To the Class of 2012…

Graduation season is winding down, and I’ve been thinking a lot about the college graduates who are now entering the “real” world.  The transition from college student to independent adult is mostly awesome, though it does entail some new challenges.  All you new graduates out there now have the freedom (and responsibility) to manage many more areas of your own lives, including your finances.  Even if you are still searching for that first job that will launch your career, you can and should begin to develop a relationship with money that is healthy and positive.

In the ten years since my own college graduation, I’ve learned a few things about money.  I continue to be a student of personal finance, but I hope you will allow me to share with you the most important things I’ve learned so far:

The way you spend your money is a direct reflection of your values and priorities in life.  It’s very easy to mistake success for “stuff.”  Wearing a tee shirt with a designer logo does not mean that you are successful; it means you are susceptible to marketing.  If you looked at your spending as a snapshot of who you are, would you like what you see?

Experiences make you much happier than “stuff.”  Experiencing something is truly living.  You and your college friends will be separated in the future by time and distance.  Spend less of your money on “stuff” so that you can afford to meet old friends for dinner, or even vacation.  Remain connected with people you care about by experiencing things together.

You will never, ever regret starting to save sooner rather than later.  Albert Einstein said, “Compound interest is the eighth wonder of the world.  He who understands it, earns it.  He who doesn’t, pays it.”  Personal finance can seem complicated, but the most important principal is easy enough for a child to understand: Save as much as you can as early as you can, and you will build wealth.  It really is that simple.

If you want to live a free and independent life, avoid debt.  You must give up your time and energy to earn money, so having debt means that someone else owns a piece of your life.  Sometimes debt is necessary, but be honest with yourself about the significance and gravity of obligating your time and energy to someone else.

You don’t need to have personal finance figured out all at once.  Slow and steady wins the race.  Small successes in managing your finances will make you feel incredibly proud.  Congratulate yourself on every small victory.  Use that positive momentum to learn more and to create new goals for yourself.  In a very short time, you will feel confident and in control of your finances and your future.

We all have our own definitions of success and our own ideas about what makes for a happy life.  Regardless of what your ambitions are, always remember that the lead role in your life should be played by YOU.  Money should never play anything other than a supporting role. 

Congratulations, 2012 Graduates, and best of luck.  Viva la frugal!

HotFrugal Goals: Where Are They Now?

Until recently, it had been a year since I had written a HotFrugal post.  I’d say it’s time to take stock of my current financial situation and goals.  This is the type of post that is interesting if you’re nosy (I certainly am, so don’t feel bad), but it’s definitely long and detailed.  So dig in and join me, won’t you?

Savings Accounts

F@!# You Fund:  This is what I like to call my Emergency Savings Fund.  I censored it a bit since my mother reads this blog.  Basically, I want to have enough money saved so that I can say a big “F@!# You!” to any major unexpected expenses that crop up (major home repair disasters, car maintenance fiascos, etc.).  I also want to be in a solid financial position if I lose my job, and I’d even like to have the option to quit my job if it ever becomes really, unbearably horrible.  Goal:  $25,000.  Current balance:  $12,313.

Mad Money Fund:  This is a phrase I’ve borrowed from my mother.  Mad Money is fun money that can be spent on any kind of Want.  Typically, I use this fund for vacations, though more recently, I tapped it for a tattoo (!!).  There is no specific amount I try to keep in this fund; it just depends on the timing and types of vacations I have planned.  Current balance: $995.

Triumph Motorcycle Fund:  No, I don’t know how to ride yet.  But I know I want to!  I’m saving as though I’d buy a new bike and all necessary accessories (helmet, saddlebags, etc.).  Goal:  $11,000.  Current balance:  $568.

Roth IRA Starter Fund (formerly known as iPad Fund):  It’s time to kick this one into high gear.  Once I have enough saved, I will open an account with Vanguard and then track future contributions and growth in the Retirement section (see below).  Goal:  $3,500.  Current balance:  $40.

Retirement Accounts (Vested Balances)

Old 401(k) from Former Job:  (At some point I need to roll this over to an IRA.)  $43,750

401(k) from Current Job:  $9,003

TOTAL:  $52,753

Debt

Mortgage:  My house is worth $165,000.  I’m not working to pay down my mortgage more quickly because I’m not sure how long I’ll live in this house.  Remaining balance:  $128,096.

Car:  Yup, I bought a new car at the beginning of the year.  The old one needed more costly repairs, and I was able to get 0% financing.  I won’t make any effort to pay this off early since I’m not being charged any interest.  Remaining balance:  $13,964.

Net Worth

A rough calculation based on the above info puts me at $104,609.

