October 16, 2008

The Logjam Effect

Sometimes it seems as though there a one million and one things you want to do. Take up that exercise routine. Finish up that pile of projects at work. Get everything organized in advance for this year's taxes. You look at them all, your list or pile of plans and dreams, and feel... a sense of utter despair and a certainty that you will never get it all done.

You might call it the Logjam Effect. A big pile of great ideas, completely blocking your thoughts and creativity. It happens to all of us every so often. But how do you get out of it? How do you "break through"?

I've found there are two strategies that get me past that point and moving forward again with a fair amount of success:

1) Do anything. Pick one project from the list that is small enough that you can accomplish it fairly quickly. The feeling of getting it done is a bit like the feeling you get when you pay off a bill. You feel a little giddy and you want to do it again. So you jump into another task.

2.Do nothing. If you are really feeling overwhelmed and paralyzed, give yourself a small amount of time to run with that feeling. Huddle up for two hours in bed with the blankets over your head. Indulge in some escapism by watching a movie or some cartoons. Get out of the house and take a walk. Just get completely away from everything for a two-hour period. You'll come back feeling better -- slightly recharged, maybe ready to laugh at yourself a little (especially post-hiding under the covers) and ready to work on and look at everything again.

If you fall, get back up again. If you backslide on your saving plan, or bust a section of your budget, take a deep breath and get back on the horse. If you feel like you're trying to juggle too many things at once (a budget AND a savings plan AND retirement investment research) scale back and try to tackle one thing at a time. Ten small steps can take you the same distance as two big ones.

October 9, 2008

Your Imaginary Money

Last night, I saw a couple on the news tearfully describing the recent loss of a substantial part of their retirement savings in the stock market. They are apparently only a few years from retirement and now have accounts that might support them for three or four years, instead of ten or twenty years. As I watched this tragedy unfold, two thoughts occurred to me:

1) If they are only a few years away from retirement, why is so much of their money in the stock market?
Pretty much every retirement strategy says you should move your investments out of more volatile areas (stocks, mostly) and into more stable areas (bonds, mostly) as you get closer to retirement. What kind of planning were these people doing? Did they have a financial advisor? (If so, they are clearly due a refund of any advisory fees.) Even if your retirement accounts are run through your place of employment, you should still get some say over where your money goes. Start thinking, reading and planning about what kind of lifestyle you want to have in retirement, and when you want to retire, and structure your accounts accordingly.

2) Technically, have they actually lost any money?
Most people forget (or don't realize to begin with) that any money invested in the stock market is only real at two points: when you put it in, and when you take it out. What happens in between those two points is all virtual.
Let me explain. The day the Dow dropped 778 points, I was riding the bus home from work. The bus driver struck up a conversation with me, and he mentioned the Dow drop. I replied, "Yes, they say it erased about $1.2 trillion worth of value."
"Really?" he replied. "Where did that money go?"
I answered him without even thinking about it. 'Well, nowhere," I said. "It wasn't really there to begin with."
(Now, I am looking at this from the perspective of a stockholder, so save your comments about market capitalization and quarterly reports, etc. etc.)
You buy 10 shares of Company X at $10 per share. Three months later, you sell your ten shares at $15 per share. You make a $50 profit. What happened during the three months in between?
It doesn't matter.
Let's say that at the end of month 1, the stock was down to $8 per share. But you didn't sell any.
At the end of month 2, the company announced that it was merging with another company and the stock went up to $18 per share. Again, you decided not to sell any.
Then at the end of month 3, the stock was at $15 and you decided to sell for a profit.
Whether the stock goes up or down in the intervening period, all that really matters is what you put in and what you take out.
You could have sold at $18 per share and made a nicer profit. Or you could have panicked, sold at $8 per share, and lost money. But you didn't.
The value of the stock you buy doesn't matter until it's time to sell it.
Tax-wise, profits and losses are recognized when you sell, not before. So panicking and selling at a loss when your stocks are low only makes those losses real, as opposed to being losses "on paper". Also, you need to consider exactly how much real money you put in to start with. You have only lost money if you end up with less than that amount after you sell.

