r u l y

It’s the last day of March and time to recap this month’s discussion of money.  I am also including some of my favorite comments from the month and links to other interesting articles.

"Where the newsboy's money goes." Photo by Lewis W. Hine, May, 1910. From the Library of Congress Prints and Photographs Division.

• We started the month discussing the reasons why you need to learn to manage your own money and suggested readers watch Niall Fergusson’s, “The Ascent of Money.“
• We discussed budgeting, a foundation concept in money management, introduced our fictional family, the Medians, and issued The Ruly Challenge to create or update your household budget.
• We discussed electronic checkbook management options and gave instructions for GnuCash, an open source financial management software.
• We discussed debt management and how to calculate payoff schedules to get rid of your debt.

Ruly Ruth commented:

“[T]here’s a HUGE emotional quotient to analyzing these numbers. The big negative balances and the lengthy payoff times can be emotionally stressful and saddening for many.”

• We walked through a cash-out mortgage refinancing example and explained why sometimes it is more cost effective to pay down your debts as they are rather than using complicated strategies like refinancing.
• We reviewed Howard Schilit’s “Financial Shenanigans” and discussed the accounting tricks you need to be watching out for as an investor.

If you follow Howard Schilit on Twitter, you saw his link to a recent New York Times article indicating that there were some financial shenanigans in the cost estimates for health care reform.

• We talked taxes and gave some organizational hints to help you get your tax papers in order.  My taxes are done and currently in the 7-day waiting period I discussed.  Once I got into the nitty gritty of my business taxes, I ended up needing to consult with a professional CPA (with the incredibly Southern and accounting-appropriate first name of “Banks”).  It would be a wonderful gift to small businesses to enact some tax simplification standards.  Currently we treat almost all businesses for tax purposes as though they are Fortune 100 companies.
• We discussed insurance, including what to look for in an insurance quote and how to evaluate the financial strength of an insurer.
• Ruly Ruth discussed the delicate politics of money and marriage.

In a sad trend, The Washington Post ran an article recently profiling the number of spouses who cannot afford to divorce and are currently doing the best they can to tolerate each other living in the same house while they wait for a better economic climate.

• We discussed saving for retirement, particularly through an employer-sponsored 401(k) plan, and the importance of rebalancing and evaluating the administrative costs charged by mutual funds.

If you need an incentive to ramp up your retirement saving, you may be interested to read the recent New York Times article indicating that Social Security goes broke this year and is currently paying out in benefits more than it takes in from payroll taxes–a troubling milestone that wasn’t supposed to be reached until 2016.

• We discussed options for those in severe financial distress, particularly bankruptcy.

Lou commented:

I hope the recession is an old fashioned lesson in learning to delay gratification, saving up front before purchasing, checking the fine print on interest rates, so no one ends up in such situations. But mostly, I just hope the recession is ending.

• We jammed to Danny Stewart-Smith’s “See So Clearly,” a song featuring the incredible vocal talents of Evin Gibson and reminding us all that there is more to life than money and possessions.

Mary Mary commented:

Having just made the transition from joblessness and receiving public assistance to being employed with a decent wage, I can definitely relate to the message in this song. My experience made me much more aware of the needless excess we often surround ourselves with, thinking it will bring us peace and happiness. I now understand the true value of life, family, hope and individual strength, none of which you can label with a price tag.

• We discussed the reasons for setting aside some cash in your emergency kit, using examples from the recent Haiti earthquake.
• As a bonus, I shared a budget-friendly recipe for an Americanized version of South African milk tart.

It has been a tough month going through this money discussion.  The math was a bit challenging and it was emotionally difficult at times to think about the reality of the recession at an individual level. I hope that you have been enriched by the discussion and that you feel at least a little more in control of your own finances.  While money can’t buy happiness, having a sound financial basis is one of the keys to being less stressed and more confident.

On Friday, we start a new month and a new theme!  We will be lightening things up a bit for April.  Please check back then!

As a bonus post for the month, I wanted to share a recipe I tried this month at a special lunch with a good friend.

While reading Leigh’s blog, (which I can’t remember how I first stumbled across, but is a wonderful read about family life in South Africa), she mentioned a classic South African dessert, milk tart. The picture looked yummy so I thought it would be a fun experiment.

I am not much of a cook and did not realize that this recipe is a smidge more complicated than it first appears until I was right in the middle of making it! The basic idea is that you mix together milk, sugar, eggs, cornstarch and flour over heat until it forms a custard! Whoever created this dessert is quite a genius. This was my first exposure to using cornstarch in this way and it was amazing. As you are stirring vigorously, the mixture starts out as thin milk, then you blink and it looks like cream, blink again and you have pudding/custard! Awesome!

I am cross-tagging this recipe as a Ruly Kids post. It is not necessarily an easy recipe but it would be a fun experiment for an older child or teen. You could win the science fair explaining the chemical reaction that goes on with the cornstarch.

The finished dessert is thick like cheesecake but creamy like pudding. It has a very mild vanilla/cinnamon flavor. If you like bolder flavors, make sure you pick a flavorful cookie for the crust. The traditional recipe calls for a South African cookie called “Tennis biscuits” with a coconut flavor. I couldn’t find any coconut-flavored cookies in my grocery store so I went with an almond-spice cookie.

The milk tart is so mild in flavor you could really experiment with the flavors. A chocolate cookie base might be yummy and I wonder if you could somehow make a chocolate milk tart filling. A citrus flavor like lime or lemon might also be yummy or you could add some liqueur.

One other note . . . due to my lack of culinary presentation skills, the finished product didn’t look all that appetizing in the baking dish. However, once it was sliced it looked gorgeous. If anyone has any tips on presentation, please share!

AMERICANIZED MILK TART
Recipe adapted from Hulett’s Sugars

Serves: about 9 (filling was enough to fill a 9” square pan about 1” high)

Ingredients

9 oz package Archway Windmill cookies (or cookie of your choice), crushed
1/2 cup butter, melted
2 cups whole milk
cinnamon stick
1/4 cup to 1/2 cup granulated sugar, depending on personal taste (I used 1/3 cup in my first attempt and would probably increase to 1/2 cup next time as I like my desserts sweet)
2 eggs
3 Tablespoons cornstarch
3 Tablespoons flour
1/2 teaspoon vanilla extract
2 Tablespoons butter
Cinnamon and sugar for sprinkling

Directions

1. Crush the cookies and combine with the melted butter. Press into a pie pan. (Or, if you are like me and don’t own a pie pan, you can press it into the bottom of a square baking dish).
2. Heat the milk with the cinnamon stick until just under the boiling point.
3. Meanwhile, lightly beat the eggs with the sugar, then add cornstarch and flour.
4. Slowly pour the hot milk into the egg mixture stirring rapidly (be careful here as if the milk is too hot or you add to much at once you could end up with scrambled eggs).
5. Return the mixture to the heat and stir with a hand wisk as fast as you can continuously. (If you don’t stir quickly enough, you could end up with lumps.) This is when the very cool transformation from milk to cream to pudding occurs. The mixture gets thick very quickly and you need the momentum from the rapid stirring to be able to keep stirring as the mixture thickens.
6. Once you have a very thick pudding-like consistency, take the mixture off the heat and add the vanilla extract and butter. Stir well until the butter is melted.
7. Pour the mixture into the prepared crumb crust and sprinkle generously with cinnamon and sugar.

