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Monday, August 29, 2011

Debt as the Norm

When I was growing up we lived in an upper middle class neighborhood with a private community club and a private beach that only people living in "Lot A" of the community were allowed to go to. Like many communities in and around Seattle, our neighborhood also had a dirty little secret that on the land deeds of the houses was the rule "No, blacks, Jews or Asians." The underlying historical attitude of our neighborhood was that if you were rich and white you floated above the rest of the world in your superiority. Luckily for me, my father did not adhere to this belief system (and I've never quite understood why he chose that neighborhood to raise his family in, although before I discovered the dirty little secret it was a fun place to grow up).

So, while the neighbors in the Tudor mansions directly on the beach were buying speedboats and sailboats and my friend's dad was buying her another horse, I would lament that my first car was a hand-me-down old Plymouth. My father's response was always, "We don't need to go into debt." He always said it so matter-of-factly as though it was the only rational way to look at things and he lived a long suffering life in the midst of consumer madness. In my childhood mind I heard it as "To be good, one must never have any fun." Add to that it was 70's and songs like this were blaring from my brother's turntable, of course my childhood view was that practicality was boring.

Not all kids grow up with that rebellious attitude that I had, and those who do usually outgrow it like I did by their 20's when they realize there is a lot of fun to be had that doesn't involve being irresponsible and partying all the time. But what our culture does not encourage is outgrowing the idea that "we deserve whatever we want". Commercials and print advertising usually have the theme that "You want it - you deserve it no matter what the cost!" Even responsible, well educated adults have told me they can't give up "shopping therapy" because they deserve that treat.

There is nothing wrong with shopping for fun things you don't need as long as you have the extra money for it, and I do that occasionally myself. The problem comes when it doesn't seem strange to buy things even when we don't have money for them. Credit cards are a huge business in our country and in my opinion are one of the main reasons our economy is a mess. Our family has credit cards and we use them frequently, but we also always pay them off at the end of the month. The reason we use them is that we get points for all our purchases for hotel rooms so we use the points to help pay for vacations we otherwise couldn't afford.

In my opinion credit card companies are modern day loan sharks. Oh you need a few thousand dollars to buy that car you can't afford? Sure, we'll give it to you even if you have terrible credit. But instead of breaking your legs if you don't pay, they increase your interest rate and slap on more and more fees.

The first step to getting out of debt is not cutting back your spending or writing budgets or cutting up your credit cards - the very first step is to change the way you look at your spending. Is buying something you really want that you can't afford really the "therapy" you want if what it achieves is more debt and more stress over your financial situation? I've said before that living within one's means does not mean deprivation. But it also means that you can't buy a new car every two years or buy a bigger house than you need but can't afford. Rethinking what you really need and what you really want is an important step. If you just want something to improve your image - like designer clothes, new cars, fancier house, or anything just because it's expensive - you might want to rethink your sense of self and identity because who you are and the worth you have comes from within you, not what you own. Today would be a great day to start focusing on what about yourself you are proud of that has nothing to do with what you own.

Here are some ways our family lives within our means but don't feel deprived:
1. My husband and I love to read, but instead of buying new books every couple weeks we go to the library a lot.
2. We found a great deal on a kayak on our local craigslist, that's also where we got our life jackets.
3. I have two horses but we can't afford horse property and boarding horses can be very expensive. To make it affordable for me I do a "partial lease" with my horses, which means that someone else helps me pay the monthly board cost in exchange for getting to ride my horses a couple times a week.
4. I also couldn't afford to buy a horse to begin with, so I looked long and hard until I found someone who was willing to give me her retired, champion rodeo horse for free. Then after keeping my eyes open for a few more years I found someone willing to sell me a race horse worth thousands of dollars for only a few hundred because she couldn't keep her.
5. I love playing piano and wanted my daughter to play piano so I just kept my eyes open until I found a free piano.
6. We were tired of paying $100+ for cable tv and still not have much to watch, so we now have basic cable service and use Netflix and Hulu, which come to about $18 am month for both.
7. I don't buy clothes unless they are on clearance sale or second hand or from an outlet warehouse. And yes, I actually am well-dressed and my daughter (who is a little fashion diva) is very happy with her clothes.

