Recently in Personal Finance Category

Here's a quick look at some of the tax breaks the new stimulus plan authorizes (for a more detailed look see the Wall Street Journal):

1. Making Work Pay tax credit.  An eligible worker would get 6.2% of earned income up to a max credit of $400 (for two income earners it's $800).  What this means is that workers would see an extra $12-$20, per pay check.  If you make more than $95,000 (single) or $190,000 (couples) you will not qualify.

2. New homebuyers will get a tax break in the form of a $8,000 subtraction from the income tax they owe (on a principle residence purchased through 11/31/09).  There is a phase our for individuals earning between $75,000 - $95,000 and couples with an income of between $150,000 - $170,000.

3. The Alternative Minimum Tax increases exemption to $46,700 for individuals and $70,950 for couples.

4. If you've lost your job you will be able to forgo taxes on the first $2,400 of unemployment compensation (in previous years, all income from unemployment was taxable).

5. Cars buyers get to deduct sales tax on a new car purchase. (for purchases up to $49,500 from the day the stimulus starts through the end of 2009).  Of course, the deduction phases out for singles with a salary between $125,000 - $135,000 and couple earning between $250,000 - $260,000.

6. If you've lost your job, maintaining insurance through your old provider got easier in the form of a 65% reduction in cost.  Cobra costs also get cheaper.  There are also qualification in terms when you got laid off.

7. The American Opportunity education tax credit allows for a $2,500 partially refundable tax credit to cover all four years of college. (this goes until 2010 and thereafter the Hope Credit comes back into play).

8. If you have a 529 college savings plan you can use withdrawals in 2009 and 2010 to purchase a computer or "computer technology" (previously the college needed to stipulate that a computer was needed for study). 

The Wall Street Journal's Personal Finance blog, "The Wallet" recently posted an article on how to save money on rent.  The article also offers a free template on how to approach your landlord about reducing your rent, which goes to show that you can haggle about anything, even in one of the most expensive cities on Earth (thank to Rich for the FYI):

The Wall Street Journal's Karen Blumenthal has a highly relevant article on "Bill Creep" that is a must read.  Bill Creep is associated with auto renewing services that are purchased ala carte, such as adding cell phones to a plan, moving to a data plan for a Smartphone, premium channel upgrade to a cable subscription, increasing your Netflix subscription from 3 movies to 4 movies out at once, and moving from a basic gym membership to personal trainer and dietary services.  

The dangerous thing about Bill Creep, as Blumenthal argues, is that it happens over time yet delivers a financial hit every month due to the use of a credit card.  How do you keep Bill Creep under control?  Try the following three bits of advice:

1. Evaluate whether you truly need the service or product and side with simplicity when it comes to the latest gadgets and services.

2. Just get the basics.  Do you really need a Smartphone, Netflix subscription, and a gym membership? Pick a few basics and stick with them.

3. Say no to pressure from the service provider to upgrade.

They say that money can't buy happiness and I certainly agree.  However, did you ever stop to think about what money can, indeed, buy? 

Here is a list of ten things that money can help you buy:

1.  Money can buy peace of mind.  Do you have trouble sleeping at night because you are worried about bills or your current job status?  Well having enough money in the bank to not worry about your job for a year or two will let you sleep like a baby.

2.  Money can buy you comfort.  Do you live in a small cramped apartment with two kids and neighbors above you constantly screaming?  Money can allow you to put a 20 percent down payment on a comfortable, quiet, home in a safe neighborhood.

3.  Money can buy you a reliable and safe car.  Do you drive a late model vehicle that is constantly breaking down or in need of monthly maintenance?  Is your vehicle equipped with anti-lock brakes, stability control, and at the least 4-6 airbags?  Money can allow you to buy a quality used (or new) vehicle from a reliable manufacturer.

4.  Money can buy you a future.  Would you like to not work and live well at some future point?  If the answer is yes, then money will let you prepare for a future without a boss and making income without working.  In short, you can use money to buy stock, mutual funds, index funds, CDs, etc.

5. Money can buy you confidence.  Do you swallow your pride and work for an organization or boss that you do not respect or just plain hate?  Well, if you have money in a bank account money can give you the courage to walk away from a bad situation and start fresh.

