Decisions of the Mega Rich

Recently we’ve seen some major news stories about the mega rich finding smart ways to spend their hard earned money.  Last night on 60 minutes it was reported that Bill and Melinda Gates plan to donate over 90% of their income over the course of their lives  (Bill is reported to be worth $54 billion in August 2010 according to Forbes.com http://www.forbes.com/profile/bill-gates) or $48.6 billion!

Mark Zuckerberg (the creator of Facebook) announced on the Oprah show that he has pledged to donate $100 million to the Newark, NJ public school system http://www.time.com/time/nation/article/0,8599,2022407,00.html.

These donations and tales of philanthropy are awe inspiring and set a good example that should be followed by the mega rich.  There’s a certain point where these people have more money than they know what do with and it makes sense that eventually they’ll be giving it away.

However, on the flip side there was a highly publicized news story of the dinner paid for by Dez Bryant of the Cowboys (just under $55,000 or more than the U.S. average annual income) http://sports.espn.go.com/dallas/nfl/news/story?id=5626300.

These stories show the positive and negative sides of rich people and what they do with their money.  Let’s look at some numbers to put this in more perspective.

The average senior citizen (65+ and retired) makes $11,000 a year, these people will rely on 90 to 100% of social security to pay their bills.  Many choose between paying their mortgage and bills and buying medicine for their ailments.  The 10 poorest countries in the world according to Aneki.com have an annual income of $200 – $700 per year Zimbabwe is the poorest with a $200 per year.

That dinner bill that Dez Bryant paid for is 4 times the average senior annual income in the US and more than 275 times the average annual income of a Zimbabwe citizen!  That’s astounding and absurd at the same time.  There’s something severely wrong with this picture and at some time there should be a lesson taught to people that make decisions such as this.  Yes, Dez Bryant will make his money, and yes, he should be fine (even though that bill is 17% of his 2010 salary).

What people decide to do with their money is their own business.  It’s hard earned and the sole owner of the person that made it.  Some make good choices (Gates, Buffet, Zuckerberg etc) and some make terrible choices (Bryant and the Cowboys) but even though there are people making donations such as this, aren’t we still missing something here?

According to Aneki.com the U.S. has 422 billionaires (that’s almost 7 times more than the country in second place, China with 62) yet, the average income for U.S. senior citizens is $11,000 per year.  Wouldn’t it make sense to donate maybe some of this money to a cause such as this?  How about investing money in bright ideas in the U.S.?  Do something about the unemployment rate in the U.S. (9.6% in August 2010) would also be a good alternative.  The foreclosure rate in the U.S. is close to eclipsing 1 million homes in 2010, that’s 1 million families!

Now obviously there are many causes that are worthy of these handouts, and at the same time, who’s to say what will happen to people that receive these handouts?  Will they learn the error of their ways?  Are they worthy of such a bailout if they’ve made terrible choices with their money and it resulted in their foreclosures?

Maybe it’s time for some alternative thinking and some wise decision making.  Create a fund for americans with brilliant ideas and fund those projects! Create jobs, allow free utilities for senior citizens that qualify, create a national scholarship fund… the list is endless!

I’m impressed with decisions by these people to make the world a better place, it sets a great example of the kindness and generosity that is possible for every one.  Every donation is a gracious and kind gesture, and many people around the world are deserving of such a gesture, just don’t forget your own country while you’re handing out that money.

Working together

You’re doing all you can, paying all those bills on time, eating at home when you used to go out, even working a second job (for many) but no matter how hard you try, you’re not making ends meet.  What’s the problem then?  Is it something you’re doing?  Is there more you should be doing?  Are you still spreading yourself too thin?

The problem may be that there is one person doing the work for two people.

Let me be clear that I am in no way suggesting that your husband/wife is sabotaging your efforts.  In fact, they could be doing almost everything you’re asking of them, but they aren’t 100%.

