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For the Financial Education Messages category

Jun 15

Raising interest rates is the quickest way to move the economy forward

By NickNo Comments
Housing
Image by james.thompson via Flickr

Suppose you buy a valuable piece of art for $15,000.  Further suppose that a month later a major economic slowdown occurs and as a result, the amount of money art buyers are paying drops substantially.  Perhaps today, if you wanted to sell the art, you might be able to sell the painting for $10,000.  If you intended to sell the painting, what would you do?  Most likely, you would try to wait for the market to correct and try to recoup the initial investment.  You aren’t motivated to sell the piece of art.  It’s not costing you anything not to sell it, so why not hang on to it.

But what if you bought that piece of art on credit?  Even at a relatively good interest rate of 5 percent, you would still be losing over $60 a month in interest and spending about $300 per month in total payments.  Having that piece of art costs you money every month.  In this case, you are much more motivated to sell the art for $10,000.

However, what if you had a credit card that carried zero interest (or in the range of 0 to 0.25%) and if you can borrow money on that card at will without fees.  In this case, you are not losing substantial money to interest and you can borrow more money whenever cash flow gets tight.  In this case, your debt no longer pressures you to move the problem forward.  Although the market has priced your painting at $10,000, you are behaving as if it is still worth $15,000.  You are arguably denying or deferring reality. 

Now I don’t think there is anything particularly wrong with this delusion.  Everyone can bury their head in the sand, but these people should be penalized to clinging to delusions.  But these days, banks do not feel the pinch.

In a market correction, asset holders need to substantially mark down the price of their assets to get them sold.  In a macroeconomic sense this is called “finding the bottom” where prices come down to a point where sufficient buyers are available to meet demand.  Once the market finds its bottom, new growth occurs. 

WASHINGTON - APRIL 17: Federal Reserve Chairm...
Image by Getty Images via @daylife

For years now, banks have reaped the benefits of policy based on monetary theory.  After making loans to millions of people who couldn’t afford them, banks should have been suffering from huge cash flow issues due to the lack of payments and loss of principal on these assets.  However, since banks can borrow money at will from the Federal Reserve at essentially no cost to them, banks have plenty of cash to meet their needs.  Banks have little motivation to turn around their growing foreclosure inventories by reducing prices. 

Because of this false support of overvalued properties, real estate property values continue to fall, not in a quick fashion, but a slow laborious multi-year fashion. When the correction could have taken a year or two, real estate values are still falling.  Wise potential home buyers see this and are choosing not to buy.  It is important to note that record low mortgage rates also played a huge role in driving home sale prices up.  Home buyers realize that once interest prices do rise, there will be even more downward pressure on home prices. 

These phenomena add up to one conclusion, sellers are hesitant to sell and buyers are hesitant to buy.  Raising interest rates, though painful in the short term, may offer the best hope for escaping the economic holding pattern we’ve been in for years.

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May 26

I Remember when Michael Jordan was Terrible

By NickNo Comments
Former basketball player Michael Jordan
Image via Wikipedia

Michael Jordan was probably the best athlete to ever play the game of basketball.  Not only was he naturally talented, he consistently worked hard to improve his game.  He was a legendary competitor.  In every facet of the game, he outthought, outfoxed and outworked his opponents.  Then, at the peak of his success, he decided to switch sports. 

Michael Jordan’s 2 year effort to become a professional baseball player was a terrible experience to watch.  Many of the things that brought him success playing basketball did not desert him.  The work ethic, the physical skill, the competitive spirit were all still there, but he languished playing in the minor leagues.  So why didn’t he succeed, where success followed him before?  He couldn’t hit a breaking ball.

Financial success is the net result of a series of good actions and smart decisions made over time.  It requires work ethic, talent, persistence and smart decision making.  Take one of these things away and it becomes a much longer and uncertain road to success. 

Explosive earning power comes from working in your talents, doing things you love and doing them over a long period of time so others come to appreciate your work.  If you don’t love what you are doing, even if you are talented at it, the quality of the work will suffer and/or you will become so burnt out you will not succeed.  If you aren’t talented in what you do, the quality of the work will never be high enough to generate large wealth.  Without persistence, you will never develop a following that is a key driver of creating that wealth.  

