Free Money Finance

Help a Reader: Parking Money

Here's an email I recently received from a reader:

My wife and I just sold our house and are walking away with about $26,000.  We are not yet ready to buy our next house for a variety of reasons, and are currently in an apartment.

I would like some input on the best place to park the money while we decide our next move.  I am extremely comfortable not having access to the money for 3 months and am relatively comfortable not having access to it for 6 months.  Anything beyond that I feel like the money needs to be liquid and accessible for a new home.

What are your thoughts for him?

Last-Minute Tax Savings for College Expenses

The following is a guest post from Marotta Wealth Management. It's a bit tailored for Virginia residents, but still offers some useful thoughts for the rest of us as well.

My youngest will be a first-year student at the University of Virginia this fall. My coauthor Matthew's oldest child is almost two years old. So he is just beginning to think about college funding and I'm about to start withdrawing from my final 529 plan.

With a well-designed 529 college savings plan, you can fund a college education at a deep discount. But even if you haven't saved much for college beforehand, simply passing college expenses through a 529 plan can save you $200 to $2,000.

A 529 college savings plan offers three types of tax savings. Virginia residents receive a state tax deduction in 2009 on contributions up to $4,000 per account. Students are permitted to attend a college out of state. If you don't live in Virginia, you can research your own state's tax benefits. In every state you receive both federal and state tax-deferred growth and tax-free distribution when you are ready to use the money. These latter two tax benefits are the most significant. But you must invest early.

The Virginia state tax deduction, in contrast, is available merely for putting money into a 529 plan. You are allowed to make a withdrawal immediately to pay for college expenses. This worthwhile tax deduction can help trim expenses. Consider it Virginia's way of promoting higher education.

Make sure you understand what counts as an educational expense before you begin this process. The withdrawal must be for tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution. In a recent change, a personal computer now also qualifies.

If you are paying tuition and fees, have a check sent directly from your 529 account to the college. This direct deposit will simplify bookkeeping and make filing your taxes easy. If your fees are spent elsewhere, keep receipts of all the qualifying expenses.

Consider Paul and Ali Hewson, whose oldest child Jordan will begin college in the fall. The Hewsons haven't saved much, but Paul's career is really taking off. So they now have the money to pay for Jordan's college expenses. As Virginia residents, they are entitled to a $4,000 state tax deduction if they put at least this amount into one of the state's approved 529 plans. At the 5.75% state tax rate, they will net a $230 savings for 2009 after they file taxes in 2010.

Jordan has decided to bypass Virginia's fine in-state institutions and attend a more expensive private college. Consequently, the Paul and Ali now have $40,000 of upcoming qualified educational expenses they can pass through a 529 plan to build a decade worth of carry-forward state deductions. Virginia 529 plans allow for an unlimited carry-forward deduction until the amount of contributions has been deducted. Assuming the tax laws and rates remain the same, the Hewsons will take a $4,000 deduction each year for the next decade. They will accrue a total savings of $2,300 savings over this 10-year period.

Paul and Ali can use any of the three different 529 plans in Virginia to accomplish this savings. We estimate it should take no more than an hour to set up the accounts and an hour to make the disbursements.

The CollegeAmerica program, the state-sponsored plan run by American Funds, must be accessed through a financial advisor. Unless you have a relationship with a fee-only advisor, you will pay a hefty commission to use this plan. If you can access the American Funds without paying a commission, invest your pass-through money in the Money Market Fund, the most liquid and stable investment in the plan. This fund requires a $1,000 minimum deposit for the initial setup. With the American Funds, expect to pay a $10 account setup fee and a $10 annual maintenance fee that kicks in if you hold the account through the end of the year.

Investors can access the state-run Virginia Education Savings Trust (VEST) program directly at www.va529.com to begin online enrollment. The plan charges a $25 annual fee in November and no other setup costs. It also has a money market fund available as part of its nonevolving portfolio investment options. Both the VEST and CollegeAmerica programs have received the highest scores from a recent Wall Street Journal report and other rating groups.

Virginia also has a program administered by the Union Bank & Trust called CollegeWealth. You can open a money market account at a Union Bank branch to receive the state tax deduction. If you are comfortable completing this task online, you may find working with a local bank difficult only because you must go there to complete all your paperwork.

Better than waiting until the last moment to start funding a 529 plan, consider investing now. With a depressed stock market, your funds can expect a healthy return for the next several years until your child is ready for college. If you have grandchildren you can get the same tax deductions by opening accounts for them. If you do not have a lump sum available to invest, start a monthly contribution from your paycheck directly into a college savings account. Although you may have to wait until your children bless you with grandchildren, they will ultimately thank you for it.

How to Spend More than You Earn When You Make Millions

Here's a story a reader sent me about past NFL quarterback Bernie Kosar and how he's fallen on tough times. Despite the fact that he's made a boatload of money, he recently declared bankruptcy. Yes, you can spend it all.

The article doesn't say how much he made during his career, but it leaves hints that show it was a good amount. For instance:

Kosar was one of the smart ones. He graduated from the University of Miami in 2 ½ years. Smart enough to help build several businesses after football, with a 6 percent interest in a customer-service outsourcing company that sold for more than $500 million.

How much has he lent teammates over the years without being repaid? ''Eight figures,'' he says.

Friends and family? ''Eight figures,'' he says.

Charities, while putting nearly 100 kids through school on scholarships? ``Well over eight figures.''

Ok, so he made enough to hand it out without much problem. But in addition to being generous, he was quite a spend-thrift. This sentence summarizes the situation:

And even the live-in maids had assistants.

Plus, he's surrounded himself with people with people that seem less than honest:

He says financial advisors he loved and trusted mismanaged his funds, doing things like losing $15 million in one quick burst. There's a $4.2 million judgment against him from one bank. A failed real-estate project in Tampa involving multi-family properties. A steakhouse collapsing with a lawsuit. Tax trouble.

And despite the fact that he's a smart guy, it seems he didn't really know or care much about handling his own money:

His finances have never been something he controlled. Dad would handle the bills; the son had to handle the Bills.

And now, to top it off, there's an expensive divorce:

He says the divorce has cost him between $4 and $5 million already.

''That's just fees,'' he says. ``And they keep coming. Attorneys charge $600 an hour just to screw things up more.''

So, despite the fact that he made tens of millions and had some good business dealings that brought him even more, he managed to go through all of it. You certainly can spend more than you earn, no matter how much you earn. This story is simply another one to add to my ever-growing list illustrating this fact.

But at least Kosar still has a good attitude and he had a fun ride while it lasted:

''Let me tell you something, bro,'' he says. ``It was all worth it.''

For Those of You Looking for a Tasty July 4th...

...here's a little reminder. :-)

Wealth Without Wall Street

The following is a guest post from The Insider's Guides.

“Wall Street's world turned upside down”

These were the headlines in 2009.

Wall Street financial management has proven itself worthless. Bill Gross was right. “Professional money management is a gigantic rip-off.” Only 2 advisors provided their clients with the correct advice about the total collapse of the market in 2008-9. In one year, most money management clients have seen their accounts plunge 40%, 50% even 70%. No advisor has fired him/herself. No advisor has returned their advisory fees and commissions. In fact, most advisors hid from their clients during the worst of the storm, as acknowledged by Fidelity executives in May 2009.

The naked truth—YOU must build wealth without Wall Street.

What to do?

Look at Wall Street “turned upside down.”

• First, when money managers buy and sell securities in their mutual and hedge funds, they are trying to predict the future of the market. There is no proof this can be done over time. Yesterday’s winners are usually tomorrow’s losers. The AVERAGE market return has been 12%, so a few managers will beat the average by luck—Just not the same ones every year.

• Second, you must pay the costs of the manager, her/his marketing group and operations, whether or not s/he makes you a dime. It is always better to pay as little as possible for the same performance over the long term. Costs can take up to 33% of your returns, over time. Investors averaged only 2.57% annually from 1984 through 2002 despite buying the ‘winners’ at the top.

• Third, managers are paid for increasing “ASSETS under management,” not for making you rich. Bringing in more assets is a full-time job. It is expensive to market the funds given that there are now thousands available. It is inevitable that popular funds will grow until they produce average returns with high expenses. Managers want to be rich, not right.  It takes luck to pick successful stocks. You do not benefit from economies of scale. As assets grow, fees do NOT shrink.

• Fourth, there is much less chance of you being treated poorly by fund management if the structure and governance are customer-oriented like Vanguard’s and TIAA-CREF’s are.

• Fifth, many professional managers and Wall Street “insiders” place their core assets in index funds. As bond guru, Bill Gross, said, “professional money management is a gigantic rip-off.”

• Sixth, since no manager can consistently beat the market, a mutual fund or hedge fund for that matter, must be evaluated as a commodity. Commodities are usually judged on price. As Benjamin Graham, legendary value investor, said, “Investors should purchase stocks like they purchase groceries—not like they purchase perfume.” Actually, all financial services should be purchased this way—insurance, mortgage, credit, banking.

• Seventh, due to changes in access and technology, some manufacturers of financial services and products have decided to enhance their direct to customer channel. Even though Vanguard funds have not been sold by personal selling, it has grown to rival most fund complexes. Discount brokers are now considered to have better customer service than brokerage firm services, according to Consumer Reports. Even though Progressive Insurance is sold by agents, their success in the direct channel has been impressive. 

• Eighth, Wall Street cannot reduce the risk of investing. Most individual investors have lost 30% to 50% of their life savings in the last Wall Street bubble. Many investors now realize that Wall Street is selling snake oil. Even the promise of diversification has left many realizing that “experts” can’t control risk.

• Ninth, Wall Street used to control price—raising the price of investing to grow revenue directly lowers investor returns. The advisor or fund with the highest price does NOT guarantee success: only expenses to investors. 

Investors can now control the price. We can use low-cost mutual funds and brokers. Since Wall Street cannot predict the markets and we don’t know if stocks will outperform all other assets over time, we must take the Pascal wager:

Pascal’s wager: The consequences of not being in the markets are worse than being in it for the long haul. Buying the market returns at the lowest price is the best solution for long-term wealth-building. You are better off without “professional” advice.

Example: Member Ron Delaney of New York will gain $400,000 because he asked about his 401k plan. Mutual fund fees are the largest source of overcharges—$400,000—over time. Ron did not believe pension costs were as high as we said. He asked his HR person about the costs of his 401K plan. He received a packet of materials. Finally, he calculated that his annual expenses were 2.1% and his annual fee was $50. His plan offered index funds for just 0.70%. He picked which funds he needed and saved $2,800 ($4200-$1400) every year. By the time Ron retires, he may have added an extra $400,000 to his 401k.

Your choice is clear—avoid Wall Street. Their “advice” is just marketing hype. Their research exists to sell their products. Take the advice of unbiased advisors like master investor Warren Buffett,

By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals.  Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.

The Psychology of Why People (Used to) Hate Annuities, Part 2

The following is an excerpt from Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money by David E. Adler. This is a fascinating book about the psychology of money and how our instincts and emotions often harm us when we make investing decisions. The excerpt below is part two of a two-part series (part one was posted earlier today.)

Annuities

There are rational reasons to buy an annuity when you retire. The foremost is you don't have to worry about outliving your money. With a guaranteed check coming in each month, you need never live your final years in poverty. On top of this, annuities also have the potential for higher returns than from traditional investments because of their inbuilt insurance features—if you survive that is. For people who make it into their 90s, the income from an investment in traditional assets would only be 40% compared to the income from the same amount of money spent on an annuity. The fact that people aren't necessarily good at handling their money once they have retired makes the arguments in favor of annuities even more compelling. This is why the wildly enthusiastic consensus among most economists, to say nothing of the insurance industry, is that annuities are a great thing.

But the consensus among the public is that annuities aren't so hot: Only a tiny fraction of people buy them. Many people hate annuities, which puzzles academics. Hence, economist Franco Modigliani, in his Nobel Prize acceptance speech, said, "It is a well-known fact that (individual) annuity contracts...are extremely rare. Why this should be so is a subject of considerable current interest. It is still ill understood."

It is no longer so "ill understood." The answer has to do with human psychology. Annuities, until recently, were a bad match for what most people, as opposed to most economists, worried about. One rational reason not to buy annuities is they tend to be very expensive, with the pricing opaque and hard to figure out. Also, they make the most sense if you plan to live a long time, and therefore attract people who are unusually good at doing this. Insurance companies have noticed, and priced annuities accordingly, meaning they are costly. They aren't actuarially fair, and the pricing favors the long lived instead of the general population. And they have some risks: Because they are contracts with individual corporations, if the insurer goes bust, there goes your annuity. Finally, annuities are complex and hard to understand, and people don't like complexity. The complexity starts with the name, with many things called an "annuity" that aren't annuitized. For instance, insurance companies offer products with annuity in their name that really resemble mutual funds: You don't have to surrender your principal and they don't guarantee lifetime income. The annuities I am referring to are "life annuities"—irrevocable insurance products that in exchange for a payment offer a minimum level of guaranteed income that lasts a lifetime.

The central problem is framing: Consumers view annuities as risky gambles rather than insurance. If we die early, we lose; if we live a long time, we win. Economists, and insurance companies, view annuities as insurance: not against dying but against the risk of outliving your wealth. They call this longevity risk—the risk that you live longer than you expected and have budgeted for. Anyone else would consider living to a ripe old age a good thing. Not economists who fret about all the financial dangers involved, which can be mostly taken care of by annuities.

This brings us back to Jeffrey Brown's framing experiment. Says Brown, "If I think about how much money I have in a bank, then an annuity looks horrible. I am giving up a lump of wealth and whether I get it back or not depends on how long I live; so it seems risky. But if I think about how much I am going to be able to spend every day, then an annuity looks great."

Insurance companies are well aware of our psychological problems with annuities, and current behavioral economics research into this area. Their psychological insights are allowing them to engineer products that meet consumer's psychological as well as financial needs. This includes "reframing" our perception of annuities by highlighting their insurance features. Some annuities are now explicitly offered as longevity "insurance"—these are usually ones designed to kick in very late in life, at 85 plus. Or another idea is to link an annuity to long-term care insurance, a sort of two-for-one product, addressing two big concerns of the elderly: cash flow and healthcare. Variable annuities try to emphasize growth and income, appealing to our desire for both. The biggest changes are in "guaranteed death benefits." Insurance companies are trying to take the "gambling with your life" feature out of annuities, through guaranteed death benefits. The idea is you, or rather your estate and beneficiaries, get the money back if you die before the annuity has kicked in. In fact, the development of annuity products is so rapid and extensive, much of it based on applications of behavioral economics, that insurance companies, once seen as plodding and dull, are at the center of financial innovation. It looks like they will succeed in making annuities popular.

But I still see challenges ahead because there is one remaining big psychological—and real—problem with annuities, and that is control. If you buy an annuity, you give up control of your money. Maybe the insurer will let you buy the annuity back, but such a rider is extremely expensive. And a true annuity is irrevocable. "Irrevocable" is not an easy concept or word to swallow. Once you buy an annuity, the money is no longer yours. Before you had, say $1,000,000. After the purchase, it now is the insurance company's. You get a check every month, but you no longer have the $1,000,000 to play with.

Even though an annuity reduces the risk you won't outlive your money, there are other risks to worry about, like the risk you won't have enough money exactly when you need it, if you get really sick, for instance, or have a sick grandchild. It doesn't have to be so morbid: You might prefer the flexibility of playing with your money. For all I know, you might have the desire to buy a $15,000 bottle of champagne and spray it around a nightclub, or go on a mega shopping trip to Dubai and end up broke afterward. These might be your desires. But it would be hard to live your dream on your carefully doled out "oldster" allowance in the form of an annuity from your insurance company.