Over the next few weeks I will be collecting ideas from people on how they live within their means without feeling deprived. Feel free to comment here or send me an email: sustainfinance at gmail dot com.

Saturday, August 20, 2011

Why Budgets Don't Work ... yet are still important.

What do you think of when you think, "I need to write a budget in order to get my spending under control?"

Because of my job, I think in terms of a small business or non-profit budget, which is a guideline to help the business know what its goals are both in input and output of money.  But when I talk to people who do not work in accounting it sounds more like a budget is akin to being on a diet.  It means depriving yourself of what you want for the "greater good" or "the big picture" or whatever phrase constitutes suffering in order to be a "better person".  In this way budgets get a bad rap.  Budgets are not a financial diet.  They are not there to make you do the financial equivalent of "eating bird food" and never having any fun.  They are not there to punish you for your extravagant ways or teach you to never follow your dreams.

For the majority of my life I was skinny and it was easy to be that way.  Then I developed some severe health problems and gained a lot of weight and found out how hard it is to lose weight.  Dieting just made me angry - really angry.  It felt like I was being punished for gaining weight.  So, I went to a nutritional counselor and I learned how to eat to lose weight so that I wasn't suffering or depriving myself of anything.  I lost the extra weight and I didn't suffer while doing it.  That is what a budget used correctly can do for you, it can help you get a realistic idea of what you're spending and where you money is coming from, and it gives you a platform to jump from to realistically achieve your goals.

You will find a reoccuring theme for me is a solid foundation.  For a house, that means a well-built foundation that will withstand inclement weather and natural disasters, not just some bricks thrown on the ground that work just fine when things are going well but will be washed away at the first big flood.  It also means building a foundation that fits your situation.  If you live in the desert, the foundation of your home is going to be a lot different from a home a block from Lake Pontchatrain in Louisiana, where the risk of severe flooding is very high.  Having a budget will help you figure out what your foundation should be and help you build a strong one that will withstand all the ups and down of our country's financial climate.

You do not need to expect to be strapped to a budget for the rest of your life either.  Just as one should not have to be on a diet the rest of their life - and if they are something is wrong - you should not have to be checking your budget every month for the rest of your life.  My aspiration for my clients is that they start with a budget in order to get an idea of what they can and can't afford, and then check in with that on and off for the first year to make sure they are spending within their means.  After they have become confident that their new spending habits are second nature, budgets aren't necessary unless you're about to buy a big purchase (such as a house) that will require adding extra monthly payments, in which case writing a budget and a cash flow forecast is helpful to see if you can really afford it.

I will follow up more on how to write budgets and do cash flow forecasts coming up in the near future. It really is very easy once you get the hang of it, and it will help quite a bit when making plans for a huge purchase.

So, in short, budgets are a way to help you get familiar with your spending and what you can afford and are a tool to help you become familiar with your money and what you can afford to spend.  They are not strict guidelines to constrain you and hold you back from what you want in life.  Like most things in life, a foundation of a little personal responsibility and knowledge can be the platform to jump-start you to the success in life that everyone desires.

This is a cute video that I'd say was for your listening pleasure but the music kind of sucks ... but in a good way (sorry - a moment from my old music critic days!) It's a cute, tongue-in-cheek video of the same point I'm making.

Tuesday, August 16, 2011

First of the Bi-Partisan Interviews

This is the first in a series of short interviews I'm doing with public figures who have different political beliefs. Everyone will be asked the same five questions and I'm curious to see if their political stance makes any difference on their view of personal financial management.

My first interviewee is Peter Bagge. Peter is a successful comic book artist and writer who has been creating popular art and comics for decades now.  His website does a much better job of describing him and his work than I could. He describes his political beliefs as "I'm a libertarian, and reject the idea that government should micromanage the nation or individual's finances."

Here are Peter's answers to my questions:

Sustentation Finance:  How do you manage money in your family?  Is one person in charge or is it a family effort?
     
 Peter Bagge: Joanne is in charge of paying bills and bank accounts etc., though we both agree on what and how we spend money on before we spend it.

