The Ruly Blog

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!

"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.

"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.

"Banking & Broking" drawing (c. 1872 - 1931) by William Allen Rogers. From the Library of Congress Prints & Photographs collection.

You often hear a home referred to as a family’s “biggest investment.” If we are brutally honest, however, a home is really a family’s largest debt obligation. This is especially true today as many people refinanced and consolidated their multiple debt obligations into their homes during the real estate boom. We are all painfully aware of the consequences of relying too heavily on equity from your home to finance your lifestyle. Today’s post is about understanding mortgage financing and how to find the information you need to evaluate mortgage decisions.

First, a brief primer on the real estate boom here in the nation’s capital. In 2001, I assisted with a real estate purchase for a family member. At the time, the real estate agent warned that we were likely buying “at the top of the market” and that she could not guarantee any investment return. Prices in 2001 were slightly inflated due to the dot com boom, the wealth generated through the stock market and the demand for workers and housing in the DC area. After 2001, however, the dot com bubble burst, wiping out many stock portfolios and revealing widespread fraud at many start-ups.

Two years later, it seemed like everyone was buying a home. People were even taking out second mortgages and interest-only loans to purchase investment real estate and second homes. Real estate investing appealed to people who felt burned by the dot com stock market crash. Stocks were complicated and required inside information to evaluate properly. Real estate seemed simple in comparison. Some people even felt that homes and land were appreciating so fast that if they did not invest right now they would “never” be able to purchase a home.

After saving for a downpayment for years, in 2003, my husband and I purchased our home. We knew that home prices were inflated and beyond the reach of most families. It took us seven months to select a home that we knew we could stay in for a long time if the market turned sour and we could not sell. Still, it felt like a pretty good deal because mortgage rates were relatively low at the time (less than 6%).

In 2005 the DC real estate market peaked. Soon after, prices began to fall and now in 2010, our home appraises for about 5% less than we paid for it initially. We know many families who feel “stuck” in their homes because values have fallen so sharply. Mortgage rates are even lower than when we purchased, averaging less than 5% for many 30 year mortgages.

The painful lesson of the collapse of the real estate market is that real estate investing and mortgage financing is complicated–as complicated as stock picking–and, due to the large dollar amounts involved, can be even more devastating to a family’s finances if done quickly, without understanding the financial implications.

For today’s post, I wanted to illustrate the complexities of mortgage financing by going through a refinancing example for the Medians.

Assume, for a moment that the Medians are chatting with a neighbor and complaining about the budget cuts they are going to have to make over the next 3 years to get out of debt. The neighbor tells the Medians that she was able to avoid such budgeting problems by simply refinancing all of her outstanding debt into a new mortgage loan. She paid off all of her debts and now just has one mortgage payment to pay, noting that the mortgage interest is also tax deductible. She gives the Medians the name of her broker.

The broker tells the Medians that for about $1,200 in closing costs, she can refinance their $19,300 in loans (car loan, student loan and credit card debt) into a new mortgage. Their mortgage would increase from $150,000 currently to $169,300 and the interest rate would be fixed at 5.5% which is lower than any of the non-mortgage loans. So, rather than paying their current mortgage plus $475 in other debt payments, their new mortgage payment would be $961.27, freeing up about $365 “extra” each month with no required budget tightening.

*For purposes of this example, you have to assume we are still in the mortgage boom and that this kind of “cash out refinancing” is still available. In 2010, cash out refinancing is pretty much off the table for most people, either because their home value has fallen and there is no equity to tap or because lending standards have tightened with many lenders capping borrowing at 70-80% of a home’s value. In my limited research, I could not find a single lender that would be able to refinance all of the Median’s $19,300 in loans into a new $169,300 mortgage.

Is the refinancing a good idea? We will explore that below. First, a couple of notes.

Whenever you hear about any sort of scheme to convert high interest debt to low interest debt, you are usually converting unsecured debt to secured debt. Secured debt means that if you don’t pay, there is some other way for the lender to get their money back. Mortgages are secured debt because if you don’t pay, the lender can foreclose on your house and sell it to someone else. Credit cards are unsecured debt because if you don’t pay and you truly don’t have any income, the credit card issuer can’t really do anything about it except write your debt off as a loss.

