Monthly Archives: August 2010

Featured, Life, Money

Escape Financial Worries with Margin

One great solution that has helped to keep me from obsessing over my finances is the idea of margin. Surprisingly, I learned this at my church and my pastor used a great phrase to sum up the impact of margin. He said something to the extent of, “Relationships are made in the margin.” The idea at the time being all the great things we love about life – friends, hobbies, adventures, solving problems – are only possible when there is room for the unexpected.

What is Margin?

To some people, margin is the extra profit they make on a deal, but for now, think of margin as the extra room we leave ourselves for the unexpected. Here are some examples on how you can create margin financially.

  • Make sure your checking account has more money than you plan to spend each month.
  • Have a budget item called “margin” that goes towards unexpected causes.
  • Create an emergency fund (3-6 months expenses) in case you lose a job or have an emergency expense.
  • Don’t buy a big purchase on credit/debt.

How Does Margin Help?

No matter how you do it, leaving room for unexpected opportunities allows you to experience the best of life. Here are some examples on how financial margin can benefit you.

  • With a well funded checking account you no longer have to worry about over-drafting.
  • A “margin” line item in your budget frees you up for spontaneous activities like treating a friend who is in town or supporting a sudden crisis.
  • An emergency fund is like insurance for down times.
  • Avoiding debt gives you the ability to take on unexpected opportunities to invest in yourself or others.

How have you incorporated margin into your finances? Have you experience any unexpected opportunities that make you wish you had more margin?

(photo evilerin)
Life, Money

Avoid Scamming Auction Sites At All Costs

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As the internet becomes a ubiquitous information tool around the world, we all benefit with the ability to find what we want and the way we want it.

The internet has also created many services that make it easier for companies to easily bring products to market at prices we like, but this low cost of entry and information overload also makes it easy for companies to find ways to scam us.  More specifically, a number of scamming auction sites have popped up with offers too good to be true.

How to Spot a Scam

If you are viewing a financial article or maybe researching your next big purchase, you may see an ad for something amazing like an iPad for $25 or a new car for $500.  Obviously the ad is trying to catch your attention and suck you in, but remember this first rule to not get caught.

Now, if you are just really curious and you want to see how someone could even consider offering the iPad for $25 and you click the ad, you will still see some scam indicators.  At the scam site memphisgazette.com (warning scam site), you will notice a few things that may seem odd.

First, all the buttons at the top are not actual links, the “Breaking News” is a saving trick (not something a little more breaking like a massive hurricane, a world war, or asteroid colliding with Earth), and my personal favorite, all the comments are extremely positive.  Any news site will have more negative comments than positive ones.

  • A fake news site may have fake links, overly positive comments, or a dramatized headline.
  • This does not give a product credibility.

But even if the news site is fake, it may be a legit ad. So you click a link and head over to swipebids.com.  This site along with some other scamming auction sites try real hard to take your money, but again, just resist it.

Why? First, depending on the links you clicked to get there, you may see some interesting reasons why they can offer these products at such a low price. For example, they may say a warehouse is overstocked and they don’t know what to do. Also, you will eventually find out that you have to sign up to really get anywhere and signing up requires a credit card. Since the site is a scam, they hide in fine print that you get charged $150 for signing up. Sure you can try and sue them for your money back, but that will take a lot of time and more money just to get them in trouble. Just say no.

  • There is no way to justify a $25 (or even $125) iPad unless it’s a scam.
  • Don’t give your credit card to a site if you are concerned it’s a scam.
  • Better yet, ask someone you trust if they have used the site or send me a question when you’re not sure.

How Scamming Auction Sites Work

Now, truth be told, the auction sites do have some deals on them and there’s a slight chance you get one. Understanding how they work, though, should convince you it’s not worth the effort.

For these “auctions”, each person buys a set of bids (e.g. 100 bids for $50) and places those bids on the product. Each time a set of 100 bids is placed, the winning price increases by a few cents, and after a set amount of time, the auction ends. So for a $25 iPad, there may have been 2000 bid sets placed.  Each one cost $50 for a total of $100,000. The winner (in a lucky scenario) put down $50 and then pays $25 for the ipad – a great deal, but everyone else lost out big.

