“We just got a subscription to Dish Network. We need a way to relax and we figured that it is only $33 per month out of our budget. We deserve it, and it’s really not much money.” I am confronted with a variation of this comment much more often than I would like to be. If it’s not satellite TV it’s high speed internet or cell phones or DVD rental programs or . . . you get the idea. I usually smile politely and nod my head. I don’t want to confront people with the thoughts that are passing through my mind. But I feel like I need to get at least one of those thoughts out there before it bursts out unexpectedly.

You have every right to spend your money

Before I go on, I want to make it clear that your budget is exactly that – your budget. I claim no right to decide or even influence how you spend your money. When clients come to me for help with their budget they often expect me to tell them what to cut. I won’t do that. All I do is help them organize their spending into categories, compare their spending to their net income, and then go through each category one by one. As we discuss each category I help them decide for themselves what is worthwhile and what is not. My opinions do not enter the conversation, at least as much as I can help it.

However…

That said, I do want people to really think about the true cost of each expense. When we spend our money we rarely think about the full cost of the item – we usually only notice what is on the price tag. Each dollar we spend is a dollar that we didn’t save. That is ok. We have to spend money to live, and we can spend money to live comfortably as well. The goal is not to be a miserable miser. (Have you ever noticed that those words have the same root?)

How much does it cost . . . really?

So, prepare yourself to hear from the financial planner/accountant that is inside me. I will now allow you into my brain to experience the thought processes that I go through in making a long term buying decision. In this example I will imagine that I am trying to decide if it is worth it to me to spend $33 per month on a Dish Network subscription.

Let’s start with the easy math. $33 per month x 12 months = $396 per year. When I am deciding to take on (or eliminate) a monthly expense, the first thing that I do is turn that monthly amount into a yearly price. For some reason $400 per year seems like a more significant decision than $33 per month, and so it makes me weigh the decision a little more carefully. (By the way, marketers know this as well, and have almost perfected the science of monthly pricing.)

Next I will sometimes turn that yearly amount into a multi-year amount, if that applies to the type of purchase I am considering. So, let’s say I get the subscription and become addicted to TV. In that case it might be a very long-term decision. Not counting price increases, I will have spent $4,000 over 10 years, $12,000 over 30 years, or even $24,000 over the next 60 years (my life expectancy). That’s a lot of money, but for 10, 30, or 60 years of daily entertainment, it honestly doesn’t seem that bad.

The scary part

Here is where it gets interesting. What if I decided to take that $33 and invest it instead? Here are the results:

I don’t know how much you think you can earn in the market if you have invested over a long period of time. But let’s say I get 10% - the lower end of overall market returns over a long hold period. Looking at these numbers I realize those 30 years of TV watching has actually cost me $74,907, not $11,880. That works out to be about $208 per month! That is significant. Here is the equivalent monthly cost of all the numbers above:

Now you can decide

I honestly believe that some things are worth the cost. But there are other things that are definitely. Do I go through this whole process each time I decide to spend money? No, but if it is a commitment to repeatedly spend I try to do this. If nothing else, having done it several times makes me realize that a $20 or $30 per month decision is really much more than that. My hope is that this glimpse into my thought process will help you stop and think about your spending choices. Are they worth the true cost? Some will be, and some will not.

Tags: compound interest, Frugality, Investing, saving

Last week I stopped by the grocery store on my way home from work with the specific task of buying some things that we needed, which also happened to be low-price-leaders for the week. Armed with my “club card” and with an iron will to only buy the true bargains that we truly needed, I entered the store like a man with a mission.

Attack! . . . Dodge! . . . Swerve! . . . Attack again!

I quickly and systematically went to those parts of the store with the best deals (that I also needed). I grabbed 10 lbs of Nectarines for $1 a pound. Then I went for the tomatoes, but as I was loading up the bag I realized that the 10 lbs for $10 was exactly that – if you buy anything less you pay $3.27 per pound! Sneaky little devils.

But I couldn’t use 10 lbs of tomatoes, so they didn’t get me - I swerved just in time. Next, on to the roast for $1.49 per pound . . . you get the picture. A couple times they almost got me, but each time I escaped. I felt pretty proud of myself on the way to the register.

You see, I only enter that particular store when on this kind of mission, and I never buy the other outrageously priced stuff while I am there. I try to beat them at their game, and I felt like I had.

The funniest comment I have heard in a while

So the lady at the register rings it all up and tells me it comes to $30.47. Then, as she looks at the receipt she proclaims, “Wow! You saved more than you spent! Great job!” She said it in all sincerity and with a look of true amazement in her eyes. As I walked away I looked at the receipt and, sure enough, it said that I had spent $30.47 and saved $44.89.

Does anyone else find that comment as funny as I do?

I didn’t save more than I spent! I spent! I spent wisely, but I still spent. I have always found it funny how these stores put the “savings” at the bottom of the receipt. Do they think that I would have spent $2.98 per pound on their nectarines if they hadn’t been on sale? I wouldn’t have, and so I didn’t “save” all the money that they indicated. I spent what I had planned to.