Many financial advisers are wary about advising people with low incomes to convert to secured debt because a small financial crisis can have an enormous impact. It is one thing to have a black mark on your credit rating because you are not paying your credit card and another to be out on the street because your home was foreclosed. Lately, another common question is about using student loans to pay off credit card debt. This is also an unsecured to secured conversion question. Click here to read Steve Bucci’s Debt Adviser response to this question.

The other issue that comes up with debt conversions is the psychological impact of debt consolidation. For most people, balling up all your debt into one payment and freeing up cash makes it really easy to indulge in other purchases. Why not add a granite countertop, a pool, a new deck, or even a new car? After all, now you can finally “afford” it due to the miracle of refinancing. Right? If you can avoid scrimping and saving and living frugally, why wouldn‘t you? Let’s find out.

Below are two scenarios for the Medians. We will call the first scenario, the “Frugal” scenario, meaning that the Medians don’t refinance. They are going to live frugally for 3 years to pay off their credit card, car loan and student loan as well as amass $5,000 in emergency savings. After that is accomplished and they are debt free, they will stop living frugally but continue to put $100 per month in an emergency fund and save the money that used to be going to debt payments ($475 per month) in a savings account.

The second scenario, the “Refi” scenario means that the Medians go ahead with the refinancing. They free up about $365 per month immediately. They don’t decide to live frugally but they do agree to put $100 a month in an emergency savings account and will put all of the $365 that would have gone toward debt payments in a savings account. Although unrealistic, for purposes of simplicity, we will assume that the Medians somehow come up with the $1,200 in refinancing costs through a one-time gift from a family member and there are essentially no refinancing costs.

How do you do the math to figure this out? It takes some time but it does not require a college degree in mathematics. You need to add and subtract some budget numbers and use a mortgage amortization schedule calculator, like this one from bankrate.com.

Monthly Cash Flow — First Five Years

Annual Cash Flow — First Five Years

Total Cash Flow — First Five Years

On the upside, the Refi seems to make a lot of sense after 5 years. You don’t have to go through three painful years of saving to pay off the credit card, student loan and auto loan and you get an instant boost of $365/month! After 5 years, if you saved every penny of the $365, you would have $27,900, almost $11,000 more than the Frugal repayment plan (again, assuming no refinancing charges).

After you look at this, you might think, “Why doesn’t everyone refinance?” What could possibly be the downside?

Now, assume after 5 years, Mr. Median has received a new job offer in another state and the Medians have to sell their home. Their timing is horrible and the value of their house has fallen 40% from its high of $200,000 to just $120,000 today.

For the “Frugal” repayer, the loss on their home is small enough that they might be able to charge it to a credit card if they had to. Failing that, they should have enough saved up after about 4 months to get themselves out of the hole. For the “Refi” repayer, the loss on the home is substantial and will require over 2 years worth of saving just to pay back the loss. The “Refi” repayer may have to make the sacrifice many families are making now and have Mr. Median start his new job in another state and rent an apartment while the family stays behind trying to get rid of the house obligation.

Even if there is no need to sell the home and both the “Frugal” and the “Refi” repayers stay in their homes for the full 30-year duration of their mortgages, we see that eventually the “Refi” catches up to you. After 30 years, the “Refi” repayer pays over $18,000 more in interest than the “Frugal” repayer, even though the “Frugal” payer paid much higher interest rates in the first 3 years for the non-mortgage debt.

What about the “tax savings” of the Refi? This one is really hard to model since taxes depend on so many variables. There are situations like the AMT (Alternative Minimum Tax) where you might not get a tax advantage at all. If we roughly assume that the Medians get a 25% boost due to the tax deductibility of their mortgage payments, it might lower the 30-year difference to $14,500. And you have to wonder if the tax savings are really just off-setting the refinancing costs.

The black and white message on debt consolidation through mortgage refinancing then is that it might be convenient and it might free up needed cash flow immediately but in many (and maybe most) cases, it does not save you money over the Frugal method.

Are there reasons to refinance? Absolutely. Many people are refinancing now to take advantage of record low interest rates. Refinancing, however, tends to work best for people with a lot of money. If the Medians had $10,000 in cash, for example, they could buy down some points and consolidate their debt in a 4.5% mortgage or maybe they could consider getting a 15-year or a 10-year mortgage and pay their home off faster. You could save a lot of money that way. You could also just refinance the existing mortgage and pay off the other debt the Frugal way.

