Form New Habits

Want to succeed at better managing your money. You can if you understand that like everything else you do, money management is nothing more than a habit. Habits can be good (like managing your finances) or bad (like not managing your finances), but habits aren't easy to make or break.

For years psychologists thought that it took 21 days to make or break a habit. But, even after following this guideline so many people still failed to reach their objective. Now new evidence shows that the timeline is much longer at 66 days.

The 21 day guideline is credited to a 1960 plastic surgeon. Dr Maxwell Maltz. Dr. Maltz noticed that amputees took, on average, 21 days to adjust to the loss of a limb and he argued that people take 21 days to adjust to any major life changes.

A paper recently published paper in the European Journal of Social Psychology reports the results of a study conducted by Phillippa Lally and colleagues from University College London. The study followed 96 people who were interested in forming a new habit Lally et al. (2009). Participants were asked daily how automatic their chosen behaviours felt. These questions included things like whether the behaviour was 'hard not to do' and could be done 'without thinking'. On average a plateau in automaticity was reached after 66 days and it was concluded that the action was now habit.

But it's not the same for everyone. Results were anywhere from 18 days up to 254 days in the habits examined in this study. The variance comes from the individual and the type of habit. The less pleasant the action, the longer it took to become a habit. The good news is that missing a single day did not reduce the chance of forming a habit. So if you've vowed to start taking a daily vitamin, missing one day won't cause a need to start over.

So why does it take so long? Researchers at MIT were curious so they've studied habits as well. They found that "Habitual activity--smoking, eating fatty foods, gambling--changes neural activity patterns in a specific region of the brain when habits are formed. These neural patterns created by habit can be changed or altered. But when a stimulus from the old days returns, the dormant pattern can reassert itself." That's why it's so easy for us to fall off the wagon.

It takes some personal persistence to stick with something new, but it's not impossible to retrain those neurons into accepting postive behavior.

Estimating Your Needs for the Future: The Millionair Next Door Formula

The following is the wealth building theory posed in the book Millionaire Next Door by Thomas Stanley and William Danko.

Your Age ˟ Your Gross Annual Household Income ÷ 10 = Your Net Worth Goal

This is a super quick way to estimate what your current net worth should be. It’s not an estimate for your future wealth goal. This rule does not consider inflation, taxes and varying interest rates. It does provide a useful estimate of your retirement savings goal. The formula is a good way to assess your current savings. Are you on track? or ahead? It can be eye opening.

So if you are 35 and earn $75,000/year your goal would be: 35 ˟ $75,000 ÷ 10 = $262,500

At 45 earning $75,000 your goal would be: 45 ˟ $75,000 ÷ 10 = $337,500

At 60 earning the same: 60 ˟ $75,000 ÷ 10 = $450,000

Liz Pulliam Weston of MSN Money had this to say about the Millionaire Next Door theory: “…this formula is problematic, at best. It requires substantial savings of people in their 20s and 30s, and it understates what people in their 60s will probably need.”

Note that the formula does not intend for you to include unexpected income from inheritance or other means. It should just be straight savings and investments. I have, however, known people who include the equity of their home in their personal net worth. In my opinion, it’s risky to consider your home equity as part of your net worth.

Great Gifts for New Parents

The following is a repeat performance of a post which first ran on August 14,2008.

Babies seem to arrive in waves. There's the spring wave that's usually around April, the July wave and the September wave. I don't have any facts to back this up I just know that these are the times that I seem to get hit with a wave of birthday celebrations. In fact, not one weekend in July was void of a kid's birthday party.

I've also got loads of friends, family members and acquaintances that are getting ready to add to their family either by adoption or birth in the next month. So how does one best welcome in these new people?

Well, we're not making any additions in our house, but experience tells me there are some gifts that while not too cute to unwrap are complete treasures to new parents.

First there's the Will. Okay, you can't exactly give new parents a will, but you should do all you can to encourage it. Did you know that 70% of Americans do not have a will? For anyone with children this is a must. And wills are not just for the wealthy. A will can state who will care for the child(ren) if something should happen to the parents. Without a will children become wards of the State. The State can then determine who will care for the child--not to say that might not work out, but it's better not to leave such things to chance.

Then there's the Coverdell Education account. The nice thing about these accounts is that anyone--family or friends--can contribute. And they don't have to be limited to college expenses. Hey, I love my father in-law and appreciate the bonds he sends the kids, but a Coverdell might offer a better return.

