Monday, December 12, 2011

The Five Safest Places to Hide Big Cash

I had a lot of fun trolling the net reading people’s ideas about where to hide big money. Of them, the clear winner is the mason jar in the back yard. Unfortunately, according to most stories, it also usually ends in the money being lost because the person can’t remember where it is, or never tells anyone else.

We all would like to have some ways of keeping cash secure enough so a casual stranger won’t find it in five minutes of unsupervised snooping or outright burglary. Making the cash difficult to find is the aim. A safe bolted to the floor would outwit most short-time burglars, but here are some other ideas:

1. Books. Burglars do check bookcases if they have the time. They throw books on the floor to look behind them, and they will open some books looking for book safes. But if you own many, many books, chances are the burglar will give up the book-by-book search long before the money is found. Most burglars want to get in and out in five to ten minutes. Trouble is, a casual visitor to your home might pull out just the one book you’ve hidden the money in. Safe, or not so safe?

2. Clutter. Got clutter? Serious clutter? If you can’t find your valuable stuff, neither can a burglar. You’ve got bigger problems than burglary, though. Safe.

3. On your person, in a money belt or wallet. These are completely secure and invisible. Even if you are mugged, a mugger is not looking for big money, just whatever is in your regular wallet or purse. Very safe.

4. A bank account. It’s your money and they keep it for you. Simple. The down sides are: now the world knows you have this money, and possibly the account could be used by the bank to pay some other account or debt of yours or even frozen by some government entity. This can happen, but most people don’t have to worry about it. Very, very safe.

5. A bank vault. Unlike a bank account, the contents are not insured, not even by your home insurance policy. But you can put anything that fits into your bank safe deposit box and no one gets to know about it or have access. Choose a freestanding bank in a corner of a busy shopping center, or similar. With no contiguous building to tunnel from, and people always around, that vault is likely to stay safe. In a bank robbery, the bank employees would not have access to your box, so the robbers would have to blast. For various security reasons, they are unlikely to have the time to do so, or to rip through every safe deposit box, regardless of what you’ve seen in the movies. Safest of all, unless your bank is run by thieves who have duplicate keys.

If you truly do not trust banks and have significant money to hide, then the jar in the yard is your answer. Burglars who have unlimited time and aren’t just looking for $50 to $200 to fuel a drug habit will eventually find all your most cunning hiding places inside and around your home, but they don't usually arrive with metal detectors. You hope. On the other hand, are you really going to remember where you buried the jar? Of course using a mayonnaise jar with a plastic lid will make metal detecting useless, but then you still have the issue of remembering where the money is. Hmm...

Thursday, December 8, 2011

Four Reasons to Toss Out Something Today

1. Possessions can weigh you down and eventually suffocate you. Lighten the load. You'll feel a huge sense of relief.

2. Your donations will help others. People are prowling thrift stores looking for inexpensive holiday gifts or basics they can't afford to buy new. You can affect the lives of others positively if you donate your unnecessary items in good condition.

3. Recycling is good for the planet. You are the person best qualified to recycle your possessions. Whether you put metal out at the curb for the roving metal guys, or you carefully sort and haul your recyclables to special centers, every item you keep from the landfill helps.

4. Trash should not be kept for sentimental reasons. We all have items that no longer work and cannot be fixed. Their usefulness is long gone, and they should be, too.

You will never wear bell bottoms again. You will never find the match to that one winter glove. You will never fix that radio, glue that broken mug, or repair that bicycle. Send them all to the next best place.

Saturday, December 3, 2011

Five Reasons to Keep Some Cash in the House

1. If you are elderly, it is expected. Don’t buck the cliché.
2. You don’t have to go to the bank so often
3. It’s fun to open a drawer and find big denomination dollar bills.
4. Having cash you can see and touch makes you feel richer.
5. There are times when having up to $100 in cash in your home is a convenience.

A long, unexpected cab ride, for instance. Paying someone who plowed the snow off your driveway, for another. Forcing cash on a reluctant relative.

When I read that all older people hide cash in their homes, I was surprised. Then I remembered my mother told us she was hiding a little cash in her house, inside the flap of her hardcover copy of Dr. Zhivago. The dear doctor’s stash was used up long before her death. After she died, I found other hidden cash, under the dividers in her vanity table drawer, between the top and bottom of a cardboard box set inside another drawer, inside a sewing table, and more. They were never big dollar amounts by current standards. A five or a ten at most. Finding these little bits of cash was like finding Easter eggs. All good feelings.

Thursday, December 1, 2011

Five Reasons to Sell Your Stocks

1. If you’ve lost money in the market and it bothers you a lot, you’re not cut out to own stocks. Sell.
2. If your stocks are not making you money, find an investment that will produce a profit. Sell.
3. If you need to preserve your principal, the stock market is not a safe place to keep it. Sell.
4. If you are being killed by brokers’ fees or fund management fees, find an investment where the money flows toward you. Sell.
5. If you don’t understand why you’re in a stock or fund, find an investment you do understand. Sell.

The stock market is not for everybody. If you want to keep a few stocks just to feel you're still in the game, fine. But if anything on this list rings a bell, get out of the stock market now. You'll sleep better at night.

Wednesday, November 30, 2011

Three Reasons to Save

1. It feels great to have a few extra dollars.
2. You can use your savings to leverage better deals from your bank, or start an account.
3. When an emergency occurs, your first thought won’t be “Where will I find the cash to pay for this?”

Do we need more than three reasons?

Saturday, November 26, 2011

Why We Should Not Give Holiday Presents

Personal finance guru Suze Orman had her staff ask people on the street what presents they got last year at the holidays. No one could remember.

This amazing consensus is proof we shouldn’t strain our finances to give holiday presents. They aren’t appreciated beyond the moment. The sad truth is, most of the presents we give make no impact on the recipients’ lives.* Why go crazy spending tons of money, especially tons of money we don’t have or can’t afford to spend?

What Suze Orman didn’t ask the people on the street was this: Did they remember not getting holiday presents? Did they hold it against someone because that person did not buy them a present?

Isn’t one of our chief fears at the holidays that we will not appear generous enough? That people will think ill of us for not getting them gifts, or for getting them presents that are not sufficiently lavish? And doesn’t that fear suck us into a never-ending effort to prove, through spending more and more money, that we are good people?

Our holiday gift-giving efforts are futile. The recipients do not remember what we give them.

This realization should be freeing. If no one remembers what we give them, it hardly matters what we give them, or even if we give them anything at all. Will they remember what we did not give them? If this year, we announce we won’t be giving gifts, will it be held against us for the rest of our lives? Probably not. This time next year, the people we did not give presents to won’t remember what they got or didn’t get, or from whom.

If we know people ready to be seriously offended because we do not give them holiday gifts, these are not our friends or loved ones. People who don’t like us will not like us any better if we spend big money on them. Within most families, there typically are some relatives who don’t get along with each other. Should they be forced to give gifts? I don’t believe so. In-laws are a common case in point. Or siblings. Presents don’t do it. If our decision not to give presents this year is held against us by someone, we should think seriously about why we are in such a judgmental relationship, and what we can to do change it or walk away from it.

Don’t get me wrong. I like buying holiday presents. I like wrapping them. I like seeing people open them and enjoy them. However, gift-giving is an art, and not all of us are artists. It can take years to learn how to give a memorable gift to even one particular person. Odds are that most of our gifts, year in and year out, will fall flat. Worse, sometimes the presents we give become a burden on the recipient. People don’t need to be reminded at the holidays that they can’t afford to give lavish presents in return. Be kind, and rein it in.

Buying a holiday gift is often an impersonal action taken to fulfill a conventional expectation. That’s why a singing bass and a pet rock and a chia pet all became best sellers. Offices have figured it out; the Secret Santa tradition limits the dollar amount to be spent, and everyone gets to unwrap one surprise item. That’s a civilized convention. Too bad we don’t seem able to carry it over to our families.