Sacrificing to get out of a financial hole is almost always necessary, but some people don’t want to make the necessary sacrifices to begin with.  Maybe it’s that they’ve grown too accustomed to their lifestyle, or they’re skeptical that it will work.  Whatever the reason is, it’s important that you work together towards the common goal.  If they view sacrificing certain joys in life as something they can’t do, they need to be reminded that they’re working towards the future.  If sacrifices lead to financial flexibility and not worrying about bills in a couple years, then it’s obvious that the future is something they should strive for.

A good way to get out of this funk is to set goals for you and your partner.  Something small and attainable.  Once your first goal is met, add on another and so on.  Pretty soon you should be seeing some benefits from sacrificing and attaining those goals.

Some examples could be:

• Start paying $50 extra dollars per month to that credit card with the high APR
• Switch off days making a meal for each other (something new and inexpensive, use the internet for help with great recipes)
• Save $25 a week towards a vacation of some sort for the both of you to enjoy (this is nice as it’s a long term goal you can also attain and reward yourself for sticking to your goals)
• Cut down on the driving as much as possible (this is an important one to me, keeping the miles off the car helps in many ways (reducing necessary maintenance, oil changes, and gas usage) this will add up over time, even increasing the life of your vehicle

If you’ve met some of these goals and feel like you’re doing a good job, don’t stop!  Take that money you used for that high APR card and apply it to another one and so on (each time using the money you’ve been paying and applying it to another one).

Eventually you’ll both be able to enjoy each other and not worry about making ends meet.  Maybe you’ll be able to get back to that lavish lifestyle you were used to before you started making these goals…

Can losing weight save you money?

Considering the epidemic of obesity in the United States (73 million people according to bankrate.com) it sounds very possible that being a slimmer you can lead to saving money.  Check out this article from bankrate.com that analyzes the relationship between being obese and it having a costly effect on your savings and earning potential.

It makes sense when you think of it.  The obvious impact it would have would be on your medical bills and food allowance.  In fact, many meals today are almost double a normal serving size for a healthy adult, cutting this in half would double the money available to you in your food allowance.  Then there’s the impact obesity has on perception in the tough job market we have today.  I feel that potential employers would be less likely to hire an overweight person versus an equally qualified person that isn’t obese.  There’s been reports on the human perception of obese versus non-obese people and it isn’t too far-fetched.  Also, when faced with promotions or raises, it’s equally likely that an obese person would lose a chance at a promotion or a raise just because of their obesity.

Being healthy can lead to many things and saving money may be one of them, it sure wouldn’t hurt not to be one of those 73 million people.

Do’s and Don’ts – Credit Scores

The 3 digit number that controls your financial life more than any other is that of the credit score.  The score started seeing widespread use in 1990 by Minnesota Based company FICO and has become the most popular scoring model for credit worthiness today.  The FICO score ranges from 300-850 with 723 being the median score in the United States http://en.wikipedia.org/wiki/Credit_score. Between these numbers are 2 numbers we want to be very familiar with: 600 and below and 650 and above.  If your score is 600 or below, you’re considered to be a high risk borrower and your application for credit has a big probability of being denied, having a high interest rate, and a low limit on the credit allowed to you.  650 and above is where the individual is considered a safe risk to lend to and it allows you to take advantage of things such as a lower interest rate, a big line of credit and a higher acceptance rate.

Later on I’ll identify why it’s important to you to have a good score and what to do / not do to achieve that score.  First, however, I’d like to explain to you why I don’t like the scoring system (and no it’s not because I’ve been on the wrong side of a 600 before).  Your credit score is derived from your credit history and there are many factors that may affect it.  The basis for this is simple and it’s a good general way to determine if you’re a risk since it’s typically correct about your behavior with credit.  The major flaw I find with the score is that the system fails to take into consideration the age of the person (and therefore overall maturity and general smarts).  The typical person needs to make mistakes before they are able to learn from them (at least that’s why I keep telling myself).  What good is it to change the way you act if you don’t know the pitfalls of such actions?  Your parents will tell you to be smart with money and you’ll listen… to a degree.  However, most people when they start establishing credit are very young and they haven’t made the mistakes that most people do when it concerns maintaining your credit.

