The concept of turning your passion into a vocation, making a living doing something you love, easily generates two opposing viewpoints. I wouldn’t say I’ve had a privileged upbringing, but it depends on the perspective. I had the freedom to explore a variety to activities to help nurture my mind, soul and body. As a kid, I explored computer programming, music performance, acting, summer camp, karate, Little League baseball, and even tennis lessons. This alone is enough to make people less fortunate scoff at the futility of my time while growing up. I could have lived in a developing country where kids have no choice but work so their families could survive day-to-day.

In an effort to develop artists, one recurring theme always present in my activities was the idea that life provided endless opportunities. There was no need to be resigned to an unsatisfying job, working for money rather than soul satisfaction. With enough education and practice, everyone would have a chance to find a way to earn money doing something with passion, an activity that was more than just “work.”

To characterize the two perspective, one would say that everyone, at least those with sufficient resources, can find a way to sustain a family while pursuing a passion completely. The other perspective takes the position that following a passion is a luxury and most people would be better off finding a job that pays the bills right away and looking for passion elsewhere, like with hobbies or family.

I wrote about pursuing my passion six years ago. I mentioned that I was stuck in a rut and was still trying to determine what my “dream job” would be. I went on to spend five more years working for a corporation in a job I had little interest. At the time, I didn’t really consider Consumerism Commentary a business. I didn’t consider it my passion, either. I never desired to be a writer or a publisher, but an interesting theme running through the last twenty years of my life has been building communities, particularly online, and that is a bigger passion for me than writing.

With a less personal approach, I suggested starting the decade off right by doing something you love.

I wouldn’t have been able to pursue Consumerism Commentary if I wasn’t already meeting my baser needs. I started this website after I had already started moving in the right financial direction, with a new income at a corporate job ready to help me pay off my debt and save for the future. If I had been struggling to find affordable shelter and scrounging for food, I’d have greater concerns than finding a web server.

When considering the idea of following a passion, particularly if that passion doesn’t naturally coincide with a potentially high-paying career like mathematics or engineering, I find that Abraham Maslow’s Hierarchy of Needs is an appropriate metaphor. Following your passion is related most to the top of the pyramid, self-actualization. All the issues pertaining to the levels below self-actualization must be met before a quest to reach one’s full potential can be moderately successful. Because of these pre-requisites, paving one’s own way to create a successful life that doesn’t rely on typical social structures (like corporations) is rare.

Once physiological needs like food, water, and shelter are met, the next needs pertain to safety: having sufficient finances, job security, and health security. A good portion of the middle class doesn’t really get past this stage of needs. Living paycheck-to-paycheck keeps the lower middle class unfulfilled. The upper middle class may not have money that could be used in an emergency other than the wealth locked in the value of their primary residence, or those who do have emergency funds would not be able to live off savings for a year to pursue a financially risky endeavor. The working class relies on employers and rarely sets out to build their own business, again due to risk.

To get past this second stage, you need to be in a position where worrying about finances is unnecessary. When there is little concern about whether you can afford to fail, you have the opportunity to try different approaches to life-sustaining pursuits of your passion.

In my work with non-profit organizations, I noticed that many people involved with activities were not in a financial situation where they needed to worry about finance. If the organization failed to provide a paycheck one week due to the company’s negative cash flow, they didn’t start a riot. If you’re “independently wealthy” the paycheck from one week to another is not the main concern, and you have the ability to take some risk in order to spend the bulk of your waking life working with your passion. If you’ve retired from your former career and just looking for a good way to spend the last few decades of your life doing something meaningful, and if you’re done raising a family and paying for a house, you have the flexibility to work for little or volunteer without concern about moving up the corporate ladder. If your spouse brings in the money and you’re only working to keep yourself from going insane alone in the house, your options are wide open.

When I was working for the non-profit, I was in a significantly different financial position, and this was a message I had some difficulty getting through to the executives. Then again, why should I receive preferential treatment of any sort when the rest of the employees were happy with the poor financial situation within the company. In the end, I made some sacrifices in my living situation and other expenses to make things work a little better, but I was also sacrificing my future financial stability. My following a passion early on in my career, I was skipping over the more basic needs like a safe living environment and financial security while seeking higher-order fulfillment. It didn’t work out so well for me.

While it’s good to persuade young students to follow their passion — and this is a great topic for motivational speakers for adults as well — it’s more important to look at any particular individual before condoning leaving reason behind to search out a living following a passion. For some, the risk of financial failure could be a good motivational tool for bringing about success while following a passion, but for others, it’s nothing more than false hope and results in a delay in building a solid financial foundation.

Abraham Maslow

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After noticing, month after month, that I include the value of my 2004 Honda Civic in my monthly net worth updates, a reader wrote in to Consumerism Commentary to ask why I haven’t given into my desires and purchased something newer or more exciting. I’ve had a bit of a storied past with cars, but in my current, more responsible era of my life I’ve been sailing through without any car problems, and saving money in the process.

I had been driving a Honda Civic I purchased used, but after receiving the car back from a relative, it never operated the same. In 2004, I accepted a teaching position and I needed a reliable car to drive to the school every day. The old Civic, at 160,000 miles, just wasn’t as reliable as I needed it to be. Since my necessity to avoid breaking down was my new first priority, I decided to sell the old Civic and buy a new one. As the 2005 models were arriving, I purchased a brand new Civic.

Typical financial advice at the time was to always buy a used car. With Civics, which were said to operate great beyond 200,000 miles if cared for well, there was just a small price difference between a slightly used car and a brand new car was. For the extra one or two years of worry-free driving at the beginning of ownership, the extra money seemed to be worthwhile to me. I bought a 2004 Honda Civic around the time the 2005 models were arriving, so I was already getting a slight discount on the new car. I took out a loan (outside the financial industry) at an interest rate of 2% to finance the purchase.

The car in this photograph is not my car.

Rather than trading in the old Civic, I sold it on Craigslist, and got more cash than I expected. I paid the loan off quickly. Since paying the loan off, I’ve had very little car-related expenses. I have the dealership perform regular maintenance and oil changes, and besides tolls, fuel, and the occasional car wash, that’s all the money I put into my car. I could probably save more money by choosing a mechanic other than the dealership, but I’ve had problems with that approach in the past with other cars. Going to the dealership gives me peace of mind, and I’ve never had any problems with their work.

Although I was a fan of driving when I was younger and always jumped on every opportunity to drive on road trips, years of commuting have spoiled my joy. I do enjoy driving fun cars, but I see that more as an occasional luxury than a lifestyle choice. A recent study shows that the enjoyment drivers get out of driving fun or luxury cars doesn’t last more than a few weeks, so when you buy a BMW or Ferrari, the euphoric feeling you might get from driving doesn’t last long. If I want to enjoy driving, I can always rent a nicer car. This should help me better appreciate the fun.

Buying a new car like I did doesn’t pay off if you have the desire for a new car every few years. I have no need to impress clients, so leasing a car doesn’t make any sense. Also, I don’t have a garage, so leaving a nicer car out in the open in asking for trouble. I live in a crime-free area, so it’s not that much of a concern, but I’d prefer knowing that something of great value could be locked away. I’m not going to park a Ferrari in my open parking lot, and I’m certainly not going to take it to Queens to visit my girlfriend and leave it parked on the street.

• By not having a $300 per month car payment since July 2007 has saved me $14,400.
• By not choosing a gas-guzzling vehicle, I’ve probably saved another $9,000 since buying the Honda Civic new in June 2004.
• I’ve probably saved another $3,000 to $4,000 by buying a car that requires hardly any maintenance.
• I’ve saved at least $16,000 and possibly much more by choosing not to buy another new car until this Civic dies. Now that I’m not commuting to an office every day, this car could last for many years.

At some point, my needs might change. Maybe I’ll have a family and need a bigger vehicle for transporting my hypothetical children and their friends. I can’t predict my needs or desires in the future, but for now, I’m not buying a new car, and I’m enjoying the savings both by spending money on other things I enjoy and by thinking about and investing in my future.

Would you replace your current car if you had cash available? Should I put a small part of my future aside to spend extravagantly on a nice car and have some fun?

Interesting. This article drew a lot of criticism from Consumerist readers who say that a car from model year 2004 isn’t old enough. The criticism missed the point of the article, which is that continuing to drive the same car saves money over buying a new car. There’s no competition to see who can drive the oldest car. As I pointed out in the article, at a time when reliability was the foremost concern, buying a ten year old (or older) used car, without a strong indication of how well it could run and for how long, would have been a significant mistake. Plus, the mileage is a better indication of operational “age” than model year.

Photo: save_7

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This is one of my biggest financial mistakes. My failure to learn some basic skills and my willful ignorance of the trouble I was in cost me thousands of dollars and major inconveniences.

When I was younger, I didn’t have that much of a positive track record with cars. In high school after receiving my license and throughout college, I drove my parents’ car, but I drove infrequently and was never really responsible for maintaining the car. After I graduated with a bachelor’s degree in music education and found my first teaching position, I needed a car. My parents were kind enough to buy me one as a graduation gift — a 12-year old Toyota Celica in good enough condition.

Well, I made a stupid mistake, though it’s a mistake that befalls many people who don’t take the time to learn about basic car maintenance when owning their first car. I never added any oil to the engine, and certainly never changed the oil. Even if the 3,000 mile “standard” for changing oil is too aggressive for modern cars, letting the motor run dry will quickly damage the car. The mistake of not learning the bare minimum for owning a car got me into trouble.

I replaced the motor after it was destroyed and the car ran well for another few years, but I made more mistakes. These were of a more financial nature. My car seemed to attract police, who seemed almost delighted to pull me over for speeding.

Although it had a rebuilt motor, the Celica was unreliable. Before it was completely undrivable, I used it to trade in for a slightly used car, a Honda Civic, and a three-year loan to make the purchase more affordable for me. I might have changed my driving habits, or the car might not have attracted police as much, but I was pulled over less frequently for speeding. But I continued to ignore the tickets.

Although speeding tickets are expensive and I had no money, it would have been more manageable in the end had I paid the fines and moved on. I was working for a non-profit, and I was broke. For some reason, I thought my life would be better if I stuck my head in the sand and ignored the tickets and fines. I was also moving around a lot in this period of my life, and I didn’t receive notices from the DMV letting me know my license was suspended for my failure to pay these fines. Since I didn’t know my license was suspended, I kept driving, blissfully ignorant of the situation I was in.

One day, soon after I left the non-profit job I had after my short stint teaching after college, a police offer pulled me over for speeding. Since my license was suspended, they impounded my car. My biggest concern was no longer finding a new job, it was determining if and how I could avoid jail time. Good news: I didn’t go to jail.

From this point on, I needed to redesign my life so that I could survive without a car. This was soon after I left the non-profit job I started after teaching, and I was in the process of looking for a new teaching position. My search was on hold because there weren’t many schools in New Jersey I’d be able to travel to without a vehicle. I did find a job, working for a financial company, and moved somewhere that would allow me to have a convenient commute using mass transportation. I gave up my Civic to a relative.

Eventually, I had my license reinstated and the relative returned the Civic. As a result of my problems, though, I still had large auto insurance bills that plagued me for years. Through this debacle, I learned a few lessons about responsibility. Today I can look back and be glad I’ve been able to make better choices this past decade.

Here are some things I’ve taken away from my earlier mistakes, and maybe they’ll be appropriate for you.

• When you first get a car, learn how to take care of it.
• When someone sends you a bill, don’t ignore it.
• If police are involved, take care of the problem as soon as possible.
• If you owe money to the courts, it’s not going away, and it could become a legal issue.
• If you have no money to pay traffic fines, find the money.
• Keep your address current and on file with the division of motor vehicles.
• Don’t speed.

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As a very last resort, employees with active 401(k) retirement accounts have an option to take out a loan against their future. Borrowing money is never a good position to be in, but if you’re borrowing money from yourself, you ease the pain. 401(k) plans permit borrowing at interest, and paying interest to yourself can help improve your finances in retirement.

The existence of a 401(k) account is often used as an excuse for not creating an emergency fund; if a loan is available at any time, why settle for low high-yield savings accounts when your money could be put to better use? This isn’t a valid argument as elucidated by the dangerous drawbacks of 401(k) loans.

Most people who take out 401(k) loans stop contributing new earnings to their 401(k) plans. Not only is the withdrawn loan not earning more or increasing value in your retirement account, you’re not adding new investments.

One of the most popular emergencies requiring more cash is the loss of a job. If you lose your job, you won’t be able to take a loan from your 401(k). Additionally, if you already have a 401(k) loan when you lose your job, it will be due within 60 days or less. At the same time you need cash, you’ll need to pay back your loan or suffer income taxes plus a 10% penalty. According to a recent study by Aon Consulting, 70 percent of workers who lose their jobs while having an active 401(k) loan default on that loan (pdf).

