Wealth...Uncomplicated

Quick Note: Wealth...Uncomplicated Sparse, TodayForward Blog Daily

Please note that posts on Wealth...Uncomplicated are at an all time low as a result of the workload at my day job - building a personal finance web application.  Between now and the time we launch TodayForward, I expect that posts here will continue to be sparse.  However, our blog for TodayForward will be very active with posts each business day.  Over the next month or two, we are focusing our attention on investment, retirement, college, and emergency fund planning - the first 5 of 21 areas of personal finance we're building into the application.

I would be very pleased to have you subscribe to our corporate blog at TodayForward and whether you follow here or there, you can expect to be invited to become an alpha tester this summer as we ramp up for public release later this year.

Thanks again for your continued support, and I look forward to seeing you at TodayForward.

Sincerely,

Michael Harr

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To join the TodayForward waiting list, click here.

The Financial Planning Process for Debt Elimination

Dear Five Cent Nickel Readers,

Thank you for stopping by Wealth...Uncomplicated where from time to time, I post articles designed to help you move forward with your finances. Since the post that brought you here was about how to get out of debt, the following is a bigger picture view that applies the financial planning process to the elimination of debt. It is through this process that results are achieved, for personal finance has, is, and always will be a journey rather than a destination.

Also, feel free to bump around the site and if you like what you see, I'd be honored to have you as a subscriber. Either way, thanks again for visiting Wealth...Uncomplicated.

Debt and financial planning are rarely used in the same sentence - particularly in the professional community - because there simply isn't any money in it. This is an unfortunate truth, but for those of you in debt up to your eyeballs, the financial planning process is exactly what you need to extricate yourself from the burdens of debt.

What is the Financial Planning Process?

As with any process, there is a series of steps that put together lead to results. The base financial planning process is just six steps:

1. Gather Data
2. Set Goals
3. Analyze Current Condition
4. Develop Possible Courses of Action
5. Implement Plan of Action
6. Monitor Progress

While this is a pretty standard setup, let's take a look at how this applies to getting out of debt.

Gather Data

When it comes to debt, the data part is pretty simple. You need to know your after-tax income and a complete run-down of your debts. To do this, here's a simple spreadsheet to host your debt listing:

Download Budget and Debt Worksheets - Open Office

Download Budget and Debt Worksheets - Excel

Set Goals

Obviously the goal with getting out of debt is to get to zero. However, it's a little more complicated than that as not all debts are created equal. There's everything from the uber-expensive payday loan to low-interest rate, tax deductible mortgage loans. For this reason, it's best to set a series of goals rather than a single goal of 'Get to Zero by X Date'.

An important reason to set interim goals is that you need to feel like you're making progress. If you simply say, "I want to be debt free," you risk thinking negatively about your progress. In other words, a series of smaller wins is what leads to the big win in the end.

A common way to break down your debt goals is to do it by category - e.g. payoff all store credit cards, payoff all major credit cards, payoff all student loans, etc. Some also group debt into 'good' and 'bad' debt types. 'Good' debt usually includes low interest rate loans that also carry favorable tax treatment like mortgages and student loans. 'Bad' debt includes just about everything else.

Regardless of what your goals are, set checkpoints along the way that will help boost your confidence and move you forward towards a debt free life.

Analyze Current Condition

In this step, you need to examine your current financial condition. Moreover, you should also figure out what the underlying issues are that put you in debt. Let's begin with some conditions that need to be addressed prior to pursuing a debt elimination plan.

Do you have an income problem or a debt problem? This is critical because income is the engine with which debt elimination is made possible. If you find that after stripping away all but the most basic monthly expenses, you still cannot meet your minimum payments, you have an income problem that must be addressed prior to attempting to payoff your debts.

Do you have a systemic expense problem? Sometimes you'll find that even after cutting discretionary expenses to the bone, there still isn't enough money left to feed your creditors. If you're making decent money, then you likely have a systemic expense problem rather than an income or debt problem. Systemic expenses are those that you pay each month that don't go away. The two largest are housing and transportation which impact more than ten different line items in your budget. If you're committed to too much house or too much transportation, think very hard about downsizing one or both. It makes getting out of debt a much easier proposition.

