Tag Archives: debt

Financial Basics: Building a Financial Reserve

Posted August 2, 2012 by admin. tags:Tags: , , ,
Standing on a ticking clock

Written by Dave Young, President

We have 24 hours in a day to do whatever we want with our time and money. No matter what we do, the clock keeps ticking.

In order to make the best decisions with our time and money, we need to make goals and have a plan.

In order to build a reserve of money for the future, I suggest making these four goals.

1- Manage & Reduce Debt

Debt can get out of control and we need to make sure we manage our
current debt. Make sure you know exactly how much debt you have and take
steps to reduce it.

2- Get out of Debt

It will take time to get out of debt, but it is possible. Take small steps to reach your overall goal.

3- Build a three month reserve

You never know what will happen. I suggest building a three month
reserve. Don’t live pay check to pay check. Put money aside so that you
could live for three months if something were to happen.

4- Invest for the future

Start investing for the future today. Open a savings account, add to your retirement plan through your work, open an IRA, etc.

Budgets may not seem exciting or even interesting, but they are the key to making your finances work.

A good example is when you make a goal to stay in shape.

You can’t get anywhere unless you start with a goal to know where you  are going. Then, you must have structure in your eating and exercise. You can’t just do whatever you want and hope you will get in better shape. Finally, you must exercise a lot of patience and persistence.

Do you realize how much money will go through your hands over the next 40 years?

$20,000 a year= $800,000 (save 10% and invest at 10% return, you will have $885,000 saved)

$40,000 a year= $1,600,000 (save 10%  and invest at 10% return, you will have $1,770,000 saved)

$60,000 a year= $2,400,000 (save 10% and invest at 10% return, you will have $2,656,000 saved)

Those numbers are hard to believe when we only see the numbers on our pay checks every two weeks. Over time what seems like a little, adds up to a huge amount.

It is important to take notice of where our money is going on a regular basis. Is it going to provide for our wants or our needs?

Teeter Totter Example

If you put your income on one side of a teeter totter and your needs (groceries, utility bills, mortgage, etc.) and wants (dining out, entertainment, new clothes, etc.) would the teeter totter be balanced? If not, it’s time to reevaluate.

Money doesn’t make you happy, but it sure helps your
situation if you stay within your means and don’t go into excessive debt. People are happy at all levels of income. If a person makes $40,000 a year and saves $5,000 they are probably happier than a person
that makes $250,000 and spends $300,000. It is all relative.

The level of control over the resources (or money) that a person has does have a direct impact on happiness. The key to that control is developing and following a budget. This will help you build wealth over time.

Visit our website, www.paragonwealth.com, for more information.


Posted August 8, 2011 by admin. tags:Tags: , , , , ,

Written by Dave Young, President of Paragon Wealth Management

Over the past couple of weeks we’ve seen extreme volatility in the financial markets.

The volatility started with political drama over the debt ceiling, which initially created uncertainty for investors. After a high drama last minute agreement, which apparently didn’t solve anything, the markets sold off hard. Uncertainty in Europe exacerbated the situation.

It looked like we might have put in a market bottom last Friday with the selling reversing midday. Then, Friday evening we found out that the S&P Bond Rating Agency had lowered their rating on U.S. Treasury Bonds to AA+ from AAA.

Their timing couldn’t have been worse. 

I knew we were in for a ride, but wasn’t sure how much of one. U.S. Treasury Bonds have held a AAA rating ever since the rating agencies were created and started rating bonds. United States Treasury Bonds have always been considered the icon of safety and security. Their yield has always been always been characterized as the risk free rate of return. Historically, no security has been considered safer than a U.S. Treasury Bond.

Downgrading U.S. Treasury Bonds takes us into unknown territory. It’s that unknown that causes investors to panic. Panic ruled the day today with stock investors taking the Dow Industrials down another 634 points on top of the 513-point loss last Thursday. This puts the market down over 1900 points in 12 days.

This extreme drop in a short amount of time with the bulk of it happening over two days. This type of market action is virtually impossible to avoid by moving to cash. It was driven by politics and occurred so quickly that there was no time to react and move to safer assets.

On a chart this drop is extreme, which puts us into very oversold territory.

