Free Money Finance

Help a Reader: Change to Index Funds?

Here's a question recently left by a reader:

I have money in the Vanguard Wellington fund. Its performance the last 1, 5 and 10 years is:

• 1 yr - 4.26
• 5 yr - 12.23
• 10 yr - 7.53

The expense ratio is 0.27%

The Vanguard Balanced Index fund performance over the same time period:

• 1 yr - 0.49
• 5 yr - 9.45
• 10 yr - 5.37

The expense ratio is 0.19%

Now these funds are not exactly the same, as Wellington's stated goal is a stock portfolio of 60-70% all in mid and large cap US stocks (my prospectus says the stock allocation can vary between 45-65). The bond portfolio is mostly in corporates with some exposure to US treasuries.

The balanced index fund's goal is 60% in the Vanguard Total Stock Market index (so you get some exposure to small caps) and 40% in the Vanguard Total Bond index.

My question is whether it makes sense to move from Wellington to Balanced Index. Do you think they are comparable funds? And if so, the track record suggests Wellington has better performance. Or do you think they are not comparable because of the small cap component in the index fund?

My goal in choosing Wellington many years ago was a 60/40 asset allocation. It looked to have better performance than the comparable index funds offered by Vanguard and with such a low expense ratio I thought it would be a cheap way to get some professional management and...............beat the market.

He and I discussed the issue back and forth a bit but didn't really come to a resolution. What's your take on the issue?

Top 10 Deeply Discounted 2008 Cars

I'm not in need of a new car this year, but for those of you who are, here's Bankrate's list of the 10 deeply discounted 2008 cars:

• Chrysler 300C
• Dodge Ram 1500
• Ford Explorer
• Mercury Grand Marquis
• Cadillac DTS 
• GMC Envoy
• Nissan Pathfinder
• BMW 7 Series
• Land Rover LR2
• Lexus RX 350

I don't think any of these would be in my consideration set if I was in the market for a new vehicle. I'm thinking the Honda Pilot or Toyota Highlander top my list right now. Both get good reliability ratings from Consumer Reports.

And before I get any "why do you need a gas-guzzling SUV" comments, here's why:

1. Kids are getting bigger and need more leg room. My son will probably be around 6 feet tall based on his growth pattern and sitting in a small back seat won't work.

2. 100 inches of snow this year. Four-wheel drive is much more than a "like-to-have" here. Many times, it's much, much safer to have it.

3. We frequently haul extra kids, equipment (basketball, soccer, etc.), and so forth from one place to another and we need room to do this.

Eight Personal Finance Subjects Schools Should Teach

The Street says that 40 states include personal finance to some extent in their educational standards or guidelines, according to the National Council on Economic Education. But the devil is in the details. They say that this may look good, but actually very little financial education is taking place. They state that "only nine states require a course with personal finance content to be offered and only seven states require students to take a personal finance course in high school to graduate (Georgia, Idaho, Illinois, Louisiana, Missouri, South Dakota and Utah)."

I was surprised to find that even this many states offered a personal finance option for students. It would be REALLY interesting to see what they taught -- the courses were on target or about as worthless as a shop class.

Anyway, the Street then lists eight personal finance subjects that schools should teach:

1. Realities of Credit Cards
2. How to Budget
3. The Importance of Saving
4. The Meaning of Frugality
5. How to Invest
6. Basics of Real Estate
7. Retirement Issues
8. Finer Points of Entrepreneurship

Obviously it's a list of personal finance basics, but it's a very good list in my opinion. I think I'll use it as a teaching guide for my kids.

See anything missing?

Inside The Millionaire Mind of Mush—How We Became Millionaires

Here's a guest post from Can I Get Rich On A Salary. My personal story is very similar to this one except I don't think of my mind being full of mush. ;-)

I first started this post by writing, “Now that we’re millionaires,…” But then I couldn’t stop laughing. I guess I find it hard to take myself all that seriously just because our net worth has gone over $1 million.

Hitting the million-dollar mark still seems to be a big deal in many of our cultures. Think how much the words “million” and “millionaire” are used in media and publicity. A quick search of any bookseller website turns up tons of titles—5,891 on Amazon. Books like The Millionaire Next Door, The Millionaire Mind, Secrets of the Millionaire Mind, and The Automatic Millionaire were all mega-sellers. Television shows span the gamut, from the Who Wants To Be A Millionaire game show to The Millionaire Inside personal-finance advice show. (And let’s not forget The Six Million Dollar Man—though with inflation, he’d probably cost over $16 million dollars today.) And it took me no time at all to turn up over 10 personal-finance blogs with “million” or “millionaire” in their titles. There’s at least a mild obsession with getting inside the minds of millionaires, presumably to unlock the hidden secrets of how to become one.

Looking inside my mind, unfortunately, revealed a big ball of mush.

The most interesting thing about our net worth being over $1 million is that there was and is no secret to unlock. Our net worth progress has been remarkably boring. The entirety of it can be attributed to: how much we saved and invested.

Most of our personal-finance plan revolves around automating how we save money and get it into the stock market. And the stock-market piece is made up mostly of index-based ETFs and blue chips. And as much as I’ve strayed and taken a big hack here and again, we’ve hit no home runs.

There’s no one stock in our portfolio that makes up more than about 3% of our net worth. The equity in our home makes up over 20%—but if you excluded it, our net worth would still be over $1 million. We have one investment property, and our equity in that might make up around 4% of our net worth. We never started, ran, bought, or sold a business. We never had stock options in a company that got acquired or had an IPO.

We’re in our late 30s and early 40s respectively. We live in an expensive area of the country. Our incomes are pretty good. We’ve been in our careers for about 10-15 years respectively—and did not start saving and investing regularly until quite a few years in. We’re decent savers. But the more blogs I read, the more I would rate us as average to mediocre on the frugality scale.

So if I had to break down the top few financial steps that we took to get here:

• We stopped and made a plan. Not a complicated plan, not even a written plan. Just a plan. This may seem rudimentary, but until we stopped and focused on our finances, they were pretty scattershot.
• As the #1 feature of that plan, we automated much of our saving and investing. We certainly did a lot in our respective retirement accounts. But we also piled on top of that with automatic investments in non-retirement accounts and also in 529s.
• We splurged here and again. I don’t think we (meaning I) would have been as good about controlling our spending overall without building in some more ephemeral rewards.
• We also did “manual” saving, setting aside some money each month that did not automatically go into investments. It just sat in high-yield savings accounts. This was a hedge for cash flow, splurges, and unanticipated expenses. And at the end of each year, there was usually some amount left, which we could then invest in a lump sum.
• We advanced our careers, which led to increases in our income.

When I think about it now, our very boring story is pretty exciting. Because it means that lots of people can replicate it. Because it means that the advice on this and other blogs on how to become a millionaire or how to become wealthy worked.

You too could have a millionaire mind of mush.

Seven Deadly Signs of Financial Bondage

The following is a guest post from Pastor Bill Reichart at Big Creek Church.

Sunday is a great day for personal rest and reflection.  Therefore, today take some inventory of your life, particularly as it relates to your money and finances.

Here are some simple diagnostic questions you can ask yourself about whether or not you may be either currently in or beginning to fall into Financial Bondage.  If you end up answering YES to any of these questions, then there is a good chance you may be in Financial Bondage.

Before you delve into this exercise and ask yourself these questions first ask God to search your heart (Psalm 139:23-24) and reveal to you what He wants to.  And by His grace and power He can move you to a new place in your finances.

• Do you and your spouse continually argue over finances? Proverbs 15:27

• Are you placing your normal, daily expenditures on credit cards because of a lack of funds?  Proverbs 22:7

• Do you find yourself putting off paying a bill from one month to another? James 4:13,14

• Are you borrowing from other sources in order to pay the "fixed expenses" in your life? Proverbs 19:1

• Are you unaware of how much you owe?  Proverbs 27:23

• Are you beginning to entertain thoughts of dishonesty in your finances?  1 Timothy 6:10

• Do you find it difficult to tithe and give?  Malachi 3:8

Free Money Finance March Madness, Final Four; Your Chance to Win a Prize Too

We're down to the final four of Free Money Finance March Madness (if you wonder what's going on in these posts, see my article announcing March Madness and/or click on my March Madness category link and scroll down to read all the posts involved in this subject.) I've listed each "game" (one post versus another) in segments along with the wording provided by the author when the post was submitted. I've also listed a keyword(s) after each post title to make it easy to vote (as a made-up example, you can just comment: Game 1 - Saving; Game 2 - Investing, etc.) Be sure to comment which one you like better out of each set of two. Here we go:

GAME 1

• Snowflaking:  A Primer (Snowflaking) - Snowflaking is a concept that many people actually employ but few people can name. It involves systematically and purposely saving and earning small amounts of "extra" money to reduce debt or increase savings. Doing this in a purposeful manner can make a huge difference in your financial health.  This post outlines what snowflaking is and how to get started implementing it in your own life.  It has worked wonders for me!

VERSUS

• A little-too-late advice on building wealth (Late) - Well, we're all stupid.  Some of us stupider than others, but mama always told me stupid is as stupid does.  If you can read this list and you haven't messed up all of these points already, you may find a way to destupidify.

GAME 2

• 8 Lessons I Learned From The Cheapest Family In The Nation (Lessons) - This post was the single most popular post I wrote last year.  It garnered a huge response on the net and a lot of discussion to boot. I think it's a great and inspiring look at a real-life family's frugality.  The Economides family proves that with teamwork, strategy and determination, we can all live below our means and live well with less.

VERSUS

• How I Taught My Preschooler the Value of a Dollar (Dollar) - It's important to teach young children about hard work, saving, and spending.  In a quite accidental way, I used a chart system to teach my son the value of money and hard work.  If you teach your children about delayed gratification early, it will have a positive effect on their money management skills throughout life.

In addition, I still have one 1GB USB drive available to give away (see details on it here.) All the rules, exceptions, etc. detailed on the linked post apply, but the basics are -- leave your votes for the best posts above and one commenter will be selected at random to receive the drive FREE!!!! Good luck!!!

Asking for a Raise, Brokers with Bad Advice, and Getting the Most from a Donated Car

Here are some posts worth re-reading from one year ago this week:

• More Thoughts on Asking for a Raise - It never hurts to ask, right?

• Shocker: Many Brokers Give Bad Advice - "Broker" is another word for "salesperson."

• How to Get the Maximum Tax Deduction for a Donated Car - A few thoughts from my experience.

Frugal Fundamentals

Here's a guest post from Lesley Scorgie’s Rich by Thirty: A Young Adult's Guide to Financial Success, copyright 2007 by and reprinted by permission of Key Porter Books.

“Spend your money wisely.” How many times have you heard that phrase? Was the person saying it a generation or two older than you? Don’t let that fact change your opinion. Despite what you may want to believe, the phrase does have a lot of value. My friend Erin is the queen of frugal living. Over the years, she has given some great advice on being frugal (even to me), and some great tips on saving money. Together, we’ve developed a list of tips and tricks to help you live the frugal life:

• Be Ruthless. Before you plunk down your hard-earned cash, ask yourself whether you really need the item in question, or if you just want it. If you don’t need yet another pair of strappy sandals, or a new set of speakers for your stereo, then you might want to reconsider its priority on your shopping list. Having trouble sorting it out? Try waiting twenty-four hours before buying. Often, you’ll change your mind.

• Cut the credit. If your credit card is getting you into trouble, hide it! Get it out of your wallet. Give it to a parent or trusted adult to hold, or stick it in a resealable bag, fill the bag with water, and put the whole package in the freezer. By the time your cards have thawed, you’ll have had a chance to think twice about making that “must have” purchase—and don’t bother trying to hammer the ice; that will just wreck the cards.

• Wheel and deal. Everything is negotiable. If you feel your credit- card interest rate is too high, call and talk about it with a customer service representative. Negotiate better rates on your debt, on your cell phone bill, on your Internet service. Remember, if you don’t ask, you don’t get.

• Pare down. While you’re in that wheeling-and-dealing mode, why not take a closer look at your various plans? Do you really need all those cable channels, or that many hours of Internet access each month? Do you need text messaging and voice mail on your cell phone? Think hard, and get rid of anything you don’t need.

• Become a bargain hunter. Look for sales and discounts when you shop. Check out eBay, auctions, garage sales, and estate sales. I’ve done it and had great success. My dining-room table cost $50, my TV stand was $8, my stove was $60, and my two beautiful leather couches cost a total of $500! My grand total was $618. Had I purchased these items new, I would have paid nearly $3,500. You can also check out vintage stores for cool clothes, jewelry, and accessories.

• Entertain yourself on the cheap. Don’t forget to apply the bargain-hunter rules to other areas of your life. If you enjoy going out for dinner and to the movies, keep your eyes open for coupons or two-for-one nights, or get to know the discount theatres in your neighborhood. Better yet, why not host a potluck and video night for your friends? Did you know most public libraries have a great collection of videos and DVDs? Yes, renting is cheaper than going to the movie theatre, but borrowing is free! (Hint: they loan CDs as well!)

• Think about your food habits. We spend a ton of money on food, whether we live with our parents or on our own. Here are a few ideas for everyone to keep in mind:

• If you live at home, eat at home—or pack a lunch! Fast food is a budget killer and can add up to over $100,000 throughout your lifetime.
• Stop drinking soda. You’ll have more money and you’ll be healthier.
• Try cutting back on meat (vegetarian dishes are often cheaper to prepare).
• Buy your food in bulk (the more you buy, the cheaper it gets).
• And finally, trade in your “designer” coffee for a less expensive cup! (Better yet, buy a travel mug and bring your own hot beverage wherever you’re going.)