S.F.: How do you view debt?  Do you think there is "good debt" and "bad debt" or is it all "just debt"?

 P.B.: Good debt is when you borrow to pay for a practical investment like a home, car or a business, and that under normal circumstances you'll be able to pay back.  Bad debt is borrowing more than you can realistically can pay back, and/or is for unnecessary items (vacations, boats, home theaters etc).

S.F.: What are your thoughts on all the foreclosures in the last few years?  Who do you think is responsible for the high rate of foreclosures - buyers? real estate agents? banks? someone else?

P.B.: All of the above, but mostly the US government for pushing the nice sounding idea of the "ownership society, which resulted in encouraging banks to make loans to people who otherwise aren't credit worthy (and guaranteeing to bail them out if the plan backfires, which is exactly what happened). The government is still pursuing this policy, while never for a second acknowledging their major role in this fiasco.

S.F.: Do you have any opinion on Social Security?  Do you think it will still be around in twenty years and if not do you think about what your financial plan will be if it's not?

P.B.: It certainly won't be around in the form it is now, since it's financially unsustainable.  The retirement age will have to go up, at the very least.  Social Security wasn't originally meant to be a pension fund when it started.  It was solely for people to old or otherwise unable to work, as well as provide for widows and orphans.  But it quickly got away from any kind of means testing and was soon offered to everybody by a certain age as a way for politicians to buy votes.  People also used to live sorter lives in the 1930s, and generally did much more physical labor.  So a retirement age of 62 or 65 in 2011 is both absurd and unrealistic.

S.F.: If you could be all-powerful and had no limits and could change whatever you wanted in our country - what would you do to bring down the huge debt in our government and balance the country's budget?

P.B.End all foreign wars, and reduce our military by at least half what it is now.  Ban ALL government funding of private businesses. Get out of health care entirely.  Social security only for those who need it, regardless of age and pay them more than they get now).  Reduce government employees wages and benefits .  Kill Homeland Security, the Dept of Education, HUD, the NEA, Fannie May and Freddie Mac, etc.

Coming up will be an interview with Suzanne Venker for a conservative's viewpoint.  We will also follow up with a liberal's viewpoint, a tea-partier's viewpoint, and a communist's viewpoint.

Wednesday, August 10, 2011

Different Ways to Track Your Spending

How do you track your spending?  This is the first question I ask in workshops on individual money management and a question I often ask my friends out of curiosity.  Usually the people who attend my workshops don't track their spending which is why they've come to one of my workshops.  But what is more surprising is most of my friends don't either, and they are not out there seeking help with managing their finances.  Not tracking your spending is not a problem within itself, but it does become a problem if you are over-drawing your bank account more than once every ten years.  I give myself that little break because I am only human and so far I've only overdrawn my bank account twice in the last twenty years - and the first time was when I wasn't keeping track of my spending.  It also becomes a problem if you are having to use your credit card for regular monthly expenses, or if you have credit card debt, or if you are having trouble paying off your long term debt like mortgage or student loans.
So here's your list - and if you have done any of these things in the last few years and you are not tracking your spending then you need to start now:

1.  Overdrawn your bank account
2.  Used credit card and not paid it off at the end of the month*
3.  Can't pay off the minimum monthly amount on long-term debt (mortgage, student loans)
4.  Are surprised at how low your bank account gets for "no apparent reason"
5.  Have not been able to get cash from the ATM because your balance is too low

*We actually use our credit card for as many expenses as we can during the month because we get "travel points" for using it.  But we also pay off the balance without fail at every statement.  Our credit card company hates us.

There are a lot of ways you can track your spending and the easiest ways are on the computer.  I used Quickbooks for our personal finances, but that can also be overkill for the average person because it was created for companies to use.  Quicken is also a good program.  There are plenty of websites out there too which help you keep track of your money.  The most popular one I've heard about is Mint.com and although I've never used it I've heard good things about it.

