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Don’t Screw Future-You

Finance, Life

A conversation between me and my temporally displaced self.

Future Me: Excuse me, Jason?

Me: Yes?

FMe: <Slap!>

Me: May I ask what that was for?

FMe: Of course.

Me: What was that for, jerk?

FMe: That was payback for all of the hell you have put me through.

Me: What?!? I’ve never even met you, before.

FMe: Of course you have. I am future-you, and I’m sick of getting screwed by past-me, that is, you.

Me: Huh?

FMe: Listen close. You’re not the sharpest brick in the box and I don’t want to explain this twice.

Me: ???

FMe: A long time ago, when you first met our wife, you were dumb.

Me: I don’t appreciate….

FMe: Shut up. I was dumb then, too. Remember? You…err…we bought a new truck, built an addition on our…err…your…err…whomever’s house, got married in the same year. On top of many other expensive decisions. Do your recall?

Me: Yes, I do. So what?

FMe: If that wasn’t enough, you and your smoking-hot bride are still shopping like you’re rich. You drive a new car. Your kids wear new clothes. You’ve got a house full of new furniture. How did you pay for all of that?

Me: Naturally, I charged it. Zero payments, zero interest for a year! Pretty smart, huh?

FMe: What happens in a year?

Me: I don’t know. I’ve got a full year to figure that out.

FMe: <Slap!> I’ll tell you what happens! Future-you, that’s me, gets screwed! Your raise didn’t come through. You had a baby. The truck broke down. Your wife took maternity leave. A roommate moved out. You took a loss in the stock market. You didn’t plan! You had no savings to cover any of those problems because you were too busy servicing debt to pay for your current life.

Me: How was I to know?

FMe: <Slap!> Life happens! You never know what is coming next. You need to plan and save for what might happen. Otherwise, you’ll just accumulate more debt to be serviced by yours-truly. That is not acceptable.

Me: So? What are you going to do about it?

FMe: <Slap!>

Me: Really? Again?

FMe: <Slap!> I’m struggling to pay your debt. Your son starts college next year, but you’ve left me completely unable to help. Your daughter wants to get married in a couple of years, but the Father-of-the-Bride can’t afford a tux. My wife, your beatiful bride, wants a vacation that I can’t afford. You’ve screwed me, dude.

Me: I’m sorry. What can I do to fix it?

FMe: Buy me dinner, first.

Me: Huh?!?!?

FMe: Stop the excess spending. Spend less than you make, for a change. No credit.

Me: None?

FMe: None. Nada. Zip. Zilch. Only spend what you can afford. Budget. Pay off those nasty bills. Don’t leave me hanging.

Me: So, what you’re saying is that, if I don’t have the money, I shouldn’t buy it?

FMe: Exactly. That’s the path to wealth, freedom, and financial independence. Live in the real world.

Me: Gee, thanks, Future-Me! Now I know.

FMe: And knowing is half the battle.

What would your future-you have to say to you?

First Steps – Ramsey was Wrong

Finance

Baby Steps” width=”180″ height=”240″ />: Image by bonnie-brown via Flickr

Fixing a lifetime of financial mistakes can be an intimidating process. Scratch that. It’s always an intimidating process. Where do you start? You’ve got a pile of bills, a dozen messages from bill collectors and two bi-weekly paystubs. What next?

Traditionally, and according to Dave Ramsey, the first step to fixing your finances is to make a budget, but he and tradition are wrong. The first step is to get everybody involved in your finances on the same page. If your spouse isn’t on board with paying off the debt and spending responsibly, nothing else will work.

Once you have that out of the way, you can move on to the traditional first step, making a budget. I’ve gone over my process to build a personal financial plan in quite a bit of detail, so I’ll just hit the highlights this time.

First, make a list of all of your expenses. Include all of your utilities, debt payments, tax payments and absolutely everything else. You need to know the amount of the payment and the frequency. If a bill is due quarterly, divide it by three and you’ll know what you need to set aside each month. Round up in all cases so you can build an automatic cushion.

