Archive for Family Budget
The Friends and Family Guide to Making Personal Loans
Posted by: | CommentsHave you ever had that awkward feeling that comes at a family gathering when you’re sitting across the table from someone who you know is buttering you up to ask for a loan?
I have. It can be amusing, or uncomfortable, but if it catches you and your spouse unprepared, it can be upsetting as well. If you have family members in need, or who have asked you for personal loans in the past, it’s a good idea to consider your alternatives before you are confronted with the "opportunity" again.
Extending credit and personal loans between family members is a common practice. Especially in light of today’s economy, many of us know someone who may be on hard times financially. Does it make sense for us to step up and extend them a personal loan?
Many advisors recommend against loaning money to friends and family. Too often, things can go wrong and leave bad blood between you, dampening the relationship more than your refusal to extend the loan ever would have.
Do not feel compelled to loan money, even to close relatives or other people who really need help. Find other ways to help them like paying part of their tuition costs or mortgage payment if they’re having trouble with bills, hiring them to work around your house (lawn mowing, babysitting, housecleaning, etc.) if they need to come up with cash quickly, or bringing them food, watching their kids while they look for work, or finding other ways to help them reduce the cost of their normal expenditures.
If you’re planning to sit down with needy friends or relatives at Christmas time, plan your strategy in advance. Before they ask, or before you offer, here are some important things to think about regarding loans to friends and family members.
What to consider before giving a friend or family member a personal loan:
- What is their ability to repay? This is the first thing to consider when giving anyone a loan. If they can’t repay, you should probably think of it as giving them a gift. It’s one thing to loan to someone with a job, great credit, and savings in their retirement account who may just be going through a tough time or needs a loan for something big like a medical bill or a new house purchase. It’s another thing to loan to a broke college student up to his eyeballs in debt with no job prospects.
When you look at making this decision, think like a bank. You are making a business decision with your money. If you are loaning to someone who can’t repay, you are giving a gift, not a loan. You might as well call it that and save the inevitable bad feelings that will come from a debtor who can’t pay his creditor.
- Get it in writing. If you do decide to loan someone money, even if it’s just $20, make sure you write down everything. You don’t have to create an attorney-prepared promissory note if its cost prohibitive. Contracts you prepare yourself are legally binding if all parties sign and they don’t have any illegal clauses in them. (If you are loaning a large sum of money, attorney assistance can be invaluable.)
Your Promissory note should include: The lender, the borrower, an interest rate, the date the agreement was created, signatures from both parties, and a due date for the repayment of the loan. It should also spell out fees and penalties that will accrue if the note is not repaid. (NOTE: I AM NOT AN ATTORNEY, SO THIS IS NOT LEGAL ADVICE).
Writing down your agreement will create a forum to iron out the terms of your deal and make sure that no one "mis-remembers" what was agreed to later on down the road.
- Do they have any collateral?
One easy way to increase your probability of being repaid is to get something as collateral. Cars and boats are easy to lien, just stop by the Department of Licensing to get the paperwork to fill out. Be careful with these assets, though. If they already have a loan on them, they are usually worth LESS than what is owed on them, so you won’t have collateral protecting your note.
You can also keep other things of value as collateral – stamp and coin collections, motorcycles, a lawn mower or truck. The idea is that if they don’t repay you, you can (as specified in your promissory note) sell the collateral item to recover your costs.
Easier said then done when it comes to family relationships, I know. But if they want to play the game, they have to play by the rules.
- What will it do to the relationship if they can’t repay the loan? This is a personal question for your consideration. In my experience, it is usually less damaging of a relationship to avoid loaning money, than it is to have a loan go into default. The lender and the borrower both feel agitated in that case, and there can be a lot of feelings under the surface that are not addressed.
- Do they have other alternative sources of credit, such as a bank loan? Before you jump to the ready with your checkbook, find out if the borrower has other sources of credit besides the BANK OF YOUR WALLET. Can they draw on their line of credit on their home, get a personal signature loan with the bank? Use their credit cards?
