Posted: December 31st, 2007 | Author: Joe | Filed under: Saving | 1 Comment »
This is the time of year when we get inundated with articles and news stories about New Year’s resolutions and how we seem doomed to fail to achieve them. It’s no different in the financial realm. Most people pay lip service to creating an emergency fund or saving for a new car or a down payment on a new home, but most will fail at these resolutions too.
It’s not surprising, since we fail at many of the things we resolve to do that entail changing our behavior. It is possible to change your behavior, but the momentum of a life time of habits stacks the deck against you.
Lucky, unlike dieting, there is something incredibly easy you can do to ensure success in most financial resolutions.
The single most powerful method to achieve success is this: Automate it.
That’s right. By making the steps to achieve your goal automatic, you eliminate the single biggest hurdle to your success – you!
For example, if your New Year’s resolution is to save $20,000 for a down payment on a new house then you need to determine when you want to achieve this goal. Once you have that number, divide that by the number of pay periods (or deposits) you can realistically absorb into your budget and you’ll have the amount you need to deposit each pay period to meet your goal.
Next, set up an automatic savings plan (ING is famous making this easy with their ING Direct Orange Savings Accounts) to take the appropriate amount out of your checking account each pay period and stow it in the savings account.
After the initial setup, you can go back to life as normal, albeit with a bit less money in your checking account each month. But you’ll have the piece of mind that you’re taking the steps toward your goal without even thinking about it.
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Posted: December 28th, 2007 | Author: Joe | Filed under: Reviews | 1 Comment »
“In those things toward which we exerted our best endeavors, we succeeded!”
-Kobbi, lyre player of Babylon.
Today’s book review is The Richest Man in Babylon, by George S. Clason.
This book was originally written as a collection of personal finance pamphlets in the 1920’s and later published in book form in 1955.
My overall impression of this book is a favorable one. I found it a very enjoyable collection of parables set in ancient Babylon, with modern parallels. As far as financial info goes, there isn’t anything earth-shattering here. It provides the basics of personal finance, so it’s best suited for anyone starting out on the road to personal finance, especially young adults.
I personally found it more motivational than instructional. It provides simple guidelines and requires discipline to follow them. Perhaps that’s the true secret here – there is no “get rich quick” formula. It is possible for you build wealth and have the financial freedom you dream of, but doing so requires discipline and time to succeed. It’s not all that sexy, but it’s true. Here is a sample of the guidelines layed out in the book:
“Such things as the following a man must do if he respects himself:
- He must pay his debts with all the promptness within his power, not purchasing that for which he is not able to pay.
- He must take care of his family that they may think and speak well of him.
- He must make a will of record that in case the gods call him proper and honorable devision of his property be accomplished.
- He must have compassion upon those who are injured and smitten by misfortune and aid them within reasonable limits.
- He must do deeds of thoughtfulness to those dear to him.
- Cultivate thy own powers; to study and become wiser and become more skillful”
Once again, it’s about having and following a plan. However, the author also ties financial responsibility to self respect. This is something I don’t see much of in a lot of modern day personal finance books, but I think it is a large part of having good personal finance habits; it’s not unlike good personal hygiene in when it comes down to it. Each leads to an increase in self-esteem, which in turn leads to more confidence and greater success.
All in all, the book contains interesting and inspiring anecdotes of wealth building, but the main points are made in just two chapters, 7 Cures For a Lean Purse and 5 Laws of Gold. 7 Cures for a Lean Purse details 7 guidelines to produce and grow wealth. The 5 Laws of Gold essentially lays out some guidelines that explain how to manage your gold (money).
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Posted: December 27th, 2007 | Author: Joe | Filed under: Debt, Tips | 10 Comments »
People accumulate debt for a number of reasons. Some are unavoidable such as a health crisis or loss of work from disability. But often, the root cause is a learned behavior of living beyond one’s means. Spending more than you earn is a surefire way to a life of debt. It’s also the most prominent reason. (It’s what happened to my wife and I and what ultimately led to My Financial Tipping Point.)
If you fall into this category, then I hope this article will help you to work your way out of debt. However, if you have accumulated a large amount of debt due to loss of income from disability or illness then you should seek professional assistance and find a Debt Counselor.
Some people believe that all debt is bad debt, while others divide debt into discrete categories that fall between good and bad debt.
