Roundup and Link Love - Regular People Are Smarter Than Pundits and Government Economists

By Ron | Oct 10, 2008

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Check out this poll from CNN Money. Could it actually be that ordinary, average American citizens are smarter than all the PhD economists, talking heads, politicians, pundits, and lobbyists?

**What will get global markets back on track?**
A bigger, coordinated rate cut by central banks	4%
Regulatory changes	20%
Another stimulus package	6%
Time	69%

Lesson: Never sell short the common sense of the average person on the street!

From the Life Skills Network:
Back to Basics: establish a personal finance emergency fund @ My Supercharged Life
Three easy ways to limit the advertising in your life @ On Simplicity
11 ways to save on car insurance @ My Dollar Plan
Keep you holiday supplies simple with an inventory and a plan @ Simple Mom
29 tips to prepare your home for winter @ Frugal Dad
How ignorance can lead to success @ Marc and Angel Hack Life

photo credit: martinroell

I’ve been spending this week at a Grand Opening for one of my stores in Pensacola, Florida, home of the US Navy flight demonstration squadron, the Blue Angels. And even though this is the exact view from my hotel room, believe it or not, I haven’t set foot on the beach … yet.

Two restaurant recommendations:

Peg Leg Pete’s has some fabulous oyster dishes (as well as great raw oysters).
McGuire’s Irish Pub has one of the best steaks I’ve ever had and a fun atmosphere with over $750,000 one dollar bills that are signed and stapled to the ceiling. Yes, three quarters of a million dollars.

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When You Come To A Fork In The Road

By Ron | Oct 9, 2008

Business, Jobs, Life, Personal Development | 2 Comments

So many times, I’m in the middle of a certain project or task and I come to a point where I have to make a decision. I’ve been asked to present some information on customer service at my company’s annual meeting, so I have a lot of information to wade through and several decisions to make on what I’ll present and how I’ll present it. It can be difficult, trying to sort through all the different choices, so I have a 7 step process to help me make decisions. If you’re managing an important project and problem solving isn’t your strong suit, check out how I work toward to head off potential difficulties when I’m in the planning stages. See if it will work for you. If it does, be sure and let me know.

1. Define the problem. Is it really a problem? And if it is, how much of a problem is it? Will it eventually settle down and go away? What are some potential consequences of action or inaction? Give it the five-five’s test:

Will it matter in 5 minutes?
Will it matter in 5 hours?
Will it matter in 5 days?
Will it matter in 5 weeks?
Will it matter in 5 years?

Sometimes problems are defined for you — your boss storms into your office and demands that you fix “X” or a customer calls to complain about how the store employees in St. Louis treated her mother. Those are cases where you can feel free to skip ahead to step 2.

2. Develop your data. Gather pertinent information and analyze the problem. You can’t solve a problem without first finding out as much as you can about it. Sometimes, the solution gets uncovered in the data gathering process.

Will lowering our price insure that we keep this customer? Are there other solutions I haven’t thought about? What happens if we wait 90 days to see if the market turns around? What if it doesn’t? What does this job applicant’s history tell me about her character and how she will handle problems? Should I choose the young doctor that has a great bedside manner, or the old experienced one that has been around the block several times? You cannot ask too many questions.

Say I love you By Being Negative

By Ron | Oct 8, 2008

Life | 9 Comments

Remember when you were a little kid? When you had wants, needs, or desires, you had only to go to your parents (or maybe grandparents) with your requests. If you wanted a giant dill pickle at your older brother’s little league baseball game, or if you wanted to play a smokin’ hot game of skee ball at Six Flags so you could win that giant Garfield stuffed animal, or if you wanted another bag of Skittles, all you had to do was ask. If one parent said no, you went to another, changing your technique just a little. If you got two no’s, then you possibly changed tactics and tweaked your methods until one parent caved in and said, “Yes! Now go play!” What you learned was: Ask loudly enough, long enough, with the right tone and inflection, and maybe with some tears welled up in your eyes … and you get what you want.

Kids learn a lot of things this way. Mostly they learn to manipulate, but worse than that, they learn that money has no limit. And even though that obviously isn’t true, that’s how it seems to an 8 year old’s mind. If you’re like me (or my wise father!), you’ve probably said, “Money doesn’t grow on trees, ya know.” But why should a child think there’s anything wrong with the money supply? If he or she uses the right technique, the right tactic, at the right time, money always seems to appear. It’s like magic.

