The Bible and The Bard Agree on this Financial Principle
Last summer my wife and I took off for an overnight getaway - just the two of us - and ended up in Staunton, VA near Charlottesville. The draw to this particular place was the American Shakespeare Center’s Blackfriars Theater . Here’s a blurb from their website:
The American Shakespeare Center is an internationally acclaimed theatre company that performs Shakespeare’s works under their original staging conditions — on a simple stage, without elaborate sets, and with the audience sharing the same light as the actors. Home to the ASC’s resident troupe, the Blackfriars Playhouse has been established as one of America’s premier Shakespeare destinations.
I was just searching for something to do and came across the town and the theater and was intrigued by them. So we made some reservations and set off to Staunton to see Shakespeare’s Merchant of Venice . I was blown away! The theater experience was amazing and I had so much fun that evening! If you are ever in the area, I would definitely recommend checking it out.
At the end of the play, I turned to my wife and said, "You know what the takeaway from this evening is? Never cosign a loan!"
C’mon - what else would you expect from a guy who has a personal finance blog!
As a reminder, here’s a brief summary of The Merchant of Venice from sparknotes.com :
Bassanio is desperately in need of money to court Portia, a wealthy heiress who lives in the city of Belmont. Bassanio asks Antonio for a loan in order to travel in style to Portia’s estate. Antonio agrees, but is unable to make the loan himself because his own money is all invested in a number of trade ships that are still at sea. Antonio suggests that Bassanio secure the loan from one of the city’s moneylenders and name Antonio as the loan’s guarantor. Antonio and Bassanio approach Shylock, a Jewish moneylender, for a loan. Shylock nurses a long-standing grudge against Antonio, who has made a habit of berating Shylock and other Jews for their usury, the practice of loaning money at exorbitant rates of interest, and who undermines their business by offering interest-free loans. Although Antonio refuses to apologize for his behavior, Shylock acts agreeably and offers to lend Bassanio three thousand ducats with no interest. Shylock adds, however, that should the loan go unpaid, Shylock will be entitled to a pound of Antonio’s own flesh.
So not only has Antonio cosigned the loan for his friend Bassanio but he has also put his life on the line for it! Of course, in the end things do not work out as bad as it could have been for Antonio…but if you want to know the entire story and experience it in a supremely entertaining way - go check out the Blackfriars Theater! (though that particular play is not playing there any more, I’m sure any of them would provide a wonderful evening)
The Bible cautions against cosigning loans also
I was amazed to learn that God actually talks about co-signing a loan in the Bible.
My child, if you have put up security for a friend’s debt or agreed to guarantee the debt of a stranger. If you have trapped yourself by your agreement and are caught by what you said—
follow my advice and save yourself, for you have placed yourself at your friend’s mercy.
Now swallow your pride; go and beg to have your name erased. Don’t put it off; do it now! Don’t rest until you do. Save yourself like a gazelle escaping from a hunter, like a bird fleeing from a net. Proverbs 6:1-5 (New Living Translation)
Again, cosigning a loan for someone is not a good thing to do. The Bible informs that you should "swallow your pride" and "go and beg" to have yourself removed from the loan. And don’t even wait until tomorrow it urges - "do it now!" This is serious and urgent advice! It certainly does not appear to me that cosigning a loan is something you should do.
Why does someone need a cosigner?
Remember, the reason that your friend needs a cosigner on a loan is because the bank (or whoever) is fairly confident that your friend will pay back the loan. If they thought your friend was good for the money, they would not have required a cosigner. And if you friend does not pay back the loan….guess who will be. So, my advice is (obviously) do not cosign a loan for someone else. And if you do consider cosigning a loan, assume that you will be the one who has to pay back the loan. Make sure that your finances, your family relationships, and you relationship with your friend will survive the probable event that you will be paying for it. It might be hard to say "no" to someone asking you to cosign for them, but that still might be a lot easier than doing serious damage to your personal finances and serious damage to your relationship with your spouse and/or family!
