Pay Mortgage Early? Financial Freedom Definition? How To Land A Job? It’s Q and A Time!

Wow. Thanks for all the curious/concerned emails lately asking, Where are you? All okay? It feels awesome to be missed :>) I’m fine; just took a blogging break. Actually, I’ve been writing a quite a bit lately, just not here… forums, media inquiry replies and interviews, a book proposal and outline, coaching followups, storybooks with my kiddo… Frankly, my backside couldn’t bear another minute sitting in front of the keyboard! It hasn’t been all writing though — I’ve been having tons of fun too: several house guests, Chinese New Year parties, homeschooling with my voracious little learner, raising and training ten baby parakeets (my hubby calls it our 4-H-in-the-condo project). But I have missed my blogging friends! So without further ado, I will pull some interesting questions from my inbox and respond to them here. Identifying details have been changed or removed. Feel free to add your suggestions in the comments as I’m sure these folks would appreciate alternate viewpoints.

Q: Carolyn asks, “For the past two years I have enjoyed your emails. My savings has grown from an average $1,500 to $35,000. I have committed to saving a set amount but also some unexpected money has come my way which I have saved all of it. I think changing your mindset along with action and education has contributed to my money growth. My next step is to pay my mortgage off early. Any suggestions?”

A: Awesome progress, Carolyn. Congratulations! While I don’t know all of the pertinent details about your financial situation, I feel compelled to share this: In my opinion, paying a mortgage off early is one of the very last steps most should take in their financial life. Why? Because there are many other money matters that take a higher priority. As a general rule of thumb, here’s the order of financial steps I typically recommend:

First: Pay off “toxic debt”: start with credit cards and loans that charge the highest interest rates (because you’ll save money), and those with account balances that hover closest to maximum credit limits (because it’ll improve your credit score). Raise quick cash immediately by selling stuff you no longer need, want or use.

Second: After you’ve paid off all debt balances with interest rates over 8-10%, start saving at least 15% of every dollar earned to build an emergency fund equal to 6-12 months of take-home income.

Third: Once your emergency fund is complete, start investing AT LEAST 10% of your monthly gross income in a diversified portfolio of no-load mutual funds, ETF’s, stocks, bonds. Start with your tax-advantaged retirement account(s).

Fourth: Get cracking on any remaining lower-interest rate (below 8-10%) debt balances.

Finally: Paying off the mortgage would be the last financial task on my list, especially if the mortgage rate is reasonable. Better yet, if I had a home with a mortgage and I was seriously in debt, I’d sell my home to pay off my debt with the equity. Besides, renting is often cheaper than buying!

Q: These days, simply being a (one) millionaire is not enough to be financially free, depending on ones age. Unless universal healthcare is achieved and unless I learn to cut back on expenditures, I think I would need 2.5 million to be financially free. At least. I don’t see that happening unless 1) we inherit a bunch of money or 2) my husband works another 15 years (minimum) AND the stock market behaves. He has a good job, we have a nice, recently remodeled home plus a small vacation cabin, and we have an emergency cash stash. I don’t want to have to buy a new car for a few years because we pay cash for cars and I don’t want to see the emergency fund take a nosedive. Good thing I love my 10 yr. old minivan! Anyway, how much do you think it takes to be financially free? ~K

A: You’re concerned about how many digits sit in front of your six $0’s and how the stock market behaves. Your husband is employed, you have two homes, a car and an emergency fund in place. In many people’s eyes, you already have financial freedom!

There is no one-fits-all magic financial freedom number. To some $50,000 sounds like a dream come true and to others 50 million wouldn’t be enough. To lots of people I’ve come across, simply breaking free from their paycheck to paycheck existence, or the shackles of debt repayment, or sleeping well at night because they have an emergency fund and a contingency plan in place is enough to make them feel financially free. Personal finance is called personal because it is so, well, personal.

