Financial Freak Show

Young people knows how to run fast but old people knows the way   -unknown

A survey of over a of over 1100 people ages 62-75 were posed a retirement question that only they have the experience necessary to answer. No matter how many finance blogs or books you’ve read, and no matter how many classes you’ve taken…nothing you have done to date, unless you‘re retired, will give you the experience and life lessons required to answer the following question:

If you could turn back time how would you have planned differently for retirement?

56% would have started saving earlier  

39% would have allocated more money towards retirement

27% would put money into safer investments

7% would put more into riskier investments

5% would have used a professional advisor

I found the results interesting because the two biggest I shoulda’s were behavior based mistakes and not really what I’d call investment mistakes. The two biggest mulligans they would take had little to nothing to do with investment proficiency and everything to do with the actual task of just getting the retirement savings in place and growing. So I’m thinking no matter what your situation may be right now it’s a good time to get about the business of putting yourself into a position where you can take the advice of these old timers and get things moving for your future. Imagine if you not only were able to run fast but you also knew the way.

So now that you know what the people “living the dream” have to say about their retirement savings what steps are you going to take to heed their advice? Or are you going to look back in a few years and repeat these same survey answers to the next crowd?  

Source: Harris Interactive and Financial Freedom Senior Funding survey of 1,140 seniors age 62-75

A USA Today article reports that credit scores are dropping due to credit card limits being lowered by card issuers. Credit card companies are closing risky accounts and lowering borrower’s limits now that fees and fines will be more regulated (I can’t blame them for that, they have the same risky customers but less legal profits to cover the lending risk).

From October 2008 through April, an estimated 24 million U.S. card holders had their credit card limits reduced or accounts closed, even though they had no new “risk triggers” such as late payments in their credit reports, Fair Isaac says. Of that group, 8.5 million saw their credit scores fall.

Lenders are doing this to cover their butts, lower limits, and less risky accounts, to help ensure a predictable customer base with less loses in the future (thats the theory anyway.)

What people are whining about though is the fact that since their credit score is partially based one how much debt to available credit they have and how long these accounts have been open, they’re taking a hit to their credit scores when card issuers make these adjustments (BTW they’re allowed to make these changes according to the contracts the borrowers signed). In my post Zero Credit Score I talk a bit about how scores are calculated and how I feel about the formulas they use. The lower credit scores mean some folks may have trouble borrowing more money in the future, and if they are able to borrow they could receive less favorable rates (that could be the best thing that ever happened to some of these people!)

USA Today quotes some 62 year old lady named Reid to make their point. This is what they had to say:

Chase had closed two of her accounts, citing inactivity. Since then, four other lenders have closed or cut limits on eight accounts. One lender also more than doubled her credit card interest rate, prompting her to close the account.

Reid says the lenders’ moves have taken a toll on her credit scores.

Her FICO scores have dropped — each of the three major credit bureaus has its own FICO score — with her Experian score plunging the most, down 52 points to 722. She attributes the lower credit scores largely to lenders’ credit reductions. As multiple issuers closed or reduced her credit lines, Reid says, she borrowed from an inactive card to try to prevent it from being closed.

Wow! She sure showed them! My guess is with lenders making adjustments to six of her eight credit card accounts maybe…just maybe, she’s not as credit worthy as she thinks, just a thought Mrs. Reid.

Here is another great quote from this article:

Consumer advocates say regulators and Congress need to address lender actions that are unintentionally hurting credit scores. They say that as underwriting standards tighten, even a small change in a credit score could affect what rate consumers get on a loan — if they get one at all. Some analysts also say the fact that consumers’ credit scores can fall even if they’ve never missed a payment or exceeded their credit limits raises questions about the score’s usefulness.

Now here’s an even better plan, run to Congress to save you from the contract you signed up for! So to that I say if these folks (the companies) are making your life so darn difficult that you need to run to Congress to fix it maybe you should shut your whining pie hole and just stop doing business with companies you don’t agree with…just another thought Mrs. Reid, remember you signed the contracts. All eight of them! 

Then again maybe we can regulate the lenders out of business by taking away their ability to remain profitable, then throw an even bigger fit when they lay people off and we get to bail them out again.

Enjoy this article I wrote at Hobostudent.com:

3 jobs that will keep you paid and cool

and no…that’s not me in the maid’s outfit

After speaking with a friend about her money problems I noticed her fear was greater than her actual money troubles (though she had some hearty money troubles too…wow) When I was buried in debt it felt like I was walking around carrying giant Dr. Seuss sized stacks of glass plates above my head. They weighed a ton and I was scared to death that with one stumble everything would come down on top of me (it’s a crappy feeling). The fear itself can be pretty crippling once you let it into your life. With finances it’s usually due to a either the lack of hope or the lack of information & knowledge. Both of these things will empower you to continue on through the fear.

I have no room for fear in my life. Fear is paralyzing. It’s one thing to be scared, but once you allow fear into your life, it is debilitating. I don’t make any claims to not being scared. It’s important and it’s healthy. I’ve been scared enough that I’m comfortable with it. When you experience fear, the next thing out of people’s mouths is ‘I can’t.’ We are in control of our minds. As much as our minds try to control us, it is important not to let your mind run too far. – Kit DesLauriers.

In 2006 Kit was the first person to ski the summits of the highest peaks on each of the seven continents.

A healthy amount of fear is normal it keeps some of us from playing in the freeway. Just make sure it’s a healthy amount and not an overreaction to the emotions and stress you’re carrying. So work to keep control of your mind so you can work to keep control of your finances. If you have fear around your money you could work to get some more information & knowledge about your situation. Read some books, read some blogs, talk to some people who’ve already been there, etc. Get some more information and your fears will likely subside once you have the knowledge to put a good plan in place. Or you could just keep whinning…it’s your call

A coworker of mine isn’t quite buying into the whole “eliminate all your debts so you can easily afford to fund you retirement plans and build wealth” idea. So we we’re discussing what is a manageable amount of debt if you’re not going to suck it up, focus, and go all the way and instead take a more half-assed approach and just sort of eliminate some of your debts (most likely temporarily though). I decided that I would look into the numbers for him anyway because any money discussion can be a good discussion for most and it can’t hurt to get a better idea of what many feel is normal debt (well broke people call it normal).

After a fair amount of un-reliable research on personal Debt to Income ratios here are some numbers I came up with – remember your home mortgage payment is also included in these numbers, no cheating here

45% or higher debt to income – Things are scary (you probably already knew that). You are walking too close to the edge and some drastic measures should be taken to address the issue.

35% to 45% debt to income - You’re still walking close to the edge but not quite as close as above. Don’t slip up here though since you likely have no cash cushion you’re one mis-step away from stumbling into serious trouble. Now is the time to make some changes while you still have a little breathing room.

30% to 35% debt to income - You’re probably feeling like you’re in pretty good control of things compared to your peers and lucky you they’re offering to help you run up debt as fast as they can get the offers into your mailbox. This area is manageable and should allow you to fund retirement at a reasonable level (especially with employer matches in place)

30% of below debt to income – Below 30% you looking solid! This means you pay 30% or less on your debts each year. You could save 15% towards retirement, pay all your debt payments and still have 45% of your money for all your other junk.

So take minute, pull up your little list you created here: No shortcuts here, now let’s calculate you debt to income ratio. For the steps to do this read check out Calculate your Debt to Income Ratio and see where you stand. This should help you plan your next steps accordingly, remember the more information you have to work with the better decisions you can make.

Calculating your Debt to Income Ratio is actually pretty simple. Grab your little list of debts (or big list), add all of them up so you have the monthly total – you’ll need that number in a second. Next figure out how much money you have coming in each month (add up all your sources of income). You’ve already completed two of the three steps. Now comes the easy part.

Step 1: Add up all your monthly debts (I know you already did this, but I’m just making sure!) Mortgage payments (including taxes, insurance, PMI, etc.), Car payment(s), Minimum credit card payments, Student loans payments, Child support, Doc bills, etc.

Step 2:Add up all your monthly income.  Add your Salary, any additional bonuses, tips, any additional income you receive through dividends, a side business, embezzlement, theft, or whatever your case may be. Total these all up and you have your monthly income.

Step 3: If you don;t have your calculator out yet you’ll want it for this part. First type in your monthly debt number, press the “divide” key, now enter your monthly income number, press the “equal” button. That will give you a decimal number, now move the decimal point two places to the right and you have your debt to income ratio. For example, if you came up with a $2,800 total debt payment number and monthly income of $4,500, that leaves you with a debt to income ratio of 52%.

There you go thats pretty much it. Now see my post Debt to Income Ratio and see how you measure up.

I dropped my SUV off at a local shop this afternoon to get some work done. This relatively normal part of life reminded me once again why I strive so hard to take good care of my finances. The thought of dropping some money into one of our vehicles was not what triggered these thoughts we’re okay in that department…now. What actually triggered these thoughts was strapping my beautiful 18 month old daughter’s car seat into a rental car that I would never, ever, ever, ever, ever pick to own myself. This lovely little piece of scrap metal would likely get totaled if it hit a curb not to mention what would happen in if I was unfortunate enough to find myself ramming head on into another car with some actual weight behind it.

So what does driving this piece of rented junk have to do with personal finance? Well it reminded me that control of your money gives you options that you might not otherwise have. It showed me that one of the fruits of my hard work is the ability to drive a safe, reliable and not to mention comfortable, PT Cruiser smashing 4×4 SUV. True this option may not be everybody’s preference but after seeing my little girl stare at me through the window of a paper thin rented rear door as we prepared to jump into rush hour traffic I remembered why money and the options it creates are important to me. If I keep working hard and managing my money well, hopefully I will have the option to never, ever, ever, ever have to own this little toy car for more than a day or two and even then it would be still be an option.

Money gives you options for cool things like schools, cars, health care, the option to leave a job, the neighborhood your family lives in, what kind of beer to drink, options how you spend your time, and more options to help those around you (broke people can’t help poor people much). When you’re in debt your choices may be greatly limited do to the burden the debt brings into your life. Sorry but I’m willing to spend some money on things that are truly important to me and I’m glad I now have more of those options. So I’ll continue to work to keep my options open for many reasons. Please excuse me now…I have a rented PT Cruiser to jump

So if you had no debt and a stash of money in the bank what options would you take advantage of? Here’s one of mine.