Sunday, September 27, 2009

The Debt Avalanche

The debt avalanche is the more traditional and mathematically correct method of debt reduction. It is called an avalanche because it starts small but becomes very large and powerful as time progresses. In this method the interest rate is everything. In researching this method, I hit on a few useful twists that can also be applied to Dave Ramsey’s, debt snowball.

The method works as follows. First let’s look at the numbers we made up last week and add interest rates. Remember, in the debt snowball interest rates don’t matter.

Debt Interest Rate
$500 Owed to store for new TV 0% for two years
$1,000 Credit Card A 15%
$5,000 Credit Card B 23%
$6,000 Credit Card C 12%
$12,000 Car Loan 8% for three years
$19,000 Home Equity Line of Credit (HELOC) 12%
$ 150,000 Mortgage 6% for thirty years

First ask Credit Card B to lower their rate. This can’t hurt. Right now it might help. Obviously this works for the debt snowball as well.

Rack ‘em and stack ‘em according to interest rates. This time differentiate between good debt and bad debt. Some might disagree with my selections of good and bad but so be it.

Bad Debt

$5,000 Credit Card B 23%
$1,000 Credit Card A 15%
$6,000 Credit Card C 12%
$19,000 Home Equity Line of Credit (HELOC) 12%
$500 Owed to store for new TV 0% for two years

Good Debt
$12,000 Car Loan 8% for three years
$ 150,000 Mortgage 6% for thirty years

Continue to pay the minimum on all your debts and use any extra money you have to go after Credit Card B, then progress to the next item on the list adding the money freed by paying off the previous item until all debts are paid in full. As with the debt snowball there are calculators and spread sheets that will help you watch your progress and manage your debt reduction process.

Bother James is not my favorite but that is where, "ye have not, because ye ask not," can be found.

James 4

[2] Ye lust, and have not: ye kill, and desire to have, and cannot obtain: ye fight and war, yet ye have not, because ye ask not.
[3] Ye ask, and receive not, because ye ask amiss, that ye may consume it upon your lusts.

Saturday, September 19, 2009

Dave Ramsey's Debt Snowball

Dave Ramsey promotes a method of debt reduction called the Debt Snowball. It is not the most financial efficient method available but Ramsey contends that for sound psychological reasons it is the method most likely to succeed.

The method works as follows. First rack and stack your debts starting with the smallest and ending with the largest. Let’s make up some numbers.

$500 Owed to store for new TV
$1,000 Credit Card A
$5,000 Credit Card B
$6,000 Credit Card C
$12,000 Car Loan
$19,000 Home Equity Line of Credit (HELOC)
$ 150,000 Mortgage

Please note that for simplicity I am not including interest in these calculations. A spread sheet as mentioned below would provide an accurate detailed pay off projection.

First, while making the minimum payments on all your debts, build a $1,000 emergency fund. Then take all the extra money you can afford on a monthly basis and go after the smallest loan first. Let’s say you can make minimum payments on everything plus $250 dollars per month. In two months the TV is paid for. Tape the receipt for the final payment on your refrigerator.

Next take the $250 and the $50 dollar minimum payment you were making on the TV and add it to the minimum payment on credit card A. In three more months Credit Card A is paid off. Celebrate your victory and tape another paid in full statement to the refrigerator.

Then take the $300 plus the $25 minimum payment you are making to Credit Card B. In 15 months the final Credit Card B statement resides on the refrigerator.

Then take the $325 and add it to the $50 minimum required by Credit Card C. In 16 more months another one bites the dust.

It is called snowballing because as you pay off each debt you have more money available to pay off the next debt, like a snowball rolling down a hill. Ramsey believes that extricating oneself from debt is 80% an emotional problem and 20% a matter of knowledge. He believes in going after quick attainable goals to build a psychology of success and willingness to continue when the going gets tougher.