So there you have it.  My number one priorities are the F@!# You Fund and the Roth IRA Starter Fund.  It’s going to take a long, long time before I’m able to buy a motorcycle, but I’ll get there eventually. 

Viva la frugal!

Finding Fault with Defaults

Despite the fact that it is very much a buyer’s market, I decided to sell my house a few weeks ago.  I priced it

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 aggressively and was under contract within three weeks.  This is great news and I’m fortunate to have made a sale so quickly in this market, but the truth is I’d prefer to rent my house rather than sell it.  The rental options in my area are limited, so I could have easily rented the house for more than my monthly mortgage payment, including taxes and insurance.  So why did I decide to sell my house if it would actually be quite profitable to rent it?

I made this decision after a conversation I had with a property manager who handles many rental houses in the area.  She told me that it is extremely difficult to find reliable tenants right now.  Many people are in the rental pool because they’ve lost their homes to foreclosure.  Unfortunately, many of these now-renters see no problem with not paying their rent consistently.  Not paying rent is a small leap from not paying the mortgage.  I’m sure that this isn’t true of everyone who has been forced into the rental market by a foreclosure.  But it’s true of enough people that the property manager I spoke with is having serious problems collecting rent for many of the properties she handles.  At this point in my life, I can’t afford the risk of having bad tenants who don’t pay their rent.  That’s why I made the decision to sell my house.

I’m very comfortable with this decision and I don’t regret it, but it has made me think a lot about our culture and the role that individual responsibility has in our society.  It’s very frustrating that so many people think it is okay to simply ignore their financial obligations.  It really shouldn’t be a surprise that people see nothing wrong with defaulting on their debts.  I have read a disturbingly high number of financial advice columns in which an “expert” tells people they should just walk away from their mortgages if it’s difficult to pay each month.  Even worse, I read one column recently that suggested it is okay to walk away from your mortgage if you owe more on the property than it is worth, regardless of your ability to pay! 

The New York Times recently published an online article that addresses this subject (http://www.nytimes.com/2010/02/03/business/03walk.html?hp).  The article quotes a mortgage broker in Arizona who shamelessly admits that he has advised people to walk away from their mortgages:

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

It is frightening that so many people see nothing wrong or immoral about not paying what they owe.  When someone lends you money and you refuse to give it back, that is not some sort of clever financial tactic.  It is stealing.  It is taking what doesn’t belong to you.  I don’t care if the money came from a big bank that received a tax payer bailout and is now making billions in profits.  That has nothing to do with your individual responsibility.  When you make a promise to pay back a loan by signing your name, you are accountable. 

Speaking of stealing and accountability, just think about what Mr. Walsh is doing to the tenants of his rental property.  His decision to default on the property means that his renters will have a very rude awakening when a bank suddenly tells them they have to move.  Hopefully Mr. Walsh does not currently have tenants in his property and his decision will not hurt anyone other than his lender (and his own credit history).  

I know there are situations where people get into terrible financial positions through little or no fault of their own.  I can be especially sympathetic to those who find themselves in foreclosure or bankruptcy due to medical costs.  When taking on debt is literally a matter of life and death, it’s hard to scold someone for doing what they had to do to survive.  There are a lot of people in this country who have been unable to get health insurance, and their finances have been thoroughly destroyed by their healthcare costs. 

I can even be somewhat sympathetic to those people who were manipulated and misled when they signed up for their mortgages.  There were a lot of unethical salespeople and companies marketing financially dangerous mortgages to vulnerable people.  But at the end of the day, those people are still responsible for their own financial decisions.  Their mortgages may be burdensome, but they committed to paying them.  I feel bad that they have had to learn a painful financial lesson, but that doesn’t mean they should be off the hook for what they owe. 

The abdication of personal responsibility is very harmful to our culture, especially when it comes to money and finance.  Free markets require a certain level of trust that people will do what they say and keep their promises.  Capitalism is not about screwing anyone you can to make a profit and get what you want.  I know it can be hard to believe that when you hear something like the testimony of the Goldman Sachs executives earlier this week.  Those executives are Grade A bastards.  But if we want to hold them to a higher standard, we need to hold ourselves to a higher standard as well.

Here’s the bottom line:  Defaulting on a mortgage because you feel like it or because you bought a lot of expensive stuff you couldn’t afford is morally wrong.  Excusing this behavior because the money is owed to a big evil bank is a very slippery slope.  I’m not a big evil bank, but apparently there are plenty of people out there who would steal from me by living in my house without paying me rent.  It is time for our society to feel some righteous indignation about such behavior.  Let’s continue to express our justifiable anger toward the banks and financial services companies who have caused so much pain in this country.  But let’s also direct some of that anger toward the individuals who take the same screw-you approach.  Their behavior is just as morally reprehensible.