I’ve mentioned it before, but part of why we are in this current economic fiasco is due to greed. An integral part of that greed is our appetite for things material, be it a fancy swimming pool with waterfall that puts "Fantasy Island" to shame, a sporty convertible with neck vents, or something with less tangible benefits such as a luxurious cruise to the Riviera. If one had property with any considerable equity just five years ago, it was very easy to tap into that with a simple call to the local mortgage broker. Many were living fat and happy, especially those in the bubble markets such as the Inland Empire or San Jose, and many have fallen hard as prices adjust back to reasonable and realistic levels.
Why did some of us make the mistakes that contributed to the economic factors of today? Better yet, what makes us want to spend? I’ve come across extensive lists breaking down why we break out the wallet, but I have concluded it comes down to three basic factors:
1. Validation- It is simply defined as the act of recognizing, establishing, or illustrating the worthiness or legitimacy of. Whether the material item is to fulfill happiness or fill some other emotional void this is a huge reason why we spend. Power and self-worth can also be factored into this. Another overlooked aspect of validation is not necessarily selfish in nature: ever have a family member ask for money and you couldn’t say no? For whatever reason you lent them the cash and most likely never gotten anything back, that is validation too.
2. Vanity- It doesn’t take a Brad Pitt flick with an alpha-numeric title to tell you why this deadly sin is on the list. We all want to feel young, attractive, and desired. The problem is that sometimes this obsession can have huge consequences on our bottom line. I’m sure you can think of some examples, but if not take a look at this loan shark.
3. Inexperience- Like a boy virgin struggling to undo a bra clasp, this is also something to consider. Many first-time home buyers got into loans they simply did not understand and is probably a reason why the house down the street is bank-owned. We have all seen the no money, no interest finance deals at the local electronics or furniture outlet, what many don’t realize is that after the payment-free period is over, the interest rolls back to the purchase date (that is why that $2000 big screen shows a balance of around $2400 or greater once that first payment is due). Some people also rely on bonuses or increases in income, but if you’ve watched Christmas Vacation we all know that companies can cut back which is so true today! With regards to investing, I read this book over a decade ago and it is still highly rated on Amazon. As for the legalese or small print on contracts, only about 25% of Americans can decipher such language and if you have that innate ability congratulations, if not, have a family member or trusted friend review any contract before signing or agreeing on anything with a significant financial stake. Don’t be non compos mentis!
Thursday, February 26, 2009
Monday, February 23, 2009
Slumping Role Models
I saw an article in the paper yesterday touting how much we as Americans have curbed our spending on food and beverages. The surprising fact was that while beer at home consumption was down almost 16% over the previous year, hard liquor at home purchases were down less than a percentage point. I guess hard times calls for the more fortified stuff. Of course this shouldn’t be too alarming as we can readily browse any reputable news source and find all sorts of statistics on how we are spending less or find a story on how car lots are void of customers. Perhaps, the over-consumption of the past few years has finally caught up to us.
My question: “Is this what our parents taught us?”
It is a common known fact that we tend to listen less to what our parents say and lean towards emulating more of what they do. My parents had two very different views on money, and just a decade ago I emulated my father by spending too much and not saving enough, as I get older and wiser even, I am becoming more conservative and mimicking my mother and her frugal ways.
What is most disturbing in today’s society is our shift from cash transactions to plastic ones where the concept of money is not clear to an observing child and this is where a parent may want to explain how money works or better yet change behavior and start paying everyday purchases with paper currency. I recall my parents utilizing the checkbook for their purchases during my youth but they never really took the time to explain things (although my mother would tell me to save, it was often my father that clouded that perception by his appetite for filling the garage with every kind of tool imaginable). My wife would say I’ve got a few power tools gathering dust as well. Are you as a parent being a positive financial role model to your kids, or are you as an aunt or uncle showing your nieces or nephews what the value of a dollar is? We were all there once and perhaps this vital piece of information will help prevent a repeat of the economic slump of today.
My question: “Is this what our parents taught us?”
It is a common known fact that we tend to listen less to what our parents say and lean towards emulating more of what they do. My parents had two very different views on money, and just a decade ago I emulated my father by spending too much and not saving enough, as I get older and wiser even, I am becoming more conservative and mimicking my mother and her frugal ways.