Photo Credits: ryanrocketshipWhere’s My Bailout?!?!
The US government is going bailout crazy. Once they loosed the genie from that particular bottle, everyone and their brother is showing up at the trough hoping to get a bite. Who knows anymore what the original intent was - a banking bailout, a wall-street bailout, a bailout of AIG, isn’t it supposed to have something to do with a housing bailout, and now the domestic auto companies and even credit card companies are clamoring for a piece of the pie (I think that sets a new personal best in the category of "most cliches used in a single paragraph!").
Some people actually acted responsibly over the past few years…
All of this, as might well be expected, has a number of people up in arms. Even in the midst of the housing craziness of the past few years, there were actually some responsible people who bought a house based on how much they could afford to pay for it as opposed to how much loan they could get (no stated income, interest-only, negative amortization anyone?). These silly people actually eschewed irresponsible purchasing and did not buy a McMansion because they held to some crazy belief that you should be able to afford the things that you purchase. And what do they get to show for it? Nothing (maybe even worse than nothing!).
And now you get to pay for the people who did not
The government has swooped in to save the day and take care of those who overspent and overindulged while the responsible pay for it through their taxes. Some of the responsible could swallow the original argument that it was for "everyone’s good" because eventually all the foreclosures and their resulting effect on the economy would bring down the value of their home as well and possibly cost them their job. So, they swallowed the bitter pill and moved on. But now they are talking about bailing out people who ran up too much credit card debt - this is getting ridiculous!
So, what can you do?
Well, nothing really. Let’s be blunt: you are going to get screwed. The government is handing out their candy to everyone else except you. (Isn’t it interesting that if do something stupid and mess up, you have to deal with the consequences. But if enough people do something stupid at the same time , the government will come in and clean up the mess). The obvious answer is to get involved politically. Call you representatives. Tell them how you feel. Get involved in whatever way you can.
Your only consolation is that at least you did the right thing
I agree that it stinks that the foolish are bailed out by the prudent (and by "prudent" I don’t mean the government). It is annoying how, in this situation, stupidity is seemingly rewarded at all levels (buying a $650,000 house with a salary of $55,000? Well, the bank wouldn’t let you do it if they weren’t confident you could repay it so you must be able to afford it! You’re going to give a $650,000 loan to a person who makes only $55,000? Sounds like a good idea to me - so what are you going to spend your commission on? You really think buying a whole bunch of irresponsible loans will make all the risk go away? You fancy finance guys sure are smart! Better yet - why don’t you borrow a bunch of money so you can buy even more of those loan package deals and greatly multiply your gains!)
And you’ll probably try to do the right thing tomorrow too
Let’s be honest here…you, as a fiscally responsible person, will not learn your lesson. Tomorrow you will go out and attempt to make more responsible decisions. You will even try to learn from the borderline decisions you made yesterday. And after you purchase big items, you will probably pay back the money that your borrowed, right? For those of you making such "foolish" decisions, remember this:
The wicked borrow and do not repay, but the righteous give generously. Psalm 37:21 (NIV)
Remember, it doesn’t matter what everyone else is doing. It doesn’t matter who is not paying for what they bought nor whether they experience any ill effects from it. The Bible tells us to be responsible in our decision making and then to honor any debts or obligations we undertake. While we’re on the subject, here’s another thing to remember:
In the house of the wise are stores of choice food and oil, but a foolish man devours all he has. Psalm 21:20 (NIV)
So, what have we learned?
When you were younger, I’m sure your mother told you not to do something just because everyone else was doing it ("If Johnny jumped off a bridge, would you jump off one too?"). So, we need to continue to follow that advice now. Continue on the path of financial responsibility because you know it is the right thing to do. Continue to not spend more than you earn and continue to pay off any debts you have incurred (and try to stay away from any new debts). It might not work out optimally for you in all cases (as current events are showing) but when you go to sleep at night, you can rest comfortably knowing that you are attempting to follow God’s mandates for living responsibly and being a good steward of your resources.
