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Applying Corporate Accounting Terms to Our Personal Finances

scott@tepom.com (Scott Bliss) — Wed, 03 Dec 2008 15:49:00 +0000

Corporate accountants and CPAs commonly use a lot of terms, ratios, and acronyms that can be confusing to anyone without a four-year degree in the field. Though the figures that accountants calculate and discuss are important for reporting on the financial health of businesses, their definitions and different applications might seem out of sight to the average American.

Here on Tepom.com, I preach the importance of financial planning, budgeting, and overall fiscal responsibility in a way that's meant to be easy to read and applicable to any average person with a roof over their head, a checking account, and a credit card. The purpose of today's post is to define some of those esoteric accounting terms that are used by big businesses and show you how they relate to the finances of you and your family. I'll discuss both terms and ratios, both of which are used by corporate accountants to report to shareholders and Boards of Directors on the monetary wellbeing of organizations.

Terms
Assets: Anything that you own that is worth money, be it your house, cash in your checking account, or money that someone owes you. It should be noted that for reporting purposes, the value of an asset is independent of any debt associated with it, such as a mortgage.

How it applies to you: The value of your assets is the most primitive of financial calculations. Basically, it measures how many things you have, how much money you have, how much your house is worth, etc. Simply put, the more assets you have, the better off you are.

Liabilities: The amount of money that you owe people or businesses, be it a credit card balance, an auto loan, a mortgage, or a personal loan from your mother. Like assets, it is important to report on liabilities independent of any associated assets, such the value of the house related to the mortgage.

How it applies to you: Liabilities are a fundamental part of the equation when it comes to your financial health. Measuring liabilities basically brings you back down to earth for those of you with lots of expensive stuff. Unlike assets, liabilities are not nearly as visible because they're not tangible; they kind of hide in the dark. All too often we judge one's wealth on his or her assets without considering the liabilities. If you walk into someone's home and see HDTVs, nice cars, and expensive art, you may think he's rich. But if he bought it all on credit, your perception is quite the contrary to reality; which brings us to equity.

Equity: Also referred to as Net Worth, this is simply all of your liabilities subtracted from your assets. As an example, let's say you own a house worth $150,000, a car worth $10,000, and have $5,000 cash in your checking account. You also owe $100,000 on your home in a mortgage, have no car loan, and have $3,000 in credit card debt. Your total assets equal $165,000 (150,000+10,000+5,000) and your total liabilities equal $103,000 (100,000 + 3,000). Therefore, your equity equals $62,000 (165,000 - 103,000).

How it applies to you: Equity may be the most important accounting term for you to be familiar with. It's by no means a difficult concept, but it is a key component of your financial health and something that we should all be aware of. For example, my wife and I currently have negative equity, meaning that we have more liabilities (debt) than we have assets. Mostly, this is because each of us has student loans and the value of our house has gone down since we bought it. Negative equity is common among young Americans, but as they get older, it generally becomes positive as you continue to spend less than you make. I like to track my equity (Net Worth) here on NetWorthIQ.

Though negative equity is less desirable than positive equity, it isn't the monster that you may think it is. My wife and I wouldn't have the jobs that we have today without having gone to college. And we wouldn't have been able to afford college on our own, so we took out student loans, which in turn pushed our equity down into the red. But because the education that we purchased increased our earning potentials, we will be able to more rapidly push our equity back into the green and [optimistically] into the clouds.

Current Assets: Assets that can be converted into cash within a short period of time (usually one year or less). Examples include cash, of course, as well as items that can be quickly sold and money that is owed to you that you expect to be paid within a year. For example, if you have a baseball card collection that could be sold rather quickly for $10,000, you could classify that as a current asset. Also, if you own an occupied rental property, you could classify a year's worth of rent payments as a current asset (FYI, monies that you are owed are called Receivables). On the other hand, money saved in controlled retirement accounts that cannot be cashed in for a number of years as well as the value of your home would not be considered a current asset.

How it applies to you: It's important to separate current assets from the pack because they represent your current buying power. Current assets control how much you might be ale to afford to spend on an upcoming purchase, such as a vacation or an investment. Let's say that you have a 401(k) worth $100,000. If you're considering buying a house and need a down payment, that $100,000 won't do you much good because it isn't current -- you can't touch it until you're 65 (without a penalty). In this type of situation, only your current assets will be able to help you.

Current Liabilities: Liabilities (debts) that must be repaid within a short period of time (usually within one year). Examples include credit card balances that you intend to pay off within a year, your next year's worth of mortgage and auto loan payments, the current year's taxes, etc.

How it applies to you: These have an affect on your current buying power, just like current assets. Even if you have a tremendous level of current assets you must consider your current liabilities -- the things that you're going to have to pay in the next year -- before making any real decisions. Let's say you want to buy a new computer for $2,000. Even if you have $2,000 in the bank, you still may not be able to afford it after you take into account your upcoming $1,000 mortgage payment and $300 car payment. This brings us to net current assets.

Net Current Assets: Similar to Equity and Net Worth, Net Current Assets (also known as Working Capital) is your current assets minus your current liabilities. It is a measure of your true current buying power. In the previous example, we mentioned a person with $2,000 in the bank (current assets) and upcoming mortgage and car payments totaling $1,300. This would leave the person with Net Current Assets of $700.

How it applies to you: A failure to recognize Net Current Assets, in my opinion, is one of the biggest reasons people get themselves into trouble financially. When they're deciding whether or not an item is affordable, they will only consider their current assets rather than their net current assets. In the end, when bills come due, once-eager shoppers will resort to increasing their debt because they didn't plan ahead and take the time to really decide if they could afford what they were buying. So before you make that next big purchase, consider not only what you have in the bank, but what you're going to have to pay in the near future.

Gross Income: The amount of money that you earned during a certain period minus the amount that you spent during the same period. I calculate this number in my own personal finances once a month. Free web-based software, like Mint.com, makes it very easy to see how much I bring in and how much goes out.

How it applies to you: Unlike assets and liability figures that measure assets and debts at a particular instant -- like, "today, I have $2,000 in my checking account and a $1,500 credit card balance," gross income is a measure of behavior during a period of time, be it an hour, a day, a month, a year, etc. It shows us how much money we make versus how much money we spend. The value of gross income is very easy to calculate in a given month by looking at your bank and credit card statements and adding all the "plusses" and all the "minuses." If you find that you're spending more than you make, it will be important for you to create a budget. If you find that you're spending less than you bring in, you can pat yourself on the back, knowing that you're doing better than a lot of other folks!

Financial Ratios
Professionals also like to use ratios when they're evaluating a corporation's financial health. They simplify the evaluation and can help compare current health with that of previous years or with the health of competing companies. In the stock market, ratios help when investors compare some ratios of two or three different companies when they're trying to decide where to put their money. Some of these ratios can be very helpful when applied to our own personal finance objectives:

Current Ratio: Equals current assets divided by current liabilities. Much like net current assets, it shows you how well off you are today and indicates your current buying/investing power.

How it applies to you: This is similar to your net current assets, but just in different terms. Net Current Assets will basically tell you specifically how much you can afford to spend or invest in the next few months, while the current ratio gives you a relative value, which can help you see how your buying power increases or decreases over time. So if one is "good," the other should be good, too. Keeping track of your current ratio over time is a good way to see how your spending and saving habits and financial health are related. For example, back in college, I had some serious spending issues. I had nearly no money in the bank and about $9,000 in credit card debt. As you might imagine, both my Current Ratio and my Net Current Assets stunk. My net current assets would have been negative because I had a lot more credit card debt than I had money in the bank. My current ratio would have been less than one. Your current ratio will never be negative, but if it gets below one, you should start to worry because it means that you might not have enough in the bank to cover you next few months of expenses (much like the American automakers).

Debt Ratio: Total Liabilities divided by Total Assets. It shows the relationship between all of your debt and assets, including both short and long-term values. Unlike the Current Ratio, it's better to have a debt ratio less than one. Basically, any value greater than one means that you're worth more dead than alive (just kidding). Any value less than one means that you have more assets than you have debt.

How it applies to you: Some people will argue that any and all debt is bad and should be avoided at all costs. I tend to disfavor debt myself, but it should be noted that debt is important and useful if it is controlled and maintained. This ratio is meant to show you an easy-to-read relationship between how much debt you have and how much all of your stuff is worth. This is the precise equation you would use to determine whether or not you are "upside down" on your house (you owe more than it's worth). Younger people tend to have higher debt ratios, but over time, as long as they live a life of on-time loan payments spending less than they earn, the ratio will eventually shrink to a level below the threshold value of one.

