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Lifestyles of the Rich (and Not-So-Famous)

Thomas J. Stanley, the author of bestselling personal-finance guide The Millionaire Next Door, has recently published a second book for aspiring millionaires everywhere. Stop Acting Rich (…And Start Living Like A Real Millionaire) offers Stanley’s research on the wealthiest people in America and how the rest of us can learn a thing or two about wealth building.

In a nutshell? Stop pretending that you’re rich because it’s getting in the way of your ability to save.

Among his findings:

  • More than 86 percent of all luxury cars are driven by people who are not millionaires.
  • The preferred shoe brand of millionaire women? Nine West. Their favorite clothing store? Ann Taylor. (Neither of which is sold at Neiman Marcus.)
  • The average millionaire pays $16 (including the tip) for a haircut.
  • Forty percent of millionaires typically spend less than $10 on a bottle of wine.

“[Y]ou must take a cold hard look at your balance sheet and at your life, and determine if you would be wealthier if you would stop acting rich,” he writes.

In other words, the best way to save money is not to spend it – as hard as that might be. (And for someone who goes by Shopaholic Suzi, trust me, it’s hard.)

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Tuesday Top 5: How to Prepare for a Disaster

Welcome to this week’s edition of our Tuesday Top 5, Econ4U’s weekly tips post to help you manage your money in five easy steps.

In the wake of the earthquake in Haiti, it seems more important than ever to prepare yourself and your family for the possibility of an unforeseen natural disaster like a hurricane, blizzard, wildfire, or tornado. The American Red Cross offers its advice for the basics of preparedness, but what else do you need to be ready for anything? Read on for our take:

  1. Update your homeowner’s or renter’s insurance. If you haven’t done so lately, take a minute to review your policy to make sure any new major purchases — like jewelry or a plasma TV — are covered under your existing policy. And remember that in some areas, flood, wildfire, or earthquake coverage can be extra.
  2. Make an inventory of your assets. This is as important for natural disasters as it would be in the case of theft. Take photos of your most valuable possessions and keep records of serial numbers and appraisals in your safe deposit box.
  3. Send copies of important documents to someone you trust. Preferably you’ll pick a friend or relative who lives in another state that wouldn’t be affected by the same natural disaster. Include copies of your bank account numbers, birth and marriage certificates, Social Security card, and a CD with a back-up of your most essential computer files.
  4. Keep some cash on hand. If you already have an emergency kit (like the kind California recommends in case of earthquakes), make sure it contains enough cash to buy supplies in the event that ATMs are out due to a power outage — $500 should do the trick.
  5. Set up an automatic payment plan for your regular bills. When disaster strikes, the last thing you want to worry about is when your bills are due and whether you’ll incur late fees for missing the due date. Set up BillPay for your mortgage, car loans, and other major bills and link it to a bank account that has enough to cover them for a couple of months (that’s what your emergency fund is there for, after all).
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For Love or Money: When Financial Opposites Marry

A few months ago, I wondered aloud whether spendthrifts and tightwads can ever find marital bliss. But the real question is, given that money is the most-cited reason for divorce, what do you do when you realize you’ve married your financial opposite?

Personal finance writer M.P. Dunleavey at MSN Money tackled this issue in her recent column:

Rather than view this state of affairs as a curse or a failure, accept that this is, to some degree, an occupational hazard of being human (and embarking on relationships with other humans).

Acceptance alone could reduce frustration levels and prevent finger-pointing and blame.

Let yourself be balanced. If you find yourself partnered with your annoying fiscal opposite, consider that, on some level, you probably admire something about that person’s way with money (and dislike aspects of your own spending style).

In other words: You probably crave some balance from each other.

Speaking from personal experience as a newlywed, I find a kernel of truth here. My husband and I are both savers at heart, but I’m more willing to splash out for things like vacations, dining out, and fun. He keeps me accountable and I make sure we periodically reward ourselves for our good budgeting habits.

Curious if you and your mate are compatible moneywise? Try taking this 5-minute financial stress test.

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Tuesday Top 5: Lessons in Entrepreneurship for Kids

Welcome to this week’s edition of our Tuesday Top 5, Econ4U’s weekly tips post to help you manage your money in five easy steps.