Just some food for thought...

October 8, 2008

Finding Money Where You Least Expect It

Since I was a little girl, I have been a money finder. I find pennies, other small change, the odd bill, and on a few notable occasions, several bills. I find money on sidewalks, on the floors of shops and restaurants, in hallways, snagged in bushes. Once my mother pulled up in front of the local Girls’ Club to drop me off for an after-school session and three one-dollar bills blew across the street practically under my feet. Another time I found a quarter while digging under an old tree behind our apartment. I found a Mercury dime in beautiful condition lying in the dust beside a parking meter. And I could go on and on. According to family legend, my paternal grandmother had the same knack.

Over the years I’ve become fairly certain, however, that this is not due to some genetic blessing. Actually, it mostly had to do with my being very shy as a child. People made me nervous, so I spent a lot of time looking at my feet. Consequently, I ended up seeing a lot of things that other people missed -- like spare change.

Most people don’t look down or notice their surroundings as they go from place to place. I saw a great 20/20 episode years ago where John Stossel dropped some wallets to see who would return them and who would keep them. (The wallets contained some money and some identification clearly showing an owner.) WalletTest.com tried a larger version of the experiment, dropping 100 wallets. In both cases, what got my attention was not who returned wallets and who didn’t, but the fact that most people did not even notice the wallets on the ground. The SciFi channel show Mind Control With Derren Brown ran a version where the wallet had a circle drawn around it with yellow chalk. Again, the most notable factor of the experiment was that even with a bright yellow circle around it, most people did not notice the wallet. One guy even stood on the wallet while waiting for a streetlight to change, yet didn’t notice it under his foot.

My point: be aware of what is around you. Look around, and look at the ground occasionally. If you see a penny, pick it up. While it’s not certain that you’ll have good luck all day, it is certain that 100 of those pennies make a dollar. I have an empty multivitamin bottle labeled “found money” that I keep by my front door. I’ve already had to empty it once into my savings account this year.

October 7, 2008

The FDIC And Your Money

In these troubled economic times, everyone seems to be worried about their money. Even savings accounts have suffered pullouts by frightened investors. While hiding your money under your mattress or in a jar atop the fridge might seem like the only way to avoid any uncertainty, you should know that your savings accounts (among others) have some special protections in place.

The Federal Deposit Insurance Corporation, or FDIC, is responsible for insuring deposits at banks of all sizes across the country. If you have ever seen the "member FDIC" sign on the front of a bank, or placed on their website, you know that bank's deposits are covered. Specifically, the FDIC insures checking accounts, savings accounts, CDs, trust accounts, and IRAs. If your bank offers a money market deposit account, the FDIC will insure that also. Until recently, all these accounts were insured up to amounts of $100,000 ($250,000 for IRAs). With the passage of last week's bailout, the Emergency Economic Stabilization Act, that limit was raised to $250,000 for all insured account types -- but only until December 31, 2009. Also, that coverage is $250,000 per depositor per bank -- meaning if you want to keep more than $250,000 in one of the above named account types, you can open the same type of account at another bank, deposit your additional money, and have up to $250,000 of coverage at that bank.

So what exactly does the insurance cover? In the event that your bank should fail, the FDIC guarantees that you will get every cent of money back that you've deposited in a covered account. According to their website, since the agency's creation in 1933, no depositor has ever lost any money from an insured deposit. You can look through their website information for more details and answers to specific questions -- it's really easy to use.

What does this mean for you? Whatever happens to your bank, if it is an FDIC member, your money is in a covered account type and within the coverage limits, your cash will be safe. Don't break out that empty mayonnaise jar just yet.

