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Monthly Archives: May 2010

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Weekly Recap: What we can learn from Greece

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weekly roundup
Happy Friday Dinks! Ok this week in our round up we will discuss Greece.  If you have turned on any news channel or opened any newspaper in the last three weeks you have probably seen something about Greece and their financial crisis.

Today we aren’t going to discuss what the problem is we are going to discuss what we can learn from Greece.  A country’s financial solvency is very similar to an individual’s personal finance.  The main aspect of saving money is to spend less than you make.  Money can’t go out if it doesn’t come in. Basically, that’s it.

Bad debt happens when someone (or some country) borrows money and is unable to pay it back within the specific guidelines. I can’t stress this point enough…If you don’t have it then you can’t spend it. Think if you really need it or if you just want it. In the grand scope of things (in my opinion) essentials that we need are food and shelter.

The same rule (in simple terms) applies to countries. Put money into your infrastructure and your population. Do not spend money on travel and tourism in the hopes that it will attract people in the future. Make money within your means and then save half and spend half.

When people (or countries) get into debt that they are unable to repay is the solution to accumulate more debt? I am not sure if this is an answer. People often use consolidation loans as a means to try and get them out of debt, but is this the best option?

Of course this is a brief overview and I know there is a lot more to the situation in Greece then these 200 words.  Here are some articles that I came across on Greece this week:

And here are some other financial posts from around the blogosphere:

(photo by williac)

Should Couples Combine Their Finances?

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swan heart couple

In a recent interview, a journalist asked me if I thought couples should combine their finances or not. Since arguments about money are one of the leading causes of divorce and stress in relationships, it’s an important topic that I wanted to share with my fellow DINKS—and get your comments on.

I told the journalist that my husband and I have always had joint accounts for everything—our bills, banking, and loans. Having joint accounts works really well for us, so that’s what I prefer. She told me that in her house, she and her husband have one main joint banking account for paying the bills, but that they also keep their own separate checking accounts for play money. She said that the secondary account gives both of them a feeling of financial independence.

My advice is to do what works for you, but to be open to making changes if your financial house gets out of order. For couples who aren’t married or who divide like oil and water when it comes to how they handle money, keeping separate accounts may be best.

Here are 3 tips to follow when you combine finances with your sweetheart:

1.  Share your net worth.

If you don’t each have a net worth statement, create one and share the information before you combine your finances in any way. How do you do that? Simply make a list all of your assets and their values, such as cash, investments, vehicles, homes, jewelry, and so on. Then list out your liabilities, or what you owe. That might include a mortgage, car loan, student loan, credit card balance, or retail store card balance. Once you add up the value of everything you own and subtract out the balances of what you owe, you’re left with your net worth.

The purpose of calculating your net worth is not to make you feel superior if you’re worth more than your partner, or inferior if you’re worth less. The point is to share a full financial disclosure on paper so that there are no surprises down the road. You need to know your partner’s level of debt—especially if you plan to co-sign for new accounts. If you’re not comfortable sharing the details of your finances, then it’s possible that you’re not with the right person or that you need counseling to understand your reluctance.

2.  Discuss your credit scores.

If one half of a couple has poor credit, it may be a good strategy to keep your finances completely separate until they raise their credit score. To do that, they’ll need to settle up on any overdue bills, pay bills on time, and try to pay down debts as much as possible.

3.  Reveal your financial goals.

If you’ve always wanted to buy a house on 10 acres, but your partner dreams about renting an apartment in the city and living on a sailboat part-time, then I don’t have to be a fortune-teller to know that you may have some problems. If your big financial dreams concerning homeownership and retirement, for instance, are way out of line, you need to work out those differences as soon as possible.

Remember that untwisting the personal finances of a couple can be very difficult if the relationship ends. If you’re simply not committed or don’t agree on money matters, it’s best to keep the majority of your personal finances, well, personal. That financial separation may help keep you from losing that lovin’ feeling.

(Photo by Keith Marshall)

You’ve Sunk My Costs

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Economists tend to think about decisions in a different way than non-Economists. Sometimes our ideas make theoretical sense but are hard to put into practice. For instance, we’ll typically argue against pre-paying on a mortgage (given a reasonable interest rate, say less than 9%) because most American households hold unbalanced portfolios that are made up far too much of a primary real estate asset and not enough equities (for an example of this discussion, see this recent article Carl at Behavior Gap in the New York Times. Carl doesn’t discussion portfolio allocation, and herein lies a difference between the economist and non-economist.