So the question comes down to this: Do you want all your consumption needs insured in the form of annuity, or just some or maybe none of them? I don't think this is about being rational versus irrational; it's just a matter of your tastes, how you want to invest your money, and how you want to spend it.

The Psychology of Why People (Used to) Hate Annuities, Part 1

The following is an excerpt from Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money by David E. Adler. This is a fascinating book about the psychology of money and how our instincts and emotions often harm us when we make investing decisions. The excerpt below is part one of a two-part series. The second part will run later today.

Take the following retirement quiz about two people who have made permanent decisions on how to spend a portion of their money in retirement. Which sounds like a better deal to you?

Quiz #1

Each person has some savings and can spend $1,000 each month from Social Security in addition to the portion of income mentioned in each question. They have already set aside money to leave for their children when they die. The choices are intended to be financially equivalent and based on personal preferences for spending in retirement.

Mr. Red: Mr. Red can spend $650 each month for as long as he lives in addition to Social Security. When he dies, there will be no more payments.

Mr. Gray: Mr. Gray can choose an amount to spend each month in addition to Social Security. How long his money lasts depends on how much he spends. If he spends only $400 per month, he has money for as long as he lives. When he dies, he may leave the remainder to charity. If he spends $650 per month, he has money only until age 85. He can spend down faster or slower than each of these options.

Results: How did you answer? It is likely that you felt Mr. Red had a better deal than Mr. Gray. His consumption was guaranteed for life whereas Mr. Gray risked running out of money after age 85.

This financial quiz (actually a psychological experiment) was developed by the economists Jeffrey Brown, Jeffrey Kling, Sendhil Mullainathan, and Marian V. Wrobel, who wanted to understand what factors went into people's retirement decisions. They found the majority of participants when presented with this exact choice preferred Mr. Red's situation to Mr. Gray's.

Then the economists varied the experiment slightly. They rewrote the setup paragraph using new language and new descriptions, which conveyed a slightly different message. They tested it on a new group of participants.

Here is their new quiz. Try taking it. You might not change your answer because you have already seen the original version. Nonetheless, try reading the introductory paragraphs slowly and carefully, letting it put you in a new frame of mind before making your decision.

Quiz #2

Two people have made permanent decisions on how to spend a portion of their money in retirement. Which sounds like a better deal to you?

Each person has some savings and receives $1,000 each month in social security, in addition to the portion of savings mentioned in each question. Each person has chosen a different way to invest this portion ($100,000) of their savings. They have already set aside money to leave for their children when they die. The choices are intended to be financially equivalent and based on personal preferences for investing in retirement.

Mr. Red: Mr. Red invests $100,000 in an account which earns $650 each month for as long as he lives. He can only withdraw the earnings he receives, not the invested money. When he dies, the earnings will stop and his investment will be worth nothing.

Mr. Gray: Mr. Gray invests $100,000 in an account which earns a 4% interest rate. He can withdraw some or all of the invested money at any time. When he dies, he may leave any remaining money to charity.

Results: The majority of people who took this quiz said Mr. Gray had a better deal.

Quiz #1 and Quiz #2 are, of course, exactly the same in financial terms. But in psychological terms they couldn't be more different, because of the differences in language and descriptions. In the first quiz, everything is presented in terms of consumption: Mr. Red and Mr. Gray spend the money. When taking the quiz, you are confronted with the consumption consequences of financial decision. The second quiz emphasizes investments. It uses words such as invest and earnings. It mentions the account balance. When taking this quiz, you think about the return on the investment.

Psychologically, these differences in perspectives are known as frames. The underlying information is the same, but we filter it and make our decisions depending on how the choices are couched. When the financial decision is framed as a consumption decision, Mr. Red's guaranteed spending money looks the good deal. When the financial decision is framed as an investment decision, Mr. Gray's opportunity to invest his money looks like a better deal. In another words, context can be as important as content when it comes to financial decisions, even very important financial decisions.

I spoke to Mr. Brown (this is beginning to sound like a Quentin Tarantino gangster movie where each character is named after a different color, but here I am referring to the eminent economist Jeffrey Brown of the University of Illinois who cocreated this experiment). He said this of his results: "Traditionally, economists have had the underlying view that people are hyper-rational and are trying to maximize their happiness (what economists call utility). If you believe that, then how you package the information shouldn't impact their decisions. But you have huge swings in how people behave depending on how the information is packaged."

The larger point of the experiment is not just that framing has an impact; it is specifically about how retirement planning is "framed" in the U.S. and how we are conditioned to think about it. Should our financial focus be on building wealth for retirement, or on what we can consume after we retire? Is the right measure of financial success how much wealth we have when we retire? Or how much we can spend each month after we retire? Like the quiz, these are different ways of looking at essentially the same problem.

It is Jeffrey Brown's contention that we have been conditioned to think about retirement as mostly an investment decision, similar to quiz #2. Whereas he feels thinking about retirement as largely a consumption decision, similar to quiz #1, is more appropriate. Says Brown, "The messages that individuals receive when encouraged to save are all about how much you have in your account and your rates of return. But really you should think about how much can you eat each month, how much can you consume." This subtle conditioning or "framing" has a real result when we retire. Most people see themselves as Mr. Gray and choose the investment solution. However, most economists feel we should be in a consumption frame of mind, and follow Mr. Red's choice.

If it is not already clear, Mr. Red has bought an annuity: $650 a month. The experiment is an attempt to explain why annuities are so unpopular, despite their many economic advantages.

--------------------------------------------

Part two of this piece will post at 7:15 pm today Eastern time. Update: Here's part 2.

Interview Lessons from a Video Contest

Remember the competition for the best job in the world? Well, here's a knock off -- it's a really Goode job (a pun because the company's name is Murphy-Goode, a winemaker in California.) They're offering $10k per month for six months for someone to come out and drink wine (oh yeah, there are a few other responsibilities.) But that's the key part of the job. ;-)

As I watched a few of the application videos, it was pretty clear what was working and what wasn't working in these 60-second interviews. In particular, the two videos highlighted below illustrate perfectly many of the do's and don'ts associated with having a successful interview.

For instance, this video isn't working (FYI, the video is going in and out on my site, so if you can't see it here, grab a look here):

Why isn't it working? Let me name the ways:

• Poor quality. Is this really the person you wanting to represent your company on the web? The video and sound quality is terrible. Poor first impression.

• "Recently unemployed." Following up the poor first impression is an even worse second impression. Talk about leading with a negative. "I'm recently unemployed" screams "you're not worth me firing." Why even bring it up?

• I, me, my. Too much about her and what she wants. Should be about the potential employer, what they want, and how she can help.

• "I love the Internet." Is this a qualification? Really? Ugh.

• No quantifiable accomplishments. How about telling us how many visitors your blog gets? Or maybe how you did something great online (that's what the job is about after all.) This video is lacking any sort of accomplishment that's verifiable and impressive.

One positive note: at least she's cute. It's something I would expect a wine company to want -- a good-looking representative.

Overall, this video demonstrated several of the ways you can kill an interview.

Now, here's one I thought was a winner (here's the link if the video does not display):

Why did I like this one? For the following reasons:

• Good quality. Nice video, scenery, music, background, etc. Starts me off with a good impression.

• Quantifiable accomplishments. This guy can deliver! He's connected! I would have preferred that he lead with the stats (and put his personal info behind it) as well as translate the numbers into "and this is how I can use these various outlets to help you," but overall I got the impression that he has made big things happen in the past and can do so for any employer.

• Nice guy. He looks friendly -- like someone I'd like to work with.

• Good presentation. He looks comfortable and presents himself well. I know this can be edited to look this way, but at least he made it look that way. The first woman simply looked uncomfortable and like she needed a haircut (she keeps flipping her hair back.)

He didn't nail it 100%, but this interview was pretty good IMO.

So what are the takeaways here? How can we apply the learnings in these two videos to make our real-life interviews better? Here's what I'd say:

1. Make sure you highlight quantifiable accomplishments. Practice interview responses in advance and be sure they are full of success stories.

2. Have a good attitude -- be pleasant. If you can deliver results and are someone people like, you're going to win way more than you lose.

3. It's about the employer and what you can do for them. It's not about you and what you want to do with your life. (At least in how you represent yourself in the interview. Obviously, you have to consider your wants and needs. But presumably you've done this prior to even interviewing for a job.)

4. The little things matter. The little things say a lot about you -- the type of person you are, whether or not you'd fit in, and so on. And remember, you're always "on" -- from the time you hit the parking lot to the time you leave it, ANYTHING you say or do can influence the hiring decision. So be warned, and act accordingly.

Best of Money This Week

Just wanted to let you all know that this week's Best of Money Carnival is up at Gather Little by Little. Congrats to all participants and especially the winning post, Identify & Overcome Money Anxiety & Stress in Relationships!

Next week's carnival will be held at Bible Money Matters. Click here to submit a post.

How to Make the Most of a College Degree

I've written a lot about the value of a college degree including the following:

• College is Expensive, but Well Worth It Financially (Or: Give Four Years and $40,000 and Get an Extra $1 Million)

• This Year's Graduate's Destined to Earn Millions in Their Lifetimes; Average Graduate Can Earn $25 Million if Career is Managed Correctly

• How I Made Millions Off a $5,000 Investment

• Why Education is So Important to Your Financial Future -- And How You Can Pay for College

• The College Degree is Not Dead

• College Degree Worth an Extra $23,000 per Year

But here's a piece from MSN Money that says a college degree isn't a good deal. To prove their point, they take two friends, Bill and Ernie, and make these assumptions:

• Ernie and Bill are the same age and each saves exactly $16,594 for college.

• Ernie doesn't get accepted to a school he likes. Instead, he starts work at 18 and invests his college savings in a mutual fund that tracks the broad stock market.

• Ernie makes average yearly pay for a high school graduate with no college, starting at $15,901 after taxes and peaking at $32,538. Each month, he adds to his stock fund 5% of his after-tax income, close to the nation's current savings rate. It returns 8% a year, typical for stock investors.

• Bill gets into a public college and after two years transfers to a private one. He spends $49,286 on tuition and required fees, the average for such a track. I'm not counting room and board, since Bill must pay for his keep whether he goes to college or not. Bill gets average-size grants, adjusted for average probabilities of receiving them, and so pays $34,044 for college.

• Bill leaves school with an average-size student loan and a good interest rate: $17,450 at 5%. The $16,594 he has saved for college, you see, is precisely enough to pay what his loans don't cover.

• Bill will have higher pay than Ernie his whole life, starting at $23,505 after taxes and peaking at $56,808. Like Ernie, he sets aside 5%. At that rate, it will take him 12 years to pay off his loan. Debt-free at 34, he starts adding to the same index fund as Ernie, making bigger monthly contributions with his higher pay.

They then detail the results:

But when the two reunite at 65 for a retirement party, Ernie will have grown his savings to nearly $1.3 million. Bill will have less than a third of that.

Why is this? The summary:

College degrees bring higher income, but at today's cost they can't make up the savings they consume and the debt they add early in the life of a typical student. While Ernie was busy earning, Bill got stuck under his bill.

In other words, saving early beats earning more.

This isn't a new concept here. I talked about the same thing awhile ago (though it was about investing) in The Best Way to Maximize Your Investment Return.

The author admits that there are flaws that could be poked in his analysis and that the standard of living of the two men will likely will be different, but the point is made. A college degree isn't the slam dunk financially it once was. Especially when you assume today's "averages" for college students. (He goes on to argue about an alternative system of higher education, but that's beyond the scope of what I'm covering today.)

But who's striving to be average? Yikes! Is that the standard we're holding ourselves up to? I know it's not, and it's not what the author intended. And yet, that's what his numbers are based on. So what can/should potential graduates do to make the most of their college degree financially? I'd recommend the following:

1. Make the cost of college as low as possible. Why pay what the "average" person pays? Why not take steps to get your education for as little as possible? For instance, instead of going to a public and private college (as assumed in this example), what about going to a junior college and transferring to a public on after two years? This alone will save a TON of money. For more ways to cut the costs of college, see Five Ways to Reduce College Costs,  10 Ways to Reduce College Costs, and How to Get the Most Financially Out of College.

2. You can also work during college. Assuming your income is zero during this time may be what average people do, but you don't have to follow suit. And not only will working in school help you out financially, but it will also kick-start your career.

3. Only borrow money that makes sense to borrow. What does this mean? It means that you match the cost of college with your potential post-college earnings. A teacher with $100,000 in debt doesn't work out financially while a medical doctor with $100,000 in debt is fine in many cases. See what I mean?

4. Do everything you can to grow your career once you get out of college. Develop a system to regularly over-perform in your job and you'll end up getting promotions and pay increases that the Average Joe doesn't get.

Believe this can't be done? Think again. It's what I did. If you want details, see How I Made Millions Off a $5,000 Investment.

Is the Welfare State the Fault of Christians?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

That title will get some attention, huh? ;-)

Anyway, let me state up front that this isn't meant to be a Christian-bashing post (why would I want to bash myself, anyway)? But it is meant to ask an honest question, namely "would the U.S. need all the government spending and programs we have if Christians simply followed the giving principles detailed in the Bible?"

This piece asks this question and has some good thoughts on it. It starts with a bit of a history lesson -- how the church used to help people:

The Church — the Body of Christ — continues its laxity in assisting the poor, the homeless, the diseased and the mentally ill in the United States. In the days before Franklin Delano Roosevelt's New Deal and Lyndon Baines Johnson's Great Society, it was the Christian church that provided food, clothing and shelter for the poor and destitute members of society.

For example, During The Great Depression and thereafter, the majority of "soup kitchens" and "shelters" were run by local churches. The homeless were provided a warm meal, a place to rest and a chance to hear the Good News of salvation through Jesus Christ. Christians in those days understood that in order to address the needs of the soul, it's best to first address the needs of the body.

But today, it appears that Christian leaders and church members have passed on the role of charity givers to the government — a government that prohibits even the mention of Jesus Christ within the public realm.

To put it succinctly, Christian men and women have changed from a people who literally give the shirts off their backs to cheapskates. And we have more than merely anecdotal evidence to back up that claim.

The article then goes on to detail a few studies showing that giving among Christians is way down over the past decade or so. It then gives these thoughts:

With such a shabby record of giving by churchgoers, it is difficult for churches — an important institution for community stabilization — to perform their Christian duties to feed, clothe, and shelter the poor, disabled, mentally ill and others in American society who depend on the charity of others.

With this lack of charity comes the unintended consequences of government programs that are intrusive and ineffective. For instance, public assistance, or welfare, has done more to destabilize the nuclear family than any other program in history. One of the stipulations for qualifying for public assistance is that a mother be alone in raising her children. So, in order to qualify, millions of women forgo marriage and create a single-parent home for their children. Another drawback is welfare payments being based on the number of children in the home. This further increases the number of children who grow up without a father.

Honest sociologists long ago realized the destructive nature of government-run "charity." Yet, conservatives — especially Christian conservatives — may find it difficult to condemn the welfare system without performing their Christian duty to be charitable.

Ok, so here's my take on the issue:

• If all Christians would tithe (or give generously, if you prefer) 10% of their income, think of the people that could be fed and housed, diseases that could be eliminated, lives that could be saved, and so on. Unfortunately, studies show that Christians give only 2-3% of their incomes, the same as non-Christians. For a group where a major part of the teaching is on giving to help others, this is surprising and disturbing.

• I'm not so sure many churches today would spend the money wisely even if they had it. Many seem more interested in building big buildings and keeping the flock comfortable and entertained than they are in helping the poor. Not that there's anything wrong with going to a service that's done in a nice place and with excellence, but so many have taken it to an extreme.

• I hang around Christians quite often and I can verify that most of them are against "big government." And yet their giving (as a group) could make the government much smaller. But they're (as a group) not willing to make the personal sacrifices required to give as they should. Kind of ironic, isn't it.

