Archive for the ‘Finances’ Category

Goal: Your Second Number

Friday, November 27th, 2009

In this post, I talked about your First Number – the Emergency Fund. Achieving this number is critical to your financial success. And yes, I do think that you must achieve this number first.

Here’s your second number:

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Goals: Your First Number

Wednesday, November 25th, 2009

I’ve been away for a while. Part of that has been due to Real Life. Most of it is due to a realization that I had to develop, research, and test. That realization is this article, broken up into four posts.

“They” say that you need to pay yourself first by saving %10 of your income.

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Crockpottery

Wednesday, September 30th, 2009

As in “crockpots”, not “crackpots”.

I am once again reminded of the incredible ease, efficiency, frugality, and usefulness of a chest-type freezer + crockpot combination.

S.O. caught a nasty bug, and is down for the count. Leaving yours truly to act the part of Knuckledragger. (I.E. Take care of S.O.)

Leaving one person to take care of an entire pile of rocks  + primordial scrub is a LOT of work.

Here’s how we make it easier:
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Credit Card Interest Rates Increasing

Tuesday, August 18th, 2009

Many of us have already or will soon receive notice with our monthly credit card statements that the interest rates will soon increase.

For those of us at Pookah Finances 101, this creates a problem, as we are carrying a balance from month-to-month while we work ourselves out of debt.

For those of us at Pookah Finances 201 (and 301), we don’t care. We pay off our interest-bearing credit card bills in full every month, thereby avoiding the interest fees. In addition, we have the ready cash available in a high-interest savings account to pay off the full amount of our efforts with credit card arbitrage.

Needless to say, Pookah Finances 201 (or better) is a great place to be in this economy.

But as for those of us at Pookah Finances 101 (or lower), we now have a problem.
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Frugal Idea – Save That Toothbrush

Thursday, May 7th, 2009

Is your toothbrush all worn out? Ready for a replacement? Do you already have a replacement ready – in one of those econopacks that you bought at a discount? Good!

Do NOT throw that old toothbrush away.

You can:

  • Use it to clean the hard-to-reach places around the kitchen or bathroom faucet.
  • Use it to clean out the crud in the kitchen sink drain.
  • Use it to clean dust off the coils of your refrigerator.
  • Use it to get those hard-to-reach spots on the pile of rocks exterior.
  • Use the handle as a soft prybar.
  • Turn it upside down and use the corner of the head to smooth out wet caulk.
  • Use the handle as a disposable stirring rod.
  • Use it to clean all the dust and insulation wrapped around an improperly installed light switch or electrical outlet (after turning the power off and testing it for no nuclear go-juice, of course).
  • Use it as a launching lever to toss kitty treats past Pookah’s nose.

BANZAI!!!!!

I keep a couple of old toothbrushes in my toolbox, another couple with the pile of rocks cleaning kit, one under the sink in each bathroom, one under the sink in the kitchen, and a few in the wash room (they’re great for cleaning lint out of the lint trap screen).

Plus, those soft or hard plastic dental tools don’t decompose very quickly in a landfill.

Update Your Will

Tuesday, April 14th, 2009

By this point in your financial life, you are getting your debts under control – probably even pulling out ahead in some areas. You’re also planning ahead for your future – to cover both expected and unexpeced expenses. Part of that planning includes the very important, but often overlooked, last will and testament.

Who cares what happens to your catnip after you are dead?

Okay, professor mode is now turned off.

Good start.

You’re going to die eventually. It’s an unpleasant thought. However, you can take certain basic steps to ensure that your final moments are handled in the way you want them to be. If you have children, brothers, sisters, neices, nephews, or other relatives that you’d like to pass on certain belonging – including money – to, your will is one of the best ways to do it.

Pookah has already passed on the best things a kitten could have: Strength, agility, keen senses, strong claws, and a tail that puffs up bigger than most other cats’.

Don’t forget cuteness.

I am royalty. Those with inborn regalness do not need cuteness. Bow down and scritch my chin.

Right. So, making a last will and testament is going to vary from state to state (and country to country, if anyone reading this is outside the U.S.A.) This will require some research on your part. I strongly recommend that you consult with a professional – a lawyer in your state who specializes in wills. Most of them will give you a free hour of consultation, and can advise you on how best to proceed according to your Wants and Needs. If your Wants and Needs are simple, you may only have to fill out a few inexpensive (or free) forms. If you want to make sure your last wishes are iron-clad, or include a “poison pill” (along the lines of, if anyone in the will contests it, they don’t get anything from your estate), or any of a number of issues that are important to you, then consulting with a professional or three is a must.

