Why the Blog?
Let me ask you a few questions
· Would you send your child out onto a football field without a helmet or without explaining the rules of the game to them?
· Would you bet your paycheck on a casino game that you didn’t understand?
My guess is that your answer to these questions is no.
Now for some more serious questions
· Why do you send your kids into the financial world without the tools or knowledge to succeed?
· Why do you wager large sums of your hard earned money on financial transactions that you may not really understand?
Many kids are ruining their credit while they are in college. School prepares you to earn money but not how to manage it.
This short, to the point book will tip you off to some of the rules of managing your personal finances and making good financial decisions. Hopefully this will encourage you to get started on the right foot or correct any bad financial habits that you may have already developed.
You can own and manage money or let money own and manage you.
I have to note that I started writing this in 2008 before the current recession. I graduated high school during the recession of the early 80’s and learned a lot from it. I was worried that my children wouldn’t benefit from the same experience. It looks like they will. Like Solomon said, “There’s nothing new under the sun.” Enjoy.
Tuesday, August 30, 2011
Monday, August 29, 2011
A Consumer Economy
What is the economy?
Turn on the TV or listen to the radio and you will hear reports on the economy. Listen to the political candidates and they will be arguing over the economy. Did you ever take a class on Economics? Do you remember the material? What is the economy anyway?
The economy is the system of manufacturing, distributing, and consuming goods and services. It is how we bring together natural resources, labor, and technology to accomplish this. The politics of a country determine what kind of economy they operate.
In the 1800’s Karl Marx described our economy as a “Capitalist Economy”. This means that a small group of people who control large amounts of money or capital make most of the important economic decisions. He contrasted us with a “Socialist Economy” where the power is held by the government for the good of the people. Neither a pure Capitalist or Socialist economy has been completely successful. We have a “Mixed Economy” in the US. Market forces such as Supply and Demand dictate much of what happens but our government sets many of the rules and regulations.
We are all selling our services and products to each other in a delicately balanced system. If the economy is doing well at least 94% of the people who want to work have a job and 12% or less of us are living below the poverty level.
Who buys the goods and services?
Two thirds of our country’s economic output is purchased by individuals for their personal use. The other one third is purchased by our government and businesses.
What is the government’s role in the economy?
The government controls the pace of the economy. The levers that they can use are:
· Raising or lowering the prime interest rate.
· Increasing or decreasing government spending.
· Raising or lowering taxes.
· Raising or lowering the supply of money and credit in the economy.
The government’s methods of using these levers are their “fiscal policy”. This can change with each new presidential election or change in which political party controls congress. The government didn’t really start using fiscal policies as we know them today until the Great Depression in the 1930’s. Some believe that increased government spending and tax cuts got us out of the depression. Others believe that not letting market forces work prolonged the depression. The same thing was tried in the 1960’s and started a cycle of rising prices and wages known as inflation. The first attempts to control inflation didn’t start until the 1970’s. Only time will tell what the long term effects of the current government stimulus programs will be.
The government also regulates pollution, safety, national defense, controls monopolies, provides for the poor, and intervenes during large disasters.
What part do I play in the economy?
You are a member of the group that controls two thirds of our economy. What the consumer is purchasing determines what manufacturers will make. How much you demand determines how high the price will be. One person cannot change the economy. What you can do is learn the basic rules of the economy and personal finance. Then you can participate in and enjoy the system instead of being crushed under it.
Turn on the TV or listen to the radio and you will hear reports on the economy. Listen to the political candidates and they will be arguing over the economy. Did you ever take a class on Economics? Do you remember the material? What is the economy anyway?
The economy is the system of manufacturing, distributing, and consuming goods and services. It is how we bring together natural resources, labor, and technology to accomplish this. The politics of a country determine what kind of economy they operate.
In the 1800’s Karl Marx described our economy as a “Capitalist Economy”. This means that a small group of people who control large amounts of money or capital make most of the important economic decisions. He contrasted us with a “Socialist Economy” where the power is held by the government for the good of the people. Neither a pure Capitalist or Socialist economy has been completely successful. We have a “Mixed Economy” in the US. Market forces such as Supply and Demand dictate much of what happens but our government sets many of the rules and regulations.
We are all selling our services and products to each other in a delicately balanced system. If the economy is doing well at least 94% of the people who want to work have a job and 12% or less of us are living below the poverty level.
Who buys the goods and services?
Two thirds of our country’s economic output is purchased by individuals for their personal use. The other one third is purchased by our government and businesses.
What is the government’s role in the economy?
The government controls the pace of the economy. The levers that they can use are:
· Raising or lowering the prime interest rate.
· Increasing or decreasing government spending.
· Raising or lowering taxes.
· Raising or lowering the supply of money and credit in the economy.
The government’s methods of using these levers are their “fiscal policy”. This can change with each new presidential election or change in which political party controls congress. The government didn’t really start using fiscal policies as we know them today until the Great Depression in the 1930’s. Some believe that increased government spending and tax cuts got us out of the depression. Others believe that not letting market forces work prolonged the depression. The same thing was tried in the 1960’s and started a cycle of rising prices and wages known as inflation. The first attempts to control inflation didn’t start until the 1970’s. Only time will tell what the long term effects of the current government stimulus programs will be.
The government also regulates pollution, safety, national defense, controls monopolies, provides for the poor, and intervenes during large disasters.
What part do I play in the economy?
You are a member of the group that controls two thirds of our economy. What the consumer is purchasing determines what manufacturers will make. How much you demand determines how high the price will be. One person cannot change the economy. What you can do is learn the basic rules of the economy and personal finance. Then you can participate in and enjoy the system instead of being crushed under it.
Sunday, August 28, 2011
Take Home Pay
How much money do you really make?
Approximately one third of the money you earn goes to federal, state, and local income taxes. When you spend the two thirds of your pay that you have left you can pay nearly ten percent sales taxes. Each dollar of gross pay has about sixty-four cents of purchasing power.
In reality, you work nearly five months of each year to pay your tax burden. Everyone in the middle class labors for nearly five months each year for our government. Some of us labor a few months more to serve another master. It is called Debt.
What is debt?
A debt is a liability or obligation to pay a person or institution. There are many types of financial debts that we can labor under in our country:
Home mortgages
Auto loans
Credit card debt
Store charge cards
Fuel charge cards
Student loans
Personal loans
Payday advance loans
And the list goes on
We work five months out of twelve to pay our tax burden and then willingly work two or three months more to pay the interest on our debts. Don’t believe it? Do the math. How much interest do you pay on your mortgage, auto loans, credit cards, and other debts each year? How long did it take you to earn that much take home pay?
Some people play the debt and interest game and survive. Others don’t make it. But as in most games, you can get back in later. Just default, see a credit counselor, file bankruptcy, do some time in the bad credit penalty box, and get right back into the game!
Why do we sell ourselves into the bondage of debt? The answer can be summed up in one word: Marketing.
Approximately one third of the money you earn goes to federal, state, and local income taxes. When you spend the two thirds of your pay that you have left you can pay nearly ten percent sales taxes. Each dollar of gross pay has about sixty-four cents of purchasing power.
In reality, you work nearly five months of each year to pay your tax burden. Everyone in the middle class labors for nearly five months each year for our government. Some of us labor a few months more to serve another master. It is called Debt.
What is debt?
A debt is a liability or obligation to pay a person or institution. There are many types of financial debts that we can labor under in our country:
Home mortgages
Auto loans
Credit card debt
Store charge cards
Fuel charge cards
Student loans
Personal loans
Payday advance loans
And the list goes on
We work five months out of twelve to pay our tax burden and then willingly work two or three months more to pay the interest on our debts. Don’t believe it? Do the math. How much interest do you pay on your mortgage, auto loans, credit cards, and other debts each year? How long did it take you to earn that much take home pay?
Some people play the debt and interest game and survive. Others don’t make it. But as in most games, you can get back in later. Just default, see a credit counselor, file bankruptcy, do some time in the bad credit penalty box, and get right back into the game!
