By Kevin M

Ominous question, isn’t it? There are all kinds of implications that go with that possibility, and none of them fit neatly within the economic progression of the past 30-40 years when it seemed the entire economy was running largely on the back of the real estate industry. But whether we like it or not, new trends in housing are beginning to emerge, pointing to a future that will likely see more renters—maybe far more—than in the recent past.

Though new construction of residential real estate has been showing definite signs of an upswing in the past few months, the encouraging statistics are far more important for what they hide.

An article last week, Rent Party! Apartments Drive Strong Housing Starts Data (Yahoo!Finance) reports a good news/bad news scenario on new residential construction. The good news: November housing starts are up 9.3% from October, and 24.3% over October, 2010. That’s an impressive turn-around.

But now the not-so-good news: though overall housing starts are up impressively, the stats for 1-4 family homes is actually down, dropping 1.5% from October, 2011.

So if home building is down from last year, what accounts for the increase in new construction? Apartments! Apartment construction (buildings with five or more housing units) are booming while construction of primarily owner occupied single- and small mutli-family homes are stuck at a recession level pace.

The economic implications of this shift are not lost on builders who are moving from the once reliable single family market to apartment construction. They’re on the front lines of the housing market, they see future, and they’re building to prepare for it. Obviously, they see the shift as part of a longer term trend.

The forces driving the rental market

The shift is being driven by a number of factors that insure it will continue for many years, among them:

1. The foreclosure wave of the past 4-5 years is turning one-time owners into renters
2. A stubbornly soft employment picture that shows few signs of significant improvement
3. Lack of savings for down payments
4. Excessive debt levels
5. Tighter mortgage lending standards in the face of weak employment, low savings and high debt
6. Flat or declining house prices have removed the imperative to own
7. A reduction in new household formations, being driven by all of the above

The combination of these economic forces means that renting may become the New Normal for many middle class households.

How could this affect your own housing situation?

OK, we’ve listed macro-economic factors why renting is becoming more popular, but how does that work out on a personal level? If you’re tossing around the own-vs-rent question, why might you be better off renting? Let’s consider the above factors in light of personal circumstances.

Employment. This is a double-edge issue for most people. Not only can weak employment increase the possibility of losing your job, but finding a new one might require moving to a different city or state. How easy will that be to accomplish if you have a house that will need to be sold? Bigger picture though, how much sense does it make to sign onto a 30 year mortgage given that the typical job lasts only from 1-5 years? As a renter, you’ll have greater employment mobility, should that become necessary, and you can more easily move to a less expensive place in the event of an income drop.

Savings and debt. Since it’s no longer possible to flip houses every few years, you’ll have to live in your home much longer, and that will mean repairs—big ones as the home ages. Home repairs now cost well in the thousands, and often tens of thousands of dollars. If soft house prices mean you can no longer take a home equity line to make major repairs, then your house might eat up your savings and force you to tap credit cards.

Flat/declining house prices. Rising house prices have been the ultimate (but generally unspoken) lifeblood of the housing market. Not only has it dangled the possibility of easy riches for ordinary people, but it also morphed into the classic buy-now-and-beat-the-price-increase marketing strategy. It’s disappearance from the housing scene has a greater impact than is generally assumed.

Even if rising property values aren’t your primary motivation for buying a home, their absence will affect your investment for years to come, and maybe even forever. Let’s face it, from the 1970s through about 2006, millions of people did buy primarily for rising values. They were a significant force in the market, and their sudden disappearance means housing is no longer either a guaranteed investment nor even necessarily very liquid.

Foreclosures, tighter lending standards and slower new household formations. Even if you have no trouble qualifying for a mortgage for the home you want to buy, the fact that fewer prospective homebuyers can get a mortgage will impact your housing investment. Fewer qualified buyers means a smaller market for homes in general, and that will translate to slower/flat/declining price trends. Not only will your home be worth less in the future, but there will be fewer prospects to sell it to should selling become necessary.

Why should we think the shift to rental housing is in any way permanent?

Of course, none of us have a crystal ball, but I think it’s pretty safe to assume that the shift to rentals will continue for the foreseeable future. It’s not a fad, but a reaction to all of the economic forces we’ve covered so far, none of which are likely to reverse any time soon.

The weak employment front is being caused by long-term fundamental shifts, such as the off-shoring of jobs to lower wage countries, and the relentless advance of technologies that are reducing some fields and eliminating others completely. Meanwhile, it seems clear that low mortgage rates—the usual solution to a bad housing market—are having no affect at all.

In addition, we have to consider the very real possibility that future recoveries may look very different than they have in the past. Not only is it likely that recoveries won’t be real estate driven, but they may not benefit housing in any meaningful way either. The Baby Boom generation—the largest single generation in history—has moved past the prime home buying years, and many are now looking to downsize. Combining this with economic factors has the weak housing market looking, smelling and acting permanent.

