12 October 2011

The Search for the Golden Unicorn

Having a good credit score is important, but for some people it just isn’t enough. They want perfection. The goal may be as elusive as a perfect game in baseball or a perfect SAT score, but that doesn’t faze these folks.

Credit scores range from 300 – 850. The score is calculated based on a formula developed by the Fair Isaac, Co., and considers five factors: payment history, amount  of available credit in use, types of credit used, amount of new credit, and length of credit history. Having a high score can save consumers money by giving them access to lower interest mortgages, car loans, and credit cards than people with less than stellar credit scores.

However, the additional benefit to be gleaned from having a perfect credit score as opposed to just an excellent one may not be worth the additional effort. Perfect score junkies invest a fair amount of time and, sometimes, money to continually monitor their credit. According to one expert cited in the article, a score of 780 will grant a consumer access to the best rates. Doing additional credit score gymnastics will not get you better rates.
Monitoring credit is still very important. Prior to the personal credit crisis starting in 2008, the best rates were available to those with scores of 720 and above. Any errors or discrepancies in your credit report should be addressed as soon as they are evident, particularly if you plan on borrowing money, like for a house or a car, in the near future. On the other hand, there has been talk that some credit card issuers are wary of extremely high scores as this indicates that “such people did not generate profit” (Mangla, 2010, para. 18) for those who extended credit to them.

Excellent credit is good enough for most people; for some, searching for the unicorn of an 850 credit score is worth the effort, bless their hearts. 

29 September 2011

9 Secret Ways Stores Seduce Us into Buying

9 Secret Ways Stores Seduce Us into Buying

Check out what the clever folks at LearnVest found for us. Yes, stores are willing to do all sorts of things to separate us from our money. Here are nine ways in which they do it.

Are there any of your favorites in there? I know that I can easily be manipulated by music. It's probably a good thing that my tastes are a little esoteric and not likely to be found in Target or at Publix.

The credit card discount can be a particularly heinous ploy. However, it is most tempting when buying big dollar items, and hopefully you have so thoroughly completed your research that you will not be lured by this siren song. Just plan your work and work your plan and you should be in good shape.

Vani-sizing. Well, guilty as sin here. There are witnesses. I will say no more. 

08 September 2011

How'm I doin'?

Back in the 1980’s the mayor of New York City was an affable fellow by the name of Ed Koch. His best known catchphrase was “How am I doing?”, which in New York-ese came out in a mere three and a half syllables as “How’mIdoin’?” He must have done pretty well because he was re-elected twice.

Sometimes it is hard to know how well we are doing financially. These aren’t things we like to freely discuss with others. ING has provided a way of comparing us to…well, other people who have found their website.  If you would like to know how your finances compare to those of the same age, income, gender, and marital status, hie thee to www.ingcompareme.com and see how you do. 

Before you trot over there, it would be advisable to know how much you have in your retirement accounts, how much other savings you have, and the asset allocation of your investment accounts. What’s that last thing? Your asset allocation is simply the percentage of your assets that are in the following categories: cash, bonds, individual stocks, domestic mutual funds, international mutual funds, target date mutual funds, and other. If you don’t have this information handy, that’s okay. You can guess, or admit that you don’t know, and still be able to see how others like you have allocated their assets. 

Other helpful information to have: your mortgage balance and monthly payment, credit card balances, and your monthly budget in fairly round numbers. After comparing yourself to others like you in savings, spending, investing, debt, and planning, you can print out a nice little report.

A couple of things to remember – the information that ING provides to you in this exercise is based on the input of other people just like you. It is human nature to perhaps round up the amounts one reports or to be optimistic in general. That’s okay, as long as we are all aware of this. Also, this exercise is no substitute for actual financial planning. Just because you compare favorably to your peers does not mean that you have done everything that you can or should do in the area of financial planning. 

So, how are you doin'?

25 July 2011

Don't short change your 401(k)!

401(k) retirement savings plans offer the best chance that many folks have to contribute towards their own retirement. Therefore it is critical that you contribute as much as you possibly can to your 401(k). How much is that? Well, of course, that answer is the same as the answer to most questions about personal finance: It depends.

Here is how most plans work: You, the employee, sign up to have a specified percentage of your pre-tax earnings put into a special account that will be invested and grow so that you can afford to retire someday. This percentage can be anywhere from 1% to 10% in most cases, although Doc has seen some plans that allow for a 20% contribution.

