From cracked.com: (foul language warning for those following the link)
Too funny, especially considering the recent fight against helping consumers in foreclosure.
Archive for February, 2008
When it comes to personal finance authors, Suze Orman is a staple. She has her own television show on CNBC and has written numerous books on the subject. So I was excited to read her latest book to see what advice she had for me and my generation. Unfortunately, I was very disappointed by this book. To me the tone of this book is very condescending, which made it tough to read at times. In addition to the tone, some of the advice makes me feel wary of suggesting this book.
My first issue is Suze Orman’s emphasis on your FICO score. While I believe it’s important to have credit history, and it is absolutely important to make sure there are no errors on your report, I don’t think it’s important to worry about things like having the right “credit mix” on your account. There are far more important things to worry about than the ratio of revolving credit to fixed installment loans. Also worrisome is Suze Orman’s involvement with the Fair Isaac Corporation. If she is being paid by Fair Isaac, is her advice really unbiased?
Another piece of advice that really made me take notice was that it is okay to use your credit card to cover living expenses when you are starting off in your career, since your future earnings potential will help you pay off that debt. She suggests pouring yourself into your work to get ahead. Looking back on how I racked up my credit card debt, using it to cover living expenses was how my card got so high. I probably bought a few things in there I shouldn’t have, but the majority of the balance came from using it to pay for groceries. So to me, suggesting that you should use a credit card to cover your living expenses is a slippery slope that you shouldn’t tread on. And I believe in working hard to get ahead in your career, but telling people to go into debt for their careers is a good way to keep them working for years trying to pay off that debt.
To her credit, Suze Orman does cover a lot of ground in this book. Her range of topics includes, your career, your credit, student debt, retirement, investing, buying a home, and money in a personal relationship. For someone just starting out this book might be a very handy if they don’t get annoyed by the lecture-style writing. Which is why I’m torn recommending this book. There is a ton of great information, and honestly a lot of good advice.
I would recommend picking this book up and thinking of it as a list of tools and ideas for you to use when you need them. Read another personal finance book, like Your Money Or Your Life to build up a proper attitude towards money and philosophy on financial living.
“The Money Book for the Young, Fabulous & Broke” (Suze Orman) is available for purchase from Amazon.com
This post is part of the financial basics series.
How often do you see advertisements saying $19.95 a month? How often have you thought to yourself that you could “afford” a new car since the lease payments are only $299 a month? Did you eye that new Macbook Air and think it could be yours for only $100 a month? If so you’re not alone. According to Bankrate.com, the average credit card debt is $8400 per person. On top of that, PBS estimates that there are roughly 641 million credit cards in circulation. That’s a lot of plastic.
Buying on credit is a dangerous game, especially when you start thinking in terms of monthly payments. What happens if you can’t make the payments one month? What would you do if you lost your job and couldn’t make the payments anymore?
How do you break out of that cycle?
What if instead of paying $100 a month to finance a new laptop computer, or $300 a month for a new car, you managed to break the credit cycle, and instead started saving for the things you wanted? What if instead of paying interest, you could begin to earn interest? If you could do this, you would be able to start affording a lot more stuff. It will take some time, yes. And discipline. But I promise the results will be worth it.
Setup sub-accounts with ING Direct
There are many online banks that offer higher interest rates than ING Direct, but I have never used any of them. I have been a customer of ING since March of 2004, and have had nothing but great customer service from them. I don’t have any experience with other online banks, so I don’t know if they have similar features. But if you’re looking for an online bank I can highly recommend ING Direct as a safe, FDIC-insured option.
One of my favorite features of ING is the ability to create sub-accounts. A sub-account is basically a separate savings account, each with its own account number, underneath your customer number. Using sub-accounts is a great way to budget and visually separate your money to more easily reach your goals. Every time you log in to your ING account, the main page will list all of your accounts for easy maintenance.
To open a new sub-account, simply log into your account, and click on the open new account button on the left-side menu. Choose to open a new Orange Savings account (click on the Open Now button), enter the account nickname, choose your existing savings account, put a few dollars in your new account, and then hit continue. Confirm that everything is correct, and then click “Open Account.” The whole process only takes a few minutes and shouldn’t present any problems.