Why we might not become a nation of renters

Part of the difficulty with home ownership right now is that real estate was at the center of the financial meltdown, and that situation is still actively playing out. While it does, renting is looking better all the time, if for no other reason than that flexibility is a huge advantage during a time of major change, and that’s exactly what we’re in.

None of this means that owning a home will have no value in the future, but how and when a home is bought will be the determining factor. If house prices continue to decline, eventually the cost of owning a home will drop down to a level where it will be competitive with renting, and maybe even cheaper. That will be the point where we’ll start to see a real recovery in housing.

Here in Atlanta where I live, new subdivisions that were priced in the $600,000-plus range five years ago are now advertising base prices of $350,000. The homes are selling at the lower prices! As price drops (to more realistic levels) move through the market, housing will finally stabilize. That won’t happen quickly or easily though, because many millions of owners of existing homes are still carrying the large mortgages that were based on much higher values. The ride down will be slow and painful, just as it’s been so far.

While that’s taking place, renting a home is increasingly looking to be the housing arrangement of choice. The building industry is betting their bankrolls it will continue.

What do you think about renting? Is it a viable alternative in the current economy?

Related Posts:

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Why Time is Your Friend When Buying a House

Guest Post

The UK government has promised to ramp up regulations around the short-term loans industry to stop ruthless and lending practices that demand disproportionate levels of interest.

Fears are growing among debt management companies and debt consolidation companies who offer fair IVA deals that the industry’s customers – Britain’s lower earners – are being sucked rapidly into a downward spiral of unmanageable debt due to borrowing from unscrupulous short-term loan companies.

Financial Times Investigation

The Financial Times (FT) has been investigating Britain’s reliance on the so-called ‘payday loans’ industry, which has grown exponentially as borrowers have come to rely on these high-cost, short term solutions amid recent austerity measures, lower wages and inflation – and at a time when they can no longer easily access fairer, more reasonably-priced bank loans.

The FT estimates that around four million people rely to some degree or another on these payday loans in Britain today, and while the industry has long been a subject of fierce debate among concerned social commentators, only now is the government beginning to listen to the fears that have been voiced.

High Interest Rates

Some lenders have been found to charge annual rates of interest of as much as 5,000 per cent, and when compared to even the steep interest rates of between 16 and 20% annual percentage rates (APR) for many credit cards, it’s easy to see why people are so worried as to the effects on Britain’s poorer population.

While Britain lags behind some US states and European countries who have thought better of placing a cap on interest rates charged by these short-term loans companies, there is now much discussion as to whether the UK should follow suit.

Government Report

However, a report issued by the government warned that by blocking easy access to these expensive short term loans could leave low-income consumers without any access to credit, while industry spokespeople argue that such a move would remove consumer choice and competition.

Industry spokespeople also claim that the high APRs in reports about short-term loans are misleading, putting forward a rather tenuous argument that to point out that a payday loan has a 4,000 per cent APR is tantamount to complaining that a hotel room or hire car costs £10,000 a year, which would be wrong because all of these products are intended only as a short term solution.

Representing the payday lenders is the Consumer Finance Association, which has underlined that the industry’s payday loans product attracted less than 60 complaints in the second half of 2010.

Codes of Practice Likely

However In an encouraging move by the government, consumer affairs minister, Ed Davey, yesterday acknowledged that the government was aware that these kinds of loans were a cause for concern, reassuring Britain that the government has initiated discussions with the industry to ensure that codes of practice “contain real enhanced consumer protection”.

Also reported by the Guardian, a spokesperson for the PM added that Downing Street was working with the industry and consumer organisations to ensure vulnerable people were protected: “We know there are concerns about these companies and the way they operate. We want to ensure that vulnerable people are properly protected and are working with the industry and consumer organisations to ensure that people have the protections they need.”

This update is brought to you by Pay Plan, a UK-based debt management company that has successfully helped more than a million people deal with their debt problems. Pay Plan is funded by donations from the credit industry.

By Kevin M

Everybody knows that too much debt is bad; the financial universe is filled with blogs, experts, and gurus who tell us as much and even how to get out. So why are people still unable to get out from under? Is it because debtors behave badly, that they fail to adequately confront their credit problems—or are they just plain lazy?

Maybe, possibly in some cases, but I think there’s a lot more to it, and by the time you’re finished reading this list, you may have a better understanding as to why—if you’re deep in debt—you’re having such a tough time getting out of it. Knowing what you’re up against is the first step to solving a problem, and only when you do can you make any real progress.

1. Lack of sufficient income to do so

A lot of people are making less money than they were just a few years ago. They were making more money when they incurred their debt, but now the lower income level has them in a trap where they have barely enough money to pay living expenses, let alone pay off debt.

2. A rate of inflation that’s substantially higher than what is publicly reported

Over time, expenses are growing faster than income, especially since raises are usually tied to the understated inflation rate (CPI). Does anyone really believe inflation is running at the 1-2% rate that’s claimed by the CPI? A 2% raise (again based on the CPI) will cause a drop in real wages in an economy where prices are rising by something closer to 5-7%. This is a very carefully hidden obstacle that requires either steadily lowering living expenses or being on a perpetual quest to find additional income sources. Many households are using credit to cover the difference, which is a strategy that’s destined to have an unhappy ending.

