Saturday, November 9, 2019

Don't Ignore Recession Warning Signs

Every week we hear more about how the economy might be slowing, companies are reporting lower earnings than last year, trouble brewing in Europe with a slowing economy and yet the stock market keeps going up, most recently the bond market has dropped as long rates have risen and most investors continue to be bullish and pile into stocks.  As an investor it's important not to ignore the warning signs and make sure you have Built a Financial Fortress for yourself and your family. 

It's not whether we will have a recession, it's simply a matter of when.  Every recession is a little different.  The Great Recession was triggered by a collapse in residential real estate values and lending, ultimately bringing down with it some of the largest financial institutions of the time and many banks.  This time it may be different.  I have assembled a few charts to help tell the story of what is happening now and what might trigger the next recession.

US stock market (S&P 500) continues to move up due to low interest rates, favorable trade news, generally good economic news (mostly about the US consumer), with no sign of weakness in the near term; a collapse in stock market values from their current highs (30% or more correction, which is certainly possible especially as the market continues its move up) will impact consumer sentiment and ability / desire to spend money, which is a key driver of economic growth:

Money supply has resumed a strong upward growth trajectory, keeping cost of borrowing low and ensuring a steady flow of credit, which is very important to the consumer and the Fed has an unlimited capacity to print money.  The downside is that it makes the dollar weaker in the long run, which makes everyone poorer who holds cash.

Interest rates are already getting close to zero so there is not much more room to continue to lower rates.  The Federal Reserve has stated that they don't plan to allow interest rates to go negative as they are in many other countries - a situation that is unprecedented and no no one really knows what the long term effects of this will be.  With rates already so low and with a recession looming, it's certainly possible to see negative rates in the US regardless of what the Fed has previously stated:

Meanwhile, real GDP growth has actually been negative for years (that's why for many it feels like the Great Recession never ended); even the official number has been dropping recently:

The real story behind the recovery since the Great Recession is the growth of consumer debt, which currently stands at just over $4 trillion and has almost doubled since the end of the last recession;  the collapse of consumer credit could trigger the next recession, since the consumer drives about 70% of the economy:

Indeed the growth of "shadow banking" $45 trillion or about 7.6% of all financial assets in 2016 when last measured, is also a significant risk since these are beyond the reach of regulators (think Bear Stearns and Lehman Brothers), with the US leading the rest of the world in having the largest share of risky shadow banking assets - see chart below.  Today shadow banking comprises pawn shops, peer to peer lending (i.e., Prosper), private equity lending and businesses that provide credit to customers for buying their products in addition to broker dealers and money market funds.

If you're interested, I recently put together a recession preparation checklist post here.  Hopefully we'll have another year or so of calm before the storm, but it pays to always be prepared.

I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.

To see all my books on investing and leadership, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Saturday, November 2, 2019

Managing Spending on Kids' Stuff

If you have kids, you know that things will always come up with them that require a payment of one sort or another:  summer camps, sports uniforms, clothing, school supplies, holiday / birthday gifts, educational support, etc.  The list can be endless.  Tracking all of this activity can be a nightmare and can make following a budget very difficult, especially if you have more than one child.  In our house, we have a "kid card," a credit card in my wife's name, that is solely dedicated to paying for kids' necessities.  Each month we pay off the balance in full so we don't have interest charges and we have an overall monthly budget for the kid card activity that we manage to.  

For example, each child has a clothing budget for the school year and if they want to use some of that budget by purchasing their own clothes online, they can use the kid card for that.  Or for example, when my oldest wanted to sign up for a community college class, college applications / testing, etc., we put those costs on the kid card.  The kid card has come in handy not only for the increasing amount of online purchasing that happens in our family, but also as a great way to control and manage the budget.  By reviewing the statement each month, we can ensure there are no "surprises," since the kids have to tell us before they use the card.  A shared card kept in a safe place in the house is much easier to manage than, for example, giving each child their own card to use.  Our kids have actually taken well to this and are very careful in keeping to their budget since they don't want to lose access to the card.

