Economics Archives - Faithful with a Few

Why You Need to Diversify Your Income Sources

Yesterday I ran into a friend I hadn’t seen in a few months; we only had a few seconds to talk but he let me know that he had lost his job a couple of months ago. Another buddy of mine was given word that his job would be gone by the end of this year. For what it’s worth, both men have families to support.

We hear stories of people losing their jobs all the time, so these episodes are hardly unique. But what is interesting is that both men were what you might call “well employed” – that is, each had a well-paying position with a large, well-known company that they had worked at for many years.

Why You Need to Diversify Your Income Sources

Jobs Are No Longer Secure

The moral of the story is that there are no safe jobs anymore. Anyone in nearly any job can be replaced either by some form of new technology, or by less expensive workers outsourced from overseas. This is happening with technical and managerial positions as well as clerical and factory jobs.

There are different ways to deal with employment instability and no matter how secure your job seems to be at the moment, you should consider investigating your options. And the time to do that is now, before you’re forced into it by a job loss.

Savings Will Last Only So Long

Many people concentrate on building up their savings as a safety net in case of a job loss. That’s a good idea, however it’s not nearly as effective as it once was.

In an economy where it can take months or even a year or more to find a new job, a two or three months savings cushion just won’t be enough. Unless you can save enough money to cover your living expenses for a year or more, savings will do little more than give you a little bit of breathing room. Not that that’s a bad thing, but it will prove to be inadequate if the job loss turns into a long-term process.

What about unemployment insurance? There are two limitations with this, the first is that for most people, the amount of your benefit won’t come close to covering your living expenses. The second is that unemployment benefits only run for a few months. Like savings, they’ll help at the beginning but sooner or later, they will run out too.

Build up your savings in case of a job loss – but be ready with additional income sources. Savings will cover you in the months immediately following your job loss, but your additional income sources will be your long-term safety net.

How To Diversify Your Income Sources:

Using A Part-Time Job To Apprentice For A Back-Up Career

One of the best ways to be prepared for the loss of your job is to have another one ready. You may be able to do that with a part-time job. I’m not talking on a job pumping gas or serving lattes, but something more substantial.

Ask yourself the question, “If I didn’t have my current job what other kind of work would I do?” The answer to this question can provide you with the insight that will lead to the type of part-time job you should get. What you’re looking for here is a part-time job that will lead you into the career of your choice, or at least into one that could be a reasonable back-up career. .

By taking such a job on a part-time basis your accomplish at least two things: 1) you get the training and experience that you need to enter that field, and 2) you pre-position yourself in a job before you actually need one. The goal will be to convert the part-time job into a full-time one if you can’t find a replacement job in your primary career.

One of the problems with job losses is that they usually occur across an industry or even an entire career field. That makes finding a replacement job very difficult because not only are there a small number of jobs available, but there are also a lot of candidates applying for those jobs. Many people are having to change fields following a layoff.

With a serious kind of part-time job, you already have a replacement career waiting in the wings. The transition is shorter, smoother and easier because of your advanced efforts.

Diversify Your Income By Starting A Business

A similar alternative could be starting your own business. Choose a business that you would like to enter and/or one you have an aptitude for. You can begin it as a side venture and develop it at your own speed. The idea is to build up gradually so that if you do lose your job, you’ll be able to quickly convert the business into a full-time occupation.

Whether it’s a part-time job or a part-time business, not only will you be building a second career for yourself, but you’ll also be providing an extra income that you can put into savings. The combination of higher savings and a backup income source will leave you well prepared for whatever happens after losing your primary job.

Retraining

Retraining is another option. Even though some fields are in decline, there are others that are going strong or are in growth phases. Sometimes all you need to enter them is some formal training. This could be a degree program, technical training or just some courses that you might be able use as a springboard into another career field.

Check with the course offerings at your local community college. They often offer training in career fields that are what you might call “closer to the ground”. This might include fields that are more hands-on in nature, such as those in the medical and computer fields, as well as some of the trades. Those are the type of occupations that tend to do well no matter what else is going on in the economy.