Often, when you have moves this extreme, either upside or downside, they are followed by extreme reversals. The problem is that nothing is guaranteed, and you don’t know that for certainty. All you know that the probabilities favor it.

A hard and fast sell off out of nowhere, like the one that we have just experienced, creates a quandary for investors. They consider selling because they don’t want to see their account go down anymore. If they absolutely knew that the market was going to keep going down then it would make some sense to sell.

However, they know that selling into a panic is usually a mistake, because it locks in their losses and hurts their long-term returns.

On the positive side, stocks are not overvalued like they usually are when you have a bear market. A combination of falling prices and rising profits has pushed stock valuations 20 percent below historical P/E ratios. More than 75 percent of corporations in the S&P 500 index exceeded their earnings estimates in the second quarter. In total, corporate earnings are expected to rise 18 percent in 2011 and 14 percent in 2012 (recent Bloomberg studies).

According to another Bloomberg survey, chief strategists at 13 of the largest banks still see the S&P 500 ending the year around 1400, which would be 25 percent higher than it closed today. While I’m not that optimistic, it is positive that they see fair value 25 percent higher based on corporate earnings.

Another positive is that fear and panic hit extremes today.

The VIX closed today at 48, which shows extreme fear. Historically, 42 on the VIX has been a level where markets reverse and start to rebound. The 2008 bear market was the only exception to that rule that I know of.

The negative side of the equation is made up of macro issues.

1- Europe has a debt mess that is trying to sort out and yet to do so.

2- Economic growth in the U.S. is slowing. Most economists don’t believe that we will see a double dip recession, but that is currently a concern.

3- Politics and our debt are creating uncertainty for investors.

4- Panic is currently ruling the markets. Even though the markets are severely oversold and undervalued, there is always the possibility that they can become more oversold. That short term selling pressure can be unduly stressful if your risk tolerance is not correctly set.

Is today’s market action creating a buying opportunity over the next one, three and five years? Or should you be selling? If you think prices will be lower over the long term or you need the money right now, then maybe you should sell. If you believe that prices will be higher one, three or five years from now, then this may be a buying opportunity.

My best advice is to stay focused on the long-term. Generally, decisions made in a panic situation are bad ones.

If you have questions or concerns, feel free to call us at 800-748-4451 or email us (dave at paragonwealth.com, nwhite at paragonwealth.com).

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.  

Savers Beware (Continued)

Posted July 14, 2011 by admin. tags:Tags: , , , ,

Written by Nathan White, Paragon’s Chief Investment Officer
Taken from Paragon’s 2Qtr 2011 print newsletter 

Debt Ceiling Debate

As July unfolds, the debt ceiling debate will take center stage. The current fiscal path in unsustainable, and we will someday experience the Greek tragedy now unfolding if we fail to enact any reforms. The main reason why the current recovery has been so sluggish is due to the continued debt overhang. It will act as a drag on the economy until the bad loans and debt are mostly cleared out. The problem with enacting reforms is that it is not politically popular because no one ever wants their benefits cut (that’s why the Greeks are rioting).

The markets always like to be bailed out in the short-term to avoid pain and hard decisions, similar to how we might react with our personal choices. The government is always willing to reinforce this behavior out of political panic and opportunity. The average interest rate on Treasury borrowing is 2.5 percent. If rates were to normalize up from the Fed’s artificial level, it would add hundreds of billions to the annual interest expense putting more pressure on the deficit.

The President’s budget predicts over four percent GDP growth every year for the next three years. These growth figures are so overly optimistic and out of line with general consensus, they are laughable.   Missing these rosy economic projections by even a percentage point with the President’s proposed budget would add trillions to the national debt in just a few short years thereby exacerbating our debt situation.

We are at an interesting crossroads where irony abounds. The healthiest situation for fiscal soundness is to enact reform now before it gets out of hand, but because it is not a problem now and requires some (very mild) short-term pain (i.e., entitlement reforms/cuts) there is not a great will to do so. In the short-term the bond market would like the debt ceiling raised to avoid any disruptions in payments of principal or interest. However, to continue to raise the debt ceiling without any real fiscal reforms will spell disaster for the bond market in the long-term.

