Personal Finance And Investing Archives: Personal Finance
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17 January 2009
What We Should Fear Volume One: Inflation
The economy is always fraught with peril. Your savings and investments are always subject to risk, and it’s your job to protect them. Unfortunately, if it were easy to identify the risks out there, we’d do a better job of avoiding them. One problem that seems to loom in the future of every investment decision is monetary policy. The current crisis is one of deflation. People have less money and feel less secure, so they spend less money. This means that companies have to charge lower prices and make less money, which leads to layoffs, which leads to people having less money and feeling less secure.
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4 January 2009
Saving: The Best Kind Of Investing
Benjamin Franklin once famously said “A penny saved is a penny earned.” But Ben was seriously undervaluing the value of savings. A penny saved is usually worth considerably more than a penny earned, and this is something you should always consider in your daily life. You may wonder how a penny saved can be more valuable than a penny earned, but it’s very simple if you think about it. Imagine for a moment that you purchase an $80 DVD player. In this theoretical situation, you make $10 per hour and work an eight hour day, earning $80. The difference between the $80 you spent on the DVD player and the $80 you made at work is: you have to pay taxes on the $80 from work. So, even though you’ve earned $80 and spent $80, you’re actually behind where you started.
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28 December 2008
Is It Too Late For An Investing Strategy?
Many people were caught unaware by the economic chaos of 2008. They watched as retirement plans that they had been considering secure “money in the bank” lost value at a rate they’d never seen before. To be fair, except for those who were alive during the great depression, those kind of losses were unprecedented. According to the Federal Reserve, the net worth of America decreased by over 11% from the 3rd quarter of 2007 to the 3rd quarter of 2008. This means that, on average, most people have worked hard the past year to be worse off financially than they were the year before. However, that logic applies a misconception that has driven most Americans’ investment strategy.
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21 December 2008
Getting Debt Under Control
As individuals, we often represent a microcosm of the country. In 2006, the US savings rate went negative, and it remained anemic for quite a while thereafter. At the time there was some beard-wringing; but ultimately some argued that this was nothing to worry about, because our stocks and houses were worth so much more. The obvious problem with that logic has become clear: it doesn’t take into account gains or declines in asset value. So when you have a sharp and sudden decrease in those asset prices, your negative savings rate is even worse than it would appear at face value.
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14 December 2008
Finding Your Net Worth
Net Worth is the value of your assets less the value of your liabilities. It sounds very simple, and it is in theory, except that each of those key words: value, assets, liabilities can be a bit hard to interpret. Moreover, as much as we may want them to be, they are not static. Even the value of your very liquid assets, including your cash, is changing. So starting with the basics.
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