Finances is half self control, mixed with one part economics, one part politics, two parts current events, and seasoned with math. This “book” ties together various finance and economic resources. This first page gives a brief overview of each one and links to further reading and resources.
Self Control
Self control is the most important aspect to personal finances. To live comfortably without worries, it is absolutely imperative that you live within your means. That means that you make more money than you spend. It’s simple, but it’s hard, because most of us didn’t have good role models growing up, and the entire culture from your school teachers to the news (let alone advertising) tells you the opposite.
I’m not going to spend much space here, because it’s relatively simple to understand. If you find yourself in debt, the absolute first step is to stop spending more than you make. The second step is to pay off your debt. There are multiple techniques to do it, but the most common is usually called a debt snowball—you put every dime of extra money toward paying off your smallest debt. Once that debt is paid, the same amount plus the money freed by the first debt are applied to the next debt. Every time you pay off a loan, the amount of money you have to apply to the next debt becomes bigger (just like a snowball rolling down the mountain).
Once you have paid off all your loans (other than a home mortgage), many families find they can pay off their mortgage within five to seven years. Two things have happened during this time: 1) You have grown accustomed to living within your means, and 2) You have known the pain of paying off your debts. At this point, you probably have well over $2000 extra a month to save. Budget a small amount to living, and use the rest to save for your long term goals (owning your own business, retiring early, taking missions trips, owning a ranch, etc.).
Debt elimination and budgeting are huge topics, and I really don’t have anything novel to add. I do highly recommend reading the book, The Millionaire Next Door, for its countercultural research that the most successful people are thrifty, monogamous families.
Economics
You absolutely need to have a modicum of economic understanding in order to make sound financial decisions, so I’ve put the economic issue next. The key piece of economic understanding that you need to know is that money’s value is not constant, and that having a certain amount does not guarantee anything.
Here’s a simple example. You are a poor nursing student and you have $100 a month to use for your personal expenses. If everything you normally buy costs exactly $100, you break even. If the price drops by half, you now have $50 extra to spend at the end of the month. You are now richer, even though you did not make any extra money. On the other hand, if you get a 100% raise to $200 a month, but price double, you are no richer or poorer— you still break even.
The application of the lesson is simple. You can become poorer even though the amount of money in your bank and retirement accounts grows. Value is now the same as money. (Becoming poorer despite having more money is usually caused by inflation, which is explained later.) There is a whole lot more to understanding economics in regards to financial decisions, but that is the most important.
Politics and Current Events
I’m going to deal with these two things together, because it is changes in politics that truly influence financial decisions, so you can think of it in terms of current events (and taxes). For example, in 2007, as gas prices soared and oil company profits soared, politicians began to talk about special taxes to confiscate these “obscene profits.” In another example, candidate Obama promised no tax increase for households making less than $250,000, but president Obama recently said he is “agnostic” about tax increases. A potential tax increase could seriously affect your finances.
The key thing about politics is that reporting is often skewed by those reporting it. So for political news affecting finances, I prefer to read libertarian news and commentary, because they hate both conservative and liberal politics. My absolute favorite source of political information is FreedomWatch with Judge Andrew Napolitano. (Lewrockwell.com is the main site I read for this, and they regularly feature articles by the economic commentators I mention below.)
Current events are important, because they effect the value of money and investments. Prices are just information about people’s values, and their values change depending on their circumstances. For example, the WHI trial was stopped because they thought that the estrogen may have been causing cancer. Overnight, the value of Wyeth (the maker of Premarin and Prempro) dropped by half. The rest of Wyeth’s products were sound, and the company was in no danger of losing half its revenue, so I bought Wyeth stock, and the price went back up to its previous level within the year. I ended up almost doubling my money (unfortunately, at the time, I didn’t have much money to invest, so double not much is only a little bit more but the principle is the same).