In selecting a credit card to use, the best ones are usually those with good cash back offers, since the plan is to pay off the balance each month.  A quick review online surfaced a number of credit cards offering between 1% and 2% cash back.  The new Apple Card is also worth looking at, since it has a great cash back reward program (1% to 3%, depending on what and where you purchase) as well as many other great features including no fees, easy to monitor activity (tap to see location on map where spending occurred that looks odd), spending reports, private / secure, and easily accessible on your phone.  I would actually have signed up for the Apple Card myself, but I have enough credit cards right now, they are all zero balance and don't need any more!  I now prefer to do most of my major spending on the MCO debit card where I get 2% back in MCO cryptocurrency with each purchase.  See my recent post for more information on this.

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress this year.

To see all my books on investing and leadership, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Sunday, October 27, 2019

Buying or Leasing a New Car

If you are thinking about buying a car, there are several things you need to know about the finances before you do.  This post should help give you some insight from my experience over the years in buying cars.

1)  Cash is Not King.  Contrary to popular belief, assuming you have the cash available, it's not necessarily always cheaper to buy a car for cash from a dealer.  They actually want you to use their financing and many times are more willing to give you a lower price or other incentives if you do so. 

2)  Information is Power.  There are plenty of online sources to check pricing these days to avoid getting ripped off, unlike the "old days" of car buying when you were at a disadvantage trying to figure out whether you are getting a good deal or not (staring at the discount off the "sticker price").  I like Kelley Blue Book or Truecar.

3)  Timing is Key.  Timing is everything when buying a car.  The best time to buy a car is usually around the end of the month and also after the next year's models have come out (which makes the prior year models less desirable and often with incentives in order to sell them).  The best time to buy a car is probably late December since many companies' accounting years end in December and they are highly motivated to get the sales recorded.

4)  Use Depreciation to Your Advantage.  I like to buy previously owned cars, since they are often like new (only a few years old with low mileage) and they cost significantly less than buying a new car, saving you a lot of money.  Most new cars depreciate in value rapidly and buying a used car leverages this fact to your advantage.  This is particularly true if you are in the market for an electric vehicle.

5)  Understand the Numbers.  In my experience, I have found the best thing to do is finance the car with the dealer and then pay the loan off right away if you are planning to own the car for several years.  Paying the loan off quickly can also improve your credit score.  Also, many people don't understand the interest rate that is charged on the car loan and other loan terms.  If you have good credit and the car dealer is anxious to sell you the car, they can often offer very low annual percentage rates as low as 1% to 4%.  How are they able to do this?  Well, first of all many auto manufacturers own their own finance companies and they provide low-cost financing to support their dealer network and ultimately sales.  Since you have to make a substantial down payment and the loan is secured by the car, and most importantly you have good credit, there's not as much risk taken by the financing company to make a loan with that interest rate.  After all, it's designed to entice you into buying the car since it makes the payment more affordable. 

Also, many times finance companies / dealers will try to make the monthly payment even more affordable by stretching the repayment term out from 3 to 5 years or even longer.  If your plan is to pay off the loan quickly, the interest rate and the term don't matter as much and that might help you get a lower price or other incentives on the car.  Just make sure that the initial payment (until you pay off the car loan) doesn't break your budget if you do go with a higher rate and shorter loan term.

Leasing a car can also make sense for you, depending on your situation.  The best thing about leasing is that you don't have to bring much cash upfront to get the car (usually less than the down payment that would be required on a loan, for example) and the monthly payment can be lower.  The downside of a lease is that your payment assumes a certain amount of annual miles you drive and if you have "overage" when you return the car, you have to pay for that.  You also get charged for any damage or excessive wear and tear on the car when you return it.  Oftentimes, the dealer will use that "return bill" as a bargaining chip to get you to lease a new car from them at the end of your current lease, which is another potential downside.  If you like getting a new car every three years or so and don't mind having a car payment all the time, then leasing might be best for you, as long as you don't lease in order to get a vehicle that you can't afford to buy outright and so long as you understand the financial impact of leasing versus buying (more on that below).  Also, if you are self-employed, leasing a car for your business might make sense as a business tax deduction, but always check with your CPA first. 