If you are really struggling with money management and are overdrawing your bank account every month or you are using your credit cards every month to pay your bills, the first thing I would advise you to do is not pay any bills online for awhile.  You need to get up close and personal with your spending and know exactly what money is going out.  In a situation like this the best thing you can do is turn back to those old archaic checks and a check-book register and write down the amount of every bill you pay and all the cash you take out of the ATM, or point of sale purchases you make with a debit card.  I would even go so far as to say don't use your debit card for the next few months. Use checks or cash and write down *everything* you spend and what you spend it on.  It's not convenient, but then neither is over spending every month.

When a person files bankruptcy or has their house foreclosed, all that debt is not just swept away and no longer exists.  Someone else has to clean up the mess.  And usually it is the banks, who if most of you were keeping up on the news you already know they received millions of dollars in Federal money a little while ago.  So, just throwing up your hands and letting your debt get out of control and saying, "OK fine! I'll just file bankruptcy" or "Just take the house back and foreclose!"  may seem harmless on the surface, but what a person is essentially doing is saying "I made a huge mess.  I can't clean it up, so I'm just going to walk away and let someone else clean it up."  That is not good for the individual and it is not good for society.

Monday, August 8, 2011

How To Get Rich Quick!

The statement, "I can make you rich!" seems to be the biggest selling phrase in personal finance in our country.  I hope to reach people and teach them basic, practical personal finance practices so that the amount of debt in this country will eventually go down, but I know that what I'm offering is not what a large majority want.  They want me (or anyone else) to tell them the secret on how to be rich (without much work).  Or come to think of it, the secret to how to be beautiful, famous or fabulously popular to romantic partners.

What most people don't realize is those things are so subjective that most people will probably never realize when they are rich or beautiful.  Because those are things that can always be considered "never quite enough".  In fact, I witnessed one situation where even fame was never quite enough.  You would think that having people frequently ask you in public for your autograph would be a good indicator of fame, but even that was not enough for a friend of mine who was world famous, but apparently not quite as world famous as another friend of ours.  And that really bothered the first friend that he was not the quite as famous as the second friend.  In my opinion striving to be rich, beautiful, famous (or any other nebulous concept that can not directly be defined) is a black hole and once you step onto the event horizon of that being your main goal, you will forever be sucked into a vacuum of it never being enough.

The first secret to being fabulously wealthy is to come from a family that is fabulously wealthy.  The second is to be that rare person who not only has the talent and the drive but the luck and connections to hit the big time with an invention or your band or your book, etc.  Having spent over half my life on the fringes of the literary and music industries I can tell you with confidence that it takes a lot of hard work selling yourself to get to that point, along with a lot of luck and knowing the right people - which is half luck and half fortunate circumstance.  It is not easy and more than not will work very hard and never make it big.  It's the same with wealth.  If being wealthy was so easy that you could encapsulate it in one book or a series of blog posts or a convention or two, being wealthy would not be so rare.

Feeling like you are rich is a totally different story.  For example, if you looked at our finances and you came over to our house and you saw the cars we drive and the clothes we wear (yay for inexpensive stores like Old Navy and Target!) you would definitely not say our family is rich.  But in my opinion we *are* rich.  We have a beautiful house, functioning cars and appropriate clothes for the weather.  We can afford a few toys and to visit our relatives and eventually we'll have saved enough money to take the family to Hawaii someday.  It's all a matter of perspective.

When my daughter was a baby and I was taking time off work I kept up my bookkeeping skills by volunteering on the board of a few non-profits.  For a couple years I was in charge of finances for our neighborhood food bank.  If you don't think having everything you need makes you rich, spend a little time at your neighborhood food bank.  When I made that statement to one of my mom-friends her response was "Well, the people who go to the food bank are either crazy or drug addicts so that's why they're poor."  Actually, a year later the same mom's husband got laid off and couldn't find a job for over a year.  If they hadn't had the mom's huge inheritance to live off of they would've been at the food bank too.

Managing your personal finances is not just about knowing where your money goes and not spending more than you have.  It is also about being realistic about what you have and not constantly wishing for more.  If you have clean water, appropriate clothes, a secure roof over your head and enough to eat then you are so much farther ahead than a lot of people in this world.  And joy can be found wherever you are at financially.  I'm not saying you shouldn't aspire to higher goals, but it is easier to move forward when you are not desperately running away from where you currently are.  It's easier to move forward when you can be calm, have a plan and know that if the things that are out of your control don't go your way this time, you can always try again and it will be ok.