If neither of the two above apply, how did you get into debt? Whether it be overspending, medical bills, inadequate insurance, a death in the family, or some other issue, you need to include in your analysis a history of how you came to this point. Whatever the issue, be sure to start thinking about ways to avoid recreating the circumstances that led you to your current position.

Develop Possible Courses of Action

Now that you have your data, goals, and current analysis, the next step is to develop some possible courses of action that will lead you to your goals. With this step, there are generally three basic plans of action that you should explore. The one you choose should be dictated by your personality and not the mathematics.

The most intuitive approach is to payoff the highest interest rate debt first and then work down the list from there. This type of plan will always yield the best results if you follow through with the plan. Of course, that's a big if. This plan is best suited for those with a great deal of self discipline and an analytical/mathematical mind.

The next approach is to payoff your debts from smallest to largest and is the same way that Dave Ramsey advocates. The main reason for using this approach is that by paying off smaller debts first, confidence is boosted along the way - meaning you're more likely to continue paying balances down. Aside from this, there is a mathematical benefit as well in that if you have a large number of debts to repay, knocking off the smaller debts reduces the number of payments and thereby the number of potential late and over the credit limit fees.

Finally, another way of going about getting to zero is to payoff your debts based on the payment-to-balance ratio. This method has been popularized by John Commuta, creator of the Transforming Debt into Wealth System. The gist of this system is to payoff the highest payment-to-balance ratio debt first and move down the list from there. Your total of payments never comes down until you are completely debt free which for most will be between four and seven years. It also relies on a kind of 'initial' push to get going, but once in full motion, it's a very powerful way to eliminate debt. This approach will have appeal to systems-oriented and impetuous personality types. Systems folks will love the ratios that lead to ever accelerating debt reduction. Impetuous types will enjoy the fact that they're using a system that's somewhat 'outside the box' and different from the traditional mantras.

Regardless of the plan of action you like best, list your debts in the order in which you'll pay them off. Before paying off any debt, it's a good idea to set aside $1,000 to $1,500 in cash to cover the minor emergencies in life and to sell some 'stuff' to help you get a fast start. At this point, you should have your debts listed in order and have a pretty good idea of how you're going to pay them off.

Implement Plan of Action

With your plan in hand, it's time to go about the hard work of implementing your selected course of action. This is the most challenging part of the exercise, as making the 'rubber hit the road' is always more difficult that creating a plan. During this phase (which can last months, years, or even decades), remember to focus on your goals and concentrate your efforts only on what is in front of you. In other words, don't get distracted, keep your eyes focused on the task at hand.

So what are the steps to get out of debt? According to your plan, you know what needs to be paid off at any given time, and all you need to do is find as much money as you can each month to reduce that balance. If that means that from time to time you need to pick up an extra job, get another job. If it means you need to cut back or eliminate certain expenses to get the job done, do it. The bottom line here is that you need to do whatever it takes to keep moving forward.

Invariably, situations will arise that will knock you off track. When these things come up, don't think about your debt, but tackle the issue at hand. Sometimes this will be an unexpected expense or a temporary lapse in judgment. No matter the issue, handle it first and then re-focus on your debt elimination plan.

While this post won't allow for the exploration of all of the ways to implement your plan or how to deal with setbacks, there are three habits that you will find of great use:

• Write and Recite - when you wake up, at each meal, and before you go to sleep each night, read aloud your #1 most important goal - e.g. I will payoff my American Express card
• Dave Ramsey Daily - love him or hate him, this guy knows debt and listening to his free podcasts daily will help you keep your focus while delivering some ideas on how to accelerate your debt elimination plan
• Find Your Voice - unlike previous generations, talking about your situation with friends and family isn't a taboo thing; by speaking about your debt plan and progress, you can create a greater level of accountability to help you stay on target

These are the three best habits that I can recommend to you and you'll see that they are all based on the stuff between your ears. There is a very good reason for this - your success or failure rests entirely in your brain. If your mind is constantly working over how to move forward through the 'Write and Recite' habit, you'll find ways to achieve your goals. With 'Dave Ramsey Daily', you'll enjoy a like minded audience and learn more about debt and people than you can imagine. Finally, by 'Finding Your Voice', you will be able to materialize your goals among your peers that will no doubt help you in staying the course - not to mention helping others improve their finances along the way.

