finances

Change Your Thinking

November 19, 2010 By Jennifer Derrick 2 Comments

I’ve noticed that when most people think about their finances, they think in terms of their income and expenses. They think about how much they make per week or month and therefore that is how much they have to spend. However, the most financially successful people that I know think of their finances in terms of their net worth. (Just a refresher: Your net worth is the difference between your assets and your liabilities.) Even if their net worth is negative, they are constantly thinking about moving that number into the positive column.

There is a mental shift that occurs when you start thinking in terms of net worth instead of income and expenses. Thinking only about your income and expenses as a measure of your financial success is limiting. It makes you think in terms of “Making X and spending Y.” When the money is made and spent, you effectively start over from zero every month. Even if you are contributing to savings because you feel like you have to, thinking only in terms of income and expenses doesn’t move you forward very quickly. It isn’t a very motivating way to think.

However, when you think about net worth and how to grow that number, you are always working toward a better financial future. When you start thinking about your net worth, you are more motivated to save, pay down debt, find higher paying investments, and make more money. Even when your net worth is negative, thinking about moving toward a positive net worth is far more motivating than just thinking about how the next pay check will be allocated.

When we first started out, we thought only in terms of income and expenses. We knew how much we made, how much our bills were, and how much we needed to allocate for savings. That was great and it kept us out of debt and even moved us ahead a little bit. It wasn’t until we looked at our net worth that we really started getting ahead. Once we sat down and listed out all of our assets and liabilities and saw that net worth number (which was barely positive at the time thanks to a mortgage and very low equity in our home), we realized how much better we could do. We started looking for ways to inch that net worth number ever higher. It motivated us to pay off the mortgage faster, increase our earnings, and learn more about investing. Once we started thinking like that, our net worth grew by leaps and bounds. And we didn’t sacrifice, either. We just got a lot smarter about our money and started acting more responsibly. We wasted less and became more educated. When we met one goal for our net worth, we set a higher goal and reached for that number.

(If you’re going to start thinking about your net worth, I recommend a good software program that will calculate it for you. You can track it on paper, but it’s much less tedious to let a computer program like Quicken or Money handle the calculations. This is especially true if you are dealing with fluctuating investments like mutual funds or ETF’s.)

Once you start thinking about net worth, you also get more serious about protecting that number. Once we became conscious of our net worth, it became a lot more important to us to make sure that we had adequate insurance and estate plans so that we would not lose everything in the event of an accident, disability, or death. Thinking in terms of net worth made us much more responsible. When we only thought about income and expenses, we weren’t as concerned about protection because it was hard to see what there was to protect.

You don’t have to become obsessed with your net worth. Chasing a number to the exclusion of any fun or frivolity is unhealthy. However, when you sit down to make out your budget and asses your financial state, thinking about your net worth can lead to greater wealth than if you simply stick to tracking income and expenses.

Stop Being Picky

September 24, 2010 By Jennifer Derrick 2 Comments

I have a friend who is incredibly picky, to the detriment of her finances. She demands certain brands of every food and personal product she buys. Even if another brand is cheaper, she won’t buy it. She demands specific features in her cars. On vacation, her hotel room must have certain views and specific amenities. She will only go to restaurants that serve certain foods prepared in very specific ways. She’ll only dress her kids in specific brands. The list of things she is picky about goes on and on.

She also complains about her finances constantly. There’s never enough money for all her needs, she claims. She can’t get ahead. There’s nothing to save. She and her husband make above average salaries so I suspect that the culprit is, at least in part, this pickiness. There’s nothing wrong with wanting certain things, but if you can’t afford them all you need to choose more carefully.

I encouraged my friend to think about the things she buys and to decide if there aren’t other acceptable alternatives. Does she have to have name brand cleaning supplies, or might the store brand work just as well? Does she have to have a great view when she travels if she isn’t going to be in the room that much? Do the kids really have to wear Baby Gap, or will clothes from Target work? I asked her to think about the things that are most important to her and limit her pickiness to just those things.