Today's homework is to look around your life and find at least five things in your life you are grateful for.  And when you find yourself feeling sorry for yourself because you can't afford something that you think you will be miserable without,  just remind yourself that is not you talking, that is a society filled with commercials telling you that you aren't enough and you need more.  It's just an illusion.  Try to find peace with who you are right now and where you are right now and then we can move on to higher goals from there.

Saturday, August 6, 2011

Living Without Debt is a BiPartisan Issue

Most people know that over the last week or so there was a big debate in Congress about the national debt and raising the debt ceiling.  I didn't read up too much on the issue because 1) it makes my head hurt and 2) I haven't really had time.  I've been busy finishing up the 990 for work (my extension deadline comes up in just over a week!) and being a mom and living life.  But I have heard some discussions among my friends that pit Democrat against Republican against Tea-Partiers.

In my circle of friends all three groups are represented.  Although, if you ask my Democrat friends they will say that Republicans are Tea-Partiers and if you ask my Republican/Tea Party friends they will say Democrats are Socialists.  And many other more colorful words back and forth.  And each seems to believe the other will be this country's downfall.

But the one thing they all have in common is that they don't understand where all the waste in government spending is coming from and why it is so impossible to rein it in.  I have my theories about that but I will save that for another time, since this blog is about finances, not my political conspiracy theories.

Living on debt has become the norm in our country, so much so that it is considered radical to say you don't use credit cards and you only buy things when you have cash.  "You have to spend money to make money" is considered a practical way to be a good capitalist.  But capitalism is not about making foolish decisions, it is about a free market and the freedom to create and run individual businesses with whatever dream you may have.  It still doesn't mean a free-for-all of over-spending is a good idea and that wracking up debt is a recipe for success.

In the next few weeks I will be interviewing people from various political philosophies. My hope is that I'll find similarities in attitudes about personal finance, but if not it will bring up some interesting discussions.

Thursday, August 4, 2011

First questions from a reader

Sarah from Bothell sent me some great questions that she'd like me to address.  These are questions I've heard a lot in workshops, possibly the first is the most common question.

Sarah: Which is more important, to build an emergency fund, or pay off debt first?  How much should you have for an emergency fund?

For the first part of this question I would like to give you a simple, formula answer for this, but honestly, the best answer is "It depends on each individual's situation".   The ideal situation would be both - pay down your debt while slowly building up your emergency fund.  But that is not always an option, especially when you're supporting a family or paying off a large debt like student loans. But let's come back to that because the second question is easier to answer.

Most experts will tell you to save three to six months of living expenses in your emergency fund.  I tend to go with the more conservative six months to a year.  But the minimum in your emergency fund should ideally be a minimum of three months living expenses.

As for paying down your debt vs. putting money away in an emergency fund, it really depends on what kind of debt you are talking about.   The first thing to look at is the interest rate on the debt.  Are you paying 13% on a credit card debt?  You should probably focus more on paying that off then because that high of an interest rate is quickly losing you money.  Are you talking about interest on a thirty year mortgage with a fixed interest rate in a neighborhood where the value of your home has increased and you have equity in your home?  Then you can safely focus on putting money into an emergency fund and keep paying your monthly mortgage payment.

Those are just two examples of the myriad of situations to take into account when you're asking whether to pay down debt or build up savings.   And no two individuals are going to have the same answer.

The best answer is, know your financial situation.  Know how much money you are spending each month to meet your needs, and know how much you're spending just for fun stuff.  Look at what your debt is and how much interest you are paying on that debt.  Look at what the debt is for - is it for a car that has depreciated in value (ie: is worth less than what you paid for it)? Or it is for a house that has appreciated in value (is worth more than what you paid for it)?  Write out an emergency plan for what you would do if you were injured and couldn't work for six months or lost your job and it took a year to find a new one. 

Sarah: Is there good debt?  How is a mortgage better or different from other types of debt?  What about a HELOC? Is that good or bad?

