Wise Bead (Silicon Valley Blogger)

The Debt Trap: Factors That Have Led Us To Our Debt

Silicon Valley Blogger — Thu, 12 Nov 2009 15:00:03 +0000

We're a nation of borrowers. This reality is quite well illustrated by the personal stories and profiles covered by various media publications on the subject of consumer debt. Recently, The New York Times published a series on debt, which I found to be both highly intriguing and sobering, as it shed light on the plight of debtors and took a peek at our saving and borrowing habits. When I hear and read about these debt stories, I sense a common thread in the discussion, as people ponder what got them into this kind of trouble in the first place. In many cases, we point fingers at lenders, banks and credit card companies for creating financial products and developing an environment that is conducive to lending and borrowing (and that which allows us to shoot ourselves in the foot).

Let's review how we've found ourselves so heavily in debt as a nation of consumers.

Easy credit

In the past, it was simply too easy for consumers to obtain access to credit. Not long ago, I remember the slew of 0% interest credit card offers that would invade my mailbox. Because credit was so easy to get, consumers figured out how to leverage their credit card rewards as well as balance transfer cards in order to make money. Many tried to perform credit card arbitrage by taking out cash advances and balance transfers from these cards, then investing the amounts into a rising stock market. This was just one of those things you'd consider to be a "sign of the times." Of course, things are different today, but the 2000s was a decade during which our debt ballooned due to these types of products. Subprime loans, jumbo mortgages and other forms of costly debt are inventions of our capitalistic society; these are high-risk financial tools which countless consumers have used and gambled with, often with dire results.

Need for instant gratification

As a society, we're quite an impatient lot. It's ingrained in us to be able to get immediate access to the things we covet, even if we can't really afford these things at the moment. We live in a highly consumerist society that encourages materialism and is not ashamed of excess. Have you seen just how huge the portions are served in most American restaurants? It's all about more, more, more right now! So it's often the case that funds that should wisely be funneled into high interest savings accounts or into high yield savings are instead being used to keep up with the Joneses, a syndrome that many of us harbor, and which has caused many a household to fall into debt.

Lack of financial education

I don't believe that we're giving our finances enough priority; after all, personal finance isn't given importance in schools. A lot of us don't learn about finance while in school and instead are picking it up through experience and trial and error. Unfortunately, this lack of understanding and awareness about money management can make us vulnerable to making many financial mistakes, particularly those that land us squarely into the depths of debt. We should take it upon ourselves to learn the ropes: you can become informed and educated for free, if you check out libraries and the Internet for financial material and resources such as money management tools, budgeting tools and investment software that are available at no cost.

Lack of accountability

I don't think we're accountable enough for ourselves either. It's too easy to procrastinate about our finances, go in denial or sweep things under the rug when we get into trouble. But also detrimental is when we can't take responsibility for our own actions and mistakes. We readily blame the government or the financial industry for causing the rifts in our economy, but we're just as guilty about causing the crisis as they are. Both lenders and borrowers contributed to the subprime lending boom, subsequent bust and credit crisis, but guess who's getting the lion's share of the blame?

Debt as a cultural phenomenon

You've heard the saying "it's the American Way," a statement most applicable when referencing our relationship with consumer debt. In other cultures, debt is heavily frowned upon and is only gingerly used by households. But in America, debt is socially acceptable and ingrained in our culture; it carries no stigma. If bankruptcy, foreclosure, debt and being broke are things we easily accept in our culture and way of life, then these aren't things we'd readily condemn (or worry about) until too late or until we're forced to face the painful consequences.

When the economy blew up last year, it prompted the government to start making some changes; they've since introduced policies that help regulate the financial industry to some degree (e.g. credit card rules) but in many respects, it's still pretty much "business as usual." Instead of worrying about what the Fed or Obama is going to do next, we should focus on the things we have control over, and take responsibility for our own financial predicaments.

Permalink | 15 comments | Silicon Valley Blogger's blog | Channel: Credit Cards

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This article is from Wise Bread.

How to Deal with Recession Anxiety

Silicon Valley Blogger — Thu, 29 Oct 2009 13:00:05 +0000

By Silicon Valley ...

The nation’s economic recovery is anemic, with unemployment rates continuing to climb, but this doesn’t mean that your household economy is in trouble. In all the news that I've read about the economy, the media fails to report that around 90% of the country that wants a job has one; small businesses are hiring; and that if you buy stock now, when the market goes back up, you’ll be in an enviable position. Recession, even economic depression, is also a mindset. And there are millions of people in the US and around the world who are simply choosing not to participate in this downtrend.

Why do recessions cause anxiety? Because of our fear of uncertainty and the unknown. And then there is the media, which can provoke that anxiety. Local news reports have started running stories about people who have a complete year’s supply of food on hand at all times for the coming depression. Employment security (or the lack thereof), investment certainty (or the lack thereof), inflation, and other factors all combine to create a sense of dread that the media elevates to panic. But you don’t have to participate in the fear, the hype, the sleepless nights, or the hoarding. Here are a few simple (or not so simple, but effective) ways to prepare for any economic slowdown. These methods will help you to avoid participating in the recession and the fear mongering that prevail during such periods.

Emergency Funds Are a MUST.

The best way to combat uncertainty is to have a back-up plan. Back-up plans remove fear. If you had money to cover six months worth of household expenses (food, bills, house and car payments, etc.) in a high interest savings account — or even under your mattress — “just in case”, would that ease your mind about getting a pink slip? Would you work differently knowing that you had a Plan B? Increasing your savings — your “rainy day fund” — will ease your mind and give your family a strong financial footing. You may even be able to tell your boss “thank you” when the pink slip comes because then you'd be free to start your own small business or spend time at home with the kids or plant that garden you were meaning to, or do whatever it is you would like to do while you look for another job.

