Live Frugally or Die Broke

What To Do, What To Do?



I believe the title of this post is probably one of the most discussed topics in personal finance. I’ve read plenty of articles discussing strategies supporting both methods. Take my situation for example. I have a student loan that is currently at a 3.65% interest rate. I know it’s tax deductible and the interest rate will be reduced a quarter of a percentage point after 12 months of on time payments. Let’s compare that with an ultra safe investment like an FDIC insured CD or money market account. The best interest rate I can get at the time of this posting is around 1.10%. So if I save my money, I lose about 2.50% in arbitrage.

Now let’s focus on a more risky investment like bonds or equities. It’s often been said that the S&P 500 yields about 8% average returns every year. The last few years have been anything but average. Age can often play a factor as well. The younger you are, the higher your tolerance to risk will be. I would feel like a dummy if the stock market went up 20% from these levels and I sat on the sideline.

Each Situation Is Different

What you do depends a lot on your current situation. Do you have an emergency savings account? Is you car on the verge of dying? Do you live in a house or rent? If you answer no to having an emergency savings account, then you need to fund that up to 3-6 months worth of living expenses, before you do anything. If your car is unreliable then you need to take that into consideration as well. If I owned a home, I would be less apt to gamble my money, as renting is more flexible.

What you decide to do is ultimately up to you. There is no right or wrong answer. You need to take into account everything I just discussed. I would not be gambling money, unless my financial house was well in order. That being said my emergency fund is fully funded, my car is unfortunately on the verge of breaking down, and I rent a beautiful and cheap apartment. I am fearful of trying to make money in risky investments right now. The stock market looks anemic and I read about banks failing and companies going bankrupt on a daily basis.

Paying Down Debt Is A Guaranteed Return

If I decide to put all of my money into student loans, it’s a guaranteed return of 3.40% and I can’t beat that in a guaranteed investment like an FDIC insured account. I yearn for the days of savings accounts that paid 5.50%. It seems like only yesterday when those types of CDs were readily available. I fear it will be many years before we see those interest rates again.

I’m not much for taking on risk at this point in my life. There are too many unknowns in my life right now. Will my car work another year? Will I lose my job? Will my housing situation change? The fact that I don’t have answers for those questions means I will continue focusing on debt reduction for now.

A Lesson From The Past

I’ve been a very busy individual as of late. I just moved apartments, as I stated in my last few posts. The move is now complete and I find myself in a financial black hole once again. The moving costs sapped my bank account and car problems have plagued me as of late. That being said, I feel rejuvenated and young once more. It’s as if I moved everything in search of the fountain of youth and found it. I’ve been trying to relax lately and have been participating in activities in which I enjoy.

Today my new roommate and I went exploring in forests located in Northern Minnesota, which have never before been touched by human activities. It felt absolutely invigorating and I’ve never felt so alive and young before. At one point in our journey, we came across an old farmstead that has probably never been revisited since it was abandon. The site was approximately evacuated during the 1930s. We were stunned at the old relics laying around and spent a few hours treasure hunting.

Back To Reality

The site of the historic ruins I found sent my mind reeling. How could such a thriving farm site fold up and collapse? It was for the same reasons we are experiencing now. It is coming apparent we are headed for a depression. We have officially been in a recession since December 2007 and it shows no signs of slowing. I was talking to an investor (now my landlord) about the current state of economic affairs. He asked me, “Where the hell are we supposed to put our money now?” He raises an excellent point. We have nowhere to turn as a flight to safety. Treasury bills, money market accounts, and equity markets are either risky or pay nothing. Real estate has collapsed and will continue to be devalued, despite what the talking heads at CNBC tell you. My answer to him by the way, “The only way to make money is to become an entrepreneur.”

Launching Your Business

I read an interesting quote the other day from Dave Ramsey. He said, “Money flows from those who don’t know how to manage it, to those that do.” My landlord, an intelligent investor, has been going to a lot of liquidation sales lately. These are businesses that have failed and he is buying up their assets in large quantities. We have plans to launch a new business in the coming months. Of course if you have debt right now, you should focus on paying that down, as that is a guaranteed return on your money. For those without debt, you should be looking at something you do well and begin building a small business of your own.

If you look back at the start of many businesses. Most began in the late 1930s including; HP, Ocean Spray, and Yellow Book. Today these companies are thriving. How was that possible? These individuals had the door slammed in their face time and time again. They had nowhere to turn, so instead they developed an idea and they never gave up. Stay the course and build upon your small business idea, hire individuals that once worked for talented companies but have since been laid off. Take the assets from the weak and learn from their mistakes. When there is crisis, there is also great opportunity. We are about to enter a golden age of American ingenuity.