Near the end of my college career there was a sort of “Psychic Fair” on campus. As I recall, nobody charged us anything, so I got a reading from a Numerologist.

She basically had me fill out a form with some information about myself. I remember “full name” and “birthdate”, for example. Multiple calculations later, the right side of the form had four numbers filled into boxes with labels like “Destiny” and “Soul Urge”. The Numerologist slowly removed her glasses and looked at me quizically before telling me that all four of these core numbers were the same: 8.

To summarize:

“The number 8 Destiny suggests that the direction of growth in your lifetime will be a move up the ladder of attainment in the material world, to achieve financial security, and status amongst your peers.” source: http://www.astrology-numerology.com/num-expression.html

She explained that apparently, the only reason I was here on Earth was to learn how to attain and manage wealth. So, more than ten years later, why do I still have a negative Net Worth? Even putting metaphysics aside, it’s still a valid question.

I think there are a few primary reasons:

Upbringing

Though I considered myself an independent thinker at a very young age, you can’t decide to disagree with something if it’s never presented to you. My parents didn’t take the time to teach me how to save money, though they always told the story of how my oldest sister learned to be stingy by age seven. We definitely had classes called “Home Economics” in school, but economy never came up. It was all cooking and sewing… very progressive, I know.

Not paying attention

I’ve been diagnosed with Attention Deficit Disorder. For those that don’t have it: imagine that you’re watching TV, and the show gets less interesting. The channels automatically start changing, but you don’t notice the change until you end up back on the original program again. That’s what A.D.D. is like for me. The problem is that I didn’t know it was a treatable disorder until I was more than 30 years old.

I’m sure there were times in my life when someone was giving out some good advice about managing money, and I was happily daydreaming.

Funny story: the first four checks I wrote out to various utilities when I graduated from college all came back because I didn’t sign my name. It’d be funnier if they didn’t all charge me extra for the inconvenience.

Lack of ambition

I never had anything resembling a “career” until after I got engaged. As soon as I was responsible for someone other than myself, I suddenly felt a drive to improve myself, my brain, my prospects, etc.

So, now that I understand all of this, what am I going to do about it? Well, the ambition part has mostly taken care of itself. As for paying attention, I’ve turned money management into kind of a video game. Because everything is digital now (at least, it is for me, or I would probably lose it somewhere), I’ve got our Google Spreadsheet budget, and the bank Web site that I can have harmless obsessions over. In order to stay accountable to my goals, I’ve got you guys.

As for fixing my upbringing… well, I can’t. And since my wife and I don’t plan on having children, I can’t teach them the things I was denied. All I can do is urge you, gentle reader: if you have kids, set a good example and explain to them why you do what you do with the money.

So that covers my past. Next time I write I’ll explain all the things I’m still doing incorrectly. Here’s a hint: $595 car payment.

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]

It’s great to focus on the little things that save you money, like The Expensive Coffee-Related Drink Factor. Reducing small, regular expenses add up over time. But all that focus on the minutiae is for naught if you make big mistakes. Consumer Reports recently published an article that explains how much some of those big—thought not always apparent at the onset—mistakes cost.

1. Investing too conservatively during retirement. I had a major problem with Kiplinger Personal Finance’s recent series on saving $1,000,000 for retirement starting at various ages. The authors there suggest shifting your retirement asset allocation away from equities much too quickly. Retirement funds have to last longer than the beginning of retirement. With people living into their 70s, 80s, and even 90s, retirement funds have to last much longer than they used to. Unless you can afford to withdraw only 1% of your assets every year for expenses, you’re going to need to stay strongly invested in stocks. Consumer Reports says this mistake can cost you $360,000 to $750,000.

This is risky; stocks fluctuate, and a drop in the market at the wrong time can have some ill effects. It makes sense to have more stable investments once you retire, but you’ll need those equities to make the funds last. Here’s what Consumer Reports found:

Overall, we found that an asset mix leaning more toward Standard & Poor’s 500 stock index than bonds provided bigger returns and annual cash draws. On average, over a variety of 20- and 35-year periods from 1940 through 2006, an all-stock portfolio provided our investor with $750,000 more than an all-bond one.

