Teens, Money, and Expensive Sneakers

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The following is a guest post by Michael German. Enjoy!

The teenage years often are both the most traumatic and most enjoyable years of one’s life. Psychologists often chalk it up to a less developed sense of long-term thinking, mixed with a wonderful feeling of invincibility.

A teen’s limited experience in the world leaves them with the impression that the world is just a long road of possibilities lying out before them; they’ve yet to meet any of the wolves often hiding in the trees along that road. Even life’s tragedies can often be soothed with a cute date and a new pair of Nikes. But, Nikes and sometimes dates are also expensive as well as being enjoyable.

Teaching Your Children a Balance Between Wants and Fiscal Responsibility

There is an age-old argument between parents, and sometimes a parent argues with just themselves on how to give your kid what they need, and at the same time, teach them financial responsibility. Naturally, parents want their kids to fit in and to be accepted in their peer environment.

On the OTHER hand, you know it’s fiscally responsible to tell your kid that you are not spending $150 on a pair of sneakers because some forgettable celebrity wears them on television. Yet still, you cringe at the thought of other kids teasing them at school, because they are wearing cheap sneakers. There are choices outside of becoming either the unsympathetic miser or human cash card, however. You can work alongside your teen to teach them about financial responsibility.

Managing Allowances

Of course, you will have to give them something to start with, a base pay otherwise known as an “allowance.” You’ll want to come up with an amount that feels fair to both you and your teen. Don’t just settle on what you got for an allowance as a kid; chances are prices have quadrupled since then and chances are really strong that your kid will just look at you and laugh.

Along with your teen, take an inventory of what their justifiable weekly expenses are, including lunches, carfare, entertainment costs – at least enough for a movie a week and maybe some food after the movie. Yes, you can throw in a little fun money, but not enough for those sneakers.

What Happens if Their Allowance Just Isn’t Enough?

Of course, like the adults teaching them, things pop up in a teen’s life that they just have to have that their allowances just won’t cover, at least not anytime soon. The same as adults have overtime pay, create a similar option for your teen. Household chores like cleaning out the garage, mowing the lawn, or even cleaning the kitchen and giving you a break are all opportunities to teach kids to earn the additional money they want. Plus, it gives you a break! Provide them with a way to prove that they are willing to work for what they want.

Beyond Allowances – Other Ways to Instill Financial Skills in Your Children

Involve Your Children in Household Financial Decisions

Lead by example, foremost. Let your teen sit in on your financial decisions. Show them how the cash flows in and how it flows back out. Let them see why it is that you say that a bigger screen television is not in the cards for this month. Maybe they will see the connection between raising the air conditioning enough to sleep with a blanket and life with a smaller television screen.

Pre-Paid Credit Cards

When you feel that your teen is ready to handle credit, you can obtain a prepaid credit card for them. This can be a wonderful teaching tool for your teen on how to responsibly deal with having credit; let them do the shopping through the best credit card offers and find what works best for them.

Conclusions

With a little work- and a lot of patience – you can nudge your teens away from a world of instant gratification into a world of financial responsibility. As the world’s economy seems an endless carousel ride of ups and downs, and will likely stay that way, your teen will be ready to ride that carousel horse. Whether the horse happens to be rising or falling.

How about you all? What methods do you feel are best to teach fiscal responsibility to children? Do you feel that giving an allowance is a good thing to do? 


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• Great post topic here Michael! Thanks so much for sharing it! After all, among the vast array of personal finance topics available, I can’t think of too many more important ones than figuring out the best ways to teach children about financial management before they get themselves in to trouble.
• @ The most important gift that parents can give their children – The Gift of Want –
• As discussed in my post last year about whether or not it is good to give children an allowance, I feel that the best gift a parent can give their children is the gift of want!
• What exactly do I mean by this? Simple – if they express their desire for a certain product, trip, etc, we should encourage them to achieve their goal by going out and earning the money themselves.
• @ Giving your children an allowance –
• As I discussed in the post linked in the previous bullet, (even though the majority of people may not agree with me) I do NOT believe that giving an allowance to children is the best practice in teaching financial responsibility. 
• Instead, I prefer the approach of encouraging children to earn the money for their desired larger purchases themselves, either through getting a job or creating their own small home business.
• @ Out of curiosity, what are allowances going for these days?!
• After reading the portion of this post that discusses the quantity of allowances, I became interested in just what is the “going weekly rate” for children’s allowances these days. I imagine it has increased dramatically since I was in junior high/high school, but I was very interested in seeing some figures for this! 
• According to Kid’s Money.org, the average allowance for 18 year old teenagers is $40. How does this compare to when you were growing up?!
• @ Overtime pay for household chores in addition to an allowance – 
• As I’ve discussed above, I’m not the biggest fan of giving children a direct allowance for merely existing and contributing to the normal household operations. 
• However, if the child goes beyond what the other members of the family do to help out, I am OK with he or she being compensated for that work. 
• Examples of this would include the following – 1) your family normally pays to have their hedges clipped once per year, but your daughter offers to clip them instead. Then, it’s perfectly OK to compensate them. 2) if your family normally pays $100 each week to have their dress clothes dry-cleaned, but your son offers to iron the pants and shirts. This is perfectly OK to pay the children for their work. It saves the family money all around!
• @ Other ways to give your children a financial head start in life –  
• I’ve discussed several other great ways for parents to head give their children a financial head start in life in a post I wrote in February of 2010. You can read all about the methods by clicking the following link – Ways for parents to give their children a financial head start in life.
• In addition to these methods, I came up with several additional techniques when I was brainstorming my comments on this post. They are described below:
• Have your teenager track their spending for several weeks in Excel to determine spending habits, and then work with them to identify areas where they could save money.
• Set a meeting once per week to talk about finances. I feel like this is a good idea since the topic of finance, unfortunately, will not be covered in any kind of detail in any form of formal education your child receives (a sad reality of the US education system).

***Photo courtesy of http://www.flickr.com/photos/demibrooke/2571620989/sizes/l/in/photostream/

The Office Of Tomorrow

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This post was selected as the No. 1 editor’s pick in the 323rd Carnival of Personal Finance at Sustainable Personal Finance. Be sure to stop by and read all of the CoPF articles!