Kids grow up, they always do, and they bring these jaded beliefs with them into adulthood. It’s a something for nothing mentality. Consider exhibit A: state lotteries. Governments have learned that, even when the odds are astronomical, even impossible, people will shell out cold hard cash in the hopes of getting something for (practically) nothing. Exhibit B is this crazy bail out of banks and insurance companies and wooden arrow manufacturers and car makers. The US Government has fostered this foolish mentality by meddling in the marketplace and essentially keeping free markets from working (in a free market, inefficient, dumb, stupid firms go out of business, they aren’t bailed out). Again, something for nothing. Maybe Dire Straits had it right all along.

If we only ask the right person, ask the right way, or ask when they’re “in a good mood,” maybe we’ll get what we want without having to really do anything for it. The reality is that all financial resources cost somebody something. There is no such thing as a “free lunch.” Yet, we learn at an early age that perhaps there really is something for nothing out there and we spend our entire lives pursuing that illusion. It’s all a lie.

The lessons:

Teach your children that nothing in life is free. Better yet, learn the lesson yourself first. Everything, e-v-e-r-y-t-h-i-n-g has a cost associated with it and someone (you, me, a faceless company, a slew of taxpayers, a colony of leprechauns) has to pay that cost. Back almost 19 years ago, I wrote out the largest check of my life to pay for our honeymoon cruise. I remember shaking as I wrote it! Later, when my new bride and I were on board, she remarked, “Isn’t this ‘free’ ice cream social great?” I just said to her, “It isn’t free honey, it’s included.”

Teach your children that you set boundaries for them because you love them. There’s nothing wrong with the giant dill pickle (that’s been sitting in that jar since last season) or another bag of Skittles, but when they ask in a way that probes for a weakness, anticipating your NO response, you are teaching them that there’s no end to the money when you cave in. I taught my children this concept a few weeks ago at the Alabama vs. Arkansas college football game (the Tide rolled 49-14 btw). I told them they could spend their $10 on whatever they wanted, food, sodas, souvenirs, or whatever, but that when it was gone, it was gone. There was an end to the money supply. They learned the economic principle of “scarcity of resources” pretty fast. And no, we didn’t cave in when they asked for more, though I did encourage them to pool their remaining resources and share those nachos.

Why is it so difficult to say no to our kids? I know I want them to enjoy a fruitful and fulfilling life, full of wonder, joy, play, and curiosity. Do I think that “things” will accomplish those goals for them? I’d like to think I didn’t, but I wonder about myself sometimes.

photo credit: Graham and Sheila

Technorati Tags: children, kids, learn, learning, lessons, life, love, economics, credit, accomplishment, parents, parenting, teaching, money, goal, goals

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It Pays To Know The Difference Between APR and APY

By Ron | Oct 7, 2008

Life | 1 Comment

APR is annual percentage rate. APY is annual percentage yield. So what’s the difference?

Both have formulas based on legislation. The Truth in Lending Act dictates how an APR is calculated, while the Truth in Savings Act describes how an APY is calculated. Based on which “act” gets to decide the definition, can you guess that APR has something to do with borrowing and APY has something to do with investing or your savings account? The government decided to get involved with the definitions and calculations to make it easier for consumers to comparison shop loans or investments. That’s why it’s so confusing.

One very important difference between the two is that APR doesn’t take compounding into consideration. APR just considers interest expense by taking the stated interest rate for a period and multiplying it by the number of periods in a year. If a credit card has a daily periodic rate of 0.060247 percent, for example, the APR is 0.060247 percent x 365 = 21.99 percent. Ouch!

But, APY does take compounding into consideration. It adds 1 to the periodic rate and raises that sum via exponents to the number of periods in a year. Then 1 is subtracted from the result to arrive at the APY. Calculating that credit card’s daily periodic rate of 0.060247 percent, the APY is: ((1 + 0.00060247)^365) - 1 = 24.587 percent. Big ouch, because this is what you’re actually paying.

I’m going to bet that you’re not really concerned about how these rates are calculated and you want to just know how to make a decision when you have one of these numbers staring you in the face. When you’re sitting in front of a loan officer, or the “finance guy” at the local car dealership, they will almost always quote you APR. Why? It’s a lot easier to get you to agree to a lower number. That’s why you should always arrange your financing before you go car shopping.

