This post is not just about buying a boat: it’s about buying any major items that you don’t really need such as a larger house, a vacation cottage or condo, an airplane, a fancier automobile, a motorcycle, or whatever.

Everyone makes mistakes. It’s almost always easier and less expensive to learn from the mistakes of others than from your own. So congratulations for reading material like this! It may help you the next time you are buying a boat or something similar.

There’s a right way and a wrong way of buying a boat.

The right way has three steps: decide what you are trying to accomplish, research your potential purchase, and pay for it properly.

Thanks to the internet as well as traditional publications such as Consumer Reports and the Yellow Pages, it’s much, much easier to do the research than it used to be. So the second step should not be a problem.

Sometimes, people are not clear about what they are trying to accomplish. They sometimes fail to think through a major purchase. The first step can be a problem.

My suspicion, though, is that the step that causes the most trouble is the third. Still, let’s consider them in turn.

I.  As Aristotle pointed out two and a half millennia ago, it’s impossible to make a rational decision without first deciding what you are trying to accomplish.

You might be interested in buying a boat because you want to go fishing or water-skiing or sailing or speeding on the ocean blue or just cruising slowly around a small inland lake.

Many people try to use one boat for many tasks. They may try to use a fishing boat also for water-skiing or a pontoon boat for fishing.

What is your primary purpose for buying a boat? Do you also want it to serve any secondary purposes? One boat can’t do everything.

What else will you need? For example, when you are buying a boat will you also need an outboard engine, life preservers, or a trailer?

Can you get them in a package deal without compromising exactly what you want? Where will you store you boat?

I happened to do step one correctly. Unless you count a canoe as a boat, I waited until I was middle-aged to purchase a boat. By then, I knew exactly what I wanted: I wanted a small boat for camping and fishing in Canada. I purchased a 14’ boat and matching trailer that has served me perfectly for many years.

Initially, I purchased an 8 hp Honda outboard for it, but experience taught me that that was too small an engine. I soon traded it in on a 9.9 Honda outboard and it, too, has served me well for many years. That boat, trailer, and outboard are exactly suited to my needs. Furthermore, when it’s empty of all my camping gear, and there’s just me and perhaps one other person in it, people have often remarked how amazingly fast it is on the water!

II. Obviously, I didn’t do as well with step two because I initially purchased an engine that was too small. However, as I recall (and it was decades ago), I’m not sure that, at that time, I could have afforded the larger engine anyway.

(Incidentally, even though the boat could handle it, in my case an even larger engine would not be appropriate. Many inland northern lakes do not permit boats with over 10 hp engines, which is probably why there is a 9.9 hp engine manufactured. Since I sometimes go on those lakes, my engine is the perfect size for my purposes.)

Don’t forget subjective as well as objective research. For example, suppose you are buying an exercise machine such as a treadmill or an elliptical machine and discover the top-rated kind. It would nevertheless be a gamble to purchase it without trying it. In other words, it may be the top-rated kind for most people but not for you.

III. The real reason I wrote this post is to try to prevent people who are buying a boat or other luxury item from wasting money by not paying for it properly.

If you win the lottery and have always wanted a boat, just go ahead and buy one you like.

(Actually, that’s similar to what happened to me. When my aunt died, she left her sister, my mother, a $10,000 life insurance policy. My mother gave each of her 5 children $2000. I used my money to buy my first boat, trailer, and outboard engine. I named my boat after my aunt. I didn’t want just to use the money to pay bills; I wanted something that, year after year, would remind me of my aunt and mother, which is what I have. So, for me, buying a boat resulted in a memorial as well as a boat.)

People waste enormous amounts of money buying boats, planes, luxury cars, huge houses, and so on. It’s possible to buy exactly the same items but to do it properly.

However, to do that, you must let go of the desire for immediate gratification. When it comes to money, it’s important to think long term.

Let’s suppose that you are interested in buying a boat because you don’t have one, you’ve wanted one for many years, and you have $20,000 to spend buying one.

Simple question:  Should you spend that money to buy a boat?

Simple answer:  No!

Instead, buy a long term investment and let that investment pay for the boat.

For example, put that $20,000 down on a small apartment house. Using good management techniques, improve the cash flow of that apartment building. Then, either wait until you have set aside enough money from that cash flow to purchase the boat or finance the boat using that monthly cash flow. Either way, you’ll wind up with both a boat and an investment property that keeps generating income!

Unfortunately, even when they hear this, many people just don’t get it. Apparently, they are overwhelmed by their desire for immediate gratification. They must have the boat or larger house or plane or whatever now!

Imagine going through life like that. Imagine being a slave to desires. What a terrible, foolish, and unnecessary way to live!

If you are that out of control, even good financial advice won’t do you any good.

However, if you are willing to take charge of your desires instead of letting them run your life, then you can begin to put your money into investments that will, if you do it well, buy you all the luxury goods you could ever want.

As always, if you know someone who might benefit from this, please pass it along.

Related posts: There’s Nothing to Gain and Joy.

Additional resources: Robert T. Kiyosaki with Sharon L. Lechter, Rich Dad Poor Dad and The Cashflow Quadrant.

Differentiation may be your key to becoming more successful.

Ours is an era of global competition. Success in doing what you do means outperforming your competition and, sometimes, that competition is global.

My father used to say, “There’s always room at the top.”

Even if you enter an extremely competitive field, you can be successful if you are excellent.

Being excellent, though, is insufficient.

Potential clients, patients, or customers need to think that your excellence is your differentiation from your competition.

You should understand that they are insecure. People buy what they think they should have to minimize the risk of losing money, the risk that the product or service won’t work, the risk that it is too dangerous, the risk that their friends won’t like it, and the risk that they’ll feel guilty or irresponsible if they buy it.

In other words, not knowing what they want, consumers follow the herd.

This is why heritage and social proof are excellent sources of differentiation.

Especially if you are unable to use heritage or longevity, focus on providing one benefit. Have one marketing message. The idea is to become the “go to” expert, the best provider for one excellence. Do it well and you’ll be putting social proof on your side. Do it long enough and you’ll be able to use heritage, too.

If, instead, you focus on marketing variations, you will only confuse the marketplace.

Similarly, forget about trying to change minds. Once the marketplace makes up its mind about your product or service, that’s it.

What excellence do you now have that separates you from your competition? If you don’t have one, what excellence could you soon have that would serve as differentiation?

Once you identify it, let the marketplace know about it. If you understand how to use the media to publicize it, you don’t even have to pay to advertise it.

Here are a couple of examples.

I have a niece who is about to graduate from medical school. She’s specializing in anesthesiology. If I were in her position when she’s all finished with her schooling, I’d wonder about my source of differentiation from all the other well-trained anesthesiologists out there.

I’d focus on improving the experience of patients. What could I do to help them relax before surgery? What could I do to help them prepare without fear for the operating and recovery rooms? What could I do to help them heal faster afterwards?

I’d become an expert at hypnosis. It’s effective, interesting, fun, and easy to learn.