They could have just as easily said that the nectarines usually sell for $15 per pound and I “saved” $140 on the nectarines alone! What a joke. But the funniest part to me was the lady’s sincere awe that I had just saved more than I had spent. I laughed about it most of the way home. (I know, this is the kind of thing that only members of the ABA (Addicted Budgeters Anonymous) would find funny – it’s a warped world that we live in).

So . . . what’s the point?

I cannot count the number of times that I have listened to people tell me about the incredible deal that they just got on _________. As I listen, it almost always becomes apparent to me that _________ was something that they never intended to buy when they went to the store. That’s not a great deal. That’s you getting duped out of your hard earned money, buying something that you never intended to buy.

I don’t care if ________ normally costs $100 and you just got it for $25 – you just spent $25! You didn’t save $75, you spent $25. (The exceptions to this would be, 1. You turn around and sell it for more than $25 or, 2. you were already in the market for this item and needed to buy it and found a great deal. In these two cases you actually saved/made some money).

So, the next time that someone is trying to convince you of the great deal that is being offered – of all the money that you are “saving” – stop and think. Does spending = saving? Usually not.

I use the term lazy only for headline punch. You are all very hard-working individuals.

No, actually it’s because of this article: “Budgeting for Lazy People” written by Dayana Yochim over at the Fool.

Here are some tips if you’re just feeling lazy about YNAB (either starting or continuing).

Use Fewer Categories

I am on a quest to get our categories down to eight. Right now we’re somewhere around 35! I’ve been whittling almost every time we use the budget (which is now almost exclusively on Sunday evenings, unless of course I’m betatesting).

A few of my thoughts going forward. I’m going to get the biggest bang for my buck by consolidating all of our insurance into one category: Insurance. That’ll kill homeowners, car, life and health. I’ll drop from four to one.

I used to have the kids’ clothing categories all separate. I’m going to get those down to just Clothing. I may keep a separate category of clothing for Julie because she likes to know how much she’s spending specifically. I don’t buy clothes, so I don’t need a category.

Now, you may be wondering how I’ll be able to keep all of the insurance payments straight if they’re in one big category? A few things: 1) homeowners is monthly, car is monthly, health is monthly, life is annual (or monthly divided by 12). I’ll be dealing with the same total to be budgeted every month. 2) a new feature in the beta version makes this very nice, because I can write notes about specific categories, or specific Budgeted amounts.

I think I’m going to expand the reach of our Miscellaneous category and also consolidate Date, Family Night, and Recreation down to just one: Entertainment.

Why all the work getting to fewer categories? I don’t want to have to make as many decisions when recording transactions. Instead of having to think, “Okay, this shirt was for Porter…those shorts were for Harrison…now I need to split the transaction…” I just record it in Clothing and I’m done.

Fewer categories means you don’t need to split transactions as often. That means you’ve saved some time.

Import Your Transactions from the Bank

OFX, QFX, QIF…YNAB Pro imports them all from your bank. I just grab the same date range every week (First of the Month through Today) and import. It disregards transactions already imported and I categorize the new ones. I very rarely deal with matched transactions because I very rarely input spending except through importing.

This saves a bit of tedium and time.

Use the Batch System

Decide on a set time once or twice per week to enter all of your spending. Just cutting down on the frequency of the process will save you time.

I implemented a batch system for email several months ago and love it. (I was prompted by Tim Ferris’ excellent book, The Four-Hour Work Week). I do emails at four, noon, and four again. (Early to bed, early to rise, makes a man healthy, wealthy and wise…) The time savings has been measurable, and productivity has increased because I’m distracted far less.

My Thoughts on the Fool Article

It’s funny, because the beginning of the article really caught my attention but then as I read it, I realized what the author was suggesting was actually quite a bit of work One aspect I really liked that they talked about: the absolute key being that you spend less than you earn (Rule Two certainly helps you in this regard) and, in the end, that’s it. That’s all you really need to worry about.

Yes, it may be nice to look back in 10 years and see how much you spent to bring your golf game from horrible to horrid (which is worse?), but in all honesty, you probably won’t ever look back and need to know that information. Bear that in mind when you’re debating about “going granular” or just wanting to make sure you’re staying on top of the Big Picture: Spend Less than You Earn.

Conclusion: To All Those Who are Out of Control

These don’t apply to you. You need to get with it. I would suggest almost the exact opposite from what this article suggests:

1) Plug leaks. If you’re spending a bunch of money on coffee then you need a coffee category. DVDs? You need a DVD category. Do you find yourself constantly purchasing books? You need a book category. As you isolate, you’ll evaluate and when you evaluate, you’ll mitigate (useless spending).

2) Record things manually. Force your spending to be something you really have to work for. Recording your spending manually will make you (dreadfully) aware of what is going on. Yes, it’s nice to have beautifully-designed aggregators of all of your spending data, but looking back at your spending nicely categorized doesn’t have near the psychological effect of sitting down with a receipt, recalling the moment of purchase, seeing the amount, t-y-p-i-n-g that amount in, deciding where to categorize it, and then feeling slightly sick to your stomach.