Yet it is easy enough to change the implicit family rules, and even long-held traditions. Just tell your relatives you won’t be giving presents this year, except perhaps one item each to the children. Ask your relatives do the same. When you release yourself from the social onus of buying presents, you should release others. You might be surprised to learn that not giving gifts is a relief to them, too.

Most important of all, you should not go into debt to buy anyone a holiday present. People who love you want you to be happy, not burdened by debt and regret come January.

(*Children are the exception, but they don’t need lots of toys. They'd rather unwrap less and participate in more fun holiday events, from outings to decorating and everything in between.)

Monday, November 21, 2011

What to Do About Medical Bills You Can’t Pay

This is my most viewed post for a reason: Americans can't pay their medical bills. 

President Obama's Affordable Care Act, which took several years to implement, has already helped many people get access to health care and to affordable insurance. It will help more people in the future. That's great, because it means that you get medical care and you don't get skinned on the price of care. You just present your insurance card and you are guaranteed to not be held up in a big way for cash on the spot. But wait, yes, you still might be expected to fork over a co-pay. Oh. That's why this post is still relevant. Because many of us do not have the cash to pay our medical bills. Or, if we pay the up-front charge, we can't pay some other bill waiting at home, and we certainly can't pay the remainder of the provider's charges, often multiple bills that show up in the mail later.

Sure, Medicaid is an option. But what if you have medical bills from doctors who don't take Medicaid, or from times when you weren't on Medicaid, or from bills that Medicaid won't pay? And what about people whose income technically indicates that they can afford to pay for health insurance, but whose personal financial situation of being deeply in credit card or other debt means they actually don't have any money to pay their bills? Aha. There's the catch.

Despite medical insurance of various stripes finally being available to us all, plenty of us still cannot pay the actual medical bills that eventually trickle or pour into our mailboxes. If we can't pay promptly, the phone calls start. Each provider or bill collector wants us to pay in full, and forget about paying anyone else or even having enough money to eat that month. Your immediate goal is to stop the provider from putting you into collection or initiating a lawsuit against you. Your financial goal is to pay the very minimum amount you can wrestle out of the provider, and to only agree to a payment schedule you have a chance of meeting.

Here’s the basic scenario: 

1. Ask the provider to write off your portion of the bill after your insurance company has paid its share. Sometimes they will, if they’ve gotten enough from your insurer. Sometimes they will even if they’ve gotten nothing.

2. Negotiate the bill lower. Whether you have insurance or not, your goal is to pay between 5 and 50 percent of what you owe, max. Start your offer at 5 percent and let them negotiate you up. The main argument if you have insurance is they’ve already been paid a reasonable amount. The main argument if you don't have insurance that covered the procedure is they have billed you the utter maximum, and you want the bill to be cut to the remaining portion an insured person would be billed. Ideally, far lower. 

3. Ask for a payment plan. By now they know you seriously care about the bill you owe, since you've talked to them repeatedly and maybe even called them on your own, trying to do something about paying it. They also know you can't pay it now. If they haven’t offered already, ask to make interest-free payments, stretched over a very long time. A year or more. These payments should give you space to recover first. Perhaps you can arrange to pay them a token fee now, or perhaps not. Then in six months, when you have regained your health, you’ll start making small monthly payments. Don't agree to a schedule that starts right now if you have no hope of meeting it. Try for delayed payments. Six months or a year later, if you still don’t have the money, try the scenario from the top, asking them to forgo payment entirely. Some dentists have payment plans that involve credit card companies and steep interest if you don't pay on time. Try to avoid this formal payment system, as it could drive you deeper in debt if you are short on cash. 

4. Ask to be granted charity status. If you know you can never pay a medical bill---for instance, a hospital stay in the tens of thousands of dollars---present a written request on your own or ask to fill out their paperwork for being granted charity status. This is better than having a bill written off, which might produce tax consequences as supposedly "earned" income. When you know you can never pay, charity status is the way to go. You'll have to document why you are a plausible charity case, but most people who are in this situation have plenty of paperwork proving it already, and little shame or embarrassment about admitting that they're out of money. If one medical supplier grants you charity status, include a copy of that supplier's grant letter in your application for charity status to the next supplier. There are zero tax consequences to being granted charity status. 

5. Speak to the doctor directly. Or write the doctor directly. If you like writing letters or aren’t afraid to ask your doctor in person, that’s a very effective method of asking for your bill to be drastically reduced or even entirely forgiven. The boss can do what the workers can’t. 

6. Asking the doctor to cut the fee applies even to the co-pay. You'll probably never get a refund, so call in advance and ask in advance not to be charged the co-pay or the usual price of a procedure or visit about which you have advance notice. You can also write in advance, or have a negotiator (it could be a family member) call or write on your behalf. If you feel too ill to be up to these tasks, ask someone you know to help you. Usually an office manager will ask the doctor and get back to you with an answer. If it isn't the answer you like, and you have other options such as a different medical provider, pursue them. 

7. If bill collectors do start calling, you have rights. The Federal Trade Commission has a great Consumer Information page that details the major rules under the Fair Debt Collection Practices Act. Best of all, you have the right to tell bill collectors to stop calling you. Check out the FTC page so you'll be aware of what debt collection practices are not allowed. Your state may have specific collection laws as well. Hopefully, they'll be in your favor. Most important, don't yield to the pressure that bill collectors exert. You know your financial and medical situation best, so don't agree to what they demand just to try to get them to stop calling. Use the method the law provides. 

8. If you do get a notice that you're being sued over a medical bill, don't ignore it. Then you'll lose your chance to fight. You likely don't have the money to hire a lawyer, but you can call your local bar association to get the name of an attorney who will work for you pro bono---free. They do exist and it's not a big deal to find one. You qualify based on your lack of income or other circumstances. The important thing is to get legal representation, so a judge doesn't just take the medical provider's word for what you owe. After all, many medical bills are inflated, or duplications, or just plain wrong. If you miss your date in court, you automatically lose your case. And by the way, even at this stage you can try to get charity status from the very same company that is suing you. You can ask your lawyer to send the medical provider a letter. 

9. What if you've tried everything, and you still owe some monstrous bill from a hospital that insists you are rich and should pay? Ask for the surgical report on your procedure, which you have a right to by law, and/or whatever records or notes there are for anything, such as a hospital stay, an in-office procedure, anything. Have an unbiased medical professional review it for errors. Medical providers make mistakes all the time. If your records show that a mistake was made, or that something, perhaps an unexpected stay in ICU or some behavior that your medical consultant flags as not according to usual standards, suggests that you were not given correct care, then, with that proof in hand, it's time to call or write and suggest that you should not be liable for the bill because they made a mistake.

The mere whiff of a suggestion that there's a possibility that you might have a malpractice case (is that vague enough? because you are not going to call up and say "I'll sue you") will make the medical provider sit up and start thinking. You will get action. It is quite likely that the response will be a letter saying, no, no mistakes were made, but according to their records, you don't owe them any money.

Yes, this really happens. Medical providers are so afraid of being sued that the mere hint that you might possibly have a case against them may be enough to get them to "lose" your bill permanently.

Or, depending on what the records have revealed, you might be better off finding a contingency lawyer and suing. A mistake that worsens your health or puts your life at risk is an actionable event.

10. Sometimes the issue may be that a medical bill is incorrect, either for a large amount of money or for a smaller sum. As Jay Lake has discovered, some medical billing issues go around and around because the low-level employees of the medical providers and the low-level employees of the health insurance companies keep denying that they have any responsibility to resolve an error. They simply keep passing the buck. They'd rather you just paid what you do NOT owe than fix the error. Bill collectors often say the same thing: "Why don't you just pay it?" When that happens, it's time to tell your story to the local action line, time to file a complaint at the state level, and definitely time to contact your local legislative representatives and get some help. Nobody should pressure you to pay a bill you don't even owe. A pro bono lawyer should be able to cut through the nonsense in this situation, as well. 