Pay off Debt.

What would you do with an extra $1,000 dollars a month? Would you revisit your stock broker for advice on how to build your retirement? Or perhaps you'd like to rethink the early mortgage payoff and pay off your house. Or what about building up your emergency fund or taking a vacation? Would you stimulate the local economy by being a consumer? There's a lot that you can certainly do when you have an extra $1000 or more a month in income. Most American households pay anywhere from $800 to $2,000 a month toward debt (including car loans) and compound interest. But imagine having no debt to worry about — then even if you lose your job because of a layoff or pay cut, things wouldn't be so dire given that you don't have to make debt payments. If you're having trouble paying off debt, you may want to consider credit counseling or debt settlement as a last resort.

Keep Cash on Hand.

If you are worried about a run on the banks, or your bank in particular, then keep a supply of cash on hand: just enough to buy food, water, and gas for a couple of weeks, no more. Should your bank fail, your deposits and surely, your high yield savings are insured though the FDIC for up to $250,000 and you will get your money back, eventually. Should the FDIC fail…well, getting money out of your bank will be the least of your problems if the Federal Reserve fails.

Don't Stop Investing.

Warren Buffett (a close, personal friend of President Obama, if one believes campaign rhetoric), once said about investing: “Be fearful when others are greedy and greedy when others are fearful.” Well, right now should be the perfect time to invest because everyone and their brother is taking money out of the market and hiding it in a paper grocery bag in the back corner of the hall closet.

Sure, you may lose a little of what you put into the market today, but when you continue to invest when the market is down, you can buy more stock than you could a year ago with the same amount of money. When the market goes back up — which it will — those who continued to invest with their discount broker during this time, when stocks are “on sale”, will be that much closer to reaching their financial goals.

Don't forget, also, that investing should be for the LONG TERM…not for just a couple of years. Remember that 80% of ANY rolling five-year period in the last 110 years has averaged up, and over 90% of any rolling 10-year period and each rolling 20-year period have shown overall gains. Thus, market hiccups don’t look nearly as bad.

When you make the conscious choice not to participate in the recession, suddenly the dire economic news does not seem so apocalyptic. If you do just a few things to protect your family — most important is paying off debt (and not accruing more) and putting aside an emergency fund equivalent to at least six months of expenses — then the numbers given in the evening news, even if you are included in the latest round of layoffs, won’t keep you awake at night.

Permalink | 7 comments | Silicon Valley Blogger's blog | Channel: Personal Finance

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Worried About Debt? Tips On Managing Your Loans

Silicon Valley Blogger — Wed, 14 Oct 2009 13:00:03 +0000

By Silicon Valley ...

I am extremely debt averse. In fact, the only debt I have is my mortgage. However, I do have family members who have been struggling with debt for a long time, whom I try to help out with some friendly advice. Someone in my family, for example, is a head of household who's had a hard time holding on to a job in recent years, especially in the state where he lives, where unemployment has been sky high. So he's taken on personal loans, credit card debt, auto loans and even student loans galore! With so many loans to manage, he's often asked me and other people for tips and advice.

Here's what I tell him: If you've got a lot of loans under your belt, you'll want to make sure to manage them well, or risk wrecking your credit by making a late payment somewhere. Dealing with debt involves both defense and offense: when your goal is to cut down on the debt you carry, the key is to stop borrowing any more money, to make sure you can afford paying down your loans (spend less and earn more to pay off debt!), and to try to lower your interest rates as much as you can.

Here are a few tip to keep your debt under control and ways to speed up the process of reducing your debt load.

1. Keep tabs on your credit.

Anyone who borrows money should keep an eye on their credit. But interestingly, there are quite a good number of people who aren't even aware of their credit score. Do you know what your credit report says about your debt habits? If you've got loans and many accounts you're dealing with, you'll need to know how your debt load affects your credit rating. The way you manage your debt influences your credit rating: this is important because by taking care of your credit, you can be eligible for cheaper loans or have the leeway to reduce your loan interest rates. If you want to retire your loans as quickly as possible, having a healthy credit history may help you negotiate your way to lower rates.

2. Consolidate your loans.

You may want to consider consolidating your loans on your own as a way of reducing your debt. For example, I like the idea of using balance transfer credit cards if you can commit to paying down your debt before the teaser rates bump up. Despite the credit crunch, there are still 0% APR credit card offers that abound, to which you may think about transferring your debt balances over if you can be aggressive about paying off your debt at the 0% rate within a short period of time.

3. Do your own debt management.

Before you seek credit counseling or turn to debt settlement companies, do all that you can to handle your debt issues on your own. Handling things on your own is cheaper. A lot of it is simply applying fiscal discipline: start off by avoiding new debt. Don't take on additional debt unless you are comfortable with what you're already dealing with. Cut back on spending or try to earn more in order to cover your bills. There's really no magic bullet here: there's nothing that others can help you with that you can't already do on your own. If you really are experiencing hardship, turn to local and government financial programs that are geared to assist low income families or those having a hard time paying their bills.

4. Lower your interest rates.

Find out if you can somehow reduce your loan rates. Can you qualify for low interest credit cards? Or you may think about taking out a cheaper personal loan to pay off a more expensive loan. Also, you may be surprised to know that financial institutions may have hardship programs available and that bankers may be willing to negotiate with borrowers who approach them for guidance. It never hurts to try!

