The first day I stepped into the corporate world full time I was overwhelmed and anxious at the notion of doing this every day until I retire. My whole life I had watched my parents work hard so that my sister and I could have a great life and strong education. My dad always told me that you can’t get rich working for someone else, but he rarely vented about the stresses of the corporate world. I always knew that he hated work, but it wasn’t until I entered the workforce myself that I could truly understand the frustration he felt. I felt like a prisoner who spends their entire day planning an escape. I have worked hard over the past 5 years to invest, save, and advance my career but I often feel like nothing has changed.

Life Lessons

I realize more than ever that focusing on “career development” and moving up the corporate latter only leads to a lower quality of life. Many articles and studies suggest that Generation Y feels a sense of entitlement in the workforce. I disagree. We are frustrated for being encouraged to incur astronomical debts for college, only to be underpaid and overworked. Now many of us have found that employers often expect more skills and experience for less money. Most college graduates will be lucky to make enough in their first job to cover the cost of one year at a private university. Many of my friends and family have realized that it is often better to downsize your life in an attempt to improve it. I know several people who despite their investment in a college education are now working jobs that do not require a degree. For many of us, we are starting to realize that our life cannot be bought.

Time is Money

Occupational status is negatively correlated with net worth. Being rich is not about how much comes in, but rather how much is left over. The most common explanation for this negative correlation is that high status occupations encourage high status lifestyles. However, I believe there is more to the story than just living large. I am quickly realizing that as my wife and I have worked our way up the corporate ladder we have been forced to outsource portions of our life that we used to manage with ease. We now rely on a dog walker to walk our dog, because we no longer have time to do so. The mornings are so hectic that I often skip breakfast or spend money on something unhealthy.

My wife is an awesome cook and does a great job preparing meals quickly and efficiently, but by the end of a 55 hour work week we have no energy left to cook and resort to takeout. We are not living a lavished life, yet our improving occupational status has not positively affected our net worth. Outsourcing life only gets worse if nothing is done about it. Add kids to the mix and you will quickly be paying for daycare, takeout, landscapers, dog walkers, and much more. Ultimately you end up outsourcing your life spend less and less quality time with your friends and family.

This is a vicious cycle that many American’s have fallen into. In an attempt to provide for their family, they are often losing out on life. Time is money, and when you have no time you are forced to pay other your money! Additionally, the levels of stress and anxiety felt by many employees results in higher medical bills. It no longer seems ironic that teachers and farmers are more likely to be millionaires than high paid doctor and layers. In addition to being frugal, they have also learned the value of free time and flexibility. I am more focused than ever to open up additional streams of income to help regain my time. My goal is to start investing in real estate in the next year and also continue to improve The Broken Penny. Don’t forget about life while attempting to build a career, often going back to the old ways of life will keep more money in your pocket.

Are you frustrated by the corporate world? How do you plan to regain your time and freedom? Have companies taken advantage of the state of our economy, by forcing employees to work harder for less money?

The automobile represents freedom and independence, and is often used to gauge one’s success. Despite our best efforts most Americans cannot avoid drawing conclusions about an individual’s status based on the make and model of car that they drive.  A Wall Street Journal study “35% of the 2,000 adults in the study indicated that to qualify as rich a person must own a motor vehicle that costs $75,000 or more”.

This should come as no surprise considering that car companies spend billions of dollars on advertising each year to convince us that BMW equals wealth.  We have been brainwashed into thinking that a family of four cannot survive without a monster SUV, that adds 43% more pollution to the environment than a car. I love cars, but they are by far the biggest hindrance to you becoming wealthy.  I cannot think of any other purchase that people would accept a -20% return on investment immediately after driving off the lot. Yet, the illusion of freedom, independence, and wealth continues to persuade us to buy bigger and faster cars.

Ironically, statistics from Thomas Stanley’s Millionaire Next Door tell a different story about our perception of cars and wealth. In America, 86% of all prestige/luxury makes of motor vehicles are driven by non-millionaires.  To become a millionaire you must be savvy and cannot get caught up in all of the stereotypes surrounding cars. We should ask ourselves if a car is affordable based on the sticker price and not on the monthly payments. Can you afford to purchase this car outright today? If the answer is no, then I believe you cannot afford that car. With the exception of 0% interest loans, it makes little to no financial sense to buy a car that you must acquire financing to purchase. Sadly, according to CNW Marketing Research only 11% of cars are purchased outright.