Here's how the numbers look (see table below with a simple example).  You'll see that you actually pay a much higher interest rate on a lease, but the monthly payment is lower because you give back the low-mileage car at the end of the lease - the residual value of the vehicle effectively reduces the amount you are financing.  Note the lower loan balance that's assumed ($40,000 car price less $25,000 residual value equals "loan" amount of $15,000).  Typically the lease includes a rent charge in addition to the vehicle depreciation, but for simplicity I have combined the two into one amount of $15,000 for this example.  The down payment of $3,000 is really just a prepayment of the lease and can be any convenient amount the dealer wants to charge.  This is frequently discounted in order to entice you into leasing the car, depending on how motivated the dealer is to move the car off their lot. 

A few take-aways on loans:  Longer loan terms can carry higher interest rates, but overall you get a lower monthly payment since you have more time to pay the loan off.  Down payments can also vary depending on the situation, but for simplicity I just assumed 20% below except for the lease situation described previously.  Also, it's important to note that this example does not include taxes, title, registration, license, dealer fees and other up-front payments required when buying a car.  It's also important to remember that most likely your insurance will go up when buying a new car and that needs to be budgeted as well.

As you can see, the highest monthly payment is for a 3 year loan and the lowest monthly payment is for a 3 year lease.  Even with the 3 year loan at 4%, you will still pay over $2,000 in interest over the life of the loan, which is why paying off early is always a good idea if you can do it.  Sometimes you can pay off in "chunks" like when you get your annual bonus or when you get your tax refund.  Also, in the lease example, you will pay almost $3,000 in interest over the life of the lease (50% more than the loan example).  This is significant and not well understood by consumers, since both the car buyer and the dealer focus only on the monthly payment and not on the "cost of money."  Unlike a loan, you cannot prepay a lease, although you may be able to "buy out" of it before the end of the term for a fee or possibly the dealer may let you out if you lease a new vehicle.  That's also important to consider when deciding whether to lease or buy. 

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress this year.

To see all my books on investing and leadership, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Saturday, October 19, 2019

Recession Preparation Checklist

Many more people are talking about a coming recession as the current expansion becomes one of the longest in history (see chart below courtesy of  Business cycles are nothing new and certainly we can expect a recession to come eventually, but no one can accurately predict when it will arrive or how long it will last.  Indeed, some have even said they expect the next recession to be relatively mild and short-lived (we can all hope), but there is no way to know that for sure.  The longer the current expansion lasts and as more data that shows economic weakness comes in, however, the likelihood of a recession in the near future grows.

S&P 500 Historical, With Recessions Shown

What, then, to do to prepare for a recession?  I put together the checklist below based on my experience from the Great Recession and lessons learned from that experience.  You may have your own priorities that are different, but this can serve as a good guide to "get your house in order" to weather the storm and perhaps most importantly, take advantage of the opportunities that will undoubtedly pop up in the wake of the next recession.

