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Seven Zen Principles to Guide Your Money and Your Life

by Flexo on October 26, 2009

in Best Of, Personal Finance

A few years ago, I visited the Japanese Tea Garden in Golden Gate Park in San Francisco. Japanese gardens are designed precisely to appear natural, resulting in an interesting collision between nature and man. There is a set of principles or aesthetics that guide the creation of Japanese gardens, including the dry gardens commonly called “Zen gardens.”

The basis for these modern Japanese aesthetics has existed for thousands of years and is rooted in Buddhist writings and teachings. However, the full concept of aesthetics relating to these ancient ideas has been discussed only within the past two centuries, as the the traditional Japanese concepts have been infused with the Western idea of art and aesthetics.

These same Japanese aesthetics, the attributes that define a Japanese garden, can be further stretched by the Western mind to relate to other areas of thought. If you are particularly interested in personal finances, as we are here at Consumerism Commentary, you might attempt to apply these concepts to attitudes and behaviors surrounding interaction with money.

Here are seven aesthetics rooted in Japanese culture that can be drawn upon to make us think about the way we live with and deal with money, from personal expenses to investing.

kanso 簡素

Keep your finances simple. The extreme limit of necessity would be to have no other financial accounts but one checking account for paying your bills. Simplifying at this level may beyond the limit of practicality even if still possible. But there is no reason I should continue to have savings accounts at seven different banks, even if seven is an odd number, compliant with other aesthetics.

In addition to utilize as few banks as possible, simplify your investment accounts. Keep your investments in one account in one index fund or target retirement fund that matches your risk profile. This also makes it much easier to evaluate your asset allocation to ensure your investments on the whole match your tolerance for risk.

There is rarely a need to have more than one credit card for your personal matters. Zero is an even better number.

Simplicity in all financial matters is an attainable goal.

seijaku 静寂

Managers of actively managed mutual funds earn their pay by buying and selling investments frequently. Index funds take the opposite approach by matching a stock index, adding or removing stocks only when the index does, which is rarely. Index funds embody this concept of stillness. Unnecessary activity, like stock trading, makes the stock broker rich while you’re adding risk and decreasing your chance of beating an index fund’s performance.

Keeping your wealth still and motionless allows time to have a chance to cultivate it. The effect of compound interest increases when you let it work for decades.

If you’ve simplified your finances down to a small number of accounts, you can further keep your money motionless by removing the necessity of transferring funds from one place to another. The 0% balance transfer game or otherwise moving your credit card balances from one card to another is in direct conflict with this aesthetic.

datsuzoku 脱俗

Break free from your possessions. We buy things because they reflect who we are or who we want to be, but no thing can be a true reflection of a self. Not only do material possessions drain you of funds that could be spent on necessities, but you will have less money for sharing with others within and outside of your family.

Break free from conventional thought and following the bandwagon. You are free to be your own person and find your own path. You should never feel trapped in a job or a career. Even a steady bi-weekly paycheck is a pattern that could be broken without fear. With creativity, draw income to you through something unexpected.

Don’t confine yourself to your budget. The ultimate way to grow wealth is to spend less than you earn, so as long as that continues, you can break free from your budget and enjoy flexibility without too much worry.

koko 考古

Focus on the bare essentials. Add something to your life only if it has a functional purpose and fills a need. This concept is a nod to frugality and sparsity. For example, do you need three televisions, one for each large room in your house? Do you even need one television when you can find entertainment, including comedy, nature, and drama — possibly even crime-focused drama — for free, by sitting in a park and watching other people interact? Wouldn’t it be more fulfilling to visit a National Park than to sit on your couch and watch a documentary about it?

Decide what in your life is not essential and eliminate it. If something does not add value more than or equal to its expense, consider it a candidate for elimination. I think immediately of the interest that you pay on a credit card balance. Once you pay interest, you’ve paid more than the value of whatever you’ve purchased with the credit card. If you decide a $1,000 television brings $1,000 worth of value into your life, then it may be worthwhile. But if you put that on a credit card and pay the balance and interest over time, the new question is whether that $1,000 television added $2,000 worth of value into your life.

shizen 自然

You should represent yourself to the world truthfully and without pretense. There is no need to purchase expensive cars and houses when necessity allows for lesser purchases. Don’t concern yourself with “keeping up with the Joneses.” Without the need to show the world you have more money than you really have, you will lose the desire to buy more than you can afford. As a result, the chances of falling into the trap of debt from unnecessary spending will diminish.

My thoughts on this are drawn to people with public-facing careers. Real estate agents, for example, often want to project an aura of success. If clients believe that the agent is rich, the clients will then believe that they are successful agents. The natural conclusion is that these agents are successful because they represent clients fairly and offer quality houses. The same is true for lawyers whose business is representing clients in court trials. Lavish spending projects an image of wealth, which indicates to prospective customers a history of successful court appearances.

This is all show and all pretense. Anyone can look wealthy or successful thanks to the availability of credit. You can’t see what lurks beneath someone else’s surface.