The reality is that with or without insurance, any health blip can become a financial disaster. Although the new health care law will change many of these situations, here are some tools you can and should stockpile before the catastrophe:

1. Supplemental insurance. If you know you won’t have money to pay the remaining owed portion if you get seriously ill, buy insurance to pay that part. You’ve seen those TV ads for supplemental insurance; this is what they’re all about. When 80 percent coverage isn’t enough, there is a way to be insured to cover the other 20 percent. If you’ve got serious ongoing health problems such as heart disease or cancer, that additional coverage could be crucial. Those cheapie “we’ll pay you cash every day you’re in the hospital” policies may also help you out a little, but they’re unlikely to cover the enormous multiple expenses that can be incurred in just a one-day visit to the Emergency Room or the ICU.
2. Catastrophic health coverage. This is one of the cheap options of the ACA. Do not imagine that paying the federal fine for not having health insurance is cheaper than having insurance. The entire point of insurance is to cover you for catastrophes. Catastrophes happen to us all. You’ll have to pony up the first $5,000 or $10,000 before its benefits kick in, and, yes, you have to pay monthly premiums. It's insurance. It'll save you from having to pay $100,000 for a surprise stint in ICU.
3. State-funded health insurance plan based on your income or diagnosis. Some states have completely free coverage for certain diseases, such as HIV/AIDS, or breast cancer. Some states have coverage for people below a certain income. These vary by state, and some states aren’t generous. (A good reason to consider where you live based on state politics and resources.) Some states have expanded Medicaid under the ACA. Make sure you apply through the ACA portal, or you might get the runaround from old line Medicaid employees who are still existing on a parallel plane and apparently know nothing about ACA.
4. Social Security, either Disability or Supplemental. Either one will qualify you for a health insurance program (Medicare or Medicaid), but they aren’t easy to get. Disability is almost always an automatic rejection. There are companies and lawyers who will help you. Use them, as it takes years otherwise. The Social Security Administration posted a goal a while back of giving a first reply within 270 days. That’s a goal, not a track record.
5. Medical Billing Advocate. There aren’t a lot of these people around, but they’re pros at making sure you aren’t being overbilled by hospitals, labs, and doctors. They can bargain with your medical creditors to settle your medical bills for far lower than the invoiced amount.
6. Social Worker. There is a persistent myth that social workers actually exist who can help you and who want to help. Maybe when you’re trying to get public assistance, there actually will be a sympathetic social worker who wants to keep you from becoming homeless. Maybe not. Maybe there will be a hospital social worker who makes an effort to help you. Maybe not. At least while you’re waiting to see this probably overworked and burnt-out professional, you’re not at home stewing over bills you can’t pay, and you’re in a heated or air conditioned building, too, something that you might not have at home anymore.
7. Statute of Limitations. Perhaps you haven’t been able to access any of the prior listed methods of paying your medical bills. Each state has a statute of limitations on past due bills, and sometimes that’s only three years. Collectors are supposed to stop calling once you speak to them and ask them in writing to stop, but examples abound of collectors not acting in a legal manner. Put a stop to it. Three years of being called by bill collectors is probably enough purgatory for anyone. Tell any bill collector you no longer are legally liable to pay, and they must drop the case and stop calling. If they overstep their legal authority—which is a constant problem with bill collectors—report them promptly to the state agency that regulates them.

Of course the real answer to the problem of medical bills you can’t pay is to change our health care system at the core. We're on our way, but we aren't there yet.

Thursday, September 15, 2011

Throw Out Old Financial Advice

You can keep whatever advice your mother told you. I'm sure that's engraved on your heart rather than taking up storage space in a paper or electronic file.

Otherwise, you're probably better off pitching every single piece you saved that tells you to invest in real estate (!), play brinksmanship with your credit cards and then do an easy bankruptcy, or get all the equity of out your house to finance new self-indulgence. I just spent an hour culling my financial article clippings and was discouraged by how time-sensitive all the well-meant advice was. The financial situation of this country has changed dramatically in the last ten years. The real estate bubble and its burst caused dramatic spending and equally dramatic regrets. Practically nothing about finance that was written before Lehman Brothers went down in 2008 is worth keeping, because at that moment, all the tried-and-true theories went out the window.

Nothing dates and becomes irrelevant quicker than specific financial advice. Laws have changed affecting credit and bankruptcy in particular, so consulting old advice that cites prior legal rights could be a crucial mistake. Holding on to dated expectations is just as foolish. Think of all those old retirement calculators that imagine you can average 10% interest on your investments. Try getting 5% today.

It's a sad world at the moment. Keeping around old personal finance advice that was keyed to a time of much fuller employment and wild credit card spending on consumables isn't going to increase happiness or give anyone pointers on how to live today and in the future. We return instead to the tried and true, the more general advice: Live below your means. Save as if trouble is around the bend. It might be.

Tossing all that now-useless advice in the recycle bin felt good.

Sunday, July 31, 2011

Worrying about Saving for Retirement

Do you worry a lot about saving for your retirement? Neither do I. Are we idiots?

No. Some of us will die before we can retire. Some of us will die only a few years later. People born during the baby boom---the group about to reach retirement age now and in the next few years---can be expected to live another for 20 years or so. Except if they are already dead, that is. According to the U.S. Census Bureau, those currently alive have a better life expectancy than those born in the year they were born. What this means is that even though life expectancy for baby boomers was circa 70 years when we were born, it now is circa 80 years simply because we (individually) aren't dead yet.

This presents an interesting puzzle. People are always dying. Although we have a better chance of living to be 80 than we did at birth, again, some of us won't make it. So how do we plan for retirement? Most personal finance counselors would advise us to plan as if we are going to live to be 90 or even 100. Some of us will, and we don't want to run out of money and have to live on cat food in some miserable rented room in a rat-infested inner city slum. Just painting a horrifying future to contemplate. No worries. It won’t happen to you.

Anyway, if you retire at 65, the magic number that no longer holds any magic, you’ll still have to wait a year or two to collect your full Social Security, so why do it? If you retire even later, at age 70, you can collect a higher Social Security benefit because you waited, and you’ll have had more years in which to put away more savings. Sounds great, yes? It is, unless you’re one of the unlucky baby boomers who dies about when expected when we were born, or even earlier. In which case you just wasted your last years working when you could have spent them living it up in retirement. Dang.

Truth is, the joker in the deck is not really whether you die when expected circa your 1946–1964 birth, but whether you get seriously ill. It is possible to spend down quite a decent fortune on medical care unless you spend it first on very good medical insurance. And, supposedly, unless you make the effort beforehand to invest in preventative health care and self care, such as eating right (however that is defined this week), getting regular exercise that doesn’t tear up your body, and so on. Still, whether you get cancer or have a heart attack or are run over by a truck remains rather random.

Meanwhile, what should you do about saving for retirement? And about working until retirement? Look at your own personal circumstances, not those of the mass of Americans. Some of us will receive substantial pensions. Some of us have very nice savings, inheritances, paid-off houses, and more. Some of us have hardworking or wealthy spouses, or grown children who've made it big and can turn around and help their parents. Our circumstances vary. Why shouldn't our preparations for retirement vary, too?

Mainstream media advice-givers keep painting a picture of gloom and doom, saying our money will inevitably run out. These experts tell us not even a million dollars in savings is going to be enough. A million dollars. It still sounds like a lot of money to most of us, because it is. Advice-givers usually offer whatever the current wisdom is about investing. Sometimes it’s not good advice because the deal is not in our favor. Sometimes, the tide of affairs works against us. Hasn't anyone yet figured out that if millions of people flock to a sweet deal, the sheer weight of their participation causes it to tank? Regardless, nobody can foretell the future. Seemingly solid investments can and do go sour. Companies that are deemed rock solid go bankrupt.