There is a maximum limit for most individuals of $16,500 for 2011 ($22,000 if you are over 50). This means that if you earn more than $165,000, you might have to do some calculating. However, if you are earning that much, you can probably afford the services of a fee-only personal financial planner to help you with this and other things.

The true beauty of the 401(k) plan is that, in most cases, your employer also makes a contribution on your behalf. Typically, an employer will contribute 50 cents for each employee dollar contributed up to 6% of the employee’s salary. Again, your plan may vary. Check with your employer and your HR department. So, if you earn $40,000 per year and have a typical plan, you can contribute $4,000 (10% of salary) to your 401(k) and your employer will contribute $1,200 (50% of 6% of $40,000).

So what happens to that $1,200 if you do not contribute at least the $2,400 per year to claim your stake in it? I don’t know. One thing is for sure, though: you will never see a penny of it. If you do not contribute enough to your own retirement plan to earn the match from your employer, then that money is still your employer’s, not yours. This is part of your overall compensation, money that you are able to earn, but if you do not contribute your share, than your employer will keep those funds for his/hers/its own purposes. Got that? It’s important. It is your compensation and it is up to you to claim it.

If you took a look at the Wall Street Journal linked above, you saw that a lot of people do not contribute as much as they can to their 401(k) accounts, thus missing out on a significant benefit. Do not make this mistake. And don’t be harsh on your employer; they have to look out for their best interests, too. Since 2006, most employers have taken advantage of a law that says they can automatically enroll employees in a 401(k) plan. Typically (a frequently used word when describing 401(k) plans), this number is 3%. So a lot of people come to their first day of work, sign a bunch of papers and save 3% of their pre-tax earnings and call it good. The Employee Benefit Research Institute has found that people are more likely to go with the 3% default contribution than to contribute as much as they need, or even as much as required to claim their full amount of compensation.

But you can do better. First, find out how much your employer contributes. Then, contact your HR department and make sure that you are contributing AT LEAST enough to maximize the employer’s matching contribution and take full advantage of the compensation available to you. It is your money, but you will not have access to it until you take the action necessary to claim it.

For public employees who have 403(b) plans, this is one of the ways in which most of us are not similar to our 401(k) holding counterparts. However, your employer may offer additional ways to save pre-tax earnings, and you should definitely look into those.

Once more, it is your money. Get your hands on it. 

02 July 2011

Quiz answers Part II

OK, here are the rest of the answers to the financial knowledge quiz question. This entry covers interest rates/bond prices, mortgages, and portfolio diversification.

3.      If interest rates rise, what will typically happen to bond prices?
a.       They will rise
b.      They will fall
c.       They will stay the same
d.      There is no relationship between bond prices and interest rates
e.       Do not know

OK, this one is hard, and I’m not sure that everyone needs to know or understand this on a daily basis but there you have it. The short answer is: Bond prices move inversely with interest rates, therefore if interest rates rise, bond prices will fall.

Here’s the longer answer. A bond is a financial instrument that represents a form of borrowing wherein the borrower or bond issuer, and this can be a company, a city, state or even the federal government, issues debt in exchange for capital and agrees to a schedule of interest payments and repayment of the principal at a specified date.

ABC Company wants to borrow money, so they issue you a bond in exchange for $1,000 and agree to pay you 3% interest (or coupon) per year for ten years, at which time you get your $1,000 back.

So what happens in a week or a month or so when XYZ Company wants to borrow money and is willing to pay 4% interest for borrowing $1,000? They will still pay back $1,000 in ten years, so this is exactly the same as the ABC deal except for the interest rate. Obviously this is a more attractive option for investors, as a 4% return is greater than 3%.

How much do you think someone would offer you for the ABC bond now? If they could take $1,000 and realize a 4% return, do you think they would want to pay $1,000 for a 3% return? Probably not. In fact, they would probably only pay about $920 for that bond.

The point here is that when interest rates go up, there are investments in the marketplace that will earn higher rates of return. Investments like bonds that are tied to lower interest rates will not be as attractive to investors as newer issues that will pay more. Therefore the prices of investments that are tied to lower interest rates will fall in price.

You can see how this works in the other direction, too. If you own an investment that pays 3% and new investments are only paying 2%, then yours will be worth more because it generates a higher rate of return.

Again, this question may be kind of complex for a quiz like this, but it is important financial knowledge.

4.      Is this statement true or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.
a.       True
b.      False
c.       Do not know

Most households will purchase a home at some point in time and need a mortgage to do so. A mortgage is a big, long-term loan backed by a substantial asset (like a house). The mortgage gets paid on a monthly basis over the term of the loan. The conventional length of a mortgage loan is 30 years, meaning 360 monthly payments. Some mortgage loans are written for 15 years. This question is asking which of these is less costly in the long run.

