Mistakes I Have Made Over the Years

 Buying brand new cars was one mistake I made.
Fortunately, I did it far less often than some folks do.

In reading this blog, I hope you don't come away with the idea that I know everything about finances.  Nothing could be further from the truth.  Almost every entry in this blog is based on horrible financial mistakes I have made over the years.

How have I been successful in spite of all that? Well, for starters, I have a decent income. And I got lucky in the Real Estate business - and got out before it crashed.

But others are not so lucky. They squander as much (or more) as I did on junk and don't have the income to bail themselves out of it. And a lot of unlucky folks bought investment Real Estate, paid too much for it, and didn't cash out when they could.

Such folks are facing serious hardship today. And that could have been me, if I had made a few decisions differently.

But seriously, I could easily be a million dollars richer today if I had made different lifestyle choices earlier in life. And by that, I don't mean living like a monk and eating bread and water. But there were a lot of things I spent money on that turned out to be bad bargains, or worse, worthless. And there were times I could have saved a few dollars when instead I chose to spend.

What mistakes did I make? The catalog is huge. Where do I begin? Well, let me list a few real boners that come to mind readily.

1. Drugs: My later older Sister thought it would be a good idea to turn me on to Pot when I was 13 years old. The next decade of my life was affected by this. I could have chose to say "No" but did not. And I knew, deep down, at the time, that the drugs were affecting my life negatively, but of course, being stoned all the time prevented me from changing my behavior. In addition to the thousands of dollars in money spend on drugs, being stoned all the time meant I made a lot of bad financial decisions, often to have consumer goods now, instead of saving for later. I was fortunate in that eventually, I figured out that the drug thing was a dead-end trap, and the key to real happiness was to be independent. People on drugs may be "functional" at best, but that's not really a life. It is hard to put a cost on the effects of drug use. But assuming I spend $100 a month on pot, over a decade that comes to $12000. At 5% compounded interest, that comes to $84,000 at retirement.

But the real cost of drug use is far more, as it lead to many of the other bad financial decisions I made at the time - and later on. I was fortunate enough to quit, finish college and go to law school. If I had stayed with the drugs, I would have ended up as some underemployed impoverished "stoner" like my old drug friends.

2. New Cars: In my lifetime, I have purchased five new cars, mostly when I was younger. I could have purchased a similar used car for 20-30% less than the new cars I bought and saved a bundle. And in every case I bought a new car, I did so for reasons unrelated to actual need for a car - I already had a working car in my driveway that could have been driven reliably for a few years more. But ego (the desire to have something "nice") made me trade-in or sell perfectly serviceable, "paid for" vehicles in exchange for monthly car payments, high insurance rates, and rapid depreciation. I estimate that I wasted at least $50,000 this way. Compounded over time at 5% interest, this would amount to $169,000 at retirement (!!).

I could have done a lot worse. Many middle-class people buy or lease brand-new cars every 2-3 years and claim "we can afford it". Well, they can pay for it, only because they are not fully funding their retirement plan. So no, they really can't afford it.

3. Cashing in a Retirement Plan: When I left GM, I was paid out a modest sum ($2500) as part of my retirement plan. I could have rolled this over into a IRA, which at retirement, would be worth $18,00o (invested with a modest 5% rate of return). What did I do with the money? Bought a cheap Japanese motorcycle. Duh. I needed that like a hole in my head! I sold the motorcycle and probably bought pot with the money. Double duh!

4. Mortgage Refinancing to Pay off Debt: Like everyone else in the go-go 1990's, the temptation to refinance a high interest rate mortgage to pay off debt was too strong. Yes, it can be a good idea to refinance a mortgage if your interest rate is too high. And yes, a refinance can be a good way to get a fresh start on your finances - provided you stop spending like a drunken sailor. But like everyone else, we went out and ran up debts again and repeated the process. We were just lucky enough to "cash out" before it all went horribly wrong. I estimate we easily overspent $50,000 this way. Again, this comes out to $169,000 at retirement.

Others were not so lucky. The refinanced again and again until they used up all the equity in their homes. Now they owe more on their houses than they are worth! At least I avoided that trap.

5. A Boat Too Far: We wanted a boat for Florida, but wanted something "reliable" and newer. So we spent $65,000 on a newer boat. We could have had the same boat, as 5-year-older model for $35,000. Five years later, it is worth half what we paid for it (typical of any depreciating motorized asset). We could have saved nearly $15,000 by buying an older, cared for, boat instead. Cost at retirement: $25,000.

Again, I count myself lucky. A friend of mine went out and paid $300,000 for a boat. When I asked him if he could afford it, he replied "Well, the bank says I can!" Ouch. At least we paid cash for our boat, so when it came time to sell it, we had no liens to pay off. Many folks who bought boats in the go-go 2000's ended up "upside down" and had to walk away from them.

