Ain't It Funny How the Money Makes the Honey Taste Like Nothing? Financial Planning for Tough Times

Sharon August 28th, 2008

 Betcha giving head to a movie star betcha gotta llama riding in
Your car betcha u gotta tv built in your jet skis, betcha giving
Head to a movie star betcha gotta llama riding in your car
Betcha u gotta tv built in your jet skis.
Hidee high, lowdy low, get up and go to the show.

Ain’t it funny how the money makes the honey taste like nothing
You can’t have no more? How we know. Ain’t it funny how the
Money makes the honey taste like nothing you can’t have no
More? Now we know. Ain’t it funny how the money makes to
Honey taste just like nothing – people act like they have but
They’re bluffing now we know that it don’t mean nothing. 
- Macy Gray “It Ain’t the Money”

Ok, time to talk finances.  I have to say, just as security wasn’t my favorite topic, neither is “what you should do with your 401K” – because while I’m a generalist, rather than a specialist, I feel that I’m especially general on this subject, because the exact parameters of the future are pretty hard to parse.  I don’t want to be responsible for someone liquidating their retirement funds and cursing my name later, so please take what I say with several large grains of salt.

At the moment we experiencing steady price increases for things we need, like food and energy, but overall deflation – that is, the overall money supply is contracting rapidly, as is the availability of credit both at the personal level and at the corporate one. That means, from the looks of things, we are headed into a Depression, rather than a period of, say, hyper-inflation.  That doesn’t mean it isn’t technically possible that things could shift, but the present trends suggest that our real incomes and access to money is shrinking, while our basic costs are going up. 

Because of this, we seem to be headed into a period where money is hard to come by. That means that debt is potentially a much bigger deal than it is in a period where credit is easy to come by and you can always borrow off your mastercard to pay your student loans, or refi your home, or even just get another job.  Not enough jobs, pay cuts, no credit – these mean tough, tough times for the indebted, and of course, that number is rising rapidly.  Most Americans can’t live within their salaries – and since their inflation adjusted income is shrinking, that makes sense.

So the first advice is “get out of debt.”  But that’s one of those “duh” things – yes, you know this.  And presumably you would if you could – or you’ve been playing the odds that one more month on the credit card bill won’t really hurt – or you don’t have much choice but to use the card to cover that broken arm and to buy groceries.  But if you can, get out of debt.

What if you can’t before the axe falls?  Well, next you have to decide whether to negotiate directly with those you are indebted to, declare bankruptcy, or walk away from your debt.  Those are pretty much the choices.

If you have one major debt that you can’t handle – say, medical bills, the best bet is probably negotiating repayment if there’s any chance of it, because this option won’t hurt your credit or your ability to get jobs that depend on good credit (lots of employers, especially federal and state ones check your credit history, and academic jobs may depend on the ability to get an official transcript, which is tough (but not totally impossible in some cases) to do if you are in default on student loans).  It will also save you wage garnishment and loss of your economic stimulus package.

You can declare bankruptcy, but this will not get you cleared out quickly – student loans and child support are almost never included, and you will certainly have to repay some of your debts under new bankruptcy laws.  It costs money and it leaves your credit trashed.  The good thing is that in 5-7 years, you should have credit again (assuming there is any).

 The third choice is to dump your debt.  This means that anything you may have that you default on will be repo’d – but that may not matter much if you’d lose it anyway during  a bankruptcy.  This actually might be a better option for people wanting to keep their home – if you can keep in payment with your mortgage, and live with the fact that it will be a long time, if ever, before you can get another one, you can probably give back the car and any other big ticket payment options, turn off the phone to avoid the credit card people, and accept that you’ll never get that federal job (they can’t repo your education) and just accept the price.  This is not an easy option, but I suspect it will be the dominant model in the future.  Someone is going to get screwed because of the mass extension of credit, and it would be a nice change to see it be the credit companies, not the average person.

Ok, what if you have money, not debts?  This is good, no?

Well, yes.  But what should you do with it?  How to preserve your retirement funds?  How to preserve your kids’ college savings?