• All this said, Christians do give a ton of money, just look at giving dollars in the absolute. You'll see that "religious" giving is always at or near the top. All I'm saying is that if it was three or four times greater (the amount, on average, that it would be if every Christian tithed) and spent to help people, then government programs would be a lot smaller.

• This post isn't meant to be a debate on tithing, I've just used that amount to set a standard. I've written enough about tithing in other posts, so check those out and comment there if you have a beef with the concept.

Just because many Christians don't give as they should doesn't mean that all are cheapskates, of course. I'm not saying that, so don't accuse me of it (I know someone was thinking of it.) All I'm saying is that Christians have a mandate to help the poor and IMO we've fallen way short of the standard. As a result, government has had to step in to fill the void. Agree or disagree?

More High Income Celebrities Who Spent More than They Earned

Here's a new list of celebrities who spent more than they earned to add to the one I already have. Here are the highlights on this group that can't control their spending:

• Mick Fleetwood - Filed for bankruptcy in 1984. He blew millions on real estate, failed restaurants and drugs. Fleetwood estimates he spent $8 million on cocaine.

• Meat Loaf - Meat Loaf's 1977 album "Bat Out of Hell" earned him millions of dollars, but his managers were stealing most of it before he could see it.

• TLC - The album ended up selling more than 11 million copies, but it wasn't enough to save the band from bankruptcy. They were on the hook for $3.5 million of debt from Lopes' arson, Watkins' medical bills (she suffers from sickle cell anemia), and a bad record deal.

• Marvin Gaye - The Motown legend lost his fortune like a lot of dudes...in a divorce. He filed for bankruptcy in 1979.

• Willie Nelson - Long before Wesley Snipes decided he didn't need to pay the IRS, Willie Nelson was dodging the tax men.

• Cyndi Lauper - Cyndi Lauper got her bankruptcy out of the way before she made a bunch of money.

• Andy Gibb - Gibb was drug-addicted and reduced to playing gigs in hotel casinos. He went broke in 1987 and died within the year.

• Isaac Hayes - Despite the sales, Hayes' record label, Stax, was in dire financial straits and not paying him. Hayes, in turn, was not paying the bank that loaned him money.

• Tom Petty - Tom Petty's 1979 bankruptcy became a negotiating ploy against The Man.

So, what are the few factors that killed these people's net worths? A summary:

1. Bad decisions. Doing drugs and trying to cheat the IRS are not good net-worth-building moves.

2. Poor relationships. Divorces, setting boyfriend's home on fire, etc. is usually not a pathway to financial success.

3. Trusting the wrong people. If you make a ton of money but your manager and/or record label don't manage it properly, you're in trouble.

Still, in the end, it all comes down to two factors:

1. They made a bundle of money.

2. They spent all they had and/or made terrible financial decisions that wasted their fortunes.

As I say, even if you make a ba-zillion dollars, if you spend a ba-zillion and one dollars, you're going backwards financially. These people are certainly examples of this.

Winners Named

Just wanted to let everyone know that I just named the winners of my June newsletter giveaways. People won a box of books, a $50 gift card from SmartyPig, and the new Wise Bread book. I named the winners on each post (be sure to go to the very last page of comments on each of the preceding links -- Typepad only allows 50 comments per page) if you want to see the winners. FYI, I emailed the winners already, so check your email if you think you've won.

My July giveaway newsletter will go out in a couple of weeks. If you want to have the chance to win next month, sign up for my giveaway newsletter here.

Be Sure Money Isn't the Only Thing Your Leave Behind

Here's a piece from Bankrate that says our money and possessions shouldn't be the only thing we leave behind for our heirs -- we also need to leave our online info, specifically passwords. It's a good point.

Just think of all the online connections you have -- to banks, brokerages, personal websites, etc. -- and the vital information that each of these contain. If something happens to you, especially if you're the only one that has access to them, what will be the impact for your loved ones? How will the access the information/funds/whatever? And in some cases, how will they even know such a site/connection exists without a list from you.

Overall, this was a good reminder IMO. I am in the process of writing down everything for my wife, and I'll certainly add passwords and such to my document.

How about you -- do you have this covered? Or do you think it's not that big of a deal?

The King of Debt

I really liked Michael Jackson (the younger, pre-creepy version.) His record Thriller was sensational and I remember listening to it over and over again. I think it was the reason my parents got me my own phone -- hoping I'd retreat into my room and talk to friends rather than play that record for the 17th straight time that day. :-)

Unfortunately, we all know how the story progressed from that time. So much talent. So much strangeness. Such a waste. And such a mountain of debt.

How much did Michael Jackson owe? A boatload according to Fox News:

Yet after selling more than 61 million albums in the U.S. and having a decade-long attraction open at Disney theme parks, the "King of Pop" died Thursday at age 50 reportedly awash in about $400 million in debt, on the cusp of a final comeback after well over a decade of scandal.

$400 million in debt. That's a hefty sum for someone who sold a ba-zillion records, owned rights to the Beatles' songs, and had a 2,500-acre primo home in California.

How could someone with so much spend it all PLUS another $400 million? Easy. He simply spent more than he earned. Like I say, even if you make a ga-zillion dollars, if you spend a ga-zillion and one dollars, you're going backwards financially. Michael Jackson spent money left and right, as fast as he could, so that while he lived his life as "The King of Pop", he died as "The King of Debt."

This is why I say that spending less than you earn is my most important piece of financial advice. Because you can always spend everything you make and more if you can't learn to keep your spending under control. And if you can't control it, then you're not going to make financial progress no matter how much you make. There are examples on both sides of this equation: people who have a ton and still spend more than they have and people who have little and yet do very well financially. The key is always controlling or not controlling your spending.

Of course, it's best to do both -- grow your income AND keep spending in check -- but spending less than you earn is fundamental. Unfortunately, Michael Jackson's life is a sad illustration that if you break this principle, you become broke.

Do You Un-Pad Company Travel Expenses?

Here's a piece from Consumer Reports (via link) that says 32% percent of British business travelers surveyed stated that they fail to claim back all of their expenses. Those that didn't claim all they could were giving up an average of $613 a year. There's no reason given for why they do this. Trying to help out their company? Poor organization? There's no way to tell what the issue is.

So I thought it would be fun for us to discuss the issue ourselves. The question:

Do you un-pad your company travel expenses?

In other words, are there deductions you could take but don't? Why or why not?

I don't travel that much, but when I do there are always expenses I COULD claim but don't. A few examples:

• A soft drink or coffee here or there when stopping in the car or going through an airport.

• Mileage to a business luncheon (if it's 20 miles or less).

• Some tips (I recently left a tip for a hotel maid and didn't claim it.)

Why do I (a well-known penny-pincher) do this? A few reasons:

• These are trifling expenses. They don't add up to that much and my employer is so generous in other areas I would feel guilty nickel and diming them to death.

• Many of them are discretionary and could go either way as allowed or not allowed expenses. If the decision is close, I forego it.

• In some cases, the time associated with filling out the paperwork to get reimbursed simply isn't worth the bother. So I don't.

• My company is more like a family than working for a business. I've worked for companies before that treated the people like dirt, and I had no problem with claiming every allowable expense. But the attitude at my current employer is much different, they go above and beyond to treat all the employees well, and I cut them some slack as a result.

In all, it probably costs me less than $100 a year, but it could be more since I don't keep close track.

How about you? Do you claim all that's allowed or do you un-pad too?

Star Money Articles and Carnivals for the Week of June 22

For weekday updates of what I find to be some of the most interesting personal finance articles on the web, follow me on Twitter. For now, here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:

• This week's Best of Money Carnival was won by the post FREE Online Money Management Tools!

• EDITOR'S CHOICE! Carnival of Debt Reduction - How NOT to Improve Your Credit

• EDITOR'S CHOICE! Carnival of Top PF Posts - Nine Tips on How to Advance in Your Career

• The Digerati Life needs a new credit card fast.

• The Sun’s Financial Diary tells what you can expect to see on your credit report.

• Lazy Man and Money talks about poor money choices made by his wife's parents.

• BripBlap covers financial behavior.

• My Dollar Plan tells us Microsoft Money is gone.

• Money Smart Life discusses your money and your health.

• Smart Spending lists seven tips for dining out.

• AllFinancialMatters hates taxes.

• Consumerist says that being lazy costs you money.

• Carnival of Personal Finance - What I Plan to Do During Retirement

• Festival of Frugality - How to Ask for and Get a Discount at a Chain Store

• Money Hacks Carnival - Investment Strategies Part 3: Rebalance Regularly Between Asset Classes and Subcategories  

• Carnival of the Road to Financial Independence - Three Steps to Choosing a Financial Adviser

• Carnival of Pecuniary Delights - Are You Tempted to Spend MORE When Money's Tight?

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

Safeguard 7: Avoid Investment Advisors Who Sugarcoat Reality

The following is a guest post from Marotta Wealth Management. If you'd like to read any of the first six safeguards, you can find them here.

We've already discussed the many ways you can safeguard your money. But these methods cannot protect you from an unscrupulous advisor. My brother, who is a lawyer, has a saying we must all take to heart: "You can't do a good deal with a bad person."

Morality can be described as a continuum from pure altruism to unadulterated self-centeredness. All advisors have their shortcomings, of course. But excellent advisors work hard to cultivate certain traits, and among them honesty is paramount. This quality in an advisor includes communicating clearly and straightforwardly exactly how bad the markets have been and can be.

Advisors naturally want to look good, and you must overcome your own desire to have a good-looking advisor. You need the truth. You can handle the truth, and without it, you certainly can't make realistic financial plans.

The markets are profitable. The markets are volatile. You can't pick just one. Even in our recent financial meltdown, I believe the wisdom of rebalancing back into fallen markets will be vindicated. But you still need to know the facts.

There are certain red flags to watch for with advisors, ways they may try to circumvent the tough honesty you need. I include both what conscientious advisors should do for their clients, as well as how financial salespeople hide their mistakes.

Ask your advisor to provide a return for your entire portfolio, not just the underlying investments. Reporting how each investment did doesn't show how you did. Your advisor can buy an investment at the very end of the quarter and then report it did well during the entire quarter. Or your advisor can sell investments that are not doing well toward the end of the quarter. These changes do nothing for you, but they help an advisor who doesn't report a return on your entire portfolio look successful.

Also, advisors should give you an accounting of your return net of all fees and expenses. Any fund expenses, fees, commissions or trading costs diminish the bottom line of the return. Only by receiving information at the portfolio level can you measure the net effect of every expense you were charged.

Always insist on a time-weighted return (TWR). Returns can also be dollar weighted, sometimes called an internal rate of return (IRR). Often the IRR looks better. It is possible for the TWR to be negative and the IRR to be positive.

A TWR removes the effects of cash flows, which allows you to judge how your advisor's underlying investment strategy performed. If your advisor reports both, that's fine. But he or she should include the TWR as well, which is considered the industry standard and allows you to compare apples with apples between two different strategies.

Returns should be reported consistently over standard and preestablished time periods. In addition to the quarter that just ended, our firm reports year-to-date, the past 18 months, and the returns gained since we began to track the portfolio. We chose 18 months because it is the shortest time period that is still long enough to discern significant market trends.

One year isn't long enough to eliminate market noise. We've considered adding three- and five-year returns, but whenever an advisor changes the time periods reported, it is cause for concern.

The bottom of the last market occurred in October 2002, so three-year returns started looking good in the fall of 2005 and five-year returns in the fall of 2007. The recent market downturn provides an opportunity to report these longer time periods without arousing suspicion that these intervals are being changed simply for window dressing.

Getting an accurate accounting of your portfolio's return shouldn't be optional. If your advisor can't supply it, perhaps it means they don't know themselves or don't consider it important to their recommendations. Unfortunately, many so-called advisors in the financial services world would prefer to focus instead on how their own fees and schedule of commissions are doing.

Even if you safeguarded your money in the many ways we have suggested, you should also insist on only entrusting your money to an advisor who regularly reports what total TWR, net of all fees and expenses, your investments have made for the quarter and for longer periods of time.

Should Women Marry for Money?

Check out this interview that says smart girls marry for money. A couple quotes that give you the flavor of what they're saving:

• We’re not espousing that everyone should marry a rich guy, but we’re saying that you have to be smart when it comes to marriage and money. It’s not just love, it’s an economic partnership.

• The reality is we have a short fertility span in our lives, and as time goes on we’re less attractive to men on a physiological level. It’s kind of repugnant to say, but it’s true. Older men aren’t looking for gray and pudgy. They’re looking for a pretty wife. You have a lot of powerful assets at this time of your life–it’s not going to last forever.

And then, there's this comment left on the article:

I just saw these two beasts, I mean women, on Fox and Friends. Wow. Is it any wonder why they are divorced? Woof woof. Lay off the Krispy Kremes and have some self respect. This is exactly the reason why so many women end up alone. The don’t get an education and spend their young adult years just partying and being lazy bums not furthering their education. They magically think that they will just marry a rich guy and everything will be taken care of for them. That is not reality for 99 percent of women. The only women that marrying a rich guy applies to is the very top 1 percent who are literally supermodels and stunningly beautiful. If you aren’t, and many women delusionally think they are, they are going to end up being poor their whole lives living with their cat. Meanwhile, a new crop of young, hot girls, who don’t have crows feet and middle age spread will be ready for the rich men to have fun with. It really is just a hilarious situation how some women really do sabotage their own lives with their delusional thinking.

Ok, so much for a pick-me-up post on this one, huh? ;-)

I think we've all seen (either in person or in the news/media) the older guy who's loaded with the much younger, stunningly beautiful wife. It's clear what she sees in him and what he sees in her. I have to think that this sort of marriage exists all across the spectrum, not just the ultra wealthy. One example: the doctor who's 50 and on his second marriage might not find a super model, but he can sure find a young, attractive new wife. Again, it's clear what they both get out of the relationship (not to say that they don't love each other, but it kinda begs the question...)

So many questions. Should women who are attractive cash in on their good looks and seek to marry someone who's wealthy? It will likely mean that they either marry someone who's much older than they are or someone who has family wealth (or fame, etc.) of some sort. Is attractiveness an asset that can be monetized? Is "love" by itself over-rated? What factor should economic stability play in choosing a mate?

I know you all have some thoughts on these issues...

This Seems Like a Bad Idea to Me

We've talked before about how an investor doesn't want too much (I've read 5% to 10% at most) of his portfolio tied up in his company's stock. The rationale goes that he's already tied heavily to the fate of the company since that's where he's employed (and if the company tanks, so could his job and salary) and to add too much more to the dependence on one entity is really too risky. If you don't believe in this line of thinking, ask people who used to be at Enron and had all their retirement savings in the company stock. They lost their jobs AND all their retirement -- a true double whammy.

And now here's a related situation that seems like a bad one to me: both spouses working for the same company. I won't comment on the "we see too much of each other" and related social issues that could be associated with this sort of thing, but just think about the impact to the family (and the risk to income) when a husband and wife both work for the same employer, especially in this economy. For instance, think about a couple that both work for GM, Chrysler, or AIG. They're probably not doing too well now.

Then again, is having both spouses work for one company any worse than having a single-earner household? Probably not. But it's not as good as having each spouse employed by a different firm so the potential risk to income is spread out a bit.

This whole line of thinking was brought to mind by friends of ours who work for the same company. The business is doing "ok", but not great, and they could be at risk (a really big risk) if things turn just a bit south. It's got to be tough for them.

So what do you think? Is both spouses working for the same employer a financial issue or is there really nothing to worry about?

The Psychology of Selecting Mutual Funds

The following is an excerpt from Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money by David E. Adler. This is a fascinating book about the psychology of money and how our instincts and emotions often harm us when we make investing decisions.