6. Home Improvements: Home improvement shows tout the idea that you can increase the value of your home by remodeling a kitchen or bath. What they don't say, and what every Realtor knows, is that the increase in value is usually LESS than the amount spent on remodeling. So while a kitchen and bath add the most value, it is still 90 cents on the dollar. I can only say I am glad we did not opt for a $150,000 home overhaul, which would have put a new house on top of a shoddy foundation ("Dressing the Pig" they call it). We easily overspent $100,000 in room additions, remodeling efforts, a swimming pool, gardens, etc. We could have had these things, or some of these things, scaled back, for far less. Money lost at retirement: $340,000.

Again, we count ourselves lucky in that a developer offered us far over market value just for the land. Other neighbors, who had poured hundreds of thousands of dollars into remodeling their homes couldn't sell, even at the inflated "buy-out" prices. If not for that developer's offer, we'd be stuck in that house, perhaps upside down (or darn close to it).

7. Car Mods: I like to tinker with cars. But over the years, I realize that this can be a money-saving hobby, if you can do necessary car repairs yourself. It can also be a money-squandering hobby if you do unnecessary modifications touted by the car magazines as "upgrades". I've easily spend $10,000 trying to "upgrade" pedestrian cars which were perfectly serviceable with their stock parts. Total cost at retirement: $26,000.

I learned from this experience and decided that the catalog companies and car magazines were not my friends. If you like to tinker with cars, you can SAVE money by doing your own repairs. "Mods" just squander money.

8. Being Careless With Money: When I was a "working stiff" at the factory, I had all the bad habits of a factory worker. I would cash my paycheck at the bar, or cash checks at the corner grocery to buy beer and junk food. I wouldn't keep track of my money and bounced checks with regularity (causing more charges to my account). I tried to play "big shot" by buying drinks for friends. They never returned the favor. Hard to figure out an exact cost here, but with bounced check fees and the like, plus excess spending, I'll peg it at $10,000 at age 23, which is like $70,000 at retirement.

Since then, I have been getting progressively more aggressive about tracking money, to the point today where almost every purchase, even small cash purchases, are logged in Quickbooks. I can now tell you, to the penny, what I spend on different things. And I now know how much I'll really need for retirement.

9. Speeding/Insurance: The subject of a future article. When I was young, I was impatient and drove fast and tailgated. Stupid. I got tickets and my insurance went through the roof - over $3500 a year! And since I had a car loan, I had to buy collision insurance. Double-stupid. The cost over my first decade of driving, was easily an excess $10,000 in insurance and speeding fines, as well as lawyers fees. Again, another $70,000 at retirement.

I drive the speed limit, or at most 5 mph over. It is far more relaxing and I get there just as quickly. Speeding really doesn't save time. And tailgating really wrecks the paint on your car.

10. Borrowing money unnecessarily: As a young person, I wanted to have "things" - cars, motorcycles, a water bed, a stereo, etc. I thought that having things was a sign of wealth, because my friends had these things and we were all envious of them. I realize now, that my friends were in hock up to their eyeballs to have these things, often paying high interest rates for cheap consumer goods. I borrowed less than they did, but still, I ran up interest charges in the thousands of dollars for no reason at all, other than to stroke my own ego. Another $10,000. Another $70,000 lost at retirement.

I have not had a car loan in nearly a decade. We pay cash for all our purchases, or do without. If you can't save up the money for something, don't get it, period.

11. Cable TV: When I was young and poor, for some reason I felt I had to have cable TV, even though it cost the staggering sum of $35 a month. Later in life, I signed up for a deluxe plan that cost nearly $75. What the frick was I thinking? Cable makes you fat and slovenly and promotes sloppy, stupid thinking. Watch Cable TV and you WILL end up a blithering idiot, babbling on about "America's Idol" and the new season of "Lost". Speaking of "Lost" - that is what happens to your life in the process. I figure at least $3000 in cable fees, but that does not begin to address the damage done! Still, that's $13,000 at retirement.

We have been cable-TV free for over 5 years now. And we don't miss it a bit!

* * *

These are just some of the "boners" I have made with regard to finances. And we continue to make them on a daily basis. You can't beat yourself up too much over things like this, as we are all prone to weakness on occasion. And when we are young, let's face it, we haven't a freaking clue whatsoever.

As a young adult, I got all my normative cues from television and what my friends were doing. So I thought a hopped-up Camaro was the "ultimate" cool thing to have and that getting stoned and drunk beyond all recognition was a worthy pastime. Saving money so that I could be financially independent just wasn't in the picture, as I felt that being financially independent was not in the cards for me, or that I could do that later in life "when I was making more money".

In reality, if you put aside money when very young, it compounds over time to quite a staggering sum by retirement. And although I did squander a staggering amount of money, I also did manage to put SOME aside, which has now blossomed into a comfortable nest egg. Not as much as some, but more than most.

According to one source, the average pre-retirement household in America has retirement savings of only $60,000. This is a scary small amount of money to have for the rest of your life. And yet, as the examples above illustrate, many middle-class Americans can have (our could have had) literally hundreds of thousands more in their retirement plans, simply by not making boner mistakes over their working careers.

You can live richly while spending less. It can be done.

And its never too late to change!