Even if the 401(k) loan is paid back in full, there’s another drawback. The interest on the loan is considered income, and therefore taxed, twice. When you pay interest back to the 401(k) account, it is paid with your regular income, which would be included on your tax return as taxable income. Once that interest is in your 401(k) account, it is mixed in with the before-tax contributions, if your loan was from the before-tax portion of your 401(k). When you retire and you withdraw your funds, the full amount of your before-tax contributions and their earnings will be subject to income tax. You could also argue that the principal portion of the loan payback amounts are taxed twice as well, because a 401(k) loan payback is not considered tax-advantaged and does not reduce your taxable income like a 401(k) contribution.

Congress is currently mulling legislation to limit 401(k) loans. If the law passes as it currently stands in bill form, employees could only take three loans against their 401(k) at a time. Repeated borrowing just sounds like trouble. The law would allow employees to continue contributing to 401(k)s while a loan is outstanding. I would think if any extra money is available, it would be better served paying off the loan rather than making new investments. I suppose it could be more tax efficient this way, but paying off debt should be a priority, even if the borrower is the same individual as the lender. Third, the law would ban 401(k) accounts from issuing debit cards that allow investors to use retirement funds as a transaction account. This sounds reasonable.

Some 401(k) plans might be more restrictive than the law. In most cases, borrowing from a 401(k) is just a bad idea. It’s tempting in emergencies, though, particularly for households that have not been able to create an emergency fund. A 401(k) loan should be a last resort. If you get stuck and are unable to pay the loan, the government takes a big chunk. On a $10,000 loan, assuming 25% federal taxes, 5% state taxes, and a 10% penalty, you’ll only be able to keep $6,000.

Have you or would you borrow from your own 401(k)?

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Pair a recession with escalating college tuition prices and the result is overall skepticism of post-secondary education. As the public begins to question the long-term viability of investing in the stock market after a crash, they criticize the perceived value of a degree when the job market is difficult and loans are oppressive.

There is no question that on average, earning a degree will increase your potential lifetime earnings over someone who receives only a high school education. Before long in economies like today’s, however, people begin trumpeting famous college drop-outs who went on to become leaders of their universe, uncompromisingly wealthy, or both, giving hope to slackers everywhere. Bill Gates dropped out of college, for example.

Aside from personal obligations, people drop out of college for two major reasons. Either they fail out because they can’t handle work, or they leave because they’ve created an amazing opportunity for themselves. The message we can take from Bill Gates’ experience is not that a below-average student who has trouble in college can still be an amazingly successful individual, but that some people who work hard, benefit from luck, and who create their own opportunities do not need to bother with formalized education in order to guarantee a lifetime of financial abundance.

Even those destined to drop out of college could benefit from a year in school. An education has value beyond the increased earnings over time. Even students who end up in fields not requiring a bachelor’s degree benefit. A college education sharpens cognitive and social skills and exposes students to two of what the most important aspects of human knowledge and understanding, cultural awareness and varied worldviews.

According to statistics in a recent New York Times article, 80 percent of high school students in the bottom quarter of their class will never manage to earn even a two-year associate’s degree. Should these students be directed elsewhere, particularly when the cost of college is high and they likely won’t qualify for scholarships or grants?

It’s necessary to take a fiscally responsible viewpoint and evaluate the probability of financial success in life. For some students, college could simply be a waste of time, either because they don’t focus on some of the benefits available with a higher education beyond career preparation for a field that doesn’t require a degree, or because they attend a college that isn’t designed to offer anything beyond career preparation for a field that again doesn’t require a degree.

To see the most non-financial benefit in college, a student should seek out exposure to different fields. Spend some time with as many interests as possible because the likelihood of having immediate access to excellent resources later in life will be significantly lower. When this is the approach, even a few years of post-secondary education is worthwhile, and you can attend a great private college for less money than a public college.

It’s a bad idea to discourage any student from attending college, even if they perform poorly in high school. A fulfilled life is defined only minimally by net worth and income, if at all.

Photo: Schlüsselbein2007
New York Times

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Some things are beyond our control, and having a happy and fulfilling life requires accepting those things we cannot change. It’s possible, however, to control more than we believe we can.

Right before I first started on my journey of getting my life and finances in shape, I left a low-paying job that depleted my money and increased my debt, I lived in a terrible apartment in a bad area, and the relationship with my girlfriend at the time ended. Most of my life seemed beyond my control for years leading up to that point. These bad things continued happening to me, and there was nothing I could do about it. Of course, a series of bad choices — including, in some cases, not making any choice at all — resulted in these bad situations, but I didn’t want to see it that way.

My boss at this company often talked about how every aspect of our lives is a result of a choice that we make. For example, in his opinion, someone who was late coming to the office due to traffic was primarily at fault for not preparing for delays by leaving home well in advance. Someone who oversleeps, even if the alarm does not wake him, makes a conscious decision that lying in bed is more worthwhile than getting out of bed and living life. At some point, something clued me into attribution theory. I was attributing various outcomes in my life to situations beyond my control, and I had a low opinion of my self-efficacy.

After some introspection, I was able to see that both the good and the bad things that happened in my life were results of the decisions I made, and I began approaching my life differently. The choices I made were making a difference in my life, so I started making better choices. It hasn’t all been perfect since then, and I am constantly trying to improve everything about me, but my mind is in a different space than it was ten years ago.

All of the items below are within our control.

1. You can get the job you want. The rate of unemployment is still high, and the official government numbers might even understate the number of people looking for work. Blaming the lack of gainful employment on a government statistic is a good example of an external locus of control, believing it’s not worth looking for a job, putting in the effort, because there is nothing out there. Even if you feel those who work hard a networking and researching employment options will be successful in this environment, and you believe the individual can transcend the state of the economy to find a job, but you believe that nothing you can do will help you compete with others for the same, limited positions, then you’ll be stuck not taking any actions. That may reflect an internal locus of control but with low self-efficacy.

There are jobs out there now, including the jobs you want, and they are available if you do the research and prepare yourself for competing at a high level.

Perhaps you do have a job right now, but you’d like a promotion. When I left my company in December, it was following a departmental merger and there was a hiring freeze. Yet, before I left, I was offered a position that, while it wasn’t perfect for me, shows that even company policies, often used as an excuse for immobility, can be circumvented in some situations.

2. You can pay off your credit card debt. It’s easy to believe that your debt increases because unexpected expenses keep coming. Your income may be enough to pay for your normal expenses, but every month, someone in your family is sick, an appliance breaks, or a family member needs to borrow money because they’re in a worse situation than you are. This can be a terribly frustrating position. You’re struggling, yet everyone is still leaning on you for support. You can get out of this situation, and it comes down to replacing the use of credit with better planning for expenses and the use of an emergency fund.

Getting started is the hardest part, though, and the spot where most people will be overwhelmed and will give up. Chances are that most people in this situation have not cut back their expenses as much as they can. They might have cut back just enough to remain somewhat comfortable, but extraordinary results require extraordinary actions. Occasionally, you need to take it to the extreme for a short time. Getting rid of cable television isn’t the last move, it’s just the start. Try following this six steps to building a better debt snowball.

3. You can reach your life goals. Few things bug me more when I ask someone what she wants to do with her life, and she tells me she wants to retire with $2 million or some other figure. That doesn’t tell me anything other than the only thing important to her is money. That may be true, but most people have something beyond money — or would benefit from thinking about why they want to retire with $2 million. What is the point of working hard, trading your time and effort and money, only to have a bank account with a high enough number? Money is just a tool for something else, and the “something else” that is most meaningful can be your primary goal or mission.

Sometimes it feels like there are people out there who don’t want us to succeed: so-called friends who would rather compete with you than work as a team to build each other up, insecure bosses who need you to handle the work but don’t want to admit they don’t have the skills they should have, This is just noise that can be relatively easily circumvented. I do this by shutting out negative energy, and when someone approaches me with this type of attitude, if I can get away with it, I rarely dignify it with a response.

I suppose, if this blog were like so many others, this article would be followed by some kind of product that you could buy that tells you how to live your life. I have no such product. I’m not selling anything. These thoughts come from my own, real, authentic experiences and I’m not pretending to be some sort of guru. If you want more, though, you can look at my series on taking control of your finances. Don’t worry, I’m not selling anything there, either. Of course, most importantly, I’d like to hear from readers.

Was there a moment, a turning point, when or where you decided you could control more of your life than you originally thought? What was the catalyst? What was the outcome?

Photo: Jude Doyland

The original version of this article, 3 Aspects of Your Finances You Can Control, is copyrighted by Consumerism Commentary.

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If you ask a Realtor or a national association of individuals within that profession whether now is the perfect time to buy a house, they would say yes. Of course, their answer was yes a year ago, when average prices were low, and their answer was yes a few years ago, when average prices were at all-time highs. Real estate agents are supposed to be the experts when it comes to the housing market, but they are biased. Whether buying or selling, agents make money as long as the industry is moving.

But I’ve been watching the real estate industry for the past few years. I haven’t zeroed in on a particular location yet, so I’ve been watching the national averages. Money Magazine is saying that now is a great time to buy a house, and they were able to pull off the article without any quotations from real estate agents. If, of course, you can qualify for the mortgage, and you still shop around for a deal, buying a house now might be a good choice.

Notice that I didn’t say that it would be a good investment. There is more than a good chance that the price of your house won’t move up much over the next thirty years. The short boom that we saw in the real estate market might be over, not to return for fifty years or even a century, if ever. Consider the expenses that you pour into owning a home, and you might not even come out with a profit when you sell.

It shouldn’t be the pseudo-investment aspects of owning a house that interests a buyer, it should be the ability to customize your living space and tailor it to what you and your family would like. That’s the primary benefit of ownership, but even that isn’t necessary for many people. Continuing to rent is always a valid option, skipping time-consuming maintenance needs and up-keep expenses, but having the possibility of increasing rent and the the need to rely on a landlord to take care of problems.

Would you buy a home today?

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Time management has never been my strength. I like working at my own pace, and the certain working structures, like deadlines, tend to annoy me rather than motivate me. It’s no wonder I’m excited about leaving a job with a typical standardized nine-to-five schedule. I allow myself distractions and breaks and often procrastinate.

Despite this, I am motivated to succeed, and that’s probably one of the only aspects of my personality that has helped me thus far. Given the above, I am a bit concerned about how I will work once my only boss is me. When J.D. Roth began working on Get Rich Slowly without the distraction and time-suck of his day job, he found that working outside of the home in a separate office was helpful in keeping him focused — I remember reading this at one point but I don’t know whether it is still the case.

A friend of mine, another business owner, plans to begin renting office and warehouse space in the new year. He offered to set up a place for me to work there, and I might have taken him up on the offer if his office were closer.

My biggest concern at the moment is that I am used to writing at night. I usually begin around 10:00 PM and don’t finish until 2:00 AM, and that’s after answering emails and doing other management activities from 5:30 PM to 10:00 PM, with some breaks for dinner and sanity. Once my schedule changes in the middle of next week, I will see for the first time whether I am capable of writing during more convenient hours. I hope I am, because I plan to increase my writing volume for Consumerism Commentary as well as for a number of other websites.

In a perfect world, I would have time every day for eating three healthy meals, exercising, and practicing hobbies — in addition to working — with classes once a week. Of course, all of this will need to be balanced with time spent with my girlfriend, and if I can manage it, more of my other friends. I’m not going to be able to manage a schedule like this without a well-defined structure, even if it is a flexible structure.

One thing I find I have to remind my friends, many of whom are envious of my ability to leave the corporate world behind, is that this is not going to be a vacation. I work hard now, and I’m going to be working even harder soon. The motivation isn’t going to be the problem, but it will be a test for me to see how well I can do on my own.

I’m thirty-four years old, young to some, but old enough that I’ve come to accept some of my weaknesses rather than stressing myself over making improvements to my life that would only have incremental value, if I’m even successful at changing my personality. Time management is one of these weaknesses. It’s a trait that corporations love, so much that they’re willing to pay for training. Skills like these help their assets (employees) produce efficiently (more work for less pay), so I understand the bottom-line implications for encouraging good time management skills.

Another concern is my work environment. As I mentioned above, working outside of my house might be a good idea to save me from distraction, but I don’t like the idea of traveling to an office and back every day. I’d like to reduce my driving for the near future, and there’s nothing in walking distance. I don’t have a proper desk. I’ve been waiting to own a house before upgrading my furniture, so most of my writing is done in my living room, with a notebook computer placed on my coffee table. I shouldn’t even mention that this is in front of a television which, when I’m sitting in the living room, is more on than off.

Working from home every day is going to require some isolation from this distraction, and my health and the long-term stability of my body would benefit from a better sitting position.

These changes to my structure and environment will not be instant next Thursday, the first day I’ll be working solely for myself. Changing my process will be a process unto itself, and I’ll need to set some ground rules to ensure that I’m making the most of my time and producing the best work I can manage as frequently as possible.

