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The Great Depression Ahead And What You Can Do To Survive

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You may have never heard of economist and wealth manager Harry Dent but many students of the economy have. Harry Dent wrote, The Great Boom Ahead, which predicted the financial bull market of the 1990’s. He also predicted that the 2000s would see the Dow Jones Industrial Average soar to 40,000 but later revised that down in 2006. His predictions are often extreme but for those who believe that history repeats itself, it would be irresponsible to dismiss his predictions as the words of a dooms day profit. He believes that it won’t be long before the world economies will have a financial meltdown not seen since the Great Depression.

What do you need to know about the details of his forecasts and how dire are they? If he’s right, what should you do to protect yourself against this complete meltdown of the world monetary system? Don’t say we didn’t warn you.

Harry Dent

Harry Dent has taken his share of criticism. Although there are a lot of people who make dire predictions in order to get a little face time with the financial media, Dent has years of research to support his claims. Not all of his predictions have panned out but the research behind those predictions is studied by best of the world’s economists.

One of his best known theories has to do with long term spending habits. He believes that once a person has kids their spending picks up and once their children graduate from college spending turns to paying down debt and saving for retirement. According to Dent, spending peaks at an average age of 50 years old. He believes that the baby boomer generation had an average peak of spending in 2009 which represents that top of the stock market for the foreseeable future.

His Predictions

To sum up his ideas, the only reason we haven’t seen a complete economic meltdown is because the United States Federal Reserve continues to print money and artificially stimulate the economy but the banking crisis has left so many consumers and businesses drowning in debt that there is no amount of stimulus that can allow the economy to recover. The only way to recover, according to Dent, is to allow it to correct without the help of artificial stimulus.

Another one of Harry Dent’s theories is that when a bubble bursts, it returns to its pre-bubble level. This, according to him would put the Dow Jones Industrial Average at 3,600 to 5,000. He also sees gold correcting to a price of $400 to $500 per troy ounce and home prices falling significantly more. Florida, Dent’s state of residence may see home prices fall as much as 30% to 35% before the bottom emerges. Finally, he believes that unemployment could rise to as much as 15%. If his predictions are true, this would represent a crisis not seen since the Great Depression. He believes that all of this could begin as early as 2012.

What Can You Do?

If he’s right, first he suggests selling your home and renting until the crisis comes and goes. He also believes that now isn’t the time to believe that the markets will recover if you need money for retirement. Once the crash starts, demand that your financial adviser pull your money out of the market and in to ultra-safe investments. Once the markets bottom out, it may represent the buying opportunity of your life.

Bottom Line

His critics are quick to point out that Harry Dent has made his fair share of incorrect predictions. He may be too severe in his forecast but it’s hard to argue that with the amount of debt held by governments and even more important, individual households presents a problem. Unless the government can find a way to get household debt to a manageable level nationwide, there is very little that can be done to prevent a meltdown. Most economists agree that further stimulus of the financial markets may be detrimental to the markets.

Do you believe Mr. Dent? If you do, you’re not alone. Let’s hope that he’s wrong.

Fixed Mortgage Rates Fall To Six Decade Low, But Few Can Take Advantage

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If you're looking to buy a home or refinance anytime in the near future you may have been happy to hear the news this past week that mortgage rates are now at the lowest levels in years. It is good news for those looking to buy, but there is a big caveat. Not everyone will be able to take advantage of the low rates because of a variety of factors.

We're currently looking to do one or the other – either refinance – or if we find the right situation – buy a new home.   So what is all the hub-bub?

Low Mortgage Rates

Fixed Mortgage Rates Lowest In Six Decades

Freddie Mac announced this week that the rates for a 30 year mortgage were at their lowest level in 6 decades – down to 4.12 pecent.

Fixed mortgage rates fell this week to the lowest levels in six decades. But few Americans can take advantage of the rates to refinance or buy a home.

The average rate for the 30-year fixed mortgage fell to 4.12 percent, down from 4.22 percent, Freddie Mac said Thursday. It's the lowest level on records dating back to 1971. And Freddie Mac says the last time rates were cheaper was 1951, when most long-term home loans lasted just 20 or 25 years.

The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to 3.33 percent from 3.39 percent. That's the lowest on records dating to 1991 and likely the lowest ever, according to economists.

So rates are extremely low, down to the low 4 percent range. I know that's definitely lower than when we bought our home a few years ago.  That's great news if you're looking to buy or get a lower mortgage payment.  But even so most experts aren't expecting this news to energize the depressed home market.

