Sushi Money

Spring sure feels good after a long winter, and now getting ready for summer. I find myself heading outside more often to enjoy the fresh air, clean up the landscaping and garage and ponder the various barbecue dinners for those warm summer evenings. I don’t know why, but then I start tinkering around with and trying to improve a lot of things both inside and outside the home.  That’s not so bad in itself, but then I start making a list of things we need from the store that will help fix or improve those things. 

Too many of us go shopping for a host of reasons other than finding something we really need.  We crave adventure and excitement, and it’s fun to buy things.  But after looking around the house and closets, we’re just buying junk that doesn’t help our family’s economic well-being.  If we’re not careful, we end up caught in viscious cycle that I call The Spending Loop.   

So there I am, wandering the aisles of the nearby big-box store filling up the cart with all kinds of stuff.  It’s a self-fulfilling spending loop that I’ve created from both a real and a perceived need to buy “things we need.”  Nothing wrong with that if spending is balanced against needs versus wants.  But too many of us don’t consider the difference.  When I head to the store to buy something, I’m half excited to be getting things that I think will help spruce up the house and keep it looking good.  

Yet sometimes, for all the good intentions we may have, a lot of that newly purchased stuff just ends up sitting on a shelf, and we don’t get around to finishing the projects we were really motivated about a few weeks earlier.   And if we’re not careful, that shopping and “sprucing up the house” can take on a life of its own, until it becomes a habit that takes real money out of the bank account over time, and we’re caught in that spending loop, piling on enormous debt over time. Honestly when I look in the garage and all the closets, I wonder if we really ever need anything else again!  Even the food pantry is too well stocked, but somehow I feel more secure with that. 

While acknowledging my impulse to head to the landscaping store to find just the right tool or hardware item, I’ve made an effort over the last few months to avoid shopping for the sake of shopping and really think about if we need something or not.  The shopping aspect has never really been a problem, but I just realize that I’ll buy things that I don’t really need sometimes.  So while I still make lists and think of things we need to buy to help finish this project or that, I’m now trying not to rush right out and buy what I think we need right away.   After a few days, some of those items don’t seem so important anymore, and the impluse to go shopping is not as strong.

Maybe it’s part of modern society and our conditioning.  When we shop or buy something at the store we feel like we’ve “done” something and that simple act of buying something will help our situation.  Too often all that we’ve done is decreased the cash in the bank or gone deeper in debt on the credit card. 

If you recognize that smiley face above, it seems to imply a certain level of satisfaction or happiness.  Combine that with a shopping environment, and it’s no wonder why the smiley face was chosen to be associated with price comparisons.  Many of us crave adventure, excitement and something “new.”   And whether we admit it or not, we try to fulfill many of those cravings by going shopping, getting a good deal, or finding something “special.”  Let’s face it, sometimes it really is fun and exciting, especially if you’re buying something you really want. 

But it’s short-lived satisfaction for the most part.  The experience and the excitement is momentary.  Far better to seek adventure and excitement in healthy, practical ways such as working outdoors, gardening, hiking or playing sports.

So while I’m in the midst of a host of spring cleaning chores, I’m working on getting all those other things accomplished that don’t cost much extra money to undertake.  If I really think about it, sometimes my desire to go shopping for “stuff we need” is a disguised effort to procrastinate or improve something else so I don’t have to deal with the stuff I don’t want to finish right now.

I’m no psychologist, but I’m sure there’s a host of other dysfunctional reasons that we go shopping, spend money and buy stuff we don’t need.   Sometimes it’s just plain fun.  But it’s too darn easy to go through money like crazy, much to the delight of the retail store business.    I’m still looking at the shopping issue, and trying to educate a child as well.  Even with kids, their eyes light up when they have a chance to buy something.  So we need to find balance and a healthy approach to spending money when we need to, and avoid the cycle of spending money for no reason at all.