Honestly, I think the most certain bet would be to stop looking at your money as the only means to a particular end, and concentrate on the end itself – that is, if you are saving money so you are not hungry, cold and lonely in your old age, perhaps you might put some of that money into a house for your kids who can’t afford one right now – perhaps one very near yourself, and maybe help setting them up in a peak-suitable local business, that can help support you in your old age.  Or maybe pay off your house, invite others without a house to live in it, and trade them help as you need it.  These are risky choices, of course, but so is leaving your money in your 401K.

If you want an educated child, perhaps the best option would be to add to her college fund a budget for lots of books, and a chance to build relationships with local college professors or knowledgeable people she might apprentice to.  That way, she gets an education even if she can’t go to college.  I’m not honestly sure, that unless you have the money to spend without loans, that I recommend college right now for most kids – the choice to go and come out encumbered with tens of thousands in debt is simply too dangerous.  Education can be had a lot of ways.

I think that gold and silver are probably overvalued right now, and that they will come down, so I don’t know that I think people should buy them.  I do think that investments in oil wildcatting, alcohol, prescription sedatives and escapist videos probably will do well in the coming years, if the stockmarket is your sort of thing.

Otherwise, I think that putting money in things that are likely to cost more later, or have value (not necessarily the same value) in the long term is probably wise.  For example, I think that food producing land will continue to have value (not necessarily the same as now) if you can buy it outright.  So will investments in local businesses, food, local energy production, and investments in sale or barter goods/equipment for your future business.

 Will state sources of income keep being there?  My bet is yes on Social security, probably for quite a while. I could see there being age caps, and payment eventually coming in effective scrip, but the political consequences of not paying Social Security to the boomers would be great (don’t bet on it if you are under 50).  Disability is also probably safe for some time, with the same caveats.  But anything socially unpopular like welfare – well, it depends on the political realities, and how many people are actually starving. 

Ok, that’s my take – what’s yours?

 Sharon

25 Responses to “Ain't It Funny How the Money Makes the Honey Taste Like Nothing? Financial Planning for Tough Times”

  1. Verde says:

    You can hear Sharon on-line. Google KUER 90.1 – she’ll be on in a few minutes after the news.

  2. Meadowlark says:

    Thanks Verde.
    And if you want to see SHEEP riding in a car…
    http://coldantlerfarm.blogspot.com/2008/08/most.html

    this girl is a homesteader and just adorable. unfortunately, she doesn’t have a truck yet! :)

  3. ceridwen says:

    well – I certainly agree that the consequences of not giving Social Security to the “baby boomers” would be “great”…as a baby boomer (British version)…..I take the attitude that its an advantage to be part of the “Protest Generation” and I’d see hell freeze over first before the Govt touches social security benefits or State Pensions for my agegroup….I think they realise that “some” of my generation honestly think its no holds barred if the Govt tries whipping that off us. In Britain – many people will moan about something – but not actually DO anything – but I do think if those things were whipped off us – then the Govt would be in very severe trouble.

    I do feel sorry for succeeding generations – and counting my blessings includes being grateful I’m not younger than I am.

  4. Robyn M. says:

    I take the attitude that its an advantage to be part of the “Protest Generation” and I’d see hell freeze over first before the Govt touches social security benefits or State Pensions for my agegroup

    Yup, my own parents have told me flat out that they will happily tax my generation straight into oblivion in order to maintain their own Social Security benefits. It must be nice to not be in one’s thirties (or younger) right now. Presumably, after 70% or more of our income is taken to maintain the system, our parents will then generously loan this money back to us and decry how hopeless we all are at being self-sufficient. I try not to be bitter… but not real hard.

    As far as decisions about our own finances, we’ve made some changes that I probably oughtn’t discuss on a public blog. As for retirement, we’ve not done much there. I guess we figure that if our accounts genuinely lose all value, then we’ve got bigger problems than retirement on our hands, and probably having cashed out earlier wouldn’t have bought us much. For example, if we cashed out now and used the money to pay down debt, we’d only make a dent in either my student loans or in our mortgage (we don’t carry credit card debt). We could then plausibly still lose our house, or default on my SLs, and ALSO not have our retirement money to fall back on. If our retirement funds could wipe out one or the other of these debts, I think we’d probably do it in a heartbeat, but unfortunately it would only cut either of them down between 1/3rd and 1/5th.