Conversely, when you’re dealing with an “investment guru,” he or she will almost always quote APY. Why? Same reasons, just in reverse. The investment guru wants your money and will try to pitch the investment in the best possible light.

One more key point: always know how many times per year the interest is calculated. This is known as the number of time periods. A daily rate will be vastly different than a monthly or quarterly rate. Always know what you’re spending and what you’re saving.

Making a wise decision when it comes time to part ways with your money is all about information and understanding how financial tools work. If you have that basic understanding, you’ve tilted the odds in your favor.

It’s about time, isn’t it?

[tags]credit card, saving, savings account, invest, investing, investment, lending, money, loan, APR, APY, interest rate, finance[tags]

photo credit: Michael Cornelius

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17 Sneaky Savings Strategies

By Ron | Oct 6, 2008

Budgets, Frugality, Life | 34 Comments

Saving money is a worthless endeavor if you don’t really “save” it. Too many times, I have personally started doing frugal activities and later noticed that somehow the savings vanished. I never really saved any significant amount of money because the money just got absorbed by something else. I’ve had to “start saving my savings” to really make a difference.

Maybe you need to trick yourself into saving money. Maybe you’re one who sets a clock 10 minutes fast just so you can arrive “on time.” If this describes you, or if you’ve discovered that your savings seem to disappear like mine, you’ll love these sneaky savings strategies. How you use the money is up to you, but I would suggest:

Start an emergency fund.
Snowflake your savings to pay off debt.
Save for your retirement or for a specific goal or passion.

If you’re interested in tricking yourself into saving money, here are 17 specific strategies (actually they’re tactics but I love alliteration), to save money. The big picture is avoid spending your savings on frivolous stuff that you really don’t need!

1. Borrow and save. Every time you get a book from the library, deposit half the cost of the book in a high yield savings account.

2. Send yourself a bill for savings. People give high priority to printed bills so think of your savings as a bill that simply MUST be paid. You have no choice in the matter. Period.

3. Love those singles. When you leave the house every day, carry only five dollar bills and put all your ones into a savings “jar” when you get home. Every Friday, deposit the entire amount into a savings account … and don’t count it until you’re already at the bank. Then transfer it to a high yield account such as ING DIRECT.

4. Your own restaurant. Learn to fix your favorite restaurant meals at home and save the cost difference. If a family of 5 eats out once per week, they can easily save $150 per month, plus making your own southwestern egg rolls is a lot of fun!

5. Your own tip jar. If you go out to eat, tip yourself the same amount as you tip your waiter.

6. Make it an even amount. Round up all your purchases to the next $5 or $10 (you pick) and save the difference.

7. Have you just paid off a bill? Save the same amount you were paying (unless you’re applying that money to another bill).

8. Join the club. Do you shop at a store that requires you to join their “savings” club? Deposit that saved amount (usually at the bottom of your receipt) into your savings account when you get home.

9. Get an ROI on that movie. When you return a movie (hopefully on time) to the rental store, pay yourself the late fee.

10. Charge your own admission. If you rent movies from BLOCKBUSTER Total Access
or Netflix, pay yourself $2 for every movie you watch.

11. Eat healthier AND save money. Forgo dessert when you eat out and save the amount it would have cost. Double the benefit!

12. Gift yourself the gift of less stress. Open a Christmas Club account and save a certain amount each month, even if it’s only $10. You’ll never miss it.

13. Make ‘em pay YOU. Regardless of what they sell, if you’ve switched companies for price reasons, save the difference. Think of phone companies, internet access, cell phones, credit cards, and others.

14. Can a lighter light bill mean a heavier wallet? It can if your utility bill came in a little lighter this month. Save the difference!

15. There’s cash in that lunch box. Brown bag your lunch at least 3 times per week and deposit the savings every Friday.

16. Own your own laundry mat. Drop a quarter into a jar every time you use your own washer or dryer.

17. Make cash rewards really work for you. If you use a cash rewards credit card (and pay it off faithfully every month), deposit the cash rewards.

