Avoid Middle-Class Land Mines

Yesterday I wrote about common financial mistakes that drive me nuts. I’ve made a bunch of them, and perhaps you have too. Today I’d like to continue along this train of thought and discuss some key learnings from Dave Ramsey.

As I mentioned before I listen to 1 hour of Dave Ramsey a day (his free podcast) when I workout. It’s great because I get about an hour of entertainment in about 39 minutes (b/c the podcast doesn’t have all of the lame commercials), and I usually learn something in the process. You can view my opinion of Dave Ramsey here.

After listening for quite some time, I’d like to suggest that you can place yourself (and your family) WAY ahead of the curve financially by simply AVOIDING common mistakes.

Now I could spend months of your time (and mine!) arguing asset allocations, efficient market hypotheses, benefits of one mutual fund versus another, or whether gold should only be purchased as jewelery. These topics may be discussed at some point, but not today.

Instead I’d like to simply point out that you don’t need the perfect “anything” to improve your financial situation. Sometimes it’s o.k. to average, and in that spirit it’s much easier to be above average if you can avoid the mistakes of others.

Please understand that I am in no way being critical or judgemental of the Dave Ramsey shower callers or of anyone struggling to make ends meet. I do believe that a little knowledge and/or experience can be of great help to others. In that spirit, here is a list of common financial themes, or mistakes, to avoid if at all possible:

• Co-signing for a loan
• Getting an adjustable rate mortgage
• Buying a house with less than 20% down
• Buying a new house before selling your old house (when you relocate for a new job, for example)
• Getting a pay-day loan (99% annual interst sound appealing?)
• Buying too much car (i.e. buying a new $30,000 car or lease when you earn $40,000 a year)
• Not having an emergency fund (or not having a sufficiently large emergency fund of 3-6 mo. of expenses)
• Going into business with friends or family
• Trying to perform estate planning without professional help (i.e. “just deed the house over to me grandma” or “just write your grandchild a check for $20,000 and we’ll put it in the kids college fund”)
• Leaving land or a business to multiple heirs (do you really want to burden your heirs and cause potential for strife?)
• Buying anything but term life insurance (in some very specialized situations this may not apply)
• Buying too much home. If your spouse looses their job can you afford your home? If you get sick and don’t work for three months, will you be behind in your payments?
• Not having a budget in place every month
• Loaning money to family members
• Not being in agreeement with your spouse on financial matters
• “paying off” your credit cards with a HELOC (home equity line of credit), and then celebrating by charging more stuff on your “paid off” credit cards
• buying a time-share

If you can avoid doing all of these things, you can avoid most of the middle-class financial land mines that have plagued a lot of us (myself included).

If You Liked This Post Then Please Check These Out...

• Choices For Storing Gold, Depending On Your Fears
• Reduce The Fear Of Layoff By Making A Layoff Plan
• For The Love Of Dividends
• Save Money Using A Foamer
• Beginner Advice For Someone New To Personal Finance, Part 1

If you liked this post please click here to subscribe to the RSS feed!

Posted in Basics, Saving | 3 Comments »

Avoiding Common Financial Mistakes

There are some things that drive me crazy (o.k., a lot of things really), and one of them is making a mistake that could have easily been avoided.

Just the other day I finished our taxes for 2007, and boy did I find a stupid mistake. Not in my tax preparations, but in my actions in 2007. My wife and I sold some mutual fund shares to use as a down payment on our home, and I apparently sold the shares after owning them for 363 days. 2 more days I would have been able to pay long-term capital gains tax! Hear that whoosh sound? That’s the sound of me flushing free money down the toilet!

In an effort to clarify my own thoughts and help you avoid some of my dumb mistakes, here a list of bad financial decisions in most cases:

1. Using a checking account that doesn’t pay interest. Checking accounts are virtually a commodity, so why have one that costs you money (in fees or in lost interest)? Check out http://www.bankrate.com/brm/rate/chk_sav_home.asp to start your search for a new checking or savings account.

