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A Matter of Interest

Posted by on December 7, 2007 No comments

A commonly given bit of financial advice is to call up your credit card company and pressure them into lowering your interest rate. This, the advice goes, will save you a pile of money.

The advice is good, as far as it goes. Unfortunately, it doesn’t go far enough. Yes, if you are carrying a balance on your credit cards it is to your benefit to lower the interest charges. The thing is, though, you are better off not carrying a balance in the first place. THAT is the advice you want. If you cut your interest rate from 20% to 10%, you haven’t saved anything. You’re still paying, just not as much.

I could get lower interest rates on my credit cards if I wanted to. I don’t care. I don’t even know what the interest rates are on any of them. I don’t want to lower the rates. Doing that plants the seed in your mind that it’s OK to carry a balance. You think you’ve done your part and saved yourself some money. Depending on whether or not you currently have a balance on your card it’s either a half measure that delays or prevents you doing what you really have to do, or a first step out onto the slippery slope. You start to think, “Ten percent is much better than twenty. If I were to let the balance slide for a month that wouldn’t be so bad….” That’s why the credit card companies are willing to do it; they know they’re going to keep getting your money. You keep bleeding, just more slowly.

If the balances on your credit cards are so high that you can’t pay them off in the immediate future, by all means get the rates lowered if you can. That’ll make it easier to pay them off. But don’t think that the job is done there. If your car gets a flat tire and you stop by the side of the road to put on that dinky little temporary spare, that’s not the end of the job. You still have to fix or replace the regular tire and re-mount it. The same with your credit cards. Lowering the interest rate is a stop-gap measure to help get the cards paid off, but never loose sight of the real goal: A zero balance.

Once you’ve gotten the cards paid off, keep paying off the full balance each month and never worry about credit card interest rates again.

Diversify Your Paycheck

Posted by on January 14, 2008 No comments

I haven’t had a job since the end of 2000, when the Dot-Com I was working for dropped dead by the side of the road.

That sounds a lot worse than it really is. I have a long history of making money that doesn’t come from an employer and after a few months of trying to find a new job I gave up and haven’t tried since. Instead, I went back to being a tech-for-hire, a computer consultant, a techno-mercenary. The upside of that was that it was work I could do, and I had just enough contacts to get a marginal start. The downside was that I had to work with computers (and users) all day long, and I had just enough contacts to get a marginal start. The most technically adept consultant in the world will starve if he can’t find clients willing to pay for his expertise.

Fortunately, I had time to build up a client base because my wife was working full time. I had a pretty good base built up when, two years ago, my son was born and that all changed. All of a sudden, my dubious and variable consulting income was the sole support of my entire family. It was unsettling.

Two years later, though, there’s still food in the pantry and money in the bank.

Some people would consider it very risky to have a family depending on the uncertain income of the self-employed. You’re too vulnerable to loss of clients, or simple slow-downs in business, where there may not be much work for weeks at a time. The stability of a ‘real’ job is much more desirable.

Perhaps at one time that was true, but I don’t think it is anymore. The so-called ‘real’ job is no more stable than being self-employed. Sure, you have a steady, unvarying, paycheck coming in twice a month…for as long as it lasts. If your employer goes bust, or simply decides that for whatever reason they no longer need your services, you suddenly no longer have an income. (This has happened to me numerous times.)

Financial advisors are always talking about diversifying your investment portfolio, but you never hear them talking about your income portfolio.

As a consultant, if one of my clients goes bust, or decides for whatever reason that they no longer need my services, or re-locates out of the area (and this has also happened to me numerous times), I still have the income from all my other clients. The money I make being self-employed may not be as steady as a regular job, but it is much more fault-tolerant. If one client goes offline, I can keep running on the others; my money comes from dozens of businesses and individuals and it would take a lot for me to lose all of them.

The feast-or-famine cash flow does take some financial discipline to manage, but now that I’ve gotten used to it I like it better than a single paycheck. Perhaps I just have little faith left in the stability of employers, but the diffuse nature of my income is comforting, not worrisome.

It may be useful to you to think, not in terms of earning a paycheck, or an income, but rather of multiple sources of income. That might mean adding investment income to your salary (which could be as simple as interest on your bank accounts), taking up selling things on Ebay, or even a second job. Besides the financial benefits, adding sidelines exposes you to people and experiences that you might not otherwise have encountered. If you are currently between positions (don’t feel bad; that’s going to be more common in the near future, as the economy sags) consider becoming your own employer rather than selling yourself to the highest bidder. Maybe it isn’t right for you, but you might be surprised. Keep an open mind, at least; if you’ve been laid-off then you certainly know how fragile the so-called steady job can be.

In this modern, globalized economy, we’re all freelancers. Think about what you can do to protect yourself from the whims of the market. Your boss might be adding your name to a list right now.

