Tax season is here, and filing does not have to damage your pocketbook.
I like to talk. I like money. I like the internet. I like to talk about money on the internet. While I hope you find some value in articles like this, keep in mind this blog is for general information and entertainment purposes. Everyone’s situation is different, especially when it comes to taxes, so always consult an expert.
That said, I had a moment of pure Centsei giddiness last weekend, ironically, when I filed my taxes for the year. No, not because of the fact I owed a little bit (darn), but rather because I finally figured out a way that nearly anyone can file their U.S. taxes – federal and state – online for free.
My last article was plenty long, so let’s not waste time. Here’s how to do it.
Option 1: Credit Karma
Credit Karma has primarily been known for tools devoted to improving your credit score. However, they recently launched their own online tax filing service that lets you file both your state and federal income taxes for free, regardless of your income. This feature is the first of its kind, and I must admit that I’d been paying $50-100 per year to file mine with the brand-name services. Never again. The software was intuitive, robust, and thorough. I filed both returns in under an hour, despite having a litany of tax documents that Lady Centsei and I gathered throughout the year. They even offer “audit defense” and guarantee the maximum refund. Only downside seemed to be that it may not yet be available in some states, though I could not find a list.
Quick note that I am not sponsored by Credit Karma in any way. I just genuinely like this product and think it would benefit my readers. Per my disclaimer, even if I ever do get sponsored or sell out, it will *always* be for a product that I actually use or truly believe would benefit my readers.
Pros – Easy-to-use software available to everyone; Completely free regardless of income; Very intuitive
Cons – Reportedly not available in every state; Not recommended for highly-complex tax scenarios
Cost – $0.000. Free for both federal and state.
Option 2: Name brand filing companies (e.g. Turbotax)
Approximately 70% of Americans make less than $72,000. Luckily, the IRS requires that filing companies like TurboTax make their software available for free if your adjusted gross income was less than $72,000. While the federal return is free to file, some providers charge to file the state return, so read the fine print.
Pros – Easy-to-use software available to most
Cons – Free version is limited to incomes below $72,000 (incomes above that must pay); Some providers charge to file the state return, so read the fine print
Cost – Free (federal); Free or paid (state) depending on the provider
Option 3: Fill it out by hand
For many years, I filled out my tax return by hand. While it might seem intimidating at first, it’s straight forward, especially if you receive a W-2, plan to take the standard deduction, and don’t have any unusual personal circumstances. The IRS provides instructions here, and there are some YouTube tutorials to help for visual learners. Sadly, the IRS got rid of the incredible handy on-page 1040-EZ in 2018, but the regular 1040 can still be manageable to navigate for most situations. If you owe money, you can include a check payable to the Internal Revenue Service or make an electronic payment online.
Pros – Truly free; Can be faster than filing online
Cons – More adding and subtracting than you’ve had to do since middle school; some terms and language can be confusing; 1040-EZ was discontinued in 2018; not recommended for complex tax situations
Cost – Free, minus the cost of a stamp
That’s it! You have until May 17th 2021 to file your federal taxes this year, and with these services, you won’t have to pay a thing. If you own a business or have other advanced tax needs, please consult a professional. If not, I hope this article saves you from those expensive filing fees – forever.
Selling a car privately on a site like Craigslist can be fast, economical, and safe if you follow a few simple steps.
Quarantine life is a strange life. What once may have been unthinkable becomes increasingly customary. No, I’m not talking about growing a garden, hoarding toilet paper, getting tipsy during a work-sponsored virtual happy hours, or throwing a party with the intention of trying to catch the virus; this is a finance blog (that last one is a bad health and financial decision, but that’s a topic for another day)! I’m talking about harnessing your inner Centsei with a dash of Marie Kondo and cleaning out your dojo by selling things in your life that no longer bring you joy.
For me, this valuable was my 2011 Mazda 3, as seen above, and unfortunately my wallet had to take a hit before I got the motivation to act.
Lady Centsei and I have owned two cars for the entirety of our relationship, as seemed to be the norm for people like us living in the suburbs. In fact, two cars in a single household is below average for the United States, and over a third of households own three or more.
However, we’ve both been working from home and will do so indefinitely during the quarantine. As a result, our car usage has dropped by 90%. We maybe leave the house once or twice per week, often together. There has not been a single time since March when we would have both needed a car for separate destinations at the same time. Even when we begin going to the office again, it’s only a 5-minute detour each way for me to pick her up or drop her off. Two cars might not have been necessary before, and they certainly aren’t necessary now.
You might initially think that having a paid for car sitting in the driveway no using gas doesn’t cost anything. Unfortunately, cars cost a great deal of money whether you drive them or not.
Since the beginning of the year, I’ve bought new tires, got an inspection, paid the registration fee and excise tax, replaced the battery, purchased insurance, and re-done the rusting breaks on a 10-year-old basic model car that I’ve driven just a few times. Total cost? Well over $2000, not including gas, any car payments, or depreciation (the fact that the car becomes less valuable over time). Nerd
Ouch.
The car has some sentimental value to me, of course. It was the first car that I purchased with my own money, and it carried many stories of my young adult life. Nonetheless, this sentiment was not worth $300 or more per month for an object that I wasn’t using and could someday replace. It was time to sell the old Mazda.
I’d never sold a car privately before. There are many options ranging from a private sale, a quick buying service like CarMax, or a car dealership. A private sale will almost always be the best deal for both the seller and the buyer if done properly. A service like CarMax might be “easier” or “less scary” but you will lose hundreds or even thousands of dollars on your trade-in by using a middleman. And do I even need to get into the problems with involving a car dealership? Didn’t think so.
Don’t trust used car dealers, especially those without a face!
Many people might think a private sale is sketchy or troublesome, but that wasn’t my experience at all. Despite never having sold a car before, I sold mine on Craigslist in 5 days with less than 2 hours of work total for the full Kelly Blue Book value. No joke. Here’s how I did it:
(1) Locate The Title And Make Sure It’s “Clean”
A title is the legal document stating the car’s ownership. If you lease the car or still have an outstanding loan on it, you won’t be in possession of the title and won’t legally be able to sell it. Before selling your car, locate the title, and verify that it’s in your name. You’ll also want to make sure that the title is “clean,” which just means that the car has never been declared a total loss by an insurance company. If you can’t find your title but are sure you own the vehicle outright, you may need to order a new one from your local DMV for a fee.