While implementing your plan, if you can develop the right habits and fundamentally change the way you think and interact with debt, you'll be miles ahead of where you are today. The three habits listed above will go a long way towards changing your mind which will, in turn, change your behaviors for the better.

Monitor Progress

As with any plan, you need to take a few minutes from time to time to monitor your progress. If you're using a spreadsheet to track your progress, be sure to record the balances owed when you begin working your plan. This will establish a baseline to help you determine how much progress you've made. When you get a chance to listen to Dave Ramsey on a Debt Free Friday, you'll here stories of people that have paid off insane amounts of debt in relatively short periods of time. It is a major motivator to see that your hard work is paying dividends, so be sure to look not just at what you've done in the last week or month, but what you've accomplished since you began.

What if things are going badly? Ouch! If things are trending the wrong way, there must be bigger or newer problems from when you crafted your plan. When this happens, go back to the beginning and start over. Identify the reasons things are going the wrong way and fix that first. The fact of the matter is that debt is a symptom and not the disease. Until you root out the disease and treat that first, debt will continue to pile up.

Closing Thoughts

Eliminating debt is a pain in the backside to be sure, but becoming debt free is a deeply fulfilling accomplishment. Talk to anyone that's paid off a lot of debt, and you'll find that no matter the pains involved in pursuing a debt free lifestyle, it's always worth it in the end. When was the last time you heard someone say, "I wish I had more debt!" Umm, I'm guessing...never.

As a final note, if you are in debt and would like to use a new technology to help you through the financial planning process, my company will begin an initial test of the debt elimination portion of TodayForward on April 26th. We are inviting a limited number of folks to test the solution in advance of our public release. To sign up to become a test user, click here to join the waitlist. Testers are asked to provide suggestions and criticisms to help us improve the solution and may use the application for free through the testing cycle.

The Case of the $13,000 Telephone Line - prime example of inefficiencies at work

A story on Yahoo! brought to light a rural Washington state issue involving telephone lines that are paid for in large part by the federal government (meaning you and I).  The cost?  How does $13,000 per line per year sound?!  I'm all for giving people in rural areas some help to connect with the rest of the world, but $13,000 per year?  That's ridiculous!

Here's an alternative:  HughesNet home service costs $59.99 per month along with $300 for setup costs.  The company offers high speed satellite internet service to rural residents in the states and with the likes of Skype, Vonage, Magic Jack, and other connectivity technologies, home telephone and internet service can be made available to the Washingtonians for a tiny fraction of the cost.

What's the cost differential, you ask?  Here it is:

$59.99/mo.  x  12 months  =  $719.88 annually

$13,000.00  -  $719.88  =  $12,280.12 saved annually

Did you catch that number?  $12,280.12 can be saved annually by giving these residents voice over IP service and full access to high speed internet.  I'm sure that HughesNet would appreciate the business and I'm sure that I'd appreciate the savings.  Wake up, government!

A Positive Spin on Today's Health Care Reform - Democrats made it happen, Republicans to make it right

As expected, the Democrats were able to push through health care reform despite growing public opposition.  The price Dems will pay for this is unknown, but it would not be surprising to see Congress move to center or even a little to the right in the November elections.  In my view, a more positive view, I say thank you to the Democrats, but it's time to bring in the Republicans.

If you take a moment and go back to the beginning of the health care debate, there were two massive problems:  (1) limited availability and (2) rapidly increasing costs.  The bill that President Obama will sign into law today does a very good job with the first goal and a horrific job on the second.  Coverage will expand from what is currently 84% of Americans to nearly 97% once the legislation is fully implemented.  However, the cost of this expansion is estimated at $1 trillion over the first decade - a price that we obviously cannot afford.

Hooray!  We Have Access!

For all of the politicking and rhetoric, President Obama and his party made good on health care reform.  They did it their way, and the results are far from surprising.  Did you expect that expanding care wouldn't cost an arm, a leg, or as it is, a trillion dollars?  We knew it would be expensive, and this legislation isn't perfect, and probably isn't even close to good, but it is a step in the right direction.

DOH! We Can't Afford It

To this end, the Democrats did the job that Democrats do - initiating social reforms.  Now, it is time for Republicans to do what Republicans do - shave costs.  Rather than try to fight the bill or attempt to have it repealed, the Republicans would do well to huddle up with conservative Democrats and find ways to reduce the price tag through a series of well targeted legislation.