3. Conforming to a “standardized” idea of middle class life

When I was younger, if a family couldn’t afford a new car they bought a used one, and if they couldn’t afford that they bought a beater. If they couldn’t afford to keep their house, they sold it and moved to a rental or in with family. But in the past 20-30 years there’s been a kind of standardization of middle class life—how one must live and what one must own to live in it. Call it the “TV version” of middle class life. Many people can no longer afford to live this lifestyle, but they’re emotionally rooted in it and cannot abandon it. Once again, credit is often used to bridge the gap.

4. A benign view of debt

Culturally, debt is seen merely as a way to get from where you are to where you want to be. Want a house—take a mortgage. Need an education? Student loans can help. Can’t afford a car? Bring us your trade in and we’ll finance the rest. All of these require little or no money up front and make the process easy. Credit cards are just an extension of other forms of debt and a natural outgrowth. If debt is what “moves us forward” then how can it be a bad thing? Once you start thinking that way, you’re licked.

5. A culture that encourages debt at all levels

Credit is what moves the economy isn’t it? At least that’s what we’re told by those who are supposed to know. I’ve never agreed with this thinking. Money is what moves the economy–how it comes into being is the real issue. We can either earn it or save it—historically the preferred methods—or we can borrow it. The System—for lack of a better term—encourages us to borrow it since that’s the quickest way to make it happen. Once we have money—what ever the source—we can buy, buy, buy, and that’s what moves the economy. But when we use debt we’re also creating liabilities and they don’t go away once a paycheck shrinks or disappears.

6. A lack of orientation toward savings

Americans have a terrible track record when it comes to building savings, and we’re paying a huge price for it. Savings are the most fundamental antidote to debt—when we have plenty of savings we’re “self-financing” and don’t need debt. Building up savings is the first step to getting debt out of your life, and that requires a fundamental shift in financial thinking.

7. Too much structural debt

Over the past 20-30 years people have taken on too much structural debt. Mortgages and student loans are widely thought to be “good debt” but represent the foundation of even more debt. They’re long term debt, which creates the need for ever more cash later, and if it worked when you bought your house or your education it can work with anything else you buy, right? Mortgages and student loans can work if you don’t overbuy, then commit yourself to paying them off. For many people, however, mortgages and student loans set the stage for a lifetime of indebtedness.

8. An economic system that has a vested interest in keeping consumers in debt

Merchants have a symbiotic relationship to consumer debt—more credit equals more consumers, equals more sales, equals more profit. They’ll often provide the credit for you, all you need to do is come in and buy. This situation exists at nearly every level of the economy and, along with the media, it works to lower our resistance to consuming—and to going deeper into debt.

9. Habit

OK, this one is comes closest to being a pure personal fault by a debtor. Like smoking, drinking and over eating—people get into debt, learn to live with it and just continue on. If you want to break this cycle, it will require an effort comparable to a crash diet. Even though there’s long term benefit to doing it, the short term is uncomfortable and easy to avoid.

10. Debt has become a massive pyramid scheme

There was a time not long ago when lending was considered to be a fringe function in society; the old saw was “before you can get a loan you first have to prove that you don’t need it”. No longer. Credit is very easy to get and has been for a few decades. Because of that ease, lending has grown into a trillion dollar industry, with many layers. You can borrow with the swipe of a credit card, and when your revolving debt reaches the point where you can’t manage it, you can consolidate it with a home equity line of credit (HELOC). When the HELOC gets stressful, you can consolidate it with a new first mortgage on your home. See the trend? If it weren’t so legitimized in our culture and economy, we might be able to identify it as the pyramid scheme that it truly is. Nothing in that system is set up to encourage us to get out of debt, but just to roll it over to more tolerable loans.

 
As you can see, the obstacles to getting out of debt are enormous. It’s not just your bad habits and lack of discipline that are keeping you in debt, you’re getting a lot of help from a culture that’s keeping you in that ditch. This isn’t an attempt to give debtors a pass or to deflect responsibility, but rather to paint a full picture of the true obstacles.

If you have a serious amount of debt to payoff you need to…

• Understand the big picture obstacles you face in trying to get out of debt
• Make a concentrated effort to resist those obstacles by setting and living by your own standards and preferences
• Be fully prepared to lower your standard of living as low and for as long as it will take—separate wants from true needs
• Stop using credit going forward
• Be ready to increase your income—if you’re paycheck doesn’t increase to cover the true cost of living or paying off debt, then be ready to do what you need to find additional sources
• Make savings—and not borrowing—the standard of your financial success
• Once you’re out of debt, vow never to get back in.

You may not have the entire blame getting into debt, but rest assured you’re 100% responsible for getting yourself out.

What are your thoughts on why people can’t get out of debt?

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By Kevin M

What happens if you aren’t able to build up a large retirement investment stash—are you doomed to live on the streets in retirement? Probably not.

