One of my favorite online budgeting tools, Mint.com, was recently bought out by rival software maker Intuit (which those of you who use QuickBooks and Quicken already know).
Mint.com was, and still is, a free service. What it does is it gathers all of your financial information (checking, savings, loans, credit cards, mortgages) and compares it against your assets of record (reported houses, cars, retirement accounts, etc.) and calculates out your net worth. Not only does it do that, but it tracks and organizes your spending information so you can create useful budgets. If you're about to go over a spending amount you set (for something like Entertainment, or Gas) it sends you email alerts warning you. Also, it compares your investment portfolio's performance against benchmarks like the S&P 500, showing you whether or not you're really outperforming the market.
For a free tool, that's pretty freaken sweet!
I introduced my parents to Mint, since they had checking accounts with three banks, two credit cards, a mortgage and home equity loan, two vehicle loans, and a recreational vehicle (aka boat) loan. Up until recently, they never worried about what debt they had, since they always maintained good credit. The interest rates they paid were not enough of an incentive to pay cash instead. Since using Mint however, they've been able to see just how much money in interest they're wasting, and have been able to re-organize their payments to pay off select loans and apply the monthly payments to other ones. Within 2 years, they should be completely debt free and ready (even if they aren't able) to retire.
The point I'm trying to make is, no matter where you are in life, a little time spent looking at your finances is warranted. Young people might need help budgeting, where as older individuals might benefit from looking at what their money routine is doing for them.
Friday, September 18, 2009
Saturday, February 14, 2009
Biggest Loser
The Challenge
I've made it a point to challenge all of my friends to become the Biggest Loser they can.
By biggest loser, I of course am referring to their credit card debt. I can't think of any easier way for someone to move ahead in life than by living the debt-free way. It's too common for people to just shrug it off and say "I can't help it, it's the economy" or "I got laid off" or "I'm only doing it through college; once I graduate I'll pay everything off in a few years..."
Bull shit! You know it, and I know it!
Financial Framework
If your financial posture lays the foundation for how you live your financial life, these people have got a raging case of financial-scoliosis. Their view of how money works is so twisted and skewed that by the time they come into any real money (i.e. a living wage that does not require the use of additional financing in the form of credit card debt) they're so trapped by their past mistakes that they will use any reasoning they can to justify their wants and wishes.
"I know I've got $15,000 in credit card debt, but I've finally accomplished something, so I think I'll buy a 64" plasma screen to reward myself..."
Tools of the Trade
Knowledge is power; and as Suze Orman is fond of saying, people need to "face it to fix it!" One way to do just that is by signing up to track your monthly net worth, as many uses have done over at NetWorthIQ.com.
Just like charting your weight from week to week, NetWorthIQ (and other similar services) offers users a chance to easily chart their finances over a period of time. It automatically generates graphs, and better yet, accountability when users choose to share their pages with friends and family members. Now, no one might know when you choose to sneak an extra snickers while on your diet; but if you charge it to your credit card and don't pay it off that month someones going to know about it.
Flash from the Past
While I was in school, I was taught the power of accountability as part of my initiation into the Society of Leadership and Success (which, hokey as the name may sound actually has an outstanding leadership certification program). Even overwhelming goals can be made possible by doing three simple things:
1. Clearly define what you seek to accomplish
2. Share this with a group of 5 to 6 individuals with similiar goals and values
3. Make it a point to hold one another accountable for reaching their success
In this instance, failure is not an option. Eventually, one of two things happens: you either do what you say you will, or you'll be too embarrased to face the group.
Sad but true, shame is at times a better motivator than the benefits from doing what's good for ourselves.
Food for Thought
My last thought to leave you with is this one: if you made it a goal to reduce your outstanding debt by at least 1.5% per month, each and every month, in 5 years 6 months and 2 weeks from the time you start you can be completely debt free and on your way to building a positive net worth. The only thing that makes this process difficult is not taking on additional debt as part of this process.
(To put things in perspective, if you currently have $35,000 in debt, that's only $525 a month paid directly on the principal to completely eliminate it.)