  1. Budget - Start by reviewing your household budget - is there anything you can cut back on or eliminate to generate a little more cash flow each month (maybe one less coffee at Starbucks each week, find a cheaper gym membership or lose one or two video / music subscriptions)?  Every little bit counts.  $100 saved a month turns into $1,200 in a year.
  2. Credit Cards / Loans - If you have credit cards or other personal loans with balances, don't hesitate to dig into your savings to pay them off and funnel the extra cash flow from the payments back into your savings; if money is tight, consider a consolidation loan with a peer to peer lender such as Prosper with a lower rate to pay off the high rate cards
  3. Cash Back - As you continue to use credit cards moving forward, make sure you are getting the maximum cash back on every purchase (forget points, cash is better - I currently have a 2% cash back debit card I use instead of credit cards that pays me in MCO cryptocurrency which I can sell for dollars or convert into Bitcoin) and of course, pay off the balance each month
  4. Retirement Investments - Look at your retirement portfolio - are you sufficiently diversified with a mix of asset classes?  Consider moving to a more defensive stance (more bonds and fixed income, less stocks)
  5. Non-Retirement Investments - Look at your investment portfolio - if you invest in dividend stocks, make sure they have a high likelihood of maintaining or even growing their payout through a recession (I like stocks that have payment histories of 25 years or more with steady increases to the dividend); buy and hold and don't panic if values drop during the recession - consider adding to your positions strategically when the time is right
  6. Interest - Maximize your cash interest income by shopping around for the best rate as interest rates continue to fall - TreasuryDirect is still a very good option but so are online banks and brokerages
  7. Mortgage - Refinance your mortgage to take advantage of lower interest rates and lower your monthly payment, if it makes sense for you; I was able to refinance recently and lowered my monthly payment by 10%
  8. Dry Powder - Keep some cash "dry powder" on the side for investing opportunities that present themselves in the wake of the recession, including stocks, real estate and other assets 
  9. Insurance - Check your insurance policies and see if you can lower your rates by switching to a different company or maybe you can lower your rates with your current company by increasing your deductibles
  10. Car Loan - See if you can refinance your car to get a lower payment, since interest rates have dropped recently
  11. Major Purchases - Minimize major purchases over the next six to twelve months (cars, recreational vehicles, homes, vacations, etc.); these can all take a toll on your monthly cash flow - especially moving to a new home with all the "hidden" costs that you never realize like having to buy new appliances, restocking cleaning supplies and other basic household items, new furniture, movers, utility deposits / connection fees, etc., etc.
  12. Phones - It can be a hassle, but you can look into switching your cell phone plan with your current provider to something less costly or possibly switching to a new provider that saves you money each month; also a great way to save money is not to upgrade your IPhone right away; I have an 8 and rather than upgrading to an 11, I can get an XR for a lot less; but I'm waiting until my lease is up to get the best deal.
  13. Side Hustle - If you have a side hustle or two, keep them going for extra cash flow as long as they don't impact your current job; the best ones are the ones that don't take a lot of time and pay while you sleep - see my post on passive income ideas here
  14. Job - Now is not an ideal time to get a new job in my opinion, as typically the new hires are high on the layoff list when a recession hits; instead, do what you can to expand opportunities for yourself at your current employer and develop your leadership skills
  15. Stay Positive - Always remember that it can feel pretty bad during a recession and things may seem bleak at times, but there is always a recovery and new opportunities so it's really important to stay positive and look to the future and not dwell too much on the past or the present.
I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.

To see all my books on investing and leadership, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Saturday, October 12, 2019

Top 20 Crypto Ranking Update (October 2019)

It's been almost six months since my last update on Crypto Rankings.  A lot has happened in the space during this time, including most notably an increase in Bitcoin's market cap from $142.4B to $150.1B, up 5%Ethereum's market cap declined to $19.5B from $26.6B, a decrease of 27% and XRP's market cap declined to $11.8B from $16.3B, a decrease of 28%.  Bitcoin continues to show  strength at the top of the ratings chart with steady market cap growth, while all other so-called "altcoins" continue to struggle.  Indeed, Bitcoin's market cap is almost 8 times that of Ethereum and almost 13 times larger than XRP.  Ethereum was recently designated a "commodity" by the CFTB, along with Bitcoin and other cryptocurrencies.  While this ruling limits trading as a security, which many had been hoping for as a catalyst for broader investor adoption of crypto and value growth, the ruling serves to further solidify Ethereum as the number two cryptocurrency next to Bitcoin and also clarifies the rules that will govern the cryptocurrency market in the US.   

There continues to be very few published cryptocurrency rating systems in the market, a big reason why I started doing these updates quite some time ago.  Rency no longer publishes ratings (site looks like it went out of business), but there is a new rating site called Crypto Coin Rankings that I referenced in the table below, along with industry stalwarts Coin Checkup and Weiss, which continue to put out coin ratings.  While Crypto Coin Rankings seems to suffer from "grade inflation," it's still a worthy data point to consider.  

Based on the overall rankings and market cap, it seems like the top three (Bitcoin, Ethereum and XRP) should continue to garner interest from investors.  Ethereum and XRP could represent good value plays now based on their recent market cap decline and growth outlook.  Indeed, Ethereum and XRP both have good commercial utility (Etherium with "smart contracts" while XRP has garnered interest from financial institutions).