Traditionally, many define financial freedom as having enough passive income that you no longer need to work; your passive income covers your living expenses. Funny thing with this definition is that there are so many variables contained within: What do you consider passive? Is it investing in CD’s, stocks, or a business? How about getting paid for “work” that you love so much that you would do it even if you didn’t get paid? What are your living expenses? Can they be reduced substantially? Can some be eliminated entirely? What if you sold your home(s), invested the equity, and moved to Mexico or Thailand or somewhere else where living expenses are dramatically less than in the US? Again, so much of this is personally defined.

My husband and I consider ourselves financially free because our family hasn’t set an alarm clock in years. Whether it be work, parenting or play, we wake with the sun, eager to spend each new day doing whatever we choose. This definition affords us the flexibility we value, therefore, regardless of the exact numbers on our net worth statement, we have “enough”.

Q: CarA writes, “I love your entire story! You’ve made some great moves throughout your life. I’m curious, how hard (or was it all hard) to talk your husband into selling your home? Did he just have complete faith in you? Or was it a joint effort? Just curious because you said so many around you were skeptical of selling your home to rent.”

A: Ha! It was INCREDIBLY difficult for my husband to jump on board with my plan. I’d crunch the numbers, craft reams of brilliant spreadsheets and grinning from ear to ear, I’d enthusiastically share my financial freedom plan. He’d remark (skeptically), “If it’s really that easy, why isn’t EVERYONE doing it, Jen?” I think the biggest obstacle for him was getting over what everyone else would think about our choice to rent. We sold when the market was hot and everyone thought real estate was THE best place to invest. Remember the days when the mantra was “real estate prices may flatten but they never go down”? Our friends and family questioned my logic. Fortunately I’m not easily deterred and my husband trusts me. But it took a lot of effort on my part to show him the numbers in such a way that he got it, too. And he had to get over his concern about what others thought about it. I gave him the time and space to deal with those issues and I reminded him that renting didn’t need to be a permanent choice.

Today he recommends renting to all his friends. I think he loves looking so smart for getting out before the market crashed :>)

Q: I follow your blog and love all the insight you share with us. Lately, there has been a lot of talk about inflation and hyperinflation heading our way in 2010. Can you offer us some insight, tips to prepare for this? Angeli

A: I wrote about this topic in June 2009 here: Hyperinflation or Prolonged Deflation? Coping and Investing Strategies For Either Scenario. The market is being so manipulated that it’s anyone’s guess what will happen, but I still think that inflation is a ways off; deflation is our first concern. Also, check my Resources page for links to web sites that focus on the economy. I follow many of these debates and only one thing is clear to me — no one really knows how to get us out of this mess. My primary goal at this point is my personal capital preservation.

Q: This spring, I will be a new college graduate. Like thousands of others, I’ll be facing a brutal job market. Any tips? Lisa

A: Get your foot in the door, Lisa. Work to get noticed rather than to get paid. Ideally you do this while pursuing your degree — if not, start now:

  • Shadow those who are doing what you want to do so that you see first hand what is involved in your chosen field.
  • Hook up with a mentor who can show you the ropes and introduce you to others who can hook you up with a job.
  • Get noticed by those in your field: volunteer
  • Negotiate an unpaid apprenticeship: offer your services in exchange for hands-on learning experiences. This is how I learned how to train dogs, teach classes, and became a professional dog training instructor and business owner.
  • Get creative: find a problem, see it as an opportunity, and present the solution. Create your own job or business!
  • Take the time to brainstorm, journal, and bounce ideas off of supportive “can-do” people.
  • Take an honest look at your lifestyle and eliminate or cut back on anything that is superfluous. Create some financial breathing room.

Readers, I welcome your viewpoints and advice in the comments. Please send me your questions, too, and I’ll respond to more. Thanks!


What Science Says About Debt and Obesity

This is a guest post written by Matthew Papa, PhD.