Do not cover up all that is natural. Do not hide money or money-related problems from your partner or spouse. Finances should be part of a communication that is open and honest, not hidden beneath layers of creative stories.

fukinsei 不均整

Create a budget, a monthly spending plan that outlines your limits for expenses in a variety of categories that make sense for you. A budget by definition starts out the same each month but will look different by the month’s final day. Life’s asymmetry is natural, and your budget should reflect this asymmetry while maintaining balance. You spend more for gifts as the December holidays approach, so you might budget more for gifts in November and December than you might in June or July. In order for this asymmetry to be balanced, an increase in one category at one time should correspond with a decrease either in another category or at another time.

This flexibility is essential for creating a workable budget. A budget should free you, not trap you.

Balanced asymmetry appears elsewhere. “Work/life balance” is a relatively new concept that is based on this idea. When my employer talks about “work/life balance,” they are not trying to imply that we should spend an equal amount of hours in our life between our career and everything else we do. It is an asymmetrical approach to living a more fulfilled life.

yugen 幽玄

Whenever your personal financial issues are public rather than private, choose subtlety over directness. Do not brag about your successes. There is no need for you to have your latest business acquisition or marriage listed in your college’s alumni magazine. If you give charitably to an organization, you do not need to publicly list your name or the amount of money you donated.

In the business world, there is a movement towards personal branding. It is good for your career to find ways make yourself stand out among your colleagues or among a sea of job applicants. While I would agree that it’s important to protect your identity, particularly online, from anything that might damage your reputation, the best way to stand out is to be the best rather than to declare you are the best.

Let others declare it for you.

A guide, not a rule

While it would be great if all of the above could apply to our interactions with money all the time, I like to look at these aesthetic concepts as a guide. Just considering these ideas and allowing yourself to think about money in a different way can be enlightening. Perhaps you can strive to achieve several of these concepts in your own life, or perhaps you can appreciate this way of living even if you choose to relate with money in a different manner.

Simplifying my finances is one way I can start applying this approach to my life. As I mentioned above, I currently use seven accounts for my savings. Many of these I open so I can review them for Consumerism Commentary, but even the purely personal bank accounts number too many. Do you or would you apply any of these aesthetics to your finances?

Disclaimer: I am not an expert in Japanese philosophy or, for that matter, in personal finance. I drew the above concepts of Japanese aesthetics from a variety of sources.

Photo credits: semihundido, laRuth, DieselDemon, 田中十洋

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10 Things Your Parents Didn’t Teach You About Money

by Flexo on July 20, 2009

in Best Of, Personal Finance

When you were growing up, you probably became accustomed to hearing some typical thoughts about money from your parents. These parents are the ones who told you that money doesn’t grow on trees. If it weren’t for your parents, you wouldn’t know that children are starving in Africa and therefore you should eat your entire dinner. When you didn’t complete your chores, you didn’t earn your allowance. Sometimes.

If your childhood was like many people’s, your parents had good intentions. Even while they may have offered some suggestions for handling money as you grew into a young adult, you learned more from their behavior than from their words. And even though you promise to learn from your parents’ mistakes, chances are you will end up, once you have children of your own, being more like your parents than you would like to admit.

Here are ten quick lessons our parents should have given us.

1. You can’t always get what you want, but if you try some times, you’ll get what you need. Who knew that The Rolling Stones would have important life lessons to impart to the public. It’s poignant for a rock and roll song, and a good place to start. With a generation of parents who have been financially successful or have had easy access to credit, have wanted to provide the opportunities for their children than their own could not have afforded for them, and have been encouraged to do whatever it takes to ensure their children rise to the top, some children have grown up with very high expectations for themselves and a feeling of entitlement.

2. Avoid debt but understand its role. Credit cards are everywhere. Young children quickly recognize that by handing a cashier a plastic card, you can walk away with whatever you want. But even teens do not understand what it means to use a credit card and the dangers that can arise from its use. Debt can be expensive if it is not handled properly and should only be used in certain circumstances.

3. Spend less than you earn. It’s simple mathematics, but parents should help their children realize what can happen when someone consistently spends more than they earn. These consequences are often hidden, so shine the light on unsurmountable debt.

4. Consider a practical career. Did you hear, “Do what you love and the money will follow,” when you were growing up? That may be true in some circumstances, but it simply is not always the case. If your passion is bicycle racing, and you wish to do this competitively, you better make sure there is nothing else you could possibly do with your life that will make you happy. It will be very difficult to make a living bicycle racing unless you make your way to the very top. And bicycle racing is only an example.

5. Money doesn’t buy happiness, but it opens opportunities. Studies show that there is only a shaky correlation between net worth and happiness. But maybe happiness is the wrong thing to measure. Having money left over at the end of the day — more income than you have expenses — provides you with opportunities to have satisfying experiences, and with more net income, you can have more and a higher level of variety of these experiences.

6. Give to the world and the world will give back to you. It is naive to believe that for every dollar you provide to a charity or every hour you spend as a volunteer will come back to you in the same form it left. But every human being has a responsibility to try to improve this world in whatever way he or she sees fit. Not only that, but charitable work makes you feel good about yourself, and since there is no such thing as altruism, all motivation comes back to feeling good.

