Bad Financial Advice: Just Default

I believe I once started a feature on "Bad Financial Advice." I don't know if this is a revival, but a thread on imamother about getting out of credit card debt bring me back to the theme. A poster advises someone seeking advice on her credit card debt to default on the payments. She claims it isn't so bad and, in this economic environment, you can even get credit again. Yippee. In this case, the mother looking for advise has $4000 of credit card debt, perfectly surmountable.

Ruining your credit isn't just a matter of getting credit and the dollars and cents of interest rates. Bad credit hurt those seeking employment opportunities. It can cost you a security clearance. It can even cost you your current job. (link)

Bottom line: employers use credit history as an indicator regarding responsibility, character, and trust. Bad credit is a risk factor, especially if you are dealing with money. Best to deal with the $4000 than seek an "easy" way out. That easy way out may cost you much more in the unforeseen future.

Look Before You Leap: Debt Settlement

(Any reader who is an imamother commentor, feel free to post my advice on any of the recent threads discussing debt settlement. . . . Disclaimer: This post is informational only and does not constitute personalized tax advice, just a summary of potential issues to be aware of).

There have, sadly, been numerous recent posts on imamother from families in untenable financial situations, often accompanied by plenty of debt, usually credit card debt. The "solution" offered by others is to settle the debt. You don't even need a company. . . you can do it yourself! is the advice. Some offer their success stories of negotiating debt down to pennies on the dollar. And, it it worked well for them, it should be something you should try too, right?

Well, maybe not. The decision whether to settle debt isn't just another solution for the amateur to test drive, like asking a credit card company to lower your rate or engaging in juggling debt from one credit card with a promotion to the next. . . . . nor is it particularly advisable to the leave it to the "professionals", i.e. those debt settlement/consolidation companies that have sprung up like weeds with all sorts of incredible claims that could work for you too. (I've noted many companies advertise heavily in the frum world).

Take my advice: before pursuing this route, consult a tax advisor/CPA who is familiar with the issues at hand. Just like in any other profession, the initials alone do not an expert make.

In short, debt settlement, unlike bankruptcy, can be a taxable event. In bankruptcy, unsecured debt is forgiven, although student loans and taxes owed still remain. In a debt settlement, there may well be a taxable event that one needs to prepare for. In such a case, the debt needs paid off as negotiated, and come tax time, an unfamiliar tax document called the 1099-C (Cancellation of Debt) will arrive in the mail and a new debt may be incurred, this one to good ol' Uncle Sam, as well as the State and Locality of residence. The taxable amount will, of course, be taxed at the marginal rate and could eliminate valuable tax credits. This could make the settlement not quite the bargain assumed.

The short of the long is that the amount shown on the 1099-C is taxable up to the net worth of the taxpayer. And, there is the rub. While some professionals in the debt settlement business will tell you ". . . relax about paying taxes on canceled debt balances. That should be the least of your concerns if you're upside down financially. Don't let the misguided criticisms of financial writers (who haven't done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom," you might define insolvency from a different standard than the legal standard.

(See Pub. 4681) When a taxpayer is deemed insolvent, there is no tax incurred. Where a taxpayer is solvent, tax is incurred on the amount of the debt settlement up to the amount of solvency. The insolvency worksheet (p. 6) assists the taxpayer in determining their Net Worth. Assets include just about everything, from the home to jewelry. Liabilities include all debts owed, from the house to the babysitter.

I can easily envision situations where a debtor may see no way out from their mountain of debt, see settlement as a great option, and end up in a pickle come tax time. This especially could be true where equity exists in a home or business. So, tread carefully. And feel free to point to this very, very incomplete synopsis when others recommend debt settlement. For some, it might smell like roses; For others, like rotten eggs.

Mesila Counselor on Correcting Erroneous Thought Patterns

The following was just published in Mishpacha in response to another letter. It is written by a Mesilsa counselor, an organization that I admire. I'm always thrilled to see well written pieces that help disseminate ideas that are key in helping build financially stable families. This is an excellent response. Rarely is solid financial advice groundbreaking as it is rooted in sechel and a mesorah.


CREDITS CARDS ARE NOT THE ANSWER
[Inbox / Issue 309]
In response to your article entitled “The Newlywed Spending Bubble,” Y.B. from Lakewood writes the following: “For some of us, credit cards are a lifesaver. Shabbos comes every week, no matter what your financial status is, as do the Yamim Tovim, bar mitzvahs, weddings, and the like. Even if you don’t buy the fanciest roast, you still need the basics, which can be burdensome for large families. And when your son’s toe is at the end of his shoe or already popping through, you can’t always wait until the funds are there.”

As a Mesila counselor, I have to respectfully disagree with that statement. For a family that is struggling to pay for its basic needs, creditcards are not a lifesaver, but a dangerous trap. Putting purchases on a credit card is an easy way to pay for immediate needs, but it creates a much worse problem in its wake.

If a family is already having a hard time making ends meet, paying an extra 15–30 percent in interest above and beyond the purchase price of everything on their credit card will surely make things harder.

Even if credit cards are a lifesaver in certain situations, a lifesaver is by definition something that should be necessary only in an emergency. Shabbos is not an emergency; nor are Yamim Tovim or simchahs. And kids don’t outgrow their shoes in a day or two. If a family is feeling the pinch from any of these normal, predictable expenses, credit cards are not the answer.

Y.B. goes on to write: “Some of us must have bitachon that, although we don’t know how we will pay off our credit cards, if we are doing ratzon Hashem, we are confident that He will provide for us in some way or form.”

This is a gross misapplication of the concept of bitachon, for bitachon does not justify acting in a way that is financially irresponsible. Charging things to your credit card and then waiting for money to miraculously appear is a highly dangerous habit, and one that the Ultimate Provider
will not necessarily underwrite.

So what is a struggling family to do when there are bills that need to be paid, but no money to pay them with?

For one thing, they can seek creative, low-cost alternatives to ensure that the family is adequately fed and attired. They can also build a spending budget that maximizes every dollar and allows them to meet their basic needs while avoiding unnecessary expenditures. And a prime example of an unnecessary expenditure is money paid to the bank in the form of
interest on credit card debt!

It is also critical for every family — even a family that is having a hard time making ends meet — to put aside cash on a regular basis. Even if all you can manage to put aside is $10 a week, the money will build up steadily, giving you your own little fund to turn to in a pinch — instead of having to look to greedy credit card companies for illusory salvation.

[Meslia Counselor]
Baltimore

Bad Financial Advice Is Everywhere

Don't worry readers, the Parade Magazine that comes with the Sunday newspaper isn't my normal reading material, but sometimes a story catches my eye. After reading what I was interested in, I turned the page to a story "How to Bounce Back from Bankruptcy" which is choke full of terrible advice.

The first piece of advice was to re-establish a credit history with just one credit card, perhaps a low fee card with a low spending limit. I'm sure the author would think a doctor giving advice to a recovering alcoholic to start drinking again with a low alcohol beer was off his rocker. Well, those who have a bad history with credit shouldn't be touching credit, certainly not from the get go because for some, credit (and spending) is a drug and an addiction. Debtors anonymous is the place to be, not filling out a Mastercard application.

I watched an interesting documentary on credit and the credit industry and it is a fact that one of the number of targets of credit card companies are those who have bankrupted. Yes, a good credit history is helpful. But someone who has found credit has been their downfall should steer clear and rest easy because, a credit history is not going to be of immediate need, and the need is overblown anyways. Yes, you can qualify for even a home mortgage without an extensive credit history. I did so many years ago showing a history of utility bills paid and rent.

Piece of advice number 5 is "View a car loan as the next big step."

While car dealers typically want to see at least a year of good payment history before financing a post-bankruptcy buyer, some dealers aren't picky these days. Initial rates can be as high as 22%, but reliable payers can refinance at better terms later on. Opting for a used car can keep costs down.

Amazing that even finance writers continue to propagate the myth that a car loan is a must. And a car loan at 22%? Is the writer out of his mind? The interest you will pay alone on such a loan can easily pay for my last car purchase. And, regarding that refinance: don't count on it after you take out the credit card that the author reminds you to monitor and keep low limits on!

I know I'm going back to advice I've given over and over again: save, put money in an interest bearing account, save some more, and pay cash for a quality used car. There are plenty of them out there. We plan to buy another used car within the next year.

The last piece of advice (7) is to plan for a mortgage. My advice: save, save, save and stop thinking about taking on more debt until you have plenty of cash in hand. I heard an interesting report from an economist that much of the present crisis could have been avoided if people had put the traditional down payments on their homes. I know it old fashioned, but "grandma's finance" was full of wisdom.