Let's start with the first question "Is there good debt?" In my opinion the answer is no.  Is there unavoidable-not-so-awful debt? Yes.  It is very rare that anyone can buy a house for cash these days in the U.S. so having a mortgage is unavoidable unless you are content to rent.  There are upsides to renting too, but you also don't get to enjoy the pluses of a good investment.  In this country is generally not considered a sign of good credit if you've never had debt and thus can't show you've paid it off, and even though I think that concept is completely wrong, it is a reality in our country.  So, some debt is hard to avoid, but definitely no, there is no such thing as good debt.  That is a myth.

I think I covered a little how a mortgage is better than some types of debt and that is because if you are working with a good real estate broker and you've studied up on where you are buying,  get a quality inspection of the real estate before buying and do your homework, chances are you are buying something that will increase in value.  There are other things you can buy that can increase in value too, but they are often not as necessary as a roof over your head.

My opinion on a HELOC?  It's generally a bad idea.  You're taking out a debt next to a debt.  Granted it's based on the equity you have in your house but that is all it is is equity.  It is not real cash.  It is a concept and you can't pay off debt with a concept.  And you already have a mortgage on your house, you are adding another debt to that - one that may or may not have a fixed interest rate.  Always look carefully at interest rates before taking out a loan.  Read the fine print.  Never assume that in ten years it won't matter when the interest rate is no longer fixed because anything could happen by then.  Look at the big picture and remember that ten, twenty, thirty years will someday arrive.  And you don't want your future self to be kicking your past self because your signed on to a huge loan whose interest rate shot up so much you can't pay it.

There definitely could be situations where a HELOC isn't a bad idea and could work.  But those situations are rare and for the most part people in this country don't need any more debt.

Sarah: How much of a mortgage is too much?  when does it become "bad" debt?

That's easy.  I actually have a one-size fits all answer to that question (finally!).  A mortgage is too much when it exceeds or comes close to exceeding the value of your home.   It is also too much if you can only pay your monthly payment as long as you don't lose your job.  The rule in our family is "If we can't pay our monthly mortgage payment while on unemployment benefits then our mortgage is too high."  That means it doesn't matter how much money we make, our mortgage payment has to stay well under $2,000 a month because I believe that that is the highest uninsurance benefits one can receive in our state.  And it has to stay below that because I doubt we'd qualify for that much if we lost our jobs.

That means that when we bought a house this year, we didn't get to buy that really nice little remodeled farmhouse on five acres with a barn and two pastures.  We had to buy a much cheaper house on a cul-de-sac with a small yard.  But we love it! We found what we could afford, it met our needs and as we settled in we realized is the best place for us.  Sometimes what you need to make you happy isn't what you *think* you need to make you happy.  And that's one of the biggest keys to staying out of debt.  Learn to enjoy what you *can* have and focus more on what you already have then what you think you want.

Tuesday, August 2, 2011

An Introduction

My father was born to immigrant parents during the Great Depression and the lessons he learned about how to manage money have greatly shaped the way I view money management.  If you add to that my career in bookkeeping and accounting and that my main interest in my work is in cash flow forecasting and budgets you can see why I started this blog.

I am not much different from anyone else as far as how I live my daily life.  We have a mortgage loan and although we have a small college fund for our daughter I'm sure she will have college loans.  We have credit cards and we use them quite a bit.  We live like any other middle class American family with some unnecessary toys like a Wii and a kayak and my two horses.  We travel twice a year to see our families in other parts of the country and we always have enough to eat. The difference though is that other than our mortgage we don't have any debt.  Granted I think our retirement accounts are too small, but that is a challenge I am working on.

That we don't have any debt other than our mortgage is not because we make a lot of money, we actually don't have a very big income compared to a lot of people we know.  It's because we are both very conservative about our spending.  And we can't buy all the toys we want or travel everywhere we want.  We have to live within our means.  Surprisingly, we do not feel deprived when we're not able to buy something we want but don't have the money.  That is a misnomer in our society that in order to live within one's means a person needs to be deprived of their needs.

I hope with this blog to be able to share some of the ideas and methods we use to manage our money and I hope to hear from others on how they save money and live within their means.