3) Increase frequency. You need to be recording your purchases every day. At least once per day. Frequency breeds awareness and that’s what we’re after.

As you develop the habit of budgeting, you’ll be able to adjust these three things accordingly.

Tags: Budgeting, motley fool, personal finance, software, ynab

Welcome to the 163rd Carnival of Personal Finance! This week’s theme is “Benjamin Franklin’s Quotable Quotes”.

You Need A Budget (YNAB) is thrilled to be hosting this week’s carnival. Since 2004, this site has been dedicated to getting the world on a budget, one person at a time — but I truly love all things personal finance, which means I absolutely loved this week’s best from the personal finance blogosphere.

And yes, we’re biased around here, so we’re kicking it off with the stuff about budgeting (Oh, by the way, I quit budgeting last week).

Budgeting

If you know how to spend less than you get, you have the philosopher’s stone.

7 Millionaires … In Training! thinks you need to think again if you’re of the opinion that 100k means you’re ‘rich’.

LivingAlmostLarge comments on 7 ways to stay poor.

To Be Debt Free asks the tough question: How Deep is the Hole You’re In?.

Career

It is the working man who is the happy man. It is the idle man who is the miserable man.

FMF from Free Money Finance says his Blackberry makes him more productive on the job.

Andy from Saving to Invest points to 21 Signs that you are losing interest in your job .

Credit

Creditors have better memories than debtors.

American Consumer News exposes 5 Untruths About Your Credit Report.

Debt Freedom Fighter provides 3 Credit Card Tricks that Keep More Money In Your Pocket.

Ask Mr Credit Card answers the question: Does Paying My Credit Card Bill Before the Statement Raise My Score?.

Debt

If you would know the value of money, go and try to borrow some.

The Happy Rock is thinking about selling the car to accelerate debt reduction [Editor's note: go for it! what have you got lose? :)]

Dan Ray from Taking Charge noticed Title Loan Ads on a Chicago Tribune Title Loan Exposé piece.. Do you smell the irony?

Dana from Not Made Of Money lays out the strong logic in how to Break the Cycle of Car Payments.

Anthony Luafalealo from Amateur Economists thinks loan modifications just add salt to the wound.

Economy

Any society that would give up a little liberty to gain a little security will deserve neither and lose both.

Curt from PennyJobs.com presents a humor piece on How to Determine When We Are In A Recession From Your Neighbors.

Kyle from Amateur Asset Allocator sheds some light on Common Misconceptions About Government Statistics.

Bryce from Save and Conquer explains how a run on the bank can happen.

FiveCentNickel did a nice piece: The Federal Minimum Wage: Looking Back Over Time.

The Personal Financier writes: On the Psychological Effects of Ownership and Overpricing (Sellers tend to overprice their assets to include the pain of having to let go). Very interesting read!

Lisa Spinelli from Greener Pastures makes the case that Cash for Clunkers helps the economy and the environment.

Free From Broke outlines Recession Or Not - The Challenge The Fed And Our Economy Has.

Finance

Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.

HelpMyCashGrow.com gives the GrigsbyCo Retro Post: What Truly Is Financial Freedom?

J2R from Journey2Retirement presents Be honest with your finances, even if they’re bad.

Broke Grad Student asks whether we’re ready for a cashless society.

Money Answer Guy gives 5 Mistakes to Avoid When Buying a Car From a Dealership.

Pete from Bible Money Matters presents Another stimulus check? Maybe, but why not just create your own? (talks about a possible second stimulus check, and then talks about why you might want to just create your own supplemental income.)

JS from Smart Money Daily states: I wish I had married for money, not love.

Bob Vineyard, CLU from InsureBlog presents With This Ring, I Thee Insure. We’ve all heard about marrying for looks or money, but insurance?! InsureBlog’s Bob Vineyard reports on couples who think they’re forced to do just that.

Jim from Blueprint for Financial Prosperity is telling you to Beware False Indicators of Bank Health.

Squawkfox wrote an interesting piece: Cars Are the New Smoking. Can the costs of SUVs be compared to smoking?

Frugality

Our necessities never equal our wants.

Daily Money Hack provides some great information on COBRA with COBRA Health Insurance Hack: Pay Only If Needed.

DJ from The Family Wallet presents Turn Closet Cleaning into Cash.

Fitz Villafuerte from Ready To Be Rich presents Simple and Practical Ways To Save Money On Clothing [Editor's Note: Hide the money from your wife?]

Dave from Money Under 30 presents Five Frugal Travel Secrets.

Grey from Frugal Fu says A Consumer Awakes!

MoneyReasons shares some money saving tips you probably haven’t seen before with Saving money in the Library.

Sean Lewis from The Money Saving Blog presents 25 Ways to be Tech-Savvy but Frugal. (This is a great read if you’re into the tech stuff but, uh, have a budget).