The following is a guest post from Joe Lewis. Enjoy!

The office has changed considerably over the last 30 years. Gone are typewriters, printed memos, and ash trays (Note from Jacob: Thanks goodness on the no ash trays!). In their place are PCs, email systems, and smoking bans! The truth is, offices are evolving at a dramatic rate, and with a new generation of workers growing up with social networks, fast Internet connection, and touch screen phones, the winds of change look set to whip up another technological storm.

So, what will the office of tomorrow look like? Will technology be powered by different energy sources? Will we still have desks? Will we even need desks? Will we all be replaced by robots that eventually develop human emotions and take over the world? Maybe not, but this article hopes to answer some of these questions fully, by taking a sneak-peak at the office of tomorrow….

Social Networking Will Replace Email

Many of today’s businesses rely heavily on email to regularly communicate and collaborate with clients and colleagues. In comparison, popular social networking sites such as Facebook, Twitter, and Myspace are generally viewed as a leisurely pursuit and not for work.

Many of today’s workers are continuously minimizing their Facebook profiles the second management pass their computer screens to hide dodgy holiday and weekend pictures of themselves looking completely inebriated…You know the ones I’m talking about….

But, things look set to change. Social media is slowly moving in to the work sector with many companies choosing either Twitter or Facebook to recruit new business opportunities or advertise internal job vacancies. The new cyber generation of workers now entering the employment market, naturally communicate using social media platforms, and there’s a huge possibility that the office of tomorrow will choose quick, prompt Twitter feeds to contact clients and colleagues.

In reality, email is not really reflecting how today’s cyber generation communicate with each other, how we work in our jobs, and how we exist in today’s modern world. Social networking technology is becoming increasingly popular in society, and it may also allow people to share information with each other virtually and more successfully.

In the future, workers would no longer need to rely on emails to obtain data. In the office of tomorrow, they’ll just log on to their work network and share information and join relevant discussions colleagues in their team are taking part in.

Wave Your Hands In The Air!

For those of you who are familiar with sci-fi blockbuster, Minority Report, you’ll remember people manipulating data on large transparent display screens without a keyboard. The future of ambient interfaces using touch and gesticulation programs may not be as far-fetched as it sounds and could ultimately symbolize a snap shot of where social interaction is going…

Microsoft has already started the ball rolling with their innovative Kinect gestural system, which is already creating a lot of publicity. What makes this kind of technology so fascinating is the fact that it’s down to simple primitive hand gestures. There’s also something very ironic about going back to basics in order to move forward. However, the downside to this would be if you were to suddenly stretch or swat a fly and find that you’ve accidently deleted all your companies files.

Will Our Offices Need Electricity?

Unless you work in a Dickensian office full of candles and quill pens, you’ll notice that many companies in the world rely heavily on electricity. From laptop, PCs and iPhones, to TVs, lighting and heating, companies spend a lot of money on gas and electricity. But, will this be the way forever?

Presently, 75% of the UK’s energy is created consuming gas and oil resulting in carbon dioxide emissions. In 2050 there is a high possibility that we will have to create more energy than we currently make but with the restriction of releasing fewer greenhouse gases. One eco-friendly solution could be to use hydrogen as a renewable energy source. Recently, breakthrough research has been successful in creating a new method for storing hydrogen.

Hydrogen Fuel Cells

Scientists have currently been working on hydrogen fuel cells to replace fossil fuels responsible for global warming and pollution. “The first car driven by a child born today could be powered by hydrogen and pollution-free energy,” professed former US president George W. Bush in 2003 when he declared a US$1.2-billion hydrogen-fuel awareness project to grow commercial fuel-cell automobiles by 2018.

Solar Energy?

Terrestrial solar energy is also predicted to be huge. But, sunlight is not regularly available on the Earth’s surface. With this in mind, one idea is to gather solar energy 24 hours per day in the cosmos, and convey it as microwave beams to receivers on our planet. This could be used to power future office computers and electrical devices including lighting.

Final Thoughts

No one knows for certain what the office of tomorrow will look like. We could be using renewable energy solutions that never run out, using our hands to manipulate data on large transparent display screens, or even surfing the web at a computer in an office on the moon! We just don’t know for sure.

But, by keeping a close eye on technology and studying the way offices have evolved over the years, we get a clearer understanding of what a future office environment will look like. But, don’t forget part of the ambiguity is also very exciting – we’ll know the answers when we’re living it, and like many office workers, I cannot wait!

How about you all? What do you think offices of the future will look like? Will we all be working from home?! Will we need to type anymore on computers or simply talk and gesture to them?


What renewable energy option do you see as the most promising? What do you think is needed for renewable energy sources to be used mainstream?


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Social networking replacing email – 
• Very cool thought here Joe! With how integral email is to the workforce these days, it’s hard to even imagine being without it! 
• I think that society is still quite a long ways off from completely getting rid of email. However, I think it will eventually be replaced by something more real time. 
• Personally, I believe the replacement won’t necessarily be a “social” network like Facebook or Twitter, but will be more of a virtual conference room, where members of a work team are always logged in and can share information with everyone in real time.
• I feel like people do prefer to have some separation from their work and private lives, so Facebook and Twitter can remain in those spaces.
• @ The question of “How connected is TOO connected?”
• With all of the Smart Phones, iPads, iPhones, and laptops, etc. we already have in today’s society coupled with the introduction of the virtual conference room mentioned above, a question I pose to the readers is: how connected is too connected? At what point do we say “no” to a tool because being constantly in contact may not be the best thing for us?
• @ Using solar energy as a renewable energy source –
• Several years ago, I attended a seminar in college about renewable energy sources. 
• Solar energy was mentioned as a very promising renewable energy option. However, as Joe mentions above, the primary issue is being able to store the energy as it comes in until it needs to be dispensed. I don’t think the technology is quite far enough along in development to efficiently facilitate this process.
• However, one promising fact that was mentioned in the seminar was this – if you covered a land mass the size of western Oklahoma entirely with solar panels, the panels would absorb enough energy from the sun in only one day to power the US energy needs for one year. Quite impressive!
• @ What’s needed in order for renewable energy sources to become used in mainstream society –
• There’s nothing I would rather see more than the entire world using renewable, clean energy. Who wouldn’t!?
• However, as a financial blogger, I have to be realistic about what it will take to make this a reality. 
• In order for any renewable energy technology to be widely adopted, I believe that one of two things must happen – either 1) the government enforces their use by law, or 2) it becomes cheaper or the same price to use the renewable energy compared to the current option.
• Thus far, renewable energy has not been very successful at being implemented because neither of these two requirements have been met. Renewable energy technology is still very expensive, with the use of such technology almost always having some varying degree of negative impact on a person’s personal finances. In addition, governments have only tried to give “tax breaks” (not law) to people for using renewable technology. However, a lot of these incentives have been discontinued or severely limited.

