How Money Works in the U.S.

An interesting perspective on money in the U.S. Romany Folk always carry gold, not trusting paper money, and sometimes I think they are right. But, on a grand scale, I think that Ron Paul is pretty much insane, or at the very least, not practical. Having banks hold all their money in reserve is difficult for a variety of reasons. Making the U.S. government stem inflation...that's another matter.

Really, really good luck

Okay, here's the end of the stories about contracts.

Once there was a saga of two friends. Friend No.1 had bought the land from her husband's best friend's father, who had found out he was dying. Friend No.2 bought land from her husband's sister's father-in-law. I am not making up these relationships, even if I sound like the girl from Ferris Bueller's Day Off.

Friend No. 1 bought horse property and improved it. The Ones put in a septic system, ran electricity to the property and put in fencing. They decided to sell but it turns out they had never actually gotten their friends to sign the mortgage contract. There had always been an excuse -- first, it was grieving over the father who died (but charged 9% interest on his deathbed, and wanted 12%). Then it was the son who was constantly out of town. So the Ones paid their "mortgage" for 5 years before finding out the family had other liens on the property, the big one being from the IRS. They had to abandon the property and start over.

Cost of the land: $35,000
Cost of the improvements: $15,000
Worth of the property at time of abandonment: $120,000
Loss, in real dollars, through payments and improvements: $45,000
Loss plus equity: $130,000

Now for the Twos.
The Twos were in a similar situation. They bought a piece of land at $18,000 and put a mobile home on the property. The Twos, however, did get their brother-in-law to sign a contract. The problem was, said brother-in-law didn't actually have the deed to the property. His father had it. The Twos are actually very good with their money, so they doubled up on payments and paid the debt within 2 years. Three years later, there was still no deed. The sister went into a Betty Ford clinic, which made them fear that she had taken a loan on the property to pay for her addiction.

However, through pure, blind, and wonderful luck (I really, really like the Twos, and they are actually very level-headed, they are just too trusting!) the sister came back from Betty Ford facing a divorce and decided they needed that deed before everything fell through, so she got her husband and father-in-law to sign and my friends called yesterday to say they had the deed to their property. I couldn't restrain a whoopee!!! myself when I heard. In fact, I want to say that I am putting these stories on my blog so that other may avoid these errors. Please, please avoid doing either of these things! The Twos won out in the end, but spent 3 years stressed and unsure whether they truly owned the land they were on or if they'd just given an alcoholic $18,000 to spend on her habit.

Cost of the land: $18,000
Improvements: less than $5,000 (they opted not to improve the property until they had the deed in hand -- a smart move, I think)
Worth of the property + improvements today: $85,000
Total gain: $62,000 (this isn't perfectly accurate; there was some loss from interest but I'm not sure how much, as they paid it off so quickly)

Total cost of peace of mind: immeasurable

Contracts are...binding

This is part II in a series about reading and understanding contracts. Let's review what I went over last time:

1. In order for a contract to be binding, you must actually sign the paperwork.
2. Make sure the person(s) signing a contract are the actual parties involved. Do not let someone sign for someone else, and do not accept a contract with someone who does not yet own the item in question.
3. Read the contract. Read all of it.

These might seem elementary financial instructions, but I cannot believe how many people sign without reading what they are signing for.

I think this problem is exacerbated by the number of contracts (many of them nearly meaningless) that we sign in order to do anything. For example, there is a statement of use policy for nearly every website (including blogger, the host for this one). This policy is several screens long and is pretty standard. Incidentally, I have read it -- more than once. I used to teach a class on blogging, and I made each and every student read it too. It's important to know what's going on.

That being said, I generally skim most contracts of this type, usually because I have already read many versions of them and they are usually all very similar. I look for unusual terms, such as "arbitration" (what is allowed? Are they protecting themselves from lawsuits?) or glance at the privacy policy to see if my e-mail address is being sold down the river. THIS IS IMPORTANT. I have turned down contracts simply because the policy says they are going to trade my e-mail with whomever comes along.

