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Updated Tuesday, March 3rd, 2009
Wow. Even I, a guy who didn’t vote for Barack Obama and tried my hardest during the election campaign to explain all of the things wrong with and untrue about his economic plans and promises didn’t see this coming.
In just over one month, Obama has spent or proposed to spend more money than any human ever in the history of the world, even if you adjust for inflation. Those who respond to such facts with clichés like “desperate times call for desperate actions,” are ignorantly unaware of how the economy works. There is only one word for Obama’s policies; radical.
All of this has forced me to reassess advice I gave just 4 months ago for surviving the current economic meltdown. I had expected the American economy to improve by summer 2009, I retract that. I agree now with (well known liberal and second-richest guy in the world) Warren Buffett who last week offered a grim assessment of today’s American economy; mid 2010 is the earliest we’ll see signs of actual improvement and that’s optimistic. http://www.menafn.com/qn_news_story_s.asp?StoryId=1093236310
Arguing over Obama’s plans is fruitless now. It’s time to react and prepare. I’ve put together a list of suggestions for people of all economic backgrounds in four specific areas:
LIVING DAY-TO-DAY
- Prepare to pay a lot more everything. I have tried to explain ad nauseam how everything will go up in price under Obama and you are about to feel it. Last week, a federal panel recommended a 10-cent-per-gallon gas tax increase. Additionally, Obama’s budget will increase taxes on energy companies which will result in a $300 billion dollar tax increase on all of us that are customers that use natural gas, electricity, and/or heating oil. These are just the tip-of-the-iceberg examples. Cigarette taxes are going up and new proposals to tax everything from liquor to porn are on the table federally and in many states. Start now eliminating excess and luxury spending, including that daily latte or trip to McDonald’s. You’re going to need the extra cash quickly. If you live in California, it will be exponentially worse.
- Prepare for a middle class tax increase. We’ve all seen this play before and we all know how it ends; your taxes are going up to pay for massive government spending. Bill Clinton and Bush the Elder both did it and Obama will have to as well. You will either be bringing home less money in 4 years than you are today, or spending substantially more on “hidden taxes” like a federal sales tax.
- For now, try to make less than $250,000 per year as a household. In Kentucky, that’s easy to do; in most of the western United States, that’s barely upper-middle class but you are about to get anally raped via extraordinary tax hikes. Along with your effective rate going up almost 5% (meaning you’ll bring home 5% less income), you are also going to be deprived of another 12% of write-offs as it relates to home mortgage deductions and charitable contributions. If you can increase tax protected retirement contributions or ask for deferred compensation to take home less than $249,999 per year, do it.
- Drive carefully. Law enforcement agencies are not even bothering to deny now that they have stepped up (dramatically) issuing traffic violations in an attempt to increase revenues. The days of “buffer zones” of 5-9 MPH and/or giving drivers a break are over. http://www.msnbc.msn.com/id/29439815/
- Secure your home. I am not necessarily recommending hoarding weapons. I do however know that as economies worsen, so do burglaries, robberies and home invasions. An increase of desperation leads more people to behave desperately. Prepare properly. |
EMPLOYMENT
| - Get your resume ready. As we discussed during the campaign, Obama IS raising taxes on small business owners in America. No matter how many times he claims otherwise, his budget does not lie. The number one group employer in America is small business owners, 75% of whom are what we call S-Corporations. Those folks file their corporate taxes via their personal returns and Obama just announced a near 5% increase in their taxes alone. This means a 5% decrease in revenue to the company and 5% of the workforce will need to be laid off. (None of this takes into account other tax increases and reductions in deductions which could cost businesses more than 10% annually).
- Evaluate your industry. Certain industries are going to be hard hit and/or destroyed by the next four years; coal mining, charities and non profits and most arenas of the home building industry are in for near or total devastation. Conversely, there will be a lot of opportunity in health care and alternative energy industries. Other industries will struggle mightily; particularly the retail sector.
- Have a heart to heart with your boss. Not everyone has a boss they can do this with, but if you do, now is the time. Last fall, everyone knew 2009 would be a rough year. Now, we know that things are going to be very bad for quite a while; probably well into 2010 (and then just when the economy is starting to turn around Obama will raise taxes dramatically…brilliant). Great bosses already know the likelihood of layoffs and who will be targeted. A boss of high morality will be able to look you in the eye and tell you that you should be prepared for the worse. |
HOME OWNERSHIP
- If you don’t own a home, don’t buy one. The market is too fluid and another wave of foreclosures is going to hit in 2010 and 2011. Now is the time to rent and wait. Interest rates won’t be raised until the economy begins to recover and that’s no where in sight. We still have not seen the bottom of the real estate market in America.