Do not be bitter that your neighbor has all those fancy toys that he put on a credit card and/or a home equity loan and now he might get some help from Uncle Sam to pay them off. Bitterness will certainly do you more harm than good. Do not covet what your neighbor has, for along with the mortgage and credit card help will come the trashed credit score - and I’m sure you don’t covet that!
Photo Credits: Mike LichtIs all this Technology Good or Bad for my Finances?
Like most people these days, my wife and I carry cell phones everywhere we go, read news and blogs via laptops, check our bank accounts, brokerage accounts, and retirement accounts online, pay our bills online, and arrange automatic saving and investing online. I thought it might be interesting to take a minute to examine the effect all of this technology has on our finances?
Stuff costs money
First of all, money is required to purchase a lot of this technology which hurts our finances. Cell phones typically cost money upfront and on a monthly basis. There is always the pull to get a newer and fancier model with a more expensive monthly plan as well. I currently have a basic cell phone, but most phones nowadays enable the user to check new and even stock prices through them. In fact, Etrade recently released a mobile platform that you can access from a smart phone.
There are also costs associated with getting online to do all the tasks (and more) I listed above. Of course a computer is required and high-speed internet access (I couldn’t imagine going back to dial-up now). If you use a laptop, you’ll probably want a wireless router as well. All of this costs money…and the more money you are using to purchase new technology, the less you get to keep.
This technology provides convenience and knowledge
With that being said, there are still many tangible advantages that comes along with all this technology. If I am not sure what my checking account balance is at any hour of the day, I can check exactly how much the bank thinks I have in less than a minute (3 minutes if I have to boot-up the computer). If I forget to mail a check to pay a bill, I can log into my online banking account and have the bill paid more conveniently, in much less time, and with less risk (and less expensively) than filling out a check and dropping it into the mail. From a purely financial standpoint, a cost savings in envelopes and stamps is realized and that doesn’t even take into account the time savings which is typically much more significant.
Also, current technology provides many tools for managing your finances (yes, I know for some a pencil and calculator work just fine, but maybe others of us need a little more help) There are numerous net worth tracking tools available online to help you stay on top of your financial situation. Also, there are many budgeting software options to facilitate managing and tracking your income and expense. These are just but a few of the advantages that come along with these technological advances.
Investing is much easier though that is good and bad
It is also much easier to invest money in stocks, mutual funds, and options via online brokerage accounts and in US Bonds at TreasuryDirect.com. A wonderful byproduct of these advances are that online brokerages have driven the cost of investments down drastically. Whereas in the past you would have to call up your stock broker and pay who-knows-how-much to request a trade, you can now buy and sell stocks for $5 online (or even free in some cases). On top of this, the internet provides an amazing wealth of useful information on investing to educate you how to invest. As such, there is really no excuse for someone not to be able to invest in mutual funds and/or bonds for long-term growth.
On the other hand, the easy availability of this information and the ability to trade can be a negative as well. Sure, it is easy to invest in stocks, bonds, and mutual funds, but on the downside, it is easy to invest in stocks, bonds, and mutual funds! Making careless decisions because it is cheap and easy can lead to real difficulties down the road. I’m sure you’ve seen the ETrade television ads of the baby buying stock - maybe this is becoming a little too easy (and that spit-up one is nasty). This can lead to irresponsible day trading and the real possibility of losing a lot of money. It seems so easy to try to time the market and make a big score and it only costs $7.99 per trade! I personally think this might be too enticing.
Furthermore, not only is there a generous amount of information related to finances and investing on the web but there is also a wealth of bad information out there. There are numerous online investing newsletters available to help you under-perform the market. I’m sure a simple search would return plenty of websites eager to hawk penny stocks in an attempt to have you make them a bunch of money. Even from reputable sources like online magazines, too many of the articles are geared towards enticing you to stray from your long-term plan to try to time the market. Already I’ve seen an article for the best stocks to buy during the Obama presidency. You can always find articles on "the hottest six stocks for next month" and "where to put your money for 2009." The point is to be very cautious in the information you rely on.