This week, New York Times columnist Thomas Friedman wrote about what the country really needs instead of yet another economic stimulus package:

What the country needs most now is not more government stimulus, but more stimulation. We need to get millions of American kids, not just the geniuses, excited about innovation and entrepreneurship again. We need to make 2010 what Obama should have made 2009: the year of innovation, the year of making our pie bigger, the year of “Start-Up America.”

On that note, and in the spirit of getting the year started on the right foot, here are five ways to teach the next generation about the American Dream.

  1. You’re never too young to learn. TIME magazine recently profiled Chicago’s Ariel Community Academy and its K-8 investing program. Each incoming kindergarten class is given dominion over an investment portfolio worth $20,000; by seventh grade, the young investors are allowed to pick what and when to buy and sell. Any profits at eighth grade graduation go toward a college scholarship fund that benefits the graduating class.
  2. Even lemonade stands are teaching tools. Watch our video for just a few of the lessons this classic summertime activity provides young kids.
  3. Encourage teens to start their own companies. The Network for Teaching Entrepreneurship’s flagship program is a contest at middle and high schools nationwide (mostly in low-income communities) that helps 24,000 participating students start their own businesses.
  4. Avoid the “Freshmen Financial Fifteen.” College students are particularly at risk for not budgeting properly, signing up for expensive cell-phone plans, and abusing their credit cards. If they are aware of the responsible use of each, they are primed for a financially secure adulthood.
  5. Finally, take the Econ4U Entrepreneurship Quiz. Even adults may be surprised at what they don’t know about starting a business.
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The ‘January Effect’ Stock-Market Phenomenon

Seasoned investors are likely aware of the “January effect,” a trend of the stock market to rise in January as people who sold losing stocks in December (to claim a loss for tax purposes) reinvest that money. But did you know the month can also be an economic predictor for the rest of the year?

Unfortunately, it cuts both ways. When the market is down in January, it’s a historically accurate predictor that stocks will perform poorly over the rest of the year as well:

A down January is a bad omen for the stock market. Yale Hirsch of the The Stock Traders Almanac suggests that since 1950, every down January in the S&P 500 preceded a new or extended bear market, or in some cases, a flat market. They go on to further suggest that down January’s are followed by substantial declines averaging -13%.

So far this month, the S&P 500 is down 1.4 percent since January 4 (the first day of 2010 that the stock market was open), but there’s still a full week of investing left in January. Keeping in mind there are no guarantees when it comes to investing, January is a great time to put money into undervalued stocks — especially if you’ve put off making your IRA contribution until now.

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Tuesday Top 5: Dumb Banking Mistakes to Avoid

Welcome to this week’s edition of our Tuesday Top 5, Econ4U’s weekly tips post to help you manage your money in five easy steps.

Have you broken your New Year’s financial resolutions yet? If so, today’s edition will help you get back on track by pointing out the most common banking mistakes people make — and how to avoid these money pitfalls.

  1. Not checking your statements. It’s easy enough for a glitch to cause an automatic debit — like a gym membership or gas bill — to post twice. If you no longer receive paper statements, do yourself a favor and check your account balances and transaction history online at least once a month.
  2. Failing to balance your checkbook. In the age of online banking, balancing a checkbook may seem like something you do with a chisel and stone tablet. But if you don’t know how much money you have in your checking account, you’re far more likely to get dinged by ever-increasing overdraft fees.
  3. Using automatic bill payment carelessly. Spinning off from the previous point, don’t sign up for BillPay or similar programs if you don’t know how to balance your checkbook. And on top of that it’s a good idea to keep a significant cushion — say, $200 — to protect you from mindlessly overdrawing on essential bills (and potentially wrecking your credit).
  4. Relying on out-of-network ATMs. When in need of cash and miles from your preferred bank, you may think “eh, it’s only three bucks” to withdraw money from an out-of-network ATM. But do that once a week and it’s sucking $156 from your bank account per year. No longer chump change, is it?
  5. Forgetting to account for cash purchases. Even if you are a champ about using Quicken or Mint.com to track your spending, keeping a tab on cash purchases still requires your attention because there’s no electronic record of it. Either keep your receipts and record your cash spending manually or keep a close eye on whatever you withdraw from the ATM.
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Sneaky Fee of the Week: Currency Conversion Penalties

Booking your spring break trip to Cancun soon? Here’s something to keep in mind: Almost every major credit card carries an “international conversion surcharge” of up to 5 percent on every purchase you charge in a foreign country. The fee isn’t listed separately on your bill so you wouldn’t even know anything fishy was afoot unless you memorized the exchange rate on the day of each transaction.

