What happens when you trade up?  Is there a right and a wrong way to trade up a home or car?  I mentioned earlier this week that we’re “bumped up in class.”

But are we stuck on what we think we deserve or want?  That we can’t imagine living in a one bedroom condo and so we say we can’t afford a “home” but refuse to consider alternatives?  Why as a society do we pretend we can’t afford a home or car.

Truth is we can afford a home and car, but it may not be to our satisfation.  That we might have to live in a smaller home, okay neighborhood before we can “trade up” to what we really want. Same with cars.

In fact Dave Ramsey says you drive for 2 years a beater, then trade up, and keep flipping upwards until you get to the car you want.  Apparently he feels that you can move upwards slowly.  Same with homes, he preaches buying what you can afford and moving as you are able to.  Many financial gurus feel this way.

So does it mean that a person should hold off on buying the car, home, or big purchase they really want?  And whine about not being able to “afford” it?  Or are they able to afford something smaller and still save for their end desire? 

It sort of applies to retirement savings. Not everyone can save the maximum in every account.  But perhaps some people start out with 1%, then 2%, etc until they reach their final goal of savings.  And perhaps others plan on saving 50% of their income from the start.

So which is better, living at the lowest level you can stand and then making the jump to your final home, car, etc?  Or slowly trading up and still striving for something better?  I think either way is fine, as long as you realize that both ways can work. 

What way did you use to increase your lifestyle, savings, etc?

Is it wise to retire in a down market?  Does it hurt your portfolio and make the risk too large to overcome if you are going to survive for 30 or 40 years?  T.Rowe Price writes up a nice article about what to do if you are thinking about retiring in a down market.

The article says the first 5 years of retirement is the most crucial to maintaining your portfolio.  And in a down market the only option might be scaling back the amount you need to retire.  This is because you are potentially taking out 4% a year while the market could be sinking 20%.  And thus you are digging yourself into a deep hole.

One suggestion is keeping the amount you withdraw the same, instead of increasing your withdrawal by 3% to keep up with inflation. This gives you a 89% of success of not runnning out of money.  A second more conservative option, is to cut withdrawals by 25% for the first few years and this gives you a chance of not running out of money at 99%.  Final suggestion was to switch to an all-bond portfolio so you don’t lose money, but pretty much guarantees you won’t have enough because the returns on bonds won’t be high enough to sustain your portfolio.

The predictions in this article were done using a Monte Carlo simulation. This uses predictive algorithms to determine the possibilities of running out of money, etc as a percetange rather than a yes/no answer.

I’m surprised that the article didn’t mention two major possibilities.  One work a few more years and instead of drawing on your retirement portfolio, keep saving into it.  This will mean less years drawn on and more years saved.

Second, get a part-time job.  This will supplement the income you need in retirement and thus your need to draw on your portfolio might be halved or less.  I know many people do this out of necessity, and if the markets continue on their roller coaster ride it could be necessary for everyone.  And perhaps not everyone is ready to fully “retire” at once and instead need a gradual slowdown.

What are your strategies for retiring in a down market?  Personally I think I would continue working or get a part-time job.

This past year inflation has been eating at everyone’s salaries.  For people on a fixed income, retirees, this hit probably has been tougher than most.  On 7/1/2008 my mom was told that the union was refused when they asked for a cost of living raise.  Instead they will continue on the set raise of 2%/annually.

What does that mean?  Well every year she gets 2% of her base pension.  Say it’s $3500/month or $42k/year, she gets $70/month or about $1k/year.  Sounds good right?  Not really.  Problem?  First her raise is not compounded. Every year she’ll get $1k more than last year, but that will likely not keep up with inflation. 

In 10 years she’ll be making $52k/year but what will it be really worth?  Since this pension is the bulk of her retirement plan, she should be concerned.  Currently in 10 years her plan is to collect social security and have that supplement the lack of purchasing power of her pension. 

But I wonder if this is a new move by pensions to save money?  That they pay you the same amount 20-30 years after you retire, and thus decrease the amount of money they need to pay in the future?

What is the solution to preventing inflation from eating into your retirement?  Right now I’m not sure. I have no answer other than save a portion of the pension and invest it for the future to make up for inflation.  Do you think this is another way pensions are getting downsized?