Here's the thing on Savings Bonds vs. the Coverdell. Bonds are secure and safe, but they earn very little. The exact rate depends on the bond, but when interest rates are low, bond return rates tend to be low. A Coverdell is invested in a mixture of stocks and mutual funds that will likely grow your money faster than bonds. If you have EE or I savings bonds already, you can roll them over into Coverdell and perhaps better your results over the long term. The Coverdell is not a simple account. There are loads of rules and clauses--too much to cover in today's post. But you can learn more by clicking here.

Another gift idea is Upromise. Yes, I've blogged on about this before. But this is another hint to friends and grandparents. When you open a Upromise account you can split your rewards between several children. You can even distribute rewards in percentages. So if one child is closer to college age, or you like one better you, can allocate a larger portion to them. You don't have to deposit money in, you just earn a (very) little by shopping and dining. My biggest caveat here would be that Upromise depends on merchants for sustainability and there is always the risk that they may not be around forever.

Valentine's Day for the Cheap and Unoriginal

photho by tonguetyed

Ah yes, that's me. I rarely think of a creative Valentine's Day gift. Part of me thinks...Why should I? Isn't that his responsibility. Well, but then again if I don't take control of the situation then I'm just setting up unrealistic expectations.

So for all those who can't think of anything and who are cheap...like me...there is Restaurant.com. Eating out isn't that creative but this website definitely appeals to my inner cheapskate. At this site you can purchase dining gift certificates that you can give or use for participating restaurants. You just type in the zip code or area that you want to go to and taadaa lots of places show up. From upscale to sandwich shops.

Usually you'll pay $3 for a $10 gift certificate. A $25 gift certificate goes for $10. Higher amounts are available at comparable discounts. That's a tasty savings.

Some restaurants put restrictions on when they can be used so look carefully. There's no waiting for the certificate to be mailed, you just print it right away and go eat. Very simple.

I think this will be a fun and low-risk way to try some place new. I like that you can glance at the menu before you purchase. Reservations can also be made online, which should be super convenient for the busy cupid day.

It's also great for traveling since restaurants throughout the country are signed up with the service.

But do the restaurants like it? According to the website, yes. It helps promote there business and get diners in, something they are struggling with right now.

Friday Encore: So What about (Borrowing From) an IRA?

Friday Encore features a past blog posting that I thought you might not want to miss. Okay, call it a repeat if you want. When necessary the post may be updated with new information or data to keep it relevant. The following was originally posted March 19th, 2008.

So What about (Borrowing From) an IRA?

I was watching some news show a few weeks ago. You know how just before a commercial break they tease you with some exciting news? Well they got me because they were going to talk about a forgotten retirement savings plan. I stopped what I was doing and sat myself down because I just had to know. Then they came back with the big announcement. For about 30 seconds they said that the IRA was practically unused—forgotten. Really? Were they kidding? How could anyone forget the IRA? They didn’t present any data to back up this statement so I just assumed it was false. That is until I read this article on Motley Fool just a few minutes ago.

Did you forget about the IRA? If so, I encourage you to read the Fool article. I wouldn’t want you to miss out on this nice little tax-advantage savings vehicle.

If you haven’t forgotten about the IRA and you read yesterday’s post about borrowing from a 401(k) you might be wondering if it’s possible to borrow from an IRA. Ok, maybe you weren’t but I’m going to answer this question anyway.

photo by dimitridf

So, about borrowing from an IRA...You can’t. You can get funds from it, but technically it’s not borrowing. Two ways you can get money from your IRA—and let’s be clear we’re talking about before you reach retirement—are through qualified withdrawals or rollovers.

The first is rather straight forward according to the IRS. Qualified withdrawals are for medical expenses, home buying or college. This means that if you take a withdrawal for these expenses you can skip the usual 10% early disbursement fee.

If you, your spouse or child have a medical emergency it can kill your finances. So it’s somewhat comforting to know that you can tap your IRA in such an event. IRA withdrawals are penalty free if used to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.

To use your IRA to buy a home you and your spouse must have had no ownership interest in a primary residence for the two-year period ending on the date of acquisition of the new home.

Qualifying college expenses can include tuition, books, room and board, fees, supplies and equipment for undergrad or graduate degrees.

And now the Rollover method. This one is a bit risky. Essentially you are closing one IRA, using the money, paying back the funds and opening another IRA all in 60 days. It’s not so much borrowing; it’s more like a loop hole. Confused? I let the fools over at Motley Fool explain it. They’ll do a much better job.

Meanwhile don’t forget to make your last minute IRA contributions to count on your 2008 taxes. You can make contributions up until April 15, 2009.

