Michelle Singletary 0-375-50753-1 © 2004
Introduction: Big Mama's Saving Grace
"Child it don't make no sense to pay more money for a pair of jeans just because somebody's name is on it," she [Big Mama] would preach. "The only one who's going to get rich is the person whose name is on your behind. And that makes you an ass." Mantra #1: If it's on your ass, it's not an asset. Mantra #2: Is this a need or a want? Mantra #3: Sweat the small stuff. Mantra #4: Cash is better than credit. Mantra #5: Keep it simple. Mantra #6: Priorities lead to prosperity. Mantra #7: Enough is enough.
Part 1: Seven Money Mantras to Guide You to Financial Serenity
Chapter 1: Mantra #1: If it's on your ass, it's not an asset.
* "An asset is an item of property, a person, thing, or quality, regarded as useful or valuable." o Such a broad definition that anything can be "rationalized" to become an asset. * 35,000+ Self storage facilities in the U.S. o People have too much stuff (and too much of their income tied up in depreciating "assets") * 4 Types of Assets o Appreciating: + Liquid Assets: Cash & other financial assets that can be quickly and easily converted to cash with little or no loss in value. # eg. checking, savings, money-market accounts, cds, cash + Investment Assets: Assets held for their potential to appreciate, or increase in value. # eg. stocks, bonds, mutual funds + Real Estate: Land and things attached to it (houses etc) # greatest source of wealth for the American family o Depreciating: + Personal Property # includes car, clothes, furniture, etc # counted in the assets column of a balance sheet, but are difficult to convert to cash and lose a great deal of value when you buy them (eg leave the store) Common definition of appreciating assets: Assets that have the potential to increase in value and/or produce income. Commonsense definition: Assets that you don't wear or drive and that will keep you from asking at the age sevent-five, "Would you like as shake with those fries?" Common definiton of depreciating assets: Assets that lose their value over time Commonsense definition: Assets that may make you look good, but don't do a darn thing to make you rich. * Debt-to-income Ratio o help figure out how much of income is spent on depreciating assets o expressed as a %, that compares the amount of debt (excluding mortgage/rent) with monthly gross income o used by lenders, especially for mortgages Common definition of gross pay: Income before taxes, deductions, and allowances have been subtracted. Commonsense definition: Income you wish you had brought home before everybody and their mama, including Uncle Sam gets their cut. * monthly housing should not be >28% of gross monthly income. * lenders prefer a debt-to-income ratio of 36% or less including mortgage payments * To calculate Debt-To-Income Ratio: 1. Add gross income including tips, alimony, child support, bonuses, government benefits 2. Calculate payments including car payment, monthly furniture payments, bank loans, student loans, credit cards (use minimum payment amount due) 3. Divide minimum debt payment by gross income. eg. Income: $2000 payments: $400 d-to-i: 20% * If your d-to-i (excluding rent/mortgage) is: o Less than 15%: doing good o 15-20%: still not too bad o 21-39%: "Red Flag" o 40% or more: In trouble * in 1998 1 in 12 families had a negative net worth, 1 in 8 had net worth less than $5,000 * Americans go shopping 1.9 times/week (according to WSL Strategic Retail) * "If you want to accumulate appreciating assets and not sweaters, you have to stop thinking you have discretionary income." Common definition of discretionary income: The amount of income left over after essentials such as housing and food have been paid for. Commonsense definition: The money you spend without having any idea where it went. * Controlling Spending o Don't go to the mall. o Keep a spending journal: write down why you want to shop & how it will make you feel. o Tape your credit card bill to the inside of your journal. o Ask why before you buy. Be honest: do you need it or want it? o Give yourself a time out. Wait 24 hours before making any purchase. o Using a credit card IS getting a loan. + Would you aske a loan-officer to finance a pair of pants? o Go cold turkey without your credit card. o Find yourself a "savings sponsor", like AA, often your spouse. o Step away from the spendthrift. Keep away from people who are "born to shop". o Clean house. Find all the stuff in your house you bought that you don't need or forgot you had. o Implement the two year throwaway rule. If you haven't worn it or used it in 2 years sell it, give it, or throw it out. o Learn to say no to: kids, spouse, relatives, sales clerks, and marketers--and mean it.
Chapter 2: Mantra #2: Is This a Need or a Want?