7. You can make the financial industry work for you. Everyone wants your money, whether they are retail stores, banks, credit card companies, your landlord, the electric company, your college, or your local coffee shop. You must give part of your money to some of these beggars, but while you do, make your money work for you. Earn interest in a high-yield savings account. Don’t stand for any financial accounts where you are required to pay a fee.

8. Don’t go into business with your friends. Once you lend money to or start a business with your your friend, your relationship is changed forever. It is likely your friend will not behave as you hope, and the result can be disappointment or outrage. Good friends can be hard to find, so don’t ruin a relationship with money or business.

9. Save first, then spend. This needs to be an explicit discussion. Children see their parents buy whatever the need whenever they want, but the background story is often hidden. They don’t know that the parents have been saving for a year in order to afford the family vacation. To a child’s point of view, Christmas presents magically appear. While you may not want to spoil the idea of Santa Claus — who must be fabulously wealthy — at a certain age, children must learn Where Presents Come From and How Many Months We Saved to Afford Them.

10. You may have to take care of us some day. Here is one reason to ensure you have money to spare as you get older: your parents are getting older first. Lifespans are generally increasing, but quality of life may not be. You may find yourself dealing with your parents’ health issues, like Alzheimer’s, Parkinson’s, ALS, or any number of medical conditions that will make it difficult for them to live without assistance. Not everyone has long term care insurance, and even if they did, there is a good chance it won’t cover all the care that is needed.

What lessons about money did your parents teach you? Are there any lessons you’ve learned since your childhood that you wish your parents had taught?

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The Paradox of The Paradox of Thrift

by Flexo on February 16, 2009

in Best Of, Saving

If you’ve been paying attention lately, you might have heard that throughout the economic recession, Americans have been saving more of their income. Some economists worry that saving, while good for the individual, can be harmful to the economy as a whole. This is commonly called, “the paradox of thrift,” a theory developed by John Maynard Keynes, a popular economist who in the early 20th century saw spending as the basis of an economy.

Keynes looks at a recession as a vicious cycle, illustrated here:

  1. Less money is being spent by consumers.
  2. Demand for products and services decreases.
  3. Businesses reduce production and eliminate jobs to meet demand.
  4. Unemployment increases, resulting in less income for saving or spending.
  5. Rinse and repeat.

In this model, it is theorized that saving more money can eventually result in having less money to save on an aggregate level. The only thing that can break this cycle is something external. In our case, it is the government. The first treatment was “stimulus,” payments given to taxpayers (from current or future tax receipts) to help “stimulate” the economy.

The reaction, when this didn’t work, was that this wasn’t enough to break the cycle, and more stimulus was needed to noticeably affect the economy. The government decided to go directly to businesses, providing them with the capital needed to finance shovel-ready projects, hire more employees, and keep aggregate income up so consumers would feel that their money is better spent spent.

The easiest argument against the validity of the paradox of thrift is that, for the most part, there is no such thing as saving money. Money is either spent now or it is spent later. Another possibility is that it is invested now and transferred to a business, and the business either spends it now or spends it later. When you decide to spend money later, in almost all cases, you put the money into a bank account, which provides the bank with more funds with which to provide loans to businesses now.

As long as banks to continue to loan out money, the economy doesn’t decline. But as we see now, thanks to the “credit crunch” (which we haven’t been hearing about as much recently), that’s not happening.

In short, it’s not consumer spending or saving, but the financial industry’s refusal to lend money to credit-worthy businesses that is keeping us amidst the recession.

The paradox of thrift, the idea that saving more money was bad for the economy, was invented when personal rates of saving were much higher and consumer credit was all but nonexistent. At this time in American history, “saving money” meant keeping cash under a mattress outside of the banking system. Perhaps the paradox of thrift was a reality at that time, but despite its popularity in the news recently, it probably no longer applies to America’s modern economy. Many economists now agree that this aspect of Keynesian economics has seen better days.

Does the government need to step in to break the cycle, like Keynes suggested? Probably, but it needs to take the right actions. Helping tax payers with $400 over two years is not enough because it doesn’t have a large enough effect for the majority of Americans in order to restore consumer confidence.

The economy is broken at the lending level, and that’s where the government should focus. Banks need to lend money to credit-worthy customers. If they refuse, the government can step in, and they have a number of options, with approaches ranging from near-socialism to capitalism, including:

  • buying the banks, nationalizing the industry, and changing the way banks do business
  • buying controlling shares in the banks and making management decisions to lend (responsibly)
  • investing in the banks with the requirement that the money be used to increase lending
  • providing tax incentives for institutions that decide to increase responsible lending
  • creating a federal bank that accepts deposits and lends its funds to compete directly with private banks

Continue to save money and spend less than you earn. It’s not a patriotic duty to spend it on products and services you don’t need, despite what you might hear. There is no need to sacrifice your future financial well-being for the sake of the greater good. It wouldn’t work, anyway. The economy will be sorted out with or without the house you buy now rather than a year from now.

Some interesting reading on the paradox of thrift: Paradox of thrift on Wikipedia, Frugal living is bad for the economy from Associated Press, Consumers Don’t Cause Recessions from the Mises Institute, and The Paradox of Thrift: RIP from Cato Journal.

