30
Jun
Posted in Wacky Wednesday by Roger |
Previously, in our Wacky Wednesday series: You attempted to use the power of time travel (combined with compound interest) to become rich. It worked, sort of; you were a billionaire, but even a cup of coffee cost millions of dollars. Inflation having ruined your plan, at which point you decided to travel back to the past, only to discover that it’s impossible to withdraw your money to travel back in time and not invest it. To survive in the future, you end up taking a job as a hamster groomer; it wouldn’t be so bad, if the hamsters weren’t such huge gossips. Finally, you’re able to travel back to your own time; well, actually, the Time Cops caught you, pre-Hitler assassination, and forced you back. What will you try now?
“Alright,” you say to yourself, “this time it’ll work.” You’re just about to rent a time machine again, but this time, you’re going to do it right. Rather than traveling to the unknown future (well, unknown to everyone who didn’t spend several weeks grooming talking hamsters), you’re going to travel to the past, invest some money in companies you know will be profitable, and then come back to the present to sell your stock and live large on the profits you’ve made.
You’ve picked 1960 as your target year; fifty years is a nice, round number, and will give your specially chosen stocks plenty of time to grow. To avoid the problems you had last time, getting stuck in the future and all, you’ve bought the deluxe time travel package; six time jumps included, a total of three round trips. You can have problems twice, and still manage to make your plan work.
You'll be a bit too early for Woodstock, though
You run one last check: list of stocks to buy, life savings (what you have left of it), address of secluded place to land your time machine and address of an old-fashioned brokerage house. Confident that you have everything you need, you travel back in time, heading toward the brokerage. You walk in, confidently asking to speak with a broker, and make your desire to open an account known. The broker seems quite eager to have you as a client, and asks you for your ID to start the paperwork.
You pause, dumbfounded. You realize that your ID won’t even be issued for another several decades; heck, you won’t even be born for a few decades more. There’s no way you can buy stock using your ID without being arrested for fraud or locked up as a lunatic if you decide to share the truth of your time traveling nature. You quickly excuse yourself, running back to the time machine to head back to the future.
STRIKE ONE!
When you’re safely back in 2010, you think of how to get your hands on an ID that will pass muster in the sixties. Forgeries are too expensive, and you don’t know how to get your hands on one, anyway. Then it hits you: your grandfather was a strapping young (well, younger, anyway) lad in 1960, one with a resemblance to you that all your family members keep commenting on; if you can borrow his Social Security Card and other old IDs, you could pass for him, and invest your money in his name.
It takes a minimum of effort to get Gramps to show off his old memorabilia, and just a bit more effort for him to allow you to borrow his old Social Security card and a late fifties dated driver’s license. Convinced you can now buy and sell stocks to your heart’s content, you hop back in the time machine and jam to the past.
You again head to the brokerage house, and get the same broker, albeit a little more reluctant to work with the man who flaked on their last meeting. Still, when you produce your authentic (if more worn than he was expecting) IDs, his mood lightens. He readies the trade, and just asks you to produce the money to cover the purchase.
You smile as you pull the wad of bills out of your wallet and hand it over. You smile disappears when he hands it back to you, frowning and asking whether you think it’s funny to waste his time. Before you have a chance to say anything, he berates you for giving him clearly fake money, the work of a not so clever forger. You don’t ask what he means; looking down at your cash, you realize it’s the re-designed, counterfeit resistant kind that’s been introduced in the past few decades. Even if it didn’t look totally alien, it all has dates of 2000 or later on it, the sort of thing the broker would only see in Science Fiction films. You excuse yourself, and run back to the time machine again.
STRIKE TWO!
You know you’ll only have one more chance at this; you vow to make it work. You rack your brain trying to figure out where you can come up with a sizable amount of pre-1960 cash. Most of the bills that old have been taken out of circulation or are being hoarded in safes somewhere; the coins are collectibles, rare pieces that fetch a high price now but will be nearly worthless back then. As you ponder for a solution, it hits you: gold! Buy some gold now, sell it in the past, and you’ll get 1960’s money without having to steal it from someone in the present!
You go to the nearest pawn shop, and buy as much gold as you can afford. Hiding it until you get back to the time machine (you don’t want to be mugged), you hurry in order to get to the past. One quick time jump, another trip to the pawn shop (this time in 1960) in order to liquidate your shiny treasure, and you’re ready for another meeting with your broker.
By this time, he’s rather perturbed with the whole situation; you’ve bailed on this purchase twice now, and he’s a busy man. But when you produce a sizable amount of time-appropriate bills and lay them down on the table, his mood lightens; he tells you to have a good day, and you leave, convinced you’ve finally accomplished your goal.
You hop in the time machine, heading back to the future as you think of what you’ll do with your money. You didn’t have that much to invest, but you chose companies that will grow at such an incredible pace that your money will double ten times over, at least, a thousand-fold increase when you finally withdraw it. If that’s still not enough, you just have to be sure to keep some seed money to rent another time machine, invest the rest, and end up a millionaire all over again.
You arrive back in the present, and go to the brokerage to check on your ‘Grandfather’s’ account. You’re surprised to hear that it was closed and emptied out decades ago. You hurry to visit your grandfather, catching him as he regales his grandchildren (and a few great grandchildren) with some of his stories. You don’t recall ever hearing this one; he tells of how he discovered one day in the early sixties that a brokerage had made a mistake, putting a few thousand dollars in an account with his name on it. Of course, being the truthful sort he was, he attempted to convince them it was a mistake on their end, but when they insisted it was his, well, what was he supposed to do? He took it out and spent it, of course!
STRIKE THREE! YOU’RE OUT OF HERE!
