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My economic forecast

1. Don't panic. However, expect this to last 3-4 years. This is the primar point. People are saying it may last 1 year. No, it will last 3-4 years.
2. Quietly start to conserve cash. Money you spend now is more "expensive" than money you have a few years from now.
3. Stick with a stable crappy job. Find a way to make it work. (If your job is not stable, seek one that is or position yourself within the company somewhere that they will always need you.)
4. If you own a house, don't sell it. If you need a house, this is a good time to buy. (Don't sell one house to buy another; that's going to screw you.)

If you are super rich, this is the time to start a new company because labor is cheap and by the time you get it up and running the recession will be over and people will be ready to buy. However, I doubt this applies to many of us.

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Your thoughts? (just curious)

We are considering buying a second home in California as we plan to move back there in 18 or so months. We would rent out the CA home until we get back. Then, depending on the market, either sell the TN home when we move or rent it out for a while.

We would pull money out of stocks to put at least 20% down on the CA home.

What are your thoughts on buying a second home now (note, we are both gainfully employed in stable jobs)

Re: Your thoughts? (just curious)

I'm not too sure what to do in that case.

Taking on new debt is probably bad right now. However, the rental market is hot and you might not have a problem renting that extra home for 18 months. It is certainly a good time to buy.

Selling stock to get your 20%? If your stocks are at a loss, that may not be a good thing. Like, if you invested 10k in stock and now it is worth 5k, then it is like paying a 50% tax on that money to use it on the down payment. I'd consult a financial advisor.

Re: Your thoughts? (just curious)

That's probably a poor way to look at the stocks.

The loss is stocks is gone. If you put in 10k, you now have 5k. No "temporary downturn". It's gone. That's the new value of the stock. Don't take risks to 'recover' the 10K. If the stocks were going to double shortly, start putting everything into stocks. :). Otherwise, it's just less money. Get used to it.

Re: Your thoughts? (just curious)

First - I'm no financial expert. Yet you may be interested in reading the article linked below before buying in California (as in the prices probably haven't gone as low as they will by ~20-25%).

Fortune just named its 10 Worst Real Estate Markets for 2009 and 8 of the 10 are in California.

Of course, there are also links from there to articles on how to take advantage of the foreclosures that might be of use if you do decide to buy.

Re: Your thoughts? (just curious)

Why is #2 "Quietly"? Or rather, what does "Quietly" mean?

Also, this makes it sound like if you have something like a big debt (say, student loans), you shouldn't put effort now into paying it down faster. I agree with conserving cash now (because really that's a good strategy at any time!) but we're aiming to have our car paid off by June (double the minimum payment, so we'll have paid our car off (over $8k) in 22 months).

We're doing this because it's even more worth it now to pay off the higher interest stuff, since there's nothing comparable (after the car, we put that $500 per month into student loans, which is the next-highest-interest thing we have -- we've already double the student loan payments). Even with low-interest things like student loans, 5% is nowhere near the return on a stable investment such as a CD. And since up to $4k of student loan interest is deductible off our federal tax returns, it's not worth it to get a big loan with a lower interest rate to pay off the student loan and then have a private loan (as Tony and I combined still have about $100k combined in student loan debt).

So it's better to save, but not at the cost of paying down debt -- money's actually *cheaper* to spend if you're using it to pay off *any* debt, even lower-interest debt.

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Re: Your thoughts? (just curious)

I agree, but the phrase "money you spend is more expensive now" might lead people to not spend on anything. :) paying debt isn't spending, and yet most people cut back debt payments earlier than they ought to when conserving money.

I just wanted to make it clear that "money you spend" doesn't apply to debt.

Re: Your thoughts? (just curious)

I agree that paying down debt (aside from the minimum) is a bad idea right now. You might need that extra cash.

Obviously if you have a high-interest debt you have to do the math and see if that's true for that special case.

Being debt-free right now is possibly the best possible position you can be in (but mostly if you did that before the recession)

Re: Your thoughts? (just curious)

Um, I was making the point that paying down debt is a GOOD idea right now.

And my point is that compared to current savings interest rates, pretty much all debt, including student loan debt, *is* high interest.

Obviously you can't just spend all the $$ on debt payment and none on savings (but again, that's true in *any* market). currently my position is socking away $800 per month, so I'm OK with spending an extra $250 on paying the car payment.

And you need to look at the situation, but many places will take the extra payment as next month's payment, instead of reducing the life of the debt (credit cards don't, but most mortgage, car, and student loan payments work this way). In this way, you can still "have" the extra cash in a way -- let's say you have a bill for $250 a month, and in one month you pay $1000 towards it. Now you've paid the current month + 3 more, so if you do need the cash later, you can still "have" it, because you can decide not to pay that bill for 3 months.

Given that CD's and savings accounts aren't even giving 4% at this point, it makes sense to pay down almost any debt you have, because it's all "high" comparatively.

Everyone has to figure out what's best for them. I also have family that can help in a pinch, though I don't want to be in that situation, of course! (and currently we have 6 months of expenses in savings, so again, it makes sense for us. In fact, it probably would make more sense to take some of that $800 a month we're saving and spend some more of it on paying down more debt, but we're cautious types).

I recommend Mary Hunt's Debt-Free Living as a really good book that talks about how to save even if you're swimming in debt, and how to make your own decisions about what's best.

