March 17, 2009

We haven’t had a lot of snow this winter.  Experts are predicting a dry summer.  Dry spells aren’t any fun.  You water as much as necessary to keep things alive, but you don’t water everything because water is limited and expensive, and you don’t want to waste it.  What lessons can a drought teach us about our finances, in a time when we feel like our money is drying up?

Water what’s necessary

Just as you provide water to your best plants or trees during a drought, you’ll need to do some careful watering of your money, too.  You want to make sure you’re paying all your bills.  Don’t neglect to pay for the electricity, water, gas, and phones.  Food is fairly important; make sure there’s always some of it to put on the table.  You also need to keep up with basic maintenance on your home and car.  Repairs that seem expensive now might break the bank later, after you’ve allowed them to get worse.

Don’t water everything

On the other hand, there are some things that don’t make sense to spend money on right now.  Now is probably not the best time to sign up for cable or satellite TV.  You may not need the best new cell phone or the best new laptop.  A new car or an addition on the house also don’t make sense if you have other goals that are more important, or if you’re worrying about running out of money.

Once we’re through this financial drought, times will be better.  It may take us a while; it might be this year, or it might be many years from now.  Keep being sensible about spending, keep searching for a job, don’t leave a job without another one lined up.  Keep the dinners out and the new iPhones to a minimum.  And imagine the green garden waiting for us on the other side!

This article originally appeared in the March 11, 2009, edition of the Greenhorn Valley View.


March 6, 2009

Here’s a cool idea for getting by in a down economy: bartering.  If you’re like me, the last time you thought about bartering was in the ancient middle east unit in world history class in high school.  But don’t write it off just yet; there are a lot of advantages to bartering.

You don’t have to be the best at everything

If you’re really good at handy-man type repairs, you could trade it for some computer work.  If you have a freezer full of beef, you could trade some of it for lawn work.  If you’re fluent in French, you could teach someone else in exchange for car repairs.  If there is something you can do, you can probably trade it for something you suck at.  If you have something, you can probably trade it for something you don’t have.

No sales tax

Quick math problem: at 6%, how much sales tax would you have to pay on that one-hour French lesson?  None, right?  Just about any good or service you buy in a store or through a service provider will require that you pay sales tax.  But with bartering, no money has changed hands, so there isn’t anything to tax.  The more you barter, the more sales tax you don’t pay.  This is not true with regard to income tax, however.  You are legally required to report bartering activity to the IRS.

Strengthened relationships

The benefit to bartering that is the most difficult to quantify is the effect on the relationship between the two parties.  And being difficult to measure makes the benefit immeasurable.  If you’re known as the guy that can get a dead car running in the middle of winter, people will want to keep you around.  If you’re known as the guy that can thaw a frozen computer and retrieve thousands of dollars in invoices, people will be glad to get to know you.  These kinds of bonds help to form a tight support network that is difficult to fall through.

So think about things you can do or make, or things you have stockpiled, that other people might want.  You may find yourself saving some coin, and also becoming an integral member of the community.

This article originally appeared in the March 4, 2009, edition of the Greenhorn Valley View.

refund anticipation loans

January 31, 2009

It’s almost tax time again.  Before the end of the month, you’ll receive W2s, 1099s, and other complex sounding forms from your employers, contract employers, banks, brokerage firms, and a lot of other companies you didn’t know you had relationships with.  Then you’ll have to wade through a 1040, Schedule A, Schedule C, countless other forms and worksheets, and software that may or may not be getting it right (how would you know?).

If you’re the kind of person who throws all this stuff in a file folder and takes it to a tax preparation agency, good for you.  The service will cost you a little bit, but what price is the peace of mind you’ll be buying.

There is one thing to be aware of though.  If you use a commercial tax preparation agency this year, and you discover you get a refund, you’ll almost certainly be offered a refund anticipation loan, or RAL.  An RAL sounds very attractive.  The tax preparation agency, for a small fee, gives you the amount of your refund – on the spot, in some cases.  No waiting!  Then when your refund arrives, the agency keeps it to pay back the loan.

The problem, of course, is the “small fee.”  The fee doesn’t seem like much, especially when it comes directly out of the loan and you don’t have to pay it out-of-pocket.  But when expressed as an annual percentage rate, the fee can be as high as 113%.  RALs are second only to payday loans in the World’s Worst Way to Borrow Money category.  Would you take out any other loan at that rate?  Probably not.  (And if you would – Hey, I have some money I’d like to lend you!)

