter how many degrees they hold or how many times they’ve appeared on CNBC.  No one knows where the bottom of the market is or when the economy will turn around.  And although many young brokers on Wall Street have tried (credit-default swaps), no one has figured out how to make money appear out of thin air.

Sure people catch a lucky break every now and then, people also win the lottery and get struck by lightening, it doesn’t mean anything.  What people have lost sight of, and what helped lead to our current mess, is that making money on a consistent basis takes self-control and discipline. It means making lots of small, but good decisions over a long period of time.

But, that message doesn’t sell books or DVD sets.  So, most people brush it off as old-fashioned and set off on their next get-rich-quick scheme only to find the pot of gold at the end of the rainbow is actually full of red ink.

The following points are probably ones you’ve heard a thousand times, but maybe it’s time you took them seriously.

1)  Live Within Your Means – Just because you can buy something, doesn’t mean you should.  All of us have something inside us that leaps with excitement when we buy something shiny and new, but within a few days, weeks or months, that feeling is gone and all we’re left with is less closet space.  I’m not saying you should stop buying new things altogether, I’m simply asking that we recognize our weakness and tendencies to justify buying things we don’t really need.

One must decide on a daily basis how much short-term comfort and pleasure they would like to sacrifice for long-term prosperity. There are a million factors that go into these decisions, but in the end life is about choices.  Each person must decide for themselves how much they are willing to sacrifice and plan their finances accordingly.  If you buy the brand new Land Rover now that’s fine, just don’t be surprised if your neighbor who bought the used Honda is doing a little better financially in five years.

2)  Create and Stick to a Budget - Two words: Wesabe and Mint.  These two completely-free online budgeting services are incredibly useful in helping one set up a detailed budget.  Not only do they automatically upload the information from your various bank and credit card accounts, they also allow you to tag purchases (groceries, entertainment, bills, etc.) and set spending limits for each.

If a person wanting to better their finances is not using one of these free and easy services they are missing out on a great opportunity.  The trick after setting up the account is checking it at regular intervals to monitor one’s progress.  This is the only way to consistently adjust your living habits to your budget (the purpose of making a budget in the first place).  If I know that I only have $100 left for the month to spend on groceries it will make the decision between filet mignon and chicken breast a much easier one.  Just like a business cannot begin to make progress without great accounting, an individual has no hope navigating the world of personal finance without a budget and an understanding of where they stand in comparison.

3)  Be Aggressive With Debt – The problem with debt is that you become a slave to another person or institution.  The whole point of money is to give one freedom, not bondage. There are times where taking on debt is necessary, maybe even advisable (student loans, exceptionally low interest rates, etc.), but for the most part it should be avoided like the plague.  Unfortunately, credit cards make taking on debt seem acceptable, even exciting.  When one finds himself in debt, the best tactic is to be incredibly aggressive in paying it down.  Everyone has seen the charts showing how expensive a purchase can become if one makes only the minimum payments, if you haven’t see here.

Pay down the debts with the highest interest rates first.  Also, don’t be afraid to call your credit card company and ask for a lower interest rate, in many cases they will help you out if you are adamant enough.  See here.  Debt is a dangerous thing for one’s finances because it always costs more than you want to pay. Most people understand this and struggle with more complex debt-related questions like whether to pay-off debt completely before investing, buying a house or renting, to consolidate or not.  Theses questions are highly dependent on the specific circumstances the person asking them, so I would be silly to offer any sweeping conclusions.  Do your homework, ask lots of questions and make a good decision.

4)  Max Out Your Roth IRA – Whenever one of my friends asks me what they should do with their extra income I always have the same question two questions for them: 1)  Have you started a Roth IRA  2)  If so, have you maxed out your contributions for the year?  If they answer no to either of these the answer is simple, get it done.  There are millions of different investment options available, but if you’re young and don’t make a significantly large income (more than $105,000 single filer) it is almost always the best option for you.

Exception*** If you’re employer offers to match your 401k, then max that out first and use whatever you have left to contribute to your Roth.

As I explained in a previous post,

A Roth IRA is different because while you get no tax break up front, your money grows tax-free in your account and when you take it out come retirement time, YOU PAY NO TAXES, not even on the earnings. Another way of saying it, traditional IRAs are “tax-deferred” and Roth IRAs are “tax-exempt” savings. American Funds has a great comparison chart comparing the two types.

For a good summary of the Roth IRA rules for 2009 see here.

5)  Educate Yourself – How much time do you invest in your financial education?  Chances are it is very little…probably less than the time you spend watching “The Office” each week.  It’s funny that for such an important aspect of our lives so many of us spend startlingly little time trying to educate ourselves.  It’s not surprising since much of the industry seems to thrive on making itself seem overly complicated – not to be understood by mere mortals.  Liars!  It’s not rocket science, even basic science for that matter.  It just takes some time and effort.

There are a lot of great books, blogs and classes out there to help you understand finance, but I’ll keep it simple and recommend two for 2009:

1)  A Random Walk Down Wall Street by Burton G Malkiel

2) I Will Teach You to Be Rich – Ramit Sethi’s Blog

Popularity: 3% [?]

Hurling oneself through the air has always been a favorite past time of man. Yet, for many years the private aviation industry has remained quite stagnant when it comes to new technology and design.

In 1978, the US produced more than 14,000 single-engine, piston-powered airplanes. As of 2007, that number was 2,000. A classic of the genre, the Cessna Skyhawk, is a slow, ugly beat that, save for a few refinements, looks today just like it did when it was introduced in 1955. Hoffman, pg 117.

Enter the Icon A5, a collaboration between a former F-16 pilot and a skateboard designer. With folding wings and the ability to take off from land or water, this new light-sport airplane represents what aviation should be – simple, free and adventurous.

I came across the A5 in the most recent issue of Wired Magazine (full article here). It caught my attention not only because of my background in aviation, but because it represents to me the excitement and energy surrounding innovation.

When people with a passion for their field embark on a journey to break the rules and make something better than its ever been made before, what’s not to get excited about?

The A-5 has the following stats:

• Wingspan: 34 feet

• Maximum Takeoff Wgt: 1,430 lbs

• Maximum Speed: 120 mph

• Range: 300 nautical miles

Popularity: 2% [?]