VERY IMPORTANT!!! Since we felines are possessed of divine grace, you must not forget us when making out your last wishes. Though you call us “pets”, we are, in fact, lordly members of your family and will need consoling if you leave us unexpectedly. We must be supplied with sufficient small tasty birds and delicious fishes to ease the transition of our living arrangements.

Here is one of the great secrets of wealth: Pass it securely from generation to generation. Your heirs can learn from your mistakes, as well as benefit from your successes. If you have lived through tough times, you well know how much of a difference even a few dollars can make. You can, as your last act, make your heirs’ lives better.

So start thinking about this now. Do your research (Google is your friend). That way, when you have the resources saved up, you are prepared with your questions and ideas for consulting with a professional. Do not look on this as a sad necessity. Instead, look on it as making life easier for those who survive you, or come after you.

You are not leaving me, are you?

No, Pookah, not for a long time, I hope. But accidents do happen. I may have to go before I’m ready. But I will try to take care of S.O. and you even then.

Prrrrrrrrrrrr!

Do What Is Right

Tuesday, March 31st, 2009

Ethics and Morals are tough. It is even tougher when it comes to finances. The news media is full of stories right now about how overwrought greed is causing our recession to get ever worse, causing our (including our elected leaders’) efforts and dollars to go to waste, and causing an immeasurable price in human lives diverted, broken, or even destroyed.

It starts with a simple concept: Do What Is Right.

If you saw someone accidentally drop a twenty dollar bill next to your foot, where you could easily pick it up with no one the wiser but yourself, would you give it back to the person who dropped it?

What if it was $100, would you return it?

What if it was a penny, would you return it?

I imagine that many of the people who are raking in these outrageous, and likely outrageously undeserved, bonuses in seven, eight, and nine figure dollar amounts started off with questions like these.

Unfortunately, I also expect they started answering, “No,” to each of the above questions as they progressed through their careers. After all, in the scale of finances, $100 all the way down to a penny is insignificantly miniscule compared to a compensation package of six figures or more.

It is true: That amount of money is insignificant. Unless, of course, that penny means the difference between eating your next meal or not eating it.

It is the small decisions that pave the way to making big decisions. If your small decisions are ethically or morally compromised, then so are your big decisions. If your small decisions are right and good, then your big decisions *MAY* be right and good.

Returning a dropped penny to its rightful owner is a small decision. But if you are already in the habit of doing what is right, you will return that penny… just like you will return the roll of $5,000 that a senior citizen left on the table at the restaurant by mistake. Yes, that roll of money might mean the difference between paying your rent or not. But that does not matter. If you lie, cheat, or steal to get ahead, it WILL catch up to you. The accumulated interest on that debt may drain your financial assets, or it may psychologically bleed and weaken you as a person. That analogy probably won’t affect many people who have already started answering, “No,” to the above questions. Unless, of course, you take into consideration the following:

Psychology determines your finances. If you have the mental and emotional basis to handle finances in a sane manner, you dramatically improve your chances of success. Anything that damages your personality, the essential “you,” also damages your chances for financial success. This damage can occur at any time during your life. The more steps you take to reduce the _opportunities_ for damage to occur, the less likely you are to suffer damage to your personality and to your finances.

Think about those high-stress situations where it is so ridiculously easy to make a serious financial mistake:

  • Buying a new car
  • Catastrophic health issues
  • Buying a house
  • Applying for a loan
  • Funerals
  • Legal procedures involving lawyers and/or judges
  • Interviewing for a job
  • Divorce
  • Marriage

If you have built within yourself the habit of doing what is right, you will tend to succeed in these high-stress, high cost-of-failure situations for one simple reason: Doing What Is Right means you can more easily recognize when someone is trying to screw you over

The added benefits are many:
* You establish a reputation for honesty and integrity that will aid you in all other aspects of your life. When your honesty or integrity come under question, you can use your past history of Doing What Is Right as *evidence* that you are still Doing What Is Right.

* Your significant other will trust you more. Think how many relationships you know of that suffer or were destroyed because of a simple lack of trust.

* You can trust yourself more. If you are in the habit of Doing What Is Right, you can rely on that habit to help carry you through even the toughest economic or personal times.