I've made it a point to challenge all of my friends to become the Biggest Loser they can.
By biggest loser, I of course am referring to their credit card debt. I can't think of any easier way for someone to move ahead in life than by living the debt-free way. It's too common for people to just shrug it off and say "I can't help it, it's the economy" or "I got laid off" or "I'm only doing it through college; once I graduate I'll pay everything off in a few years..."
Bull shit! You know it, and I know it!
Financial Framework
If your financial posture lays the foundation for how you live your financial life, these people have got a raging case of financial-scoliosis. Their view of how money works is so twisted and skewed that by the time they come into any real money (i.e. a living wage that does not require the use of additional financing in the form of credit card debt) they're so trapped by their past mistakes that they will use any reasoning they can to justify their wants and wishes.
"I know I've got $15,000 in credit card debt, but I've finally accomplished something, so I think I'll buy a 64" plasma screen to reward myself..."
Tools of the Trade
Knowledge is power; and as Suze Orman is fond of saying, people need to "face it to fix it!" One way to do just that is by signing up to track your monthly net worth, as many uses have done over at NetWorthIQ.com.
Just like charting your weight from week to week, NetWorthIQ (and other similar services) offers users a chance to easily chart their finances over a period of time. It automatically generates graphs, and better yet, accountability when users choose to share their pages with friends and family members. Now, no one might know when you choose to sneak an extra snickers while on your diet; but if you charge it to your credit card and don't pay it off that month someones going to know about it.
Flash from the Past
While I was in school, I was taught the power of accountability as part of my initiation into the Society of Leadership and Success (which, hokey as the name may sound actually has an outstanding leadership certification program). Even overwhelming goals can be made possible by doing three simple things:
1. Clearly define what you seek to accomplish
2. Share this with a group of 5 to 6 individuals with similiar goals and values
3. Make it a point to hold one another accountable for reaching their success
In this instance, failure is not an option. Eventually, one of two things happens: you either do what you say you will, or you'll be too embarrased to face the group.
Sad but true, shame is at times a better motivator than the benefits from doing what's good for ourselves.
Food for Thought
My last thought to leave you with is this one: if you made it a goal to reduce your outstanding debt by at least 1.5% per month, each and every month, in 5 years 6 months and 2 weeks from the time you start you can be completely debt free and on your way to building a positive net worth. The only thing that makes this process difficult is not taking on additional debt as part of this process.
(To put things in perspective, if you currently have $35,000 in debt, that's only $525 a month paid directly on the principal to completely eliminate it.)
Thursday, January 22, 2009
Financial Posture
I'm relatively certain that the author of Rich Dad/Poor Dad first published this notion, and I found it incredibly useful. Just as posture is an incredibly important aspect of your personal health, your financial posture can be just as important to your financial health. A little bit of slouching here and there can add up to quite a significant amount of lost opportunity later on in life.
So you buy a delicious coffee-drink from Starbucks three times a week at $4 a pop. And sure, your bank isn't located anyplace convenient, so you hit up an ATM twice a week, with the ATM owner's bank charging you $1.50 each time and your own bank accessing a $0.75 charge. It's little, seemingly insignificant purchases like these that add up over time to become huge sums of money. (In this instance, $858 a year, which over ten short years without increase is a surprising $8,580—almost enough to buy a car outright!)
This is just the 'little stuff' that doesn't add up to much. What about those smaller, but still significant purchases made once or twice a month? $20 here, $30 there... I'm not advocating being a penny-pinching miser or even saying it's not alright to splurge once in a while. It's when it becomes a regular habit that we find ourselves in trouble; massively in debt, and wondering where our hard-earned money went.
When one takes the time to master impulse control and evaluates what will truly be a 'good purchase', usually two things immediately result:
First, your purchases will bring more "utility" (which is just a fancy economics term for "satisfaction"). You'll find yourself experiencing less buyers remorse and more true enjoyment from what your wealth has bought you.
Second, you will find yourself with more and more money left over at the end of every month. Before you can be tempted to spend it though, it's important to ask yourself three important questions for your financial-health checkup.