What is most disturbing in today’s society is our shift from cash transactions to plastic ones where the concept of money is not clear to an observing child and this is where a parent may want to explain how money works or better yet change behavior and start paying everyday purchases with paper currency. I recall my parents utilizing the checkbook for their purchases during my youth but they never really took the time to explain things (although my mother would tell me to save, it was often my father that clouded that perception by his appetite for filling the garage with every kind of tool imaginable). My wife would say I’ve got a few power tools gathering dust as well. Are you as a parent being a positive financial role model to your kids, or are you as an aunt or uncle showing your nieces or nephews what the value of a dollar is? We were all there once and perhaps this vital piece of information will help prevent a repeat of the economic slump of today.
Tuesday, February 17, 2009
Money Rut
So here it is, a week before payday and your wallet and bank account are empty like theaters during the premier of Disaster Movie. It is often this habit of living paycheck to paycheck that gets us into these binds. And as costs rise and incomes don’t keep up with these fluctuations or we find a pink slip in our inbox, this is becoming more common in today’s economy. In fact, some 50% of workers are in this exact situation.
How does one run out of money? The problem lies in discipline. Some two-thirds of us have some kind of budget in place but only about 20% really follow it. The other problem is that while we were busy buying the latest fashions or travelling to Aspen for our winter holiday, many of us neglected our savings accounts. These are all contributing factors to what I call “inequity of living standards”.
Many find that when we aren’t able to sustain we simply whip out the credit card to help carry us over until that next payroll deposit. The problem is that credit card issuers are hacking credit lines like Jason Voorhees in a Friday the 13th flick. What I predict next is that we will see more and more consumers migrating to payday loan scammers in order to make ends meet. My advice: stay away and don’t post-date that check!! There are three things I want you to consider before exploring the two options above:
1. Is it essential? - By essential I mean does it fulfill Maslow’s two basic needs: physiological or safety. While that new sweater would look nice, I’m sure the old one in the back of the closet gathering dust and cobwebs would suffice for another season.
2. Is it practical? - Many folks have different definitions of what is practical, but let’s look at it this way: You are buying groceries at the big chain grocery store without a coupon in sight, or you could buy those groceries at an alternative grocer and perhaps get an extra bag’s worth of food for the same price. Practicality needs a plan.
3. Will you be able to pay for it when the bill or maturity date comes? - A big one and even if the answer is not clear, consider this: Are you willing to change habits in order to get out of this rut? If you truly are committed then go ahead and make ends meet. If you constantly find yourself lacking follow-through, find funds from another source: borrow from friends/family, get a second job, and/or seek help.
How does one run out of money? The problem lies in discipline. Some two-thirds of us have some kind of budget in place but only about 20% really follow it. The other problem is that while we were busy buying the latest fashions or travelling to Aspen for our winter holiday, many of us neglected our savings accounts. These are all contributing factors to what I call “inequity of living standards”.
Many find that when we aren’t able to sustain we simply whip out the credit card to help carry us over until that next payroll deposit. The problem is that credit card issuers are hacking credit lines like Jason Voorhees in a Friday the 13th flick. What I predict next is that we will see more and more consumers migrating to payday loan scammers in order to make ends meet. My advice: stay away and don’t post-date that check!! There are three things I want you to consider before exploring the two options above:
1. Is it essential? - By essential I mean does it fulfill Maslow’s two basic needs: physiological or safety. While that new sweater would look nice, I’m sure the old one in the back of the closet gathering dust and cobwebs would suffice for another season.
2. Is it practical? - Many folks have different definitions of what is practical, but let’s look at it this way: You are buying groceries at the big chain grocery store without a coupon in sight, or you could buy those groceries at an alternative grocer and perhaps get an extra bag’s worth of food for the same price. Practicality needs a plan.
3. Will you be able to pay for it when the bill or maturity date comes? - A big one and even if the answer is not clear, consider this: Are you willing to change habits in order to get out of this rut? If you truly are committed then go ahead and make ends meet. If you constantly find yourself lacking follow-through, find funds from another source: borrow from friends/family, get a second job, and/or seek help.
Monday, February 16, 2009
Digging Out
I recently watched a Suze Orman show where the theme was being honest with yourself and others. She had all sorts of guests and callers confessing about being heavily in debt and that they couldn’t afford the façade of wealth they created and their high-class tastes. I began to think maybe Suze’s on to something, perhaps you know someone who lost their job and is really having difficulties making ends meet and may have been living behind a lie of boats, fancy cars, or a $3,000 purse. They never planned for that rainy day and the cloud rumbled over them like an MMA fighter punching for a knockout.
