Photo courtesy of krisandapril

We have recently attended a number of weddings, birthday parties and other celebrations.  With little time to shop for gifts we resorted to giving cash or gift cards in most cases, but from now on I think I’ll opt for simply giving cash.  Here are a few reasons why:

• Cash can be spent anywhere.  Unlike gift cards to specific stores, cash can be spent anywhere.  I always appreciate receiving a cash gift because I spend it in whatever manner I want.  Gift cards and gift certificates do not provide the same flexibility.

• Cash can be used for things other than spending.  Depending on what stage you are in of your financial turnaround, it might make sense to hang on to the cash gift, or use it to pay down debt.  In the past I have considered selling gift cards on eBay (for slightly less than face value) just to get the cash value to apply towards other goals. Newlyweds may be particularly appreciative of cash gifts to cover honeymoon expenses.  In fact, cash has become such a popular wedding option in Israel that couples are renting ATMs that allow wedding guests to transfer a sum of money in the newlywed’s bank account with the swipe of a credit or debit card.

• Gift cards may get lost. I am notoriously bad at keeping up with gift cards, and the remaining balances. If I toss the cash gift in a separate envelope I know exactly how much of the gift is left by simply counting the money.  That’s a lot easier than calling a 1-800 number and wading through a sea of voice prompts.

• Giving cash to kids helps reinforce spending lessons.  It is true what they say, spending with cash hurts.  When you hand over that $20 bill you got in your birthday card and get three pennies back it registers.  When you swipe the same amount on a gift card it just doesn’t create the same kind of mental lesson of separating you from your money.    What a better time to reinforce this lesson than when kids are young.

• Gift card balances are rarely fully redeemed.  Of course, this is primary reason retailers offer gift cards.  Unused portions of gift card sales eventually add to the company’s balance sheet.  Best Buy compiled its gift card redemption statistics and found that of its unused gift card balances, the average card had been held and not redeemed for about 2.2 years.  It’s probably safe to say the majority of those balanced will never be redeemed.

• Some gift cards and gift certificates expire with little warning.  I gave my wife a gift certificate for a day at the spa a couple Mother’s Day ago, along with the promise of keeping the kids out of her hair and letting her enjoy a day of pampering.  It was a while before we scheduled the spa day, and were disappointed to find out the gift certificate had expired the month before.  Fortunately, after talking with the spa owner she was still able to use it, but it made me recognize that if I had simply paid for the spa day on the day she visited we would have not had to worry about expiration dates.

Would you rather receive cash or a gift card?

Photo courtesy of lrargerich

While perusing a few of my favorite personal finance blogs over the weekend I ran across an article last week from All Financial Matters, One Reader’s Reasoning On Why Younger People Don’t Save.  I like the way JLP addressed each concern raised by the commenter, whose attitude reminded me a bit of myself at that stage in life.

I went away to school and came back with a credit card and small pile of student loan debt, but no degree.  I thought I was pretty financially savvy, so almost immediately after starting a new job I signed up for their 401(k) plan, employee stock purchase plan, and even a Roth IRA.  I started socking money away and felt pretty good about myself. The problem was I wasn’t addressing the debts I had accumulated earlier while away at college.  I was paying minimum payments and continuing to use the credit card to finance life’s luxuries–vacations, new clothes, baby furniture, etc.  I was eager to start saving, and neglectful in repaying debt, and controlling spending.

Eventually, it caught up with me and by my late twenties I realized I had to address the debt or I would continue running on this financial hamster wheel for the rest of my life.  I halted my Roth IRA contributions, temporarily, and dropped back on my 401(k) contributions.  I also suspended my employee stock purchase plan because that money could be better spent repaying debt, and because the idea of not being diversified began to bother me as the company I worked for developed serious issues.

Looking back I realize now that I was smart to start saving early, but I jumped in with both feet, when I was really only ready to get my big toe wet.  So heads up young friends, here are a six secrets to save money when you are just starting out:

• Try to save half of your income.  If you are at a stage in your life where you don’t have kids to care for, and haven’t accumulated much debt yet, you may be able to pull of saving half of your income.  If you can do this, you are essentially buying yourself one month of early retirement each month you adhere to this plan.

