I like to save money;  I always have.  Even as a kid I remember saving up all the money I earned for a long, long time.  I still like to save today.  And since we paid off the remainder of our student loans last year, we’ve been saving a lot of money in various accounts.

But why am I saving?

I tend to fall into the trap of just saving money for the sake of saving it (now there’s a lot worse things you could do with your money, frankly).  I feel, however, that you should really have a purpose for the money you save (and I don’t usually do a good job of this).  Remember, money is only useful when it is spent.  Amassing a huge fortune doesn’t really do you or others in this world much good if you hoard it all for yourself and die with a huge bank account balance.

The genesis for this post came as I was preparing my latest monthly net worth update.  I usually look at the overall net worth increase or decrease as a rough gauge of how we are doing financially.  While doing that the other day, Istarted to think, “that’s all well and good, but will I have enough money to buy a car the next time I need to get one?”

Different goals require different strategies

The point that I’m trying to get across is its not enough to just stash a bunch of money in a 401k or IRA or savings account or whatever.  There are many different goals for which you are saving money right now such as your next car, a home, college, vacation, retirement, starting your own business, etc.  And you will (at least you should) use a different strategy to save for each of them.  For instance, saving for next year’s vacation (a short-term goal) probably involves monthly deposits to a CD or savings account while preparing for retirement (assuming it’s a long-term goal for you) probably requires a diversified mix of stocks, mutual funds,  bonds, real estate, etc.

Set specific savings goals and track them

So in my last net worth update post, I mentioned that my net worth increased 4% this past month…but so what?  Would I be able to get new siding on my house if I wanted to?  What about remodeling our master bath?  It is very important to set goals for your savings and monitor your progress toward each goal individually.  This obviously makes it easier to track your progress, but I think it is also highly motivating as well.  Creating a goal and seeing yourself step closer and closer to that goal can be very powerful in helping you to continue down the path.

Think about it, it’s always easier to save for something like an upcoming vacation because it’s a short term and attainable thing.  Longer term and bigger goals require much more effort to stay motivated while pursuing.  Try to make your saving as tangible as possible by creating each as its own specific goal and tracking progress towards it.

It doesn’t matter how you do it, just do it

There are a few methods you could use to accomplish this goal setting and saving.  Personally, I have a bunch of sub-accounts opened at my online savings account of choice (EmigrantDirect).  I have automatic transfers setup each month to drop money from my checking account to each individual savings account.  This works well for me (I love automation) as I accomplish the saving and it’s very easy to see my progress by viewing my account balances whenever I need to.  You could just as easily track your saving using an application like Quicken, a spreadsheet, or good ol’ paper and pencil!

Save what you need and give the rest away

In summary, save for what you need to save for (retirement, college, etc) but don’t just save for the sake of saving (that’s usually called hoarding).  If you already have more than enough for all your short and long term needs (Congrats! Do you have a blog I could read?), then think about giving a bit away to someone who needs it more than you do. How will you know if you already have enough….well, that’s why you need a plan and a purpose (weren’t you reading the post!)

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I realized recently that I’ve been coveting quite a bit lately. I find myself driving through neighborhoods and looking at the different houses and often thinking to myself, I wish I had that house.

To be a bit more specific, the thoughts that go through my head are something like this, "hmmm, that house is smaller than ours, and I bet the people have lived there for a while which means they probably bought it before house prices started to drastically increase…..I bet their mortgage payment is a lot lower than mine."

That’s right, I’ve started coveting other people’s mortgage payment (or at least what I guess to be their payments with the underlying assumption that it is less than mine).

To be fair, I don’t have a ridiculous mortgage payment.  In fact, the entire payment (principal, interest, taxes, & insurance) is less than 26% of our take home pay (18% of our gross).  Those numbers are much smaller than most mortgage lenders were willing to lend three years ago when we bought it.  So, we didn’t go crazy when we bought our house, but I’d still like to be paying less each month for it (but who wants to be paying more for someting!).

A few things to remember when buying a house

You decide how much you can afford, not your agent or mortgage lender

When buying a house and deciding your price range, do not let the mortgage company tell you how much house to buy (unless it’s lower than you were planning, of course).  I feel that people sometimes think, "well, the mortgage company approved us for $X, so I guess that’s what we can afford."  No, No, NO!  Sit down before you start looking at houses and figure out exactly what you say can fit into your budget.  And make it a comfortable number that you can live with for 15 or 20 or 30 years.

Plan for contingencies

Remember that things may change in the future too.  If you’re married, you might eventually have kids and you or your spouse might want to stay at home and raise the kids.  I don’t like to say that this is no longer working (just ask a stay-at-home mom if it is a full-time job) but your income will drop drastically if you do this.  Or maybe you’ve always wanted to start your own business.  Make sure you can still afford the house if you decide to do this or make some other change.

Know your real monthly payment (all the other payments too)

Another thing to remember is that the costs of home ownership do not end with your monthly mortgage payment.  Besides the principal and interest portion of the mortgage payment, you will probably also need to pay into escrow for home owner’s insurance and real estate taxes.  This will most likely add thousands of dollars to your yearly expenses, so plan for them.

Beyond the mortgage payment, there are many other costs as well to keep up your house.  Stuff gets old and breaks, pipes freeze , work needs to be done…this can add up quickly so at least keep it in mind when deciding how much you can afford for your house.

Consider a shorter mortgage term

If possible, opt for a shorter mortgage term.  Of course, each monthly payment will be more (sometimes substantially) but over the long run a shorter mortgage can save you tens or hundreds of thousands of dollars!  Usually, shorter mortgages have lower interest rates as well.  Play around with a mortgage calculator to see the long-term difference this can make.  As a real quick example, consider a $250,000 house at 5.5% interest.  Even at the same interest rate, a 15 year mortgage will save you about $143,000 in interest payments!

I didn’t intend this to be a comprehensive list of all things to consider when purchasing a house…just a reminder of a few things.  In today’s market, mortgage lenders appear to be much more strict on the mortgages for which you can qualify and I think that is a good thing.  At the end of the day, though, you are still the one who must pay the mortgage and the upkeep and other expenses for your house , so go into the process with your eyes open and learn as much as you can before proceeding.

