In the Berkshire Hathaway 2010 Annual Report, Warren Buffett shared a letter from his grandfather to his uncle’s family in 1939, and the advice contained within the letter formed the basis of Berkshire Hathaway’s commitment to weathering any financial storm.

I can’t say if the idea of an emergency fund was novel in 1939, but the advice contained within the made enough sense to Warren Buffett that the idea stuck with him and helped to form his philosophy for operating his business. Here’s the letter, scanned and included in the annual report to shareholders.

Warren Buffett’s grandfather, Ernest, owned a grocery store, and as a business discovered the importance of having cash available immediately in the event that it is needed to keep the business running. The letter also emphasizes the idea of assisting future generations, but not with so much money that those within the younger generation do not become self-sufficient. The $1,000 provided with the letter in 1939, and provided with similar letters to other family members as Buffett discovered in 1970, is equivalent to about $15,500 today due to inflation. This is a significant emergency fund and a significant gift, something that might only be possible when the giver has experienced his own financial success.

Berkshire Hathaway holds about $10 billion in cash, which helps its company survive even the toughest financial setbacks. With the company invested heavily in the insurance industry, the Katrina hurricane and flooding resulted in an unexpected $3 billion loss. The company survived thanks in part to its cash reserves.

Taking this advice to the personal level, the attitude towards cash reserves passed from one generation to the next is a great model for managing the finances of a family or individual, not just a business. Despite the opportunity cost when you figure money held in cash could be more effective invested to earn a greater return or used for paying off debt to reduce interest expenses, holding cash where it is accessible in the event it is needed on short basis can save a family’s finances from collapsing.

An emergency fund of $15,500 could mean a big difference for a family, and a patriarch provided this security in addition to the lesson about management is a great example for the financial discussions families should be having today.

Hat tip to @ramit for pointing out the letter.

Berkshire Hathaway 2010 Annual Report

The original version of this article, The Emergency Fund in 1939, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Parents who offer their young children an allowance or pocket money are helping to introduce the concept of money at an age when they are susceptible to ideas they will hold for the remainder of their lives. It’s a good idea to allow kids to gain exposure to to concept and application of income and the decisions that need to be made surrounding that money. Introducing money-related concepts at an early age helps to reinforce the idea of financial literacy, a quality that many people believe is missing in the general public.

There are generally two ways to look at offering an allowance, particularly as children are gaining the ability to handle larger responsibilities. Allowances can either be tied to chores and used as a motivational tool to inspire help around the house, or they can be given free of any condition. There are dangers to both approaches.

Approach #1: Allowance in return for chores and help around the house. This is the favored approach for many parents because it emulates the experience their kids are likely to have later in life: they will be rewarded in money for the quality and quantity of the work they provide for someone else. I’m not a fan of this approach for several reasons.

• Helping around the house is not a job. A housewife doesn’t get paid for cleaning; a father who stays home to babysit does not get paid per hour. Helping around the house is something that everyone who can do should do simply because they are a member of the household. There will be more than enough time in someone’s life to earn money in return for work.
• This type of allowance glorifies money as a reward. Money is your “reward” for working for someone else as an adult, but without proper control in formative years, children could grow up thinking that money is the only reward for working. This type of attitude could lead the children as they mature to choose only those careers that pay high salaries or consider marrying only a spouse who comes from money. These things aren’t bad per se, and they are legitimate choices, but to focus on money at the exclusion of all other things that make life meaningful could lower their quality of being. With the correlation between money and work ingrained, money becomes a primary motivator. This can make it difficult for someone to succeed or excel at their job, because they might wonder why they would put in any extra effort if not compensated immediately.
• You become an employer, not a parent. The relationship between a parent and a child is unique, but introducing the idea that being a member of a household warrants a payment is a dangerous mangling of what should be a non-financial relationship. The power that a parent has over a child is now linked to the financial relationship rather than the familial relationship.

Approach #2: Money should be available, but not in return for working around the house. This invites childhood misconceptions. They may believe that money is available whenever they need or want, or that their parents will always provide money. Regardless, I believe this is the better choice as long as it is controlled and accompanied by guidance in terms of saving, spending, and giving responsibly.

All the guidance you could provide as a parent is good in helping children grow up financially literate. Even through teenage years, when children might be interested in getting a job outside of the house, children’s attitudes about money are still in formative stages. Any lessons you may impart will not be effective without good modeling. The best thing you can do for children is to manage your own money responsibly and let them see what’s happening behind the curtain. Take them with you when you go to the bank. Let them see the work you do for charity or encourage them to learn about the organization you’re involved with. Have positive financial discussions with your spouse without being secretive. If your experience with money isn’t positive, let your children see that as well.

I don’t have any children yet, so my opinions could change when my time comes. What are your thoughts about motivating children through an allowance? What approach works for you?

Photo: woodleywonderworks

The original version of this article, The Dangers of Motivating Kids Through an Allowance, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This series explorers the concrete steps anyone can follow to take control of your finances. Many years ago, I felt like I was a victim of circumstances. Bad things, like job losses, apartment losses, and debt — even my girlfriend leaving me — were other people’s fault, a result of the world around me. I came to realize after self-reflection that I had the ability to control these outcomes. I applied the theory of control to my personal finances. I was able to dig myself out of debt, and now I’m doing quite well financially.

Here are the keys. Click on each of the links below to learn more.

Part 1-A: Become aware. Compare this to the scene in The Matrix where Neo sees the world around him for what it is. Every journey starts at an awakening.

Part 1-B: Take an inventory. You can’t determine where you are going without knowing where you’ve been and where you are.

Part 1-C: Make accurate predictions. With an inventory in hand, you only have part of the story. Your income and expenses are key to determining your future.

Part 1-D: Decide to take action. Although you can see what the future might look like, events are not fixed. You can change your path if you don’t like what you see.

Part 2: Track your money. All you need to get on the right path is a pencil and paper — but these tools will help, too. Tracking your finances closely immerses you to build a better understanding.

Part 3: Spend less than you earn. This is the basic financial principle that, if followed, will help you prosper, and if ignored, will send you into a spiral of debt.

Part 4: Use high-yield savings accounts. Everyone needs to keep some cash on hand, so why not make that cash earn as much as possible while still being available to you?

Part 5: Build a better budget. Budgeting is the third rail of money management — no one wants to touch it, but it provides the power to move you from one station to the next.

Part 6: Get out of debt. There are many methods to eliminate your debt obligations, but whatever you do, just pay it off. Debt leaves you beholden to other individuals, and everyone has the right to be free.

Part 7: Set goals. Do you have a personal mission statement? If not, then what’s the point of growing your net worth? Set long-term goals so your short-term goals make sense.

Part 8: Set savings targets. The point of accumulating money isn’t the accumulation of money, its what you want to do with it. With real goals in mind, you can make relevant and accurate short-term targets.

The original version of this article, Take Control of Your Finances, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This article is presented by Kelly Whalen, Consumerism Commentary staff writer, who hosts a weekly internet show called the ¢entsible show.

Unexpected income is a problem many people would love to have, but it happens more frequently than people realize. Whether it’s a $20 birthday check from your eighty-something grandmother or a raise, there are few months we don’t have something unexpected.

When you get a windfall you could dream up many ways to spend or save it, so it is important to have a plan.

One-time income

You may find yourself with one-time income when your receive rebate checks, tax refunds, or birthday money, or if you sell something you own. Unless you are like Ebenezer Scrooge you’ll probably have the urge to spend some of this extra cash. The best way to deal with extra cash is to prioritize.

If your windfall is under $50, it’s a good idea to use this as fun money. $50 doesn’t go very far when you try to split it up, and unless you are $50 away from a savings goal or debt repayment, it will be pretty painful to put it away.

If your windfall is over $50 but under $100, put it towards debt. If you don’t have any debt use this as a little boost to your savings goals. If you have a favorite indulgence under $5, perhaps a hazelnut latte or a particular gum, spend a little on that so you don’t feel completely deprived.

If your windfall is over $100, plan to split it between spending and savings (or paying off debt). A good rule of thumb is to use a 50/50 split, though in some houses, like mine, that may be a 50/25/25 split.

If your windfall is over $1,000, I would highly recommend using it to (in this order):

• Pay off high interest debt.
• Boost your emergency fund.
• Save for a long term goal such as saving for a home.

Regular unexpected income

Whether your side business suddenly takes off or you get a raise from your job, careful planning will keep you from lifestyle inflation. Lifestyle inflation is an increase in cost of living corresponding to an increase in salary. No matter how much extra income you earn, you need to have priorities.

If you are in debt, paying off your debt should be your first goal. Do whatever you can to make that happen as quickly as possible. The easiest way to pay off debt is to have your money automatically deducted from your checking account the day after your paycheck arrives.

If you are out of debt, or have a comfortable amount of debt (many people consider a mortgage comfortable debt), you should consider saving all of your dough. It’s unlikely you will miss your hard-earned cash, because you are already accustomed to living within your means. Choose your own order of savings, but I highly recommend using the following order:

• 401(k) to the maximum employer match
• Emergency savings
• Roth IRA
• Traditional IRA
• 401(k) to the full maximum
• Long term savings

If you are already doing all of the above, you should consider using your leftover money to fund other investments.

If you are out of debt, maxing out all your retirement options, funding your children (or future children’s) college investments, and have a healthy savings account, you should consider any other income that isn’t accounted for your do-as-you-wish money.

How do you deal with unexpected raises or revenue? What do you do when you get an extra $100?

Photo: ervega

The original version of this article, Unexpected Income: What Should You Do With a Windfall?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Before I got married, I was never really vocal about problems I had with companies. If the food I ordered at a restaurant was the wrong order, I usually wouldn’t say anything. If I had extra fees in my checking account at the end of the month, I’d chalk it up to coincidence and think it wouldn’t happen again. I didn’t like asking people for things I didn’t know for sure were mine.

After my wife and I married, and we became 100% responsible for our bills, somewhere inside me an internal light switch flipped on. Maybe it was because the money paying for these products and services was mine, or maybe I just got fed up with getting jerked around, but I started to find that there were a lot of things I could do to get rid of a fee, fix a problem, or simply lower my bill.

1. Ask productive questions. Don’t ask yes or no questions when you’re on the phone; find new ways to express what you want. Saying things like:

• “I’d really appreciate it if you could do…”
• “What can we do about…?”
• “Please remove this fee/change this thing.”
• “I’m considering switching services, what can you do to help me stay with (company)?”

It’s so easy, especially over the phone, to say no. Don’t give them that chance.

2. Be direct. Sometimes it can be intimidating to call someone and tell them you think they made a mistake or that you need something to change. I think this is the main reason I originally hated calling. However, I had a great experience with a company that helped me to realize it’s better to ask and be told no than to not ask at all.

My wife and I are involved in a start-up company and have been making more and more phone calls. Two months ago, we realized early on that we were going to run out of minutes on our cell phone plan, and we wanted to change our plan and buy more minutes. When I called, I told the person on the other end of the phone exactly what was going on. The customer service rep told me that I wouldn’t be able to change our plan until the end of the month, but that she could give us each 900 free bonus minutes. This saved us, as paying for minutes over our monthly amount would have been killer.

If you find you start running into problems when you’re asking for what you need, find something you can use as leverage. One of the best things (if it’s true) is your long history as a customer of the company. If you’ve done a good job of paying your bills on time and haven’t caused any major problems, they’ll be more likely to want to help you out. Be persistent and don’t let a simple ‘no’ deter you.

3. Know the situation. Paying attention to bills, letters from the companies you work with and deals offered by other companies can help you when negotiating. Because of the high cost of customer acquisition, many companies will be willing to cut you a deal to keep you as a loyal customer. It’s also much harder to dispute a fee you received a letter about two weeks earlier.

Make sure to keep track of who you talk to, when you talked to them, and exactly what they told you. This information will be very useful if you have to call in about the same situation again. Sometimes companies make honest mistakes, and usually they’re happy to change them.

4. Be realistic. Don’t chew out the person on the other end of the phone. They didn’t cause your problem. Even though fees or a company mistake might have you frustrated, yelling at the customer service rep makes them want to help you even less.

Having worked in customer service before, I can say that I worked so much harder to help people who were frustrated but reasonable, rather than the people who just called and yelled into the phone.

In today’s economy, there are few things that aren’t negotiable in some way. Doing some research and then making a phone call could save you quite a bit of money. Don’t let these huge companies jerk you around. It might be easier to just sit tight and pay the fees you don’t understand and eat the food you didn’t order, but it sure is cheaper to do something about it.

