Monthly Archives: November 2010

Holiday Shopping Season: It’s the Best of Times, It’s the Worst of Times

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My favorite (and least favorite) time of the year has arrived. I enjoy the holidays because of the extra time with family, the break from work, and the occasion to slow down and give thanks. However, I don’t enjoy the endless stream of Black Friday ads, which now apparently lasts an entire week, and the Cyber Monday ads that follow which also now last a week.

However, Black Friday does provide an opportunity to exercise frugality by scoring a few deals early and retreating home for Thanksgiving left overs. Look for a post on that very subject early next week.

The Frugal Roundup

Need some help with your Christmas shopping list? Peter provides a huge list of 75 frugal gifts to give this Christmas season. Sticking with the frugal theme, here’s 25 Christmas gift ideas under $25.

Now for the hardest part, controlling the impulse to buy yourself a present!

If you decide to venture out next Friday, check out Julia’s post on the best Black Friday 2010 deals.

So much for stocking up on over-the-counter medicine using our medical flex card. According to this article, flexible and health savings account changes for 2011, we’ll no longer be able to buy OTC medicines using FSA money. Nice. (Update: Someone in the HR world corrected me here. Apparently, you will still be able to purchase OTC meds using your FSA funds, but a doctor’s prescription is now required. Still don’t like the change).

Ever wondered what it would take to save a third of your income?

Guess what’s happened to the average food portion sizes over the last twenty years?

Baker shares his thoughts on couples and money and tackles that age-old question: should couples have separate or joint finances. A nice bonus interview with Corey from SimpleMarriage.net included.

I am not keen on the idea of making failure impossible for high school students and issuing an incomplete instead. After all, when students get in the real world they have to meet real deadlines. Bosses don’t generally allow “incompletes.”

Ron is about to release what promises to be a timely read for anyone looking for a job, or looking to switch jobs. The Inner View of Your Interview is a look inside the mind of the job interviewer.

After recently cleaning out my closet I’ve discovered I need to replenish my wardrobe. Fortunately, I ran across Jeremy’s post on maximizing your wardrobe.

It’s that time of year. Time to sell off a few lousy investments to offset gains in other areas (or create a little tax deduction). Beware the wash sale rule for investment losses.

Are Student Loans Good Debt? Student loan debt is out of control. It seems like every day I read a story about someone struggling to repay over $100,000 in student loans, which makes you wonder if college is overrated. After all, there are still a few high paying jobs with no college degree requirement.

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FTC Cracks Down on Debt Relief Rackets

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Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to compare credit card offers.  Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and the Christian Science Monitor.

In a bad economy, con artists, scammers, and schemers come out in full force.  This time around is no different, with a number of profit-motivated credit counseling companies popping up and pushing “debt management plans” to consumers.

With so many Americans out of jobs and up to their eyeballs in debt, bankruptcies are at decade highs and many people are desperate to unburden themselves and start over.  So it’s easy to make debt management and debt relief sound like a good idea.  Who doesn’t want to shed their bad credit and move on with their lives? And while there is nothing inherently wrong with a debt management plan, it pays to be skeptical when anyone makes promises that seem to good to be true.

Over the past ten years or so, a new breed of credit counseling agencies has become common, with these agencies making unscrupulous promises on what they could negotiate on your behalf, and charging absurdly high upfront and ongoing fees. These companies spend heavily on TV advertising due to their hugely profitable businesses, causing additional headaches for already indebted families.

You’re probably seen many of these TV commercials or gotten unsolicited emails or phone calls advertising their “nonprofit debt relief services.”  And while you should definitely never sign on with a “for-profit” credit counselor, the nonprofit designation doesn’t necessarily mean you’re safe.  Many unscrupulous agencies designate themselves as 501(c)(3) organizations in order to falsely gain the trust of potential customers, and it doesn’t necessarily mean they aren’t motivated by their own bottom lines.

Fortunately, there’s help available

Just a few weeks ago, the FTC rolled out a new rule to protect consumers from just these types of debt relief schemes.  On October 27, 2010 they designated that credit counselors are not permitted to collect fees in advance of helping you with your debt.  It’s never been a good idea to pay these guys before they help you, but now the FTC has made it official.

