Some Musings On Debt - Advice for the Indebted

Many of you carry various types of debt; the most common and easily accumulated debt is credit card debt.

Merchants love that we have the 'plastic' because it feels so much less like actually paying for something than when we use real, hard, cold cash. Problem is, we use our credit cards too much. The average US citizen has over $8,000 in credit card debt. And, if all you're doing is making minimum payments, you're not putting a dent in that pile of debt you've accumulated. What to do, what to do?? Here are some options to consider - best is to adopt all of the following, of course!!

· First and foremost, stop spending money you don't have. If you're saddled with unmanageable debt, cut up all your credit cards and limit yourself to using cash, debit cards and checks. If you don't want to cut them up, throw them into a freezer bag, fill it with water and put it in the freezer; at least if you do get the urge to splurge you'll have to wait for your cards to thaw, and, well, by then you'll have time to think twice!!

· Work with your credit card companies to reduce your interest rate. Call up customer service and explain that you are experiencing financial difficulties but that you want to be able to continue making payments; ask for a lower rate. Typically, if this is your first time, you'lll get what you asked for. If not, hang up, and call again... You'll get a different customer rep... Try again... If that still does not work, call them up once more and say you want to have the card closed to new purchases - that should work the magic and they most likely will offer you a lower rate.

· Consolidate your debt - if you own a home, best is to get a home equity line of credit from your bank; pay off all your credit cards, that likely carry rates ranging from 12% to 24%, and you'll be left with a single monthly payment to your bank which may run as low as 4%!! You can also consolidate all of your debt under a single card - negotiate with the credit card company first and let them know you would like to transfer balances from other cards; again, they'll usually offer you a lower rate to do so. Cancel and destroy the cards you will no longer be using!!

· Pay down as much debt as you can every month - spend some time budgeting and maximize the debt you pay off every month; this will pay off greatly in the long run. As you pay off your debts, make sure to first pay off those debts that carry the highest interest rates!!

Finance 101 - Markets are NOT efficient...

One of my famous pet peeves is that - contrary to prevailing academic opinion - markets are not efficient. Kahneman and Tversky are far more "in the money" than Sharpe could ever hope to be... (witness the dismal failure of Long Term Capital Management and the ensuing bailout...)

In my own investing as well as in the finance classes I teach I've taken a "nishtahin nishtaher" approach - i.e. neither here nor there, but rather as a compromise which allows the century long battle between fundamentalists and technical analysts to subside into something manageable. One must carefully analyze the fundamentals - yet make trading decisions based on the basic precepts of technical analysis. Why? Because technical analysis reflects the psychology of the market.

I was glad to come across a series of articles from Investopedia that serve to support my own theory; they are:

Brumley (2006) What can traders learn from investors?

Brumley (2006) What can investors learn from traders?

and...

Vonko (2006) Fundamental analysis for Traders.