Show me someone who has saved enough for retirement, and I will show you someone who can separate a need from a want. Delayed gratification is the number one trait for personal finance success. I saw this article on Yahoo recently discussing how the lifespan of a smart phone is months, not years. This means that most consumers are turning their phone over at least once a year. With each change, they are probably incurring costs, usually in the form of the phone purchase.

My advice is not to look at what new product is on the market, but is your current phone meeting your needs. Don’t worry about the new features or look of the new phones. Keeping up with your cube mate or neighbor only hurts your finances.

I have a Palm smartphone that is almost five years old. It still works great, and, more importantly, it does everything I want. Maybe it isn’t as fast as a new phone would be, but I will use it until it actually dies (or I lose it). If this stops me from buying 10 or 15 phones over my lifetime at $200 a pop, I have just earned around $8,000 in retirement funds in twenty five years assuming an 8% return. That may seem small, but if you do this in every aspect of your life (cars, televisions, stereos, etc.), you will have a nice chunk of change come retirement. Plus, you aren’t sacrificing much. I can still call (remember when a phone was used to actually talk to someone), text, surf the web, and check my calendar with my five year old phone.

Why am I getting on a soapbox about buying cell phones? Amidst all the recent talk about the return of the consumer and growth of the economy is the fact that our savings rate is dropping again. This new found spending by the consumer is not driven by increases in income; it is from less savings.

As you can see from the chart, the savings rate is above the 2005-2007 levels, but it is still far below the historical average of 8%. If you are one of those who absolutely has to have the latest gadget, my advice is to get over it. Delay your gratification a couple years and save a bundle. Your portfolio will thank you for it.

Here is an excerpt from an email from the Daily Reckoning, an interesting website filled with folks who seem to be of the Austrian economic theory. It is a humorous look at how the economy works today, but, sadly, too true.

Mary is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Mary’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in Dublin.

By providing her customers freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Mary’s bar. He so informs Mary.

Mary then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Mary cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks’ liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Mary’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion euro no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Mary’s bar.

Now, do you understand economics in 2010?

My wife loved Target (pronounced by the hard core shoppers as Tarjet with a French accent). I should know as every other transaction on our credit card bill was Target. Sometimes I feel as if I am not working for myself, but for Target. But, Target recently shot themselves in the bullseye with my wife.

A couple months back I read about the upcoming Target RedCard. Target was offering a 5% discount on all purchases. Even though we haven’t opened any new credit cards for years, I knew this was the card for us, at least for the multitude of monthly Target purchases. A 5% discount is serious cash. The RedCard is finally live, and my wife gleefully signed up for the card when the store cashier offered. My wife didn’t get an on the spot approval decision, but she did get the 5% discount that day.

A couple days ago she got the decision in the mail….DENIED. The reasons cited in the denial letter was an insufficient number of revolving credit accounts and no home equity lines of credit. I chuckled when I read the denial letter because Target’s objective was clear to me. They saw we pay our credit card balance each month and have no debt outside our mortgage. Target doesn’t want to give us a 5% discount because it is a losing proposition for them. They want customers who carry balances each month. If a customer is paying between 15 and 22% in interest, then a 5% discount doesn’t hurt. Besides, Target figures they might as well get that interest instead of Citi or Bank of America.

I explained this to my wife, but she was irate. What bothers her is the card is being promoted as a customer loyalty card, and she certainly is a loyal customer. She was also peeved that Target is merely trying to capitalize on the poor credit habits of a subset of their customer base. That is not the brand she thought Target promoted. She saw Target as a customer centric company, not one that takes advantage of its most vulnerable customers.

So she called to complain, but she got the obligatory “we’re sorry your upset, but the decision is final talk.” I knew that would happen since she wasn’t actually talking to Target, but to the credit card company that fulfills the operational activities for Target. They just answer the phones as Target.

Suffice to say, Target has alienated a great customer. My wife was so upset she is now going to start shopping at Walmart…something I thought I would never hear her say. This shows how it takes years to build a brand for a client and only a few seconds to ruin it.

Everyone knows that protecting your identity is important. You may be taking many right steps as far as shredding documents with personal information, not giving your information over the phone from unsolicited callers, and keeping your social security card secure (not in your wallet or purse). Hopefully, you also have a list of all the cards and documents in your wallet or purse in case you are robbed or misplace the items.