Take two different people, we’ll name them Person A and Person B.  The Credit Report for both A is identical to person B which will result in the same exact score.  The difference between A and B is that Person A is 20 and Person B is 30.  The score SHOULD be reflected to show that (based on typical human behavior) Person B is the safer risk to lend to (when factoring in age, what they’ve learned, and general maturity level).  You may say “but your credit history is taken into account when determining the score and someone with more history would typically be the older person!”

This is true, however there are flaws with this being the “Answer” to age.  A typical credit history can be bad at determining how old someone is for the simple fact that anyone can just decide to not establish credit until much later on, this in turn would lead to an older person having a less established history because of lack of usage.  Also, it’s not nearly as influential on your score as being late on a payment.  Your maturity level and age should play a huge role in determining your score, after all people get smarter about their credit as they see how their behavior has affected it.

The Do’s and Don’ts:

• The single most influential action you can do to affect your score is by missing a payment or being late on said payment.  It’s upsetting that the most influential thing you can do is a negative action that will adversely affect your score.

If you want to build a good score that will save you thousands of dollars in interest later on I highly suggest that you get those minimum payments (at the very least) to your major credit cards ON TIME.  (I’ll cover the pitfalls of just paying the minimum and a plan to get your cards paid off fast in a future post).

• Your debt to income ratio is the second most influential action on a credit score. (This can positively or negatively affect your score).  Simply put, the better your ratio of income to debt, the better your score can be.

This is incredibly important as it is one of the things that you can do to positively affect your score.  There’s 2 kinds of debt to income ratio that’s important to note here (this is geared towards a mortgage but the rule of thumb covers credit cards and student loans as well).  The first ratio relates directly to your housing costs (Rent, Mortgage, Taxes, Insurance, etc) and it’s desired ratio is 28% (Monthly Gross Income times 28% needs to be more than what you pay for the expenses).  The other type is revolving lines of credit (Credit Cards, Student Loans, Car Loans, etc) and the desired ratio here is 36% (Monthly Gross Income times 36% needs to be more than what you pay).  To keep it safe you need to make sure that your ratio doesn’t go more than 10% above either number (remember these will accumulate since it’s a snapshot of your expenses and 100% is living paycheck to paycheck).  Keep this in mind, your debts should be lower or equal to 70% of your income, if it’s any higher you need to do some work to lower that percentage.

• Your available credit to balance ratio is another aspect that can be looked at as negative or positive.

Basically that $200 balance on your $5000 chase account is good for your credit and the $1900 balance on that $2000 limit American Express card is bad for your credit.

Random Thought: Have you ever found it strange that companies consider people with bad credit as high risk candidates when it’s likely these same people will pay a lot in late/over-the-limit fees and interest fees?  You’d figure they’d want that more often than the people that always pay off their balances before the interest is assessed.  Anyway, this leads to my next point (depending on the terms of your cards) never close accounts unless you have multiple (5+) accounts.  Remember, you need to keep a watchful eye on the terms of the account.  Some companies will close the account on you if have a zero balance with no activity for a predetermined period of time.

• Multiple credit inquiries adversely affect your credit score.

I’m not 100% sure why this is viewed as negative, in fact I think it’s only there because “statistically” people that do this have turned out to be credit risks.  It’s further explained that people that apply for multiple accounts when shopping for rates for big purchases (Student Loans, Car Loans, Mortgages etc.) don’t get penalized for a 30 day period as it’s normal to shop for loans with low rates for big purchases such as these.  And finally:

• Compare your credit reports frequently and note any inconsistencies.  Make a claim on reports that aren’t consistent with your credit history.

Experian, TransUnion, and Equifax are the major bureaus to get reports from (you’re allowed to get one report per year for free; go to freecreditreport.com and request yours today).

