Beyond Paycheck to Paycheck

at June 17, 2009 in General Financial Planning. 0 Comments

The following is excepted from my first book, Beyond Paycheck to Paycheck:

Identity theft, the stealing of another individual’s personal information in order to commit illegal financial transactions, is a major problem today. Reviewing your credit reports annually is one way to monitor suspicious activity. In addition, there are other tactics to consider. Some of these tips might seem obvious, but people do make these mistakes and I don’t want you to be one of them.

Use a crosscut shredder to shred all those credit card solicitations arriving in the mail each day. If you don’t, someone can go through your trash (or recyclables) and accept your pre-approved credit card.

Choose to receive your current monthly paper statement as an electronic statement instead. This way, no one can find something valuable in your trash or mailbox, such as a statement with your name, account number, and other useful information. Save the electronic statement on your hard-drive and put a password on your computer.

Be very careful online. Look for the “s” at the end of https in the address bar before submitting any confidential information.

Also online, don’t respond to emails you receive which ask you to verify account data, such as your name or account number. Such fraudulent contacts are known as phishing. I am unaware of any bank, brokerage house, credit card company, and so forth who asks for your identifying information unsolicited by email. When in doubt about an email correspondence, call the financial institution. Don’t call the number listed in the potentially phony email; call the one listed on the back of your card or on your last statement. The customer support representative can tell you if the email is legitimate. It won’t be.

The last online tip is the most obvious but least taken to heart. Your account passwords shouldn’t be your kid’s name. Duh. It shouldn’t be on a post-it note in your wallet or on the side of the computer either. Double duh. Make your password something not easily figured out and memorize it. If your password looks suspiciously like your email address, it’s probably not a good password.

Don’t carry your social security card in your wallet. If your wallet is stolen, the thief probably isn’t going to have such a high level of integrity as to limit the take to the credit cards and cash in your wallet-the thief is going to apply for more credit in your name. Bigger payday for the thief and an even bigger headache for you.

If you haven’t been a victim of identify theft yourself, you probably know someone who has. It’s that common. And victims would tell you what an ordeal identity theft is and that it seems to take forever to straighten everything out. It’s worth being careful in order to reduce your odds of suffering from the theft of your identity.

Please share your identity theft experiences. Has it ever happened to you? To someone you know? When did it happen? Did you ever figure out how it happened?

"financial education"

Friday Q & A: Where to Put Your Future House Down Payment Money Today

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at June 12, 2009 in General Financial Planning, Housing and Q & A. 1 Comment

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

Coincidentally, I received the following two questions less than five minutes apart:

You signed my book at the ING DIRECT cafe in Chicago some time ago. In your book you refer to an 8% savings rate in hypothetical scenarios in several places. Where/how does one get this rate? I have a high interest account (under 2%) at ING DIRECT. I’m considering seeking financial advise/money management at Charles Schwab, but thought I’d check w/you first to get any feedback. I have $60,000 that I think I should be able to grow at a better rate with little (or no) risk, but not in a cd. I’d like to buy my first home in 6 months (with most of this money as a down payment) and am wondering what options I have to safely grow this money. I’m saving maybe $3,000 a month. I’ve never invested. Thoughts?

– Becky B., Chicago, Illinois

I’m thinking of buying my first house some time in the next 4-5 years. And I know I should start saving now. But what is the best way of saving? Should I put my money in a High-Interest Savings account such as ING DIRECT, in a 3-year long CD, or invest in a mutual fund with Vanguard? How do I choose which is the best option? Thank you.

– Diana C., Los Angeles, California

Straightforward Answer: Your investment choices must match your time horizon.

More Detailed Explanation:

Whenever you choose save a dollar, you must choose how to invest it.

You: No, I could put it in the bank.

Putting your money in the bank is an investment decision. It’s called investing in “cash.” Broadly speaking your investment choices are:

Cash (includes savings accounts, checking accounts, money in your wallet, and change in the couch).
Fixed Income (includes savings bonds, municipal bonds, corporate bonds, and the stable value option at your retirement plan)
Equities (includes stocks)

You: What about mutual funds?

