From the Editor’s Desk

Gary Foreman


Indoor Activities That Can Pay Benefits to Your Home and Family

Hello to all my Frugal Friends!

Winter has always been a challenging time of year. The weather forces us to spend more time indoors. And, for many of us, COVID has made this a very, very long winter.

Reports indicate that it’s affected our mental health. “The number of people looking for help with anxiety and depression has skyrocketed. The number of people screening with moderate to severe symptoms of depression and anxiety has continued to increase throughout 2020 and remains higher than rates prior to COVID-19. (source: Mental Health America)

Obviously someone who is clinically depressed needs appropriate medical attention. But for those of us who are just feeling ‘blue,’ I propose that we do something about it. One way to combat those winter blues is to accomplish something. Let’s explore some ideas for indoor activities that will pay benefits for your home and family.

You’re probably tired of looking at the same rooms. Why not start with The $150 Living Room Makeover. Or maybe you want to tackle Quarantine Redecorating: Liven up Your Living Space on a Budget.

Or perhaps you’re tired of seeing all the stuff that’s taking over your home. How Much Is Clutter Costing You? could be a real motivator. 10 Benefits of Organization should be enough to get you started on a decluttering project!

Keep on Stretching those Dollars!

Will You Be Prepared?

Hello to all my Frugal Friends!

In the past two weeks I’ve made the case that we’re likely to see higher interest rates and inflation in the near future. Like any forecast/prediction only time will tell whether I’m right.

I can’t predict how fast or slow it might be. In the 1970s it took a few years to build up. But things seem to happen very quickly today. When you’re talking about being prepared, it’s always better to be too early, not too late.

If the 1970s are a pattern, be prepared first for inflation, and then when interest rates increase, a recession/depression that follows. Both can be quite severe. It wouldn’t be surprising to see prices rise 10+% or more annually. And for a recession to cause unemployment and a serious drop in the stock market.

Let’s first look at protecting your investment and retirement accounts from inflation. Double digit inflation can erode the purchasing power of your investments in a short time. Imagine if prices went up 25% in just 2 years.

Inflation becomes more of a threat as we age. I was in my 20s the last time inflation was rampant. We hadn’t had a chance to save/invest much so there wasn’t a lot to be devalued. Our wages lagged but did increase. Being young we had plenty of time to recover. Now that I’m in my 60s it would be a much, much bigger problem. So the older you are the more you stand to lose if inflation returns.

So how do you protect yourself from inflation? You buy/invest in assets that will increase in value if inflation returns. Real estate, metals (gold, silver), natural resources (oil, gas) are typical choices. For example gold went from less than $50 in 1970 to over $500 in 1979. Housing prices were increasing by 10+% per year in the late 70s. You can learn more about inflation here.

Be cautious about any long term investment with a fixed interest rate. I know that investment professionals will tell investors that they should have some bonds in their portfolio. Especially retirees. Normally I’d agree with them. But I remember the 1980s when clients would want to sell 4% bonds that they had bought years earlier and were upset when they found out that they could only get 50% of the bond’s face value.

Instead I’d look at investments that will pay more or grow faster if inflation occurs. TIPS (Treasury Inflation-Protected Securities) and annuities adjusted for inflation may meet your need.

For 25 years I’ve encouraged everyone to become debt free. Inflation can make that bad advice. Inflation allows you to pay back debt in dollars that are worth less than the ones you borrowed. So having some debt is actually a good thing. One caution. Make sure that you can meet your debt repayment schedule.

If you have debts of any kind, now is the time to try to lock in fixed rates. Especially on mortgages. You’ll find more on understanding mortgage APR and interest rates here.

Your low interest credit card could suddenly become much more expensive. Same thing for a home equity loan with variable interest. Pay down those loans or try to transfer them to something with a fixed interest.

If you’ve considered becoming a homeowner you might want to jump in now. I know that prices are high and I can’t guarantee that the housing market will continue to rise. But short term price changes shouldn’t bother you if you’re planning on owning a home for many years. And it’s hard to believe that you’ll find mortgage rates much lower than they are now?

