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As a teenager I was fascinated by Douglas R. Hofstadter’s book, Gödel, Escher, Bach: and Eternal Golden Braid. The book explores set theory, computer programming, logic, philosophy, genetics, music, Zen, and art. Between each chapter are fun interludes. They take the form of scripted scenes featuring colorful characters like Achilles, Tortoise, and Crab. In most of these interludes, the characters discuss a concept such as recursion or a fugue while the script itself illustrates that same concept.

The book introduced me to the philosophical tug-of-war between reductionism and holism. Reductionism is the belief that an explanation of a system can be valid only if it focuses on the smallest elements of that system, whereas holism is essentially the opposite: the whole is greater than the sum of its parts, and the only way to explain a system is to look broadly, all but ignoring the components.

Reductionism and getting out of debt

The concept of reductionism can be used to help get out of debt. Debt itself is a mathematical concept. You are in debt because the balance of your assets is less than the amount of your liabilities. Each purchase worsens this condition, and if interest is involved, a $100 purchase could cost multiples of that amount in the long run. If never paid off, the true cost of any purchase approaches an infinite number of dollars.

Emotional spending is often, but not always, the cause of debt. Purchases are made without regard to financial condition, enabled by access to easy credit. Sometimes debt is caused by unexpected expenses without a cash cushion to cover surprises, and occasionally even the best emergency fund can’t save people from finding themselves in debt. Focusing on and eliminating the various root causes of debt, eliminating each, and evaluating your progress at every step are all reductionist approaches to getting out of debt.

The Expense Coffee-Related Drink Factor is a reductionist approach, as well. If you have a daily habit of excess, like drinking a $4 drink from a boutique coffee shop when it would cost $0.20 to make your own, eliminating this expense fits with the reductionist philosophy. A reductionist would also creating a specific plan for paying down debt once excess income is available, whether the plan is the Debt Snowball, Debt Avalanche, or something in between.

The reductionism approach, if followed faithfully and tailored specifically to unique circumstances, will engender success. However, this may be missing an important part of the debt reduction process.

Holism and getting out of debt

One might look at their financial situation with a holistic philosophy. Rather than focusing on the specific causes of debt and a predefined path for eliminating debt, it may be worthwhile to look beyond these details and at the total self. These are some questions that trigger holistic thinking and evaluation:

• What kind of person am I?
• What are the aspects of my self that define who I am?
• What are my most important values?
• Why have I not focused on sound financial management?
• How would others benefit from my financial condition if it were stronger?
• Am I satisfied with the balance of power between myself and those to whom I owe money?
• Why do I feel I am not in control of my financial situation?

While these are all questions that are somewhat separated from the specific actions taken when dealing with money, the answers describe a character. The whole self provides insight that can help someone improve a financial situation and life. Holism and reductionism are by definition mutually exclusive, but that shouldn’t prevent someone from using aspects from both philosophies to increase the probability of financial success.

You could eliminate bad habits, cut up your credit cards, and pay off your debt, but if you haven’t evaluated your identity and your relationship with money, you are treating only symptoms. Likewise, if you redefine your values and begin to re-frame your locus of control without thinking about the consequences of your purchases, you may feel better about yourself but the financial damage will still exist.

Do you lean more towards holism or reductionism? Or are you just a fan of GEB:EGB?

Photo credit: psd

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Getting Out of Debt: Reductionism and Holism

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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Seven Zen Principles to Guide Your Money and Your Life

In my article the other day about the deal I got on a new computer despite my immediate need, I neglected to mention something important: I refused the extended warranty that the salesperson offered numerous times. Any extended warranty is almost always a bad deal.

When I was a teenager, I had a short-lived job at a ubiquitous electronics store; let’s call it “Transistor Hut.” This was the only job in retail I ever had, and I can’t say I was a fan. Our bonuses were determined by our success in selling the “TSP,” an extended warranty. Let’s say that stands for the “Candy Service Plan (with a T),” and I don’t know whether this is still in existence.

The price of the TSP depended on the price of the item, and TSPs were available for almost every product. If you buy a $19.99 pair of headphones, you could spend another $9.99 for unlimited replacement, no questions asked (other than your phone number). If you buy a $299.99 DVD player, $79.99 (or so, keep in mind this was fifteen years ago) would allow you to bring the broken device into the store, have them ship it to a repair facility, and fix or replace it. That’s a process that would likely take several weeks.

The TSPs and any other store’s extended warranties are pushed hard by salespeople because they are often rewarded for them, and they are rewarded because they are very profitable for the store. Most people who buy the warranty will not use it, so the funds become significant income for the company.

Most credit card companies automatically double the manufacturer’s warranty on products purchased with the card for up to one additional year, so that automatic, free protection is often more than enough. Check your credit card’s terms to see if this is available to you. I knew it was available to me on my American Express Blue Cash for Business Card when I purchased the new desktop computer for Consumerism Commentary’s multimedia production.

Perhaps a smarter way to deal with the possibility of broken items — besides not buying anything — is to self-insure. Rather than spending an extra $50, $300, or $2,000 for an extended warranty depending on the product, put that amount into a new savings account designated for your own personal warranty extension. Do the same for all the products you buy for which a salesperson attempts to sell you the extended warranty. What you have created is a pooled funding source for repairs. It is unlikely that all of your products will break or stop functioning, so you can withdraw from this fund to pay for repairs for the one item that fails.