We parents are always watching our children.  We often see their flaws and we try to correct them. We sometimes can see their talents and we are grateful that at least that is one area where I can take more of a “hands off” role.  Maybe we look at the marketplace and try to steer our children into the roles that we think will bring them security and success.  This is the wrong approach.  People don’t outgrow who they are.  A child who struggles with math probably won’t make a good actuary.  Another child may be very talented at math, but becomes exhausted by doing a problem set.  People have many talents, but only a few of the talents really allow us to experience a life we love.

Parents have enormous influence over their children.  Sometimes a simple throwaway comment given at a critical time may set a child on a wrong course that may take years to correct.  There are millions of people who currently work in careers which began because a well-meaning father said something like, “I think you would make a great architect.” 

Work ethic, persistence and brainpower can take a young person very far.  But she will only thrive if she is working in the right field.  We parents have a responsibility to be careful observers of our children.  Our children need to be allowed to discover their gifts and ultimately their calling.  Be mindful of what you are saying to your children.  Talk frequently about their talents, what they enjoy doing and, as they grow, what they could see themselves loving to do every day of their adult lives.  Nurture your child’s talents and find the ones that he really enjoys exercising.  These will be the key to not only wealth, but self esteem and general happiness.  As they get into adolescence, start working on a career path.  Perhaps visit a career counselor. Encourage your child to experiment with a few opportunities.  The choice of a career is one of the most important choices a person faces.  Careful work, great deliberation and time will create the best chance that your child will make the best choice. 

Michael Jordan eventually went back to basketball, where he returned to winning form, but he lost the chance to do what he loved for 3 years.  Do what you can to help your child do what they love as soon as possible.  Three years is a long time.

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May 24

Asked and Answered: How are Middle Class Americans Going to Survive?

By NickNo Comments

I ran across this question on LinkedIn and felt I had to respond.

How are middle class Americans supposed to survive these economic times? With high prices on everything, health insurance, gasoline and the salaries not going up as high as they used to, it seems that for the middle class, single parents and other Americans is getting harder and harder to save. How are we supposed to overcome this period?

My response:

Your question contains within it a solution.

If you think about it, what are the things that even the strained middle class, continue to struggle to pay despite the difficulty. Why do people continue to pay for health insurance, food, gasoline, etc. Simply put, these things are valuable to everyone.

Americans live in a freer market than nearly anywhere else of the planet, which means that people spend their money on items which they find to be of value. People who struggle right now are having difficulty in showing their potential customers (including employers) that they are valuable. Every day wealth is being created. Productive energy is constantly creating wealth. This means that money and wealth are NOT dwindling resources. Our task is just to find the ways we can encourage others to share it us. This is only going to happen when we convince those that have or those who make that we are of value to them.

Too many of us walk through life focusing on what we do. We have been paid in the past by doing what we have done, so we think that by continuing to do these things, we will continue to be paid for doing them. But the world is always changing.

Consider the world of tax preparation, H&R Block and Jackson Hewitt have been hit very hard by TaxCut and TurboTax. Many people no longer see $100 to $300 of value in tax preparation. They see $0 to $25 of value in these activities due to the prevalence of cheap, easy to use software. The world is changing for all of us and what may have been valuable in the past may be of lessor or no value now and in the future.

Our task is to look inward to see how we can use our own individual strengths, experiences, resources and talents to generate value for others. By marrying that value to a business case, each of us can find personal wealth and prosperity.

 

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Apr 22

Cultivating Work Ethic

By NickNo Comments

I had the pleasure of listening to a recent lecture by a researcher in child psychology. One of the most interesting findings involved an experiment of 7th grade students.  All students were asked to perform a set of some moderate difficulty math problems.  After completion of the problems, one-half of the students were complimented on how smart they were for being able to solve the problems.  The other half were complimented on how hard they worked to get to the solutions.  Though the problems that each group worked on were unchanged, those kids who were complimented by the effort they exerted as opposed to some innate intelligence were substantially more likely to choose to do a more complex set of math problems when given a choice of a new assignment.

This finding is fascinating to me.  It demonstrates that work ethic and the willingness to work hard and take on new challenges can be cultivated in children.

Wealth creation is the result of a collection of habits founded on fundamental premises.  Habits such as spending less than you earn, performing due diligence and managing risk can be brought about by education and practice.  But if the fundamental premises behind wealth creation are not observed or not believed, no amount of education and training can help your child down the road to success.  This means that one of the most important tasks for any caring parent must be to instill a strong work ethic and cultivate a belief that usually hard work dedicated to a good purpose over time is a great recipe for success. 

