Credit problems create a vicious cycle. Credit card interest rates are increased, fees are onerous and even applying for jobs is negatively affected (many employers look at credit reports as one factor in the hiring process), insurance companies look at them too and can offer higher rates. Employers and insurers have the belief that bad credit is an indication of other risks they don’t want to take on. Once into the cycle there are challenges to deal with. I must admit I think it is silly to look at credit for most jobs. But a significant number of organizations do so that is an issue someone that gets themselves in this trouble has to deal with.
I think the best way to deal with this problem is to build a virtuous cycle of savings instead. We tend to focus on how to cope with a bad situation instead of how to take sensible actions to avoid getting in the bad situation. In general we spend far too much money and take on too much debt – we live beyond our means and fail to save. Then we have a perfectly predictable temporary hit to our financial situation and a vicious cycle begins.
If we just acted more responsibly when times were good we would have plenty of room to absorb a temporary financial hit without the negative cycle starting. The time to best manage this cycle is before you find yourself in it. Avoiding it is far better than trying to get out of it.
Build up an emergency fund. Don’t borrow using credit cards – or any form of consumer debt (borrowing for education, a car or a house, I think, are ok). Save up your money until you can afford what you want to purchase. Don’t buy stuff just to buy stuff.
Re: The Vicious Circle of Poor Credit
Related: Real Free Credit Report – In the USA 43% Have Less Than $10,000 in Retirement Savings – Financial Planning Made Easy
3. The payment ploy: A dealer might say, “We can get you into this car for only $389 a month.” Probably true, but how? In some cases, the dealer may have factored in a large down payment or stretched the term of the loan to 60 or 72 months. Focus on the price of the car rather than the monthly payment. Never answer the question, “How much can you pay each month?” Stick to saying, “I can afford to pay X dollars for the car.”
Some good advice. I bought my last car at CarMax which gave a good price and none of these tricks (I didn’t have a trade in – I donated it) and I paid cash. They offered a great deal on a Toyota Rav4 when I was looking. I believe, those that are interested in getting the very best deal and are skilled and able to defend themselves from the dealer can do better than CarMax. But I would bet most people would be much better off using CarMax.
Related: Manufacturing Cars in the USA – Avoiding Phone Fees – Actually Free Credit Report – How to Use Your Credit Card Properly
There are several personal finance basics that everyone must account for. Retirement requires the most planning and accumulating the largest amount of money. Luckily if you plan ahead you have a long time for compounding to work in your favor. Unfortunately most people continue to fail to make even the most minimal efforts to save for retirement: 43% have less than $10k for retirement
The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.
Fewer workers report that they and/or their spouse have saved for retirement (69%, down from 75% in 2009 and 72% in 2008. Moreover, fewer workers say that they and/or their spouse are currently saving for retirement (60%, down from 65 percent in 2009).
27% say they have less than $1,000 in savings (up from 20% in 2009).
46% report they and/or their spouse have tried to calculate how much money they will need to have saved for a comfortable retirement by the time they retire.
What is a very rough estimate of what you need? Well obviously factors like a pension, social security payments, age at retirement, home ownership, health insurance, marital status… make a huge difference in the total amount needed. But something in the neighborhood of 15-25 times your desired retirement income is in the ballpark of what most experts recommend. So if you want $50,000 in income you need $750,000 – $1,250,000. Obviously that is difficult to save over a short period of time. The key to saving for retirement is a consistent, long term saving program.
Related: Retirement Savings Survey Results (2007) – How Much Will I Need to Save for Retirement? – Personal Finance Basics: Long-term Care Insurance
Once again the personal savings increases point to healthier economic choices being made by individuals.
Personal saving was $534.2 billion in December, compared with $506.3 billion in November. Personal saving as a percentage of disposable personal income was 4.8%.
Personal income increased $44.5 billion, or 0.4%, in December, according to the Bureau of Economic Analysis. Personal consumption expenditures increased $22.6 billion, or 0.2%, the 3rd straight month of increased spending.
Related: Increasing USA Saving Rate is a Good Sign – Saving Spurts as Spending Slashed – Changing Shopping Habits
Many people find personal financial planing boring. Building a cash safety net is an important part of your personal finances even though it isn’t exciting. I have written previously the very simple idea that you can just not buy what you can’t pay for. If you can’t pay for it this month, don’t buy it.