Many people find these debt refinancing calculations incomprehensible but I hope you see that anyone with a little time and effort can figure them out for themselves. And if you can’t figure it out, then I beg you to consult with a professional financial advisor to do the calculations for you before you plunge into something you don’t understand.

NPR did a story this week profiling one California neighborhood that illustrates perfectly the impacts of certain financial choices with regard to mortgage refinancing. Click to listen here. As you can see, the temptation to spend in the Refi method is very hard to overcome.

My head is spinning a bit from all these numbers and I hope that you were able to follow my discussion. Please share in the comments your thoughts on mortgage refinancing. Which choice would you advise the Medians to take?

Debt gets a bad reputation but is a critical part of our financial lives today. Without debt, many of us could not purchase homes, cars, attend college or have some emergency cash to help pay the bills each month. In small doses, debt can be a beneficial means to an end. Overindulge in debt, however, and it can lead to financial ruin.

Comedian Marty Allen displaying his credit cards (1960). Photo by Al Ravenna for the New York World-Telegram & Sun. From the Library of Congress prints and photographs division.

When you are thinking about taking on a debt obligation (like a car loan), your first step should be to revisit your budget. How much money do you have available to spend on debt payments each month? This number should be your primary guide driving your purchase price. Sometimes, however, you will have situations, like student loans, where you might have reason to be more optimistic about your earning power in the future and can afford to take on more debt now.

Once you have made the decision to proceed with a debt obligation, make sure you research to find the best interest rates, especially online. Many people don’t know to do this and only visit the source they are most familiar with (the car dealership, the local bank, the college student loan office). I used to do the same thing in the past but now I would never take on any debt without trying to get the lowest interest rate by investigating competitors. It is often helpful to make a spreadsheet or table of the name of the lender, the interest rate and the fees charged. Google is your friend here as well as sites like bankrate.com. Also, asking friends and family for recommendations has yielded a lot of great tips as well.

Finally, once your loan is secured, you are in the “fun” stage of paying off your loan. The first years of paying off a loan are the hardest. You feel the pain to your budget of the new obligation and even though you are dutifully sending in your hard-earned payments each month, it seems like they are hardly making a dent in your total obligation. It is a bit depressing, actually. Once you get a few years in, however, you start to get used to planning for the debt expense, the bill-paying goes on auto-pilot and one day you notice that your outstanding balance is actually going down! Toward the end of the debt payoff, you take pride in writing the last few checks knowing that soon you will be debt free and will have more money back in your budget each month. The last check is a celebration!

The above scenario applies best to one-time obligations like student loans and mortgages. Many people never get to a “final payoff” amount because their debt is “revolving” credit like credit card loans. So, while they are paying off their current balance, they are also adding new charges on. It doesn’t take a mathematical genius to understand that you can’t get out of debt if you are spending more than you are paying. This is why you often hear financial experts advise to “cut up your credit cards.” The credit cards themselves are not evil but when you lack the discipline to spend only within your budget, they are an easy temptation.

The theme of this post is organizing your debt and by this, I mean a couple of things. First, you need to do the research described above to make sure you are taking on an obligation you can pay off and that you are paying the minimum amount of interest and fees that you have to. Second, you should understand the basic math that goes into loan payoff calculations and use these tools to organize your way out of debt.

The basic idea of a loan is that you take out a certain amount today from a lender and you pay the lender back the initial amount (principal) plus more (interest) to compensate the lender for the loss of use of the lender’s funds and/or the risk that you won’t pay the lender back. You pay the most interest in the first years of the loan (which is why your balance seems to never go down) and then over time you pay less and less interest until the loan is paid off.

Loans involve compound interest which gets confusing quickly to a lot of people. We have ventured beyond basic adding and subtracting and into multiplication and even calculus in some cases. Some people are so afraid of the complexity that they simply refuse to take out loans of any kind (which is OK but it can significantly limit your opportunities). Fortunately, there are many online calculators available that help you with the math. Below are two of my favorites:

1. The minimum payment calculator at bankrate.com. This calculator tells you “the true cost of paying the minimum” on a credit card obligation.

If we plug in the Median’s credit card balance of $3,000 at 18% interest into this calculator, we see that at their current rate of $150 per month, it will take them about 2 years to pay off their credit card balance (assuming they stop any new charges). If they only paid the minimum payment required on the card ($75), it would take them 18.5 years! Below is an example of an amortization table, showing how each of the Median’s monthly $150 credit card payments is applied with respect to interest and principal. You will note that the Medians pay the most interest in month 1 and the least interest in month 24.

