My Honda Civic has an option for cruise control. Unfortunately, most of my driving currently takes place on the New Jersey Turnpike and local highways during rush hour and construction, so I rarely have an opportunity to activate this feature. In the slim occasion I find myself driving on a deserted country road, I activate the cruise control and sit back, letting the car’s computer maintain my speed. I like to imagine cruise control is an auto-pilot device, so I can relax, close my eyes, and wake upon arrival.

If you’ve ever driven with cruise control, you’ll know it is not the same as auto-pilot. You have to be vigilant and aware of your surroundings, even if you’re not keeping your foot on the accelerator pedal. I have the same concerns with the topic of automating finances.

Making your finances automatic is a great way to put your savings into overdrive. I take advantage of technology’s ability to automate in a number of ways:

• My paycheck is directly deposited into my bank account every pay period.
• Several of my bills, as many as possible, are paid automatically and in full every month with the appropriate credit card.
• My credit cards are paid in full every month without me writing one check or clicking one button.
• A number of savings transfers and investments are programmed to occur at the same time every month, again with no intervention.

I would like to say that these features of automation have effectively put my finances on auto-pilot. It is true that I am now free to use the time I would have otherwise spent paying bills and depositing paychecks for other, possibly more worthwhile tasks. I am hesitant to call this system an “auto-pilot,” however. Like driving, I am still in charge and my brain needs to be engaged. If I stop paying attention, the likelihood of a crash increases.

I primarily use three credit cards, two for personal use and one for business use. Despite the cards’ close proximity in my wallet, their cycles have not converged. The payments are due at different times of the month. My checking accounts are debited automatically, so I need to ensure I have enough money in the appropriate accounts at the appropriate times to avoid an overdraft fee. The automation doesn’t permit me to to “set it and forget it.”

The same is true with my bills. I mentioned I drive on the New Jersey Turnpike every day. That’s an expensive commute. I use the E-ZPass system to make the drive go quicker and receive a discount on tolls, but this kind of automation lowers my sensitivity to increasing tolls. Since I’m not stopping at the booth and handing out cash, I don’t see that money leaving my wallet. I look at my quarterly statements from E-ZPass, but with 65 weekdays of toll charges, plus some on weekends, it’s easy to let the increases stay buried in my mind.

I’ve begun to offset the toll increases by opting non-toll roads occasionally but with more traffic lights on these alternate routes, I would have to wonder whether the extra fuel expense negates the savings in tolls.

Even though my utility bills like electricity, cable and telephone, as well as my credit cards, are paid automatically each month, I am sure to review the statement or transactions. It’s tempting to let cruise control handle everything. I mentioned that it’s important to ensure money is in the accounts prior to the automated withdrawals, but more attention is necessary. Reviewing statements and transactions is necessary to catch mistakes.

Mistakes can be on the company’s part or on the consumer’s; at least once I’ve forgotten to cancel a “free for the first month” service and was rewarded with a charge on my credit card. I would have remained ignorant of the charge if I didn’t review the statements and download my transactions into Quicken. And I have also experienced a number of mistakes, such as the cable company charging me for a service they didn’t provide.

Companies are quick to encourage automation because they know a certain percentage of consumers will let “mistakes” slip. That’s a statistic I don’t want to be.

What part of your finances is tackled automatically, and are you on auto-pilot or cruise control? Have you ever encountered mistakes you would have missed if you weren’t paying attention?

Photo credit: mhalon

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Put Your Finances on Cruise Control, But Stay Alert

Over the next couple of weeks, six finalists will be auditioning for the opening of “staff writer” at Consumerism Commentary. Each will be providing two guest articles to share with readers. After the six writers have shared their guest articles, readers will have an opportunity to provide feedback before we select the staff writer.

This article is presented by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts.

I hate going through bills and statements every month, but the Mrs. on the other hand is very particular about it, she goes through all of the bills and checks items off “what a waste of time” I used to think until I recently. The few minutes it takes to check your bills can save you a lot of headache in the future.

Fraudulent charges

The most obvious reason you should take the time to check your statements is to check for unauthorized charges. This happens more frequent than you would think, if there is a large fraudulent charge it would be easy to detect but it’s the small amounts that can go unnoticed for a long time. This could also be charges that are not necessarily unauthorized but certain fees that you are unaware of, often you have between 60-90 days to dispute these charges so it is important to check regularly and report such charges immediately.

Mistakes

Yes mistakes happen, sometimes you are charged for things you are not suppose to be charged for, maybe a promotion ended or maybe a new fee was placed on certain things and you may miss them. By checking your bills regularly you will be aware of any extra fees or mistakes on your accounts, again taking early action will help you rectify these issues.

Accounting

Although I am a big fan of putting your finances on autopilot, you still need to keep track of your spending and budgeting. Going through your bills and statements will enable you to keep track of your expenditures and see if you are staying within your budget. It will also help you keep track of who you owe and how much, doing this on monthly bases will save you a lot of time at the end of the year and during tax filling.

Promotions and changes

Every now and then I notice some promotional offer being available from the company, for example recently I noticed that we can get a free upgrade on our TV package for six months, I love free! Checking the bills you may be able to find a few good promotions, which can go a long way. Companies also notify their customers of any changes in their terms and conditions when they send out the bills, you may miss important changes if you do not go through them which can end up costing you in the end.

I used to hate going through bills, but now I realize that those few minutes can save me a great deal of headache and run around later on. Not to mention the potential of saving money.

Do you go through your bills? Any other reasons why one should go through their bills on regular bases?

This is a guest article by Ray, one of six finalists interested in being Consumerism Commentary’s staff writer.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

4 Reasons Why You Should Read Your Bill Every Month

One of my favorite bloggers, and likely one of yours, is J.D. Roth. He has been writing about personal finance at Get Rich Slowly for some time now, and I was a fan of his writing at foldedspace when “blog” was still a new word. He is working on a book now, which I can’t wait to get my hands on (and read), and at the same time, he has been working on a blog series condensing his thoughts about personal finance into thirteen core tenets.

This is one of J.D.’s favorite mantras when offering financial advice or support: Do what works for you.

I think this is a great philosophy, and I can see how it is appealing to intelligent people who are capable of thinking independently, performing objective analysis, and making decisions based on empirical data and other established facts. It cuts directly to the core of personal finance: that money is personal and not every solution is universal. Different people require different answers, and what works for one person might not necessarily work for another.

The spirit of “What Works For You” is the important aspect: there are many paths to success and one should find the path that fits personally, using experimentation and consideration as a guide.

There are many open questions in personal finance but few concrete answers. What is a good investment? What will the stock market do tomorrow? Will I be able to afford college for my children in ten years? health care for myself next year? Uncertainty can lead to frustration, and when people don’t know what to do, they want to stick with something that feels comfortable.

I think it’s easy for the spirit of the “What Works For you” philosophy to be lost as one spreads the message, because the philosophy implies a search for comfort and is therefore subject to a number of psychological traps.

“What Works for You” grants a license to ignore criticism

One thing I remember about the time I was required to listen to a day-long Landmark Education seminar is the leader’s ability to silence anyone who didn’t accept their philosophy. If you disagreed with one aspect of their nonsense, a Landmark follower simply claimed you had a “racket” and you were immediately dismissed. The “What Works for You” argument does the same thing.