This may not be enough to truly protect your identity though. Identity thieves are shrewd and unscrupulous. Take for example the story of Eldrick Woods. Two thieves stole Eldrick’s identity and opened up credit card accounts using his social security number. The two thieves racked up over $50,000  in credit when they decided to step it up a notch and buy a Lexus under Eldrick’s name. Fortunately, the auto salesman had a suspicion that these two were up to no good, and he called the authorities who arrested the two men. Why did the auto salesman suspect wrongdoing? He associated the name Eldrick with Eldrick’s more common name: Tiger. Yes, Tiger Woods had his identity stolen. It was a smart move on the part of the thieves as most people don’t know Tiger’s real name is Eldrick. The thieves picked the wrong salesman when they entered the Lexus dealership. Otherwise, they would probably have a Lexus as well.

The $50,000 really isn’t an issue for Tiger as that is chump change for him. He could clean up the credit problem by just writing a check. For you and me, this problem would require hours of legwork and some legal fees to clear up. Often times, it is so bad that people have to change their name to clear their credit. So you need to protect your identity. The best way to do this is a credit freeze. What is a credit freeze? This procedure prevents companies that issue credit from reviewing your payment history and credit score so the companies will not issue any credit.  This means no new credit cards, auto loans, cash advances, nada.

How do you freeze your credit? It is a breeze. You just need to fill out an online form, write a letter, or call the three credit rating agencies – Experian, Equifax, and TransUnion. There may be a nominal fee up to $10 at each bureau to freeze your credit. It depends on the state you live in, but some states allow you to do this for free. You also have to pay a fee to unfreeze your credit so if you plan to buy a car, house, or open a credit card in the near future, you don’t want to freeze your credit just yet. For most Americans, a freeze is a great idea as we use the same credit card and don’t move that often.

If you don’t want to freeze your account, another option exists. You can put a fraud alert on your credit with the three rating agencies. The fraud alert is free, but you have to request a new fraud alert every 90 days. Otherwise, the fraud alert goes away after 90 days. If you are victim of identity theft, you can get a permanent fraud alert so long as you file a report with the police. The fraud alert is what services like Lifelock do for you. For their annual fee, they update the fraud alert every 90 days. These companies also provide insurance and help clean up your credit if it is stolen.

Fraud alerts aren’t as foolproof as the freeze though. The reason is lenders can still review your credit history and score. The lenders can choose to ignore the fraud alert and issue credit anyway. So if you aren’t planning on taking out any new debt, you may want to freeze your credit report. It takes a few minutes, but it can save you tons of time and hassle if you do. Of course, if you make as much money as Tiger Woods, you probably don’t need to worry about it.

I saw an interesting article in Yahoo Finance about the Five Quickest Ways to Bankruptcy. The five were:

1. Doing the Plastic Shuffle
2. Assuming Insurance will cover medical bills
3. Taking out advances on your paycheck
4. Keeping up with the Joneses
5. Overestimating the Value of an Expensive Degree

All of these are very valid. I might add buying too much house, but that could also fall in the keeping up with the Joneses.The plastic shuffle is something I see folks doing quite a bit. This slowed drastically during the 2008 downturn as the zero percent transfer balances disappeared, but this silly behavior is making a comeback since the banks have taxpayer backup for dumb ideas like this. The article specifically addresses how people assume they will get pay raises or other income to eventually pay back the debt. Until then, these people just transfer balances to keep their minimum payments low. This is a recipe for disaster. Shuffling debt around does not solve the issue of over-indebtedness. It temporarily masks it.

The point about medical bills is wrong or misleading. In this section, the authors quote a Harvard study showing that 62% of bankruptcies are caused by medical bills. This is flat-out wrong. The findings show that 62% of those in bankruptcy have medical bills, but it does not show that this is the reason for the bankruptcy. This fallacy was used quite a bit to justify the health care bill, but it is patently wrong. Certainly, cases exist where someone gets ill and has no insurance. That is essentially the fast track to bankruptcy. However, the vast majority of bankruptcies are caused by fiscal mis-management, not health care.

The third point is a no-brainer. You should not take any kind of cash advance either on a paycheck or a tax refund. The interest rate charged on these is egregious. This is where you should use credit cards if you need emergency cash. Or, as the article states, cut your living expenses drastically by eating beans and rice. That is the better option.

Keeping up with the Joneses is futile. If you base any of your self-esteem on material items, you need to reprogram your mind immediately. This isn’t to say you shouldn’t have a dream for a convertible, boat, or round the world trip, but these items should be dreams of yours, not an effort to out due your neighbors. I drive cars and use appliances till they die; I still wear clothes from the 1980s (they will come back some day I tell you); and I have used furniture in my house (I call them antiques). I am sure some folks think I am either poor or cheap (my wife thinks the latter), but I don’t care what they think. I spend money on items I see as important to me based on my values and goals. Case in point – I know so many parents that are the same age as me that haven’t saved a dime for college. They have nicer cars and homes than I do, but I have money set aside for college. I choose to align my assets around my goals, which are my children, rather than a 60 inch LCD screen.