The country is tired of spending money (the Tea Party isn't going away).  There is a groundswell of support for anyone running on a platform of fiscal discipline, and now is as good a time as any to work on the cost structure of this health care reform.  To date, we've reformed access, now it's time to reform costs.

Looking back on the debate leading up to the passage of this bill, the Democrats walked the talk of expanding coverage.  Now it's time to see if the Republicans can measure up by walking their talk of fiscal discipline.  Will it happen?  Couldn't tell you.  This is just a positive spin on today's health care reform/gargantuan spending bill (depending on your perspective).

How Good is Your Advisor?

In an article from FORTUNE, research was exposed that basically says that financial advisors are yes-men and -women.  Having been in the advisor community for over a decade, I can assert that these findings fall in line with my observations throughout my career.  While there are many reasons for this that range from advisors simply not knowing their business to advisors wanting to be well liked by their clients by avoiding confrontation, the bottom line is that advisors say 'yes' far too often.

In the most recent decline, many advisors found their clients' portfolios poorly positioned, following a trend of investors without advisor relationships that invested too heavily in equities.  Obviously this led to a great deal of turnover for advisors as clients sought out more conservative advisors to hopefully 'avoid making the same mistake twice'.  What has actually happened for most of these investors is they've traded one mistake for another.

When the market was moving ever higher, many clients thought their advisors were doing a great job.  When the market tanked, their advisors were worthless.  Those that have changed advisors are doing nothing more than finding another yes-man or -woman to make them feel comfortable.  This is a problem - a big problem.

As the market rebounded, these investors that found another advisor to confirm their beliefs (even if the beliefs are wrong) re-positioned assets into more conservative asset classes.  The result was a missed rebound that cost investors a great deal of money.

So, how good is your advisor?  If he or she was fighting tooth and nail to keep you invested through the downturn and subsequent rebound, give them credit where credit is due.  If he or she had you selling after the market collapse only to miss the rebound, fire your advisor today.  The value of an advisor is not in making you feel good about what's going on, it's about helping you make smart decisions along the way.

When the market's hot, a good advisor will call clients and tell them that the market run-up presents an opportunity to rebalance.  When the market is in free fall, a good advisor will help you to hang on.  The very best advisors are those that educate, communicate, and stand tall in their convictions.  A simple yes-man or -woman is nothing more than an expensive anti-depressant - they make you feel good, but ultimately don't work and cost a lot of money.

Where Overdraft Fees Come From and A Better Process to Eliminate Them

The short answer is that overdraft fees come from spending more money than what is available in a checking account, but in an article from USA TODAY, they had a nice graphic that tells us how these overdrafts are transacted.  It should be no surprise that debit cards were number one on the list - generating 41% of all overdraft fees.  Here's the full list of how overdraft fees are created:

Overdraft Source	Percentage
Debit Cards	41.0%
Checks	30.2%
ACH/Electronic Debit	14.2%
ATM	7.8%
Other/Unknown	6.8%

The evolution of the 'free' checking account owes much of its thanks to the rise in debit card overdraft fees estimated at $15.785 billion last year.  Compared to the old model of checking accounts with monthly fees of $5 to $12, the banks have come out well ahead by offering 'free' checking accounts.

These are certainly big numbers, but what's troubling on this list is the 7.8% of overdrafts created at the ATM.  It seems to me that if there's no money in the account, an ATM should simply decline the transaction.  This is exactly what consumers have been saying for years, and it looks like Citibank, Bank of America, and others are finally coming around to giving up their overdraft fees from ATMs (most of it anyway, you can still opt-in to paying these fees).

By the way, if you want to reduce your overdraft fees, the best things to do are:

1. Pay all bills through your bank's online bill pay service - rather than having a check floating out there that you might forget about, the money is debited on the day the payment goes out.  No more sneaky checks coming through for an overdraft fee.
2. Separate your discretionary spending from your bill paying - if you boil down how much goes out in recurring bills versus how much you need as 'walking around money', you'll see that 70 or 80 percent of your money is gone before it ever gets to your wallet.  Setup a single account for recurring bills and a separate one funded with automatic transfers for your day-to-day expenses.  This way, you can manage a much smaller amount of money and eliminate overdrafts coming from checks and electronic withdrawals (44.8% of all overdraft fees).
3. Use cash instead of your debit card - if you're not using your debit card, you can cut your total risk of overdraft by 41%.  Find a bank with convenient ATM locations and go there instead of using the plastic.