If the answer to either of the first two is no, I heartily encourage you to put the money away. After all, if you have to make a purchase, why not purchase an asset that will generate more money for you? (A CD, a zero-coupon bond, or even a few shares of a high-dividend-yield stock like Duke Energy or GE are all good examples of money generating assets, although I am advocating nothing specifically.) If the answer to the third question is yes, then, by all means pay down your high interest debt! There is nothing closer to earning a 'guaranteed' return on your money than paying down high-interest debt!
Okay, for the record, just so you know I practice what I preach...
I know everyone can't afford to do that, but I know I wouldn't have been able to stick to the budget I do if I didn't show some backbone when tempted with the likes of a Venti Caramel Macchiato....with an espresso brownie...damn.
(The problem is, the caramel macchiato and the espresso brownie won't generate any income for me. If anything, they'll cause me to spend more money when I have to go and buy a gym membership after too much splurging.)
So you buy a delicious coffee-drink from Starbucks three times a week at $4 a pop. And sure, your bank isn't located anyplace convenient, so you hit up an ATM twice a week, with the ATM owner's bank charging you $1.50 each time and your own bank accessing a $0.75 charge. It's little, seemingly insignificant purchases like these that add up over time to become huge sums of money. (In this instance, $858 a year, which over ten short years without increase is a surprising $8,580—almost enough to buy a car outright!)
This is just the 'little stuff' that doesn't add up to much. What about those smaller, but still significant purchases made once or twice a month? $20 here, $30 there... I'm not advocating being a penny-pinching miser or even saying it's not alright to splurge once in a while. It's when it becomes a regular habit that we find ourselves in trouble; massively in debt, and wondering where our hard-earned money went.
When one takes the time to master impulse control and evaluates what will truly be a 'good purchase', usually two things immediately result:
First, your purchases will bring more "utility" (which is just a fancy economics term for "satisfaction"). You'll find yourself experiencing less buyers remorse and more true enjoyment from what your wealth has bought you.
Second, you will find yourself with more and more money left over at the end of every month. Before you can be tempted to spend it though, it's important to ask yourself three important questions for your financial-health checkup.
- Do I have at least 6 months living expenses in savings?
- Have I contributed at least $50 this month to my IRA?
- Do I have any credit card debt outstanding?
If the answer to either of the first two is no, I heartily encourage you to put the money away. After all, if you have to make a purchase, why not purchase an asset that will generate more money for you? (A CD, a zero-coupon bond, or even a few shares of a high-dividend-yield stock like Duke Energy or GE are all good examples of money generating assets, although I am advocating nothing specifically.) If the answer to the third question is yes, then, by all means pay down your high interest debt! There is nothing closer to earning a 'guaranteed' return on your money than paying down high-interest debt!
Okay, for the record, just so you know I practice what I preach...
- I only buy Starbucks when I'm traveling on business; and only because my company only reimburses 'Actual's (as in what we actually spend on food) in lieu of a daily Per Diem (or fixed) rate.
- I contribute 10% of my income to a 401(k), $100 a month to a Roth IRA, and an additional 10% of my net-check to a high-yield savings account (namely Emigrant Direct) which I use for emergencies.
- The only credit card debt I have is a 0% offer for furniture. The money used to pay this off currently sits in my Emigrant account, currently earning 2.5% interest.
I know everyone can't afford to do that, but I know I wouldn't have been able to stick to the budget I do if I didn't show some backbone when tempted with the likes of a Venti Caramel Macchiato....with an espresso brownie...damn.
(The problem is, the caramel macchiato and the espresso brownie won't generate any income for me. If anything, they'll cause me to spend more money when I have to go and buy a gym membership after too much splurging.)
Friday, January 16, 2009
Variable vs. Fixed Rate Interest
Overview
Fixed interest is just that—fixed! It stays the same throughout the duration of the loan. A variable interest rate is one that changes and is linked to another changing rate. This means it can increase or decrease over time, but is limited to the original terms of the agreement.