I am not sure if you can serve it right away. I would probably let it set up in the fridge for at least a few hours. I refrigerated my tart overnight and it didn’t seem to harm the flavor.

Since we are talking about money this month, I thought I would mention that this recipe is relatively budget-friendly. It costs about $5.00 to purchase the ingredients you might not have readily available (cookies, whole milk).

I hope you try the milk tart. If you do, please comment with your results!

"The money changer and his wife," by Marinus Claeszoon van Reymerswaele (1541). From the Wikimedia Commons.

Time and again you hear that you should have some extra cash tucked away in your emergency preparedness kit. Usually no exact dollar amount is given but estimates range from a token amount ($25) to several hundred dollars.

In the few small disasters I have been through (a hurricane and a major snowstorm), I have never needed cash during the emergency itself or in the immediate aftermath. Even if one did have some cash, there was often no place to spend it as all the stores were closed either due to power outages or because the employees couldn’t make it in to work. In those situations having provisions like food, water and tools (generator, snow shovel, chainsaw, etc.) were much more important than cash.

Here in the United States, if our family suddenly had to evacuate in an emergency and live on the road for a while, I don’t see how we would need a huge amount of cash. We wouldn’t have to drive too far to get to a major city. Most restaurants and hotels take credit cards and if we really needed cash there is sure to be an ATM somewhere we could use.

There are only three realistic situations I can think of where we would really need some cash:

1. If we were landlocked in our current neighborhood for an extended period and had to buy supplies or tools from our neighbors or purchase services (like snow clearing or tree removal) from visiting contractors.
2. If we had to evacuate and head in the direction of small towns with small businesses who do not take credit cards or checks.
3. If, during an evacuation, we had to pay road tolls, campground fees, etc. where cash was required.

The unlikely situations where we would need cash would be where there is a widespread power outage, a national shutdown of the banking and credit card systems, or a run on the banks. Between the realistic and unrealistic options, there is enough reason to keep some cash on hand. . . but how much?

The answer to this question is probably different for each person, depending on their situation. In our community, the most likely needs for cash in an emergency would be one-time large fees for things like snow clearing, tree removal or car repair and small charges for things like road tolls where we might need quarters or small bills. In a more remote community you might need significantly more cash to purchase food, pay for a private flight to safety, etc.

In the recent Haiti earthquake, I was surprised to read several accounts of the need for cash among the survivors.

“The longest and most visible lines in Haiti’s capital are not for food, water or gas. They are for money. . . . Basic groceries are relatively easy to find for sale throughout the streets of Port-au-Prince. Those with canned goods, some produce and even ice and bread have formed a massive, impromptu market. But most quake survivors do not have the cash to buy any of it.”

–”Haitians Seek Cash as Banks Stay Closed,” CNN, January 21, 2010

Banks opened in Haiti for the first time since the earthquake that killed an estimated 110,000 people almost two weeks ago. . . . Cash withdrawals were limited to 2,500 Haitian Gourds to ensure there is enough money on hand and to discourage a run on the banks. . . . Bank officials worry lack of Identification could be a problem for many customers.  Many Haitians lost their documents in the earthquake.  Bank employees have been relying on secret questions and quizzing customers on personal details.

–”Haiti Banks Open But Tempers Flare,” VOAnews.com, January 24, 2010

“Musgaile Bolivar left his collapsed home in the pulverized town of Leogane at 4 a.m. and traveled more than 20 miles to Haiti’s capital, only to wait all day Tuesday in front of a closed door.

Each time the door opened in the yellow Unitransfer building in Port-au-Prince’s decimated downtown, an anxious few slipped in amid screaming, shoving and arguing.

–”Money slowly trickling into Port-au-Prince, Haiti as banks and wire transfer offices begin to reopen,” NY Daily News, January 31, 2010

As you can see from the experience in Haiti, if you do need to get money during a disaster, it can be painfully hard to get it. So, stashing away an appropriate amount for your family is a good idea.

If you do decide to keep money in your home, where is the best place to keep it? In the sugar bowl? The mattress? A piggy bank? The two biggest threats to your money at home are likely theft and fire. Cash is the most commonly stolen item in home burglaries.

With regard to theft, you should revisit your home security strategy in general. These tips from the Hartford insurance group emphasize locking doors and windows at all times, not leaving spare keys in easy-to-find places and installing a home security system. Similarly, the U.S. Fire Administration emphasizes routine fire safety procedures like installing smoke alarms and exercising caution with use of electricity and portable heaters.

This article from a security consultant suggests that jewelry is a commonly-stolen household item and not to store valuables in a jewelry box on top of the dresser or in the bathroom medicine cabinet. Other common places thieves look? Under the mattress, under the bed, in dresser drawers and in the bedroom generally. If you opt for a safe, choose one that is heavy or bolted to the floor. Otherwise, all you have done is conveniently packaged all your valuables for a would-be thief. The thief could quickly grab your safe and jewelry box and head for the exits.

You can get clever with your money hiding places. YouTube is full of videos (particularly from teenage boys) on where to hide your money or how to create secret hiding places from ordinary objects like soup cans, books and cereal boxes. Here is one example from stashyourswag.com:

If you go this route, just make sure that you remember where you put your secret cache and make sure it doesn’t get thrown out by mistake, (like the Israeli woman whose daughter threw out her mattress with over $1 million inside)! Also, since the point of all this stashing is to make sure you have money ready in an emergency, make sure that the money (as well as the rest of your emergency kit) is in an accessible spot in the event disaster strikes.

Have you ever needed cash in a natural disaster situation? Do you have a money hiding strategy? Please share in the comments.

All this month at Ruly, we have been discussing money so it is fitting that the Ruly Mix this month is also about money. There have been a lot of classic money anthems, including Money (That’s What I Want) by Barrett Strong, For the Love of Money by the O’Jays, and Money by Pink Floyd.

This month’s Ruly Mix, See So Clearly, is a fitting recession anthem and comes from Tokyo-based musician, composer and producer, Danny Stewart-Smith and features vocals by North Carolina native, Evin Gibson.

Read on for more about Danny and his music.

Danny Stewart-Smith http://www.ddeprod.com

What is your musical background?

I began my musical journey at the age of 6 learning piano under Scottish composer of note, Ronald Stevenson. Stevenson was a fantastic teacher inspiring creation and internal understanding of notes and scales not just pontificating on the mechanics of playing as subsequent teachers seemed to do. Anyway, I gave piano up after moving from Scotland to Devon. It was not until I was 16 that I picked up the guitar and listened to Hendrix, Santana, Zappa, Satriani, Vai, and Pass among many more. Everyone seemed to play guitar and when we wanted to form a school band we had no bassist, so I volunteered. After a couple of years playing cover tunes I got offered a job with a local pianist playing Jazz gigs. He taught me all about walking bass lines and I took his left hand patterns onto the bass guitar, then onto upright bass. I spent a couple of years playing Jazz and Funk around the UK with him and another funk band with some of my school friends. We did the pub and club circuit all over England. I then decided to move to London to pursue music seriously and was fortunate enough to get picked up for a touring position with Real World Records and also accompanying acclaimed vocalist/actress Kate Dimbleby for a theatrical production. While in London I worked and lived in a project studio where I met my future wife. She visited the studio on an assignment and we became friends and worked together on a few projects including a Japanese Embassy subsidized event named Tokyo Mania. We grew closer through our work and became romantically involved. We came to her home country of Japan seven years ago, to have our first child. I liked it here, so we decided to stay. Since then I have been involved in radio, composition and arranging more so than performance.

