Here, then, are five strategies you can use to give meaningful gifts your recipients will love — and actually use!

What are good gifts to give —
for even the pickiest recipient?

1. Avoid giving “stuff” if at all possible.

   All of us get an inordinate amount of “stuff” every year. Most of it clutters up our houses, and therefore, our life. I’m a big proponent of reducing the amount of stuff in my life, so I don’t like these gifts. Instead of giving stuff, why not give an experience they will remember for a long time to come?

   Here’s an easy question. Simply ask the gift recipient where they shop, eat, or would like to have a spa day, nail treatment, etc. Don’t let them get away with vague answers like “I buy most things at my local grocery store.” Ask them, “Where is your favorite place to shop?” Then give them a gift card fom that place.

   My mom gives me Amazon gift cards, which are nice — but they do contribute to the stuff accumulation in my life. I wouldn’t mind gift cards to my chiropractor, for instance, or my massage therapist. Heck, even paying a month of my gym membership would be awesome. The point is, these are all experiences I enjoy and that make me feel better. Why not contribute to someone’s well-being instead of contributing to their closet?

2. Give gifts that will save the recipient money.

   I admit to being a rather quirky gift-giver. Last year for the holidays, I gave everyone in my family about $75 each worth of compact fluorescent bulbs. With each gift, I explained why I had given it. “Installed properly, these will save you about $5-10/month on your electric bill,” I said. Then I helped them figure out where to install them in their house for maximum savings.

   If we all switched to compact fluorescent bulbs, we’d save 15-20% monthly on our electric bills, and our overall electricity demand in the U.S. would drop by 18%! [source]

   I’m definitely a crusader for environmentally friendly products, and I’ve been known to give away many CFL bulbs. But I can’t think of any better gift to give than one that takes less than 5 minutes to install and saves the recipient money, month after month. Who couldn’t use an extra $10-20 a month?

   Another gift in the same vein is a programmable thermostat (though you might want to consider how handy your recipient is, or offer free installation with it). Finally, a “smart” power strip that shuts off all devices when the primary one is turned off can help avoid “vampire” energy-sucking appliances by automatically turning off a DVD player, video game console, etc. when you turn your TV off.

3. Consider “add-on” gifts that the recipient would have to buy anyway.

   Find out what printer they have and buy cartridges for it. Find out what kind of razor they use and buy extra blades for it. If they have a video game console with only a single controller, consider a second or third controller. Buy them some blank DVDs or CDs so they can burn backups or music. If they print photos at home, get them some nice photo paper. Find out what exact bathroom and household supplies they have and buy them more of what they already own.

   These are great gifts because you practically guarantee they will get used. Instead of buying them something new (and therefore less likely to be used), you’re helping them use something they already own without outlaying additional cash.

4. If they have a subscription they like, continue it for them.

   Subscriptions and other “small luxuries” are often the first to go in a downturn. If your recipient loves Netflix, for instance, help them out by extending their subscription for a few months. Other subscriptions to consider extending include magazines, gym memberships, newsletters, and newspapers.

   The catch is that they actually have to be using that membership for this gift to be worthwhile. There’s a simple solution to this — ask them! We all love to talk about whether a certain service helps us or not. You won’t look foolish for asking “Hey, I noticed you had a couple Netflix DVDs on the table. Do you like their service?” Rather, you’ll appear interested in their life — and thoughtful when you later give the gift!

5. Buy gift cards for an experience they will remember — not for stuff they won’t use.

   One of my fondest memories was when a client we had gone above and beyond for sent my company a Ruth’s Chris gift card. Ruth’s Chris is a fantastic, high-end steakhouse. I wouldn’t typically eat there on my own, but the gift card made for a truly enjoyable experience. I can’t remember most of the gift cards I’ve gotten, but this one I will never forget.

   What’s a local, really nice restaurant near your recipient? Where can they go and have an amazing experience? Try to pick a place you’ve been to yourself. If you don’t know the area, use Yelp or Citysearch to help you find the cream of the crop in restaurants or spas.

What’s the point? We can all do a lot better at identifying what gifts to give recipients. Often, my friends and relatives complain that I’m hard to buy for. But by using these simple tactics, you can figure out what even the pickiest gift recipient would find useful.

By the way, if you want to buy a small holiday gift for your favorite blogger — particularly if I have helped you grow your business — I have the $13.99/month (2 DVDs) Netflix plan, and my email address is erica@erica.biz. You can buy Netflix gift certificates here. Thank you in advance!

I’m at the Train the Trainer workshop in Los Angeles, CA. The goal of this 5-day workshop is to train you on how to speak in front of an audience…from specific ways of handling questions to actually getting up there on stage and speaking.

Tonight was “Outrageous Night”, where we had to dress up in costumes and perform a minute-and-a-half song in front of 100 people. We were not allowed to lip-synch or talk.

Before we got up on stage, we were asked to write down some fears and obstacles we would like to overcome in our performance. Dancing is a huge fear of mine, which stems from my fears of not being perfect and of looking silly. And, of course, one of my beliefs is that I have to do everything myself — which was why hiring an assistant was such a huge step for me.

Before we were scheduled to go up, we had an hour and a half break for dinner. I knew my mission was to find a guy and set up a dance routine with him. I was really clear that this was part of what I had to do to overcome my fears.

The song I had picked was Madonna’s “More”, which is from Dick Tracy. (If you don’t know it, click on that link and watch the video.)

I walked downstairs and found a guy about my age sitting at the hotel bar, eating. I introduced myself and explained that I needed a dance partner. His name was Eli, and he agreed! I showed him the video I linked to above on my laptop, and we agreed we’d do the hand-in-hand part you’ll see Madonna perform with Warren Beatty at 0:53 in the video. After that, he spun me off and I was off to sing, “Got my diamonds; got my yacht….got a guy I adore…!” and run across the stage and put my arms around Eli.

The End

This went on for over a minute, and finally I was done. Now, there was a hugely important part at the end. The crowd had to give us a standing ovation. (By the way, this may sound fake to some of you…like it wasn’t real because they “had” to do it, but that couldn’t be farther from the truth. We really did want everyone up there to succeed, and it was real for everyone.)

While they were giving you a standing ovation, you had to stand at the front middle of the stage for ten entire seconds with your arms wide open and just accept it. No nodding, no “thank you”, no embarrassed “aw shucks” look. Just stand there, breathe, and watch over 100 people honor you with a standing ovation.

Let me tell you, that first moment, when they erupted in cheers, was one of the most amazing and powerful moments of my entire life. I had my arms out and I had the quick vision of being an Olympic gold medalist when she absolutely 100% knows she freaking nailed it. I knew I had nailed it. I had the voice. I can do Madonna. I sang the crap out of that song. The choreography went great. And as I stood there, back completely straight, proud, with my arms out, and a huge smile on my face, taking in the applause, something really strange happened.

I don’t know how to explain this, except I know that something like this has happened to you, too. One moment stretched out for eternity, and all of a sudden, I saw myself 100 times over again, standing there, in front of the audience, receiving that applause. I absolutely knew, with astonishing clarity, that I am meant to be a performer. I am meant to be on stage. Being on stage and doing motivational speaking is how I’m meant to transform millions of other people’s lives in this lifetime.