While I wanted to highlight something about the stock market given the roller-coaster last week (mainly, to reiterate that short-term behavior in the stock market is entirely unpredictable and clearly not efficient, and those two things put together make any short-term trading strategy a gamble Vegas would love), I really wanted to talk about how we deal with sunk costs.

We face sunk costs each day. How we handle sunk costs tends to be, well, less than optimal. For an economist, a sunk cost is something that can’t be recovered. It is gone. Kaput. Thus, the economist would claim that the best thing to do with a decision (let’s say you already purchased movie tickets but then wonder if wine on your porch with friends would make a better night, and you can’t refund the tickets). Our psychological inclination biases us toward going ahead with our plans for the movie even if the wine/dine would be much more pleasing, because we already spent the money.

But, what economists would argue is that the sunk cost of the ticket shouldn’t impact your decision. But how often is this true in reality? Can we really ignore sunk costs?

Going back to the first paragraph, my advice to active investors (those who do short-term trades, or mess around with stocks outside a 401K or IRA) is to treat their investments as sunk costs. Once we buy, we really can’t do anything, it’s like fishing, either the fish bite or they don’t, and we hope we picked a good spot and bait. If we view these kinds of risks more like sunk costs, we might be less apt to rashly buy high and sell low, a mistake many made last Thursday due to the apparent trading glitch.

Sunk Costs are everywhere around us. They should not stop you from changing plans.

5 Easy Strategies For Smart Investors

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weekly roundup
There are several different types of investment strategies that can help investors reach their maximum potential returns on their portfolio over the years. Some examples are staying focused on the long term, don’t try to time the market, and don’t put all of your eggs into the same basket. Here are 5 easy tips to help you maximize your investment strategies:

1. Invest before you wake up.

If we don’t see the money in our account we won’t spend it on other things. Set up pre-authorized payments directly from your bank account into your investment account on your payday. This way when you wake up in the morning the money is already withdrawn from your account. It is forced savings.

2. Continue to Invest on a regular basis.

Dollar Cost Averaging is an excellent strategy that helps investors keep their costs low and their rates of return high. Dollar Cost Averaging encourages investors to make contributions into their investments regularly over time on a weekly, biweekly, semi monthly, or a monthly basis.

The benefit of investing regularly over time is that you are constantly buying into the market; both when it is high and when it is low. This strategy averages out the cost of each investment unit to be lower than it would if you made a lump sum deposit on one day of the year. When you make a lump sum deposit on one day of the year you have approximately a 1/261 (365 days in the year -104 weekend days) chance that you are buying into that investment on the lowest day of the year. Those are not very good odds.

3. Don’t try and time the market.

The best strategy for high potential rates of return in any market is to have a balanced and diversified investment portfolio. This includes foreign and home fixed income such as bonds, dividend funds, foreign and home equity, as well as a small cap mutual fund and growth investments such as stocks.

You can also invest in foreign securities such as specific countries such as China and Japan, or specific sectors such as health care or technology. However, these types of investments are very high risk due to the foreign exchange rate against our dollar, and the daily fluctuations in the various sectors. You should never invest more than 10% of your entire portfolio into specific foreign or sector funds. These types of funds are favoured by investors who accept high fluctuations in their portfolios because when the specific market is good the potential return is very profitable.

4. Over time it all adds up.

Saving a little bit regularly or whenever you can is better than not saving at all. Ideally you should save between 10% to 30% of your after tax income depending on your budget and expenses. Investing, especially investing for retirement is focused on the long term. Therefore, I know it’s hard, but don’t be discouraged by short term fluctuations. Keep your focus on your long term goals.

5. Add your savings into your budget.

Budget does not mean spend everything that you make. Plan ahead to cover expenses and invest for retirement and your “rainy day” account. “Rainy day” what does that mean? I thought that it meant when it’s raining outside and I have nothing to do go to the mall and spend my rainy day account. I am sure that I don’t need to tell you that this is not the case. “Rainy day” means Emergency Fund. You should accumulate 2 months of your total income into an account that is accessible anytime in case any unexpected emergencies arise.

(photo by epicharmus)

The Loss of Personal Finance

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If you live in the Washington D.C. area you may have noticed that many employment opportunities are either with the government, or with government contracting companies. Chances are if you are applying for a position in the government sector, including government contracting companies, you will have to undergo a background check. And often that means undergoing a credit check.

I recently interviewed with a government contracting company, and they asked me if I could pass a background check. “Certainly,” I said.
“How’s your credit?” they asked.
“None of your business,” I wanted to say, “but thanks for asking.”