BONUS

18. Use coupons? Save the amount you don’t spend.

The key is to start saving something today and you can start by saving your savings. It doesn’t have to be a set percentage, a set amount, or large sum. Even if you’re on a tight budget, these small amounts will add up over time. Saving money doesn’t have to be hard (it isn’t hard to make extra money either) but it IS important to involve your whole family. Plan a treat for everyone when you reach your savings goal, such as such as a day at the zoo, the park, or a museum.

What other sneaky methods can you think of to save money?

Technorati Tags: save money, saving money, save cash, save, sneaky, savings, savings account, account, retire, retirement, emergency fund, coupon, coupons, ing, ing direct, nickel, dime, quarter, dollar, savings strategy, savings strategies, strategy

photo credit: quinn.anya

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Roundup and Link Love - Final Tax Deadline 2008 Edition

By Ron | Oct 4, 2008

Life | 6 Comments

It’s almost here: October 15th, that is. If you’ve filed an extension to complete your tax forms, you have 11 days to go. I wouldn’t wait around if I were you. Gather up your information, and do your taxes for FREE with TurboTax Federal Free Edition.

Here are this week’s great articles and posts from the Life Skills Network:

Why cash offers more flexibility than gift cards @ Frugal Dad. I agree. We recently tried to purchase some items using a gift card and the cashier “couldn’t get it to work.” I had checked the balance by telephone and knew it had $15 remaining but the cashier insisted that it was worthless. Only when a supervisor came along did I get credit for that $15. Cash IS king!

4 secrets of the successfully self employed @ Marc and Angel Hack Life. Marc made a very important point, no matter who your employer is, no matter who signs your paycheck, you work for YOURSELF and you have only two products: time and knowledge. Great post.

What is your weakness? @ My Dollar Plan. Madison reveals her weakness: College Football and all the trappings such as season tickets, tailgating, food in the stadium, eating out along the way to the game, etc. Madison, I share your weakness! The question she asks readers is “how much does your weakness cost YOU?”

Long term thinking is your greatest tool for success @ My Supercharged Life. Success is an attitude, and according to Jeff, that attitude should have a long term vision. Long term thinkers give up those things that instantly gratify so they can enjoy a much deeper satisfaction later.

Baby steps toward a saner life @ On Simplicity. Who couldn’t use more sanity in their life. Sara outlines some really simple ideas to un-complicate, un-clutter, and un-crazy your life. Give them a try.

Enjoy a simple Christmas with a well planned budget @ Simple Mom. We’ve budgeted for Christmas for about 12 years now and it has been a lifesaver. But this post is about more than just budgeting. Simple Mom encourages readers to find ways to make extra money over the holidays as well as map out what they plan to spend before hitting the stores. Great advice!

From the rest of the web:

We’ve bailed out banks, car manufacturers, insurance companies, investment houses, and now the state of California? @ The LA Times
Fear and complexity: Why politicized science is dangerous @ Michael Crighton
STOP WORRYING ABOUT THE ELECTION! (emphasis mine) @ Ludwig von Mises
10 frugal steps to help you survive a tough economy @ The Digerati Life
Are you a millionaire in the making? @ Dough Roller
9 cheap and easy ways to prepare your home for winter @ One Caveman’s Financial Journey
Your family budget step by step @ Small Notebook
The lengths some parents go for their kids schools @ Quest for Four Pillars
The trouble with living the frugal lifestyle Part One @ PT Money
Are you worried about your job? @ Money Ning
A new economic agenda I can 99% agree with @ My Two Dollars
Your HELOC is not your emergency fund @ Mrs Micah
Pork Barrel spending and the economic bailout @ Five Cent Nickel
Before you sign that rental agreement @ Being Frugal
Tough times for borrowers @ Uncommon Cents
Free creative ideas to help friends facing foreclosure or bankruptcy @ The Passive Dad

Enjoy the links and if you haven’t finished your taxes, you better get started!

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3 Different Debt Payoff Strategies

By Ron | Oct 3, 2008

Credit, Debt, Life, Money | 4 Comments

Okay, you’ve made some bad moves. You’ve found yourself using one (or more?) of the 10 excuses for going into debt and now you’ve seen the error of your ways and are committed to getting that debt monkey off your back.

Assuming you’re going to use the debt snowball method, which of the 3 different strategies should you use? What’s the wise move?

Pay off the smallest balances first.