Investing

An investment in knowledge pays the best interest.

Todd from Harvesting Dollars makes a great case for Spreading Out Your 401K Investments Throughout The Year.

Megan from Counting My Pennies asks: Who Should Get Your Retirement Money?.

Dividend Growth Investor shares his Dividend Growth Plan Strategy.

The Dividend Guy cautions against loading up on company stock just because of the match.

Money Management

The use of money is all the advantage there is in having it.

AJC takes issue with paying your mortgage off as quickly as you can. (Dave Ramsey followers beware).

Saving Advice presents God and Money: Prayer Won’t Fix People’s Finances. If you’re up for a lively debate, you’ll want to head here.

The Financial Blogger manages to tie in the new Batman Movie with The Dark knight Money Management Approach. It’s a nice twist.

Budgets are Sexy gives My 4 Favorite Pieces of Financial Advice E-V-E-R.. There are some gems in here!

Tanesha Morgan from Personal Finance Analyst presents LifeLock Identity Theft Protection - Savior or Fraud?.

mbhunter from Mighty Bargain Hunter presents Can you handle the financial truth?, and says, “Sometimes is takes someone raking you over the coals to make a real change …”

Shadox from Money and Such presents iPhone and the Road to Financial Ruin, and says, “The long lines for iPhones are the road to financial ruin for many Americans. Not because the iPhone is not a great phone, but because folks just seem unable to control themselves.“

Ashley from Wide Open Wallet shares Green Living: Solar Power.

Glblguy from Gather Little by Little presents Personal Finance Kata. (I had to look it up too).

Kevin from No Debt Plan presents The No Debt Plan: Step Five: Revisit Your Goals and Budget, and says, “Once you’re out of debt, you need to reassess where you’re at before moving forward.”

Patrick from Cash Money Life says the first step to becoming a millionaire is to earn some money.

RC from Think Your Way To Wealth presents 7 Safe and Smart Money Moves for Unstable Economic Times. (This is a great read).

Other

MoneyNing (David) from Personal Finance Blog by Money Ning presents An Intro to Passive Income, and says, “Passive income, we all love it but seldom know how to make it.

So Cal Savvy from So Cal Savvy presents Going to the chapel of thrifty love.

Jennifer Lynn from Broke-Ass Student explains Why A Smile Is Your Most Valuable Asset.

Real Estate

Dan Melson from Searchlight Crusade presents What Does It Mean To Fall Out Of Escrow?.

Blair Benjamin from Asset Almanac presents Housing Bill: New Help for First Time Home Buyers.

Money from Moneymonk warns that a large house could threaten your financial future.

Peter Harrington from Money Management And You! talks about Diversifying With Real Estate.

Reviews

Silicon Valley Blogger from The Digerati Life presents Mint and Wesabe: Online Personal Finance Tools Are Gaining Ground.

Saving

A penny saved is a penny earned.

Del from Fiscal Liberty presents How To Change Yourself from a Spender to a Saver.

Dan from Everyday Finance talks about saving money by avoiding convenience.

Bob from Christian Financial Help shares the most important organic fruits and veggies.

Penelope Pince from Our Fourpence Worth presents How to Save Gas and Time with Google Maps. This is a great article about re-routing, mapping, etc. — Very cool!

Super Saver from My Wealth Builder presents Are My Bank Deposits Insured by the FDIC?.

Fred from Smart Savings 101 presents 10 Tips to Save Money on Gas.

Taxes

In this world nothing can be said to be certain, except death and taxes.

Michael from Beyond Paycheck to Paycheck asks, “Can I lower my tax withholdings?”.

Kay from Don’t Mess With Taxes presents Sales tax holidays on tap, and says, “Attention shoppers! More than two dozen jurisdictions are waiving sales taxes on purchases this coming weekend.”

There were tons of great submissions this week. Thanks so much for participating and thanks especially for letting YNAB host!

While I didn’t have a whole lot of good things to say about Fixed and Equity Indexed Annuities, I do have a few more positive things to say about Variable Annuities. I actually see some real benefits to some of the Variable Annuity products out there, and have found them to be the best choice for a portion of some of my clients’ portfolios. That said, you must make a very informed decision, taking all aspects of your personal situation into consideration before investing in a variable annuity.

Variable Annuities (VA)

Variable Annuities are a creation of insurance companies that allow you to invest your money in the market while still keeping many of the benefits and promises of an annuity. When you invest in a VA you are given a choice of “sub-accounts” in which you can allocate the funds. Usually you are able to choose from a wide range of investments, from money market accounts to emerging market funds, and everything in between. Unlike fixed and equity indexed annuities, the value of your account will go up and down in relation to the sub-accounts that you have chosen to invest in, and there is the potential to lose a lot of your principal. On the other hand, there is much more potential for growth than in the other types of annuities – 100% of the growth of the sub-accounts that you (or your advisor) have chosen.

