Thoughts On Financial Preparedness

In addition to writing many of my favorite fiction novels Peter Grant also publishes on of my favorite blogs, Bayou Renaissance Man. Peter is a really interesting guy with some fairly extraordinary life experiences and I have been reading his blog for years which is pretty amazing for someone with my attention span. Last week he posted some investment advice (link) and I would like to share it and see what you think about it.

The source is a CNBC article quoting advice from a self-made millionaire to never invest in retirement saving accounts. His recommendation is to make sure you have at least $100,000 in a regular old savings account and then invest everything else into profit making ventures because “you can’t save your way to millionaire status.”

First, I am no millionaire and never will be. I am just an ordinary working guy who started saving for retirement (way too lat)e so I am no expert and don’t claim to be one.

Second, retirement is not the only financial concern I have. It is, perhaps, my biggest but I am also concerned about other things too like the mounting global debt crisis. I also want to be able to leave something behind to help my kids and grand kids have a leg up in an increasingly tough world.

With those caveats, here is is the plan I have been following:

Step 1: Get out of (unsecured) debt

Credit card interest was eating us alive. At 25%+ most credit cards will eat just about anyone alive so we worked very hard to pay off all unsecured credit cards debt. To be honest, we do still have some. If I come across a zero interest deal I take it. If Lowe’s or Best Buy or whoever want to loan me money for free I will take it but we have to have the money in the bank to cover the amount of the loan.

I don’t mind going into debt for a car either as long as I get a good interest rate. The combined monthly interest charge for both of the auto loans I have is less than $10 a month. The rates on both are at or below the interest rate on a savings account o I’ll keep the cash.

Our home loan is well under 4% but we are still trying really hard to pay that down as quickly as possible because 4% of a lot of money is a lot of money. In the last two years since we paid off the credit card debt we have paid down the principle on our mortgage by almost $28,000 despite being laid of for several months of that time. If we are going to be able to retire within the next fifteen years the house payment will need to be gone. The drive to pay off the house is not only driven by dollars and cents. There is also a security aspect to it. Our house is big enough for the whole family including grand kids and mothers in law. Should something happen we are their backstop. It will be tight and it may not be a lot of fun but we could do it. So, making sure that everyone’s “backup plan” is safe factors into this as well.

Step 2: Build a cash buffer (savings)

Our initial goal after paying off our debt a couple of years ago was to have enough in savings to pay the bills for a month. We (slowly) met that goal and reset it to add another month each time. Right now we have the equivalent of four months of my salary in savings which will pay the bills (if we conserve) for at least six months. I wish that was a year’s worth of bills and maybe we’ll get there at some point.

Some of this is in a traditional savings account. Some may be stashed someplace safe (not in my home) in cash. Based on the current inflation rates (real and what the government reports), this is losing us money because its worth is decreasing at a higher rate than the interest we earn. That’s OK. It is a price I am willing to pay to have it readily accessible in an emergency.

Step 3: Invest in hard assets

We have been investing about 3% of our income in hard assets such as precious metals. Ammo is another hard asset. I watch and buy ammo at a cost that, if I needed to, I could resell it for about the same price I paid for it. It lasts for years or even decades when properly stored and as the price of ammunition generally increases over time…

We also buy and store food and some critical goods. While the return on investment is minimal at best, food purchased today will be eaten at some point and I can pretty well guarantee that it will be more expensive than it is today. Like having cash in savings, this is a buffer that is worth more to my sense of security than any return on investment.

Within the last month, we have decided that we are going to invest in some land. After the first of the year we will start looking for a piece of property large enough that we could raise, grow or hunt our own food. I’m hoping to buy at least 15 acres (more if I can swing it) and equip it with a well, electricity and a septic system. It would be nice if we could include a windmill and some solar panels for power or to pump water from the well and a small cabin or camp house but those will likely have to wait. With an agriculture exemption the taxes should be pretty low and if the bottom falls out of the economy we should be able to be pretty self-sufficient. My grandparents and Wonderful Wide’s parents survived and raised families on less.

Step 4: Traditional investments

All the companies I have worked for have offered some sort of 401K plan and all matched, to some degree, the first 6% that I contribute. Currently, that is about a 66% return on investment just from what they match. Most of the plans I have enrolled in generated a long term yield that was at least on par with inflation even after the fees (if any) associated with the plans.

I have no illusions that this money is completely safe and have taken several pretty bad hits over the years but on average these investments offer my best shot at a comfortable retirement. Even with those hits the return has been positive.

I also have a few stocks, mostly from employee stock purchase programs or bonus programs. I am not a stock trader, I don’t have the time or the inclination. So, I view these as long term investments. It is either “free money” in the case of the bonus programs or “discounted money” in the case of the stock purchase programs.

By the way, just because each of these is listed in a step by step order that does not mean they have to be sequential. Once my unsecured, high interest debt was paid off I started focusing, to some degree, on each of these steps. That is the only one that I would recommend tackling in sequence. It’s tough to earn better than the 25% (or higher) interest rates on such debt.

Step 5: Useful skills

I have been trying to learn and develop skills that would prove useful not only in an emergency but also in an economic downturn. Hunting, fishing, trapping, gardening, reloading, foraging and even first aid are skills that could help supplement our income or save us money in some way. They are important skills that would likely be in demand in any number of situations.

What have I missed?

OK, that’s been my basic strategy for the last three or four years. What do you think? What am I missing or what have I overlooked?

God bless.

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