Are there other strategies we can use to structure our shopping needs?  Credit and debit cards are really too easy to use.  Is something like the household budget really an effective tool to prevent binge shopping, or buying stuff we don’t need?   Not for me, at least a lot of the time.   Do you see a better way?    It’s a continuing issue for so many of us, and without really looking at the issue within the family, a lot of people are going to struggle financially while remaining stuck within the spending loop.  But it’s time to break free, to be a little more honest with ourselves, and to begin restructuring our goals toward positive, long term financial outcomes.

Sometimes we make some strange decisions involving money.  At the time we often think we are buying something we really need.  Usually it is something we really want for a host of reasons we may never understand.  And so often we haven’t really thought it through.   Last night I was watching the news and they were interviewing a woman who drove across three states with two young children to attend a Hannah Montana concert!  That wasn’t the amazing part- she made that trip without any tickets, prepared to pay whatever was necessary to get in.  And pay she did, giving a scalper over $450 per ticket to watch the concert.  She was quoted saying, “My husband thinks I’m crazy.”   Hmmm… really?   To each their own of course, and I hope that concert was a memorable outing for all of them. 

     I’ve made my own share of extravagant spending only to wonder later why I felt so strongly about something.  For example, I have a really nice shotgun in my closet that I purchased over 15 years ago for hunting.  It’s very nice, but guess what?  I’ve never used it.  I rationalize that now it’s probably a collector’s item, but looking back- I would have been far better off investing the money I spent on it.  And I can find a lot of similar themes just by looking around the house.  Why do we own some of these things!?   So often I think it’s about satifying some need within ourselves for very different reasons altogether.

Laura Rowly on Yahoo Finance has written a great article called This is Your Brain on Money. In the article she cites the work of author Jason Zweig who has written a new book called Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.   I haven’t read it yet, but it sounds pretty good.  Author Zweig takes a close look at why we make foolish financial decisions, and strategies we can use to avoid them and improve our financial lives.  It sounds like some of his key advice has to do with the basics, but also the essentials:  Put a good financial plan in place, and stick to it!  Easier said than done over the long-term, but it’s something we must work at to achieve our financial goals. 

     Foolish decision making isn’t always about money of course.  There is a host of research into Decision Science, or why we make decisions that are not always in our best interest, or that of the organizations we work with.   Most of this has to do with psychology and how our emotions can govern our lives.  This knowledge helps me to understand financial decision-making, especially where poor financial decisions result in too much debt, and too little financial security over the long term.  I read an article recently by Ron Blue on The Road to Debt that makes a lot of sense.  In the article  he cites four main factors as causes for problem debt:

1.  A lack of Discipline
2.  A lack of Contentment
3.  A search for Security
4.  A search for Significance

     These themes also have a lot to do with our habits, our emotions and the psychology involved in money decisions.  Does it help me to understand the personal psychology of using money, even in a spiritual sense?  Yes, I think it does.  Mostly because it helps me to reflect more about why I am going to make a certain decision, or why I want to buy a stock or some other item for the home.  I then ask myself, what meaning or need will it fulfill in my life?  Why do I need to purchase it now?  

    I know I must work at staying disciplined in meeting my financial goals.  That is more than a daily thing- to achieve success over the long term I need discipline that lasts.   And that’s where Contentment, Security and Significance come in…  We can try to explore what is important to us individually and within our family and community.  We can try to do things that bring joy and growth personally, and to others over the long term.  We can focus on achieving positive outcomes, and what Curt Rosengren calls Skewing the Bell Curve of Potential Results.   For me, it all serves as a sort of self-improvement project for one’s entire life.  And heck, if it helps us improve our financial futures, then that’s good enough for me.  I often wonder what foolish money decisions other people have made.  But do you know what my most foolish money decision was?  Not starting to save and invest sooner.  The simple measure of time does amazing things for a portfolio. 

     I’ve come full circle on mortgage loans.  I used to be a fan of Adjustable Rate Mortgages, their flexibility and diverse product makeup.  And they can be a useful tool for specific situations.  But I’ve evolved to being a fixed-rate kind of guy. Why?  Because it’s just simpler over time, and probably costs less over the long run.  If you’re shopping for a new mortgage loan, and your choice is an ARM however, I strongly recommend you find an ARM tied to a U.S. Treasury index rather than a LIBOR or other index.  Why?  Because for quite some time now, the LIBOR interest rates have been moving in the opposite direction from Treasuries… meaning LIBOR has headed up while Treasuries have remained stable and begun trending down.  What does this mean to you?  In a nutshell, when (not if) your ARM resets… that is when the ARM initial rate period ends, and the new interest rate takes effect, a LIBOR ARM is going to reset upwards by more than a Treasury index based ARM will.  