Guarantees

The industry is coming up with a new guarantee every month, or so it seems. I cannot possibly get into the details of these promises without creating a monster of an article. I will try to just give you a taste of the types of things that are available.

First, nearly all VAs have a “death benefit,” which usually gives the promise that if you die and the value of your account is less than the amount you have invested, your heirs will receive the amount invested. So if you had invested $25,000 and the market had gone way down and now you only have $12,000, the company will pay your heirs the full $25,000. Of course, there are variations out there, but this is the idea.

Next, there are a bunch of “living benefits” available as well (living, meaning you don’t have to die to get the benefit). One such benefit is a promise that if you leave your money in the annuity for a minimum number of years (often 7 or 10) you will always be able to withdraw an amount equal or greater than your investment. So in the example I used earlier, you would be able to get $25,000 from the company even when the value is only $12,000, to use however you want to.

Another guarantee out there is a promise that the value of your account will grow at least a certain amount (usually between 5 and 8% per year) for 10 years, no matter what the market really did, and that you will be able to withdraw a percentage of that guaranteed account value (again between 5 and 8% per year) for as long as you live (as long as you don’t withdraw more than that). There are so many other variations along the same vein as these, but hopefully this gives you an idea.

The Benefit

The benefit, in general, to these guarantees is that a person is able to invest in the stock and bond market and participate in the potential growth of those markets while minimizing the risk of losing their principal. For some this is important because they really need to get the kinds of returns that can only be found in the stock market, but are afraid to or unable to put their principal at risk. Also, with some of these guarantees there is the promise that you will never run out of money (which is one of the biggest risks and likelihoods that I see for most people). In addition, there are also the benefits of tax deferral while the money is in the annuity.

The Downside

First, you will pay higher fees, generally, in an annuity than you will when investing in similar mutual funds. Often these fees are 1-3% higher. The more guarantees you buy, and the bigger the promises, the more you will pay. Remember, you are in essence buying insurance on your investment.

Also, you are locking up your money. You will pay tax penalties on the growth if you pull the money out before you are 59 ½ and insurance company penalties on the principal if you pull it out before the contract allows. These penalties can really add up. At the same time, the penalties might be a good thing for some people if it keeps them from spending the money before they should.

Last, each of these “promises” are only good if you abide by the rules. Often, the bigger and better the promise is, the more restrictive the rules are. In addition, these rules are often the least understood part of the product by both the salesman and the client. Great effort must be given to truly understand the terms of the guarantee and all of the implications that future decisions and circumstances may have. I think that many people invest in these products thinking that they understand, when they really don’t and really shouldn’t.

In Conclusion

I am afraid that I have glossed over the ins and outs of VAs without giving enough detail to be helpful. I could go into depth on the benefits and risks of some of these guarantees one at a time in future articles, if there is interest. You will have to let me know if there is enough interest out there in doing that.

I do believe that there are some great VA products which could really be the best choice for some people. I also believe that they are sold to a lot of people who would be much better served in a different investment. The details of each person’s complete financial picture must be carefully analyzed to determine if a VA is a good fit.

Read Part One | Read Part Two | Read Part Three

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.

I’m tired of it. Sick about it. Through with it. Finished. Fertig. Done.

I can’t stand knowing exactly what my money is doing at all times. It’s so obedient! My money just sits there, looking up at me like some dependent, too-young-too-realize-how-things-work puppy just out of obedience school waiting for me to give it some type of command — just so it can march off and execute my plan to a level of perfection found only in military brigades and the Von Trapp family.

Oh sure, I can tell you how much I spent on groceries during 2004, 2005, 2– anyway, I can tell you those things. Easily. But what do I have to show for it? A keen sense of how my life plays out financially? An uncanny ability to forecast (to within ten dollars) what we’ll spend in any given category during virtually any given month? (On average, we all know there are no perfectly normal months).

Really. What do I have to show for it? Instead of filling my head with this useless information (wow, housing costs are how much in relation to the rest of our spending, is this a problem we should talk about?) I could have been really getting to know the new people on Survivor. Now I can’t even name them!

Oh, it gets worse. My wife and I we…we talk about things like what kind of financial goals we have. She actually openly shares her feelings about things like retirement goals, aspirations, kids’ college etc. And you know what? It gets much worse. She spends money and doesn’t feel guilty about it.

How am I supposed to handle that? Huh? So yeah, when we were budgeting we would sit down at the beginning of the month and plan where to spend our money, and then yeah–uh–I guess she felt fine about buying the stuff we had planned to buy. Okay, when I write it out like this it doesn’t seem that hard to handle, but — eh — you get my point right? I mean, spending = guilt. We learn that as soon as we get our free t-shirt from those Visa people on campus.

Budgeting’s making me lose my edge. That’s one of the big problems. I used to be able to tell you exactly how much money I had in my checking account.

$10.12. Boom.

$18.45. Bam!

($25.40). Zing! (Yeah, it was overdrafted a few times. I didn’t think they’d cash the check. It had been three weeks!)

