Be Conscious of Choice and Change

I am honored to have been asked to be a presenter in Fort Lewis College’s Fire Side Chat series.

This post is a compilation of my preparation notes and the resources mentioned during my talk.

Thanks,

Matt Kelly, Personal Finance Coach

If I knew in college what I know now, I would have made more conscious choices about things that affected my personal finances.  My hope for you is that you will make conscious choices and will consider the long-term affect your choices will have on your stress levels and true happiness.

Our choices are driven by our Dreams, Goals, Beliefs, Values, Culture and Lifestyle.  These are powerful forces.  They are able to help us achieve much and they can cause us to unconscious choices too. Consider your motivation regarding where you want to live, what type of home and car you want, will you live with debt, will you use credit cards, what type of wedding will you have, will you marry at all?

The list could go on and on and it is important to note that each choice we make is an effort to make ourselves happy.  Though if we have not consider what makes us deeply happy and peaceful we may be living someone else’s dream.  And no amount of spending will make us truly happy if we are not living our own authentic life.

Change is inevitable: So be prepared appeared in the September 29th edition of the Durango Herald.

Personal Finance Vocabulary:

Here is a link to my personal finance vocabulary document.

Resources:

Use the After Tax Take Home Pay Calculator to find out home much of your income you’ll really have available after taxes.  Because you can only spend what you bring home after all of your taxes have been paid.

Use this calculator to compare the cost of living in two different cities. As you choose where you want to live it is very important to consider the cost of living not just how much you expect to earn.

Knowing what you can expect to earn is critically important to choosing where to live. This report details the median household incomes for the the MSA’s in the US.

Of course how much you earn is also affected by your career choice.  Here is a link to a salary wizard which will help you determine how much you’ll earn based upon where you live.

Housing is typically the most expensive item in your budget.  Where you choose to live determines how much you’ll pay for rent and how much it will cost to buy a home.  The more you spend on housing the less money you’ll have for saving, investing and spending.  This report details the median cost of a home in the MSA’s in the US.

At 17% of household income transportation is the second most expensive budget item.  The Real Cost of Car Ownership is a calculator that can help you see how much transportation really costs. And it calculates how much money you would accumulate if you were to opt not to have a car and invest the difference.

Another look at the cost difference between car-commuting and public transportation is provided by Public Transportation.org in their report Save $9,381 by Riding Public Transportation. In Denver it is estimated that you would save $9,761, slightly above average, annually.

Plugging these numbers into a savings calculator I found that if you invested that $9,761 dollars each year at the end of 20 years you would have accumulated $482,417.14 and with no further investing that money will grow to be just over 1 million dollars in just 10 additional years.

Mint.com Question: As a recent college graduate, I’ve incurred a number of student loans, credit card debt, and a car payment.  After budgeting for my monthly expenses, I’ve found that I have some extra money that I can use to pay off some of my debt.  Where is the best place to start?

My Answer:

I encourage my clients to have no debt because I believe that debt and unconscious spending steal our dreams.

I suggest you begin by taking the extra money you have in your budget and building a $1000 emergency fund so that you have the ability to handle small emergencies.

Once you have your $1000 emergency fund, organize your debts from smallest amount to largest; either on paper or in a spreadsheet.

Take any available money you have and pay down the smallest balance debt.

Once you finish with the first debt take what you were paying on that debt and add it to the minimum payment of the next largest debt – keep that up until you are out of debt.

You’ll find that getting fewer bills in the mail will reduce stress and seeing real progress will keep you motivated.

You are at an ideal time in your life to get out of debt and stay out of debt so that you can work towards living your dreams.

Good Luck,

Matt

This was a great question asked on Mint.com – see my answer and other in the Mint Answers section.

Personal finance coach, Matt Kelly, lives in Durango, CO.  He blogs here at www.debtfreetribe.com and writes a monthly newspaper column called Money Savvy.

Watch this Saturday Night Live skit – Don’t Buy Stuff You Cannot Afford, and see if you can relate?

According to a Columbia study Americans are pretty clueless about energy usage. 

Take this quiz to see how energy smart you are.

Many people believe that they can save energy with small behavior changes.  When in fact these small changes, such as switching off lights, actually achieve very little.  In addition most people underestimated the benefits  of switching to more efficient appliances and autos.

The study surveyed people regarding their understanding  of the most effective ways to save energy. The survey results appeared in the Proceedings of the National Academy of Sciences.

Nearly 20 percent of the people said that turning off lights is the best approach to saving energy.  The truth is that turning off lights affects energy budgets relatively little.

If you can afford make changes the highest energy savings will come from replacing energy wasting autos and appliances with a more efficient ones.  Plus, weatherizing your home.

Saving energy = saving money!