The fifth reason is an often overlooked one. Education is expensive. While it is easy to make a case that a college educated person makes more than someone who only has a high school diploma, this doesn’t mean you shouldn’t reduce the costs for the bachelor’s or master’s degree. Education is an investment, and the smart person ensures a decent return on the investment. You don’t need a Harvard degree if you plan to be a teacher in the public school system. The education will not produce a higher income. For those who argue that you can’t put a price on education, don’t understand what an education is. It is not a degree, but the amount of knowledge we attain. I know folks with no high school degree that are extremely well educated because they have a thirst for knowledge and read their tails off. This also applies to high school. I live in the Baltimore area. There is a huge private school system in this area. One reason is the Baltimore public schools are atrocious. But, the private schools draw students from areas where the public schools are fantastic. That makes no sense to me.  Maybe if you want your child to get a religious curriculum along with the traditional secondary education, I could see it. Of course, you can buy a Bible, Koran, or Torah for a few bucks at a bookstore. Or, you could attend Wednesday services along with Sunday so I still don’t buy that too much. However, I know parents shelling out $20,000 a year for high school when the public schools are solid. Seems like a waste of capital to me.

The commonality among all of these reasons is financial education. If people had a better understanding of basic personal finance, these mistakes could be avoided. If I could waive a magic wand and effect one change in our pre-college education, it would be to add a personal finance class to the curriculum.

Here is an article on Yahoo Finance that lists 21 items never to buy new. I pretty much agree with all of them, except I would add underwear to the list.

I especially agree with timeshares. My folks bought some timeshares on the secondary markets years ago for next to nothing. They got tired of paying the maintenance fees so they “gifted” them to my sister and me. We are at a point where we wonder if we are just better off getting rid of the timeshare or keeping it. They are nicer places than a hotel, but I don’t travel as much with my own business. Or, I am shuffling back and forth between Florida and Maryland to visit clients. Anyway, we rented a week out last year for friends of ours, and I specifically told them not to get caught up in the timeshare tours. They received a call each day offering free Disney tickets to take a tour. They succumbed to the tour for the tickets, but ended up buying a place from the salesman. I almost punched my friends in the face when they told me. Instead, I held back and merely asked if they were idiots. Probably not much subtler, I know. I then proceeded to show them how many timeshares are for sale on ebay. I probably shouldn’t have done that either as you could see the buyer’s remorse. So if you want a timeshare, especially after the dog and pony show for free ticket trick the salesmen offer, then hit ebay or craigslist. They are deeded properties so you get no benefit for paying full price, except the satisfaction of helping the salesperson pay for their sportscar.

Cars are another no brainer. Sure, you don’t get the new car smell, but you can buy that smell as an air freshner.

Anyway, a good list of items. What else do you think should be added to the list?

My wife loves Target (she and her friends use the French pronunciation). It appears the chain store is going to provide a flat 5% discount to customers using the Target Credit Card starting this fall.

Target tried the discount at some locations in Kansas City and found it increased sales. So the company will launch the program nationwide this autumn. This is a substantial discount, especially for savvy shoppers who couple this discount with coupons. If you do a large portion of your shopping at Target, you may want to look at getting the card.

The big question is how long will Target offer this sizable discount. During the economic downturn, Target saw credit card charge offs rise to 15%, which is extremely high. If this 5% discount encourages more consumption, it could lead to high charge offs and offset the increase in store sales. Since the credit card division hurt the company previously, why do the executives think it won’t in the future. This doesn’t pertain just to credit cards. The auto dealers are already back to the 0% financing, which was a large factor in the hardships of the auto manufacturers. It appears many of these parties haven’t learned their lesson.

Credit, in particular cheap credit, is not a problem during good times. People are able to handle the cheap credit payments. However, cheap credit induces higher spending (and lower savings) so when a downturn hits the default rates are substantially higher as consumers have way too much debt. Considering our debt levels have not receded much since 2008, any company expanding credit at this time is playing with fire.

That said, I will probably get a Target card since it is my wife’s second home.

Many folks look to build wealth by trying to “beat the market” substantially or working endless hours. These methods may help, but they may actually hurt. Most folks end up taking too much risk with investments while pursuing high returns, which usually ends up in subpar returns. Over-exertion at work often leads to stress, which leads to absenteeism or costly medical assistance. This can lower your wealth, but, more importantly, your quality of life.

Jeff Yeager, author of the The Ultimate Cheapskate’s Road Map to True Riches: A Practical (and Fun) Guide to Enjoying Life More by Spending Less, laid out some of his ideas to build wealth. He discussed some of the ideas in a Yahoo article, but I have summarized a few below.

