Simple Debt-Free Finance

Eat the Rich: From Beatnik to Business Major Back in Fashion Again?

Joe — Tue, 31 Jan 2012 16:57:29 +0000

I was reading through an old copy of Eat the Rich: A Treatise on Economics by P. J. O’Rourke and came across this page which pretty much sums up view of the OWS crowd and many of their supporters…

The book was written in the late 1990′s, so it struck me how current and relevant this section is today.

In lighter times, I would have thoroughly enjoyed the above passage but in the current economic and political climate I felt a twinge of unease. It’s a reminder of how far off the rails the country has gone that this has become common discourse and even seems to be the basis of much of the recent State of the Union address.

Perhaps this excerpt should serve as some small consolation because it shows that the Occupy mentality was prevalent in the Universities even in the late 1990′s, when the economy was booming, and that it only has a voice now because of the times.

I suppose it’s always been an undercurrent, and we can hope it returns to that status quickly. Of course, if it truly is indicative of the majority view then we’re in for a much longer time of economic unease, uncertainty and non prosperity. I guess we’ll find out in November….

Want to Build Wealth, and be Secure? Focus on Learning Instead of Earning!

Joe — Wed, 18 Jan 2012 17:33:34 +0000

I just finished reading Robert Kiyosaki’s book, Rich Dad’s Increase Your Financial I.Q.: Get Smarter with Your Money and the one major takeaway is that too many people never realize their true financial potential because the get in their own way! Many people focus on earning more money when they should be focuses their time and energy on learning and increasing their money I.Q..

* Note: Kiyosaki discusses 5 aspects of Financial I.Q. in his book, but I’m just going to focus on this one, general concept here.

The learning discussed in the book is not a formal education. In fact, that’s one of the mistakes that many people make – amassing huge amounts of debt going to college in the hopes of “finding a good job” and their place on the financial treadmill, only for some it’s more like a hamster wheel.

So what does “focus on learning” mean if not the traditional, middle class mantra “go to college to get a good job”?

It means taking risks and chances while you’re young, and always learning from your mistakes as well as your successes. People come into money all the time, sometimes mass amounts of it only to lose it all later. Think of lottery winners, famous athletes and performing artists. Suddenly rich, then suddenly broke. Why? Because they didn’t increase their 2nd financial I.Q. after mastering the 1st. They simply did what they loved doing and fell into their riches, but never learned how to manage and protect their wealth.

The first two financial I.Q.’s in the book are :

earning more money.
learning how to protect that money.

In the example of the star athlete or lottery winner, they mastered I.Q. #1 but failed horribly at I.Q. #2 – protecting their money.

Protection can mean many different things, and is usually referred to as “security” by many people. They may want to be secure in the knowledge that their savings are safe from loss, or maybe they want to protect their savings and assets from legal action. Whatever meaning you take, once you’ve earned it you must get educated on how to keep it or risk losing it all.

But even losing it all isn’t the end.

There are many well known moguls, like Donald Trump, who have built vast financial empires and lost it all only to come roaring back again. Why? Because they learned from their experience and were not afraid to fail.

” Those who cannot remember the past are condemned to repeat it.”
-George Santayana

If you do not learn from your mistakes, you will keep making them and make little or no progress in life.

I’ve always thought it’s important to learn from your own mistakes, but it’s also important to learn from other people’s mistakes as well.

Here are a few resources to help boost your financial I.Q.:

Tips to avoid losing money to these common investing mistakes .
Educate yourself at tax time to avoid common tax mistakes and save more money.
Get educated on credit cards so you can know how bad credit mistakes can be and avoid even basic credit card mistakes that cost thousands.
And if nothing else, learn from other people and avoid even basic money mistakes whenever you can.

Robert Kiyosaki Plays Loose With His Math.

Joe — Mon, 16 Jan 2012 18:23:54 +0000

I’ve been reading Rich Dad’s Increase Your Financial IQ: Get Smarter with Your Money, by Robert Kiyosaki and while I like the general gist of the book (especially the first half), he rubs me wrong way in several places. One of these is in his use of math to support his opinions on real estate. Much of the second half of the book focuses on real estate as a means to grow wealth, but he does make an important distinction between speculating for growth or flipping a house, and buying property as an investment. In other words, he espouses buying real estate for the purpose of renting it out and creating a cash flow, not hoping for the market to rise and create capital gains. I’m not really interested in becoming a renter, but his approach makes a lot of sense to me, especially with the current economy, housing market and demographic changes.

Where I have problems is when he gets into things like OPM (Other People’s Money). Here is one of his examples:

He buys a rental property for $100,000 in cash.
He is able to rent this property for an annual income of $10,000.
He has made a 10% return on his investment.

So far, so good. He’s using very simple math and ignoring taxes, repairs, etc.. but that’s fine – he states that in the example. His problem is in his comparison to the same scenario but using OPM. Here’s his example using OPM (i.e. money from the bank – a mortgage):

He buys a rental property for $100,000.
He puts $50,000 down and the bank loans him the other $50,000 at 6% interest.
He is able to rent this property for an annual income of $10,000.
He has made a 20% return on his investment.

The problem is that he has not made a 20% return on his investment – unless he is a deadbeat and doesn’t pay his mortgage! While it is true that $10,000 in profit would be a 20% return on $50,000 invested he is ignoring the mortgage payment entirely!

Using the Mortgage loan payment calculator at BankRate.com, I plugged in a $50,000 mortgage over 30 years (I’m being generous in giving him a low monthly payment) at 6% (his figure in the book) I determined the monthly mortgage payment to be :

$299.78

This works out to be $3,597.36 annually, which makes his actually profit in the OPM example $6,402.64 not $10,000. That means his return on investment (ROI) in that example is 12.8% not 20%.

Granted, 12.8% is better than 10% but it’s a far cry from 20%!

This makes me wonder about the rest of his examples and stories. What if the mortgage were larger or the rent less? Someone reading this book may think it’s a slam dunk only to find that his property and mortgage alter the numbers to a point where he’s not profitable. Kiyosaki neglects to mention that part of the financial equation altogether.

Still, the book is quite motivating and offers much food for thought and for that alone it is worth the read in my opinion.

8 Tips to Reduce Your Debt This Holiday Season.

Joe — Thu, 22 Dec 2011 02:32:00 +0000

The Holiday Season is the busiest time of year, full of family and friends, good food – and spending. Between the parties, travel to be with family, and gift-giving, it’s practically inevitable you’ll be dishing out a lot of dough. But you don’t have to go into debt during the Holidays that leaves you financially hungover in January and behind for the rest of next year. Plan ahead to minimize your debt, or better yet, not rack up any at all! Avoid the debt collectors by following these 8 simple tips to keep your Holiday spending on track:

Get on a Budget – Start the season out right by planning how much you can reasonably afford to spend and limit yourself to that, no ifs, ands, or buts. This means you’re going to have to budget for those unexpected holiday expenses that tend to pop up.
Treat All of Your Expenditures Like Cash – Don’t set yourself up for failure by walking into the glitzy shopping mall with three credit cards and no idea of what you plan to buy. Preferably pay in cash, but if you use a credit card, treat it like cash – plan to pay off the balance at the end of the month to avoid incurring interest fees.
Don’t Use the Store Retail Cards – These may be tempting, but don’t fall into the habit of applying for store credit cards simply for the 15% off coupon they’ll give you. Each time you apply for one of these it will hit your credit report and can make you look desperate for credit lines. Plus, these cards generally carry high interest rates – often at percentages in the 20s! Steer clear of this shiny Holiday shopping lure.
Be Creative With Your Gifts – Think from the heart instead from the wallet for a change this season. Are you an aspiring artist? Do you have the best gingerbread recipe in town? Consider something homemade, sentimental, for a gift. Chances are you’ll save money and your loved one will appreciate the gift all the more for it!