Paper contracts are a different matter. I learned the hard way that credit card companies can withdraw a low-interest deal because of non-payment -- and then charge up to 32% interest. Thirty-two percent! This is an unbelievable amount. My mother was recently surprised that I have a credit card that has a "high" interest rate of 9% through my credit union. Why? Because if, for some reason, we forget a payment, the rate stays the same and they only charge $10. Most cards would charge $32 and raise the rate to 22% the first time you are late, even if it's by a few hours (and for some cards, the cutoff is at 5 p.m. EST on the day the payment is due). Don't be fooled by those "deals" credit card companies give you. They have so many rules, they are just waiting for you to screw up. If you read the policy first off, you'll know whether the deal is really worth it, because they have to disclose all those "hidden" fees. They aren't really hidden -- they are right there on paper, just waiting for you to read them.

Long contracts really are a pain to read, but read them you must. It took us three hours to sign the paperwork for our house when we bought it, but my husband and I BOTH read every single page. The title company rep was rather impatient with us, but I was determined to know what I was signing; thousands of dollars hung in the balance. Another time, a woman wanted us to sign a rental contract without reading it. When we did, we noticed that a crucial escape clause was missing. The woman, up until that point very sweet and accommodating, got very angry. It was fine, she said. There was a sign on the wall saying that the escape clause was there. I pointed out that I wasn't signing the wall hanging, I was signing the paperwork in front of me, and she could redecorate tomorrow. She became furious; didn't we want the apartment? she would say. Did we want to go elsewhere? We went all the way up to the president of the company (it was a large one, incidentally). Every single person refused to change the contract to include the escape clause. In the end we did exactly what she suggested -- go elsewhere. And the people at the next place were perfectly happy to let us read the contract, primarily because everything was on the up and up.

I think the main reason people don't read their contracts is that they feel embarrassed, particularly when someone says, "Oh, it's there." Don't take their word for it. Maybe they are well-meaning, maybe they are impatient, or maybe they are out to take you for all you've got. Remember, though, that most of these people, regardless of their level of honesty, don't care about you. They don't care if you lose $10K. They want to get you in and out so they can get back to studying their nose hairs or, better yet, making money from another client. So don't let what they think affect you! Probably you will never see them again. It's YOUR money. It's YOUR time. Use it well.

READ THE CONTRACT.

Read it and Weep

You know, a couple of years ago I met a woman who was having some trouble with the property she lived on. She and her husband had "purchased" it shortly after they were married. His best friend's father was dying of cancer, and they didn't want the property to be seized after his death, so they asked this couple -- I'll call them the Joneses -- if they wanted to buy the property. The Joneses didn't especially want that property, but they had horses and it was horse property, and so they bought it. The father charged them 9% interest and carried the contract (they argued him down from 12%), which is hard to believe. He was swindling them from his deathbed. Anyway, later he died.

Well, he never signed the paperwork because he passed away, so they called his wife to get her signature, and she said she was too upset to sign but that she would do so after things settled down. Well, a few weeks turned into a few months and a few months turned into a few years. The Joneses moved onto the property, bought a manufactured home, put in a septic system and ran electricity onto the property.

Then interest rates began to drop and the property, originally sold for around $35,000, rose in value. The improvements helped, and suddenly this little property had more than tripled in value, and the family they bought it from continued to give excuse after excuse as to why they couldn't sign the contract. The Joneses were ready to cash in on their investment and move into town, but they couldn't, despite having made a mortgage payment every month.

I advised my friends to consult a lawyer and finally they did. By the time they did so, however, the IRS had put a lien on the property for tax evasion from the family, and suddenly my friends were between a rock and a hard place. The lawyer looked at what they had, declared it worthless and told them to leave the property and start afresh. They did. The family they "bought" the property from had the audacity to call and scream at them for "leaving her with a worthless piece of land." Yes, worthless now, since the IRS was taking it.

The problem here was easy; nobody signed any contracts. Herein lies lesson number one: SIGN THE CONTRACT. ALL PARTIES MUST SIGN THE CONTRACT.

Next story.