The Beginning

I want you to get this, because it’s so powerful. If you have ever had a moment where you knew what you were meant to be doing — if you have ever had that vision with such clarity — it’s time for you to do everything in your power to honor that, and to move toward it. I don’t care what your excuses are. No money? You’ll find it. No time? You’ll find that, too.

But when you move toward that moment of clarity — and set your entire life into motion to achieve the goal showed to you then — there’s nothing that can stop you. The only thing holding you back is that bullshit voice in your head. You know that one…the one that tells you you’re not good enough, or you’re not worthy, or you don’t have this or that. Tell it to stop. That voice isn’t you! It’s just a stupid voice! So tell it to shut the heck up and get on with changing the world…because the world needs you. It needs you to step up and become that vision.

We need you. Not the you that plays it safe and sits at home, but the you who says, “I’m ready to take on challenges, because I know they will only make me stronger. I’m ready to play my game at full strength and honor the good that I have to give to this world. And I’m ready to make sure nothing will stop me in pursuit of my goal to help other people.”

Are you ready? I think you are. I think you are able to achieve much bigger things than you’ve let yourself achieve so far.

It’s time to put it all aside and start anew. Who is that real you? I know you’ve seen it in flashes. Right now, it’s time to step into your new clothes.

I’m ready.

Is emulating the “big boys” really a key to success?

Sometimes, corporate is good — it’s professional. For instance, I don’t recommend using those tear-out business cards with dotted-line edges. Can we put those back in the 1980s where they came from?

The mistake I most often see is not in business cards, though — it’s in the message of your business. There is a pervasive belief that the more “corporate” your website and emails look, the better.

I completely disagree, and here’s why.

Why You Shouldn’t Emulate Large Corporations

Many of you, as business owners, look to large corporations’ websites and marketing materials to see what you should do. For instance, if you’re starting a restaurant, you may wish to emulate the Cheesecake Factory website.

There’s nothing inherently wrong with this, except that you do yourself a disservice by trying to clone these websites. By making your website a clone a big company in your industry, you miss out on the largest marketing opportunity for your small business: you.

I have a new marketing message for you: Be personal.

Here are seven ways you can beat the big corporations by refusing to play their “corporate” game:

1. Have an About page that talks about you, not just your company. One of the first pages I click on on any website is the “About Us” page. I want to put a face to the name. Why are you doing what you’re doing?

   If your blog doesn’t have an About page, I won’t subscribe. It leaves me feeling “empty” — even if the content is fantastic, I have nothing to anchor that to.

   Also, when I go to your About page, I don’t want to read your resume! Please don’t barrage me with bullet points. Just write an honest, factual description of who you are and why you started your business or blog — and put in your picture!

2. Use personality in your emails. When you send an email to your customers, as far as I’m concerned, the more personal you get (in terms of how you view your business), the better. When I say “personal”, I’m not talking about adding a little token that inserts the customer’s first name from your database. I’m saying — tell us your thoughts, your actions, and your successes. If you’ve had a failure, explain why and what you’re doing to rectify it.
3. Tell your customers you take failures personally. If you own a business, you should be taking failure personally. You will create a bond with your customers by emailing them all or calling them — even if they weren’t personally affected — and sharing what your failure was and how you’re taking action so that it won’t happen again. Then, as soon as you finish telling your customers, take that action — even if it means making a tough choice, like firing an employee.
4. Stop being so afraid to call your customers. It’s often easier to throw together a pre-generated email to your customers than it is to pick up the phone. If you really want to make an impression on your customers, give them a call.
5. Send hand-written thank-you cards. If you want to have your assistant mail these out, there’s nothing wrong with that. But sign every one individually. If a customer, a vendor, or a supplier has really gone out of their way to help you, let them know with a hand-written, mailed thank-you card. Thank-you cards are a lost art, and they’re something that customers appreciate.
6. Acknowledge that you can learn from your customers. When a customer offers you advice, listen! Write it down. Think about it. I often received advice from our customers — from loony ideas that would never work to good ideas that we implemented to become more successful. No matter the idea, however, I listened to it. I replied with, “That’s good advice. Thank you. I’ll see if we can do something like that.”
7. Enjoy the fact that your business is small. Big businesses have a host of their own problems. Don’t be afraid to be small. Being small means you have a better opportunity to deliver the best customer experience. It means your customers can pick up the phone and chat with the CEO (that’s you!) if they need help. It means you are personally committed to your customers’ success. Tell your customers this!

Why Should You Be Personal?

In every single business, you will win customers by letting them know that there’s a person out there on the other end of the transaction. What customers want to know most is that they’re heard — that someone out there is listening to them and taking them seriously.

Like I said, I learned this the hard way. I used to send out boring corporate emails with no real information in them. They would have titles like “Simpli Hosting Customer Newsletter.” Yawn!

Once I started to put some personality into my business, it started to take off. I ignored the naysayers who said I was putting too much of myself into my business and that 1) it would scare away large customers and 2) I would never be able to sell the business.

Those opinions are based in fear…that if you truly connect with a customer, your business will forever be small. It doesn’t work that way.

It really comes down to how you define success. Some would imagine business success as having a huge company with tons of employees and a giant office. I would argue that the real successes are the little ones that most people don’t know about: the happy customers who thank you, and the lives you know you have made better with your business. And yes — to stop the naysayers — you can make a multi-million dollar business with a personality!

With that said, go out there and be personal. Send hand-written cards and put your grinning face on your website. Make your customers excited to give you their money. That’s success.

Recommended Reading:

• Sparkplug CEO is running a contest where you can enter to win a new printer. One of the ways to enter is writing a blog post sharing the best marketing advice you received when you were new to starting a business. This blog post is my entry into the contest. Thank you, Sparkplugging, for this opportunity!
• How to Win Friends and Influence People. If you haven’t read this yet, buy it today. Includes a gripping story of “the best car salesman in the country” (something we can all learn from — he didn’t get customers in the way you’d expect!)
• How I Turned My Mediocre Website Into A Million-Dollar Business. Hiring fancy website designers isn’t the key to success, either.
• Are Your Business Cards Still Stuck in the 1990’s? Business cards are a good way to get personal, too. I show off my unique business cards in this post.

Manifesting A Trip To Tahiti

Tahiti, by Robbi BabaI recently picked up the book Money, and the Law of Attraction by Esther and Jerry Hicks. I can already hear some of you sighing… “Erica, surely you don’t believe in that stuff.”

Actually, you might be surprised to find out that I became a believer after consistently envisioning for several months that I would sell my business for $1 million, and then doing it. I’ll explain how I did it in another blog post.

In the meantime, since I’ve achieved that goal, and am working hard toward my $10,000/month in writing and blogging income by the end of 2008, I decided to envision something more fun. I noticed on the Abraham/Hicks website that they were taking a cruise to Tahiti next year. I was disappointed to find out, however, that the cruise was sold out and the wait list was closed.

I used a bit of intuition to figure out how to get on the wait list even though it was closed. Then, I figured I’d have a bit of fun. Every day, I close my eyes and imagine myself on a cruise to Tahiti. I also taped up a picture of Tahiti next to my monitor on my desk.