How about you? Has there been a time when you’ve been able to get a problem solved or a fee reversed?

The original version of this article, Be Financially Proactive, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

CNN is featuring a short survey to help you determine your level of financial health. The result is presented in a form of a grade from F to A+. My result was an A; I lost points for not having any life insurance. The survey does not ask if there are any dependents. Right now, I am the only person depending on my income for survival.

The survey questions visitors about annual income and your age in order to determine the healthy expectations for the other categories. For the highest score, your monthly housing payments should not exceed 28% of your gross income. That’s almost unheard of for many people who purchased houses in the past few years. Monthly debt payments should not exceed 36% of your gross income. CNN further suggests three months’ worth of expenses in a high-yield savings account. The editors also subscribe to the rule of thumb that suggests the percent of your portfolio invested in stocks should be 120 minus your age.

Also related to diversification, you will lose points if you have more than 10% invested in your employer’s stock. For life insurance, a category where I failed according to CNN’s algorithm, you should have enough coverage to provide a replacement for your income for at least 5 years, 10 years if you have multiple dependents. The survey asks about your contributions to and balance of your retirement account. If the combination of the two, while taking your age into account, results in a favorable outcome as judged by CNN, you will pass this question.

Here are my results.

Take the survey here and share your results!

The original version of this article, CNN Will Grade Your Financial Health, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

About the author: Jeff Rose is a Certified Financial Planner™ and co-founder of Alliance Investment Planning Group. He is a veteran of Operation Iraqi Freedom, having served in the National Guard. His blog, Good Financial Cents, covers financial planning and investment related topics.

As a kid, there’s no greater comfort in having your parents there to pick you up when you fall. But what happens when the role reverses, and now you become the care taker of your elderly parents. Most parents will never admit to you that they need help keeping track of their finances. Admitting help is a sign of giving in and succumbing to their elder age and for many seniors is a hard pill to swallow. Down the road it may be a necessity to assist them in their finances, but it’s not too early to start the money discussions today.

Usually it will take some sort of medical emergency before both parent and child realize that they both need to be on the same page with the financial situation. I’ve seen client instances where suddenly deceased parents left their children to sort through the financial mess that’s left behind. It’s the equivalent of setting out on a long hiking trip without compass and map, having no clue where to begin or where you are going. If you think a parent is in need of help, start looking for signs. If they start complaining about misplaced bills, bouncing checks and unpaid electricity bills, it might just be time to step in.

Get the picture

You need to sit down with your parents to find out their whole situation. They should have in place several essential documents, including a will, living will and separate durable power of attorney for health care and financial decision making. If they have setup a trust, you should know where the trust documents are and who has been appointed trustee. If they have a safe or safety deposit box, you need to know where and what’s located in there. I’ve seen instances where clients parents had Cd’s and other investments spread over dozens of different banks and brokerage firms. Getting on the same page will save countless hours of frustration once your parents are gone.

Find out what the monthly income and expenditures are and make sure a usable budget is in place. By knowing what they spend their money on each month, you’ll be able to better assist them going forward.

Make things simple

If your parent has a plethora of plastic in their wallet, it’s time to start cutting the cards up and consolidating. Find the one with the lowest interest rate, and transfer all the cards to them. If they have department store cards, do your best to pay them off if the funds are available.

It might also be time to introduce some technology in their life with online banking. If you’re comfortable with this option, you’ll be able to streamline this so you can set up direct deposits, automatic bill pay and even have outside investment pay their dividends and interest into their checking/or savings accounts. I once had a elderly senior client who didn’t need his social security checks, so he just let them accumulate. Last time I checked he had almost 9 months of accumulated checks still not cashed. I could only imagine if something had happened to him and how hard it would be for his family to sort through his finances.

If your parents are computer savvy, develop a bill paying calendar and remind your parents to write checks. If it’s pass that point, you might have to write the checks yourself.

Find a money manager

Choosing the right person to manage the money might be tough. Handling your own finances is tough enough, by taking on somebody else’s can be overwhelming. Somebody that lives close might be the logical answer, but you also want to make sure that person has a handle on their own finances first. If you are the only child, it maybe your burden to bare, but don’t forget about close family friends or even a friendly close neighbor that might be there for support. There are even money management services that will take on the task of paying the bills on time. Before hiring one, be sure to thoroughly inspect the actually costs and fees of their program.

If a bill payer is required, check out the American Association of Daily Money Managers. Depending on your parents’ situation, you may also need to hire an elder care attorney to help with estate planning and to help assist them. The National Academy of Elder Law Attorneys can point you to qualified experts to help out. I’ve worked with elder care attorney that was able to greatly assist some clients whose father was in assisted living. When all else fails, there are even Certified Financial Planners that will assist in these sort of situations.

Have you had to help an elderly parent with their finances? If so, share your story on what you did to help out.

If you enjoyed this article, please visit Jeff Rose’s blog, Good Financial Cents. You can also subscribe to the blog’s RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

The original version of this article, Helping Your Parents With Their Finances, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Many of us are going to be faced with tough decisions this year, and probably next year. We might even have to grapple with “how do I get these creditors to stop calling me?” or “well, where do I live now?” If owning a home is the American Dream, then being homeless is surely the American Nightmare.

Before it gets that bad, there are things you can do to trim your monthly budget. But instead of just presenting you with a list, I thought it’d be fun to try and take advantage of the wisdom of crowds once again, as I did in my article “No More Credit Card Debt: Now What?.” (Incidentally, the credit card debt is down to about $4,100. It hasn’t been that low before in this entire millennium.)

So, here’s a list of things that I have previously considered removing, or actually did remove, from my family’s budget when we needed to be spending less. Vote “Yay” for the things you think should be removed from a struggling household budget. Vote “boo” for the things you think are necessary for survival in a civilized world.

If you think something is missing from the list, go ahead and add it.

The original version of this article, Your Recession Budget, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Last week, I wrote about the importance of setting real life goals in order to take and maintain control of one’s own financial condition. It’s important to break past the idea that a life goal is based on money. For example, entering retirement with $4,000,000 is a good target, but it’s not a major goal. Your goal is the purpose for earning that $4,000,000. What do you want to do with that money? Is your goal for life to retire comfortably in a location with a low cost of living? Is you goal to provide financially for your family? Or is your goal to have an effect on some issue that you care about?

The life goals define your savings and investing targets. How much money will you need to achieve your goal in the manner you wish to achieve it? This will vary from person to person, even when the goals are shared. Three people might have the same goal, for example, to promote financial education for teenagers. One person may wish to achieve this goal by creating and managing a charitable foundation, another would prefer to become a public school teacher, while a third individual might choose to write a personal finance column. Each path, inspired by the same mission, requires significantly different financial obligations.

Long-term savings and investing targets

Ideally, determine your goals while you’re still young. The earlier you start to work on a goal, the more time you’ll have to meet your financial targets. (Also, if you decide to change your goal while on your path, you’ll have more flexibility to change course.) In reality, there is rarely enough time. With time on your side, you can afford to be more conservative with your investments in order to reach your goal, but the urgency of a short time horizon requires you accept more risk or work harder to raise the money you might need.

While in an earlier article, I warned against using the “SMART” model for defining your life goals. But now that you have your mission out of the way and are focusing on the financial requirements for achieving your goal, it helps to keep your targets in perspective. Your financial targets should be specific, measurable, attainable, relevant, and time-based. For example, if your ultimate mission is to support arts education in your town and your path for achieving this goal involves establishing a scholarship for college-bound students attending your local high school, your SMART target may be to set aside $1,000,000 within five years. The interest earned on that money can then be used by the school to fund each year’s scholarship. This sets a specific, measurable, relevant, time-based target for reaching your goal. If your income level allows you to save $200,000 above your other expense and savings needs each year, or if you currently have investments that might appreciate to this level, this target is attainable.

Short-term savings and investing targets

If you haven’t already achieved a comfortable level for your emergency fund, that should your primary short-term financial targets. This is a key component of a financially stable lifestyle, regardless of your long-term goals. Here are some resources about emergency funds.

• The Right Size for Your Emergency Fund
• What Qualifies as an Emergency?
• 50 Tips to Help Establish Your Emergency Fund

Other short-term financial targets depend on personal needs, outside of your larger mission. You may want to dedicate your life to saving feral cats, but you’d also like to own a house. To purchase a house responsibly, you may need to provide 20% of the purchase price at the time of the sale as a down payment. If your mission is to help search for forms of life in other galaxies, you will need to earn a college degree or two. Enrolling in college requires some financial consideration, and the requirement is much more immediate.

If you’ve determined that you have ten years to raise $1,000,000 to start a foundation, you can set short-term targets to maintain your focus. The targets might not be achievable if evenly spaced, such as earning $100,000 per year. The achievement of a goal such as this might require a slow start and using compounding interest to your advantage. You need to consider the specific financial tasks you need to accomplish in order to start a foundation with $1,000,000 within ten years, such as fundraising among friends and family.

High-yield savings accounts should be part of your short-term targets. This is one of the reasons I still enjoy ING Direct despite the bank’s slightly lower interest rates than those offered by other online banks. It’s easy to split your ING Direct savings account into sub-accounts, each designated for a specific target.

Using short-term and long-term financial targets will help you stay on task as you reach to achieve your missions, but don’t be afraid to change your plans. The experiences you encounter while on your path might point you to an idea you hadn’t considered originally, reshaping your mission or changing it entirely. If that happens, you may need to revise your expectations and targets. The mission sets a guideline for living your life, but it’s this living that is the important part, not reaching a specific goal.

Here is what we’ve explored on Consumerism Commentary in terms of taking control of your finances so far:

• Part 1-A: Become Aware
• Part 1-B: Take an Inventory
• Part 1-C: Make Accurate Predictions
• Part 1-D: Decide to Take Action
• Part 2: Track Your Money
• Part 3: Spend Less Than You Earn
• Part 4: Use High-Yield Savings Accounts
• Part 5: Build a Better Budget
• Part 6: Get Out of Debt
• Part 7: Set Goals

The original version of this article, Take Control of Your Finances Part 8: Set Savings Targets, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is the next installment in a series at Consumerism Commentary about taking control of your finances. Please consider subscribing to the Consumerism Commentary RSS feed for updates.

It’s no secret that budgeting is a chore. Although this piece of personal finance carries an ugly reputation, even a simple form of budgeting will help you achieve more towards your goal of taking control of your finances. Despite the negativity surrounding budgets in the news — the economic slide is affecting corporate and government budgets and people are depressed everywhere — personal budgeting doesn’t have to be an ugly process.

Why develop a budget? The purpose of budgeting is not to force someone into spending less than a certain amount of money towards a particular category. A budget should be more like a guide. Yes, you can set aside money for a certain type of expense, but if you find you need more, you can “borrow” from another category or future time in which you expect to spend less. This borrowing, like debt, can get out of hand, so it should be limited as much as possible. Keep in mind that budgeting is flexible.

The best way to visualize a budget, particularly if you pay all your expenses with cash, is to use a system of envelopes. To simplify the visualization even further, let’s assume you receive your income on Day 1 of each month, and you must use that income throughout the month until your next paycheck on Day 1 of the following month. When you receive your income, you take the cash left after paying income taxes and place it into envelopes. On the outside of each envelope, write the name of a spending category.

You should have envelopes for rent or mortgage, insurance, food, and utilities. Also consider budgeting for transportation, household, debt repayments, entertainment, and charity. To get a good idea of where you spend your money, take a look at your expenses, which you track every month. Your most frequent spending categories should determine the labels for the envelopes. Use the data to determine the amount of income you require in each category each month. This is the amount of cash you should place in the envelope.

Do not neglect infrequent expenses. You may have certain obligations that are not paid monthly, like property taxes. If you pay $1,200 every six months for property taxes, consider your monthly budget to be one-sixth, or $200. Then left that money accumulate in the envelope for half a year until it is time to pay the bill.

Do you have an envelope for savings? You should. Consider setting this envelope apart from the others, perhaps in front so you will be reminded that it is one of the most important destinations for your cash. Everything not distributed to an expense envelope can be placed into the savings envelope. From here you can take as much as possible to the bank for deposit, invest some of it, and spend a small portion.

Now that you’ve set a budget based on your past or current spending, see if you can find a few places to cut back. Can you reduce your budget by 10%? You may find that this is not as hard as it seems, particularly if you have excess cash to spend on wants rather than needs. Start cutting back with your wants, but also look at your needs to see if they can be reduced. Once you’re familiar with using your budget, you can focus on the future rather than your past spending habits.