With this strategy, you’re able to make a quick change to your situation, one that’s easy to see. You get to experience rapid successes by paying off company “A” then moving on to company “B.”. This is a good method for people who have a large number of debts, because once you pay off company “A” you’ll have a visible success and never have to think of that stinkin’ debt again.

Paying off 100 percent of any debt is extremely satisfying and will make you feel a sense of progress toward becoming debt-free. In addition, if you’re overwhelmed by the sheer quantity of payments you’re having to make every month, and all the accounts you have to maintain, you might like to go with this plan. I know from personal experience, that seeing the overall number shrink from 12 to 11 to 10 to 9, in a short period of time was very motivating. If you’re motivated by quick progress, this could be your most useful strategy.

Pay off the highest interest rate first.

This scenario makes the most sense from a pure dollars-and-cents approach. If you pay off those debts that cost you the most in interest, you get to keep more of your money over the long run. A credit card debt of $10,000 can potentially cost you $200 in interest every month.

Even if you have a credit card with a small balance and could pay it off immediately, if the interest rate is lower than your other debts, this strategy dictates that you work on the higher interest rate card first. By directing your excess cash to your highest interest rate debt, you’ll see your principal amount shrink faster and ultimately, you’ll save more money in interest.

Pay off the debt that will help your credit score the most.

If you’re planning to apply for a loan in the near future, how you pay down your debts could save you more than either the smallest payment or the interest rate approach. Credit scores look at a number of factors and one of them is, what percentage of a credit card’s limit is owed? If you owe more than 50 percent of the limit, you potentially lose credit score points. By paying down your balances so they’re all below 50 percent of the maximum will help your credit score and might save you some serious money on longer term loans.

In the end, its a personal choice and you have to pick the strategy that works best for you. Which strategy you choose isn’t nearly as important as actually choosing one and sticking with it. It’s like working out or dieting and your debt payoff plan has to satisfy you. You know your individual circumstances and you know best what will work for you. But make no mistake, paying off your debt is the right thing to do to avoid your own personal economic crisis, and as always, if you use the proper motivational strategy, along with a plan to make extra money, you’re well on your way to debt freedom!

Technorati Tags: debt, credit score, credit scores, credit scoring, debt strategy, how do I pay off my debt, how do I pay down debt, how do I pay off debt, how should I pay off debt, finance, money, finances, loan, loans

photo credit: weegeebored

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The Best of The Wisdom Journal - September 2008

By Ron | Oct 3, 2008

Life | 3 Comments

September was a great month, but then again, they’re all great! We’ve had some interesting discussions on various topics, mostly in the personal finance realm. Here are some of the most active:

Sept. 2 - 3 Money Decision Traps and How To Avoid Them
Sept. 8 - Your Low Salary Isn’t Really Your Fault
Sept. 17 - 50 Frugal Things You Aren’t Doing
Sept. 26 - Where Do We Go From Here? How About Back To The Basics
Sept. 29 - What IS Greed?

Top Referrers to The Wisdom Journal were:

Thank you for your referrals!

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Jack, Beans, and A Personal Economic Crisis

By Ron | Oct 2, 2008

Life | 5 Comments

Once upon a time, there was a man named Jack, who had survived a terrible crisis with a giant some years ago. Jack eventually took up bean farming to provide sustenance for himself and his family. Indeed, beans had become the main medium of exchange in his local town and Jack had established the habit of consuming most of his annual crop and saving a portion, enough to plant for the next season, plus a little extra “just in case.”

Those future investments would be what fed Jack and his family next year. The percentage of saved beans, relative to his entire crop, was his savings rate, since the consumption he delayed today was his investment in the next season’s production capacity.

Life was great because Jack had reached a state of equilibrium. Jack’s own common sense dictated to him this key economic point: Increasing his personal economic growth is only possible by increasing his rate of investment (planting more beans next year) … and increasing his investment is only possible through an increase in savings (having more beans to plant) … and an increase in savings demands a decrease in his current consumption.

Jack had taken some basic ~~bean counting~~ accounting classes and kept track of his stock in a spreadsheet. He knew precisely the number of beans he had available to satisfy his consumption demands for this year and for planting next season, plus his reserve. The numbers that Jack tracked in his spreadsheet represented actual beans, a “gold standard” of sorts. Those beans were real and the numbers didn’t lie.