Why do we sell ourselves into the bondage of debt? The answer can be summed up in one word: Marketing.
Saturday, August 27, 2011
Marketing
What is marketing?
Marketing is all of the activities that work to influence how you spend your money. Sounds pretty tame doesn’t it?
Before World War II there was very little national marketing, much less worldwide marketing. Every state, town, and community had its unique ideas and styles. Things started to change in the 1950’s. All of the GI’s who came home from the war had seen the world and had met people from across the country. Women who had mostly stayed at home tried out the job market. People who had never left their hometowns started to travel. Television came of age.
National marketing was still young. The target was a general adult audience: “See the USA in your new Chevrolet”. The appeal was broad and general. A lot has changed in 50 years.
Modern marketing is more precise and calculated. Corporate America spends billions of dollars to make you spend money. Marketing shapes our culture. We are told how to dress, what to drive, how to groom ourselves, how to entertain ourselves, what to eat, how to act, and the list goes on.
Why do you spend money?
The basic physical needs of humans are food, clothing, and shelter. The basic emotional needs of humans are love, purpose, and belonging. We spend money to fill both physical and emotional needs. Marketing tells you how to fill these needs and ultimately how much to spend doing it.
Take shelter for example. Should you rent an apartment, rent a house, purchase a house? A realtor would suggest that you purchase a home, more than likely a four bedroom two and a half bath home. The bank or mortgage company can tell you exactly what percentage of your income should be used to pay for shelter. You can even do it with no money down (I’ll discuss mortgages and PMI later).
How about love? Jeweler’s ads will tell you exactly how many months pay should be invested in a diamond engagement ring. Floral ads will suggest the perfect rose bouquet and gift for Valentine’s Day.
We really don’t even have to discuss clothing do we? If kids are willing to kill for athletic shoes and warm up suits I think you can see the effectiveness of athletes in marketing.
In short, after the basic needs of food, clothing, and shelter are met you spend money to fill emotional needs. Marketing tells you what will make you look better, feel better, be socially accepted, and be loved.
Psychologists suggest that we form an emotional response to a product or service within three seconds of seeing it or hearing about it. Marketers are learning how to generate positive emotional responses to products. They are reaching out to younger and younger audiences. Much marketing is directed all the way down to preschool children. It’s never too early to grow a new consumer.
Marketing is all of the activities that work to influence how you spend your money. Sounds pretty tame doesn’t it?
Before World War II there was very little national marketing, much less worldwide marketing. Every state, town, and community had its unique ideas and styles. Things started to change in the 1950’s. All of the GI’s who came home from the war had seen the world and had met people from across the country. Women who had mostly stayed at home tried out the job market. People who had never left their hometowns started to travel. Television came of age.
National marketing was still young. The target was a general adult audience: “See the USA in your new Chevrolet”. The appeal was broad and general. A lot has changed in 50 years.
Modern marketing is more precise and calculated. Corporate America spends billions of dollars to make you spend money. Marketing shapes our culture. We are told how to dress, what to drive, how to groom ourselves, how to entertain ourselves, what to eat, how to act, and the list goes on.
Why do you spend money?
The basic physical needs of humans are food, clothing, and shelter. The basic emotional needs of humans are love, purpose, and belonging. We spend money to fill both physical and emotional needs. Marketing tells you how to fill these needs and ultimately how much to spend doing it.
Take shelter for example. Should you rent an apartment, rent a house, purchase a house? A realtor would suggest that you purchase a home, more than likely a four bedroom two and a half bath home. The bank or mortgage company can tell you exactly what percentage of your income should be used to pay for shelter. You can even do it with no money down (I’ll discuss mortgages and PMI later).
How about love? Jeweler’s ads will tell you exactly how many months pay should be invested in a diamond engagement ring. Floral ads will suggest the perfect rose bouquet and gift for Valentine’s Day.
We really don’t even have to discuss clothing do we? If kids are willing to kill for athletic shoes and warm up suits I think you can see the effectiveness of athletes in marketing.
In short, after the basic needs of food, clothing, and shelter are met you spend money to fill emotional needs. Marketing tells you what will make you look better, feel better, be socially accepted, and be loved.
