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Archive for May, 2008

An Immediate 10% Return on Your Rebate Check

Saturday, May 10th, 2008

I have argued that the last thing someone should spend their economic stimulus rebate check on is monthly bills, because your income should cover your monthly expenses. If you need a one-time bonus to cover the bills, something’s out of whack. Instead of using the stimulus as a bandaid, you need to address the underlying problem and cut your spending – and get your inflow equal to your outgo.  

Here’s the one exception: Buy groceries. Why? Because you may get an instant 10 percent return on your money. My local grocery store, Shop-Rite, is one of a dozen retailers that are offering a 10 percent bonus to people who use their stimulus checks to buy the store’s gift cards (which work exactly the same as cash). 

So, for example, if you get a $300 stimulus check and bring it to the store, they’ll give you a gift card worth $330; for a $600 check, you get a card worth $660; for a $1,200 check, a card worth $1,320. In other words, up to $120 in free groceries. I can’t get an instant 10 percent return in a savings account, and I have to buy groceries anyway.  

Shop-Rite is allowing customers to do a partial purchase and receive the balance in cash – so you can bring in a $900 stimulus check, buy a $300 gift card (worth $330) and they’ll give you $600 in cash back. Even people who have their stimulus checks direct-deposited are eligible; they just have to bring in copy of their bank statement with proof of direct deposit. The offer ends August 2.  

Kroger, one of the first to announce the bonus, is offering the 10 percent deal on gift cards to all customers – so you don’t actually bring in your rebate check. You do have to bring your checks to Supervalu, which owns Acme, Albertsons, Bigg’s, Cub Foods, Farm Fresh, Hornbacher’s, Jewel-Osco, Lucky, Shaw’s/Star Market, Shop ‘n Save and Shoppers Food & Pharmacy, to get their bonus, through July 31. TOP Food and Drug and Haggen Food in Seattle are offering a 15 percent bonus on their gift cards.  

Sears is offering a similar incentive for its Sears, Kmart and Land’s End stores, and online at sears.com and landsend.com. But you need to convert the entire amount of your rebate to a gift card to get the 10 percent bonus. If you do take advantage of one of these programs, make sure the gift card you purchase does not expire.  Check out this clip from Better TV for more ideas on what to do with your rebate check. 

Living on One Income

Thursday, May 8th, 2008

Today’s Yahoo!Finance column looks at whether couples with children can afford to live on one income. When I sent out queries looking for average couples who are managing on one middle-class income, I got no replies. I worry that it’s a sign that families who are living on one income are struggling, and don’t want to talk to a reporter about it. Or maybe everybody’s busy with end-of-the-school-year stuff and they don’t have time for a reporter. 

In any case, I thought I would throw in my experience on this front. My spouse and I have earned two incomes, but mostly lived on one, for 16 years. We earmark the second income for savings and luxuries — vacations, home improvements, kids’ enrichment activities and the like. What’s worked for us? 

-Minimizing child-care expenses. Instead of full-time care, when my oldest was born I worked the overnight shift producing a morning television show, so I was home with my daughter between noon and 7pm. Over the next ten years, my spouse and I traded off working from home with part-time help. Eliminating a commute gives you time to take care of basic household chores and to grocery shop quickly (not during peak weekend crowds), so you eat take-out less.  

Working without full-time child care sometimes meant working in the middle of the night or weekends to finish a project. I also tried (sometimes unsuccessfully) to push the biggest projects into the school year and cut back in the summer.  

It also means making strategic decisions about the kind of jobs you take and how much you work so that your income isn’t eaten up by taxes and childcare.I would argue that if you can work from home on a freelance basis and it doesn’t create enormous stress and turmoil in the household, do it – even if your profit is minimal for a few years. It’s an important investment in the future. Eventually, your kids will be in school full-time, eliminating childcare expenses, and your experience, skills and contacts will translate into more work at a higher wage. It’s also a critical safety net if something happens to your partner.   

-Developing a support system. It helped to move out of New York City and into a kid-oriented suburb where we quickly found friends and developed a support network, and had family an hour away.  

-Minimizing automobile expenses. I’ve blogged about this before. We own one used car and take the train to work. 

-Staying debt-free. We have never carried revolving debt of any kind; our only debt is a 30-year, fixed-rate mortgage. -Always maintaining some kind of emergency fund — whether it’s a few hundred dollars or a few thousand dollars. It keeps you from pulling out a credit card when something goes wrong with the car. 

-Saving for retirement aggressively before you have children. I always tell people who are 21 to max out their retirement savings — because if they save for just nine years and stop, they’ll have more money than if they start at age 31 and save for 30 years. Some people tell me this is bad advice because who has money to save in their 20s, and their incomes will be higher later. I would argue, from experience, it’s a lot harder for a family of five to save than it is for single person out of college. 

