Category: General

How Big is Your Emergency Fund?

Early Retirement Now had a post out about the continued uselessness of an emergency fund. He discussed how they kept all their funds in an equity index fund portfolio, with only $1K – $2K in a checking account. They assumed they’d use credit cards and/or Home Equity Line of Credit (HELOC) “if any larger expenses came up that exceeded my monthly cash flow, e.g., car and home repairs, medical bills, etc.”

The general comment back in 2016 was “my point here, I most definitely advocate stashing a large pile of money. I simply advocate for moving all that money into an investment with high expected returns, ideally equities, instead of letting the money languish in a money market account at 0.03% interest.”

The plan, if something went wrong, is:

  • Use credit cards, with a long “float” of interest free loan
  • Use the HELOC to pay for the credit card if the issue continues for longer
  • Only sell investments if they have to – but they’ll have had years of  positive growth to offset selling at a loss

I think this argument falls into the “sleep at night” problem. The issue here is there are so many people now investing and in the FIRE movement that weren’t very aware during the 2000 and 2008 recessions, or remember the 1970 “stagflation” period (where the market went nowhere for 10+ years).

Let’s look at some holes in the plan.

  1. Assumption that credit extended will continue to be extended: Just because you have credit cards now, doesn’t mean they will issue you new ones, or not close down your existing ones (or at least reduce what you can borrow). A HELOC can be pulled back as well. Suddenly, you’ve got no credit – and you’ve got to sell investments
  2. For this sort of credit crunch, think the 2008 recession. How was the market doing at this time? 50% drop in value, erasing everything gained back to 2000, and even before that. In 1968-1970 the market dropped 35.9%, and never regained its numbers till 1982.

I also think the creation of an emergency fund is the first step in working towards FI. It could be $500 or $1000 (the number in ERN’s checking) but by building on that, you reach the point where you can shrug off medium level issues.

In ERNs defense, he does end his article stating that folks should not leave their emergency fund in the market if they are retired, or within 2-5 years of retirement.

Earlier in the year, I pulled money out of bonds and put it in the dividend stocks – only to turn around within 30 days because I just couldn’t sleep at night. It’s a personal choice, and you need to do what makes sense for you.

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Mr. 39 Months

Should you plan for inflation in 2021?

There have been talks for the last several years about the potential for inflation, and the effects it would have on individuals spending, investments and lifestyle. The inflation rate has jumped around significantly throughout the 20th century, and it wasn’t until Reagan and Volker (in the 1980s) took the steps to “slay the inflation dragon” and get it to a more controlled level, without the wild swings in the past (it went from 4.7% in 1976 to 13.3% in 1979!).

Since the 1991, the inflation rate has stayed under 4% every year, and average around 2% for the last two decades. Whole generations have grown up without the threat of watching their purchasing power melt away over a short period of time. Some argue that the CPI (Consumer Price Index) is not measuring accurately, and that the key items for living (shelter, food, transportation, etc.) have been going up at a much higher rate than the CPI index shows. This is similar to the Monevator’s article on personal inflation rate I noted earlier in the year.

Now with the huge amount of government spending over the last year (added to the large amount of government spending since the 2008-2009 crash) has led to renewed articles on the potential for inflation in 2021 and its effects. Stocks continue to rise well above all levels of base P/E ratios, and more people are talking about a bubbles. So what can you do?

I’ve written before about having a SHTF plan and what you can do to prepare. The key is to look at the items that will increase in value, and do things to ward off the effects of rising prices.

  • Invest in stocks vs. Bonds. Bond rates typically don’t keep up with inflation rates, so you can lose buying power, while the stock price of companies tend to go up at a better rate
  • Invest in hard assets to hedge (gold, oil, etc.). As the purchasing power of a dollar goes down, these items will increase in value.
  • Real Estate: Inflation typically makes real estate values shoot up (see house prices in the 70s). They’re already on the rise now – which lends to the belief that we are already experiencing inflation

The last bit of advice I have in regards to this is the opposite of what you typically should do in times of high inflation. The base suggestion would be to take out loans (especially low interest loans) with today’s dollars, and then when the dollar inflates, you can pay the debt off with lower value dollars. My suggestion in times of high inflation is to pay off your debt – not take on more. High inflation times are uncertain times, and job losses and economic disruptions happen. Having little or no debt will help you to weather through these tough times.

My hope is that we don’t see anything major happen in the next decade or so. However, I am very concerned at the out of control spending at the federal level. It just isn’t sustainable.

