This American Life has put together another one of their excellent shows on the current economic problems. This time they explain what wrong with the banks — it’s worth a listen. From the show’s description page:

The collapse of the banking system explained, in just 59 minutes. Our crack economics team—the guys who explained the mortgage crisis, Alex Blumberg and NPR’s Adam Davidson—are back to help all of us understand the news. For instance, when we talk about an insolvent bank, what does it actually mean, and why are we giving hundreds of billions of dollars to rich bankers who screwed up their own businesses? Also, two guys go to New Jersey to look at a toxic asset.

[Click here for ‘This American Life: Bad Bank]

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The Dave Ramsey Show is a personal finance radio show that’s actually worth listening to. Every few months I try out the finance podcasts available on iTunes and every time I’m disappointed. Many financial shows discuss money in the most dispassionate, dull way possible. The focus is always on the interest rates, exchange rates and futures.

The Dave Ramsey Show is different. Ramsey takes calls from average people and helps them with their money problems. He also knows that most of the time money isn’t their problem, they are their own problem. People call in and Ramsey makes them face their irresponsibly with money, their family problems and their addictions, all through the lens of how it destroys their financial (and personal) lives.

Ramsey has a simple fix-your-finances algorithm that he mercilessly applies to all the callers. They are his ‘baby steps’ and go as follows:

1. Put $1,000 in an emergency fund.

2. Pay off all your debt using a debt snowball.

3. Save three to six months worth of expenses.

4. Invest 15% of your income into Roth IRAs and pre-tax retirement plans

5. Save for your children’s college

6. Pay off your home early

7. Build wealth and give

After you’ve listened to the show for a few weeks, you get to know what Ramsey will say before he says it — there is a church-like aspect to listening. Yes, you already know how how to lead a good and prosperous life, but it helps to hear the steps repeated over and over.

If you are not a Christian, be prepared for a few biblical moments in each episode. Ramsey always tells his listeners that people who don’t take care of their family are ‘worse than unbelievers’. When talking about future job paths, the question is always asked what the listener feels God is calling them to do. That being said, I am one of those unbelievers Ramsey thinks there can be nothing worse than, and I (and my unbelieving wife) both enjoy the show and listen together. For the unbeliever, there are some entertaining moments, such as a discussion on whether credit card numbers are the mark of the beast. There was also the time a listener’s mortgage payment came out to be $666 a month and Ramsey advised him to change it ‘for obvious reasons.’

Disagree with him though I may do on religion, his financial advice is sound. It was his plan that I followed to get out of debt. My wife and I owe our debt-free lives to him. Every Friday the show encourages people like us who have followed the plan to call in and scream ‘I’m debt free!’ when they’ve made it out of the credit card trap. While you’re working to pay off you debts, the Friday show is a mighty inspiring thing.

If you’re struggling to get out of debt, I highly recommend listening to the Dave Ramsey Show. You can click here to subscribe to the podcast. Also, if you are a fan of This American Life they did a segment on Ramsey a few years ago that’s worth listening to.

Look at the skyline of any major city and play the ‘who owns the tallest buildings game’. Almost always it’s insurance companies. These buildings are like the resort casinos in Las Vegas: they are evidence that, on average, people don’t win. I don’t go so far as Ned Flanders (who doesn’t insure himself because `it’s gambling’) but there is a similarity.

A warranty is a kind of insurance. You buy something, and pay the company a bit extra to fix it if it breaks in a given time period.

If you walk into Home Depot and purchase a washing machine, they will try to sell you the extended warranty. Imagine the warranty costs $100 for two years of coverage. Is it worth it to buy the warranty?

Think of the warranty as what it is: you are betting Home Depot that you will need more than $100 of repairs over the next two years and they are betting you won’t If you need $101 in repairs, you win, if you only need $99 (or 0) then Home Depot wins. Is it a good bet?

Well, you really only know one thing: the average person spends less than $100 in repairs on a washing machine every two years. If the average person needed more than that, the warranty would lose Home Depot money — they would either discontinue it or raised the price.

Statistically, if you want to save money, when you are offered a warranty, note the price and then stick that amount into a separate savings account for repairs. On average, over the lifetime of your purchases, you will come out ahead.

While I do have a separate `repairs’ ING account, I don’t always follow my own no-warranty advice. When I bought a shiny new MacBook Air, I also purchased the AppleCare warranty, even though it’s not mathematically the smartest thing to do. However, I did this because my laptop is a mission-critical device for me. In this case I was buying security.

So, if you have a fully-stocked emergency fund and would rather trade mathematical correctness for security, forgo the warranty and save your money.

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Header photograph by pvera

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This American Life recently did a show on the subprime mortgage crisis. I’ve listened to lots of shows on the impending credit crisis, but none have explained the situation with such simplicity and gentle humor as TAL.

[Click here for ‘The Giant Pool of Money’ by This American Life]

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Header photograph by Thom C

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There is a big difference between ‘having a job’ and ‘working’.

People mix the two, they say they don’t want to work, but they really don’t want to have a job. A job is boring, tedious and pointless for so many reasons. Working is not. If someone else makes profit from your effort, you are jobbing, if you are the primary benefactor of your effort, you are working.

