Walk With Money » Personal Finance

Ten Big Mistakes #8: Credit Card as Emergency Fund

admin — Wed, 28 Jul 2010 20:20:02 +0000

Along my financial journey in life, I made a great number of mistakes. In this ten part series which runs from July 19 to July 30, I’m going to focus on ten of my worst mistakes and the difficulties and successes I’ve had in overcoming those mistakes.

I treated my credit card as my emergency fund.

In late 2004, the brakes failed (in a nearly catastrophic fashion) on my 1997 Ford F150. For whatever reason, the brake cylinders chose to collapse as I was attempting to stop at a stoplight. I nearly caused a very large accident, but I managed to get stopped after swerving into another lane and running a red light.

The repair bill was pretty significant – about $300 more than I currently had in my checking account. I remember standing there flipping through the four or five credit cards I had at the time, trying to figure out which one had enough available credit to cover that bill.

Personal finance 101 would have kept me out of this situation, but I didn’t have enough sense to have planned a bit for this brake problem. Instead, I believed that having some credit available on a credit card was just as good as an emergency fund.

That’s just horrible, horrible planning. Here’s why.

Let’s say, on average, I have a major emergency that costs $1,000 once a year in my life. A car breaks down. A job is lost. A family member is ill and you need a plane ticket. There are countless emergencies that can happen in life, so I’m just using that $1,000 once a year emergency as an example.

If you sock away $20 a week into a savings account earning 1% interest, you’ll have that $1,000 once a year when you need it. The brakes aren’t a concern, nor is that emergency flight you have to take. Plus, you’ll earn a small amount of interest on that money – $5 to $10.

If you just spend that $20 a week on something unnecessary – and that’s what you will spend it on, because almost everyone has $20 worth of fat in their weekly budget – when the emergency comes, you’re putting that $1,000 on a credit card. At that point, you’re now making $80 a month payments on that credit card instead of socking it away. Even worse, you’re paying 20% interest or so on that credit card, meaning …

Money and Basic Math: Some Thoughts and Six Quick Tips

admin — Sun, 11 Jul 2010 04:20:02 +0000

Lately, I’ve been reading the very enjoyable book Stop Getting Ripped Off by Bob Sullivan of The Red Tape Chronicles (a full review will come in a week or two).

The first section of the book discusses at length how people are often stymied at personal finance due to basic math skills. Here’s a quote, from page 7, discussing a simple math problem that involved pulling two numbers off of a list, adding them together, and figuring out what a 10% tip would be:

If you answered this question correctly, consider yourself part of an elite group, because when the U.S. Department of Education asked U.S. adults to answer it as part of a nationwide study, 42% answered correctly. Less than half of American adults were able to pick two numbers from a list, add them, then perform the most basic of all percentage calculations – simply moving the decimal point one column to the left to calculate 10 percent.

You might be surprised by this abysmal performance. But then, if you think about your last dinner with a group of friends, perhaps you won’t be. Remember that dreaded moment when the bill came, and the splitting began? Cell phones and calculators were whipped out. Shrugs swept around the table. Finally, most of you gave up and threw down $20 bills or credit cards.

Sullivan goes on to point out that a dollop of very basic math can keep people out of a lot of financial trouble.

I know from my own experience that many people out there are extremely math-phobic. When they see numbers, they shut down.

Why is this? Some of it is in brain chemistry, I’m sure. Some people simply don’t do well in terms of numbers. On the other hand, I also believe that some of the problem comes from our educational system. I have always enjoyed math, but I had at least one elementary school teacher who was so abysmal at teaching the ideas that I just read the book on my own and asked my father for help. Many of my classmates, later on, who were confused by math recalled being baffled in this teacher’s class and always feeling lost thereafter.

The solution isn’t to just yell at everyone to learn math. Yes, it would be great if we were all very good at such basic math, but the dream doesn’t match the reality.

Instead, I think one solution is to simply have a repertoire of very basic math techniques that help in many situations.

I’m going to point out six of them that I’ve collected over the years, intending to use them in a post like this. If one (or all) of these seem obvious or too easy to you, congratulations – you’re pretty good at math. But each one of these situations has stymied someone I know at least once, so there are certainly a lot of people who could use some tactics like these to help them out.