October 6, 2008

Goals For The Next 90 Days

I find that when I set goals, even if I don't reach them, I tend to make more progress than I would have if I hadn't set them. So, in the spirit of getting a little farther, these are my personal goals from now until the end of the year:

1) Increase my emergency fund to $3500.

I currently have about $1400 in my emergency fund, which is not bad considering that a year ago I didn't even have an emergency fund. But I want a better rainy day cushion for my plans. I am currently putting 25% of my paycheck toward my emergency savings. That puts me on track to have just over $3300 in the account by the end of the year, if I don't add anything extra. But I like nice round numbers, and $3500 is about two months' worth of expenses for me, so I intend to kick in a little extra toward that.

2) Pay $50 extra per month on my student loans.

I have around $40,000 in student loans that I am itching to get rid of. I calculated recently that making monthly payments of $800 would pay off the full balance in 5 years. That blew my mind. Five years. Not twenty. Not when I'm old and grey. Not never. Five measly years. So my plan is to start making $800 payments every month beginning in January. (The required payment is $247/month.) I still want to get ahead a bit, though, and I think I can put $50 a month toward that without really missing it.

3) Not use my credit cards at all, except for my friend's upcoming wedding.

If I keep my credit cards in my wallet, I find myself pulling them out and using them without thinking about it. So now I keep them in a box in my closet and only take out one at a time, right when I need to use it, and put it right back. I am attending a friend's wedding in November in New York, so I'm going to put everything (plane ticket, ground transportation, gift, etc.) on my cash rewards card to get back the maximum amount. Aside from that, however, the cards stay in the closet.

How do you set goals for yourself? Are they quarterly, yearly, daily? Or do you set any at all? I'd love to hear from others.

October 5, 2008

Bailing Ourselves Out: A Final Note

One last thought about the bailout:

This grand scheme was engineered by the hardworking people in the U.S. government. While technically they are the employees of the voters and taxpayers, they seem to have a track record of looking out for the people with the most money, or the people who essentially own a piece of them (via campaign contributions, kickbacks, business investments, nepotism, etc.).

You could be one of those people.

No, I'm not suggesting that you go out and offer bribes to your Congressperson. (You'd probably have to stand in line for that and who has time?) I am suggesting that you go out and buy yourself a piece of the Federal Government.

Remember savings bonds? Our moms and dads, or our aunts and uncles, or our grandparents, would buy savings bonds for birthday or Christmas presents. You'd see this funny looking piece of paper that you couldn't play with or even touch. And Mom would lock it away in a drawer somewhere. Then a long time later, she'd take it out, go away with it and come back with money for you. You might get to spend some of it yourself if you were lucky -- more likely Mom would decide what you "needed" and spend it on that.

Well, savings bonds are alive and well and in the company of a host of other products that allow you to invest in the U.S. Government. Check out Treasury Direct, where you can purchase Treasury Bills (aka T-Bills), Bonds, Notes, Treasury Inflation-Protected Securities (aka TIPS) and yes, good old-fashioned savings bonds. Investments range in length from 4 weeks to 30 years, so you can find something to fit with any investment strategy.

Why invest in the U.S. Government if you aren't very fond of its work lately? Well, all this bailout money has to come from somewhere. To cover part of it, the U.S. treasury is planning to issue even more debt in the hope that it will be purchased by foreign countries who want to invest in the U.S.

That's right, foreign countries.

A lot of people get pretty riled up about foreign investment in America. They start talking about outsourcing and downsizing and NAFTA and jobs being taken away from Americans, etc, etc. But remember, the savings rate in this country is something like 0%. So the government is not counting on the citizenry to cover all the costs. I say, why let the Chinese have all the fun? Let's buy up as much Treasury debt as we can lay hands on and then call Henry Paulson in for a little sit-down.