***Photo courtesy of http://www.flickr.com/photos/rintakumpu/2396304044/sizes/l/in/photostream/

8 Ways to Help You Get Rid of Your Debt

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The following is a guest post by Richard Jacobs. Enjoy! 

If you are looking for ways to help you get rid of debt, you will come across many tips, but these 8 tips will help you get rid of your debt for good. The one thing you need to keep in mind is to make sure you follow these tips, and stick to them to make them work for you.

Get rid of your credit cards –

In today’’s world, people have started depending on credit cards a lot. If you are in a habit of swiping your credit card whenever you go to the market or to dine out, get rid of the habit. The best way to do this is to lock your credit cards at home to avoid using them at all. However, keep in mind that you do not close the accounts as it will result in a reduced credit score.

Stop adding more debt – 

Some people think that they can pay off old loans by taking on new loans, but that is not the right thing to do. Piling on debts will not help you get rid of your financial problems, but will keep you stuck in your debts for longer.

Change your lifestyle and attitude –

Your attitude plays a very important role when it comes to paying back loans. If you have a “can-do attitude”, you will succeed in your efforts. You will also need to make changes to your lifestyle, such as by cutting down on your spending.

Small things can bring a lot of difference, such as taking the bus to your job instead of driving. When buying groceries or other essentials for your house, look out for sales, discounts, and offers to use and save money. Stick to this lifestyle for a few months and you will be surprised with the amount you can save this way.

Look for ways to improve your earnings – 

Always lookout for ways to help you make more money. Work hard at your day job, as you might be rewarded by your employer in the form of bonuses or a raise. Also look for opportunities that can give you some extra cash, like a part-time sales job or a freelance work-from-home option.

Plan your budget and stick to it – 

Make an estimate of your monthly earnings and expenses and then decide on how you will spend the available cash. Keep a portion of this income to pay off your debts.

Pay more than the minimum payment toward your debt –

Many people tend to pay only the minimum amount towards their credit card bills, mortgages, and other loans. If you have extra money at hand, pay a little extra with every payment toward your debt.

Get help from your loved ones –

Your partner and family can help you get out of your debts. Discuss your financial problems with them, and get all the help you can to get out of your financial crisis.

Keep yourself busy –

Keep your self busy in your work, and you will not end up wasting time at the bar or at the mall, spending the money you have at hand.

Conclusions

Remember, getting out of debt can take some time, especially if the loan amount is high, but if you stick to the tips mentioned above, you will rid yourself of your financial miseries. Small sacrifices made today will help you go a long way.

How about you all? What has been the biggest contributor to you significantly reducing or eliminating your debt balances? 


Have you tried any methods of debt reduction that have NOT worked at all?


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Getting rid of your credit cards – 
  • I definitely agree with Richard that cutting down credit card usage/spending is essential if you are looking to banish your credit card or other debt completely. If you get behind on credit card payments, the interest rates can rack up to above 20% (accruing daily), which is “bad-news bears” for just about anyone!
  • Along the same lines as locking the credit cards up somewhere at home, another trick I’ve heard that is effective is actually freezing your credit cards in a Tupperware container filled with water/ice in your freezer. This way, you have to physically thaw them out to use them. I’ve heard the physical act of doing this thawing is a great deterrent to using the cards again.
  • Locking or freezing up your credit cards should only be used as a last resort for people who absolutely do not have the control to stop credit card spending. Instead, I have faith that the majority of people with credit card debt do possess the control to simply carry the credit card in your wallet, but to only use it for emergencies. However, you know yourself better than I do, so make the decision based on what will work for you!
• @ Stop adding more debt (i.e. – don’t bother with debt consolidation loans) – 
  • The topic of debt consolidation is a truly fascinating one!
  • On one hand, it sounds like a great idea because you can combine many smaller balance loans for credit cards, etc in to one and pay just one lump sum each month.
  • However, as I discussed in Part 1 of my helping a friend get out of debt series, I personally do not think that debt consolidation loans and debt counseling is worth the time and effort unless your financial situation is such that a) you are on the verge of bankruptcy or b) making your minimum payments results in you not being able to feed yourself or your family.
  • Furthermore, I think that the majority of the time, people need more than debt consolidation to truly “win” against debt; they mainly need to change their habits and behaviors in regards to their finances/spending.
• @ Planning your budget – 
  • I’ve said it before, and I’ll say it again – budgets (in the simplistic sense) do not work. 
  • I personally do not believe that people should plan their finances by laying out a budget and then “seeing what’s leftover” at the end of the month to pay their debts and save for retirement. 
  • Instead, the better option is to 1) track your spending to determine your spending patterns and monetary requirements, 2) decide at the beginning of the month how you will allocate funds to your different needs, and then 3) actually transfer the money or pay your debt accounts at the beginning of the month before you have time to spend the money.
• @ Paying more than the minimum debt payment –
  • I absolutely agree with this piece of advice! In fact, I’ll venture a guess and say that if you have a sizable amount of consumer debt, you will actually NEVER 100% pay it off if you only pay the minimum required payment! 
  • However, I would advise everyone to consider the account hierarchy prior to paying too much on their debt accounts (i.e. make sure you have an adequate emergency fund first).
• @ Getting help from your loved ones – 
  • In my mind, getting advice from a loved one is great, fine, and excellent! 
  • However, actually getting money from a loved one is an entirely different story. 
  • Too many times, I’ve heard and seen friends or family members “loan” each other money in an unofficial capacity. In other words, there was no legal loan agreement involved. This is simply foolish because the majority of these “loans” are never paid back. 
  • If you want to help out a friend or family member, GREAT! However, it would most likely be better to simply make the “loan” a gift and not have any need to get the money back. 
  • If you want to actually loan them the money with the intention that it will be repaid, I would recommend hiring a lawyer to draw up a loan agreement.
• @ Keeping yourself busy – 
  • I agree with this bit of advice, with one caveat. 
  • I agree because I’ve found that in my life, some of the times when I have saved the most money has been when I wasn’t doing much else besides work or school.
  • However, one caveat/thing to watch out for is that when you are really busy, you might be tempted to go out to eat a lot to save time on cooking. Spending from this can add up very quickly, so just remember to take 30 minutes to cook or prepare your meals yourself, and you’ll be set up for success!