Please, if you have more simple tactics like these, leave them in the comments.

Figuring out a 10% tip
This is the easiest tip of all and is exactly as described …

Is It Better To Buy Or Rent? [Infographic]

admin — Tue, 22 Jun 2010 02:20:03 +0000

Everyone is talking about how now is a great time to buy a home. And, on the surface, it looks like the perfect time. Home prices are low, and mortgage interest rates remain at near-record lows. There is some argument, though, that it might be better to buy a home in six months; without the home buyer tax credit to help keep home prices higher, some argue that another dip in prices is likely. However, whether you are really ready to buy a home has little to do with what is happening in the housing market; more important is what is happening in your personal finance world.

When many people start thinking about purchasing a home, they usually get excited about figuring out how big a house they can get, and use online mortgage calculators to help them estimate monthly payments at a specific interest. What many of these calculators don’t include, though, are additional costs. We often forget that homes need to be maintained — by the owner. Other costs come into play as well, from property taxes to insurance to upkeep. Additionally, when many people move, they do so into a larger place. This often requires that you spend more in utilities, and you may have additional expenses, such as buying furniture, yard maintenance, and more.

The following infographic from CreditLoan.com offers a sobering look at how much it can cost to own a home. It also compares renting to buying, and your costs in each case (click here for a larger image):

There are a number of financial experts that recommend you plan to live in your home for five to seven years if you buy. This infographic backs that up by showing that it takes five years for a home purchase to be “worth it.” It also brings up the point that sometimes it isn’t always better to buy. Especially right …

Simple Changes Aren’t Always Simple

admin — Sun, 20 Jun 2010 08:20:02 +0000

One of my favorite writers is Ian Rogers, who blogs about his health at Fistfulayen. In one of his best posts, he writes about his use of the L.L. Cool J workout, which eventually turns into an astute point that virtually every “healthy diet” book focuses on the same handful of seemingly simple principles. He identifies six:

1. Eat five or six times a day
2. Limit your consumption of sugars and processed foods
3. Eat fruits and vegetables throughout the day
4. Drink more water and cut out calorie-containing beverages (beer, soda, and so forth)
5. Focus on consuming more lean proteins throughout the day
6. Save starch-containing foods until after a workout or for breakfast

… but then he notes they’re not as simple as they seem:

Pretty straight-forward, no magic, no surprises, but I had to completely change my diet around to get there.

The steps seem easy enough, but in order to achieve those simple steps, he had to alter his entire pattern of food and beverage consumption – and the cultural and social patterns that went with it.

In other words, a simple change that can be described in one simple phrase often has a huge amount of change underlying it. In order to, say, cut out calorie-containing beverages, a person may have to break a caffeine addiction, break an alcohol addiction, change their social lives in order to break free from such addictions, and significantly alter their daily routine so as to not fall back on such addictions.

That’s a challenge, any way you paint it. The intensity of that challenge, which ends up actually being a large handful of changes all at once, can easily overwhelm someone, even if their intent is wholly in the right place.

Let’s use a personal finance example. Cindy, a reader who emails me fairly regularly, recently wrote in to me lamenting her difficulty in implementing what seemed like a simple personal finance goal.

I will limit entertainment spending to $100 a month.

Within entertainment, she included her cable bill, the costs of going out with friends, and money spent on purely fun things. It seems like a very straightforward goal, but in Cindy’s own words, it’s harder than it seems.

In order to make that goal, I cancelled my cable and used some of the money from my first month to buy one of those digital converter boxes for my old TV. This disrupted three of my weeknights, as I’m now missing out on shows I watched faithfully. I’ve started skipping every other “girl’s night out,” which has been really hard. I don’t go clothes shopping any more either. I now spend a lot more time online than I used to and I feel a lot more moody and …

Make Each Day Your Masterpiece

admin — Wed, 09 Jun 2010 22:20:04 +0000

Those who have followed this blog for a long time know that I don’t have many personal heroes. There are a lot of people who have valuable things to say, but there are very few people who have reached such a trusted level with me that I tend to put extra value on the things they say just because that person said them.

One of those few people was John Wooden, who passed away this past week (I mentioned it briefly in my reader mailbag on Monday). A few years ago, I wrote about how John Wooden had taught me a lot about personal finance and over the years, I’ve read his books and a big pile of interviews he’d given.

