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Your First Decision to Make in 2008 (About Money)

Wednesday, January 2, 2008 | Dylan Jovine

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Today's article is courtesy of frequent Tycoon Report guest contributor Ethan Roberts.  It is the single most important message I could share with those of you who want to turn your financial lives around in 2008.

Yes, that doesn't apply to all of you.  Not everyone reading The Tycoon Report needs to turn his or her "financial life around".  But for those of you who do, I know the feeling.  I've made and lost millions of dollars in my life, and I know what it is like to have to start from scratch all over again.  (It gets tiring after a while, let me tell you.)  So you'd better get it right, and get it right now.

This is Ethan's opinion on the best financial decision you can make to start 2008, and I couldn't agree with him more.

2008: The year of "Cash is king, and debt is dumb!"

I know that the last week of December is the time when all of us begin to think about New Year's Resolutions.  You know the typical ones, like stop smoking, get more exercise, lose weight, find a husband, etc.

I want to offer another idea for a resolution.  I am asking all Americans to pledge that 2008 will be the year to eliminate, or at least substantially reduce, all debt, and to save and invest more money.

The great lesson of 2007 and the subprime mess was that debt can be very dumb, especially if you are signing financial documents without reading the small print or without understanding your debt.  Question: How many people reading this right now can state the exact interest rates of their various credit cards?  Hmmmm, maybe it's time to read the fine print!

I am indebted (no pun intended) to Dave Ramsey, the radio and TV host (www.daveramsey.com), for the title of this article.  Dave teaches people to get out of debt and start to build wealth through savings and investing.  And if ever there was a year to do this, it will be 2008.

I say this because as 2007 ends, Americans are sitting on more personal debt than ever before.  Credit card balances and delinquency payments are at all time highs.  Mortgage defaults and delinquency payments, even among non-subprime loans, are rising.  The increasing debt load is getting out of hand and, if it continues, may well bring down our great economic system.

On the other hand, 2008 offers some great investment opportunities that we have not seen since perhaps the bottom of the stock market in 2002.  There will be several sectors of the market with badly beaten down stocks, such as the Homebuilders, Financials, and Construction-related companies.  Those with cash and a long term outlook will be able to purchase these companies at the lowest prices in years.

The Real Estate market at some point may begin to offer great bargains, both for owner/occupants as well as long-term investors (not house flippers).  Prices have already retreated to 2005 levels, and inventory is still way up, foreclosures and short sales are everywhere, and sales are down.

Those with cash, low debt levels, and good credit scores will eventually reap the benefits of the current Real Estate downturn.  Those with large debt, no money, and bad credit will continue to suffer the economic consequences of their self-indulgence.

Investors who are sitting on cash will be able to purchase the assets which panicky folks dump at fire sale prices.  We have already seen the beginnings of this as foreign countries buy stakes in some of our largest financial institutions!

So pay off those credit cards, start paying cash for what you can afford, and resolve to become more financially responsible in 2008.  Resolve to put money in your IRA.  Resolve to increase those 401k contributions at work.  Those who are age 50 or older are allowed to increase the maximum savings limits on both 401k plans and IRAs.

Finally, resolve to pay yourself first, the bills second, and then entertainment or frivolous purchases last.  Retirement is always closer than you think.  Know anyone who has reached retirement and then says, "I wish I had saved LESS money"?

Recommended books to help you keep this resolution: Stanley and Danko, The Millionaire Next Door and Bach, The Automatic Millionaire.  Recommended TV Program: "The Dave Ramsey Show", Fox Business Channel, 8 PM.  Recommended newsletter, as always, "The Tycoon Report"!!

2008: The year of "Cash is king, and debt is dumb!"

And, of course, a very Happy New Year to all of the staff and readers of The Tycoon Report!

(Please let us know what you think about Dylan Jovine's article.)
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Dylan Jovine
Contributing Editor
The Tycoon Report




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8 Comments

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  1. Ken (1 year ago) Is this Spam?

    Ethan,



    Your absolutly right. Most people do have problems with credit, and do get in trouble with their debts. But will warning them acually do any good? Will telling them what they've already been told, and should already know, change anything?



    Most people dont want to have to think for themselves, they want to be able to believe what they are told. People dont want to stand alone and see things as they are. They want to be a part of a group, a herd, they want the comfort of knowing that if they fall off a cliff they are not alone. They want somebody else to take responsibility.