Should we be terrified of our future unless we are immensely wealthy? Are we all going to die broke? I don’t think so. The scary part about retirement is not running out of money, because we all will have some income. Even people who do not qualify for Social Security (and that would be who?) are likely to qualify for other government assistance. What is scary about retirement is the finite quality of our income. Those of us who have never successfully lived within a budget finally have to learn a new approach to spending. That’s a lesson the baby boom generation has been spectacularly bad at learning so far.

We could try that now. Live within our means, or a little under, and save the difference. Build up a cushion for the future. Who knows? We might save up that million dollars yet. Some of us will sleep better, too.

Saturday, June 25, 2011

A Signing Bonus Instead of Unemployment Checks?

Todd G. Buchholz, a former White House economist, had a huge spread in the Washington Post’s Outlook section recently about his idea of paying people who have been unemployed for 26 weeks to take jobs instead of continuing to draw unemployment benefits. “Will Work for Signing Bonus” contains a number of interesting ideas, and his math appears to compute, but alas, I don’t think Buchholz realizes just how nasty the job market is today. After being unemployed for half a year most people are considered dead meat to potential employers. No offers are being made. Many of the long-term unemployed aren’t even getting interviews, because people who already have jobs are openly preferred. Next come people who have left jobs within the past month or so. People who have been out of work long-term reside at the bottom of the employment heap.

The crux of the problem is most people are not sufficiently humbled immediately after losing their jobs. They don’t grab at the first thing that offers, and in this economy, likely they ought to. If the new job is a poor fit, the person can continue the job hunt from a position of strength—that of being employed. Unfortunately, most people who lose their jobs are in a state of shock when it happens, and they need time to recover. Time is what they don’t have in our fast-changing society. We have so many safety nets, not only unemployment benefits but also credit cards and spouses with jobs, that many recently laid-off workers aren’t quite desperate enough right after the event. They should be. This is a buyer’s market and employers have their pick. A resume is viewed as fresh for a month or so, but after two to three months, the resume is definitely sour. People who lose their jobs should settle for whatever is offered within the first two months, because there may not be any more offers for a long, long time. If ever. I know it sounds awful, but it’s the practical thing to do unless unemployment benefits happen to pay more than the new job would.

Buchholz wants to pay people bonuses to take a job, but impose an enormous penalty if the person quits or changes jobs in under a year. This presumably is to encourage people not to game the system, as has been done with the first-time homebuyers' credit and various other tax advantages. I think it would be more fair to require the worker to pay back the bonus with interest, raising that interest over time if payback is dilatory. Regardless of the details, Buchholz’s idea of giving unemployed people a financial incentive to take jobs instead of extended unemployment benefits is interesting. If it worked, it would save the government money and add to government coffers as the employed person began paying income taxes again.

Should we all rush out and take whatever jobs we are offered? Yes. If the worst your resume shows is a little job-hopping rather than a lengthy period of unemployment, you have a competitive advantage over other job seekers. And meanwhile, you have a job.

With one caveat. This strategy does not apply to low-level retail employment. The field is not stable enough, and your prospects are not good enough, to give up anything to enter it. In many cases, even working full-time at a big box store will not be enough to pay the rent if you previously held a moderately good office job. Also, I've done plenty of tax returns for people who only lasted for half a day at McDonald's or Home Depot. Firing people from these jobs is dead easy and happens all the time. Many out-of-work people are nagged to go work at these places, but accepting such underemployment is a strategy of last resort, to be taken only after all other avenues have been explored, including using up all unemployment benefits, getting a roommate, and selling possessions.

Monday, June 13, 2011

How to Get Out of Debt

1. Stop buying on credit.
2. Contact your creditors and push to get your interest rates lowered.
3. Balance transfer your high-interest debt to lower-interest accounts.
4. Pay off your highest-interest debt first.

This simple advice presumes you have income. Maybe not enough income, but there's a paycheck coming in steadily, and that gives you some choices.

Another set of tips to try:

1. Change up your eating habits. Do not buy food at the same places, or the same food. Instead, try to work from a budgeted food amount outward. If you have $100 for food this week, what can that buy you, and how long can that last, and how often must you shop, and is food preparation involved?

2. Sell any vehicle on which you are making payments, and buy a used vehicle outright. It has to be in good condition. You have to be reasonably certain it won't beggar you with repair costs. But a paid-for car is usually cheaper to own and run than a new car.

3. Hold a yard sale (or post on Craigslist, which is free) and sell anything you no longer need or want. It may surprise you how little people are willing to pay for your used goods. They may not buy them at all. A good reminder not to spend so much money on buying all that new stuff in the first place.

4. Empty your clothes closets into your suitcases. What you own doesn't fit? Reduce it until it does, and never buy a piece of clothing again without getting rid of a piece. Be mindful of this when you shop for clothing, because it is easy to think you need multiples when the truth is you don't. If your suitcases are full, you have enough clothes.

Add your own tips for getting out of debt if you've got 'em.

Saturday, May 28, 2011

No New Credit Cards Without Gifts

How glad I am not to be caught in the toils of the credit card companies. Another offer came in the mail today, full of talk of penalty fees and other disclosures of punitive rules if I do not pay my balance in full and on time. Frankly, I can’t see any reason to apply for this credit card. It didn’t even seem that the credit card company was making any effort to sell me on their card, other than the usual balance transfer offers. I have made use of balance transfers in the past to my advantage, but recently I decided that keeping some money liquid made more sense than borrowing it from these companies. Especially since at the middle-class level of investments where I sit, the earnings on my savings currently are pitiful.

Yes, pitiful. Less than 1%. Sometimes less than .1% Far less than the 3% or 4% a credit card would charge for a cash advance. Obviously in this economic climate it is cheaper to use my own money to finance what I want to buy. What is the point of saving when one’s money cannot earn money? Ah, I know. To have cash when I need it. Presto. The reason to keep rainy day savings in liquid form, not locked away in CDs or stocks.

This isn’t always the best strategy. If and when the Big Inflation that everyone predicts actually happens, it may make more sense to get some quick profits from CDs or other guaranteed investments. Maybe banks will hand out toasters for opening CDs, the way they did in the inflationary 1970s. Not that I need another toaster, but we all like free gifts, don’t we?

That’s my primary objection to the recent credit card offers I have received. Not only are they full of threats, but also they contain no free gifts. Oh, I can earn 1% cash back on my spending, but then I’d have to spend, wouldn’t I? Nah, not interested. Many years ago, I banked at the Bowery Savings Bank in New York. Almost every time I visited a branch, they were handing out a little gift. I still have the bright red yardstick they gave me one day. Who buys yardsticks, anyway? They’re always freebies from someone. Well, I loved the Bowery Savings Bank because they gave me those little gifts. Still do, although they have long since been swallowed up by another bank.

So, no, I don’t want your credit card. I don’t want to make myself the victim of yet another bloodthirsty credit card company whose only intention is to trip me up and charge me fee after fee. And yes, I want gifts. Real gifts.

Tuesday, May 17, 2011

Depressing Credit Error Situations

What do we do about news stories like this, that cite how cavalier credit reporting agencies are about our good names? They basically don’t care if they attribute someone else’s bad credit to us, and they hardly bother to make the corrections we ask for, regardless of how much documentation we supply. Innocent people often find they are unable to clear their credit reports of serious errors that conflate them with the guilty, which leads to denied employment or credit. This is bad.

A few tools to fight this nasty situation:

1. Check your credit reports religiously every few months.
2. If you spot an error, immediately take steps to have it corrected.
3. If all else fails, sue.
4. Change your name legally.

1. Check your credit reports. We’re all supposed to do this, but I am quite sure most of us don’t even get our one free annual credit report from each of the three major agencies. People with very common names should pay to check more often, or even seriously consider signing up for a credit alert service. Ordinarily, I wouldn’t recommend such a step, but common names can get mixed up far too easily. If you’ve ever had a serious problem with accuracy on your credit report, get your files locked, and do pay to have your files watched.