• Get healthy. A healthy lifestyle can be remarkably affordable. Just think about it: if you drink or smoke, cutting down can put dollars back into your pocket and add years to your life. Walking or biking, instead of driving or taking public transit, will leave you feeling fit both physically and financially. Why not give it a try for a week and see what a difference it makes?

Giving Money Versus Giving Time

Which is easier: giving money or giving time? Or maybe neither is easier in all cases -- maybe it depends on a person's circumstances? Maybe I should ask which is "better". But, then again, this probably depends even more on personal circumstances.

Why am I asking? Because I found this in Money magazine's April issue:

52% of Americans say it's easier to give money than time to their cause of choice.

TONS of variables here. A few I can think of:

• How much money is it easier to give?
• How much time are we talking here -- an hour a week or 10 hours a week?
• What money/time availability does the person have?
• What opportunities does the charity have for volunteers versus givers?

Personally, we do both. We give money but also volunteer our time -- my wife and I serve on the board of a non-profit (I'm the President of the board, so I spend a lot of time on it) and my wife also sings in church and teaches 4th and 5th graders every Sunday. It's not really easier to do one over the other. Sure, writing out a check doesn't take much effort, but when it adds up to a good sum every year, you have to consider how much you had to work in order to afford that giving level. Volunteering certainly takes lots of time, and as time gets scarcer for people I suspect that many more will eventually think that giving money is easier than giving time.

How about you? What are your thoughts on this issue?

Broker: They're Broker than You Are

Here are some thoughts from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money on what he thinks about brokers:

"Broker" is another word for "salesperson." In the world of money there are brokers for stocks, bonds, real estate, mortgages, insurance, businesses, etc. One of the problems today is that most people are getting financial advice from salespeople, not rich people.

Warren Buffett once observed, "Wall Street is the place people drive to in their Rolls Royce to take advice from people who ride the subway."

Rich dad said, "The reason they are called brokers is because they are broker than you."

One of the problems of not having much money is that good brokers, brokers who know what they are doing, often do not have time for you. They are busy working with their higher net worth clients.

I think you all know where I stand on the issue of financial advisors (including brokers) as a whole. Sure, there are many good ones and I use some for certain financial needs. But in today's environment where someone can label himself a "broker", "financial planner" or whatever with little to no experience or knowledge, you need to be very, very careful in selecting a good one. Otherwise, you'll simply find someone who's main interest is turning your money into their money.

Investing in Gold

I personally don't invest in gold but I know quite a few readers are interested in it (based on comments I've received.) Hence I'm running this guest post from Marotta Asset Management that contains their thoughts on gold investing. I'm looking forward to your thoughts on the same topic.

Last week gold broke $1,000 an ounce. Gold advertisers and gold investment newsletters are touting their wares as though gold only goes up in value. Nothing could be further from the truth. Gold may glitter, but it is still better to own the mine.

Keep in mind that investing in hard asset stocks is not the same as investing directly in commodities. Buying gold bullion or a gold futures contract is an investment directly in raw commodities or their volatility, whereas buying a gold mining company is a hard asset stock investment.

Over time, dollars lose their buying power, and the goods and services we buy cost more. Commodities as an asset class generally maintain their buying power in terms of dollars. Stocks as an asset class, in contrast, generally appreciate over inflation after factoring in dividends. And recently, hard asset stocks such as precious metal mining companies have been appreciating nicely.

Jeremy Siegel, author of the book "Stocks for the Long Run," analyzes investments over the past 200 years. Gold, on average, maintains its value over time. If you bought a dollar's worth of gold 200 years ago, after adjusting for inflation, it would be worth $1.07 today. Because of inflation, a dollar today would only have had the buying power of about 7 cents back then! However, the stock market, on average, has been appreciating about 6.5% over the long-term rate of inflation. Hard asset stocks give you the best of both worlds: the stability of a real asset plus higher market returns.

The beauty of hard asset stocks is that they are not highly correlated to U.S. large-cap stocks as a whole. The correlation between the Goldman Sachs Natural Resources Index and the S&P 500 Index is only 0.49. Importantly, the correlation between the Goldman Sachs Natural Resources Index and the Lehman Aggregate Bond Index is even lower at 0.26. A negative correlation means that bonds and natural resources, as separate asset classes, are often moving in opposite directions. Balancing a bond portfolio with hard asset stocks can help hedge the risk that inflation poses to a bond portfolio.

Natural resource companies sell valuable tangible commodities. Thus their earnings are tied to inflation because their resources are worth more as the dollar declines in value. This situation can occur in times when the supply of money and credit is increased to fund government spending and budget deficits.

Consider a gold mining company in 2001 whose expenses and overhead allowed it to pull gold out of the ground for $290 per ounce and sell it for $300 per ounce, making the company a $10 per ounce profit. As the price of an ounce of gold rose 3.3% from $300 to $310, the company's profit doubled from $10 an ounce to $20 an ounce--a 100% jump--which caused the company's earnings and stock price to soar. Now that gold is more than $1,000 per ounce, the current price level of gold stocks is much higher than it was in 2001.

Therefore, we segment hard asset stocks into their own asset class because they have a unique set of characteristics. First, the movement of hard asset stocks generally correlates less with the movement of other asset classes such as bonds. Second, hard assets react in a unique (and positive) way to inflationary pressures. And third, in certain periods in the longer term economic cycle, including hard assets helps boost returns.

Direct investments in gold react a little differently, however. The correlation between the price of gold and the S&P 500 is nearly zero, lower than hard asset stocks at 0.02 instead of 0.49. But the correlation between the price of gold and the Lehman Aggregate Bond Index is also nearly zero at 0.09 instead of 0.26. In truth, the price of gold does not fluctuate with investments because it is simply holding its value.

But although it is true that gold generally holds its purchasing value, it still fluctuates wildly based on other factors of supply and demand. While it does so, the part of these movements that is not just random noise is simply an inverse reaction to the value of the dollar.

In January 1980, gold reached its high of $850 an ounce. The following year my wife and I became engaged and chose modest wedding rings that were still very expensive. Note that $850 in 1980 had the same buying power as $2,184 in today's dollars. Gold trading at $850 an ounce then was like gold trading at more than twice its current price. Those people who purchased gold in 1980 have lost over half their buying power during a 28-year investment.

In August 1998, gold reached its low of $356 an ounce. So those who had invested 18 years earlier at $850 an ounce had lost 79% of their purchasing power. By 1998, an ounce of gold should have been worth $1,682 just to keep up with inflation, but instead it had dropped dramatically.

A small percentage of your portfolio should be in precious metal mining companies. It provides a balance to your portfolio that you cannot gain by investing directly in gold.

Here are three mutual funds we have used for investing in precious metal mining companies. We look for a low expense ratio, a turnover ratio of under 50% and returns that capture the lion's share of the sector's returns.

Vanguard Precious Metals and Mining (VGPMX) earned 36.13% during 2007 and has had an annualized return of 35.28% for the past five years. It is up 12.74% for the first two months of 2008. It has an expense ratio of 0.35% and a turnover ratio of 24%. Although closed to new investors, VGPMX is probably one of the best funds.

U.S. Global Investors World Precious Minerals (UNWPX) earned 23.02% during 2007 and has had an annualized return of 36.66% for the past five years. It is up 15.05% for the first two months of 2008, with an expense ratio of 1.01% and a turnover ratio of 54%.

American Century Global Gold (BGEIX) earned 15.12% during 2007 and has had an annualized return of 20.53% for the past five years. Although it underperformed relative to other funds last year, it is up 16.52% for the first two months of 2008. It has an expense ratio of 0.67% and a turnover ratio of only 3%.

Because of the negative correlations, our firm uses these investments and others in this sector for a small percentage of a balanced portfolio. Diversified and negatively correlated investments can help your portfolio maintain its equilibrium when the U.S. markets are losing money.

Star Money Articles and Carnivals for the Week of March 24

Here are some recent interesting posts from the MoneyBlogNetwork and beyond as well as a list of the carnivals Free Money Finance was in this week and my posts that were included:

• Consumerism Commentary tells us that home prices are declining.
• Wise Bread discusses taxes on irregular income.
• AllFinancialMatters likes Target.
• MightyBargainHunter tells us that you can't always turn away spendthrift parents.
• Five Cent Nickel advises against timing the market.
• No Credit Needed says that moving debt is not the same as paying it off.
• Get Rich Slowly gives a DIY option to a popular Suze Orman product.
• Carnival of Personal Finance - How to Keep Your Child's Identity Safe
• Tax Carnival - Review: TaxCut
• Festival of Frugality - Wisdom from Readers: Saving Money and Performance of Index Funds
• Carnival of Money Stories - Help a Reader: Separated Mom Needs Advice

Carnival Hosts: As a reminder, I post all carnivals I'm in for a given week as long as the host either emails me a link to the carnival or sends me a trackback.

Enjoy!

Tips for Dealing with Deficits

Here's a guest post from Lesley Scorgie’s Rich by Thirty: A Young Adult's Guide to Financial Success, copyright 2007 by and reprinted by permission of Key Porter Books.

So, you’re over your monthly budget. You’re spending more than you earn, which might explain why you always have to borrow bus fare from your parents! What should you do? What can you do? You have three options: reduce your spending, increase your income, or borrow money. Obviously, the last option isn’t always a good one. Let’s look at some tips addressing the other two.

Tips for Dealing with a Deficit

• Question everything. Look carefully at your budget. What are your biggest expenses? Are you spending more money on clothes each month than you need to? Is your car insurance through the roof? Ask yourself if there are lifestyle changes you can make to reduce your monthly output of cash. Eliminating two pizza dinners each month, for example, could free up $35!

• Look for opportunities. Do you have the ability to increase your income? Can you take on a few more hours at work, or make a deal with your parents to do an additional household chore in exchange for an increase in your allowance? Are you driving friends to school every day? Might they be able to contribute a small amount to your gas costs? Do you have a hidden talent that could help you earn some money on the side? These things may seem insignificant, but every little bit helps.

• Reorganize your priorities. Put your savings and investing goals at the very top of your list of expenses. These should be nonnegotiable—more important to you than a few extra cable channels or an extra night out. Always pay yourself first—even if it’s only $25 a month.

• Examine your cash flow. As much as we’d like them to be carved in stone, our expenses change from month to month. This affects your cash flow—a term used to describe the changes occurring in your expenses and income from month to month. You need to be aware of these fluctuations to have a firm grasp of your spending habits. For example, people tend to spend more in December because of the holidays. If you don’t budget for this, you might end up with a big credit card bill near the end of January. The opposite situation can occur, as well. Are you taking a two-week holiday from work in the summer? Remember to include your transportation costs in your budget for that month. The more aware you are of these fluctuations, the better able you’ll be to handle them.

• Plan for emergencies. While you’re revamping your budget, it’s not a bad idea to include an expense dedicated to building an emergency fund. If your car broke down tomorrow, would you have enough money to fix it? If you lost your job next week, how would you cover your expenses until you found a new one? No one likes to spend more than they have, but things happen. Often, people don’t plan for the unexpected. When an emergency occurs, they end up having to work overtime, pay high interest rates on a credit card, or do without something they really need. Some experts recommend you sock away the equivalent of six months’ salary in your own emergency fund. That’s a little excessive for the average person, so choose a number you find comfortable. Then, work it into your short-term savings plan (see chapter 5).

• Avoid debt. Only as an absolute last resort should you borrow money to cover your expenses. We’ll talk lots more about debt in chapter 4, but for now, just realize that borrowing to pay for something you can’t really afford is the first step down a very slippery slope. Before long, you’ll be borrowing to pay off what you’ve already borrowed, and so on, and so on. It’s much better to look at what you’re buying, and ask yourself if you really need it. You’ll be surprised at how often the answer is no.

Give Away Money and Become Happier

A couple weeks ago I talked about how to have a better life by giving/helping those in need. I pointed to a book on the subject that is backed up by some pretty significant research. (If you want more details, click the link and read the post.) That piece actually focused more on the benefits of volunteering -- helping people directly through service. But a new piece of research shows that giving money can also make you happier. The details:

New research reveals that when individuals dole out money for gifts for friends or charitable donations, they get a boost in happiness while those who spend on themselves get no such cheery lift.

Statistical analyses revealed personal spending had no link with a person's happiness, while spending on others and charity was significantly related to a boost in happiness.

"Regardless of how much income each person made," Dunn said, "those who spent money on others reported greater happiness, while those who spent more on themselves did not."

Pretty interesting stuff, huh? And the good news is that you don't need to spend thousands to become happier:

In another experiment, the researchers gave college students a $5 or $20 bill, asking them to spend the money by that evening. Half the participants were instructed to spend the money on themselves, and the remaining students to spend on others.

Participants who spent the windfall on others — which included toys for siblings and meals eaten with friends — reported feeling happier at the end of the day than those who spent the money on themselves.

So what's the reason people feel happier when spending on/giving to others? Well, that's a bit harder to determine. But there are some leading theories:

"I think it's a lot of factors of prosocial spending that are responsible for these happiness boosts," study researcher Lara Aknin of UBC told LiveScience. "I think it could be that people feel good about themselves when they do it; it could be the fact that it strengthens their social relationships; it could just be the act of spending time with other people."