To Rebate and Stimulate

Posted by on January 20, 2008 No comments

As the US economy worsens, and economists start talking not just about Recession, but Depression, there is some panic in the air. Not from consumers or retailers or bankers, but politicians. The economy heading into the dumpster in an election year is a nightmare for incumbent politicians of any party. Americans may protest long-running wars, but they vote their wallets.

It is certain that the government is going to do something to ‘stimulate’ the economy. A tax rebate is the method that both parties seem to have united behind, differing only on the details. The current proposal, which I will use for discussion here, will see up to $800 returned to each taxpayer ($1600 for couples filing jointly) some time this summer. In theory, the recipients will take that money and run out to the mall and buy a bunch of stuff, stimulating the economy and saving the economy (and numerous Congressional seats).

The problem is, tax rebates as a means of stimulating the economy don’t work. It was tried in 1975 and it didn’t work, and it was tried in 2001 and it didn’t work then either. The problem is that it’s too little money, too thinly spread. It simply doesn’t generate the sort of spending that tax rebate advocates claim it will. People spend based on their predicted permanent income, not temporary windfalls. One-time payments like this tend to either be put into savings, or used to pay some bills.

This time the politicians are talking about up to $800 per taxpayer, rather than the $300 they returned back in 2001. It’s still too little, too late.

A few numbers may illustrate the scope of the problem.

Through this discussion I am going to assume, just for the sake of argument, that the average refund would be $1000 (remember, the rebate is up to $800 per taxpayer). I think the real average check (to single and joint filers combined) would be closer to $750, but to keep the numbers simple I’m going to be generous in my assumptions.

So the hypothetical average household gets a $1000 check this summer to pump some money back into the economy. That household has an income of about $48,000 a year. It spends over $58,000 each year. The $10,000 difference is either drawn from their savings or added to their debt. Their total household debt already tops $115,000, of which about $8000 is credit card debt and $10,000 is other short term debt (mostly student loans or car loans).

The interest on their credit card debt alone amounts to about $1300 a year.

The proposed tax rebate would hardly touch the household’s income shortfall, slightly reducing the rate at which they are sinking into debt. It won’t cover one year’s interest on their credit cards. It probably won’t even cover a single mortgage payment.

It’s pissing in the wind and claiming to be a rainstorm.

The miniscule size of the rebate, compared to the scale of the problem, is only part of the reason why the rebate stimulus won’t work.

To see the other reason, let’s assume that a significant number of people do go out and spend their rebate. Think about where most of the goods at your local mall are actually made. Manufacturers in China, Thailand, and Japan would probably get more of a boost than any in the US. The retail sector would get a short-term jolt, but we simply don’t make much for people to buy anymore.

In my opinion, the purpose of stimulating the economy would be better served by spending that money on some sort of public works project. At $1000 each for, let’s say, 100 million tax returns, that’s we’re talking about $100 billion. (This is just illustrative; the actual rebate total will probably be quite different. I’m just cobbling together some figures to show the scale.)

Now, $100 billion isn’t a great deal of money by government standards, but there is quite a bit that could be done with it. It would pay room, board, tuition, and books for every college student in the country. It would buy health insurance for every uninsured family in the country. That’s not the sort of thing I would suggest, though. Not that those aren’t necessarily worthwhile goals, but they don’t directly stimulate the economy. (Tuition relief to college students would help a great deal three or four years from now. The current system of university education is on its way to destroying the middle class, but that’s the subject for another day.)

I’d rather spend that $100 billion on building things. That money would build a hydrogen fuel network that would include about 75% of all the filling stations in the country. It wouldn’t supply the terawatts of power required to make the hydrogen, but it could be done.

We could convert every car in the country to run on ethanol. (It wouldn’t be a good idea–burning food like that is idiotic and you can see the result in the higher prices you pay at the grocery store–but you could do it.)

We could buy up the tens of thousands of abandoned houses being created by the mortgage crisis, renovate them, and use them for low income housing. (Using apartment properties just creates min-ghettoes in otherwise decent neighborhoods. Scatter poor families one at a time in middle or working class neighborhoods and the transplants are much more likely to adopt the values of their new neighborhood, as opposed to taking the old neighborhood with them.)

We could repair the thousands of decaying bridges that otherwise aren’t going to get fixed until they fall down.

We could build power plants. Improve roads. Build schools. Build something.

Spending the money on this sort of infrastructure improvement is superior to a tax rebate in every way but one. Rather than just handing people a check and telling them to go have a night out on the town it puts people to work, gives them a paycheck and something to do. It builds things that benefit society as a whole.

The only thing it doesn’t do is get votes.