But having pawned the golden harp to buy his land and having eaten the hen that laid the golden egg for Christmas dinner, Jack yearned to buy some new oxen, more clothes for his family, a new wagon, a beautiful horse, proper schooling for the kids, and many other “finer” things. It occurred to Jack one day (after keying in a typo) that if only his spreadsheet would tack a zero on the end of his current reserves and savings, inflating the numbers, he would be able to use some of his beans to buy those “finer” things he and his family wanted. On a lark, he added the zero himself, just to see what it would do to his income statement.

“Wow,” Jack thought to himself, “I could get those things now and just worry about replenishing my seed stock later.” And that’s exactly what he did. Jack and his family were suddenly in utopia with all the newer, finer things they wanted. Jack’s family nominated him for Father of the Year in the local town and since he had 12 kids, and they all voted for him, he won in a landslide. It felt great! Economists would call this the boom phase of an inflationary business cycle.

But planting time rolled around shortly thereafter, and Jack planted what remained of his beans, knowing he would never harvest enough, even with newer technologies in fertilizers and pest control. “But, I can always borrow some beans from Mr. Chow,” Jack reasoned. “He knows I’m good for it.” Sure enough, Jack experienced a predicted shortfall at harvest time as his new, “finer” things weren’t so new anymore. Jack bought more things, hoping to get that euphoric feeling again, but it was a little hollow this time around.

You don’t get out of debt by going into more debt.

That year, his needs consumed everything he harvested … and it still wasn’t enough. He approached Mr. Chow who willingly lent him some beans for next year’s planting, based on the spreadsheet Jack showed him. “I’ll lend you 50 pounds of beans, but next year, you have to pay me back with 100 pounds of beans!” Mr. Chow drove a hard bargain. The interest rate was large, but Jack disregarded it because of his intense need for more beans. He didn’t worry that his fiat currency, his loaded books so to speak, were incorrect because once again, his needs were temporarily met and life was again good. There would always be time to worry later.

What happened in the next season? Since typing another zero didn’t actually create more beans, Jack was unpleasantly surprised when his bean stock (his capital) suddenly ran out, and wasn’t sufficient to meet his planned or unplanned expenses. He sold his new clothing in a rummage sale, and many of those “finer” in things were traded, pawned, or returned to the store from whence they came. Jack found out that without a true accounting of his available investment capital (the seed stock), accurate long term planning became impossible and short term needs trumped everything. Welcome to the bust phase of the inflationary business cycle!

The best way for Jack to get back on track is for him to drastically cut his consumption rate, pay down his debt, and restore his seed capital and reserves.

If Jack could learn from his economic failures and fallacies, make some wise decisions, and cut his current consumption to restore his former savings rates and pay his mounting debts, he could pull himself up out of the hole he dug. But suppose that he petitions some bureaucrats, convincing them that “HIS farm CANNOT fail because its too important to the local economy?” When the bureaucrats decide to implement a “bailout plan” by adding some more zeroes to his spreadsheet so Jack can get more loans to support his unsustainable consumption level, what happens in future seasons?

Jack may temporarily “rescue” his personal economy this season with the help of bureaucrats but it’s at the cost of further depleting his investment capital. He won the “vote” of his kids but has even less capital reserves for next season. Rather than making hard decisions to recover his personal economy, he further distorted his grasp of reality. Now he has no idea how many beans were available to consume, and how many he needs to save. He can attempt to borrow more beans from his neighbors, but unless he can drastically cut consumption to pay the interest, those neighbors will eventually grow impatient and refuse to lend any more. The more he tries to convince himself that the illusion is real, the more out of touch he becomes. Alas, as the falsified numbers on his spreadsheet showed exponential growth, his actual consumption plummeted toward zero. It was all a lie.

No one can correct over consumption with more consumption.

So what did Jack do? He drastically cut his consumption rate. He rented out a portion of his home to business travelers. He set up a co-operative that would allow farmers to buy fertilizers and pest controls in bulk (taking a small cut for storing those items on his farm), he learned to make his own clothing, he leased out 25 acres of his land that he couldn’t farm himself to a share cropper, in short, he learned to make extra money to help get himself out of debt.