Inflation has a life of it’s own. History shows that when it gets into the teens it’s either reduced by higher interest rates and a recession or it goes out of control. In the late 1970s and early 80s inflation was brought under control with higher interest rates. Rates topped 20%. Unemployment reached 7.8%.

At that time if you lost your job, couldn’t pay your mortgage you were in jeopardy of losing your home. Your home had increased in value, but selling to cash out was difficult since rates for new mortgages were sky high. So if you’re taking on a mortgage make sure that your income is secure enough to make payments.

Higher interest rates and a recession will affect the stock market too. No one can predict the size of a market pullback. But if history is an example we could see stock prices drop by 30%.

I’m not a big believer in market timing. Especially for non-professionals who aren’t following on a daily basis. But there are ETF funds that move opposite to the market. They can provide insurance for market declines.

I’ll admit that I’m not able to predict future events. But I’ve been involved in personal finance since 1982. We can learn from the past. History doesn’t exactly repeat itself. But it can give us an idea of what the future might bring. And it’s a wise person who prepares for a storm before it hits.

Keep on Stretching those Dollars!

What We Can Learn From a Time When the Economy Was Similar to Today

Hello to all my Frugal Friends!

Last week we looked at government debt and the printing of money. This week I’d like to take a look at a time when the economy was similar to today. We didn’t have a COVID crisis but we were facing upheavals that have some similarity.

If you were born after 1960 you probably don’t remember the inflation and high interest rates of the late 1970’s. My first mortgage rate was 10.75% for a 30-year fixed mortgage. Many people had mortgages at 12% or more.

Interest rates averaged over 11% in 1979. The reason for the high interest rates was inflation. Before the 70s were over, inflation neared 20% annually.

Traditionally, inflation only happened when the economy was booming. To make matters even more challenging, the last few years of the 1970s introduced us to ‘stagflation,’ or a stagnant economy with inflation.

Unemployment hovered between 6 and 8% for the last half of the 70s. And, when the Federal Reserve moved to stop the inflation, the unemployment rate peaked at 10.8% in 1982.

The inflation had a number of causes. The 1960s saw an increase in federal spending (Great Society and Vietnam war) resulting in deficits. Then the U.S. went off the gold standard in 1973. That meant that paper money could be printed without being backed by physical gold. The money supply grew faster than the economy. Energy prices soared due to the Arab oil embargo. A perfect storm for higher prices.

Why do I bring all this up? History’s value is in what it can teach us for today. So let’s compare what’s going on today with the late 1970s.

Currently government spending (federal, state and local) as a percent of GDP (what the economy produces) has continually increased. It was only higher during the peak of WW2. “The federal government ran a deficit of $3.1 trillion in fiscal year 2020, more than triple the deficit for fiscal year 2019. This year’s deficit amounted to 15.2% of GDP, the greatest deficit as a share of the economy since 1945.” (source: Sounds like the 1960s.

As I said last week, I understand that the pandemic has many, many people hurting very badly. So please don’t email to say that I don’t care about those who have lost jobs/income due to COVID. This is the time to help them. My point here is NOT that the government shouldn’t step in. My point is that they have spent the money and will continue to spend more.

The Federal Reserve has responded by running the printing presses. They gave it a nice sounding name: quantitative easing. As of summer of 2020, quantitative easing has totaled $2 trillion. That’s money created out of thin air. It’s said that extraordinary circumstances require extreme actions. That may be true. But the fact remains that the money supply has grown much faster than the economy.

Finally, it’s only a prediction, but it would appear that the energy supply could shrink and/or become more expensive. The movement towards zero carbon emissions may have value. But the bottom line today is that carbon-free energy sources are not as cheap as existing sources of energy. California has lead the way towards zero carbon emissions. A KwH of electricity costs over 18 cents in California. By comparison, West Virginia spends less than 10 cents per KwH. So it’s not hard to expect that energy prices could rise as we move to a carbon-free economy.

It’s easy to see the similarities to the 1970s inflation, high interest rates and slow economy. It appears that we’re heading for a very similar situation. Depending on whether you’re prepared, that can be a blessing or a curse.

Next week we’ll examine some of the steps that Dollar Stretchers can take to protect themselves from future economic shocks.

Keep on Stretching those Dollars!

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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