* "Understanding the difference between a need and a want is the first step toward eliminating wasteful spending and putting yourself in the path to successful saving." * In a study by Tahira K Hira, Iowa State University: o Women Men Buy something w/out needing it 36% 18% Bought because it was on sale 24% 5% Shopped impulsively 36% 18% Shopped to celebrate 31% 19% * 25% of American Families have net assets greater than $10,000. * 53% of American Families live paycheck-to-paycheck. * "Hundred-Dollar Holiday" Movement o each family tries to spend $100.00 on gifts for Christmas. Total. For everyone. o Started out of concern for environment. o can donate part or all of what we would have spent on gifts to needy charities. * 1/3 of all parents worked extra during the holidays to earn money for holidays * 40% of Americans would buy for 15 or more people * It takes 6 months for most people to be able to pay off their holiday shopping bills. * Without looking, write down everything you bought on your credit card in the last yeor. The date, item(s), and price. If what you bought was truly a necessity (like fixing the car) you'll remember, but frivolous stuff you probably won't.
Chapter 3: Mantra #3: Sweat the Small Stuff.
* "Beware of little expenses; a small leak will sink a great ship." --Ben Franklin * "Many people are nickel-and-diming themselves into debt. If you want to create wealth, you have to sweat the small stuff." * Assume you buy lunch everyday, spending $5.00. That's $1300/yr. Invested at 5% for 5 years would give you $28000. * $60/month --> $720/year for 20 yrs @ 11% --> $48,500 * on average most bank customers use an ATM 4 times/week.
Chapter 4: Mantra #4: Cash is Better Than Credit.
* In experiments, participants bidding on basketball tickets with cash bid half as much as those bidding with credit cards. * The average cardholder had $8490 on credit cards in 2002 o If you pay the minimum (2%) ($180/month) @ 18% it will take 670 months (~56 years) & pay $26,000 in interest * According to Consolidated Credit Counseling Services 56% of the 850 people in its poll in 2002 would spend less this year @ Christmas because they were still paying off the previous holiday season.
Common Definition of Dead Beat: One who persistently fails to pay personal debts or expenses
Common Sense Definition: This isn't someone who robs Peter to pay Paul. This person can't even rob Peter.
"Never forget that credit is other people's money. There is always a high price to pay when you use other people's money."
Chapter 5: Keep it simple.
* "Never underestimate the power of simplicity" * When it comes to things like this, listen to your gut, your intuition, or that little voice in your head that is saying: "I don't know what the hell this person is talking about." The moment your head starts spinning, take you money and run.
Chapter 6: Priorities lead to prosperity.
* Make a list of your values, and then attach a goal to it. This list will become your spending-and-saving blue print. o must have specific goals, eg. house paid off by age 50 * Am I putting my resources toward what I say is important to me?
Common Definition of disposable income: The amount of income left to an individual after taxes have been paid and that is available for spending and saving. Disposable income may either be spent on consumption or saved.
Common Sense Definition: Money you burn & later regret.
* only ~1/3 of workers have an idea of how much they need to save for retirement
Chapter 7: Enough is enough.
* don't sacrifice your quality of life for a higher standard of living * Ask yourself: "When is enough, enough?" * "The things that will destroy America are prosperity-at-any-price...the love of soft living, and the get-rich-quick theory of life." --Theodore Roosevelt
Part 2: The Basics of Saving, Spending & Investing Your Money
Chapter 8: Paragons of parsimony: Penny-pinchers share their money-saving strategies
* find ways to save small amounts of money, but don't spend more time/energy (or money) that it is worth * "regift"
Chapter 9: Another day older and deeper in debt
* A survey by VISA found that of those who filed for bankruptcy in a 12 month period of 95-96, nealy 29% said the precipitating factor was excessive spending, not loss of job or emergencies * Terms on credit card bill o APR: Yearly interest o Cash Advance: Cash from credit card o Credit available: unused credit o Credit limit: max you can borrow o Grace Period: time in which you can payback the money without interest o Late-payment charge: Fee for paying late o Minimum payment: usually 2% of unpaid balance * Interest Rate o Fixed: rate stays the same all the time o Tiered: different rates for different levels of outstanding balance o Variable rate: rate changes depending on the index used by the issuer (eg T-bill, pime rate) * Calculate Finance Charges o Avg Daily Balance: most common. Adding the daily balance then divide by the # of days in the billing cycle o Adjusted Balance: subtracts the payment you've made from previous month's balance o Two-cycle avg daily balance: Averages the daily balance for two-consecutive months o Previous Balance: based on amount owed at the end of previous billing cycle. * Consumer Action (a consumer group) survey in 2003 o looked at 143 credit cards from 47 lenders o Avg late fee: $27, median $29 