5. Pay on time!

You know you're in trouble if you're unable to make your loan payments on time: this indicates that you've taken too heavy a load and that you should make it a priority to address this debt. Do your best to cut down on expenses, while paying on time. Pay your bills late and you'll see your rates go up. Whatever happens, do your best to make those payments because late or missing payments can do a number on your credit.

6. Pay more than what's required each month.

If you ever get a hold of a windfall or find yourself with extra income, you should think about applying it towards your debt. Some people suggest keeping debt around while banking the extra money in an emergency fund, but I think it would depend on just how big a debt obligation you actually face. If debt is a thorn on your side, get rid of it asap. In my case, I've added extra payments to my mortgage whenever I could afford it!

7. Be picky about the help you choose to get.

Turning to credit counseling, debt settlement and loan modification outfits should be the last thing you try to do. You can actually do your own debt negotiations yourself by approaching your lenders directly for assistance. Some people decide they need the extra help by reaching out to debt management companies when they feel there's nowhere else to turn. These companies can help alleviate the pressure but you'll be paying for offloading the work onto someone else. The good news is that there are other free and non-profit programs that may be able to assist you — so go to these first: visit Debtor's Anonymous or the National Foundation for Credit Counseling for support and information on how to live with and manage your debt and credit.

Permalink | 6 comments | Silicon Valley Blogger's blog | Channel: Credit Cards

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5 Creative Ways to Invest During a Weak Market

Silicon Valley Blogger — Wed, 23 Sep 2009 16:00:05 +0000

By Silicon Valley ...

With the stock market finally recovering this past month, even closing at highs for the year, a lot of investors may be breathing a sigh of relief about their stock investments. You may have checked your online broker recently and discovered your balance looking a bit healthier than it did several months ago. But given the volatility we've seen over the past year or so, can we really trust that the markets are reflecting a true recovery in our economy, or is this just a technical bounce?

A lot of armchair market pundits I've been reading are keen on predicting that we're going to see a double dip recession. And interestingly, market insiders are also making defensive moves right now, apparently bailing out of their equity positions while the market registers this year's highs. This caught my attention, given that these very same insiders were known to be buying heavily when the market was carving out a bottom (at DJIA mid 6000).

So if you're worrying about what you should be doing with your investments right now, you're certainly not alone. But instead of wondering whether you should hang on tight or abandon everything for cash, I'd like to suggest that we think outside of the box a little and investigate some alternative approaches to investing. Here are 5 creative ways to invest right now.

1. Invest in lending notes.

While I've known of peer to peer lending for a while now, it's only recently that I've looked into it earnestly as an investor. I was particularly intrigued by the potential returns you can make by investing in notes (between 7% to 9.6% as an annual average). For more details, you can check out my Lending Club review and evaluate this particular lender's personal loan rates to gauge what you can earn as an investor.

2. Explore foreign currency investments.

Are you interested in adding some foreign exposure to your portfolio beyond owning traditional international equities? Then you may be interested in foreign currency CDs which are certificates of deposit that are invested in various world currencies. There are variants of this product that may give you downside protection (most currency CDs do expose you to currency risk): for more information, check out my EverBank review, which discusses such products in more detail.

3. Ladder your cash instruments.

Short term cash reserves aren't the most exciting things these days, given the low yields they've got right now. So for the short term reserves I have, I've opted to use a CD ladder, which requires staggering the purchase of certificates of deposit of various terms so that they reach maturity at various times. Laddering allows you to diversify across CDs of differing rates thereby giving you a chance to enjoy a higher average rate of return. They also grant you some level of liquidity because of the different maturity dates represented in your CD portfolio. Here's are some of the best CD rates I've found, which you can explore for this strategy.

4. Diversify into precious metals.

For further diversification, consider delving into other asset classes such as precious metals, and in particular, gold. Investing in gold has paid off for long term investors over the last decade, but like any other investment, can be subject to volatility during certain periods. A good rule of thumb is to put only a small portion of your funds (say 5% to 10%) into this category for diversification purposes. Investors normally flock to precious metals when there's fear in the markets and the streets.

5. Diversify into commodities.

Aside from putting a small portion of your funds in precious metals, you may also want to investigate the possibility of buying a commodities fund, index or ETF. Relatively speaking, commodities are not a very popular asset category and are not widely found in the average investment portfolio. The truth is, they are meant to represent only a very small part of your holdings due to their volatile nature. However, if you are looking for one way to hedge your core equity portfolio (e.g. against inflation), then you may want to put a little bit of money in a commodity index fund like the PIMCO Commodity Real Return Strategy Fund (PCRDX). This particular type of investment has both its champions and critics, so do your best to learn about it before investing.

So what about investing in the obvious? Now that stocks and real estate are down from their price peaks, you may start feeling tempted to move the lion's share of your portfolio into these weakened areas. I would caution you from making such radical moves though, since outright market timing can be a dicey game (you can be wrong, after all!). Instead, look into rebalancing your investment portfolio if you haven't done so already, in order to keep to your original asset allocation (by shifting your funds accordingly, you're actually buying low). Or if you really want to invest in real estate, make sure you study the local markets. Alternatively, you can simply go for REITs, which are so much easier to manage. But if you're thinking about buying a house to live in, I believe that now is a good time to buy!

Permalink | 7 comments | Silicon Valley Blogger's blog | Channel: Investment

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How to Tell if You're on Track for Retirement

Silicon Valley Blogger — Fri, 04 Sep 2009 18:00:02 +0000

By Silicon Valley ...

