Directbanc.com discovers the man behind the mustache, the uncoventional and highly entertaining Mr. Money Mustache. (Pete, actually)
Mr. Money Mustache is a new financial blogger who retired, financially independent, from an average engineering job shortly after turning 30 in order to start a family. With no punches pulled, he attacks the mindless consumerism that defines America’s middle-class today, while re-teaching the traditional values of hard work and honesty as they apply to becoming wealthy in the modern world. You can check him out at mrmoneymustache.com.
1) Would you please share your story of how you became interested in personal finance?
I think I was born with a certain interest in money, since I remember being fascinated with the cash from the Monopoly game as a little kid,stacking it up and carrying it around in a little briefcase. Later this interest manifested itself in not wanting to waste money, and enjoying saving some of what I earned so I’d be able to pay my university tuition without going into debt.
2) What prompted you to set on a course of early retirement?
When you graduate from school and get your first Grownup Job, they start paying you more. But I didn’t see the need to increase my lifestyle to absorb all the new income, so I kept the college lifestyle of living with roommates, biking for some of my transportation, and driving a used car for a few more years. This made it possible to really start saving a good portion of my earnings, which led to learning about investing.
At that point, I realized that work is optional if you have enough money invested and working for you. And the factor that controls it all is not your income, not any sort of magical investing prowess, but simply how much of your income you choose to spend. But I also noticed that not many people believed this was possible, even with incomes much higher than I had enjoyed.
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Happy days are here again! Or are they? After 3 years of belt tightening, American consumers began spreading their cash around again as consumer spending showed an increase of .08 percent, the largest increase in over a year. Was the new “frugality” that came to characterize the fiscal attitudes of Americans only fleeting? Or are we just seeing a brief spending burst from the news that the economy has improved? Either way, spending has to be good for the economy, right? Yes, and no – good and bad.
We explain:
The economy has been dragging largely based on depressed consumer spending, so an increase is just what the doctor ordered. An increase in consumer spending in conjunction with an increase in consumer confidence, as was the case in February, is even better. As anemic as the jobs reports have been, the fact is that there is some hiring going on, so people have a more positive view of the economy.
It seems that much of the increases are coming from the upper end of the spectrum as upper-middle to high income consumers are opening their wallets again for higher end goods, and the fast food crowd is once again “going big” on their combos. Middle class consumers are also increasing their spending, although in more modest amounts.
Restaurants are reporting increased sales of appetizers, and grocery stores are seeing a decline in generic brand sales in favor of name brands. According to a recent AAA Travel survey, many Americans are still planning to take their summer vacations, despite rising gas prices.
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Last week we were treated with the news of another multi-billion dollar loss suffered at the hands of one of the largest and most respected banking institutions in the world, JP Morgan Chase. While the loss of $2 billion may turn out to be nothing more than a blip on JP Morgan’s financial statement, it is a stark reminder of how inexplicably linked we, as taxpayers, are to the fortunes of banks that are “too big to fail.”
Although JP Morgan is not about to fail anytime soon – they will easily be able to absorb the loss – the incident has fueled the fires raging over the need for more bank reform which, thus far has done little to stem the systemic risks that led to the financial crisis in 2008. In fact, if anything, the reform measures advanced through the Dodd-Frank financial reform law has done nothing more than make life more miserable for the banking public by increasing costs and reducing bank lending.
Just a “Stupid” Mistake?
At issue for banking regulators is the way in which JP Morgan used “risky” credit derivatives to minimize its investment risks. Essentially, it utilized a convoluted series of trades to offset the perceived risk of corporate default on its loan portfolio. First, it hedged its portfolio against the possibility of default, so that its portfolio could profit with an increase in defaults. Then, when it was determined that the default risk no longer existed, it hedged against its hedge so it could make money the other way.
In the end, the massive portfolio wrapped in hedges and hedges of hedges became unmanageable, and the traders lost control. While the loss was egregious, the trading strategy was characterized by the CEO of JP Morgan as “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” And for that, several heads rolled. But, other than that, it is business as usual at JP Morgan.
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The number of American renouncing their U.S. citizenship each year has increased nearly 200 percent per year over the last four years, the vast majority of who do so to escape the long arm of the IRS. Granted, we’re only talking about 1,800 expats out of more than 6 million living abroad; however, it’s not the quantity as much as it is the trend that has taken on alarming proportions.
At the current rate, the number could rise to the tens of thousands seeking refuge from the IRS. We’re not talking about your typical tax dodgers here; most of these expats are honest, hard working people who feel they have no choice but to break their national ties over the oppressive treatment they receive from the IRS.