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Mr. 39 Months

Stay Prepared for the Months Ahead

I’ve spoken before about the need to prepare for emergencies, and with the advent of Hurricane Season (Sep/Oct), The wildfires in the West, and the coming winter, I thought it would be good to revisit. As the Boy Scouts say “Be Prepared.” I was reading an author with some good ideas (I won’t link, because some folks might not like his politics).

Here are the “must have” items that you will need:

  • A two-month supply of your prescription medications and your over-the counter medications.
  • 20 AA and 20 AAA batteries.
  • Two good flashlights per person plus extra batteries
  • 20 Bic lighters.
  • 25 candles. 
  • Two portable radios plus extra batteries
  • 3 rolls of Duck Tape
  • 2 extra tarps.
  • 200 feet of 550 lb. paracord.
  • An everyday carry knife for each person
  • A professional bleed/trauma first aid kit
  • 2–3 bottles unscented household bleach

For this food section, the author attempted to generally balance the total calories — 50% carbs, 30% protein, and 20% fats.  Buy items that you like to eat already; avoid items that you have never tried.

  • Rice: 25 pounds total            
  • Dried Black Beans: 1- 4- or 5-pound bag
  • Dried Pinto Beans: 1- 4- or 5-pound bag
  • Dried Garbanzo Beans: 1- 4- or 5-pound bag
  • Dried Kidney Beans: 1- 4- or 5-pound bag
  • Dried Lentils: 1- 4- or 5-pound bag
  • All Purpose Flour (unbleached): 1- 10-pound bag per person
  • Yeast: 2 ounces per person
  • Rolled Oats: 10 pounds
  • Corn Bread Mix: 4 packages
  • Muffin Mix: 4 packages
  • Canned Tuna: 60 oz. total
  • Canned Pink Salmon: 36 oz. total
  • Spam or Beef Stew: 12 cans
  • Chili and Beans: 12 cans
  • Powdered Milk: 4 cups reconstituted per day per person
  • Powdered Hot Cocoa Mix: 2 cups reconstituted per day per person
  • Olive Oil: 1- 51 oz. bottle
  • Canola Oil: 1- 48 oz. bottle
  • Mayonnaise: 2- 20 oz. jars
  • Peanut Butter: 2- 48 oz. jars
  • Jam/Jelly/Honey: 3–4 large jars
  • Salt: 1- 26 oz. Morton Salt
  • Brown Sugar: 1- 32 oz. envelope
  • White Sugar: 1- 4- or 5-pound bag
  • Assorted Nuts: 1- 2.5 pound jar

Overall a good list of items. Some other points to consider:

  1. Keep your cars fueled up to at least ¾ of a tank (folks in NJ during Hurricane Sandy found that a large percentage of gas stations had no power – so no gas)
  2. Check car status (spare tire) and buy a couple of quarts of oil
  3. Fill propane tanks (can use grill to cook if needed)
  4. Check your cell phones OS and apps are updated
  5. Make sure your important papers are available and able to be moved. Maybe make a copy and send to someone you know

Stay healthy and be ready.

Mr, 39 Months

Sometimes I hate to be right…

Well, Wednesday starts after several days of the tech stocks being hammered, resulting in the S&P 500 dropping about 7% over the last three sessions. This morning Amazon, Facebook and Apple each rose about 1%, but analysts still believe that, since their way above their valuations a year ago. Amazon is up 70%, Apple 54%, and Facebook 32% vs. an overall 3% gain for the S&P over that time.

Mike Wilson of Morgan Stanley stated “We think there is more downside over the next month but eventually leads to further broadening out of the bull market.” In laymen’s terms, they think the Tech stocks may drop somewhat, while other stocks in the S&P make gains commensurate with the improving economy. We can all hope that this market rally “broadens” as opposed to being concentrated too much in Tech Stocks. Again, I remember 2000 and the dot.com bust.

For most of us, this means “steady as she goes” in our investments. Continuing to put money away, dollar cost averaging, and watching our spending for the year. Hopefully your income hasn’t been too negatively impacted by Covid-19 shutdowns. If you can do that, you can weather most any storm.

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Mr. 39 Months

Back to Square One

Well, the S&P 500, the benchmark that so many folks use to determine how well the stock market is doing, has gotten back to “even” for the year. Its taken five long months to dig out of the Mar 16th hole of $2,304.92 (a 32% drop from its Feb 10th high). If things continue along these lines, we could expect a 4% – 5% return for the year. So everyone is OK, right?

