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Are You Seriously Committed To Saving, Or Still Committed To The Short-Term?

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People can't stop talking about the possibilities of a second recession, which may very well be redefined as the continuation of what becomes the broader-defined Great Recession of the decade.

Between talks of European economic crisis and American debt doom, the average man and woman who have to deal with these realities are talking about how to make ends meet. Luxuries of years past have been stripped away, such as two cars in the garage, constantly updated wardrobes, and state-of-the-art technology. But relatively speaking, are these really sacrifices, and do we remain tasked with having to sacrifice much more in order to survive impending economic calamity?

In A Rut Of Self-Indulgence

Despite struggling to make ends meet at the end of every month, I still chuck $100.00 to my mobile service provider in as much time. For what exactly? The essential aspect of a phone is the ability to communicate with the outside world, but not be constantly attached to it, which is what my unlimited data plan encourages me to do. The prepaid phone, even a smartphone model, would cost significantly less by limiting what I can do. Yet I want that unlimited streamlined service, even though I can easily live without it while still having the usefulness of a mobile phone.

Countless families across the country are still stuck in similar ruts of self-indulgence. Consistent credit card bills plus news of a worsening economy plus barely getting by should equal the abandonment of entertainment in favor of austerity. To do anything other than that is logically idiotic. Yet we all continue to essentially waste money on the here and now.

Prioritizing Our Spending

But entertainment and pleasures can't be the only enemy to attack. To be honest everyone needs a night out at the movies and creature comforts during these tough times. We just need to prioritize them much more than we currently do. The major obstacle in our way is not the need for fun and games, which are essential, but our inability to understand the importance of moderation, especially in times like these.

Food is another major source of spending that can probably be seriously revamped by the majority of American families. Studies confirm that American food portions have increased significantly since after the Second World War. Modern American families are not familiar with healthy portions. Reduced levels of food consumption can be hard to commit to for a number of reasons, but it can reduce monthly household spending significantly.

The 2008 financial collapse caused millions of Americans to rethink the way they spent their money. But maybe it will be the unfortunate resurrection of a recession in 2012 that makes Americans realize that “toughing it out” is something they aren't exactly used to. But in tough times, it's an essential part of survival.

The Great Depression Ahead And What You Can Do To Survive

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You may have never heard of economist and wealth manager Harry Dent but many students of the economy have. Harry Dent wrote, The Great Boom Ahead, which predicted the financial bull market of the 1990’s. He also predicted that the 2000s would see the Dow Jones Industrial Average soar to 40,000 but later revised that down in 2006. His predictions are often extreme but for those who believe that history repeats itself, it would be irresponsible to dismiss his predictions as the words of a dooms day profit. He believes that it won’t be long before the world economies will have a financial meltdown not seen since the Great Depression.

What do you need to know about the details of his forecasts and how dire are they? If he’s right, what should you do to protect yourself against this complete meltdown of the world monetary system? Don’t say we didn’t warn you.

Harry Dent

Harry Dent has taken his share of criticism. Although there are a lot of people who make dire predictions in order to get a little face time with the financial media, Dent has years of research to support his claims. Not all of his predictions have panned out but the research behind those predictions is studied by best of the world’s economists.

One of his best known theories has to do with long term spending habits. He believes that once a person has kids their spending picks up and once their children graduate from college spending turns to paying down debt and saving for retirement. According to Dent, spending peaks at an average age of 50 years old. He believes that the baby boomer generation had an average peak of spending in 2009 which represents that top of the stock market for the foreseeable future.

His Predictions

To sum up his ideas, the only reason we haven’t seen a complete economic meltdown is because the United States Federal Reserve continues to print money and artificially stimulate the economy but the banking crisis has left so many consumers and businesses drowning in debt that there is no amount of stimulus that can allow the economy to recover. The only way to recover, according to Dent, is to allow it to correct without the help of artificial stimulus.