While retirement investing may be the single best way to prepare for retirement, there are other strategies that can at least help to offset the impact of inadequate savings.

One of them is to pay off debt.

The elderly are drowning in debt

Debt has become a chronic problem across the board, but it’s also affecting retirees. A Yahoo Finance/Wall Street Journal article,
Debt Hobbles Older Americans reports that debt has become quite common among current retirees and near retirees:

“Most people used to pay off their debts before retiring. But as wages have barely kept up with rising prices over the past 35 years Americans have pushed debt higher, living beyond their means. Now, people are postponing retirement, cutting living standards or both. All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights’ MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.”

That represents a near doubling of the number of people in their 60s carrying both first and second mortgages in just a little over 15 years. The article goes on to report that the situation has only gotten worse as the housing slump has wiped out equity faster than people can pay down their mortgages. And apart from mortgages, people are also moving into retirement with higher levels of auto and credit card debt than ever.

Why the change from previous generations?

The debtor mindset

Millions of people have come to view debt as benign and the idea that it ever needs to be fully paid off has largely gone away. There’s a common belief among people preparing for retirement that the primary focus needs to be on building up retirement investments, and that they’ll “get right” about debt as they get closer to retirement. That probably won’t happen.

The flaw in that thinking is that after a lifetime of using credit, you won’t be able to stop and suddenly begin living without it. It’s a certainty that a lot of current retirees—who are now carrying substantial debt into retirement—thought the same way when they were younger. Somehow, we’ll magically stop using credit, and it will just kind of…go away in time for retirement!

Why the rising asset/rising debt parallel won’t work for retirement

In the best of all worlds, we save for retirement at the same time we pay down and pay off our debts, ultimately learning to live without them. But life has an uncanny way of derailing the best of intentions. It’s not at all hard for a person to both increase retirement investments and increase debt at the same time. After many years, you’re looking at two very large piles of money that may even cancel one another out.

Save for retirement we must, but eliminating debt can be equally important. If we think about the basic purpose of debt—to enable us to buy now what we can’t really afford—what it does is put us on a path toward lifestyle inflation that isn’t consistent with the goal of retirement. It’s not just a matter of debt per se, but rather the lifestyle it affords that we settle into. Our standards go up with the cost of our possessions and activities, which not only will make retirement more expensive, but it will also reduce our ability to prepare for it between now and then.

More bang for the buck

Let’s get down to the numbers–how can paying off debt be more effective than saving for retirement? It’s purely a matter of math.

Let’s say you’ll be carrying a $100,000 mortgage balance into retirement, and the payment on it is $1,000 per month—we’re assuming that you’ll be halfway through a $200,000 loan, which is why the payment is high based on today’s rates. Now at $1,000 per month ($12,000 per year), you’d have to earn 12% on an investment portfolio of equivalent size just to stay even with the payment; do you think you can do that every year until the loan is paid?

It’s very doubtful. You’d have to be 100% invested in the stock market which has the potential to fall, setting you back even farther. Over a 10-15 year period, you’ll be more likely to see returns in the 7-8% range (or even zero if the past dozen years is any indication!), which means your cash flow would improve quite a bit more if you concentrated on having your mortgage paid by retirement instead of an additional $100,000 in savings.

The same is true of car loans—paying off the loan will have a more positive affect on your cash flow than an investment equal in size to the loan balance. And credit card debt…it goes without saying.

The critical takeaway is that the payoff of debt lowers your expenses more dramatically than the income from an investment of equal size will provide. By being debt free, you’ll need less income, and that can help offset a shortfall of retirement investment savings.

Once debt is gone, everything else is easier

Here’s an inescapable fact: there is an asymmetric relationship between debt and investments. Debt payments are fixed, investment income is not. Once we realize that, the course of action changes. If all you do to prepare for retirement is to get completely out of debt, you’ve probably done the single best thing you can. I’m not saying that you shouldn’t save for retirement, but what I am saying is that if time is growing short and investments will be insufficient, paying off your debts will be the single best strategy.

The unexpected bonus is that once your debts are paid, not only will your living expenses be lower (maybe MUCH lower) but you’ll also free up money for saving and investing. The sooner you can do this before retirement, the more you’ll save.

The key is to pay your debts off once and for all, not only to reduce expenses and have more cash for investing, but to establish a debt free position as a lifestyle as far in advance of retirement as possible. Once you learn to live without it, everything else will be easier.

Right now there are a lot of people struggling with building retirement savings in the face of unstable employment. Do you think paying off debt and learning to live without it could be a viable Plan B?

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”Retiring” on Business Income

Getting out of debt can be a big relief. But it’s not just the short-term effects of debt that can have an impact on your finances. Because of the impact on your credit rating, debt problems can affect your finances further down the line too, which means getting back on your feet once you’ve paid your debts off in full isn’t always as simple as you may have hoped.

Many approaches to dealing with debt problems – from debt management plans to bankruptcy – will affect your credit rating, and records will generally show up on your credit file for between three and six years. This could mean you have problems getting access to certain financial services, such as opening a bank account, or taking out further credit.