Advice like: get a credit card, take out a car loan (at up to 22%), and buy a home is a great way to . . . . . . . . . . .bounce back from bankruptcy or end up back in bankruptcy?

Along with "Ask Orthonomics" I foresee plenty of installments of "Bad Financial Advice."

Book Review: The Total Money Makeover

I have to thank my wonderful readers for introducing me to Dave Ramsey, author of the best selling book The Total Money Makeover. Meeting Dave Ramsey by listening to his radio show and reading his books (I have read a number of them) was sort of like meeting my financial twin. Who would ever imagine that my financial twin would be more fiscally conservative, Protestant, male, and bald? This promises to be a short review because someone has put a hold on this book and I cannot renew it and I'd rather someone who might need this book get their hands on it because I've been practicing "Grandma's Finance" for a long time.

This book is, in Dave Ramsey's own words "NOT sophisticated or complicated." It is not academic, nor is it a finance manual, nor does it present ideas that are earth shattering. Rather it is a presentation of a plan that will help individuals and families tackle their finances head on by getting out of debt and building wealth. Simple as that.

You might ask, what makes this book different from the many other books that outline the same concepts? I would answer that this book is both entertaining and inspiring, plus it has a great, easy to read format where ideas are set off for clarity. Unlike yours truly (that would be me), who has always been unsophisticated and risk adverse, Dave Ramsey has a story, or as he writes, "I have been there, done that. I have a PhD in D-U-M-B. So I know what it is like to be scared and scarred. I know what it is like to have my marriage hanging by a thread because of financial stress. I know what it is like to have my hopes and dreams crushed by my own stupid decisions."

As I mentioned above, Dave Ramsey is a Protestant, and a quite serious one at that. Some of the inspiration in his book does come from the Bible. Some might be afraid of his books because he is a serious Christian. I am not afraid of reading lines from Psalms (Tehillim) or Proverbs (Mishlei) because these passages only reinforce a commonsense Torah approach to personal finance, one of simplicity guided by a consistent philosophy. And if anything was quoted from the Christian Bible, it certainly isn't anything that our great sages have not said. If you listen to his radio show, I think you can appreciate his religious background more. One thing he I have never heard him advise is holding off children as a way to solve a financial problem. He considers building a family of great importance, which is not something I sense from other financial authors. His ministry is named "Financial Peace" the goals go far beyond sensible finance and into building strong marriages and families.

The real inspiration in this book I believes comes from the stories interspersed throughout the book of individuals and families that have "changed their family tree" by turning their lives around. Seeing how other people have succeeded is empowering! Additionally, Dave Ramsey has some great quotes and a good sense of humor. The following are some saying to hang your hat on:

"Winning at money is 80 percent behavior and 20 percent head knowledge."
"Ninety percent of solving a problem is realizing there is one."
"It is human nature to want it and want it now; it is also a sign of immaturity."
"We buy things we don't need with money we don't have in order to impress people we don't like."
"The secrets of the rich don't exist, because the principles aren't a secret."
"We have met the enemy and he is us."
"Don't even consider keeping up with the Joneses. THEY'RE BROKE."
"Radical change. . . is required for a money breakthrough."
"Christmas is not an emergency." (I.e. You know it is coming, so plan ahead.)
"Live like no one else today so you can live like no one else tomorrow."

The first part of the book tackles some debt myths, namely that debt is a tool used to create prosperity. As Dave [Ramsey] writes: "Debt adds considerable risk, most often doesn't bring prosperity, and isn't used by wealthy people nearly as much as we are led to believe." Another book that I recommend, which Dave references is "The Millionaire Next Door." I was raised in by unsophisticated parents who taught me to save for the next big purchase. I remember sitting through finance class dumbfounded by the idea that people would actually take out loans against their homes to invest in the stock market. I managed to run all the calculations asked of me, but in real life I've seen these calculations destroy marriages.

Dave also recommends against loaning to friends and relatives (see more notes on that below), cosigning loans (guess who is on the hook should your relative default?!), and payday loans. He debunks the myth that "ninety days [is the] same as cash" and that a person will always have a car payment (nope, "the average millionaire drives a two-year-old car with no payments") .

He doesn't like car leases (which he refers to as fleeces), new cars, 30-year mortgages, whole life insurance/cash value insurance, credit cards (most people spend more and few pay them off each and every month), debt consolidation (because it only treats the symptom) and debt-management companies (too much fraud and a great way to trash your credit in addition to treating the symptom via a 3rd party no less), buying gold, get rich quick schemes, gambling, mobile homes (OK, I doubt any of my readers have a mobile home, but you never know), prepaying funeral and college expenses (you can do better by investing, additionally see my notes below), home equity lines of credit, student loans, and bankruptcy (it might be necessary in some situations, but it isn't painless procedures where "you merrily trot off into your future to start fresh").

What does he recommend? Using cash, frugal living, getting on a written monthly budget, saving for retirement ("Ed McMahon isn't coming". . . certainly not without Techiyat HaMetim), being adequately insured and drawing up a will (auto, home, life, disability, health, long-term care for those over 60), having an emergency fund, paying off the 15-year mortgage, putting away for your children's college education, and having FUN with your money (not before you have some solid footing however).

Before delving into his plan, Dave Ramsey outlines some hurdles which cause people to resist changing their financial lives, namely:

#1: Ignorance or lack of know-how. Somehow when it comes to money, people get defensive. Dave writes: "Ignorance is not lack of intelligence; it is lack of know-how."
#2: "Keeping up with the Joneses: The Joneses Can't Do Math" and they are likely broke.

There is a story in this section that I think is worth sharing. Although the story involves Christmas, it could be about making a simcha or forgoing social expectations from what you serve or wear on yom tov, to what you do with your kids in the summer, to what you wear on your head:

"Radical change in the quest for approval, which has involved purchasing stuff with money we don't have, is required for a money breakthrough. Sara's breakthrough came with family. Her family was upper-middle-crust and had always given Christmas gifts to every member. With twenty nieces and nephews and six sets of adults to buy for, just on her side, the budget was ridiculous. Sara's announcement at Thanksgiving that this year Christmas giving was going to be done with the drawing of names, because she and Bob couldn't afford it, was earth-shattering. Some of you are grinning as if this is no big deal. It was a huge deal in Sara's family! Gift giving was a tradition! Her mother and two of her sisters-in-law were furious. Very little thanks were given that Thanksgiving, but Sara stood her ground and said, "No more.""

The Plan

Now that I've completed the (rather lengthy) introduction I will quickly outline the plan that Dave Ramsey recommends for getting out of debt and building long-term wealth which he calls Baby Steps. I am presenting the Baby Steps in brief. Plenty of questions are asked and answered in this section. If this plan is of interest, read the book!

1. Save $1,000 Fast: To inspire confidence you need to get started and focus your efforts. He recommends getting your hands on $1000, the baby emergency fund because "it is going to rain." Whatever it takes to get $1,000 of cash in your hands, do it. Have a garage sale, return stuff, work some extra shifts, cut coupons, etc. Once you've got it, hide it and keep it liquid.

[Shocking States: 49% of Americans could cover less than one month's expenses if they lost their income].

2. The Debt Snowball: Debt is the enemy and the goal is to eliminate all debt with the exception of the mortgage. Dave recommends lining up all the debts owed by amount and start paying them off from smallest to largest, while making minimum payments on all larger loans. I do have a quibble with this (see below), but he bases his method on inspiring confidence in one's abilities rather than on interest calculations which he calls "behavior modification over math." He has worked with many people and has observed that small victories lead to larger victories. The way to get the snowball rolling, of course, entails radical action and a lot of beans and rice.

3. Finish the Emergency Fund: Kick Murphy Out. "Murphy" is a play on Murphy's law. Dave writes, "an emergency fund can turn crises into inconveniences." Dave recommends a three to six month emergency fund of money needed to pay expenses if you lose your income. He mentions that women are more security oriented and that this step will improve many a marriage.

4. Maximize Retirement Investing. Here Dave recommends 15% of income be saved for retirement. First you put away in a 401(k) what your employer will match, followed by the remainder in a ROTH IRA if you quality. He has a nice (but simplistic) chart which clearly demonstrates just how much easier it is to put away small amounts when you are younger.

5. College Funding. I'm going to keep this section really brief. Dave hates student loans, as do I, and recommends figuring out how to do without. Note that saving for college follows saving for retirement. And Dave likes ESA's (Coverdells) over 529s because of the flexibility of investing.

6. Pay Off the Home Mortgage. Here he points out that the tax savings from a mortgage don't justify paying the interest and that leveraging your home isn't the way to make money. We all like to reduce our taxes, but it doesn't make sense to pay more interest in order to pay fewer taxes (a point finance and accounting professors will make which, unlike leveraging your home, is financially sound for those who want to follow Grandma's Money Rules).

