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Old 05-20-2018, 06:34 PM
Ravenscroft Ravenscroft is offline
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Join Date: Oct 2015
Location: NW Minnesota
Posts: 1,724
Lightbulb some thoughts on practical economics

{I was going to put this in the RPS thread, but I figure it'd get better attention independent}

I've studied some economics over the years &, while I'm not a "market watcher," I do keep half an eye on the condition of my 401(k). So, in hopes that everyone here is doing well when I get to start enjoying that nestegg, I thought I'd pass along some thoughts about money.
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First: feed the pig. If you don't have a retirement account or even a bank savings account, then start one NOW & put as much in it as you can. (It's too late to benefit from the "irrational exuberance" of the markets, but cash funds are generally reliable, & there'll be bear opportunities soon. If you don't understand that stuff, find a broker/advisor who charges based on performance.)

For the savings account, look into your elegibility to join a credit union. Earned interest on bank accounts is pitiable, & about as bad with the CU... but because it's a co-op, I get a dividend of 4.25% annually, which beats up most CDs (certificates of deposit).

A goal I once heard was to have the equivalent of six months' net (after-tax) income set aside. The idea is that if your life blows up -- house fire, layoffs, major medical -- you'll be positioned to take up the slack.
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My minimum goal at the moment is half a year of mortgage payments (working on it).

However, if you've got a mortgage, then DON'T fall into paying extra against the principle. That's "back loaded," meaning it'll be great as you near the last few payments, but it doesn't do you ANY good in the near future. Instead, start a new savings account JUST for this mortgage money, then DO NOT touch it EXCEPT when you come up short on the mortgage.
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The United States is coming up on another recession. I'm not judging, but that's the typical fallout a year or three after a major round of tax slashing, especially at the federal level. I saw it under Reagan, & Clinton, & Bush II. That's what's known as "the short-term debt cycle."

Expect it late 2019 or early 2020.

Problem is, we're also coming due for the downturn of a LONG-term debt cycle, a huge wave made up of the foregoing short-term waves. However, interest rates are so low that there's not sufficient room to "prop up" the economy by cutting the rate -- the usual way to offset a downturn.

The other main method is to increase government spending, which is certainly NOT going to happen under GOP control (especially with midterm elections coming up), & probably couldn't be afforded anyway because less income (taxes) means less to spend without taking on debt (again, unlikely with the GOP).

FFI:
https://www.marketwatch.com/story/th...ion-2018-01-26
https://www.marketplace.org/2016/04/...omy-debt-cycle
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Right now, it's a great idea for people to pay off debts, & to pay down credit cards. If you have excess wealth tied up in semiliquid assets, sell off what you can while everyone's a bit giddy from their income-tax cuts & a rising DJIA.

It won't do you ANY good if you've got a houseful of Really Cool stuff... but no house to put it in.

Unless you're a rancher, get rid of ATVs. Sell off the jetskis & watercraft in general, & campers & stuff -- a friend at work realized it's cheaper to rent a cabin or camper when he actually needs them AND he doesn't need to maintain (or store) them. He even sold his treasured Harley to a friend, & instead borrows it occasionally.

If you're paying more than 7% on a vehicle loan, refinance through a bank/CU: it'll cost you some up-front cash ("points"), but you'll save a lot in the long run &/or retire it years sooner. I was horrified when a co-worker told me they were paying 26%. As a result, against $25K the actual portion of the $400 going to principal was minuscule, like $5/month, so they weren't making appreciable headway against the debt. I bugged her into calling the bank, who took like $1K in points raised the monthly slightly, but they're already seeing the principal melt away, & this makes them feel lighter. This has improved their credit rating, & now they can think about buying a house.

The real estate market up here is at a knee. We're long on half-decent houses, & very short on rentables; as a result, it's not uncommon that rents are significantly higher than PITI payments on near-identical houses. A landlord can jack up rent; a bank is at worst very limited, once the contract is signed.

(That's another thing: watch out for PITI, payments of "principal AND interest AND taxes AND insurance." Realtors will glibly tell you that "you can afford a GREAT house for what you're paying in rent!" by which they mean ONLY the principal part -- as well overlooking closing costs, down payment, & necessary repairs/upgrades. As a rough rule of thumb, with 0% down & taking everything but repairs into account, the monthly payment on a 30-year mortgage is going to be a little less than 1% of final price, so a $150,000 house will be <$1,500.)

(Oh, & buy what you need for the next few years, NOT decades ahead -- you can always move as your needs change. A friend of mine has just paid off her dream house, with lots of room for growing kids... & it dawned on her that the kids are now 25-40, have families of their own, & that sprawling house is far too much for two older adults AND expensive to heat every winter, so after a couple decades of meticulous detailing they're looking to sell, & move to a nice little lake cabin.)

My sister has amassed a nice little collection of sterling silver for pennies on the dollar, having an uncanny eye at thrift shops & garage sales; she's also in a position to buy a house, & I'm encouraging her to dump the silver to inflate her down-payment fund. Me, I've got quite a collection of guitars, but would really rather fix my basement.

If you get some handy cash, then set it aside. Question whether any vacation trip is worth your while, & instead consider setting aside a "fun fund" savings account with specific goals, putting everything else into the house fund.
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