However, there are things that can help. Let’s look at some of the basic steps you could take to help you get back on your feet after being in debt.

Find a suitable bank account

Simply having a bank account is a great way to stay on top of your finances. When you’re applying for a bank account, though, banks and building societies could turn you down if you’ve had serious problems with debt in the past – for example, if you’ve been bankrupt.

However, many account providers also offer basic bank accounts, which offer many of the same services you’d get with a normal account – but are aimed at people who may have problems getting a standard current account.

Some basic bank accounts don’t require a credit check, and some could even help you to budget by separating the money you need for your essential living costs from your disposable income – which could give you peace of mind that you’re never spending more than you can safely afford.

On the other hand, basic bank accounts don’t tend to offer features like overdrafts or give much interest on your balance.

Everyone has different needs, so it’s important to take the time to compare what each basic bank account has to offer. You could start by looking on a site such as thinkbanking for some further information.

Plan a strict budget

Organising your finances so you can keep on top of the money you earn and manage how it’s all spent every month could really help you regain a solid financial foundation. Creating a carefully planned budget is one of the best ways of staying in control of your money – and avoiding further financial problems in the future.

Firstly, work out all the money you receive in your account on a regular monthly basis: including your salary and any benefits you receive. Secondly, work out all your essential outgoings every month – such as your rent/mortgage, food and utilities, as well as anything else your household regularly spends money on.

Then, if you subtract everything you spend from everything you earn, you’ll be left with your ‘discretionary’ income – in other words, spending money – some of which could be put into savings, if you wish. As long as you keep all your spending within this monthly amount, you should greatly reduce the likelihood of future money problems.

This post is provided by thinkbanking.

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By Kevin M

In previous posts I’ve suggested that frugality can be counter productive if it keeps you hyper-focused on saving money at the expense of increasing your income. There is a very definite “siege mentality” that is inherent in frugality, and if taken too far it can lead to a process in which you’re constantly working to lower your cost of living but never moving forward in any real way.

Today I’d like to look at the flip side of this thinking. In this post I’d like to examine an area where properly channeled frugality can create business opportunities.

Last week I had lunch with my friend Jay and we got to talking about the possibility of a connection between self-employment and being frugal. Jay himself was the inspiration for the question—and for this post. In addition to having a very successful business, one he quite literally built from the ground up, Jay has never held a job. His entire career has been a process of moving from one entrepreneurial venture to another and sometimes juggling two or more at the same time. Oh, and yes, Jay is also very frugal. I don’t mean cheapskate frugal, but more along the line that frugality is a part of who he is.

Have you ever known anyone like this? I’ve known several. Make that many! That’s what leads me to believe that there might be a connection between self-employment and frugality. I’m not sure whether frugality sets the stage for self-employment, or if being self-employed makes one frugal out of necessity. But I’m willing to guess that there are certain characteristics of the frugal that make it easier for them to be self-employed.

What are those characteristics?

An inclination to find the best deals

What ever it is that a frugal person needs he’ll almost always pay less for it than others will. In that process he develops a sense to be able to almost sniff out the best deals on nearly every product or service he buys. A truly frugal person almost never buys “off the shelf”. He hones something of a horse trader’s instinct that he’s able to summon anytime he’s about to buy something. Think of it as buying wholesale, a skill that any self-employed person needs to develop.

”By Low, Sell High”

The inclination to find the best deals is rooted in a deep sense of value. The frugal person knows that what it is he buys is purchased at a lower cost than what most others are willing to pay. This sets the stage to sell what he buys for a profit. The primary “secret” of having a successful business is the ability to buy on the cheap and sell what you buy at a higher price. It’s easy to see how this would help in running a business.

Getting the most out of scarce resources

The frugal not only know how to buy for less, but they also have an uncanny ability to use what they have to the fullest. That may involve using a product past the point where most others would discard it, the willingness to fix or otherwise enhance it to get more life out of it or, failing all else, to find cheaper alternatives.

This is exactly what you’re doing when you’re self-employed. There are business plans, but as anyone who’s ever run a business knows, improvising quickly becomes the order of the day. Since income is never unlimited, the ability to make do with less becomes the critical “other half” of business success.

Managing cash flow

Since a frugal minded person is always aware of expenses and the need to control them, his ability to successfully manage cash flow tends to be better than that of the average person. We can see how this is a benefit in managing personal finances, but it works just as well in running a business budget. By keeping expenses low, and buying only what’s absolutely necessary, the frugal person also maximizes net income.

Staying out of debt

Frugal people are keenly aware that debt and the interest it carries raise the cost of everything it’s used to buy. For this reason, the frugal avoid debt and that works very well if you run a small business. Debt can be the mortal enemy of a business entity, reducing options and cash flow during downturns. By staying out of debt, a business is in a better position to weather economic troubles. The frugal tend to be naturally better at making this happen.

