Monday, February 26, 2007

how rich are you

i recently came across a site ( where you input your annual income and it ranks you on how 'rich' you are. it's an interesting site that kept my attention for a few minutes as i tried various figures, but it got me thinking. someone making 100k a year could very easily be a lot poorer than someone making half that.

if the 100k guy overspends, it's actually very easy for him to amass debt and be much worse off than the other guy.

it's not how much money you make, but what you do with it that makes you rich.

also, you can be very, very wealthy and not bring in any income at all -- if your holdings are in real estate or the stock market, you could be making unrealized gains and not have any amount of income at all. imagine you are retired, but have a million dollars in the stock market appreciating at 10% per year -- that would give you a million dollars of unrealized income, but $0 of actual income.

doesn't sound too poor to me.

Sunday, February 25, 2007

you're a credit to your . . .

about 3 weeks after we bought our first house, my wife and i were laid off from our respective companies within a few hours of each other. it was a pretty stressful time, but we made it. imagine draining your savings to put into a down payment and taking on the responsibility of a mortgage with no job and very little cash on hand. it was quite an experience, but we definitely learned a lot from it. here's how we did it:

the day i found out we were going to be without a job, the very first thing was call my credit card company and ask for a credit limit increase. crazy? maybe so, but i figured that if i was going to need some leverage to handle any type of emergency, i should have some more credit. this wasn't for going out or having fun, but basically a very high priced insurance policy, in the event of some major emergency.

the very next thing we both did was file for unemployment. unemployment insurance is something that you pay for in every paycheck, so it's not something that you should be ashamed of collecting. it's not much, but it helps with the necessities.

the next thing we did, obviously, was get our resumes together. considering the state of the economy at the time, we weren't going to be bombarded with job offers, or even interviews for that matter. we made finding jobs our jobs. it was a tough time, but we didn't mope about it. we sent our resumes out, made calls, went out on interviews, and made it our daily routine.

we also learned how to live on very little. it was spring time, so the weather was pretty mild. we opened the windows to cool the house, we prepared food at home, we cut out all non-essentials, but we still treated ourselves and went out every so often. i think it was important that we did that. just because we were jobless didn't mean it was the end of the world, and it helped us break the monotony of the everyday.

since we had just moved in, we didn't have a mortgage payment due immediately. you'll get one or two months after you close before you have to pay, so we didn't have that looming over our heads. and, in the end, we made it through, but what we learned was we could deal with being out of work, we could manage and make it through, and the next time we'd buy a house, we'd have more of a savings cushion on hand after our down payment to deal with just these types of emergencies.

Wednesday, February 21, 2007

0% credit

i was trolling the web the other day and came across a number of 0% credit cards. there are quite a number of cards out there offering 0% balance transfers for up to a year or longer. their rates then jump back up to typical credit card standards of 10-15%. well, i figure there are enough cards out there that i might could just revolve some credit around and never have to pay . . . never really tried to take advantage of the system like that, but i imagine it would work for a while.

anyway, i have taken advantage of this before. once, we were organizing a trip, so we collected money from all the people on the trip and booked everything through my credit card. well, instead of paying that off right away, i transferred the balance over to a 0% card for about a year while i had the cash stashed away drawing interest. it wasn't a lot, but it amounted to enough to buy a nice dinner or two at the end of the year (it was a trip to hawaii for about 25 or so, so it was a decent chunk of cash).

actually, my credit card is always has a 0% interest rate on it because i pay my balance in full every month. i still get to take advantage of 2 weeks of float . . . and while it's not a lot, it's a lot better than paying 15%!

the cost of higher education

every so often, i'll wake up in a cold sweat and bother my wife with the trouble of the escalating costs of college. i'll ask her: 'what if our kids want to go to harvard?' or 'how will we ever afford to send our kids to school?'.