If you are focused on doing “What Works For You,” there is no room for opposing viewpoints. We are given the opportunity to selectively ignore facts that don’t fit our world view. Consider credit cards that offer rewards when you use them. I use a cash back credit card and never pay interest or late fees. That sounds like a great deal, and I often suggest this as a good way to make the credit card companies work for you. But according to consumer studies, on average, people like me spend more using credit cards than they would with cash. Even the rewards earned, particularly as credit card companies find ways to keep reducing these rewards, don’t make up the difference due to increased spending.

But many like me continue to use credit cards because it works for us. We say that we are spending less than we earn and we’re winning the battle with credit cards. But unless we have conducted our own experiments to determine how our own behavior, as an individual or family, is affected differently through using credit or cash, we have silenced criticism from cash-only advocates with a nothing more than a wave of the hand and the contentment that since we don’t see any surface damage on our finances, our behavior works for us.

“What Works For You” invites analysis that could be far too simple

Notice that the philosophy is not “What Works Best For You.” Whether something works is a binary state: either something works or something does not work. The only answers are yes or no. There is no gray area, no sliding scale, no room for judgment.

The Debt Snowball is often touted as the best method to pay off debt. There is no doubt this method, which calls for paying off your credit card debt from the card with the lowest balance to the highest, works for many people. And its popularity leads people to believe that it’s not worth considering another choice.

But many people who have succeeded paying off debt with the Debt Snowball would have succeeded with the Debt Avalanche, which offers similar psychological benefits but saves money and time. It’s important for someone embarking on the journey to pay off debt to be presented with options and be allowed to make their own decision. If you look only for “What Works For You,” you could be missing something that works better.

“What Works for You” accepts mediocrity as a way of life

I have been around enough high-achievers to be jaded with the constant strive for excellence and the endless desire to be the best in whatever activity happens to be involved. Determination to be the best is how some teams win world championships but others live in misery with failure. Thankfully we don’t all have to be the best in the world at what we do.

But that’s not an excuse for refusing to seek improvement. Since the 1970s, there has been a new focus on self-esteem, which after many years of filtering from psychologists through to popular culture, has resulted in an environment where “everybody is a winner.” Everyone in Little League gets trophies, even the team with the worst record. Consideration of self-esteem is important to a point, and the placement of that point is debatable; before too long, people should be rewarded for something more than just participation, something beyond just the minimum.

“What Works” is just the minimum. Do more than that. Do what works and look for something that works better. Don’t just stop buying daily $5 lattes, stop leasing expensive cars every three years. Don’t just start putting 5% of your salary into a savings account, put 10% into a great savings account, contribute the maximum to your Roth IRA, and get at least the maximum employer match in your 401(k).

It’s important, in dealing with personal finance, to just start somewhere but that’s not an excuse to stop doing or to stop thinking.

The spirit of “What Works For You” is a good philosophy. Personal finance is personal. You should be free to make your own choices based on the best information and experiences and find the path that works best for you. I will submit that it is also important that while searching for your personalized version of a financial plan that you don’t fall into the above traps.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

“What Works For You” Can Be a Trap

While I was in California this past week, I spent a few days at my brother’s new apartment before his wedding this past Saturday. Among the piles of books not yet placed into a bookcase was something familiar: I Will Teach You to Be Rich by Ramit Sethi (review here). Ramit is a colleague of mine, a personal finance blogger who published a book that quickly became a favorite.

How Ramit saved my brother

My brother, who we’ll call Stewie for the sake of anonymity, is both a systems administrator and a musician; he earned good money from a day job which he then used to help fund his band’s national tour last year. But tours are expensive and money runs out. When I asked, he credits Consumerism Commentary and Ramit’s book with helping him get his finances in order and out of debt from the tour, and I think he mentioned Consumerism Commentary only to be nice. Stewie is an avid reader and has read a number of other books about basic money management and investing but I Will Teach You to Be Rich is the only one he feels provided concrete advice and suggestions for being smart about money.

I know Stewie was truthful because when he gave me a check to pay for the restaurant hosting his wedding ceremony and reception, the check was drawn from a Schwab Bank Investor Checking account, an account recommended several times throughout Ramit Sethi’s book.

The six-week “Boot Camp”

Today Ramit Sethi is releasing a new project. He has created a “Boot Camp,” a six-week program designed to empower participants to make better financial decisions. Through the Boot Camp, Ramit places participants with similar financial goals together and provides them with the tools, information, and most importantly, the motivation to get started and the group accountability to maintain action.

Here is how it works. At the start of each week, participants receive excerpts from I Will Teach You to Be Rich with additional content and worksheets. This is followed with a webcast, a video discussion on the week’s topic, downloadable so you can watch or listen on your iPod or computer when you have time. Each week will also feature special guest speakers including Andrew Jolls (ex-executive of FICO and founder of VideoCreditScore.com), Charlie Hoehn (author of Recession-Proof Graduate), and Chris Guillebeau (traveler and author of The Art of Non-Conformity). A complete curriculum including guest speakers is included below.

If Ramit had created the Boot Camp one year ago, I would have recommended the program to my brother. And this is coming from someone who was originally a skeptic of Ramit. When he first launched his blog in August 2004, I wondered how a pompous graduate student at Stanford could teach people to be rich without a long history of personal experience being rich. But his writing is captivating, he understands people, and provides the tools for getting things done.

How much does it cost?

At $199, the program might be a bit expensive for someone who is trying to figure out how they’re going to make their next rent payment. I’m confident this program will help a participant save at least $199, recovering the cost of the program, and the tools within will provide a lifetime of benefits. Ramit is offsetting the high price by offering a 30-day money-bank guarantee, so you can participate in most of the program and back out before the end if it is not working for you.

I’m generally a critic of seminars like Rich Dad Academy and Landmark Education, but with Ramit, I know the information will be sound, specific financial advice designed to inspire and motivate, not an up-sell scheme where you have to pay more for the “deluxe” package in order qualify for the useful information.

I expect the next time the Boot Camp is offered, the price will be significantly higher as he tweaks the service to include more materials and guest speakers.

Registration for the Boot Camp is only open through Friday, November 6.

Here is a taste of the Boot Camp, a twelve minute video of Ramit Sethi talking about automating your finances with specific tips for setting up accounts and directing your funds to the right places at the right times. (If you are reading through an RSS reader, you may need to click through to view the video.)

If you want to listen to more from Ramit before signing up, listen to my interview with Ramit from earlier this year. If you opt to join the Boot Camp, come back and let us know whether you like it.

Boot camp curriculum and guest speakers

Week 1: Optimizing your credit cards
Speaker: Andy Jolls: Thursday, November 12, 10:00 pm EST

Week 2: Beat the banks and negotiate for lower bills
Speaker: Charlie Hoehn: Thursday, November 19, 10:00 pm EST

Week 3: Open 401K and Roth IRA
Speaker: Chris Guillebeau: Tuesday, November 24, 10:00 pm EST

Week 4: Conscious Spending
Speaker: Penelope Trunk: Tuesday, December 1, 10:00 pm EST

Week 5: Automation
Speaker: Shannon Sofield: Thursday, December 10, 10:00 pm EST

Week 6: Investing – setting up portfolio
Speaker: Pam Slim: Thursday, December 17, 10:00 pm EST

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

I Will Teach You to Be Rich, a Six-Week Boot Camp With Ramit Sethi

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

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

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

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

kanso 簡素

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

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

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

Simplicity in all financial matters is an attainable goal.

seijaku 静寂

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

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

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

datsuzoku 脱俗

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

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

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

koko 考古

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

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

shizen 自然

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

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

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

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

fukinsei 不均整

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

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

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

yugen 幽玄

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

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

Let others declare it for you.