Next, make a list of your income sources. For most people, this is far easier than tracking their expenses. Figure out your monthly income. If you get paid weekly, that that amount times 52, then divide by 12 to get your monthly income.

Finally, subtract your expenses from your income. If your total is a positive number then you are golden. If you total is negative, you have been a bad monkey. You need to make some cuts, and they may be painful. If your outgoing money is more than your incoming money, it is not possible to get ahead.

Once you have your income and expenses recorded, and you have made the cuts necessary to have a positive balance at the end of the month, you have a successful budget. Congratulations!

5 Pain-Free Ways to Save Your Money

Finance

Everyone needs an emergency fund. More than that, you will eventually need retirement savings, a new car, a big-screen TV, or maybe just a new kidney. Whatever the reason, one day, have a comfortable savings account will make your life easier.

But, Jason, you say, it’s hard to save money! How can I start saving when I can’t make ends meet? I’ve got rent, 9 kids, and a DVD addiction that won’t quit. My mortgage is underwater, my Mercedes still has 8 years on the loan, and the Shoe-of-the-Month Club only carries Christian Louboutin’s. What can I do?

Well, I’ll reply, since I am Jason and you asked for me by name, you need to find a way to make it happen. I’d never recommend someone give up their diamond-studded kicks, but something’s gotta give. In the meantime, there are some ways you can save money without feeling the sting of delayed gratification.

1. Save your raise. When you get your next raise, pretend you didn’t. Set up an automatic transfer to stick that new 5% straight into a savings account. Don’t give yourself an opportunity to spend it.

2. Find it, hide it. When your Aunt Gertrude dies and leaves your her extensive collection of California Raisins figurines, sell them and save the money. If you find a $20 bill on the ground, throw it right into your savings account. When your 30th lottery ticket of the week gives you a $10 prize, save it! Don’t waste found money on luxuries. Use it to build your future.

3. Let it lapse. Do you have magazine subscriptions you never read? Or a gym membership you haven’t used since last winter? Panty-of-the-Month? Crack dealer who delivers? Stop paying them! Let those wasted services fall to the wayside and put the money to better use. I don’t mean flipping QVC products on eBay, either. Save the money.

4. Jar of 1s. Roughly once a week, I dig through my pockets and my money clip looking for one dollar bills. Any that I find go in a box to be forgotten. I use that box as walking-around money for our annual vacation, but it could easily get repurposed as a temporary holding tank for money I haven’t gotten to the bank, yet.

5. Round it up. Do you balance your checkbook? If you don’t, start. If you do, start doing it wrong. Round up all of your entries to the nearest dollar. $1.10 gets recorded as $2. $25.75 goes in as $26. If you use your checkbook or debit card 100 times a month, that’s going to be close to $75 saved with absolutely no effort. It even makes recording your spending easier.

There you have it, 5 easy ways to save money that won’t cause you a moment’s pain.

Do you have any tricks to help you save money?

A Budget Isn’t Enough

Finance

: Image via Wikipedia

You know exactly how much you make, to the penny. You’ve listed all of your bills in a spreadsheet, including the annual payment for your membership to Save the Combat-Wombat. You know exactly how much is coming in and how much has to go out each month. Your income is more than your expenses, yet somehow, you still have more month than money.

What’s going on?

The short answer is that a budget is not enough.

A budget is not…

…a checkbook register. Do you track everything you spend? Are you busting your budget on $10 lattes or DVDs every few days? Is the take-out you have for lunch every day adding up to 3 times your food budget? Are you sure? If you don’t track what you spend, how do you know what you’ve actually spent? You have to keep track of what you are spending. Luckily there are ways to do this that don’t involve complex calculation, laborious systems or even proper math. The easy options include using cash for all of your discretionary spending(no money, no spendy!), rounding your spending up so you always have more money than you think you do, or even keeping your discretionary money is a separate debit account. That will let you keep your necessary expenses covered. You’ll just have to check your discretionary account’s balance often and always remember that sometimes, things take a few days to hit your bank.