Imagine how much easier your life would be without the hassle of a car loan.  For the past 2 years I have been driving a 1999 Nissan Maxima that I purchased outright for $2,000. Prior to the Maxima  I was paying $300 dollars a month to drive an Audi A4, which I admittedly could not afford.  I estimate that in just two short years I have saved close to $8,000 just by not having a car payment. I loved my Audi and look forward to having one again in the distant future, but while I am building my net worth I cannot be bothered with such an anchor.

A car is not freedom or independence. It is just an obstacle in the way of achieving freedom. I do not want to have to work for money. I want money to work for me. A car does not provide a return on investment and therefore will have to wait. I encourage you to forget about the stereotypes and look at the facts. Millionaires are not financing their cars, and they are also not buying luxury cars on their way to the top. I believe owning your dream car should be a reward for achieving financial freedom, not as a means of making people believe that you are wealthier than you are. In the meantime you should buy a used car that is affordable, safe, and reliable.

Do you agree that cars are one of the worst investments you can make? Do you finance, lease, or purchase your vehicles wish cash? Is it smart to buy a car used?

Credit: Alan Cleaver

On Tuesday March 16^th the Federal Reserve met to discuss and set the Federal Funds rate, which has hovered at 0 – 0.25% since December of 2008. Not surprisingly the rate will remain unchanged once again, making these meetings feel like a bad case of déjà vu. According to the Fed Press Release “Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” Despite these negative statements the Fed suggested that signs of growth and stabilization are on the horizon.  Yet, with unemployment rates still hovering just below 10% it appears rates will remain the unchanged until summer at the earliest.

What does this mean for you?

If you are a saver, you have probably gotten used to seeing your interest rates go down the tubes. Even normally generous online savings accounts such as ING, have fallen to around 1%. Despite rates remaining flat since December of 2008, ING has actually made 12 rate cuts starting at 2.50% APY and falling all the way to 1.10% APY. I expect banks to continue to chip away at interest rate slowly until the Fed makes a move to up the rate. While CD’s earn slightly higher yields, I believe that currently the best rate of return is to pay down your mortgage.  Others might argue that you would be eroding your tax write off, but I can tell you first hand that home ownership tax breaks are highly over-rated.

For those looking to get low rates on mortgages or are struggling to pay down consumer debt, you are in luck! I would encourage you to pay down your debts and lock in mortgage rates as soon as possible. The Fed made no mention of extending the program which was implemented to drive down mortgage rates and improve the housing market despite reports that housing construction is continuing to decline. This will end the $1.25 trillion dollar mortgage security purchase program from Fannie Mae and Freddie Mac, which is scheduled to end this month. Greg McBride of Bankrate.com believes that the end of the mortgage-bond purchase program will cause the tables to turn, sending mortgage rates higher. While, he doesn’t expect the rates to surge overnight, increased volatility is expected.

Now What?

Despite my frustration with savings rates, it is what the Fed’s decision says about the state of our economy that bothers me the most. It seems that we just cannot dig ourselves out of this recession. I know that technically it is over, but now it feels that we are in a lingering state of turmoil. It seems that despite “surviving” the recession, the outlook for this country has not improved.  Today General Petraeus warned the US of a tough year in Afghanistan for 2010. While yesterday I learned that social security payouts will surpass collections by $29 billion dollars this year. Yet, the best part of the story is that none of that money actually exists. It’s just a bunch of IOU’s from the federal government, which has been raiding the social security piggy back for years!

When will our economy be strong enough to merit a Federal Rate Increase? Are you seeing signs of improvement? How has the Federal Rate affected your savings, mortgage, or debt?

Last night I was watching Suze Orman’s 8 year anniversary show, and was intrigued by a comment she made. Suzie started the show by saying “You cannot have wealth without health”. She explained that if you do not take care of yourself physically and mentally it will be difficult to become wealthy. This may seem like a straightforward concept, but many of us including myself get caught up in our daily lives and forget about how important this concept is. My current job is very demanding and I realize that it has started taking a toll on my health. Usually, I am in such a rush in the morning that I end up eating something fast and unhealthy. Then by the time I get home I am too tired to exercise, so I sit on the couch for the rest of the night, and then rinse and repeat the next day.  This is a bad habit that many American’s fall into, and it can end up costing us thousands of dollars.

