Looking at the Way We Spend Money

David Podley and Noble Acuff talk about why this recession feels different than other recessions of the past.

First, this recession may be the first many people have been through. People who graduated after the tech bust of 2001 may not have seen a real

People tend to have a short-term memory about other recessions. First, when we’re in the middle of a recession it’s easy to forget that they have always come to an end. When we’re in the middle of a thriving economy, we often forget that a recession may be a few years away.

This is a recession where several industries are falling apart. Banks, car makers, and service providers are all struggling.

Every time we see a boom or a bust, people say, “This time is different.” When the economy is booming, we say, “This is different. The rules have changed.” But inevitably, things slow down. When they do, people often say the same thing, that things have changed.

On the macro scale, things are different right now. But on the micro scale, it’s not. On the macro scale, the banks are re-thinking their lending practices (to say the least). On the micro scale, people are making decisions at home of what to spend their limited resources on. And yes, many people are worried about either finding a new job or keeping the one they have.

The tone from politicians hasn’t been very positive. In the last week or two, politicians have changed from saying the economy is only going to get worse to saying it’s going to get better. This shift has helped people relax a little bit and there’s a little less stress out there.

Recessions can becomes a self-fulfilling prophecy. As people hear that the recession is going to get worse, they slow their spending, thus causing the recession to get worse.

There has been a massive correction in spending as people have shifted their spending from having a savings rate of 0% up to about 5%.

You can download this episode of the FrugalPod Podcast by clicking this link. You can also subscribe to the FrugalPod Podcast in iTunes by using this link that opens iTunes and clicking on the “SUBSCRIBE” link on the page that opens or by simply opening iTunes and going to the Music Store and searching for FrugalPod.

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David interviews Ramit Sethi, author of the newly released personal finance book I Will Teach You To Be Rich and blogger at the website that shares the same name (IWillTeachYouToBeRich.com).

Although the title Ramit chose for his website and book sounds like a scam, his book is full of practical advice on getting ahead and living a life where you’re making financial decisions that suit the life you want to live.

This is different than simply cutting expenses. His goal is to get people to cut mercilessly on expenses that don’t matter to you so you can feel comfortable spending lavishly on those things that do matter.

You can’t out-frugal your way to be rich
According to Ramit, most of what we hear in the personal finance realm is that we need to stop doing things. Stop going to Starbucks. Don’t go on vacation. Or Stop spending on things that matter to you. His advice is to cut everything you don’t really value so you can afford those things you do.

Frugality vs. being cheap

• Cheap people focus on cost while those who are frugal focus on the value of things.
• Cheap people have a fixed-pie mentality, think there’s only so much money out there. They don’t see that they can either earn more or adjust the pie so that it doesn’t fee as constrained or small.
• Cheap people go to a restaurant and put in $8.00 for a $7.95 meal.
• Frugal people focus on the value of something and ask whether the value and cost line up.
• Frugal people recommend going to a restaurant they can afford.

Personal finance is not about more and more will-power
Most people aren’t saying, “I want to be more frugal.” They’re saying, “I want to be more secure in my finances.” Many people say, “If I just try harder, I’ll be able to save more.”But how is that working for you?

We do need to change our behaviors and attitudes, but we need to realize we have too many choices. Because we have so many options, often we do nothing.

In order to combat this, Ramit suggests automating your financial life and to attack two areas of discretionary spending and reduce them by 25% to 33%. Over a period of six months, you may be able to re-direct several hundred dollars into savings or investments.

Buy a la carte
According to two researchers from Stanford and UC Berkeley, people over-estimate the frequency they use their gym memberships by 70%. The average person in the group spent $70 per month on these memberships and actually go to the gym 4.3 times per month (once a week, not every four days like they thought).

What’s interesting is that these people could have spent $10 each trip on a day pass and saved $32o per year.

Bank charges are a killer
Banks will negotiate on the fees they charge in order to keep you. It cost the bank a lot of money to acquire you as a customer, so losing you over a $25 charge doesn’t make sense to them.

You can download this episode of the FrugalPod Podcast Interview with Ramit Sethi by clicking this link or you can subscribe to the FrugalPod Podcast by using this link that opens iTunes and clicking on the “SUBSCRIBE” link on the page that opens.

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Where were you in the recession of 1980-81? What about the one in 1991-1993? If you’re like many of the FrugalPod blog readers, you were young enough that you weren’t affected too much by the downturns. You didn’t lose a job because you probably weren’t working.

Since this may be the first real downturn you’ve experienced, you may be facing feelings and thoughts you haven’t felt before. In particular, this may be the first time you’ve had to tighten your belt and cut spending.

If this is your first downturn, there are a couple of things that may be helpful to remember.

First, recessions are temporary in the United States. The U.S. economy has shown itself to be incredibly resilient and recessions usually don’t last more than a couple of years.

Second, recessions can be an excellent time to re-think your career path. If you find yourself laid off, it may be a time to think about starting a business or trying something new. Look at growth industries that boom when the economy turns around. Technology, and personal or professional services fit this category. Environmental technology or services to help people live “greener” lifestyles may take off as well.