Slumping along the wall, you realize that all your plans have come to naught, yet again. Still, from the excited way that Grandpa talks about finding that money and what he did with it, you can’t help thinking that perhaps it was worthwhile, after all. Bringing this much happiness to an old man must surely be worth something. Also, if you heard correctly, you thought you caught something about a business he started with the remaining funds…
Will you learn more about Gramp’s business? Does time travel always lead to trouble? Does Roger like to do ongoing stories? (The answer to that last one, by the way, is a resounding yes.) Find out next Wacky Wednesday!
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29
Jun
Posted in Weekly Thoughts by Roger |
It’s been a while since I’ve done a round-up; real life has made it hard to get online enough to update my own blog, let alone spend the time needed to read through, comment on, and link back to some of the other great blogs I try to follow. But, now that I’m getting back into the swing of things, blog-wise, I figured one of my first actions should be to re-start the whole blog round-up habit.
Now, I’ll probably try to go back and check out all the posts I didn’t have a chance to publish in earlier round-ups, possibly even going as far as making some post-dated weekly round-ups just to include all the goodness I see. For now, though, let’s take a look at some of the quality posts from this past week:
Contests
Joe Plemon mentions the GRABBBR contest being run by several Christian-flavored personal finance bloggers. There looks to be $200 in cash and numerous other prizes up for grabs, so it’s definitely worth checking out.
There’s a book giveaway being held by Young and Thrifty for a copy of Your Money Ratios, a book I’ve seen recommended in quite a few places. If I don’t win it (which I intend to do), perhaps one of my readers can.
I wasn’t fast enough to get to Austin (Foreigner’s Finances) contest giving away a copy of Investing Made Simple, but I suppose I’ll mention it at least; apparently you need to really be on top of his blog entries to win his contests.
If you’ve got kids in your life (or just like reading what we, as a society, are trying to teach our kids about money), you can enter to win a copy of Three Cups, currently be put up by J. Money of Budgets are Sexy.
Good Yakezie Posts
Staying Calm Under Pressure – Financial Samurai, always an interesting and entertaining writer, shares a story about his father, and how his father’s calmness and independence handling life has helped to influence his behavior.
The Millionaire Calculator – I love financial calculators and other devices to help you discover your current financial state. Monevator has a good one, letting you know when you’ll become an (inflation-adjusted) millionaire, always something cool to know.
Are Chiropractors Quacks? – I’ll admit, I’m a bit negatively biased toward chiropractors; my uncle was (is) one, and he didn’t treat my aunt (my mother’s little sister) very well. But Mrs. Money provides a pretty fair and honest view of the profession overall.
I heart Warren Buffett – Buffett is the classic example of both buy-and-hold investing AND living well below your means. If that’s not enough reason to heart him, Young and Thrifty provides more Buffett Factoids to inspire your love.
Does Income Change Who You Are As A Person? Or Your Tastes? – A good question for all of those who are upwardly mobile to ask. Evan of My Journey To Millions asks due to his own feeling that his lifestyle is inflating around him.
How to Control Emotional Spending – Mixing money and emotions frequently results in decreasing the amount of said money. Money Funk provides a pretty good list of ways to help decrease the effect your emotions will have on your spending.
Take Action Tuesday: Automatic Investments - It’s something we know we all should do, but precious few of us end up following through. Daniel of Sweating the Big Stuff provides a quick and easy guide to setting up your automatic investments so you can ‘pay yourself first’.
Where The Amateur Financier Was Featured Last Week
My post about my Deep Thoughts on Tipping was included in the Yakezie Carnival Round Up by Young and Thrifty. I do so enjoy hearing good things from my fellow Yakezie.
Speaking of Yakezie, and my post on tipping, Joe Plemon mentions it in his very sweet Father’s Day Round-Up post. That card from his children is just adorable.
My post on Building Up Your Bull**** Detector was considered one of the Best On The Web by Cheapskate Sandy. Pretty good, considering her BS detector is already running at full throttle (being a native New Yorker and all).
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28
Jun
Posted in rant by Roger |
I’ve now been working at Wal-Mart (or as a disturbing number of relatives, friends and passers-by insist on calling it, Wally World) for a little over a month. I’ve gotten the basics of the job down pretty well, and have been working hard, even if the job is far from what I expected to be doing with my life at this point.
As I’ve gone about my daily work, I’ve noticed many things that, well, just plain annoy me. So I’ve decidedthat the best way to change some of this behavior, is to note it in my blog. What follows thenis a list of do’s and don’ts for Wal-Mart and other retail store shoppers.
DO Ask for Help When Necessary: The people working at Wal-Mart or other stores are there to help. I obviously can’t speak for every single retail worker in the country, but the ones I have met, are generally eager to help customers whenever possible.
DON’T Interrupt Other Work: That said, there are times when I and other Wal-Mart workers will be occupied with other tasks that require our attention (such as stocking high shelves with heavy objects). If you require assistance during those times, please just wait for a moment or two while we finish doing what we were doing (or at least have set down anything we might drop on our own or someone else’s head), and then we’ll be glad to help you.
DO Ask If There Is More Of A Product In The Back: Try as we might, we can’t refill the shelves as fast as you, the customers, can deplete our stock; you simply have too much of a numerical advantage for us to win that game. (Especially when there is only one person assigned to refill the shelves in a particular section, a situation in which I frequently find myself.) If you ask (preferably politely), we can go into our store room, look through the products we have, and perhaps provide you with what you need.
DON’T Get Angry If We’re Completely Out Of Stock: Our backroom, alas, is not a magical tesseract that connects us to the production floors for all our items, effectively giving us an infinite amount of any item you want. Sometimes, we’re just plain out of something. In those cases, getting angry with the low level worker (such as myself) that you’ve encountered on the sales floor will do no good. If you really need to acquire the item, the best chance you’ll have is to go to customer service desk and get a rain check.