  5. Sharon says:

    Robyn, I do know what you mean about the generational thing. I will note that in some states, you can get your mortgage reassessed if you pay down your principle – ie, you can get the payments reduced without a formal refinancing if you’ve made a big dent in the principle. So if you are worried about being able to pay the mortgage, using the retirement savings might (this is a might) make it possible to keep your house. But if you think that’s unlikely anyway, well, that’s another issue.

    Sharon

  6. Eva says:

    I agree with everything you say except “Someone is going to get screwed because of the mass extension of credit, and it would be a nice change to see it be the credit companies, not the average person”. When it’s the average person that has borrowed more than they can afford, then they deserve what they get. If the average person gets screwed because other people have borrowed too much thats another question.

    Interesting article on student loans here: “That Student Loan, So Hard to Shake” http://www.nytimes.com/2008/08/24/business/24loans.html

  7. [...] Casaubon’s Book » Blog Archive » Ain’t It Funny How the Money Makes the Honey Taste Like Nothi… Ok, time to talk finances. I have to say, just as security wasn’t my favorite topic, neither is “what you should do with your 401K” – because while I’m a generalist, rather than a specialist, I feel that I’m especially general on this subject, because the exact parameters of the future are pretty hard to parse. I don’t want to be responsible for someone liquidating their retirement funds and cursing my name later, so please take what I say with several large grains of salt. [...]

  8. bunnygirl says:

    Regarding college, the reality is that it’s tough to get a professional job and sometimes even a clerical job without a degree. In hard times it gets even tougher. No matter what your skills and experience, you’re always competing against someone with all the same credentials and a degree.

    I’ve been on both sides of this and I work in HR, so I know of what I speak.

    If I were making a recommendation to a young person today (or to my younger self), I’d say go to a community college and get credentialed in something practical that will net a decent income: court reporting, paralegal, electrician, HVAC, respiratory tech, etc. Then use that job to finance a four-year degree if your heart’s desire is in a professional field where degrees are the norm.

    Don’t think, though, that skills and experience will cut it without a lot of lucky breaks. I have department heads who won’t even consider someone who doesn’t have at least a bachelor’s degree, even if they have decades of experience and the official job description says that experience can be substituted for education. There are so many people running around with letters after their names that it’s become an educational arms race and whoever dies with the most diplomas “wins.”

    I don’t agree with the way things are, btw. I’m just stating the facts as they are in a large urban center on the United States Gulf Coast, and as my professional colleagues have told me they are in other places as well.

  9. Shamba says:

    I would think if you have some money to “spare” that putting it into home improvements–not just remodeling but real improvements–for energy saving would be an excellent use of funds. For example: energy efficient new windows and/or doors; rewiring, upgrading the electrical system if it’s old; insulation in walls and attics, maybe some outside patio/yard work that makes your own backyard/frontyard/house and more pleasant place to stay home.

    I’ve done acouple of these things to my paid for house and it’s motivated me to “declutter” a lot of stuff I’ve had for too long.

    And suppose you took cooking classes or sewing classes or gardening workshops, or “building things” workshops to help you learn those skills. these things will be helpful in the future.

    cheers,
    shamba

  10. Paula Hewitt says:

    I agree pretty much with everything. I agree with robyn re ‘hell freezing over’ comment. not going to discuss boomers- makes me too cranky. In Australia we are not (as far as I know) able to touch most of our superannuation (which i am assuming is the same as 401k) until we reach a certain age (65?) so our options in this regard are limited. with our ‘other’ savings we have bought land – we took a loss and got money out of managed funds last year – against the advice of everyone – at least we have something tangible now.

  11. Heather Gray says:

    Hm, interesting on the Social Security/Boomers bit. As a tail-end member of the Boomer gen, I’ve never assumed Social Security would still be there when I hit “retirement”. Personally, I don’t expect to ever retire. Yes we have a little bit of savings, and yes we’ve paid down debt (still have a student loan from when I went back to school a few years ago), but seriously, we expect to keep working in one capacity or another. Heck, Lyle’s dad retired years ago and he’s still working — within the financial limits allowed to retired persons of course.

    But the farm wouldn’t keep going without all generations pitching in, so that’s all there is to that.