Psychologists suggest that we form an emotional response to a product or service within three seconds of seeing it or hearing about it. Marketers are learning how to generate positive emotional responses to products. They are reaching out to younger and younger audiences. Much marketing is directed all the way down to preschool children. It’s never too early to grow a new consumer.
Friday, August 26, 2011
The Game
Some of you may now feel that it’s you against the financial and marketing world. Good, it is!
Are you a player in the financial game? Like it or not if you live and work in the United States you are a player in the game. The problem is that you may not know the rules.
How do I win the game or at least break even?
If you are in debt, get out of it
Don’t incur late fees
Don’t pay interest
Spend within your limits
Walk away from emotional purchases, cool off, think it over
Save for large purchases
Avoid the “poor man” traps
Don’t bounce checks
Maintain what you already own
Save in your 401K
Don’t collect junk
Don’t make a habit of eating out
Save 3 to 6 months living expenses (cash in a savings account)
Now for some details:
If you are in debt, get out of it
Normal debt is a burden. Overwhelming debt is debilitating. It affects your work, your personal relationships, and your self-esteem.
If you are in overwhelming debt you need to make a plan to get out. Some tips:
Protect your home. Credit card companies and stores will harass you to pay your bills but they will not foreclose on your home. Either stay current on your mortgage or make a deal with the mortgage company to protect your home.
Prioritize your debts and pay the highest interest debts first. Making the minimum payment on all debts may not even touch the principles. On some charge cards the minimum payment does not even cover the interest.
Make a deal with your creditors. Some creditors will freeze the interest if you call them and make a plan on how you will pay them off.
Get help. If you can’t make a plan yourself or make a deal with your creditors get help from a non-profit credit-counseling agency.
If you have debts but they are not controlling your life you should still make a plan to pay them off. Any myths that some types of debt are good are just that, myths.
Don’t incur late fees
Credit cards are very useful tools. They allow you buy online, make plane and hotel reservations, and are very convenient in stores. Platinum cards and other high-grade cards are the best. They usually have no annual fees, insure your purchases against loss and damage, and offer other perks.
You are losing the game if you carry a balance or make late payments. Interest and late fees are a tremendous waste of your hard earned income. Pay your bills early and pay them in full.
Don’t pay interest
If you buy a $300 television from Sears and pay cash you pay $300. If you are sharp you will negotiate with the salesman or wait for a sale and pay less than $300.
If you buy the same $300 television charge it on your Sears card and then make the minimum payment you will pay $600 or more for the same television. If you can afford the minimum payments wouldn’t it be smarter to put them into a bank account or cookie jar until they amounted to $300 and then pay cash?
This is a very simple concept. It ties together “don’t pay interest” and the next three points.
Spend within your limits
If you can’t afford it, don’t buy it. Period. Marketing says “Buy it, you deserve it!”
Good financial management says, “Do you really need it? If you do, save for it.”
Charging something you can’t afford on a credit card and paying interest is ridiculous if you think about it. You can’t afford to pay cash for a $300 television so you then finance it and pay $600. Huh?
Walk away from emotional purchases, cool off, think it over
Shopping is not in itself a financial problem, purchasing is. Do not make emotional purchases! Look at the leather jacket, try it on, appreciate how you look in it, and walk away from it. Go home and think it over. Do I need it? If the answer is yes then ask, “Can I afford it?” If the answer is no, save for it. Pack a lunch instead of eating out. Don’t buy your morning Latte’. Save for it, pay cash.
Save for large purchases
Saving for large purchases such as refrigerators and televisions used to be a common thing. Somewhere along the way they became emotional purchases just like clothing and trinkets. Most people now shop for the TV or computer and then pay for it with a credit card or charge it on store credit. Remember credit cards are not bad if you pay them in full each month and don’t pay other fees.
If you can afford to make $50 - $100 monthly payments, you can afford to save this much each month for a cash purchase. At a $50 per month rate you will save $600 in a year. At $100 per month you save $1200. That will buy most any TV, except the plasma screen, which by the way if you can’t afford it you don’t need it.