When you pay expenses by check, credit card, or debit card, you may find that it’s difficult to effectively use physical envelopes to manage your budget. Although placing cash into envelopes won’t work for everyone, the metaphor can be extended to software. Here are some of the popular choices:

• Mvelopes is a website that lets you manage your personal finances online. The site focuses on your budget using a virtual envelope system similar to what I’ve described. Fee: $7.90 or more per month.
• You Need a Budget is a tool you can download to help you organize your budget. Fee: $12 to $50 to download.
• Intuit Quicken has a budgeting system included but many people find the feature difficult to use. Fee: $45 or more to download with this link (regularly $60 or more).
• PearBudget is another web-based option that follows the envelope system. Fee: $3 per month.

If nothing else, use the $0.10 option: a pencil and paper. Writing down your budget will help you stick to it, whether you use paper or computer software. I started my first budget with a pencil and paper even though I was inclined towards computers. I was in a transition phase in my life, trying to get myself into financial shape for the first time. After working for a few years out of college, I left my low-paying, high-expense non-profit job and moved back in with family for about four months. I worked out a plan and a budget, found a new job, and by the time I moved out I was in control. Money was still tight, so I stuck close to my budget for a while.

As you see more financial success as a result of spending less and earning more, you may be tempted to move away from your budget. Despite other advice suggesting to always stick to a budget, it’s a good idea to focus less on the categorization and limitation of your expenses as the need decreases By the time you are sufficiently saving and investing money every month, the energy you spend working with a budget could probably be better spent on other activities. But it doesn’t hurt to check in with a budget once in a while. It has been suggested that more confident personal money managers will succeed better with an annual budget. Always keep tabs on your spending, and evaluate the trends, but don’t tie yourself down.

Budgeting, even in the early stages, should not be seen as a burden. Here are some tips to make budgeting easier.

Consider the 60% rule. I’m not a fan of rules, but sometimes a guideline can help get you started on the right path. As an individual, you can decide what’s right for you, but sometimes an example helps. The 60% rule suggests that the first 60% of your gross income (before income taxes are taken out) should be designated for your non-discretionary, essential expenses, like housing, food, clothing, and taxes. The rest of the income should be split with 10% going towards savings, 10% towards retirement, and the rest for “fun,” or your discretionary expenses.

Reward yourself for staying under budget. If your budget is realistic — not too difficult nor too easy to achieve — then you should reward yourself when you spend less than you plan. With your “fun” expenses, your spending may be variable month to month and difficult to predict. If you make a conscientious effort to spend less than you expected, perhaps by seeing fewer movies in the theater or cutting back on vacation plans, you have extra money left in your envelope (virtual or otherwise). First, move that excess money to savings. If you don’t perceive savings to be an intrinsic reward, treat yourself to something you’d like.

Use ING Direct’s subaccount feature. Since you can split money in ING Direct’s high-yield savings account into separate buckets, you can label these subaccounts to match your budgeting categories. this lets you earn a decent interest rate while keeping your money organized.

Pay yourself first. No matter what, make sure some of your excess income is diverted to your savings. If you set up direct deposit into your checking or savings account, this will require less work. Your savings envelope contains 100% of your income (minus income taxes) after you are paid, and from there you can distribute funds to your remaining envelopes.

Please share any budgeting advice or suggestions!

Photo credits: Bill in Ash Vegas, Jeff Keen

The original version of this article, Take Control of Your Finances Part 5: Build a Better Budget, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is the next installment in a series at Consumerism Commentary about taking control of your finances. Please consider subscribing to the Consumerism Commentary RSS feed for updates.

If you’re on your way to spending less than you earn, then you’re going to need a good place to put your excess income. Even before setting savings goals and before establishing an emergency fund, it’s best to let your cash earn as much interest as possible while staying somewhat accessible. High-yield savings accounts are the best options.

Typical savings accounts at most banks pay an interest rate well below 1%. With conservative estimates of inflation running 3% to 4%, you’re losing purchasing power quickly by leaving your money in these accounts. In the last several years, internet banks paved the way for higher interest rates. Theoretically, these banks without branches could afford to pay higher rates because the companies lacked the expenses associated with owning a network of branches on street corners or in strip malls. More recently, traditional brick-and-mortar banks added more accessible high-yield savings accounts to compete with these offerings.

Interest rates have fluctuated over the past few years and we’re currently at one of the low points. Great interest rates are harder to find, but there are a few quality savings accounts offering 4% or close to it. While you may barely beat inflation at this rate, the purpose of a savings account is not long-term investment. You want to cash available to you within a day or two. All it takes to withdraw your cash is perhaps an online transfer and a visit to an ATM.

You shouldn’t just chose the savings account with the highest interest rate. Banks offer high interest rates because they want to compete for your deposits. If any particular bank is in the midst of a capital crisis — if they don’t have enough cash on hand to pay their expenses and liabilities — they will raise rates to attract more customers. For example, earlier this year, Washington Mutual raised rates several times and was frequently at the top of the list of interest rates. The purpose of this plan was to receive more cash. In the end, Washington Mutual failed and was bought by JP Morgan Chase.

Despite turmoil through bank failures, mergers, and acquisitions, there is very little risk in savings accounts. The FDIC insures these deposits on behalf of the banking industry. As long as you stay within the coverage limits, you should be able to access your money even in the event of your bank going out of business or being taken over by another bank. There may be a delay in your ability to access the money, but that is not typical

I have two recommendations for high-yield savings accounts. I am a new customer and new fan of FNBO Direct, the online division of the First National Bank of Omaha. I’m not the only fan of this account. Recently, Kiplinger Magazine honored FNBO Direct as the “best online savings account.” As of today, the online savings account offers a 3.25% APY. Since opening my FNBO Direct account in September, my experience with FNBO Direct has been smooth.

My other recommendation is ING Direct. With the Orange Savings Account’s 2.75% APY, this is not the highest rate you can find. ING Direct was one of the first banks to popularize the idea of branchless banking, and they have historically offered great interest rates. All reports indicate that customer service is fantastic and they have one of the best websites for navigating your accounts. It’s also very easy to organize your money at ING Direct into different labeled subaccounts. With ING Direct you can earn up to $525 in bonus interest my participating fully in their referral program.

Last Friday, I wrote about newcomers to the high-yield party, including Venture Bank Direct, ShoreBank, and DollarSavingsDirect. I also maintain an index of the popular high-yield savings accounts, organized by interest yield on the first $1 of deposit. The list was updated last night to include the rate changes from the past few weeks, and there have been several.

The high-yield savings account is an important piece of healthy finances and it will come into play as someone further develops money management acumen. Here are six tips for optimizing your savings:

1. Open the high-yield account. It will take only minutes to be approved, but funding your account electronically may take several days.
2. Keep your change. Use a jar to collect your excess coins every day and take the jar to the bank.
3. Automate your savings. Set up Direct Deposit for your paycheck so you’re saving first, withdrawing for expense later.
4. Divert small, unnecessary daily expenses to savings. If you spend $10 on two gourmet coffee drinks each morning, switch to one $2 Dunkin’ Donuts regular coffee and deposit the $40 you save each week into your savings account.
5. Hide your savings from yourself. Try to forget that you have money stashed away earning interest and survive without it.
6. Make your raise invisible. If you receive a 3% increase in your salary, increase the amount you leave in savings each month.

If you do things right, the money in your high-yield savings account should grow each month. It feels good to be in control of savings.

Image credit: Redvers

The original version of this article, Take Control of Your Finances Part 4: Use High-Yield Savings Accounts, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This should come as no surprise to Consumerism Commentary readers or anyone who has spent time reading anything relating to basic money management advice. Once you’ve decided to improve your financial condition and spent some time tracking your spending, you may have come to the conclusion that your situation declines each month because you’re allowing more money out the door than what’s coming in.

Spending more than you earn isn’t feasible for the long term. However, if looking at finances from month to month, even those fully in control of finances will have some instances in which monthly cash flow is negative. Variation is possible over short periods if savings if accessible or debt is available. Over longer periods, the variation should smooth out. The only way build your wealth over the long term outside of investments is to keep your spending lower than your income after averaging out monthly variations. Certain life events may require large outlays in the short term, like buying and furnishing your first home or starting your first professional job. While there are ways to save money when navigating these events, it’s not uncommon for spending to exceed income for a short time.

If after analyzing your current finances you see that your savings is decreasing or your debt is increasing due to negative cash flow, here is how to approach the point of reversing that trend.

Make a psychological adjustment. “Knowing is half the battle.” If you are losing ground month after month, laying out your income and expenses on a spreadsheet should give you a clear indication of the situation. This might not be a strong enough wake-up call, especially if you have savings or available debt, but both of these run out. Living above your means is not sustainable indefinitely as your predictions should show. You’ve already made the commitment to improving your finances, and in order to succeed you must spend less than you earn, whether from a job or your investments.

For some people, changing a state of mind is more difficult than it is for others. Whether it’s a lack of motivation or a lack of faith, keep this in mind: Other people in worse conditions have succeeded. No matter how difficult your financial situation is right now, many people with worse problems have been able to adjust their attitude and behavior. This dedication to change is necessary for stabilizing finances. Earlier this year, readers of the blog Get Rich Slowly shared financial success stories. Reading through the comments, it’s easy to see how people in a variety of conditions were able to get past the present and improve the future. If they can, so can you.

Once you’ve made the psychological adjustment, continue with striving to spend less than you earn. Let’s stop to look at this idea from a mathematical standpoint. While there is more to money than math, the numbers form the basis of any financial decision, so this concept should always be in the back of your mind.

Net income = Income – Expense

If Income is greater than Expense, Net Income is positive, and you have a positive cash flow. If Expense is greater than Income, Net Income is negative, and you have a negative cash flow (a loss). There are two mathematical solutions to a negative cash flow. You can either increase income or decrease expenses. For many people decreasing expenses is the easier option. Many people have a steady income that may not appear to be flexible. Even if income is not flexible, it may take more effort to earn an extra $200 per month after taxes than it would to save an extra $200 month. So we’ll consider saving money first. While I’m briefly discussing these categories, each one deserves a full article just to review all the available options for saving money.

Before we get to the details, consider adopting a philosophy of frugality. Some people see this as something with negative connotations, like “cheap” or “penny-pinching,” but there are ways to be smart about being frugal. Frugality is simply reducing your desires to match your needs and making purchasing decisions economically. I try to find a balance with my approach to frugality, but needs may outweigh the concept of balance.

Discretionary expenses

If you’ve estimated your expenses in Part 1-C, you’ve seen how to categorize your spending as non-discretionary or necessary and discretionary. The most obvious choice for cutting your expenses is by evaluating the necessity of your discretionary expenses.

Here are a few expenses I would categorize as unnecessary and some suggestions for reduction or elimination. Keep in mind that everyone’s situation is unique and you may prioritize your life differently than someone else. Take these suggestions but make your own call, but keep the goal of spending less than you earn in mind. Take a stab at these changes, if only temporarily to see how they work for you.

Cable television. “Cable” (whether from the cable company or the telephone company) or satellite television is usually the first bus stop on the route to financial well-being. I like to be entertained as much as anyone, but if I had to, this would be the first service to go. In fact, while I was first on the road to improving my finances, I reduced my cable television service from $80 or $100 a month to just $13 per month, allowing me to receive the most basic service to keep my internet service valid). There are a number of replacements for cable that you could consider.

Get your entertainment in the mail. Netflix allows you to receive DVDs of your favorite television shows through the mail. While you won’t be watching the shows at the same time as those who have cable, you will still experience an equivalent entertainment value, if only later. Netflix plans start at only $4.99 per month, and coupons for a free first month abound.

Over-the-air television signals are free. Unless you are in the United Kingdom, television programming is broadcast over the air and received by land-based, home-mounted antennae for free. In fact, some stations broadcast in high definition, so despite retailer’s marketing claiming the contrary, you do not need cable or satellite service to receive digital or high-definition broadcasts. In fact, over-the-air high-definition broadcasts look and sound better than cable and satellite broadcasts because the signal is not compressed or compressed less. The cable companies want to provide a vast selection of channels, but in order to fit them all into the signal, they are highly compressed, resulting in blocky pictures in some cases. Over-the-air broadcasts do not suffer from this problem nearly as much.