I am one of the last to encourage the irresponsible use of expensive forms of credit, but it’s good to know that the person has OPTIONS besides going to you. I would not encourage them to go to a Pay Day lending source or take a cash advance on their credit cards, as this is EXTREMELY expensive.
Another emerging new source of credit is peer-to-peer lending sites like prosper.com and lendingclub.com. These sites allow ordinary folks all around the country to lend money for interest rates (as an investment) and to borrow money when they need access to cash.
- What will the money be used for? When I was volunteering for a micro-credit banking agency in Nicaragua one summer in college my research partner Julie gave some money to a woman living in poverty whose children had very little food and clothing, no shoes, and lived in a dirt-floored hut. I remember Julie’s chagrin when the recipient of her charity turned to her baby and said "now we can go buy a candy bar." That’s not what Julie had in mind when she handed over the money.
Likewise, it can be frustrating to give someone money, only to see it spent on items you consider to be wasteful or frivolous.
When you extend someone a personal loan, consider whether you will specify how it is spent.
- Is there a way you can assist them without loaning them money? At the end of the day, often a lack of money is not the problem – or at least not the root of the problem. Sometimes people need a loan to fix a problem because of other circumstances in their lives that are out of balance. For example – they own a house and the mortgage payment is more than they can handle. They have poor budgeting skills, or they are out of work.
If you are not comfortable giving someone a personal loan when they ask, try to uncover more about the underlying situation and see if there is a different way you can help. For example – helping them consider ways to increase income, reduce expenditures, or make a big change for the better in their lives.
It’s never easy to be asked for a personal loan. Especially if money is tight at your house, too, you may have to think long and hard before you decide whether to extend credit to a friend or a family member.
The good thing is that with these questions in mind, you can re-frame the request into a conversation about how to help the potential borrower, while protecting yourself and keeping the peace on the home front.
In this case, I would say be conservative and never loan money you can’t afford to lose.
Have you ever had to borrow money from friends or family? How did it work out?
Have you loaned money before? Did you get paid back? What tips can you offer other would-be lenders?
I’ve loaned money in a business situation before, with everything in writing and a car as collateral, and I’m still having trouble collecting. Read my collections story here.
Popularity: 10% [?]
What’s Happening Out There With Stocks Down, The Economy Down, and Retirement Looming?
Posted by: | CommentsAmericans face uncertainty in deciding where to go next with stocks down, and less money to invest
With bad news on the economy flying around the newsstands, through the airwaves, and across the blogosphere, it’s easy to get frozen by information and paralyzed as we wait for the other shoe to drop. It’s easy, in times of uncertainty, to rely on behavior modeled by others to help us decide what to do next.
The problem is, as I mentioned in my article on retirement planning last week, "the masses" are uneducated and/or undisciplined in their retirement preparation, and not the people to follow. When mimicking the behavior of others, it is wise to first ascertain whether your target for emulation is headed in the right direction.
Bank of America Study Reveals Economic Downturn Affects Savings and Retirement Preparedness
In a recent (November 2008) survey of 1000 Americans commissioned by Bank of America, researchers confirmed some common-sense concerns about the impact of the economic recession on our financial behavior.
- 60% are spending less than they did 3 months ago
- 51% are saving less than they did 3 months ago. 20% of Americans say they are saving "much less"
- 23% of respondents say the ‘impact of economic turbulence on their retirement savings’ is the issue that concerns them most.
- 68% of respondents with a retirement account have not withdrawn funds from their retirement accounts, but 18% have withdrawn funds prematurely, 75% used the funds to pay for credit card bills, mortgage payments and/or to cover income shortages from recent job loss.
- 43% of Americans anticipate more years in the work force than they did a year ago.
- 62% of the general public was behind or had not started saving for their retirement, up from 53% in March 2008.
- 68% have not changed the way they save, invest or manage their retirement investments in the last 3 months.
- 59% don’t know how much they need to save in order to maintain their current lifestyle in retirement.
- 47% of retirees believe their retirement savings won’t be enough or are uncertain of whether they will have enough money to cover their financial needs.
- 42% of Americans do not work with a financial advisor.
What does this data tell us? Let’s connect the dots…
Spending is down, savings and investments are down, uncertainty is up, and folks’ concern about their preparation for retirement is up.