Few people actually behave like Jack and deny the objects and events that happen before their very eyes. But in economics, too many people, including politicians, “mainstream” economists, and investors unconsciously follow the philosophical principles that reality is driven by social consensus, and the success or failure of our markets depend only on the optimism or pessimism of consumers and investors. This goes far beyond the fairy tale belief that wishes affect reality, this is a belief that one’s wishes ARE reality if enough people share the delusion.

Economic principles are really quite simple. The key to is to understand that the same principles that apply to your personal finances, and even to your dealings with your local merchants apply equally to the world at large, at all levels of economy activity. Don’t delude yourself or allow yourself to be deluded. Violating basic economic principles will eventually come back to haunt you

photo credit: cbertel
photo credit: gardengrrrl

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10 Excuses for Going Into Debt

By Ron | Oct 1, 2008

Life | 14 Comments

I’ve spoken with quite a few people about the current economic crisis and it seems to me that this is primarily a debt crisis. My question is this: isn’t debt almost always a crisis? When asked how “Main Street” would be affected, politicians, economists, financial experts get that deer in the headlights look and stammer, “Well, um, people won’t be able to, uh, get that car loan, or get the credit to start a new business, or funds to make their payroll.” I don’t know about you, but I’ve learned that debt begets more debt. We need other options, wise options.

Other than going into debt for large purchases (a business, a home, maybe a car), debt is almost always the result of some type of crisis, whether we recognize it as such or not. The main problem, in my opinion is the failure to research, seek out, explore, and use any other option. Always give yourself more options than just more debt.

Here is what I see as the most common reasons people wander into the debt trap. Most fall under the “failing to plan” rule.

1. Decreased income but no change to expenses

This happened to my wife and me when she quit work to stay at home with our first child. Actually, we didn’t have the “same” expenses, they actually went up and I never tried to make extra money. I put off making serious changes to my expenses out of laziness mostly, but it was also the desire to show friends and family that we were “doing okay” financially and new clothes, eating out, and moving into a newer, nicer rental home did that … in my mind. I let debt fill in the gap between where I was and where I wanted to be.

2. Underemployment

A close cousin to No. 1 above, I was one of those people who foolishly went to college, got bored, dropped out with no degree but lots of debt, and thought I would still be able to find a job making 6 figures. Brilliant, huh? Later, I went back to finish college and incurred more debt because tuition had risen substantially. In the meantime, I had taken some jobs that didn’t pay well. People like me, who experienced under employment tend to think of it as a temporary situation in order to generate a false sense of relief. Yes, it was temporary but I didn’t get my expenses in line with my current income at the time. If you’re currently in this situation, recognize that down the road, when you increase your income because of more hours, starting a business, a second job, or a better job, then is the time you can add back some of the spending you enjoyed before you became underemployed. But make no mistake, failing to rectify the situation will result in debt.

3. Poor money management

I was the poster boy for poor money management, never knowing how much I had in the checking account, nothing at all in savings, no plan, no future, and lots of debt. A monthly spending plan was an essential element that was missing in my financial life. For all I knew, the purchases I was charging could have been paid for by the savings from the hundreds of dollars I was wasting unnecessarily each month by not knowing where any of my money went. All I had to do to plan was simply write down my expenses and income and reconciling the two together. Once I started this practice, I was surprised at how great it felt to realize that I was making thoughtful and purposeful decisions about where and when to spend my money.

4. Medical expenses

Please, please don’t let your medical insurance lapse. I did for just a short 90 day period and the unthinkable happened. My wife had to have emergency (read: NOT optional) gall bladder surgery at day … #89. Do you think the insurance company stepped in and helped us out? If you do, I have some ocean front property in Kansas we need to talk about. Things like coverage gaps, lapsed policies, and increasingly costly alternatives make medical expenses a popular debt category. Think about it: do you know any doctors who don’t take Visa? They don’t accept it for convenience purposes. If a doctor doesn’t get paid at the time service is rendered, his or her chances of getting paid drops. Using a credit card at the doctor’s office means more debt for you, and less for them. In all fairness, they’re not in the lending business, but they do want, and need, to be paid.