So, all other things being equal or ignored, let’s look at two mortgages. One is for 30 years and the other is for 15 years. Both have the same interest rate, 5%, and both have the same principal loan value, $100,000. We won’t go into detail on the math, but the 30 year mortgage is repaid with monthly payments of $536.82. The 15 year loan is paid back with a $702.92 monthly payment. That’s a pretty big difference when you are evaluating your monthly expenses! However, let’s take another look at the total cost of the loan.

With the 30 year loan, you will be making monthly payments for 30 years, or 360 payments. We know that the payments are $536.82. This means that you will pay 360 * $536.82 or $193,255.20. With the shorter loan, monthly payments are made for 15 years, meaning that you will spend 180 * $790.92 or $143,342.20. That’s a difference of almost $51,000! Since the amount of the principal for both loans is the same at $100,000, the difference is in the amount of interest paid.

Thus, a shorter mortgage does cost more on a monthly basis, but the borrower ends up paying less overall with the difference being entirely interest. So this is a true statement.

5.      Is this statement true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
a.       True
b.      False
c.       Do not know

This question is all about diversification. Have you ever heard the statement “Don’t put all of your eggs in one basket”? That’s all about diversification, too. The idea here is to spread the risk of investing over many assets, and not placing all of your faith on just one company. If you buy a single stock and something bad happens, you have lost your entire investment. If you buy lots of different stocks, then you have spread your risk over many different companies and you chances of losing it all are greatly diminished. However, it can take a lot of money to buy stock in several different companies and a lot of time to do the necessary research to manage your investments. Mutual funds are professionally managed financial entities that buy a wide selection of companies and then repackage them and sell them to investors. That way each investor can share the benefits of ownership of many different companies, diversify risk and generally enjoy a safer return than owning stock in just one company.

There are almost as many mutual funds available as there are individual companies, and they are not all created equal. You still need to be a conscientious investor, but generally speaking, mutual funds offer a reduced risk alternative to owning one individual stock. The statement is false.

I hope that these explanations have been helpful and that you feel more secure in your financial knowledge. While financial knowledge is not the one and only key to financial satisfaction, it is an important component. Remember the motto of Faber College: Knowledge is Good (if you are mystified, it's an Animal House reference). 

01 July 2011

Quiz answers Part I

This will take a couple of entries. We'll take on the first two quiz questions today, and address the others in due time. 

1.      Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a.       More than $102
b.      Exactly $102
c.       Less than $102
d.      Do not know

OK, so you go to the bank and deposit $100 at an interest rate of 2%. What does that mean? It means that you leave the money there and in a year you will have 2% more than you started with. Simple math version: $100 + ($100 * .2%) = $100 + $2 = $102.

But the question says that you leave the money in the bank for five years. It’s pretty easy to work through that. We’ve already done Year 1.

Year 1  $100 + ($100 * .02)  = $102.  This can also be expressed as $100 * 1.02 = $102.

Year 2  $102 * 1.02 = $104.04. This is where we start to see the magic of compound interest!

Year 3  $104.40 * 1.02 = $106.12 (We’ll round to the nearest penny.)

Year 4  $106.49 * 1.02 = $108.24

Year 5  $108.61 * 1.02 = $110.41

So, if you leave $100 in the bank earning 2% in annual interest, in five years you can withdraw $110.41, which is more than $102.

2.      Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a.       More than today
b.      Exactly the same as today
c.       Less than today
d.      Do not know

We have a good start towards answering this one. We know how to calculate how much money is in a savings account after one year. However, this time the interest rate is 1%.

$100 * 1.01 = $101

However, we are dealing with inflation here. Inflation means that prices are rising. This can happen for a variety of reasons, but usually the cost of the underlying goods is rising for one reason or another. The relevant piece of information here is that inflation is 2%. That means that $100 worth of stuff on January 1 would cost $102 to buy one year later.

Year 1 inflation $100 * 1.02 = $102

This means that even though you saved money and had it earning 1% per year, inflation has outpaced you. At the end of the year you would need $102 to buy all of that stuff, but you only have $101. Which sucks, but also means that the answer is ‘less than today.’ 

That's enough for today. There will be more answers tomorrow!

30 June 2011

How much do you know?

Financial knowledge, sometimes known as financial literacy, is cropping up in the news again. The truly good folks over at the FINRA Investor Education Foundation have been doing some excellent survey work on the American public, and one of the things they have found is that we are not very financially knowledgeable. Take this five question quiz for yourself and tune in later for the explanations behind the correct answers.

