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The Best of Money Carnival is now up. Congrats to all participants and especially the winning post, The Power of Progress.
Enjoy!
Just wanted to say "Happy Labor Day" to my readers in the U.S. I hope you are enjoying a day off -- and basking in the glow of some of the last days of summer.
I'm not blogging today -- plan to spend time with the family today. I'll be back tomorrow with more money news, commentary, tips, and thoughts.
For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.
Nestled in the middle of what could be the most well-known Psalm of all time is this one little verse:
My cup overflows with blessings. Psalm 23:5 (NLT)
We talk about money, money, money here every day. And that's fine because money is important and handling it well impacts so many other parts of our lives. But I think we can all agree that there are many things that are more important than money. It's often these blessings that we list when we think of our "cups overflowing."
It's been several years since I shared what I'm thankful for and on this holiday weekend I want to sit back a bit and be thankful for all of the non-money blessings in my life. Strangely (or maybe not so strangely), the list is the same as it was in 2006. Here's what I'm thankful for:
Of course I could add to this (I'm thankful for living in a free country, for being able to make a difference in the world by volunteering, etc.), but the items above make up my "main" list.
How about you? What are you thankful for?
The following is an excerpt from Buying a Home: The Missing Manual.
Question: What problems and issues appear most frequently during a home inspection?
Be on the lookout for these problems, which, according to a survey of ASHI members, are most likely to turn up during a home inspection:
1. Improper surface grading and drainage. This problem, reported by 36 percent of home inspectors, can mean that water is damaging the foundation and getting into the house.
2. Improper and undersized electrical wiring. The second most-frequent problem shows up in the electrical system. Specific issues include insufficient electrical service to the house, aluminum wiring, inadequate overload protection, improper grounding, and dangerous amateur wiring connections. Because a faulty electric system is a safety hazard, put problems like these high on your must-fix list.
3. Older and damaged roofs. Deteriorating shingles or poorly installed flashing can result in a leaky roof.
4. Deficient and older heating systems. Heating system issues include broken or malfunctioning controls, blocked chimneys, unsafe exhaust flues, and cracked heat exchangers. As with the electrical system, a faulty heating system can pose a serious health risk.
5. Poor overall maintenance. This category reflects what happens when a homeowner doesn't take proper care of his residence: cracked or peeling paint, crumbling masonry and broken fixtures and appliances may signify an owner who hasn't paid much attention to maintenance.
6. Structural problems. Older homes are especially likely to have some damage to foundation walls, floor joists, rafters, or windows and doorframes. These problems are often minor—but ask.
7. Plumbing problems. Old piping material, broken fixtures, and faulty water heaters are frequent issues in this category.
8. Exterior items. Outside the home, doors, windows, and wall surfaces sometimes let the elements in. Degraded weather-stripping or poor caulking is often the culprit.
9. Poor ventilation. Without proper ventilation, moisture can accumulate inside a home and cause rot, deterioration, mold growth, and other damage.
10. Miscellaneous items. This catch-all category includes problems found in the home's interior, from lead-based paint and asbestos insulation to windows that stick rather than open smoothly.
Since we've discussed what money skills kids should know before they leave home, I was interested in seeing if the authors of Lessons to My Children: Simple Life Lessons for Financial Success, Wealth, and Abundance
Lesson 1: Pay yourself first.
Lesson 2: Patience pays. (Save over a long period of time.)
Lesson 3: Write yourself a "reality" check. (You need a budget so you can see what you're really spending.)
Lesson 4: Have a game plan.
Lesson 5: Limit your debt.
Lesson 6: You get what you pay for.
Lesson 7: Balance risk and reward.
Lesson 8: Learn investing 101.
Lesson 9: Assemble your team of experts.
Lesson 10: Being organized pays dividends.
Lesson 11: Ask what your taxes can do for you.
A couple comments from me:
Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.
Here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:
Enjoy!
P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.