She determined that food is very important to her. She wants to eat healthy, so she wasn’t willing to give up organic foods and restaurants that cook with certain ingredients. Fine, that is important to her. But she did agree that she could choose less expensive lodgings when they travel since she doesn’t use the room very much. The savings from one area can pay for the other. She also agreed that the kids could wear less expensive clothes and the savings could go to their college funds. She decided on a few other things that she could be less picky about and will put that money into savings.

My friend is now choosing to pay a premium for the things that matter most to her and saving money by purchasing cheaper alternatives of everything else. I reminded her that this list isn’t set in stone. If her priorities change one day, she can decide to place a premium on other things while choosing others to save on. If her income increases, she can reintroduce her preference for items she’s chosen to save on at this time. Nothing she decides today is permanent. She can still be picky, she just has to make certain that her finances can accommodate her pickiness.

I also reminded her that she may still be able to be picky, as long as she pays less for things. She can have that name brand product if it’s on sale or she has a great coupon that makes it the cheapest option. She can buy those name brand clothes if she waits for the end of season sales (or gets them at a consignment shop).She may be able to afford her special hotel rooms if she travels in the off-season. There are ways to be picky on a budget. I think she’s now motivated to satisfy her pickiness for less.

If you want to save money, you have to stop being so picky about the things you buy and the things you do. Sure, it’s fine to prefer certain things, but if your finances aren’t unlimited you may have to stop being so picky about everything and choose to be picky about only those things that are really important to you. Unless something really matters to you, get over your picky tendencies and pocket the difference.

Win Competitions and Sweepstakes: Ways to Make Money

August 25, 2010 By Jennifer Derrick 2 Comments

Contests and sweepstakes can be fun to enter and the prizes can be great. You can win everything from a few bucks in cash all the way up to new cars or houses. Contests are easily found. You can find them on product packaging, advertised on TV or in magazines, and through associations to which you belong. They’re also all over the Internet. Some people are quite successful and win many of the contests that they enter. Do they have some super-secret method for winning? No, but they do enter a lot of contests (increasing their odds of winning something, somewhere) and they do use some of the tricks listed below to increase their odds.

Find competitions that require you to do something: Maybe you have to write an essay about your favorite vacation destination. Maybe it’s a talent or skill based competition like a photography contest. Contests that require you to put forth some effort are a better bet than random draw contests. Why? First, these contests usually have fewer entrants (either people don’t have the required skill or they aren’t willing to put forth the effort), increasing your odds of winning. Second, you have some control over the outcome. Unlike a random draw, you have some control over the quality of your entry. If you write the best essay or take the best picture, you will win.

Enter local contests and sweepstakes: Contests sponsored by local merchants (or limited to certain geographical regions) have a much smaller entry pool than national or worldwide contests sponsored by huge corporations. Your odds of winning at the local level are greater.

Follow the rules exactly: Make sure you do everything exactly as the rules state. You don’t want your entry disqualified because you didn’t use the right sized postcard, or you entered multiple times when only one was allowed.

Look for contests that offer multiple prizes: Contests that only offer one prize aren’t a great bet because every entrant is competing for that one prize. Contests that offer multiple placings give you a better chance at winning something.

Don’t pay to enter a contest: The exception to this rule is if it is a talent based/judged competition. Sometimes legitimate contests in fields like photography, writing, and agriculture charge an entry fee. This is to keep out those who are not serious about the craft or talent being judged and the money usually goes into covering the overhead for the organization running the contest. If it’s a reputable contest sponsored by a reputable organization and you are skilled in the craft, go ahead and pay the fee. For most run of the mill contests and sweepstakes, however, don’t pay fees to enter. Similarly, don’t enter contests that require you to buy something to enter or to listen to a presentation, unless you are really interested in that thing to begin with. Some contests are simply marketing ploys to get you to cough up money or buy the product. Beware.

Use a disposable email address: You’ll probably generate a lot of spam from your contest efforts. Set up a disposable, free email address to keep your primary email clean. If you’re really into contests, you might want to think about a disposable cell phone, too, since you might end up getting a lot of telemarketing calls from contests that require your phone number.