The current economic state worldwide has led to an increase in the number of people living in high-income countries who can be considered over-indebted — owing more money than they can repay. While there are many negative factors associated with indebtedness, a new study by Eva Munster and colleagues of Germany, published online in the journal BMC Public Health, found that over-indebtedness is associated with obesity – in fact, people who are over-indebted are more than twice as likely to be obese and almost twice as likely to be overweight as their more financially successful counterparts.

The Study

Traditionally, socioeconomic factors such as education and income, as well as other factors like sex, age, depression, and smoking habits, have been found to have a relationship with weight. This new study was unique in that it specifically examined the relationship between weight and indebtedness, a characteristic rarely used to describe socioeconomic status. Over-indebtedness is defined by the study’s authors as “lack of possible debt redemption in due time due to the relation of income and cost of living after a remarkable cutback in standard of living.”

To conduct the study, Dr. Munster and her colleagues compared the results of two surveys: a study designed to measure the health of 949 over-indebted individuals, and a previous telephone health survey of 8318 individuals representative of the German adult population. Both surveys asked questions about age, sex, income, education, Body Mass Index (BMI – a measure of obesity calculated based on height and weight), smoking, and depression.

The study found a number of interesting relationships with indebtedness. When compared to the general population, the average over-indebted study participant was younger, had less education and income, and a higher incidence of depression, smoking, overweight (BMI ≥ 25), and obesity (BMI ≥ 30). Both men and women were equally likely to be over-indebted.

Aspects other than indebtedness that were found to be related to an increased likelihood of being overweight or obese include being male, being over 40 years old, and suffering from depression. Smokers and those with higher education and income were found to have a decreased likelihood of overweight or obesity.

Over-indebtedness and Obesity

The study found that indebtedness was associated with an increased likelihood of overweight and obesity, even when examined independently of other factors. This means that people who are over-indebted are more likely to be overweight or obese regardless of factors such as income, education, sex, or age – suggesting that over-indebtedness alone can cause obesity.

Why might this be the case? The study’s authors present several possibilities for this relationship between over-indebtedness and obesity. One potential reason is that over-indebted people may be less able to afford healthy food. It is known that, internationally, food that is energy-dense (meaning high in fat, sugar, and calories), is less expensive and more filling than less energy-dense (and healthier) food. For example, for the amount you would spend on a bag of carrots, you can buy a more filling and higher-calorie snack like a Snickers bar.

Another possible reason is the psychological distress faced by those who are over-indebted. Being unable to afford all one’s debts can be stressful and depressing, things that can lead to increased eating for compensation and enjoyment. A number of studies have shown that the majority of people change feeding behaviors when facing stress. Around 40% or more increase and 40% or less decrease their caloric intake during stressful periods, while 20% do not change feeding behavior. Stress also induces secretion of glucocorticoids, which increase motivation for food, and insulin, which promotes food intake and obesity, as mentioned in a recent study by Dr Dellman MF.

Is this a German phenomenon?

Since this study was conducted on a German population, there has been some discussion in the United States’ medical community about whether the results can be generalized to other countries. It is possible that this relationship between over-indebtedness and BMI is a uniquely German phenomenon, but there are also excellent reasons to believe that the study has relevance to other countries such as the United States.

Dr. Emanuela Taioli, a physician at SUNY Downstate Medical Center in Brooklyn, New York, said of the study: “This result is even more applicable to the U.S., where unhealthy food is currently much cheaper and more affordable than healthy food, and so is water in comparison to sugary drinks. This will have a large impact on the current U.S. obesity problem, now that the proportion of people with debts is increasing.”

On the other hand, Dr. Lewis Kuller of the University of Pittsburgh noted that the findings would be more impressive had the data been collected over time, rather than all at once, asking “Did the individuals gain weight when they lost [their] income [or] job over indebtedness? Or were they already obese, overweight before their economic problems?”