Are your PERSONAL finances any business of a potential employer? Hawaii and Washington State do not believe so. Hawaii and Washington have a law in place which prohibits the use of credit information in most employment decisions. In July 2009, Representative Steve Cohen from Tennessee introduced a bill which would extend this law on a national level. Chances are, however, that this bill is dead where it sits.

Some will argue that there is justification for credit checks in certain areas, such as national security or supervisory, managerial, professional or executive positions at financial institutions. I find that a little ironic. I would argue that the job seekers in the financial and government sector should be the ones requesting credit checks from the government and financial institutions for which they are applying? It is hard to imagine any individual with a worse credit score than the Federal Government, or today’s financial institutions.

Ask Donald Trump what he thinks about credit reports. Mr. Trump files bankruptcy every three years. Can you imagine someone at Trump Industries asking you for your credit report? Mr. Trump, “you’re fired!”

Perhaps you have already deduced that my credit is less than perfect—would I be making such a fuss over it, otherwise? Maybe not. Yet the fact remains that individuals continue to be turned away from employment opportunities due to poor credit scores. So until Mr. Cohen from Tennessee pushes his bill through (don’t hold your breath), many will be faced with the task of cleaning up their credit; myself included. I’d like to know what you think. Are credit checks by employers an invasion of our privacy?

Please note that all comments are subject to credit score approval.

——–
For more information on improving your credit score, I have provided two links below:
– How to improve your credit score via Dinks
– Facts for consumers via Federal Trade Commission

And a few good reads:

Weekly Recap: Finance is Still a Man’s World

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weekly roundup
Happy Friday Dinks. For this week’s recap we are going to discuss the thing that makes us our money…our jobs.  We wouldn’t be able to take vacations, and pay our bills without money, and wouldn’t have any money without our jobs.

As you know, I work in finance and historically the financial services industry has been dominated by men.  To this day the top positions in many financial institutions are held by men. Many branch managers are men while assistant managers and tellers are generally women.  On my team of 5 financial planners I am the only female. The reason I bring this up is because this week I met a new client to my bank branch who declined to work with me because I am a woman. Of course I didn’t say anything.  We may not like it but we put up with it because it pays our bills.

Something else that is even more appalling than a client declining to deal with a woman is the fact that my branch manager (who is a man) told us this week that our VISA cards sales are pathetic.  His exact words were “We are losing to the other branch down the street and they are a bunch of girls.” Again, of course I didn’t say anything because in a tough economic situation I am lucky to have a job.  Unfortunately this is the world of finance that we live in. It’s not right but it’s ok because that’s just how it is.

I am glad that this week is finally over. Now, I am sitting here and I have to ask myself (and you too) Is Finance Still a Man’s World?

OK have a great weekend. Here are some articles about women in the workplace and other financial news this week:

And here are some other great reads from the week:

Using Credit Cards (and Friends) to Save

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friends, food and beer

If you’re like me, a lot of times when going out with friends to your favorite local bars and restaurants hefty bills can easily be racked up, only to be paid for in cash after the final check arrives.  Personally, I see these as missed opportunities…

What if you pay the bill?? I’m not saying right then and there you fork over $100+ in cash.  What I’m saying is to collect cash from your friends (who were already planning on paying cash) in the amount they owe and throw the total on your credit card.  It’s a small example of Time Value of Money…“a dollar today is worth more than a dollar tomorrow”.  Either way you would have had to pay your share, but now you’re able to immediately input that cash into your savings account or invest it elsewhere, while earning interest.  By the time you pay the credit card company your monthly bill total, you have already been able to earn interest on money that wasn’t even yours in the first place!

Obviously it’s not going to save you loads and loads of money if you only do this once a month, but even then it helps, and every little bit does!

And nowadays, with the benefits of certain credit cards (via fly miles, hotel stays, etc.) the fun doesn’t have to stop there.  Take the American Express Starwood Preferred Guest Credit as an example.  This is my go-to card that I swear by.  For every dollar I spend on this card I receive at least a point, and just for signing up for the card receive thousands.  Once I have accumulated enough points, I’m able to use them toward different hotels.  All the hotels/resorts I have stayed at are VERY NICE, and they’re all also rated by Starwood on a five star scale (more stars costs more points).  And some hotels even have specials, for instance allowing you to have your fifth night free (aka not pay points).  And I haven’t done this, but if I plan a vacation through Starwood with my friends and want to get really greedy, I could book the hotel room with my points while having my friends pay me (I hope none of my friends read this haha).  Or could just have my friends cover food/travel expenses.

So to recap:  Get a credit card that has some sort of benefit package included, pay with your card when possible, use your card in large groups and collect the cash, and deposit/invest that cash.

