The American Dream Is An Illusion

part of our living room

What is the American Dream to you?

I used to think of it as owning a home, having a good job, and raising a family.  I don’t think I’m far off by thinking that’s what many of us think it is.  Perhaps the conventional thought is the house has a white picket fence with a 2-car garage as well?

But is that what we are actually aiming at these days?

My big issue here is owning a home.  We’re all hearing about financial institutions doing bad because of mortgages.  So what is happening to the people who buy homes?  Foreclosures!

Why foreclosures?  Could be that people bought too much house than they could afford with too little down?

The way I see it, when you’re buying a house with say zero down or even 5% down when will you actually own your home?  This has become a major problem for people.

In my opinion it’s no longer the American dream to own a home.  That’s an illusion.

Today’s American dream is to appear like you own a home.  It’s become more important to look like you have a great big home.  Who really owns these homes?  The banks!

If there’s anything to learn from all of the recent financial bruhaha it’s that most people have to re-think what owning a home really means!

  • An interest only loan or an adjustable APR will not help you own a home.  You’ll get to move into one but you won’t own it.
  • A modest home is OK.  You don’t need a McMansion!
  • Put down as much as you can when you buy a home (remember when you really needed 20%, aim for that).  This way you start off owning a good piece of it.
  • Homes are to live in!  Perhaps flipping a house is profitable for some.  But for most people a home should be where you live not where you speculate.
  • Just because you make enough to cover the cost of the mortgage it doesn’t mean you can actually afford the home!  So many other things have to be considered from taxes to losing a job to how much savings you have to home repairs, and so much more.

I’m ranting a bit so I apologize.

It just seems that there’s so much talk about how banks and such are so greedy that we might be forgetting that it’s people who are living in these homes.  They had a bit to do with all of this as well.  Some people probably got genuinely swindled and some came on hard times.  I understand this.  But many people were just greedy and wanted as big a home as they could get without considering if they could afford it.

I’m going to go a bit further.

The American Dream has turned into consuming as much as you can.  At least that’s what corporate America wants.

One of the biggest measures of the economy is GDP, Gross National Product.  This is driven by us buying more stuff.  When we buy less stuff then the economy stagnantes.  But is it really a fair point to judge the economy by how much stuff we buy?  What’s the end goal?

We can only buy so much stuff without going into debt and I dare say we’re in enough debt already.  How much more debt can we handle without bursting?

We need a new measure.  Maybe we need to look at quality of life instead of a dollar figure put on our economy.  Think of it.  How many times can we upgrade our personal technology?  We can only get so many computers and flat-screen TVs.  How quickly can we really upgrade or cell phones?  But when we don’t do these things, even if we’re already saturated, then Chicken Little runs around saying the economy isn’t doing well.

But how happy are we?  What is our life like?  If we have to work 2 jobs or put in overtime in order to afford all this stuff and their upgrades then is that a good life?  Is that a dream to aspire to?

What do you think?  What is the American dream these days?  Is it attainable?  Is the American Dream an illusion?

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Personal Finance In One Simple Equation

We’ve heard it all before haven’t we?

The simple way to build wealth is to spend less than you earn.  Let me demonstrate this as a simple equation:

Spending < Earnings = Savings

That’s it in a nutshell.

Take what you earn.  Now look at what you spend.  If what you spend is less than what you earn then what is left over is savings.  Let that grow and invest it properly and you will build wealth.   You only need two numbers to figure out that math!

Let’s use dollar figures.  You earn $3000 a month.  If you spend $2999 you have a dollar left over for savings.  What’s a dollar you ask?  In today’s economic climate one dollar of savings will put you in better shape than corporate giants like Lehman Brothers, which is declaring bankruptcy, Enron, Worldcom, or Merrill Lynch, which was bought by Bank of America.  And that dollar will have friends joining it every month as long as your spending is less than your earnings.

Now imagine if you could increase that savings amount either by spending less or earning more?  The savings will build up faster!

Let’s change the equation slightly now:

Spending > Earnings = Debt

Spend more than you earn and you are in debt.  You have to be.  Where else could the money come from unless it’s borrowed?

Back to the numbers…  You still earn $3000 a month but now you spend $3001.  You’re in debt.  Where do you get that extra dollar to get out of debt?  Maybe you borrow it from a friend?  Maybe you put it on a credit card (another name for debt)?   Either way it won’t materialize from out of nowhere.

And what happens the next month? 