DO Feel Free To Ask When The Next Shipment Will Arrive: If you do opt to get a rain check, or simply want to come back when we have more of the product in stock, you can ask when the next truck carrying that product will be arriving. It might take a little digging, but we can usually find that information out easily enough. (Just bear in mind that the time when the shipment arrives and when we are able to get the product out on the shelves for you to buy might be several hours apart, especially when, as mentioned, there’s few people doing the stocking of the shelves.)
DON’T Ask For Products To Be Put Aside For You: Generally, the rank and file (and frequently the managers) in a large retail store have no power to put aside items in the back for your future purchase. Besides the fact that we can hardly guarantee that the products won’t go out on the shelves the moment we leave the store, you can hardly expect us to hold products for customers who may or may not follow through on their promise to buy it in the future. You’re not completely out of luck, though; you can have products set aside in some cases (usually at stores that still offer layaway) or get a rain check that will enable you to purchase the item at the desired price when you want to in the future. Either of those methods will have more success (and get the employee in less trouble) than asking someone to put aside a product for you under the table.
DO Ask About Any Specials: Employees can direct you to any possible savings in the store, showing you where the discounted products are kept or letting you know about any pending sales. There might be ways to save money that you didn’t know about, which the employees can clue you in on. Not everything will be on sale, though, which brings us to our next point…
DON’T Try To Pressure Employees Into Giving You A Discount: The average retail store worker has no incentive to overcharge you on your groceries or other goods; you’ll be able to pay the listed price on everything you purchase. Trying to get the cashiers to give you an ‘employee discount’ or otherwise decrease your bill will not only annoy the cashier, but can lead to a big scene. (If the employee does take advantage of their employee discount or otherwise illicitly decreases your bill, they’ll likely face disciplinary action and possible job loss; hence, the number of employees who’ll acquiesce to your desires is fairly small.)
DO Be Courteous: Remember that the people working at Wal-Mart or other retail stores are just like you: hard-working, capable and eager to help. Treat them with the same level of courtesy you would treat those in your everyday life. If you treat them well, they will do the same for you.
DON’T Be A Jerk: This should fall under ‘being courteous’, but it deserves its own mention. There are times when things will go wrong on your shopping trip: the store is out of one of the items on your list, a sale expires, or you simply can’t find what you want to buy. Taking out your aggression on the employees will do nothing to improve your shopping experience, and only make that employee much less likely to want to help you in the future. Treat store employees as you’d want to be treated, and everyone will be much happier.
There you are, several tips on how to behave at retail outlets, from someone who’s spent more of his past month there than he ever intended. Enjoy your next shopping trip!
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25
Jun
Posted in 5 Simple Rules by Roger |
Alright, we’re at the end of the week, and also the end of our list of simple rules. As usual, I’ve saved the most important rule for last. Always, no matter how you are doing financially, you need to remember to
Be Sure to Give Back
More than anything else we’ve covered this week, giving to charity will help not only you, but also your community. You can help to improve the lives of those around you, and feel good doing it. Of course, you can’t simply give to everyone who asks; besides the fact that there is a limitless amount of charities that want money, there are (unfortunately) plenty of dishonest people out there who would take advantage of your generosity. To be sure that your charity goes to those who most need it, here’s a few tips:
1) Check That The Charity is Legitimate: There’s more than a few ‘charities’ out there that are ineffective, at best, and downright deceitful at worst. Luckily, you can usually protect yourself and ensure that your money goes to worthy charities with a little preliminary research. I detailed some of the research I do when looking into a charity in my Choosing Charities series, and you should, before you hand over any of your hard earned money, be sure to put in some due diligence in order to ensure that the charity is on the up and up.
2) Don’t Overlook Local Charities: As the many stories, movies and video games can a test, it’s frequently easier to focus on the big fish rather than the individuals who surround you, even if it’s the latter group who actually make everything happen. In the same way, there’s the temptation to focus on only the big charities with large advertising budgets and/or high name recognition. There are plenty of smaller, more local charities that could use your help, from the local food bank to a nearby homeless shelter, where your money could do a great deal of good for your neighbors and friends, all in short order.
3) Don’t Leave Yourself in Poor Financial Shape In Order to Donate: Unfortunately, as with so many things in life, giving money to charity entails a trade-off: every dollar you donate is one dollar less you have for your own savings, investments, and spending. Obviously, I can’t give any hard and fast answers about whether you should or shouldn’t give to charity and under which conditions to make each choice; those are highly personal things, which will depend on everything from your personal financial situation to your religion and moral compass. I just want to point out that if doing so will put your other personal money goals at risk, maybe you shouldn’t give money and instead…
4) Consider Donating Time: If you are short of money (and who of us isn’t these days?), that doesn’t mean you can’t make a worthwhile contribution to a charitable cause. If you have time, you can always volunteer to help those less fortunate than you. Work in a soup kitchen, help out your church, even give to a blood drive the next time you have the opportunity; all of these (amongst many other options) are ways to improve the lives of those around you without needing to break out the check book or dig through your pocket for loose change. If you have skills that could benefit a non-profit or other charitable group, from marketing (even charities need to spread the word) to managing the money that comes in from other donors, volunteering your time will help the group to save money and be able to better focus on its charitable goals.
5) Work on Spreading the Word: While we’re on the subject of spreading the word, that raises another option for you when it comes to helping charities: pass on news and your interest in the charities to help draw others to the causes you support. Letting your friends and family know about the types of charities you choose to support, your reasons why, and what they can do to help can be an excellent way to increase the support that your chosen charity receives, as well as getting your loved ones more interested in the causes you support.