Mutual funds can fall into any of the three categories above.

You: Even cash?

Absolutely. A money market fund is actually just a mutual fund that is invested in ultrasafe assets like “cash and cash equivalents.” Furthermore, some mutual funds invest in more than one category.

You: They can do that?

Sure. A balanced fund, for example, will often have a large percentage invested in both fixed income and equities.

Your Risk Tolerance, Time Horizon, and Investment Choices

As covered in depth in the investing chapter of Beyond Paycheck to Paycheck, your risk tolerance should drive your investment choices. (Unfortunately, that’s often not how it works since choices are often revealed to having made:

Out of fear of losing it all and therby keep it all in the bank - also known as the “Depression Mentality”
Out of fear of missing out on the next good thing and thereby purchasing 17 condos in Miami, putting $1,000 down per unit.

But that’s a post for another day.

Your risk tolerance is based on both your personality and your time horizon. Both Becky and Diana have shared with us their time horizon as 6 months and 4-5 years respectively. Let’s first address Becky’s conundrum.

Becky Wants 8% And Has a 6-Month Time Horizon

Turns out Becky isn’t going to be happy.

You: Why?

Because she has two mutually exclusive objectives. The first is to earn an 8% rate of return on her money. The second is extreme safety for her money since she needs it for a home down payment in just 6 months.

You: Why can’t she have these two goals?

She can. Just not at the same time on the same money. In order to expect to earn about 8%, she’ll need to take the risk of investing her funds in the stock market. (For those of you skeptical that 8% is achievable or that it dramatically understates today’s opportunity, I say:

I really don’t know what’s going to happen in the near term and neither do you.

However, 8% is the long-term historical return of the stock market (Check out this cool little calculator at Money Chimp where you can plug in any pair of start and ending years and learn the historical performance of the S&P 500). Since 1900, we’re at over 9%. Since 1990, we’re still over 7%.) Indeed, even today 8% seems reasonable for long-term performance.

You: But what’s the big takeaway?

There’s a ton of volatility in the stock market.

You: Well, there’s a newsflash.

First off, to some people it is. And secondly, when times are good (which they will be again), many people forget about the risk. Or, more precisely, they redefine risk as “not making as much money as someone else did.” All along, in good markets and in bad, you can make money and you can lose money by investing in stocks.

The net impact to Becky is that no matter how aggressive she is (and she’s probably not that aggressive, being that she’s accumulated $60,000 and has “never invested,”) she must keep all of her down payment money in cash. That’s the only way to ensure she will absolutely have her money available to her when she needs it six months from now.

Only in a savings account or a money market fund can she be assured that she won’t lose her principal. Furthermore, only cash affords her the ability to refrain from timing the market. After all, where will the stock market be in six months?

You: I don’t know.

Me neither. You wouldn’t want to have to sell if we’re back down at 6,500, would you?

You: No. will it be back to 6,500 again?

I still don’t know.

You: Me neither.

I think you see my point.

You: Right. So Becky can’t get 8% without risking her principal?

Correct - and please don’t comment below about the sure thing in soybeans.

Gary: It’s actually frozen orange juice.

Whatever.

Becky, just keep your money in a high-interest savings account and you’ll be fine. If you’re absolutely certain you won’t need it for six months and you can get a better rate with a CD, feel free, but remember the first time home buyer tax credit. If you’d otherwise buy a house in December, buy it in November and get the free $8,000 (subject to income restrictions).

Diana Has More Time - Can She Take More Risk?

Diana’s time horizon is a bit longer: 4 - 5 years. But, from reading her letter, her risk is less so from a potential loss of principal than it is from a current lack of savings. Diana needs to get going on savings for this specific goal (a home) today. It takes along time to get a down payment of 20% of the price of the home in order to avoid costly and utterly unnecessary PMI - especially in California.

You: Why is PMI unnecessary? I thought it was required if you put down less than 20%.

It is required. It’s unnecessary because no one is putting a gun to your head saying buy a home you can’t afford to pay 20% down on.