…a debt repayment plan. You may know how much you have available, but if you aren’t exercising the discipline to pay down your debt and avoid using more debt, you not only won’t make progress, but you’ll continue to dig a deeper hole. Without properly managing the money going out, watching the money coming in is pointless.

…an alternative to responsible spending. Your budget may say you have $500 to spare every month, but does that mean you should blow it on smack instead of setting up an emergency fund? I realize most heroin addicts probably aren’t reading this, but dropping $500 at the bar or racetrack is just as wasteful if you don’t have your other finances in order. Take care of your future needs before you spend all of your money on present(and fleeting) pleasures.

A budget is a starting point for keeping your financial life organized and measuring a positive cash flow. By itself, it can’t help you. You need to follow it up with responsible planning and spending.

Money Problems: Day 10 – Debt Insurance

Finance

Today, I am continuing the series, Money Problems: 30 Days to Perfect Finances. The series will consist of 30 things you can do in one setting to perfect your finances. It’s not a system to magically make your debt disappear. Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days. That’s not my schedule. Also, I think that talking about the same thing for 30 days straight will bore both of us. Instead, it will run roughly once a week. To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 10, we’re going to talk about debt insurance.

Debt insurance is insurance you pay for that will pay your lender in the event of your death, dismemberment, disfigurement, disembowelment, or unemployment. Exactly what is covered varies by insurer, type of debt, and what you are willing to pay for.

Private Mortgage Insurance(PMI) is a common form of debt insurance. Generally, if you take out a mortgage with a down payment under 20%, you’ll be expected to pay for PMI. According to the Homeowners Protection Act of 1998, you have the right to request your PMI be cancelled after reducing your loan amount to 78% of the appraised value of the property. That ensures that the lender will be able to recoup their money by seizing the mortgaged property if you should happen to fall under a bus or get hit by a meteorite.

Another common form of debt insurance is for your credit cards. Card companies love it when you buy their insurance. If you buy their life insurance, your card is paid off when you die. Disability insurance pays it if your get hurt. Unemployment insurance…you get the idea.

Here’s the deal: Get life insurance and disability insurance separately. It’s cheaper than getting it through your credit card company and let’s you get enough to actually live on if something tragic happens. Unless, of course, you die. Then it will leave enough for your heirs to live on.

As far as unemployment insurance, build up your emergency fund instead. That’s money that gives you options. Credit card insurance is money flushed down the toilet. Many of these policies cost 1% of your balance. If you’ve got a $5,000 balance, that will mean you are paying $50 per month. By comparison, if you’ve got a 9.9% interest rate, you’ll be paying about $40 per month in interest.

Debt insurance is a bad idea, if you can possibly avoid it. A combination of life insurance, disability insurance, and an emergency fund provide better protection with more flexibility.

Your task for today is to review your credit card statements and mortgage agreement and see if you are paying debt insurance on any of it. If you are, cancel and set up the proper insurance policies to protect yourself and your family.

Money Problems – Day 8: Insurance

Finance

On this, Day 8, we’re going to talk about insurance.

What is insurance? Insurance is, quite simply a bet with your insurance company. You give them money on the assumption that something bad is going to happen to whatever you are insuring. After all, if you pay $10,000 for a life insurance policy and fail to die, the insurance company wins.

A more traditional definition would be something along the line of giving money to your insurance company so they will pay for any bad things that happen to your stuff. How do they make money paying to fix or replace anything that breaks, dies, or spontaneously combusts? Actuary tables. Huh? The insurance company sets a price for to insure—for example—your car. That price is based on the statistical likelihood of you mucking it up, based on your age, your gender, your driving history, and even the type of car you are insuring. What happens if a meteor falls on your car? That would shoot the actuary table to bits, but it doesn’t matter. They spread the risk across all of their customers and—statistically—the price is right.