If you’re like most Americans, you will manage to rack up a measure of debt during the Holidays despite your best efforts. Don’t despair; you can still right the ship financially without spending the whole year trying to pay it off. It will just take a little planning:

Set a Definite Payoff Date – Try to put a plan in place right away to pay your debt off as soon as possible. Maybe it’s March 31^st, the end of the first quarter, or maybe you want the debt gone by the time the kids are off school for the summer. Stick to your plan and know exactly how you will pay it off in order to make all you financial decisions fall in line.
Scrimp and Sacrifice Where You Can – Are you getting a Starbucks every morning before work? Make coffee at home. Are you eating lunches out during the work day? Bring a sack lunch. Cut down on dining out, entertainment, and the cable bill – wherever you can. You probably received some gift cards during the Holidays, so make good use of those.
Pay off Your Debts in a Smart Order – Plan to pay off your cards with the highest interest first, making the maximum payment you can afford on those and just the minimum payments on the others. Work your way down the line with your cards so you can avoid paying high interest rates if possible.
Plan for Next Year’s Holiday Season – It’s okay if you take advantage of post-Holiday sales, so long as you’re doing it for the right reason. That cashmere sweater that went on sale for $90 from $120? Probably not the best choice. But decorations, household goods, and practical things you can save until next season will help you curtail spending next year and stop the revolving cycle of debt.

There’s no way to get around it – you’re going to be spending money during the Holiday season. But if you plan early and spend wisely, you can make sure that this Holiday season is one full of merriment instead of financial misery.

Larry P. Smith & Associates, a Chicago Law Firm, focus on consumer rights protection. If you are having difficulties with bankruptcy, identity theft, debt collection or consumer fraud, request a free case review with Larry P. Smith & Associates.

5 Bad Habits About Money Kids Learn From Their Parents.

Joe — Thu, 15 Dec 2011 17:52:53 +0000

Children learn many things from their parents, and most of it is subliminal. We indirectly learn habits and behaviors by watching our parents, and when we become adults and have children of our own we pass many of those habits, behaviors and beliefs on to them whether we know it or not.

Here are the top 5 bad habits about money children learn from their parents.

#1. Arguing about money.

This is easily the most common habit picked up from parents, since money is often at the center of any disagreement between parents, and many people – parents included – do not know how to have constructive discussions on those disagreements. This can indirectly teach children that money causes problems, and lead them to place an unhealthy emphasis on money to the exclusion of all else.

#2. Spending money you don’t have.

The average college student graduates with $4,000 in credit card debt. Some of that is because the insane cost of college leaves little left for basic living, but few students are leaving home with any understanding of debt and why it should be avoided.

#3. Failing to price compare.

Whether it’s at the local mall or online, parents who don’t shop around for a better price have children who don’t shop around for a better price and that means spending more than you need. This leads to children becoming adults without an appreciation for the value of a dollar. For my part, my children have seen my wife and I Google for coupon codes so often before making a purchase that the first thing they say when they see something in the store they like is, “Let’s Google for a coupon code when we get home and see if we can afford it!”

#4. Spending money and not time with your kids.

Trying to make up for lost time with your children by giving them gifts reinforces materialism and teach kids that “things” are more important than people. Spend money on making memories instead. It’s what kids want, and parents will be creating stronger bonds with their children that help keep them on track later in life. When it comes to kids, it’s better to spend time than money. It’s better still to spend time teaching kids about money.

#5. Handing out money with no strings attached.

It amazes me how many people are angry with the government for bailing out banks, and automotive unions and yet see no problem bailing out their children. Bailouts, whether federal or parental, reinforce bad behavior. It teaches the recipient that there is no risk in making a bad decision, because someone will come in and clean up your mistake.

It creates a lack of responsibility, and an unhealthy dependence on the parent. Parents should consider this: One day you will shuffle off this mortal coil. Think long and hard about where your children will be when you’re no longer their to bail them out.

It’s also bad news for the parent because the money is often being redirected from retirement savings, leaving the parents unable to provide for themselves or their children.

It’s an insidious cycle that needs to be broken. Parents should realize that a little pain early on is worth it if their children learn to stand on their own two feet. Also, it’s much easier if started when the children are younger.

Money in the form of an allowance, tied to chores or goals is a far better reward.

Watch this video for interviews with students about what they’ve learned from their parents about money:

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Are You Prepared to Pay $3,598 More in Income Tax for 2012?

Joe — Wed, 07 Dec 2011 17:47:40 +0000

Many people are not aware of the extent to which the U.S. income tax laws will change next year if Congress does not move to make them permanent. This goes well beyond the much hyped payroll tax break. In fact, the $3,598 doesn’t even factor in the increase if that provision fails to win extension!

To make the situation clear, a recent Yahoo! news story (Why Your Tax Bill Might Surge Next Year) profiles a fictional married couple, meant to portray the average tax paying family.

Meet Bill and Joan.

Bill and Joan Smith are 26 years old, married and have two young children. Bill works in sales and earns $65,000 a year, while Joan has re-entered the work force and earns $35,000 a year.

This gives them a combined income of $100,000 annually – well below the various “millionaire” threshold often touted by politicians when trying to make a tax increase more palatable to the masses.

Bill still owes a chunk of change on his student loans, and pays about $3,000 a year in interest on them.

Since Joan went back to work, they need childcare. This costs them about $3,000 a year.

In addition to her salary, Joan also inherited some shares of AT&T stock from her grandmother. She earns $1,000 in dividends each year from that stock.

Factoring in their deduction for mortgage interest, they have $20,000 in itemized deductions for the year.

Meet the new tax code.

The Bush tax cuts are set to expire at the start of 2013, and when that happens the Smiths will pay $960 more in 2012 taxes than they will in 2011 taxes. This is the result of the elimination of and tightening of marginal tax rates .

Next on the chopping block, the student loan interest deduction. That will also expire without an extension, leaving Bill to lose out his $3,000 deduction and costing him about $840 more on his 2012 taxes.

The allowable child care deduction would drop from $3,000 to $2,400 an the child tax credit would drop in half costing them an additional $1,000 in taxes.

The marriage tax penalty is set to make a come back also, costing the Smiths an additional $500 in taxes.

Remember Joan’s AT&T stock that she inherited from her grandmother? Due to the increase on dividend tax rates when the Bush tax cuts expire it will cost her another $130 in taxes.

Tax law changes not considered.

All of the above ignores other aspects of the tax code, such as the Alternative Minimum Tax, which will ensnare more people if it is not adjusted yet again. Also missing from the analysis are a number of other itemized deductions and personal exemptions that phase out at certain levels of income.

Summary.

Due to tax code changes in the coming year, the average American family will owe $3,598 more in taxes with no change in their income to offset this increase.

Here’s a list of what is due to expire in the next two years.