The original version of this article, Life After Salary: Structure and Motivation, is copyrighted by Consumerism Commentary.

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The concept of frugality has permeated mainstream personal finance in the past few years. That’s understandable, given the state of the economy. For many who have been personally affected, following the loss of income or a job, this frugality is a forced approach. People are looking for ways to save money because they have less of it to spend. Those of us who have been fans of the concept of frugality have been proud that the rest of the country is starting to jump on the bandwagon, re-affirming our outlook on personal finance.

Businesses are experiencing a forced frugality as well, particularly those whose business models rely on access to credit, a resource that all but vanished for some businesses during the credit crunch. As CNN Money pointed out recently, business aren’t hiring because they’ve learned how to survive on less. The employment numbers aren’t improving significantly, and unemployment forces more people to live on less, just like those businesses.

The economy won’t improve until businesses begin hiring and the public sentiment about the economy improves. It’s a feedback loop.

The primary tenets of frugality work well within an individual’s personal finance philosophy, but once the concept becomes a movement that spreads to a greater population and businesses, the economy can’t move. Here are some of the aspects of frugality that improve your own personal finance, but when practiced by the business world, keep the economy from growing at the pace we would like.

• Building up your emergency fund. Businesses like to call this their cash reserves. One of the first steps to creating a solid financial foundation for your family is fully funding a savings account to a level that could cover, for example, six months’ worth of expenses. This keeps cash liquid to help pay for necessary items during an unforeseen loss of income. If a company were to take the same approach, it would mean they’re not increasing return for shareholders by either investing in their business or by returning the cash to investors in the form of dividends.
• Spend less than you earn. This tenet is so basic that anyone who doesn’t follow this rule will, given enough time, eventually find themselves without a home or any other assets. Most of the time, the results are less drastic. Credit card balances increase and families become buried among high-interest debt. Many businesses rely on leverage for growth, and without access to credit and without a desire to over-extend, they can’t compete in the marketplace as well as they could otherwise.

There are other aspects of frugality that don’t particularly have a negative effect when adopted by businesses en masse. For example, smart shopping — finding the best discounts and the best value, not necessarily the cheapest option — benefits the economy overall, because vendors who provide the most efficient solutions will receive the most business.

On a personal level, let’s keep frugality alive as long as possible. The sooner businesses are willing to take on a little more risk, however, the sooner employment will improve, people will feel they have more money to spend, and the economy will start growing.

The original version of this article, Frugality is Bad For the Economy, is copyrighted by Consumerism Commentary.

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I’ve written several times on Consumerism Commentary, and other people have written and said many times as well, that debt is slavery. In fact, there is a popular book on the topic aptly titled, Debt is Slavery. It’s a convenient metaphor; if slavery is working without the benefit of enjoying the fruits of your labor, being in debt is similar.

Deep in debt, any extra money you have after paying for living expenses is designated to pay off debt. Like slavery, you cannot save money for your future. There is no such thing as retirement for someone who is debt or someone who is enslaved; you must work until the day you die, or until you pay off your debt, for the benefit of a master.

The metaphor doesn’t sit well with me. Debt is a financial reality that is difficult, but slavery is much more than that. Calling debt slavery minimizes the gravity of what it really means to be enslaved. Slavery relegates an individual to property, bought and sold like a piece of furniture or cattle. While it may feel that way for someone working for a living, meeting their expenses paycheck-to-paycheck or even falling deeper in debt, it’s not even close. Even in debt, you are free to make your own choices. You have the freedom to live your life as an individual, even if building your future is out of the question at the moment.

While in debt, you can work harder, possibly earn more money, and even develop your skills through education. Eventually, you can qualify for better jobs, earn more money, get out of debt, and build your future, no matter how out of reach that may feel. This is far removed from the conditions of slavery.

Slavery and debt are both serious issues and there are similarities. However, the common aspects are superficial at best. Debt will trap you. When your money doesn’t stay with you in order to pay interest to credit card companies and lenders, it’s understandable to feel like you’ll never get ahead. The possibility exists, and people in debt have options for improving their lives regardless of the difficulty. The same options aren’t available to slaves without the threat of death.

What do you think? Is it fair to claim that debt is slavery?

Photo: kudumomo

The original version of this article, Your Opinion: Is Debt Slavery?, is copyrighted by Consumerism Commentary.

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The world cheered as the thirty-three miners trapped a half-mile underground in Chile for more than two months were pulled aboveground to safety. The rescue mission was a fantastic success. Aside from the miners, no one can be happier for their survival of the ordeal than their families. Mining is a risky profession even when mines are relatively safe, and I know how unlikely it is that I would ever wish to work every day with the constant threat of being trapped.

From an event like this, observers like me can do not much more than take away some good tips for living our lives and handling our finances.

1. Life is more important than money. Mining is a risky business, but men around the world take these jobs because their paid relatively well and helps them provide for their families. This may be obvious, but it’s good to have a reminder occasionally. You can always earn more money, but a lifetime is a finite resource. Don’t get bogged down with financial details to the point at which it affects your ability to live; keep it simple so you can spend your time living.

2. Prepare your family. These families were lucky; the breadwinners have lived to work another day. They will go on living, providing for their families, for what I hope will be a long time. The situation could have easily been worse, and that income would have disappeared. In financially sophisticated societies like the United States, life insurance is available to help families survive after the permanent loss of an income. Have life insurance if anyone else relies on your income for their well-being.

3. Stay organized. If you are the individual who takes care of the family finances by paying the bills and monitoring the accounts, think like a business and create a succession plan. Train someone else in the family, your wife, husband, child, or parent, for example, to access all the information that is needed to take care of the financial necessities in the event you find yourself unavailable for an extended period of time.

4. Never lose hope for the future. In a tough ordeal like this, hope can be a powerful enough force to keep someone alive. Draw upon hope by thinking about your family and friends, and when you are with them, ensure they understand your appreciation.

5. Even today’s big issues are not so big. As all miners survived a worst worst case scenario, there is never reason for anyone else to believe that they can’t make it through everyday problems that are much more trivial. When all you care about is surviving until the next day, it doesn’t matter who the president is, you won’t be upset you missed your favorite television show, and there is no need for the latest iPhone. In the end, these things will hardly matter.

6. Teamwork results in the whole being greater than the sum of its parts. Even people who function best individually rather on a team should work to align themselves with like-minded people. Whether you’re working on a team or being a member of a group with whom you have interests in common, you will have a support group when needed. Living is a social activity, and people who associate in groups of any sort are happier, more successful, and live longer than those who chose to be alone.

I’m inspired by stories of survival, and I often wonder if I have what it takes to survive the same ordeals. I don’t know what I would do when faced with a terrible situation. I do hope my survival instinct is strong enough. For those of us whose exposure to danger is limited to driving daily on the New Jersey Turnpike, Garden State Parkway, or similar highway, our problems are never as bad as we often believe they are.

The original version of this article, 6 Money and Life Lessons From the Chilean Miners, is copyrighted by Consumerism Commentary.

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Several years ago, I decided to take advantage of an opportunity to pursue a master’s degree in business. I had been working in finance for a while, and as someone who believes in lifelong education, I figured it wouldn’t hurt to obtain an MBA. I took the relatively unpopular route of pursuing a degree where the instruction takes place online.

The choice was spurred mainly by the fact that when I attended college as an undergraduate, I participated in a class with a professor who designed one of the first web-based campus learning systems. This was exciting technology.

I’ve written extensively but not completely about my experiences obtaining this MBA. In summary: the experience was not perfect, the courses were much more difficult and required more teamwork and focus on communication in difficult circumstances than typical, classroom-based education, and this type of education still suffers and will probably for a long time suffer from a stigma. Like any graduate program, the first classes were full of students who were not dedicated and were not the caliber of learner and communicator you would expect in a graduate level course, but by the end of the program, I was amazed with the level of professionalism, dedication, and proven success among my classmates in my final courses.

I learned interesting information, so my main goal was achieved, though I often question my desire to learn more about business and corporate finance anyway.

This also came at a time when MBA graduates were common, eventually decreasing the value of that degree in the employment marketplace overall. And of course, the fallout in the finance industry has continued to mar the reputation of the MBA, even degrees awarded by Ivy League institutions.

I would argue that an undergraduate degree is always worthwhile; here are some thoughts for determining whether a graduate degree is also worthwhile.

What are your goals? When it comes to MBAs, I can safely say most people pursue this degree in order to increase their salary. In this case, the only measurement that matters is the same one you’ll focus on in an MBA financial class: a cost-benefit analysis based purely on the numbers. But this is not the only reason people decide to attend graduate school.

Some people decide to go to graduate school, particularly in an economy with high unemployment, to mark time while they’re waiting for better job offers to come around. Others choose to pursue post-graduate education because they have a thirst for knowledge and feel comfortable in an academic setting.

There are many career paths that require a postgraduate degree, as well. If your goal is to succeed as a doctor or a lawyer, a graduate degree is not only worthwhile but necessary.

How important is prestige? Perception is reality. It’s quite possible that you can get a better graduate education at a state university than you can at an Ivy League school. If the people you want to work for generally have Ivy League degrees, you will want to emulate your future bosses and mentors. If the purpose of pursuing education is broadening your knowledge, then all you need to worry about is finding the best education for the best price.

Will you recover the cost of tuition? If you’re working for a company that’s willing to pay for most or all of your education, go wild. If the employer restricts the benefit to those who stay with the company for a certain amount of years and requires you to reimburse the company for tuition if you leave, consider whether the company will really provide the opportunities you’d be interested in with your new degree. Sometimes the best offers only come when you move from one company to another.

If you aren’t receiving any tuition assistance, and particularly if you have to take out loans, finances must be at least one of your considerations. Is it likely your income will increase with this new degree? How long will it take for your salary differential to cover the cost of tuition and interest on the loans? How long will you have to continue paying off those loans?

Also consider whether taking on a master’s degree will require you to take classes full-time and cut back or eliminate the time you spend working, drastically reducing your income over that time. A break in income can have long-term detrimental effects to your wealth accumulation as well as future salaries.

For the numbers, Liz Pulliam Weston offers an analysis of averages.

While the decision to pursue a graduate degree must consider finances, money isn’t the only factor. It’s dangerous to take on a program that would put your financial situation in jeopardy. Decide if the benefits you could receive from a graduate degree, financial and otherwise, outweigh the costs. Choose the graduate program that is best for you and your goals. Perhaps you can reach your goals through continuing education outside of a master’s degree, too.

If you keep these things in mind and decide to pursue a master’s degree, you will find that it is worthwhile.

The original version of this article, Is a Graduate Degree Worthwhile or Worthless?, is copyrighted by Consumerism Commentary.

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My household has almost always included pets. First, let me establish the true hierarchy. It’s very clear when you live with one cat or more that they own the place, and we humans are only permitted to share living space with them because we provide food and shelter. The only years I’ve lived in a house or apartment not “owned” by a cat were when I was living in a dorm on my university’s campus and for some time following graduation.

As a single man without a human roommate, my cat spends a lot of time with me. He greets me when I come home from work and spends the evening at my feet while I work on Consumerism Commentary and other projects. What we interpret as unconditional love from a pet like a cat is invaluable — you cannot put a price on such a thing.

That’s what we’d all like to believe, anyway. I knew this when I wrote about 10 unusual ways to save money for U.S. News & World Report. I had the apparent audacity to suggest that if you cannot afford the responsibility of fully caring for a pet, you should not have a pet. More precisely, I said, “get rid” of the pet, which may have been a more heartless way of stating the fact, but I still stand by the thought behind the words.

Pets are money drains, cute and lovable money drains. My cat happens to be a low-maintenance, frugal pet. Food and litter cost me only $50 a month or so, and that’s normally the bulk of my expense. I took my cat to the veterinarian this past weekend for a check-up and to determine whether there’s a pathological reason he lost weight over the last few months. The one visit cost more than $250. While results of the blood test are still to be determined, the vet was able to tell during the visit that my cat’s gums are not healthy. Possibly in an effort to scare me away from a procedure, he mentioned that full dental work could easily be $1,000.

He’s an older cat, and as he continues to age, I expect expenses like these to increase. But my experience so far pales in comparison to my boss’s dog. Her dog has a thyroid problem that keeps the pet on and off medication. Not only must she pay for his drugs, repeated visits to the vet, and special dietary considerations, but she also must factor in the cost to clean up after a large dog that cannot always control its bodily functions until it is let outdoors.

Taking care of a pet can be a significant expense, and it is not a responsibility that anyone should take lightly. If you’re not in a position to take care of a pet, including the ability to afford a healthy lifestyle that involves regularly visiting the veterinarian and paying for procedures that ensure the comfort of the creature’s continued existence, you should not own a pet. Living beings deserve better care, and love is not enough.

If your financial circumstances change due to forces beyond your control and caring for a pet is a major expense that you can no longer afford, then you must at least consider your options for removing the pet from your care. While adoption agencies are already overcrowded with pets who need a home, living creatures designed for domestication, as are dogs and cats, deserve families who can care for them fully, not just with love.

When my friends had baby who was determined to be allergic to cats, I agreed to adopt their pet when they were having difficulty finding a home for him. This is the cat who has lived with me for the past five years. I agreed to adopt knowing I was likely to be able to care for him through his old age, not because I selfishly wanted a pet. I would not have been able to do so several years earlier, a time I was having trouble affording necessities for just myself.

I strongly suggest considering the financial and emotional responsibilities before committing to care for a pet. The “unconditional love” we receive from pets is not worth the financial hardship we may encounter if we are not prepared for all the responsibilities. The New York Times has an insightful look at the true cost of pet ownership here. I found this link on Free Money Finance, where FMF often discusses the financial realities of pet ownership.

Update: For more on the realities of pet ownership, take a look at Donna Freedman’s article, Why You Can’t Afford a Dog. Also, PetFinder has these tips for saving money on pet care.

The original version of this article, Pet Ownership: A Financial and Emotional Responsibility, is copyrighted by Consumerism Commentary.

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A person feels most at peace with his or herself when the major aspects of life are balanced. We look at workaholics and overachievers and wonder about all the interesting or wonderful parts of life they may be missing.

My first boss was a workaholic and overachiever, and he had trouble understanding that not everyone was like him with the same goals and priorities. On occasion, he would work in the office until three o’clock in the morning, fall asleep at his desk, and wake up at six o’clock to continue. I convinced myself of the importance of sleep for maintaining a healthy and long life at that time, and it may be needless to say he and I had a number of philosophical differences.

He was the executive director of an understaffed non-profit organization that had a tiny operating budget and a grand mission, so his work was never done. When you run the only company in the world that does all that this organization does and you manage a product that is considered one of the best of its kind in the world, you can’t get to that point by trying to achieve balance in your own life.

In the office where I work now, we talk about “work/life balance.” This is the idea that the life someone has outside the office is important, and work should not always prevent emphasizing things that make a person more than just an employee. Most people do not want to be fully defined by their job.

The goal of balance between work and “life” is more achievable when there is little pressure to be the best in the world. At the non-profit organization, which I can’t describe in more detail without identifying myself, work was life. That’s just the way it had to be in order to operate on the level that was expected of us as employees and as an organization. And it works when you have the right team.

Business owners are often in a similar situation, especially when first getting their business off the ground. For them, there may be no such thing as work/life balance. Often, new business owners spend as much effort and time as possible working on their project in order to make it viable. In order to do this, they must make sacrifices in other aspects of life.

Olympic athletes don’t have a balanced life. CEOs of global corporations know that they make sacrifices in order to achieve their goals. The most successful musicians and bands don’t rest until they’ve perfected their instruments of choice. Scientists who make paradigm-shifting discoveries don’t clock out at five o’clock and go home to their families.

Over time, our goals may change; someone who started their adult life looking for balance may feel the need to achieve something great while another individual who came out of the gate with a clear mission to succeed may find other aspects of life more important. It’s always important to pay attention to your inner desires and follow the path that works best for you at that particular time.

The good news is that not everyone has lofty goals and expectations. For most people, striving for balance is a reasonable and admirable approach. Nevertheless, balance is not the path to world-class achievements.

The original version of this article, The Quest For a Balanced Life, is copyrighted by Consumerism Commentary.

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As you know I’ve been writing for Consumerism Commentary since 2003. I’ve been blogging, or chronologically updating websites, since 1994 or 1995, at that time running a web server called “Winhttpd” from the computer in my dorm room. My university did not yet offer web server space to students, but every dorm room was wired for cable television and Ethernet. I soon convinced the university to let me use space on the main web server normally reserved for the college’s formative central web site and the few collegiate departments whose department chairs were wise enough to create their own web pages.

I’ve been building online communities before the World Wide Web was wide, since 1991 or so, starting with a local dial-up bulletin board system. It’s only recently that I began earning money from these types of activity, and most of that income is generated by advertising.

A few months ago, I stopped sharing my income reports alongside my net worth reports. There are many reasons I shouldn’t be publicly sharing my specific income numbers, but most importantly, my accountant thought it would be a bad idea. Even when I did publish my income reports, I did so without much detail. I reported my “other income” as one number, grouping together a variety of income sources without drilling down to the specifics.

I receive many questions each month about how I earn money outside of my day job. Without sharing specific numbers, here are the major sources of my “side business” income, including each source’s percentage of the total income. The figures are based on January through April 2010.

Various affiliates

If I write about a product or service on Consumerism Commentary, whether it’s an ING Direct savings account or a movie that can be purchased on Amazon.com, I check to see if the company pays publishers for sending visitors to their website. I’d rather keep readers on Consumerism Commentary, and so would most publications. If you look at major newspapers’ online presences, you’ll see that they rarely link to other websites from within their articles. In most cases, these companies do not pay publishers.

A few companies do, however. Most will only pay a publisher if a visitor completes a certain action, like opening a bank account or buying a DVD. Furthermore, most visitors who click on these links do not take any action. Therefore, very few of these links actually generate income.

I do not write articles based on affiliate relationships, and I’m very careful to avoid as much as possible any outside influence. I always share my opinions, whether good or bad, regardless of affiliate relationship.

Google AdSense

This was the first type of advertising I ran on Consumerism Commentary, beginning in November 2004. It continues to perform satisfactorily, though Google is temperamental. Performance fluctuates significantly, and if Google for some reason decides that this blog deserves a lower “ranking,” I could lose significant cash flow. This pressures me — in a good way — to keep writing quality articles, but it can be frustrating at times because Google’s algorithm is beyond my control.

Google has a broader effect than the effect on AdSense income. Despite competitors’ efforts, Google is the primary gateway people use to find information on the internet. Just about all of this web site’s traffic aside from regular and occasional Consumerism Commentary readers comes from Google. Without visitors from Google, I’d be unable to attract most advertisers.

Direct advertising

Google is a third party when it comes to advertising. Working directly with advertisers can be more profitable. I speak with a number of advertisers directly who are interested in buying advertising space on Consumerism Commentary, on the Consumerism Commentary Podcast, or on other websites I maintain.

Direct advertising is currently a smaller piece of the income picture than it was a year or 18 months ago. While the economy is beginning to recover, it recently has been difficult finding high quality advertisers.

Miscellaneous income

Additional income each month comes from syndication rights, academic database listings, producing podcasts for other websites, freelance writing, and website memberships like the Friends of pfblogs.org. I haven’t had as much time to nurture these income sources as I would like.

Managing and growing the side income is a full-time job in itself. Add this to the full-time job of writing for and managing Consumerism Commentary, a few hours each week managing other projects, as well as my full-time day job and managing a career (such as it is), it’s easy to understand how I’ve been spreading myself thin. This could be the reason I haven’t seen the kind of growth I would have liked over the past year.

Perhaps the key to this growth is leaving my day job. I had planned to do just that at about this time. As I hinted yesterday, the lack of growth over the past year has made that decision more difficult. This is despite earning a side income large enough to make a living, in many months expressible in multiples of my day-job income.

You can do it, too, perhaps

Part of my success must be attributable to the fact that I’ve been doing this for a long time. Often, people start blogging — particularly about personal finance, which is seen as a lucrative niche — with the sole purpose of making money. Before you set out to earn a living from blogging, I suggest you examine realistic expectations for earning money.

The original version of this article, How I Earn Side Income From (Mostly) Blogging, is copyrighted by Consumerism Commentary.

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One successful retail business model is the concept in which a company sells a main device at a discounted price while the necessary, refillable or replaceable supplies for that device are sold at a premium. One example is the ink-jet or laser printer; the printers are generally priced to be bargains, occasionally included for free with computers, because the manufacturers know the customers will be coming back to the well for ink cartridge after ink cartridge. A consumer who buys a Canon brand printer will basically be locked into buying Canon brand ink.

The same is true for cartridge-based razors. Some time after college, I graduated from the electric razor to the Gillette Mach 3 razor and shaving cream system. I had heard that making this switch would be better for my skin, and like Smithee, I was dealing with razor bumps and ingrown hairs. I have a habit of sticking with things for a long time even if they don’t work, and this was not an exception. The razor-in-a-cartridge system was an improvement over my cheap electric razor, but I still wasn’t quite happy with the results.

Ten years later, I decided to make the adjustment. Other shaving techniques, like the use of a straight or double-edge razor, was foreign to me. I remembered reading an article by someone I knew as The Frugal Law Student, teaching his readers on The Art of Manliness how to shave like their grandpas. Searching out the article and reading advice from more experienced shavers on the Badger & Blade message board, I took the plunge.

In February, I ordered new shaving materials from Amazon.com:

• Merkur Model 180 Long Handled Safety Razor ($32.49)
• Omega Stripey 100% Pure Badger Shaving Brush with Stand ($27.25)
• Colonel Conk World’s Famous Shaving Soap, Bay Rum ($6.20)

The razor came with one blade, but that would not be enough for me to grow accustomed to a new shaving technique. Armed with advice from the message boards, I purchased a blade sampler pack from Amazon.com ($38.75 for 80 blades) in order to determine which brand of double-edged blade is best for me. I am still progressing through the brands, experimenting with my technique, and discovering what works best with my skin. Each brand is surprisingly different. My favorites so far — those which do not do much damage to my skin while providing the smoothest shaves — include Feather and Astra, while I will likely never let another Bic razor touch my face.

While this seems like a significant financial outlay at the beginning, it’s a much cheaper system than a cartridge system. My start-up cost was $66, and the recurring costs of blades at one blade per week will be about $0.50 a week or $25 a year if I continue shaving three times a week with multiple passes using one blade per week. You might be able to find blades on Amazon for even less, approaching $0.15 a blade. The shave soap might last six months so that’s another $12 a year. The total cost for the first year is $103, and the total cost for every subsequent year is $37.

Compare this with the costs of the cartridge system. The Gillette Mach3 Turbo costs $8 but 16 blade cartridges cost $30, or about $2 a piece. One blade a week (three shaves) adds up to $100 a year, though we can subtract $8 from the first year because the razor includes four blade cartridges. (In other words, they’re giving away the razor.) Shaving foam costs $18 for a pack of six, which might last one year. The total cost for the first year is $118, and the total cost for every subsequent year is also $118.

When I previously shaved with the Gillette Mach3, the earlier version of the Mach3 Turbo, I would do so in the morning and the process would take about three minutes. Shaving with a double-edged blade and safety razor is more of a ritual. At first, it took from twenty minutes to half an hour to shave properly, including hydration, building and applying the lather, shaving with two or three slow passes, and further hydration. To accommodate the new requirements of my time, I shaved at night. I woke up in the morning still smooth, and that was never the case when I shaved at night with a cartridge razor.

As readers have already mentioned in the comments below, it is possible to keep this process under ten or even five minutes. My face has adjusted to the new shaving technique and the process no longer requires as much hydration, speeding the process further.

More important than the cost savings, and worth the extra time and effort, is the fact that my skin is much more comfortable. For the most part, I have no more ingrown hairs, razor bumps on my neck, or other unsightly skin blemishes due to dull blades that require pressure and pull hairs away from the skin.

Although I’m happy with the change I made, whether you follow suit is up to you. It will save money and will eventually be just as quick as shaving with a cartridge razor, but it’s a personal choice. If you are already satisfied with using a cartridge razor, there is no need to change your process, but this has proven to be worthwhile for me.

I’ve already mentioned some of the resources I’ve used to improve my shaving technique, but I also recommend the instructional videos on YouTube created by mantic59 for anyone who is interested in pursuing a similar path. As you watch these videos and read articles on Badger & Blade about finding the right technique, you will find a lot of differing opinions. It’s best to take some suggestions and experiment in order to discover what works best for your skin. There is one thing to be sure about: just about anything other than a cartridge system will be best for your wallet.

I should also note that I use no other chemicals on my face during this process other than the shaving soap. I prepare my face with hot water, keep hydrated with hot water, and rinse only with cool water. I don’t use any fragrant aftershave chemicals, astringents, or balms. There is a tendency for my skin to dry out after the shave if I don’t hydrate with enough cool water.

What materials do you use for shaving, and are you satisfied with the results?

Photo: Dharion

The original version of this article, Getting a Better and Cheaper Shave, is copyrighted by Consumerism Commentary.

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Over the course of thousands of years, the character of money has gone through various metamorphoses. Bartering was the chief method members of a society acquired their individual needs until they developed shortcuts. Since that first shortcut, societies haven’t stopped creating more shortcuts, further separating the method of acquiring something from those things that are acquired.

Money is just a temporary replacement for things, with a value that everyone accepts as a standard. If you have meat that I need, but you don’t need the clothing I create, I can give you money rather than clothing. You can then take that money to someone else and offer it in exchange for something you need, like knives to cut the meat you offer to your customers. Here, money is only a tool for getting the materials you need.

This money is the first level of abstraction — a representation, just like a word is a representation of an idea. Abstraction layers are helpful because they allow replacements to be used with the same monetary value of items that aren’t available. That is, you use coins to buy the meat because you don’t make the knives the butcher needs.

The next abstraction layer is credit. You don’t need cash on hand when you can pay with credit cards. Technology has led us to what must be the final abstraction level conceivable; a world where our “money” exists only as bits of data, zeroes and ones, in a bank’s master computer database. If we need cash, we can exchange some of those bits, lowering our balance in the database, and receive cash out of a machine, but that’s less and less necessary when we can pay for more things electronically. Debit cards, ACH transfers, and Federal Reserve wires don’t necessarily involve any cash, just a rearrangement of data in computers.

This technology makes it much easier to keep our hands off our own money. This should be one of the best things that can happen for the state of our own personal finances. Pay checks are delivered right into our bank accounts. Employers don’t send cash to their employees’ banks, they transfer “electronic funds.” The banks receive instructions electronically and increase the balance in your checking accounts overnight.

If you have created automatic savings or investments, the bank will make these transfers without any human intervention. Those consumers who take advantage of all that technology has to offer have likely put as much as possible on auto-pilot, including paying bills electronically and perhaps receiving automated shipments of underwear every three months.

Therein lies a problem. Automation is an abstraction layer that separates you from your money. While much of the automation we’ve discussed on Consumerism Commentary is designed to take good habits, amplify them, and make them occur without thought and without the interference of human error, if you take this concept too far you cede control of your finances.

Going back to the original bartering system, the things we make have intrinsic value. As you increase abstraction by using money that represents those things, the credit that represents that money, the digital bits that represent both credit and money, and the automation that keeps your brain away from the decision-making process, the real value becomes further hidden.

Here’s the result: it’s easier to spend more than you need to the further you get away from intrinsic value. We know this because despite best intentions, overall people spend more with credit cards (a higher abstraction layer) than they would with cash (a lower abstraction layer).

While it’s a good idea for the basics to remain automated, return your brain to your money and get involved with spending decisions. I have a good personal example to share. A few years ago, I set up automatic payments to take care of my electricity and gas bill from PSE&G. I’m busy, so I don’t like to be bothered with writing checks and sending them through the mail. But that’s the same excuse I have for hardly looking at the detailed electricity bill.

I used to be familiar with my energy usage trends as well as the fluctuations of energy prices, but no longer. I look at my checking account balance online every few days, so I notice when the bank makes the bill payment for me, but I have not looked at monthly trends to determine what I could do to cut costs. As a result, I’m likely spending much more than I need to.

It takes time and effort, but it will be worthwhile to become involved with your own money once again. If you made your automation decisions many years ago like I have, you might now be in a different situation requiring different decisions. If you’re not intimately involved with your money, you’re likely not making enough decisions, and as a result, your future may not be as financially secure as it could be.

For more on “unautomating” your finances, check out Unautomate Your Finances, an e-book by Adam Baker from Man Vs. Debt. This e-book isn’t free, but it is an easy and enjoyable read with several tips for getting your brain involved in your money again. You do not necessarily need this e-book to know what to do. Just start paying attention and know where your money is and is going at all times.

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The original version of this article, Automation Moderation: Don’t Let The Machines Control Your Money!, is copyrighted by Consumerism Commentary.

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There’s something satisfying when looking at a bank statement. I know firsthand that this is more true when your balance is positive. The bottom line is a hard number; if it says $100, you know exactly how much money you have. The net worth, at least the way I count mine, is just as hard a number. The value of assets like cash and most typical investments is well-defined, as is the amount you owe on loans.

Net worth is an incomplete measurement of total financial worth as a living person, however. Human capital, your ability to increase your net worth in the future, is a bit harder to nail down, but it is an important factor to consider. There are formulas that might result in a number, but this tally will never be as well-defined as a balance on a bank statement.

On average, it’s sage to assume a healthy, smart twenty-year old with $1,000,000 to his name is in a better financial state than an sixty-five year-old with $1,000,000. Despite the same net worth and the same purchasing power on the same day, the younger individual’s human capital put him far in advance of the older individual.

Even if these two individuals have the same annual income, their financial reports don’t tell the full story. The young individual has decades to earn more income and improve his financial well-being. While the sixty-five year-old’s life isn’t over yet, there are fewer possibilities. It’s in any person’s best interest not only to earn as much as their potential, but to increase that potential.

Here are ten ways to increase your human capital.

1. Get more education. There will always be a discussion about whether certain levels of education are worth the investment, and many people fail to look at the full picture. You may hear about ROI (return on investment), but many people have a narrow definition. Your return is more than the salary you receive out of the gate, and it’s even more than all the income you would earn throughout your lifetime while practicing the specific skills you learned.

The process of continually seeking more education keeps your mind active and working hard, improves your ability to learn anything (cognitive skills), and opens your mind up to new ideas. These are all qualities that can increase your human capital.

Read more about increasing your education to boost your human capital.

2. Get more experience. If you believe that your job is confined to what happens between 9:00 AM and 5:00 PM, your opportunities for advancement might be similarly limited. I’m a strong proponent for not making your job the only thing that defines you, but developing a work ethic in which you expend effort and achieve at levels beyond what is asked of you, you can increase your human capital.

Read more about gaining experience.

3. Become a versatile subject matter expert. Like Ron Howard, wear many hats. As a young actor, Ron knew what he really wanted to was direct, so he ensured he had the opportunity. He may not have the opportunity to be a highly-compensated leading man in a film, but he could be a highly-compensated producer. Rather than at film, strive to excel at multiple facets of your job. Learn other people’s functions and how to manage other people to increase your human capital.

Read more about becoming an expert.

4. Explore beyond your industry. When the housing market collapsed, thousands of mortgage brokers were forced out of their jobs. Many of these individuals didn’t have much training in any other industry. They had to trade in their six-figure commission-based incomes for low-wage sales training positions or opt to wait for the market to return. With skills in an industry that doesn’t fluctuate due to market cycles or other external forces, you will have a higher human capital than someone whose job will always be a victim of circumstances.

Read more about exploring beyond your industry.

5. Get involved. If there is an issue you care about, seek organizations whose mission includes advancement of that issue. Volunteering for a non-profit organization or speaking out to express your passion is a good way to increase your value to the world and your human capital at the same time.

Read more about volunteering.

6. Improve your public speaking and presenting skills. If you are a good speaker or presenter, you’ll be several steps ahead of someone with the same knowledge and technical skills who does not know how to perform in front of an audience. While Toastmasters is the traditional path to improving public speaking skills, a better choice is acting. As an actor you learn two important aspects that might not be covered in normal public speaking: presence and emotional communication. These are add-on skills that increase your human capital.

Read more about public speaking.

7. Cultivate your human network. In order to boost your human capital, you need to focus on the people you know and meet in two ways: breadth and depth. The more people who know you and are familiar with your skills and interest, the more opportunities you will have to seek opportunities. But not only should you expand your network, you should cultivate your most important contacts. And if someone in your network asks you for help, say yes almost all of the time.

Read more about cultivating your network.

8. Publish your thoughts. I’m a strong proponent of writing online, the easiest way to publish your thoughts. Certain methods of doing so can result in growth in human capital. Keeping a journal of your daily activities is not one of these methods, unless you see journaling as a path to increased income. Most of the time, you should write within your field of expertise. And, unlike me, you should use the name you would like to be known professionally. As your writing increases in volume and quality, your human capital will increase as well.

Read more about publishing your thoughts.

9. Stay healthy. This is one I should take to heart. Find time to be physically active and eat healthy foods. While we all have stories of heavy smokers and drinkers who live beyond one hundred years, this is not the norm. If you want to increase your human capital, you want to behave in ways that are most likely to extend your life. In particular, you want to prolong the years of life during which you have an ability to earn income. Your health is not always entirely in your control, so you should control as many aspects as possible.

Read more about staying healthy.

10. Start early. Whether you’re investing or looking to increase your human capital, you want to have time on your side as much as possible. When it comes to investing, longer time periods smooth out risk and offer opportunities for compounded returns; with human capital, the earlier you start, the more time you will have to earn income. Additionally, the younger you are, the easier it is to shift gears and start a new career if necessary. This ability is a significant factor in the measurement of human capital.

With an increased human capital, an ability to earn more income regardless of external forces, you are able to take fewer risks with your investments. Conversely, a lower level of human capital might result in unstable or less income over time, necessitating more risk in investments to achieve a higher return. Human capital is therefore an important part of your total financial value and should be factored in some form in addition to your other financial metrics like net worth, income, expenses, cash flow, and a variety of financial ratios.

How do you increase your human capital?

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The original version of this article, 10 Ways to Boost Your Human Capital, is copyrighted by Consumerism Commentary.

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I can’t completely fault companies like Amway, Mary Kay, and Lia Sophia. They know that friendship results in two important qualities: trust and guilt. These two qualities are important to companies because they make the process of selling products much easier. I find it relatively easy to politely decline — and hang up on if necessary — a salesperson who calls me uninvited in order to get me to upgrade my phone service or subscribe to a theater. Although I usually don’t have a problem, it can be more difficult to say no to a friend.

In most cases, people join these multi-level marketing (MLM) programs not because they believe in the product but because there is a system designed to allow them to earn significant amounts of money if they play the game right. If you are an influencer in your social circle, you will be able to convince your friends to sell products and host their own parties increasing your income. “Party” is just a code word for “sales pitch.” You can’t achieve success as a multi-level marketer without burning some relationships.

MLM isn’t the only issue. Everyone knows someone who is a social seller. From my observations, the products involved are almost always low quality, too expensive, or both. For example, someone in my office was trying to sell Girl Scout cookies to co-workers the other day for $4 a box. When asked, she had to explain that $4 was the real price and she was not artificially marking the price up. That’s a difficult sell when another co-worker was offering boxes of Girl Scout cookies for $3.50 a piece a few months ago.

I like these cookies, so I usually buy a box each year. Although I’m driven partly by my enjoyment, I’m also driven by guilt. One box of Girl Scout cookies is as far as I’ll go, however.

Dealing with co-workers trying to sell you products you don’t want is easier that dealing with friends who try the same tactics. When a friend is the seller, pressuring you to come to a party (a code word for sales pitch), you have to be strong.

• First, you can consider going to the party. Don’t bring any money and don’t bring your credit cards. If you see something you truly like and is a good deal, it will be available from your friend later.
• Politely decline. If you buy from your friend and there is a problem with the product, your friendship could be ruined. If the seller is a co-worker, you could be making your work environment uncomfortable. There are many stories about friends disappearing or not answering calls once they take their money, and the sale could go bad no matter how close you are with your friend.
• If sales pressure continues, make it clear you are not interested. Sometimes you have to say more than, “No.” Just explain that you’re not interested in the products and you’d prefer to keep the relationship away from business.

Unfortunately, just by denying a friend, you might lose your connection. That may be the fear that prevents people from saying no more often. Saying no is fine, because a good friend won’t use you for their own financial benefit, and a good friend won’t pressure you into something in which you’re not interested.

How do you deal with friends who want to sell you products?

Photo: Pictures from Heather

The original version of this article, When Your Friends Become Social Sellers and Multi-Level Marketers, is copyrighted by Consumerism Commentary.

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I don’t have to remind myself that I’m not an expert when it comes to money. While my choices have improved over the past few years, I still make mistakes at about the same rate I always have. Even recently, I thought I could outsmart the public and take advantage of Toyota’s recent bad news. I bought shares of Toyota Motors (TM) on January 28 with the impression that temporary bad news wouldn’t stick to a strong brand. That purchase hasn’t worked out well so far; the bad news keeps coming.

So I am taken aback when friends and family ask me for financial advice. I am not an expert. The concept of “expertise” is meaningless when it is possible for people to self-brand themselves as experts. Real experts don’t write dust cover autobiographical snippets calling themselves experts. They don’t solicit endorsements from authors they admire or recommendations from their friends on LinkedIn. Expertise can only be observed from the outside.

What if Carl Jung were alive today? Would he be a recurring guest on Oprah with a series of books and seminars to sell? Would Adam Smith, if creating his best work in the early 21st century rather than the 18th century, focus on building an email distribution list for marketing a series of products to his customers?

Since I am not an expert, I don’t offer financial advice to my friends. Even though most do not read Consumerism Commentary on a regular basis, they all know I write about money every day. They may not realize that I do this not because I have all the answers and I need to share my knowledge with the world, but because I always have questions and I use Consumerism Commentary as a resource and sounding board.

Every once in a while, a friend has a question about which they believe I can help. I’ve been asked questions such as whether a Roth IRA is a good investment vehicle, whether I would recommend a bank’s forced savings program, and even asked to analyze someone’s complete retirement portfolio. Some questions are easier for a non-expert to handle than others.