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Your Job as Your Identity? Not For Me, Thanks

by Flexo on April 29, 2008

in Best Of, Career and Work

By the time I was in third grade, I knew the answer to the age-old question, “What do you want to be when you grow up?” The question is always formed this way, with these particular words. The object of this question is to determine not the philosophy of the individual, but the type of career that is most desirable. The presence of the word “be” in the question is worth noting. From an early age, children are trained through language to associate their career with their identity. Who you are is what you do and vice versa.

The very fact that the question is asked instills the importance of a job or career.

In Across the Universe, the character Max is eating Thanksgiving dinner in the late 1960s with his family in rural Massachusetts, at which point he announces his intention to drop out of his undergraduate studies at Princeton University.

His father asks him to get serious for once: “What are you going to do with your life?” He responds rebelliously, “Why is it always what will I do? Why isn’t the issue here who I am?” His uncle chimes in, “Because what you do defines who you are.” Max responds, “Who you are defines what you do,” and asks for confirmation from his new friend Jude from Liverpool. Jude replies with a different point of view: “Surely it’s not what you do, but the way that you do it.”

I loved being involved with music. I’ve known I’ve had musical talent and an enjoyment of the art since I was in kindergarten. In third grade, as I mentioned above, I knew what I wanted to be: a teacher. It should have come as no surprise to me when in high school I decided that my purpose (my being) was to become a music teacher. When I was studying in college to be a music educator, the piece of advice that stuck with me the most was uttered by a professor most likely while I was still a freshman: “If there’s any other career that would make you happy, choose that now. Continue down this path only if teaching music is the only thing that you can or want to do.”

This advice stuck with me for several reasons. First, music wasn’t my only talent or interest. I excelled in every subject at school (when I wasn’t bored). My interests ranged from computer programming to physics to languages to mathematics. I even liked history when I was learning on my own rather than within public school curriculum. The world was open to me, but I stuck with music.

Many years later, after some bad experiences, I left teaching and the arts. My current choice of a day job happened mostly by accident. I needed a job after leaving the arts, so I started as a temp in a financial company. I moved into accounting after that because the accounting department was nearby and they needed someone, and have switched jobs at the same company a few times since then. This job, which is unfortunately becoming a career, does not define who I am. It has nothing to do with the person I am, it’s only the result of a series of circumstances defined by others.

Strawberry Fields ForeverIn the arts, I was a teacher and a leader. I earned the respect of my peers by being very good at what I did. I even taught others how to be leaders. I was a great motivator. Of course! Music is something that is exciting, invigorating, and essential for the soul. The arts are necessary for modern culture. In my current career choice, being a leader is a joke. It’s a world of middle-managers and meaningless tasks. Why should I get excited about any activity that is not directly changing the world for the better in a way that satisfies the ideals that are important to me? Sure, it’s important to someone that I make sure that one department of our company pays back another department of our company for whatever expense they happened to incur. But how is that changing the world, how is this meaningful or satisfying?

So I have Consumerism Commentary. That’s more fulfilling. I write, usually nonsense like this, and reach more people than I’ve reached in any other facet of my life. For someone who has been building communities and leading smaller groups of people for almost 20 years, that is definitely cool. But Consumerism Commentary is an accident like my current job, though it is a happy accident. I don’t believe I’m changing the world, but I’m happy if I help someone get to a piece of information faster, or on the rare occasion, make someone think about something, anything they’ve taken for granted. But I don’t even use my real name, so whatever I’m building with Consumerism Commentary doesn’t exist in the “real world.”

I don’t want to be defined by my role at my day job, and without sharing my real identity online, I can’t be defined by my blogging endeavors. If I were still teaching music or involved in the arts, I would agree that who you are defines what you do. But I’m not, at least not at the moment. So I’m resigned to agreeing with Jude for now.

Image credit: ^riza^

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Following Your Bliss: Good Advice or Bunk?

by Flexo on April 20, 2008

in Best Of, People

One of my favorite musical “acts” is Blue Man Group. The Blue Man Group explores, with primitively modern musical instruments, society, detachment, and collectivism. You may remember them from Intel’s old Pentium commercials. You may also remember them from the television show Arrested Development, in which the character Tobias, played by David Cross, auditioned for the show and failed, later declaring, “I blue myself.” Blue Man Group has shows in New York City, Boston, Las Vegas, and a few other cities, as well as a touring rock show, with each show similar but not identical to the others.

I recently picked up the latest Blue Man Group CD and DVD combination package, How to Be a Megastar! and watched the program. It includes fantastic music and visual performances as I expected, but I am equally intrigued by the special features, including a documentary-style interview with the creators of Blue Man Group, Phil Stanton, Chris Wink, and Matt Goldman.

When originally devising the concept of the Blue Man, the creators struggled at first. These three percussionists, who were working day-jobs as caterers in New York City, were ready to abandon their vision. At the right time, they received a sign. While watching television, they came across an interview with an expert on religion and philosophy. In this interview, the expert was asked to summarize the prevailing philosophical thought across the world, to which he answered: “Follow your bliss.”