Other important current events to keep track of include the Federal Reserve’s actions, laws that affect you or your investments, wars, global trade, and elections. Of course it’s best if your source of current events is filtered and explained by someone knowledgeable about economics. The important thing to remember about current events and predictions is that even though an “investment guru” may be right about what is going to happen, if the timing is off (or your timing), then you might still lose money. A few of my favorite writers on this matter include:
- Peter Schiff: CEO of EuroPacific Capital, he predicted the real estate crash. He has an excellent book (Crash Proof 2.0), a Youtube channel, an internet radio show, and regularly writes articles. I also highly recommend these two seminars.
- Gary North has been writing about financial issues for years and warned his readers to get out of the stock market before the 2008 crash. His writings are a bit technical but well worth the reading. He also has a paid membership website with additional articles, has written a 20 volume economic commentary on the Bible, and maintains a debt elimination website. (He even has a “how to study” guide.)
- Marc Faber is best known for predicting the 1987 stock market crash known as Black Monday one week before it happened. He publishes the Gloom Boom & Doom Report.
All three of them agree that current U.S. government policies will ultimately lead to inflation and loss of value for the dollar. All agree that gold is currently a good hedge against inflation.
Some looming political current events
There are two terms that you should be familiar with given the current economic and global events. The first is sovereign risk. This refers to the risk that a country will not pay its debts. It can be done by outright repudiation, such as Hitler did in the 1930s, or by announcing inability to pay, such as Mexico did in the 1980s, or more commonly, a country can inflate (print money) and then pay its debts with worthless currency. The reason sovereign debt is the buzz word of the day is because of Greece and the so-called PIGS countries (Portugal, Italy, Greece, and Spain). All of them are Eurozone members who have very high deficit to GDP ratios and debt to GDP ratios. The fear is that they will not be able to pay back their loans. As Eurozone members, they do not have the ability to print money, so they cannot even pretend to pay back their debt with worthless money. The big question is whether the other Eurozone countries will bail out the PIGS.
Two reasons you should care about sovereign risk: 1) It affects investment decisions, and 2) The United States deficit to GDP figures are almost as high as Greece’s (something like 12% vs 12.8%). But for some reason, most people (esp. Americans) are blind to the fact that the United States is now a high risk investment. Worldwide, however, the U.S. government has had a much harder time selling bonds. If the U.S. government cannot sell enough bonds to cover its operating cost…it’s anyone’s call.
The second term you should be familiar with is regime uncertainty. This occurs when investors do not want to risk their money for fear of actions the government could take. For example, 2007, with record oil and gas prices and oil company profits, U.S. politicians began to talk about special taxes on just oil companies. One congressman, Maxine Waters, even threatened to nationalize the oil companies. Talk like that most likely discouraged potential investors from investing in oil companies. (Who wants to own a company the U.S. government is going to take over?)
Other causes of regime uncertainty recently include the 2008-2009 bailouts, possible Cap and Trade legislation, healthcare reform, and the circumventing of bankruptcy laws in the Chrysler case.
Math
Yes, I’m looking at you K____! T____! C____! The good news is that you don’t have to do most of the math yourself. Spreadsheets can do most of the math for you, and if the formula is too complicated, there are plenty of financial calculators on the internet to calculate everything from mortgage interest to capital gains tax. You can also use personal finance software, such as Quicken.
Spreadsheets
You need to use a spreadsheet for your budgeting and long term planning. Think of it as smart graph paper. Every block (cell) has an address made up of its column (a letter) and its row (a number). So the first cell is A1, the next to the right is A2, etc. If you want to perform math on some cells, just type “=” and then a formula. So if you want to add 100 to cell A2, you type “=A2+100”. If you want to subtract the contents of A3 from A2, type “=A2-A3”. You can also use more advanced functions such as sum and average.
The most common spreadsheet is Excel, which is part of Microsoft Office. While you are still a student, you can purchase Office from the Bookstore at a 90% discount. You may want to consider doing so. Alternatively, you can download OpenOffice for free.
The budget spreadsheet at the bottom of this page can be opened in either spreadsheet and already contains common expenses you may encounter and formulas to track your cash flow.
What next?
This is just a brief introduction to these issues. We will explore each one on the next few pages.
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