5. Saving too little or not at all

For years, I fell into the not at all category. I wish I had learned this simple principle: to avoid unwanted debt always prepare for unexpected surprises by saving 3 to 6 months of living expenses. With an emergency fund in place, a job layoff, an illness, a new heating system, or a blown head gasket will not cause immediate financial strain and force you to go into debt. I always heard, “pay yourself first,” but I neglected to do so for years. Don’t make my mistake! Start an emergency fund today and it will be there when you need it. No one has ever regretted the wise decision of having a savings cushion.

Saving anything is better than nothing, and the hardest part of starting a savings plan is starting. Just put aside a set amount from each paycheck and refuse to touch it, no matter what. This money is separate from your emergency fund, so try to never confuse, or mingle, the two.

6. Financial illiteracy

Too many people lack a basic understanding of how money works, how it grows, how to save, how to invest for a rainy day, or even something as basic as why they should balance their checkbook. I, on the other hand, had no excuse because I had majored in Finance and Portfolio Management before dropping out of college my junior year. Most primary schools neglect teaching money management and your parents may not have sat you down and explained it. It doesn’t matter. You are responsible for your life and your money anyway. All that is in the past and there is nothing you gain by allowing resentment or regret take over your attitude. Learn from your mistakes and resolve to correct the failings of the past. Financial mistakes get worse over time and only get more complicated to resolve. Make the wise move and get educated and in control of your finances.

Three options you might consider are:

Read financial blogs like this one and those in my blogroll.
Read financial books and take notes.
Take one of Dave Ramsey’s courses called Financial Peace University.

7. Gambling

No matter if you call it America’s “new entertainment” or the Indian’s revenge (because of the rise in tribal casinos), there is a guaranteed exchange of money from you to “da house.” Rarely, exceedingly rarely, do you see gambling houses go belly up and there’s a reason. Gambling is a highly profitable enterprise … if you’re the house. It can be addictive, hard to stop, and loans to continue your gambling escapades on into the night are freely available from the nearby pawn shops and loan sharks. A casino could be the only place you can sign a contract to get an equity line on your house while intoxicated and it still be legal. This is entertainment? Add in the increasing addiction to online poker by using a credit card and you have the makings of a mountain of debt.

8. Counting on a windfall

As somewhat of an optimist, I have fallen for this line of thinking before, too. Many people are almost certain that someday, their ship will come in and they’ll receive that big check from the lottery, or from a long lost relative, or they’ll get a huge bonus, a “stock tip,” invent the next “big thing,” or get a cushy, high paying management job. Spending tomorrow’s money today is very tempting, especially if you mistakenly believe that “tomorrow will come” regardless of how the winds are blowing. Nothing is certain in this life, not even your job bonus, your tax refund, or your lucky number coming up. The inheritance from your parents or grandparents may get swallowed up in probate or you might be surprised at the reading of the will! The lesson is don’t spend the money until it is in your hands … and even then I would recommend waiting another 6 months to get your head on straight in the event you DO get a big windfall.

9. No money communication skills

For many years, my wife and I didn’t talk much about our finances. There wasn’t much to discuss! Looking back, I wish we had been more open with each other and I wish I had stepped up to the plate to initiate it. It is so vitally important to communicate with your spouse about your finances. If I had it to do over again, I would keep the lines of communication open, discuss financial goals and plans for attaining them, and discuss our different spending styles. If you are married to a saver and you are a spender, you’ll want to map out a strategy for you both to get what you want. Know what credit accounts you each have and promise each other to be honest about what each other spends. Many people find out that their spouses have racked up thousands of dollars in credit card debt and they had no idea that the accounts even existed. This often leads to …

10. Divorce

The number of divorces is staggering. A significant number do it, and some more than once. Thankfully, divorce has never been an option for either my wife or myself and I can think of few things more expensive and likely to put you in debt. They say that getting a divorce is like converting all your assets into $100 bills, then you and your spouse putting the top down on a convertible, driving down a busy street and competing to see who can throw out the most money the fastest. Love is grand, but divorce is 100 grand. You were once in love enough to get married. Get counseling and make sincere attempts to salvage your marriage.

Going into debt is a decision, an active decision, in most cases. Yes, there are instances where you have limited choices (thinking medical emergencies here), but in most cases, debt is a decision, disguised as an excuse.

Make the decision to avoid debt.

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photo credit: woodleywonderworks

Note:
This article was included in The Carnival of Personal Finance #173 at Girls Just Wanna Have Funds. Thanks!

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