Look for contests that allow multiple entries: Or not. Many online contests allow you to enter once per day. If you’re diligent about entering, you can increase your odds. However, contests that restrict you to only one entry can also increase your odds because you’re not competing against such a large field. It’s probably a crap shoot, but if the rules say you can enter more than once, do it.

Keep to a schedule: Contest entering can become a time consuming hobby if you’re not careful. While it’s fun to win, you have to be realistic that it will not replace a full time income. Allot yourself fifteen to thirty minutes every day as your “contest time.” Use only this time for your contest hobby and then forget about it.

Organize: Keep a list of currently active contests so you remember to enter every day if it’s allowed. Track due dates for submissions and make sure that any talent based entries are submitted on time. If you’re doing a lot of contests it’s easy to lose track, so devise a system to stay organized.

Use a form filling program: This can greatly increase the number of online contests that you can enter in a short period of time. These programs enter repetitive information like name, address, email, and phone number for you, saving you tons of time. There are several paid software programs available, but there are free alternatives available from Google and Mozilla.

You may never win a new car or a house entering contests. And even if you did, the taxes due on those prizes might mean you couldn’t keep them anyway. (No winner has ever kept the HGTV Dream House, for example, because the tax burden is too great.) However, you can win some cash, concert tickets, vacations, movie tickets, gift certificates, or other items just by entering your name. You might not always win “money” but there’s a lot of fun stuff out there to be had and anything you win is something you won’t have to buy.

Do Automatic Retirement Contributions Help or Hurt?

August 16, 2010 By Jennifer Derrick 8 Comments

You may have heard about the movement to automatically opt employees into their 401K’s. Right now, the default option is for you not to contribute. When you’re hired they ask you if you’d like to contribute and how much. If you say no, then nothing is taken out of your check. There is a movement afoot to make opting in the default option instead. When you’re hired you would automatically have three percent (more or less depending on the employer’s plan) deducted from your check and placed into a retirement plan/fund of your employer’s choosing. You would have to specifically tell your employer not to do this in order not to contribute to the plan.

The thinking is that if the default option is to be enrolled in the plan then more people will save because, frankly, we’re all too lazy to be bothered with filling out the paperwork to stop the withdrawals. This is partly why more people don’t currently contribute to retirement plans. They’re too lazy or busy to be bothered with filling out the paperwork to join and researching the options for their contributions. So, the thinking goes, if you automatically enroll people into the retirement plan, they will be saving something and probably won’t opt to change it.

The goal of this plan is to get people to save something for their retirement. The government wants us to save more because retirees with no money will soon overburden Social Security and Medicare. People need to start taking responsibility for their own retirements. Since people have shown time and time again that they won’t contribute voluntarily, the government wants to try to sneak it up on us.

I don’t disagree with the plan. I wish more people would step up and take care of their own retirement planning. I’m not looking forward to supporting others in my old age. I will have saved enough to take care of myself, but I will likely be penalized in higher taxes and reduced Social Security payments to take care of those who did not take responsibility. However, I wonder if the plan will really help all that much.

Sure, it’s great that people will be saving something. And they probably won’t really miss the money because three percent taken out of your paycheck before taxes really isn’t that much. If your gross pay is $2000 every two weeks, for example, then three percent of that is only $60, or $10 per month. That shouldn’t present a problem for most people. And therein lies the problem. The contributions that will be automatically deducted are not nearly enough to create a secure retirement on their own. Obviously the idea is that the employee will opt to contribute even more or to open some other retirement account like a Roth IRA on their own. Yet if people won’t even voluntarily sign up for retirement plans, what makes anyone think they will voluntarily opt to have even more deducted from their checks? I think the odds of most people exceeding the default deduction are pretty slim.