That would instantly serve as differentiation from all the other anesthesiologists who only use chemical anesthesia. All kinds of scientific papers have been published arguing that hypnosis in addition to ordinary anesthesia is superior to ordinary anesthesia alone. It not only improves the psychological experiences of patients, but it reduces costs by enhancing recovery.

Why not become known as the anesthesiologist who really cares? My expertise in hypnosis would separate me from most anesthesiologists who haven’t bothered to learn it.

(Actually, this is such an obvious suggestion that even medical schools get it. Since 1958 the American Medical Association has accepted that hypnosis is an adjunct to standard medical care and recommends that it be taught in medical schools. The result is that many medical students are briefly exposed to it, but it is still far from being maximally utilized.)

Another example is that of a struggling landlord. If you are a landlord whose vacancy rate is too high, why not specialize? Equip your apartments appropriately and seek to serve, say, only those who are hearing-impaired or only cat lovers.

The key to providing really effective social proof is that your claim must withstand scrutiny.

If you are not an excellent hypnotist as well as an anesthesiologist, don’t claim to be. If your apartments are not more functional for those who are blind or who must use wheelchairs, don’t claim that they are.

With a little self-examination, you should soon be able to find some feature of your product or service that separates you from your competition. If you look at that feature with the eyes of your clients, you’ll have a benefit to promote in the marketplace that will serve as a source of differentiation between you and your competitors.

Without such differentiation, don’t be surprised if you struggle or, even, fail.

So do what it takes to become excellent in some way or other and tell your story in the marketplace.

As always, if you know someone who might benefit from reading this, please pass it along.

Additional Resources: Robert Cialdini, Influence; Jack Trout and Steve Rivkin, Differentiate or Die; Roberta Temes, Ph.D., The Complete Idiot’s Guide to Hypnosis and Medical Hypnosis. Paul Hartunian’s course on using publicity is excellent.

DEDICATION: I dedicate this post to Victoria. Way to go! Your grandfather would be beaming with pride.

Will there soon be an economic collapse?  If so, what’s the best way to prepare for it?

Nobody knows the answer to either question.

My prediction? The recession that we’ve been in since 2007 is still with us and is a sign of lasting economic change. Before 2015 there will be a currency collapse, and the stock markets will drop by at least one-half (and more likely two-thirds). That will herald a worldwide depression followed by hyperinflation.

What are the odds that that prediction will prove accurate? It’s impossible to tell.

I hope that I’m wrong! However, this isn’t a time for wishful thinking.

Eventually, even if the world’s current economic and political systems take a serious hit and are transformed, there will be stabilization. The question here concerns to best way for individual Americans to get from here to there. While hoping for the best, why not be prepared?

Either there will be a major economic collapse or there won’t be. If there will be, then it will either come sooner or later. So let’s look at these three alternatives and what may prove to be the best way to deal with them.

First, there won’t be a major economic collapse.

Unfortunately, this is the least likely of the three outcomes. Despite current signs to the contrary, what could prevent an economic collapse?

The only realistic possibility that it won’t occur would be a major but unforeseen technological breakthrough.

Current indicators are so dire that this would actually require multiple technological breakthroughs simultaneously. For example, if a nonpolluting, virtually inexhaustible, and inexpensive new source of energy came on line quickly in conjunction with a major breakthrough in nanotechnology, that would be a game changer.

Second, there will soon be a major economic collapse.

In addition to various hot wars around the world, currency warfare and cyber warfare are already being waged. Political turmoil in the middle east or bad decisions involving Iran, Pakistan, or North Korea could easily upset the fragile global economic system in the next three years.

Historically, collapses have been much more frequent than major technological breakthroughs.

There is growing dissatisfaction, too, with the dollar standard. No fiat currency has ever stood the test of time, and time seems to be running out on the dollar.

Every thinking person understands that the world is awash in debt. Furthermore, since current economies depend upon growth and there simply isn’t enough growth, countries are already trying to steal growth from other countries, which is sufficient to explain why there is already currency and cyber warfare.

There’s no easy way out. For example, if a country under attack responds by cheapening its currency, that just creates more inflation and economic dislocation.

Third, there will be a major economic collapse in five or ten years. (It’s early 2012 now.)

Despite relentlessly increasing pressure from such looming catastrophes as global warming; the depletion of nonrenewable supplies of oil, natural gas, and water from ancient underground reservoirs; and still increasing human population growth, many people have a vested interest in maintaining the status quo for as long as possible and preventing an economic collapse.

Political leaders may be able to stave off economic collapse for another decade. Doing so might well make it worse than it would otherwise have been, but it would postpone the shock and suffering for a few years yet.

So, take your pick.

What’s the best way to prepare?

I don’t know.

If asked, my general answer would be: “Do your best to serve others today.” That’s based on the fact that the best way to prepare for tomorrow is to live well today. The best kind of life is a life of selfless service (giving, loving). If you agree, focus on helping others help themselves (as I’m doing with this blog).

This is not a new idea. At least since the time of the ancient Chinese Daoists, some philosophers have been saying this. I happen to agree with them.

The best way to do that is to show (not tell) others how to live well. That’s usually much more effective than preaching or teaching. (So living happily in solitude as a hermit is, pace Aristotle, not necessarily an undesirable kind of life.)

Long term financial well-being requires prudential behavior, which comes from realistic thinking. So ask yourself: “What is the best way for me to prepare for each of the three scenarios?”

First, eliminate liabilities and acquire assets. [See some of the posts whose links are provided below as well as Kiyosaki's books.]

Second, take advantage of the bull market in gold and silver.

It’s been rising for a decade and it’s still rising. Since commodity bubbles typically rise for much longer than that, even getting in today could make a big difference in just two or three years.

The idea is not to hoard gold and silver. The idea is to buy them, wait until the bubble gets near its top, sell them, and use the proceeds to invest in undervalued assets.

Remember: assets put money into your pocket. They are things like apartment buildings and profitable businesses.

All investments like precious metals, real estate, commodities (other than precious metals), stocks, bonds, and so on rise and fall. They fluctuate. They experience waves or cycles.

To have wealth transferred to you, buy low and sell high.

So, if you buy now, when the prices of gold and silver are still relatively low, and sell later, when their prices are much higher, you will increase your wealth. Then use that wealth to buy other investments are undervalued.

Third, same plan as for the second scenario: take advantage of the bull market in gold and silver.

In fact, that plan will work even better assuming that that market keeps rising for another five or ten years.

In any event, stay nimble. Economies are too important to governments to remain unregulated. Free markets are, and always have been, a myth.

For example, right now the federal government is trying to keep the bull market in gold and silver from rising even faster in order to preserve faith in the dollar standard, which has been a paper or fiat currency since 1971. Could politicians enact a windfall profits tax to punish those who have the financial foresight to be heavily invested right now in gold and silver? Yes.

So the rules of the game may change. Since it’s impossible to predict what will happen, you’ve really no choice but to accept full and sole responsibility for your own financial condition. There are plenty of people who will tell you they are gurus, but nobody has a clue what will happen.

So, make your own guesstimate of what will happen, act accordingly, and see what unfolds.

Do not attach yourself to anyone else’s ideas (including mine). Educate yourself, go with your best judgment, and then flourish or suffer financially.

