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- The Borrow Smart Chronicles - Be Liquid & Manage Cash Flow
Earnest Hemingway was interviewed about his successes and his failures - including his ultimate bankruptcy after being such a successful writer. His response about how he became bankrupt... 'slowly at first, and then all at once.'
JP Morgan shows the average cash balance by income thresholds, is coming down - other recent studies show 50% of US can’t handle a $1,400 unexpected bill…
Dollar General reported earnings and an interesting part of their report was that 1 in 3 US Citizens now has at least 1 credit card that is maxed out, and can no longer be used to support spending. Investing is all about cash flow management. Credit cards are a convenience for those that have money, but not an antidote for those that do not. You simply can’t outrun 24% compounding interest from credit cards, as based on the Rule of 72, your balance doubles every 3 years…
There is so much truth in what Ernest is saying. Mistakes compound just like interest. People rarely become bankrupt overnight - but through a series of misunderstandings (poor financial literacy, poor financial discipline)* and ultimately bankruptcy comes 'all at once' because a payment can't be made. Cash and cash flow are critical to avoiding most bad financial outcomes. Life events can also bring difficult situations, where we often rage at now, yet remember when we had it better, how we could have done things differently. The more you understand risk management the faster you’ll recover from life’s temper tantrums that appear directed solely at you.
Cash flow is the currency that makes our financial body work at the individual level, and at a societal level. The heart keeps beating, until it doesn't - and that flow of blood is the currency of the body that we need beating day in and day out.
In 2008 during the GFC (Great Financial Crisis) we saw the flow of currency literally stop at times - as systems failed largely through fear induced mass psychosis. A 'herd mentality' can be very scary once it starts moving - it isn't easy to stop.
Being cash flow positive doesn’t mean you don’t enjoy spending, but being cash flow positive is the gateway for wealth accumulations that creates future income (cash flow). And while there are no guarantees in life, this is about as close as you get if you can squirrel away a little income and invest for 20 years or more!
From Ben Carlson, you don’t have to have a big Investment Return, if you can live on 80% of your income, and save 20%, if you do that and get a high return - yee haw…
a BORROW SMART CONCEPT
Be Liquid (or have proxy)
If you WANT to borrow, then that’s one thing. The problem is when you NEED to borrow and can’t. It is best to address risk and planning for liquidity needs when you don’t need the liquidity, not when you do… as you best not try to repair your roof while it is raining.
Below are examples when you might NEED to borrow, based on a life event. The best way to borrow in these NEED situations is to have that liquidity IN ADVANCE of the NEED. Proper planning allows for true liability management. You can’t buy insurance after the fire. One of the best tools in the business when house equity is HIGH is the HELOC (Home Equity Line of Credit).
Source: Borrow Smart Repay Smart - Page 180
The house is a tool and can be accessed up to a % of the value of the house - but set it up when you don’t need it. If you want money from a house, a loan is a ‘soft sell’ as you get to keep the house and you can still use the money - otherwise if you do a ‘hard sell’ you get the money, but you lose the use and control of the house.
Coaching Tip: I believe everyone should have an equity line of credit in place to their maximum level available. Not to draw down on, but as a financial planning tool. It's there if you need it, and while it could be frozen or taken away - it is a way to ride out (and even take advantage) of opportunities that require cash liquidity. Maybe it's there to make a payment when you've lost a job, let the house can pay for itself for a while - we are all ultimately only one final cash flow missed payment away from an Earnest Hemingway moment.
rates are coming down, but they are historically back to normal
we have gotten used to (spoiled) with free money and low rates
inflation is a symptom of easy money and it historically is likely to move up if you compare the last cycle to this cycle
we could see rates fall fast and then rise fast again
a long look at inflation - it is very hard to see deflation which is the only way prices come back down, otherwise 2% inflation is based on today’s higher prices
LIABILITIES and DEBT
What’s Happening.
7 rate cuts are now expected, but this is largely a function of inflation response IMO
up bigly…
there’s equity in them thar hills!
we prefer the cut slowly, 25bps at a time, not 50bps
“mommy where does money come from?”
REITs and other interest rate sensitive stocks are booming
and mortgages are a key financial tool to drive real estate
“To live is the rarest thing in the world.
Most people exist, that is all.”
REAL ESTATE
What’s Happening?
wow, the lowest sentiment my indicator has ever registered, this could be the bottom
as often reported, landlords are eating market share of real estate
a positive surprise for single family home sales
another look
driven by lower mortgage rates driving some positive sentiment
existing home prices under pressure again
another look at price pressure
as why buy an old house when you can get a new house for the same price
Interesting to see we are still just getting back to prior norms before the big breakout in 2000 https://www.resiclubanalytics.com/
rates impact sentiment and sentiment leads behavior changes
very important to watch - trending up https://www.resiclubanalytics.com/
“To hold our breath is to lose your breath."
Get a grip and let go.
ASSETS and INCOME
What’s Happening?
NVDA is becoming the market much like Cisco was in 2000
but over time small caps provide higher returns
and they do the best when rates are coming down
retirement savings by age - this is a how and why problem IMO - everything compounds…
if you expect to take money from social security and invest it, then claim at age 62, otherwise wait - pretty interesting advice
retirement plans are now coming with automatic start and automatic increases which is GREAT as you don’t have to think about it
good guide on tax impact
they recommend starting with emergency reserve (see HELOC)
as we age we simply spend less, so important you do enjoy it when you can
invest in what you know - rates coming down is good for? Homebuilders!
for geeks, this shows there is a lot of money on sidelines that must be invested
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
ON BEING HUMAN
What’s Worth Sharing?
maybe we are falling in love with the wrong things?
DOPAMEMES
And Other Happy Moments…
This is so bad, it’s good…
AI OR DIE (Pilot Episode)
— AI OR DIE (@aiordieshow)
1:11 PM • Aug 14, 2024
Artificial Intelligence
And the Future of Work…
PROMPT IDEA FOR CHATGPT:
Conduct thorough research on (enter your full address). Provide a list of options and include detailed comparisons on the features, pros, and cons of buying this house. Organize the information in a table format for easy comparison.
Having trouble staying awake? Watch this:
Go here: https://www.midjourney.com/ if you only do one thing with AI, just play with this or this: https://ideogram.ai/t/explore
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