House poor

In today’s uneasy economy (with decreasing house prices, possible job losses, and general uncertainty), buying a house that you can’t afford can certainly show you the meaning of this verse:

The rich rule over the poor, and the borrower is servant to the lender.  Proverbs 22:7 (NIV)

Say you and your spouse bought a nice house a few years back that was a bit too expensive for you to afford (but hey, the value would keep increasing – it always does!).  Now you’re having a child and one of you wants to stay at home and devote yourself to raising that child.  Unfortunately, you can’t afford the house payment on only one salary and you currently have negative equity in the house because of the decrease in real estate prices.  Well, in that lamentable situation, your freedom is drastically limited by that mortgage debt.

House prices have been coming down recently, so you could argue it is a good time to be in the market for buying a house.  If you are, be smart, be realistic, and plan for some contingencies in the future.

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No, it wasn’t the picture of Jaime Pressly that caught my eye but rather the large article title splashed across the top left: "Live debt-free – How women like you are spending less and loving it"  Seriously?  Redbook has an article on debt-free living?!  Spending less and loving it?!  If you check out the Redbook website, some other articles that pop out immediately are "8 Hilarious Sex Life Don’ts" and "10 Things your Man Really Wants in Bed."  So, excuse me if an article on the benefits of spending less than you earn and getting out of debt seems a bit out of place to me.

I haven’t been blogging for very long (about 9 months) but I’ve been talking about finances and the economy and related topics (a lot) for a number of years (just ask my friends – or the few that I still have) and I am taken aback by how many people I now encounter discussing the economy.  And now I see the Redbook article (I didn’t notice if there was a Cosmo magazine on the rack – now that would be something if they had articles about getting out of debt!)

I feel that it is very unfortunate that it takes extreme circumstances like we are going through now to pique everyone’s interest in this important topic.  If as many people discussed debt and savings and the economy a few years ago before all of this badness started to happen, a lot more people would be in position to weather this storm.  In fact, if enough people would have been more realistic about house purchases and investments, etc, etc, the effects of this whole downturn might have been a lot less severe.  Certainly, I am no economist, so take my opinion for what it’s worth.

Another benefit to being in a strong financial situation is that it is possible to position yourself for the long-term right now.  If you don’t have much debt and do have cash to spend, you can purchase stocks that are very cheap compared to their prices of a year or two ago.  If you have the time and money and believe that economy will eventually recover, then you can pick up some serious bargains and wait for the market to recover.  Or consider rental properties – in most places in the US right now housing prices are down quite a bit.  With some money and little to no debt you can purchase property for much less than it was selling for the past few years.  This could lead to some considerable financial benefits years down the road when the housing market recovers.

See, there is more benefit to being fiscally responsible than just being able to sleep easy at night or weather financial storms.  With the proper planning, you can not only survive an economic climate like we are experiencing right now but also thrive in it and set yourself up for long-term prosperity.

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It’s that time of year again here in the USA – tax season!  I finally completed and submitted my tax returns (federal and state) early yesterday morning.  I’ve found TurboTax to be fairly straightforward to use (at least for the Federal) so I’ve done them myself for as long as I’ve done them (I’ve tried TaxCut too but prefer TurboTax).  It has handled my returns sufficiently as they’ve grown in complexity (this year I have Schedules A, B, C, D, H, SE, and Form 2441).  With my side business growing, however, I am definitely considering turning it over to a pro next year….we’ll see.

Side note about using TurboTax: as most of you know, you put all your income in first before adding your deductions.  For us, that leads to TurboTax telling me that we owe this enormous amount of money!  Then I view it as a challenge to whittle it down and I get real excited as it gets closer to $0.  But it’s a bit unnerving to look up and see that you owe the federal government alone almost $10,000! (last year, I think it peaked for us near $15,000!).

Anyway, I’m getting a pretty good chunk of change back from my federal and state governments this year and I find it interesting to see how different people react to the idea of getting a tax refund.

Woohoo – free money from the government

In this corner there is the group of people who consider their tax refund to be a windfall from the government.  It’s found money or an April Bonus.  If you fall into this camp, remember that this is your money !  This is not our generous government giving you some money for the fun of it (that’s called a stimulus check).  You have basically allowed the government to borrow your money (kinda like your deadbeat uncle) for about a year with no interest (Unlike your uncle, however, if you actually ask nicely by filling out the correct forms the government will give it back to you).  But it’s not a gift or a bonus!

A splinter group of this camp is the people who might view a tax refund as forced savings.  If they had received the extra money in each paycheck, it probably would have evaporated into the ether by now.  By overpaying the government, at least they were able to end up with some money come April.

A 0% interest loan

As I mentioned above, the other group considers a tax refund to be a wasted opportunity.  This money has an opportunity cost of the  lost interest they could have earned throughout the year.  This is a mathematically accurate way to look at a tax refund, but as Dave Ramsey likes to say to his listeners (I’m paraphrasing), "Don’t talk to me about math, if you were good at math, you wouldn’t have all this debt to begin with."

If you want to talk about math, the optimal strategy is to underpay as much as possible (just remember there is a penalty if you go too low).  This will leave you with a large tax bill, but the maximum amount of your money will have been working for you throughout the year.  Writing a huge check to the government is easier said then done, however (Personally, I think I’d like to shoot for being pretty close to $0).

If you are good about automating your saving and investing, then a large tax refund is a certainly a less-than-idea situation.  If you can put that money to work for you throughout the year, you’ll end up with more money (in the long-term) than you would have by allowing the government to sit on it and give it back each spring.  If you are not good about controlling your money, however, then this strategy will just lead to more squandered money and you might be better off having the government save it for you.

My thoughts on a large refund this year

I guess I get freaked out about underpaying my taxes so I am reluctant to decrease my withholding.  I did decrease it a bit last year, but with starting a tiny side business, I was wary of decreasing it too much.  And I’ll chicken out and do the same thing this year because I am foreseeing an increase in my extra income.  So, I’m left annoyed that I’m letting the government sit on so much of my money each year.

On the other hand, If I had the money during this particular year, I would have maybe put some into the stock market (and would have much less of it now) or I could have put it into a savings account and earned 2% interest or less.  So, taking into account that possible 2% gain at best (reduced further by taxes), I am trying to tell myself not to feel bad about the refund this year.

