Peak Oil
Donate Bitcoin

Donate Paypal


PeakOil is You

PeakOil is You

The best thing to do with $5000

Discussions about the economic and financial ramifications of PEAK OIL
Post a reply

Re: The best thing to do with $5000

Unread postby falser » Fri 30 Sep 2005, 11:05:57

$this->bbcode_second_pass_quote('jdmartin', 'I') will also add two other things - first, I think you'd be hard-pressed to find a financial anybody (bank, advisor, non-profit, etc) that would advise to do what you're suggesting. Second, the old saying "Pay yourself first" has many years of wisdom behind it, and it wasn't invented by me.


It's this kind of advice that puts people into debt in the first place, and prevents them from getting out of debt and living within their means. You are worse off with $5000 in the bank while carrying $5000 in credit card debt because each month you still have to pay the credit card company. It's a continous drain on your income, and there is absolutely no safe investment that will earn enough to pay 20% rates + penalties.
User avatar
falser
Lignite
Lignite
 
Posts: 308
Joined: Fri 12 Aug 2005, 03:00:00
Location: Arlington, VA
Top

Re: The best thing to do with $5000

Unread postby allenu » Fri 30 Sep 2005, 15:50:40

$this->bbcode_second_pass_quote('jdmartin', '
')I will also add two other things - first, I think you'd be hard-pressed to find a financial anybody (bank, advisor, non-profit, etc) that would advise to do what you're suggesting. Second, the old saying "Pay yourself first" has many years of wisdom behind it, and it wasn't invented by me.

Here's what someone else has to say on the issue:

Dr. Don


I understand what the link is saying, but it seems to me that it's a question of how much cushion you want to give yourself in case of such catastrophe knowing that you are in a sense reducing your financial well-being in the short term. In the absolute worst case, I guess you could be better off if you had some cash savings and still had the credit card debt, but if that doesn't happen, you are going to be worse off overall.

I think that in general, it is better to pay off the debt before trying to save. I think it could be shown mathematically that you are going to more likely end up in the black with more probability by paying off the debt than saving in the unlikely event of an extreme emergency. Just looking at interest rates, it's apparent. But again, it's a question of how much risk you want to reduce by reducing your well-being in the short term. To me, it's not worth it if the likelihood of being in that extreme condition of being in a terrible financial situation is very low.
User avatar
allenu
Wood
Wood
 
Posts: 10
Joined: Wed 06 Apr 2005, 03:00:00
Top

Re: The best thing to do with $5000

Unread postby Dukat_Reloaded » Fri 30 Sep 2005, 16:45:20

I might soon have another $5k to invest into gold bullion, after that I'm going to get out a bank loan from the bank for about 10k and buy gold bullion with it.

So I will own 15k of gold, and 10k of gold on credit.
So over the next year I can slowly pay the loan back. I was thinking of borrowing $20k but if gold went down it would stuff me up too much financialy.
User avatar
Dukat_Reloaded
Tar Sands
Tar Sands
 
Posts: 953
Joined: Sun 31 Jul 2005, 03:00:00
Top

Re: The best thing to do with $5000

Unread postby Vexed » Sat 01 Oct 2005, 00:49:28

Dukat wrote:
$this->bbcode_second_pass_quote('', 'I') might soon have another $5k to invest into gold bullion, after that I'm going to get out a bank loan from the bank for about 10k and buy gold bullion with it.

So I will own 15k of gold, and 10k of gold on credit.
So over the next year I can slowly pay the loan back. I was thinking of borrowing $20k but if gold went down it would stuff me up too much financialy.


I can appreciate your enthusiasm, I am currently investing in gold too, but...and I hope I don't come off condescending...

Have you ever heard of hedging your bets?

If things don't go exactly your way, you will be one more consumer with massive credit card debt, and you will likely have to sell all or a portion of your remaining gold to pay it off.

Many investors have done their research and know what is likely to happen. If you are investing in gold the way you are, I imagine its because you have studied the subject diligently.

But that's not why investors get burned. Being aware of liklihoods is one thing, predicting when those liklihoods will occur is a completely different animal.

