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Personal Finance

Ads: Credit report monitoring scam

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A reader e-mailed to say he had come across an ad on Funny for one of those outfits that proposes to provide free credit reports from all three reporting agencies, but which hooks you in to a subscription whereby you end up paying a monthly fee for “credit rating monitoring.” Please be careful. Do not order “free” credit reports from any such lash-up: it’s a scam. While you do get the free credit reports—which you can get for yourself online very easily—paying someone to monitor your credit reports is unnecessary.

Here’s why: By law, each of the three credit reporting agencies, Experian, Equifax and Transunion, is required to give you a free credit report once a year. Because there are three agencies, you can monitor your own status, for free, simply by asking for a report from one of them every four months. If you then  review your bills and checking account statements each month, you will protect yourself just fine against identity theft. For free.

To get free credit reports without anyone trying to lure you into an expensive scam, go to AnnualCreditReport.com. This site was commissioned by the three credit reporting companies to provide the three annual credit reports mandated by law. You can request your report online, by phone, or by snail-mail.

You don’t have to ask for all three at once. So, if you order one in January, one in April, and one in August, you can cause the system to monitor your credit rating, allowing you to check for anything strange on a regular basis. It’s easy to put reminders in Outlook, iCal, or even Quicken to tell yourself when to call up a new report and which agency to ask.

Apparently different ads come up on different computers. I haven’t seen any such advertisement on my Mac; otherwise I’d get AdSense to block it.

How does your (financial) garden grow?

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Over at A Gai Shan Life, Revanche has been contemplating the degree to which her investments have recovered from the late, great economic crash. In comparison to the pickle we were in just a few months ago, even “not great” returns look good!

Coincidentally, just a few days ago I happened to take a look at my own funds’ performance over the past year or so…the first time I’ve had the heart to do so in a long time.

My big IRA, which is professionally managed, has been doing a lot better the past couple of months. Between mid-September and mid-October, it increased by a healthy $4,288. The taxable Vanguard funds increased $1,623 over the same period.

The high point reached by all my scattered investment holdings (not counting real estate) occurred in April of 2008. As of about three days ago, the value of all my non-realty investments had dropped by $110,470 off that high. However, I used about $20,000 to pay off a small second mortgage on my home, and so the real difference in value is about –$90,470.

The low point occurred in March 2009. The most recent figures show a gain of about $49,145 from the low point. Again, we need to remember that I made that $20,000 withdrawal in May 2009, and that some of the gain consisted of contributions to the 403(b).

The total package of investments, then, has a ways to go before my illusory riches come back. I certainly don’t expect to regain the remaining $90,470 of the retirement savings that evaporated in the economic meltdown anytime during 2010, even if I succeed in leaving the funds untouched. Really, I’m pleased just to recover that $49,000.

What a ride we’ve had, eh? How are your investments doing? Are you seeing any sign of life yet?

Reprojecting next year’s income

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Obsessive again, I spent another day and a half rehashing, in a desultory way, next year’s income and outgo. And worrying. Worrying worrying worrying: can I make it?

It appeared very much as though I could not. In 2010, projected discretionary and monthly unavoidable expenses, all told, will run about $30,075. Net income from Social Security, teaching, and GDU’s one-time payout for unused vacation time would come to about $26,200. The problem is, the $14,160 that Social Security will allow me to earn in 2010 before a 50% penalty kicks in is just too little for me to live on.

Cutting costs every which way from Sunday (my expenses have already been cut significantly, preparatory to unemployment) brings the estimated outgo down to $27,675, still more than projected income.

The goal, BTW, is to avoid taking a drawdown from savings next year, so as to allow the investments in my major savings instruments to recover from the crash of the Bush economy. With that constraint, there was no way income was gunna exceed or equal outgo, no matter how many numbers I crunched.

Dang!

Well, this morning a dim light dawned. The community college district issued my first full paycheck, which for the first time showed state and federal tax withholding. A little English-major math revealed that the total gouge, for everything, is only about 14 percent. I’d been estimating a 20 percent tax bill.