How do we pick a particular mutual fund to invest in? The answer is very simple: Its performance last year, last quarter, or even last month. Of course, advertising helps, too, but "returns-chasing behavior" as it is technically known, pretty much captures our actions when it comes to mutual fund choices. The #1 fund in the country last year in terms of performance will be near or at the top of mutual funds attracting the most new investment dollars.

And performance here means absolute raw performance, not adjusted for risks, fees, taxes, or compared to a benchmark such as the S&P 500. If it makes more money than we paid for it, we see it as a winner, even if the S&P did much better. Alternatively, if a mutual fund is below what we paid for it, but every other investment is doing significantly worse, we aren't impressed.

But after we make our performance-related investment choice, our one moment of action, we as investors appear to go to sleep. Our inbuilt inertia and apparent passivity when it comes to investing take over. We open an account and then sit on our hands. The fund may stumble, but we don't seem to react. We leave our investment where it is. Most investors don't reallocate from low-performing to high-performing funds, even within their portfolio. Returns-chasing behavior, therefore, only goes in one direction: We give new assets to high-performing funds, but leave old assets with the underper-forming managers. An unattractive analogy is to roach motels: We check in, but don't check out.

This returns-chasing behavior is seemingly hardwired in humans, from the most naive individual investors to the most sophisticated institutional investors. Everyone does it. It is why hedge funds, which may have had their highest returns in the 1980s and 1990s (although no one knows for sure), became such a popular investment a decade later, even though their best days were probably long behind them as a strategy. Financial planners, in surveys, say they don't chase returns, but an analysis of their investment choices by Daniel Bergstresser of Harvard Business School found plenty of evidence of it. And we know that returns chasing is what drives individual investors in their choice of mutual funds.

Returns chasing isn't automatically a bad strategy. In most circumstances, learning about the track record and history of what you are investing in should be valuable information. Even so, as every investment prospectus warns us, in a rare moment of clarity, "past returns are no guarantee of future returns." This is true, but do past returns tell us anything about future returns when it comes to mutual funds? They do, but not in ways we might assume.

Performance and Persistence

Alpha is the catchphrase bandied about by hedge fund managers and other finance types as shorthand for their market-beating performance (in another words, their skill). Sometimes called "Jensen's alpha," it is a technical measure of the "excess return" on an investment compared to what the market would give you, adjusted for risk. For hedge funds, alpha is their mantra, their obsession, maybe even their mojo. It's everywhere in their speeches and publications and the names of their conferences. They call each other "alpha" males. Mutual funds managers keep a bit quieter about alpha, but nonetheless mention it, too.

The word alpha, as used in a financial context, was coined in the 1960s by Michael Jensen, then a graduate student at the University of Chicago. He was interested in mutual fund performance—was it based on a manager's skill from picking stocks or just the market going up or down on its own? He had to figure out a way to measure this, which is when he invented the concept of "alpha." He defined this as "a risk-adjusted measure of portfolio performance that estimates how much a manager's forecasting ability contributes to the fund's returns." Alpha was indeed an analytical breakthrough—the word and concept stuck and is now part of financial culture.

But that is only part one of Jensen's story. There is a second part that is completely forgotten, at least by hedge fund guys. And that is what happened when Jensen went looking for evidence of alpha in his study. He couldn't find any, at least over an extended period of time. The mutual funds he studied were not able to beat the market for any long time period. Examining the performance of mutual funds for the period 1945 to 1964, Jensen concludes: "The evidence on mutual fund performance indicates that these 115 mutual funds were not on average able to predict security prices well enough to outperform a buy-the-market-and-hold policy. Also there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance.... On average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses."

The ability to beat the market for a specified period is known, at least by academics, as persistence. Though Jensen didn't use the word persistence when writing about alpha, it is implicit in his measure and another of his discoveries. As he modestly wrote to me when I asked him about this research: "I do not recall the idea of persistence being in existence before my study, but the study was a long time ago."

Everyone still talks about alpha, but no one talks about persistence. An investment manager might get lucky once or twice, but whether he or she can persist in generating excess returns over the market for more than a few months is really the question—and the question you should ask when selecting a fund that claims to be able to beat the market. If you ever meet a fund manager who brags about his alpha, you can ask it of him directly: "What about your persistence. How long can you keep it up?" (There might be a less aggressive way of asking this, but the point remains).

If mutual funds can't persist in beating the market, then returns chasing makes no sense as a strategy. Doing better than the market in the past is no guide to the future. The question of persistence in mutual fund performance is an unsettled one. It has been studied extensively since Jensen's day. Most academics are intrinsically skeptical that a mutual fund would be able to beat the market for very long. They use seemingly noncommittal but in fact savage language, claiming that any real evidence of persistence of market outperformance by mutual fund managers is "elusive."

Wall Street has a different view, of course. There is always the example of Peter Lynch, who ran Fidelity's Magellan Fund and had returns almost double the S&P for many years. Part of the discussion of persistence has to do with the time period you are talking about. There are managers such as Bill Miller of Legg Mason who had great runs for a while. Miller had a 15-year winning streak, only to be followed by a 10-year losing streak. This culminated in his disastrous 2008 presentation at an investment conference in New York. The topic: "The Credit Cycle—What's Next?" Miller recommended financial stocks as a great buy. He singled out Bear Stearns, in which he was one of the biggest investors, having committed $200 million of his fund's money. An audience member raised his hand and asked Miller a question: Was he aware that Bear Stearns was in crisis, in fact was cratering that very morning? Miller seemed shaken. He quickly left the conference. His $200-million dollar investment was soon worth only $15 million dollars.

Miller's downfall is exceptional, but it is also clear that many mutual fund managers have exceptional skills at picking stocks, as Miller himself did for a while. Mutual funds have some great years, extraordinary years, that can't be explained by dumb luck. So, what's really going on here in terms of persistence and performance?

Help a Reader: Paying Off a Mortgage Early

Here's an email I recently received from a reader:

Lots of financial experts say to pay your mortgage off early if you plan on staying in that house forever. In fact, as of late this seems to be the popular opinion on most financial blogs as well. My question is a little more involved than that. What if either a) you're not sure if you will stay there forever, or b.) you plan on eventually using that property as rental income and buying a second home. Should you still pay off the mortgage early? These are the two scenarios I'm considering.

I'm sure there will be a wide variety of opinions on this one, so go ahead and offer him your thoughts in the comments below.

Buy High, Sell Low: The Basic Instinct Driven Error of Investing

The following is an excerpt from Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money by David E. Adler. This is a fascinating book about the psychology of money and how our instincts and emotions often harm us when we make investing decisions.

Benjamin Graham once said, "An investor's chief problem, even his worst enemy, is likely to be himself." This is nowhere more true than when it comes to deciding to buy or sell a stock. We have an uncanny ability to buy stocks that are poor investments and sell stocks that are good investments. In essence, we buy high and sell low. In general, investors tend to shoot themselves in the foot—because they follow their instincts.

Once upon a time most economists and some investors thought people behaved rationally when it came to their money. Economic theory assumed investors, on average, would make good, even optimal decisions in terms of maximizing their wealth: Real money was at stake, so people would do the thing that earned them the most. Psychologists who study how people make decisions were under no such illusions. They knew our decisions are driven by irrational impulses, gut instincts, and the way our brains process information, rather than the cold rationality embedded in economic models. Finally, researchers stopped arguing about theory and studied how investors actually make decisions. They found that investors behave the way psychologists predicted, not the way economists predicted. Behavioral economics was born.

The most clear and startling finding came from Terry Odean, an economist at Berkeley. Odean's research is now one of the classics of the behavioral finance literature, even though arguably the field is too young to have classics. Odean studied the stock selection-decisions of individual investors. He found we do everything wrong: We trade too often for no economic gain. We are undiversified, holding only a few stocks that get our attention. The details get even more interesting. We easily sell off stocks that have done well, but we have trouble letting go of stocks that have performed badly, holding onto them in the hope they will come back. This is ruinous on two levels. By selling winners and holding onto losers, we are setting ourselves up for a tax hit, because we face taxes on stocks that have appreciated. Because stocks prices show momentum (see Chapter 12, "Momentum," for more about these effects), the stocks we have sold tend to keep rising. And the stocks we hold tend to keep falling.

Our trading patterns make no economic sense given these results, but they make a lot of psychological sense. We feel we should at least get what we paid for a stock, even if the stock market has no interest in our feelings. The behavioral economists Meir Statman and Hersh Shefrin called this the "disposition effect" as shorthand for our "predisposition to get-even-itis." As a result, we have trouble letting go of stocks that are worth less than we paid for them. Amplifying this impulse is the different way we experience gains and losses identified by the psychologists who pioneered behavioral economics. Losses are more painful than gains. Moreover, we are willing to gamble on the downside, to make a certain loss less certain. By holding onto our losers, we are hoping they will go up. For our stocks that are winners, we aren't compelled to gamble and want to lock in our gains. And as a result we sell our winners and hold on to our losers. Psychologically, we are satisfied, only to be punished by the stock market for our actions.

Odean was familiar with these behavioral theories and predictions. His personal history in many ways anticipated his nonconventional research agenda. Odean was a college dropout, who had worked as a New York City cab driver among other jobs, before returning to get his undergraduate degree at Berkeley at age 37. As a "mature student" he met psychologist Daniel Kahneman, the future Nobel Laureate then in the process of refining his work on decision making. Kahneman suggested Odean continue on in graduate school in economics rather than psychology. Odean analyzed real stock-trading data for evidence of psychological factors at work, which no one had bothered to do before. He discovered how precisely trades followed the disposition effect, with investors trying to get even in terms of what they paid for a stock.

Odean remembers the reactions to his discovery at the time, way back in 1997, which is not exactly light years ago, but a very different economic environment from today. The tech bubble was just heating up. "The standard response from professors was 'Personally I think this is interesting but my colleagues won't be as open minded as I am,'" says Odean. The group dynamics at work interested him as a behaviorist. Everyone liked thinking of themselves as open minded. But at the same time, no one dared risk publicly acknowledging in a group setting the merits of the behaviorist approach.

The news media had no such hesitation. Odean's findings broke out into the press, which is rare for an economics research paper, and Odean did numerous TV appearances (though audiences were surprised to see an economist sporting an earring the size of a class ring). The profession changed its views. The disposition effect in stock trading, once a heretical idea, is now mainstream, and even arguably part of a new orthodoxy. Every financial planner warns against the human tendency to sell our winners and hold on to our losers.

This instinctive error in stock trading might still pose some dangers to investors, but has greatly diminished in impact. The effect is now widely known, and the age of the day trader is over in any case. Most trading is now done by institutional investors, where the disposition effect is less pronounced. It isn't their money, so they are less emotionally involved.

Being aware of the disposition effect is primarily a defensive strategy. (If you are trading stocks, next time you are holding on to a losing position, hoping it will come back, ask yourself how realistic this belief is. Also consider the tax consequence of selling.)

However, you can take advantage of the disposition effect exhibited by other investors. This profitable trading is one way to make money off of psychological insights about investor behavior. It is a variation on the momentum strategies discussed later in the book.

Again, central to the strategy is the fact that people don't like to sell things at a loss. This is an immensely strong behavioral bias. The way to make money is to apply this insight to earnings announcements. Suppose a company has surprisingly good earnings. The stock goes up. Investors have no trouble selling off their winners. The market becomes swamped with sellers so the price doesn't rise immediately. But let's say the opposite happens. The company has a negative earnings surprise. The stock goes down. Investors are very unlikely to realize their losses. They hold onto the stock, hoping it will come back. As a result, the price of the stock doesn't fall, at least not at first.

What this means is in both cases it takes a while for the stock price to reflect its new situation. If the stock has gone up, the dumping of shares slows down its price increase. If it goes down, the hoarding of shares slows down its price decrease. In both cases, the stock price eventually reflects its true value but takes a while to get there, giving you time to move, to buy stocks going up, and to short or sell stocks going down.

Though exploiting the disposition effect can be a profitable strategy, there is an additional factor influencing the speed of change, making returns more predictable—and that is knowing the reference point, the price at which someone purchased the stock. The disposition effect always involves a reference point. If you bought IBM at $1 and it goes up to $20 and then drops to $19, you still view it as a winner. But if it drops to 50 cents, then get-even-itis effect kicks in, quite intensely. You now are extremely reluctant to sell the stock. If there are many investors like you, the price decline will be severely slowed down. This gives hedge funds more of a profit window because the market isn't reacting instantaneously. Sophisticated hedge funds now try to identify and sort the purchase price of a stock in order to be able to identify the magnitude of the disposition effect in order to improve returns.

The trading strategy based on the disposition effect and stock price sorting was first identified by Andrea Frazzini, a finance professor at the University of Chicago Business School, who is also well known in the hedge fund world. Frazzini explains: "From my active investor point of view, I like to short stocks with bad news." But even if you aren't shorting these stocks, you should consider selling them, according to Frazzini. It won't generate enormous market-beating returns but instead may simply be the sensible thing to do. He says, "Stocks with bad earning announcements keep going down for a while. Individual investors should just sell them. Waiting can only lose you money."

For stocks with good news, waiting to sell makes sense. The disposition effect means everyone is selling, depressing the rise in price at first, but eventually it reaches fair value. Waiting eventually makes you money.

In other words, do the complete opposite of what your gut impulse tells you, as seen in the disposition effect. Sell your losers. And hold on to your winners.

The Difference Between Quicken Online and Quicken Desktop

I've been a Quicken user for years (almost 15 years as a matter of fact) and I love it. Simple, easy to use, and gives me the data I need. Plus, I now have a great history of financial information that I can use to create all sorts of charts and graphs and analyze my finances. I have to control myself or I get carried away, so I focus on three or four key charts and that's primarily it.

Quicken also now has Quicken Online, a free, web-based version of Quicken. Since I have Quicken set up like I like it AND I'm a bit leery about putting my personal finance info online, I'm not really interested in Quicken Online. And, in fact, I didn't even really understand what it was about. So when a Quicken rep contacted me, I asked her to explain the difference between the two.

She said that Quicken and Quicken Online are two personal finance options from Intuit, Inc. designed to meet a variety of wide personal finance needs and help people in different stages of their money lives. She noted that a good analogy is that Quicken desktop like a large nationwide home repair store that offers customers every possible tool for every possible job, whereas Quicken Online is like a specialty shop with employees ready to help you complete a specific task, like building a shed.

Quicken Online is a good match for customers seeking:

• a 100% free, all Web-based basic personal finance solution.
• a first start with managing money at a basic level (see balances, what's left between paychecks, manage cash flow).
• access to their balances across accounts plus get bill reminders, large expense transaction alerts, and more via email, text, iPhone or Blackberry.
• a similar experience to online banking, but including accounts from all of their financial institutions (right now customers can access more than 8,500 financial institutions).
• automatic refresh of account balances each night, allowing them to keep tabs on finances without tracking each expense manually.
• "what's left" between paychecks once bills are taken into account.

Quicken desktop is a good match for customers seeking:

• a desktop personal finance solution to meet a variety of specific money needs including bill pay, drill-down on investments, home and business financial management, and rental property management to name a few.
• in-depth investment tools.
• advanced reporting.
• detailed tax preparation and deduction maximizing tools.
• savings tracking against goals and optimized savings tools.
• an environment where you can really track finances on a daily basis.

Ok, so maybe I once would have been a potential user of Quicken Online. But now it looks a bit too simplistic for my needs. It appears to be more of a starter tool for financial management with the desktop version being for those who are a bit more sophisticated, want to do more analysis, and have a broader list of more complicated needs. Got it.

What's your take on these two products? Anyone out there use either Quicken Online or Quicken Desktop? What do you think of them?

