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My Story on Getting to $0 Credit Card Debt and Staying There June 30, 2006

On my continued quest to the next income bracket, I am grateful for not having any more credit card balance. Since college I had a credit card balance in the thousands and got pretty good at managing the servicing of my debt by taking advantage of 0% balance transfers, limited time low balance offers, and credit card issued checks. I had up to 7 credit cards and at one time had $4,000 of credit card debt in college and $13,000 debt post-college. The interest rates on those cards were between 15% and 23%. I wasn’t financially saavy and didn’t consider negotiating rates, calling to ask to cancel that occassional late fee, or taking it seriously. It wasn’t easy, but it took some dedication, education, and a commitment to myself that I will change my lifestyle to erase that debt. Now, I only have 2 credit cards and $0 balance on both. It’s been more than a year that I’ve had a $0 balance, so like a successful diet, I’ve removed my debt and kept it off. Once you pay off debt, the race isn’t over. You still have to work hard at keeping it at $0. I’ve used the money I would have used to pay off the credit card and saved up for a home and put in $15,000 per year in my 401k retirement fund. There’s so much freedom in having the choice to direct your earned money to YOU.

For those of you who have credit card debt, you can achieve financial freedom. Read up on all those great PF blogs out there and take the debt and shove it out of your life. There’s so much collective wisdom that everyone has to offer from sites such as PFblogs.org (a great collective personal finance site, by the way), and I wish I had that back in college. Anything is possible if you decide that you don’t want to be a slave to money and work hard at keeping the debt out of your life. Once you get there, imagine your life with that extra money and the relieved feeling you’ll have. This is the best step you can take to improve your life and get to the next income bracket to give you choices.

PS: ING Direct Savings Account just increased their savings rate to 4.35% today. I’ve parked my money there since I don’t need to put all my extra money into Visa or Mastercard. :P

Education Gap May Lead to Income Gap for the US June 28, 2006


A lot has been written up about the American education system failing our kids, while Europe and Asia’s education system is churning out many more Ph.D.s and M.D.s than the US education system. (Google some news stories on the US Education System). But what about the economic consequences of our failing schools? On a personal income level, workers with a high-school diploma earn on average $18,734 a year, according to the Census Bureau, while high school graduates earn $28,000 a year. The average worker with a bachelor’s degree earns three times as much as a high-school dropout.
On a macro level, if there’s a widespread difference between the US students and the rest of the world, the lack of qualified workers will slow our economy. What’s the difference between US and Chinese students? NY Times’ Nicholas Kristof writes in his column from yesterday:

…In math, science and foreign languages, the Chinese students were far ahead.

My daughter was mortified when I showed a group of Shanghai teachers some of the homework she had brought along. Their verdict: first-grade level at a Shanghai school.

…One reason Chinese students learn more math and science than Americans is that they work harder at it. They spend twice as many hours studying, in school and out, as Americans.

Chinese students, for example, must do several hours of homework each day during their summer vacation, which lasts just two months. In contrast, American students have to spend each September relearning what they forgot over the summer.

…only 13 percent of American high school pupils study calculus, and fewer than 18 percent take advanced biology.

Yet if the Chinese government takes math and science seriously, children and parents do so even more. At Cao Guangbiao elementary school in Shanghai, I asked a third-grade girl, Li Shuyan, her daily schedule. She gets up at 6:30 a.m. and spends the rest of the day studying or practicing her two musical instruments.

So if she gets her work done and has time in the evening, does she watch TV or hang out with friends? “No,” she said, “then I review my work and do extra exercises.”

A classmate, Jiang Xiuyuan, said that during summer vacation, his father allows him to watch television each evening — for 10 minutes.

The Chinese students get even more driven in high school, as they prepare for the national college entrance exams. Yang Luyi, a tenth grader at the first-rate Shanghai High School, said that even on weekends he avoided going to movies. “Going to the cinema is time-consuming,” he noted, “so when all the other students are working so diligently, how can you do something so irrelevant?”

…Now, I don’t want such a pressured childhood for my children. But if Chinese go overboard in one direction, we Americans go overboard in the other. U.S. children average 900 hours a year in class and 1,023 hours in front of a television.

You say it can’t happen? Bill Gates and Warren Buffett are worried enough to donate $60billion of their money into the Bill and Melinda Gates Foundation to focus on education and global health. If we don’t do anything to improve graduation rates and education in the US, our kids and grandkids’ incomes will drop.