October 4, 2008

Bailing Ourselves Out, Part 3: Credit Cards

The $700 billion bailout bill has passed both the House and Senate and been signed by the President. But will it really help end the current financial crisis? I'm feeling pretty skeptical about that, and I'm hearing a lot of skepticism from others as well. While we wait to see what future this Emergency Economic Stabilization Act and its add-ons will carve out for America, let's all do something to help the overall situation. This post is my third in a series on ways regular, everyday people can address the causes and concerns of the financial crisis in their own lives.

Part 3: Cut down (or cut up) your credit cards.

Credit cards can be a wonderful tool for building your credit score and history, as well as helping you make important purchases with added consumer protections. Unfortunately, they can also be hugely destructive in the wrong hands, burying the cardholder in mountains of debt they can't afford to pay.

Part of the reason the financial world is such a mess right now is that over the last few years, it's become the norm in America to spend like there's no tomorrow. Most people spend what they earn instead of saving it, then spend even more than that by putting purchases on their credit cards (vacations, computers, flatscreen tvs, you name it) without thinking about whether they can really afford those items. Many people, myself included, have gotten credit cards intending to use them "for emergencies only" but ended up using them for frivolous spending.

If you have more than two or three credit cards, consider that you may have too many. If you are carrying balances on any or all of them that you cannot pay back at the end of the month, you definitely need to take a hard look at your situation. Credit cards are not magic -- the money has to be paid back, and the interest charges every month mean you'll only owe the company more.

Make a plan today to cut down on your credit card use. Make a list of your cards with their current balance, interest rate and credit limit. Then look at the list and decide on a plan of attack. Some people, like those who use Dave Ramsey's snowball method, pay off the card with the smallest balance first so they have a quick victory to encourage them to continue. Others go for the card with the highest interest rate, so they'll immediately pay a lower percentage of money for interest fees. You can also consider what the cards do for you. If you have one card with particularly good rewards, you might want to keep that one and get rid of any others. Or if you really want to have one card for emergencies, pick one with a limit high enough to cover any serious problem and get rid of the rest. (Of course, having an emergency fund is the best choice to plan for those situations, so if that's your motivation you should also start putting small amounts of money away every week or every month. That way, you'll eventually have emergency funds in place and won't need your credit card.)

Once you've targeted your first card to eliminate, make your minimum payments on your other cards and put all available cash toward the balance on the card you are eliminating. When you've paid the balance down to zero, cancel the card/close the account.

Closing a credit card account puts a small negative mark on your credit score. If you are planning to buy a house or car, or something else that will require financing in the next six months, don't close your paid-off credit card account. Just cut up the card so you can't use it for any additional purchases. After your mortgage or loan is in place, then you can close the credit card account.

And after you've set up a card payoff plan, cut down on your credit card spending. Don't make a plan to get out of the hole and then dig yourself back in again. Look carefully at the types of purchases you've been making on your card(s) and look for patterns. Do you tend to charge big-ticket items? Save up for them instead by setting aside small amounts on a weekly or monthly basis. Some places will even give discounts if you pay cash for large items.
If your charges tend to be recurring impulse buys at a few particular stores, avoid those stores! Yes, I mean it. Do not pass store, do not spend. And if you have a habit of charging your morning breakfast at Starbucks or expensive dinners out every night, scale back. Make breakfast or dinner at home a few times a week and give your cards (and your cash) a break.

We created this credit-driven, flash-driven, try-to-beat-the-Joneses culture in America. We need to be the ones who dismantle it and replace it with a healthier model that benefits everyone.

October 3, 2008

Bailing Ourselves Out, Part 2: Loans

Today the House of Representatives votes on the $700 billion bailout. Whether or not they approve it today, odds are good that the government (and thus the taxpayers) will be on the hook for that money. This post is my second in a series discussing ways for ordinary Americans to address and repair some of the basic causes of the current financial crisis.

Part 2: Make your loan payments in full and on time.