What kinds of insurance should you get?

Homeowner’s Insurance

For most people, their home is, by far, the largest single purchase they will ever make. If your home is destroyed, by fire, tornado, or angry leprechauns, it’s gone, unless you have it insured. Without insurance, that $100, or 200, or 500 thousand dollars will be lost, and that’s not even counting the contents of your home.

Homeowner’s insurance can be expensive. One way to keep the cost down is to raise your deductible. If you’ve got a $1500 emergency fund, you can afford to have a $1000 deductible. That’s the part of your claim that the insurance company won’t cover. It also means that if you have less than $1000 worth of damage, the insurance company won’t pay anything.

You can get optional riders on your homeowner’s insurance, if you have special circumstances. You can get additional coverage for jewelry, firearms, computer equipment, furs, among other things. You base policy will cover some of this, but if you have a lot of any of that, you should look into the extra coverage.

Auto Insurance

Car insurance is required in most states. That’s because the kind caretakers in our governments, don’t want anyone able to hit you car without being able to pay for the damage they caused. To my mind, I think it would be more effective to just make whacking someone’s car without paying for it a felony. If someone is a careful driver or has the money to self-insure, more power to them.

Auto insurance comes with options like separate glass coverage, collision, total coverage (comprehensive), or just liability. Liability insurance is what you put on cheap, crappy cars. It will only pay for the damage you do to someone else.

Rental

I’ve never had rental insurance. The last time I rented, I could fit everything I owned in the back of a pickup truck with a small trailer, and it could all be replaced for $100. Heck, I had the couch I was conceived on. Err. Ignore that bit.

Almost everything you can get homeowner’s insurance to cover will also cover renter’s insurance, except for the building. It’s not your building, so it’s not your job to replace it.

Life Insurance

If you care about your family, you need life insurance. This is the money that will be used to replace your income if you die. I am insured to about 5 times my annual salary. If that money gets used to pay off the last of the debt, it will be enough to supplement my wife’s income and support my family almost until the kids are in college. You should be sure to have enough to cover any family debt, and bridge the gap between your surviving family’s income and their expenses. At a minimum. Better, you’ll have enough to pay for college and a comfortable living.

Life insurance comes in two varieties: whole and term. Whole life…sucks. It’s expensive and overrated. The sales-weasels pushing it will tell you that it builds value over time, but it’s usually only about 2%. It’s a lousy investment. You’re far better off to get a term life policy and sock the price difference in a mutual fund that’s earning a 5-6% return.

Term life is insurance that is only good for 5, 10, or 20 years, then the policy evaporates. If you live, the money was wasted at the end of the term. The fact that it’s a bad bet makes it far more affordable than whole life. It doesn’t pretend to be an investment; it’s just insurance. Pure and simple

Personal Liability Umbrella

An umbrella policy is lawsuit insurance. If someone trips and hurts themselves in your yard, and decides to sue, this will pay your legal bills. If you get sued for almost anything that was not deliberate(by you!) or business related, this policy can be used to cover the bill.

If you call your insurance company to get an umbrella policy, they will force you to raise the limits on your homeowner’s and auto insurance. Generally, those limits will be raised to $500,000, and the umbrella coverage will be there to pick up any costs beyond the new limit.

A little-known secret about umbrella policies: They set the practical limit of a lawsuit against you. Most ambulance chasers know better than to sue you for 10 million dollars if you only have a policy to cover 1 million. They will never see the other 9 million, so why bother? They’ll go for what they know they can get.

The flipside to that is that you should not talk about your umbrella policy. Having a million dollars in insurance is a sign of “deep pockets”. It’s a sign that it’s worthwhile to sue you. You don’t want to look extra sue-able, so keep it quiet.

Insurance is a great way to protect yourself if something bad happens. Today, you should take a look at your policies and see where you may have gaps in coverage, or where you may be paying too much.