Many investors have been wiped out investing in a future they foresee, a year or two before the future they foresee actually unfolds.
User avatar
Vexed
Coal
Coal
 
Posts: 434
Joined: Fri 13 Aug 2004, 03:00:00
Top

Re: The best thing to do with $5000

Unread postby GoIllini » Sat 01 Oct 2005, 15:01:25

$this->bbcode_second_pass_quote('Vexed', 'D')ukat wrote:
I can appreciate your enthusiasm, I am currently investing in gold too, but...and I hope I don't come off condescending...

Have you ever heard of hedging your bets?

If things don't go exactly your way, you will be one more consumer with massive credit card debt, and you will likely have to sell all or a portion of your remaining gold to pay it off.

Many investors have done their research and know what is likely to happen. If you are investing in gold the way you are, I imagine its because you have studied the subject diligently.

But that's not why investors get burned. Being aware of liklihoods is one thing, predicting when those liklihoods will occur is a completely different animal.

Many investors have been wiped out investing in a future they foresee, a year or two before the future they foresee actually unfolds.

Good point. Protecting anything you're buying on credit- or with money you can't afford to lose- with puts is an incredibly wise move. The bank might also be able to reduce your interest rate, as it generates less credit risk for them.

Alternatively, gold options may also be a good buy. Personally, I think that a lot of credit card companies might run into trouble with rising interest rates and increasing loan defaults. March puts in Capital One look awfully tempting...
User avatar
GoIllini
Tar Sands
Tar Sands
 
Posts: 765
Joined: Sat 05 Mar 2005, 04:00:00
Top

Re: The best thing to do with $5000

Unread postby jdmartin » Sat 01 Oct 2005, 23:54:49

$this->bbcode_second_pass_quote('falser', '
')It's this kind of advice that puts people into debt in the first place, and prevents them from getting out of debt and living within their means. You are worse off with $5000 in the bank while carrying $5000 in credit card debt because each month you still have to pay the credit card company. It's a continous drain on your income, and there is absolutely no safe investment that will earn enough to pay 20% rates + penalties.


What a ridiculous statement. How does "pay yourself first" put people into debt in the first place? If anything, paying yourself first allows you to avoid debt because if/when a large expense comes up, you have cash on hand to pay for it rather than borrowing for it. Example: my stepdaughter needed to replace her vehicle. She has no credit card debt, but no savings either. She needed the vehicle now in order to get back and forth to work. How did she purchase this vehicle? Stepdad (me) loaned her money from his "pay yourself first" account. If this account didn't exist, where would the money have come from? It would have to be borrowed. And there you begin your descent into consumer debt hell.

But listen, don't take my word for it. I encourage you to provide me links to anyone with any kind of financial sense that doesn't encourage saving some money aside, regardless of whether or not they have debt.

As an aside, to follow your advice to it's logical conclusion, if one has a $100,000 mortgage, and $5,000 spare dollars to set aside, they should forego an emergency fund in order to pay down $5,000 on the mortgage. Would you agree with that?
After fueling up their cars, Twyman says they bowed their heads and asked God for cheaper gas.There was no immediate answer, but he says other motorists joined in and the service station owner didn't run them off.
User avatar
jdmartin
Heavy Crude
Heavy Crude
 
Posts: 1272
Joined: Thu 19 May 2005, 03:00:00
Location: Merry Ol' USA
Top

Re: The best thing to do with $5000

Unread postby falser » Sun 02 Oct 2005, 01:10:17

$this->bbcode_second_pass_quote('jdmartin', 'H')ow does "pay yourself first" put people into debt in the first place? If anything, paying yourself first allows you to avoid debt because if/when a large expense comes up, you have cash on hand to pay for it rather than borrowing for it.


Here's a quick example of what I'm trying to say:

Option A) you're carrying $5000 credit card debt, have $5000 in savings, and suddenly need to buy a car for $5000. You use your savings and end up with $0 in the bank, and $5000 debt. Option B) You have no debt, and no savings, so you get a car loan and end up $5000 in debt. Same net result, right? Wrong.

If you choose Option 'A' then guess what - you just bought a $5000 car with a credit card, which has 20% or more interest and high penalties. What you should have done was get a car loan.

$this->bbcode_second_pass_quote('jdmartin', '
')As an aside, to follow your advice to it's logical conclusion, if one has a $100,000 mortgage, and $5,000 spare dollars to set aside, they should forego an emergency fund in order to pay down $5,000 on the mortgage. Would you agree with that?