Actually, the situation is not so rosy. Yes the S&P is back, but in listening to Ric Edelman the other day, he noted that the five big tech stocks (Facebook, Apple, Amazon, Netflix, Google) were up 30% – 35%, but the other 495 stocks of the S&P were still down an average of -5%! So the market rally isn’t broad based, its concentrated in the tech stocks – and those of us around in 2000 – 2002 remember how quickly that can evaporate.

For us, we are still down a little for the year (-0.8%) primarily due t the fact that we are invested in International, Small-Cap and REITS (REITs are getting hammered with the Chinese Covid virus). Still, by diversifying, I think our recovery is a little more broad than just the folks that are in the S&P 500.

It will be an interesting time for the remainder of the year. We are starting to creep out from the lockdowns, but a significant amount of economic damage has been done, especially to small businesses, the restaurant industry, and the commercial real estate industry. I believe we’ll see  a waive of bankruptcies for the next 5 years as all of this is cleared out, and the economy won’t really start humming until these are cleared away.

Of course politics will also have a effect over the next 4 years. Going to be interesting….

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Mr. 39 Months

Family Trip

They live in the northern part of Vermont, roughly 10 miles from the US/Canada border, in a small town called Montgomery Center. Really a nice town in the shadow of Jay Peak – a big skiing site in the Eastern US. Its also about 1 hour from Stowe (another big skiing site where the Von Trapp family from Sound of Music settled).

There wasn’t much open in the area (some shops) which you had to wear masks into. Mrs. 39 Months wanted to visit the Ben & Jerry’s Ice Cream plant & take the tour, but they weren’t having them – we had to settle for ice cream.

So we ended up spending a lot of time with my brother and his wife – which is really why we went up there. Took the opportunity to sleep in and relax and just enjoy the company. It was just – nice.

The Covid has affected a lot of people and their plans, but never forget that family always comes first, and sometimes its good to be reminded of that.

Stay healthy!

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Mr. 39 Months

US Independence Day!

I’ve always loved this holiday. As a patriotic American and a former US Army Soldier, I feel a rush of pride on this day, as the US “laid down a marker” on the kind of society they wanted to have. There was a long war to fight, and then hundreds of years of trial and error as we attempt to move to that kind of society – to live up to the promise of the Declaration. While we still have a long way to go, we have come a long way, and as a society we can be proud of what we and our forefathers have created.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed…

Such a radical concept at the time, the idea that governments derive their power from the people, not from a ruler, a divinity, or some small minority. We the people are the ones that get to decide our own fates. It is very much in line with the concepts of FIRE that we have control of our own lives and of our government.

Today, we celebrate it with barbeques, parades, and fireworks. We will have a few friends over on our back porch for BBQ, good discussions and good times. We may go out and purchase a few fireworks (small, safe ones like sparklers) to celebrate our good fortune. Go out and enjoy your freedom!

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Mr. 39 Months

What to do for the potential of hyper-inflation in the US?

For some folks in the US (including myself) there is a major concern with the size and scope of the US deficit (now over $20T and approaching 100% of GDP). The latest round of “stimulus” put us another $2Trillion in debt, further pushing the day of reckoning up. At some point, the US is going to find that it can’t get people to buy their debt. When that happens – look out!

Wheelbarrow of marks to buy bread

A lot of folks are not that worried, because the cost of borrowing for the US is incredibly low In one of their recent podcasts, Stacking Benjamins talked about how the cost of borrowing for the US government is incredibly low (0.68% for the latest round of bonds recently) – so why not borrow at this incredible rate? The concern I have is that, no matter what the rate is, we are still borrowing a crapload of money, and that will need to be paid! It may be 10 years, 20 years, 30 years from now, but we are going to have to pay it off – or put out new bonds. What happens when the rate on those bonds is 4%? 6%? 8%? Each of those rates have been paid at some point by the US government.

The FIRE community is all about generating cash flow and using debt strategically. This isn’t strategic. So what is a person to do when their government is addicted to debt, and you can see the train wreck coming? Over the next several weeks, I’m going to go through some periods of history where countries had this happen, and what were the areas where someone could have at least done some items in advance to mitigate it. Maybe we can do some of these now to prepare.