I am a staunch advocate in that it takes time to get into debt and it takes even longer to dig yourself out of it effectively. Think of the folks who bought houses prior to the real estate bubble, they suddenly found themselves swimming in equity and some used it to finance lavish vacations or a shiny motorcycle that scares cats and small kids every time it clamors down the street, now many of them are struggling to keep their homes or may have already fallen victim to foreclosure. It’s this sudden infusion of cash that drives us to make some impulsive and often stupid decisions. A prime example is this article which highlights several million-plus lottery winners whom blew away their winnings faster than a squirrel crossing a country road. How does this happen?
My goal over the next few posts is to look into the psychology behind spending, because once you figure out why you do what you do, you can then try to change bad habits (if you’ve got any) and focus this on positive action for your wallet. Think of it as highly effective habits for your bottom line, I can’t guarantee there will be seven, but you get the idea.
I am a staunch advocate in that it takes time to get into debt and it takes even longer to dig yourself out of it effectively. Think of the folks who bought houses prior to the real estate bubble, they suddenly found themselves swimming in equity and some used it to finance lavish vacations or a shiny motorcycle that scares cats and small kids every time it clamors down the street, now many of them are struggling to keep their homes or may have already fallen victim to foreclosure. It’s this sudden infusion of cash that drives us to make some impulsive and often stupid decisions. A prime example is this article which highlights several million-plus lottery winners whom blew away their winnings faster than a squirrel crossing a country road. How does this happen?
My goal over the next few posts is to look into the psychology behind spending, because once you figure out why you do what you do, you can then try to change bad habits (if you’ve got any) and focus this on positive action for your wallet. Think of it as highly effective habits for your bottom line, I can’t guarantee there will be seven, but you get the idea.
Thursday, February 12, 2009
Attn: Chase Cardholders
Another blow to credit card customers! If you’ve got a Chase credit card be ready to pony up $120/year or lose that nice, fixed rate. Oh, and your monthly minimums, in many cases, will double!! Chase is behaving like a gaggle of baboons in a feeding frenzy!
Sunday, February 8, 2009
The "B" Word
Sorry for the delay of “B” Word but the post below was urgent!
Budgeting is like SPF 45 sunblock, many of us need to use it, but few of us really do. Many sunbathers forego the highly-protective lotion and go for a lesser strength in hopes of getting some color. The budget is something we all like to think we follow, but many of us (some 51%) do not have any kind of budget in place and simply rely on the check register or online bank statement to keep track of expenses. An interesting study also found that income level, gender and race did not have any factor in those that skipped logging expenses. Think of a budget as a tool of necessity, the study also revealed that folks that regularly track expenses are those whom carry many loans or have had a problem with managing their expenses.
Some of us realize it is a luxury to eat out, but many engage in this common practice without really knowing how much of a financial impact it has on us. The average American eats out at least two times per week, and while the value menu may be growing in popularity, it is this statistic alone that is disturbing, not only because our waistlines are expanding faster than a cockroach startled by lights, but because this habit has a huge impact on our wallets. Look at this piece of the budget alone: the average cost of a midday meal runs around $9 according to a 2007 report, this expense alone can cost you $900/year, enough to cover air and hotel for two from LAX to New York, or pay for a nice weekend in Vegas from almost any part of the country. The cost of brown bagging it can range from $1.50-$4.50/day (depending if your bologna has a first name or not), even on the higher end for the premium meal, this will cut that eating out expense by 50%, enough to buy a month and a half’s worth of groceries for the average couple.
This is just one aspect of budget crunching, here are some other creative ways:
1. drop the landline phone
2. consider cheaper options for television or internet service
3. skip the manicure for a month or two out of the year
4. clip coupons for groceries, services, and meals
5. caulk those windows
6. can the DVR or TiVo and watch shows on hulu.com or similar
7. download the free music of the week or borrow some CD’s to rip
8. catch the matinee show at the movies (sneak in candy while there)
9. learn to change your own oil/check your vehicle’s vital fluids
10. pass on the monthly clothes shopping trip (especially if things in the closet still have tags on them!)