1.      Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a.       More than $102
b.      Exactly $102
c.       Less than $102
d.      Do not know

2.      Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a.       More than today
b.      Exactly the same as today
c.       Less than today
d.      Do not know

3.      If interest rates rise, what will typically happen to bond prices?
a.       They will rise
b.      They will fall
c.       They will stay the same
d.      There is no relationship between bond prices and interest rates
e.       Do not know

4.      Is this statement true or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.
a.       True
b.      False
c.       Do not know

5.      Is this statement true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
a.       True
b.      False
c.       Do not know

Correct answers: a,c,b,a,b

25 June 2011

Your Karma $1,000

Having an emergency fund is one of the keys to financial satisfaction. Many pundits will say that you need to have three to six months’ worth of living expenses (debt service, rent or house payment, groceries, insurance, etc.) in a cash savings account to be financially secure. They make a point. It would be nice to have enough cash on hand to see you through a change in jobs, but that might seem like a luxury right now. It is especially luxurious if you are just starting out or among the financially challenged at this point in the economic cycle.

Having a six month cushion would be nice, but do you need that much? If the bulk of your income comes in the form of a steady salary, three months is sufficient for most households. If part of your pay comes from commissions, or if you are uncertain about the security of your job, a larger emergency fund is appropriate. However, your first savings goal should be to put $1,000 into a savings account and keep it separate from your other accounts. I call it the Karma $1,000. 
When your finances are tight, there is nothing worse than finding out that you have to spend $300 at the dentist or $400 to get a belt replaced on your car. These are the kinds of expenses that are not budgeted and could cause you to charge up your credit card, borrow from a family member, or do something else that is financially or personally risky. If you have $1,000 in the bank waiting for just this situation, a trip to the emergency room for a few stitches doesn’t have to ruin your month, or your vacation plans.

Here’s another thing about the Karma $1,000 – when you have a little money in the bank, you are less likely to need it. I don’t have specific research to back this up, just many years of observations. There is a known relationship between financial stress and job performance. I think that extends into our personal lives. Having $1,000 in a savings account has the effect of diminishing stress in our lives, making us less likely to back over a curb, or bite down wrong on a piece of toffee. That’s where the Karma comes in; money in the bank, even that little bit, makes you less accident prone.

Other thoughts: if you have to tap your Karma $1,000, be sure to replenish it right away, even if you can only add $10 or $20 per week. Next, more savings equals more Karma! As this Wall Street Journal article states, $2,000 is the cost of a major auto repair, so make that your next goal. Once you are there, focus on adding a little bit more each pay period until you reach that three month goal.

Also, this is an emergency fund, not an investment account. Savings accounts earn virtually nothing in interest. Most money market funds pay a teensy bit more and are still very accessible. Talk to your bank or credit union and ask what is available. When you’ve got three months worth of emergency savings, we can take the next step and talk about laddering some CDs, but not yet. 

In conclusion, it sure would be nice to have a big fat cash cushion to see you through any potential life transition, and it is an important goal to achieve. However, if you are just getting started on your road to financial independence or experiencing hard times, start with an emergency fund of $1,000 to keep Karma on your side. Keep it funded and build it up to $2,000, then set three months worth of living expenses as your next goal.

Happy Saving!!

18 June 2011

Why you want a 401(k)

You know all of those forms and things that your employer puts in front of you on the first day of work and then about once a year thereafter? Chances are that some of those forms have to do with something called a 401(k) plan.

A common employee benefit is a retirement savings account known as a 401(k) account, named after the section in the Internal Revenue Service codebook that defines said account. 401(k)s provide most working folk a way to save for the time in which they will no longer be working (aka retirement) in a tax-deferred manner (aka something that saves you money now) and, in many cases, with a supplement from your employer (aka free money). 

Most of us plan to retire. Actually, I think we all plan to retire. I mean, who really plans to either drop dead on the job or just keep working through the throes of the final moments? The generally accepted retirement age is 65, although that is gradually being ratcheted up to 67. Life expectancy in these United States is currently just shy of 79 years. You do the math. Will you have enough saved by the time you are 67 years old to sustain you for 12 years? And what if you are a healthy, contrary, stubborn sort who lives longer? How are you going to pay for that? What if, for reasons beyond your control, you have to retire before you reach 67? It happens. All the time. 