6. Money can buy you the ability to give.  Do you wish you could help a not so well off sister or brother or contribute to your local Red Cross?  Well, money can help you be more charitable and giving.

7.  Money can buy you time.  Do you often find yourself wishing you could spend more time exercising, reading, learning to cook, traveling, spending time with family, et. al. ?  Retiring early by way of making the right financial moves in life can give you the time to do the above.

8.  Money can buy you nice food.  Do you clip coupons to the point that you will not buy something you are craving?  Do you buy sub par ingredients and generic store brands even when you know quality is poor?  Money can help enjoy great meals (including wine).

9.  Money can buy you experiences.  Do you not travel because you're worried about airline fares and hotel prices?  Do you decide often against a trip into the city to enjoy the opera and a glass of champagne?  Money can help you expand your mind and bring you places beyond the town you were born in.

10.  Money can buy you opportunity.  Do you wish you could buy a home in today's economic environment because interest rates are low and home prices have been dramatically reduced?  Do you wish you could buy GE stock because it's under $20 and inevitably will rebound to record highs in the near future?  Money can help you leverage opportunities that would normally not be able available in ordinary times

Now more than ever the idea of an emergency cash fund is critical.  Many personal finance gurus recommend that individuals and/or families put aside at least 3 months of living expenses in a conservative vehicle (such as a CD, money market fund, or traditional savings account).   Living expenses include: mortgage, taxes, utilities, food, gas, and car payments.  

An emergency cash fund is a must in any economic environment (including good times) as you never know when you may lose your job, need to make an emergency home repair, etc.  I also believe that establishing an emergency cash fund should be done early (that is, within the first six months of your first job) and ahead of any other money matter (even before funding your 401K).  Having cash at the ready provides a sense of security and freedom and also builds discipline in terms of saving for the cash fund.

I like to have well over 3 months of emergency cash on hand and I would recommend an amount closer to 6-9 months of living expenses.  Look for an online money market fund via ING or Vanguard and connect it with your checking account (this way transferring money to your emergency fund is easy and convenient).

A September New York Times article argued that the key to "wedded bliss"  is a shared viewpoint on money matters and I couldn't agree more with the basic premise.  I'm sure you all know couples who couldn't be more different: she likes Prada and drives a shiny black Lexus, while he dresses like he just returned from Woodstock and eats peanut butter and jelly sandwiches 6 nights a week.  Big differences in marriage (whether they be about raising kids, time spent with family, or money matters) often lead to big arguments and, at times, divorce.  So, it's vital that successful partners have the same basic goals in life and can identify with the same "value proposition" (marketing speak for what makes a product special). 

In terms of couples with successful personal finance lives, they often follow a few basic tenants:

1.  Communication.  Do you and your spouse talk often about important issues?  Do you talk like adults about money, the kids, and how annoying certain family members can be at times?  If you don't lay things out and speak frankly, say, about how much money you'd like to be investing each month, then you're both not communicating.    

2.  Money goals.  Do you both have money goals?  Every couple should have similar thoughts on: how much money to save, what makes up healthy monthly, household, expenditures, how much to spend on Christmas gifts, how many lessons or after school activates the kids truly need, etc.  Simply put, your money goals need to have alignment.

3.  Process.  Do you and your wife have a plan in place for who is in charge of investments, monthly bills, home maintenance, etc.?  You can't reach any personal finance goals unless you have a plan in place with dates and who is in charge of getting things done.  In some ways, a marriage needs to be run like a corporation (sorry to all you romantic types!) and you can't have one employee doing all the work while the guy in Accounting sits on his butt all day.

4.  Have Fun and Make Sure Your Love Evolves.  It's always a good idea to invest in your love.  This means going out and doing special things on occasion or treating your spouse to a gift or a dozen roses.  Being cheap with your husband or wife is not a good move.  If your budget allows for a yearly vacation, maybe without the kids, then go and have fun (your marriage and life will be revitalized when you return).

5.  Independence.  I know some couples who are tied to the hip both in terms of finances and friends/social activities/etc. and this is not good.  I believe that married couples need to preserve some individuality, including attending events with close friends or just going out for a drink with a college buddy on occasion (it's ok to have some differences in your social lives).  On the money side, it's also important for both partners to have their own spending money (just as long as one partner is not abusing the privilege by making purchases from the web each night, for example.).  

