Apr 26, 2016

How a Drug Bust Got a Student Thinking About Money

Saw a very interesting story on CNN this evening.

A college student was awarded $4.1 million dollars in a settlement relating to mistreatment by the DEA.  The student was arrested along with 9 others in a raid of a home on April 20th, otherwise known as "Four Twenty" by recreation marijuana smokers.
The DEA agents discovered:
  • 18,000 pills of extasy
  • 10 ounces of Marijuana
  • Guns
  • Thousands of rounds of ammunition

Allegedly, the student was locked in a dark, windowless cell for 5 days and nights and was forced to drink his own urine to survive.  He shared a shocking story during the interview, literally trying everything he could to survive.  He was unsuccessful in his attempt to strike the ceiling sprinkler to get access to water, as well as getting the attention of anyone outside his cell by sliding his shoestrings beneath the door.

The interview did not share details of what would have led to the lapse of responsibility by the jail facility to care for their inmate, but it sounded to me like he was just forgotten about!

In a last ditch effort to survive, he consumed his own urine and carved a goodbye note to his mom in his arm with a piece of glass.  It turns out the urine actually saved his life, as he was immediately admitted to a hospital with severe kidney failure.  Doctors during the settlement deliberations confirmed the patient's tactic for survival and not long after, the prosecution won the large 7 figure settlement for their client.

The takeaway from all of this, however, came at the end of the interview.  The back and forth between the student and the news anchor regarding the $4.1 million settlement really reignited my suspicion that most people have NO IDEA what to do with a windfall.

CNN News Anchor: "$4.1 million is quite a bit of money.  Do you have any plans?"

Student: (5 second awkward pause) "I'm going to lock it up, protect it from myself."

CNN News Anchor: "So, does that mean you're going to save it?"

Student: (another 5 second awkward pause) "Um, um yes.  I'm going for the retirement."

I suppose it wasn't the worst response he could have made.  I mean, after all, he was involved in a HUGE drug sting.  Maybe he was still stoned?  He could have said he's planning to toss hundred dollar bills out the top of a limo in Vegas? 

This is great evidence of the lack of financial knowledge many people have.  Students in high school receive very little training on how to manage their money, and this student who is an ECONOMICS major, is "going for the retirement."

Well Mr. Student, good for you!  Now pick up a book about managing your finances.

Its interesting enough to note that this student was never formally charged with any crimes.  I guess the DEA felt guilty enough to let him off the hook in addition to giving him $4.1 million dollars.

To be honest?  I don't think he'll have a dollar left of it by his 40th birthday.

What are your thoughts?  Are most of the people you know oblivious to their finances?  Share your thoughts!


Apr 1, 2016

How I Use Mint

Mint.com is an exceptional website designed to help people keep track of spending, budget, and set goals while occasionally marketing various financial products to users.  On the whole, the user experience is outstanding, and is a site I use several times a week.

Here's What I Use

The "dashboard" screen when you log in consolidates all of your financial accounts (and property) into one place, giving you an up to date look at your personal balance sheet.  I have many accounts which I use for different purposes, so I definitely like this screen the most.  For example, the "cash" section in the upper left provides the balances for any checking or savings accounts in one simple to read area.  Mint also gathers any data on account "titles" from your banks, for example, I use Capital One 360 (formerly ING Direct) and each of my accounts have names such as:
  • MBA Savings Account
  • Vacation Account
  • New Car Account
  • Home Down Payment Account
  • Wedding Account (Thanks to Mint, this one is paid for with zero debt)!
I really like how Mint takes all of this data and consolidates it in one place for you.

Beneath the cash section is your credit liabilities, providing the user a nice snapshot of what you owe on any loans, lines of credit, and credit cards so you can manage  checking account balances accordingly.

Just below credit and liabilities are investments.  This gives you the same type of snapshot, but for taxable and tax advantaged accounts.  I also have my savings account in a short term bond fund at vanguard, so this is found here also.

Another great feature is the way Mint tracks your spending.  In the middle of the page, it provides a "budget" section with a color coded bar which gives you a feel for how you are doing on your monthly budget targets.  I only budget groceries, restaurants, and gas, but you can personalize this as much as you want.  All you need to do is click on the word "budget," set a monthly target, and categorize your spending in the "transactions" section as you go.