Let’s take these issues in order.
1) Spending is Down – GOOD! Let’s keep it that way.
Personally, I think it’s good to see people reducing their spending. A credit-fueled spending blitz has fueled our economy for years. I viewed this behavior as unsustainable (How many years can you spend more money than you make before your debt comes back to bite you?) and am glad to see it on the wane. It shows that people are able to effectively tighten their belts and cut back on excesses that are detrimental to the financial health of their families.
I admit that belt-tightening Americans are not good for the economy as a whole. Overall, the American economy is better off when we all spend freely, but the individual is better off when he spends prudently, saves aggressively, and invests moderately. This blog is aimed at helping YOU – an individual person – with your retirement goals, it is not aimed at improving the American economy!
2) Savings and Investments are Down – That’s not good, but it may not be the wrong choice.
Americans may have found that they are unable to take advantage of the great investment opportunities in the stock market and real estate market now because they are cash-poor. Job loss, salary freezes, and reductions of working hours can all contribute to a smaller discretionary spending budget and create a situation in which money previously available for savings and recreational spending must now be redirected toward day-to-day necessities.
When money is tight, reducing or eliminating investment savings programs may be the best choice.
As I explain in my book, you should not be investing if you can not afford to keep your funds in a long-term investment vehicle like stocks or real estate, for at least 5 years. If you can’t afford to invest, don’t try to force the issue by putting money into retirement plans which you may have to withdraw later at a stiff penalty rate.
If your budget is uncomfortably tight right now, you may be better off keeping your emergency funds fully-funded and putting your excess savings into savings, money market accounts or short-term CD’s until you know better what the future holds for your family.
The good news, even if you can’t afford to invest now, is that in my estimate, we’ll continue to see good buys in the real estate and stock market for a while yet. My concerns, though, are that the current financial turmoil is highlighting a problem we need to address, and we’re not taking the hint by changing our behavior. The problem being – our lifestyles are too expensive relative to our income levels. We need to trim the fat during lean times, but good times or bad – our budgets should still allow room for savings and investment.
If you find yourself suffering from a temporary income reduction, it’s OK to stop saving for a little while. But consider the long-term ramifications on your retirement plan if you stop spending altogether for a period of years or months. If you are in a situation where you are so cash-poor that you may not be able to save for years, it’s time to consider a serious lifestyle change so that you can begin to put 10-20% of your income into savings for retirement on a regular basis.
If a drastic change is needed in order to this – say, starting a business, getting a second job, selling your house, or finding another way to slash costs – NOW may be the time to implement this approach. Why wait a year or two to "see if things get better?" You can be ahead of the game if you start now.
3) Uncertainty is Up – Is it safe to move, yet?
When people get uncertain, scared and worried what happens? They get scared of making a mistake, so they do nothing. They hole up and wait out the storm – waiting to make a move until it’s "safe" to do so again. That’s why, when the stock market is up, everyone jumps on board because it looks like a safe investment; and when the stock market is down, everyone bails out because they’re afraid it’s not safe.
In this case, fortune favors the bold. People who are willing to get educated, and make moves even in the face of uncertainty can often face rich rewards.
If you’re not afraid to do so, and you have the money to spare in your budget, consider this a great buying opportunity in both real estate and the stock market. Warren Buffet is.
The stock market tends to over-react and can underprice itself when people feel bearish. The stock market is very emotional. Step away from your emotions, and use your head. Look at the numbers and see where the good buys are.
Real estate is a slow-moving beast. With foreclosures up, there are lots of banks doing short sales and selling REO’s. However, no one wants to buy in a falling market and see their newly-purchased real estate continue to drop in value. To enter the market, start looking for smart deals that represent a discount off of the current market value. (If you buy a house at 80% of market value, the market can drop 20% before you’ve really "lost" anything.) Negotiate hard, and look for properties that cash flow, so you can afford to hang on in the face of a slow recovery.
4) Anxiety about lack of preparation for retirement is high.