Month	Fixed Payment	Interest Paid	Principal Paid	Remaining Balance
1	$150.00	$45.00	$105.00	$2895.00
2	$150.00	$43.43	$106.58	$2788.43
3	$150.00	$41.83	$108.17	$2680.25
4	$150.00	$40.20	$109.80	$2570.46
5	$150.00	$38.56	$111.44	$2459.01
6	$150.00	$36.89	$113.11	$2345.90
7	$150.00	$35.19	$114.81	$2231.09
8	$150.00	$33.47	$116.53	$2114.55
9	$150.00	$31.72	$118.28	$1996.27
10	$150.00	$29.94	$120.06	$1876.21
11	$150.00	$28.14	$121.86	$1754.36
12	$150.00	$26.32	$123.68	$1630.67
13	$150.00	$24.46	$125.54	$1505.13
14	$150.00	$22.58	$127.42	$1377.71
15	$150.00	$20.67	$129.33	$1248.38
16	$150.00	$18.73	$131.27	$1117.10
17	$150.00	$16.76	$133.24	$983.86
18	$150.00	$14.76	$135.24	$848.62
19	$150.00	$12.73	$137.27	$711.34
20	$150.00	$10.67	$139.33	$572.01
21	$150.00	$8.58	$141.42	$430.60
22	$150.00	$6.46	$143.54	$287.05
23	$150.00	$4.31	$145.69	$141.36
24	$143.48	$2.12	$141.36	$0.00

2.  The Debt Pay Down Calculator at bankrate.com. This calculator gives you a plan to pay off all of your debts and become debt free. In the Median’s case, we have the following:

$10,000 @ 8% for 5 years = $202.76 monthly (car loan)
$6300 @ 7% for 5 years = $124.75 monthly (student loans)
$3,000 @ 18% interest = $150 monthly (credit card)
$5,000 @ 0% interest = $100 monthly (amount to pay themselves to build an emergency fund)

The calculator asks how much “extra money” the Medians can squeeze out of their budget to help pay down their debts. We’ll assume they will give up cable TV to save $60 a month, they will cut down to just one vacation a year to save $62.50 a month on travel costs, they will cut down their clothing budget by $50 a month, and they will cut down their grocery bill to the “low cost” plan to save $200 a month. They will pay $100 per month into a savings account to start building their emergency fund.That gives us $272.50 “extra.” We will assume the Medians get no raises and no windfalls and that they are in the 25% tax bracket.

The calculator tells us that the Medians can be completely debt free (except for their mortgage) in just 35 months, including having built up $5,000 in emergency savings, if they stick to this plan. The plan that is generated tells the Medians to put all of their $272.50 extra per month to their credit card in order to pay it off by January 2011. They then put the extra toward their car loan and pay it off by May 2012. Then the money goes toward their student loans, which are paid off by November 2012 and then finally to their emergency savings account which is built up to $5,000 by February 2013.

You can play around with the calculator and see the effects of various decisions. If the Medians, for example, did nothing other than just commit not to charge one penny more to their credit cards, they would pay off everything in 59 months (5 years or 2015). If the Medians agree just to give up cable and put the cable payment of $60 toward their debt (along with not charging one penny more), they shave 9 months off the total payoff time.

Let’s assume the Medians look at this plan and agree that they want to be debt free by 2013. They also look at their budget and realize that all those extra charges they put on their credit card each month have to go, so not only do they have to make the cuts to the cable, travel, clothing and grocery budgets, they are going to try to cut down on their auto expenses by carpooling to work at least a few days to save on gas. They know that some months they will be less than perfect and they will borrow from their own emergency savings to tide them over but they are going to really try.

If they make it, the great news is that come 2013, the Medians have an extra $850 per month in their budget. If they are smart, they will treat themselves to a few things but plow most of this amount into retirement savings, college savings or adding to the emergency fund.

Being organized with your money is something I feel strongly about. A lot of people with serious debt problems never run these calculations– most because they don’t know how. As you can see, however, you can learn to organize your own finances. If you know someone struggling with debt, I encourage you to forward a link to this post to help encourage more people to learn to be smart borrowers.

Back on Wednesday when we will discuss more about borrowing and loans in the context of mortgages.

