Cash & Loans Advice Blog

If a credit event occurs…

Selling short-term and buying long-dated protection leaves a forward short position, which would benefit from a steepening in the credit curve and vice versa.

Senior versus subordinated CDS strategies: The senior-to-sub spread differential in CDS is driven fundamentally by expected recovery values. If senior spreads are half those of subordinated, then the expected senior loss following default is half that of sub. A 50 percent senior recovery (50 percent loss) would imply a 0 percent subordinated recovery (100 percent loss) A potential strategy is to sell subordinated protection and to buy senior protection (weighted). It offers the chance to unwind at a profit if the seniorto-sub ratio mean reverts to historical averages (positive carry trade). If a credit event occurs, the payoffs will reflect the actual relative recoveries in sub and senior debt.

The Grandosity Issue

Successful real estate speculation leads to grandiosity. Small real estate investors, who missed the stock bear market of 2000-2001, are prone to grandiosity.

Grandiosity, when returns are positive, manifests as extreme good humor and excitement. Grandiosity can be intoxicating. Once experienced, gamblers seek to recreate the high. Day traders continually believe they will have another streak. Tech investors search for the next Microsoft. Real estate developers crave breaking ground on the next mega project.

Yet, even on a winning streak, grandiosity has a down side. A sense of isolation is common. Sudden wealth stands out in a society where savings are accumulated slowly. Grandiosity can lead to a loss of connection with family, friends, colleagues, social norms, and even one’s self.

Grandiosity is often followed by both poor investment results and personal unhappiness. Crashing from grandiosity can be very painful. The detox process leads to grief, sadness, plummeting self-esteem, self-loathing, or depression. Thoughts of suicide are common. Actual suicide is the extreme manifestation of fallen grandiosity.

Although some people are not prone to grandiosity, you should consider any experience you might have with it.

Decreasing fixed expenses

Decreasing your fixed expenses can result in a huge jump in your discretionary income. Oftentimes, though, getting rid of or lowering a fixed expense can take a major lifestyle adjustment. But when you are battling to eliminate debt, the thousands of dollars you may save might well be worth it. Here are some ideas:

1. Ditch the ride. Over my years as a financial planner, I’ve seen few things that suck up as much discretionary income as a car payment. Add in the other costs such as gas, insurance, and maintenance, and you can easily spend $5,000 to
$10,000 per year for the privilege of sitting in traffic. One to two years of riding the bus or subway, or even carpooling with your accountability partner, may get you completely out of debt!

2. Put a smaller roof over your head. There are a lot of reasons why you may have needed a bigger house or apartment in the past. But since the kids moved out, the dog ran away, and you’ve sold a bunch of your stuff at a garage sale, you could make do with less space. A few hundred dollars less per month in rent will go a long way toward getting you out of debt.

3. Cancel your PMI. Mortgage insurance is required by most lenders when they loan you more than 80% of a home’s value. However, when your mortgage balance drops below 80% you are no longer required to pay PMI. Oftentimes, companies will continue to charge it until you ask them to stop. Canceling your PMI as soon as you’re eligible can save hundreds each month.

4. Cancel unused subscriptions/memberships. Whether it’s the gym or the newspaper, there are a lot of things that slowly nickel-and-dime us to death every month. A couple of canceled memberships or subscriptions could easily save $50 per month, or $600 per year!

5. Shop your insurance. If you haven’t updated your life, health, auto, or home insurance in the last few years, now may be a great time. Besides making sure you don’t have too much insurance, you may also find significant savings as you shop.

How to increase income

1. Rent out a room. If you own a house or are renting an apartment by yourself, you might be able to seriously knock down your debt by renting out a room to someone else. An extra $300 to $500 per month goes a long way!

2. Start blogging. You can start an online diary of your own, with ads built right into them, or you can sign on to blog for someone else. Blogging for someone else can pay anywhere from $3 to $20 per post, especially if you have a unique perspective or skill.

3. Freelance. If you have certain job skills or talent, ranging from bookkeeping to website design, you can make significant money working from home. Go to Google and search for “freelance websites” where you can bid on projects people need completed.

4. Tutor. Were you that kid who always got 102% on the math tests? Do you love American History or Spanish verbs? There are a lot of kids who don’t, with parents who are happy to pay $20 per hour for good tutoring. You can tutor on the weekends at your local coffee shop.

5. Turn your hobby into a home business. When we were really poor, my wife learned how to make beaded jewelry at her preschool mom’s group. We started using her creations in place of store-bought gifts, and it wasn’t long before people were asking how to buy them. She works when she wants and makes an extra $2,000 to $3,000 per year.

6. Open a home day care. If you are already a stay-at-home parent, taking care of a few extra kids besides your own can bring in significant money. After a few required classes and a safety inspection, you can start providing day care for other children at $8 to $15 per hour, per child!

7. Recycle. For years, I was that parent scooping up all the cans and bottles after my kid’s baseball games and at my office. The $10 to $20 per week I’d earn on Saturday mornings helped me overcome the weird looks I’d get from my coworkers.