Major Individual Income Tax Benefits Expiring 12/31/2011:

• Personal tax credits applied against income tax no longer apply

• Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds

• $250 school teacher expense deduction ends

• Mortgage insurance premium deduction expires

• State and local sales tax deductions expire

• Tuition and related fees deduction end

• IRA to charity tax-free transfers stop

• 2% Social Security tax reduction ends

Major Individual Income Tax Benefits Expiring 12/31/2012:

• Marriage penalty equalization ends

• Dividends taxed at capital gains rates removed, taxed at regular rates now

• Capital gains low tax rates expires

• Removal of itemized deduction phase out for higher income Americans

• Removal of personal exemption phase out for higher income Americans

• Child care deduction limit of $3,000 reverts to $2,400

• Child credit reduces from $1,000 per child to $500 per child

• Low 10% tax bracket for low income Americans is eliminated

• Lower income tax rates and smaller brackets expires

• Refundable adoption credit and reduced deduction

• American Opportunity college education credit expires

• Major reduction in earned income credits and refunds

• Income tax exemption for debt forgiven on home foreclosures and repossessions

• Deduction for student loan interest ends

• Education IRA limit drops from $2,000 to $500

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Five Common Debt Solutions.

Joe — Thu, 01 Dec 2011 17:25:28 +0000

Debt is an ongoing problem that plagues consumers around the world. Heavy debt is caused by various factors. Loss of job, divorce, and over extending one’s financial abilities are just a few ways debt sneaks up on hard-working people. If you are having a problem with debt, you are most likely wondering how to get out of it. Here are five common solutions.

1. Bankruptcy

Many people get scared and naturally want to solve debt by filing for bankruptcy. Bankruptcy is a legal status that clearly defines one’s inability to pay creditors. Depending on the chapter the debtor files, he or she may be excused from making any payments.

The downside to choosing bankruptcy as an option is the resulting credit status. A bankruptcy will remain on the consumer’s credit report for a period of seven to ten years. This status will make it difficult for that person to obtain any credit during that time. Bankruptcy should be used as a last resort when no other options seem feasible.

2. Debt Consolidation

Debt consolidation is another common method to solving the problem of overwhelming creditor bills. The process involves merging all open accounts into one account. A consolidation can be done in several ways. One way is for the debtor to apply for a consolidation loan. The lender will write out a check big enough to cover all of the debtor’s open accounts. The debtor will then make payment to this single creditor.

A debtor could also perform a self-initiated consolidation by applying for a high limit credit card that would cover payment for all existing accounts. This is also a great method because some high limit credit cards offer excellent APRs. The down side is availability. If the debtor has already experienced several negative notations on his or her credit report, lenders may be reluctant to help. In addition, if that individual’s income is not enough to cover the debt payments, a consolidation will not be very beneficial.

(Read more about Debt Consolidation and Your Credit Score.)

3. Credit Counseling Services

Credit counseling services can provide consumers with advice on how to manage their bills. They offer a wide range of solutions from financial planning, to payment tips, to writing letters to creditors. Credit counseling services are not a bad idea. However, they are not free. So, the customer risks paying for something that may not work.

4. Debt Management Company

A debt management company is a company that also offers a wide range of services to consumers in need of assistance. One thing they can do is negotiate with the lenders. They will attempt to convince lenders to lower interest rates and finance charges on the debtor’s behalf. Another service that these companies offer is a third party debt consolidation. In this situation, the debtor makes a lump sum payment to the debt management company and they pay of his or her creditors. DMC companies can possibly help to lower an individual’s debt. However, the bill can get costly and not every DMC is trustworthy.

5. Nada

Some people actually opt to do nothing to fix credit. They let the debt rack up in hopes that the seven-year period will pass before legal action wipes them clean. This is definitely not an intelligent idea. A smart debtor needs to be proactive for effective debt repair. With the right attitude and the will to make the situation better, a debtor can get from under the heavy weight.

This has been a guest post from Leah Fields. Leah likes to write about home improvement, personal finance; she writes for creditreport.org.

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Older Americans Are 47 Times Richer Than Young – So What Or Injustice?

Joe — Mon, 28 Nov 2011 20:07:02 +0000

According to a recent “news” article on CNNMoney.com, Old Americans are 47 times richer than young .

Is this social injustice?

Is this even a news story?

It seems from the article that the writer wants to at least give the implication that this portends something inherently unfair:

“According to analysis by the Pew Research Center released Monday, younger Americans have been left behind as the oldest generation has seen wealth surge since the mid-1980s”

Just look at some of the statistics on these greedy elderly people:

Households headed by adults younger than 35 had a median net worth of $3,662 in 2009.
Households headed by adults ages 65 years and older had a median of $170,494 in 2009.
The net worth in the less than 35 age bracket declined 68% since 1984.
The net worth in the 65 and older bracket increased 42% in the same time frame.

Is this really a story?

CNNMoney is comparing 2 separate things at the same time and getting them muddled.

First, instead of pitting the two age groups against each other, it should serve as an example of how the American dream is still achievable – you can be better off tomorrow than you are today! People, on average, tend to be better off financially as they move through life. This is a good thing. They accumulate more assets and less liabilities – their net worth improves. Comparing younger and older people in this sense is like saying that older Americans are less young than younger Americans. it may be true, but it’s a pointless comparison.

Secondly, comparing these segments to similar segments from 1984 is wildly inaccurate. Here’s why:

The economy in 1984 was on an upswing after the brutal recession of 1980-82, while the economy in 2009 was still in the midst of the Great Recession.
Housing prices were hardest hit in the 2008-2009 recession. Most homeowners in the under 35 age set had recently purchased their homes at high prices and had very little or no equity, in contrast to the over 65 age set who had held homes for longer (on average) and not lost as much equity. This skews the net worth towards the older set.
Simple demographics are different. People are working and living longer in 2009 than they were in 1984, giving them longer to accumulate more worth.
Children were deferring there entrance to the workforce longer in 2009 than they did in 1984, staying in school longer and accumulating student loan and credit card debt when they would have been earning a salary and likely saving some money or buying assets like houses.

Maybe I’m cynical, but it seems like this CNNMoney piece is just meant to contribute to the sense of class warfare out there and lead people to assume this ” 47-to-one wealth gap” is the result of unfair tax policies, or greed, or Halliburton or whatever. Then again, maybe it’s just a poorly written, minimally researched piece to fill some deadline for the writer.

Judging by some of the comments on the original article, quite a few are taking the story as a justification for class envy, which is just a sad state of affairs.

What say you?

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11 Things to Consider When Choosing an Online Bank.

Joe — Sat, 19 Nov 2011 19:32:11 +0000

Do you feel like your money isn’t showing a very impressive rate of return with your bank savings account? If so, perhaps it’s time to explore other options that will provide a better interest rate. The whole purpose of saving is to build a nest egg to put purchase a new home, finance your children’s college education or enjoy a comfortable retirement.

There are two primary factors which account for low interest rates on savings accounts: the relatively low short term interest on short-term borrowing (i.e. the rates bank charge one another for lending money) coupled with high overhead costs and rising expenses associated with brick and mortar locations (e.g. employee salaries, building rent). As per Bankrate.com, an aggregator of rate data, the rates for checking and savings as of August 2011 are as follows:

Traditional Savings and Money Market (MMA): 0.05% APY to 1.00% APY
One year certificate-of-deposit (CD): .8%
Traditional checking with interest: .51%

Online banks that have reduced overhead expenses offer somewhat higher rates. Yet, with so many online banks in business, how do you know which one is best for your needs? Below we list 11 considerations when choosing an online bank.