Now though. Seriously, if I want to know my bank balance I have to login to my bank and check. It’s in the thousands, I know that. But beyond that I’m not sure. Wait — yeah, it’s something like $6,000 (well, $1.5k is for property takes, which are due in six weeks, $200 of that is for groceries for the rest of this month, and we’re saving for Christmas so we can pay cash — that’s $800 of it, with a goal of hitting $1,000 before The Season rolls around–UGAHHHHHH! YOU SEE WHAT’S HAPPENING? WHAT KIND OF PSYCHO AM I? WHO DOES THAT?)

Whew! Anyway, that six grand, that’s a ballpark figure. And that’s what’s killing me! Every morning, first thing, I used to check my bank balance. And then again when I got to work because I had just bought some stuff on the way and wanted to be sure there was still enough to be able to buy lunch that day and — OH NO I TOTALLY FORGOT I NEEDED TO BE ABLE TO PUT IN AT LEAST 2 GALLONS OF GAS TO GET HOME.

Where was I?

Right. So I miss that daily “interaction” with my bank balance. It’s like it doesn’t even know I’m there anymore. It just “does its own thing” making me feel all secure and confident — as if money could make me feel confident. Everyone knows confidence comes from looks–the main contributors being well built-out delts and rippling pecs.

So I quit. I’m through. It’s done. We are OVER.

When I first started, it felt okay, you know? I would still enter transactions daily and look at my bank balance a lot and all that stuff. But then this totally weird thing started happening:

I think we started spending less money. I couldn’t tell you for sure because before we started budgeting I have no idea how much we were spending… but I noticed that I didn’t need to enter as many transactions after several months. Maybe each transaction was just a larger amount? No… OH! That’s probably where the 6 Gs came from that are in my checking account! That’s like “old spending” that I haven’t gotten around to spending yet!

Yeah, this budgeting thing, it’s just completely changed my life. I’ve got to stop. I think there’s a 12-step program out there somewhere for people like me, you know, people that are reaching their financial goals, don’t feel guilty about spending money, have great communication with their spouse, etc.

Hi. My name is Jesse and I’m a budgeter.

“Hi Jesse…”

Tags: 12 step program, budget software, Budgeting, communication, personal budget, personal finance

There are a lot of annuity salesmen out there that are not going to like what I have to say about these types of annuities. There are many strong arguments (sales pitches) in favor of them. And, I am willing to admit and accept the fact that my opinion is just that, my opinion. I may not have considered certain factors that would enlighten me if I had. However, I have done a fair amount of research into these products from the standpoint of one who could sell them, as well as the standpoint of one who has to answer to his clients at some point down the road. With that said, I am not implying that anyone who puts these products forward to their clients is a scoundrel. I just think that there are a lot of people selling them who have not given enough thought and thorough research time to understanding them and their implications.

Equity Indexed Annuities (EIA)

The concept behind an EIA is that you are guaranteed not to lose any principal while at the same time participating in the gains of the stock market. Good upside potential without any downside risk.

First, an index is a measure of the overall performance of a certain segment of the stock market. The best known indexes are probably the Dow Jones Industrial Average and the S&P 500. If you see what an index is doing (going up or down) you have a pretty good feel for what that segment of the stock market is doing overall.

An EIA will link your investment to the performance of that index. So, if it is linked to the S&P 500 and the S&P goes up 10%, the value of your EIA will also go up, at least a portion of that 10%. However, if the S&P is down the value of your account will not go down. Sounds like a pretty good deal, doesn’t it? Almost too good?

The Benefit

There is the potential to have your investments grow at a greater rate than a fixed annuity or a CD. There is some link to the market in your performance. While gaining some of the potential of the markets, your investments are not at risk of loss.The Down Side –

There are many. First, the “link” to the market is often limited. You may only get 90% of what the index does, or you may get 100% of what the index does up to 10%. If it does better than that, you don’t participate. There are other variations to this, but the point is that you only get part of the up swing – and many times it is extremely difficult for almost anyone to really figure out how much that is. When it comes to these rules, a simple explanation is often way too simple. When I have tried to figure out what the performance of an investment would be with an EIA, using real market returns, I have been less than impressed.

Next, the fees associated with these annuities are often very high compared to other investments. These fees, by definition, will lessen the performance that you could otherwise obtain.

The worst part of these products, in my opinion, comes when you try to get your money out. Life is very unpredictable and people often have a need to draw upon their savings when they hadn’t planned to. I have seen outrageous things written into these contracts. Most have 10 year penalty periods for taking money out. Some are as long as 15 years. On top of that, if you pull your money out during that period you often lose the index linked guarantee. So, not only do you not have the promised growth, but then they take a percentage of the principal as a penalty. If this weren’t bad enough, there are some products that, even after the penalty period, require you to take your money out over five or ten years in order to lock in the promised value. During those five or ten years you only earn a low interest rate like a fixed annuity.

