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How to Easily Overcome Your Bad Financial Choices
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Personal finance is about 95 percent mental and 5 percent physical. Once you've put the right system into place, you just have to block out all the noise and plow ahead.
So as much as you may have been led to believe otherwise, the biggest thing blocking your success is you.
You are your biggest investment — and sometimes you make the wrong decisions. That's simply human nature.
The 7 Psychological Money Traps
Bankrate has a great story about 7 'psycho' money traps and how to beat them, highlighting how we cause ourselves problems.
Their seven mental money traps:
1. The lure of 'free'
2. The 'anchor-price' persuasion
3. The instant-gratification attraction
4. The dollars-to-donuts decoy
5. The separate-buckets blunder
6. The 'sacred-fund' slip-up
7. The lost-money fallacyThese are all great examples of how we naturally make poor financial decisions. You're not the only person who's ever made these mistakes. But you can easily overcome them.
Use Automation to Remove the Human Element
If you want to ensure that you aren't blocking your own financial success, automate the processes.
Want to save for a new car? Set it and forget it.
Leave your paycheck sitting around instead of cashing it? Get direct deposit.
Working hard to time the stock market? Automate your investments and you'll benefit from dollar-cost averaging.
When you take the 5 percent action required, you've set yourself up for financial success. Turn around your bad habits and start to feel comfortable with your decisions.
When Technology Can't Help You
Online banking and the Internet can do a lot to improve your money management shortcomings, but they can't do it all.
No one's going to stop you from buying that videogame you don't really need.
No one's going to stop you from living beyond your means (except maybe the bank, and you don't want to go there).
No one's going to stop you from being lazy and putting off the process to your financial freedom.
You've got to be the one who steps in and makes smart decisions. The tools are all there, but you need to make it happen.
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3 Reasons the Economy Isn't Worrying Me
Every time you turn on the news, you hear it:
CRISIS! RECESSION! DEPRESSION!
You can't seem to go anywhere without someone talking about the flailing economy, high gas prices, and their retirement savings causing them worry.
It's the reality of the situation today — but it doesn't need to be.
While Wall Street's problems have turned into Main Street's (who do you think is funding that $700 billion bailout?), the current economy doesn't need to worry you. It isn't worrying me.
Here are three reasons the economy isn't worrying me.
I'm Investing For the Long Run
My retirement accounts have dropped significantly over the past year, especially from their recent highs. But I'm not worried. That money isn't going to be touched for another 40 years or so.
But what if you're nearing retirement? You don't have as much time for the market to rebound — that's for sure. But if you're close to cashing out, you should have a very conservative asset allocation. If you're 58 and you're 100% in stocks, you're in trouble.
Make it a priority to evaluate and adjust your asset allocation once a year. Don't try and time the market — pick a day (April 15 is an easy one to remember) and do it no matter what's happening.
I Have Money Saved Up
One of the most important things to have in an unsteady economy is a strong cash position. No, that doesn't mean you should sell your stock and buy gold (in fact, don't do that). It means you need to have the leverage to avoid depending on financial institutions and credit cards when everyone is tightening their belts.
Look at a guy like Warren Buffet — when everyone is panicking, he goes and invests $5 billion into Goldman Sachs. Having the cash when no one else does gets you the best deals.
If you've got cash, you don't have to worry about everyone else's financials.
I've Got a Few Income Streams
In a market where the unemployment rate is at 6.1%, it's more important than ever to have a few different sources of income.
While an emergency fund prepares you for the uncertainties of the future, having more than one way to make money softens any potential job hazards. In addition to my day job, I do some consulting work and own a number of Web sites.
You don't put all of your eggs into one basket when you're investing in the stock market, right? It makes as much sense to only depend on one source of income.
(For the entrepreneurial types, this is the perfect time to start a business. You're required to depend on what you have — no small business loans, etc — and are forced to focus on the fundamentals.)
Why isn't the economy worrying you? Let us know in a comment below.
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12 Ways to Save for a Down Payment on a House
We've been saving pretty aggresively to build up a down payment for a house, as hard as it may be.
Thankfully, our automated finances force us to put the money away, so we don't have to wait until the end of the month to see what we have left over to contribute.
MSN Money has a new article up, "How to come up with a down payment," that offers 12 ways to save money for house purchase.
- Set up an automatic saving plan.