7. Build wealth and have FUN. Once you have set up a strong foundation and have built some wealth through investing, there is no reason not to have some fun. It could be a new toy, being super-duper charitable, or a combination while making wealth a blessing, not a curse. Dave notes that wealth comes with responsibility and warns against "affluenza."

All in all, I HIGHLY RECOMMEND this book as a motivator for getting out of debt or just developing a philosphy toward personal finance. I would not use it as an investment manual (see note below). Many readers write me with questions and I am so thankful to my readers for introducing me to this book because I think it presents a simple and healthy view on how to approach finances including the spiritual.

I do have more Dave Ramsey posts coming up, so stay tuned.
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Like I said, I love this book, but I do have a few quibbles, which in the scheme of things aren't anything major which is why I am noting them in small print:
1. I don't like carrying cash, so I have a hard time jumping on that train. That said, I do not recommend taking out a credit card until you have established consistent and frugal spending habits. And I would also say that anyone who has reached the end of the month and found themselves unable to pay their card off in full should immediately start using cash and checks. The same goes for anyone seeing their savings falling in a quarterly period.
2. I think the 15 year mortgage is fantastic, but I can't seem to jump on that train either. A 15-year mortgage would be quite a squeeze for most young people buying into my neighborhood, even if they really have it together. I do recommend budgeting extra each month, but I think the emergency fund wins out over the 15 year mortgage.
3. Dave Ramsey rules against loaning money to friends and relatives as it creates a master/servant relationship and ultimately destroys relationships. (He does not opposed gifting under certain circumstances). This is a tough one to reconcile with what we have been taught about the mitzvah of lending. However, now that I've had time to digest his thoughts and think about some real life situations I know of, I think he brings forward a good point. Certainly that halacha takes into account the changed relationships as you must be careful about not even walking by the home of the person you have lent to unecessarily so as to not badger. Personally I think there is a lot to be said for free loan societies that serve as a middle man between the giver and receiver.
4. Dave Ramsey reminds the reader that over time the stock market averages 12%. While I do believe in investing, I don't ever make my calculations based on such a high return. As such, it is hard for me (a lazy investor) to get worked up about pre-paid college plans for example. I think Dave Ramsey has solid advice, but I look to him more for solving the debt issues rather than the investing puzzle.
5. As a math person, I have a hard time buying into a debt snowball that pays off debt according to the amount due, rather than the APR. But I do understand the reason he recommend this method, but I would probably recommend a hybrid method after building some confidence.

Please Don't Do It

Hat Tip: Ezzie

Sorry to overwhelm my loyal readers with three posts in one day. But just one more before I switch gears. I have a busy week in front of me. If anyone wants to guest post, let me know.

Dear Editor,
I would like to address recent discussion regarding high tuition costs.

I believe I have bitachon especially in parnassa issues because of events that have taken place in my past. That having been said, last year, after receiving scholarships from the various yeshivos that my children attend (I have 6 children in 5 yeshivos - 3 different levels: bais medrash, high school, elementary school), my total tuition bill came to approximately 82% of my take-home (net) salary. My mortgage payment put me over 100%. That meant that even if I totally gave up everything in my life except the house, I would still be running in the negative. For the record, although I’m not going to give out my salary, I am receiving a high five-figure salary in a major New York financial institution.

While I don’t advocate any sort of ridiculous alternative to a solid - and necessary - yeshiva education, clearly, something has to be done about exorbitant tuition
costs.

It is good there’s plastic, I guess.

Shalom W.

This is a letter to the editor at Matzav. I know the letter writer is not alone in charging it to the card. I know other families that charge and move the debt from one card to the next as they chase 0% introductory rates. But such a scheme can't last forever.

Please, please, please Shalom W, don't charge it.

Guest Post: Crossroads

It took me a while, but I finally convinced a reader of this blog to share her experiences of living life deep in debt in hopes that her story, as presented in brief here, can help other avoid similar pitfalls. Keep reading. If you have questions, I will forward them to her, although I cannot promise a reply.

This could be really long so I'm going to try and stick to the highlights. This was hard to write because it is of course, much more complex than can be expressed in a short essay.

Where we are now

$40k in credit card debt. 3 kids ranging 10 to 5. Our ages: mid-40s (me) mid-50s (spouse). Own our home with $130,000 mortgage. Spouse currently not employed due to an injury. Spouses' business owes IRS $20k and credit cards $50k. We have a $50k HELOC. Future feels very precarious. We are not saving enough for "retirement" (whatever that is). Due to this stretch of spouse unemployment we are almost draining the meager emergency fund. No other assets other than modest house. We have payed down about $40k in debt via Consumer Credit Conseling Services, but at $1500/month this is unsustainable and since I care not about my "credit score" I will probably declare chapter 7 bankruptcy in the next few months.

How we got here

In the interest of sticking to the point, I will divide this section into 2 subsections:
1) mindset/attitude and 2) crossroads, ie events where we could have gone one way or the other and what we chose. Why we chose it can be explained by mindset so I won't bother going into the mindset at every crossroad.

The Mindset

Here are several catchphrases that described the mindset that led me here. I don't think any of these are particularly unusual just like I don't think the end result (deep debt) is particularly unusual.

1. It can't happen to us. Other people go broke, but not us.

2. Comfortable with debt. My spouse was in the process of changing careers. How do you pay for schooling? Student loan of course! Starting a business? How do you fund it? Credit, of course. Need a car? Car loan. When you are comfortable with using credit to buy things, the criteria is no longer "Can we afford it?" because you can afford anything you want, rather "Do we need it?" And when you have a seemingly bottomless pit of money to pull from, that line between want and need becomes fuzzy indeed.

3. Everyone's doing it. But of course when you reach a certain stage in life you 1) buy a house, 2) buy a car. Of course if you are frum your kids go to day school. Again, no objective criteria for determining affordability. Other people can do it -- surely we could, too.

4. Frum Welfare mentality. When we started dealing with the issue of paying tuition and were starting to glimpse the foundering of our financial house of cards, in the back of my mind was this sense that The Commuity would help us out. Whatever that means. :-) It's in the interests of The Community to have happy, stress-free, home-owning families with kids in day school. The Schools being an extension of The Community would surely not let us flounder. That same mindset was reflected in that financial profile of the frum family where the woman expressed something about The Community taking care of her for a couple years in the event of her husband's untimely demise so they didn't need [more] life insurance.

5. Spending on the future. At the time we had our first kids and bought our first house, we still had not really established ourselves financially. We took on a lot of debt because we knew we'd be making more money in the future. Well, we are making more money now (or were until April), but the debt load was so high by then that a huge portion of it went to servicing debt.

6. This isn't really a mindset, but lack of communication between husband and wife on financial matters contributed greatly to this situation.

7. I should mention that I've had a credit card since college (mid-80's) so the credit spending habit has been loooonnng established.

The Actual Mistakes

Bought a house. We had enough for a modest down payment on a modest house (<$100k). But the house needed a lot of repairs and we are not do-it-yourselfers. Credit card debt +$30k. The house was a deal we "couldn't pass up", but in reality we couldn't afford it because we hadn't really established ourselves financially. We had >$50k in student loans and no emergency fund. That $30k eventually was paid off with inheritance money. Lesson learned: Do not buy a house when you are already broke from debt and have no emergency fund.

I stopped working full-time after baby #2 was about 14 months old (#1 was almost 3).. I was losing her mind. We 2 young babes (under 3) and no help from hubby, an 8 to 5:30 work schedule is a straight path to the nuthouse. However, this meant losing employer healthcare. Healthcare costs including insurance ended up being about $1200/month. We could not afford that so much of it went straight onto the credit card. Husband, in 2nd career till not financially established. I have to admit that it really gets under my skin when people (or schools) suggest that household help for dual-fulltime working famlies is a luxury. FYI I can not afford household help now and sometimes it's - ahem - very difficult. The stress of running the house myself and working full-time surely contributes to the current mindset (read on for more details on that). Let's leave that subject for another day.

Maintained faith that things would improve and anyway, people like us don't live like "that" so we continued to incur credit card debt. Lesson learned: where there is a will, there is a way. If you don't have the money, don't spend the money!

Refinanced home to consolidate some CC debt. Our monthly payment rose by $400. I did not understand the difference between secured and unsecured debt. Lesson learned: Do NOT TRADE UNSECURED FOR SECURED DEBT. I go nuts whenever I hear someone on the radio give that advice to someone with a lot of cc debt.

Took HELOC to finance business. As Dave Ramsey says, the cash flow should be from the business to the home and not the other way around. Lesson learned: Do not use your home to finance anything other than your home. I think many people have learned that lesson in the last year!

