The Paradox of Thrift

One of the more amusing paradoxes that surfaces up in textbook economics is known as the 'paradox of thrift,' which occurs when one person engages in a financial beneficial action, but has negative consequences when the whole country does it. For instance, let's say that, going into the 2008 recession, I had $20,000 in debt. When the economy tanked, I got spooked, and vowed to never get into that type of poor fiscal health again. Like a responsible adult, I kept my vow in 2010 and 2011 as the economy slowly but surely began to improve. Instead of going out and increasing my purchases, I use my excess disposable income to pay down my debt and improve my finances.

This is perfectly logical, smart, and leads to long-term financial security. But what if an entire country engages in this practice? The economy needs consumers to spend money in order to grow, and if consumers are paying down their debt instead of enjoying fancy meals and luxury goods, then it hampers economic growth, employment, wage increases, etc. It seems incredibly counter-intuitive that being responsible with your money doesn't add to the country's growth, but it doesn't matter. Getting in a position where you are no longer suffering from bone-breaking debt is the most important goal, and if that means it takes you longer to contribute to the GDP, then so be it.

Wall Street Daily recently put out a good post on this very subject: http://www.wallstreetdaily.com/2011/06/24/investment-news-in-perspective/ .

Is Tiger Woods Broke?

The recent word on the street is that Tiger Woods is quickly running out of money. This is not particularly surprising. Like most athletes, Tiger Woods got himself in the habit of thinking that the gravy train of money that he was earning in his 20s and 30s would continue for life. But when his recent infidelities hit the news, his life quickly changed.

First of all, his wife Elin Nordegrin got a $100 million divorce settlement. That's going to put a dent in your wallet. Tiger clearly wasn't budgeting for such a sharp hit, and I can only imagine the legal fees that he has racked up throughout the proceedings. Additionally, rumors allege that Tiger has spent millions of dollars keeping his ex-lovers quiet. 

Secondly, Tiger has stopped winning in golf. That's not good for him. In 2006, 2007, 2008, and 2009, Tiger was bringing home the big backs, making $5-$10 million dollars per year in golfing victories. For the time being, those days appear to be gone. Tiger hasn't won a major golf tournament since his reputation took a sharp hit, and there's no indication that it's about to recover anytime soon. If you don't win, you don't get the big paychecks.

And most of all, Tiger has stopped receiving the big paychecks from his advertisers. Most of his endorsers cut him, and even the companies that kept him on, like Nike, have sharply reduced the amount of money that they are paying him. Additionally, Tiger has a $50 million mortgage on his Florida home, and the expenses from such a property are most likely adding up fast. While most people would gladly trade places with Tiger, things aren't quite as rosy for him as they once were. 

Budgeting Trade-Offs And Spending

J.D. Roth over at Get Rich Slowly recently pointed out that every financial decision we make is a trade-off. While this may seem self-evident enough--i.e. if I spend $1000 on a vacation, then I can't spend that $1000 on a  brand new television. Usually, this relationship is most evident when we are dealing with large expenses. That is, we recognize that by choosing to spend five hundred dollars on one item, then we cannot spend that kind of money on another item. That's Budgeting 101. But it is with smaller purchases that it is easier to forget this truism. If you regularly go to McDonalds for lunch, you might think of it as a meaningless $4 purchase that won't affect your finances much. However, if you go to McDonalds three times per week, then you are spending about $12 per week, or $48 per month at McDonalds. Annualized, this comes out to a little less than $600 per year. This is neither a good nor a bad thing. All I want to point out is that it is important to remember that small, frictional expenses can add up over time, depleting your money gradually and relentlessly without you even realizing it. If you want to read a great article that points out how this applies to all areas of our life, be sure to visit Mr. Roth's article at Get Rich Slowly by clicking here: http://www.getrichslowly.org/blog/2011/07/05/every-purchase-is-a-trade-off/ .

Mortgage Refinancing & Credit Scores

One of the greatest financial myths out there is that you need a perfect credit score to quality for a low-rate loan from a bank. Whenever I hear this line of thinking, I am reminded of the Robert Frost quote, "A bank is an institution that will only lend you an umbrella when it's not raining." And a similar thought was echoed by Mark Twain when he commented that The Bank of England would only lend money to gentlemen who could prove that they didn't need it. And many people who have tried to get a loan in the past three years have been tragically surprised by the lofty lending standards in a post-credit crunch world. But, in the interest of playing the devil's advocate, I'd like to point out that a less than perfect credit score may still enable you to receive favorable terms on a loan or refinancing. The most important thing to a bank is your ability to pay them back. So if you can prove to the back that you have always paid your bills on time, have steady income, and haven't shown a tendency to abuse credit in recent years, then you should be putting yourself in a position to receive favorable terms on a loan. TFB at The Finance Buff recently wrote a great personal anecdote about refinancing without a perfect credit score, and I recommend that you checkout his article by visiting the link here: http://thefinancebuff.com/a-high-credit-score-is-not-necessary-for-the-best-loan-rate.html .

Financial Reasons To Stop Smoking

Normally, the fact that a product causes cancer and kills someone might be enough of a reason to avoid it. Obviously, that was a bit crass--cigarettes are addicting, the tobacco companies constantly try to come up with new ways to make it even more addicting, and it's very difficult to stop doing something that you have done daily for years upon years. As Warren Buffett has said, 'The chains of habit are too light to be felt until they are too heavy to be broken.' And unfortunately, not only do cigarettes imperil your health, but they can also whack a whallop in your finances. The average pack of cigarettes cost about $5, and let's say you smoke four packs per week. That comes out to $20 per week, or $80 a month. On an annualized basis, you would be spending almost $1000 per year in cigarettes. Over the course of a lifetime, that could be in the neighborhood of $40,000-$50,000. How much more fun would it be if you socked that money on Coca-Cola stock, Pepsi stock, or Berkshire Hathaway? Guess what $1,000 per year, compounded at 10%, for 40 years equals? Almost $650,000. Not a bad chunk of change. And as governments continue to heavily tax cigarettes to raise revenue and discourage consumption, the price of cigarettes is only going to increase from here. If you want to read a great article on this topic, be sure to visit Sustainable Personal Finance by clicking here: http://sustainablepersonalfinance.com/how-to-stop-smoking-cigarettes/ .