What should this remind you of? This is very similar to the lottery or other forms of gambling. In this example, the average person pays $50 for a 1/2000 chance at winning a $500 iPad.  These are odds you should always avoid.

  • Avoid SwipeBids (scam!) and QuiBids (scam!) at all costs!

Have any experiences with scam auction sites? Let others know in the comments or check out these links for actual bad experiences.
http://www.sitejabber.com/reviews/www.swipebids.com
http://bloggerboon.com/2010/06/23/how-swipe-bids-scam-works/

This post is featured in the Carnival of Personal Finance at Budgeting in the Fun Stuff.

(photo from bloggerboon.com)
Life

Hear Malcolm Gladwell and Steve Jobs for Free at TED

It’s always fun and beneficial to go to conferences where subject matter experts let you in on some of their secrets and how to advance in whatever you love doing. The downside of course is that conferences can cost hundreds of dollars and require days of your time. Although they still may be worth it, what if there was a place to go to get this content instantly and free?

Well, believe it or not, one website should be considered the YouTube channel of great speeches. This site, TED.com, offers hundreds of great speeches that cover everything from Money and Happiness to the Axis of Evil Middle East Comedy Tour.

TED.com Ideas Worth Spreading

TED started out as a conference aimed to spread ideas on technology, education, and design in 1984. They still hold annual conferences around the world, but the online site has given access to everyone for free. Additionally, all conference profits are dedicated to a TED Prize with the intention of seeking “goals of global impact.” For more information on TED and the why the group is trying to spread great ideas check out this page.

Best of TED

Advice is easy to find online, but it’s not always what you need to hear. Here are some talks, though, that may change the way you see life and the goals you choose to pursue.

Malcolm Gladwell – On Spaghetti Sauce

  • Gladwell is the well known author of The Tipping Point and Outliers. In this speech, he makes the case that there are no universal absolute desires (e.g. no universally perfect spaghetti sauce), but that each person seeks different things.  Companies and people should embrace this to appropriately find ways to make people happy.

Steve Jobs – How to Live Before You Die

  • Steve Jobs created a following of “Apple Fanboys” with his company’s iPod, iPhone, and Mac computers. This great speech at a Stanford graduation makes the argument that making the most of each opportunity, doing what we love, and counting our days is the best path to success. It also provides viewers an inside look at Steve’s life and what led him to making Apple what it is today.

Daniel Kahneman – The Riddle of Experience vs Memory

  • Kahneman is one of the best known researchers on behavioral economics. In this talk, he analyzes how people’s memories impact their happiness. Let me know what you think about his research on pain in surgery.

Jeff Bezos – Gifts vs Choices

  • Bezos created Amazon.com. In this address to a graduating class at Princeton, Jeff discusses how our lives are more based on the choices we make than on the talents we are born with.

What is your favorite? Have any speeches you want to recommend? Let everyone know in the comments.

Life, Money

Ten Great Time, Money, and Fun Facts

Life is full of interesting facts, tricks, and shortcuts. Here are 10 of the greatest regarding time, money, and fun.

Time

Money

  • If you can get someone to agree to the following pay scheme you will have $10 million in a month. Just ask them for a penny on day 1, two cents on day two, four on day three, and so on.
  • In a Ponzi scheme like Social Security, the rate of return is equal to the growth rate of members. With the US population growth rate and Social Security returns around 1% (before considering SS money is spent for other things), you could make significantly more money investing your Social Security tax in basic mutual funds or savings accounts.
  • Assuming you are the average American, your national debt burden is greater than $43K.
  • Income mobility is better than most people think. Between 1999 and 2007, people moved up from the bottom quintile of income earners 60% of the time and down from the top quintile 40% of the time. This is partly due to the fact that the top quintile pays nearly 80% of our taxes and the bottom quintile pays roughly 1%.

