Financial Freedom 4 All

Reducing Debt, Investing in the Future

Introduction

Tips and Hints

Financial News

My Ten Dollar Project

Frank, at Hello, Dollar! has been conducting a project to turn ten dollars into as much profit as possible. He has been making jewelry to sell on eBay. Neville had a ten dollar experiment that went quite well, selling bottled water. I do not think that I am going to perform anything revolutionary, but I am going to make my own spin on these and try to make ten dollars a day.

This will be quite different as they are taking ten dollars and making more of it. I am just trying to make ten dollars a day. This is to be done through as passive a medium as possible. I do not believe in true passive income because if you do absolutely nothing, there is a good chance your passive income will do nothing, as well. So, I am going to try and make money from things I am already doing, like this blog, and from simple things where I usually just either spend my time doing nothing or spending money.

So, I have AdSense on this blog, as well as two other blogs I run. While I cannot get into any specifics, like revenue per click, or how many clicks I make, I will say that I am making just under a dollar a day from this right now. If I could increase this by twelve, I could start working on a Twenty Dollar Project.

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Economics Definition: Thinking at the Margin

For our third economics term, let's look at thinking at the margin, presented to us by, today, by Google.

Thinking at the margin:
Thinking about the costs and benefits of making changes in behavior.

This is the only definition that I could between using Google's "define" function, and Dictionary.com. I found a great example in the economics textbook, Economics Principles in Action, published by Prentice Hall.

From page 10: deciding whether to do or use one additional unit of some resource.

I like that much better. Basically, it is an analysis to find the optimal return on actions. Basically, you decide when to stop. For instance, we could come up with a method to determine how much the freethrow percentage would increase for a basketbal player based on how many extra hours the player practices. Here is an example given with a decision making matrix:



As we can see, the amount of benefit we can receive by incrementally increasing our effort is not constant. This is the case for nearly anything. For instance, if we have 80 acres with which we can grow corn or raise horses, we could choose to use all the land for corn or all the land for horses. However, all the land is not equally suited to do either task. As an example, 40 acres could be optimally suited for growing corn, while another 30 acres is moderately okay for growing corn. The remainder of the land is poor for growing corn. On the same token, perhaps the 30 remaining acres are optimally suited for raising horses, while 20 of the acres are moderately suited for raising horses. The rest of the land would be poorly suited for raising horses. We are going to simplify this by stating that only the moderate portion may overlap.

So, we would use all 40 acres that are optimally suited for growing corn, to do so. On the same token, we would use the 30 acres that are optimally suited for raising horses to do so. The only thing left is the moderate land. While 20 of the 30 acres are moderately good for raising horses, all of it is moderately good for growing corn. We could choose what is more important and make our desicion that way. If horses are more important, we would use the 20 acres that are moderate, and use the other ten for corn.

Let's assume we can raise two hours for every optimally suited acre, one horse for every moderately suited acre, and one horse for every three poorly suited acres. Using the desicion making matrix we could come up with these results:



So we can see, even though we are adding more and more land, our output per unit of land decreases. This is why we make decisions based on the best overall output for our effort. This may not seem important for you personally, but it can help you understand the motives of some people and companies, and it can help if you become the manager or owner of a company. Also, if you ever are given the choice between using land for horses or corn, you have a nice head start.

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Contribute Early, Contribute Often

When saving for your retirement, it is better to start sooner, rather than later. To emphasize this further, we will take two extremes: an early investor, and a late investor.

Meet Jane and John. Both Jane and John have just graduated from college and are very excited about their futures. Both Jane and John have been informed about their employers' 401k plans.

John is very excited about getting into the workforce, and he is eager to start earning money. However, he thinks he is too young to worry about retirement. He decides that he will wait to start contributing to his 401k plan. Ten years into his employment, John decides to begin contributing to his 401k plan, and defers $,2000 a year to the plan for the next 20 years.

Jane is also very excited about getting into the workforce, and is also very eager to start earning money. Jane, however, would rather start investing while she has few responsibilities. Jane decides to contribute from her date of eligibility, $2,000 a year, for the next ten years.

So let's recap. John waited for ten years before he contributed. He contributed $2,000 a year for 20 years, for a total of $40,000. Jane began contributing immediately. She contributed $2,000 a years also, but only for ten years, for a total of $20,000.

Assuming that they each had returns of 8%, compounded annually, who would have more money after 30 years? Jane! Jane invested $20,000 into her 401k and stopped, letting it compound interest for 20 years or more. After the entire 30 years, Jane had $145,845 for retirement. John, however, contributed for twice as long, and contributed twice as much money, but he did not have time on his side. Even though John's 401k compounded, it did not have enough time to pick up steam. John had $98,845 to retire on.

