Just in time to help with your goal-setting, here is a list of 12 simple steps you can take with your money in the new year:

1. Develop a habit of saving: It’s never too early or too late to start.

2. Build a budget that aligns with your values: Think about what makes you happy and then allocate your money accordingly.

3. Create a financial plan that reflects your most cherished goals: Think of it as a roadmap to happiness.

4. Invest the maximum amount that you can for retirement: You will need more money than you think.

5. Build and maintain a diversified investment portfolio: Don’t worry about finding the “best” investment.

6. Review your spending periodically to keep yourself on track: It’s the key to living within your means.

7. When it comes to investing, avoid the crowd … and tips from well-meaning friends and relatives.

8. Understand that volatility is a normal occurrence when investing in stocks: Keep a cool head and stick to your plan.

9. Know what your money is doing—look at your investment statements at least quarterly: Ignorance is bliss, but not when it comes to your finances.

10. Insurance protects you from the unexpected: It’s just smart to have enough.

11. Choose your advisors wisely: Find people you like, trust, and who will listen to you.

12. Spend on the things and experiences that make you happy: They make life worth living.

Challenge: Choose one of the simple steps as your New Year resolution for your finances and write a short (200–250 word) essay describing how you will put it into action. In return, you will receive a 12 Simple Steps to Financial Success 2012 desktop calendar (see here), and your essay may be included in a future blog post on “Of Independent Means.”

Happy New Year!

After reading Carl Richards simple but powerful book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, I realized that a better title for my ebook would have been, The 10 Simple (But Not Easy) Truths About Money. As Richards says, “We often resist simple solutions because it requires us to change our behavior.” Thus, the behavior gap.

Richards displays a true understanding of human nature with his words, but also with his disarmingly simple sketches that portray powerful truths about people’s behavior around money. You will recognize yourself in many of them. With amazing insight into how our brains work, he uses real-life stories and humor to show how we are our own worst enemies when it comes to money management. He also offers up great advice on how to make better money decisions.

Some of my favorite “behavior gap” insights include:

• Investments don’t make mistakes. Investors do.
• Figure out which emotion is the bigger issue for you—fear or greed—and invest accordingly. You can’t have it both ways.
• Planning for your financial future is a balancing act rather than a single-minded pursuit of the highest return.
• There is no such thing as the best investment.
• Planning for your financial future is personal. A good plan will be unique to your situation.
• No one knows what the future holds.
• Our real task is getting to know ourselves and our goals, making choices aligned with those goals, and adapting to the surprises that are bound to come along.
• Financial decisions are almost always life decisions. Before you decide on your financial goals, you need to choose your life goals.
• Focus on your personal economy and stop worrying about the global one.
• Our deepest instincts will tell us that money doesn’t mean anything, it’s simply a tool to each our goals.

Two thoughts kept running through my head as I read Carl’s book: “I wish I had written this” and “All of my clients need to read this.” Even if you don’t have time to read the book, flip through and take in all the sketches. They tell the story of our behavior gap just as well and may just motivate you to stop doing dumb things with your money!

Over the years, I’ve developed a few strategies that allow me to indulge my fashion passion and still manage to stay current on credit card bills, invest and save money. It’s all about stretching those dollars to stay within budget. You do have a clothing budget, don’t you?

Here are my top five strategies for smarter clothes shopping:

(I like to support the local economy, so most of the retail establishments mentioned below are in the San Francisco Bay Area. But most metropolitan areas will have similar venues—you just have to go out and find them!).

Strategy #1: Take a cue from chic French women and maintain a small but high quality wardrobe. Artfully use accessories to create different looks.

How? Find designers and shops that suit your fashion sensibility. Patronize these places—buy less, but buy what you love. As an added bonus, if you become a loyal customer, you’ll be invited to special sales and sample sales. My personal favorites:

FIT: www.fitclothing.net. FIT is a small clothing boutique in the Rockridge district in Oakland. Joyce Gardner, the owner, carefully curates her stock to satisfy her local clientele. She carries selected labels such as Schmacher, Cop Copine, Yoshi Kondo, Diane Von Furstenberg, Three Dot, Velvet by Graham and Spencer, and Pete. She packs a lot of style in a small space and her employees are adept at pulling looks together. She holds special sales and gives first dibs to her best customers.