     For example, let’s say you have a 5/1 ARM.  That means your intitial interest rate is fixed for the first 5 years, and then can reset once each year thereafter.  Each reset period is usually “capped” at a certain limit, such as a maximum of 2% per annual reset period, or with some loans the first reset is capped at 6% for the first reset period, and then 2% thereafter.  If you have had a 5/1 LIBOR ARM for the past 4-5 years (probably at a very low rate of 3%-4% plus a 2.5% margin) you need to be prepared for the reset that will increase your mortgage interest rate, especially with LIBOR rates currently around 5.2%.  Add the 2.5% margin to the LIBOR index and the new rate is 7.7%!.   For those with ARMS tied to the one-year Constant Maturity Treasury (CMT or TCM) index, their loan reset will result in a lower mortgage payment than the LIBOR reset because the 1-year TCM is about 4.3%.  Add in the 2.5% margin and the new rate is only 6.8%.

     Here’s an example- remember this only shows the Principal and Interest portion of the monthly payment, since every tax, insurance and PMI situation is different.  The mortgage payment includes PITI and PMI, which means Principal (cost of the loan), Interest (rate), Taxes (on your home), Insurance (for your home) and Private Mortgage Insurance (if your down payment/home equity is less than 20%). The following example is for illustration only, and may not consider specifics of various ARM products:

     So in the example above, the LIBOR ARM mortgage payment was higher because LIBOR interest rates are higher for the LIBOR index.  We know interest rates change all the time… the 1-year Constant Maturity Treasury index is lower right now, it’s a simple as that (and maybe after next week it will be even lower)?    And in the example above, the ARM payment resets are only for the next 12 months… in another year they will reset once again.  Will they reset higher or lower?  No one really knows… that’s the ARM game, and each year after the initial period the mortgage rate is going to change in one direction or another, and sometimes dramatically.   Here’s a look at the last few weeks comparing the 1-year Treasury index to the LIBOR index.  The rates are not always that different, and often they are very close, although it seems to me that the “London Inter-Bank Offered Rate” (LIBOR) tends to be higher over time.  In 2007 however, they have been drifting further apart for a host of economic reasons, monetary policy, the Dollar versus the Euro, etc.  It pays to know what Index your ARM is based on:

     And there are many different index values used for ARMS such as COFI, CODI, COSI, LIBOR, CMT, etc, etc.  Here’s a chart comparing the COFI, 1-year Treasury and LIBOR rates:

     We don’t know the future, but we can make thoughtful and careful analysis about our income and debt.  If you’re considering an ARM, think about what happens if interest rates go higher over time… the mortgage payment is going higher as well- can your income afford an increase?  How much?  We have also seen recently that it is not always so simple to refinance a loan, especially if housing prices are falling nationwide.  That’s the bind a lot of people are finding themselves in recently.  And yes, ARM loans have a “maximum interest rate cap” typically around 11% or 12%.  But can you imagine making mortgage payments at those rates?  We probably won’t see those rates of course… but they did in the early 1980’s, and I’m not willing to mortgage my future, and my house, to the risk of higher rates over time and increasing mortgage payments.  If a person has really solid documented income or other sources of personal wealth, they can choose to play the ARM game and just refinance when desired.  The bottom line these days is that ARM rates are not much different than 30-year fixed rates.  So why choose an ARM over a fixed rate loan?  Well, if you can get a lower ARM rate, and  can handle the increased mortgage payment if rates go up, and can refinance when desired based on  your income and wealth, and can sell your home if you can’t refinance, and can deal with watching interest rates over time… then maybe an ARM is for you.  