One more tip. How much do you spend on the Christmas Holidays? Most families spend in the hundreds if not over $1000. Is this a large purchase? Start saving for it. The holidays are much more enjoyable if you aren’t paying for them (with interest) deep into the New Year. Most banks have very convenient Christmas Clubs that save a set amount each month and disperse the funds around October to November. You can even direct deposit from your paycheck.
Are you a player in the financial game? Like it or not if you live and work in the United States you are a player in the game. The problem is that you may not know the rules.
How do I win the game or at least break even?
If you are in debt, get out of it
Don’t incur late fees
Don’t pay interest
Spend within your limits
Walk away from emotional purchases, cool off, think it over
Save for large purchases
Avoid the “poor man” traps
Don’t bounce checks
Maintain what you already own
Save in your 401K
Don’t collect junk
Don’t make a habit of eating out
Save 3 to 6 months living expenses (cash in a savings account)
Now for some details:
If you are in debt, get out of it
Normal debt is a burden. Overwhelming debt is debilitating. It affects your work, your personal relationships, and your self-esteem.
If you are in overwhelming debt you need to make a plan to get out. Some tips:
Protect your home. Credit card companies and stores will harass you to pay your bills but they will not foreclose on your home. Either stay current on your mortgage or make a deal with the mortgage company to protect your home.
Prioritize your debts and pay the highest interest debts first. Making the minimum payment on all debts may not even touch the principles. On some charge cards the minimum payment does not even cover the interest.
Make a deal with your creditors. Some creditors will freeze the interest if you call them and make a plan on how you will pay them off.
Get help. If you can’t make a plan yourself or make a deal with your creditors get help from a non-profit credit-counseling agency.
If you have debts but they are not controlling your life you should still make a plan to pay them off. Any myths that some types of debt are good are just that, myths.
Don’t incur late fees
Credit cards are very useful tools. They allow you buy online, make plane and hotel reservations, and are very convenient in stores. Platinum cards and other high-grade cards are the best. They usually have no annual fees, insure your purchases against loss and damage, and offer other perks.
You are losing the game if you carry a balance or make late payments. Interest and late fees are a tremendous waste of your hard earned income. Pay your bills early and pay them in full.
Don’t pay interest
If you buy a $300 television from Sears and pay cash you pay $300. If you are sharp you will negotiate with the salesman or wait for a sale and pay less than $300.
If you buy the same $300 television charge it on your Sears card and then make the minimum payment you will pay $600 or more for the same television. If you can afford the minimum payments wouldn’t it be smarter to put them into a bank account or cookie jar until they amounted to $300 and then pay cash?
This is a very simple concept. It ties together “don’t pay interest” and the next three points.
Spend within your limits
If you can’t afford it, don’t buy it. Period. Marketing says “Buy it, you deserve it!”
Good financial management says, “Do you really need it? If you do, save for it.”
Charging something you can’t afford on a credit card and paying interest is ridiculous if you think about it. You can’t afford to pay cash for a $300 television so you then finance it and pay $600. Huh?
Walk away from emotional purchases, cool off, think it over
Shopping is not in itself a financial problem, purchasing is. Do not make emotional purchases! Look at the leather jacket, try it on, appreciate how you look in it, and walk away from it. Go home and think it over. Do I need it? If the answer is yes then ask, “Can I afford it?” If the answer is no, save for it. Pack a lunch instead of eating out. Don’t buy your morning Latte’. Save for it, pay cash.
Save for large purchases
Saving for large purchases such as refrigerators and televisions used to be a common thing. Somewhere along the way they became emotional purchases just like clothing and trinkets. Most people now shop for the TV or computer and then pay for it with a credit card or charge it on store credit. Remember credit cards are not bad if you pay them in full each month and don’t pay other fees.
If you can afford to make $50 - $100 monthly payments, you can afford to save this much each month for a cash purchase. At a $50 per month rate you will save $600 in a year. At $100 per month you save $1200. That will buy most any TV, except the plasma screen, which by the way if you can’t afford it you don’t need it.