Balancing a checkbook is one of those tasks that seems like it should be very easy but is really an accounting nightmare! When I got my first job as a teenager, I had my own checking account that I would dutifully balance “to the penny.” Of course, it was easy to do it then because there were very few transactions to worry about. Once I left home, got married and began my own household, balancing “to the penny” became time consuming and difficult with the paper-based system. Often I was happy if I was within about $10 of balancing. My husband’s system at that time was just to keep a rough idea in his head of how much was in the account. After an embarrassing bounced rent check, he quickly converted to my written system.

Accountant and assistant at the W. Atlee Burpee Company, seed dealers (1943). Photo by Arthur S. Siegel. From the Library of Congress Prints and Photographs Division.

Our finances got complicated quickly with two paychecks to keep track of and bills, bills, bills. About the time I began to complain to my husband that the bank must be stealing money out of our account because my fine accounting skills could certainly not be to blame, he insisted that I learn to use computer-based checkbook software. I grudgingly consented and today I would not be without financial software.

While there are those who swear by their paper-based methods, today’s world of finance moves too quickly not to use the computer. Once you have your accounts set up on the computer, you can know in a few seconds what your checking account balance is, how your retirement account is fairing in the stock market, what your net worth is, how much you spent on groceries last year, and other helpful data. Yes, you can do this on paper too but it takes much longer to figure out–hours or even days.

The computer is not without its frustrations and problems, though. I have been primarily working with Quicken software for about 10 years now. While there are a lot of things to like about Quicken, I have become increasingly frustrated with some of Quicken’s business practices. When Quicken stopped using the universally available .qif format in favor of the proprietary .qfx format, I had to reset a lot of my accounts and some banks no longer seem to participate in the automated “One Step Update” download feature that used to work so beautifully. I also have been disappointed in the advanced analysis tools available in the software. Many of the analyses I get from Quicken are just plain wrong (perhaps because I have not entered my transactions in exactly the right way Quicken wants them–which seems to change from time to time) and I have to do my own calculations anyway. Despite numerous upgrades over the years, there haven’t been a lot of significant improvements in Quicken either. Currently, my 2009 Quicken software now crashes on me 3 times each time I try to upload my checking account information before it finally loads on the fourth try for unknown reasons.

Despite all these problems, I still believe that everyone should learn to manage their finances electronically. At a minimum, you should track your primary checking account and the main credit card you use. As you become more knowledgeable, you can add investment accounts, loan obligations, your asset accounts and other transactions to round out your financial picture.

Below, I tell you how to get started balancing your checkbook with GnuCash, a FREE open source software download.

BALANCING YOUR CHECKBOOK WITH GNUCASH

1. Download the Gnucash software at http://www.gnucash.org and install it on your computer.

2. When the software opens, close the Tip of the Day box and choose “Create a new set of accounts.” in the pop-up window that appears.

3. Find the window called “New Account Hierarchy Setup” (might be hidden behind some other windows). Click “Forward.”

4. Choose currency (for most of my readers, USD (US Dollar)), then click “Forward.”

5. Choose the accounts you want to create and then click “Forward.” If you are worried about being overwhelmed, start with just “Common Accounts.” The Medians would choose to set up the following:

Childcare Expenses
Common Accounts
Education Loan
Home Mortgage Loan
Homeowner Expenses
Retirement Accounts
Spouse Income
Spouse Retirement Accounts

In the next window “Setup New Accounts,” you can make changes to the accounts you have just created. If this is your first time using software to monitor your accounts, decide when you are going to start. January 1, 2010 might keep things simple. If you use this date, then you need to know the balance in each account as of the last transaction on December 31, 2009. In the Medians case, I will assume they have $100 in their checking account on December 31, 2009. You can type the opening balance directly into the list.

If you have more than one checking account, you might want to rename the checking account to Checking-NameofBank, ex. “Checking – MyBank.” Don’t get overwhelmed here! If you are ready to give up because it seems too complicated, don’t worry about picking all the different options or entering balances, just click, “Forward.”

7. On the next screen, click, “Apply.”

8. You will then see a screen with a summary showing, Assets, Equity, Expenses, Income, Investments, Liabilities. Click the down arrow to the left of Assets and then the down arrow next to “Current Assets” to get to your checking account ledger.

9. If you put in an opening balance, it will show up as the first transaction in the ledger. Change the date of the opening balance to 12/31/09. You do this by clicking on the date and either typing 12/31/2009 or clicking on the little box to the right of the date and selecting the date from the calendar that appears.