1. Live a Smaller Lifestyle: Yeager talks about staying in your starter home, rather than buying a much bigger place. The additional costs to heat, furnish, maintain, and insure the home eats away at your wealth. Yeager tires of financial gurus telling people to make their own coffee, rather than buy it, since the amount saved is minute compared to the savings from a smaller home.

2. Need versus wants: Yeager recommends really looking at every purchase to see if you really need it. Buyers remorse is high for most purchases so wait a week before buying something. During this week, ask yourself if you really need it. Many times you will avoid wasting money by doing this simple trick.

3. Drive Less: When gas was $4 a gallon, most people drove less, and most claimed it didn’t really affect their lives. So why not drive less even with gas under $3 per gallon.

4. Be Green: A life long environmentalist, Yeager ridicules folks who pay extra for buying “green” items. If you really want to be green, then reducing consumption is the best way to achieve this. Spending more for green products is silly in his opinion, especially when a truly green product is cheaper than non-green. For instance, vinegar and baking powder is substantially cheaper (and better for the environment) than green and non-green cleaning supplies.

5. Eat healthy: Eating healthy is actually cheaper than the typical American diet. Beans, whole grains, and fruits/vegetables are cheaper than meats, processed foods, and sugars, and you will be healthier for eating this diet.

I think the key is to live a smaller lifestyle than your income would allow. I had a boss in the Coast Guard who lived one pay grade below his rank When he was a Lieutenant, he lived as a Lieutenant Junior Grade. When he was a Captain, he lived on the Commander’s salary. This ensured he lived a smaller lifestyle and saved a ton of money.

Competing with the Jones is futile and only makes everyone poor. Plus, giving your kids every toy they want teaches them nothing and makes them unappreciative of gifts. I always like the Buddhist maxim that “the things you own eventually end up owning you.”

Here is a brief clip from Elizabeth Warren, who has been tasked to overlook the TARP bailout by the government, is talking about how those individuals who file bankruptcy are just like us. They work hard and spend rationally. It is just the debt piles up too fast.

Certainly, there are folks who end up in bankruptcy due to medical expenses, divorce, or other personal issue. Her explanation doesn’t make sense. If you are spending rationally, then you shouldn’t be piling on debt. Warren receives all kinds of love from anti-establishment folks because she is pointing out the ineffectiveness and political shenanigans associated with the TARP. And, I am glad she is.

However, this populism needs a dose of reality. Sure, the banks are bad and should not have been bailed out like they were, but painting folks who mismanaged their finances as victims is wrong. Consumer debt is one of the reasons we are in this mess. You can argue the average Americans are too ignorant or the Madison Avenue marketers entice us to spend, but until all Americans acknowledge their fault (and correct them), we will never get better. Worse, we will experience this again.

I never got any financial education in school (we need to cut useless courses like geometry and add personal finance), and my parents weren’t financial wizards. They were school teachers who figured they just needed to bide their time to get their pensions. However, they imparted two simple rules on me that I have found practically guarantees success:

1. Never spend more than you make.
2. Always save 10% of your earnings.

That’s it. For rule number one, this meant if I wanted a new stereo or tv, I saved for it before I bought it. I never spent more than I brought it unless I had savings set aside. With the 10% rule, that provided me with lots of options.

If we could teach all Americans these simple rules, including our government, life would be much better across the board.

The Congressional Budget Office does a decent job of making projections on the budget…usually. What usually throws this organization off is the government ends up spending more than projected. This time I think CBO is too optimistic in its projections, and it isn’t just based on the inevitable spending overruns by our elected “leaders.”

Above is a chart showing the expected federal outlays and tax receipts through 2020. As you can see, the dark blue line, spending, is expected to remain high through 2010 to combat the recession, but it drops precipitously after that through 2018 when it starts to rise again due to Social Security and Medicare shortfalls.  The CBO bases this off current projections, but does anyone really believe that the government won’t continue its prolific spending? We know there will be more stimulus because this economic funk is not going to go away quietly. As I mentioned, the CBO does a nice job here usually. There errors tend to be due to new spending programs that are introduced as time progresses.

Where I see the CBO’s miscalculation is on the revenue side. The CBO is projecting a parabolic increase in tax receipts starting this year. In other words, the CBO is expecting a huge economic expansion. This is the only way we can get this kind of growth. Either that, or the CBO is basing its decision on new taxes, which haven’t been disclosed to Americans. As far as I see, there are no new taxes taking place this year unless the current health care bill is passed.

This increase in revenue is beyond any other recession. For the past recessions (1981, 1991, and 2001) the tax revenue returned quickly, but it looks like a 45 degree angle in growth. The current projection looks like an 80 degree increase. This is clearly too optimistic. I would expect revenues to be even lower than previous recessions since this is a balance sheet recession, not an inventory led downturn.