But that leaves out one thing. Even if you do have the cash you should be building up a cash reserve before buying luxuries. The typical advice is to build up 6 months of expenses in cash (rent or mortgage, food bills, utilities, health care, etc.). Now actually building up to that level can take awhile and forgoing all non-mandatory expenses until you have that saved is not usually reasonable. But as part of your personal finances building up an cash reserve is important (even if it is boring). And I believe you really should aim at a higher level – say building to 1 year.
A significant portion of downward spirals in personal finances are started when people have emergency expenses and have to borrow that money (since they don’t have cash reserves). And even worse when they start racking up huge fees for late payments, increased interest rates on outstanding debt, health care expenses if they fail to keep health care insurance…
If you are over say 26 and don’t have a cash reserve yet saving for it should be part of your monthly budget. How quickly you build that up is a personal decision but I would say a 2% of the target amount (so if you are aiming for a cash reserve of $20,000 then $400/month). If you have next to nothing saved now start aiming at 6 months. As you get 3 months saved up start aiming at 9 months. As you get 6 months saved up start aiming at 1 year. And you have to also be saving for other needs – you shouldn’t raid your emergency fund savings for other things (a new car, a vacation…). This takes real discipline but it is much easier than the challenges our ancestors had to face of billions of people face financially today. So yes it is not easy, but really those that feel sorry for themselves need to realize they shouldn’t expect that they are so special the world owns them financial riches with little effort.
Doing something is better than nothing so do what you can (even if it is less than 2% of you target). But realize that is one of the weaknesses in your personal finances and try to fix that as soon as possible.
Very important personal financial allocations for you to put first include: current needs (food, car payment, rent/mortgage, utilities…), insurance, creating a cash reserve, retirement savings, saving for future purchases. Then there are luxuries and treats, such as: eating out, vacations, cable TV… Many people put current needs, luxuries and treats fist and then say they don’t have the ability to do what is responsible (check how rich you are – before making such claims yourself).
Related: How to Protect Your Financial Health – Save Some of Each Raise – Buying Stuff to Feel Powerful – Consumer Debt Down Over $100 Billion So Far in 2009 – posts on basic personal finance matters
3 Nobel prize winning economists, Robert C. Merton, Robert Solow and Paul Samuelson, took questions about the impending retirement savings crisis from PBS NewsHour correspondent Paul Solman in October 2008. Paul Solman asked them about their personal portfolios in the clip shown above.
Robert Merton tells his portfolio portfolio is in a Global Index Fund, Treasury Inflation-Protected Securities, and one hedge fund. He said he had been invested in a TIAA commercial real estate fund until recently, but sold in early 2008 when he worried commercial real estate prices had increased too far. He also sold out his Municipal bond holdings.
Robert Solow says he has no idea of his portfolio.
Paul Samuelson declined to say. He did offer that timing is not something investors can successfully do. He stated that timing the selling of assets was not as difficult as timing when to get back in. And that markets move very quickly so you can miss out on big gains. 2009 provided a great example of this. Many people sold stocks in late 2008 and early 2009. And most did not get back in. In 2009 the S&P 500 was up 26%.
Related: Retirement Savings Allocation for 2010 – How Much Will I Need to Save for Retirement? – Gen X Retirement – Many Retirees Face Prospect of Outliving Savings
Well done article on CNET looks at theAT&T-Verizon price war and provides usable information.
and Verizon have each reduced the price on their unlimited voice plans. The plans have dropped from $99.99 to $69.99 per month for individuals.…
If I am an existing customer paying a higher fee for my voice service, can I switch to the all-you-can-talk plan without being penalized?
Yes, AT&T and Verizon Wireless representatives say all you have to do is call a customer service agent to change your plan. You will not be charged any kind of fee for switching. And you will not extend your existing contract by switching to the lower cost plan.
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Each of these plans will cost about $120 a month. Unlimited texting and voice is about $90 a month. And the data service is an additional $30 a month. The price of unlimited voice, text, and data from these carriers previously was about $150, because the unlimited voice service was $30 more expensive.
Are the data plans really unlimited or is there a 5 gigabyte limit?
AT&T and Verizon Wireless say their data plans are unlimited for all phone customers. The 5GB limit only applies to customers using their 3G broadband service for laptops.
Do either AT&T or Verizon Wireless allow tethering phones to laptops for Internet service? How much does this cost?
AT&T and Verizon Wireless each allow attaching phones to a laptop to get 3G wireless service. Verizon allows tethering on most devices, but not all. For smartphone customers with a voice and data plan, the tethering plan costs an additional $30 per month. For customers wanting to connect their laptops to a feature phone, the tethering plan will cost about $49.99 if you use the new plans. In either scenario, customers are subject to the 5GB limit for tethering usage with 5 cents per MB for overage.