Specifically, debt relief companies that sell their services over the telephone can only accept fees when the following criteria are all met:

  • The company successfully helps to change the terms of at least one of the consumer’s debts
  • The consumer and the creditor come to terms on a settlement agreement or debt management plan
  • The consumer has made at least one payment under the agreement

What does this mean for consumers? The idea is to prevent debt relief rackets from making money off of high upfront fees, often with unrealistic promises of success. Prohibiting those fees means debt relief companies can only charge when they are at least partially successful, so they’re no longer likely to prey on clients they can’t really help. It also means we’re likely to see fewer misleading ads.

It still pays to be a skeptic

Another FTC rule took effect on September 27, 2010 that requires debt relief companies to make specific disclosures to consumers about the services they provide and prohibits them from making misrepresentations. Specifically this means they need to tell potential clients how much their services will cost, how long it will take them to see results, what could potentially go wrong, and what (if any) dedicated accounts will be set up to make creditor payments, collect fees, and so on.

That’s generally good news. But the new rule changes also mean that companies will look harder to find loopholes, as is common in any financial or debt-related industries. So regardless of any rules designed to help you, you should still always be skeptical. Before signing on with any such agency, do some research and verify that they have your best interests in mind.  One good place to start to do such research is the NFCC website, where you can find advice and information about legitimate credit counselors.

With the right help, it’s only a matter of time before you’re back on your feet and en route to rebuilding your credit history.

It’s Time for a “Virtual” Reality Check

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Over the weekend, I read a story about a gamer making  a “cool half million” flipping a “virtual” property. Virtual property? Since when did fake real estate built atop a fake asteroid fetch $635,000? Compare that to the ridiculously low amounts being offered for real property (here on the planet Earth) in previously high-flying real estate markets.

Granted, those markets were suffering from a little irrational exuberance prior to the housing bubble, but their lots still offered tangible items like sticks, bricks, dirt, etc. And last I checked, I can’t grow vegetables on virtual properties built online. Farmville anyone?

You know Farmville, the Facebook application where participants pour hours of real world time plowing, planting and harvesting virtual crops for virtual gains. You can grow the size of your farm by increasing the number of neighbors, or if you can’t convince your virtual friends to be virtual neighbors, you can just give Facebook your credit card and they’ll gladly convert $20 to virtual acreage. Then you can plant even more crops to harvest even bigger gains towards that ultimate goal of…what is the ultimate goal again?

It’s Time to Get Our Hands Dirty Again

My kids are like a lot of kids these days, and many adults, too. They don’t necessarily mind work, but they don’t want to get dirty, or cold, or sweaty. They don’t mind sitting in front of a computer building virtual empires, or leading their favorite football team to the Superbowl in Madden 2010. But don’t ask them to toss a real ball, or swing a real hammer.

It’s too hot. It’s too hard. I might get hurt. There are bugs. It doesn’t pay enough.

I’m not exactly sure where it all started, but I distinctly remember a number of virtual “advancements” that seemed to encroach on our real world activities. They made us a little lazy, a little soft.

For example, when I was growing up, I remember parents scrimmaging against their kids at soccer practice. In fact, my grandfather was goalie for the parents’ team during scrimmages. We even ordered him a jersey with “Papa” on the back, number 60 (his age at the time). Now, most parents sit in their cars during practice, checking their fantasy football stats on an iPhone.

I’m guilty, too. This past season, I actually enjoyed the hour my daughter was practicing soccer because it was the one hour of the day I could tilt the seat back, turn off the radio, the telephone, the computer, and just rest. Maybe that’s the key. Maybe if we all unplugged and rested a bit more, we’d have time for true recreation. Not virtual fishing, but real fishing, complete with fresh air, smelly bait and muddy grass under our feet at the shore.

By the way, by the end of the season I had remembered my grandfather participating in all my practices, and made it a point to play soccer with my kids’ teams when the coach asked for volunteers. I learned a very important lesson – soccer was much easier when I was a kid!

We’ve Come a Long Way, or Have We?

Like I said, it’s tough to put a finger on the point where virtual connections became more important than real connections. Where virtual products and services were preferred over tangible ones. Where virtual reality was more engaging than our own reality. It has been more of a gradual decline.