Investment and business asset growth

One of the hallmarks of the frugal is a healthy savings account balance—a natural result of buying on the cheap, keeping expenses low and staying out of debt. This is also a benefit to a business owner since it keeps cash available for future investment. This can be either investment in personal financial assets or investment in the business itself.

Where ever it’s done, when a business owner is able to invest without borrowing he improves the likelihood of both the survival and increased prosperity of his business.

Getting back to the question in the title: Self-Employment and Being Frugal – Is there a Connection? In my opinion, most definitely.

What do you think? Is there a connection between the two? Does frugality benefit a business owner? Can you think of ways it might work against being self-employed?

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Pursuing Your Passion Isn’t As Risky As It Used to Be

By Kevin M

You read that first word right—RISKS—as in something to lose! Historically risk is not a word normally associated with a college education, but this isn’t history—it’s the big, bad now and the rules have changed.

Not only is the cost of a college education much higher than it’s ever been (and rising relentlessly), but the ways people are paying for it are farther out there on the danger scale. And the jobs that once reliably awaited students upon graduation don’t seem to be there in either number or compensation. To paraphrase a well worn cliché, this ain’t your father’s college education.

The college game is changing. A number of factors have developed that have turned the one time ticket to the good life into a high risk proposition. I’ve identified five and you could probably cite a few others.

Risk #1: Financial Cost

No matter what it is we’re pursuing and how noble the cause, in a world of limited resources, we always need to consider the cost/benefit ratio. That ratio is way out of balance in many college norm careers. Back in the 1980s when I was in college it was possible to obtain a college degree for about the amount of a starting salary in a typical degree field. In that environment, going to college was a risk free proposition.

Today, larger amounts of money are being paid for college while the job prospects in many degree fields are weakening. It’s now possible, even typical, for a college education to cost several times the starting salary in a typical degree program. There is a real risk that the full value of the price paid for a college education may never be recovered.

Risk #2: Debt Hangover

It’s bad enough that college has such a high price tag today, but the problem of cost is magnified by the fact that debt is increasingly being used to pay for it. That debt carries well into the working years, and even though it may have preferential rates of interest, it’s still a drag on the graduate’s financial future.

Kelli Space wrote a post over at Budgets Are Sexy titled I Went to College and All I Got Was This $200,000 Bill—that was the amount of the student loan debt she had accumulated while earning her degree. That sounds like an incredible amount of debt and perhaps it is at the upper end of the range. But with college costs rising steadily and incomes and savings levels stuck in neutral, the debt numbers are getting higher all the time.

Whether it’s $200,000, $100,000 or “just” $50,000, we’re talking about a staggering amount of unsecured debt! Liabilities of this magnitude can be life altering—it sends the graduate into an increasingly uncertain job market with one, large strike against them.

Risk #3: Time Invested

The four years it takes to get a college degree is long enough that the job prospects in a chosen field of study can change significantly in that space of time. And many students are spending more than four years to get an undergraduate degree alone.

The pace of change in the world seems to be quickening, and that includes the growth, maturation and decline phases in many companies and entire industries. There’s now a real risk that a student can spend years preparing for a career field he’ll never work in.

Risk #4: Lack of Entrepreneurial Training

With jobs in many fields degrading or disappearing the career path for graduates is increasingly pointed in the direction of some form of self employment. Sadly, college coursework preparing students for the entrepreneurial path is close to non-existent at the undergraduate level.

College curriculum is geared heavily in favor of the organizational universe of the corporate world, various levels of government and even non-profits, but not life running a small business. Part of the reason for this is that organizational training is readily teachable. Entrepreneurial training, by contrast, is so decentralized and diverse that it doesn’t lend itself to the type of comprehensive curricula that make up the vast majority of college programs.

There’s a real risk of preparing for declining organizational careers in a world where self-employment is fast becoming the new normal. College programs may eventually adjust to this change but there’s little evidence that any sort of shift is even on the horizon, let alone a work in progress.

Risk #5: Opportunity Cost

This risk starts with the question, “what else could I be doing to build a career that I might not be doing while attending college?” The job market is becoming increasingly selective—you won’t necessarily have a career by virtue of a degree.

Many college norm career fields are now in oversupply while jobs in the skilled trades and technical fields go begging. Such careers, as well as self-employment, often take an entirely different path than college norm jobs. Technical school training, apprenticeships and the good, old “school of hard knocks” are often the best (or only) way to enter these fields.

In many fields the four years that someone might spend in college would be sufficient to gain the training, experience and credentials that would enable earning a living wage with greater career security and job mobility than many college norm careers afford. In addition, many trades and technical fields are now paying salaries comparable to or even greater than college norm careers.

How can we respond to the college risk

Where ever there’s risk, we should be practicing risk mitigation; what can be done to do that in connection with a college education?

1. Don’t use college as a default when you don’t know what career to enter—the risks are too high to just “get a degree in something”. Some life experience might help more than spending time in college.

2. Set a limit for how much money you’re prepared to borrow to pay for your education—lenders and colleges aren’t putting any limits on how much a student can borrow so it’s up to the student and the student’s family. You can for example, set the upper limit on student loans to no more than the expected salary for the first year in the new career. Any metric is better than sky’s-the-limit.

