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8.03.2011

When Will Savings Account Rates Go Back Up?

Some people claim that mattresses pay out better interest rates these days than savings accounts. While that is a bit facetious, many long-term savers have become dismayed by the extremely paltry savings rates that banks have been offering the past 3-4 years. Most banks currently pay interest rates less than 1%, and some pay much less than that. Obviously, savings accounts aren't a way for anyone to get rich these days.

About a decade ago, it wouldn't be that terribly difficult to find a bank that paid out 5-6% in interest. This makes a world of a difference for savers, especially those nearing retirement. If you had $100,000 in the bank, you would be collecting $5000-$6000 per year on your savings accounts, and nowadays, you'd be rather fortunate to be making a $1000 per year. 

If you made your retirement calculations a decade ago, you probably didn't imagine a world of less than 1% in interest rates facing your account. So naturally, you're probably wondering--when will the higher rates return? There is not necessarily a clear answer. If the United States economy takes off again, then the federal reserve will start to raise rates. But as long as unemployment remains high, I doubt the federal reserve will raise rates. Ask yourself when you think American unemployment will once again return to the 6-7% range, and then you can get an idea of when you can expect to earn 3% or so on your savings account. The only way the federal reserve will raise rates is if inflation takes off or unemployment declines sharply. 

When Am I Ready To Take Out A Mortgage?

During this past decade, many of us became spoiled. Some banks were offering mortgages with hardly any money down, and others were offering future homeowners the opportunity to buy a house and only pay the mortgage interest for the first few years. Obviously, this was not a good formula for success. The recession of 2008 hit the housing industry hard, and it still hasn't recovered.

Because of this, banks have drastically sharpened their lending standards and criteria--some of this has been mandated by the federal government, and some of it is a desire by banks to take toxic assets off of their balance sheets. Because of this, future homeowners must go to greater lengths to prove that they can afford a home than they had to in years past.

This is not such a bad thing, though. The more money you can contribute up front to a down payment, the lower the amount of your wealth that you have to ship to banks in the form of interest payments. The best advice to follow is that you should prepare for a mortgage the same way our grandparents did. Make sure that you can make a 20% downpayment on a home, and do not purchase a house that exceeds 5x your annual income. If you follow this conservative advice, you will be fine in the long-run. You don't want to stretch yourself too thin and find the local bank foreclosing on you when another recession hits us here in a few years. 

8.02.2011

What Should I Do If I Get A Pay Cut?

Pay cuts are awful. Most people assume that every year they spend on a job will lead to increased earnings. Who hasn't come to expect a 3-5% raise for each year they spend on the job? It's perfectly natural. Even though we all know that we shouldn't be counting our chickens before they hatch, we oftentimes do.

And that's a problem. We tend to think of stagnating wages as the enemy, but a sharp pay cut can be troublesome as well. Whether it be new ownership, poor performance, or a poor economic climate, there are plenty of factors that can cause someone to endure a pay cut. When this happens, you will probably feel the lowest you have ever felt in your life, and you'll have no idea where to go from here.

You might start shopping for a new job, think about quitting, or do both. You might consider protesting the pay cut, pointing to your superior performance in the work place, and demand that your employer reconsider their decision. However, let's say you are stuck with a pay cut--what should you do?

The first thing you should do is make sure you have enough money to cover your basic expenses--gas, mortgage, utilities, and food. If you no longer have enough money to meet these needs, you need to consider severely downsizing your living costs. If you are still earning enough money to meet these financial obligations, you should cut everything else from your life until your once again a secure financial footing. No matter what happens, you should avoid credit card debt at all costs. It will eat you alive. A year or two of pain on a low-income is much preferable to the alternative of jeopardizing yourself for decades to come.

8.01.2011

When To Start Investing?

I think that every household should have 2-3 months in expenses covered before they even begin thinking about investing. After all, when you buy a stock, you should be intending to hold it for the long-term. However, if you are short on cash to meet everyday expenses, you might have to sell some of your stock to meet your everyday needs. This is not a good situation.

Generally speaking, the odds are decent that the time you need to have money could also be a time when your stocks aren't performing well. Think about it--stocks go down when there is a recession because companies aren't making as much money. Do you think that you're more likely to need money during a recession or during times of economic expansion? Most likely, during a recession. If you have to sell your stocks at this time, you'll most likely have to take a 10-30% loss, and this is not a good way to live.

A much better approach would be to make sure that you have enough liquidity on hand. Lehman Brothers, the legendary Wall Street firm, was worth billions upon billions of dollars, but they went bankrupt in the fall of 2008 because they had tied up too much of their money and didn't have enough cash to meet everyday expenses. And the same could happen to you.

Get in the habit of regularly setting aside $50-$100 a month for an emergency fund, and quickly replenish any funds that you have to take out to meet a short-term need. If you get in the habit of regularly putting aside money, you will not have to jeopardize your long-term fiscal health. Having to put $1000s of dollars on your credit card is the surest way to shoot yourself in the foot, and you will end up paying 10%+ on your debt. You can't get ahead making these kinds of decisions. Focus on having enough cash on hand, even if that means scaling back your lifestyle, and you'll be surprised by how many of your problems will disappear. 

7.31.2011

Should I Not Pay My Bills If I'm Starting A Business?

There is nothing harder than starting a business. Trust me, I know. When I first started blogging, I thought it would be a walk in the park. I thought plenty of readers would flock to my content, and I figured I'd be raking in hundreds of dollars within no time. Unfortunately, reality is much harsher than that--I haven't made diddly squat, and it's incredibly difficult to constantly think of topics to blog about. But still, I trudge on.

Likewise, it can be difficult for those starting a business to decide which bills to pay. You probably aren't spending a lot of time at the office if you're starting your own business--or even harder yet, you're not bringing in any income while your business tries to kick start itself off the ground. If you have to decide whether or not to pay your bills or keep your business dream going, the choice you have to make could be a daunting task.

What's worse--missing a water bill or having your dreams destroyed? Do you decide to throw that extra $500 at a business improvement, or do you skip a credit card bill? These are the types of decisions facing plenty of small business owners every day, and unfortunately, there is no clear right answer.

For me, I would make sure I paid my mortgage, electric, water, and other utility bills. These are essentials for basic living, and have to come before your business. For other costs, I would pay the bill, and then cancel the service so I could focus on my business. Who needs TV anyway--that just means more time you have to throw at your business. There is no clear right or wrong answer, but I do think the smartest thing you can do is pay for the bare essentials, cancel everything else, and the fanatically focus on growing your business. In the long-term, I think this will make you the happiest.

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