Hopefully Social Security, or whatever is left of it, or whatever form it assumes between now and the time you retire, will help. Personally, I’m not counting on this, and I advise you monitor it closely. Depending on whom you listen to, Social Security will run out of money sometime between 2025 and 2060. It seems that the system designed by the folks in charge at the time is heavily dependent on an ever-growing work force and, given birthrates and other such information, we’re not making Americans at the same pace as we used to make us. So, Social Security will suffer. Like I said, I am not counting on this particular program to keep me rosy during my golden years.

Maybe you are counting on getting a pension from your employer. I would check very carefully with my employer if I were you. Without going into excruciating detail, the types of pension plans that many of our grandparents and maybe even our parents were able to depend upon are kind of like dinosaurs. Most employers have decided that the risks of managing other peoples’ retirement funds were too much for them to handle.

Or maybe your last name is Rockefeller or Gates or something like that and you will one day inherit gazillions and you don’t need to worry about this stuff. In that case, thank you for stopping by. Please purchase something from Amazon before you exit the blog; perhaps a house. For the rest of us, do you really expect your parents to provide for you after they’re gone? Do you think it will happen? Do you want to stake your future existence on their ability to provide for you beyond the grave?

So who does that leave? Ummm, that would be you and me. For all practical purposes, you are responsible for funding all of those years between when you quit working and when you quit breathing.

Which brings us back to 401(k) plans. For most of us, this is the most available and accessible way to save for retirement. You want one, you know you do. Stay tuned and learn more.

(P.S. For those of us working in the public sector, the equivalent of a 401(k) is a 403(b) account. There are differences, but the similarities are greater. If you can have one, you want one. Trust me.)

13 June 2011

Book Review - The Wealthy Barber

If you only buy one book about personal finance in your life, I hope it is this one. The idea is basic, there are no pictures, charts, or graphs, and in terms of plot and prose, it is closer to Dan Brown than John Updike (sorry, I was an English major for a while and I’m rather picky). On the plus side, it is a fairly easy read (once you get past all of the Detroit-based sports analogies) and it covers the financial planning basics for just about everyone. And it covers them well, in a conversational style that makes for pleasant reading. Even better, it is available on Amazon.com for pennies, which is something that the wealthy barber himself would think was a pretty good idea.

The premise of the book is that a young teacher, his sister, and a childhood best friend are directed to their childhood home town’s local barber for financial advice. While this at first seems to be an illogical reach, we learn that Roy had to drop out of college to take over a family barber shop and that the experience did not stand in the way of his financial success. He mentors his young charges into learning a few basic steps that, if followed consistently, will lead them to financial success.

A few of Roy’s more important points:
·         Save 10% of everything you earn for long term investments
·         Utilize mutual funds to diversify investments, rather than trying to make big, quick scores with individual stocks.
·         Wills and life insurance are critical responsibilities for people with families.
·         Buying a home is a good thing (in spite of recent activities in some specific areas, this remains good advice).
·         Know when to seek professional help for taxes, investments, insurance, etc.
·         Take advantage of the variety of retirement savings vehicles available to you, especially tax deferral and employer matches (Note: the author is a Canadian, and the book was originally written for a Canadian audience. U.S. versions of the book are widely available, but just in case, it might be helpful to know that Canadian RRSPs are very similar to American IRAs and 401(k)s. The basic advice is still golden.)

If there is one area in which I disagree with Mr. Chilton, it would be that he does not emphasize having a good emergency fund. He does, in one of the wee latter chapters, mention the importance of disability insurance, but that is not the same as an emergency fund. Emerging research indicates that having an emergency fund is a critical element of financial satisfaction, so having one should be a priority.

Another thing: the Wealthy Barber does not harp on debt like many financial authors. Of course, debt is not a good thing in and of itself, but it is not evil either. Leveraging one’s assets is necessary for many things such as buying a home, but it needs to be controlled. The Wealthy Barber’s advice is not for people whose primary financial concern is debt. His advice is aimed at people whose professional education does not naturally encompass basic financial training. 

07 June 2011

Good information about Credit Scores

Five things you should know

The attached article contains some excellent information about protecting or improving your credit score. The negative consequences of using a debit card to rent a car were new to me, but not surprising once you think about it from the perspective of the rental company.

Just to review the differences between hard and soft hits on your credit score: The folks who calculate credit scores have determined that applying for several credit accounts at once increases the likelihood of future difficulties to make one's payments. According to FICO, having six or more hard inquiries on your report may make you look eight times more likely to declare bankruptcy than someone without hard inquiries. Therefore, it is very important to minimize the number of inquiries on your credit report, particularly if you know you will have a need to apply for credit in the near future (to purchase a car or a house, for example). Will one hard inquiry irreparably damage your credit score? No, of course not, but why have more  inquiries than you need? Keep your report as clean as possible.