What inspires you when you are writing/producing music?

The actual subject matter I am writing for; for example, if a client asks me for music for a fighter jet flying scene, I then immediately start visualizing the scene and the music just comes. Of course the frame work of existing music for similar scenes has already been ingested through viewing films in the past. So typically composers like John Williams or Hans Zimmer have influenced me. The thing is, I can hear the workings of all kinds of music on a first listen so I constantly digest music in any situation, be it in the supermarket, watching TV or movies and I expect much of what I digest plays out through my compositions too.

If I get stuck for ideas I look to existing music in similar genres to get inspiration. For dance music I get inspiration from all over the place, I compose for many different purposes and sometimes I find a commission work inspires a new dance track, or I start hearing the possibilities of the work in different genres or hear a great track on the radio and feel inspired to do something in a similar vein. In most cases however, a tune just pops into my head and no matter where I am I just have to hum it into my mp3 recorder. After that the rest just flows, beats, bass lines, chords etc. all just materialize from the initial groove or melody.

What were you thinking about when you composed this mix for beruly.com?

How obsessive we can be about money and possessions. See So Clearly is really about how comparison to others and living in excess or beyond your means is not of great importance/or is actually dangerous, and that success and happiness is really down to how you feel about your life.

If you are happy in what you do, you are successful, never mind the Jones’s.

How important is money in the music world?

Since artists can now run their own digital record labels for next to nothing, money is of far less significance to independents as far as I can observe. Distribution and promotion on the web is also very cheap, you have virtually nothing to lose and you can “test drive” your releases on sites like Jango, Reverbnation and many others for free.

Money is of course important to the majors, and they need to offset the loss in CD sales to illegal downloads by selling merchandise and affiliate advertising. Bizarre as it may seem, these days it is possible to become “popular” without even performing live. Many independent artists have seen sales of their own material create a second income for them, but it does take hard dedicated, web promotion….you have to reach your target audience and to do that requires work…if you like, a virtual tour of many websites, forums and music distribution rings.

This of course, has sparked a torrent of bogus “opportunity” sites that prey on the independent musician’s penchant for success and I suspect they make a lot of money!

How has the recession affected Japan?

Japan’s ties with America and its subsequent Americanization has of course seen a slight rise in unemployment and a wider range of salaries due to the linear structuring of American companies trading and operating in Japan. However, it still seems that there is less of a class gap in Japan and this helps it feel as though nothing much has changed, at least on the surface.

Some Foreign companies such as HP, have had to reduce salaries or employ a work share strategy in order to battle the recession without axing employees. However, in Japanese companies, employees are well protected by the law, it is not easy to be sacked from a Japanese company, but many are reporting salary or bonus cuts (including management) to get through this downturn. Most Japanese see this as an amicable option versus losing their job. Another side effect is that low interest rates in Japan have caused many banks to branch off into the loan market, where they can earn much more interest, and this in turn is beginning to feed a small but growing culture of debt.

As far as I understand it the government and the FSA have plans in place to try and curb this activity, but the younger generations are not so wise when it comes to money, which is a shame as in the past the Japanese have been notoriously good at saving money. Catastrophes like the Leamann collapse also affected Japanese banking systems negatively too due to the quantity of shares held and integrated banking laws, and play a large part in this outbreak of loan companies. It seems like Japan, a nation that appeared to think long-term about its citizens future, has thrown down the gauntlet of job security to compete in today’s volatile market, through fear of losing its place, and as a result company cultures are restructuring to match the market. This, in my opinion, is a long-term mistake leading to long-term financial difficulties.

http://www.evingibson.com

How did you connect with Evin Gibson?

Evin contacted me over the web before he visited Japan to tour. He was wanting to hook up with some musicians during his visit so I obliged and prepared a song for him to perform on. Evin not only provided excellent lead vocals, he also helped to rephrase some of the lyrics and added some lines based on the topic of the song. What he brought to this tune is excellent, his vision seemed to complement mine nicely. I hope to work with Evin again, he is a true talent.

Ready to listen?  Click the picture below to play or right-click to download. (If the picture is not working for you, you can also download by clicking here.)

See So Clearly

Lead Vocals / lyrics; Evin Gibson
Lyrics and music; Danny Stewart-Smith
All instruments, backing vocals and production, Danny Stewart-Smith

I gotta tell you,

Verse 1

You wanna flashy car Mercedes Benz or Jaguar baby,
Rolex watch diamond ring and all these things now

you want fine cigars, warm champagne, and caviar,
you want designer jeans, Gucci, Prada, latest styles

What do you do with 1000 shoes and can only wear one pair at a time?

Wonderin’ which watch to choose and they’re all sayin’ the same time.

Chorus

I can see there’s more to life, I can see, see so clearly
Pushin’ back the sands of time it’s all fine, life flows on by.

Fortune shines when we’re satisfied in our hearts and in our minds.
Pushing through and we can find and redefine what makes us all so blind.

I gotta tell you…..

Verse 2

You’ve got those credit cards and plastic dreams manicures and facial creams,
What does it really mean, to have almost everything and still want more?

What do you do with 1000 shoes and can only wear one pair at a time?
Wonderin’ which watch to choose and they’re all sayin’ the same time.

(repeat)

You’ve got those credit cards and plastic dreams manicures and facial creams,
What does it really mean, to have almost everything and still want more?

Bridge

There is so many things to think about
There is so much that we can live without
There is so many things to think about
There is so much that we can live without..

So many things oh yeah…

(Bass solos over chorus and refrain…)

Refrain

I don’t need it, you don’t need it, we don’t need it o-oh no (etc…)

Don’t need no diamond rings, don’t need no fancy cars

Ruly License: You may download and play any Ruly Mix song for your own personal use so long as you keep the voiceover tags intact indicating the name of the artist and that the song came from beruly.com. Businesses may also download this song to play as background music in their establishments so long as the voiceover tags remain intact. Any other uses of the song (such as in videos, etc.) must be pre-approved by the musician. Questions about license permissions can be addressed to info@beruly.com.

"Farm Debt Adjustment Committee meeting with farmer who has appealed for assistance. He has been threatened with foreclosure and loss of farm. Ozark Mountain town of Harrison, Arkansas" (1941). Photo by Jack Allison. From the Library of Congress Prints and Photographs Division.

The downfall in housing values, the resetting of adjustable rate mortgages to market rates, and rising unemployment have ratcheted the debt level of many American families to astronomical levels. Many families feel overwhelmed by their situation, stuck and wishing for a fresh start. Some may be wondering if bankruptcy is a good option. Today’s post talks about the difficult choices facing those in financial hardship.