While I would not consider either of these examples to be adequate for my retirement, it illustrates that starting earlier is definitely better. If you have fewer responsibilities, you can afford to contribute when you are young. As a matter of fact, can you afford not too?

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Economics Definition: Factors of Production

Today, we have another economics term, brought to us by our friends at Dictionary.com:

Factors of Prodcution: noun
A collection of various resources which contribute to the production of goods or services.

In economics, there are three factors of production: land, labor, and capital.

  • Land - encompasses land and all resources derived from land (water, minerals, crops, etc)
  • Labor - effort expended by people to create goods or services
  • Capital - human-made resources that are used to produce other goods and services (tools, buildings, etc). There are two kinds of capital: Physical captial and human capital
    • Physical capital - human-made objects used to create other goods or services (conveyor belts, tractors, presses, etc).
    • Human capital - investments made in people including education and expereince that help to produce more or better goods or services
Our various economic systems are built around the ownership of the various factors of production. When slavery is used, the laborers have no factors of production. In communism, the factors of production are considered to be own collectively, but are rather owned by totalitarian government. In capitalism, the factors of production can be owned by anyone.

The goods and services produced can be business-to-consumer (B2C) or business-to-business (B2B). Many of our goods and services are B2B, as goodes and services are need at many levels to provide for the needs of business that produce goods and services for consumers (B2C).

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Economics Definition: Opportunity Cost

Opportunity Cost is one of the most fundamental concepts in economics. Let's look at its definition as provided by Dictionary.com.

Opportunity Cost: noun
The best alternative that is forgone because a particular course of action is pursued. An example is the interest income that is given up when large balances are kept in a checking account. Likewise, purchasing a home means that less money is available for another investment.

So what does this really mean? Well, in every decision you make, there are pros and cons. The best decision is to pursue the choice that has the best advantage, where the greatest difference lies between the pros outweighing the cons.

Here is a very simplistic example, but it illustrates the point. There are two banks that offer savings accounts that you are considering. Bank A offers a $50 bonus to sign up for an account, with an interest rate of 3%. Bank B offers a savings account with an interest rate of 5% without any bonus. Which is better? As always it depends on how you will use the savings account. Let's say you are going to save $10 per month in the savings account. On day one, your balance with Bank A will be higher. Eventually, there is a point where you balance will be greater with Bank B. This is because of a higher interest rate and compounded interest. If you are saving for short-term, and you will not exceed that point where the balance with Bank B would be greater, then Bank A is the choice. If you will be saving long-term, then Bank B is the choice. However, if you choos Bank B, you miss out on the opportunity to receive the $50 bonus. If you choose Bank A, you miss out on the opportunity to have a higher interest rate.

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Disclaimer

I will be the first person to tell you: you will not get rich from reading my posts. I take no responsibility for any outcome you experience from following my advice. There are different right answers for different people. Further, you never reach the end of a road by reading or listening to advice; you reach the end of a road by traveling it. On the road to financial freedom, expect hard work, discipline, and a lot of self-education if you plan to complete the journey.

The only thing I can give you is some ideas that you can try, and also learn more about. Here is a crucial piece of advice; if you want to be successful in personal finance, professional finance, business, politics, or even in humanities, learn as much as you can about economics. It shapes your daily decisions. If it doesn't, then you are probably not managing your money well.

I am announcing a daily (or as near daily as possible) economics term and definition. This is to be on top of everything else I discuss.

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Get $25

I have a special promotion that I am able to offer you, from ING Direct. There is no secret or catch. If I refer you to ING Direct, and you open a savings account, you will get $25. Anyone with an ING Direct account can do this. In addition, I will receive $10 as a referral fee (just to be honest). You will only receive your $25 if you sign up via the referral link (going directly through the ingdirect.com website results in no deals). If you want me to send you a referral link, email me with your request.

Here are some facts about the ING Direct savings account:
  • 3.75% Interest rate (above the average inflation rate)
  • FDIC-insured
  • No fees, service charges, or required minimums
  • Optional automated withdrawals from checking
This is a great place to save up some money for short term use, or to hold for a larger investment, like a CD. It is just over the average inflation rate, so you are not losing money by sitting on it.

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The Carnival of Personal Finance

I would like to introduce you all to the Carnival of Personal Finance. This is a round-robin system that is sort of like a web ring. Each week, one blog hosts the carnival. Various bloggers send posts to the hosting blog which are moderated.