A year or two passes and I make another friend, who has bought a piece of property from her sister-in-law (these are all true stories). The problem is, her sister-in-law bought it from father-in-law, and didn't have the title "just yet, but it's on it's way." Now these friends, whom I will call the Smiths, made up a contract and everyone signed it, but it wasn't signed by the person who actually owned the property. Also, the contract was never recorded and made official. Now the Smiths are actually very good with their money, they are just a little soft-hearted. They paid double and triple their mortgage to the sister-in-law and in just five years, paid off the mortgage. Problem is, that title is still "just about here." Later they found out the sister-in-law had a serious alcohol problem and nobody knows where the money went. They are continuing to stay on the property and hope for the best, but they are technically squatters because not only do they not have the title, they have never paid any money to the rightful owner of the property. They essentially paid someone who said she owned the property without any proof of ownership.

Lesson Number 2: MAKE SURE THE PEOPLE SIGNING THE CONTRACT ARE THE PEOPLE ACTUALLY INVOLVED AS OWNER AND SELLER.

Next story.

Fast forward another year and I make another friend. I will call her "Carolyn," since I don't know anyone by that name. Carolyn has been working for the company for 27 years and makes good money. Her husband makes six figures and between them, they should be very well off in Tucson. But Carolyn doesn't like to tell her children "no," and so instead of affluent they are $50,000 in debt with credit cards and living paycheck to paycheck.

Carolyn's middle son is a smart guy but not very practical. He goes to college and runs up $800 in parking tickets, for example, because he can't be bothered to park where he's supposed to. He decides to go overseas and takes out additional student loans (as did I, so I can't lay blame there). He wants to be a lawyer but already has $40,000 in student loans by the time he graduates, so he decides to join the military. They promise to pay his student loans and to give him a sign-on bonus, and he decides to enlist rather than become an officer because of a particular position he can only get as an enlisted soldier.

Middle Son (MS) graduates college and ships off to boot camp. About 2 weeks later Carolyn gets a frantic call. Two things happen:
1. The military takes his paperwork, including his contract, and he has no backup copy, and;
2. The contract now says nothing about paying $40,000 in student loans.

Carolyn is frantic. She realizes that MS never actually read the contract; neither did she or her husband. She raves at work, "Who reads an entire contract? Did you read your contract when you bought your house?" I hate it, but I nod -- Yes, I did.

Lesson Number 3: READ THE CONTRACT. READ ALL OF IT.

I will continue this in the next post.

Still finding new debt

If you follow my net worth calculator, you may have seen the numbers shifting as of late. There is a reason; I both find new money and/or assets, and I find new debt. It is amazing to me how little we've known about our money. I just found another $1095 worth of student loans (and also that we missed some crucial paperwork, causing interest to start accumulating 6 months early -- ouch!). Calculating our net worth every month and actually checking every penny has resulted in my finding extra savings along with extra debt. Incidentally, it will also save us over $500 in accumulated interest as we straighten out the paperwork (and has been a good lesson in communicating with my husband about our money and accounts!).

Despite this and my relative inexperience regarding money, tomorrow I will present my finance class for kids. This is an opportunity for me to grow and learn, as my classes are very interactive and parents are involved as well as kids (for those worrying I might warp the young). These are the things I have decided to focus on:

• Money, it's origins, and money as an idea
• Marketing, specifically marketing targeted toward kids
• Saving, spending and bartering as types of transactions
• The stock market and what it means to invest in a company
• Where to find stock prices, indexes and the like
• How kids can save money and the importance of compounding interest

This may sound dry as toast when I spell it out, but I'm going to do little quizzes; for example, I have a big plastic jug, a pile of paper, a handful of beads and shells, some coins and some precious metals, and kids will get to pick what is money. Of course, it is all money or used to represent money in some kind of form. Kids who get right answers will get a quarter put in a cup with their name on it or the opportunity to "barter" for a prize. We'll have a race to find a stock (they may have to look up the name) and read a picture book about how a smart woman used one grain of rice and compounding interest to save her country from famine. Then we'll look at commercials targeting kids and talk about what is truth and what is fiction, as well as comparing various $40 items (one toy, a pile of clothes, a bag of food, etc.). I think it's going to be fun and informative.

I haven't read as much about saving and investing as I'd hoped; part of this is because I've been sick with strep throat for over a week and unable to prepare. However, I am looking forward to seeing how the kids respond.