(2) Fix Any Major Malfunctions
You’ll want to ensure all critical functions in your car are in working order, such as the engine, breaks, electrical, exhaust, steering, and mirrors. If the car wouldn’t pass inspection, you’re going to have a very difficult time selling it, and it’s worth your time and money to get the important stuff fixed. That said, you generally don’t need to fix cosmetic flaws, since those generally cost more to fix than the added resell value you’d get by fixing them. For example, if the car has dings and scratches, you could easily spend a thousand dollars or more at a body shop but add only a few hundred to the car’s value. The seller doesn’t expect cosmetic perfection, so don’t waste list of money.
(3) Clean The Car Thoroughly
One area where you do want to spend a little time and a few bucks, however, is in cleaning the car. Take it through the car wash, vacuum the interior, and wash all the hard-to-reach areas like the inside door panels and dash with a cloth. Spending $10 on a car wash and 30 minutes of labor will make the car substantially more attractive to buyers, potentially adding to your asking price or quickening the sale.
(4) Set A Fair Price
Set emotions aside and set the price based on what your car is actually worth. No more, no less. Use a site like Kelly Blue Book to get and approximation, and be honest about the car’s mileage and condition. KBB said “good” condition my car was worth $4,600 – $5,400, so I asked for $4,950 despite having just spent $700 on brakes and a batter. Expect to negotiate down by 5-10%. Don’t hold out forever waiting for someone to overpay; it’s not going to happen. Remember: Each month you fail to sell it will cost you hundreds.
(5) Take At Least Ten High-Quality Pictures
Front, back, both side, front seats, back seats, trunk interior, dash, radio/panel, and any luxury aspects that make your car stand out. Use photo software to block out your license plate number.
(6) Gather Maintenance Records
A buyer may ask for these and you should have them in a single place ready to present. Be thorough in your explanations of exactly how often you completed routine items like oil changes and tune-ups, and be prepared to give specific dates on when you last perform major repairs like brakes, tires, timing belts, transmission, battery, alternator, and so forth. Make a cheat sheet. Don’t lie or exaggerate.
(7) Create A Craigslist Account
Signing up for Craigslist takes two minutes and a minimal amount of personal information. Here is a quick guide on the basic functions like making, editing, deleting, and renewing a post.
(8) Craft Your Craigslist Ad With Excellent Detail
Let your creative and artistic side shine by creating a post (advertisement) that makes your car stand out. Highlight the attractive features but be upfront about any defects that a seller would want to know about.
Do post the year, make, and model in your title. Do include your photos, asking price, car type, mileage, a broad description of where you would like to meet up, and how you would like to be paid.
Don’t post your phone number or street address in the ad (Craigslist has an option for them to contact you through a message that goes to your e-mail address without the need to display your personal info online).
Here’s the actual ad I used, with maps and a few personal details removed:
(9) Submit The Ad
Double check your work and submit the ad. Craigslist charges a $5 fee for an automotive ad that lasts for 30 days. It’s worth it and is a much better deal than a newspaper or other websites. Consider lowering the price if you don’t get many hits for a week. You can repost the ad after 30 days if it isn’t sold.
*Note that Craigslist may not be the best option in your area. Autotrader (affiliated with Kelley Blue Book) and eBay Motors are alternatives that might work out a bit better, though they can be more expensive and require more effort. I haven’t used either so can’t say either way.
(10) Post A “For Sale” Sign
Setting your car up with a For Sale sign is another way to market your car with little time or upfront cost. Buy a professional-looking sign for a few dollars on Amazon and maybe you’ll get some interest, especially if the car can be parked on a street with decent traffic.
(11) Respond To Questions Quickly And Honestly
Buyers will likely have some questions about your car, so respond to them promptly to show you are serious.
If the seller asks for the VIN or more questions than you want to answer over e-mail, encourage them to meet up in person so they can see for themselves. A willingness to meet in person also helps ensure they are not wasting your time. Feel free to ask questions of your own, such as whether the buyer is local and when they were planning on making the purchase. The onus is on the seller, not you, to order a Carfax report if they are interested.
Please be on the lookout for fraudsters at this point.
— Only deal with people willing to meet locally and face-to-face.
— Don’t give out personal information beyond your first name to someone you don’t know.
— Be on the lookout for someone with an offer that is too good to be true (ex. twice your asking price).
— Under no circumstances should you offer to ship the car or try to conduct payment with someone you have not met in person!
(12) Meet With Prospective Buyers For A Test Drive
Offer to meet up with the buyer during the day in a well-lit public place that is convenient for both of you and could be witnessed by others. If you’re not comfortable alone, bring a friend with you and offer that the buyer bring a friend too. Don’t be outnumbered. Take any valuables out of the car in advance.
When it comes to a test drive, the first step is to exchange pictures of licenses, quickly checking to make sure that the person is who they say they are and are legally allowed to drive. Only allow one driver at a time, and enter the car with them if you feel comfortable doing so. Limit the amount of time they can drive the car. Agree on next steps and timeframe if the sale won’t be finalized that day.
From a safety perspective, think of it like a first date. Always make sure a loved one knows where you will be. Turn on your geolocation option on your phone, like FindMyPhone for Apple, so you are easily found. Always conduct business in broad daylight in a safe area. Trust your gut – if you sense the buyer is up to no good, take your keys and leave without giving it a second thought.
(13) Print And Sign A Purchase And Sale Agreement
A purchase and sale agreement isn’t required in all jurisdictions, but I recommend printing one out in advance and requiring that it be signed to formalize the purchase. Here’s a quality sample that I used for mine that works in my state, but find one that works for you. It doesn’t need to be fancy; just include the date, purchase price, the statement of purchase (“The seller grants, sells, conveys, transfers and delivers to buyer the following to the buyer… [followed by vehicle description],” details of the car including VIN, and the signatures of the buyer and seller . You can get this notarized at your local UPS store, though it’s not legally required to make the sale valid.
(14) Secure The Payment
This part can be a little awkward, so it’s important that you protect your interests.
— If the seller offers you cash, come prepared with a pen to confirm whether its counterfeit and maybe a little cash of your own to try to detect it. Cash transactions are harder for both parties to prove, but that isn’t a reason not to accept it.
— If the seller offers you a personal check, offer to go to the seller’s bank to cash it right away. This is the best option for most people and protects you both. If the seller’s bank is out of town, I’d recommend waiting until the check clears before handing over the keys and title. You want to protect yourself from a bouncing check.