While it is true that some medical problems are inherited and cannot be avoided, many others are preventable. I recently spent over $3000 on dental work, that could probably have been avoided or at least delayed if I had taken better care of my teeth. But the ordeal was eye opening for me, because I realized how quickly medical expenses can add up and affect your overall wealth and savings plan. A 2007 study by Harvard University found that 62% of personal bankruptcies filed in the U.S. were the result of medical expenses. Even more surprising was the fact that 78% of those individuals had medical insurance, included 60.3% that had private coverage, not Medicare or Medicaid. If those statistics do not seem surprising, consider the fact that in 1981 only 8% of personal bankruptcies were the related to medical expenses. That is an increase of 54% in just over 25 years!

What Caused this change?

I believe there are two main reasons for this change: Increasing rates of Obesity and increasing costs of medical care. In the United States, it is easy and convenient to gain access to fast and unhealthy meals that contain high calories and sugar.  This results in increases in weight, and also causes decay in teeth. According to Wikipedia “rates of obesity have been rising rapidly from 19.4% in 1997, 24.5% in 2004 to 26.6% in 2007. Should current trends continue, 75% of adults in the United States are projected to be overweight and 41% obese by 2015″. Obesity is the cause of 100,000 – 400,000 deaths in the United States every year, and results in direct and indirect medical costs of $117 billion dollars.

It is important for all of us to evaluate the effects of our lifestyle on our health and our wallets. By skipping out on healthy meals and exercise you are not only decreasing your chances for a long and healthy life, but you are also decreasing your chances for becoming wealthy. There are very few events in life that can take a toll on your wallet the way that medical expenses can. While my $3000 dollar dental visit seemed shocking, that is just a fraction of the bills that can be racked up with serious medical conditions. As displayed in the above statistics, insurance will not save you from financial disaster. In the event of a medical emergency, you will quickly realize how fast those funds are drained. In order to protect ourselves from this type of event, we must focus on healthy lifestyles and building strong savings accounts.

Has your wealth been impacted by medical expenses? Do you worry about this happening to your family? What healthy lifestyle changes are you making to prevent this?

In 1949, Frank McNamara was about to pay the bill at his favorite restaurant, when he realized he forgot his wallet. Frustrated by this predicament McNamara decided there should be an alternative to paying cash, so he created The Diners Club Card in 1950. Considered to be the first widely used credit card, it had more than 20,000 customers by 1951. Owners welcomed the long overdue convience and flexibility provided by credit cards.But, The Diners Club Card and other like it were “Charge Cards”, meaning that they had to be paid off in full each month. It would be another decade before Master Card introduced the concept of revolving credit card in 1959, which allows customers to carry debt from month to month.

Living on credit

While the popularity of charge cards was traded for credit cards in the 1960’s, it wasn’t until the 1980’s that average American’s started to carry any kind of consumer debt. By 1999 Americans were spending more money than they made for the first time in history. Lifestyle inflation was being mass marketed and credit was easy. The size of our house, cars, school loans, and credit card bills were growing faster than ever imagined. But it was all a facade that came crashing down along with home prices in the most recent economic downturn. Now, in an attempt to protect consumers from increasingly erratic behavior by credit card companies looking to re-capture profits lost by bad loans the government is implementing a series of credit card reforms.

Starting Monday February 22, 2010 The Credit Card Authorization, Responsibility and Disclosure Act of 2009 (CARD Act) will go into effect. This act will implement the following changes:

• 45 days noticed must be provided to card holders prior to interest rate increases

• Interest rate increases can only be applied to new debt , unless you miss payments for more than 60 days

• New restrictions will require college students under the age of 21 to have a co-signer in order to obtain a credit card

What do these changes really mean?

While these changes sound promising, many have ignored the fact that no restrictions have been made on the types of fee’s that card companies can charge. Let’s face it, the government is on the side of big banks and card holders. These decisions were not made lightly, and certainly received plenty of oversight by banks and lenders. The good news is that these changes will continue to make it more difficult to get credit, which will hopefully improve our ability to live within our means. But for those “lucky” enough to be approved for credit cards I believe you will be pleasantly surprised to learn that these changes will prove to be nothing more than bait & switch.