Consider the following tug of war matches currently being fought in our society between the old-fashioned farts like me and those advancing new technologies and services:

  • Virtual books (Kindle) vs. real books. Disclaimer: I own a Kindle, and while I do like it, I miss real books. I miss the way an old book smells. I miss looking at the cover, seeing the occasional photos included in a biography, making notes in the margins, and bookmarking my favorite sections. I think I’ll eBay this Kindle and go back to hardcovers.
  • Email vs. real mail. Letter writing is officially a lost art. When was the last time you received a handwritten letter from a friend or loved one? Receiving a new email isn’t exactly an exciting event, but I can still remember how special it felt to receive a handwritten note from my mom while away at school, along with a few goodies for the dorm room.
  • Debit cards vs. cash. Spending cash hurts. The physical transaction of a twenty dollar bill leaving your wallet and being placed into the hands of a cashier registers far more in your brain than swiping a piece of plastic. Debit cards are more convenient, but if you need to get a grip on spending, go back to cash (while you still can).
  • Second Life vs. real life. I’ve never understood these virtual reality games. Why invest so much time and energy building something that only exists in a virtual world? I’d rather spend that time building something I can see, and touch, and enjoy in the real world. Doesn’t matter if it is a birdhouse or a real house.
  • Online learning vs. classrooms. I attended a traditional campus for the first two years of college, but finished my undergraduate degree several years later using an online degree program. It was nice not to have to go to class at end of a long work day, but some things were lost in the online learning world. I experienced very little interaction with other students, and missed professors asking me why I had a puzzled look on my face because I didn’t understand something, but was unwilling to raise my hand and ask the question.
  • Ipods vs CDs vs tapes vs records. That’s right; record albums. Remember those? Records, and even tapes and CDs, used to be made more special by the cover art, the lyric inserts, etc. I remember my mom enjoying looking through old record album collections…remembering how she had to hunt all over for the album, the first time she put it on her record player, etc. Can’t exactly get that from a download from iTunes.
  • Physical gold vs gold stocks and ETFs. Gold and silver are hot commodities these days, and many are scrambling for new ways to own both. My grandparents and great-grandparents also thought a lot of gold and silver, but preferred to hold actual coins. My great uncle even collected a few nice silver pieces. They thought certificates guaranteeing your gold was being held somewhere else was about as worthless as used toilet paper. Wonder what they would have thought of the many “investment” products created today that merely track gold and silver prices, but have no tangible assets to back it up.
  • Virtual friendships vs real friendships. Social media has helped connect many people who may not have otherwise been connected. In fact, the phenomenon known as blogging has connected you and I. But I still highly value offline friendships. Close friends and neighbors are the ones you can turn to in times of need, and likewise, you can be there for them.
  • Digital pictures frames vs. real pictures. Digital picture frames are neat, aren’t they? You take a bunch of photos, put them on a memory card, and stick it into a digital frame. The frame loops through dozens of photos, instead of just the one you’d see in a glass and paper frame. I still like real, hardcopy pictures. I’ve been going through many old photographs since my grandfather passed away, several that are 30-40 years old (and older). I’ve enjoyed reading the notes my grandfather wrote on the back of the photos – the date, who’s in the photo, a little story to accompany the picture. Can’t get that on a digital frame. Which makes me wonder; what will our kids and grandkids have to remember us? Will the portraits of our lives be reduced to a single CD of digital images?

I don’t mean to be a complete wet blanket. I am all for technological advances, but I also happen to believe that in many cases, change does not equal progress. I guess when it comes right down to it, I am old-fashioned. And that’s not necessarily a bad thing.

My mom and grandparents used to talk a lot about the “good old days.” My grandfather used to joke there wasn’t much good about them – especially the times we were at war, suffering through a depression, his family’s lack of now-modern conveniences like indoor plumbing, electricity, etc. But there were good things about those times, things I wish we could enjoy today.

More families stayed together. More families played together. Kids played outside, and for the most part, they could do so safely. People were more reluctant to get too deep in debt. People knew their neighbors. People trusted their government (well, for the most part). Kids respected their teachers. Music was still music. We gathered at the table every night for dinner. We moved slower. Life was just – simpler.

Sound the Alarm – It’s Time for a Financial Fire Drill

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A couple weeks ago a tornado was spotted close enough to sound the alarm, sending us running for cover. It reminded me that every now and then it’s a good idea to review emergency procedures at home, work and school.

As usual, I thought about how this related to personal finance. Shouldn’t we periodically review how prepared for financial emergencies? Consider the scenarios.

How long could you survive if you or a spouse lost your job? What if you are like me and are the sole income provider – how long could your family live on savings alone? Could you sustain a 6-month period of no income due to a medical disability? If you are not sure about the answers to these questions it is probably a good idea to conduct a financial fire drill.