2. If you spot an error, get it corrected. I’m not claiming this will always be a simple process, but if you do it for little errors, you’ll have the experience to know what works and what doesn’t when a serious error occurs.

3. If all else fails, sue. If the police are coming to your door because you are being confused with a felon, you need paid legal assistance.

4. Change your name legally. I know, crazy idea, right? Not so crazy. By changing your name legally, you create a clear historical record of your ongoing financial activities, as opposed to any by your former doppelgangers. If “Jack Johnson” or “Cathy Taylor” keeps getting you into trouble because there are low-lifes with the same name, become Juwann Jacks or Caitlin Tawes. Seriously. Go a step further if you can and establish a name that doesn’t call up thousands of duplicates in an Internet phone book search like Zabasearch. You are less likely to be a victim of identity errors or theft if you change your name to an extremely unusual one.

Wednesday, May 11, 2011

Credit Card Fantasyland

Oh, this is scary. I heard an interview on NPR the other day in which the financial expert said she met a girl who couldn’t wait to get a credit card. Turned out the girl did not know that you have to pay back the money you spend when you buy on credit. Seriously, this was a teenager, not a five-year-old, and she did not understand the basic concept of credit.

Every time I watch one of those “we’re up to our eyeballs in debt” shows on CNBC, I get the creepy feeling that these people think the same way. They may say they want to pay off their debts, but you can see the self-will oozing out of them as they proudly admit to their insane spending habits. These usually consist of constant shopping sprees and the accumulation of vast piles of stuff, although sometimes as a change of pace it’s eating out and ATM advances. These people simply do not understand that credit is only a means of delaying paying. It’s not free money. Even creepier, the CNBC shows are about Canadians. They’re been infected by the same spending virus we have. More than one society has bought into the entitlement fantasy of materialistic accumulation via credit.

An entitlement fantasy is just that, a fantasy. We’ve all had them. They’re the daydreams in which we inherit a fortune from a relative we never met. Guilt-free money, because we didn’t even have to go to the funeral. Or we win the lottery. Effort-free money, because we didn’t have to do anything other than purchase a ticket and pose for a winner’s photo with that giant check. Most of us are aware these are fantasies. Apparently, some people are living with these fantasies as real scenarios in their heads. They live as if money grows on trees because credit cards allow them to pretend their fantasies are real. For a while. When they don't make their payments, they qualify for the new penalty APR of 29.99% that Fidelity Mastercard just instituted. Do all these crazy spenders really want to pay almost one third of the purchase price of every transaction to the bank? No. In their heart of hearts, our materialistic spenders don’t intend to pay the bank at all. Scary.

Thursday, April 28, 2011

Is Strategic Default Moral Turpitude?

Strategic default is in the news because it is gaining popularity, and possibly may account for as much as 35% of all mortgage defaults. Strategic default happens when someone who can afford to pay the mortgage decides that it’s not worthwhile to keep doing so, and walks away. This is happening all over the country in situations where the value of homes has dropped substantially below the mortgage amount owed. It’s a daring strategy, not one usually employed by the meek middle classes. Financial writers tut-tut about this practice when individuals do it but strategic defaulters are simply taking a page from the behavior of large corporations. Corporations in our country are beyond feeling shame, but individuals until recently have not been.

Is strategic default an act of moral turpitude? Issues of right and wrong about money are very slippery. Historically, most of our ideas about money have been simple:

Pay cash.
Don’t incur debts, but if you do, pay them back.

That approach to money is now nearly obsolete. It’s in direct contradiction to the way we all have recently been trained to use money. Instead of waiting and saving up for something, we are pressed to buy now and pay later. We have been using capital leverage, i.e., credit, to do this. Just as the concept of paper money only works if everybody agrees that paper money actually is worth goods or services, so also the moral rules of money only work if everybody plays by them. Recently, we have seen egregious examples of companies that arrogantly refuse to be bound by even the most elemental moral rules, or even by regulatory laws. This creates an atmosphere of moral hazard. If the banking system is crooked and yet the banks don't have to pay and no one goes to jail, then why should individuals keep paying? Some people believe the only way to beat a rigged game is to stop playing the sucker. Walk away from a mortgage and the bank gets the house; that's what a secured loan is all about. End of obligation, both financial and moral. Yes, there’s a back-end income tax issue, and in some states the bank can come after you for what’s called the deficiency, but it’s still less hassle than the futile efforts people have been making to pay or modify mortgages they can’t afford.

The real hazard with strategic default is not moral, and it's not that the banks will go broke owning all these houses. It’s that if individuals feel free to act the way corporate crooks do, the entire financial system could grind to a halt. This system does not just depend on the Federal Reserve. It depends on every individual who accepts a paper dollar or a contract as worth something. Most people don’t believe that what they do has such potential for a far-reaching effect. We don’t know at what level strategic or other individual defaults will destroy the U.S. housing market entirely, but maybe we’re on the road to finding out. Meanwhile, the banks are not hurting, not when they seize homes worth $75,000 and sell them to investors for $30,000, while sticking the foreclosed owner with a tax liability for the “forgiven” $94,000 difference still owed on the mortgage. If it’s all a game, say the strategic defaulters, why shouldn’t they play to win?

It is not illegal to default on a mortgage. Right now is probably the best time to use the strategy, when so many others are doing it that one more default won't stand out from the crowd. Sure, your credit score takes a hit, but who says high credit scores are a moral imperative? Only FICO, which is in the business of collecting and selling credit scores, and therefore has a strong interest in making us all care terribly about scores. We have been brainwashed into believing we must behave in a certain way, or we will be punished by the Great God FICO. If substantial numbers of people have lowered scores, then the curve is lower, and who cares? A landlord will rent to someone with a low FICO score rather than let an apartment be vacant. A car dealer will make a deal with someone who has a low FICO score, because the dealer wants to make the sale. And so on.

Would I default on a mortgage? Probably I should have 20 years ago, when the country had a real estate crisis and housing values dropped precipitously. They stayed low for some years, but then they recovered big time. Will this current miserable part of the cycle ever end? I think so, but I hope you enjoy the house you’re living in right now, because rather than strategic default, there’s an even better plan: Just live in your house.

Tuesday, April 12, 2011

Record-keeping Tips

Some people hate record-keeping and others love it, but here’s a dirty little secret: there is no right way or wrong way. Just pick or create the one that suits you best. Here are some popular ones:

1. Shoebox
2. File folder
3. Multiple file folders
4. Expanding file box
5. Ring binder
6. Software program
7. Physical ledger
8. Hybrid

For some of you, record-keeping will consist of throwing receipts in a shoebox. This is perfectly acceptable as long as it doesn’t drive you (or your spouse) crazy. Just don’t attempt to deliver that shoebox to a volunteer tax preparer. And don’t expect that a paid accountant will sort the contents of your shoebox for free. Or in April. Still, if everything is in one place, you have won more than half the battle of record-keeping. Really.

One step up from the shoebox method is the file folder. Same principle: it’s all in one place. Maybe you bothered to sort the items inside the folder into categories; maybe you didn’t. If sorting is not your thing, pay someone else to do it. Again, a tax professional will be pleased to find all your records in one folder, even if jumbled up.

Then there’s the multiple folder method, or the expanding file box method. Of the two, the file box method is best, because it keeps the records in one place. (Notice a theme here?) Multiple file folders have a way of wandering off and becoming invisible just when you need them.

I recently met someone who kept tax records in a three-ring binder. The binder was impressive but incomplete; she had failed to gather all the documents relating to her taxes. One of my co-volunteers complimented her on her record-keeping method, but I was not so inclined. The time she had spent getting the binder, punching the holes, and placing the papers inside would have been better used finding her pertinent documents. The binder made this person look organized, but that was an illusion.