Another one of Harry Dent’s theories is that when a bubble bursts, it returns to its pre-bubble level. This, according to him would put the Dow Jones Industrial Average at 3,600 to 5,000. He also sees gold correcting to a price of $400 to $500 per troy ounce and home prices falling significantly more. Florida, Dent’s state of residence may see home prices fall as much as 30% to 35% before the bottom emerges. Finally, he believes that unemployment could rise to as much as 15%. If his predictions are true, this would represent a crisis not seen since the Great Depression. He believes that all of this could begin as early as 2012.

What Can You Do?

If he’s right, first he suggests selling your home and renting until the crisis comes and goes. He also believes that now isn’t the time to believe that the markets will recover if you need money for retirement. Once the crash starts, demand that your financial adviser pull your money out of the market and in to ultra-safe investments. Once the markets bottom out, it may represent the buying opportunity of your life.

Bottom Line

His critics are quick to point out that Harry Dent has made his fair share of incorrect predictions. He may be too severe in his forecast but it’s hard to argue that with the amount of debt held by governments and even more important, individual households presents a problem. Unless the government can find a way to get household debt to a manageable level nationwide, there is very little that can be done to prevent a meltdown. Most economists agree that further stimulus of the financial markets may be detrimental to the markets.

Do you believe Mr. Dent? If you do, you’re not alone. Let’s hope that he’s wrong.

How We Paid Cash For Our New Car

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Over the past 3 weeks my wife and I have been searching for a new car. We hadn't originally been in a hurry to buy a new car, but an opportunity presented itself where we could sell our current car, a 9 year old Honda Civic, at a decent price to a family member. The family member had purchased a Toyota Camry 20 years ago, and it had finally quit on him and was going to be more to repair than it was worth. He decided to cut his losses, save the money and look for a quality car that would last him another 10-15 years. He thought our car fit the bill since he knew we treated our cars well, it still has relatively low mileage, and Honda is known for their reliability.

Since he needed the car within a week or two, we had to start looking immediately. Thankfully because we pay ourselves a car payment even when we have paid off cars, we had the cash in the bank to be able to go and buy a new car on short notice – without having to get paid for our car first, get approved for a loan at a bank, or financing at the dealership.

Paying cash for cars

Paying Cash For Your Car: Not Normal?

We know that not many people nowadays actually do what we do – paying cash for their cars.  Paying for a car is one of the most expensive things most people will buy, right behind buying a house.  If you don't plan ahead far in advance, you won't be able to do it, and financing a car will be in your future.   Who can pay $10,00-25,000 for a vehicle without planning ahead?  Not many people make enough money to do that.

Saving up and paying cash for your cars, while it may not be normal – is a good idea.  After you've done it a few times you'll have enough cash saved in order to buy a nice 2-3 year old used car every 5-10 years, while never paying thousands in interest again.

Car Payments – A Fact Of Life?

Most people just assume that having a car payment is a fact of life.  After all, cars are expensive, and most people just don't have thousands of dollars laying around.    So what is the average car payment?  Dave Ramsey's site recently told us what one study found:

Recent statistics show that one-third of car buyers sign up for a six-year loan at an average interest rate of 9.6%. Among these buyers, the average price of the car is just over $26,000. This means that one-third of the cars you see on the road are dragging a $475 payment behind them.

So 1/3 of car buyers have an average of a $475 car payment over six years at 9.6%.  That means they'll end up paying nearly $33,000 for a  car that retails for about $26,000.  On top of that, the car will only be worth on average about $6,000.  That's quite the loss!  So why not make car buying more affordable, while at the same time freeing up more money for saving and investing?

Buy A Cheap Car.  Work Your Way Up.

So how do you get started paying cash for a car? For me it meant that my first car was a bit of a beater.  My first car was a 1986 Chevrolet Caprice Classic station wagon with 140,000 miles on it.  I saved up the money from a high school job and paid $1500 in cash for it.  It had cigarette burns in the upholstery, and was a gas guzzler, but it was paid for in cash.  That car lasted me a few years during which time I still saved up money for my next car (which would hopefully be a bit nicer).