Overall I feel technology has a beneficial effect on finances - if we use it responsibly
Of course, there are pitfalls, but when you look at the big picture, I think we are much better off due to the advances of banking, investing, and personal finances compared to a few decades ago. If you can resist the urge to drift from your long term investing plan, there is great convenience and cost savings to be had making use of the internet. I love my online banking and being able to access my Vanguard account online. Setting up automatic transfers from my checking account to a high-interest savings account at a different bank and to my Vanguard account makes it very easy to setup and stick to a savings and investing plan. Technology will always advance, so we might as well figure out what pitfalls to avoid and what advances to embrace to make it easier to realize our goals.
Where should you keep your Emergency Fund?
Well, I’m not sure whether this is a good day to write this article or a week or so too late. At the very least, it will be easy for me to find an example and will probably make my argument easier. I have had this post on my list for almost two months - I now wish I would have posted it sooner.
I was having a conversation with a friend a while back and (as most of my conversations seem to do) it turned towards financial topics. He asked me if I thought it was really necessary to keep your emergency fund in a liquid account - like a savings account. He told me that he didn’t see any reason to keep it all in a savings account. Instead, he liked to keep most of his money in the stock market. He reasoned that he can withdraw the money from his account at any time and have access to that money within a week.
Conventional wisdom says keep your emergency fund in a safe account
Most of the time you will hear conservative financial personalities (like Dave Ramsey) tell us that an emergency fund should be in a simple savings account. In fact, Ramsey goes so far as to say that the money should be absolutely safe and absolutely easy to withdraw. Earning interest, he says, is not the point of that money; it must be there if and when you need it. But is the conventional wisdom correct in this case?
Personally, I agree with the conventional wisdom
In discussing this with my friend, the scenario I described to him was as follows: Imagine that the economy is not doing so good. Say that the stock market just decreased by 20%. And since the economy is not doing well, you lose your job. So, you’ve just lost your job and now your emergency fund is 20% smaller at the exact moment you need it. That was my "worst case scenario" as I described it to him. Unfortunately, reality is even even more grim at this point in time with many jobs being lost due to our struggling economy (have you noticed how most of the current problems with the economy are related to debt in one way or another?) and the US stock markets are down 40% from a year ago. So, if you’ve lost your job recently and your emergency fund is now only a bit more than one-half of what it was last year, you are hurting!
But what about the opportunity costs?
My friend countered that he could tolerate the 20% loss because he would have made 40% in the market during the good times. He felt like leaving the money to sit basically idle in a savings account would cost more money in the long term. This argument is reasonable but, to me, is a bit risky. Certainly, I do not advocate putting all of your money in a savings account. I am definitely in favor of investing most of your resources for the long-term. I just think that the emergency fund portion of it should be safe and readily available.
This argument is just semantics
Remember that the typical range bandied about for an emergency fund is 3 to 6 or even 8 months of your expenses. That is a huge range! So I think this argument comes down to how risky you want to be with your money. If you are saying you want to put most of your emergency fund in the stock market, I would say that money is not really part of your emergency fund. You are actually preserving a very small emergency fund and taking on a bit more risk than someone with a full 8 or 12 months of expenses in a savings account.
Like a lot of things, it comes down to risk
Maintaining a small liquid emergency fund while putting more of your money in the stock market introduces a higher risk than having a larger emergency fund. If you are comfortable with that risk, then that is a fine decision for you. For a single parent, it is probably not prudent to take on a lot of risk if it is possible to avoid it. I work full-time (and I blog, of course) and my wife works part-time, so having a smaller emergency fund is not as risky for us.