3. Look for less expensive college options, such as spending the first two years at a community college or commuting to school rather than living away where room and board can more than double the cost of your education.

4. Consider the alternatives to a college education. Would you be better suited to be a plumber? If you think you’d like to be self-employed do you think college will help you get there? Or is there some other path the might be more effective?

What do you think about the cost of a college education relative to the employment opportunities that are available in today’s economy? How much money should a student be prepared to pay for a degree? Are there any other paths a would-be student might pursue that won’t leave him/her buried in debt after graduation?

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By Kevin M

One of the biggest line items in a typical household budget is car expense, and one of the reasons it’s so large is because of car loans. After decades of easy credit, we’ve been conditioned to think of car loans as a normal part of the car buying process. I have a car, therefore I have a loan.

But is that the way we should be thinking? Are there deeper risks to having a car loan that we tend to gloss over? I think so. The loan you sign on for when you’re safely employed can quickly become unsustainable after just a few months of unemployment. And with job losses and extended periods of unemployment becoming the “new normal” we should be changing our assumptions about car loans.

What are some of the reasons you should avoid a loan and pay cash for your next car?

A loan puts your car at risk

Unlike credit cards—where the lender has no specific claim on your assets—it you fall behind on your car loan, your car can be repossessed. This reason alone should remove any casual notions we have about car loans. They’re higher risk than almost any other loan type! Even if your house is foreclosed on, there is an extended period of due process that can take a year or more in many states, giving you valuable time to maneuver. No such protections exist for a car loan; stop paying and the repossession process is pretty swift.

A car is a survival asset for most people

For most people, a car is critical to their ability to earn a living, if only for commuting. If the car is lost—which is much more likely during a period of extended unemployment—your ability to earn a living will be greatly impaired. You can lose your wide screen TV, your $3,000 deluxe treadmill or even your home and still be able to earn a living. Not so with a car; lose it and your job prospects collapse immediately.

The double car payment trap

One car loan is bad enough, but as a testament to the casual way people often see them, many households have two or more. All of the problems of one car loan are multiplied by the number of loans outstanding. In some households total car payments can exceed the monthly house payment.

High cash flow drain

A car is an expensive proposition to begin with; you already have insurance, gas, repairs and maintenance. A car payment magnifies all of this. In fact if you total up all the expenses you pay each year to own a car you’ll see why your money just seems to disappear into thin air. For most people, a car is the second most expensive budget item, after a home. By paying cash for a car, you cut this expense considerably.

Owing more on the car than the car is worth

This is also referred to as being “upside down”–for obvious reasons. Cars depreciate rapidly, so it’s possible to be upside down shortly after purchase, even after making a 20% down payment.

This situation creates at least two problems that I can think of. First, it limits your options if you want to sell the car or refinance the loan—you’re no longer talking about an 80% loan, but maybe a 110% or 120% loan. Or you could face a loss on sale.

Second is an insurance claim. In the event you’re involved in a crash and the insurance company totals your vehicle, they will only cover an amount up to the value of the car before the crash. That may mean a settlement that is not enough to payoff the loan, let alone provide for the down payment on a new car. Gap car insurance exists for this purpose, but few people purchase it unless the car is leased or the car is purchased with little or no money down.

Owing less on the car than it’s worth

On the surface I’ll admit that this one doesn’t seem to be a problem. But let’s imagine that you’ve been unemployed for about a year and you’ve fallen behind on your car payments. Your car is worth $15,000 but you still owe $5,000 on it, and the bank is repossessing it. You’ll lose a $15,000 car and the $10,000 equity you had in it will evaporate for the inability to pay a $5,000 loan.

Equity for your next car

The equity in the car you own today will probably make up most of the cash you pay on the next car you buy. By owning your car free and clear, not only do you maximize the amount of cash you have for the next purchase, but you also keep your options open to make the buy at any time. You won’t need to wait until the loan is paid, or worse, having to deal with the complications that come with selling an indebted car.

You don’t need a car loan if you work from home

Millions of people are now working from home, whether they’re self-employed or telecommuting. You don’t need to have a car loan if you work from home, in fact you don’t even need much of a car at all. A ten year old “beater” that works for short local hops is really all you need (you can rent a car for long trips if you don’t trust your beater to get you there). It makes no sense to borrow to pay for a car you’re hardly using.

 
What’s the alternative? Most obviously, don’t borrow to buy a car—paying cash is the way to go. Fortunately, there’s a car for every budget, especially if you can overcome the dreaded affliction newcaritus. And there are other ways to deal with car loans in the event you already have one.

1. Buy only as much car as you can afford to pay cash for; it that’s $2,000 for a 15 year old car, then that’s what you can afford.
2. Dedicate a savings account specifically to accumulate money for your next car.
3. If you have a car loan now, make paying it off a priority, even ahead of your credit cards.
4. If you have loans on two cars, make a priority of paying off the smallest as soon as possible—then go after the bigger one.
5. If you do use a loan to buy a car, make the largest down payment possible and the term as short as possible, then pay it off early.