As an example, let's say you buy a home for $150,000 and put zero money down. In your first month you will owe exactly what the house is worth. So your total assets and total liabilities would both be $150,000, creating a Debt Ratio of exactly one. Then as you make your mortgage payments, the amount that you owe will start to go down, slowly at first, and then more rapidly as time goes on. Meanwhile, the value of the house will begin to rise because of inflation and maybe even more if it's in an up-and-coming neighborhood. Before you know it, the house will be worth $200,000 and you'll only owe $100,000, making your Debt Ratio .5 (100,000/200,000). Like I said before, the lower your number, the better. When you have all assets and zero debt, your debt ratio will simply be zero.

There are a plethora of financial terms and ratios that I won't get into today that can be applied to the average American's personal finances. If there are any accountants out there, I'd welcome any feedback or additions to my analysis.

Preventing the January Spending Hangover by Controlling Holiday Spending

scott@tepom.com (Scott Bliss) — Mon, 01 Dec 2008 11:27:00 +0000

Much like drinking, spending in excess during the holiday season can give you a nasty hangover in the following months. Not long after we make our financial New Year's resolutions, we're faced with bills that can tumble our annual goals like a Jenga tower. So before you make the trip to the mall or navigate to your favorite online store, make sure that you know your tolerance for spending. And if you're already carrying a balance on your Visa, you're a lightweight and should sip rather than gulp when passing your plastic to vendors.

Take a look around your house. Or if you have one, look in your attic or in your garage. How much crap do you have laying around that simply takes up space and is never used? If your house is anything like ours, you're probably overwhelmed. Somehow all of those "useful" little gadgets like foot baths, back massagers, golf-themed desk ornaments, ugly sweaters, and wall-mounted singing fish have lost their holiday luster. Chances are, those for whom you're buying gifts this season have their own similar stockpiles of Chinese-made widgets that outlived their usefulness by January 10th of the year following that in which they were given. Turn things around this season by giving reasonable gifts that neither waste your money nor beg to be dumped in storage by your family and friends.

Here on Tepom.com, I've always been a proponent of planned and controlled spending. This is especially important during the holidays. All too often we decide to wing it with gift giving, buying whatever for whomever we deem important in a valiant -- yet irresponsible -- effort to be extraordinarily thoughtful. But just as we should create a spending budget each month for groceries, restaurants, and travel, we should plan ahead of time for our end-of-year gift giving extravaganza. Here are a couple of easy ways to do so:

Don't be afraid to buy a Christmas gift in the summer
If you're out shopping in the spring or summer months and see something that reminds you of a friend for whom you'll most likely get a Christmas gift, buy it. There's no rule that says there needs to be snow on the ground to buy a holiday gift. By buying early you'll avoid the pressures of last-minute shopping and hopefully avoid the default Applebees gift card. You'll also spread out your spending throughout the year.

Save regularly and specifically for gifts
An old coworker of mine had a great system for saving for the holidays. He set up a regular savings transfer every month though his online banking. Twice a month, on payday, he transferred $75 to a special account designated for Christmas gifts. Though it was tough at first to part with the $150 per month, it made the price tags of the PS3s, iPods, and new bikes much easier to swallow.

Social pressures are another reason that we spend too much during the holidays. Honestly, I believe that we put way too much thought into how others will judge our gift giving. We may want to impress someone with a lavish gift. Or we may feel obligated to spend a certain amount on someone because we spent a higher amount on another person. Or we might want to wow our obscure friends and colleagues with an incredible bout of thoughtfulness by remembering to buy a gift for everyone that we've ever shook hands with. Here are a few tips to handle the social pressures of gift giving:

Look out for #1
It's only natural to want to show off a little bit with our purchases, whether they're for ourselves or our loved ones. And as much as we like to impress our friends, coworkers, and family members with expensive gifts, we only hurt ourselves if we can't really afford expensive gifts. So before embarking on your holiday shopping adventure, remember that impressing others comes at a cost. No one over the age of twelve will think any less of you for being financially responsible with your gift giving. And furthermore, before over-extending yourself with a gift for your boss, remember that he knows how much money you make!

Check reciprocity and equality at the door
This is one of my biggest pet peeves when it comes to Christmas. During a season when we're supposed to be focused on family and love and peace and all that stuff, many of us are too focused on equality and reciprocity of gift values. "If my brother's gift cost $50 and my sister's gift cost $30, then I need to spend another $20 on my sister." Bullshit. Unless you're giving all of your grandkids a card with $50 in it, you can easily overdo it by trying to achieve total equality. "Well, my friend bought me a $50 gift card, so I need to spend at least $50 on her." Horseshit. You should buy gifts for your loved ones that you think they'll appreciate and enjoy. Don't get them gifts just to even the scales. The more we steer our holiday values toward consumerism and dollars and cents, the further we migrate from the true values of the season.

Send Christmas cards
Some of us more than others can bring thoughtfulness to near-obsessive levels. Wanting to think of everyone, we may buy small gifts for everyone in our Rolodex. And sure, they'll be thankful for us thinking of them, but the costs can really add up come New Year's. Instead of getting a gift for each of your coworkers, your spouse's coworkers, and all of your family friends, fill your outbox with Christmas cards. For less than a dollar apiece, you'll remind your life acquaintances that you care and you're thinking of them. Truth be told, not everyone expects something from you. So when you send your cards in lieu of gifts, think of it as going above and beyond.

The holidays are a fun time of the year during which we eat, drink, and spend a little too much. But by planning ahead of time and controlling your gift spending, you can reserve your brainpower in January for figuring out how to work off those December love handles rather than how to pay off that looming credit card bill. When it comes to buying gifts, don't put more pressure on yourself than your wallet can handle. After all, the holidays are about being with each other, not buying for each other.

Renting to Strangers: How to Become a Spy, Lawyer, and Private Investigator

scott@tepom.com (Scott Bliss) — Tue, 25 Nov 2008 16:55:00 +0000

As banks foreclose on more properties, more Americans are finding themselves in a position to rent a dwelling rather than buy one. And as homeowners move and are unable to sell their homes for a reasonable price, we're seeing a proportionate increase in the supply of rental properties. If you're upside down on your home and need to move (a previous topic on this site), I've always recommended renting your home for whatever you can get for it. Or if you just bought your first investment property, you, too may be searching for that perfect tenant. But being a landlord is not for everyone. So before you put pen to paper, consider some of these points to prevent some headaches that are often associated with renting to strangers.

Become a Spy

My parents have been landlords for two rental properties that are adjacent to their primary residence. For them, having their tenants as a neighbors has improved their relationship with the renters while enabling them to keep a close eye on the homes. When you rent to strangers, you usually don't know much about their lifestyle. They may drink, smoke, have destructive pets, throw wild parties, or bury human bodies in their spare time. Unless you have some view into who and what is going in and out the front door on a regular basis, you could very well find yourself with a tricky situation. In hindsight, I can't imagine how quickly I would have been kicked out of my college apartment if my landlord (or parents, for that matter) saw the terrible, evil debaucheries that we commited on a daily basis...

If you are renting out a home that's located in a place that you can't regularly visit or at least drive by, consider hiring a property manager -- you may well save yourself time and money in the long run. If you're still close with your neighbors, they can work as great accomplices in your spying operations, too. You certainly need to give them their privacy, but your home is too valuable to be trusted to an unknown, unsupervised tenant with nothing to lose but their $1,000 security deposit. So if you don't live nearby, make sure that you have either a trusted neighbor or a hired property manager to check in on the place every now and again.

Become a Lawyer

When my wife and I first moved to Wilmington, we rented a house on the southeast side of downtown. After living in the home for a few months, we realized that we were in a somewhat tough neighborhood and were turned off by the fact that someone had come onto our property twice to steal something. Eight months into our lease, we bought a house.

We contacted our landlord to see how we could legally break our lease. However, she had protected herself when she had us sign a bulletproof lease which gave her unlimited power during our negotiations. We asked her if there was any way we could move out and pay a penalty or forfeit our security deposit. Nope. We offered to pay the finder's fee for a new tenant. Nope. As unreasonable as we thought she was, she was able to show us, line-by-line, the language in our lease that prevented us from moving out before its termination date. There was nothing we could do. She had successfully protected herself from the likes of Scott and Michelle Bliss and she ended up receiving every penny of rent that was due until our termination date. Phew -- I'm glad those days are over.

She had language in the lease that was so detailed, it discussed who would pay the legal fees if we had a dispute in court. It detailed how many people could occupy the property and how many nights our guests would stay. It nitpicked over the maximum allowable weight of our dog and what constituted a proper cleaning when we left. It had warnings and legalese and penalties regarding any possible risk that could ever arise. And as stuffy and annoying as it was, it protected our landlord from losing any money in the event that we wanted to move out early. Though you should certainly be a reasonable human being with your tenants, you should always do as our old landlord did and allow yourself to be as nice (or not nice) as you wish by protecting yourself on paper. If you're ever at war with a tenant, it will serve as your coat of armor; and the heavier it is, the more protected you will be. Pay the money and get yourself a professionally prepared lease that is fair and resilient.