Steps to Planning a Financial “Fire Drill”

The concept of a financial fire drill is based on the idea behind a real fire drill. It allows you to run through a real emergency before you have to act with smoke and flames. In the case of a financial fire drill, this means you will simulate a “what if” scenario so you’ll know what to do, and what things need to improve, before a real life financial emergency strikes.

1. Include the entire family. My family has a pretty good emergency plan. We all know where to meet in case a fire separates us in the middle of the night. We have a rendezvous point established for larger-scale emergencies, and even the kids are aware of actions to take based on various types of disasters. Similarly, the entire family should also be involved in a financial fire drill.

2. Gather a list of necessary expenses. These expenses are absolute necessities, so things like mortgage payments or rent, basic utilities like water, power, etc. (cable, XM radio and Netflix memberships don’t count), and other basic expenses related to food, shelter, prescriptions, etc. Nothing else matters at this point.

3. Determine how much is in your “extended emergency fund.” A basic emergency fund is a pile of cash stored in an online savings account or local credit union. Our goal for an emergency fund is to have one year of basic household expenses stashed away.

However, in a large emergency such as a job layoff or medical disability, you could likely tap other resources. Be sure to include any stocks or mutual funds not held in retirement, CDs (even if you had to pay a penalty), bonds and any other assets that could be converted to cash quickly. This total amount will represent your “extended emergency fund.”

4. Determine your maximum survivability (in months). Divide the amount of your extended emergency fund by the total expenses identified in step 2. This number represents the months you could survive without an income.

For instance, let’s assume an average family of four needs about $2,000 a month to cover their mortgage, basic utility payments and food. If the same family has a $17,000 extended emergency fund, they could expect to make it about 8.5 months on savings.

5. Adjust for increased expenses. Unfortunately, expenses don’t always go down in an emergency. In fact, they rarely do go down, despite your best efforts to cut expenses to the bone. Things like continued health insurance premiums under COBRA, or other medical expenses, can cause spikes in spending categories otherwise in check.

Make adjustments to your prediction based on these estimates. To show how much impact these “surprise expenses” can have, in our example above the same family could only survive five months or so with a $1,000 COBRA health insurance premium added to their $2,000 in household expenses.

6. Conduct a financial fire drill regularly. Armed with all the facts and figures required, it’s time to pull the alarm and practice getting out safely. Since laying yourself off is not exactly a smart idea, it is sufficient to simply pretend you just received your last paycheck.

What expenses would you immediately target to be cut? Write them down, along with customer service phone numbers and terms. Repeat this exercise once a quarter or so and update your list accordingly.

The day you are laid off you may grab your list and make phone calls to the newspaper subscription department, your gym, your lawn service guy, Netflix, and the cable company. These moves alone could save you a couple hundred dollars a month in expenses not necessary to your survival, preserving precious emergency funds. Keep this list handy, and only break it in an emergency.

None of these steps will happen on their own. You must be proactive. Force yourself to sit down and run the numbers. If you don’t know how much COBRA might cost, find out.

If you don’t know how much your health insurance plan’s deductible is under a major medical event, find out. Don’t wait until your exit interview to discover these new costs. Doing so would be like waiting until smelling smoke to map out an escape route.

Stop Being a Slave to Debt (and Banks)

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Over the years I have seen a good bit of information posted on how to get out of debt. In fact, I shared much of our own struggle to claw our way back to even. Getting out of debt is certainly much more difficult than getting into debt, however, given enough time and disposable income freed up by a frugal lifestyle, it is certainly doable. So why are so many Americans still deep in debt?

To answer that question, we must first consider the less obvious answer: some people don’t care. Seriously. They are apathetic, believing debt is just something people are supposed to have. After all, who can afford to buy a house or a car with cash, and even if they had enough, who would want to drop that much cash on such a large purchase?

Ignoring for a moment the side argument on whether or not it makes sense to pay cash for a home, I can understand how people have come to accept debt as normal.

Unfortunately, we live in a debt-driven society. We are told to get out and spend to resurrect our economy, even when we don’t have the money, or prefer to save it for a rainy day (and even when we see storm clouds gathering on the horizon).

A Debt-Driven Society

We are inundated with advertisements from credit card issuers, banks, car dealers and on and on. Our media is saturated with messages that make us feel inferior, or somehow inadequate, if we don’t own the latest gadget, a bigger house, a fancier car, nicer clothes, more bling, more toys and more payments (OK, so they don’t advertise that last one).