We have the benefit of living in a time in history where our society can afford a great deal.  Not long ago, young boys and girls of age 10 were busy planting and harvesting crops or performing the household laundry.  Families needing to eat had to hunt or fish or grow their own food.  Our lives of convenience are truly blessed, but with our increased time for ourselves, what do we do with this time.   Our children in many cases live lives of comfortable privilege free from the cares of daily life.  As a parent, I wish that my children never know pain or hardship, but we forget that pain is an important part of the learning process.  When my son hits his head on the edge of a table and he cries, he will know next time to be more careful and mind where the table’s edge is.  Similarly, nearly all families and individual at one time or another will suffer some financial hardship.  But hardship is not permanent condition.  I, myself, learned the hardest financial lessons in a time of hardship.  These lessons have only tempered my resolve to pursue success and the hardship itself has forced me to make decisions that have propelled me further down the road. 

Parents, to cultivate a strong work ethic in your children it is important to keep in mind several items

  • Money must be tied to effort – Reject the concept of an allowance.  Demand that your children perform some of the household tasks in exchange for any money you provide them.
  • Encouragement – Periodically, be sure to encourage your children to continue to work hard by recognizing the effort they put in.  Reinforce that success is a pattern of reward that follows achievement.
  • Share how the family works through hardship – Whether you realize it or not, your kids are watching and they know when things are tough for mom and dad.  So let them know, to the extent that they can understand, what is happening and how you are working to resolve the problem.  You may be working longer hours or doing extra jobs or giving up on luxuries that you used to enjoy.  Explain these things with a smile.  Let your children know that work is one of the best companions you have on the road to success, because work can help you solve nearly all financial problems.
  • Work is life – Most importantly, it is important that your children learn early on that it is only through our contributions that we make the world a better place.  Anything of value ever created throughout human history has been brought about by the efforts of individuals working in solitude or in concert with others. 

Children want to change the world; but the world has never changed by itself.  It changed because of the desire and effort of the former 7th grader who once chose the harder set of math problems.

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Feb 16

Great First Jobs for Kids

By Nick1 Comment

I have long recommended that no parents give their children an allowance, rather I recommend they provide them commissions for certain household chores to help teach your kids that money comes from effort.  At some point, many children begin to look for work outside the home to help augment their earnings and start to earn income that isn’t reliant on Mom and Dad.  First jobs are also great ways to learn about oneself and  begin to learn about business.  Here are several ideas for great first jobs for kids under age 16.

Paper Route – Many children cut their teeth waking up before dawn to deliver papers prior to going to school.   Young people performing this work learn many of the mechanics and hiccups concerning the flow of goods from the factory to the consumer.  One learns to push through challenges such as poor weather and supply problems to get the job done. 

Babysitting – One of the most common first jobs for many (but not exclusively) girls is babysitting.  Babysitting teaches responsibility, preparation, patience and safety not to mention dealing with the highly emotional expectations of customers (parents).  These skills are extremely valuable in all aspects of working life.

Park League Official – My first job was as an official at the park league where I had previously been a player.  A year round program I had the opportunity to be a referee and umpire for several sports.  As an official I learned to make quick decisions, how to handle authority, peacemaking, and how to deal with difficult people.   I found it one of the most challenging jobs I have ever held, because at the time I suffered from a great deal of self-doubt.  The confidence that I learned through learning to wield these skills have paid dividends throughout my life.

Repetitive overhead throwing motions, like tho...
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Camp Counselor – Another great job I had at an early age was that of a camp counselor.  Many of the same skills that one gains as a park league official are learned here as well, but often at a greater rate simply because one is learning for more hours in a day.  Some opportunities are for day camps while others are for resident camps.  I had the opportunity to work at a resident camp, which not only gave my parents a break from me, it gave me opportunities to experiment with independence as well as make stronger friendships, many of which thrive to this day.  Two other great aspect of being a camp counselor is working as part of a team and being silly.  I have found both skills to be invaluable in working with others and making my workplaces fun.

Staff Orientation Week 2008
Image by Camp ASCCA via Flickr

Tutor – Smart kids blessed with patience and good communication skills could be great tutors.  Tutoring challenges young people to find different ways to convey information to students who are often reached in different ways.  In addition, like all teachers can relate, dealing with personal frustration involved with turning on the light of understanding can be very challenging.  Patience, understanding, and encouragement skills are gained through tutoring.