Whether you decide to use a part-time job, part-time business, or some form of retraining, seize the opportunity now to prepare for a job loss that may come later. If the job loss never happens, you’ll have yourself a solid second income. But if it does happen, you’ll be ready for it.

photo credit: freedigitalphotos.net

How Social Media Can Affect Your Investing

By // by Khaleef Crumbley

If you want to know what your friends are up to, look at funny pictures of cats, or scope out deals at your favorite stores, social media is a great tool. More and more people are turning to social media for other things as well, such as help with making investment decisions. A look at the specifics of how people use social media to shape their investment plans can help you decide if such an approach is right for you.

Younger People Lead the Way

Image via Flickr by thetaxhaven

The results of one survey published at marketwire.com revealed that the group most likely to use social media to make investment decisions is people under 40. The same survey found that this age group is three times more likely to believe that information received through social media is credible than other age groups. Overall, 40% of investors use social media as part of their financial game plan, and that number is likely to continue growing.

It isn’t just the young and the folks with limited assets who look to social media. Individuals with a high net worth are also seizing hold of the trend. As stated at hewinsfinancial.com, another survey found that “high net worth adults that are online are using social media for investing purposes at a rate that is higher than the general population!”

It becomes clear that investors want social media to impact their investment decisions. As financial advisory firms and other companies take note of this, they are more likely to use social media as a way to connect with clients.

How Businesses Use Social Media

Image via Flickr by Jason Howie

A report released earlier this year by the SEC states, “companies can use social media outlets like Facebook and Twitter to announce key information…so long has investors have been alerted about which social media will be used to disseminate such information.” This go-ahead opens the door for increased company-investor communication.

Financial advisors are taking full advantage of the opportunity presented by social media. A survey conducted by Accenture found that out of 400 financial advisors, 73% said that social media has led to an increase in client transactions and 77% said that it helps with client retention. Indeed, social media helps financial advisors communicate efficiently and easily with clients, and it makes the task of keeping up with industry news easier.

How Investors May Misuse Social Media

With the above being said, it’s obvious that the world of social media has a lot of sound information to offer to investors. When financially savvy individuals stick to official, reliable sources, they stand to benefit from their social media experience.

However, a note of caution is in order. If you follow the link to the Hewins Financial website included earlier in this article, the page it takes you to has an introduction all about how emotions can negatively impact your investments. One of your friends boasts on social media about an investment that paid off, and you decide to invest in the same stocks, just when those stocks are about to fall. Eventually you get locked into an unprofitable cycle of buying at high prices and selling at low prices.

In another scenario, the buzz on social media about a certain investment might make you doubt official sources of information. If all your friends on Facebook say one thing, but an official source says something to the contrary, which are you likely to believe?

Should Social Media Impact your Investment Plans?

When considering the pros & cons of annuities — resources for any type of investment, really — take the time for introspection. What are your specific long-term and short-term financial goals? Who do you trust to help you with those goals? Once you have a clear picture in mind, start searching for information.

For every source of information, ask yourself, “Is this advice coming from an expert, or did Great Aunt Helga just get over excited about her portfolio?” “Is this information up to date?” “What is this source’s motivation?” Tweets, blogs, and status updates from well-reputed experts and financial advisory firms are the best places to look.

If you’re new to the world of investing, don’t make any of your decisions based on what you see on social media. Educate yourself about the basics of investing, and don’t be afraid to meet face to face with a financial advisor. If you decide to trust that advisor, look for that person’s company’s social media sites.

As social media steps into more and more aspects of daily life, it becomes increasingly important to know the advantages and the potential pitfalls that can come from it. Keeping your emotions in check and your goals in front of you will help you make wise decisions.

How To Deal With Financial Emergencies Before They Happen

By // by Khaleef Crumbley

Having a financial contingency plan is always important, even more so, now that the economy is more unstable than ever, it is a necessity for every household! Keeping your finances organized when you fall upon hard times is one of the keys to surviving and thriving in these situations.

Here are 6 things that you can do now in order to prepare for financial hardship.

How To Set Up A Financial Contingency Plan

Rather than waiting until you fall on hard times, it makes sense to plan for the worst now, while you are in the best position to prepare yourself. Start with these basic points…

Set Up An Emergency Fund

I have talked a number of times on this site about the importance of an emergency fund. Having money set aside will be extremely important if you lose your job, or face some other financial difficulty. My goal (once our debt is paid off) is to to have between 9 months and a year of our living expenses saved for a “rainy day”..

Many people have gone deep into debt (I’m one of them) because they did not have significant savings to carry them through hard times. The purpose of an emergency fund is to remove the stress, fear, and even the need to borrow, when financial hardship comes.