To sum up, make sure you pay all your bills on time, even if it’s just the minimum payment.  Keep your debt to income ratio and available balance ratio as low as possible,  apply for credit only when it’s absolutely necessary, and always make sure the information on your credit reports are accurate and there are no discrepancies.  One final note, most items on your report are accurate, but there are instances when the report will be wrong for one reason or another.  When you dispute a charge on your report, be sure to include any documentation (copies, not originals) to help support your cause.  Also, most charges fall off your report after 7 years of the original negative charge’s first appearance.  In some instances these charges will still be on the report even though 7 years have passed.  Be sure to dispute or ask that the agency removes any charges like this as well.

Time is opportunity…

I had a nice post lined up for how I was going to relate money to opportunity cost and opportunity cost to the concept of time, but WordPress lost my autosave somehow.

So just take my word for it, ok?

Just kidding, let’s revisit this attempt.  In terms of consultation and productivity I want to explain to the average reader why “Time is money” and “Time is opportunity”.

The easiest way for me to explain my adage “Time is opportunity” is to examine the corollary and see if that’s true.

“Wasted time is Wasted Opportunity”.

Sounds like a true statement right?  Think about it, if you’re late for a deadline, or waited too long to put it in that application means it can mean that you missed your opportunity.  You wasted time therefore you wasted your opportunity.  Let’s look at the concept of opportunity cost to further illustrate the corollary.

According to Investopedia.com opportunity cost is defined as “The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.”  http://www.investopedia.com/terms/o/opportunitycost.asp

I’ll give you a moment to think about that…

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This concept represents a choice between two mutually exclusive options.  Whatever caused you to be late for that deadline was a choice made by you (whether it was to do something else entirely or just procrastination was the result of an active choice by you).  The cost of that opportunity (or choice) was being late for the deadline.  That being true, you could easily make the assumption that every choice has an opportunity cost, right?  And even further you can say that every good choice can equal opportunity while every bad choice can equal wasted time.

Here’s a choice and the opportunity cost of either choice:

You can go to McDonald’s and get a meal for 3 dollars or you can go to a grocery store and buy items to make a meal for the same price.  Each choice has its pros and cons.  Going to McDonald’s would lead to the food being prepared and being almost instantly ready for you to eat.  The cons means that it’s terribly unhealthy for you and is only one meal.  Going to the Grocery Store means that you can get a much healthier meal and there are possibilities that you can make more than one meal with the ingredients you purchased.  The cons would be the time it takes to prepare and the fact that you would have to prepare it yourself.

The smarter choice is obviously going to the grocery store versus McDonald’s the food would be healthier and you would have ingredients to make another meal.

Hopefully that example helps you better understand the concept of opportunity cost.  Now, you may be asking yourself, how does this relate to “Time is Money”?  I’ll gladly explain that in one second but I would like to take a moment and relate opportunity to money.

Dictionary.com defines opportunity as a good position, chance, or prospect, as for advancement or success.  Opportunity is a chance to be successful.  There are many ways someone is defined as being successful, be we want to be successful in our management and acquiring of money.  So if you take advantage of a financial opportunity you’re taking advantage of a chance to be successful.

I’ve done a lot of explaining: “Wasted time is wasted opportunity” and “Opportunity is a chance to be successful” and hopefully we can all agree that being successful can relate to good financial health.  Why am I explaining this though?  What’s the point?

The point is that every day we are presented choices to make, some of them are trivial:

“Do I have oatmeal or cereal today”

While some of them are paramount and can equal a missed opportunity were you to choose wrong:

“Do I play video games today or do I spend a few hours looking for a new job?”

In closing, if you agree that “Time is Money” then you must agree that “Time is Opportunity”.  No one would ever give up on money so do yourself a favor, take that opportunity, stop wasting time, and go out there and be successful, acquire that money!