That 6 percent difference will make it possible for me to live on Social Security, my net vacation time payout, and teaching income next year! My share of the Investment House mortgage will be paid from a separate little windfall, and without that $800 a month hit, I should be able to live in something slightly more luxurious than full-out anchorite style.

Without cutting my current $1,200 a month budget for discretionary expenses (some of which are only nominally “discretionary”), I still run in the red, as you can see from the first four columns on the left. However, as a practical matter discretionary expenditures have averaged about $1,000 for the first nine months of 2009, despite several months with large budget overruns. Assuming straitened circumstances will lead me to keep those costs at or below $1,000 a month, I end up just within my 2010 net income—as shown on the right.

Add a $2,500 drawdown from the S-corporation, which I plan to take this December and stash in next year’s survival fund, and the picture looks even better:

In this scenario, if I manage to keep discretionary expenses around $1,000 a month (on average), I should have about $2,740 of play over the course of the year.

So, if no really huge unexpected expenses strike next year, I should survive the tight times of 2010 without undue suffering. It won’t be luxurious, but neither will I have to set up a campsite under the Seventh Avenue Overpass.

Whether 14 percent withholding for taxes will suffice remains to be seen. But that problem will have to take care of itself in April 2011.

By 2011, my investments should have recovered enough to justify a 4 percent drawdown. And the onerous restriction on the amount of earned income Social Security imposes will expire (for me) in 2011, so I can put all of my contract and blog income into the pot. As a practical matter, the combination of teaching, Social Security, and S-corporation income may be enough that I won’t have to draw down anything like 4 percent. I’ll need $800 to cover my share of the Investment House, and that’s only 2 percent of the present investment total. If, as my financial managers think, investments will have recovered substantially by 2011, it may be even less than that.

Hallelujah!

Do you have to be wealthy to be financially independent?

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Going for home
Going for home

I’m such a bag lady. Not literally…but I suffer acutely from Bag Lady Syndrome. You can tell me till you’re blue in the face that I have plenty to get by, but I won’t believe it until the bills are paid and no one has carted me off to the poor farm.

Matter of fact, this morning after I’d run another Excel spreadsheet that showed, contrary to the present optimistic theory, an average shortfall in 2010’s enforced “retirement” of $740 a month, my financial adviser was on the phone, cooing in soothing tones, “You’ll be f-i-i-n-e.” Even though I don’t have anything like a million bucks in the bank, he says, there’s more than enough to supplement Social Security and cover all my expenses for about 50 years, at a 4 percent drawdown.

The other day Frugal Scholar, the professor with the penchant for thrift-store shopping, reported a delightful revelation: truth to tell, she and Mr. FS could rent their paid-for house and retire to Costa Rica. Today. Gone fishin’. Once and for all… If they so chose.

Ah hah! Financial independence: freedom to do as you please, absent the chains of debt.

Many of us, I think, assume that to enter that blessed state we need to have stashed enough in savings to make us wealthy by most anyone’s definition: a million bucks or more. But I beg to differ. With a reasonable standard of living and a paid-for roof over your head, you don’t have to be a millionaire to achieve financial independence and maintain a middle-class lifestyle. A much more modest stash can support you, given the right conditions.

The Scholars appear to be situated firmly in the financial middle class. With the exception of university presidents, certain deans, and the occasional patent-holding bioengineer, academics don’t earn much. At least, not in the larger scheme of things—compared, say, to the owner of a carpet-cleaning service, to a doctor or a lawyer, to a basketball player, or to a twenty-something kid on Wall Street. It’s unlikely that even between the two of them they’ve stashed a million bucks in their 403(b) plans. Yet they are financially independent. They could, if they wished, retire today with little or no change of lifestyle (other than moving to a tropical paradise…).