Usually the agreement will read something like "Prime + 1.5%". This means that the variable rate will be the Prime interest rate (the most popular Prime rate index being published in the Wall Street Journal daily), plus an additional 1.5%. So, if Prime is 6%, the variable rate is 7.5%.
Practical Uses
You'll most likely see this on the back of a credit card offer (in what is referred to as the "Schumer Box") where the APR will be described as "Prime + 7% (Currently 14.7%)"
Another instance will be for a variable rate mortgage loan. Such offers might be described as "Prime - 1%" for the extremely credit-worthy borrower.
Quick Tip
Here's a quick little tip on how to know if it's better to go for fixed or variable interest. Go to your bank's website and look at the difference between a 3-month CD and a 12, 24, or even 36-month CD. If at any time you see the longer-term CD lower than the 3-month, it might be a good idea to go for the variable rate interest. This is because the bank is expecting interest rates to drop in future. This can't be your only deciding factor because, like all things finance, it's a matter of timing.
Deeper Dive
The Prime rate follows the Federal Funds Rate (aka the "Fed" Rate) by around +3%. So, when the Federal Funds Rate has a 'target' of 0.25%, the Prime rate becomes 3.25%. That is one key method for the Federal Government is able to influence the economy, because my simply adjusting the Fed Rate target, they are able to change all Variable Rate Interest loans in the country that are tied to the Prime Rate. (There are many more steps in between, but this a simplified explanation.)
One More Thing...
Sometimes you will see LIBOR, which stands for the London InterBank Offered Rate. (Sometimes Three-Month LIBOR or Six-Month LIBOR.) It is a composite rate, calculated and averaged over time and then tied to financial contracts. You may or may not see it, but in case you do you'll at least have some idea of where it comes from and will be able to go and learn more about how it's used.
Fixed interest is just that—fixed! It stays the same throughout the duration of the loan. A variable interest rate is one that changes and is linked to another changing rate. This means it can increase or decrease over time, but is limited to the original terms of the agreement.
Usually the agreement will read something like "Prime + 1.5%". This means that the variable rate will be the Prime interest rate (the most popular Prime rate index being published in the Wall Street Journal daily), plus an additional 1.5%. So, if Prime is 6%, the variable rate is 7.5%.
Practical Uses
You'll most likely see this on the back of a credit card offer (in what is referred to as the "Schumer Box") where the APR will be described as "Prime + 7% (Currently 14.7%)"
Another instance will be for a variable rate mortgage loan. Such offers might be described as "Prime - 1%" for the extremely credit-worthy borrower.
Quick Tip
Here's a quick little tip on how to know if it's better to go for fixed or variable interest. Go to your bank's website and look at the difference between a 3-month CD and a 12, 24, or even 36-month CD. If at any time you see the longer-term CD lower than the 3-month, it might be a good idea to go for the variable rate interest. This is because the bank is expecting interest rates to drop in future. This can't be your only deciding factor because, like all things finance, it's a matter of timing.
Deeper Dive
The Prime rate follows the Federal Funds Rate (aka the "Fed" Rate) by around +3%. So, when the Federal Funds Rate has a 'target' of 0.25%, the Prime rate becomes 3.25%. That is one key method for the Federal Government is able to influence the economy, because my simply adjusting the Fed Rate target, they are able to change all Variable Rate Interest loans in the country that are tied to the Prime Rate. (There are many more steps in between, but this a simplified explanation.)
One More Thing...
Sometimes you will see LIBOR, which stands for the London InterBank Offered Rate. (Sometimes Three-Month LIBOR or Six-Month LIBOR.) It is a composite rate, calculated and averaged over time and then tied to financial contracts. You may or may not see it, but in case you do you'll at least have some idea of where it comes from and will be able to go and learn more about how it's used.
Sunday, January 11, 2009
How to Balance a Checking Account
It should surprise me just how many people don't bother to look at their bank statements—but it doesn't. I understand that we're all busy, and opening mail from the bank we love and trust just adds to the number of tedious chores that seem to consume all of our free time. This is one chore that should be an exception for one simple reason: it might just be able to save you hundreds of dollars.