I try to avoid even the easier questions. I want to help, but it’s not my place to tell my friends how to spend their money or how to invest. In the worst case scenario, I might offer suggestions that end up being detrimental down the road, and advice that turns out bad has the potential to disturb the relationship. Another way to lose friends is simply to present ideas someone just doesn’t want to hear.

Regular readers of Consumerism Commentary might be in a similar situation. An interest in smart money management is occasionally seen by outsiders as expertise. So here are some tips for handling friends who turn to you for financial advice.

1. Determine your friend’s true intent. Is he looking for someone only to listen to a complaint or is he willing to accept specific suggestions? This is one key to communication that would be difficult to interpret if you are not speaking in person. Sometimes, a concerned friend is looking for only confirmation that a purchase won’t have a long-term negative effect on their finances and not a detailed spending plan.

A friend’s willingness to talk about money is not an invitation for you to offer your suggestions. Look for specific questions directed to you and try to determine if the friend asking the questions wants truthful answers or just a friendly ear.

2. Redirect your friend’s attention to experts. If the question is simple, feel free to offer a few opinions. When a friend is looking for a quick recommendation for a new savings account, I usually start with ING Direct due to the bank’s simplicity, popularity, and level of service, but I might offer a few options that offer higher interest rates if I feel that my friend is open to more than just the basics. You don’t have to be an expert to handle this kind of request; opinions based on personal experience are generally welcome.

But when it comes to questions whose answers depend more on an individual’s full financial picture, like whether to invest in a Roth or traditional IRA, I stay away from making specific decisions on her behalf. I may offer some generalizations and examples, remind her that I’m not an expert, and suggest some resources that might help or a financial adviser who will take the time to analyze all the relevant numbers.

3. Don’t offer unsolicited advice. If you see a friend in financial trouble, it might be tempting to offer your help. It pains me to see a friend making poor choices and setting himself up for financial failure in the future. It is none of my business, however, so I won’t get involved unless he asks me for thoughts. Even when he does ask, I am very careful to stay as uninvolved as possible. There may be a point at which intervention is necessary, for example, if his financial choices hurt others in addition to himself. That should be saved for extreme circumstances.

I admit that I find it very hard staying silent when I overhear co-workers offer each other bad financial advice — but I stay out of the discussions.

4. Don’t lend money to solve your friend’s financial problems. Adding another obligation is usually a Band-Aid, not a solution. Your friendship will turn sour if your friend cannot pay you back, and you will be bitter when you see her spending money on anything other than repayment. Once you lend money, you don’t want to see your friend taking vacations rather than accelerating his credit card debt payment.

In the rare situation I’ve been approached by a friend needing a loan for any reason, I direct them to peer-to-peer lending services.

5. Remind your friend that your thoughts are only opinions. No one knows for certain what will happen in the future, and even when considering only the present there are few absolute truths. My financial opinions come mostly from my own experiences and somewhat from research. That should be similar to most non-professionals or even someone who considers himself an expert. Any one person’s experience might not fit the model of the mythical “average investor” or “typical American,” and I’m always careful to point this out.

It’s not worth the potential of ruining a relationship with a friend or relative by bringing attention to money-related issues. The best answer for anything other than a simple question is, “That question would be better answered by a financial adviser who can analyze your full financial picture.” Don’t play the part of an expert, just be available as a friend.

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The original version of this article, How To Handle Requests For Financial Advice, is copyrighted by Consumerism Commentary.

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When I started Consumerism Commentary in 2003, after about eight years of writing on the internet in a smaller, more personal capacity, I only had two goals: to track my finances while working to improve my money situation and to learn more about personal finance by finding articles, sharing links, and adding occasional thoughts of my own. Over a year later, I added advertising to Consumerism Commentary, and within another year, the website became more than just a way for me to track my financial improvement, it became an essential part of that progression.

For the last three or so years, I’ve been earning more from Consumerism Commentary than I have been from my day job. At times it has been significantly more, expressible in multiples — enough for me to consider leaving my career behind and write for the website and tend to other related business on a full-time basis. I’ve ultimately decided to make this jump, and now it’s only a matter of timing.

Throughout this time, I’ve been receiving request after request to write more about the income I receive outside of my day job. I’ve been reluctant to write about earning money from blogging. My primary reason for this reluctance is that the concept of blogging is not directly related to the concept of personal finance. Although the topics on Consumerism Commentary occasionally stretch away from pure personal finance, I want to remain focused.

Asking me to write more about blogging would be similar to asking David Bach to offer his opinions about the process of writing a bestselling series of books rather than about the content within those books. (I don’t mean to imply any similarity or equivalence between myself and David Bach.) An even better illustration would be asking Claude Monet to paint his impression of how he paints a scene rather than his impression of a bridge over a pond of water lilies. It’s too “meta,” an added level of abstraction between something that exists and its representation.

I also don’t want to write about earning money for blogging because I’d prefer not to draw attention to my success. Of course, that is antithetical to most people’s suggestions for broadening a “personal brand.” I think it should be obvious that at this point I have little desire to be a renowned expert. No one in the “real world” has any interest in taking advice from someone who calls himself Flexo, a name chosen in about five seconds when there were no expectations for growth. “Personal branding” is furthest from my intentions.

Despite this, I reluctantly admit that earning money from blogging, just like earning money from a career or saving money on non-discretionary expenses, is a legitimate aspect of personal finance. I shouldn’t shy away from writing about the process of blogging.

So here is what I have learned from almost seven years at Consumerism Commentary, and at a lesser extent, from fifteen years writing for the web and almost twenty years building online communities including a popular modem-based bulletin board system in the early 1990s. (I’ll be thirty-four next month; it’s up to you whether you want to consider my teenage years managing a BBS as experience, but it is surprisingly similar to what I do today.)

Consider some of these points before starting a blog to earn money.

1. Increase success by writing about your passions

Which comes first, the topic or the passion? Much of the “earn money by blogging” advice I’ve seen suggests would-be internet moguls should start their business by determining which topic generates the most income overall and creating content within that topic. Unfortunately, that leads to a lot of people writing about personal finance, a lucrative topic thanks to a proliferation of deep-pocketed advertisers in the financial industry. Even broader than the topic of personal finance, it also results in proliferation of less-than-inspiring content, more noise making it difficult to discover the signal.

I don’t see this as a path to long-term success. It leads to frustration when the dollars don’t appear quickly or don’t appear at all. The only path that seems to work well is to start writing only if you have a passion for a certain topic and only if you are willing to dedicate time and effort into creating content at the highest level you can. You don’t choose the topic, the topic chooses you.

2. If you write with dollar signs in your eyes, don’t bother

It’s true that financial success is expedited by focusing on the business aspects of your endeavor, and I often hear from people who believe that if an untalented writer like myself can earn a living by writing on Consumerism Commentary, anyone can. However, most people will not earn a living from blogging-related income.

Many dollar-chasers start writing about the lucrative topic of personal finance without either a passion or interest in the subject. I read perhaps thousands of articles each week and it is crystal clear to me when a blogger is inspired by the topic and when a blogger is inspired by potential income.

Here is what I think about when evaluating whether a blogger is motivated primarily by potential income:

• Is the writer more interested in quality or quantity? Quantity is necessary in order to get noticed by search engines, but quality provides a better experience for the reader. Attaining both would be a good goal; I try to find a balance while other successful bloggers take obsession over quality to an extreme and try to “save the world” with every article.
• Are the articles written for the benefit of the reader, the blogger, or the advertiser? I give exceptional writers free passes to throw in a post for affiliate income if the overall tone of the blog does not involve shilling for companies. If every article borders on advertisement, my impression is the blogger is writing solely for money.
• Does the blogger bother removing spam comments or spam links within comments? A website operator who can’t be bothered to filter noise from comments is not interested in creating a user-friendly experience. Many times I’ve stopped myself from linking to an otherwise excellent article that’s full of spam links at the bottom of the comments section.
• Is there any personality within the articles or does the blog read like it could appear in a textbook? When I was looking to add writers to the Consumerism Commentary staff, I found that those who considered themselves “freelance writers” had a more difficult time bringing something personal to the tone. I like to know that there is a human being behind the words.

It is good that talented experts and dedicated amateurs are able to earn compensation for producing quality content and for making it available to the internet-browsing and searching public. But as the popularity of earning money through blogging has increased, so have the bloggers who are interested more in fattening their bank accounts than they are in adding something valuable to the world.

3. Have a mission statement or at least a mission

Consumerism Commentary began without any income-related goals. Its purpose was to keep myself accountable for my finances and to help me learn more about money. That was, and is, the mission of this website. It sounds somewhat selfish on the surface; Consumerism Commentary is mostly for my own benefit, not for the readers.

This approach is, however, less self-focused than it sounds. The opposite approach would be to write a blog under the assumption that the author has all the answers and with the purpose of teaching others, ignoring the possibility that the author has more to learn. This is self-fashioned or self-proclaimed expertise, and I find it unappealing.

4. Earning money takes time

I don’t know exactly when Google created AdSense, but I do know it was not available when I started Consumerism Commentary. Very few blogs at that time earned money. I added the first AdSense advertisement to the website in November 2004, about sixteen months after my first post here. It was more of an experiment than anything else, and I had no expectations for income.

My cumulative earnings didn’t reach $100, the threshold for receiving the first check from Google, until April 2005. That is six months after the first ad appeared on the website, almost a year after Consumerism Commentary began, ten years after I had been writing for the web, and fourteen years after I started creating online communities.

I was lucky that there weren’t many, if any, other blogs discussing personal finance when I started Consumerism Commentary. There are thousands now, so it is more difficult to stand out in this particular niche. The same is true for the wider web, as well.

But great talent will always rise to the top. J.D. Roth is one of my favorite examples. He started writing on Get Rich Slowly in April 2006 and is one of the finest writers among those focusing on personal finance. Although there were over a thousand personal finance blogs when he started, he quickly rose to the top of the list. J.D. had been writing a personal blog since at least 2001, and that experience should not be ignored when looking at his path to success.

It is almost five years after I received that first AdSense check. Now there are more bloggers competing for advertisers, and putting the recession aside, more advertising dollars to go around. So I believe it is still realistic to expect income to come in slowly during the first year. If waiting six months for the first $100 seems like too much work for too little return, you may want to consider a different business venture.

5. Success takes more than just writing

I am reminded of why I’m perhaps not as successful as I could be. Over the past few years, I’ve been working harder at writing and managing this and several other websites. Unfortunately, I’ve put aside important aspects of building a successful website and community, such as participating on similar websites. As I mentioned above I read thousands of articles each week. About 70 percent of these articles are on “mainstream” websites or major media blogs and 30 percent are on amateur or independent blogs.

With more time, I would be able to participate in discussions and social networking media more. This participation in the larger community will assist with increasing the chance for success with a blog.

So is earning money through blogging unrealistic?

There is significant potential for earning money, possibly even earning a living, through blogging. For many people, especially those who are not passionate and dedicated, financial success will be elusive. My intent is not to discourage but to help manage expectations.

It’s great that free and widely available tools on the internet can help anyone can have a voice. You need to strive for excellence in order to stand out both to readers and to advertisers. It’s not enough to write occasional uninspired articles, put up a few ads, and wait for the money to roll in.

Readers can expect at least one more article on Consumerism Commentary about the specific ways I earn money from blogging with suggestions helpful to those who are writing about their passion and are ready to form a strategy for building diversified, self-sufficient income.

Because I was writing for new audiences, my recent ten-day tour forced me to write better articles than I normally write for Consumerism Commentary. This experience, in addition to my decision to put thoughts together for this article on earning money through blogging, helped me realize that I need to focus on improving my writing skills and find time for more participation within the community.

The original version of this article, Realistic Expectations For Making Money Through Blogging, is copyrighted by Consumerism Commentary.

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The more profitable your employer, particularly if it is a large corporation, the more attention the employer pays to its biggest asset, its employees. Profitable companies offer perks to employees like vacation days, 401(k) matching contributions, health care subsidies, free lunches, on-site day-care, unlimited restroom breaks, and development opportunities. Don’t confuse these benefits designed to woo would-be and current employees with actual caring.

Corporations do not care about employees. Your boss and your co-workers might care about you as a person, and if they do, that’s a good thing. But a corporation provides benefits for only two reasons: to attract the best talent and to keep that talent motivated and productive. Even the primary purpose of health benefits are to keep you in the office doing your work rather than sick at home.

From a corporate point of view, employees are only seen as how they affect the bottom line. This is the same way you should view your employer. Forget about corporate loyalty.

In finance, the term “sunk costs” refer to expenses that have been spent and can’t be recovered. When making business decisions you have to ignore the past and decide what options are the best moving forward. The same idea applies to time you’ve spent with a company. I’ve talked to many people who say, “I’ve already spent fifteen years at this company, so I might as well stick around until retirement so I can get a package.” I’ve heard this even when the speaker had another twenty years before retirement!