With this strategy, you keep all your money if nothing goes wrong, and if the money is sitting in a high-yield savings account, it’s working for you rather than lining the pockets of major retail chains.

Here is the step-by-step process.

Step 1. When you purchase an item, make note of the cost of the extended warranty. Don’t buy it.

Step 2. Transfer this amount to a special savings account that you will not touch until one of your “protected” items needs to be repaired. ING Direct lets you create sub-accounts, one of which you can name “My Extended Warranties” or “Warranty Fund.” Don’t create a sub-account for each item. One for all of your items will do. Thus, the “Warranty Fund” is pooled.

Step 3. Repeat steps 1 and 2 using the same Warranty Fund you already created for all products you buy that might break or are associated with an extended warranty. This will build up a sizable Warranty Fund in your own name at your own bank earning interest for you.

Step 4. When one of your self-insured products breaks or otherwise needs repairs, dip into your Warranty Fund. Try to avoid using your Emergency Fund unless the Warranty Fund doesn’t cover the full expense and the product must be fixed or replaced.

The strength here is that you are pooling your own funds. This is what the retailers do to ensure warranties bring significant profits to the company. Just like not every customer will take advantage of their purchased extended warranty, not every product you self-insure will break unless you are extremely unlucky or extremely careless. In addition, the best benefit of self-insuring is that you will never have to argue with a store representative about whether certain type of damage is “covered.”

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How to Create Your Own Extended Warranty

I do not currently have children, but I have not ruled out starting a family some day. If and when I do have children, I hope I will be able to help them become smart and capable adults over time. I believe this is what my parents have done for me, and I’d like to believe I’m in a position to pass on good attitudes about money.

Here are a few concepts I’d like to teach these future children about money as they become old enough to understand them.

I intend to teach as much by example as by conversation with the understanding that no person is perfect.

1. Money is neither good nor evil. Money is simply a tool, with no quality that defines it as good or evil. It can, however, be used to do good things or evil things. Money does help reveal the nature of a person. There is nothing inherently bad about not having little wealth or having great wealth. The value of a person is not defined by how much money he or she has, so you cannot judge a person by looking at the bank account statements.

2. Money is not a goal. There is no point in wanting to have one million dollars, or any sum of wealth that might make a good milestone, if it servers no purpose other than to sit in a bank account or at the bottom of a balance sheet. Focus on real goals, not net worth. Don’t be the boy who, when asked what he wants to be when he grows up, answers, “Rich.” It’s not the number that counts, it’s what you do with it.

3. Money will not make you happy. Money is not correlated to happiness. Rich people aren’t necessarily happier than poor people. In fact, wealthy people are more stressed. The happiest people are those who are satisfied with what they have; if you always want more, you will always be struggling. Now, there will be people who will tell you that you must constantly strive for more in order to be successful, but these are people who equate success with things like job title, wealth, and seeing their name on seminar advertisement posters. They’re probably not happy. It’s okay not to settle, but only if your goals are worthwhile.

4. Don’t be jealous of other people’s money. There will always be people who have more money than you, but there will always be many more people who have less. If you learn to handle your money properly, you will find that you’re more financially secure than others who try hard to flaunt their wealth; those with fancy cars and houses may owe money to other people and to banks. Jealousy is a distracting emotion, so it’s better for your own sanity to worry about yourself than it is to look at other people, especially when you can only see what they are showing on the surface.

5. If you are in a position to help, you have an obligation to help. As I mentioned above, at any one time it is more likely you’ll be in a better financial position than most of the other people who live on this planet. You are lucky to be born in a rich country in a very prosperous time. Though it is no fault of your own, these circumstances present the responsibility of helping to make this world a better place in whatever way you see fit.

6. Companies want your money. Corporations spend lots of their own money trying to develop ways to get you to give your money to them. Don’t believe what you see in commercials, on television shows, in movies, on the internet, or even on the news. Everyone has an angle and that angle is often to try to get you to part with your money. It’s a cynical view of media and of the world, but turn off the commercials and think for yourself. Increase the signal-to-noise ratio.

7. Pay attention to your money. Once you start receiving an allowance, create a budget. Save part of the money and spend the rest as you see fit, but write out a budget and track everything you buy. This is a good habit to start early. If you’re paying attention, you’ll soon realize that the only situation that results in building your wealth is spending less than you have.

8. Don’t expect a free lunch. I will do everything in my power to ensure that lots of opportunities are available to you, but our culture within the “middle class” is defined by trading your time and effort for money. In other words, you get paid for working and you get paid better for working harder. You’re not a Bush, so you won’t get to be President of the United States because it runs in our family. There is no trust fund.

9. Save as much as you can for later. Even though Albert Einstein never really said that compound interest is the strongest force in the universe, he probably would suggest saving as much money as possible. It is true that the sooner you can control your actions to delay gratification, the better you can plan for the future. But it is also true that spending money shouldn’t always illicit a feeling of gratification. Feel good about saving, then you can feel gratified when you put money in the bank, not when you take it out.

