"Responsible Lending"

Over the weekend, I attended a function that included lunch. At the table behind me, I overheard 2 people talking about how several friends were in tight spots with their mortgages. That didn't surprise me, but as their conversation developed, I was dumbfounded when the blame was placed entirely on the mortgage lenders.

I'm not saying that mortgage lenders weren't making bad loans, but at some point, don't the consumers have some responsibility to read what they're signing? Didn't we all grow up hearing things like "let the buyer beware", and "if it sounds too good to be true, it probably is!"?

The conversation touched on the fact that the lenders should have told people this or that. No mention of the obvious - that the lenders don't work for the borrowers, the lenders make their money from the borrowers. If the borrower (customer) wants someone "on their side", they need to (and should!) hire a real estate attorney to look over the contracts before they sign them.

The lenders were irresponsible - to their share holders. Those are the people they have a responsibility to. They were irresponsible because they sold people more than they could afford. Really, the lenders are responsible for figuring out how much they can get out of a borrower without forcing the borrower into default. If that means the borrower eats nothing but ramen noodles and rides a bike to work for the duration of the loan, it just means that the lender got the best deal they could for the people they ARE responsible to - the aforementioned shareholders.

The person that is responsible for making sure they don't spend more than they can pay is the borrower.

The thing I find truly scary about this is that I'm a complete idiot when it comes to money and finances. I've just recently figured out how to actually make a budget, and even I know the basic rule "don't spend more than you have". How much worse off are these hundreds of thousands (millions?) of people that are caught in the mortgage crunch if even a self-acknowledged "financial idiot" knows more than they seem to?

Financial Functional Illiterate.

That would be me.

I'm still trying to get my head around doing a budget - and that's actually going well. Right now I'm laying low, waiting for the end of the month. I've laid out my "guesstimate" budget in Excel, signed up for Mint.com (which tracks most of my purchases) and now I'm waiting to see how well I'm able to stick to my budget, and where I can cut back farther. I find I'm actually a little impatient - I want the end of the month to be here so I can see how I did, and get started on revision 2.

The very, very first thing I'm doing is building up a one month buffer in my Suncoast savings account. It earns a very small amount of interest (about a third of what the E*Trade savings earns) but it is attached to my checking account for overdraft protection. Once I have a month of money in that account, I can stop living paycheck to paycheck, and set up automatic withdraws to my E*trade savings and my investment accounts.

I'm convinced that the only way to get ahead is to NOT be behind. Living paycheck to paycheck, even if all your bills are paid on time, is being behind. It took me a while to get my head around that idea. I can't comfortably set up ANY automatic payments right now - bills, savings, investing or otherwise - because I am not 100% certain there's no way those payments won't accidentally bounce. So priority one is getting a full month's budget stashed in that Suncoast savings account.

Priority 2 is getting an "emergency" fund stashed in that E*Trade savings account. I'm thinking that $1000 should be enough to start with. That should cover any "average" major auto repair or bill. It's also a nice, round number. The trifecta is that it seems to be the number lots of financially literate people recommend to start out an emergency fund with.

Priority 3 is getting my credit cards paid off. Right now, that's down to about $1200.

I know, I know - it sure seems like that last one should be first. That makes the most sense to me. But then, my financial life is a train wreck, and the people out there that have been writing personal finance blogs for months and years say this is the order it has to be done in. At the risk of sounding Zen, financially speaking, I know that I know nothing. So we'll do it their way.

One thing has become very clear - I've been living stupidly. Well, that's not true. I've been living ignorantly. Now that I know better, if I continue to live that way, it would be living stupidly. What I mean is that until now, I've always thought I was making just barely enough to "make ends meet". I had no idea where my money was going, and I was always broke. It's sort of amazing to find out that I make enough to live comfortably, and still have a fair amount left over for savings.

That defines the difference between financial literacy and financial illiteracy. The financially illiterate has a hard time making ends meet no matter what their income level. The financially literate can find a way to live comfortably at a wide variety of income levels.

Refreshing Personal Finance

I'm going to be looking at a variety of budget tools over the next few days - all the free ones. I see no reason to pay a fee for something when there are great, free alternatives available out there.

Initially, I used Excel to generate my basic budget. I'm fortunate that I have about 9 budget items, and that's it. I suppose I could break things out a little more, and have both a "groceries" and a "dry goods" category, but I really don't care if paper towels and windex live in the grocery line category.

Once I had my budget, I wanted to start tracking. I'm looking at a few different free options, and today's was Mint.com. Total set up time was under an hour (1 Credit Union with checking and savings, 2 credit cards, 1 investment account and 1 paypal account). The transactions all categorized fairly well on their own, and as I went in and assigned things manually the systems seems to learn to look for different key words in the transaction descriptions. For instance, at first both credit card payments were tracked based on the "ACH withdraw card" keywords. When I manually renamed one to "HSBC Payment" all of those transactions started tracking off of "ACH Withdraw HSBC". I'm not certain that it's an adaptive system, but if it proves to be then that will be really nice.

Mint.com does a good job of showing you your spending habits, and tracking where your money is going. It has some nice alert features you can set up to send you e-mails or text messages. The spending trends displays a nice pie chart, showing what you've spent where, and you can get that displayed from one month at a time to, "all time". I like that you can click on each category and "drill down".

A few things I've seen that I already don't like is that I can't manually tell it that I'm not using my E*Trade account as an investment account. There's several years of history in my E*Trade account from when I was using it as my default checking account, so it would have been great to load all that in and see historically how I've spent my money, but Mint refuses to get the transactions from that account. Since NOW I'm using it strictly for investments, it's OK - but if you aren't using a "regular" account for your checking and savings, you might have problems.

*Side note: I liked using my E*Trade brokerage account for day-to-day because it was fee-free. Checks were free, they rebate my ATM fees from other banks, and there was no annual or monthly fees. My current credit union doesn't even give me that good a deal!

I'll also be checking out Wesabe.com here in the next few days, to see how it compares.

Taking Stock

"The key to wealth is being satisfied with what you have."

It's interesting to me how intertwined things are. At the beginning of this year, I started out having one of my goals as "pay off my debts". Seemed simple enough - pay down my credit cards and pay off a loan. It occurred to me that it couldn't hurt to do a little research about what the most effective way to do that would be.

Along the way, that simple "pay off my debts" goal got changed around into "become financially responsible".

I looked around me, and what I saw was that I didn't live nearly as poorly as I'd thought. I also don't live nearly as well as I could.

Now I need to start by taking a financial inventory - then I'll move on to learning about budgeting tricks. I suspect that there's a lot of learning ahead of me in this category.

Personal Responsibility = Escape Poverty

This is an older article over at Whatever, but it's something I couldn't have written without going off on a rant. Which is my issue, and something I should work on. That's a post for a different blog.

He boils it down to these 5 points:

1. Get an education.
2. Take responsibility.
3. Get help.
4. Learn patience.
5. Filter out the stupid and ignorant.

He's right - do those 5 things, and you will escape poverty. I'm flummoxed as to why he stopped there. These 5 things are not only a recipe for escaping poverty, they're a recipe for attaining happiness.