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Create A Financially Happy New Year

Any time of year is a great time to make resolutions but today, New Years Day is the day that most people traditionally take a look back and reflect on the good and not so good in the prior year. It’s a time to take stock, to make changes and take a long term view of what you would like to achieve in the upcoming year. This year has been a difficult one to say the least – bank failures and rescues, stock portfolios down about 40%, ever increasing unemployment and housing depreciation - making us all feel a little bit anxious and less wealthy.

With all that economic turmoil, I believe many more people may be thinking about how they can increase their financial knowledge and create a sound financial plan for the future. I have compiled a list of top financial resolutions - some are on my list and I hope these ideas will help you have a happy and financially healthy new year!

Control your expenses and stick to your budget. You are more likely to face financial problems, if you have been extravagant in your expenses. However, in a bid to tide over the current crisis and also avoid such crises in future, adhering to some basic financial disciplines – such as making a budget and sticking to it is one of them. Its hard to live within your means, eliminate debt and accumulate wealth if you don’t know where your money goes. A monthly budget is crucial part of any plan – it helps to track what you spend to see where your money is going. There are several good tools out there – Mint, Quicken, Mvelopes and SimplePlanning are just a few online tools to get you started.

Take control of your investments. What is the worst thing you can do in this recessionary environment? Panic and pull all of your money out of your investments! Therefore, resolve to protect your finances as the market storm rages on. Take this time to build up your emergency fund, and set reminders to regularly review your portfolio’s asset allocation. Ask questions of your advisor and know what investments you are in. If you don't understand the investments, maybe you should not be in them.

Become debt free. Gather all your credit card statements and other outstanding bills and make a list that includes the interest rates, total amounts you owe and minimum monthly payments. Pick the credit card with the highest interest rate and begin paying it off. After paying off all the debts, try to only use credit cards for essentials. For other purchases, use cash or a debit card. Resolve NOT to get another credit card in 2009. Also, resolve to STOP using your credit cards for everyday expenses and use only in an emergency.

Save more. If you already have a retirement account as well as an emergency fund – continue to save just a little more. If you are not withholding the maximum on your 401K – then increase it by 1% to 2% - you won’t even notice the difference in the amount you take home. If you don’t have a retirement account, start now by saving at least 10% of your take home pay. An easy way to do this might be to have a set amount automatically withdrawn from your account every month.

Have an emergency fund. As I have recommended before, you should have enough cash to cover three to six months of living expenses to tide over a family crisis or meet unexpected expenses. Your emergency funds can also come handy in case of a job loss.

Give back. Establish a regular charitable giving plan. Give of your time, treasure or talent to a cause that you care deeply about and that cause you angst. For me, its women focused organizations that I care deeply about and want to give to. We as a nation spend to feel good – when we feel down – we shop. I believe that those same good feelings one gets from buying "stuff" can also be gotten from giving your money to a cause you care deeply about.

Know yourself. Try to take some time for introspection each month. Do you know what your priorities and values are? Does your spending reflect this? Is impressing your friends and strangers one of your core values? If it’s not, then why is that expensive leased SUV sitting in your driveway? Start to know yourself and what is important in your life and build parameters so your life and money line up with those parameters.

I came upon this quote (author unknown) and thought I would share since it resonated deeply with me. I am going to try to remember this quote every time I get caught up in the deeply embedded consumerism in our society.

"The real measure of your wealth is how much you'd be worth if you lost all your money."

Happy New Year To All Of You!!!

Lessons From Wall Street's Biggest Ponzi Scheme

What can we take away from the Madoff Scandal? For most of us, the name Madoff a previously unknown name, has now become a household name – sad but true. For those of you who have not yet heard, let me give you a quick summary of what has been described as one of the biggest Ponzi schemes yet to hit Wall Street!! Madoff, the founder of the Bernard L. Madoff Investment Securities LLC, and a former Nasdaq stock market vice chairman, allegedly ran an elaborate Ponzi scheme with clients of his firm and did so for many years at the loss of potentially $50 billion. A Ponzi scheme is an illegal investment vehicle that pays off old investors with money from new ones, and is dependent on a constant stream of new investment. The invested capital is not earning a sufficient return on its own, and as such, the schemes eventually collapse. Read about the original famed fraudster, Charles Ponzi.

Madoff told employees last Wednesday that the firm had been “insolvent for years, and had lost $50 billion” and that “he was finished” and that “it was just one big lie”. Madoff’s hedge fund catered to the ultra wealthy and had $17 billion in assets. His clients were “sophisticated” people, and include some of the world’s biggest banking institutions (HSBC, RBS), hedge funds (Fairfield Greenwich Group $7.3 billion) and many super rich and famous (a charity of Steven Spielberg’s). They had no idea that they were being fooled and that they money they invested just vanished – poof! Gone. A lot of money has been lost.

Am I surprised about the epic proportion of this scandal – not really! And I find it sad that I am not in the least bit surprised by the scandal maybe because of what has been going on in the markets –especially the US housing market for the last year. So, given the Madoff scandal, what can we take away?