Lynnae at BeingFrugal.net posted on 12 steps to a prosperous New Year. Via BeingFrugal.net

4 Things we are duped into thinking we need.  Via BluePrint For Financial Prosperity.

Arguments for paying off your mortgage early.  Via The Greenest Dollar

Paul from CrackerJack Greenback has a series on how to deal with being laid off.  Via CrackerJackGreenBack

36 ways to earn extra money.  Via FiveCentNickel

Reasons why young people fail in college. Via Studenomics.

Recently, our extended family has been going through a difficult period caring for my 89 year old grandfather (Nonno Vincenzo).  Nonno Vincenzo has been housebound for the last year suffering from dementia, et. al.  I was named after Nonno Vincenzo and we share many of the same traits (including being calm most of the time with the occasional loss of temper).

Nonno's physical decline got me thinking about how personal identity is shaped by family and whether it's a good thing?  For example, in most large cities in the Western world, people cherish the ability to create their own identity and the personal freedom that comes along with such a choice.  In Ancient Greece, however, a newborn male became a citizen only after being acknowledge as a member of a particular family.  The newborn was also, in most cases, named after the paternal grandfather.   So, in many ways, identity in Ancient Greek culture was shaped by the family the individual was born into.

Family, as I've said in other posts, is critical if you're interested in money matters and living a frugal life.  The way I see it, an extended family can help with:

1. Raising and caring for children (this has been the model for thousands of years and it's only in Western countries where we've moved away from this idea).

2. Managing a home (including home repairs and maintenance).  This is especially true if you live in an older home and have family members who are handy.

3. Maintaining a social life.  OK, hanging out with your 90 year old grandfather on a Friday night may not be that much fun, but the occasional dinner and party with family is really nice.  I try to have dinner my parents once a week and I like having family over for a coffee and light snacks every month or so.

4. General advice.  Think of Uncle Frank and Aunt Maria as pro bono attorneys and psychotherapists who can offer advice on tough life decisions.  Making a decision in a vacuum is not good and I like to shop ideas and possible solutions around with family before acting on an item, so I think this tip is particularly important.

Let me know what you think in terms of family, identity, and how you've managed to stay close to your extended family.

One of the most important life skills you can teach your child is how to save or, more specifically, why it's important to save.   My parents would often bring me to the bank as a small child and I observed my mother writing and cashing checks, depositing money, etc.  By the time I was 7 or 8 my parents told me about a little blue passbook they had opened for me when I was born.  The passbook (or savings account) contained some regular deposits and a healthy amount of money.  I had no sense of the value of the account or what the cash really represented, but I do remember my parents telling me:

- This is where you will (not can) save any money you should come across (birthday, holiday, etc.).

- Once you put money into the little blue book you really do not want to take it out (unless you need something).

- The bank will give you some money in return for keeping a little blue book full of money.

There's something about Warren Buffett that makes me feel warm and tingly all over and it's not his net worth of $62 billion!  Rather it's a combination of his personality, habits, and life philosophy.   I first saw Warren Buffett on Charlie Rose (he and Charlie are very good friends) and become captivated with him from the get go (I remember thinking, how could this affable and happy Midwestern man be the world's richest person?).

Recently, I've started reading a new biography on Buffet by Alice Schroeder entitled, The Snowball: Warren Buffett and the Business of Life.  Schroeder was an insurance analyst that covered Berkshire Hathaway (Buffett's company that basically buys other companies) and she got to know Buffett well over a number of years, so they collaborated on a rather bulky biography.  Reading through the first couple of chapters got me thinking: if Buffett leads a frugal and thrifty life then why in the world isn't every other person in this country not living like him?  Buffett's habits and life philosophy are classic "Millionaire (or in his case, Billionaire) Next Door"; here's a little about how he lives his life:

There have been some great blog posts on the web this past week focused on happiness and savings, frugal living, how to talk about sensitive money/job issues, etc. and here are the best of the lot:

- Trent @TheSimpleDollar talks about Happiness and Saving for the Future

- JD @ Get Rich Slowly posted a nice article on great wine buys and even had a guest video blog by Gary Vaynerchuk from the WineLibrary.com .  JD also had a great entry on the ROI of gardening (part of a series)

- The MSN Smart Money blog has several blog entries on "8 Questions Not To Ask In This Economy"  , "Netflix: Frugal or Not"  and "50 Financial Skills Every Person Needs to Have"

- Frugal Dad has an article on "Budget Avoidance Syndrome"  and the "Black Friday Sales Emotional Trap"

Trent over at The Simply Dollar blog had an interesting post this morning on "A Long December"; that is, how, for many American's December will be a tough month given job cuts, gift buying pressue, investment/401K performance, and the poor economy in general.

