Healthy Financial Habits

In my previous article Cash for Clunkers – Is the Program Suspended I discussed how the Cash for Clunkers program is quickly running out of funds. Here’s the latest update:

UPDATE: The house approved a bill today with a vote of  316-109 to allow an additional $2 billion from the economic stimulus program  go to the “Cash for Clunkers”. This additional funding was the result of an unexpected number of people who took advantage the program. Nearly 1/4th of the funds were depleted after the first four days.

Cash for clunkers also known as the Car Allowance Rebate System (CARS) went into effect less than a week ago and is already facing funding issues.

The program, aimed to boost automotive sales and put cleaner cars on the road, offers people interested in purchasing a more fuel efficient vehicle rebates up to $4,500 in  exchange for their old clunker. After only 4 days the funds are drying up and Whitehouse is “reviewing options to keep the program funded”

The original plan was to keep the offer open until November 1^st 2009. With an overwhelming response the amount offered, terms or duration may change.

One billion dollars was set aside to fund the program and as of yesterday only $779 million remains. This equates to a depletion of 22% (5.5% per day) of the funds within four days. At this rate the money will dry up within the next two weeks. This estimate may actually be less than two weeks because of heavier sales volume on the weekends.

Bailey Wood from the National Automotive Dealers Association said last night that the program was suspended however Whitehouse spokesman Robert Gibbs stated that it was not being suspended.

So the answer to the question – Is the program over or suspended? NO, the as of Friday morning the program still remains in effect. The government is currently working to revamp the system. If you were planning on taking advantage of the rebates right now would be a great time to act because terms and condition may change anytime.

Please visit Paying Student Loans – Student Loans Debt for up to date news and information on obtaining and paying student loans.

The income-based repayment plan came as part of the College Cost Reduction and Affordability Act of 2007 and went into effect on July 1, 2009.

This plan was established to help struggling college graduates by lowering their monthly payment to less than 10% of their income and forgiving any remaining debt after 25 years.

In addition, the plan offers forgiveness of balances after 10 years through the Public Service Debt Forgiveness Program. With this program you must  maintain a public service job for 10 years.  These service jobs include being a teacher, social worker, or governmental worker.   After making 120 on time monthly payments, your remaining debt will be eliminated.

The federal government calculates your monthly payment based on your family size, state of residency, and income. The chart below shows what your maximum monthly payment would be under the new program.   Note: If your annual income is under $20,000 per year, your monthly payment would be $0.

Check out the Federal Student Aid calculator IBR Calculator to find out how much you could save by participating in the IBR program.

There are some limitations to this plan:

-You must have federal loans such a Stafford, grad plus or a consolidated loan made under the direct loan or FFEL

-Loan balance must be at least $30,000

-You must prove your income annually in order to remain eligible

-You can not miss any payments with the Public Service Debt Forgiveness program

- You could lose loan forgiveness if you are more then 360 days late on a payment with the 25 year plan

For more information on the program visit http://studentaid.ed.gov

UPDATE: JULY 27 – The federal government released a new plan on July 1, 2009 aimed to make payments affordable for college graduates. For details visit:  Federal Student Loans – Income-Based Repayment

According to the 2009 Census, nearly fifty percent of Americans have either attended college without obtaining a degree, or have obtained a bachelor’s degree or a graduate degree. Of this group, sixty-six percent finance their educations through student loans. This means that one-third (.50 X .66) of people in America have paid or are paying student loans. Student loans debt can adversely affect your financial health if not handled properly.

These staggering numbers have influenced me to write a periodic section on  Healthy Financial Habits that addresses issues with obtaining student loans, loan consolidation and eliminating student loans debt.

If you are currently paying student loans or are considering taking on student loans debt this section will be of great value to you. Please check back frequently for updated news and articles.

In a previous blog  Why a High Interest Checking Account? I discussed some advantages and disadvantages of using smaller community banks and credit unions. Today I would like to discuss a simple concept yet pertinent to your financial health and that is balancing a check book.

It continues to amaze me how many people I meet that tell me that they keep no records of their spending. Coincidentally these are also the same people who have no idea where all their money disappears to and frequently receive overdraft notices in the mail. I simply can not stress enough the importance of keeping accurate records of your spending. By doing so you can examine your spending habits and plug any holes that leak hard earned cash. This information has several other uses such as planning a budget, saving for an event, or cutting expenditures due to loss of income.

Balancing a check book is a task that is dreaded by some and even neglected by others. The thought of sitting down with a checkbook and penciling in all of those bad spending habits can often create feelings or sadness and regret. I found that using a program such as Microsoft Excel can not only help you keep  up with your money and avoid overdraft fees but also  be a useful tool when examining your spending habits. With a little knowledge of your favorite spreadsheet program and some patience you can balance your checkbook 21^st century style and here’s how:

1. Pay for all your purchases using either your debit card or credit card and get a receipt. You should always avoid paying for goods or services with cash. The reason being is that cash can be spent easily and then forgotten. Think about all the $100’s and $20’s that you have spent and hours later had no idea where it went?
2. Save the receipt. Keep your receipts in a safe place such as your wallet or purse
3. At the end of every week empty out your wallet or purse and sort your receipts by date
4. Create a simple Excel spreadsheet with  several columns titled  Date, Name, Grocery, Prepared food, Entertainment, Haircuts, General merchandise, Clothes, Bills, Gas, Gifts, Deposit, Balance, Etc. You will have to tailor these columns to be congruent with your lifestyle. (See fig 1. below for example) Write a simple formula used to keep a running balance.
5. Log all your receipts for the week placing the dollar amount in the appropriate category.
6. Total up each column at the end of the month.
7. Continue this process for several months
8. Create visual representations reflecting your average spending habits for past months.