Catherine Jane: http://catherinejane.net. Catherine Jane is a San Francisco designer who has an eye for gorgeous fabric and fit. She creates wonderfully feminine clothing with her own unique flare that will flatter your figure. Tip: Her sample sales are full of outrageous bargains.

The reward for buying high quality, timeless fashion is longer wear and thus less money spent over time.

Strategy #2: Find consignment shops whose buyers are very picky and who echo your style sensibility.

Yes, these are pre-owned and pre-worn garments. If you don’t have a problem with that, it’s a great way to add pieces to your wardrobe at good prices. Here’s how consignment shops work: Women bring in their current, gently worn and seasonal items and the store buyer selects which pieces work for her store. Then she splits the sale price with the seller, usually 50/50 or 60/40. Prices are generally 1/4 of retail prices.

My personal favorite consignment shop is Mirabel (3251 Lakeshore Ave, Oakland). This store is full of fashion gems. You will find labels such as Marc Jacobs, Burning Torch, Velvet by Graham and Spencer, Diane Von Furstenberg, Prada and Missoni as well as a carefully edited selection of Banana Republic, J. Crew and H&M. Occasionally there will be truly great finds (like an Isabel Marant leather jacket I found recently).

Added bonus: If you don’t want to buy, you can always sell clothing that is gathering dust in your closet.

Strategy #3: Find a fashion stylist to audit your closet and help you shop.

If you love clothes but hate to shop or feel like you make a lot of expensive buying mistakes, hiring a personal stylist may be the perfect solution. She can save you both time and money and you’ll look great with minimal effort.

Great Find: Urban Darling. www.urbandarling.com

Stylist: Lisa Deane. www.urbandarling.com/stylists/lisa-deane/

For more tips on working with a stylist, check out my previous post, “Save Money By Shopping in Your Own Closet with a Wardrobe Stylist.”

Strategy #4: If you don’t like going to shops, bring the shop to you!

There are clothing lines that are sold only in private venues. If you host a party, not only do you get to invite all your friends, you receive 50% off your items depending on how much others buy. Personally, I like the CAbi (Carol Anderson By Invitation) line. And my favorite CAbi consultant is Erin Saul who lives in Oakland.

Great Find: CAbi. www.cabionline.com/

Strategy #5: Use the Internet to find sales on items you crave.

You see a gorgeous pair of shoes at Bloomingdale’s. You can’t afford them. Go home and do a Google search using the specific brand name, style and color. You may find that the shoes are on sale somewhere else. In addition, you can ask retailers to match prices if you find them lower on-line. Don’t be afraid to ask.

I think these five strategies will give you a good start on smart clothing shopping. But, if your closets are bulging and think you might have a shopping problem you may need another kind of help. Jill Chivers, a former shopaholic, has created the “My Year Without Clothes Shopping” program for people like you. Her program offers a fun and safe way to “break the cycle of unconscious and compulsive shopping” and to be more in control of your money. Check out her website: www.myyearwithoutclothesshopping.com

I would love to hear of any tips or strategies you have to be stylish without breaking the bank. Please share your thoughts!

Unfortunately, this “stuff” sells. The media is trying to capture as many eye-balls (and ears) as possible to maximize profits and the more provocative the content, the better. Some of the worst offenders are the most visible – talk show hosts or political analysts who get away with name- calling and worse, especially during political campaigns. The film has some clips of the likes of  Bill O’Reilly, Pat Buchanan and Rush Limbaugh spouting some nasty commentary in regards to women candidates. Who can forget the Hilary bashing during the 2008 campaign with much airtime about the tone of her voice, her hair and attire?

Imagine the impact on the younger generation in the U.S. who are continually exposed to these viewpoints? My friends and I, who are past the bloom of youth, reacted to the film similarly at first – so, what else is new? But we realized after some discussion that this documentary is an excellent wake-up call that all-is-not-as-it-should-be and that perhaps we should get over our complacency and be part of the solution.

After all, women have power. They make over 80% of consumer purchases in the U.S. – from soap to cars to houses. Women also control a lot of private wealth – $14 trillion at last count (out of approximately $55 trillion). Women make up 51% of the U.S. population. In contrast, within our most powerful institutions – media, government and business – female representation is shockingly low. Only 3% of women hold clout positions in the mainstream media, only 17% of seats in the House of Representatives and merely 3% of Fortune 500 CEOs.