Trent's post got me thinking about my childhood and how my parents (pic: that's my mother on the left with my great grandmother and grandmother in Calabria in the late 1960's) handled tough economic times.  And I easily concluded that parents didn't panic much or for that matter pay much attention to recessions, the stock market, or even my dad's job (my mother did not work a formal job).  I'm sure my folks worried like everyone else, but I don't remember hearing or feeling any sense of panic from mom/dad.

As I sat in my home office this morning the book, "The Millionaire Next Door" stood out prominently on my wood bookshelf.  The book stands out because it's a classic in the personal finance world and can be easily understood by everyone.  I often re-read chapters of the book and can really identify with most of the content in the 1996 book - see the The Simple Dollar for a nice review of the book.

One of the key principles in the book centers on living below your means (regardless of income level, profession, or status); specifically, the author talks about how most closet millionaires live in modest homes in solid, but not ritzy, neighborhoods.  The principle got me thinking about how important it is, especially for a young couple, to purchase the correct home (and start a financial life on the right foot).  By correct I mean a home that is the right size, in the right neighborhood, and the right price point. 

Many of the best personal finance blogs I read on a daily basis, including Get Rich Slowy (which Money Magazine called the most inspiring money blog today), The Simple Dollar, Free Money Finance, and Money, Matter, and More Musings focus on how to save money or lead a frugal life, however we often hear via the media that the US economy is tanking and that increased consumer, business, and government spending will be the only way back to more prosperous times.  The logic is that some group needs to spend in order for the economy to grow, or with the current economic crisis, stabilize.  And when consumers don't spend money on cars and LCD TVs (because of lack of funds or because they are simply being conservative) and corporations don't sign big contracts for services or equipment, the US economy grinds to a halt.

Do you know those people who need to spend money in order to have a good time?  You know, the folks who inevitably see a movie, go out for dinner, buy a new pair of pants, and buy a few books at Barnes and Noble every weekend.  Well, it's easy to fall into the trap of spending to put a smile on your face or occupy your weekends.  I, for example, was addicted to buying books for a period of time; I would often head to the nearest super-bookstore on a Saturday morning and spend a good 2-3 hours looking for a few books to purchase.  I would justify the $70-$90 expenditure as a good thing because it involved reading and learning new things, but I was still spending on something I could easily get for free (namely, books at my local library).  Here, then, are five "Instead Of X" scenarios that you can look at this weekend:

Becoming financially independent is about setting goals and staying on track in order to achieve those goals.  In my view, most Americans are in poor financial shape (i.e., living on credit, spending more than they earn,  not saving enough or at all, etc.) because they have not set financial goals, partly due to not knowing how to do so (that's my great grandmother to the left, she knew how to set financial goals!).

In order to put your money to work you need to first prepare and set up your financial foundation and this includes:

NOW is the time to start preparing for the worsening economy (that's right, you've read the preceding sentence correctly, the economy will get worse).  Sure, we've seen some pretty abysmal days on Wall Street and some radical actions taken by the US government, but beyond a deflated 401K account most Americans have yet to feel the roar of the current Recession.  As a who's who of corporate America begins announcing job cuts (e.g., Coca-Cola, Whirlpool, Merck, Yahoo, GE, Goldman Sachs, Bank of America, etc.) "Main Street" is going to really begin feeling the downturn over the next 6-18 months.  So, how can you prepare for bad economic times?   Here's a quick list:

Paycheck and Savings

Begin saving more of your current paycheck.  The average savings rate in the US is less than one percent (compared to 20 percent as far back as 1982), so saving more of your cash should be a no brainer.  Set up a savings account at your local bank or search for the best rates online for a Money Market Fund (most of the large funds are now FDIC insured) and begin making regular deposits.  If you're a two income family, see if you can save half of your incoming cash and use the other half/salary to pay your mortgage, buy food, and run your utilities.  Regardless of how you do it, it's time to get extreme and save between 20-40 percent of your income!