Third, as difficult as it is, try to be thankful for what you do have. I encourage you to write five things each day that you’re thankful for. I’ve done this exercise in the past and it’s been helpful.

Finally, as Dr. Dilley mentioned in the most recent FrugalPod podcast, don’t dwell on your finances if it’s a tough subject for you.

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David Podley interviews Dr. Joe Dilley about emotions that come up when dealing with tough financial times. Dr. Dilley is a clinical psychologist based in South Pasadena, California.

It’s dangerous to invest ourselves too much into straightening out our finances because we can end up dwelling on either our personal finances or the finances of our country.

Dwelling on finances is easy because we spend money every day, whether on bills, at the gas pump, or groceries. The danger of dwelling on finances is that because so many people are struggling in this area, there is a potential for the dwelling to snowball into almost an obsession.

Specific problems with dwelling on negative things, researchers are finding that we actually burn out the neurons in our brains.

The tough thing about finances is that even people who aren’t obsessive or “dwellers” by nature can find themselves in a deep rumination cycle.

Taking Care of Ourselves
We don’t want to avoid things by not opening bank statements or not talking with our partners about finances, but we want to strategically time when we look at our finances. Don’t open a bunch of bills before going into a stressful situation. At the end of a tough day, it’s okay to take some time to relax before digging into a stack of bills.

Take time to get away from things. Work on your garden, play with your kids, or exercise. Do the things that make you come alive. Sometimes you should even find a quiet space where you’re simply thinking.

Changes in Our Lifestyle
People are staying at home for vacation, entertaining at home, and otherwise getting back to a simpler lifestyle in order to both save money and simply simplify.

Our Past Struggles with Money Can Affect Us Now
Healthy ways to deal with our financial past include getting some good, objective input on your current situation, whether through a financial planner or an accountant, in order to better understand whether you are seeing things as they really are or if you’re unduly influenced by past memories. You may also want to talk with a therapist about past issues to get beyond past economic burns.

You can download this special episode by following this link or you can subscribe to the feed in iTunes here (this will open iTunes).

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There’s lots of talk about one trillion dollars being spent to support the economy. It’s a lot of money. (Here’s a site that offers a visualization of $1 trillion.)

Here are some statistics I came up with:

• If you took $100 bills and laid them end to end (with the short sides touching), $1 trillion would go from here to the moon and back twice, with enough left over to go around the perimeter of the United States.
• The cost to print $1 trillion in $100 bills would be $400,000,000 ($400 million).
• If you filled standard, 40-foot containers with stacks of $100 bills and put them on a train, it would take 209 railroad cars to carry it.
• The weight of the bills would be 22 million pounds (11,000 tons).

 It’s a lot of money, isn’t it?

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A standard financial plan will help you know where your finances are now, where you want (0r need) to be in the future, and how to get there.

Financial plans come in a few varieties.

First, there is the traditional financial planning model where you go in and visit with a financial planner who will work to understand your key goals. For example, you may want to pay off debt and retire at a certain age. This experience is a lot like working with an accountant or a family attorney.

There are many people who use the title Financial Planner but who are more focused on selling a particular financial or investment product. For example, a lot of sales of insurance products are done this way. If the person you’re thinking of working with fits into this category, the person’s advice will be limited to what they can sell you.

In addition to insurance sales, many stock brokers use the Financial Planner title but their guidance will typically be limited to mutual funds or stocks that they earn a commission from.

The other type of a financial planner is a fee-only financial planner. When you work with a fee-only planner, the planner gets paid for their time rather than the product they sell. This often means the planner can be a little more objective in the products they recommend since they can guide you toward investments that do not charge sales fees or have commissions attached.

Some fee-only planners also work as investment advisers. In this model, you would go to the planner and they would write a financial plan for you. During the planning process, you would figure out what average return you would need to make in order to reach your financial goals. Once the plan was complete, the planner would work on building an investment portfolio that would help you meet that average return.

In the planner/investment advisor practice, you will likely pay the planner a fee of about $200 an hour for the financial plan and about 1% per year ($1,000 for every $100,000 managed) for the assets managed under the investment advising part of their business.

If you’re comfortable online, you can look at some of the lower-cost options for financial planning. Ranging from free to about $100, options such as thrive.com provide you with a financial plan generated by a web server. The challenge with these plans is that they don’t provide any professional oversight of the plan. They leave the assumptions of investment growth and the like up to the user.

Finally, there’s the site that is one of the sponsors of FrugalPod: PennyPuddle. PennyPuddle charges $375 for a plan that is written by a professional financial planner. The site walks you through a series of questions about your current situation and goals. Once you’ve filled out the information, you submit your plan and a person reviews your information, writes a report, and then goes over the report with you on the phone.

LINKS
To find a fee-only planner, you can check out NAPFA at this link.
PennyPuddle is found at PennyPuddle.com

Questions to ask a potential financial planner:
How do you get paid? Do you get a commission based on what you recommend?
What is your training or background?
Do you have a list of references?
How long does the financial planning process take?

This podcast can be downloaded through this link or by visiting our page at iTunes through this link.