Vacations. One advantage in living in a “rich” country is the ability to travel for pleasure, whether within the same country or abroad. While breaks from work are mentally beneficial, they can be financially damaging. Here are some suggestions for gaining the mental benefits of a vacation without the expense.

Don’t travel as far. Airfare and lodging add up in you assessment of yearly expenses, and it can be one of the largest on your books. Rather than going to France, visit Montréal, the 10th cleanest city in the world (according to Forbes Magazine). Even better, stay local. Find a nice hotel in your area and discover their amenities.

Take it down a notch. Living close to New York City, I have access to the some of the best arts in the world. Broadway has the best theatrical shows and the New York Philharmonic is the premier orchestra. Both of these experiences are the finest in the world, but they are expensive. To save money, opt for local theater and music. The performances may not be world class, but the events will be performed by people who are very passionate about their work. Also, rather than seeing the New York Philharmonic in a formal venue, spend an evening with them in Central Park (or in the other boroughs or New Jersey) for a free concert during the summer. (I’ve been volunteering for the New York Philharmonic’s Concerts in the Parks for the past several years.)

Charity. Charitable giving is a controversial expense. Many people in this country are brought up with the suggestion that it is a requirement to give 10% of your income to those who are less fortunate. This is a fantastic idea if you can afford it. This is a matter of prioritization, and for some people, charity is a non-negotiable expense. If you’re scraping the bottom of the barrel in order to feed your children, I would start to question the validity of this approach. The best way to save money in this category while still providing help to those who need it is to donate your time and effort rather than money.

The Expensive Coffee-Related Drink Factor. Other people call this the Latte Factor®, but that term is a registered trademark. There is something to be said about changing a behavior that costs $5 a day, $25 a week, or $1,250 a year, as long as you don’t consider the job done and forget about saving money with your larger, infrequent decisions. You can cut back all you want on fancy drinks but if you still buy a house you can’t afford or a car that’s not financially practical, you’ve just undone any savings you may have gained by eliminating something that make you pleasant to be around. Here’s more about the ECRD Factor.

If you’ve eliminated as much as possible from your discretionary expenses, take a look at how you could save money while paying for the necessary monthly expenses.

Non-discretionary expenses

Transportation. Consider car-pooling to work, school, or after-school activities for your children. If it’s time to buy a new car, buy one that’s more fuel efficient. If it’s possible, consider working from home more often.

Food and groceries. Evaluate generic or store-brand food to determine whether you could save money while still eating healthfully and enjoyably.

Insurance. Review your coverage. With automobile or homeowner’s (renter’s) insurance, you may be able to raise your deductible in exchange for lower premiums if you have savings to cover your deductibles. Shop around and you might find lower rates for the same level of coverage, but keep in mind that you want to work with a company that won’t deny your claims.

Rent. If you rent an apartment, consider taking on a roommate or moving to a different location. When I was struggling financially several years ago, I had a few options available. First, I lived with my father for a few months as I looked for and accepted a new job. I was lucky to have this option available, and I took advantage of it. I soon moved out to a low-rent apartment in a bad neighborhood. It was worth a try, but I moved out soon afterward. My next stop was a three-bedroom apartment which I shared with three other people. It was a tight fit, but my rent was less than $350 per month.

Utilities. Optimize your thermostat usage by using a timer and setting the heat for a lower temperature than you normally would and the air conditional for a higher temperature. Turn of all the lights when you’re not in a room and switch to compact fluorescent light bulbs. Ensure your windows and external doors are sealed and close your internal doors. Use power strips for your electronic equipment because otherwise they will draw power even when they or switched off. Drop your land-line telephone or your cell phone.

The other side of the equation is income. As I mentioned above, it’s usually harder to increase your income than it would be to decrease your spending, but here are some suggestions.

Income

Maximize your income at your job. If you deserve a raise, ask for one. If not, determine what is necessary to earn a raise or a promotion and make it happen. Do your peers with similar jobs, experience, and education make more money at other companies? Consider shopping around for a new job where you can be paid more competitively.

Take a second job. This isn’t a suggestion for everyone, but a number of people I know have side jobs. A former coworker of mine wanted some additional money, so she became a bartender (not pictured here) during nights and weekends. She said the tips she received increased her income by $500 each week (and she may have been paid under the table). If you’re a technical-minded person, consider consulting during your off hours. You may find that you like this type of work and have the ability to earn more by consulting full-time. This blog is my second job.

Sell your stuff. Whether you hold a yard sale or sell your belongings on Amazon.com or eBay, you can probably earn some money for a variety of unused items around your house. I sold a few of my old college text books eight years after I graduated and earned several hundred dollars.

Each one of these options deserves an entire article because there are so many ways to save money on expenses and to increase your income. The goal is to spend less than you earn, and any way you can make that happen is a good choice. If you have a positive cash flow, over time you will improve your financial condition. This is, of course, ignoring the effect of the stock market which is an entirely different topic.

Photo credits: tomdobb, braydawg, tristanbrand

The original version of this article, Take Control of Your Finances Part 3: Spend Less Than You Earn, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

After deciding that it’s time to get a handle on your finances, find a way to accurately track the way you handle everything involving money. Before deciding to take action, you may have estimated your income and expenses, but now the details matter. Here is how to get to the details.

Every cent is important at this point. That will change later on; as you grow as a master or mistress of your money, you can ease the pinch on the penny. But in the beginning of this journey, you should record everything. From the $5 check from your grandmother on your birthday to your $75,000 annual performance bonus, and from the $1.99 music download to the $28,150 car, you must write it all down in some form.

There is a purpose to this madness. By tracking every detail of your money, you get a real picture of how much you’re spending. Many people don’t know off the top of the head how much they spend on lunches with coworkers every month or how much they spend on cigarettes or coffee. This process can be very enlightening, and in some cases, it might provide motivation in itself. By tracking your finances accurately, you’ll be poised to make better decisions about where to spend your money.

You don’t need to start with fancy software. Sometimes, low tech can be most effective, especially when starting out. Pads and pencils are portable as well, and they are great tools for keeping track of your cash spending while you’re on the move. The first step is to choose the method that will work best for you.

Desktop software

Intuit Quicken is the king of financial tracking software. Unfortunately, the software is not cheap. Quicken 2009 Deluxe, the most basic version available this year, costs $45 through Consumerism Commentary. You can connect to banks to download your deposits and withdrawals and credit card companies to download your charges and payments. Microsoft Money Plus is another option offering similar features. Both of these programs cost money to use. For those who don’t use Windows-based computers, MoneyDance is a good choice, but this software is not free, either.

If you’re looking for software that is free to use, take a look at GnuCash. GnuCash also has a portable edition which allows you to take your financial data with you and access the program anywhere you can jump on a computer. (Thanks to Dave Stinner who reminded me about Gnu Cash.)

Web software

Quicken Online Edition is now free. Here’s a review of the service. Mint (reviewed here), Geezeo, and Wesabe offer similar features to help you track your money.

While web software offers seamless integration with online access to your banks, it has some limitations. These web applications are not designed to keep track of your cash spending, which may be the most important requirements for accurately tracking your expenses.

Mobile software

Keeping track of the money you spend while you’re out is a challenge, at least for me. It helps to ask for receipts for all transactions so you can collect them and record the amounts at night when you’re home. I’m experimenting with software for mobile phones that allows you to keep track of your spending. SplashMoney works with my BlackBerry as well as iPhones. For Quicken users who enter transactions while away from the computer and sync them to desktop Quicken later, Pocket Quicken may be a good option. This software runs on Palm and Windows Mobile devices.

Paper

For people who prefer old-fashioned methods and have unlimited filing space, paper accounting is an option. Download this ledger paper and print a few pages. Use a separate page for each account, and keep track of your transactions just like you would with software. If you don’t like my ledger paper, try these templates, available for free.

Tips for accurate accounting

• Collect receipts for all transactions, including the purchases using cash. “Cash” should be an account in your software or on paper. Your starting balance is amount of money you have in your wallet on the day you begin tracking.
• If possible, keep notes about your expenses while you’re away from your computer or desk. Carry a small pad or use mobile software like those listed above.
• Every month, or more often if you have online access or automatic transaction downloads, compare what you record with the activity your bank has recorded in their systems. This “reconciliation” ensures you have accurate records for your bank accounts, investments, and credit cards.
• The web software listed above usually download your bank activity automatically. In some cases, the application will try to categorize your spending based on the vendor name or similar transactions by other users of the software. This “artificial intelligence” will make errors, so review every transaction to categorize the expenses and income properly.
• ATM withdrawals should be recorded as a transfer between your savings account and your cash account, not an expense. Cash deposits should be transfers as well.

As time goes on and you become more familiar with your finances, you can afford to be less aggressive about recording every cent. I suggest following the above suggestions and keeping track of everything for at least several months to get an informative view of your money.

If you have any additional tips for tracking your money accurately, please share.

Image credit: Refracted Moments

The original version of this article, Take Control of Your Finances Part 2: Track Your Money, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

After viewing yesterday’s income and expense report for an imaginary person, Dan observed astutely:

… The one area that I don’t see is for a persons IRA, 401K, or ESPP. When is that money taken out or where/how is it assigned? It isn’t like you can say that you had a net income so you placed the net income in these funds because those IRA, 401K, or ESPP plans are taken out as if it was money flowing out.

Let’s call the imaginary person “Roger.” Here is a view of Roger’s income and expense report again.

After paying all non-discretionary (required) expenses, only $175 of the income remains. Roger could take this excess money and save it, invest ir, or spend it. Beneath the non-discretionary expenses, Roger also has discretionary expenses. This second category of expenses adds up to $350. Before Roger can think about saving and investing, Roger spends more than the $175 he has left.

Rather than having an extra $175 at the end of each month, Roger has a $175 deficit. In order to cover all his expenses, Roger has to come up with an additional $175. This will come from savings or a form of debt, like a credit card or a loan. Either way, Roger is cash flow negative and his financial health will get worse every month until expenses decrease or income increases.

If this month is typical for Roger, he will reduce his savings or increase his debt by $1,500 each year. And this is a conservative estimate, because he may need a new car someday or he may want move to a new house. Most likely, he will have large expenses not covered by his income. If Roger has savings to cover the monthly shortfall, eventually they will be depleted. He is not able to save or invest for retirement or any other future goals. Roger will be required to work to afford to survive until he can live no longer.

This should be a wake-up call. In this first part of this series, I wrote about financial enlightenment, the moment when you realize where you stand and your future outlook. I described how to take an inventory of your finances to determine your current position and how to use your income and expenses to predict your improvement or deterioration over time.

In many cases, people don’t reach a turning point in their financial lives until they hit “rock bottom.” That is something that people should avoid as much as possible. It’s not uncommon to just ignore a problem until it gets in the way of normal human functioning. You can live with a broken heater until winter, and you can continue to accumulate debt for a long time. Eventually, you’re going to want to be warm when the temperature drops and you’re going to want to keep your house when you start receiving foreclosure notices.

Now that he has reviewed his finances, Roger should have a good understanding of his condition. So far, I’ve written about self-evaluation, but now it is time for people whose situation is similar to Roger’s to take action. Starting with Part 2, I will share some ideas for moving in the right direction.

Image source: crowt59

The original version of this article, Take Control of Your Finances Part 1-D: Decide to Take Action, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Now that you’ve taken an inventory of your finances and determined your net worth, I can tell you that the number is meaningless. Well, there is a point to your net worth, but it’s not the most important number to your finances. Your net worth tells a very small part of the story that defines who you are.

Let’s say my net worth is $100,000. Am I in good financial shape, poised well for the future? It’s impossible to say because we don’t have enough information. $100,000 means different things to different people. For example, starting retirement with $100,000 in the middle of Kentucky will go farther if you relocate to Kentucky or Argentina than if you move to New York City or London.

But more importantly, your net worth is nothing more than a snapshot at some particular time. If you’ve recently climbed out of credit card debt, $100,000 is good. If you have hospital bills to pay without insurance, $100,000 might not be enough to last the next year. When you view your net worth in combination with your income and expenses, you will be able to better define your finances. You’ll have an idea of where your money is going.

Income

In today’s society, almost everyone needs income. Most people acquire money by trading their time and effort. I give eight hours of my day, five days each week, as well as a portion of my brain power during that period, to an employer. The employer is (usually) grateful and provides me with money in return. It’s kind of a strange system, but it works. Chances are you do something similar, but perhaps you receive income from investments or a pension.