o Greater than 1/3 of issuers will raise rates if the cardholder has poor credit with other issuers, even if they always pay then on time o 62% will give you a late fee if you are late o 67% will increase rates for 1 or more late payments (penalty rates: 12-29.99%) * What is in your credit report o Personal info: name, previous names, current & old addresses, SSN, current/past employers, similar info about your spouse o Loan details: lender, acct#, date opened, loan amount/credit limit, cosigners, payment history o Listing of court actions: eg bankruptcy o Listing of parties requesting your credit report * Get a free credit report if: o You live in Colorado, Massachussettes, Maryland, NJ or Vermont (Once/yr). Georgia 2/yr. o You were denied credit, insurance, or employment within the past 60 days because of your cridet o you can certify you are unemployed & intend to apply for work in the 60 days period beginning on the date in which you made the certification o You are a recipient of public-welfare assistance o You have reason to believe your file contains inaccurate info due to fraud * How long does stuff stay in the report o positive info can stay forever o credit transactions w/a principal amount of $150k+ can stay forever o bankruptcies: 10yrs from settlement date o civil suits & judgements: 7 years from filing date o late payments: 7 years from original late payment o account gone to collections: 7 years o pade tax lien: 7 years * Review your credit report at least once per year * How to get erroneous inf off your credit report (according to the FTC) o Tell each agency in writing what info is innaccurate & request a correction or deletion. Provide your name & address o Enclose a copy of your report w/disputed items circled o Include copies of documents that support your claim o Send your letter certified mail, return receipt requested o keep records of everything & everyone you talk to * Here is what should happen o the law requires that credit agencies investigate disputed info & correct inaccuracies w/in 30 days o the credit bureaus must forward all relevant data you provide about the dispute to the information provider - You should send a letter to the creditor as well o when both the information provider & credit bureau investigations are complete, your must be given written results & a free copy of your credit report o If the reinvestigation does not resolve your dispute ask the credit agency to include your statement of dispute in your file & future reports * If you aren't satisfied you can complain to the FTC o www.ftc.gov or 1.877.382.4357 o Consumer Response Center, CRC-240, Federal Trad Commission, Washington DC 20580 + the ftc doesn't resolve individual problems o File a lawsuit * Credit Score o created by Fair Isaac & Co o 3-digit # from 300-850 o FICO Score + used by all three major credit bureaus + available @ myfico.com, equifax.com & transunioncl.com + Experian doesn't give consumers their real Fico score, neither does transunion (the score you get for free w/ report is similar but not the same) + 13% Score below 600 + 11% 600-649 + 16% 650-699 + 20% 700-749 + 40% >750 o How to improve Fico + Pay bills on time + keep balances low on CC & revolving credit + apply for and open accounts only as needed o What are the most important factors in the score? + payment history + length of credit history + types of credit in use + amount owed + new credit * Never cosign for anybody for anything o when you cosign, you're being asked to take a risk that the lender wouldn't take.
Chapter 10: Financial Boot Camp
* avg bounced check fees is $30.00 * ATM should mean "always taking money" * >30% of money from atms located at retail locations is spent at the retailer * Avg total fee for ATM withdrawal is $2.86
Chapter 11: Can you Spare a Dime?
* If you must loan money to a family member or friend get in writing. Example:
Length of loan (weeks/months/years): _________________
Total loan amount: $_____________
Annual percentage interest charge:_______%
Repayment conditions: The borrower(s) agree(s) to repay the agreed upon loan installment of ______ on the ________ day of each week/month.
Late charge: Any payment not paid within (5) days of the due date shall be subject to a late payment fee of $_________.
Total payment due at the end of this loan agreement: $_____________.
Prepayment: The borrower(s) has/have the right to repay the entire loan amount at any time. Interest will only be due for the time the loan is outstanding.
Co-Borrowers: All borrowers listed on this agreement shall be equally responsible for paying the entire balance due on the loan. In other words, if one borrower decides not to pay, the co-borrower will still be responsible for paying the entire balance, including any interest and late charges due.
Default: If for any reason the borrower(s) fail(s) to make ________ number of payments on time, the loan shall be in default. The lender(s) can then demand immediate payment of the entire remaining unpaid loan balance, including any interest and late fees.
Legal Fees: If this loan results in legal action for nonpayment, the borrower(s) agree(s) to pay any attorney or court fees associated with the collection of the unpaid loan balance.
As a legal adult 18 years or older I am fully responsible for paying back the full amount of this loan.