No one cares more about your money than you. Along with that comes a big responsibility. No manager or financial planner should be given your money without the proper initial and ONGOING due diligence!! I was in the acquisition business before and I was always very careful with the due diligence I performed on pending businesses that we were going to buy or do business with and I feel this is no different.

Do not base financial decisions on what your friends say and do. It seems to me that too many people in this scam were following the herd mentality – all the country club members were investing with Madoff, he seemed like a nice enough guy – heck he was even Jewish like me – so why not invest with him? Everyone else is investing and they seem to like him and the returns, so it must be the right thing to do!!

If something sounds to good to be true, it probably is. Madoff’s returns were too consistent, too smooth and should have raised a red flag.

If someone can’t explain their investment strategy in terms that you can understand, then you should not invest!!

What I Wish My Mother Had Told Me

Lately, I have been thinking about how my mother raised me and how I differ in raising my own children. When I look back on my childhood, I realize my mom taught me many things – such as the importance of brushing my teeth and making sure the house was clean. But she never taught me the basics of keeping my financial house in order!! Now that I have two young daughters, here is what I am doing to teach them some basics:

Always spend less than you earn. I think part of what we are seeing now in the broader economy is massive deleveraging in companies as well as in households. People tried living beyond their means and took on too much debt and now are in the painful process of realizing the consequences of those actions. So with this in the background, I am very aware of trying to teach my children to live within their means and not incur debt as they get older.

Pay yourself first. I love this one and think it is by far one of the best pieces of advice you can give your children. Before you sit down to pay your bills each month – pay yourself first – 10-12% of your take home earnings and put it into a savings account.

Pay off your credit card bill in full each month. Realize that compound interest is costly! Compound interest is the practice of taking an interest charge and adding it to the balance of your loan. This means that you pay interest on your interest charges, as well on the principal of your loan. Compound interest works in your favor in your savings account but against you with credit card debt. You can use this calculator from Credit Card Nation to figure out how long it would take to pay off your credit card debt.

Know that your credit score can affect more than interest rates. If your credit score is less than 620, you will pay significantly more for mortgages and other types of loans. But you could also pay more for car insurance. In addition, an adverse credit score could impact your ability to lease your dream apartment. Review your credit score periodically.

Don’t try to keep up with the “Joneses”. Yes, their friends may have a bigger house, a pool and every toy or amenity possible BUT they also may have a huge mortgage and credit card debt as well. I have been talking with my children about how to be thankful for what we have and that money is not the key to happiness!!!

Now more than ever, I am focusing on the basics of what money can do such as buy things we need and how it can be used to secure a solid financial future but it can’t buy health or happiness.

Establishing An Emergency Fund

This morning the US job numbers were released and they were ugly and worse than expected. As reported this morning, nonfarm payroll jobs fell by 533,000 in November and put the unemployment rate at 6.7% - the highest in 15 years. Most economists are expecting the unemployment rate to peak next year at 8% or more next year. This number is much worse if you include involuntary part time workers – it is more likely 12.5% if these underemployed are included.

Are you prepared if you were to lose your job? One of the most important things that you can do is ensure that you have an adequate emergency fund established. The general rule that I try to live by is to have 3-6 months worth of expenses to pay for the essentials should something happen.

Figure out how much you really need in your emergency fund. This is different for everyone – examine your needs and income. Calculate your monthly expenses – include food, housing (mortgage or rent), transportation, utilities, & entertainment. Don’t know what you are spending, try Mint.com’s free online budgeting service!!!

Add some extra padding just in case something happens – such as your hot water heater breaks.

Start now by adding to this emergency fund – because emergencies don’t wait!!

Stash this money somewhere you can get it quickly – in high yield savings accounts, money market accounts or short term CD’s.

Do not touch this money!! This is your financial safety cushion should something devastating happen – it should not be used to satisfy wants.

Time To Go On a Diet

I know that after the Thanksgiving holiday, I always want to go on a diet….and this year is no different. However, this year I am going to go on a different type of diet – the DEBT DIET!! I am going to go on this diet prior to the Christmas shopping season so I don’t end up with bulging credit card bills just aching to be paid right after the holiday.

A few months ago, I would not have had second thoughts about taking out my credit card and splurging for gifts during the holiday season. But now with the financial crisis as a backdrop in my thinking, I feel that too much credit is dangerous to my financial health. Just this morning as I read an article in the Wall Street Journal about how the "wealth effect" impacts our spending habits, I knew that most Americans were probably feeling the same way and were contemplating ways to curb their debt habits and reign in their spending.

So how can you go on a debt diet? The solution is very simple – spend less than you earn and trim expenses where you can. Then you just need to put this into practice. First, you will need to take an honest assessment of where you are now in terms of your debt to income ratio. One of the ways to calculate your financial health is the debt to income ratio. This is determined by adding up all your monthly debt payments and dividing by your total monthly income (after tax). It should look something like this:

Monthly mortgage payment or rent
Monthly car payment
Monthly student loan payment
Monthly revolving credit (furniture & appliance loans)
Monthly home equity loans
Monthly credit card payment
Monthly child support
Total Monthly Debt Payments

Monthly net income (pay after tax)
Any other income (bonuses, etc)

Most lenders will tell you that a debt to income ratio of 36% or lower is good but I suggest working to bring it down to 30%.