There are a lot of great blogs on the Carnival of Personal Finance. I hope to one day host a week of the carnival myself.

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Maximize Your 401k

There are various retirement accounts available to people. The best accounts offer tax advantages. Some of the retirement accounts that offer tax advantages are: 401k, 403b, and IRA. 401k, 403b, and some IRA accounts offer tax deferred growth. What this means is that you contribute pre-tax money into the accounts. Some IRA accounts, including Roth IRA accounts, have other advantages like tax free withdrawals.

What are the advantages of tax deferred growth?
  • Reduce your adjusted gross income
  • Pay less taxes
  • Possible move to a lower tax bracket
  • Increase your investing power
When you spend after-tax money, a dollar actually is worth less than it was before taxes. For example, if you have one dollar, after tax, you may have actually earned $1.20, and 20 cents went to taxes. When you are using pre-tax money, the dollar you invest may have been worth only 82 cents with after-tax money. This increases your investing power, and reduces your overall tax burden. However, you must remember that you will be paying taxes on the money when it is withdrawn. This usually works out well, however, because you typically earn less in retirement. So, when you retire, you can typically expect to be in a lower tax bracket, meaning you will pay less taxes, overall.

There are other great reasons to invest in 401k accounts. Typically, your employer will match your contribution, at some level. For simplicities sake, let's say that John earn $100,000 per year. John's employer, Acme, offers a 50% match on his 401k contributions, up to 3%, and a 25% match on contributions beyond that, up to 6%. So, if John contributes 3% of his salary into his 401k account, he will invest $3,000. John's employer, Acme, will match his contribution by 50%, or $1,500. This means that the $3,000 that John invested is already worth $4,500, assuming he is 100% vested, or will become 100% vested. That is a 50% return, on day one. You will be hard pressed to beat a 50% return.

In many instances you are allowed to contribute up to 15% of your earnings into your 401k. Many financial advisors will suggest maxing out your contributions. A guaranteed suggestion will be to contribute as much as your employer will match, at a minimum. That means that a financial advisor will recommend for John to invest a minimum of 6% of his earnings, as his employer will match up to that amount. This is a good idea, no matter your financial situation. If you are currently trying to reduce your debt, I would recommend that you do invest up to the match, and no more, as you need to focus on your debt reduction. If you are in a two-income family, and you comfortably live within your means, I would suggest maxing out your 401k, if you can still afford to invest elsewhere.

I will advise you to not max out your 401k if you can not afford to invest in other areas. Why? Because you must remember that your 401k is not very liquid. You must wait for you retirement to come around in order to withdrawal funds without penalties. If you want to attain financial freedom before you hit your retirement age, you will definitely need to invest in areas that allow you more convenient access to your earnings. You could invest in rental properties that can give you immediate, but small amounts, of income. You could invest in certificate of deposits, mutual funds, stocks, bonds, or anything that has a decent return. I would shoot for things with a return of nearly 10%. I would avoid investments with returns of 3% or less, as that is at or below inflation.

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Another Method to Pay Off Debt: Snowball Debt Payoff Method

For all intents and purposes, the method that I described for paying off debt in Getting Down to Business is the most financially sound method. Debts with the highest interest rates are the ones that cost the most to keep. These debts usually have the largest balances, as well. For example, you can typically get a credit card interest rate for pretty low these days, even if you do not have stellar credit. However, you could have an installment loan for a car that would probably be in the 12-18% range. The car is probably going to be the larger of the two.




For many people, the most difficult issue with getting out of debt is self-discipline. For starters, this is usually the reason why people get into debt in the first place (that, and they may not be financially astute). So, as I always say, let the people do what works. Calling someone a fool because the best method is not working for them is wrong. People tend to do this all the time. Examples of this include conservation, technology, etc. People tend to think if you are not doing everything to perfection you are somehow below them. This is not the case. It is, in fact, counterproductive. If people think that conservation is important, they should accept that few people are going to make a complete 180. Allowing these people to do something small, like switch to more efficient light bulbs, is good enough. In the same way, giving people an easier method of reducing their debt is better than nothing.


The snowball debt payoff method employs some of the ideas that I explained in the past post. For instance, you pay the minimum on all your debts except your target debt. For the target debt, you pay as much as you possibly can until it is paid off. After you have paid off the target debt, you move on to the next debt and do the same thing. The difference in the two methods, however, is drastic. In the method I described before, your target debt is always the most expensive debt. The most expensive debt is the one where the interest to tax benefits ratio is the worst. Meaning, the debt with the highest interest rate that has no tax benefits is the most expensive debt. Many times, it also carries the highest balance. If this is the case, it is even more expensive. For some people, though, they do not see much progress because they are stuck on that one debt for a considerable amount of time. With the snowball method, your target debt is always the debt with the lowest balance. For people who find it difficult to stay disciplined, or who are impatient, this works the best. You see the results more quickly because you are knocking out the small debts very quickly.