Besides, we made it through the year in good shape for our finances, so I won’t be complaining when I get the money deposited into my bank account.  I’ll take the money, put it into my emergency and vacation funds, and start trying to convince myself to decrease my withholding again this year.

What are your thoughts on your income taxes?  Do you like to get a large refund?  Do you like to pay a little bit?

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Rules of thumb for a refinance

I’ve heard various criteria for deciding when it is a good idea to refinance (like if you can save 2% off your rate, for instance, or figuring out if it is better or not based on how much longer you’ll live in your house).  The problem with that, of course, is that a simple formula can not possibly apply accurately to the unique circumstances of each individual.  I think a better course of action is to look at the details of the refinance tailored to your specific situation.  (BTW, do people actually know how long they will live in their house?  I’m sure there are a few stable people out there, but it just seems crazy to me to know that you’ll be living in this house for 10 or 20 years or whatever! – I guess because we’ve lived in 6 different places in the 12 years we’ve been married).

Considerations for refinancing a mortgage

There are a number of reasons why you might want to refinance your mortgage.  In the olden days (they weren’t  really that long ago, but they sure seem like it), your home would make a great ATM for whatever you wanted and couldn’t afford.  I didn’t recommend this in years past so I am certainly not going to recommend it now as house values plummet (Seriously, this is a really bad idea right now).

Some better reasons to refinance

A much better motive for refinancing in the current environment would be to secure a "historically" low rate.  Especially if you have an adjustable rate mortgage, this feels like a good time to lock it in (to be honest, we currently have an ARM though there are 5.5 more years before the rate adjusts for the first time).

Another great reason would be to lower your monthly payment.  If you can get a significantly lower interest rate, then your monthly payment might decrease quite a bit (and that extra cash flow would surely help out these days).  If you are doing this, however, keep in mind how long you’ll be making these payments.  It might sound like a good idea to save a few hundred bucks each month, but if you are trading in a mortgage that you’ve had for a number of years and starting over with another 30 year term, you might end up paying a ton more money over the length of the mortgage).

Some (potentially) bad side effects of refinancing

If you, like me, do not have very much equity in your house, then refinancing might drop you into the realm of the dreaded private mortgage insurance (PMI).  Unfortunately, after the events of the past year or so, I would guess that a lot of us find ourselves with less than 20% equity which is the typical cut-off for PMI.  I currently do not pay PMI but if I were to refinance, I would be required to start paying it.  Depending on the type and amount of your loan, the PMI could run as high as hundreds of dollars a month.  Just to review: PMI is bad.   It’s extra money (on top of the principal and interest) that you have to pay each month that doesn’t reduce the principal…it just disappears into the ether (from your perspective, that is…it certainly ends up someone’s pockets).

Of course, do not forget that refinancing a mortgage is an expensive proposition.  You will need to pay closing costs and lender fees and all that junk to get the refinance done.  In fact, if you end up paying points on the mortgage, the refinance itself could run up near or over $10,000.  I do know of some companies, like CapCenter Mortgage , that advertise no closing costs – so that could potentially save you a lot of money.  Most of the mortgage companies out there, however, will take their share.

To refinance or not to refinance?

In my specific situation, I really don’t know if it makes sense to refinance at the current time.  I do have an ARM that resets in 5.5 years so it would certainly be advantageous to lock in a low rate.  I would also love to refinance into a shorter term loan that could save me more north of $100,000 compared to continuing on my current 30 year path.

On the other hand, I do not currently pay PMI and do not like the idea of starting to pay it.  In my specific situation, I could refinance into a 20 year mortgage and end up paying about the same monthly payment but for 7.5 fewer years…plus a PMI of almost $300 per month!  And don’t forget the cost of the refinance itself – the estimates I’ve gotten from one company range from $5000 to over $9000!

So the question becomes,would I be better off using that cash to pay down my current mortgage a bit and then applying the extra I’d be paying for PMI to accelerate my monthly mortgage payments?  I don’t know…I think I’ll create a spreadsheet and run some numbers for a future post (woohoo – a spreadsheet!) (BTW, Dave Ramsey has a pretty useful mortgage calculator for playing around with these numbers)

What are you thoughts on this?  Have you recently refinanced?  Have you been considering it?  Have I missed anything else that I should be considering?

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By Howard Dayton

BFN Book Reviews

Well, it has been quite a while since I did a book review here at BFN.  It’s a habit that I’d like to get back into – so why not start again today?  I provide a brief overview of the book and the author, touch on the good and bad in the book, and finally, give you my personal recommendation for whether you should borrow the book, buy the book, or neither.

What is this book about?

This book is a pretty small book but it basically tries to cover everything about money.  Specifically, to clarify, it tries to cover most of what the Bible says about finances.  It’s a pretty ambitious goal, especially given the size of the book (it is 175 pages, but it’s skinny).  It actually does cover quite a bit of the ground it mentions on the cover.  In fact, it touches on other subjects as well.  Of course, it can’t go into much detail on each portion.  Overall, however, the author is quite successful in jamming an extraordinary amount of biblical guidance into this skinny little book.

Who is the author?

Howard Dayton is a co-founder of Crown Financial Ministries with Larry Burkett.  The mission of Crown Financial Ministries is:

Equipping people worldwide to learn, apply, and teach God’s financial principles so they may know Christ more intimately, be free to serve Him, and help fund the Great Commission.

Before founding Crown Financial Ministries, he founded Crown Ministries back in 1985.  Therefore, Dayton has been studying Biblical financial principles for quite some time and attempting to teach them to others through the Crown bible studies and events.

What are the best parts of the book?