The only way to break yourself and your family free from the vicious cycle of debt is to finally scream ENOUGH! Enough of the marketing. Enough of the feelings of inadequacy. Enough of being compared to others. It is time to start living withing our means, not the couple down the street with two sports cars, a boat, a bigger house and a condo on the beach.

I have nothing against those people, but I am not in competition with them either, because financially, we have little in common. We have more mouths to feed. We make different choices. We make less money because my wife stays home with our children. We forgo the trappings of today for the promise of financial independence in the future. And that is just fine with us. But it hasn’t always been.

For far too long we tried to keep up with those people by augmenting our lifestyles with debt. It was all a facade, and the funny thing about it was people probably expected that we were simply using debt to finance a lifestyle that they could afford, but we couldn’t. Who were we fooling? Ourselves.

Then one day I woke up broke with a dead end job, a wife and two kids and nothing to show for seven years in my first career but a pile of debt and high blood pressure. We decided it was time to quit fooling ourselves, and to dedicate our lives to a more frugal existence. If you can’t first be honest with yourself, you can’t be honest with other people.

It’s difficult to admit to yourself you’ve screwed up. But this admission is very important, because continuing a lifestyle of financial denial only leads to a bigger hole to dig out of down the road. Like the saying goes, when you find yourself in a hole, stop digging.

STOP…

  • paying minimum payments on your credit cards.
  • writing balance transfer checks from one card to pay another (yes, I did it).
  • getting cash advances from ATM machines because having a wallet filled with cash makes you feel rich.
  • shredding bills without even opening them because you’d rather stick your head in the sand than face reality.
  • reaching for your card to finance “emergencies,” sales and groceries. So many people rail against those dependent on the government, but are just as dependent on Visa and Mastercard. Don’t be a slave to big banks.
  • opening credit card accounts for free t-shirts (been there), or 10 cents off a gallon of gas (done that), or some silly rewards program that accumulates points so you can exchange them for more crap to put next to the crap you’ve already stuffed inside your home using credit cards (done a lot of that!).
  • turning to debt to finance cars because you lack the discipline to save cash for a car, or the discipline to buy a less sexier car. Cars do not define you.

START…

  • finding ways to boost your income. Overtime, part time work, a side hustle, selling your crap all qualify as potential ways to get your income up. There is no shortcut to getting back to even.
  • accepting responsibility for the actions that got you in debt. For years I blamed my employer, school, medical issues, lack of financial education growing up, etc. for my debt balance. How ridiculous. So many people have had it much worse, and managed to live within their means. So could we.
  • educating yourself about personal finance. Much of what I’ve learned along the way I learned from reading. I checked out books at the library. I read magazines about money. I even watched and listened to media geared towards personal finance (radio shows, television shows, etc.). Turn off the football game, or the IQ-draining sitcom, and pick up a book about personal finances, or budgeting, or investing, or mutual funds, or insurance, or maybe even a biography about someone whose financial situation you admire.
  • thinking about ways to get money working for you, rather than the other way around. How much better would your financial life look without debt? Create a dream budget and replace your debt payments with contributions to savings accounts, college savings funds, and your retirement account. Replace interest payments with interest income. Figure out just how much being a slave to debt is really costing you.

So, You Want to Be Free?

Leading up to last week’s election a popular theme was personal and economic freedom. Some people think government is infringing on our freedoms. Others think government isn’t doing enough.

I say many in both groups are forgetting that they have already given up their freedom. They are totally dependent on banks to finance their emergencies, their businesses, and their households. They willingly sign away future paychecks in exchange for borrowed money.

Businesses turn to banks when they can’t make payroll. People ask for loans to pay off other loans, or loans to finance their education, or loans to finance an emergency car purchase because their other one just died. They often find themselves begging someone thousands of miles away in a call center for credit limit increases to finance emergency travels to care for a love one.

So if you really value freedom, you will join me in first ridding yourself of the bondage of debt. When you sign up for a loan, you are at the mercy of the bank and its well-crafted fine print filled with legalese and the many ways they can control you for the life of that loan. And if you don’t play by their rules, remember they have your credit held hostage, and they don’t mind reporting to the credit bureaus the first time you slip up.

The next time you have an emergency, you can still call the bank, but this time it will be to move a little money from your emergency fund to your checking account to cover the plumber’s bill, or the hospital, or from your business emergency fund to cover repairs on the company truck. No longer will you be at the mercy of those holding the credit. Now, you are truly free.