If you are interested in investing in cryptocurrency, I really like  See my post here on their app and how they are innovating the crypto space in many different ways.  As I have written many times before, I don't recommend you put everything into crypto, but it certainly makes sense to buy a small amount monthly to dollar cost average and just hold for the long term.  I have been doing that with Bitcoin for quite some time and have been very pleased with the result.  If you are interested in reading more about developing a crypto investing strategy, please read my post here.  

I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.

To see all my books on investing and leadership, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Saturday, October 5, 2019

Music Royalty Investing Update

Some time ago I wrote about investing in music royalties on the Royalty Exchange site.  I thought now would be a good time to review how the returns have been on my investments in music royalties and also look at some of the new features on Royalty Exchange that they have implemented recently.

I originally invested a total of $38,400 in three royalty streams almost exactly one year ago.  Two of the streams were 10-year duration and one was "life of rights," meaning you continue to receive royalties for the entire legal term (life of author plus 70 years).  Over the past year, I have collected a total of $2,850 on these royalties and (based on last quarter's payment), I'm anticipating the current September quarter payment will be about $520, bringing the total payments for the year to $3,370.  While that seems okay, unless the payments increase over time, I'm unlikely to recover my entire investment over a 10 year period at the rate I'm going, incurring a loss of about $4,700 if everything stays the same.  Of course, quarterly royalty payments vary significantly and mine are no exception, from a high of $1,144 to a low of $429.  International payments lag by a few months versus domestic, so that can also play a factor in the volatility.  It's very difficult to extrapolate future royalty payments, especially if the songs are newer.  Songs that have been out for a while are much easier to predict since they have a longer royalty history.

As you can see, the difficult thing to predict is how songs will perform in the future when investing in music royalties.  For example, if one of the songs you own the rights to is used in a television show / series or movie, that will perhaps significantly increase the payment stream (and value) of the royalty.  Also, if the artist wins a grammy or produces a new album, that frequently increases interest in the "back catalog" of older songs that you may own the rights to.  Similarly, if you have some royalties that are relatively new songs that are played a lot on radio, as those songs transition to streaming, the payments can increase over time depending on their popularity.  Production of music videos and remixes of songs can also increase the popularity of songs and the royalty payments over time.  Also, growth in international demand is a factor that can increase the value over time, especially with R&B and hip hop music which has a lot of international popularity.  Of course, as mentioned earlier, those payments lag, so the increasing popularity may not show up right away in the dollars you receive.  These are all the unknowns of investing in music royalties.  As a general rule, most royalty streams that I have looked at show a slowly decaying rate of payment over a long period of time, unless something occurs to increase the artist's popularity or there is some other activity like tv / movie use.  That's also why people like investing in "name brand" grammy-winning artists such as Drake, where you can be fairly confident that the songs will get plenty of plays over time.  As such, even though music royalties are uncorrelated to stock and bond markets, there is still a fair degree of risk that you could be overpaying for the royalty asset, depending on what happens over time to the popularity of the artist and songs that you own the rights to.

Royalty Exchange has always held auctions for music catalogs and that feature continues to work the same way as it has in the past, with bidders entering the auction and bidding up the value of the royalty until the end of the auction.  The winner pays a $500 fee to the exchange plus the final sale price of the royalty stream, signs some forms and starts collecting the royalties.  Royalty Exchange handles the administration of the royalty payments and they have an online portal to monitor your activity.

A new feature recently launched is a separate catalog of select older auctions that have been relisted for sale, with the owner's permission.  This allows the owner to set a "buy it now price" and also allows interested investors to submit offers.  One of my royalties was included on this and I have already received two "low ball" offers.  This seems like a good opportunity to find some values depending on how motivated the seller is to exit the investment.   Even if you are able to get a lower price than what the original buyer paid for the stream, the volatility and general declining nature of the payment stream may still pose some risk, so you have to do your research in looking at the payment history critically and also evaluating the popularity of the artist and songs in the catalog.

Investing in music royalties is still an interesting alternative investment strategy for those looking to diversify away from stocks and bonds, but is not without risk and potential investors should definitely do their homework before buying these.  Having said that, there is certainly the opportunity to make good steady cash flow from these investments over time, especially with a "life of rights" royalty.

I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.

To see all my books on investing and leadership, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.