Every good financial contingency plan should involve a large emergency fund!

Pay Off All Debt

One of the biggest factors in how well you handle a financial emergency is the amount of debt that you have. It is much easier to adjust your living expenses than it is to rearrange your debt payments. So when you are in a position where you need to free up a large amount of committed money, you won’t have over $500 in student loan repayments (that used to be me) to worry about!

Being at the mercy of credit card companies, banks, and other loan servicing agencies, will only add to your stress and may impair your ability to make good decisions during an emergency.

Know Your Options Ahead of Time

Whether it’s an old profession, becoming a part of the contingent workforce, or part-time job, you should ensure that you have a way to earn money that’s not connected to your current full-time job. You may not want to take on that side job, or put more time into your hobby just yet, but knowing what realistic options you’ll have if you are no longer able to work at your current job will be crucial if/when it happens.

Also knowing what expenses you can easily cut and what services you can do without (it may be wise to just cut them now and build up your emergency fund, pay off debt, or save for retirement), can save you from having to make those tough decisions while under stress!

Know Who You Can Depend On

Don’t make assumptions about who will and who won’t help you. Many people who you think you can count on may not be willing or able to help you, while those you’re not even considering could be the ones who offer you the most support during your time of need!

If your relationship allows for it, verify with your loved ones that they would be willing to help out (and find out how) if you fall on hard times.

You may need to consider taking loans from family or living with friends for an extended period of time; it’s best to know ahead of time (if possible), the people upon whom you can rely.

Be Prepared To Sell Your Possessions

I’m not saying that you should start holding garage sales tomorrow, but it is important to have a discussion with your family members and decide what items can go if you fall upon hard times. A good financial contingency plan will take into account how much money can be gained from selling certain items.

It will be much easier to make this plan now, rather than when you are all under the stress of a financial hardship (stress can skew proper judgment)! Decide what things you can part with, and conduct research to see how much you could possibly get for them. Knowing that you can get $7,000 for you 2nd car may be all that you need to survive a financial emergency.

Be Prepared For Natural Disasters

Even though New Jersey has been hit hard by storms in the last few years, I’m not really focusing on hurricane preparedness, or being able to prevent the damage from a natural disaster in this point. What I am referring to is the ability to quickly get back on your feet after the devastation.

The first thing that you should do is create a home inventory. This will allow you to quickly determine what items were damaged (or are completely missing) after the disaster. It will also help you when filing an insurance claim – everyone around you will be filing claims with their insurance company or requesting disaster assistance from the government. Having a home inventory can help to speed up your claims when that happens.

You should also review your various insurance policies to ensure that you are covered against various disasters. Many people just assume that their policy will reimburse them for all of their damages if something happens, only to find out that they weren’t covered at all, when it’s too late!

Reader Questions

Do you have a financial contingency plan? If so, what are some of the things that you have included?
Have you dealt with emergencies in the past? If so, what have you learned from the experience(s)?
Have you ever been hit by the sudden loss of income or dramatic increase in expenses or debt? If so, how did you handle it?
What else would you add to this list?

How Much Do You Plan to Rely on Social Security?

By // by Kevin M

It sometimes seems as if we get hit with yet another of those “Social Security is going broke” scares at least once a year. Is that what is really happening? If it is, what can you and I do about it?

Is Social Security Really “Going Broke?

There is absolutely no question that there are serious flaws in the Social Security funding mechanism – or should I say Social Security assumptions? From an actuarial standpoint Social Security has been a developing fiscal train wreck for decades.

The retirement age was set at 65 way back in 1935, when the average person lived to be…about 65. Today, almost 80 years later, the average person is now living to be about 80. That means the average person can expect to collect Social Security benefits for about 15 years. To make matters worse back in the early 1970s, the government created an early retirement provision that allowed people to begin collecting reduced benefits at age 62. That just advanced the train wreck.

There have been a steady series of increases in the Social Security payroll tax since the Carter administration days. Then under the Reagan Administration, a trust fund was established that would direct at least some of the payroll tax into the fund as a reserve against swelling expenditures expected as the Baby-Boom generation would begin entering retirement.

None of the efforts have completely kept up with expenditures, and projections are now showing that the Social Security trust fund will be exhausted sometime in the 2030s. That means 20 years into the future, which will affect the retirement plans of the generations coming up just behind the Baby Boomers.