As I mentioned above, this book undertakes a very ambitious goal.  I feel that it does, for the most part, meet that goal.  This is a great introduction of  God’s teachings on money, possessions, and prosperity.  The book starts off by providing these statistics from the Bible:

• 16 of the 38 parables regard how to handle money and possessions
• There are approximately 500 verses about Faith
• There are approximately 500 verses about Prayer
• There are over 2350 verses about money & possessions

So, the author points out that the proper attitude and treatment of money and possessions is quite important.  Why is there such an emphasis on money and possessions in the Bible, you ask?  Dayton offers these three answers:

1. How we handle money affects our relationship with the Lord (see Luke 16:11 )
2. Possessions compete with the Lord for our focus and attention (see Matt 6:24 )
3. Much of life as we currently live it revolves around the use of money

Dayton then spends the remainder of the book going through the various aspects of finances that touch us on a daily basis.  For each section, he discusses the main points and provides numerous Bible references.  Personally, I feel that the references are the most valuable part of the book.  For the topics covered, this book provides a great starting point for personal Bible study.

The book really does cover a lot of ground, so I can’t possible summarize even a fraction of it in this review.  Allow me to provide you with a glimpse of some of the interesting things I learned while reading it.

Giving

The author touches on the importance of giving and mentions that there are more Bible verses on giving than on any other individual financial topic.  He points out that your attitude about giving is of crucial importance.  He does not provide a set percentage that you should give, however, as he leaves that as a decision between you and God.

Working

Dayton also brings to the reader’s attention that work was designed before the fall of Adam and Eve in the Garden of Eden (Genesis 2:15 ).  So, having to do work is not a result of sin, work just got a lot harder because of it.

Investing

The author advocates being a "steady plodder" when it comes to your investing strategy.  He uses the quote "saving is making provision for tomorrow while debt is presumption upon tomorrow."  He lays out these three important investment goals:

1. Providing for your family
2. Becoming financially free to serve the Lord
3. Operating your business

He also stresses that it is not an acceptable investment goal to save and invest for the sole purpose of becoming very wealthy (1 Tim 6:9-11 ).  His counsel is to determine the maximum amount of money you want to save and when you reach that number, stop saving and redirect the money you were investing to helping other people (kinda like those commercials where the people carry around those big orange numbers).

At the end of the book, there is a small section with some related questions (basically a FAQ), here are two questions and summarized answers that I thought were interesting:

How does the Bible define financial success?

It is achieved by being a faithful steward – not by how much wealth you have accumulated.

Should Christians give to secular charities?

There are many charities competing for our dollars and scripture does not specifically address whether we are only to give to Christian charities.  The author and his wife have decided that, with some certain exceptions, they themselves will only give to Christian charities.  This is mainly because, for the most part, everyone gives to secular charities but only Christians give to Christian charities.

What is not-so-good about the book?

This book covers a tremendous amount of information in a relatively short amount of time (well, I guess it depends on how fast you read).  As you might imagine, there are not enough pages to go into terrible detail on each topic.  As a result, your appetite is whetted but you will need to turn elsewhere if you want an exhaustive treatment on any specific topic.

Also, it is not nearly as practical or "step-by-step" as some other financial books.  For instance, Dayton spends about half a page on his four step process for getting your finances in order.  Dave Ramsey, in contrast, has an entire book on the subject .  I feel that this book is not really trying to be that, though.  The point of this book is to get you thinking about Biblical standards for money.  It is to give you a primer on the main points, to maybe challenge some of the (wrong) ideas you may have about money, and to pique your interest to delve into the subject more.  And in that scope, I think it performs well.

So what is my recommendation?

I think this is a good reference book to own.  It has a ton of information crammed into it.  In fact, it’s going onto BFN’s virtual bookshelf .  I think it is a valuable read to get started on your path to understanding what God teaches about money.  There are copious amounts of Bible references throughout, so it is helpful to open it up to a specific topic to see how the author summarizes the topic and start searching the Bible references provided.

As I mentioned, it’s not a practical step-by-step guide to getting out of debt or whatever.  If that is what you need in your life right now, this is not the book for you.  One option is to find a Crown Financial Ministries Bible study in your area – that’s actually where I received this book (you get it as part of the material for the class)  – as it will provide that step-by-step process you’re looking for.

I would say that if you can do the Bible study or pick up a copy of this book at a good price, then it’s a good book to have and refer back to often.

Want to borrow this book? Search your local library

Want your own copy? Buy this book now at Amazon.com

Check out the other books I’ve chosen for my virtual bookshelf

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Last summer my wife and I took off for an overnight getaway – just the two of us – and ended up in Staunton, VA near Charlottesville.  The draw to this particular place was the American Shakespeare Center’s Blackfriars Theater .  Here’s a blurb from their website:

The American Shakespeare Center is an internationally acclaimed theatre company that performs Shakespeare’s works under their original staging conditions — on a simple stage, without elaborate sets, and with the audience sharing the same light as the actors. Home to the ASC’s resident troupe, the Blackfriars Playhouse has been established as one of America’s premier Shakespeare destinations.

I was just searching for something to do and came across the town and the theater and was intrigued by them.  So we made some reservations and set off to Staunton to see Shakespeare’s Merchant of Venice . I was blown away! The theater experience was amazing and I had so much fun that evening!  If you are ever in the area, I would definitely recommend checking it out.

At the end of the play, I turned to my wife and said, "You know what the takeaway from this evening is?  Never cosign a loan!"

C’mon – what else would you expect from a guy who has a personal finance blog!

As a reminder, here’s a brief summary of The Merchant of Venice from sparknotes.com :

Bassanio is desperately in need of money to court Portia, a wealthy heiress who lives in the city of Belmont.  Bassanio asks Antonio for a loan in order to travel in style to Portia’s estate. Antonio agrees, but is unable to make the loan himself because his own money is all invested in a number of trade ships that are still at sea. Antonio suggests that Bassanio secure the loan from one of the city’s moneylenders and name Antonio as the loan’s guarantor.  Antonio and Bassanio approach Shylock, a Jewish moneylender, for a loan. Shylock nurses a long-standing grudge against Antonio, who has made a habit of berating Shylock and other Jews for their usury, the practice of loaning money at exorbitant rates of interest, and who undermines their business by offering interest-free loans. Although Antonio refuses to apologize for his behavior, Shylock acts agreeably and offers to lend Bassanio three thousand ducats with no interest. Shylock adds, however, that should the loan go unpaid, Shylock will be entitled to a pound of Antonio’s own flesh.