Six Months Is Not the Magic Number: Why the Size of Your Emergency Fund Needs to Reflect the Times, Not Conventional Wisdom

The following is a guest post by Ryan Irvine from The Elements of Lifestyle.

For about as long as people have been writing about personal finance, they’ve been espousing the merits of the emergency fund, which, in a perfect world, would contain about six months of living expenses.

If you’re at that point in your personal finance journey, then I applaud you for at least being ahead of the curve.  But notice how I used the phrase, “in a perfect world.”

The current times are anything but.

In this economy, in which gainful employment can no longer be taken for granted and benefits are like found money, six months just doesn’t cut it anymore.  I learned that the hard way recently.

When the financial sector finally crapped its pants last Fall, I was 4 months into my new job (at a bank of all places), working on a project that was supposed to last anywhere from 2 to 5 years.  Two months later, I was shown the door to the worst economy of my lifetime, a fate only compounded by the fact that I lived in a dying rustbelt city.

That was in December, and at the time, I had somewhere between nine and ten months worth of living expenses set aside. Flash forward to June, when I’m only now getting back on my feet. 

Many of my ex-co-workers were not as fortunate.

See, having six months worth of living expenses saved up leads to two basic assumptions: First, you trust your ability to find work within six months in the event that you’re laid off, even if this means having to transplant your life somewhere else.  Second, even though it is just that---an emergency fund---you are perfectly fine with the idea spending the entire amount, knowing full well the amount work it will take to replenish it once depleted.

If this were a year ago, I’m not sure I know anybody who wouldn’t agree to those terms mostly because the first assumption was pretty much impossible (and so the second becomes a non-issue).

But this isn’t a year ago---this is the Great Recession.   In a time like this, your saving habits may need to go from casual and reactionary to proactive and aggressive.

Here’s how to know for sure.

Pay attention to your company’s finances.  Companies are bad hiding imminent doom from their employees---and the market.

Somehow it wasn’t enough that my company was trading at 20 times below its 52-week high: it took a surprise fire sale of my employer to another bank in October before I really kicked my saving into high gear. 

I began operating as though the writing was on the wall---I reallocated every additional non-retirement penny I could squeeze from my paycheck into my emergency fund.  Two months later, I was out of work for the foreseeable future.

If you work for a publically traded company, you’re doing yourself a disservice if you’re not at least casually following your company’s stock price and listening in on earnings calls.  You can get an idea of how well you’re company’s really doing by listening to what your CEO is saying---or not saying.

Pay attention to your company’s workforce.  Your employer’s ability to recruit top talent (or any talent at all, really) is a reflection of their vision and solvency.

About a month after I started with my company, new hiring all but ceased.  As the scope of our project increased, the size of our team didn’t; instead, we were given additional “offshore”---that’s the P.C. way to say Indian---resources.  This was a swift departure from my company’s policy of not outsourcing mission critical new development, and a cause for concern for a lot of people who had been there a lot longer than I had.

Around the same time, a new Database Architect started on contract two cubes over from me.  As I’d soon learn, he was “new” in multiple senses of the word: He kept the book Become a Database Architect in 21 Days on his desk.  Needless to say, he was gone pretty quickly, but as I’d come to learn, really expensive personnel gaffes like this one were becoming a lot more commonplace. 

Indeed, you should follow your company’s culture as closely as you follow their finances.  If either one of those two things seems out of whack, you have cause for immediate concern: Problems in one area invariably lead to problems the other, and both are equally devastating to a company’s solvency.   The first sign of a toxic anything is where employees usually start formalizing contingency plans.

That having been said, not everyone has the liberty of a contingency plan in this economy.  That’s where fortifying your emergency fund becomes all the more valuable while we all wait for this to blow over, even if that means going above and beyond six months.

Investment Strategies Part 4: Don't Rebalance at the Sector Level

The following is a guest post from Marotta Wealth Management.

Rebalancing between asset classes boosts returns and decreases volatility. But setting your asset classes based on sectors of the economy is not an effective strategy.

You can rebalance your investment allocation at three levels: stocks and bonds, between asset classes and among subclasses. At the highest level, rebalancing between stocks and bonds reduces risk. Selling some of your stocks after the market has appreciated limits your portfolio’s volatility and locks in some of your gains.

Correlation between investment categories helps define asset classes and sort out which are merely subclasses. The lower the correlation, the greater the bonus you can gain by rebalancing regularly. Rebalancing between U.S. stocks, foreign stocks and natural resource stocks offers a significant bonus because these asset classes have the lowest correlation.

Smaller bonuses are available within each asset class for categories with a higher correlation. But the law of diminishing returns comes into play as the number of categories continues to double and the correlation between divided subcategories approaches 1 (one).

Some investors try to allocate and rebalance between sectors of the economy. For example, Dow Jones divides the economy into these 10 sectors: Financials, Consumer Services, Telecom, Industrials, Basic Materials, Consumer Goods, Utilities, Oil and Gas, Technology and Health Care.

I don't recommend rebalancing at this level. You cannot know what percentage to allocate to each category. Putting 10% in each sector doesn't make sense because the division is arbitrary. Dow Jones puts Oil and Gas together in one sector. If they had divided it into two sectors, it would not have justified twice the investments. Dow Jones divides the index one way, and the S&P 500 indexes another.

Additionally, some of these sectors represent a greater percentage of the economy. If you set your target percentages now, the economy will change and your targets will be out of date. Technology has grown significantly as a percentage of our economy. Investors who continually moved out of technology missed much of the best returns during the 1990s.

Ten sectors taken two at a time produces 47 different pairings, each with its own correlation and rebalancing bonus or penalty. I computed those statistics using annual returns from 1992 through 2008. Some pairings have a bonus, and some have a penalty. I don't recommend rebalancing at the sector level, but an analysis of which sectors offer a bonus and which cost a penalty can suggest some investment strategies.

Some have a high correlation and have little or no bonus, such as Consumer Goods and Financials. Consumer Services, Telecom and Technology are also all highly correlated.

Basic Materials and Oil and Gas are subcategories of the natural resources asset class and therefore highly correlated. Oddly enough, they have one of the largest rebalancing bonuses partly because they represent different natural resources that are subclasses of the natural resources asset class. This is also true because Oil has had its bubbles.

Categories with a higher average bonus for rebalancing include Financials, Telecom, Technology and Oil and Gas. These are all sectors that have expanded and then corrected sharply.

Rebalancing out of bubbles is always warranted and valuable. But of course recognizing them is challenging. The bonus for rebalancing out of technology is the smallest of these because the growth in technology was mostly a shift in the economy and only a bubble at the very end of that trend. Shifting out of technology early would have killed returns. Timing the shift perfectly would have been difficult.

Rebalancing in this case is a poorer version of tilting toward value. A better bonus would be gained simply by emphasizing those stocks with a low price-to-earnings (P/E) ratio. When stocks in a sector bubble, they often experience high P/E ratios because they represent a greater percentage of the S&P 500.

The markets are smarter than the experts. It is by definition that they know what market cap a given industry deserves. It may bubble in its growth getting there, but you only know the bubble is over after it bubbles.

Four sectors offer a large rebalancing penalty with each other. They are Industrials, Basic Materials, Consumer Goods and Services.

Sectors of the economy wax and wane with the business cycle. As a result, when stocks in one sector of the economy are performing poorly, they may continue that way for some time. This form of rebalancing will result in lower returns than if you just let the market cycle adjust your portfolio.

Business cycles vary in length. As a result, annual rebalancing will incur a large penalty when you move out of a sector that did well last year into a sector that will do poorly next year. The penalty appears to be the worst for sectors that peak and valley at similar times during the business cycle, such as Industrials and Basic Materials or Consumer Goods and Services.

In this case, intelligent rebalancing, which takes the business cycle into account and rotates which sectors you are emphasizing, would at least try to capture the bonus and avoid the penalty. Knowing where you are on the business cycle, however, is just as demanding as predicting which industry will have the highest return.

Utilities are the least highly correlated to other sectors. They are a defensive sector and often do better than other sectors when the market is dropping. A sector rotation strategy suggests overemphasizing utilities and underemphasizing stocks when P/E ratios are high.

Sectors of the economy grow or dwindle based on global macroeconomic trends. Over time, companies responding to market conditions increase the capitalization of those goods and services that society demands and decrease those that are phasing out of the economy.

In the beginning we were an agrarian society. Then the industrial revolution began in America and Great Britain. Now we have more of a service-based economy. Perhaps genetics will bring about a health-care boom in the near future.

The lifetime of my grandparents spanned the Wright Brothers to landing on the moon. Your grandchildren may choose a college major that hasn't even been invented yet.

Setting percentages of your portfolio at a level of the sector of the economy doesn't make sense. If you set those percentages today, based on current levels in the S&P 500, our economy may never again match those percentages. There is no reversion to the mean for sectors of the economy.

Setting investment percentages also doesn't allow you to make strategic investments in sectors that you expect to grow and outperform over the next three to five years.

Rebalancing at the capitalization level (large cap and small cap) makes sense because large- and small-cap companies will always exist. Small companies have a higher expected rate of return because it is easier to double the size of a small company than a large company.

Similarly, it makes sense to rebalance using investment style (value and growth) criteria because these are universal descriptions of stock types and not specific to industry. A company can move between value and growth based on its price. Overweighting value companies outperforms growth stocks because of the risk of a growth company faltering in its expansion and causing a serious price correction. Limiting your investment in such stocks slightly smooths and boosts your returns.

Although the markets as a whole often revert to profitability and growth, this isn't true of individual stocks or industries. Most of the dot-com stocks that bubbled at the beginning of 2000 will never regain their former glory. Buggy whip manufacturers are no longer ubiquitous.

A better strategy is to look for three- to five-year trends in the economy and simply overweight those that have the best chance of continuing to grow in importance. Such trends last long enough for investors to take advantage, assuming they are looking forward to what may do well and not backward to what has been recently bubbling. Two such industries I would expect to do well going forward are health care and technology.

The most critical expertise that an investment manager can provide is a good investment philosophy. Investment analytics give you the best chance of matching your specific financial goals with the diversified investment mix that is optimum to meet those goals.

Do You Fly or Drive on Summer Vacation?

Here's an interesting piece from MSN Money about the costs associated with flying versus driving on vacation. Which is "better"? The summary: driving is usually cheaper but flying will save you time.

We mostly drive. My family is an eight-hour drive one way and my wife's is seven hours the other way (and we usually visit each one once a year.) That seems ok for all of us and the kids don't get too crazy (my wife packs CD players and audiobooks for them). But if the trip is a very long one, we fly. For instance, we flew to Orlando (Disney) a couple years ago. Doing so saved us a couple days (and it wasn't that expensive since we flew out of a larger airport a couple hours from our house.) That said, we have friends that drive from Michigan to Florida. That's crazy to me.

Of course, there are other options like taking the bus or train. Bus? No thanks. Train? We're thinking about taking it to Chicago this fall. It will not only save us money (no parking/gas costs for a car and the train fares are cheap) despite the fact that we'll need to take s few cabs, but it also gets us out of the driving in downtown Chicago nightmare. Plus, we can all relax while traveling (including me). And it is only 30 minutes or so longer than driving.

How about you? Do you drive, fly or a combination of both? Why?

Another Good Experience

Remember when I went to my car dealership for a quick repair and they saved me $90 by being honest? When I was there, they tightened up the heat shield that was rattling under my car. A week later, it was rattling again (or maybe it was a different one -- they didn't say.) So I made an appointment, went in, and had them fix it.

When I got to the cashier's desk, there was no charge. This was probably because they felt they hadn't fixed it fully the first time. Still, I expected some charge. But no, there was a $0 balance. And they even washed my car for me to boot!

I don't know why it stands out so much to me when I get good service these days, maybe because so few companies do a decent job with it.

Anyway, I was impressed and will certainly be back to that shop. They are honest AND have great service, what's not to love? Yeah, the price isn't that great, but they send me coupons to get it within reason.

How about you -- anyone out there had a great customer service experience lately?

How to Market Yourself into a Job

This piece from Yahoo suggests how to sell yourself during the job hunt process reminded me that finding a job is all about marketing (or selling, if you prefer) yourself correctly. How so? Consider these points:

• The employer is looking for a product. He wants several things in this product (just like we all do when we buy something as consumers) such as a great return on his money (the more work/accomplishments he can get for the least amount of pay, the better), someone with a good attitude, a person that fits well within the culture of the company, and so on. The "product" (a person in this case) that most closely fits his criteria out of all the ones he considers will get the job.

• As a job hunter, it's your task to identify what the buyer (employer) wants and to market (sell) yourself as having these abilities. The person who does the best job of this gets the offer.

Each buyer, job, and company is different, but generally what do employers look for? And thus how should you market yourself to meet these requirements? These are the two biggest keys IMO:

• Employer wants: Someone who can deliver good results (however the company/employer determines these.)
• How to market yourself: Show a long list of quantifiable business results on your resume and then bring them up in your prepared interview answers.

• Employer wants: Someone with a good attitude.
• How to market yourself: Be pleasant and positive throughout the hiring process -- on the phone, in correspondence, in person, etc. And be this way to EVERYONE, including the secretary at the front door and the janitor you pass in the hallway. You're always "on" during the job hunt process and you never know when a good or bad word from someone not directly associated with the hiring decision could make or break your application.

Of course there are a lot of other considerations that play into the job search decision (just like there are with any purchase), but if you do a good job of marketing yourself as an employee that can deliver great results with a positive attitude, and you can convince potential employers that this is what you are, in most cases you'll be well ahead of any other marketing done by any other candidate.

Managing Student Loans: 5 Ways to Make Repayment Less Painful

The following is a guest post from Nicole White, who writes at Web Design Schools Guide.

Whether you went to an Ivy League school or a small state college, school loans can take a heavy toll on your finances post-graduation. While the cost of college is still one of the best investments out there, repaying the loans once you’re out can be tricky, especially for those who’ve never been on their own with financial management. Here are some tips that can help you deal with this debt and give you the skills you’ll need to manage any other big financial decisions to come.

1. Make it a priority. While paying off student loans may be the last thing you want to do with your new paychecks from work, it should be at the top of your list. Carrying around the debt will only cause it to accrue more interest and cost you more in the long run. Work out a payment plan for yourself that ensures you’ll pay off your loans before you’re old and gray.

2. Consolidate. If you have a variety of loans, one way to make your payments more manageable is through loan consolidation. You’ll be able to combine all your loans into one larger loan from a single lender. This can have some advantages in that it’s much simpler and most consolidated loans have a fixed rate, meaning you won’t be hit hard with changes in interest that can happen with many other variable loans. Additionally, these kinds of loans often offer a range of flexible repayment plans that can help to structure how you’ll pay it off.

3. Talk to your lender. If you’re struggling to make ends meet and simply cannot make loan payments, talk to your lender rather than just not making the payments. You may be able to arrange for deferment or forbearance, rather than only accruing more interest and further complicating the situation for yourself personally and financially.

4. Consider automatic deductions.  For those who have the money, automatic monthly deductions from a checking account can be the way to go in repayment. If it’s gone before you even notice, you’re unlikely to miss it and things will get paid off a whole lot sooner.

5. Know your options. You can’t win a battle without knowing the enemy. Learn all you can about the type of loans you have and your options for repayment. Many government loans offer a grace period after graduation where you won’t be earning any new interest or have structured repayment plans that can help you work out how much and for how long you’ll be paying. This can make a big difference over the long haul so do your research and be prepared.

With the average student loan working out to be around $23,000, repayment is never going to be fun. You can, however, make it a process that won’t hurt your credit, cost you insane amounts of interest or leave you more broke than you were while in college.

----------------

My best advice on this subject is to be sure to match college costs with expected post-graduation salary levels.