The tax rebate isn’t intended to stimulate the economy. It is intended to stimulate the voters. The politicians will hand you a check and say, “See? I care. Go have yourself a good time and remember me come November.”

Public policy decisions are typically not made with the intent of actually solving a problem, but rather with the intent of appearing to be solving a problem. It is the appearance that counts, not the result.

I’ll take their idiotic check, though. Like everyone else, I have bills to pay.

There’s a Bad Moon Rising

Posted by on January 28, 2008 No comments

As I mentioned last week, the US economy seems to be headed for the crapper, and it is very possible that much of the developed world will be dragged down with it. Many of you may be too young to have seen it before, but this sort of thing happens every now and then.

You may not be affected much; there are some people who do well even in very bad times. (The people who had jobs during the Great Depression were quite comfortable. There were very, very many people, though, who did not have jobs, and it was brutally hard for them, for many years. And when I say brutally hard, I mean like dumpster-diving behind department stores to scrounge discarded wrapping paper to use as toilet paper. Think of that when your life seems tough.) If your job is secure and your company is solid, or you are already wealthy, maybe you have nothing to worry about.

If the economy does get as bad as nearly every economist thinks it may, though, you could be in for some hard times. Probably not Great Depression bad, but bad enough. If you are already established in your career (and spending habits), you may suddenly find yourself struggling to maintain your lifestyle. If you are a college student about to graduate, you may find yourself stumbling right out of the gate, unable to find the sort of job you would like. As a student, you have an advantage over the thirty-something who was just laid off in that you’re used to not having any money. On the other hand, you’ve got all those student loans to pay back, and you were probably unwise enough to accumulate some credit card debt too. Good luck.

It has been a while for me, but all of my childhood and much of my adult life were spent in…financially adverse conditions. I don’t like it, but I’ve done it before and I can survive it again. Even better (for you, you lucky devil you), I can pass along some advice that may be helpful to you after your boss stops by your cube to drop an ominous, “Could you come into my office for a minute?” There’s nothing earth-shaking here, and any truly poor people reading this are probably going to be thinking, “Damn, these well-off people sure do whine a lot,” but I’ve seen first-hand how poorly many people respond when faced with a downturn in their financial status. Maybe this will help.

The important thing is to adjust your expenses to fit your new income. That may seem like common sense, but it is exactly what most people don’t do. If you take nothing else away, remember that. Everything else is details.

(You may not have much choice anyway; banks are tightening up and credit isn’t going to be as easy to come by as it used to be. Even if you (foolishly) want to keep spending and racking up debt, you may not be able to.)

If you were foresighted enough to have saved up an emergency fund, this is where it pays off. You’ll still want to manage your expenses carefully, to get the most out of it, but you don’t have to worry as much about losing your house or car, or putting food on the table, as someone who doesn’t have one. Congratulations. Just remember that you should only dip into the emergency fund to pay for essential expenses. If you use it to pay the cable bill or buy a new TV, you may find yourself unable to pay your mortgage down the road.

Preventative Maintenance

It wouldn’t hurt to periodically evaluate your finances even if you’re not having any financial difficulties. Do it the next time you have an hour or so free. You may be surprised at how much you’re paying for some things, possibly things you aren’t even using anymore. Sometimes just making a few changes can save you some money without cutting back at all on what you’re getting in return. For example, I recently made some changes to my phone, TV, and Internet services which are going to save me about $110 a month, but get me overall better service. That’s $1300 a year, just for spending about half-an-hour on the phone. A couple years ago I shopped around my home and auto insurance and ended up getting better coverage while cutting my bill by several hundred dollars. Don’t assume that the great deal you got years ago is still a great deal today. Shop around.

If you can do it painlessly, why not save the money now? Someday, in the not very distant future, you just might be glad you did.

Triage

The first thing you want to do when you find yourself with a sharply reduced (or non-existant) income is to take a hard look at all your expenses. The essentials are food, utilities, housing, transportation, and possibly certain debt payments. I include phone and Internet service (both very important these days if you want to get another job) in with utilities. Everything else is secondary. Make a list if you have to. Write down everything you spend money on in a given month and organize it into two columns: Essential and Not Essential.

Now, look at the non-essential stuff and see where you can cut back. Do you have to eat out five times a week? Do you really need the top-of-the-line cable package, with all the hi-def movie channels? Try eating out just once a week, and basic cable. Hit the liquor store instead of the bar and buy your booze by the bottle instead of by the drink. Maybe you can live on one new pair of shoes a month instead of five. You get the idea; cut out or cut back on the things you can do without. Don’t cry too much if you have to say goodbye to HBO; with any luck you’ll be able to get it back again in a few months or a year and if you missed anything good you can catch it in repeats or on DVD.

Every dollar you save by cutting back in the non-essential expenses is another dollar that you can spend on the stuff you have to spend money on. HBO you can live without. (Yes you can. Really. Be strong.) Groceries, not so much.