Things to look out for:

  • Credit card maximum (DO NOT exceed!)
  • Pay attention to how much you’re spending
  • Don’t feel obligated to buy goods/services you normally would not
  • Not all businesses accept all credit cards (AMEX charges businesses larger percentages)
  • Deposit the cash you receive (don’t think of it as “extra loot”)

Playing off the same concept, my next arbitrage target is renting.  My goal is to find a two or more bedroom apartment in a complex that accepts my credit card (not an easy task).  Then, I plan on paying the entire monthly rent on my credit card, while receiving my roommates’ monthly checks at the beginning of each month…earning myself extra interest and an exuberant amount of points.

Arbitrage is fun.

(photo by colros)

10 Tips to Raise Your Credit Score

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bank of america bankA question that seems to come up more often these days is how to increase your credit score. Especially how to do it fast! Maybe you and a partner or a spouse want to buy a home that you think is a great deal. Or maybe you want to refinance a loan or get a rewards credit card, but you’re not thrilled with your credit score. You’re secretly afraid that your application will be denied or that you’ll end up paying a much higher interest rate than someone with squeaky clean credit.

Credit scores range from 300 to 850. Consider this: Someone with a credit score of 550 might be charged an interest rate that’s three to four percentage points higher than someone who scores over 750. That could translate into paying several thousand more dollars in interest for a $20,000 car loan or over $100,000 extra bucks in interest over the life of a 30-year $200,000 mortgage! That’s serious money you could invest for your retirement instead.

How to Get Your Credit Score

You can get your credit report from each of the three major reporting agencies–Equifax, Experian, and TransUnion – for free once a year at annualcreditreport.com. A good strategy is to pull a different free report every four months. For example, get Equifax in January, Experian in May, and TransUnion in September. Just put a reminder on your calendar.

Even though credit reports don’t include your actual credit score, don’t let that keep you from checking your reports once a year. Carefully reviewing your credit reports is how you could nab an identity thief or correct a silly error that’s crushing your score. You can purchase your credit score for about $15 from each of the credit agencies or from myfico.com. However, I recently joined Credit Karma, where you can get a credit score estimate for free.

10 Tips to Raise Your Credit Score

Try out these 10 tips to increase your credit score fast:

  1. Clear up any errors on your credit report. Incorrect credit limits, late payments, or collection items that aren’t yours may be silently wreaking havoc on your credit score.
  2. Always pay your bills on time. Delinquencies have the biggest negative effect on your credit score.
  3. Reduce your overall debt. If you don’t have the funds to pay down debt, consider taking a loan from a family member or friend. That doesn’t reduce what you owe, but it does move debt off your credit report and give your credit score a quick boost.
  4. Don’t close unused credit cards accounts. Canceling a card can actually lower your score because it leaves you with less available credit relative to your total debt. It may also shorten your credit history, which will ding your score.
  5. Never max out your credit cards. A good rule of thumb is to keep your balances below 30% of your credit limit – even if you pay your accounts off in full each month.
  6. Do your loan shopping quickly. Having lots of credit inquiries can decrease your score. But the system won’t treat a cluster of credit inquires (for a car or home loan, for example) within a short time period – like a week or two – unfavorably.
  7. Get a secured credit card. You’ll have to dish out an upfront security deposit of at least a couple hundred dollars, which the card issuer holds as collateral. Check out the Public Savings Bank Visa and more secured offers on Creditcards.com.
  8. Get a gas or retail store card. Even though you may want to buy more than gas and clothes on credit, making small monthly charges that you pay off in full and on time each month will work wonders for boosting your credit score. Check out cards offered by BP, ExxonMobil, Kohl’s, or your favorite retailer.
  9. Get a subprime credit card. If you have bad credit, a subprime card can help you build up a strong payment history if you use it wisely. They come with sky-high interest rates – some as high as 30%! So, use subprime cards with extreme caution and pay them off in full each month. You’re never charged interest when you don’t carry a balance from month to month. Find subprime offers on sites like Bankrate.com and Creditcardguide.com.
  10. If it ain’t broke, don’t fix it. If you already have good credit, why would you want to risk doing something radically different? A score over 750 is excellent and means that you’ve been doing everything right when it comes to your credit.

Unless you have a serious black mark on your credit, like a foreclosure or bankruptcy, putting these tips into practice is the fastest way to pump up your credit score.

(photo by joellevand)

The Biggest Bank Scams Ever

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bank of america bankToday we had a sales meeting at my bank and our branch manager wants us to promote our new VIP banking service, as well as our Gold Visa Cards to EVERY client that walks into the bank. I was sitting there thinking “Aren’t we supposed to serve our clients in THEIR best interest?” Well, I guess not anymore.