Consider this: the typical bounced check (or overdraft) fee runs between $25 and $35. Do this twice a month, and you've suddenly encountered the cost of an entry-level cell phone bill. Sometimes it's not even your fault. Businesses are notorious for "accidentally" taking double or triple payments due to 'billing errors.' My own insurance company recently did just this, which is why I mention it. It REALLY happens, and it's the poor individual who doesn't at least give their bank statement a quick peek each month that pay the price.
You work hard for your money, don't let it slip away. The vigilant Finance Creep can easily avoid feeling pain from these mishaps by taking 5 minutes each day to complete a simple check register.
I've included a link to a good template. It is completely free, compatible with MS Excel (or OpenOffice Calc), and no, was not created by me.
You can check your recent account balance either online, by phone, or ATM and enter it as your starting balance. Then, as you write checks, take out cash, transfer funds, or make electronic payments simply enter the amount into the register, along with a brief description to let you know what it was for later. Then, as you get paid, make deposits, or receive interest you can enter that too. The account balance will automatically update based on the information you enter letting you know exactly how much money you have left to work with. (Make sure you don't skip entering the date! This is important for comparison later on.)
Now for the tricky part: there's a column labeled "C". This stands for cleared! At the end of each month, you have to take your bank statement, open it, and check off each transaction from the account that actually showed up (usually with a simple "X"). You'll be able to see, over time, whether any checks you've written have failed to clear the account.
This is where so many of us who rely on glancing at our online bank balance get thrown off. Sometimes checks we write months ago (up to six months legally in most states) get drawn on the account, throwing everything we've done recently off and causing payments to bounce.
When everything is marked off as being cleared you can compare the balance on your statement to the one in your new register. Is it the same? If it's not, why? Did a business overcharge you? Was there an unexpected bank charge or other fee? Or, did you miss entering something into the register in your haste one morning before work? It could even be an error in your favor where you forgot to enter the $100 check your friend gave you for your birthday.
Any of these things are possible, and since it's your money, it's in your best interest to figure out what happened. Banks can fail, businesses make mistakes, and I can say with almost 100% certainty that nobody will care about your money as much as you do.
Consider this: the typical bounced check (or overdraft) fee runs between $25 and $35. Do this twice a month, and you've suddenly encountered the cost of an entry-level cell phone bill. Sometimes it's not even your fault. Businesses are notorious for "accidentally" taking double or triple payments due to 'billing errors.' My own insurance company recently did just this, which is why I mention it. It REALLY happens, and it's the poor individual who doesn't at least give their bank statement a quick peek each month that pay the price.
You work hard for your money, don't let it slip away. The vigilant Finance Creep can easily avoid feeling pain from these mishaps by taking 5 minutes each day to complete a simple check register.
I've included a link to a good template. It is completely free, compatible with MS Excel (or OpenOffice Calc), and no, was not created by me.
You can check your recent account balance either online, by phone, or ATM and enter it as your starting balance. Then, as you write checks, take out cash, transfer funds, or make electronic payments simply enter the amount into the register, along with a brief description to let you know what it was for later. Then, as you get paid, make deposits, or receive interest you can enter that too. The account balance will automatically update based on the information you enter letting you know exactly how much money you have left to work with. (Make sure you don't skip entering the date! This is important for comparison later on.)
Now for the tricky part: there's a column labeled "C". This stands for cleared! At the end of each month, you have to take your bank statement, open it, and check off each transaction from the account that actually showed up (usually with a simple "X"). You'll be able to see, over time, whether any checks you've written have failed to clear the account.
This is where so many of us who rely on glancing at our online bank balance get thrown off. Sometimes checks we write months ago (up to six months legally in most states) get drawn on the account, throwing everything we've done recently off and causing payments to bounce.
When everything is marked off as being cleared you can compare the balance on your statement to the one in your new register. Is it the same? If it's not, why? Did a business overcharge you? Was there an unexpected bank charge or other fee? Or, did you miss entering something into the register in your haste one morning before work? It could even be an error in your favor where you forgot to enter the $100 check your friend gave you for your birthday.