As a general rule of thumb, debt is considered “good” when it is used to pay for an asset that appreciates in value faster than the debt payments expend your resources. Student Loans and mortgages often fall into this category. Interest payments of this type of debt also tend to be tax deductible, at least partly.
Pretty much any other type of debt falls into the bad debt category. This is typically known as consumer debt. Items in this category include credit card debt and personal loans. Car loans usually fall somewhere in between as they are used to purchase a liability (automobiles tend to go down in value as well as require regular maintenance and upkeep), but that liability usually carries some value, whereas credit card debt does not.
The good news is that getting out of debt and learning to avoid it in the future are attainable goals if you follow some simple principles. The principals of debt management are simple, but the process can be difficult at first due to the discipline and persistence required. That’s the hard part, but these 7 steps should help you get out of debt and keep you on the road to a debt free life.
DISCLAIMER: There are numerous avenues for debt management advice from free articles on the Internet to professional consumer debt counseling. There are also many debt solutions to be found. I offer 7 simple steps that have helped me to eliminate just over $12,000 in debt in 18 months. To be fair, it was 18 months of determination, discipline and sacrifice of many things we wanted but in the end what we really wanted was to be free from our debt! This is how to get out of debt on your own.
Step 1. The first and most important step to getting out of debt is this: Admit you have a problem.
I cannot stress this point enough – changing your behavior is the key to eliminating debt. After you recognize your situation, you next need to assess the severity. This leads to step 2.
Step 2. Find out where your money is going.
The next step is to create a budget. Many people never make it beyond this step. This is mostly because they set unattainable goals by making idealistic assumptions about their cash flow. They forget to account for all the “little things” like their daily coffee from Starbucks or a bottle of wine once or twice a week. It is true that these things are little on there own, but in the aggregate they add up and they can make the difference of being on target or $100 over budget for the month.
You don’t necessarily have to stick to a strict budget for spending, but you should create a budget for a few months to see where your money is going at the very least. This is what we did. Once we got an honest handle on where our money was going, we were able to find places we could trim our spending. Which leads to step 3. You can get a budget worksheet here and here.
Step 3. Cut expenses where you can to free up money.
This step is all about freeing up extra money that can be put toward paying down your debt. Take a close look at your budget and see what expenses you can cut. Be sure to ignore any debt payments, i.e. Credit card payments, car loans, mortgage. You read correctly: ignore those payments, for now.
Shop around for new car insurance and increase the deductible to lessen the premium. If you have high long distance bills, consider consolidating your cable, Internet and phone service or go without cable for a few months if you want to eliminate your debt even quicker. If you need a cell phone, but never use all your minutes, you may also want to look into a pay as you go service.
Bill consolidation and elimination is a major part of this step. Look at your budget and cash flow and eliminate (or reduce) any reoccurring payments that you can. These can act like financial wounds that slowly bleed your bank account dry.
Another great place to “find extra cash” is to adjust your withholding tax. Cut back on how much Uncle Sam swipes from your paycheck, and stop giving the government a tax free loan with your money. Here’s a great worksheet to help you determine just how much you should be withholding, but be sure to have your latest pay stub handy!
Step 4. Consolidate any loans that don’t carry tax-deductible interest payments.
This is an extension of Step 3. Where Step 3 dealt with cash flow for non-debt payments, Step 4 focuses the same approach on debt payments. Now, go back through your budget and look closely at all your debt payments – the ones I said to ignore in Step 3. It’s now time to focus on debt consolidation.
Look for items like car payments, personal loans and credit card debt. If you own a home, consider transferring your balances to a home equity line of credit for a lower rate as well as a tax deduction on the interest paid. You can also consolidate to 0% (or at the least a lower rate) card with a balance transfer offer to another credit card. NOTE: This is only beneficial if you already have the credit card (i.e.: don’t take out any more credit cards) AND if you stop increasing your credit card balance. This goes back to Step 1. I’ve seen too many people consolidate their credit debt on a 0% transfer and then go on using the 1st card without paying off the transfer, only to see that 0% introductory rate jump to double digits over night.
Finally, if you have student loans I highly recommend looking into federal loan consolidation services, or student loan consolidation services. It’s possible to refinance multiple student loans into a single low interest (sometimes less than 3%) loan.
Now that we’ve taken stock of the situation, it’s time to develop a plan for downsizing your debt.