Either you lower your spending by a dollar (assuming no interest) or you increase your earnings so you can pay back the debt.  If you don’t then your debt increases!  Just like our savings example that debt will keep growing until you find a way to pay it off.  If you let it grow too long then you get to be in the same boat as some financial institutions as you either have to declare bankruptcy or find someone to bail you out (and really if someone bails you out you will probably still be in some sort of debt).

As complex as personal finance can be sometimes it still boils down to a simple equation.  Plug in your spending and earnings. 

Too often we over-complicate the ideas that make up personal finance.  In reality the concepts are pretty simple, aren’t they.  Sure, you can go nuts poring over the different ways you can invest your money but the simple concept is clear — spend less than you earn and you can save.  That savings can help you build wealth.

Are you saving or in debt?

The Financial Roller Coaster Continues For Lynch, Lehman, And AIG

Threatening

Crazy news this Monday morning! So here’s the scorecard:

Merrill Lynch will be bought by Bank of America. According to Bloomberg.com, BofA will buy Merrill for $29 a share a 70% premium on it’s 9/12 price but considerably lower than it’s 2007 high of $97.53.  What caused this buyout to happen?  Bad mortgages! According to the NY Times Merrill Lynch has lost over $45 Billion in mortgage investments.  The iconic bull from their logo will now be running through the halls of Bank of America!  Is Bank of America slowly becoming the Google of banking?

Not so good news for Lehman Brothers which is filing for chapter 11 bankruptcy protection.  The firm was unable to find a buyer and as a result needs to protect itself until a sale can happen.  Lehman almost worked out a deal with Bank of America but BofA bailed someone else out instead.  Lehman Brothers’ problems stem from $60 Billion in “soured real estate holdings” according to the Associated Press.

And since two isn’t enough, AIG is seeking a $40 Billion loan from the Fed in hopes to prevent a downgrade of it’s credit rating.  AIG recently reported a quarterly loss of $5 Billion as a result of mortgage-related investments (see a pattern here?).  According to MarketWatch if AIG’s credit rating goes down it will be difficult for them to sell new products which would prevent them from raising new capital.

What does all of this mean? 

Well it’s going to be an interesting day in the stock market.  And by interesting I’m thinking not so good.  The International Herald Tribune is already reporting drops in the World markets.

As more financial firms reach critical mass it will become more difficult for other firms to get loans.  This could potentially be the straw that breaks the camel’s back on the whole recession question.  When firms can’t get more capital they can’t invest more in their businesses which slows their production.  If productions slows enough to become negative then we’re in a recession.

For us, the little people, I think it’s going to become more difficult to get a mortgage, at least in the short run.  Banks are going to be more skittish about giving away cheap loans.  I’m sure this isn’t the end of the situation either.  Hopefully though, the end result will be new policies at banks to prevent a housing crisis like this from happening again.  Banks aren’t the only ones to blame though.  The Fed has a hand in this as well as low Fed rates have made cheap money available for some time now.  And of course some blame has to go out to realtors and housing consumers for bad mortgages as well.  (Check out the take on the Freddie Mac and Fannie Mae bailout at My Two Dollars).

Buckle yourself in, it’s gonna be a bumpy ride!

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I Re-Allocated And Re-Balanced My 401(k) Portfolio

On white: Topsy-turvy

I logged into my 401(k) plan.  Ouch! It’s been taking a beating all year.  In fact I mentioned that my 401(k) was hurting back in December when Hank over at MiB Smarter Money gave me a nice analysis of my portfolio.  Now, I understand that I’m in this for the long haul as far as the investments are concerned.  After all this is for my retirement which is still a ways off.  There’s plenty of time for the investments to recover and do well.  I’m not going to pull my money out because the market isn’t great.  The only reason my contributions were lowered is because we’re a one-income family right now (I only lowered my contributions down to the company match).

So I accept that my 401(k) isn’t so hot. Now what?  Well, I’ve been reading The Bogleheads’ Guide to Investing (which I won from The Digerati Life).  I’m not done with the book (which, by the way, is a great how-to investing read) but I have read how important it is to have a good asset allocation and to re-balance your portfolio from time to time.

This made me wonder what my portfolio looked like.  I set up how I wanted my assets allocated when I started contributing and I’ve made a few adjustments from time to time.  But reading the Boglehead book made me re-think what my allocations should be.  Also, I haven’t re-balanced the portfolio in the longest time.  I’ve changed my future contributions but rarely what was already in there.