(In fact, it’s a good idea never to attach yourself to anything!  For an explanation, see the posts in the spiritual well-being category.)

Here are some resources that may help:

Related posts (in chronological order): Sitesell, Gold, Currency Collapse, Increase Your Assets, Monetary Value, Rich or Poor?, Your House, Peak Oil, Buy Gold, Real Estate Investing, Inflation, Stealth Tax, Global Economic Collapse, Sound Money, Price-Rent Ratio, Silver, Cash Flows, After the Party, and The Best Place to Live.

Recommended Reading: Robert Kiyosaki’s Rich Dad Poor Dad and The Cashflow Quadrant and James Rickards’s Currency Wars.

As always, if you know someone who might benefit from this, please forward it.

What might be an excellent career choice for the next few decades?

Let’s assume that you are young, perhaps in your twenties, and are looking for a viable option for sustaining yourself and your loved ones. Alternatively, you are open to a significant change or want to supplement your retirement.

The general task is to match your aptitudes, skills, and interests with what will be the pre-existing demand for them.

Since I don’t know you as an individual, let’s focus here on demand. I have two suggestions worth considering seriously and one of them may surprise you.

Look at the big economic picture. I have mentioned some salient trends in other posts [whose links are provided below]. Let’s assume that you are an American and that, for geographic and climactic reasons similar to the ones I’ve mentioned, you’ll be living in, or just outside, a small community in the Northeast.

In a world after the collapse of the dollar standard that is not only hotter by at least 1 or 2 degrees C but also has a dramatically curtailed transportation system due to depleted supplies of oil and natural gas, what might be an excellent career choice?

First, one of the helping professions will still be an excellent career choice for some.

After all, it’s not easy to flourish and people often want direct help with their problems. They often feel a need for the services of physicians and surgeons, teachers, and counselors. Presumably, there will be more options in the future for serving patients, students, and clients online.

Two downsides of this option are that (1) certification in one of the helping professions can require many years of advanced education that can leave you mired in financial debt for decades and (2) your actions can easily become the target of lawsuits so that you’ll require expensive insurance. Nevertheless, one of these as a career choice may provide immense, direct satisfaction.

(If you know my background as a professor, this suggestion is hardly surprising!)

Second, an excellent career choice for which there will be huge demand is anything involving local food production.  Furthermore, it can work well as a supplemental income stream right now.

To get your mind around this option, begin by letting go of any ideas involving monocultures, plows, combines, or feedlots. Start thinking in terms of properly managed herbivores and perennials.

I learned about that kind of farming or ranching as a boy growing up in the 1950’s. Each summer my parents would rent a housekeeping cottage for a couple of weeks at Bondi on Lake of Bays in the beautiful Muskoka district of Ontario.

Paul Tapley and his wife Rosemary ran the resort. It was Paul who taught me about the relevant energy cycle. He kept two work horses, Pat and Tony, for tilling his fields, hauling timber out of the bush to be turned into firewood for heating, pulling blocks of ice in the winter up from the lake to the ice house, which was packed with sawdust from cutting firewood, for the iceboxes used in the cottages, and so on.

There was a small barn with their two stalls. Paul explained to me one day while mucking out those stalls that he spread the manure they produced on their pasture, which fertilized the grasses and other plants. Pat and Tony then ate those plants and produced more manure. Lovely!

I’m suggesting that you consider what has come to be known as “permaculture” as a career choice. Ideally, the end of one production cycle is the beginning of another; material that is a byproduct of one cycle is the beginning of another.

The idea is to tier or stack natural, seasonal production cycles to achieve a balanced, sustainable, local system of food production. In other words, it’s to mimic Mother Nature by avoiding unnatural production such as single-use acreage to create a multi-species symbiosis.

Think of land as wealth. To think about investing in a small ecological farm is to think about healing the land by feeding the soil with multi-species controlled grazing, fertilizing with animal manures and other organic material such as compost, and developing protected water supplies.

Imagine working with the seasons instead of increasing production costs by trying to buck them. Similarly, imagine maintaining natural chains of who follows whom. For example, in a pasture birds follow herbivores . In a hay shed, pigs follow cows (to make compost and root through the bedding). Let animals do as much of the material handling work as possible.

If you have access to the right kind of land, one good career choice might be to buy some 500 or 600 pound calves every spring, graze them properly for 6 or 7 months, then sell them for meat in the fall after they’ve doubled in weight.

The right kind of land for pasture-finishing beef would have pasture that is never more than about 200 yards from woodland and plenty of water. It should have water pipes, electric fence, and fenced out riparian areas. Making it pay would require satisfactory marketing.

However, it wouldn’t necessarily require owning land or a barn or a tractor or other machinery. So it could be inexpensive to get started and wouldn’t require much insurance.

If you know what you are doing, you’ll not only make a good profit from selling the beef, but you’ll reduce weeds, make the land more beautiful, and increase wildlife populations!

Start small to gain experience inexpensively. In your first year you could raise several stockers on just 5 acres. Moving them to fresh pasture requires no more than twenty minutes daily (so you could do it part-time) and you’d learn a lot in just one season.

That’s only one career choice – and there are many similar ones. Think in terms of becoming a good steward to the land and using livestock as your chief land management tool. Do it well and your pastures will become more productive with every passing season.

Think of passing a well-managed 15 to 50 acre farmstead on to others. You’d be giving them a way of being lastingly useful to their neighbors by being able to offer them in a sustainable way, for example, pasture-finished beef, pastured broilers, eggs, turkeys, firewood and market garden vegetables and fruits.

Your career choice should be something you genuinely value. Forget money making and acquiring possessions or fame; instead, ask yourself how best you can serve others for the rest of your life.

On your deathbed, what would you regret not doing? What ability do you have that you would regret not turning into a skill?

Examining yourself is not easy, but it’s necessary if you are to make an excellent career choice.

If you hate animals and growing things, then don’t make farming your career choice. Many people, though, dream about having a beautiful, productive farm of their own. If that’s you, why not?

Related posts: The Second Agricultural Revolution, The Anthropocene, Purpose, Global Economic Collapse, After the Party, and The Best Place to Live.

Additional reading suggestions about the second career choice mentioned above: Joel Salatin, You Can Farm, Salad Bar Beef, and Pastured Poultry Profits; Bill Mollison, Introduction to Permaculture; Charles Walters, Jr., Eco-Farm, An Acres Use Primer; and James Howard Kunstler, The Long Emergency.

As always, if you know someone who might benefit from reading this, please forward it.

Might a reverse mortgage be an optimific option for you?

Let’s assume that you are 62 or older and own your own home.  Either it’s a single-family home that is your primary residence or your primary residence is one unit of a property that has 4 or fewer units on a single tax map.

Equity is the market value of your home less the amount required to pay off the balance of the mortgage.  If your home would sell for $300,000 and the amount required to pay off your mortgage is $170,000, you have about $130,000 equity in your home.

If you own your home free and clear, a reverse or backward mortgage is the wrong option for you.  Your best option to obtain money from the equity in your home might be a home equity loan or a line of credit.  Even if you never use one, because it shows up as a second mortgage, it will help protect you from lawsuits.