You have to make a differentiation between short term high interest debt (credit cards) and long term low interest debt (mortgage, car loan, HELOC). Credit cards are only for short term use only. Carrying credit card debt long term is basically like using a credit card debt to buy EVERYTHING. It's that kind of financial habit that gets people in trouble.
User avatar
falser
Lignite
Lignite
 
Posts: 308
Joined: Fri 12 Aug 2005, 03:00:00
Location: Arlington, VA
Top

Re: The best thing to do with $5000

Unread postby jdmartin » Sun 02 Oct 2005, 02:22:36

$this->bbcode_second_pass_quote('falser', '
')You have to make a differentiation between short term high interest debt (credit cards) and long term low interest debt (mortgage, car loan, HELOC). Credit cards are only for short term use only. Carrying credit card debt long term is basically like using a credit card debt to buy EVERYTHING. It's that kind of financial habit that gets people in trouble.


Well, for one thing you simply reiterate my earlier point that not enough information was received from the original post for one to say 100% in any direction.

But, beyond that, your original logic stands at this: because saved money accumulates at only 2-3%, while the credit card costs 18%, there is no sense in holding that money aside. Because, after all, you are paying more in interest at the end of the road than if you had applied that money towards the loan. So it stands to reason, regardless of what kind of debt (long term, short term is all relative anyway) we're talking about, that your logic would continue that it makes more sense to apply that money against something costing more in interest than holding it aside for a lesser interest. This is foolish logic, and if you can provide me links or references to anyone who has any kind of financial qualifications, I would appreciate receiving them to review it myself to see if my own belief systems in this area need adjusting. Because I could show you all kinds of scenarios to counter your single case listed above, which likewise makes little sense because no one finds themselves in an emergency needing a $5,000 car, since decent, reliable cars can be found for $2,000 anywhere in the country (check e-bay).

Your fundamental error in this equation continues to be the assumption that the savings amount would be equivalent to the debt owed, which is highly unlikely (and if it were, I would agree that it would be prudent to pay the highest interest off completely). Let's say you have 5k in the bank, but debt of $110k (say 10k in CC, 100k in mortgage). The amount due and payable each month on that debt is not the entire amount, but a portion (your "monthly payment"). So in this example, your monthly payments due might be around $1200. If you suddenly were out of work, and assuming someone else (your wife, say) had a job that provided enough money to cover everything except debt, you could go over 4 months without a job and still be on time. If you took the 5k and paid 5k worth of credit card debt, your monthly payments might be around $1100 instead of $1200. It would be unlikely that your credit cards would allow you to take $1100 in cash advances every month to cover the bills. Instead, they would notice the activity and likely put a halt to it, knowing full well that you are on the road to bankruptcy and that money will be gone.

The point is that in today's economy, losing one's job is a very real possibility from which few of us are immune. Having some cash backup buys you time. But, again, if you can provide me information to the contrary, I would certainly be interested in reading it.
After fueling up their cars, Twyman says they bowed their heads and asked God for cheaper gas.There was no immediate answer, but he says other motorists joined in and the service station owner didn't run them off.
User avatar
jdmartin
Heavy Crude
Heavy Crude
 
Posts: 1272
Joined: Thu 19 May 2005, 03:00:00
Location: Merry Ol' USA
Top

Re: The best thing to do with $5000

Unread postby allenu » Sun 02 Oct 2005, 05:18:14

$this->bbcode_second_pass_quote('jdmartin', '
')The point is that in today's economy, losing one's job is a very real possibility from which few of us are immune. Having some cash backup buys you time. But, again, if you can provide me information to the contrary, I would certainly be interested in reading it.


It sounds like due to past experience, you have become very risk averse. As a result, you feel safer having that emergency cash, even if it's going to cost you extra to have. I think I understand your argument as basically this: Have emergency money now, even if it costs you extra, because if you end up needing it, it will be very difficult to obtain that amount (due to credit card companies or banks not wanting to lend to you).

In the end, choosing to have an emergency fund in lieu of paying off more of one's debt is definitely a good idea if there was a good chance you would need it. As the probability of requiring the emergency fund goes down, however, it becomes less useful and more wasteful.

Put in another way, if you knew three months from now you were going to be out of a job and would be hard pressed to find somebody who would lend you money to get by, then of course you would save up that cash now instead of paying off your debt. However, if you could look into the future and see that you weren't going to lose your job at any time in the next year, you would be more likely to pay off the debt.