Become a Private Investigator

Most of the time, tenants are honest, hard-working people that pay their bills on time and will treat your home as they would treat their own. And sometimes, they're unemployed, broke, transient, dirty liars that will tell you anything that will convince you to rent to them, upon which time they'll take you for a wild ride that would make even Mr. Toad wet his pants. Consider this short story:

When we were trying to legally break our lease, our landlord told us that we could only get out of our last four months' rent if we found another qualified tenant that would be willing to sign a new one-year lease at a higher monthly rate. So we started our search. We had applications coming in left and right, but every vagrant that applied had some sort of complicated story that received two thumbs down from our landlord. And then we met "Alex." Alex had no pets and a documented steady income. He was well-dressed, well-spoken, and ready to put down the full security deposit and first month's rent. But when I called his most recent landlord as a reference, here's the story I got:

Apparently, Alex destroyed the rented house with a combination of wild parties and equally wild live-in beast that was once classified as a dog by a clearly inexperienced vet. Surprised, I asked why Alex would have given the landlord's name as a reference if he had demolished the home; the answer made the story a bit juicier. It turns out that Alex didn't pay his rent for a few months and owed the landlord a couple of thousand dollars by the time he was evicted. Alex said that he would only pay the money if the landlord swore to give him a good reference. He agreed and Alex paid his money, but, as I was figuring out, the landlord wasn't keeping his word. Naturally, Alex never rented our house.

So while it's true that most would-be tenants are fully capable and willing when it comes to their rent payments, you need to remember that there are still a few axe murderers out there. As long as you are renting to a stranger, make sure that you verify -- and double-verify -- your prospective tenants' income, credit history, and references. Unless you play the part of a private investigator, you're setting yourself up to get screwed. If you're renting a home for money and not running a charity, you have to verify an applicant's information before signing anything, no matter what anecdotal self-victimizing story he or she gives you. The minute that you accept to a sob story in lieu of three months' worth of pay stubs is the minute that you hand your house keys the Tasmanian Devil inside. Check out E-Renter.com: it will probably prove to be $35 well spent.

I welcome any previous landlords to share their tenant horror stories to help encourage their fellow readers to become a spy, lawyer, and private investigator.

A Curmudgeon's Analysis of the US Automaker Bailout

scott@tepom.com (Scott Bliss) — Fri, 21 Nov 2008 11:49:00 +0000

A friend on mine once called me a curmudgeon. And I agreed -- well, kind of. A curmudgeon is defined as a crusty hotheaded cantankerous old person full of stubborn ideas. Generally speaking I'm a pretty nice guy, but it will be difficult to bring out my non-crusty, agreeable, go-with-the-flow side if you bring up the US automaker bailout.

With $700 of "bailout" money ripe for the picking, corporations large and small are looking for their piece of the pie -- including US automakers. Things are starting to look like the aftermath of a funeral. A rich man with a missing will has passed away unexpectedly and all of his grandkids are milling around. They're trying to get a piece of the estate, justifying their worthiness by any means possible. The funny thing is, a bunch of self-important knuckleheads in our legislature are going to decide who gets what.

This week marked the first time in my life that I watched C-Span for two nights straight (much to my surprise, my brain didn't turn into cottage cheese). The CEOs of the big three automakers were giving testimony to the self-important knuckleheads about why they should be permitted to borrow approximately 3.5% of the money that has been allocated to "fix" the economy. As I watched these three assholes ask for money, I began to understand why their companies are about to die. When asked if they (the automakers) would ever return with their tin cups, Rick Wagoner, CEO of GM, replied "well, I can only guarantee that I won't be back if you can guarantee me that the economy won't continue to fail." That moment is when they lost my support.

At that moment, I realized that those cocky SOBs didn't have a humble bone in their bodies. Instead of accepting responsibility for messing up, they instead blamed the market. Because of their own denial of mismanagement and their refusal to be introspective and propose real change, the American taxpayer shouldn't give them a penny. General Motors, Ford, and Chrysler are as American as a brand can be, but they've taken their good ol' boy status completely for granted. And I'm sure they were surprised when it was hinted that we would dare let them fail. But guess what, guys...the buck stops here.

Let's say your son came to your door asking for a thousand dollars because he was in trouble. Sure, you had the cash on you, but before handing over any of your green you'd probably ask why he needed it and how he'd plan to pay it back. The why and how are important because they indicate his ability and willingness to take the situation seriously. If he needed money because of a drug problem, you'd probably only loan it to him on the condition that the drug use would stop. Without that commitment, you'd be better off loaning it to someone else actually willing to do what was needed to turn his life around. The blame game of the big three proves to me that they're not ready to turn things around.

The big three have shown that they don't take the loan seriously because in two nights of watching C-Span I didn't hear a single one of them offer a plan large enough to reverse years of poor decision making and stubborn management. In fact their plans fell quite short of those required to justify this mega loan. They blamed their problems on the economy, not their outdated business practices. They believe that they're entitled to this money simply because they're as American as George Washington, not because they have a realistic recovery plan. Simply put, the Detroit automakers are as competitive in the auto industry as the Detroit Lions are in the professional football industry.

So here's my cantankerous message to the big three: Shame on you. Don't you dare testify to our self-important knuckleheads and tell them that if they don't give you the money, hundreds of thousands of jobs will be lost -- that's on you, not them. You're the ones responsible for not competing with international auto manufacturers. You're the ones that ridiculously thought that your companies could survive on national pride alone. You're the ones that somehow feel entitled to borrow this money just because of your brand name. You're the ones that have driven your companies into the ground for years, yet look to the economy as a scapegoat. I've got news for you: Your cars and management have sucked for years, yet 13 months ago, the Dow was at an all-time high. Get real...

And I hope that if the big three fail, our nation will learn an important lesson about the dangers of unionized labor. I'm all for people earning a living wage, but it must be determined by the market. Getting a group of workers together to strongarm an employer by dictating and enforcing their definition of a fair wage is simply an unsustainable, unrealistic endeavor that hurts more than it helps. I understand the reasoning behind unions, but as it's showing now, they can bring a giant to its knees. And when that happens, everyone loses. Tepom to the UAW: This is just as much on you as it is on the automakers.

Golf, Kids, and Other Things You Should Avoid Until They're Affordable

scott@tepom.com (Scott Bliss) — Wed, 19 Nov 2008 11:59:00 +0000

I've played exactly 36 holes of golf in my life. And the first 18 were played in August, 1996 with Bill Lyons, a friend of the family from Upstate NY. I was 13. As you might guess, my parents weren't golfers, so I looked forward to trying my hand at something I had seen, but never participated in. Any of you golfers out there will probably agree with me and understand when I say that driving a ball with a cheap, borrowed 3-wood is just a little bit more difficult than tapping an orange ball through a windmill at the local mini-golf. You might say that I was, well, awful.

Drive after drive, I sent ball after ball into the woods. None of the hungover men I was with had the patience to chase after them or even to send me on a one-kid search party. I had the notion that the balls were expensive and I felt guilty. I had officially became the golf ball grim reaper, sending several boxes full to shallow graves in the deep dark forest. "How much do these even cost?" I asked sheepishly. And Bill, god bless him, gave me an answer that I still remember more than 12 years later: "If you've got to ask how much the balls cost, you can't afford to play golf."

This is an interesting principal that most of us dismissed with a laugh on that day. Bill's a naturally funny guy, but he had a point. Many of us non-golfers grew up in a house without much of a golf influence. That means no sets of clubs as a Christmas gift, no free lessons, no country club memberships, etc. Golf is an expensive hobby with lots of fixed and variable costs. If you already own your clubs and you or a family member have a paid club membership, then it's probably an activity you can afford. But if you're young, in debt, and without much savings, chances are you'll have to ask how much the balls cost. And you know what that means.

Kids
People all over the world dream of having kids one day, and every day, thousands of those dreams come true. But in America, I see lots of people having children before it's financially feasible. Of course there are many factors that influence our decision about when to have children. Maybe you want to be young so you can play with them and share more years together. Or maybe you're pressured by your parents to give them some grand kids. Many children -- including me and my parents -- are born into a family that is having a tough time getting by financially. And most of the time, everyone turns out just fine.