A guide, not a rule

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

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

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

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

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Seven Zen Principles to Guide Your Money and Your Life

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Ten Things I Will Teach My Children About Money

If you are reading this article, it is almost completely guaranteed that you are human. And if you are human and do not have a major cerebral deficit, you have emotions. Perhaps have is not a strong enough word; everything you do, and every decision you make, is controlled by your emotions. Even the strive to take a logical approach to life is an emotional desire. Despite this, and even with the knowledge that you can never fully leave your emotions behind, the best financial decisions are made when you are aware of your emotions, control them to a point, and compensate for the effect they might be having on your decision making.

Emotions in negotiations

In this Sunday’s Consumerism Commentary Podcast, one of our guests is Herb Cohen, a master negotiator who advised Presidents Jimmy Carter and Ronald Reagan on dealing with the Iranian Hostage Crisis. One of his suggestions, framed around negotiating a major purchase like a house, will be not to fall in love with the object.

If you want a good deal, you have to be willing to walk away. If you let your emotions control your decision, you are much more likely to pay more than you should. The salesperson — or anyone else with whom you negotiate — will know right away if your emotions are controlling your decisions and will use this fact to their advantage. Your emotions give your power away.

Emotions in debt

Many otherwise smart people find themselves in unmanageable debt as a result of their own decisions. Not everyone is in debt for this reason, but some who are have made decisions fueled by emotions, where “want” and “desire” were the operative words. When it comes to getting out of debt, you could take an emotional approach or try to put your emotions aside.

As humans are emotional creatures, I can see why some people would argue that an emotional approach to getting out of debt would be successful. And it just might be in the short term. But unless this example individual, in debt due to emotional spending and using emotional decisions to get out of debt, changes their mindset drastically once they are in better financial shape, there is a good chance their emotional decisions will lead them back to debt.

I like to tell people about the Debt Avalanche method of debt reduction because it takes a more mathematical approach to getting out of debt. This approach helps people get used to separating emotions from financial decisions as much as possible. On the other hand, the Debt Snowball method relies on emotions — the same emotions that might have allowed us to find ourselves in trouble and might cause us to falter again. The Debt Avalanche does have emotional components, but it does steer us away from using emotions to guide actions.

Emotions in investing

The only way to make money in investing is to “buy low, sell high,” but this is the exact opposite of what actual trading behavior looks like. Most investors decide to buy after a stock or other investment has shown a confidence-inspiring pattern of price increases. They also decide to sell when the price has declined; if everyone else is selling, causing the price to go down, they must know something that we don’t know. We lose confidence in the investment, and we sell. “Buy low, sell high” is a mantra that all investors know, so why do we ignore this in practice?

The answer is our emotions. Rather that making decisions based on an investment’s underlying value and expectations for the future, we are affected by the media and the stock market. News and price movement inspire fear or excitement, and it takes these emotions to encourage someone to resist inertia and decide to buy or sell.

We can’t fully separate emotions from our ability to make decisions. However, just by being aware of the effect they have can help mitigate the bad choices. How do you deal with your emotions when making financial decisions?

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Keep Emotions Separate From Financial Decisions

I’m not a big fan of “rules of thumb.” These are bite-sized nuggets of wisdom masquerading as advice, designed to apply to a mass audience. At best, they cant point someone in the right direction, but at worst, rules of thumb can erroneously send people on the wrong path or can mistakenly instill a false sense of security. This is a good example of why the best financial advice is specifically tailored to an individual or a family.

Rules of thumb satisfy the human desire for knowledge on a stick, like fast food for the brain. They are easily repeatable and retweetable, and they invite a minimum of critical thinking. But it would be unfair to suggest ignoring all rules of thumb. Some are better — more accurate for a larger number of people — than others. But it’s important to determine which ones apply to your situation and which one’s are not relevant.

Here are some of the more popular rules of thumb targeting personal finances, often repeated by gurus and writers targeting a wide audience.

You should save 10 percent of your income. Grade: B-.

This rule of thumb is not specific. It is not clear whether 10 percent should be counted before or after taxes. Saving this percentage of your gross income, a larger sum than the same percentage of your “take-home” income, would be preferred. This rules of thumb also does not specify whether your 401(k) or other investments are included or if this only refers to savings not invested or spent.

I can’t say that saving 10 percent is a bad idea. This is a good starting point; in fact, putting this portion of your income away without touching it will put you far ahead of the “average” American. Many people, however, will need to save more, some significantly more, than 10 percent in order to meet their goals. This rule of thumb, ingrained in the minds of many people who have read books suggesting this amount, can convince someone than 10 percent is enough.

Your emergency fund should be large enough to replace 3 to 6 months of your income. Grade: D.

Again, this is a good starting point, but your income is not related to the size. Your emergency fund should be allow you to afford your non-discretionary expenses while you work to replace your income. Determining the right size for your emergency fund requires measuring your monthly expenses, judging the stability of your income, determining what you would be willing to do to replace that income, considering how much it might cost to relocate in an emergency, and seeking expenses to cut.

The economy and the job market — how long it might take you to find a new job — should be a consideration as well. A better rule of thumb might state that the size of your emergency fund should be enough to cover necessary expenses for the number of months equal to the unemployment rate. For example, if the unemployment rate in your state is 10 percent, your emergency fund should be large enough to cover 10 months’ worth of expenses.

You can withdraw 4 percent of your nest egg in retirement to provide yourself an income while keeping enough invested to last indefinitely. Grade: C.

The 4 percent “safe withdrawal rate” relies on a number of dangerous assumptions. First, the funds from which you take the 4 percent must be invested completely in a diversified selection of stocks, like the S&P 500. As we’ve seen recently, beginning retirement while completely invested in stocks in a year where the stock market is down can be disastrous to financial health. Secondly, in assumes the stock market will perform 5 percentage points higher than inflation. That’s a reasonably good estimate when you look at the stock market on average, but there is rarely an average year. The stock market performs significantly better in some years and significantly worse in others.

The rule of thumb is not detailed enough to explain, but 4 percent is the withdrawal rate for the first year only. The withdrawal in every subsequent year should increase by the rate of inflation. For example, if you withdraw $40,000 from your $1,000,000 in the first year, and in the second year your nest egg increases to $1,001,000 after a year where inflation was 3%, your withdrawal in the second year should be $41,200 (3% more than $40,000) rather than $40,040 (4% of your new balance).

To find the percentage of your portfolio that should be invested in stocks, subtract your age from 100. Grade: F.

According to this rule, once you are no longer a minor the most you’ll be invested in stocks or stock mutual funds is about 80 percent. Someone retiring at age 65 would have a portfolio only 35 percent invested in the stock market. This directly contradicts what would be necessary to make the 4 percent safe withdrawal rule of thumb a reality. And for most people, the calculation using 100 just simply won’t cut it in order to grow wealth over the long term.

There’s more to consider. Suze Orman has a massive net worth compared to most people, and can therefore afford to play it safe by investing almost all of it in bonds. Stocks are riskier, and she and other people with significant net worth do not have to take on as much risk as what is found in the stock market to provide more than enough income for the rest of their life. Not only that, but significant wealth in a less risky investment helps ensure there will be an estate to leave to family or charity at the end of life.