— If the seller offers you a cashier’s check, again offer to go to the seller’s bank to cash it. The bank will let you verify that the cashier’s check is legitimate.
— If the seller offers you Venmo or another app, be warned that the transfer could take a day or two to finalize, so this may affect when you feel comfortable parting with the car.
— If the seller offers you Western Union, RUN AWAY!
Regardless of payment type, you’ll want to confirm that the payment is coming from the person actually buying the car. If the name on the check or payment method is different or if something else feels fishy, do not proceed. The seller could be trying to pay using someone else’s money.
Deposit your payment as soon as possible.
(15) Prepare the Title for Transfer.
The exact procedure for transferring or “signing over” the title vary by jurisdiction. Complete the “seller” portion of the title on the reverse side, and only sign when your payment has been received, not before. Once again, make sure the “buyer” portion matches the license and payment details of the person you’re doing business with.
If you’re uncomfortable with doing this on your own, your local Motor Vehicle Registry (also called DMV, RMV, etc) can assist with this.
Remember, once the title is signed, the buyer now legally owns the car. You don’t want this to fall into the wrong hands. Make sure everything is in order, and wave goodbye to your old car!
(16) Inform the Appropriate Motor Vehicle Registry And/Or State Authorities.
Go to the Motor Vehicle Registry or visit their website if your jurisdiction allows. Check with them to see the exact steps required on your end. Generally, you will report the sale to them and confirm that you no longer own the vehicle in question. You may need the VIN, registration number, and your license number. Check with your local motor vehicle registry or secretary of state to learn what’s required of buyers and sellers in your area. You may need to inform more than one government entity, such as your state’s RMV as well as you local town/city government, so double check.
You may also qualify to get some of your registration or excise tax money back. Check the rules!
(19) Notify Your Insurance Carrier
Don’t forget this last critical step, since you certainly don’t want to insure a car that you don’t own! Call or go online to remove the car from your insurance. You may need to cite the reason (“sold the vehicle”) but more carriers make this painless and should rebate you a portion of your premium if you paid in advance. Lady Centsei saved $500 per year by going from two cars to one… and no, this is not even a GEICO commercial!
(20*) Remove The Craigslist Ad
You don’t want people e-mailing you about a car that isn’t yours, and you don’t want to waste anyone’s time.
Truth be told, I spent more time writing this article that I did selling my car start to finish. 20 minutes taking it to and from the shop for repairs, 20 minutes cleaning it, 20 minutes taking pictures and authoring the post, and maybe just over 60 minutes dealing with the buyer. I got my asking price for the car, saved hundreds on my insurance, and expect a refund on my registration and excise tax any day. No more repairs, no more gas, no more shoveling out snow, no more fees and taxes. The feeling is liberating, and I really do recommend this process to anyone looking to sell vehicle – or almost any possession for that matter – on Craigslist.
In the fallout of the coronavirus, banks have begun tightening their lending standards to the point where even the Federal Reserve had to report on the potential impact to lower-credit individuals. Thus, it’s more important than ever to be informed on how to improve your credit score. The good news is that this topic is not as complex as it seems.
To help gain some insight into whether it’s a good idea to lend someone money, let’s consider an imaginary story about two friends from my 3rd grade class, Andrea and Adam, both of whom would occasionally ask me for money to buy snacks during lunch from time to time.
As you’ll see, children and adults think about most concepts in life the same way
Andrea always paid her money back the very next day. She had a long reputation (the whole school year!) in the class, regardless of whether the person was a friend or not. She didn’t ask for money all the time, and she didn’t have a reputation of owning every single person in the class money.
Adam, well, was a different story. He’d just recently starting borrowing money from the classmates, and took week to pay them back, if ever. It felt like he owed a lot of money to everyone, and he asked for money every single day. The was well known for targeting only certain people for money that he felt he could take advantage of, and when one person said “no,” he went to another person. In no time, he had a well-known reputation of the person you avoid during lunchtime.
Oh yeah, definitely “imaginary,” rightAdam!?
This story is not too far off from real life, just with banks and loans rather than classmates and milk money.
Credit Scores receive a lot of coverage in the media, with many outlets implying that the score is a measure of one’s financial acumen. Sadly, when news stories cover personal finance they often rely (heavily!) on sensationalist headlines and anecdotal stories.
Hey, isn’t that why we have bloggers?!?!?!
Anyway, just what is your credit score and why does it matter?
In the United States, a credit score is a number based on an analysis of a person’s payment history and credit usage that (in theory) statistically predicts how likely a person is to pay their bills and financial obligations on time. The U.S. relies on three private companies, Experian, TransUnion, and Equifax, to collect this data and produce a score. Originally, banks and other lenders used this credit score to help them determine whether to lend you money. Nowadays, your landlord, insurance company, cable/phone provider, and employer are usually allowed to use some aspects of your credit score in their decisions of whether to do business with you. Furthermore, even certain overdue non-loans like parking tickets, traffic fines, medical bills, child support payments can affect your score negatively. Both good (on time payments) and bad (late or non-payments) marks could stay in your credit history for up to seven years. It’s easy to see that your credit score has an impact on your financial life, whether you borrow money or not!
Other countries have slightly different regulations surrounding what affects your score and how it may be used, but in general, this concept of a score is accepted worldwide.
Interestingly, your income and employment history are not factors that directly affect your credit score. It is very possible for an unemployed person living on $20,000 per year to have a better score than the executive living on $100,000. However, there may be an indirectly relationship between your income and your credit score, since higher earners should have the ability to pay their debts on time.
In the U.S., most of the credit bureaus use a variation of the FICO method to create and adjust your score overtime, though there are some more modern approaches being tested. Each bureau is a little different, but your score can range from 300 – 850, with 850 being outstanding and 300 being extremely poor. According to fool.com, the average score is 700 with 20% of people having a score over 800, 20% under 550, and the rest in the 550-799 range.
Individuals with higher (better) credit scores can qualify for better types of loans, such as those with lower interest rates and higher amounts of dollars lent. For example, people with scores below 620 usually can’t obtain a home mortgage at all. Those with barely acceptable scores might pay an interest rates up to 5.00% APR in today’s market, those with 660 might pay 4.00%, and those with 740+ might pay as little as 3.00%. Over a 30-year mortgage, this adds up to tens of thousands of dollars in interest alone!