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Sprint’s Simply Everything plan costs $99.99 and includes unlimited voice, texting, and data. This is still $20 cheaper than a comparable unlimited plan for an AT&T smartphone or any Verizon phone
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T-Mobile USA
Related: Move to Finland for Cell Phone Service Savings – Kiss Your Phone Bill Good-bye – iPhone + AT&T = Yikes – Customer Service is Important
N.Y. Raises Pension Requirements to Save $48 Billion
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For new workers, the bill raises the age for retirement without penalty to 62 from 55, imposes a 38 percent penalty on non-uniformed workers who retire before 62 and increases the minimum years of service to draw a pension to 10 from 5, according to Paterson’s office.
Overtime payments included in calculating pension benefits will be capped at $15,000 a year for civilian workers, and 15 percent of wages for police and firefighters.
Raising the retirement age from 55 to 62 (for new workers) is something that should have been done decades ago. 62 is too young for a full retirement age. If a country has the life expectancies we do they either need to have huge retirement savings (which for NY State would mean huge taxes to support that level of retirement savings) or live off the wealth saved in previous generations (or count on taxes of future generations).
Unfortunately for too long all of the USA we have chosen not to save for retirement when we work and then retire when we still have decades to live (on average). That is not sustainable. You can only add so much to the credit card (buy now let someone pay later strategy). Increasing from 55 to 62 is a good move. But it is too little and too late. More should be done.
Saving for retirement is not complicated. It is just that many people would rather speed money now and now save it. That is easy to understand but it is not helped if we make it sound like saving for retirement is hard. It takes some discipline. But certainly adults should be able to show some discipline. We have to stop acting like not saving for retirement is somehow acceptable. It is no more acceptable than those that had to store food for the winter a few hundred years ago deciding they would rather go swimming all summer and worry about the winter later.
And state governments should not provide out-sized retirement benefits which must be paid for by the taxpayers. 80 years ago maybe setting the retirement age at 55 made sense. It certainly did not for new workers in 1980 (or 1990 or 2000 at least now in 2009 they are making a move in the right direction).
Related: Working Longer and Delaying Retirement – Many Retirees Face Prospect of Outliving Savings – Pushing your financial problems into the future – Gen X Retirement
Wells Fargo is offering to donate $1 to Kiva for every person that completes a 7 question survey (no contact information is required) to get what they call a retirement security index. I did and there are 2 benefits to doing so yourself. First, most of us would benefit from more attention to our retirement planning. Second help out Kiva – which I have mentioned many time.
Now I think their questionnaire is far too simplistic but it is hard to get people to spend even 15 minutes looking at a saving plan for retirement. So I know they are trying to keep it very simple so people will complete it. That said, read our posts on retirement planning to lean more about planning for retirement. It is critical that you spend the time in your 20’s, 30’s and 40’s doing this or you are really going to have trouble making decent retirement plans.
Related: Add to Your 401(k) and IRA – Spending Guidelines in Retirement – Retirement Savings Survey Results – Personal Finance: Saving for Retirement
Surging U.S. Savings Rate Reduces Dependence on China
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Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10 percent to 11 percent. What’s critical, he said in a Bloomberg Television interview on June 24, is how quickly it increases.
A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, he said. If it occurs over a few years, the economy may grow.
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From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said.
That process has now gone into reverse. U.S. household wealth fell by $1.3 trillion in the first quarter of this year, with net worth for households and nonprofit groups reaching the lowest level since 2004, according to a Fed report. Wealth plunged by a record $4.9 trillion in the last quarter of 2008.
Edmund Phelps, winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.
As I have been saying the living beyond our means must stop. Those that think health of an economy is only the GDP forget that if the GDP is high due to spending tomorrows earnings today that is not healthy. Roubini correctly indicates the speed at which savings increases could easily determine the time we crawl out of the recession. I hope the savings rate does increase to over 10 percent.
If we do that over 3 years that would be wonderful. But it is more important we save more. If that means a longer recession to pay off the excessive spending over the last few decades so be it. And it is going to take a lot longer than a few years to pay off those debts. It is just how quickly we really start to make a dent in paying them off that is in question now (or whether we continue to live beyond our means, which I think it still very possible – and unhealthy).
Related: Will Americans Actually Save and Worsen the Recession? – Can I Afford That? – $2,540,000,000,000 in USA Consumer Debt (April 2008) – Paying for Over-spending