The following is an excerpt from Your Life & Your Money
Do what you can, with what you have, where you are.—THEODORE ROOSEVELT
Once you have a mission statement, you can start acting as your family’s CFO. The job has many dimensions, of course, but there are four basic rules:
Rule #1: Know Your Expenses
Familiarity with expenses is the CFO’s most important job. Think about it. If you don’t know how much money is going out, how will you know how much money to spend—or not to spend? People, businesses and governments get into fi nancial trouble when they don’t know exactly how much goes out each month. Unlike the government, however, you can’t print money when you’re in trouble or running a little short.
Can you imagine what would happen if a corporate CFO didn’t know how much his company was spending every month? He’d be fired. Well, if you’re the family CFO and you don’t know your monthly expenses, you’ll be fi red too. (It’s called divorce.)
Here’s how to start getting a handle on expenses.
Review the last three months of your check register and see where the money is going. Also, look at the last three months of credit card statements to see what you’re charging. Don’t plan the next three months of expenses until you get a clear idea of how much you and your spouse have been spending recently. This will give you a ballpark figure of what you can afford. If you pay quarterly, biannual or annual bills like homeowner’s insurance or association fees, for example, then divide those bills by the appropriate number to get as close as you can to figuring out your monthly expenditures.
Computer software can help get you expense house in order. Packages such as QuickBooks™ and Quicken™ can help you tally your monthly bills or expenditures and keep everything well organized. I like doing my family’s expenses on QuickBooks.
Rule #2: Analyze Your Expenses
After you have organized your expenses over the past three months, look at the biggest expenses fi rst. The number one expense is likely to be your mortgage payment or rent. If it’s a home mortgage, research your market frequently on the Internet to make sure you have the best interest rate possible. If you’re renting, check comparable rentals every three to four months to see if you can get a better deal elsewhere.
The next big expense may be car and homeowner’s insurance. Every six months, look for the best possible rates. Insurance rates vary significantly, and many insurance companies are very willing to save you money. Please don’t let your friendly relationship with your insurance agent get in the way of saving money. If you can get a better deal on the same coverage, say goodbye! Too many times I’ve had people who could be saving thousands of dollars on insurance over a couple of years’ time tell me that their insurance agent is a good friend or a family member, or that they’ve been with him or her too long, and don’t want to cause hurt feelings. Well, your insurance agent doesn’t pay your bills. Maybe you could give him or her a financial tip: Work for a more competitive insurance company!
Because you are now your family’s CFO, you get to fi re poor producers or people who cost you too much money. Do it tactfully, but fire away. Hire the insurance person, CPA and fi nancial advisor who’ll give you the best service and the best rates. They are out there if you do your due diligence and research.
Next, credit cards. Take a look at all the credit cards on your expense list. I am a fi rm believer in paying credit card bills in full each month. Buying what you can’t pay for is called living beyond your means. It’s delusional, so don’t do it.
If you have problems with credit card debt and would like to pay off the debt as soon as possible, then research credit card deals to find the lowest rate. Do this as often as you can. Always pay off cards with highest interest rate fi rst, then the next highest card, and so on.
I could write a book on how to lower your credit card debt, but that’s not what I aim to teach you here. This book is designed to give you your own personal blueprint to fi nancial success. It’s for you to get off your butt and not let someone else do the work. If you have a specific problem with credit card debt, fi nd a book, CD or other material to help. Don’t let mindless TV, Internet chat or other idle activities get in the way of this goal.
Other expenses. Since you probably look for the best price every time you shop for food, gas and clothing, apply that same tenacity to cell phone bills, cable expenses and everything else your household spends money on.
Once you pay off your last credit card balance, do the right thing from then on and charge only what you can pay off each month. Better yet, avoid credit cards altogether; pay cash whenever you can. Yes, that means the convenience of pulling out your credit card is over. Go to the ATM and keep yourself honest. Isn’t that what you would tell your kids to do?
My motto is, “A dollar saved is a dollar earned.” If you analyze every expense, you can’t help but start saving money.