10. Avoid borrowing money. Just like money is inherently neither good nor evil, owing money to other people is inherently neither good nor evil. Borrowing money has its drawbacks. Any purchase you finance with interest will end up costing more than it should. However, within the “middle class,” it will be difficult to avoid some borrowing. Not all debt has to be bad. You may need a loan for college and you almost definitely will need a mortgage to buy a house. Make smart choices about these purchases and you’ll be in a good position even if you do have debt.

11 (bonus). It’s not about the money. While money gives you flexibility and eventually independence, don’t spend too much of your time focusing on it. Realize that money should not be the sole driver for your decisions. Many smart people will tell you about “return on investment” (ROI), but sometimes you can’t measure the validity of a decision by how much money you receive. Think about all factors when making decisions. Some decisions, like those pertaining to investments, should be based on financial considerations as much as possible. But for other decisions pertaining to your life, money should be only one consideration of many.

Do you disagree with any of the above lessons? What do or will you teach your children about money? Is there anything else you wish your parents had taught you?

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Ten Things I Will Teach My Children About Money

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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10 Things Your Parents Didn’t Teach You About Money

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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The Paradox of The Paradox of Thrift

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.

In 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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Your Job as Your Identity? Not For Me, Thanks

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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Following Your Bliss: Good Advice or Bunk?

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.

Moving 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.

Here’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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Unintended Consequences and Money

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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10 Steps to Break the Credit Card Habit

In an world of overly simplified platitudes and one-size-fits-all “advice,” there is little repeated more in personal finance than the importance of the emergency fund. Typical popular financial advice prescribes a high-yield savings account in which one can store three to six months’ worth of expenses. Suze Orman suggests aiming for eight months’ expenses in a savings account. David Bach believes four months is a good starting point for an emergency fund.

Advice for a fat emergency fund sounds good when high-yield savings accounts are actually providing high yields. When interest rates are low, it can be financially detrimental to leave so much cash uninvested. It may be worthwhile to diversify. Rather than having just an “Emergency Fund,” like a “subaccount” at ING Direct with its own name, this can be only one component of a larger scheme. To encompass all that could be included, perhaps “Emergency Plan” is a better term than “Emergency Fund.”

I am not talking about a box that you keep in the trunk of your car that contains a gas mask, a gallon of water, a hand-crank radio, and a can opener, like one of my coworkers. While that might be helpful for the Y2K bug when airplanes fall out of the sky in midflight, this “Emergency Plan” refers to finances only. There are five components.

1. Mattress cash stash. Obviously not hidden beneath your mattress, having some cash in the house — hidden in a weird place that a burglar would not think to look — gives you access to fast cash if you need to leave right away without any time to stop at a cash machine. Also, if the ATM network is down for some reason, you won’t have any trouble trying to access some money. It would be impossible to predict how much you would need before you could access the banking system in a catastrophic event, so I think the guideline here is just to be reasonable. Maybe keep a couple hundred dollars in cash around the house.

Of course, in the worst situation imaginable, money itself would lose all value and society would be reduced to a system of bartering for what you need. Even gold, which some people claim has intrinsic value that paper money does not (it doesn’t), could be worthless. Don’t bother keeping bars of gold around. The idea is to prepare within reason. Keep this amount as low as possible; money sitting around loses value relative to the things you would need to trade it for thanks to inflation of the money supply.

2. Liquid account. Unless the banking system fails, you should be able to access your next level of emergency fund within 24 hours. With interest rates decreasing every week, it might make sense to seek out better paying liquid investments like money market funds. All of the cash I have earmarked for emergencies, about $10,000 right now, is held at ING Direct, currently one of the lowest of the “high-yield” savings accounts.

It wouldn’t hurt to add layers to this level. This year, I will change my Emergency Plan to leave cash in the amount of expenses for one month or less at ING Direct while increasing my savings at a money market fund that beats inflation like the Vanguard Prime Money Market Fund, currently earning a 4.55% yield. Between my mattress stash and liquid accounts, I want to be able to cover three months’ worth of my current expenses. That’s a little lower than what’s recommended by the gurus, but I chose this amount because the chance of losing both of my sources of income at the same time is low and I believe I could find a new job quickly if necessary.

Bankrate discusses using certificates of deposit or bond funds for this portion of liquid savings, but they are not liquid enough. The interest premium offered over high-yield savings accounts and money market funds, usually small, won’t outweigh the chance of paying an interest penalty for early withdrawal before maturity.

3. Investments. With investments, we’re starting to get into the territory of the money you’d be better of not touching, even in an emergency. The Roth IRA is the first stop if you need to tap your investments in an emergency. You can withdraw your contributions (not your earnings) without penalty, taxes, or fees (depending on your broker). Once the emergency condition has subsided, you can still contribute the money you withdrew back into your Roth IRA.

If you don’t have a Roth IRA, you may have to turn to taxable investments. This isn’t a great option, but still better than the next. If you have to sell when you’re investments are down, you’re not doing yourself a favor down the road. You may get some tax benefits in this case, but you’ll have to determine whether it’s worthwhile. If you sell your investments while they’re higher than they were when purchased, you will owe taxes, which could be just as troubling in the short term if you’re still in an emergency condition. Either way, you’ll also contend with transaction fees.

Stay away from granting yourself a loan from your 401(k). If you lose your job during this emergency, your 401(k) loan will become due immediately. That’s an unaccessible level of risk, at least for me.