2. Keeping your emergency fund in an interest bearing account that is well below average. Now I’m not advocating switching banks or investment companies based on a 0.1% different in the APY, but you can switch companies very easily, all online today. Seriously. You could move your emergency fund to a different bank in about 5 minutes, all online, once you’ve identified a new bank. Go ahead and do it. I’ll wait….. People spend weeks and months shopping for clothes, cars, household appliances, etc, and yet just leave their $5,000 emergency fund earning 1% somewhere. Move it to a bank that pays 4% and you’d have $150 extra “free” dollars to spend on clothes, cars, etc!

3. Cashing out your 401k or 403b when changing jobs. Or worse, accidentially having the funds sent to you in your name and missing the deadline to roll the funds over into an IRA. With taxes and penalties you’ll be losing 30-40% of your money.

4. Buying life insurance if you have no dependants, or buying life insurance on children. The primary purpose of life insurance is to provide for your family if you were to pass away. I’m very risk averse and I understand wanting to be “covered” by insurance for some items. The only reason I could see for insurance in this situation would be to pay of debt to family (something you’re hopefully working to pay off already) and to cover any final expenses. And hopefully your emergency fund and/or assets would be able to cover all of those items.

5. Buying “load” mutual funds. Paying commissions on mutual fund purchases does not improve your total return, and typically reduces your total return (because the cost of owning the fund increases). Although I do believe getting professional investment can be worth the cost, I personally would recommend finding a fee-only financial advisor so that you can be sure you’re receiving objective advice. If you’re just starting out and don’t have the funds for a fee-only financial advisor, there are plenty of books, blogs, and other online resources you can use to get started.

6. Co-signing for a loan. I’m sure your brother-in-law is a wonderful guy, but consider this: bankers are paid to make a certain number of loan each month. If a banker’s not willing to loan money to your friend or family member, should you? Would you agree to provide life insurance for someone if every life insurance company turned them down? There are other ways you can help your friend without co-signing, like offering to help them get their finances in order so that they can qualify for a loan (or better yet save up for the purchase!).

Thus ends the rant. As I will undoubtedly get all raged up again when I think of (or do) more stupid things, so I’ll probably work on a follow-up article in the near future.

If You Liked This Post Then Please Check These Out...

• My Wife And I Are Saving Our Tax Refund
• A Different Way to View Your “Number”
• Reader Mailbag
• Happy Thanksgiving!!!
• Tax Day Resolutions

If you liked this post please click here to subscribe to the RSS feed!

Posted in Basics, Rant | 2 Comments »

Prepare For A Recession Or Job Loss With 2 Budgets

I am not a fortune teller, weather forecaster, or an economist. I don’t know if we’re headed into a recession or not, nor can I do anything about the economy even if I did know what was going to happen. I do know what it’s like to to face massive layoffs in an industry that seems to be shrinking daily, and I can tell you what I do to prepare for lean times. I keep 2 budgets.

The benefits of budgeting are legion, but the quick reason for having one is that knowing where you spend every dollar helps you make better decisions. It’s not about being without or scrimping just to get by, but rather it’s an organized way of improving your financial situation and adding knowledge and security in the process.

I’m guessing that most people don’t keep a budget consistently. So why 2 budgets? I keep 2 budgets for times when I’m worried about the future or other MAJOR situations that I can’t really control. The first budget is my normal, monthly budget. The second budget, aka Budget B, is my contingency budget, meaning that it is a worst-case budget. Budget “B” includes only necessities. Actual, honest, hard to accept, no eating out, necessities. The Wants and Nice-To-Haves cannot be found in Budget B. Eating out, Entertainment, Cable TV, NetFlix, the web hosting costs to run this website, the clothing budget, all savings (pre and post-tax), etc are removed.

The benefit of Budget B is that is shows me my true cost to just “get by” should I lose my job, my health, or anything else that has a major financial impact on my family. It’s entirely up to you what you consider a need, but my recommendation is that you think through what you could really do without and still survive. A mental scenario may help: If your friend, family member, or child required an expensive medical procedure and you couldn’t borrow money, how much could you get out of your budget if you really tightened down your spending? I think if you’re honest you could live with some deep cuts to a lot of categories if you had to for a limited period of time.

Most of my Budget B assumptions account for things that are relatively easy to change. Shutting off cable is relatively easy, but selling a house is not. Although I would be willing to sell my house if need be, that is not a quick switch that can be thrown within a short period of time.