Bought brand new toyota sienna with inheritance money. Should have stuck with something WAY cheaper. But at least there is no car loan.

The Turnaround

We were in marriage counseling. And when I spoke to a therapist about our financial situation he got very alarmed. Clearly we were overspending and needed to stop. I decided at that point that I was not going to charge another cent even if it meant losing the house, which for me was the worst possible outcome to this situation. It was a turning point for me. At this point I was forced to confront some very uncomfortable situations, such as bouncing a lot of checks and begging the bank to cut down my overdraft fees, calling the kids' schools to say I had no money for tuition, told my cleaning lady not to come back because I had no money to pay her.etc. I also became fed up with my marriage and that enabled me to put my foot down a little more because I no longer cared what my husband had to say about it. It was all very liberating.

Read Total Money Makeover (Dave Ramsey) and started listening to the podcast. I finally started learning what it means to be able to "afford a house". Dave Ramsey provides many useful rules of thumb. Hearing stories of self-sacrifice and paying down debt was very inspiring. He also is very systematic about personal finance and I need that.

Increased work hours to qualify for healthcare. Signing that medical insurance form lifted a significant weight from my shoulders.

During a conversation with our accountant he disabused me of mindset #3 (see above). He pointed out that as far as he knew, everyone was struggling and many many people were not "making it". I felt better knowing that.

Spoke with a financial "big wig" in town. He runs a major charitable organization and is of an entrepreneurial spirit. However, he firmly told my husband that while dabbling in business projects was fine he needed to stay focused on working 40 hrs/week. This made the light bulb go off in my husband's head and he has been diligently putting in those hours since then though as a free-lancer so the benefits remain my responsibility.

The Here and Now

Though we are very frugal now, we still do not adhere to a budget successfully. I don't know where the mental block is. SL I'd like to pick your brain privately on this matter. [My pleasure]. The immediate financial picture is on hold due to temporary unemployment of spouse due to an injury. All creditors have been put on hold. We still owe a couple months tuition and only necessities are being handled. B"H we can handle necessities. The silver lining to the injury is that it will lower our income to the point where we can declare bankruptcy. Sad when bankruptcy is the silver lining.

Some Links for Your Reading Pleasure

The Rebbetzin's Husband has put together some tips on (successfully) bringing children to shul. This is a very helpful list. Articulating expectations and having a back up plan is key. I might add choosing an appropriate minyan to the list, where applicable. Role modeling is important.

Ezzie has put up some figures regarding Orthodox Credit Card debt from the Jewish Economic Survey he has been running. It appears that there is a huge jump in credit card debt once a couple has four children. The average amount is simply staggering: $31,640. If you calculate out the potential amount of interest being paid on that type of debt, and stare at that amount for a while, you can see that we can't bury our head regarding the problems of debt in our communities.

Amen Brother! Honestly Frum is screaming about money leaving our own backyard while many local institutions are on the verge of major financial problems. I have no idea how much tzedakah leaves our own communities that could possibly stay within the communities if parlor meetings and solicitations for every one's favorite project were to cease. But, so long as drivers are still carting around 3-4 meshulachim on a regular weeknight, I'm afraid that we are only shooting ourselves in the foot by sending money abroad. My own phone seems to be ringing off the hook lately with solicitations for non-local tzedakahs. And meshulachim aren't any less in number as per my own amateur observation. I believe it was just Wednesday night when I told a collector that our own children in our own community needed our funds desperately too.

Perhaps a more face to face approach to keep tzedakah in the community is needed. Door to door collections featuring the local principal anyone? Doesn't seem time efficient. But if collectors can both afford plane tickets and a driver, perhaps it is time to send the troops out marching?

Mrs. Braverman of Aish.com seems to have hit a cord with some of her readers in her column on selfish kindness. But it didn't hit the same chord with me. In fact, fairly recently we made a small birthday party with family for one of my kids. And I gave the same little talk before the party started that I always give: after you open a gift you say thank you whether or not you like the gift. My mother used to give me the same talk and after receiving some rather hideous outfits and saying thank you (as well as writing the card), my mother would say, you only have to wear that when Grandma comes around.

Must Read Articles

Hat Tip: anonymous commentor
This NY Times article, My Personal Credit Crisis, written by an economics reporter for the NY Times, is a must read. Ever wonder how it is that finances can get so out of control, so quickly? Check out this profile about an already overextended husband, who took on yet another obligation (a mortgage) and soon found out he was down to $196. Next thing you know, the credit card debt incurred when the cash had run out how balloned out of control. The $3,000 of initial debt was now $50,000. The loan officer that originally helped secure the mortgage made him feel that their situtation was normal, and naturally he suggested a plan that would get their on better footing by borrowing their way out of debt (huh?). Things were going a bit more smoothly, until his wife, who was now back in the job force and making a respectable sum of $60,000, lost her job. Now they are awaiting foreclosure.

Hat tip: Jeremy
What about those credit card users who always pay off their balance in full and enjoy getting some cash back? Well, times are a changin' and while members of Congress keep themselves busy trying to make sure irresponsible credit card users don't get hit with the type of fees that can make their debt spiral out of control in the blink of an eye, there is speculation that borrowers who have been taking a "free ride" are going to suffer the collateral damage as a result. Someone has been paying for the gravy, and when the plug gets pulled. . . . . .well, it is probably time to start thinking about maintaining a check register again (I can't even tell you what a terrible mode a small discrepancy send me into. Going back to check writing hardly seems appealing to me). Perhaps I can make it more fun by ordering some cute checks! It is very possible that the clock is going to be turned back.

CNN Money Should Get My Number on File

Hat Tip: Numerous readers who alerted me to the Money Magazine Article on Faith and the Expense. Please feel free to self-identify.

Money Magazine is featuring three families in a article about religion and money: a Muslim couple, a Christian family with three children, and an (Orthodox) Jewish family with four children and a fifth on the way. Each family pulls in combined income in the low six figures, and each family incurs religious based expenses, particularly tithes. Personally, I have a difficult time thinking of tithes as a religious expense, as we learn in Pirkei Avot that tithes (done right) are a protective fence for wealth.

The Muslim couple's issues don't particularly interest me. Being observant of one's religion comes at a price, and the $1,800 they pay to maintain a mortgage according to Islamic law seems more than manageable. Additionally, the mortgage won't last forever and given their current income and spending habits, I see no reason they couldn't knock off the mortgage early and rid themselves of the expense. Sure, they have racked up some student loans that they wished they hadn't. But they have no credit card debt, and have even managed to put together $17,000 in liquid savings, which will start to grow now that they have been educated about some of their options regarding investing and Muslim law (think heter iska). They are well on their way to creating a small, but reliable passive income.

And, while they have made some errors, such as passing on 401(k) match due to lack of education, they have a lot going for them. They are young (28 years old), have not yet started a family, although they plan to do so, appear to spend modestly and only on a cash flow basis, make a decent combined salary, and are saving. While I can see it is difficult not to have a full smorgasbord of potential investments, they do have options, and most importantly they have decently sound financial behavior. (My own preference would be to knock off the student loans before buying a home, but I don't see their situation as unmanageable).

The Christian family is a bit more interesting. Only recently has their combined income surpassed six figures. Amongst loyal Christians there are those that believe in wealth building and those that believe that wealth building detracts from service to the church. We seem to have a similar divide amongst Orthodox Jews. Already into their 40's and with 3 growing children, they found themselves tired of living on the edge and decided that perhaps taking care of their own needs isn't quite the distraction they had been raised to believe it to be. They discovered that not having funds to fall back upon, worrying about how they would educate their children in the future, and having to take on 2nd and 3rd jobs, was also a bit of a distraction. So, the husband trained for a higher paying position and now they are firmly within the middle class.

Like the Muslim couple, I don't see impending doom and gloom. The Christian couple, while a bit older, certainly has time ahead of them. They are using their increased income to save, and in only two years have put away $18,000 ($8,000 in retirement accounts and $10,000 in liquid savings). Assuming that they continue to save consistently and do not touch their savings, it won't be too much longer until those savings start to provide a second, yet passive income of their own. The family seems committed to debt free living, e.g. the wife is planning to attend divinity school, but they are saving for the expense in cash. And while cutting spending, as recommended by the financial planner, was met with some skepticism, they are putting in effort and surprising themselves by just how much extra savings they can squeeze out of their budgets by changing their habits. One hopes that buying a new, larger home, won't be a mistake. I wish they had went in for something at a lesser cost, but they seem to be on the up and up.

And now we come to the Jewish Family. . . . . . . . . and I think the financial planner procured by Money Magazine should have called Yours Truly before dispensing advice!!!