And don’t forget, customers who e-file, which includes you if you use a tax preparation agency, can get their refunds from the IRS in as little as eleven days.  So not only are you paying a high rate to borrow money, you’re doing it just to get the money a couple weeks sooner.  So do yourself a favor and skip the refund anticipation loan this year.

This article originally appeared in the January 14, 2009, edition of the Greenhorn Valley View.

personal responsibility

November 13, 2008

Whose fault is the credit mess?  Is it the fault of home buyers who borrowed more than they could afford, using risky mortgage products?  Is it the fault of lenders, who created ever more risky mortgage products, and pushed them on borrowers, in an effort to raise the bottom line?  Is it the fault of buyers of mortgage-backed securities, who bought investment products based on these mortgages, but were left without options when these mortgages went bad?

The truth is, all of these groups of people had the same objectives – earning more money for themselves or their companies, and lowering their total costs.  Don’t we all have the same objectives?  Everyone – from my six year old daughter on up – wants to have more money.  So whose fault is it?  Who can we blame?

I lay the fault squarely at the feet of… everyone.

If you’re a home buyer, you have a responsibility to buy within your means.  It’s your job to look seriously at your income and your other debts and responsibilities, and determine how much mortgage you can afford.  It is not the lender’s job to do this.  The lender is a salesman, and he wants to sell you as much mortgage as he can.  You will have to carefully examine all the possible mortgage choices laid before you and pick the one that fits, even if you have to get a smaller house, or delay the home purchase for a while. 

If you’re a lender, you have a responsibility to lend within your means.  If you make a risky loan, don’t be surprised when it goes bad, and do be prepared to swallow the loss.  Don’t lend your reserves, and don’t depend on the borrower to know what he can afford.  The borrower is looking to get the most house he can, and will be easily enticed to bite off more than he can chew.  Make the loans you know you can handle, and leave the riskier loans to someone else, even if it means delaying profit for a while.

If you’re a buyer of mortgage-backed securities, you’re kind of without options.  You assumed the risk when you bought the security, and when it goes bad, there isn’t much legal recourse.  Don’t depend on the government to bail you out.  Limit exposure to risky investments.  Although there is an upside, there is also a huge downside to these investments.  As with the borrowers and the lenders, it’s your job to take care of your own balance sheet, the responsibility rests with no one else.

In whatever realm you are responsible for, be it your personal finances, your company’s bottom line, or your little piece of a much larger corporate giant, be responsible.  Do the right thing.  Pursue the bottom line, but don’t cross the line into impropriety.

This article originally appeared in the November 12, 2008, edition of the Greenhorn Valley View.

financial crack

November 6, 2008

Crack is pretty bad.  (So I’m told.)  A refined form of cocaine that can be addictive after the first use, it requires its addicts to be in continuous search of the next high.  Because it is so addictive, a crack dealer will sometimes give a purchaser the first hit free.  The dealer knows the victim will be willing to empty his wallet when he comes back for more.  But often the next high is elusive because of the large amounts of fake crack on the streets.  So an addict will often buy much more crack than he needs, in the hope that one of the hits will give him the high.

I was driving through a shopping district the other day and saw a sign for a payday lending institution.  The sign, out by the edge of the road so all passersby could see it, said simply, “First loan free!”  I assume they meant interest free, and not that they were just going to give you a bunch of money.  But regardless, why do you suppose a store like that would give you your first loan free?

Payday lending “customers” look a lot like addicts.  The first loan doesn’t cost anything, delivers instant relief, and helps you forget about your troubles for a while.  But what happens when payday finally arrives?  So does the bill for the loan – you have to pay that loan back.  But because you have a hundred other bills and credit cards due, you’ll have to decide what doesn’t get paid this time.  Are you going to quit buying food?  Gasoline?  Will you quit paying the rent or mortgage?  No, you have to have those.  But hey, here’s a friendly offer from the payday lending store offering to roll your loan over for just another small fee.  Why, it doesn’t hardly cost anything, and it will provide another instant hit of relief and forgetfulness.

But rolling the loan over doesn’t provide quite as much satisfaction as it did just two weeks earlier.  You’ve accumulated a few more bills and a little more debt in that time, and the original amount you borrowed may not be enough.  So you borrow more.  Hopefully, you can see this vicious cycle before it happens, and not after you’re already in it.