Here is an example, modeled after the one used in my past post:



  • Credit card #2 - $32/mo. - $800 @16.99%

  • Credit card #1 - $40/mo. - $1200 @ 15.99%

  • Credit card #3 - $27/mo. - $600 @14.99%

  • Car payment - $212/mo. - $10,200 total @ 11.99%

  • Student loans - $120/mo. - $15,500 @ 5.3%


In this case, Credit card #2 is the most expensive debt, but it does not have the lowest balance. So, you would arrange the debts from lowest to highest balance and pay them off in that order:



  • Credit card #3 - $27/mo. - $600 @14.99%

  • Credit card #2 - $32/mo. - $800 @16.99%

  • Credit card #1 - $40/mo. - $1200 @ 15.99%

  • Car payment - $212/mo. - $10,200 total @ 11.99%

  • Student loans - $120/mo. - $15,500 @ 5.3%


I say, if it works, that is great. One thing you could do is to use this method to get started. This will help to build your confidence. Once you knock out all of your small balances, switch to the other method and get rid of the most expensive debts. In this situation, it happens to be the same order. But, in other cases, it may be different. Always keep in mind, however, that debts such as mortgages and students loans have tax benefits associated with them. You have to weigh those benefits against the interest rate. Also, some people think having that tax benefit outweighs paying off the debt in full. This is completely untrue, although, paying off your other debts first is more prudent.



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The Best Advice Ever: Goal Setting

"If you do not know where you are going, every road will get you nowhere"
- Henry Kissenger (1923 - ), US Secretary of State

If you want to end up nowhere, you do not need goals. Most people, however undisciplined they may be, do not want to end up nowhere. This is why you need goals. Goals help you measure your progress. If someone says they want to be rich, how do they measure if they achieve "rich." They cannot do that if they do not define it. Your goals must be measurable, definable, and attainable. If your goals do not meet these criteria, they will not work.

This idea is pervasive. It applies to debt reduction, building financial independence, lowering your cholesterol, everything.

I am a very goal-oriented person, I always have been. It lets me know when I need to move on to something else. This is probably why I never became an Olympic swimmer; I met my swimming goals in high school, and then became bored with it. I am always working on something. Right now, I am working on my BS and a business. Next year, I will be working on my MBA and investment properties. A couple of years later, I hope to be working on my JD and buying a farm (do not let your heart be troubled, I will not be practicing as a lawyer... I hope).

Here is another piece of advice about goals. This idea comes from the accounting joke: You keep a set of books for yourself, a set of books for your partner, and a set of books for the IRS. While I do not advocate this for accounting (it is fraudulent), I do advocate this for goals. When I set goals, I figure out the shortest realistic time to complete these goals. This becomes my "books." I have to be the toughest on myself, because no one else will be. For my partners, I loosen it up, so that if I stumble, I can still look good in their eyes. For customers and others whom my goals are shaped, I keep the most loose set of goals; this is so my partners and I all feel comfortable with the client. This way, you work towards your own goals, as hard as you can. If you stumble and still make it according to the goals you state for others, you still win. If you make it to the goals you set for yourself, you are a superstar, in their eyes.

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Check Your Credit Report

When trying to get out of debt and improve your financial situation, checking your credit report, regularly, is crucial. It allows you you to monitor the progress of your efforts, notifies you of outstanding issues for which you may not be aware, and it can be an early indicator of identity theft. Further, credit is being used for more purposes these days, including: employment screenings, insurance coverage, and security clearances (if you need that sort of thing). Essentially, everyone is starting to use your credit as a judge of character, whether you will have distractions, that it may indicate irresponsibility, or that you may have a conflict of interest.

You should check your credit report annually. Checking your credit report more frequently, including applying for credit, will hurt your FICO score (the score which is derived from your credit report).

There are three credit reporting agencies (CRAs) that are used to report credit issues. You can use an online credit reporting service, which you may be able to get all three credit reports from one of the agencies (called a 3-in-1 Credit Report). Also, they may be able to furnish your FICO score, as well. The three credit reporting agencies are:

Equifax
P.O. Box 740241, Atlanta, GA 30374-0241; (800) 685-1111

Experian (formerly TRW)
P.O. Box 2002, Allen, TX 75013; (888) EXPERIAN (397-3742)

Trans Union
P.O. Box 1000, Chester, PA 19022; (800) 916-8800.