Mortgage rates tend to track the yield on the 10-year Treasury note, which fell to an all-time low this week. An uncertain outlook for the U.S. economy has led many investors to shift money out of stocks and into the safety of Treasurys, lowering the yield.

Still, few expect record-low rates to energize the depressed home market. Over the past year, the average rate on the 30-year fixed mortgage has been below 5 percent for all but two weeks. That compares with five years ago, when the average 30-year fixed rate was near 6.5 percent. Yet prices and sales remain unhealthy and are holding back the overall economy.

Sales of new homes are on pace to finish the year as the lowest on records dating back a half-century. The pace of re-sales is shaping up to be the worst in 14 years.

Most Can't Take Advantage Of Low Rates

While rates are low, the unfortunate thing for homeowners and buyers is that most can't take advantage.  The reason?  Either their credit isn't good enough after the last couple recessionary years, or they don't have enough of a down payment.

Many Americans can't take advantage of this rare opportunity. Some are in no position to buy. Unemployment is high, few Americans are getting raises and many are struggling to shrink their debt loads.

But others can't qualify for the lowest rates. Banks are insisting on credit scores above 700 and 20 percent down payments for first-time buyers.  Many repeat buyers have too little equity invested in their homes to meet loan requirements.

Studies have shown that about 40% of U.S. households have credit scores necessary to get a prime mortgage rate, but most people just don't have enough for a 20% down payment.   In fact a huge number of folks are now in an underwater mortgage, and won't be able to move any time soon.

So are you in a situation where you can take advantage of the low mortgage rates?  Why or why not?

Roth IRA: Emergency Fund?

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I recently found out that one of my associates uses her Roth IRA as an emergency fund. Rather than put money into a low yield savings account, or some other cash account, she uses her retirement account as an emergency fund. Technically, the basics of a Roth IRA are conducive to this arrangement. However, you do want to be careful. Think things through before you use your Roth IRA as an emergency fund.

Why Your Roth IRA Could, In Theory, Be An Emergency Fund

In theory, your Roth IRA works as an emergency fund because of the withdrawal rules. You are actually allowed to withdraw your contributions to a Roth IRA at any time, and for any purpose – no matter your age. This means that you can take money out of your Roth IRA with no penalty or tax, as long as you are only withdrawing money that you have sent to the account through regular annual contributions. As long as your withdrawal amount doesn't exceed your overall contribution amount, you don't have to pay a penalty or taxes. Keep in mind that previous withdrawals count against your overall contribution amount.

Roth IRA Emergency Fund

You do have to be careful, though. Withdrawing from your Roth IRA can cost you if you don't do it right. If you are under 59 1/2, and you exceed your contribution amounts (except in certain cases), you might be subject to a 10% penalty and to paying income taxes on the amount. Make sure you know what you are doing before you withdraw money from your Roth IRA to shore up your finances in the case of emergency.

Opportunity Cost

While you might not have the expenses associated with penalties and taxes when you withdraw your contributions to your Roth IRA, you are still subject to opportunity cost. Remember: The money in your Roth IRA is working for you. You are earning interest at a pretty good rate (depending on your asset allocation and market conditions), and if you withdraw principal, you miss out. You can't replace the time that your money might have spent in your Roth IRA, growing with the power of compound interest.

On the other hand, though, some insist that the opportunity cost comes when you put that money in a low yielding cash account as an emergency fund. Because your money (theoretically) grows faster in the Roth IRA, the power of compounding interest at a higher rate makes up for the fact that you withdraw some of your contributions for emergencies.

Bottom Line

What you decide to do depends on what you think is likely to work best for you, and provide for your needs. If you plan ahead sufficiently, it should be possible to get quite a bit built up in your Roth IRA. Of course, for it to work, you need to make sure you only withdraw contributions in cases of true emergencies. If you use your Roth IRA as an ATM, you could easily remove all of your contributions quickly — and then move into penalty areas where it starts costing you more. Make sure you carefully evaluate your situation before adopting this emergency fund strategy.

How We Paid Cash For Our New Car

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Over the past 3 weeks my wife and I have been searching for a new car. We hadn't originally been in a hurry to buy a new car, but an opportunity presented itself where we could sell our current car, a 9 year old Honda Civic, at a decent price to a family member. The family member had purchased a Toyota Camry 20 years ago, and it had finally quit on him and was going to be more to repair than it was worth. He decided to cut his losses, save the money and look for a quality car that would last him another 10-15 years. He thought our car fit the bill since he knew we treated our cars well, it still has relatively low mileage, and Honda is known for their reliability.