First off, bankruptcy law is a very complex area that varies by state and if you are seriously considering bankruptcy, a consultation with an experienced bankruptcy lawyer in your state is well-worth your precious dollars. One good way to find a lawyer is through the lawyer referral services offered by most state bar associations. For those in the DC area,

• Bar Association of the District of Columbia – Lawyer Referral Service
• Maryland State Bar – Lawyer Referral Services
• Virginia State Bar – Lawyer Referral Service

If we return to our fictional family, The Medians, let’s assume their finances are in severe distress. The $150,000 mortgage on their home was a 5-year interest-only mortgage. Initially, they were paying $500 a month but their loan has recently reset to just over $1,000 per month. The Medians are struggling to afford this new payment and cannot refinance because their mortgage debt is now more than the value of their home. We will assume they do not qualify for new government programs such as Making Home Affordable.

The Medians have no savings to speak of really so the extra mortgage burden has no place to go except to their credit card balances. Their credit card balances have ballooned, the Medians are getting further and further behind in their payments and the interest rates on their credit cards are soaring. The financial strain is taking a toll on their marriage as well and Mr. Median in particular feels depressed. What are their options?

Is bankruptcy the only option? Two of the most popular financial advice columnists, Suze Orman and Dave Ramsey, say no. Suze Orman describes bankruptcy as the “absolute last choice.” Dave Ramsey goes further, “Bankruptcy is not something I recommend any more than I would recommend divorce. . . . . Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.”

If the Medians decide not to file bankruptcy, how are they going to get out of the mess they are in? It will be painful and the options basically fall into two categories: make more money or cut expenses. Some possibilities:

1. One or both of Mr. and Mrs. Median could seek a higher paying job or a raise. They might also take on a second job to earn more money. (With high unemployment right now, this could be easier said than done and the cost of child care needed would have to be factored in.)
2. Mr. and Mrs. Median could take in a renter to help pay the mortgage or perhaps provide child care in exchange for room and board.
3. Mr. and Mrs. Median could sell off collectibles or other items of value.
4. Mr. and Mrs. Median can cut expenses absolutely to the bone, spending nothing other than what is essential to pay the mortgage, eat and work. They might ask for food or clothing assistance from their church or a local charitable group if necessary. They might adjust their thermostat to a temperature either hotter or colder than they would prefer to save on utilities costs.

What about the mortgage problem? Initially, the Medians would have to find another $500 in their budget to pay the adjusted rate. Over years, they could save up to pay down the mortgage to a level where they could refinance into something more affordable. While the Medians are making all these sacrifices and paying down their debts, they are likely to be hounded by creditors and living a somewhat miserable existence.

Would bankruptcy be that much better? One of the benefits of the bankruptcy process is that creditors have to stop calling you while the bankruptcy is pending. This gives some mental relief. There are many options for how the bankruptcy can be structured and resolved but if the Medians chose Chapter 7 bankruptcy (the most common type of bankruptcy), they would most likely lose most of their assets in exchange for debt forgiveness. And some debts, like tax debts and student loans, never go away. After the bankruptcy, the Medians might not have the burden of an underwater mortgage, but they also won’t have a home. They might have trouble finding a place to rent and might need to move in with a friend or family member temporarily. If they are able to qualify for credit, it will be secured or at a very high interest rate. It will take many years for them to re-establish a good credit history. Also, sometimes bankruptcy will disqualify you for certain jobs.

Of course, sometimes there is no other option other than bankruptcy. If your debt levels get too high you might never be able to repay despite your best efforts. The only way out might be bankruptcy. If this is your situation, know that you are not alone. Almost 1.5 million bankruptcy cases were filed in 2009, increasing nearly 32% from 2008. Almost all of these filings were individuals filing Chapter 7 bankruptcy, with businesses filing almost 61,000 cases.  There are so many bankruptcy cases being filed that the Justice Department has asked for increased funding to cope with the load.

If I was in the Median’s situation, I don’t know which option I would choose. Likely, I would at least try the non-bankruptcy option first. Neither one is all that great a choice. In the non-bankruptcy option, you would have a lot of pain immediately, having to acknowledge to friends and family that you are struggling and making dramatic lifestyle changes. In the bankruptcy option, pretty much the same thing happens except you can delay the changes until after the bankruptcy is finalized.

The Hardest Year.com profiled families across the United States struggling with the recession. Bob and Callae bravely shared their experience of bankruptcy.

One of the most disturbing aspects of this recession is the deep emotional pain it exposes in hard-hit individuals. Starting over and acknowledging to friends and family that we made mistakes is incredibly hard. For some, the pain is so great that they would prefer suicide over the humiliation of bankruptcy or foreclosure. Horrifying stories of fathers taking their own lives as well as those of their entire families have surfaced, including a family in Los Angeles and one closer to home in Frederick County, Maryland.

I sincerely hope that none of my readers will ever find themselves contemplating suicide over financial troubles. Truly, money and status is not that important. Anyone who will no longer speak to you because of your financial status is not someone to be concerned with anyway. Your life can be different and still very much worth living. Being able to admit a mistake and move forward is a very valuable lesson for all of us. We will all be impacted by the emotional carnage of the recession in some way, whether personally, through friends or family, or in our workplaces. Here’s hoping we can all remember to value people above possessions, learn to forgive and allow people a true fresh start to their lives.

What do you think the worst impacts of the recession will be? Is society ready to accept bankruptcy with less stigma? Please share in the comments.

Mr. and Mrs. Jucius Catlan, old couple receiving old age pension. Greensboro, Greene County, Georgia (1941). Photo by Jack Delano for the Office of War Information, Overseas Picture Division. From the Library of Congress Prints and Photographs Division.

Saving for retirement is one of those financial challenges that we know we have to do “someday” but the need for money in retirement seems so much less pressing than our need for money today. In the past, many people didn’t have to really worry about saving for retirement because their employer provided a pension. Today, almost no one gets a pension, except for certain government and military employees and large unionized workplaces. For the vast majority of Americans, retirement savings is our responsibility and for most of us, that means putting money aside in an employer-sponsored 401(k) plan.

When my husband began working his first full-time job after college, his workplace was full of ambitious young men who were always discussing strategies to increase their wealth. One of their “strategies” involved 401(k) savings. “Put in the max,” they told my husband. “You will reduce your taxes and starting young will mean that compounding will help you earn a huge amount of money by retirement.” We really had no idea what the 401(k) plan was but my husband heeded this advice and has always put in the max.

So, now a dozen years later, how are we doing on that 401(k) plan? In terms of actual dollars, we are just slightly better off than if we had stuffed the money in a mattress. When you take into account tax savings, however, we probably have done OK. We don’t feel we are on the road to riches with the 401(k) plan and have endured many years of wild swings in value in the 401(k) accounts. If we had been a little smarter investors, however, we might be doing quite a bit better than we are now.

Today’s post provides some tips and information about retirement planning to help you maximize your savings strategy.

How Much To Save

The first question in retirement saving is how much to save?

We know from our discussion of debt that most people are intimidated by very large numbers. If you want to feel intimidated, try a calculator for how much you need to save in retirement. One of the standard calculators is the Ballpark Estimate Worksheet from Choose To Save.org. They have tried to make saving for retirement “cool” with a series of humorous PSAs like the one below:

Every retirement planning calculator I have ever used asks you to input how much money you need at a minimum per year. If you don’t know, they generally estimate about 70% of what you are making now. For our fictional family, the Medians, how much would they need? Well, they should look to their budget.