      I have had ARM loans before, and they served the purpose… but did I truly understand what I was getting into at the time?  Not the first time, but yes for the second time.  My favorite was a 5/1 ARM for two and half years, at 4.3%, and I then sold the home and moved. That ARM saved us a lot of money in interest payments over the short term.  But it was a concern for me because I knew interest rates were going up.  If I had not sold the home, I would have needed to refinance the loan, probably to a 30-year fixed rate mortgage.   And that’s where we are now… trying to keep it simple with the knowledge that our monthly mortgage payment will remain the same. It’s just easier to not worry about payments that might change over time, or what interest rates are doing. 

Remember!  Every Adjustable Rate Mortgage can be different, using a different index, rates, margins, adjustment caps and maximum caps.   Closely examine any ARM loan documents to ensure you understand the loan terms.   

For more information about ARMS and other types of home loans, here is a list of references.  I really like Jack Guttentag’s website as The Mortgage Professor.  He provides a plain-language, no-nonsense approach to a host of information about mortgages, real estate, many tools and calculators and an excellent mistakes to avoid section.

Types of Mortgage Loans – The Mortgage Professor

Adjustable Rate Mortgage Calculator – The Mortgage Professor

Adjustable Rate Mortgages – The Federal Reserve

Adjustable Rate Mortgages – Wikipedia

     What did I miss?

    Sometimes I wonder if I’m a compulsive shopper… maybe not in terms of buying everything and anything out of a need or desire to spend money, but rather that sometimes I’ll see something that looks like a great buy… and I’ll just buy it without regard to the budget or spending plan.  Take today for example… my son wanted a nice shiny red apple to give to his first grade teacher.  On the way back from some errands I stopped at the grocery store… “I’ll just run in and get an apple” I told myself.  I knew I would look around the store a bit, and as it turned out I spent about $50 on groceries.  Dang!  But I rationalized my purchases by only buying items on sale that we needed.  Or that I “thought” we needed.  So in terms of my actions, I spent money without planning for it just by stopping at the store (businesses thrive on people like me!).   Realistically, I could have lived without everything I purchased, even if I did only buy sale items at an excellent price.  I don’t think my actions meet whatever definition there is for compulsive shopping, but let’s see- I’ll check around the web for a minute…
     Okay, not surprisingly I found a lot of data about shopping and debt!  Here is some great information on compulsive shopping from the Illinois Institute for Addiction Recovery (I didn’t really think of compulsive shopping as an addiction before, but it makes sense): 

     After reviewing that definition I would safely say I’m not a compulsive shopper in terms of addiction.  I might be an undisciplined shopper, or even a “whim shopper” however, and I need to be more aware of my spending habits.  The research behind shopping as an addiction indicates people shop compulsively as a way to feel good about themselves, or replace something that is missing in another area of their life.  The problem is that compulsive shopping can spiral out of control and become a viscious cycle, especially in a society which rewards consumption and makes credit too easily available.  The end result is unchecked debt accumulation with little understanding for how to “get out of the hole.”  From a personal perspective, the greater hazard to my undisciplined spending over time is the insidious drain of money that could take place without being aware of it.  I think that’s where keeping track of your spending can really be helpful.  So I’ll work harder to not spend simply because I can… or to buy three bags of groceries when I only went to the store for an apple!   What do you think?  And how do you keep from spending money on a whim?  

     For more information on compulsive shopping, here’s an excellent article from Indiana University.  On a similar topic, there’s even an organization called Debtor’s Anonymous, helping people recover from issues relating to compulsive debt accumulation.

     Anna from Widow’s Quest has posted a terrific weekly round-up of articles on How to Solve Your Money Worries, and was kind enough to include Sushi Money’s discussion of Avoiding Foreclosure.  The Widow’s Quest site is dedicated to supporting those who are rebuilding their lives as widows, and how to reinvent yourself and move forward.  It’s a very interesting site and I appreciate the focus on solving money worries, as well as grieving the loss of a loved one.  From a personal perspective, my father passed away in 2005, and I know my mother has faced many challenges and questions along the way.  Losing a loved one at any stage of life is very difficult, but especially for seniors and those with long-established relationships.  The financial aspects of this change and separation can pose an additional burden at times of great stress.  For anyone going through this challenge there are many ways to find help.  Widow’s Quest talks about finding support as well.   For financial questions and concerns, I strongly recommend finding an objective fee-only certified financial planner in your local area.  You can use the Financial Planning Association’s search tool to help.