Since he needed the car within a week or two, we had to start looking immediately. Thankfully because we pay ourselves a car payment even when we have paid off cars, we had the cash in the bank to be able to go and buy a new car on short notice – without having to get paid for our car first, get approved for a loan at a bank, or financing at the dealership.

Paying cash for cars

Paying Cash For Your Car: Not Normal?

We know that not many people nowadays actually do what we do – paying cash for their cars.  Paying for a car is one of the most expensive things most people will buy, right behind buying a house.  If you don't plan ahead far in advance, you won't be able to do it, and financing a car will be in your future.   Who can pay $10,00-25,000 for a vehicle without planning ahead?  Not many people make enough money to do that.

Saving up and paying cash for your cars, while it may not be normal – is a good idea.  After you've done it a few times you'll have enough cash saved in order to buy a nice 2-3 year old used car every 5-10 years, while never paying thousands in interest again.

Car Payments – A Fact Of Life?

Most people just assume that having a car payment is a fact of life.  After all, cars are expensive, and most people just don't have thousands of dollars laying around.    So what is the average car payment?  Dave Ramsey's site recently told us what one study found:

Recent statistics show that one-third of car buyers sign up for a six-year loan at an average interest rate of 9.6%. Among these buyers, the average price of the car is just over $26,000. This means that one-third of the cars you see on the road are dragging a $475 payment behind them.

So 1/3 of car buyers have an average of a $475 car payment over six years at 9.6%.  That means they'll end up paying nearly $33,000 for a  car that retails for about $26,000.  On top of that, the car will only be worth on average about $6,000.  That's quite the loss!  So why not make car buying more affordable, while at the same time freeing up more money for saving and investing?

Buy A Cheap Car.  Work Your Way Up.

So how do you get started paying cash for a car? For me it meant that my first car was a bit of a beater.  My first car was a 1986 Chevrolet Caprice Classic station wagon with 140,000 miles on it.  I saved up the money from a high school job and paid $1500 in cash for it.  It had cigarette burns in the upholstery, and was a gas guzzler, but it was paid for in cash.  That car lasted me a few years during which time I still saved up money for my next car (which would hopefully be a bit nicer).

When the old Caprice died, I ended up buying a slightly more expensive $6000 1996 Dodge Intrepid with 70,000 miles on it.  That car lasted me another 5 years.  When it started having engine problems I traded the vehicle in for a couple thousand, and used that money and the payments  i had continued saving in the meantime to buy my next car, a 2001 Chevrolet Lumina.  I paid $7000 in cash.    That car lasted 7 years, at which time we paid cash for my current 2006 Chevrolet Impala.    We got the money from my old trade, plus the payments we had saved to buy it for $10,995.

So as you can see I've been saving up and paying cash for cars for the last 15 years or so, and never have I paid interest on any of those cars.  Each time we buy a car we purchase one that is a bit newer, and in a bit better shape.  That means the car lasts us longer and we're able to save up more for the next car.   My current car has been with me for only 3 years, and I'll probably keep it for at least another 5-6 years at least.  I've got a number in mind of how much I'll want to spend then.  So in the meantime I'll continue paying myself a car payment until i reach that number.  At that time I'll take that money and start investing it for our future!

My wife has followed a similar process, starting out with an older used Honda over a decade ago, and working her way up to our current 2009 Honda CRV which we purchased last week.

Paying Yourself For Your Next Car, Not The Bank

So the essence of how this whole process works is this:

  • Buy a beater:  Save up and pay cash for an affordable and reliable “beater” that should get you by for a couple of years at least.  Don't forget to save up an emergency fund to cover any auto repairs that may come up.
  • Pay yourself a payment: Pay yourself a car payment instead of the bank now that you have a paid off car.  Use that money to pay cash for your next car.  This car could be a bit nicer and more reliable since you'll be able to sell your old beater for at least some return, plus you'll have they money you've saved.
  • Wash, rinse, repeat:  Save up and pay cash every time you buy a new car.  Every time you do buy a car you'll most likely be able to buy a nicer car as you've had longer to save, and more money to spend.  The newer and more reliable the car, the longer you can own it – and the more you can save for your next car.
  • Invest the difference: Take the money you've saved on interest payments and invest it!

Of course this scenario is going to be different if you're one of those people that prefers to have a new car every few years.  for a slightly different take on the subject, and how you can upgrade your vehicle twice in 20 months –  check out Dave Ramsey's post on the topic.

Have you ever paid cash for a car, or are you considering doing it now?  If not, what has kept you from doing it?