Stanton, Wink and Goldman then knew that despite their difficulties, they must continue to create their vision through completion, even if success would never come. Thankfully for them, success did come, and Blue Man Group is now a cultural phenomenon. But the interview made me think about this particular philosophical idea.

First of all, what is “bliss?” Wordnet defines the word’s most common sense: a state of extreme happiness. The true path is the path that leads you towards a state of extreme happiness. In fact, in the interview, the creators of Blue Man Group went on to say that the journey is more important than the destination.

Am I following my bliss? I’m not sure. There was a time when I thought I had my life planned out, but year by year, I allowed this path to change. I’m now quite far from what I thought I would be doing with my life by this point, the age of 32. My job is fine, but it’s not intellectually, emotionally, or artistically stimulating. I like writing for Consumerism Commentary, but I’m not a particularly good writer. I enjoy building online communities, and that may be my personal strength for the moment, but is it my “bliss?”

Who should follow this advice, to follow one’s bliss? Perhaps not everyone has the luxury of doing so. The world needs janitors, truck drivers, bus boys, and others who perform thankless jobs — the jobs children often don’t think of when they are asked what they’d like to be when they grow up. But then again, are we sure that these individuals are not following their bliss? Perhaps their “extreme happiness” is satisfied simply by providing for their family in any manner possible.

In the case of the creators of the Blue Man Group, they needed to complete their project before they could be satisfied. With success, it seems their project may never be complete; shows are revised, new tours are initiated, and new audiences are born constantly.

After leaving the arts world, I thought my goal would be to volunteer for causes about which I feel strongly or become a to philanthropist as much as my budget allows. It seems I may be too picky to do so at the level at which I would be making a difference, and in some cases, to do so at all. Even though the organization closest to meeting my requirements is strongly involved in the activity I wish to support, having been close to that organization with intimate knowledge of its administration, I’d prefer not to do business with them. Unfortunately, no other organization is similar.

Do you follow your bliss?

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Unintended Consequences and Money

by Flexo on April 17, 2008

in Best Of, Money Management

Ethanol: a study of unintended consequences

As recently as two years ago, ethanol was considered by many to be the solution for this country’s reliance on imported oil. Ethanol can be produced domestically, and it costs no more to make a car that runs on ethanol than it does to make a car that runs on gasoline. Following Brazil’s example with sugar cane, farmers began converting their corn crops into ethanol for use in automobiles.

Like this 2006 story from 60 Minutes, not many people were considering some of the downstream effects of using food crops for other purposes. The Earth Policy Institute provides a good example how ethanol has been a victim of the “law of unintended consequences” through two of its articles, separated only by time and events. In 2005, the institute praised efforts to promote ethanol.

Agricultural residues, such as corn stalks, wheat straw, and rice stalks, are normally left on the field, plowed under, or burned. Collecting just a third of these for biofuel production would allow farmers to reap a sort of second harvest, increasing farm income while leaving enough organic matter to maintain soil health and prevent erosion. The agricultural residues that could be harvested sustainably in the United States today, for example, could yield 14.5 billion gallons of ethanol — four times the current output — with no additional land demands.

The organization does not hold this opinion today. Earlier this year, the Earth Policy Institute called ethanol production “the beginning of one of the great tragedies of history.” This opinion is fostered by the unintended consequence of the popularity of and demand for ethanol. The prices of food worldwide are sharply increasing.

From 1990 to 2005, world grain consumption, driven largely by population growth and rising consumption of grain-based animal products, climbed by an average of 21 million tons per year. Then came the explosion in demand for grain used in U.S. ethanol distilleries, which jumped from 54 million tons in 2006 to 81 million tons in 2007. This 27 million ton jump more than doubled the annual growth in world demand for grain. If 80 percent of the 62 distilleries now under construction are completed by late 2008, grain used to produce fuel for cars will climb to 114 million tons, or 28 percent of the projected 2008 U.S. grain harvest.

cornMoving father down the chain of cause and effect, rising prices of food staples are “translating into social unrest.” Across the world, protests and demonstrations are increasing. While originally studying Brazil’s success with ethanol, these consequences were not anticipated.

Unintended consequences in your life

On a more personal level, the law of unintended consequences is present. Often, unintended consequences arise as a result of ignorance, error, or immediate gratification. Using credit to fund purchases beyond the level of affordability can have unintended consequences, fueled by ignorance. In this case, the consequence can be a lifetime of debt. Certainly this was not the predicted outcome when signing up for the first credit card offer. Immediate gratification can result in unintended consequences when dealing with credit as well.

The decision not to fund an emergency plan can have unintended consequences. Without the obligation to create an emergency fund, you have more cash available for spending — even if all you spend money on are necessities. But all other things being equal, it’s easier to divert $10 a week to a high-yield savings account now than it will be do scrounge several thousand dollars for vehicle repair, a hospital bill, or emergency house maintenance later, if you don’t have a buffer.

stressHere’s another example. Let’s say you have two job offers. One offer includes a $100,000 annual salary, long hours, responsibility, and growth prospects. The other offer is a $60,000 annual salary and a more manageable work-load, and a more enjoyable and emotionally fulfilling career. Many people will take the $100,000 salary, no questions asked, and “learn to deal” with the feeling.