***Photo courtesy of http://www.flickr.com/photos/digiart2001/2214844805/sizes/l/in/photostream/

Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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If you point your browser towards Dictionary.com and type in “paradox” in the search field, the following definition pops up:

“Any person, thing, or situation exhibiting an apparently contradictory nature.”

Background on the Paradox

Over the past few months, I’ve been helping one of my friends evaluate his personal finances and get out of debt. In this endeavor, I’ve ran in to a lot of questions involving decisions around the topic of how personal funds should be prioritized as they are received (a decision process I like to call the Account Hierarchy). 


At first, I suspected that these decisions would be quite easy, not thinking much on the matter and advising that he simply follow the My Personal Finance Journey Account Hierarchy that I laid out in the first month I started this blog and consider my most important article for readers to read (and that I follow in my personal finances to prioritize my money). This prioritized list is shown below:


1. Buy or make sure you have adequate health insurance coverage.
2. Invest enough cash in a high-yield taxable money market savings account to cover 6-9 months of living expenses
3. Pay off/get rid of your high-interest credit card debt
4. Pay your monthly mortgage payment (only the minimum amount required)
5. Invest in your employer’s 401k only up to the company match level
6. Max our your IRA (individual retirement account – either Roth IRA or Traditional IRA)
7. Finish fully funding your company 401k account
8. Prepay additional amounts to reduce the principal on your home mortage loan
9. Open up an individual, taxable mutual fund account with Vanguard.com to invest any remaining money
10. Open up a tax deferred higher education savings account for your children and fund it

The Fault in The Original My Personal Finance Account Hierarchy 

However, once I really started to “get my hands dirty” and consider the details of his personal situation, I felt like I ran in to a web of contradictions about how funds should be properly prioritized (hence the paradox title of this post).


What I ended up realizing is that the account hierarchy listed above is really only applicable to someone who is 1) debt free (or almost debt free with very little credit card debt), and 2) has a average level of income that enables him or her to have a sufficient amount of money to meet their monthly needs.


So, in other words, this account hierarchy works great for someone like me (which was probably the reason I created the list the way it is). 


However, the harsh reality of the citizenry of the United States is that paying off debt is simply a way of life. It is and will be a constant for the majority, if not all, of many people’s adult life. This, in my mind, is something very important that we need to accept before moving on.  


Here’s an example:


Let’s say that someone in their late teens to early 20’s racked up $25,000 in credit card debt due to irresponsible spending along with almost $100,000 of student loans for attending a private college. Although it sort of pains me to admit it, in my opinion, these figures are not that far off from reality for many young folks in today’s society. 


And, unless these people have rich relatives or land a job making a very good salary, money will be very tight, and they will most likely be paying off this debt until they are well in to their 40’s. In other words, if they follow the original account hierarchy listed above, they’ll effectively miss out on saving for retirement through their best investing years because they’ll only be focusing on paying off their credit card debt. 


This simply won’t work. Therefore, a new version of the account hierarchy is needed for the copious number of people who have large amounts of debt and cannot expect to pay it off in less than 2-5 years. I always like to liven up sometimes-dry personal finance topics with exciting names. So, in this case, I’m going to call this the “Debt-Payoff-and-Retire Account Hierarchy.”

The Debt-Payoff-and-Retire Account Hierarchy

Note: Before we get started with this list, for the sake of simplicity, I’m going to make the assumption that it is known that prior to embarking on prioritizing funds according to the list below, that you have already met your very basic requirements for survival each month. 


These include paying the rent or minimum required mortgage payment, water/electricity/sewer/gas/trash bills (other bills also), and buying food from the grocery store for your family. However, these basic survival needs do not include cable TV, internet, going out to eat every night of the week, or other frivolous spending. With this in mind, let’s get on with the list!


Part A – The Minimum Requirements


1. Pay only the minimum required payment on your credit card and other loans (student, car, etc). DO NOT PAY MORE (yet)!


In the Debt Free Account Hierarchy (what I’ve decided to call the original listing from now on), you probably noticed that debt payments weren’t addressed until Priority #3. However, if money is very tight and you have large amounts of debt to payoff, the reality of the situation is that you cannot skip out on paying back the minimum required balance on your debts. Well, I suppose you could, but no up-standing citizen wants to have debt collectors calling them up, right?! 


Because of this, paying only the minimum required balance on your debt accounts is first on the list. Prioritizing the minimum loan payments ahead of health insurance (see below) was one of the paradoxes I ran in to with this exercise. I wanted to place it first, but ultimately decided against it in the end. 


In addition, I would advise you to negotiate a lower APR rate with your credit card company and also discuss your “low-money” situation with your student loan provider (student loans like to see ex-students succeed and may be lenient in pushing back the terms of loan repayment).


2. Buy or make sure you have adequate health insurance coverage.   
   
The next highest priority on the hierarchy is getting adequate health insurance. I cannot stress enough how important health insurance is. If you get in a car wreck or get injured otherwise, medical bills can rack up to be in the $100,000 range or higher, something that could result in financial ruin for the rest of your life. Because of this, you simply cannot afford to go without health insurance. 


The trouble? Health insurance is VERY expensive if it is not provided through your employer, especially if you have multiple part time jobs as a lot of people do these days. Typically, if you have to pay for your own health insurance, you should expect to pay between $150-$400 per month. When you are shopping for health insurance, make sure that you find a policy that features a low enough deductible that you can actually pay it with your emergency fund money (see below for details). I personally like to see my deductible be between $500-$750.