Review the bank’s Veribanc rating which is based on six factors, commonly referred to by the acronym CAMELS: A: Capital reserves; Asset quality; Management experience; Earnings-to-debt ratio; Liquidity; and Sensitivity to market fluctuations. The best banks will have a green rating and a minimum of three stars.
Compare the rates you will earn on deposits. As noted, because online banks have reduced overhead costs, they are able to offer higher rates than traditional banks. However, be aware of “teaser rates” that will apply to only a part of your balance.
Make sure the bank is FDIC insured, meaning that your money is protected should the bank ever fail. FDIC insurance is backed by the “full faith and credit” of the Federal Reserve.
Does the bank offer competitive rates? Use a comparison site such as Google Advisor to compare rates offered by different banks.
Find out how long the bank has been in business. The longer the better since that is an indication that the bank has survived periods of economic fluctuation.
Find out if the bank charges monthly service fees, whether you are required to maintain a minimum balance and what happens should you fall below this minimum requirement.
Ask the procedure for deposits. Because you will not be able to visit a branch, ask how long it takes deposited checks to clear.
Determine how many withdrawals you may make per month. Some banks impose limits on this that you may not feel comfortable with.
Check the level of security. If you are doing all of your banking online, make sure the bank has ample security precautions in place, such as encrypted servers. Ideally, there will also be an alert system in place that notifies you of transactions over a certain amount.
Choose a bank with a strong ATM network. Some online banks have a network of ATMs that you may use with no fee. For those that doesn’t make sure that you can be reimbursed for out-of-network transactions on the ATMs of other banks. This is important since some banks charge as much as $5 for non-account holders.
Consider whether you will need paper checks. Recently, ING Direct began offering paper checkbooks to their customers. Prior to this, bank customers would have to order checks singly that were already filled out with respect to payee and then wait for delivery by regular mail. If you need to pay your rent or other services by check, it is best to choose an online bank that offers checkbooks.

This is a guest post by Ashyia Hill. Ashyia is a social media advocate with CreditDonkey, a credit card comparison website. Read her team’s latest article on preparing for the unexpected with an emergency fund.

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Participatory Economics and Why The Occupy Movement Was Destined To Fail From The Start.

Joe — Tue, 15 Nov 2011 17:23:58 +0000

Much of the coverage of the Occupy Wall Street protests has focused on whether there is a single, overall point or purpose to the movement and even whether it is a movement at all.

It’s hard to argue that a gathering – be it a movement or simply a protest – is successful if no one can come to a consensus as to the what it’s all about.

The folks at NPR’s Planet Money went down to see what the OWS protests were about, and they concluded that it is more of a “venue” than a movement. It seems that the OWS group is a loose conglomerate of disparate interests – at least on the surface.

“We went downtown this week to talk to the protesters at Occupy Wall Street. We asked people why they were there. We heard lots of different answers.”

But delve a little deeper and you find that it’s a platform for launching a whole new society. One based on Participatory Economics. More on that in a minute. First, the General Assembly.

The General Assembly.

At the heart of the OWS gathering is what the organizers call the “General Assembly” It takes place nightly, and it’s where everyone goes to discuss topics important to them.

For example:

“Should we buy some sleeping bags? What if we just buy fabric and make our own sleeping bags? How will we keep the sleeping bags clean?”

But in the midst of such discussion, a challenger arises to question the authority of the “facilitators.” Asking if they alone grant the power to be heard – without the general consent of the group body – can they be consider legitimate themselves? That’s right, before the meeting can be facilitated the very framework must be agreed upon and legitimized by the group body!

This led the Planet Money team to conclude that:

“It’s not a movement; it’s a venue. Standing around, talking about what everybody wants — this is a model of how the protesters want society to be.”

But could this ever really work? Could you base a society on this model and have it function better than the current society?

It turns out that an economics professor has been dreaming up such a system for the past 40 years and he calls it Participatory Economics.

Participatory Economics (ParEcon): A Theoretical Alternative to Capitalism

Participatory Economics is the brain child of economics professor Robin Hahnel. Hahnel, a self proclaimed “libertarian socialist” (you figure it out, because I can’t), has spent 40 years developing a new model for economics that is more democratic than capitalism.

The basic theory is that the best system of economics (and society in general) is one that is based upon group participation. In Hahnel’s world, there are no owners, no bosses and everyone is equal. In Participatory Economics, people gather in groups to do business as a worker group.

Businesses would be run by the employees, broken down by committee. There would be a committee to determine what kind of product to make, in what styles. Compensation would be determined by peer review and have little bearing on success of the company.

Supply and demand would be managed by a national network of these worker groups coming together to make requests for more goods and services. Some other committee would employ a computer algorithm developed by Mr. Hahnel that seeks to optimize utilization of resources.

Besides sounding like a plot for some cautionary sci-fi apocalypse tale, it’s likely to fail utterly when dealing with shocks to the system like a natural disaster destroying a food crop or other “unexpected” demands of the supply. In fact, when questioned about this Professor Hahnel admits that his system “may be a little weak” in such situations. He essential goes on to say that it would be worth such problems in the end because it’s a more fair system overall.

This is antithetical to the society the founders created for America and the basis of free market capitalism. The framework which the founders created grants the power to the individual, not groups. Once the power and control moves to groups, the individual is lost. In free market capitalism, supply and demand is managed by the price mechanism which has proven itself to be the fastest and most efficient way to manage the consumption of scarce resources with alternative uses.

In essence, the protestors want a society in which an idea is floated by an individual but everybody gets a say in whether that idea is accepted or not, and to what degree it is accepted. Rule by committee in it’s most benign form, rule by the mob in it’s malignant form.

History shows this is folly.

NPR asks, “But is this effective?”

No. Of course not. In fact, even one of the protestors himself – a former facilitator no less – when interviewed by NPR admitted it’s not effective. But that’s not the point he says. The problem with effective governance is that “some people will feel disenfranchised and that their feelings are not being heard”.

It sounds like the individual is first and foremost, but by structuring decisions based by committee or group quickly absorbs the individual into the collective.

Like the 1825 failed socialist experiment New Harmony of Robert Owen, this model is destined to fail.

Josiah Warren (original participant in New Harmony) wrote:

“It seemed that the difference of opinion, tastes and purposes increased just in proportion to the demand for conformity. Two years were worn out in this way; at the end of which, I believe that not more than three persons had the least hope of success. Most of the experimenters left in despair of all reforms, and conservatism felt itself confirmed. We had tried every conceivable form of organization and government. We had a world in miniature. –we had enacted the French revolution over again with despairing hearts instead of corpses as a result. …It appeared that it was nature’s own inherent law of diversity that had conquered us …our ‘united interests’ were directly at war with the individualities of persons and circumstances and the instinct of self-preservation… and it was evident that just in proportion to the contact of persons or interests, so are concessions and compromises indispensable.” (Periodical Letter II 1856).

Participatory Economics. Mutualism. Socialism. Call it what you like, it amounts to Collectivism and it doesn’t work. It aims to replace an imperfect system (Capitalism) with an even more imperfect system.