Soft hits, or soft inquiries, are those that do not directly pertain to your attempts to borrow money. For example, prospective employers have noticed the correlation between good credit and employee retention, so if you apply for a job you can expect to get a soft inquiry on your report. Insurance companies are making soft inquiries into their existing customers' credit and adjusting premiums accordingly. This can be a tremendous boost (up to 25% discount) to those with outstanding credit. But remember that for every action, there is an equal and opposite reaction, so if your credit score is poor, you can expect to pay more for risk management.

The single best thing that you can do to keep your credit score solid is to pay your bills on time every month. Even if you can only pay the minimum, do everything you can to avoid the dreaded 30 days past due label on any of your accounts. Checking your credit three times a year and knowing the sources of all hard and soft inquiries is a good practice, too.

28 May 2011

Saving some money this summer

Want to save some money this summer? And be green in the process?

The summer is upon us and thus the summer travel season. Although gas prices are down a bit, they are still rather hideous, aren’t they? It has been a long time since gas dipped below the $2 per gallon mark, but it was way down there within memory, wasn’t it? So as we plan our summer travels and wistfully recall fonder gas prices, the ugly reality of $3.60 or so just won’t go away.

Fortunately, there is something you can do about it! By following a few simple guidelines, you can improve your car’s mileage and have more money to spend on other, more appropriate summer expenses.

Gas saving measures come in a couple of varieties: mainly car maintenance and driving technique.

 Keeping your car serviced is part of good ownership. It can also make a difference in your mileage, up to 5% according to www.fueleconomy.gov, provided that you have the proper grade of motor oil lubing your engine. You can also improve your mileage by keeping your tires properly inflated. Particularly before a road trip, check your tire pressure and adjust it as necessary. Don’t go overboard; overinflating tires can be dangerous. Stay within 2 or 3 pounds of the manufacturer’s recommendation. Consult your car’s owner’s manual if you are not certain about either motor oil grades or tire inflation. If you’ve lost your owner’s manual, check the internet.

Keeping your car tidy can also save miles. Sure, it can be handy to carry around your golf clubs at all times, but excess weight means excess work for your engine and less efficiency for your gasoline dollar.

There are driving techniques that can improve mileage and save money as well. The first, and least fun, is to watch your mileage. Adhering to posted speed limits in town not only makes good legal sense, it is also good manners and keeps your mileage in line. Avoid “jack-rabbit” starts and sudden braking. Both of these are inefficient uses of your engine and waste gas. Also, avoid idling whenever possible. When you are idle, you are getting zero miles per gallon.

There is an e-mail that makes the rounds every so often that purports the practices of filling up your tank in the morning and refilling when the tank is only half-empty will improve your gas mileage. The science behind this is somewhat arguable, but it isn’t like there is anything wrong with either one. Just don’t expect drastic improvements.

Getting ready for a big trip? Here are four things you can do: 1) Get your car serviced if you are within 500 miles of needing a visit to the mechanic. 2) Make sure that your tires are properly inflated. Consult your owner’s manual and do not over inflate. 3) Pack sensibly. 4) Choose a reasonable speed at which to drive.

Another word about driving speed and saving gas: there is a balance to be maintained. Sure, your car may function more efficiently at 55 mph than 75 mph, but weigh the savings against the costs. Assume that you are driving 400 miles to get to your destination and that driving 55 mph rather than 75 mph realizes a 20% savings on gas. At $3.85 per gallon, you will save over $20 for the round trip. However, you will also spend almost four more hours on the road. Saving money is good, but time is also a valuable resource, especially when you’re on vacation.

And if you choose to drive 55 mph, please, for the love of God, stay in the right hand lane. Thank you. 

13 May 2011

This Ever-changing World in which We Live in

For many years now, the conventional wisdom has been that used cars offer a better overall financial deal than used cars. Well, it took a sea change for that to become the conventional wisdom and it might be time for another look. 

My grandfather was a mechanic in a small town in Southeast Kansas. He could fix anything, be it car, truck, or farm equipment. He taught his children that buying a used car was buying somebody else’s problem. It made sense at the time. In those days, people bought cars and drove them for their useful life. If anyone was selling a car, there was probably a reason.