You: But–

But nothing. Save longer or buy a less expensive home. Or, like Diana and Becky, start saving well before you actually go home shopping.

You: When Diana starts saving, where should she put her money she has earmarked for a home?

In the bank.

You: She shouldn’t invest in stocks?

Probably not.

You: Why not?

Because the risk of loss of principal is still too great.

You: But if the next three years prove to be stellar for the stock market, this would prove to be the wrong advice.

No, it would prove to be unlucky. It’s the right advice for that very reason: we simply don’t know. Many people have advocated investing in stocks for your long-term objectives like retirement. Count me among them. From my vantage point, stocks make sense for my retirement plan as much today as they did 15 years ago when I started investing. I still felt that way earlier this year when the Dow was down in the mid 6,000s.

Don’t get me wrong, it may have periodically caused some lower intestinal distress, but it was and is still the best way to go - for the long-term.

You: What’s long-term?

At least 10 years. Four or five years is just too short. Diana, put your money in something much safer. A CD (or more than one CD) could be attractive, but you shouldn’t be investing your home money in anything you could actually lose your principal by in. By definition, this includes stocks.

More aggressive and sophisticated investors could consider bond or other fixed income investing - but given where we are with interest rates at the moment, even those may prove to be overly risky - especially for someone new to the game.

Good News

All of this leads to a wonderful conclusion: savings will be the primary determinant for you getting you your first house someday. True discipline will give you the opportunity to become a homeowner and in a far different way than the buyers of 2005 and 2006 accomplished the feat.

Remember, however, do not be cheap - be fiscally responsible.

I’m beginning to go through the home buying process myself. When you call your banker and you tell them you’re going to be putting down 20% (or more) and they pull your impeccable credit history, you will feel rewarded when they tell you what you can afford and at what rate. This is the future for Becky and Diana.

You: And me?

That’s up to you.

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Friday Q & A: Should I Repair My Car or Buy Another One?

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at June 5, 2009 in General Financial Planning, Q & A and Saving Strategies. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question. Recently, the questions have been arriving in droves, so get yours in today! As you’ll see from the signature below, they’re also coming in from all over. (Although nothing from Turkey yet. Istanbul, are you out there?)

Hi Michael,

I own my 2000 Volvo V70 wagon with 140,000 miles outright, but it needs major work to stay on the road – to the tune of $5,000. I am wondering if I should pay for the repairs or replace the car? The private party sale of the car, once repairs are made, would be $3,000 to $4,000 — less than the cost of the repairs.

Here are a few more details about my situation:

My general MO with cars is to buy a newer used car in good condition and drive it into the ground. I don’t like to spend money on cars, but I do like reliable and comfortable transportation for my family.

The mechanic who quoted me the repair estimate is fair and has been working on the car since the beginning. We trust him, as much as you can ever trust a mechanic.

Also, the 5K estimated for repairs are just the critical repairs. There are other repairs that aren’t critical so we’re ignoring those.

My husband and I plan to buy our first house later this year and don’t want to spend all of our cash. Even though I would normally tap my savings to buy a good used car outright, this year I am hesitant to do it because we will need the money for our down payment.

I’m considering financing a car, and I’m wondering if I should consider other options, like a new car where there might be some bargains or great incentives.

What do you suggest?

Many thanks!
Genevive, Maui, Hawaii

Straightforward Answer: Replace your car with a slightly used car and finance it.

More Detailed Explanation:

I fully realize that my short answer above may draw the ire of some. Although not for that reason, my response is for Genevive’s facts and others in very similar circumstances. Let’s address each of your issues in turn. I believe you really have three considerations:

Consideration # 1: Replace the car or fix the car?

It will cost you more to fix the car than it will be worth after completing the repair. By definition, this means that your car currently, sans repairs, has a negative value. (This happened to my first car after only seven years and 90K miles. You’ve benefited from 9 years and 140K since manufacture so you’ve done okay.)