when i went to college -- a state school -- it was really cheap. i remember it being less than $1,000 a semester. i had a scholarship that paid up to $1,000 a semester and i always got a little spending money back after registering for classes. but even state schools are expensive today . . . my school would likely cost me 2-3 times that much today. when you add in room and board, things can get pretty expensive pretty fast. now, i had a job throughout college and managed to get out of school with no debt. i'm not sure that i could do it today with the numbers i hear being thrown around about cost of school.

well, fortunately for me, i have time on my side. no kids yet . . . so, even if somehow a newborn were dropped on my doorstep today, i'd have about 23 years to stash some cash away (that's 18 years up to the 1st year of college and 5 years after that). and to me, that's the only way to do it. if it cost $25,000 a year, that's $125,000 per child for a college experience. sounds like a lot, huh? well, that's only somewhere around $5,000 per year every year if you start saving the day your child is born through his last year of college. that's if it's just sitting there without any interest. if you can make 5% on that annually, it turns out that you can just stash away $3,000 a year, which seems pretty doable -- that's just 250 bucks a month. of course, if you can jump it up to the 10% historical return on the stock market, you could put away half of that annually -- a very reasonable $1,500.

now, i've exagerated the numbers a little bit, but i'd rather wrong on the high side in this case. i mean, if it turns out that my kid can finance some schooling with a scholarship or if it doesn't quite cost as much as i'm expecting, hey, that's a nice little fund to start off with coming out of school.

Monday, February 19, 2007

another day older and deeper in debt

i tell people that i've never carried any credit card debt in my life -- maybe missed one payment way back after something got lost in the mail -- but it's something that i am quite proud of. i read an alarming statistic once that credit card companies write off over a billion dollars a year of bad debt annually. a billion dollars sounds like quite a lot of money to me. i know there are a lot of companies out there that have lost a few billion here or there -- the airlines were doing poorly for a while, u.s. automakers are bleeding money right now -- but the reason that credit card companies can basically throw away a billion dollars a year is that total u.s. credit card debt is somewhere around 700 billion dollars!

i used to think that if i could amass about a million dollars, i could live off the interest without chipping away at the principal. at about 5%, that's 50,000 a year -- a very reasonable take home for doing nothing at all. now, with inflation and other trappings of middle class life, i estimate i'd need a bit more, but imagine what you could do with 700 billion dollars! and, credit card companies don't charge no 5%, either. they're pulling in 14, 15, sometimes close to 20%. i could learn to live on that, i'm sure.

what's more, people don't pay off their cards at the end of the year -- many people just make the minimum payment -- so these numbers just keep growing for the credit card companies. if you continue to just make the minimum payment on those balances -- as many people do -- it'll take forever. i've seen articles that show that by making a minimum payment on a 1,000 dollar balance, you could have your balance paid off in a short 22 years! that's just nuts.

look, i'm not anti-credit by any means. i'm not even anti-credit card. i use my credit card for everything, but i always, always, always pay it off every month. i've found that's the easiest way for me to not fall into the 700 billion dollar trap.

Sunday, February 18, 2007

maxed out

i sometimes come across shows on tv like maxed out, suze orman's show, and personal finance shows of that ilk. they're not bad, but they're all alike and they're a lot like other kinds of advice shows -- people call in, describe a pretty dire situation, and the host says something like: you can't do that, you can't live like that, you need to save, blah, blah, blah.

yes, it's all true, but the key to helping people to me is not to tell them what to do, but to teach them how to do it. when it comes down to it, over extending and over spending seem to be habitual, practiced, almost unconscious behaviors. if you don't realize how you got into your current situation, it's going to be easy to find yourself back in the same situation a year or two down the road.

fortunately, i think we as people are pretty stuck in our ways, so, if you can reverse max-out type behavior and turn it into savings, i find that it's pretty easy to get out of debt, and start building a nest egg or a rainy day fund.