Entrepreneurship – Finally, more industrious kids can actually try to create the whole endeavor.   There are numerous ways kids can find ways to practice entrepreneurship.  World famous personal finance author, Robert Kiyosaki writes about how he and his best friend, at a young age, opened a comic book store for neighborhood kids and managed to secure a source of comics for free.  Typical new businesses consist of lemonade stands, lawn mowing services and snow shoveling services.  There is not better way to learn a wide variety of skills quickly than by starting a business.  Children learn sales, managing equipment, customer service, procurement and a host of other concepts.  In addition, much like in adulthood, often the rewards of being an young entrepreneur are much greater than a young employee. 

There are undoubtedly other ways for children to enter the workforce.  Getting children involved in earning money not only allows them to begin the process of financial liberation from Mom and Day, it also allows them to learn valuable skills that will help them throughout their lives.

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Nov 26

Supply, Demand and the Higher Education Bubble

By NickNo Comments

In the mid 2000’s, our society saw the largest asset bubble in modern history.  Low interest rates spurred loosening of credit which propelled home sale prices upward.  Operating by simple laws of supply and demand, the abundance of cheap and loose credit meant that there was an abundance of money.  Without a strong constraint on the availability of funds with which to buy homes, there price of homes increases to match the supply.  The crash that began in 2008 was driven in large part of the well of credit drying up.  This caused the supply of money to shrink rapidly.  Again, operating under the simple laws of supply and demand, home prices plummeted. 

For decades, we have been seeing the same process at work in education.  Driven by easy access to low interest credit in the form of Federally backed student loans, the prices of post-secondary education has risen unchecked.  According to inflationdata.com, in 1986, average costs of a 4-year degree was $10,000.  By 2015, costs of a 4-year degree is anticipated to be $120,000.   Between 1985 and 2010, the total cost of education increased more than 485 percent, while the average of all consumer prices increased about 107 percent.

Based on this information, it is apparent to me that higher education costs are a major bubble.  The only reason that bubble hadn’t burst years ago is because the Federal Government has been willing  to continue to lend with reckless abandon.  In 2010, in the wake of ever increasing student loan defaults, combined with a widespread cry for fiscal accountability in government, there finally started some discussions about limited the pool of government funds to be used for new loans.  If and when that pool dries up, finally, there will be a reversal in the cost of a college education.

Unfortunately, this will come too late for those students who will be laboring for decades under the load of loans that in many cases will not result in a large enough income stream to pay them off in a reasonable period of time.

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Nov 25

Nick is an Expert Author!

By NickNo Comments

I am proud to report that I have been awarded Expert status over at EzineArticles.com.

 

Nick Wolff, EzineArticles.com Basic Author

Nov 25

Check Your Financial Idle – Keep Committed Expenses Low

By NickNo Comments

In my last article, I introduced the concept of the financial speedometer to provide a simple framework on how to evaluate the extent of spending in your household.  To extend the analogy, so long as a car engine is running, a car will consume some power and fuel even when the car is not moving.  Some big and typically highly inefficient engines burn fuel at high rates even when idling.  This makes sense for a complicated machine like a semi tractor which is geared for towing and hauling very heavy loads up and down mountains.  For a semi, high power comes at a cost of lower efficiency, but it is a fair tradeoff, because that additional power can be brought to bear to pull the load in times of need. 

A high idle, however, is much less appropriate for a small economy car.  Unfortunately, too many households have the financial engine of an economy car that idles in the red.  When I say that a household budget is idling in the red, I mean that many families have arranged their financial affairs so that their committed expenses every month almost equal their entire income.  Through the choices they have made and circumstances they have endured, they have eroded almost all the financial operating room they have.  Unlike the semi which can draw upon additional power when needed, households idling red are unable to use their budget or discipline to change their financial situation. 

Many people overspend on clothes, entertainment and food.  In most cases, instilling fiscal discipline and refusing to spend opens up financial capacity that can very quickly help a family improve its position.  But a family that has overcommitted to rent/housing expenses, insurance, taxes, utilities, gym memberships, contractual obligations and most of all debt cannot simply choose to stop spending.  These expenses are commitments and breaking commitments carries much larger repercussions in practical, philosophical and often moral terms.   