The reason for this disparity is that the lender sees those with a lower score as more likely to default on the loan and cost the lender money. The lower the risk, the lower the interest rate the lender can offer.
So what affects your credit score? There are five main factors:
1) Payment History (35% of your total score)
How often you pay your bills on time, including credit cards, student loans, mortgages, and car loans.
Being 30 or more days late on a loan payment can cause a negative mark on your payment history. Making at least the minimum payment is essential to keep this part of your score strong, though try to pay off all your loans as quickly as you can. Being 60+ days late or affects your score even more, and being 180+ days late is usually a “write-off” where the lender sends your loan to a collection agency and a major blemish appears on your report for years. Payment history is the most important part of your credit score, so do your best to pay your existing bills on time. If you can’t, contact your lender immediately to work something out and avoid being considered late. Many banks and companies are willing to be flexible given the circumstances of COVID, but you’ve got to call first.
2) Debt Utilization (30% of total)
How much debt you have outstanding compared to how much credit you have available.
Most experts agree it’s best to use 10- 20% of any lines of credit that you have available. Lenders want to make sure that you’re not maxed out or otherwise in over your head. For example, if you have a $5,000 line of credit on your credit card, it’s good to use the card a little bit each month to prove you can make payments, but try not to use more than $1,000.
3) Length of Your Credit History (15%)
How many years you have had your credit products or accounts.
Creditors want to see a long history of your ability to manage your debts. Someone who has never had credit products before, such as a loan or credit card, is higher risk than someone who is experienced with them. There are two factors that matter here, (1) the age of your oldest account and (2) the average age of all your accounts collectively. If you open a low-limit credit card when you’re very young (18 years old in many parts of the world) and keep it open for a long time, the first portion of this category will be good. If you keep all your oldest accounts open for a long time, the second portion will be good, even if you only use the old ones occasionally (don’t let the banks close them). Just make sure don’t fall into the credit card trap while you’re young!
4) Types of Credit (10%)
How many types of credit products or accounts you’ve used successfully.
There are two main types of credit accounts that go into that mix. The first type is revolving debt, such as credit cards, where the amount you owe “revolves” or varies each month. The second type is installment debt, such as car loans or mortgages, where you borrow a fixed amount and repay it in even “installments” each month. Again, you should not go into debt for the sake of trying to boost this part of your score, but your credit score will be a bit stronger when there is a good mix of both revolving credit and installment debt.
5) Number of Recent Inquiries to The Credit Bureaus (10%)
How many times in the recent past you have had your credit report pulled for a loan.
Lenders assume that desperate borrows are more likely to default, and they measure this by how many times you’ve applies for loans in the last two years, with heavier wait being put on the most recent six months. Keep in mind there is a difference between a “soft pull” (when you pull your own credit or an employer does so for verification purposes) and a “hard pull” (when a lender pulls credit to make a decision on a loan). Luckily, only hard pulls count towards this part of your score. Try not to apply for more than one credit product per year.
What can we conclude from all this?
Having a good credit score is important for qualifying for credit with good lenders on good terms when you need it. Understanding your credit score and managing your debts accordingly is the key to improving it over time.
Let’s looks back at our friend Adam again. He’d just recently starting borrowing money from the classmates (#3: Length of Credit History), and took week to pay them back, if ever (#1: Payment History). It felt like he owed a lot of money to everyone (#2: High Debt Utilization), and he asked for money every single day (#5: Numerous Inquiries). The was well known for targeting only certain people for money that he felt he could take advantage of (#4: Types Of Credit), and when one person said “no,” he went to another person. In no time, he had a well-known reputation of the person you avoid during lunchtime (Poor Credit Score).
Lenders compete to get the “Andreas” and only do business with the “Adams” on the most arduous terms.
One parting thought: I want to emphasize that your credit score does not define who you are, nor how good you are with money, nor how successful you will be in life. Rather, it is just a statistic; a number assigned to you by someone you don’t know that tries to predict whether to risk lending money to you. While you should learn to manage your finances wisely, you should not obsess over your score continuously. Learn from the past, appreciate the present, and prepare for the future. You are more than your score!
Indeed, the Coronavirus is no joke and should
be treated as any other bad outbreak of the flu or other infectious
disease. DO wash your hands with soapy
hot water several times per day; DO cover your nose and mouth when you sneeze
or cough; DO take extra precautions when going to a public place, especially if
you are more vulnerable to disease; DO avoid unnecessary travel to countries or
regions with a significant outbreak; DO call your doctor if you have severe or
prolonged flu symptoms. DON’T touch your
eyes/nose/mouth, especially if you encounter someone with flu symptoms; DON’T
wear a mask if you’re not sick; DON’T go to work or public places if you have a
fever or symptoms; DON’T panic. This
last one, of course, is particularly important, since this is neither
the first corona virus, nor
the most severe flu outbreak, in the last century.
Returning to the idea of the next recession (this isn’t a public health blog, as thrilling as that sounds), it has been widely reported that last week’s stock market woes were caused by fear that the virus would be more widespread and sustained than originally expected. However, although the Coronavirus certainly may have been a “trigger” of a sell-off (an economic term for “the straw that broke the camel’s back”), it is true that certain fundamentals of the economy have been weak for the last year or two.
1) Corporate debt is
at an all-time high. We’ve seen a
few major bankruptcies for household-name businesses like Payless ShoeSource, Forever
21, and Sears/Kmart all due to crippling debt.
2) Consumer debt is
reaching new highs in certain categories. Student loans debt has doubled
since 2010, all while wage growth for those repaying the loans has gone up
only marginally. Auto loan delinquencies
have now reached
a 19-year-high, especially in the atrocious 7-year loan category, and are
now at levels that exceed the Great Recession.
3) The global
political climate has grown more uncertain.
Issues like Brexit, instability with Iran, and tariff wars with China create
instability that makes investors panic and negatively impact the U.S. and the
global economy.
4) The yield curve inverted in 2019. This means that short-term interest rates are larger than long-term interest rates, which means that investors see more uncertainty in the near future. Experts say this has happened prior to each of the last seven recessions. NOTE: The curve inverted, then “un-inverted,” and may be re-inverting again. Stay tuned.
5) Income inequality
has increased. The rich have gotten
much richer and the poor stayed about the same… or, at best, have gotten just a
little bit less poor. Income inequality
is sometimes
considered a precursor to a recession because it means that a financial
disruption among relatively fewer people can have a more significant economic
impact. To understand this at a smaller
level, imagine you have a family of ten.
