A Credit Crunch to be Legitimately Worried About: Yours!

You can't turn on the tube nor open a paper without hearing about "the credit crunch". Pretty interesting given that credit spreads (basically the cost of borrowing) are the same as they were before these doom and gloom headlines started appearing en masse about a year ago. And especially laughable when you consider that the "tightening" means that banks are actually looking for proof of income and requiring a down payment for a house again! (This has been the historical, proven model -- it's not a credit crunch when lenders go crazy and give out too much money to easily, then decide to reign themselves in to a healthful level. Kind of like when you return from vaca and stop drinking ten pina coladas a day!)

I digress. Today's post covers personal credit. And more precisely: plastic. Some of us don't use credit cards, others abuse them to the point of wearing out their strips. If you're one of those in the former group, or a gal who pays her monthly balance, feel free to disregard the rest of the article. But if you're like a lot of people, perhaps a bit too tied to the "cha-ching" of Visa, MC, Amex, or all of the above, press on.


Time for a personal inventory: Each questions below has an italicized directive -- you'll need a pen and piece of paper. And a glass of Pinot -- something has to be sexy because this exercise ain't, although getting control of your credit will be!

1. How many credit cards do you own?
Experts recommend two to six cards. (I have one personal card and one work card -- yes, the latter counts even if your company pays it!) Applying for them continuously can lower your score, as can closing several lines of credit at once. If you have say, ten cards, aim to close an account every six months. Having more of them increasese the chance that you'll forget to pay one or be psychologically more inclined to buy by viewing them as separate entities versus a card.
---> write this number down

2. How much do you owe, combined, on your credit cards? What is the interest rate on each card? And are there any additional fees?
If you're paying off your balances monthly, super. If you're carrying a balance, you're likely paying pretty penny in fees.
--> write down the total owned and interest rates/other fees for each

3. Are you using cards to get by on bills month-to-month?
This is a bigger problem. If you are spending more than you make, you have a situation that will only get worse over time. Sure, we all go through down times -- the loss of a job, medical issue, an unexpected need for four tires, etc. But if you're living month-to-month on cards, or racking up more debt than you're paying off, you need a severe fix and a reasonable and tight budget. Period.
--> write down your monthly expenses and check those paid on credit card because your paycheck doesn't cover them

4. What are your typical purchasing patterns? Where do you tend to "blow it"?
This is an especially important come-to-Jesus if your answer in question three made you want to vomit. In order to fix the cycle of plastic pain, you need to figure out where and why you're overspending.
--> a more qualitative exercise: print out six months worth of statements and see if you can identify any patterns. Pay special attention to clothing/shopping, eating and drinking, sports, travel, etc. Tally your personal categories up.

5. Do you know your credit score and how your card use affects it?
There's no excuse not to know your credit score. You can get it for free on this website once per year. Using more than 30% of the credit available to you will lower your score. Having a lot of accounts or opening/closing a lot will lower it too. Other big no-no's are delinquent payments and overdrafts.

Take Action: By now you have a list -- organize it like this.
Card #1_____ - Balance____ - Rate____
Card #2_____ - Balance____ - Rate____
Card #3_____ - Balance____ - Rate____
(etc. if there are more)
Total Debt = ___________

(If this number is bigger than you expected, take a deep breath. At least you've just made a huge leap in taking control of your debt by recognizing it!)

In order to have psychology work on your side and save fees in the long run, you should consider paying off the card with the highest interest rate first. So if card A has a balance of $5000 and an interest rate of 8%, and card B has a $4000 balance with a 20% interest rate, by all means, attack card B first! You'll of course need to make a payment on the card(s) with the lower rates -- perhaps the minimum or slightly above, so as not to incur additional fees and penalties. Set these up for automatic payment via online banking so that there are no excuses!!!

Next, call your lenders armed with your credit score and ask for a lower rate. Does your boss give you a raise without your asking? Does your honey read your mind? Of course not! And I'm sure that you HMW are good at asking for what you want, so go for it. Assure the lender that you're "committed to being a great customer" and remind them how long you've been one. Better yet -- if possible, cite your history of on-time payments.

Finally, figure out how much you can pay each month and stick to the plan. Trust me, the joy of paying off each card or getting your balances to zero will much outweigh that of any purchase. And the more you pay, the better your situation will become. As your payments increase, your debt ratio decreases, and your credit score improves, you should be able to ask for even lower rates and perhaps refinance any outstanding loans (i.e., a car at a higher rate given past poorer credit).

You'll reach your goal -- zero credit card debt, faster if you commit to a budget. More on budgeting in my next post.

The R Word!!! Why Believing it's Here Makes you More Likely to be a Fad Dieter!

No, I don't intend to counsel you on the merits of keeping your roots in check by having a regular recurring appointment with your hair stylist. I talking about the term being tossed around like a teenager with a roll of toilet paper late night in a neighbor's yard: "(The supposed-impending- bound to happen-already is here-will be if its not) Recession"!!!