An Insider’s Perspective

Look, a person could make a lot of money selling EIA’s. If that person focused on all of the positives and brushed over the negatives it would be hard to see why a client would want to invest in anything else. On top of that, the commission on these products is often as high as 10%! A salesman can offer a “dream” investment and make 10% commission for doing so. Many do, making a killing in the process. There are actually businesses out there teaching insurance agents how to make a fortune selling EIAs. “Find 20 people in a year with $200,000 each to invest and promise them the moon and you have just made $400,000!”

I will say again that I do not believe that all who sell these things are as bad as I am making them sound. I know several personally who just never looked far enough into the nitty gritty details and honestly thought that these were the best things that they could bring to their clients. The insurance companies are surely not forthcoming with all the negatives when they pitch their products to the salesmen. However, you can also see the great temptation for abuse that others may succumb to. Just be warned.

One Last Thought

From a logical, business standpoint, how can these companies offer these products and promises? Think about it. You give them $100,000 and they immediately pay the salesman $10,000, reducing what they have of your money to $90,000 from the start. Then they have guaranteed that you will never have less than $100,000 and that the full $100,000 will grow as much as the market does, and that the growth will never go down either. That would be a tough thing to make happen. The only way would be to make sure that they have your money for a very long time, charge a lot of fees and penalize you severely if you don’t do everything exactly according to the rules. They better also be sure that in really good years they get to keep some of that growth and limit your participation. I could go on, but you get the point. EIAs simply cannot be all that the are cracked up to be.

Read Part One | Read Part Two

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.

There are three kinds of annuities: Fixed, Equity Indexed and Variable. The next three parts of this article will address each one. I will explain how each works, what the pros and cons are, and my overall opinion of the type of annuity and when it might be appropriate.

Fixed Annuities

A fixed annuity is the insurance industry’s answer to CDs. These annuities operate under the same premise: Put your money here and we will guarantee that you will not lose money and that it will grow at a certain (usually low) interest rate. Often these annuities will pay equal, or even a little better than current CD rates. This is the case especially for the introductory period. The company, as an incentive, will offer a rate quite a bit higher than CD rates for the first 1-3 years. After that the rate will change to something based on the current market.

 Benefits
As I mentioned before, there is low risk of losing your principal and you can often get equal or better rates than with a CD. On top of that, while the money is in the annuity you are not taxed on the growth. With a CD you are taxed each year on the interest.Down side –

There is usually a penalty period, often significantly longer than with a CD. Should you need to take your money out you may lose a good sized portion of your principal. With a CD you never lose principal, only a portion of the interest. Also, at some point during the life of the annuity the rate of return might be below that of a CD and you may have penalties and tax implications if you want to move it. Finally, there are often significant fees within the annuity that you do not find in a CD.

When would I recommend a fixed annuity? I am not sure if I would – I haven’t yet. But perhaps it could be appropriate for someone who absolutely cannot afford to lose any principal and does not need much growth, and if the annuity will get better returns than a CD. I would also be very wary of the penalty period and of how hard it is to get the money out, if needed. If all of those things appear satisfactory and it seems like a better fit for the client than other alternatives, then I might move forward with a fixed annuity.

Read Part One

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional. 

Sometimes it’s hard to own up to reality and we’d rather just pretend things are fine. They’re not. They’re bad. Money is tight. We’re spending more than we make. Debt is climbing. Retirement contributions have come to a standstill.

You basically have two choices: 1) continue doing what you’ve been doing and get the same result (which actually is a decline, not a maintenance of the status quo) or 2) change what you’ve been doing and start seeing some improvements.

This small desire for change is a great start.

Facing reality–finally–can be a pretty rough thing. Operating the YNAB Way means you record every single purchase you make, look at how much money you have available to spend and allocate every single dollar of that available pot to a job before you spend it.

If you’re needing to face reality then YNAB will throw it right back in your face (as kindly as it knows how). When you’re recording every transaction you’ll be painfully aware of it. You’ll be forced to address it with an actual thought process (vs. a zero-thought, impulse purchase): “Was that a smart purchase?”, “Did I really need that?”, “Could I have gotten by without it?”.

These questions won’t always be asked, but when you’re attempting to climb out of a hole you’ve been digging for the past while, they’ll be asked a lot. And that’s a good thing.

YNAB also makes sure you’re facing reality by forcing you to acknowledge that you are not made of money, it does not grow on trees, and you will run out if you spend all of it. It does this with Rule Two: Give Every Dollar a Job. You have $2,000 available, you budget $2,000 into spending/saving categories and when that money’s gone, your job is done. There’s no pretending, no fudging the numbers, no hesitation. You have a finite amount of money–just like everyone else. Get used to it.

Having your head in the sand financially is a very–eh–unproductive way to go about managing your finances. It only pretends to give you reprieve from your financial stress, but we all know that deep down inside of you there is your Voice of Rationality that screams as loud as it can (muffled by the sand maybe?) for you to stop acting irrationally. You still feel the stress. You can’t ignore it. You can, for a while, convince yourself through exerted efforts and some type of (ir)rationalization that what you’re doing is fine…but that eventually just adds fuel to the fire and the point of change, the “Ahhhhhh!!!!” moment will just be more painful.