Other projections have the Medicare trust fund being exhausted as early as 2016. That would be a bigger problem than Social Security going broke, but that’s an entirely different topic that we will not examine here.

Why That Isn’t Likely To Happen

I don’t and never have entirely bought into the idea of Social Security going broke, or that it even can. I’m not being naïve about this; technically speaking, a government program never really goes broke. There are reasons for this…

The Federal government’s budget is different than yours or mine. Businesses have formal balance sheets and individuals have informal ones. It’s a tally of assets minus liabilities equals capital, or net worth. The government – especially the federal government – doesn’t operate that way. It isn’t restrained by budget shortfalls in the same way that you or I or a business could be.

Government borrowing. The government can always borrow money to make Social Security payments. And as we’ve seen in the past few decades, this neatly fit’s the governments M.O. (modus operandi).

Money printing. If the government cannot borrow enough money to meet its bills, it can always print more. It will do this with Social Security failing all else. Governments have done this for thousands of years.

Recent evidence proved that the Roman Empire, under Nero, debased their silver coins by putting iron plugs in them. Coins that were trading based on their silver content, were in fact just 80% silver and 20% iron. This enabled the government to issue more silver coins than they had silver to mint. And so it has been ever since with governments all over the world. And the citizen reaction? They mostly don’t care as long as they get paid.

The US is already “broke” but we keep chugging along . The United States government has been operating with increasing deficit levels for most of the past 40 years. In addition, the level of official national debt is now higher than the country’s total economic output. The US has been spending more money than it earns for at least half a lifetime – what we would call being broke – and yet the checks are still going out. We should expect no change on this front, and that includes the future of Social Security.

No Matter How Social Security Is “Fixed” We’ll All Be Getting Less

Okay, that was all the good news on Social Security. In practical terms, we’re likely to see one or more of several scenarios play out, and none of them will be positive for us:

Our Social Security benefits will be paid in inflated dollars, meaning we will have less purchasing power.
Benefits will be gradually reduced, so slowly that we won’t notice it, but we will still end up with less money.
The retirement age will be increased. This is already happening as the age for collection of full Social Security benefits is being gradually increased from 65 to 67. Expect the age bar to be set higher.
More Social Security benefits will be taxable. We should expect that 100% of Social Security benefits will be taxable in the not-too-distant future. Right now benefits are only partially taxable above a certain income threshold.

[Find out why it is now harder to garnish Social Security benefits.]

It’s not inconceivable that we will see all four solutions implemented, plus one or two more than we can’t even imagine at this time. All will produce the same result – lower Social Security benefits than we currently anticipate.

What Can We Do About It?

All of that is big picture stuff, and there’s not a whole lot that we can do to change it. But we can change how we react to it, and that’s where our action on this issue has to be concentrated.

Plan on a less lucrative retirement. If you are planning on a full-fledged retirement living in a condo on a golf course, you might want to scale that back to something more modest.

Double your efforts to save for retirement. Whatever percentage of your income you are saving for retirement, plan on consistently increasing it as you get older. Savings will be one of the best protections against reduced Social Security benefits in the future.

Plan on working as long as you can. This doesn’t mean working at a full-time job until the day you drop. But plan to have at least a part-time career or business you can tap as an additional source of income. It can even be something casual or seasonal on an as-needed basis, but be ready with something.

Cut your living expenses as much as you can. Aside from scaling back your retirement lifestyle expectations, plan on cutting your living expenses across-the-board, both now and in retirement. That will mean less income will be needed when you retire, and more money for retirement savings between now and then.

Trust in God. Every one of us came into this world as a helpless baby, and the only reason that we’ve reached the age that we have is because God has had his hand on us. Expect that to continue, even into retirement. In the end, our faith in Jesus Christ is our best and only security. He’s seen us through worse in the past, and he’ll see us through this to.

Can Christians become obsessed with retirement?

No matter what we hear from the media, the sky isn’t falling – at least not as far as Social Security is concerned. However, do anticipate some stormy weather.

What do you think the future of Social Security will be? Do you think that it will be there when you retire?

photo credit: Michael Molenda

Which Debt Should You Pay Off First? It’s NOT What You Think

By // by Kevin M

Nearly everyone on the web and in the financial press is telling us to get out of debt. Get out so you can save more, so you can retire early, so you can improve your credit score, so you can just get out of debt. But what if you have several debts—credit cards, a car loan, an installment loan (or two), a student loan and a mortgage. Which debt should you pay off first? Or does it even matter?