- Caveat; if you are ripe with cash you may want to buy a few homes in attractive areas right now as rental properties. One of the fall-outs of Obama-nomics will be a stark rise in renting homes, as fewer people will be able or willing to buy them. People who own rentable homes will make a killing over the next many years.
- If you own a home, take stock of your life and your future. If you are in a home you honestly want to live in and own, consider asking your lender for a loan modification. If you are in a home you know you can’t afford or don’t want to own 5 years from now, consider the ramifications of walking away from the home and renting somewhere else. I would never in my wildest dreams have thought that I would ever come close to advocating for people to walk away from their mortgages, but in an age of a total lack of accountability the repercussions are worth it to certain people. Anyone “needing” to sell their home in the 2 years is up shit creek.
- Similarly, if you are in a home you plan on living in for many years and selling 10 years or more down the road, take advantage of the current economic climate to upgrade your home at reasonable prices. Contractors are dying for work and are willing to cut deals 50-75% cheaper than just five years ago. You’ll improve your quality of life and your home’s overall value all at once. |
INVESTING AND SAVING
- See above about purchasing rental homes. In all recessions, smart rich people become wealthy. One of the markets that will explode will be rentals.
- For now, keep your money away from the stock market. Wall Street is and always has been about the future and the Dow has lost 2,000 points since Obama was elected and began proposing his financial plans; there will be a time to re-invest in the market and make a lot of money but we are no where close. If you allow someone to manage your money, tell them to pull it all out and put it on the sidelines. Also, consider my long-standing advice of managing your own money. I pulled all of my money out of everything 18 months ago. While my portfolio has shown a growth of only 3% in the last year, that looks pretty damned good compared to most people who have lost between 20-50%. Knowing how to manage your own money continues to prove one of my adages; no one will protect your money more than you will.
- Reconsider charitable contributions and home ownership as financial decisions. Obama’s new budget will essentially punish upper middle class people who want tax write-offs in return for charitable giving and/or interest paid on their mortgages. Only 28 cents of every dollar given to charity will be deductible, a more than 25% reduction. Similar numbers will be in place in regards to home interest. Suddenly, charity and private property are worth a lot less in America. If you have the means, I would place excess income somewhere it is free from confiscatory taxes yet still accessible; on the sidelines in money market accounts, tied up in annuities, or even in laddered Certificate of Deposits.
- Stop freaking out about the banks. Your money is safe. Barring the country literally crumbling, there is no need to pull your money out of American financial institutions; although I always recommend having access to a significant amount of cash for emergency purposes. |
10 WAYS TO SURVIVE THE CURRENT ECONOMIC CRISIS |
Tuesday, October 14th, 2008
It’s hard to overstate how bad the current economic climate is in America and across the world. It’s hard for most people to understand for a myriad of reasons, including the complexity of the problem and the lack of devastation in most peoples’ day to day lives. For many people, we can see and hear that the economy is somewhere between slow and awful, but yet we also see buildings still being erected, restaurants being patroned and mall parking lots with cars in them. Despite those who decry it, trickle down economics is real; and the pain and suffering that is being felt across banks, governments and lending houses worldwide will trickle down to average Americans soon and more and more people will begin to actually feel the pain of an economic crisis sure to last well into 2009. How do you survive or even thrive in such an environment? Here are some tips, in no particular order of importance:
1. RE-ASSESS YOUR SPENDING: I know, I know, it’s not very sexy to advise and it sounds like something your parents would say. The truth is, though, that things may get much worse over the next many months. If they don’t, then how does it hurt you to save up some money? If things do get grave, you need to have cash reserves to go to in the event that prices soar or your job goes away. Cut back on spending and do everything you can to gather up at least 3 months of living expenses to have on hand.
2. REPEAT STEP ONE: Most people lack the self discipline to truly cut back. People will say things like “I have already cut back as much as I can,” while they are holding a $4 cup of Starbuck’s coffee and applying high end lip liner. No one covets luxuries more than I do, but now is the time to re-assess whether or not you are living within your means. Credit will be harder to get and use over the next few months and was never a smart safety net to begin with. Your friends may tease you, but when you are the one who comes through this crisis still intact, while they have wasted their money on nightclubs, cell phone upgrades, new shoes and other discretionary spending, you’ll be the one standing tall.