Help a Reader: Rent Deposit

Here's a question I recently received from a reader:

I am planning to move apartments in the upcoming months. I wanted to get lower rent for more space so I was planning on renting a townhouse from a local landlord rather than a rental company. I've read a few stories on the news about renters being foreclosed upon and being forced to move out along with losing their deposit.
 
Is there anything I can do to protect myself in case this happened? Once a house is foreclosed the lease is void, so I presume I can't force anything to be written in there. And I imagine the landlord will not accept no deposit either. What steps can I take to prevent losing my deposit and/or being compensated should this happen during the term of the lease? Is it reasonable to ask the landlord for their credit report prior to signing the lease? Also, is there a special type of account where the deposit could be placed that I would still have legal right to it?
 
I'm afraid that asking these questions and being firm place me farther down the potential tenant list. But I do not have room in my finances to lose $1,200-$1,400 because my landlord doesn't pay their mortgage! And in my area renting from apartment complexes vs. individual landlords is a difference of 100-200/month. That could make for some nice extra money in my budget.

Any suggestions for her?

Best of Money Carnival Up Now

The Best of Money Carnival #4 is up at Bargain Babe. As usual, it features the 10 best money posts from the last week. Check it out if you want some good stuff on money.

Congrats to all participants and especially the winning post, FREE Online Money Management Tools.

Examples of People Who Have Turned Their Hobbies into Incomes

I've listed turning your hobby into an income as one of my top ideas for making more money. And I've even suggested three steps you can take to make money from your hobby. But what I like best are examples of how people turned their hobbies into money making ventures. That's why I had to post on this piece from Yahoo. It details five people who combined their hobby with the web to develop an income-producing business. These include:

• Michael Parayno, a lifelong tinkerer, began building off-the-wall birdhouses in order to get rid of the wood from his decommissioned garden fence. Neighbors took notice, and he began selling the handmade birdhouses right off his front yard. That was over a decade ago. Today, the Berkeley birdhouse guy owns a lucrative business selling hand-crafted birdhouses.

• The Snyder family offers a one-stop shop for vintage pinball restorations and sales. To reach their small but passionate market of pinball wizards, the Snyders operate both a brick-and-mortar store and an Internet storefront.

• Jellyfish have special needs. The gorgeous and ethereal creatures have eluded standard fish tanks, which lack the technology to keep them alive. Until Alex Andon, a laid-off biotechnology worker, developed the means to keep jellyfish alive in captivity. Evidently, there's a market for pet jellyfish: A restaurant was among the first in line for a tank. Price tag: $25,000. Cool factor: priceless. With several charter clients under his belt, Andon is developing his hobby into a business selling desktop jellyfish tanks for a comparatively affordable $249.

• Parents charged with entertaining a roomful of pint-size partygoers will be thrilled to discover Teddy Bears to Go, which hosts teddy bear-stuffing parties for children. Lisa Roby, a single mother of two, started the small business when she lost her advertising job. Her new labor of love suits her just fine: "It's the most wonderful job I've ever done," says Roby. "It's so rewarding."

• Animal lovers have a wealth of opportunities to transform their passion into a business. Linda Callaway found her niche market in owners who have lost pets. Her four coonhounds have a knack for tracking lost pets. And Callaway has discovered a knack -- and the resources -- for turning the dogs' noses into a small business.

It's taking all the willpower I can muster not to comment on the pet detective business. :-)

But seriously, look how varied all of these businesses are. And who would have thought that most (any?) of them would ever become a viable business. But these people took their love for something (building, jellyfish, pinball, etc.) and combined it with technology to make a business. They get to do what they love and make money. Kinda cool, huh?

And even if your specific idea/hobby doesn't turn into a full-time job, that doesn't mean it can't generate some useful extra income does it? An extra few thousand dollars would come in handy for most people, and if it's something you enjoy doing, you're really earning money for having fun, aren't you?

My son is starting to see the value in this concept: $20 per game (not what he's earning now but what he's working toward) as a soccer referee times 25 games per season times two seasons a year (spring and fall) is $1,000. Throw in a few tournaments and he's close to $2,000 earned for doing something he enjoys. Beats flipping burgers at McDonald's by a long, long way.

The Best Way to Maximize Your Investment Return

For daily tips and ideas on how to grow your net worth, subscribe to Free Money Finance using this link.

There are three basic variables that impact the total return your investments generate. They are:

• Amount saved -- The amount of money you save every year.
• Return rate -- The rate at which your money grows.
• Time -- The number of years that your money is allowed to grow.

All of these are important and we talk about them frequently, but which is MOST important? Well, I developed a quick spreadsheet, ran some scenarios, and wanted to offer my findings to you. (But before I do, anyone want to guess which one has the biggest impact on the outcome?)

To begin this process, I had to make assumptions about a person's saving/investing to get a baseline investment return. Here's what I assumed our mythical person did with his investments:

• Earned $50,000 a year and saved 10% of that (or $5,000) per year.
• Earned an 8% total return after fees, taxes, etc.
• Invested for 30 years.

Using these assumptions, I found that this person would have $566,416 at the end of 30 years (FYI, I used this calculator to check my numbers.) In other words, $5,000 saved per year at 8% for 30 years generates $566,416. Pretty simple, huh? (BTW, I assumed that the money invested did not earn anything in the year it was invested. It started earning in the next year.)

Next I started tweaking the variables one at a time, leaving the others the same, to see what the impact would be. I tried to pick increases that I felt were comparable. In other words, I assumed that it was just as easy (or difficult if you prefer to look at it that way) to save $1,000 extra per year as it was to earn an additional 1% per year as it was to save for five extra years. I'll comment on how valid those assumptions are in a minute, but for now here are the results:

• I increased the amount saved to $6,000 per year. $6,000 per year at 8% for 30 years equals $679,699 or a 20.0% increase versus the original result.

• I increased the return rate to 9% per year. $5,000 per year at 9% for 30 years equals $681,538 or a 20.3% increase.

• I increased the time to 35 years. $5,000 per year at 8% for 30 years plus an addition 5 years of growth (but no extra investment) equals $832,251 or a 46.9% increase.

So, when you increase the amount saved by 20% per year, your overall increase is 20%. This seems to make sense and be "fair." But if you increase your return rate by only 12.5%, you get a 20.3% increase in the total, a much better result. Yet when you save for an additional five years, a 16.7% increase in time, you get a much, much better return -- an increase of 46.9% total. Quite interesting, wouldn't you say?

Now it would be easy to declare time the winner, rate second, and amount third, but a few other things have to be taken into account:

1. In reality, saving an extra $1,000 isn't comparable to earning an additional 1%. Earning that extra percent is a lot harder. So while the rate increase delivers more, it's much more likely that you'll be able to save more, thus I'd place the amount saved over the return rate in importance.

2. Time saved really is the winner. In fact, if our mythical person saved for only two extra years instead of five, he would have earned about as much as the 1% increase in the rate and $1,000 extra. Therefore, IMO, it appears clear that time saved is the most important factor in investment returns.

3. The good news: the two most important factors in determining a good investment return are ones that we have the most control over. It's much easier to add extra time (by putting off necessary withdrawals and starting as early as possible) and the amount saved (increasing income/decreasing expenses to save more now for investing) than it is to try and earn an extra 1%.

4. That said, you can't buy extra time. You can keep extending it on the back end as much as possible, but if you're 50 years old, planning to invest and let your money sit for 35 years isn't a realistic option. So for older individuals, I think the amount saved is the most important factor in maximizing your investments.

5. Yes, there are some flaws in this simple analysis. For instance, most people don't earn $50,000 starting in year one. Thus it would probably be hard for them to save $5,000 in year one. Furthermore, people start earning as soon as they invest, so the actual numbers are a bit higher (though for comparison sake they are all accurate here.) And investments don't earn return rates in a straight line, they vary from year to year. Finally, I had to make several assumptions that will likely be different than the actual scenario for any specific individual. So sure, there are things that could be changed, but this analysis does give us a good view on the comparable impact of the three factors.

6. If you do all three -- increase the rate to 9%, increase savings to $6,000, AND increase time to 35 years -- you really get a huge impact. The amount at the end of the 35 years grows to $1,294,265, 129% more than the initial scenario. That's why people spend so much time trying to increase all three of these, because if they can, the payoff is really big.

Now, on a personal note, here's what I'm doing to make these three factors as high as possible:

• I'm saving/investing as much as I can each year in a variety of ways. For details on what I'm saving/investing, see I'm Still Buying.

• I'm doing all I can to maximize my return rate -- investing in index funds in the lowest cost alternatives I can find.

• I'm going to postpone withdrawing funds from my savings for as long as possible by working part-time once I "retire". For details on why I think I can do this, see What I Plan to Do During Retirement.

I realize that much of the information here is not new news to seasoned investors. But for those just starting out (especially new grads that have a chance to save for 35 years) or those unfamiliar with how investing works, I thought this information would be insightful.

For those of you who are more advanced investors, I'd appreciate your thoughts/comments on this analysis. It's likely that your perspective will make this piece better, so I'll look forward to your comments below.

Who Should Know How Much a Pastor Makes?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

After the discussion we had on my post titled Is It Ok for a Pastor to Earn $600k a Year?, I got to wondering:

Who should know how much a pastor earns in salary every year?

A couple thoughts from me to frame the conversation before you respond:

• On one side of the issue, you could say that "no one" (or at least not very many people -- maybe just the church administrator, the board, and the person cutting the checks) should know any pastor's annual salary. After all, it's a personal and private matter isn't it? And do Joe and Mary Member really need to be aware of what the pastor makes?

• On the other hand, the pastor's salary is paid from contributions from the members, so aren't those members entitled to know what the pastor earns? In addition, many non-profits make the salaries of their top executives known to the public, why shouldn't church pastors?

What's your take on the issue? Should everyone know what a pastor makes, very few know, or somewhere in between?

Exit Strategies

The following is a guest post from The Strump. 

How many times in your life have you jumped into something without thinking, then tried getting out but it wasn't so easy? Getting into anything is pretty simple because it's so fresh and new at the start - like an investment or a relationship – but sooner or later the lustre wears off and you know you it’s time to move on.

Take a bad investment – you plop down your money on the latest stock or mutual fund and you're eager to watch it grow … but then it fizzles. What do you do? Keep your money invested and hope it goes up or cut your losses and invest in something newer and better?

What about a bad relationship? You've spent years living together building assets but then turn over one day and realize you're not living with the same person. It's funny how love can quickly turn into hate. Nothing is worse than a scorned lover who feels entitled to half of everything. What if there is a financial imbalance where one makes significantly more and the other stayed at home? That is a recipe for disaster, if you ask me.

Here are some examples of exit strategies:

• Relationships
– get a pre-nuptial agreement or cohabitation agreement. When the love is gone, you're money won't be because you've protected yourself at the outset and everyone knows what they're entitled to. A friend of a friend of mine didn't have a co-habitation agreement and ended up losing half his pension. Ouch!

• Investments – before you buy, you should of course, do your homework. But when you're ready to sell, do you know what you're investing in yet or are you simply panicking at some tidbit of news you read on some financial blog? Have another investment in mind before you sell or you'll just end up making the same mistake again.

• Work – with all the layoffs floating around these days, it's clear that the day of staying with a company for life are over. Always network when you don't need a job and keep your eyes open … and don't forget to keep your skills up to date. These will come in handy if you get that pink slip.

• Life
- for the ultimate exit strategy, get your estate in order and make sure you have the following – will, life insurance, etc.

Using a personal example, I had a job once and thought it was going well in the first three months, until I was summoned into my manager's office and promptly dismissed. Given that it was my probationary period, I didn't get any benefits or severance. I also had not kept up with my networking and didn't have any new opportunities readily available. That was a huge lesson learned. (I should have had an emergency fund, too!)

All good things come to an end. When I look around and think that life is going my way, I usually know there's some nasty surprise around the corner.

Having an exit strategy can ease the pain of these unexpected or rather inevitable events.

And Yet Another Reason to Move to Wyoming...

Here's a piece from MSNBC that lists the worst and best states for getting speeding and other driving-related tickets. The worst five:

1. New Jersey
2. Ohio
3. Maryland
4. Louisiana
5. New York

The best five:

50. Wyoming
49. Idaho
48. Montana
47. Nebraska
46. Kentucky

And now we have another reason to move to Wyoming. :-)

I drive a lot in Ohio and Illinois (#6), but other than that, it looks like I'm in pretty good shape. Pedal to the metal, boys!!!!!!!

My state, Michigan, was rated #15. It's always rated in the top 15 or so for anything bad (unemployment, worst governors, longest winters) and in the bottom 15 on positive factors (states with most recreational opportunities, highest average salaries, best climates). Why do I live here again? Oh yeah, those three perfect days of summer we get are awesome. ;-)

Seriously, I don't mind Michigan all that much. Besides, we have a nationally-ranked football team every year. Oh, wait a minute, scratch that. I think Northwestern actually does better than the maize and blue these days.

Freedom from Budgeting

The following is a guest post from Luke, the guy behind NeoBudget, an online budgeting system using the envelope method.

The title of this article is intentionally deceptive.  This is not an argument against budgeting.  Contrary to what you may have heard, budgeting is a liberating experience.  Creating a budget and sticking to it can be one of the most freeing experiences of your financial life.  I've seen this happen in my own life and in the lives of several friends.

Just so we're all on the same page, let me define what I mean by the term "budget".  A budget is simply a plan for your money.  In order to plan your money, you need to know where your money comes from and where it goes.  Budgeting is a way of controlling where your money goes.  It doesn't mean you can't eat out every night, it simply means you would plan for eating out every night and know you have money available to do so.

I've never seen anyone regret budgeting once they get the hang of it.  I've helped many people get started with a budget, and they all say the same types of things: "It's great knowing I will have money at the end of the month for all my bills," "My wife and I don't fight over money any more," and "I actually spend more on recreation now that I'm not nervous about paying my bills."

Here are some of the freedoms provided by a good budget:

• Freedom in your marriage.  Money is one of the leading causes of divorce in the US.  It stands to reason that even when it doesn't lead to divorce, money can still be a significant cause of stress in a marriage.  One spouse may spend a lot of money, while the other is working hard to find money to pay the bills.  More likely than not, they both think the main problem is with their spouse, not themselves.  Creating a budget together and sticking to it together can relieve the stress.  You both have defined goals, and both can work to meet those goals.

• Freedom to sleep.  A budget lets you know how much money is coming in, and how much money is going out.  You should figure out your bills and other expenses, and reserve enough money to pay them.  Money left over is yours to spend (or save) how you want.  No more sleepless nights wondering if you have enough money in the bank to pay your bills for the month.  You know that you do, or you know that you don't.  If you discover that you don't have enough money to pay the bills, you have the information necessary to take action and resolve the problem by cutting expenses and trimming back.

• Freedom to give.  One thing I've enjoyed most about budgeting is that I can budget a certain amount to give.  Without a budget, I would be a hoarder.  I would be afraid that I couldn't pay the bills, so I wouldn't spend or give anything away.  With a budget, I know how much I can give away without hurting my family's financial stability.

• Freedom to remember.  It's amazing how money can slip through your fingers without you realizing it.  This happens to me all the time if I carry cash in my wallet.  It's gone before I know it, and looking back I have a hard time remembering how it was spent.  Keeping track of your spending helps you see where you spend your paycheck.

• Freedom to have fun.  As I mentioned in the introduction, creating a budget doesn't mean you have to stop spending money on fun.  If you want to eat out every night, budget for it.  You'll know if it's going to hinder your ability to pay the bills.  If you can afford it, and you budget for it, then you can eat out every night without feeling guilty when you pay the check.