To the typical American on Main Street, the idea of expatriates renouncing their citizenship might seem both extreme and unpatriotic. After all aren’t we all supposed to pay our taxes? Yes, but what most Americans don’t realize is that many expats working overseas are being forced to pay taxes twice; once to the government of the country in which they are working, and then again to IRS even though their earnings never touched American soil.
In fact, the U.S. is the only country of all developed nations that taxes its citizens living overseas; a fact that should make us feel a little embarrassed considering how much we preach the virtues of economic freedom to the rest of the world.
Expats Hunted Like Tax Dodgers by the IRS
The justification for the strong arm treatment of honest American citizens comes through the U.S. government’s efforts to crack down on tax cheats who deliberately hide their assets overseas to escape taxation. In what the government has described as an effort to reduce the budget deficit, the IRS has, essentially, been given a free reign to track down American citizens wherever they reside and force a full accounting of their assets and earnings.
While many expats end up not paying any taxes to the IRS because of a $95,000 exemption of foreign earnings, they suffer under a tremendous paperwork burden in order to comply with the complex provisions of the tax code relating to expatriates.
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It’s difficult getting through life these days without a credit card. While many people simply take them for granted, others walk a daily tightrope in managing their credit cards where one slip could suddenly send their credit situation tumbling down. In either case, all it takes is one mistake to turn your financial dreams into a nightmare.
Credit card mistakes usually result in higher interest charges or a lower credit score, either of which can be very costly. The problem is that many people don’t understand the magnitude of what they might think is a harmless little mistake. But when you understand the costs it should be enough to make you lose some sleep.
These are five common mistakes people make with their credit cards that can and should be avoided if you want a good night’s sleep:
Making minimum payments
This could very well be the most costly mistake you could make as it can add hundreds or even thousands of dollars of interest charges over time, and it can adversely impact your credit score. Making minimum payments on your credit card balance can explode your interest costs to nightmarish proportions to where it could take years to pay down the debt. Also, the credit bureaus don’t take too kindly to minimum payments, especially if it results in your debt-to-credit limit ratio to increase. You should always make more than the minimum payment on your credit card balance, even if you have to cut other things out of your budget.
Missing a payment
When finances get tight, people sometimes need to do some major juggling of expenses and payments to get through to the next pay day, and it is often the credit card payment that falls on the priority list. The rationale for some people is that, as long as they pay it before 30 days, it won’t be reported as a late payment. While that may be true, the damage to your credit begins the moment your payment is late.
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Savers and investors are in quite a quandary these days as fiscal and economic policies have driven interest rates to their lowest level in history. In fact, when you factor in inflation most bank savings vehicles are yielding a negative return. Treasury notes are not much better as their yields barely break even with inflation.
For retirees especially, this can be disastrous, but for anyone trying to accumulate funds for future needs, it can be like trying to gain ground by walking on a treadmill. For many people, the stock market is out of the question as an alternative simply because they can’t stomach the volatility. But, with a little bit research and a willingness to go outside the box it’s possible to find some pretty attractive alternatives for your “safe” money.
The first thing to understand is that bank savings vehicles and Treasury notes pay such low yields because they are, in essence, risk-free. If you absolutely can’t tolerate any possibility of losing your money, then you really don’t have any other options. In any financial instrument, the interest rate or returns you earn are a direct function of the amount of risk you are willing to incur.
So, while there are a number of “low” risk options in which you can increase your yield or returns substantially, you need to be comfortable with risk. But, considering that your money is already exposed to inflation risk, you don’t have to increase your overall risk exposure by much to get a better return. The ultimate key to minimizing your risk is through diversification – allocating your money amongst several different types of instruments so that a wrong turn in one of them won’t extensively hurt your overall portfolio.
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If credit card use is up at all these days it may be largely attributed to the popularity of the cash back rewards programs offered by most of the major card issuers. After all, if you can earn an extra $40 or $50 a month just by making your normal purchases of gas and groceries, why wouldn’t you use a cash-back credit card?
Like extreme couponing, finding ways to reap the maximum cash back from credit cards has become an obsession with some people. The one program that seems to be receiving the most attention right now is the 5% cash back from rotating categories now offered through cards like Chase Freedom and Discover More. 5% is a hefty cash back reward, but the question for many people is whether it is worth the time and effort to track the rotating categories so you know when to use the card.
Like all cash back programs, you can earn cash back from all of your purchases with Chase Freedom and Discover More. These cards, however, also pay 5% cash back in specific spending categories that rotate every three months. For instance, the spring category might be Restaurants and Home Improvements, and then it changes to Gas and Family Fun in the summer. The categories are to a large extent “seasonal” so they can be used for spending on things typically purchased during those periods.