It can also backfire, though, and both annoy your loved ones and decrease the chance that they will help your charity. It’s a fine line to walk, and you need to be careful and not make it seem like you’re going to turn into a pushy telemarketer on them; just bring up your interests when an opening presents, and follow up or let the subject drop according to your loved ones’ response and interest level.
6) Just Do It: Sorry to rely on quoting a Nike commercial, but it is good advice (at least, in this circumstance): giving back is good. You’ll help to improve the lives of others, make the world a better place to live (if only by a tiny little bit) and feel pretty good about yourself. While I again caution you not to donate so much that you jeopardize your own financial situation, if you are able to give something, anything, really, it can go to improve the lives of others who are less fortunate. And that is an amazing feeling.
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24
Jun
Posted in 5 Simple Rules by Roger |
Ah, now we’re getting to the good stuff; now that you’re not spending all your money, have a decent emergency fund and have debt under control, it’s time to start having your money make money. If you want to retire (who doesn’t?) and aren’t earning several times the amount of money you spend each year (who does?), you need to put some portion of your money aside in investments that will grow your money at a rate faster than inflation, fast enough to let the magic of compound interest take hold and leave you with a sizable retirement fund (or college fund, or whatever you are attempting to save up to achieve). In other words, you need to
Invest Early and Often
Getting your investments started as early as possible is one of the best ways to increase your net worth that exist. Thanks to the power of compound interest, where the interest you earn in turn earns more interest, which in turn earns even more interest, you can turn a relatively small initial investment into a sizable fortune. Each dollar you invest at age 20 will turn into thirty two dollars by age 65 (assuming you earn a fairly modest 8% return on your money). If you wait until age 30, each dollar will grow to only about fifteen dollars by age 65, less than half of what you’d earn by starting a decade earlier. It only gets worse from there: start at age 40 and your dollar becomes seven dollars; start at age 50, and your dollar will only grow to three dollars when it’s retirement time.
Starting your investment career early has some other advantages, as well; you have more options for what investments you can use when you have more time available to recover from your mis-steps. If you want to choose highly speculative investments, the types that could either greatly grow your initial investment amounts to huge sums or leave you completely penniless, it’s much, much, much better to do so when you’re 20 than when you’re 40. While I certainly hope that you have good luck and end up with a sizable amount of money, if you do end up losing your shirt, it’s much easier to pick up the pieces of your financial life at 30 compared to 50 (just look at the difference in the grow of your money starting at those two ages).
Conversely, if you want to invest more conservatively, starting earlier gives your investments more time to grow, allowing you to stick with investments that allow you to sleep at night while still growing your money to meet your goals. If you’re earning only five percent return on your money (perhaps by investing in bonds, or even keeping your money in a savings account when interest rates start to go back up again), it’s important to get an early start to allow time for compound interest to work its magic. Starting at age 20 and earning a 5% return will yield nine dollars when you’re 65; wait until age 40, and you’ll have less than $3.50.
Of course, most people don’t put a lump sum into their investments and then just stop, only taking the money out at retirement. No, most people follow the second part of our advice and invest often, putting aside a bit of money monthly or whenever they get a paycheck. The advantages of investing regularly really add up over time. Remember how each dollar invested at age 20 grew to thirty-two dollars by age 65? If our twenty year old added an extra dollar each year, by sixty five he or she would have a total of $418. If we use more realistic numbers (after all, who invests only a dollar each year?), say $5000 each year, investing each year yields a total of over $2 million, compared to $159,000 for a single five thousand dollar investment at 20.
Investing often also allows you to dollar cost average your investments. By putting in the same amount of money on a regular basis, you’ll buy more shares of your investment when the price is low and fewer when the price is high. If you invest a single lump sum right before a big decline (say, back in 2008), you can end up losing years worth of compounded interest (at eight percent return, it’ll take nine years to get back to even with a fifty percent drop in value). If you invest year after year, though, a sizable drop in value offers you the chance to greatly increase the amount of your holdings, leaving you with a much more valuable investment.
Where to Invest
You’ll notice we haven’t discussed where to invest your money yet. There’s a reason for that: there’s a lot of investment options. From stocks and bonds to options, futures, and forex, a complete list would fill a pretty sizable blog entry by itself. As a result there’s no real way for me to give you a simple rule on what to invest in. You’ll have more options if you start investing earlier (as there’s more time to catch up if you run into trouble and more time to grow your money), but what exactly to invest in is up to you.
If you want a simple, set it and forget it type of investment that will automatically adjust your holdings to something appropriate for your investment goals, you could do much worse than a target date fund. Target date funds hold a mix of other mutual funds that is designed to slowly decrease in risk as you approach the target date (which is generally retirement or the start of college, or another major life event for which you’re setting money aside), making it less likely you’re lose all your money right when you need it. If you choose an appropriate fund from a quality company, a good target date fund (or one for each goal) could be all you need, investment wise, though they’re still far from the only option. Otherwise, reading and learning more about the other types of investments available is your best option. Good luck with your investments!
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23
Jun
Posted in 5 Simple Rules by Roger |
We are now at one of the most tricky spot in personal-finance, debt management, something that gives a great number of people quite a bit of trouble. But if you do it right, you will save yourself a great deal of time and aggravation.
Manage Your Debt
There are many different theories as to how much debt is acceptable. Some people, like Dave Ramsey, believe that you should do everything in your power to remain debt-free. Others, such as Robert Kiyosaki, considered debt, even substantial debt, to be necessary part of building your financial future, something you can’t do without if you hope to retire rich. And of course, there are many opinions that fall in between these two extremes.
Regardless of which tactic you prefer, it’s important to know how to manage your debt in a way that will keep it from overwhelming you. If your amount of debt continues to rise beyond what you have the capability to manage, it can overwhelm you, wrecking your financial goals and your life. (That’s one reason I came forward with my current debt issues before they got to be too overwhelming.). So we’re going to go over a few tips to help you keep your debt under control.
