Kamis, 30 November 2006

Eliminating Debt (Psychological vs. Financial)

Is one way better than another to get rid of debt? The answer to your question will likely differ depending on who you’re asking.

“FINANCIAL” METHOD. Nearly every ‘financial’ person will advise that debts should be paid off in a particular order: start with highest interest rate and move to the lowest interest rate (done by rolling the payment from one debt to another as debts are paid off). While this method makes perfect sense from a mathematical point of view, more and more people are finding that there is another method [often overlooked] that works better on their psyche ...

PSYCHOLOGICAL METHOD. This system of debt repayment, often referred to as the “debt snowball,” organizes one’s debt from the smallest balance to the largest balance. This method is not likely to save the most money or time (as the interest rates are not likely to align in that manner), but many find this approach very empowering and motivating because they see progress quickly. Focusing on the smallest balance first will accomplish this end.

In both of these methods, pay the minimum amount on all debts except for the “focus” debt (smallest balance in psychological method; highest interest rate in financial method); pay as much as possible on the focus debt until it is eliminated and then approach the next debt in the list with similar intensity.

I’m not arguing against the merits of the financial method as outlined above. Obviously, if someone has the discipline to adhere to the plan, you’ll save the most time and the most in interest expenses. The psychological method merely takes a seemingly more “human” approach to finances that suggests that people will be more likely to stick with their ‘financial diet’ if they see some ‘debt pounds’ come off quickly … that is what Personal Finance is all about – doing what works best for you (which very well may be something different than the next person). After all, the point is getting out of debt [the end]; don't get caught up in the means to the end. How you decide to do it is much less important than doing it.

Check out the following Excel spreadsheet if you want to play around with the different methods …

Senin, 27 November 2006

Kids and money, loose change, and turkey leftovers

Carnival of Personal Finance #76 is up at My Financial Journey, with 47 entries. My personal highlights:

Finance-4-Kids gives some tips on how to teach your kids about money. One or two seem a little pie-in-the-sky--I'm not sure how you can "Eliminate fear and greed" in anyone, let alone children--but generally his points are well-taken.

(Incidentally, I've started CJ Jr. putting money in his piggy bank. At two-and-a-half years old, he is more interested in the loud "clunk!" sound from dropping the coins into the pig's belly than the value of saving today for something tomorrow. Hopefully, someday that will change.)

Jenna Coffee at Moneybucks Coffee writes about something dear to my heart, given the name of my blog: what she calls "nuisance money," or the coins at the bottom of her purse and in a jar on the counter. I didn't know Coinstar charged 8.9% for their automated machine to count your pennies (it's also free if you use the money to buy a gift card). Nice work if you can get it.

Finally, here's a post in the spirit of the season that I wish I wrote: What can you learn about money from a turkey dinner? at Money Smart Life. You'll be looking at your Thanksgiving leftovers in a new way.

Calculator gives you the basics for creating a budget

The thought of creating a family budget stops many people dead in their tracks. They look at the stack of bills and receipts on their desk, and suddenly cleaning out the garage is more appealing.

Often the reason is because folks don't know where or how to begin. But when it comes to setting up a budget, you don't have to recreate the wheel--there are any number of tools out there to get you started.

Take the "Ideal Budget" calculator on CNNMoney.com, part of its Money 101 series on the basics of personal finances. The "Ideal Budget" doesn't quite live up to its name in my book, but it's a quick and easy way to give you the basic framework for your own budget.

A broad financial picture
With the Ideal Budget calculator, you first input the amount of your income. Then you enter your expenses, in five broad categories: Housing & Debt, Taxes, Insurance, Savings and Investment, and Living Expenses. The calculator shows the percentage of your income going to each specific category, and provides an "ideal" budget allocation to see if you're spending too much or too little in one area.

It took me all of about 10 minutes to enter my family's information, though admittedly I have most of that information available at my fingertips. If you don't keep track of your expenses regularly or can't remember what you did with your last paystub, it will take you a bit longer.

I liked the fact that the budget was organized into just five expense categories. If you're just starting out making your first budget, simplicity is key. You need to have enough categories to make the personal financial "data" you're gathering and tracking helpful, but not so many that it's an administrative headache.

Not perfect categories
But I question a couple of the specific categories the Ideal Budget uses. For instance, I don't see a whole lot of value in budgeting your taxes. True, taxes are a big expense, but they are what they are. Most people with a steady paycheck or mortgage payment pay the same amount each month. If you're overspending in one category, you wouldn't be reducing your taxes to make up the difference. M and I base our monthly spending plan on after-tax income, which is truer to the actual income we have to spend.