Rule #3: Hold Regular Financial Meetings with Your Spouse or Yourself
During the first year of your term as CFO, you and your spouse should meet monthly for the first six months and then every two months until your “anniversary.” After that, meet with your spouse (or review your financial affairs yourself if you are single) once a quarter to make sure you are implementing your mission statement. You have to make sure everything is going according to plan. If it’s not, you can make adjustments so that you keep yourself and your spouse motivated and willing!
A great CFO always keeps the lines of communication open. Always ask your family members, “How can we save more money?” or “With all the money we’re saving, how should we invest or pay off unwanted debt?” Here’s an idea: Make one spouse the CEO and the other the CFO for the fi rst year. After that, switch roles so both can see what it’s like to be in charge of the expenses. The CEO’s job is to keep the mission statement on the table at all times and to display leadership. That means practicing what your mission statement is preaching. As a team player, the CEO can do research in conjunction with the CFO and help to lower expenses.
Rule #4: Institute a Family Reward System
To get everyone involved and demonstrate that the family CFO idea works, develop a bonus structure or reward system based on a portion of the family’s quarterly savings. Get the children involved since as shareholders they contribute to the family expenses and can help control them. Give them assignments with monthly or quarterly deadlines to research cell phone packages, for example, or to fi nd how (by taking shorter showers, for example) they can reduce water and fuel bills. Help them understand in a practical way that they can help lower most household expenditures.
Bonuses or rewards should go to those whose ideas and practices lower expenses. If you make the process fun and creative, you’ll get a lot more out of saving money than you ever imagined. Your activities will help your child develop a positive relationship with money and build confidence, reduce anxiety, and create a sustainable attitude of empowerment and well-being in your household.
It seems like all the "rage" now in my city -- every time I fill up my car with gas I get a commercial on the pump screen before they print out my receipt. It always says something like, "You could have saved 5 cents per gallon today if you had used the Shell Credit Card." Yeah, yeah, yeah -- can I just have my receipt?
The reason this may look like a good deal is that while it says "5 cents" some people might translate this into "5 percent." If the card did pay 5 percent, that would be a pretty decent return. But it doesn't offer that -- it offers 5 cents per gallon off.
Let's say a gallon of gas costs $2.60 (I've paid more than this on most recent gas purchases, but I'll go low to help the card companies out). That's a 1.9% discount per gallon. Not bad, but my Schwab Visa gives me 2%. In addition, it gives me 2% off EVERY purchase -- and I buy a whole lot more other stuff on it than gas. Many (most?) of the gas cards pay 1% on non-gas purchases -- even those that do offer (usually for a limited time) 5% back on gas purchases. So the cards aren't really that great of a deal. And yet, I have to endure a commercial every time I fill up.
Could you just give me my receipt, please?
The following is an excerpt from Buying a Home: The Missing Manual.
You may have heard horror stories about scam movers who demand a big deposit and then never show up on moving day or who hold people's possessions hostage until they pay an amount three or four times greater than the original estimate. Don't get scammed. If you plan to use a professional mover, follow these tips:
For a smooth move, think ahead. Unlike Dorothy in The Wizard of Oz, you're not going to look out the window one day and discover you're not in Kansas any more. A move happens in stages—and staying on top of those stages at the right time is the secret to a successful move. Use the to-do lists in this section as a starting point for your own, adding any tasks your situation requires.
Moose Tracks ice cream (yeah!) and yard work (boo!) is on the horizon for my family this weekend. We're going to Chicago in a few weeks, so we're going to be low-key until them vacation-wise.
What are your plans to celebrate the holiday?
The personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest
Here's what I do on these:
How about you? Are you working on these this month?
Here's an email I recently received from a reader:
I am recently married, and my husband's parents took out a Universal Life Insurance policy for him when he was six (6) years old. Yesterday, we met with the insurance agent to transfer the policy into my husband's name, and add me as a beneficiary. After growing for 20 years, the policy is now worth $58,000 and the premium is $17/month.