When the old Caprice died, I ended up buying a slightly more expensive $6000 1996 Dodge Intrepid with 70,000 miles on it.  That car lasted me another 5 years.  When it started having engine problems I traded the vehicle in for a couple thousand, and used that money and the payments  i had continued saving in the meantime to buy my next car, a 2001 Chevrolet Lumina.  I paid $7000 in cash.    That car lasted 7 years, at which time we paid cash for my current 2006 Chevrolet Impala.    We got the money from my old trade, plus the payments we had saved to buy it for $10,995.

So as you can see I've been saving up and paying cash for cars for the last 15 years or so, and never have I paid interest on any of those cars.  Each time we buy a car we purchase one that is a bit newer, and in a bit better shape.  That means the car lasts us longer and we're able to save up more for the next car.   My current car has been with me for only 3 years, and I'll probably keep it for at least another 5-6 years at least.  I've got a number in mind of how much I'll want to spend then.  So in the meantime I'll continue paying myself a car payment until i reach that number.  At that time I'll take that money and start investing it for our future!

My wife has followed a similar process, starting out with an older used Honda over a decade ago, and working her way up to our current 2009 Honda CRV which we purchased last week.

Paying Yourself For Your Next Car, Not The Bank

So the essence of how this whole process works is this:

  • Buy a beater:  Save up and pay cash for an affordable and reliable “beater” that should get you by for a couple of years at least.  Don't forget to save up an emergency fund to cover any auto repairs that may come up.
  • Pay yourself a payment: Pay yourself a car payment instead of the bank now that you have a paid off car.  Use that money to pay cash for your next car.  This car could be a bit nicer and more reliable since you'll be able to sell your old beater for at least some return, plus you'll have they money you've saved.
  • Wash, rinse, repeat:  Save up and pay cash every time you buy a new car.  Every time you do buy a car you'll most likely be able to buy a nicer car as you've had longer to save, and more money to spend.  The newer and more reliable the car, the longer you can own it – and the more you can save for your next car.
  • Invest the difference: Take the money you've saved on interest payments and invest it!

Of course this scenario is going to be different if you're one of those people that prefers to have a new car every few years.  for a slightly different take on the subject, and how you can upgrade your vehicle twice in 20 months –  check out Dave Ramsey's post on the topic.

Have you ever paid cash for a car, or are you considering doing it now?  If not, what has kept you from doing it?

Do You Have Savings In Case Of An Emergency? 1 In 4 Americans Have Zero Emergency Savings

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As the economy continues to be stagnant and the unemployment rate continues to be high, a recent poll by BankRate.com found that still far too few people are preparing for the possibility of a job loss or a long term financial emergency.

Over 6 million people have been out of work longer than six months, yet only 24 percent of Americans have at least six months' expenses in an emergency fund. An equal 24 percent have nothing tucked away for a rainy day. And 22 percent have some savings, but not enough to cover even three months' expenses. Those under age 30 and the lowest-income households were most likely to report having no emergency savings at all.

As the poll found, only 24 percent of Americans have saved a minimum of 6 months of expenses in an emergency fund or saving account of some kind.  To be honest I guess I'm not surprised that in our credit focused society that only 1/4 of people have saved up 6 months of expenses, but to some degree it's still sad that so many people are unprepared.  Are they hoping that someone else – or the government – will pick them back up when they've fallen?  I wouldn't count on it.

emergency savings

 

Why Are Emergency Funds Important?

There are a variety of reasons why I think emergency funds are more important than ever.

Bad Things DO Happen

I think a lot of people have the outlook that bad things happen to other people, or that if something bad does happen, it won't be that big of a deal.   The thing is, most of us are going to have a major negative event at some point.

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

78% of us are going to have a major negative event to deal with in any 10 year period. I know that has certainly held true for our family has we've had to deal with several major negative health events. So if you haven't had one recently, you may be due.

Emergency Savings Help You Bounce Back Quicker

The fact that you have an emergency fund can help you to weather any number of storms from a layoff to a major health event.  While you can't always avoid bad situations, when you have an emergency fund you're able to bounce back that much quicker.  When you don't have an emergency fund the sad fact is that people end up in foreclosure, bankruptcy and other horrible situations I wouldn't wish on my worst enemy.