Picking Savers’ Pockets

If the government does not like to make outwardly hard decisions, how can they tackle the enormous deficit and debt overhangs? This is where you come in. The government does not need to tax you more outright or cut your benefits – that would be to obvious and politically unfeasible. According to economist Carmen Reinhart of the Peterson Institute for International Economics, the option then becomes what is called financial repression. Financial repression involves keeping nominal (i.e. published or quoted) interest on government bonds lower than inflation. It is basically a form of picking the pockets of savers, and it is already happening.

The Consumer Price Index as of the end of May was running at 3.6 percent. I am sure you are well aware of the rate you get on savings, which is pretty much zero. This means that your cash just sitting around or at the bank is worth 3.6 percent less than a year ago.  This spread directly benefits the government at your expense. It inflates away the value of the debt. This type of action for 10 years could reduce the Debt/GDP level by 30 -40 percent! Voila, it’s like magic! They just stealthily increased your tax burden without you directly noticing. You will feel it over time in the form of a lower standard of living where things just never really seem to get to where they were before.

Although economic growth is slowing, it is still growth, and corporate profits are still very impressive providing support for further equity gains. All Congress and the President have to do is pass real fiscal reform along with the short-term debt ceiling increase, and the markets would smile.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.  

Stop Spending Now!

Posted April 22, 2010 by admin. tags:Tags: , , ,
Real American Money

photo by photos8.com

Written by Dave Young, President of Paragon Wealth Management

In the past we have written about the negative impact of politics on our economy and how politics impact the investment markets.

Political meddling affects the markets in several ways. It creates a host of problems, with slower long-term growth being directly affected.

The problem is fairly simple.

Every couple of years politicians run for office. In order to get elected they make all kinds of promises to those who give them money and votes. In order to pay back their supporters they pass laws and spend money to benefit them. That translates into massive unnecessary spending, which costs everyone but only benefits a few.

The politicians are happy to spend endlessly because they figure that someone else – in the future – will pick up their tab and pay the bill. In other words, there is no accountability or responsibility for their spending because they don’t have to pay for it.

On a national level, the debt they have created has become enormous. The numbers are so huge that most people just glaze over them. In other words, if something doesn’t make sense to us then it doesn’t sink in, and we don’t really understand it. We just ignore it, and we don’t worry about it.

It is time to worry about it.

If this financial mess and its damage is going to be stopped, it is up to the people to get involved and elect people who will stop the out of control spending once and for all.

George Bush was fiscally irresponsible and spent far more than he should have when he was president.

With his promise of “change” Barrack Obama is on track to create a debt in 20 months equal to the debt that it took George Bush eight years to create. After that his own projections show it getting worse.

The short video below puts the debt in perspective. It also shows how insignificant the $100 million dollars that the White House is going to “save” is. It is time to get serious about the debt.

The time for political games is past.

Paragon Wealth
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Don’t Buy Stuff You Cannot Afford

Posted September 22, 2008 by admin. tags:Tags: ,

We saw this video the other day and thought you might enjoy it. It is a funny clip about not buying things you cannot afford starring Steve Martin. I don’t think credit card companies would like this video!

Seven Steps for Building Wealth: Step #4

Posted April 15, 2008 by admin. tags:Tags: , , ,
Carrying large amount of debt

Written by Dave Young, President

Step #4:  Avoid Unnecessary Debt

Debt can be useful if used properly. On a recent trip to Africa, I noticed that there were half built buildings everywhere. Projects were at different levels of completion and then abandoned. When I asked my guide why the structures were halfway done, he responded, there is no banking system. There is no way for the common man to borrow money. People can only complete part of the building because they lack the funds to pay for building supplies right away. So they build what they can pay for now, and then come back and build more next year when they have more money.

If debt is used sparingly, for assets that appreciate or allow you to make more money, then debt makes sense. For example, a house, a car, or an education all make sense.

Using debts for consumables or things that go down in value, makes no sense. Most credit card debt is for things that hurt rather than help your financial situation.

My definition of a credit card is, “A means of buying something unneeded, at a price you can’t afford, with funds you don’t have.”

Set a goal to live debt free. With 1.5 billion credit cards in circulation, an average household credit card balance of $8,562 and an average interest rate of 19%, it’s no wonder that one out of every 50 households filed for bankruptcy in 2005. In the United States the household debt-to-income ratio reached an all time high.

