Debit versus Credit

The Sorry State of our Economy

By now the whole world knows just how bad the state of our economy is. It’s no secret to anyone. You hear every day how Wall St. did this or is going to do that. There’s plenty of blame being thrown around and no one willing to admit fault to anything. I’m not going to argue that some corporate hotshot on Wall St. helped to land us in this mess and I’m also not going to argue that he/she didn’t. The fact is that we’re all partially to blame for the sorry state of our economy.

Let’s rewind just a couple of years to the start of this financial crisis. I’m sure you remember it well – I sure do. There was a sub-prime mortgage crisis which was “contained” and not going to affect the greater financial markets. As they say, hindsight is 20/20 because the sub-prime crisis clearly did affect the majority of our economy. Now I love to cast stones just as much as the next person but this is something I just can’t ignore any longer. Rest assured blame does rest on Wall St. but even more than them I say the blame falls on us – on Main St.

People clearly did not make wise financial decisions, people just like you and me. We bought more house than we could afford and treated our homes like money pits – taking out massive home equity loans to go on vacations and buy expensive things.

Why did we do this? How could we be so foolish? To be fair we were told home values would continue to increase–indefinitely. We were talked into buying more home than we could afford, by Realtor and loan officer alike. In the end though it was us who made that decision – we signed our names on the dotted line, and in so doing contributed to the unraveling that our economy has seen over the past couple years.

Where Do We Go From Here?

There’s plenty of blame to go around, but until we’re able to get past the blame game and actually work towards fixing this mess–together–not much will ever get done. It’s true that at this point we seem to be past the worst of the unraveling of the financial markets. In fact, with the Dow at nearly year highs it’s easy to assume that we’re pulling out of this recession quickly. Unfortunately that’s probably not the case.

In fact, what’s more likely is that we haven’t seen the last of the financial crisis. There’s still plenty of fighting in Washington about how to treat this financial crisis and beyond that, how to regulate the financial industry so this sort of meltdown doesn’t happen again.

The best thing we can do at this point is to be smart with our money. Establish an emergency fund if you haven’t already done so. Be careful not to fall for the latest get-rich quick scheme. Establish an automatic savings plan. Live a little. Enjoy life. On a political note, don’t forget you have the voting power if your congressman doesn’t seem to be making very wise decisions when it comes to the regulation of the financial industries or the disbursal of taxpayer money.

August 28, 2009
Starting on the Road to Wealth
I’ve heard it said that wealth is a state of mind. There may indeed be some truth behind that saying, but when you go by the book being wealthy means having money or other monetarily valuable possessions. I’m going to discount something from this equation because I want to emphasize that wealth isn’t about having stuff; it’s about being well-off and financially secure. Take the Joneses, your neighbors who seem to have everything. They may have a lot of material possessions… but do they have any real assets? In other words do they own anything that they, in reality, own? You may be surprised. It’s easy to have a lot of nice stuff. All you really need is a credit card with a high spending limit.

Building real wealth is not an entirely difficult thing to do. It will require some sacrifices to be made, but almost anything that’s worth having requires sacrifice in some form or another. What kind of sacrifices? Well that really depends on you. If you spend your money before you make it then you’ll have to change some of your buying habits. If you save your money for a month or two to buy something nice, well you have a head start, but you might have to start saving some of it for yourself, rather than for that new HDTV.

I’ve come up with a short list of things that I feel are important to starting out on the road to wealth. It’s all about habit building. Once you’re in the habit of saving and investing it’ll be hard to not do it.

Here’s what I’ve come up with:

Establish and maintain a positive credit rating

Learn to budget, and then to LIVE ON that budget

Learn to save (and not to immediately spend your savings)

Establish a 401(k) account, or if not offered establish an IRA or a Roth IRA

Sound difficult? It’s really not. I promise. Keep reading for some more insight.