The first key to financial independence is to get out of debt.  All debt, including the mortgage. You’ll notice that the Scholars had the initiative and self-discipline to pay off their house. In my own case, I’m especially grateful that I managed to do that a few years ago. Because I don’t have to come up with hundreds of dollars every month to keep a roof over my head, now that I’ve been laid off…hallelujah! I don’t have to get another day job!

And the other key? Come to terms psychologically with living within your means. Though I won’t be enjoying the Queen of Sheba’s lifestyle, neither do I expect to move to the poorhouse. The only real “sacrifice,” if you can call it that, is that I will have to drive my fully functional, very nice nine-year-old Toyota a few more years, rather than trading it in when it reaches the ten-year milepost. I will have to earn a few thousand bucks a year to cover my share of the house M’hijito and I are copurchasing, but that can be done  by taking on a couple of easy, part-time teaching gigs. Pay is low, but work is minimal and mildly entertaining.

Debt, particularly mortgage and automobile loans, racks up the largest part of most Americans’ month-to-month costs. Once you no longer have to pay an outrageous slug of interest to keep a roof over your head and wheels under your feet, your ordinary living costs are surprisingly modest.

Financial independence doesn’t necessarily mean not working. After you’ve attained financial independence—that is, your living expenses are low enough that the proceeds from modest savings and other forms of passive income will support you—you’re free to do as you please. If you want to keep working at your job, you can. Or you can take up a more interesting line of work, try to do something less profitable that you’ve always dreamed of doing, or devote your time, energy and skill to altruistic pursuits.

A friend retired from his medical practice with plenty of zing still left. He and his wife spent a year working pro bono at a hospital in New Zealand. Another friend passes his time working for Habitat for Humanity, as does my step-sister. A third decided to become an organist in her old age, an enterprise that led to a wonderful adventure in Australia. With the possible exception of the anesthesiologist and his wife (who by and large live modestly, by Seattle standards), none of these people are wealthy. They live middle-class lifestyles, dwelling in ordinary homes in decent neighborhoods, driving nice-but-not-gaudy cars, staying out of debt, and generally doing as they please…within their means.

Image by Gargoylepni, public domain, Wikipedia Commons

How much financial help to give a family member?

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Over at Get Rich Slowly, J.D. has a great post on dealing with a family financial crisis. Responding to a reader’s question asking how to stay out of the red when you’re faced with a job loss and dwindling statements, he brings up a similar problem his brother faced and is still struggling to overcome, and then he lists several points of good, commonsense financial advice. In the series of comments on this post, readers wandered away from coping with job loss to dealing with financially stressed, often dysfunctional family  members.

There’s no question that J.D.’s debt-avoidance strategies are great advice…but what do you do when the family member refuses to listen to any such advice?

For many years, SDXB (Semi-Demi-Ex-Boyfriend) has dispensed exactly that advice (and more) to his profligate daughter. She’s capable of earning a good living (she’s an RN), but she’s even more capable of spending mightily, and she seems unable to recognize the difference between “need” and “want.” A single mother with four children, she rents $2,500/month houses (in a market where you can get a very nice place for $1,000 to $1,200) so that every child has a separate bedroom…and of course, they couldn’t do without a pool! At one point she had five cell phones (until the provider cut her off for nonpayment). Cancel the cable? Unthinkable! The kids have to have it!! She wears expensive clothes, drives an expensive car, and had an (endlessly) expensive divorce. Three landlords have evicted her, and the repo man broke down one landlord’s garage door in his frenzy to repossess her car.

Already on the brink of financial ruin, she suffered a serious accident resulting in head injuries that made it impossible for her to work. She’s now on disability and our state’s half-baked answer to Medicaid. But she still refuses to budget, will not reconcile a bank account, declines to even try to understand anything about personal finance, and continues to try to live up to means that she no longer has.

SDXB has advised her, gone to court with her, helped her apply for welfare, helped her move, given her money he couldn’t afford to part with in retirement.

In some cases, I’m afraid, there’s a point where you have to stop. When you continue to give a person money while that person continues to indulge in irresponsible behavior, you’re not really helping the person. You may actually be making things worse, by underwriting the irresponsibility.