One thing is certain: this carefully conducted scientific study uncovered a significant association between indebtedness and overweight and obesity. The startling finding – that being over-indebted increases a person’s risk of being overweight by almost 100%, and increases their risk of being obese by more than 150% – definitely suggests that over-indebtedness should be considered when looking at risk factors for overweight and obesity.

About the Author: Matt Papa is a postdoctoral fellow and medical researcher at Washington University School of Medicine, St. Louis, MO. Concerned about the increasing rate of obesity in the United States and other countries, Matt is interested in sharing the latest relevant scientific information. He is the owner of a WeightLossTriumph, where he provides information on best weight loss programs and offers a Medifast coupon.

How To Track Your Expenses

Money flows like water. It can gush like a raging river or drip like an annoying leaky faucet at midnight. If we use this precious resource mindlessly, we face drought. However, if we first observe the ebbs and flows, effective management becomes a simple matter of design. In other words, you NEED to know where your money goes in order to manage the flow. Once you know where your money flows, you can design a realistic budget plan and start making conscious spending choices for your hard-earned dollars.

Create an expense tracking system and establish a routine. January is the perfect month to start. I’ve tracked my expenses for over 15 years. It really doesn’t require a lot of time (~5 to 15 minutes a week). I pay my bookkeeper to do this task for me now and at about $1.25 to $3.75 a week, it’s worth it. If you have kids, this can be an educational task to delegate to them.

Expense tracking options include:

  • save all receipts and file them into large envelopes labeled by expense category
  • write each expenditure under a category column in a ledger book
  • write each expenditure in a pocket-sized spiral-bound notebook (carry it with you when you leave home)
  • use a software spreadsheet like Microsoft Excel or Open Office Calc
  • use a personal finance software program such as Microsoft Money Plus Premium or Quicken.
  • sign up for an online application such as Mint.

While all of the above methods work, I use personal finance software (specifically Microsoft Money Plus Premium because I like their Lifetime Planner tool). Both Microsoft Money and Quicken include a wide range of helpful tools to make personal money management tasks easy. Specific to this particular task of tracking expenses, Microsoft Money Plus Premium and Quicken personal finance software:

  • connect to thousands of banks and update your expense transactions automatically
  • automatically categorize your transactions and compare them to your budget
  • show you exactly where your money is flowing using charts, graphs and reports
  • let you see the big picture or drill down to the details

Four Tips:

  1. Make the most of on-line banking. To make tracking your expenses easy and accurate, pay for everything with a check, debit, or credit card. Check your account often and set up as many automated transactions as possible. (Important Note: If you pay routine expenses by credit card, pay off your account balance in full each month!)
  2. If you must use cash, keep your receipts and enter each transaction into your expense tracking system.
  3. Make it a habit to track your expense transactions regularly. Designate a time weekly for this task and at the end of each month, total the amounts spent by category. In my case, it only takes about 10-20 minutes per week to confirm my automatically downloaded expense transactions and to reconcile my downloaded bank account statements.
  4. Here is a comprehensive list of expense category suggestions. Modify my list to fit your own needs and lifestyle:

    Auto -repairs, gas, insurance, registration, tolls…
    Auto Payments
    Bank Account Fees
    Beauty -hair cuts, manicures, makeup…
    Child Care
    Debt/Loan Payments -create a different account/category for each loan
    Dining Out
    Finance Fees
    Home Improvements/Maintenance/Repairs
    Household Furnishings
    Insurance (Disability)
    Insurance (Health)
    Insurance (Homeowner/Renter)
    Insurance (Life)
    Insurance (Medical)
    Insurance (Personal Liability)
    Liquor/Tobacco -if applicable
    Mass Transportation -bus, train, light rail…
    Medical -everything except health insurance premiums
    Misc -avoid this category as much as possible!
    Mortgage Payments/Rent
    Savings (Education)
    Savings (Emergency Fund)
    Savings (Retirement)
    Savings (Specify Purpose)
    Storage Unit
    Subscriptions, Books, Software
    Taxes (Federal, State, Local)
    Tax Preparation Fees
    Toys (purchase, repair, insure) -includes boats, electronics, bikes, jewelry…
    Utilities (Electric)
    Utilities (Gas)
    Utilities (Internet)
    Utilities (Misc)
    Utilities (Telephone)
    Utilities (Trash)
    Utilities (TV Programing)
    Utilities (Water)

Questions for readers: Where does most of your money go? If you currently track your expenditures, what method do you use?