If money is so tight that you’re not sure you can even pay all of your essential bills every month, buy food first. Your money will go farther if you can cook — frozen dinners are handy, but a lot more expensive than making your own meals — but whatever; buy the food first. Screw the mortgage company and the phone company; you have to eat. If you don’t even have enough money for that, give serious thought to calling your parents and seeing if your old room is still available….

After you’ve stocked the ‘fridge and pantry, pay your utility bills. You have to have electricity to live (quite literally in some cases; here in north Texas a number of people die every summer because they don’t have air-conditioning) and you’re going to have a hell of a time finding a new job without a phone. The water bill, if you have one, is no place to cut corners. You may be able to save a little here, by downgrading your phone and Internet service, for example, or being more careful about wasting electricity, but in general don’t mess with the utilities. Pay them if you have any money at all left after groceries.

Only after you’ve put food on the table and kept the lights and water on should you worry about paying the mortgage (or rent). Yes, you have to have a place to live, but the thing is, it takes a long time for the bank or landlord to throw you out of your home. It won’t make anyone happy, but you can run a month or two behind and still survive. Lack of food and water is much less tolerable.

If you have a car payment, you’ll have to use your judgement as to whether it should be prioritized above or below your housing. That will depend on how essential a vehicle is in your area and how quick you think the bank will be to repo it if you fall behind. I usually ranked the car payment as more important than the rent. Putting gas in the car and fixing it if it breaks is more important than making a payment. If you need a car it’s not going to do you any good just sitting in the driveway looking pretty.

Credit card and other debt payments are last of all the essential expenses. Bad things may happen if you don’t pay them, but you probably won’t be deprived of a place to live. (If you owe money to the certain people, of course, you may lose more than your home. Or certain other people may provide you with a place to live, but one you probably won’t like.) Try to make at least the minimum payment on your credit cards, and as you watch the balance pile up resolve to get rid of those credit card balances forever once the money starts flowing again.

There is some slight of hand you can do with credit card debt, like opening a new card and taking advantage of their low-interest balance transfer option, and I’ve had to resort to that in the past, but you can only do so much of that. That is another reason to carry as little debt as possible.

Ramen Again?

I could go into a lot of detail on specifics of where to save money on this or that, and maybe I will sometime, but the important thing is to think in terms of trying to save money. The wrong mindset is what will do you long-term harm. Studies have shown that most people, faced with a financial setback like losing their job, don’t change their spending habits. They keep right on as before, but either draw from savings or go (deeper) into debt to make up the shortfall. (Same thing, really; drawing money out of savings is just another kind of debt; you’re borrowing from yourself.) Maybe you’ll have to do that even if you do cut back on your expenses, but wouldn’t you like to minimize that debt?

You could think, “This isn’t going to last forever; I can afford to run up the credit cards and pay them off after I get a new job.” Or you could think, “This isn’t going to last forever; I can live without the HD cable sports package for a while.” Guess which one is going to leave you with an empty bank account, and maybe a foreclosure notice from your bank?

Who knows; maybe you’ll find you enjoy cooking your own meals, and you might find some good books to read. The best things in life may not be free, but they can be cheap.

Investing Starts At Home

Posted by on February 3, 2008 No comments

If you have read many of my past entries, you may have gotten the impression that I am in favor of living in a hovel, huddling in the dark around a bare lightbulb for light and warmth, and eating only room-temperature ramen noodles, while saving every penny for a possible future emergency.

Even my wife would admit — reluctantly — that that’s an exaggeration. The fact is, that just wouldn’t be any fun. I am a strong believer in saving money now so you’ll have it later, and I have been since I was very small. (I remember loaning my mother money when I was nine years old, and insisting on getting interest on it. Not enough — my mother was a very poor risk — but I was young.) I also believe, however, that there is enough misery in this life without inflicting more of it on ourselves than we have to.

As it happens, we live in a nice house in a quiet suburb, have numerous computers, TVs, and other personal electronics, drive good cars, and dine out as often as is practical with a two-year old in the house. It’s not a fancy life, but it’s a comfortable one.

There are, of course, qualifiers to the above. The nice house is in a good neighborhood, but not one of the local ‘prestige’ suburbs. A similar house a few miles to the east would have cost us another $30,000. It wouldn’t have been a better house, just one with a more prestigious address.

I bought a good home theater system ten years ago and it still works great. Someday we’ll upgrade to a big flat-panel TV, but there’s no hurry.

We tend to buy new cars and keep them for a long time. Mine is ten years old now and due for replacement (As I’ve talked about before.) but my wife’s is only a few years old and good for many more. She wanted an SUV, but instead of looking at one of the big, fancy gas-guzzling ones that would have been too big for her to be comfortable driving anyway, we got a modest little Honda CR-V. It runs great, does everything we need it to, and she likes it. All for half the cost of a fancier truck.