Why you should be saving

Saving money is a tough endeavor for many people, at a young age your mind begins to understand in order to acquire something you want, you need to expend money.  You’re literally bombarded with commercials on what to spend your money on, where to spend your money, and they make it easy for you by banking on instant gratification.  The plight of the consumer is a great business model for companies selling a product, it’s not good for the consumer spending it.  Granted, there’s times when spending money is absolutely necessary as it allows us to enjoy the splendors of life, but this comes at a price.  Each individual must work to attain this money initially, and the actual cost is not in terms of dollars, but by comparable work necessary to gain that hard earned cash.

Imagine this: according to LaborLawCenter the federal minimum wage is $7.25 an hour  http://www.laborlawcenter.com/t-federal-minimum-wage.aspx At 40 hours a week an individual working at a minimum wage job will take home $290 before taxes and withdrawals are factored in.  Imagine for what second what that $290 does: The average car gas tank is 15 gallons, the average price for a gallon of gas (at the time of this entry) is $2.72 per gallon at a total cost to fill of $40.80.  With an average work day of 8 hours, this individual would have to work a little less than a full day just to fill his/her tank of gas.

Explained above is what I call the “Actual Cost” of any good or service available to be exchanged for money.  What’s listed on a price tag as $600 dollars I see as a full week of work.  What’s listed as $7.00 I see as an average tip from a table.  Using the term Actual Cost is an easy for me to determine if something is worth me spending my hard earned money on.  Can I wait 2 months to buy a brand new phone or do I need to work 3 extra days to get the money necessary?  Of course, depending on what you do for work, picking up 3 extra shifts isn’t possible and it can be exchanged to working over time for others.

Thinking in terms of actual cost can be a bit depressing if you really think about it.  A house that has a price tag of $200,000 can be seen as working four straight years at $50k per year without spending money on anything else (luckily there’s financing, we’ll get to that another time).  As you can see Actual Cost is a great way to differentiate between what is a want or need.

Working for money is great for many people, having a career is a satisfying experience and leads to a well rounded lifestyle.  However, work isn’t always fun, that’s why it’s called work.  Wouldn’t there be a better way to get this hard earned money without sacrificing your time being in some boring office for 8 hours a day?

Enter saving money.  The idea of saving money is to make your money work for you allowing you to do other things free from work.  Some sayings, tips, and facts:

• “The most powerful force in the universe is compound interest” Albert Einstein
• Online banks with little to no overhead have the better interest rates available for simple savings accounts.  I use ING Direct
• Having 3 months worth of expenses saved is common practice for people in the event something unforeseen happens
• Additionally having $500 readily available covers most emergency situations
• If you have 401(k) then you should already be enrolled in it, most companies will match what you contribute and can help you towards retirement – it’s free money people!
• Having a diversified portfolio is the best way to make your money work for you, distribute your money equally across various investments that range from low to high risk
• The higher the risk, the higher the yield: the converse is also true

Any individual that starts a saving goal should start small, for example: “I’d like to have $300 saved up by the end of the month.”  A bad example: “I’d like to have $5,000,000 saved up for when I retire.  That’s not a goal, that’s a death sentence.

If you’re interested in starting early, check this link out for a great strategy that can be followed with any income level: http://www.stretcher.com/stories/00/000612m.cfm

Are you Budget Conscious?

There are many major events in life that define and shape who you are as an adult, many of which you don’t see coming until it’s right on top of you.  Many people that leave the security of their parents house for the real world discover a world of freedom and endless possibilities.  Many of these people also develop the spending habits of Lindsay Lohan without really knowing where the money’s going before it’s too late.

I used to be that way, I left High School and the security of my family guiding me financially to a world of credit cards and fast emptying savings accounts.  The money was leaving fast and not coming in fast enough.  As a result I needed to get a job to support my spending and I realized that the money was going out faster than it was coming, but yet again, I couldn’t really pinpoint where.  Fast forward five years to a spreadsheet filled with nonsensical numbers and columns upon columns.  Yes, the budget, something I discovered way too late after all the damage had been done.