I will be taking a cruise to Tahiti. I won’t guarantee that it will be that cruise, but I figured I’d let the Law of Attraction do its thing. I’m not pushing to get on the cruise. I haven’t booked plane tickets, I haven’t surfed other cruise websites, and I’m not doing my typical research on the location. I’m simply envisioning being there every day, and what it will feel like, and how glorious it will be.

Having done this for a few days now, I’m starting to see small “echoes” of cruises showing up in my life. For those of you who are into the Law of Attraction, you should recognize this as the recognition that my thoughts are having an effect.

I’m sure at this point that some of you will think I’m absolutely nuts. But for me, this is an important experiment. I push hard to make the things I want happen. What if I don’t really need to push so hard? What if all I really need to do is truly become in alignment with those things and then act on my intuition when it is appropriate? This thought experiment may show me a much easier way of achieving my goals.

I’ll keep you posted. Either way, I’m having a blast doing this.

Income and Inspiring Innovators Status

Many of you have been asking how I’m doing regarding my goal of making $10,000/month online by the end of 2008. Progress has been a bit slower than I had hoped, but I’m still going for the goal. Last month, my income was $1199.21. I made $291.10 from this blog, $861.00 from sales of an interview I did, and $47.11 in recurring membership fees from the site I acquired in June. (Turns out his revenue of $800/month was mostly from one-time sales, not memberships, as I had thought.)

I recently completed several more interviews, including one with Steve Pavlina, where he shares how he created a blog with over $40,000/month in income and millions of visitors per month. As soon as I have the transcriptions of these interviews, I will be posting them here. The Steve Pavlina interview will be free; others will be part of Inspiring Innovators.

I plan to launch Inspiring Innovators next month. Initially, there will be a monthly fee of $18 for access to 2 interviews per month with successful entrepreneurs and a community forum for all members to share experiences and network. Later, there will be an additional premium membership, which will be a way for you to get consulting directly with me about how to grow your business.

Once I launch Inspiring Innovators, I’ll keep you in the loop about how the business is going and what interviews I have available. Like me, I have a feeling you will find many of these stories inspirational!

Other Great Blogs You May Like

I’ve been reading several fantastic blogs lately. Here’s a highlight:

• Jamie Harrop interviewed me, and then compiled my interview, along with interviews of 9 other interesting bloggers, into a free ebook. The ebook gives insight on how to grow your blog to thousands of subscribers. Thanks for thinking of me for this series, Jamie!
• Cath Lawson, whom I found out about when Jamie interviewed her, seems to be my long-lost twin. She also started a successful business and is now running a blog talking about her business experiences. If you enjoy my blog posts, you may like hers, too!
• Roy Leban is on a mission to build a web startup in 30 days. He’s blogging about the startup and his challenges and goals. For those of you who wonder what it’s like to build a web-facing startup company, Roy gives great insight.
• Derek Halpern made a 6-figure income from blogging in 2007. He ran several celebrity/pop culture blogs, and is now blogging about what it takes to be successful in business.
• Brian Armstrong wrote a book called “Breaking Free” on how to start your own business, and is also blogging about how to start a business.
• Christine OKelly recently came back from a long blogging hiatus to share more of her story. She took the plunge and started a business when she had 2 kids and no savings, and it hasn’t always been an easy road, but she blogs with a refreshing honesty.

I had come to I Can Do It with my mother that year. I was driven to come to the conference because I had known since I was quite young that I was destined to become a writer. But I struggled to connect with any author at the conference. They were swoopy and syrupy and spiritual, and they had legions of adoring fans who mobbed them for autographs. I was practical, a straight shooter, and a technology freak who owned a web hosting company. I felt uncomfortable and out of place.

The conference had started on Thursday, and on Saturday night, I finally broke down in our hotel room. The tears flowed, and I explained to my mom that I had wanted a sign at this conference as to what I was supposed to do to become a writer, and I hadn’t seen it.

My mom said, “Don’t write this off yet. You have one more day here.”

The only thing I had planned to look forward to on Sunday was a meeting with Steve Pavlina and a group of people from the forums on his website. That morning, I grudgingly got up early and went to meet them. I had no idea what to expect.

Meeting Steve Pavlina

There were about 20 people at Steve’s meetup. Many of us wanted to know how Steve had gotten started, and gradually he relaxed and began to tell his story. He was a techie, who had also run a technology company that didn’t quite fit him. So instead, he started a blog, not knowing where it would go…and ended up reaching millions of people and pushing them to change their lives for the better.

(Picture borrowed from Steve’s website; I’m the one near the middle wearing a patterned brown and tan shirt. Steve is wearing all black and is in the middle; his wife Erin is to his left.)

As I listened to Steve’s story, something clicked in my head. Finally…exactly what I wanted: a clear path to success, articulated by someone I had a lot in common with. Later, as I pored through what Steve had written on his blog, it occurred to me that there was nothing he had done with his blog that I couldn’t do with mine. It was then that I understood what I had the potential to become.

Taking Action on My Decision

I came home and made some big changes. First, I immediately hired another employee at Simpli. Over the next few months, I also got serious about selling my business.

I wrote all about it, of course — on a blog post that you probably haven’t read, since I wasn’t promoting my blog at that time. I called it “What’s Most Important?” It may be one of the most important blog posts I have ever written, because in it, I acknowledged publicly that I was ready to step up and embrace my future. I wrote it right after I came back from the I Can Do It conference, on June 2, 2007.

Here it is, in part:

I must simplify my life, and whittle down what I do to the things that I am absolutely the most passionate about, or else I risk being stuck in mediocrity.

I know that one of my large purposes in this life is to help other people eliminate fear and overcome obstacles…to obtain goals previously thought of as impossible, and to influence people to change in a positive manner and thus leave a lasting impact on the world. Instead of a series of small, relatively unimportant tasks, then, I needed to focus my objectives and only say “yes” to those things that aligned properly with my Big Goals.

A lot of previous things that I had said “Yes” to needed to be turned into a “No” or “Not any more” due to my changing life circumstances. Either the task gets done by someone capable, or it does not get done. In neither case, though, does it rest on my shoulders.

This may sound facetious to some of you. “How can you turn away people who ask for your help — especially if your skills align with their needs?” And the answer is simple — my life involves a call to action to help millions of other people. I can’t spend time doing web design or volunteer work for a small group if I could instead be turning my focus to things that help thousands or millions of others. If that still sounds bad to you, I recommend that you set bigger goals.

There’s no reason you, too, can’t go out there and help millions of other people. But to do it, your life must be keenly focused so that every resource you have is turned toward that goal. Your most valuable resource becomes your time — so much so that you’ll need to hire layers of other people just to help you out. If you succeed, your success will be breathtaking. And if you fail… is there really such a thing as failure if you set out with a goal to help millions of other people, and only succeed in helping hundreds or thousands of others instead? Really? Here’s the worst that could happen — you only improve 1 person’s life: Your own. If you’ve put happiness in your own life, you haven’t failed.

What I must find is time. From having someone clean my house to having a personal assistant who can help me/Simpli do the tasks I don’t have time to do (such as filing papers), I must clear out my time so that I have time to do what matters most to me. Once those repetitive, menial tasks start disappearing from my horizon, I can start achieving bigger goals. As I do this, I expect to write more (after all, that was one of my Big Goals for 2007 — “blog more often.”) I expect to work less. And I expect that I will feel happier and more fulfilled, because instead of energy-draining labor, I will be spending time living my dreams and fulfilling my passions.