Then there’s the “entering it into a software program” method. Unfortunately, many people I know have been suckered into thinking this is easier than just sorting the actual physical receipts. They usually confess (with surprise) to being behind on entering the data. They have a pile of papers next to their computer, and other piles elsewhere. They are convinced that this is the easiest method, but somehow, they’re never caught up. Record-keeping methods only work if you follow through and use them.

Some people keep ledgers. My mother recorded every single household expense. Reading her old ledgers is like reading the story of my family’s life, since every purchase is entered down to a candy bar. Most of us aren’t that careful. I used to keep a kind of ledger but nowhere near as complete. Mine consisted of two photocopied pages per month with each possible business expense being given a column. After a while I realized that most of the columns were empty most of the year. When I did have entries for them, there wasn’t enough space for the details. Travel was the problem. I didn’t travel often on business, but when I did, of course there were numerous tax deductible events during each trip. My one box per day per category record didn’t work for those. On the plus side, I could see at a glance exactly what my most frequent business expenses were, and adding them up was a mere matter of totaling each column.

I now do a combination method. I keep four file folders, labeled Bills, Tax Deductible, Banking, and Medical. Receipts are tossed into these files as I get them. Every few months, I sort the two biggest and messiest folders, Bills and Tax Deductible. (I never sort the Medical or Banking folders unless there’s a problem requiring research.) Sorting the contents of the folders takes maybe half an hour if I’m really stretching it out. Some other day I enter the items from the Tax Deductible folder into a computer spreadsheet. This takes another half an hour or so, depending on whether I have pre-sorted each category of expense and done it by date. If not, more time is consumed, but not much. This hybrid method works for me. I can be messy with my receipts when that’s my mood. And I can be precise with them when I’m feeling like handling details. I also let the computer do the addition.

Consider whether your current method of record-keeping is a good fit. Are you always losing papers, or behind on entering data, or finding that you have no place to put some category of receipt? These problems can be solved by choosing or creating the right record-keeping method. Just make sure you get a large enough shoebox.

Sunday, March 27, 2011

Zombie Economics, is that like Voodoo Economics? No.

For the first time, I understand why the notion of a zombie apocalypse is so popular. In an irrational world, when everything we know has turned upside down and constants are suddenly variables, zombies make as much sense as anything else. I got this message by reading a new personal finance book called Zombie Economics*. By Lisa Desjardins and Rick Emerson, names familiar from CNN and other broadcasting, this primer is a mixture of fiction and nonfiction. The fiction is the gripping tale of a lone survivor of the zombie apocalypse who, chapter by chapter, is seen desperately seeking ammunition, supplies, medical care, and most of all, safety from the lifeless attacking hordes. The nonfiction is money advice taking off on the concept of a zombie invasion, such as the prologue, entitled “No One is Coming to Save You.”

The beauty of likening protective personal finance to self-defense during a zombie apocalypse is we completely skip over the concept of blame. A lot of us get hung up over blame, either blaming Wall Street, the banks, or the credit card companies. Closer to home, we tend to blame ourselves, our untrustworthy family members, or our lousy employers. Or ex-employers. But blaming entangles us in unprofitable historical research or quarrels. Does it matter if our financial boat started taking on water with that $50,000 entertainment center we had installed, or the fifty pairs of designer shoes we bought at $1,000 a pop? In a zombie apocalypse, there’s no time for blame. We’ve got to lock the doors and protect ourselves from the onslaught. Right now.

Desjardins and Emerson hand out straightforward advice skewed to the age range 18-35 (or perhaps older), people who don’t have children demanding their own cell phones or college tuition. The target of the authors’ admonitions are people who have jobs, have bills, and who need to act defensively to make sure inattention, poor choices, and sheer bad luck don’t destroy their world.

Sure, the authors are stretching it a bit with their zombie similes. The action scenes of shooting or whacking zombies and the descriptions of squishy zombie parts are a little gruesome, too. But this is the era in which personal finance counselors often throw people into homeless shelters for a week in order to get them to wake up to how dire their financial situation is. What’s a few scenes of zombie guts by comparison? Something has to mobilize us to fight to save ourselves, because no one is coming to save us. The younger we are, the truer that is. A lot of unemployed Baby Boomers are currently thinking if they can just hold out until Social Security kicks in, maybe they can make a dignified exit from the world of fruitless job hunting. Maybe they can even keep the house, or sell it and move somewhere cheap. For the young, the future may have more potential, because unemployed young people will probably find jobs eventually. But there is no lifelong pension about to come due. Instead, there are zombies.

If you’ve avoided personal finance books before, or are sick of their typical clichés, try this one. Go for the advice, and enjoy the blood and guts.

*Not to be confused with the book of the same name by John Quiggin, which is about dead economic ideas that walk among us.

Monday, March 21, 2011

We Don’t Need Money for Retirement, We Need People

Here’s an important side issue to the big question of do we have enough money to retire in comfort: Do we have enough relatives and friends so we can decline or be ill in comfort? Some public discussion has arisen lately about which ethnic or class groups of Americans have fewer dollars set aside for retirement, with tut-tutting over which have more cash. I don’t think dollars are the only capital we can build up in our lives. When it comes down to it, dollars might not be as important as human capital. If I am part of a large family who lives near me, or deeply involved in a local social group like a church or a fire department or even a book club, then I may need less money for retirement or during an illness than if I am a loner whose only human contacts are via the Internet. Families and social groups often pull together to help people struck down by illness or old age. They create drives to buy needed medical equipment for one of their own, or medical treatment, for instance.

In my family, a daughter and a grandson provided most of the eldercare for our aged parent. Although we eventually did hire nurses to help, we also supplemented with friends who came over as unpaid sitters. Thus an elderly person did not have to go into a nursing home and become indigent to get government aid, and so on. If that parent had been completely alone, all the care would have been a cash transaction. Eldercare usually can’t be rendered in extremis by the friends of the person; very often the person has outlived all her contemporaries or they are too feeble themselves to help. Which is not to say that old friends don’t try to give whatever assistance they can. I know of more than one case in which people in their high eighties are giving care to friends in their nineties. But when the last person in a group has to stop driving, some help from a younger individual is necessary, or else cash must be available. Yet many aid programs only kick in when a person meets a needs test, that is, has no money. The assumption our governments make is that family and friends will provide most of the care.

Sometimes they do. When a person is ill, friends or family can pull together and trade off chores related to the person’s care: one friend takes her to doctors, another is the mediator with insurance companies, a third provides meals, others clean her home or sit with her on specified days, etc. Not everybody has friends or family like these, and some illnesses drag on or get complex, exhausting their abilities or expertise. Money again becomes a necessary substitute. But money ideally should be a third leg to the stool, a means of support after families and communities have done their share.

A statistician can quantify the services rendered by relatives and friends and give them a dollar value. We can investigate the cost of assisted living and nursing home living versus the cost of home health care, too. But the bottom line here is that some help can and should be unpaid. It makes a huge difference in how a serious illness goes or our declining years play out. We don’t all need $5 million in our retirement savings, because some of us will have people instead of money. On the whole, the people are the more valuable. Not because they give services free, but because they render them with a variety and often with a love and respect that few paid services can emulate.