Once you have Budget A and Budget B in place you can:

• Determine how many days, weeks, or months could you and your family get by on Budget B given your current emergency fund. Is that enough?
• Decide if your current emergency fund is too much. Let’s say your annual expenses equal $50,000 on your normal budget, and you have a three month emergency fund ($12,500). If you can get down to an annual expense level of $40,000 by reducing the entertainment, restaurant, and clothing expensing without much pain and suffering, you may realize that you don’t need such a big emergency fund. Or viewed another way your 3-month emergency fund would actually last you ~4 months.
• Talk with your spouse about what you would do if you experience a job loss. It’s easier to turn off the cable if you’re both in agreement beforehand than it will be when a major financial impact hits home.
• Use this time to reevaluate your “wants”, and how much you’re spending on these items. Did you really get the enjoyment out of the $3,000 you spent on clothing last year? Could $1,000 of the clothing budget be repurposed for something else?

Knowing your true financial situation and having a game plan during a recession will give you and your family peace of mind. It will also help you (potentially) take your time when looking for a new position or dealing with an issue because you’ll have knowledge on your side rather than stress.

Related Links Around the Blogosphere

• Nervous about a potential layoff @ BluntMoney
• One Nice Thing About The Layoff @ Frugalize
• Surviving a Layoff @ Frugal Village

If You Liked This Post Then Please Check These Out...

• Not All “Index” Funds Are The Same
• Bible Quote Of The Day
• INGYourNumber Review
• Total Returns Versus Investor Returns
• Learn To Be More Content

If you liked this post please click here to subscribe to the RSS feed!

Posted in Basics, Career, budgeting | 12 Comments »

Book Review: Now, Discover Your Strengths

If you are looking to learn a little more about yourself, I highly recommend the book Now, Discover Your Strengths by Marcus Buckingham and Donald O. Clifton. The authors are researchers for the Gallup Organization (the folks that are famous for polling the general public), and their company has performed interviews of over two million employees across 63 countries. Using this research the authors have identified 34 strength profiles, and an online survey that will show you your top five strengths.

The basic premise of this book is:

• The authors define a strength as “consistent, near perfect performance in an activity”
• You don’t have to have strength in every part of your role to excel, meaning you do not need to be well-rounded
• Everyone has several strengths, which provide the potential for superior performance
• You cannot develop a “new” strength. You can learn skills that relate to a strength, but you will never be able to perform at the same level as someone with a strength.
• People should focus on improving and refining their strengths rather than working only to improve on weaknesses.
• The 34 strengths can be applied to a variety of vocations and interests, and do not indicate only one or a even a few career choices.

This is one of my favorite books of all time, and it has been very helpful to me when it comes to making career decisions. I found the results of my survey to be very accurate and representative of me and my nature, and it’s interesting to see how hobbies and personal themes tie into my strengths.

The only downside to this book is that you actually have to buy the book to take the online survey. There’s an access code that comes with each book, and the code can’t be reused once the survey is taken. The audio book version has a key code as well for the survey, but the abridged version of the audio book skips some information that I found valuable, including summaries and examples of all 34 strengths and how to manage people with those strengths.

If you read the book and like it please leave a comment and let me know!

My top 5 strengths:

1. Focus: I need a clear direction, and therefore I set goals all the time. Daily goals, weekly goals, annual goals. Etc. I always evaluate whether an action will move me towards a goal (although I don’t always make the choice that does so).
2. Learner: I love to learn. I loved school so much I went back after college for more!
3. Achiever: This theme explains my drive. I have a constant need for achievement, as if each day I start out at zero and need to achieve something tangible in order to feel productive and valuable.
4. Intellection: I like to think, and I like mental activity. I like using my brain and stretching my brain. For me this strength manifests itself when I creatively find ways to combining existing things to make new things (i.e. using leftover ingredients from dinner to make something new or solving a unique problem at work).
5. Discipline: I am disciplined, and I like things to be predictable. I enjoy the planning process, sometimes more than the “doing” part, and I like to focus on timelines and deadlines.

If You Liked This Post Then Please Check These Out...

• What Is The “Pension Protection Act?”
• Eating Out
• Consider Doing Your Taxes Now
• Harvesting Dollars Is Up And Running!
• Vacation Budgeting

If you liked this post please click here to subscribe to the RSS feed!

Posted in Goals, Self-Improvement | 3 Comments »