Understanding Credit Cards

Credit cards are a useful tool - like a handgun.  Like a handgun, though, they can blow your head off, if you are not careful with them.  Very, very careful!

I often tell young people that they should treat a credit card like a major asset - like a car or an expensive appliance. Thus puzzles them, as they view a credit card as merely a cheap piece of plastic. But if you think about it, a credit card can easily have a credit limit (or worse yet, a balance) of $10,000, $20,000 or even (much) more. One could easily buy a new Mercedes with the amount of credit available on some credit cards. They are a very powerful and dangerous thing.

Actually, a credit card can be a lot like a loaded handgun. You can hurt yourself quite easily with it. Credit card companies are not your friends, any more than the local loan sharks are. It is very easy to get deep into credit card debt and not be able to dig your way out. That's the way the deal is structured. Buyer beware! Credit Cards are, to some extent, necessary in this day and age. You can't rent a car without one, and they certainly come in handy in emergencies.

If you are self-employed like me, a credit card can be necessary to tide one over between paydays. And if you run a business, you need one to pay for goods and services, and it can make running a business so much easier. But many people fall into the credit card debt trap. I have, so I know firsthand how it works. It is easy to do. Like television, Credit Cards are fatally attractive to those with addictive personalities.

If you read blogs relating to credit card debt and problems, you often hear people refer to credit cards in the same way junkies refer to their drugs. Shiny plastic cards are probably one of the strongest drugs out there, and they can ruin lives and marriages. With the Republican sponsored "Bankruptcy Reform Act" passed a few years back, it is harder and harder to get out from underneath credit card debt by declaring bankruptcy.

Credit Card companies loved it when their customers spent up to the limit, and paid off in only small increments. But they hated it when those same customers walked away from huge bills by going Chapter 7 on them. So they made that harder to do. As a result, getting caught in the credit trap can really hurt you in a big way. Here are some small things I've learned:

1. Get the lowest interest rate and keep it: Getting cards with airline miles on them, or ones that sponsor your favorite college or organization are neat and all, but these often carry the highest interest rates. Why? Simple. Those "Free Frequent Flier Miles" are not free, but are paid for by the card companies to the airlines. So they jack up the rates to cover their costs. While it is a nice fantasy to say "Well, I'll pay off the balance every month and never pay interest" the reality is that if you don't pay the balance off for even ONE month, huge credit charges apply. 

Suppose you have an emergency and need to charge more than you can pay off in a month? You are then stuck with high interest charges. I have a "Frequent Flier" card that I do pay off every month. That has an interest rate of 18%. My other "low interest" card with no benefits, has a rate of 6.7% Which one is the real bargain? Owning a high interest card can be a dangerous temptation. If a balance builds up, it can be much harder to pay off.

And when getting a low rate, remember that some low rates are basically "teaser" rates that expire after a year or so, or go to astronomical rates (21.9% or higher) if you are even one day late with a payment. Yes, yes, you always pay your bills on time, right? So you have no worries, right? WRONG! If a statement or payment is lost in the mail, tough! If you mail it too late, tough! If you forget to pay online, tough! If you setup automatic payments and the bank messes up, tough! Jacking up rates for even one late payment make credit cards like a loaded handgun ready to go off.

And in today's world, banks have no incentive to lower rates anymore. Credit is tight, and they realize you will not likely "take your business elsewhere", particularly if you are near your credit limit. Those neat credit card offers tend to dry up once you are even a day late on a payment.

So when looking for a low rate, pick a rate that is low and STAYS low. Ask if the low rate expires or can be "adjusted" at whim, or will go up with late payments or any other indicia. Some credit card companies word the agreements to allow them to raise their rates based on your credit score. If you get into trouble, then you are in deep trouble.

2. Setup Autopay for the Minimum Monthly Payment: Not paying off the balance every month is bad. Not making any payment at all is horrific. And it can happen to anyone. I pay my bills online and once, before leaving for vacation, I made a payment on my card. When I got back from vacation, I was appalled to find that the interest rate had skyrocketed. When I called to find out why, they told me I had paid one day earlier than scheduled, so that my monthly payment for the next month was "missing."

It can happen to anyone - if they lose a payment in the mail for example. And if you read the fine print, most cards will jack your interest rate to 22% or even as high as 36% (!!) if you are late on even one payment. In this instance, I was covered, though, as the card company agreed to credit my account for the proper month, waive the late fee, and reinstate my previous interest rate. I setup both cards (personal and business) to deduct the minimum payment every month from my checking account. That way, if I forget to pay the card or don' t pay it on time, at least I am not socked with a late fee AND the staggering higher interest rate.

3. Check your balance weekly or more: Waiting for the end of the month for the mailed statement is a very bad idea. To begin with, statements can get lost in the mail (and you may then forget to send payment). Moreover, you may find that your balance is unexpectedly high at the end of the month, and your well laid plans of "paying off the balance every month" go awry very quickly. The good news is, nearly every credit card company now has a website you can log into to check your balance and even make payments. By logging in frequently, you can check to see how much you are spending, and also make yourself more aware of what your balance at the end of the month will be. No "surprises" at the end of the month.