It’s not a good idea to put money into an asset that is worthless. As you describe your car, your repair needs go well beyond routine and expected maintenance expenses. Furthermore, there are additional expenses, already known, that are needed in the short-term that go above and beyond the $5K amount.

Still, while your car has a negative value to you, it will have some sort of positive value to someone else. If you go to trade-in the car, it will have value as a trade, since a reasonable dealer will do what he can to move a car off his lot. (In this case, the economy will both help and hurt you. The dealer will be excited at the prospect of moving a car, but he’ll be less excited about the idea of taking your clunker. (Yet another reason to keep these two negotiations separate.)

Net: replace the car and get what you can for it. It’s about to become a money-pit.

Consideration # 2: Replace your car with a new or slightly used car?

This used to be a no-brainer: choose a slightly used car. Doing so enables you to avoid the painful, instant, and dramatic depreciation suffered by any new car buyer. It is likely still going to be your best strategy. But it is no longer a no-brainer. Due to the crazy economy we are now in, new car prices have been punished and, in many cases, severely so.

A brief illustration:

My wife and I finally purchased a second car (Until late April, we’d had just one sedan. However, with two growing kids and my new out-of-the home office, we eventually had to concede to running out of room and flexibility). We fully intended on purchasing a used mini-van (insert Dad joke here). But after several weeks of looking for used mini-vans, pricing them and doing just a little bit of negotiating with a new car dealer, the value proposition was notably stronger for the new mini-van.

Because of the economy, certain manufacturers are selling certain model cars at far lower prices than just a few months ago. Also because of the economy, many people are keeping their cars far longer than they would typically (I’m not talking about financially shrewd people who historically have always kept their cars until they couldn’t run anymore; I’m speaking of the masses who replace their cars every three years or so.) As a result, it’s possible that, for the make and model of the car you’re looking for, used cars might not be as readily available as during normal times. Supply and demand doing what they do, used car prices for certain models are strong.

Net: do your research. Depending on your local market conditions, the car model you desire, and your flexibility to consider other car types, you may very well be better off with a new car. Run the numbers, keeping in mind that you should expect and plan to keep a new car two years longer than a used 2007 model.

Consideration # 3: Lease, Finance, or Purchase for Cash?

I’m hugely against car leasing except in very specific circumstances. You’re not an ideal candidate for leasing anyway, given your intention to drive your vehicle for a long time and your history of actually doing so. So the real choice for you is to finance or purchase for cash. That you are even considering purchasing a car for cash puts you in the great minority. You are only able to do so because you either have ample savings, a low car budget, or both.

There are huge upsides in paying cash for a car, most notably avoiding interest charges on your car purchase. Furthermore, you won’t be in the monthly payment trap. Good outcomes to be sure.

But, again, there are other factors at work. You have two primary issues that influence my suggestion to you:

First, there’s the economy again. If you have the financial strength to be an attractive car buyer (good credit and a job), you will be eligible for significant financing opportunities not available to less credentialed buyers (or even to you, during normal economic times.) It is financially responsible to consider such low cost financing options. Currently, several new cars are available at low rate or no-interest financing. While I’m not advocating you sign up for an 8% car loan interest rate, if you can score a 1.9% or 2.9% rate, I’d rather see you with the additional cash in your savings account for emergencies or with the ability to increase your retirement savings.

Your second consideration with regard to financing the automobile is your intended upcoming purchase of your home. If purchasing the car for cash would push you below the 20% down-payment required to avoid PMI, the car for cash purchase option should be eliminated (or you’ll just need to shop for a less expensive home). Since you don’t seem like a “car person,” you’re better off making sure you are the most attractive home buyer you can be. This will mean bringing a sizable down payment to the table.

Genevive: Good luck with your decisions. Let us know how it all works out or if you have any other questions.

Everyone else: okay, where, and how passionately, do you disagree? Or do you see it the same way?