There are snowball debt calculators that require Excel or an Open Office equivalent available on the web. I used a spread sheet to track my mortgage as I made extra payments to principal. It is reinforcing to watch the extra payments peel off the backside of the loan as you go after a reduction in principal. I expect these would aid in a debt payment plan using Dave Ramsey’s method.

Proverbs 15

[16] Better is little with the fear of the LORD than great treasure and trouble therewith.
[17] Better is a dinner of herbs where love is, than a stalled ox and hatred therewith.

Monday, September 14, 2009

Never Ask an Elf for Advice

Those of us who love the writings of J.R.R. Tolkien probably remember this quote, “Never ask an elf for advice for he will say both yes and no.” While poking about the Internet looking for something interesting for this blog, I came upon a brief video predicting a drop in the price of gold. The man was using a basic form of technical analysis (such people are sometimes called elves). He drew a line with a crayon across the top prices of gold over the last few months. Since the line was relatively flat, the commentator assumed that gold is trading in a range, that it is near the top of its range, and it is about to go down. He might be right.

It is hard to turn on the radio without hearing an add touting the virtues of gold as investment. These promoters point out that gold has outperformed the stock market over the past five years and gleefully predict that it could double in price over the next year. They might be right. I have found reputable analysis that stated gold should be sold, that gold should be bought, and that if you already own gold you should neither buy any more nor sell what you already possess. Schwab, my brokerage house, subscribes to Market Edge, a technical analysis service. They rate gold as neutral and point to indicators that state it will go up and indicators that state it will go down. Oh, those elves.

For some reason most of humanity seems to have considered gold as money for at least 5,000 years, maybe longer, so gold is money. Gold seems to go up in value when people are afraid and down in value when they are confident and happy. For the past five years gold has followed a jagged unpredictable climb in an upward direction. The average increase looks pretty linear. There is clearly a positive correlation coefficient but it probably isn’t very high. One of the articles I read fears that gold might become the next bubble. The author may be right, but I don’t think there is any danger of that happening in the foreseeable future. Bubbles happen when prices go parabolic. Look at what happened to gold in the late 1970s and early 1980s. Now that is a bubble.

For the record, I own gold in the form of shares of an exchange traded fund, SPDR Gold Trust (ticker symbol GLD). It can be bought and sold like any stock and does not require a treasure chest buried on a deserted island for safe storage. If the price of gold goes up, I will be happy. If sometime in the near future, the price of gold goes down, I will buy some more. I am not there yet, but at some point in the future I would like to have about 5% of my investments in gold. I think over the long run the value of the American dollar is going to decline relative to the value of gold. The Chinese government is buying more gold and fewer U.S. Treasury Bonds. Indians have long prized gold as foundation of a family’s wealth. They are getting richer and they are buying more gold.

If you will kindly indulge my sense of humor let me end with some wisdom from Kenny Rogers.

Now ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
’cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.

Sunday, September 13, 2009

God and Game Theory (Update)

In God and Game Theory (Part I) I wrote about how the nature of the social covenants, the unwritten rules of the game of life are changing, and changing very rapidly. In that article I wrote about “jingle letters” containing keys to houses with upside down mortgages. The banks and academic economists were shocked by this change in customer behavior. In the same article I wrote about preparations being made by the credit card companies, as they were expecting similar actions from their customers (victims?) when unemployment passed the magic 10% marker.

Here it is. I wish I could set up live links on this blog, but I can’t. Please cut and paste this address into your web browser and watch the three minute video. It is important. An ordinary American middle class woman has declared war on the Bank of America. The rules are changing. It doesn’t matter if you like it or you do not like it. It is happening and it is happening now.

Proverbs 22

[22] Rob not the poor, because he is poor: neither oppress the afflicted in the gate:
[23] For the LORD will plead their cause, and spoil the soul of those that spoiled them.