* You will collect people around you who also Do What Is Right. These people will support and advise you when you may falter, need help, or must lean on someone else while you get your feet back under you.

* You will inspire others to Do What Is Right. People tend to rise to meet the level of expectation you set for them. By the same token, people tend to lower themselves to meet the level of expecation. Your children, brothers, sisters, parents, and even strangers on the street are watching. What are you telling them about yourself when you take action? That you will take advantage of them if the opportunity presents itself? Or that you will abide by standards of fairness, truth, and honesty, even when it hurts you in the short term?

Return even the penny to its rightful owner.

Be a person who deserves success.

Do What Is Right.

Thank you for taking me into your home.

You’re very welcome, Pookah. A soft, velvety kitty purring on my arm is a princely reward.

Macro Economics – Encourage People To Save Part II

Thursday, March 26th, 2009

In Part I, I went over some very basics on how banks work, and ended with introducing inflation into the mix. The last questions I asked was: Now everybody’s hurting some, right?

Wrong.

Banks are for-profit businesses.

Banks have lots of smart number-crunchers working for them. They pick an interest rate that they charge for loaning out your money that allows them to not only fund their expenses, but also make a tidy profit and thereby increasing their purchasing and lending power in spite of inflation.

Savers aren’t quite so lucky. The savers’ purchasing power goes down if the saver leaves the money in the bank.

This leads to the bank’s greatest fear: Savers taking their money out of the bank all at once.

See, in our overly-simplified example, the bank has less than the $1000 plus savers’ interest available at any given time. (Remember, for this example, the bank wants to keep about 30% of the assets loaned out at all times so it can collect interest and fees on those loans to pay itself and then the savers.)

If 80% of the savers take their money out of the bank in one month, the bank is in trouble.

  • It doesn’t have enough money to give those savers *their* money back – like the bank is required to under the agreement with the saver.
  • It hasn’t saved enough of its own profits to make up the difference. The bank is now in debt – it owes money.
  • We call this “bankrupt”. The bank doesn’t have enough money to cover the debts.

(This is why banks tend to offer better rates on CD’s – they’re guaranteed to have the savers’ money to loan out for that period of time, and can use those assets to cover themselves better. It’s less risk for the bank, less risk for the saver.)

Bluntly, the banks want to pay savers (the asset providers) the absolute lowest possible return, and charge lenders (borrowers) the absolute highest possible fees. The monetary difference becomes the gross profit/loss for the bank.

Now comes the trick that short-sightedness misses: Banks need more savers to give them the new assets that they can then loan out and use to generate profit.

But banks and the Federal Reserve have been punishing savers by paying very low rates to savers for providing those assets. Those assets have declined in value due to inflation. A certain percentage of savers noticed this, and moved their money to greener pastures. This had the net effect of reducing the bank’s total pool of assets (influation plus losing savers).

(Yes, I know that there’s a LOT more to it than this. Please bear with me, and remember that my focus is on people like me – savers.)

With a smaller pool of assets relative to their loans, banks are harmed more by defaults on those loans, and by people losing confidence/trust in the financial safety of the bank. The net result is more and more savers start moving their savings out of the bank, the bank’s asset pool shrinks more, the risks increase for the bank, who charges higher interest on the loans, resulting in fewer borrowers providing profit to the bank, and makes it even harder to regain savers’ confidence/trust to give the bank more assets. When financial institutions started buying and selling “securities” (basically, selling loans as if they were stocks), they started going beyond their core business of money management and jumped headfirst into gambling: When the price of those securities drops below what a financial institution paid for them, the institution just lost some of its critical reserves — the savers’ money entrusted to their care.

So this boils down to one essential question:

Why would anyone keep their savings in a bank?

1. Safety. The FDIC insurance means that, if the bank goes under, the savers will get up to a certain amount of that money back courtesy of the United States Taxpayers (currently set at $250,000 maximum, though historically it’s set at $100,000 per institution).

2. Habit. Growing up, my generation was hammered with the “save it in a bank” mantra. Don’t think about why you would want to save it in a bank — just do it without asking any questions.

3. Inertia. Once a person makes a decision, especially a “safe” decision, we are loathe to change it.

People, savers, do eventually wise up and start moving their savings elsewhere to get better returns.

This, of course, makes lots of trouble for the banks.

Got all that?

Okay, now look at the reverse: What if savings earned a higher-than-inflation rate of return?