Our biggest luxury is probably that we have someone come in every couple weeks to clean, and a crew of guys who come every couple weeks to mow the lawn. No excuses there; that’s pure laziness, paying other people to do things we don’t have time, or don’t want, to do ourselves.

If you are above the poverty line it’s almost certainly possible for you to live a comfortable lifestyle within your means. Simply don’t spend more than you make, and judge the merits of the things you purchase based on how they will serve you, not on what other people will think of them. Bragging rights are expensive and if every month finds you a little deeper in debt, you can’t afford them.

Don’t be stupid in what you spend your money on. My wife was at our bank a while back and one of the bank officers pounced on her, trying to get her to take out a home equity loan. “You own your own home? Why don’t you take out a home equity loan and go on a vacation?”

A vacation? THAT is the sort of thing people are taking out second mortgages on their houses for? No wonder foreclosures are at their highest rate since the Great Depression.

Just to be absolutely clear, borrowing to purchase necessary durable goods, like a house or a car, can be a good idea. Borrowing to finance something as transitory as a vacation is just plain stupid.

People do it, though. I heard a news story the other day claiming that in the past ten years the American consumer has spent $3 TRILLION dollars more than he has earned. The amount of debt that some people have accumulated in order to finance a lifestyle they can’t afford is staggering. Don’t be one of those people. You can only write bad checks for so long before they start coming due, and for a lot of families across the country they are coming due right now.

But, there is no need to suffer either. In THE MILLIONAIRE NEXT DOOR the authors talk about the research they did into the lifestyle of the average millionaire. They go on at great length about how these millionaires are typically working-folks who have simply accumulated a lot of money by the simple method of not spending much. They live very simply and save a great deal of their income.

What the authors don’t talk about, though, but what jumped out at me was why these people are saving. Almost all of them said that they were saving all that money so that their kids could live a more affluent lifestyle. In other words, these millionaires did not see their own frugal lifestyle as something to aspire to, but rather something to suffer through.

My wife and I have a tradition, going back about twenty years now, of going out to eat on Friday night. Sometimes we go out to a nice restaurant, sometimes we order in Chinese or pizza. Sometimes, if we’re sick or the weather is bad enough, we’ll go out for breakfast on Saturday instead. Since our son was born we’ve done more fast food than fancy dining out, but the point is we do something. It’s an expense that the truly cheap would avoid, but I consider it money well spent. Guys, your wives will put up with a lot if they know they’re going to get that night out at the end of the week. Trust me on this.

Small luxuries like our maid service and the weekly night out are important. Having some nice things in your house will make living there more enjoyable, and watching your child play with his new toys is its own reward.

Keeping your family happy is more important than adding a few dollars to the savings account. It’s not an expense; it’s an investment. The most important investment there is.

For Just A Little Bit More

Posted by on February 25, 2008 No comments

I am finally preparing to make the new-car purchase that I talked about nearly a year ago. (What have I been doing for the past year? Saving money to buy the car with.) As I review the options, I have found myself falling into a common trap, one that the manufacturers of many consumer goods set deliberately.

I began by looking at the Civic and Mazda3, which are both very capable cars for about $18,000. Relatively easy on the wallet, as such things go (which is to say, not very). Then I felt a sudden and quite irrational urge for an SUV. Possibly because it finally sank in that I was going to be hauling my son around in this thing, possibly because the city has removed a section of the road from near my house, requiring me to drive over the rubble to make a left turn. Even at their best the streets here in Lane Closed Ahead, Texas make a 4×4 SUV seem more reasonable than you might think for the suburbs.

At any rate, the SUV I mentally latched onto (the Nissan XTerra; reliable, inexpensive — as such things go — and well-mannered both on and off the road) costs more than the above small sedans. About $2,500 more. Not all that much, really, when I’m already looking at spending eighteen or nineteen grand. Just a little bit more.

Then, not able to get past the inherent absurdity of driving a four-wheel drive truck around the city (despite the terrible roads), it occurred to me that about the same money would buy me a Civic Si, the zippy sport-sedan version. Nearly all the virtues of the standard Civic Sedan (though not frugal at the gas pump), but with gobs more horsepower available and much-improved handling. Just the thing for carving a bloody swatch through the LORD OF THE FLIES traffic environment in the DFW metromess.

Reading reviews on the Civic Si, though, shows surprisingly low performance numbers. The handling is indeed razor-sharp, but the accelerator punch is somewhat lacking (probably because Honda’s VTECH engines require you to, in technical terms, rev the shit out of them to get the best results). Well, I thought, I’m up over twenty-one grand; I think the Mazdaspeed Mazda3 is about at that price. It has more power on tap than the Civic Si, the handling is about as good, and the interior looks even nicer. It only comes in that ugly hatchback style, but let me see how much it is.

