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October 03, 2011

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I always have a hard time with a predefined percent of income that should be saved because to me, it depends on what your income is. If you are just getting by and have high interest debt, then I think almost all money should go toward debt (once an emergency fund is established). Also, I kind of look at it from the reverse in that housing/car/other commitments should not take up a certain amount of income and the balance should be saved. If you control your expenses, then the savings will happen automatically. Maybe it will be 10 percent, maybe it will be 18 percent. If your fixed expenses are minimal, you should be fine.

Wish I had met you at Fincon, I don't think I saw you!

Everyday Tips --

I was there! Sorry to have missed you!!!

I disagree on leverage - for some people. Sure, someone who is undisciplined with their spending and saving should not use leverage. But if you have a mature understanding of money, healthy cash flow, and strong financial discipline, careful leverage for wise investments is generally a fine idea. Especially at a time right now when you can accumulate asset-backed debt at such incredibly low rates and when your savings earn pittances.

I definitely agree on credit card debt - stay far away from it. And I believe people should find a certain modest standard of living that is significantly lower than their "means" and save the difference between that and their incomes, even as income increases. Hopefully the rate is far higher than 10%.

>•The truth: Leverage is debt -- and is almost always a bad idea.

Leverage is debt, and it is risky, but I do think that if it is used wisely it can be a key to prosperity. For example- you might be able to start a business using debt that you would never be able to without debt. I do think that using debt to fund consumption you can't afford is always a bad idea.

>•A mortgage on a house, especially if the note is a maximum of >seven years.

They really don't like debt! Even Dave Ramsey is Ok with a 15 year mortgage. I have to disagree on this one- You can get a 30 year fixed mortgage at about 4%, that is an amazingly low rate.

I think it is very likely we will see higher interest rates in the next 30 years. I would be amazed if CD rates don't return to the least 4% in the next 30 years. It seems likely to me that if you can afford the payments on a 7 year loan you would be likely to be better off taking a 30 year loan and saving the monthly payment difference in CDs.

-Rick Francis


One kind of leverage that I am 100% against is "Buying mutual funds or stocks on Margin".
In other words it's when you can own twice as much of an investment as if you had bought it using available cash.
For one thing you are paying interest every month but the more important thing is that you are now gambling with other people's money.

The last time I used margin was in 2006 when I made a short term loan to my son so that he could close escrow on a real estate transaction. It was far cheaper and simpler than going through a bank.

Buying a new home in 1963 with a 25% loan definitely turned out to be a fantastic use of leverage when it was sold in 1977.
Likewise upgrading to a much nicer 5 year old home in 1977 also turned out to be a great use of leverage when you look back at the transaction with hindsight.

The reason - the price of homes was in a very strong uptrend. Mortgages were in the 4.5% - 5.5% range and price appreciation was around 9%/annum.

You can't make a flat statement that using leverage is always bad or inadvisable, it all depends upon current loan rates and appreciation rates.

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