The good news is this: this family can get out of debt and this family can build a better financial future. But, they won't do so following the financial planner's advice which have little to do with the underlying issues. (I don't really blame the financial planner. He probably believes that the ritual and religious costs are completely non-negotiable).

The bad news is this: The numbers presented don't tell the entire story and I believe that the situation is worse than it appears.

Here is my math. The article notes that they sold a home in Los Angeles and walked away with a $300,000 profit. The article notes that they bought a home in Houston for $270,00 and paid an additional $30,000 to renovate the kitchen (total: $300,000). Yet, the family lists its investments at $95,000 and they have a current mortgage liability of just over $105,000.

Scenario 1: Not having a multi-year balance sheet, I can't presume to know the entire story, but the most positive version of the story would be that the couple hasn't saved a penny since they sold their Los Angeles home for a $300,000 gain and that the missing $100,000 disappeared in the fall of the market making it "on paper."

Scenario 2: Another, unfortunately likely scenario is that the couple took about a mortgage in the low $100,000's, leaving them with a bit less than $200K from their $300K gain. Their moving costs and the $30,000 for the kitchen remodel, left them with a large chunk of change, perhaps around $150,000. The $95K, much or all of which I believe sits in the 401(k) came from annual contributes and employer match, and therefore did not come from the $300K the couple had in cash at one point. Somehow, between their move from Los Angeles to Houston, they have worked through a sizable chunk of change and more, evidenced by their sizable and mounting credit card debt of $25,000. In other words, they are spending more cash than even they (or the financial planner) cares to realize.

Perhaps the truth as what has happened along the way lies somewhere between scenario 1 and 2. No matter what happened in the past, the couple needs to change course via a change of spending habits. The money that has disappeared somewhere along the line isn't coming back, and it appears they have some out of the ordinary needs with their 3rd child.

The financial planner recommended the following:
*Restructuring their debt from their current 15 year mortgage to a 30 year mortgage that the planner predicts will be somewhere between a .5% or 1% lower. He suggests rolling their $25,000 of credit card debt into a new mortgage.

The financial planner notes that the increased cash flow should take care of future tuition increases and allow them to contribute more to retirement. (I don't think the financial planner has a clue about day schools and how "financial aid" works! I also don't know how financial aid works in Houston either, but in other areas, restructuring liabilities to free up cash sticks you with a higher tuition bill. Many people refinance regularly to make more room for tuition).

The wife is perhaps a step ahead of the financial planner noting that she fears they will just end up in the same position, i.e. running up credit card debt, because of *behavior.* She is willing to consider the idea after seeing if they can stick to a strict budget. I think that if they stick with a strict budget, they should be able to knock off a good amount of their credit card debt and won't have to worry so much about refinancing.

*Increase the amount of life insurance they carry to cover day school in the event of early death of the breadwinner.

Talk about one step forward and two steps back. I am in disbelief that the Mrs. believes that if her husband passes that the community will 1) take care of her children and 2) marry her off within 2 years [getting her back on her feet]. Of course, it isn't that a school doesn't want to help the widow and her children (we are rachamim bnei rachamim), but it seems that day schools from North to South and West to East are coming to the realization that it is sink or swim time, or in other words, not all can be helped to the extent needed. Sad, but true. Regarding remarriage, I simply don't think it is always in the best interest of the widow and children to remarry quickly, even if it were so easy.

* Write a will, especially to provide for the needs of their special needs child.

Fine advice, but it simply doesn't address the here and now. But, we all (and I'm talking to myself here) should probably get on task.

Here is my advice:

*Go on a super-duper-financial-diet because credit card debt is an EMERGENCY. Track every single penny that is spent (including the amount spend every month to pay for financing the debt because that is likely to provide some serious motivation):
1. Put the credit cards on ice. They are completely off-limits.
2. Put together a small cash emergency fund as quick as possible, perhaps $1,000. If you have to advertise yourself as a fill in cleaning lady, do it. If you can watch neighborhood kids when you aren't working, do it. If you have stuff you can sale through Ebay, Craigslist, or a consignment store, part with it. You need cash and you need it quickly.
3. Take a full accounting of all credit card debt. Your inventory should list amounts due from the card with the highest APR to the lowest. Make minimum payments on the cards with the lower APRs and throw cash at the card with the highest APR. Once you have paid off a card, start throwing money at the next card.
4. Stop contributing to your 401(k) because you are going to get out of debt asap and will soon resume contributions after that. (Some might say stop contributing beyond match).
5. Make sure you are only withholding the taxes you need to pay. Many Americans over withhold and love to get their refund. Don't give Uncle Sam an interest free loan while your credit cards explode.
6. Cut the grocery bill in half immediately. Over $1,000 a month is simply too much to spend. $14.99 a pound brisket gets replaced by chicken or fish. Chicken and fish get replaced by canned tuna, beans, or legumes. Hard cheese gets replaced by soft cheese. And you start looking for alternatives to the $9 a bottle grape juice. If you can't buy grape juice for under $9 a bottle in Houston (Houston readers, I need your comments), you need to start freezing the 64 ounce bottle in four ounce increments for making kiddush. Even at $9 a bottle, this shouldn't be the thorn in the budget.
7. Medical expenses should be tracked for the past year or two so a reasonable prediction of future needs can be made. Set up a Flexible Spending Account with pre-tax dollars and pay expenses from the FSA.
8. Sponsoring a $500 kiddush is going to have to wait until it can be paid for in cash. According to the article, the family contributes $3,600 a year to their synagogue, of which $600 is dues. It also mentioned sponsoring a kiddush for birthdays. While the question of cutting back of tzedakah in order to get out of debt should be left to qualified Rabbonim, sponsoring kiddushes is something that can be cut back on, especially because it means IRREPARIABLE LONG TERM FINANCIAL DAMAGE.
9. Reprice your auto and home insurance. Shop for new quotes every 6 months to a year. Look into lower cost alternatives for all major expenses, from camp to childcare to auto insurance.
10. Slash all variable expenses. Turn off lights, put the lights you use on Shabbat on timers, hang laundry to dry, take shorter showers, etc.

While I see the Christian family and Muslim family building wealth little by little, I see the Jewish family loosing ground and quickly. $25,000 of revolving credit card debt can easily cost between $3,000 and $7,000 annually to finance. Think about this for a second. . . . . .that is a lot of money! It is easy to see their debt doubling in just a handful of years. But, if they get out of debt, they will be freeing up thousands of dollars a year, and they don't even need to refinance their home. The Jewish family can also get themselves on far better financial footing, even without cutting tuition out of the budget. They need to speak to a Rav about how to give tzedakah in the here and now. They need to cut their spending like their is no tomorrow. What they don't need to do right now is refinance their home. They are already likely a few years into their 15 year 5.5% mortgage. The size of their mortgage is not unreasonable, in fact is is lower than their combined annual incomes. While I will not declare that they should not refinance, I will declare that it won't solve the underlying problem.

I wouldn't leave a stone unturned, mostly because I believe that the family can win this battle.

Your comments.

Dear Orthonomics: What do you think?
What About your readers?

Dear Orthonomics,
Can you please advise? I have found an incredible deal on a quasi-essential big ticket item that would really help improve quality of life in our home. I’m thrilled to find this item, which I predicted would cost over $1000 for only $600. However, I do not have the cash to buy this item and will need to put it on a high interest rate credit card. I will be able to chip away at the debt each month and believe I will pay off the entire purchase in just over one year, incurring around $100 in additional cost. I’ve calculated the price after interest and it still is a deeply discounted. What do you think?
Sincerely,
A reader

Dear Reader,
My answer won’t surprise you! Don’t do it! Personal finance is more about behavior than numbers. While the numbers work out favorably, you have to keep in mind that another great deal will come along. Between now and then, you can save up the cash for the purpose. As you state, the item is quasi-essential, not essential. Refraining from the purchase will not prevent you from working or receiving necessary and expensive medical care, it will simply make your life more convenient.

We have a saying in this house, “debt begets debt.” If you do not have the cash to make a relatively small purchase, and this is a relatively small purchase, you are certain to find yourself in a bind as unexpected purchases accrue. And life has its way of throwing the unexpected, from increased prices for essentials like rent, utilities, food, or gas, to some thug sticking nails into your car tire twice during the same week or busting your windshield (yes, both of these things happened to us!), to the shower doors and bedroom door lock malfunctioning and leaving you nearly trapped inside (yes, both of these have also happened to us!).

If you really believe that you can chip away at this debt over the course of a year, you can also SAVE up the cash over the same year. I recommend going into serious saving mode through all means possible. Look for a little bit of extra work here and there. Before long, you will have the cash and another deal will come along.