The issues with Germany’s 1923 financial collapse starts at the beginning of World War I. While Britain had large financial resources, and France imposed their first income tax to pay for the war, Germany “decided to fund the war entirely by borrowing.” The idea was to pay for the war from the spoils of war, gained from France, Russia, etc. At the start of the war, the mark (German currency) was valued at 4.2 marks to the dollar, but as the war progressed without success, it dropped down to 7.9 marks per dollar.

As we all know, German eventually lost the war, with one of the reasons being the economic collapse of the country. By 1919, the mark was valued at around 48 to the dollar. For the next several years, the mark slowly drifted down, as Germany tried to come out of the war, eventually landing around 90 marks to the dollar by 1921. Germany’s industry hadn’t been damaged during the war (unlike France) but the reparations decision in 1921 ordered Germany to pay their reparations in gold or foreign currency (not cheaper marks). While there were arguments about this, eventually Germany had to comply, which led to more and more devaluations of the German mark. By 1922, the mark was valued at 320 to the dollar.

Germany tried to work out a better reparations method (including working with J.P. Morgan Jr) but it failed, and hyper-inflation was kicked off, with the mark falling to 7,400 to the dollar by the end of 1922. When Germany couldn’t pay reparations, Belgium and France occupied the Ruhr Valley industrial area. In trying to work this out, Germany printed more and more notes, further devaluing the currency. “A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923. By November 1923, the US dollar was worth 4,210,500,000,000 German marks.”

In late 1923, Germany issued a new currency, backed by bonds indexed to the market price of gold – based on the same price of marks-to-gold as it was pre-war. The central bank was no longer allowed to discount government treasury bills. The new marks were allowed to be exchanged with the old marks (at a rate of 1-trillion paper marks to one new Reichmark). By 1924, one dollar was the equivalent of 4.2 of the new marks (i.e. back to pre-war levels)

So what were the lessons we can learn from this experience?
• The link to a real asset, gold, was broken at the beginning of the war, unleashing inflation. Since the US got off the gold standard, inflation has eaten up 80% of its buying power, as of 1971. There are numerous tradeoffs that the gold standard has created, so that is a topic for another time
• When you lose a war, the victors can be very punitive (see Versailles 1919).
• Political Fragility and infighting can prevent a positive solution to the problem (anyone see that as an issue in the US today?)
• Hyperinflation destroys savings and fixed return assets (bonds). Since a large number of people save this way, hyperinflation can lead to riots and societal collapse
• All these issues can easily lead to the creation of a dictatorship or rule-by-decree. People will do anything to lessen the pain
• The items that maintained (somewhat) their value were good quality company stocks and real assets (gold, real estate, etc.) For those concerned about hyperinflation, invest wisely, start growing some of your own food, and be prepared for society to go through some rough spots.

My plan is to look at other historical issues in the past to get some guidance for long-term planning in the US

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Mr. 39 Months

Watching Your Weight While on Lock Down

Like many folks in the world, we have been on lock-down/self-quarantine here at Casa 39Months for the last month or more. Both of us are lucky (unlucky?) enough to be able to do our work from home, so we have been busy for 8+ hours a day just getting our normal work done. We are also lucky enough to have the room in our house for each of us to have a “home workstation” setup without having to take over the kitchen table.

That said, one of the concerns I have had (and many people I have talked to) is getting a good diet while working from home. Most folks can go to work and only eat during lunch or breaks, but when you are at home, you can just get up, walk to the fridge or shelves, and grab something. In times of stress, folks also have a tendency to eat snacks & fatty foods to help deal with it (survival response from 100,000 years ago?). So how do you deal with this issue?

As a numbers geek, I chose to approach it by doing some tracking and charting! Taking a page from various low-carb/keto plans, I started March 1st, tracking the carbs I have been eating on a daily basis and tracking my performance. Just like with the finances, this helps me judge my performance and motivates me to keep the carbs low.

For many of the books I read, if you get your daily carbs in the 100-150 range, you can slowly lower your weight, while under 100 can cause dramatic weight gain (though you should only do this for a short span of time). It is also different for each sex (women need more carbs, apparently). How have I done?

  • March average: 143
  • April average (to date): 156
  • Weight loss/gain to date: Loss of 1 lbs.

As for exercise, the self-quarantine has put a damper on my workouts/lifting, but I do get out daily for long-walks, and I stretch every morning. I think some of the weight loss/lack of weight gain is muscle atrophy. Since muscle is heavier than fat, I am concerned that I am losing muscle tone and not the fat. We will have to see once I get back to the gym.

Therefore, I am doing my best to keep the “Quarantine 15” off. How are you doing?

Mr. 39 Months