About $22,500. Just a little bit more….

Hmm. But the crash-test ratings on the Mazda3 still suck. Maybe the Honda Accord? The version with the V6 engine performs pretty well. It’s almost $26,000, though.

And that’s when I realized what I was doing.

I had run myself up more than $4,000 and climbing over my original target price with “It’s just a little bit more.”

Consumer products, whether cars, refrigerators, or MP3 players, all have their pricing structure set with modest intervals between the available options specifically to move you up the ladder to a higher-end product. Say, for example, that you’re looking for an iPod MP3 player. The iPod Shuffle holds 1GB of songs and costs $50. Not bad. A gigabyte is quite a bit of music and fifty bucks is pretty cheap. But wait; the Nano, which holds 4GB of songs, sells for $110. Four times the storage, for about twice the money. That’s a pretty good deal.

But wait, there’s more. The 8GB version of the Nano sells for $180. You can double your storage again — eight times the music of the Shuffle that you were first looking at — for about 65% more money. Spending just a little bit more gets you a lot more capacity.

Oh, but what’s this? The iPod Classic sells for $235 and it holds a whopping 80GB of music. That’s eighty times the capacity of the humble Shuffle that you first looked at. What a deal!

You’ve also talked yourself into spending nearly five times as much money. That may really be a good deal (I happen to own an iPod Classic), but if you went into the purchase only intending to spend fifty bucks you might find yourself looking at your credit card bill a few weeks later and wondering why it’s so high.

This is just an example (and the exact prices may have changed by the time you read this), but it illustrates the selling technique. The idea is to ease you up the price-ladder, teasing you along with enticing features that you can get for just a little bit more money.

Now, sometimes spending just a little bit more is worthwhile. If you can get a significantly better product for a small bump in price, and can afford the small bump in price, give it serious thought. But know when to stop. Bumping again from your new price threshold will almost certainly not get you the same kind of return on your investment. It’s not such a big deal when you’re talking about a hundred dollar music player, but it can be quite significant when you’re talking about a car or a house (when ‘just a little bit more’ can be tens of thousands of dollars).

Stick to your original budget if you can (you picked that number for a good reason, right?) but if you simply must bump it up ‘just a little bit more’ only bump once. As a rule of thumb, if the amount is significant stick to within 10-15% of your original budget. Go over that and you’re quite likely to go a LOT over. Grit your teeth, focus, and concentrate on moving the price down if at all possible, not up. Your bank balance will thank you.

Don’t take more than one step up the ladder. It’s a long one and you probably won’t like where it leads.

Now, if you will excuse me, I have to locate a four-door sedan with absolute reliability, impeccable crash-test results, excellent gas mileage, and thrilling performance, all for under $20,000.

Perhaps while I am at it I will cure cancer and bring about peace in the Middle East.

Turbo Budgeting

Posted by on March 3, 2008 No comments

With all the emphasis I place on living comfortably within your means, it may come as a surprise that I don’t bother with a budget.

Yes, it’s true; the tight-fisted, penny watching Grumpy Pundit doesn’t use what is possibly the most often recommended means of managing your home finances. And you probably shouldn’t either.

Heresy!

Now, if this were the conventional sort of financial advise blog, I would jabber on for a bit here about how to set up a budget. I’d tell you to list your monthly expenses and total them up, and total up your monthly income, and carve away portions of the former until it fits within the latter. Most likely you would nod thoughtfully and make a mental note to do that, then go watch TV and forget about it. If you were feeling particularly dutiful, though, you might fire up your bootleg copy of Excel and fill in a few numbers, take your best guess at a few more, and decide that if you cut your drug habit back to $500 a week that’ll still leave you $50 a week for groceries and let you save up a little money for a spring break trip to the coast to get laughed at by girls who are much too young for you.

Or something like that.

At any rate, after reading my conventional advice and spending a bit of time fudging numbers in Excel (come on; do you really know how much you spend on groceries every month?) you might actually come up with a budget, determine that you can spend this and that much on these and those things and you might stick with it for a week or two and then you’ll forget about it. Right? Come on, be honest. You can’t even stop watching that crappy TV show that was funny last season, but sucks this season. Do you really think you’re going to change your spending habits just by whomping up a spreadsheet and deciding to?

(OK, sure, there are a few people who could do that. They aren’t surfing the web for financial advice.)

But this is the Grumpy Pundit Blog. We do things differently here. I’m going to tell you how to live within your means, and even save money, without wasting any time on a budget that you’re not going to pay any attention to anyway.

First rule. Pay your bills in full. That is, don’t carry a balance on your credit cards; pay them off every month.