Monday, September 7, 2009

Speak The Word and We Shall be Healed

I really feel pretty inadequate to present this meditation on Labor Day. U3, the official unemployment rate stands at 9.7%. The more realistic measure, U6, that includes marginally attached workers and those forced to work less than full time stands at 16.8%.

We are approaching depression type unemployment numbers. The problem is already past serious in states like Michigan, Nevada, Florida and even South Carolina. It is time that we all look into our own hearts confess our sins and ask God to extend his hands in mercy to our Nation. Let us try and understand that when we stand with Christ we can not separate ourselves from our neighbors.

Psalm 70

[1] Make haste, O God, to deliver me; make haste to help me, O LORD.
[2] Let them be ashamed and confounded that seek after my soul: let them be turned backward, and put to confusion, that desire my hurt.
[3] Let them be turned back for a reward of their shame that say, Aha, aha.
[4] Let all those that seek thee rejoice and be glad in thee: and let such as love thy salvation say continually, Let God be magnified.
[5] But I am poor and needy: make haste unto me, O God: thou art my help and my deliverer; O LORD, make no tarrying.

But It's The Only Game In Town

Canada Bill Jones was a notorious card sharp and con artist who worked his trade in the mining camps and cattle towns throughout the Wild West. He had a number of famous quotes.


It’s immoral to let a sucker keep his money.
A Smith and Wesson beats four aces.

But his most famous quote was delivered to a complaining victim of one of his cons, “Yeah, the game is crooked but it is the only game in town.” Something good to remember if you ever think you are going to get an edge on the major Wall Street Trading Houses. Computers, cell phones, and the Internet have certainly evened the playing field and lowered brokerage fees, but the big boys will always have the edge, don’t ever forget they play by a different set of rules. Here are some examples from a recent article found on MSN Money (the link is listed at the end of this post).

High Frequency Trading: Sophisticated computer programs analyze real time trading data looking for anomalies that signal large scale movements such as those made my mutual or pension funds. Their computers then execute orders faster than the human players in the market can possibly respond. These programs are the result of decades of research and millions of dollars invested in programming and hardware. They really work. It isn’t illegal, but don’t think for a minute the little $3,000 technical analysis program running on your PC will ever be able to compete with Goldman Sach or the major hedge funds.

Flash Orders: This one is a little harder for me to understand. Evidently there are new, small, on line stock exchanges competing with the better know exchanges such as the New York Stock Exchange and NASDAQ. To lure in large customers these little exchanges have invented something called the flash order. If they can not fill a large order they flash that information to the computer of a large brokerage house giving them not only an opportunity to fill the order but inside information on a trade that will not be made public for a few seconds or minutes. That is more than enough time for the brokerage house computer to execute a trade at a price that the individual investor will never see. The Security and Exchange Commission is concerned that flash orders skirt the edge of legality and they are under investigation.

Dark Pools: Major trading houses set up off line electronic trading venues for their largest and best customers. Within these secretive private exchanges, high rollers can move huge quantities of shares away from public view. They affect the value of your stocks but you will never know what happened in private until it is way too late to do anything about it. If the dark pools become large enough, they will also affect the number of shares available on the open market creating a double price structure. Guess which price is the real price. It is currently estimated about 7% of all trades take place in dark pools.

There is one more thing to worry about. These trades occur so quickly there is no way they can be reviewed by a human. If an algorithm used by a major player goes haywire there are no circuit breakers that can possibly react fast enough to prevent a meltdown such as the one that occurred on Black Monday in October 1987. The safeguards currently in place were designed to prevent a repeat of that disaster, but in the last 20 years computer speed and the sophistication of the algorithms they run have advanced to the point that what use to require seconds now occurs in nanoseconds.

I know the game is crooked but I play it anyway. It is after all, it is the only game in town.

And, hey, let’s be very careful out there.