Why not plan ahead and avoid all those things?

Emergency Savings Give Peace Of Mind

When you  have emergency savings you'll have a lot more peace of mind when the waves start to get higher and the adversity starts showing up.  When you've got emergency savings, insurance and a backup plan, you won't be as worried about some of the bad things that can happen.

Have A Backup Plan

So many have not planned ahead for the negative events that will happen in life.  They don't have emergency savings, they don't have insurance and they are just hoping that someone else will cover the bill for them.  While in some cases that may happen, far too many will find that there isn't anyone there that they can rely on, including the government.

Do you have an emergency fund saved up?  How much are you saving in case of an major negative event?  Why do you think so few people save up in case of an emergency?

7 Creative Ways To Save Money On Your Vacation

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In today’s economy, it’s already hard to enough to scrounge up enough spare funds to take a trip. Then to make matters worse, higher oil prices have sent the cost of airline tickets into the stratosphere and of course driving is no longer an affordable alternative, either. However if you get creative, you still might be able to afford a trip once in a while. Here are 7 ways to save money on vacations – some common while others you might not have thought of!

#1. Skip the restaurants and head for the grocery store
It’s been drilled into our minds that vacations = eating out. But is that really necessary? Even if your hotel doesn’t have a kitchenette, you can still save money by hitting up Trader Joes or a cheap supermarket for some premade dishes – or better yet – bring food with you from home packed in a cooler (if you’re driving). Even if you only do this for half the meals during your trip, you will be saving a tremendous amount of money.

#2. Venture where others don’t want to go
With all the violence in Mexico, package deals for traveling there are looking mighty good these days. Of course, there is a risk/reward thing here, but many claim as long as you stay at the resort you should be pretty safe. If that works for you, then it might be a lot cheaper than traveling to one of those hot Caribbean tourist destinations.

#3. Discounts for students, seniors, military, etc.
If you’re going to a touristy area in the United States – such as Orlando – there’s a good chance that many of the amusement parks, transportation services, and even some restaurants accept discounts for various groups like senior citizens, military, students, AAA members and so forth. So make sure you bring all your cards with you!

#4. Milking a credit card signup promotion
First of all, I would like to say that anyone who has a tendency to get into credit card debt should avoid this tip! That being said, if you can use a credit card without raking up a balance, then there are tons of offers out there for airline and hotel credit cards that might save you some money. For example, the Hyatt credit card is offering 2 free nights at any Hyatt hotel with no restrictions whatsoever. Their rooms can easily run $300 to $500 a night, so the dollar value of the Hyatt credit card offer is significant. For a complete comparison of offers, check out Smart On Money's credit cards page!

#5. Group travel deals
We all know sites like Groupon,  LivingSocial and Moolala are all the rage right now for buying restaurant gift certificates and the like. These group buying sites now offer travel packages too, but I must warn you, they are a hit or miss. Sometimes what’s offered truly is a good deal, while other times it’s only a discount on an inflated price that no one pays anyway. Regardless, they are definitely worth checking out. In addition, you can also snag some great deals through more traditional group travel venues, like Apple Vacations (over the years I have personally got a couple amazing offers through them that were not found on any of the travel websites).

#6. Home/apartment swapping
Even the cheap hotels cost a lot these days (in my opinion at least) so why not consider a house or apartment swapping arrangement? There are a number of websites available where you can arrange to either rent someone’s unused room/apartment/house – or – you can do a trade arrangement where both parties will literally switch homes for a week or so. As far as the latter option, I’m not sure I would feel comfortable having strangers in my own apartment, but I wouldn’t mind paying to rent someone else’s if it was cheaper than staying at a hotel!