A budget is simply amazing for many reasons, but the most important one is that it allows you to discover what you’re spending simply too much money on and therefore can realistically cut back on to make ends meet.  Many people that begin budgeting realize two different things.  First, you might realize that buying an iced coffee every day was a really bad way to spend your money last year, and the more sobering problem is that you spend more than you make. In fact, according to Way2Hope.org http://www.way2hope.org/tips_on_budgeting.htm this problem is extremely common and in fact, they’ve coined a term for it, they call it outgo.  Yours truly has experienced outgo as well, but it’s very easy to solve these problems of outgo by prioritizing where money goes first and remove what isn’t necessary.  Money for food, shelter (rent, mortgage, utilities, taxes, h.o.a. fees etc.), and transportation (especially if it’s necessary for work) are the most important expenditures and should be paid first and foremost.  Next are any line of revolving consumer credit (as it effects your credit score) and finally the lowest priority are those iced coffees or snacks that you get at the vending machine.

You may see that as you’ve listed your expenses and have accounted for the most important items that you might see that you’re still experiencing outgo and may have to cut even more out (something you may not want at all).  I call this separating the needs from the wants.  Of course, we’d all love to go out and get a beer or two followed by a nice meal and generous tip for your server (tip your server people!) but is it really necessary?  Your cable package includes all the premium movie channels and costs almost as much as your car, is it really necessary to have all those channels and not have the time to watch them anyway?  After you’ve prioritized, removed the needs from the wants and finally compared the numbers you may still see that you’re experiencing outgo.  If you’re experiencing this, there are many ways to fix this and not go under water.  Completely remove cable TV, cut out your data package and/or text package from your cell phone provider, car pool to work, buy generic brands instead of brand names at the grocery store.  You can also follow my personal tips to help cut even more out of your budget.

• Cut coupons like a mad man (or woman) – you’ll see that it’s possible to save a decent amount of money per trip and still get the items you normally buy
• Use direct deposit or deposit cash at an ATM – with direct deposit you get your paycheck virtually as soon as it’s available and many ATMs nowadays allow you to deposit your money faster than you would than with a teller
• Adjust your thermostat accordingly – You may find it very comfortable at 76 compared to the antarctic temperatures you used to keep your home at
• Remove that gym membership that your insist you’ll need – and use but you never seem to go
• Read this blog daily

You may find that you’re in a hole deeper than you need to be and that you still don’t want to make these sacrifices (especially if you’re accustomed to your lavish lifestyle) but you need to remember that these changes are necessary for your financial health, state of mind and overall comfort, and most importantly, your future.

For even more tips on budgeting, browse the web or visit http://www.moneymanagementtips.com/budgeting.htm

Are you Over Extended?

Do you know if you’re qualified to get secure a loan for your dream home?  Being prepared is a difficult task (especially after the mortgage crisis) but it’s not impossible.  First time home buyers should be aware that banks look at many things other than your credit score and how much money you make.  Depending on your credit score (some lenders will allow a higher percentage from borrowers with a great score) many lenders are looking to see that your monthly payments are between 28% to 44% of what you take home, anything more than this (with fair to average credit) is called being overextended.  Since this blog is about ALL THINGS financial, I’ll help you do the calculations necessary to determine if you’re overextended or not.  To determine if you’re overextended you need to total up your monthly payments (Student Loans, Car Loans, Utilities, etc) and divide that by what you take home each month.  The number might surprise you, or it may upset you.  If you’re in the clear then you’re well on your way to acquiring a mortgage for the home of your dreams.  If you’re one of the many that are upset about your status, don’t fret.  If you’re reading this post you’re probably thinking about buying a home and may also be prepared for a situation such as this.  Utilities can be adjusted (change to a basic cable package, be ever mindful of the thermostat and be extremely energy conscious, change your phone plan for something a little more affordable).  Pay more towards your credit card bills and if you’re able to pay one off, pay that amount towards your next account and so on (but don’t close those accounts)!  In closing, the dream of owning a home is reachable for anyone, proper planning and necessary sacrifices can make that dream a reality!

Inception

Tuesday, September 14th… Day One of your guide to healthy financial planning.  Stop by later for tips and recommendations on improving your financial health.