I know from reading your blog that 1) buy term and invest the rest is usually the better way to go; and 2) you don't need life insurance until you have dependents who rely on your income. We currently have no children (but hope to in a few years), and neither of us relies on the other's income to survive. So, normally, I wouldn't even think about buying life insurance until kids came around.
But--given that he has had this policy hanging around... is it worth keeping? I hate to "throw good money after bad" and spend $17/mo on a bad investment, but wonder if there is any value to maintaining what he's been building for so long.
What's your advice for her?
I've previously talked about all the ways being a AAA member can save you money, and here's another example.
When I was recently looking at what I was going to do regarding TV services (detailed in My Comcast Saga Continues), I considered satellite TV as an option (specifically I was looking at DirecTV since the friends I asked seemed to like them the best). As such, I started to save every DirecTV ad I saw from every source -- Sunday newspaper inserts, promotional offers we were mailed, ads in magazines, etc. In almost every instance, the price for their three main packages (Choice, Choice Xtra, and Choice Ultimate) were exactly the same -- $29.99, $34.99, and $39.99 per month respectively.
But there was one resource that had a different price. AAA mails a free magazine to its members on a regular basis (once a quarter?). In a recent one I found an offer for DirecTV that had the following prices: $19.99, $24.99, and $29.99 per month. Yep, that's right, the AAA offer was $10 per month better than any other option I had seen. If I had been interested in getting DirecTV, having AAA would have saved me $120 per year. Not a bad deal for something that costs less than that to be a member, huh?
Anyone else out there have ways to save by being a AAA member?
The following is an excerpt from Your Life & Your Money
We must become the change that we want to see in the world.—Mahatma Gandhi
We live in an age of delusion. It seems to be the inherent nature of mankind.
Our biggest delusion is a sense of entitlement. It permeates our country. People delude themselves into believing everything is fine while engaging in behavior that’s definitely not fine. Then, when something goes wrong, they stand there blankly and do nothing about it, expecting somebody else to pick up after them! Everywhere you turn, people are blaming everybody else for their problems.
Look around. It’s everywhere—in our neighborhoods, schools, big business. There’s the chain smoker who sues the tobacco company. Or the overweight, overfed cheeseburger eater who sues the hamburger chain, claiming that their food made him fat. Or the guy who drank too much, left the bar and then crashed his car, who blames the bartender for serving him too much alcohol.
Are you kidding? The next thing you know, the government will be bailing out all the homeowners who double- and triple-dipped into their home equity and are upside down, plus the brokerage houses that bought lousy loans and the banks that accepted those loans. Oh, wait—that’s happening too!
Worst of all are our politicians. They believe they can print money and manufacture prosperity.
I’m not making this up, it’s true. What in the heck is happening? And why is it happening? The answer is simple: it’s much easier to blame others than to take responsibility for yourself.
The Delusional Trap
We delude ourselves when we’re uncomfortable with accepting things the way they are as opposed to the way we want them to be. When we act on the way we want things to be instead of how they actually are, we make bad financial decisions and create painful problems that often end up hurting many others.
People become ensnared in the delusional trap when they create financial trappings in their lives without noticing or acknowledging or, even worse, deliberately ignoring reality. They’re afraid to face their financial lives head—on with brutal honesty. They’ll do anything to avoid the consequences, often at the expense of other people or businesses, and when it’s too late, they take down a lot of innocent people with them.
Every time someone claims bankruptcy, overspends on credit cards and repeatedly refi nances their home, they are lying to themselves and being negligent and disrespectful of their fellow humans.
As my dear friend Willy M. Nieman put it, delusional thinking is defined as:
1. Telling yourself a lie
2. Believing in that lie
3. Acting on that lie
The Sub-Prime Debacle
For a vivid example of how our entire society is ensnared in a delusional trap, look at the sub-prime debacle. As I write this, we are seeing millions of foreclosures nationwide, and it’s probably going to get a lot worse before it gets better. How did this happen? Let me give you my version:
In response to considerable housing discrimination against minorities and the poor, Congress over the years has been trying to make amends. It passed the Equal Credit Opportunity Act (ECOA) of 1974 which made it unlawful for any creditor to discriminate against any credit applicant on the basis of race, color, religion, national origin, gender, marital status or age. The Community Reinvestment Act (CRA) of 1977 further mandated that no lending institution could discriminate within various low-income and minority neighborhoods nationwide. Failure to comply subjects a fi nancial institution to civil liability for actual and punitive damages.
Talk about the road to you-know-where being paved with good intentions. Banks were accepting loan applications that in ordinary times they would have thrown in the trash. The reason was that as soon as the banks issued the loans, they could package them up and sell them to brokerage houses, which in turn packaged the loans and sold them as mortgage-backed securities.
The banks and securities fi rms were making so much money that they fell into a delusional trap themselves, believing the less-than-stellar securities they were manufacturing actually were sound. Nevertheless, the euphoric mood allowed many people to buy a house for the first time despite less-than-ideal (or sub-prime) credit.
To buy what most times were properties they could not afford by any conventional yardstick, many fi rst-time homebuyers of primary residences and rental properties used adjustable rate loans, which had low fixed rates for the fi rst two or three years of the mortgage. After that, their monthly payments increased signifi cantly.
What happened next shook the world—although anyone not deluding himself could have predicted the mess: those sub-prime adjustable loans started adjusting. For example, people paying $2,700 a month for their mortgage were receiving new mortgage payments at $3,400 to $3,600. And the monthly payments kept rising.
Borrowers began to default. Eventually, so many of these loans went into default that the capital structure of many brokerage firms, banks and hedge funds worldwide became questionable. The financial soundness of the world’s banking system and the ability to create the credit needed for the world’s daily economic functioning was being called into question.
Governments around the world had to bail out troubled financial institutions, leading to credit cutbacks and the recession we’re in now.
Everyone was deluded: the government, banks, loan brokers, securities firms and the sub-prime borrowers themselves. The problem spiraled out of control because there was so much money to be made in believing that a fantasy—taking on more debt than anyone could afford—somehow would work out.
A Solution
When you lose, don’t lose the lesson.—THE DALAI LAMA
The mortgage mess can teach us valuable lessons.
First, we must take responsibility for ourselves. Once you get the hang of it, it’s liberating. Yet taking complete responsibility for yourself is tough, which is why most people would rather blame others or deflect responsibility.
If you get anything from this book, it’s that taking responsibility for your own actions is the key to success and fi nancial and emotional well-being.
You will become empowered by taking full responsibility for your actions and for your role in all situations. If you blame and judge others without looking at your own actions, you will lose the essence of authentic accountability. It takes courage and practice to look at yourself first and foremost in all of your affairs, but it builds character in you and goodwill for your family, your friends, and your community. That’s what I call making a positive impact in your life!
Once you start taking responsibility, you’ll start noticing positive changes. You will feel empowered. You won’t waste time and energy on what someone else should have done. You will stay consistently focused on your role in all of your affairs.
By taking responsibility, you may be surprised to discover that you weren’t as much of a victim or as innocent as you initially believed. That realization is both humbling and enlightening, and it’s where your inner awareness takes place. Can you imagine how much better the world would be if all of us were accountable and took responsibility for our actions?
Let’s start wiping out the cobwebs of delusional thinking by asking a few questions. Do you overspend? Do you have a savings account that will last for three to six months in the event of an emergency? Do you know what your monthly expenses are? Do you know what you are invested in and why?
You probably don’t, and we’ll be giving you the tools to answer those questions over the course of this book. The fact is we all suffer from delusional fantasies, just some more than others. Notice how I use the word “suffer.” Suffering is usually the result of delusional thinking in any financial aspect of our lives. Some psychologists might say that this behavior is a necessary mechanism to cope with certain situations. They might be right. But when it comes to your financial affairs, nothing could be further from the truth. If you don’t meet your financial affairs head-on, you will eventually suffer. The more honest we are with ourselves in all of our affairs, not only the financial ones, the better off we will be, because we will always know who we are, what we are, and what we stand for.
It takes courage and bravery. But the rewards are worth it. If you don’t take care of your financial affairs, who will?
Here are some thoughts from the author of the Millionaire Next Door on car-buying habits of millionaires:
86% of those who drive prestige makes of motor vehicles are not millionaires [having an investment portfolio of $1M or more]. Also, I mention the median price paid for the most recent motor vehicle purchased by a millionaire was $31,367 [for decamillionaires-$41,997]. It is understandable why so many people relate wealth with the price tag of a motor vehicle. In a study of more than 2,000 respondents, The Wall Street Journal found that 35% believed that in order to qualify as being rich a person must drive a car that costs $75,000 or more. If I applied this $75,000 threshold to the millionaires whom I surveyed, more than 90% would fail to qualify.
A few thoughts on this issue as I start looking for a new car in the next month or so:
1. Leaves you with a different conclusion when you now see people driving a Lexus, Mercedes, or BMW, huh? ;-)
2. $31k is still a good amount to spend on a vehicle. I'm looking at all-wheel drive SUVs (to handle the Michigan winters and have room for our growing kids and friends) and I'm not sure I'm going to get that high. So people buying $40k vehicles would still be getting something "prestige" in my book.
3. I thought people reading the Wall Street Journal were smarter than that. $75k? Yikes!!!
4. I know that many of you are "buy quality used cars" buyers. Personally, I like a new car every seven years or so (100k miles) and I can afford it, so consider it one of the ways that I choose to spend/enjoy my hard-earned money. ;-)
And just to throw fuel on the flame of this issue, how about this as a debate question: should I buy, a Honda Pilot, Toyota Highlander, or something else? ;-)
Here's an employment scenario from Yahoo:
Bob and Joe are both applying for the same job. They each interview well, but Bob has 15 years' experience and no college degree, and Joe is fresh out of college with no experience. Who gets the job?
My answer: Bob (assuming he's performed well for those 15 years and is willing to work for the same pay.)
Their answer: It depends.
They are probably more "right" than I am -- there are other factors involved -- but I think that "in general", I'm right.
It's been awhile since we've discussed the age-old question of whether education or experience counts more in career success, so I thought this was the time to bring it back up. I'll give my thoughts and then you all can chime in:
That's my take. Agree or disagree?
The following is an excerpt from Buying a Home: The Missing Manual.
Weeks—or sometimes months—can pass between the time you make an offer on a house and the day you take possession of it. In between, things can happen that affect the home's condition—an appliance might go kaput, the owners' toddler could dump a half-gallon of grape juice on the white living-room carpet, the roof could spring a leak. That's why you put a final walkthrough contingency in your purchase agreement—so you can check for last-minute problems before the house becomes yours.
If the home has been sitting vacant, problems might go unnoticed and unrepaired, until you have the bad luck to discover them after closing. You don't want to find that a burst pipe has flooded the house or that the seller has removed appliances or fixtures that were supposed to convey with the sale. If the seller is still living in the home or has recently moved out, check to make sure no recent damage has occurred—walls and floors can get pretty banged up when the seller moves his furniture and personal property.
What to Look for on the Final Walkthrough
Although a "walkthrough" sounds like a quick, casual check, dispel that notion. Take your time. Don't get distracted by deciding whether the sofa should go against the far wall or under the window—you'll figure that out later. Your priority is to make sure the house is in the condition you expect. If the seller made repairs and you haven't inspected the work, you might want to ask a professional to walk through with you, to make sure the repairs are complete. Also, bring a camera so you can document any problems.
Tip: If you took photos when you toured the home or during the home inspection, take them along to the final walkthrough. Use them to compare the condition of the home when you made the offer with its current condition.