There could be unintended consequences to this decision. Yes, you may move up the corporate ladder faster, but perhaps the stress will take a toll on your health. The high-powered career and resulting stress may knock a decade off your life span, providing you with ten years less to enjoy with your family. The desire for more money, more recognition, even more freedom, satisfies immediate gratification, one of the causes of unintended consequences.

What can you do to prevent unintended consequences?

Not all unintended consequences can be avoided. Many smart economists never expected the increased demand of ethanol to cause a deathly stampede in Chongqing, China.

No matter how much you go over a decision, considering its effects, it’s unlikely you’ll think of everything. It might help to staying away from instant gratification and short-term satisfaction that conflicts with long-term growth. Educate yourself about your situation so you can make your decisions as complete as possible.

Taking the example of the first credit card with the consequences of years of debt, when signing up for the card. you might have known you’d be in debt. The knowledge may have only been on a superficial level. The number of years it may take to pay back your debt at a particular interest rate and a particular monthly payment is a piece of information that will help you understand your decision on a deeper level. It may be this deeper knowledge that prevents unintended consequences.

Image credits: r-z, @aius

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50 Tips to Help Establish Your Emergency Fund

by Flexo on April 14, 2008

in Best Of, Saving

One of the first steps to cleaning up one’s financial situation before embarking on the journey to become financially independent is the establishment of an emergency fund. An emergency fund, in its most basic form, is an accessible savings account where you keep cash for true emergencies, like the loss of a job or a medical emergency. Financial advisers and writers often suggest that emergency funds should contain enough cash to cover all expenses in a three to six month period.

Beyond the basics, I suggest at least five separate components to an complete emergency plan. Getting to that point presents challenges for many people. When one is starting out, it can be difficult to assemble the basis for eventual financial freedom.

Here are 50 tips for the beginner who may be pressed for money.

  1. Open a high-yield online savings account with as little as one dollar.
  2. Sign up for direct deposit.
  3. Empty your pocket change into a jar every night.
  4. Bring your coin jar to the bank every month.
  5. Add to your jar every time you swear.
  6. Have a garage sale.
  7. Whenever you purchase groceries with a coupon, deposit your savings into the bank.
  8. Downgrade your telephone service.
  9. Bring your own lunch to the office.
  10. Ask for a raise (with substantiation).
  11. Drink soda rather than alcohol when you’re dining out.
  12. Drink water rather than soda when you’re dining out.
  13. Switch to store-brand food items.
  14. Switch to generic medication.
  15. Cut back or eliminate your addiction to smoking.
  16. Be aware of your ECRD Factor.
  17. Create an automate deposit to your savings account.
  18. Divert your raise into the bank
  19. Don’t consider your emergency fund part of your spending money and keep it hidden.
  20. Celebrate America Saves Week every week
  21. Tutor a young student in a subject you know.
  22. Get a part-time job at your favorite book store or coffee shop.
  23. Use a cash back rewards credit card and deposit your rebates directly into your emergency fund.
  24. Call the cable company and cancel your service (or agree to a better deal).
  25. Save gas by not driving faster than 65 miles per hour.
  26. Stop using credit cards if you pay interest.
  27. Cancel your Netflix subscription.
  28. Fire your gardener and do the work yourself.
  29. Visit the library rather than your local bookstore.
  30. Stock up on non-perishable groceries when they are on sale.
  31. Consolidate your student loans.
  32. Cancel magazine subscriptions.
  33. Reuse any items you can rather than buying new, and pocket the difference in your emergency fund.
  34. Delay vacations until your emergency fund is complete.
  35. Sign up for online bill payment if your bank offers the service for free.
  36. Shop around to ensure all your your financial accounts do not charge you extraneous fees.
  37. Always know how much you have in the bank so your accounts will never be overdrawn.
  38. Consider switching your land line phone service to an internet (voice over IP/VOIP) service.
  39. Use public transportation rather than driving when possible.
  40. Work a few extra hours at your day job.
  41. Call your insurance provider and ask for an updated quote.
  42. Shop around for a new insurance provider.
  43. Troll the web for abandoned and unclaimed property owed to you.
  44. Negotiate in any retail environment. The more you try, the less you’ll spend (and the more you can save for emergencies).
  45. If you travel, join AAA; the discounts will often pay for the membership fee.
  46. Don’t be an early adopter of new technology.
  47. Cancel your gym membership.
  48. Check your three free credit reports each year from annualcreditreport.com, the official website, for accuracy.
  49. Consider adopting a frugal philosophy, at least until the emergency fund is in place.
  50. While paying attention to small, repetitive expenses, don’t ignore larger decisions like your car, house, and wedding. With smart choices on big-ticket items, you could fully fund an emergency account with the savings.

With a goal to be financially independent, the first step is securing a cash cushion, accessible in emergencies. During this funding phase, it may be beneficial to make sacrifices that in other situations you would not make. A slight decrease in quality of life in the short term will likely outweigh long-term financial devastation when a future emergency arises.