Fun

  • If you have just 23 people in a room, there is more than a 50% chance that two will have the same birthday.  With just 50 people, there is a 97% chance. This is known as the birthday paradox.
  • You can count to 31 using just one hand and to 1023 using two hands. Check it out on YouTube.
  • Despite being the best selling movie of all time, Avatar doesn’t even break the top 10 when revenue is adjusted for the times. Top three are Gone with the Wind, Star Wars, and The Sound of Music.

Know any cool facts or stats that didn’t make my top 10? Let us know in the comments.

(photo sam_churchill)
Featured, Life, Money

How to Reduce the Need for Welfare

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It’s one thing to have a lot of money or know a lot of people, but it’s a much more important thing to know how to use the money you have or to give and receive support from friends. If you have plenty of money but can’t use it to achieve your goals then you have much less wealth than someone with no money but plenty of supporters who are willing to provide everything he needs. I bring this up to show problems I see with some welfare programs and to inspire readers to find better ways to support those around them.

Two Views on Welfare

I recently came across an article discussing two books that see welfare from two completely different viewpoints.

In the book, Nickel and Dimed, the plight of poor workers is discussed and analyzed. The author Barbara Ehrenreich argues that workers at minimum wage jobs are stuck in an endless cycle where they never have enough money or energy (after manual labor jobs all day) to improve their livelihood through better education and networking. She suggests welfare is needed to get people out of this endless cycle.

In Scratch Beginnings, Adam Shepard performs a personal experiment to prove wrong the concept in Nickel and Dimed. He moves to a foreign town and starts off with only $25. After starting with no job or connections and living in a homeless shelter, he is able to amass $2,500, a job and a car in a year. Apparently, anyone can get out of a financial pit if they just have the right mindset.

The Key Concept

Although the books look at welfare from different lenses, both have a good point – People can get stuck in poverty. Where they differ is where a solution can be found.

When Adam Shepard found a way out of poverty he admitted that the life and financial lessons he had learned from accomplished family and friends while growing up made a big difference (the only difference from my perspective). Most people stuck in poverty don’t grow up hearing what they need to know to get out of tough situations. This is evident in stories of poor people just completely wasting handouts designed to help them. Welfare does not help them because they don’t know how to use it. Concepts that wealthy people consider common sense are lost among people spiraling through poverty.

How to Fix Welfare

If the lack of knowledge is why people get stuck in poverty, then educating them is the best way to help them out. Whether you are a hard core capitalist, tired of paying taxes, or just someone who cares, investing in the education of simple life and financial lessons has benefits for everyone. Welfare can be removed (or shrunk) if we simply remove the need for it. Here’s how.

  • Capitalism assumes everyone knows what’s best for them. To help pursue this ideal, companies should invest in programs that teach basic financial principles and skills to people who did not learn them growing up.
  • Individuals, take the time to develop relationships with people lacking the basic understanding of finances and business skills and gradually teach them what you know as trust is developed. This can be done by putting some of your time towards mentoring to and volunteering for those in need.

Great examples of these investments paying off can be found everywhere. One I recommend is the book Same Kind of Different as Me. It’s a true story about a couple who invests in one homeless man with the goal of learning his story as he learns about their own.

What ideas do you have on improving the lives of those in poverty or ceasing the need for welfare? How have you invested in the lives of others so that they can learn from your experiences? It may be idealistic to say welfare will end soon, but educating those without simple financial knowledge can go a long way to helping us all.

(photo credit jimfischer)
Featured, Life, Money

A Personal Credit Score Designed for You

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Many people rely on banks to tell them whether or not they deserve a loan to buy anything from a house to a TV. What people don’t realize is that credit scores are designed to tell banks how much money they can make off of someone.

From a bank’s perspective, credit scores tell the following.

  • Someone with a high credit score is a good guarantee of consistent profits
  • A medium score is potential for high profits through fees but with some risk
  • A low credit score is too risky to consider

We need a system for us to know when to get a loan or when to sign up for that credit card. A true Personal Credit Score will tell us (and not the banks) when a credit decision is best for us. I have started a score sheet below to help everyone out.  Let me know if you think this works for you or if something is missing.

Rules of Credit

My Personal Credit Score tool is based on some well known rules of money.