4. Know Your Card Stats: It is funny how some folks will know how many horsepower their car has, how fast it can go from 0 to 60 and what the mileage was when they last changed the oil, but they have no idea what their interest rate is, the statement date, and payment due date for their card is. Like I said, a credit card is as expensive, powerful, dangerous, and necessary as an automobile. Being ignorant of either can be costly. You should know what date your statement closes, when your payments are due, and what your interest rate(s) are.

5. Use the Cramdown: And don't be afraid to "cram down" your card provider on fees and interest rate. If you tell the card provider you plan on switching cards, they will usually waive fees and lower interest rates. To make this threat credible, however, you have to have a low or zero balance and a good credit rating. If you have a high balance and bad credit, well, they know you aren't going anywhere anytime soon and they will tell you what interest rate you are paying. 

I went to cancel one high-interest rate card once, and was transferred to a "cancellation specialist." I listened to their spiel and then calmly told them the reason I was cancelling the card - I could get a lower rate elsewhere with no fees. After a short pause, the representative put me on hold and then came back with yet a lower rate than the competing card. If you don't need the money, they are more than willing to loan it to you, as the old saying goes. 

Cramdown tactics are not available to those who have high balances, though. If your card is paid off every month, they will offer a lower rate. If you have a high balance, they know you are "stuck" with the debt, and they will try to foist the highest rates possible on you.

6. Pay cash: As I noted in my previous blog post, carrying and paying cash is a good idea. As a youth, I did not carry cash as I felt I would be tempted to spend it, and also I was worried I would get "robbed". Both fears turned out to be wrongly founded. By not carrying cash, I just ended up spending money on credit cards or bouncing checks. And I haven't been robbed in my lifetime. Paying cash has other advantages. Many small businesses prefer cash, as they don't have to pay high credit card charge fees. In addition, they may (ahem!) keep the transaction off the books. So you make friends when you pay cash. 

7. Cutoff Card Spending: If you find yourself with an alarming and growing balance on your credit card, don't panic. The first thing to do is STOP USING THE CARD, PERIOD. Revolving credit is just what it means; it keeps revolving and revolving so long as there is a balance on that card. The only way to put an end to those interest payments is to stop using the card and pay off the balance. If you keep adding incremental charges to the card and keep it near its limit, you will never pay it off, and you will end up spending hundreds, if not thousands of dollars per year in interest charges.

8. Use Balance Transfers Wisely and Carefully: We've all gotten those offers in the mail - little checks you can just cut out and spend, right? Well, think carefully before doing a balance transfer or getting a cash advance. Both can be dangerous to your financial health if used foolishly. To begin with, one fatal mistake many folks make is to use a balance transfer offer to "pay off" an old, high interest rate credit card, and then run up new debt on that very same old card. Now they have twice as much debt as before, with no end in sight. Once the initial "teaser" rate on the balance transfer disappears, the consumer now has twice as much high-interest revolving credit. These balance transfer offers CAN be helpful in some circumstances. 

If you CUT UP your old card and transfer the balance to another card at a lower rate, it can give you the "breathing room" to start paying back that debt. With rates as low as 4.99% or even 0%, you can cut a monthly interest charge of $250 or more in half or even to zero. So long as you take that savings and use it to PAY DOWN the debt, you can come out ahead. However, the card companies are counting on you spending that money on new useless gadgets, toys, restaurant meals, and other junk and hoping you'll end up as another debt slave. 

For my situation, I needed some cash to pay my tax bill. I could just go online to one of those tax payment services, which for a 2-5% fee of the total, would process my credit card to pay the tax bill. 2-5% is a lot of money. Ouch. On top of that, I would have to pay the regular purchase rate on the debt on the card, which could be as high as 17%. Double ouch. However, the friendly card company would process a cash advance at 4.99% for 12 months over the phone while waiving the 2% service fee. Nice. That's cheaper money than my credit union will loan. 

There are catches, though. The interest rate rockets upward if you are even one payment late. And if ANY of that debt is still on the balance 12 months later, the rate goes up to the regular purchase rate. Needless to say, I'm making this a VERY short-term loan! So long as you strictly play by their rules, these deals can be good - but there is little or no room for error. 

NOTE: Credit Card Companies are NOT STUPID. One trick they can use is to change the terms on your card. How does this work? They send you a letter saying "we are changing your interest rate to 15% next month. If you don't agree to this, you can still have your old rate, but they will close the account once the card expires. Citibank has done this recently to over 4,000,000 (FOUR MILLION) customers. Of course, they are loathe to lose customers, so before the card expires they will gladly talk about renewing the card at a higher rate.

9. Cut Your Credit Limit: You've gotten letters in the mail from your credit card company that goes something like this: "Congratulations! We've raised your credit limit!" Gee, thanks. More debt I can get into! One way not to spend money is not to have it. One way not to get into debt is not to have a tempting line-of-credit to fall into. Call your credit card company and ask them to lower your limit to an amount you feel comfortable with. There is nothing wrong with this, provided you don't charge over the limit and incur over-limit fees. Again, frequently checking your balance and using CASH instead of credit can prevent this from happening.