Seriously, If You Don’t Have The Money, Don’t Buy It!

‘Tis the season for buying, buying, buying. And then, if you’re like the typical consumer, you’ll spend the better part of next year paying, paying, paying for it! My suggestion? If you don’t have the cash set aside specifically for purchasing holiday gifts, then don’t do it. It really is that simple.

I know you worry about what your family and friends will think if you show up empty handed, and I know that your kids might whine for a few minutes on Christmas morning. But there are plenty of ways to enjoy the holiday without expensive gifts. Instead of shopping, spend time together caroling, baking cookies, and spreading good cheer. A cheerful attitude is easier to come by when you aren’t stressed out by spending money you don’t have.

But you say you’ve bought the gifts already? And wrapped them? It’s not too late — unwrap them, return them to the store, and have the cashier put the credit back onto your card. This year, try giving your love instead.

Happy Holidays!

Video: How To Stay Out Of Debt, a funny Saturday Night Live piece starring Steve Martin.
(Email subscribers, you’ll need to visit my website to view the embedded video.)

Lose The Extra Weight and You Are Likely To Increase Your Wealth

In my last post, I shared the bummer news that being in debt doubles your risk of being overweight. Since the poll I included with my last post shows that roughly 45% of the readers who responded are overweight, I thought I’d share the encouraging news I dug up today:

Overweight Americans who lose a lot of weight also tend to build more wealth as they drop the pounds, according to new research.

The study found that the link between weight loss and wealth gains was particularly strong among white women. Black women and white men also gained wealth as they lost weight, but not as much as did white women. The wealth of black men was basically unaffected by their weight.

There’s no way to tell from the data whether losing weight was the reason for the gain in wealth, but the linkage was definitely there, said Jay Zagorsky, author of the study and a research scientist at Ohio State University’s Center for Human Resource Research.

“The typical person who loses or gains a few pounds had almost no change in wealth, but those who lost or gained large amounts of weight had a more dramatic change,” Zagorsky said.

For example, white women who dropped their body mass index score (BMI) – a standard measure of obesity – by 10 points saw a wealth increase of $11,880. White men saw an increase of $12,720 for a similar drop, while black women increased wealth by $4,480.

Overall, the results showed that a one unit increase in a young person’s BMI was associated with a $1,300 or 8 percent reduction in wealth. But the changes varied dramatically by ethnicity and gender.

The study appears online in the “Articles in Press” section of the journal Economics and Human Biology. Read more here: Dieting Linked To Increased Wealth, Study Finds

The data doesn’t indicate whether a person’s wealth affects obesity or whether obesity affects wealth. However, an analysis of those in the study who received inheritances showed no dramatic changes in their BMI scores in the following years. This suggests that wealth does not have a strong influence on weight; it is more likely that weight influences wealth.

If weight does affect wealth, how does it do so? Perhaps overweight people are discriminated against in the workforce and therefore don’t earn as much as thin people. Women are often held to higher beauty standards — this could explain why women gained more wealth compared to men when they lost weight.

For those of you who are overweight, is learning that you could be $4,480 to $12,720 richer by losing weight an encouraging incentive?

Being in Debt Doubles Your Risk of Being Overweight

The likelihood of being overweight or obese doubled with increasing indebtedness, an association that could not be explained by other socioeconomic or medical factors, according to an article published online in the journal BMC Public Health.