3. IGNORE THE MEDIA: Including me. It would be hypocritical of me to tell you to listen to a radio talk show host but ignore Chris Matthews, so ignore all of us. The media makes money by telling you things are horrible; no one watches a news cast of positive stories. Most in the media also have no understanding at all of how the economy works; what they do understand is that telling you it’s horrible makes them richer and more successful. Do your own research, historical and otherwise and discover for yourself why I am about to advise you to get INTO, not out of, the market.
4. IF YOU’RE IN, STAY IN: Now is not the time to panic. Stay in your house, and stay invested in the stock market. The time to get out (or upgrade your home) was long ago if you were going to, and now it’s time to ride it out. In the case of the stock market, shift your investments (more on that later). In the case of your home, enjoy living in it, confident that its’ value will increase.
5. IF YOU’RE OUT, GET IN: Economic melt downs are when people make money. Middle class people become rich and rich people become super-rich by buying up and into greatly and unfairly devalued properties and investments. If you have the credit and funds needed, now is the time to buy a house. If you have a 401K, make sure it’s invested in the markets which WILL recover and invest in the things you (or your broker) believe or know will lead the way. Un-savvy investors shouldn’t try to pick specific stocks, so buy mutual funds from reputable companies like Vanguard. If you believe the major companies in America will lead the way, buy into the Dow Jones (the 30 biggest stocks) by buying up shares of the Diamonds, a basket of the Dow.
6. IF YOU CAN’T HANDLE IT, GET OUT AND STAY OUT: If you are a wuss, disregard my last two pieces of advice and get the hell out of the money making business. Last week, Bill O Reilly decried on national TV the fact that he has lost all of the economic gains he made in the past 5 years in less than the last two weeks. That’s because he’s an idiot who didn’t make necessary adjustments to where his money was along the way. The market is a gamble and if you aren’t going to be happy taking small but significant gains along the way, then you have to be prepared to take giant losses. Ignorance and/or blaming “your broker,” aren’t an excuse. It’s your money. Much of the stock market tumbling of the past week has been weak-kneed fools bailing out of the market. Good…stay out.
7. IF YOU AREN’T A WUSS, BUT DON’T KNOW ENOUGH YET, PARK YOUR MONEY SAFELY: There are safe, smart places to put your money while you learn how to invest it later. Those of us with money and know-how are buying now, but that’s risky if you don’t have the knowledge. Equally as stupid, though, is leaving your money stagnant and not working for you. Buy into Cds, Treasury Bills and Bonds (all of which can be done through your bank) and at least make a few pennies on your dollars.
8. IF YOU THINK THE WORLD IS ENDING, BUY GOLD: Earlier this year as the economy slowed, I moved almost all of my money, for a time, into Gold. I know from experience that when the world is nervous and uncertain, gold is god. If you believe that things are going to get dramatically worse, buy gold now.
9. IF YOU THINK AMERICA IS ENDING, BUY FOREIGN: If you are an idiot and think America will never recover from this, then make money by figuring out what countries will thrive in the coming years and invest in them. You can buy stocks in foreign countries and currencies easily, so, Einstein, if you believe that Russia, China and India are the economic powers of the future, get your piece now.
10. LEARN FROM ALL OF THIS AND PREPARE: I have been handling my own money for 10 years now and along the way I have lost plenty. Every time was a learning experience that helped me prepare for this crisis. So far, for 2008, I have made 8% while most have lost 20-30%. That’s because I knew how to move my money ahead of what was coming. I am not a genius; I just care about my money and know that no one will care more about it than me. Many friends of mine over the past 5 years have ridiculed me, for example, for selling out of my Apple Computer shares after making only 25%. Those same friends have now lost all of the gains they made and an additional 50% because they refused to be happy with modest but significant gains. Make money now, and learn how to keep it!
RICH ROB/POOR YOU FREQUENTLY ASKED QUESTIONS PART TWO |
Tuesday, November 13th, 2007
After years of doing the “Ask Doctor Rob” feature it has become painfully apparent that there are very specific questions that seem to be very common. I will continue to do my best to answer your specific questions, but this update is meant to help provide broad answers to very common queries.
I have done my best to paraphrase in the most broad sense the tone of the questions that I get asked most often. Additionally, I have tried to specifically answer each question as best I can to provide a “catch-all” to help as many people as possible.
HOW DO I GET STARTED INVESTING IN THE STOCK MARKET?