With one source, it’s easy to calculate income. On a monthly basis, how much money do you receive? Some incomes are steadier than others. I receive a predictable paycheck from my employer each week. But I also earn money from a side business. The side business is highly unpredictable, so I don’t rely on counting that income each month.

Expenses

The reason we trade of time and effort for money is often because we need to use money to trade for items that allow us to survive, like food, water, and shelter. If we’re lucky, we’ll have some money left over after paying for necessities to spend on luxuries like furniture, internet access, and hot air balloon rides, or to save for the future.

Your expenses should be less than your income. Put another way, spend less than you earn, or live within your means. If you do, your financial situation will gradually improve. If you do not; that is, if you spend more money than you have each month, then you will dig yourself a hole that gets more treacherous each month.

Determine about how much you spend each month in a number of categories to determine whether you’re sinking, treading water, or winning a gold medal in breast stroke. For now, until you actually track every financial transaction you make, these numbers can be estimates.

Non-discretionary expenses

These are expenses you have to pay, the necessities for living. I use these categories but you may have some others you’d like to include. Like the net worth calculation, create a two-column list. The first column contains the category and the second column contains the monthly amount you spend in each category.

1. Automobile/Transportation: This includes parking, tolls, and train tickets.
2. Food and Groceries: If you have a family to feed, this could be very high.
3. Healthcare: How much do you pay each month for doctor’s visits and prescription drugs?
4. Household: Some household expenses are non-discretionary. I include clothing in this category.
5. Interest and Fees: If you have loans, credit cards, or any service that charges a fee, then include the amount you spend in this category.
6. Insurance: Health, car, and life insurance should be placed in this category.
7. Rent: I rent an apartment, but you may not.
8. Utilities: You pay for power to your home. Perhaps you would include cable television here, but I would consider that discretionary.
9. Tax: It’s almost impossible to avoid paying tax.
10. Debt payments: Each month you must make at least the minimum payments on all your debt.

Discretionary expenses

Everything else is a discretionary expense. You don’t have to spend this money every month. Dining out, gifts, charity, and your vacation are discretionary expenses.

The goal is to be able to start with your monthly income, subtract your non-discretionary and discretionary expenses, and still have some money left over. This calculation is your “net income” if it is positive; if the number is negative, you can call it a “net loss.” Net income can be saved, invested, or used to pay off your debt faster. Here’s what your income and expense report might look like. Note that income is positive while expenses are negative.

This person is in bad shape. With a monthly income of $2,000, he has only $175 after non-discretionary expenses. During this time period, including all expenses, he spent a total of $2,175 while earning only $2,000. If this is a pattern, he is probably increasing his debt load every month, and the non-discretionary debt payments expense will grow.

If this is you, this should be the first sign that it may be time to change your behavior. This individual has some flexibility, but everyone’s situation is different. Assuming that the month observed here is typical of other months, we can predict fairly accurately that net worth, if not buoyed by investments, will decrease every month.

This is the opposite of anyone’s financial goal. It’s time to take action.

Image source: specialkrb

The original version of this article, Take Control of Your Finances Part 1-C: Make Accurate Predictions, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

An acquaintance of mine formerly owned a store that sells “country” products like hand-crafted wood furniture, candles, and decor inspired by rural living. Twice a year, she recruited family members and friends to help take an inventory of the entire store. This process involved many hours of walking throughout the building and counting items on shelves and in storage. Even though the computer sales system tracked the quantities of items so at any time she could identify the number of wool welcome rugs with a turkey design, someone would count the rugs on the shelves to ensure the computer was correct.

Like a store, your awareness isn’t complete until you do your own financial inventory. Just like your name or your occupation identifies yourself quickly to other people, your net worth — the sum of the values of all your financial accounts — is a nominal description of your financial identity. The complete calculation of a net worth can be convoluted because there are some important items to include that aren’t easily valued, so we can start with the most important aspects. For our purposes, we will look at the simplest way to determine your net worth.

Everything we need to consider fits within these six categories:

1. Bank accounts: where are they and what are the balances?
2. Investments: Do you have any? If so, what is the current estimated value of what you own?
3. Property: Do you own a house? How much did you buy it for or how much do you think it’s worth now?
4. Mortgage: Are you paying off your house? How much left do you owe?
5. Other loans: Are there any other loans that require your attention?
6. Credit cards: If you have credit cards and don’t pay the balances in full each month, what are the balances?

If you enjoy working on the computer, list all of your accounts in each category into a spreadsheet program like Excel, Google Docs, or the free OpenOffice.org. Spreadsheet software isn’t difficult to use for the purpose of creating these lists, but if you would prefer to work with paper and a calculator, that is a valid choice.

Each row should represent an account or item. For each item, the first column should include the location or type of account and the second column should contain the amount or value. For accounts in categories one through three, enter the values as positive numbers. For accounts in categories four through six, use negative numbers to represent the values.

Add up the numbers in the second column and enter the total beneath. This total, for the purpose of this early stage of financial development, is your “net worth.” Your net worth is just a calculation of what you own subtracted by what you owe at any one point in time. Just like your name or your occupation identifies you, your net worth describes your identity in financial terms.

If you are married or share finances with another individual, you may want to consider the financial accounts belonging to everyone within the household rather than just your own. Whether to do so is a personal choice.

Here is an example net worth calculation in its most basic form. If you’d like to go beyond the basics, read How to Calculate Your Net Worth. In the report below, the red numbers in parentheses are negative numbers, representing amounts you owe to other people or companies.

While your bottom line is a very personal number, don’t take it too personally if you feel unsatisfied. There are often quoted guidelines that describe what your net worth “should” be for your age, but that type of comparison neglects to consider situations which might be unique to your situation. For example, if you’ve spent more time earning undergraduate and graduate degrees before entering the workforce, your net worth may be lower than average once you begin working full-time, but may increase faster if your degrees provided you with opportunities for higher-earning jobs. (Please note that I wrote “higher-earning,” not “better.”)

Resist the temptation to compare your net worth with those of others. Although websites like NetworthIQ exist to make interesting comparisons within and across demographic groups, focusing on other people’s numbers is distracting when all you want to do is control your own finances. Use this number, your net worth, to understand your current position and determine whether it is where you would like to be.

Now that you know where you are financially, you need to look at some more numbers to get a quick feel for how fast your net worth is likely to increase (or decrease). The next part of taking control of your finances is making an accurate prediction based on your income and expenses.

Image source: jenn_jenn

The original version of this article, Take Control of Your Finances Part 1-B: Take an Inventory, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Who are you?

For any one human being, the number of answers to this question approaches infinity. There are many aspects that are included in the definition of self. The most common response is to answer with the collection of sounds used to nominally identify yourself: “I am Joe.” Our names, generally given to us by our parents, influence our identity to some extent. In a world with billions of practically identical members of the same species, names help us identify each other quickly.

You might also answer with your occupation: “I am a plumber.” Many adults spend most of their lives training for a certain job or career and exchanging their time and effort within that career for compensation in the form of money. This trade is permission to survive, and in some cases, prosper. It is not surprising that a person would choose to identify herself by the activity that consumes her life and provides the opportunity to continue living.

If you do not have an occupation, you may answer with the way you are considered by the people most important to you: “I am a father.”

This only scratches the surface of who you are. There is more beyond this top layer. How do you view the world? What is important to you? What topping do you like on your pancakes?

I want to focus on “What is important to you.” The details of your finances probably aren’t that important to you. You live, work, and pay your bills. You may be in a comfortable situation financially, or you may not be. Is there a need to fix something that isn’t “broken?”

Most likely you only pay attention if your finances start impeding your life. In other cases, you might keep denying bad situations until you hit a point at which no further decline is possible — rock bottom. At rock bottom, there’s a good chance that the accumulation of poor circumstances or choices force you to suddenly become aware.

In terms of finances, it’s much less damaging if you become fully aware of your money and everything that is tied to money in your life before the worst occurs. Whether you call it Enlightenment, kensho, epiphany, or a revelation, it pays to move towards awareness than let it happen to you.

The first part of becoming aware is understanding your role in the greater economy.

• Assuming you are not a slave or independently wealthy, you trade your time and effort for money.
• You trade the money you earn for food, shelter, and possibly some extras.
• If you are lucky enough to earn more money than you need to survive, some of your money will be diverted to programs that help society in general.
• Companies make money by convincing you that their products are worth spending the remainder of the money you earn, and in general, companies are smarter than you.

I don’t mean to insult anyone with the last point. Successful companies spend a large amount of money to understand the way people think and behave in a consumer society. If you watch television, the commercials you see are targeted specifically to people just like you. These commercials are tested, and only the most successful ones make it to the airwaves. Companies spend money on advertising because they know they will regain that money through new customers as a direct result of that advertising. Advertisers are getting smarter and are adapting to new consumer behaviors, like time-shifting television programs and skipping commercials. It is very hard to outsmart advertising experts who rely on scientific studies of financial behavior. Understanding your role as the consumer in this relationship is the first step to being able to control your finances.

What are some of the creative ways companies try to convince you with your money?

Now that you’re aware of your role, you can begin to quantify your financial identity and place it in context. The next step in taking control of your finances is to expand the definition of yourself by discovering your financial identity.

Image source: Swami Stream

The original version of this article, Take Control of Your Finances Part 1-A: Become Aware, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When first attempting to gain some control over your finances, it’s particularly helpful to micromanage. If your money is in a state of disarray due to spending more than you’re earning, then it’s helpful to look at every little expense, at least for a time. This will help give you a more accurate picture of your overall “outgo.” You may decide that those expensive coffee-related drinks you buy every day add up over time, and you can use that money for more important things, like investing for the future. (This idea is known popularly as the “Latte Factor®.”)

Paying close attention to the minutiae of spending is certainly helpful to many people as they learn to gain control of their financial lives and maintain that control. It’s easy, however, to get into the habit of looking through a microscope so often that you fail to see the bigger picture. This is a classic case of being penny wise, pound foolish.

Put another way, buying the wrong car can in an instant undo years of your hard work and financial gains sustained by eliminating your daily latte or replacing it with a $0.99 coffee. Following a tip on a hot stock has the possibility of decimating your investment in a short period of time. In fact, although I wouldn’t consider Vanguard’s Total Stock Market Index (VTSMX) a “hot stock tip,” I invested $5,000 in this fund for charitable causes at the end of of 2008, and the value has already dropped by 10%.

An article at the Motley Fool presents an interesting idea to illustrate just how much one big mistake, though seemingly innocuous, can undo years of scrimping and saving pennies here and there. The article presents a better example for housing than they do for stocks:

Conventional wisdom says that buying a house beats renting because you build equity and get tax benefits on your mortgage interest. But as with any investment, price matters.

And prices got detached from underlying value in a major way during the run-up. Those who took on conventional mortgages with monthly payments they could afford can wait out the storm. Unfortunately, those faced with refinancing teaser rates they could barely afford don’t have that luxury.

To calculate the cost of a housing mistake, let’s assume someone bought a $400,000 house and the house’s value dropped 10% (the latest numbers show average housing prices have fallen 14.4% year over year). That’s negative equity of $40,000, or 10,000 days of lattes. You’d have to skip that pick-me-up for 27 years to make up for this one. Yikes!

While most people decide when to buy a house out of necessity, perceived or actual, many people try to time the housing market, no matter how intelligent they may seem otherwise and how well they’ve convinced themselves of their infallibility. You can pinch all the pennies you want, but if you still make poor choices when faced with major purchasing decisions, you’re no better off.

The best solution is to find a balance between micromanagement and focusing on the entire financial picture.

Don’t Blow Your Retirement With One Mistake, Anand Chokkavelu, Motley Fool, June 19, 2008.

The original version of this article, Managing Your Money Vs. Micromanaging Your Money, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When it comes to tracking my daily spending, I’m not as diligent as I used to be. That’s due in part to laziness and part to the lack of necessity. Let me explain.

First, this topic was inspired by a recent email I received from a Consumerism Commentary reader. Nat asked: How do you keep track of all minutiae of sending? Do you charge everything on your credit card? All the little daily things. And then review your bill periodically? Or do you keep receipts? Jot it down?

Flashback to the 20th century. I had played with programs like the Microsoft Money free trials before so I was familiar with the notion of tracking spending with the intention of finding opportunities for improving my financial management. I was also familiar with my personal need to do something; I had a job but nothing in the way of savings to show for it. I did, however, have increasing debt.

It wasn’t until 2002 when I was out of work for a short time did I finally knock some sense into myself. Without spare funds to buy Money or Quicken, I downloaded the free (at the time) Moneydance and began tracking my expenses. I didn’t get very far right away, however.