You must dispute anything on your credit report that is false, misleading, or out of date. Below is a template for writing the credit reporting agencies to dispute discrepancies on your credit report (and remember to do this with each CRA that has the issue):


Date

Your Name
Your Address
Your City, State, Zip Code

Complaint Department
Name of Credit Reporting Agency
Address
City, State, Zip Code

Dear Sir or Madam:

I am writing to dispute the following information in my file. The items I dispute are also encircled on the attached copy of the report I received.

(Identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.)

This item is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.

Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.

Sincerely,

Your name

Enclosures: (List what you are enclosing)

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Credit Card Minimums on the Rise

Do to recent legislation regulating credit card activities, credit card companies are going to be gradually doubling your monthly minimum payments. Currently, the minimum monthly payment is just 2% of your overall balance. While this means that you have low monthly payments, it also means that it will take from years to decades to pay off the balance if using the monthly minimum. Through the recent legislation, the minimum monthly payment will be 4% of the overall balance. This means you will get out of debt more quickly, if you are only paying the minimum.

If you are only paying the minimum now, and things are tight, watch out. This means you will need to budget for more money, each month, to pay your new monthly minimum payments. Do not get behind on your payments, it will affect your FICO score.

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Getting Down to Business

People go in search of easy ways to fix their credit and get out of debt. I am going to tell you this right up front; There is no easy way to fix your credit or get out of debt. It takes a lot of hard work and discipline. If you have the will, there is a way.

Step One - Chart Incoming and Outgoing Funds
In order to get out of debt, you need to know how much you are making, and how much is going out to pay expenses. So, take the amount of money you bring home (as that is what you have to work with), and keep track of that. Next, add up all of your monthly expenses (rent/mortgage, car payments/leases, utilities, groceries, credit cards, installment loans, etc.), and subtract that from the money you make. If it comes up as a positive number (i.e. you make more than you pay each month), you are in good shape. This means you have some leverage to pay off your debts. If it comes up as a negative number (i.e. you make less than you pay out each month), you have some problems. This means you definately need to make some changes. There are two things you can do: spend less or earn more. You could also do some combination of the two. This means you may have to stop doing things you are used to doing; eating out, going to movies, etc. For most people, that will probably be sufficient. In extreme circumstances, you may need to do things like cancel cable/satellite tv service, cancel cell phones, reduce home phone service perks, sell a vehicle, move to more affordable housing, etc. Here is an example:

Incoming funds
--------------------
$1800 after taxes

Outgoing funds
--------------------
$600 rent
$212 car payment
$70 car insurance
$40 credit card #1
$32 credit card #2
$27 credit card #3
$200 groceries
$50 home phone
$40 cell phone
$120 student loans
$80 electricity
$80 gasoline

Incoming $1800
Outgoing $1551
----------------
Leftover $249

Now, you have $249 to work with in order to reduce your debt. Use this in order to start eliminating each of your debts, one at a time.

Step Two - Organize Your Debt

You determine which debts to reduce by finding the one with the highest interest, and paying it off first. Here is a list of the total balance of each debt, and its interest rate:

Credit card #2 - $32/mo. - $800 @16.99%
Credit card #1 - $40/mo. - $1200 @ 15.99%
Credit card #3 - $27/mo. - $600 @14.99%
Car payment - $212/mo. - $10,200 total @ 11.99%
Student loans - $120/mo. - $15,500 @ 5.3%

So, Credit card #2 is the most expensive debt, because it has the highest interest rate, and it has no tax deductions. So, you will pay the minimum payment on all of your debts, including Credit card #2, and then the extra $249 to Credit card #2, until it is payed off. It should be payed off after three or four months. When it is payed off, move to the next most expensive debt, and take all of your extra money and pay it off, you will not have $281 extra. Continue to do this until all of your debt is payed off.

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Welcome

This is Financial Freedom 4 All, dedicated to helping people reduce their debt and invest moneyto create a better life. Much of the focus on this blog will be debt reduction. If you have too much debt, how can you expect to leverage money to your benefit? The simple answer is that you cannot. If you have too much bad debt, it affects your credit and FICO scores. This means you are viewed as a risk to credit lenders. If they decide to extend you credit at all, you will be paying a higher interest rate. This means you are throwing away money, and reducing your buying power.

Once you have a solid credit history, you can then start making investments to ensure adequate funds for retirement, college savings for your children, or grandchildren, and have a better quality of life.

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