I look back on that post, and I remember the energy and passion I had when I was writing it. Fresh from meeting someone who finally explained to me a path I could understand to becoming a successful author, I could finally see what I had to do.

Getting From There to Here

After I sold my business, I bought the domain name erica.biz and migrated all my old blog content to it. Then, I started writing…but this time, I made some changes. Instead of just writing about my day-to-day life, I started writing for you. With every post, I wanted you to think differently about something. And if I didn’t have a post that would engage you to think differently, instead of just churning out a bunch of links or a rehashed post and calling it a day, I simply didn’t post.

Hunter Nuttall asked me recently, “How did you grow your blog to over 1000 subscribers in just 10 months?” It was quite straightforward, actually. I set a goal to write one post a week. That post had to be an ass-kicking, life-changing, no-B.S., get-you-thinking post, or I didn’t publish it. If I couldn’t think of a great post, I’d let the blog sit until I got so irritated with myself that I had to write.

I challenged you — all of you — to reconsider buying a house, and I evangelized cheaper cars. I pushed you to grow your own business and told you to stop letting fears get in your way. I explained that selling a business wasn’t all roses.

As my blog grew, I started to get a steady stream of emails and comments thanking me for knocking loose a few old beliefs. Now I am getting so many comments and emails that it is hard to keep up — but I do my best, to honor you for your time spent here.

Your Turn!

You might be saying, “Yes, but I can’t be like you, Erica.” Challenge that belief. The reason I write is to show you that no matter what the economy looks like or no matter how much you hate your job, you have a better life waiting out there for you. I’m here to push you in the direction of accepting your higher purpose in life.

The first step to success is simply to believe what you want most — your perfect life — is possible. If you wonder how you can become a best-selling author, or how you can make a living full-time on the Internet, I offer my example as one path.

Steve Pavlina recently released his first book, Personal Development for Smart People. I have read it, and I’m impressed by it. More than even the great content, though, Steve’s book shows that it is truly possible to make a living doing what you love — in my case, writing — and that you don’t have to settle for something that sounds like it will pay a lot more. It may take years for your passion to pay your bills, but it will be absolutely worth it. As I held the book, I recognized what it meant to me — it was a beacon, showing me my own way to success.

I’d like to thank you for joining me as I walk down this path toward helping millions of others. It is your emails and your thoughtful comments that keep me writing here. Know that even if I can’t reply to everything you write me, it is all read, honored, and appreciated.

Thank you.

Recommended Reading:

• Personal Development for Smart People by Steve Pavlina. If you’ve read Steve’s blog and enjoyed it, or you’re interested in building a foundation to achieve your dreams, you’ll want to read this.

Given that nearly every class of investment seems to be going down, what is the best way to invest your money (for the long and short term) to buck the trend? In this post, I break down how to invest your money during this downturn, based on how long your investment horizon is.

Long-Term: 10+ Years

The two most likely assets that you will want to hold on to long-term are your house and your retirement account. Let’s examine each of those in more detail:

Housing.
If you own a house: Make sure you are on a fixed-rate mortgage (preferably with a term length of 15 years or less), and that you can afford the payments for months even if you were to lose your job or income. If you are on an adjustable-rate mortgage, call your mortgage company and negotiate to get a fixed-rate mortgage at the lowest rate possible.

If you are on a mortgage and cannot afford the adjusted payments, or you have housing-related debt that will be untenable long-term, this is the time to drop all emotional pretense and admit that you cannot afford the house you are in. Whatever you do, do not pull money out of a retirement account or put money on a credit card to pay your house payment. Your house will be worth less next year than it is right now — there’s no point in throwing good money after bad.

Call your bank and immediately arrange a short sale of your house, and then rent for a few years and save up money. There’s nothing wrong with renting — especially if it frees up hundreds or thousands of dollars a month that you would otherwise be throwing down a drain. Even with a foreclosure or short sale on your record, you will be able to buy a house again later, when your cash position is better and houses are more affordable.

If you rent: Continue renting for at least another year, no matter where you are. I have heard some people say they are planning to buy a house because they are afraid they won’t be able to get a mortgage next year. Do not make one of the largest financial decisions of your life based on fear! If you plan to buy a house, you should be saving money every month toward that house…putting you in a stronger cash position. Also, every year for the next 3-5 years, you will have more cash and houses will be worth less — a win-win proposition. Your patience in continuing to rent will be rewarded.

401(k)/IRA accounts. If you’re investing for the long term, keep your money in an index fund. The stock market may go down short-term, but that means your money buys more. Eventually, the stock market will recover. If you plan to retire in the next few years, you need to adjust your 401(k) and IRA out of the stock market now and put that money into a safe haven such as bonds.

Intermediate-Term: 5-10 Years

Pay down all your credit cards. If you already have debt, especially credit card debt, it’s key to pay it down as soon as possible. Tally up everything you spend money on (I track my expenses to the penny every month.) Really look at those numbers. Where can you cut back?

You may be surprised at what you’re spending money on — I found my boyfriend and I were spending over $1500/month on food. We’ve cut that by 60% since then, and found we enjoy meals out more than we did previously, since it’s no longer a burden to decide where to eat. I also cut my spending on clothes by 80%, cut our cable bill by $57/month by downgrading to basic cable, canceled a business membership I wasn’t using, and changed to a different gym, saving me about $300/month. Overall, I pared my spending by nearly $1000/month, just by tracking what I was spending!

What did I do with the extra money? I paid off all my debt except for my car payment — which should be paid off next year.

Short-Term: 0-5 Years

Cash will be king over the next few years, and you will be able to buy assets as large as houses and as small as electronic gadgets at discount prices.

If you have no high-interest debt such as credit cards, there are a few approaches you can take. Gold recently hit a long-term buy signal, dropping below $850 an ounce on the day the second bailout passed. I noticed this and decided to take the plunge. I pulled money out of my savings account and invested in 10oz. of gold coins. If gold drops below $850 an ounce again, I would recommend picking some up. Gold is an excellent hedge when times are rough and fear rides high.

I plan to sell my gold when it hits $1500-$1700 an ounce, and invest the proceeds into housing. If you currently are in a positive cash flow situation, you can do something similar. There will be a time in a few years when houses make sense again as an investment. That time is not now, but you can put your cash in CDs, high-yield savings accounts, or government bonds and wait patiently for that time. (Stay tuned here, as I will be posting about real estate regularly.)

For you cash savers, ING Direct has a $25 bonus just for signing up for their high-yield savings account. It pays 3% interest at this time. I have one and would recommend it. You can set up auto-deposits to it from your regular checking account, which I would also recommend doing, so you won’t be tempted to spend that money.

You should have several months’ worth of living expenses set aside in a high-yield savings account in case you need cash.

I do not recommend the stock market for short-term investing, unless you are an options trader who enjoys volatility. I have traded options in the past and they are tricky. It’s an easy to lose a lot of money quickly. Only attempt day trading if you really know what you are doing. Ultimately, after spending a month day trading, and having some wins and some losses, I decided it wasn’t for me at this time.