So not only has Antonio cosigned the loan for his friend Bassanio but he has also put his life on the line for it!  Of course, in the end things do not work out as bad as it could have been for Antonio…but if you want to know the entire story and experience it in a supremely entertaining way – go check out the Blackfriars Theater! (though that particular play is not playing there any more, I’m sure any of them would provide a wonderful evening)

The Bible cautions against cosigning loans also

I was amazed to learn that God actually talks about co-signing a loan in the Bible.

My child, if you have put up security for a friend’s debt or agreed to guarantee the debt of a stranger.  If you have trapped yourself by your agreement and are caught by what you said—
follow my advice and save yourself, for you have placed yourself at your friend’s mercy.
Now swallow your pride;  go and beg to have your name erased.  Don’t put it off; do it now!  Don’t rest until you do.  Save yourself like a gazelle escaping from a hunter, like a bird fleeing from a net.  Proverbs 6:1-5 (New Living Translation)

Again, cosigning a loan for someone is not a good thing to do.  The Bible informs that you should "swallow your pride" and "go and beg" to have yourself removed from the loan.  And don’t even wait until tomorrow it urges – "do it now!"  This is serious and urgent advice!  It certainly does not appear to me that cosigning a loan is something you should do.

Why does someone need a cosigner?

Remember, the reason that your friend needs a cosigner on a loan is because the bank (or whoever) is fairly confident that your friend will pay back the loan. If they thought your friend was good for the money, they would not have required a cosigner.  And if you friend does not pay back the loan….guess who will be.  So, my advice is (obviously) do not cosign a loan for someone else.  And if you do consider cosigning a loan, assume that you will be the one who has to pay back the loan.  Make sure that your finances, your family relationships, and you relationship with your friend will survive the probable event that you will be paying for it.  It might be hard to say "no" to someone asking you to cosign for them, but that still might be a lot easier than doing serious damage to your personal finances and serious damage to your relationship with your spouse and/or family!

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The US government is going bailout crazy.  Once they loosed the genie from that particular bottle, everyone and their brother is showing up at the trough hoping to get a bite.  Who knows anymore what the original intent was -  a banking bailout, a wall-street bailout, a bailout of AIG, isn’t it supposed to have something to do with a housing bailout, and now the domestic auto companies and even credit card companies are clamoring for a piece of the pie (I think that sets a new personal best in the category of "most cliches used in a single paragraph!").

Some people actually acted responsibly over the past few years…

All of this, as might well be expected, has a number of people up in arms.  Even in the midst of the housing craziness of the past few years, there were actually some responsible people who bought a house based on how much they could afford to pay for it as opposed to how much loan they could get (no stated income, interest-only, negative amortization anyone?).    These silly people actually eschewed irresponsible purchasing and did not buy a McMansion because they held to some crazy belief that you should be able to afford the things that you purchase.  And what do they get to show for it?  Nothing (maybe even worse than nothing!).

And now you get to pay for the people who did not

The government has swooped in to save the day and take care of those who overspent and overindulged while the responsible pay for it through their taxes.  Some of the responsible could swallow the original argument that it was for "everyone’s good" because eventually all the foreclosures and their resulting effect on the economy would bring down the value of their home as well and possibly cost them their job.  So, they swallowed the bitter pill and moved on.  But now they are talking about bailing out people who ran up too much credit card debt – this is getting ridiculous!

So, what can you do?

Well, nothing really.  Let’s be blunt: you are going to get screwed.  The government is handing out their candy to everyone else except you.  (Isn’t it interesting that if do something stupid and mess up, you have to deal with the consequences.  But if enough people do something stupid at the same time , the government will come in and clean up the mess). The obvious answer is to get involved politically.  Call you representatives.  Tell them how you feel.  Get involved in whatever way you can.

Your only consolation is that at least you did the right thing

I agree that it stinks that the foolish are bailed out by the prudent (and by "prudent" I don’t mean the government).  It is annoying how, in this situation, stupidity is seemingly rewarded at all levels (buying a $650,000 house with a salary of $55,000? Well, the bank wouldn’t let you do it if they weren’t confident you could repay it so you must be able to afford it!  You’re going to give a $650,000 loan to a person who makes only $55,000?  Sounds like a good idea to me – so what are you going to spend your commission on?  You really think buying a whole bunch of irresponsible loans will make all the risk go away?  You fancy finance guys sure are smart!  Better yet – why don’t you borrow a bunch of money so you can buy even more of those loan package deals and greatly multiply your gains!)

And you’ll probably try to do the right thing tomorrow too

Let’s be honest here…you, as a fiscally responsible person, will not learn your lesson.  Tomorrow you will go out and attempt to make more responsible decisions.  You will even try to learn from the borderline decisions you made yesterday.  And after you purchase big items, you will probably pay back the money that your borrowed, right?  For those of you making such "foolish" decisions, remember this:

The wicked borrow and do not repay, but the righteous give generously.  Psalm 37:21 (NIV)

Remember, it doesn’t matter what everyone else is doing.  It doesn’t matter who is not paying for what they bought nor whether they experience any ill effects from it.  The Bible tells us to be responsible in our decision making and then to honor any debts or obligations we undertake.  While we’re on the subject, here’s another thing to remember:

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.  Psalm 21:20 (NIV)

So, what have we learned?

When you were younger, I’m sure your mother told you not to do something just because everyone else was doing it ("If Johnny jumped off a bridge, would you jump off one too?").  So, we need to continue to follow that advice now.  Continue on the path of financial responsibility because you know it is the right thing to do.  Continue to not spend more than you earn and continue to pay off any debts you have incurred (and try to stay away from any new debts).  It might not work out optimally for you in all cases (as current events are showing) but when you go to sleep at night, you can rest comfortably knowing that you are attempting to follow God’s mandates for living responsibly and being a good steward of your resources.

Do not be bitter that your neighbor has all those fancy toys that he put on a credit card and/or a home equity loan and now he might get some help from Uncle Sam to pay them off.  Bitterness will certainly do you more harm than good.  Do not covet what your neighbor has, for along with the mortgage and credit card help will come the trashed credit score – and I’m sure you don’t covet that!

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Stuff costs money

First of all, money is required to purchase a lot of this technology which hurts our finances.  Cell phones typically cost money upfront and on a monthly basis.  There is always the pull to get a newer and fancier model with a more expensive monthly plan as well.  I currently have a basic cell phone, but most phones nowadays enable the user to check new and even stock prices through them.  In fact, Etrade recently released a mobile platform that you can access from a smart phone.