- Get a gift from your parents, grandparents, other relatives or friends.
- Sell a car, boat, motorcycle, collectibles or other assets.
- Liquidate stocks, mutual funds, savings bonds or other investments.
- Allocate your income tax refund.
- Take a loan from your 401(k) retirement plan and repay yourself with interest.
- Withdraw funds from your 401(k) plan, subject to taxes and penalties.
- Collect on a loan that you made to someone else.
- Get a bonus from your employer.
- Explore homebuyer programs for public servants if you qualify.
- Apply for a state or local government down-payment program.
- Use a private down-payment assistance program.
While some of these make great sense — an automatic savings plan, setting aside a bonus and allocating your income tax refund — do they really expect someone looking for a downpayment to have a boat to sell?
I'd also warn against taking money from your 401(k); not only will you have to pay taxes or interest on what you take out, but you'll be losing out on any compound interest you'd otherwise be making.
What tips do you have for saving for a down payment?
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Mint Launches Re-Design; Are Conversion Rates Up?
Mint, the online money management and personal finance tracking tool, has launched a re-design of their site.
From their blog:
Starting today, you’ll find a refreshing new look which reflects the new features we’ve added to the site since launch; enhanced budgeting tools, brokerage and investment accounts, mortgage accounts, student loans, and auto loans. We’re also kicking off a series of “how-to” guides designed to simplify your financial life, giving you practical, actionable advice on things like saving for retirement, paying off your student loans, buying a car, creating a personal budget, and more.
According to TechCrunch, the re-design is aimed at increasing conversion rates — and it's doing just that.
That normally isn’t big news, but what caught my attention is that Mint has been bucket testing various redesign formats with some users and is seeing conversion rates increase by 20% over the current site.
That equals “hundreds of thousands” of more registered users over the course of a year given their current growth rates, says CEO Aaron Patzer. When we last checked in with them, they had 350,000 registered users and were tracking $11 billion in assets. Those numbers are likely substantially higher now.
Even though Mint is one of the more well-known online finance-tracking applications, it hasn't always done what I've needed it to do, including loans, investments, and more. The re-design is apparently supposed to help users track these accounts (which have been added in the past months) easier.
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These Are Odd Times for Savers
America has relatively low interest rates at a time when banks and credit intermediaries are curtailing loans and cutting bank lending. Low interest rates do not normally go with less borrowing. Low interest rates, or falling interest rates, should increase borrowing and lending whereas higher interest rates decrease borrowing and lending.
Low interest rates are part of the Federal Reserve Bank's current policy to keep up spending and avoid a recession at the same time home mortgage foreclosures help limit lending since defaulters restrict the banking sector's loanable funds.
As savers, we need borrowers or interest rates would be zero. In general, the fewer the borrowers the lower the interest rate, but we should worry too about the new mix of loans.
Banks are having trouble finding enough business and industry borrowers. In the search for new borrowers they keep turning to more consumer lending and promote the use of consumer spending and consumer debt with heavy advertising.
A recent New York Times article entitled "Given a Shovel, Americans Dig Deeper Into Debt" quotes an advertising executive. "One of the tricks in the credit card business is that people have an inherent guilt with spending." … "What you want is to have people feel good about their purchasing."
The article also reported from Federal Reserve Bank data showing the percentage of disposable income used to pay debt keeps going up year by year reaching 14.5 percent in 2007. That is one piece of data and one sign of the rising consumer debt among many signs including personal bankruptcies.
The growing reliance on consumer debt and consumption spending makes it harder for the Federal Reserve Bank to maintain the economy. Sure, they can lower interest rates, but credit card interest rates continue above 20 percent for millions of consumers.
The lower interest rate policy applies primarily to business loans, but essential consumer spending depends more on people's income rather than interest rates.
America must keep up consumption spending to prevent a recession but threats to continued consumption grow with the numbers who earn stagnate wages, or who are unable to pay credit card debts, or file for bankruptcy, or have reached credit limits. Defaults limited new loans.
Government spending and tax cuts will stimulate consumer spending, but government, especially the federal government, are already running big deficits.
These are tough times for savers with interest rates low and limited ability for the Federal Reserve Bank to stimulate the economy. As savers we are in the awkward position of hoping others will go on buying, buying, buying so that we can save.
