Archive for November, 2008

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October Savings Increase Reflects a Return to Thrift

Friday, November 28th, 2008

It was interesting to read the news on spending and consumption in the wake of the recent Bureau of Economic Analysis report on personal consumption and saving trends. The report indicated that personal saving as a percentage of disposable personal income increased 1.4% in October from 1.0% in September. Personal consumption dropped 1%.

What was interesting in these reports was that the decrease in spending and increase in savings was generally viewed as largely negative. In an economy that is dependent on consumer spending for 70% of economic growth, the decrease in spending may be frightening and an indicator of future economic weakness and this point was largely played up by the press. However, what was generally ignored was the fact that the increase in savings is a logical response to economic uncertainty and increases long-term growth prospects.

In the 1980s, the US savings rate was 9-10%, steadily declining to roughly 0% in the mid-2000s. At the time, a lot of economists (including the US Federal Reserve) who explained the decline in consumer saving as a logical response to increasing home and stock values (the wealth effect). With the recent declines in both equity and real estate markets, we’re seeing an unwinding or negative wealth effect, with a predictable retrenching and increase in savings.

Rather than lament the increase in savings, we should be celebrating. We’re making rational decisions based on the value of our assets. This retrenching will increase savings and create funds to fuel long-term growth. As we increase our savings rate, we will be able to better fund future growth and economic obligations such as retirement.

How has the downturn affected your savings rate and how do you feel about the decrease in US consumption?

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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From Turkey Day to January: Less Debt and More of What Matters

Thursday, November 27th, 2008

I’m not going to bore you with the single cheapest ingredient that the grocery store can give you for today’s big meal. But the fact remains: Thanksgiving is upon us and that means the 4am shopping marathon is about to start. But before making the commitment to buy wants instead of saving for the needs, consider a new, less costly approach. Celebrate a December Christmas without a January in the red.

Tips for holiday presents:

  • If the kids are young enough, consider buying used gifts. They will love the surprise on Christmas Day just the same and get just as much enjoyment. Finding cheaper, online versions of popular toys is easier than ever with sites like eBay.
  • Buy one present per person. The happiness received from each additional present beyond the first declines a lot!
  • Be creative with the time not spent shopping ’til you drop. Bake some sweets, go for a hike, enjoy some books from the public library, or plan a family movie night with a rental or flick that you already own.
  • Limit or skip the gifts to non-family members altogether. Instead, have a potluck party and let everyone bring a dish to be shared.
Above all else, use the tight times as a learning experience for children. Carry an attitude of thankfulness for what one does have. Use a modest December to focus on something that truly matters: time with family and friends. And smirk on New Year’s Day as you remember having left the plastic in the wallet.                                                                                                           
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Eliminate Temptation to Defeat Debt

Wednesday, November 26th, 2008

I was just recently reminiscing with my wife about some of the financial challenges we have overcome since we have been married. We both have been stretched in ways that we didn’t necessarily enjoy, but that were ultimately good for us. We both were world-class spenders who needed to learn how to tell ourselves NO. As painful as it was to convert from the “I gotta have it now” to “I will save up for it” mindset, I now understand the necessity and tremendous value in making that change.

We used to live above our means, spending more than we had coming in, only making us poorer each and every day. We have progressed to living at our means and currently living below our means, allowing us to finally get to a point where we can build wealth rather than building debt!

For me, I always thought I understood money. In reality I just didn’t know what I didn’t know. Seeing that my life was a financial mess I had a choice. I could either continue in my pride and act as if I had it all figured out or I could admit that I really didn’t know what I was doing. Thankfully I chose the latter. Just making that admission of a lack of understanding allowed me to start seeking information that would help me make the necessary changes.

I started reading magazines, books, taking classes, and quickly realized how ignorant I really was about how money worked. I fought against overwhelming feelings and focused on making one small change to my finances at a time. I realized that I spent a lot of cash in vending machines, so I decided to not carry cash any more. It was a very painful first step. It seems silly to me now, but thinking back on it I remember feeling as if I hadn’t eaten in a week and my stomach was crying out for a Snickers as I passed the vending machine. Knowing my level of will-power I would have caved and continued to spend $5-$10 a week in the vending machine, but the decision had already been made. I didn’t have a single dollar in my wallet, so it really didn’t matter how bad I wanted it.

As I began to take additional steps towards getting out of debt, I noticed that preventing temptation rather than overcoming it was a key to my success. Just like with the vending machine, I knew that I was not strong enough to say no in the heat of the moment. However, if I had a plan to prevent the temptation from ever occurring (by not having any cash) I could defeat it.