Source:
Chinese Medicine for American Schools, NY Times (subscription required)
By Nicholas D. Kristof
Published: June 27, 2006

Urban Financial Etiquette June 27, 2006

Want to be a socially responsible financial etiquette friend? The Urban Etiquette Handbook article, in the June 26, 2006 issue of New York Magazine has some great rules for getting along with everyone in New York. There are some personal finance related ones as well (along with my take on them):

Who pays the bill on a date?
The asker pays, unless the woman does the asking—then the man should pay. If the check’s on the table and her suitor hasn’t moved for it, a woman should allow him a one-bathroom-trip grace period. If it’s still there when she comes back, she should split the bill but is entirely free to silently ruminate about what a cheap jerk he is. (For same-sex couples, the asker really does pay.)

I’m somewhat of a traditional person, so I agree with this one. The man should always pay. However, the woman should always offer to pay, as a courtesy. Men, if a woman offers to pay, never accept her offer.

Should the wealthier half of a friendship be expected to give more-expensive gifts?
In an ideal world, no. But in the real world, yeah, pretty much. A rule of thumb: Give according to your means, not the recipient’s. If you’re the richer friend, your impoverished friends will appreciate your generosity infinitely more than a cheap trinket you purchased so as not to embarrass them. If you’re the poorer friend—and you’re worried about being outclassed—get together with other friends of lesser means to pool resources on an item of greater value. Better still, spend extra effort on a thoughtful but nevertheless affordable gift that shows you’ve actually paid attention to your friends’ most obscure tastes and interests.

I’m not sure if I agree with this one. The less wealthy friend shouldn’t expect anything from the wealthy friend. If you’re close friends, both sides will offer friendship, not tangible items, right?

How do you pick restaurants and other social activities in circles that involve widely varying incomes?
Inviting the whole gang over for dinner solves some problems—the poor people won’t have to choose between missing a credit card payment or being treated, and the richer folk get a nice meal if you’re a generally decent cook. Of course, it creates an altogether new problem: In your sensitivity to everyone’s income issues, you alone wind up underwriting the entire evening. That’s fine some of the time, but for another alternative, choose an under-the-radar, inexpensive restaurant where everyone will feel cutting-edge— self-congratulatory hipsterdom knows no class boundaries.

I’ve been guilty of paying for my friends once in a while for no apparant reason, but it’s been a while since I’ve done that. I payed for thanking my friends for helping me move recently, that’s another story. There are plenty of affordable but hip restaurants, even in Manhattan.

What’s the best way to split the check in a group?
At a group meal, an equal split should be the baseline expectation: It falls to those who ordered more-expensive dishes to offer to pay more, not to others to pay less. Failure to partake in the appetizers or the wine can be cited as a reason to cut one’s contribution only if there was some socially sanctioned reason for declining (veganism, Islam, pregnancy). If you just got the soup and you don’t think that’s fair, well, think about whether it’s “fair” to make your friends eat dinner with a buzz-killing cheapskate.

This one’s a pet peeve of mine. I’ve witnessed too many times when a friend of a friend joins in a dinner and leaves less than they owe. On top of that, they duck out early hoping that no one will notice! If you’re among friends, it’s ok to do that as long as you acknowledege that you’re short $10 or something. My philosophy is that it eventually evens out among friends.

So do you have any other financial etiquette rules? Do you agree with the NY Mag’s etiquette rules?

Source:
The Urban Etiquette Handbook, from New York Magazine

Based on Average Price and Percent of Income Spent on Housing, Manhattanites Make $268,000 June 26, 2006

According to The Real Deal, New Yorkers are spending more than 30% of their income on housing, and in many cases, more than 50%. That doesn’t even include other debt as I mentioned in a previous article.

By 2006, New Yorkers were spending more than 30 percent of their gross incomes on rent, surpassing what’s commonly cited as the maximum threshold households should spend on renting. The median share of income spent on rent by renters in the city rose from 28.6 percent in 2002 to 31.2 percent in 2005, according to a new report from New York University. Decreasing real income and increasing real rents were the main culprits for inching over the 30 percent threshold.
…
For unsubsidized, low-income renters in the city, the situation was even worse over the three-year period from 2002 through 2005. The median share of income spent on rent increased to more than 50 percent last year, up from the already dire 43.9 percent in 2002.