But tegardless of the reasons we choose to have children, it's less than ideal to have them when you're not on solid ground. If you're struggling to pay down debt, if you don't have family health insurance, or you're having difficulty paying your rent or mortgage, bringing a child into the situation will undoubtedly cause you more stress and financial discomfort. I'm not saying that bringing a child into a middle-class family is a poor decision that will leave everyone hungry and homeless. I am however saying that the financial burdens of a child will be reduced if you wait until you're already in a comfortable place. Think of it this way: if you don't need a new car today, it's better to wait and save your money until you do need one rather than take out a large loan and make payments for several years. The latter option won't necessarily put you in the poor house, but the first is clearly a better financial situation than the other. Simply put: If you have to ask how much doctor's visits, diapers, and formula cost and you have doubts about your ability to pay them, you might not be able to afford to have a child today.

Pets
I adopted my first dog from the County Animal Shelter and immediately took her to the vet to get her shots. Afterward, when I was walking back to my car, a man approached me with his family behind him and asked where I'd gotten my puppy. He and his family were very friendly but clearly poor, with old clothes, a rusty car, and unkempt hair. I told them that if they hurried, they could get to the animal shelter before it closed, and all they had to do was pay a $10 adoption fee and agree to have the dog spayed/neutered within two months. Then he asked, "Do you need to have the $10 today?"

Clearly, it is an extreme situation when a family of five doesn't have ten dollars to spare and are in the market for a furry friend. I felt like telling them that dogs cost a lot more than ten dollars -- the first round of shots alone cost fifty! Thankfully, I didn't have any convincing to do when he realized that he was priced out of dog ownership.

I certainly don't mean to pick on the guy, but the situation inspired some sentiments of improper pet ownership. Though pets have low fixed costs -- often a small adoption fee and a bag of Ol' Roy -- they can quickly turn into a burden. My friends Brian and Christiana once had a cat whose vet bill soared to thousands of dollars. Though it's easy to become attached to a cat, dog, ferret, or fish, remind yourself that if you're struggling to make ends meet, you're better off waiting to get a pet. Pets deserve reasonable care and attention. If you have to ask how much pet food, adoption fees, flea control, and vet visits cost, you probably can't afford to have a pet.

Grad School
This might come as a surprise to you. Unless someone in your family is paying for your education, make sure that you figure out whether or not you can afford grad school before you apply. Many of us want to get it over with right after getting our bachelor's degree just as a matter of habit and sequence. And if you're going to use student loans to pay for your graduate degree, be extra careful.

A friend of mine had well over $100,000 in student loans from his undergradute education before he even started grad school. Now he has over $140,000 in student loan debt. If he had asked me before applying for his advanced degree, I would have recommended that he take a couple of years to work down his balances and get comfortable with his payments before getting over his head.

A strategy that I've seen some employ is to take out a loan to pay for a small portion of grad school, say, the first year, and to work during the program. I've also seen husbands and wives take turns, with one working while the other goes to school. Another option might be to get a job with a company that offers tuition reimbursement. Even if it means taking more time to get your degree, there's a good chance an MBA or an MFA could be paid 100% by your employer!

Don't get ahead of yourself with grad school; it's very expensive. An advanced degree is an investment that you should vet thoroughly before commiting, just like any other.

A House
This last one is pretty simple. Unless you want to follow suit with many other Americans that are in foreclosure today, don't buy a house unless you're in a good position to do so. Don't try and convince yourself that it's affordable. Don't try to convince yourself that it's a good idea. Don't try to convince yourself that you're entitled to own a home just because you're married or because you earn a certain salary. Instead of trying to convince youself, prove it to yourself. In the end, it's going to come down to dollars and cents. Click here to figure out how much home you can afford. Remember to be honest. If you're not, you're only cheating yourself :-)

For some people, owning will never make sense. Take my friend Quang, for example. He's single, works long hours, and rents a room in a house in northern Virginia. He's close to work, he likes the location, and rent is dirt cheap. In my opinion (and his, too), it will never make sense for him to buy a place because of the outrageous price of real estate in his area and the headaches that come along with homeownership. Because his rent is so cheap, he can afford to save an incredible portion of his income that he would otherwise have tied up in an expensive home. Let's not forget that he doesn't pay for any home maintenance or repairs.

Many of us feel entitled to have children, own a pet, buy a home, go to grad school, or play the back nine because they're very American things to do. But unfortunately, those are all very expensive undertakings. Our culture, our national heritage, and social pressures can sometimes take precedence over our own financial wellbeing. And though these purchases and activities are very important to some of us, it's important to recognize that for the working majority, these things come with time and patience. So before you take that first step toward the maternity ward or the country club, get your ducks in a row and make sure that it's not going to break the bank in the long run.

Why a Black-Coffee Management Style Would Have Saved Starbucks

scott@tepom.com (Scott Bliss) — Tue, 18 Nov 2008 11:23:00 +0000

In a waiting room magazine I once read that Howard Schultz, the founder and CEO of Starbucks, ironically prefers black coffee to any of the outrageous hot or cold drinks offered by the morning/afternoon/evening "fix" giant. The pied piper of java himself sticks to the core of coffee, and I think that says a lot about him as a person. Black coffee is strong and bold; it is foundational and pure; it's as American as Lewis and Clark; and though it is so incredibly simple, it's almost against-the-grain. Now I understand that not everyone likes black coffee. Some think it's bitter and rather plain, which is why Starbucks' overhead menu is bigger than that of McDonalds. And just as their menu appears to be slightly cocky and over-the-top (a 13-shot venti soy hazelnut vanilla cinnamon white mocha with extra white mocha and caramel? You've got to be kidding me!), in recent years their business plan started to follow suit by adding dozens of stores to every corner of the globe. Today, with profits down an astounding 97%, the executives at Starbucks are starting to feel an awful lot like mortgage lenders, cleaning the gum off their faces from a freshly-popped bubble.

Now that the economy is looking like a typical season for the Pittsburgh Pirates (they suck, BTW), consumers are cutting back on spending like never before. And luxuries -- like Starbucks -- are hurting the most. We're through with our smoke-'em-if-you-got-'em (and-borrow-'em-if-you-don't-got-'em) spending habits and have moved to a more conservative way of living, as if we just discovered that we can actually brew coffee at home. We're starting to treat fru-fru coffee as a luxury now as opposed to an everyday entitlement. And guess what -- if Starbucks had stuck to a simple, black-coffee management style, they would've seen it coming.

Am I saying that we should never drink Starbucks because it's a luxury? Absolutely not. Actually, I almost always drink Starbucks when I'm at the mall watching my wife spend money on clothes that cost a hell of a lot more than my cup of coffee. I can probably count on two hands the amount of times that I visit a Starbucks each year. But when I think of coffee spending getting out of hand, a story comes to mind. While enjoying a hot drink with my in-laws at their local 'bux, I spotted a woman waiting in the 15-person line. She carried her own purple mug (going green -- nice), but it had a homemade sticker on it; I investigated. On the sticker was printed the exact specifications of her favorite [complicated] drink, the details of which I will not bore you with. I couldn't believe it! This seemingly frivolous experience (which we recognize with every $4 coffee joke we make) had become an obvious daily habit of this woman. After I watched her pass her mug across the counter, I noticed many of the other patrons in line ordering their drinks without even glancing at the menu. They were hooked, too.

A big reason that the economy is where it is today is that people spent outside of their means for several years. Today, the average amount of household credit card debt is over $8,000. And though the woman with the purple mug may have very well been wealthy and within her means while indulging in her $100/month habit, I've got to imagine that at least half of those people in line were part of the startling outside-of-our-means American spending statistic.

Did Starbucks know that consumer debt was spreading like a California wildfire? They must have. Did they know that their coffee was expensive? Umm, does a bear shit in the woods? Despite evidence that Americans were becoming poorer and the clear and present fact that their product was expensive and easily replaced by a much less expensive homemade substitute, Starbucks continued to build store after store after store. Now, with profits down for the count, they're closing hundreds of their locations to make up for their grossly overestimated forecasts that, frankly, were as ridiculous and pretentious as their holiday coffee selection.

I'm sorry to pick on Starbucks. What's happening to them is happening to a lot of businesses, which is why so many Americans are losing their jobs and, subsequently, their mortgages. When Americans as a whole strayed from a reasonable and symmetrical expense/income ratio, businesses like Starbucks saw the desert mirage of infinite exponential growth that, in reality, was merely dust. This is why I preach, day after day, the covenants of responsible spending.

Responsible spending helps individuals by allowing them to save for the future. It allows them to keep more of their own money and to live a sustainable and healthy financial life. Responsible spending helps the entire nation by eliminating these false forecasts of eternal growth and profits for businesses. It keeps the economy in check, managing inflation and stabilizing cash flow. Keep in mind that I am an absolute proponent of spending money. Spending is the be-all-end-all of a capitalist society. And if we as a people bought only the bare essentials, we'd eat nothing but rice and all live in caves. But by buying the things that we don't need day after day for years and years, we become a gluttonous society that cannot sustain itself, much like a balloon. Now, because of America's overspending -- much like overeating -- we must reduce our consumption to below normal levels to get back to the point of a healthy equilibrium.