MasterCard and Visa each charge a 1 percent “processing fee” for international purchases, and American Express adds 2 percent. On top of that, the issuing bank is permitted to determine its own additional surcharge.

The sneaky fees have been going on for a few years now with most consumers unaware that they’re been gouged. In 2006, the New York Times first reported on the fees and experts advise consumers to know their credit cards’ policies on foreign purchases:

“Consumers will save a lot of money if they think about using the right card when traveling, and think about it in advance,” said Jennifer Openshaw, chief executive of Openshaw’s Family Financial Network and host of “Winning Advice with Jennifer Openshaw” on ABC Radio. “Using the wrong card can add close to 10 percent to the overall cost of a given purchase,” she said. “For example, your bank might charge you 3 percent for a purchase, and the merchant might charge 6 percent to convert the charge to dollars.”

ATMs are a handy way of getting cash out in the local currency (and saves you the hassle of travelers checks). While many banks will ding you there too with an “international cash withdrawal fee” averaging $5 per withdrawal, you’ll typically get the most favorable exchange rates.

Curious how your credit cards stack up? Bankrate.com compiled this chart that compares surcharge rates at 21 credit-card issuers.

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“Automatic savings” programs take the pain out of setting money aside

Not long ago, I received an email from Wachovia Bank advertising a new program called Way2Save. It’s one example of the automatic savings programs now being offered by a range of different banks. Here’s how it works at Wachovia:

We’ll transfer $1 from your Wachovia checking account to your Way2Save account when you make everyday purchases like: Check Card purchases; Pay bills online […]; Make automatic payments from your checking account.

Bank of America has a similar program that they’re calling Keep the Change. Each time you make a purchase with your debit card, the folks at B of A round the purchase price up to the next whole dollar, and deposit the difference in a savings account for you.

As we’ve written about before, many Americans are living paycheck-to-paycheck, and may be under the impression that it’s too expensive to save. Automatic savings programs are appealing because, as the name implies, you don’t have to choose to put money in savings – the bank does it for you. By saving small amounts, you can build up an emergency fund over time without taking a chunk out of your budget.

There is a catch, though – most of these accounts have some sort of fee associated with them. For instance, the Wachovia account has a person-to-person transfer fee, a teller service fee, and a monthly fee that applies in limited instances. Bank of America, who markets their program as a free service, will reportedly charge a $5 maintenance fee if your Keep the Change savings account falls below the minimum $25 balance.

These fees are all fairly small and don’t apply if you follow the account rules, so there’s really no reason you can’t start saving today. However, for those whose banks don’t offer automatic savings plans, take heart – the New America Foundation is currently testing a pilot program that would allow you to automatically deduct money from your paycheck and place it in a savings account.

As always, you can learn more about saving by revisiting earlier Econ4U posts under the “Saving Money” category.

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Credit Market Update: More transparency in credit decisions coming in 2011

If you’re working on Capitol Hill, you may have joined us Tuesday for our webinar on credit markets and personal credit history.

In line with that topic, there’s good news on the horizon for consumers concerned about the effect credit scores have on the terms they’re offered from a lender. Starting in January of 2011, the federal government will require lenders to give notice when a poor credit score results in a higher interest rate. From the Washington Post:

The rules require lenders to alert consumers whenever derogatory credit data cause them to be charged higher rates, higher down payments or less than optimal terms on a “risk-based pricing” system.

It used to be that a bad credit score didn’t mean a high interest rate – it meant you didn’t receive a loan at all. Consumers would then have the opportunity to find out why they were denied, and could appeal the decision to the lender – especially if the decision was due to an error on your credit report.