Notarized signature of
Date of loan agreement:____________
* a 2003 survey showed that 61% of college students planned to live at home after graduation. 24% were gaing to stay more than 1 year * Avg undergrad student loan debt in 2003: $18,900
Chapter 12: Heart Currency
* Tips for handling money in a marriage o Pool money and use a joint checking & savings o get your credit reports, share the info o develop a budget o make a dat. to talk about your money. Once a week for an hour o Set financial goals for the relationship. Establish priorities o agree on spending limits + never spend >$200 without talking to your spouse o learn to negotiate. develop a compromise o educate yourself as much as possible about how to manage your money
Chapter 13: It's not play money
* You should begin to talk to them [kids] about money the moment they begin to ask for stuff. * It's your responsibility to use every opportunity you can to teach your children what they need te know about money, including howe to spend wisely, save & invest. * An Ohio State Univ study found that half of kids got an allowonce. The median for kids between 12 & 18 who got an allowance was $50.00/wk. 25% got less than 7% * If you give kids an allowance: o Be consistent. Set up a regular pay day (a 1998 survey found the avg for kids 8-14 was $5.82 wk) o decide what will & won't be covered by the allowance (read & sign an allowance agreement) o don't pay for regular chores o require that at least 10% will be saved o take out 15% in "taxes" or have them give it to charity o follow the money. parents should still have some say in what the money is spent on o keep allowance & punishment separate o have a regular allowance reviews
Chapter 14: When life & death happens
* Health Insurance o 19.5% of blacks, have no health insurance o 10.1% of whites, have no health insurance o 33% of hispanics, have no health insurance o 65% of people get health insurance through work o only 7% of unemployed workers used COBRA + avg monthly cost: $600 in 2001 + avg monthly unemployment benefit: $925 + have 60 days to accept COBRA coverage * Homeowner's o review your policy so you have 100% replacement value o set up automatic yearly adjustments * Renter's Insurance o only 3/10 renters have insurance * national average auto insurance premium: $683/6 months * What to do if you are laid off (or expect to be): o discontinue 401k contributions o lower withholdings on your paycheck o make minimum payments on credit cards o maintain cash reserves in a money market fund (don't put it in long term investments like C Ds) o collect all the unemployment & severance you are entitled to o maintain health insurance o arrange a home equity line of credit to get you through tough times o cut expenses * Wills are a necessity for everyone o don't have an heir serve as a witness o if you can afford it, have a lawyer do it * Revocable living trust: allows you to give specific instructions on what to do with your assets * A living will: instructions if you become mentally or physically incompetent. Life support, etc. * Pour-over will: allows anything you've bought but not yet included in the trust to get included automatically. * Durable power of attorney: Appoints a person to act on your behalf if you are mentally/physically incompetent * You need an executor to carry out the instructions in your will * Common pitfalls in designating beneficiaries o naming your estate as beneficiary. It will make insurance money subject to claims from creditors. Causes taxes to become due on retirement accounts immediately o failing to name a 2nd beneficiary. If your 1st beneficiary dies 1st then it will go back to your estate o naming minor children as beneficiaries: you should name a trustee instead. Otherwise the money will end up tied up in court while they appoint a trustee o overlooking tax ramifications. consult a tax attorney o failing to update records o failure to be specific o assuming your will "has you covered". benificiaries named in insurance policies & retirement plans trump wills. o not telling people where your important documents are kept. * Prepare a letter of instruction (a master list) o www.njlaws.com - click on letters of instruction o should include: + location of safe-deposit box & key + location of will & estate planning documents + med coverage & location of policies + social security and or veterans records + life insurance policies & where located + location & explanation of title documents & other records; ex ) deeds, stocks, bonds, accounts, vehicle titles + A list of obligations involving periodic payments; ex) home mortgage, or loans, etc + names of lawyers & professional advisors such as brokers, accountang, insurance agent + If you operate a business, a list of key employees & business friends who will keep it running until sold
Chapter 15: There's a swindler born every minute
* 161,619 identity theft complaints in 2001 * 47% caused by wallet/purse losses * 23% mail theft or fraud -- address change * What they do with your info o >50% opened credit cards or charged to credit cards o 27% started phone or utility service o 17% opened new bank accounts, wrote fraudulent checks, or withdrew money from their account o 11% obtained a loan * FTC identity theft hotline o 877.438.4338 or www.consumer.gov/idtheft
Chapter 16: Building a nest egg? Start with one twig at a time.
* only 6% of employees contribute enough to their 401k to qualif for their employer's entire match * useful websites: o www.investereducation.org - useful tools & info to get started o www.dallasfed.org/htm/wealth/index.html - useful budget calculator o www.ici.org/quiz/get_the_facts_quiz.html - test mutual fund knowledge o www.sec.gov/investor/pubs/inws.htm - tips for selecting a broker o www.mfea.com/newscommentary/fundsfor50.asp - list of mutual funds you can start for $50.00