4. Credit. This is a slippery slope. Some recommend using a home equity line of credit as an emergency fund but having a HELOC in the first place means having an interest expense every month. The purpose of a HELOC goes beyond emergency funds, and therefore shouldn’t be the only part of an Emergency Plan.

Credit cards should be avoided in most cases. They could be used most effectively when you know that the emergency condition will subside before your credit bill comes due. Interest charged for credit card accounts is usually way too high for effective emergency use. If you have a special promotion with your credit card, like 0% APR on purchases or cash advances, then taking advantage of these deals could pay off. It requires extra special attention to make sure you don’t fall into any of the credit card traps. If you end up owing back interest due to a late payment, even in an emergency situation, you could be paying for this emergency longer than you would otherwise.

5. Friends and family. While I originally thought this fifth component is outside of one’s control, if you’ve done a good job of taking care of the universe around you, the universe will return the favor when you’re in need. If you’ve made a habit of helping those in need when you were able, when you’re in need, perhaps someone will be there to look out for you. Perhaps this will be in the form of your roommate or friend lending money to you at a very low rate or a gift from your parents. Either way, it’s best not to rely on help from the universe, as there are no guarantees. When you save cash in a money market fund, it’s guaranteed to be there when you need it. Friends and family can provide powerful assistance, but if you don’t need it, don’t take it.

Here’s a secret. There are actually six components.

6. Reduce your expenses. One thing you can do to make your Emergency Fund last longer, or save more for next time, is reduce your expenses temporarily. Make some sacrifices, like the Expensive Coffee-Relate Drink, cable television, or weekly dining engagements. Desperate times call for desperate measures. Feel free to indulge again once you find a new job or otherwise increase your cash flow to normal conditions.

What is your Emergency Plan? Do you consider yourself covered with cash in a savings account, or do you take a more complete approach?

Image credits: tanakawho, ChicagoEye

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The New Emergency Fund: Five Components of an Emergency Plan

Welcome, Consumerist and The Simple Dollar readers. Feel free to subscribe to the Consumerism Commentary RSS feed and stick around for a while if you like what you see.

Whether you’re Joe Torre or Joe Cubicle, your at-will (more aptly, fire-at-will) contract may come to an end unexpectedly. If you’re smart, you may have seen the writing on the wall and given yourself time to prepare. Life isn’t always that obvious, so you should be thinking ahead and protecting yourself. Here are some tips that you can start putting into effect now, particularly if you are not the sole controller of your employment destiny.

Keep three to six months in accessible funds. The term “emergency fund” is outdated. Keeping a large portion of your emergency money in cash-like vehicles like high-yield money market funds was a decent plan when you were able to get interest rates above and beyond 5%. Nowadays, savings accounts are not the best options, but you still need to consider the possibility of not finding a job — at least, not at your desired salary — for a long time.

The money you use in an emergency — when you have no income coming in — can be a mix of the following:

• Cold hard cash (a few days’ expenses). Only keep enough cash on hand for emergencies to hold you over until you can get more out from the bank.
• Highly liquid savings or money market account (expenses for one week to a few months). If you can use your ATM card to get this cash, then you shouldn’t have any problems. As you can see from the the latest savings account rates, you’re not earning much on this money, so keep the balance low. With the Fed poised to lower the target federal funds rate this week, you can be sure banks will drop their interest rates even further.
• Roth IRA (the current year’s contribution). You can liquidate and withdraw any amount you’ve invested in your Roth IRA without any taxes or penalties. If you do so, you will give up any anticipated earnings (or losses) on that money. You can refund your Roth IRA once you are no longer in an emergency up to that particular year’s maximum contribution as long as it is before April 15 of the following year.
• Credit. If you have good credit, and if you normally manage credit well, you can get by with using a credit card to pay for some expenses. This can be dangerous and is not advisable for most. If credit is your main form of emergency fund, an unexpected hospital bill during an unexpected unemployment stint could present expenses that will cost you a fortune for years thanks to interest charges.

Mix and match the above keeping in mind what works best for you. If some of the other preparations are in good standing, you won’t have to use much of your emergency money if any.

Keep your resume and portfolio current. While your resume should be tailored to any position for which you apply, you should have a basic resume off of which you build your specialized documents. Review your basic resume and update it with your current responsibilities. Any time you work on a new, significant project, complete a task that is worthwhile for the company, assume new responsibilities, or receive a promotion, update your basic resume. Have it ready to go.

In the arts or in teaching, a current portfolio may often be the key to the next job. My girlfriend keeps a folder with some of the more impressive lesson plans and projects, as well as students’ work. While I was looking for a teaching job, I kept a portfolio that included music arrangements and videos of my instruction and ensemble performances. Artists certainly need to keep copies of recent work.

Rather than scrambling at the last minute to gather all these materials, simply keep updating your folders as you progress. I’m forgetful, so if you’re like me, schedule reviews on your calendar to remind you to take a few minutes to make the additions.

Always be networking. This doesn’t mean just going out after work with your boss whenever invited. Make friends in other departments and see as many people as possible related to your career goals. Always carry your business card. If your company doesn’t provide you with your own, make them yourself. If you create your own, keep yourself open to different avenues by not including any specific job title on your card. Include your name, basic contact information, and if you feel someone needs a reminder of who you are, jot a note on the card before you hand it to someone.