So today I changed that.  Looking at my portfolio I realized I had funds that I was no longer contributing to but still had large balances.  I also saw that based on suggested portfolios in the book and my age that I should probably have a higher percentage of bonds in my investments.  Other funds that I was contributing a higher % to really took up a very small % in my portfolio since I haven’t been re-balancing.

First, I changed where my future contributions will be going.  This is money that comes out of my check as well as the company match.  Next, I moved investments already in my portfolio to match my new asset allocation.  Both processes were pretty easy on the Fidelity site (the company that manages the 401k).  Remember, changing your future contributions isn’t the same as re-balancing your portfolio.  You have to look at both if you want it truly balanced to the investments of your choice.

Here’s what the allocation is now:

Stocks

Large Cap

  • Fidelity Contrafund 18%
  • Vanguard Institutional Index Fund Institutional Shares 22%

Mid Cap

  • Artisan Mid Cap Inv CL 10%

Small Cap

  • Fidelity Small Cap Stock Fund 10%

International

  • American Funds New Perspective Fund Class R5 5%
  • Fidelity Diversified International Fund 5%

Bond/Managed Income

  • PIMCO Total Return Inst CL 30%

Before I started changing anything I made sure that there would be no fees for changing investments.  Some funds charge a fee if you sell them before a certain time frame.

I also set up my account to send me an email if any of my percentages exceed 5% of what I set.  This gives me a reminder to check if I want to re-balance the funds that changed.

I’m not expecting my portfolio to all of a sudden jump into the black but it will be interesting to look and see where it’s at year-end.  Again, these funds are for the long haul as I won’t use them until I retire.  That said, I still need to adjust my contributions and allocations as time goes on.

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What We’re Doing To Adjust To One Income

Contando Dinheiro

As I told you yesterday we’re moving from a two income family to one income. This will take some adjusting on our part.  If you’re considering moving from two incomes to one you should check out 9 Tips For Going To One Income from PT Money.

Among the things we have done so far to adjust:

  • Changed my 401(k) contributions – I was contributing more than the company match for my 401(k).  I’ve now lowered it to the company match.  Anything lower than the company match and I would be missing out on free money.
  • Roth IRA contributions – We lowered our monthly contribution to our Roth IRA’s.  Yes it’s important to save for retirement but for right now we need to make sure we can handle our new budget constraints.  If we find we have enough left over we’ll up the amount.
  • 529 Plans - Again, it’s important that our kids are able to go to college but having money now is more important.  We didn’t eliminate contributions, just lowered them.
  • Tax Withholding – With my wife not working I plan to change my tax withholding so I can keep more of my paycheck.  We’re waiting to hear back from our accountant for advice on what we should set my withholding for.
  • Health Care – Our health care was through my wife’s job.  I’ll have to switch it over to my company’s once my wife’s coverage officially ends.  This will cost us as my wife had free coverage and I don’t.  We had to keep this in mind when we worked out our budget.
  • Look for ways to trim expenses – The Starbucks days are coming to an end.  And now when we go to Target or BJ’s we’ll go in with a set list of things we need and not buy things we want.
  • Work on finding alternate sources of income – We’re keeping an eye out to see if there are any ways to earn some extra money.  I’d love to say this site would help support us but blogging isn’t as lucrative as some make it out to be.
  • Go through all of our monthly bills/expenses – We made sure to see where our money was going monthly.  We didn’t want to build a budget then find out we skipped something that would make us go over.  Make sure you check for any automatic contributions or payments you may have set up!

This will be a big adjustment for us but it will be worth it.  We’ve saved and planned and budgeted and I think we’ll be fine.  A little tighter than we used to be but fine.

Do you have any other ideas?

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What Is Raising A Child Worth – We’re Going To One Income

island hopping

What is it worth to raise your child? Is it worth giving up an income?  For us the answer will be yes.  First the first time in a long while my wife will not be heading back to work this September (she works in education).  Instead she will be staying home to raise our little guy and our princess (19 months and 8 yrs old respectively).  This wasn’t an easy decision for us.  Giving up her income will require us to be a lot more frugal and we’ll really have to watch our spending now.  Our future savings will also decrease as we won’t have as much to put away.  We have  a nice cushion already and I think we can do this; it just requires us to change our lifestyle.