How can women use their buying power and majority to help more women get promoted, elected and recognized? Wouldn’t it be great if instead of the explosive growth in cosmetic surgical procedures performed each year on American girls (more than tripled between 1997 and 2007) there was this kind of growth in the number of women in our legislative bodies? Wouldn’t our dollars be better spend on education instead of liposuction?

Becoming a conscientious consumer is one way to stimulate change. Some ideas:

• Buy products that support, instead of offend, your values.
• Select media (movies, television, games,magazines,books) that portray positive messages about gender.
• Support men and women political leaders with your vote and/or dollars who fight for the ideals you believe in.
• Go see Miss Representation! Bring the children and men in your life.
• Take the Miss Representation pledge.

“The most common way people give up their power is by thinking they don’t have any.”   Alice Walker

Related Links:
Blog post from Sally Around the Bay: “Money Honey”
Blog post from Small Change: when deju vu draws the same blank
Blog post from Tam Holland: The Week of Representing

Risk Tolerance
To simplify the concept of risk tolerance, think of it as measuring how much volatility you can stand before you want to cash out. The riskier an investment is = the higher the return potential = the higher the volatility. “OK,” you say, “I can’t stand any volatility so I plan to sell all my stocks and transfer the proceeds to my savings account.”

Stop there. It’s not quite so easy. And repeat: “Stock market volatility doesn’t imply direction of the stock market – it’s the price we pay for a higher return.”

Return on Investment
Most of us invest because we want our money to grow. We want it to outpace inflation, to fund our key financial goals and to enable us to maintain our lifestyle in retirement. To understand how much ROI you need (and consequently how much volatility you will need to withstand) a few numbers are critical to know: How much you have now; how much you can add in the future; how much you will need in the future; and when you will need it.

Risk/Reward
If you are young and have many years ahead to save and invest, or if you have been a disciplined saver and investor, you may not need as high an ROI to reach your goals. If the volatility of the markets gets to you, you can rebalance into a lower-risk, lower-volatility portfolio. (This is accomplished by increasing your allocation to bonds or cash-like investments.) However, if you run the numbers and realize you have some catching up to do, seriously reconsider your desire to “run for the hills” and maintain an allocation to stocks.

Important Caveat
When determining your risk tolerance and need for ROI, keep in mind that the stock market isn’t the place to invest money in stocks that you’ll need in the short term (in 3–5 years). For example, retirees would be wise to keep 3–5 years of living expenses in very safe investments. A prospective new homeowner wouldn’t want to invest their down payment in stocks. In addition, it’s just smart to maintain an emergency fund of six months to a year’s worth of living expenses in cash-like investments.

The charts and statistics below illustrate the long-term return potential of stocks, bonds and cash.

Market correction: refers to a “mini-bear”  market which isn’t expected to turn into a long-term bear market (down market), but it can be a predictor of worse to come. The phrase “it’s just a correction” is commonly heard when markets are dropping (by 10-20%) – but this is a best guess at the time and only future stock market activity can determine the true outcome.

Double-dip: no, it isn’t your stomach doing a flip-flop when the Dow plunges over 500 points in a day. The term refers to a double-dip or W-shaped recession where the economy emerges from a recession, then goes on to a brief spurt of growth but then falls back into a recession.  We don’t know if we have double-dip yet – it’s too soon to tell. The Great Recession which lasted from December 2007 through June 2009 was the worst since WW II. A recession is identified by a long period of falling activity visible in real GDP (Gross Domestic Product) growth, falling employment, income and production.

Bear market: a declining stock market over a period of time and some say defined  as a  price decline of 20% or more over at least a two month period.
New to me:  this market trend is also referred to as a “Heifer Market!”  Bear markets usually accompany recessions and periods of high unemployment or inflation. The bear market that coincided with  the Great Recession started with the Dow at 14,164.43 on October 9, 2007 and ending on March 5, 2009 at 6,595.44.

Bull run: refers to a  “bull market” which is a rising stock market over a period of time. The last bull run started in March of 2009 when market pessimism reached its lowest point. To be determined is whether the market drop of last week is “just a correction” during a bull run,  or the start of a new bear market.