For my next post, I want to talk about contracts, mostly about reading them, regardless of how awkward you might feel about it, and I will bring some real-life stories. Stay tuned!

Investment Lesson #1

I think one of the hardest things about saving and investing is the pace of it. I don't know how many times I heard my dad say, "If I only had $10,000 to invest..." We all think that way sometimes, at least those of us who grew up hand to mouth like I did. $10,000 seemed like an impossible sum of money. I remember my mom saving $3,000 to put into an IRA (which they lost most of, selling when it hit $500 and putting it all into bonds) and it was like, wow, $3,000!

Saving takes patience. Investing, it seems, also takes patience, except more of it. I now have $150 in my investment account, but I can't make my first trade until I hit $350. Ho, hum. I'm waiting. I want to live on mac and cheese and put half my paycheck in so I can get started. I'm ready! To invest! Now!

Yet even I, as the greenest of green investors, know this is not the way to do things. It is best to start slowly and approach with caution. I have a deferred compensation account with a little money in it (now almost $3000 between two accounts) and it has gained, then lost, then gained again. I know this is how it works (by the way, I made $135 last quarter -- yippee!). Plus, I hardly know what to invest in yet.

So this is lesson number one, according to all the books I've looked through to date:

Invest in What You Know
Reading this was a huge relief, because pretty much 90% of investing is what I don't know. Maybe 95%. I've been looking around at what I use and know ... Target? New Balance? Eddie Bauer? It is surprisingly easy to find products that I know and use that can be invested in. Next is the hard part:

Research the company so you know it
Sure I "know" about Hormel chicken, but is it a company I want to invest in? What about Cargill? Is it publicly traded? What are their labor practices? Are they conducting shady deals in Mozambique or supporting schools and small farms? Sometimes things aren't what they seem; Cargill, on the one hand, is big, evil agribusiness. On the other hand, they are doing an amazing job of helping African farmers by paying a fair trade amount for cotton. It's a mixed bag.

Predict the Future
Ha ha ha, just kidding. Nobody could predict the future to see if a company would be profitable, but there are some red flags that crop up when you stay familiar with the business world. For example, Starbucks offers benefits to part-time workers, and is expanding quickly. Coffee is an extremely profitable business. But, I am thinking of the downside too -- Starbucks products are high-calorie items, so they could run into the same issues as McDonald's and other fast-food restaurants, with impending lawsuits for misrepresentation. They are also very aggressive, and some people see them as predatory. So, by reading what is happening in the business world, I can make an educated guess as to possible problems that can effect a business.

Invest in what matters to you
In my mind, a business that provides a good product and is fair to their workers is probably going to keep expanding and doing well. I feel better about investing in that kind of business, and after all, it's my money. I want to spend it on what I want, and that includes investing in companies I think are doing good business and contributing to the community. Maybe that's the woman and mother in me, but who cares? I might make a quick profit on some unknown company that provides a product unknown to me, or I might lose my shirt. I'd rather reward the companies that matter to me and to my life.

Take your time
This is the hardest part for me. I have been saving so aggressively, I overdrew on my checking account. I want things to happen, and I want them to happen now! But saving and investing is not a race. Most investments lose money from time to time. I am in it for the long haul, and losing $29 to the bank in overdraft fees is not the way to make money! I am learning the lessons the hard way. It's like dieting, but for your checkbook; slow and steady wins the race. I am trying to let go of my parents' ideas on money and save that $10 or $20 when I can. Maybe it will be this summer before I can invest, but it certainly gives me plenty of time to research my favorite companies and decide what I want to buy.

I am reading books and subscribing to financial RSS feeds. Hopefully, when I do invest, I can do so wisely. And, if when I lose money, I can't blame myself (a woman's curse!) but can step back and say I did my best...and hope for a better quarter next time.

Re: Kids Do Cost

Recently Boston Gal blogged about the cost of having a child, and there were a lot of comments, particularly about the reality of expenses. Some said $30K a year; others said $20/month. I think both are kind of a stretch, at least in my opinion.