I also don't like grouping Housing & Debt together. Yes, your home mortgage (if you have one) is debt, but it's also an investment--much different than the credit card balance you have for that plasma screen TV, or your new car loan. It's much more revealing to give your consumer (i.e., non-mortgage) debt its own place in your budget, and see just how much of your monthly income it's consuming.

Percentages can be questionable, too
The "Ideal budget allocation" percentages provided with the calculator are helpful. Some of the most common questions folks have about their finances are, "How much should I be spending per month on my house? On groceries? On entertainment? etc.," and the calculator gives a basic idea.

But like the categories themselves, the percentages come with some caveats. The calculator lists 25% as the ideal amount that should go for taxes, an amount which realistically could vary by the individual. It lists just 26% of income going for living expenses, but includes everything from food and clothing to gasoline and utilities. I don't know where the folks from CNNMoney live, but in New Jersey, the cost of living is probably higher than 26 cents of every dollar.

One "Ideal budget allocation" I agree with: 15% for Savings and Investment. That's truly an ideal figure, based on the fact that the U.S. savings rate has been negative for the past year, but one well worth striving for.

A first step worth taking
Judging by the "Ideal Budget," my family's in pretty good shape. We have little debt, so we're well below the 30% ideal allocation in that category. Our living expenses are running about more than a third of our income, which makes me question the cost of my 105-mile roundtrip daily commute--but since I love where I work and where I live, that's probably not changing.

If you've never created a budget before, the Ideal Budget calculator is worth a try. At least you'll get to say, "So that's what a budget looks like...!" But keep its limitations in perspective and think about how you could tailor it to your own needs. Hopefully, it will encourage you to put off cleaning the garage for another week.

How to save $1,000,000 and have your own jet, too

My friend Tim, hero of my recent "Shopping tips from a savvy online bargain hunter" post, proved again that he really knows how to find good deals online. Check out this one he found advertised a couple weeks ago on Dealnews.com for a Cessna Citation Mustang Light Jet from Sam's Club.

Sure, the $2.7 million pricetag might seem a bit steep. But consider that it's $1 million off the list price and comes with a Sam's Club lifetime membership. Chances to be a wise spender like that just don't come around every day. No wonder Sam's Club is already showing the jet as "sold."

Selasa, 21 November 2006

High taxes may be the least of your problems

The politicians here in New Jersey are at it again--trying to figure out a way to lower the highest state taxes in the country. Few Jersey residents believe they'll make much headway, as this Philadelphia Inquirer article points out, and I, too, will believe it when I see it.

But if you think that lower taxes will make a big difference in your personal finances, think again. If you're complaining that taxes are too high and are a big reason you don't have enough money to live, you just might be looking at the wrong side of the equation.

It's not the taxes that are killing you
I was struck by this quote at the end of the Inquirer article linked to above:

"I just spent $200 on beauty products and makeup and had to pay $14 in sales tax," said Elisa, a woman shopping in Atlantic County. "I think that's ridiculous. They better start giving us something back or people are going to start moving to states where they have to pay out less money in taxes."

Now I'm trying hard not to rush to judgment. I've been with my wife M when she's bought makeup and I know it can cost a pretty penny (even at our local drugstore). Plus, I know that M wears makeup to look nice, mostly for me, and so I can be held responsible for the lipsticks and eyeliners in her purse. Guilty as charged. (Though she looks beautiful naturally, too--seriously.)

But $200? For makeup? And then complaining about $14 from a 7% state sales tax?

I can't make that kind of logic add up.

Taxes are a good, not great, deal
No one likes a big tax bill. And I've done my share of griping about the big chunk of our family income that goes to our federal and state governments.

But taxes are a fact of life. They pay for things our country and states couldn't do without, like roads, schools, and the protection of our homes and families. In the big scheme of things they might not be a bargain, but they could be considered a pretty good deal.

Being money-wise is less taxing
I don't know if Elisa is rich or poor. I don't know if that $200 in makeup will last her a year or a month. I don't know if she carefully included the expense in her monthly spending plan.

But if she's in a financial mess, I know one thing: Paying $14 less in taxes--or moving to another state with no sales or income tax--isn't going to get her out. Her best chance at financial redemption is to change how she thinks about her money, and how she behaves in regards to it. Save more, spend less, know where every dollar goes. That's taking a wise approach to managing your money.

It's good advice for every person to follow. And come to think of it, for every legislator too.

Senin, 20 November 2006

We've been "crammed!"

That's right, crammed. And I didn't even know it.

"Cramming" is the practice of unethical companies burying charges in the pages of your phone bill for services you never authorized or even used. The charges can range from a few dollars to double-digit amounts--but often not large enough for you to notice and question the total amount of your bill.