It may be a little bit early to think about retirement all too seriously if you still have several decades left before you face it. But don't look now -- time flies and before you know it, there won't be much time to prepare for retirement. On this subject, the big question I have in mind is this: how do we know if we've saved enough for our retirement years?

In order to maintain the lifestyle that we are used to, the conventional wisdom tells us that we need to be subsisting on an income equivalent to 75% to 90% of what we currently make prior to retirement. This is a natural assumption because we don't expect to have the same amount of expenses in our older age as we do when we are growing our families. Of course, it would be another story altogether if you expect to live it up in a big way once you've retired.

While retirement is a long time goal, it would still serve us well to plan for it while we're still young and healthy. I've been saving for retirement ever since I started earning an income because I realize that with long term investing, time is of the essence. As the saying goes "Timing the market is not what's important. It's time IN the market." Simply put, investing early and as regularly as you can makes a huge difference in how large your nest egg will be in your old age.

So let's answer the question: how much savings do we need to retire? Here are a couple of ways to calculate the answer:

Solution 1: Use online retirement planners and calculators.

You'll find these free tools available in a variety of sites, such as standalone investment sites, mutual fund sites such as T.Rowe Price and Vanguard, or even at discount brokers (the likes of which I've reviewed: you can check out my reviews of Scottrade and TradeKing). They offer great ways to help you plan for retirement which are based on several assumptions such as:

Your current age
The age you intend to retire
How long you expect to live
Your current income
Your cash flow during retirement
The size of your retirement savings
How much you expect to contribute to savings
Expenditures during retirement
Risk level of your investment portfolio
Historical return rates of your portfolio

I would suggest trying out these calculators to give yourself some idea of where you stand with regards to your retirement savings. For my retirement planning, I've visited Scottrade to try out their tools. These tools can help us figure out the cost of waiting (which tells us what happens to our accumulated savings based on when we start investing), how much to save and how long our retirement savings can last, and how to choose between a traditional IRA and a Roth IRA. Knowing these facts is a great way to start developing your retirement plan -- and as you can see, it's easy enough to do on your own.

Solution 2: Try a quick and easy retirement savings formula.

I would also suggest using the following simple formula for determining exactly how much it is you should have saved by the time you retire. Just crank out your numbers manually as follows:

1. Know how much income you'd like to have during retirement.

2. Peg down an annual withdrawal rate that you're comfortable with. How much of your retirement savings do you plan to withdraw each year? In order to keep your nest egg intact, the recommendation is for you to withdraw between 4% to 6% of your savings on an annual basis.

3. Make these calculations.

To find out how much savings you need to support yourself during your retirement, try this formula:

Your annual income during retirement divided by the annual withdrawal rate should equal your desired savings.

As an example, let's say you are making $80,000 a year right now. If you expect to live on 80% of your current income during your retirement, then designate this to be $64,000. If you determine your withdrawal rate to be 4%, then your nest egg by the time you retire should be:

$64,000 / .04 = $1,600,00

Take note that the result here is but a rough estimate. Of course, if you plan to work through retirement, then such a savings amount should be adjusted accordingly. The formula is simplistic but it helps give you a basic idea of what you need to do.

One of the best ways to save up for your later years is to maximize your contributions to tax-advantaged retirement accounts. Better yet, contribute the maximum to your retirement plans and take advantage of employer contributions to your program as well. All this is pretty well known advice that seems simple enough to do, but surprisingly, a lot of people tend to procrastinate on this matter. Remember that the better prepared you are, the more likely you'll be able to enjoy your golden years without financial worry.

Permalink | 5 comments | Silicon Valley Blogger's blog | Channel: Investment

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10 Tricks to Save Money with Credit Cards

Silicon Valley Blogger — Mon, 24 Aug 2009 14:11:37 +0000

By Silicon Valley ...

The most credit savvy among us have been able to use credit cards to their benefit in order to wisely and optimally save money even while charging on their cards. If you are careful about how you use your credit cards, you may actually come out ahead by using them, rather than if you just stuck to cash. I've written about the perks of using cards before and why I prefer credit cards over cash, but this time, I'd like to share some actual strategies we can use to get the most out of our credit cards.

10 Tricks To Save Money Through Prudent Credit Card Use

1. Consolidate your credit card debt with care.
Many consumers use a common strategy to trim what they owe on their cards: they use balance transfer credit cards, which offer 0% or low APR on the balance that is moved over, but for a limited introductory period. Make sure you perform a cost benefit analysis before executing this plan since most cards these days have a balance transfer fee (typically around 3% of your debt) that you'll need to pay when you do the switch. You should also assess if you'll be able to pay off your debt entirely before the promotional 0% rate period is up, in order to avoid any increases in the card rate. If you can't make this work, it may still be worth doing a balance transfer if the new card carries a much lower APR than your old one.

2. Use rewards cards only if you can pay your balance in full.
I'm a huge fan of credit card rewards. But to offset the rewards that they pay out, rewards cards tend to have higher interest rates than regular credit cards. For instance, it would only make sense to earn American Express rewards if you intend to pay your balance in full each month, no fail. If you can't commit to such a schedule, then it's better to apply for lower interest cards.

3. Be careful about participating in credit card arbitrage schemes.
Because of today's more restrictive credit environment, it's now tougher for shrewd cardmembers to execute any money making schemes using credit cards. In the past, it was fairly easy to make money with cards by taking borrowed funds and funneling them into a high interest savings account that sported an attractive yield. With savings accounts no longer yielding such great returns and balance transfer cards with awesome terms now dwindling in number, this strategy is no longer as lucrative as it once was. There are still people who play this game though, but it's a game that requires top notch organizational skills since any misstep (say a forgotten or late payment) can cost you much more than you'd earn in this plan.

