Debt Sinks Worlds Oldest Business

Think using debt to fund your small business is a good idea? I have a great counter-example for you, Koko Gumi. Koko Gumi (a Japanese construction firm) was the worlds oldest continuously operating company, and had been in business 1,400 years. Yes, they have been a family business since the 7th Century and are having to shut their doors. Why? Debt, of course.

You see, in the 1980′s, the company borrowed heavily to invest in the inflated Japanese real estate market. It was an opportunity too good to miss, they thought. The bubble burst, and they were in hock up to their eyes. Then, demand for their services diminished (they are specialists in building and restoring Buddhist Temples) and they couldn’t keep afloat.

The 1-2 punch of debt and hard times is too much for almost any business or family. You can’t predict when hard times will come, but you can influence how hard they will hit you. By preparing with a generous emergency fund and keeping out of debt you can make sure that your head stays above water, no matter what.
If you are interested in learning more, Business Week has all the sad details.

Nothing Wrong With Student Loans?

The prevailing logic in our culture is that student loans are a good thing, or at least a necessary evil that is required in order to get an education. In reality they sap both our individual and collective futures. We take the people with the most energy, the most enthusiasm, and the most potential and saddle them with long-term financial commitments at exactly the wrong time.

Student loans are a student loans are a multi-billion dollar industry , in some ways a shady one. With hundreds of millions of dollars going through major universities there is a significant conflict of interest, establishing a relationship that will enrich an institution at the expense of its students. The New York Times published an article detailing the tangled relationship between Citibank and several universities. While no wrongdoing was admitted on anyones part, both parties agreed to pay restitution and to abide to a new code of conduct for student loan processing. That sure sounds like wrongdoing to me!

MasterCard Makes Identity Theft Easier!

I just saw a commercial that really struck a nerve. It is from MasterCard (I believe) and is touting the new proximity cards that don’t require a signature.

The ad is a story about a sick zookeeper who has his animals steal his card, then go to the store and get him chicken soup, a blanket, and other soothing things. Then the animals swipe the card and are able to buy the items without a signature or a second look from the merchant.

I thought this was an excellent commercial, at least from my point of view, as it showed how insecure these tools really are. It tells the world, any mammal can steal your identity!

Finding Inspiration

You can’t wait for inspiration. You have to go after it with a club.

– Jack London

A Great Trend — Colleges Refusing Student Loans

I feel one of the real short-sighted decisions that we have made as a society is the decision to saddle students with debt (often a great deal of it) in order to complete their graduation. Now, I know that if you approach education with your eyes open it is entirely possible to make it happen without debt. However, it still is the case that when a student is evaluated for financial aid, it is assumed that they can and will go into debt in order to get an education.

It gave me great hope to read that Davidson College (alma matter of one of my nieces) has decided to go a different direction. MSNBC is reporting that Davidson has decided to replace student loans with grants and work-study programs. This is especially heartening, as this is a small, private, liberal arts school, where prices are often highest. The ability to graduate without debt makes this a great college value in my book!

Why I Don’t Use Credit Cards

The issue of credit cards comes up a lot when I teach FPU, and there is always someone who doesn’t see the problem with using them. Personally, I think credit cards are at best dangerous and at worst usurious. There is absolutely no upside to credit card debt, whatsoever.

Here are several reasons why I don’t use credit cards for my finances:

• On average, people spend 12-18% more when they use credit cards vs cash.
• Credit card companies don’t have any loyalty.
• Perks and rewards come at a very high cost.
• Credit Cards make it difficult to track your purchases day-to-day and easy to buy things you can’t afford. I don’t want to use any tool or service that has a vested interest in damaging my long-term future.

Here are some reasons why I don’t do business with these companies:

• Credit card companies force consumers to pay higher prices, even if they pay their balance off every month.
• There are a ton of tricks to force late payments.
• Consumers are regularly charged interest on debt that has already been paid.
• Interest rates can be raised arbitrarily, for something as mundane as applying for a mortgage or for accidentally making a single late payment with a different company.
• Interest rates can be changed retroactively, effectively raising rates for purchases that were made long ago.
• Credit card companies don’t seem to care about my security, and merchants are even worse.

Dabbling with credit cards is like playing with snakes. Don’t be surprised if you get bit!

Investing Strategy — From the Mouths of Babes

Is investing easy enough for children to do? Evidently so! Paul B. Farrell, author of ‘The Lazy Person’s Guide to Investing‘ wrote about how an 8-year-old crafted a portfolio that not only outperformed the S&P 500, but also his own professionally managed pick.

How did he do it? Well, primarily by investing in low-cost, well diversified mutual funds that cover the entire market. Sound familiar to all the FPU people out there?

Best College Values

Kiplingers has some great tools that look at public colleges  and private colleges to find the best value. Not the schools with the best reputations or the ones with the best rankings, the ones with the best bang for the buck. This is a great idea, and and in my opinion, a much more fruitful way to look at higher education. One of the particularly interesting things is the statistic that you can see how much debt the average student has after graduation.

As I wrote previously, I don’t think isn’t the obligation of parents to provide their children with the best education possible. It is the responsibility of parents to provide their children with an education that will be a blessing both to everyone. This could be picking up the entire bill for four years at Harvard or providing room and board while your child pays their way through community college or trade school. If a student (or a parent) can’t afford a certain school without going into debt, then perhaps it is time to start looking at better options, with the help of tools like these.

Nice Rules of Thumb

I Will Teach You To Be Rich has a simple and useful summary of two rules of thumb that are very useful in the personal finance world. I would highly recommend reading, understanding, and applying these lessons, as they will become invaluable when you are trying to quickly evaluate opportunities that come up in daily life.

Once you understand the rules, without a calculator, computer, or paper and pencil you will be able to:

1. Translate an hourly wage into a yearly salary amount .
2. Know how much time it will take for an investment to double in size.

When you are considering a career change or looking at making an investment it is crucial to understand the financial impact it will have on you.  Wouldn’t it be nice to be able to do those calculations quickly, easily, and in your head?  Take a moment and learn how.

Thriving on $12K/year

MSN Money provides some inspiration from a true story on surviving and thriving on $12,000 per year. Donna Freedman decided to go back to school to better herself and her future, and in doing so she had to make some radical lifestyle changes. She is now a full-time student with a grant that covers her tuition and books.

In order to make ends meet, Donna:

• Works doing baby-sitting, mystery shopping, freelance writing, paid medical research, and as the manager of her apartment complex.
• Takes a brown bag lunch every day.
• Gives money to those less fortunate than herself.
• Donates regularly to her church.

I found it totally inspiring to see someone who is making their future better and thriving in a difficult situation. She has totally taken responsibility for herself and is making it happen. Donna is going to sacrifice to graduate from school completely debt free, and be able to live like no one else. It isn’t going to be easy, but it isn’t going to be forever either.

The next time you are struggling with making a financial sacrifice, measure yourself against what the Donna Freedmans of the world are doing.