Summary: The Best Way To Invest

Paying down debt with an interest rate higher than 8% will return you far larger amounts of money than pretty much any investment right now. Do that, and get your spending under control, first. Cash will become critically important over the next few years; do what you can now to make sure you have as much cash as possible sitting in a high-yield savings account, CDs, or government bonds.

The stock market is risky for short-term investments. For the short term, consider gold, and stockpile cash to prepare for an eventual investment in housing or other distressed assets at low prices in a few years. Keep your eye open for bargains, but don’t expect too many right now. Next year around this time, there will begin to be some good deals, but don’t spend all your money then, either, as the housing/commercial real estate contagion will continue through 2012-2015.

There will be many chances to get firesale prices on assets in the future, but you must have the cash position to be able to jump on them when you see them. Have patience and do not act when you see the first good deal. Asset prices on everything from real estate to art to wine will decline in real terms over the next few years.

Long-term, keep your existing retirement account in the stock market and continue investing in it now while stock prices are low.

Finally, don’t panic! Focus on what you can control. You can control your spending. You can start a business to make more money. My IRA, like many of yours, is invested in stocks and has fallen 30% this year. I am, however, not concerned, since my IRA is very long-term and I will have many more years to gain that money back. In the meantime, I am happy to stockpile cash, invest in gold below $850, invest in my new business, and patiently wait this crisis out.

“Don’t waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour’s duties will be the best preparation for the hours and ages that will follow it.” –Ralph Waldo Emerson

Recommended Reading:

• Why You Don’t Save Money, Even Though You Know It’s The Right Thing To Do. Can’t resist buying stuff? I couldn’t either. Learn how I stopped spending myself into oblivion.
• When Will Housing Really Bottom? Charles Hugh Smith wrote the blog post I have had on my mind for months now. Short answer? Expect houses to keep going down in value through 2013 or perhaps even longer. Start preparing for this eventuality now.
• Three Business Ideas That Will Help You Thrive During A Recession. I started my last business in 2001, at the bottom of the dot-com bust. You, too, can start a business that will thrive during a recession. You just have to know which trends to look for.
• One Decision That Can Make Anyone A Millionaire. A decision any of us can make that will make us $1 million.

This is a long post, but I urge you to take the time to read it if you want to know how you can help stop the credit crisis.

Henry Hazlitt Explains The Bailout

Perhaps the most succinct and understandable explanation of the bailout plan is highlighted by Henry Hazlitt in his book Economics in One Lesson. Chapter 14 of his book is called “Saving the X Industry,” and explains an example of a government bailout. It begins as follows:

“The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion picture theaters will lose business, and depression will spread in ever-widening circles.

But if the X industry, by the prompt action of Congress, is saved–ah then! it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers, and neon-light makers, and then it is prosperity that will spread in ever-widening circles.”

The Argument For The Bailout

Hazlitt goes on to point out:

“We are concerned only with a single argument for saving the X industry–that if it is allowed to shrink in size or perish through the forces of free competition…it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else.”

This should be easily seen as the argument of those who are in favor of the bailout. In fact, George W. Bush was recently quoted as saying, “With this strong and decisive legislation, we will help restart the flow of credit so American families can meet their daily needs and American businesses can make purchases, ship goods and meet their payrolls. I’m confident that this rescue plan, along with other measures taken by the Treasury Department and the Federal Reserve, will begin to restore strength and stability to America’s financial system and overall economy.”

You might be surprised, then, to know that Henry Hazlitt wrote Economics in One Lesson, not recently, but in 1946.

When Hazlitt was writing this book, a similar proposal was making its rounds in the U.S. government, called “save silver.” The bill was passed…and here’s what happened:

“The United States Treasury was compelled to acquire, at ridiculous prices for above the market level, hoards of unnecessary silver, and store it in vaults.”

Quite like our modern-day equivalent of acquiring worthless mortgages…

What Happens If The Bailout Passes?

Don’t let today’s “no” vote on the bailout mislead you; this isn’t over yet.

As Hazlitt points out, the money must come from somewhere: “The taxpayers must lose precisely as much as the people in X industry gained.” $700 billion is a little over $2000 for every taxpayer in the U.S. That $2000 must come out of your pocket at some point. That is $2000 less than you had before, to spend, save, or invest.

Hazlitt continues: “It is equally clear that, as a consequence, other industries must lose what the X industry gains.” Many of those new taxes, which will be paid by businesses, will mean that those businesses no longer have working capital to invest in new equipment, salaries, or processes. Billions of dollars that could otherwise be used in productive, profitable industries will now be forcibly taken by our government and handed to an industry that cannot survive in its current incarnation.

If you think that jobs will be lost if businesses cannot get the credit they need from the banks, and thus, that this bailout is needed…I assure you that it is guaranteed that jobs will be lost and our economy will falter if this bailout passes, since ultimately it is every one of us who will pay the cost in higher taxes.

What Happens If The Bailout Doesn’t Pass?

This is where it gets more interesting.

Let’s take a step back. Representatives of our government are saying that banks will not be able to lend if they do not have the capital to lend, and that this $700 billion will help them be able to lend again.

Banks make money by taking deposits and then lending the money that has been deposited out to businesses and consumers so they can buy new equipment, such as houses, cars, and machinery.

The Federal Reserve dropped interest rates to a low of 1% in 2003 to try to stimulate the economy. This had the effect of lowering the cost to borrow. It also had the secondary effect of making money in a savings account nearly worthless, since many savings accounts were not even beating inflation.

What did this do? It caused a massive wealth transfer from deposit accounts (such as savings accounts and CDs) to tangible assets such as land, houses, and even art and wine. Many of us shrugged and stopped saving. What was the point? Our money wouldn’t even be worth as much next year as it was this year. But houses, collectibles, gold and silver would. In particular, this caused a massive housing bubble, as housing was one market that was considered nearly infallible.

Banks rode the wave. After all, they were making plenty of money giving everyone mortgages. The homeownership rate hit a historic high of 69% in the mid-2000s, up from 64.2% in 1990 and 55% in 1950. All of those people buying homes (and refinancing since rates were at a lifetime historic low) kept the money rolling into banks. Deposits were dwindling, but the banks didn’t care, since there was more money to be made by selling those same people mortgages.

Ultimately, in 2007, when many of those mortgages went bad, banks had to shore up their loss reserves, and turned to their depositors. The seeping away of bank deposits had gone largely unnoticed. But now banks needed those depositors’ money! That’s why, in 2007, many banks started offering high deposit and CD rates (sometimes as much as 5.75%) to lock in money and shore up their accounts.

The FDIC stepped in when certain banks had so many losses that they could no longer meet minimum Federal requirements for loss reserves. The FDIC helped arrange the sale of several banks, including Washington Mutual, to institutions that desperately wanted to buy depositors (like Chase.)

Banks became afraid to lend to each other since they didn’t know how many unrecognized losses they had in their mortgage portfolios. In the absence of more depositors, the Federal Reserve stepped in and lent short-term money to banks to ensure they would have money to then lend out to businesses and consumers.

How YOU Can Help Resolve The Credit Crisis

I want to give you an example of how we can work our way out of this mess ourselves.