Accumulating debt is the exact opposite of accumulating wealth. If you are paying debts, you are helping someone else accumulate wealth. With the few exceptions mentioned above, avoid debt like the plague.

Financial Basics: How to Stay out of Debt

Posted March 4, 2008 by admin. tags:Tags: , ,
Holding Up Debt

Written by Dave Young, President

DEBT IS NOT ALL BAD. It does have a purpose. I realized this when I went to Tanzania recently.

As we road through the small villages, I noticed several unfinished houses. One had a completed foundation, another had a completed foundation with framing, another had a completed foundation, framing and sheetrock, etc. Each home was unfinished at a different stage and didn’t look like it would be finished any time soon.

I was surprised to see so many unfinished homes. I asked our guide why they were like this. He explained that they didn’t have an effective banking system for the common man, which meant they couldn’t borrow any money. When a person wanted to build a home they had to save up for each part of the home and pay in full before they could continue. Each home took years sometimes to build because they couldn’t borrow money.

Without debt, a society cannot progress.

In order to work effectively, debt must be used responsibly. Irresponsible debt can be devastating to your financial future.

To succeed financially, you must AVOID irresponsible debt like the plague. Remember that there are people who receive interest, and there are people that pay interest. Usually, the payers work for the receivers. My goal is to help you understand principles that will make you a receiver.

Debt is effectively compound interest in reverse.

Look at this situation for an example. A person puts away $100 a month for 30 years.

At 5% interest…………………………………………………………………..$81,886

At 10% interest………………………………………………………………..$208,084

At 15% interest………………………………………………………………..$564,082

At 20% interest………………………………………………………………$1,567,624

Over a 30 year period, the amount accumulated at 15% is more than seven times greater than the amount accumulated at 5%!

If you are paying the interest rather than receiving it, the higher the interest rate you are paying, the more devastating the consequences.

A credit card has been defined as:

“A means of buying something unneeded, at a price you can’t afford, with funds you don’t have.”

Let’s look at some examples of how debt works.

Example 1

Two families have the same income, three children, education expenses to plan for that will cost approximately $33,500.


Chose to meet this obligation by saving $50 per month over a 20 year period and earning 9% interest.

Their total out-of-pocket cost…………………………………………………$12,000


Chose to meet this obligation by borrowing the $33,500 on their home equity line of credit. Their interest rate was 12%. Their payments were $368.40 for 20 years.

Their total out-of-pocket cost…………………………………………………$88,416

Example 2

A person decides to purchase a new car. They purchased it new for $25,000. They paid $2,500 down and financed $22,500 over five years at 9% interest.

ACTUAL COST…………………………………………………………………..$30,523

VALUE AFTER 5 YEARS…………………………………………………………..$9,000

Return on investment……………………………………………………………..-71%

Example 3

A person buys a condo and borrowed $250,000 at 6 1/2 percent interest over:

Years                                               Payments                                                 Total Amount

15                                                    $2,177                                                        $391,998

30                                                     1580                                                            568,861

100                                                   1356                                                          1,627,490

500                                                   1354                                                          8,125,000

A 15-year mortgage is optimal. Any longer than 15 pays unnecessary interest.

When is debt okay?

If it is used to purchase an appreciating asset such as a home, an education, a business, a car (to provide transportation to work), etc.

When is debt NOT okay?

When spent for any depreciating asset. This includes just about everything except what is listed above. Any time you are going into debt for something you don’t need and don’t have money for, it is NOT okay.

The key to staying in balance is the issue of NEEDS versus WANTS. Everyones needs and wants are different depending on your financial situation. Only you can determine specifically what your needs and wants are and your flexibility.

Four Steps to Help you Stay out of Debt

Step 1-

Put together your personal budget with serious attention to identifying your needs versus your wants.

Step 2-

After your bills are paid and a portion of your income is put into savings, determine what you have left to spend. This is called your discretionary income.

Step 3-

Make a list of wants or things you would like to purchase.

Step 4-

Prioritize your list of wants and then only purchase those things that you actually have cash to use. Do not go into debt by spending money you don’t have.

Never spend money you don’t have. It sounds simple. It is simple, but it takes discipline. Mastering the proper use of debt is one of the seven steps to building wealth (we will discuss those steps in another article).

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