Card companies will find new ways to collect the projected $12 billion in annual losses that are expected to result from CARD Act reforms. Many will lose their rewards, gain new annual fee’s, and other fee’s that have yet to be invented. My advice would be to clear your balances as fast as possible. I realize that for most life without a credit card is not an option, but remember why Frank McNamara created the credit card. Not to live beyond our means, but to provide us with a flexible alternative to paying in cash. Do you pay our balance off in full each month? What do you think of the reforms outlined in the CARD Act? Is the government really looking out for the consumer’s best interest or are they working in favor of banks & lenders? Do you think the credit card bubble will bust?

Budgeting for unexpected expenses is a task I always find frustrating. Yet, most of these bills are manageable and generally do not require us to dip into our savings. Recently, due to a change in jobs I was required to find a new dentist in the city. The transition between dentists resulted in a 5 month overdue cleaning, which I was not too concerned about. Then the dentist informed me that I had 4 cavities and 1 filling that need to be repaired! Although frustrated by the news, I was not concerned about the cost. How bad could it be, I have dental insurance. I have never even taken advantage of my employer’s flexible spending account, or setup a separate savings account for dental work because in the past my insurance has covered most of the cost.

The $3,500 dollar bill

A recent study found that 36% of American’s have put off trips to the dentist due to the economy. This is a sad statistic, because those missed cleanings will end up costing them much more when they finally make it to the dentist.  I did not want this to happen to me, so 2 weeks after my cleaning I arrived promptly to start getting my cavities taken care of. Much to my dismay my dentist informed me that the out of pocket cost for a white filling would be $250 dollars! Then, while attempting to fix the second filling the dentist concluded that the decay was too deep and it would require a root canal. A $267 dollar co-pay later and the root canal was complete, and it had drained the $1500 dollar limit that my dental insurance provides.

What Insurance?

I am shocked that 1 filling and 1 root canal resulted in a year’s worth of insurance being depleted. How can it be possible that I have insurance and am going to have to pay over $3,500 dollars out of pocket for dental care? The completion of the root canal requires a post and crown which will cost $1,700 dollars, and the remaining cavities will add $1,080 to the final bill. I never expected that someone who visits the dentist regularly, brushes, and occasionally…flosses could rack up over $3,500 in dental bills in one year at age 26. I will continue to pay dental insurance each month for the remainder of the year, but I am on my own to pick up the tab. I will get no more help from my insurance company.

President Obama and the rest of the nation have captivated by the debate over health care, but little is being said about dental care.  While I accept that I have bad teeth, this caliber of dental bill is not that uncommon. Look around, I have found that people’s smiles are often more telling of their personal finances and the state of the economy than is their car or event their house. As society continues to age, many people realize that they cannot afford the procedures they need resulting in missing teeth, dentures, and painful infections.

While this experience has taken its toll on my savings, I feel grateful to be able to afford the care I need. But, what about other who cannot afford to have this work done? Have you skipped or postponed dental work due to the cost? How are you handling the rising costs of dental work?

In the past few months my wife and I have found an unusual amount of money on the sidewalks and streets. Normally, we don’t consider ourselves to be lucky, but in a 2 month period I found a $100 dollar bill and a $10, while she found a $5. Finding this kind of cash just lying on the sidewalk is rare, but I walk past pennies, dimes, nickels, & even quarters all the time, yet I never pick them up. As a young kid my grandmother’s vision would suddenly become that of a hawk when a penny would appear. She would shout for me to hurry up and pick up that “lucky” penny. If the coin was of greater value the command would be even more abrupt as if only seconds remained before the next person beat us to it.

Sometimes I feel ridiculous that I won’t even pick up a quarter that is starring me in the face, but I have found this to be a common trend. Is it because coins aren’t worth what they used to be? Maybe my generation (Y), doesn’t appreciated the value of money the way depression babies such as my grandmother do? Most of us have never experienced what it feels like to be truly poor, and therefore overlook the value of a penny. In reality, I will not stop to pick up anything less than a dollar. Do you pickup lucky pennies? What is the smallest amount of money you would stop to pickup?  Why do most of us now pass by change without picking it up, is it a generational thing?