So while irresponsible customer spending helps companies like Starbucks in the short term by giving astounding inflated profits for a few years, it can destroy them in the long term. If Howard Schultz had stuck to a black-coffee, back-to-the-basics management style, he would have recognized the looming bubble and directed the company proportionately. Like black coffee, it would have been simple, yet against the grain, to slow expansion -- but it would have saved his ass. Instead, for years he and his stockholders were swooning over the streams of cash and credit pouring through the doors and laughing all the way to the bank. But who's laughing now?

The Reasoning Behind Golden Parachutes

scott@tepom.com (Scott Bliss) — Fri, 14 Nov 2008 11:44:00 +0000

There's a reason that McCain and Obama brought up Golden Parachutes so much during the election -- it's a touchy subject and easy to despise (especially by those that are losing their homes). At first glance, paying large sums of money to failing executives seems like a bass-ackwards practice that rewards the rich for simply being rich. Many of us picture a clan of back-slapping, cigar smoking golfers sitting in a country club lounge, deceitfully scheming about how they'll bestow our retirement funds to each other. Though we must keep a watchful eye on those in power -- especially our politicians -- before you grab your torch and sword and storm the castle of Wall Street, know that there is a legitimate reason that executives are given wildly lavish compensation packages. Read on if you dare...

Executives have a fiduciary relationship to company shareholders. Basically that's a legal term that means that executives are legally responsible to act on behalf of the shareholders. So it's their job to see to it that shareholder's wealth is increased. It's up to them to save the company money wherever possible and increase sales. It's also up to them to encourage mergers that would benefit the shareholders. But unfortunately, sometimes mergers lead to eliminating redundant positions -- including executive positions. So even with the legal obligation to serve the shareholder, there is a clear conflict for an executive that's putting his own job on the line.

Let's say that the McDonalds and Burger King people decided to merge. For whatever reason, the CEOs honestly believed that it would be in the best interest of both sets of shareholders for the two restaurants to join forces. So with the paperwork filed and the stroke of a pen, every McDonalds and every Burger King became a McBurgles. The stock soared on day one, but soon after, it became time to start cleaning house. Though each restaurant was making both Big Macs and Whoppers, they only needed one kitchen. So some cooks got laid off. And each franchise didn't need two managers, so some of them got laid off, too. Next came the regional managers and the district managers. The chain of redundant position eliminations worked its way up, one job at a time, all the way to the executives at headquarters. The McDonalds and Burger King CEOs looked like two kids playing musical chairs, squeezing their butts into the only open red-leather seat in the top floor office of the McBurgles building. But it's not like they didn't see this coming.

When the CEOs of these companies started talking Merger, each of them knew that there was a good chance of getting laid off after the smoke cleared -- just like the cooks and managers. But they went through with it anyway. But wouldn't they have to be crazy? I mean, I like my job, but if I thought that there might be someone out there better than me at it, I doubt that I'd call my boss and say, "Hey, you should fire me because I think that Bill over here will do a better job than me." As they say, you've got to look out for Number One. So even though it might be better for the company to hire Bill and let me go (maybe because he doesn't blog during work hours -- just kidding :-) ), I'm not likely to speak up because I don't want to lose my job.

But what if you had an agreement with your boss ahead of time? He wants to make sure that the best person is doing your job; right now he thinks that is you. But should you ever find someone that might do it better than you, you should bring them in for an interview. Noting the inherent conflict of interest, your boss promises that as long as you're acting in the best interest of the company, you personally won't suffer financially. So if you're a carpenter and find someone that can swing a hammer harder than you, the company will pay you to give up your job to the stronger candidate.

Mergers happen all of the time in just about every major industry. Companies may merge to strategically increase shareholder wealth or to cuddle together in the same sleeping bag, living off each other's body heat to survive a frigid night. Those that oversee these complicated mergers are by far the companies' highest paid employees. And would these executives put their own family's livelihood on the line just because the decision would benefit the company? That's a tough question that many executives would answer differently. Essentially, golden parachutes exist to remove the conflicts of interest that are inherent to mergers. Unless some mechanism exists to ensure that executives have nothing to lose personally, it's likely that many mergers would never go through, even if they're in the best interest of everyone else.

Because executives are so highly paid (which is a different story altogether), golden parachutes exist in the form of many millions of dollars. Executives that lose their jobs are losing out on a very lucrative gig, and unless the severance package is big enough, the conflict of interest isn't truly eliminated.

It's easy to criticise those that are getting huge bonuses during a time of such national economic turmoil. But the distinction between reward and conflict resolution is critical. CEOs are often faced with business decisions that may positively affect the company and its shareholders but negatively affect their position. Golden parachutes take executives' personal risk out of the equation -- they're not meant to be a reward. So while it's fair to criticize performance bonuses given to those that don't, well, perform, it's important to know that certain bonuses are given to mitigate the effect of one's personal survival instinct on large-scale business transactions.

The first thing that I learned in my first day of collegiate economics is that people are smart and people are selfish. It's just human nature...

Managing the Finances of a Two-Income Household

scott@tepom.com (Scott Bliss) — Thu, 13 Nov 2008 14:45:00 +0000

Before I got married, I had been warned that money was the root cause of many marital disagreements. My wife and I hoped that we would be exempt from this trend, noting our comfortable individual salaries and modest tastes. Each of us is good with money and we had no problem agreeing to share it 100% from day one. But we didn't realize that merely sharing money with your spouse, even without financial difficulties, can sometimes prove to be a challenge.

So what's so hard about sharing money with another person? If you can each afford the things you want on your own, how does bringing in another person with his or her own income affect this? I can tell you from experience that joint checking accounts will sometimes test you. In a couple that carefully manages their finances, one may feel controlled by the other, like he or she can't spend a dollar without first asking the other. Or a person risks being sneaky by making a large purchase without a spousal consultation.

Sentiments of control or sneakiness can also be amplified by factors outside of spending, like differences in salary, the number of hours worked each week, or even the amount of chores that one does around the house. If a wife makes more money than her husband, she might feel entitled to spend more than him. Or if she feels like she does more around the house than her husband, she should be able to splurge without first consulting him because, hey -- she earned it. On the other side, the husband, though he makes less money than his wife, might work more hours than she does in a given week. Therefore, he justifies spending money on an expensive leisure item -- maybe a boat or a case of expensive beer.

When we are single, we choose to reward ourselves for varying reasons. We might reward ourselves for something big, like getting a high-paying job, or for something smaller, like finishing a long 60-hour week at the office. These are habits that we probably developed as bachelors and bachelorettes and it's easy for them to be part of the package when we promise to have and to hold and till death-do-us-part. But once you're married and have checks with both of your names on them, it's easy to disagree with the other's spending habits. The good news is that there are a couple of simple things you can do to help ease the transition.

#1 - Talk about money regularly, but only at established intervals
If your wife comes home from the mall with an armload of shopping bags or your husband walks in the door with leftovers from Outback, it's easy to call him or her out on it. "Hey, didn't you just buy new clothes?" or "Hey, isn't steak a little out of our budget?" The opportunities to micro-manage your partner's spending are limitless, but they should be avoided because they can give the impression that you're being controlling.

What I suggest is this: Only review your budget and spending at established periods -- be they weekly, bi-weekly, or monthly -- and not in-between. As you know, I am a huge proponent of using free online personal finance tools, such as Mint.com. Mint has a feature that will email you every Friday with your account balances and month-to-date adherence to your budget. And it gives you the option to send the message to two email addresses. So each period, you and your spouse should look at those items together and note any flags. "Hey, we're way over budget on restaurants this month -- we should start eating in more," or "I've already spent $300 on clothing this month. Maybe I should hold off on another shopping spree for a while." These regular reviews will help prevent micro-management of each others' spending while allowing the two of you to stay on top of your finances as a whole.

#2 - Establish a $100 rule
Call it whatever you want to call it -- the $50 rule, the $100 rule, or the $500 rule. Establish a spending threshold that will constitute a required consultation with your partner. If you have a $100 rule, any time one person is going to spend more than $100 on anything, the other needs to be consulted. You can bypass this by setting up spending limits for trips. For example: "When you're in Pittsburgh, don't spend more than $200." Again, this is a rule to help alleviate sentiments of one controlling the other's spending while ensuring that the couple's financial goals are on track.

It's easy to have be critical of your partner's spending -- especially if you do more around the house, work longer hours, make more money, etc. But if you two have decided to pool your green, forgive the expression, but you'll have to put your money with your mouth is. Check your grievances at the door and manage your finances as an individual with two jobs. Play nice, don't micro-manage, and consult one another on large purchases. Active or passive aggressiveness won't cut it.