I also really enjoy the "goals" section.  I am currently saving for a trip, a new car, and retirement, so each of these goals has a target, target date, and monthly savings target.  It really gives you a lift when you hit your monthly savings goals!

Lastly, Mint.com will send you a weekly "financial summary" email detailing each of your budget categories, as well as a snapshot of account balances and total net worth figure.  Watching your net worth figure rise is a big motivator to save, as the progress you make adds up!

...and What I Don't Use

Some of the areas I don't use are the upcoming bills notification and portfolio movers and shakers.  I don't really pay attention to my portfolio holdings, except to re balance to my target allocation once/year.  The ways to save section offers products from 401k and credit card companies to potentially save the user money, but I don't really use this.

Overall, this is an outstanding site and I'm sure many of you use it already.  However, if you don't definitely try it!  I was a little concerned before signing up about the safety of my financial information, but Mint is REALLY on the ball with this important area, and all sign-in information to your various accounts remain fully confidential.

Give it a try, you may find that it completely reshapes your spending and saving habits!!!


Tortoise Banker

Dec 9, 2015

Setting Up a Budget: For New Couples

This is a guest post from Little House in the Valley who blogs about tips for smaller living. Many of her topics include little house plans, becoming financially savvy, and learning to do more with less.  Little House and I are involved in a larger personal finance blogger’s network called the Yakezie.com, a community of finance bloggers selflessly supporting others with the common goal of sharing our finance experience and knowledge.  As part of that support, we frequently swap posts to help broaden our readership.

The Basics of Budgeting
Why budget? Many people live day-to-day without any sort of financial guidance. People have inaccurate balances of how much money they actually make (bring home) and many are unclear on how much they spend and on what. Yet, when two people meet, fall in love and become a couple, it's a good excuse to get serious about your finances. Income, expenses, banking and credit all come into play here.
The expression, "Two heads are better than one," definitely applies in the case of budgeting. Instead of working in isolation, a couple working together towards the same financial goals can achieve much more. However, before you can set any financial goals, you need to know how much money you have to work with and how much in expenses or debt you need to pay off. Budgeting is the first step in becoming financially responsible and independent.
The word "budget" sounds about as interesting as doing chores around the house. Nevertheless, budgeting is really quite simple; a budget reflects the money coming in and going out. You track your income and expenses for a period of time, then set realistic goals based on the information you've collected. As you track your money, use this as a starting point to discuss areas where you might be spending too much and common financial goals you'd like to work on.
Getting Started
Now comes the dirty work; it's time to track income and expenses. Tracking income is the easier of the two, but make sure you've accounted for all income streams including any supplemental income, credits or extra cash. You'll also be pleasantly surprised that by combining both of your incomes, you have more money to work with before and after expenses.
The harder part is the latter: Tracking Expenses. If you're combining households, some costs have gone down for one of you (or possibly both). Take this time to also discuss each other's bills, especially debts like credit cards, student loans and any other debt either of you have.
Now for the nitty-gritty: Calculating Expenses. There are a couple of ways to do this; one is manual, the other more automatic. The manual approach means collecting receipts or tracking every single expense, then entering it into an Excel spreadsheet or writing it by hand in a log of some kind. It can even be a simple legal pad which is definitely more tedious, but still effective.
The automatic approach will still mean entering in all receipts, but doing so in a program like Quicken or Budget Pulse which will tally everything up for you as long as you've categorized your entries (groceries, eating out, insurance, etc.). Both programs, one is software the other a website, will create graphs and charts giving you a visual of where you spend your money. There are also free, online tools you can use to manage your finances. Quicken has a product called Mint that can do a variety of things along with educate you both further about your money.
This is also a perfect time to discuss who will do the work. At this stage it is highly recommended that you both play an active part in the actual tracking and monitoring of your money. Married couples who manage their money together are typically more financially successful.
Now What?
So you know how much you make and how much you spend. The next step is actually setting your budget based on the figures you've gathered. Maybe you've found you are eating out too much and the two of you have decided to cook at home more often. In the "restaurant/dining out" category, you'd set your budget for a little less than what you've been spending. However, in the "groceries" category, you'd round up a bit to balance out eating at home more often. Below is an example of a budget including categories:
 For recurring expenses that don't fluctuate, set the amount to the realistic figures. It's always a good rule of thumb to set your budget to reflect your actual expenses and for the sake of sanity, round up not down on the more variable ones. If your cell phone bill is always $68.90 a month then put $69.00 down in the budget. The first month or two, you'll want to follow your expenses and compare it to your budget; tweak the budget as needed.
Hey, this sounds like a lot of work!
For many people with reliable incomes and stable expenses, much of the work load is in the beginning in the form of tracking money coming in and going out. Once you get into the groove and hopefully continue tracking expenses, the budget can be reviewed only a couple times a year.
The Benefits
The greatest benefit is that you and your partner will have a good understanding of your income and expenses.  Together as a team you can set future financial goals and create a plan to achieve those goals. Those goals might include paying off debt, saving for a house, or building an emergency or slush fund. Now you have a starting point.