Okay, back home again and time to get serious!  Finished taxes for the year and looks like paying estimated taxes worked well for last year.  Actually I’ll get some of it back… after selling two homes in the last three years, the second home was just above break even, and under the threshold for paying taxes on any gains.  Keeping good records for home improvements and doing most of the landscaping myself really helped.  I use Turbo Tax and it has been helpful to look back as well as forward to see where our tax situation will be.  Now it’s time to work on debt reduction.  I have several credit cards and have taken advantage of 0% balance transfers, as well as 0% financing.  But one has to be very disciplined to ensure the payments are made on time, as well as paying off the credit cards before the 0% time period expires.  In some ways it’s a challenge to “manage debt” in that manner… but it allows me to keep funds in a good money market account earning close to 5% interest.  I don’t believe debt is always a “bad thing” because it can be used as a tool for a given time period.  For most of us, car and house payments are a fact of life.  But taking on more debt than one’s income can sustain is where you can get in trouble.   My goal over the next 6 months is to reduce all debt to a minimum.   After moving twice in less than five years, there is a lot of financial juggling that takes place.  Moving expenses and setting up a new home or lifestyle is a major transition.  Now we are in a place where we intend to live for a very long time…  and that allows a positive focus on our personal and financial lives over time.    Psychologically, does anyone enjoy carrying debt?  I think it bothers some people less than others.  It’s still a “burden” in terms of owing money and ensuring responsibility for the debt is managed.  Again, a short-term tool to help with life transitions and goals.   I think I’ll compute some debt to income ratios, and look at net worth… then begin tracking that on a monthly basis.  But along the way?  Keep saving and investing! 

Are credit card fees and interest rates an increasing, but unknown financial risk for consumers?  You wouldn’t normally think of risk in this way, but if credit card industry practices are closely examined we carry a lot more risk around in our wallets than we realize.  At least with investing, the rules and regulations are pretty clear and you generally know where you stand when you take on the risk.  But with credit cards?  It’s a game of roulette that we play according to an indecipherable rule book, and credit card companies that can change the rules almost any time they please.  For more and more consumers, those rules are taking a heavy (and unfair) toll on personal finance and indebtedness.  Bob Sullivan of MSNBC’s The Red Tape Chronicles has written an excellent article titled Credit Card Companies’ Change of Heart in which he examines how recent Congressional investigation may have prompted several credit card companies to quickly change what many view as unbridled predatory lending policies.  I won’t reiterate some of the egregious examples by credit card companies as described by Mr. Sullivan’s article, but suffice it to say I learned a few things I was not aware of.  Some of the really interesting insight was provided by other people commenting on his article.  In those comments, people have provided real examples of how they were hit hard by the credit card companies for late payments, universal default and even surprising increases to card rates with little explanation.  There were also comments on personal responsibility- reminding others that “we choose to use the cards” and no one forces us to take on that debt.  True, however when one uses credit cards or borrows money in this manner, there is a reasonable expectation of being treated fairly without the lender being able to change rates, fees or credit card agreements on a whim.  I think these issues will become increasingly visible in the months and years ahead, maybe leading to a welcome overhaul of regulatory practices.  Bank and credit card company policies are fiercly driven to extract fees and charges from consumers at every turn. Personally, enough is enough and I’m going to work harder to pay down the debt I do carry, while resolving to use my cards less frequently.  I’ve always taken “financial pride” in using my credit cards wisely, maintaining good standing and paying down debt efficiently.  Although I have not been treated unfairly with the debt I do carry, the more I read the more I realize my credit card debt is a ticking time bomb awaiting change or modification by credit card fee-creation teams whenever they choose.  Even paying down debt involves risk of having your rates increased-  when a consumer is worried that paying down a debt too fast will incur an increased credit card rate, then something is wrong!  For me, the word risk has taken on new meaning when I consider the potential fees and charges I might be levied with by my credit card companies… these fees are far more excessive than management, administrative and brokerage fees for mutual funds and stocks.  Take a look at your own debt profile and the revloving or secured credit cards you carry… read the fine print and you too may see risk beyond mere debt. You know what?  I think I will write the word RISK in bright red letters across the top of my credit cards- the next time I pull out the card for a quick purchase I’ll think twice, and maybe use cash instead.