My family was fortunate because the charge was small, we picked up on it right away, and it took just one call to get it removed. But others haven't been as lucky. Cramming can mean shelling out quite a few bucks, wasting a lot of time on the phone, and dealing with a big headache.

Getting a name pays off
I discovered we'd been crammed thanks to writing this blog--specifically the "To get better service, get a name" post a few weeks back. I was going to write about my experience following up on a $7.64 "miscellaneous charge" included in our August phone bill from a company named OAN Services, Inc. The charge was for a call from our home phone line to a strange-looking, 9-digit number, one that neither I nor my wife M could recall making.

I called the 800-number provided on the bill for OAN and told their representative that the charge was either a mistake or bogus, and we wouldn't be paying it. The OAN woman briefly tried to explain what it was for--which I still don't know, but it was something having to do with the Internet--but I stood my ground. When she finally said she'd have the charge removed, I dutifully wrote down her first and last name--just like I advise in my post--and confirmed that it had been done a few days later by checking my bill online.

I couldn't recall the woman's name, so I couldn't use the experience for my "Get a name" post. But in looking up OAN on the Internet to try and jog my memory, I discovered that the company's business is scamming people through unauthorized phone charges.

Rip-off reports galore
According to posts on www.ripoffreport.com, OAN billed one person in Illinois $53 for "non-basic service charges." "After calling the numbers provided on the Verizon Bill...we were placed on hold for a period of time, then when we disputed the call they said we had said yes to this service. Verizon would not address this issue, only tell us to call the numbers provided," the Illinois resident said.

"This company is charging me for Directory assistance in Nevada that I never used. My phone Company...said that there was nothing they could do...My charge was $7.14. Imagine multiplying that by all the phones and cell phones in the United States and you have a MULTI_MILLION dollar business," wrote Patti from Missouri.

And blogger Brian Patton had to make five calls and spend a couple hours on the phone to get a $50 charge removed from his bill.

If you're a victim, too
The Federal Trade Commission (FTC) and Federal Communications Commission (FCC) are well aware of cramming. Here are a few tips from the FCC to protect yourself:

  • Review your phone bill every month (as you should do with every bill and account statement you receive). Keep an eye out for calls to unfamiliar numbers, or for services that you don't recall ordering or using.

  • Make sure you know what service was provided, even for small charges such as $2.00 or $3.00.

  • If you can't explain what a charge is for, call your phone company or other service number provided and question its authenticity.

  • Keep a record of the telephone services you have authorized and used – including calls to 900-numbers and other types of telephone information services.

  • Read the fine print in promotional materials before signing up for telephone or other services to be billed on your phone bill.
If you have been crammed, immediately call the company that charged you and request to have the charges removed. If that doesn't work, you have several options: contact your state Attorney General's office, enlist the help of your local Better Business Bureau, or escalate your complaint to the FTC or FCC. The FTC, in fact, has a special cramming hotline at 202-326-3134.

One theme consistent in "cramming resolution" success stories: Be persistent. It may take several calls and some time, but you should be able to stop it and even have your money refunded.

And if OAN is the one you're after, here's where I reached them: 800-731-7777.

Visit this week's carnival of personal finance
Everybody loves the carnival, and Everybody Loves Your Money is the host of Carnival of Personal Finance #75. The list of personal finance articles seems to grow every week. Here are my favorites:

Kamis, 16 November 2006

Negotiating a Lower CC Rate

There have apparently been some 'issues' with registration for the 1-credit Financial Success class. They should [hopefully] be resolved now - there are no prerequisites or requirements for class entry. More info below ...

Negotiating a lower credit card rate:

Any “get out of debt” strategies/plans you come across will consistently tell you to lower your credit card rates. Obviously this is good advice and a no-brainer strategy – if I can repay my credit card debt at 10% instead of 20%, I’ll be better off. What most of these plans leave out is how you go about getting a lower rate on your credit card. Let me share some ideas with you if you find yourself in a high rate CC situation.

1. Call your credit card company and ask for a lower rate. Most have lower rates available to good customers (customers paying on time every month), but they don't volunteer the information ... you have to ask. This is likely to work if your high rate was the result of a missed payment and not a long-term problem.
2. If your card refuses to give you a lower rate, find one that will. Do some homework – there are over 30,000 credit cards out there. In this highly competitive industry, if someone won’t treat you the way you deserve, someone else will. A few websites to search for no-fee, low rate cards [assuming you haven’t already gotten several acceptable offers in the mail] include:
- CardRatings.com
- CardWeb.com
- CreditCards.com
- Index.Credit.Cards

After you’ve done your homework, contact your company to inform them of your offer. Being specific is important, because an offer in hand will create leverage for you. Let them know that you wanted them to have the opportunity to match the competitors offer before you transferred your balance. Ask to speak with a supervisor if necessary. Click here for a sample script.
3. Be prepared to switch. If what you’ve tried to this point hasn’t worked, consider switching to a card that is more interested in your business [willing to work with you]. If you have a card without a balance, call that company first to see if they have a balance transfer special prior to opening a new account.