There are also costs associated with getting online to do all the tasks (and more) I listed above.  Of course a computer is required and high-speed internet access (I couldn’t imagine going back to dial-up now).  If you use a laptop, you’ll probably want a wireless router as well.  All of this costs money…and the more money you are using to purchase new technology, the less you get to keep.

This technology provides convenience and knowledge

With that being said, there are still many tangible advantages that comes along with all this technology.  If I am not sure what my checking account balance is at any hour of the day, I can check exactly how much the bank thinks I have in less than a minute (3 minutes if I have to boot-up the computer).  If I forget to mail a check to pay a bill, I can log into my online banking account and have the bill paid more conveniently, in much less time, and with less risk (and less expensively) than filling out a check and dropping it into the mail.  From a purely financial standpoint, a cost savings in envelopes and stamps is realized and that doesn’t even take into account the time savings which is typically much more significant.

Also, current technology provides many tools for managing your finances (yes, I know for some a pencil and calculator work just fine, but maybe others of us need a little more help)  There are numerous net worth tracking tools available online to help you stay on top of  your financial situation.  Also, there are many budgeting software options to facilitate managing and tracking your income and expense.  These are just but a few of the advantages that come along with these technological advances.

Investing is much easier though that is good and bad

It is also much easier to invest money in stocks, mutual funds, and options via online brokerage accounts and in US Bonds at TreasuryDirect.com.  A wonderful byproduct of these advances are that online brokerages have driven the cost of investments down drastically.  Whereas in the past you would have to call up your stock broker and pay who-knows-how-much to request a trade, you can now buy and sell stocks for $5 online (or even free in some cases).  On top of this, the internet provides an amazing wealth of useful information on investing to educate you how to invest.  As such, there is really no excuse for someone not to be able to invest in mutual funds and/or bonds for long-term growth.

On the other hand, the easy availability of this information and the ability to trade can be a negative as well.  Sure, it is easy to invest in stocks, bonds, and mutual funds, but on the downside, it is easy to invest in stocks, bonds, and mutual funds!  Making careless decisions because it is cheap and easy can lead to real difficulties down the road.  I’m sure you’ve seen the ETrade television ads of the baby buying stock – maybe this is becoming a little too easy (and that spit-up one is nasty).  This can lead to irresponsible day trading and the real possibility of losing a lot of money. It seems so easy to try to time the market and make a big score and it only costs $7.99 per trade!  I personally think this might be too enticing.

Furthermore, not only is there a generous amount of information related to finances and investing on the web but there is also a wealth of bad information out there.  There are numerous online investing newsletters available to help you under-perform the market.  I’m sure a simple search would return plenty of websites eager to hawk penny stocks in an attempt to have you make them a bunch of money.  Even from reputable sources like online magazines, too many of the articles are geared towards enticing you to stray from your long-term plan to try to time the market.  Already I’ve seen an article for the best stocks to buy during the Obama presidency.  You can always find articles on "the hottest six stocks for next month" and "where to put your money for 2009."  The point is to be very cautious in the information you rely on.

Overall I feel technology has a beneficial effect on finances – if we use it responsibly

Of course, there are pitfalls, but when you look at the big picture, I think we are much better off due to the advances of banking, investing, and personal finances compared to a few decades ago.  If you can resist the urge to drift from your long term investing plan, there is great convenience and cost savings to be had making use of the internet.  I love my online banking and being able to access my Vanguard account online.  Setting up automatic transfers from my checking account to a high-interest savings account at a different bank and to my Vanguard account makes it very easy to setup and stick to a savings and investing plan.  Technology will always advance, so we might as well figure out what pitfalls to avoid and what advances to embrace to make it easier to realize our goals.

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I was having a conversation with a friend a while back and (as most of my conversations seem to do) it turned towards financial topics.  He asked me if I thought it was really necessary to keep your emergency fund in a liquid account – like a savings account.  He told me that he didn’t see any reason to keep it all in a savings account.  Instead, he liked to keep most of his money in the stock market.  He reasoned that he can withdraw the money from his account at any time and have access to that money within a week.

Conventional wisdom says keep your emergency fund in a safe account

Most of the time you will hear conservative financial personalities (like Dave Ramsey) tell us that an emergency fund should be in a simple savings account.  In fact, Ramsey goes so far as to say that the money should be absolutely safe and absolutely easy to withdraw.  Earning interest, he says, is not the point of that money; it must be there if and when you need it.  But is the conventional wisdom correct in this case?

Personally, I agree with the conventional wisdom

In discussing this with my friend, the scenario I described to him was as follows: Imagine that the economy is not doing so good.  Say that the stock market just decreased by 20%.  And since the economy is not doing well, you lose your job.  So, you’ve just lost your job and now your emergency fund is 20% smaller at the exact moment you need it.  That was my "worst case scenario" as I described it to him.  Unfortunately, reality is even even more grim at this point in time with many jobs being lost due to our struggling economy (have you noticed how most of the current problems with the economy are related to debt in one way or another?) and the US stock markets are down 40% from a year ago.  So, if you’ve lost your job recently and your emergency fund is now only a bit more than one-half of what it was last year, you are hurting!

But what about the opportunity costs?

My friend countered that he could tolerate the 20% loss because he would have made 40% in the market during the good times.  He felt like leaving the money to sit basically idle in a savings account would cost more money in the long term.  This argument is reasonable but, to me, is a bit risky.  Certainly, I do not advocate putting all of your money in a savings account.  I am definitely in favor of investing most of your resources for the long-term.  I just think that the emergency fund portion of it should be safe and readily available.

This argument is just semantics

Remember that the typical range bandied about for an emergency fund is 3 to 6 or even 8 months of your expenses.  That is a huge range!  So I think this argument comes down to how risky you want to be with your money.  If you are saying you want to put most of your emergency fund in the stock market, I would say that money is not really part of your emergency fund.  You are actually preserving a very small emergency fund and taking on a bit more risk than someone with a full 8 or 12 months of expenses in a savings account.