Let’s assume the Medians are 35 years old now and plan to retire at age 70. At 70, they expect that their house will be paid in full, that they will not have any debt or loans and that they are not supporting any other children or grandchildren aside from themselves. If they were retired today, what might their budget look like?

ESTIMATED MONTHLY RETIREMENT EXPENSES

Housing
Real Estate Taxes ($0.62 per $100 of assessed value on $200,000 home)		$103.33
Home Insurance		$24.75
Home Repairs/Improvements (1% of home’s value)		$166.67
Subtotal Housing Cost		$294.75
Food
Groceries (assumes the “Moderate” cost of food at home)		$522.10
Restaurant Meals		$120.00
Subtotal Food Costs		$642.10
Transportation
Car Savings Fund (fund to purchase a new car when needed)		$200.00
Car Insurance		$166.67
Gasoline (assumes Mr. and Mrs. Median don’t drive all that often)		$150.00
Vehicle Registration/Inspection Fees		$7.00
Car Tax (required in Virginia)		$50.00
Car Repairs/Maintenance		$100.00
Subtotal Transportation Cost		$673.67
Utilities
Electricity/Gas/Water		$200.00
Telephone/Cell phone		$70.00
Internet		$40.00
Subtotal Utilities Costs		$310.00
Luxuries
Clothes, shoes, haircuts, manicures, etc.		$75.00
Gifts		$50.00
Cable TV		$60.00
Travel (cost of 1 or 2 big vacations per year, airfare, hotel, etc.)		$125.00
Subtotal Luxuries		$310.00
TOTAL ALL EXPENSES		$2,230.52

Since both Mr. and Mrs. Median have been working, how much might they receive in Social Security benefits? According to the Social Security administration, the calculation of their monthly benefit is kind of complicated and depends on how much they earned each year they paid in to the system. The maximum benefit amount is $2,346 per month but the average benefit is $1,164. Out of that amount, you have to pay for Medicare insurance which costs $96.40 per month per person.

So, if the Medians earn the average amount of Social Security, they might expect to receive $1067.60 each after Medicare. Most likely, they will need to pay some additional amount for extra medical insurance but we will assume for this example that they don’t need to. If we factor in a small amount for taxes, they might each earn about $900 from Social Security each month.

The Median’s Social Security income after medical expenses is roughly $1,800. They need at least $500 a month ($6,000 per year) from their own savings to meet basic living expenses. So, how much do you need to save starting at age 35 if you need $500 a month in retirement until say age 100? You can use a calculator like this one to get an estimate.

There are a lot of variables in the calculation. If we assume the Medians investments do well at 8% per year both before and after retirement, the Medians need to save $76 a month. If the investments do modestly, say 4% before retirement and 1% after retirement, they need a total of $478 a month. Currently the Medians are saving about $182 a month in their employer retirement accounts. So, depending on how you interpret the calculations, the Medians are either just fine or need to save an additional $300 per month!

For anyone retiring after 2037, there is a good chance there won’t be enough money from the government to pay the entire Social Security amount. Most likely, people will get something, maybe 80% of the standard amount. This would make a big difference for the Medians. If they only get 80% of estimated Social Security, they need to come up with about $800 a month to meet basic expenses.

For those of us with enough time to retirement, we need to make sure we try as hard as we can to provide for our own retirement, regardless of what happens with Social Security. Even a small amount saved is better than nothing.

Rebalancing

While the biggest challenge for most people is simply having money to put aside for retirement, once you have an amount saved, you can’t afford to just let it sit there without a little attention. Most advisers suggest that you periodically rebalance your 401(k) portfolio. What this means is that you need to figure out what types of investments you currently have (stocks, bonds, cash, real estate, etc.) and what percent of your money is in each type of investment. You then need to figure out what the optimal investment mix is for your portfolio based on your age and risk tolerance. You then sell off investments that have done well and reinvest in investments that are lower priced to keep the investment mix “balanced.”

Confused? Here is another explanation:

Rebalancing is quite a complex concept and one of my goals for this year is to figure out how to do this for our portfolio. The biggest challenge I have faced is just figuring out what type of investments we have. Some of the mutual funds in our 401(k) plans are highly complex and it is really not clear at all what they are actually invested in.

Keeping an Eye on Fees

One other area we all have to look at is the fees charged by the various mutual funds in our 401(k) plans. There is a tradeoff in most mutual funds between the performance of the fund and the fees charged. Ideally, if the fund performs extraordinarily well, you might expect to pay a little more in fees for that fund. Often what happens though is that the fees charged by the fund are out of proportion to how the fund performs.

The video below explains how fees decimate your savings strategy.

There have been several articles recently advocating that investors look for “index funds” or other low-cost mutual funds. The Motley Fool even provides a letter you can send to your employer requesting lower-cost mutual fund options.  You can see why this might be a good strategy for someone who doesn’t want to spend a lot of time evaluating the cost-benefit of various investment options.

Don’t Get Overwhelmed

If your head is swimming from all the above information, take heart. You don’t have to conquer all of this all at once. Start with a small goal to address just one aspect of your retirement planning. For 2010, you might just figure out how much you need to be saving (even if you can’t save it right now). If you are already saving, you might look at whether you need to increase your savings, rebalance or switch into mutual funds with lower fees.

It is somewhat amazing that all of this investing responsibility falls to average people, but that is the system we have and we need to learn to work within it. The good news is that if we can learn to become better investors, we might be able to do quite well with our retirement investing.

What lessons have you learned about retirement planning? Are you currently saving for retirement? Please share in the comments.

"The comforts of matrimony - a smoky house and scolding wife." Engraving by Robert Sayer (1790). From the Library of Congress Prints and Photographs Division.

Money is a flash point in most marriages. Conflicts over money occur in good times and in bad but many marriages right now are incredibly strained because of financial decisions.

Adding to the economic woes is a broader trend of gender role changes in marriages. Who is the breadwinner any more? Joe Peck’s editorial in The Atlantic has raised a few eyebrows with its dire predictions of the societal impacts of the recession.

The weight of this recession has fallen most heavily upon men, who’ve suffered roughly three-quarters of the 8 million job losses since the beginning of 2008. . . . In November, 19.4 percent of all men in their prime working years, 25 to 54, did not have jobs, the highest figure since the Bureau of Labor Statistics began tracking the statistic in 1948. At the time of this writing, it looks possible that within the next few months, for the first time in U.S. history, women will hold a majority of the country’s jobs.

In this respect, the recession has merely intensified a long-standing trend. Broadly speaking, the service sector, which employs relatively more women, is growing, while manufacturing, which employs relatively more men, is shrinking. The net result is that men have been contributing a smaller and smaller share of family income.

–Joel Peck, “How a New Jobless Era Will Transform America,” The Atlantic, March 2010.

Why is money management so hard for couples? At a macro level, it seems so simple. Each partner should chip in a contribution for the basic expenses and share in the excess funds. Suze Orman gives a good explanation here.

But why isn’t it this simple?

Often the basic problem is that the couple doesn’t have enough money to fund all of their desires. Then it is not merely a conversation of budgeting and accounting but a difficult negotiation about who will sacrifice a dream and who gets to indulge. It is always hard to tell someone, especially someone you love, that they can’t have or be what they want because of a lack of money.