No system is perfect. The best we can do is devise a system that provides the individual with the most latitude and freedom to make of his own life what he wishes (provided he does not harm others in the process).

That’s capitalism. Not the crony capitalism of Washington D.C., but free market capitalism.

The founding fathers new such collectivist systems were doomed to fail. They considered many forms of government throughout history and after careful deliberation and much spirited debate settled upon a representative republic as the surest way to promote prosperity and preserve liberty and freedom of the individual. Pure democracy devolves to mob rule (Greece, anybody?) and monarchy is dictatorship by a different name. At either end of the spectrum, individual liberty and freedom cannot exist.

The founding fathers knew that there was no single, perfect system. It’s why the preamble of the constitution states:

“We the people of the United States, in order to form a more perfect union, ..”

It’s a more perfect union, not a perfect union.

Collectivism fails every time it’s tried, and the Occupy movement is no different.

The saddest part of this whole episode is that it is fueled by people who are frustrated with the current system as they see it, and feel the only solution is to riot for revolution. While the solution already exists and has been hiding in plain sight.

Perhaps if their education had been a bit more complete and less radical, they would focus their efforts on occupying the voting booth instead of everything else.

For more about what made America great and how it can be again, check out The 5000 Year Leap (Original Authorized Edition)

For more of NPR’s Planet Money interview, listen to the NPR Planet Money podcast from October 7th:

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How to Get Your Tax Refund Now!

Joe — Tue, 01 Nov 2011 16:13:43 +0000

Everyone likes a big tax refund, right? Well, not me. It may seem counter-intuitive, but getting a big tax refund is not necessarily a good thing. A lot of the money that makes up most tax refunds is just money that people overpaid to the IRS through paycheck withholding throughout the year. You could be getting that money now in your paycheck instead of waiting until you get your tax refund next year.

How Do You Start Getting Your Tax Refund Money Now?

You can start getting your refund money now by using a form called a W-4. The W-4 is your way to insure that you are not paying too much income tax. This little form has the power to instruct your employer to withhold more or less tax from your pay. You do this by choosing a number of “allowances” to take.

What Is an Allowance?

An allowance is something that will reduce your tax burden. A dependent equals an allowance, but an allowance does not have to be a dependent. You can take allowances for lots of things. The truth is, you can take as many allowances as you want. You can take so many that you have no tax withheld, or you can choose to take no allowances and have the maximum withholding. But the sensible thing to do is to try to take enough allowances so that you have just enough tax withheld to cover your actual income tax debt.

Some things which you can take allowances for include:

Yourself
Your spouse
Each of your dependents
Some tax credits
Some itemized deductions
Additions to the standard deduction
IRA Contributions
Business expenses
Job-related moving expenses
Alimony payments

A tax calculator will help you estimate your tax debt or expected tax refund, and a withholding calculator is very handy in figuring out the right number of allowances to take.

When Should You Fill Out a New W-4?

When is the last time you adjusted your income tax withholding by giving your employer a new Form W-4? A lot of people only fill out a W-4 when they first get a job. The truth is that you should check your allowances and adjust your withholding every time something major happens in your life that might affect your tax situation.

Aside from when you begin a new job, you probably want to adjust your withholding if you:

Get a pay raise
Get married or divorced
Gain (or lose) a dependent
Buy a home
Win the lottery

Don’t Let Your Money Go to Waste!

Remember: any money withheld from your paycheck that you don’t owe in taxes is YOUR money. You can do with it as you please. If you wish to loan it to the government at 0% interest, then you can do that. In fact, some people prefer to have more than they owe withheld and use this option as a sort of forced savings account. But they would be better off opening an actual savings account, where their dollars could accrue at least a little interest. Furthermore, the future value of a dollar is less than the present value of a dollar. Due to an inconvenient fact of life called inflation, a dollar today is worth slightly more than the same dollar a year from now.

So if you want to save, but you don’t think you can stop yourself from spending the extra money you will be getting in your paychecks, at least put it somewhere (like a bank) where it will earn you some interest. Don’t just hand it over to the IRS for safekeeping. You might as well let your extra money earn you a little bit more!

When’s the last time you adjusted your tax withholding? What did you do with the extra money? Share your thoughts in the comments!

This has is a guest post from Paul Hack. Paul works for efile.com, a company that provides an online platform for tax return preparation and secure efiling. They aspire to be a less expensive and more user-friendly alternative to the big online tax companies, with all of the same capabilities and more benefits.

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What Is a Bad APR?

Joe — Tue, 25 Oct 2011 16:05:24 +0000

I received an email from a reader who wanted to know what is considered a bad APR, but this is really the wrong question. Instead of focusing on what is a bad or good APR, you should be looking at the APY. Here’s why.

Focus on APY instead of APR.

First, let’s define the Annual Percentage Rate, or APR. The APR of a loan is the annual interest rate that is charged for borrowing. This is often portrayed as the total cost of borrowing money per year (excluding 1 time fees or application costs), rolled into a single number. The idea is that it makes comparing loan offers much easier. The problem is that it is not always accurate.

The heart of the problem is Compounding Interest.

For example, let’s consider a simple credit card offer. The offer states that the interest rate (APR) of the credit card is 12%. But once you look at the details, you see that interest is compounded monthly.

This means that were you to carry a balance on the card for a year, the actually interest rate you would end up paying is 12.68%.

This is where APY comes into play.

APY is the Annual Percentage Yield and is the same concept as APR except that it takes into account the effect of compound interest throughout that year.

*** WARNING : MATH AHEAD ***

Here’s the formula for computing the APY of a loan:

APY = (1 + periodic rate)^(periods) -1

in the example above, the periodic rate is 1% and the number of periods is 12, since the interest is compounded monthly and there are 12 months in a year. This makes the rate charged per month 1% since the APR is 12% per year (12% / 12 months = 1% per month).

So let’s look at the two costs of borrowing – the APR vs. the APY…

To keep things simple, we’ll assume a balance of $10,000 on the card carried for the year…

APR.

Computing the cost using just the APR gives us: $10,000 * .12 = $1,200 per year (or $100 per month).

APY.

Now running the same $10k through the Annual Percentage Yield formula [APY = (1 + periodic rate)^(periods) -1] gives us:
(1 + 0.01)^12 -1 = 12.68% OR 12.68% * $10,000 = $1,268 per year (or $105.66 per month)

So, what does this mean?

If a person has a balance of $10,000 on this credit card for a year, it’s the difference between what the offer leads him to believe it will cost and the actual cost is $68 per year, or $5.66 per month.

Not a big deal, right?

Maybe not for a $10,000 loan. But when you’re considering the cost of a mortgage in the hundreds of thousands things add up pretty quickly.

Note: These are simple examples to illustrate the difference between APR and APY and the importance of knowing which to pay more attention to when applying for a loan.

The other important thing to consider is what is this loan for?

Interest rates differ by loan type.

It’s impossible to answer the question of “what’s a good (or bad) APR” because there’s no context given. Is this a loan for a new car, a credit card or a mortgage?

For credit cards, 16% may be average but if you have excellent credit you may get an offer for 8%. While the 30-year mortgage rate is currently at historic lows of 4%. New car loans may be as low a 0% for certain models, or as high as 10% for borrowers with a poor credit score.