If you have just one working adult who then loses their job, the entire
family is in trouble. If, however, you
have two, three, or more working adults, then one losing their job doesn’t have
the same impact, even if the total family income is the same.
6) The economy might
be “due” for a recession. On
average, there has been a recession every 7 years for the last 100+ years. Sometimes the economy grows for just 2-3
years before a recession; sometimes it grows for 9-10. The fact that the U.S. has been growing for
12 years and not seen a recession since 2008 is unprecedented. Economists expected (hoped) that because the
Great Recession was so bad, it would be followed by a period of longer-than
average growth. It has, but I don’t
think anyone would have expected 12 years of steady growth is most areas.
For any readers unfamiliar with the word “recession,” the
term basically means a decline in economic activity in a given area, such as
the United States. Many governments define
a recession as two or more consecutive quarters of declining gross domestic
product (GDP). Another way of saying this is that a recession six months where
the economy isn’t growing. In practice,
recessions often include (a) increases in unemployment, (b) involuntary
declines in personal spending, (c) lower production for businesses, in the form
of lower sales growth and/or profits, and (d) a loss in consumer and corporate
confidence.
Recessions are bad, but they are also very normal. As the economy grows (“expansion”), consumers
and businesses make more money. As they
make more money, they spend more money and take on more debt. This spending and debt cause prices and wages
to rise (“inflation”), often at a faster rate than the underlying growth. Eventually, this process reaches a peak, and
people are no longer able to afford as many goods and services they were
before. As a result, the economy begins
to shrink (“recession”), and consumers and businesses make less money and
default on their debt. This set-back
causes prices and wages to fall (“deflation”), again, often at a faster rate
than the underlying economic decline.
Eventually, the process reaches a trough and starts over again, once
prices have fallen low enough for people to afford things again.
Source: Financeandcareer.com
The expansion and recession process is partially
self-correcting, though governments may intervene to assist the process
along. When the economy is good, they
may raise interest rates in an effort to prevent inflation from getting too
high. When the economy is poor, they may
lower interest rates to encourage spending.
Governments “should” generate surpluses during strong times and spend
these surpluses in the form of stimuli during weak times… though the reality is
that politicians historically have spent more than they’ve taken in all the time. Perhaps we can learn from their mistakes!
As you can see, the overall average slowly increases over
time. This is a good thing. It’s just a shame it tends to take on a
roller-coaster-like pattern in the process.
The world is not coming to an
end.
Do I personally think a recession is coming though?
Well, yes. I think a
recession is likely within the next year or so, if it’s not already here. The economy has grown very well for the last
12 years. The stock market has recovered
rapidly; unemployment has been extremely low; consumer confidence has been high
for a long time; and businesses have been highly productive for over a
decade. This implies (to me) that we are
at or near a peak, and a downward correction is probable.
Unfortunately, I’m fresh out of crystal balls, so predicting
the exact timing of the recession is anyone’s guess. On the one hand, the 6 factors I listed above
are real concerns and could collectively trigger the next recession, even
though none of them would on their own.
On the other hand, because our growth has been slow and steady and because
unemployment and inflation have remained low, it makes sense for our current
period of growth to continue. However, I
also think that the next recession won’t be as bad thanks to what we learned
from the last one. We haven’t even seen
a downturn for one quarter, much less two, so in the words of Yoda:
What does this all mean to us?
As consumers and everyday people, there are some takeaways
from this. Recessions are normal but
unpredictable, so there are some steps you can take to position yourself when
one does come:
• The single best thing you can do is to remain prepared for
a recession but not let the fear of it take over your life.
• Prepare by making sure you have an emergency fund of 3-6
months of your core necessary spending (it isn’t a coincidence that most recessions
last about 6 months). If 3-6 months
isn’t realistic, it’s even more important to start, say, with one month. Doing so could save you from going into debt
immediately if you were to lose your job.
• Cut back on non-essential spending, and pay down your debt
aggressively.
• Come up with a plan if you or your partner were to lose
their job for a period of time and what the impact would be on your family
financially and emotionally. Be sure to
consider even the worst-case scenarios of needing to find new housing.
• Make sure you are insured against things that could have a
major impact on you financially, like your health or home.
• Consider reducing any riskier investments you have for
some more conservative ones, and don’t take on any major new risks that you
can’t afford to lose.
• Ensure you have some cash or liquid assets to cover any
transitions you need to make during a recession, like finding a new job or
moving to a less expensive area.
• Begin the process of diversifying your income sources with
a side gig. Start
with a few ideas here. Apps and
websites nowadays let you sell any of your skills, whether its driving,
cleaning, tutoring, or playing dungeons and dragons!
• Assess your current work situation with your employer if
you can. Some employers are more open to
discussing the company’s future with their employees. You may also be able to tell whether things
appear to be slowing down a bit too much.
• Keep learning new skills and make your services valuable
in the workplace. The least productive
employees relative to their salaries are often the first let go. If you can make yourself invaluable to your
employer, you’ll better be able to weather the storm. Keep mastering hard things and taking on
tasks that others shy away from.
Should you be worried about all this?
No. In fact, the most
important thing is to stay calm to avoid giving room for fear to drive your
decisions instead or rational thinking. Remain
calm, work hard, keep saving, and find peace in knowing that any economic
downturns
will be temporary. Don’t try to time the
market or alter your long-term goals. Definitelydon’t stop contributing to your retirement fund.
The stock market may have lost 12% last week, but this is
because the market wildly overreacts to current events. The fundamental economy is not 12% weaker, just like it was not 30% stronger at the end of
2019. Just because the market and news
react far too strongly to current events does not mean that you should. Be prepared
for the worst in the short-term, but expect
the best in the long-term.
Here’s some data to back this up. One of my favorite financial YouTube
channels, Next Level Life, did a fantastic analysis on what happens immediately
after a day where the stock market loses 3% or more in one day. We had several of these last week, and there
have been over 300 since the 1920’s.
The left column tells us that after a major day of losses (sometimes
called a “Black Swan Event” because of their extremely low probability), the
stock market will, on average, regain 0.41% within one week, will be
completely recovered within one quarter, and will gain 9.2% within one year
(more than 3x the amount lost)! Sure,
there are some extremes in both directions – as shown by the Min and Max
columns – but a single even like we had last week is not enough to predict a
recession.