Establish a positive credit rating

Establishing (and maintaining of course) a positive credit rating will more than likely be one of the most important things that you will ever do when it comes to your finances. Truthfully it’s not difficult to establish and keep your credit rating (e.g. credit score) at an above-average level. The average FICO score is in the mid 600’s, something which can be achieved with just a little dedication. What sort of dedication? Not much. Truly. Pay your bills on time (this can be easily achieved with recurring online bill pay). Don’t max out your credit cards. Get credit cards if you don’t have any; use them monthly and then pay off the bill every month (on time of course). Be smart about your credit. Don’t open up a charge account at every store you shop at just because they are offering you 10% off today’s purchase. Don’t use your credit card to pay for something unless you have the cash to pay it off (or if you insist on using it still, make sure you’ll have the cash within a month to pay it off). Doing these simple things will help you to establish a squeaky clean credit rating, which will lead to lower loan rates and a much easier time qualifying for loans… not to mention potential auto insurance savings, etc.

For a little more detail on how a FICO credit score is calculated, and how it can be used, check out How Your Credit Score Defines You.

Learn to budget

Budgeting is an important part of your financial health. Budgeting means, in a nutshell, living within your means. It doesn’t necessarily mean tracking every single purchase you ever make and not allowing yourself to spend more than “x” amount of dollars on entertainment in a given month. Instead I have learned that it means to know how much you earn in a month and to not let your expenses exceed your income. Sure it sounds like a silly thing to say, but many people have yet to grasp this concept. Another thing I’ve learned that must be a part of ones budget is to budget a portion of your money away into some form of a savings or investing account. Go ahead, enjoy your life and spend your money while you still can, but make sure that you save just enough to cover emergency expenses and larger more expensive purchases, such as a down payment on a house or that new 52″ HDTV you have been lusting after. For a detailed look at a budgeting method I use, check out My 33% Savings Plan.

Learn to save

This one is pretty self-explanatory. Save a bit of every single paycheck and you’ll find yourself living much more comfortably than those around you. This principle is important for a few reasons. First it’s a good idea to have an emergency fund of about 3 to 6 months worth of your income saved up… for emergencies of course. Having this fund will erase untold amounts of stress from your life. Finally learning to save will eventually lead you to financial independence, and isn’t that what we’re all really after? Chances are you won’t be winning the lottery in this lifetime, so you’ve got to provide riches to yourself rather than expecting others to provide them to you.

Establish a 401(k)

For those who might not be informed on what a 401(k) is, please check out Are You Ignoring Free Money. I believe most of you probably have a pretty good idea of what a 401(k) is and what they can mean to your financial health at retirement. Contributing regularly to your 401(k) starting at a young age can mean all the difference in the world to the lifestyle you will be able to enjoy at retirement. If a 401(k) is not something that is offered by your employer (if you don’t know if it’s offered ask your manager – there’s a pretty decent chance that it is) then you will want to spring for an IRA or a Roth IRA. These are retirement accounts similar to the 401(k) in that they are tax-advantaged, but instead of being managed by your employer they are managed either by yourself or by a financial services company such as Vanguard. If you are in a low income tax bracket then a Roth IRA might be a better choice for you, because they are only taxable before the money is deposited into them. In other words when you go to withdraw from your Roth IRA at retirement you will not owe taxes on ANY of the monies that you pull out of your Roth IRA. Fantastic eh?

I defininitely believe that the above listed principles are very important to maintaining a strong financial health, and I also believe that only by being prepared and informed will you be able to become financially independent and probably even rich.

Do any of you have any other suggestions on things that you have found to be important when starting out your financial life? Or maybe something you wish you would have known – or done – when you were younger? Please leave your comments, and if you like this post feel free to share it with others.

Updated September 27, 2009
April 15, 2009
I’m Buying A House. Here’s Why (and why not).

It was bound to happen eventually.

