The sky is falling….

The past few weeks have been very trying for those who work for financial firms. With the markets all over the place and uncertainty about a government ordained rescue / bail out / investment I’m glad to see that there is one man who’s not losing his cool over the matter. Well okay maybe two men. John Bogle and Warren Buffett. If you search for video interviews of Mr. Bogle on Bloomberg or Morningstar you’ll find that he keeps saying the same thing. What’s even better is that he’s been saying that same thing for well over 20 years!! It doesn’t get any more consistent than that folks.

If you’re new to investing I would highly recommend that you purchase, or borrow from your local library, his book “The Little Book of Common Sense Investing” it contains those invaluable pearls of wisdom that can seem simple at first blush, but hold mountains of truth.

The Evolving Gentleman hereby tips is hat to John C. Bogle, founder of the Vanguard Group and champion of the everyday man.

I’m writing this week about the “financial crisis” because it didn’t have to be. While it’s impossible to pin down the exact cause of it, we can safely say that the motivating factor for all the causes was greed. We all know that we shouldn’t spend more than we earn, yet millions of people do exactly the opposite every year, in the US the average consumer credit card debt is around $40,000 last time I checked. Pile on a home mortgage, an auto loan, and you’ve got the makings of a mess. When we let businesses do that, and do it in a much larger scale, we’re really playing with fire. Add in investments in securities instruments that a lot of people barely understand and can’t figure out how to price… well you have the situation we’re currently in. All is not lost however, the stock markets will once again return to their patterns of growth. It’s what they do. Time after time. Cycle after cycle.

I’m not going to offer you advice on what to do with your investments, because I would say now looks like a good time to be buying investments. Nor can I offer you advice on how to survive a possible economic downturn, because you needed to prepare 5 years ago, anything you do now will most likely feel like too little, too late.

How do we avoid making these mistakes next time? Simple, don’t have debt you can’t afford. Some things it’s nearly impossible not to have, for example a home mortgage. The prices of homes over the past 3 decades has made it nearly impossible for the middling people (like yours truly) to pay cash for a home. While it may be necessary, you can protect yourself by being smart about it. For example if long term interest rates are near historic lows, get a fixed APR on your mortgage. If rates are at historic lows they’re not likely to go down much more. They’re actually more likely to rise, so if you get an adjustable rate mortgage you’ve almost guaranteed yourself an increasing mortgage payment. I know way too many “smart” people who did this and they’re now in danger of losing their homes.

Another way you can protect yourself is to not buy more home than you can afford. I understand the temptation, I do. I too would like to have one of those homes you see on Cribs, or other celebrity shows, but I’m not a celebrity, I don’t have royalties from my last album coming in so I can’t afford a place like that, and most likely neither can you. Stay within your means, you can always trade up later if you need or want to. Additionally don’t over pay for what you’re buying. A few years ago homes in the US were selling for more than the asking price. It was what was termed “a sellers market”. When you go to buy a home ask yourself how much you’d pay in rent for the place. If your mortgage and taxes, etc. are the same or less than what you’d pay in rent consider the price about right. (The logic of this comes from the fact that when a landlord rents a place out he must incur all the expenses a home owner does, mortgage, taxes, etc., and make a little profit on top of that. So if your all in number as an owner would be higher than you’d be willing to pay in rent for the property, you’re paying too much for the property.)

Now I know that someone will comment that I’m not factoring in the tax advantage of owning property or the benefits of increasing equity in the home, to which I can only say they’re right. Because what’s important is that you’re able to make those monthly mortgage payments without straining yourself to do so. Tax breaks are nice, equity is nice, but they don’t help you pay the bills month to month, you need to be concerned about your monthly cash flows. Whatever you get back from the tax man at the end of the year is bonus money.

Next up is personal savings. As the wonderful book “The Richest Man in Babylon” states, 1/10 of all you earn is yours to keep. It doesn’t really matter where you put it, your bank, a mutual fund, your 401k, buried in a tin in the back yard; keep 1/10 of what you earn for yourself. Meaning live on 90% of what you earn. Does that mean cutting back on the luxuries for some of us? Yes! For those that are living paycheck to paycheck I know that’s very tough to do. I won’t deny that in some situations it’s nearly impossible, but try. If when you get a raise you put that money in the bank you’ll be starting. And after all you were surviving, perhaps barely, without the raise before, so hold on to that money.

Holding on to our money brings us to credit cards. These too are almost impossible to live without. But we really need to try and live without them. Keep one around for your emergency expenses, like buying a last minute ticket to fly across the country for a family emergency. Don’t use it for your everyday expenses, unless you’re getting rewards points and you pay it off every month. However I’ve found that with most people as long as the money is still in their bank account they’ll spend that money over and over until it’s not in their account anymore. Also if you carry a balance on your credit card you’re paying interest on that money, and most credit cards aren’t low interest. So why give money to someone who hasn’t really given you anything in return for it? (If you like to do that you can send it to me, at least I’ve given you these lovely posts to read.) The best advice I can give is don’t use the credit card for everyday items, use a debit card. Most merchants actually prefer debit cars as well since the transaction charges are less for them on debit cards than credit cards.

If the bankers had only acted responsibly, and protected consumers, and businesses, from themselves we wouldn't be in the mess we're currently in, at the very least it wouldn't be this big.

Acting in a responsible way is the way of a gentleman, in case you were wondering the relevance to this blog.

I think that’s enough for today, and I hope the length of this post makes up for my silence over the past months. I won’t bore you with details, it’s been a blur of a year.