The coronavirus may indeed be one of these Black Swan Events
and may cause global productivity to dip a bit.
If it is prolonged or particularly severe, it may cause the economy to
contract because consumers and businesses will cut back their spending and
investment. Then again, it may be just a
temporary hiccup and the market could return to normal in no time.
For some perspective, here are a some of the largest
single-day losses in stock market history.
Some were followed by periods of significant market downturn (Great
Depression, Great Recession); some were followed by periods of market upturn
(the Mini-Crash of 1997). The
coronavirus drop of 4% last Thursday doesn’t even crack the top 25 single-day
market drops in the last 100 years.
True, we’re only looking at single days here rather than weeks or
months, but last week was far from the worst in history.
The point is, nobody can predict the market. Those that try often end up buying high and
selling low, the opposite of what you should do. Unless you get improbably lucky, you will
always be financially better off by buying and holding for long periods of time
rather than trying to predict every turn of the market. The old saying remains true:
“Time in the market beats timing the market”
What you and should control, however, is your level of
preparedness for significant events. You
can control your non-essential spending, your taking reasonable precautions for
your health, your commitment to an emergency fund, and your willingness to
continuously improve your professional skills.
These things are recession-proof.
Remember, recessions hurt the most for those who are
unprepared. If you can weather the storm
without acquiring debt, you could come out on the other side in a great
position. If you do acquire debt out of
necessity, remember, you can and
will pay it off. After a recession,
stock prices are low, home prices are low, and opportunity for new investment
is high. However, if you can’t manage
your finances now, the recession will likely set you back for a while, with
fewer opportunities on the other side.
Mel Brooks tries to adopt a Centsei-quality beard in History Of The World: Part 1
We began this blog with an examination of the single most important idea of personal finance and lifelong happiness. A few posts later, we mentioned one hundred tips to improve your finances and quality of life. Today, we outline the 10 Commandments Of Personal Finance. And no, you don’t even have to change religions!
COMMANDMENT I. Thou cannot manage what thou does not measure
Translation: Budgeting and tracking is essential to your financial success.
The bodybuilder, trying to deadlift a new personal best. The corporate executive, trying to profitably integrate a new product. The dieter, trying to lose those last few pounds. The athlete, trying to improve a batting average or free throw percentage. The guitarist, trying to perfect a new song. The gamer, trying to beat the original Super Mario Bros in the fastest time ever. And finally, the Centsees (i.e. you), trying to better manage their personal finances.
What do all of these masters of their craft have in common? They all rigorously measure their performance. Personal finance is a skill that can be taught, and no skill can be improved without a willingness to objectively measure one’s performance.
Start by measuring your net worth. Add up all your assets with real value (cash, savings, car, retirement, property, stocks) and subtract your liabilities (credit card debt, mortgage, student loans, IOU’s, back taxes, other loans). Here’s an easy tool to calculate it using Excel that takes just a few minutes. Write the number down, update at least once per year, and keep track of it over time.
Is the number less than zero? Don’t worry; this number just tells you that it would be best to aggressively cut back on your spending and pay down your debt. Is that number greater than zero? Nice start; set a specific attainable goal – whether it’s $10,000 or $1,000,000 – and focus on increasing your assets and minimizing your debt. Most importantly, is your net worth number increasing month to month or decreasing? You’ll only be able to tell through measurement. Tools like Mint (free), Personal Capital (Free), or YouNeedABudget “YNAB” can help track and illustrate your progress, and they will be cover in depth in future posts.
Take this principle and apply it throughout your finances. How much do you spend each month? What percentage of your income do you save? How much do you spend on essentials vs non-essentials? How close are you to being able to cover your necessary expenses off your savings indefinitely (“financial independence”)? What is your next financial goal and how quickly can you meet it? The methodology is the same with each: Assess where you are; set a goal; and track your progress each month. Sure it takes a little effort, but don’t postpone it. Just like the bodybuilder, the executive, and the guitarist, measurement is the key to financial management.
COMMANDMENT II. Thou shalt spend less than thou earns by minimizing the difficult choices
Translation: By limiting the number of decisions you need to make (via automation), you can spend less than you earn all the time without even thinking about it.
At its core, personal finance is about spending less than you earn. “Wow, great insight, Centsei!” The trick is knowing how to get there.
We’ve recently examined how to make more money and how to spend less, but to make doing so even easier, the trick is minimizing the number of difficult decisions you need to make.
It is a very “difficult decision” to set aside your “leftover money” at the end of the month for savings and long-term goals. You only have to make this decision once if you automate your savings. Set aside a portion of your paycheck to retirement, healthcare (including an HSA or other savings account to cover your deductibles and out of pocket), tax withholding, emergency fund, mortgage/rent payment, and even an account devoted to paying down your debts. Most payroll companies allow you to split your paycheck between various accounts, so consider going so if you haven’t already. If your payroll company can’t do it, your bank can, as almost every bank allows you to make weekly or monthly recurring transfers for free to accounts of your choice. It doesn’t take long to set this up, so do this before sending a dime to your checking account… and don’t touch the money. This “save first automatically” mentality will virtually ensure that you’re never hit with an unexpected expense. For example, Lady Centsei and I each have over six different accounts that we devote our paychecks to (retirement, heath insurance, HSA’s, mortgage, emergency, and taxes) before we see any of it. This one-time setup has made our financial goals a lot easier to attain.
The same is true when it comes to spending. Your decision should always be between spending on the best option and not spending at all. Saving should always be the second option. Change your environment to match your goal. If you have a financial “trigger” that causes you to spend, eliminate that trigger from your life so there is no longer a decision to be made. For example, if you have a partying group of friends who cause you to spend frivolously, change your environment to one that limits the time with them and eliminates the decision of whether to splurge with them. Harness your inner Centsei!
This philosophy can help you in other areas of your life that may or may not connect to personal finance. Going to the grocery store with a shopping list and sticking to it (“no decisions”) will help you buy more healthful foods and spend less money. Having a trusted friend assist you through a personal situation or choice can help you be more objective and waste less emotional energy. Creating a specific schedule for your hobbies and routines can help you be more productive and waste less time. Quantify your options, reduce irrelevant factors, and focus on the long term, and you will find yourself making more satisfying decisions just about everywhere.