I’ve been wanting to buy a house for several years now. It was partly emotional, partly financial and partly a desire to establish a more permanent residence, thereby helping to fulfill my safety needs (Maslow anyone?). Well that day looks like it’s finally come. My wife and I have been hunting for homes for about a month now in the Phoenix area and about a week ago we found one that we absolutely adore. We placed a bid on it and our bid has been accepted. Now we work out the rest of the stuff: appraisal, inspection, closing and then we will be homeowners!

It’s rather quite exciting. I have some major plans, such as planting a garden to grow my own fruits and vegetables, or decorating the home exactly how I’d like it (I feel limited here in this apartment because I don’t want to paint or put too many holes in the wall).

We found a beautiful house that is offering us just about everything we want. It’s a single story three bedroom, two bathroom house with vaulted ceilings in all the right places and a very large (for the city) lot. It’s in a great location (North Phoenix) that’s not only close to work but also close to everything else: downtown Phoenix, Scottsdale and even the West Valley (where our families live). We couldn’t be happier about the home that we’ve found.

Before I cut off let me tell you what is not motivating me to buy a house. It’s really only one reason, and is often the main reason for certain types of people to purchase a home. I’m not buying this house as an investment. In my eyes a home is not a builder of wealth. It is not an ATM machine. The real return on homes has historically never been as good as other types of investments. Sure you can’t live in other investments, but that still doesn’t mean you should count on all of your wealth building to come solely from the house that you buy. I’m not counting on it, and neither should you.

April 8, 2009
What You Need To Know About New Roth IRA Rules

Roth IRA’s are a great way to save for the future. For those unaware a Roth IRA is just a different spin on the traditional IRA. Instead of seeing tax benefits up front – such as when you contribute to an IRA – you see your tax benefits on the back end: when you actually withdrawal from your Roth IRA. This can be a powerful way to avoid income taxes in your retirement, especially if you foresee income taxes being higher when you retire then they are today.

In 2010 there will be new rules for the Roth IRA. Starting next year the government is going to make it easier to convert a traditional IRA into a Roth IRA. Historically conversions were only an option if your AGI (adjusted gross income) was less than $100,000. This income limit is going to vanish in 2010. Another great option being given to us is the ability to spread out taxes on conversions implemented in 2010. You are being given the option to split the taxes payable due to the conversion between your tax returns for 2011 and 2012.

This is a great opportunity for those who are interested in converting an IRA into a Roth IRA in order to diversify their future retirement portfolio (and their future tax payments). I’d recommend meeting with your financial advisor for more information on the upcoming conversion and to see if a Roth IRA is right for you!

March 31, 2009
Did You Learn Financial Literacy In School?

While biking to school this morning I started thinking about education, finance and money. This led me to wonder how many people are actually taught anything about finance and money while they are attending school. I for one didn’t learn anything about managing money throughout any of my early education years (in fact this goes all the way up through high-school). Maybe this would explain why so many American’s are so in over their head with debt. With so much debt it’s hard to survive if anything bad comes along; especially unemployment.

With that being said, I present to you a new poll:

[poll id=”9″]

I’m interested to see your answers to this poll. We’ll see how it turns out, but I’m guessing a majority of us didn’t learn much about managing money in our education.

March 19, 2009
Methods To Save Money And Survive The Recession

There is no doubt that times are hard. And though you are not part of the pack who have lost their jobs in recent months, you’d still feel the crunch when prices are sky high and you just understand why money is harder to come by these days. You are not probably thinking of ways to either earn additional income or ways to save money.

This is especially true for those who are used to having part time jobs that supplement their income. Right now, additional jobs are harder to come by. Not only are their fewer jobs, there are also plenty of competition and frankly, employers will prioritize those who do not have day jobs.

But saving money is actually not as difficult as people make it out to be. Like everything else, it’s all about discipline. If you are committed to the task and you can do anything you want, even manage to squeeze in all your expenses into one measly budget and have enough left to put in the bank. Here are some of the ways on how to save money that you never really thought of.

