The Amateur Financier

This week has been pretty horrible, money-wise. As I mentioned on Wednesday, I had to spend nearly $1000 on my car to keep it running. As a result, my financial situation is lower now than it was last week, and it was not great then.

The account rundown, as always:

Savings

PNC (Checking Account) $ 238 -$566
Susquehanna (CD) $ 2542 +$0
ING Direct (Checking) $ 39 -$100
ING Direct (Savings) $ 1405 +$405
ING Direct (Orange CD) $ 1012 +$0
HSBC Direct (Savings) $ 22 -$200
Smarty Pig (Savings) $ 2439 +$100
Vanguard (Money Market) $ 1000 -$0

Total Savings $ 8697 -$361

Investments

Vanguard (Roth IRA) $ 5395 -$238
- Small Cap Index (NAESX) $ 3108 -$151
- High Dividend Yield (VHDYX) $ 2287 -$87

Share builder (ETFs) $ 2334 -$74
- Total US Market (TMW) $ 705 -$30
- Extended Market (VXF) $ 712 -$27
- Total Foreign (VEU) $ 452 464 -$12
- Small Cap Value (VBR) $ 215 -$10
- Emerging Markets (VWO) $ 250 +$5

Total Investments $ 7729 -$312

Total Assets $ 16,426 -$673

Credit Cards

MasterCard (JCPenney) ($ 107) -$0
American Express ($ 1645) -$1146

Student Loans ($ 11,929) +$0

Total Debts ($ 13,681) -$1146

Net Worth $ 2745 -$1818

I’m actually pleasantly surprised by my expenses this week. After you subtract the aforementioned car expenses, the investment losses, and my insurance premiums, my out of pocket spending (for things like gas and food) was only $145. I do need to get myself a budget to manage such ‘incidentals’, but I’m happy about my self-control and restraint this week. Hopefully, next week will be a bit kinder to my wallet, and I’ll have happier news to report.

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Yesterday, I wrote about all the things my mother taught me about money. She laid a good foundation for my financial success up to now, and her support and encouragement will no doubt serve me well in the future. The more I learn about financial issues, though, the more I wish I had received a broader exposure to money and investing while I was growing up. I sometimes feel like I’m trying to catch up to other people my age when it comes to financial knowledge and money management skills. (Although, as I’ve been hanging out on PF blogs a great deal lately, I might have a somewhat skewed view as to just how much the average twenty-six year old knows about good money traits.)

There are several points I particularly regret not learning sooner in my short life:

1) Invest early, invest often – When I started to look into managing my money more actively last year, one of the avenues I considered was investing. My mother, though, expressed numerous concerns with my plans. If I had been encouraged to start investing earlier, I could have a greater investment currently in place (although, given the latest market movements, perhaps it was good that I didn’t have more ’skin in the game’).

When I have kids of my own, I’m going to do what I can in order to spark an interest about money and investing in them. One specific plan I have is to match their Roth IRA contributions while they’re in high school (and possibly college), in a sort of make shift 401(k). This will pass along several important lessons: start saving for retirement as soon as possible, using tax-advantaged accounts allows your money to grow, and when someone offers you free money, you should take it.

2) Network, Network, Network – One of my biggest problems finding a new job has been the lack of a network to utilize as I search. It’s tough to find something when you can barely get your foot in the door. I’m hoping my luck will change soon, but at the moment, I wish I had built up a network of contacts before I left school.

I’m working to build up my network now, including planning to go to a few conventions and putting myself out in front of placement agents. I am trying to make friends and contacts in my field (and for that matter, in the world of PF bloggers). It’s slow going, especially as I’m normally a shy, withdrawn person, but it’s important that I have more contacts, in case I find myself in this situation again.

3) Take advantage of the Internet – Alright, this one is hardly my mother’s fault; the web wasn’t even invented until 1993, when I was already eleven years old. The idea of setting up a blog, putting up a few ads, and using that as a source of revenue is new enough that I’m not too surprised I’m only now getting started with it.

By the time I have kids, though, the internet revolution will have been in effect for more than a generation; while I won’t claim to know what the future of computers will hold, I do know that my kids will need to understand them. I’m going to do my best to spur them to get online and figure out ways of making money, from blogging to producing static websites and other online ’side hacks’. Chances are, they’ll be even more proficient at using the computer than me, so perhaps they’ll end up showing old Dad a few new ways to make money online.