Personal finance coach, Matt Kelly, lives in Durango, CO.  He blogs here at www.debtfreetribe.com and writes a monthly newspaper column called Money Savvy.

Borrowing from your 401(k) is not advisable. Because if you quit or lose your job, you’ll likely have to repay the loan within three months – see your tax adviser to know for sure. If you aren’t able to do that, you’ll owe income taxes on the money, plus a 10 percent penalty if you’re under 59-1/2.

A better strategy is to consider selling things you own to raise the money to pay off your debt.  Also, consider selling anything, except your home, that will take more than 18 months to pay off.

Durango, CO resident and personal finance coach Matt Kelly owns Momentum: Personal Finance.

Why is college tuition rising faster than inflation?

Because colleges and universities can charge more when students and parents are willing to take loans to pay the tuition.

On average tuition is going up at a rate of about 8% per year. Like the housing market before the bubble burst…easy money means higher prices. And a lifetime of student loan payments just isn’t worth it.

Student loan debt has officially surpassed credit card debt.  One of the reasons may be that you cannot declare bankruptcy on student loans.

My advice, go to the best college or university that you can afford to pay cash for the tuition and living expenses.  And even if you can afford to pay cash for an expensive school consider a less expensive one because the Ivies just aren’t worth it.

All life insurance involves paying premiums over time.  If you die the insurance policy pays based upon the terms of the agreement.

I believe that you should have enough life insurance so that if you, or your partner, pass away you can live off the interest.  Assume a 4% return on your investment.

If you need $40,000/year income then you’d want to have 1 Million dollars in life insurance.

Now, cash value life insurance Vs term life insurance.

Cash Value Life Insurance has a savings component involved in the policy.  A portion of your premium is placed in a separate savings account that accrues value over time, which can later be reclaimed if the policy is ended. Premiums for cash value life insurance are typically 7-10 times higher than those of term life insurance. Other names for cash value policies are whole life and universal life policies.

Term Life Insurance covers you for a specific period of time – typically, 10, 15, 20, 30 or 35 years from when the policy starts. As long as you pay you are covered and if you die while the term insurance policy is active, your beneficiaries will receive the amount of specified coverage. They differ from cash value policies in that the  premiums do not partially go towards a savings plan and are much lower.

Stick With Term Insurance – don’t mix investments and insurance.

I believe that you should not mix your insurance and your investments.  Thus, I recommend staying away from cash value policies.  The return on investment is not typically very attractive and you will likely be able to do much better investing the difference between the cost of a term policy and a cash value policy.

This morning when watching TV with my nine year-old son an American Express commercial came on.  This prompted him to ask me about the reward points they were promoting.

His question was, “How much is a point worth?”  Good question, and one I’m not sure most credit card users ask themselves.

On face value the question is a simple mathematical equation:

Points Required to Redeem Reward/Retail Price of the Reward = Point Currency

Let’s look at the cost of a FREE airline ticket purchased with reward points.  The average domestic airfare in the first quarter of 2010 is $328.00. Let’s say that you can get an airline ticket for 25,000 points – this assumes that you didn’t need to use a “rule buster” that costs 50,000 miles.

Based upon our equation, 25000 points/$328 = 76.22 points per dollar.

Since points are earned for each dollar charged on a rewards credit card this means that you must charge $76.22 for each dollar that you can use towards the “free ticket”.

Because we know the typical consumer spends between 12% and 30% more when they pay by credit card we can calculate the real cost of this $328 ticket.

If you were spending 20% more and you charged $25,000 over a year – so you can get the “free ticket” – the true cost of they ticket is $25,000 x .2 = $5,000.

Want to buy a $328 ticket for $5,000?  I didn’t think so – after all you’re smarter than a 4th grader…right?

When it comes to income, debt, and spending habits it can be difficult to reveal your true fitness. Thakor has good advice, “When you’re willing to take your clothes off in one way with each other, you should be willing to get financially naked as well,” she says.

I think that the more open and honest a couple can be early in their relationship the more successful they can be in establishing a solid foundation for their future.

Check out the website or book.

Financial institutions and lenders are marketing debt. Why?  Because they make lots of money when you are in debt.

Don’t believe me that they are marketing debt?  Check out these three examples:

1. Credit has become a media topic. Take for example this CNN Money article, 6 steps to improve your credit score and it’s accompanying graph about how to get the perfect credit score so that you can get the best rates on homes, autos and credit cards.
2. Visa commercials telling you not to pay with cash because it slows life down.
3. Look at your mailbox and how many pre-approved credit card offers are crammed in there every week.

So what can you do?

1. Don’t believe that your “I Love Debt Score” (FICO Score) means anything about who you are as a person.
2. Stop believing the lie that credit is better than cash.
3. Stop the unsolicited credit card offers by calling 1-888-5-OPTOUT (567-8688) or visit www.optoutprescreen.com for more information.