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10 Steps to Break the Credit Card Habit

by Flexo on April 7, 2008

in Best Of, Credit

If you’re a Type A credit card user, chances are you know it whether or not you are willing to admit it. If you can answer yes to these questions, then a lifestyle change is in order.

  • Do you pay interest fees when you send in your credit card payment?
  • Have you ever paid your credit card late because you didn’t have the money for the payment?
  • Do you use your credit card when you don’t have enough cash?
  • When your issuer raises your credit limit, do you spend more because you can?

Type A credit card users are loved by the issuers. They pay interest and late fees. Between that income and the interchange fee the cards charge the merchants for each transaction, the card issuers’ business plan is to get Type A credit card users to spend more.

On the other hand, Type B users, who don’t pay interest or fees, are shifted to cards with higher interchange fees. For example, Citi switched me from a Dividend Platinum MasterCard to a Dividend World MasterCard. The main difference between the two cards is the RFID chip that allows transactions without physical contact, but the hidden difference is the higher charge merchants pay to accept the card. (Also, like the larger trend in the credit card industry, the cash back rewards have been reduced.)

If you’re a Type A user, then it would be in your best financial interest to stop using your credit card, to budget your income, and use cash. While some people can take that advice and get it done, others have built up a psychological dependency on credit cards. Here are 10 steps to break the cycle of dependency.

1. Look at your spending carefully.

Deep down, some know that they are spending more than they are earning and wasting money on interest fees. This fact is ignored at the conscious level; ignorance is bliss. Use software like Quicken, Microsoft Money, Excel, or even a pen and paper to track all your spending for a month, even the quick daily cafe mocha at Starbucks.

Use your credit card statements to compare with what you have recorded. Did you track everything?

This might reveal incredible, depressing detail about your spending. $100 a month at Starbucks or $400 for dining out are not out of the ordinary when looking at these numbers for the first time.

If you continue this for more than a month, you might see your bottom line, or net worth, declining each month. This is not a good sign, and it may be enough to encourage you to change your behavior for a better chance of financials success.

2. Understand marketing.

Society doesn’t want you to curb your spending. Products and advertising are designed to make you believe you need something when you don’t. Even the government encourages spending, especially when trying to boost the economy. President Bush would be ecstatic if everyone took their economic stimulus payment and loaded up on American-made goods.

It’s hard to maintain control when the rest of the world is against you. The sooner you understand that it takes effort to defy the prevailing trend, the closer you will be to being above the influence of marketing.

Being completely above the influence is impossible unless you disassociate yourself from “civilized” society. Accept the fact that powerful forces in the world are trying to manipulate your behavior, and accept the fact that with extensive research they are mostly successful. With this realization comes enough power to resist a portion of those marketing efforts.

3. Commit yourself to change.

You can only change your behavior if you want to change your behavior. A smoker can be told repeatedly that there’s a good chance her lifespan will be shortened and may face halth consequences like emphysema or cancer, but unless she’s ready to quit, all the words in the world would have no effect. Logic and reason often play small roles in human decision-making.

For those with debt accumulation, the problem isn’t the credit card. Credit cards are just tools, but they enable people to spend money they don’t have. If you’re ready to break the credit card habit, understand that there’s a deeper problem to solve. Without credit cards, the most accessible facility for overspending will be removed, and that can be the first step to solving the deeper problem of overspending. That is, of course, if you’re ready to admit there’s a problem and commit to changing it.

Steps 1 and 2 above may help you get to the point at which you’re ready to commit to changing your behavior. Committing to this change means spending less than you earn. You should be familiar with the details behind your income an expenses and have the knowledge to determine where there are opportunities for cutting back your spending and increasing your income.

If you use the credit card for spending more than you have, then you will need to cut back immediately.

4. Consolidate your balances onto one or two cards.

Gather the latest statements for the cards containing balances. Choose one or two with the lowest interest rates and consolidate your balances onto these cards. By calling the credit card company, you can provide the information for your other cards with balances and they will initiate a balance transfer. Ask for a transfer fee waiver. If they aren’t willing to waive the balance transfer fee, consder using a different card to consolidate your balance.

5. Enact a cash-only policy.

Once you consolidate your balances onto one or two cards, you cannot use those cards for spending. You have two options for spending from this point forward: cash or debit. I suggest cash because spending with a debit card can be psychologically similar to spending with a credit card. In order to kick the overspending habit, changing the way you think about financial transactions is important.

While there is a logical difference between spending with credit cards and with debit cards — debit cards are linked to your checking account so you can only spend what you have — if humans were logical they wouldn’t be in debt.

Actually, now many banks allow you to overspend (overdraw your account) with your debit card. Additionally, they charge a somtimes hefty fee for this “priviledge.” If you want to change your behavior, cash-only is the best policy. An empty wallet is a great spending barrier.

6. Destroy your credit cards except for one or two.

Forget all the talk that says closing your credit cards will damage your credit score. Overspending is a larger problem than getting a more favorable rate on your next mortgage. I would suggest canceling almost all of your credit cards. Why not all? While some people might have good results with the “cold turkey” approach, I don’t believe it should be a universal recommendation.