Jobs are necessary for companies to exist. Companies can only profit by paying their employees less than the amount they are worth. If a company employs computer programmers for $30,000 a year, then the average programmer must produce more than $30,000. The difference between the value the employes produce and their salary goes toward the profit of the company. (It’s difficult to measure the value of an individual employee so their efforts are averaged together. For this reason, if you have an entrepreneurial sprit, you may be better off on your own. For more on this, see the essays of Paul Graham)

Jobbing isn’t necessarily bad. If you produce less value than the average employee, having a job is the optimal strategy. If the value you produce is less than that which is necessary to support your life, then get a job. Jobs, depending on the field, can be less risky than working. Even for the highly productive, the company they work for may give them leverage. A scientist working for a research firm will have access to tools and equipment he would otherwise never get on his own. With these he can produce much more than he ever could alone.

Working is when you are the primary benefactor of your efforts. If you produce more value then you are rewarded more. I suspect that some of peoples’ frustration with jobs is from their efforts not equaling their reward. Even when extra contributions are rewarded they are usually done in a delayed and somewhat arbitrary way. If your employer thinks you will continue to produce increasing value for a constant salary, why would they increase your pay? Or, if you are in a strongly unionized field, pay raises are across the board or not at all. But this is what you trade for security.

If you open a store and you own it, there is tremendous incentive to grow the business because you are the benefactor of all that effort. I define working as when the benefit of your effort goes directly to you, and not an employer.

Jobbing is demoralizing because, deep down, you know that you either aren’t being fully rewarded for the work you do (and never can be) or you know that you’re slaking off and not living up to your potential.

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Header photograph by Todd Huffman

Forbes has a slideshow up about the cheap billionaires. These frugal men include Warren Buffett, who still lives in the house he bought in 1958, Jim Walton, who drives a pickup truck, and others.

[Click here to see the slideshow]

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Header photograph by EverJean

Story via boing boing

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Unfortunately, I’ve suffered from being a naturally frugal person. I don’t make big purchases. I don’t have an expensive apartment filled with expensive clothes. Why do I say ‘suffer’? Because I’ve never been forced to track my spending. I’ve glided along under the impression I’m doing fine.

I feel fine, but what do I know? Science has shown, repeatedly, that people are woefully ignorant of their abilities. People who are the worst at a task often will self-rate their abilities the highest. Given this, I could easily be wasting significant amounts of money simply because I’m not paying attention to where it’s going, and overly confident in my natural frugality.

Currently, I keep vague track of my finances with a program called Moneydance. Here is a typical pie chart for a month’s spending:

Notice that big pink slice? The largest one after rent and tax? That’s the dreaded black hole of cash spending. Where does that money go? I have no idea. I have a sneaking suspicion that my fiscal irresponsibility hides in that wedge of the pie. To shine light in that darkness and root out any problems, I intend to track all my expenses for one month.

What I don’t intend to do is wildly change my spending habits. I want to get a baseline of spending activity to start building a reasonable budget on. Though I’m sure the attempt to perfectly capture a typical month will be somewhat marred by the dreaded Hawthorne Effect.

So, for this month, I’m tracking all of my spending and recording the results. I encourage you to do the same. Leave a comment if you’ll join me on this goal.

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Photograph by bachmont

On Point, an excellent current events podcast, recently did an episode on how to protect your investments from the falling value of the US dollar. From the show’s description:

It has been scary times for any American with two cents to invest and no idea where to put it. Stock markets — at home and abroad — way off their highs and who knows where the bottom is. Housing prices collapsing. Headlines full of crisis talk and emergency intervention. The pros say don’t panic, but some days that’s hard for a nation nursing IRAs and 401K nest eggs into an uncertain future. We need advice, and this hour we’re going to get it.

[Click here to listen to the show]

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There are a lot of get rich quick schemes out there. One of the oldest and best is writing a book (or blog) on the very process of getting rich itself. Fill the book with correct but hopelessly vague advice, wait for the dreaded Hawthorn Effect, then promote yourself as an expert.

An established author who uses this technique is Robert Kiyosaki, of the Rich Dad, Poor Dad series. His book is stuffed with oversimplified stories (of possibly dubious truthfulness). Try to use his books as a practical how-to manual for increasing your wealth, and well… good luck to you.

I don’t want this blog to fall into that category. Let me state, for the record, that I am not rich. I’d like to be one day, but I have a long, long way to go. I decided to start this blog after growing frustrated with many of the money blogs out there that seem to follow the nice-sounding-but-vague-and-impractical method for riches.

The goal of this blog is to be different. To detail real, practical how to articles on ideas that I’ve had experience working or that seem like good ideas. So, lets get started.

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Header photograph by AMagill

Active Income

Active income is derived from being in a physical place performing a physical task. Most commonly this is in the form of a job or work. You have to actively engage in the work if you want to get paid. Don’t show up, don’t get money. This is the most direct and clear way to earn money, but not always the most desirable.

Semi-Active Income

Semi-active income is from sources that don’t require you to always be actively engaged. For example, income derived from intellectual property. After the initial investment of time creating the intellectual property, you can earn income from it. While the income from the intellectual property will eventually decrease, it won’t immediately cease. The typical blog is also an example. Missing one weeks’ worth of posts won’t cut off the income, but long-term neglect will.

Passive Income

Passive income requires no investment of time or effort. The interest earned from savings or investment accounts is a good example of this. If you can live on a tropical island with no contact with the outside world and the checks keep rolling in, that’s passive income.