Have you ever thought about the risks of financing a car? What do you think about paying cash, even if that means buying an older, less expensive one?

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Guest Post by Darin Sewell

When it comes to fixing a bad credit report and boosting a low FICO score the first question out of most people’s mouths is how long is this going to take. Truthfully that is a hard question to answer mainly because each individual’s credit and personal situation are different and are going to require its own approach and amount of work. But in most cases you can make some good progress inside of 3-6 months, but you have to make sure you follow along with some proven credit repair principles. Let’s take a Look at one of these principals below, debt reduction with a twist!

Before you can increase your credit score you are going to have to look at the amount of total debt that you currently have. If you have bad credit chances are that you have many accounts that are maxed out or near the account maximum so you need to find a way to get this debt paid down.

Why Too Much Debt Hurts Your Credit Score

Having a lot of accounts maxed out or near maxed out is very bad because anytime you carry more than 50% of your available debt, your scores will start to go down, and go down fast. To avert this, you need to pay down your debts as fast as you can. I know this sounds easier said than done but there are a few advanced tactics you can use to get it paid down faster.

An Advanced Tactic To Pay Your Debt Down Faster

One such tactic is called stacking. What this means is that you find savings in your monthly expenses and apply them to your debt reduction. It might be lowering your cell plan, cancelling Netflix or taking a lunch to work instead of buying it every day. You can then take the extra money you get from these savings and pay it towards your debt with the lowest balance.

To make this tactic work you will have to keep paying towards the debt until it is paid off and once it is paid off, apply the money that you used to pay towards that bill to another bill, in most cases you can often come close to doubling your payment amount and by the time you get to your last account you will have a large amount of money going towards its reduction every month.

Of course no amount of debt reduction effort is going to help you if you continue to spend and acquire more debt. So make sure to set a budget and stick to it. And do not open any new credit accounts during this time and do not close your accounts when you pay them off.

Maintain Your Credit Accounts

Keeping your existing credit accounts open is critical because along with the amount of debt you have, you are also scored by how long your accounts have been open. This means that an account that is brand new will not give you as much score boosting power as an account you have had open for a few years. Maintain these accounts even if you have late payment history on a seasoned account; do not cancel it, as most negative activity will disappear from your credit report 12 months after it appears.

How To Ensure You Never Pay Late Again

Once you get your debts paid down you will see your credit scores rapidly increasing, keep them on the upswing by not making any late payments. The best way to do this is to use only one card and set it up for automatic payments every month. While the auto payment will only make the minimum payment you can always send in more after the minimum is made. This will put your bill payment efforts on auto pilot and keep you from slipping into the same habit of late payments and too much debt!

Depending on how much debt you have to start with, this process can take a few months or a year or more, but it does get a little easier each month so stick with it because the only thing you have to lose is your low credit score.

Guest Post by Melanie Taylor

If you’re struggling with a significant amount of unsecured debt, and you don’t think you can repay it in a realistic amount of time, it’s important to find a debt solution that could improve your finances as soon as possible.

One option is an IVA, or an Individual Voluntary Arrangement. If you’re having serious difficulty repaying your unsecured debts, entering into an IVA could allow you to make one affordable repayment tailored to your circumstances every month.

What’s more, on successful completion of your agreement, the remainder of the unsecured debt included in the IVA would be written off, leaving you debt-free.

What exactly is an IVA?

An IVA is a legally binding agreement between you and your unsecured lenders. Once your IVA is agreed, you would:

• Make reduced monthly payments

• Be protected from any further action by your lenders

• Potentially freeze interest and other charges on your debts

When entering into an IVA, you agree with your unsecured lenders to repay as much of your debts as you can over a realistic timeframe – usually five years. On successful completion of your IVA, the remaining debt will then be written off, leaving you with no further liability towards your unsecured debts.

As a form of insolvency, an IVA offers an alternative to bankruptcy that could protect you from some of the potential downsides – such as the repossession of your home.

How do I get an IVA?

An IVA must be agreed with the help of an Insolvency Practitioner (IP) – an expert who will only recommend an IVA you for if it is the most appropriate solution for your financial situation.

If it looks like the best approach, your IP will then draw up an IVA proposal: a plan based on what you owe and what you can reasonably afford to repay each month, which is then submitted to your lenders.

For your IVA to be accepted, the majority of your lenders – that is, those holding 75% of your total debt value or more – must then agree to it before your IVA can go ahead.

Is an IVA right for me?

Entering into an IVA could only be a suitable solution if you’re unable to meet your monthly repayments as agreed – but you can still commit to making regular (smaller) monthly payments.

If you’re a homeowner, it’s very likely you’ll have to re-mortgage to release some of the equity in your property in the 54th month of your IVA.

Furthermore, an IVA will remain on your credit history for 6 years from the day it starts – and you must be a resident of England, Wales or Northern Ireland to potentially qualify.

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