  2. benduretoah (1 year ago) Is this Spam?

    excellent advise.I hope people will follow thru! Toah

  3. Ethan R (1 year ago) Is this Spam?

    Ken, let me address some of what you have written. First of all, there are some studies that have shown that the average person spends 18% more when using a credit card than when paying with cash. If you personally do not do this, all power to you, but those are what the studies say about the average person. So even people who pay the cards off each month may be overspending.



    Second. I did not say in my article to hold a lot of cash. Rather, I spent much of the article discussing how 2008 could bring about some excellent long term investments to make, as many good stocks, as well as real estate have been beaten down by the sub prime mess.



    Third, remember that when you play with snakes, it is easy to get bit. And credit card companies are definitely snakes. Ever pay a card late because you lost the envelope or the mail was slow? I have and its no fun to pay the extra charges. Kind of cuts into the investment profits a bit as well.



    Fourth and most important point. The article was directed towards people who are carrying high balances, not towards those who use their cards judiciously and pay in full each month. As I stated, credit card balances and delinquencies are at all time highs. I just read another article this morning which confirmed that.



    As a Realtor and Landlord, I have seen many credit reports, and I can tell you that so many people are carrying thousands of dollars of debt on their cards, and paying exorbitant and unnecessary interest because of it. Nobody is building wealth that way, but plenty of people are going to be working well into their 70's or older because of it.



    I realize that when one writes an article that there will always be an exception to the rule. The purpose of this article was to reach out and help those who may be struggling financially because they are over their heads in debt. And I still believe that debt is dumb and cash is king. It is amazing how much you can save and invest when you have no debt each month.



    Thanks for the feedback.

  4. Ken (1 year ago) Is this Spam?

    Credit cards are a great tool if used properly. I dont pay cash for anything I dont absolutely have to, and I mean absolutely. Twenty dollars can sit in my wallet for months without being touched, I rarely handle cash. I've never even seen my bank. Money is just numbers on paper, something to be juggled and traded, transfered into appropriate places, and used to pay for the tools and toys and commodities we need and want to survive.



    As far as debt is concerned, debt can also be a great thing. It just depends on the rate you borrow at and how you use it. When American Express offered me balance transfers at 2.99%, a year and a half ago I maxed out the card straight into my bank account and pay the minimum each month, thats a no brainer. My mortgage rate is twice that, and I can easily make way more than twice that amount trading. So does it really pay to pay down your debt, at the expense of the capital you need to work with. Whats really smart is to manage your money well, to live below your means, and to be prepared for unseen circumstances.



    Working cash is a very valulable tool, but holding too much cash is dumb. Rather owing American dollars could be a great move. The question is what is worth holding? FXE, FXC, or how about GLD or RJI. I dont own any of these, although GLD and RJI are interesting.



    Debt is certainly not dumb, and cash is certainly not king.

  5. Marie (1 year ago) Is this Spam?

    Great advice!

  6. Sharon (1 year ago) Is this Spam?

    Hello Ethan,

    Another great article with good advice. For some, it is a reminder and for others it's a point of the finger.

    My belief is that the market will rally in spite of the outside predictions, because the internal indicators point in that direction and although there may be downside externals, the market doesn't stay oversold for very long.

    A Happy, Healthy and Prosperous New Year to you and your family, the Tycoon family and their families, as well as the Tycoon readers and their families !

    Sharon

  7. jj (1 year ago) Is this Spam?

    Better than paying cash is using a rewards credit card and paying online on due date each month.Also only buy items when there is a big discount.Be willing to try different brands to take advantage of offers.Use coupons,double coupons,rebates.Buy used at thrift stores,swap meets,Ebay and garage sales.I buy most things much cheaper than "normal" people do.

  8. John (1 year ago) Is this Spam?

    Ethan,



    Some great common-sense (seemingly in short supply in the US) ideas.



    To answer your question about credit card interest rates: 0.00%. My wife and I made a conscious decision shortly after we were married in 2004 to eliminate our non-mortgage debt completely. It took a few months of high payments, but we have no credit card debt, no car payments, and a fixed 6.00% APR mortgage. We also max out our respective retirement plans each year and take advantage of all employer matching.



    This is the year that I teach my wife, with the help of The Tycoon Report, and our other investing resources, how to invest her own money.



    I wish everyone a happy and prosperous 2008!



    Cheers,



    - John
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