Any of these things are possible, and since it's your money, it's in your best interest to figure out what happened. Banks can fail, businesses make mistakes, and I can say with almost 100% certainty that nobody will care about your money as much as you do.
Saturday, January 10, 2009
Free Suze Orman E-Book
Hello all,
Tonight, watching the Suze Orman show I learned that her recently published Suze Orman's 2009 Action Plan is being offered by free-download from Oprah's website.
http://www.oprah.com/article/oprahshow/20081119_tows_bookdownload
It will only be there until January 15, after which it goes away.
Only from a woman who always puts "People first, then money, then things" could we ever expect such generosity during these unsettling times. Afterward, you can feel free to visit her dedicated website by clicking here.
Suze Orman is a woman who has made it a mission to help people learn to manage money; and address the fears and concerns that prevent them from becoming (or staying) wealthy. She is an inspiration to me, and to other Americans by being an unbiased, honest source of financial information in our varied times of need.
Thank you Suze!
Enjoy!
Saturday, January 3, 2009
Simple Interest
Simple Interest is just that...simple! Under a Simple Interest loan, interest is calculated in a way that "ignores the effects of compounding." What this means is that additional interest is not calculated on the interest that has already been accrued. Simple Interest loans are commonly made on a short-term basis or in relatively informal settings (such as loans between friends or family members).
To calculate, simply take the amount of money interest is being earned on (commonly called the Principal), and multiply it by the interest rate in decimal format.
For example: $100 at 5% (0.05 in decimal form) per year.
$100 x 0.05 = $5.
It really is just that easy.
Slightly more complex, we can determine the Simple Interest earned at less-than-year intervals. The formula becomes Principal x (Interest x [Time / Total Interval] ).
So, using our original example of $100 at 5% per year, we will shorten the time period to 6 out of 12 months.
1. $100 x ( 0.05 x [6/12] )
2. $100 x ( 0.05 x [1/2] )
3. $100 x (0.025) = $2.50
Now, let's apply it to a real life situation. I lent $1,000 to a friend for one year at 8% interest. However, given the significant interest, he decided to pay me early at 9 months. So, to calculate the total amount I was owed...
1. $1,000 x ( 0.08 x [9 / 12] )
2. $1,000 x (0.08 x [3 / 4] )
3. $1,000 x (0.06 ) = $60
I then take the $60 in interest and add it to the principal balance my friend borrowed.
4. $1,000 + $60 = $1,060.
Some may be thinking "I could never charge my friends interest!"
While the amount of interest earned may seem insignificant, it is enough to provide a gentle incentive to pay on time or, as in my case, early. Also, if my friend had decided he could not pay on time, it would help to protect my own finances by compensating me for the delay in repayment in the form of additional interest.
To calculate, simply take the amount of money interest is being earned on (commonly called the Principal), and multiply it by the interest rate in decimal format.
For example: $100 at 5% (0.05 in decimal form) per year.
$100 x 0.05 = $5.
It really is just that easy.
Slightly more complex, we can determine the Simple Interest earned at less-than-year intervals. The formula becomes Principal x (Interest x [Time / Total Interval] ).
So, using our original example of $100 at 5% per year, we will shorten the time period to 6 out of 12 months.
1. $100 x ( 0.05 x [6/12] )
2. $100 x ( 0.05 x [1/2] )
3. $100 x (0.025) = $2.50
Now, let's apply it to a real life situation. I lent $1,000 to a friend for one year at 8% interest. However, given the significant interest, he decided to pay me early at 9 months. So, to calculate the total amount I was owed...
1. $1,000 x ( 0.08 x [9 / 12] )
2. $1,000 x (0.08 x [3 / 4] )
3. $1,000 x (0.06 ) = $60
I then take the $60 in interest and add it to the principal balance my friend borrowed.
4. $1,000 + $60 = $1,060.
Some may be thinking "I could never charge my friends interest!"
While the amount of interest earned may seem insignificant, it is enough to provide a gentle incentive to pay on time or, as in my case, early. Also, if my friend had decided he could not pay on time, it would help to protect my own finances by compensating me for the delay in repayment in the form of additional interest.
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