Re: Your thoughts? (just curious)

Obviously you can't just spend all the $$ on debt payment and none on savings

Any why not? At any given time, savings will be worth more than paying down debt, or not. Assuming you have money to do either, doing both is only worthwhile to the extent that it's a diversification technique.

Re: Your thoughts? (just curious)

my reasons:

0) if you get laid off and can't pay your rent, it's better to have a late credit card payment than to miss a rent payment. Switch "laid off" with "have a big unexpected payment to make".

1) peace of mind (see 0, but more for the worry, not the actual outcome. If I don't have the "just in case" funds it affects me a lot, and there is "back burner" space devoted to my worrying)

2) keeping the habit of always saving no matter what is a good thing. Most folks don't start saving because they think they *can't* save, they don't have enough to. And/or they sabotage themselves by taking out of savings to pay a bill. I struggled with the "right amount" to save for a long time before I found my own sweet spot wrt this.

3) Your credit score increases more if you make payments that are more than the minimum but less than the whole thing. Credit card companies will increase your credit card score if you spend $1000, and make 4 payments of $275 (the extra $25 per month is for finance charges/interest) than if you just pay it off in a lump sum.

Re: Your thoughts? (just curious)

For Reasons 0 and 1 to apply, you've got to not yet have enough of a cushion to make you feel comfortable and the credit line is (or might) go away as you pay off the debt. The second condition is usually true, I guess, but the first might not be.

If you view debt as negative savings, then paying off debt is savings, habit and all. So I don't see Reason 2.

I can't argue with Reason 3, except I doubt the benefit outweighs the difference in interest rates between potential savings and extant debt for most people.

Re: Your thoughts? (just curious)

We're still saving because while 6 months of living expenses are great, we are saving to buy a house. It doesn't *feel* like saving if all we're doing is paying off debt, and our savings are stagnant. Even though we *know* that's not the case, mental!=emotional.

(for example, 1/2 our 6 months' living expenses is sitting in our regular checking account, because Tony feels better seeing the cushion. I would be happy having it all in our ING account, where the other half is, but it doesn't matter to me where it is. So we take the few percent interest hit on a few thousand dollars so that Tony feels better about things).

If it were all about mental stuff and $$, anyone in the SF Bay area and greater Boston area and NYC area would move somewhere tons cheaper and save gobs on rent if/when they got laid off. I know tons of folks in the Boston area who are paying 1/3-1/2 their take-home pay in rent.

Re: Your thoughts? (just curious)

can you explain "Quietly" btw?

Re: Your thoughts? (just curious)


Re: Your thoughts? (just curious)

Gotcha :)

if you're super rich, adopt me!

For once my mattress-based financial planning wins!

Although actually this time I'm not totally following my usual Chicken Little financial planning, since I'll probably incur some educational expenses before this is all over.

I would definitely add a #5, that now is a great time to go into school. :)

I think you're about right there. Of course, it turns out that we just chose a really *terrible* time to move house from Oxford to Zürich - we own (well, with a mortgage) our house at the moment and none of the options are terribly appealing.

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With respect to #4, I'm not confident that this is always the case. It seems to me this is potentially a good time to trade up in housing, assuming you have accomplished #2 and #3.

My reasoning, at least in the Philly real estate market, is that houses in the lower end of the market (200-250K) have gone down from the peak considerably less on a percentage basis than houses in the higher end (300-400K). (anecdotal, admittedly) So if you believe that trend will reverse when the economy improves, it might work out.

To put it in more concrete terms, let's say it costs 10% of the value of a house to sell it and you are upgrading. Current house you bought for 250, now 10% down (225) and you are trading up to a 400K house at the top of the market now 20% down (320)

Cost of upgrading at the top of the market (or when market recovers) would have been
25K(cost of selling)+150K(diff in purchase price) ~ 175K

Cost of upgrading now is
22.5K(cost of selling)+95K(diff in purchase price) ~ 117.5K

Which would be a savings of >50K when the market recovers, over waiting for the market to recover and then upgrading. Of course, given that you are paying interest it is always cheaper to live in a cheaper house.

Unless, of course, we have actual deflation, as rabbitocracy points out as we are discussing this. In which case it's a much better idea to stay put and buy after the deflation.

I agree with #1, #2, #4, of Tom's original post. My only problem with #3 is that there really are no stable jobs, so you might as well just maximize cash compensation. It's probably a better time to organize your life so you are more flexible; if you cling to a crappy but "stable" job and then lose it, you're fsck'ed, but if you are more oriented toward contracts and freelancing you have less invested in any given client or project. (I have organized my own life like this for years, and it works for me; and certainly reduces the amplitude of economic booms and busts.)

My advice on debt and investment is slightly divergent from others, based to some degree on circumstances. First, this is not a good time to pay down debt unless it's at a very high rate - you're paying with what others have noted are "expensive" dollars. Plus you are losing flexibility of holding the case. If you have low interest rates (like a traditional fixed-rate mortgage) it's way better to pay that back with tomorrow's cheaper, devalued dollars. And if you can borrow cheaply (good credit), go for it.

I think this will prove to be a historically excellent time to buy equity stocks, but you have to be willing to hold them for quite a while (that is, not need the money for anything else in the meantime).

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