  • Managing money takes time and time is our most limited currency (not money or gold)
  • When you give money as charity, money loses its grip on your life
  • Spend less than you make (auto saving)
  • Don’t use a loan to buy something that depreciates
  • You earn the right to use a credit card
  • Credit makes it easier for people to spend beyond their means

Personal Credit Quiz

Now choose the answers below that best describes you and keep track of your points. At the end you’ll have a better idea of your true Personal Credit Score and when you should be using credit.

Do you consider managing money a fun hobby?

  • Yes, I love it and could spend hours each week! – 100 points
  • No, but I still spend a few hours monthly doing a budget – 60 points
  • No, I don’t look at bank statements ever or commonly miss bill payments – 0 points

How much money do you donate annually?

  • Greater than 10% of my salary – 100 points
  • Between 5-10% of my salary – 75 points
  • A little bit when something bad happens – 20 points
  • Sorry, I’ve got my own things to buy – 0 points

Do you spend less than you make?

  • Yes! I even have an emergency fund with 3-6 months expenses – 100 points
  • Yes. I have an automatic savings account – 60 points
  • Sometimes – 10 points
  • No, I’m living paycheck to paycheck or off my parents – 0 points

Do you currently have debts (including credit card bills not paid off monthly) ?

  • No, I don’t have any debt – 100 points
  • No, except for a house, student loans, or another appreciating asset – 50 points
  • Yes, I’m sorry but I just had to buy the car or TV via a loan/credit – 0 points

Do you have an income producing job?

  • Yes, it’s a full time job – 100 points
  • Yes, part of the time – 30 points
  • No, but I’m looking or volunteering – 5 points

Results

Great job! Now here are your results.

  • 500 – Congrats you financial all star! Feel free to use a credit card, but I’d be surprised if you really wanted one. Also, take some time to write a guest blog on Obsessed Analytic.
  • 420-499 – You’re financially sound. If you have the time, you’re allowed to get a rewards credit card, but keep looking for ways to improve.
  • 350-419 – Still hanging in there, but be careful you don’t lose track. Don’t get a credit card until your score improves.
  • 280-349 – Things are getting tense so make some time to get things in order. Don’t use any credit cards.
  • 150-279 – You’re good in some areas, but other areas can bring you down. Find the problems and do something. Obviously stay far away from any credit cards or loans.
  • 50-149 – Don’t panic. Just breathe. It could be worse, but time to sound the alarm. Start fixing one thing at a time and find someone to hold you accountable.
  • 0-49 – I’m not sure how you found this blog. Send me an email and I’ll help you get going, but this may take a while.

How’d you do? What is your first step to improving? Let me know, comment below, or tell a friend.

This post is featured on the Festival of Frugality: Time Passes Edition.

(photo credit frugallawstudent)
Life, Money

Save Money on a Car, iPhone, and TiVo with Depreciation

If you are having trouble convincing yourself or someone else that your next big purchase is really worth it, here’s a strategy to add to your arsenal – depreciation.

Sticker prices aren’t the only costs we need to consider when making a purchase.  Depreciation rates (not just business lingo anymore) can make the most expensive purchases look cheap and should be a driving force in your next big buy.  It doesn’t matter if you’re buying a car or DVD, understanding depreciation can save you money while getting more.

When Depreciation Works for You

Depreciation is the opposite of appreciation.  An appreciating asset can be hard to find, but is when the value of what you own increases over time.  Houses before the housing bubble burst appreciated every year and made the only real cost the interest you paid and the opportunities you gave up.  Depreciation is never an investment, but does decrease the real cost of an item from what you see on your receipt.

  • Fast Depreciation – Lots of new items like cars and top of the line electronics often lose half their value in the first year or two you own them.  If you try to resell a new car or TV a couple of years down the road for half the original cost then you effectively paid the other half for your two years of use.
  • Slow Depreciation – Used items have already seen their fast depreciation days pass by and start to depreciate more slowly.  A few years with a used item may only see a 10% drop in value meaning if you resell it then you pay only 10% of the sticker price for a few years of use.