10. When you try to change something, a warning box comes up. Click the box for “Remember and don’t ask me again.” then click, “Record Changes.”

11. Now you are at a point where you have a choice to enter in the transactions from January 1, 2010 to the present. You can either enter them by hand based on your most recent account statements or, if your bank offers it (and most banks do), you can download the transactions from the bank’s website.

12. To do an automated download, sign in to the bank’s website and follow the instructions to download the account information. Most banks offer .qif format. Typically, when you select .qif format, you have to specify the date range you want. It is usually a good idea to put the dates you used in the saved file name. So, for example, you might save the file as “2010-01-01-to-2010-03-05-mybank-checking.qif.”

To import these files into GnuCash, you select, File, Import, Import QIF… from the GnuCash main menu.

This will load a helper menu. Click forward on the first screen and on the next screen, click, “Select” to find the file you saved from your bank. (You might need to double-click to get the file to be accepted.) Then click “Forward”

The next screen asks what the name of the Account is that you want the QIF transactions imported into. Type the name of the checking account, in my case, “Checking – MyBank”

On the next screen showing the QIF files you loaded, click, “Forward”

On the next screen, that essentially tells you that GnuCash might create accounts for you based on the downloaded information, click, “Forward.”

On the next screen, GnuCash is asking you to confirm that it is putting the downloaded transactions into the right account. You can see that it is going to download the Medians’ transactions into Current Assets: Checking – MyBank, which is correct. Click, “Forward.”

On the next screen, GnuCash essentially tells you that it might need your help to categorize some of your downloaded data, click, “Forward.”

On the next screen, you might get a long list of things that look kind of scary. Relax! If you can’t figure out what these transactions are, just click, “Forward.” Otherwise, if you see a transaction you recognize, in my example, an electric bill, you can tell GnuCash that this is an electric bill so it will remember this for the future. If you want to do this, highlight the name of the bill, then click the “Change GNUCash Account” button and then select Expenses, Utilities, Electric, OK. Repeat for any identifiable bills.

When you are done, click, “Forward.”

On the next screen, select the currency of the transactions. For most readers, it will be USD (US Dollar), then “Forward.”

On the next screen, click, “Apply.”

13. You are now in your check register! Your job is to go through each transaction one by one and give each one an appropriate category. You might want to modify the “Description” category to be something you remember. I usually use the name of the vendor, ex. “Acme Power,” or “MyKids Child Care Center.” In the “Transfer” category, select the category of expense. Most of your expenses will be easy to recognize. Get familiar with how GnuCash titles each category. Restaurant meals are called “Dining.” Your water and gas bills fall under “Utilities,” etc. When you get more familiar with GnuCash you can change all these names but if you are feeling overwhelmed just stick with how they are called now.

14. What if you need to add a new category? We’ll use the Medians as our example. Let’s say you want to add a special category for Internet access because you don’t like the “Expenses:Online Services” category or you use that category for something else. In the expense category, you can just start typing the name, “Expenses:Internet.” When you are done typing the name, press enter. You will get a little warning box, select “Yes” to create the new category. Click “OK” on the next box that comes up.

15. How do you enter a paycheck? This can be a little confusing but once you do it a few times, it won’t seem hard to you. Let’s use Mr. Median as an example.

In the ledger, find a blank line and enter the date of the paycheck and a good description. In your case you might put the name of your employer and the word paycheck, such as “Acme Inc. Paycheck.” Then, click the “Split” button.

This will open up some subcategories in your paycheck. Type in the net amount of the paycheck (after all deductions) in the first category that is created by default (Assets: Current Assets: Checking) then hit “Tab” to move down to the next line. Enter in all the deductions to your paycheck one by one, giving each the appropriate category. At the end, you will enter in the gross amount of the paycheck (before deductions) as Income: Salary. Mr. Median’s paycheck looks like this:

After you have done all the work to set up the paycheck and assuming the paycheck is the same every two weeks, you can click the “Schedule” button. If Mr. Median is paid every two weeks, select “Bi-Weekly” from the drop-down box and the start date of his first 2010 paycheck (usually 1/15/2010) and click OK.  (For me, I had to save, close and re-open GnuCash to get a pop-up window asking me to click OK to auto-populate the paychecks between 1/1 and 3/5.)