Like a lot of things, it comes down to risk

Maintaining a small liquid emergency fund while putting more of your money in the stock market introduces a higher risk than having a larger emergency fund.  If you are comfortable with that risk, then that is a fine decision for you.  For a single parent, it is probably not prudent to take on a lot of risk if it is possible to avoid it.  I work full-time (and I blog, of course) and my wife works part-time, so having a smaller emergency fund is not as risky for us.

I would just caution you to be honest and realistic about your need and your tolerance for risk.  Warren Buffet has said that if you aren’t comfortable with possibly losing half of your money, then you shouldn’t be invested in the stock market.  This is even more critical for an emergency fund where you could need the money at any time as opposed to a retirement account that is decades away from being tapped.  Markets do go up but remember that they also go down sometimes (and as we saw last week, they can go down frighteningly fast).

Keep it safe

My advice would be to decide how much you are really comfortable having for an emergency fund and keeping that in a safe, ordinary, boring (but FDIC insured) savings account.  Personally, I use two online savings accounts – EmigrantDirect (currently 3%) and ETrade (3.3%).  (Update: Etrade currently has a deal where you can get $25 for a referral sign up – if you’re interested, drop me your email address and I’ll send you an invite).  You won’t make any money on it (although I’ve made a lot more money this year in my savings account than my mutual fund accounts) but that’s not really the point.  Remember, it’s an "emergency" fund, not a "making lots of money" fund.  Putting it in the stock market is not going to make you rich but if it’s not available if you need it, that decision might just make you poor.

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The object of his desire was a simple catalog that we received the day before. In fact, I don’t have any idea what the name of the catalog was. All I know is that the catalog had "stuff" in it that, apparently, four year old boys and six years old girls really like….a lot.

Everything is so shiny and pretty

This all started the day before when my son burst into my office with catalog in hand. He proceeded to sit down on the floor and show me the numerous items that he had circled. He had chosen all manner of stuff (most if it really expensive for a four year old boy) was circled from this thing. When he (finally) got to the end, he said, "ok, so you go ahead and order these for me, ok!" and went to walk out. "Hold on a minute!" I said and tried to explain to him how these catalogs actually work. "You have to pay for this stuff." "Can I use my money?" "You only have 2 dollars." (He had recently splurged on a pirate set and drained his Bank of Mom & Dad account). "Is 2 dollars enough?" "No."

This behavior went on for days

Preceding the story above was the trip to school for my daughter and her friend. My daughter took the catalog with her and she and her friend paged through it the entire way to school asking each other what they liked and wanted. Then my son spent way too much time looking through this thing and talking about it over the next few days. He so wants what is in it that he is now beside himself because Christmas doesn’t come for another 4 months – "I just can’t wait until Christmas!" (yes, we told him he could ask for some of the things for Christmas).

I can not believe the influence this catalog has had on them

I am shocked by this random catalog’s effect on our family. We talk about these items A LOT now. But let me frame this for you – this is really out of ordinary behavior for them. Sure, they ask for stuff when we’re out, but they don’t constantly obsess over "stuff" and continually ask how long until Christmas (at least, not four months out!) In fact, I have overheard both of my older two kids at various times tell each other "you don’t need it, you just want it."

The more you look at catalogs, the more you want to buy

In the book I’m currently reading, Your Money Counts by Howard Dayton (of Crown Financial), it states that "the more you look at catalogs and magazines, the more you spend." This may seem obvious to you or it may seem ridiculous, but I can tell you that I have seen it first hand in my kids this past week. Normally frugal kids (every penny my daughter finds she immediately gives to me and says "put it in my account") were transformed to caring a lot more about buying things merely by the presence of the catalog.

Personally, I really agree with this statement. I am usually fairly good at avoiding coveting, but when I look through a Performance Bike catalog, or walk through Home Depot, or drive through a nice neighborhood, I am all of the sudden not as content as I was a few minutes before. This is just something to keep in mind when you’re planning your budget or trying to cut expenses (or when you’re just bored). If you’re having trouble with your spending, don’t participate in the activities that will trigger more spending: Don’t watch TV, don’t read catalogs, don’t go to the mall. For the most part, I think that "out of sight, out of mind" really works for some spending issues.

Random only-somewhat related thought stuck on the end of the post

Yikes – a thought just popped into my mind: If you take the above statement as true, then how bad is it for a married man to be looking through a Victoria’s Secret catalog? That’s like a double whammy of spending more and entertaining impure thoughts all at the same time.

photo credits: futureshape and raindog808
PS: Wow – Chuck Norris has his own catalog?!?

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The Borrowers

The Borrowers are living the high life.  They have the best of everything – expensive cars, high-end clothing, a huge McMansion, and so on.  They have numerous credit cards and they are not afraid to use them.  When the balances on the cards become too high, its time for a cash-out refinance or home equity loan to clear the credit cards and start all over.  Leased cars, no money down interest-only adjustable rate mortgages, and minimum monthly payments typify the Borrowers as they lead their life of luxury.

The only problem is that they are nowhere near able to afford their lifestyle.  Forget about retirement, they will be working until the day they die.  They are a job loss or a prolonged illness away from losing everything to the bank and their numerous creditors.  In Texas, the term for this is "big hat, no cattle."  (I find it strange that I’ve read a few different personal finance books that use that term)

The Consumers

The Consumers, in contrast to the Borrowers, do not live life restricted only by the limit of their credit cards.  Instead, they live life restricted only by their take home pay.  The question they ask themselves when investigating a major purchase is, "Can we afford the monthly payments?"  Interest rates and the length of the loan do not matter, if they can wedge the affordable payments into their monthly budget, then what’s the big deal?

Again, this is an unsustainable lifestyle in the long-term.  If their take home pay drops for whatever reason, the low monthly payments quickly become huge.  Retirement will not be the dream of a huge RV, traveling the country, and golf courses.  Instead, it will be a very restricted one governed by the check received from the government each month (assuming that is still going on by the time they are no longer able to work).

The Keepers

The authors contrast the first two lifestyles with the Keepers.  The Keepers live according to a net worth mindset as opposed to the credit card mentality or paycheck mentality.  They are concerned more with their net worth than their net income.  The first thing they do with their money each month is to save some.  They avoid debt as much as possible (certainly no high credit card rates as they pay off the balance each month) and participate in  tax-advantaged retirement accounts.