Modern credit technology changed all of that:

But with the rapid spread of risk-based pricing systems, fewer applicants were formally declined for loans; lenders simply raised rates to handle the perceived higher risk.

Though this expanded the availability of credit to those who may not have received it previously, it also meant you were less likely to find out if your credit score resulted in a higher rate until well after the paperwork was signed.

The Fair and Accurate Credit Transactions Act of 2003 set out to change that. Because of this law, you can access your credit score once a year from each of the three major credit agencies (Experian, Equifax, and Trans Union). And, starting in 2011, this new provision will ensure you know what effect your credit score has had on a loan’s interest rate before you‘re committed.

Of course, if you’re interested in improving your credit score, or in understanding your credit report, Econ4U has many resources available.

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Correlation is not Causation: George Washington Professors Need a Refresher Course in Statistics

Every night, around the time the sun sets, my local television station runs an evening news broadcast. It’s been this way my entire life – a setting sun means that the evening news will be coming on shortly.

But what if we said this: Since the sun always sets at about the same time as the evening news starts, the good folks broadcasting the news at CBS, NBC, and ABC must cause it to set.

Of course, that’s a ridiculous claim to make; Brian Williams and Diane Sawyer don’t make the sun set any more than the crew at Good Morning America causes it to rise. But this example highlights an error that many people make when they confuse correlation with causation.

An unfortunate example of this error appeared recently in a magazine called The American Banker. Two sociology professors from George Washington University (GWU) took to the opinion page to promote a recent study which claims an increase in the concentration of payday lending stores causes an increase in violent crime.

The big problem with such a broad claim is that the study in question finds correlation between payday lenders and violent crime, not causation. This kind of academic overreach is not only irresponsible – it’s also dangerous. Strong conclusions based on faulty logic could cause policymakers to take rash actions with harmful unintended consequences for the poorest among us.

Let’s take a step back and look broadly at what correlation means. There are all sorts of phenomena that may be related to, but not caused by, each other.

For instance, a study might find that an increase in diet soda consumption is associated with weight gain. Since diet soda doesn’t have any calories, it’s unlikely that it caused the weight gain. Rather, people who are already overweight may be more likely choose diet soda over regular to avoid the additional calories. Perhaps they’re still gaining weight, but the soda has nothing to do with it.

To actually prove whether one event caused another, scientists perform a “controlled experiment.” In these experiments, scientists observe two groups of people that are similar in almost all ways except one- the product or behavior whose effects they’re trying to test. Prescription drug companies often do this, testing an active drug on one set of individuals and giving a sugar pill (or “placebo”) to the other set.

Despite these time-tested principles of determining cause and effect, some researchers and professors still refuse to call a spade a spade – they might detect correlation, but their research interests or other biases lead them to overreach and call it causation.

This brings us back to our professors from GWU. They’ve studied low-income neighborhoods in the Seattle area, and found that violent crime tends to increase after payday lending establishments set up shop – hence, their claim about the link between crime and payday lending. However, many of these poor neighborhoods studied were already characterized by violent crime before the payday lenders moved in, and were likely to see more of it in the future.

Without setting up a controlled experiment, where two similar groups are tested, the professors cannot positively claim that an increase in payday lending establishments led to an increase in violent crime. Following the professors’ flawed logic, you could look at any business concentrated in a low-income neighborhood – liquor stores, bail bond establishments – and claim that they also led to an increase in violent crime. But the world isn’t that simple, and we do a disservice to real social problems in low-income neighborhoods by pretending that it is.

The danger of faulty conclusions shrouded in academic language is that policymakers may take them as gospel. Across the country, states have chosen to place restrictions on payday lending establishments. Yet these lenders are often the only source of funds available for consumers who lack access to more traditional lines of credit. Given that, it’s not surprising that recent economic research found “borrowers in states that permit more payday lending are less likely to be denied credit generally and have lower delinquencies.”

What’s the bottom line here? Be careful when using statistical relationships alone to generalize how the world works – you may miss the forest for the trees. Wolf Blitzer probably doesn’t make the sun set each night, and payday lenders probably aren’t the reason that low-income communities struggle with higher rates of violent crime.

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