Controlling your debt
The first step in managing your debt is knowing where you stand. You need to take an honest inventory of your current debts and obligations. It might be painful, but it’s important that you know what you owe, whom you owe it to, and how much interest you’re being charged in order to know how to get out of debt.
Once you know where you stand, it’s time to work out your plan. There’s a variety of techniques you could use in order for you to get out of debt. I’ve covered several of them previously, even comparing their effectiveness, but it’s worth a quick review.
The most effective technique is to pay down the highest interest debt first and then go to the next highest interest debt, pay that debt down, and so on. This has the advantage of being the most efficient means of paying down your debt. Dave Ramsey, on the other hand, favors paying down the lowest balance debt first. While not as financially efficient, unless of course your lowest balance debt also happens to be the debt with the lowest interest rate, it does have the advantage of a quicker repayment of the first debt, giving you a psychological boost as you attempt to pay down your other debts.
Rather than spending too much time worrying about which is the most effective or “best” method, it will be much better for you to simply begin paying down your debts in whatever fashion you prefer. Put extra money (beyond the minimum payments, which you should be making for all your debts) toward one of your debts, and you’ll slowly wear down the debt and eventually eliminate it. Keep doing that for all the other debts, and you’ll soon be debt-free (or at least, free of non-productive debts like credit card debt).
I that all of this is easier said than done, as there will be no one in uncontrollable debt if repayment was as simple as I make it sound. Obviously, the psychological element is very important as well. In order to have the willpower to eliminate your debt, you need to have as much encouragement as possible. If you are married or in a committed relationship, your spouse or significant other should be able to provide you with support. Other members of your family or your friends can also serve to help support and encourage you in your debt elimination goals. And of course, there’s any number of personal finance writers and bloggers whom you can read to gain encouragement. (Many of them, myself included, will gladly accept e-mail describing your challenges and attempt to provide you with whatever help and encouragement will enable you to succeed.)
Good debt versus bad debt
There is much discussion about the concept of good debt and debt. While there is general agreement that the worst debt is debt taken on to buy goods that decline in value, such as taking on credit card debt to buy consumer goods, there is more disagreement on whether there is such a thing as good debt. Mortgages and college loans, for example, are used to acquire goods that grow in value over the years. Some commentators, such as the aforementioned Kiyosaki, considered it perfectly acceptable take on such debt; others, like Ramsey, believe that debt should be avoided at all costs.
Which position you take is going to depend on your personal beliefs and values. I can’t tell you which will be the best position for you, but regardless, any debt you do have needs to be treated with caution and kept under control. If you find your debt increasing, or it’s getting harder and harder to make the needed payments, you should take a step back, reconsider you need for that particular debt, and if needed, stop adding to it and start trying to eliminate it.
That’s all very really is to know about debt. It’s not really that hard a concept, although fully getting a handle on it does take time and effort. Here’s to both you and I getting out of debt as soon as possible. Cheers!
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22
Jun
Posted in 5 Simple Rules by Roger |
We’re continuing today with our list of five simple rules to help you make your financial life easier. After yesterday’s advice to earn more than you spend, you should have a bit of extra money left at the end of each month. One of the first things you should try to do with that money is
Keep An Emergency Fund
Actually, if you do much personal finance reading, you’ll discover that there’s actually two types of emergency funds that you need. The first is designed to protect you (and your wallet) from sudden, unexpectedly high short term expenses. For example, if your car breaks down or you need to go to the hospital, you should be able to cover the expense without having to put it on your credit card or sell off some of your investments. This is a buffer fund, designed to keep your income flow buffered from the sudden expenses that life throws your way.
The sort of emergency a buffer fund is perfect for
For longer term situations where your cash flow is decreased (or nonexistent), you need something more substantial. The second type of emergency fund is really an unemployment fund, a sizable chunk of money that is easily accessed, safe from any (major) losses in value, and substantial enough to supply with living expenses for several months, at least. This is what most people tend to think of when you mention the term ‘emergency fund.’
In practice, these two types of funds can (and should) be used in conjunction with each other. What you want is a step like arrangement of emergency funds, where each step contains more money, earning a little bit more interest, in a little bit harder to reach location. As you use up the money in the preceding step, you move onto the next step, slowly drawing down the money you have available there to provide living expenses. I like to think about the number six as I try to organize my emergency fund, as follows:
Emergency Fund Levels
Six Days of Expenses: Cash – Keeping nearly a week’s worth of your average spending in cash on hand. You don’t have carry the full amount on your person at all times; a locked safe at home with a few hundred dollars in it would be an excellent idea. That way, you’ll have a little money available for those sudden unexpected expenses, or if (knock on wood) you find yourself in a disaster a la the aftermath of Katrina, unable to reach a bank and unable to use credit cards to get needed supplies.
Six Weeks of Expenses: Bank Account - Once you’ve got a nice cash supply, the next step is put some money away into a regular, brick and mortar bank account. This will form the basis of much of your financial life, and will also provide a ‘hub’ to which you can link other accounts (like an online bank or investment firm). Most importantly for our purposes, a bank gives you a safe place to put some extra money, enough to cover your regularly monthly bills (and then some, hopefully). This will form the bulk of your buffer fund, keeping you from living pay check to pay check and having to hope you can cash your latest check in time to cover the monthly expenses.
Six Months of Expenses: Online Savings Account or CD Ladder – The disadvantage of accounts with traditional brick and mortar banks is that they tend to have very low yields, regardless of whether you have a checking or savings account. The cost of being able to run to the ATM or write a check against the balance in your account is a low interest yield. Once you have enough money stored away to cover your monthly expenses, you can start trying to seek a higher yield for your money (while still keeping it safe). Online savings accounts, like those for ING, HSBC, or Smartypig, make it harder to get your money (you’ll usually have to a wait a few days to transfer the funds), but offer a much higher yield than most traditional banks in exchange.