Realize that you may need to tap into that equity in some point in the future.    It’s almost always foolish to take money out of the equity in your home for any consumer purchases such as a new car or vacation.  It’s wise to consider obtaining a backward mortgage loan or any other kind of loan using your equity as collateral only if you absolutely require money for a necessary expense such as health care or to acquire an asset.

If you have a (forward) mortgage on your home, a backward mortgage might be the best choice for you.  Let’s consider it.

Essentially, a reverse mortgage is a way of refinancing your home.  It’s a way of obtaining a loan that enables a borrower to convert a portion of the equity in a home into cash.

The amount you receive in cash from a backward mortgage refinancing would be the amount of the balance on your present mortgage subtracted from the new loan amount.  (See the example below.)

The bank would pay off your present mortgage and you would have no more principle or interest payments on your property until you die.  You would still own the property and pay for insurance, taxes, and maintenance just as you do now.  When you die, your heirs would inherit your home and be responsible for paying off the backward mortgage.

Therefore, a backward mortgage does not free up equity in your home to use for other purposes.

The biggest advantages of a backward mortgage to you, the homeowner, are that you would never have any more monthly principle or interest payments on your property, which would obviously increase your monthly cash flow, and you would receive a one-time payment that you could use for almost anything you wanted.

The only good you could not use the cash to purchase would be another primary residence.  If you did that and the lender discovered it, the loan could be called due.

The biggest disadvantage to you is that a reverse mortgage is very expensive.

The amount required to pay off the loan grows each month.  Because of compound interest, the younger you are when you do a backward mortgage, the more it will cost eventually to retire the loan.  Even if you should you sell and move after only a few years, however, high up-front costs make these loans very expensive.

Let’s consider a concrete example.  The following is a current [February 2012] example I obtained from a banker who has been doing these kinds of loans for over twenty years.  Of course, it’s extremely unlikely that the figures used will match yours if you take out a reverse mortgage, but they’ll give you the idea.

The overall plan is this: the lender will pay off your mortgage and give you cash in exchange for your loan commitment. You will live in your home until you die without making monthly mortgage and interest payments.  You’ll continue to pay for taxes, insurance, and maintenance.

When you die, your heirs will inherit the loan along with your home.  They will have to pay off the reverse mortgage loan at the rate you selected when you took it out.  It may be either a fixed or an adjustable rate.

How much money will you receive if you take out a reverse mortgage loan?  Here are some current estimates.

Let’s suppose that you owe $170,000 on a first mortgage and take out a reverse mortgage loan at a fixed rate of interest at 4.99%.  The amount you receive would depend upon the appraisal the bank will have done on your property.

The higher the appraisal, the more you will receive. For example, a $318,000 appraisal would get you about $27,000. A $340,000 appraisal would get you about $40,000. A $390,000 appraisal would get you about $71,000.

If you are interested in obtaining a reverse mortgage loan, the first step is mandatory counseling.  You can do it right over the telephone from your home.  You’ll probably have to pay for it ($125), but that payment may be refunded to you when, and if, you close the loan.

The second step is the appraisal.  Again, you’ll probably have to pay for it, but that payment may be refunded to you when, and if, you close the loan.  Expect it to cost at least $300.

If the appraisal doesn’t come in high enough to suit you, just pay for it and walk away.

If the appraisal comes in high enough to suit you, you’ll probably have to pay 2% of the appraised value to the FHA at closing.  All other closing costs are negotiable with the lender.

To determine the value of the reverse mortgage, just add the balance of the first mortgage to the cash you’d receive.  So, for example, with the $318,000 appraisal, the value of the loan would initially be $197,000 ($170,000 plus $27,000).

Because you won’t be making monthly payments on it, it will grow each month.  That’s the difference between a reverse and a forward mortgage.

Typically, a reverse mortgage will be made at 62 to 65% loan to value.  The collateral for the loan is a portion of the equity of your property.  This protects the lender.

If you take out a reverse mortgage loan, the lender will pay off your current mortgage. You probably already understand that a (forward) mortgage loan is structured so that initially the amount you pay each month goes mostly towards the interest and not the principle.  That amount decreases so that, as time goes by, you are paying a bit more towards retiring the principle each month.

Therefore, if you pay off a mortgage early, you are losing the money you paid on its interest.  This is another disadvantage of taking out a reverse mortgage loan that pays off your (forward) mortgage.

On the other hand, this will probably be partially offset by the fact that you gained income tax breaks for those interest payments.

Here’s another factor to consider.  Recently, housing prices have fallen by about one-third nationwide.  In many areas, they are likely to fall farther.  The real estate bubble that began to deflate in 2007 is still deflating.

Typically, too, bubbles over-correct. Therefore, if you wait to get a home equity loan, a line of credit based on the equity in your home, or a reverse mortgage, you are risking a lower appraisal.

The market value is never known until a property actually sells.  An appraisal provides only an estimate of actual market value.   If you do take out a reverse mortgage loan, you should be able to pay it off at any time without penalty.  Don’t worry:  the lender will make plenty of money whether the loan is retired sooner or later!

Assuming you are qualified for a reverse mortgage, if you genuinely need money now, what should you do?

I don’t know.

My best suggestion is to try to obtain a home equity loan or line of credit before seriously considering a reverse mortgage.

If you must consider a reverse mortgage, you’ll be doing yourself a favor if you do not take one out unless you really need the cash and have no other options.  It might even be better to sell your home and either downsize or rent.

The bottom line is that a reverse mortgage is a very expensive way to obtain a loan.

If you are nevertheless interested, you may obtain more information from the government.

As always, please consider forwarding this to a loved one if that person might benefit from it.

What’s likely to be the best place to live in the U.S. for the coming decades?

I don’t know. I not only probably do not know you, but also it depends how a number of relevant factors unfold in the future and that is impossible for anyone to know.

Let’s consider some of those factors. They lead me to the conclusion that, in general, the Northeast will be the best part of the country.

Even if you disagree, you might be wise to consider the justification that conclusion.

It’s helpful to divide the relevant factors into personal and impersonal. My focus here is on the impersonal, but let’s mention some of the personal ones first.

Personal Factors

Age is an important personal factor in deciding the best place to live. If you are a senior with not long to live, even if you picked a better location than where you are now and could afford to move, moving might not be worth the hassle and stress. However, if you are young or middle-aged, it might be better to select where you want to live now rather than later having events that are not of your making select your location for you.

Health is an important factor. For example, for some people living in an arid rather than a humid location would be a blessing rather than a curse. Remember that health, too, is changeable – in either direction.

Family is an important factor in selecting the best place to live. If you are single and childless, you need not worry about establishing yourself in a community that will be good for your children many years from now. On the other hand, the relationship between you and your loved ones is changeable.

Community is related to family. It’s certainly good to have friends, acquaintances, and organizations with which you are already familiar as support and to support. This is why many people prefer to live not far from where they grew up even if they have the option of living elsewhere.

Impersonal Factors

Although personal factors may be more important to you than impersonal factors in deciding the best place to live, my sense is that, because many people seem much more uncertain about the impersonal factors, this post may be most helpful to you if I emphasize them.

