QUESTION: Steve calls in from Denver, CO, to ask Dave about investments. He’s retired and has about five percent of his retirement savings in gold and silver, which he’s been acquiring the last few years. Steve has seen prices decline, but he’s wondering if he should hang on to these as a safety factor in the event the economy goes bad in a hurry. He wants to make sure he’ll still have something of value.
ANSWER: What’s the safety factor here? And if everything goes downhill, why does it have value? Gold has this weird allure and mythology around it that says, “I’ve still got something that people will take when the economy crashes.” But the truth is, there’s not been an instance when people used gold as a medium of exchange in a crashed or failed economy since the Roman Empire.
People still use gold because they believe in it, but we also believe in green paper with presidents’ faces on it. So, gold has no more intrinsic value than green paper. The only reason we place value on it is because we, the society, place value on it. A failed society might not place value on it anymore.
In a completely failed economy, the first step is usually a takeover by a Fascist government. After that, you get a new color of money – of paper – with a new president’s face on it. Then, the old stuff isn’t worth anything. It’s very seldom that you ever see gold come to the rescue.
I don’t believe in investing in gold for that reason. It’s mythology. Plus, the track record on gold, as far as a rate of return, is horrible over the long haul. There was a time a few years back when everyone was going crazy on it, but other than that? Ugh!
QUESTION: Trudy in Tampa, FL, is a long-time listener of Dave’s show. She’s debt-free except for her home, is currently making $60,000 a year, and she’ll have her house paid off in 12 months. Trudy lives in an area that is a designated flood plain. She pays $1,070 per year for flood insurance, and her house is worth $325,000. Water has come halfway into the yard a couple of times in 26 years from a river behind her house that empties into Tampa Bay, so she asks Dave if she should continue to maintain flood insurance.
ANSWER: It sounds like your biggest issue might be if a hurricane caused a backwash in your area. Insurance is already pretty tough in Florida when it comes to hurricanes and that kind of thing, but you don’t want to run the risk of the house getting mowed down and losing the whole thing.
I think I would go ahead and stick with the flood coverage if I were in your shoes. What you’re paying for it is such a small percentage of your world, compared to the value of your house and your income. Keep it!
QUESTION: Taiwan is a social worker in Phoenix, AZ, who has been through Financial Peace University. He’s calling in to ask Dave about two or three options to generate some “passive income.” He’d like to find a way, other than rental properties, to make more money.
ANSWER: “Passive income options” is a term that sometimes comes from things like nothing-down real estate seminars. It’s a phraseology often attached to get-rich-quick schemes, and I want to make sure you’re not thinking about dabbling in anything like that.
Passive income is pretty simple; it is income off of investments. It’s money you set aside, and it makes you money. There’s not any other income that is real passive income. Now, if you wrote a book and got royalty fees off it, some people call that passive income.
I wrote a book years ago called The Total Money Makeover, and I get royalties off that. But the people who would call those royalties passive income didn’t follow me around working my tail off to sell that thing. To me, it wasn’t “passive income;” it was a business. Technically, the government would call it passive income, but they don’t have anything to do with reality.
I only invest for passive income in two things — real estate, for which I pay cash, and good growth stock mutual funds. Active income usually takes the form of a small business idea and/or your career. That’s income that you, yourself, are literally creating. That’s how I look at this stuff. Some people may have different views on it, but I like to keep things simple.
QUESTION: Gina in Texas is trying to help a friend who is experiencing financial problems. Her friend is between jobs at the moment and only bringing in about $600 a month. Even when her friend is working regularly, Gina says she doesn’t budget and manage her money wisely. She’s always looking for more money, too. On top of all this, the friend is holding out hope for a dream job in another state – one she interviewed with several months ago and hasn’t heard a response from since. Gina asks Dave what he thinks she should do to help her friend.
ANSWER: The way you describe her makes her sound kind of impulsive and flighty. I’m thinking that maybe she’s a little bit immature, too. I don’t mean this as a put-down so much as an assessment. I’m just trying to get a handle on what we’re dealing with here.
So really what we’re talking about is how to get your friend to grow up a little and quit chasing rainbows. There’s nothing wrong with going after a dream, but you have to be realistic and practical at the same time. Right now, I want her chasing about six smaller rainbows at once so she’ll actually have a chance of catching something. When you chase just one, you end up with nothing in most cases.
The first thing I’d tell her is that the most employable people are the ones who aren’t broke. When you go into an interview and you’re broke, you’re tense and you don’t make for a very good candidate. The answer to that, when you’re basically unemployed, is to work any job – and six any jobs. Wait tables, walk people’s dogs, deliver pizzas, cut grass … I don’t care what. Just generate some income. Work all the time — and smile! You never know when you might be talking to your next employer. You could be walking someone’s dog one day and end up in their marketing department later. But none of this will happen if you’re not out there trying to make stuff happen. Sitting at home watching Oprah reruns, and trying to feel better about yourself that way, isn’t the answer.
In all this, I’m assuming that she’s willing to listen to you a little bit because you’re friends. But if she won’t, all you can really do is pray for her. It’s like the old saying goes, “Those convinced against their will are of the same opinion still.”