For those who are not familiar with using a spreadsheet and have no desire to learn how to use them I would recommend implementing the same strategy except enter your receipts into some form of money management software such as Quicken or Microsoft Money. Www.mint.com offers a free online money management program. Although these programs have some cool bells and whistles I still prefer using a spreadsheet program because it is fully customizable.

Fig 1. EXAMPLE OF SPREADSHEET

The Parkinson’s law is important to understand and practice when it comes to accumulating wealth.  I will start off with a short story of a typical college graduate then later explain what exactly the Parkinson’s law is and how it applies to wealth accumulation.

After completing four years of college and living on minimum wage supplemented by various credit cards, you finally land your first full time job. You are excited to know that you will not have to eat another bowl of Ramen noodles or order off of the dollar menu at McDonald’s.

You are now earning more than twice what you were earning prior to graduating. You move out of that bug infested apartment into a nicer apartment on the other side of town. You now buy actual food at the grocery store instead of vitamin fortified cardboard and purchase bottled Budweiser opposed to canned Natural Light.

With money still left over each month you stop by your local Ford dealership and purchase a brand new Ford Fusion. You drive off the lot feeling good about your purchase.

Soon enough you are spending everything that you earn each month. You are no better off financially from one month to the next.

Four years go by and the excitement of owning a new car has long passed. Around this time you are offered a promotion that comes with a $20K a year raise. You are excited about your new raise and are already thinking of new ways to spend your extra money.

The first thing that you do is stop by the grocery store and pick up a 12 pack of bottled imported beer to celebrate. As you are checking out you vow never again drink that cheap domestic horse piss that you have been drinking in the past and only buy premium imported beer.

You have been noticing advertisements offering new luxury town homes not far from your job. You stop by one Saturday afternoon and without much thought purchased one.

After moving in you noticed that all of your neighbors are driving new imported vehicles and you are driving one of the few American cars in your community. Feeling inadequate, you stop by your local BMW dealership on your way home from work one day and drive off in a brand new BMW M3.

Your choice of food went from wholesome home cooked meals to take out food four days a week along with frequent restaurant visits. After all, with your new promotion and pay raise you can afford it.

Once again you find that every dollar that you earn is consumed. You can’t seem to save any money but that’s okay because you are still young and don’t have to worry about it.

Well yet another four years go by. With another promotion comes another raise- a big one this time. You receive a huge promotion with a $35k a year pay raise.

Once again you purchase a newer more expensive vehicle, larger more expensive home, and eat more expensive exotic foods. After all, you now make over six figures and can afford it right?

Several years go by and you are now in your ladder 30’s. All of this time you have been making six figures and still have not been able to save any money. In fact you now owe $30k to creditors.

Realizing one day that you are getting old and will soon need to save money  for retirement you asked yourself “Why is it that I have been making over $100k a year and can’t seem to save any money?”

Well, the answer to the question can be explained by the Parkinson’s Law:

The Parkinson’s Law can be defined as the notion that work expands to fill the time available for its completion. In terms of money and personal finance it can be defined as the supply of a resource (your income) increases the demand (your spending).

This is one of the biggest secrets when it comes to wealth accumulation. The majority of people, especially Americans, simply do not understand this concept and live their entire life trying to keep up with the Joness.

I’m not saying that you should live in the roach motel and continue to eat Ramen noodles for the rest of your life. What I am saying is that in order to accumulate wealth you need to find a comfortable lifestyle that is well below your means and stick with it.

Don’t pay attention to what your neighbors are driving or what your peers are doing. Chances are that they can not afford the lifestyle that they are living.

An interesting letter awaited in my mailbox when I returned home from a recent vacation. It was a plain white envelope with Chase printed in the return address.  After some thought I figured out that it was a response to a recent credit card application that I submitted before leaving. But something was different about this letter. I examined it, checking for the infamous flexible piece of plastic within.

It was thin and appeared to contain only a single piece of folded paper.  I quickly opened the letter and started  to question what may have possibly gone wrong. Is there a problem with my credit? Maybe they are sending the card separately? Maybe this isn’t the letter I thought it was?

After opening the envelope and unfolding the letter I read:

Thank you for your interest in our visa platinum credit program. Your application was given thoughtful consideration…

“We have determined that the projected costs of maintaining this account would exceed anticipated earnings.”

I could not believe my eyes! I was denied an extremely high interest gas rewards credit card because I am one of the few who use credit cards responsibly. Apparently they took a look at my credit history and figured out that I always pay off my balance and have never paid a nickel of interest. The rejection of my application was a result of the recently signed CARD Act.

On May 22, 2009 president Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act.
The objective of this act is to protect Americans from deceptive practices that some creditors use. Part of this act states that creditors must now use plain language when explaining credit card terms. In other words they must now dumb it down for your average “Joe six pack”. It also places limits on how often rates can change and gives more time (21 days from mailing) to pay your balance.

Here are a few more highlights of the act:

-card issuers must clearly disclose how long your card will take to pay off if you were to pay the minimum payment along with amount of principal and interest paid.
-People applying that are under the age of 21 must have a co-signer
-People under age 21 will be protected from prescreening
-Interest rates are not to increase in the first 12 months
- Promotional APR must be offered for minimally 6 months.

The entire act can be read at http://www.whitehouse.gov/the_press_office/Fact-Sheet-Reforms-to-Protect-American-Credit-Card-Holders/

Most of these rules will take effect in February 2010.  The fact is that credit card companies unfortunately make the  their money from people with less than average common sense. Credit card issuers are now scrambling for ways to make up for anticipated loss of revenue.  Keep an eye out for changes to your current credit cards terms and conditions. Such changes will come in the form of taking away rewards and incentives, charging a higher APR, or even charging annual fees.