I’m not going to get into the details of networking as the topic deserves its own article, book, or series of books. I’ve never been great at networking; Myers-Briggs classifies me as split between an I (introvert) or an E (extrovert) — I’m an introvert among strangers and an extrovert among friends. Pure extroverts make the best networkers.

Get recommendations without asking. Part of my previous job at my current company was working with clients while planning official company events. I was not in the event planning department, but I found myself doing this work outside of my job description anyway. I’ve received thank you notes from other company’s CEOs as well as from senior executives from within my company. I’ve filed these away into a folder for any future needs. Personal notes from famous names and organization may help me someday.

Any recommendations you receive from your employers should go in this file as well.

Study your industry. There are two parts to this. First, you must make sure your knowledge is always current, especially if you are in a field like technology, where frequent advancements in the industry may change the way you operate. Take classes on the latest issues, even if they are not paid for or supported by your employer. If your field is more stagnant than software for example, then broaden your knowledge by learning about related topics.

Second, always know what the market is like in your industry. Are your target companies in hiring mode, offering fresh graduates bonuses or high salaries to attract new, young, malleable talent, or are job openings at an all-time low? Is some other city becoming the worldwide hub in your industry? These are the things you can learn by talking to people involved in hiring, reading industry magazines, newsletters, and even internet forums, and looking at job postings frequently.

Here’s a summary of the above:

• Keep three to six months in accessible funds.
• Keep your resume and portfolio current.
• Always be networking.
• Get recommendations without asking.
• Study your industry.

Following these suggestions, you will likely be able to better handle an unexpected job loss psychologically and financially. If you’re always prepared, you should be able to find a new position relatively quickly. The quicker you are, the less you have to dip into your savings to pay expenses.

I don’t have all the answers. Almost definitely there are other great suggestions for preparedness just waiting to be shared. Please feel free to leave some comments if you have other ideas or if you disagree with my thoughts.

This article was updated on October 31 to clarify wording regarding 401(k) withdrawals.

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Always Be Prepared: 5 Tips for Unexpected Job Loss

The “snowball method” for paying off debt isn’t something out of Clerks. It is a way to organize your outstanding debt in such a way that the funds you have available for paying off debt are optimally distributed in the manner that will allow you to pay off that debt quickly and cheaply.

There are two opposing philosophies or approaches to the snowball method. The first system was popularized by financial guru Dave Ramsey. In his own words, here is his approach to the snowball method:

List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.

Once you have your debts listed in order, pay the minimum payment required to all the debts except for the debt on top, which should receive all the remaining funds for debt service. The value of this approach is in the small victory. By paying your debts off from smallest balance to highest, you will reach satisfaction quickly. For someone who has made debt their way of life, has made the commitment to turn over a new leaf, and requires small successes for motivation, this approach may be beneficial.

Debtor beware: If you choose the above method, you could be paying more interest than necessary for a longer time period than necessary. Simple financial calculations show that if you order your debts from highest interest rate to lowest interest rate rather than lowest balance to highest balance, and then follow the same steps outlined above, you will pay off the debt sooner and spend less on interest throughout.

The big assumption is that you will be able to focus on the larger goal of paying off the entire debt without a quick rate of successes to constantly motivate you. The higher interest rate method still sees you paying off smaller debts throughout the process, so it’s not completely without motivational cues.

This calculator is one of the best I’ve seen that illustrates this point.

Let’s assume I have three credit cards to pay off. The first is an American Express Business Gold Rewards Card with a $13,000 balance and an interest rate of 14.99%. The second card is a Discover Business Miles Card with a $9,000 balance and an interest rate of 13%. The final card is a Starwood Preferred Guest Business Card with a balance of $7,000 and and APR of 7%.

Remember, this is a hypothetical example and not my personal debt situation. Here’s how to use my improved snowball, Flexo’s Debt Avalanche.

Like Dave Ramsey says, the first step is to establish an emergency fund. That’s important, but not directly related to paying off the debt, so let’s use that as our initial starting point and call it Step 0:

Debt Avalanche Step 0. Establish an emergency fund. For someone who is working on paying off debt, the optimal emergency fund should be all cash, deposited in a savings account. Savvy financial all-stars have other options available to them (like a Roth IRA or — as a matter of fact — credit) but for someone on the road to recovery, cash is the best option. Consider leaving a portion of your cash in a local bank or credit union for fast access but the bulk of the deposit should be in a high-yield savings account such as HSBC Direct or ING Direct.

It’s good to build up several months’ worth of expenses in this fund, but once you get a foundation of $1,000 or so, don’t hesitate starting the Avalanche.

Debt Avalanche Step 1. Commit to avoiding new debt. You should not add to your credit card balances while in Avalanche mode. It would be massively counterproductive. Also, while you are paying off debt, you will be forced to live within your means. Once your debt is fully paid off, continue living below your means with cash.

If you have truly changed your approach to using credit during this time, you may safely be able to use your credit cards again to take advantage of convenience, rebates, and other special offers. But let’s not get ahead of ourselves. The goal is to eliminate credit card debt as well as the need for credit card debt. From now on, you will only spend less than you earn, only in cash.