One more tip. How much do you spend on the Christmas Holidays? Most families spend in the hundreds if not over $1000. Is this a large purchase? Start saving for it. The holidays are much more enjoyable if you aren’t paying for them (with interest) deep into the New Year. Most banks have very convenient Christmas Clubs that save a set amount each month and disperse the funds around October to November. You can even direct deposit from your paycheck.
Thursday, August 25, 2011
Credit and FICO
What is credit?
In the plainest terms, credit is trust. If a bank or credit card company extends you credit, they trust you with their money. They are trusting that you will pay them back in a timely fashion.
How do you measure trust?
Banks and lending institutions measure trust in terms of a “credit score”. The standard used in the United States is the FICO score.
What is FICO?
In the 1950’s the Fair Isaac Corporation established a model to determine the likelihood (risk) that a borrower will pay back money that is loaned to them. This scoring system was named FICO.
How does FICO work?
FICO scores range between 300 and 850. The lower the score, the higher the risk. The average score in the U.S. in 2004 is 725.
The factors used to make the score are:
Payment History – 35%
In the plainest terms, credit is trust. If a bank or credit card company extends you credit, they trust you with their money. They are trusting that you will pay them back in a timely fashion.
How do you measure trust?
Banks and lending institutions measure trust in terms of a “credit score”. The standard used in the United States is the FICO score.
What is FICO?
In the 1950’s the Fair Isaac Corporation established a model to determine the likelihood (risk) that a borrower will pay back money that is loaned to them. This scoring system was named FICO.
How does FICO work?
FICO scores range between 300 and 850. The lower the score, the higher the risk. The average score in the U.S. in 2004 is 725.
The factors used to make the score are:
Payment History – 35%
Do you pay bills on time, have you defaulted on loans, bankruptcies, etc.
Amounts Owed – 30%
This is a comparison of how much you owe versus how much credit you have a available to you. For the best credit score you should owe less than 10% of your available credit. That is like owing $1,000 on a credit card with a $10,000 limit. You can still get a good number in this area if you owe 20% or less of your available credit. In today's financial climate credit card issuers are lowering limits. This is in turn lowering credit scores. Are you over extended? Mortgage debt is not as bad as credit card debt for this item.
Length of Credit History – 15%
How long has your credit been established. Short histories that are clean will get high scores.
New Credit – 10%
Applying for too many credit accounts in a short period of time will lower your score.
Types of Credit in Use – 10%
Do you have a healthy mix of credit types? When I buy a car, I usually finance through my credit union, with no fee, and then pay it off with cash. This helps the credit mix. Having no debt and not using a credit card can hurt your credit score on this item.
Who calculates my FICO score?
There are three main credit-reporting agencies in the United States.
Equifax
Experian
TransUnion
Some lenders use the score from one agency and others use an average of two or three. All three use the same model but they can be slightly different based on what is reported to them by lenders.
What does a FICO score not consider?
A FICO score does not consider your race, sex, age, income, residence, marital status, or child/family support payments.
Why should I care about my credit score?
Your FICO score is a major factor that banks use when determining the interest rates on car loans, home mortgages, credit cards, and personal loans. If you have a high score, you are considered a low risk. A bank will give you their lowest interest rate.
Changes Coming
Some people and services have learned how to game the system. They “repair” credit to give someone a false high score long enough to secure a loan. Fair Isaac is making some changes in 2009 to close this loophole. I will update when the facts are out.
Consider a $150,000 mortgage:
A FICO score above 725 could get a 5.7% interest rate on a 30-year loan. The monthly payment (excluding insurance and taxes) would be $871 per month.
A FICO score around 600 could only get a 9.0% interest rate on a 30-year loan. The monthly payment would be $1207 per month.
The total payments for the 5.7% loan would be $313,560. The total payments for the 9.0% loan would be $434,520.
The lower FICO score means that you pay $120,960 more for your house!
What if I don’t need credit?
Do you need insurance? Your FICO score also affects your auto and homeowner insurance rates. Lower scores mean higher rates!
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