Money

January 2005

If your income doesn't match your spending, try our financial fitness tips for the new year.

By Mary Rowland

Did you make a New Year's resolution to get your personal finances in order?

If so, you're not alone. Over the two decades that John Norcross, a professor of psychology at the University of Scranton, has been studying resolutions, improving personal finances has always been among the top five, along with losing weight and giving up nicotine or alcohol.

When you think about it, dieting and budgeting have a good deal in common. Each requires modifying your behavior—and your attitude. You gotta learn to feel satisfied on less, rather than abstaining altogether.

Experts say that many people who overspend do so because they believe clothes, makeup, cars, or sports equipment can enhance their image. Or maybe they find themselves pouring money into a hopeless relationship. If you have any self-esteem problems, best to address those first. But many Americans get into debt simply from inexperience, because they spend more than they earn, and because, with credit so available, it's so easy.

Some tips to steer you toward financial health:

Add it up. Most financial planners advise tracking just where your money goes. Write down everything you spend—from that cup of latte to your car payment—for two weeks or a month. Then extrapolate from your spending diary to estimate what you spend in a year. Make sure to add in occasional big expenditures, such as semiannual insurance premiums or holiday spending. You may well find that you're spending more money on some items—such as eating out or on DVDs—than you thought. This information is the starting point for cutting your spending and bringing it back into balance with your income.

Fund your goals. OK, you say, but I'm not a "ledger type" who's going to chronicle every expense. Then put your energy into funding your priorities, with the help of online banking. Decide first on your goals: paying off debt, saving for retirement, or creating a college fund. Set up an online account with automatic bill paying, and set aside money from your account for each goal, instructing the bank to make automatic payments. That way you'll be sure to fund your important goals, rather than just your day-to-day expenses.

Challenge yourself. Try deducting a bit more than you think you can afford for savings. If your savings and checking account are at the same bank and require merely a quick transfer from one to the other, you can make it a game to see how long you can last without the big chunk taken out for savings. Alternatively, some planners advise clients to open a savings account at a small bank without an ATM and to make squirreling money away a contest where you the spender compete with you the saver.

Starve the card. Try going a week without using a credit card. Pay cash for everything. Before credit was an option, people who hoped to feel better about themselves by shopping or buying something new could not do so unless they had the cash. Many people who try the "cash cure" find they can't lay out $100 in cash for a dinner or a piece of audio equipment or a couple of polo shirts.

Leave room for rewards. As with any type of behavior modification, the idea is to feel satisfied under your new regime. Set aside one indulgence that you really enjoy—a dinner out or a night renting a family movie. Whatever you choose, plan it ahead of time and make a production of it. Savor the anticipation. And if you slip up a little and splurge on something, don't feel guilty. Just try again.

A Mortgage That Pays You Instead

One solution is to use the home as a source of income by taking out a reverse mortgage. A reverse mortgage allows a homeowner who is 62 years old or older to convert home equity into a lump sum of money, a line of credit, or fixed monthly payments for life. The amount of money you get depends on your age and the value of your home. The older you are and the greater your home's value, the larger the reverse mortgage.

Repayment is not due until the owner dies or sells the house. Heirs must repay the loan, but they need not sell the house.

If you own a home and are 62 or older (or if you have a parent who is), a reverse mortgage could help to generate a little more breathing space in your monthly budget.

For information on rules guiding reverse mortgages, check out the Web site of the U.S. Department of Housing and Urban Development (www.hud.gov). Reverse mortgages also are available from

Fannie Mae, a federal agency that buys mortgages. Look in the "Find a Mortgage" section of www.fanniemae.com.

That  SHRINKING Gift Card

If you received a gift card—a plastic card that looks like a credit card but works like a debit card—for the holidays, it could be shrinking as the weeks turn into months.

The reason? Purveyors of gift cards sometimes fold in a variety of fees that can eat away at the cash balance your friend forked over at the cash register. For example:

Although most cards offer an expiration date a year from the date of issue, some charge monthly fees after a certain period, such as three or six months. If you haven't used your card by then, these fees will nibble away at your balance.

If your card holds a balance when it expires, you'll pay a hefty fee to get it in cash.

If you use the card to get cash from an ATM, the issuer imposes cash limits as well as a transaction fee. Add the fee charged by the ATM owner and you could pay $3 for taking out $10 in cash.

Moreover, you should be aware that gift cards may sometimes be denied even if you have the funds available on the card. For example, when a restaurant checks your card to see if it holds enough money for the purchase, the restaurant "upcharges" or adds 15 to 20 percent to your food bill to make sure you'll have enough for a tip. Although this money is not charged to your card, it could mean your card is denied.

Similarly, your card may be turned down at the gas pump if your balance won't pay for the average purchase price of gas. And if you plan to use the balance on your gift card toward a larger purchase, be certain to tell the cashier before the transaction that you will be paying the balance in cash or credit. If you don't, the card will be denied.

So sit down now, plan an outing for coffee, dessert, or a new novel. Enjoy it.

Cashing In

Time was when "cash" referred to cold, hard currency—coins jingling in your pocket that you could spend in the next 10 minutes for a cup of coffee. Today, when an investor says, "I'm in cash," he doesn't mean he has 3,000 quarters in his pocket.

What does "cash" mean? Test yourself.

1. Which of the following is considered cash?
   1. 100 shares of stock in IBM
   2. coins and bills in a piggy bank
   3. money in a checking account
   4. a balance in a money market fund
   5. bank certificates of deposit.
2. What are the advantages of cash?
   1. liquidity
   2. safety
   3. guaranteed return
   4. it is not heavy
3. Does cash offer a good return?
   1. sometimes
   2. never
   3. always
4. Is this a good time to place more of your money in "cash?"
   1. yes
   2. no

Answers

1. The correct answers are b, c, and d. Cash is either currency or money that you can write a check on today. A bank certificate of deposit is a "time deposit." If you put your money in a CD today, you cannot spend it tomorrow.
2. The best answer is a. To qualify as cash, the money must be liquid. Is money under the mattress safe? Does money in a cookie jar provide a guaranteed return? Coins weigh a lot.
3. a. The appeal of investing in cash changes as short-term interest rates change. Those rates are set by the Federal Reserve Board, which raised them from 1 percent to 1.75 percent between summer and early fall of last year. In the early 1980s, cash paid a double-digit return.
4. a. Cash looks better this winter than it has for a long time. Money markets cracked the 1 percent barrier last fall with signs that they'll keep heading up.