4. Pay more than the minimum and pay on time!
By simply practicing good payment habits, you'll avoid exorbitant finance charges and penalties levied upon your account. It's best to pay off any monthly balance in full, but if you can't swing it, then paying more than the minimum will save you quite a bit in interest over the long term. There are also certain credit cards that will reward you for this type of good behavior (check out my Citi Forward credit card review for more details).

5. Do your research before applying for a card.
Compare credit card offers before signing up for anything. Have you read the terms carefully? Based on your shopping habits, you'll find that there are certain credit cards that will suit your spending patterns better than others.

6. Don't own too many cards.
I'd avoid collecting rewards cards simply because owning too many may prevent you from optimizing your rewards on any one card. Also, having too many cards may just encourage you to charge more than you should and to overuse your credit.

7. Avoid relying on credit cards to cover an emergency.
Some people I know don't have emergency funds and end up relying on their collection of credit cards to bail them out whenever the need arises. However, with no savings, you're likely going to keep a balance on your credit card as soon as you use it for any unexpected expenses -- and keeping a balance means paying extra in interest. So keep in mind that while depending on your cards as backup is quite tempting to do, it will certainly be expensive in the long run if you charge up a storm.

8. Carry a spare credit card.
Here's a great compromise: if you are interested in taking advantage of rewards, you can still own a rewards card but use it only for those items that you'll be able to pay off completely each month. You may want to consider applying for a second card which should be of the low interest kind; this is the card that you can afford to own with a balance given its lower rates.

9. Talk to your card issuer about lowering your rate.
If you've got a good history as a cardmember, you may have some leverage here. When you've been a customer for a while, give your card company a call to discuss the possibility of cutting you a break on the rates. They're more amenable to this type of request than you think since card companies would love to hold on to their good clients.

10. Don't use your card for cash advances.
Avoid using any free checks that come your way that draw from your credit card account. And try not to use your card for any form of cash advance -- it's not worth what you'll pay for the convenience.

Permalink | 5 comments | Silicon Valley Blogger's blog | Channel: Credit Cards

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What's the Right Way to Save?

Silicon Valley Blogger — Thu, 30 Jul 2009 12:00:13 +0000

By Silicon Valley ...

We all have our own ways of handling our finances -- and that's why it's called "personal" finance. What works for one person may not necessarily work for someone else, and this is why I find it highly interesting when people get into debates over the different ways to manage money or handle debt. Is there really a right way and a wrong way to do things?

I will argue that there are many effective strategies to go about handling your money, even if some of these strategies may at first come across to you as being on opposing sides of the fence. Depending on one's circumstances, one approach may work better than another. Also, it's not unusual for your financial habits to change based on your particular situation or stage in life. You may find that a lifestyle adjustment may prompt a corresponding change in your financial plans.

So allow me to present some interesting arguments that govern the process of saving. There are many more debates of a similar nature to this that I've come across, but for now, I'll cover these five points on the subject of saving money. Do you find yourself belonging to one camp or another? I'll try my best to supply my own perspective on each question so you can see where I stand:

Is There A Right Way To Save?

1. To budget or not to budget, that is the question.
Do you budget? Budgeting is an important step to get your financial situation under control. If you are feeling the weight of a heavy debt load, then the first thing you've got to do is to track your income and outgo. Where is your money going? You can do this for free with a tool like Mint or Wesabe. Or you can go with a solid desktop tool like this one I've reviewed called YNAB, or any one in this list of budgeting tools. While some people meticulously record every single dime they've got and apply this to their budget, some perform a more cursory process and take a lighter approach to budgeting. I actually belong to the latter camp: I don't capture every cent that enters or leaves my clutches. I tend to have a rough idea of my expenses and do a monthly review based on the account statements that I have. I then enter these summaries into my budgeting tool. I'm comfortable doing things this way because I feel that I have solid control over my spending. Since most of my spending has been very predictable, I don't see why I need to track every item I buy from the grocery store or every dollar I spend on gas. I've been "cutting corners" this way for years, but I've noted that this hasn't had a negative impact on my budget in the least bit. But how about you -- how do you budget?

2. Pay yourself first or pay yourself last?
I am an advocate of the "pay it yourself first" approach -- that is, I've signed up for bill pay, direct deposit and an automatic savings program. Paying yourself first is a strategy that involves designating a portion of your income (say 10%) and moving it to a savings fund such as a high interest account, or to a longer term investment such as an index fund. But there are folks who evangelize the "pay yourself last" approach, which as I understand it, simply means that you save as a conscious "choice" rather than as an automatic process. I'm actually using both strategies to some extent -- I've set up an automatic savings program for a percentage of my income, then with whatever discretionary income that remains, I may save additional money based on choice. For more on "paying yourself last", check out Passion Saving.

3. Use credit cards to save or avoid them like the plague?
I've often declared how much I appreciate credit cards as a financial tool to help me with my finances. I've applied to various credit card rewards programs to help me save while I spend, and quite appreciate the cash back and points I earn when I use my rewards cards. Of course, for every person who agrees with me, there are countless others who will fervently disagree. And it all boils down to our past experiences with credit card debt. For those who have been heavily stung by their credit cards, it's not a surprise that they develop an aversion to cards as they work to control their debt. Is it possible for those who've had negative experiences with credit card debt to eventually develop a more favorable opinion of credit cards?