Perhaps the fuzzy feelings associated with giving last longer than selfish buys. "The happiness 'hit' from giving may last a bit longer if the 'warm glow' from donation lasts longer than the hit from own consumption," said Paul Dolan, an economics professor at the Imperial College London in England. Dolan was not involved in Dunn's study.

Interesting stuff for sure.

As many of you know, I give all the money raised from Free Money Finance to charity and it makes me happy to do so. But long before I started this blog, giving was a major part of our finances (initially encouraged by my wife and then I caught the vision) and is part of our budget that we plan for every year. I can attest that it certainly is a great feeling to give as well as testify that the more you give, the more you receive.

Do You Think You Could Do a Better Job than Your Boss?

I've often talked about asking for a raise as a vital part of making more money. One key to getting that raise you ask for is actually deserving the raise (ok, it's not just a key -- it's required.) Well, turns out that a good portion of workers think that they do deserve a raise. In fact, they think they deserve their boss's pay and job. This from Money magazine's April issue:

43% of employees think they could do as good a job as or better job than their boss.

Personally, I don't think I could do a better job than my current boss. (I have thought I could do a better job than bosses in the past, but not at this job.) He has extensive knowledge of our industry as well as connections within the industry that I couldn't even come close to. In fact, not many people in our industry can match up to him. And on top of that, he's a great guy and terrific leader. I'm happy to work under him. (No, he doesn't read this blog in case you were wondering.) ;-)

But what about you? Do you think you could do a better job than your boss (and deserve his/her salary)?

The Seven Financial Predators

Here's a thought from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money where he lists his thoughts on what financial predators (as he calls them) exist and how to protect your money from them. The predators:

• The Government -- Taxes are our single largest expense. There's a big difference in taxes paid on earned income versus portfolio income versus passive income. Know these and plan accordingly to minimize taxes.

• Bankers -- Banks take your money, charge you tons of fees for various financial transactions, and then work to lend you money at a much higher interest rate than you receive.

• Brokers -- This includes all sorts of brokers -- brokers for stocks, bonds, real estate, mortgages, insurance, businesses, etc. Another word for "broker" is "salesperson." Do you really want to get your financial advice from a salesperson?

• Businesses -- One of the reasons so many people struggle financially is they buy products that make them poorer and then make themselves even poorer by paying for that product for years with high-interest credit cards.

• Spouses -- Marry wisely and get a prenuptial agreement.

• Family -- Plan your estate properly or your wealth could go to someone you don't want to get it.

• Lawyers -- These people are just waiting to sue you, so you should keep nothing of value in your name, buy personal liability insurance, and hold assets of value in legal entities.

Here's my take on these:

1. Yep, taxes are a killer expense. I don't mind paying my fair share, but I'm certainly going to work to pay no more than that. I wouldn't even mind contributing a bit extra to the public good if I felt that the government was spending my taxes wisely but I think they're wasting a boatload of all the money we give them.

2. I personally don't keep much money in banks. I have a checking account and that's it. I NEVER use my ATM card (it's locked in my safe.) Most of my assets are with Vanguard.

3. Yes, Vanguard is a broker, but they're about the cheapest one going. As far as other brokers go, I try to minimize my contact with them. I think you all know how I feel about this lot.

4. He's preaching to the choir here. I agree that people often can't control themselves and buy things they can't afford -- then make it worse by keeping it revolving on credit cards. Have you ever been in a building of some of those credit card companies? I have, and they're pretty nice. Yep, they're making money hand over fist.

5. The keys regarding marriage are to marry the right person and then stay married.

6. You need a will. If for no other reason, you need to name guardians for your kids.

7. Two words: umbrella insurance.

790s Credit Score Barely Enough In Today’s Loan Market?

Here's a guest post from Can I Get Rich On A Salary.

Banks are falling, the Fed is jumping in aggressively, and the bigger players are acquiring the most distressed ones for pennies on the dollar. And the rumor went something like this: some lending institutions are going to start pulling home-equity lines of credit (HELOCs). I understood this to mean not letting people draw down on their existing equity lines.

It’s just a rumor, though it was passed on to me by a mortgage broker. As rumors are prone to do, it’s probably evolved in my head, and I’ve probably misremembered some part of it. And at the end of the day, I have nothing at which to point that shows it’s anything but a rumor.

But I can tell you that it has been much harder for my wife and I to redo one of our HELOCs than I ever thought it would be. We’re undertaking a big landscaping project, and we wanted to increase the available credit—both to finance the project and to give ourselves some cushion for emergencies. So we asked our bank to increase the line by $80K.

Granted, that’s a chunk of change. But my wife’s and my credit is excellent. The last time we checked, our credit scores were in the high 790s. (She’s competitive about most everything, and her 799 or whatever was admittedly higher than mine....) We don’t have any non-mortgage debt, our income is strong, and we have a long history with this bank—maybe 18 years. And we have more assets with this bank (savings and brokerage) than the $80K we were requesting.

The first troubling sign was that the bank did not have its own act together. Apparently, it was changing its policies faster than its own people could keep up! The person who took our application on the phone said we could and should apply for credit up to 85% of the value of our house.

A day later, the online status said we’d been denied.

After some mild panic, and several telephone calls, I figured out that the bank was now only approving lines up to 80% of value. Lowering our request put us back in play. Still, the bank then made us put in a full application for a new HELOC, rather than an increase. This also meant we had to provide full back-up documentation on our income and finances—as if the bank knew nothing about us. Five weeks later, we’ve finally been “conditionally approved.” Hopefully, we’ll be able to close on this soon, but I’m not counting any chickens.

And this was just for an equity line. It sounds like it is that much harder to get a new jumbo mortgage. A recent CNN/Money article suggests as much:

“Even if you have good credit, you don't know if they are going to give you a loan or not,” said Joseph Mason, a senior fellow at the Wharton School of the University of Pennsylvania.

I have to think—or maybe just really want to think—that folks with good credit and financials will still be able to get mortgages and HELOCs at the end of the day. This may be true, but that same CNN/Money article reports borrowers will have to do more to get them:

Borrowers must also put more money down, especially if they don't have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.

Who is out there applying for mortgages, and what have your experiences been?

What's Your Favorite Day for a Floating Holiday?

I've worked for companies before where you have a floating holiday each year -- one day that you can take off as an extra day off whenever you want to. I always used the day either on a Monday or a Friday to make for a long weekend or to tack onto an already long weekend or vacation to make them longer. But it appears that many people have a different idea for a floating holiday. This from Money Magazine's April issue:

46% of workers say their top choice for an office holiday is their own birthday.

I'm not a big birthday celebrator (I love to celebrate my kids' birthdays, but not so much my own), so I don't see the appeal in this.

What about you? What day would you (or do you) select as a floating holiday?

Help a Reader: Money Spread Among Many Investment Accounts?

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

In light of the recent Bear Sterns fallout, I am wondering if I should have investment accounts at several brokers.  Right now I have an investment account and IRA at Vanguard and a 401k at Fidelity.  Do you recommend that I open a new investment account with a different broker?

I've wondered about this as well and I think there are many of you reading this that are likely very knowledgeable on this subject. What do you think?

How Democrats and Republicans Run the Nation's Finances

Here's a thought from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money. Today I want to share what I see as Kiyosaki's humorous yet true take on how the two political parties in the U.S. generally run our nation's finances. His thoughts:

It doesn't matter which party is elected into office. If it's Democrats, they will probably tax and spend. If it's Republicans, they will probably borrow and spend. The net result is the same: greater debt, bigger financial problems, and higher taxes. All funded by taking as much of your money as possible.

My take on this:

1. When you think about it, and you do so without bias, I think you'll agree that his thoughts are generally true about each party.

2. Why can't we find a party or politician who can control spending, taxes, and debt? Is that too much to ask?

3. How much debt is too much? I know there are varying opinions on this, but at some point we'll certainly reach a point of no return. Is that next year or 100 years from now?

4. This is really Kiyosaki's only politically-related statement in the book as it's about personal finances, not politics. But it was made during a discussion of taxes, so it fits well into his thoughts.

5. I wanted to share it because: A) I think it's true for the most part, B) it's an insight I hadn't thought of before, and C) it's an election year, so this is something for us all to ponder as we go to the polls in November.

Review: Kmart

Last week I started my "review" series where I give my comments, thoughts, and opinions on a retail store. We had quite a spirited discussion about Walmart then, and I'm looking forward to the same today. ;-)

This week I'll be reviewing another mass merchandiser: Kmart.

I have a long history with Kmart. I used to shop there all the time while growing up and between my junior and senior years in college I worked for a store as an assistant manager intern (no, you can NOT get farther down on the food chain than that.) At that time Kmart was the king of mass merchants, but my particular store was panicked because a new competitor was headed into their region, some company by the name of Walmart. They had heard of Walmart's devastation on other Kmarts across the south, and they were bracing for an invasion that they expected to be about as terrible as the Huns coming to ransack their city.

But that was a long time ago -- back in the days of the Blue Light special (yes, I had to do those) and Teddy Ruxpin (he was new that summer and I swear I almost murdered our display bear because all he did was talk, talk, talk!) For now, I'm going to look at Kmart as a shopper and what I think of it as a consumer. To cut to the chase, here's my quick summary:

In general, I think a good description for Kmart is "a low-end Walmart." Yep. I'm not too high on the big K.

Pros

The only pro I can think of is that they SOMETIMES have a great deal in their ad that makes it worth the horror of actually going into their store near us. That's about it for the positive. Oh yeah, there's a Taco Bell nearby, so that makes it a more positive experience. ;-)

Cons

The cons -- everything else. Stores are crummy and in poor locations, prices are only "ok", employees are rude, merchandise is weak. If I could think of anything else negative to say, I'm sure it would apply to these stores.

Overall rating: F

As a result of my thoughts above, we rarely shop in Kmarts. I was in on a few weeks ago and it simply served to reinforce the perceptions noted above. It's a loser in my book.

What's your take on Kmart?

Help a Reader: Negotiating Salary for a New Job

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

I'm currently in a sales capacity at my company and have been since graduating college a little over a year ago.  Yesterday I was contacted by a higher level manager here at the company.  He invited me to his office and informed me of a newly formed position (not sales) in which I'm a leading candidate.  It would definitely be a step in the right direction for my career.  The new position combined with my impending return to school (enrolling in an MBA program this fall) leads me to think I will become a major player in the company's future. 

The question I have is in regards to salary.  Previous to the company informing me that I am a candidate for the position, I heard through the grapevine they had offered it to a programmer who declined to accept a position with another company.  They re-evaluated the position's direction and decided to have someone with more of a business background who can learn some ground-level programming but at the same time market and develop new software programs and initiatives.  Through a loose tongue of one employee, I became aware of the offer they made originally to the programmer.  It was markedly more than I currently make. 

In the event I do receive an offer and it is lower than the other offer they had previously made, how should I handle it? Obviously I don't want them to know I was privy to the old offer, but what steps could be taken to get them to raise the offer? Should I list a "ballpark" idea of where I'd like to be (which would be in the range of the previous offer) or just accept the offer made to me outright?

My two cents is that the other offer has virtually zero impact on this decision. Instead, focus on the market value of you in the position. Take the following into account when doing so: 1) Your experience (maybe less than what the other person had) and success in the field, 2) the position (a bit different than the original one they had in mind), and 3) similar positions at other companies. Try to get a firm number on this before you actually get the offer.

I'm guessing that they'll try and pay an in-house candidate less, and if they do offer something below fair market value, I'd offer some of my research into why I thought the position deserved more (in a kind way, of course.) If they balked or tried false promises (like "we'll review your position for an adjustment in the next six months") or otherwise persuade you ("this is your ticket to the higher ranks"), you could possibly negotiate something else -- more vacation time, them paying for your schooling, flex-time, working at home, etc. that had some meaning to you. If they refuse to budge, you're going to have to decide whether or not the position is a good move for you or not.

In addition, remember that you're only out of school for a year, so while you've been doing well, there are probably a ga-zillion people who have the same or close to the same amount of experience that you have. Yeah, it would cost them something to find the right person, but it wouldn't be much. And if they perceive you as making too many waves or causing too much of a fuss over the issue, they may simply tell you "we've decided to go in another direction."

That's my take. I'm sure others have some thoughts too. Have at it in the comments.

Final Four Decided Today

Just a note to let you all know that voting is winding down for the following games:

• Free Money Finance March Madness, Elite Eight, Posts 1-4

• Free Money Finance March Madness, Elite Eight, Posts 5-8

I'll be naming the winners this afternoon, so if you want your vote to be counted, add it now.

The Five Financial IQs

Here's a thought from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money. Today we'll summarize what the book is all about -- the five financial IQs. He lists them as follows:

• #1: Making more money.
• #2: Protecting your money.
• #3: Budgeting your money.
• #4: Leveraging your money.
• #5: Improving your financial information.

And here's what he means by each of these:

• Making more money -- Pretty straight-forward. The more you make, the higher your IQ in this area.

• Protecting your money -- Keeping financial predators from taking your money. The biggest predator: the government/taxes.

• Budgeting your money -- Having a financial plan. His key here is budgeting for a surplus which we'll cover later. It's an interesting concept that I may use in our own budget.

• Leveraging your money -- Using debt to increase your net worth.

• Improving your financial information -- Learning how to manage your money.

A few thoughts on these:

1. I'm pretty much in agreement with all of these except #4 (#5 is a key reason I maintain this blog.) I'm not a big fan of messing with debt to make money, though I understand what he's saying, of course.

2. For similar lists, see my five financial principles as well as the Richest Man in Babylon's seven cures for a lean purse.