I think it does, in fact, I think it matters a whole lot. Some loans are just more…dangerous…than other loans, and need to be paid off sooner. This is especially true if you’re struggling financially. You should make a priority to pay off the loans that have the greatest potential to cause you the greatest problems in the event you can’t pay them any longer.

Which Debt To Pay First?

Here’s my attempt at establishing that priority, and the reasons why for each. Feel free to disagree!

1. Car Loans

Most people start paying off debt with their credit cards, but I disagree. A car loan is a secured loan, which means that if you stop making the payments for any reason the car will be repossessed by the lender. If you hit on hard times and can’t pay your bills, the last thing you need to have happen is to have your car taken away.

You need your car to commute to your job, to run your business and to live your life. If it’s gone, you’re ability to pay your other debts will be gone with it.

Maybe this is just my thinking, but a car loan is really the most “strategic debt” that you have. A debt chain reaction will be set off if you lose your car, one that you may not be able to recover from any time soon. Get your car free and clear as soon as you can, then you’ll have time to deal with other debts.

2. Other Secured Loans

These loans could be debts taken to buy furniture, household appliances or to replace major components of your home, like a furnace or central air conditioner. And like a car loan, they’re secured and that’s why you want to pay them off ahead of unsecured debts. If you fail to make your payments for any reason, the lender will be able to take the collateral from you.

That may not be a problem if the collateral is furniture or a boat—you can live without those. But if it’s your computer that you use for business, or your air conditioner in the summer time, life will get ugly in a hurry.

These are worthy of being paid off right behind your car loan.

3. Student Loans

This is a sticky subject. Because they tend to be large and generally carry low interest rates, most people prefer to leave them alone and take every one of the ten, 15 or 20 years they have to pay them. But that’s not always the best course of action.

Though we may not think of it this way, it is a reality that student loans are unsecured debt. Even though they’re typically the size of car loans or even larger, there’s no asset beneath them that can be sold to pay them off if you get into financial trouble. Worse, they can’t be discharged in bankruptcy. In fact, except under certain very limited circumstances, you can’t settle them with the lenders in the way you might be able to with credit cards. For that reason, paying off your student loans deserves a higher priority than for credit cards.

4. Credit Cards

This is everyone’s favorite payoff! And why not? Credit cards are really annoying, at least when it comes time to pay them! But at the same time they’re aren’t as threatening as any of the above loans if you can’t pay them.

Sure, credit card lenders have remedies they can pursue against you, like nuking your credit, torturing you with collection calls, charging default interest rates and implementing judgments and garnishments. But they can’t take away your livelihood or kick you out of your home—that lowers them in the pay off hierarchy.

Usually, you can also settle your credit card accounts for less than what you owe, and there are even agencies—some of them non-profits—who will help you arrange this. In addition, though lenders can seek legal remedies against you, they often avoid going too far lest they push you into bankruptcy protection. Credit card lenders don’t do very well when that happens.

The popular “debt snowball” method really is the best if you have multiple credit cards. Pay off the smallest one first, then work your way up to the bigger ones. Each little one you pay frees up more money to pay off the bigger ones.

5. Mortgages

The reason for putting mortgages in last place? It’s typically your biggest debt and it will take many years to pay it off early. Also, even when you start paying it off, your mortgage won’t go away any time soon. Your house payment will remain fixed until the mortgage is completely paid off, as in zero balance. Since that will take many years to accomplish, the mortgage should be a low priority.

[Is it better to rent or own a home? <–What do you think?]

A couple of other things to consider in connection with a mortgage, one being that the payment is paying for something tangible—the use of your home. You’d have a rent payment if you didn’t own your home, so it’s not like the mortgage payment is something extra or extravagant. There’s also the tax benefit of having a mortgage. Since you get a break on your income taxes as a result of having your mortgage, paying it off should be less urgent than paying off debt that has no tax advantage.

Finally, if you plan on selling your home in the foreseeable future, there’s probably no point in working to pay down the mortgage. It will be paid off when you sell the house.

Is this debt pay off priority a bit unconventional? Probably. But when it comes to personal finance, I think it’s always worth looking at things from outside the box.

What to you think the priority should be when it comes to paying off debt?

photo credit: Freedigitalphotos.net