Friday, February 16, 2007

a new car!

i've purchased 3 cars in my life -- all new -- and i'll never buy a new car again. my first car, i bought after about a year at my first job. the car that i had been driving wasn't in great shape -- it had some body damage, the a/c didn't work, it burned all sorts of fluids -- but it drove pretty well. i just 'needed' a new car.

well, i bought one. it was pretty reasonably priced and i put quite a bit down. i financed it over 3 years at 5% and the payments were somewhere around 200-300 a month. i drove that car for 3 years and got into another new one. this time, i had some better reasons, my family needed a car and i could afford to help out.

well, i found another new car to buy. i put nothing down on that, financed it over 4 years at 7% and the payments were around 750 a month. i liked the car, but i didn't like it 750 a month worth. i had serious buyers remorse, but i kept plugging along and am still driving that car today, 8 years later. i love that car now. the best thing about it is there's no payment.

my next new car was an suv that i bought 2 years ago. similar situation -- my family (or actually my wife's family in this case) was in need of a car. so, we bought a new one and gave them her old car. this time, we put quite a bit down and are currently financing it over 4 years at around 4%. payments are around 300 a month.

the next time i have to buy a car it is going to be used. i used to think that there was no way to buy a reasonable used car -- there'd always be mechanical problems, you can't trust a guy selling a used car (why would he be selling it?), etc. but, i've come around -- that 750 a month payment taught me a lesson. 750 bucks a month can be much better spent (or saved) other ways.

i came across a posting by dave ramsey about how to get into a car you want. it basically starts with you buying a beater for cash and putting the money that you would be spending on a new car into savings. a year later, you can trade the car you bought and add the savings for a better beater. rinse and repeat.

Thursday, February 15, 2007

balance your books

i never balance my checkbook, there's just no reason to do it anymore with online banking. everything is handled for me online -- all withdrawals, deposits, interest, checks. i do however check my account online and make sure it is correct.

i rarely use cash, either. credit is convenient and helps me to keep a similar register of my purchases with the benefit of fraud protection, insurance, and points, rebates, or cash back. i use an american express cash rebate card with no annual fee, which rebates me 1.5% on all purchases. it doesn't sound like much, but it's free money.

i never carry a balance, so this really is a no brainer. no matter how painful it is -- and believe me, some months it can be quite so -- i always, always, always, without fail pay off my balance in full before the due date.

if you can do it, it can be a great way to live.

Tuesday, February 13, 2007

how to rest easy in retirement

when i was 25, i thought i'd retire a millionaire at 30. at a more conservative 30, i figured i'd be a millionare by 45. now, while i'm pretty sure that i'll be a millionaire at some point, the exact date seems to slide.

at 25 i wasn't too concerned with retirement accounts -- that stuff is for old ladies, i thought -- and besides, i wouldn't be able to get at that money until retirement age without some stiff penalties. i didn't care about it then because i was going to build a company that would change the world. i worked some crazy long hours back in my 20s and spent quite a lot of cash blowing off steam (i would reason that it was necessary after those crazy hours), and didn't contribute much at all to my retirement . . . why bother, when i'd have enough money after i cash in on the next big thing?

5 years later after basically treading water retirement-wise and not being part of the next big thing, i started paying closer attention to my retirement accounts. i started contributing 10% of my income to my employer's 401k plan and maxed out contributions to my roth ira. while it's not a huge nest egg, it's at least a nice place to put money for my old age.

401k plans (and iras) are nice in that they are tax deferred. you get a break on your taxes today because they reduce your taxable income -- you pay taxes when you take the money out in retirement. the thinking is that you're in a higher tax bracket today when you're making money than in your salt-and-pepper days when you're not working. pretty sound reasoning. employers often make matching contributions, too, which is essentially free money.

roth iras (and roth 401ks) are a bit different. you put after-tax dollars away, but the money grows tax free, making it a perfect vehicle to experience the magic of compound interest. if time is on your side, i don't know that you can beat that kind of magic.

i've heard of a method where you pay your children and have them contribute their earnings to a roth ira. i know there is some speculation out there about this, but to me it sounds like the perfect way to help them save for retirement. it would require you to actually pay your children -- that is, you would have to submit a 1099 or w-2 tax form to them and the irs for work that they have done. they would have to file taxes as well, but now that the legalities are out of the way, they can contribute those earnings to a roth ira. even with the most conservative portfolio, because they have time on their sides, their contributions would likely be worth well over a million dollars when they reach retirement age. there are all sorts of calculators and things online to predict this . . . try one with one or two contributions at age 13 or 14. that's the power of compound interest.

so, now all i have to do is build a turn-back-time machine, go back in time to when i was a kid, get the roth ira on the books (it didn't exist back then), convince my parents to pay me for household chores (ha!), contribute to a roth, convince my past self not to break into that roth for any reason, and return to the present . . . and i'd be able to rest easy in retirement.