Non-farm payroll report: an employment report released  by the U.S. Bureau of Labor Statistics on the first Friday of every month. It heavily affects the U.S. dollar and bond and stock markets when it is released. Last Friday’s report was the one bright spot in a bad week when it was announced that the U.S. economy had added 117,000 jobs in July – higher than expected. From 1939 to 2010, non-farm payroll averaged 116,870 jobs reaching a high of 1,114,000 in September of 1983 and a low of -1966 jobs in September of 1945.

S&P’s AAA rating vs. AA+ rating:  Friday, August 5,  Standard & Poor’s took the unprecedented step of lowering the top credit rating for U.S. long-term debt (notes and bonds that come due in more than a year). A downgrade is basically a warning to buyers that there is an increased chance (however slight) that they won’t get their money back and in theory should lead to higher borrowing costs for the government as investors will want to earn a higher interest rate for the increased risk. The 10-year Treasury note is considered the basis for all other interest rates so higher rates on it could mean higher rates on everything from mortgages to car loans, to borrowing costs for state and local governments and companies.

But it’s not clear that S&P’s downgrade will have an effect on rates. Treasury securities are still considered one of the safest investments in the world. As stocks plunged the last two weeks, the price of Treasurys soared because demand was high, even though investors knew there might be a downgrade. Since yields on debt securities fall as prices rise, the yield on the 10-year note dropped from 2.96 on July 22 to 2.39 on Friday.  The reality is that no other market is as large or as liquid as the U.S., even though it has its own set of problems.

The next weeks and months will determine whether the bull or the bear prevails and whether fiscal or monetary policies are instituted that redirect the U.S. economy (and yes, I will explain fiscal and monetary policies in a future Finglish tutorial). Stay tuned for “Finglish” tutorial #3.

?

The reality is that financial and economic terms are confusing—and not just to non-finance types. Plus, new financial terms crop up all the time to label or explain a new product or strategy (QE2 anyone?). It’s enough to make anyone’s head spin.

Since the news is particularly ripe with financial terms right now (due to the dismal state of the U.S. economy), I’ll take a stab at explaining some commonly used examples of “Finglish.” Hopefully, this will increase your financial knowledge, or, at the very least, prevent your eyes from glazing over the next time you read “yield curve.”

Federal budget deficit: This term is in the news constantly and for good reason—the federal deficit is huge at $1.4 trillion. This means that the federal government is spending $1.4 trillion more than it is earning in revenues over a year. Why? Because entitlement spending, interest paid on the national debt and defense spending are much greater than revenue from taxes. And when the economy is weak, as it is now, tax collections are down.

Entitlement spending: Another ubiquitous concept, entitlement spending refers to Social Security, Medicare and Medicaid outlays by the government. Even though we pay into this system during our working years, with rising costs of healthcare and longer lives, much more goes out than comes in. Our country’s leaders know that entitlement spending has got to be cut to fix the debt problem, but it’s a political minefield, and things will probably not change much until after the elections of 2012.

National debt: The amount of gross federal debt outstanding is an unable-to-imagine $14 trillion. The national debt increases or decreases based on the annual federal budget deficit or surplus. But a surplus has not been seen since 2003 and the deficit is now growing at a rate of $1 trillion a year. Together with the budget deficit, this debt was one of the reasons Standard & Poor’s gave when downgrading the United States’ credit outlook to “negative” on April 18, 2011.

Debt ceiling: The federal government is limited by law as to the total amount of debt it can issue. This limit is known as the debt ceiling. Currently the debt ceiling is $14.3 trillion, an amount that was technically exceeded on May 17. Fortunately, the government can continue to operate and pay its obligations through various accounting mechanisms and Congress will mostly likely vote to increase it.

And finally, quantitative easing (QE). This is a tool in the Fed’s arsenal to help the country out of a recession when all else fails. This is also referred to as “printing money.” The Fed tends to use QE when interest rates have already been lowered to near 0% levels (as they are now) and the economy doesn’t improve. Quantitative easing increases the money supply by flooding banks and other financial institutions with capital in an effort to promote increased lending and liquidity. The downside is that this could lead to inflation as there is still a fixed amount of goods for sale (too much money chasing too few goods leads to higher prices and inflation). The Fed will complete QE2 in June. There is much controversy over what effect this will have on interest rates, Many economists expect them to rise, causing another set of issues for the economic recovery.