4. Pay down debt or build an emergency fund?
For some of us, aggressively paying down debt is a significant goal. I actually tend to fall in this camp as well, because I'm not one who likes to carry debt for long. But if you've been following Suze Orman, you may have encountered one of her more recent tips: if you don't have any savings, she encourages you to think about paying only the minimum on your credit cards and instead, channeling the rest of your money towards an emergency fund. The current credit crisis has prompted this new advice from Suze, who believes that we should focus on building our savings and relying on our own funds, now that card companies have become less supportive of their customers.

5. Pay down most expensive debt or smallest debt?
The quickest way (and therefore the cheapest way) to retire debt is to pay down those loans with the highest interest rates. I tend to address my debt this way, regardless of how large my loans are, but it may be easier for some people to stick to their debt reduction program by tackling smaller goals first. So picking the low lying fruit by first paying off those debts that are smallest in size (regardless of APR charges) may be the more encouraging option for some folks. Which method would you prefer to go?

Given all these points, I don't disagree with any one approach to managing money. I say: do whatever works for you, whatever's comfortable for you. What's important is that your chosen techniques help you make good progress towards your financial goals. What matters is how well your strategies work for your bottom line.

This post was selected to be in The Best of the Best in Money and Personal Finance #5 carnival!

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Personal or Business? Parameters for Choosing a Credit Card

Silicon Valley Blogger — Tue, 14 Jul 2009 17:00:03 +0000

By Silicon Valley ...

We've all got our different reasons for making a particular product choice, and it's no different when it comes to shopping for a credit card. These days though, many people are probably just happy they're able to qualify for any credit card at all, given just how much stricter card companies are these days about signing up new customers.

So what is it that draws you to any one card? Some people are attracted to certain credit cards because of their design and appearance. But some are very practical and look at the bottom line: they check the interest rates, APR, card fees and other terms that come with the card. And in my particular case, I look at a couple of things: the rewards and the annual fees. Since I pay my credit card in full each month and don't carry a balance, I'm after maximizing cash back rewards and minimizing those annual fees and grace periods. The best cards for me are those with $0 annual fees with decent terms and sign up bonuses (free money, why not!) and for this reason, I am partial to Discover card rewards programs and American Express rewards cards.

Differences Between a Personal and Business Credit Card

Now the aforementioned parameters are some of the more obvious reasons for picking a card. But there's something else you may want to consider before you fill up that credit card application. If you own a business, and would like to enjoy the benefits of a business card, there are a few considerations you may want to be aware of. Some people may not be aware of the differences between business and personal credit cards, which I'd like to clear up. Here are a few tips to consider when making a decision between these different cards:

1. Your personal credit standing is still on the line with a business credit card.

What a lot of people don't realize is that if you're a small business owner, you can still be personally held liable for how you handle your business card. If the card company asks for your social security number to open a card account, then you know you're on the line for it, and you'll remain liable for how you manage this credit line. Thus, any late payments on a business card will affect your personal credit score. In fact, many people confuse a "small business credit card" with a "corporate credit card." With a corporate card, the main cardholder's personal credit won't be affected with its use; any defaults on such a card won't affect the business owner's personal credit. But note that corporate cards are only available to big business entities and that the criteria that defines such businesses varies by card company (e.g. A card company might declare that a big business enterprise must have at least 20 million in sales and at least 200 employees, for instance).

2. Compare the rewards of carrying a small business credit card with those from consumer cards.

There are certainly benefits to getting a business card; just not what you may automatically assume. As a small business owner you may want to have a separate card for your venture to make financial planning easier. Also, some vendors only take business cards exclusively. And finally, there may be much better rewards available to you that are pertinent to your business if you use such cards.

Here's a case in point: many rewards business cards pay you extra points or cash rebates for so-called "business related items" (like buying your stationery at Staples). If these are huge expenses for you, this is something to think about. Amex business cardholders receive benefits like getting 5% discounts from Hyatt hotels or Fedex. Discover small business cards offer 5% cash back on office supplies and 2% on gas. These are things to consider when you are doing your research.

3. Your card statements may be presented differently.

Unlike consumer credit cards, business credit cards tend to give cardholders a monthly breakdown of expenses in categories. For those who like this feature, this might be a reason to lean towards a "small business credit card." While many consumer card statements have this feature as well, they tend to give you an annual statement summary rather than a monthly one.

4. Watch out for additional fees for employees.

Beware of any extra fees that a card company charges for additional cards. Some cards won't charge you any fees. Some have no fee for the first few additional business cards. But certainly, do some proper research on this point. If you have just a couple of employees whom you want to give cards to, perhaps even a personal card will do.

5. Most travel rewards are the same.

By this, I mean that there's really no difference between the frequent flier miles perks for personal vs business cards. Whether you get a United Airlines personal or business card, you will still be earning the same United Mileage Plus Miles.

6. Some business cards report to Business Credit Bureaus.

If building a business credit score is important for you, ask if a credit card issuer reports to bureaus like Dun and Bradstreet. But bear in mind that whether or not they report to D & B, any default (or other problems) will also show up on your personal credit score and report.

7. Leverage 0% offers when it makes sense.

Many personal and business credit cards offer teaser 0% APR for purchases for some extended time (the introductory period). I wouldn't recommend that consumers go on a 0% financing spree on a plasma TV, but for a business, 0% financing for some start up costs may make sense and may provide some breathing room.

8. Find out whether vendors will accept American Express or Discover cards.

Visa and Mastercard are the most popular credit cards. But you may want to get an Amex or Discover card if you find it more appropriate for your business spending habits. But before you do that, check with your vendors to see if they accept these cards (some don't).