That depends upon what you’re looking for of course.  Lets assume an individual’s overall debt situation is well under control, and their credit card debt, if not paid off monthly, is mild.  If an individual is trying to stay away from all market risk, and wants to keep cash readily available for a near-term use, then “safety” is defined by your need for the money, for a purpose close at hand.  

Having an “emergency fund” is important for unforeseen situations… the time you really need money for something.  Most advocates say 3-6 months savings in the amount of your monthly income needs should fit that bill.  I think 6 months is more appropriate, and should be a first priority, especially in a family. So bank savings, money market accounts and CDs will fit the bill (CDs for savings, not an emergency fund due to possible penalties upon early withdrawal… e.g. you need the money).   Next is the credit card situation… pay down the credit cards!   

But what about longer term?  Is a safe bank/money market account or CD really helping over time?  Aside from peace of mind for knowing the money is there if needed, it may not be a safe place to keep funds.  Why?  Walter Updegrave from CNN Money writes a nice overview on why stockpiling cash may be a bad idea in a recent article “A lot of cash- too much risk.”  In essence he shows how the bite of inflation can slow the interest rate growth of bank savings (or CD or money market accounts) to a crawl.  That just doesn’t provide the necessary growth for someone trying to save for retirement or some other longer-term goal.  Mr. Updegrave shows the better alternative of really using a 401(k), if you have one, to grow retirement funds.  

I can think of few reasons why someone should not take advantage of 401(k) opportunities.  Most of those reasons involve hassles with paperwork, or how long one expects to be with a certain company, etc, etc.  But most 401(k) plans offer amazing benefits, and can be portable to take to a new employer.  Best of all, most 401(k) plans offer some kind of attractive matching or other benefit to how much you countribute… why pass up free money?    If you don’t have one, or just don’t want to use it… start an IRA.  We all need some kind of tax-deferred savings vechicle.  There is no better way to build retirement funds over time than a long-term tax-deferred approach to savings.  What if that just doesn’t meet your goals and need?  Maybe it can for a part of your savings program, and you can still use bank savings, money market and CDs for another portion.  You don’t like stocks or mutual funds?  Historically they provide the best long-term growth opportunities.  What about U.S. Savings Bonds?  They can provide a safe investment with a decent return, and can be used to fund education needs for children at a later time. 

The point is that there are many opportunities to grow your money over time… the earlier we start, the better off we are in later years.  I had a water-softener installed a couple weeks ago.  I didn’t plan on making a large appliance purchase this month, but the old water-softener finally gave in.  We live on well-water, and a good water-softener is essential.  Good reason for having an emergency fund… but more interesting was the conversation with the installer.  Here’s a guy in his middle forties that has a construction business on the side.  He was an energetic guy with lots of ideas and a strong work ethic.  He built his own house, had no debt, purchased only used cars, and was helping his children pay for school.  What about his retirement needs?  He had over $100,000 in savings.  Where was it?  In the bank, in a passbook savings account.

 This hard-working family man had never invested, never started an IRA, never looked at stocks or mutual funds, and was not comfortable with anything but cash at hand.  He was proud of his financial accomplishments, and should be… but he was also taking on a lot of “risk” in terms of the long-term safety of the growth of his money over time.  He also didn’t have any life or disability insurance beyond what social security might provide, and a family member to run the business in case of his disability.  Lots more there to be concerned about.  He knew he needed to start some savings and investment programs that would give him a leg up on inflation, but he was very risk averse.   We talked about some options and I referred him to a Certified Financial Planner to help get started.  He didn’t seem inclined to really want to do more however.  I wished him well… and hope he looks at other options.  It’s never too late to start!