Sincerely,
Orthonomics

Using Credit Plays Games with Your Mind

The more I read, learn, and even work with people on budgets who have fallen victim to credit cards and other consumer debt, the more I loathe credit. I made a comment in the last post that credit doesn't slow consumption, it fuels it. And I believe such more and more every day.

Since it is at least tangentially related to my last post, I thought I would point out a back and forth I had with Ezzie on the the use of credit personal credit to make money (note: I am not addressing using credit for legitimate business purposes, which is a different discussion than this one) .

Ezzie advocates the idea of using student loans to build assets in his post Guaranteed Gains. I'm not familiar with all of the ins and outs of student loans, but I know people who do something similar with credit cards, i.e. taking a large cash advance, putting the money is a savings or CD account, and planning to pay back the money before interest on the card kicks in.

Those who recommend these ideas, of course, only recommend them to the "responsible." But something I have learned in life is that few view themselves as irresponsible. And herein lies the problem.

Below is my [slightly edited] response to Ezzie:

I really dislike the idea of building both sides of the balance sheet. It convinces the borrower that they are making money, when they are really setting themselves up for a potentially sticky situation.

Many people I know who are debtors have themselves convinced that they are quite responsible. I would bet the more responsible go by the advice of chazal to never trust oneself until their dying day. While I believe chazal was looking at the issues of the yetzer in terms of keeping hilchot yichud, I think the advice could be extended to taking on debt, experimenting with gambling, etc.

I'm not going to fly into a tirade about credit cards. I do use a credit card, although I pay it off each month in full and I enjoy my cash back. However, like I said in the other comments, if you are going to use a credit card, I would wait until you have some established spending patterns, a budget, and an emergency fund. Too many people think of their credit card as an emergency fund.

Back to the student loan scenario (and you are not the first to promote the idea, nor the last. In fact, not too long ago my husband and I were asked out opinion of a similar "money making" scenario involving a credit card cash advance a 0% APR for 1 year).

I can see the following scenario happening:

An 18 year old hears of this idea and wants to make some cash. In his mind the potential thousand or few thousand is big money. And he thinks he will have no problem putting the money away, being paid interest, and then turning around and returning the principal. And interest free loan sounds great to him.

But let's imagine for a moment:

Sometime towards the end of college, he is introduced to a girl and they are headed to an engagement. He wants to impress her and takes her out for nice dinners, buys her jewelry for the engagement, etc. He feels like he has some cash to spare. After all, it is his senior year and he has been building up his assets. Our chatan even has taken on some work and has made a good amount of pocket money. He believes his investment income is tax free, but knows little about the tax system. As a dependent, he is surprised that his passive income pushed him over the line and now he owes taxes on money he thought was 'gravy.' Setback number one. But he pays up the taxes (state and city too. . .who knew that the state and city can eat money at a lower threshold than the feds?) and is back on track.

Now the wedding comes and, like many other chatanim, he and his kallah decide a one year stint in Israel at Yeshiva would be the best way to spend their shana rishona.

Student loans are deferable, right?

He will have a [small stipend] and she can work as a therapist with special needs kids.

They defer paying back their student loans. And the [loan] money is still in tact and is still growing.

But soon his wife is pregnant. And they need a bunch of stuff. And her job isn't working out quite as planned. His stipend doesn't seem to be stretching as far as they thought it would stretch. So they dip into their "savings."

After a year, they return to America. The student loans are still outstanding, and what is left in "savings" isn't enough to pay off the loans, plus put down a security deposit, 1st months rent, put down a deposit for the daycare, etc.

What seems like a good idea, might not seem like such a a great idea in hindsight. Oh. . . and the young couple returns to a down economy. Finding a job isn't so easy and there is a sizable gap, but the loans can't be deferred any longer, and the loan debt is now growing. It seemed like it would never accrue interest. That wasn't part of the plan. The money was going to be there to pay them off.

I never though I'd have something positive to say about credit card debt. . . . but here it goes: when debt is building on a credit card, it has its own line item and as the interest charges rack up, it can create an urgent situation [for some people].

Student loans, on the other hand, can be deferred and lack a sense of urgency [everyone has student loan debt, right?]. And, yes, I've seen couples defer them after they marry to spend a year in Israel. The part about ends not meeting in Israel is also something I've seen.

[Just something to think about before trying to beat the system].

Comments welcome, as always. If you have a true story to tell. Please do. The story I imagined above, I should add, isn't completely made up.

Needed: A Mass Marketing Campaign on Savings and Frugality

I finally read an article in Business Week that nicely stated what I have been saying to my husband for years now:

*The negative savings rate in this country is going to ultimately hurt the economy. The Business Week article stated that a positive savings rate will eventually strengthen the economy. Another Business Week article predicts that hit number 2 to the financial institutions will come when massive amounts of unsecured debts from credit cards is unable to be sold and will be written off.

*This nation needs to *market* good old fashioned saving as "cool." The Business Week article mentioned the success of the the Just Say No campaign for smoking and other government marketing campaigns as models to emulate.

Turns out frugality is making a comeback as families who have been living beyond their means get their wake up call. The Business Week article titled "The New Frugality" profiled a family that got their wake up call that frugality was a necessity when they went to sale their home, which had doubled in value, and only pulled out $60,000. They then realized that they had eaten nearly $200,000 of equity on consumables.

(Hat Tip: Dave) The New York Times has an article this week, The Frugal Teenager, Ready or Not which shows teen discretionary spending is dropping (My word! At the peak the average US teen had been spending more on discretionary items than we do as a family). For teens that are unaccustomed to hearing the word "no" the new economic reality is going to be a bumpy ride.

For the first quarter in 17 years, consumer spending has not grown and is in fact negative . (Stop and digest this figure for a moment please). An entire generation of teens and young twenties has lived an entire lifetime without a period of time where cutting back was on the national agenda. This is really incredible the more you think about it. Marketing is powerful (with a capital P) and this generation has lived during an era of buy now, pay later, creative and even more creative financing (ARMS, interest-only, nothing down), "your home as an investment/piggy bank/ATM", "housing always goes up," leverage your credit to invest, etc, and now we as a nation are getting a taste of (great) grandma's personal finance rules.

The Washington Post had an article on consumers' changing habits which is no Tightwad Gazette, but perhaps more a demonstration about how weak the frugality muscles have become. Buying what you "can get some use out of" seems more like common sense than thrift. There is a story about a mother checking out books for her daughter instead of buying them new, a grandmother paying for her grandson's *Stride Rite* pair of shoes because the mother can't afford them (my husband would like to point out that putting the burden on someone else is in no way an exercise in frugality), and a college sophomore watching tv instead of buying (not renting, buying) movies, certainly underscores the fact that a mass marketing campaign on frugality and saving is in order.

Readers: If you were designing a mass marketing campaign on savings and frugality, where would you start? What slogans would you use? What points would you drive home? And, to keep with the Ortho part of the blog, what messages does the Orthodox community need to hear most?

Bonus: If anyone puts together a quality commercial of their own as a digital file, I will feature it on my blog if you tell me how to do that (sorry, I'm technologically challenged).

Reminder

(Thank you readers who have emailed me offline. I'm behind on email, but will catch up eventually).

Coming up:
Orthodox Union Workshop: Credit Meltdown & Practical Solutions

I'm looking forward to see what sort of advice is given and how it will square up with the advice I give myself. Workshop is this Monday, September 22. I hope my kids will give me enough downtime to take some notes and after that we can discuss it.

Shabbat Shalom.

The Big Donors are Going Broke

I have so many topics to revisit and write more on. In the meantime, dare we speculate about what the troubles in our economy mean for the Orthodox world at the Macro an Mircro levels?

Frequent commentor Mark writes, "I want to mention something that really ought to become the subject of another blog entry. This year (and the next few) in particular is going to be very difficult. With all the upheaval going on at Wall Street, and knowing that so many of our wealthy school benefactors earn their money there, I have little doubt that fund raising is going to suffer. And it may suffer a lot. Especially in New York!" I concur.

And an anonymous reader pointed out an article on Hamercaz titled "Jewish Charities Fear Wall Street Chaos Will Hurt Donations." It should come as no surprise that major donations are essential to the budget of non-profit organizations and that these major donations are often cut from investment earnings (passive income) rather than from actively earned income.

One can't but wonder how the Orthodox world is going to fair during this economic downturn. We might not be able to rely on donors who are underwriting large portions of non-profit budgets. Less availability of credit means that families who have been paying tuition "on the house" aren't going to have this source of cash (not that I think home equity lines of credit are a good idea. . . but let's not kid ourselves about how much of this lifestyle is being funded by credit rather than cash). Job loss in the financial sector from executives to the kollel man turned mortgage agent is sure to hurt numerous pocketbooks of tuition paying parents.