The Medians

If our fictional family, the Medians, were to apply Suze Orman’s advice about splitting their money among 3 accounts: his, hers and ours, their current budget requires that all of the money go in the “ours” account, leaving nothing for individual needs. Suppose Mr. Median’s goal is to eventually get a new flat screen TV, add a deck on the house and buy a new car. Suppose Mrs. Median’s goal is to update her wardrobe and hire a personal trainer or maybe she wants to stop working so she can stay home with their children.

Maybe they both have decided that life is short and they want to enjoy it now. Is it OK if they each charge up secret purchases on credit cards? When they finally have “excess” money in their budget how should they share it? Should it be a strict 50/50? Do they take turns funding their respective goals? There isn’t one answer and a lot of complex emotions involved.

How does a real life couple address these issues? Ruly Ruth shares with us.

My “BFFs” on Bravo’s “Housewives of Orange County” are showing us that even in their elite worlds, money and spouses clash/have problems that mirror all economies of life in this crazy financial era. Lynne’s husband hid from her the fact that they’ve been going under for some time now—-crashing to a horrifying halt. Ending their stay in their gorgeous home, and placing them in a condo to rebuild their lives. Even Lynne admits on the show, “We’ve been living beyond our means.”

A 2003 Reader’s Digest poll “How Honest are Couples, Really?“ found that the most frequent form of dishonesty in marriages was the amount each of the partners was spending.

From clothing purchases to haircuts/dye job costs, a new video game, even how often and where we eat out for lunch, are hidden all the time from spouses. In the grand scheme of things these items seem and may be trivial and unimportant. But when budgets are tight, an $80 blouse or even a $20 Walmart splurge can almost break the bank, especially when a couple’s main goal is working to reduce debt and increase savings.

So this brings us to two questions:

1) Why do we buy/splurge on something we know our spouse won’t be happy about? Is it because we don’t realize the price of the item until we reach the cashier? On rare occasion, yes–but the vast majority of time we DO know the approximate or exact transaction price before we pay for an item or service. So why do we still do it?

2) What can we do to reward ourselves without breaking the bank/budget? (Since often shopping is a known temporary stress relief–yet can cause marital stress once the trip is over.)

Part of the problem is education of the other spouse and appreciation of the desired object. For example, my son has a “Cars” polyester inexpensive $35 comforter. My husband was not thrilled when he learned that it was time to upgrade to a new all-cotton queen-sized comforter for about $100. (For some that would be the basement model.) Until he went to Walmart and researched online for himself would he believe me, and allow said purchase. By the way, this convincing took over two days. So I can see if you found this item for $75, which to me would be a great deal, that you would jump on it without taking the time to educate your spouse, that you would go ahead and buy it and pretend you spent $50 or whatever dollar amount would be acceptable. (I am NOT saying you SHOULD do this–just simply stating that I understand and am probably guilty of this in the past myself.)

On the flipside, my husband has wanted a welder and had to explain to me the variances and options of what is turning out to be a spendy purchase. Apparently a butane torch and a piece of metal are not all that are required!

The other issue that goes right along with this is the unwillingness of spending time on said object by the other spouse/partner. For example, my husband doesn’t mind shopping for my son’s bedding, but he does NOT want to go through a mall with me for a new ball gown or new outfits. This is unproductive to him–he’d rather “throw money at the problem” as our Uncle Jimmy would say, than spend his own time researching ball gowns and garment lines. Therefore he doesn’t always understand what makes a $300 dress MUCH better than the okay $150. (By the way—I settled for the $50 post-pregnancy-not-sure-if-I-can-wear-it-again one this year–just wait ‘til next year, honey!)

So—what do we do now? How to alleviate these purchases that cause marital discord….or at least mitigate the sticker-shock? COMMUNICATION! My husband recently told me after 11+ years of marriage he would rather we spend $25 or $100 more on an item we agreed upon rather than me snatching up a “deal” without letting him know about it first. Prior communication would be ideal, but in this world of instantaneous communication via texting and email, it’s very simple to notify your spouse of the unplanned purchase.

However, probably the best idea would be to talk each week (like we try to) and discuss how many lunches out we plan to have, what gifts we need to buy, and any incidentals that are beyond the typical household requirements. Maybe those incidentals can wait until a sale comes around, or at a later time when maybe a bill is paid off fully. This is my Ruly challenge to our readers—communicate with your spouse weekly and see if it makes a difference in your spending. I hope it does! Let us know how it goes.

How do you rate your communication skills with your spouse about money? What lessons have you learned about the marital checkbook? Please share in the comments.

World War I life Insurance poster (1917). From The Library of Congress Prints and Photographs Division.

Insurance is one of the less interesting financial topics but it is an important part of sound planning.  Insurance protects us from financial ruin in the event of uncommon but devastating disasters like fire, flood, disability and even death.  People buy insurance often because they lack the money on an individual basis to cover the effects of a particular disaster.  How many of us, for example, have cash available to pay our current mortgage and completely rebuild our home if it was destroyed by fire?

Insurance is all around us.  Most states require drivers to have auto insurance.  As we have been reminded time and again in the recent political debate, approximately 85% of Americans currently have health insurance.  If you own a home, you were probably required to purchase title insurance and home insurance (and maybe mortgage, flood or hurricane insurance).  You might have life insurance.   Insurance is crucial for the business world too.  As just a few examples, banks are supported by deposit insurance, doctors and lawyers by malpractice insurance and farmers by crop insurance.

Insurance works by having a large number of individuals or businesses (“insureds”) contributing a share of money representing their individual risk of disaster (a “premium”) to a common insurance fund.  Ideally, only a small percentage of the insureds actually experience disaster and require a payout from the fund and each year, the insurance fund should take in more in premiums than it pays out.  The surplus funds are invested to generate more money to protect the fund in the future (and, of course, to turn a profit for the insurance company).

Occasionally, there are too many disasters, too many claims on the fund and not enough funds to go around.  We see this more often than we would like in situations like the 9-11 terrorist attacks, Hurricane Katrina and particularly now with regard to mortgage insurance.  Professor Niall Ferguson’s Ascent of Money provides a detailed and interesting history of the insurance industry.

When you are in the market for insurance, the Internet can be a great place to start your search.  If you type a general keyword like “life insurance” or “home insurance” into your favorite search engine, you will come up with a variety of service providers.  There are services like reliaquote.com or esurance.com that allow you to type in your insurance needs and have brokers from numerous agencies contact you to solicit your business.

One lesson I had to learn the hard way, however, was that sometimes it is less expensive to forgo the insurer referral websites and just contact a major insurer directly.  For example, you might call Traveler’s, Aetna, or MetLife or put your information into their respective websites.    Once you put your name into an insurance referral site, the insurer has to pay a referral fee to the broker which is then passed on to you.  Even if you then call the insurer directly to sign up for their policy, they might indicate they cannot help you because a broker already “owns” your business.  The referral fees can be significant depending on the type of policy you are buying. Fortunately, the referral fees are typically a one-time upfront charge so you don’t get punished year after year on a multi-year policy if you have to pay them.