10. Debit Cards: Credit Card companies like to tell horror stories about debit cards. "If someone STEALS YOUR IDENTITY they could DRAIN YOUR BANK ACCOUNT" they say. There are certain precautions you need to take with debit cards, of course, but they can be very safe to use. To begin with, the "Identity Theft" thing is totally over-hyped (like terrorism) by folks with an agenda (usually selling something, like credit protector, or a missile system). Checking the balance on your bank account and reconciling it DAILY (or nearly so) is the best way to avoid problems. 

When paying with your Debit card ask the clerk to "run it as a credit" (with a signature, not a PIN). This may provide you with additional credit-card like protections, and also prevents anyone from learning your PIN. If you use a Debit card responsibly, you can avoid carrying a balance and also avoid interest rates and charges. It might be a good idea to tie your debit card to a working account that doesn't have a large balance (like your life savings) so it can't be drained if someone hacks into it. But make sure the balance is enough to more than pay your bills. 

For example, when I was younger, I wrote a check from my account to pay the rent. There was $50 left over in the account (I was poor), so I went out for Chinese food that night. The clerk kept swiping the card several times and for some reason the charge did not go through. After his fourth attempt, the charge went through and I though everything was OK. The next day, I checked the balance on my account (I was anal-retentive even then) and was horrified to discover FOUR charges for Chinese food on my account. What's more, my landlord had tried to cash my rent check - and because of the erroneous Chinese food charges, it BOUNCED. Ouch. 

What happens when Merchants "authorize and settle" a credit or debit card is that often a hold is first placed on the card ("authorize") and then when the transaction is completed, the amount is settled. Once the Chinese restaurant ran a settlement later the next day, the erroneous charges came off my account. But the fact remained that the three erroneous "holds" on the account meant my balance was too low to clear the rent check. The moral is to never spend your account down that low - with a DEBIT card. If you have to squeak the last penny out of your bank account, write a check (which the Chinese place would have taken) or pay cash.

11. Paying Off Credit Card Debt by Refinancing Your Home: Everyone has probably done this once, and it is a very bad idea unless you really, really are in serious financial trouble and are willing to use this as a start of a turnaround, and not just another "fix" for the credit card junky. The temptation was simple: Back before the Real Estate Crash, housing values shot up and interest rates were dropping. You could refinance your house and "take out" enough money to pay off your credit cards (or more) and still have nearly the same monthly payment, or maybe just a little more. 

On paper, it sounds like a swell idea - to folks who look at money as monthly increments and monthly payments only. Your monthly cash flow will improve greatly, and now you have a paid off credit card! The problems are multiple: To begin with, you now have more debt on your home, which may or may not be tax deductible (Uncle Sam has not checked up on this, but it is supposed to be limited to loans up to PURCHASE PRICE only!). Your major asset is now further encumbered. That debt will have to be paid off someday - and all that restaurant food you charged on your credit card is now financed over 30 years. 

The second problem is obvious: Once you've paid off the credit card, the credit card junky in you will temp you to rack the balance right back up again. Double Ouch. Third, when making these transactions take place, those friendly and helpful mortgage brokers and closing agents are all too happy to slap on all sorts of "junk fees" and the like, which add to the balance of your mortgage. You end up spending just as much, if not more, than you would have if you had paid off the card the regular way. You just don't realize it because they've spread all the fees out over 30 years. 

The major problem with this, of course, is that it has lead to the credit and Real Estate "crises" we are in now. Many folks mortgaged their homes to 100% of market value - some even to 110% or more. Weird loans were available back then. Now that prices are falling, these folks are "upside down" in their homes, and if they want to sell, they'd have to just walk away or declare bankruptcy. And of course, many of these "re-fi" loans were toxic ARMS or other "novel" instruments such as balloon notes or payment optional notes that now have indexed up and locked their borrowers into unaffordable payments. 

If you really, really are over a barrel, refinancing can be helpful. But going in, you should search for the best FIXED RATE loan possible with no points or junk fees. Come-on artists and mortgage places that advertise heavily usually try to sneak this stuff into the agreement. Just avoid them entirely. And you should have a debt PLAN in place to make sure you are not refinancing four years later with yet another "maxed out" credit card. Of course, all that advice is probably moot. Few lenders are making refinancing loans these days. It's hard enough to get a 30-year fixed with 20% down. But maybe that's the way it should be....

Credit Card companies are kings of the fine print. And the way they treat their customers often forces them in to bankruptcy. They lure people into agreements with low rates and high credit limits, and then, if even one payment is a day late, raise the interest rate to the point where the borrower can never pay off the balance.

If you read my article on SCAMS, you'll see that the typical credit card company hits several of the scam indicia: They use Fine Print; Too-good-t0-be-true low initial rates; and the entire business relationship predicated on a lie.

If you can live without a credit card, you are far better off. If you feel you have to have one, treat it gingerly and carefully. It is all too easy to 'get in over your head' and end up in bankruptcy, as happened to at least one young friend of mine.