If you take away only 2 things from this article, make it these:

APR is relative to your credit score and the type of loan
APY is really a better gauge of what you’ll pay than APR.

In the end, shop around and compare by APY whenever possible.

Further recommended reading: APR and APY: Why Your Bank Hopes You Can’t Tell The Difference

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New Debit Card Fees Got You Angry? Switch to a Local Bank.

Joe — Thu, 20 Oct 2011 16:35:36 +0000

Bank of America made news a few weeks back with its announcement to begin charging a $5 monthly fee for using its debit card. As you can imagine, this (along with other new credit card fees) generated the kind of publicity BofA would rather not have.

A consumer backlash and bad publicity from bloggers. Here are but a few examples:

NerdWallet shared 6 Ways to Fight Back Against New Debit and Checking Fees.
Free From Broke shared his information about the New Bank of America Debit Card Fee: Here’s What You Should Know.
The new fee prompted PTMoney to write What You Can Do About It
And Ron at The Wisdom Journal told us How You Can Avoid The New Debit Card Fees .

Perhaps the easiest way to fight back is to simply take your business elsewhere. There really is less and less reason to use a big bank. And besides, it was the multi-national banks at the heart of the financial crisis in 2008 not local banks. Local banks and credit unions have stuck with the core purpose of a bank – lending money to the community.

In fact, some local banks are using this decision by BofA (and big banks) to attract more customers. The latest such bank to enter the fray is Community Bank of Tampa Bay:

“Community Bank will pay $5 a month, for up to one year, to new customers who open a Value Checking account with direct deposit. Value Checking is the bank’s basic consumer checking product, with unlimited check writing, no minimum monthly balance and no monthly service charge. Depositors must keep the account open for six months.”

That’s right – Community Bank will pay YOU $5 a month for using your debit card!

Here’s a list of banks charging fees for debit cards so far:

SunTrust Banks Inc. : $5 monthly debit card fee .
Regions Financial Corp.: plans to start charging a $4 monthly fee.
Chase ( JPMorgan Chase & Co.): $3 monthly fee in select markets.
Wells Fargo & Co.: $3 monthly fee in select markets.

These new fees are coming about as a way for banks to make up for the “unintended” consequences of a provision of the Dodd-Frank bank regulation (as tacked on by Democrat Senator Dick Durban ). This Durban provision was meant to punish banks by cutting their profits from card transactions in half. so the banks are making up for that loss of income by imposing new fees, including fees on debit card use.

Community Bank is among a handful of local institutions bucking the new fee trend, but more will likely follow suit. The question is, how else will they make up for that lost transaction revenue?

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How to Find the Best Place To Put Your Savings.

Joe — Tue, 04 Oct 2011 16:31:26 +0000

The Federal Reserve has recently announced that it will be keeping interest rates that banks pay to borrow money at 0 – 0.25% for the foreseeable future. This is done in the hopes of encouraging borrowers and spenders, but punishes savers. This makes it harder than ever to find the best place to let your emergency fund grow. But just because it’s difficult to find a place to make your money work harder for you doesn’t mean you should let it sit idle in a low yield bank account!

While it’s easy to find places to stash your cash that pay more than the average bank savings account (currently 0.08%!), high yield isn’t the most important thing when looking for a home for your emergency fund.

The two most important factors to determining where to keep your emergency cash are:

Safety
Liquidity

“Safety” is a measure of short term risk. Putting your emergency fund in the stock market is foolish because stocks can lose money on any given day, and you need to be able to count on your money being there when you need it.

Certificates of deposit are safe. They are FDIC insured, so you cannot lose principal. But this is where liquidity comes into play. CD’s are safe, but you don’t want your emergency fund tied up in a 5-year CD when you need that money now.

Because of these two factors, the most common places to store your emergency fund money is in a high yield savings account and sometimes a short term certificate of deposit (CD). You could put some of your savings in a savings account, and the bulk of it in a CD. This way you have immediate access to what’s in the savings account, but the bulk of your fund would be in a CD earning higher interest.

Ideally, you’d put the money you would need for repair bills on the house or car in the savings account, and you’d use the CD for that part of your savings you would tap only in the event of a loss of income or some larger emergency.

In the current economic environment however, it makes sense to use only the high yield savings account and skip CDs. Here’s why…

High yield savings account vs. a 1 year CD.

A quick look at yields on 1 year CDs shows that the highest yielding CD (currently offered by Sallie Mae) only offers a tenth of a percent more that the highest yielding savings account, but you wouldn’t have access to your money for an entire year (without penalties). That’s simply not worth tying up your money like that.

So, on to high yield savings accounts…

How to Find The Best High Yield Savings Accounts.

First, head over to BankRate.com and check out their list of high yield savings accounts. Sort by APY (the yield you can expect if you leave your money in the account for a full 365 days), and work down the list. Be sure to read the details of the terms and look for a star rating of 4 or 5.

That star rating is Bankrate’s rating system which rates a financial institutions solvency and safety, not customer service or satisfaction. It’s meant to give an indication of the likelihood of the bank being closed by the FDIC.

For the record, neither of my banks is on the list (ING direct or HSBC)*, so it’s not the only resource you can use but it is a good place to start. If there’s a bank or credit union you’re interested in, you can search Bankrate’s safety ratings.

They also offer a checking account search.

* I’ve been a happy customer of both HSBC and ING Direct for over five years now. I’ve kept the bulk of my savings at HSBC direct , but they have recently decreased their rate . It’s still much higher than the average though. ING direct has been very good to me, and they still sport one of the highest rates and easiest to use website in online banking. They’ve recently been acquired by Capital One though, and a lot of people are not happy about that. I haven’t seen any changes yet though, so I’m taking a wait-and-see approach. Plus there’s the ever popular $25 ING Referral codes that give you an extra $25 free when you open an account with $250 . (that’s an immediate 10% return on your money, for those of you playing along at home)

Look for special deals.

It’s also a good idea to check out online forums, like the FatWallet finance forum and see what people are saying about various banks and account offerings. You can also search for discussions on high yield savings accounts and learn about the most recent perks for signing up with various banks. Sometimes they offer introductory rates that are higher than normal, or cash back when you open an account. Public forums like FatWallet’s are a great source for getting the experience of real customers, instead of marketing execs.

Please share any tips, tricks or experience you may have in the comment section below.

Happy Saving!

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How To Reduce Car Insurance Costs In 5 Easy Steps.

Joe — Thu, 22 Sep 2011 15:13:02 +0000

Car insurance is one of those things people love to hate. It’s mandatory in many states, and most people think there isn’t much they can do about the cost other than shop around every few years. But there are some things that can cut costs even further, and a few that will help avoid unnecessary costs in some situations.

1. Can you drop collision insurance?

As your car gets older and depreciates (loses resale value) there comes a point in time where it’s worth less to replace than you would pay in collision coverage. Collision insurance exists to cover repair expenses due to a collision, but the insurance company will not pay more than the car is worth regardless of the repair costs. Once the resale value of the car drops below the amount you pay in your premium for collision, you’re better off dropping the collision coverage and putting that money into a high yield savings account for your next car (or repairs if you can’t afford a newer car).

To find your car’s current resale value, use the Get Your Car Value tool at Kelly Blue Book (kbb.com).