Eliminating points of temptation has been one of the most painful steps, but also one of the most crucial for my journey to financial freedom. If you are anything like me, I encourage you to take an honest look at your weaknesses and find ways to overcome them.

After learning many financial lessons the “hard way,” Bob started ChristianPF.com. The site focuses on the Biblical principles that apply to debt, saving money, making money, investing, and all other areas of personal finance. For more information or to get the free daily newsletter, visit http://www.christianpf.com/.

 

Bob writes the Christian Personal Finance blog, where his goal is to provide advice, tips, tools, insights from scripture, and personal investment advice in order to help others master their finances. He can be reached at bob@christianpf.com.

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Don’t Even Look at Your Minimum Payment

Monday, November 24th, 2008

Why shouldn’t I look at this? Doesn’t it tell me what I should pay? The answer to this, unfortunately, is yes-it tells you how much you should pay in ways that work against your interest. Why is this? A little-known psychological trick called the anchoring effect.

I’m about to geek out on psychology, but I think it’s interesting and maybe you will as well. The anchoring effect occurs when unrelated data influence your opinions or decisions. Let me illustrate by using a well-known study as an example. In a study on the anchoring effects, two groups of people were first asked whether the length of the Mississippi River was greater than or less than an arbitrary distance (the first group was shown 70 miles while the second group was show 2000 miles). They were then asked for their estimate of its length. Not surprisingly, the second group picked a much higher estimate for the length of the Mississippi. Both groups had been “anchored” by the initial data point, even if it wasn’t realistic.

What does this have to do with your credit card payment? Simply put, credit card customers’ payment behavior is influenced by the same anchoring effects. A study by Neil Stewart at the University of Warwick tested how card borrowers who don’t usually pay balances in full respond when shown statement with minimum payment compared to those given a statement where the minimum payment is omitted. The results are predictable, but still shocking. Borrowers who weren’t shown a minimum payment actually paid 70% more than those shown a minimum. Given average interest rates, Stewart finds that this effect will get credit borrowers to pay four times more in interest over the life of their debt.

Credit card companies clearly know this. In an NPR special, Andrew Kahr details how he helped change credit card practices to reduce minimum payments from 5% to 2% to lengthen the repayment period for borrowers and increase profits.

So what should you do? First, recognize that your credit card company is not suggesting a minimum payment to be nice-they’re hoping you take longer to pay off your debt. Second, don’t base your decisions based on the minimum payment-commit yourself to paying a constant amount above the minimum and stay with that amount over time regardless of the statement minimum.

By being aware of how you respond to the bank’s strategies, you’re better equipped to get yourself out of debt.

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Debt-Free Christmas

Monday, November 24th, 2008

Every holiday season, millions of American families swear to manage holiday spending only to wake up to stacks of bills that take months to pay off. Last year, feeling the pain of their credit hangover Americans made paying down debt the top New Year’s resolution. With the economic downturn this year’s pain could be even worse, but with by following a few guidelines, you can avoid the credit hangover.

1. Create a plan.

Know what you can afford and set a budget, starting with a total amount and then working down to an individual amount for each person on your list. Make sure to leave a bit extra for unexpected gifts.

2. Have a conversation with your children to set expectations in advance

If times are tough and you will be cutting back this Christmas, explain your financial situation to your children in advance. Explain that you love them, but that you will have to cut back on holiday spending. Involve them in the process and ask them to help you set priorities. Not only will this give them a stake in the outcome, but it will teach them about finances and prioritization.

When it comes to gifts, consider giving your children a one-on-one date, a day trip, or something special in lieu of a monetary gift. What ultimately matters are thoughtful gifts rather than sheer quantity. With each gift, tell you kids why you selected the gift you did and make sure that it communicates your love and how well you know them.

3. Discuss your situation with others and the impact on your gift giving

If you have a tradition of reciprocal gift giving with your family members or others, talk to them about your situation. See if you can agree on both sides to buy gifts for the whole family instead of for each person or exchange home-made gifts made by the children. Talking about finances is difficult, but you may find that others are feeling the same economic insecurity and will be glad that you suggested money-saving alternatives.

4. Stick to your plan

It sounds obvious, but most of us fail execution rather than planning, so track your spending as you go to make sure you don’t go over. Watch for sales on key gift items, but avoid the temptation of impulse sales.

Christmas is a great time of year and with a little planning you can make it much less stressful. Creating and sticking to a solid plan will get you through the holidays with minimal stress and let you focus on showing your love for your family and friends rather than dreading the bills that come in early January.

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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