Also, remember – with the new health care regulations, you can still be covered under your parents’ health insurance until you are age 26. This may be a viable option for some of the younger people out there. 

3. Invest enough cash in a high-yield taxable money market savings account to cover 6-9 months of living expenses (Emergency Fund)


After first paying the minimum payments on your loans so that you don’t have debt collectors knocking down your door and securing health insurance, it is now time to focus as much money you have remaining on accumulating a secure, liquid, readily-available source of cash that you can tap in to in the event of an emergency. Often, this fund is used to pay the deductible on your health insurance (or other forms of insurance) mentioned above. It is very important to state also that the purpose of this account is NOT TO MAKE TONS OF MONEY. It is to provide you with peace of mind and security.


In today’s low-interest landscape, it’s important to be very selective in choosing where to park your emergency fund. I prefer to use a high-yield online savings money market account. These accounts offer much higher interest rates/returns than savings accounts at brick-and-mortar banks and are still FDIC insured! A no-lose situation if you ask me!


So, this all sounds well-and-good. However, you might be asking yourself the following question at this point. – “But Jacob, funds are really tight for me right now. If I’m doing this math correctly, at the current $1000 monthly expenses level at which I am operating, this would sum to $6000-$9000 total. I currently have $0 saved up. This might take me 9 years to accumulate! How do I proceed?” 

This is actually a great question! It’s quite tempting to recommend that people only really need a minimum level of an emergency fund (maybe only $500), and after they accumulate this amount, they can move on to higher-earning investments and credit card debt payoff. This is even more tempting given the plethora of options available to people for personal loans in the event of an emergency. For example, you can compare loans online and very quickly narrow down your choices to a loan with suitable terms.   


However, at the end of the day (and although there might be some disagreement on this), I believe that the peace of mind and safety that comes from having a sufficient emergency funds outweighs the benefits of being “debt free.” So, my answer to this would be that if it does take you 9 years to accumulate an emergency fund, then so be it. Your debt balances may accumulate significantly, but at least you won’t experience financial ruin if an emergency occurs and you cannot work.

Part B: Beyond the Minimum Requirements


Having fulfilled the absolutely essential requirements listed in Priorities 1-3 above, you can now shift your focus to actually becoming debt free and saving for retirement.


Enter our next paradox: traditional financial wisdom states that if you had to choose between investing in mutual funds for retirement (which at best can earn you 10-11%) and paying off credit card debt balances which carry a 20% or higher interest rate, the clear choice would be to pay off the credit card interest rate first because it represents an AUTOMATIC and GUARANTEED savings.


Indeed, this is the wisdom that applies for myself and many others who are lucky enough to be consumer debt-free. However, if you have large amounts of consumer debt that you cannot possibly pay off in less than 5 years, the choice becomes much harder. On one hand, we need to pay off our credit card debts to capture the automatic savings on the extraordinarily higher interest. However, if you are 24 years old and will be paying off your huge debt balances for 20 years to come, you cannot put off saving for retirement until that time. That would be both very unfulfilling and unwise due to the power of compound interest over long periods of time. 


Because of these facts, in the Debt-Payoff-and-Retire Account Hierarchy, I now recommend the following hybrid approach:


4. With the money leftover from Priorities 1-3 above, split the balance in to two (2) sub-accounts – one for paying off debt and one for saving for retirement. 

4.1 Use the debt-payoff sub-account to pay off your various debt accounts beyond the minimum balance


In this exercise, funds should be prioritized to pay off your highest interest debt balances (probably credit cards) first and then moving down the chain from there.


4.2  Using the funds in your “saving for retirement” sub-account, invest in your employer’s 401k only up to the company match level


Matching employer contributions represent free money, and we should all take advantage of this! After that, continue working your way through the priorities listed below. This order pretty much remains the same from the original Account Hierarchy.


4.3 Max our your IRA (individual retirement account – either Roth IRA or Traditional IRA).
4.4 Finish fully funding your company 401k account.
4.5 Prepay additional amounts to reduce the principal on your home mortage loan (if you have one).
4.6 Open up an individual, taxable mutual fund account with Vanguard.com to invest any remaining money.
4.7 Open up a tax deferred higher education savings account for your children and fund it.

Conclusions

So, there you have it folks – the updated, new, shiny, revised, and expanded My Personal Finance Journey Debt-Payoff-and-Retire Account Hierarchy priority order! 


As you saw in this post, a very different priority order is needed depending on whether or not you have large amounts of debt. But, I believe that this list will be very helpful for the millions of Americans out there who will be dedicating a large portion of their adult lives to paying off debt. While it’s definitely true that being in severe amounts of debt will drastically hinder the speed at which you accumulate wealth, overall, it is not the end of the world. I firmly believe that you can still live a happy, fulfilled, and meaningful life even if you are paying back debt.


And, I sincerely hope that this updated priority order will help you on your way to becoming debt free and also living the fulfilled lifestyle we all hope for! Thanks for reading!


PS – I’ll be sure to update the original account hierarchy page with the details of this alternate priority order so that everyone can easily find it!


How about you all? Should paying off debt, saving for retirement, having an emergency fund, or securing health insurance be your highest priority? Does the answer to this question change depending on whether or not they have loads of debt?


Do you agree with the order of priorities listed above?


Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/wlscience/2121691688/sizes/l/in/photostream/

Best of Money Carnival # 116 – "Who Dropped a Bomb on the Stock Market?" Edition – August 15th, 2011

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Welcome to the Best of Money Carnival (a weekly listing of the top 10 personal finance posts)– August 15th, 2011 “Who Dropped a Bomb on the Stock Market?” Edition!  

I hope you enjoy all of the posts I’ve selected for this week’s edition – and then come back to visit My Personal Finance Journey on my non-carnival days too.


It was very interesting to see that a good portion (probably 30-40%) of the post submissions this week were either inspired by or focused on the significant drop in the stock market that has occurred over the past week or so. As a passive investor, I was happy to see that most of these posts were advising readers not to panic and hold out while the dip plays out. 


And, being the personal finance nerd I am, the drop in the market by some miracle caused me to think of the insanely awesome 1982 music video/song by the Gap Band called, “You Dropped A Bomb on Me”. Please don’t ask me to explain how I thought of this, just enjoy the attached YouTube video below!  