11. install CFL’s instead of incandescent bulbs
12. insist on generic drugs for prescriptions and OTC medications
13. don’t be a leadfoot
14. Jettison the extra fridge
15. Microwave a meal instead of using the range
16. do your own taxes or find a free tax service
17. drop the gym membership and buy free weights/exercise bands
18. visit your library instead of buying books
19. fire the gardener
20. skip the coffee/ juice bar and drink a bottled water or tap if you dare
21. pass on the expensive travel destination for a cheaper locale
22. shop around for insurance and raise deductibles when possible
23. buy water saving fixtures/flow restrictors
24. find cheaper gas
25. turn off lights when not in room
26. shop around for deals
27. turn the car off if sitting for 30 seconds or longer (you can even try this at stoplights)
28. dump the timeshare
29. do something nice instead of buying a gift
30. turn off the heater, A/C and get out of the house
31. quit smoking, gambling, drinking
32. Buy gently used items from craigslist or freecycle
33. Don’t fall victim to a scam
34. Turn off shower when lathering up
35. Reduce minutes on your mobile phone plan
36. Check your tire pressures
37. Walk to the store
38. Go to the community theater instead of the fancy, performing arts center
39. Trim that dryer vent
40. Book museums, amusement parks on special days or during promotions
41. Rent the smaller car (these days, more like the SUV, especially for local use)
42. Fly later or stay an extra day for the cheaper flight
43. Buy in bulk (especially non-perishables like batteries and toilet paper)
44. Buy an energy-efficient appliance
45. Purchase the appliance as a floor model or scratch and dent markdown
46. Shop at the alternative grocery store such as Trader Joe’s, Aldi, or Fresh & Easy
47. Get pampered at a beauty school
48. Insulate that attic
49. Dry clean at home
50. Get away from the desk and use the laptop
Yes some of these measures are extreme and not all will apply, but even applying a few can make budgeting fun and help you from throwing away money!
Budgeting is like SPF 45 sunblock, many of us need to use it, but few of us really do. Many sunbathers forego the highly-protective lotion and go for a lesser strength in hopes of getting some color. The budget is something we all like to think we follow, but many of us (some 51%) do not have any kind of budget in place and simply rely on the check register or online bank statement to keep track of expenses. An interesting study also found that income level, gender and race did not have any factor in those that skipped logging expenses. Think of a budget as a tool of necessity, the study also revealed that folks that regularly track expenses are those whom carry many loans or have had a problem with managing their expenses.
Some of us realize it is a luxury to eat out, but many engage in this common practice without really knowing how much of a financial impact it has on us. The average American eats out at least two times per week, and while the value menu may be growing in popularity, it is this statistic alone that is disturbing, not only because our waistlines are expanding faster than a cockroach startled by lights, but because this habit has a huge impact on our wallets. Look at this piece of the budget alone: the average cost of a midday meal runs around $9 according to a 2007 report, this expense alone can cost you $900/year, enough to cover air and hotel for two from LAX to New York, or pay for a nice weekend in Vegas from almost any part of the country. The cost of brown bagging it can range from $1.50-$4.50/day (depending if your bologna has a first name or not), even on the higher end for the premium meal, this will cut that eating out expense by 50%, enough to buy a month and a half’s worth of groceries for the average couple.
This is just one aspect of budget crunching, here are some other creative ways:
1. drop the landline phone
2. consider cheaper options for television or internet service
3. skip the manicure for a month or two out of the year
4. clip coupons for groceries, services, and meals
5. caulk those windows
6. can the DVR or TiVo and watch shows on hulu.com or similar
7. download the free music of the week or borrow some CD’s to rip
8. catch the matinee show at the movies (sneak in candy while there)
9. learn to change your own oil/check your vehicle’s vital fluids
10. pass on the monthly clothes shopping trip (especially if things in the closet still have tags on them!)