Thursday, March 17, 2011

Newsflash: Unemployment is the Fault of the Unemployed

Of all the things that people without jobs dislike, it’s being told they aren’t doing enough to find work. Recently the Washington Post published yet another article blaming the victim. This time the Post came up with a new angle. Instead of honestly citing the real reasons people don’t find new jobs, the article describes a man who has decided to sit out the recession and let his wife and his savings support him. The article then goes on to say that when the economy recovers, this selfish man will skew the jobless rate by daring to look for work again---and thus increasing the total number of the unemployed again. Guess that’s what all the rest of us are doing, right? Not so fast, Washington Post. Over 200 angry comments later, here’s part of one that sums up the true situation:

We all know the unemployment rate is worse than stated, that older workers can't get hired, that recent college grads are doing menial jobs, and that contract and part time is becoming the gold standard of hiring for the HR stooges. [by veerle1]

It’s a cheap shot for an employed journalist to tell the rest of us we ought to try a lot harder to find a job. There aren’t enough jobs for all the people who want to work. I see people all the time who have tried everything they can think of to find a job. These are the ones at the bottom of the economic spectrum, people who are not too overeducated to work at Wal-Mart or at a Target distribution center, people who have lost their factory jobs to outsourcing. Clever resumes, smart business attire, and classy answers to trick interview questions have nothing to do with the kinds of jobs they’re seeking. They can’t get hired because there are no jobs available, not because they don’t know how to wow an HR rep. So they live on their savings and on the kindness of family members, plus the odd short-term gig and some government handouts. Are these people comfortably sitting out the recession? No. Do they get counted as unemployed? Only if they still get unemployment benefits. If they don’t, they aren’t counted. This method of counting the unemployed has never made sense, but short of going door-to-door, economists have few ways of measuring unemployment. Even so, this article posits a large potential workforce that lost jobs and isn’t trying to find jobs.

I am not a statistician, but even I know that if you intend to find the people who don’t want a job and are not looking for one, you investigate categories of people such as those aging out of the workforce, those voluntarily leaving it to stay at home and raise a family, those whose medical conditions force them out of the workforce permanently, and so on. Not by citing anecdotal evidence that some guys are letting their wives support them. Which BTW there is nothing wrong with doing, other than trusting that his wife will still have a job by this time next year.

I also don’t agree with the idea that “discouraged” workers have stopped looking for jobs. The reality is that many people have knocked on every door, exhausted all their contacts, imposed enough on the goodwill of their former coworkers, and used up all help from other sources. So they've moved on as a matter of daily life. They may no longer spend forty hours per week trying to find a job, but they’re still interested and still looking. Any hint of an open position is followed up. To blame people who don’t keep beating their heads against the wall of a bad economy is both silly and cruel.

Monday, March 14, 2011

Debt Collectors are Scum

But you knew that, right? Here's a story of just how outrageous they have become lately, from our friends at Cracked.

This story leaves me speechless. Really. You've got to check it out.

Tuesday, March 8, 2011

Self-managing Retirement Money

Someone I know self-manages his IRA. He directs his (discount) broker to buy certain stocks and to sell them based on his knowledge of a specific industry. Over the years, he has grown a nice nest egg from very little cash investment through this method. I applaud him, even while I know that I do not have similar expertise about an industry that would allow me to replicate his hands-on management style. The publishing industry, my field, is in utter flux right now over ebooks. The dust won’t settle for a while. Possibly this is the moment to invest in some epublishing start-ups. Possibly not. I don’t have the instinct to guess right about them, so I’m not going to try. I'm not unusual in wanting my retirement money to be managed by someone else so I don’t have to think about it. By allowing that situation, though, I am potentially setting myself up to be a victim of some fund manager’s folly. Do you have intimate knowledge of an industry that would give you a more-than-fighting chance of picking individual stocks on the rise? If so, perhaps active management of your portfolio, or a piece of it, would benefit you.

My friend who self-manages does not have the goal of amassing a huge amount of principal and then pulling it out as cash, which is the typical IRA or 401k plan. He has a far different goal. Although he buys and sells some of his stocks based on how the stocks are valued so he can make a quick profit, his purpose is to amass more cash to buy more stocks. He looks for stocks that pay dividends. We don’t usually think about dividends with IRAs and 401ks, because we usually arrange for all dividends to be reinvested automatically in the very same products. This is advantageous during our highly taxed years when we are earning our maximum. Later, however, this is not necessarily the best strategy. My friend, who is at retirement age even though still working, now allows the dividends to be paid to him directly. That money supplements his income from other sources. Meanwhile, he has not reduced his principal.

Hearing about this, I realized that the common way of thinking about IRAs and 401ks is all or nothing. Either we keep it all in various funds, locked up and not paying out a dime, to rise and fall according to the whim of the stock market, or we take it out as cash and spend it. Moreover, we are told that there is a formula for taking it out, usually around 3% or 4%, by which we can sell out on a yearly basis and keep our principal intact. This isn’t exactly true, though, if the stock market is not doing well. (We’ve certainly seen that situation in the last few years.) Meanwhile the federal government wants us to sell out of these funds on a regular basis, starting at age 70 1/2, whether we want to sell or not. At that time, we have to start converting our tax-deferred savings into taxable income, or face stiff penalties. We can do that, but we don’t have to let it all be cash. We can convert the required amount of principal (less the government automatic withholding of 20%) to the very same or different financial instruments as simple investments. Investments that pay us dividends or interest.

This strategy does not reduce principal dramatically. Most people expect to cash out their principal, and so they worry about it running out. If we create an income stream rather than sell off the principal that doesn’t happen. This method harks back to the old-fashioned concept of living on cutting coupons. Coupons were the quarterly dividends that bonds paid, and rich people bought the bonds and then cut the coupons and redeemed them for cash. Organized correctly, these became a constant flow of income, income not affected by the ups and downs of stocks. Also, if we don't spend down our principal but live on dividends or interest instead, we can leave an estate for our children, which an important consideration for some people.

It’s very daring to self-manage one’s retirement money, but at some point we all do have to make decisions about it anyway. Why not think about this method?

Saturday, February 26, 2011

Does Your College Student Need a Car?

Here's something to think about before the next kid or the first kid goes off to college. Someone I know is all bent out of shape over a child needing a new car while a freshman. Unless the child is commuting from home to college each day, even owning a car while in college is an unnecessary expense. No, it’s a luxury. There is virtually nothing for which a college student needs a car. Commuting from an off-campus apartment to college each day does not require a personally owned vehicle. It requires two legs. Or bus fare, if the off-campus apartment isn’t within walking distance (dumb idea, that; students should live very near the college library).

We are raising a generation of spoiled little princelings, I fear, who get trapped early into the mistaken belief that they “have to” have a car even when their job for four or more years is simply to attend classes and do their course work. Aside from the privilege issue is the unhappy truth that we’re not doing our teenagers any favors by enuring them to the idea that a car is a must. A few years later, out in the adult world, the cost of car ownership can be prohibitive to a young person who only has a McJob for support, or who has a “real” job but only a starter salary. Or who cannot find a job at all. A car is something to which a young person might aspire, but the several thousand dollars a year it costs to own one (even not counting gas) is a burden that many of them are not able to carry on their own. If they accept parental aid to own a car, they prolong their childhood dependency, something neither parents nor children ideally should do.

My college had plenty of rich kids whose parents were well able to give them cars, even luxury cars. But the college had a rule of no cars until one had lasted through the freshman year. This was a sensible method of encouraging new students to fully enter into campus life and bond with other students rather than run away from the college experience to go shopping or whatever. A car is an isolator, and our current generation of pampered youngsters doesn’t need more isolators. Many of them never even shared a bedroom with a sibling in childhood, and they enter college ill-equipped to deal with a roommate. College students have plenty to think about and explore. They don’t need the additional burden of worrying if their car needs oil or is about to be towed.

If you’re teetering on the edge about whether your teenager needs a car at college, let the kid try the first year without one. It’s a bracing experience; it teaches responsibility, ingenuity, cooperation, and even learning how to cope with public transit to arrive at class on time, all skills that will be helpful in adult life. Also, if you’ve signed on to pay your child’s college expenses, a hiatus in paying for a car will be a welcome relief as well as financially sensible. In later college years, once your child masters being a student, having a car might enable him or her to intern or do part-time work, but neither are recommended for the first year. Try this. See how it goes.

Tuesday, February 22, 2011

Seven Tax Tips for 2010 Tax Filings

1. The AMT patch and the Educator Expense deduction are in---again.

2. The deduction of up to $500 of your real estate taxes ($1,000 if married filing jointly) on a standard deduction return is out.