Climate and Geography

You undoubtedly already know whether you’d prefer to live in Hawaii or the middle of Alaska.

Why aren’t climate and geography merely personal factors?

They are relevant to choosing your best place to live, but there’s more involved than you may initially realize.

Economy

Geographical location and climate are related to the economy, which is critical to choosing your best place to live.

If your job has you living in a place you’d rather not live, you have weighed your job as being more important than the factors of climate and geography in your decision concerning the best place to live. That may be a mistake.

How are you going to shelter, feed, and protect yourself (and your loved ones) in the coming decades? This the key question for you about the economy.

If all of us could have as much of whatever goods we happen to desire, there’d be no need to distribute goods, which is what an economy does.

While hoping for the best, isn’t it wise to prepare for the worst?

Unfortunately, the global economy is entering a sustained period of contraction.

There are a number of well-understood reasons for making this assumption. For example, stocks of nonrenewable supplies of oil and natural gas are rapidly declining (see Peak Oil). This is important because many of the economic blessings, such as factory farmed food, we enjoy today are directly dependent on those supplies. For example, the effects of global warming will continue to get worse. For example, just as all fiat currencies do sooner or later, the dollar standard will collapse (see Currency Collapse). For example, the wonders of antibiotic medicine will diminish as microbes become drug-resistant faster than new drugs can be produced. And so on.

If so, understanding the question changes. Instead of just asking, “What is the best place to live?” while assuming all the relevant impersonal factors will remain the same, it becomes, “What will be the best place to live during the economic collapse?”

Again, my answer: The Northeast.

This does not mean that I think that, during the economic collapse, the northeast will be the best place to live for everyone. After all, personal factors may still outweigh impersonal factors. There will remain some parts of the country that will be good for living as a homesteader or for trapping, hunting, and fishing.

This also does not mean that I think that the northeast is now the best place to live or that it will always be the best place to live.

It only means that I think that, for most people, the northeast will be the best place to live during the long economic collapse that we are entering.

I think this because the impersonal factors favor that conclusion. The Northeast will be the best place to live because all the other areas of the country will be worse. This is the same conclusion that James Howard Kunstler argues for in his The Long Emergency.

In recent decades many people have moved from the Northeast to warmer, sunnier parts of the country. Why might this have been a mistake?

The Dry Sunbelt, the Southwest, will be especially hard hit by the demise of cheap oil. Agriculture based on cheap oil and gas will have to be replaced by more local agriculture in a desert! Transportation, water, and energy for air conditioning will soar in price. Increasingly serious political disruption caused by massive Mexican immigration into the Dry Sunbelt should be anticipated. I expect loss of resources to create conditions ripe for violence, especially if there are natural disasters such as drought or a huge earthquake in California.

The Wet Sunbelt, the Southeast, is dependent upon rural electrification and universal air-conditioning. Its economy has been driven by real estate “development” that extended suburbia. Coastal areas, including cities like New Orleans and Miami, will disappear under seawater as sea level continues to rise. Rampant religiosity, hyperindividualism, and the cracker culture will exacerbate political turmoil and paranoia. Newly poor, undereducated, angry whites will be a new class of economic losers who will be prone to violence. Turn up the already intense heat and humidity and you have an area of the country that will be good to avoid.

The economy of the semiarid Great Plains depends upon cheap fossil fuels and water from underground reservoirs. As those supplies diminish, the Great Plans will become increasingly unproductive and, therefore, more depopulated and desolate. It’s been happening for years already. As transportation costs soar and agriculture declines, what else could be expected?

What about the beautiful Rocky Mountain area? It, too, is arid. How will food be produced there? Except for a few hardy souls who can rely on, say, trapping and homesteading, without cheap fossil fuels expect people to leave. As the interstate highway system begins to crumble and gas becomes ever more expensive, leaving today might be better than leaving tomorrow.

The Pacific Northwest, Kunstler suggests, may find itself the target of displaced hoards of Asians. As bad as the economy will get in the United States, it will be worse in Asia. Might turmoil among Asia’s billions cause millions of people to escape towards the west coast of North America? Could Seattle and Portland become the world’s next Beiruts? It’s possible.

With much less appealing options elsewhere, the Northeast will become the place to be. It’s the states in the New England, mid-Atlantic, and Great Lakes regions. Even there, though, avoid low-lying coastal cities and areas.

It is favored by the virtues valued by its Puritan past such as industriousness, thrift, perseverance, and community allegiance. It’s much more secular than the Wet Sunbelt. The climate is temperate, and there’s plenty of water. Much of it is very beautiful.

Furthermore, within its borders today there are people who, I think, are role models for how to live and produce food during the long economic winter just ahead. (My intention is to discuss this more in future posts.) The place to live will be small towns in the Northeast that are surrounded by small, productive farms.

It won’t be easy anywhere; the notion of the best place to live is relative. Kunstler: “Climate change is going to combine with the termination of oil-and-gas based farming to very negatively [sic] affect the world’s food supply. A lot of people will go hungry in the decades ahead and . . . [m]illions of human beings are going to die” [The Long Emergency].

Let go of the idea of a growth economy and replace it with that of a nongrowth economy.

If you are serious about feeding your loved ones in future years, consider the idea of soon putting whatever wealth you have acquired into purchasing land or a small farm that has plenty of fresh water (and, perhaps, some wetland) in the Northeast just outside a small town and making it productive.

Why a small farm? Wind and water power are insufficient to make fertilizer or pesticides. Think in terms of farming the old-fashioned way, without reliance on fossil fuels.

So, if you agree with Kunstler and me and aren’t already living in the best place to live for you, consider moving soon.

The prolonged recession that began in 2007 is the beginning of an economic collapse that is actually long overdue. Because political leaders have managed to delay it, it will actually be worse than it might have been. It may take even more years, more decades, to work out of than otherwise.

If you decide that the Northeast is, indeed, the best place to live for you, what will you actually do there? How are you going to support yourself (and your loved ones)?

I have some concrete suggestions in answer to that question that I intend to offer you in future posts. If you are not yet signed up to be notified of them, I encourage you to do so if those suggestions might interest you.

Reading Suggestion: James Howard Kunstler’s The Long Emergency. I know of no better book related to your choice of the best place to live.

Dedication: The publication date of this post is 12 Feb 12, which happens to be the birthday of my best friend. I dedicate this post to Anna.

As always, please forward this to any loved ones who might benefit from reading it.

How will you and your loved ones live after the party?

It’s astounding that many people still don’t seem to realize that the party will soon end.

In James Howard Kunstler’s The Long Emergency he not only gives a clear-headed analysis of our present situation but also offers a general plan on how to live well after the inevitable deterioration.

“[W]e are entering a new period of world history, the uncharted territory of a post-oil world.  We will be in it long before the middle of the twenty-first century . . . [and] have to contend with the problems of the Long Emergency:  the end of industrial growth, falling standards of living, economic desperation, declining food production, and domestic political strife” [all direct quotations in this post are from Kunstler’s book].

In short, we shall have to learn a new way to live after the party.

The purpose of this post is not to infect you with pessimism; instead, it’s to fuel your realistic optimism about life after the party.