Once you have a sizable amount of savings, if you want to boost your return even more, you can opt for a CD ladder. Essentially, you’ll buy CDs of varying maturities, attempting to arrange your money so that each month, a CD with one month’s worth of expenses will mature. You’ll be able to (usually) get a higher interest rate than with a straight bank account, without much added risk. Be careful though; if you need to get the money in a CD before if matures, you’ll usually pay a stiff fee. Be sure that you have enough money in other, more accessible accounts to cover any foreseeable (and some unforeseeable) expenses you may incur.
(Up To) Six Years of Expenses: Other Cash Equivalents – Once you’ve gotten the previous steps complete, you might be ready to call your emergency fund finished. Six months is a pretty sizable emergency fund, and if you’ve been high-balling your expected expenses, six months should cover you pretty well. But perhaps you want even more money set aside in your emergency fund because you have a large family to support, or you’re approaching retirement and will soon be using your ‘emergency’ fund to provide your regular living expenses for decades to come.
In those cases, you’ll be best served by looking into some the higher yielding but still fairly safe investments, allowing your cash a chance to grow at a faster clip than any of the previously mentioned locations without too much risk of it dropping in value. One possibility is money market funds, mutual funds that invest in highly safe and steady short term investments. They frequently yield more than regular bank accounts (although, as of this writing most money market funds have essentially zero yield) with only a tiny chance of losing money. If you’re in a retirement account, you can also consider a stable value fund, which has as its goal keeping the value of your investment safe while still earning a yield (however low that might be).
For those willing to take a little bit more risk to get a higher yield, there are other reasonably safe options. Short term bond funds, for example, have much higher yields than money market funds. In the event that interest rates start to rise, though, short term bond funds will decline in value, at least temporarily, while money market funds almost certainly won’t. If you have a substantial amount of money in the other parts of your emergency fund, though, you might be willing to take that chance in exchange for the higher rates of return offered.
There you have it, how to build a sizable and complete emergency fund. It’s a bit trickier than you might have guessed (at least, if you want to be ready for any emergency), but still fairly easy to do. The piece of mind it can bring is hard to understate, though.
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21
Jun
Posted in 5 Simple Rules by Roger |
This week, I thought I would go back to basics, and provide five simple rules to help make money management that much easier. It’s not possible to cover everything about money in five rules; it’s probably not possible to cover it all in five hundred rules. But these five rules should help you to get a better handle on your money, and if you truly understand them, you’ll be a much better position financially. That brings us to our first rule:
Earn More Than You Spend
If you do nothing else to improve your personal finance situation, if you take no other personal finance advice from this site (or the thousands upon thousands of other blogs, books, magazines and other personal finance media), let it be this: keep your spending below the money you earn. If you spend more than you earn, or even the same amount of money that you earn, you won’t have the extra money you need to save, pay down debt, invest, or accomplish any other personal finance goals.
Charles Dickens knew the score: 'Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.'
If you want to accomplish this goal, there’s two different ways you could do it. You can…
Increase Your Earnings
-Work Longer Hours: If you work for an hourly wage, the easiest way to bump up your income is simply to increase the number of hours you work. Besides helping to show your dedication to the job, working longer increases the money in your paycheck (unless you’re a salaried worker, in which case you have to hope that the dedication you show to the job leads to a larger raise). Admittedly, this may not be an option; most employers limit the number of hours you can work (and for which they’ll pay you) in order to limit their expenses. If you find yourself in this group, you might need to…
-Get Another Job: We’re not talking about leaving your current job (although, if you can find another position that pays higher than your current one, it’d definitely be worth considering), but rather getting a second (or third, potentially) job to supplement your income. It’s not for everyone (particularly those whose family or other commitments limit the amount of time they have available), but it does offer one major avenue for increased income.
-Develop Alternate Streams of Income: Easier said than done in many cases, there are ways to earn money other than working for an hourly wage. Owning rental property, creating a blog, starting your own business, or writing and selling an eBook are all options (among many) to create income that can continue and grow without your continued effort. (Of course, often forgotten in discussions of alternate streams of income is that they do take time, effort and frequently money to develop, and many times are far from guaranteed.)
If earning more money is not an option, or it’s not enough to close the gap, there’s always the second option:
Decrease Your Spending
-Cut Down Small, Regular Expenses: David Bach calls it your ‘Latte Factor‘; the tiny, daily or weekly expenses (like your morning latte) that add up over time to big amounts. If you can identify the small areas were you spend almost without thinking, plug up the leaks, and save the money, you can make a large difference in your actual cost of living (and help to spend less than you earn).
-Save on the Big Expenses: On the other end of the scale, it’s important to try to save on the large expenses, from appliances to automobiles. Comparison shopping, buying used whenever possible, and trying to delay the need to replace these big ticket items as long as possible are all ways to ensure that you don’t overspend on big expenses. You might only have one or two of these savings opportunities each year, but any method of savings on these costs is will help to decrease the amount you outlay.
-Just Cut Your Impulse Spending: Probably the best way to keep your spending below your earnings, developing the ability to keep your wallet in your pocket (or purse) when you go out to the mall (to say nothing of not going to the mall as often to begin with) is your best ally in keeping your spending under control. Just say no to the urge of spending and you’ll be able to keep more of your money. (And of course, if you cut down on recurring expenses, like monthly television and phone bills, you’ll help to save even more.)
Which is Better: Earning More or Spending Less?