Friday Encore: 3 IRA Changes for 2008

Welcome to the Friday Encore where you'll get to read a past blog posting that I thought you might not want to miss. Okay, call it a repeat if you want. When necessary the post may be updated with new information or data to keep it relevant. The following was originally posted January 2008.


3 IRA Changes for 2008

1. Contribution Limits Increase

In 2008 IRA contribution limits rise to $5,000 ($6,000 for anyone 50 or older). This is a $1,000 increase over 2007. For the years after 2008 contribution limits are scheduled to be indexed with inflation in $500 increments.

2. Income Limits Increase

If your modified adjusted gross income (MAGI) doesn’t exceed $53,000 (for single filers) or $83,000 (for joint filers) your entire IRA contribution will be tax deductible.

You can make the maximum Roth IRA contribution if your modified adjusted gross income (MAGI) doesn’t exceed $101,000 (for single filers) or $156,000 (for joint filers).

3. Easier Rollovers
Previously to roll funds into an Roth IRA you first had to park them into a traditional IRA and then convert to a Roth. Now you can roll assets directly from a 401(k) to a Roth IRA. You’ll still have to pay applicable taxes, but the process is less complicated. However, there are income limits. In 2008 and 2009, you may be eligible for a direct conversion if you make less than $100,000. In 2010 income limits for Roth conversions go away.

Are you ready to lose your job?

This is one of those questions that nobody really likes to think about--but you must. Any number of things could happen to cause you to lose your job. You could get downsized, you might have a medical emergency or whatever. Of course it's best to be prepared for the unexpected. And maybe you have stashed away some funds just in case. But is it enough? The average job hunt takes six months. How long will your stash last?

Here's a way to calculate how much you'll need and how long your savings will last. But first remember that your cash reserve needs to be liquid. That excludes your 401(k) or IRA. It includes savings accounts, money market accounts and other savings that you can access quickly without penalty or loss.

#1 How much cash on hand do you have each month?
$________ Monthly income
(-)$________ Monthly savings
===========
$________ Cash available for expenses

#2 Current emergency cash balance
$________ Liquid savings balance
(+)$________ Checking account balance
============
$________ Readily available funds

#3 What percentage of your monthly funds does your emergency reserve represent?
To figure this take your answer to #2 and divide by the #1. In other words your readily available funds divided by the net cash available for expenses. For example, (your answer to #2) #2,000 divided by (answer to #1) $3,500 = 57.1428571. And so your answer to #3 would be 57%.

#4 How long will it last?
Take the answer to #3 and multiply by the average days per month. That's 30. So, using the example above would be .57 x 30 =17.

That's how many days (17) the cash reserve of $2,000 would last if the person in our example had no income and no change in spending. That's an eye opener especially when you remember that it takes 6 months on average to find a job (yes I repeat myself). If you lose your job due to illness or injury you could be out of work for longer.

I have to give credit to Dave Ramsey for sharing this formula.

September is for Change

Sadly this weekend marks the official end of summer. But the start of every season always gives me a lift to start new things. For one I'm getting into the back to school spirit by assigning myself to read more personal finance books. More about that another day. It's also a great time to take on a new challenge.



Recently I read about SmallNotebook's No Spend Month in which a family of 3 decided to spend no more than $250 for one 31-day month. This included: food & eating out, gas, clothing, coffee,
household necessities and entertainment. Not included: gifts, Rent, insurance, bills, health expenses, work expenses, savings and investments. And they did it! On the last day they still had $4 left from their budget and celebrated by going out for coffee.

Wow! This is amazing! But I don't think my family is ready. So I've come up with another challenge. So far, however, my success at challenges hasn't been so great. I'm still struggling with the Savings Saving Challenge. But anyhow on to my September challenge...

I'm calling it the Change Challenge. This month I'm going to challenge myself and anyone who wants to play along to save change. It's a tactic that's always part of any "how to save" tips. And Safeway has been using it to encourage shoppers to give to charity. It works like this: whenever I buy something I'll round up the expense to the nearest dollar. If my bill is $3.75 then $.25 goes to savings. If it's $4.09 then $.91 goes to savings. It sounds simple, but there is discipline involved. To get the rest of my family to join in will be tough, but we've got 3 days to prepare.

Great Gifts for New Parents

Babies seem to arrive in waves. There's the spring wave that's usually around April, the July wave and the September wave. I don't have any facts to back this up I just know that these are the times that I seem to get hit with a wave of birthday celebrations. In fact, not one weekend in July was void of a kid's birthday party.

I've also got loads of friends, family members and acquaintances that are getting ready to add to their family either by adoption or birth in the next month. So how does one best welcome in these new people?