What you need to know about 5% Cash Back Rewards
So, who wouldn’t want 5% cash back on their spending, especially when compared to the typical 1% to 2% cash back programs? That would seem like a no brainer, and it is, as long as you are willing to do some additional, proactive management of your credit cards. Here’s why:
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Even as the dust continues to settle after the calamitous financial crisis of 2008 that cost investors and tax payers trillions of dollars, there is still no shortage of hucksters scheming for our money. And incredibly, the pool of hapless investors, willing to turn over their life savings in pursuit of “homerun” returns seems to be ever-expanding.
Drawn by the allure of easy-money, investors continue to fall victim to scams, some of which are outright fraudulent schemes and others which are glazed over with a sheen of legitimacy because they originate in the lobby of a “trusted” bank. The lessons of Enron, WorldCom, the Internet Bubble, the housing bubble, Bernie Madoff, and the double-dealing of investment banks throughout the 2000’s have apparently gone unheeded, as investors continue to ignore the most fundamental tenet of investing: If it sounds too good to be true, it’s because it is.
Scam artists are particularly adept at utilizing the power of media and the internet to target and capture their prey, which typically consist of older people who are anxious over their ability to fund their retirements. They’re the ones with the money and the “urgency” to move their funds from low-yielding savings vehicles into something that can generate “high returns with no risk of principal” as most of these fraudsters advertise.
FOREX Fraud
Take, for example, one of the fastest growing scams being promoted on the Internet and late-night TV – FOREX trading. FOREX, which stands for foreign exchange, is a global network of electronic exchanges that enables institutions and individual investors to buy and sell currencies. FOREX traders can make a substantial amount of money from trading profits on a daily basis. Because the currency markets are very volatile, traders can capitalize on the smallest of price movements with short term trades lasting mere minutes. It’s also why FOREX trading is not for the faint hearted.
Enter FOREX scammers who profess to have the mechanisms to invest your money in the lucrative currency markets without the downside risk. The speak of “hedges” and other techniques that allow your profits to run while protecting your principal.
Too good to be true? The Commodity Futures Trading Commission (CFTC) has uncovered a number of FOREX operators who have collected millions of dollars of investors’ money with such promises, but as it turns out, they are operating nothing more than a Ponzi scheme. Aside from the fact that Ponzi operators never really invest your money in actual securities, you usually don’t learn of the scheme until the operator has been caught or has fled the scene. By then, your money is gone.
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As we have learned over the last couple of years, there is nothing the market hates more than uncertainty, and this year, with the all of the vital fiscal issues dangling before a hyper-partisan Congress and President, its revulsion will very likely become a wrath it unleashes on investors with vicious volatility.
What else is new, you say? Last year the market seethed as politicians fiddled over the debt limit (twice), the Bush tax cut extensions, the threat of a ratings cut (which came to pass), the deficit, and entitlement reforms. And on all of these issues, they merely punted.
After climbing a Wall of Worry early in the year, the market finally succumbed to its mounting rage with a vengeance in the summer and fall, only to shrug it all off as the New Year began. This year it resumes its climb up the Wall of Worry as the short memories of investors allow them to ignore the “fiscal cliff”, as Ben Bernanke himself calls it, that we are rapidly approaching.
Under the glare of a campaigning President, Bernanke walked-back his dire forecast, but recently two more Federal Reserve officials punctuated the warning with predictions of a “financial shock” if the markets begin to anticipate the inactions of a gridlocked Congress. In front of the Congress, sit at least four extremely consequential fiscal matters, any one of which is enough to raise the ire of the market.
First, we have the debt ceiling to deal with. It was the debt ceiling debacle that sent the market into convulsions last summer. And, while deals were made last year to “guarantee” that enough funding would be available through the elections in November, a slowing economy and bigger increase in spending this year is very likely to push the debt ceiling issue up a couple of months, perhaps as soon as August. If you thought last year’s debate was contentious, what do you think the threat of default will do to the markets in the weeks ahead of an election?
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What is a short sale, and is it the best choice for you right now? Maybe so, however there is a lot to slip between the cup and the lip. As the nation anxiously awaits the next wave of foreclosures, thousands of distressed homeowners are desperately clinging to the possibility of escaping their underwater homes on better terms, so as to avoid the stigma, credit damage and deficiency liability of a foreclosure.
For many homeowners in or near default, a short sale is the more preferable way out, if it is approved by the bank. And that’s a big “if”, as homeowners are finding that banks are very stingy with their short sale approvals. The reality is that more short sales are denied than approved and often for reasons beyond the control of the homeowner. This leaves the homeowner with very few options in avoiding a foreclosure.
What is a Short Sale?