Eliminate Some Metal

If you're a two car family and can run your household and get to work with one vehicle, then loose the second car.  Eliminating a second vehicle will save $$$ on fuel, maintenance, and car payment.  Using a single vehicle may not seem as difficult as you think; in fact the two-car family is a recent phenoomenon so see if you can arrange a car pool for work and after school pick ups and consolidate your weekend trips so you can stick to a single car.

Don't Spend Just to Spend

Cut the extras.  That is to say, for the time being, eliminate going to the movies, eating out, random entertainment, large gifts, random and spontaneous shopping (including online shopping), and large vacations.  You don't want to live like a miser, so continue to spend on what brings you pleasure and fulfillment (possibly nice foods to cook at home and a nice pair of pants or shoes for work) but be very conscious about every dollar that leaves your wallet.

Not Another Bill

Examine your bills.  Look at your monthly bills and target those auto-renewing costs first.  Do you really need your Netflix subscription, home delivery of your local paper, unlimited text messaging from your cell phone provider, 200+ cable channels, Tivo, and other programs/products that automatically charge your credit card every month or year?

I don't want to convey an overall sense of doom and gloom, but everyone should be prepared with adequate cash reserves by making the above sacrifices.  And if you're looking for inspiration or feel as though you need to spend to feel happy, just 'spend' some time with your family (as the above photo shows - note, it does help if there's plenty of homemade wine available). 

My parents emigrated from Italy in the early to mid 1970's.  My father has the equivalent of a technical high school education and my mother finished her formal education in the 7th grade.  Yet my parents are one of the most financially savvy couples I know, often making smarter economic decisions then their US-born Boomer peers (with BAs and Master's Degrees in hand).  How do they do it, here's a quick list:

• My parents spend much less then they make and live below their means. 
• My parents do not eat out regularly, go to the movies, or buy fancy cars.
• My parents are incredibly crafty and skilled: they can make their own home repairs, make their own food (including food from scratch and canned tomato sauce, pickled vegetables, homemade pasta, homemade wine, etc.), iron and repair their clothes, grow their own fruits and vegetables, landscape, etc.
• My parents are always saving
• My parents are not slaves to their paycheck, they have other forms of income.
• My parents own a two-family home and are landlords
• My parents do not panic and are level-headed about financial decisions and the economy, in general.
• My parents own a single car
• My parents live in a solid, blue collar, middle class neighborhood, in a comfortable but mid-sized home.
• My parents do not feel a sense of entitlement from a material perspective. 

Mom and Dad also have their financial house in order because they realize that life is about being fulfilled and fulfillment doesn't come via a big screen TV or a fancy vacation home, it comes by way of:

• Being with family and friends (my parents social network is very larger and they're always out visiting people or having folks over for dinner or espresso).
• Traveling and vacationing in smart ways (my parents visit their families in Italy every summer and they don't pay for restaurants, hotel, or souvenirs).
• Helping their immediate family (kids, brothers, fathers, etc.) with home renovation, home health care, decision making, etc.

So, if you're looking for your own personal finance bail out program just look at the habits of folks who didn't start with much and had to build wealth on their own terms.

The Wall Street Journal recently ran a short article entitled, "Making of a Miser: Nature versus Nurture"  The article highlights a few important points in terms of what makes people cheap:

• If you have two thrifty parents, you're likely to be thrifty as well.
  
• People who lived through the Great Depression were thrifty their entire lives.
  
• People have innate tendencies to be tightwads or cheapskates.

So, is being cheap a bad thing?  I would argue that if your quality of life is poor because you don't want to spend money in order to acquire, say, quality food, clothing, shelter, etc. then there may be a problem.  For example, some folks head to the supermarket with the idea that they need to find the cheapest price in every food category, but as a self described Foodie I often reach for the organic whole chicken versus the on-sale Perdue roaster.  The better tasting (and better for you) organic chicken provides a higher quality of life for me and I'm not willing to opt for the cheaper chicken.