Well, we're not making any additions in our house, but experience tells me there are some gifts that while not too cute to unwrap are complete treasures to new parents.

First there's the Will. Okay, you can't exactly give new parents a will, but you should do all you can to encourage it. Did you know that 70% of Americans do not have a will? For anyone with children this is a must. And wills are not just for the wealthy. A will can state who will care for the child(ren) if something should happen to the parents. Without a will children become wards of the State. The State can then determine who will care for the child--not to say that might not work out, but it's better not to leave such things to chance.

Then there's the Coverdell Education account. The nice thing about these accounts is that anyone--family or friends--can contribute. And they don't have to be limited to college expenses. Hey, I love my father in-law and appreciate the bonds he sends the kids, but a Coverdell might offer a better return.

Here's the thing on Savings Bonds vs. the Coverdell. Bonds are secure and safe, but they earn very little. The exact rate depends on the bond, but when interest rates are low, bond return rates tend to be low. A Coverdell is invested in a mixture of stocks and mutual funds that will likely grow your money faster than bonds. If you have EE or I savings bonds already, you can roll them over into Coverdell and perhaps better your results over the long term. The Coverdell is not a simple account. There are loads of rules and clauses--too much to cover in today's post. But you can learn more by clicking here.

Another gift idea is Upromise. Yes, I've blogged on about this before. But this is another hint to friends and grandparents. When you open a Upromise account you can split your rewards between several children. You can even distribute rewards in percentages. So if one child is closer to college age, or you like one better you, can allocate a larger portion to them. You don't have to deposit money in, you just earn a (very) little by shopping and dining. My biggest caveat here would be that Upromise depends on merchants for sustainability and there is always the risk that they may not be around forever.

Tempting Isn't It

photo by kspoddar

So might be this:

• Save at Washington Mutual and earn 3.75%


• Open an savings account at HSBC Direct to get 3.50%


• Try saving at WT Direct to earn 3.26%

Diversifying your savings to accounts is a good strategy for keeping your money safe and even earning higher interest rates. But do be wary of high earnings advertising. Each of these temptations has a downfall.

this one is loaded with unnecessary calories

Wamu's 3.75% is only offered online and requires an active checking account

HSBC's offer is temporary rate until September 15th.

WT Direct's offer drops to 0.50% if you don’t have a $10,000 balance after 60 days.

Still none of these temptations will kill you, they just carry some risks and maybe even unwanted extras. That chocolate yummy may give you heartburn, a sugar-caffeine buzz and a few extra around the middle. A high-interest temptation could lure you in to an unstable financial situation.

More banks are in trouble of going down and the FDIC publishes a quiet list on their website. (NCUA, the governing body for credit unions also has a website and publishes such news. While credit union's can and have gone down in the past there hasn't been much of this happening lately.) There have been murmurings that WAMU is in trouble. During tough times financial institutions will offer higher deposit rates to attract deposits. It's when those rates are amazing that you need to be suspicious.

So the moral of the story is that you need to know what you're getting into. Just like you should know if the lake is shallow before you dive off the rock, you need to check out your financial choices. Get a copy of their annual report or earnings profile, do a Google search and read the fine print before opening an account (that's where the you must do this to get that is hidden).

Keep your money safe by remembering the government insurance limits and knowing the stability of your financial institutions. Don't let your wants control your needs and remember too much of a good thing isn't always best.

I Promise, Do You?

Have you heard about upromise? It's a college savings program that basically a rewards program that sets money into a college savings program based on a percentage of what you spend when you shop. It sounds simple, right?

All you do is register any of your credit cards and the system automatically tracks your "qualified" purchases. Qualified purchases are those that are made with the retailers that they work with.

But here's the trouble: I don't regularly shop at any of these places. And sometimes the purchases must be made online.

I signed up with upromise almost exactly a year ago. In atypical behavior, for me, I didn't check the list of retailers before I signed up. But in typical behavior I only registered one card. I chose the one I used the most (my credit union debit card) and left off the AmEx (my only other card).

To date I have earned my children ZERO dollars and ZERO pennies. Again, I just don't shop at the places upromise contracts with. But, I'm not pulling the plug on upromise. Part of the reason I haven't earned anything is because I need to spend a little more time with it. I need to register my grocery store cards (not credit cards, the other club cards) and possibly add the AmEx. Though I'm not convinced it's worth the time. I probably save more money just by shopping for deals than I would with upromise.

To my kids: I promise I'll help you out with college, just don't count on upromise to fund it.

Click the comment below to read how upromise pays off for a reader.