Financial
Image by Brajeshwar via Flickr

I, therefore, advise people to carefully monitor what percentage of their spending is composed of committed expenses.  The percentage of income that is spent on committed expenses is called your financial idle.  I urge people to never allow your idle to exceed more than 55 to 60 percent of your take home pay, (45 to 50 percent if you have irregular income).   If, at any time, your financial idle exceeds 80 percent of your income, you are more likely than not, bankrupt.   Even if you can somehow stave off bankruptcy in the current arrangement, you will end up endlessly treading water with no hope of improving your situation.  To escape this exhausting physical and mental grind, you have only 2 options: upgrade your financial engine by seeking either more lucrative work or additional work, or you will need to make draconian cuts in your lifestyle when you do have opportunities to exit some expenses.  By draconian, I recall advising someone to move within a couple of blocks of work, sell the car and give up driving altogether.  Some folks have moved a family of four from a 3 bedroom house to a 2 bedroom apartment. 

Keep in mind the concept of financial idle.  It is one of the key concepts that will help you avoid ending up in a situation where the only escape is via the path of pain.  It’s best not to walk that road at all.

 

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Nov 23

Don’t Speed – The Financial Speedometer

By NickNo Comments

In 1995, Congress repealed the Emergency Highway Energy Conservation Act.  Prior to repeal, the law established a national speed limit of 55 mph and later 65 mph.    Repeal of the law allowed the individual states to establish their own speed limits as they had done prior to passing the Federal law.  In my home state of Illinois, the speed limit of most interstate highways is 65 miles per hour.  Historically, state speed limits had widely varying limits.  For example, prior to passing the law Rhode Island and New York for example limited speed to 50 mph.  Nevada and Montana had no posted speed limit on rural roads.  After the 1995 repeal of the Law, Montana again reverted to having no posted speed limit in daylight hours. 

The speed limit has been established for two major reasons energy usage and the likelihood of having an accident.  One of the greatest critiques of speed limit laws is that there is a low net reduction on fatalities and energy usage because of the huge amount of non-compliance.  I know many folks who have no trouble driving 85 mph on interstates.  The lure of time savings is much more attractive to them then the risk of accidents or increased fuel economy.  Some folks will reduce their speed during periods where they believe police are more likely to be monitoring roads.  Their fear of tickets pressures them to take things more slowly.  Each individual constantly makes decisions about what is the right amount of risk they are prepared to accept relative to the perceived gain the expect to receive.  We know, for example, that the likelihood of our receiving a ticket is much greater if we choose to drive 90 mph rather than 68 mph, when the speed limit is 65 mph.  From my perspective, it is much more a question of self-governance than any outside influence that encourages people to drive more slowly. 

There has always been a debate about how speed limits may have reduced roadway fatalities and conserved energy, but I believe there are lessons that can be drawn from applying an analogy to our financial lives.  

When it comes to money, many of us speed all the time.  I’d like to introduce to you the concept of the financial speedometer (or more accurately spend-o-meter).  Each month each of us earns and spends a certain amount of money.  When we divide one by the other, we realize what proportion of our earnings we spend every month.   If we make $4,000 (net income) and we spend $2,400, we are spending 60% of our income and we’re driving 60.  $3,000 during a month, we are spending 75% of our earnings and we are driving 75.  While if the speed limit is 65 mph you can reasonably expect not to receive a ticket when you are driving 60 mph, sooner or later you can expect to receive a ticket if you are always driving 75 mph, if for no other reason than the officer who pulls you over has had a bad day.   

The key learning here is every time you are financially speeding, you are running the risk of being ticketed.  Moreover, since tickets cost money, it is much more likely that you will need to speed more just to keep up.  If you are spending 80 percent of what you earn and, for example, your car breaks down, it is likely you will feel you have no other choice than to place the repair bill on your credit card.  Now you have to pay $50 more a month than you had been previously.  You now must drive 84 just to keep up.  If you never have an occasion to either increase your income or lower your expenses, it will only be a matter of time until you are exceeding 100 mph.  At this point, you are driving out of control and you are destined for a catastrophe. 

However, if you are driving at 60 mph and your car breaks down, after repairs you might have to drive 64 mph for a few months, but you have the capacity to pay down the bill faster and can quickly return to driving at a leisurely 60 mph.  Better yet, you may have the money in the bank needed to pay cash and never be forced to change your speed at all.

Another consideration is that of energy usage, if you are driving above 80 mph in your car, you must concentrate a great deal more, you have less margin for error, you must be more attentive to hazards ahead, the movement of other cars relative to your own, your adrenaline is pumping at a much greater rate.  When you finally reach your destination, you are exhausted because the physical toll of driving at this speed is so much greater. 