Here is why we’re moving to one income:

  • Child Care Cost – We were paying a LOT in child care.  And yet for all we were paying our son was getting sick way too often, catching bugs from the other kids at day care.  Not that the day care was bad; it’s just inevitable that a child gets sick and spreads it around.
  • Sick Days – My wife took a lot of sick days during the last school year.  As I mentioned the little guy was getting sick a lot.  Day care is supposed to help us go to work but it was causing a lot of stress instead.  Let’s face it, it’s painful seeing your child sick and not be able to do much about it.  And my wife was getting to a point where her sick days were going to start costing her.
  • Stress of getting around and making arrangements - Mornings were hectic to say the least in our home.  Getting two kids ready and getting to work on time s a big deal.  The evening before we had to make sure everything was prepared and laid out for the next day.  Then there’s actually dropping the little guy off and picking him up (sitting in traffic, finding a spot, etc…).  Ever leave you child with someone else and have him cry for you?  It will break your heart!  We also had to find arrangements for our daughter after school for a good part of the year.  And because I was dropping her off in the morning I was getting to work and leaving later.
  • Enjoying raising our children – Last on this list but first in our hearts, the main reason for my wife staying home to raise the kids is because we feel it’s the right thing to do.  We feel strongly about being there for our children in their formative years.  My wife originally intended to take more time out when the little guy was born but she ended up going back anyway.  Now she will take the time off to be there for them.

It’s a shame that in today’s economy having a parent stay at home to raise the kids has to be a difficult decision.  When did it switch from a second income being gravy to it being just about necessary?

Stay tuned to see what we have done so far to adjust to one income!

Have you moved from two incomes to one?  How is it working for you?

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Not Having The Police At A Car Accident Can Cost You

Car crash

As I mentioned in an earlier article, our new car got into an accident on our vacation driving down to Virginia. The weather had recently turned to rain.  We were driving along the highway below the speed limit making sure to keep a safe distance from the car in front.  Suddenly traffic slowed down so we did as well.  Then I saw it coming in the rear-view mirror – BAMM!!  We just got hit from behind. The force was enough to throw us forward.  I moved to avoid the car in front but ended up clipping his fender.  All three cars pulled off to the side of the road.  Thank goodness no one was hurt!  The kids were shaken up (heck, we were all shaken up) but we were OK.  I got out and assessed the damage.  Man I didn’t realize how bad we were hit.  Back door was crunched inward.  At first I couldn’t even open it.  Our front has a small dent as well.  The other two cars – scratches at best.  It was an SUV Oreo and our poor mini van was the creamy middle.

Still a bit frazzled from the accident the other two drivers and I began to exchange automobile insurance information.  The person who hit me was in a rush to leave.  He didn’t think we needed to call the police since no one was hurt and we were exchanging info already.  Something didn’t feel right about this to me.  Thankfully, I listened to my Spidey sense and called the police.  A few minutes later an officer arrived and took all of our information.

What A Police Officer Does At The Accident

  • The officer took all of our pertinent information and heard separate descriptions of what happened from each of us. This was good because the officer gave us each a Driver Information Exchange Report which listed car insurance information, driver’s license #, address, phone number, car description VIN, and more.  After an accident it’s easy for a driver to forget to get a piece of information or write something down incorrectly.  Getting this from a police officer helps to prevent that.
  • I didn’t know it at the time but you could be given a ticket for driving too close and causing an accident (at least where I was). This may have been one of the key reasons the driver who hit me wanted to leave.  It ends up the officer gave him a written warning.  This is very important in that it gives official evidence that the officer felt it was the driver’s fault for causing the accident!  This will help in determining the fault for the insurance companies which will lead to me getting back my car insurance deductible from repairs on my accident claims (my deductible is $1000).
  • The officer filed a police report for the accident. The insurance companies will use this as well in determining the fault.  Without getting a police report you run the risk of a driver changing his story after the fact and it becomes an issue of his word against yours.  Again this will help in getting my deductible back.
  • Having an officer there helps keep everyone’s heads level. Things can get heated when there’s an accident.  I’d rather have the officer do the peace keeping than worry about it myself.  Also, I want to believe in the best in people but I don’t know the person who hit me from Adam.  An officer can confirm that this isn’t a criminal.  A little paranoid?  Yes.  Does it give me additional peace of mind at a stressful moment?  Heck yeah!

As you can see calling the police was important. With the written warning and the police report the automobile insurance company should see that the fault was on the other driver.  This will save me my insurance deductible of $1000.  Had I not called it could possibly cost me that $1000!

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