"financial education"

Expect the Unexpected: The Jacoby Elllsbury Edition

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at April 27, 2009 in General Financial Planning, Insurance and Investing. 9 Comments

You might already know that I’m a pretty big Red Sox fan. This weekend’s series with the NY Yankees was filled with a lot of unexpected events including a 2 run bottom of the ninth comeback, a 16-11 game (during which the Red Sox once trailed 6-0) and in my mind the craziest: Jacoby Ellsbury’s dramatic straight steal of home.

Depending on who you listen to, the last time a Red Sox player stole home was either 10 or 15 years ago. Regardless, it’s an incredibly rare event, especially when you consider how many games the Red Sox play every year. And while it’s truly special to see it, if you watch enough baseball, you will, sooner or later, see it.

You: What’s this got to do with personal finance?

Plenty.

Expect the Unexpected

Emergency Funds are for Emergencies

To all those people who never feel the need to create an emergency fund because they’re super-confident in their job security: get an emergency fund. Even if you’re never laid off, you could still get very sick or have an expensive accident. At that point, you’ll need an emergency fund and won’t have time to create one.

Investing Means Risk - Especially When it Feels Risk-Free

To all those who feel they can stomach the potential incredible short-term volatility of the stock market and therefore invest very aggressively even if they’re nearing or in retirement: Open a newspaper. Stuff happens. Was any of it truly expected? Heck no and certainly not the actual combination of events that led to the most recent market meltdown. Was something crazy going to happen sooner or later to spook the market? Of course. Invest for your age and true risk tolerance.

Never Risk a Lot for a Little

To all those who don’t have renter’s insurance because the odds of something going wrong are so low and because they don’t own too much anyway: Just go buy the policy. Since the odds are low, the cost of coverage is cheap and I can practically guarantee that, although you might not have much, losing all of it would be financially devastating.

Of course, there’s a good chance that you won’t need to tap your emergency fund, experience another tremendous market correction, or survive an apartment fire in the next few months, years, decades, or, perhaps, ever.

It was also quite possible I’d never see a straight steal of home - especially from a few hundred feet away.

Expect the unexpected. Sooner or later, it happens. I was glad to be there for Ellsbury’s accomplishment, but I’m not looking forward to any of the other events I mentioned above. But I’m prepared. Are you?

"financial education"

12 Things Every Teenager Needs To Know About Money (And How To Teach Them)

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at April 15, 2009 in Cash Flow, Debt management, General Financial Planning, Guest Posts and Investing. 3 Comments

This is a guest post from Grant Baldwin, the author of Reality Check, a book about helping students transition into the real world. His new website, BrokePiggy.com, answers questions from teenagers about personal finance, savings, and all things money.

This series “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” is a community blog experience. This post is only one of the 12 points in the series so to view the other 11, please visit the list of links below.

Living On A Budget Isn’t An Option

Ah, it’s time to discuss the dreaded ‘B’ word. Not that ‘B’ word you filthy animal…get your head out of the gutter!

In order to be successful with money, you really need to have a budget. It becomes a roadmap to guide your decision-making and your spending habits with your finances.

But I’m sure like most people, you and your teenager probably aren’t math nerds who stay up late into the night coming up with new ways to solve expert-level Sudoku puzzles.

I don’t do that either just so you know!

But whether you’re a math whiz or you still count on your fingers and toes, you need a budget. Most teenagers are more like free spirits who prefer not to live in the confines of a budget (I wonder if they learned that from their parents…hmmm…I’m just saying). So how do you teach a teenager to budget? Let me help young grasshopper…

· Start Now With What You Got – Budgets aren’t just for millionaires or people who make over minimum wage. Budgets are for anybody and everybody who has ever had a dollar (that would be all of us in case you missed it!). Same with the concept of giving, if you don’t budget when you make $100 per week, you’ll never budget when you make $10,000 per week (don’t forget about me when you do). I know expenses are limited and income is small, but establish that habit now to make a budget.

· Do It On Paper – I like gadgets and gizmos. And oddly enough, I kind of like spreadsheets. Spreadsheets are great for creating budgets, but don’t start off there. Start with good ole’ fashioned pencil and paper. Why? Something changes when you have to do the math by hand and see where your money is going. It forces you to really think it all through and make better decisions with your finances.