If you know nothing about stocks, then you have no business overseeing which stocks you buy; however, I do believe that ultimately you, and only you, will care the most about your money. So, the proper strategy is, I believe, the same path I chose. If you have money to invest in the stock market, whether it be via a retirement fund or an active account, find a reputable brokerage house and have them invest it as they see fit based on your risk tolerance. Meanwhile, buy some books, take some classes, watch some TV shows and learn how the market works. Once you know enough, pull your money out of the brokerage house and take control of your own money via an on-line investment firm like Etrade, Scottrade, or any of the other choices that allow you, and only you, to decide where your money goes and how long it stays there. It took me 3 years to know enough to take my money back from the brokerage house I was using but it doesn’t have to take that long depending on your commitment to learning.
WHAT STOCKS SHOULD I BUY?
If you understand the market, you know that the answer to this question changes constantly. However, I have a basic “magic rule” that can often lead to big gains; If you find a company and the company makes “a thing” that is good and coveted, by their stock. This premise involves some timing, of course, but has a solid track record. Harley Davidson, Krispy Kreme, Starbucks, Apple (IPOD), Google, Dell, Garmin, and RIM (Blackberry) are all examples of companies that make or made things that were good and coveted and whose stocks, when purchased at the right times, increased by hundreds of percentage points.
WHEN WILL THE HOUSING MARKET RECOVER?
Let’s start with this fact; Real estate in America ALWAYS increases in value over time. It is a given fact of our economic system that this must and will occur. One of my favorite memories was watching people in Southern California panic in the mid 1990’s because housing values were plummeting. Many of them, out of paranoia and fear, stupidly sold their property at discounted rates which have now increased by more than 100% in value. Similarly, and more recently, we were told at the beginning of this century that the San Francisco Bay Area bubble was bursting and it was time to get out of the real estate market. Many did, and they missed out on 50-100% gains in the 5 years that followed. Idiotic. The answer to the question is that real estate always, eventually increases and the key to making a ton of money off it is to be patient and hold on to it. In March 2006 I bought a home that appraised at $1.2 million for $900,000. In October 2007 (in a depressed housing market) an identical home half a block away from me sold for $1.4 million. I will sell this home someday for $3-5 million. Patience, planning and understanding are what translates into real estate returns.
Questions or Comments on my investment tips? E-mail me.
RICH ROB/POOR YOU FREQUENTLY ASKED QUESTIONS PART ONE |
Updated Tuesday, October 2nd, 2007
After years of doing the “Ask financial Doctor Rob” feature it has become painfully apparent that there are very specific questions that seem to be very common. I will continue to do my best on-air to answer your specific questions, but this update is meant to help provide broad answers to very common queries.
I have done my best to paraphrase in the broadest sense the tone of the questions that I get asked most often. Additionally, I have tried to specifically answer each question as best I can to provide a “catch-all” to help as many people as possible.
SHOULD I TAKE MONEY OUT OF MY RETIREMENT ACCOUNT (IRA/401K, ETC) TO…
In a word, no, never, not ever…wait, that’s 4 words. Unless we are talking about a rare instance of a life threatening situation like needing the money to pay for medical treatments, there is absolutely no reason or justification to ever borrow or withdraw from your retirement funds. To do so is to simply execute a sadistic version of robbing Peter to pay Paul, except you are both Peter and Paul in this case. Whatever hole it is that you have dug financially; robbing from your future is not the answer. Making it even more stupid is the fact that you are taxed and penalized heavily for such an idiotic maneuver.
HOW MUCH MONEY DO I NEED TO BE SAVING/INVESTING EACH YEAR IN ORDER TO RETIRE?
The basic answer is; as much as possible. The truth is that there’s no way to know, so you better start as soon as possible and save as much as possible. With that, I mean that you need to be smart and enjoy life while trying to plan as best you can for the future. I do not believe in living a paltry existence so that someday you’ll have millions in the bank and 5 years to live and enjoy it. Similarly, you can’t spend every cent you earn and expect to be fine 30 or 40 years down the road. Make a reasonable and realistic budget and plan and save as much as you can. As recently as the early 1990’s, everyone believed that $1 million was more than enough to retire on. Now, with a booming world economy contributing to greater costs of living combined with a longer life span we all know that $1 million is not nearly enough. If you have a 401K, contribute the maximum. Remember to always pay yourself first, meaning save before you spend.
WHAT’S THE BEST WAY TO SAVE FOR MY KIDS’ COLLEGE?