You may be looking at the above sentence and wondering if you've read it correctly. After all, who doesn't make their loan payments in full and on time? The answer is, quite a few people. Mortgaged houses are being abandoned by owners who simply stop making payments and mail the keys to the bank. Car loans, student loans, and credit cards have all seen an increase in payment delinquencies recently. So, what's going on?

It's true that some adjustable-rate mortgages shifted to new rates with monthly payments so high, the homeowners simply couldn't afford to pay them. But that isn't the whole story. All over this country, people have gotten in over their heads in debt, be it measured in swollen credit card balances, expensive cars, or houses they really couldn't afford. There is some blame to be directed at bad lending practices for this. At the same time, the consumer also has to take some responsibility. We're the ones who sign up for the credit cards, walk into the car dealerships, and agree to make the offer on the house. But now it's time to really look at the mess we've created.

Paying late, missing payments or making partial payments on mortgages, cars, credit cards, consumer and student loans can all badly affect your credit. If you find yourself with more bills than you can afford to pay, look seriously at other spending that you can cut down to cover the gap. Do you really need premium cable? Or a new cell phone every year? How about that morning coffee at Starbucks? Most budgets have some fat that you can cut.

Consolidation might also help you by cutting down on the number of payments you're making. If you are juggling balances on multiple credit cards, keep making your minimum payments and target one particular card for elimination. You could choose the one with the highest interest rate, or smallest credit limit. Using balance transfers, move the balance from that card onto one or more of the others. Then close the target card. (Closing a credit card account does have a negative impact on your credit report, but so does missing scheduled payments.) If you have multiple student loans, you may be able to get a consolidation loan that allows you to combine them all into a single loan with one interest rate and payment. Several lenders have stopped offering these recently, so call yours or check their website to see if they offer consolidations.

Lastly, a word on mortgages. If you can afford to make your mortgage payments, and you are not planning on moving or selling your house within the next 2-5 years, stay put!!! There have been a lot of alarming news items about homeowners being "underwater" on their mortgages -- that is, they currently owe more on the mortgage than they would be able to sell the house for in the current market. It is partly this concern that is causing some people to sell their houses at a loss, or walk away from them. But unless you need to sell your house right now, or fairly soon, what you can get for it in the current market does not matter. In fact, if you're planning to live in your house for another ten or twenty years, the current real estate value means little. In the last year or two, home prices have been heading down. For four or five years previously, they were increasing. The real estate market has ups and downs like any market. And the longer you hold your property, the more likely you are to see the value go up.

We've seen several large banks disappear during this crisis, partly because they could not meet their obligations. Take a good, hard look at your finances and make sure you can meet yours. And before taking on any new loans or credit cards, think long and hard about whether you really need to make that purchase right now. We've developed a bad habit in this country -- mortgaging our futures.

October 2, 2008

Bailing Ourselves Out, Part 1: Savings

While it's virtually guaranteed that the bailout bill will pass in some form or other, there is no guarantee that it will fix, end or even moderate the current economic crisis. Rather than wait for the Treasury Secretary to throw more money at the problem, I came up with a few ideas that can be easily carried out by you, me or anyone that will address some of the basic causes of this mess.

Part 1: Start a Savings Account.

I've seen several finance articles recently that mentioned that the personal savings rate in America is at or near zero percent. I'm sure it's not true that no one in this country is saving any money, but it seems quite likely that we aren't saving enough. And one of the big factors in this credit crisis is liquidity shortages -- simply put, banks haven't had as much cash on hand as they needed.

As I mentioned yesterday, I have a savings account for emergencies. I've actually had the account at ING Direct for some time now, but only in the past year have I made a real effort to keep a balance.

I set an initial goal for myself to have a cushion of $1,000. It took me almost a year to reach that goal, including one or two occasions where I emptied the fund to cover a bill or buy myself something. But I kept at it and now have a $1,400 balance. Do I sleep better at night? Absolutely.