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I’ve been using Twitter a bit recently (you can follow the FrugalPod stream at twitter.com/frugalpod) and I’ve found the search tool to be fascinating. I’ve been searching for people who have updated their status using phrases suggesting that they’ve paid off some debt.

When I checked the other night, over thirty people had mentioned that they’ve paid some debt off or have made significant progress toward paying off debt. The time stamps on these entries were no older than 12 hours.

I think this is great. I asked one person how she attacked her debt and she decided to go after the smallest balance first. She knew it wasn’t the most cost-efficient way to pay down her debt, but she felt a sense of empowerment by paying things off quickly.

In a recent podcast (found in this post, or here at iTunes) we talked about debt payment and the different methods of attacking debt.

I get excited knowing that people are getting their financial houses in order. Although the current financial situation is tough on a number of people, my sense is that many people are taking a step back and examining their fiances in a way that hasn’t been done since the early 1990s.

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If you are facing a layoff, you need to go through your budget with a fine-tooth comb. Know where your money is going and think about whether you really need something.

Focus your efforts on things that can both cut expenses as well as bring in more money. Sometimes you aren’t going to save a whole lot on an individual bill, but the exercise of cutting your bills puts you in a mindset of reducing your expenses.

If you’re thinking you may be laid off, think about what you can cut in your budget, but more importantly, think about what you will do. Having a plan that will kick into action will prevent you from panicking.

If you are laid off, it’s tempting to take a check from your employer for your 401(k), but this will cause you not only to pay income taxes on the amount, but also a 10% penalty.

When you’re laid off, health insurance is another issue that needs to be addressed. You may be able to buy the same type of insurance your employer offered through somethign called COBRA. This allows you to keep your insurance by paying the entire amount of the plan. If you’re healthy, this typically is more expensive than buying insurance on your own.

If you’re married, you may be able to switch your insurance to your spouse’s employer’s plan, as loss of insurance may be considered an event that allows you to sign up for insurance in the middle of the year with the employed spouse’s employer.

Finally, think about bringing in more money. You may have extra stuff around the house that you can sell. This is also a time when you can sit down and think about what you really want to do. There is opportunity out there for people to sell services that help people save money.

Here’s an article I wrote on how to sell books on Amazon for a profit.

Episode #7 can be downloaded through this link, or you can check us out in iTunes at this link.

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It is easy to get confused about retirement planning, but it’s important to get started, especially if your company offers a 401(k) matching program.

The differences between retirement plans:

401(k) and 403(b) are both employer-sponsored retirement accounts. The 401(k) is offered by companies that are for-profit and the 403(b) is offered by educational institutions and some non-profits. Most of these plans are traditional and tax-deferred, but occasionally a company will offer a Roth 401(k).

Individual Retirement Accounts (IRAs) come in two flavors - traditional and Roth. IRAs are opened by an individual through a brokerage firm such as Schwab or TD Ameritrade.

In an IRA, there are many more options for investments and many of them are lower cost than what’s offered through an employer-sponsored plan. That being said, many employers offer some sort of matching of what you deposit into the account.

If your employer offers some sort of matching you MUST take advantage of this. If you’re not, you’re passing up free money.

Traditional vs. Roth: Traditional retirement accounts are what are known as tax-deferred. This means you invest money in the account before taxes, but when you withdraw the funds upon retirement you pay income taxes at your future tax rate.

Roth plans are the opposite. You pay taxes on the income today but do not pay taxes in the future when you withdraw.

If you withdraw from any of these accounts before the age of 59 1/2 you will pay a penalty on the withdrawal of 10% plus income tax on the funds withdrawn.

When it comes to deciding on whether to pay off debt or investing in a retirement account, if your debt is low-cost (5% or so), it typically makes sense to invest and continue to pay off loans over time while investing as well.

If your debt is credit card debt in the 12% to 18% range, most planners recommend paying off the debt as quickly as possible and investing at a later point.

It is important to think about the emotional benefit of beginning to save for the future. For some, even though it makes more sense to pay off the High rate credit card,  it may be more important to put away money for their future.

When it comes to planning your financial future in retirement  many financial planners assume that your expenses will be about 75% of what they are right before retirement. I believe it makes more sense to assume that you are going to spend about the same amount in retirement that you were spending right before retiring. The tricky thing to think about is what the impact of income taxes will be. On the one hand, in retirement you will no longer have income in the traditional sense of income coming from a job. On the other hand,  you will have income coming from your retirement plans. If these plans are traditional, tax deferred plans, you will have income tax that is based on what you are withdrawing from your investments.

Retirement planning often fails people a when they approach retirement investments by simply putting as much money in ways they can without thinking about how much they will need.  One of the most important elements in financial planning is trying to figure out what the appropriate rate of return should be on your investments. For example, a couple that puts away $20,000 a year in retirement plans but invests in investments that pay either too low of a return or take too much risk may not have as much money as a similar couple would have by investing $15,000 a year in investments that are well suited for their goals.

Episode #6 can be downloaded through this link, or you can check us out in iTunes at this link.

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