Making use of your new sub-accounts
Now that you know how to open a sub-account, you need to know what to do with them. First, think of the things you would like to begin saving for, the typical things people put on credit cards or go into debt over. A few examples might be a new computer, vacations, clothing, or even Christmas gifts. Don’t forget big purchases like a car. Imagine if you bought all of these on credit. You would have a car loan and a credit card that you bought your computer with. You might have another credit card that you use to buy your clothes and gifts with, and yet another card that you used to go on a trip to Hawaii. Opening a few savings accounts that are all available in one place doesn’t seem so bad now, does it?
Consider again the things you would seriously like to save for, and open an account for each one. If you plan on buying a new computer every two years, open a computer savings account for example. Combing goals is also an option. For instance I only go clothes shopping once or twice a year, and I only buy Christmas gifts once a year. So I created one account, and named it Clothing and Gifts. Think of these accounts as your new debt payments, only now you’re the lender and you’re in control.
Once these accounts are open, you need to start thinking about how much you’re going to need total, and from that figure out how much you will need to contribute monthly. Let’s look at the new computer fund. Suppose you want to buy a new laptop computer every three years, along with a few accessories like a new external hard drive or new software. First factor in the actual cost of the laptop, say $2000. On top of the $2k you want to get a protection plan and upgraded ram. This might add another $500, bringing your total to $2500. Don’t forget to add sales tax! Including tax and the software you think you might buy, suppose your total number comes out to $3,000. So over the course of 3 years you will need to save roughly $83.33 a month to meet this goal. By the time you save that much money, you will actually have more than $3k, since you will be earning interest on the money while it sits in your account. I will talk about how you can use this to your advantage in another post, but for now just think of it as compensation for your hard work (but try not to spend it!)
One trick I like to use, when naming your account, put the amount of money you would like to save next to the name. So the computer fund for example, would have the nickname “Computer Fund 3000.” I know that sounds like the name of a bad science fiction movie, but seeing that goal every month, and seeing the balance get a little bit closer to that goal every month, will provide you with the motivation to keep saving for that goal.
Don’t forget to start an emergency fund!
The number one sub-account you absolutely need is an emergency fund. This is going to be your shelter from the storm, your rudder keeping you steady when the water gets rough. This account will be used for emergency expenses, like unexpected car maintenance costs or medical bills, sos you don’t have to pull out the credit card. Buying a new shirt to impress your date Friday night is not an emergency, so be careful not to use the account frivolously.
Final thoughts
Using the sub-account feature is a great way for you to budget for your goals, and to budget for annual expenses like Christmas or your kid’s birthday. But when you’re just starting out, don’t over do it. Building up a small emergency fund should always be first on your list. After that it’s important for you to pay off all of your current debt before you start trying to save a major amount of money. It wouldn’t make much sense to save for a new car when you haven’t even paid off your current one.
Using ING you can set up an automatic withdrawal every month or every paycheck, giving you an easy way for you to fund your accounts. Don’t forget to budget those withdrawals, or you might spend that money and get hit with overdrafts. Now go open those accounts!
Fortune magazine’s recent cover article “Now What?” provides advice for investing in a weak U.S. economy. On a side note, I see that the article is completely free on their website, which is making me rethink my subscription.
The advice from Fortune:
- Watch your investment fees
- Invest for dividends
- Buy into beaten-down companies, if you can handle the risk
- Consider investing in foreign markets
- Don’t keep to much money in bonds
I would say this is all good advice. Some of it, especially tips like watching your investment fees and investing abroad, are good tips for anytime. Fees can quickly cut into your investment returns, so it’s always important to consider whether your broker is providing enough to justify the cost. And if you’re paying high fees in a mutual fund you really should reconsider switching to low-cost options like those offered by Vanguard. Looking abroad for investments is a great idea, especially when the U.S. economy is sliding. If you use mutual funds, investing abroad is as easy as buying into a fund that invests overseas. Buying individual stocks might be a little more difficult, and is beyond the scope of this post.
One piece of advice that struck me as interesting was to avoid bonds. Typically investors consider bonds to be a safe choice during a recession. But as the article points out, yields on bonds are not in line with the risk you take on, especially considering the amount of inflation. A good choice for bond investors might be TIPS, which protect you from rising inflation (or at least some of it, since inflation numbers seem to be drastically reduced lately. But again, that’s a whole different post).