Monday, February 12, 2007

save, save, save

last year, i lost somewhere on the order of 50 pounds, but before that, i had yo-yoed, like many people do -- gaining 5 pounds here, losing 10, gaining another 15. i had tried a lot of fad diets with some success, but it wasn't until i dedicated myself and really learned about fitness and nutrition was i able to lose the weight and keep it off.

now, what does this have to do with personal finance? at first glance, absolutely nothing, but i think a lot of people fall into the same weight loss traps with their savings. i mean, it's easy to stash some cash away one day but find it gone the next, get a raise or bonus and find your spending magically drift to that level, or diligently contribute to your savings but break into it because you 'need' that next great thing. we've all been there -- nutritionally and financially.

i read somewhere recently that the us savings rate for this past year was something like -1%. that means that as a people, we were spending more than what we made last year. now, i know that this doesn't take into account other measures of worth like unrealized gains in equities or real estate, etc., but, it seems like a pretty alarming statistic to me. at this rate, we'll be broke in a few years!

personally, i am an aggressive saver -- it has saved me from myself those times that i have been an aggressive spender. i've heard all sorts of numbers, rules of thumb, etc. on how much we should save, but i've never paid much attention to those -- they just seem way too low. i put away 10% of my after tax pay directly into a separate account, but beyond that, i contribute 5% to my 401k plan, put another 35-40% into equities or other savings vehicles and live off the remaining 50%, which largely falls into my mortgage, bills, and other spending. these percentages have stayed pretty much static throughout my professional life. it's rather unfortunate, but what that means is that i am spending way more today than i was when i was bringing home 20k a year. i think that makes me pretty typical, too, though.

i guess the point to my whole rant is this . . . einstein is credited with saying that compound interest 'is the greatest mathematical discovery of all time'. i don't have a lot of knowledge in the stock market or real estate or other investment vehicles (these are all part of my portfolio, but we'll get to that in a future ramble), so one way that i can make sure that i can participate in this great discovery is to save. whether that be a money market account, savings account, cd's, or what-have-you, i save a bit every month.

whether you put away 5, 10, 20, or more percent of your take home every check, it's all getting you the game of the great discovery of compound interest. it may not seem like that much now, but after it doubles in a few years, and doubles again a few years after that. it's just like dieting -- one or two pounds this week or next doesn't seem like much, but after 25 weeks, you've lost 25-50 pounds!

Sunday, February 11, 2007

first post

i was stumbling around, looking for something interesting this sunday afternoon, and i came across a decent personal finance site. unfortunately, i can't find it anymore, and after googling for a bit, it looked like most of the existing sites out there on the matter weren't really that great.

so, i figured i'd try my hand at it and maybe could contribute something at least as good.

first, a little about me. i am a thirty-something, dinky, professional. i started my career about 10 years ago making a tight, but livable wage. i have been able to move up professionally and financially, but along the way have had to start over several times. while i have never fell into the credit trap, i have seen my bank account return to single digits, purchased way more home than i've needed, purchased luxury cars, and made a number of fiscal mistakes that i have been able to learn from and hope that others can learn from, too.

in the coming days, weeks, months, i hope to contribute some postings on saving, investing, and spending from what i have learned over the course of my life and over the past 10 years, specifically. i am by no means any type of investment professional, financial adviser, or anyone with any credentials to speak of, but, hopefully what has worked for me will work for you, and what has failed for me will be a warning for you!