Then we have the opposite problem for the bank. The bank has to loan out assets at higher interest rates in order to cover costs (such as paying the savers that Inflation+ percent) and make a profit. Always remember that banks are for-profit businesses.

Since the cost of the loan is now so much higher than infaltion, fewer people/businesses will ask for loans — it’s better for them to become savers than borrowers. Now the bank has a harder time lending out money, makes less profit, and eventually can’t afford to pay its employees or savers.

The net result of this is that any savings account that earns a return too far below inflation is bad for both savers (due to inflation) and banks (due to the presence of higher-interest accounts that are closer to inflation level or higher). This result, however, is worse for savers.

The break-even point, savers getting the inflation rate, is constantly moving, and less profitable for the banks (businesses exist to maximize profits within the constraints of law and good sense. Banks are businesses.) Therefore, it seems to me that the best savings interest point is 2/3 to 3/4 of the last 10 years of average inflation. At this level, the assets provided by savers or profits from bank operations, aren’t deteriorating as much due to corrosive inflation. And the bank’s ability to generate profits (the bank’s main reason for existing in the first place) is still solid and reliable.

But I don’t think that banks, even the theoretical overly generous and conservative bank in our simple example, will raise their savings interest rates at their rock pile centers that high. It would cut too much into their profits (and reduce executive compensation by millions – a crime beyond imagining).

So for these reasons, I think savers should understand and do the following:

  1. Savings are not an asset because of inflation. As long as inflation is higher than the rate of return on your account, you are losing purchasing power. That’s a continuing expense.
  2. Use savings accounts only for short term goals (1-2 years at most) and as an emergency fund. There are better alternatives for both of those, but they require more effort on savers’ part.
  3. Put your savings in the highest interest account that you can, or ladder them as CDs that earn as close to or more than the inflation rate.
  4. Stop being just a consumer. If all you do is consume, you never produce anything of net worth.
  5. Stop being just a saver in mindset. You’ll never get ahead being just a saver.
  6. Start being a frugal investor in mindset (Pookah Finances 201 and 301).

Now, what should you take away from all this? Two basic things:

1. A better understanding about banks in relation to savers and our current (and developing) economic situation as a nation. Well-run banks are NOT your enemy; but they are not your ally either. They are in it for the money.

2. Motivation to take an active role in your own finances.

Macro Economics – Encourage People To Save Part I

Tuesday, March 24th, 2009

(Note: I actually started writing this post back in early December. I notice now that several talking heads on major news and “research” agencies are starting to think that banks keeping large amounts of savers’ money on hand, rather than shoveling it out the door in bad loans, might actually be a good idea. Be warned – this is a long post. Really long.)

Please consider the following information that I have gathered over the last ten years:

  • Basic economics: Money in exchange for goods or services.
  • The Federal Reserve, in cooperation with banks and other financial institutions, has been punishing savers for years. Just look at your savings account APY.
  • As a nation, our population is now referred to as “consumers”, even in casual conversation. Consumers don’t produce. They consume – resources, money, air, space.
  • The basic pile of rocks bank savings account doesn’t even keep up with inflation. In effect, savers lose money continually. Online banks, CDs, and the “very safe” vehicles often offer only a little better than inflation.

This is bad because those savers are the fundamental source of banking and investment assets. Yet those assets, those ultra-safe and reliable sources of money to loan out or invest, are constantly de-valued.

So banks (and other institutions) are fundamentally slitting their own throats.

Here’s why:

If you’re a bank with $1000 of savers’ money in your accounts, then you have $1000 that you can loan out. To encourage those savers to keep their money in your bank (so you can loan it out), you offer them %1 per year. That means that you add $10 to those savers’ accounts the first year, and compound it in the following years — effectively increasing the bank’s assets by the same amount each year.

Where does that $10 come from? Let’s keep this example very simple.

The bank lends a portion of that $1000 to other people or businesses, after checking to make sure the recipient is capable and willing to repay the loan plus interest. The bank conservatively sets a limit of lending out no more than %30 of its assets ($300 in this case) and charges %8 interest, for a gross profit of $24.

If the bank is destroyed, the FDIC will reimburse the savers. Nice and safe.

If the loan doesn’t get repaid, the bank covers itself by a) requiring some up-front payment, say %10 of the loan; b) seizing the property/business goods for itself and auctioning them off; or c) pursuing other legal means to recover the money plus expenses.

Still pretty safe so far.