For some people this is a major change in philosophy, or a “paradigm shift” as motivational speakers are wont to spew. Whatever you call it — eureka, an epiphany, common sense, or Enlightenment — you have to be in the right mindset before you can be successful. For those set in their ways, this will be the most difficult step, but it must be completed before moving on to Step 2.

Debt Avalanche Step 2. Call your creditors and negotiate lower interest rates. Your credit card companies will be happy to reduce your interest rate, but in some cases, they will close your card and not allow you to make further purchases. That’s fine! You are in Avalanche mode and you have no need to use the cards again for purchases. Our example debtor was able to lower his Business Gold Rewards Card interest rate from 14.99% to 9%.

Even if you think your interest rates are already “low,” call your customer service representatives anyway. Keep going up the ranks of supervisors until someone lowers your interest rate.

Step 2a. Some time — maybe a month or two — after you negotiate, check your credit reports for free via AnnualCreditReport.com. Verify that your credit cards didn’t provide the agencies with information that could potentially be harmful to your credit score. If a card is listed as closed, it should be listed as, “Closed at account holder’s request” or with similar terminology, not, “Closed at issuer’s request.” Dispute any incorrect information with the reporting bureaus as necessary.

Look also at the minimum payment required by each card. You should have enough cash available from income each month to meet all of your minimum payments plus some. If not, then you may have to negotiate more than just interest rates. The solution may be to consolidate your debt into one credit card, a bank loan, or a home equity line of credit. This may stretch out the time it takes to finish paying off the debt, but it is the best way to meet your monthly obligation.

Step 2b. Take a pair of scissors and slice your cards into small pieces. For those seeking an emotional high to boost and motivate them through the process, like the small victories Dave Ramsey says are important, this may provide the same feeling and effect. Listen to Pink Floyd’s song “One of These Days I’m Going to Cut You Into Little Pieces,” which may have been written about the process of paying off debt despite the band’s claim otherwise.

Debt Avalanche Step 3. Use this calculator (with the “Interest Order” option) to determine the amount to send each card each month, and stick to this schedule without missing one payment. For fun compare the “Interest Order” option to the “Balance Order” option. With the example debt, a total of $1,000 available each month, and minimum payments of 2% of the balance on each card, the “Balance Order” option as prescribed by Dave Ramsey would cost about $500 more and take one month longer than the “Interest Order” option. That’s a shame; perhaps you could have spent that $500 on Dave Ramsey’s seminars and books. But you won’t, now that you see his plan is mathematically inefficient.

Better yet, if you want to part with an unnecessary $500, just send it to old Pink, care of the Funny Farm, Chalfont.

Debt Avalanche Step 4. Automate your payments so you don’t even have to think about them. Reduce stress, reduce agony, and increase your time on other life-enriching activities. Have your credit card deduct the appropriate amount each month directly from the checking account is directly deposited. This may be difficult if your amount changes each month, but at the very least, set up direct debit so all you have to do is click a few buttons online rather than writing a check.

When the first card is completely paid off, shift the largest amount of available cash to the second highest-balance card, still paying the minimums on the remaining debt. Lather, rinse, lather, rinse, ad finitum, or until pigs (three different ones) fly.

Debt Avalanche Step 5. Get in the groove of spending within your means by cutting back expenses. Perhaps you can think about creating a budget if your means are tight. If you want to spend more, find ways to earn more. If you haven’t already, formalize your personal finances. Grab software like Quicken or Microsoft Money — or the free GnuCash in conjunction with budget software like You Need a Budget — and track all of your expenses, including what you spend with cash every day, and map out a formal budget.

Want support from a community of individuals in a similar situation? Start an anonymous personal finance blog and write about your journey, complete with struggles, triumphs, and more than enough melodrama to go around. (Just don’t beg people to send you money to help pay off the debt you incurred. That’s not classy.) Also check out No Credit Needed, the premier blog for eliminating debt.

Debt Avalanche Step 6. Complete your payoff and celebrate. How you choose to celebrate is up to you, but it would be a good idea to reward yourself without getting back into the credit card habit.

Taking advantage of airline miles rewards and cash back rebates is an advanced technique better undertaken by someone who has shown they can use credit responsibly and avoid late fees and interest payments while paying off their entire statement balance each month.

After you have reformed your spending ways, you may be ready to make money off of credit cards with 0% APR deals or balance transfer arbitrage, which take some discipline, perserverence, and willingness to fight to get what you want from unscrupulous credit card companies.

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Paying Off Debt: 6 Steps to Building a Better Snowball

USA Today reported earlier this year that teens are not getting a decent financial education.

High school students failed a 2006 quiz from the JumpStart Coalition for Personal Financial Literacy, correctly answering an average of only 52.4% of questions about credit cards, insurance, retirement and savings. This is well below high school students’ average 57.3% score in JumpStart’s 1997 poll, but up from a 50.2% low in 2002.

This latest article applauds states that are beginning to require personal finance classes in the high school curriculum. Is a class on money management appropriate as a requirement? After all, this is a skill necessary to function properly in life. As one becomes an adult, with adult responsibilities, one must know how to correctly balance a checkbook and understand credit card and loan terms.

But does personal finance fit alongside history, literature, foreign language, sciences and mathematics, art, and music, the “staples” of all public high school curricula throughout the United States?

No. And here are some reasons why personal finance classes in high school would be an incredibly inappropriate use of students’ already overbooked time.