3. Not all Energy Star appliances qualify for a credit. Washers and driers don’t.

4. The IRS is not sending tax packets out anymore, and libraries aren’t carrying tax forms. You’ll have to pull them off the Internet.

5. If you e-file, depending on who does it for you, you can get your federal refund in less than a week. Not a loan. A fee-free refund.

6. If you pay medical expenses for a parent, even if that parent is not your dependent and does not live with you, you can deduct those expenses along with your own itemized medical expenses.

7. If you break into your 401 k or IRA and use the money (or its equivalent, since money is fungible) to pay medical expenses, you won’t have to pay an early withdrawal penalty, but your tax preparer must know how to fill out a special form to get you excepted from it.

Is College Debt All Bad?

Plenty of people talk about why college debt is bad, but thinking of higher education as a mere matter of dollars and cents, as Michelle Singletary seems to, is a mistake.

Here’s the single most important reason to go into student debt: to get into the very best school in your field if you want to become eminent in your chosen career.

Not only will you have exposure, often directly, with the outstanding achievers, both professors, visiting speakers, and fellow students, but you will have the opportunity to be on the cutting edge of developments within it. The people you get to know at that kind of college are likely to be the people you want and need to know later. The alumni of an outstanding school will become your personal old boy network. Your classmates will become the next generation of important people in the field. Some of them will become your friends, some your rivals, and others will be part of a network that will help you make career moves far in the future.

This is not a universal situation. At lots of schools, and in most fields of study, neither the professors nor the alumni nor your fellow students are likely to be significant to your future career success. Classmates might be potential friends or mates, but statistically, they seldom are potential colleagues. The reason for this is that most people who go to college do not end up making a career out of their college major (also, huge numbers change their majors), and even if they do, they do not reach for the top in their field. Only a very small minority do. There’s a huge difference between having a successful career as a scientist and being the scientist who is appointed by the president to run NIH, for instance. As for graduate school, which used to be for the elite, these days just about everybody gets a masters, so even there you are not necessarily hanging out with the future movers and shakers of your field. Most people you meet in an average college will not be important to your professional future.

If you plan to be a teacher, you don’t need to go to Harvard. If you intend to be an accountant, the same. Most careers can be prepared for quite adequately through the state university system.

High-profile institutions have their share of washouts, of course, but in the fierce competition to get accepted, there tends to be a larger percentage of highly motivated, driven students than there will be in a school for which acceptance standards are looser. The stakes are high and even seventeen-year-olds know it. There are careers for which the networking advantages of attending a high-profile college are so valuable that tuition debt is simply the cost of access, and well worth paying.

Not every teenager is suited to or driven to the kind of career that requires intense networking to achieve a high profile position. There is no point in going to a school where the student will be a fish out of water, either, unless that person has an exceptionally strong, determined personality. Of course it has been done, but when an exceptional child is sent to a school filled with the exceptional, there is a distinct possibility of personal adjustment problems interfering with the work of being a student. Parents should analyze their child's chances of making the most of an expensive prestige college experience. Another factor to consider is the financial stability of the student’s family. If the only way to finance a particular college choice is through punishing loans that the family can barely manage to pay, tremendous pressure is put on everyone. The student is under pressure to follow a predetermined career path and succeed. There may be hostility from siblings not given the same opportunity because the parents are completely tapped out paying for the first child. Unless the student is a perfectly performing robot who never makes a false move, always is lucky to be in a strong economy, and feels the moral responsibility to promptly pay the family back for the sacrifice, the dreams for which the debt is undertaken may not come true. That’s a huge moral load to put in the shoulders of a young adult.

Debt should be an important consideration when choosing a college, but not the only consideration.

Tuesday, February 1, 2011

Are we middle class?

Not really. We only think we are. If we don’t qualify for food stamps or discounted housing, or the poverty credit that our state or city provides, we believe we are middle class. But are we?

If we are insolvent, are we middle class? What is “insolvent,” anyway? It’s the state of negative net worth. Many if not most Americans with a mortgage in its early years are insolvent, because they do not have the funds to pay off that mortgage on the spot. Many more Americans also have car loans that, again, they would find it impossible to pay off instantly.

Then why do we think we are middle class? Hundreds of years ago, in western Europe, there were laws that kept wealthy middle class people from wearing the bright and luxurious clothes worn by the nobility. The middle class was frozen as the middle class, or so it seemed, because they had to wear a uniform, usually black. In America today, with no such laws, the only way to define someone as middle class is through tokens.

Middle-class people aspire to houses, cars, and education, tokens of being middle class today. People who define themselves as middle class are determined to secure the outward show of being middle class even if they don’t have the money to buy it outright. They do it through consistent employment, with allows them to leverage their small net worth to get credit and thus have negative net worth and become insolvent. So they look middle class but they aren't.

Is this a different modus operandi than the working class and the poor use? Yes. They buy for cash because they can’t get credit. To the degree that the working class and the poor have been caught up in middle-class aspirations and tried to get in on the housing and credit booms, we have the subprime mortgage category and the credit cards with immense finance charges, and the payday loan phenomenon. But they are not middle class. Most don’t have or can't keep the tokens of the middle class. Others don't aspire to be middle class. They aspire to be rich, as defined by what they see on television, i.e., a flashy car, jewelry, and fashionable clothes, etc. Not middle class at all.

The true middle class is almost invisible. The solvent middle class is the group that owns homes outright, pays cash for their cars, and has cash saved for their educations. As distinct from the working class or the poor, though, the true middle class can afford nice houses in the suburbs (still the middle class ideal) or discreet town homes. This middle class is what most self-defined middle-class people aspire to be, the group that can afford the tokens. They still live a middle-class life. They just don’t finance it with credit. Or, to put it another way, they aren’t fronting. That’s what the rest of us are doing. Fronting, posing, whatever you call it, even though technically we are insolvent and we are only a few lost paychecks away from having it all collapse on us.

Why bother to define what middle class really is? Because we who self-define as middle class also believe that we must have the tokens of being middle class, and so we go into hock to get them. We believe we are entitled to these tokens, in fact, because a lifetime of fronting, posing, and pretending (while hiding those horrendous credit cards bills and getting repeated home equity loans) has accustomed us to believe we are middle class. But most of us, sadly, are not. If we can lose this mindset that we are middle class and we therefore must have certain possessions, perhaps we can behave with enough fiscal responsibility long enough to actually become middle class for real. Food for thought.

Tuesday, January 18, 2011

About Debt

I like to read Michelle Singletary’s column in the Washington Post because she is not a financial professional so much as she is a financial synthesizer, as I am. She researches all the current information from various public sources about personal finance, and then she opines about it based on her personal beliefs. Like me. We don’t always agree, but most of the time I think she has her head screwed on right. She is anti-debt, perhaps rabidly so, because that’s how she was raised. In this current economic crisis, that attitude comes across as sheer prescience. How did she know the economy would tank? She didn’t. She grew up knowing how to squeeze a penny and stay out of the clutches of creditors. The heretofore comfortable middle class has a more benign view of credit than does Singletary, whose grandmother, a low-paid nursing aide, managed to support a family through persistent thrift. The grandmother knew that the kind of credit she could obtain would likely come at a huge price, a price she was unwilling and probably unable to pay. By contrast, for many of us, credit has been easy and relatively cheap for many years. And then, just like the frog being slowly boiled, it got a little more complicated, and a little more, and now we’re in severe danger. The frog could have hopped out of the pot when the water was cool, but didn’t sense the danger, and that’s exactly what has happened with the majority of Americans who have become overwhelmed by debt. Yes, there are many contributory factors. But Michelle Singletary’s grandmother knew that debt itself was peonage---like unto slavery---and she wasn’t signing on for it. Too bad so many of us closed our eyes to the danger for so long.