How do you and your significant other share finances?

Coping with a layoff

scott@tepom.com (Scott Bliss) — Mon, 10 Nov 2008 11:39:00 +0000

As of October, the national unemployment rate in the United States is 6.5%. And of those unemployed, one in five have been out of work for more than 27 weeks. So how are you feeling? Are you sitting fat and happy in a plush government job or working on on a sexy, profitable project? Or are you watching your co-workers resign one-by-one or -- even worse -- get laid off in large groups? If you are in any way starting to get a little nervous about losing your job, be proactive! Prepare yourself financially and do whatever you can to keep yourself on the payroll and out of jeopardy. Here are some tips:

1. Prepare your finances
If you're anticipating a layoff, you'll need to do all that you can to make sure that you've got cash in the bank that can cover several months' worth of expenses -- let's say six or seven. Once you've accumulated a pile of green, between unemployment and your savings, you'll be sitting pretty while you look for another job. If you already have that money sitting in the bank, you're clearly a financially responsible person and should probably be visiting Edward Jones instead taking advice from the likes of me.

The easiest way to start saving a bunch of cash is to start living (and spending) like you are unemployed while you are still employed. And do it to a degree equal to that which you're anticipating a job loss. The specifics of determining the likelihood of getting laid off will vary greatly, as anyone that isn't on a contract can be let go at any time, regardless of how long they've been employed, their seniority, etc. But trust your gut here -- though many people are caught off-guard, many more get "that feeling" when they might be in trouble.

So if the future of your current job is very uncertain, fix your budget to ensure that you and your family are as cash-rich as possible. Be sure to consider and adjust two dimensions of your finances: where you're spending and where you're saving.

As far as spending is concerned, start with the big stuff and then work your way down. Postpone your expensive vacation if it isn't already paid for. Don't overdo it with Christmas gifts. Hold off on the HDTV purchase. Delay any of your plans to spend a lot of money on anything non-critical until you're assured of your job security -- whether that assurance comes from your old boss or a new one.

Once you've abandoned the notions to spend lots of money, look at the little things. Start shopping at Walmart instead of Whole Foods (believe me, I know that's difficult for some of you). Downgrade your TV service. Put XM or Sirius on hold and stop going to coffee shops. These little things may seem obvious, but they're important. Look at all of the ways that you spend money, analyzing each one to come up with a method to reduce your spending. You won't always have to live like this, but spending like you're penniless while you're still enjoying a paycheck is critical to accumulate the cash you'll need to stay afloat after a layoff.

After your spending is reduced, it is then important to to analyze where you're saving your money. Why? Because bracing yourself for a layoff is all about liquidity -- ensuring your money can be accessed at the drop of a hat. Cash is the most liquid asset. Your home and specialized savings accounts are much less liquid because a lot more is involved in turning them into groceries or money that can pay bills.

Depending on the degree to which you're concerned about a layoff, consider cutting the amounts that you regularly contribute to a retirement or college savings account. Contact your HR representative and ask about reducing your contributions to your 401(k) -- most let you do that quite easily. Once you're back in the saddle, bring your contributions back to a normal level. But if you're short on cash -- especially during uneasy times -- it's better to have that money in-hand than put away for retirement (again, liquidity). But be careful: If you're going to take money from your retirement, it's much better to simply stop or reduce your future contributions. Don't cash out the money that's already in your 401(k) -- you'll end up paying through the nose with taxes and a 10% penalty.

If you're paying off an auto loan or a mortgage early, pat yourself on the back, but take a breather while you're building your reserves. Once you're assured of your current job security or find a new employer, you can play catch-up with all of the cash you've got laying around. And I hate to say it, but if you've got lots of credit card debt and are facing a likely layoff, I would rather see you with enough cash in the bank to pay the minimum payments on those cards if their balances is greater than your bank account balances. Though it's not ideal to pay interest for a few months, it's better than destroying your credit.

Finally, be careful when anticipating a severance package at your current job. Don't take anything for granted unless it's in writing. All too often people underestimate the impact of a potential layoff because they wrongfully believe their company will provide a severance or separation package. Unless it's already in ink, do yourself a favor and don't rely on it.

2. Step up at work
Aside from getting your personal finances together, be sure to perform at your absolute best at work. If only a few positions are being eliminated, don't give your boss a reason to let you be one of those that is let go. Be outstanding, proactive, and flexible. A good friend of mine works for a major newspaper and was able to avoid getting laid off along with many of his ex-coworkers by doing these three things. The paper was moving in a new direction, and he proactively came up with new ideas for how he could support the new model. The new model would require him to perform many different duties (moving from print to the web) which he accepted with enthusiasm the a promise of his flexibility. And because he wanted to stand out, instead of sucking up, he always did outstanding work.

If you still get laid off, you'll maximize the amount of time you can get by without a paycheck by adjusting your finances. Stay on top of receiving your unemployment benefits. While you're looking for a new job, have an intelligent friend proofread your resumes and make sure you customize it for each position. Never miss an opportunity to apply for a job. Write down all of the companies in your city that are hiring and check their websites every day. And don't forget to browse Craigslist's Jobs section!

Also, don't neglect networking. Accept every dinner invitation, attend local alumni and professional events, and volunteer wherever you can. Most jobs are given to people with connections, and by leaving no social or professional stone unturned, you'll improve your chances of meeting your career's benefactor. This is also the perfect time to reconnect with old friends and coworkers.

Have you had experience with getting laid off recently? How have you prepared yourself? How well would your finances stand if you were laid off today?

The Inability to Say No and Having Ritz-y Taste on a Econo Lodge Budget

scott@tepom.com (Scott Bliss) — Fri, 07 Nov 2008 11:40:00 +0000

I usually hate to give generic, common-sense financial advice that you can find anywhere on the internet. The most common is "instead of buying a cup of coffee at Starbucks, put that money into a savings account." No shit. My readers are not stupid and I'm not going to insult you by giving that kind of cookie-cutter advice.

Today's post will consist of something like observational humor, except not funny...at all (that was kind of funny, right? No? OK, I'll move on). I'll highlight some of my specific observations related to people's spending habits that drive me nuts -- especially when I see those in question complain about their finances or at least imply their struggles.

#1 - The inability to say "no" to your friends
Many people are aware that they've got financial difficulties, yet accept any invitation to spend money, as if it is OK to do it because it wasn't their idea. If you know that you're going to be short on rent for next month but your friend invites you on a weekend road trip, what should you should say? "Hell no!" Making excuses for spending money is easy. Just because it was someone else's idea doesn't mean it's any less of a poor decision.

If you're invited to spend money and cannot afford it, it's OK to say no. In fact, some of your friends and family might respect you for it. Whether the invite is direct, like "Want to go to Cancun this winter?" or indirect, like "Hey Bob -- all of us bought new Macbook laptops -- where's yours?" you need to learn to say no. There is simply no point in taking the time to come up with spending and financial goals if they can be so easily changed by some peer influence.

#2 - Ritz-y taste, Econo Lodge income
Regardless of the weakness, I see that many people have at least one. Whether it's designer clothing, organic groceries, a certain brand of electronics, or the refusal to cook for oneself, every day I see people that cannot afford their personal luxuries try to justify them. Here are some real, specific examples with fake names:

- Joe is unemployed, has a young child, no savings, and a wife working a low-paying full-time job, recently refused a truck full of free furniture from his grandmother for his new apartment because he's "looking for matching stuff."
- Devin struggles to pay his mortgage and other bills, yet goes out to lunch every day because he hates to cook and thinks it's a good way to socialize.
- Fred has thousands of dollars in credit card debt yet buys expensive designer clothes every month.
- James uses his first paycheck from his first job out of college to buy a Hi-Def TV and a Wii.
- Tom has many tens of thousands of dollars in student loans but goes to the bars with his friends every Friday and Saturday night.
- Tracy has a very low income and is unsure how she'll pay her rent for the month. Yet she refuses to do her grocery shopping at any place other than the specialized organic food store.

Am I trying to say that you can't have matching furniture, a Hi Def TV, or designer clothes? Abosolutely not. Am I saying that you can't eat organic food, go out to lunch, or drink beer at a bar? No. What I'm saying that that you cannot classify these items as affordable simply because they're mainstream and everyone else is consuming them or because you feel entitled to them. If you've got an Econo Lodge income, you can't stay at the Ritz.

Insisting on expensive habits when you cannot afford them is, in my opinion, the biggest reason that people get themselves into financial trouble. Consuming based on our personal preferences gives us a feeling of independence. It makes us feel like we're doing things our way on our terms. But in the end, the choices that we made that once made us feel so independent actually enslave us and forfeit our control to our creditors.