Teachers are not trained in personal finance. In most cases, teachers become certified to teach subjects through pedagogical education in college in their particular subject area. History teachers likely studied history education and math teachers studied math education. When was the last time you saw a college offer a bachelors or masters degree in money management or money management education? Economics and accounting won’t qualify.

Not all teachers require pedagogical training. My high school had a wood shop and an auto maintenance department, whose teachers may not have even been to college. But those classes are not listed as a state requirement for students.

Teachers are not parental replacements. Parents don’t generally teach their kids world and American history, literature, physics, and calculus. These are subjects that to teach require textbooks and strong familiarity, perfectly suited for teachers. While there may be some overlap, most parents can’t cover everything. Parents can and should teach life-learning skills like money management, a topic that requires no textbooks and no special training.

Many parents don’t teach these skills. In fact, many do not have the skills to teach. That is not a good enough reason to force high school teachers to take up the slack.

The public high school curriculum is not life training. High schools do not teach students what they need to know in the “real world.” Why should they? The vast majority of students across the country plan on going to college. They need the skills which will help them succeed in higher education. That means these students need research, analytical, and cognitive skills.

This isn’t the case in all school districts, especially at inner city locations. When students are more concerned about survival, housing, and providing food for their family, college is not a primary concern. (See Maslow’s Hierarchy of Needs.) This reveals a major problem with No Child Left Behind’s policy of basing funding on standardized test scores; a system in which inner city schools are doomed to fail. But more on point, students not planning to provide for a family right away rather than going to college need personal financial education right away.

But it still should not be a state-mandated requirement in high school any more than a class on job interview techniques should.

Personal finance classes have bad track records. Interestingly, USA reported in 2006, before the article cited at the top, that personal finance classes in high school do more harm than good:

Nearly 17% of the seniors had taken a money management or personal finance class, down from 20% in 2004. Surprisingly, students who had taken a class actually fared worse than those who did not. Students, however, who had played a stock market game, in which they used play money to pick stocks, fared better than students who had not participated.

It’s possible, as Jeremy noted in a comment on my original post on the 2006 USA Today survey, that this statistic is a result of selection bias. The students who took the money management or personal finance class may have been the students not inclined for higher-level thinking at the high school level — those who weren’t studying geometry, advanced algebra, calculus, or macro-economics.

For example, J.D. from Get Rich Slowly was bored in his required high school personal finance class:

I thought the class was lame. It wasn’t challenging. I never did any of my homework, and so earned an F on every assignment. But I always received the top score on every test. The teacher wanted to fail me, but his own grading system required that he pass me with a D.

J.D. performed poorly because his intellectual level was above that of the intended audience, and the class couldn’t hold his interest.

There is no room in the curriculum. If you want to add an additional mandatory class to the high school curriculum, you will either have to remove other subjects, give other subjects less time, or extend the school day or year. None of these options are satisfactory. What are you willing to give up?

In this article, the Pittsburgh Public Schools warn they have no room in the high school curriculum for mandatory money management classes. However, they do offer personal finance lessons incorporated in the classes in their “career and technical education” program.

Maybe there’s a better place.

In seventh grade, I was forced to participate in a class called “home economics” for part of the year. We learned life skills such as sewing pillows and making crêpes. Home economics would be the perfect class to spend about two weeks on the basic money management skills needed to get students started on the way towards fiscal maturity.

In the end, it’s the parents’ responsibility, and if that’s not an option, life will eventually “happen” to the students and as they grow up, they will learn from experience. Here are some tips for parents from Golbguru and Liz Pulliam Weston.

For more personal experiences with financial lessons in school and at home, read through the comments on the Get Rich Slowly post I mentioned above.

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Should High Schools Require Money Management Classes?

One of the features I liked when I used Microsoft Money was the ability to track airline miles or points. I didn’t accumulate many, but it was good to see what I had available in one place rather than going to the individual airline websites.

I switched to Quicken and I was disappointed to find that there was no similar option. I was determined to find away to track miles, so I discovered a work-around. Here are four easy steps for setting up accounts within Quicken to track your airline miles.

Before you get started, make sure you have your most recent statement with your latest miles or points awards. By the way, you can click on any of the thumbnails below to zoom in on a screenshot.

Step 1. Enable Support for Multiple Currencies.

By default, Quicken is configured to use only one currency. What we’ll do is enable multiple currencies so we can create one of our own to track miles. In the application menu, choose Edit → Preferences → Quicken Program. Select Calendar and currency on the left column, and place a checkbox next to Multicurrency support. Click OK.

Step 2. Add a Custom Currency for Miles/Points.

In the application menu, select Tools → Currency List. In the currency list window, click New. For Currency Name, use Miles/Points (or your choice). For Symbol, enter Mi or any other unique currency symbol. You can leave Currency Code and Shortcut letter blank. For Mi per $, enter 100. This will value each mile at one cent, which may approximate the real value of miles or points. Click OK. Close the currency list window.

Step 3. Add Your Airline Account.

On the main “Quicken Home” screen, Click the button labeled “Add Account” on the sidebar. Your account isn’t held at a financial institution, so select that option and click Next. The application will prompt you to select a currency; select Miles/Points and click Next. The best type of account for airline miles is Asset, so choose Asset and click Next. Name the account “Eastern Airlines Dividend Miles” or the name of the particular loyalty program and click Next.