COMMANDMENT III. Remember to keep holy thy recurring expenses, for none is insignificant
Translation: Letting your recurring expenses add up can devastate your finances.
If I asked the average person how much a coffee run in the drive-thru cost, what would you say? Most would say maybe $3 per day. Maybe $5. The average American earned $27.16 per hour in 2018, it’s no wonder that small dollar expenses like this seem trivial.
However, the question was how much that coffee really cost. A financially astute person might say the coffee cost $100 per month (let’s assume $3 every day or $5 per workday) or $1,200 per year, in after tax income. The Centsei, nonetheless, would tell you that this recurring expense would truly cost you $250,000 over a 40-year working life (7% annual return).
($100 per month, invested rather than consumed, could be worth a fortune when you retire, as shown here)
Check every transaction in your bank and credit card statements every month. Cancel any recurring transactions that did not bring you joy. Did your cable TV subscription bring you joy? How about that wine of the month? That unused membership? The insurance protection on your phone or chair? The overpriced club? That coffee/lunch each day? Beware, because these transactions could hit you once a day, once a month, or even once per year, so it’s even more important to keep a close eye on them.
Don’t become complacent and let “a few dollars here and there” every day or every month become a drain on your finances. Cancel any recurring expenses that aren’t truly “holy” and bring you great joy!
COMMANDMENT IV. Honor and respect thy body
Translation: Taking care of your body is taking care of your finances. And vice versa.
I think it was Buddha that said that “To keep the body in good health is a duty… otherwise we shall not be able to keep our mind strong and clear,” but since 50% of quotes are made up and the other 50% are misattributed, we’ll just give him credit on this one and move along.
There is no question that your physical and financial health can go hand and hand. Those who take care of their body are better able to take care of their pocketbook, and vice versa. There’s very little point in pursuing financial independence if you’ve sacrificed your body in the process. And by “body” I don’t mean just mean trying to look like Brad Pitt or Jessica Alba; I mean the impact that things like stress, overworking, addiction, and fatigue can have on both your body and your mind.
You’ll never regret time spent taking care of your health, and its impact on your happiness and bank account is immeasurable.
V. Blessed art thy savings; Cursed art thy debts
Translation: Saving for your future and freeing yourself from debt will allow you to live a happier and more fulfilling life.
Let’s begin this exercise by listing all the things you may have gone into debt for in your lifetime: A mortgage on a house? A new car? A business? An education? An unexpected health expense? A shiny new phone or gadget? Put these the debt itself next to the “thing” that it bought. Now list which of those things you value the most today, starting with the most important and ending with the least important (what you most regret).
I’ll best most people put things like an education (for a subject in a high-demand field) and house near the top, the business and healthcare in the middle, and the junk they bought with their credit card or personal loan near the bottom (if they can even remember a fraction of everything). This ties into one of our recurring themes of this blog regarding debt: Never go into debt for something that loses value over time.
A house and an education won’t lose value over time. A brand new car will. A restaurant meal, a movie ticket, or a night out at the bar will – immediately. If you can’t afford it in cash and if it’s going to become worthless over time, never ever go into debt to buy it.
Take a moment to think of a few things that you saved for and were able to pay for without debt. Take another moment to consider the things you didn’t save for but instead purchased with debt. Which ones brought you more joy? Which brought you anxiety?
Things you save for diligently almost always bring you more long-term happiness than those you buy impulsively.
VI. Improve thy good habits and remove thy bad habits, one at a time
Translation: Improve your behaviors by building a routine that become a habit. Focus on one small, easily achievable task at a time, and watch the benefits start to add up.
As I’ve mentioned before, I used to hate exercising. Ugh. There was always an excuse: too hot, too cold, too rainy, too far away (the gym), too painful, too tired. I was young and in good health and couldn’t find a way to get into the habit.
I started studying why this is and learned some very effective ways of building good habits that stick. It begins by making something a “routine” – a behavior that you have to think about, but that you do at the same time every day or week until it feels normal. For me, that was the routine of walking for as long as I could at lunch. Make the routine as easy and manageable as possible, then increase the time/effort you put into the routine slowly until you have more sustained benefits. In time, this routine becomes a “habit” – something that you do without even thinking about it. I now don’t even think about whether to go for a walk every day, I just do it, and my body feels weird without the walk.
This methodology can apply to any area of your life where you feel like you’re not at your best. Start by switching your routine, do it until it feels normal, and improve upon it until it becomes a habit. Try one of the following, then add another:
—Walk 10 minutes a day at the same time, then gradually make it 30 minutes per day.
—Stop buying just one type of “guilty pleasure” food at the grocery store, then gradually eliminate the rest.
—Drink one large glass of water in the morning, then gradually drink one every hour for eight hours.
—Throw one cigarette away from the pack you smoke each day, then two, then all of them. (NOTE: Addictions may require specialized action, so make a plan with your doctor)
—Give up a time-waster like social media site first thing in the morning, then until noon, then all day (but never stop reading the Centsei!).
—Do a 15-minute jog in place once per week, then gradually make it a daily routine or add in a 15-minute weight routine.
Focusing on one at a time is absolutely the way to go. One minor change to your routine is infinitely more likely to become a habit than multiple major changes. For me, I tried to go from no exercise to “three days a week for an hour at the gym” and my body quickly punished me for it until I lost motivation. I started by just walking, added an easy weight routine after a few months, added one day per week at the gym after that (same day of the week at the same time), and am now up to two days per week – while not giving up the walks or weights. Find ways to give yourself a positive feedback loop, and the habit will stick even harder. It’s magical!
Interested in learning even more? Check out The Power Of Habitat your local library!
VII. Thou shalt not covet thy neighbor’s goods, for there is no greater “status” than financial independence
Translation: Humans are programmed to seek status among their peers and often do so by spending money on status symbols. Break free from these social cues. The only status that matters is financial freedom.
We’ve all been there. A classmate gets a sweet new iPhone and shows it off to everyone. A friend gets a brand-new wardrobe with all the latest fashion. A neighbor remodels their kitchen with high-end appliances. An acquaintance gets “fancy” hair extensions, jewelry, or watches. A family member takes a weeks-long vacation to some exotic destination. A coworker buys a new car with fancy rims and leather interior. It can be difficult to see other people buying nice things (seemingly) with ease and equally difficult to avoid the temptation to one-up them.
