Links of the Week

29 May 2011

Here are the links for the week of 5/29 - 6/4:

  • Salon has an article on how hydraulic fracturing ('fracking') can contaminate food supplies.
  • Harvard Business Review has a great article on the ways businesses try to maintain an advantage, by creating barriers to competition.
  • The Boston Review has an intriguing article on what systemic economic, business, and governmental factors are hurting the middle class.
  • Lender Processing Services, a company that services (read: manages) the loans of over half the mortgages in this country, apparently has a fantastically high error rate. Yves Smith explains why. Rortybomb has another great breakdown of why their business is tailor-made for fraud due to bad incentives.
  • Here's a very interesting narrative on what is happening in Europe. The bottom line? The core raison d'etre of government is becoming 'of the banks, for the banks, by the banks' instead of 'of the people, by the people, for the people'. Also, Too Rich to Pay is becoming the new Too Big To Fail.
  • In honor of Prince Phillip's birthday, here are 90 gaffes from his 90 years in the Royal Family. I particularly like 53, 65, and 82.
  • Yves Smith of Naked Capitalism looks at an idea for bankers to have incentives to take only appropriate levels of risk. Right now they have incentives to take dangerous risks and then leave governments (read: taxpayers) holding the bag.
  • Chris Martenson over at ZeroHedge has a somewhat-terrifying post about why he thinks we are past peak oil, why incentives to develop alternate energy sources are insufficient, and what the implications are.
  • ProPublica has a great, easy-to-read piece on what potentially criminal activities were done by financial institutions during the housing boom. This has some interesting implications for society, since we haven't successfully prosecuted any financial institution for what could easily be massive amounts of fraud.
  • Google Advisor looks interesting. At first blush, it seems to be an intuitive way to find and compare different financial products (like CDs or checking accounts).

From Broke to Breathing: Personal Finance 101

26 May 2011

Seven years ago I was a college student, broke and sleep-deprived. I had $10K in student loans, an $8/hour part-time job, and nothing to my name but a computer, bicycle and clothes. $5 teriyaki was a treat. Today I'm a few years away from paying off a house, have 6 months' emergency savings, and no debt.

What did I do?

  1. Reduce my expenses
  2. Pay down debts
  3. Increase my income

That's it. Let's take a quick look at why I did the things I did.

Reduce my expenses

Like most Americans, I like stuff. Movies, music, books, good food, shiny new electronics, etc. However, I also hate giving people my money. So I like finding cheap or freeways to get what I want.

If you are like most people, you have 2-3 expenses that consume most of your paycheck. Two of them are probably housing and food. The third varies, but it is often health care, transportation, childcare expenses, or paying off debts.

Meta-Lesson: When spending money, don't do what society expects. What society expects is often the most expensive choice. Be creative, diligent, and unusual in trying to achieve your goals.

Let's use housing as an example. I don't like mortgages. I especially dislike them when a bank is involved. Why? Because I don't like paying $900,000 over 30 years for a $300,000 house, which is what happens when you have a mortgage. So instead, I arranged a loan through my grandparents, paying them a lower interest rate as well.  I'll probably pay $400,000 for a $300,000 house, and there is no way a bank can ever foreclose on me.

Lesson #1By making modest tradeoffs and being creative, you can save a lotof money for other things.

Let's take books as another example. I've spent $4,000 a year on books before. Now I spend roughly $300 for the same volume. How? I use the library, go to bargain-book sales, and use sites like to get books for $0-$3 instead of $10-$40.

Lesson #2: By focusing on exactly what you want (books to read) and eliminating what you don't want (a new book, in a hurry), you can save a lot of money for other things.

Let's use food as an example. There are dozens of websites that talk about how to reduce your grocery bill. The best advice I've read is to spend 30 minutes each week going over your receipts, and figuring out what you spend money on. Then keep a notepad with the lowest price you've found for your common items, and where you got it. That way you'll focus on saving money on your most common groceries, and probably think of alternatives. If you eat a lot of veggies, farmers' markets and CSAs can be handy. If you eat a lot of meat, knowing a local butcher could save a lot of money.

Lesson #3: Data is power. Having more information about yourself empowers you to change your life. History is chock full of good ideas, if you look.

Lastly, let's use childcare as an example. I don't know much about this, since I don't have kids yet, but my first instinct is to use friends and family. It's how families have taken care of childcare in the old days, and it's highly effective. I'll cover why in a later post, but the key point is that they share your values and are going to be more personally interested in your child's welfare than someone who is just getting paid to do it.

Lesson #4:

Pay down debts

The average American family has $118,000 in debt. $95,000 of that is debt on their house (mortgage, line of credit), $7,400 is credit card debt, and the remaining $15,600 is assorted loans (auto loans, student loans, etc).  That is a lot of money to owe people.

Worse, you have to pay interest on it. Lots of interest. Even a super-nice 5% interest rate on all of that means you pay $5,900 just to keep things from getting worse. If you do that, your debt never goes down.

Debt Meta-Lesson: Do not trust lenders or banks to help you reduce debt, or to help you make prudent financial decisions. It is in their best interest for you to be squeezed for all you're worth.

Debt Lesson #1: Try and stay out of debt whenever possible. If you can't, try to minimize how much debt you take on, and have a plan to pay it off.

This was very hard right after I graduated, because I had no income (yet) and needed to get an apartment, basic furniture, etc. I ended up asking a couple friends to be roommates and buying a small amount of furniture at IKEA. It worked out well for a while, until I had more income to help with expenses. I was definitely living on credit cards for a few months, though.

Want some more concrete tips? Search for 'how to reduce debt' in a search engine.

Debt Lesson #2: Make sure you don't rack up new debts as you pay off your old ones.

This was another hard lesson for me to learn. After I had paid off my moving/apartment debt and had a steady income, I used my credit card to buy an HDTV, computer parts, books...until I realized I would have to pay $500/month for a year to get it all paid off. That's when I realized that I don't have sufficient discipline to handle a big credit card.

Another useful tip: Once you have some savings, ask to get your credit card limit reduced.

Increase your income

For most people, this is hard to do. It also comes with an ever-increasing spiral of time, stress, and worse health. Arguably, you should not expect your income to increase unless:

  • You are significantly underpaid for your duties (>10% under market price)
  • You have skills that let you make significantly more than your day job.
  • You have an aptitude or passion for a career that's more lucrative.
  • You are just finishing up school/training for a new career
  • You have the financial stability (or steely nerve) to try something new and untested.