9. Ask the right questions before applying for a card.

Here are a few questions to ask in order to find out whether a business card is something you should get:

What kind of expenses do you plan to put on your card?

Does your business require travel?

Will your business carry a balance on the card (do you need lines of credit)?

How many employees should your card be distributed to?

What kind of cards will your vendors accept (will they take Discover or Amex)?
Can you get better trade terms from a vendor?

You should take into account these concerns even as you look at each card's general terms, such as interest rate, fees, grace period and rewards program. For those interested, here's a sampling of some of the best business credit cards out there today.

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How To Avoid Gambling Away Your Investments

Silicon Valley Blogger — Mon, 06 Jul 2009 16:47:35 +0000

By Silicon Valley ...

Investing has been the subject of debate between me and my colleagues, on and off throughout the years. Some of my friends consider participating in the stock market a form of gambling, while I say "it depends." While I agree that not everyone should be risking their money in certain investments, I believe that by taking on an extreme view against investing in general, you could be missing out on potential growth in your net worth. Unfortunately, in recent years, what's happened in the stock market may validate what some people already think -- that investing is indeed synonymous with gambling.

But for those who are young, able-bodied, employable and with a good income stream, putting money in the stock market is still a good bet (pun intended). For instance, while I'm pretty conservative when it comes to my money -- I'm debt free but for my mortgage -- I am one who also enjoys investing and who has happily reaped the benefits of this activity over the years. So if you're nervous about investing, here are a few tips to help you find the confidence to make that first step as a stock investor:

How To Prevent Your Investments From Turning Into A Gamble

1. Learn about investing.
These days, many online brokers and mutual fund companies offer a lot of resources and information that you can use to boost your knowledge about the stock market. When I first started investing, I only had books, magazines and publications to turn to, unlike today with the wealth of information at our fingertips. I'd encourage you to check out our TradeKing review or this coverage I have of ETrade, where you'll see the kind of resources that are available to you for free by simply joining a well rated brokerage. You'll get very strong support at mutual fund companies like Vanguard and Fidelity as well, or at independent financial sites like Motley Fool and SmartMoney.

2. Have enough of a cash cushion.
Make no mistake, the stock market is rife with risk. But don't forget that there are other risks too, when you decide to keep all or most of your money in a safe, liquid account. While it's important to ensure that you do have some money saved up in a savings account, don't overdo it because over time, you may not be earning enough in interest to make up for the effects of inflation. You'll need stocks and other investments to prevent your assets from losing ground due to inflation. For most people who earn an income or have cash flow, their emergency fund can serve as the cash cushion here.

3. Diversify, diversify, diversify.
The key to managing your risks with investing is a little thing called diversification. I've often written that diversification is the foundation of any solid investment plan. Create a portfolio that represents all the major asset classes such as stocks, bonds, cash, and maybe include real estate and gold (or precious metals) in the mix. For stocks, you'll want to diversify further by getting representation in foreign and domestic companies.

4. Gamble only with a little.
Should you trade stocks online? Some people make the mistake of equating investing with trading, which are two different animals. The prudent approach is to create what is called a "core and explore" portfolio. The one I have consists of core investments in solid, high quality investments such as index funds and ETFs, while I cap the amount of money I use for "fun, experimentation and exploration into wild investments" at 4% of my total portfolio. That way, I can indulge my interest in trading the market.

5. Stick with what you're comfortable with.
Go with the kind of portfolio that will make you sleep at night. Deciding to put most of your funds in aggressive stocks and risky investments like penny stocks or options (unless you have great experience in options trading), is gambling, if you're an average investor. Instead, use your goals and self-understanding to invest according to your risk profile.

6. Stick with easy to understand, well known investments.
What can be more popular and easy to understand than mutual funds? These boring funds often get some flack for being ... well, boring, but you'll increase your chances of making money over the long term with a simple diversified portfolio of index funds.

7. Avoid making emotional decisions.
I used to think that market timing is bad. Today, I don't necessarily think it is, unless you're timing the market based on emotion. Remember that with market timing, you risk being whipsawed by volatile prices. If you time the market by basing your decisions on a clear investment strategy and loads of analysis, then it's a different story. That said, market timing is only appropriate for skilled and experienced traders, while the average investor should probably avoid participating in such a risky exercise.

8. Understand your risks.
Know the risks you take before you put your money on the line without any guarantees, so do your research and read your prospectuses before you invest. It's also important to understand the relationship between risk and reward, as well as your own investment profile. Ask yourself: what kind of investor are you? Here's more on how to manage your financial risk as well as some basic investing tips we've shared here before.

To close, I believe that it's all semantics when one compares investing to gambling. You're a gambler if you trust luck to take care of your fortunes in the markets. You're an investor if you've put careful thought into your investment plan and decide to execute your strategies accordingly. While both actions involve risk, they don't mean the same thing to me.

Permalink | 7 comments | Silicon Valley Blogger's blog | Channel: Investment

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10 Tips To Lower The Cost of Banking

Silicon Valley Blogger — Fri, 19 Jun 2009 05:41:18 +0000

By Silicon Valley ...

When shopping for a savings account, I don't believe it should necessarily be all about the yield. You should also consider how much it costs to bank with your financial institution because bank fees can very easily neutralize the interest you are earning on your savings.