• When it comes to savings, no amount is too small. If you are like most of us, and are not able to save half of your income, just start saving something.  You might think saving a measly $20 a paycheck, or $50 a month is not worth it.  Not true.  In fact, consistent savings is a sure-fire way to build a small emergency fund that will keep you away from the financial edge early on.

• Establish a comfortable style of living early, and keep it that way.  It doesn’t matter how much you save if you constantly increase your style of living.  A new car every four years, and a housing upgrade every seven, will not put you on the fast track to building significant wealth.  The best way to save money when you are young is to keep expenses as low as possible, for as long as possible, and stash away every bit of savings you can.

• Stay away from malls, televisions and catalogs.  All three are designed with one objective–to separate you from your money.  And it isn’t just advertisers that do it.  Peer pressure has forced many otherwise financially savvy people into bankruptcy.  When we see others on television driving nicer cars, wearing nicer clothes, and living in nicer homes, it is natural to be a little envious.  Hollywood sets an unrealistic expectation of how things work in the “real world,” so don’t buy into the hype.

• Ignore what others think.  Talk about feeling like you are on an island!  Just wait until fellow graduates and friends hear about your one-bedroom apartment within biking distance of your new job.  Are you nuts?  You have a college degree!  It’s time to buy that big house in the suburbs, or that upscale condo downtown, and finally upgrade that beater you’ve been driving throughout school.  Ignore this advice.  Develop some thick skin, and stick to your plan.  In a few years, you will be the one laughing–all the way to the bank!

• Move slowly.  While it is important to get an early jump on investing, only do so when you are on solid financial footing.  Also wait until you have a full understanding of the investment vehicle and the various options.  Don’t start a Roth IRA because it just sounds sexy.  Don’t put all of your 401(k) money in international equities because your boss’s “investment guy” said it was a smart move.  Only move on to the next step when you think it is a smart move.

The most important step in saving money when you are young is to simply start.  I recommend opening a high-yield savings account with ING Direct today!

Photo courtesy of Seamus Murray

Much of the news over the past couple weeks has been dominated by the financial markets, specifically the $700 billion bailout plan proposed by the current administration.  There are many personal finance lessons to be learned from the recent bank failures, and the regulations pushed by the last two administrations, both of whom are largely responsible for this mess.  One of the most important lessons is to avoid lending money to others in an effort to bail them out of their own problems.

Abraham Lincoln Set a Good Example

The story of Abraham Lincoln’s refusal to lend his step-brother money is well documented, and it emphasizes the idea that others should first try to dig out of their own mess.  In Lincoln’s letter he advises his stepbrother to find an honest day’s work, for which he will reward him by matching his earnings. 

Apply that same logic to today’s fiscal crisis makes a lot of sense.  Perhaps if these companies that are folding right and left cleaned up some of their own mess by asking for the millions paid to outgoing CEOs back, and using it to write down at least a portion of the losses, this bailout could help clean up what’s left outstanding.  As it is, many of the top dogs are bailing out in golden parachutes while taxpayers are going to clean up the mess they leave behind.

Lending Money to Friends and Family is a Bad Idea

I don’t like the idea of lending money to friends or family in need.  However, that doesn’t mean I’m against giving money to loved ones in troubled times.  When we give we should expect nothing in return.  When money is loaned there is an expectation of repayment, and that creates a debt between the lender and the borrower–not a good relationship to have with a family member or friend.  Like Dave Ramsey says, “Thanksgiving dinner just doesn’t taste the same.”

If you decide to give money to someone to help them out, be sure to set the proper expectation that this is a one-time thing.  If not, the person may come to expect the money on an ongoing basis, and then it will only serve to further enable their bad habits.