The addiction-like qualities of payday lending aren’t its only problem.  There’s also the high cost. You could borrow $100 for two weeks and pay only $15 for the privilege.  That doesn’t sound too bad, and most lenders count on customers thinking that fee is OK.  But quick math tells you that works out to 15% interest.  15% is pretty high, compared to other sources of credit, but it’s even higher when you consider that rate is for a two week loan.  If you kept rolling the loan over for an entire year, turning the two week rate into an annual rate, you would be paying 391% interest on that $100 loan.

Just like crack, payday lending can ruin you.  Don’t let it.  Stay far away.  Don’t do crack.


This article originally appeared in the November 5, 2008, edition of the Greenhorn Valley View.

freedom is…

November 4, 2008

I saw a billboard recently that deserves some comment.  Over a picture of a middle-aged man in a convertible, hair blowing in the wind, were the words, “Freedom is being able to afford my mid-life crisis.”  The bank that presented this ad would like to loan you the money you need so you can live your life without worry.  But it’s just possible that following their advice might lead to big trouble.

I have to take every opportunity to harp on debt.  Debt is not freedom.  Debt is slavery.  Debt is  the extra weight that keeps an airplane on the ground.  Debt is the extra cheeseburger that keeps you from performing your best.  Debt is a suitor that promises us the moon, but delivers a dungeon.  Debt builds wealth for the lender, and keeps you from building your own.  We as a culture, and you and I as individuals, need to be extra vigilant that we don’t fall for the false promises debt makes to us.  The truth is, without the debt, we’d be able to save enough money in a very short time to pay cash for our mid-life crises.  And since we’re paying cash, we might just realize how silly the whole mid-life crisis thing is anyway.

Why does a mid-life crisis flare up, and how does spending money help soothe it?  I often joke that my master plan was to conquer the world by age 30.  Oops!  Just missed it.  So do missed goals prompt crisis?  How about the realization that your goal was too lofty to begin with, and you probably will never achieve that goal?  How about the oncoming train of old age?  The same old job year after year?  Divorce?  Bankruptcy?  Depression?  All of these are serious issues, of course, and all of them need to be dealt with for your own health and the health of those around you.  So do it.  Address these issues.  Don’t let them smolder just below the surface and flare up at the slightest provocation.  But understand that none of these issues would be helped by digging your debt hole just a little deeper.  In fact, additional debt only exacerbates the problem.  Our depression, lost goals, or whatever other problems we’re facing will be more difficult to deal with if we add additional debt.

So don’t fall victim to the cultural messages that debt is the answer.  You know better.  Now go conquer the world.

This article originally appeared in the October 15, 2008, edition of the Greenhorn Valley View.

5 year plan

October 6, 2008
In five years I will still be married to my wife.  Our four children will be 16, 15, 12, and 11.  We will still be living in our current house, but we’ll have a new deck, new windows throughout, and a new driveway.  I (or my business) will own five rental houses, which will provide a good chunk of our needed monthly income.  We’ll own a minivan or similar vehicle capable of transporting all six of us, and a smaller vehicle for short trips.  We will have no debt other than our primary mortgage, and we will have sizeable equity in our home.

OK, your turn.

This little exercise will tell you a lot about yourself and your goals.  Answer these basic questions for yourself.  Be realistic, but don’t be afraid to dream a little, either.  Anything reasonable is great.  I’m a mid-30s kind of guy, so my five-year vision might be a little different than yours.  If you’re just starting out, you might dream of things like higher education, a place of your own, or settling down with that special someone.  If you’re on the other end of the spectrum, you might dream of shuffling off the 9-to-5 and sailing around the world, or taking the grandkids to Disney World.  Whatever it is, commit it to paper (or electronic bits).

Now, do you think you’ll make it?  What if you could reach your five-year vision in three years?  Or, what if you could do twice as much in five years as your vision states?  Would that be worth something to you?  Would it be worth doing something crazy like, oh, I don’t know, skipping one meal out each month?  Or one less soda a day?  Could you cut back on driving or other energy bills?

Chances are good you know somebody who never spends any money, someone you think of as “cheap.”  When you’re out buying your third iPod, they’re listening to the radio.  When you’re showing off your new ride, they’re putzing along in their 1998 Rust Bucket.  Chances are also good that this person has thought about their own five-year plan, and is working to make it happen.  Five years from now, when they are happy and debt free and you are still in the same position you’re in now, it’ll be their turn to laugh.

Or maybe they won’t laugh.  They won’t notice you because by then, they’ll be on to their next five-year plan, and probably a ten-, twenty-, and 100-year plan.  Think big.

This article originally appeared in the October 1, 2008, edition of the Greenhorn Valley View.