Well, this one is not surprising. Of course people feel less prepared for retirement when the value of their retirement assets drops 20% in a matter of months. They ARE less prepared, and for those near their retirement time horizon, or worse, those who have retired in the last five years, the effects of the recent market downtown are even more pronounced.
The youngsters who have years until they retire should be jumping up and down, excited about the buying opportunity that has been presented early in their investment career. We 20-somethings should be stocking up on stocks now, in my opinion!
For the folks who are closer to retirement, the only remedy is increasing their level of savings to make up for the losses suffered in their portfolios. They’ll also want to consider re-balancing their portfolio’s to make sure their level of risk and liquidity meets their current financial needs. (E.G. Too many stocks/mutual funds makes a portfolio more volatile, and folks who are unable to afford this volatility should reduce their exposure to stocks.)
Consider professional help
42% of us are not working with a financial advisor and 59% don’t even know how much we’ll need to retire. I think everyone’s philosophy must be "I’ll just save as much as I can, and hope that it’s enough, when the time comes."
Anyone who’s studied goal-setting probably would advise against this strategy as the best way to prepare for a successful retirement?
With longer life expectancies now, why aren’t we spending more time preparing for an active retirement?
What’s the psychology or life circumstance that’s stopping us from doing what we should?
Are people afraid to go to a professional advisor for fee of bad advice? High costs/fees? Getting a sales pitch? Do we think we can do it better ourselves?
I admit that I don’t use a professional advisor because I’ve spent hours reading, talking to people, running numbers and otherwise educating myself on personal finance. I keep tabs on my numbers and am confident of where I’m going. How do you feel about your situation? I really want to know!
Emily
Popularity: 11% [?]
Have you contributed to your Roth, lately?
Posted by: | CommentsI was reading an article yesterday by a financial advisor for financial advisors. The author, Evan Cooper, mentioned a recent teleconference he had hosted in which he reminded his 1,000+ listeners of something I had always known, but which came across as frightening when he described it…
He succinctly defined the changing state of retirement plans in America: Institutionally-managed defined benefit plans (like the golden parachutes the Big 3 car companies in Detroit seem to have been roped into supplying for all of their employees) are going the way of the Dodo bird, and Americans are now banking their retirement on the performance of their defined contribution plans, like 401(k)’s and IRA’s. The problem is, that EXPERTS are no longer managing the money, WE are managing our money. And many regular Americans have NO IDEA how to go about this. They have not been trained or educated to build their wealth through their retirement plan, and they don’t seem to recognize the necessity – the gravity – of getting this taken care of now.
That’s the part that scared me. There are a bunch of us out there who are banking our future wealth and lifestyle as retirees on something we may not be good at doing.
We Don’t Know What We’re Doing, And Our Future Depends On It
The statistics clearly show that we, as a country, are pretty poor at delaying gratification for future benefit.
We don’t exercise as much as we should. We eat things that are bad for us. We don’t floss regularly or go to the dentist every six months. We don’t save money… heck, we’re learning that one the hard way at the moment as our national economic crisis proves.
The problem is, just as we are suffering as a nation from over-use of credit, we’ll soon be suffering from under-use of savings and investment plans. As the number of retirees with defined benefit retirement programs decreases and employees who’ve been depending on defined contribution plans begin retiring, we may see a massive shift in the income level of retired seniors.
The point of Evan Cooper’s article, which I mentioned above, was to alert financial planners to the tremendous opportunity that lies before them.
Now that workers are solely responsible for their own retirement plans, many may need the services of a financial planner more than ever to help them navigate the world of IRAs, 401(k)’s, Roth IRA’s and related investment opportunities.
Does this apply to you?
The proof is in the pudding – have you been managing your retirement assets correctly? Do you know you’re on track for your own retirement? If not – take heed – learn how to change your behavior or hire someone to help you change – otherwise the price will be dire as your earned income tapers off in your retirement years.
Can you find a good financial planner, yourself?
Even if you’ve decided to go with a professional, hiring a financial planner is no easy task.
The field is muddled considerably by salesmen who get paid every time you buy something, be it a stock, mutual fund, annuity or insurance policy and whose own best interest (selling their products and creating trading activity) are often in direct conflict with your best interest (buying the best, low-cost products and holding on to them for long periods of time).