If you are here or reading this, you are likely concerned with your finances.  Well I wanted to watch McCain speech last night and hear his policy ideas.  John McCain did not mention his policies except for one (doubling child tax exemption) and I’ll bring it up later. 

Let’s start with this mornings unemployment data.  The unemployment rate for August 2008 has hit 6.1%.  The highest rate in 5 years.  That means 84,000 jobs were lost in August 2008 alone, and 605,000 jobs have been lost in the United States in 2008 alone THUS FAR!  Last year the unemployment was 4.7% and there were 7.1 million people unemployed last year, but 9.4 million unemployed this year.

Yesterday the Dow lost 344 points yesteday, the 4th largest one day drop this year.  Expect a stock market drop today after the disappointing job numbers reported.  Economists were expecting only a 5.7% unemployment rate similar to previous months.  Also workers wages have grown at 3.6% this year, substantially below inflation.

So are we better off now 9/2008 versus 9/2000?  Are we better off than we were 8 years ago?  How about 4 years ago?  Has this current administration and government made our lives better?  Personally I think we’re in a much worse position than even 1 year ago.  But let’s look at the candidates positions on things affecting our finances.

Taxes

McCain - Will keep all Bush tax cuts in place.  He will also double the child tax credit from $3500 to $7k per child.  He will continue to give tax cuts to Big Business, especially oil companies.  He will tax employer provided health insurance, so your taxable income will increase, but he’ll try to offset it with a tax credit.

Obama - Will raise taxes on families making more than $250k/year.  Will cut taxes for everyone below $250k/year.  Will tax Big Business more, not small businesses.

Decision - Obama.  I think most of us are struggling to be financially secure, and McCains tax cuts are for the rich.  Also they mimic Bush’s current economic plan.  And how’s that working for you?  As you can see with job loss, stagnant wages, I don’t believe this current economic plan is working.  Also would you like to complicated your taxes with adding back your health insurance premiums as income and then taking off a portion as a tax credit?

Healthcare

McCain - Tax health insurance benefits from Employers while providing a $2500 or $5000 tax credit to offset this new tax.  This is to incentivize people to buy their own insurance because it will be cheaper than using employer provided plans.  But how does $5k compare to medical plans for families costing $10-15k/year?  He thinks that people will use the credit to buy insurance.

Obama - Will move towards a nationalized system. He will tax employers who do no provide insurance and will implement mandatory coverage for children.  He is looking to insuring everyone by forcing it.

Decision - Toss up.  Not sure which is better for our pockets because it depends on if you are young, healthy, and single.  Or if you are older, have preexisiting conditions, and children.  If you are young, like me McCain’s plan will really help us because we’ll take the higher salary, refuse employer insurance, buy cheap insurance and get the tax break. But anyone unhealthy, older, and with multiple dependents probably can’t take the risk of an individual plan.  So it’s really a toss up which plan is better. 

Economy

McCain - Has said that the economy doing well.  He has agreed with President Bush that the fundamentals are strong.  He also believes that he can change the economy though his policies are the same as Bush.  Tax breaks for Big Business, open trading, and more tax cuts to stimulate the economy. 

Obama - Has said we’re in trouble.  He has disagreed with tax cuts for business, and is proposing taxing businesses which are outsourcing jobs overseas.  He suggests new jobs from researching alternative energy sources.

Decision - Obama.  Unfortunately the beginning I wrote about the job loss and stagnant wages.  Well are we better off than we were 4 years ago?  No. But maybe people can weigh in and tell me that they are better off.  Because of the economy, why would we support more of the same economic policies?

Energy

McCain - Drill baby Drill.  Funny, that it’s his policy.  3 months ago he was against offshore drilling in the ANWR, however since picking Palin he’s pretty much changed his position.  In his speech last night he says they will look at other energy sources, but gave no substance as to what he would do.  Also he’s voting against renewable energy sources getting Federal funding so why is he saying he’ll look into it?

Obama - Look for alternative energy sources. Is it entirely realistic?  I don’t know.  But he did suggest creating jobs by trying to develop alternative energy sources.  He also said we all must contribute by starting to conserve and decrease our energy consumption as individuals.  He was against drilling but switched his position that we can do it in a limited basis.