As savers, we can't change the rest of the world, but we can avoid get rich schemes, pay our monthly credit card balance and do our best to avoid paying interest and fees even as we earn less from our savings.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Why I Love the End of the Month
The last day of the month is almost always my favorite day. Seriously.
It's the day that I get to calculate how well we did with our finances for that month and, most of the time, see how much we have left over to move around into our various savings accounts.
I know. Totally geeky, right? But it's true. I even started calculating our expenses a couple days early this week, adding up categories I knew we wouldn't add to (like rent and phone payments) just to see where we'd come out.
The best part about adding up the totals is that it automatically includes money saved for our housing fund and for retirement. So when our expenses are totaled, we've already socked away 25% of what we've "spent" — and that doesn't even include my 401(k).
So when we have "extra" money at the end of the month, it's exciting to know that we saved even more money beyond our autopilot contributions. Deciding where to stash that money is the most exciting game we get to play all month (well, besides Bananagrams).
This month, our spending (including the 25% auto-savings) totaled only about 89% of our take-home pay, so we've got a nice 11% difference to use.
It's a great feeling to have. That's why I love the end of the month.
Are you giving yourself something to look forward to for next month?
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How to Prepare For Once-in-a-While Expenses
Everyone has those once-in-a-while expenses that require some planning and preparation in order to pay: car insurance (once or twice a year), yearly dues or memberships, and even taxes.
They're a bit odd because they're not recurring monthly bills, so you're not always thinking about them, but when they hit, they can hit pretty hard.
Here's the easiest way to prepare for those once-in-a-while expenses: automatically set aside money to pay those bills once a month.
By setting up a new online savings account or an ING subaccount, you're establishing a fund solely for these once-in-a-while expenses. Rather than having these bills take a big chunk out of your checking account once or twice a year (which itself requires creatively moving money around), the money is coming from a separate location.
But you still need to feed these accounts — and the easiest way to do it is to make your big once-in-a-while expense a bunch of little monthly expenses.
Got a $1200 car insurance bill you know comes every January 1? Set your new account to automatically transfer $100 from your main checking every month. That way, when the bill lands at your door, you've already paid for it.
You may find it works better to have one account for each once-in-a-while bill or to have a once-in-a-while slush fund, where you transfer the total amount of those bills (divided by 12) each month.
Whichever way you choose, the point is the same: by automatically setting aside the money for these bills, it's like you've already paid for them.
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Why IndyMac's Failure Matters to You (Even if You Don't Have Money There)
All savers should pay attention to what happens with the recent IndyMac Bancorp default.
IndyMac Bancorp is different than other recent defaults because IndyMac is a bank that offers checking accounts, which are money by definition of the Federal Reserve Bank and by common understanding of depositors and everyone else. Bear-Stearns, remember, was not a bank.
It is good that accounts are insured by the Federal Deposit Insurance Corporation up to $100,000, but that is not the only protection for depositors. Failure to guarantee every dollar of every checking account has potentially severe and dangerous consequences for savers and the economy.
Failure to pay on a bank default introduces risk for those who are holding money as deposits. Every business and individual needs somewhere to hold money that is risk free.
If businesses and individuals realize there is risk to holding checking accounts, they will change their financial habits in unpredictable and unmanageable ways that will make it much harder to manage the U.S. economy.
Businesses can hold accounts abroad. Individuals can horde cash and so on.
As a bank offering checking accounts for depositors, IndyMac only had to hold around fifteen cents on each dollar of deposits as reserves to pay on their customer's checks. In the normal course of business that is adequate because those writing checks will about equal those making deposits.
In the normal course of business, their borrowers will be paying monthly principal and interest to further assure they have reserves to pay on their checking account customers.
There in lies the problem. The banks were careless and made many risky and foolish mortgage loans. The loans were made with the other eighty five cents on the dollar of depositors' money; loans made without the knowledge or approval of depositors.
Notice how different that is from someone who buys a stock or a bond by their own decision and using their own money.
Our Federal Reserve Bank and other bank regulators have the full ability and authority to regulate and supervise loan practices and review their financial condition. They failed to do so.
Our Federal Reserve Bank has full ability and authority to protect every dollar of the IndyMac accounts in addition to deposit insurance. They can provide the reserves in case of default. They determine and manage total bank reserves. Now they must do so. Pay close attention here.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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