I just want to give you a small baby step toward getting your head out of the sand. Pick a spending point that you believe has room for improvement: groceries, eating out, entertainment, etc. (those are the popular leaks in most everyone’s budget) and record what you spend in one of those. Don’t go all out. Just pick one category and record what you spend. Do this for two week blocks and compare each two weeks to the last. Notice a trend?

That downward trend is you pulling your head out of the sand.

Tags: Budgeting, flamingoes, habits, head in the sand, saving money, spending

There are few people who haven’t at least heard the word annuity. But I think that there are few people who actually understand what an annuity is. I think it is important to understand what an annuity is because there is a very large effort in our country to get people to invest their money in annuities and a lot of misinformation, both for and against, such an action. From the beginning I will let you know that I believe there are annuities available that would be good for some people in certain situations – in fact that would be the best choice that they could make. However, I also believe that way too many people are sold annuities that would be much better served in other ways, as well as many annuity products that are not beneficial to anyone.

In the Beginning

To begin, the word annuity means a series of payments at set intervals for a defined amount of time. You most commonly find this term (when it comes to income) in lottery payments, pension payments and insurance products. When it comes to the insurance products the word annuity has come to mean a lot of other things in addition to the definition that I gave. However, that definition is the underlying basis of the product.

Insurance Annuities

The fact that annuities come from insurance companies is significant. When you purchase an annuity you are really purchasing insurance on your money. Just like you insure a car or a house in case of loss, you are insuring your money in case the value goes down. If it does, the insurance company makes up the difference, to one extent or another. And, just as with any other form of insurance, for that protection you are paying premiums or fees as you go along in order to get that promise of protection. The fees are taken as a percentage of the amount of money that is being protected, or the total value of the investment.

To continue the analogy, with car and home insurance there are things that you automatically protect and then other things that you can add to protect as well. Each time you increase the level of protection you also increase the fees that you pay for that protection. So, I may choose not to protect my car against theft or chipped windshields, but you may think it is worthwhile. All else being equal, you will pay more for that protection than I will.

What Kind of Protection Can I Get?

There are three basic things (with tons of variations) that annuities can protect against. I will discuss these options further in subsequent installments. For now I will give you the basics.

Income Protection
Annuities got their name from this protection feature. The idea is to protect you against a shortfall in future income. In essence, the insurance company takes your money and, in turn, promises to pay you a certain amount for a defined amount of time. That time period might be 5 years, 10 years or even a promise that they will pay that amount for as long as you live. The alternative is to have your money elsewhere and take the risk due to market fluctuations, inflation or theft (if you put the money in your mattress). Like I said before, there are a bunch of variations of this protection feature, but this is the basic idea underlying all of them.Principal Protection -

In this case the protection that you are purchasing is a promise that no matter what happens in the investment world (including where your money is invested) you will not lose money. It may not go up in value, but it won’t go down either. With this promise there are also rules that you have to abide by in order to receive the promise. Usually one of the rules is that you can’t withdraw the money for a certain amount of time. Break the rules and all bets are off.Inheritance Protection -

This type of protection is usually called a death benefit. It is very similar to the principal protection, except that there is usually no time frame and no extra rules. It is basically a promise that if you die your heirs will receive at least an amount equal to what you put in, or more if the account has a greater value. This feature is an automatic part of almost every annuity that I have seen, but there are a few exceptions.

Taxes and Penalties
One more feature of an annuity that is often touted by those who sell them is the tax benefits. The IRS gives to annuities many of the same rules as they do to IRAs or 401(k)s. You will not receive a tax deduction for investing in an annuity (unless it is also an IRA or the like). However, the money grows in the account tax deferred – meaning you won’t pay any taxes on the growth while it remains in the annuity.

Along with the tax benefit also come the consequences and possible penalties. First, when you to pull money out of an annuity you will be taxed on the growth. Second, if you remove money before the year in which you turn 59 ½ you will also have to pay an additional 10% penalty. This is the case even if you don’t use the money but only move it to a different type of investment, like a mutual fund (for non-qualified money only).

To top it off, nearly every annuity product has its own penalty schedule and rules for how and when you can take your money out. There is usually a period of years after the initial investment where you have a penalty assessed on the entire principal for taking the money out early. That number of years varies greatly, but I usually see four years at the low and I have seen as many as fifteen years at the high end. The penalties tend to range from 8 to 10% for the first year, and then slowly move down over the remaining years.

A Few More Quick Things

All of the promises and guarantees are based on the insurance company’s ability to pay. Be careful which company you are choosing. Second, should you choose to annuitize (start that guaranteed income stream) that is almost always a permanent decision. Usually there is no turning back once it starts.

In the following three parts I will discuss in more detail the annuity options that are available in the market today. Whether one or another is right for you depends completely on your personal situation and on the particular product that is being offered. I will only discuss the general details of each type of annuity.

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.