Decision - Obama.  Mostly because the reality is that we can’t drill our way out of the problem and we have to look long term for a solution.  The original moratorium on drilling was started by President George HW Bush in 1990.  Why are Republicans suddenly changing their minds?  T.Boone Pickens, a Republican oil baron, says we can’t solve our problems drilling. It will help but it won’t solve the energy problem. Republican Senator Lindsey Graham has said “drilling is the easy way out and the worse thing we can do, we are not addressing fossil fuels problem“. 

I guess these are the major issues economically.  How will we handle taxes, healthcare, economy, and energy prices?  For the most part I think Obama is going to bring change while McCain will continue with our current policies in place.  So are we better off than we were 1 year ago?  4 years ago? 

If you vote on social issues then these economic policies won’t matter and they probably shouldn’t.  The candidates greatly differ on social issues.  But that’s another forum.

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The winner of the book “It’s all too much” is Helen. Please contact me at livingalmost at gmail dot com!  Thanks to everyone for entering.

This week I got back into the swing of things and back into Carnivals.

• Festival of Frugality Labor Day Edition
• 168th Carnival of Personal Finance
• 104th Festival of Stocks
• 10th Investing Carnival
• 75th Carnival of Money Stories
• 14th Carnival of Financial Learning
• Money Hacks Carnival - Print Edition
• Carnival of Financial Goals - Sarah Palin Edition
• 7th Carnival of Net Worth
• 09-04-08 Edition of Kids and Money
• 13th Finance Fiesta

Roundup of PF bloggers and others

• GetRichorDieTrying talks about “The Documentary: The Breakdown“, breakthrough here on debt…
• Kristy tells us about “Buying Retirement with a Credit Card“, we’re at new lows.
• Ginger talks about “Putting on the lace gloves and getting the car you want at the price you can afford.”
• Prime Time Money debates the topic “New or Used Cars“.  It was more of a dialog between two people but funny!
• Bible Money Matters asks the question “who is to blame for your money problems?”  He says you are, funny though most people who use Dave Ramsey blame the credit cards as “snakes”, so how is that taking responsibility?
• Financial Ramblings asks the question “What is Frugality?”  I don’t think I’m very frugal, but maybe compared to the norm?
• Pennyjobs asks “Where does the victim mentality come from?”
• Nickel asks the question “What’s your oldest Credit Card?”, I’m right at the 15 year mark, wowsa about half my life.
• Nickel also writes about “Updating our Allowance System” @ Raising4Boys.  I love that site maybe a bit more than his finance site.  But he needs more posts!  I’m hooked on the stories.
• NCN says “You CAN” get out of debt.  Yep everyone can, but you have to want it!

That about wraps up the week.  Have a great weekend and check out my new blog LAL Musings!

People wrote in to Money Magazine complaining about the “raw deal” that is overdraft fees.   People were complaining that they were hit with multiple fees because checks they had expected to clear had bounced.  The problem?  They didn’t have money in their checking accounts to cover some of the checks in the first place, which they were expecting, just not all.

What happens is that banks processed the largest charges first and thus, when there wasn’t enough in the account, then all smaller checks also were charged an overdraft fee.  For example one reader had $30 in his checking account and had two debit charges for $5 and $5 and a check for $435.  Then he got hit with 3- $35 overdraft fees.  While I understand his frustration, I don’t feel bad for the guy.  He knew he didn’t have enough money to pay his bills yet he was still using a debit card and writing checks?

It’s been argued that you can’t overspend with cash unlike CC. My rebuttal has been even with cash you can’t necessarily afford it.  And no it seems that even with cash you can overspend by using overdraft on your checking account.  That many people on the article were overdrafting hundreds of dollars because they had no idea how to balance a checking account.  These people are hurt that if they overspend cash by one penny they are charged a fee.

I have to wonder, if these same people aren’t the ones running up credit cards?  I mean they cannot balance a checkbook and have no conception that once you spend money it’s gone.  On the talkback blog one response is What you forget though, Bill, is that you probably aren’t aware of what you have outstanding. Maybe you are but for most people that is difficult to figure out - what checks have hit and which ones haven’t, etc. To have the grasp on it that you propose would mean people would be spending hours every day reconciling.

