I loved the sense of twisted reality provided by image-distorting mirrors and the wacky side-rooms where water appeared to flow uphill and it was nearly impossible to stand straight.
Today, thanks to an extended period of near-zero interest rates, years of massive government deficits, and central bank “money printing,” we’re all stuck in a different kind of fun house now: an economic one that has turned some previously-sacrosanct canons of personal finance on their head.
At least as far as I’m concerned.
As a result, when it comes to managing my personal finances, I now find myself doing things I would have never considered a decade ago.
Keep in mind that the new paradigms I’m espousing here aren’t for everyone. In some cases, the old practices still have their benefits — however, they’re no longer the slam dunks they used to be. With that in mind, here are the biggest examples:
1. The mortgage
Old reality-based tenet: Pay off your mortgage as soon as possible; the shorter the mortgage the better.
New fun house tenet: Hold on to your mortgage for the full term; the longer the mortgage the better.
Why I changed my mind: I made close to $80,000 in extra mortgage payments between 1997 and 2009. Then I stopped — and for good reason. Remember, the US dollar has lost more than 97% of its value since 1913; and for most of that time, the Fed at least feigned an interest in maintaining the dollar’s purchasing power. However, since 2008, they’ve clearly lost their way. As such, I expect the dollar’s purchasing power to depreciate at a much faster rate. So, from a purely financial perspective, it only makes sense to pay off my mortgage as slowly as possible, using dollars that will be worth significantly less in the future.
2. Debt and savings
Old reality-based tenet: Savers are rewarded; irresponsible debtors are punished.
New fun house tenet: Responsible debtors are rewarded; savers are punished.
Why I changed my mind: Artificially low interest rates act as a stealth tax on thrifty folks and other financially responsible people. As a result, savers today are, sadly, “rewarded” with real interest rates that are actually negative. Today, for people with steady jobs, zero- and other low-interest rate loans have greatly lessened the risk of taking on bad debt. Considering that my emergency and rainy day savings accounts are fully funded, I’m willing to do this more than ever now — as long as I have additional savings on hand to pay off these loans in full should the need arise.
3. My retirement nest egg allocations
Old reality-based tenet: An age-appropriate mix of stocks, bonds and cash is enough to adequately protect your nest egg.
New fun house tenet: A diversified mix of stocks, bonds and cash is insufficient to adequately protect your nest egg — you need physical gold and silver too.
Why I changed my mind: Until a few years ago, I thought economic collapse was inconceivable. Today, I’m absolutely certain that a “hard reset” is inevitable. Our current debt-based monetary system is completely unsustainable; since 2008, the Fed has hastened the process by backing itself into a corner from which there is now no escape. No, I can’t say for certain when this will happen — but I do know that the dollar’s inevitable fall will wipe out most middle-class nest eggs. So, in order to hedge against such a scenario, I now supplement my retirement savings with physical gold and silver.
4. My 401k plan contributions
Old reality-based tenet: If possible, take advantage of the pre-tax paycheck deduction by making the maximum 401k contribution.
New fun house tenet: Deduct only enough money from your paycheck to take advantage of your employer’s 401k match.
Why I changed my mind: For years, I used to have the maximum pre-tax contribution deducted from my paycheck. Not anymore. If I contribute at all, it’s only enough to qualify for the full company match because my 401k offers no precious metal investment options as a hedge against economic collapse.
5. Bank and credit union deposit accounts
Old reality-based tenet: Parking up to $250,000 in your bank accounts is perfectly safe because the money is insured.
New fun house tenet: Parking even modest amounts of cash in your bank accounts should be done at your own risk.
Why I changed my mind: I used to think my savings were safe because the Federal Deposit Insurance Corporation (FDIC) says they insure deposits up to $250,000. After all, the FDIC has a $25 billion insurance fund. Then I found out that the value of all insured deposits sitting in US banks and credit unions currently total more than $9 trillion. Yep, that’s trillion — with a “t.” Welcome to the fun house.
Photo Credit: avrene