Saturday, January 8, 2011

Is it Better to Pay Down Credit Card Debt or Build Up Savings?

If you were one of the lucky ones and received a end of year bonus, congratulations. You have the happy task of deciding what to do with it. Do you blow it on a new 50" 3D LCD TV or do you use it for a more responsible objective. Do you have credit card debt, why not use it to pay it down. What about putting it in a nice Roth IRA? 

You have decided to put off the big screen TV purchase for the time being and use that windfall for more financially responsible goals. Where do you put it, on your debt or in savings?

The answer depends on your own personal situation. What would boost your bottom line the most? If you go purely by the math, paying down the credit cards makes the most sense. If you consider the interest rate your paying and what it's costing you and how little you will earn in a savings account, paying down the debt seems like a good plan.

If one of your goals is to give up credit cards permanently, a nice savings account is necessary. It's hard to make progress when every time an emergency comes along you have to reach for the credit card. 

So building up a nice emergency fund of $1000 to $3000 is the way to start. Once you have an amount of cash put away for the rainy day thats coming, then go back to paying off the debt. 

If you are anxious to pay off debt faster, then do a little of both. Pay a little extra to the debt and also still put some into savings. Also it's time to get a little creative with your budget. Try for six months to squeeze a little more of your cash toward your goals. Try cutting some items from the budget to arrive at your goals a little faster. Make it a project to sacrifice some of your extra expenses, like cable or dining out, but for only six months to get the job done quicker. 

Friday, January 7, 2011

5 Ways to Mess Up Your Retirement Plan

Like most people, thoughts of retirement cross your mind every time you dread going to work. Sitting on a sandy beach, looking out at the surf, without a care in the world, is my retirement dream. Maybe it's yours. It's not going to happen for me.


According to statistics, only 25% of baby boomers are able to make that dream come true. I'm not in that 25%. That 25% have assets and savings lined up to live the dream. Even though the boomers have decent assets, they're not enough. The result is, there will be some full or part time working occurring well into their retirement.


You may ask how I got into the statistic of the 75% of who aren't ready or able to retire someday. It' was easy, I just followed these simple rules:



  1. Don't be on a budget. Spend all the money you earn.
  2. Don't save your money in Mutual Funds, IRAs, 401ks, or investments of any kind.
  3. Don't live on what you make. Use credit cards irresponsibly. Run up their balances and only pay the minimum.
  4. Don't have a car you can afford. Buy, lease, or rent an expensive car. Have a payment until you old and gray.
  5. Don't live in a house that's affordable. Buy a house where the payments are half your monthly income.

If you follow these five rules you will be on your way to financial ruin in no time. These things, if done correctly, will keep you poor, your whole life. I will attest to the fact that the rules do work. Because I have done them all.


For me I'll be working well into the future. My investments are meager at most. Social security is not enough and can we really count on it in to days atmosphere, forget about it in 20 years.


What does the future hold for me? When I reached 65, I was going to sell the house and downsize. My original plan was to count on the house value appreciating, so when I sold it, I would have enough cash to generate an income and a comfortable life. That's out the window.


My plan 'B' is to keep working. My business generates a good income. A lot of the work is done by me. As I get older and can't do as much, I would hire more help. That plan would work well. I would be able to work well into my 80's. It's hard to imagine myself that old.


Trying to plan events over the next 25 years is presumptuous at best. Planning ones future with a wife and 6 childrens' needs can be hazardous. Financially, even in a bad economy, I'm still heading in a positive direction. Things can completely change in the next 5 to 10 years and I still may be able to make it to that beach. I'm exploring new directions to increase business, who knows where they may lead.


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Wednesday, January 5, 2011

She's Buying a Car, What's Better a Rebate or Low Interest? Help Dad.

My daughters car finally went to heaven. After 10 years of life, 200,000 miles and puddles of oil on the driveway, she needs a new  car. I advised her to use the $5,000 dollars she has saved and buy used. But no. She wants a new one. She's just not going to listen to the old man. 


She's been looking around for a while because her car has been on life support for the last 3 months. I went with her down to the dealer for technical and moral support. 