Second rule. Pay yourself first.

Sounds pretty simple, doesn’t it? But simple does not mean easy and most people can’t manage it.

If you can follow the first rule, you are automatically living within your means. You are not spending any more than you are making. The adjustment you have to make here is not a budgetary one; it’s mental. You must fix the idea in your head that what you buy in a month must be paid for that month. Be as extravagant as you like, but remember that the credit card bill has to be paid off completely when it comes due. Do that and your spending is automatically limited by your income.

That may seem obvious, but it is a — perhaps the critical step to getting control of your finances. Pay your bills on time and in full. It’s a simple rule that is easy to get your head around and I find that simple rules like that are much easier to stick to than a complicated budget.

But what if your credit cards already have balances on them and you simply can’t pay them off each month? Simple; pay off all the new charges plus interest. Don’t let the balance grow. Cover what you spend each month out of that month’s income (or, if you have to, your emergency fund).

It may take you two or three months to adjust to that. Once you have, it’s time to go to Rule 2.

Pay yourself first. This reverses the way that most people save money. Rather than taking anything left over at the end of the month and putting into a savings account, decide how much you want to save each month and put that into savings before you pay your bills. If possible, set up an automatic transfer so you don’t even have to think about it. (If you are carrying a balance on your credit cards put the extra money towards paying that off instead.) By doing this you are adjusting your spending to fit your savings rather than adjusting your savings to fit your spending.

Let’s try an example to see how this works. Let’s say that you make $4000 a month and after you finish paying your mortgage, car payment, utilities, groceries, etc., (including that money that just seems to melt out of your wallet; the two or three hundred a month you never can quite account for) you have $1000 left of the month’s pay.

Then the credit card bills come in. You have outstanding balances of $3000, with $1200 in new charges.

Uh, oh. There isn’t enough to even pay all the new charges. You grit your teeth, remind yourself, “Pay in full,” dump that $1000 on the credit cards and resolve to cut back on your spending so you can do better next month.

Next month you’ve got $1100 left before the credit card bills (progress!). The credit card statements land with a thud on your dining room table and amount to $3250 in balances carried over plus $800 in new charges. Pour all $1100 into the credit cards, to start paying down that debt.

Fast forward several months. You’ve paid off the credit cards and gotten your average credit card bill down to about $700 a month. You figure you can start saving $300 a month now. Pay that $300 a month into your savings account first. Then pay all the other bills. Conceptually, what you are doing is subtracting that $300 from your income, forcing yourself to live within that reduced income. It’s like your pay was cut to $3700 a month and now you have to cut back.

These are, as I said above, very simple tricks. They are, however, very powerful tricks. The magic isn’t in what numbers you juggle around, it’s getting yourself into the habit of following one simple rule that’s easy to grasp and focus on. Whether it’s setting yourself an exercise plan (“I’m going to work out for twenty minutes every Sunday night.”) or managing your household finances, creating a simple rule for yourself and sticking to it come hell or high water is the way you get things done.

Pay your bills on time and in full. That’s all the budget you need.

Pay yourself first. Decide how much you want to save and put that money aside automatically, before paying any other bills.

Do those two things and you’ll be ahead of nearly every other person in the United States. Practically no one will be as good at managing their money as you. Take pride in your accomplishment.

Oh, and think about that exercise plan too.

Here Comes the Cavalry…But to Whose Rescue?

Posted by on March 17, 2008 No comments

Right now, I would like a lot of people to lose their homes.

OK, that’s perhaps overstating the case a bit. Allow me to explain.

You have surely by now heard about the housing crisis in the US. The one where home values are dropping and people who bought homes they couldn’t afford are being foreclosed on, and the banks who hold the mortgage paper are getting killed. (As I’ve said before; your bank doesn’t want your house; they want your money.) The Federal government is frantically slathering money all over the problem as politicians scramble to be seen saving the homes (and mortgages) of millions of registered voters.

The trouble is, that’s how this mess started. What with lots of loan money out there looking for borrowers, and lots of Federal guarantees on the loans, there was more and more money chasing houses and in certain markets the home prices became grossly inflated. The houses were soon priced out of the reach of most people, including the people who had actually bought them. As will happen in a free market, with no buyers the prices fell. With houses now worth less than the mortgage, many home owners are stuck in a terrible financial crunch.

Now the Fed is spending hundreds of billions of dollars — our dollars — to try and prop up those unreasonably high home prices, so the banks and homeowners won’t be hurt so badly.

Personally, I think it’s a damn bad use of my tax dollars. I don’t much care if those homes are ‘saved.’ I want home prices to drop precipitously. You heard me; I would love to see home prices in those overheated markets drop by 50-75%. (Any realtors or bankers reading this just fainted.) Yes, that would be ugly. Many families would suffer great financial hardship, and many banks would lose piles of money. But let’s be honest here. Their greed and stupidity got us into this mess. Do we want to spend hundreds of billions of dollars rescuing them?