Let’s have a brief look at (I) where we are now and (II) what tomorrow will be like.

Understanding the immediate past enables better living in the immediate future.  Yes, there will be a rough ride for a while, but, understanding what is happening today entitles you to prepare to thrive tomorrow.

Why sleepwalk through life?  It’s always better to choose philosophy over foolishness.  Instead of believing that the party will continue forever, it’s better to prepare for life after the party.

(I) Here are eight features of life today (in no particular order) that are important to acknowledge if we are to be ready to live well economically after the party.  Much of Kunstler’s book is devoted to providing evidence for this analysis.

First, the era of inexpensive fossil fuel utilization is rapidly coming to an end [see Peak Oil].  “[R]eliable supplies of cheap oil and natural gas underlie everything we identify as a benefit of modern life.”  Resource wars have already broken out.  This is widely understood.

Second, “industrial civilization will not be rescued by technological innovation.”  This is not widely understood.  Nuclear energy, renewable sources of energy (such as wind and solar), and potential sources of energy (such as hydrogen fusion) will be insufficient to replace the energy we are now using from fossil fuels.  If so, the industrial age will soon end.

Third, global warming is real.  Even if we did what is impossible to do, namely, immediately and permanently stop all discharge of greenhouse gases into the atmosphere, global warming will still increase for the next several decades.

Fourth, the benefits of antibiotic medicine will not last as microbes become drug-resistant faster than new drugs can be created.  Disease will diminish life spans as well as the physical quality of human life.

Fifth, today’s fragile political arrangements are based on a globalized economy that is itself fragile.  As non-renewable fossil fuel usage inevitably decreases, the globalized economy will break down and so will current political arrangements.

Sixth, since the beginning of the dollar standard in 1971, “all monies and fungible financial instruments pegged to money floated on a collective hallucination of relative value, rather than being pegged to a fixed medium of value, such as gold.”  When that collective hallucination dissolves, all the major currencies in the world will be in crisis.  This will be the beginning of the end for the globalized economy.

Seventh, we are squandering other precious natural resources.  For example, we are poisoning the air and polluting rivers, lakes, and oceans.  We are emptying underground aquifers much, much more quickly than they can be replenished.  Some investors are already talking about water as “blue gold.”

Eighth, Americans have made a colossal investment mistake by squandering our national wealth to create suburban sprawl that has no future when the present twilight of the fossil fuel age ends.  “[M]uch of suburbia is unreformable.”  The end of suburbia will be part of the generalized contraction that will be nothing short of the downsizing of America, which will characterize life after the party.

It’s been a helluva party, hasn’t it?

The bigger and better the party, the worse life after the party.

Still, there will be life after the party. The transition will be difficult; everyone will suffer. The unprepared will suffer greatly.  However, many of the prepared will survive and some will even thrive.

We are unable to predict what will happen after the tipping point.  Future intellectuals will be able to explain it, but only in hindsight.  Civilization as we know it now, near the end of the party, will be radically different after the party.

(II) Some of the enormous changes caused by the end of the industrial age are already beginning to become apparent.  More are coming.

This, though, should not be surprising.  We live in Becoming, which is ever in flux.  As we begin to lose familiar economic and political institutions, others will replace them.  While life after the party won’t be as fun as life during the party, there’s no reason why life after the party cannot be better than life before the party.

For example, consider the end of suburbia.  Like living in cities, living in suburbs will be dramatically different after the party.   Let’s hope that it won’t just be the end of commuting.  If we prepare for the transition and make it well, there’s reason to hope that it will also be the end of “horrendous levels of alienation, loneliness, anomie, anxiety, and depression.”

The party was based on a simple fact, namely, that fossil fuels are a unique inheritance from our geologic past that enable us temporarily to extend the carrying capacity of our habitat, the planet Earth.  As they disappear, human over-population will decline.  There will soon be many fewer people after the party than there are now.

Many fewer people means many fewer consumers, which means the end of the consumer economy.

That may become, though, as much of a win as a loss.

I invite you to look back over your own life and ask, “When has my most important growth occurred?” Growth occurs after losses, not after gains.

As mastery grows, gains become more and more routine.

It is losses, especially unexpected losses, that spur growth in those open to growing.

Not all losses spawn growth.  Often, losses must be repeated until we understand the lesson life is teaching us.  Once we become sick and tired of losing, we become open to growing by learning from losses.

My hope is that life after the party will be better than before the party.

Spiritual teachers like Eckhart Tolle are already talking about how much better life could be after the party ends.

People will suffer physically as the globalization of the industrial age ends and current economic and political arrangements transition into unfamiliar forms.  That will be an important loss. Therefore, it could also be an important opportunity.

What is measurable is of no ultimate importance.  Form is what is measurable.  It doesn’t matter much how many lovers or houses or children or dollars you temporarily have during your life.  It doesn’t matter much how popular or famous you are.  It doesn’t even matter much how healthy you are.

What matters is only whether or not you enjoy sufficient identification with Being, which is formless.  If you live life wholly immersed in Becoming, you will never live well.

Living well is living a life balanced between Becoming and Being, between form and formlessness.  A life without realization of Being is a life out of balance.  Just like a business that is out of balance, a life that is out of balance cannot be profitable.

For more on this topic, please visit the posts in the spiritual well-being category of this site. [They are listed on the Navbar on the left.]

My intention is to provide you in future posts with a concrete plan for physically surviving the end of the party, for economically getting through the end of the industrial age.  It’s the plan that I myself am using to counter the ill effects of the eight factors mentioned above.  (Essentially, it’s the same general plan that Kunstler suggests, but I have discovered a practical way to make it specific.)

If it interests you, just ensure that you are signed up to be notified of future posts.

I think you’ll find it very useful because, even if you don’t adapt the specific plan I’m using for yourself and loved ones, you should be able to tweak it to fit your circumstances better.

May you live well both now and after the party!

Suggested reading:  Kunstler’s The Long Emergency.

As always, please consider forwarding this to friends who might benefit from it.

Investing for cash flows is better than investing for capital gains.

This may be especially important for the average investor during these difficult financial times. All authorities seem to agree with Robert Kiyosaki’s statement that “we are entering a long and hard financial winter” (Rich Dad’s Conspiracy of the Rich [2009]).

Capital gains investing is gambling. It is possible to win at gambling, but it’s foolish for the average investor to gamble at all in difficult financial times.

Since there are only two kinds of investing and since capital gains investing is unnecessarily risky, investing for cash flow is better because it’s much less risky.

Taxes are another important reason why investing for cash flows is better than investing for capital gains.

Taxes are paid on earned income, portfolio income, and passive income.

It’s good to have any kind of income! However, the problem with earned income, which includes income from a job or a retirement plan, is that it is taxed at the highest rates. If you flip real estate properties or buy and sell stocks and hold those assets for less than a year, the money you make will be taxed as earned income.

Portfolio income most often comes from capital gains. If, for example, you buy stocks or real estate low and sell higher after holding it for over a year, that is capital gains income that is taxed at 28 percent. The danger, of course, is that the stock or real estate that you purchase will not increase in value at all, which is why investing for capital gains is gambling.