Even before the financial crisis, I had been noticing just how costly it was to keep our money in the safety of our banks. Now that banks are shaking in their virtual boots, thanks to the credit squeeze and recession, they're doing what it takes to keep afloat, even if it means passing on more costs to their customers. But we consumers don't need to sit down and accept the charges they keep handing out to us. There are things we can do to avoid having to pay unnecessary bank fees. I'm all for helping compensate my bank for the services they render, just as long as the fees are reasonable. But I'm also for watching my bottom line and making sure I'm making the most out of my checking and high interest savings accounts.

Here are some tips I've put together to help you avoid getting hit by pesky bank fees:

Lower Your Banking Costs With These Tips

1. Keep track of your accounts.
First things first -- know what you are signing up for! When you open a new savings account or other bank product, make sure you check the terms carefully and know just what kind of fees you can be charged. Surprisingly, not everyone looks at the terms when applying for an account since their eye is squarely on the interest rate earned. Once you've got an account, monitor any fees that come your way by regularly reviewing your account's statements and reports. One more thing: once you've established your accounts, make sure you remember you've got them. Surveys point to the fact that a percentage of bank customers don't even remember where they've stashed some of their money. Honest.

2. Select bank products with good rates and low or no fees.
Don't just chase rates. Don't ignore the other aspects of your bank account just because it happens to give you a rate you can't refuse. As mentioned, when shopping for an account, you should check on the account's charges and fees, the bank's stability and reliability, their customer service, etc. There are online saving accounts out there that have no or low fees, including those offered by well-known banks which I've previously reviewed. Check out what I've written about the HSBC Direct online savings account and Emigrant Bank products, which have minimal bank fees. Make sure to read the fine print on any account that's recommended to you. Some fees to watch out for: ATM fees, cash advances, stop payment, return deposit fees, overdraft charges, insufficient fund fees, excess withdrawal fees, account maintenance fees. So how much does your bank charge you?

3. Maintain more than the minimum in your account.
There are some banks that offer online savings accounts that have a no balance minimum. But it's always safer to have a savings buffer to make sure you escape fees that the bank may levy upon you as a consequence of having too small a balance in your account. Some specific fees that you may inadvertently get charged if you have a small balance include insufficient fund penalties, bounced check fees or overdraft charges. Have enough money in your savings account to cushion you from such fees. Or you can try these strategies: arrange for overdraft protection by linking your checking account to your savings account if your bank permits this, and consolidate your accounts into one place to achieve a higher balance.

4. Watch your transactions.
You can avoid incurring penalties and fees by keeping an eye on your balance and by being on time with any payments you need to make -- whether it's to your bank or other financial institution you're doing business with. By using budgeting tools, I've actually been able to get a better handle on the transactions I make on a regular basis.

5. Foster a relationship with your banker.
It pays to know someone from the inside. I've been banking with a particular bank for quite a long time now, and have been assigned a personal banker whom I deal with directly. I've seen just how much easier it is to have someone on my side to help me out with issues, concerns and even complaints I may have from time to time. A lot of banks and institutions are hoping to keep you as a loyal customer, so by communicating your concerns with them, you may just find some of your fees waived for good. A personal banker may also be able to suggest other products for you if the account you currently have doesn't seem like a good fit.

6. Be wary of services you don't need.
The flipside to having such a tender, loving banker on your side is that they may try to "sell" you unnececessary services that can cost you a mint. Here's an example: to avoid bounced check fees of $25 to $35 a piece, banks will offer to cover you. With these services, you may avoid embarrassment and merchant fines but you won't avoid the costs, which you're simply deflecting through your bank. You see, if you sign up for courtesy overdraft protection (otherwise known as a sneaky form of bounced check protection), you'll be paying your bank huge fees ($22 a pop) for making sure your checks are all good. Instead of paying a bounced check fee, you'll be paying a courtesy overdraft protection fee. So do you really need this kind of protection? Not really, if you're able to keep on top of your bank balance and transaction activity each month.

7. Don't bounce checks.
Some people try to tempt fate by writing out checks, postdating them and crossing their fingers that their money makes it into their account before the funds get withdrawn. I don't think it's worth taking the risk of playing this game when the penalties for error are onerous. Using checks in this manner is a bad habit that has cost many people thousands of dollars in fees and penalties each year.

8. Use ATMs with care.
ATMs are convenient, but if you really want to save money, be aware of what kind of ATM you are using. If there are charges for using another bank's ATM, then limit your ATM use to those machines from your own bank. Seems straightforward enough, but people don't realize just how much convenience can cost them until they see those ATM charges in their monthly statements. Many banks charge non-customers $3 a transaction for the use of their machines.

9. Look into credit unions or small local banks.
I hear this suggestion made quite often: join a credit union. As a member of a credit union, you become part owner of this non-profit enterprise. You may get better rates and receive fewer and smaller fees when dealing with your institution. There seems to be a lot more advantages to taking your business to a credit union these days so why not try one out? Is there any downside to opening an account at a credit union? Perhaps there are fewer choices of products or services to be had, and you may not have the same accessibility to ubiquitous ATMs or branches that you may be used to visiting. Credit unions and smaller banks may not have much of an online presence either (or may have limited online features). I suppose everything has tradeoffs!

10. Keep your money in a mattress.
I'm not really entirely serious here, but I'm quite aware of people who do hide a lot of their money at home, in home safes or in other odd places in the house. Not a great idea, with too much risk of loss and the erosion of your money's value due to inflation, but there are still folks out there who find this the most comfortable way to stash their cash. Maybe this story of a million dollars in someone's mattress may convince you that your money is safer somewhere else!

Permalink | 1 comment | Silicon Valley Blogger's blog | Channel: Personal Finance

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