If you have any money in the markets, it’s worth taking a look at the article to get some ideas for your portfolio.
This post is part of the financial basics series
When you have multiple credit cards, car payments, student loans, and other consumer debt it’s easy to begin to feel overwhelmed by the payments.
If you want to take control of your debt, it is important that you have a method and a plan to pay your debts off. A plan will give you control and put you one step closer to financial freedom.
So how does it work?
The first thing you will need to do is make a list of all your debts, including the balance and the minimum payment due each month. Next you will need to figure out your budget and determine the maximum amount of money you can pay towards your debt each month. Ideally you can pay more than the total minimum payments, but it may be that the most you can pay is the minimum amount due. This is fine. If the total amount you can pay is less than the minimum payment you need to go back and rebudget, and figure out where you can cut costs elsewhere so you can make your payments.
Now that you have a budget, you will need to decide which debt to pay off first. There are multiple ways to choose which order you should pay your debts off, but there are three main schools of thought on which debt payoff order is best, each with it’s own pros and cons which you should consider.
1. Payoff the lowest balance debts first (the debt snowball)
This is the method advocated by Dave Ramsey, and is the method my wife and I are using to payoff our debts. Using this method you will put any extra money towards the debt with the lowest balance, paying extra on it every month until it is paid off. When that one is knocked out you will put all of the money you were paying on the first debt and add it to the minimum payment of the next lowest balance debt, paying extra on it until it’s paid off. You will keep doing this until you have paid off the last debt. By the time you get to the debt with the largest balance you should be able to put a massive amount of money towards it every month (hence the name debt snowball), since the rest of your debt will be gone. While it may not actually be the quickest method to paying off your debt, it will feel like things are in motion since you every few months you can potentially get rid of another debt payment, which means one less bill in the mailbox.
The downside is that, mathematically, it is the least efficient method if your highest balance debts are also the ones with the highest interest rates, and over time you will end up paying the most amount of interest. My wife and I actually faced this dilemma, since our credit cards have both higher interest rates and higher balances compared to our car loan and student loans. Still, the excitement for us of paying off our car is worth the higher costs.
2. Payoff the highest interest rate debts first
With this method, endorsed by Suze Orman, you will order your debts from the highest interest rate to the lowest interest rate, and begin to pay them off in that order. Again, once a debt is paid off you will put that money towards paying down the next debt. As I said before, if you are looking for the method to pay the least amount of interest over time, and the method to pay off all debt in the absolute quickest fashion, this is the one to use.
The only downside to this method is a psychological one. If your highest interest rate debts also have high balances, it might take a long time to pay them off. It may begin to feel like you’re not getting anywhere with your goals, and you may find yourself in a rut. And if this leads to a breakdown in discipline, you might go off on a spending spree and quit altogether. And that, of course, would not be good.
3. Payoff debts according to their ‘DOLP’ number.
DOLP (Dead On Last Payment) is a trademarked term used by David Bach, author of The Automatic Millionaire. This system actually works out to be a hybrid of the previous two methods. To use this method you will need to find the DOLP number for each debt, calculated as the total balance divided by the minimum monthly payment due. Once you have all of the DOLP numbers calculated, you will order them from lowest number to the highest. The lowest DOLP debt will be paid of first, and the highest last. If you have no extra money to pay down your debt every month you are actually using this method by default, since you will pay off whatever debt is receiving the highest % of its balance first.
Let’s look a little deeper into the DOLP method. There are two ways a debt could have a low DOLP number. The first is if the minimum payment due is large relative to its balance. For example, consider two credit cards with the same balance, but with different interest rates. The credit card with the higher interest rate will have a higher minimum payment, and thus a lower DOLP number, and should be paid off first. The other factor leading to a high DOLP number is a relatively low balance. An auto loan payment for instance, is a fixed amount every month. As the balance gets lower, the DOLP number goes down, meaning you will pay it off sooner. Getting rid of low balance debts means more money freed up to pay down other debts, and one less bill in the mail every month to worry about.
In short, using the DOLP method prioritizes higher interest rate debts and lower balance debts. Of course using this method doesn’t guarantee that you will pay off the highest interest rate debts first. You can still end up paying more interest over time than simply paying off debts in order of the highest interest rates.