Shining light in the dark corners of your financial life can be a frightening experience.  Enough so that you might consider keeping the truth about your checking account in the dark.  But, once you honestly evaluate your financial situation and create a budget you'll discover, like I did, the financial freedom and peace of mind that can follow.

Help a Reader: Transfer of Funds

Here's a question recently left by a reader:

My parents are very old and want to turn over their funds to me, their only son. I'm concerned about tax implications of a $120K transfer to my account. Also, in the event of their passing, I'd like to avoid the probate vultures. What's the best way of handling this?

Any advice for him?

Star Money Articles and Carnivals for the Week of June 15

For weekday updates of what I find to be some of the most interesting personal finance articles on the web, follow me on Twitter. For now, here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:

• Surprise! I was the winner of this week's Best of Money Carnival with my post titled The Most Useful Thing Students Can Do to Prepare for the Job Market!

• EDITOR'S CHOICE!  Festival of Frugality - Four Home Upgrades Worth the Tax Break

• EDITOR'S CHOICE! Money Hacks Carnival - Three Ways to Get the Most from Your Credit Cards

• EDITOR'S CHOICE! Carnival of Debt Reduction - Seven Ways to Wreck Your Credit

• WalletPop suggests paying off half your credit card debt.

• Free by 50 details miscellaneous perks from work.

• Free from Broke confesses.

• Debt Free Adventure tells how to make laundry detergent.

• Wealth Pilgrim tells how to protect yourself from others' financial insanity.

• The Weakonomist gets his first returned check fee.

• Financial Highway tells how to spot a bad credit loan scam.

• Carnival of Personal Finance - Change You Can Believe In

• Carnival of Money Stories - Should You Let Your Car Idle or Turn It Off?

• Carnival of Pecuniary Delights - How Do You Decide When to Get a New Car?

Enjoy!

Reminder: Why You Shouldn't Listen to Me

Based on a few comments I've received recently, people seem to think that I'm a financial "expert" (ugh!) of some sort. Let me remind those people and the rest of you of this post, the fourth post written on this blog and published well over four years ago. The highlights of my "financial qualifications":

• I am not a financial expert.

• I do not have a professional degree in finances. 

• I do not work in the financial products industry. 

• In other words, you may find my advice to be worth what you pay for it (the “free” in the name of the site.)

In addition, I also said the following:

• I also promised to tell you why you should listen to me instead of listening to them (the financial media).  The reason: You shouldn’t.

• In other words, use this information at your own risk.

Just wanted to be sure we understand each other. I am not a financial expert in any form or fashion. I'm simply a person who has a financial blog that has some readers. If that's a qualification to be a financial expert, heaven help us all.

It is true, though, that the day after I shared the above, I also listed some reasons you may want to read this blog. Here's the most important one:

Over the past 20 years, I have managed my own finances so that my net worth now places me in a very good position versus the average American.  I started with nothing and while I’m not “rich”, I am doing well.  And what I did (and continue to do) can be done by anyone.  That’s what I’ll be sharing here.

I've never detailed my net worth on this blog before, but let's just say it's in the top percentiles based on this and this -- the best numbers I could find on the subject. If that has any sort of meaning to you, then maybe I'll say something that can help you. Then again, maybe not.

But let me state the following so we all know where we stand:

• I am not a financial expert of any sort and do not hold myself out to be.

• I simply write about what I've done/am doing financially. This may or may not work for you. So far, it's turned out well for me.

• It's likely that much of what I write won't work for you since you're not me. That's fine. Take what you can use. I'm simply hoping to leave you better off financially than you were before you read this blog.

• That said, you can't simply pick and choose from what I say and expect the same results. For instance, if you spend the way I spend and invest the way I invest but don't grow your career like I have, it won't work (or at least work as well). Or if you grow your career like I have but don't spend the way I do, it won't work (or at least work as well). In other words, don't blame me if you take one part of my thoughts and chuck the rest of them and don't get the results I've gotten. It doesn't work that way. I know most of you know that, but some commenters seem to imply they can do this (and even that I'm suggesting this is ok) and all will turn out well. I'm saying clearly, it will probably NOT turn out well!

• If you disagree with me, that's fine. You're free to say so (evidence: note some of the comments I leave up). But saying I'm an idiot, that my thoughts are meaningless, and so on isn't 1) kind, 2) right (see the net worth info above) or 3) helpful to anyone. If you wouldn't say something if people knew who you were, you probably shouldn't say it just because you can do so anonymously on the web. And for those of you who can't seem to control yourself, I remind you of my comment policy.

Now that we're all on the same page, we'll return to our regularly scheduled programming with the next post...

Best Ways to Access Your Cash Out of the Country

The following is a guest post from Money Help For Christians.

The tickets overseas have been purchased, the destinations established, and the kids are excited.  Now you are forced to watch with horror as the US dollar continues to lose its value compared to most of the major currencies.  While you cannot control the value of the US dollar, you can minimize the damage by finding the best ways to access your cash out of the country.

How to find out current and historical exchange rates:

To find out the currency exchange rate for your desired country, simply go to a site like Onada.  You can get the current and historical ‘interbank rate’ which is essentially the prime rate.  This gives you an idea of what your currency value is before any buying or selling fees.  Typically, venues will add anywhere from 0% – 5% to the interbank rate allowing them to make a profit on the transaction.  The way you save money is by using the method that gets you closest to the interbank rate while offering you the security and convenience you prefer.

The Various Methods for Accessing your Cash Overseas

Travelers Checks:

There was a day when Travelers Checks were synonymous with cash and travel.  It was safe and easy to use money overseas.  But a new day and age in travel demands better alternatives.  Travelers checks do offer the comfort of knowing they can be replaced if lost or stolen.  However, travelers checks have extra fees and relatively poor exchange rates.  In addition, they are time consuming to acquire and a hassle to use. 

Exchange at your local bank or a Foreign exchange counter:

The British newspaper, the Telegraph, warns that getting your money exchanged at an airport currency exchange counter is the most expensive way to exchange your money. 

Credit Cards:

Credit Cards are by far the most convenient way to purchase your items overseas.  Most offer high levels of fraud security if lost or stolen.  The biggest drawback with the credit card is the exchange rate fees.  Here is a sample listing of the fees at some larger credit card companies:

• Capital One – 0% - Capital One has very sensitive overseas fraud monitors in place.  Always call and pre-notify them of your travel plans before leaving the country.
• American Express – 2.7% – Compared to Visa and MasterCard, American Express is accepted at fewer locations overseas.
• Citibank (Citicard) – 3%
• Chase – 3%
• Bank of America 3%
• Schwab – 0%

Withdraw Cash Using Your Bank Card at an ATM Overseas:

ATMs have been growing in popularity for overseas travelers.  Most countries overseas have an abundance of ATM locations.  With the exception of one airport, I have not traveled anywhere recently where there was not at least one ATM in the airport. 

There are two types of fees to be aware of when using your ATM card overseas.  First, you might get charged a flat fee by either your home bank, overseas bank, or both.  Your home bank can let you know what they charge and the overseas bank will ask you to confirm the fee before proceeding.  The second charge is the percentage that will be added to your withdrawal as a foreign exchange fee.   For example, if they add a 3% foreign exchange fee and the US dollar value of your withdrawal is $100, you would pay a $3.00 fee.

Sample ATM fees (assessed only by the home bank):

• ING Direct – 2% with no transaction fee.
• Citibank – if you use your card in their network they charge you 3% and no transaction fee.  If you go outside the network you pay $1.50 per transaction.
• Bank of America -  If you have a Bank of America checking account with a debit card you can withdraw local currency, with no added fees, from ATMs operated by Barclay's Bank in the U.K., BNP Paribas in France, Deutsche Bank in Germany, Santander Serfin in Mexico, Scotiabank in Canada, and Westpac in Australia and New Zealand. Best of all, you are not assessed the usual one-percent exchange fee.  Be cautious, however, because they will charge you $5 per ATM withdrawal if you get cash outside the network listed above. 
• Local Credit Union – be aware that every credit union has their own fees. You may wish to contact your local credit union to see their rates.

I highly recommend you confirm this information with your local bank.

Here's a full list of credit card and ATM related fees.

Prepaid Travel Money Card

A prepaid travel card, the TravelMoney Card, functions much like a credit or debit card and is available through Visa.  Of course, the primary difference is you pre-purchase all the available funds before leaving home.  It includes common features you would expect - accepted anywhere Visa is accepted, ATM cash access, and zero liability for fraudulent charges.  You predetermine the amount you want added to the card ($100 – $9,999).  The card can be used both domestically and overseas until the balance has been spent.  The card imposes a 3% foreign transaction fee when used overseas.  The card costs $4.95 to purchase.  Then there are additional fees for 12 months of inactivity and a replacement card.  You can get the details here. 

Use an Online Foreign Currency Provider

There are many online foreign currency providers but I use XE. Once you have joined and set up an account, you can have most major currencies sent to you via bank draft, electronic funds transfer, or wire.  They publish their exchange rates in real time so you can compare it to the interbank rate to determine the value of your transaction.  There is no fee to use the service (depending on the method you choose to have your fund delivered); however, they include a foreign exchange fee in the rate.  To find out the exact amount for your currency just compare the exchange rate they are offering to the interbank rate.

My suggestions:

• Avoid travelers checks, banks, and foreign exchange counters. The fees, rates, and hassle make them a poor option.

• For credit cards, I carry a Capital One Platinum credit card.  They do not charge foreign exchange fees.  If you travel frequently, consider getting either this card or the Schwab card as they both have 0% foreign exchange fees.  The advantage of the Schwab card is the 2% cash back.  Also, do remember that you need to have a brokerage account with them.  Of course, Free Money Finance has posted about the Schwab card. 

• For ATM cash withdrawal I use my credit union card which charges 1%.

• Prepaid travel MoneyCard – this would be a good way for parents to send money with their children who are traveling overseas.  The fees are more, but when you send a 16 year old on a school or mission trip, who wants them holding a credit card or a pocketful of cash?  Otherwise, I would avoid the MoneyCard.

• Online Foreign Currency Provider – I use XE when I want to lock in the exchange rate.  Have you ever planned a vacation only to watch the exchange rate increase?  The only way to guarantee your budget will work is to prepay for the currency so you know what exchange rate to expect.  Of course, things can go the other way and the exchange rate might drop.  Consider your knowledge, experience, and comfort level. I do not invest in foreign currencies, but there have been occasions when I have planned a trip when an exchange rate was at its lowest in 3-5 years.  In those circumstances I often pre-purchase my funds using XE.

My strategy for accessing cash overseas:

• I limit the use of Credit Cards to car rentals and other large purchases.  Credit cards are just too convenient.  Who wants to watch their spending on a big family vacation?  No one. Typically people buy an item and promise to sort it out when they get home.  Credit cards do not track your spending in real time.  They tell you what you spent, not what you are spending.

• The remainder of my spending is done with cash that I have gotten from an ATM or an online foreign currency provider.  Cash is the easiest way to track your budget on vacation.  Here is what I do.  Let’s say your budget is $1,000.  Go to the bank and get $100.  You don’t need to keep receipts or anything because you will know when you spent the $100 (when the money is gone!).  When the money is gone, get another $100.  Repeat the process until you have spent all your money.  It is an easy way to keep on top of your budget to be sure you don’t overspend.  Moreover, it is an easy way to track all of those little expenditures along the way – tips, taxis, snacks.

Bon Voyage!  Enjoy your summer travels and minimize the financial impact by finding your best option for accessing your cash overseas.

How to Ask for a Raise When the Pay Freeze Thaws

Here's a US News piece on how to ask for a raise when the pay freeze thaws. It could also be called "how to ask for a raise when the economy recovers", or, simply "how to ask for a raise" (since the principles are rather basic), but you get the idea.

They list several suggestions, but here's the one I think is key:

Measure your own performance. It's important to consider whether you're a true asset to the company, Williams says. Consistently positive performance is likely to be something the company won't want to lose. Proving your flexibility during any recessionary changes in the organization is also a positive attribute.

If you're one of the company's "best and brightest," then asking your employer to discuss salary won't come as a surprise, says Judith Bowman, an expert on business protocol and author of Don't Take the Last Donut: New Rules of Business Etiquette. She suggests taking the time to write down all of the work you've been doing during the recession, then catalogue your achievements and highlight any duties or projects you've taken on that vary from your job description. Using numbers can elevate those achievements from anecdotal to concrete.

Exactly. The best way to get a raise no matter what the situation -- after a pay freeze, after the economy recovers, after your company turns around or whenever -- is to deserve a pay raise. Pretty simple, really. Prove your value to the company and show them that you're worth much more to them than even what a healthy raise would give you (you don't need to take all of your value off the table for your company now do you?) If you can do this, a raise should be fairly easy to obtain. And if they won't give you one, you can brush up that resume and sell your skills to another company as most companies will pay rather nicely for people with the ability to deliver proven results.

But whatever you do, don't leave your current job until you find a new one. Not that you would, but I just wanted to be clear.

Want some more thoughts on getting a pay raise? Check out How to Increase Your Salary and How to Ask for a Raise.

How to Check Your Retirement Assumptions

The following is a guest post from Monty Hothersall, co-founder of Financial Fate.

If you’ve ever projected your financial or retirement planning numbers using an online calculator, you might be surprised how much those results have changed over the past 12 months.  But this probably makes sense given the market’s free fall, right? 

Well, not exactly.  Since most of these online calculators use a statistical program called Monte Carlo Simulation (MCS), you might easily get a false sense of the future due to the problematic assumptions which drive the MCS results.  To use an example, let’s say your results from last year’s MCS planning said you had a rock-solid 98% chance of successfully meeting your retirement goals.  (But today it’s a much different story.)  So, was the 98% result a realistic number and you just had some unfortunate luck? 

Not likely.  The problem is that MCS is based on a risk model where the future market returns are projected to be “normal.”  Where in reality, market returns are far from normal because they are “uncertain.”  And since the underlying assumptions of MCS are not valid, the 98% result was not valid.  Maybe it should have been 68% or even 38%, who knows? 

Instead of using MCS based tools, you need predictive financial-modeling tools (like on my free site, FinancialFate.com, or others like ESPlanner's non-MCS solution) which allow you to challenge the rates of return by asset class and question the targeted future asset allocations.  And you must be able to realistically forecast the volatility of your free cash-flows which will be available for future investing.  This would allow you to control your scenario planning rather than "flying on auto-pilot" with MCS technology that wasn't designed for predicting market returns with all its inherent uncertainty.

Also, when developing a long-range financial plan remember that it will take 3 to 5 hours of your time.  But it usually requires only one planning session per year unless something dramatic happens, and each subsequent year should take less time than the previous year.  Tools like Fidelity's My Plan which take less and 5 minutes to generate a plan are akin to taking diet pills to lose weight instead of dieting and exercising; it's easy but it just doesn't work.

Once you allocate the appropriate amount of time, the next step is to find software or an online tool that utilizes rules-based forecasting to automatically project all your "sources and uses" of cash-flows.  These projections should be in line-item-detail and projected year-by-year into the future with total transparency.  If the output reports that support your results are not fully disclosed and available for your review, don't believe the results.  (Even if you don't plan to actually scrutinize the projections, it's nice to know they could be audited.)  And you should bear in mind these four categories that all impact each other as you plan for your financial future:

• Income Taxes:  While most solutions determine future tax bills based solely on a percentage of future income, that’s not how taxes are calculated.  This short-cut methodology neglects significant adjustments in your AGI, deductions, exemptions, tax credits, and the actual tax tables (both state and federal).  For example, if one plans to move from California to Texas in 2 years, it would have a huge impact their state tax bill.