My initial answer is simple; don’t. I have never understood this mentality that has sprung up in America in the past 50 years that parents are somehow obligated to or should save for their children’s college education. Furthermore, college is not for everyone and has been proven to be less and less necessary in terms of peoples’ ability to make a lot of money in America. College is a wonderful and necessary experience for certain types of people, but I still believe those kids should have to earn and pay for it themselves. I am not sure what parents think they are teaching their kids by providing them an education in their adult years. I often hear that they believe they are setting their kids up to succeed in life, but that belies all forms of logic. College is no guarantee of success and you certainly are not teaching them anything about the real world by handing them a college education for free.
With that said, if you are hell bent on saving money for your kids’ education I suggest safe, solid investments that guarantee a modest but acceptable return (assuming you have 10-15 years to allow the money to mature). Certificates of Deposit (available through your bank) and Treasury Bills are the safest way to earn an average of at least 5% on your money.
There are also 529 funds that allow tax breaks for college savings, but they are worthless in terms of the tax benefits and provide a pretty big penalty if your kid decides not to go to college so I don’t recommend them.
SHOULD I TAKE OUT AN EQUITY LOAN/SECOND MORTGAGE ON MY HOME TO…
Depends. Keep in mind that when you do so, you are borrowing against yourself and essentially giving back all that you have earned up to that point. That doesn’t mean that you shouldn’t do it, it means that you have to do it smartly and for the right reasons.
For starters, you should only take out an equity loan on a home you plan on being in long enough to recoup what you’re taking out of it. For example, if you owe $250,000 on a home that’s worth $500,000 on the open market, then you’d best be sure that if you’re going to take $250,000 in equity out of it that you’ll be able to sell the home for at least $550,000 some day (the seller pays the fees so you have to build in a 10% cushion to be safe).
Additionally, you should only cash in your equity for the right reasons. Remember that you are borrowing/robbing from yourself, and just because your home loan is tax deductible doesn’t justify using your equity on a total waste of money like a motor boat. It absolutely makes sense to use an equity loan for the following:
- Home improvements that will greatly increase the value of the home (kitchen remodels, additional rooms, top of the market upgrades, etc)
- Debt consolidation as long as you are disciplined enough to not create the same debt problem again. Many people advise against this, but if you can make a promise to yourself to do this smartly, it’s a great way to alleviate the burden of debt.
- As an investment; using the cash from a home equity loan to finance higher-yield investments is another good option. You might, for example, consider using a home equity loan to finance the purchase of an investment property, retirement, or vacation home.
- Starting your own business assuming you have the right, realistic business model.
- Buying a car in certain situations. A car is a terrible waste of money, but in most cases vehicles are nearly a necessity in America. If you are forced to buy a new vehicle, paying cash for the car with equity money may work if the equity loan provides a tax deductible way to buy a car outright.
It absolutely does not make sense to use an equity loan for the following:
- Home improvements that do not increase the value of your home enough to justify the expense. The most common example of this is a swimming pool, which at best, will bring you a 30% return on what you pay for it, meaning a $100,000 pool will, at best, add $30,000 to the selling price of your home. That’s a miserable ratio.
- A wedding; your or your kids. What a colossal waste of money.
- Stupid purchases that you can’t really afford, shouldn’t be buying in the first place and will never recoup upon resale. Boats, lavish vacations, electronics, extra vehicles, toys of all types, and clothes are obvious examples.
HOW DO I KNOW WHEN/WHERE TO BUY A HOME AND HOW MUCH TO PAY?
A home is not an investment in the traditional sense. Unless you are upgrading from a home you already own and live in or buying a second, third or fourth home the question is irrelevant as it relates to finances for the most part. There is almost nothing that provides an identity and a sense of accomplishment as much as owning your own home. As long as you realistically expect to live in the home for up to 5 years, don’t expend too much mental energy trying to outsmart the market. Home prices will always go up in the long run and the emotional benefits of owning your own space are indisputable. Buy the nicest home you can reasonably afford and enjoy the hell out of it. As long as you follow that formula, the financial part of it will work itself out.
If you are trying to upgrade from your current home, then you need to pay more attention. The trick then is to gauge the current market from both a buyer’s and seller’s standpoint and do your best to time the sale of your old home and purchase of your new home when the market is fairly stagnant from both sides. If you don’t, you’ll pay for it on one end or the other. This can be irrelevant if you’re upgrading for the long term.
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