Now if you know me, you would know of my absolute love of going down to the dealer to talk to car salesmen. Talking to car salesmen or getting root canal, which would I rather do,  I think the later. Our salesmen was an elderly gentleman, his fire had long gone out, but he was interesting to talk to. Everything went well for a while until he had to throw a curve ball. He advised us there was a rebate. Then he said instead of the rebate she could have 0% interest. What to do? 


When buying a car you have a choice between low or no interest and a rebate. How do you know which is better. It's a matter of doing the math. Huh! Do math? I know. Why not get some online help!

Several websites have online calculators that will help you decide. AutoTrader.com and Cars.com each have one, as does Bankrate.com . It's simple, just enter the loan amount, the rebate amount, and the interest rate if you take the rebate, and the interest rate if you don't take the rebate.

Lets put in some numbers and try it out. Say you have a 48 month loan for $25,000; the rebate is $3,000, and if you take the rebate the interest is 6%. If you leave the rebate you get zero percent financing. The answer: "It's a Wash", the calculator tells us. But if the interest rate was 8% instead of 6, you would come out $1,000 better by taking the zero percent loan and no rebate. One other deciding factor is if you are short on a down payment, you can use the rebate to help with that.



Now we had the facts to make an informed decision. I thought finally we were going to be done with this car hunt. Yet it was not to be. My daughter was starting to get cold feet, thinking about that long commitment of payments every month. We went home to think it over. To be continued........

Tuesday, January 4, 2011

Before You Marry It's Time To Get Financially Naked

With the statistics of divorce in this country, more than ever we must better prepare for the big step of marriage. There is a lot to do before the big day. The list is long with all the things that need to be arranged. The preacher, the hall the church, the caterer and on and on. Lots of time is needed to get all this done. We can't forget to be sure we are preparing our financial lives together, also.

With all the rushing around be sure you give yourself the time and space to talk frankly about your financial philosophies. With financial conflicts still among the chief reasons for divorce, it's critical.

You need to talk over all the obvious questions like, How are we paying for the wedding? Should we combine our accounts? What if one of us gets laid off? Those are the easy questions to ask. You need to dig deeper into philosophical questions. Is your future wife a clothes maven with a hundred pairs of shoes? Is the husband a car freak that will only drive a BMW? These things are cute when your dating your future spouse. But if your future love has spending problems, you need to know before the big day.

A thorough pre-marital counseling is imperative to work all the bugs out. You owe it to your future spouse to expose all your crazy spending habits, turn over all the cards and get financially naked.

There are so many facets of life to touch on during counseling you will only be able to touch on the very important ones. One of them being your future home together. Does one person want a small 3 bedroom house and the other want a lavish 2 story McMansion. When the kids arrive is it public or private school. Religious school or home school. What about vacations? will it be Hawaii or North Carolina?


Counselors ask piercing questions to get an answer from your soul, for example:


Imagine the Best. You have enough money to take care of your needs, now and in the future. How would you live your life? Would you change anything?


Life Cut Short. Now the doctor says you have only 5 to 10 years to live. You won't feel sick, but you'll never know when death will come. What will you do? Will you change your life? How?

Regrets. Now imagine that your doctor says you only have one day to live. Ask yourself: What did I miss? What did I not get to be or do?

With these sample questions, your philosophy comes out. You really get to know how your future spouse ticks. Today people are more careful with their money. If they don't know their future spouse well enough an anxiety about their future behavior arises. This leads to mistrust. A sign of this mistrust is the use of Pre-nup agreements. They are used to protect assets in case of divorce. This is a big red flag that your marrying someone you don't trust.

The action that needs to be taken is, if your engaged to marry,  get a good financial marriage counselor to help you better prepare for the big step your about to take.



Monday, January 3, 2011

Small Businesses Don’t Create Jobs – New Businesses Do!

Mark Zuckerberg at South by Southwest in 2008.Image via Wikipedia
How many times have you heard that small business creates the largest amount of jobs? You hear this all the time in the media. I am finding out that proposal is not really accurate. Even though the government thinks it can create jobs. More on that subject later. 

According to entrepreneur Peter Thiel, it's really new small business that creates jobs. Who is Peter Thiel? He happens to be the smart investor who in 2004 put up $500,000 dollars to finance a small business, run by Mark Zuckerberg, called "Facebook". 

Thiel says the misconception is only a urban legend and doesn't hold water. I am finding out that proposal is accurate. The real indication of whether a business is likely to create jobs is not how large a business it, but how old it is. 