Of all of the things I’ve taken away from the things he’s said, one stands out above all others.

Make each day your masterpiece.

In other words, how would you spend today if it were the one day by which your entire life would be judged?

This is something I make a genuine effort to keep in mind every single day of my life.

What would I write if I knew I only had one shot at making a difference in someone’s life?

How would I spend the next hour with my four year old son if I knew it was the only hour he’d remember from his childhood when he was an adult?

How would …

How We Are Our Own Saboteurs

admin — Fri, 04 Jun 2010 17:20:09 +0000

Ultimately we control our destiny, meaning we have some say in the decisions that affect our personal finance in our adult lives. Yet the three biggest life decisions we make may be sabotaging our ultimate financial goal, saving enough and being financially independent come retirement. Those three big choices include where to live or settle down, who to marry, and what profession to choose.

Where to Live

Many of us choose to stay put; we remain close to where we grew up, our family and friends. There are definitely some benefits to remaining in the city where we’ve spent the majority of our lives in, such as familiarity with the city, where to shop, eat, visit, and work. Other benefits include potentially low cost baby sitting if grandparents are willing and able to help care for young children. Living near relatives may also be cost effective for DIY home projects, holiday gatherings, or transportation needs.

Yet, choosing where we live, whether we stay near home or move out of state, can negatively affect our personal finances if the cost of living in the chosen city is extremely high. Take Los Angeles or New York for example. Living as an independent adult costs much more in these cities in the long run than choosing to live in a city where the cost of living is half the price. Even though it may mean moving out of our comfort zone, choosing to move to a less expensive area may be more financially sound.

Making a choice on whether to rent or purchase property becomes important in an expensive town. Renters have more freedom on when they can move, they aren’t tied down by a mortgage and can make good financial decisions based on rent prices. Renting may not be a terrific long-term financial strategy, but could work in the short term if mobility is important.

Who to Marry

Love is blind, so they say. Unless your date wears his FICO on his sleeve and “I’m a saver” is stamped on his forehead, you may be entering into uncharted spending territory. Many of us plunge into a relationship head over heels, only to find out later that our beloved can’t balance his checkbook to save his life. Few first dates …

Who Really Needs a Financial Advisor

admin — Wed, 02 Jun 2010 09:20:03 +0000

Not everyone has the time or inclination to master the subject of personal finance. Luckily, it is not always necessary to master it. In the same way you can hire an electrician without understanding the inner workings of home wiring, you can hire a financial advisor to get your money in order. There are all sorts of reasons why you might choose to do this: lack of interest in personal finance, lack of time to study it or circumstances requiring urgent action, to name a few. No matter the reason, a financial advisor is a must if you cannot or will not manage your own money.

Following are several situations in which it pays to use a financial advisor.

Big-Picture Analysis

Photo by freddyfromutah via Flickr

The most helpful task an advisor can assist you with is developing a comprehensive, big-picture analysis of your finances. As any advisor will explain, personal finance is not just one thing, but an entire constellation of concerns: savings, investment, retirement planning, estate planning, tax preparation and more. To succeed financially requires devising some kind of overall plan that addresses each of these issues in an intelligent and responsible manner. From there, the advisor will seek input from you as he or she plans each specific area in more detail.

Defining Savings Goals

Photo by jimwhimpey via Flickr

Any advisor worth using will tell you that savings is the bedrock of a solid financial foundation. With savings, your options expand. Vacations, starting a business, or helping a child attend college are all feasible. Without savings, your financial options will be vastly and perhaps painfully reduced. Yet advisors also know that saving for a reason is far more motivating than just “saving.” Therefore, most financial advisors will assist you in developing goals for your savings, both short and long term. These goals will include specific dates and targets (such as “$50,000 for our second home by August 2014) to keep you focused on progress.

Creating an Investment Portfolio

Photo by D’Arcy Norman via Flickr

Most experts agree that 90% of your investment returns are a function of your asset allocation. That is, how much of your money is invested in stocks, bonds, mutual funds, etc. Unfortunately, some people are too intimidated by all the conflicting investment information out there …

Convenience and Piracy

admin — Thu, 20 May 2010 22:20:02 +0000

I’m going to go a little bit off of the beaten path here and talk about something not directly related to personal finance, but something that has a strong indirect relationship: piracy of intellectual property.