And what about those who were already on the edge? Our own local tzedakah organization that helps with utility bills and food has had an increase of requests lately. Another commentor L writes: "The turn in the economy will probably also impact many families as it has already severely impacted the fixed-income elderly. Those who are trying to raise large families might also be asked to give their tzedukah to their own grandparents rather than to yeshivas." L points to an AARP magazine article regarding a trend of the elderly becoming increasingly reliant on their own family to help made ends meet. In the frum world, as we know, there are a number of parents, even middle age parents, who are reliant upon small and large gifts. What happens if those gifts have to start going the other direction because investments are down and prices are up, up, up?

L also asks, regarding tzedakah agencies, "Do the recipients outnumber the donors?" I have no idea. But I do know that tzedakah agencies often have to pick up the pieces after families pay tuition and we already know that schools offer some sort of discount to 1/3 to 75% of students. Therefore, I think we can safely make a guess that recipients outnumber donors, which of course is a problematic factor when we ask what the economy might do to Orthodox community in the next couple of years.

Just some rough comments. I'm not an economist, although I enjoy reading articles dealing with economics. Let's hear your own comments. I'm especially hoping to hear from those involved with tzedakah organizations that help with household bills and those who sit on tuition committees.

Yeah or Nay? Financial Education in Orthodox Schools

There is an idea I've seen floated in various frum publications, at various blogs, and in the comments section of this blog that financial education should become a standard part of the curriculum in Orthodox Schools. ProfK, in the spirit of activism has asked her readers to "Send a note to your high school and tell them that you believe that a course in practical living is essential. Tell them you would have liked such a course and that you really needed such a course. Tell them that many shalom bayis problems center around money, and that a course in high school might cut these problems way down. Lay out some of the general areas that such a course should cover, like budgeting and what the real costs of living on credit are."

The trend follows that of the general public as more and more middle schools and high schools across the nation are introducing courses in personal finance into the curriculum. I believe most high school students in the US have always taken a course in Economics, micro and macro, but this type of course is centered around supply and demand graphs, not 1040's, budgets, credit, and financial tools. At my high school, Economics was a high school graduation requirement. Seeing some of the ridiculous complaint letters in the Yated regarding the price of camp and the price of pizza, I think an academic economics course would be a fine addition into an Orthodox Yeshiva/Day School education. Supply and demand theories, the drive for profit, etc, shouldn't be a mystery to the yeshivish consumer. I do not believe any of the local schools where I live offer a course in economics. I'd say that is a shame.

But back to the subject at hand, teaching personal finance in Day Schools, Yeshivas, and Bais Yaakovs. Yeah or Nay?

The arguments for yeah are obvious. Learning how to handle money (and the relevant halachot) is essentially for daily living. Not knowing the basics can lead to serious shalom bayit problems. I know of people who have gotten in over their head tax wise because of mistakes when filling out a W-4, or because they didn't know they were responsible for their own taxes as contractors. I certainly do not want my children to walk out of my own house without knowing some halachic basics, some tax basics, some budgeting basics, some savings basics, some investing basics, and some smart shopping basics. But, I have no fear they will leave my house ignorant because we make it a regular point to speak about choices. And as they get older we will start to involve them in banking and tax preparation.

But, as most of us have learned, running a fiscally sound home is really far less a function of knowledge and far more a function of BEHAVIOR. I can reconcile accounts, calculate amortization schedules, and engage in tax planning and savings (marginal tax rates, retirement, Coverdell IRAs, 529 Plans, depreciation schedules, stock options, 1031 exchanges, etc). I know how to invest in mutual funds, stocks, and bonds. But, ultimately, if I can't DISCIPLINE myself, my knowledge is only theoretical, and the unsavvy grandma who just puts her cash "under the matress" is going to live better when that rainy day comes. And, it will come.

Like I mentioned before, personal finance was *not* a feature of my own high school education. But, there is a moment that sticks out in my mind which makes me weary of allowing any teacher (or at least a teacher I haven't grilled to the bone and run a credit report on) to take over teaching about personal finance on my parental buck.

One day during a discussion about debt financing and the economy during my high school Economics class, the teacher veered off into the area of household finances. He mentioned that the guys would probably debt finance a big ticket item in the near future (we were seniors). The example he named was not a home, not a college education, not a first car. .. . . . .but an engagement ring (!). He had no problem with this rather expensive proposal, and seemed to consider this type of debt financing as a "reality" of life (note: outside of the frum world, gifts are generally regarded as the responsibility of the couple, not the parents).

I raised my hand, absolutely repulsed by the idea that a young man (future husband and father) would finance a ring, get married with the debt, and then stick the bill (now a shared responsibility) with his new wife, basically asking her to pay for her own ring! I raised my hand and said: "I'm sure as heck not going to pay for my own engagement ring. If he can't pay cash for a gift, he needs to buy something less expensive or not buy it at all. And, any guy who would surprise his wife with a proposal on credit, would be a surprise of him own." An entire argument ensued in class. The girls tended towards my sentiments. The guys were more evenly split.

My example should be demonstrative of what might happen if we left the teaching of personal finance in the hands of a school: an endorsement of an idea that we as parents might find really repulsive, ideas we would rather our children not internalize as "normal." Even if the curriculum is acceptable, discussion will ensue and personal opinions will be introduced and great weight could wrongly be placed on those unsound opinions; perhaps the idea that Retirement is Goyish, or that your parents want to give you soooooo much and will be more than happy to help you after marriage/if you get into debt/need babysitting, or that there is a mesorah for a chatan to get a watch upon engagement and naturally a young chatan should expect one, or that women dedicating themselves at least temporarily to homemaking is financially impossible, or that "everyone" uses credit--the idea my high school econ teacher was promoting. . . . and he was a good teacher when he stuck to supply and demand graphs).

And, unless a school were to start a personnel hunt for just the right personal finance teacher, I imagine that the teachers that you will get are the teachers you see in front of you right now. They might be great at teaching their subject, but is this a subject you want them to teach too? In some (but not all) cases, that would be enough to ask for a dispensation for my children, as this is a subject I'm more than happy to continue homeschooling.

I think we all know that the state of personal and communal finance isn't very rosy. I vote nay, at least until the state of personal and communal finance in the frum community changes enough that I am more trusting or those who could be teaching the subject and building the curriculum.

You have the potential to be your child's best personal finance teacher, so jump on the opportunities you find.

Financial Infidelity II: Gambling

The letter that follow is from this week's Yated Letter to the Editor. This letter fits well into the "Our Finances" series (I and II) and adds to the previous topic "Financial Infidelity" and well as the "Get-Rich-Quick" mentality discussed recently. It isn't the more positive post I was looking to post, but that will have to wait. My comments in orange.

THE GAMBLING CRISIS [Gambling in frum circles deserves a "crisis" label imo].

Dear Editor,

I would like to begin by thanking Rabbi Pinchos Lipschutz and the Yated for the wonderful job done on a weekly basis. The divrei Torah and up-to-date news that the Yated provides to Klal Yisroel is a tremendous kiddush Hashem. Of course, like so many others, I especially look forward to the interesting letters in the Readers Write section. I have decided to write this letter to make the public aware of a problem that is affecting us in the frum community, and I hope you publish it. I have been reading the letters about the shidduchim crisis and money issues, which I wholeheartedly agree are matters that should be discussed in public. This issue that I am writing about is not mentioned in our circles at all and I think it is a growing problem in our community. Parents, wives and mechanchim should know about this issue, which can rip apart families and destroy lives. The issue I am writing about is gambling.

The Gemara says in Maseches Sanhedrin (24a) that a person who is a mesacheik b’kuvya - who bets on pigeons (one who gambles) - is posul for eidus. There is a machlokes as to the reason that this is so. The Gemara discusses whether it is because if you gamble, you are not really letting the other person take the money, and if you win, it’s like stealing, or because since you don’t have a real job, you might take a bribe to say false testimony. Whatever the reason is, it is definitely something that the Torah does not allow (creates distasteful character traits too). What makes gambling such a problem (and anyone who has been involved with it can attest to this) is that like drugs and alcohol, it is very addictive. Whether it’s because of the thrill of winning or the dream of becoming instantly rich, it can make someone obsessed with playing “just one more hand.” There are many types of gambling. There is gambling on Chanukah, where a spin of a dreidel in a ninth-grade class can go for $10 (parents should be outraged if schools allow money, as opposed to candies, to be used in school for Chanukah. . . . I know I would be), or where a quick office game of kvitlach can lose your husband a week’s paycheck in a matter of minutes! (Not mentioned is Chinese Auctions, which I discuss here. My readers know I'm no fan of this popular fundraising method and I wonder if the "gateway" to other types of gambling can start innocently through giving).