Check your latest statement and enter the statement date and balance as listed. Now you’ll be presented with the register for your new account.

Step 4. Hide Balance from Net Worth.

Since it may be difficult to convert your points into real cash, you may wish to remove your airline miles account from being included in your net worth. If you wish to do so, click the “Customize” button in the sidebar to open the Account List. Scroll down to find your airline miles account listed under Assets. Place a check mark in the second box under the column heading “Don’t Include in Totals.” Click Close.

Repeat Steps 3 and 4 for any additional points or miles programs you’d like to add. That’s it! You’re done. The only feature missing the ability to configure accounts to have zero decimal places, as airlines rarely credit an account a portion of a mile or point. Regardless, you can configure reports within Quicken to track your miles. There’s no way to use Direct Connect, Web Connect, or Automatic Web Update to synchronize your airline account with your provider, so all updates must be done manually.

Got any more Quicken tips? Leave them here or just say hi. Anyone who comments here will be entered to win a free copy of Quicken Basic 2007. Now you can use the free software to track rewards miles as well as your bank accounts and house values.

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Quicken Hack: How to Track Airline Miles or Points (With Free Quicken!)

I think there is a point in every person’s life at which he comes to a realization and has to make a decision that shapes the course of his life. This happened to me in the early part of the year 2002. I’ll spare most of the details, but at this time I realized I needed to change a few things about my life. Here is basically how it happened.

From December 2001 through March 2002, a series of changes in my life affected me. The older, rational me can look back and say on some level I caused them to happen: My girlfriend left me, I lost my low-paying non-profit job (for which I just moved), my car was impounded, and I was forced to leave the apartment into which I had just moved.

I moved in with my father so I could take some time to look for a new job and to contemplate my existence for just a couple of months. It was during this time I realized that I was losing money every month while working at that non-profit. It cost me more to travel to and from the job and pay rent and other necessary expenses than I was earning. I decided to start focusing on my financial situation (among other things).

I bought Microsoft Money and started plugging in numbers, accessing my accounts online, and paying off debt. “Interesting,” I thought. I liked how the numbers on the computer looked as if they were some sort of official financial statement.

I got a job in Newark — accessible via train from my dad’s house — since I could not afford to drive for a while. I worked as a temp for the Chief Operating Officer of a very large company. They liked me, so they kept me after the temp assignment ended. Now I began to see something really interesting in the Microsoft Money: the numbers were going up each month! Neat!

I moved twice during the next twelve months: once to a cheap apartment in Jersey City which kept my expenses down, and then to an apartment I shared with three roommates in central Jersey. Rent was less than $350! Cable was split among four people! Now that I was tracking every penny earned and spent, I saw the value of saving money where possible, spending less than I earned, and maximizing my income. (I’m still working on that last one.)

Rather than just letting things happen to me, I was making decisions about my money management. I was investing in a 401(k) with company match. I opened a high-yield savings account at ING Direct, back when they had the highest interest rate. And I was making other good decisions. At this point, I became the Chief Financial Officer of my life.

Then I put two and two together.

I had been blogging since 2000 — since earlier, actually, but it wasn’t called “blogging” yet — and I thought that creating a blog about my finances would be a cool way to keep myself accountable. I doubted at the time that anyone would actually want to read my financial updates, how I spent money, and whatever money-related issues I was pondering.

In my first post, in July 2003, I presented my financial update, a status of my current net worth divided into a few categories. I was inspired by the automatic monthly reports generated by Microsoft Money. Since that first post, my monthly updates have grown into financial statements, not unlike the financial statements in the annual reports published by corporations. I’ve been posting them here ever since.

Thinking about my finances and treating them in terms of a business makes sense. Putting together these reports each month like a business is the most important part of being the CFO of my life. As I export the numbers from Quicken (no longer Microsoft Money) into Excel to prepare the website post, I am forced to think about how much I spent, and where I could have saved more money without compromising the things that are important to me. Now that I have income from several sources, I also review those numbers to determine how I can expand my business opportunities. Preparing the reports makes me consider my progress and publishing the reports keeps me accountable.

I am thankful for the regular readers my blog has attracted over the past few years; their comments have been invaluable in shaping my thought process and my decision making. Each month, I do not want to let them down. Part of my motivation for always trying to make appropriate financial decisions is the knowledge that I have to report my progress to the public every month. It’s no wonder that so many companies would rather stay privately owned than open their finances to scrutiny by going public. It’s a tough crowd, especially when you make a sour financial move. Although the mistakes show up less often these days, I am positive I have more mis-steps to make before my life is through.

No matter how poor my decisions are, the results will be posted every month, for the world to see. I now prepare two statements each month.

• Here is my latest personal income statement.
• Here is my latest personal balance sheet.

I’ve created Excel spreadsheet templates for use by anyone who wishes to keep track of their personal finances. They can be used in conjunction with reports exported from Quicken or Money and are completely configurable. Here is the template for the income and expense report and here is one for the balance sheet.

This was originally a guest post written for Get Rich Slowly. I’ve slightly re-edited and reprinted the article on Consumerism Commentary for those who might not have seen it yet.

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How to Be the CFO of Your Own Life