The rest of us must take on the risk of the stock market in order to provide the best chance of building wealth in the long term. And the amount of risk needed for us is a higher percentage than the result of subtracting your age from 100. Perhaps 130 or 140 would be a better figure to use.

To retire comfortably, you will need to have an income of 80 percent of your maximum pre-retirement income. Grade: C.

Although it’s common to believe your needs, and therefore expenses, will be less in retirement, reality shows that this is not always the case. It is safer to assume that your expenses will be 10 percent higher in retirement. Keep in mind that health care costs will most likely rise dramatically as you age. And with people living longer than ever, those expenses will last for many years.

Once size does not fit all. Rules of thumb are good starting points, but don’t fall into the trap of believing you are safe if you follow these rules. Do you know of any other rules of thumb deserving a thrashing?

Photo: John Leach

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

A Report Card for Financial Rules of Thumb

The total net worth among Americans has risen to $53 trillion, the highest this measure has been since the end of 2007. At that point, Americans were worth $65 trillion. The increase this past quarter of $2 trillion was the first increase in this measure since 2007.

I am taking this as a good sign for the economy. In addition to this increase, overall personal debt is not increasing. Even though some markets are still slow and unemployment is still high, when consumers start feeling better about the economy, these should improve. I’m still waiting for interest rates for savings accounts to start climbing again more than just a few hundredths of a percentage point like Ally Bank.

On the other hand, the stock market has been the primary driver behind the increase in net worth, and it’s quite possible that stocks have recovered too much too quickly. If the current recession is over, another might be around the corner. The stock market helped my net worth increase, in addition to income, over the past few years, but this might just be the result a temporary rally.

Has your net worth been increasing over the last few months, and if so, how are you increasing it?

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

America’s Total Net Worth is Up. Is Yours?

It’s easy to adopt one concept and use that concept to define your world. You commonly see this in religion, but I’m referring to personal finance concepts, as you might expect from Consumerism Commentary. One popular financial guru talks about The ECRD Factor. His followers — a guru can’t be a guru without a throng of fans who believe the guru’s words are gospel and question nothing — spread the word and this concept becomes well-known even if the name of the guru is not as widespread.

Outside of Consumerism Commentary, in what is usually referred to as “real life,” when the conversation turns to money for whatever reason, it is not uncommon for someone to share their advice. And often, someone will explain to me how wise and financially savvy they are because they’ve given up their daily morning coffee or doughnut or other expensive treat.

I will admit that saving four dollars a day is not entirely a bad idea. If this savings is repeated five days a week for fifty weeks a year, you’ve “earned” yourself $1,000 a year. Taking that concept to the next step, you could invest that $1,000 each year and grow your nest egg over time, doing much more for yourself your quality of life than a daily doughnut ever would. But the choice to forgo a daily treat does not exist in a vacuum.

In the cases of some of the people who have discovered their alleged personal financial freedom through their daily latte resistance, they’ve made this sacrifice only to lose ground on the larger, important financial decisions. They’ve taken daily baby steps forward but every so often, leap so far back that they’re worse off than they were when they started.

It’s very noble to have achieved the mindset that allows you to change your habit and break free from spending a few dollars each day. But if your real problem is buying clothes you can’t afford, or a car you can’t afford, or a house you can’t afford, any progress you’ve made by eschewing gourmet coffee or fattening doughy products can be rendered null and void. And the people I’ve spoken to who have been eager to flaunt their smart decision of going without a daily latte often fall victim to these other harmful behaviors.

If you pay $40,000 for a car when you only need one worth $16,000, you just undone twenty-four year’s worth of missing daily lattes. And that’s only if you pay cash. If you get a loan, the interest will harm you even further. If you pay $400,000 for a house when you should have spent for something smaller or in a different location $200,000, you can’t even live long enough to make that up in daily lattes. If you don’t manage your credit wisely, you could qualify only for a high-rate mortgage, costing you thousands of extra dollars — a thousand lattes or more — throughout the life of the loan.

The little things, like the daily small savings that accumulate over time, are helpful to your financial condition, but making wise decisions for the larger purchases can have a much larger bearing on your personal wealth. If an expensive coffee-related drink keeps you happy and sane, I say enjoy it, but make better decisions about the big things like cars, houses, the size of your family, and the location where you decide to live. The “mistake” of enjoying a daily treat doesn’t compare with the real financial decisions you make.

Keep in mind that I have no problem with people buying fancy cars or big houses, particularly if they can afford it. But someone opting to trim their expenses by skipping coffee is someone who wants to improve their financial condition, so it would be fair to assume that they should want to do so in the most effective manners. Everyone is free to set their own priorities, but life works better when those priorities actually match the goals.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

The Little Things and the Big Things: Which are More Important?

This is a guest article by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts. You can check subscribe to his RSS feed or follow him on Twitter.

I strongly believe that tracking your financial progress is crucial to reaching your financial goals. If you visit personal finance blogs on regular bases you have already noticed that measuring net worth is very common and many bloggers make it public like Flexo does here. There are a couple of metrics that can help you track your financial progress: Net worth and
Net Investable Assets are two most common and each provides different information. Let=92s take a look at each and determine which of the two measurement methods is better for tracking your financial progress.

Net worth

This is the most common metric you will see around and it’s simple to calculate. Net Worth illustrates how much you are worth after all your assets are sold and all debts have been paid off. The formula is simple:

Net worth = Assets – Liabilities

Debts include your consumer debt (credit cards and loans) as well as your mortgage. Assets include all your investments and savings (including emergency fund and retirement funds) as well as your home, cars and other personal property. You simply add up all your assets and subtract your debts from it and you have your net worth. Although this is often used in determining your financial strength, I do not consider it the best measurement. It assumes that you sell all your assets at the current value; this is not always a practical option.

Net investable assets

This term is often used in the investment industry; we would primarily track our clients’ net investable assets because this would be the amount we could work with. The net investable assets calculation is slightly different than the net worth calculation, and to me it’s somewhat more practical. In calculating your net investable assets you do not include your personal properties such as car, home and cottage. You simply add all your savings and investments and subtract your consumer debt (credit cards and loans). This leaves you with investable assets. This tells you how much money you have available without selling all your personal properties.

We do not subtract your mortgage because you need a place to live and if you do not have a mortgage than you would have rent to pay so it’s a regular expense. The net investable assets calculation gives you a more accurate measure of your financial independence.

Net worth or net investable assets?

How should you calculate your financial progress? Well it’s all up to you and what you feel comfortable with and makes sense to you. Recently Trent Hamm of The Simple Dollar announced that he is not including his home value in his net worth calculation, however he is still continuing to count the mortgage in the formula. Although this method makes sense to some I find it distorts things a little. If you do not count your home in your net worth than the mortgage that goes with it should not be added either, hence you would have your net investable assets.

No matter which way you go, or if you decide to make slight changes to things the important thing is to stay consistent and do what makes sense to you!

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Measuring Financial Progress: Net Worth vs. Net Investable Assets

Here are some articles of note.

12 Step Program: Shopping Addiction? MLR (My Life ROI) offers an overview of a twelve-step program for overcoming an addition to shopping. What I really like about this post are the twelve ways to spot a shopping addict. People are notoriously inept when it comes to self-evaluation; perhaps someone you love is a shopping addict. Is it time to plan an intervention?