And while you certainly can’t be telling an adult how to behave, neither are you required to support self-destructive and irresponsible habits. No matter how much you love the person and feel responsible for the person’s well-being, you and your family member may be better off if you lay down some ground rules and stick to them.

What might those rules be? Depends on the situation, o’course. But here are a few possibilities:

• The financially strapped family member agrees to get a job, even if it’s part-time and no matter how low-paid and “beneath” his or her status it may be.
• The person develops a realistic budget that fits his or her current means.
• The person moves into affordable housing. If the person can qualify for housing assistance, she or he will apply for it.
• She or he agrees to eat at home, not in restaurants.
• If the person can qualify for food assistance, he or she will apply for it.
• The person disposes of all credit cards but one, and uses that as little as possible.
• The person gets rid of all but one car and may, if possible, dispense with cars altogether and walk, ride bicycles, or use public transportation.
• The person cancels cable or satellite TV.
• She or he restricts phone service to a land line or to a cell phone—whichever is cheaper, but not both.
• If no jobs are available in the person’s field, he or she will go back to school for vocational training in some industry that is hiring.
• She or he agrees to limit the amount of time spent living in someone else’s home.
• If the person has a drinking or substance abuse problem, that issue must be addressed within a specified period or assistance will stop.

Obviously, if a family member is disabled, sick, or mentally ill, it’s reasonable (maybe even a moral obligation) to provide much more support than you would for a person for a person with training, education, and the capacity to hold a job. My point here is that for a healthy, fully abled adult, responsible behavior should play a part in earning family members’ support.

If I Had It to Do Over: 10 money moves I’d do differently

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Ever think about what you’d do if you could turn back the clock and be 20 again? Though I wouldn’t especially want to live my life over, there are a number of money moves—and decisions that had more influence on lifelong personal finance than I could have guessed at the time—that I’d either not do at all or that, given a peek forward 40 years, I’d do differently.

For example:

• I would have taken advanced degrees in disciplines whose graduates make decent pay.

Can’t say I regret having prepared for an academic career. It has allowed me to earn an adequate (not generous) living after spending way too much time as a lady of leisure. However, I’d never recommend to a young person who wants a life in academe that she or he pursue a doctorate in the humanities. University faculty in business, engineering, and law earn more than those in other disciplines. A Ph.D. in accounting can start at the assistant-professor level with a six-figure salary, and believe you me, that is one hell of a lot more than you earn teaching history or English.

Mind-numbing major? Puh-leeze! What could be more mind-numbing than postmodern theory? Oh yah: postmodern feminist theory! Give me a bag of beans to count, any day!

Knowing what I know today, I’d still want a career in higher education. I would take an undergraduate degree in a humanities discipline that a) interested me, b) would furnish a young mind, and c) would build skills in logical thinking. But at the same time I would take lower- and upper-division courses in statistics and basic college-level math. Then I would get myself an M.B.A. and a Ph.D. in business management, a subject not too taxing for my sketchy math skills. With those credentials—which certainly demand no more work, expense, or skill than the doctorate in English that resulted in a well respected book published through a prestigious press—I’d be earning about twice what I make now.

• I would have started working in higher education early on, even though it entailed having to teach five sections a semester of freshman comp at a community college.

What I didn’t understand, in my callow youth, about that horrifying prospect is that over time community college faculty find ways to evade the most onerous courses and to wangle course release time, just as university professors do. Nor did I have any idea how much more community college faculty here earn, compared to GDU, UofA, and NAU faculty.

Without the fugues into magazine journalism, today I’d be earning a decent income, and I’d probably occupy a layoff-proof job. Or, more likely, I would have retired by now with plenty of savings to support me in the style to which I was accustomed while I was married to the corporate lawyer.

• If I were 25 again, I would insist that my husband include me in the marital finances.