Aug 20, 2015

Principle 3: Tough Love...Pay Cash

The amount of damage paying interest to a bank can do to any solid financial plan is devastating.  I sit with folks everyday that have way to much debt already, and for some reason are considering more.  The best advice I can give you is to PAY CASH FOR EVERYTHING. Period.  Below is a little bit of tough love, and additional details for your to reflect on.

Exceptions to Paying Cash

Though exceptions like a house and an education exist, it is nearly always best to save up the appropriate amount of cash to make a purchase versus using a loan.  This may seem like common sense or even laughably simple to some of you, but I have a feeling someone out there needs to hear this.

In the rare borrowing exceptions like buying a home, be conservative with your mortgage.  Put a minimum of 20% down and borrow no more than 2 times your annual income with a 15 year fixed rate mortgage (30 if you must).  Aim for payments to be no more than 1/4 of your take home pay.

Buying a bigger home isn't an investment, its a lifestyle choice and a very expensive one at that.  As soon as possible, set up an automatic additional "principal only" payment through your mortgage company, and watch your net worth explode and your remaining balance disappear.  Having a paid off home is a wonderful feeling, not to mention the deep sleep you'll begin to feel once you own your home "free and clear!" Pay cash.  *Optional-stick your last mortgage bill to the fridge with a big PAID stamp on it.

Steer Clear of Home Equity Loans and Lines

Pay for improvements with cash and find a way to look the other way when you see shiny new toys.  One of the biggest reasons we experienced the credit crunch and global financial meltdown was because people looked at their homes as ATM machines and pulled out all of the equity to do projects or buy new things.  Fight the urge.  Pay cash.

College and Education

Urge your kids to pick an "in-state" school or a less expensive school known for the program or subject they are interested in.  The name brand is not nearly as important as what they learn while at school.  Hopefully you funded a 529 plan while they were growing up.  Pay cash.

Buying a Car

Get a reliable 2-4 year old car with high gas mileage and solid consumer reviews.  Look up the suggested retail on Kelly Blue Book and try to find a gem on either Autotrader, Craigslist, or the like.  Taking a look at some local dealerships with attractive warrantees is a great place to start as well.  See my in-depth guide to car buying herePay cash.

In General

Avoid revolving debt or monthly payments like the plague.  Consumer debt is no good, and if you are wondering if you should take out a loan to buy something I already have the answer for you and it's easy. It's no.  Pay cash, live within your means and get back in the game!

With love,

TB (Pay cash).
Take Me to Principle 4:

Jul 29, 2015

Principle 2: Why High Monthly Overhead is Crushing Your Investing Goals

My Wife and I have a few high-value items that we can not live without.  She likes her I-Phone and I like my gym membership.  We both like having cable TV, and we do not plan on selling one of our cars any time soon.  But we both know there are areas in our budget we could cut back or eliminate and apply the saved monthly payments to mortgage reduction or retirement savings.

How about you?  Can you think of any monthly overhead expenses, particularly recurring monthly expenses like subscriptions, fitness clubs you don't use, or any expense that gives you minimal value in relation to its cost?