3. I'll be covering these five IQs (what they mean, what I agree with and what I don't, etc.) over the next couple weeks, so stay tuned, there's more to come. 

Money Saving Tip: Don't Assume the "Special" is Cheaper than Regular Price

I was in a restaurant the other day with a friend. He said that when he came in he saw that "Grandpa's Breakfast" was the special of the day and he might get it. I looked over to the sign that greeted everyone as they came in and sure enough, Grandpa's Breakfast was listed as the special of the day for $6.50. Being the curious, financially savvy person that I am, I opened up the menu to see what the regular price was for Grandpa's Breakfast. I expected it to be higher than the "special" price or, at worst, the same.

Guess what -- the "special" price was higher!!!! The regular price was only $5.29!!! Yikes!!!! I didn't know "special" meant "expensive"!!!!

I didn't ask the waitress about the difference in price because my friend ordered something else, but this brief episode served to remind me to always compare prices when eating out and not to assume that the special is always a better-priced alternative to what's already in the menu.

How to Avoid a Hefty Vet Bill

My local paper recently ran a piece saying that the bad economy is forcing people to cut down on veterinarian costs. And in some cases, people are so bad off that they are turning in their pets. The details:

Besides having people seek out low-cost vet services, the sluggish state economy also is resulting in the Kent County Humane Society seeing a steady increase of pet owners relinquishing their animals, said Mark Petz, the Society's development and marketing director.

Owners have specific reasons, Petz said. They're letting go of their pets because they cannot care for them anymore, they need to move where animals are not allowed, they're being evicted for inability to pay their mortgage or rent and they're unemployed.

My take on this:

1. It's a sad situation all the way around -- for both the owner and the pet. I can't help but thinking that if people cut off the cable TV (which HAS to be watched on a flat screen, of course) and luxuries like these that many could afford to keep their pets.

2. I told you pets were expensive. Please, please, please consider the cost before getting a pet. Once you make the commitment to one, my thinking is that you're committed no matter what. That's why it's important to think through the true costs before you get a dog, cat or any other pet.

The piece also shares some proactive ways to avoid making a medical trip to the veterinarian:

• Keep your animal inside the house, fenced inside the yard or on a leash when it is outside to avoid the pet getting struck by a vehicle.

• With Easter approaching, remember lilies are toxic if cats eat them.

• Keep dogs away from chocolate, it can be fatal. Warning signs they've eaten it include vomiting and diarrhea.

• Don't leave medications where a pet could get into them; they could trigger a reaction.

• Keep a pet's nails trimmed, wipe out its ears to prevent infection and bathe and trim its fur regularly to prevent potential medical problems. Long, matted hair can lead to skin infections.

They also offer some ways to save on veterinary care:

• Ask your veterinarian if he or she will let you work out a payment plan.

• Contact your local shelter. Some shelters operate or know of local subsidized veterinary clinics or veterinary assistance programs. Go to Pets911.com and enter your ZIP code for a list.

• If you have a specific breed of dog, contact the National Club for that breed. In some cases, these clubs offer a veterinary financial assistance fund.

• Ask your veterinarian to submit an assistance request to the American Animal Hospital Association "Helping Pets Fund." In order to qualify, your animal hospital must be AAHA accredited. To find an AAHA accredited hospital in your area, visit Pets911.com.

I might as well let the cat out of the bag (pun intended) and tell you all that we are considering getting a pdog. If we do, it would be after we move to our new home, which would likely provide several acres of land for a potential Fido to romp and play. Of course this is far off for us now, but I'm already doing my homework: checking out different breeds, considering the cost and listening to a book on CD from the library by Cesar Millan.

My Take on Robert Kiyosaki and His New Book

Seems like everyone I know either loves or hates Robert Kiyosaki, the author of Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not! as well as entrepreneur and speaker. (He's kind of like Dave Ramsey in that way.) If I were guessing, I think more Free Money Finance readers dislike him than think he's useful. I believe that they dislike him because he often says some very off-the-wall things (at least in some readers' opinions), especially in his Yahoo Finance column.

My take on Kiyosaki is a bit more balanced than the usual love/hate opinion. Here are my thoughts on him and his new book:

1. Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not! was a good book in my opinion -- even if the rich dad and poor dad were made up (as some people say.) I read it several years ago and it was a key part of my early thinking on personal finances. That said, I don't agree 100% with the book (there are very few books I agree 100% with.)

2. I don't think I've read any of his books since the first one, so I can't really comment on them. No real reason for me to avoid them, it's just that they didn't look that different than the original when I looked at reviews.

3. You can't deny that Kiyosaki has been successful in business. From what I can tell, he's making a bundle of money selling books, seminars and the like. Of course making lots of money doesn't mean you know what you're talking about, but it does show that you're good at, well, making money.

4. Kiyosaki has written some bizarre thoughts in his Yahoo column. My thinking is that he does this just to cause controversy, stir the pot a bit, and distinguish himself from other personal finance advisors. Let's face it, the basics of personal finance are fairly simple, and many "experts" say the exact same things. I think Kiyosaki's "strangeness" is more of a marketing move to establish his brand as "different." I don't think he's crazy at all.

5. Much of what he says that appears strange is simply the way he says it. Often he says something that seems totally whacked out, then when he details what he means you can see that his "differences" are simply semantics. For instance, in Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money, he says he hates the advice "spend less than you earn." Then he goes on to detail that you should work on earning more. And as he explains this it's clear that the differences between what he's saying and what the "spend less than you earn" people say is not that different.

6. Just like any financial "expert", Kiyosaki has some good points and some bad points. And just like with any of the others, you need to think for yourself when you read what he suggests.

7. I actually liked Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money quite a bit and I'll be sharing several thoughts from it over the next few weeks. It was a surprise to me that I agreed with so much of it since I had assumed I wouldn't (based on many reactions to the Yahoo column.)

8. Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money is pretty basic. I'd say it's for a financial newbie or for someone wanting a simple overview of basic personal finance principles. I liked it because it goes over the basics of money management in a different way that makes it worth reading. And as I've said several times, if you can just get the basics down, you'll do very well financially.

So those are my thoughts on Robert Kiyosaki and his new book. Stay tuned for more thoughts on Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money and my take on them.

Help a Reader: Currency Hedging

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

My wife and I are planning a trip to Europe next summer. With all the tumult in the market and perpetually pending FOMC interest rate cuts, the dollar seems destined to continue its downward plunge against other major currencies (particularly the pound and the euro, the currency of the places we're look at going). So, I'm seriously considering a currency hedge for the items that I can't pay for in USD, or even those things that I could pay for in the foreign currency (like spending money, or B&B nightly rates)... Do you have any advice on where to begin even researching how best a US person could do that, given that I'm here, and banking occurs, well, over there?

I have absolutely no idea how to answer this. Do any of you have suggestions for him?

Free Money Finance March Madness, Elite Eight, Posts 5-8

Here's the fourth round of Free Money Finance March Madness (if you wonder what's going on in these posts, see my article announcing March Madness and/or click on my March Madness category link and scroll down to read all the posts involved in this subject.) I've listed each "game" (one post versus another) in segments along with the wording provided by the author when the post was submitted. I've also listed a keyword(s) after each post title to make it easy to vote (as a made-up example, you can just comment: Game 1 - Saving; Game 2 - Investing, etc.) Be sure to comment which one you like better out of each set of two. Here we go:

GAME 3

• 8 Lessons I Learned From The Cheapest Family In The Nation (Lessons) - This post was the single most popular post I wrote last year.  It garnered a huge response on the net and a lot of discussion to boot. I think it's a great and inspiring look at a real-life family's frugality.  The Economides family proves that with teamwork, strategy and determination, we can all live below our means and live well with less.

VERSUS

• Think before you buy!  A wallet-sized reminder of your priorities (Think) - Being a thoughtful shopper is vital if you're trying to buy less and/or buy in ways that fit your values and priorities.  This post links to a ready-made credit/debit card sleeve printed with some great questions to ask yourself before you buy anything-- and is also full of suggestions and inspiration for designing your own list of questions if the existing one isn't right for you.  It's an exercise that's all about developing a mental checklist (with a physical reminder) that makes you more intentional and thoughtful about your consumption.

GAME 4

• Lessons Learned from Diet Books: How to Think Like a Rich Person (Lessons) - Some people are rich, and some people are thin: what are they doing right? Using a best-selling diet book as inspiration, this post lays out 8 personality traits that can make it difficult for you to manage your finances, and suggests ways to combat these self-defeating traits. There are many ways in which dieting and saving money are analogous but I think these 8 points really get at the heart of why many people have trouble succeeding in each area.

VERSUS

• How I Taught My Preschooler the Value of a Dollar (Dollar) - It's important to teach young children about hard work, saving, and spending.  In a quite accidental way, I used a chart system to teach my son the value of money and hard work.  If you teach your children about delayed gratification early, it will have a positive effect on their money management skills throughout life.

How to Increase Your Salary by 19%: Become a Pastor (Ok, Not Really)

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why. This post isn't exactly in line with my usual Sunday "sermons", but the issue certainly deals with money and the church so I thought it fit best here.

I am on the mailing list for a pastor's leadership magazine (I'm not a pastor, but I wrote a few personal finance articles for the publication for free and they gave me a free subscription.) Every other month they send me a special CD where the host discusses issues related to church management with a special guest. This month they had a CPA on the show and talked about the various accounting/tax/finance issues associated with being a pastor.

I was surprised to hear how a couple of them can be very lucrative. So I went to Google and found this piece from the New York Times (not quite the expert on religion, mind you, but hopefully they have most of their facts straight.) This article talks about the various tax breaks associated with being a pastor (priest, rabbi, etc. -- really any form of church leader). The highlights:

...the most valuable tax break available to ordained clergy members of all faiths: an exemption from federal taxes for most of the money they spend on housing, which typically represents roughly a third of their compensation.

Ministers of every faith are also exempt from income tax withholding and can opt out of Social Security. And every state but one exempts religious employers from paying state unemployment taxes — reducing the employers’ payroll expenses but also leaving their workers without unemployment benefits if they are laid off.

If you do some quick adding in your head, you'll see that this can add up to quite a bit of money. More on that later -- let's keep exploring the issue for now:

The deduction, usually called the parsonage exemption, is available to ministers, rabbis and other clergy members of all faiths working at houses of worship. It allows them to live in congregation-owned housing without being taxed on the imputed value of their free housing.

Until 1968, clergy members were exempt from Social Security unless they joined voluntarily. Since then, they have been automatically covered — but, unlike other citizens, they are allowed to drop out as conscientious objectors if they assert, by a certain point early in their ministry, that they have a religious opposition to receiving public welfare benefits.

Because the exemption is irrevocable, why would so many ministers take such a drastic step? Clergy members are considered self-employed and therefore pay a 15.3 percent contribution to Social Security, Mr. Hammar explained. So young ministers on tight budgets sometimes decide, or are persuaded, to drop out and thereby give themselves an 18.1 percent raise.

“The vast majority of clergy who did opt out of Social Security never replaced it with another retirement scheme,” he added.

Yikes!

There's a lot more to this issue, and if you'd like to read about it you can check out what the IRS says about the clergy housing allowance.

I have a few thoughts on this issue:

1. The exclusion includes "the lesser of the fair market rental value (including furnishing, utilities, garage, etc.) of the amount officially designated (in advance of payment) as a rental or housing allowance, or the actual amount used to provide a home, and cannot exceed what is reasonable pay for your services." So think about it. Take your mortgage payment, cost of utilities, cost of furnishing the home, and so forth and add them up. What will they be? I'm not sure since I haven't had a mortgage in more than a decade, but let's be conservative and say that's 25% of your income.

2. Now add to #1 the fact that a pastor doesn't have to pay Social Security taxes if he doesn't want to. That's another 18.1% pay increase if you're self-employed. And even if you're not considered self-employed, you get to save your half of the 15.3% employer/employee payment every year. So that's another 7.65% added to your salary.

3. Taking #1 and #2 together, let's see the financial benefit of being a pastor. If you're in the business world and make $100,000 a year (I'm using this because it's a round number too -- easy to calculate -- but you could plug your own number in) and you go into the ministry making the same $100,000 per year, here's how much better off you'll be:

• Standard income: $100,000
• Total federal income tax owed (married filing jointly): $17,847.50
• Income after housing adjustment: $75,000
• Revised total federal income tax owed (married filing jointly): $11,597.50
• Amount saved by not paying your portion of Social Security taxes: $7,495
• Total saved by being a pastor: $19,092.50

I probably calculated these wrong a bit here or there, but I'm at least in the ballpark.

4. In other words, earning $100,000 as a pastor has the same financial benefit as someone who earns $119,092.50 in the business world (or in another profession.)

5. Don't quote me on this, but I believe that pastors can still claim the mortgage interest deduction if they itemize, so they don't lose out on this benefit when they get the housing allowance break.

6. Pastors/church members will say that these benefits are called for because pastors get paid so little compared to other professions. There are two ways to look at this -- both of them pointing to the same conclusion. The first is that pastors earn a low salary (FYI, this data is a bit dated -- I couldn't find anything more current) compared to what others earn. The details:

The study also revealed that the compensation package of the typical pastor now exceeds $38,000.

In 2006, the median annual household income according to the US Census Bureau was determined to be $48,201.00.

Note that the second number is income while the first is total compensation. If additional compensation was added to the second number (which it probably should be), the difference would be even greater. Then again, the first number is five years older, so it's likely that it's increased during that time.