Attack your debt
Once you have decided what order you will pay your debt off, the next step is to start doing it. Being consistent every month is the hardest part, especially if you figure out that it is going to take years to pay everything off (like I did). You may think to yourself “What’s the point?” I know this feeling well, but if you don’t do it now, when? Unfortunately your debt is not going to magically disappear. The only way to overcome it is to attack it with every bit of money and effort that you can. Keep picturing how great it will be to not have anymore debt. And think about the money you will have to save every month once that debt is out of the way.
It won’t be an easy road, especially if you have a lot of debt. But stick with it and you will be debt free before you know it.
Have you seen this icon and wondered what it was about?
This is the icon representing Really Simple Syndication (an RSS feed), which is basically an easy way to subscribe to to a website’s content. Most blogs, and many professional news sites such as the New York Times, provide this as a means to easily keep track of any news that has recently been posted. Using a feed reader, such as Google Reader, will allow you to keep track of multiple feeds at a time. So instead of visiting multiple websites a day to see if any new content has been created, you can simply open your feed reader which will fetch new articles for you, drastically reducing the amount of time required to find new useful information, and increasing the amount of time for you to actually read that content. And best of all it’s free!
To get started with RSS you will need a feed reader. My current favorite is Google Reader, which I have been using for about a month. The most convenient feature for me is the ability to log in to my Google account and see what is new. Before that I used Firefox’s live bookmark feature, which creates a bookmark of the feed. The biggest drawback to this system is the difficulty in tracking a large number of feeds.
Another option for subscribing to RSS feeds is to use a desktop-based feed reader. Mac users can check out Vienna or NetNewsWire. Windows users can look into FeedDemon or RSS Owl. The biggest drawback to a desktop based system is the inability to view your feeds when you are away from your home computer.
If you would like to try it out (and support my site by subscribing), go to the top right corner of this website and click on the RSS icon where is says “subscribe in reader.” The feed burner page should open up, asking you what program you would like to use to subscribe. You will see Google as an option, as well as a few other options. If you are using a desktop based solution you should be able to select it in the scroll down window.
A few more links for reading:
If you’re trying to weigh the pros and cons of a desktop vs web-based reader, Lifehacker has a great write-up comparing the two.
If you decide to go with Google Reader, Lifehacker also has a few tips to help you become more efficient. And if that’s not enough, there is a whole slew of posts with the Google Reader tag. And in case you didn’t notice, I like reading Lifehacker’s articles quite a bit.
If you’re a California resident looking for an easy way to file your taxes, take a look at the California Ready Return site.
If you meet the Federal qualifications for free filling, the combo could be an extremely convenient (and cheap) way to file your taxes.
Ron at The Wisdom Journal outlines 12 things he learned by 42 that he wish he knew at 22. I’m past 22, but I think these tips are outstanding for anyone at any age.
Many of these ideas seem like common sense, but they are not common. Investing early is a good example. Many young people starting their career ignore their 401k accounts, putting off retirement for another time. But the longer you wait the less time you have to accumulate wealth, and the less time compound interest has to work its magic.
His money advice is spot on. There is no shortcut for to becoming rich, establish a budget, and realize that there’s more to life than money.
He also advises not buying the first house you look at, but instead waiting to get into an area you love. My wife and I have often discussed buying a house, and we both agree that we would rather rent in an area we love than move farther away to buy a cheaper house. With the recent housing bubble, many people bought houses with the sole intention of upgrading to something better later. But with prices going down, many of those folks are stuck in the houses they really didn’t like to begin with. So heed this advice, hold out for something you like instead of jumping at the first house you can afford.
An interesting companion to this comes from Consumerism Commentary with suggestions for reaching a million from the age of 25. These are a few of the steadfast rules of personal finance, including starting an emergency fund and paying off debt.
Dealing with burnout
JD at Get Rich Slowly has advice for dealing with frugality burnout. For anyone working towards living below their means, burnout is sure to set in at some point. When you are used to living at one level of income (even if you can’t afford that level of income), moving to a lifestyle of less can get you down. But these tips should help you stick with it and work towards your goals.
Buying the things you want
The Digerati Life has some suggestions for affording big ticket items. If you’re trying to live within your means, it’s not likely that you’ll have a few hundred dollars (or more!) lying around for you to buy expensive items. So it’s important to learn how to make these purchases a reality without using credit.
