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?

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Be Financially Proactive

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!

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CNN Will Grade Your Financial Health

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.

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Helping Your Parents With Their Finances

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.

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Your Recession Budget

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

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Take Control of Your Finances Part 8: Set Savings Targets

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

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Take Control of Your Finances Part 5: Build a Better Budget

Welcome, visitors from The Dallas Morning News! 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

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Take Control of Your Finances Part 4: Use High-Yield Savings Accounts

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 premiere 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.

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Take Control of Your Finances Part 3: Spend Less Than You Earn

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.

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Take Control of Your Finances Part 2: Track Your Money

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.

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Take Control of Your Finances Part 1-D: Decide to Take Action

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.

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Take Control of Your Finances Part 1-C: Make Accurate Predictions

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.

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Take Control of Your Finances Part 1-B: Take an Inventory

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.

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Take Control of Your Finances Part 1-A: Become Aware

One of the most important metrics for tracking financial progress is net worth. I write about my net worth, or a modified form of it, every month when I report my balances. By watching my net worth change over time — usually increasing from month to month but occasionally decreasing — I can get a fairly decent picture of my financial health.

What is net worth?

Net worth is the financial value of all your assets, everything you own, subtracted by the financial value of all your liabilities, everything you owe. Finance gurus are familiar with this formula:

Net Worth = Assets – Liabilities

The equation works as well for individuals as it does for businesses. There should be no question of what is included in the net worth calculation. It starts out simple. Your bank accounts are assets and your credit card accounts are liabilities. These are easy to include in your net worth calculation because the values of these accounts are expressed in dollars and cents at any moment. You could at any point check your accounts online to get an up-to-the-minute balance.

Investments are assets as well. Generally, investments are held in shares, so a calculation may be necessary to convert your shares to a dollar amount that you can include in your net worth calculation, based on the value of those shares. If your investment is a stock traded frequently, you can generally place a value easily. If your investment is something more complicated like a business partnership, then there might be some wiggle room when coming up with a value for your net worth calculation.

Your house is an asset. Its anticipated sale value, even if you don’t plan on selling, should be included as an asset, while the value of your mortgage if you have one should be included as a liability. Your net worth includes all assets and all liabilities, so if you own a home, you must include your house and its mortgage.

Here’s more discussion about how to calculate your net worth.

How is net worth useful?

You might find that a true net worth calculation doesn’t provide you with useful information all of the time. For example, a true net worth calculation includes the value of everything you own. That includes your television, furniture, car, coin collection, and light bulbs. Since I use my net worth to track my financial progress over time, I’m not concerned about the value of most of the things I own. Including the liquidation value of my electronic equipment would skew my net worth slightly and in such a way that it would reduce the usefulness of my net worth.

I include the value of my car in my net worth, not because I plan on selling it but because it was once associated with a loan. The value of the loan is considered a liability, and it was important to me to reduce that liability as quickly as possible. By including the loan in my net worth, I could track my progress as I eliminated that debt and the effect of the remaining balance on my total financial picture. To include the automobile loan, it made sense for me to include the value of the car (which I check once in a while using the private sale price listed on edmunds.com). After paying off the loan, I left the car in my net worth calculation for the sake of continuity.

It’s this personal continuity that is important. As long as you maintain the same formula from month to month and year to year, it doesn’t matter what you include in your net worth calculation as long as it makes sense to you.

Net worth is an internal metric

Net worth is best used as a tool to compare your progress over time, particularly if you insure it is calculated the same way every month. While some aspects of your net worth you may view as beyond your control, like the performance of the stock market, there is enough information in the numbers to give you a good picture of the results of your everyday financial decisions. There is something interesting about the idea of being able to compare your net worth with those of other people, but there are a few reasons why it’s best to keep your net worth an internal metric.

A quick online search can provide broader statistics so you can compare your net worth with a large population of people in your income range or age range. These comparisons are meaningless, however. Age groups can include a variety of education levels, particularly at the lower end of the spectrum. At the other end, you may be grouping retirees in with CEOs. If you’re comparing your net worth with people with similar incomes, you don’t know whether this income is a full year’s salary, pension, or dividends from investments.

Different people are faced with different situations. If you’re 22, making $40,000 in your first year as a teacher, dealing with student loans, single, and living at home with your parents, what benefit is there in comparing your net worth with another 22-year-old, making $40,000 in his fourth year in a factory, married with one child, owning a home and dealing with a mortgage?

That’s why technologies like NetworthIQ are popular. You can compare yourself with people like yourself to get an idea of where you stand among your peers. NetworthIQ does a good job of encouraging people to calculate net worth in a similar manner and groups members among different dimensions to ensure meaningful comparisons. This gets you closer to being able to compare your net worth with others, but there is still no guarantee that people are providing true information.

As I was one of the first people to blog about my personal net worth and track my finances online in blog form, I think it’s great that tools like NetworthIQ exist now. I’m also slightly interested in blogger comparisons like this one from last year, but they have very little real value beyond voyeurism.

I prefer not to worry myself about other people and focus on my own progress. My goal is to keep my finances moving forward, which usually means showing an increase in net worth each month, and other people’s finances have absolutely no bearing on my progress. By publishing my financial reports each month, I keep myself accountable to the public, and this inspires me to make decent financial decisions. Depending on your psychological tendencies, comparing yourself with others could provide you with motivation to improve your financial condition or it could leave you frustrated with your own situation.

This motivation can be helpful, but don’t look for too much meaning in person-to-person or person-to-average comparisons.

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Net Worth Competition: Don’t Compare Yourself With Others

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.

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Managing Your Money Vs. Micromanaging Your Money

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

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How to Track Your Spending: From Obsession to Reasonability

Ethanol: a study of unintended consequences

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

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

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

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

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

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

Unintended consequences in your life

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

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

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

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

What can you do to prevent unintended consequences?

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

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

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

Image credits: r-z, @aius

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Unintended Consequences and Money

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]

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Teaching Financial Skills to Teens With Learning Disabilities

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]

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Today is the Worst Day of the Year: How Does it Affect Your Money?

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]

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Getting Your Finances On Track In 2008

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

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Math Anxiety Could Hurt Your Finances: 5 Ways to Get Over It

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.

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Battle of the Riches: Good vs. Evil. Which Side is Money On?

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.”

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Wall Street Journal: Managing Money in Public

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.

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10 Improvements I’d Like to See in Quicken 2008 (And a Giveaway)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Maybe there’s a better place.

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

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

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

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Should High Schools Require Money Management Classes?