All a loan

Those of us destined for the fields of accountancy and finance experience a peculiar rush when the numbers make the real world make more sense. It's similar to the rush a future programmer gets when his first "Hello World!" program runs (I've been there), or a future used car salesman gets when he first learns how to swindle. I first got this rush in accounting when I learned how to amortize a loan. Before I go any further, I would like to express my feeling that loans can be very useful, and can even do a great deal of good in the world.

Having said that, let me express why seeing the loan broken down into payments was such a break-through for me. I knew very little about the workings of loans and money at the time. I knew that when you have a loan, you pay interest, but I didn't really know how that worked. I have created a Google Spreadsheet (click here) that breaks down a 30 yr. fixed rate loan into monthly payments and yearly payments. What struck me was how much interest and how little principal is paid at the beginning of the loan. In the spreadsheet above, the total interest paid if the payments are monthly and the interest rate is 4.99% (rather low) is over $372,000 for a $400,000 loan.

Loans are often useful and sometimes necessary (college, home mortgage, business, etc.), so understanding how they work is essential. If you experiment with the Google Spreadsheet, you will see that there are three main things that affect how much you will end up paying on your loan: interest rate, length, and amount. There is a direct relationship between each of these and the total amount of interest you will pay, all else equal. As each of these increases, so does the total interest of the loan. I think that is pretty intuitive, so what I would like to focus on is the way lenders try to trick potential borrowers into paying more interest.

"No Down Payment!"
Driving away from a car dealership in a new car without having paid a dime makes some people feel like they've really tricked the salesman. But, the larger the loan, the more interest you will end up paying, so who has really been tricked? As a general rule, the larger the down payment, the better, whether for a house, a car, or a stereo (but, if you have to get a loan for a stereo, you don't need it and you can't afford it).

"Low Introductory Rate!"
Nothing gold can stay. Excessively low interest rates on loans are gold, and they don't stay for long. They are great while they last, but be wary of the terms of your loan, and don't think you'll be paying 0.9% the whole time.

"Only $199 a month!"
Car dealerships especially like to focus on the monthly payment rather than the total price of a car. Paying $199/month for a year is a great deal (for most cars), but paying $199/month for the rest of your life isn't such a good deal. The longer a loan is stretched out over time the lower the monthly payment will be, so a car dealership could potentially sell you any car you want (even a Ferrari) for $199/month if the life of the loan is long enough. But remember, the longer the loan is, the more total interest you will end up paying.

Again, loans can be very useful, but they can also be very tricky. Some other things to be wary of if you're looking for a loan are fees, variable rate loans, points, and early payment penalties. If you don't understand it, you probably don't want it. 



 Photo Credit: DennisSylvesterHurd on flickr.com

Hey, that's my identity

A fence with a hole in it is as good as no fence at all. It's only a matter of time before the goats/sheep/cows get out and the wolves/coyotes/thieves get in. It is very difficult to keep our personal information safe. There are holes in our defense every where we look. Here are a few things everyone can do to quickly shore up some of those holes and make personal information a little more secure.

1-888-5-OPTOUT 
If you have a bank account, a credit card, a car loan, a student loan, etc., you have a credit history. Your credit is being tracked by credit reporting agencies (e.g. Experian, TransUnion, Equifax). These agencies are allowed to sell your credit information, along with your address, to credit card companies and other financial institutions. That's why you get credit card offers in the mail all the time. Dumpster diving sounds funny, but it apparently happens quite a lot. If you throw your credit card offers away, someone else can find them, accept the card in your name, use a different address, and suddenly you have debt you didn't even know about. By calling 1-888-5-OPTOUT or going to www.optoutprescreen.com you can prevent the credit reporting agencies from selling your information, which will reduce the amount of junk mail you get, and reduce your risk of identity theft. For other ways to control where your personal information is and how it's used, go here.

Gramm-Leach-Bliley Act

This act allows your bank to sell your information to whoever they want (like mortgage brokers), as long as they tell you how they will be using your information beforehand. The same act says that if you request that your information not be shared, the bank has to comply. You have to actually go to (or call) your bank and request that your information not be shared under the Gramm-Leach-Bliley Act. This is useful for the same reasons that optout is.

donotcall.gov

There are way too many ways to defraud someone over the phone to get their personal information. A few things to keep in mind when you get an unsolicited phone call are:

• Your bank will not call to get your personal information. They already have it. If your bank loses that information, you should consider going to another bank.
• Be wary of any phone call that you don't initiate. It's hard to be sure who is calling you, but you know who you called.
• Investment opportunities that require you to "act now" or you'll miss the opportunity are almost certainly fraud. Extremely high rates of return are also likely fraud. If they're making so much money, why do they need your money? Couldn't they get a loan at a much lower rate?

donotcall.gov is great because takes you off the lists of legitimate telemarketing companies for 5 years. If you get a call from a telemarketer after that, it is likely a fraud. An added bonus is you don't get phone calls from strangers during dinner.