  12. Heather Gray says:

    btw, the Baby Boomer generation is those born 1946 – 1964. So if you’re correct that those folks under 50 are out of luck for Social Security benefits, that includes some of the boomers. The youngest boomers are 44 this year.

  13. From a Distance says:

    Heather G

    With the total meltdown of US finance just around the corner (bank’s are bankrupt) it is very ironic that the rah, rah free market place solution of private pension funds and savings instruments won’t be there either.

    The trillions of dollars invested in such financial ‘vehicles’ are evaporating as we speak at astonishing and accelerating speed.

    So much for the wisdom of the ‘Market Place”

    The Giant Croupier just raked the whole table into the Hole in the center of the table.

    Get your visors here:

    http://www.amazon.com/Universal-Size-Casino-Dealer-Visor/dp/B000F7SROE

    A friend, asked about ‘retirement’ said,” I’m going to have to work until the dirt hits the lid.”

  14. Wendy says:

    This is what I’ve been saying – at least in part. It just makes more sense, to me, to invest in making low-energy improvements to my home. If I had a retirement fund or a stock portfolio, I would cash it out right now, and start spending that money to reduce my current expenditures. I might not be able to pay off any “debt” (like my mortgage), but I could put up a solar array so that I could stop paying for electricity … or I could build a cold closet and/or a root cellar so that I would have a no-cost food storage option and I could get rid of my freezer and/or refrigerator (I live in the northeast where “natural cooling” for food storage is quite possible most of the year).

    If I could reduce my reliance on outside sources for electricity, gas, oil, and water, or I could have in place systems that supply alternatives to these, I could save a few dollars each month that could go toward debt reduction, and then, when I retire, I would own my house and I would have a garden and some small livestock (chickens, goats) for food and plenty of places to store it for the winter. Most of my needs would be met without me spending a dime. If I needed money, I would have a home and my small piece of land … I’m sure it wouldn’t be too difficult a stretch to find ways to earn a couple of dollars.

    I guess I wonder, if I don’t have any “living expenses”, why would I need so much money I “retire”?

  15. Jordis says:

    As being in my thirties, I definitely know that relying on social security or any kind of state pensions funds being available when I’m 67 (or retiremenet age over here – and we have to!) is a stupid gambit. Try to invest in things of durability and practical worth. As a city dweller that meant for me getting a garden lot within cycling distance of my appartment. It will be available for my use until I die – and though I do not own it, I can leave it to my children in my will. The lease will move into them, if I specify so. Probably not ‘worth’ much moneywise, but it looked like a sensible investment.

    We also try to invest in skills: Take courses and evening classes to acquire those skills that will come in handy (or do even today). And then at least try to share our knowldge wuth those in our community not being able to afford such classes – doesn’t always work, you can’t really teach certain things if your just a beginner yourself. But you can always show what you learned, and orobably someone gets the idea and shows some real talent :-) .

    If you expect money to be scarce and probably worthless for many things, nonetheless keep in mind that services like medical care tend to be paid in cash even in places where barter economy still lives a healthy life, espcially in impoverished communities. So don’t shed all your money :-)

    And I totally agree with the ‘get out of debt’ advice. BTDT – right now we’re debt free, and I’d like to share a support group link for this: They really helped me in getting debt free by the age of 33 despite student loans and the usual stuff.

    It is a women’s platform, mainly, but men are not discriminated against: http://messageboards.ivillage.com/iv-mlsupport

    Greetings, Jordis

  16. Sharon says:

    Bunnygirl, you are certainly right – but I still think that the crushing debt that most students endure probably isn’t worth the price of a good job – and if this is anything like previous recessions, newly graduated college students aren’t going to be getting jobs anyway, but moving back with their parents, since they will be competing with older, more experienced workers with college degrees. The best advice I can give is, for now at least, stay out of the college market unless they give you enough money to go more or less cheaply or unless parents can pay outright. In the early 90s recession (when I finished college) and the early 2000s, having a degree was not a ticket to a job by any means.

    The system is going to have to shift, and it will – I think training for the new low energy life skills may work, but honestly, I don’t think being hard to employ can be worse than hard to employ plus Sallie Mae on your ass.