In all likelihood, the next time you walk through the house, it'll be yours. Make sure it's in the shape you expect by doing a thorough check of all areas of the home, inside and out. Here's a summary of what you're looking for:
Outside the home
Interior rooms (general)
Kitchen
Bathroom
Utility room
Garage
Attic and basement
Electrical system
Heating/cooling system
Miscellaneous
Tip: If the seller has left junk behind on the property, find out how much it would cost to have it hauled away. Ask the seller to put that amount of money into an escrow account and get a written agreement that the seller will remove the junk by a certain date—if not, you can use the escrow money to pay someone to take it away.
Here's an interesting post from Thomas Stanley (the Millionaires Next Door author) that sheds some interesting light on average versus median net worths in the US:
The average net worth of an American household is $434,782. However, there is a major problem with this wealth figure. When it comes to expressing the net worth/wealth of a household the average figure is very misleading. The presence of high net worth households, billionaires like Buffet and Gates, for example, highly skews the distribution and thus the average in an upward direction.
The median measure of household net worth paints a much more accurate picture of the character of wealth in America than does the average. The median is that of the typical household, the mid point range of all of the more than 115,000,000 households ranked from bottom to top along the net worth scale.
Today the median net worth of an American household is $91,304. It now costs more than this amount for a one year stay, drugs excluded, in a high grade nursing home. Therefore, less than one half of the households in this country do not have enough to pay for such a service even if they sold everything they owned and worked for.
The $91,304 net worth figure also is indicative of something else. The typical American worker who becomes unemployed today has only about two years of wealth to live on before he hits economic ground zero.
Most American households are nowhere near being financially independent. Nor will most be able to retire in comfort. Yet there is more bad news. What if the equity in homes and motor vehicles is factored out of the median net worth figure? Then the median figure is about $34,000 or about 2/3 of the annual median income generated by a typical American household today.
A few thoughts on these points:
1. Ugh. $34,000. I am almost speechless...
2. Not surprising to me. I've quoted various stats/research showing that net worths in the US were low (though specific data is sometimes hard to come by). And you know what I think of the average American's ability to save/invest. This just confirms it.
3. As one commenter pointed out, it's not that Americans don't have high incomes, it's just that we spend too much of it. We've discussed previously that there are reasons why high incomes don't translate into high net worths. Yep, overspending. And overspending is the worst money move anyone can make.
4. The numbers are for the total population and are not age-adjusted. I'm guessing that older people would have higher median net worths and younger people wouldn't be as well off. That said, the numbers are so low that no one age group is likely to be doing that well even when separated from the pack.
5. Personally, I'm way above these net worth numbers (both median AND average). I'm sure many of you reading this today are as well.
6. As the post goes on to say, these numbers have huge implications for our country. Who takes care of an aging population that's living longer but doesn't have the financial resources to pay for their own care? It's a big, big issue for our country and one that's likely too big for the government. The author's solution? We all need to save and prepare to take care of ourselves and our own families -- and not leave it to others.
The Best of Money Carnival is now up. Congrats to all participants and especially the winning post, How I Run My Home-Based Business.
Enjoy!
The following is an excerpt from Personal Investing: The Missing Manual.
After you spend decades living off a paycheck and saving money for retirement, selling investments so you have spending money can be downright unsettling—it's the exact opposite of what you've done your entire life. In addition, you worry about having to sell investments during a down market and hurting your portfolio. Meanwhile, you have enough on your mind wondering whether you'll get to the local diner in time for the early bird special. You can balance withdrawing cash from your portfolio and making sure your money lasts. This section tells you how.
Figuring Out What You Can Spend Each Year
The whole point of a retirement plan is to save enough money so you can live the way you want during retirement. However, when you retire, you have to be realistic. If you want your money to last, you can spend only a certain amount each year. That amount depends on the sources of income you have:
If you're lucky and frugal, you may receive enough money from the first four sources to pay your living expenses. However, most people have to withdraw principal from their portfolios to make ends meet. If you fall into this category, here's how to figure out how much you can withdraw from your portfolio in income and principal each year without worrying about running out of money:
1. Figure out the real return you expect from your portfolio between now and when you die.
The real return is the investment return you expect, reduced due to the effects of inflation. For example, if you expect to earn 7% and inflation is 3%, your real return is 3.9%. (To calculate the real return for yourself, use this formula: (1 + investment return)/(1+inflation rate) – 1, and then multiply by 100 for a percentage.) For simplicity, this example assumes the real return is 4%.