For this edition, we had 66 articles submitted. Below are my choices for the Top 10 Personal Finance posts of the last couple of weeks (that were submitted properly of course) in order from 1 to 10.  A big congrats to all of this week’s winners!


1. Jim Yih presents The science of building a diversified investment plan posted at the Retire Happy Blog, saying, “The problem with diversification is it has been treated more like an art than a science. For most people, diversification is more about quantity rather than efficiency.”

2. Mike Piper presents Tax-Loss Harvesting posted at Oblivious Investor, saying, “One thing you can do while the market is down: take advantage of tax-loss harvesting opportunities.”


3. Melissa presents How One Family Survived Unemployment, Part One posted at Mom’s Plans, saying, “A true story told in two parts about how a family of 6 survived nearly 18 months of unemployment.”


4. Jeff @ Stay Thrifty presents How I Beat $20,000 In Credit Card Debt posted at Stay Thrifty, saying, “Credit card debt can paralyze your finances and take a real toll on your emotions. When you have a huge balance it can seem hopeless, but I’m living proof that you can get out of debt… and live to tell the tale.”


5. Neal Frankle presents Successful Entrepreneurs – 7 Unconventional Tips To Become One posted at Wealth Pilgrim, saying, “If you own or are thinking of launching or buying an existing business, here are 7 potent and unusual tips to help you reach success much faster.”


6. Darwin presents US Loses Triple A Credit Rating – It’s About Time posted at Darwin’s Money, saying, “Curious which countries have a AAA credit rating now that America doesn’t? I was shocked; I never even heard of some of these countries.”


7. Sarah Minton presents Day 292 – A Letter To My 18-Year-Old Self posted at The $60K Project.


8. Jason Price presents Ask the Readers: Can You Live Well on $40,000 or Less? posted at One Money Design, saying, “You may not think it’s possible, but this family is living very well on less than $40,000 per year.”


9. Money Beagle presents Career Tip: Become An Expert At Something (And It Doesn’t Have To Be Big) posted at Money Beagle, saying, “One thing is sometimes all it takes to separate you from the pack.”


10. Money Cone presents Market Meltdown, What Should You Do? posted at Money Cone, saying, “What should the U.S. investor do now that the market has taken its worst tumble in two years? Here are some options.”

Well, that concludes this week’s Best of Money Edition. To all participants – it was a pleasure reading your articles this week!

Please submit your posts to the next edition of the Best of Money Carnival using the carnival submission form. The next carnival (#117) will be hosted by Pastor Personal Finance and is scheduled for August 22nd, 2011. 

Also, If you’d like to host a future carnival, send FMF an email asking for a slot.

***Photo courtesy of http://www.flickr.com/photos/karanj/31469695/sizes/z/in/photostream/

Help a Reader – Should You Continue to Fund Your 401k With the Recent Market Downturn?

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Happy Friday everyone!

Yesterday, I received the following great question/message from a reader about the recent market downturn we have experienced:

Considering the current plight of the stock market, do you still recommend for 20-somethings to max-out contributions to their 401k retirement accounts? Or, should they invest in a high-interest cash savings account instead? 

I am a 29-year-old with a lifecycle mutual fund with Fidelity and just lost $2,000 in the past two days and am wondering what to do. Thanks for your help!

Reader Financial Details:

• Already has adequate medical, dental, and vision insurance.
• Has 6-9 months worth of living expenses in a cash savings emergency fund. 
• Employer does not match 401k contributions.
• Currently maxes out 401k with 100% of contributions going to the Fidelity 2050 Freedom Lifecycle Fund.
• Does not have an IRA.
• Is currently satisfied with the asset allocation offered by Fidelity through the 2050 Freedom Fund. Also prefers the “hands off” approach offered by lifecycle funds.

***Photo courtesy of http://www.flickr.com/photos/dimi3/3096166092/sizes/l/in/photostream/

How to Start Planning for Your Retirement Early

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The following is a guest post on behalf of Debt Advisory Centre. Enjoy!

How to Start Planning for Your Retirement Early 

How about you all? What method do you use to save for retirement that you find easiest to stick to / is the most effective? What % of your income do you generally target to save for retirement each month? 

For you, is paying off debt or saving for retirement a higher priority goal?

Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Putting off/delaying planning for retirement – 
• Being in my early-mid 20’s, I’ve seen my fair share of young people who find excuses to put off saving for retirement. 
• In my experiences, the most common reasons that people put this off is because 1) they have a significant amount of debt (credit card and/or student loans) to pay off, or 2) they simply don’t understand investing enough to save money intelligently. This turns them off to the idea of putting away money for use a long time down the road.
• @ Saving for retirement consistently each month –
• In my opinion, saving for retirement is simply too important to put off until the last minute. Furthermore, there are numerous tax-privileged account options that make the avoidance of saving for retirement almost a foolish notion.
• The best way I’ve found to save for retirement and not miss contributions is to do the following: 1) Decide what % of your monthly salary you can save for retirement, and then 2) set up an AUTOMATIC, recurring, monthly deduction of that amount from your paycheck (either on a pre-tax basis or post tax if you are using a Roth IRA). The transfer has to be automatic so that you trick yourself in to thinking that you don’t actually have that money in your possession.
• @ Account hierarchy / monetary needs priority order –
• Analyzing the priority at which different accounts (debt, retirement, emergency funds, insurance, etc) need to be funded is a very interesting topic. 
• To address this issue in a general sense, I’ve developed the My Personal Finance Journey Account Hierarchy, which details the order I personally use to prioritize my funding of different needs in life.
• One question in particular that is rather difficult to address is if it is a higher priority to pay off debt (especially credit card debt) or save for retirement? On one hand, it’s tempting to recommend tackling the debt payoff first since it would represent an immediate monetary savings  on the interest charges. However, it would be rather demoralizing to spend your entire 20’s paying off student and/or credit card debt and not have anything to show for it in retirement savings. 
• Because of the complexities surrounding this question, I’ve decided to put together an upcoming post analyzing this topic. It should be on the way soon! Stay tuned!
• @ How much to save for retirement each month – 
• The answer to the question of “how much should I save for retirement?” is about as variable from person to person as answers can get. 
• In an effort to help people find an answer to this question, I developed a Google Docs Spreadsheet-based calculator, which can be accessed by clicking here. The various inputs that go in to figuring out this amount are as follows: current age, current salary, years to retirement, and your expected standard of living during retirement.
• However, as a general guideline, if you are saving 10% of your income each month for retirement, you are doing pretty well. On the other hand, if you can save 30% of your income, you are considered to be “on the road to wealth.” 