But if you look at salary by education, pastors take a real beating:

George Barna, who directed the study, also pointed out that clergy compensation is especially noteworthy because more than two-thirds of all Senior Pastors have a graduate-level degree. Other professionals with that level of education earn average salaries over $60,000 or more, depending upon their profession. He pointed out that many church-goers, however, expect their pastor to earn less than the national average because they are involved in ministry, regardless of their school loans and family obligations. Pastors who have a seminary degree receive an average compensation package of $42,083 – significantly above the average for pastors without a seminary degree ($31,500), but notably below the national norm for professionals with advanced degrees.

7. The flip side of the argument in #6 is that other non-profit workers often earn a low salary but they don't get the same breaks. Maybe they should.

8. I don't have a real conclusion here other than I find the topic interesting. It certainly was new news to me. For those thinking of making a shift from another profession to going into the ministry, you can earn much less and still take home the same net amount as you do now. Good thing because it looks like if you make the move, you will be earning a lot less.

Free Money Finance March Madness, Elite Eight, Posts 1-4

Here's the fourth round of Free Money Finance March Madness (if you wonder what's going on in these posts, see my article announcing March Madness and/or click on my March Madness category link and scroll down to read all the posts involved in this subject.) I've listed each "game" (one post versus another) in segments along with the wording provided by the author when the post was submitted. I've also listed a keyword(s) after each post title to make it easy to vote (as a made-up example, you can just comment: Game 1 - Saving; Game 2 - Investing, etc.) Be sure to comment which one you like better out of each set of two. Here we go:

GAME 1

• Snowflaking:  A Primer (Snowflaking) - Snowflaking is a concept that many people actually employ but few people can name.  It involves systematically and purposely saving and earning small amounts of "extra" money to reduce debt or increase savings. Doing this in a purposeful manner can make a huge difference in your financial health.  This post outlines what snowflaking is and how to get started implementing it in your own life.  It has worked wonders for me!

VERSUS

• I want to be rich like you (Rich) - My teenage cousin thought that because of the things I had – house, car, electronic gadgets – that I had to be rich. I had to explain to him what debt was and how appearances from the outside can be deceiving.

GAME 2

• A little-too-late advice on building wealth (Late) - Well, we're all stupid.  Some of us stupider than others, but mama always told me stupid is as stupid does.  If you can read this list and you haven't messed up all of these points already, you may find a way to destupidify.

VERSUS

• Shopping at Costco the frugal way (Costco) - Here's how to become an extremely disciplined Costco shopper and save significant amounts of money, even for small families.

Saving Money, Making Kids Rich, Hated Taxes and More!

Here are some posts worth re-reading from one year ago this week:

• Save Big Money by Talking About What You're Planning to Buy - A GREAT tip I stumbled upon.

• A Great Money Saving Tip That Few People Use - The coat lasted through this winter too.

• How I Plan to Make My Kids Multi-Millionaires on $1,000 a Year - A little bit of money over a long time makes people very wealthy.

• What is the Most Hated Tax in America? - I'm going with the federal income tax.

• The One Answer to Every Financial Question - Want to guess what it is?

How the Government Spends Our Money

Parade recently ran a piece on how the government spends our money, highlighting the following:

• Consumer & Occupational Health and Safety: $3.1 billion
• Federal Prison System: $6.2 billion
• Disaster Relief and Insurance: $12 billion
• International Development and Humanitarian Aid: $14.3 billion
• National Institutes of Health: $28.6 billion
• Food & Nutrition Assistance: $60.2 billion
• Homeland Security: $64.9 billion
• Medicare: $396 billion
• Military: $583 billion
• Social Security: $615 billion

We haven't had a good old "I hate the government and how it spends my money" bashing session for quite a bit, so I thought I'd post this info and let you all have at it in the comments. ;-)

Why Your Home's Value May Go Down but Your Assessment Goes Up

Remember when I told you that my home's assessment for property taxes went down? Well, it looks like not all the people in my neck of the woods are seeing red -- at least on paper. The details:

Holding the paperwork for his Highlander Drive SE home, Warren Jackson asked the city's Board of Review how the assessment on his home possibly could have gone up.

"I read the papers," he said. "I check the (National Association of Realtors) Web site. In just the last three months, our real estate values in Kent County have dropped. How can they possibly raise the value of my house?"

Even more people took the earlier step of calling their city or township assessors for an explanation of this year's painful reality: Even in a sharply depressed housing market, many homeowners will see their assessments and, therefore, their tax bills, rise.

That's a killer. Housing values going down and assessments going up. But what could be a reasonable explanation for this? Here's what the local tax authorities are saying:

It is a result of a state law from a 1994 referendum, known as Proposal A. For many years, the law held down tax bills because it capped the increase in taxable value to the rate of inflation or 5 percent, whichever is lower.

Meanwhile, the State Equalized Value assessment continued to grow at the true market rate, usually higher than inflation.

This created a gap in the taxpayers' favor.

When a property is sold, the taxable value is reset to the SEV assessment, eliminating the gap. Until a sale, however, the taxable value continues to play catch-up, even if assessments go down.

"People might think the system is working against them this year," Wyoming Assessor Gene Vogan said. "(But) we ask them to try to remember the good old days when assessments were going up 6 or 7 percent and taxes went up only 2 or 3 (percent).

"That's at least a 10-year benefit. Now, there's a little catching up that's going on."

In other words, the tax authorities are saying that people have underpaid property taxes in past years because home values have risen faster than assessments. And now they're paying more because of the breaks they've had in past years -- not because home values are actually increasing.

I thought I'd be paying less since my assessed value went down. Seems like I will -- but not that much less:

The average assessed value in the city fell by about 2.5 percent. But state law requires the taxable values to be increased by last year's rate of inflation, 2.3 percent (as long as it does not push it higher than the assessed value).

And one other note that will impact me:

When a property is sold, the taxable value is reset to the SEV assessment, eliminating the gap. Until a sale, however, the taxable value continues to play catch-up, even if assessments go down.

This means that when (or I should say if) we buy a new home, the assessment will be reset to the fair value of the house at that time -- something that should save me a ton of money versus what the previous homeowners were paying (if I buy at a substantial discount as I'm planning.)

Finally, for Michigan residents, the piece gives a link to the Michigan Tax Tribunal which gives details on how to appeal an assessment.

Have You Ever Been Asked to Do Something "Crazy" by Your Employer?

Ran into this today:

A Qwest supervisor in southwestern Colorado took his concerns over extended bathroom breaks to an uncomfortable level, union officials charge.

The manager, they claim, recently gave disposable urinal bags to about 25 male field technicians with the message: When you have to go, don't waste time searching for a public bathroom.

Brief Relief is described on the company's Web site as a "20-ounce plastic pouch with a one-way valve and funnel that leads liquid waste to a holding compartment filled with a proprietary blend of powdered enzymes, polymers and deodorizers."

It can save time and "boost morale," according to the Web site.

;-)

I've never had to do anything even close to this bad, but I've certainly had my moments. Most were pretty calm compared to this.

How about you? Have you ever been asked to do something you felt was "crazy" by your employer?

Live Like a New Yorker in Your Own Home Town

Here's a guest post from Susannah who blogs at How to Live Well on Nothing a Year.

Any New Yorkers here?  Then you know about that Holy Grail of urban housing, the rent-controlled apartment.  From World War II until the 1970s, rent-controlled apartments were considered a way for cities to maintain lower-cost housing for poorer residents.  It's estimated that in 1997, 1.1 million of the 1.7 million apartments in NYC were rent-controlled.  The median rent for those apartments was $545, according to the 1990 census, compared to $1350 a month for non-rent-controlled apartments.  (Yes, nearly 20 years ago.)

Imagine renting a two-bedroom apartment in Manhattan for $545 a month.  (Imagine renting a broom closet in Manhattan for $545 a month!)  There are a couple of wrinkles, though: your rent is set the day you move in.  If you moved in in 1974, your rent may still be $545 a month.  But if you move out, the next tenant's rent readjusts to market rate--which may be $2450 a month.  If you have a rent controlled apartment, you guard it with your life: in 1997, 88% of tenants living in rent controlled apartments had been there for more than 25 years.

Stories like these make me envious.  Yes, I too could live in Manhattan, if I had the foresight to get an apartment there at the age of 6 months.  As an aspiring novelist, I've thought about moving to New York City.  I've gone as far as apartment hunting.  And that was the end of that.  Due to my lack of planning as an infant, an apartment in NYC is priced out of my reach.

And then, about a year ago, I discovered a cute two-story semidetached with wooden floors and big windows--in my hometown.  The best news of all?  It was rent-controlled.

You too can discover rent-controlled housing in your area.  We call it "home ownership."

The new rent control

Of the many advantages of home ownership, a stable monthly payment is the one most often overlooked by prospective buyers.  And that makes sense--when you buy, your monthly outlay is equivalent to or greater than the monthly rent of a comparable property (more about that later.)  It doesn't seem like a deal to shell out that huge hunk of cash every month for the next thirty years. 

I'm going to speculate that in 1975, paying $545 a month for that Midtown apartment was a nasty shock, when there were bigger places going for $75 a month in Podunk, USA.  But after a decade or two, your payment starts to look much better.  The same force that has made that $545 apartment more desirable than dinner with Tom Cruise will make your mortgage into a laughable sum in thirty years.  (No, I meant inflation, not Scientology.)

"Not the same," you say.  "You have to pay up front for the home."  So you do.  On the other hand, after 30 years, you stop paying rent altogether.  Is it worth the initial outlay?  Well, how many landlords give you back a percentage of your rent when you move out?

"But you have to do your own maintenance when you buy!"  Sadly, the same is true for many rent-controlled apartments.  Rent control is a frustration for landlords because they are making so little and are often unable to sell very valuable property out from under their tenants.  Many try to chase out their stubborn tenants by ignoring all repairs and improvements.  Is that illegal?  Of course.  But it's still a big problem.  A smart rent-control tenant has a wrench and knows how to use it.

"Your insurance and taxes may go up!"  This is true.  One assumes you have renter's insurance in your NYC pad, so that cost may be even, but property taxes are an issue.  On the other hand, those property taxes are deductible, and increases are often capped for as long as you own the home.  (In my area, they're capped at a 3% per year increase.)  And, as a renter, you're indirectly paying your landlord's property tax, but you don't get the tax break.

If you own your own home with a fixed-rate mortgage, your payments stay essentially the same.  This is a big benefit for anyone trying to live on commission or freelance work.  As inflation eats away at the cost of your housing, you will find yourself progressively better off.  Stability isn't just for the people who pay off their mortgages early.  It's built into the homebuying experience.

Make it a frugal hack

I see someone in the crowd gearing up to address the other benefits of home ownership.  But we're skipping them.  To treat your home like a rent-controlled apartment is a valuable frugality hack.  And let me tell you why:

• The average American thinks of home equity as wealth.  But it is only accessible through consumer debt in the form of a HELOC loan.  And, until the home is sold and the profits locked in, the market can turn and leave a homeowner stranded, without the income to continue to live above his means, and with debts that may threaten the home itself.

• The idea of "resale value" has been used to justify 10,000 granite countertops and 100,000 new showers.  Do you really need them?  What was wrong with the old ones?  Could you pay in cash?  No one asks these questions because of the delusional concept of "investing in the home."  I hate to break it to you, but that new deck is an expense, not an investment.

• The myth of can't-lose real estate investing has been exploded, along with the credit and housing markets.  You can lose money on a house.  It can become worth less than it was when you purchased it, and you can find yourself in the hole with no way out but foreclosure.  It's happening every day.

• You won't necessarily grow into your mortgage--perhaps you'll want to change careers or stay home with kids.  What you can't afford today is something you shouldn't buy. 

How does this relate to rent control?  If you think of your home and your mortgage primarily as a housing expense, you are less likely to succumb to living outside your budget, buying a home you can't afford, or overpaying in a high-priced market because everyone else is doing it.

Go house-shopping and apartment shopping at the same time.  Knowing the rental market is the single best way to evaluate the true value of a home.  Figure out the initial premium you'll have to pay in order to lock in a cheaper "rent" for fifteen or thirty years.  Remember that it's a waste of money unless you intend to stay for a few years, and figure out how many years it has to be.  In some markets, rent is so much cheaper than buying housing that I'd advise you sit down and decide: do you want to stay where you are and rent?  Or do you want to move in order to own a home?

Naysayers will tell you that it's always going to be much more expensive to buy than to rent, and your costs will have to be made up for by counting on appreciation.  They're wrong.  My home payment is almost exactly the same as the rental of a comparable home down the street, and I bought only a year ago.  By thinking of my mortgage payment as paying for housing instead of as OMG!!! THE BEST INVESTMENT EVER!!!!, I steered clear of the little house I fell in love with and bought a bigger, nicer, and only slightly less-cute house at a much better price.

I thought buying was good.

I'm a big advocate of buying a home.  But home ownership should be about finding a long-term place to live, and settling there.

• Your home shouldn't substitute for financial management and investment. 
• It shouldn't be a cash cow. 
• It shouldn't be an emergency fund. 
• It shouldn't be a status symbol. 

By focusing on the actual monthly financial benefit of your house payment (the stabilized price for shelter), you can avoid being caught up in the phantom financial benefits.  If your neighbor down the street sold his place for $20k more than you paid to buy, no one has put money in your checking account.  When you write a mortgage check for only 75% of what rent would cost you, that other 25% is a real savings, in your hands today.