-Keeping it simple. We take full advantage of local parks, the library and school-sponsored sports (can someone please explain the benefits of putting an eight-year-old on a traveling team and spending the weekend in the car?) We own a 15-year-old television. Every time I think about buying a fancy flat-screen, I remind myself that the last thing I want to spend my free time doing is watching T.V.   

I would love to hear your ideas for living on a single income.

The Risks and Rewards of Living on One Income

Wednesday, May 7th, 2008

Is it possible for families to shift from two incomes to one?

It’s something most households with two working parents and young children at home have contemplated at some point. More than 60 percent of families with children under age 18 had both parents employed outside the home in 2005-2006, according to the Bureau of Labor Statistics. That compares to less than a third of mothers in 1975.

You see lots of articles discussing ways to eliminate the second income — things like clipping coupons, buying second-hand clothes, and cutting out vacations and cable television.

But ultimately, paring those expenses isn’t going to cover the gap for most middle-class families, because those aren’t the costs that drive them to the economic edge. The real problems are what Harvard Law professor Elizabeth Warren calls “the big five” — housing, health insurance, child care, a second automobile, and taxes.

Warren, co-author of “The Two-Income Trap,” is an expert on family bankruptcy. She has found that married couples with children are more than twice as likely to file for bankruptcy as childless couples. (More children live in homes that will file for bankruptcy this year than live in homes that will file for divorce.)

Moreover, income volatility has increased sharply among families with children. According to Jacob Hacker, author of “The Great Risk Shift,” the volatility in family incomes doubled between 1969 and 2004. Moreover, Americans with at least four years of college experienced a larger increase in family income instability than those with only a high school education over the past generation, with most of the rise occurring in the last 15 years.

The single-income family with two children in the early 1970s earned about $32,000 in inflation-adjusted dollars, compared to $73,000 for the dual-income family in the early 2000s. Despite the higher income, today’s families save less and carry more debt: In 1970, the one-income family saved 11 percent of its take-home pay and allocated 1.4 percent of its annual income to pay revolving debt, such as credit cards. In 2005, the two-income family saved nothing, and allocated 15 percent of its annual income to revolving debt, according to Warren.

In other words, the two-income family spends everything — the second income, all of its annual savings — and has piled on debt. Where does the money go? Despite the sticker-shock that goes with buying a gallon of milk these days, they didn’t spend it on food, clothing, appliances, electronics, or automobiles — on an inflation-adjusted basis, those costs actually went down.
 
Warren found two-earner families today spend three-quarters of their household incomes on five categories (which consumed only half the income of single-earner families a generation ago):
Housing: The cost for families with children has risen 100 percent in inflation-adjusted dollars since 1970.

Health Insurance: For a healthy family that has an employer-sponsored insurance plan, costs have risen 74 percent in inflation-adjusted dollars since 1970. In that year, the demographic group most likely to lack health insurance was a 23-year-old unmarried man with no children; today it’s a person age 35 who is married with children.

Cars: Families today spend 52 percent more on automobiles than in 1970, on an inflation-adjusted basis, Warren found. While the inflation-adjusted price of automobiles has dropped since 1970, families are still spending more on this category because they typically need two cars to get to work.

Taxes: The first dollar that the second earner earns is taxed after the last dollar of the first earner, Warren notes. This means that the tax rate for the family unit has risen by about 25 percent between 1970 and today.

Child Care: In 2007, fees in licensed centers ranged from $10,920 a year for 4-year-old children to $14,647 a year for infants, according to a study by the National Association of Child Care Resources and Referral Agencies (NACCRRA). In every region of the United States, annual costs of child care surpass the cost of food.

A sixth major expense is education — both preschool and college — which most families in 1970 didn’t view as necessary to launch their child into the middle class.

The number of children who attend preschool has risen to 45 percent of all 3- and 4-year-olds from about 20 percent in 1970, according to the Census Bureau. On average, parents pay $7,000 a year, according to NACCRRA.

Finally, there’s the challenge of saving for retirement. In the late 1970s, 62 percent of workers were covered solely by defined benefit plans, paid for by their employers; in 2005, the number was 10 percent, according to data from the Employee Benefits Research Institute.

Making It on One Income

So is it possible to downscale to one income? It may be, for couples who are willing to make bold changes with their money and in their attitudes, says Judy Lawrence, a financial coach and author of “The Budget Kit.”

“You have to be willing to do some soul-searching about the things you’re going to change and let go of,” Lawrence says, adding that the stay-at-home parent takes on the additional job of planning ahead and investing the time to get the best deal. It’sgoing back to your true priorities, values and goals and saying ‘it’s the best choice for me, my family, and our future’ — not ‘we’ll be locked into a life of drudgery and we can’t do what we want to do.’”

