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.
Wednesday, August 10, 2011
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.
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.
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.
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.
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.
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