Today I am going to write about Bank Products that are totally not worth it for our clients. These are products that make huge profit for banks and although they may be beneficial to one in one thousand clients they are not designed for the masses. However we sell them to you anyways.

The first biggest bank scam is the low interest rate credit card. If you are accumulating debt then paying another $25 or $50 per year is not to your benefit. Also banks don’t charge you this fee directly, they add it on to your credit card balance and therefore you are also paying interest on the fee. Yes you are paying lower interest. But, you are still paying interest.

While we are on the subject of credit cards, let’s talk about credit cards with an annual fee. Ok so let me get this straight…banks are charging me 19% interest AND they are also charging me an annual fee to have the card? This is ridiculous. As a bank employee let me tell you that banks need clients more than clients need banks. There is no way clients should have to pay an annual fee for a credit card. I can think of 10 things off the top of my head that I would rather do with $150 than pay an annual credit card fee.

The next big bank scam is the VIP Banking/Gold/ Preferred Client Service Package… or whatever ridiculous name your local bank calls it. This is possibly the biggest bank scam ever to their clients. The worst part is that the bank doesn’t think twice about offering this service to their clients who don’t need it because it makes huge profit for the bank.

This is the type of bank account package that offers “VIP” bank clients many services for the “bargain” price of $25-$35 per month. You can receive unlimited transactions, and free cheques, and free money orders but are they really worth it for you? Let’s say that checks cost $45 to order, how many times a year do you really need to order a book of checks? I think that in the last 5 years I have ordered checks twice. Free Money Orders? I have personally never bought a money order in my life. Free checking? A lot of banks are currently advertising fee checking accounts, so why would you pay for it? Bank account fees vary depending on the city and state of where you live. Here are some examples of checking account fees based on New York City:

Of course these fees can all be waived if you meet and maintain a minimum daily balance requirement.

Free Gifts or “Signing Bonuses” are also another big bank scam. Please, don’t sign up with a bank for a free IPod, or Toaster Oven. Choose a bank because the branch is close to your home or office. Open an account at a branch where you have a friend who works there, or you followed your personal banker from another Financial Institution. Please don’t get caught up in the free gift scam. Happy Banking!

(photo by teofilo)

Socioeconomic Standing, Age & Where We Live

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The other week, I talked about asset diversification involving our biggest physical asset (our house).   I felt that how we treat our house in our investment portfolio and what kind of house we buy is not properly understood, so I brought in an economics toolkit and went to town. This week, I’ll be focusing my efforts on correcting an article that the big man himself,Mr. BudgetsareSexy, wrote on his blog: Are you middle class? (and should you care?)

Rather than answer how “middle class” or “upper class” are defined, I’d instead like to point to the New York Times’ online piece “How Class Works“. It is a nifty little tool and shows a few dimensions of social class.  Class is broken down into 4 categories:  occupation, education, income, and wealth.

What exactly is middle class income?  Median income for a household of 4 in the United States is 81,000 according to the US Census.  And normally, we evaluate our standing by looking at how our income compares to that of the median. But the median is misleading for many reasons. (Median Income = what the person right in the middle of the distribution of incomes makes.  This is not an average, as averages can be distorted by lows or highs on the extremes)

However well the New York Times did their research, they make two critical mistakes that I want to highlight this week because these mistakes are important in how WE evaluate how well we are tracking towards our goals – and are important if WE are deciding between various job offers.

First up is the idea that the average or median is a poor metric because of geographical diversity in the costs of living.  Running a Cost of Living tool from CNN Money I find that that if I earned the “average” $81,000 in Washington DC, I would be just as well off living in Atlanta, GA as someone making $55,000.  This is a difference of $26,000 or 32%!  And this is one example among millions.  Failure to account for cost of living creates a bias in the whole notion of whether you have middle class income or not.  Sadly, there are very few location-based adjustments in taxes so that the 81K earner in DC is taxed liked their twin 55K earner counterpart in Atlanta.  So maybe, all things being equal, you’d be better off living in Atlanta and earning 55K.

Additionally, the New York Times survey doesn’t include differentiation by age. If we’re talking class, or how we’re doing relative to our parents, we’d want to know :

  1. Where were my parents when they were X?
  2. Where am I now that I am age X?

And yet, this important distinguishing characteristic is noticeably absent from the calculators on NYT and on BudgetsareSexy.  The “tests” that allow us to check where we are in terms of socioeconomic standing are ignorant of our age or where we live. That doesn’t make much sense.

If you really want to see where you are in the world, head over to GlobalRichList.com.

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