Steps to Obtaining Financial Stability
- Keep a buffer of liquid assets equivalent to at least six months of essential expenses. A full year's worth would be preferable.
- Essential expenses would include: auto (gas, insurance, maintenance, payments), food, home (electric, heat, insurance, maintenance, payments, taxes), phone, tithes/offerings.
- Liquid assets are things convertible into cash on short notice and could include: cash, checking/savings account, gold/silver.
- Liquid assets would not include: CDs, 401K, IRA, property.
- Never consider your primary residence an asset unless you are willing to downsize to obtain the difference.
- Pay off all outstanding debt. You should start with the highest interest debt and work your way down. This includes paying off cars and houses.
- Live well below your means. Single income households should be able to live off half their income. Double income households should be able to live off half the larger income or completely off the smaller income.
- Spend some time researching the economy in order to determine what kinds of investments make the most sense for you. Regardless of the investments you choose, your aim is to retain your purchasing power by overcoming the annual rate of inflation.
Rules for Buying a House
If you are unable or unwilling to purchase a house outright, then you must give careful thought to the following items: length of loan, monthly payment, total interest.
- Length of Loan: You should try buying a house with the shortest loan you can manage. Normal choices are 10, 15, 20 and 30 year loans. I recommend buying a house that can be paid off in 5 to 15 years.
- Monthly Payment: You should aim for a monthly payment that is half of what you think you will actually pay. That way you have some breathing room if you get in a jam.
- Total Interest: You should keep your total interest to a level you find reasonable. I recommend trying to keep the total interest under 20% of the loan amount.
Mortgage Interest Formulas
- Given L,R,Y: I=(R/12+((R/12)/((1+(R/12))^(
Y*12)-1)))*L*Y*12-L - Given L,P,R: I=P*log[ base (1+(R/12)) of (P/(P-L*(R/12))) ]-L
- I = interest
- L = loan amount
- P = monthly payment
- R = annual percentage rate
- Y = number of years for loan
Types of Investments
- 401K, IRA, Money Market, Roth IRA: Stock market investments.
- Certificate of Deposit (CD): Flat rate bank investment that is locked in for a given period of time.
- Gold/Silver: Alternate currency that hedges against fiat monetary inflation.
- Farm Land: Purchase farm land and rent out to farmers. Rent should cover any payments you are making.
- Rental Property: Purchase houses/apartments and rent out. Rent should cover any payments you are making.
- Treasury Bonds: Purchasing government debt that promises a return on investment.
How to Approach Investing
I recommend paying off your debts before focusing on investing. As for investments, I recommend investing around 30% of your gross income if possible. Your main goal with investing is to save money for a desired purpose like a house or more importantly retirement. However, this is difficult since we use fiat currency and live in an inflationary economy. Fiat currencies are those not backed by anything real like gold or silver. Our fiat currency is a very recent experiment. For most of our country's history the U.S. dollar was maintained by the U.S. Treasury and backed by gold. Then we took a devastating turn. In 1913 the U.S. Treasury handed responsibility of the money supply over to a conglomerate of banks known as the Federal Reserve. Then in 1933 the government confiscated all privately owned gold from citizens and removed their ability to convert their money into gold. The final blow came in 1971 when the government completely removed the gold standard by no longer allowing foreign countries to convert dollars into gold. At that point our money was no longer backed by anything real like gold or silver. Instead our money is now literally created out of thin air.
You must understand inflation in order to beat it. Inflation is simply the loss of purchasing power due to an increasing money supply. The federal government produces what's known as the CPI-U inflation rate and has added multiple layers of calculated manipulation over the years in order to keep it artificially low. A group called Shadow Stats produces an alternate figure known as the SGS Alternate CPI which uses the same CPI data yet excludes the various manipulations. You can find both inflation rates side-by-side at Shadow Stats: http://www.shadowstats.com/
The key to investing is to beat the rate of inflation over the long term. This can be done by tracking all your long term investments based off the overall average rates of return starting from 1971. That year is important because it is the year we went off the gold standard and started inflating the money supply. Since 1971 our money supply has been inflating an average of 7.76% per year. This is the percentage you need to beat when investing.
Here are some average annual rates of return on some common investments based off data going back to 1971:
- Gold: 11.75%
- Silver: 12.18%
- Stocks (DOW): 7.54%
Most people think it natural to save for retirement by investing in the stock market via 401K or IRA accounts. These accounts are usually based on underlying mutual funds that typically carry an annual rate of return somewhat near the DOW average. As you can see, the DOW stays about equal with the rate of inflation. That means the stock market is not really making gains, but is just breaking even. If you are one who wants to invest in the stock market, I would recommend researching individual stocks that have a historical precedent of beating inflation.
Due to the instability of our monetary system I would not recommend the stock market as your primary investment. Instead I would recommend investing primarily in gold and silver since they are natural hedges against inflation. History shows that fiat currencies come and go in rather short order and I don't expect the U.S. dollar to defy history. The U.S. dollar will either collapse or be re-backed under a gold standard. I expect this to happen in the next 5 to 20 years.
You should plan where you live, how you live and your investments according to what kind of future you expect in the years ahead. Consider scenarios like natural disaster, hyperinflation, increased taxation, government regulations and even economic upheaval. Judge for yourself the probability of these events and then prepare accordingly. As the former V.P. of Pfizer, Chris Martenson, says in his Crash Course video series, "the next 20 years are going to be completely unlike the last 20 years."