It’s Cheaper Than You Think

If an item that you are looking to buy first seems expensive (or not), consider how it depreciates. Don’t worry, it’s not as complicated as it sounds.  Here are some examples.

  • Cars – We all hear that cars lose thousands of dollars when you drive them off the lot.  The Motley Fool suggests that new cars lose 20% or more of their value the first year followed by 15% in year 2, 13% in year 3, and 12% in year 4.  Since a newer car depreciates faster than a used car, you will end up paying more per year to drive a new car than a used car of the same price.  More importantly, if your loan only pays down principal slower than the car depreciates then you won’t be able to sell your car for enough money to cover the loan.  Avoid this by putting down at least 30-50% of the car value as a down payment.
  • iPhone – Although you may be a cheapskate, don’t think that holding off on an iPhone upgrade is a good deal.  Most iPhones sell for $200 upfront plus a service plan.  Since the service plan is used to subsidize the phone, its value is much more than $200 and after two years of depreciation the iPhone is still worth around $200 (just check out eBay for the two year old iPhone 3G).  What this means for you is that if you don’t upgrade, you are subsidizing a phone for no reason.  Instead, you should sell the old one and upgrade to a better phone for “free”.
  • TiVo – Most people complain that buying a TiVo is too expensive especially when you consider the monthly fees just to get access to the TV guide.  Worse yet, a lifetime TiVo plan costs $400. Of course, that’s unless you consider depreciation.  Some quick research on eBay reveals that while the box may depreciate as fast as any other electronic, the lifetime service depreciates slowly.  Even after three years of owning a TiVo, the lifetime service may only depreciate by $100 making the monthly cost a more realistic $3/month (and much cheaper than cable). Take it a step further by buying a used TiVo with lifetime service and when considering the resell value, the service is practically free.
  • Books & DVDs – With sites like Half.com, eBay, and Amazon, it is very easy for anyone to sell their old books and movies.  Better yet, if you don’t want to wait for all the DVDs on that boxed set television series to come in on Netflix, consider buying the whole thing on Half.com.  After a few days of non-stop 24 or Lost, you can sell them back for approximately the same price you bought them minus some fees.  This slow depreciation makes watching the used DVDs almost free.

Considering how your next purchase may depreciate can dramatically change how you perceive its value.  Taking advantage of the ease of reselling online through eBay, Amazon, or Craigslist makes reselling your used purchases more practical than ever.

This post is featured in the Festival of Frugality at SimplyForties

(photo credit maczter)
Featured, Life, Money

Billionaires Give Wealth Away in the Giving Pledge

Warren Buffett is famous for being one of the richest men in the world, but he is also known as a great example for his pledge to donate 99% of his wealth.  Over the past few years, he has been working with Bill Gates to challenge other wealthy businessmen and celebrities to relinquish the hold they have on their money for the greater good.

The Power of Giving

I have long been an advocate of giving away money and recommend it before any other financial decision including saving for retirement and establishing emergency funds.  Similar to spending money, giving supports those around us and is an investment in our community when done wisely.  Even for yourself, giving is beneficial as it allows you to prioritize more important things in life ahead of money by making you realize money is just an optional tool that we can use towards our goals.  If you really think about it, money has no direct value to you unless you are out of wood to burn and need paper to start a fire.

Joining the Giving Pledge

I remember as a kid wondering why it was so hard for rich people to give money away.  When I had $10 in a shoebox, I didn’t mind giving $1 away to help others so why couldn’t someone with $10 billion give a way $1 billion.  As I grew older and my wealth increased from $10 to $100 to $1000s, I began to realize how a modest percentage like 10% became hard to give away.  As the numbers get bigger, it’s hard for you to stomach the idea of giving that much away.  This is what makes Buffett’s ambition to get the wealthiest people in the world to give away at least 50% of their wealth so amazing.

Lately, Warren Buffett’s example and hard work has paid off (literally) as forty of the richest people in the world have joined his pledge.  The Giving Pledge list includes well known names like Ted Turner, George Lucas, and T. Boone Pickens among lesser known billionaires like Alfred E. Mann.  On NPR this week, Mann acknowledged that giving his money away is better than leaving it to his family since an inheritance often ruins people.  He also said that he hopes to give it all away before he dies so that he can see the benefit of his donation.