I would just caution you to be honest and realistic about your need and your tolerance for risk. Warren Buffet has said that if you aren’t comfortable with possibly losing half of your money, then you shouldn’t be invested in the stock market. This is even more critical for an emergency fund where you could need the money at any time as opposed to a retirement account that is decades away from being tapped. Markets do go up but remember that they also go down sometimes (and as we saw last week, they can go down frighteningly fast).
Keep it safe
My advice would be to decide how much you are really comfortable having for an emergency fund and keeping that in a safe, ordinary, boring (but FDIC insured) savings account. Personally, I use two online savings accounts - EmigrantDirect (currently 3%) and ETrade (3.3%). (Update: Etrade currently has a deal where you can get $25 for a referral sign up - if you’re interested, drop me your email address and I’ll send you an invite). You won’t make any money on it (although I’ve made a lot more money this year in my savings account than my mutual fund accounts) but that’s not really the point. Remember, it’s an "emergency" fund, not a "making lots of money" fund. Putting it in the stock market is not going to make you rich but if it’s not available if you need it, that decision might just make you poor.
Photo Credits: G & A Sattler and Nieve44/La LuzFear the Catalog!
As I returned home the other day from dropping my daughter off at school and spending the morning working at a local restaurant, my son rushed out to greet me in the garage. Ahhh, that’s so nice, you say, your son is happy to see you….well, not quite. As he ran past me toward the car, he asked "is the catalog in the car?"
The object of his desire was a simple catalog that we received the day before. In fact, I don’t have any idea what the name of the catalog was. All I know is that the catalog had "stuff" in it that, apparently, four year old boys and six years old girls really like….a lot.
Everything is so shiny and pretty
This all started the day before when my son burst into my office with catalog in hand. He proceeded to sit down on the floor and show me the numerous items that he had circled. He had chosen all manner of stuff (most if it really expensive for a four year old boy) was circled from this thing. When he (finally) got to the end, he said, "ok, so you go ahead and order these for me, ok!" and went to walk out. "Hold on a minute!" I said and tried to explain to him how these catalogs actually work. "You have to pay for this stuff." "Can I use my money?" "You only have 2 dollars." (He had recently splurged on a pirate set and drained his Bank of Mom & Dad account). "Is 2 dollars enough?" "No."
This behavior went on for days
Preceding the story above was the trip to school for my daughter and her friend. My daughter took the catalog with her and she and her friend paged through it the entire way to school asking each other what they liked and wanted. Then my son spent way too much time looking through this thing and talking about it over the next few days. He so wants what is in it that he is now beside himself because Christmas doesn’t come for another 4 months - "I just can’t wait until Christmas!" (yes, we told him he could ask for some of the things for Christmas).
I can not believe the influence this catalog has had on them
I am shocked by this random catalog’s effect on our family. We talk about these items A LOT now. But let me frame this for you - this is really out of ordinary behavior for them. Sure, they ask for stuff when we’re out, but they don’t constantly obsess over "stuff" and continually ask how long until Christmas (at least, not four months out!) In fact, I have overheard both of my older two kids at various times tell each other "you don’t need it, you just want it."
The more you look at catalogs, the more you want to buy
In the book I’m currently reading, Your Money Counts 
Personally, I really agree with this statement. I am usually fairly good at avoiding coveting, but when I look through a Performance Bike catalog, or walk through Home Depot, or drive through a nice neighborhood, I am all of the sudden not as content as I was a few minutes before. This is just something to keep in mind when you’re planning your budget or trying to cut expenses (or when you’re just bored). If you’re having trouble with your spending, don’t participate in the activities that will trigger more spending: Don’t watch TV, don’t read catalogs, don’t go to the mall. For the most part, I think that "out of sight, out of mind" really works for some spending issues.
Random only-somewhat related thought stuck on the end of the post
Yikes - a thought just popped into my mind: If you take the above statement as true, then how bad is it for a married man to be looking through a Victoria’s Secret catalog? That’s like a double whammy of spending more and entertaining impure thoughts all at the same time.
photo credits: futureshape and raindog808
PS: Wow - Chuck Norris has his own catalog?!?
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