By borough, median rent in 2005, according to the NYU report,

If the average rental for a studio in Manhattan is over $2000, it’s very difficult to keep up with expenses and save up if you have to spend 30% of income on rent.

Put another way, if the average price of a Manhattan apartment is $1,260,000, the mortgage of $1,008,000 is about $6,700 per month (assuming 20% down and 7% interest rate). That would mean that if that mortgage is 30% of income, one would be making $22,333 per month (or $268,000 per year) for the debt-to-income ratio to be at 30%.

Of course these numbers are in theory. A lot iof people may put a bigger down payment or have lower interest rates. Either way, I don’t know about you, but I don’t know many friends who make that much at this point. I have several friends who are forced to change their spending habits or have to get a roommate, just like me, but how many more people can afford Manhattan anymore?

Source:
City rents claiming greater income slices; New Yorkers now spend more than 30 percent of incomes on rent, The Real Deal

Tax Around the World: Finland June 23, 2006

Today’s series on Tax Around the World features Finland. Taxation of an individual’s income in Finland is progressive. The tax rate for an individual in 2005 was between 10.5%-33.5%. In addition to direct taxation there is also municipal tax in Finland. This tax is payable by an individual on his or her income and it fluctuates between 15% - 20% depending on the municipal authority.

The following table shows Finland’s individual income tax rates for 2006:

2006 Finland Tax Brackets

Tax Base - Euro Tax Rate
0 - 12,200 (US$ 15,350) 0%
12,200 - 17,000 (US$ 21,389) 9.0%
17,000 - 20,000 (US$ 25,164) 14.0%
20,000 - 32,800 (US$ 41,269) 19.5%
32,800 - 58,200 (US$ 73,227) 25.0%
58,200 and over 32.5%

(n.b.: as of 6/22/06, 1 USD = 0.794786 Euro)

Some facts about Finland:

Source:
~ www.nordisketax.net
~ Thanks to x-rates.com for the currency calculator.

Splurging on Sushi, Bad for Budget I know June 22, 2006

After seeing a couple of interesting articles this week, on the “sushification” of America and Tokyo’s Tsukiji market, I had a craving to go to my favorite sushi bar in NYC. I don’t go often, but when I do, I tend to splurge on sushi. I’ve been fortunate to have great sushi from a young age, so I can’t bring myself to go to less expensive sushi restaurants. Sushi tends to be either really fresh (i.e. expensive) or just ok (i.e. cheap and not as good quality). For me, splurging on sushi is worth the cost. I’ve had mediocre sushi and got food poisoning or came away disappointed. I know it’s bad for the budget but for the rest of the week I’ll be making up for it by cooking.

It seems as though there’s a sushi boom out there. Did you know that there are thousands of sushi restaurants in Russia? In the USA, there’s now a sushi counter in Wal-Mart! Compared to the $500 chef’s selection dinner at Masa in Manhattan, my once-every-two-month sushi splurge won’t break my bank account at $35/person.

Are there food splurges you must have?

Sources:
~ The sushification of America, The Atlanta Journal-Constitution
~ Shrine to the sea, Chicago Tribune
~ Japanese Restaurants in Moscow

Want More Income? Work For the Dept of Homeland Security Then Do This… June 18, 2006

Forget about doubling your income; That’s nothing compared to making 6 times your current income or gaining 47,000% on an investment. After I wrote about how my former bosses doubled their income, I saw this article in the NY Times this morning about how former Department of Homeland Security officials are finding that moving from public office to the private sector pays much better. It sounds like all of these federal workers not only doubled their income but made 6 times or more and purchased stock options for $25,000 that are valued at millions of dollars.

At least 90 officials at the Department of Homeland Security or the White House Office of Homeland Security — including the department’s former secretary, Tom Ridge; the former deputy secretary, Adm. James M. Loy; and the former under secretary, Asa Hutchinson — are executives, consultants or lobbyists for companies that collectively do billions of dollars’ worth of domestic security business.

More than two-thirds of the department’s most senior executives in its first years have moved through the revolving door. That pattern raises questions for some former officials.