By saying "I'm going to go out to lunch if I want to," or "I'm going to eat organic food if I want to" or "I'm going to go drinking with my friends if they invite me," if you can't afford it, all you're doing is signing over control of your life every time you sign a credit card receipt.

It is often said that the troubles with today's economy stemmed from "securitizing" mortgages, which means taking big bunch of mortgages, putting them all in a box, taping it shut, writing "security #1" on it, and then selling it. Those who buy it don't have the details of what's inside -- just that it's got a bunch of mortgages. To me, not being aware of your individual transactions is the same thing. By refusing to analyze where and how you're specifically spending your money, all you're doing is looking at the credit card bill at the end of the month and seeing one big number that reflects the sum of your monthly spending. Without looking at the individual transactions and evaluating their impact on your big picture, you're simply asking for trouble -- just like the mortgage industry.

So before you start spending on one of your vices, create a budget to see what you can really afford. You may be quite surprised!

Transitioning to a New Job

scott@tepom.com (Scott Bliss) — Thu, 06 Nov 2008 11:24:00 +0000

I just got a terrific job offer Monday and decided to accept it. I'll no longer be working from home, which means no more shorts-and-t-shirt uniform and no more bedroom-to-home-office commute. But his is a positive move because I won't be required to travel and I'll be able to have more face-to-face interaction on a daily basis with peers and coworkers.

Moving from one job to another can be a stressful experience. In this economy, it can be difficult to find something that not only pays well, but also fits your interest and experience. So if you finally found that dream job, first, pat yourself on the back. Next, consider a few of these points to ensure that your transition is smooth -- particularly on your finances!

Giving notice

Even if you dislike your old boss and have no intention of inviting him or her to your wedding or to your child's birthday, you should still give at least two weeks' notice. Your new employer should respect your decision to do so and give you at least that long to begin. Giving notice will help to make sure that you're not burning any bridges on your way out the door and will hopefully help your chances of getting a good reference in the future. Put yourself in your boss' shoes; it's the right thing to do.

Switching your benefits

If both of your employers offer health benefits, it will be important to make sure that you don't have any gaps. Believe me -- if you get into an accident, you probably can't afford to be hospitalized for very long. Determine whether the benefits at your new job will kick in immediately, on the first of the month following your first day of employment, or after a probationary period. If they're not immediate, you'll most likely need to sign up for COBRA, which will temporarily (and expensively) extend your benefits from your old company.

With COBRA, you can expect to pay up to 102% of the total cost of your benefits for up to one year. However, you usually have a month or more to decide if you want to use them. So if you know your benefits at your new job won't kick in for a few weeks (let's say the first of next month) and your old benefits expire on the last day of employment (let's say the middle of the current month), you can go two weeks without insurance while maintaining your option to use COBRA if you become hospitalized. Essentially, because you have a month or two to "decide" if you want to use COBRA, you can pay out-of-pocket for prescriptions and doctor visits (which cost less than a month of COBRA) and decide not to pay the pricey COBRA fees. However, should you incur extraordinarily expensive medical bills, as long as you're within the month or two deciding period before your new benefits kick in, you can retroactively pay your COBRA premiums and regain your insurance. Be sure to ask your old HR representative about the company's COBRA rules.

In some cases, your benefits from your old company may be valid until the end of the last month that you work there. If this is the case, then you may try and work for the first few calendar days of a month before switching to your new job. This may eliminate any lapse in coverage and keep you from paying the high COBRA premiums.

Rolling over your retirement

First of all, the bad news for you is that you're going to lose any non-vested portion of your retirement savings that you had with your old employer. You get to keep everything that you contibuted, but if your old employer matched some of your contributions, unless you've been with them long enough to become vested, you'll lose all or part of that money. If your new employer has a similar 401(k) or 403(b) plan, they may be able to help you roll-over your money to a new account. If they do not offer assistance or do not have a 401(k), be sure not to cash out your old 401(k) money if you're under retirement age. By cashing out your money, you will pay a 10% penalty as well as regular taxes on the money. If you roll it over to another 401(k) or a traditional IRA if your new company doesn't have a 401(k), as long as a check is not delivered to you, it will be like nothing ever happened to the money.

Taking some time off

Before deciding to take time off between jobs, figure out how much that time will cost you and what impact it will have on your finances. If your new company is offering you a signing bonus, that will help pay for your off days. But if you're not getting a bonus, or if you're living paycheck-to-paycheck, it will be important for you to do a little cash flow analysis before you end your old job and start the new one.

Ask yourself these questions: How often are you currently paid? When will you get your last paycheck? How long will it take before you get your first paycheck at your new job? Will your last and first paychecks be for a normal amount? When will you receive your signing bonus? How much accrued paid time off from your last job will you be able to cash out when you leave?

If you've got some cash savings, you'll probably be able to take some time off to refresh before you start your new job. But if you're tight on cash, create a cash timeline to help you figure out if a gap in income will still allow you to pay your rent/mortgage and credit card bills. Don't assume anything, as first and last paychecks can vary substantially. Once, I started a job with a company that paid its employees once per month, at the end of the month. And each paycheck paid you for last month's work. Because of this, I started work on February 1st and did not receive my first paycheck until March 31st -- two months after I started! So be sure to anticipate this sort of thing before making any decisions about taking time off in-between jobs.

Where to put $1000: Starting a Lifetime Habit of Saving with a Cool Grand

scott@tepom.com (Scott Bliss) — Fri, 31 Oct 2008 10:31:00 +0000

First let me say that I encourage commenting on my site. I often receive requests for topics via phone calls, emails, or today, Facebook chats. If you ever have a question related to investing, paying down debt, or planning for the future, I welcome anonymous comments and promise to respond promptly.

So you've got a thousand bucks. Where do you put it? Today's post will talk about what you can do with that money instead of spending it. I will give you options based on priority. The options begin with keeping the money close in a savings account, then paying off high-interest debt, saving for retirement, and then investing in the stock market.

Where you should put your thousand dollars depends on who you are:

If you're Bill Gates, you should give it to charity. If you're Joe the Plumber, you should save it to buy your boss' business. John McCain should spend it on campaign ads. Barack Obama should save it for a moving truck, because I've got the sense that he'll be moving to Washington before long. But I digress...you're the one with a thousand dollars.

First of all, let me congratulate you on making the commitment to start saving. Like commiting to lose weight, deciding to save money is a wise decision that will enhance your life, boost your conficdence, and never be regretted.

Where to put your first cool grand is going to start with your financial plan. The highest priority that I recommend in any financial plan is to have a reasonable cash balance before putting money anywhere else. Deposit the thousand dollars that you have in your pocket in a cash account that is easily accessible, like an interest-earning checking or savings account. No, you won't get rich quick, but you should still keep it as close as you can without putting it under the mattress. Here are two reasons why:

1) It is in your best interest to have more cash available than you need on a monthly basis. Some say that it's a good idea to have three, four, five, or even six months worth of expenses in cash. I don't necessarily agree with six, but I could be convinced that three is a good idea. Extra cash is important because annoying financial circumstances arise all the time, and without a buffer, those annoying circumstances are likely to put you into debt. Two weeks ago, my car needed an unexpected repair that cost me $420. If I hadn't had the cash to pay for it, I may have had to borrow the money from a friend or, even worse, a credit card company. Keeping extra cash in the bank is essential to prevent those annoying, yet inevitable, financial inconveniences from becoming financial disasters.

2) The other reason to save money in a cash account is purely psychological. Though you're not going to get rich earning 3% interest, you'll never lose anything, either. Over the past few months, my stock portfolio has decreased about 35% in value. If you put your first thousand dollars of savings into the stock market and end up losing a third of it, you may be discouraged from saving in the future. Before investing in stocks or mutual funds, build up a stable collection of cash that will grow slowly, but surely.

So my first piece of advice about your thousand dollars is pretty simple. Put it in a slow-growing savings or checking account (check out a Schwab or E*Trade checking account) so that the money is accessible if you need it. Once you've built a nice cash reserve, it's time to look at debt.

Notice how my first priority was to build up a small cash reserve before looking at credit card debt. If you've got some cash in the bank, before putting your $1,000 anyplace else, use it to pay down/eliminate any credit card debt that doesn't have a low promotional interest rate (0-4%). Credit card debt is a real leach when it comes to personal finance and it should be eliminated before investing your in-hand money anyplace else. Start with the card with the highest interest rate and then work your way down.