11. install CFL’s instead of incandescent bulbs
12. insist on generic drugs for prescriptions and OTC medications
13. don’t be a leadfoot
14. Jettison the extra fridge
15. Microwave a meal instead of using the range
16. do your own taxes or find a free tax service
17. drop the gym membership and buy free weights/exercise bands
18. visit your library instead of buying books
19. fire the gardener
20. skip the coffee/ juice bar and drink a bottled water or tap if you dare
21. pass on the expensive travel destination for a cheaper locale
22. shop around for insurance and raise deductibles when possible
23. buy water saving fixtures/flow restrictors
24. find cheaper gas
25. turn off lights when not in room
26. shop around for deals
27. turn the car off if sitting for 30 seconds or longer (you can even try this at stoplights)
28. dump the timeshare
29. do something nice instead of buying a gift
30. turn off the heater, A/C and get out of the house
31. quit smoking, gambling, drinking
32. Buy gently used items from craigslist or freecycle
33. Don’t fall victim to a scam
34. Turn off shower when lathering up
35. Reduce minutes on your mobile phone plan
36. Check your tire pressures
37. Walk to the store
38. Go to the community theater instead of the fancy, performing arts center
39. Trim that dryer vent
40. Book museums, amusement parks on special days or during promotions
41. Rent the smaller car (these days, more like the SUV, especially for local use)
42. Fly later or stay an extra day for the cheaper flight
43. Buy in bulk (especially non-perishables like batteries and toilet paper)
44. Buy an energy-efficient appliance
45. Purchase the appliance as a floor model or scratch and dent markdown
46. Shop at the alternative grocery store such as Trader Joe’s, Aldi, or Fresh & Easy
47. Get pampered at a beauty school
48. Insulate that attic
49. Dry clean at home
50. Get away from the desk and use the laptop
Yes some of these measures are extreme and not all will apply, but even applying a few can make budgeting fun and help you from throwing away money!
Saturday, February 7, 2009
Credit Rate Alert
I had a coworker complain recently that his credit card issuer had jacked up his rate from a nice 7 1/2% to a whopping 24.99%, he mentioned he had never been late on a payment with the credit card company or other creditors as well. It seems that with the current state of the economy this is not uncommon with a reported 37% of card issuers following this lousy practice! This is insane as we are seeing unemployment rates elevate to even higher levels week after week!
My coworker's options were few as he mentioned he could choose to shut down the card and maintain the current rate which would affect his FICO score or he could pay the new rate which is like stabbing yourself in the eye with a pencil. The two options are tough to swallow: closing the card down would lower your credit score yes, but there are things to consider such as how long have you had the card, what is your credit limit, and is there an annual fee. If the limit is below $5,000 and it's a newer account (less than two years old), my advice is to close it down like a high school prom after midnight. If you know your credit score and it's 700 or above, don't close it, but be prepared to pay more than the minimum payment each month. Here's why: say the balance is $7,000 and you've been happily plugging along with the minimum payment (@ 2% of the balance) which is $140, it will take 21.5 years to pay that off! Now with the 24.99% rate your monthly minimum would likely double as credit cards don't like to carry out payment terms out to four decades or so. With a 4% minimum, your monthly payment is now $280 and that would take only 208 months to pay off. Now if you were to squeeze just another $70/month toward that credit card the balance would be paid off in a more reasonable 27 months. Let's also take into account that this trend will likely continue as credit card companies continue to scrutinize credit requirements and look to tighten their belts as we slip deeper into a recession. FYI the once magical credit score of 720 brought one exclusive offers at 0%, that minimum score has now grown to 740 out of an 850 point scale. Of course, the next step is to take that card out of the wallet or at least stash it in the back with the lint and coupons from 2007. You're on your own for that!!
My coworker's options were few as he mentioned he could choose to shut down the card and maintain the current rate which would affect his FICO score or he could pay the new rate which is like stabbing yourself in the eye with a pencil. The two options are tough to swallow: closing the card down would lower your credit score yes, but there are things to consider such as how long have you had the card, what is your credit limit, and is there an annual fee. If the limit is below $5,000 and it's a newer account (less than two years old), my advice is to close it down like a high school prom after midnight. If you know your credit score and it's 700 or above, don't close it, but be prepared to pay more than the minimum payment each month. Here's why: say the balance is $7,000 and you've been happily plugging along with the minimum payment (@ 2% of the balance) which is $140, it will take 21.5 years to pay that off! Now with the 24.99% rate your monthly minimum would likely double as credit cards don't like to carry out payment terms out to four decades or so. With a 4% minimum, your monthly payment is now $280 and that would take only 208 months to pay off. Now if you were to squeeze just another $70/month toward that credit card the balance would be paid off in a more reasonable 27 months. Let's also take into account that this trend will likely continue as credit card companies continue to scrutinize credit requirements and look to tighten their belts as we slip deeper into a recession. FYI the once magical credit score of 720 brought one exclusive offers at 0%, that minimum score has now grown to 740 out of an 850 point scale. Of course, the next step is to take that card out of the wallet or at least stash it in the back with the lint and coupons from 2007. You're on your own for that!!
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