Spending Cash Is the Same As Borrowing If You Have Debts. The best point in this article by Four Pillars is that all cash should be treated the same. In his example, if you’re in “debt repayment mode,” as much of your cash should be put towards that goal as possible rather than setting aside a portion for fun — the fun you already had that landed you in debt.

Unfortunately, not all debt is a result of fun. And I certainly don’t agree that you should sacrifice a complete emergency fund to pay off debt — if an emergency arises, your only choice would be to go deeper into debt. But as an example of the first point I mentioned, in the past I tried to separate the income from my day job from income from my side activities. This worked well but only to a point. When I realized I had enough income to maximize my 401(k) contributions, I was doing so with a significant percentage of my salary. This resulted in having no choice but to pay for some living expenses from the side income.

What the Heck is a Money Quantum? On Tuesday, Consumerism Commentary will be launching a new community-focused website, in the style of social networking, for people whose life involves money. Mighty Bargain Hunter had an early look at the site, Money Quantum, and shared his thoughts in this article. I’m really excited about this new project. I’ll be sharing more details shortly, and will soon be letting readers know how they can obtain an invite during the “private beta” phase of the launch.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Posts of the Week

For some fun reading, I recommend these articles written recently and published across the internet.

Estate Planning: Are You Ready When Your Time Comes? Lazy Man narrowly avoided death recently, but it is my grandmother’s condition that leads me to link to this timely post. Here, Lazy Man offers several tips to help prepare the loved ones left behind for handling your responsibilities following your passing.

What Works for Me: Debt Reduction Mindset. It’s always fascinating to see someone else’s motivating factors in any task. Motivation varies greatly from person to person. In this article NCN describes what motivates him to getting out of and staying out of debt. You may come away with some suggestions for keeping yourself on the debt reduction path as well.

Want a High Paying Job? Do the Math. Mr. Tough Money Love points out a recent survey that shows that the college majors resulting in the top job offers in terms of starting salary are strongly weighted towards those requiring strong math skills. Most of these jobs are various forms of engineering.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Posts of the Week

Here are a few articles from around the web I recommend reading.

A Journey of a Thousand Miles Begins With a Single Step. A few days ago, Tom, the producer of the Consumerism Commentary Podcast, and I spoke with Matt Jabs and recorded most of that conversation for an upcoming episode. Part of the discussion focused on the core message of this article and its inspiration, a quotation attributed to Lao Tsu matching the title of the article.

This quotation inspired Matt to set goals and take the first step towards achievement, but for me the quotation reinforces the idea that your goal (of traveling a thousand miles by foot or making the world a better place) need not be reached. The steps you take towards that goal, the small things you do, are what define who you are. Look for more on this topic in an upcoming episode of the Podcast.

Carnival of Personal Finance: New Zealand Edition. Baker from Man Vs. Debt hosted the 213rd edition of the Carnival of Personal Finance on Monday, and put together an excellent presentation of the prior week’s best articles in personal finance. The articles are interspersed with fantastic photos from New Zealand, representing the backpacking journey through the country Baker and his family were undertaking.

Is Frugal Living Just a Fad? The media has made much to-do over the idea that Americans are saving more and spending less due to the economic recession. Some out of necessity, but there is an implication that frugality is now more mainstream than it ever has been. I believe that’s an exaggeration. Perhaps we have been to the point where circumstances necessitate a change in consumerist behavior, but very few things in life are permanent. Entire generations have been identified by generalized adjectives such as “frugal;” current behavior is simply a reaction, not a permanent shift in behavior.

I wouldn’t call the recent popularity of “frugal living” a fad, but it’s not going to stick around for too long. The economy moves faster than it did seventy years ago; changes that used to take a generation to complete may take much less. Before long, Americans will be back and spending in full force.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Posts of the Week

Every so often I address questions and comments I receive via email. If you have a question, please contact me using the form on this page. I try to respond to everyone, but it might take a while before I read every email I receive.

From Mary Lynn:

I really liked your article that explained how freecreditreport.com isn’t free at all. I was wondering if you knew of any credit report site that doesn’t ask for a fee! I don’t have any credit cards since I just turned 18 and graduated from high school but I need a credit report for this job I’m taking. Please, if you know of any, let me know.

First, to answer Mary Lynn’s question, the one and only website for retrieving the government-mandated three free credit reports each year, one from each credit reporting bureau, is AnnualCreditReport.com. Even there, since the site works with the for-profit reporting agencies, they will try to sell you something. Steer clear of the offers and get your free credit report once every four months.

I find it odd that your employer requires you to get your own credit report and present it. Employers, if they must to a credit check on prospective employees, should do it without requiring you to do anything other than provide your Social Security Number.

From Jake T.:

You seem to open a lot of bank accounts. How many different banks do you have accounts at, and which one is your favorite?

I do have a diversified set of savings accounts. I wrote about reducing your number of banks as a way to simplify your finances, but I like the idea of keeping money spread around. Without Quicken, this would be an organization nightmare. I have accounts with Wachovia (my main brick-and-mortar bank for both business and personal savings and checking), TD Bank (formerly Commerce Bank, open on Sundays, my secondary brick-and-mortar bank), Ally Bank, FNBO Direct, HSBC Direct, ING Direct, E*TRADE Bank, and Emigrant Direct. I’m also in the process of opening an account at EverBank. Of these, ING Direct and FNBO Direct stand out as favorites.

If you have questions, let us know. You can email your questions directly to me (or to Smithee, Jeff, or Tom) or leave your questions in the comments area.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Answering Mail: Free Annual Credit Reports, Online Savings Accounts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

10 Things Your Parents Didn’t Teach You About Money

Here are a few articles from around the web I suggest reading.

Dangerous Personal Finance Magazine Headlines: The Attraction of High Yields. Jonathan points out some recent examples from magazines featuring enticing headlines on the cover. This is done to inspire sales of magazines. The investing advice found within is dubious, and important facts are often not included. That wouldn’t make a good headline. It’s not just magazines; a good headline promising something hardly attainable draws people in whether it’s a television news lead-in, a legitimate newspaper, or yes, even a blog.

Why Entrepreneurs Fail. Erica Douglass has three reasons why most entrepreneurs fail. First, I think it is great to recognize that most people who try to run their own business fail. Even those who succeed likely failed first. The three reasons included in this article are a subset of the hundreds of problems that plague small and start-up businesses. But for me, I can relate to all three “traps.”

Average Credit Scores Down From 2007, but Leveling Off. My girlfriend purchased a new car this weekend. Yes, a new car, not a new-to-her car, for a number of valid reasons, just like when I bought my new car a few years ago. She chose an economical car that rates well, drives fun, and gets decent gas-mileage. Although she might not be happy with me sharing the details, she made a down payment of over 60% of the purchase price and took out a loan for the rest. Here’s the point: for the first time, she shared with me her credit score. You know how the highest score is 850? Well, she’s not far from that number. She wins!

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Posts of the Week

I suggest reading these articles gathered from around the web.

Emergency Fund Is For Emergencies ONLY – 6 Ways To Leave It Alone. Matt Jabs suggests keeping your hands out of the emergency savings account except when the need is due to a true emergency, not just when you have unplanned expenses. I’ve also explored what should qualify as a true emergency.