A week barely goes by when a person writes to me asking for some sort of justification for their piracy of music, computer software, or other electronic materials. I usually don’t give it to them because I feel pretty strongly that piracy is wrong and that content creators (and all of the people that help that process along) deserve to be paid for that work.

However, I also believe that the biggest reason piracy thrives online is that most of the time it’s easier to just pirate a song or a piece of software than it is to pay for it.

Case in point: recently, the “Humble Indie Bundle,” a wonderful collection of computer games, was made available for a stunningly low price online. You could simply pay whatever you wished for it with the minimum price of one cent. You could also direct any portion of that price to charity.

What happened? There were people actively pirating the “Humble Indie Bundle.” Rather than giving a single cent to a charity to download it legitimately, they chose to simply steal the software.

Why? It’s easier.

That’s my explanation anyway.

In order to download the software legitimately, you had to fill out forms. You had to decide how much you wanted to pay the developers. You had to decide how much you wanted to give to the charity. You also had to have some sort of method for actually paying for it, whether it be a credit card number or a PayPal account or something else.

And that’s the problem. Some people aren’t comfortable sharing their credit card information with a random website or with Paypal, and I don’t …

The Power of Small: Improve Your Finances One Step At A Time

admin — Fri, 14 May 2010 14:20:03 +0000

Many people like to dream big and think big. Unfortunately, the sheer amount of effort to accomplish their big goals simply overwhelms them. For instance, take a routine activity like walking across the street. You take one step at a time and you get the job done. But if I ask you to leap across the street, could you do it? This is why you should dream big and think small!

Think small is a simple but powerful idea that helped many people succeed. The most popular example in personal finance is probably Dave Ramsey’s Baby Steps. Knowing that it’s too overwhelming for people to go from “broke and in debt” to “financial freedom”, he advocates taking small steps to turn your finances around.

Likewise, you can apply the concept of “think small” in many ways. For example:

Instead of trying to add $5,000 a year to your IRA account, it’s easier to add $416 a month, or better yet $192 every two weeks.

You can start your retirement today, by saving 25 times the value of your annual expense on an item. For example, let’s say you spend $100 a year on magazine subscriptions. You could set aside $2,500 and try to get 4% return on investment, or $100 per year from it. If you can accomplish this, your magazine expense is retired for life.

You can make small changes to significantly improve your business’s bottom line. For example, by improving the number of leads, conversion rate, returning customers, revenue per customer, and lowering your costs.

Basically, you can break down any big goal into smaller, more achievable sub-goals. And likewise, you can achieve significant result by making small improvements. How can you apply this to your own situation?

Don’t …

Snowflaking and Goals

admin — Sun, 02 May 2010 03:20:03 +0000

One of my favorite personal finance tactics is “snowflaking.” For those unaware, “snowflaking” refers to the idea that if you make little frugal steps throughout the month, you simply add the amount you saved with that method and include the total as an extra payment at the end of the month. So, for example, if you used coupons to save $5 on your normal purchases, you would then add $5 to an extra debt payment at the end of the month. This knocks $5 off of the total amount you owe, reducing your interest owed in future months and getting rid of the total debt that much faster.

“Snowflaking” is almost always used in a debt-related context – the name itself comes from the popular “debt snowball” – but I’ve actually found that snowflaking is incredibly powerful for almost any goal in life. In fact, I use snowflaking all the time in my own life for bigger goals.

Here are some examples for how I use snowflaking for some of my personal goals.

Bigger savings goals The biggest savings goal that Sarah and I have right now is for our next home. We intend to buy a piece of land in the country with some wooded area on it (expensive) and then build a house to spec on that land (even more expensive), along with a barn (whew!).

That’s an expensive goal.

So I keep that big goal in my mind as often as I can. I have a picture of a home with a barn and some woods in the back that I look at all the time to keep myself reminded of it. When I make a choice to save a few bucks – buying something in bulk or some similar little effect – I log onto my online banking and transfer that amount to a separate savings account, never to be touched until we’re ready.

With every little choice, that account grows and we move a little closer to our dreams.

Motivational …