Should you invest in GOLD? Uh, No.

Should you invest in GOLD? Uh, No.



















As the chart above illustrates, gold prices have gone up over the last few years. Many websites, television shows, newspaper advertisements, and the like are hyping Gold as a good investment for the average consumer.

Should you invest in Gold? The answer is NO and let me tell you why.

In shaky financial times, like we have today, where people are worried about finances, many turn to gold as an investment vehicle, thinking that the "security" of a mineral is better than some currency or stock investment. As a result, the price of gold skyrockets during such times.

When times get better, gold prices either drop or flatten out. Here is another chart that might give you a better idea of the historical price of gold and where it may be going:
















As you can see from this second chart, the price of gold spiked in the past, in fact is spiked right at the peak of our last financial crises in 1979. Then, it dropped and stayed relatively flat for over two decades - until about 2007. If you had "invested" in gold in 1979 at the peak of the market, you would only have made back your investment in 2007 - and even then, taking into account inflation and the opportunity cost of money, you would still be behind.

2009 has been a scary year for many people, and gold is spiking again. People hawking gold on television (including the odious Glenn Beck) show you the first chart above and say "Look at how gold is going up, up, up!" and entice you, the unsophisticated investor, to buy.

Gold is a commodity, and commodities are a risky investment for any investor, particularly one that is not familiar with the commodity. You can lose your shirt in commodities if you don't know what you are doing. The idea that you should buy any investment because it has "gone up" is flawed. Usually if an investment increases dramatically in value, that means it is too late to jump on the bandwagon. The investment may go up some more, but most of the desirable gain has already occurred. When it starts to tank, the people who bought last, or close to last, get stung the hardest.

So yes, if we had a crystal ball, buying gold in 2005 would have been a good investment. And selling it in 2010 would be a smart move - unload your gold onto the people dumb enough to follow Glenn Beck's financial advice. There will likely be another drop in the price of gold, just as we saw in 1982.

Why is this? Again, gold is a commodity. They dig it out of the ground. You can even refine it from seawater. The cost of making gold and the price of gold are two different things. Once the price of gold reaches a certain point, gold mining operations ramp up to cash in on the market. Mines that were once not profitable are re-opened to go after more gold. People who were sitting on gold mines will decide to go after the ore and refine it and sell it.

It's call the theory of the mine, and it is taught in economics class. If you own a gold mine, you have an incentive to mine the gold - to sell it. But if prices are low, you have an incentive to keep the ore in the ground and wait until prices go up. As prices are up right now, guess what the gold industry is busy doing?

That's right, they are mining gold. Production is going UP right now, to meed demand.

Not only that, but the "we buy gold" people are snapping up old gold jewelry and pieces and paying people cash for them. This in turn is melted down and increases the available supply.

Supply and demand - the basic market forces - apply to gold as well as anything else. The people hyping gold as an investment don't mention this. They want you to think that gold is "rare" or "limited" or that there is a finite supply. The reality is, there is a lot of gold in the world, and other than industrial applications and jewelry, it serves no real function other than as a quasi-currency. It's inherent value is really very low. The same is true of diamonds - despite what the deBeers people say.

When you buy gold as an investment, you hype up the price more - by saying it is worth something. This works fine, until folks start to question the value of it. If people stop buying, and there is more gold on the market than there are buyers, the price can plummet - dramatically.

I suspect sometime in 2012 or thereabouts, the supply of gold from various sources will increase to the point where prices will drop. Ones prices start dropping, people will start panic-selling their hordes (before the price drops more) and the sudden peak in gold prices will be a sudden valley.

There are other problems with gold as well. Storing it is difficult and costly. You'll either have to rent a safe-deposit box or buy a safe and risk theft. If you purchase physical gold or sell it, you'll have to pay transaction costs to a gold dealer. If you buy "paper gold" - shares in a gold company or some other paper transaction that represents physical gold, you are no better off than the person holding paper currency. The company claiming to keep gold on deposit for you could end up bankrupt and leave you with nothing. The "security" of owning a mineral is illusory.

If you want to "invest" in gold, a few years from now will be a better time to buy - perhaps in 2013 or 2014. But even then, as a long-term investment, it will still suck. Study the diagram above and think about the poor SOB who bought gold in 1982 and where he was in 2002, twenty years later. If you put your money in gold in 1982, as opposed to the stock market, you'd come out way behind - even taking into account the "black Fridays" and other setbacks the market has had since then.

When someone starts hyping an investment on television, you should be skeptical. If something was such a good investment, they would not be hyping it on television - they'd be investing in it themselves. That should be readily apparent to anyone. Why sell the goose that laid the golden egg?

Don't fall for investment scams like this. Don't buy gold. You'll get burned in the long run.

NOTE: I am re-posting this, as I am receiving SPAM comments from people hyping websites. I am deleting the original post and now have comments moderation turned ON.

What Causes Poverty

Poverty may be caused by lack of opportunity.
It is perpetuated by poor financial choices.

One of the sponsors on NPR is some foundation whose stated goal is to "find the causes of poverty."