Passive income is taxed at the lowest rates. Suppose, for example, that you purchase an apartment building that, after expenses, puts money into your pocket every month. Your income from it won’t only be taxed at the lowest rates, but there are ways to reduce even that tax exposure such as amortization, appreciation, and depreciation.

Assuming that you do your due diligence in advance, you will have an excellent idea before you purchase apartment buildings what their income will be.

Still, since apartment buildings are not liquid and require intensive management, it’s important to understand exactly what you are doing before purchasing them. After all, a single real estate investment can cost you tens of thousands of dollars.

The point is that, from a tax perspective, passive income is the best kind of income to have. If that’s the kind of income you want, then investing for cash flow is your kind of investing.

Another advantage is that you may be able to invest for cash flows using other people’s money! For example, it may prove easier for you to obtain a mortgage on a $1,000,000 dollar apartment building than on a $100,000 single family home. Why? Folks who lend money understand that there’s a huge difference between owning a shelter for you and your family (see Your House and Increase Your Assets) and a cash-flowing asset.

A mortgage on your home is a liability that takes money out of your pocket. Financially, it is bad debt; whether you rent or buy, shelter is an expense. On the other hand, a mortgage on an apartment building may be an asset if it puts money into your pocket. It may be good debt that is not only tax-free but also your tenants may pay it off for you!

I don’t think that any of this is controversial. Why, then, don’t all investors invest for cash flows?

I don’t know. My guess is that it’s because investing successfully for cash flows is more difficult than investing successfully for capital gains.

To continue with the same example, in general, is it easier to sell a single-family home or an apartment building?

A single-family home. Why? There are many, many more people looking to purchase them than there are real estate investors looking to purchase apartment buildings. That higher demand makes it easier to sell.

Real estate is not a liquid asset, and apartments are more illiquid than single-family houses.

Also, more people understand how to buy single-family houses than apartment buildings.

Furthermore, apartment buildings are usually more expensive than single-family houses.

Therefore, it seems that buying apartment buildings is more dangerous than buying single-family houses.

Well, not exactly: they are only more dangerous to buy for the average investor.

What if you learn how to purchase them? What if you specialize and develop an unusually high degree of financial intelligence about investing in apartment buildings, which is an excellent example of investing for cash flows?

If you don’t get distracted, stick to that one kind of investing for cash flows, and avoid all other kinds of investing (including other kinds of real estate investing such as investing in office buildings or shopping centers), you’ll soon be able to develop a plan that will work well for you.

Why re-invent the wheel? Learn how to invest in apartment buildings for cash flows from those who have already done it. It’s foolish not to learn from the mistakes and successes of others.

For example, Kiyosaki sketches his plan in Rich Dad’s Conspiracy of the Rich. He ignores high-end apartment buildings because there is weak demand to live in them as well as low-end apartment buildings because they are too management-intensive.

Where are safe, clean apartments for working-class people located that have a high demand to live in them? Near great sources of working-class jobs!

Everyone understands that location is the most important criterion when selecting real estate. It’s critical when selecting apartment buildings for cash flows.

For reasons that James Howard Kunstler gives in The Long Emergency, I think that the best location to be a real estate investor in the U.S. in the coming years will be in the Northeast.

The reasons for that include global warming as well as oil depletion. Even if you buy real estate with good cash flows now along, say, the Florida coast or in the cities of Nevada, you may not have to live very long to regret your foolishness!

It’s also critical to take into account where in the market cycle real estate is before making any offers. There are very good books and courses that teach how to do that.

Investing well for cash flows is complicated. In fact, it’s too complicated for most people.

Whether that’s good or bad news for you depends on you. If you are too distracted, ignorant, or unwilling to learn how to do it well, my best suggestion is not even to try.

If you are focused, willing to learn how to overcome your ignorance, and committed to doing it well, my question is, “Why not?” If you have read this far in this post, you probably have what it takes.

Remember, since it’s easier to invest for capital gains than for cash flows, fewer people invest for cash flows. Since fewer people are trying, there’s less competition. Because there’s less competition, the odds of your being successful are automatically increased.

If you are the right kind of person, it’s an excellent way, perhaps even the best way, to become financially successful and independent.

Silver may be the best investment right now (early 2012) for the average investor.

If it’s not, I don’t know what is.

Why?  What’s so good about it?  Why consider buying it now?

The fundamental fact about this world is that nothing abides. Flux is relentless. Always be aware of this when investing.

The way to do that is always to think in terms of wealth waves (cycles, booms and busts). Whether you are thinking about investments in precious metals, real estate, businesses, or paper assets such as stock and bonds, always think long-term, which means having the perspective to consider where the wealth wave for an asset class is at the present moment.

The only time to make an investment is in the present moment. It is always impossible to invest yesterday or tomorrow.

Why might precious metals be a good – or even the best – investment in the present moment [January 2012]?

After all, there has been a bull (rising) market in it for a decade! Perhaps that is a bubble that is about to burst. It will end. Why? All bubbles end. If not, eventually one ounce of it would be sufficient to purchase everything in the world!

So the critical question about buying it in the present moment is: “Is the current bull market about to end?”

Some analysts think it is. Harry S. Dent and Rodney Johnson: “Deflation is the only possible scenario in the decade ahead . . . we are a couple of years into the Winter Season. . . deflation is a monster . . .Gold and silver are inflation hedges, not deflation hedges” (The Great Crash Ahead [N.Y.: Free Press, 2011]). They predice that, like most other commodity prices, precious metals will fall in price.

They are correct that precious metals are inflation hedges. However, gold and silver are not like other commodities in one respect: they are real money. As fiat currencies drop, real money soars.

They are also correct that deflation is ahead of us. In fact, it’s already here.

The critical question is whether or not precious metals are deflation (as well as inflation) hedges.

I don’t know. Most analysis seem to think either that they are or that real money is still worth having in your portfolio anyway.

For example, Michael Maloney thinks that they “have a proven track record of performing well in inflation or deflation” (Guide to Investing in Gold & Silver).

Doug Eberhardt: “Silver is money . . . Historical ratios of gold and silver have fluctuated between 12:1 and 16:1” (Buy Gold and Silver Safely). Buying silver is a good idea when the ratio is below 80:1 and “be cautious” or “possibly take the other side” when the ratio goes higher. (Today it’s about 52:1.)

Howard Ruff: “Silver always rises during gold bull markets, usually twice as far and fast as gold, but the supply/demand situation . . . dwarfs all other reasons why silver will soar in price, perhaps much more than twice as much as gold.” (Huff’s Little Book of Big Fortunes in Gold & Silver)

Thomas Herold: The U.S. economy “must go into either default or into hyperinflation . . . Either option is dire . . . Silver metal is the one that has the lowest quantity of reserves to production, as well as the lowest reserve base to production ratios. . . [Its] uses are only projected to escalate. . . silver has more than a whopping 615 percent in price appreciation potential left to it before it reaches its inflation adjusted high again . . . should silver realign to its traditional average of 1:12 purchasing power of gold to silver . . . silver prices would . . . be far higher . . . count on between five and ten more years of the bull market continuing. . .”(Building Wealth with Silver [2011])

So, as usual, expert opinion is divided.