The other goal of this plan is to teach people to save. The idea is that if you show people savings in action they will be inspired to save more. If you show them how a 401K adds up they will want to do more. I don’t think this will work, either. Most people know how saving works. You don’t need much more than an elementary school education to understand interest and compounding. When you start a job you are usually given information on the retirement plan that includes all kinds of charts showing how your contributions add up. People ooh and ahh over those charts during orientation, but still don’t sign up. For all that they understand, people still don’t want to save. You can’t force people to save money. Sure, you can take a nominal amount of their check but you can’t make a non-saver get excited about doing more. Sadly, many people only learn how to save once the crisis comes. Forcing people into a 401K isn’t going to turn them into savers or teach them how to save for the long term.

I worry that these plans will have the opposite effect. Instead of getting people to save more, I worry that this default contribution scheme will increase complacency amongst people and actually lower their desire to save. People will start to think, “I’m saving for retirement through my employer. I don’t have to do more.” They’ll lose any desire they may have had to save more because they will assume it’s being taken care of by those default deductions. Even if you explain that they need to do more, many will assume that what is being done is enough. If people are so complacent when they aren’t saving at all that they think retirement will magically take care of itself, why would anyone think that they would not become even more complacent and guilty of magical thinking once a little money is actually being put away?

When people who’ve been “tricked” into these contributions retire they will have some money saved and that is better than nothing, but it won’t be nearly enough to accomplish the governments’ goal of reducing the burden on entitlement programs. It won’t be enough to make them independent in retirement. I don’t think many of them will have learned to save on their own. I’m afraid that this plan might actually make the saving situation worse in this country. People will assume that it’s taken care of and not bother to save more, to learn about investing, or to take responsibility for their own situation. If they won’t do it when no contributions are being made, why would they do it once some contributions are being made by default? So what do you think? Will automatic contributions help or hurt the long term retirement prospects in this country?

Keeping Control of Your Money

March 10, 2010 By Jennifer Derrick 5 Comments

Have you ever thought about how much control over your financial life you give to companies when you sign up for things like cable, cell phone contracts, Internet access, loans, or credit cards? When you engage in most financial transactions, you are letting someone else have a little bit of control over your financial life. The cable company can drop channels and raise rates. The cell phone company can extend your contract when you buy a new phone. The credit card company can increase interest rates and lower your credit limit without any input from you. All of these actions take control away from you and give it squarely to the company from which you’re buying services.

It probably doesn’t seem like a huge deal. So what if the cable company drops a few channels or increases your rates a few dollars? So what if they extend your contract when you order that new HD receiver? So what’s a few hundred (or thousand) less available on your credit card? So what if the cell phone contract comes with a huge penalty for early termination? Taken separately these aren’t big deals. Taken individually they can be annoying, but not detrimental to your
financial life.

However, many of us are involved with several of these types of transactions and contracts. The problem with ceding control over so much of your financial life to others comes when you are faced with a situation where you need all the control. When you lose an income or face some other crisis that requires major financial cutbacks and changes, you discover that you have no control. You can’t just cancel the cable because you’re locked into a two year contract that will cost you $200 to break. You can’t downgrade the cell phone plan because you have a contract with them, too. You discover you could really use that $2,000 that you lost when the credit card company lowered your limit. And you could really use your old interest rate of 5% rather than the 25% you’re now paying. You need to get out of your car lease, but there are big penalties for early termination. You have to keep paying on the furniture you bought with the same as cash offer. You’ve given control to these companies and now you have no room to make the changes you need in order to gain breathing room. Sometimes negotiating and bargaining work, but more often than not you’re just stuck.

I tend to be a bit of a control freak. I know this. I hate it whenever I feel like someone else has total control over a situation. This is one reason why I am very careful about what I do with my money. I don’t like giving any more control to others than I have to because I know the day might come when I need all the control. I want to preserve my ability to make any decision and take any action necessary to save my finances if I have to.