OMG.  When I was around 10 my mom sat me down, gave me a checkbook, and had me start paying bills.  Every check I wrote I immediately wrote it on the check register as money spent.  As we used to pay for groceries with checks, at the grocery store while in line I would write the check and on the register the amount paid and reconcile it in the car.

Most of the people with overdraft fees have no idea what is outstanding on their accounts literally.  They are using their debit cards or writing checks and many know they don’t have the money but they do it anyway.  And then they complain about the fees.

I can’t understand why people say you can’t overspend with cash because it’s now obvious that people can and do.  And I understand why people believe they spend more with credit cards.  Because these same people who are spending more than they make with cash probably do the same with credit cards. 

So is it really credit cards that cause people to overspend?  Or is it really the person and the behavior they exhibit?  But wow I didn’t realize how hard it is to balance a checkbook and cash, or that people regularly overdraft checks because that’s how they live.

Hi all, I’m hosting the 29th Carnival of Money Hackers on 9-10-08. Please submit posts related to money at the Blog Carnival.

I look forward to your submissions!

I hope everyone’s watching tonight’s RNC address by John McCain.  It will be hopefully good.  I am hoping to hear exactly what McCain would like to do for this country and what direction he hopes to take us in.

Points of interest for those us of concerned about personal finance.

Healthcare - McCain is proposing a $5k tax credit for all families in the US to help subsidized the cost of health insurance.  Sounds good, but he’s also proposing taxing the employer provided health insurance.  This will incentivize those healthy and young to buy our own plans, while leaving those older and uninsurable with the employer plans.  I think he needs to be clear about where we are going with healthcare.  I’m worried and I’m sure I’m not the only one.

Economy - McCain has talked about keeping the tax cuts in place.  Also he’s talked about relief for American Families.  This will occur with a gas tax holiday and no bail outs for subprime mortgages.  He isn’t really detailed on his plans and I hope he’ll address the falling dollar, price of oil, and commodities.  Will he tax companies for shipping jobs overseas?  What will he do to get us out of a funk?  And I have to say as someone without kids I don’t really like his doubling the child tax credit, versus a family credit of $1k to everyone under Obama. But it’s time to listen and see what he says.

Energy - Last night Sarah Palin said their plan was to drill for more oil in Alaska to stop dependence on foreign oil.  What are the long term repercussions of this plan and how much will it save Americans?  How long can we use drilling as an answer to the rising price of oil? What are the more long term plans?  We can drill as a stopgap measure but it will still take awhile still much like looking for alternative energy sources.

Foreign Policy - With the war in Iraq costing us $10 billion/month I know we all want to know what the future direction is here?  How will he extract us financially and physically from it?

Exciting and interesting questions to hear about tonight.  This will greatly impact our financial choices over the next 4 years.

A simple thought, should I spend the money and frame this embroidery picture my grandmother made for me?  It will likely be at least $40.  But it’s a cool picture and one she made and probably the last she’ll ever make because of her arthritis.

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Is money a “dealbreaker” in relationship?  If you meet a great person and found out after a few months of dating, they had massive student loans, some credit card debt, and a car loan; is that a deal breaker?  Would you run for the hills or stick around?

It was an interesting question posed on a message board I read.  But currently two of my friends are dating men with debt.  Yep and lots of baggage from exs and kids and debt!  So should these be deal breakers?

I don’t think that money/debt itself should be a deal breaker.  A lot of people, actually I would say most people, make financial mistakes in their lifetime.  So it’s not necessary that you have to be “perfect” with regards to finances and have never accrued debt. 

Personally I wouldn’t end a relationship over debt.  However what’s more important is how these people view debt.  Whether they are paying off the debt or are willing to pay off debt once they learn how important it is to you.  The real determint in a relationship is ”do we as a couple can have compatible future goals?”

I would be very supportive of someone who is dealing with their debt or willing to deal with it.  Kicking someone to the curb just because they made mistakes in the past, I feel isn’t the way to handle a potentially otherwise great relationship. 

But for many oppposing views such as “you’ll always have debt, why save for the future,” those fundamentals would be deal breakers.  Also hiding debt and misleading a person about their financial situation would be deal breakers.  This is usually a sign of mistrust. 

Nowdays it seems to difficult to find a compatible match, that I have to wonder if using money as a “dealbreaker” doesn’t unnecessarily weed out potentially great matches?