This struck me as sort of odd, as the cause seem rather obvious to me.

Many folks believe that poverty is caused by a lack of money. But that is merely the symptom, not the cause.

I believe that poverty may be caused by lack of opportunity, but is perpetuated by poor economic decision making.

Consider, for example, a young rich man who inherits a million dollars when he turns 21. He squanders it all on parties and expensive cars and junk, and by the time he is 25, he is bankrupt.

Not many folks would feel sorry for him, would they? After all, he had a great opportunity handed to him, and he foolishly squandered it.

Now consider another young man, also 21 years old. He goes to work at the local factory and makes $50,000 a year for 20 years. Over his career at the factory, he makes a million dollars. But he squanders most of his income on cigarettes, beer, cars, jet skiis, snowmobiles, motorcycles, cable television, and other unnecessary expenses - all financed, of course, by the finance company. By the time he is ready to retire, he is essentially broke.

Funny thing, but many people would feel more sympathy for the second fellow, as he was a working stiff who didn't just get a million bucks handed to him. But he squandered it in pretty much the same way the first fellow did - on shiny trinkets and junk.

So is there really a difference? I think so, but not as much as you'd think.

Both fellows had opportunities. Obviously a million bucks is a better opportunity. But the point is, both had opportunities to make money and become wealthy.

But more importantly, neither fellow had the education and training to make good sound financial choices, and as a result squandered most of their money. One fellow just did it all at once, while the other fellow just slowly bled to death over 20 years.

We do not educate people in this country about how to use money and what it is. On the contrary, we do just the opposite. We encourage consumerism and spending and borrowing and owning of shiny depreciating objects. And we do this through the greatest teaching machine ever invented - the Television.

Greatest Teaching Machine? Yup. Yes, you know how I feel about television - it sucks. But that is only because of the way it is presently used today, not because of the underlying technology. In the early days of TeeVee, it was not such a medium for shilling corporate interests and encouraging consumption. But since the 1980's, great changes have occurred. The FCC has basically been neutered. Moreover, regulations that applied to "over the air" stations have been deemed not to apply to cable.

So television acts as one long advertisement for consumption and borrowing. The ads blare how you should buy a new SUV for "only" a few hundred dollars a month. And then order a pizza and pay for it with a credit card. What's in YOUR wallet? Broke? Go get a Pay Day Loan like the smiling girl on TeeVee who is fanning a wad of $20 bills. She's happy, you can be too!

The ads are bad -the programming is worse. The home channels push the idea of owning more home than you can afford. And they push, push, push the idea of home renovations, including expensive gourmet kitchens and bathrooms. Every channel has programs on how to spend your money.

Home shopping sells junk over the air, enticing you to "call now" and rack up more credit card debt. When I worked at United Parcel, I would see boxes from these places go to the same addresses again and again. People think they can be happy if only they can consume more. And of course, it never works.

The financial channels are the worst - often pushing the idea that you should monitor the stock market on a day-to-day basis, looking for "hot picks", instead of investing for the long haul. Let's face it, real good financial advice just isn't all that interesting and doesn't make compelling television. So we have this guy on the financial channel shouting at the camera. And people think he's a genius. Go figure.

Poor people may start out poor because their opportunities are limited. But what keeps them poor is that they squander what little opportunities they have and then make bad financial decisions over and over again. Education is the one opportunity that is available to the poor in this country. And yet in many poor communities, studying hard is not viewed well by your peers. Moreover, many poor people end up studying hard, but getting useless degrees that never lead to jobs. It is an opportunity lost.

Compounding squandered opportunities are the bad financial decisions made. Payday loan places, title pawn shops, bling-rim stores, and the like, all are prevalent in poor areas, as they all prey upon the weaknesses of the poor - the desires to have shiny consumer goods NOW, even if they can't afford them. So people sell their souls to the payday loan place so they can have shiny rims on their car. And they wonder why they are broke all the time.

It is sad, and it does make one angry. Some well-meaning folks have tried to outlaw these payday loan places, with some success. But the payday loan places and other industries that exploit the poor are well-funded (with the money they make ripping off the poor). So they fight back and get laws changed back again. It never ends.

And it has always been this way, too. And perhaps it always will be. The solution of throwing money at the poor rarely works. Without proper financial education, the money is often squandered. Lottery winners are the extreme example of this problem. People with no appreciation or education about money win the lottery. Within a few years, they are bankrupt, or as happened in one recent case, dead. There rarely is a "happily ever after" for lottery winners.

But there is some good news in all of this. It is possible - very possible - to get ahead and get out of poverty, simply by making different decisions than your peers. Instead of trying to have a fancy ride or flashy clothes, concentrate on building wealth. Instead of borrowing money to buy a flat-screen TV and renting furniture, put money in the bank.

It isn't easy, as all of your friends will think you are insane for not having cable - or worse yet, poor. But in the long run, you will come out ahead -far ahead, that your peers.

It is a ray of hope in an otherwise bleak existence. But it is there. But you have to chose it.

But to many, the temptation to have things NOW outweighs having real wealth.