Step 5. Eliminate unsecured debt.
Pay down high rate, unsecured debt first. This is mostly credit card debt. You’ll pay more in interest than you could make in a savings account and there are no tax benefits; so get rid of this debt first. A general rule of thumb is to pay at least twice the minimum monthly payment, with any extra cash also going toward this debt.
You may also want to try asking your credit card company to lower your rate. It doesn’t always work, but if you can realistically threaten to take your credit card business elsewhere or never use the card again, it carries a lot of leverage.
Step 6. Cleanup the secured debt.
Next, pay down any car loans you might have followed by student loans. Rates were very low for government-backed loans a few years ago, so it’s possible you have a rate in the range of 1-3%. If this is your situation, then you’re probably best off with paying the minimum, getting the interest tax deduction and putting any extra money in a high yield savings account.
Step 7. Buy only when you can afford to and never pay full price.
Budget and save before you buy. Try to buy only when items go on sale. This can range from groceries to mp3 players. Be patient and pay with cash instead of credit. You’ll be surprised how soon your thinking will change to saving instead of spending money, and you’ll be glad it did.
If you must shop, here are some links for coupons and savings:
Changing our behavior is never easy, but the rewards can be tremendous. In the case of learning to live debt free, you’ll find a new sense of confidence and security. You’ll also be on the road to building true wealth and having your money work for you, instead of working for someone else.
Still hungry for more?
Check out Little Steps: 100 Great Tips For Saving Money For Those Just Getting Started over at The Simple Dollar, for great tips on cutting costs and squeezing out as much extra money as you can each month!
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Posted: December 26th, 2007 | Author: Joe | Filed under: Insurance | Tags: How To, Insurance, Life Insurance, Tips | 2 Comments »
When buying insurance, there are often two important and confusing questions that need to be answered:
1. How Much Do I Need?
2. What Kind Should I Buy?
I’ve answered the question of “How Much” in a previous post that you can read here.
This post is dedicated solely to the second question: What kind of life insurance you Should buy.
At first glance, there seems to be many different types of life insurance: Term Life, Whole Life, Variable Life, Universal Life, and Universal Variable Life. But, there are really only two basic categories of life insurance: “Lump Sum” and “Cash Value” policies.
The only type in the “Lump Sum” category is term life insurance. Term life insurance is also the simplest and most cost effective type. This is sometimes referred to as “pure” life insurance, as it only pays a specific lump sum to the beneficiary at the time of the insured’s death.
This puts all other kinds of life insurance into the “Cash Value” category. These types pay a lump sum death benefit (same as term life), but also, as the name implies, carry a cash value. Part of the premium on these types of policies goes into a savings account or some other low-risk investment, so the premiums tend to be higher on cash value policies.
Now the single, most important thing to know about life insurance is this: the primary purpose of life insurance is to replace the income of the insured should the unthinkable happen.
Most experts recommend buying term life insurance and forgoing the whole life or universal life varieties. The reason is twofold:
1). It fulfills the purpose of life insurance.
2). It’s cheaper than all other kinds and allows for the greatest flexibility in your financial planning.
This second part is key. The thinking is basically that you should buy your life insurance to ensure an income stream for your beneficiaries if you should die prematurely (the single purpose of life insurance), and invest the difference in premium cost between the term and cash life policies in a separate investment vehicle that you control.
With the wealth of information on investing and the abundance of discount brokerage services, studies have shown that people earn more if they invest in lost cost investment vehicles (i.e.: low cost mutual funds, or index funds). Of course, the key is to follow through and invest the difference between the cost of the Term and Whole policies. The result will be that you’ll earn much more on your money without the high fees and commission of an insurance agent, but you’ll also have the power to decide what fits your risk tolerance and investment style. You’ll have greater freedom and reward, but greater responsibility as well.
This is a great time to buy life insurance. The mortality rates of adults in the U.S. have been falling steadily over the last decade and a half, and so have life insurance rates. Also, there are numerous online sources that allow users to compare life insurance rates and institutions so they can select the best offering for their money.
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This is the time of year when we get inundated with articles and news stories about New Year’s resolutions and how we seem doomed to fail to achieve them. It’s no different in the financial realm. Most people pay lip service to creating an emergency fund or saving for a new car or a down payment on a new home, but most will fail at these resolutions too.
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