A few that stick out in my mind that you may want to look at are the following:

1. X BOX Live Membership-These can be up to $10/month.
2. Expensive Yoga Studios-I know classes can cost $25 or more EACH.
3. Magazine and Online Content Subscriptions-Do you read them anymore?
4. High Cost Cell Phone Plans-My wife likes her I-Phone, but are you getting the best deal?  (Hint: Check out Straight Talk Wireless-$30 to $45/month)
5. Unnecessary Insurance Premiums-Boat, Motorcycle, or any other kind of "nice to have" item that requires monthly insurance
6. Netflix/Hulu Subscriptions-These seem like a good value, but do you need both?  Can you get away with cancelling these?
7. Home Security Systems

A few non-recurring expenses you may also want to look at are:

8. Dining Out-This is likely the biggest budget buster out there.  Track this for 3 months and you may be surprised.
9. Clothes-Trips to the shopping mall can add up to BIG annual totals spent on clothes.  How about Ross?

What I'm trying to get at by sharing some examples with you is discretionary expenses need to be audited closely.  These can escalate quickly, and attention should be placed particularly on recurring expenses (auto-debited from checking/credit card, monthly bills by mail).

What about premium cable?  Do you really need Direct TV or 25 premium channels?  Does your cell phone plan call for Unlimited Talk/Text/Data at a low cost of $200!!!  Eliminate or scale these back now to get more value for your money.

Need some motivation?  Google "time value of money" and find out exactly what those monthly bills end up costing you over a, say, 10 year period.  Here's an example:

$100/month Jiu-Jitsu Academy Membership

10 Year Cost assuming opportunity cost of 6% growth: $37,387.

In other words, if you chose to instead invest that $100 membership fee in a low cost index fund at Vanguard earning 6%/year, you would have a total of $37,387.  Pretty expensive membership, huh?

Again, I'm not saying you turn into the guy on the internet eating peanut butter and jelly sandwhiches all day to retire at 30 with annual expenses of $25,000.  I am saying, however, that these monthly expenses can really cost you in the long run and it would benefit you greatly to honestly assess the value they bring you and your family.

Until next time,

Take Me to Principle 3:

Jul 23, 2015

Principle 1: How to Get Out of Debt

One of the most difficult conversations I have with my clients usually involves how to get out of debt.

Let's look at an example.

Jane Doe owns a home, and a friend recommended she speak to me.  Her daughter was getting married, and she didn't know what to do.  She had over $20,000 in credit card debit and figured she could tap her home for the last bit of equity in it, and use the funds for her daughters wedding.  I know what you're thinking... she's a spendaholic. 

Actually, she's not.  She got married young to a deadbeat Dad who hasn't paid child support in over 15 years.  She raised her two daughters alone as a single parent in an incredibly high cost of living area.  Not to mention, she did all of this on a teacher's salary. 

Between 5 credit card bills, her mortgage, and the essentials, she had less than $50 of disposable income.  I really wanted to help her, possibly by consolidating her high interest credit cards into a low interest Home Equity Line of Credit, but her debt-to-income ratio was too high.

With tears quickly building in her eyes, I scrambled to calm her down.  "I'd like to help you." I said.  "Will you listen to everything I say and do your best to stick to a plan I give you?  I will be calling you once a week to discuss your progress, and would like your full commitment prior getting started."

"Yes!" She exclaimed. 

So I began reviewing her finances, and remembered a Dave Ramsey theory that getting out of debt is 20% head knowledge, and 80% behavior.  I know conventional wisdom tells us to pay off higher interest credit first, but what about getting some MOMENTUM!  I firmly believe his snowball tactic is a good one, and will recommend it to my readers as well.

So here's what you do:

1. List all of your (non-home) debt on a piece of paper in order from smallest balance owed to largest.
2. Pay the monthly minimum on all debt until you have $1000 in an emergency savings account.  Do not touch this.
3. Pay the minimum on all debt besides your smallest balance.  Pay the maximum you can afford on this, and do so with "gazelle-like" intensity as Dave Ramsey would say.
4. Do your best to keep expenses low.  Ramen isn't healthy, so I don't recommend it, but Costco and sandwiches will feed you very inexpensively.  I'd suggest you try that.
5. Once you pay off one of your credit card balances or loans, save the last statement and display it somewhere you'll see it everyday.  I can't say enough about the positive impact the feeling of "making progess" can have on a plan to eliminate debt.
6. Take the same payment (+minimum from next largest liability) and apply it to the next largest balance.
7. Continue this process (and be sure to display the paid off loan balances on your fridge or bathroom mirror) until all balances are paid off.
8. Take a sigh of relief and pat yourself on the back.  You did it!