2. Retiring before you need to. Early retirement is tempting. I’d like to stop working while I can still enjoy my life. There is enough I’d like to do that I won’t get bored with my time. But Consumer Reports says that early retirement can be an idea that provides the opportunity to forgo $237,000 to $309,000. Stay in the workplace longer, and the nest egg with which you start retirement will be significantly larger and will last longer. Also, the earlier you retirement, the less you’ll receive from Social Security. I’d hope that by the time I retire (if I take the traditional career path), Social Security will be the least of my concerns.

What else? Health care costs can be brutal if you quit the workforce before Medicare can help you:

What’s more, Medicare won’t cover you until age 65, so you might have to buy individual health insurance at an age when costs are apt to be at their highest. And each year you postpone is one less year your savings will need to support you.

3. Launching a divorce war. Unless you’re a “gold digger,” divorce can be a costly action. If it’s a particularly nasty divorce, not only can it drain you emotionally, but financially as well. A divorce could cost a person $49,000 to $188,000, though Consumer Reports cites an expert who says that a full courtroom ordeal could easily exhaust $250,000. That’s a quarter of a million dollars for a judge to say, “You get the house and you get the retirement accounts.”

So what do you do? Skip the divorce and live unhappily ever after? Mediation is a common cost-cutting measure. Finding a new rich spouse is an option.

4. Underinsuring your home. I am a poor example. I’ve been meaning to ask my insurance company about and shop around for renter’s insurance. I find myself busy during business hours and I put it off, even though I know that’s not an excuse. A home that’s not properly insured could end up costing you $16,000 to $194,000 more than necessary, according to Consumer Reports.

This has more to do with damage to a house, which as a renter I currently don’t need to worry about other than the contents inside. That could certainly contribute to a loss of $16,000. Consumer Reports explains that home owners, if they haven’t updated their insurance policies from the time they purchased their homes, could lose out on all gains if the house is damaged or destroyed. And if they’ve been living in the same place for a decade, that could be significant gains. The money you would receive from the insurance agency, while an amount that might have helped a decade ago, would be insufficient considering the climb in house prices.

5. Overpaying for your mortgage. You better shop around. It is absolutely worthwhile to look at different lenders when you plan on initiating a mortgage. Consumer Reports shows that a difference of 750 basis points between two otherwise similar mortgages could unnecessarily cost $27,000 extra down the road. Why pay someone an unnecessary $27,000? If someone asked me for that amount of money for no reason, I would turn them down. Why give such a gift to a mortgage lender? Find the lowest cost mortgage possible.

6. Carrying a credit-card balance. When should you carry a credit card balance? I can only think of two situations. The first is if you are using the credit card for arbitrage: earning more from a liquid investment than you’re paying in credit card interest. That’s a dangerous adventure for someone who isn’t prepared. The other situation is if a credit card is the only source of funding for starting out in a career. If your first job out of college requires a suit and you have no money saved up after boozing your way through higher education, you’re going to need to make do. Of course, it’s imperative to get rid of credit card debt as soon as possible.

If you have a card with an interest rate of 15 percent and you pay only the minimum due each month, it will take you 22 years and 2 months to retire a $5,000 debt, and you’ll have paid $5,729 in interest.

Minimum payments are not the way to go. They’re designed to keep you in debt for a long time. You must pay more than the minimum payment suggested by the credit card company. In most circumstances, take Consumer Reports’ advice and use credits only for security features (and I would add for rebates) and pay off the balance every month. Otherwise, you can end up paying $5,000 to $23,000 over the course of your life in credit card interest alone.

Common sense will help you with the small mistakes that add up over time. It often takes some education and awareness in addition to common sense to avoid wasting hundreds of thousands of dollars unnecessarily.

Image credit: banjo d
12 money mistakes that could cost you $1,000,000 [Consumer Reports]

I’ve made a few financial mistakes in the past year, but the last one I’ll share is perhaps the worst of all, since it’s about more than just money.

If I don’t recover from this one, I could pay years of penance, not just suffer through one dismal tax year. My earning potential is something I need to carefully nurture, and that’s why I’m kicking myself for:

5. Failing to Remain Competitive Within My Field

In a way, this is the number one disservice I’ve done myself in 2007. I worked impossibly hard at my day job, but I truly let it become my focus, allowed corporate goals to become the whole of my career goals.

This means I’ve gotten kudos on some fine achievements within my company, but this truly doesn’t mean much outside of it. And I need my skills to be appreciated and relevant not just within my little corporate microcosm, but within the industry at large.

A friend of mine really helped me to gain some perspective on this recently. She advised:

“You need to consider not how many projects you’ve done each year, but how much what you’d put on your resume has changed between this year and last, and what you expect to change for next year. Regardless of how hard you’re working, ultimately you need to make documentable progress every single year.”

Besides being able to add +1 to my years of experience in various areas, I need to look at my career progress holistically and ensure that each year I am adding new skills and experiences/areas of expertise to my resume. If I’m no longer growing my talents, I need to seriously consider making a move, either within my company or beyond it. This is a tricky thing to do because I honestly enjoy my job and the people I work with, but I ultimately cannot afford to let my skills atrophy, especially since my work is technically oriented. Adding a side project could also help to expand and grow my capabilities and experience.

As you know, I invested a lot in attaining a quality education and advanced degrees, but now I need to continue investing in my career even though I have obtained a demanding and fulfilling job. It sounds so simple, yet somehow I’ve fallen way off course. It’s just so hard to find the time, especiallly when you lack motivation because you’re already settled into your role.

I’m going to start by writing out an action plan for getting my skills back up to snuff. Once I have established clear, S.M.A.R.T. goals, I will set aside at least 30 minutes a day to focus (no multitasking!) on these efforts, whether reading industry publications, attending training, pursuing a skill-building project or networking to learn the latest strategies.

I’ve been considering this topic quite a bit, and will be sharing some of my concrete plans and tactics for getting back into the game and remaining competitive in the coming weeks.

2007 may be my worst tax year ever.

Not only did I fail to qualify for the full energy credit and fall out of touch with my tax accountant, but I made it worse by having a great year with my rental properties.

A great year which I did not sufficiently offset, and that’s my next mistake:

4. Failing to Balance Rental Property Income with Deductible Expenses

Psychologically, rental property ownership is a funny thing. During years when I suffer through months of vacancy or renovations, I shudder to think of the losses, wondering how I’ll make it through. Throw in court costs for evictions and the like, and I’m nearly over the edge.

Once tax time arrives, however, my tune changes, and I’m thrilled by the deductions I get to claim due to the expenses and losses. Renovation expenses are depreciated across multiple years, but it still helps to offset my primary job’s income.

2007, however, was a profitable year, with the properties fully rented for all 12 months. The rent was even paid right on time. It was my lowest-stress year as a landlord on record, and yet this is the worst possible situation for tax purposes. Read the rest of this article »

Sure, I’m much more aware of my personal finances now, and made some very positive changes in 2007, but looking back, I realize I’ve also made some very-avoidable mistakes, for which I’m kicking myself.

My first mistake is also the most annoying to me, since I’ll be feeling the impact of this particular poor decision as I trudge through my tax filing in the next two months.

1. Failing to Utilize the Energy Tax Credit
A tax law change in 2005 meant to encourage energy-conscious home investments by consumers offered a ten percent tax credit for 2006 and 2007 purchases of energy-efficient exterior doors, windows, insulation systems, metal roofs, furnaces and water heaters.

The credit, up to $500 in total, could be split across the two years.

In 2006, I was thrilled to take a $140 tax credit for new windows I’d purchased for my home, but planned to use the remaining $360 credit for door and window purchases in 2007.

I knew I needed to buy several exterior doors, knew they’d be expensive, had all year to make the purchases, and yet I failed to do so. My rationale? I figured that if I kept haunting the returned special order bins at Home Depot and Lowe’s, I’d eventually find dirt-cheap doors, and the savings would justify the wait.

Now it’s the first day of 2008, I still have no doors for my home’s impending remodel, and I lost out on a $360 tax credit I badly needed to offset my 2007 income.

The only way to make up for this now is if I really do find an insane deal on the doors I need, and with a month left until I need them for the remodel, that’s not looking likely.

I have 4 more mistakes to share; stay tuned.

Treasury and IRS Provide Guidance for Energy Credits for Homeowners [IRS]
Rebates and Tax Credits for Windows, Doors, and Skylights [EnergyStar.gov]