This sort of make sense. New companies, by definition, tend to experience growth as they find their optimal, ongoing size. Once they reach maturity, whether it’s 20 employees or 20,000, they stop adding jobs so fast. And the smaller that number, the sooner the company is likely to reach it and quit hiring. And mature firms seldom enjoy significant bouts of growth. On the other hand, new companies also fail much more often than mature ones.

Conditional on survival, young firms grow more rapidly than their more mature counterparts. However, young firms have a much higher likelihood of exit so that the job destruction from exit is disproportionately high among young firms. More generally, young firms exhibit much more churning of jobs as evidenced by high rates of gross job creation and destruction.

Still, though, the study says young firms deliver more gross and net new jobs than older firms.

Obviously, this is a very big deal from a policy perspective. If we want to fight unemployment, it’s not very helpful to help small businesses in general. Instead, we should be promoting entrepreneurship and the birth of new businesses.


Recession Lessons Learned In 2010

Marty Allen, American comedian, holding wallet...Image via Wikipedia
The last few years we all have been going through tough financial times. Expenses have been going up and incomes have been going down. We have been forced to do a reset on our financial lives. We don't spend money the way we used to, we can't, we don't have it to spend. The smart ones that haven't been effected, our cutting back for fear of things getting worse. They are saving more and spending less; they are reusing, reselling and recycling. The best lessons are learned in the tough times and hopefully they are integrated into our lives and endure.

I have listed a few of the lessons learned, I hoped you learned them to. 

Savings Accounts. If you are already saving your income every month your way ahead of most people. If your not, it's time to start. Make this your top goal for the coming year. Start small and as you begin to see that balance rise you'll be encouraged to increase the amount. Be sure to put it somewhere it's not easily accessed, so you won't be able to get to it easily when your tempted. And you will be tempted. 

Your home is not your piggy bank or a retirement account. What I have learned and most of America to is that home equity is not guaranteed. I have owned 2 homes in my life and always thought their price would always rise, it never occurred to me their value could be cut in half. My retirement plan was partially dependent on selling my house in ten years and retiring, using the proceeds to setup income producing investments. The idea of producing equity out of home appreciation, may be a thing of the past. The lesson to learn is, your home is not an investment.

Home Equity Lines of Credit (HELOC) are another thing to be avoided. They are a foolish way to borrow money. You putting your home in jeopardy, when you can't pay it back. That new kitchen or bath you borrowed the money for, will sink you when you lose your job or can't work due to illness. Do it the old fashion way, save for it, pay cash or don't do it. 

Living within your means. Americans are blasted everyday from the media that we need to buy things to make us happy. It's not true. Only buy what you need with cash that you save. Rule #1: If you don' have the money, you don't buy it. Rule #2: If you need to buy it, save ahead of time for it. Rule #3: Setup and maintain an emergency fund for those unexpected emergencies.

Credit Cards are not our friends. The main purpose of a credit card is to get you to use credit for your purchases and ask for only a small payment every month in result you pay interest to them. This interest is their way to make money on you. If you pay back your balance every month they make no money and actually lose money on your use of the card. Their goal and only reason to be in existence is to keep you in debt. Some debt always grows into massive debt. Your best move is to avoid credit cards altogether. They are built to keep you in debt. 

Car Loans will keep you poor. Keeping up with the Joneses is a trap you will never satisfy. If you think you have to be defined by what you drive your deluded. If you have a car loan, pay it off. If you need a car, buy a used car let someone else take the depreciation hit. Here's a plan, save for that car purchase and live within your means.

Job security is an illusion. Don't fool yourself. We are all self-employed. Your only as good as what you can do for the boss today. I don't care how many years you work for a company, your an asset on their books until your not needed anymore and then you will be put out. 

Frugality is a must. What we have must be used longer. Our money must be spent in the most economical way. We can't just go in a store and put down our money. We have to shop sales, deals and always get a bargain. Coupons and coupon codes are a must. Ask for discounts everywhere. Nowadays, it's become perfectly permissible to ask for discounts from your dentist, doctor, plumber and kids' tutor. Don't forget to ask for drug samples whenever your doctor writes you a prescription.

The recession has taught us many things we already should of known. Making your hard earned dollars do that much more is not a option anymore, its a necessity.


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