If, like me, it's hard for you to put money aside and keep your hands off it, ING or another internet-based bank might be your best choice because the money isn't immediately available. Transfers take two business days, so you can't impulse buy a designer purse or car stereo. And most let you make deposits in small amounts, so even if you can only do $10 a week, you can start to put something away for a proverbial rainy day. Shop around to see where you can get the best interest rates on savings accounts in your area. Online banks tend to offer better rates than brick-and-mortar banks, but look at all of them. And don't forget local credit unions, as they sometimes offer great options for their members. You can also compare accounts from several banks at websites like Bankrate.com.

I know a few people who keep credit cards "for emergencies." I did the same thing with my first credit card. I promised myself it was only for emergencies. Then it was only for necessities. Pretty soon, I was swiping it to cover dinner at Taco Bell. Credit cards can be very useful, but when it comes to real emergencies they are no substitute for the reassurance of cold hard cash.

Try to start saving something now. Set a goal of having at least the amount of one full paycheck in your emergency account. If you can put aside money today, when credit everywhere is tight and everyone is cutting back, you'll have an advantage, regardless of what Wall Street is doing. And while everyone else is running for the exits and charging stuff on their "emergency" credit cards, you can enjoy knowing that you're on more solid financial ground.

October 1, 2008

Introduction and welcome

My name is Laura, and this is my blog, Dollars and Dreams. I am on a journey toward my own personal vision of financial success, and I hope that sharing my experiences can help others, and maybe allow us all to learn from each other. Before we get down to the nitty-gritty, I want to start with a little background.

Who I am:
I'm a 32-year-old living in Seattle, Washington. I was born and raised in New York state, and lived there for my entire life until just over a year ago. In August of 2007, I packed three bags, got onto a plane, and came to Seattle. I did not have a job lined up. I did not know a soul here. I found a room for rent on Craigslist and came here with my first month's rent and the last two paychecks from my old non-profit job in New York. Now I live in a beautiful city that I absolutely love, and within two months of being here I managed to achieve a personal goal: I got my first real editorial job. In New York, I worked mostly as an administrative professional, and it bored me to tears. But the parts of my jobs that I loved best always had to do with writing and editing. I felt trapped in office work because I'd been doing it for seven years, and when I came here I promised myself I would try something different and go after what I really wanted. If you think that sounds scary, it is.

What I want for myself:
My goals are many. I want to retire early, travel the world, and write about it. I want to work as a disaster relief worker for the American Red Cross, write award-winning bestsellers, and get back into theater, among other dreams. To do all that, I need to do a better job with my finances. Currently I have almost $40,000 in student loan debt. I have a few hundred dollars on my credit cards right now, but I pay them off every month. I have an emergency savings fund (my first!) that I started when I got my job here. While my parents taught me some lessons about saving as a child, I never saved much money as a working adult. The money would come in, and I would spend it right out again. It has been a struggle to change that, but right now my emergency fund is at $1,400, which for me is huge. Financially, I want to be able to afford to finish my college education (yep, I'm one of those poor souls who has student debt and no degree to show for it), travel a few times a year without getting into debt, buy a house in the next few years, be able to help my family financially, and work toward the eventual goal of being fully self-employed as a writer and editor (with a few other interesting side ventures and hobbies).

Why I'm writing this blog: Over the past year, I realized my financial situation couldn't go on the way it was. While not in really dire straits debt-wise, I still wasn't making any provision for my future. I had lots of dreams, but wasn't taking steps toward making any of them possible. While prowling around online, I discovered personal finance blogs. I read, sometimes for hours, following chains of links from one to the next. I realized there were other people out there in situations similar to mine. Like me, they had dreams, and weren't quite sure how to get from point A to point B. But they were trying, and they were inviting others to take that journey with them. I love helping people, and sometimes I can do things for others that I can't do for myself. Maybe reading my story as I find my way along this new path will help you. I'm pretty certain that knowing you are out there listening will help me.