If you've got a thousand dollars to invest and already have a cash reserve that you're comfortable with and no credit card debt, then I'd look into putting it into a Roth IRA. Why a Roth IRA? Well, it's a tax-advantaged retirement account into which you deposit cash-in-hand. Your other retirement options, like a 401(k) and a traditional IRA deal with pre-tax money; if you have $1,000 in-hand, it's after-tax money and can only be deposited into the Roth IRA retirement account. E*Trade, Vanguard, Fidelity, and many more companies offer Roth IRA accounts. Check out the no-load, no fee mutual funds (preferably one that is tied to an index, like the S&P 500), as they have the lowest overhead costs and tend to perform just as well as more expensive managed funds (the ones that charge you fees to employ a manager that tries to beat the market, but rarely does). If you're under 50, you can deposit up to $5,000 per year into a Roth IRA. Those 50 and older may contribute $6,000 per year.

I could go on and on with additional investment advice related to stocks, CDs, money market accounts, or retirement. But we're talking $1,000 here. In summary, if you have an extra pile of cash sitting around, whether it's $100, $500, or $1,000, here's what you should do with it:

#1 - Make sure you've got extra cash in your checking/savings account that you can easily access.
#2 - Once you've got a little extra cash in the bank, use the money to pay down/off any credit card debt that you have, starting with the highest interest rate (not the smallest balance).
#3 - When you have no credit card debt, open a Roth IRA or contribute to one that you've already opened. Be sure to invest in no-load, no-fee funds, as they have very low costs and tend to perform just fine. Look for funds with a Net Expense Ratio under $.50.
#4 - Only after saving up some cash, after paying off high-interest debt, and after putting the maximum amount into a tax-advantaged account should you consider investing any serious amount of money in stocks. With a Roth IRA, your gains will never be taxed. With stocks, all of your gains will be taxed.

If you've made the commitment to start saving, pat yourself on the back. You won't regret the decision to live a financially healthy lifestyle.

What the 1% Fed Funds Rate Means to You, Your Neighbors, and Your Neighborhood Bank

scott@tepom.com (Scott Bliss) — Thu, 30 Oct 2008 10:38:00 +0000

First let me say that I've got good news for you: If you're reading this blog, you're probably not going to be as affected by the troubles of today's economy as someone not reading my blog. Many of my readers are young 20 or 30-somethings that navigated here from Facebook or Twitter (yes, I keep track of my demographics!). Unfortunately for me (and them), I don't have a lot of older, fixed-income Americans reading my site. And they're the ones that are going to suffer the most in our troubled financial environment.

Yesterday the Fed cut its Funds Rate to 1% -- the lowest it's been since 2003. And the last time it was at 1% prior to 2003 was in about 1960. One might say that, historically, it's an uncommonly low rate. But what does it mean? Why is it so low? Should you be concerned? And who should really be concerned?

What it means:
You may be under the impression that when you go to the bank and ask for a mortgage, the amount the bank can give you is limited to the amount of deposits that it has from your neighbors. If you want to borrow $100,000 for a house, your rich old fogey neighbors down the street need to have at least that much sitting in their CD or savings account if you want the money...right? ...right?!?

Wrong.

Actually, if you want to borrow $100k from the bank, your rich old fogey neighbors only need to have $10,000 in their account. That's because banking regulations say that banks are only required to have 10% of their outstanding loans in reserves, a.k.a. "cash in the bank."

The Fed is the nation's central bank, and has kind of a big brother/little brother relationship with smaller, commercial banks. Commercial banks, eager to make bank (forgive the expression), lend out as much money as they possibly can every day because lending money is how they make money. But at the end of the day, when the little brother sees that he's lent out$150,000 and only has $10,000 in cash reserves, he knows that he's broken the rules (he only has 6.6% reserves, not the required 10%)...and he had better have that 10% before close-of-business (a.k.a "when dad gets home"). So what does he do? He goes to his big brother (the Fed) and asks, "Hey bro, can you spot me five grand before dad gets home? I promise I'll pay you back tomorrow...and with interest!" Big brother lends him the five grand, and the next day, as promised, little brother pays him back with interest equal to the Fed Funds Rate.

Because commercial banks are in the interest of maximizing their profits, they lend out as much as they can every day. But they never really know for sure how much cash they'll have at the end of a given day, so there's no way to know for sure how much they can loan out on a given day. If they lend too much (more than nine times their deposits), they'll need to borrow money from the Fed. But if little brother knows that he can borrow money from his big brother overnight at a mere 1%, he won't be as afraid to lending out more than he's allowed.

Why it's so low:
Big brother knows that loans are important to his little brother and all of the people that he lends to. And big brother helps out wherever he can. Well, the big problem as of late is this: the little brother lent lots of money to subprime borrowers, many of whom never paid him back. So all of the sudden, the cash reserves of his little brother diminished. Now, instead of using his cash in the bank as a reserve for making more loans, he is using that cash to cover his costs associated with foreclosures. And because more and more people aren't making their mortgage payments, he has less and less money that he can use as reserves for new loans.

Think of it this way: if a foreclosure costs a lender $70,000 (which is realistic), it means that lender will have to decline $700,000 in new loans. That means that one foreclosure might prevent three or four qualified people from getting a mortgage.

Many of the little brother's customers -- even those with good credit -- can't get new loans. It isn't anything personal -- he just can't afford to lend to them! These customers are both businesses and individuals. And when businesses can't get the loans they need, it sometimes leads to layoffs, which in turn leads to more individuals defaulting on their loans.

With all of this chaos in the air, big brother stepped in. "Hey little brother -- I see you're having tough times. Go ahead and loan to those people with good credit. If you need to borrow some money, I'll lend it to you for next to nothing." By lowering the Federal Funds Rate again and again -- eventually to 1% -- the Fed is attempting to give banks the wiggle room they need to be able to start lending again.

Should YOU be concerned?
With the Fed lowering rates, it will effectively drive up inflation, which has both upsides and downsides. Lower rates cause inflation because banks can more easily get money. And when money becomes easier to get, that means that it's worth less. As money becomes worth less, more and more money is required to buy the same things.

At first, this sounds bad. But in reality it can help some people. Those with long-term fixed-rate loans, like student loans or a mortgages benefit greatly from inflation. Essentially, they're repaying a loan over a long time with money that's becoming worth less and less. On the flip side, inflation is the key driver for increasing home values. So those that own homes are seeing inflation drive up the value of their property. Because of the fixed-rate nature of mortgages (though some are variable) and the general increase in property values over time, owning property is, for the most part, a good investment. Without inflation, this theory might be different.

Additionally, most working professionals get a raise every year that resembles the rate of inflation. This raise is often referred to as a cost of living increase. It is meant to offset the burden of inflation so that it has less of an effect on our wallet. So if the cost of goods goes up 3% each year, you're going to be just fine if you get a parallel raise of 3%.

So why should you care about the 1% Fed Funds Rate? If you're a working professional that has a fixed-rate mortgage, owns a home in a stabalizing market, and get a cost of living increase each year, you're going to benefit from slightly higher inflation. Your mortgage will become easier to pay, your home will increase in value, and your annual raises will cover most if not all of your increased cost for everyday goods.

Who should really be concerned?
The elderly that are living on fixed incomes for the rest of their lives should be the ones to worry. They're the ones that aren't borrowing money and the ones that won't get a cost of living increase every year. If they're living in the last home that they'll ever own, it will become increasingly difficult for them to keep the home in their family; unless they sell it or get a reverse mortgage, they won't benefit from inflation driving up its value.

Also negatively affected by lower rates and increased inflation are companies and individuals working on a long-term fixed price contract. As money becomes less and less valuable, the benefit that they'll receive as time goes on will decrease until their contracts are renegotiated.

Keep in mind that banks are included in the list of companies that work on long-term contracts (in the form of fixed-rate mortgages). With the Fed lowering rates, though their immediate costs of getting money may go down, they know that inflation will make the money that they'll receive in future payments worth less. Anticipating the decreasing value of the dollar, they'll need to increase the rates at which people borrow from them. Last week 30-year fixed mortgages were at 5.92%. Today, they've shot up to 6.35%. On a $200,000 mortgage, that rate increase would increase your monthly payment by $55.64.

Because of this significant mortgage rate increase, you should be concerned if you have yet to buy a house. A decrease in the Fed Funds Rate will increase mortgage rates and may therefore decrease homeownership. In 1980, inflation was at an astounding 13.58%. Interest rates for mortgages often exceeded 11%. Therefore, in the early 80s, my parents lived in a trailer.

Summary:
- The rate at which the Fed lends to commercial banks was reduced to 1%
- This gives banks wiggle room and makes it easier for them to make new loans to businesses and individuals
- Those that will benefit from the rate cut are homeowners with fixed-rate mortgages and those with jobs that offer annual cost of living pay increases
- Those that will be hurt are those living on fixed incomes and those committed to long-term fixed-rate contracts
- Increased inflation caused by the decreased cost of money will increase mortgage rates and therefore make it more difficult for first-time homebuyers to afford a home.

In case you were wondering: Yes, I was conceived in a trailer.