The past is a sunk cost. Look only at the present and the future. Those retirement packages are designed to chain you to your employer but with some fancy maneuvering you might be able to get a better deal by changing jobs. Even if you haven’t been working long enough at the company for your 401(k) matching contributions to vest, you can use that when negotiating your compensation for your next job.

Think about your greater state of being in addition to your finances when making life choices, but when dealing with your employer, focus on the bottom line. Just like a company has a responsibility to its shareholders to maximize revenue and minimize expenses, you have the same responsibility to yourself and your family.

The economy is rough right now, and a lot of people I know are sitting tight waiting for better employment news and other indicators that certain companies are hiring again. One of my friends has been out of a job since 2008. Even though it’s an employer’s market, employees can’t let employers take advantage of their talents and work ethic.

Generation Y isn’t the only group of workers rejecting the unblinking loyalty to employers once favored.

• Always keep your eye open for new opportunities.
• Always have a basic résumé updated and ready.
• Always stay up-to-date in your field.
• Always say yes to manageable projects.
• Always look to meet new people in your industry.
• Always let outsiders know you are interested in moving forward with your career.
• Always look for ways to be successful working for yourself.
• Always have options.

What do you suggest to help ensure employers don’t take advantage of employees in today’s job market?

The original version of this article, Treat Your Employer How It Treats You, is copyrighted by Consumerism Commentary.

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Ron Howard, famous mostly for playing Richie Cunningham on the television program Happy Days, is one of the film industry’s most successful directors and producers, having been involved with a long list of films. He directed, among others, Apollo 13, A Beautiful Mind, Cinderella Man, The DaVinci Code, Frost/Nixon, and Angels and Demons. I happened to catch Ron and the rest of the Happy Days team on television this weekend, to celebrate the 30th anniversary of the television show. The special aired several years ago and featured the actors and creative team talking about their experiences.

I’ve seen in previous interviews Ron Howard explain that he was always interested in directing. Garry Marshall, the creator of Happy Days, was a mentor to Ron, and first worked with Ron on an episode of Love, American Style. This episode, “Love and the Happy Days,” was a nostalgic look at the 1950s that wound up being a precursor to Garry Marshall’s Happy Days. Garry’s advice to Ron and to others involved with the show was to wear many hats.

Ron likely knew by this time that his hair was thinning, and Garry’s advice may have inspired Ron Howard’s trademark look of wearing hats to cover up the fact that his is follicularly challenged, but I believe the advice was more meant to encourage action beyond acting. With Ron’s goals of directing, Garry wanted the young actor to experience as many aspects of film and video production as possible.

Specialism vs. generalism

Specialism is the philosophy of finding one thing at which you might excel and nurturing your abilities in that skill, pursuing excellence, without nurturing other skills. This is how many people eventually succeed. For example, Mark Nuccio is the acting principal clarinetist for the New York Philharmonic. To be the principal clarinetist in this ensemble, you simply have to be the best (non-retired) clarinetist in the world. The New York Philharmonic is likely the most coveted ensemble for classical performers, and for a clarinetist aspiring to be the best in the world, the principal position in that ensemble is the apex.

It is likely that Mark has done not much outside of performing and practicing music on the clarinet since high school. Any time he spent on any other activity would be time not focused on the goal of being the best clarinetist in the world. The world needs such dedicated souls.

I see the “specialist” argument used to encourage career growth:

• After 10,000 hours of practice, whether it is playing an instrument or coding in Java, according to author Malcolm Gladwell, you are likely an expert.
• Experts are sought after for most higher-level positions in corporations.
• Personal branding and marketing will be stronger when they involve a single message.

Specialism may well be the ideal for today’s modern, capitalist culture. I’d like to encourage some people, especially those who might have a strong aptitude for many different fields or have no particular driving passion for any career choice, to consider generalism. In Italy during the Renaissance, this was a highly regarded approach to knowledge and experience. Here is the concept of being a Renaissance man (or, today, woman):

It embodied the basic tenets of Renaissance humanism which considered humans empowered, limitless in their capacities for development, and led to the notion that people should embrace all knowledge and develop their capacities as fully as possible. Thus the gifted humans of the Renaissance sought to develop skills in all areas of knowledge, in physical development, in social accomplishments and in the arts.

Benjamin Franklin was a generalist. He is known as a printer, author, politician, political theorist, scientist, and inventor, among others. While he could have spent all his time focusing on any one of these activities, his historical importance relies on him being involved in activities that cross the spectrum. He, and most people who specialize, would not be considered the “best of the best” in any of these fields, but his broad skill set solidified his place in history.

The benefits of generalism are not confined to a chapter in a history book.

Generalism makes you more marketable to companies. I mentioned it is easier for specialists to market themselves — or, more precisely, for marketers to work with specialists, as a specialist would by definition not be very good at marketing themselves unless their specialty is marketing. Even though it is easier, it’s not better. Unless you have evidence that you are among the best in the world at your specialty, it’s quite possible that someone more accomplished at the one skill upon which you are relying is applying for that same job.

In an economy where unemployment is high, the supply of applicants is more than the demand. In this competitive environment, job seekers need to emphasize anything that makes them unique. When a company’s resources are low, they are more likely to be attracted to an prospective employee who can fill many roles. Someone with a variety of needed skills — someone who can take over the responsibilities of more than one function — is seen as a bargain for the salary.

Generalists make better business owners. Particularly during a start-up phase, a business owner needs to take care of various functions by herself. Particularly if the funds for outsourcing have not yet materialized, she needs to market the business, build the website, write up the business plan, secure funding, handle the accounting, negotiate with suppliers, research the market to stay ahead of the competition, advertise, provide customer service for the existing clients, and find new clients. It is not a surprise that, according to the Small Business Association, half of all new small businesses don’t survive four years, even after taking to account that some of these attempts may be an entrepreneur’s second or third start-up.

Specialists are often drawn to entrepreneurship although they lack varied skills necessary for success. Success rates do improve after initial failures, after business owners can determine which skills need refinement.

Generalism leads to a more fulfilling life. Like Mark Nuccio, I could have spent every waking moment practicing my clarinet. I would have become an excellent performer, perhaps even one of the 100 best in the world given the right opportunities and focus. It would still be very unlikely I would have become the principal clarinetist in a Big Five orchestra. Instead, I spent time performing on other instruments, such as trumpet, guitar, piano, and percussion. Experience on a variety of instruments would help me be a better music teacher.

Furthermore, I had interests outside of music performance. I’ve been an amateur computer programmer since I started playing with a Commodore VIC-20 when I was about eight years old. In college, I started a number of minors, including computer science and psychology, eventually settling on music business. Several years ago, when I decided to pursue a Master’s degree in business when the opportunity was almost completely free, I decided against specializing in either finance or accounting; I took enough classes across the business spectrum to get exposure to as much as possible.

More recently, I’ve taken my interest in photography to the next level by enrolling in classes to help improve these skills even though they are not connected to anything I’ve ever done professionally. I have a long way to go before I my photography skills are comparable with professional photographers; in fact, even some of my friends who have had no formal training but have a certain knack often show me how their skills exceed mine. Regardless of my progress relative to others, expanding my knowledge into other areas keeps my brain active and adds more dimension to my identity.

Wearing many hats, as Ron Howard has done after advice from Garry Marshall, will protect that active brain.

Photo credit: SashaW

The original version of this article, Wearing Many Hats: Specialism Vs. Generalism, is copyrighted by Consumerism Commentary.

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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

The original version of this article, Getting Out of Debt: Reductionism and Holism, is copyrighted by Consumerism Commentary.

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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

The original version of this article, Seven Zen Principles to Guide Your Money and Your Life, is copyrighted by Consumerism Commentary.

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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.”

The original version of this article, How to Create Your Own Extended Warranty, is copyrighted by Consumerism Commentary.

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For most humans, life is much shorter than we would like, and for many of us saving even ten percent of our income will never result in a state of wealth within our lifetime. There are too many forces working against this endeavor: a lack of sufficient opportunity, inflation, and unplanned events to name a few. In addition, most people, at least in the United States, save much less than ten percent. It’s no wonder spending other people’s money and going into debt is so alluring for many.

Even if wealth eventually arises through conscious, compounded saving, by the time we reach a level of net worth that qualifies us to fall into the category we have set as a goal for ourselves, we are too old to enjoy what we have set aside. Putting aside the noble, selfless acts of passing our assets to charitable causes and descendants, the point of accumulating money is not to have a large bank account; the purpose of saving is to do something with the money.

When we save, we are putting aside our desire to do something now for the chance of doing something more later. Those nurturing a superfrugal mindset argue you should always choose the latter. The problem with the future is it never arrives regardless of how long you wait. Even though there is always a place or time or dollar amount where you can draw the line and begin living your life, that line may never come.

I will freely admit that I am not particularly adept at focusing singularly on the future. I likely fall somewhere along the spectrum of forward-thinkers. While I am not overly concerned about the present and I do not need immediate satisfaction, I do have my doubts about the future. I am saving money for retirement, including putting money into accounts that can’t be touched without penalty until several decades pass, but there is a possibility I may not live long enough to reach that goal. I am sacrificing a part of my life — not only the selfish activities in which I’d like to participate but the good, charitable things I could be doing with that money now — for the chance of doing more later.

If I don’t have the opportunity to do more later later, I would have made many needless sacrifices.

There are no certainties, so how can anyone truly offer advice about how much someone should save for the future? Life is short, and it’s important to make the most of it while you have a chance. No one knows what tomorrow will bring, so we guess and we offer suggestions. Save ten percent of your income (a weak but popular rule of thumb), or save as much as possible, but don’t completely sacrifice your life now for your future.

With your finances in control or on the path to being in control, ensure you are making the most of the short time you have on this planet. The slow road to accumulating money is the road that most people will take, so enjoy the scenery. The future may never come, so don’t deny yourself all joys of experiencing life now, however you define these joys, in deference. If your approach is causing you to miss out on aspects of life that you find important and will later regret, you may be saving too much money.

The original version of this article, Is It Possible to Save Too Much Money?, is copyrighted by Consumerism Commentary.

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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?

The original version of this article, Ten Things I Will Teach My Children About Money, is copyrighted by Consumerism Commentary.

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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?

The original version of this article, 10 Things Your Parents Didn’t Teach You About Money, is copyrighted by Consumerism Commentary.

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Even though I share my financial reports every month, I don’t see increasing my financial wealth as a goal. The accumulation of money is not a destination. I am not aiming for any particular measure of financial worth, such as ten million dollars of net worth or one million dollars of passive income each year. While these milestones would be nice, they, or any other financial metrics, are only means to an end — or to no end.

Money is only worth what you can do with it. What is the point of accumulating a higher balance in a banking account or a higher value of investments if you never put that money to use? I will concede:

• Leaving money alone to appreciate through compound interest or investment gains is a great way to build wealth over time.
• Saving as much as possible when you are young allows you to have more options as you proceed along your journey through life.

But money has very little meaning now on its own. There is no money, there are only bits and bytes in banking institutions’ extensive computer server farms. You trust that when your banking institution says your bytes have changed to award you a higher number, you can connect that account to someone else and transfer your bytes to pay for an expense. In rare cases, you may even wish to turn those bytes into pieces of paper or coins.

So when I hear that someone’s goal is to have a nest egg of ten million dollars, it is an empty goal. This goal is nothing more than having bits and bytes in a certain configuration on a certain server in a database record associated with your identity. I accept that it will be difficult to get the bytes to arrange in that fashion, but look beyond this. What would you like to do with that money?

You may feel happy or proud when you reach this or any milestone you set for yourself, but wealth doesn’t do any good sitting in your bank account. I mentioned above that saving more now provides you with more options in the future, so rather than looking at a number, start deciding which options you would like to pursue. Here are a few in no particular order. Assign your goals to the reasons you are saving money, not the money itself.

Providing the basic necessities for yourself and your family. Many people build wealth simply so they can survive, sometimes with just the necessities and sometimes in the style to which they are accustomed. These financial needs, including shelter, food, water, and health, need to be taken care of before you can consider doing anything else with your money. If you plan to stop working and expect your income to cease, saving for the necessities is essential.

Leaving money to your heirs. If you don’t have children, perhaps this is not a concern. But many people do have children and would like their wealth to pass along to the next generation. Not everyone with children will choose to set aside money for their children. I have heard arguments claiming that children are better off without trust funds and what may be excessive support from parents, but I feel that children can succeed with as many options available as possible.

Education for yourself and your family. Analytical people suggest basing decisions about education based on your financial return on investment. If you spend $100,000 for a degree, or much more if you have loans with interest to pay, how quickly will your new degree allow you to recoup those expenses? Well, thankfully not everyone believes that the only value of education is the ability to earn an increased income. A life without teachers, non-profit organizations, researchers, and artists would not be worth living. Saving for future education expenses, for you or your children, will reduce the difficulty in affording an educational program that does not put one on track to become a hedge fund manager.