The fact is, however, the average person is really bad with money. Half of Americans (about 61%) don’t have enough cash to cover a $1,000 emergency. About a third don’t have a dime saved for retirement. The average household has $8,000 in credit card debt, and 35% have some sort of collections reported on their credit history. If that weren’t enough, more people are more concerned about paying for their next vacation than they are saving for retirement. An astounding 20% of people making $100,000 per year are living paycheck to paycheck, according to a recent article. Yikes!
Yet, these are the same people showing off their iPhone, flaunting their wardrobe, and flashing their new car. The next time you feel that twinge of jealousy, remember that it’s much more likely that the person in question is spending beyond his means and has next to nothing in savings. As that last article shows, people are poor financial decision-makers at all income levels, but this doesn’t mean you have to be as well.
Material possessions are no sign of status. The only status worth having is ownership of your time and the freedom to do only the things you find meaningful. This status is only truly accomplished when you’ve achieved financial stability and the peace of mind of being able to pay the bills and any unexpected expenses without taking on debt. Such stability puts you on a path towards saving enough to cover all your core expenses for the rest of your life, of what I and many others call “financial independence.” It isn’t something out of a self-help book; it is a very real position that you can put yourself in by keeping your spending low and your savings high.
This isn’t to say that you can’t enjoy a night out, a new suit, or a fancy gadget from time to time. Rather, avoid all spending done to keep up with your peers. Spend your money based on what you value, not what your peers value.
Be patient, keep saving, and imagine your fancy-car-coworker’s reaction when you no longer have to work by age 50 (or sooner)… and he’s still decades away.
VIII. Learn from thy past, appreciate thy present, and plan for thy future
Translation: Learn from the past, but don’t dwell on it. Live in the present, but don’t lose yourself in it. Plan the future, but don’t depend on it.
Ancient philosophers and modern thinkers (including bloggers!) each seem to have different thoughts on the extent to which humans should focus on the past present and future. Let’s look at some examples.
Historians look deeply at the past and try to connect it to current events. This is a useful exercise, as history can repeat itself, though not an easy one, as the world often evolves at a faster rate than textbooks.
Buddhists focus on the present and finding peace in the current moment. This, too, has great value, as we often lose sight of the present and don’t always appreciate the many things that make the current moments in our lives so special. However, too much emphasis on the present can cause us to lose sight of major problems right in front of us or behind us, so it does pay to reflect on non-current moments too.
Economists concentrate on predicting the future using data and analytics. These predictions can have great value in helping people, businesses, and governments plan the correct course of action, but there is a reason they call it “the dismal science” – they’re often wrong.
Here at TheCentsei, we recommend a balance in all these things from the perspective of your finances and happiness. Keep learning new things and sharpening your skills. Take the time to examine the past to figure out what went well and what didn’t… but don’t beat yourself up if things weren’t perfect, just do it differently in the future. Continuous learning is the ally of success.
Source: makeameme.org
IX. Thou shalt not hold thy financial goals in vein
Translation: Goals give our behavior meaning and keep us on the right track.
As you may recall, I moved back home after graduating from school in 2009 with a mountain of student debt and no job. Being in your 20’s and living in your mother’s basement (or the first floor, in my case) can take its toll on your ego, and I knew it was on me to improve my situation. So from the very beginning, I set myself on the path of paying off my student loans and finding a place to live in 18 months. This was my goal.
I settled for a temp job that became a full time “intro level” job 3 months later because they were pleased with my performance (well, and I forced my company’s hand because I’d continued to job search and got another offer). For the next year or more, I saved 70% of my after tax income, paid off my student loans, and saved enough for a down payment on an apartment and a car. The remaining 30% was spent paying my mother rent and for gas/insurance on my old jalopy. Virtually no nights out at the bar, no vacations, no video games, no new clothes, no status symbols. I knew exactly how much I had to save each month to make my goal a reality. This was my behavior.
In the end, the goal took 20 months to achieve, not 18, but it kept me entirely focused and genuinely happy about my life at the time. Saving was legitimately fun because I could see the goal at the end of the tunnel, and I felt progress every month. I spent more time with my friends, my family, and our new dog doing things that were not financially draining. What might have seemed like an unfortunate situation to others proved to be a blessing.
The point here is just that having a goal brings value to our behavior. The slight “let down” I might feel by sacrificing a night out at the bar is “made up” by a factor of 10 when I stepped into that apartment debt-free with a bright future on the horizon. With no goal, I likely would have drained my bank account by pouncing on each opportunity to spending money without thought for the future.
From time to time, write down your financial goals and create an attainable plan for how exactly you can achieve it. Do you want to pay off your debt? Buy a home? Go back to school for a degree? Start a business? Retire early? From there, pick one and go get it!
Estimate how much this goal will cost and how quickly you’d like to achieve it. Figure out how much you have and how much you need to make it happen. Think about what (if any) sacrifices you’ll might to make to get there in a time frame that works for you. Consider all options and set out on the one that suits you the best. You’ll find it so much easier to pass on other spending when you have a goal in mind.
Once you complete the first goal, get started on the next.
Personal finance is as much about behavior as it is about numbers. Giving your money a purpose gives your behavior a meaning. With a purpose and a plan, you can accomplish anything.
X. Thou can
Translation: Nothing is more important to your financial success than a positive mindset.
You must believe that you can succeed. It can be easy to give up trying to master your finances and decide it’s too complicated. The only way to get past that is to believe in yourself. At that moment, you will begin to begin to prosper.
This blog is about how to live richly without spending a lot of money and how to become wealthy both in mind, spirit, and wallet without sacrificing your integrity.
The requirement to get there isn’t being a math wizard, finance major, millionaire, or trust fund baby. Indeed, personal finance doesn’t require a large salary, a prestigious education, or even a perfect past.
“It’s never too late to be what you might have been.”
– George Eliot
“The man who moves a mountain begins by carrying away small stones.”
– Confucius
“Optimism is the faith that leads to achievement.”
– Helen Keller
Rather, the only requirement is the mindset that you can do it! The rest is just learning how money (and your own brain) works and applying that knowledge to your situation to establish the right behavior. Anyone who believes in themselves can begin making improvements in their life.
Study, after study, after study, after study shows the power of positive thinking. Having the so called can-do attitude and willing to keep improving your skills not only affects your finances, but also bolsters your happiness and lengthens your life!
No, I’m no cultist or motivational speaker. Yes, I am a scientist that believes in data, especially when it reflects my own experiences.