2. Buy used, or buy GAP.

As discussed in the point above, a new car depreciates the minute you drive it off the lot. Now consider what happens if you buy a brand new car for $25,000 and get into an accident a few weeks later. Say this particular car is now only worth $20,000 but you’ve got a loan for $25,000. The insurance company will only cover up to the current value of the auto, which is $5,000 less than you owe. This is where GAP insurance is a good idea because it covers the gap made by the difference in what you owe vs. what the car is worth.

GAP insurance is a good idea IF you buy new. A better idea is to buy slightly used.If you buy a car that’s 2-3 years old, you end up with a car that’s already experienced the bulk of its depreciation, but is still in very good shape. If you’re disciplined and plan ahead you can buy this new-to-you car with little if no financing. Either way, the chances are that whatever amount you end up taking out a loan for will be below the value of the car and so you can skip the GAP insurance and save even more money.

3. Keep your credit score in good order.

Head over to AnnualCreditReport.com and check your credit history. The report is truly free (not free with purchase of some other service, like the credit report site with the catchy commercials..) and you don’t need to buy your credit score, though you can. You basically just want to make sure all the items in your history are up to date and correct. Each agency has its own proprietary score that should give you a general idea of where you fall on the poor to excellent scale.

The idea here is to get to and stay in the excellent range because more and more insurance agencies are checking credit scores of prospective clients, and basing premiums on that score.

Don’t have an excellent credit score? No problem, just follow these tips to improve your credit score and over time you’ll be in excellent shape. After that, you can shop around for a lower rate.

4. Know your worth.

Well, know your car’s worth anyway. It’s a dirty little secret that many insurance companies offer incentives to claims adjusters to minimize the payout to customers when a claim is filed.

It is to your benefit that you be aware of this and don’t accept the first decision if you feel the agency is not meeting their obligation to pay the full amount of your claim.

Know how much your car is worth both as a trade-in and on the open market (again, use Kelly Blue Book’s Get Your Car Value tool) before entering into negotiations with the claims adjuster. If there is an injury involved, have a full understanding of the extent of the injury and speak to an attorney if necessary.

5. “I have this friend who…”

Some insurance companies may view a call as a claim and adjust rates accordingly, even if you’re only asking whether a specific incident is covered. Even worse, the claim may go in a comprehensive report that other insurers use when determining what rate to charge customers for premiums!

In other words, don’t call your insurance agent to ask if the mirror your son broke with his cave-man style baseball swing is enough to meet your deductible. This could be considered a claim by some agencies, as it pertains to an actual event. The better course of action is to be vague in your question. Only ask what your deductible is, or use the old “my friend” ploy. For example:

“I have a friend and his son broke the mirror on his car but his insurance company told him that it didn’t meet his deductible and he’d have to pay out of pocket. This got me wondering about my policy and what might happen to me if I were in his place..”

Keep any discussion as general as possible until you know what’s covered and what’s not and where you stand in the matter. Otherwise, you could end up paying more in the end.

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Can a Website Teach Kids About Money (VIDEO).

Joe — Tue, 20 Sep 2011 14:04:07 +0000

One thing that seems to be universally agreed upon is that if more people learned how to manage their money at a younger age, the country would be in a far better place as a whole, financially speaking.

How young is “young”, and is there such a thing as “too young” to learn about money?

I personally believe that there is no such thing as “too young”, which is why I wrote about games to teach children about money a while back. That post focuses on the toddler and elementary school age kids, but I don’t think you’re ever too old to learn about money either.

So that post was about role-playing style games to play with your children, but here’s a video about websites that can help your older children to learn money basics like budgeting and delayed gratification.

The video (above) profiles 10-year old Evan Lipset who’s used a site called ThreeJars (Allowance Made Easy) for 10 months. He claims to have saved $500 in allowance over that time. Not bad for a kid who only wanted enough for an iPad.

ThreeJars creates the incentive for the child to prioritize and set financial goals, and allows the parent to approve or deny various goals or money moves. It makes tracking easy, and visually appealing. The downside is that it cost $30 a year.

Two other, similar sites offer free levels of membership. They are FamilyMint (Helping kids appreciate money) and Zefty (Online Allowance and Money Management for Kids & Parents.

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How Warren Buffett’s Tax Rate is Lower Than His Secretary’s.

Joe — Mon, 12 Sep 2011 15:57:34 +0000

America’s favorite billionaire has been getting a lot of press of late with his calls on congress to raise taxes on the rich. Of course, that’s the point of his PR stunt – generate positive press about himself. He likes to be characterized as “brave” and “caring”, rather than greedy. Who wouldn’t really, but where that car falls off the tracks however is that anyone can make a donation to the U.S. Treasury any time they want – and for any amount. So Mr. Buffett and his pals who would love to “share the sacrifice” if only those Republican lovers of the rich would hike the tax rate already can write a big, fat check to the government anytime they want, and stop hiding behind congress for not doing so. In fact, some suckers out there have already donated $3 million to the treasury! I doubt Buffett was one of them.

Here’s an interview with Buffett in which he compares his income tax rate to the average employee in his office. In this interview he states that

He is taxed at about 17% on his $46 million in income “without trying to avoid paying higher taxes” while his secretary was taxed at 32%.

The devil is in the details.

While Buffett states he has “no tax shelters” and just follows “what congress tells (him) to do.”

The details here are that While Buffett may not have “tax shelter” he certainly makes full use of the deductions available to him. One such deduction is the charitable donation deduction. This one alone is enough to offset his entire ordinary income!

After that, he is taxed at the long term capital gains rate (currently 15%).

Some say that’s unfair to the office worker making $60,000 who is paying taxes at a rate of 30%, but I have a feeling that those workers are more or less clueless about the tax code and are not taking advantage of the deductions available to them.

For evidence of this, watch the interview with Buffett again. At about 3 minutes in, Brokaw interviews his secretary who has “no idea what kind of rate they pay in taxes, until Buffett told them.”

This is insane!

Oh course they’re going to pay more if they have no idea how much they’re paying! They obviously haven’t looked into it and don’t know the rules of the game, so to speak. It’s like comparing 2 shoppers, 1 who’s an avid coupon user and sales junkie to someone who just meanders through the store with no regard to sales and no shopping list. Which do you think is going to spend more money?

Warren Buffett pays a lower tax rate because he knows the system. He knows the rules and how the game is played. He’s right about one thing though – you don’t need to cheat the system to lower your tax bill. You can do it legally, you just need to know how and plan for it.

For example:

Learn the difference between tax deductions and tax credits
Pay yourself first and contribute to an IRA or 401K. This reduces your taxable income (which is what Buffett does) and saves for retirement!
Claim the Mortgage interest deduction
Be aware of changes to the tax code
Avoid common tax mistakes
Make smart use of your withholding

The bottom line: Educate yourself on the basics of the tax code. Or hire an accountant if you can’t be bothered, but realize that no one – not even uncle Warren – is really watching out for you and your money. That is up to the individual.

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Unemployment Rate, Cities With Highest and Lowest Growth (Infographic).

Joe — Fri, 09 Sep 2011 14:15:31 +0000

We all know the economic state of the country in pretty bad, and here’s a visual representation of one factor of the economy – unemployment.

You can see that despite the rhetoric (and trillions of dollars in spending), the unemployment rate hasn’t moved much. This first graph covers the unemployment rate from the start of the recession to August, 2011. The August figure is important because it’s the first time in over 40 years that the U.S. economy produced a net 0 new jobs.