***Photo courtesy of http://www.flickr.com/photos/jcapaldi/4918597810/sizes/l/in/photostream/

Need Some Help Getting Out of Debt? Consider Debt Eye!

The following review is sponsored by DebtEye.com*.

Recently, through being a Yakezie Personal Finance Blog Network member, I was exposed to a brand new online debt payoff/management tool, called Debt Eye.

The full version of the tool is currently being rolled out (due to launch fully in the next few weeks), so I wasn’t able to try out all of the features that Debt Eye has to offer, but I was able to get the feel for what will be available. Below are my experiences thus far:

Overview of Debt Eye

So, at a high level, Debt Eye’s goal is to help you pay off your debt. However, how exactly do they help with this? Furthermore, what makes them different from the hundreds of other “tools” available on the Internet to help you reduce your debt?

Well, let’s take a look in more detail at what Debt Eye offers to seek out an answer to these questions.

Getting Started with Debt Eye

To get started using Debt Eye, you simply input your specific information in to the secure online system. The information you need to provide is listed below:

• Name (first/last), address, phone number, etc.
• Desired username and password.
• In order to have Debt Eye pull a free copy of your credit report from the credit agency, TransUnion, you must enter your Social Security Number (SSN).
• However, if you are unsure about whether or not you want to enter your SSN, then you can elect to list out your different debt accounts manually.
• Once you have entered your SSN, the Debt Eye system will automatically generate a list of all of the debt accounts you are currently carrying (or you can enter your debts manually if you choose).
• Included in this list will be the amount of debt owed, status of payments (whether they are past due or not), time frame of payback, and interest rate.

What Tools Does Debt Eye Offer?

Once you confirm a comfortable payoff amount, Debt Eye then allows you to interface with your checking and/or savings account from which to transfer money to your creditors.

Debt Reduction Plans Offered by Debt Eye

Once you enter all of your personal information in to Debt Eye’s system and your list of debts has been generated, the interface will then recommend one of 3 types of debt reduction plans, including debt snowball, debt settlement, and debt management plans. A screenshot of the different plan options is shown below:

Debt Snowball Plan

As described in a previous post on my site about helping a friend get out of debt, the overall aim of a debt snowball plan is to pay off your lowest balance debt account first. In order to do this, you will set up your debt payments so that you pay the minimum required amount for all your debt accounts EXCEPT for the one with the lowest balance.

Debt Management Plan

Debt management plans work by getting all of your creditors to agree on one low(er) monthly payment and reducing your interest while you are on the plan. It usually doesn’t impact your credit when you start, and your credit will improve once you complete the plan.

Debt Settlement Plan

The premise of a debt settlement plan is to save up enough of a lump sum amount to offer your creditors at one time to get rid of your debt balances completely. Extreme caution should be used when proceeding with this option because debt settlement can have a large negative net impact on your credit score. However, when someone is getting behind on their payments and is struggling to meet their monthly demands, having a lower credit score probably isn’t the worst thing in the world.

How Much Does Debt Eye Cost?

According to the Debt Eye site, the service is free to sign up for and to use. On the “How it Works” page, it mentions that it is free of charge to set up a debt management, settlement, or snowball payoff plan. However, it does mention that you can choose to have Debt Eye manage your debt payments for a small fee.

Unfortunately, it never talks about the detail about what is or isn’t involved in having Debt Eye manage your payments nor does it discuss the exact definition of the “small fee.” Additional detail is needed in this regard to the service.

Conclusions

Overall, I was nicely surprised by how easy the Debt Eye interface was to use, especially in regards to how easy it was to manually enter my various debt accounts. I also liked that Debt Eye seems to offer the majority of their tool free of charge. In this way, it could serve as a great tool for people wanting some guidance in paying off their debt, but whom do not want to seek the help of a formal debt counselor.

Lastly, since the complete version of the interface wasn’t rolled out yet during my investigation, I’m very curious to give Debt Eye another run through once it officially “goes live.”

How about you all? Have you tried Debt Eye yet? What did you think? 

Have you tried any other type of debt management/payoff tools? How did you like or dislike them?

Share your experiences by commenting below!

*Disclosure – I received monetary compensation for writing this review. However, as with all of the reviews I do, I offer my fair and honest opinion about the service/product.

Are You Clueless About Mortgages? Start Here!

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post. Enjoy!


This post was selected as an editor’s pick in the August 15th, 2011 (32nd) Totally Money Blog Carnival “A Flood of Great Articles Edition.” Be sure to stop by the carnival page to read all of the interesting and educating posts!

Purchasing a house is probably the biggest purchase most people make in their lives. To make the process less stressful, it is important to know a few pertinent facts first.

Utility of Mortgage Calculators

It is always useful to use some form of mortgage calculator to give a rough idea of whether or not it is affordable before making applications to mortgage lenders.

What’s Needed to Get Approved for a Mortgage?

In today’s difficult financial climate, lenders are very specific with their financial requirements before they will consider making a mortgage offer.

Minimum Requirements

As a minimum, a lender will require two years employment history, proof of assets in your bank account over at least a three month period, and three current finance lines, e.g. credit cards, car finance etc.

Debt to Income Ratio

Decisions are based on several factors, including down payment and credit scoring, as well as the all-important Debt to Income Ratio (DTI). This is a measure that compares income against certain monies owed.

To complete the DTI calculation, all monthly commitments or debts are listed. This includes mortgage or rent payments, loan repayments (secured and unsecured), minimum payments for credit and store cards, bank charges (for overdraft), insurance premiums, child-care, and student loan payments. Next, all monthly income is listed and totaled. This includes basic salary or wages, commission, overtime, bonuses, tax credits, state benefits, child-care, pensions, and any other documented income.