Because no one can see into the future, whether or not you choose to save up emergency money despite being in debt depends on how much risk you want to take on.
User avatar
allenu
Wood
Wood
 
Posts: 10
Joined: Wed 06 Apr 2005, 03:00:00
Top

Re: The best thing to do with $5000

Unread postby Monk » Sun 02 Oct 2005, 09:38:51

$this->bbcode_second_pass_quote('allenu', '
') if you knew three months from now you were going to be out of a job and would be hard pressed to find somebody who would lend you money to get by, then of course you would save up that cash now instead of paying off your debt.


all you have to do is get 2 or 3 credit cards NOW, while you have a job.... then the option to use CC debt will be there if you lose your job. You shouldn't have to APPLY for anymore debt after you are out of a job.
User avatar
Monk
Peat
Peat
 
Posts: 151
Joined: Tue 02 Aug 2005, 03:00:00
Top

Re: The best thing to do with $5000

Unread postby falser » Sun 02 Oct 2005, 11:38:25

$this->bbcode_second_pass_quote('jdmartin', 'Y')our fundamental error in this equation continues to be the assumption that the savings amount would be equivalent to the debt owed, which is highly unlikely (and if it were, I would agree that it would be prudent to pay the highest interest off completely). Let's say you have 5k in the bank, but debt of $110k (say 10k in CC, 100k in mortgage).


I'll conceed that if you have a mortgage or bills that can only be paid with cash then this might make sense. But for day to day expenses a credit card would do just fine. Food, public transit, cable bills can all be paid on a credit card. I do maintain that having a savings account while you are in credit card debt (with any short term possibility of paying it off), then you're better off paying it down. That cash savings gives you a false sense of security and financial stability, because mathematically you really do not have any money and are no better off.
User avatar
falser
Lignite
Lignite
 
Posts: 308
Joined: Fri 12 Aug 2005, 03:00:00
Location: Arlington, VA
Top

Re: The best thing to do with $5000

Unread postby medicvet » Sun 02 Oct 2005, 16:17:30

I have a novel solution.

Give it all to me. :p

I will get a fireplace with a stove in it built into my house, and you can come to OK anytime you want and I will put you up. You never know when things turn bad if you might need another place to stay..

In the future, if there is a fire, or some natural disaster where you are at, no matter how well prepared, do you think you will get any money from any insurance company or fema? Why not lay up a little 'insurance' and help out someone who will most definitely 'pay back' when the time comes. ;)
Human history becomes more and more a race between education and catastrophe.-H.G. Wells

The only basis for a nation’s prosperity is a religious regard for the rights of others. - ISOCRATES
User avatar
medicvet
Lignite
Lignite
 
Posts: 264
Joined: Mon 15 Aug 2005, 03:00:00
Location: Hicktown OK
Top

Re: The best thing to do with $5000

Unread postby some_guy282 » Sun 02 Oct 2005, 18:08:22

$this->bbcode_second_pass_quote('TT', ' ')My daughter will be alive for the worst of it. Her survival is of paramount importance to me. The problem is that she is not willing to accept the concept of Peak Oil.


I'm sure she (like many others) will become a believer when things start to get bad. I agree with what others have said that you should try to diversify such a large investment. Some in cash, some in gold/silver, and maybe you can even play stocks a little and invest in energy companies, or place put optons on businesses you know wont be doing well in light of Peak Oil (airlines). If gold starts to break out against all currencies, maybe a small amount of gold you buy now might be able to pay off a large portion of your daughter's mortgage if you ever have to pay it down for her.
In individuals, insanity is rare; but in groups, parties, nations, and epochs it is the rule. – Nietzsche

Time makes more converts than reason. – Thomas Paine

History is a set of lies agreed upon. – Napoleon Bonaparte
User avatar
some_guy282
Tar Sands
Tar Sands
 
Posts: 651
Joined: Sun 18 Jul 2004, 03:00:00
Top

Re: The best thing to do with $5000

Unread postby jdmartin » Sun 02 Oct 2005, 22:20:53

$this->bbcode_second_pass_quote('allenu', '
')It sounds like due to past experience, you have become very risk averse. As a result, you feel safer having that emergency cash, even if it's going to cost you extra to have. I think I understand your argument as basically this: Have emergency money now, even if it costs you extra, because if you end up needing it, it will be very difficult to obtain that amount (due to credit card companies or banks not wanting to lend to you).