A short sale is a real estate transaction in which a property is sold for less than what is owed on the mortgage. In all cases, a short sale needs to be approved by the lender in order for the homeowner to be relieved of the deficiency. For the bank, it may be in its interest to approve the short sale if it stands to recoup more money than if it were to foreclose on the homeowner. But not every property meets the bank’s requirements for a short sale, and in some cases, it may be more costly to the bank than a foreclosure. For a bank to even consider a short sale at least four conditions must exist:
- There is a negative equity to debt ratio
- The bank is willing to consider a short sale
- The homeowner meets the bank’s criteria for financial hardship
- A qualified buyer makes a reasonable offer
When a bank is willing to consider a short sale, it often attaches a timeline in which all conditions must be met. Many short sales fall through because a qualified buyer never emerges, and/or a reasonable offer is not made. Generally, banks will accept offers that are within 85 percent of the home’s fair market value.
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Credit cards for those with good or excellent credit are everywhere, however, credit cards for fair credit are still hard to find. Unquestionably there has been a credit revival in the U.S. over the last year or so. The number of people thawing out their credit cards is increasing, as evidenced by the uptick in consumer debt this year.
And, the number of new credit cards being offered by the credit issuers has increased nearly three-fold. So it would seem that life is finally getting back to normal and America’s are resuming their love affair with credit.
Except for one thing: The only people who can get credit cards are the Have’s and the Have Not’s; that is, people with excellent credit and people with bad credit. Everyone else in between, including those with fair credit, are finding themselves on the outside of the new credit love fest as credit card issuers focus on the extreme ends of the credit spectrum. Why aren’t the fair-credit folks getting any love from the credit issuers, and what do they need to do to catch their eye again?
Credit Cards for Fair Credit Lost in the Shakeup
At the height of the financial crisis, a major shakeup ensued within the credit industry that saw some big banks getting gobbled up by bigger banks followed by a near total credit retrenchment. As far as credit card issuers, we were then left with the few major issuers of credit for prime borrowers, such as Chase, Citi, and B of A, and a host of subprime issuers, such as Orchard Bank and Capital One.
Many of the banks that targeted the “middle” market of fair to good credit consumers, such as Washington Mutual, ceased to exist, and their new owners had very little appetite for the risk that comes with that market.
The net effect is that people with fair to good credit (FICO scores between 620 and 720) have been almost completely shut out of credit market. Ironically, people with poor or limited credit can more easily obtain a credit card than those with fair to good credit. That’s because subprime issuers never went away. In fact, they actually flourished in the fallout of the financial crisis. So, for the middle-credit market, the only option is to apply for subprime cards, which means higher borrowing costs.
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Have you ever considered using a virtual bank as opposed to a traditional bank? You may be one of the 175 million people who have become comfortable conducting their banking business online. And why worry, because with all of the security and redundant data encryption used in banking websites, you’re as safe banking online as you are braving the traffic driving to your bank. It saves time, money and it keeps many of us more on track financially.
If you really want to save, or make more money, you may want to consider true virtual banks – those that exist only in the internet cloud without a brick and mortar presence. Without the overhead of physical locations, they can sweeten the banking relationship by offering higher savings rates or more competitive loan rates, and they usually don’t nickel and dime you for many of those pesky fees for checks and minimum balance requirements. In fact, many of them will actually reimburse your account when you need to access an ATM machine not of their brand.
At the core of the virtual bank relationship is the access to state-of-the-art online account management technology that enables you to manage all aspects of your account including transfers and bill pay. Some include cash management features that allow you to manage your expenditures around a personal budget. All provide daily, monthly and annual reporting on all account activities with the ability to track expenses by category.
The competition in the virtual bank sphere is increasing, but the two that consistently appear at the top of review lists are PerkStreet and Ally Bank.
PerkStreet - Virtual Bank
The first thing you notice about PerkStreet, as you do with any top virtual bank, is the absence of fees. Not only is it free to open a checking account, there’s no minimum balance requirement. If you are worried about having access to your cash, PerkStreet makes available nearly 40,000 ATMs in the STARsf surcharge-free network. Plus, you can get free cash back at most merchants including Wal-Mart and Target.
What really stands out with PerkStreet is its robust rewards program which pays you cash back on all purchases made with its free debit card. The cash back is deposited right into your checking account on a monthly basis. PerkStreet, which is based in Boston, has been recognized by a number of consumer organizations for its excellence in customer service.
In fact, Perkstreet has expanded its customer outreach by teaming up with Ramon Medeiros and Jessica Limpert, of The Biggest Loser: Season 12, to provide an e-course in personal finance. The course, Building a Healthy Financial Future: Lessons Learned on The Biggest Loser, aims to educate their customers on ways that they can improve their financial health, along with guidance and encouragement from Medeiros and Limpert.
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