Remember: renting isn't throwing money down the drain.  It's paying for a roof over your head.  Your mortgage has the same primary purpose.  Ignore the investment aspect of home ownership and look at it as a way to stabilize your housing costs.  Your home's equity will probably grow whether you're thinking about it or not.  But don't gamble on it.  Count on your guaranteed benefit: the joy of paying a 2008 price in 2028 dollars.

How to Determine the Amount of Life Insurance You Need

The following is a guest post from Marotta Asset Management.

You may have heard that "Life insurance is a gift of love." But if you bought a $100,000 whole-life policy because you wanted to build some cash value when you should have bought a million dollars of low-cost term insurance to meet the survival needs of your family, your well-intentioned effort was not an act of love.

Objective life insurance advice is hard to find. Prior to joining the National Association of Personal Financial Advisors (NAPFA), Bob Arms, CLU, ChFC, AIF®, coauthor of this week's column, sold life insurance for 26 years. He is currently licensed as a life insurance consultant, a fiduciary whose legal obligation is to represent the client first.

The first step toward representing your best interests entails an in-depth discussion of how much life insurance you might or might not need. The formula is Future Financial Needs minus Current Assets equals Your Current Risk. How much you want to provide for your loved ones should you predecease them (A) minus how much you have that could be used to provide for the survivors (B) equals your surplus or shortage (C).

To the extent that a gap exists between your financial needs and your current assets, life insurance is the most efficient product available to provide tax-free dollars exactly when you need them. As you go through the life changes of marriage, children, and career, you should recalculate your need and revisit the life insurance you own.

When members of a young family are making a decision about life insurance, six line items are significant.

1. Debts: The baggage of debt makes the journey toward financial success difficult. Avoid debt if possible, but if you have any, don't burden your family with it after you are gone. Being able to liquidate all credit card debt and car, home equity, and personal loans will give your surviving family the best chance at success in life.

2. Mortgage: Carrying a long-term fixed-rate mortgage keeps more money invested in the markets and qualifies you to enjoy a tax deduction on the interest. Leverage is a popular financial strategy of the rich. But if you would sleep better at night without a mortgage, sleep is more important. Either way, you need enough insurance or investments to pay off the mortgage.

3. Educational and child-care expenses: Depending on the age of your children, multiple expenses must be considered. If your children are preschoolers, the cost of child care may make it impractical for the surviving spouse to return to work. Consider the math. When the children are school age, will you want them to attend private school? Call the schools in your area and work the numbers. What percentage do you want to help with college? In-state tuition, room, board, books and transportation for college presently averages $6,185 annually. Private schools cost about $23,712 per year. Which do you want to fund?

4. Final expenses: Include a small amount for your funeral, approximately $10,000. The average funeral today costs $5,000 to $7,000, but expenses can exceed $10,000.

5. Family income: Estimating a young family's income needs is very challenging. To ease the mental strain, use seven times your adjusted gross income as a rule of thumb. A more accurate prediction requires either a financial calculator or a computer program.

6. Emergency fund: No one can forecast the exact amount a surviving family will actually need, but this category does absorb a potential miscalculation. Most gaps are filled by using 10% of the total of the other five line items: debts, mortgage, education, final expenses and family income.

Now that you have an estimate of how much your family needs, compare the total with your current assets. Include only the assets the surviving spouse can use for expenses. So do not include your house because your spouse needs someplace to live; your car because transportation is essential; or your retirement assets, which the surviving spouse will need during retirement. Nor should you count any inheritance. The old adage is true: Don't count your chickens before they hatch. This category is the total of your current life insurance and all investment assets.

The easiest math remains: Your Total Future Financial Needs minus Your Current Assets equals The Current Risk you may want to insure against. To determine how much life insurance the other spouse should carry, trade places as the first to die and rerun the numbers. Clearly, if the bottom line is positive, you've done something right and either you have enough life insurance or you are self-insured. Congratulations. If the bottom line is negative, thankfully you still have time to take action.

Financial planning is a lifelong process that covers multiple areas, including investments, insurance and taxation. Reviewing all of your financial affairs periodically with a trustworthy advisor who sits on your side of the table will ensure that you achieve your financial goals. 

Star Money Articles and Carnivals for the Week of March 17

Here are some recent interesting posts from the MoneyBlogNetwork and beyond as well as a list of the carnivals Free Money Finance was in this week and my posts that were included:

• The Digerati Life tells how to save on healthcare costs.
• The Sun’s Financial Diary offers thoughts on high-yield savings.
• Generation X Finance covers the recent Bear Stearns purchase.
• Lazy Man and Money gives a net worth update.
• BripBlap was a poor kid.
• My Dollar Plan details her dumbest purchase ever.
• Money Smart Life asks if you're borrowing against your tax return.
• Money Crashers discusses the envelope budgeting system.
• Odnal has free money with Updown.com.
• The Happy Rock pays in cash.
• 7 Million is working on making money.
• Twin Commas discusses buying a home.
• Consumerist says sub-prime borrowers are living in tents.
• Carnival of Debt Reduction - Be Careful with Home Equity and 401k Credit Cards
• Carnival of Personal Finance - Money and Marriage
• Festival of Frugality - 8 Ways to Cut Your Grocery Bill
• Carnival of Money Stories - How to Make Money in This Housing Market

Carnival Hosts: As a reminder, I post all carnivals I'm in for a given week as long as the host either emails me a link to the carnival or sends me a trackback.

Enjoy!

How to Negotiate in the United States

The following is excerpted with permission from How to Negotiate Anything with Anyone Anywhere Around the World, Third Edition by Frank L. Acuff (AMACOM 2008). Though this isn't specifically about personal finance, it does indirectly impact on many careers, hence I'm running it here. I also found the information interesting to read.

UNITED STATES

Fast Facts

• Monetary Unit: U.S. dollar
• Major Industries: petroleum, steel, motor vehicles, aerospace, telecommunications, chemicals, electronics
• Primary Trading Partners: Canada, Mexico, Japan, China, Germany
• Key Exports: capital goods, automobiles, consumer goods, industrial supplies and raw materials
• Key Imports: crude oil and refined petroleum, machinery, automobiles, consumer goods, industrial raw materials
• Major Cities: Washington, D.C. (cap.) (571,000), New York (18.5 mil. metro area), Los Angeles (12.2 mil. metro area), Chicago (8.7 mil. metro area), Houston (2.0 mil.)
• Ethnic Groups: Caucasian (69%), Hispanic (13%) (Hispanics can be of any race), black (12%), Asian (4%), Pacific Islander, American Indian, Alaskan, or claiming more than one race (2%)
• Primary Religions: Protestant (52%), Roman Catholic (24%), Mormon (2%), Jewish (1%), Muslim (1%), other (10%), none (10%)
• Languages: predominantly English; sizable Spanish-speaking minority

Reducing Communication Noise

Greetings

• Shake hands firmly and briefly with both men and women upon meeting and leaving, and smile. American greetings are informal. A peck on the cheek or a hug may be used between women or between men and women who have been acquaintances for a long time.

• First names are used in most business situations. Possible exceptions would be to use Mr., Mrs., or Miss for a very senior person in age and rank, or in formal situations.

• Common greetings are Pleased to meet you and How do you do? More casual greetings include Hello, Howdy (in the West), and Aloha (in Hawaii).

• Business cards are routinely exchanged in a business setting, though not in social settings.

Conversation

• Americans enjoy talking about business, travel, current trends, and world events. Going to the movies and restaurants are popular leisure activities.

• Baseball, football (American), basketball, golf, tennis, and bowling, are popular spectator and participant sports. Hunting and fishing are popular in rural parts of the country. Soccer has become popular in recent years among children but has yet to catch on as a major national public sport.

• Expect for people to ask you in social gatherings, "What do you do?" (i.e., "What kind of work do you do?") and "Where do you work?" ("For what organization do you work?").

• Americans like their physical space, and usually stand about three feet from each other during conversation.

• Good eye contact is usually considered to be direct eye contact for perhaps five to seven seconds with breaks of two or three seconds. This sustained eye contact is perceived as a sign of interest, sincerity, and truthfulness.

Sensitivities

• Americans like discussing politics. Do more listening than talking.

• Don't criticize the United States. Even though Americans may be self-critical about their environment, they are usually patriotic and don't appreciate negative opinions from others.

Key Negotiating Pointers

• Make prior appointments and be punctual. Although Americans are very time-conscious, business meetings sometimes start ten to fifteen minutes after the appointed time.

• Be cordial but get to the point of the discussions after a limited amount of small talk. Americans sometimes suggest that "we dispense with the formalities and get down to business." Expect negotiations to move quickly.

• Be polite, but be direct and candid in your comments. U.S. negotiators will expect you to "tell it like it is," which means to be open in your communication. Indirect answers may be mistaken for lack of confidence, insincerity, or even dishonesty.

• Don't expect large U.S. negotiating teams. Unless the negotiation is very complex, a typical American negotiation team probably consists of one to five persons.

• Make proposals and presentations detailed, factual, and formal. Be sure to have copies for those present.

• Leave yourself some room to negotiate. U.S. negotiators often have very ambitious initial demands.

• A common tactic is for U.S. sellers to tell buyers to "take it or leave it."

• Expect U.S. negotiators to concede grudgingly, saving concessions until the end of the negotiation.

• Use patience to your advantage. U.S. negotiators sometimes make concessions in order to conclude the negotiation and get on to other business.

• Respect deadlines. Americans are extremely time-conscious.

• Expect contracts to be very detailed and lengthy.

Day-to-Day Pointers

Business Entertainment Guidelines

• Business entertaining is usually done in restaurants.

• Dinner is the main meal of the day, but business breakfasts, lunches, and dinners are common. Dinners start about 7:00 to 9:00 p.m. and continue for one-and-a-half to two hours.

• You may discuss business during a meal.

• In restaurants, tips are not usually included in the bill. A 15 to 20 percent tip is typical.

Table Manners and Food

• Napkins are usually placed in the lap. The left hand often rests in the lap during the meal.

• Americans usually eat with the fork in the right hand. The fork is switched to the left hand and the knife is held in the right for cutting.

• It is generally considered poor manners to rest one's elbows on the table, but many Americans are casual about this.

• There is a rich variety of foods, reflecting diverse cultural backgrounds. Beef, pork, and chicken are popular meats, though many Americans are eating a higher portion of vegetables and fruits for health reasons.

• The large number of fast-food restaurants reflects the busy U.S. lifestyle, as well as food preferences.

Gender Issues

• Compared to other countries, U.S. women occupy more key professional and managerial positions.

• Businesspeople can expect to do business with women as well as men in every region of the country, in many different product lines and services. However, an Old Boy Network still remains in some business sectors.

• Women make up about half the workforce.

• Both parents often work outside the home. Only about 6 percent of the U.S. population lives in a "traditional American family": father at work, with mother and children at home.

Also Remember This . . .

• The United States has the world's largest and most diverse economy, though not the highest per capita income. It is the financial capital of the world.

• American society is prosperous as a whole, though there is a widening gap between income levels.

• The United States is an extremely diverse country, with a wide variety of ethnic, racial, and other backgrounds in the workplace.

How to Keep Your Child's Identity Safe

Here's a guest post from Family Secure, a service from Experian that alerts parents of key changes in their credit file and their children’s that could be a sign of identity theft.  The product has a $2 million guarantee. They had asked me to review their site and instead I asked them to provide a guest post that would tell Free Money Finance readers what they should do about protecting their child from identity theft. Here's what they had to say:

Identity theft has become an increasingly common problem in the last few years.  A recent survey conducted last year by the Federal Trade Commission reported that there were 8.3 million victims of identity theft in 2005.

What many people do not know is that child identity theft – stealing a minor’s personal information and establishing lines of credit in his/her name – is also increasing at an alarming rate.  Some sources estimate that up to 500,000 children per year become victims of identity theft. In many instances, parents and children don’t realize that the child’s identity has been stolen until he or she applies for credit much later in life. By this time, the child’s credit history is already tarnished. 

A 2007 Experian-Gallup poll showed that while 72 percent of the respondents felt it would be “very easy” or “somewhat easy” to steal a child’s identity, 68 percent knew “only a little” to “nothing at all” about child identity theft.

Instances of child identity theft will likely continue to grow as minors become more active online and on other information sharing platforms. Parents should consider the following precautions to help protect their children from becoming victims of identity theft.

• Educate children about the importance of keeping personal information private. Teach them to come to you should any person or organization ask for their social security number and address.

• Closely monitor a child’s online activity.  Many sites ask for personal information such as last name, address, etc., which can open the door for identity thieves. 

• Monitor the type of mail a child receives. Credit card advertisements, unexplained merchandise or collection notices could all be indications of identity theft.  Also, the more mailing lists a child’s name is on, the more exposed he or she is to identity theft. Whenever possible, sign up for items like magazine subscriptions under your own name rather than your child’s name.   

• Think twice before giving out a child’s social security number.  Giving a child’s social security number is voluntary even when directly requested. When signing children up for programs such as daycare, basketball camp, etc or filling out medical forms at a doctor’s office, parents do not need to provide social security numbers. If someone insists he needs a child’s social security number, parents can ask why the number is needed, how the number will be used, what law requires them to provide a social security number and what the consequences are if you refuse.

• Don’t give out even the last four digits of a child’s social security number. These last four numbers can be easily used to obtain the full social security number, creating numerous opportunities for a child’s identity to be stolen. 

• Do not let children carry their social security card in their wallet.  Keeping their card locked in a deposit box ensures that their social security number will not be compromised if their wallet is misplaced or stolen.