16. When you are finished entering all your transactions in your checkbook register, click the “Reconcile” button. A box will come up asking what the ending balance in the account is. You can either look this up manually on your account statement or by logging into your account on the bank’s website and type it in or it might be automatically populated if you downloaded the transactions from your bank’s website.

In the next window, you will see a list of your “Funds In” on one side and “Funds Out” on the other. You can check the last column under “R” to indicate the transaction has cleared your account. When you are done checking all the cleared transactions, the “Difference” value at the very bottom of the window should read “$0.00.” Here is the Medians example:

Click the green “Finish” button at the top of the window to complete the reconciliation.

17. Before closing the program, click File, Save and select where to save the file. You will also want to save a backup copy to a CD, flash drive or other location. You don’t want to lose all your hard work!

I hope that the above information inspires you to have the courage to taken on computerized checkbook management. While it helps to understand accounting principles, it is not necessary and you can learn to do this!

If you try the above instructions and you are having trouble, please post a comment and I’ll see if I can help you. You can also check out the GnuCash Help Manual here.

Hang with me! Even if you are not up to electronic checkbook management, please continue to read and don’t give up. Every little bit you learn about managing your finances will help you. You don’t have to understand everything all at once.

Wishing you a wonderful and financially sound weekend!

Budgeting is one of the most basic financial planning methods but also one of the most powerful. A budget is nothing more than adding together your sources of income and subtracting your expenses. Your budget should be the baseline for all of your financial decisions. Most people, however, think budgeting is complicated, time consuming or have no idea where to start.

If you are only going to read one post at Ruly this month, this is the most important one.  Regardless of any other financial decision you make, if you structure your life so that you can comfortably pay all of your obligations as they come due each month, you should sleep well at night and hopefully amass wealth slowly over time.

Art Brown and Family on the couch. (1932) Photo by Theodor Horydczak. From the Library of Congress prints and photographs division.

Sometimes the best way to learn is by example. Allow me to introduce you to The Medians, our fictional family who loosely represents the data on median American income and expenses compiled by the Federal Reserve and the Census Bureau. Because the median doesn’t accurately capture any one particular circumstance, I have filled in a few holes based on my life experience to round out the Median’s finances.

The Medians are a Virginia family (husband, wife and two children).  They earn the American median family income of approximately $73,000.  Both Mr. and Mrs. Median are employed full-time.  Their children are cared for in a day care setting while their parents are at work.  Mr. and Mrs. Median commute to work in the Washington, D.C. metropolitan area.  Due to the high cost of living in D.C., they reside in the distant suburbs where housing is more affordable and commute long distances to work.  The Medians try hard to live within their means.  They aren’t extravagant in their expenses but they do indulge in a few treats: annual family vacations to the beach, visits to family during the holidays, cable TV, a restaurant meal out once a week and occasional wardrobe updates. Sometimes the Medians come up a little short each month and charge a few things to their credit card. They are still paying off car and student loans and their mortgage. They put aside a little for retirement savings each month in their 401(k) accounts and their employers match their contributions.

Peeking inside the Medians checkbook for the month, you see the following:

THE MEDIAN FAMILY BUDGET

ANNUAL INCOME

Mr. and Mrs. Median’s combined full-time salaries		$73,000
Mr. and Mrs. Median’s combined 401(k)/retirement plan contributions		$2,190
Estimated salary income after taxes and deductions for Social Security, Medicare, 401(k) and employer health insurance premiums		$60,000
Estimated Monthly Disposable Income		$5,000

MONTHLY EXPENSES

Housing
Mortgage Payment ($150,000 @ 5.5% interest)		$851.68
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		$1,146.43
Food
Groceries (assumes the “Moderate” cost of food at home)		$850.00
Restaurant Meals		$120.00
Subtotal Food Costs		$970.00
Transportation
Car Loan Payment		$200.00
Car Insurance		$166.67
Gasoline (assumes Mr. and Mrs. Median are driving to work)		$400.00
Vehicle Registration/Inspection Fees		$7.00
Car Tax (required in Virginia)		$50.00
Car Repairs/Maintenance		$100.00
Subtotal Transportation Cost		$923.67
Child Care
Day care expenses and/or children’s classes/extracurricular activities		$800.00
Subtotal Child Care Costs		$800.00
Utilities
Electricity/Gas/Water		$200.00
Telephone/Cell phone		$70.00
Internet		$40.00
Subtotal Utilities Costs		$310.00
Debt Payments
Credit Card Payment ($3,000 balance)		$150.00
Student Loan Payment		$125.00
Subtotal Debt Costs		$275.00
Luxuries
Clothes, shoes, haircuts, manicures, etc.		$150.00
Gifts		$50.00
Cable TV		$60.00
Travel (cost of 1 or 2 big vacations per year, airfare, hotel, etc.)		$125.00
Subtotal Luxuries		$385.00
TOTAL ALL EXPENSES		$4,810.10
MONTHLY NET INCOME		$189.90