This would be a good time to explain “yield curve” because when the Fed expands the money supply it also has the effect of lowering interest rates further out on the yield curve.  But I think this is enough of a Finglish tutorial for one blog post—I just know your eyes are glazing over. Stay tuned for the next Finglish lesson. I plan to write at least one blog post a month on the topic!

Economists call the U.S. type of deficit a “structural deficit” because it isn’t temporary; the U.S.government habitually spends more than it takes in. Imagine if you ran your own personal finances this way. It would mean you spend more than you make each year and never pay your debt off—it just grows. Your creditors wouldn’t allow it and bankruptcy would surely be the outcome.

In The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now, Russ Koestrerich takes on this issue in straightforward prose that even a person unfamiliar with deficit economics can understand. In the first few chapters he explains the what, why and how of the U.S. deficit problem. He attributes the large and growing deficit to entitlement spending: revenue spent on Social Security, Medicare and Medicaid, compounded by our politician’s unwillingness to take action to reduce and control this spending. Koestrerich’s premise is that the largest pieces of the deficit pie, entitlement spending, along with the interest expense on existing bonds and defense spending, are politically untouchable. No politician wants to be voted out of a job.

Koestrerich concludes that the deficit isn’t going away and the result will be higher interest rates, slower economic growth and inflation.

In Chapter 2, Koestrerich explains why this matters to you—why slower growth, higher interest rates and inflation will dramatically affect the U.S. standard of living. As more government spending goes to paying interest on the debt, there will be less spending on more productive areas, such as job creation, education and infrastructure. Taxes will inevitably rise as a way to fund the deficit, hurting business and households alike. Higher deficits lead to higher interest rates on government debt which then extends to higher rates on consumer loans such as mortgages, auto and student loans. And in the worst outcome, inflation will start to rise, and each dollar will buy less goods and services, stretching already tight household budgets to a breaking point.

If you believe in Koestrerich’s worst case scenario, then Chapters 5 to 9 are for you.In them, he outlines investing strategies that can potentially protect your capital and make money in a deficit-run economy:

Bonds:

• Reduce bond holdings, particularly U.S. Treasuries.
• Focus your bond portfolio on shorter maturities.
• Build bond ladders.
• Raise allocation to municipal bonds.
• Favor corporate bonds over government bonds.
• Add international (including emerging market) bonds to your portfolio mix.
• Add TIPS (if held to maturity).
• If you need income, look to preferred and dividend paying stocks as bond substitutes.

Stocks:

• Increase your exposure to stocks outside of the U.S.
• Favor regions with better growth prospects and less debt, i.e. Canada, Australia, Germany, Hong Kong and Singapore.
• Own stocks in countries that produce commodities, particularly energy, i.e. Canada and Australia.
• Focus on U.S. companies that are large exporters of goods or services.
• Give more weight in your portfolio to emerging markets, i.e. Brazil.
• Overweight stocks that are more resilient to rising rates such as technology, energy and healthcare and own less in utilities, financial and consumer discretionary stocks.

Commodities

• Allocate a percentage of your portfolio to a broad commodity basket and gold.

Real Estate

• Buying a larger home, a second home or some commercial property is a good strategy in the event of higher inflation, but buying REITS is not.

Koesterich does an excellent job of describing the ways to invest in these different asset classes and the book is a useful investment primer. He explains his recommendations in just enough detail and again, in prose that most investors can understand. I would recommend this book to anyone who wants to get a deeper understanding of our current economy and ways to invest, whether you believe we are on the road to a deficit debacle or not.

Note:  This book was provided to me free of cost by McGraw-Hill. Any investment strategies discussed above are not recommendations. Consult your financial advisor or conduct your own due diligence to ensure investments are appropriate for your risk tolerance and investment timeframes.

Many of these investors are just ordinary folks who pay their bills on time, have good credit scores and would no more consider defaulting on a debt than they would stop brushing their teeth every day! But “walking away” is now on their short list of options to consider.