2. Use the real return you calculated to figure out how much you can withdraw during your first year of retirement.
Say your portfolio is $500,000. Multiplying your portfolio balance by the real return ($500,000 x 4%), you see that you can withdraw $20,000 the first year.
3. Calculate the withdrawal for each subsequent year by multiplying the previous year's amount by the inflation rate.
In this example, you'd increase your second-year withdrawal by 3%, making it $20,600. You'd withdraw $21,218 in the third year of retirement.
Note: If you opt to withdraw only the income from your portfolio, you may be tempted to weight your portfolio heavily on the bond and REIT side of things. Although you'll be able to withdraw more each year, your portfolio won't grow fast enough during retirement, and you'll run out of money sooner.
Creating a Retirement Paycheck
The withdrawal strategy in the previous section assumes that the annual return is the same each year. But you know that the market has good years and bad years. That's why you set up a cash reserve to cover several years of living expenses. That way, you won't have to sell investments at a loss to pay your bills. As long as you have a cash reserve, you can set up automatic withdrawals to act as a replacement for the paycheck you grew accustomed to.
Using the $20,000 first-year withdrawal from the previous example, here's how you use your cash reserve to set up a retirement paycheck:
1. Set aside a cash flow resesrve for 5 years of living expenses.
To keep things simple, multiply your first year's withdrawal by 5 (totaling $100,000 in this example).
2. Put 1 year's worth of expenses ($20,000) in an ultra-low-risk savings account, like a money market account.
You don't earn much interest, but you don't lose any money either.
3. Invest the second year's living expenses (another $20,000) in a low-expense, short-term bond fund.
Invest in high-quality bonds to keep your risk low (see Section 7.2.1.1). You'll earn a better return than you do in the money market account without much additional risk. If you invest in municipal bonds, your taxes on the income will be low, too.
4. Invest the remaining 3 years of living expenses in short- and intermediate-term bond funds.
These investments are still relatively low risk, but provide slightly higher returns than the rest of your cash reserve, which helps protect your money against inflation.
5. Set up a monthly transfer from your money market account or savings account (the one in step 2) to your checking account so it acts as your retirement "paycheck."
You can live on this money just like you did with your paycheck while you were working. In this example, the monthly amount starts at $1,667. Each year, you increase your monthly withdrawal for inflation, so the monthly amount in the second year is $1,717.
6. Every year, replenish your cash reserve.
Remember, your cash reserve has to increase for inflation. So, if you started with $100,000, the next year's reserve would have to be $103,000.
Because you have to sell investments to refill your cash reserve, choose what to sell wisely. If you can sell some investments without taking a loss, sell the investments that also keep your overall asset allocation on target. You can also use these sales to get rid of investments that aren't meeting your expectations. If stocks and bonds are both in the toilet, sell short-term bonds first (they drop the least of any duration bond, as explained on page 138). That way, you give the rest of your portfolio time to recover.
Because you have 5 years of expenses in your cash reserve, you have time to wait out a bear market. If all your investments have lost money, you can wait before replenishing your cash reserve. For example, you may choose to delay adding to your cash reserve for a year. Then, when the market recovers, you can sell investments to top off your reserve.
Tip: If you have money in traditional IRAs or 401(k)s, you have to take required minimum distributions. When you refill your cash reserve, be sure to withdraw your RMDs first. After that, it usually makes sense to withdraw the additional money from your traditional IRAs and 401(k)s, so money in Roth IRAs can grow for as long as possible. (Roth IRAs don't have RMDs, so you can leave the money in as long as you like.)