When my monthly reports showed “Cash Withdrawal” as one of my largest expenses, I knew I wasn’t getting the information from the software necessary to make decisions about my finances. I knew what I had to do — I had to track every expenditure, even if I used cash.

I changed my methodology moving forward. I created a tracking account in Moneydance called “Cash.” When I withdrew money at the ATM from my checking account, I recorded it in the software as a transfer rather than an expense. Then when I spent that cash, say at the cafeteria at my new job or at the movies, I could list the transactions as outflows of cash, categorized as “food:convenience” or “entertainment:movies.”

For this to be successful, I had to be very diligent, almost (but not quite) obsessive. It was actually a very simple process. I would ask for receipts for everything and save the receipts in my wallet. At night I would dump my wallet onto the table and enter the day’s expenses, whether paid by cash or credit card, one by one into the software.

I’m saying that this is “not quite” obsessive. If I had been obsessive, I would have written down every purchase for which I could not be provided a receipt. I relied on my memory for many expenses, and I was usually able to do so because I opened Moneydance every evening.

I used the knowledge gained from tracking the minutiae, as well as from discussion boards like The Motley Fool where I learned about cash-back credit cards among other financial tidbits, to make better-informed decisions about spending and saving.

This continued for a while. As the availability of cash back credit cards increase, more and more of my spending was electronic. Eventually, I switched from Moneydance to Microsoft Money and finally Quicken to take advantage of more features, such as the automatic reconciliation of credit card transactions with the bank’s information, but the process remained fairly the same.

As the next few years progressed, I was managing to net anywhere from one thousand to several thousand dollars each month. That’s mainly due to increased income from a variety of sources, but also due to smart spending. I went without anything but the basic cable television for a while, I kept my rent expense low even when I was living alone, and I made sure I had a reliable car that did not guzzle gas and required little maintenance. For much of that time, I had no car and made use of public transportation almost exclusively, and even in New Jersey, that wasn’t easy.

In a few short years, I went from spending more than I was earning to just the opposite. And for the most part, the difference between my income and expense was large enough I wasn’t in any immediate danger of increasing my debt to pay for necessities. At this point, tracking every single cash expense is not worth the effort. I still collect my receipts, particularly for anything that may be a business-related expense, purchases with the possibility of being returned if defective, or large expenses in general. The receipts generally get filed away.

Every few days, I open Quicken to enter transactions. Now I rely on my memory for a large portion of my cash expenditures. I don’t fret over whether I get something exactly correct or if I miss something. I generally round up when figuring my cash expenses, so that pay make up for forgotten transactions.

This does affect the accuracy of my monthly financial reports, but the purpose of these reports has changed over the past few years. At first, I needed to know with good accuracy where my money was going in order to find ways to chip away at it from different angles. Now, I look at the big picture: how are my investments performing, am I seeing a decline in business income, how big of a vacation will I be able to afford, etc. This information and the decisions based thereon are not affected by the $7.00 I spend at the office cafeteria. I still try to account for everything, but I’m past the point of pseudo-obsession.

Photo credit: PPDIGITAL

The original version of this article, How to Track Your Spending: From Obsession to Reasonability, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

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.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Almost 3 million children in the United States have learning disability (LDs). Different types of LDs have different effects on a child’s ability to perceive, comprehend, and interpret information, and these effects can last into adulthood. For example, dyslexia and dysnumeria can make financial calculations difficult, and temporal problems can lead to a tendency to pay bills late.

Arlyn Roffman, Ph.D. is an active psychologist who specializes in young adults with LDs. She presents a number of suggestions for parents interacting with middle and high school-aged children to help overcome financial and consumer struggles due to learning disabilities.

1. Orient your child to a variety of types of stores. As you visit grocery stores, department stores, pharmacies, etc., discuss the layout of the stores with the child. Allow them to help find the products you intend to buy by looking for the posted signs and similar items.

2. Help your child learn the sizes of the shoes and clothing she wears. Dr. Roffman indicates that many parents continue choosing clothing for children with LDs beyond the point the parents would stop and allow the children to choose otherwise. As children grow up, they should be allowed to express their personalities and start defining their own “image” through clothing like their peers.

3. Discuss tipping with your teen. Charts and calculators are available to help determine the percentage of a bill for tipping. If a child is involved in the tipping process when dining out with his family, he will likely be more comfortable when placed in these situations without parents as he becomes more independent. Also discuss the “going rates” for other service providers, like bellhops.

4. Counsel her about credit cards. Some aspects of credit cards are difficult to understand even without a learning disability. Dr. Roffman suggests discussing credit cards with a child once they start receiving credit offers in the mail, but I would suggest starting sooner. Middle school or early high school is probably a more appropriate age. They will have already noticed their parents’ spending habits at this point or have friends who use their parents’ credit cards.

5. Teach your teen about basic contracts. Warn teens against high-pressure sales tactics. Explain how contracts work (cell phone contracts, for example) and pay attention to the details, like termination fees and other traps.

6. Establish a basic budget early in the teen years. If you provide an allowance to your child or if he earns money from working, help him create a spending and saving plan.

7. Encourage her to use a “budget envelopes” book. The “envelope” system of budgeting is a simple method to maintaining a budget. If taken literally by using real envelopes and real cash, the concrete and tactile nature of the activity can be beneficial for a child with LD.

8. Toward the end of high school, teens need to learn how to manage a checkbook and pay bills. Dr. Roffman offers a great suggestion. Children with LDs may find the choice of carbon copy (duplicate) checks more beneficial. Dysgraphia can be a strong obstacle in writing checks, so you can slip in a “cheat sheet” into the checkbook if necessary, including proper spellings of numbers.

9. Help your teen set up a home office at a desk table. This suggestion seems to acclimate children towards working at a desk job, like many people in the United States. It also provides a central location for all the tools of money management, including the checkbook, the computer with Quicken for tracking financial accounts, and a paper file for maintaining records and bills.

Most of the suggestions above work well for children without learning disabilities as well, but children with LDs will face some extra challenges as they grow into adult consumers.

National Dissemination Center for Children with Disabilities
Dollars and Sense: Teaching Teens with LD Consumer Skills and Money Management [GreatSchools]

The original version of this article, Teaching Financial Skills to Teens With Learning Disabilities, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

How are you feeling today? According to a psychologist from the U.K., January 24 is the most depressing day of the year. There’s an actual scientific formula that has been used to determined this fact. Some of the conditions that have led to this conclusion are specific to Britain, but there are seasonal cycles that contribute to this feeling anywhere throughout the winter, which is now, at least in the northern hemisphere.

This inspired me to think about my finances. Does my spending go through seasonal cycles? Checking Quicken, I see that my discretionary expenses do jump a bit from December through March compared to other times of the year. I don’t believe this has to do much with the weather or with therapeutic spending — shopping to make one happy when sad or depressed.

Obviously, Christmas and Hanukkah start the winter and Valentine’s Day occurs in the middle of the season. These holidays lead to more spending, at least for me. Additionally, I take a week-long vacation in February to coincide with my girlfriend’s winter break. (She is a teacher.) So for me, the winter is one of the most expensive seasons.

Perhaps offsetting this spending, I am more inclined to stay inside during the cold winter rather than go out and spend money on outside events like concerts and days spent in New York City.

What about other financial cycles? I wonder if people make worse investing decisions in the winter thanks to turbulent emotions, unpleasant weather, or both.

Image credit: scottfeldstein
Jan. 24 called worst day of the year [MSNBC]

The original version of this article, Today is the Worst Day of the Year: How Does it Affect Your Money?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

In the next few days, I plan on reviewing my 2007 progress against my goals. However, I need to start thinking about 2008 before I have a chance to compile all the data. One of my biggest plans is to save a higher portion of my income. 2007 was a spend-heavy year for me, and it’s time to return to more basic levels of expense in most categories.

When I lay out my goals for 2008, that will be a primary focus.

Helpful for next year’s planning, Kiplinger has six suggestions for a prosperous 2008.

* Take advantage of higher IRA limits. The maximum contribution to all IRAs combined (in the role of an employee) is $5,000 (or $6,000 if you are over 50 years old). I say, “in the role of an employee” because self-employed people, as an employer, can contribute more to the SEP IRA. I may find that I no longer qualify for a Roth IRA, so while I’m considering a lump sum investment, I may wait before pulling the trigger.

* Stretch your raise even further. Use some of your raise to boost your 401(k) contribution. Now that the Roth 401(k) is available to me, I am splitting my contribution between the new account and the typical pre-tax account. Depending on other income sources, I may try to maximize my 401(k) contribution to the full $15,500.

* Focus on high-interest debt. Interest expense on debt is an unhealthy and in many times unnecessary payment. The only debt I have right now is a student loan. With savings account interest rates shrinking, it would be more beneficial for me to pay off the remainder of my student loan in 2008.

* Start gathering your tax records now. Ever year, my tax calculation increases in complexity. I think it’s time to hire a professional to make sure I’m finding every deduction and not making any mistakes. Many banks provide tax records electronically now, but it’s still important to develop a filing system to ensure everything is readily available.

* Put your bills and savings on autopilot. My telephone bill and cable bill are deducted automatically from a rewards credit card account. I am required to pay my rent by check, so that cannot be automated. My credit card payments change each month, and I cannot schedule in advance without knowing the exact amount. Savings, on the other hand, are easier.

* Protect your assets. I have not been a good protector. I’ve accumulated a fair amount of non-financial assets in the last few years, and particularly in 2007. I do not have a strong renter’s insurance policy to cover everything. This will be one goal of highest importance for the new year.

6 Moves for a Prosperous New Year [Kiplinger]

The original version of this article, Getting Your Finances On Track In 2008, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

I just ran across a cute article by TODAY Financial Editor Jean Chatzky which really spoke to me as a hater of all things mathematical.

According to Chatzky, math anxiety, one of the biggest roadblocks to getting one’s finances together, affects half of all Americans at some level. It can result from any early numerical trauma, from a bad experience in school to overdoing things on your first college credit card. And it’s a recognized condition:

The phobia is so real, it has its own diagnosis code from the American Psychological Association: 315.1.

It’s a serious affliction, Chatzky says, because to do money, you need to do math. To get beyond the fear and into your finances, she offers some useful suggestions:

1. Take a refresher course - Noncredit courses at a local community college are a great way to dive back in. Not only will it improve your skills, but can help you develop positive associations with math.

2. Start a money group – Clubs can help you to overcome a math phobia and increase your learning in a fun, social way. I think investing clubs sound like an interesting way to get information and experience on a topic that might otherwise bore me to tears. Even Finance 101-type topics would be very valuable to me, so I think I need to follow Chatzky’s advice on starting a “money group” among your friends:

At one meeting you might cover the basics of investing, at another you’ll talk about sending your kids to college. This support system can be a huge confidence booster, but more than that, you’ll be able to feed off of each other’s strengths. If your friends don’t go for the idea, you can link up with an existing group in your area by visiting Oprah.com/jean and clicking on “money groups.â€?

I bet that Meetup.com has some groups in my area as well. Just as long as I can make sure I’m not lured in by an advisor with a personal agenda, I think this can be really helpful and enjoyable.

3. Use shortcuts – Calculators and estimating, especially when rounding up, can make things simpler since you’re not manually crunching every digit.

4. Learn by osmosis – Even if you don’t have time to focus on financial topics, listening to a radio show or perhaps some Jim Cramer or Suze Orman in the background might help you start to absorb more information. Personally, I’ve found I burn more calories on the elliptical trainer when Mad Money is on at the gym. If you find you’re more open to reading about finance, the local paper or personal finance magazines at the library are great places to start expanding your knowledge.

5. Set your kids on the right track – Discuss math at home so that you help future generations of your family to be more financially confident. Real-life examples help you monitor your progress towards financial goals as you educate.

Have math anxiety? It might hurt your finances [Today Show at MSNBC.com]

Image Credit: Silence of Night

The original version of this article, Math Anxiety Could Hurt Your Finances: 5 Ways to Get Over It, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

In my review of Cash, Cars & College by Janine Bolon, I didn’t mention the author’s thoughts on the nature of money, which she included in the book. To expand on this section, Janine has offered the following guest post.

Why Become Wealthy? Believe it or not, I’ve actually been asked this question by a student of mine! She totally did not get why anyone would want to be wealthy. After asking her to define what it was to be wealthy for the class I quickly became aware that she had a mental block to becoming wealthy. To her, “Rich” people acquired their secure financial state by abusing and crushing those around them to gain more and more money.