It was easy to tell my women friends to get a grip on their family finances, establish credit in their own names, and know where the money was. But all the time I was dispensing that excellent advice, I wasn’t following it myself! I had no idea where all our money was going, I did not know what my husband was investing our money in or what debt he was obligating us to, and to tell the truth, I never did know exactly how much he earned. Because he deliberately entered false figures in the checkbook, I couldn’t reconcile the bank statements when I tried, and so I had no clue how much we had in our joint account. Nor did I know about the two other bank accounts he’d opened without my name on them.

• I would open my own savings and checking accounts—preferably at an institution other than the one that held our joint account—and set aside part of my paychecks, my freelance income, or (when I wasn’t working) part of the grocery money.

Being my relentlessly frugal father’s child, I was bothered when the husband refused to save for our son’s college education. But he never tried to exercise any serious control over how much I spent. In those days, I paid for everything with checks and often asked grocery-store cashiers for cash back (cash-back policies were more generous then). I could easily have creamed off $100 a month—weekly cash-backs of $25 would’ve gone unnoticed. If I’d started doing that the month my son was born, I would have stashed $21,600 for him by the time he graduated from high school.

My husband also refused to budget; his express reason was that budgeting is for poor people. Consequently I had no control over our spending and no idea whether I was spending more than we had. If I’d put aside money  for myself, I could at least have budgeted independent of his whims and felt more in control of some of our finances.

• I’d use a credit union instead of banks.

Even before banks decided to make a profitable business of fleecing their customers, credit unions were always preferable to commercial banks. Savings rates are higher, checking is free, and service is infinitely better.

• I would have learned about investing early on.

If I’d had a clue about such things as mutual funds (no joke: before I walked from the marriage, I’d never heard of them), I wouldn’t have taken my husband’s private banker’s weird advice to invest a $40,000 inheritance in (hang onto your hats, folks!) one-week CDs! Yes. Forty grand sat in one-week CDs for over a year, until after I ran away, spent three awful months sleeping on the ground in the outback of Alaska and Canada, and finally made my way back to the city.

Yup. I could’ve invested the $21,600 of grocery money in instruments that earned compounding interest, too. Hmmm. Check out this handy-dandy little calculator. Assuming we went ahead and paid for my son’s education out of his father’s capacious salary and so I just kept on investing a hundred bucks a month for him at, say, 8 percent, today he would stand to inherit another $177,395.38.   Ah, coulda shoulda woulda!

Moving on…

• I would have learned and started to use Quicken the minute it came out.

Quicken is the answer to the innumerate English major’s dreams. Not having to add and subtract (something I can’t do reliably even with a calculator) made it possible to reconcile bank statements easily, without dampening sheets of paper with sweat or with tears. Consequently the program allowed me to take firm control of my financial life, in a way that wouldn’t have been possible when every encounter with money involved a daunting episode of math torture.

• I would have learned how to use Excel.

I still don’t know it well enough to free myself from Intuit, which, despite the glories of its Quicken program, rips off customers by issuing ever-more-bloated annual updates that won’t read data in formats more than three or four years old. Excel does everything I need Quicken to do, it doesn’t go out of date, and it functions across platforms.

• I probably would have spent less on my current home’s landscaping.

I’m pleased with the yard and glad to have it, but something acceptable could have been accomplished at lower cost. Specifically, I wouldn’t install such a large front patio (or possibly any front courtyard!), and I would have planted younger, less expensive trees.

• I would have opened a Roth IRA as soon as they became available and maxed out contributions every year.

Though we can add a substantial amount to our 403(b) above and beyond our mandatory retirement contributions, the university matches only 7 percent of our paychecks. IMHO, that makes these highly restrictive investment instruments less desirable than the after-tax Roth IRA, which accrues interest and dividends tax-free and can be passed to your heirs without encumbrance.

My not building Roth savings from the get-go is a function of late-blooming investment knowledge. Which takes us back to item 6: learn about investing early on.

What would you do differently if you could start from financial scratch again?

On this subject, check out Frugal Scholar’s conversation about the most successful things she and Mr. FS did with their finances.