For example, I knew a clerk at the Patent Office who had a brand new Toyota, always had nice Coach hand bags, and wore stylish clothes.

Now bear in mind that as an Examiner making 2-3 times her salary, I was driving a used car, buying my clothes at Marshall's and certainly not carrying a Coach bag.

When I asked her how she could afford all this on her salary, she explained that since she (and many of her relatives) all lived with her parents, she had to pay no rent. So all of her income was disposable - and she disposed of it as quickly as she could. No savings. No 401(k) (Thrift Savings Plan), nothing. Just a series of payments to finance companies that totaled, every bi-week, the amount in her paycheck.

And of course, since she lived in a bad neighborhood, the new car got broken into and vandalized. And since she was so tight on cash, she never maintained it or changed the oil. It was DOA before the payments were done. Bad financial decisions compounding one another.

A more difficult but better choice would have been to put money in the Thrift Savings plan, dress more plainly, and save money for her own place to live someday. Eventually, she would get married or her parents would pass on, and she would have to move out of their house. Rather than save for this inevitability, she just spent every penny.

And I see this with other friends, who try to "save money" by living in in bad neighborhoods. They use the savings to buy expensive consumer goods, like televisions and cars, and then buy alarms and put bars on the windows to keep their neighbors out. It is a false economy, paying less for housing so you can have depreciating assets.

You are better off living like a pauper in a good neighborhood than living like a lottery winner in a bad one. But people don't see that. After all, the guy in the bad neighborhood has a flat-screen TV and a new Buick, right?

But in terms of opportunities, there are more in the better neighborhoods - education for your children for starters, not to mention a better environment to raise them in. And not having people steal all your stuff all the time (both because you are not in a crime-ridden area and you have less stuff to steal) is a lot more relaxing and less hassle.

But again, this is a matter of personal choices, and you certainly can't force people to make choices in a free society.

But then again, you can't force me to feel sorry for people who make bad choices, either. Whether it is the 21-year-old heir who squanders a fortune, or the working stiff who squanders his paycheck, both have made poor choices. We can try to educate people, but that is all you can do.

And I have made poor choices in the past myself. Does anyone feel sorry for me because I gave in to peer pressure and felt I had to have a brand new car? Of course not. It was my own darn fault. We have to take responsibility for our own actions.

And that is the point of this blog. Rather than trying to blame our situation on someone else (as so many are trying to do in this day and age) we need to take responsibility for our own actions and make changes in our lifestyle than enhance our wealth, not squander it.

We do have an amazing amount of choices to make in our lives. Despite what some may tell you, that the system is "fixed" against you, or that you have no options, we do have choices. When you compare your options and choices to those in many other parts of the world, the distinction is startling - and one reason why many immigrants do so well here. They are dying (often literally) to have the choices you and I take for granted.

It's all about choices. You may be dealt many bad hands in life, but you still can choose how to play them.

Mortgage Loan Insurance - a Total Ripoff

Insuring your mortgage makes no sense, when you can buy a term policy for far less.

When I say mortgage insurance, I am not talking about the kind of insurance you may be required to get, by your lender, if you make too small a down payment.   That kind of insurance - PMI - is designed to insure the lender, not you.  That is also a kind of rip-off as well, and an indication you may be stretching yourself financially.   If you can put down a larger down payment, you can avoid paying PMI.

What I am talking here about is the kind of mortgage insurance you will get offers for in the mail. You may get one with regard to a car loan or credit card.

"Pay off your mortgage if you die!" they cry, "Protect your family from high bills!"

The theory is this, if you die, they pay off the mortgage. Some more ambitious plans offer this service if you are disabled as well. Why isn't this a good deal?

Well to begin with, it basically is a life insurance policy, with a declining coverage - the balance on the mortgage. And the rates for this life insurance policy are astronomical - 2-5 times more than a conventional term policy.

Worried about leaving your spouse with a mortgage? Well, for half the cost of these "protector" plans, you can get a term life policy with twice the coverage. Such plans may be available through your local insurance agent, or organization (ABA, etc.), credit untion, or whatever. They are so common, you trip over them. And the rates are so competitive, it pays to shop around.

Worried about disability? Well you can buy disability insurance as well - often for far less than what these companies charge. But even then, I would caution you. Insurance agents are good at selling these policies, but in reality, the odds of you becoming disabled are pretty slim. And if "shit happens" as they say, you'll likely find a way to make ends meet - by collecting social security disability, using your retirement money, selling off properties, etc. Disability insurance doesn't protect you, it protects your possessions.

Car loan insurance is even more ridiculous. And many young people buy it, too. If you die, who cares if they repo your car? And frankly, paying $25 a month extra so your $10,000 loan is insured for three years is more than ridiculous.

Credit card companies are jumping on this bandwagon with a new twist - they offer to pay off your credit card if you lose your job involuntarily. They are playing off people's FEARS, and as we have discussed before, acting out of fear is never a good idea.

If you want insurance, then buy it. But walk away from mortgage, car loan, or credit card insurance, as it is horribly overpriced.