Jonni McCoy, a Colorado writer and founder of Miserly Moms, agrees. When she left her job as a buyer for Apple Computer in 1992 to stay home with her two children, she was earning more than half the family income. “Make sure you’re really clear why you are doing it, because there will be days when this is the last thing on the planet you want to do,” she says, drawing an analogy to nutrition: “The average diet lasts 72 hours, but if you have a medical reason, it will stick.”

Find a community of like-minded savers, says McCoy. “You have to have people who share your values, who say ‘no, I can’t afford that,’ ” she says. “The beginning is so tough, because when you’re leaving the working world you may not have that community established.”

Bankrate.com offers a calculator to help figure out what a second income is really worth on an after-tax basis, without all the work-related expenses. You need to track your monthly expenses for child care, commuting, work clothes, lunches and coffee breaks, dry cleaning, cash for coworkers’ birthdays and other celebrations, and money spent on take-out meals and restaurants because you don’t have time to shop and cook. Also consider savings on cleaning and other services the stay-at-home partner could take on, and the possibility of eliminating or downsizing a second car.

Start to tackle grocery expenses before you quit. “Food is the largest unfixed expense in most household budgets, so there’s a tremendous amount of money in there,” says McCoy. “We tweaked our budget in every way, but the majority of extra money came out of groceries.” Basing weekly menus specifically on sale items can cut 30 percent off a grocery bill, McCoy says.

Lawrence, whose budgeting guide was first published in the 1980s, says it’s harder to live on one income today because a number of innovations — such as Internet access and certain prescription drugs — have become necessities. But just as important, there’s so much more choice in luxuries than there used to be — that is, so much more stuff to say “no” to.

“Children and adults are bombarded unconsciously with media showing them how life is supposed to be; you’re unconsciously saying ‘no, no, no’ all the time — and that takes energy,” Lawrence says. “It’s much more of an emotional challenge than it used to be.”

(Adapted from my Yahoo!Finance Column)

To Pay and Pay Off

Wednesday, May 7th, 2008

I work out on Tuesdays with the Kims – my friend Kim the trainer, and my friend Kim from our kids’ school. Actually both Kims have kids in school with mine, which makes it even more confusing. But confusion is the topic here.

The latter Kim caught my spot on the Today Show last Friday and told me she thought my answer to one of the questions was wrong.While sweating profusely (and being ordered by the other Kim to continue lifting the weights as we spoke) Kim and I discussed how a word on a full screen can create confusion. The question was: “You’re in debt and have to pay tons of bills…which one is the most important to pay off?” The choices were credit card bills, mortgage, loans and medical bills.When I spoke with the producer of the show, we talked about which monthly bill someone should pay first. Clearly you want to pay your mortgage first, or you risk losing your home. After that, pay the minimums on your credit cards, putting any extra toward the credit card bill with the highest interest rate.  

But the words “pay off” could definitely lead to confusion. Clearly, you don’t want to “pay off” – or put extra cash — toward your mortgage at the moment. In a shaky economy, it’s better to build up cash reserves. You can always decide later to use that cash to pay down your mortgage early. But if you lose your job, it’s going to be tough to tap your home equity. Bottom line: If you are swamped by bills you can’t pay, contact the National Foundation for Credit Counseling. Here’s the Today Show Video:


If you’re looking for more financial tips, I’ll be answering reader emails on CNN’s Issue #1 between 12pm and 1pm today. Meanwhile, with any luck, my weekly meeting with the Kims will “pay off” in better health both now and in the future.

Check Out This Happiness Blog

Wednesday, May 7th, 2008

I’ve interviewed Sonja Lyubomirsky a number of times over the years. She’s a psychology professor at the University of California, Riverside and author of the recent book “The How of Happiness.” Click here to see my review on Yahoo!Finance. Lyubomirsky just started a blog, and in her latest post tackles the psychology behind the best-selling book “The Secret.” Check it out.

Saving on Homeowner’s Insurance

Monday, May 5th, 2008

My homeowners insurance renews in April. It’s a big bill, that I pay in full, because I don’t want to pay the finance charge. This year I noticed my bill had gone up 8.5 percent from the previous year. I contacted my insurance broker and asked why. He came back and said because the value of my home had surpassed $500,000 (the cost of a middle-class home in New Jersey), I was actually eligible for a discount from Chubb. Apparently, the company offers a discount to attract owners of higher-priced homes because they are hoping to sell riders that cover jewelry, artwork and the like. So instead of rising 8.5 percent year over year, my bill dropped by 19 percent! This was a significant chunk of change. Bottom line: A month before your homeowner’s insurance is up for renewal, call your broker and ask him what discounts might be available. Here’s a story from the Wall Street Journal on credits that you may be eligible for (subscription may be required).

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