· Use The Envelope System – If you’re unfamiliar with this idea, basically the concept is to pay for as much as possible with cash. After you’ve helped your teenager to establish their budget, find categories that can be paid for in cash. Things like gas, eating out, movies, etc. Make an envelope for each of those categories and put the budgeted amount of cash in each. Then pay for items from their respected categories out of these envelopes. Paying with cash is tougher than swiping a piece of plastic and will also help your child to better manage their money, because when that envelope is empty, their spending is done.
Here are the rest of the articles in the “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” series:

Money Doesn’t Grow On Trees @ Bargaineering.com
Two Words: Compound Interest @ PoorerThanYou.com
Delay Gratification To Succeed @ GatherLittleByLittle.com
Credit Cards Will Steal Your Lunch Money @ PTMoney.com
Should You Earn A College Degree @ TheDigeratiLife.com
Spend Money Based On Needs Not Wants @ MoneyNing.com
There Is More Free Money Than You Realize For College @ FreeFromBroke.com
Taxes Are A Necessary Evil In Life @ MoneySmartLife.com
Do What You Love, Love What You Do @ GenXFinance.com
Don’t Be A Tightwad: Give Generously @ CashMoneyLife.com

"financial education"

Extended Warranties - Are in-store warranties a good idea?

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at March 20, 2009 in Cash Flow and General Financial Planning. 0 Comments

You: Are in-store extended warranties a good idea?

No.

You: Why not? They seem pretty cheap and they extend the warranty significantly.

Actually, they’re fairly costly and they don’t do much.

You: That’s not what they told me in the store.

I know.

You: So what’s going on?

Good question. Regardless of how an in-store warranty on a new television, printer, or other gadget is presented, you ultimately face a question about your risk tolerance.

You: My risk tolerance?

Yes. At a very high level, your risk tolerance is how you feel about subjecting yourself to the possible loss of money. So, in the case of an in-store warranty, you are presented an option of insuring yourself against a possible future dollar loss later due to the damage or breakage of the item you purchase. But to get this protection, you voluntarily choose to pay an additional cost today (the cost of the warranty).

If you’re more of a “Nervous Nelly” type, you’ll probably highly value the security of the additional coverage and minimize the cost of that protection. Those who are the “All in” types are likely to conclude the exact opposite.

You: What’s the right answer?

While that ultimately depends on your risk tolerance, I believe the overwhelming majority of in-store extended warranties are bad purchases.

You: Why?

First, these warranties are often eagerly sold, and anything that is that eagerly sold should raise a caution. Second, these warranties are among the most highly profitable items for sale at the retailer. They’re so profitable because there is so little cost to them.

You: Little cost to the warranty?

When all is said and done, the retailer selling the warranty has to pay out very little in claims. This is due to the numerous exclusions, the existence of a manufacturer’s warranty, people forgetting they have purchased the extended warranty in the first place and, of course, the realization by many customers two years from now that they don’t feel like paying to pack up and ship a 2 year old printer to some fulfillment center when a new one, which is much better than the one the one that just broke, cost just a few bucks more.

So, in general, I’d say pass on extended or in-store warranties. For more information on in-store warranties, check out one financial journalist’s experience when he was presented the option of an extended warranty for his cell phone.

What do you think about in-store warranties? Have you ever bought one? DId it pay off? Other thoughts on the matter?

"financial education"

How long do I have to keep this stuff?

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at January 27, 2009 in Carnivals and General Financial Planning. 1 Comment

Thanks to a crazy Monday, I just finished reading through this week’s Carnival of Personal Finance, a football-themed extravaganza hosted by Taking Charge. The top Saving/Investing post of the week was my recent post Investing in 2009 - What are your financial priorities? in which I answer a reader’s question about the relative importance of establishing an emergency fund in an environment of dramatically lower stock prices.

As is my custom, I’ll also highlight the best article of the carnival.

You: How is the best article determined?

Exclusively by me.

You: Based on what metrics?

How much I like an article compared to the others.

You: That doesn’t seem to be very scientific.