Call confidently – a 2002 study found that more than half of the people [from a wide variety of credit situations] that called to request a lower credit card rate were granted their request – from an average starting rate of 16% to a lowered rate of 10.47%. I met with a student this afternoon and we talked about her credit card rate and tactics she could explore to try to lower her rate. All of these things above were discussed – the source of these three suggestions to negotiating with your CC …? AMERICAN EXPRESS!

Seats in the 1-Credit courses for spring are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (68 seats left)
Financial Success -- FIN PLN 4318 (Ref #43587) - (117 seats left)

The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

New cars may be more affordable, but still don't buy one

Cnnmoney.com ran an article recently that cars are at their most affordable levels since 1980. According to Comerica Bank's "Auto Affordability Index," better productivity in the auto industry combined with intense competition has driven the cost of a new car downward since its high in 1994. Meanwhile, the average family income has risen five percent over the same period.

"It's a pretty happy story for the consumer," Dana Johnson, chief economist at Comerica, is quoted as saying.

Not this consumer. Including finance charges, Comerica estimates the cost of the average passenger vehicle sold in the third quarter of 2006 at $26,500. That's about five percent less than the same period a year before, but still an awful lot of money to pay for something that's going to be worth about half that amount in a year or two.

If you are trying to get your finances on track--working to pay off debt, amass funds for your retirement or your kids' college, build up an emergency cash reserve--then a new car is a sure way to run yourself off the road. Just say no to buying one.

Used cars are a lot better deals than they used to be. I saved a few thousand dollars buying a 1998 Nissan Sentra with 12,000 miles on it eight years ago. It just passed the 170,000-mile mark. Best of all, it's completely paid for, giving M and I the freedom to work on our other financial goals--like trying to move up to a single-family home without mortgaging our life away.

Kamis, 09 November 2006

Successful Models in Financial Education

As I sit here in a hotel room in Washington D.C. contemplating what to write about in this week's tip, I think I'll take the opportunity to toot our horn a little bit ...

Since arriving at the University of Missouri about 15 months ago, the Personal Financial Planning Department has been supportive of just about everything I've wanted to do in starting/operating the Office for Financial Success. We've had many rewarding successes along the way - today among those. I was very honored to be invited to D.C. by Freddie Mac to receive two awards that provide national validation to the good things being done at MU.

2006 Successful Models in Financial Education Awards:
Freddie Mac today announced their 2006 successful models within four financial education categories. The OFS was proud to be recognized in two of the four!

* Successful Outreach and Marketing Efforts for Financial Education.
We received the top recognition in this category for our Financial Tip of the Week. Time has only increased the popularity/readership of the tip; the new conversion to a weekly blog has been popular as well.
* Successful Tools or Resources Used in Financial Education Initatives.
We were runner up in this category for our Financial Survival course for college students. The unique 1-credit pass/fail Financial Success course that hasn't even been offered yet (next semester will be the first offering) is already receiving attention.

Seats in the 1-Credit pass/fail courses are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (<100 seats left)
Financial Success -- FIN PLN 4318 (Topics) (Ref #43587)

The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Kamis, 02 November 2006

Personal Finance - Educational Resources

It is amazing the amount of resources available in the area of Personal Finance. Some resources are stellar, some are poor, and a whole lot fall in between. My objective this week is to expose you to some of these resources [the better ones]. Keep in mind that this is not an endorsement for any of them – my hope is that you’ll be able to find some that will be beneficial to you [as a teacher, a parent, a student, or whatever situation you find yourself in]. You will find that some of the resources are geared toward beginners; others are geared toward individuals that have a good understanding of beginning personal finance principles … all of these resources [at least the basic information] are available at no cost. This should not be considered an exhaustive list of resources, merely a broad brush stroke. Here are a dozen different resources covering various aspects of personal finance:

* Checkbook Basics
* FDIC - Money Smart
* Florida State - Fundamentals of Financial Planning
* Freddie Mac - Credit Smarts
* MoneySKILL
* MU Extension - Info Sheets
* My Money
* NEFE - Get Smart About Your Money
* NEFE - High School Financial Planning Program
* Practical Money Skills for Life
* Rutgers - Investing for your Future
* Smart Money - Investing 101

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director