The Medians feel pretty good about themselves after this exercise. They have done a lot of things right. They are saving for retirement, they own a home and they are making regular payments on their loan obligations. And gee, they even have almost $200 left over at the end of the month. That’s pretty good, right?

Well…not really. While the Medians are doing a lot of things right, this budget is really pretty tight. The Medians spend every penny they generate. The budget prices only the average cost of expenses over the year. If the gas bill suddenly doubles in the winter, the Medians will have to charge that to their credit card, for example. The Medians also are not counting on the fact that since most employers pay every two weeks, their typical monthly income is more like $4615 with two months a year where it is $6923. So, 10 months out of the year, the Medians’ expenses put them in the hole by $200.

There are a couple of things that are not in this budget too that really should be, like life insurance on Mr. and Mrs. Median for the benefit of their children and a small amount for emergency savings. Mr. and Mrs. Median are not putting away nearly enough money for retirement and college savings is out of the question.

Any family budget with less than about $500 “fat” at the end of the month is prone to overspending in my experience. Even the most accurate budget is going to forget a few things. In the Medians case, for example, there is no allocation for charitable donations or religious tithing, which for many people is a common expense. Magazine subscriptions, impulse buys, computer upgrades, they all add up. Also, I have been a bit kind to the Medians on some of their expenses. For the DC area, their housing and child care expenses are probably on the low side.

Also, if you put this family under one extra bit of stress (higher taxes or health insurance premiums, Mr. Median gets laid off or Mrs. Median takes a 5% pay cut, one of the Median’s children has a medical emergency, etc.) this family’s debt load will spiral out of control. The Medians current situation assumes that everything in their lives will go perfectly. As we all know, this never happens. There always has to be some allocation for disasters.

Is it hopeless for the Medians? No. They can do a lot to improve their financial situation but they have to be realistic about how much things cost and consider adopting an extraordinarily frugal lifestyle for at least a little while to build up an emergency reserve. They might consider axing their “luxuries” for a while. Mr. or Mrs. Median could consider “slugging” to work to save on the transportation expenses. (Slugging is an unusual Virginia transportation solution wherein you drive to a commuter parking lot and hop in a car with total strangers so that the driver can take the fast highway commuting lanes (which require at least 3 occupants in the car)). They could stop eating out and try to adopt more frugal eating habits with their grocery shopping.

Is any of this fun? Not really. But this extreme frugality doesn’t have to last forever, just until Mr. and Mrs. Median pay off their credit card and build up at least a small emergency fund (say $5,000). The luxuries can work back in gradually, hopefully as Mr. and Mrs. Median’s income rises over time.

This type of exercise can be particularly stressful for those in retirement age or on fixed incomes. There could come a point at which the budget shows, for example, that a home is no longer affordable. Making a big change like selling a home is stressful and hard. Yet, we all have to be realistic that such a difficult change could come to any of us at any age. Rather than fear the change, I would rather be prepared to accept it.

Now that you have seen what life is like for the Medians, it is time to issue the Ruly Challenge.

The Challenge:  Create or update your household budget.  Have a firm understanding of your income and expenses.  Identify the costs that are fixed and the opportunities you have to save or improve your financial situation.

Below is a Ruly worksheet to guide you in your efforts. You have two options, the pencil and paper method or a spreadsheet with some calculations built in that can be adjusted over time.

• Ruly Budgeting Worksheet (printable pen and paper version)
• Ruly Budgeting Worksheet (Excel spreadsheet)

Be brave!  This is the foundation of your financial planning.  There are no wrong or right answers.  Each budget should reflect the lives and goals of its planners.

Please feel free to share in the comments your thoughts on the Medians or budgeting in general. What advice would you give to the Medians?  (The Medians are fictional and don’t bear a grudge so if you have some tough love to give them, they can take it!) Do you think the Medians reflect the financial challenges of the typical American family?