Then you have lottery tickets, which can be purchased by a 16-year-old boy using his bar mitzvah money or weekly allowance. (I have yet to discuss "Their money" in much details on this blog, with the exception of this post, but I do think parents must hold their children to an agreement of what is and what isn't an appropriate expenditure with "their money," i.e. the money that have to spend while food, shelter, and education are being provided for them. Money for lotto tickets would not be one of those appropriate expenditures).

The greatest addiction for most men involved in gambling is the game of poker. It has become extremely popular since the turn of the century, with millions getting hooked. There are many places to play, some that are legal, some that are not. There are also online poker sites (they are illegal in the United States, but the owners are very smart and base them out of other countries), where one can play and lose lots of cash from the comfort of one’s own home and with the click of a mouse! The options are endless. It’s an addiction that has caused many people their friendships, their jobs, and, chas v’shalom, their marriages.

I know of cases where wives think their husbands are at work or elsewhere, when they are really wasting their precious time and money playing poker (I have read cases of female "financial infidelity" involving gambling also. But, I think that in general, gambling, would top the list of expenditures a husband does not want his wife to find about, just as designer clothing a wife didn't need would top the list of expenditures a wife doesn't want her husband to find out about).

I know of a few instances where boys have gone into their marriages with thousands of dollars of debt because of gambling and credit card bills. It is hard enough financially for most young couples; starting off in debt and having a gambling problem surely doesn’t help. (Next topic on my list: Should singles ask for a credit report in addition to the Dor Yesharim number?)

I am writing this letter to help publicize this growing issue in the frum world. If you know of someone with this terrible addiction or suspect someone of having it, help them. Rabbeim, mothers, fathers, brothers, sisters, family members and friends, please help out those who need it.

We have to keep an eye on this growing problem.

May Hashem help us in overcoming any problems or addictions that might be prevalent.

Dice K.Flatbush, Brooklyn

Our Finances: Welcome to the 21st Century

In my first post in the developing "Our Finances" series, I used two threads on the Imamother Chat Board as a starting points. My written piece, in which I stated the necessity of both spouses being aware of the basic details of their household's finances, was posted on the Imamother chat board by a participant. Soon a participant asked exactly made my opinion profesional and why I needed to denigrate the traditional approach. It is actually rather humorous that my opinion was questioned for its professionality since the beginning of my written piece points to professional experience and since many of the women on the site seem to have no problem asking and receiving advice (much of it ranging from bad to terrible advice) from lay people on matters like investing in rental properties, buying life insurance, or selling a home to get out of debt.

Unfortunately, when I address the dangers of not having a clue about household finances, I'm not just talking out my blog. What I write about is based on real life work experience, fielding questions, and reading a lot of personal finance articles. I don't normally feel the need to defend my every opinion and am open to other perspectives, but in this case I feel very strongly that in today's world, yesterday's method of household finances (i.e. keeping one person in the dark, normally the wife) when combined with the yetzer hara, or communication issues, is fraught with danger. I've seen the damage that can be done, I've read about the danger that has been done, and therefore I feel the need to use my soapbox to open up the discussion.

Imamother participant Motek seems to think shalom bayit can be improved when one spouse sees their way out of the finances if it is causing arguments (the idea that resignation is a sign of a healthy marriage deserves a whole post of its own) and she writes that tradition falls out on the side of letting the husband/provider take care of everything. Another poster writes there is no "wrong or right way. . . . as long as it keeps peace in the home."

Motek also brings "daas Torah," writing ". . . . .Rabbi Y. Zweig of Florida . . . said that his grandmother was given a weekly allowance by his grandfather and she knew nothing about his business. He gave her the allowance when things were going well for him and also when they were not, and she was none the wiser. She was a happy, secure woman. Her husband provided."

I am sure the "husband knows best" approach worked, at least somewhat, for Jews and non-Jews alike 50 years ago. I am NOT here to denigrate families (especially families of talmidei chachanim) who lived by this approach. But, I sure wouldn't recommend it today.

Times have changed drastically. Besides the fact that the workplace is flooded with working women, there have been other significant changes. Probably the biggest change in the world of finances is the liberal extension of credit. The availability and ease of getting and using credit was unheard of, even 25 years ago. Today, people can take money out of their homes using a HELOC with the push of a button at the ATM. Another change is mobility, especially virtual mobility. One doesn't even have to leave their home to shop as it can be done from the convience of their own computer with the click of the mouse. And what about gambling (which includes playing the stock market) without anyone ever knowing or seeing you? Another significant change is the proliferation of credit cards and the death of the Mom and Pop store. While credit is still extended at many kosher grocery stores, one need not approach a store owner/manager for a personal loan when they don't have the funds, .

Unfortunately, many spouses are "none the wiser." I hate to bring up the subject of fraud again, but we have many, many, many frum men sitting in jail today (soon to be joined by other, r"l) because they were involved in shady business deals, schemes, and other "victimless" crimes. While I'm convinced some of the wives were perfectly aware that their husband's were engaged in illegal acts and knew that their household could face disaster should the crimes be discovered, I am equally convinced that some wives were sideswiped when their husbands were arrested and convicted. Being "none the wiser" while their husband "provided" certainly doesn't lend credence to the saying "ignorance is bliss."

But, I hate being alarmist. So, let's take a step away from high profile cases and talk about things that could be happening to a person in your neighborhood. I just completed reading a book called Green with Envy: Why Keeping up with the Jonses is Keeping us in Debt, by Shira Boss. The book practically jumped off the library shelf into my bag and it was a worthwhile quick read. In one story, a husband who married right out of high school, but managed to climb up the ladder despite his humble background and lack of higher education end up living "behind the gates," surrounded by Joneses. The family started spending more than they ever spent on country club memberships, Disneyworld annual passes, matching clothing for the kids, high end vacations, cars, home improvements, cleaning help (the neighbors 'convinced' them it was a necessity even though they never knew anyone before with such help), and more. The wife always took care of the finances, and the husband didn't concern himself too much, that was until they cashed out his last stock options. He knew things couldn't be good, but "everyone else was managing" and his wife couldn't seem to give him any hard numbers (a common problem I will hopefully get around to addressing in a post soon). The wife, herself, never actually ran tallies and didn't know the debt totals. In the end, he had to order their credit reports online and had to smell the coffee as they had $100,000 in credit card debt alone, this in addition to the HELOC. A long story short, this high income family ended up bankrupting and can no longer live the way they used to. Here you have an all too common problem of too much credit and too little information in the hands of too few.

I have another friend who was also "none the wiser" about their financial foundation, until her divorce that is. They didn't argue about money. She had seen her way out. She knew her husband had debts, but didn't get involved. . . . until she had no choice. He had borrowed every penny of equity in the house and lost most of it in the stock market. She had made, what would have been a very nice decision to stay home and raise her baby, but nearly ended up facing financial ruin when she found out there was no money in their home and she had no real finances of her own. Baruch Hashem her family came through in a pinch and she is establishing a future for herself now. Divorce or no divorce, she would have been thrown out to the working world eventually because at some point the husband wouldn't have been able to provide.

More to come iy"h, next time on a more positive note I hope.

Jewish Education and the Housing Slump

Not even a year ago, I was speaking to friends who had tried an alternative to Jewish schooling for some of their children, but who found themselves no longer able to continue this arrangement. Now, they are faced with large tuition bills, but they are not much better off financially. However, they do own a home. Their tuition plan: a home equity line of credit (heloc) and continued credit card use. Given that nature of credit, adding to a pie of debt doesn't seem like a sound way to get a handful of kids, only one of who is past Bar Mitzvah, through their high school graduations.

As anyone who reads the newspaper or listens to the financial reports knows, real estate is in a slump. Borrowers are starting to sweat as the first wave of risky mortgages are coming due, especially as many have overextended themselves via home equity lines of credit. And mortgage companies are starting to suffer from underwriting loans for less than qualified candidates.

One has to wonder how this slump is going to effect frum finances in the short term. It is fairly common knowledge that families "pay" for weddings using their home. Quite frankly, you won't find me crying if people have to scale back in that department. If the simcha guidelines didn't work, maybe being turned down by the bank will help people scale back.

But, weddings aren't the only way frum families have used their house as a "bank." I have no data to even venture a guess as to how many tuition dollars are being paid through bank loans, but I can't imagine that my friends are the only people who have erroneously decided to use their house (in which they have little equity to begin with) as a bank.

It is any one's guess just how the slump in the housing market will affect Jewish education. But for now I will just say what I wish I had said to my friends while I stood their mouth agape as they informed me of their "plan:" . . . . . . . . Your house is NOT a bank. Don't do it!