While not quite a big enough discussion to be called a Great Debate, there is some discussion of whether it is better to focus on earning more or cutting your spending. Each method of closing your budget has its advantages and disadvantages. Cutting your spending is fairly quick, for example; cut the amount you pay on your cell phone bill and you’ll see the savings within a month, while resisting the urge to spend the remnants of your paycheck at the mall every other week will leave more money in your pocket almost instantly. The disadvantage is that there is a limit to how much more money you can generate by saving; you’ll never have more money than what you are getting paid (after taxes and other deductions). Add in the fact that because of the need to spend some of that money on food, water, heat and other necessities, you’ll never get down to zero spending, and there’s an even greater limit to how much spending you can really cut.
Earning more money, on the other hand, is practically limitless. Building a good blog or investing in real estate can generate as much (or even more) income as working a job (or two), meaning that the sky is the limit for your income. While there’s a limit to how much more available funds cutting spending can generate, that’s not the case with earning extra money. Of course, attempting to earn more money isn’t without its own flaws. Trying to build alternate income streams is tricky and often leads to failure; while working more hours or an extra job requires time and a willingness to work that many people lack. Either method requires a lot of time, effort, and much less certainty of how much you’ll be able to gain on top of your current earnings.
My view is that both methods are important; cutting your spending allows you to quickly boost your earnings above your spending, and lowers the bar for how much you need to earn in order to have the money for other personal finance goals. Earning more money through whatever method you choose then yields even greater rewards and helps to boost your earning above your spending. Taking advantage of every method possible to make sure that you earn more than you spend will help you to get your personal finance house in order, improving your monetary situation.
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14
Jun
Posted in schools by Roger |
Welcome to the first of a multi-part series where we’re going to take a look at the American school system and see if we can find ways to improve it. We’re all affected by the effectiveness of the educational system and its ability to produce well-educated, capable workers and leaders for the future. Even if we don’t have kids (at least for myself and many others, not yet), how the country progresses will be determined by how the young people around us are educated and grow into adults; making that education process as effective as possible benefits us all.
First, though, a quick note in defense of the US educational system. If you’re a US citizen and pay any attention to the news, you’ve probably heard much talk about how US public schools, well, suck. The general narrative is that compared to private school students or students in foreign countries, the average US public school student is underachieving, failing to stack up to foreign competition or even the more effective teaching methods offered by private schools.
Well, that’s just not the whole truth; as Trent of The Simple Dollar noted back on one of his much earlier posts, the cause of this seeming disparity is Simpson’s Paradox. In a nut shell, private school students seem much more successful than public school students because their personal qualities (socio-economic status chief among them) mean that they would succeed no matter where they are are schooled. Similarly, unlike the US, most foreign countries divide students into segments; the academically higher achieving ones are sent to high school (and get counted in studies that compare their performance to other students around the world), while the less accomplished students are sent to vocational technical schools (and are conveniently ignored). Take those factors into consideration, and suddenly US public schools don’t look so bad.
Of course, ‘not as bad as they first look’ is hardly the sort of goal we want to set for our education system. (To say nothing of the fact that, if we need to set aside the performance of poor or otherwise ‘disadvantaged’ students for our national scores to look good, we apparently have a problem ensuring they get a proper education.) That’s why we still need to find ways to improve our schools, starting with…
Funding
Fitting for a blog about personal finance, our first area to consider is how our schools get their money. An effective funding system can ensure that our schools have the resources needed to survive and innovate; an ineffective one will doom our schools to a slow downward spiral. To ensure a more equitable and effective means of distributing funding, here’s a few suggestions:
-End Property Taxes: One of the most common mechanisms to fund schools is through property taxes, and it’s also rife with problems. Since property taxes are linked to the value of the property you own, rather the amount of money you earn or spend, they end up hitting the elderly or others on fixed income the hardest. They can dry up when property values take a hit, as they have these past few years. Property taxes ensure that the students of the wealthiest parents, the ones who can afford the most expensive houses in the most expensive districts, have the nicest, most expensive schools to attend. (There’s also an argument to be made that property taxes mean that the government really owns your property; if you fail to pay, year after year, the government can come in and take your property, selling it to collect back taxes). Ending property taxes, replacing them with a sales or income tax specifically to fund schools, will eliminate these problems.
-Divide the money (mostly) equally among students…: As mentioned, property taxes ensure that the areas with the most expensive property have the nicest school system. We get into something of a repeating loop, where students go to schools that have fewer resources, have fewer opportunities, get lower paying jobs, move to areas with lower property values, and the cycle ends up repeating for their children. We can break this cycle by dividing the money taken in by our new sales or income tax among all the children in the state, increasing the opportunity for children from poor families to get a quality education. There won’t be anything stopping well-off families from spending more on their children’s education if they want (in fact, as we’ll see in just a bit, it’ll be easier for not so well-off to move their children to more effective schools), but there will be a minimum amount available to fund every child’s education.
-…And provide a bit extra for special cases: Let’s be honest: there are some students who have needs beyond those of other children of the same age. Physical disabilities, mental handicaps, or emotional problems are issues that can prevent children from getting a quality education; providing extra funds will both help the schools to provide the extra staff or other support needed, and (hopefully) help keep the special needs child from being ignored. (Might I add that, as someone who was (and I hope, still is) considered ‘gifted’, a little bit of extra funding for schools with gifted students to allow them to stretch their mental muscles would be appreciated.)
-Attach the money to the children, not the school: This is a biggie. If we’re going to ensure that each child gets the same amount of money spent on their education, we want to be sure that is goes toward educating that child. If a child goes to a private school, the money the state is putting towards his education follows him to help offset tuition. If another child is home-schooled, the money (or at least a portion of it) goes to her parents to help compensate for the expenses involved. If a family wants to send their children to a different school district without leaving their current house, the money follows their children, not their residence. As John Stossel notes, we’ll increase competition and make educators and administrators work to improve their schools to draw in more students.