Here’s the proper way to destroy your cards. First, get your free credit report from annualcreditreport.com, the official site that will provide you with your three free reports each year. Inspect the report carefully taking note of every credit card listed. See some unfamiliar cards? Chances are your report contains information on cards you didn’t know you had.

If that’s true, first confirm that these cards are in fact yours. If someone is using your identity to open credit cards, this must be resolves as soon as possible. There’s also the possibility that the credit reporing agency has bad information. Clear any errors quickly by contacting the company that provided you with the credit report, like Experian, Transunion, or Equifax, and disputing the incorrect information.

Next, call the credit card companies for which you do not have your card and cancel your accounts with them. If you don’t have the card, you didn’t even know you were a customer. There’s no sense in keeping a credit line open if you didn’t know you had one and if you’ve survived thus far without needing it. The plan is to reduce your spending, so the simple solution is simply canceling the cards you haven’t been using.

If you consolidated your balances as suggested in step 4, you should have one or two cards with balances and more without. Here’s the dirty secret about consolidation. Now that your your balance is all on one or to cards, your combined minimum payment is probably lower than it was before. Don’t forget to pay at least the minimum to each card, but we’ll tackle paying down the balance aggressively at a later point.

Cancel all the cards not containing balances. As I mentioned above, this is not the savviest approach if you are concerned about your credit score. If you have an overspending habit enabled by easy access to credit, you are not concerned with your credit score. Keep your oldest card if you expect to be applying for a mortgage in the near future, but otherwise, stick with the lowest interest rate.

To cancel your accounts, you have to call the companies. The representative on the phone will try to keep you as customer by offering you lower rates and higher limits. Don’t bother negotiating, even if they offer a lower rate than the card you are saving. The idea here is to simplify, so don’t play any games.

Shred all the now-unused plastic. If you don’t have a shredder that handles credit cards, use a pair of scissors to slice the cards into several pieces. I would even discard of the pieces in different locations.

7. Lock away your remaining credit card.

Now that you have one credit card left, realize that you will not be using this card for everyday spending; for now, cash is king. Put your remaining credit card out of sight. Lock it away. I’ve even heard of some people who put their credit card into a cup of water in the freezer. The extra step of breaking a block of ice to get to your credit may be an extra demotivator.

This final credit card can be used in extreme emergencies until the next step is complete.

8. Build an emerency fund.

This step will take some time. If you have an overspending habit, you’re spending more than you earn. That creates a situation that prevents saving. In step 1 you evaluated your spening. Perhaps you cae across some options for cutting back, allowing you to put money into a short-term savings account.

Open up a high-yield savings account. Many, like ING Direct, allow you to set up direct deposit or an automatic investment plan. Choose one or the other, which ever is the best for you. It’s simpler if you already have a pay check deposited somewhere else to go with the automatic investment plan.

The goal is to save 3 to 6 months of your expenses in this savings account. This could take a long time if your expenses apprach or exceed your income. You’ll have to be creative. If skipping this year’s vacation would help you achieve this goal, then you have a decision to make.

Remember: an emergency fund is to be used in true emergencies only. This doesn’t take the place of your credit card. Te purpose of the emergency fund is to remain untouched for regular expenses but accesible when major spending is required. Some examples might be the loss of a job or a significant medical expense.

For more details, see Five Components of an Emergency Plan, but ignore component number four.

9. Pay down your balances.

While you’re building your emergency fund and paying cash for all your expenses, don’t forget to spend money every month to your consolidated credit card balance. In order to get out of debt, you’ll probably have to pay more than the minimum. There are several theories prescribing the best way to divert all available funds to paying down your debt.

A popular financial guru, Dave Ramsey, suggests what he calls the “Snowball Method.” He suggests ordering your balances (you should only have two at the most at this point) from highest to lowest. To the card with the highest balance, pay the minimum each month. To the card with the lowest balance, send the minimum payment plus any additional funds you have available. Dave believes this will allow you to see success (paying off the first card) sooner, providing a psychological boost, encouraging you to continue.

While psychology plays a large part in terms of money, I believe Dave’s reasoning is faulty. If you put the most money towards the card with the highest interest rate, you might not get the psychological boost of paying off a card sooner, and the time difference may be negligible. You will have a psychological boost from knowing that you will be paying less interest.

For more information, read about the Debt Avalanche, a better snowball method.

10. Check your progress monthly.

If you use financial software mentioned above, you’ll have a straightforward way of measuring your progress. You should see your expenses decreasing each month and your credit card balances decreasing. These monthly reports can be excellent motivation to continue. Your habit is clear in graph form; visuals are powerful. Each month, recommit to spending only what you have.

When changing a behavioral pattern like overspending, don’t expect immediate success. Our society encourages consumerism, and breaking from that trend, like swimming against the current, is going to be difficult. We often do not see the consequences of overspending. We hear about the government bailing out banks for making bad lending decisions and creating laws to protect consumers who purchased houses too expensive.

Don’t let this distract you. In most cases, the consequences a pattern of overspending can be difficult on relationships as well as personal finances. Once you’re ready to change, make the commitment and follow the steps above. Success will come through sticking to the plan.

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