Five years later, everyone realizes that the economic recession that began in 2007 was not just another recession. It’s actually the beginning of a transition to a new world economy. We’ve never been there before – and this is the fundamental reason why expert opinion is divided about precious metals right now. Nobody knows what will happen.

There is agreement, though, that, minimally, we are in for a very difficult decade ahead. (I’ve been discussing some of the reasons for that in these posts, and I intend to continue to do so.)

Like paper assets and real estate, all fiat currencies are falling in relation to real money [precious metals].

That’s the fundamental reason to have them in your portfolio now.

When currencies, paper assets, and real estate re-value themselves against real money, that will be the time to transfer the wealth you have in precious metals to other assets.

Think in terms of value rather than price. When you do that, as Michael Maloney likes to say, precious metals are cheaper than dirt. “Whether you like it or not, the empire of the United States of America is now in decline . . . There is no possible scenario in which . . . [precious metals] do not rise” in value.

Is the U.S. empire in decline? Yes. The beginnings of the decline have been obvious for years. However, that does not mean that it won’t continue to be the most powerful and important nation in the world for quite a few years yet.

Will precious metals rise in value? Nobody knows. For my part, I predict that they will. I’m in!

Even if you agree, however, please don’t become attached to them. When you decide that their bubble is near its top, sell them.

Either way, my most important suggestion is to continue to develop your most precious asset, which is your mind. Keep reading blogs like this as well as books, keep thinking regularly, and every day practice letting go of all thoughts.

The amount of time we waste on trivialities is astounding. If you need to, please break out of your beer-and-sports induced coma or addiction to soap operas and shopping.

Step back. Notice your attachments. Starting with the most important one, begin breaking them all one at a time.

I’ve known bright people who were attached to television news! That news is mostly mass entertainment. “If it bleeds, it leads.” Regularly focusing attention on short-term catastrophes and crimes robs you of paying attention to what is valuable.

Investing in precious metals or anything else is a game. Since all such activities can become addictive, I believe it’s important to remind yourself daily that the purpose of the investing game is to get beyond the need to play it.

What do you want freedom for?  What do you want freedom from?

(My answers: Freedom from Becoming. To live well, which is living a balanced life between Becoming and Being, and to help others do the same.)

Whatever your answers to those important questions, precious metals may be a means to enable you to get there.

Why consider the price-rent ratio?

You need shelter. Either you rent a place to live or buy a place to live.

Let’s suppose that you understand that the real estate bubble for housing in the U.S. burst in 2007 and that prices for single family houses have been falling ever since. Let’s also suppose that you are wondering whether you should rent a house for you and your family or purchase one.

Have prices fallen enough for purchasing a house to be a good deal or not?

There’s no point offering you a straight answer for three reasons. First, with respect to any particular deal many factors are involved. Second, since the market is always changing, there’s no one answer that will work well all the time. Third, I don’t know what you should do because, like everyone else, I don’t know what the future consequences of whatever decision you make will be.

Instead, let’s simplify things by assuming that you are going to investigate this unemotionally as a real estate investor would. My thesis is simple: consider the price-rent ratio before making a decision.

Why? What is the price-rent ratio? Why is it important? What’s a good one?

Whether you are considering purchasing a house to live in or to rent out, the price-rent ratio is the average cost of ownership divided by the rent you would receive from a tenant.

Suppose that you find a house for sale in a good location that you are considering purchasing. It’s easy to find the owner’s asking price. Next, answer two questions:

First: What is the yearly cost (principle, interest, taxes, insurance, and maintenance) of owning that house? Let’s say it is “X” dollars.

Assume you’ll be getting a fixed rate, 30-year mortgage at the going interest rate. Its owner can show you recent tax receipts or you can look them up at the county court house. Any insurance agent can give you quotes on either homeowner’s or landlord’s insurance. A real estate agent can help you estimate yearly maintenance costs, which will vary with the age and condition of the house. So, after you do your due diligence, you determine it is “X” dollars.

Second: What is the average annual rent for a similar house? Let’s say you estimate it to be “Y” dollars.

To determine the price-rent ratio, simply divide X by Y.

If X is $1000 and Y is $1000, the price-rent ratio is 1. Roughly, that is about where it should be – or perhaps slightly higher such as 1.05.

If the ratio is lower, the price of the house is low. For example, if the price-rent ratio were .8, the positive cash flow for an investor owning that rental house would be about 20%, which is very high.

If the ratio is higher, the price of the house is high. For example, if it were 2, an investor owning that rental house would have an “alligator,” which is a property with a very negative cash flow that may eat you alive.

As Michael Maloney argues, it’s important to understand the history of the price-rent ratio for the average single family home in the U.S. if you are thinking of buying one.

For example, in the residential real estate bubble of 1989-1990, the national price-rent ratio was 1.25. Housing prices were too high.

In the recession of 1996-7, the price-rent ratio was .90. That was a great time to purchase a house – if you had the money or could get a loan, which was very difficult.

Then there was the greatest real estate bubble in history that didn’t begin to deflate until 2007, when the ratio was 1.85 or 1.90! That was a crazy time to buy a house!

What about more recently? The great real estate bubble hasn’t yet deflated. It fell and then bounced up to 1.25, which was the same as the ratio during the bubble of 1989-90!

The timing won’t be right until it drops below 1.05.

In fact, usually, when there is a market bubble, it doesn’t just burst down to fair value: the higher the bubble, the farther below fair value it usually goes until another bubble begins. So you might want to hold off buying a house until you see a ratio at .9 or lower.

Either rents must increase or prices must decrease. Since we are in a deflationary period (as I write this post in January 2012) in terms of both the stock market and real estate (when compared to real money, namely, gold or silver), rents are not going to go up. That means that housing prices are going to decline farther.

Why buy a house at a higher price now when you can purchase a similar house later at a lower price?

So, there is a conclusion from our looking at the price-rent ratio: it’s a good time to be a renter.

That, though, will change. Right now, rent a house and invest in gold and silver.

All bubbles burst! The gold and silver bubble will eventually burst. If it didn’t, you’d eventually be able to purchase a house for an ounce of gold or, even more absurdly, all the real estate in the world for an ounce of gold!

If so, as real estate decreases in value while gold and silver increase in value, investing in gold and silver now will enable you to use them to purchase more real estate later.

All that being said, though, this does not mean that you should not purchase a house right now.

That may seem to contradict everything else in this post, but it doesn’t. The point: the price-rent ratio is just one factor to consider. If it were the only factor to consider, it would follow that this is a poor time to purchase a house.

Again, this discussion has been over-simplified. My thesis is only that it’s a good idea to consider that ratio before purchasing a house.

If you agree with that now and didn’t before, excellent! You’ve absorbed some information that may be important to you.

Income from rents is similar to personal incomes and corporate incomes that are closely tied to price and supply fundamentals.

What are the most important fundamentals regarding real estate? Everyone knows the answer: location, location, location.

There are always good real estate deals available. Just please don’t be in such a hurry to purchase real estate that you forget the price-rent ratio.

(Have you read the related post about Your House?)