Five Steps to Pay for Healthcare in Retirement

I've said before that I think the biggest issue in retirement will be healthcare. As noted in that post, Fidelity estimates that a couple retiring today needs over $200,000 just to pay for healthcare costs alone. And you know the costs are going nowhere but up!

Market Watch attacks this issue head-on and offers five steps to pay for healthcare in retirement. Their list:

1. Create a retirement plan. It's vital that Americans create a plan that factors in current savings, income sources, lifestyle, expenses, geographic location and likely health-care needs, according to Fidelity. Why? Well, Fidelity's estimate is largely an average and actual costs will vary greatly.

2. Earmarks savings for retiree health-care costs as early as possible. Fidelity recommends that Americans enroll and save money in a health savings account (HSA) or other qualified account earmarked for health care.

3. Spend money/time on a healthy lifestyle now. The best way to avoid future health-care costs is to spend one's money and time wisely on health care today, said Cooper. He recommends, for instance, hiring a personal trainer who can help develop an exercise and nutrition program that will improve the odds of spending less on health care later.

4. Determine details of any employer-sponsored coverage.

5. Understand the financial impact of health-care costs on Social Security income.

To me, the best option for the younger/not-so-close-to-retirement crowd (those 55 and under) deal with options #1 and #3. In particular:

1. Determine your retirement number and start saving aggressively for it. To be conservative, assume you'll need 100% of your current expenses covered (adjusted for inflation) by your retirement savings.

2. Start taking care of yourself RIGHT NOW. As in "today". Stop smoking (it's costing you a fortune anyway), start eating better (you can still indulge now and then, just not every night), and get into shape. For me, it's biking but there are lots of options for getting into/keeping in shape that are fairly cost effective. And, not only will being in shape likely reduce your healthcare costs later in life, but might save on health insurance costs now.

Another Interesting Idea for Teaching Kids About Money

Here's a very interesting/compelling idea someone suggested on my post titled Interesting Ideas for Teaching Kids About Money:

I say give them (kids) an allowance of $500 bucks a month. At the end of the month give them an itemized statement (like a paycheck) deducting $480 for boarding, food and clothes and let [them] spend the $20 as they like. That should get them in the real world mindset.

Ha! I couldn't help but think this might actually work. What do you think?

Review: TaxCut

Last week I gave away four 1GB USB drives with TaxCut on them to four different readers. In addition, I gave one to one of my co-workers. He'd done his taxes already with TaxAct but he offered to re-do them again with TaxCut and write up a review. It's a bit rough, but I think his message comes through clearly. Here are his thoughts:

TaxCut review: Full version with Federal, State and E-File. Included was Deduction Pro, a program to keep track of your donations to charity and other deductions.

I installed the program on a PC with Windows XP operating system. There were no problems with the installation and no crashes during install or running the program but I read reviews on Amazon.com that some people were having problems with Windows Vista and Mac OS X 10.5 Leopard.

The last two years I used the free version of TaxAct so that is what I am comparing TaxCut to. I have no experience with TurboTax or any other program offered. I had already filed my taxes for 2007 last month so I was just re-entering the data from what I had filed.  My tax situation is not very complex, I do file a 1040, itemized deductions, some capital gains and interest income and state filing is in only one state. Other than that it is pretty straight forward. If you have very complicated returns with Schedule C's for business, income with K-1 forms, or tricky deductions I can not attest to the accuracy or usability of this program. I also did not get into the Deduction Pro since I had already kept track and used an Excel spreadsheet to do this job. But I did open the program and played with it a little and it was pretty nice.

First impression is that the user interface is nice and easy to move around. Everything progressed in a logical sequence. I liked the listing of all the topics that were going to be covered before each section and you checked which topics you wanted to deal with and those were the only topics that it ran you through. It speeds things up when I do not have to go through every single topic like you have to do with TaxAct.

I really like how the 1099's were set up to fill in just like the 1099's that you get from the banks and brokerage houses.

The small movies were a nice touch and helpful.

The program even questioned a mis-keyed charitable deduction that I put in because it thought it was too high. Nice touch. (And no I was not trying to sneak in a larger tax refund.)

It did require me to go online and get the update for federal and there was not state form. The state forms had to be downloaded separately. This federal download was a 33 meg file and at my slow dial up connection is was going to take over three and a half hours to download. Instead I was able to download the update file at work from the TaxCut web page, in 3 minutes, and put it on a flash drive and then uploaded it at home the next night. (ya gotta love high speed internet service) I copied the file into the TaxCut folder and clicked on the .exe file and it updated the federal forms. However it did not load in a state form and I had to then download the state form from the slow dialup connection which was 4 meg large and took about a half hour. (A high speed connection would have taken less than a minute.) Once this was done I had the state form loaded and was easy to complete.

To my surprise the state form showed that I was to get a refund but I had paid the state when I filled the form out by had last month. Then I saw my mistake. On the hand written form that I filled out last month I had multiplied the stated tax by 4.1% and not 4.01%. Of course TaxCut calculated it correctly. Now I have to figure out how to amend a return. This mistake alone might make me a convert to pay the extra to have the computer file the state form. Up to now my motto was that the state form is so easy to do why pay $10 extra to just have it fill in a few numbers that come right off the federal form. An easy mistake to make but a $100 mistake.

Another dislike is the viewing of a 1040 form. I would like to find an easier way of looking at the Federal forms without having to print them out. It would be nice to be able to see the form at anytime with one click of the mouse. Maybe this is set up so people do not make a mistake and print out a form that is not completed. Whatever the rational, it is an inconvenience. I finally figured out a way to print the form as a pdf, save it, and then view it as a pdf with Acrobat Reader. I got pretty proficient at this so it was not too bad.

The cost of TaxCut is less than TurboTax but more expensive than TaxAct. The kicker is the convenience to e-file. TaxCut and TurboTax both have a hefty extra charge for this e-file service, but TaxAct will let you e-file for free. It sure stinks that these guys are gouging the customer for a convenience that should be free or a nominal charge.  There are also complaints on the Amazon.com reviews about how the price of the software jumping 25% over the previous year. That is a pretty substantial price jump for something that does not really change much from year to year. Plus you don't get a price break from downloading from the web on the TaxCut site. You can actually buy it cheaper at Amazon.com than from the TaxCut home page.  When are these companies going to learn that they can make a lot more money if they give a customer a 25% discount for downloading an electronic version from their home web page as compared with buying a CD that incurs all the costs of manufacturing, packaging, materials, distribution and the wholesaler profit margins? It just amazes me that they have not figured this out.

The bottom line is that TaxCut performs as it advertises, is easy to use, and is competitively priced.

Why Most Investors Can't Beat the Market

Here's a piece from the New York Times on why most investors can't beat the stock market. In a nutshell, here's the reason: expenses. Transaction fees, sales loads, expense fees for managing a fund, taxes, and on and on -- all these add up to big money that is subtracted from any gains made by investments. And once these are subtracted, most investors/investments have returns that are below that of a simple market average. The details:

Investors collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult.

What are the investment implications of his findings? One is that a typical investor can increase his annual return by just shifting to an index fund and eliminating the expenses involved in trying to beat the market. Professor French emphasizes that this typical investor is an average of everyone aiming to outperform the market — including the supposedly best and brightest who run hedge funds.

Professor French’s study can also be used to show just how different the investment arena is from a so-called zero-sum game. In such a game, of course, any one individual’s gains must be matched by equal losses by other players, and vice versa. Investing would be a zero-sum game if no costs were associated with trying to beat the market. But with the costs of that effort totaling around $100 billion a year, active investing is a significantly negative-sum game. The very act of playing reduces the size of the pie that is divided among the various players.

Even that, however, underestimates the difficulties of beating an index fund. Professor French notes that while the total cost of trying to beat the market has grown over the years, the percentage of individuals who bear this cost has declined — precisely because of the growing popularity of index funds.

The bottom line is this: The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you.

As regular readers know, I regularly post on why I invest in index funds and this piece summarizes my key reasons. And even with all this evidence, I know I'll get commenters (or at least people thinking) "Yeah, that's true for most people, but I can beat the market." Yeah, right.

Believe me, I know the lure of trying to beat the market -- I tried it for the first several years of my investing life. But I ultimately learned (the hard way -- by losing lots of money) that I couldn't consistently beat the market (sure, I'd get lucky now and then, but it was nothing I could replicate). That's when I switched to primarily investing in index funds.

Even today I still have some remnants of those poor decisions. I have mutual funds with high capital gains associated with them that I'd prefer to have in index funds. But the capital gains are so high that I don't want to take the tax hit for selling them either. That's why I'm taking a unique approach to adjusting my portfolio. The downside: it's taking a lot of time, effort, and money to get things straightened out.

I don't want this to happen to you -- especially younger readers who don't have a lot yet tied up in actively managed funds. That's why I continually suggest you all look closely at index funds for the majority of your investments.

For more thoughts on this issue from me, see these posts:

• Costs Can Cripple Your Investment Returns

• Index Funds Continue to Be Great Investments

• Investing Advice from a Guy Who Manages $22.5 Billion

• Kiplinger's Loves Index Funds

Details and Pics of Tiger Woods' New Home

It's nice to earn a fortune every year, huh? Here are the details on Tiger Woods' new home:

Tiger has a brand-new lair - a $65 million estate in the Hamp tons where he can send his chip shots flying into the ocean.

Located on exclusive Gin Lane, Tiger Woods' estate is on nearly six gated acres with a 13,200-square-foot Colonial Revival main residence, a 7,500-square-foot guesthouse and a four-car garage with staff quarters.

Here are some pics of the place.

Update: Turns out this ISN'T Tiger's home. Thanks, Harold.

Life Insurance Advice from Dave Ramsey

Here's Dave Ramsey's take on life insurance:

The only people that have a real need for life insurance are those on whom people are depending for their livelihood. They should carry about 10 times their annual income on 20-year term life insurance.

Here's my take:

1. This is straight-down-the-middle advice, and it's what I do myself personally (for the most part -- see next point.)

2. Insurance on me is about five times my annual salary but that's because: 1) our annual living expenses are FAR below my annual salary (my life insurance is about 12 times our annual living expenses) and 2) we have a good level of investments that could help to support the family in case something ever happened to me.

3. I know there's a contingent of universal life, whole life, etc. readers on this blog, and I've got something to say on these offerings as well: 1) Most of these are VERY expensive, 2) they aren't good options for MOST people, 3) in certain circumstances, they are advisable, and 4) I'm working on having an agent write a post on when these forms of insurance are good deals. More to come.

For more of my thoughts on insurance, check out these posts:

• Buy Term and Invest the Difference

• 12 Ways to Save on Insurance

• What to Do When Your Term Life Insurance Expires

SmartyPig: A Simpler Way to Save Or A Fee Trap?

The following is a guest post from The Finance Buff.

Smarty what? That was my first reaction when I read about SmartyPig on Netbanker. It sure has a catchy name. What's it about then? From SmartyPig's web site:

"SmartyPig is a simple, smart, fun way to save for a specific goal. Using groundbreaking technology and the latest in security standards, SmartyPig allows you to invite family and friends to contribute to your account, gives you additional incentive boosts from top retailers who sell exactly what you’re saving for AND *4.30% (APY) interest on the money you’re saving."

"*Annual Percentage Yield (APY) is effective as of 3/9/2008. Rates may change at any time without prior notice."

SmartyPig wants to offer a service which encourages people to save for a specific goal and then make the purchase when the goal is reached, as opposed to charging the purchase now on a credit card which adds to one's debt. I'm all for that. Want that new car or vacation? Save up. In a nutshell, here's how SmartyPig works:

1. Save for a Goal. You open an account with SmartyPig. You create one or more savings goals, minimum $250 per goal. You have to set up automatic monthly electronic fund transfers from your bank account toward these goals, minimum $25/month per goal, although you can also add more money on top of the automatic transfers by doing a one-time transfer. While you are saving toward the goals, your money earns interest in a FDIC insured savings account.

2. Get Help from Family. You can keep the goal private to yourself or make a goal public and solicit help from friends and family. They will have to pay a $5 fee every time they contribute to your goal. The SmartyPig founders said they got this idea of collecting money from family members from 529 plans where it's common for grandparents to contribute to their grandchildren's account, although I don't think 529 plans charge fees to the contributors.

3. Redeem Your Savings. You can't get your money back unless you close your goal. You can close your goal at any time, either because you reached your goal or because you changed your mind. You get a prepaid MasterCard debit card from SmartyPig. You can either withdraw money to the debit card or use the money to buy gift cards from SmartyPig's partner retailers. Some retailers will add an up to 5% bonus if you buy their gift cards. They may charge you a shipping fee if it's a physical gift card. It's possible to get a check from SmartyPig but you will have to pay a $25 fee per check. From the terms and conditions:

"At no point in time can the funds in your SmartyPig Savings Account be transferred to a third party or a bank account outside of SmartyPig. Funds can only be redeemed on a SmartyPig MasterCard® Debit Card, a Best-In-Class Retail Gift Card or cashiers check."