My wife and I have been using this system for a long time, and as you can imagine, no overdraft fees.

The Process at Work

As promised at the outset of this year, it's all about principles and processes.  In this post, we're looking at using a better process in managing cash flows in an effort to eliminate overdraft fees.  If you use your bank's web bill pay, separate your bills from your discretionary spending, and use ATMs instead of debit cards, you can take overdraft fees out of your life.

Data Source:  November 2008 FDIC Study of Bank Overdraft Programs

[America] Preparing for a Long Decline - rufreakingkiddingme?!?

The Simple Dollar is a personal finance blog that I read regularly, and its author, Trent is generally dead on with his advice to readers with respect to personal finance matters.  However, this post has me fired up because I think some of the views expressed couldn't be further from the truth.  Here's what has me troubled:

"My belief is that, for the most part, the standards of living everywhere else in the world will rise rapidly to meet the standard of living in the United States. However, I also feel that our standard of living here will probably never grow at the same rate as it did in the twentieth century. In short, I think our growth rate will be much lower than that of the rest of the world and may in fact be a slow reduction over a long period of time."

While it's unlikely that our standard of living will grow at a pace equal to China's current fever pitch, I couldn't disagree more with Trent's assessment that we may face a "slow reduction over a long period of time [in our standard of living]."  I'll spare you the economics lessons, but let's consider this in some common sense terms.

Myth:  Globalization Hurts America

One of the great myths held by the public today is that globalization comes at the expense of wealthier nations and benefits the poorer nations.  This myth has been perpetuated for years based on the same underlying theme of all great myths - myopia.  Indeed, nearsightedness allows us to focus on the job losses of those here in the United States without seeing the broader landscape.

The manufacturing sector has seen a substantial decline here in the U.S. as these jobs have been moved overseas to places like China, South Korea, and Vietnam.  As a result, we have a smaller manufacturing sector and these Asian countries have seen dramatic increases in their overall standard of living.  In fact, more people have moved out of poverty in the last quarter century in Asia than in any other part of the world at any other time in human history.

This is a good thing, a very good thing.

But what about these American workers?  How have they fared?  Well, in the short-term, they're screwed.  A job that was perhaps a career job (got steel?) in the 1970s may not be available anymore or it might have a seriously shortened lifespan.  Pittsburgh is a great example of short run pain when jobs and even an entire industry sees job losses as a result of globalization.

Guess what?  Pittsburgh is in the midst of a major transformation from a steel mill town to one that is driven increasingly by technology and other services industries.  These new jobs pay more than the old steel mill jobs of years past because they require new and better skills that produce more for the economy.  This transformation is what is gained by globalization.

On a broader scale, the net losses in manufacturing versus the net gains in technology and other services industries is actually a plus for the United States.  If you take some time to look at the research, you'll see that offshoring jobs has created billions of dollars in net benefit for American consumers and businesses.

A Slow Decline?  I Don't Think So

If you do take a macroeconomics course or spend a little time to study the subject, what you will find is that real economic growth (net of inflation) is driven by innovation, and it is this particular subject that America is very, very good at.  In fact, many of these Asian countries send employees over here to learn how to be more innovative.  Much to their dismay, the process of innovation is something that cannot be easily broken down into a 'how-to' book or a formula that can be reproduced on a wide scale.

So what is innovation in economic terms?  It's any kind of change that increases the productivity of workers.  Railroads were a pretty big innovation in the 19th century.  The light bulb and telephone were pretty solid.  That thing called the interweb was pretty good too.  Each of these things allowed us to be more productive workers and the result was an increase in real GDP and real wages (the source of increased standards of living).

I'm not certain that anyone knows what exactly causes Americans to be better innovators than the rest of the world, but I like to think that it has a lot to do with the way our country is setup.  We have tremendous personal liberties.  Our nation was built on concepts that lend themselves well to free thinking and collaboration.  Beyond that, we have some of the most highly developed financial markets in the world.  In short, we thrive on free thinking and have the money to convert those ideas into productive innovations.

A long decline...in America...rufreakingkiddingme?!?  Not while I'm still above ground and sucking wind!