With that sort of paradigm floating around in her head, is it any wonder that this woman had problems saving money? She was in continual battle with herself! She knew she needed money, but anytime she had too high a savings account she would “splurge” on some item and blow out her stash of cash so that she was back to living paycheck to paycheck. Ouch! How painful is that?

To my sadness, this student is not alone in her assessment of “rich” people. Throughout my travels, classes and seminars I find that roughly 45% of the people who are having problems with money have to deal with this issue first before anything else can happen! No, it is not your credit card debt that is the problem, at least that isn’t the core issue with your financial scarcity.

The issue is much more basic then credit card debt. You have not given yourself permission to become wealthy because you haven’t answered these questions for yourself:

1. Do you see money as good or evil?
2. Do you want to have more cash because you can use it to buy things that you or people in your life need or want?
3. Are you afraid of having too much money because the only people who seem to have lots of it are the folks who have done something bad to get it?

These are some of the first questions you need to ask yourself. If you see money as a necessary “evil,” your ability to find and save money, let alone use it wisely, will be colored by your negative view of what it can do. Money is not evil. Money is only a tool, like a hammer. You can use that hammer the right way, to build a house for someone who needs one. Or you can use it the wrong way, to smack someone on the head. Either way, the hammer has no choice in how it is used. Good or bad, right or wrong, the choice along with credit or blame, belongs solely to the person who wields it.

The same is true for money. Money is a useful tool, a medium of exchange that allows you to buy stuff you want. Money spends, regardless of how you get it. The bucks from your paycheck buy just as much as the cash you get from part-time employment, or the coins you picked up in the parking lot. The sales clerk and the shop owner don’t care where you got the money; it spends. The only “good” or “bad” in money is what you bring to it.

If you think that money is “evil,” take a minute to ask yourself some questions.

1. “Why do I believe that money is evil?”
2. “Is my view colored by how my parents handled cash?”
3. “Do my friends have money, and do they use it well?”

Write your answers down on a piece of paper, and then read them aloud to yourself. Why? Because as long as you believe that money is “bad” you will not be able to make or keep much of it. It is very important that you understand the battle in your brain as you go about changing your thoughts on money. If you want to keep money flowing in your life and working for you, then define for yourself what type of wealthy person you want to be.

Once you have a clear picture of the type of person you envision yourself to be and how you will handle money, then you can move toward creating it in your personal life. All it takes is a bit of introspection and reworking your internal definitions on what it means to be wealthy.

Janine Bolon is the author of Money…It’s Not Just for Rich People! and Cash, Cars and College. She is also a radio talk show host and financial coach. Check out her web site, Smart Cents, Inc., for more tips on wealth accumulation and frugal living. Janine invites you to subscribe to her free newsletter, My 2Cents, which can be found on her website.

The original version of this article, Battle of the Riches: Good vs. Evil. Which Side is Money On?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

My former boss at the company I currently work for knows that I have a side interest that involves personal finance and the web. Obviously, I do not supply too many details to him as I prefer to maintain some level of anonymity on Consumerism Commentary, considering the personal information I’ve been posting since 2003. He contacted me today to make me aware of an article in today’s Wall Street Journal. (The article is available for free online, for now.)

The article addresses the trend of twentysomethings (I’m 31) sharing their personal financial information online using social networking websites. One of the social networking sites mentioned is NetWorthIQ. NetWorthIQ allows people to create profiles and update their financial standing every month. These profiles can be set to either public or private. You can even look at trends and comparisons between individuals.

While I like NetWorthIQ, I never got into using it much. I like keeping my information on my website, first of all. Also, I think the social networking aspect encourages comparisons between individuals or groups of individuals, which I’d rather not be a part of. I’m a fan of internal comparisons for tracking progress, but comparisons between people are almost meaningless. Also, balance sheet information doesn’t mean much without an income and expense report, which I don’t believe is supported by NetWorthIQ.

Nevertheless, I think it’s a great tool, especially if you want to take some of the work out of publishing your own reports.

The article also mentions Wesabe, which provides a way to access the information one might enter in software like Quicken from anywhere. The article didn’t mention Mint, which is still under testing, but it may turn out to be a better application than Wesabe.

Two additional websites sound interesting and are worth a look.

At other sites, such as the just-launched Covestor LLC, which allow investors to share their portfolio information, members manually input transaction data for their brokerage accounts or provide their account passwords to have the firm automatically track their trades. Members can choose to remain anonymous, and the actual dollar values of trades and specific holdings of each member always remains confidential, with only percentages displayed…

On Geezeo, members can create discussion groups with other users about specific financial topics. The site lets members create a consolidated view of their financial accounts and use text-messaging technology to get quick balance updates from their mobile phones. Starting this week, users will be able to provide feedback on financial products, such as student loans, credit cards or savings accounts.

The idea of tracking your finances publicly is gaining a lot of attention and popularity. I never thought this would be something that would catch on and have “mass appeal.” That’s the beauty of the internet — people with strange interests can come together to form communities, convincing those involved that their perceptions are “normal.”

The original version of this article, Wall Street Journal: Managing Money in Public, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

I’ve been a user of Intuit Quicken for the past few years after being a loyal user of Microsoft Money (and MoneyDance earlier, when I felt I needed to run Linux on my home machine). While I think I’ve settled on the software that works best for me, I’m not completely satisfied.

I’m waiting to try out the up and coming Mint to see what features it might add for me, but until then, I’ll continue relying on Quicken for Windows.

The 2008 version of the software should be released in the next couple of months, so the new version is most likely finalized by now. If these improvements aren’t included by now, I’ll have to hope for the next version to be released a year from now.

So here are my ten suggestions for improvements, most of them minor enhancements. At the end of this post, I am giving away a free copy of Quicken Premier 2007, the version which is best for those customers with investments but no self-employment income to track.

1. Restricted Stock Units. When I was granted restricted stock units a year ago, to vest in 2009, the best option for recording the grant was as an employee stock option grant. It’s not exactly the same. For example, the tax due is calculated differently.

There are probably other, more complicated financial instruments that can be added to the software just for a more complete package.

2. Real Background Downloading. Probably the biggest hyped new feature in Quicken 2007 was “background downloading” of transactions via Direct Connect, as well as a way to use Web Connect (logging in to the bank’s website and manually downloading transactions) from inside the software. It doesn’t really work that well. By the fourth interim update to software, there have been some improvements, but some things just don’t work right while the software is downloading transactions.

Entering transactions — particularly in investment or retirement accounts — is tricky. For some reason, using the “Enter” key to input new transactions doesn’t work while Quicken is downloading in the background. The downloading process is also much slower than it was in 2006. This could use some improvement for the new version.

3. Double-entry Accounting Mode. For sticklers to accounting rules, every debit should be matched with a credit. That means rather than dealing with expense categories, you have expense accounts. For a simple example, you would record the act of buying a computer as a transfer from a cash account to an asset account called “Dell notebook computer” (or “computer equipment”). Double-entry accounting mode would be an initial set-up option in this ideal world.

This feature would make accounting geeks happy, but most people are fine with the single-entry method in which transactions are categorized and not balanced.

4. Monthly Reports. I like Microsoft Money’s automatic monthly reports that consist of a number of mini-reports, which together provide a complete financial snapshot at the end of each month. In Quicken, I have to view several different reports in order to get the same information. I think the entire report configuration interface in Quicken can use a redesign. It is quite flexible in terms of configuring each report, but I’d like to be able to define my own structure for saving reports.

5. Airline Miles. This isn’t that much of a big deal, as I already use a hack to use asset accounts to track miles and points. Other people who earn and cash in their reward travel more often than I do, business travelers for example, might benefit from accounts and reports designed specifically for tracking miles.

6. Mobile integration. Right now, the best way to use Quicken on the go is with third party software, Pocket Quicken. If I’m already paying for the software, I don’t want to have to pay again for a mobile version that won’t expire in 14 days.

7. Bring Back QIF Support. In the past few years, Intuit has begun eliminating support for the QIF file format, one that Quicken created originally and quickly became a standard for transmitting transaction information over the Internet. The official stance is that the QIF format is not as flexible as the OFX/QFX format. I think it’s a money issue. Regardless, many financial institutions are still hanging onto QIF, refusing to change their systems to support QFX. I’d still like my software to communicate with those banks and brokerages.

8. Improve the User Interface. For the 2007 versions, Intuit redesigned the graphical user interface throughout the software. It’s pretty, but it’s slow. It also doesn’t have basic interface customization options such as selecting which columns are displayed or changing the width of columns on the register screens.

9. Automatic Tax Liability. One thing I don’t include in my net worth right now is my full tax liability for all my accounts. Quicken should be able to calculate this automatically with just a little help from the user to fine tune some assumptions.

10. Quicken Bill Pay. Yes, Quicken has a bill payment feature which costs $9.95 a month for the first 20 payments and extra if you go over that limit. The service lacks the most basic feature I would like: the ability to pay bills without taking the money for the payment from my bank or credit card accounts. Yes, I want the bills to be paid without having to pay for them. If Quicken were to include this simple “feature,” I could get past the other shortcomings.

Don’t forget, I promised a giveaway. I have one copy of Quicken Premier 2007, which is the most complete version of the software except for Home & Business. If you’ve made your way through this entire post, then you deserve to win. Therefore, I will give all who choose to participate two entries in the contest.

All I ask is that you participate in a discussion by sharing what you do like about Quicken (or MS Money), what you don’t like about Quicken (or MS Money), or what you think about someone else’s contribution to the discussion.

(By the way, as I was preparing this post, Quicken crashed while attempting to access the Quicken Bill Pay feature.)

Update: This contest is now closed! The winner will be announced tomorrow. Please feel free to keep commenting and adding your thoughts for Quicken 2008.

The original version of this article, 10 Improvements I’d Like to See in Quicken 2008 (And a Giveaway), is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Why listen to what celebrities — non-experts in finance — have to say about money? Well, some of them have been around for a while and have experienced the fickleness of the entertainment industry. Here are some lessons learned.

Dave Barry: “Don’t emphasize money if you don’t have much; be happy.”

Eric Bogosian: “Live within your means.”

Alice Cooper: “Put yourself on an allowance.”

Judge Alex Ferrer: “Save more than you spend.”

Al Franken: “Live frugally, pass on to the next generation.”

Jeff Greenfield: “Don’t be extravagant but enjoy life.”

Carl Hiaasen: “If you can’t predict what your income will be, it’s important to budget.”

Meg Tilly: “Eating in will help you save money, and saving money will give you choices in life.”

Each of the celebrities interviewed shares a personal story related to the way they handle their finances, whether directly or through a financial planner. Here are the details.

The original version of this article, Money Advice From Celebrities, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

At the age of fifteen and as a freshman in high school, Cameron Johnson’s internet company had grown to sales in excess of $15,000 per day. Cameron is now 22 years old, and his most recent endeavor is writing. Cameron Johnson is the author of You Call the Shots, a book I highly recommend. In this guest post, Cameron answers the question: “If your businesses are going so well, why take the time to write a book?”

There are several answers. Credit card debt and student loans are at an all-time high. The cost to attend college increased 57% between 2000 and 2005 alone. Having a college degree, in many cases, isn’t by itself enough to compete in today’s job market. Instead of entering the job market after four years in college, many students are opting for graduate school to make themselves even more attractive to potential employers. It’s very expensive and if we look at the statistics, they can be very alarming.

Financial literacy is not something that is taught in schools. It’s not something that’s taught at home either, although that’s probably a good thing given the record high consumer debt. I feel it’s an important topic and it’s hard to believe an 18-year-old adult can leave for college and enter the real world, without ever being taught how to manage their money and knowing very little about the risks associated with credit cards.

There are dozens of books and plenty of media attention associated to the topic. My generation is very unlikely to buy one of those dozens of books on financial literacy, simply because they were likely written by someone twice their age and they feel they cannot relate. I wanted to change this. I felt like I had a story which would be valuable to young people, but also to parents and business people as well.

I started my first business when I was 9 years old with a personal computer. My parents taught me the value of a dollar and how to manage my money, and I realized I would have never learned those principles otherwise. My father also said to me, “If you chase the money, the money will run out. If you chase the skills, the money will come to you.” I took that to heart and began reading books on business, marketing, sales, management, and any business biography I could get my hands on.