dban.org

I was in New York last weekend, and I couldn't help myself. I had to visit the Apple Store on 5th Ave. They have done an amazing job with it; it's such a cool atmosphere, you want to buy something just to bring some of that atmosphere with you. I resisted, though. I did, however, test out the iPad, and when I opened the web browser, I saw that whoever was testing out that iPad before me had forgotten to log out of his facebook account after posting about "posting on the iPad in the Apple Store in NYC!" We have tons of our personal information on our computers, and we are too often too careless about it. One thing most of us don't realize about our computers is that deleted files are not deleted. I just took a class on how to find and recover those files, even from hard drives that have been formatted, and it's not really that hard to do. So, be careful with how you handle your personal information on your computer, and if you plan on giving your computer away, go to dban.org, download their boot disk and wipe your hard drive clean. It is military grade wiping software, and won't leave anything readable on your hard drive.

If you have any other suggestions for preventing identity theft, please leave them in the comments.

Photo Credit: geograph.org.uk

The way to a man's wallet is through his belly

It's shocking how much of our income disappears through the black hole on the lower half of our faces. Since eating is one of the basic necessities of life, you shouldn't cut back too much, but there are a few things you can do to spend less on food without sacrificing on what goes into your belly.

Planning

This conversation is far too common:

"What do you want to eat tonight?"

"I don't know. What looks good to you?"

"I don't know, but it's already 7:30 and I'm starving. Let's just go get McDonalds."

or (slightly less [evil/fattening])

"I don't know... let's just have cereal."

It's okay that this happens sometimes, but no one few people actually want McDonalds or cereal for every meal, and the former will end up costing you a lot of money. I suggest getting at least 10 recipes that you really like, planning which days in the next two weeks you will be eating these meals, then making a shopping list to get the ingredients you will need to make these meals. Then in two weeks, repeat - but maybe mix in some new meals (go here for ideas). This way, you eat food you like, you pay less to eat it, and you don't waste time trying to figure out what to eat. Admittedly, however, making the list is a huge pain.

The grocery store is a daunting, frustrating place even if you know exactly what you need. If you try planning your meals on the fly while you are there, you will end up buying things you don't need and won't eat, and not buying things you do need (which may be worse, because you'll have to go back to the store to get them).

Shopping Frequency

Every time you go shopping, you buy things you don't need and won't use before they go bad. Often these things are on your list (my most recent mistake was an avocado planned for last week. We got invited to a family dinner on the day we planned to use it, and the avocado was forgotten). Regardless, every time you go, you buy too much. The more often you go, the more you spend money on stuff you don't need. So, the better you plan your shopping trips, the less often you have to go, and the less money you will waste. We do our grocery shopping about once every two weeks - we plan to eat fresh produce in the first week, and canned and frozen produce in the second week.

Eating out

Eating out is awesome, especially when it's an event. If it happens too often, it loses its magic, and you lose your figure. For those of us who are trying not to spend too much money, it's best to avoid restaurants where a tip is expected, for obvious reasons. On the other hand, if you're going to tip, may as well tip generously - if you've ever worked for tips, you understand.

So, if you can stomach it, make a list of meals and ingredients before your next shopping. Both belly and wallet will be grateful.

The Philosophy of Saving

We live in a world where technology and culture allow, even demand instant gratification. We are a "now" society. If I can't remember who sings the song I just heard, I can google the title or a bit of the lyrics and I will be able to not only see who sings it, but often hear the song, and then buy it within seconds. And, as if credit cards weren't already a problem, soon everyone will be able to accept credit card payments with their smartphones. So, how can we possibly wait for anything in this world where everything is available to us now? Why should we?

Research has shown that the ability to delay gratification can lead to overall higher level success in school, careers, and relationships. This ability is also essential for anyone who hopes to save money, because if I buy every song I hear or search for, I will never make more money than I spend, so I will never save.

If you don't save, you have no cushion in case of an emergency, be it a medical emergency, a natural disaster, or an economic downturn. Those who don't save pass the burden of these emergencies on to their families and the government. Eventually, someone has to pay, and as Greece is showing us, governments can't pay for everything. It is irresponsible to always think that someone else should pay for us or bail us out when things go bad. If we have savings, we will be prepared when crises like that are upon us.

Saving money is more than an act; it's an attitude. You don't buy everything you want just because you want it, not even if you have the money. It's also not good to be a miser, but most people don't have that problem these days.

But even people who have the right attitude can have trouble saving. Money doesn't take care of itself. You have to take interest. If you don't watch yourself, you can very easily spend more money eating out than you do on your rent/mortgage. Saving money is difficult, and take practice. So don't fret if it doesn't come quickly or naturally, but keep at it, because there are few things as rewarding as providing for yourself, and having a safety cushion in case of emergencies. 