Be a positive force in the world. There is at least one issue that is important to every adult. Money allows you to change the world if you concentrate your funds towards that issue. For example, Bill Gates believes that it is despicable that people throughout the world are still dying of malaria, a preventable and treatable disease. Through the Bill & Melinda Gates Foundation, an organization whose existence is possible due to his financial success, Bill uses his wealth to help eliminate needless death in Africa.

It’s admirable to want to increase your wealth, but that can’t be a goal. It’s one step on the way towards other goals. Money is nothing by itself, particularly if it is sitting in your bank account.

Why do you save money?

The original version of this article, Why Be Wealthy? Focus on Real Goals, Not Net Worth, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, The Paradox of The Paradox of Thrift, is copyrighted by Consumerism Commentary.

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Recently, I mentioned that setting goals is an important part of taking control of your personal finances, focusing on the idea that the best approach is to determine your major, non-financial life goals first. This is a difficult process for many people, and many people go through life without determining a direction.

There’s nothing wrong about not having a major purpose for your life. I wouldn’t criticize someone who blindly lives decision to decision without a driving force behind the choices made every day. Living without direction is still living, and it is possible to be a positive force in the world without setting out to do so.

Choosing a life goal isn’t a final decision, and it’s a process of feedback. It may take some time living before you decide on a goal, and your experiences will help shape the goal you choose. In turn, the goal provides an ideal that will guide you as you make everyday decisions. What you experience as a result of those decisions can shape, refine, and change your goal.

Again forgetting about “SMART” goals, the concept promoted by people who want you to work efficiently and earn more money for your employer, here are 8 tips for helping you find a direction and focus on yourself.

1. Think about your passions. Many people throughout the world have limited options. Living conditions force the less fortunate to focus on survival only. Others have the luxury to pursue activities beyond the search for sustenance. Even for those with time to read about and participate in a number of activities, finding a passion can be difficult. What do you like doing? What kind of activities do you get excited about? Is there something unique you can bring to the table?

If you really, really love playing video games, that may be your passion. Other people may see you as a couch potato or a kid trapped in an adult body, but perhaps you can turn your love into a mission. Perhaps your purpose is to create video games that bring enjoyment to teenagers, training to the military, or education to children.

2. A natural skill leads to a natural purpose. Do your friends and family look to you as an expert in some activity or skill? Many “big fish in a small pond” become overwhelmed at the realization that the world is an ocean with many other big fish. With the right approach, you can view this as a challenge to present your skills to the larger community in a unique way.

If you have a knack for public speaking as well as a passion about a particular issue, perhaps your purpose is to advocate for your cause. Do your talents lean towards mathematics or can you naturally understand complex scientific concepts? Your purpose may be to discover a new way of understanding the world in which we live and translate concepts to the public.

3. Your values define your purpose. People are not born with values, they are learned from our environment. Parents and community define the values we hold. Your purpose should take these values into account, be they community service, family, God, self, human rights, or any other issue. Values set the parameters for the choices you make, and it makes sense to integrate them with your largest life decisions.

If you can’t pin down your own most important values, do not worry. Think about the people you care about the most. What are their values? The values held by the people you admire most are most likely the values that will feel right to you. Talk to these people about their values and you may find that certain ideas feel comfortable for you.

4. Create a mission statement that describes your purpose. Your passions and your skills should lead you to your mission or purpose. Your mission statement should concisely describe your long-term purpose in no more than three sentences. It should an idealistic view of the best possible situation. Defining your mission statement is not the time to limit yourself.

Development consultants want you to focus on your job when you design your mission statement, but this view is far too narrow. It should apply to your life, something much bigger than your job or career.

Your mission statement should be everything that follows, “My purpose is…” Here are some examples:

To educate women about breast cancer through sharing personal experiences, and inspiring others to share their own, to build public awareness about the disease.

To encourage participation in the performing arts through grants.

To inspire young people to learn about personal money management and provide ideas for building a solid foundation for financial success.

To live life completely and honestly with guidance from a higher power and be the best possible father to my family.

5. Write down your mission and display it prominently. Once you’ve developed your mission statement, write it down. Tape it to the inside of your bedroom door so you see it every day. Post your mission statement to your refrigerator with a magnet.

The local Chick-fil-A restaurant has their mission statement displayed above the counter, facing the employees. Every time a cashier looks up, they are reminded “to be Quakerbridge Mall’s best quick-service restaurant at winning and keeping customers.” You can perform this basic form of brainwashing on yourself by doing what you can to create a constant reminder of the effect you would like to have on the world.

6. Involve friends and family in your mission. The people who know you best are those most likely to support you as you reach for your goals. Not only will they be your cheerleaders, they might offer suggestions to help you refine your mission or select your path. Stay away from those who criticize or try to bring you down to earth.

7. Determine the goals that will lead you to achieving your mission. What do you need to accomplish along the way towards completing your mission? Just like setting savings targets, you can start to get more specific. These are the milestones you need to pass.

The best way to plan is in the form of a pyramid with your purpose at the top. Determine three specific goals that will allow you to achieve that purpose. For example, if your ultimate goal is to encourage participation in dramatic arts, three major goals that you might find necessary could be running a successful theater foundation, writing a play for young actors, and creating a touring acting company that visits elementary schools. From here, determine three steps along the path to each of these three goals.

8. Remain flexible and welcome changes to your mission. If a person is the sum of his or her experiences, a person changes every day. These changes can have an effect on the way you see yourself. Your purpose should always be highly relevant to who you are, so you should reconsider your mission when you feel it is necessary. If you find, however, that your mission changes every year, then you may not be ready to set a long-term goal. There’s nothing wrong with this; continue to discover more about yourself and a solid mission will eventually feel natural.

Remember that your mission doesn’t have to be your ultimate goal. You might be lucky enough to fulfill your purpose before you expect. Rather than ceasing purposeful existence at this point, consider expanding your mission and moving forward. Or take what you’ve learned and forge a new path.

9. Maintain a mission journal. I must say, right up front, that one of the best things you can do for your mission is to keep a public journal online. Today, the quickest and most efficient way to accomplish this is to start a blog. You can create a blog for free on wordpress.com. This blog should be focused on your mission, and you should try to write every day about something related to your goal.

Just like Consumerism Commentary allows me to hold myself accountable for my finances, publicly writing about your daily progress towards your mission will force you to think about your decisions from the right perspective. The journal doesn’t have to be public, but opening yourself up to the constructive criticism of strangers can give you wonderful insight.

Not everyone needs a defined purpose in life. I am not a fan of personal development gurus who claim that mission statements are the key to a fulfilling life and career, particularly when they encourage focusing on career-oriented goals. I do, however, think it’s important to keep your eyes open to the world and using your interests and talents for the benefit of many. Consumerism Commentary readers are lucky or blessed and have advantages well beyond the majority of people all over the world. If making a contribution to the world is important, thinking about your purpose and creating a mission statement is a good way to formalize what you would like achieve.

Do you have a mission statement? If you have any tips to share for other readers, please do.

Photo credits: 416style, Prabhu B

The original version of this article, 9 Tips for Choosing and Achieving a Purpose in Life, is copyrighted by Consumerism Commentary.

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When it comes to mathematics, certain facts are universally agreed-upon. For example, regardless of your culture or educational system, you must agree that one plus one equals two unless you mistakenly fall for an invalid proof. When dealing with money, why are people inclined to believe that one plus one does not equal two?

If you have a certain amount of money available to pay off a portion of your credit card debt each month, even if that certain amount changes, there is a mathematically correct way of paying off that debt. You can call this approach the Debt Avalanche. It is similar to Dave Ramsey’s popular “debt snowball” method, with one small but important detail: With the Debt Avalanche you will pay off your debt faster and pay less total interest to banks and lenders.

The simple calculation for the Debt Avalanche requires only the interest rates for each debt account. This assumes that all debt accounts have the same tax liability, but if that’s not the case, determine your interest rate after taxes for this calculation.

Step 1. Order your debts from highest interest rate to lowest. You may find credit cards at the top of the list. It’s typical to see interest rates from 10% to 20% or more. Credit cards offered by stores often have the highest interest rates, so you might find these at the very top. Watch out for promotional rates ending, which they may do on the date promised when you enrolled, or earlier. Card issuers also re-evaluate their customers every so often, and will not think twice about raising your rates midstream. Note that if your credit improves, they will not magically lower your rates. While lenders will notify you if they intend to raise your rates, you may have missed the notice.

Your mortgage and home equity loan may be the next debts in line. It’s important for your list to capture every debt for which you make a monthly payment. Student loans may be the last on the list, particularly if you qualify for tax credits. The Debt Avalanche formula won’t work properly if it covers only a portion of your debt, so consider all accounts.

Order your list from the highest interest rate (after tax) to the lowest. You may have noticed we didn’t factor in your account balances in the above formula. That is because your individual account balances are irrelevant. The issue solved by the Debt Avalanche is the best way to pay off your total debt with all available funds.

Step 2. Pay the minimum to all debts every month. If you’re writing down your list, or using a spreadsheet like Excel, add a column next to each debt to list its minimum monthly payment. This is the amount you will pay towards each debt, except for the one account listed at the top of the list.

Another column should list the payment due date if it is relatively static from month to month. For example, my credit card payment is due on the last date of almost every month, so I would write “30.” This would indicate to me the last date of every month. Your payments should always arrive before the due date. In fact, in some cases, you can reduce your total interest paid by paying weeks in advance of your due date.

Step 3. To your debt with the highest interest, send all extra available cash. If you have an emergency fund, this step is simple. Since it’s unlikely that you can earn more in savings than you can “earn” (reclaim) by paying off your debt, all your unused income after paying expenses (necessary and discretionary as you see fit) should be dedicated towards the debt account with the highest interest rate.

Step 4. Repeat every month. You cover all your bases by ensuring every creditor receives the minimum payment, but you hone in on only your debt with the highest interest. Once a debt account has been eliminated — and it may not be the account at the top of the list if other balances are smaller — remove it from the list and re-order if interest rates have changed.

It’s that simple. This is mathematically the best method for paying off your personal debt. No other method will get you out of debt faster and save you as much money.

Despite the facts, many people disagree. The primary reason detractors, or supporters of the “debt snowball” method, may argue is that Dave Ramsey’s method will help you pay off your smaller debt faster, providing you with “early success” and possibly the motivation to continue along the path of debt reduction. The Debt Avalanche will also provide early success, but if you need special motivation to continue your monthly payments, consider this: By choosing the Debt Avalanche method, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient.

That is motivation enough. Or is it?

Dave Ramsey believes his “debt snowball” method, in which debts are paid off in the order of balance from lowest to highest, has shown better results than any other method thanks to “quick wins.” If he were to ask his followers if they want to carry their debt longer and pay more interest throughout before offering the “debt snowball” method, they would choose the faster, cheaper, better option of the Debt Avalanche.

One of the many reasons people can fall into debt is the difficulty of separating emotional thinking from rational thinking. The Debt Avalanche helps separate these two methods of thinking, as the best financial decisions are almost always the rational decisions. But it helps to pay attention to some of the psychology involved, as well.

The possible motivation due to the “early success” aspect of the debt snowball method is cited by many followers to be its strongest point, encouraging debt reducers to continue down the path. Followers of the mathematically and financially superior Debt Avalanche, if they need this sort of motivation, can achieve the same effect by defining milestones.

Rather than “celebrating” when your first full credit card or other debt account is paid off, take note and reward yourself when you’ve paid off your first $1,000 (or $500 or $10,000, whatever is applicable to you). Setting and achieving these short term goals influences the same area of the brain (the mesolimbic system) as the act of paying off the first credit card and are similar enough to provide the same motivational results.

Quick wins may help to motivate debt reducers to continue along the path, but the real win comes in knowing you’ve made the smarter choice.

If you need help in paying off your personal debt, consider signing up for a free-trial with DebtGoal. DebtGoal can help you budget your creditors appropriately and pay the highest interest debt first.

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The original version of this article, The Correct Way to Pay Off Personal Debt: The Debt Avalanche, is copyrighted by Consumerism Commentary.

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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.

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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?

The original version of this article, Following Your Bliss: Good Advice or Bunk?, is copyrighted by Consumerism Commentary.

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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

The original version of this article, Unintended Consequences and Money, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, 10 Steps to Break the Credit Card Habit, is copyrighted by Consumerism Commentary.

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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

The original version of this article, The New Emergency Fund: Five Components of an Emergency Plan, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Always Be Prepared: 5 Tips for Unexpected Job Loss, is copyrighted by Consumerism Commentary.

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The “snowball method” for paying off debt isn’t something out of the movie, 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 Debt 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 sign up or Mint 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.

The original version of this article, Paying Off Debt: 6 Steps to Building a Better Snowball, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Should High Schools Require Money Management Classes?, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Quicken Hack: How to Track Airline Miles or Points, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, How to Be the CFO of Your Own Life, is copyrighted by Consumerism Commentary.

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