As I mentioned in my previous post about doing contract work on the side, as long as these officials aren’t breaking any laws or violating any national security policies, I think everyone has a right to make a living. But the article goes on to mention that many of these government officials are avoiding certain federal laws via loopholes. “Federal law prohibits senior executive branch officials from lobbying former government colleagues or subordinates for at least a year after leaving public service. But by exploiting loopholes in the law — including one provision drawn up by department executives to facilitate their entry into the business world — it is often easy for former officials to do just that.”

“In their new roles, former department officials often command salaries that dwarf their government paychecks. Carol A. DiBattiste, who made $155,000 in 2004 as deputy administrator at the Transportation Security Administration, earned more than $934,000 last year from ChoicePoint, a Homeland Security Department contractor she joined in April 2005, the same month she left the agency.” It’s hard not to switch from a government salary of $155,000 as compared to $934,000, but if I were working there, having the impact of protecting the country is an intangible benefit and would make it harder to leave the post. If anyone can get me a job in the Department of Homeland Security I’d be happy to offer my technology expertise anytime!

Source:
Former Antiterror Officials Find Industry Pays Better,
By ERIC LIPTON, NY Times
Published: June 18, 2006

Three of My Past Bosses have Doubled Their Income By Doing This June 16, 2006

This may not be for everyone, but if you work in an industry where you become a subject matter expert at something, you can double your income by consulting for other companies. I work in technology for a specific industry, so over time you pick up specialties and knowledge where other companies may benefit from your experience.

Three of my past bosses have consulted for other businesses. They didn’t tell me, but I found out from others and they worked on other contracts on their spare time. Be sure there’s no breaching of contracts or disclosure of confidential company information. I’m all for side consulting jobs if you can get them so long as it doesn’t affect your full-time job. My guess is that they doubled their income by working on the side for about 12 hours a week. Let’s assume that they made $100,000 per year in their day job ($8333 per month). I heard that they worked on the side for big corporations for $175/hour (yes, this is management consulting billed hours. Must be nice.) If they worked on average 12 hours a week, that’s $2100/week (or $8400/month), more than double their full time day job. Nice change if you can get it.

But this doesn’t only apply to high paying corporate jobs. I just happen to speak with three people this week who got extra income on the side:

Some consulting and side jobs can turn into bigger opportunities later on. In the cases of my former bosses, their side careers did better than the current job and decided to go on their own. Do you have a side job?

Gut-check: Economy vs Personal Finance in America June 13, 2006

Here’s a non-technical analysis on what’s going on now. According to this CNN/Money article, net household wealth hits record high, but debt rose at the fastest rate since 1986, the Federal Reserve said on Thursday. At the same time, America has a negative savings rate. So let’s summarize the household financial status this year,

Here’s the economic environment we’re in today:

From what I’ve seen out there, there are a lot of nervous economists out there…not to mention us people who are doing our best to support our families. Do the figures above say anything about Americans?

Source:
News Release: Personal Income and Outlays, Department of Commerce, Bureau of Economic Analysis (BEA), May 2006
Consumer Price Index Summary, April 2006

Debt to Income Ratio - My Example June 8, 2006

Because of our recent move, I haven’t been able to post as much in the past few weeks. But I finanlly had some time to look at my housing costs and provide you a real world example of my debt to income ratio.

You know that debt to income ratio is a comparison of gross income to housing and non-housing expenses. According to the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income. (aka “29/41 qualifying ratio”)

Calculating the Debt to Income Ratio

To calculate your debt to income ratio first calculate your income before taxes. Next calculate your fixed debt payments like credit cards, auto loans, and school loans. Don’t include living expenses such as grocery, utility bills, or phone bills.

Example:
Gross monthly household income: $5,000
Fixed monthly expenses: $1,200

Debt-to-income ratio calculation:
$1,200 / $5,000 = 24.0%

Generally a ratio of 36% is considered high and creditors prefer people with lower ratios somewhere around 20%.

Here’s my ratio:

Old: 15%
New: 30%

We doubled our ratio, but because we no longer have any other debt, this ratio used to be approximately 25%. We felt that because of our age and financial ability, we made the move. At 30%, it’s on the higher end of the ratio, but our financial advisor thinks it’s ok. We don’t have any car payments, no gas to purchase, no school loans. Also, in NYC, it’s tough not to own property and be in the lower end of the debt to income ratio. For older people, it’s important to lower their debt to income ratio so that they can live a debt free life in their old age. Younger couples tend to have a higher ratio and probably should decrease this by 1% each year (more on this for a future post).

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