While they make no more money than the Borrowers or the Consumers, they are much more likely to achieve their long-term financial goals (partly because they actually have long-term financial goals other than buying the latest and greatest stuff).  While this lifestyle may not sound as exciting as the first two, it certainly sounds a lot less stressful to me.  Plus, I like the idea of being able to stop working 40+ hours a week to devote my energies to other pursuits at some point before I die.

There are numerous other lifestyles

Of course, these are three very broad generalizations.  In real life, there would be more lifestyles too numerous to detail.  I think that we all know people that fall into these three categories though.  Obviously, the book portrays the Keepers as the best lifestyle (the chapter in which this is found is called "Choose a Sound Financial Lifestyle" after all) and I would guess most of us (at least those reading personal finance blogs) would tend to want to live as the Keepers do.

So which type are you?

I do think my lifestyle matches up most with the Keepers.  I track my net worth monthly (oh, time to do another update in a few days).  We do use credit cards but pay them off each month.  I don’t care anything about monthly payments – when I buy a car I negotiate on the price, not the payment.  I should take more advantage of tax deferred investing options, however, as neither my wife nor I max-out our 401ks.

Some people, however, would certainly say that we are not living life to the fullest.  They would claim that we should spend more of our money to enjoy today instead of worrying so much about saving for tomorrow.  That is probably a valid point to some extent, but for me, I think the stress of not feeling like I was being a good steward of my financial blessings would outweigh any short-term benefit.  Though I probably do lean too far towards the "hoarding" side of things and that is something I’m working on.

Well, what do you think?  Do you even agree that the Keepers are the lifestyle to emulate?  If you do, do you hit the mark?

photo credits: David Boyle in DC and donandcarol

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One other area that bothered me a little about the book…they never addressed WHAT all those millionaire wanted to do with all that money or WHY they tried to accumulate so much wealth… Of course, you could be a millionaire to buy more stuff, but is that really what motivates us? I just wish they had asked each millionaire they interviewed one more question…WHY they wanted to be wealthy?

This raised a number of questions, such as

• Do I think wealth is a worthwhile goal and, if so, why?
• Is it "ok" to become wealthy?
• What does the Bible say about attempting to build wealth?

I think for some people, the reasons for becoming wealthy are pretty straightforward – to have more money than other people, or to buy all the "toys" they’ve always wanted, or they think that having money will solve all their problems and provide happiness. In contrast, I think others are somewhat uneasy about building wealth and are not even sure if it is a valid goal.

I am going to pursue this topic from a heavily Biblical perspective. If you aren’t interested in hearing about the Bible, or you already know you want to become wealthy to buy lots of fun stuff, I’d kindly ask you to skim down to the last few paragraphs when I tie this all together and discuss some good ways to use the wealth you’ve built up.

God has created world and therefore owns everything in it (including money) and has put people in charge of managing all of His creation:

You [God] made him [people] ruler over the works of your hands; you put everything under his feet. Psalm 8:6

The wise person saves and invests carefully

There are numerous verses related to money in the Bible, here are a few that describe some of the basic personal finance topics that I often discuss:

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has. Proverbs 21:20

The plans of the diligent lead to profit as surely as haste leads to poverty. Proverbs 21:5

As I interpret this, the first verse is telling us to save some of what we have – to spend less than we earn. The second verse is telling us to take a carefully planned approach to investing rather than rushing in and acting hastily. To sum these two verses up: save some of your money, skip the get-rich-quick schemes, and diligently invest.

Repeating this process naturally leads to wealth

If you save some money and steadily invest it, over a long period of time, this will most likely lead to wealth. I do think it is not a bad thing for a person, even a Christian, to become wealthy over time. In fact, you have to build up significant wealth to leave an inheritance that lasts long enough for your grandchildren to use it:

A good man leaves an inheritance for his children’s children, but a sinner’s wealth is stored up for the righteous. Proverbs 13:22

The goal should NOT be to become very wealthy

Though I think it is acceptable to become wealthy as a natural consequence of fiscal responsibility, I do NOT believe that your desire should be to become very wealthy for wealth’s sake:

People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. 1 Timothy 6:9-10

Note also here that the "love of money" is the root of all kinds of evil – not money itself . Money can a great tool if wielded responsibly.

Use your wealth a tool

So, over the years you’ve saved and invested and now you’ve accumulated some wealth. There are a number of paths you could pursue with that money to help others. Remember,

In everything I did, I showed you that by this kind of hard work we must help the weak, remembering the words the Lord Jesus himself said: ‘It is more blessed to give than to receive.’ Acts 20:35

First, you could just give more of it away as you earn and save it. You will be able to care for more people along the way and you won’t end up with a great deal of wealth. In this manner, you don’t even have to consider whether or not it is a good thing to become wealthy.

Another option is to give some of it away to help others after you get to a certain point in life. When you get to the place where you know you won’t need all that you have saved up, start helping others with significant gifts. Remember, not everyone can be a missionary or a pastor; there must be others with the financial resources to support all those missionaries and pastors.

A third path is to use your wealth to reduce your daily work commitments. Think of the contributions you could make to society if you didn’t have to spend 8+ hours per day at work. This is the abundant life I touched on in yesterday’s post of the Personal Finance plan enhancements . You could live in a way that is fulfilling to you and useful to others in society. You could take a lower paying job or become a full-time volunteer – you’ve got so much more time and freedom to serve and help others with your life.

Caveat: You don’t have to have lots of money to serve others

Remember, there are two ways to accumulate enough wealth to free you from your current job. You can earn and save a lot of it or just learn to spend very little . If you don’t need much money to live, then you don’t need to accumulate very much of it. This is the point of being frugal that was espoused in Your Money or Your Life.

Your wealth can be a great benefit to others

In summary, accumulating wealth can occur as a natural consequence of responsible saving and investing. And this wealth can be given away to help others or can be used to enable you to give yourself away to help others. If you desire to become wealthy just to be wealthy and buy stuff or whatever, then I’m going to say that is probably not a great and noble pursuit. However, using your wealth as a tool to make this world a better place is quite noble indeed.

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