1. Mind the plug

One of the biggest wastage that people do is their electricity. You don’t realize it but you are probably paying far more for your electricity that what you are supposed to be not because of the cost of electricity but because you have managed to waste those watts when you forget to unplug the appliance or you have left the lights on even when nobody is there already. By changing the schedule of your laundry and your ironing, you can already make a lot of changes in your bills and therefore save tons of money. All you need to do is to always remember. Besides, you will not only save money but you will also be able to help lessen the problems on energy.

2. Get an Insurance Quote

Getting quotes for insurance products that you already have can be a great way to save money. Find out about the different kinds of quotes from: cheap online health insurance quotes or online term insurance quote or free car insurance quote.

3. Skip the coffee

If you are the coffee addict and you just can’t go through the day without the cappuccino, curb the habit. If you can’t, at least resolve to have that cup of coffee inside the house and not buy it from Starbucks or other coffee shops. Coffee there are just so expensive and it is an absolute crime to spend money on just a single cup of coffee, something that you will be able to do at home. Lessen your trips to the coffee shops and you will find that you have a room in your monthly budget.

4. Take a walk or the metro

If you are so used to taking the taxi to work, now is the time to start walking and riding the sub. It’s not actually so hard. You just need to wake a little bit early so that you will have enough time to walk. Although it will definitely take more effort, commuting offers a lot of advantages. If you are on the plump side, you can already lose a lot of pounds when you do it. You can even forgo with your gym class because you are already getting the exercise that you need from it. If you are the fashionista, commuting can provide you with the chance to display your fashion sense.

March 16, 2009
355 Money Saving Tips

Like so many of my personal finance blogging peers, I believe that anyone can excel at managing their personal finances; I believe that anyone can become financially independent. Most people just need a little bit of advice and an occasional hand to hold. While I can’t necessarily hold your hand (hard to do over the internet) I am able to offer up advice on occasion. Today I’d like to offer 355 money saving tips that you can use to turn your financial life around, or continue on the path of saving money that many of you are already on.

These tips can be found on three different personal finance blogs: The Simple Dollar, The Dough Roller and The Frugal Law Student. I’m going to quote for you some of my favorite tips, the rest you can check out from these respective PF blogs.

5. Make your own gifts instead of buying stuff from the store. You can make food mixes, candles, bread, cookies, soap, and all kinds of other things at home quite easily and inexpensively. These make spectacular gifts for others because they involve your homemade touch, plus quite often they’re consumable, meaning they don’t wind up filling someone’s closet with junk. Even better – include a personal handwritten note with the gift. This will make it even more special than anything you could possibly buy down at the mall, plus it saves you money.

45. Master the ten second rule. Whenever you pick up an item in order to add it to your cart or to take it to the checkout, stop for ten seconds and ask yourself whyyou’re buying it and whether you actually need it or not. If you can’t find a good answer, put the item back. This keeps me from making impulse buys on a regular basis.

100. Never give up. Whenever the struggle against debt feels like it’s too much, go read a personal finance blog and remember that there are a lot of people out there fighting the same fight. Read around through the archives and learn some new things – and perhaps get inspired to keep going, no matter what.

For more money saving tips from The Simple Dollar check out Little Steps: 100 Great Tips For Saving Money For Those Just Getting Started.

Don’t pay interest on credit cards. This is obvious, but I soon as you fail to pay off the credit card in full, the high interest payments start to eat away at your monthly budget. If the temptation to spend more than you can pay on a credit card is to great, get rid of the credit card…

Check the insulation in your home. Extra insulation can easily pay for itself in one or two years, and it helps save the environment, too.

For more money saving tips from The Dough Roller check out 75 Painless Money-Saving Tips.

Don’t buy into trends. Keep a wardrobe of classic pieces, so you don’t have to update your clothes every year.

Eat right and exercise daily. You’ll reduce health costs.

Don’t buy extended warranties. Eighty percent are never used, and they’re a major profit item for the vendor. That’s why they push you so hard to buy them!

For more money saving tips from the Frugal Law Student check out 180 Money Saving Tips to turn your Financial Life Around 180 Degrees.

March 12, 2009