As our economy developed and the auto industry became more competitive, folks began to trade cars more often. It may have been conspicuous consumption, or accommodating growing families, or just wanting the latest in an ever-evolving selection of bells and whistles, but more perfectly good used cars were available in the marketplace.

More than one automobile sales professional in the past ten years has told me that the best deal in a car of any kind is a used car with a manufacturer’s warranty. These tend to be vehicles that were driven by corporate users and have been well-maintained as well as completely refurbished and evaluated by the manufacturer before being placed back into the marketplace.

Think about a sales person who works for a medical supplies company and drives around a lot visiting customers and delivering product. It is more cost efficient for their employer to buy a large number of cars directly from Ford or Toyota, distribute those cars to their sales force, and insure those cars through one policy than to manage transportation for all of their employees individually. This same company will replace these cars on a regular basis and return them to the manufacturer, who will place them into the market creating a secondary supply.

However, in since the recession, the landscape has changed again. The market for used cars, particularly the high-quality, manufacturer’s warranted type, has become increasingly competitive. When looking for a small, fuel-efficient car last summer, my husband and I found that the difference between new and used in our car category of choice was minimal. All of the great bargains in used cars were in the luxury segment, or in minivans. We bought a new Honda Fit and plan on driving it for at least five years, although based on my personal history our little Scooter doesn’t have to worry about being traded until 2020 or beyond.

Used cars are not the rejects of my grandfather’s era, but they cannot universally be considered better deals financially than new units. If you are looking to buy or replace a car, certainly give used cars a chance, but don’t discard the possibility of buying a new car out of hand. This advice particularly applies to fuel efficient vehicles that you plan to own for at least five years.  

For more information, check out this article from Kiplinger: http://kiplinger.com/columns/kiptips/archives/when-it-pays-to-buy-a-new-car.html

08 May 2011

Why Bother?

It is hard to drive around Tuscaloosa and not be stricken by the randomness of the destruction. Beautiful homes were destroyed; housing projects were destroyed; family-owned businesses were destroyed. Yet, across the street, or even next door, life appears untouched.

One of the saddest stories heard from a survivor came from an older gentleman who was on the radio the other day. He is the owner of a small business that has seen diminished cash flow since the economic downturn started. After thirty (30!) years of paying on a mortgage for his home, he made his final payment last summer. Once the mortgage was paid, once there was no longer a mortgage holder who required that he have homeowner’s insurance in place, he stopped paying for it. He had been there for thirty (30!) years and no tornado. No one was making him pay for homeowner’s insurance anymore, so he didn’t pay for it.

So now, today, after a lifetime of paying for a home, he is left with nothing. Nada. Bupkes. I don’t know what his monthly payments were; I do not know what his annual premium would have been. I only know that he is left with nothing to show for all of those years of paying for his home. It is so sad, and it was so preventable.

It is also a story somewhat similar to my own, with lots of differences. And hopefully a happier ending.

I grew up in the leafy suburbs with a professional father, a stay-at-home mother, and relatively few cares in this world other than stuff like braces, the swim team, and music lessons. My father was the sole proprietor of a health care practice. My mother took care of us and was active in our community. All in all, it was a pretty idyllic existence.

Then one day, my dad got sick. And then he died. There was no disability insurance to help us out during his lengthy illness. There was no life insurance to replace his income which supported my mother and was to educate my older brother and me. Didn’t my father love us? Oh, my God, yes he did; that was never in doubt. But he was not a person who planned things. He figured that one day it would be time for him to stop working, so he would sell the practice and he and mom would have a nice retirement on the proceeds. I suppose that does amount to a plan. It just wasn’t a very good one.

So my life changed. We did sell the practice, and there was enough to pay off the house and provide a nest egg for my mother. She had been working at the local University library for a couple of years, which was a blessing. It allowed her to maintain her standard of living and save for her retirement through the University’s plan. She had never really expected to be a widow at 53, but there it was.

Not only did I lose a father, I lost the opportunity to make choices that I had once taken for granted. No, I didn’t go to a small private college where I had been accepted. Even with financial aid, the difference was too great to bridge. I stuck it out in the dorms instead of living in more expensive, and socially desirable, Greek housing. When I graduated on time, thanks to a full academic scholarship, I got a job instead of going to graduate or professional school. Am I any worse for the wear and tear? Who knows? I think that I’m a fairly happy and well-adjusted person. I know that God has been good to me. I have a savings account, several retirement accounts, disability insurance, life insurance, and substantial emergency savings.

This is why I bother: I want to have choices and, although I have not been blessed with children, I do not want to deprive anyone else of choices should something happen to me. 