Scenario 1: Hypothetical consumer Ann, in 2006, takes out a $30,000 loan from her local bank in order to make home improvements, such as buying a new roof and installing central air conditioning. Ann agrees to repay the loan over 10 years, giving her a (approximately) $320/month obligation for the next 10 years. The bank now has an additional $30,000 liability, and must carry more deposits to meet loan loss reserve requirements.

Scenario 2: Hypothetical consumer Bev, in 2009, decides her house needs a new roof, and heads to her local bank. Because the value of her house has gone down since she purchased it in 2004, she is denied the loan. Bev decides to take a different track. Instead of applying for a loan, she decides to save $500 a month in a high-yield savings account. Her new roof won’t go on for a few years, but her bank now has thousands of dollars to lend out to another business. At some point (perhaps in 4-5 years), banks reach an equilibrium and loosen lending standards.

Remember, banks make money by lending out their deposits. They may take fewer credit risks than they did in the past few years, but if they have the deposits, they will lend. The problem right now is that we’re stuck in a strange zone where banks have few, if any, deposits, and a lot of bad lending debt.

What About Complicated Financial Instruments such as Derivatives?

I am not arguing that credit default swaps and derivatives aren’t part of the problem. Certainly, a lot of investment banks adopted a “can’t lose” attitude in the past few years, and conjured up overcomplicated financial instruments to pass a debt burden to other companies.

But I also think that in order for us to feel we have control over the situation, we must look at what we can all do differently. Most of us did not save anything over the past few years. We are in debt up to our eyeballs. Is it really going to hurt us that badly if we have to save a few extra years for a new TV or a new appliance? Yes, that means that appliance won’t get purchased right away, but it will still be purchased.

Some of us will lose houses that we couldn’t afford to begin with. But then we will rent, for less money, and have extra money every month to save, invest, or spend. If hypothetical consumer Cara goes into foreclosure on a $2000/month mortgage payment and decides to rent an equivalent house for $1400/month, don’t forget that Cara now has an additional $600/month. If Cara decides to put that money in a safe investment such as a high-yield savings account or a CD, that bank can then lend Cara’s money to another business or consumer. And if Cara decides to spend it, that means more money for many businesses who will benefit from her spending.

We can solve this credit crisis on our own. No one forced us to buy a house or take out loans. We created this crisis by going into debt and ignoring our savings, and we can fix it by starting to save again and by speaking out against insane amounts of debt.

Yes, I acknowledge that that means there will be pain for many of us over the next few years. But ultimately, I believe that a more sound financial system can be built from the ground up out of this crisis — one where we buy what we can afford, and learn to love what we have instead of seeking to constantly acquire more.

Let’s solve this crisis ourselves. Take action! Please Digg this post or recommend it on StumbleUpon. It will only take a few seconds, and it will help others realize that we hold the solution to this problem.

Recommended Reading:

• Economics in One Lesson. Henry Hazlitt explains many common myths about economics. A must-read if you want to know more about governments and bailouts.
• How To Start A Business With No Money. Starting a business doesn’t have to mean a huge capital outlay. Here’s how you can start a business even if you don’t have money to work with.
• Three Business Ideas That Will Help You Thrive During A Recession. Three specific businesses that will do well during a time of cutbacks and belt-tightening.

Typically, two major obstacles come up: time and money. I addressed time previously. Now I’d like to address how to start a business with no money.

First: Two Major Misconceptions

Let’s clear up a major misconception: It doesn’t take a lot of money to start a business — even a million-dollar one. I started my business just after quitting a job, with a few thousand dollars of severance pay from my job. The year after that, my parents gave me a $15,000 loan so I could expand my business. So I “started” my business with just over $20,000.

On the other hand, let’s clear up another common misconception: Businesses that are good ideas don’t necessarily blossom into multi-million dollar enterprises right away. In fact, in May 2003, nearly two years after I started my business, and 8 months after I received the $15,000 loan from my parents, my business made a whopping total of $461/month in revenue. I could have made more money by consulting!

But I wasn’t discouraged. I could see that our revenue graph was going straight up. My customers really liked me. I was making a difference in their lives by running a web hosting company whose owner actually cared about who they were and what sort of business they ran. I knew I was in the right place, in a growing market. So I stuck with it.

It took six long years for my hunch–that web hosting wasn’t dead–to be validated, but I stuck with it and achieved success.

How can you do the same thing (with no money)?

The Four Values that are the Core of my Success

1. I worked every single day on my business. I’ve learned a key lesson when it comes to setting priorities: The night before, decide what one thing you can do on your business the next ay that will make you feel proud and accomplished to have performed it. It doesn’t have to be a lengthy task. For instance, one of my goals is to write a new blog post every week. This doesn’t always happen, but when I write a blog post, I consider that an accomplishment. With every post, I am building my personal brand, my subscribers, and I am getting recognition from other hard-working bloggers who enjoy my post. That’s enough for me to continue blogging. I consider every day which activities I can do to give me this feeling of accomplishment, and then I do those things — and ignore email, Twitter, and TV until they’re done!
2. I set goals and hit them. You see my strong goal-setting mentality on this blog, as well. To engage goals for yourself, make your goals public. Also, the more specific your goals are, the better. Right now, my biggest financial goal is to have $1 million a year in passive income by the time I’m 30. Having that goal has helped me align myself with the resources I need to achieve it. Set specific and measurable goals, and set them publicly. Write a blog. Send your goals to your friends and ask them to kick your butt about them! Keep track of your progress. Figure out why you hit the milestones — or didn’t hit them. Just the act of writing down specific, time-based goals makes you much more likely to achieve them.
3. I ignored lures of “instant riches.” Running a business takes a strong commitment. That’s why many “how to start a business” books emphasize starting a business in a field you’re passionate about, instead of starting something just for the financial gains. I enjoyed web hosting and technology, but what I enjoyed most was seeing those revenue graphs go up and the feeling of pride I got when happy customers sent me a thank-you letter. No “get rich quick” scheme will give you that same feeling of deep satisfaction. Stop flipping from one business idea to the next. Pick one, settle down, and make it work…even if it takes years for you to be able to quit your day job.
4. I stopped listening to those who told me it couldn’t be done. Everyone has fears, and people enjoy bringing you down to their level. When I started my web hosting company, a friend was convinced I’d fail. Even years later, he denigrated my choice to run a web hosting business, asking me at one point: “What have you done? Pfft. You started a hosting company. Anyone can do that.” I dug a bit deeper, though, and found out the real reason he was downplaying my achievement: He had started a web hosting company around the same time as mine, and it had gone nowhere. He assumed, then, that since his hosting company was not successful, mine would never be. By acknowledging my success, he would have to acknowledge his own failure, and that was painful. (By the way, the story ends well: we are still friends today.) Who in your life is telling you you will fail? What fears of theirs are really hiding behind their words? Most importantly, why are you letting those other people dictate your success or failure?

Interestingly enough, when I outlined my plan for Inspiring Innovators to another friend of mine, he said words quite reminiscent of my friend who started the web hosting company that fizzled. I asked him why, and he admitted he had owned a content-driven membership site that had failed. “The customers didn’t stick around,” he said. I acknowledged to him that my business plan may change, but I’m also not listening to his predictions of failure for my business! I’m quite confident I will succeed, even if the game changes a bit along the way.

Notice, that among these traits (determination, persistence, specific and measurable goal-setting, and a willingness to challenge others’ beliefs), “money” is not mentioned. Neither is time. If you have the drive, the determination, and the willingness to succeed, you are much more likely to succeed - regardless of how much money you start out with.

How do you get started? That’s a forthcoming post. Please subscribe to see my ideas on how to get started creating a million-dollar business (or just a business that will earn you a little extra cash) from home. As always, I promise to be honest and blunt in my appraisals of many ways to “make money online.”

Recommended Reading:

• Steven Wagenheim’s Honest Income Program. Don’t know where to start? Steven guarantees that you’ll make your first $15 online after reading his ebook. I bought it and devoured it. It’s one of the best “getting started” guides I’ve ever read on Internet marketing. As an added bonus, Steven is a heck of an honest guy himself, and not interested in scummy Internet marketing “systems.” Well worth the money.
• How To Make A Million Dollars. My earlier blog post emphasizes some of these same keys, as well as going into detail about negotiating and “multiple streams of income”.
• Three Business Ideas That Will Help You Thrive During a Recession. What if the upcoming recession is an opportunity for you to make more money than you are now — and be happier to boot? Specific details about what types of businesses you can start that will benefit from a recession.
• How To Make Money From Your Blog. Steve Pavlina details how he turned a $9 investment (in a domain name) into over $40,000 a month in revenue. (Hint: Not instantly!)

What follows is a quick look at my journey through the past year, and then exactly what I plan to do to make my next $1 million.

The Rest of 2007

My boyfriend and I went on a 7-day cruise in November, 2007. I bought $12,000 in art at an auction on that cruise –realizing my goal of buying a Romero Britto limited-edition serigraph. In fact, I bought 6 Britto pieces, as well as several other beautiful paintings!

Here’s one of the pieces I bought. It’s my favorite of all the Brittos I own since it has a cat in it! It’s called Squeaki - Britto’s World.

In December, I became quite ill and delved into personal finance books and blogs while recovering. Encouraged by them, I tallied my spending for October, November, and December, and was shocked to see my large cash burn rate.

I became a budgeting convert and adopted a simple rule that has kept my spending well in check since then: for every thing that I buy, I have to get rid of one equal thing. That keeps my house from becoming cluttered. With that, and my boyfriend’s love of cooking, my monthly spending dropped by 40%. I’m still keeping track of every dollar I spend (it’s not as time-consuming as you think).

2007 Rolls Into 2008…

In early 2008, I got hooked on Internet marketing, and discovered a whole crowd of people who were making money online selling “info products” such as ebooks, membership websites, and videos. I went to two Internet marketing conferences and found a great group of people I’m happy to call my new friends.

I spent hours and hours reading every Internet marketing ebook and watching every video I could find online. I explained what I wanted to do to make $1 million a year online.

Then, I bought a small business — a membership website where the members pay $10/month for access to two interviews with successful entrepreneurs.

In the meantime, I set up a one-day personal finance conference called WealthCamp. The first WealthCamp was held in San Francisco and had 34 signups — not as many as I had hoped, but it was a group of people who really bonded. It was a lot of work to run a conference, and a huge learning curve, but everything worked out and the reviews that came back were great! I will definitely be running more conferences in the future.

That brings us to today. I haven’t posted my goals since June 6. It’s past due for me to explain what I’m gearing up to do.

What’s Next?

Instead of splitting out my profit center into Hardworking Millionaire and making Inspiring Innovators free and ad-driven, I’ve decided to make Inspiring Innovators a for-pay site and keep erica.biz as the free, ad-driven site.

Here’s the business plan:

Inspiring Innovators will be a site where I interview two successful entrepreneurs per month. We’ll have a 30-minute conversation about something that will help you improve your business, and talk about how that entrepreneur became successful. I’ll charge a monthly fee for access to the interviews: an audio download; a transcript; and a PDF that shows you how to implement the success story yourself.

This is a proven business model that is in use on several other sites. As part of my research into the viability of this business model, I paid for a subscription to those sites. As promised, they deliver the interviews…but there’s no community feel or connection. In addition to just posting interviews, then, Inspiring Innovators will have a members-only forum where deals happen, people post questions that I will then find entrepreneurs to answer, and entrepreneurs have a chance to connect with each other.

I’m going to be tapping into one of the biggest problems entrepreneurs have: finding people who understand what it takes to build a successful business. Through my interviews, forum, and community events, I’ll be helping entrepreneurs engage with each other, learn more quickly, and help them grow their business faster by utilizing contacts and connections.

I expect to charge $27/month for a basic membership where you get the two interviews every month and access to the Inspiring Innovators community.

Figuring Out A Price Point

You might be asking, “Why not free?” My goal is to build a cohesive community of entrepreneurs committed to helping each other build their businesses. Charging a monthly fee keeps the community full of serious entrepreneurs who want to move their business forward, and makes it easier to deal with spammers and the like. Plus, it allows me the flexibility to hire people to keep customer service top-notch.

Some of you may be asking the opposite question: “Why not charge more?” I wrote previously about going for the more lucrative contracts — e.g. trying to find a few people who will pay you $500/month instead of many who will pay you $10/month.

My goal is to have a pyramid that looks something like this:

Why not jump straight into the middle, which is clearly the most profitable price point? I thought about this for quite a while. After all, if my goal is to have the most profitable site, it clearly makes sense to price my product at the $297 level, since I’d need only 10% of the subscribers to make the same amount of money.

A Huge Shift: Maximum Profit Is Not My Goal

My biggest revelation in all of this was that I didn’t want to set the site up for maximum profit. Instead, I want to go up to entrepreneurs, ask them what their biggest problems are, and let them know that either I’ve already helped others solve those problems through an interview, or that I plan to help them solve their problems with a future interview.

It’s this camaraderie, this connection that I desire most in a new business — not maximum profit. If I can help 1000 entrepreneurs solve their problems, that’s more meaningful to me than helping 100 entrepreneurs and charging them 10x as much.

Having experienced that shift, I am now free to move forward with confidence and charge less for a basic membership than I was originally planning to. Of course, I fully expect that there will be plenty of upsell opportunities up to several thousand dollars a month for more personal help and guidance. But the basic product is affordable enough that I will be able to help thousands of entrepreneurs move their businesses forward — something I look forward to!

In the meantime, I will continue to blog at least once a week here on erica.biz. My goal is to keep all of the content here free forever — supported by a few ads, and more importantly, supported by those of you who will become Inspiring Innovators.

By the way, I plan to keep posting my goals and progress on this blog, so if you want to see whether I can really build another million-dollar business, and my successes and failures, just subscribe.

It’s been a fantastic year, and I look forward to the next year, where I grow another million-dollar business by inspiring you to do the same!

Perhaps the most interesting prediction I made was comparing Fannie Mae and Freddie Mac to Enron. I thought then, and still do believe, that this will make Enron look like chump change. In the August 2006 post, I wrote:

“(Fannie and Freddie) are allowed to borrow money at interest rates lower than any private company due to the assumption that they will be bailed out by the U.S. government if they go under. The problem is that this implicit (NOT explicit — Fannie/Freddie loans do have a disclaimer stating that the government does not guarantee their loans) assumption has allowed corruption to reign supreme. Earnings were ridiculously overstated. Then the executive management paid themselves huge bonuses based on the fraudulent earnings. This has ‘Enron’ written all over it.”

I have to say I missed that prediction, only because I was too early — the Fannie/Freddie bust did not happen until a few months ago.

What this should show you is that this corruption was known at many levels years before it became headline news. In fact, Warren Buffett stopped investing in Freddie in 2001, “when it became apparent the company wasn’t being run well.”

Apartment Complexes and Commercial Real Estate Buildings Fall Into Foreclosure

As I theorized in 2006, headlines make the financial news section when they have interesting numbers, but they don’t make the front page of the newspaper or media service until they affect people. Once you read the financial news on a regular basis (I read it every day), you start to get a sense for what will eventually affect people, and what will never gain traction because it is theory or policy.

Here’s a great example of an article that will make front-page news next year or in early 2010. Some very large New York City apartment complexes are on the verge of default. Why hasn’t it made front-page news yet? Simple: The residents haven’t yet been affected. But soon the owners will have no choice: tenants will either have their rents doubled, causing a mass exodus and protests (front-page news for the New York Times), or the owners will default and the bank(s) holding the loans will put these large apartment complexes up for sale (also front-page news, since very few of these defaults have happened in the past few years.)

But for now, it’s relegated to the business section. There are some shocking numbers in the article:

“Savoy Park… was refinanced a few months before the credit markets stalled last summer. Credit Suisse pooled the main or senior $210 million loan with other mortgages and sold it to Wall Street investors as a commercial mortgage-backed security. The owners secured four additional loans, bringing the total debt on the property to $367.5 million, with a loan-to-value ratio of 88 percent, according to Realpoint.”

That means the owners had debt totaling 88 percent of the property’s value — and this was at the height of the market, meaning the owners are now likely underwater.

The interesting thing is that, using the article’s numbers, you can actually predict when it is likely that this apartment complex will fail. “There is no evidence that the owners are having trouble covering their debt service of nearly $2 million a month,” the article says. Then: “The building’s annual net cash flow was only $4.3 million at the end of last year.” And finally: “The landlords have a… generous reserve fund… to cover the shortfall on their senior debt — $30 million.”

$2 million a month x $12 = $24 million, minus the $4.3 million cash flow = $20 million. Reserve funds: $30 million. Doing a bit of back-of-the-envelope calculation, the building will likely fall into foreclosure in approximately 18 months.

Why Commercial Real Estate Failures Matter to You

Why does it matter to you? Because thousands of large apartment complexes and office buildings were financed in this way during the boom. Something you may not know is that I considered buying some commercial property here in San Jose a couple of years ago for my hosting company. I looked into several buildings — nearly all of which had recently changed hands to a “private equity” firm. Many of them were selling “office condos” (commercial property) at double the monthly price it would have cost my company to rent the same amount of space.

Needless to say, we ended up renting.

The fortunate thing for the renters in this particular apartment complex is that it is rent controlled. I’m dead set against rent control since it raises prices and reduces available supply, but in this particular case, it’s the only thing that is keeping this story from heading to the front page.

“Subprime” Disappears from the Headlines

What else is going to happen in 2009? The word “subprime” is going to disappear from the news. Here is the mortgage rate reset chart. By mid-2009, the vast majority of subprime loans will have finished resetting, which means that by mid-2011, the majority of subprime foreclosures will be over.

Instead, in 2009, “prime” foreclosures will become the new front-page news. It turns out that prime loans were just about as rotten as subprime.

I posted a link recently from CNN showing that 1 in 25 “prime” jumbo home loans (loans greater than $417,000) are now in default. A friend asked me: “What does that actually indicate?” Great question. It means that 4% of all those who purchased a home with a loan greater than $417,000 are now past-due by at least 90 days on their mortgage. At least 80% of these loans will go into foreclosure.

61.9% of the loans in the Bay Area in January-June 2007 were prime jumbo (also called “non-conforming”) loans.

This means a substantial percentage of “prime” loans on higher-priced houses in California are headed into foreclosure.

And that means this snowball of lower house prices has just started for the higher-end properties here in California.

Avalanche of Foreclosures Means House Prices Continue to Fall

Another tidbit for 2009: Foreclosures will start to outnumber homes being sold in many areas of the country. Realtors are crowing about home sales being up, even though prices are down. But when you look at two pieces of data for the same month: number of foreclosures, and number of homes sold — a different picture emerges.

View from Silicon Valley did some excellent research. Taking the total number of home sales for June in Santa Clara County, and subtracting out the number of foreclosures, the net number of homes sold in this county was just 433.

Don’t let this data mislead you; it doesn’t imply that all but 433 homes sold were foreclosures. It’s intended to point out that while Realtors trumpet high sales, they’re fighting a losing battle. The number of foreclosures coming on the market means that even the higher sales numbers won’t make prices go up anytime soon.

When Should You Consider Buying a House?

In fact, you have plenty of time to wait if you want a good deal on a house. Mish of Global Economic Trend Analysis says you have 15-20 more years to wait until prices return to their ‘04-’06 levels. He uses data for Southern California, but I have been tracking both NorCal and SoCal markets and I see no difference in price deflation between the two.

In August 2006, I said that late 2010 would be the best time to buy a house. I’m sticking with that. If you want to buy a house, put the money you would pay for a mortgage payment (since even with 30%+ drops, it’s still more money to own a house in most parts of California than it is to rent) in a savings account. There’s absolutely nothing wrong with waiting this out for a few more years and getting a better deal. Use those years to live frugally, pay off your debt, and build a substantial piggy bank instead of taking on more debt.

When you are ready to buy, calculate the monthly rent for a comparable place using craigslist or local classified ads, and multiply that rent price by 150. If that number is lower than the price of the house you want to buy, I’d recommend waiting. For lower-income areas (the ones hit hardest by subprime foreclosures), multiply by 80 instead to avoid continued deflation.

A Summary of my Headlines for 2009

• Apartment complexes, office buildings, and other commercial real estate bought at the peak will go into foreclosure in the next 12-18 months, or will be forced to raise rents substantially to stay in business. Since customers won’t take the rent increase nicely, this will likely make for some interesting headlines, and potentially lawsuits. This likely won’t happen until late 2009 and will continue for several more years.
• “Subprime” will disappear from the headlines and will be replaced by “prime” — particularly jumbo prime loans (those greater than $417,000.) Those jumbo prime loans will be much harder to get, and prime mortgages will default at a heretofore-unbelievable rate, bringing house prices on the high end down significantly.
• More waves of foreclosures will mean housing inventory, despite strong sales on the low end, does not decline significantly. Therefore, prices will continue to drop.
• It still won’t be a great time to buy a nice house. Wait until 2010 and use the 80-150x rent calculation to decide for yourself. In the meantime, stop taking on additional debt and start saving for a down payment — you’re going to need it, especially if you intend to buy a nice house.

What are you seeing in your local area? What are your real estate predictions for 2009? I’d love to hear from you in the comments.