The second graphic shows major U.S. cities that are losing or gaining the most jobs. It’s important to note that this data is NOT seasonally adjusted.

All the data is from the U.S. Bureau of Labor Statistics and presented as an infographic courtesy of the folks at Visual.ly

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Stop Acting Rich! Introducing The Frugal Rich.

Joe — Wed, 07 Sep 2011 17:51:39 +0000

Who are The Rich in America today?

Most of the wealthy in America are 1st generation wealthy, meaning they earned their wealth and didn’t inherit it. They are mostly entrepreneurs and small business owners.

According to Thomas Stanley and William Danko, “Wealth is what you accumulate, not what you spend.”

Stanley and Danko are the authors of the fascinating book, The Millionaire Next Door (Surprising Secrets of America’s Wealthy), and they’ve made a study over the years of the habits of the wealthy in America.

What they learned about America’s wealthy is summed up in this quote from the book:

“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes, wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”

There are many lessons in this book, and that quote touches on a few of them. The most important lesson is that you don’t need to be born into the right circumstances to become wealthy. It sometimes takes luck, but mostly takes self discipline and perseverance. In short, stop finding excuses – you too can become rich!

I know, that probably sounds a bit like an infomercial for some get rich quick scheme, but it’s not. They never say you can do it over night or that its something you can do on the weekends in your spare time. Quite the contrary. It takes years of planning and discipline, but that’s not to say it takes as much as a career or full time job. You just need to have a plan and keep at it.

OK, enough cheerleading about how you can do it… let’s answer a basic question: What is wealth?

The definition of wealth.

Wealth can be defined in many different ways, but in its most common use it equates to a person’s net worth. That is, the value of everything a person owns, minus what a person owes.

That’s overly simplistic, but you get the idea. Having a fancy Mercedes Benz in the driveway doesn’t make you any more wealthy if you owe more on the loan than the car is worth… or if you’re leasing it and don’t actually own it at all. That’s because the car is a liability, not an asset. An asset is something that either puts money in your pocket, or can be sold to generate cash. A liability is something that costs you money.

But there’s a difference in assets too. Some are liquid, and some are not. Stocks for instance are generally more liquid than real estate, since you can sell a shares of a stock much easier than you can a house.

How the wealthy view (and use) money.

The wealthy get rich by maximizing their return on investment. They may still spend big bucks on discretionary items, but they view those purchases as investments, not mere expenses. They are more apt to maximize quality and value, regardless of price. But that’s not the same as buying expensive name-brand merchandise for the sake of owning expensive name-brand merchandise. This has especially been true of the rich during the recession.

There are definitely plenty of people with money who act rich, but when their finances are viewed more closely it’s clear that they are only suffering from Affluenza (The All-Consuming Epidemic).

Don’t be one of them.

The rich and debt.

You may think that the wealthy eschew debt and pay only in cash, but that turns out not to be the case entirely. Stanley and Danko found that most American millionaires tend to pay for large ticket items like cars, homes and boats with cash and to the extent that they use debt it is for investment purposes. This is likely a big difference between the middle class wage earner and the millionaire, but if the wage earner can get to a point where he can buy those big ticket items without debt, then he’s well on the road to a more financially free lifestyle if not the road to riches.

Tips for increasing your wealth.

OK, enough about how we’re different from the rich. Here’s how to become more like them financially:

Don’t look to debt to fund your lifestyle – this includes getting a college degree. Going $30,000 into debt for a degree and getting a job with an income ceiling of $30,000 probably isn’t worth it in the long run.
Have cash on hand to cover your unexpected expenses (emergency fund).
Live below your means – spend less than you earn and avoid Lifestyle Creep !
Plan – plan for today, tomorrow and 30 years after retirement.
Diversify – invest in mutual funds and bonds, not just cash. Add exposure to commodities and real estate.
Don’t use credit for purchasing – unless you can (and do!) pay off the balance each month!

If I had to distill the lessons learned in The Millionaire Next Door into one simple concept it would be this:

Break out of the debt cycle; plan, save and work to avoid going into debt for any reason.

If you master that, you’ll have the tools and resources on hand to accumulate wealth instead of payments.

Source

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7 Things People Spend More Money on Than They Should (and Tips to Stop Doing it).

Joe — Fri, 02 Sep 2011 14:07:27 +0000

Saving money is always a good thing and with the recent recession, more people are casting an eye on their expenses in the hopes of cutting back. It’s not just a good idea during recession. If more people became more watchful of their spending, then the country as a whole would be in a much better place financially.

Here are 7 things that many people spend too much on, as well as some tips for cutting back on that spending.

1. Bargain traps.
Buying cheaper isn’t always better. For expensive and inexpensive items alike, there are often a multitude of options to choose from. The cheapest is not always going to save you the most, but the most expensive is usually not the best either. Be sure to weigh all the aspects of the item and choose the trade off in quality vs. price you can live with.

Also, beware of “spend x and save y” type bargains. Spending $50 more than you planned, just to “save” $10, still leaves you with $40 less.

2. Going warehouse when you have a small house.
My wife and I love the local warehouse store. We buy many things in bulk: diapers, paper towels, dish detergent, laundry detergent, etc.. with a 5 person household and 3 growing kids, we go through that stuff pretty quickly. But buying in bulk rarely makes sense for a single person or even just a couple living in an apartment. Saving on large quantities doesn’t help much when you have no place to store them and can’t use them before they spoil.

3. Buying what you can borrow.
Why buy a single-use new tool from Home Depot when your neighbor already has one? Use social networking, or just ask a neighbor if you need a tool for a job that you know you’re unlikely to ever use again. Just remember to return it when you’re done.

4. Suffering from sticker-price tunnel vision.
Don’t focus solely on the sticker price of a car (or other big-ticket item). Look at depreciation, cost of ownership, repair, upkeep, etc..

For example, the base model Chevrolet Malibu costs about the same as the Honda Accord but their service and maintenance costs, average fuel cost and depreciation are quite different.

5. Jumping on the “new” used car.
Buying a used car is a great way to save money on an auto, and most used cars that have been on the lot for more than 30 days receive at least 1 price drop. Buying too soon can leave that extra savings behind on the lot. When looking at a used car, find out how long the car has been on the lot and don’t make an offer until it’s past the 30 day mark. One caveat to this is if the you’re having a hard time finding a used car that suits your needs. One of the results of the misguided Cash for Clunkers program was that the clunkers (i.e. used cars) had to be destroyed. This has created a scarcity of used cars, and driven prices and demand up. Also, certain vehicles, like minivans, hold their value well and always seem to be in demand so you may not be able to play the waiting game on these models.

6. Control your urge to splurge.
Impulse buying is costly. Stores know they can charge a little more for that merchandise in the display rack near the register and the entrance. They’re counting on your impulse. Use a list and stick to it. That list is your mission, do not deviate from your course!

7. Skip the travel sites.
Booking a hotel room through a travel site like Expedia.com or Hotels.com requires you to pay in advance. Cut out the middle man instead and use these sites for comparisons, but call the hotel directly yourself. You will likely get the same rate if not a better one and not have to prepay. I’ve also heard that calling a local number (i.e. not the 1-800 number) can get you in town prices that are lower than what they charge out-of-towners. That ay not be standard practice, but it’s worth a try.

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