As you search for a place to invest, you may also find a number of fund managers who will manage your money for a percentage of your portfolio’s value. This can be a good business model, but often the "hot" managers one year are stone cold the next, so look for funds and investments that have a long track record of performance.
Don’t be afraid to ask potential advisors how they get paid. If you just need a little advise or a financial check-up, I would talk to a flat-fee (charge by the hour) financial advisor who can objectively review your portfolio and does not have an incentive to steer you in a certain direction (toward products he sells).
Personally, rather than trying to "beat" the market, I try to "own" the market and invest through Vanguard.com’s low-cost mutual funds. I highly recommend starting your investment plan with them. They are low cost, low-minimums, fully online and have a great web site with a lot of informative articles to help you understand the basics of putting together an investment strategy.
The Important Thing is To Do Something
At the end of the day, you just need to make sure that you’re addressing the issue of preparing for your retirement, rather than burying your head in the sand when it comes to looking at your personal finances. When it comes to retirement planning, TIME is an equal or greater tool than EARNINGS, so even if you don’t earn much now and can’t save a lot, it’s still a good idea to save something to put away for your future. My best advice: Start NOW.
Contributing money to an IRA – Roth or Traditional – is a great place to start. I like the ROTH for younger people and those who expect to be in a higher tax bracket when they retire than they are now. If you need help running the numbers on which retirement program to choose, drop me a line and I’ll see if I can help.
Maxing out your Roth IRA each year is a good goal to shoot for. I wouldn’t necessarily suggest that your ROTH be your only retirement vehicle, but if you can’t save much to start with, it’s probably one of the best place to set aside money to put into investments. (The other best place is your 401(k) at work, if you get an employer match). The nice thing about a ROTH, rather than a 401(k) is that you have complete discretion about where to invest your Roth, and usually the investment choices through your employer’s plan are more limited.
It All Comes Down To You
At the end of the day, planning for a successful retirement comes down to you and your commitment to doing something now to take care of yourself (and your family/spouse) down the line. You can learn about it, read about it, hire someone to tell you about it, but you have to make a change and set up a regular savings and investment program in order to start seeing results. Let the historically low stock market prices we’re seeing today be an incentive – a motivation – to get into the market at a great time and prepare for some great returns down the road.
So – how ARE you doing?
Let me know how you’re doing with your investments… are you falling behind with your retirement savings due to the slackening in the economy? Are you building up your cash reserves to insure against job loss? Are you BUYING MORE right now since stock is ON SALE CHEAP?
Tell me how these economic times are affecting your retirement plans and let me know how I can help you refine your strategy to meet your goals!
Yours In Prosperity!
Emily
Popularity: 12% [?]
The Recession’s Here, Let’s Cheer Up and Look at the Bright Side
Posted by: | CommentsEven though they changed the definition of "recession" – the word is out – it’s official – we are in a recession and have been since December 2007.
Understandably, this can be depressing news – especially around the holidays.
Lighten the economic mood in your house with these sunny ideas:
- It’s time to start saving money, again! After years of living beyond their means, many Americans are looking at this recession as an opportunity to tighten their belts and start living within their means! This takes frugality and self-discipline, but it’s a doctrine I’ve been preaching for years. Wouldn’t it be funny if the national savings rate went up during this period when everyone feels they have less?
- We can focus more on people and experiences, and less on things! This is especially true during the holidays. This Christmas, I’m putting a real focus on looking for fun EXPERIENCES, rather than pricey presents. Instead of spending my weekends stuffed into the shopping mall, battling crowds and circling in search of parking, I’m heading out to festive holiday activities.
Here are some ways to enjoy Christmas without spending a lot of money
- Christmas caroling in friendly neighborhoods or at other events that draw people – this is a great one to do with friends.