#7. Avoid souvenirs and shopping!
When I was a kid, we would go on a family trip once every couple years and I would always buy a bunch of junk wherever we went. Do I have any of that stuff now? Nope! Just goes to show what a huge waste of money it was. But fortunately, it taught me early on what a waste it is to spend money on trinkets and other crap that you don’t need (and really has little to do with your vacation spot since it’s probably made in China). The best souvenirs are memories and if that’s not good enough for you, then take a bunch of pics using your digital camera!

This post was written by Michael from CreditCardForum.com, which is a forum and blog for all things credit, including reviews of the best travel rewards credit cards.

How Much Of My Annual Pay Should I Be Saving For Retirement?

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Over the past few weeks I've been noticing quite a few searches coming to this site with people putting together their financial strategy for the new year, and asking one important question. How much annual pay should I be saving for retirement? It seems like a lot of folks are just unsure about how much they should be saving, and they're worried that they won't have enough, especially given the current economic climate, and debts they may be trying to pay off first.

Today I thought I'd do an examination of this question, and talk about what some of the different thinking on the topic is.

How Much Should I Save For Retirement?

There are several viewpoints that people can come from when trying to figure out how much to save for retirement.  Their calculations all seem to take into account different assumptions and criteria, so it's important to look at them all, and figure out which you think would work best for your situation.

Some of the criteria that may be important when calculating how much you'll need include how long you expect to live, the costs of health care in the future, how much inflation we'll see and what type of lifestyle you're living.  Also important are your age, your current income, how much you've already saved, your employment prospects in the future and how much you're willing to sacrifice now for future security.

With that said, here are some differing viewpoints on how to determine what you should be saving for retirement.

Save A Set Percentage.  Save 10-20% For Retirement

Most retirement calculators will use people's current pre-retirement income as a frame of  reference when calculating how much the person should save for retirement.  A lot of financial planners will say that most people will need anywhere from 70-100% of their income in retirement in order to be able to live a similar lifestyle when they retire.   To do that most of them will suggest that people save anywhere from 10-20% of their income.  While I think that it can be  a decent rule of thumb to save that much, in some cases it may not be adequate – or in some it may lead to saving more than you need.

Save As Much As You Can

Another viewpoint that I've seen quite often are the folks that just say to save as much as you can.  Some months that may mean saving just a little, other months it may mean up to 1/2 or 3/4 of their income.  Basically they feel that there is no such thing as “too much savings”.    They feel that if they can just save as much as possible  every month, they'll be fine when it comes to retire.   While this may serve some folks well, it may be a bit too simplistic for a lot of people.  It may lead to saving more than you need, requiring more sacrifice than is necessary.   It could also lead to saving too little if  the “saving as much as you can” is only a little bit of money at the end of the month after all other bills and even entertainment costs are paid.

Save What You'll Need

Some people believe that saving for retirement is an extremely personal thing, and you should really put together a personalized retirement package based on your own expectations and personal situation.  For example, they'll factor in things like their current income and age, amount of money the have already saved, their employment outlook,  how long they expect to live when they retire, and what type of lifestyle they'd like to live in retirement.  They also factor in things that may be changing when they retire like downsized housing costs, reduced auto expenses, and increased travel and entertainment expenses.   In other words they take a comprehensive look at what their current situation is, what they hope to do in retirement, and then they make a plan based off of what their ideal situation would be, and how much they will need.

Retirement Planning Is Very Personal

I think that retirement planning is a very personal process, and one that all families should undertake.  When looking at the viewpoints above I think I come down closest  to the “save what you'll need” camp, where you figure out your personal situation, factor in your personal needs and desires, and then come up with a number based off of those.    Once you come up with a number – add 10% to it, better to have too much saved than too little.

While I understand that getting into the nitty gritty details is probably the best idea, I know not everyone will take the time to do that.  If you don't go through with it, at least stick to the old 10-20% rule, and start saving for your retirement as early as you can!

List Of Retirement Calculators

Here is a list of retirement calculators I found via getrichslowly.org.  The ones on this list take into account more criteria than just income, and will probably give you a better picture of what you need to save.

Have you figured out what your retirement savings number is, and how much are you saving towards that number today?  How did you determine your goal?  Do you think you'll reach  it?