As many of us know, balancing a budget is no easy task. But, imagine being responsible for balancing the budget for the entire country? With a goal of increased job growth and stabilizing the economy, today the Obama administration announced a $3.8 trillion dollar budget proposal for 2011. While the current proposal is a 3% increase over the current year’s budget, the President has assured Americans that “It’s time to save what we can, spend what we must and live within our means once again.” But how can we practice frugality, while increasing spending by 3% you ask?

It turns out that the Obama administration has applied PAYGO (pay-as-you-go) principles to terminate or reduce 120 programs across the government, generating $20 billion dollars. PAYGO, is simply a budgeting technique being used by the government to create “budget neutral” proposals. In other words, for every dollar you add to the budget, you must find a way to save a dollar. This is not a particularly different strategy then most of us use daily, but on such a grand scale this philosophy cannot be overlooked.

Trying to figure out where your money is being spend can be difficult. Below I have outlined some of the good, bad, & the useless spending allocations outline by our government for 2011:

The Good:

• $6 billion in funding for clean energy technologies while also eliminating existing fossil fuel subsidies. Decreasing our dependence on foreign oil is a better method of improving national security than increasing military spending.
• Increased tax breaks for small businesses, which while hopefully spur job growth.
• Cut Spending for NASA’s Constellation Program which aimed to send astronauts back to the moon in 2020. I am a huge science/space fan and would love to see us explore outer space, but NASA isn’t our best option. Companies like Richard Branson’s Virgin Galactic will be the future of the American space program.
• A record $2.9 billion increase for the Elementary and Secondary Education Act. Our schools are our future and we must continue to improve if we expect to keep pace with other countries.

The Bad

• President Obama’s decision to sent 30,000 additional troops into an un-winnable war may have cost him in more ways than one. In a year when we should be dedicated to cutting costs, the president has quietly introduced a record $708 billion in defense spending.
• Increased taxes for families making over $250k annually. While we should all be responsible for the tax burden, I find it unreasonable to penalize the wealthy for their hard work. Do you think it is fair to tax the wealthy a higher percentage?

The Useless

• Making Work Pay tax breaks – A $22 billion program intended to provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers. I would qualify for this program and still insist that the government save the $22 billion and cut this program. The impact of this program is minimal. Do you think a $400-$800 dollar tax credit is going to improve the economy?
• $734 million to install 1,000 new full body scanners at airports. Experts agree that these devices would most likely fail to stop the so called Underwear Bomber. I think we should investigate thermal technology as it has been proven more accurate and less invasive.

For those interested the 192 page “Budget of the United States Government, Fiscal Year 2011″ can be downloaded for your reading pleasure. Like most members of congress, very few of us (including myself) will take the time to analyze the entire report. The point is that overall the budget appears sound, with one exception, The Military. The President told reporters “Even though the Department of Defense is exempt from the budget freeze, it’s not exempt from budget common sense.” I disagree, I think our increased involvement in an un-winnable war goes against the promises our president made to this country. I don’t think 19% spending on military in a good use of funds, while our country tries to battle back from a severe recession. Do you believe our military spending is out of control? What are the best and worst aspects of the President’s budget proposal? What can we do to influence what portions of this budget get approved?

Prior to the purchase of my first house I knew little about my FICO Score. My understanding was that as long as I wasn’t late on payments and avoided debt, I would have a good score. While going through the approval process I found out my score was around 725, which was borderline for getting the best interest rates.  Although I was pleased with the score, I was encouraged by the lender to open additional credit cards and increase credit card limits to improve my score. In order to improve my score I would have to obtain more debt & higher credit limits! My car loan was paid off, minimal school loans, and I intelligently chose to use only 1 credit card with a “modest” limit of $3500 dollars. Why would a score intended to identify your credit worthiness punish you for paying off debt, keeping credit limits low, and only using 1 credit card?

A Brief History

After nearly 12 years of development, Earl Isaac and Bill Fair of Fair Isaac Corporation released the FICO algorithm in 1970. The goal of the project was to create a method of quickly and automatically judging the credit worthiness of an individual. Using a 3 digit score ranging from 300 – 850, the Fair Isaac Corporation succeeded in turning a previously complex review of credit history into an instant and elegant process. It was so successful that the FICO score has become the dominate force in the United States. Equifax, Experian, and TransUnion are the 3 major American credit bureaus. Although all 3 credit bureaus use the FICO algorithm to generate your credit score, the methods and sources used to collect consumer credit data varies and therefore results in 3 slightly different scores.So far this sounds like a pretty great system, so what is the problem?