    Sharon

  17. Patrick says:

    I’m a new fan of this blog for starters. Also, by the sounds of it I’m the youngest to post a comment about this subject at 28 years old. Quick recap is that I have a wife and 2 kids under the age of 4. We’ve “bought,” 3 houses to date, all during the housing boom here in the US, and we’ve gone from a low priced house to a high priced house and now back to a smaller and less expensive house than we first started out in. The reasons for downsizing are obvious enough to readers here. In addition, we now have a small amount of land to put to use. Anyway, I say all of this because since graduating college and landing a professional job, sans student loans thankfully, we built up a small 401k balance. Now I need access to some funds to do necessary things to our land like clearing and leveling. I could do all of this myself, to a certain degree, but a few thousand dollars would get everything done quickly. I would consider this money well spent. But, I haven’t yet pulled the 401k withdrawal trigger. The 10% penalty is a pain for sure but it’s better to have 90% of my funds than 0%. We are also going to liquidate a college savings fund for our kids because it’s a paltry sum and I can’t stand all of the gov’t regulations. So to sum it all up why haven’t I withdrawn the 401k? Honestly I’m not sure. Maybe it’s the fact that I find it hard to believe how much things have changed from 5 years ago when we started all of this “retirement savings.” In the end though I do feel that investing in your land, tools, and skills much outweighs a number of digits held out in cyberspace. Also, at 28 years old I know that hell just might in fact freeze over before I ever see a dime from Social Security. No reason to even mention Medicare because I highly doubt most boomers will see anything there either. This is all especially funny as well because part of my work duties include analyzing Medicare reimbursement for a large hospital. To end, invest in yourself and stay free from debt. This seems to me how all of history (successful history, that is) has been lived with the exception of the past 75-100 years.

  18. Christina says:

    Patrick, you’ll have less than 90% of your 401k funds if you withdraw. The 10% is the early withdrawal penalty; you also pay taxes on the full 100% (including the 10% you don’t get to keep). You pay those taxes at your marginal rate, which a large withdrawal could bump higher. You are required to pay a mandatory withholding of 20% up front, with reconciliation to a higher or lower tax rate at tax time.

    We are ten years beyond you in 401k savings and growth, and are still struggling with the issue of whether to access what capital we can after taxes and penalties to build our post-peak infrastructure.

  19. Susan says:

    • Especially liked three points made here: 1.)”Money as a means to an end, not an end in itself.” Words of wisdom! One starts thinking about those ends or purposes and working towards them. 2.) Creative means to educate young people without burdens of debt or big wastes of money (such as if the courses paid for do not lead to real-world useable knowledge and skills.) 3.)The courageous look at simply (but with careful planning) dumping debt and taking the consequences. It surprises me that this is not often talked of, since, I agree, it will end up being the most usual recourse. It seems tragic for hard-working people to give priority to the “tapeworm cartel” hoping for benefits from the faltering system, while neglecting their own needs to prepare along with their neighbors. Financing young people (or anyone) into peak-suitable local businesses is very wise advice. The most likely source of income in coming times will be in the informal economy. Perhaps already is for many. Such businesses, or individuals, could specialize in survival-friendly things, such as rainwater harvesting off rooftops and roadways, edible landscaping, local (non-chemical) fertility-building with composting and agrichar-making, community-based seed-banks/plant nurseries, construction with local materials, natural wastewater treatment, or small, local alternative energy solutions all the way from little, easy-to-make solar ovens to wood gasification (a resurgent technology) to small-farm-scale ethanol distillation (a venerable old technology) using inputs from wastes or marginal land. My take is that government and most of the system will soon be quite bankrupt and chaotic.

  20. Ani says:

    Good points I think.
    In terms of college, I really do agree that if one decides to go to college that spending time at a community college is a great idea. I have taught at both community and private colleges and can vouch for the fact that the course content and standards were equal at a vastly lower cost at the community college. I would second the motion that not having a degree can hinder job prospects in the current economy,unless of course one is looking for work in fields where one is not needed. But it does seem that getting one as cheaply as possible is the best solution.