The 10 Year Savings Strategy: Saving money after you’ve already handled the basics. I like that Ramit’s approach to money and financial advice is rooted in social psychology. He points out that people never want to believe they are most likely average or like everyone else. Ramit will also appear on tomorrow’s Consumerism Commentary Podcast.

Moving in Together? How to Avoid Money Mistakes. The author of this article, Melissa Korn from the Wall Street Journal, is preparing to have her boyfriend move into her house, and this article take a look at what their expectations and approach should be for ensuring the continued success of their relationship.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Posts of the Week

Ron Lieber, a columnist for the New York Times, spent one day focusing on the financial tasks that he had been neglected. He calls this day a “fiscal health day,” like the mental health days everyone needs to take once in a while to remain a functional human being. I think this is a great idea. While I have taken similar financial health days in the past, I feel there is always more I could have done.

Lieber cataloged and documented the tasks he chose to accomplish. This is a good start for your financial health day.

• Open a high yield savings account. The author chose http://www.exclusive-offers.net/r/smartypig/7092″>SmartyPig for its high interest rates while recognizing the account’s monthly deposit requirement.
• Apply for a cash back credit card. Like Smithee, Lieber prefers the Schwab Bank Invest First Visa Signature Card.
• Insure your assets. The author used this opportunity to shop for more affordable insurance for the family jewelry. If I were to take a financial health day, I would do the same for my automobile and home insurance.
• Optimize your services. You will need a good portion of the day if you plan on calling your phone or cable company to negotiate.
• Hire an assistant. While Ron Leiber had a very specific need. He hired a nanny tax service to take care of the financial paperwork involved with paying a baby sitter. Even Schwab helped out by setting up automatic direct deposits. It may not be a nanny tax service that you need, however. You may want to research outsourcing some of the tasks that take up the time that could be better spent on other activities, as long as it is financially worthwhile. I might be exploring this in the future if I decide to hire a virtual assistant.
• Create or update your will. I don’t have a will, but the only one relying on my income for survival is my cat, Rupert. Yet I may be underestimating my need for a will.
• Organize your financial paperwork. Ron Lieber used the opportunity to arrange his family’s health insurance paperwork for a successful campaign against the companies in the future. I am not a terribly organized person, and it usually takes a block of dedicated time for me to reorganize.
• Leave information for those who follow after you. Although this is a morbid thought, if something happens to you, it’s important for your family to know how to access your financial accounts. Merrill Lynch offers a convenient form that you can complete and keep with your records.
• Automatic charitable giving. Here is a good way to have a positive effect on the world. Lieber signed up with NetworkForGood.org which allows him to put his charitable giving on autopilot for a small fee. I have a few non-profits that deduct monthly payments but I could improve this by setting up automatic grants from my charitable gift fund.
• Use your gift certificates and gift cards. Even if they don’t expire or lose value over time, the companies that offer these gift cards are making the use of your money, hoping you never come into the store to claim your merchandise. Collect your gift cards and use them on your financial health day.

If you have the luxury of turning your financial health day into a two-day money spree or a week-long retreat, you may be able to tackle more.

• Choose a path to get rid of your debt. Whether you like the debt snowball, the debt avalanche, or some combination, formulate your plan and put it into action.
• Review your credit report and score. You are entitled to three free credit reports each year, one from each reporting bureau, through AnnualCreditReport.com, not the industry’s scammy lookalike, FreeCreditReport.com. Review each credit report for errors that could affect your score and your abililty to qualify for loans. You can get your TransUnion credit score for free through CreditKarma. I check once a month, and I’ve seen my score drop from 779 to 774 since October 2008.
• Get ready for your next employment. If you work for someone else, part of your employment status is out of your control. No matter how hard you work and how well you perform for the benefit of some organization, you are always in jeopardy of losing your job. Be ready for the next opportunity by keeping your resume and portfolio current.

Please share if you have any other tips for beneficial activities on a “financial health day.” Thanks to Ron Lieber for the inspiration.

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Take a Financial Health Day to Organize Your Finances

My wife and I went way over our budget in a couple of categories during June. Part of it was to be expected because I’m commuting to a new internship, and part of it was planned, but unfortunately, most of the over-spending can be chalked up to a simple fact: we made some spending mistakes.

Any time you make a mistake it hurts, but financial mistakes have the possibility to cause quite a bit of damage. Mistakes are especially costly when you’ve been making progress with your efforts to get out of debt and put your finances in order. They stifle your desire to keep trying and give you one more problem to fix. When you’re dealing with multiple banks and bills and paychecks, however, mishaps are bound to happen, whether small or large. While mistakes may be unavoidable, disaster is not.

Here are some simple steps you can take to mop up after a mess.

Minimize the damage

Because accounts and bills are all linked together by transfers, there is a good chance the mistake might become a bigger one if you don’t take action. If your overdraw your checking account, make sure that you have enough money in there to make up for the overdraft and any associated fees your bank might charge you. Nothing is more frustrating that withdrawing too much money from your checking account, depositing money to cover it, and then overdrawing again because of a fee.

If your financial misstep is something more long-term, like spending more than you planned, you have a bit more time. Slide the money in your budget around, and if you do have to add more money, make sure you only add as much as you need, and unless it is a real emergency; don’t pull from your emergency fund.

Take steps to ensure it doesn’t happen again

Double check any automatic transfers or bill payments you have and record them all on a calendar so you know how much is going to who and when. It’s easy to forget about the electric bill that’s due while you’re on vacation or the check you gave the kid who mowed your lawn that finally got cashed. Getting into a rhythm takes a couple of months, but once you get the swing of it you can be sure to always have your money where it needs to be.

With mistakes in budgeting or spending, go back over your purchases and find out exactly where all that money went. Make sure you can account for all of your purchases, and try to find a couple that you can leave out next month. If your situation is dire, you might want to see if you can return something or cancel a service.

You can keep more money in your checking account or come up with a bill reminder calendar to help you get an overall picture of what you need to be doing.

Learn from the experience

Do some research to find out exactly what happened. Did you forget about a bill payment or checking account fee? If you see a charge you don’t recognize, don’t just pay it and brush it off. Learn why you were charged and if there was anything you could do about it. If you understand what happened, you are more than likely able to prevent it from happening again. The worst thing you could do is ignore it.

Catch your second wind

Don’t let the setback discourage you! Everyone runs into trouble of one kind or another as they get their finances in order. It’s important to pay attention and do all you can to know what’s going on with your money, but when you miss something or something bad happens, don’t get stressed out, just fix it and do what you can to improve future.

Learning to handle mistakes in a way that suits you takes a little bit of practice, but you will cut down on the majority of mistakes and recover quickly from the others.

Photo credit: neilspicys

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Dealing With Financial Mistakes

In a move should sound familiar to readers who have been with Consumerism Commentary since 2003 and to those who have noticed my monthly personal financial reporting, the President and Vice President have used the White House blog to provide updates on the financial condition about each of the Executive Branch families.

President Obama and his wife Michelle seem to prefer investing in the Vanguard FTSE Social Index Fund (VFTSX. Barack’s retirement fund, valued between $50,000 and $100,000, is invested solely in this fund although he is carrying a pension as well. Michelle’s retirement accounts are invested in VFTSX as well. This seems to be a smart choice for the family, with an expense ratio of 0.24%.

Barack also own between $1,000,000 and $5,000,000 in Treasury bills, and for the daughters Malia and Sasha, the Obamas have between $100,000 and $200,000 in Bright Directions 529 college savings plans.

Both the President and Vice President Joe Biden have substantial income from royalties paid by publishers for their books. In fact, right before taking office, Obama agreed to postpone writing his next book until he is no longer in office and to a $500,000 advance for the royalties (from 7.5% to 15% of U.S. sales) to be paid for a new, abridged version of Dreams From My Father for children.

Read the President’s financial disclosure here.
Read the Vice President’s financial disclosure here.

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President Obama’s Financial Disclosure

Want to win something? I’m currently giving away one free copy of Quicken Home and Business 2009. Find out how you can put your name in the hat to win by following the link.

Do you play the lottery? I’ve always considered lotteries to be a method of “taxing the poor,” as the saying goes. While no one is forced to play the lottery, those who do are more often than not people who believe society has left them with only one “reasonable” option for becoming financially comfortable — sheer luck against massive odds. Another class plays the lottery: people who pool their money with others in a corporate-type office, dreaming of leaving their cubicles behind.

I admit that since I accepted a new job a few years ago, I have occasionally been contributing one dollar when a co-worker decides the latest jackpot is high enough to justify the group purchase. It’s not often. Perhaps I’ve contributed twenty dollars over the past three years. I never expect this cash outlay to pay off for me, and with this expectation, I have not yet been let down. Why do I bother play, with my full understanding of the odds? Chipping in for lottery tickets with co-workers benefits my team socially more than financially. Is it financially smart? Probably not, but it gives us an excuse to maintain good working relationships with each other. I’m willing to pay twenty dollars over three years for that benefit.

For a group of ten employees at Chubb in New Jersey, pitching in to play the lottery did pay off. They, not we, won the $216 million jackpot for the “Mega Millions” game. After taking the cash payout, each employee will walk away with $14 million. “Walk away” may not be the term they prefer; according to their interview with the media, they will not be leaving their jobs.

If these winners are like many others, they will quickly burn through their new-found wealth, or what is left after taxes. During this process of spending and perhaps investing, I hope they choose worthy recipients and uses for the funds.

When you win the lottery, you are required to speak to the media. With your name in the open, long-lost friends and relatives, charities, and scam artists will be knocking down your door. Here are some basic tips to make sure you aren’t harassed as much as you would be otherwise:

• Change your phone number.
• Hire a lawyer.
• Find a financial adviser through a recommendation from a trusted friend.
• Talk to the a bank to open account within which you can accept a large wire transfer.
• Set aside enough for taxes. Lottery winnings are taxed as regular income.

If you have more tips, share them here with other Consumerism Commentary readers.

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Playing the Lottery: Tips for Ten New Mega Millions Winners

9 years ago, I was a fresh college graduate with a degree in music education, living close to campus and looking for full-time teaching jobs while working as a substitute teacher. If I remember correctly, the pay was about $70 per day. My one-bedroom apartment, almost completely unfurnished, was $600 per month if I remember correctly. I’m estimating because I have no financial records from this time. Looking back, I can’t determine how I was able to afford my rent, food, and student loan payments.

I have a hunch that my survival was assisted through the use of credit cards, but I have no surviving documents that prove this other than the first credit report I pulled, in 2005, which lists a number of open credit cards dating back to 1994, the year I entered college. One of these old credit cards is listed as “past due 30 days” around the time I had graduated college and another was “past due 60 days.” Although the details have been lost forever, I can’t deny that I was doing something wrong by not managing my money properly.

Unable to find a teaching position that suited me perfectly — I wasn’t about to settle and be miserable — I decided to work with a touring, competitive drum and bugle corps over the summer and continue to work for a similar organization full time in the fall. The best thing about touring with the corps, other than the exposure to some of the country’s best musicians between the ages of 16 and 21, the country’s best music instructors, and an overall exciting summer, is that I had almost no expenses during that time. We lived on the road for nine weeks or so and had four free meals every day. Most of my belongings went into storage for the summer, so my only rent was the storage fee.

Returning to “real life” after the summer ended was not as easy. Many weeks I worked over 80 hours at the non-profit arts organization, and they did not pay overtime on top of the low salary. To save money, I moved in with my father and younger brother for a few months, but our apartment was about 60 miles from my office, so I needed a reliable car.

There was one problem, however. Just like I didn’t know much about managing my finances, I didn’t know much about cars. Apparently, you have to add oil to the engine every so often. After destroying the motor of my 1986 Toyota Celica, I learned my lesson. In the fall of 1999, I purchased a used 1997 Honda Civic and was introduced to the wonderful expense we call car payments. With the low salary, rent on a new apartment I was sharing with a friend, my student loans, the new car loan, and everyday expenses, my credit card debt increased every month. I had a general feeling that this wasn’t right, but I still wasn’t paying attention.

In the years that followed I did try to improve parts of my life by moving closer to work, where I was spending more than 50% of my time, but the options were not great. After moving as close as 20 minutes away from the office, my employer and I (sort of) mutually decided to part ways. This is what led me to discover the value in managing my money, and I’ve written about this in How to Be the CFO of Your Own Life.

9 years ago, my net worth was negative, but I don’t even know the extent. The primary causes were the student loans and the low income as a college graduate in the non-profit arts education field. By changing my attitude, applying focus, and learning the importance of “living below your means,” it didn’t take me long to become self-sufficient without the use of credit. My situation became crystal clear, and the change was like flipping a switch.

How far have I come since then? I’ve been chronicling my progress on Consumerism Commentary every month since July 2003, so feel free to browse my monthly financial reports.

This story was part of May’s writing project at the MoneyBlogNetwork. Here are more articles written by bloggers looking back at their finances from a decade ago.

• Now and Them: How My Current Financial Situation Compares With a Decade Ago, Get Rich Slowly
• Then & Now: What Our Finances Looked Like 10 Years Ago Compared to Now, AllFinancialMatters
• My Finances 10 Years Ago and Now, Free Money Finance
• Money Management Lessons: Not Quite 10 Years to Life, Wise Bread
• Stepping Back in Time: Our Life Ten Years Ago, Five Cent Nickel
• My Finances Ten Years Back, Mighty Bargain Hunter
• Looking Back: 10 Years Ago, No Credit Needed

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Looking Back: The Difference 9 Years Makes

The company I work for “found” several million dollars last year thanks to a common law that originated in feudal England to the benefit the King.

Not every check that a company sends in the mail gets cashed. Supposed recipients, such as investors, employees, insurance beneficiaries, companies, and other customers, don’t always keep current addresses on file with said company. When the checks are lost in the mail, and the companies issuing the checks have tried for a year to get in touch with the recipients, the companies can’t just forget about the payment. They can’t reclaim the money. The funds must be escheated to the last known state of residence of the recipient.

States are strongly in favor of this arrangement as it provides them with income from time to time. But the states must also publish lists of the original intended recipients, just in case they come around and want to claim the money that is rightly theirs.

All state unclaimed property offices work together in the form of the National Association of Unclaimed Property Administrators (NAUPA).

The internet and NAUPA have made it easier for states to publish their abandoned property databases as well as for individuals to search these databases. When my company decided to look for money it was owed but never claimed, a search of just the biggest states resulted in claims totaling several million dollars. Needless to say, the company’s internal businesses that received these funds from the various states were quite happy with the unexpected income.

It was probably in 2000 when I first heard that there was a possibility that there existed in the world money someone had once attempted to send to me. I searched the unclaimed property databases for New Jersey, New York and Delaware. Unsatisfied with my results, I searched (fruitlessly) for money originally destined for my parents and other family members.

These days, searching for unclaimed property is easier. Many states work together to combine their database in one central location, Missing Money. When I originally performed my searches, only 25 states participated with Missing Money, but now there are only 15 states (including U.S. territories) that are not yet included in the central database.

No more than three people in my company work with NAUPA and the states to reclaim all funds originally intended for the businesses, and their first sweep of the largest rates resulted in income of more than ten million dollars. That doesn’t include millions of dollars that was found but will never be claimed due to unidentifiable co-owners.

A quick search of several websites can prove to be worthwhile, even if it doesn’t result in finding millions of dollars. Here are all the links you’ll need:

• Missing Money (for all states not listed below)
• Arkansas
• California
• Connecticut
• Delaware
• Georgia
• Hawaii
• Illinois
• Indiana
• New Mexico
• New York
• Oregon
• Rhode Island
• Wyoming
• Guam
• U.S. Virgin Islands

If you do find that you may be owed money, you’ll have to file a claim and provide positive identification. The process could take some time. If you don’t find anything, put a reminder in your calendar to check back in a year.

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Missing Money: Troll the Web for Abandoned and Unclaimed Property Owed to You

Focusing on small spending habit changes is a good way to save significant money over the long term. No matter how many daily lattes you forgo, if you make poor spending decisions on major expenditures, all your ECRD savings could be negated in one moment. Consumer Reports has identified some of these major mistakes that, while common, could cost thousands of dollars unnecessarily. Earlier, I wrote about six such mistakes. Here are six more.

7. Maintaining an unhealthy lifestyle. Living healthy, including an acceptable body weight, low cholesterol, normal blood pressure, and no smoking, can reduce your expenses by $4,600 to $42,000 throughout your life. These savings come from reduced life insurance premiums for healthy individuals. Consumer Reports offers this advice:

Before you apply for life insurance, consult a doctor about the best ways to get your stats in line with the “preferred plus” underwriting requirements. Insurers are OK with you taking medications to achieve normal blood pressure and cholesterol levels.

I’m surprised Consumer Reports’ analysis stops at life insurance. There are many ways healthy individuals spend less than unhealthy. First of all, smoking is an expensive habit. Cigarettes are expensive and the health problems smokers will likely have to deal with will be financially difficult depending on the severity of the problem. Quitting smoking is one of the best things someone can do to save money, not just from the expensive cigarettes but from increasing health care costs. In general, unhealthy people visit the doctor more and perhaps require medication. While health insurance covers some expense, staying healthy is a much better choice.

Personally, I can do much better in this category by exercising and having at least annual check-ups with my doctor. I’ve tested my blood pressure recently, and that seems to be fine. I do not know where my cholesterol stands, and I could stand to lose a few pounds.

8. Ignoring Roth accounts. Roth IRAs and 401(k)s allow earners to set aside money for retirement while allowing that money to grow tax free. If withdrawn when allowed, and if the law does not change by then, earnings will be tax free as well. Roth accounts are excellent options for those who believe their tax rate now will be lower than their tax rate at retirement. I don’t think anyone’s guess is better than anyone else’s regarding future tax rates, so my approach is to diversify my tax exposure.

Consumer Reports estimates that ignoring the Roth option could cost $9,000 to $26,000.

9. Cashing out your 401(k). This figure surprises me. Consumer Reports mentions that 45% of workers cash out their 401(k) when they change jobs. I can only think of one situation in which this makes sense, and even then it’s sketchy. If someone finds himself out of a job unexpectedly after being fired or laid off, does not have any access to emergency funds, and cannot find a job immediately, I can understanding tapping into a 401(k). There are huge penalties for doing this, and I think it’s a bad option. Always be prepared for job loss by following these five suggestions, and you won’t have to worry about where your money will come from if you find yourself unemployed.

10. Underfunding your 401(k). One of the most common pieces of financial advice doles out by professionals is to maximize your 401(k) contributions to the IRS limit (after funding your emergency fund, meeting the requirements for your company’s matching contribution, and maximizing a Roth IRA). This is a somewhat difficult goal for many people. If you are single and earning $40,000 in New Jersey for example, and you have to pay for an apartment or a house, you’re going to find it difficult to pay all of your bills while diverting $15,500 to retirement. I only recenntly bumped my 401(k) contributions high enough to max out my 401(k), and I could only do so thanks to outside income.

Consumer Reports calculates that an average worker not contributing fully to a 401(k) would give up $36,000 in savings compared to one who does fully contribute.

11. Paying needless fund fees. Several years ago, when I first started investing, I set up a recurring purchase of a fund I had already owned through a UGMA account. I thought recurring purchases in AIVSX would help my portfolio grow. It turns out the fund did well when the market did well, but my purchase price did not seem to line up with the price of the fund on the purchase dates. The price I was buying the fund at was about 5% higher than the fund’s actual price. I later realized that I was paying a 5% premium each time I purchased the fund because it was a “load fund.” This load reduced my performance to below the market benchmark. Once I realized, I stopped purchasing the fund every two weeks. It was a waste of money and a lesson learned.

I could have easily found a no-load fund in which to invest. If I had continued with AIVSX, I might have wasted $4,000 over the course of my investment.

The high-cost fund that we chose had a 5.25 percent load and annual expenses totaling 0.45 percent. The low-cost fund was a no-load with annual costs of only 0.18 percent. The high-cost fund grew to $36,000, the low-cost one to $40,000. Note that we could have chosen a fund with even higher expenses, had we not done our comparison with index funds.

The magazine recommends Fidelity, T. Rowe Price, and Vanguard. I have accounts with Fidelity and Vanguard, and so far, I would have no problem recommending either of these companies. Both have low-cost, no-load index funds perfect for frugal investing.

12. Falling for a scam. Anyone can fall for a scam, even otherwise intelligent people. Professional con artists are good at what they do, and they continue to exist because the scams work often enough to make it worthwhile. Consumer Reports can’t even estimate how much someone could lose on a scam; it can be a family’s entire savings.

Always check out the license, reputation, and references of any company or individual you’re thinking of doing business with. Never respond to an unsolicited request for personal information, such as your Social Security number or online passwords, even if it appears to come from a business you know. Instead, call the company yourself. Be especially wary if you’re nearing or in retirement, a prime age group targeted by fraudsters because, as the bank robber Willie Sutton once said of his own favorite crime target, that’s where the money is.

On a smaller scale, sometimes gainfully employed professionals can commit what amounts to a scam. It pays to know all the details about any financial arrangement you agree to, whether it’s a car loan or a variable annuity. Many professionals are not required to act in their customers’ best interest, and what’s good for the salesman is not always good for the customer. If you are unsure, it’s best to wait before making a decision or bring someone knowledgeable and trusted with you. Last year, I wrote about an elderly person who was sold a variable annuity by Bank of America without really understanding the details. It’s likely she wouldn’t see any benefit from the product before she would pass away. It’s hard to always know who to blame, as there is often miscommunication, misunderstanding, and in some cases, misleading before the contract is signed.

12 money mistakes that could cost you $1,000,000 [Consumer Reports]

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Big Mistakes That Cost, Part 2