So what we have is this:

Assets                                       Debits
Year 1    $1000 savers’ deposit        -$270 loan
$30 up-front for loans        -$10 savers’ payment
$20 loan interest                  -$10 business expenses
=========================================
$1084.02                                -$290

Assets                                           Debits
Year 2    $1084.02 savers’ deposit    -$240 loan
$30 loan repayment             -$10 savers’ payment
$19.20 loan interest              -$10 business expenses

==========================================

$1133.22                                    -$260

etc…

Until Year 10

With me so far? Everybody is making a tidy profit, right? Now, let’s add in the effects of inflation. We’ll assume %3 inflation per year, as a penalty, because everyone’s purchasing power has gone down (your money buys less food).

Now everybody’s hurting some, right?

Wrong.

And you’ll find out why in Part II.

Trust, But Verify

Saturday, March 21st, 2009

I’m revealing my computer techie roots.

In computer security, there is a saying: Trust, but Verify. What it means is (in very basic terms), go ahead and trust the user. But before letting the user do something, verify that the user is who he/she says they are. That’s what the whole userid/password combination is for: You’re claiming to be the person “userid”. The password is the verification that you are. Some setups take it a step further, and ask a verification question.

Trust me, folks. This is NOT meant to annoy you. It is meant to PROTECT you, and to protect the rest of US. If you don’t like having to type in a password, either change the attitude or return the computer to the store. If you are one of “those”, then it’s only a matter of time before your computer starts spewing viruses and malware all over the internet… and spattering the reasonable and sane people with the mess.

But back to my topic.

Trust, but Verify also works in other parts of life. Take this real life example of a phone call I received (details changed to protect the obvious):

Me: “Hello?”

Caller: “Hi! This is your water utility company. There’s a mixup in your billing. We want to verify your credit card number.”

Me: “That’s nice. What is my account number at the utility company?” While I waited for an answer, I fired up ye olde computer to pull up the account information.

Caller: “Pardon me?”

Me: “I said, ‘What is my account number at the utility company?'”

Caller: “I just need your credit card account number to verify the automated billing.” Whups. Clue #1 That All Is Not Well.

Me: “That’s nice. I just need you to recite my account number at the utility company – y’know, the one that is associated with the mixed-up credit card information – so that I can verify that your request is legitimate and not a scam.”

Caller: “Well, I don’t have that information. If you do not provide your credit card information, your payments won’t be processed correctly and your water WILL be shut off. Do you really want to pay a $120 re-connect fee?” Whups. Clue #2 That All Is Not Well.

Me: “Well, I can’t give you that information. If you don’t have my water utility account number, then there’s no way you could legitimately know if my credit card information is correct. Besides, according to the laws of this part of the primordial scrub, you guys can’t cut off my utilities without at least a 30 day WRITTEN notice. So, unless you can provide proof that you really are from the utility company, don’t ever call me again.” And I hung up.

Then I pulled the contact number for my water utility from my House Manual (conveniently placed next to the phone) and called them. After giving them my name and account number, followed by the nice lady responding with the correct billing address, I told her what had just happened. Funny, they had no record of any problems with my auto-billing to my credit card. In fact, they’d just processed a payment earlier that week. Clue #3 That All Is Not Well.

The utility thanked me for letting them know that the bad guys were scamming their customers. I pulled up my credit card info on the computer, and let the credit card company know about the scam going on, and requested that they keep an eye on my account. (I set up only one credit card to handle utility payments, so it’s pretty easy to spot anything out of the ordinary.) I logged both calls, noting down the date, time, person talked to, and summary of discussion. Then I put all that info in the computer for easier reference.

I initially trusted the caller. But as soon as I requested verification that the caller was who she said she was, she refused to provide verification. Then the caller made threats – disconnecting my utility – but I was already prepared: I knew what the requirements were for getting a utility cut off in this region. The caller’s information didn’t match – another failed verification. The first one was more than enough reason for me to hang up. The follow-up call to the utility company, using previously vetted contact information, merely confirmed what I already knew (the utility company requested my name and account number – to verify that I was who I said I was – and gave me the billing address when I requested counter-verification). The follow-up call also served as a stop-gap, just in case I’d gotten a legitimate call from a poorly-trained or incompetent out-sourced agency. Calling the credit card company and logging the call, person I talked to, and subject matter was just a precaution on my part, so that if my account was illegally billed, I had more protection for myself.