What’s Your Pledge

As more and more of the world’s wealthiest commit to giving away their wealth, I’m curious how much of the rest of us will follow suit.  It’s easy to say that these rich people still have plenty to live off of and that’s true, but at the same time, they may be the people most attached to their money.  If everybody who wasn’t a billionaire even pledged to give away 10% of their income, that would have a much greater impact on our world community.

So what do you think?  Do the non-billionaires have the ability to join the Giving Pledge or are we too attached ourselves.  Let me know your goals on giving and how it impacts your life in the comments below or on Facebook.

Featured, Life, Money

What to Know About the US National Debt

A reader asked recently, “What is national debt? It seems both complex and simple. How will it affect the future?”

Indeed, the US national debt is a complicated issue and this is evident in how the nations top economists continue to debate the significance of our debt and its impact on the nation.  As the US national debt continues to swell, many people are seeking to understand the issue better.  Here are some basic principles and strategies that should set your foundation for understanding the subject.

Types of US Debt

The US national debt can be looked at in two main ways.
First is the “public debt.”

  • Public debt can be viewed as the actual amount of money the US owes through loans to individuals, groups, and governments.
  • This is what the government pays interest on right now.

The second type is “gross debt.”

  • Gross debt includes future obligations like Social Security.
  • Although future obligations may be covered by future taxes, current tax rates will not bring in enough revenue to cover them.

Today’s public and gross debt levels relative to the size of the US economy (GDP) are higher than they have been since WWII.  This has happened since the Iraq invasion around 2003 and can be largely attributed to the post 9/11 economy and recent “Great Recession.”  Entitlement spending (Social Security, Welfare, Medicare) has also had a significant impact on the rising gross debt as population growth has slowed and the ratio of people on entitlement programs to those paying for it has increased.

How the US Debt Will Impact Us

As obligations increase, the US government must continue to raise interest rates so that investors are willing to loan the US money.  Alternatively, taxes must increase across the board.  Either scenario can be harmful to the economy and thus limiting job opportunities and people’s ability to spend effectively.  This creates a few potential problems.

  1. As the US government increases interest rates to raise more money, investors may move money out of corporations leading to more government power and inflation.
  2. As interest obligations to debt holders increase, taxes are no longer used to improve the country but instead go to other nations.
  3. If a decrease in infrastructure programs happens before a decrease in entitlement spending then taxes become less and less an investment in economic growth and more of a temporary solution to support those in need.
  4. American companies are considered more risky as the US debt increases causing prices to rise which creates inflation.

What You Can Do

As time passes, the US will either have to cut programs or increase taxes to pay for the problems.  Simply increasing debt is not exclusive of these options since it will increase interest payments which decreases the amount of money going to programs.  Even if the government never goes bankrupt, its power on the international scale will diminish slowly over time making living in the US less of an advantage.  Here are some strategies you can consider to be prepared.

  1. Be thankful that you live in a great economy that provides you with many more advantages than other places.  How many people honestly are completely independent from everything else?  Even if our country one day fails us, we’ve been very blessed until now.  You have to appreciate the benefits along with the losses.
  2. Get financially sound in case you’re required to live on less.  Practice the basics like saving for an emergency, spending less than you make, and investing in yourself.  For more frequent advice, read some good financial blogs like MoneyCrashers.com or ChristianPF.com
  3. Vote for politicians whom you believe will best spend your taxes for the good of the country.  Tell your friends to vote for them too.
  4. Lose your dependence on money by giving some away and seeing it as a tool for other things.  When possible, find ways to enjoy life and make a difference without needing lots of money.
  5. Look outside.  Even when the stock market drops the sky is still blue (or gray but I don’t think there’s any relationship there).

Have your own question to submit?  Submit your time, money, or fun question here and get it posted on the Obsessed Analytic blog.  If you have any thoughts to add, then share with others in the comments below.

This post is featured in the Carnival of Personal Finance Edition #270.