It’s not at all scientific. It’s just my opinion. However, it allows me to quickly cut to the chase for you.

You: A point you are quickly defeating by continuing this meaningless dialogue.

Fair point. My favorite article is How Long Do We Really Need to Keep Those Papers? by My Dollar Plan. It’s a good and concise list of what you need to keep, for how long, and what you can toss right away. Hey, less paperwork means less storage, so you’re saving right there. Then there’s your sanity . . .

"financial education"

Investing in 2009 - What are your financial priorities?

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at January 23, 2009 in General Financial Planning, Investing and Q & A. 0 Comments

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

My wife and I are going to receive a hefty income tax refund. We didn’t adjust our W-4’s properly until September ‘08 (after we read Beyond Paycheck to Paycheck), and by then we had already overpaid.

We have been saving aggressively but are still 4-months short of a 6-month emergency fund; I also have an unsubsidized student loan at 6.8% interest and a Roth IRA I haven’t funded in a long time. Meanwhile, Wall Street is having a huge sale.

My wife’s job is very secure, so I don’t believe the emergency fund is as crucial for us as for some people right now, after I get done grad school I am going to be a teacher in Philadelphia public schools district.

So, what do I do with my tax refund?

- Jeffrey R., Pennnsylvania

Short Answer: No one ever expects an emergency. If you did, it wouldn’t be an emergency.

Detailed explanation: Jeff, it’s great that you’re viewing your finances broadly. Your long-term holistic view will be a key ingredient in your ultimate financial success. Your question, while partly an investing question, is also one of financial priorities. While you and your wife have strong job security as teachers, events other than sudden job loss cause financial emergencies. Such possibilities include car accidents, a health issues, and expensive unplanned home repairs. While job security reduces one key concern, it does not eliminate all of them.

I, along with most financial planners, recommend a minimum of three months of living expenses for an emergency fund. Those people who are self-employed are better served by having a year’s worth set aside. Most employed individuals can be comfortable with about three to six months. Keep in mind that the number of months included in the emergency fund is necessary living expenses, not income. In a true financial emergency, you don’t spend money on discretionary items, so living expenses include only rent/mortgage, car payment, groceries, utilities, child-care, and other monthly payments you can’t change in the short-term.

Your sizable tax return may instantly give you the ability to get your emergency fund to an appropriate level. If you’re left with additional funds, I’d consider saving for retirement, either by increasing your 403(b) contributions (tapping into your income tax refund to make up any cash-flow shortfall) and/or establishing a Roth IRA.

Since you’re decades from retirement, you have a long-term time horizon and the majority of your investments should be equities to take advantage of this fact. That “Wall Street is having a huge sale” is just gravy when you’re investing long-term. (If you would have asked is this a great time to buy given that you want to sell in five years for some other non-retirement goal, I would say “I have no idea.”)

Good luck, Jeff, and thanks for submitting your question!

"financial education"

The post-six figure salary world

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at January 2, 2009 in General Financial Planning. 4 Comments

I just finished reading Life after a six-figure salary at CNNMoney.com. The article highlights two examples of the plight of the numerous recently laid off workers. Specifically, how in this very difficult job market job applicants face stiff competition from other unemployed workers, lengthening the time out of work. Even if an offer is to come, people find little wiggle room in salary negotiations and are accepting a LOT less just to get some income flowing to them.

Shaun Chedister, 30, is one of those people. Chedister was laid off from his job at Washington Mutual at the end of last year. After eight months of actively looking for work to help support his wife and four children, he accepted an offer from Ernst & Young even though the new position as an executive administrator paid less than half of what he was making before.

Needless to say, everything for Chedister and his family changes.

But the adjustment to making $66,000 a year from $125,000 has been hard. “For the last four to five years I’d been making six figures,” Chedister said. “My lifestyle had been at a certain level.”

While Chesiter is happy to be employed, he and his family have backtracked and will continue to go backwards in how they live from their housing to their cars to their dining choices.