Sometimes a contract is inevitable. Sometimes I have no choice but to cede control to someone else. Whenever possible, though, I balk at contracts and loans. I keep a prepaid cell phone because I don’t have to sign a contract. If things get tight, I can just stop paying for the monthly minutes. One of the side benefits of dropping cable has been that I no longer have that contract and the cable company no longer has the ability to “extend” my contract when I get new equipment. By avoiding loans and credit card debt I get to retain control over where my money goes each month. Whenever possible, I try to keep as much control possible by not signing contracts and not obligating my money to others every month.

This strategy has come in handy more than once. We’ve been through layoffs and other crises and each time I’ve been able to quickly take control of the finances without having to jump through some company’s hoops. It keeps an already stressful situation from becoming an untenable one. That’s not to say that you should never take out a loan or a contract. Sometimes it makes sense. But be careful about getting involved in too many situations where you’re giving control to others. Too many contracts, leases, and loans will make it impossible for you to deal with a financial crisis because you won’t have the control that you need.

A Life Without Debt: Complacency Is The Enemy

February 23, 2010 By Sadie Morris 4 Comments

One of the biggest enemies of a debt free life is complacency. Not only is it an enemy, it’s a very sneaky enemy. When you become complacent (apathetic is another good word for this problem) you relax too much. You stop worrying about where your money is going. You start spending more and more, thinking it’s no problem. You accept things as they are and don’t look to see if they could be better. You don’t question expenses. You stop shopping for the best deals. In other words, you take your foot off the gas and start to coast on your prior success.

It’s easy to let complacency take over your financial life. After all it’s hard to always be vigilant. It’s tiring to track spending and adhere to a budget. It’s a pain to always watch the pennies. It’s human nature to take the path of least resistance and coast where possible. But if you want to become and remain debt free you can’t afford to ever relax. Sure, you can blow a little money once in a while, but when you make a habit of letting things slide it becomes harder to get things back under control. Coast for too long and the next thing you know debt is knocking on your door.

I have a debt free friend who had this problem last year. She’s been debt free for about ten years. In those ten years she and her husband started making more money. They bought a newer house, better cars, and traveled. They could afford it and they were debt free, so there was no reason not to. The problems started when they did this too many times. Then they stopped watching the everyday expenses. They stopped checking insurance rates. They stopped fighting price increases and negotiating better deals. They stopped buying store brands and using coupons. They stopped balancing their books every month. They gradually backed away from frugal things like making their own cleaning supplies, doing repairs themselves, and eating at home. They relaxed their spending and started treating themselves to meals out, convenient cleaning products, and the joy of letting someone else paint the house. While they were making good money, it wasn’t enough to cover this amount of relaxed spending indefinitely. One day my friend was balancing the checkbook and she couldn’t believe it. They were going to have to transfer money out of saving to cover their expenses. Otherwise, it was going to have to go on a credit card. Debt was lurking, just waiting for her!

She tried to rein things in, but they had become so accustomed to the new way of living that it was difficult and uncomfortable to go back to being frugal. It wasn’t fun to paint their own house. They missed eating out. They missed their name brand products. It was a pain to call service providers and check for lower rates. Suddenly everything that had gotten and kept them debt free was a pain and an inconvenience. This couple had allowed themselves to get too comfortable. It was a painful few months as they gradually pulled themselves back form the brink of debt and relearned how to live low to the ground.

Can you splurge and be debt free? Sure. Can you have a comfortable life? Sure, as long as you keep that comfort to a level your income can reasonably support. Can you use name brand products and not buy everything on sale? Sure, as long as you are watching your overall spending a few treats can be worked into the mix. You don’t have to live an anxiety-ridden life where you constantly sweat every single penny. But you cannot allow yourself to let things slide for long.

You can never become too comfortable and relaxed about your finances. Even as you earn more money you have to remember and practice the things that got you debt free. What happens if you lose an income or your income is cut? What happens if someone becomes too sick to work or incurs huge medical bills? Life throws the unexpected at us (and it seems to do that at just the moment you’re thinking you’ve got it made) and you have to be on your toes. You have to keep your frugal skills sharp and your expenses low if you want to stay debt free. Complacency and thinking that you’re home free is the path right back into debt.