“Walking away” – also known as voluntary foreclosure or strategic default – occurs when a borrower decides to stop paying a mortgage even though they can still afford the payment. Why would someone consider such a controversial course of action? Because of the following unfortunate circumstances:

• Market values are way less than the mortgage balance (often referred to as being “underwater”).
• Refinancing to current lower rates is not an option due to lack of equity.
• Experiencing negative cash flow (rents are not covering expenses) each month.
• Selling isn’t an option with prices as depressed as they are, without bringing in cash to close.
• Difficulty raising rents in current economic environment.
• No clarity on when real estate market values will recover.

You’ve heard the expression “throwing good money after bad”?

What Happens if You Walk Away?

When you walk away from a mortgage, your credit score will drop. If you have a secure job, own a home with a decent mortgage loan or are happy renting, you may not need a mortgage loan for many years. But if you do plan on buying a home, it will be up to seven years before banks will lend to you, and you may be required to make a bigger down payment or pay higher interest rates.

You will also need to deal with your tenants. Fortunately, their rights are protected by the “Protecting Tenants of Foreclosure Act of 2009.” This legislation requires the new owner to let the tenant stay at least until the end of the lease; month-to-month tenants are entitled to 90 days notice before having to move out.

If you live in California (laws vary by state), as long as you first mortgage is a purchase money loan used to buy a one- to four-unit residential property, you won’t have to worry about  the lender coming after assets other than the property itself. Anti-deficiency statutes exist that protect borrowers in non-recourse states. The same protection doesn’t exist for refinanced loans. In either case, banks in California rarely go down this path due to the time and legal expense involved (at least for now).

If you took out an equity line or HELOC and it was used to buy the property, then it is also considered a non-recourse loan. Otherwise, most equity loans and HELOCs are recourse loans and you will be personally responsible for paying them back after the foreclosure. The lender can pursue you for a deficiency balance.

Under federal law, a lender must report to the IRS any forgiveness of debt in an amount larger than $600. So, as a real estate investor, you will owe tax on the amount of debt forgiven.

There is some “good” news: If you aren’t a professional real estate investor and you have owned the property for several years, it is likely you have accumulated capital loss carryovers. You will be able to deduct those losses from your taxes in the year of the foreclosure.

Two Sides to the Moral Dilemma Debate

Since 2007, the rate of foreclosures has sky-rocketed, and there is no end in sight. A national debate has ensued regarding the decision to walk-away. One side believes that underwater property owners are acting in their financial best interest to walk while the other believes it is shameful and unacceptable.

No matter which side you are on, the decision to stop paying your mortgage is not one to be made lightly. But it’s one that any financially intelligent person would consider with the right circumstances. The most prudent course of action is to get educated, understand all of the repercussions as thoroughly as possible, consult financial professionals as needed, and make a well-thought out decision for yourself and your family.

But it’s not only her unique voice. The book is organized in a very logical and helpful way. Each chapter, beginning with Chapter 1: The Small Business Checklist, has a To-Do List and Questionnaire to review before you read the chapter. At the end of each chapter is a complete list of resources to make it easy to get even more information and do research on the topic at hand. If you are short on time, you could get a lot of information by just reading these two sections. However, it would benefit you to read through the chapters. Rosenberg is a tax expert and there are many gems of tax wisdom contained in the chapters where you will find yourself thinking, “Oh, I didn’t know that,” or, “Great idea, I think I will incorporate that tax strategy into my business.” It’s a workbook, so get out a pen and take notes where needed!

The book is really a small business bible, not just a tax book. The chapter titles tell the story: Business Plans You Know and Trust; Entities; Record Keeping; Income; Common Deductions; Office in Home; Vehicles: Everyone’s Favorite Deduction; Employees and Independent Contractors; Owner’s Fringe Benefits, Retirement, and Tax Deferment; (the dreaded) Estimated Payments; Online Businesses; and Audits. Ms. Rosenberg really wants you to set up your business right, from the start, for growth and profit! And we all know that taxes play a big part in the outcome.

You can download worksheets from www.YourBusinessBible.com that will help you stay on track as you complete the tasks in the book. She provides a different password to the site each month that you can only retrieve by owning the book. Clever!

I plan to keep this book nearby as a reference for those questions I often get from my business-owner clients. And if you are a business-owner yourself – whether you’re just starting out or not –  This book is a must-read.

Please note: This book was provided to me free of cost by McGraw-Hill. Even so, this is an honest, objective review of the book!