Drawing the analogy out, if you are financially driving your life greater than 80 mph, you are taking a huge physical toll on yourself.  You experience high stress, greater sleeplessness, more moodiness and your personal relationships suffer.  This is made all the worse because it is an experience from which you cannot escape.  There is no short term destination to reach.  You deal with this stress as long as you are moving that fast, which for many people is a period of years.  It leads to physical ailments, emotional trauma and depression and various forms of self destructive behavior.  The human body and mind is not designed to accept such physical exertion over the long term.  We see similar struggles from soldiers returning from a war zone. 

Finally, storms are going to happen.  When the storms come, it is suicidal to continue to drive at the same speeds you were driving in clear weather.  When heavy fog, hail and blizzards hit you while driving, you need to be able to reduce speed.  You will experience at least 1 major financial obstacle in 10 year period in addition to several small to moderate obstacles.  You will be laid off, have a major accident or illness.  The car will need to be replaced.  An investment will go bad.  When you have a setback, life cares little if you cannot afford to reduce your speed.  You will crash.

As a general rule, it has been my experience that for most families, who have regular income and expenses, a self-imposed family financial speed limit of 65, that is to spend no more than 65 percent of what you earn is a great value to achieve in the long term.  We call this the “Green Zone”, and is shown on the financial speedometer.  This will allow you keep you financial stress low, provide you great resources to plan for your future success and still allow you to have some enjoyment in your life. 

The zone on the financial speedometer between 65 and 80 is referred to as the “Yellow Zone”.  For short periods of time, if your speed moves between 65 and 80, though you have some increased risk, you can utilize this zone to both adjust to surprises and to take reasonable risks to get ahead.  When you have a financial setback, if you remain in the yellow zone, though you may have to tighten the belt a little, it is likely that you can work yourself out of the problem relatively quickly.  In addition, if you start in the green zone and you wish to take a risk, such as start a part time business and are in need of start-up capital, you have some capacity to move some of your earnings to subsidize the business until it gets off the ground.  The Yellow Zone is a tool which allows you manage risk over short periods.  Again, if you are driving 75 mph, eventually you will be pulled over.  In general, you should never be in the Yellow Zone more than a year, 6 months is even better. 

The Red Zone is located on the financial speedometer between 80 mph and 100 mph.  If you find yourself consistently spending more than 80 percent of your earnings in a month, you are probably steadily increasing your speed and you one step away from financial tragedy.  Above 80, you no longer have the capacity to work yourself out of the hole you’ve dug for yourself, or even if you do, the amount you have extra to clean up your mess is so small that you cannot gain traction.  Every small setback adds additional burdens to your financial engine.  Doctors appointments, replacing clothing, even basic cable television become luxuries.  Every dollar you spend for these items usually is placed on credit which steadily pushes you closer to 100 mph.  Financial stress skyrockets.  You begin to jeopardize basic needs.  You personally undergo psychological and physiological changes that reap havoc on your personal and interpersonal health.  It is an existence that tears you apart and one from which is not easily escaped.  If you find yourself in the Red Zone, must urgently get yourself out of it.  If you do not dramatically cut your expenses or increase your income, you are on the headed for financial death.

Once you reach 100 mph, every dollar you earn is being spent on supporting yourself and your family.  At this point, you financial life resembles much more of that of a serf in Feudal Europe than a member of a free society.  I call the zone above 100 mph the Black Zone as is symbolizes financial death.  If you have any savings, every day you live costs you some of it.  Every day you work, you do so not for yourself, but for others.  It is made all the worse by the fact that you have absolutely no capacity with which to change your situation.  If you ever find yourself in this situation, you are financially flat-lined.  It is possible that if you work quickly, deliberately and are willing to make huge sacrifices you can be brought back from the brink, but the odds are against you.  Those who are brought back suffer scars that are with you for years.  Those who die, suffer scars that stay with you forever—scars that stay on your soul and your heart and on any mortgage application you will ever file.  Bankruptcy is financial death; and in case you aren’t aware, death is something to be avoided.

To summarize here are the recommended ranges for financial speeds on your financial spend-o-meter.  As a caveat, if you are in a household with variable income, such as self employed individuals, I highly recommend a lower range of speeds for the Green and Yellow Zones.

            Zone                                                   Expense to Income Ratio

                                                Regular Income                                 Irregular Income

            Green Zone                0 to 65                                                0 to 55

            Yellow Zone                65 to 80                                              55 to 70

            Red Zone                   80 to 100                                            70 to 100

            Black Zone                 100+                                                   100+

 

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