In the end, choosing to have an emergency fund in lieu of paying off more of one's debt is definitely a good idea if there was a good chance you would need it. As the probability of requiring the emergency fund goes down, however, it becomes less useful and more wasteful.

Put in another way, if you knew three months from now you were going to be out of a job and would be hard pressed to find somebody who would lend you money to get by, then of course you would save up that cash now instead of paying off your debt. However, if you could look into the future and see that you weren't going to lose your job at any time in the next year, you would be more likely to pay off the debt.

Because no one can see into the future, whether or not you choose to save up emergency money despite being in debt depends on how much risk you want to take on.


Very good post and one I pretty much agree with. Having been in the workforce for 20 years, I have been on the receiving end of a job loss once before, and it is not pretty. So to some extent I speak from experience. Nonetheless, it is almost a universally considered financial concept to have some cash on hand for a certain number of living expenses (6 months used to be popular, 1 year is gaining more credence these days).

And you are absolutely correct in the statement that if you could look into the future and be assured to have your job a year, two, ten down the road, you would be remiss in amassing a war chest while high-interest debts accrue interest. This is why its usually recommended a certain amount of living expenses (i.e. 6 months) versus building a war chest for war's sake. I like to keep 6 months on hand, with the knowledge that I've got access to another 6 months worth of expenses easy in credit. So that gets me a year down the road should the situation arise - hopefully, more than enough time to sell the house, land another job, etc. Of course, I work in the city management field, and as anyone familiar with local politics knows, the axe can drop at any second. So to some extent I am in a "high risk" field. However, in these days of instant unemployment, there's few people who are not in a high risk field.

As for being risk-averse, I would say that I'm a risk realist. My 6-month money sits in low/no risk avenues easily liquidated (savings account, cd's, money market). My retirement funds run around in higher-risk growth mutual funds, since I don't need them anytime soon. As a hedge, my pension funds are invested in low-risk mutual funds. So to some extent I've got several bases covered. I consider myself to have a portfolio, in which different needs are placed in different areas. If the whole thing goes to hell, I may be screwed to some extent. I like to think, however, that I've got something of a finger on the pulse, versus many of my mindless "let's get a bigger SUV" cohorts. At least there's comfort in the knowledge that for the most part, we'll all be going down together...
After fueling up their cars, Twyman says they bowed their heads and asked God for cheaper gas.There was no immediate answer, but he says other motorists joined in and the service station owner didn't run them off.
User avatar
jdmartin
Heavy Crude
Heavy Crude
 
Posts: 1272
Joined: Thu 19 May 2005, 03:00:00
Location: Merry Ol' USA
Top

Re: The best thing to do with $5000

Unread postby jdmartin » Sun 02 Oct 2005, 22:27:30

$this->bbcode_second_pass_quote('falser', '
')
I'll conceed that if you have a mortgage or bills that can only be paid with cash then this might make sense. But for day to day expenses a credit card would do just fine. Food, public transit, cable bills can all be paid on a credit card. I do maintain that having a savings account while you are in credit card debt (with any short term possibility of paying it off), then you're better off paying it down. That cash savings gives you a false sense of security and financial stability, because mathematically you really do not have any money and are no better off.


That's the key - the short-term possibility of pay-off. If I had a thousand dollars on a credit card, two thousand in the bank, and a reasonably stable job, I would most definitely pay off the credit card. If I had two thousand in the bank but ten thousand in credit card debts, it would depend on what else I had (mortgage? school loan?) and the rate at which I could put aside enough money to cover those bills that couldn't be jettisoned (cable can be cancelled, but you need a roof over your head).

Again, what the original poster should do depends on the whole situation, but I stand by my belief that everyone who has bills that cannot be cancelled (i.e. a mortgage) should have some emergency cash set aside to handle a short period of income loss.
After fueling up their cars, Twyman says they bowed their heads and asked God for cheaper gas.There was no immediate answer, but he says other motorists joined in and the service station owner didn't run them off.
User avatar
jdmartin
Heavy Crude
Heavy Crude
 
Posts: 1272
Joined: Thu 19 May 2005, 03:00:00
Location: Merry Ol' USA
Top
Previous
Post a reply

Return to Economics & Finance

Who is online

Users browsing this forum: No registered users and 1 guest



cron