    I myself am currently very frustrated as I tried to get some grant funding to take some courses to assist me in starting a new career; although my income is very low and I should qualify, as I own a home(farm) and have no mortgage on it (it’s an owner/friends built home, still incomplete), I’m considered to have assets to borrow against. Thus the state education funding folks think I should borrow money against my paid off home, using it as an ATM machine basically; and if I couldn’t pay it back, would lose my home. Insane………. I know- I’m lucky to not have a mortage, but not everyone is willing to start out with an outhouse and no running water, etc and take it from there….. Of course if I had used my home to fund trips to Europe and cars and clothes and dinners out, I’d be in deep debt, have no or minimal equity in my home and they’d happily send me the money to take the classes….. doesn’t seem right to me…..

  21. I have been struggling with the idea of spending money on the house, getting a new metal roof and rain water catchment system and some more new windows and doors OR selling the house and moving up north near my friends and buying land with a house. I go back and forth between staying with what I know and thinking it will be better somewhere else.

    Will you be teaching the AIP class again? I think I will take it if you do.

    Cindy in FL

  22. Cindy Mathieu says:

    Sharon,

    I admire the breadth of your knowledge on many subjects and the productivity of your life.

    However, I must disagree with you on the current dollar price of gold.

    Gold is money. Aristotle concluded that gold is the perfect money in the 5th century for 5 reasons which are still true: Durability, Convenience/Portability, Divisibility, Demand, Consistency.

    The US dollar is a fiat currency. Inflation is not actually rising wages and prices. Rising prices and wages are symptoms of too much currency (or credit, in our present case) in circulation. Inflation began in earnest when Nixon took the US off the gold standard in August of 1973.

    So, when the government is planning to create so many more dollars in order to cover its obligations (Social security, national health care, more guns, etc.), you can count on inflation to continue and intensify.

    What is the typical hedge against inflation?…gold.

    Instead of gold being overvalued in terms of dollars, its price is actually being suppressed by the “8 or less” traders on the COMEX. These traders (bullion banks) suppress the price by shorting the precious metals and never having to cover their shorts. Ordinary people would not be able to do this, legally, but these entities are allowed to do it. There is an organization called GATA which has mounted some legal action to stop this, but the courts grind slowly in these cases.

    Physical silver is actually in short supply because its price is being suppressed so badly.

    Cindy in Spring, Texas

  23. Anonymous says:

    My situation is a little bit different than the others who have posted so far. I’m 25, just finished graduate school about a year ago, and am married with no kids. My husband and I have seen our income go up since I graduated, and have been saving a good portion of that extra income in the past few months — though with little direction. We both have student loan debt, having taken the loans out with the belief that we would have many years of the business-as-usual economy to pay them back. Of course, I came to the conclusion earlier this year that this was unlikely to be the case. After moving through some anxiety and anger, I’ve been trying to sort through the best course of action for the money we have saved up so far (which, at about $20,000, is far from a huge sum; I knowingly signed up for a rather low paying field and we paid for part of our wedding last year, though it was modest).

    Although I know what I would do financially if I expected forty more years of the same for the economy, it is of course much more difficult to sort through planning financially with so many uncertainties. At my age, the things I think I should be doing with extra money assuming business-as-usual seem too risky to me (putting money into a Roth IRA, for example). As far as getting out of debt, the extra savings we have so far would cover less than half of our combined student loan debt. We also have a car loan, but no credit card debt. Our small savings are obviously not enough to buy a house outright (we rent currently), though it would be enough for a down payment on a house in our area. However, my husband and I have no interest in more debt, and we live in an urban area that we plan to leave within the next year or two (and would certainly leave in a heartbeat were things to get really bad sooner). So I cannot really implement major household preparedness changes or strategies, beyond minor, short-term efficiencies for our apartment. I also feel as if I live in a twilight zone of sorts, torn between the prevailing world view, with all of its associated common ‘wisdom,’ and making hard decisions based on peak oil, which has so many uncertainties. For now I figure that having money in the bank at least gives us some options. And we plan to at least pay extra every month on student loans and our car loan, though it would still take us years and years, assuming we are able to maintain the payments…

    I am thankful for your post on this topic, Sharon.

    - Jenn in Ohio

  24. Proper thanks are due for this awesome article. I’ve read id for a couple months now and they’re always very informative. Thanks!

  25. Only another half the post is showing, strange, is this my on-line browser or the internet site?

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