Each day, the media coverage gets more ominous and damning. Even those who are supposedly schooled in these matters in the finance industry have been caught dangling the "R" word in public. (I think this has more to do with the fact that these types like to "call the market" and attempt to predict direction; by the way, most of them suck at it, to be so frank on this lovely Friday. And recessions are a normal part of the economic cycle, so they figure if they keep saying it, they'll at worst be "ahead of the curve".)

Some people are downright paralyzed by the school yard taunts coming from the press: "The economy!"; "Subprime crises!"; "Credit crunch!" These guys are paid to sell "news", and I'm beginning to see that their "fear" -- uh, I mean "news" is about as worthy and researched as the National Enquirer reporting that Lindsay Lohan is giving birth to a human clone of Britney Spears during Tom Cruise's next Christian Science diatribe.

The main problem is, no one ever stops to question this negative information superhighway to see if the economic fundamentals are really in peril. (Going to primary sources would be too boring and time consuming, right?) It's all about selling "news", which means selling fear. Even the good ole' USG today announced that they've bought into it --its "stimulus package" is on its way to your front door. (Gotta keep the voters happy, even if they don't speaka!)

Be honest with yourself -- if I asked you to define the R word, "recession", what would you answer? "Bad economic times?" Nope. "I can't own a home in San Francisco or New York City so times must be bad?" Please! "Markets are down?" No!!! According to Investopedia, a recession is "two consecutive quarters of negative economic growth as measured by a country's GDP".

I really doubt most HMW keep a running tab of the Bureau of Economic Analysis' quarterly GDP reports front of mind. So let's take a look at the last three years (from top of page 5 of the aforementioned link):
2005
Q1 = 3.1%
Q2 = 2.8%
Q3 = 4.5%
Q4 = 1.2%
2006
Q1 = 4.8%
Q2 = 2.4%
Q3 = 1.1%
Q4 = 2.1%
2007
Q1= 0.6%
Q2 = 3.8%
Q3 = 4.9%
Q4 = not yet posted

It doesn't take a math whiz to see that there ain't a negative number here. Hmm... maybe Investopedia didn't get the memo that the media changed the definition of a "recession" to "getting the US consumer really scared of the 'crisis' "?

I urge all HMW to ignore the hype! Keep investing, saving, and being productive!!! Enjoy yourself.

Still think we're heading towards economic disaster in the US based on the hype? I smell a fad dieter! Go eat some real food, you probably just have a headache from your "negative calorie soup", high-protein/no carb plan or "no orange stuff" diet.




If you can't get these "terrible times" out of your mind, the only cure for you is to give up TV for good music or a book, preferably the latter and Siegel's Stocks for the Long Run!

An Easy (Re)balancing Act

I last waxed on about mindful consumption -- having a spending plan so that you can make better decisions about how you want to balance saving with enjoying "the good life". To continue the mindful personal finance theme, today's post covers rebalancing your portfolio. The best part is, it's easy to do and you only need act once a year! Put it on your calendar next to "deal with taxes". And open something zippy and fresh like a Gewurztraminer to quell the dull ache produced by the topic :)

Rebalancing is when you reallocate or realign the funds in your portfolio to your original intended percentages. Why do this? Over the course of the year, as some investments grow and others decrease, your allocations become skewed. Let's look at a simple hypothetical two-fund portfolio without contributions during a one year period to examine the concept:

January '07
Fund A - $1000
% Allocated to A - 50%
Fund B - $1000
% Allocated to B - 50%
Total Value = $2000

Dec. '07
Fund A - $1,100
% Allocated to A - 52.6%
Fund B - $990
% Allocated to B - 47.4%
Total value = $2,090

The HMW's desired allocation is 50% in each fund. In January, her $2000 is split evenly between Funds A and B. Over the course of the year, Fund A gained 10% and Fund B lost 1% (this HMW earned 9% on her investment). Due to these gains and losses, the percent allocated to each fund has changed. Fund A now represents 52.6% of her portfolio and Fund B, 47.4%. While the percentage change in each is not drastic in a year, over time, failing to rebalance these allocations could skew this HMW's goals.

You might be wondering why she should reallocate and buy more Fund B when the investment is down? It sure seems tempting to "ride" a higher performing fund (or stay overweight in Fund A), which is why reallocating can be psychologically difficult. However, it's important to do so because very few investments or funds move in the same direction every year. And it's very difficult to predict future returns. What you can expect and grasp is that change is normal! Fund A might hold international investments that do very well for several years, but then lose some of their gains. Fund B might make a come back during Fund A's down years. No one can predict what's going to happen.

That's exactly why the most important thing to do (other than contribute and save) is to create an allocation based on sound investment principles and stick to it. Don't try to chase returns -- doing so is about as fruitful as chasing men. It rarely works, and when it does, it's susceptible to future failure.

Most online investment accounts have a very simple "rebalance" function or button. If you're not sure how to rebalance your accounts this January, call your provider and find out -- it will keep you on the right track for the long haul. And make sure to add an annual reminder to do so.