When you purchase insurance, there are three primary things to look for:

1. Premium Amount. This is probably the area we focus on the most as insurance consumers.  The premium is the amount we regularly pay for the insurance (monthly, quarterly or annually).  While this is certainly a huge factor in our decision-making process, it shouldn’t be the sole one.
2. The Financial Strength of the Insurer. It doesn’t do much good to be dutifully paying your premiums if the insurance fund is weak and can’t pay out claims in the event of a disaster.  How do you find out what the financial strength of the insurer is?  There are several ratings agencies that assign financial scores to insurers.  The most frequently cited rating agencies are A.M. Best, Fitch, Moody’s and Standard and Poors.  Each rating agency assigns its own rating scale.  Below is a compiled summary.
3. The Coverage Amounts Included in the Premium.  Different types of insurance have different coverage categories.  Automobile insurers for example, typically quote using 3 numbers–per person, per accident and property damage.  If someone refers to a 100/300/50 policy, for example, the insurer is proposing coverage that would cover $100,000 per person injured, $300,000 maximum per accident and $50,000 per accident property damage.  If you have questions about what your coverage amounts are, I have found that brokers and insurance representatives are generally reliable and informed on this topic.  If there is some aspect of the insurance that is particularly important to you, you might ask the broker to email or write to you to confirm in plain English what that coverage means.  You have to evaluate how much coverage you need as well as the premium costs for different coverage amounts.  Sometimes, for not much more money, you can obtain significantly better coverage and sometimes you realize the coverage is too pricey.

Rating Agency	Rating Scale	“Secure” Ratings
A.M. Best	A++ to F	A++, A+, A, A-, B++, B+
Fitch	AAA to C	AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-
Moodys	Aaa to C	Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2
Standard & Poors	AAA to D	AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-

So, as you are evaluating your insurance choices, you need to take into account both the premium amount and the financial strength rating.  Often stronger insurers charge higher premiums than less financially secure insurers.

How do you find out what an insurer’s rating is?  Typically it is on their website.  Here are some examples.

• American General Life
• Liberty Mutual
• MetLife

In today’s turbulent economic climate, it is a good idea to periodically check in on the ratings for your insurer and especially your bank!  While most insurers aren’t truly all that healthy right now, the U.S. government is standing behind them to help rebuild the credit markets.  Still, before you renew your next insurance policy, it might be worth a quick visit to check their financial strength rating.

What lessons have you learned about insurance?  Please share in the comments.

P.S. The incredible artist, Angie Jordan, wrote a blog post recently about the creation of the Ruly line art characters. Angie chooses one of her Facebook fans each month to receive a free digital caricature and I encourage everyone to “fan” her.

“The Home of the American Citizen After the Tax Bill Has Passed” (July 19, 1862), unknown illustrator. The first federal income tax was imposed in August 1861 to help reconstruct the nation after the Civil War. From the Library of Congress Prints and Photographs Division.

Things are a little off-kilter in our house due to the switch to daylight savings time. Both adults and children are having to adjust to the one hour earlier time difference. It is amazing that “just” one hour has such an impact. Starting off a new week feeling a little disoriented is not my first choice but perhaps it is helping to distract me from the fact that only 30 days remain to file our taxes.

Taxes. Gotta love ‘em. No one likes taxes but we accept them as necessary to pay for things like roads, police, national parks, public education, Social Security and the military defense of our nation. I have not met a person yet who feels that they pay just the right amount of taxes. We all feel that we pay too much, regardless of our income level or how many credits or refunds we receive.

I have prepared my own taxes for the last 12 years and I will do my own taxes again this year, even as things start to get a little more complex adding a small business into the mix. Today’s post provides tidbits of tax help.

First, three important lessons I have learned about self-help tax preparation over the years:

1. The “Coupon” Test. If you are ever filling out a tax form and you fill in a credit or deduction and get an immediate happy sense like, “Wow! That is a really great deduction!” chances are you have done something wrong! Every time this has happened to me, I go back and rework the math or study the IRS guide on the deduction and learn that the deduction is capped, I am entitled to only a pro-rated amount, or the deduction does not actually apply to me. I have been served well by what I call “The Coupon Test.” Most tax deductions and credits are supposed to be like a 10% off store coupon. They take the edge off of certain expenses but they don’t necessarily give you a huge financial boost. For us, the amount of most deductions and credits is just barely worth the effort to fill out all the paperwork needed to claim them.
2. Choose Your Tax Sages Wisely. While you would think that as long as you consult the IRS for any questions, you should be OK, unfortunately this is not the case. If you have ever called the IRS tax question help line, you would know that it appears to be staffed primarily by temporary workers who are answering questions based on a computer script. These workers may know nothing about taxes. One time I called with a question about domestic employment taxes and was routed to four or five people around the country. All of them were reading off the same computer script and none could answer my question. According to the IRS itself, its own advice is about 93% accurate. I have received great insight on difficult tax questions from Internet moderated tax discussion groups. On these lists, typically you have a lot of CPAs and other tax professionals. They might not have a solid answer to your question but they can at least point you in the right direction.
3. The One-Week Filing Rule. In our house, we have a rule that all tax forms must sit for one week before they are officially filed with the tax authorities. Inevitably, a few days after we declare our taxes “done,” one of us wakes up and remembers something that we forgot, realizes an error, etc. I try to spend as little time as possible doing taxes and the last thing I want to do is file my taxes twice because I need to amend the return (which, yes, has happened over the years).

Some great links to help you with your tax preparation:

1. IRS Free File. If you earn $57,000 a year or less, you may be eligible to get free software to help you file your taxes. If you earn more than $57,000 a year, you are out of luck and have to purchase tax preparation software if you want this type of service. (Note that our pals, the Medians, would not qualify for Free File.)
2. IRS eFile. If you exceed the Free File income guidelines, you can still file an electronic return with the IRS without having to pay a fee. I used the eFile system for the first time last year and while I am glad to have the opportunity to eFile for free, the system is really bare bones. It does not check your math on most calculations, the interface is a bit clunky and is hardly better than pen and paper forms. I will soon find out if this year’s version is any different. I was cheered to hear Vivek Kundra, our nation’s first government CIO, specifically mention improving IRS tax filing software.
3. IRS Small Business Tax Workshop. I will give the IRS kudos, however, for this great virtual tax preparation workshop for small businesses. Lesson 2 addressing common business income and deductions and Lesson 4 on the home office deduction were particularly helpful.
4. misc.taxes.moderated.  This is a great moderated forum to search to see if your tax question has been asked and answered or post a new tax question. Of course, you take the information at your own risk but many of the people answering questions are professionals and provide high quality answers.

Finally, a few tax organizing tips.

1. Have a Yearly Catch-all Taxes File. Each year, I create a file with the word “Taxes” on it and the year. As the year goes by, I throw in there all charitable donation receipts, personal property tax receipts, W-2′s, etc. When it comes time to file taxes, I just pull the file.
2. Use Certified Mail if you are Paper Filing. When I told a friend this tip once, she wrote it off to my legal training and said that in 30 years of filing taxes a single stamp seemed to do the job just fine. In a way, this is a risk calculation. Is it worth $5 in postage to give you a pretty good defense in case your return gets lost in the mail? For me, the answer is absolutely yes.
3. Print A Copy of All Screens if eFiling. This tip may seem crazy to some people as well but on numerous occasions this has served me well. As you are going through the eFiling process, you may be asked to complete various worksheets or forms. These forms are then consolidated into your final tax return. Usually, when you get to the end of the eFiling process, you are allowed to print/download a copy of your return but often it does not include those intermediate worksheets. It takes a little extra time to print a copy of all the screens as you go through but often you might need to refer back to these worksheets in future tax years.
4. Create one Final Copy of Your Taxes for Your Permanent Records. When my taxes are done, I make sure I have a copy of the signed federal and state returns with supporting documentation clipped together for easy reference. The general order is:

• • Certified Mail Receipt
  • Cover letter (if applicable)
  • Signed Tax Return, including all schedules
  • Copy of Any Spreadsheets/ Calculations I used to Prepare my Taxes
  • W-2s
  • Other income reporting forms
  • Bank interest (1099-INT forms)
  • Brokerage/Investment Statements (1099-DIV and 1099-INT)
  • State Tax Refund Statement (1099-G), if applicable
  • Mortgage Interest Statement
  • State Personal Property and Real Estate Tax Statements
  • Charitable Donation Receipts

Do you have your 2009 taxes done? Have a tax tip?  Please share in the comments.