Oh, we don’t have a will yet. Since we live in a joint tenancy state and have no dependents, and absolutely no bloody fear of bumping up against the estate tax limit, it may not be terribly necessary. But there are other estate documents that need to be attended to, and will. Feel free to keep bothering me about that.

Please, bother to plan. Bother for yourself, bother for your partner and children, bother for anyone else who might lose the ability to make choices if you are not here. Or if a tornado happens. 

07 May 2011

Moving Unknowns, both Known and Unknown

My husband and I are in the process of moving. We’ve been in an apartment in Tuscaloosa for almost two years but we found a really terrific house, so we bought it. And we are in the process of moving. This will be, I think, my 19th mailing address, and hopefully one of the last.

This is the third house I’ve bought, so I should know the ropes by now, right? Not so fast, my friend. We knew that there would be some expenses. Got to pay the movers, we want to upgrade some furniture, got to have shelf paper and stuff. Still, there have been some unanticipated expenses. So, for the edification of future homebuyers, I will start a list of Unknowns.

Mailbox We should have seen this one coming. Our new neighborhood is an older one, with homes dating back to the 1930’s. I never noticed before, but some of them have curbside mailboxes while others have the type that connects directly to the house. You know, the more convenient type. Well, it seems that the U.S. Post Office has determined that all new residents of the community will have curbside post delivery. This means us. The very cool folks we bought our house from had lived there for over fifteen years, so were evidently grandfathered into the handy variety of mailbox. With us, not so much.

Funny thing about a mailbox – you get to pay for it (and its installation and maintenance), but the space inside of it belongs to the U.S. Post Office. They are rather particular about things, too. The post must be sunk so deep into the ground. The opening for the mail box must be at just exactly a certain level, for their convenience. And the innards of your mail box may not be used for anything except U.S. Mail. Them’s the rules, as they say.

This is not cheap. The most cost effective mailbox at Home Depot will set you back about $15. The post itself runs about $40. There is also a gizmo called a post anchor that runs another $35 or so. Also, one must prepare the ground and set the post anchor before the post can be installed and the mailbox attached. If you want your address and/or name in cheesy lettering, expect to pay $1.25 per number or letter. So $95 or so in materials and an unknown investment in labor and possible medical/chiropractic care. Or you can subcontract the whole thing out to your local iron monger and get something nice, stylish, and professionally installed for $200. We are still in the evaluation process.

Water setup and deposit We will be dealing with a new water company in the new house. Never mind that we have been ideal customers, paying on a timely basis and not causing any troubles. Our new water provider is unimpressed, so we have had to pay a $75 deposit and $25 setup fee so that they can send us our bills. I hope we have a functioning mailbox by the time the first bill arrives.

The one I hate to complain about.  An F4 tornado swept through our community at 5pm the evening before our scheduled close. More than forty people lost their lives. Thousands lost their homes. We had to do without cable for maybe 36 hours. So this is not a complaint. It is merely an Unknown. Our lender required a drive-by appraisal after the storm to verify that our new house had not been destroyed. Our bill $100. I am very happy to pay this.

That’s about it so far. I’m sure there will be more. And should I classify the fact that I suddenly want a stainless steel kitchen trash can to match my spiffy new stainless appliances as an Unknown? Or should I just try to bury it in the budget?

Here it goes...

Welcome to my new blog!

Hello, my name is Ann and I teach people about personal finance. This is my blog.

American families are increasingly financially stressed. The baby boom generation is getting ready to retire, and they might not be ready. Our health care system is constantly changing, and no one is sure when, or if, it will ever stabilize. One thing can be said, though, with a fair amount of certainty: you and I are increasingly responsible for making decisions that affect our families’ quality of life now, and in our uncertain futures.

I live in Tuscaloosa, Alabama, home of the University of Alabama and site of a devastating tornado last month. I hope to have a link to Recover Tuscaloosa installed on this blog, but until I can cross that techno-hurdle, I will ask that you please consider making a contribution to relief efforts via this link: http://www.recovertuscaloosa.com/ Roll Tide.

As time goes by, I hope to share here various and sundry bits of advice and life wisdom that I hope others will find useful in managing their family resources. There will be links to articles, book reviews, and general commentary. I also hope that there will be some discussion. However, be forewarned that I am a schoolteacher and certain types of behavior will not be tolerated. Think of this as an extension of my classroom. When it comes to the determination of proper behavior, etiquette, and content, I am the final arbiter.

So welcome to the blog! I hope that this turns out to be fun and informative for all of us.