It is hard to pin down the expense of having a child, because there are those who think that Baby Gap and matching furniture is an absolute necessity, while others get by on hand-me-downs and yard sale furniture. However, there are a few real expenses that do crop up. My husband and I were taken by surprise after our son was born; I had driven a Ford Festiva for years and suddenly we realized that a) It wasn't safe, b) It was hell getting a car seat in and out of it, and c) It rode so bumpy he cried the entire time whenever we went anywhere and made us both crazy. So, a new car had to happen, to the tune of about $10,000. With the new car came triple the cost of insurance. Oh, and maintenance costs changed: we paid $110 for four new tires on the Festiva, but the cost of one new tire for our new compact was $60-80, more than doubling the price. The cost of registration for the car went up by 1000%, and I'm not kidding. And that was just the car.

Here are some other numbers:
Daycare for Tucson (1 child): $350-700 a month, $650/month minimum for an infant.
Daycare in a metropolitan area (Washington DC) for one infant: $1400 a month.
Car seat: $50-350, and usually multiple versions must be bought as the child grows.
Crib: $175-? as much as you want to spend, to buy new.
Changing Table: varies, usually $50-$100. We got a $250 dresser with a top that converted to a changing table, killing two birds with one stone.

Bassinet: $50 and up, with moses baskets the cheapest at $50 exactly.

This brings up an issue: this time around (2nd kid) we bought a mini co-sleeper ($125) and a crib that fully converts into a toddler bed and then a regular bed ($325). We kept the mattress from our first child's toddler bed to use, but new mattresses are about $40 and up. The reason we did this is that we wasted a lot of money and time trying not to buy a crib for our 1st child and really didn't save much of anything. Here's what we bought: moses basket, $50; full-size co-sleeper (that eventually was broken), $225; extremely on-sale toddler bed, $50 + $60 mattress (also broke over time); twin bed, used, $100 (we got the mattress for free from a relative). Total: $485 and a lot of broken or worthless furniture, versus $550 for some beautifully made new furniture. We spent the extra $65 to save the headache. Okay, back to expenses.

Diapers and formula: $75-100/month. If you breast feed, it's free, but if you breast feed and want to work it's $250 for a double electric pump (I have to have one, as I don't have the leisure time to spend 45 minutes pumping at work) and $5 for a box of breastmilk bags. I go through about one box every two months. If you breastfeed for more than 6 months you break even.
Clothes: $40/month minimum unless you get a lot of gifts.

Total minimum cost for the first six months of a child's life: $1005 without daycare, $4905 with daycare. I didn't include things like blankets or a diaper pail, as we got a ton of free blankets from the hospital and you can always just tie the diaper in a plastic bag and throw it in the garbage. This is a very conservative estimate. In reality, my husband and I saved $5000 for my son's birth in 2002, and we spent all of it within 3 months. I tried to be very frugal, but the cost of a first child is high. I will say that it wasn't so bad for my second child, because we had everything. I am not embarrassed to dress her in her big brother's blue outfits either; it's ridiculous to not use perfectly good clothing because it's blue.

There was much discussion in the post about this article -- 6 ways to be grown-up about debt -- because the couple was going to spend $500 on a birthday party. Is $500 excessive? Yes, it is. But it is not unusual. I have been to a birthday party where the child had so many gifts, he actually got bored opening them. Now that is a family that is not spending the $167.50 a month I just discussed -- or even the frugal amount of $817.50 a month for a child in daycare -- but yes, it is pretty common. A lot of people work long hours away from their children, and the equation seems to go like this: number of hours away x guilt = extravagant gifts. My husband and I do a lot of trading to keep daycare costs down (see below -- they are still more than my mortgage) and have our children in care a mere 20 hours a week (full-time is actually 50 hours a week -- imagine driving time, fighting traffic, dropping off before work, etc.), so I don't have any qualms about calmly telling my child "no" when s/he wants a new something. And this year, my son is getting hand-me-down (but very nice!) wooden toys for his birthday, plus a Chuck-e-Cheese party (he's been asking for a year, after all). I still expect to spend about $150.

Am I spoiling him? I really don't think so. Last year we spent $75 and provided his class with cupcakes and some party favors. It's just the cost of having a party, period. And while I love being frugal, some things are just worth the money.

Anyway, that's my two cents on the cost of having a child. What about you? How much did you spend? How did you cut corners and save money? I'd like to know.