In other words, should the rest of the country pick up the tab for them, so they don’t have to suffer the consequences of their bad decisions?

No. Let the people lose their houses, let the banks crumble. It will all sort itself out, fairly quickly. People who bought houses they couldn’t pay for will lose them, but home prices will fall back to a level at which people can actually afford to buy them. People who bought within their means will be unharmed. Lenders who engaged in shoddy practices will go out of business. Banks who behaved more sensibly will survive.

Let the prices fall and the economy will rebound fairly quickly. Keep the prices artificially high, and the economy will limp along for years. It’s like being very sick for a day or two, but then it passes and you feel better, versus just feeling kind of sick for weeks or months. You’re better off taking the hit and moving on.

That won’t happen here, of course. There’s an angle that I haven’t mentioned yet. As far as I know, it has hardly been mentioned at all. There’s a third party panicking at the sight of falling home values, besides the home owners and bankers.

The city and county tax offices. Most local governments get a majority of their revenue from property taxes. With values dropping, the tax base is eroding out from under these local governments. They got used to fat budgets when grossly inflated home values sent tax dollars pouring their way. (And that huge tax burden doubtless has a lot to do with why many people are walking away from their houses.) Now they have to cut back, and governments hate cutting back. They don’t like trimming a budget. If home prices continue to fall it’s going to put increased tax pressure on the remaining home owners to take up the slack in the tax rolls, and local services are going to decline, both of which are going to contribute to causing more people to walk away from their houses. Further diminishing the tax base.

Local governments desperately want to keep their inflated property taxes. I suspect, but cannot prove, that that has more to do with the Federal bailout of home owners than any desire to save people’s homes.

Governments don’t really care about people, you see. They do, however, care a great deal about their budgets.

If Saving is Outlawed, Only Outlaws Will Have Savings

Posted by on April 7, 2008 No comments

If you try to save some of your money you must hate America.

OK, no one has actually come right out and said that yet, but that is basically how US fiscal policy works. The US economy is based on consumers spending, and the system is set up to punish anyone who tries to save their money instead.

Take this tax rebate thing their going to be sending out soon. You’re supposed to immediately take that money down to your local mall and spend it. If you put it in the bank, or use it to pay down debt (like a sensible person), you’re not stimulating the economy like you’re supposed to.

It’s not just a matter of the government hoping that people will spend instead of save, either. They actually punish savers. Ever listen to the news and hear some reference to “The Fed” lowering interest rates in order to stimulate the economy. What that is is a tax on savings. When interest rates go down debtors don’t have to pay as much, but savers don’t get as much return on their investment. What the Fed is basically doing when they lower interest rates like that is taking money away from people who are trying to save it and giving it to people who want to spend it.

(You will also sometimes hear about The Fed lowering interest rates “to combat inflation.” That’s because lowering interest rates, and making more money available for people to borrow, is inflation, and every now and then it’s necessary to give the appearance of doing something about that.)

I don’t really know why the US Government wants its people to keep spending and go deeper into debt, but I can speculate. It probably never occurs to them that the economic well-being of individuals and families matters. Families just have mortgage and car payments, groceries to buy, and college tuitions to pay for, after all. They don’t have ticker symbols and trade on Wall Street.

Ordinary people, in other words, only matter in-so-far as they affect those stock prices, by giving their money to some company or other (or — horror! — not doing so). Perhaps I’m being overly cynical, but try listening to any day’s financial news, then tell me I’m being too cynical.

Of course, if you want to have money to send your kids to college, or to retire on, you have to save anyway. Just be aware that everyone’s hand is against you. You are, in your quiet way, an enemy of the state.

Be proud.

A Taxing Time

Posted by on April 14, 2008 No comments

It is, once again, time for all good citizens to send thousands of their hard-earned dollars to their penurious Uncle Sam, who, let’s be honest, is probably going to just blow it all on hookers and cocaine.

The whole Earth is covered up in tax-time advice, and I’m not going to try and add to that. I’m just going to point out something equally obvious.

If anyone wanted to bring about the downfall of the United States Government, there’s no need to waste time stocking up on RPGs in their secluded compound in Montana. Just do away with the payroll withholding tax. Require everyone to write a check for the full amount of their tax bill on April 15th. That would destroy the government twice over.

First, people would be horrified at outraged at the sudden realization as to how much they actually pay.

Second, hardly anyone would actually have the money to send.

Which, of course, is where there is a withholding tax in the first place. The…probe doesn’t hurt quite as much if it’s slid in just a little bit at a time.

Happy Tax Day.