However, I would describe myself as being frugal.  For example, I could never:

• Spend more than 25,000 on a new or used vehicle
  
• Not haggle with an contractor or at an independent shop  
  
• Hire someone to do a home repair that I (or my super craftsman father) could handle
  
• Pay someone to cut my grass
  
• Purchase designer clothing
  
• Not save for what I want (or use credit for high ticket items as opposed to cash)
  
• Use my assets to over leverage (in order to afford a vacation home or make improvements to my existing home)

But, I often:

• Enjoy having dinner parties and cooking great food for my guests
  
• Buy high quality material and products for our home
  
• Purchase quality dress shoes
  
• Go to a men's salon for a quarterly haircut
  
• Go on vacation

In the end, living a good consumer life is about balance, so skip the generic, super market meat and opt for a good pair of leather shoes.  Your life (and feet) will be better served!

  

Bo Lundgren, ex Swedish Finance Minister, knows how to fix economic problems.   And now he's teaching the US government how to fix its current crisis.  Lundgren was Finance Minister during the Swedish banking crisis of the early 1990's and the solution, at the time, was easy: big government intervention in the form of cash and (part) government ownership of ailing banks.  Call it fiscal socialism or whatever you'd like, but the policy worked and the same sort of intervention is needed in the US.  

So if government intervention is a strong given in the current US environment (as Fed Reserve Chairman Ben Bernanke stated), then the real question on the table is the level of help or involvement.  Here's what Sweden did during their crisis:

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today's dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

US Senators, from both parties however, are hesitant to give Bush's administration the $700 billion needed to rescue the banking sector - reasoning more along political lines then economic lines (that's a problem).  Stay tuned to see how the bailout unfolds...

If you're any where near the NYC metro area, then you're bound to notice great tension in the air.  The tension is the by-product of recent financial news headlined by the financial giant Lehman Brothers filing for bankruptcy.  Today's NY Times summarizes the current state on Wall Street well:

Nervous investors tried to make sense of a rapidly changing financial landscape on Monday as the State of New York offered American International Group a lifeline, the Bank of America began the task of assimilating Merrill Lynch and Lehman Brothers started its journey into bankruptcy.

The surprising development surrounding this disastrous Monday is that the Fed allowed Lehman to file for bankruptcy.  If you remember, the Fed rushed in to bail out Bear Stearns over concerns that if a major bank was allowed to go bankrupt, financial disaster would follow. 

So what can we make of the recent developments?  From the latest news reports, there are certainly more banks to fall (even the mighty Goldman Sachs is mentioned) and with no real, grand, government intervention likely, we may see some real downturns before the Banking sector can recover.

Read all about the current financial misery at:

NY Times Business section

Wall Street Journal

Financial Times

 

Well before my wife and I were married we shared intimate discussions about our dreams, goals, and beliefs (like most healthy couples).  On the topic of money, we shared our financial goals and we were surprised how aligned our individual plans were (I'm not sure if this is common or not)! 

On the same topic my good friend recently sent me a New York Time article on how the key to wedding bliss is to marry someone who shares similiar personal finance goals ("The Key to Wedded Bliss? Money Matters").  And, boy, couldn't I agree more with the article!  Thanks, Av.

Gregory Clark's new book, A Farewell to Alms: A Brief Economic History of the World asks some pretty big economic questions:

- Why do certain countries prosper while others find it so difficult to grow?

- Why did the Industrial Revolution occur in England during the 17th century?

- How do cultural attitudes play a role in economic development?

Clark also challenges modern day economists to better understand history and I couldn't agree with him more. After all, economics is not just about number crunching, hedging, banking, international trade, etc., rather the field is also about understanding current economic conditions in relation to what has happened in the past. 

The NY Times has a terrific interactive map on how people across the world spend their discretionary income.  Some interesting findings include Japan spending more on recreation than clothing and Greece throwing money at clothing versus electronics.  Read the full article here.

The US Government likes to keep unemployement between 2-5 percent, 0 unemployment is actually a bad thing (according to some economists), so it's quite surpising to see the latest unemployment figures at over 6 percent.

Have you ever given much thought to what it must have been like for an intellectual during the Inquisition?  Say, for example, you opposed the Church and read a little Plato; that could get you in some serious trouble, as it did for the sixteenth - century heretic Giordano Bruno.