Sunday, February 6, 2011

Debt Free for Life Review

There are only a handful of blogs I read everyday and Financial Samurai is one of my top five favorites.  There are a few things that I really find intriguing in a blogger, the ability to relate to their readers and the willingness to respond to comments by engaging in thoughtful discussion and feedback.  Sam at Financial Samurai does all of the above.  Make sure you take time to check out his latest blog:

As someone who has personally been on the debt-to-freedom and back again plan I have used financial blogs as a validation and source of strength when my own bills felt overwhelming.  There have been times in my life when I was $15,000 in debt while only making $20,000 a year and other times when I was completely debt free just to turn around and buy a house and two cars, hello $200,000+ in debt.

There are many reasons why people get in debt, but at the end of the day each person needs to make the decision to get out of debt.  I think American's struggle with debt because it is ingrained in our society, our own government is set to vote soon on raising the debt limit above 14.3 Trillion dollars, no wonder the average person can't figure out a way to live within their means.  We see over indulgence everyday in politics and are almost paralyzed by the concept of doing something about it.

I am proud to say that I am hosting a Super Bowl party today and I was able to buy all the food and drinks with cash.  There is nothing worse than going into debt to finance a consumption event that will have no lasting tangible asset when it is over.  I saved for this day, I still have my mortgage, but I feel better entertaining my family and friends in a conservative and responsible way.

Wednesday, January 26, 2011

What is your savings rate?

In an article published today over at MSNBC the personal saving rate is currently 5.3%, which means that Americans are not spending every last dollar they earn.  While this is better than where we were in 2006 when it was at -2.4% there is actually a fine line between saving to much and saving to little.

Our economy is consumption driven, or as you have all heard a hundred times, supply and demand.  When the stock market shred 7,000 points in 2008 people stopped buying and started saving their paycheck.  Unfortunately this only made matters worse as everything is cyclical.  The more people saved the more businesses struggled which caused more layoffs which sparked more fear and thus made people save even more.

So, what can you do?  I think that having a 5% savings rate is healthy as long as it is in line with your long term goals.  If you are carrying credit card debt with an interest rate of 24.99% it makes little sense for you to save 5% of your income in a bank paying less than 1% interest.

The answer to this question is like the answer to most questions, everything in moderation.  A lot of financial websites will tell you to have three to six months of living expenses in a savings account in case of an emergency. After that is accomplished you can really focus on paying down debt and saving for your long term goals.  The crux is that I truly don't know very many people who have built up an emergency savings account.  So if you can't do six months, how about you start with $500.

In the mean time, ask yourself if you are comfortable with your personal savings rate and what steps are you going to take to fix it?

Monday, January 24, 2011

Why Pujols will be traded this summer

I grew up watching Ozzie Smith and listening to Cardinals baseball on the radio and I love watching Albert Pujols play but I think the only choice the team has is to trade him this summer.

If we have learned anything from the stock market crash of 2008 is that if you pay for past performance you are going to get burned.  There is no questioning the production and the value Pujols has brought to the team, but a long term deal will be devastating four years from now.

This off-season the baseball world was shocked once again by a team over spending on a player which disrupts the market.  Of course I am talking about the Jayson Worth deal which gives him $18 million a season over 7 years.  Worth has a career batting average of .272 over 8 seasons, while Pujols' career average is .331 over 10 seasons.  Worth has hit 120 home runs, Pujols 408.  If Worth is getting $18 million a year and that is what the market will pay then by all accounts the Cardinals should pay Pujols somewhere in the neighborhood of $25-$35 million a year.  If the Cardinals give Pujols a 7 year deal the starting dollar amount is at least $175 million, which while not A-Rod money is still a lot of money.

The Cardinals have already had the best player in baseball for a decade now and have to chose between pleasing the fans and making a smart financial decision.  I don't think Pujols will be a $35 million dollar player in 2015, yet that would only be 4 years from now still leaving 3 years on the contract.  If the Cardinals were smart they would offer a 5 year $150 million contract with a team option for years 6 and 7 if Pujols reaches 450 at bats a year.

If they can't get the deal done, I say you trade for Reyes from the Mets and spend the leftover money on the bull pen.  

Sunday, January 23, 2011

Ready to mow

I know the vast majority of us are shoveling snow and giving no thought to the upcoming mowing season; but for others right now is the time to put everything in motion for a successful summer.  I plan on making $20,000 this summer and if I am going to reach my goal then I need to get a plan in place.

My father has a mowing business but is thinking about selling his equipment and 22 yards.  I have full time employment, but the opportunity to take part ownership is very tempting.  I know how to mow commercially, and I also know that I would be able to take on the administrative tasks without creating a burden on my own financial record keeping.

The problem I am facing is the distance I would have to travel to take ownership in the business, and thus figuring out how much I would need to make to offset the wear and tear on my vehicle.  The first item on my agenda is to set a value for my time, and for strictly hypothetical reasons I will go with $30 an hour.  By establishing a base value this will help when I do cost analysis on the rest of my business decisions.

With a base value established I start identifying the costs associated with running the business.  The distance traveled from my house to the business is 50 miles, so I am looking at a minimum of a 100 mile round trip each day I travel.  My car currently gets around 34 mpg, and by doing some simple math I will use 2.95 gallons of fuel and at today's cost of $3.09 per gallon that trip cost me $9.12, not counting the depreciation on the car.

Since it takes me 1 hour to travel each way by my valuation of $30 an hour I need to make at least $60 to make this trip worth it, and I have already spent $9.12.  I change the oil in my car every 5,000 miles and while this is not a major expense it will have to get added in as I will reach this milestone in just 50 trips, which could happen as quick as 2 months.

I have some more costs to identify and will be doing research and posts as the winter drags on and I move closer to making my decision.