 
Photo courtesy of Michael Casey

After news began trickling out of Washington that we may be due another stimulus check, Pete from Bible Money Matters put together a great post asking why not just create your own stimulus check?  With news of the government (taxpayer) supported bailout plan dominating the news recently, I thought I would use Pete’s same logic by providing a few ways to create a personal bailout plan of our own.  After all, many of the problems on Wall Street could have been avoided if bankers and government regulators had applied the same common sense approach to money management that many of us out here in the real world apply every day.

• Don’t spend more than you earn.  Unlike the government, regular citizens cannot print more money or borrow it from foreign countries to sustain spending beyond what we are bringing in.  No, here on “Main Street” that behavior leads to debt, and not the kind that can be bailed out by taxpayers.  Create a household budget and stick to it.  If you don’t have the cash for something then you simply cannot afford it.

• Live frugal.  If more people lived well within their means there would be no need for this proposed bailout.  Just because opportunities abound to overspend, and there are people ready, willing and able to help you do it, doesn’t mean you have to take advantage of those opportunities.  Apply this logic to the housing market.  Just a couple decades ago people were perfectly content to live in homes with modest square footage, three bedrooms, and a small garage for knick-knacks and tools.  Now days everyone needs a bonus room, home office, double garage on a one acre lot.  To finance this “American Dream” many people leveraged their financial future borrowing over half of their income to support a house payment they really couldn’t afford.

• If you have debt, pay it off and fast.  There are various ways to pay off debt, but at the heart of all the plans is the basic idea that if you live on less than you earn you will create excess money that can be applied to your current debts.  That’s really all there is to it.  Some people line up their debts by interest rates, making larger payments on the higher interest debts first.  Others prefer the debt snowball method of paying balances off smallest to largest.  I don’t really care how you do it, just do it!  And don’t let people convince you that debt is good, or that if it is low-interest you are better off investing the money.  If you aspire to be debt free, tune out the naysayers and make it happen.

• Create an emergency fund.  With debts paid off, and living a frugal lifestyle, savings should be your next priority. Build a healthy emergency fund of 6-12 months of expenses–the more the better.  Many financial planners suggest 3-6 months of expenses saved, but I personally would sleep a lot better knowing my family could survive comfortably for a year in the event of a major emergency such as a layoff or illness.

• Don’t suffer a spending relapse. Often times when people reach this stage of their financial recovery they backslide into bad habits of excessive spending.  Think of times past when the government got control of spending, balanced a budget and shrunk the national debt, only to see spending increase as national events changed the political landscape.  The government does not get the idea of an emergency fund, because in their mind a surplus is simply money unclaimed by a new spending plan.  Do not repeat their mistake–keep money in your personal surplus set aside for emergencies and keep your spending in check so you don’t have to dip into these savings to finance bad habits.

In some cases the best form of education we can receive is to be provided examples of how not to do things.  The poor money management lessons from our Congress are a great example of this type of negative behavior modeling.  Whatever you do, don’t follow their lead with your own finances.

Just arrived home from a late hospital visit with my Mom. She remains in intensive care–going on two weeks now.  Not much change in her condition, and this is becoming an emotionally exhausting ordeal.  Not to put a downer on the roundup this week, because there are some fantastic articles out there, but I really don’t have much creative energy at the moment.  I plan to simply list my favorites without the usual witty commentary (stop laughing) and simply ask you to give them a read.

The Roundup

• Do You Really Deserve a Break Today?  @On Simplicity
• 20 Things the Millionaire Next Door Does Not Do.  An oldie, but a goodie! @Marc and Angel
• Getting Things Done at Home By Getting Stuff Out of Your Brain.  @Simple Mom
• The Busyness and Hurriedness of Life is Overwhelming.  It certainly is!  Funny how something like a life-threatening illness in a loved one makes you stop and smell the roses a little more often.  @My Super-Charged Life
• Where Do We Go From Here?  How About Back to the Basics?  Couldn’t agree more with this one!  @The Wisdom Journal
• Old Shipping Containers Could Be Inexpensive Homes for Many People.  @The Good Human
• The Twelve Biggest Personal Finance Mistakes People Make Over and Over Again.  @The Simple Dollar
• Could Good Come Out of the Economic Crisis?  @Being Frugal

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