So for example, you are trying to figure out if you can afford a mortgage payment of $1500 per month, you would add up all your other monthly debt payment and the proposed mortgage payment of $1500 and divide this total by 36% to get a minimum monthly income number you would need to stay in a debt range that would be comfortable for the average person.

But remember that as your situation changes you will continually have to re-evaluate your debt and income situation. If you add on additional debt, you will have to recalculate your debt to income ratio and the same goes for any changes to your monthly income.

Credit and debt are very powerful tools that allow you to buy a house or send a child to college but too much debt can pose a serious problem to your financial health. Not only do you have to keep up with your debt payments but you lose the opportunity to use money to build wealth for the future. Just like any diet, part of the answer lies in making do with less. Painstakingly cut expenses and increase your credit card payments (if you have a balance) so that you can start preparing for your future.

Role Modeling for Your Children

I am sure you have all heard the saying, “children learn what they live” – and as parents we all strive to impart strong values to our children. If asked, most of us would agree that children learn a great deal by imitating behavior of others – both positive and negative. While I believe that children look to media for role models, I still believe parents have a tremendous amount of influence in their children’s lives – especially if they intentionally role model positive behavior. Most parents probably strive to role model the following behavior: honesty, integrity, compassion, trustworthiness, respect, fairness and citizenship – which are all noble.

But what about financial role modeling?

Have you thought of how important it is to model sound financial behavior to your children? I believe that the financial crisis we are now experiencing can be attributed (in part) to a lack of sound financial education. We have failed as a nation to understand that our poor financial behavior has consequences. A lot of us believe that money is the source of all happiness and we lacked the responsibility to live within one’s means. The situation that we as a nation find ourselves in presents the perfect opportunity to start talking to your children about money NOW. Help your children realize how their behavior has consequences – and then help relate it to financial decision making.

Children don’t learn basic money management skills in school, so it’s up to us to teach them at home. I guarantee if you take it upon yourself to familiarize your children with money management, the effect will be powerful and lasting. If you feel you don’t know where to start, I have outlined a few things you can do to get your children on the right path towards healthy money habits.

Give Them An Allowance. I believe the purpose of an allowance is to help your children learn how to MANAGE their money. It is to be used as a tool by children not by parents to control behaviors. Decide upfront what you want to teach via the allowance? What type of values can you help instill with the allowance? What money values are important to your family? For instance, are you trying to teach budgeting skills or independence? Or are you trying to teach them the importance of savings and giving to your family’s causes? Be clear about your expectations with your children – what do you expect your child to learn through the allowance? Hold them to it.

Open Up A Savings Account. Open up a savings account with your children – at an early age. When they get money for allowance, birthday parties or other monetary presents, have them take a portion of it to the bank. Have them fill out the deposit slip. Explain the very basics of banking and let them see their balance each time. My daughter is expected to save 20% of her allowance and any other monetary gifts.

Model Good Behavior. We have a tremendous amount of influence on our kids and they will try to emulate our behavior. If they see us buying everything we want, without thinking – then we should expect nothing less than for them to have the gimmies all the time. So the next time you are shopping with your kids and you see something that you really want, talk with them about how its’ something you would really like to buy but that you are going to delay the purchase and/or maybe buy it for a special occasion. Talk about the choices with them – you can either buy it now or wait to see if it goes on sale. When you go to the ATM machine, explain that the money is stored in the bank and is not free but rather it is from the hard work that you and daddy do. If you use a credit card, explain that you are only “borrowing” the money and that it has to be paid back and that you also get charged for borrowing the money.

Talk About Family Choices: First, determine what your family values are when it comes to money. Do you believe as a family that you should only buy necessities and that luxuries are wasteful? Do you believe that life is worth living now and saving money can wait? Or does your family believe that a portion of what the family earns should be used for a good cause? Use your family values as a guide when you are talking with your kids about money. For example, instead of saying “no” at the toy store or supermarket – use this as a teaching moment. You could say things like, “if we get this now, then we will not be able to have our family dinner out on Friday night” or “you know that we as a family only like to buy what we need and save luxuries for a special occasion”.

Increase Responsibilities as They Grow. Give your teen a clothing budget. If your teen goes to the movies, have them pay. If they are old enough to drive, have them buy gas. Before they go off to college, make sure then know how to handle a credit card – I suggest getting them one while they are living with you. Get a low credit limit and have them pay the bills.

Connect Work With Earning Money. Children need to know where money comes from and we can help them connect work to earning money. This is very helpful in establishing and developing good work habits, discipline and understanding the need to make hard choices. If we start early, it is easier for children to master these skills than those who have never been required to work until after college graduation!! Here are some easy ways to help your children connect work and money: hire them for household projects such as washing and vacuuming the family car, organizing closets, shoes, etc.

Start today by talking with your children about money and keep the conversation going. Model sound financial behavior. The more formal and informal lessons you teach your children - the more financially stable and happier they will be in the long run.