It is very easy to feel discouraged when you are up to your ears in debt.  I truly sympathize for clients like Jane Doe, even more so because she got there in large part by doing her best to provide for her children in less than ideal circumstances. 

Getting out of debt is a concious decision.  It must involve a lifestyle change. 

I applaud you for reading this article if your circumstances are similar to Jane's, and thank you for sharing with friends in debt if you feel this would be helpful to them.  Please leave a comment if you have any questions!


Take Me to Principle 2:

Jul 8, 2015

Principle 5: How to Automate Your Personal Finances

*Credit: Ramit Sethi at I Will Teach You to Be Rich
One of the most important topics I studied in business school was system creation.  From your local Mom and Pop, to Fortune 500 companies, businesses all share the need to develop systems that lead to success.

My advice to readers would be to establish an automated system to assure lasting wealth creation.  No matter your income stream, a clearly defined process for the money flow in your wallet can take the short-term struggles and temptations out of saving and investing.

Let's assume you get paid twice monthly.  I don't want to lose any entrepreneurs that have irregular income streams, so this will work for you as well.

You'll need:

-401k (nearly a must have, but not quite)
-ROTH IRA (Vanguard is best company to open this account with)
-Checking account with bill pay feature (preferably free of any monthly service fees)
-Savings account with sub account options (Best option here is Capital One "360", formerly known as ING Direct.
-Credit Card

Step One

Contact your HR department and request a predetermined percentage of your paycheck be "auto-deducted" into your company's 401k plan.  Ideally, your company offers a match of your contributions.  If your company matches 3% of your salary, select 3% for now.  We'll return to this in a moment to see if increasing this further makes sense.

Step Two

Establish a direct deposit of your paycheck into your checking account.  No one has time to deposit checks at the bank anymore, so save yourself the bi-monthly trip.

Step Three

Determine your monthly expenses.  An incredibly important piece of any sound financial plan is an emergency savings account with 6 months of expenses available in case of job loss, medical emergency, family emergency, car repairs, etc.  This account should not be touched unless its an extreme emergency.  So if you spend (not including investments) $3000/month, your emergency fund should have $18,000.

Next, set up sub savings accounts for your various short term savings needs.  Some needs that come to mind are:

-Home Down Payment
-Car Replacement

Capital One will allow you to set up an auto-deposit from your checking account into each of the sub savings accounts.  A number that sticks out in my head is 5% of gross income, but each person's financial picture is different.

Step Four

Contact your ROTH IRA company, and set a fixed monthly auto-investment amount in line with your current income and expense levels.  The 2013 monthly maximum is $458.33/person.  If you are married, this figure would be $916.66.  The ultimate goal would be to max this out, and if any room were left in your budget, put the remainder in your 401k up to a monthly amount of $1458.33, the monthly max for 401k contributions.

Step Four

Set any recurring monthly bills (cable, phone, gym membership, netflix) to be auto billed to your credit card number.  This way you will earn miles/cashback rewards on these purchases, which will really add up over time.  All other spending, such as groceries, gas, restaurants, etc. should also be paid for with credit card.

Pay off your credit card in full at the end of each month.  The best way to do this is to set up an email notification for the 30/31st of each month, and use this to review all purchases and pay off full balance.

I can't stress enough the importance of paying your card off in full.  More on this in later posts.

Step Five

In the rare instances where a credit card cannot be used to pay a bill, use your bank's "e-bill pay" feature, where an electronic check is sent to an address you specify.  This can be automated as well to assure important obligations like rent are not missed.

For "cash only" businesses and miscellaneous spending that isn't supported by bill-pay or credit cards, ATM withdrawals will take care of the rest.

And there you have it!  The above guide will position you to "set it and forget it" when it comes to your personal finances.  The only goal you should have once this system is in place is to be committed to increasing your savings rate over time.  Your ability to control spending will make or break your long-term success, so do your best to eventually get your savings rate to 30% of your gross income (before taxes).


Warm regards,

 Take Me to Principle 6: