Financial Observations for the Modern Christian:

Financial insights from various contributors for the betterment of the Kingdom of Christ and to encourage his seekers and saints to a higher understanding of financial responsibility.

BRUCE L. MOODY, Consultant, Editor & IT Coordinator

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1 DECEMBER 2008

Twenty things I didn’t know before I worked as a debt counsellor
By David Gaffney. Illustration by Joe McClaren
Published: November 21 2008 11:14 | Last updated: November 21 2008 11:14

1 You wouldn’t put all your soup in a basket, so don’t put all your debts in one

One easy payment, the ads say, as if a little light tidying were the solution to chaotic debt problems. Faced with insurmountable multiple debt, most people try to borrow their way out. This is like mending a leaking bucket by joining up all the little holes to make one big hole. Repeat this several times until you realise it doesn’t work.

2 In multiple debt land, time is geological

When I told my first client I would offer 31 pence a month off a debt of £12,000, she gasped. It would take 3,225 years to pay it off. “Don’t worry,” I said cheerfully. “Just think about it as being in debt for the rest of your life. Be positive: governments will fall, continents will shift, cities will crumble and be rebuilt, but your debts will remain standing throughout.” This, it turned out, was an insensitive way to explain the situation to my client. My bedside manner improved over the years.

3 It is legally permissible to laugh at bailiffs and drop milk bottles on their heads from upstairs

There’s case law to prove this. Bailiff law is like vampire lore. Bailiffs can come into the house only if invited over the threshold. Once inside they take an inventory of goods that they can return to remove. The courts can leave a bailiff on your premises to check you don’t move anything. This is called close possession and a bailiff has to provide his own flask and sandwiches. Bailiffs are not allowed to take away “wearing apparel in use”, so balance your plasma TV on your head and say it’s a hat. In one case, a landlord gained entry to a flat by jigsawing a hole through the floor from below. This was held to be lawful entry.

4 Debtors are expected to roll cigarettes from the hair of their dead pets

A bailiff hammering on your door doesn’t usually encourage you to stop smoking, but if you include fags in your financial statement, creditors will be as angry as if you were employing two personal pastry chefs and a private pole dancer. Creditors dislike lots of things, mainly things that you spend money on instead of giving it to them, things like pets and costly middle-class pastimes such as horse-tasting, dance-upuncture or aromabingo – anything that makes them think that you are having fun while they sit up at night writing your nightclub bills into a fat ledger.

5 The principles of debt counselling are that there are no principles

The debt counselling method is to maximise income, sort out emergencies like disconnection and eviction, then contact non-priority creditors – the credit cards, catalogues and door-to-door loan companies. Non-priority creditors don’t like debt counsellors. No one likes to be anyone’s non-priority. The technical way to describe the relationship between your client and his non-priority creditors is “F*** ’em, look after yourself, they’ll survive.”

6 It’s sometimes a good idea to borrow money off one card to pay another

This can work for a short time but never works for long. It’s like trying to stand still by running down the up-escalator at the exact same speed as it rolls in the opposite direction. You can do it for a while if you get the timing right, but it takes a lot of concentration and energy, and in the end it’s easier to get off and stand still.

7 Multiple debt problems can be fun

Most of my clients were cheerful optimists who lived life to the full. This meant that it wasn’t at all unpleasant to sit down with a succession of debtors and talk about sorting out their problems – there was laughter and joy sometimes.

8 You have to pay a fee to go bankrupt

It costs more than £200 – and the court won’t accept a credit card.

9 People who sell Christmas hampers door-to-door are not your best friends

Before I was a debt counsellor I thought a brimming Christmas hamper was a sign of great luxury and abundance. But I discovered that door-to-door peddlers of this sort of thing also deliver extortionate loans at annual rates of over 100 per cent. And, although these companies aren’t illegal loan sharks who decorate their walls with your kneecaps, they can be very persuasive and like to come up your path on giro day.

10 A giant magnet with Acme written on the side clamped on to your meter won’t reduce your fuel bills in the end

But plugging into the street lamppost supply might help. I met a client who had learnt how to fiddle her electricity token meter by fitting a Benson & Hedges cigarette packet into the slot (other brands are available, but it’s the metallic coating, you see) and striking the end with a gas cooker igniter. This sent an electric surge through the meter and added loads of credit. She showed her neighbours and it was free power all round until the electricity company found out. When I visited she had car batteries running the lights, and a power lead snaked out of her window into her neighbour’s house for the heating. Back in the days of coin meters I had a client who used to make 50 pence pieces out of ice; when the inspector opened up his machine it was always empty, except for a damp patch. But if you steal fuel, your supplier will estimate how much they think you stole and charge you for it.

11 County court judges like debtors more than they like solicitors from the bank

The average county court judge hates solicitors but loves normal members of the public like you. This is because he used to be a solicitor but he’s never been a normal member of the public, so to him you are exotic. And it is usually a he. A judge will find every way he can to humiliate the solicitor. Take advantage of this by pointing out grammatical errors in the solicitor’s papers. Never wear a suit to court – the judge will ask you with a friendly smirk whether it was from Next Directory, which is one of your debts (Next Directory is always one of your debts). One of my clients wore the mascot outfit of his local football team to his hearing as evidence of the extra job he’d taken on.

12 Credit companies want you to owe them money. They like it. It makes them happy

As long as you aren’t really poor, this is how credit companies make their money. Creditors like people to be in debt. More interest, more charges. But they don’t like it if you take liberties and pay nothing at all. Their ideal customer is someone who borrows regularly, messes up now and again to incur a few penalties, but has enough dying aunties to pay it all off.

13 You can buy stuff on credit – as much as you like – and they can’t take it back

In the old days we had hire-purchase, or HP, also known as the never-never, or the drip. HP was invented so Edwardians could buy sewing machines, pianos and moustache wax. Nowadays, you just use shop credit or plastic and the stuff is yours. In fact you can buy stuff and sell it to pay off your other debts (though beware of this – if you go bankrupt, it will be considered an offence and you could go to prison).

14 A garnishee order does not involve salad

A garnishee order means a creditor can take money out of your bank account. They find out about your bank accounts by ordering you to attend court for an oral examination. This is not like what happened to Dustin Hoffman in Marathon Man. Nevertheless, the best way of avoiding this is not to go. If you don’t go, and you keep not going, when they get round to it they will hire a van and call on all the houses of all the people who haven’t turned up for stuff in the past, arrest them and take them down to court. The best way to avoid this happening leads me to the next point.

15 Never be available at home to personal or telephone callers

If credit companies can’t get hold of you, they give up. The statute of limitation says that if a creditor has been out of contact for six years, a debt can’t be enforced. This means you should never reply to a letter. Ignore them all. Treat ’em mean and it doesn’t keep ’em keen – they just lose interest. By the way, this does not apply to all debts – check with an adviser first because...

16 You can lose your house if you don’t pay

I know your house is no palace, with its built-in foot spa and Uncle Joe’s Liver Pills painted on the gable end, but these people have no taste.

17 The quiet ones are the worst

Beware those creditors who send measured and polite threats – they probably mean it. The louder and more persistent the threats, the more desperate the creditor is and the weaker his position. One creditor was so desperate for leverage he acquired an office on a street called High Court and wrote these words in red at the top of every letter. When one of these desperate creditors rings you, tell them they are being put on hold and play the piano accordion down the phone. Piano accordions are available by credit agreement at most large music stores.

18 Your local council hates sending people to prison for not paying council tax, so you can take them to the edge on this one, just for fun

But some creditors are tough. The Inland Revenue is Uma Thurman out of Kill Bill. If you don’t pay them ahead of everyone else, they will shove a hand down your throat and yank out your heart. They are taught this by martial arts experts and it is performed under medical supervision. It plays no role in getting people to repay their tax debts, they just like how it feels.

19 If someone rings you up and says they want to hire a bouncy castle and you agree to hire them a bouncy castle even though you know nothing about bouncy castles and you then continue to trade as the bouncy castle hire man who used to live at your address, and who turns out to owe lots of money in back taxes and VAT and who, to all intents and purposes, you have now become, you will end up in court for fraud.

This happened.

20 Life is beyond some people’s means

A debtor is someone who hasn’t got enough money for the lifestyle he or she chooses. Most frequently this is a lifestyle most people call normal life – like having a phone, a telly, some clothes, heating the house and running the water. What should we do, kill them all?

David Gaffney worked as a debt counsellor for 12 years in Manchester and Birmingham. His comic thriller about multiple debt problems, ‘Never Never’, is out now

Copyright The Financial Times Limited 2008

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The Problems of Deleveraging
1.2 Million Jobs and Counting
Be Careful of Geeks Bearing Recovery Data
Back to 1982
New York, Birthdays, and Moving


In general, we consider it a good thing to save money and to "owe no man anything save love." But what happens when a debt-happy society wakes up and decides that saving is a good thing for everybody? What happens when banks and hedge funds decide (or are forced) to reduce their debt? What happens when businesses of all sizes find it harder to get loans to operate?

In this week's letter we discuss "The Great Unwind," that process of deleveraging that we are now in the midst of. We also explore some recent economic data on the economy. It's a lot of ground to cover, so let's jump right in.

1.2 Million Jobs and Counting

The unemployment numbers came out today and they were ugly. October showed a loss of 240,000 jobs. But the really bad part was the negative revision to August and September, by a further loss of 179,000. As I have written in the letter numerous times, downward revisions in a slowing economy are the rule. Unemployment estimates are largely based on recent past performance. There is no way the models can catch a change in the overall trend. All the statisticians can do is go back and modify the data as hard information becomes available.

What the data shows is that the economy has lost 1.2 million jobs since December, with over half of those losses in the last three months as the problems from the recession accelerate. While two-thirds of the losses are in manufacturing and goods production, the service economy is also starting to show signs of strain. One in five lost jobs are from the retail sector.

Philippa Dunne of The Liscio Report writes: "A stunning fact: yearly job losses in private services, 0.4%, now match the worst of the 1982 recession and exceed the worst of 1975; once upon a time, the service sector wasn't very cyclical. Now it is."

Just as disturbing is the jump in the unemployment rate. It leaped to 6.5%, far above even the most dismal of expectations. For reasons we will go into below, it is likely we will see another 1 million jobs lost over the next year, with the unemployment rate headed up as high as 8%. There are now ten million unemployed Americans. You have to go back to 1982 and a double-dip recession to find an 8% unemployment rate. Very few people under 50 remember what that is like.

Look at the chart below. Notice how swiftly unemployment rises during a recession and continues to rise even after the recession is over. Since I do not think the current recession will be over until the third quarter of next year, we could see unemployment continue to rise for the next 8-10 months. At least, I hope it doesn't last longer.

Be Careful of Geeks Bearing Recovery Data

Before we look at how weak the economic numbers were from both the manufacturing and service sector surveys, let me cover an important point about recessions. You are going to hear all sorts of analysts (including sometimes even this humble analyst!) quote statistics that in general sound like: "Since the end of WWII average recessions have lasted X months, and thus we are almost through the current one, so buy what I am selling." Or the ever popular "Stocks tend to find the bottom in the middle of a recession, so now is the time to buy."

There will be lots of variations that all assume that past performance is somehow indicative of future results. And such an assumption is a prescription for investment pain.

First, there are not enough data points about recessions between the end of WWII and now to have any statistical meaning. I count 11 recessions since WWII. In what other human endeavor would we use just 11 data points and then decide to bet our hard-earned money? While average data can have meaning and give some grounds for comparison, it should be treated with heavy levels of skepticism when used as an argument for investing with conviction.

Let me tell you what we do know. Each and every recession is different from all the others and in different ways. That stands to reason, as the background economic environment was different for each one. The '70s and '80s were subject to serious levels of inflation. The recession at the beginning of this decade saw fears of deflation. Some happen with a strong dollar and some with a weaker dollar.

This recession is the result of serious bubbles in the housing and credit markets imploding. It is not the result of excess inventory or overinvestment in manufacturing capacity. As I have written numerous times, these excesses took years to build up and will take at least 2.5-3 years to correct. We are 15 months into the correction process. That is unlike any other recession we have experienced. So be careful in your use of comparisons based on historical averages.

One more point: since we do not know how long this recession will last, nor do what the results will be from further stimulus packages and hidden surprises, it is a mug's game to try and pick a bottom in the stock market based on some theoretical halfway point of this recession. You are going to hear over and over that markets anticipate the recovery about six months in advance. Given that this may be a very long and slow recovery that could be quarters away, be very cautious when you hear some bullish commentator using that "anticipation" rhetoric.

And with that said, let me now turn and look at some comparisons with past recessions that do offer some insight. By looking at how severe this recession is compared to previous ones, we can glean some idea of the level of problems we face now.

Back to 1982

The Institute for Supply Management released their October survey this week, and it was a shocker, helping send the Dow down by 10% in two days. It showed much more weakness than expected. This survey is collected from a large number of manufacturing firms. The ISM then makes an index of the data. For instance, if 60% of the reporting companies see new orders rising, then that would yield an index number of 60 for new orders. Anything below 50 shows negative growth. Below 40 shows a serious recession

The overall manufacturing number came in at a very weak 38.9. We are now down to levels not seen since September 1982. (Chart courtesy of Paul Kasriel and Northern Trust)

The internal data was even worse. New orders fells to 32, suggesting further weakness in the manufacturing world. Backlog of orders was 29. New export orders, a source of growth in recent months, fell from 52 to 41, a rather large drop for a single month. This shows the rest of the world is beginning to slow down as well. Boding poorly for employment, only 43% of companies reported that they were planning to add additional employees.

Nowhere was that illustrated more than in the auto sector. Last year sales were running at about 17 million new cars a year. Last month's annualized rate was 10.5 million, the lowest level since 1983. And a recovery might not be in sight for several years.

There is now about one car in the US for every person of driving age. An article in the Financial Times estimates that an extra 1.5 million cars a year have been purchased due to cheap financing, rebates, etc. If consumers decided they did not need more than one car, which would imply a flat growth rate, sales could drop by 3.5 million cars a year from the pre-crisis levels, which means Detroit would have a lot of spare capacity even after an economic recovery.

Further, I remember buying a car as a young man and not expecting it to last more than 80,000 miles before it needed major work or replacing. I now drive a 4-year-old Cadillac Escalade (I am a Texan, after all!) and it has 65,000 miles. I have a friend with an identical car that has 270,000 miles on it, and it is still running fine. My car could easily last me another four years, as could the cars of many people who bought new ones in recent years.

Basically, automobile manufacturers, in their drive to sell as much as possible, "brought forward" future sales of cars and, as a side effect, put lots of still quite good used cars on the road. New car sales are likely to be depressed for some time. It is somewhat like the housing problem. There is just too much inventory on the road that will have to be worked through. When Detroit gives me a real reason to buy another car, like an electric-powered vehicle, I will. And a lot of Americans, with a need to save money for retirement, are going to feel the same way.

As noted above, it seems that the service sector is now cyclical. The ISM Non-Manufacturing Survey results show broad-based weakness. The headline composite index dropped to 44.4 in October from 50.2 in September. This is the lowest in the 11-year history of this index. Indexes tracking new orders and employment also fell sharply, to 45 and 42 respectfully.

The data shows that we are sadly not yet close to the end of this recession. It is going to be a long slow Muddle Through Recovery. Do not expect a typical V-shaped recovery.

The Problems of Deleveraging

There is a quite humorous series of quote about the demise of the American consumer, starting with a Fed chairman in 1954 and going through one after another major financial figure in the ensuing decades. They have all been wrong. Predicting that the American consumer will change his profligate ways has not been a recipe for forecasting accuracy. This time, it may be different. Not because US consumers really wants to change, but that they may be forced to.

Look at the explosion of consumer debt (credit cards, auto loans, bank loans) over the last 20 years, rising to $2.6 trillion. Household debt, including mortgages, skyrocketed from 47% of personal income in 1959 to 117% in the fourth quarter of 2007. And from 25% of GDP in the first quarter of 1952 to 98%. (Gary Shilling)

Let's look at some numbers. Since 1 January, 2008, owners of stocks of US corporations have suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. (Losses in other countries have averaged about 40%.) Homeowners will soon see their equity down by as much as $8 trillion, and those losses are likely to increase.

As highlighted here repeatedly, mortgage equity withdrawals counted for a full 3% of annual GDP growth in the period from 2002-2007. MEWs have fallen by 95%, and are falling again this quarter. Credit card debt is being reigned in. In fact, as the chart below shows, bankers are not surprisingly tightening lending standards to consumers, and raising their rates. (Again, from Haver Analytics, courtesy of Northern Trust)

Much of US GDP growth has been fueled by debt. And that debt is now going to be much harder to get, as equity in both houses and stocks has fallen precipitously.

Further, as detailed last week, US consumers are clearly cutting back. The retail sales figures that came out this week are dismal. J.C. Penney stores are down 13% year over year! At Nordstrom's, one of my favorite stores, sales are down almost 16% (six months ago they were growing at 10%!). Sales at major discounter Costco were down 1%. The Gap, The Limited, Target - store after store is down. Limited Brand sales are down by 70% from October of last year. All this does not bode well for Christmas sales. (Thanks to Greg Weldon of www.weldononline.com for that data.)

Remember how I talked about how auto manufacturers had cannibalized future sales? Credit cards have allowed many retailers to do the same. Money that goes to cut down credit card debt is money not spent today.

Consumers leveraged their way to higher levels of consumption, and now are going to be forced to reduce that leverage. Many others are going to see the need to increase savings to shore up retirement funds. People (and not just in the US, but throughout Europe) have learned that a home is not an investment.

Hedge funds are also being forced to de-lever. While for most styles of hedge funds, leverage was not all that high (an average of about 1.4 times equity), large redemptions, especially by funds of funds, are forcing sales of all types of assets, but in particular stocks. As an aside, this selling is not over. Mutual funds are seeing large withdrawals, and are also selling.

Large banks are being forced to reduce credit lines in order to shore up capital, as they must deal with subprime debt and other mortgage-related problems. Smaller banks are just now starting to deal with losses on commercial loans due to the economic downturn. That means that they will have to reduce their loan portfolios to meet capital requirements.

This is happening all over the world. Whole countries are imploding. Iceland? What were they thinking? Italian sovereign debt is now suspect, calling into question their ability to meet their deficits.

Just as consumers used debt to buy "stuff" they wanted now, so did businesses, banks, and governments. It powered a huge global growth boom. The Great Unwind will have the opposite affect, softening demand and weakening spending and growth. What leveraging did for growth, deleveraging will take back. It is likely to be a long, Muddle Through trip.

The IMF now projects that the developed world will slow by a collective 1% next year, dragging world growth close to zero. The export growth that has been powered by a cheap US dollar is destined to slow as world demand falls.

The good news? Oil prices are likely to fall even more, which will free up some money to be used in other ways. The ISM data showed that prices paid are falling, making inflation less likely. The US government deficit, under Democratic control, is likely to be $2 trillion in 2009, a staggering number to be sure. Without the pressure of inflation, and with the threat of outright deflation, it may even be that such a deficit can be managed. In the short term, this massive debt will provide a stimulus, lessening the effects of a deep recession.

The sad thing is that our children will be saddled with the debt for a very long time. Hopefully we spend it on things like infrastructure, which will be of some use to them, rather than on an endless stream of consumer stimulus packages that simply add to current debt.

As investors, businesses, and employers/employees, we will have to deal with the outcome of a major resetting of consumer spending. Unemployment will rise. Whatever stimulus package is enacted will mostly be used to draw down debt, and not actually spent. Businesses all over the world are going to have to rethink their growth plans to the extent that they were based on ever-rising US consumer spending. Earnings are going to be under real challenge in most industries. This is going to become more obvious as time goes by, and is going to challenge whatever bear market rally can be mounted.

All is not gloom and doom. The last major recession and problem period, in the '70s, saw a number of new businesses start and prosper (Microsoft, Apple, Intel, etc.). Businesses that have access to capital are going to be able to take market share and come out of this recession in much better shape. It is just a recession, after all, and will end. But I would suggest keeping your powder dry and being nimble. There are opportunities which will arise, as they do in every downturn. Just don't expect this recession to be like any past recession. Make your plans accordingly.

Make a note. I showed a chart a few months ago which illustrated that imports were falling, even as the trade deficit was not. This was because of the high price of oil. Oil at that time accounted for two-thirds of the trade deficit. When they tally the trade deficit for November in a few months, I think everyone will be surprised at how much the trade deficit has fallen.

This is something we will discuss in a future letter, as a lower trade deficit means there will be fewer dollars to buy US debt, just at a time when US debt will explode. That means that US citizens must save and buy that debt, or the Fed will have to monetize it, or rates will have to rise to attract capital. These are somewhat counterintuitive concepts and need explaining. But not this week. It is time to hit the send button.

Have a great week.

Your trying to figure out how to grow his business in this recession analyst,

John Mauldin
John@frontlinethoughts.com

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A good resume touts your talent and lands a job interview.

Think of your resume as an advertisement for yourself. But a resume that isn’t a winner is a sinner and you’ll never get in the door. Remember: Simple mistakes can kill your prospects.

“Many students don’t realize that a resume is one of the most important documents they’ll ever prepare,” says Jack Rayman, Director of Career Services at Penn State University. “Some students think they can throw a resume together in 15 or 20 minutes.”

As part of a study, Rayman says his office prepared a set of resumes with intentional spelling and grammatical errors and passed them on to campus recruiters from major companies. Without fail, the resumes with minor errors were rejected, regardless of the mock student’s internships, course of study and grade point average.

Moral: Check and double check your resume because presentation counts. Then have a friend read it over.

“A little thing like subject-verb disagreement will kill your chances,” Rayman says.

A winning resume is concise and well-written. Keep it to one page if you’re just out of school.

A solid resume is more than just a summary of your experience. It demands the attention of a prospective employer and sells you as a top prospect. Your pitch: This is what I can do for you.

Right under your name and contact information, a good resume should include a brief summary of your education, experience and strengths.

Three to six crisp sentences will do the job. Use the active voice. Keep it short and tight. No buzzwords or semicolons. Kill most adjectives and adverbs with a shovel. Never refer to yourself in the third person because it’s silly and pretentious.

As a recent graduate, employers don’t expect you to have a lot of experience. Include internships, but remember employers are betting on your potential to perform at a high level - not your limited track record in your field.

At a job interview, the prospective employer seeks to answer basic questions: Can the applicant fit into the corporate culture? What does the applicant bring to the table? You got the interview because the employer believes you can handle the job. Now, you must convince the interviewer that you’re the right person for the job.

Major corporations such as Intel (INTC), Microsoft (MSFT), Hewlett-Packard (HPQ) and General Electric (GE) are flooded with resumes. Many companies electronically scan stacks of applications looking for key words. If you’re applying to a major company, dig out the key words in your field -- programmer, copy writer, Web designer, for example -- and use them to boost your chances of getting picked up in the computer scan. But don’t let this degenerate into jargon because an experienced person with a finely tuned blather detector will read your resume in round two.

Don’t mix the professional with the personal. There’s no reason to include marital status, church affiliation or political persuasion on your resume. Include relevant extracurricular activities, but don’t note that you like kittens, hiking and Mozart, because who doesn’t?

This should be a no-brainer, but apparently some recent grads don’t think: Never lie on a resume. You can bet that the personnel office or an outside agency will check your degree and other qualifications.

A resume isn’t a legal document so the only penalty for fibbing is not getting the job. However, a job application is a legal document and that’s why many personnel offices ask you to copy key information from your resume onto the company’s form. Lying on the company’s job application will get you fired if discovered after you’ve gotten the job.

Here are five things you need to know about writing a resume that will get you noticed:

Contact Information:
 
At the top of the page, include your name, home address, phone number with area code and email address. This should be obvious, but some first efforts bury the information. Prospective employers don’t have time to hunt for the basics.

Typeface:

You can’t go wrong with 12- or 14-point Times New Roman. Avoid cutesy fonts and don’t use too many fonts because you want your resume to be crisp, clean and easy to read. Use bold or bold italics for section headers.

Be Positive:

Don’t knock your school, internships or anything else. A good resume is a sales tool designed to sell your talent and get a job interview. A sour tone will kill your chances.
Play It Straight:

Keep in mind that prospective employers aren’t flower children seeking blithe spirits for a far-out time. They’re in business to make money. Employers seek bright, talented and diligent people - make sure your talent comes through in your resume. Can the smarty pants attitude.

Presentation Counts:

Use a heavy, off-white paper. Avoid red, pink, lime green or anything that’s hard to read and makes you look frivolous. Prepare an electronic version that can be emailed as an attachment or sent in PDF format. Run the spellchecker. Then have an eagle-eyed friend proofread your resume. A typo or using the wrong word is the surest way to kill your chances.

“We suggest that our students come to the career center and have someone review their resume on the spot,” Rayman says. “It’s important to have several people go over your work before sending it to a prospective employer.”

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IF YOU AND YOUR partner are like most couples, chances are, you fight about money. Numerous studies have shown that money is the No. 1 reason why couples argue — and many of the recently divorced say those battles were the main reason why they untied the knot.

While anyone will tell you that talking about money is the first step in resolving problems, talk alone won't do the trick.

In fact, a recent study commissioned by SmartMoney magazine and Redbook found that more than 70% of couples talk about money on a weekly basis. So what's the problem? "Most of us don't know how to talk about money," says Mary Claire Allvine, a certified financial planner (CFP) and co-author of "The Family CFO: The Couple's Business Plan for Love and Money."

"People tend to be emotional and reactive about money, not strategic," she says.

When emotions run high, people tend to make fiscal mistakes. Allvine's solution: Approach family finances as if you were running a business. "If you put a business metaphor into the picture, you'd be surprised how much more methodical people are."

And so, to help make your next state-of-the-financial-union meeting run smoothly, we've assembled a collection of the six most common mistakes couples make when handling money issues, along with some advice on how to correct them. Do yourself a favor: Make sure all board members review this before you talk.

1. Merging the Finances
The Wrong Approach: United we stand, divided we bank.
The Right Approach: It's yours, mine and ours.

One of the first issues newlyweds face is how to handle their finances. "Couples struggle about this one," says Ruth Hayden, author of "For Richer, Not Poorer: The Money Book for Couples." Should you merge everything you have and earn into one joint account, or should you maintain individual accounts and open a joint one for household expenses?

SmartMoney magazine's survey found that the majority of couples (64%) put all of their money in joint accounts, while 14% kept everything in separate accounts, and 18% had both. "Married couples should try different ways of handling the money to see what works for them," says Ginita Wall, CFP and co-founder of the Women's Institute for Financial Education.

For many newlyweds, the right choice may be somewhere in the middle. "You should have some autonomy money, I should have some autonomy money, and we need to learn how to practice being a couple together with our money," says Hayden.

The advice is different when one spouse enters the marriage with a high debt load. (See our next point below.) But assuming you both have a clean bill of fiscal health, finding a way to blend finances comfortably without feeling like big brother is watching every financial move you make can dramatically cut down on fights. Over time — once kids and mortgages come into play — many couples find that merging all their finances is simply easier. But unless you're both comfortable with the idea, there's no need to rush things.

2. Dealing With Debt
The Wrong Approach: Your debt will ruin us; you must find a way to pay it off.
The Right Approach: It's our debt: Let's decide how to pay it off together.

Of all the issues that spark a fight, debt ranked No. 1 for most (37%) of SmartMoney's survey respondents. "That's one of the places where couples have most disagreement," says Hayden. Couples often don't see eye to eye on how much debt is too much and which kind of debt is bad.

Compounding the problem: in many cases, one spouse enters the marriage with a lot more debt than the other. "We saw that more frequently than we anticipated when we began interviewing couples [for our book]," says Allvine. "It's almost unavoidable. Even if you manage to get to your 20s or 30s without debt, you hook up with a partner who's in debt."

What to do in situations like that? Like it or not, once you're married, your spouse's debts can become your problem. Granted, you're not legally responsible for the credit-card balances ran up before you got married, or for any loans opened in your spouse's name alone — provided you keep your finances completely separate. (Unfortunately, all bets are off should you get divorced. For more on that, click here). But even with separate finances, your spouse's credit score will affect your ability to get joint credit. "It's a public [credit reporting] system, and what you do will absolutely affect the other," says Hayden.

For those couples not yet married, it may be worthwhile to think about a prenup, just to make sure that assets that one spouse brings into a marriage will always be protected from the other spouse's creditors.

But those who've already tied the knot should find a way to pay down the debts as quickly as possible, and without any late payments.

3. Keeping Spending in Check
The Wrong Approach: I'm a saver and you're a spender. That's the problem.
The Right Approach: We both spend, but on different things. Let's budget.

Your husband keeps nagging at you that you spend too much — but then comes home one day with a huge smile and — surprise! — a 70-inch flat-screen plasma TV. He happily explains how he sealed the "terrific" deal. You're definitely not impressed.

Sound familiar? Spending is the second most common reason why couples fight, according to SmartMoney's survey. What usually happens, explains Hayden, is that one spouse gets labeled the "spender" and is blamed for skimming all the money out the checkbook. In most cases, however, that's not accurate. "Studies show that men and women spend the same, they just spend differently," she says. Women usually take care of most of the family's daily expenses: the groceries, the bills, clothes for the family — while men spend on large purchases like plasma TVs, cars or computers. "If you counted up your money, you would be spending about the same," Hayden says. "But because you spend so differently, the perception is different."

The solution here is to identify the real problem, Hayden says — namely, that you're both spending money on a tight budget. Then sit down and decide how much money you'll allocate to the "dailyness" of life, and how much to save for the big purchases. "What we're trying to do is get the 'Surprise!' out of it," she says.

4. Investing Wisely
The Wrong Approach: You're a risk-taker, I'm risk-averse. Hands off our retirement savings.
The Right Approach: Let's think in time frames and take as much risk as our goals allow.

SmartMoney's survey showed that when it comes to investing, men are more willing to take financial risk than their wives (62% for men vs. 19% for women). But fighting about how much risk to take with your investments based on how you feel about risk doesn't do much good. Rather, sit down and talk about your investment goals and time frames, says Christine Larson, co-author of "The Family CFO". "You could be completely risk-averse with money you need for next year, but you can be a huge risk-taker with money you're saving for retirement," she says. If that doesn't work for you, seek the help of a broker or a financial planner.

Whatever your investment choices, review your investments together at least once a year and make sure that, overall, your portfolios balance each other out, suggests Wall. "I have one couple — they're in their 70s. She likes to take risks and it scares him to death, so they do invest themselves separately," says Wall. "We let her take risk with part of the money, but not all of the money."

5. Keeping Money Secrets
The Wrong Approach: What my spouse doesn't know will never hurt him/her.
The Right Approach: Big financial secrets can ruin a marriage.

Among Hayden's clients is a family that first came to see her when the wife found out that her husband had lost a lot of money trading commodities. The real problem? She didn't know his little secret. "It got them in horrible trouble!" Hayden says. "He's very steady, he's a fabulous doctor, he's a great dad...but he had this other part of him that's pure gambler, and it almost brought the marriage down."

Will you be shocked to hear that most couples do keep money secrets from each other? While secret trading or gambling may not be that common, our survey saw 36% of men and 40% of women confess that they had at one time or another lied to their spouse about the price of something they bought. "It's the most common secret," says Wall.

Is it a big problem? Depends on how you deal with it. "Most people also lie to themselves about what they're spending, just as they lie to themselves about how much they're eating," says "The Family CFO" author Allvine. And let's face it, if your wife saved up the extra $100 for her "only $30" Givenchy scarf from her monthly mad money, it's not that big a deal. But if your spouse has been squirreling away thousands of dollars, it may be time to seek the help of a family finance professional. "If this happened in a company," Allvine says, "they'd call it embezzlement."

6. Emergency Planning
The Wrong Approach: We're fine. We don't need to worry about money.
The Right Approach: Anything could happen. Let's plan for emergencies.

Even if you have a great career, earn a comfortable living and don't have to worry about debt, you could find yourself woefully unprepared for an emergency. "Couples today are under so much stress that anything could tip them," says Hayden. An unexpected pink slip, an accident, illness — anything could throw you off track if you don't have an emergency savings account.

"With the couples we interviewed, we found a tendency to panic [in an unexpected emergency] that could lead to the wrong decisions," says Larson.

Bottom line? All couples should have an emergency stash of three to six months' worth of living expenses held in a safe place, like a money-market fund or gold. Simply knowing it's there can reduce stress, since you know you're not walking a fine line between comfort and catastrophe.

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4 APR 2008

5 Retirement Maxims

Human beings, it is said, are distinguished from our animal cousins (no slur against the in-laws intended) by our ability to plan ahead. While that may be true, it's difficult enough for most of us to plan anything just six months ahead, like summer vacation. So how on earth are we supposed to deal with something in the distant future -- like retirement?

In an effort to kick-start your retirement plans, we'll take a cue from the animal kingdom's "fight or flight" mentality and scare you into action: If you don't do something right now to assure your retirement, you'll end up living in an alley fighting the stray cats for your dinner.

Now that we've raised your hackles, let's use that surge of adrenaline to your advantage. As you know, retirement brings on a set of extremely complicated decisions -- many of them all at once. However, when it comes to The Eternal Truths About Retirement (I'm going to see about patenting that title), the rules are pretty simple. Below, on this single page in cyberspace, are the five retirement truths that will prepare you for the future when it turns inexorably into the present.

1. This isn't your parents' retirement.

Think back about 30 years. Individual retirement accounts (IRAs) were just being created. There were no such things as 401(k)s. Gasoline was free. (Or at least it seems that way in hindsight.) Older folks relied on the proverbial three-legged stool to prop them up in their golden years: Social Security, pension checks, and savings. Retirement didn't last too long because life expectancies didn't go far beyond the age of 70. The average male didn't even make it that far.

Your retirement will be very different. You will live longer, and you'll have a more active (read: expensive) lifestyle. Your parents may have survived on 70% of their pre-retirement income (perhaps you've heard this common rule of thumb?). But that's probably not enough for you.

2. No one's got your back. Sorry 'bout that.

If you put your retirement on that proverbial three-legged stool, there's a good chance it's going to collapse. Why? Let's do a little structural engineering and see how each "leg" is holding up.

Social Security: As of 2004, the average annual Social Security retirement benefit is approximately $11,000. In other words, retirees cannot live on Social Security alone. And don't expect that to change. As the baby boomers retire and put a strain on Social Security, benefits will have to be cut or taxes raised. For those in or near retirement, your benefits are pretty safe. (See? We don't have it out for the in-laws at all.) For the younger crowd, don't count on receiving all of the benefit estimated in the statement sent to you by the Social Security Administration every year, three months before your birthday.

Defined-benefit plans (a.k.a. traditional pensions): The amount you'll receive from a traditional pension depends, first of all, on whether you work for a company that offers one. Most of us don't. In fact, only 20% of Americans have such a benefit, down from 40% in 1975. If you are among the lucky one in five, the benefit you'll receive is based on your salary and the number of years you worked for that employer. Since we've become a mobile workforce, many people don't stay in a plan long enough to accrue significant benefits. The average annual defined-benefit payout is less than $10,000. Plus -- unlike Social Security benefits -- most benefits aren't adjusted for inflation over the years.

Savings: Of the three legs that may prop up your retirement, your personal savings are what you have the most control over. So while two out of three of those stool legs have some pretty serious cracks, this leg is as strong as you want to make it. Thd good news is that this one decision -- to save or not to save -- will have the biggest impact on the quality of your post-work life.

3. It's never too early -- or too late -- to warm up your nest egg.

You can brag all you want to your son-in-law about that 34-inch waistline you maintained through your 30-year high school reunion. Photographic proof is all you need to keep that young whippersnapper in line.

Same with savings scenarios. We can yammer all we want about the factors that affect the size of your nest egg. Instead, we'll regale you with a few pictures.


Even though each person invested the same amount of money, they have significantly different amounts at retirement. For example, Investor A began investing $5,000 a year when she was 25 years old and stopped when she was 35. For the next 30 years, she didn't contribute any more money and she didn't withdraw any money. She just left the account alone.

Investor B, on the other hand, waited until he was 35 years old and contributed $5,000 a year until he was 45. As you can see, that difference of a decade is substantial. At retirement, Investor A has $422,5671 more than Investor B -- over twice as much. In fact, each investor in the chart above has more than twice as much as the person who started 10 years later (except for Investor D, of course, but she's a lot better off starting at age 55 than someone who waited until age 65).

As you can see, three things -- that are completely under your control -- can have a sizable impact on your retirement kitty: 1) how much you invest, 2) the rate of return you earn on your investments, and 3) the number of years those investments have to grow. No matter your age, the sooner you start, the more money -- and options -- you'll have.

4. There's really only one place your retirement savings should go.

While we've got our calculators out, let's take a look at various investments' average annual returns from 1926-2003 (source: Ibbotson Associates):
• Treasury bills: 3.7%
• Intermediate-term Treasury bonds: 5.4%
• Large-cap stocks: 10.42%
• Small-cap stocks: 12.7%

If investments squared off in a basketball game, stocks would be Michael Jordan and bonds would be Michael Jackson. In other words, stocks beat the pants off of bonds. But not without drawbacks. I often get questions from early retirees (55-year-old whippersnappers, for instance) who wonder if 50% of their investments should be in bonds. Phooey.

Market risk (the chance you will lose money) and reward (the chance that your investments will head skyward) travel hand-in-hand in the daily marketplace. The greater the risk, the greater will be the potential return for taking that risk. Equally true is the potential for loss, which quite handily explains why taking that risk should pay a greater reward. By and large, however, risk is pretty much a short-term phenomenon. That's particularly true in the stock market, which many regard as a quite risky investment.

Fools recognize that the stock market shifts every day, sometimes sharply downward. That can be absolutely gut-wrenching when it occurs. Heck, from 2000 to 2002, many people lost more than half their life savings in the market. But history shows us that the inexorable pressure on the stock market is upward. The biggest bang for our buck will be found in stocks.

According to Jeremy Siegel's Stocks for the Long Run, for every rolling five-year investing period from 1802 to 2002 (i.e., 1802-1807, 1803-1808, etc.), stocks outperformed bonds 80% of the time. Stocks beat bonds for 90% of the rolling 10-year periods, and essentially 100% of the rolling 30-year periods. For holding periods of 17 years or more, stocks have always beaten inflation, a claim bonds can't make.

Think now about your retirement. When will it occur -- 20 years from now, five years, tomorrow? If you're close to it, or are already retired, how long must the money last? Now think about your retirement investments. Is the bulk of your money positioned for long-term growth (read: stocks) or short-term stability and income (read: bonds and bills)? The mix you have in these instruments is something you must decide for yourself.

After all, you're the one who has to sleep at night. Recognize, though, that investing for retirement is a long-term goal. Hence, you truly want to shoot for the best growth in your investments that you can get. That won't be found in bonds or bills over the long haul. If you elect to keep most of your money there, almost assuredly in retirement you will be eating Beanie Weenies instead of sushi.

5. When Uncle Sam (or your boss) gives you an inch, take a mile.

As we approach the end of our room in cyberspace (we did promise all the retirement truths you need to know on a single page, after all), we come to our last revelation. It is, quite simply, this:

Be greedy.

As the number of defined-benefit plans has declined, the number of defined-contribution plans -- e.g., 401(k)s, 403(b)s, and 457s -- has increased. Your contributions to such a plan lower your taxable income dollar for dollar, so you immediately cut your income tax bill. (Be greedy!) Plus, the investments grow tax-deferred -- i.e., you don't pay taxes on the growth and income until you make withdrawals in retirement -- leaving more of your money to compound through the years. (Take it! Take it!) As a third bonus, your boss might pay you to save by matching your contributions. For example, the company might add 50 cents to your account for every dollar you sock away. (Freebies! Grab! Grab!)

So, now you know. These five truths about retirement should help clear your mind; why not take a few moments more, get a pencil and paper and jot down some ideas to take action toward securing your future...today.

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20 FEB 2008

5 Steps to Fixing Your Credit Score

If a low credit score is limiting your ability to get a car or home loan, there are five basic steps you need to take to raise it.

The process isn't complicated, but requires the basics of discipline and common sense. Remember: There are no immediate fixes and repairing the damage takes time.

"You've got to stop digging the hole before you can get out," says Gail Cunningham, Vice President for Business Relations at Consumer Credit Counseling Service of Dallas. "You've got to freeze your spending. It won't get better tomorrow unless you do something today."

Start by cutting up unsolicited credit card offers that arrive in the mail. Accepting similar deals allows you to run up large balances on several cards and transferring the balances to one card doesn't reduce the amount owed. Worse, the low introductory interest rate on a new card is likely to encourage more spending.

But don't cut up all your current credit cards. There's no need to conduct all transactions in cash. Creditors tend to view someone with no credit cards as a higher risk than someone who has managed a few cards well.

One major bank credit card and one oil company credit card should be enough. Use a debit card when possible because there's a direct link between spending and your bank account.

Leave your credit card at home when you visit the mall. This will eliminate impulse buying. If there's something you need – not just want -- it will be in the store tomorrow.

These steps should stop you from digging yourself into a deeper hole. Here's what you've got to do to rebuild your credit:

Step 1: Get your credit report.

Federal law requires the three major credit bureaus to provide consumers with one free copy of their report each year. To download and print a copy from Equifax, TransUnion and Experian, click to www.annualcreditreport.com, the official Web site for free reports.

Step 2: Pay your bills on time.

You've probably overlooked this basic point in the past – that's one reason why your credit rating stinks. Remember that late payments – or worse, collections – drag down your credit score. So, build a record of timely payments. The longer you make scheduled payments on time, the higher your score. While a good sign for potential creditors, paying an account that's been turned over to a collection agency in full won't remove it from your credit report for seven years.

Step 3: Keep your credit card balances low.

Revolving credit can be seductive and misusing it can be a hammer on your credit score. Potential creditors check how much outstanding debt you carry so pay off existing debt as quickly as possible.

Don't open new accounts in an effort to boost your available credit. Creditors want to know how long your accounts have been open. So, opening a slew of new accounts won't improve your standing and will make you look like a bad risk.

Step 4: Learn from your mistakes.

Oddly, once you're on the comeback trail, you'll find it's easier to err because your finances are in better shape. It's much like dieting – mints look manageable after losing 25 or 30 pounds.

It shouldn't be hard to figure out what you did wrong in the past to damage your credit rating. It should be unambiguous what you need to do to avoid similar flubs in the future.

The trick is putting the theory into practice. That requires changing your spending habits and your attitude about saving. To do that, ask yourself a basic question: Do you want credit to work for you in lower rates for a home or car loan or do you want to be a slave to your credit cards, never quite catching up to the balance due?

Step 5: Write a budget – and stick to it.

Your budget doesn't have to be fancy, but should include the basics: Rent, groceries, car payment, maintenance, clothes – and savings.

Keep track of what you spend. You don't have to crank up the spreadsheets – a notebook will do. Label the left half of the page "income" and the right half "expenses." This will help keep spending in line. If you don't know what you spend each month on movies and eating out, your hand-written account will soon provide the answer.

Open a savings account and set aside a pre-determined amount each month. This will force you to cut spending, and that's just what you need to do as you rebuild your credit rating.

Saving is basic to sound personal finance. Some financial planners say 10% to 20% of gross family income should be stashed in savings. Others suggest saving enough to cover household expenses for three to six months.

"If you're hiding purchases from your spouse and having the bills sent to a Post Office box, it's time to talk to a credit counselor," Cunningham said. "Debt follows you everywhere – it's there when you wake up in the middle of the night and it affects your performance at work and damages your ability to be a good parent."

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16 JAN 2008

5 Questions Answered About Your Child's Allowance


If you’re a parent, you’ve wrestled with the allowance beast. How much should we give? What age should we start? What expenses should it cover? These issues are worth tackling as early as you can. Kids learn valuable life skills from making money decisions, starting as soon as they can identify coins and count change.

And there’s something in it for you, too, as a parent, beyond serving up mere lessons in personal finance. The sooner your kids can stick to a budget the sooner you can stop playing ATM every time they walk out the door. This is especially irksome in the teen years, when their list of “needs” grows exponentially and includes things you’d rather not know about—like underwear from Victoria’s Secret and dozens of on-demand viewings of American Pie.


Why give allowance?

The idea isn’t just to break free from the routine of having to dig every time your kids want something. Budgeting is a critical life skill, one your kids must become adept at before trekking off to college where they will be swamped with credit card offers. Evidence suggests that as many kids drop out of college due to debt-related stress as from academic struggles. Kids who learn to budget in high school have fewer credit problems as adults.

Teaching budgeting skills is a critical parental role, and no method is more efficient than setting an allowance; make it clear what that money is to be used for, and stick to your guns. Cold reality hits your child when they have run out of money before Saturday night, when the other kids are going to the movies. This usually doesn’t happen more than once or twice before your child starts to seriously plan.


Should they work for it?

There’s a lot of debate on this issue. Certainly, tying allowance to chores teaches a life lesson—that you only get paid when you’ve done your job. But, to me, chores are about another life lesson—that you must contribute some effort to be fully engaged in any community, from your family to your school to a club or your faith group. Allowance is about teaching money management skills. If you dock your kids because they didn’t take out the trash, you deprive them of that lesson.


When should you start?

First grade, give or take a year. Kids at this age don’t need much. But you can help them get in the habit of spending, saving and, yes, giving to charity. They’ll grow to understand the power of money and all that it can do.


How much?

Some experts say the dollar amount, paid weekly, should equal the child’s age. That’s a good place to start. But this really depends on what you expect them to do with the money, and clearly by the time they are in high school they’ll need more if they are paying for clothes, gas, and X-box 360s. You should give enough for them to plan for near-term and long-term purchases and still have enough to go to the movies and offer something to charity.


How should they be paid?

Young kids should be given cash once a week. By high school they should have their own checking account and/or prepaid card that gets automatically replenished weekly or bi-weekly. By college, if you are still paying allowance, it should be once per semester.

Pre-paid cards are especially useful for teens, who buy so much stuff online today that they need to be able to transfer money electronically. But cards like Allow (Mastercard) and Upside (Visa) come with startup charges, and monthly maintenance and reload fees. If you’re dealing in small amounts, they are probably too expensive. Instead, open a checking account in your child’s name but linked to your own so you can make easy transfers. Get your child an ATM card, but make sure the account does not permit overdrafts. Your children will be on their own, and you’ll be out of ATM business.

More on this later...