The debt to income ratio is then calculated by dividing the total of monthly debt repayments by the total monthly income. When a DTI calculation is used by mortgage lenders, it is to check that the monthly mortgage repayment does not exceed 30% of gross income.

Different Types of Mortgages – Fixed and Adjustable Rate

Once an application is successful, a decision must be made as to the most suitable type of mortgage (Fixed or Adjustable Rate) for the individual. A mortgage broker can often assist with this, but having an idea of what is available will help.

Fixed Rate mortgages ‘fix’ the interest rate at a certain level for a pre-arranged period of time. This is usually for anything from 2 to 10 years (note from Jacob – in the USA, it’s either 15 or 30 years), although longer periods are available. A mortgage calculator can be used to work out the repayments for a variety of periods. The main advantage is knowing what the repayment will be each month, but disadvantages include paying a higher rate of interest and missing out on savings if the interest rate should fall.

Adjustable Rate mortgages periodically adjust the monthly repayment based on an index that reflects the cost to the lender of borrowing on the credit market. The borrower benefits if the interest rate falls by having reduced payments, but pays more if it increases. Mortgages of this type should be ‘index-linked’ or ‘capped’ to avoid payments being inflated by unscrupulous lenders.

Miscellaneous Mortgage Fees to Consider

Other than the mortgage repayments themselves, there are other initial costs to take into account that need to be budgeted for. These include arrangement fees, a lender’s or broker’s charge for setting up the mortgage, valuation fees, and legal fees.

Mortgage Repayment

It is essential to make each repayment in a timely manner in order to avoid additional financial penalty, or at worst, foreclosure. It is also worthy of note to add that whilst it is a good thing to overpay monthly payments, thus reducing the term of the loan, some lenders will charge exit fees for early redemption.

Conclusions

A mortgage is an important and very long term commitment. Use a mortgage calculator to help work out what repayments will be. And, before agreeing to anything or signing a binding contract, it is essential to ‘read the small print’ to protect your interests. Best of luck!

How about you all? What do you look for as a crucial aspect of a mortgage? 


What’s your opinion of Adjustable Rate Mortgages vs. Fixed Rate? Which is better?


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

• @ Mortgage calculators –
  • In my opinion, mortgage calculators are quite essential. There is an ENORMOUS selection of online mortgage calculators created by different organizations. If you decide to use one of these, you will definitely want to make sure it is from a reputable source.
  • Personally, I use a mortgage calculator that I derived myself. I actually wrote a post about this in April of 2010 when I was preparing to buy a condo and was applying for home loans. You can view the complete post at the following link and create your own calculator (I recommend making your own calculator because it is a very valuable learning experience)! – How To Create Your Own Home Mortgage Calculator
• @ Getting approved for home loans in today’s post-bank crash economy –
  • It’s almost annoying how hard it is to qualify these days for a home loan. Gone are the days of loose banking where almost any one with any type of income could qualify to buy a house because “the housing market never goes down.”
  • Personally, last year, I tried and failed to obtain a home mortgage loan since my graduate school employment didn’t appear solid enough for a 3 year minimum time period. You can read all about that experience at the following post – Can Graduate Students Obtain a Home Mortgage Loan?
  • Even though it is more difficult to obtain a loan, it is far from impossible/futile. Furthermore, there are several steps you can take to improve your chances of being approved for a home loan.
  • In a post I wrote in April of 2010, I detailed 7 ways to improve your chances of being approved for a home loan.
• @ Debt to income ratio and how much house you can afford vs. how much you can qualify for –
  • In the post above, it mentions that 30% is the highest debt-to-income ratio that mortgage issuers will look for in prospective mortgagees.
  • However, what I’ve read is that here in the United States, a debt-to-income ratio of 28% is generally accepted as the level at which you can comfortably afford house payments, but that you can be approved for home loan which correlates to you having up to a 40% debt-to-income ratio. Quite interesting! The mortgage issuers want to get you in to the biggest loan they can it seems!
• @ Fixed rate vs. adjustable-rate mortgages –
  • In the United States, adjustable-rate mortgages got a terrible “rep” after the financial sub-prime crisis of 2008-2009. However, this type of mortgage is not as devilish as the press would make them out to be, provided that you use a little common sense and vigilance when investigating your options.
  • Personally, I would probably prefer a fixed-rate mortgage loan, just because I really like the idea of being able to predict what my loan repayments will be for the entire course of the loan.
  • However, I would also consider the possibility of an adjustable-rate mortgage loan in the following circumstances –
    • The introductory “teaser” rate was very low / a really good deal.
    • There was a cap in how much my loan interest rate could increase, both per year and total.
    • There were no balloon repayment requirements.
    • I was only planning to live in a house for 3-5 years.
• @ Mortgage pre-payment and biweekly mortgage payment plans – 
  • This post bring up a very important point about loan repayment.
  • When you are signing up for your loan, you will want to make sure that it does not contain any penalties for prepaying/paying off your loan early.
  • In the US, most loans these days do not carry this type of fee. However, it is worthwhile to check.
  • Another good option to investigate is a biweekly mortgage payment plan option. I could go in to a lot of detail about how this works, but essentially, a biweekly plan forces you to pay the equivalent of one extra month’s worth of mortgage payments spread throughout the entire year.
  • In this way, paying this extra amount lets you get ahead on your principal payments and decrease your home loan balance sooner, saving you thousands of Dollars in the end.
  • Theoretically, a person could do this type of plan by himself or herselft, but life almost always gets in the way, and people have a lot of trouble sticking to their plan if they are not forced to pay the extra payment with the structure of a biweekly payment plan.

***Photo courtesy of http://www.flickr.com/photos/truliavisuals/5241592552/sizes/o/in/photostream/

Petsmart vs. Petco – Which Is More Affordable?

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• Purina Dog Chow (34 lb bag)
• Petsmart = $23.99
• Petco = $21.99
• Winner = Petco = $2 less

• Science Diet Cat Food – Light Version (17.5 lb bag)
• Petsmart = $32.99
• Petco = $34.99
• Winner = Petsmart = $2 less

How about you all? Do you shop at Petco or Petsmart? Which do you prefer? Does store layout play a role in which you prefer? 


Share your experiences by commenting below!

***Photo courtesy of http://img.docstoccdn.com/thumb/orig/2374207.png