If SmartyPig achieves what it's supposed to achieve, i.e. getting people to back off from charging their credit cards, it would be a great benefit to the consumers. Netbanker thinks it's "the most innovative financial service we've seen since Prosper launched two years ago" and they gave it a Best of the Web award. However I doubt it will have a material impact on people's behavior, because I think people who want to save will save and people who want to charge will still charge. It's not like people who want to save don't have a good way to save now. Online savings accounts are everywhere. Industry pioneer ING Direct lets you set up multiple accounts for tracking different goals. With ING, there is no minimum balance, no mandatory requirement for automatic transfers, and no limitation on getting your money back. Or does SmartyPig think people who want to charge their credit card now will give up instant gratification just because there is SmartyPig now? Letting family members contribute to a goal is touted as an innovation but they can do it today easily by sending a check or by PayPal.

The SmartyPig service also has quite a few fee traps. Hey, they've got to make money somehow! You want to contribute $100 to your sister's wedding? They will charge you $5 every time you do it. How come you can add money to your SmartyPig account by electronic fund transfer but you can't pull your money back the same way when your goal is reached? Because they want to earn the interchange fees from the debit card. If it takes 1 year for a typical goal to be reached, they pay you 4% interest on an average of 50% of the ending balance (because money is added to the account over time), but they take back 2% interchange fee from the merchants when you use the debit card. That's smart business (for SmartyPig, not you)! They get to recoup their entire interest cost. What a deal. If you ever lose your debit card, they will charge you $20 for a replacement. Don't want the debit card but want a check instead? $25 fee for producing a check. Are the gift cards with up to 5% bonus such a big deal? You can buy gift cards today from eBay and a few other places at a discount which translates to a bigger bonus. How did SmartyPig become a roach motel where your money can check in but it's so hard to come out? What's wrong with just crediting back to the same checking account the money came from? I'm afraid it's because they don't make any money that way. Breakage from prepaid debit cards and gift cards is a big deal.

Call me old fashioned but I see a lot of smoke and mirror in SmartyPig. I also don't see how it solves any problem that's not being solved today. Announcing a goal and sharing the progress with family members is nice. Being charged $5 for the privilege of chipping in is not. Separating the savings account balance into specific goals is nice, but not being able to get the saved-up balance back to your bank account is not.

Six Ways to Assertively Handle Conflict

The following is excerpted with permission from How to Become a Better Negotiator, Second Edition by Richard A. Luecke and James G. Patterson (AMACOM 2008).  Since negotiating is important to success in personal finance (for saving on purchases, asking for a raise and so forth), I thought this piece on how to handle conflict in a negotiation was worthwhile.

Left alone, serious conflict will fester. Someone has to step up to it and move it toward resolution. Consider the following six approaches.

#1: Confront Gently

This technique calls for openly confronting the situation, but in a diplomatic manner. You'll know that you are being successful at gentle confrontation if you can answer yes to all three of these questions:

• Has the other person's behavior changed?
• Have you preserved the self-esteem of the other person?
• Have you preserved the relationship?

Here's how to prepare for gentle confrontation:

• Maintain control of your emotions. Avoid overreacting.
• Rehearse what you plan to say. Practice makes perfect.
• Make sure you're aware and in control of your voice, body, and facial expression.
• Be willing to listen—and don't interrupt while the other person is telling his side of the story.

There are six elements to constructive assertive but gentle confrontation. These are widely taught to new supervisors and managers but can be applied to negotiating situations in which the behavior of the other side is getting in the way of a good outcome:

1. Objectively describe the undesirable behavior you're trying to change. Do not be subjective; do not be personal.

2. Identify the specific and negative tangible effects of the behavior. Don't attack the person—that will only put him or her on the defensive. Instead, attack the problem. For example, don't say, "Your frequent tardiness tells me that you don't think our meetings are important." Instead say, "Your coming late makes it impossible for the other people on this panel to get their work done."

3. Don't lecture. Nothing turns people off more than being talked down to, lecture style.

4. Listen to the other person's response; don't be tempted to interrupt.

5. Describe your future expectations in specific terms.

6. Gain commitment or agreement from the other person. Either you can ask him if he agrees, or you can say, "This seems like a reasonable request, doesn't it?" While you're saying this, look the other person in the eye, and look for agreement.

Most people want to be reasonable. Getting the other side to agree that you are being reasonable can be a powerful tool in resolving conflict—with either a problem employee or a difficult negotiating counterpart. It can move the other side to show reasonableness as well, and that may mean a bigger concession to you in the future.

Most people want to be reasonable.

With that advice in mind, how would you tackle the following situation:

Your team is negotiating to buy a large allotment of jet fuel. Jerry, one of the sellers, has raised and lowered the price of the fuel several times without explanation. How can you handle this situation using the assertive confrontation model?

Hint: Be polite. Be specific. Describe the effects of those erratic price changes on your business—and your ability to remain a customer. Then ask for something specific. Ask for commitment.

#2: Say No Assertively

One test of assertiveness is the ability to say no. Do you often find yourself saying yes to requests when you really want to say no? Are people always asking you for many small concessions because you're a pushover? If so, you need to be assertive—to stand up for your interests and say no. Using the principles of assertive confrontation, how would you say no in the following cases?

• The demanding customer. You must refuse the other side's demand for an extended warranty on the framing implements you're trying to sell because such a practice is not followed in your industry.

Hint: First, explain that your boss would never agree to such a demand. Second, offer an alternative (people are more likely to agree with you if you offer them an alternative). Perhaps you could extend such an unprecedented warranty if the other side locks in to a longer-term contract. Third, ask for commitment and understanding. The wrong way to respond is to say, "I said no. What part of no don't you understand?" Put yourself on the receiving end of that message. How would it make you feel? Keep in mind that you want to say no but at the same time preserve the relationship.

• The boss asks for too much. Your boss has just asked you to stay late again to work on a proposal that is due. You don't mind pitching in when there are emergencies, but her requests for working after hours have become routine. If you don't push back, you're afraid you'll soon have a 10-hour-per-day job.

Hint: State, "I understand that the proposal is important. As you know, I've stayed late three nights in a row to work on this. But tonight I have important family business I must attend to. However, I'd be glad to come in a half hour early tomorrow to work on the project. Doesn't that seem fair to you?"

#3: Disarm the Opposition

Sometimes the other person has a legitimate beef. If you deny that reality, the other person will be angry and the problem will get worse. By acknowledging that the other person is right, you will have taken an important step toward diffusing the crisis. Let's assume that a police officer pulls you over for speeding (yes, you were driving too fast).

Usual Defensive Approach

You: What's the problem? I wasn't speeding. My friend sitting right here will vouch for me.

Police officer: Don't tell me that. My speedometer doesn't lie.

• How would you disarm the opposition?
• What might the officer say?

Hint: Surprise the officer. He expects you to deny that you were speeding. Admit it. You can use the same technique while negotiating. Just don't overdo it; if you get predictable, you'll lose effectiveness.

#4: Handle Your Anger

Tough negotiations often generate friction, which easily takes the form of anger. Anger in turn makes what might have been a win-win negotiation a win-lose contest, which isn't good for either side—particularly for the one with the weakest negotiating hand. So do whatever you can to diffuse anger. Never tell another person, "Don't be angry." Instead, encourage the person to tell you what's angering her.

There are some things to do with an angry person:

• Listen. Maybe the person has a right to be angry.
• Don't argue, even if that is what the person wants. A person's feelings are neither right nor wrong. Perhaps the other person's self-esteem is in the Dumpster. Compliment him whenever possible.
• Ask open-ended questions—not yes/no questions—to uncover the reason for the person's anger.
• Demonstrate empathy. Use the reflective listening technique of occasionally paraphrasing the other person's words.
• If you're in the wrong, admit it!
• Encourage cheerfulness, and use light humor whenever possible.

But the other side isn't always the angry party. You may be the angry one. If you feel you're in danger of really exploding in anger, consider these suggestions:

• Go for a walk by yourself to get away from the problem for a while. That separation may clear the way for more constructive, positive thinking.

• Write an angry letter—but don't send it. Writing the letter will get the anger out of your system without hurting anybody. It will also force you to clarify your complaint.

• Then write a calmer, more rational letter. Either send it to the person who angers you or use the act of writing as a rehearsal for facing the individual in person.

What should you do if the rational approach doesn't work and the other side is dismissive of whatever is upsetting you? Sometimes a good old-fashioned temper tantrum on your part will focus people's attention on a problem. This works best if you have a reputation for being a rational, cool customer. Do it only to get people's attention on a problem; be selective about using this drastic measure (if you overuse it, you'll just be seen as a hothead). Even then don't make it personal. Direct your anger at the situation, not at the other person.

Consider the following situation. You must straighten out a problem with somebody from the other negotiating team, and you're sure that dealing with that person will make you angry. And your anger will make matters worse. What should you do?

Hint: Let the person know you're angry. Be specific about describing what you think is wrong. Stick to talking about actions and behaviors, not about attitudes or motivations. Listen. Look for solutions to the problem so that everybody wins. You can influence and persuade others by not yelling and by remaining in control.

#5: Appeal to a Powerful Third Party

Sometimes a gentle approach to a problem won't work. The other person may not want to compromise; he may not be interested in finding a win-win solution to the conflict. He may want to use power to solve the conflict. In that case, you may have to do the same—by appealing to a more powerful third party. Use this tactic only when winning is very important, because it will certainly create ill will. Here are two examples of appealing to a third party:

1. Your company is involved in a labor dispute that, after being stonewalled by the local union, you take to the state labor board. This third party will impose a settlement that may please neither side.

2. You have reached an impasse with the person with whom you are negotiating a supplier contract. As a longtime supplier, you've always enjoyed an amiable relationship with this company, and its contracts have always benefited both parties. But the new purchasing manager seems cut from different cloth. He is being extremely unreasonable, pressing you so severely on price that you will be unable to make any money on your sales to his company. You wonder if this newcomer is trying to impress his boss with his negotiating toughness at your expense. So you take a drastic step: You contact his superior and ask, "as a longtime and reliable supplier to your corporation," that you be allowed to bring in someone else to negotiate with you.

#6: Trade Places with Your Antagonist

One of the most effective ways of diffusing conflict is to get each party to walk a mile or two in the other person's shoes. You can do this through a role-playing exercise in which each party adopts the other person's perspective and interests. If done well, this exercise sensitizes each of the parties to the other's concerns and helps each understand the source of conflict.

To use this strategy, ask the other person to (a) write down her side of the dispute, and (b) write a paragraph in which she describes your viewpoint—as she understands it. Then, you do the same. Now, exchange the written information and discuss the differences. Once you've done that, trade places, with you arguing her point of view and she arguing yours. This is a powerful exercise when both parties take it seriously and do their best to represent the views of the other side.

A Lesson on the Power of Compounding

Here's a quick lesson on the power of compounding from the news recently:

In the early months of the Civil War, the city of Tampa needed ammunition and other supplies to defend against attack but apparently was short on cash.

So it issued a promissory note for $299.58 to storekeeper Thomas Pugh Kennedy on June 21, 1861.

Kennedy's great-granddaughter says the city never made good on its loan. Now, Joan Kennedy Biddle and her family are suing to collect the payment plus 8 percent annual interest.

The total bill: $22.7 million.

:-)

Yes, with enough time, even a meager amount can become a fortune.

Of course most of us don't have 147 years to wait for our money to compound, but if we invest early and often in our careers, we'll certainly have a nice-sized nest egg when we retire.

For more on compounding, see these posts:

• The Richest Man in Babylon: Seven Cures for a Lean Purse Part 3, Make Thy Gold Multiply

• The Power of Compound Interest

• Oh the Joys of Compounding!

Review: Walmart

I was in a store the other day and thought "I really like this store, I should tell people about it." It was at that point the inspiration hit me: I could do a series of mini-reviews on stores I like/dislike and allow all of you to chime in. That way, people will see the full spectrum of what a bunch of people think about stores we all probably have an opportunity to shop in.

I thought I'd start with the store that everyone has an opinion on: Walmart (BTW, I was NOT in a Walmart when I had the thought I shared above.) Here's what I see as the pros and cons of Walmart (FYI, this is NOT a Walmart Superstore) for me:

Pros

• Good prices. Not the cheapest all the time (they'd like you to believe that they were always the cheapest), but decent prices everyday. Especially if you buy the Equate brand -- it can save you a ton of money.

• Easy to get around. One caveat here -- this is true IF you go at the right time. We usually go around 10 am on a Saturday and it's easy to get in, shop, and get out.

Cons

• The store itself. It's not dirty, but it's not really clean either. It's kind of run down and the fixtures, flooring, etc. are old.

• The crowds. Go at any other time of day than the "off" times, and you're facing an onslaught of people. We went a couple Saturdays ago at 2 pm and it looked like it was the day after Thanksgiving. People were all over the place. I could hardly drive my cart down the aisle. It was like someone had stepped on an anthill (and we were the ants scurrying everywhere.) I was exhausted when I left.

• The checkout. I'm sure Walmart has some formula that tells them how many checkout clerks are supposed to be working at any given time, but either the store I shop at is not following the guidelines or the guidelines themselves are simply wrong. There are usually too few cashiers available which means extra long waits at checkout. We've had times where we've seen it getting busy and have cut our shopping short just so we could check out in a reasonable amount of time. I'm sure that if Walmart knew there were more people doing this they would take action to rectify it.

Overall rating: B+

If you're willing to deal with the hassles, you can save a good amount of money.

Just to note, I did not bring up the issue of how Walmart treats its employees since this is not a real issue for me when I decide where to shop. I know many people think that Walmart needs to do this or that for their employees. My feeling is that if the people are treated so poorly, they have freedom of choice to move on to another job. I know some of you will disagree, and that's fine, but I didn't want to end this post without making at least a reference to the topic. After all, it's been a well-publicized and on-going issue for Walmart.