Recently, Nickel at fivecentnickel.com, did an analysis of the effect of paying off a mortgage on his FICO score. Nickel’s dedication and hard work to pay off his mortgage in 10 years earned him a 17 point decline in his FICO score. Obviously, his recent financial achievements made him less credit worthy. This is ridiculous and confirms my belief that FICO  rewards individuals for constantly maintaining debt. I can understand that you need to have a proven credit history in order for this system to work, but why after a long and flawless payment history should you be penalized for clearing your debt? Why should I be penalized for closing credit cards that I no longer use, and may even be charged an annual fee to keep it open?

FICO Encourages Debt

Somewhere along the way, the FICO score went from being a quick and effective measure of credit worthiness into a corrupt tool which encourages debt. The algorithms have become absurd and feel like they have been strongly influenced by lenders and credit card companies. In the past year your credit score has become increasingly visible and influential in your ability to land a job as well. Deanna Templeton of Credit.com has made it clear that employers can view your credit score, but the results cannot affect the employer’s decision to hire you. What a joke, it’s not hard to see a bad credit score and then pretend it did not influence your decision. This type of action is giving FICO way too much power in controlling the decisions we make.

I wish I could say to ignore your score and just focus on living debt free, but that’s not reality. We all need to have a strong FICO score, so I encourage everyone to play by the rules, but don’t incur unnecessary debt, or delay early payments to get a top score. Those scores are reserved for American’s who have learned to love a lifetime of debt repayment, on time of course! Do you agree that FICO has been influenced by lenders and credit card companies? Why should someone who has never been late on a payment be penalized for having 1 credit card, with a long credit history? Why was Nickel’s score lowered for paying his mortgage early?

Happy Martin Luther King Day! Today, after careful consideration I decided it was time to buy a Smartphone. I have always argued that it was pointless to pay extra for a cell phone that does anything other than make calls or send text messages, until now. The Motorola Droid, which runs the Google Android 2.0 operating system, is closer to a computer than it is a cell phone. But, even with mail-in-rebates and contract renewal discounts this phone (plus accessories) was going to set me back a cool $250 dollars. Can this amount of money for a luxury item be justified? Why not just keep my old cell phone?

Justification

I spend close to 2 hours a day commuting to work, and 75% of that is either walking or on a train. Therefore, I have plenty of time to catch up on emails, current events, personal finance, and writing. This phone has build-in high speed wireless, 3.7 inch screen, and a full keyboard which enable me to accomplish these tasks with ease. Additionally, the Droid has a 5 megapixel camera with flash, which is 1.8 megapixels more than our old digital camera. It has FREE Google turn-by-turn directions, live traffic updates, and voice recognition, which has caused standalone GPS systems such as Garmin to plummet. Finally, it’s build in music player and 16GB of storage is substantial enough to replace my recently deceased 4GB Creative Zen mp3 player.

In the week since my mp3 player died, I realized I could not handle my commute without music. If I wasn’t going to purchases a Smartphone, then I certainly would be buying a replacement mp3 player at a cost of $150 or more. Additionally, my stellar sense of direction has caused my wife to beg me to purchase a GPS unit and spare her the task of asking for directions every time we get lost. The combination of GPS & Mp3 player would have cost me over $50 dollars more than buying the Smartphone. The decision was clear, I had to buy the Droid!

Today’s cell phone has been described by the New York Times as a “Swiss Army knife of the digital age, able to transform into a camera, music player or game machine at the swipe of a finger”. The cell phone has displayed some truly remarkable evolution over the past 20 years, from a huge emergency only calling device to an all-in-one digital device. I believe this is only the beginning of an exciting future for the Smartphone, and look forward to what tomorrow will bring. For me this purchase was a splurge that made financial sense, but it might not be for everyone.  Do you agree that this was a well thought out purchase, or am I fooling myself? Do you own a Smartphone, how has it made you more efficient? Could the Smartphone replace many of our digital devices in the future?