Credit: Image from virulentwordofmouse.wordpress.com

How to Handle Credit Cards

As of the end of 2008, US consumers had an average of 5.4 credit cards. At that time, Americans held $972.73 billion of credit card debt. The US population is approximately 304 million, so that's approximately $3200 of credit card debt per American, but many Americans (~23%) aren't even old enough to carry credit cards, some people simply don't want or need credit cards, and some people who have credit cards have no credit card debt at all. We should all be in one of these last two groups, and the goal of this post is to show how that is possible.

Who needs credit cards?

Not everyone needs to own or use a credit card. If you don't feel like you could control your spending with plastic in your pocket, or if past experience has proven that you can't, you may not be ready for a credit card yet. Having said that, I believe that credit cards can be very useful and can be good for most everyone.

Credit cards make tracking your expenses much easier, and free you from having to carry cash around with you. You can always have exact change. Many cards allow you to earn rewards. Wise use of credit cards can help improve your credit score, which is very important if you hope to buy a house at some point.

What card to get

There are way too many options, so here are some things to look for.

Interest Rate

This can be the least and most important aspect to look for. If you use your card correctly, you will never deal with the interest rate. However, you should be aware of the interest rate before you sign up for a credit card. Interest generally range from 12% - 18% APR.

Grace Period

The grace period is the amount of time you have to pay off the balance on your card before you begin to accrue interest. The average grace period is between 20 - 25 days. Generally, more time is better, but if you are paying attention, 20 days should be plenty of time to pay off your balance.

Membership fee

Avoid membership fees. In some cases, membership fees are a good idea, but I want to show how to use a credit card without paying a cent to the credit card companies. Why should you have to pay to spend money?

Get rewards

Even without paying a membership fee, you can get a credit card that will give you rewards like cash back. You usually get more rewards for purchases on things like groceries and gas (3-5%), and a smaller amount for other purchases (1-3%).

Check reviews

Some credit card companies are more ruthless and less friendly than others. Their current and former customers will let you know which type they are.

How to use a credit card

Don't use it as debt

If you have to get a loan to buy a TV, purse, or even candy bar, you are better off without it. Don't ever carry a balance that you can't pay off from your checking account that same day. I would say, don't even get close, but that's just my rule.

Pay off the whole balance every month

On top of the ridiculously high interest rates, if you don't pay off your entire balance, most cards have fees, and will charge you interest for the next month's balance, even if you do pay it off on time. Pay attention and make sure you pay that thing off before the grace period is up.

How to get out of credit card debt

Unfortunately, the only really good way to get out of credit card debt is to pay it off slowly, by consistently spending less than you make, and using much of the excess to pay down your debt. Most of the commercials that claim to help you reduce your debt are scams, so be careful. The best way to pay it off is to have a plan. There are several sites online that offer free debt reduction calculators to help you plan your monthly payments, so you can eliminate your debt. Some of the better tools I've found are at CNN Money's Calculator and powerpay.org. More to come on this subject later.

If you have any other tips about how to use credit cards or reduce credit card debt, please leave them in the comments.


Photo credit: forutnewatch.com

Budgets and Diets

In writing this blog, we hope no one thinks we know everything about money and finances. We mostly just want to be able to help anyone who is struggling in this area. I think it's only appropriate that our first post be about how to save money (this video is worth watching).

Saving money is a lot like dieting, but in reverse. If you burn more calories than you than you eat (or drink), you lose weight. If you make more money than you spend, you save money. That's a simple explanation, but that's really how it works. The problem that most of us have, is that we don't know how much money we are making, and how much money we are spending, until the bank statement comes (or we step on the scale, as the case may be). We don't intend to spend too much. It just seems to happen. In my opinion, the for failure in both budgeting and dieting (though I won't go into dieting here) is a failure to track.

Tracking can be time consuming and difficult. Fortunately for us, though, we have technology. We no longer have to save receipts and balance a checkbook. Here are a few tools and tips that I would suggest using to make tracking easier.

Online Banking. You don't have to wait for a monthly statement in the mail. You can check the status of your finances any time you want. Bank websites are secure, but I wouldn't suggest accessing them in public places like Starbucks, school, or the airport. Also, banking sites don't update in real time - there is generally at least a one day lag. But instead of going to each of your bank and credit card websites separately, wouldn't it be great if you could see all of your financial information in one place?

Mint.com - This is where technology really comes through. Mint.com, a free service, will track your incomes and expenses for you, and help you set up budgets for individual categories, like groceries or restaurants. When you sign up, mint will ask you for usernames and passwords for your online banking and credit card accounts. Mint is secure, and your information is safe with them. Mint will also offer ideas for how to save more money, by offering different car insurance, credit cards, or bank accounts. These may be good offers, but don't be too quick to switch. Other options for free online financial software are wesabe.com and myspendingplan.com.


These tools and ideas aren't enough alone to make sure you save money. But, this is a start. The more aware you are of what is coming in and what is going out, the better financial choices you will make. If you want to track your finances on your own, I suggest GNUcash, which is free, open-source accounting software. If you know how to do basic bookkeeping, this software will be pretty intuitive, and it's free.