[poll id=”3″]

Adam Baker, mid-twenties, boldly exposes his dual battle with debt and weight by openly blogging all about it. I was first drawn to Baker’s blog because he and his family recently moved to New Zealand. (My husband and I spent about a month in New Zealand and considered moving there, too.) But now, I also read Baker’s blog because I want to understand what makes his generation tick, particularly when it comes to thoughts and choices made about money.

Today, Baker asked his readers, “would you rather be fat or in debt”?

I am puzzled by Baker’s question. Here’s the comment I left on his post:

I can’t pick one option over the other because I choose neither. I can’t comprehend why I’d want to pick one because “neither” is a realistic answer. I’m stumbling over WHY you feel you need to pick one to be more important over the other, Baker. I think it’s okay to want to be fit AND debt-free. Maybe I missed something between the lines of your post.

May I suggest that rather than waiting until after you lose weight to do the kick-ass things you want to do, do them now. Live your life as though you are thin, fit and healthy and your body will catch up. Don’t look at this as a weight-loss diet. Look at this as your forever lifestyle choice. Otherwise you will bounce back and forth between fat and not, fat and not. AND THE SAME GOES WITH YOUR DEBT ISSUES!

Sorry to shout that last sentence.

You are courageous, open and honest and this is a huge start to something great. Many sweep these issues under the rug… and they stay there, festering. Keep your eye on how you want to live your life and you will live it!

I am not being insensitive, just curious. I wonder why indebtedness increases one’s odds of being overweight. What is the common thread between the two?

My weight has always been within the ideal range for my height and frame size. I’ve been mulling this topic over today and I’ve realized that I maintain my healthy weight in much the same way that I maintain my finances.

  • I identify and visualize what I want. I think healthy and rich thoughts so I am more likely to behave accordingly. Thoughts affect actions, actions affect outcome.
  • I take inventory on a regular basis. I weigh my net worth, spending and eating choices, and body.
  • I am mindful of and replenish my limited daily supply of self-control.
  • I avoid temptation: I grocery shop after I’ve eaten with a list in hand, I don’t hang out at the mall, I don’t look through catalogs or surf ebay.
  • I am willing to trade short term instant gratification for long-lasting, kick-ass benefits.
  • I search for and enjoy substitutes: Think baked sweet potato wedges drizzled with olive oil, dusted with cinnamon, and broiled until edges are crispy– rather than greasy McDonald’s french fries. Or think world travel, month-long vacations, picnics and delicious organic foods instead of fancy new cars, expensive restaurants, and closets full of clothes I’ll never wear.

Why and how do you think weight and money management outcomes are correlated?

Hyperinflation or Prolonged Deflation? Coping and Investing Strategies For Either Scenario

Rebecca commented:

I enjoy these posts – thanks for adding a voice of reason given the vast propensity to imagine the solution to the problem is doing more of the thing that caused the problem. We’ve collectively been telling ourselves the same stories so long it’s hard to ram home still that they *are* just stories; it’s good to keep hearing stuff like this to remind us. Like Anna, I’d love to read your thoughts on surviving the possibility of heightened inflation over the coming years – its impact on savings and so on. I know you suggested in a previous post you were concerned with this matter. Any thoughts?

Many fear hyperinflation, but after digging into the topic, I don’t think it’s as likely a scenario as prolonged deflation. From what I’ve been hearing, talk of hyperinflation might be driven more by politics than economics.

We are experiencing deflation right now. Using the 12-month change in the Consumer Price Index as the measure, inflation has been negative for three consecutive months. I think the more likely scenario will be like Japan: low inflation, low interest rates, and falling house prices for at least a couple more years.