Sunday, September 6, 2009

Peter and the Fish

Matthew 17

[24] And when they were come to Capernaum, they that received tribute money came to Peter, and said, Doth not your master pay tribute?
[25] He saith, Yes. And when he was come into the house, Jesus prevented him, saying, What thinkest thou, Simon? of whom do the kings of the earth take custom or tribute? of their own children, or of strangers?
[26] Peter saith unto him, Of strangers. Jesus saith unto him, Then are the children free.
[27] Notwithstanding, lest we should offend them, go thou to the sea, and cast an hook, and take up the fish that first cometh up; and when thou hast opened his mouth, thou shalt find a piece of money: that take, and give unto them for me and thee.

The story of Peter finding tax money in the mouth of a fish is one of my favorites. I have such a clear picture of Peter in my mind. He supervises the third shift maintenance crew over at the chain saw factory. He big, mean, has a bad temper, and is not particularly bright. The thought of Peter poking around in a fish mouth is just hilarious. Jesus really had a sense of humor. But let’s put this story in context. It came immediately after Peter saw the bodily transfiguration of Jesus, a preview of the glorified risen Christ, with Elijah, one of only two men who never died, and Moses, evidently resurrected after the Archangel Michael and Satan contended over the possession of his body. Peter saw this with his own eyes and he heard the voice of God the Father say, “This is my beloved Son, in whom I am well pleased; hear ye him,” with his own ears. After being a part of one of the most astonishing events in Biblical history, Peter was worried about paying some kind of petty tax. Jesus asked him a curious question, “Simon? of whom do the kings of the earth take custom or tribute? of their own children, or of strangers?” Peter, like Leona Helmsley, knew only the little people pay taxes. Jesus then reminded him, “Then are the children free.”

Yes we are free. We are free indeed, but how quickly I forget that in Jesus God became one with and redeemed His creation. I am a part of the most spectacular miracle in the history of the world yet I worry about retirement, my health, and even the cost of our vacation. Jesus stands there reminding me, “Then are the children free.” Yes, we are free indeed.

First John 3:

[2] Beloved, now are we the sons of God, and it doth not yet appear what we shall be: but we know that, when he shall appear, we shall be like him; for we shall see him as he is.

Friday, September 4, 2009

Update: Where do You Give?

I would like to post an addendum to, “Where do You Give?” A friend has been writing on the problem of giving in the church during a period of recession. He is convinced that there are no recessions in the Kingdom. I believe that observation is correct. However, I do not always choose to live in the Kingdom.

I would like to quote from his newsletter:

“Kingdom Principle #1: Give . . . MORE. Whatever your current level of giving is, ask the Lord if you are to increase your giving, and if so, by how much. “My sheep hear My voice” (John 10:27). The moment you are still and quiet inwardly before the Lord and ask the question, He will speak—the First Voice will always be His. Please bear in mind that this is a Principle for accessing the Kingdom of God, which is the realm of the Holy Spirit, which is the realm of the IMPOSSIBLE, ie, you may be shocked by what He says, especially in light of your current economic situation! You may have to make some adjustments in your lifestyle. You may have to abandon some of your ‘American dreams’ in order to fulfill what He says to do. But for those who implement Kingdom Principles as they “seek first the Kingdom of God” by engaging the Holy Spirit and hearing from Him, “all these [material and financial] things will be added to them”. They will headed toward becoming ‘recession-proof’.”

I might have said the same thing with more caveats and what lawyers call weasel words, but he is correct. No matter at what level we give, if we are honest, most of the time, most of us, could give more. We are reluctant to hear from the Lord on this issue. We also have been hardened by guilt manipulation and promises of health and wealth from dubious ministries.

This brings up a second topic, practice. Practice makes perfect. Why should our giving be any different? As we learn to listen to the Lord in the area of giving, it is a certainty that we will make mistakes, particularly in the delicate and difficult area of person to person altruism. As we practice charity, with a heart filled with compassion and a mind submitted to God in an attitude of prayer, we will learn how to hear the Spirit when one of those important life changing opportunities presents itself.