I’m now only 22 years old, yet I have started 12 businesses, I’ve been an advisory board member to a Tokyo-based company, I’ve served as a consultant to several Fortune 500 Companies, my story has been featured in more than 200 newspapers and magazines worldwide, and I had a bestselling book in Japan when I was 15. I was hesitant to write a book because it was a huge decision to put my entire business life and lessons into a 270 page book which is available to the entire world to read. Although I felt like I had a duty to share my message as it could very well inspire other young entrepreneurs or help struggling small business owners.

So a year and a half ago, I was interviewed by the editor of a business magazine and I make this declaration to him: “We should write a book together!” The rest is history. The book follows the business lessons I learned through some very unique stories which I’m honored to be able to share. My publisher described the book as “Harry Potter meets Donald Trump” – and with that description, I’m flattered. What a powerful duo! I’m very passionate about the book and I really hope you’ll take the time to read it, and share it with the young people in your life.

Now if that doesn’t convince you to pick up the book, stay tuned for the excerpt from You Call the Shots I will post later today. You can purchase the book through Amazon.com. Also, check out Cameron’s blog.

The original version of this article, Guest Post: Why Did I Decide to Write a Book?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Money Magazine has an interesting feature with money-related thoughts from celebrities — mostly former celebrities — who have learned much through experience since their earlier days. The first example is William Shatner, one of my… favorite actors.

Shatner managed to barely scrape by no matter how much income was coming in. He constantly worried about whether he’d have enough money and was concerned about finding the next job. There is a famous scene in the second Star Trek movie where Shatner finally lets the stress get to him, and in his financial despair clenches his fists and yells, “Coin!” The director left the scene in the film.

Anyway, his earlier experiences and mistakes, such as investing his saved money ($500) in Canadian uranium at the worst time possible, led him to a strong anti-debt philosophy.

Money Magazine has short interviews with 21 pop icons covering their money experiences and habits. I might share other interesting ones I find as I have time.

The original version of this article, How Captain Kirk Handles His Space Bucks, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Money Magazine is running an extended feature targeting 7 of the most annoying money problems, and proving some easy solutions. Here is a shortcut to the seven shortcuts:

1. Ace your retirement. Buy a target-retirement fund in your 401(k). If you believe you’ll be retiring in 2030, you can buy a fund that targets that date and has “appropriate” risk for that time frame. The article doesn’t mention that with any fund of funds, you’re also paying fees on top of fees.

2. Invest (almost) like a pro. If you don’t want to buy a target-retirememnt fund, use a stock index fund and a bond index fund to achieve the level of risk you’re willing to undertake. Here’s their rule of thumb. Subtract your age from 120 and put that percentage into the stock fund. I’ve heard this rule using 100 as the baseline rather than 120.

3. Cruise into college. The Utah Educational Savings Plan will configure your 529, a college savings investment plan, using low-cost Vanguard funds. Or view your local options at savingforcollege.com.

4. Disaster-proof your family. Build an emergency fund, buy life insurance, and write a will. The first part applies to anyone, including single men like me. Once I have a family, I’ll take care of the rest.

5. Protect your identity. Opt out of receiving junk mail, which is targeted by identity thieves, by calling 888-567-8688. Shred paperwork and opt to receive statements via email rather than snail mail. Get your credit report for free three times a year from AnnualCreditReport.com.

6. Shop smart for a car. If you don’t want to deal with the hassle, hire a buyer for $400 to $800. Buying online is an option, as well.

7. Simplify your credit life. If you carry a balance, use a low-rate card. Call the company and ask if they can lower your interest rate. If you pay in full like I do, use a rewards card.

The original version of this article, Money Magazine: 7 Shortcuts for Major Money Hassles, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

According to a biannual report by Prudential Financial, women are now more involved in financial decisions then they were five years ago, but their financial knowledge and money management confidence is relatively low.

Two-thirds of the respondents gave themselves a grade of “C” or lower, while just 1% assigned themselves an “A.” These women have clear financial priorities, such as saving for their children’s college educations, having enough money for retirement, or not being a burden to others in their old age. Yet many lack confidence that they’ll be able to achieve these goals.

* In the past 24 months, only 11% of the sample invested in stocks or bonds.
* 84% of the sample say they understand insurance but “few” have acquired enough to help their family.

The survey’s main conclusion is that women’s lives are a balancing act. This pursuit for balance often results in inaction when it comes to financial decision making. While some strides have been made, there is clearly room for improvement.

Read the study here (PDF, 24 pages). The report includes lovely, colorful charts depicting the survey results and lots of analysis.

The original version of this article, Women Don’t Do Enough (According to Report), is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Jeanne Sahadi has a tendency to bring people back to reality, and she does so nicely with her latest commentary, the Not-a-millionaire guide to financial security.

She points out that getting rich is pretty difficult unless you’re an investment banker or venture capitalist. If you try to live like you’re rich before you are, you’ll run into problems accumulating wealth. Do you have kids? Climbing the financial ladder will be much more difficult. If you insist on living in an expensive location, you’ll have even more problems gaining an upper hand.

Even if being rich may not be a likely goal, financial security is easier to attain. Here are her tips:

* Build a cushion. I’ve said many times, building an emergency fund should be the first thing one considers. In most cases, your emergency fund should have a sizable cushion even before accelerating payments towards debt. Take a small amount from your paycheck each week to fund the account in a high-yielding account like the ones at any of these banks, and add your bonuses and gifts directly to the emergency fund goal.

* Live on less than you make. If you’re spending more money than you’re earning — like I was doing for a few years when I commuted 90 minutes each way to a non-profit organization that paid peanuts — you’re taking a step backwards each hour you work. Maximize your income and minimize your spending.

* Adopt a pay-go, pay-off strategy. I wasn’t familiar with this term, but I follow this concept. Simply pay your credit card off in full each month. Large purchases — like furniture for filling a new apartment or house when you move out on your own for the first time — can be made with the store’s 0% interest offer, but you have to be very careful. One misstep and they will charge you back interest.

* Take cover. Health insurance may be an expense, but it is necessary. Also look at short-term disability insurance. Term life insurance (7 to 10 times your annual salary) should be considered if other people rely on your income. Jeanne recommends renters’ insurance, although I admit I’ve never had it. Your car insurance should include liability coverage as well as collision.

Most of us are not going to be rich in our lifetime. Yes, with some discipline you can become a millionaire in 30 years, but I’m sorry to report that in 2036, one million dollars won’t be so impressive.

The original version of this article, You Won’t Be Rich, Maybe Just Solvent, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

I saw this interesting tidbit on Everybody Loves Your Money. According to Ben Bernanke, the chairman of the Federal Reserve, most American households are doing just fine managing their finances. Here is some of what he said:

On average, debt burdens appear to be at manageable levels and delinquency rates on consumer loans and home mortgages have been low.

He does note that lower income families have more problems without bank accounts or an emergency cash cushion. How about teaching financial savvy and money management in public schools? Bernanke says the curriculum is already overcrowded (and I agree).

I am surprised that Bernanke has said that most households manage money well. It may be true for middle and high income families, but it is not the message that the government generally tries to push. It’s beneficial to push the opposite message — that Americans are poor at managing their finances — for several reasons. This message, opposing Bernanke’s:

* Validates the existence and importance of asset managers, financial advisors, and brokers
* Encourages people to think about the management of their own finances
* Makes people feel good about being “above average”

Do you think households are generally capable money managers?

The original version of this article, Most Families Manage Money Well?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

It’s widely agreed that people are not generally taught about money management as they grow up from children, to adolescents, and to adults. USA Today is looking at a new study from the Jump$tart Coalition for Personal Financial Literacy which tests high school students on basic financial knowledge. Here’s the survey with answers [Microsoft Word document]. That file also contains the percentage of students who answered each of the multiple choice responses to each question.

The obvious response to the poor results is to provide more classes in personal finance (besides encouraging parents to teach their own children). Interestingly, according to the survey, those who took a class in money management and personal finance fared worse than those who did not. However, those who took part ni a stock market simulation game performed better on the survey.

The original version of this article, Personal Finance Classes Do More Harm Than Good For Teens, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Suze Orman is appearing on PBS right now on her fifth special, Young, Fabulous, and Broke. I’ll live-blog the first hour of the program. You can catch her on WNET 13 New York or possibly your local PBS station. Show them your support.

Read on and reload throughout the hour! Keep in mind my server is a little slow when it comes to posting.

Her first point is about how talking to a 24-year old made Suze question the financial beliefs to which she held fast. She realized that following her standard advice is difficult for the 25-to-35 age group: the “Young, Fabulous and Broke” as coined by Suze.

Just about everything in the economy today is working overtime against this generation. We have to take responsibility for funding our retirement. The old advice doesn’t work anymore.

She is relating the FICO score to your SAT score. Build the credit score while you’re young and you’ll have the ability to get good rates on debt and even get jobs (?) just like good SAT scores will open doors to colleges.

Don’t close down credit cards… keep them active (but unused) to keep your debt to credit limit ratio high. That will have a good effect on your FICO score. I used to close old credit cards. Now I just leave them open, having heard this advice a few years ago.

She’s talking about the FACT Act. On the east coast of the United States, we’re still waiting for free credit reports to be available to us.

Advice: Don’t depend on a paycheck. Make your mark so those who give you your paycheck are dependent on you. Suze gives us a story as an example. She advised a young person not to take a $65,000 job because it wasn’t what she wanted to do. Work for something you love and strive to be what you want to be for the rest of your life.

Once you get that job, you must kick ass and not ask for a pay raise. You have to be the greatest worker they’ve ever seen. But how can you survive on a sub-$30,000 salary in New York?

Suze’s answer: credit cards! Consider it investing in yourself. Borrow what you have to while you’re in the “establishing” stage. You, the youth of America, are the only undervalued asset left in this economy.

Good use of a credit card: groceries, gasoline for work.

Bad use of a credit card: eating out, gasoline for going out with buddies.

One and a half years later, Suze’s example received a great raise and didn’t need to use her credit card any longer. Use the credit card in order to “give your all to the place you’re working” and they’ll notice and want you. And don’t ask for money. Prove yourself and the money will follow.

Ah, pledge break. Before the break, Suze gave us a hook so we don’t change the channel. When we return, she’ll give us three things for something-or-other. During the break, Suze tells us that when she became a financial advisor with Merrill Lynch, she realized the importance of financial education.

The audience is very responsive when Suze offers a 50% return on their money. This is probably heading towards a “company match on 401(k)” bit. She is saying that it is necessary to not take this “free money” opportunity. I had to lower my 401(k) investment, but I still invest just enough so I get the full company match.

This is exactly what she’s suggesting for those whose company offers a match. If a company doesn’t offer a match, don’t invest. Pay off debt instead. After the credit card is paid off, or if you have none, the next step is to do a Roth IRA.

The taxes we have now are lower than they have ever been. Most likely, tax brackets will increase. So take the tax hit now and invest money with an account that gives you many choices instead of a 401(k) that defers taxes and usually has limited choices. When you take money out of your Roth IRA after you’re 59 1/2, you can do so tax free. Your contributions (but not gains) can be taken out of the Roth IRA at any time, it is tax free and there are no penalties.

After the Roth IRA, start saving for a down payment on a home. Every single person needs to have a goal of owning a home. A home is the best investment no matter what. No one has 20% to put down anymore due to overvaluation of houses. Returns on real estate have been above normal, but assume that everything will return to normal as they tend to do. Suze is very hot on real estate and she uses some fuzzy math by ignoring mortgage debt to come up with the idea that putting down $10,000 for a $100,000 house that appreciates 4% gives you a 40% return on your initial investment.

She just now mentioned having an emergency fund, forty minutes into the program. This takes us to another pledge break. What gifts are they offering? A DVD or VHS of the program (with deleted scenes!) for $75. For $120, a copy of her new book. For $270, a “complete financial fitness kit.” That includes a copy of the show, the book, a free audio download of the book, a guide to credit reports and scores, a “talk to your kids about money” guide, and a kit for making wills and trusts.

The pledge phones aren’t ringing much, but all the volunteers seem to be talking to callers. (We all know that’s just for show, anyway.) It’s 8:50, and I’m wondering if the show will come back from the pledge drive to actual programming before I am “forced” to change the channel to watch The West Wing.

Suze is talking about mortgages during the break. Don’t get a variable rate mortgage if you’re going to be in the house for a while.

It looks like this is it for me. I hope you enjoyed the live-blogging. It’s time for me to change the channel and make some dinner.

March 9, 2005.

The original version of this article, Suze Orman: Young, Fabulous and Decidedly Not Broke, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.