If you’re employed in this economy, you may still, like the others before you, become one who loses his job through no fault of his own. I believe in personal accountability, but when your entire industry implodes or your company vaporizes overnight, it’s hard to argue you should have seen that particular event on the horizon

To those still employed: you’ve been warned. Do more than read. Listen. Take action.

Job loss can happen to you. If it does, a significant paycut may be your only immediate option. What can you do to prepare? For starters, live beneath your means. Ideally, way below. Build your emergency fund. How big? If you suffer a job loss, you won’t be disappointed to have “too much” money set aside for an emergency.

One of my friends recently lost his job and isn’t worried. Sure, he wants to get back to work as soon as possible. But he knows he can last a very long time without income because of the financial discipline he and his family put into place while he was still working. He can afford to be selective, at least in the short-term. Save like him and you’ll also have options if, one day, you get pink-slipped.

Twice in my life I’ve taken 100% pay cuts. Once to go to graduate school and again to start Total Candor from scratch. Both times the impact could have been brutal to my lifestyle, but each cut was a non-event. My wife and I have always lived a certain way, so our lifestyle didn’t need to be cut that much as a result of the whole non-salary thing. But even when our incomes came back, we still didn’t significantly change our lifestyles. We live how we live and we’re happy.

What have you done to prepare for the remote but growing possibility you incur an involuntary temporary 100% pay cut? If the question becomes more than hypothetical, will it be enough?

"financial education"

Smart Financial Moves: 2008 in Review

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at December 29, 2008 in Balance, Cash Flow and General Financial Planning. 1 Comment

I hope you are enjoying the holidays. Now that we’re in late December, a 2008 recap seems appropriate. Financially speaking, these were my top four financial moves of the last 12 months:

Not buying a house. Although home prices have fallen in our area, prices have only retreated to 2004 levels according to most local reports. Unless you purchased in 2006, this is hardly a major correction. Furthermore, home prices are still expensive by historical measures (e.g., ratio of sales price to rent, affordability based on median income, etc.). As such, I believe (but cannot guarantee) that home prices will continue to fall for the near future. Yet when we do buy, we expect to stick around for a while. Add that to the size of my growing family and we just might purchase before the 2010 expected bottom. Still, not buying a home during 2008 is my top financial move.
Visiting Boston during an ice storm - Like most New Hampshire residents, we lost power for at least two days earlier this month due to an ice storm. No way we were going to ride it out at home when the inside temperatures were expected to (and did) reach the thirties - we have an infant! So we planned on heading to a hotel 20 minutes away. Then my wife and I chatted: Why not make lemonade out of lemons? If we’re forced to use all these hotel points (I travel a lot for work), why not go somewhere fun? So off to Boston we went. Now we have family memories of being tourists in Boston (riding the subway, going to the Aquarium, pressing buttons to go up and down on the elevator) with two little kids instead of hanging out in the confines of a breakfast nook in Dover, NH waiting for the lights to come on back home.
Not selling any investments as a reaction to the financial crisis - Other than a swap of very similar mutual funds for tax purposes two weeks ago, we made no changes to our investments this year. Yes, we got pummeled in the market like everyone else. Yet we’re adding to our stock market investments at this fairly low point in the market. I can afford the risk as a thirty-something, knowing I have decades until retirement. Still, stomaching the downturn without selling impulsively was a top 2008 financial move.
Buying tickets to two Red Sox playoff games - Admittedly this might not have made the list had the Sox been blown out twice instead of rallying, in the bottom of the 9th, to win both playoff games I attended. This financial move serves as a reminder that money is only a tool to bring you things and experiences you desire. Money is not a thing or experience in itself. Some people would scoff at spending $150 (twice) on a ticket to a baseball game. They should. But I underpaid; each ticket was worth far more to me. Since I prioritize my spending (and limit or even eliminate it on things I don’t truly value), I can afford the rare extravagance of a $150 ticket. As a result, I have memories that will last my lifetime. I can see it now: “Yes, grandson, I was at that game when the Red Sox came back from 7-0 with two outs in the seventh . . .”

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What were your best financial moves of 2008?