• Expenses:  Each expense line-item will behave differently in the future.  For example, when projecting healthcare premiums, fluctuations will be due to: 1) a changing family size, 2) a future retirement, 3) future Medicare benefits for each spouse, 4) Flexible Spending Accounts, 5) tax implications, and 6) medical cost inflation.  You should be able to view these cash-flows and change underlying assumptions such as the age that Medicare kicks in, if desired.

• Income:  If one plans to retire early, go part-time, or start a company in the future, this will impact such things as Social Security and pension benefits.

• Investments:  In order to allow dynamic "what-if?" analysis to be preformed, you should be given the flexibility to select long-term expected annual returns (growth &/or income) by asset class.  You also should be able to select investment risk tolerances (asset allocations) that shift as your time horizon changes for goals like retirement and education.

Anyone Use Upromise?

Anyone remember Upromise, the program where you sign up your credit card, shop/eat at participating stores/restaurants or buy certain products, and get a rebate percentage back to be used to pay for college expenses? Here's a summary of how it works:

Once you join Upromise®, nearly everything you buy or do can mean more money for college in your Upromise account. Check out all these great program options. Remember: the more you do, the more you can get back. You'll be able to watch your Upromise account accumulate daily with all your eligible purchases.

All your earnings are automatically saved securely into your Upromise account. Then, you decide if you'd like the potential to grow them tax-free in a 529 plan 1 to pay for college, use them to pay down a Sallie Mae student loan, or receive a check for college expenses. 

Seems to me like this was "all the rage" several years ago, but I haven't heard much about it lately. I'm sure some of you use it. How do you like it?

I signed up for it at one point but for a reason I couldn't remember, I never really used it. Then I searched their site of participating restaurants within 15 miles of my home. I didn't recognize a single one of the 30 or so that were participating. Then I looked for my grocery store to see if it was included. It was -- as long as I wanted to shop online. What? Ok, so now I know why I didn't run with the program -- I'm not interested in any of their offerings. Guess that kills their "nearly everything you buy or do can mean more money for college" claim.

Anyone out there using this program with great success? What are your tips for making the most of it?

Simplicity Can Streamline Your Budget

The following is a guest post from StretchyDollar.

Budgeting, in one form or another, is an essential part of financial success. Knowing where your money is coming from and where it is going will help you see the big picture, and keep things in perspective.

In the beginning, budgeting is a bit like trying to ride a 2,000-pound bull in a rodeo. Not only do you have to try and keep from falling off a huge galloping steer, but that same animal is angry and wants to kill you.

In all of your excitement to document the life of every cent you call your own, it’s easy to get overwhelmed, distracted, or discouraged. All three of those emotions are notorious budget killers – they’ll suck any desire to maintain your budget right out of you before you finish your first week.

Remember that keeping your budget as simple and accessible as possible will benefit your financial health in the long run. As with anything else, it can grow and scale up as you become comfortable with it. Here are some of the lessons in simplicity I experienced as we wrangled our finances into control with our attempts at budgeting.

Focus On the Numbers, Not the Tools

I remember shortly after I found my motivation to get our finances in order I spent an entire Saturday afternoon cruising around the Internet, looking for a tool my wife and I could use to keep track of our money. There are a variety of sites that match up with different styles and tastes, and I wanted the right one. Each tool has bells and whistles and is geared towards different audiences.

I wanted to use a website, but I admired the classy “old-school” feel of a spreadsheet. I was comfortable with Excel, too – so I knew that was an option. The only thing I wasn’t sure about there was how my wife and I would be able to both have easy access to it.

Before I knew it I had signed up for two different budgeting sites and tried to design my own budgeting template in Google Docs. Needless to say, we didn’t stick within our budget that month.

We tried different things, but ended up checking a couple of different sites, confirming that with the online statements provided through our bank, and then trying to reconcile a spreadsheet. Ha. Budget – FAIL again.

After a couple of months trying a few different things, we’ve finally figured out our system. We use an online budgeting site mostly to get a quick overview of all our accounts at once, but our budget has found a home as a spreadsheet in Google Docs.

In and Out and Where Is Good Enough

One of the things that intrigued me about the websites and other tools I was finding online was the depth of the information they provided.

I could find out how much I spent on gas each month (sure – useful!) how much I spent on the 16th of each month (remotely interesting), or even how much I spent on toilet paper compared to Americans (less than average – wonder what that means?) All of that information can be useful, interesting, or humorous on certain levels, but at some point, it just becomes clutter.

Tracking certain trends like month-to-month spending on groceries or average spending on “eating out” can be useful and help you find the things in your budget that are working and the things that aren’t. Past that, though, you really need to decide how much information you want.

If you’re able to stay focused on the basic information, you’ll spend less time staring blankly at your budget, trying to figure out how much lunch money you have left, and more time out doing whatever you like to do when you’re not hanging out with your budget.

Keep The Overall Goal In Mind

Your budget should govern your spending. If you’ve already spent your allotted amount of cash on “entertainment” for the month, you shouldn’t spend any more. Is it really a big deal to go over on your budget, though? Should you sweat every little time you go over a certain category in your budget? If it happens consistently, yeah, you should. That is an indicator you need to go back and re-evaluate your spending habits and determine if you need to make a sacrifice, or increase the amount of money you have to spend in that category.

Always remember, however, that your budget is like the Pirate Code – it’s “more of a guideline” (to quote Disney’s Pirates of the Caribbean).

If you’re under in some areas and over in others and the excess balances out the deficits at the end of the month, you’re doing well! Don’t sweat every little thing. Emergencies and mistakes happen, and are part of life no matter what you do.  Simple and dedicated focus on the end goal of keeping your spending less than your income will help you gain traction and move on to doing more with your money.

Best Advice for Graduates

The Wall Street Journal asked several prominent people about the best and worst financial advice they received—and their guidance for this year’s grads. Here's what each of them said their best advice was for those graduating this year:

• David Bach, author of the best-selling FinishRich books - Don’t give up if you’re not finding a job. Ask someone for an informational interview. At the meeting, get three more names of professionals to meet. That’s how he eventually landed a job.

• Paula Deen, restaurant owner, author and Food ­Network host - Get all the experience you can and be persistent.

• Robert Kiyosaki, businessman and author of the best-selling “Rich Dad, Poor Dad” books - If you’re going to be an entrepreneur, find a successful one who will teach you.

• John W. Rogers Jr., chairman and CEO of Ariel Investments - You want to be known as the best teammate in whatever organization you join. Look out for your teammates every step of the way. Be a good listener, teammate and friend, and live up to the commitments you make. Whatever you promise you’re going to do, you’ve got to do that.

• Mary L. Schapiro, chairman of the U.S. Securities and Exchange Commission - Live within your means. People need to know how to manage debt so don’t borrow without understanding the implications of the debt and how you’ll repay it.

• Carrie Schwab-Pomerantz, ­president of the Charles Schwab Foundation - Live off 90% of your income. Save the other 10%, first as a cash cushion. “When you’re young you don’t need all the bells and whistles in life,” she says.

Not bad advice, huh? All of these basically boil down to two thoughts: make the most of your career and spend less than you earn. Hard to argue with those two, isn't it?

BTW, this is not only good advice for graduates, but for all of us.

Investment Strategies Part 3: Rebalance Regularly Between Asset Classes and Subcategories

The following is a guest post from Marotta Wealth Management.

The investment metric correlation helps you continually take your gains off the table for safe spending. And it helps you determine what constitutes an asset class and which subcategories to consider for further diversification. Once these categories are defined, correlation can also reveal how much of a bonus to expect from your returns when you rebalance between two categories.

In his 1996 article "The Rebalancing Bonus," William J. Bernstein presented a brilliant formula to approximate the extra return you can expect by rebalancing your portfolio regularly. We rarely focus on a formula in this column. But there is deep wisdom here, both for portfolio construction and for determining which categories are worth regular rebalancing. Here is the formula:

B1,2 = P1P2{σ1σ2(1 - c) + (σ1 - σ2)2 / 2}

Where B is the bonus, P is the percentage allocation, sigma (σ) is the standard deviation (SD) and c is the correlation between the two assets.

The implications of the formula are useful, even for average investors. We can learn six valuable lessons from Bernstein's model.

First, notice the approximate size of the rebalancing bonus. A 50-50 allocation between two investments with a 0.5 correlation where each investment has an SD of 20% might be typical for equity investments. Such a mix has a rebalancing bonus of 0.5%. We will use the formula to demonstrate ways to boost this bonus. Even a half percentage point is noteworthy.

Investment professionals divide an extra 1% into hundredths of a percent, called "basis points." Earning an extra 50 basis points is huge. Investment advisors bend over backward for an extra 10. So rebalancing pays.

Second, the rebalancing bonus is the sum of all possible rebalancing bonuses. Our example of a 50-50 allocation has a 0.5% bonus because there is only one potential allocation mix to rebalance. With three categories allocated 33-33-33, the bonus rises to 0.67%. Each of the three rebalancing opportunities contributes 0.22%. Four categories split 25-25-25-25 provide a 0.75% bonus by giving six smaller rebalancing opportunities. Five categories of 20% each give 10 separate pairs of rebalancing for a 0.80% bonus.

Investors are taught to minimize the number of investments and investment categories. Although there is a gradual law of diminishing returns, diversification provides investment gains any time the investment itself is worthwhile and the correlations are low. With computer support for the analysis and rebalancing, investors can handle a large number of categories and holdings.

Third, note that the rebalancing bonus is proportional to the product of the percentage allocated to each holding. With a 50-50 allocation, the product is at its maximum at 0.25. A 60-40 allocation is nearly as high at 0.24. With a 70-30 allocation, the product drops to 0.21. And 80-20 drops all the way to 0.16.

The bonus is at its maximum when roughly equal allocations are made to each asset category. The smallest allocation should be at least half the size of the larger allocations. Our example, with four equal holdings of 25-25-25-25, resulted in a 0.75% bonus. An allocation of 30-20-30-20 is still high with a 0.74% bonus. But a 40-10-40-10 allocation drops the bonus to 0.66%. And an allocation of 85-05-05-05 drops the bonus way down to 0.27%.

Thus when an option is investment worthy, it merits a significant allocation. A good rule of thumb is to only skew an investment choice as much as two thirds to one third. Always invest at least a third into the smaller allocation.

The remaining lessons come from the terms inside the curly brackets of the formula. The allocation product is multiplied by the sum of these two terms. Maximizing their sum augments the bonus gained from rebalancing. Either of these two terms might be zero under certain circumstances. Each term has lessons to teach the savvy investor.

The first term depends on the correlation between the two investments. That is, the lower the correlation, the higher the bonus. A correlation of 1 has no bonus. Our example had a correlation of 0.5 and a bonus of 0.5%. If the correlation drops to zero, the bonus doubles from 0.5% to a full percentage point. At negative 0.5, the bonus becomes a full percentage point and a half.

So lesson 4 teaches us that the lower the correlation between two investments, the greater the importance of rebalancing. Rebalancing at the asset class where correlation is the lowest is more consequential than rebalancing between suballocations with a higher correlation.

Fifth, we learn that the higher the volatility of the investments, the greater the bonus in actually rebalancing. In our original example, both investments had a SD of 20%. The higher each SD, the higher the rebalancing bonus. By raising the SD of both investments from 20% to 30%, the rebalancing bonus increases from 0.5% to 1.13%. At 40%, the bonus is 2%. At 50%, the bonus is 3.13%.

Emerging market investments are extremely volatile. When they appreciate, an excellent strategy is to trim the position and take some profits off the table. When it drops precipitously, it is equally critical to reallocate and invest some more. Volatility equals opportunity if you rebalance regularly.

The last term is the difference between the SDs. It was zero in our example because the SDs were both 20%. To consider the contribution to this term, take the case where one of our investments has a 20% SD. But the other investment is as secure as possible and has a SD of zero. The first term becomes zero, but the second term makes up the difference.

With half invested in stable investments, the rebalancing bonus when the other half has a SD of 20% again is 0.5%. As the equity investment becomes more volatile, the bonus increases. At 30% SD, the bonus is again 1.13%. At 40%, the bonus is 2%. And at 50%, it is 3.13%.

Thus the greater the difference between the SD of two investments, the greater the bonus from rebalancing. Moving money from bonds back into stocks after a market correction yields substantial gains. A recent study from Fidelity shows exactly that: "Millionaires who used past recessions as buying opportunities now boast an average of $1 million more in investable asset than millionaires who shifted into more conservative investments."

Finally, we must learn to recognize when rebalancing provides a good chance of boosting returns and when it is unimportant. Rebalancing between two categories of U.S. stocks with a 0.85 correlation only gains a 0.15% bonus. In contrast, rebalancing between fixed income and emerging markets gains nearly 1.5%.

I asked formula creator William Bernstein how he might caution investors. He answered, "Rebalancing works best with high-volatility, low-correlation assets with similar long-term returns. Although this usually boosts the return of the equity part of the portfolio, if the returns are different enough, as occurred with Japanese equity over the past two decades, it can actually reduce return. This is not a free lunch."

The markets are inherently volatile. Rebalancing works best for categories that qualify as asset classes or subclasses. Next week we explore which investment categories do not warrant rebalancing because you are more likely to reduce returns than boost them.

Rebalancing is always a contrarian move, selling what has done well and buying what has done poorly. Many investors don't have the discipline to take that step when it is appropriate. But regularly rebalancing your portfolio offers expected returns about a percentage point better than buy and hold. Rebalance your portfolio regularly, and take advantage of this bonus.

Are You Tempted to Spend MORE When Money's Tight?

The following is a guest post from Dr. Bonnie Eaker Weil.

If you answered yes to the above question (or thought you might be inclined to answer yes, but didn't really want to admit it to yourself) you're not alone. A Stanford University study identifies one in twenty Americans as compulsive shoppers, and a recent survey determined that  80 per cent of women would go on a spending spree to cheer themselves up.

This survey, conducted by  Professor Karen Pine, from the University of Hertfordshire, concludes what some of you with one-too-many pairs of “retail therapy shoes” may already know: that some people use shopping as an emotion regulator, “a way of anesthetizing themselves to negative feelings or dissatisfaction with life.”

So here's what it boils down to – some of us are actually spending MORE during this recession. Or at least, spending more in proportion to our income. In other words, if we've lost a job we may not be spending more, dollar for dollar, than we did when we had a full time job. But if you fall into the above-mentioned one in 20, or 80 per cent, you could be spending more, proportionally to what you're bringing in, than you were before we hit this financial crisis. That's sobering.

But I guess the good news is: if you find yourself wrecking the budget  - or even fantasizing about wrecking it! - when you should be more concerned with keeping money matters in check, you're not alone. I'm referring to this phenomenon as a “pent up purchase.”

This type of purchasing is actually allowing us to participate in different stages of the grief process: anger and denial. Out of denial, Americans have awakened to a new emotional response to the economic collapse. We might be in denial about our financial situation, or we might be really upset about it. Either way, we're looking for a way to feel better about it. Of course, our rational, calculating minds know that the way to feel better about a tight budget is not by spending more! But in the moment, it makes sense: our addiction to spending to get that “high” is a common response to spur dopamine production (feel good hormones).

If you're indulging in spite of your budget – or worse, because of it – you may be headed down a dangerous path that will be unhealthy both financially and emotionally. Work to re-wire the pattern of thinking that leads you to shopping, opting instead for spending time with friends, trying something new like taking a class, head to the gym, or use your energies to volunteer. Work to divert your energy and attention into something positive – the possibilities are nearly endless!

Help a Reader: Whole Life Policy

Here's a question recently left here by a reader:

My grandmother took a whole life policy out on her son 50 yrs. ago which would be (MY father). He just recently died in April at the age of 56. The face value is $5,000.00 is this worth anything more than $5,000.00? We don't understand and she is in a nursing home still somewhat coherent. We need advice or help.

Any suggestions for him?