… Japan, during what came to be known as its “lost decade.” A gigantic real-estate boom in the 1980’s came crashing down in 1991, bringing many other prices with it. Efforts to restart the economy foundered time and again, as businesses were not able to generate the kind of profits that would reignite prosperity’s cycle of hiring and spending. Not until 2005 was the deflationary era finally declared to be over. ~ New York Times

Because I’ve been sitting on a considerable sum of cash since I made my exit from the stock market during the first half of 2008, I’ve been mulling over this topic. I’m still trying to wrap my head around the implications of hyperinflation and prolonged deflation. I am not an economist, so please take my thoughts and opinions with a grain of salt. In other words, this post is not investment advice; just my best guess and opinion.

During deflation, debt is the enemy. Deflation is better for those with savings accounts because it increases the value of the money they have saved. Deflation rewards people like me (with cash) and retired seniors (who no longer need to worry about rising unemployment rates and would benefit from living cost containment).

During hyperinflation, the last place one wants to be is in cash. Inflation is better for those who owe money because it reduces the value of the money previously borrowed. Inflation is better for those in debt — including the US Government. So naturally, the Fed wants to create and maintain a moderate, steady rate of inflation.

Many people worry that the amount of money the Fed is spending to stimulate the economy will create hyperinflation. I think these fears are unfounded, at least for now. Last I heard, the Fed created about a trillion dollars, which sounds enormous, but is actually small when compared to the approximately $10 trillion drop in housing values and ~$10 trillion drop in stock market capitalization.

The Fed realizes they need to be careful — if they dilute the economy with too many dollars, they risk creating hyperinflation. Hyperinflation would be tough on everyone, including the Government, because foreigners would stop lending money to the US — unless they were sufficiently rewarded for taking on the heightened risk of investing in dollars.

Compensating foreign investors for taking on inflation risk means raising interest rates. But increasing interest rates would push homebuyers and homeowners with adjustable mortgages right over the edge. Mortgage rates have increased recently and if they keep increasing, we should see home prices fall further. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Collapsing property values simply are not synonymous with hyperinflation.

According to this recent article in the New York Times:

For the short term, investment experts agree, deflation is more probable, with unemployment still climbing and the economy still mired in a recession. There’s talk of green shoots, but most everyone agrees that an earnest recovery is a long way off.

No one knows for sure what is more likely to occur: prolonged deflation or hyperinflation; or when the economy might change course. So how can we prepare for either scenario?

If you think hyperinflation is likely, you could invest in:

  • shorter-term fixed-income investments
  • TIPS (Treasury Inflation-Protected Securities)
  • foreign stocks and currency
  • real estate, REITS (real estate investment trusts)
  • commodities
  • precious metals
  • gold

During hyperinflation, the last place one wants to be is in cash.

If you think deflation is likely, you could:

  • raise and hoard your cash.
  • live below your means.
  • put off big purchases until prices drop more. You are, in essence, actively making money just by not losing it.
  • rent a home rather than own because home prices, like other hard assets, will continue to drop in value during deflationary times.
  • de-leverage yourself: pay off your credit debt as soon as possible — and don’t start building it up again. You don’t want your debt to expand at the same time dollars are becoming more valuable!
  • invest in dividend paying stocks. But it can be tricky to find a secure dividend paying stock in a deflationary environment.
  • play the currency market (certainly not my area of expertise).
  • play the short side using things like inverse index funds that move in the opposite direction of the market. Caution: While there are possibilities for making huge returns in this market, the rallies in a bear market can whomp you. Your timing must be precise.
  • build a CD ladder. The longer the duration the more risk there is, but at least your principal is protected.
  • invest in yourself and your education. Staying employed in such a downturn is the most important thing.

During deflation, debt is the enemy.

What am I doing? What do I plan to do?

Over the course of the past few years, I have positioned myself as best I can for the current economic deflation: I sold my home, paid off all of our debt, pulled out of equities and hoarded cash.  Today I am in a wait-and-see holding pattern and once deflation is curbed, I am in a great position to change course accordingly: I have cash ready to buy the hard assets (when they are cheap) that will help me weather inflation.

What about you? Do you think prolonged deflation or looming hyperinflation is more likely? Why?