Financial Shenanigans by Howard M. Schilit, Ph.D., C.P.A. has been on my reading list for some time. I assumed that the book was about how to learn to recognize fraud or misleading statements in financial statements. It is about this but not in exactly the way you might expect. This book is an important read for anyone who invests in stocks or runs a business but there are many insights for individuals too.

Dr. Schilit refers to the techniques he reveals in this book as “shenanigans” which he defines as “actions or omissions intended to hide or distort the real financial performance or financial condition of an entity.” It is not exactly the same as “fraud” because some of the techniques he outlines are perfectly legal and perfectly acceptable under Generally Accepted Accounting Principles or GAAP.

Dr. Schilit indicates there are 7 common accounting shenanigans:

1. Recording Revenue Too Soon.
2. Recording Bogus Revenues
3. Boosting Income with One-Time Gains
4. Shifting Current Expenses to a Later Period
5. Failing to Record or Disclose All Liabilities
6. Shifting Current Income to a Later Period
7. Shifting Future Expenses to the Current Period

Even though I have had a brief course in accounting, I erroneously assumed that accounting is a sort of black-and-white exercise where there is one “correct” way to record your revenue and expenses. After reading this book, you too will understand that there is a lot of discretion and even creativity in accounting.

While we in the general public might want stocks to be regulated so that every company reports revenue and expenses in exactly the same way (making it easier to compare which companies are doing well and which are doing poorly), professional stock analysts don’t seem to have the same expectations. These professional stock analysts instead are trained to evaluate all of the “shenanigans” presented in corporate accounting statements and use the information as a competitive advantage to make their buy and sell recommendations. For example, if an analyst spots a company using a trick to boost income, they might anticipate a drop in revenues later on and sell the stock. If they see a company “taking a bath” by suffering large expenses now, they might buy knowing that profits in later periods are likely to improve.

It is unrealistic to assume that we all can become as knowledgeable as professional stock analysts but if we can just learn a little about this type of analysis we might be able to get out of bad investments before we lose a lot of money.

One of the best tips I learned in this book was where to look for the most telling information about a given company. If you have ever invested in a stock (either individually or through a retirement account), you have probably been sent voluminous reports, such as quarterly and annual reports or proxy statements asking you to vote on certain issues. Many people likely just toss these reports in the trash and think, “Who has time to read all of this?” Most of us probably make our investing decisions based on quick recommendations from financial experts and news sources.

The next time you receive a report on a publicly traded company’s financial performance, Dr. Schilit advises you to look the most carefully at the following information sources. Note that none of these sources are the actual financial statements provided by the company! While those are clearly important as well, Dr. Schilit advises that you can only evaluate the actual numbers with the background provided in the following supplementary sources of information.

1. Auditor’s Reports. Usually, these are found in the 10-K. If you see any qualifying statements from the auditor about the accuracy of the reporting of the company’s financial situation, you should be quite alarmed. Note that the quarterly 10-Q reports are not audited, only the annual report.
2. Litigation Statements. Make sure you look closely at any statements about pending or potential lawsuits against the company and do your best to evaluate what the cost impact of these lawsuits might be.
3. Executive Compensation. Does the way executive compensation is structured give management an incentive to (legally) shift money into certain quarters/years rather than record it exactly when it occurs?
4. Related Party Transactions. Is the company engaging in transactions with subsidiaries that disguises how a transaction is presented?  Are conflicts of interest occurring?
5. Footnotes to the Financial Statements. Dr. Schilit indicates that many accounting irregularities are cleverly hidden in the footnotes where most people aren’t going to read them.
6. The President’s Letter in the Annual Report. If the President mentions the word “challenging” frequently, you might want to think about selling.
7. Management Discussion and Analysis in the 10-K.

Dr. Schilit spends a chapter on each of the shenanigans going over in detail what each one means and how it might appear in the accounting. He illustrates each example with actual company misconduct. Dr. Schilit also provides examples of frauds throughout the past century and a brief chapter on accounting concepts at the end (that a novice might want to read first).

Some of the eye-opening examples were Dr. Schilit’s discussion of how executive compensation influences significantly how revenue and expenses are reported and the (legal) use of a corporate sugar bowl technique for the “smoothing of income.”

“Most executives prefer to report earnings that follow a smooth, regular upward path. They hate to report declines; but they also want to avoid increases that vary widely from year to year. It’s better to have two years of 15 percent earnings than increases of 30 percent one year and none the next.  As a result, some companies ‘bank’ earnings by understating them in a particularly good year and then use the reserves in bad years to boost profits.”

–Howard M. Schilit, Financial Shenanigans

Due to the age of the book (the version I read was published in 1993, although a third edition, is due to be released in May 2010), most of the companies profiled are unrecognizable but it was helpful for me to realize that recognizing accounting fraud is by no means a modern problem and is something that has always plagued investors. It was also comforting to know that some of the problems with corporate accounting Dr. Schilit identifies have since been corrected by regulation to a small extent. Now companies are required to expense stock options, have independent audit committees, establish codes of business conduct and adopt other fraud prevention procedures. These steps may not prevent fraud entirely but they are at least a step in the right direction.  I assume the revised edition of Financial Shenanigans will address these changes as well as comment on recent shenanigans, like the Madoff scandal.

There are also some shenanigans that we can address in our own personal finances to improve our budgeting practices. For example, if you need to buy a new computer every 5 years at a cost of about $2,000, then you really are incurring a regular expense of about $33.33 per month for computer equipment. If you set aside this amount each month, then every 5 years you will have enough to replace your computer equipment with no shock to your budget. Some people, however, employ a “shifting future expenses” shenanigan and just make a big one-time purchase out of their cash reserves in year 1 and for years 2-5 have no allocation for computer expense. When year 6 rolls around and it is time to replace the computer, there is a budget crisis.

By reading this book, you will not become an expert on detecting financial shenanigans and avoiding fraud. You will learn that in order to completely avoid fraud, you would need to know information that never appears in any required public financial statement reporting. The information you might really want to know about a company’s finances likely occurs in private internal meetings, emails, and conversations with auditors and lawyers. Dr. Schilit’s book, however, is the next best thing, and gives you the tools to learn the substance behind the numbers and become a more savvy investor.

How would you rate your own skills at interpreting corporate financial statements? What information would you like to know about the companies you invest in? Have you ever been burned by a financial shenanigan? Please share in the comments.