- Hand-making gifts or baking to share warm feelings with friends and family
- Going out to see the "Christmas Ships" – sailboats that put lights on their masts and sail around Lake Union and Lake Washington, here in Seattle
- Attending or hosting an Advent Dinner, like my Grandmother’s traditional "Second Sunday in Advent" candle-light dinner. She makes a great "candle" salad for dessert… a piece of lettuce on the plate, with a ring of pineapple on it, then a half banana sitting vertically on the pineapple, like a candle. She tops it with a dollop of whipped cream and half a cherry – for the flame.
- Having my son participate (for the first time!) in the church’s Christmas Pageant. If you don’t have kids, go watch someone else’s perform!
- Driving around to see the Christmas lights at night – our newspaper publishes a list of well-decorated neighborhoods to visit.
- Writing people meaningful cards/letters rather than sending gifts
- Remembering our abundance and donating time or money to help those less fortunate – giving gifts to a family in need, helping out at a soup kitchen, etc.
- Giving the gift of time with a gift certificate under the tree from us. We like to give "play dates" in my family – we’ll take you out hiking, invite you over for dinner, rent a kayak and spend a day paddling, or other fun activities, rather than giving a lot of "stuff." We also enjoy getting "coupons" for things like free babysitting, a car wash, pressure washing the driveway, weeding the garden, or other things we don’t enjoy doing ourselves.
- Getting together for movie night! Cider and popcorn are great companions for some classic holiday films!
- Spend time with someone who is alone for the holidays – enjoy A Cup of Christmas Tea!
- Go see the a display of gingerbread houses or make some yourself!
- Listen to some holiday music albums while you decorate your Christmas tree. I like the old-fashioned religious music, not the pop Christmas tunes on the radio.
- I just heard about The Cinnamon Bear – a great old Christmas radio show you can listen to with your kids.
- Nail down great investment opportunities. When everyone is looking the other way (watching out for chunks of sky falling, probably!) you can scoop up great bargains – the stock market and real estate market are where I’m focusing, but there are lots of great deals on cars and computers right now, too.
- Go Green! Even though I’m kind of against the whole environmental movement (I’ll save that for another post… but I’m not convinced a) that there is global climate change, b) if there is change that human’s caused it and c) that we can do anything about it to make it better if we are the culprits, and d) that we can avoid spending WAY too much money on TRYING to fix it…), I am an environmentalist to the extent that I am a frugal waste-not kind of lady. Whether your motives are "Green" for the environment, or for the color of money, tighter budgets are a good reminder to turn down the thermostat when you’re away from home and drive less.
- Some businesses are up — Find Them. There are plenty of people that do well in recessions. Charles Atlas built his fitness empire during the recession. My uncle who is an attorney who works in collections and bankruptcy is doing well. Folks who clean up REO houses before the banks sell them probably have more business. My dad knows a guy who sells an information-product on Bankruptcy… he’s making a killing. (I’m trying to set up an interview with him, so stay tuned for more information…) If you’re concerned about money or your job security, consider what industries may be doing well right now, and decide how you can become a part of them.
Popularity: 8% [?]
Warren Buffett’s Buying Stocks – Maybe We Should, Too
Posted by: | CommentsOne famous quote from Warren Buffett, the renowned billionaire investor and founder of Berkshire Hathaway is: "Be fearful when others are greedy, and be greedy when others are fearful."
After years of sitting by the sidelines with his money in bonds – while the U.S. Stock market rose to unprecedented levels, and the real estate market did the same – Buffet is now primed in a cash-heavy position to be able to get out into the stock market and scoop up bargains, now that a recession is upon us.
According to Buffett’s recent op-ed piece in the New York Times, Buffett recognizes the deflated stock market as a buying opportunity. Although he can’t predict whether the market will go up or down in the next year or so, he knows it’s down now, relative to historic levels… and he’s buying. He anticipates moving 100% into U.S. equities before too long if market trends continue to keep prices attractive.
Likewise, 3 of the 4 indicators on Ben Stein’s website (the website is a follow-on to his book, Yes You Can Time The Market, which I profiled earlier this year) indicate that the stock market is undervalued and the S&P 500 represents a good buying opportunity.
If you’ve been thinking about how to invest in the recession – maybe Warren Buffett is the guy you should be emulating right now.
Be Well and Be Wealthy!
Emily
Popularity: 8% [?]
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