This is hardly a complete list of what I hope to pass onto my kids (and what I regret I didn’t learn about sooner), but it’s a decent start, and should inspire me to help my children grow and learn.

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J.D. of Get Rich Slowly made me laugh by posting about cats as stock market analysts. Honestly, it’s one of the better (or at least, more entertaining) suggestions of how to reform Wall Street that I’ve heard lately. At the very least, it would make for more interesting shows on CNBC:

“Now, Mittens, if the Dow is going up, bat the rubber mouse; if it’s going down, pounce on the ball of yarn.”

But that’s not the only thing that made me think this week:

Young People in Debt – Studenomics writes about several of the societal forces that lead young people to get into debt, specifically credit card debt. He touched on convenience, media pressure, and the feeling many young people have that they need to reward themselves. I would add in some of the practices of the credit card companies (only requiring you to pay a tiny amount of the total debt each month) as a major contributing factor.

10 Things You Must Do After College – My Life ROI (a relatively new blogger, whom I have begun to follow) gives several useful actions you should take while you’re young, such as starting a Roth IRA, building your network, and start a rainy day fund. All very reasonable actions to take, and my only quibble is that you should be doing most of these things during college, if not before. If you’re old enough to hold a job and you haven’t started checking things off this list, what are you waiting for?

Three Financial Lessons Learned the Hard Way – The current market conditions are proving a harsh and brutal teacher, as Lazy Man and his wife are discovering. One big thing I took away from his story is the importance of establishing your risk tolerance well before investing, and being willing to follow it, even in bad times. It’s easy to say you’ll be able to handle a drop in your portfolio’s worth, but much harder to actually resist pulling out when it happens to you (as I can certainly attest).

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I give my mother a great deal of credit; she raised me and my two sisters essentially by herself, all the while working full time. She never let us feel deprived, alone or unloved. I’m proud of all her accomplishments and everything she has done.

Some of the most important lessons she taught me involved money. Between her actions in her personal life and what she explicitly told me, I learned a great deal about how to get a handle on my finances and keep my life in balance.

1) Control your spending – One of the first lessons I learned from my mother, I picked up simply by watching her in her daily life. She did spend money, but not on extravagances. She would buy food, resisting temptations of candy and sweets. She took us to the library, encouraging us to borrow books rather than buy them. She enrolled us in low cost after school activities, such as Scout programs, allowing us to socialize, learn, and grow.

All of these experiences that I observed helped to establish the idea of frugality in me. I still tend to keep my spending low, without even making much effort. Many of the tips I encounter about saving money, such as packing your lunches and resisting daily treats (like a Starbucks coffee) come naturally to me, all because of my mother’s influence.

2) Save up for what you desire – When I was sixteen, I wanted to get a car. (Well, actually, my mom wanted me to get the car more than I did, so I could take my sisters to school and our other activities, but I still wanted it, as well.) Rather than simply buying me a car, my mother encouraged me to get a job, earn and save the money, and buy the car on my own. Thus began my employment at McDonald’s, lasting long past when I actually bought my first car (a 1988 Aries, if I remember correctly; a pretty solid car, especially since I only paid $1000 for it).

From this, I learned that if you are going to make a big, expensive purchase, the best way to do so is NOT to charge it and slowly pay it off while accumulating interest; but rather, to work, spend less than you earn, save the difference, and eventually purchase the item outright. It has been a valuable, meaningful lesson for me, and I am glad I learned it without having to get overwhelmed by debt (as so many other people seem to have done, sadly).

3) Study hard and get good grades – My mother always stressed education. She encouraged us to work hard in our classes and take some of the harder courses. She pushed my sisters and I into the gifted program at our school and motivated us to stand out academically as much as possible.

This might not seem related to my finances, but it’s had at least two important monetary impacts on me. First, my good grades and high SAT scores allowed me to start college without having to pay for my tuition, and by keeping my grades high allowed me to continue in the same fashion. I still had room and board expenses, but the savings enabled me to graduate with a relatively small amount of student loan debt, avoiding one of the major pitfalls of the recently graduated college student.

Secondly, that push to learn and study has stayed with me up to this date. As a result, I tend to be cautious, carefully, certain to learn as much as I can about something before jumping in. It is a good approach for many things in life, particularly when it comes to money and investing.

Almost all of my good money management traits are a direct result of my mother’s influence.

This is not to say that my mother taught me everything I now know about money; in fact, there are some areas where I wish she had done more. I will cover those tomorrow.

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I had to take my car in to be reinspected and have the emissions checked on Sunday. Unfortunately, my brake pads needed work and my muffler had a hole in it; as a result, I ended up having to go to another garage and spending just shy of one thousand dollars before I was able to get my stickers renewed today.

$1000 and a two day wait without being able to drive my car.

Luckily, I do have the money set aside in my emergency fund; I had hoped to avoid pulling so much money out so soon, especially as I am still unemployed and will likely need it in the future. Still, while this situation is adding to the stress of being unemployed, it’s nothing compared to what I’d be suffering without an emergency fund. I’ve been able to forestall having to make more difficult choices, such as selling my stock holdings for a loss or floating the expense on my credit card, which will help me to get to sleep at night.

This has been a wake call for me. I had been assuming that I could ride out my unemployment without making any significant changes, that somehow all the horror stories and risks didn’t apply to me. However, this car issue came out of nowhere, blindsiding me. If I didn’t have funds already put aside, I’d be in serious trouble. As it stands, I’ve been forced to pull out money from my emergency fun, getting ready to pay the bills that will be due in the next few weeks.

From here on out, I’m going take on a few additional tactics to help make it through my unemployment:

1) Cut down spending – I’ve been resisting this, but I need to spend less. I’m not a prolific spender, but I do a fair amount of shopping and impulse buying (perhaps too much), and if I am going to be unemployed for an extended period of time, I need to be able to stretch my emergency fund. I can’t keep assuming that something will come along before I exhaust my money; I need to cut down my expenses NOW.

2) Increase my job hunting – I keep searching, applying to jobs, calling to follow up, trying to see if anyone I’ve encountered in my past could help me to get a new position. But there’s so much more I can do; if I treat job hunting like a job itself and spend five or six hours a day, I can canvass more ground. I’ve considered hiring a head hunter in the past; I might have look more into this avenue, and see how I’d go about hiring someone.

3) Stop my automatic investments – This one is painful; I like investing, even now, when my mutual funds and ETFs seem to be down more often than up. But, while I still believe in the importance of investing, right now, the $300 I’m putting into stocks is probably better if held in my emergency fund. I’ll have to put more in later, once I have a job, but for the moment, my priority has to be taking care of my expenses.

4) Look into more ’side hacks’ – I’ve found a part time job, running study sessions in organic chemistry, and have been approached by a few students to have additional, private sessions. It’s not a huge amount of money (about $150 a week, all told), but it helps, and does allow me to network with some people in my field. I’m looking for more possibilities to get money from other sources, including this blog. I won’t get enough to replace a regular salary, but every little bit helps, especially in an economic environment like this.

If I implement these plans, I should be in much better shape next time I need to tap my emergency fund for unexpected expenses.

How about you? What changes would you make if you were unemployed?

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Over on MSN Money, Michael Brush has posted about the five biggest lies from Wall Street. I’m very impressed by his willingness to go through all the work of cutting it down to five (I counted 43,257,892 lies in just the last three weeks), but as I was reading through his list, I started to wonder just how…dishonest they actually were. Could it be possible that Wall Street was actually telling…the truth? Let’s see what Mr. Brush has to say.

Big Lie 1: The market will take care of everything. This one is pretty obviously false; unfettered capitalism isn’t a cure all. Balancing out the good that the markets can do in creating wealth with rules to ensure that people don’t get trampled in the rush is an essential part of government, one which has been sadly lacking as of late.

Big Lie 2: The ‘experts’ will help you. This one I take issue with; not all experts are the same. Yes, there are plenty of false ‘advisers’ and others who seek to profit off of your naivette, but there is still plenty of good advice out there. Ruling out someone, just because they are an ‘expert’ makes it hard to find any information at all. (To say nothing of the irony of being told about the untrustworthy nature of experts BY an expert…)

Big Lie 3: Buy and Hold. This is the first one with which I flatly disagree. Mr. Brush talks about changing your investment holding as the risk profile for the investment changes, in other words, timing the market. I admit, perhaps there were signs that the economy was starting to have trouble earlier than most people now admit (at least, the ‘expert’ Mr. Brush quotes says as much), but knowing when to get out, and more to the point, when to get back in, is all but impossible. And attempting to do so will result in much worse results than simply riding out the market gyrations.

Big Lie 4: Overpaid CEOs are worth the money. I’ll second this; at best, quantifying the worth of a CEO is difficult (how much of a gain or loss in a particular stretch of time is directly traceable to the head person is nigh impossible to judge); at worse, there’s an aura of inevitability to executive pay, a form of cronyism from top stockholders to keep them in power. Hopefully, one result of this recession will be a readjustment of executive compensation to be more in line with what regular workers are receiving.

Big Lie 5: Buy a flat-screen TV, save the economy. I mostly agree that this is a myth, but it does have an element of truth. If you spend money, you’re putting someone, somewhere to work. It used to be that if you were saving in a bank, they’d do the same thing, but given how over-extended many of the national banks are, right now they seem to be gathering up larger amounts of money to add to their ledgers without putting it back into the economy. This isn’t a reason to go out on a spending spree, but money added back to the economy does have an effect, beyond just making you poorer.

Overall, I’d say Michael Brush is about half right; a little less harshness for experts, a little more tolerance for buy and hold, and he’d be right on track.

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Just about everywhere you turn, you see articles and commentary about the government actions to stem the fall out from the subprime mortgage crisis. I’ve resisted writing about this until now, mainly because so many people with at least a passing interest in money, government, or politics have covered every conceivable angle on this crisis. But, reading this post on the Money Blog Network forums, I was just so fired up, I wrote this in response. Be warned, I do start ranting:

My Fellow Americans,

Our financial system is a mess, our elected officials are more worried about getting re-elected than doing the right thing for our financial system, and nobody is taking responsibility for their actions. I am angry (mad as hell, to be more accurate) about the subprime mortgage crisis and the fall out into the rest of our banking system (and beyond).

I am NOT angry at individual homeowners, for the most part; while they certainly should have exercised more caution when running their finances, I have a hard time getting upset with people who took out mortgages their bankers allowed, in many cases encouraged, them to take. While the homeowners aren’t innocent victims in this situation, I can think of so many more deserving targets for scorn:

-School systems that provide inadequate financial and money management teaching, leaving so many potential homeowners undereducated about the risks of mortgages and reliant on the (sometimes unscrupulous) advice of bankers.

-The aforementioned bankers, for giving people loans they couldn’t afford by any reasonable measure, under the assumption that home prices would keep shooting up, and telling the mortgagees they could easily do a cash out refinance in a few years.

-The huge market for mortgages that allowed the banks to move the subprime mortgages off their books, enabling them to make MORE questionable loans with virtually no (perceived) risk to the banks themselves.

-Investment banks that bought up and packaged dozens, if not hundreds, of subprime mortgages, pretending that if they sliced and diced enough questionable loans, they’d end up with high quality products with virtually no risk.

-Ratings agencies, which played along with the charade and gave high ratings to the mortgage backed bonds, regardless of which mortgages were backing them, leading to the spread of mortgage-backed securities throughout the national and international financial system.

-A federal government that, through a mixture of deregulation, perverse incentives and implicit (and now explicit) promises of government protection, allowed a massive bubble to form in the housing market, and did nothing to limit the fallout until it was too late.

-At least a quarter century of government policy makers who, when given the choice between cutting spending or raising taxes to bring the federal budget in line, have opted for (c) adding to the deficit and pushing the politically tough but fiscally possible decisions off onto our children. We face massive entitlement deficits and looming shortfalls and yet, neither Democrats nor Republicans are willing to tell the American people that there have to be cuts in federal spending, higher taxes, or both, and SOON, or our children are going to spend most of their lives simply repaying the debt that accumulates.

Next time you feel like hurling blame at homeowners who took out loans much larger than they could handle and now need to be saved from foreclosure, remember all the ‘helpers’ they had in getting to that point, and direct your scorn accordingly.

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One of the most entertaining blogs I’ve encountered is from Stephanie, of Poorer Than You. She’s an interesting writer, with a unique perspective as a young woman finishing school and facing plenty of educational debt. She seems like a strong, fascinating person, and it’s nice to have her perspective out there in the blogosphere.

Some of the most interesting posts she’s done in the last month are listed below; be sure to check them out:

Is It Ok to Bridge the Gap with Credit Cards – This is an interesting post, considering the possibility of relying on credit card use to make up the difference between what she’ll be able to earn and what she can afford when she gets out of school. She’s looking into using her credit cards to help make up the difference between her earnings and her spending. It’s a difficult decision that shouldn’t be made lightly, but between the blog entry and her comments, it seems like Stephanie has thoroughly thought about her situation, and has determined that using her credit cards will be the best solution. If everyone put as much foresight into their credit use, we wouldn’t have nearly as many problems with excessive debt in this country.

Review: The Boglehead’s Guide to Investing – Stephanie takes a look at a book I’ve been looking to read for a while now, detailing the investing strategy and philosophy of the Bogleheads. (The people who follow the investment strategies popularized by John Bogle, founder of Vanguard.) She has high praise for the book, a very detailed and thorough treatment of a variety of financial topics, and strongly encourages everyone over their mid-twenties to read it (which, sadly, is a group that now includes me).

Checking the Status of my Health Insurance – One of the biggest worries for most people, especially those just getting out of college (or as in my case, losing their jobs) is ensuring continuing health coverage. Luckily, it sounds like Stephanie’s got coverage for the next few years, so that’s one load off her mind.

College Money Tip #8: Know What You Owe – Stephanie has been doing a series of tips for college students regarding their money lately. This tip in particular is right on target for college students and recent grads: knowing what you owe (particularly in this context, for student loans) and whom you owe money to is vitally important, if you hope to have a handle on your expenses.

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Another week has come and gone. A week with another impressive drop in stock prices. And here I am, unable to put more money into the market. One of my biggest regrets about being unemployed currently is not being able to put more money into my investments. If that’s not a sign of high risk tolerance (or at least, the understanding that I have four decades or so before retiring), I don’t know what is. And to the financial statements we go:

Savings

PNC (Checking Account) $ 804 +$750
Susquehanna (CD) $ 2542 +$0
ING Direct (Checking) $ 139 -$148
ING Direct (Savings) $ 1000 +$0
ING Direct (Orange CD) $ 1012 +$0
HSBC Direct (Savings) $ 222 +$0
Smarty Pig (Savings) $ 2339 +$148
Vanguard (Money Market) $ 1000 -$0

Total Savings $ 9058 +$750

Investments

Vanguard (Roth IRA) $ 5632 -$526
- Small Cap Index (NAESX) $ 3259 -$299
- High Dividend Yield (VHDYX) $ 2374 -$226

Share builder (ETFs) $ 2408 -$201
- Total US Market (TMW) $ 735 -$54
- Extended Market (VXF) $ 739 -$62
- Total Foreign (VEU) $ 464 -$36
- Small Cap Value (VBR) $ 225 -$22
- Emerging Markets (VWO) $ 245 -$27

Total Investments $ 8040 -$727

Total Assets $ 17,098 +$23

Credit Cards

MasterCard (JCPenney) ($ 107) -$107
American Express ($ 499) -$266

Student Loans ($ 11,929) +$0

Total Debts ($ 12,535) -$373

Net Worth $ 4563 -$350

After a Valentine’s weekend spent with my girlfriend and a lackluster week for investors, my finances have taken a bit of a hit. Nothing too huge, but still a decline. Luckily, with my paycheck and unemployment arriving this week, I do have money on hand. Plus, I’m feeling good about my job prospects. so hopefully I’ll soon have good news on that front *crosses fingers*

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One of the major disagreements you’ll come across in financial literature is the issue of student debt and whether it’s worthwhile. Let’s look at my remaining student loans (my only long-term debt) under three different paradigms:

1) Good Debt is Cheap Debt. A fairly simple, purely mathematical distinction; you simply have a cut off point for interest rates. All the debt above that level is bad, any below that is good. Simple, hunh?

Well, not that simple; you still have to settle on a cut off point. There are different views on what constitutes the division; Suze Orman, for one, recommends 8%, but there’s nothing magic about that particular number. My student loan, at 2.87%, certainly meets that level for cheap debt, as well as more grueling requirements of 3-5%. So far, so good debt!

2) Good debt buys value. In other words, if you are able to buy an appreciating asset with the debt, it’s good debt. By this logic, real estate mortgages, small business loans, and yes, student loans all qualify as good debt. The result is an increase in earning power in all three cases. That’s two for two, with student debt qualifying as good debt.

3) No debt is good debt. This is the philosophy of Dave Ramsey, among others. By this standard, any kind of debt you acquire is bad debt. Exceptions are made for mortgages, but even those should be paid back as soon as possible. By this point, even the $12,000 I owe is bad debt, and I should make it a top priority to eliminate the debt.

My View: I tend to lean toward the first definition. I don’t feel that I can go through life without any debt, nor should I put investing and other goals aside until I’ve paid them back. In addition, while the purpose for taking on the debt is relevant (particularly to the IRS)

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