-Expand the choice of schools: A continuation (or natural extension) of the above point; there’s not much point in giving students and their parents the ability to move their children to other schools if there are NO other schools. Given that the school system, for the whole of its existence, has been effectively a monopoly, with residents having few options other than their local school districts, setting up real competition will take some time and money. Directing some money away from existing schools and toward viable alternatives, at least until we can have a more reasonable competition, seems like the best way to expand the options available.
-Tie funds to performance: Unfortunately, sometimes parents make decisions about schooling for their children for reasons other than trying to ensure the best possible education for them; these sorts of situations are only going to increase if we add the possibility of parents trying to ‘home-school’ themselves into a fortune at their kid’s expense. Being sure to regularly test the progress of all children in an impartial, fair manner (admittedly, a challenge in and of itself), with published results and, particularly in cases where parents attempt to home-school their children, the loss of education funds until the children are put into a more successful education system, will help to ensure that only the highest quality education is allowed.
There, several ways to alter the means by which we fund our schools, (hopefully) leading to a better, more productive school system as a result. Join me again later this week when I look at how to improve things for teachers and make a more vibrant school curriculum.
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11
Jun
Posted in Personal by Roger |
I try to share as much of my personal life with those of you who read this blog as I possibly can, particularly when it comes to my finances. Besides being useful in illustrating the broader points I try to make, it also helps, I like to think, in building a connection with you, my readers.
With that in mind, there’s something I haven’t been sharing which I feel I should: I have credit card debt. Not just ‘a few charges on the card, which I will pay off at the end of the month, allowing me to collect bonuses from the credit card companies for free’ debt, but an unpaid (if still relatively small) debt that is accumulating interest as we speak.
How Did This Happen?
If you’re a long term reader of this blog, you might remember that I lost my job back in November; that was the starting event. Given my extended period of unemployment before that point and the short time I was employed, I hadn’t managed to accumulate much of an emergency fund to that point. Luckily for me, Pennsylvania has a pretty generous employment program, which, thanks in part to the numerous extensions passed by the federal government, I was still eligible to receive benefits, which provided me with an income stream roughly half the size I was previously receiving.
Unluckily, or more accurately, unwisely, I was still spending money as if I was getting my previous full income. In fact, I actually ended up spending more, in large part because upon losing my job, I soon moved out to live with my fiancee. While I adore being able to see her everyday and spend time with her, it did make a major dent in my bank account. Besides the increased number of date nights that we went on (thanks to no longer living 330 miles apart), I went from living essentially for free in my mother’s basement to contributing a sizable amount of my unemployment to bills and food expenses. (The trip to Philadelphia for NCECA, while fun, was probably also ill advised given the state of my employment and finances.)
What happened shouldn’t be a surprise to anyone who’s done much reading in the personal finance sphere. I started dipping into my savings accounts to cover the credit card bills; when those funds were gone, I was dependent on getting my unemployment benefits in a timely manner to cover the expenses. Before long, trying to beat the clock caught up with me; as of May, I didn’t have enough to pay off the bill in full when it came due, so I paid the minimum and starting floating the balance on the card.
The bane of my existence
I was still pretty confident, though; by that point, I had gotten my current job at Wal-Mart, and with that income combined with the continued unemployment benefits, I was sure that I could quickly wipe out the remaining debt and even start to accumulate savings again. (Since I’m not working full time at Wal-Mart, Pennsylvania’s unemployment system allows me to keep drawing unemployment benefits in addition to collecting my pay from work.) It was working pretty well for a while there, too; only about $150 of last month’s bill needs to be paid (although, the charges for my spending in May are due soon, as well).
Unfortunately the bottom has fallen out of that plan; while filing for my latest set of benefits, I discovered that I’ve exhausted what the Pennsylvania unemployment system is willing to provide for me. I’ve gotten my last unemployment check, which was much smaller than I was expecting, to boot. My Wal-Mart income, about one quarter what I was earning at my previous job, will not allow me to pay off my debt for at least a few months. In other words, all my attempts to keep unemployment from interfering with my fun and enjoyment have blown up in my face, leading to a hunk of money sitting on my credit card bill, just taunting me.
The Lesson
I’m not sharing all this to win any pity; given that most of the people who comment on my blog are fellow personal finance bloggers, I’d expect more recrimination and ‘What were you thinking?’ comments than pity, anyway. I’m sharing this because I hope it can serve as a warning; it’s easy to delude ourselves into thinking that we have everything under control, even as it starts to get out of hand. Had I stopped to notice what was going on, or had the courage to really take myself to task for my increasingly bad money habits, I might not be in this situation now.
Here’s my advice to all those who find themselves in similar situations to the one I was in since November: Be realistic, even pessimistic, about how long it will take to get a new job, how much you earn from that new job, and how much you can really afford to spend. It’s easy to tell yourself that you’ll get a job soon, that unemployment will see you through, that you don’t need to make any changes to your lifestyle now that you have less money coming. If you fall into that trap, though, you’re just going to end up hurting yourself. A much better, although admittedly less fun, method is to treat unemployment or any other bad situation with all the seriousness it deserves, and act accordingly: decrease your spending, cut out any vacations or other large, optional expenses, and do your best to keep your costs under control.
As for me, I’m doing my best to take care of this credit card debt as fast as I possibly can, and then a bit faster. I’m doing most of my spending with cash, rather than cards, and am closely monitoring that to ensure I have plenty of money left over to cut down my debt. (I haven’t gone as far as cutting up my credit cards, at least not yet; if I don’t see enough improvement on my debt in a few months, though, it’s into the shredder (or at least, into a huge block of ice in the freezer) for them!) I’ll have that debt gone in no time, you can count on that; and then it’s back to more personal finance goodness in the coming weeks!
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