3 paydays in April

April has come and gone and I've been a very bad girl during that month with my financials. My company issues a paycheck to us every other friday which equates to 26 paychecks in a year versus 24 paychecks to those that get paid on the 1st and the 15th of the month.

This translates into a lesser paycheck amount but it does make it up for it in quantity. My next 3 paychecks would again be in October.

To my dismay, I was only able to save 1 of 3 paychecks.

I saved my first paycheck entirely. My second paycheck was used to pay for the mortgage. My third and final paycheck was spent...well.. on vacations. Yes, that is vacation with an "S". But these are just small vacations that I will be taking very soon later this month.

One to Dallas and the other to Cancun Mexico. But all in all, both trips cost under $1500 for airfares + hotel.

How was everyone else's month? Any upticks on your financials.

Why the well-offs are not spending

Even as the economic recovery plods ahead, many American consumers are refusing to come along. They're not spending freely -- and they have no plans to.

Many of them have steady income. They aren't saddled by high debts. They don't fear losing their jobs. Yet despite recent gains, they've lost so much household wealth that they're far more cautious about spending than before the recession.

Their behavior suggests that the Great Recession may have bred a new frugality that will endure well into the recovery. And because consumers fuel about 70 percent of the economy, their tightfisted habits means the rebound could stay unusually sluggish.

They had in mind people like Marjorie Feldman of suburban St. Louis, who retired three years ago as a systems analyst for a utility company. The stock investments in her retirement account have sunk 15 percent from 2007. The value of her home is down 20 percent.

"I had retired assuming I'd make money" off the investments, said Feldman, who's in her early 60's. "I just don't feel as confident in the economy, and I never will again. I won't spend money the way I used to."

Feldman's husband works full time in academia. She has a part time job preparing tax returns at H&R Block. But her prime earning years are behind her. "I don't think it will ever get back to where it was before," she said of her nest egg. "I won't spend money the way I used to."

To be sure, many shoppers, especially the wealthy, are buying into the recovery. Partly on the strength of consumer spending, the economy emerged from recession last year and has been growing steadily, if moderately, since. Major retailers logged solid sales in March. Employers have begun to add jobs, including a net increase of 162,000 in March. The stock market has risen 70 percent from its low in March 2009.
Yet many who became penny-pinchers during the recession are in no mood to start shopping again with abandon for clothes, cars and home additions. They've discovered the peace of mind that comes with rebuilding savings, shopping more prudently and learning to live with less..

Interviews with ordinary Americans suggest a new frugality endures even though consumer spending has risen for five straight months and retail sales for three. In the AP's new quarterly survey, a majority of economists agreed that a new frugality will persist even as the recovery gains firmer footing.

"Consumers will not run up multiple credit cards to their limits, and when buying a house the objective will not be to get the maximum square footage for which they can afford the payment. A higher savings rate will be in place for several years."
Jeff Thredgold, an economist at Thredgold Economic Associates, predicts "less impress-my-neighbor-type spending" in coming years. He isn't worried about losing his job in business development at an information technology company. What's led him to cut back spending is the sunken value of his condominium. He bought it in 2005 for about $270,000.

"I doubt right now it's cracking $100,000," Flowers said.
Household net worth -- the value of assets like homes, checking accounts and investments minus debts like mortgages and credit cards -- has risen for three straight quarters. But economists say consumers would need a stronger and prolonged increase in wealth to lead them to ratchet up spending. Net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion.

Some economists put their hopes for the economy in the rich, who are spending more freely than the rest of the population. They hold out hope that this will encourage more hiring and stimulate spending by the less wealthy. More spending could increase companies' revenue, which allow them to boost hiring and pay. And that would lead their employees to spend more.

Royal Caribbean Cruises Ltd. returned to a first-quarter profit as more travelers vacationed on its ships and spent more money on board. And makers of luxury goods are benefiting from a release of pent-up demand for jewelry, watches and high-end furnishings.

High-end retailers have reported blowout results. Nordstrom's revenue in stores open at least one year jumped 16.8 percent last month. Saks' surged 12.7 percent.
McClaren Automotive has announced it will debut a $200,000 sports car in the U.S. next year. And business is picking up faster at high-end hotels than at mid-priced and budget hotels.

Whether spending by the wealthy will cause the less-well-off to spend freely, too, remains unclear. For now, though, many people have embraced a more frugal approach to spending.

Or maybe they've just learned to go without.

Jan Iris Smith, 57, and her husband of Cabin John, Md., put off furniture and clothing purchases after the stock market's collapse in early 2009. "We were counting on our income from our investments," said Smith, a psychotherapist whose husband is retired. "We just stopped pretending everything was going to be OK anytime soon."


American Greed

Anyone ever watch this show on CNBC? It's on every Sunday and Wednesday night. I tuned in last night and found this one story outright ridiculous.

It follows 2 sisters that operate a business supplying bolts, nuts, and screws on machineries operated by our troops during the war in Afghanistan.

It's very important that these supplies get to the troops in a quick and fast manner. So the government usually pays a high shipping cost to have these delivered pronto!

These two hardworking sisters were able to accidentally stumble across a loophole with the way they can bill their buyers (US Government of Defense) extravagantly.

It started out innocently when they were shipping some supplies over to the buyer and mistakenly keyed in the wrong shipping cost. They realized that regardless of the shipping cost number billed, the automated system used to generate a check to reimburse them for the shipping would pay the amount billed.

For example, the government of defense orders $4 worth of supplies from them. They were able to bill the buyer $100,000 shipping charge on this transaction. Overtime, they realized they can enter in any amount for shipping and still get reimbursed by the automated bill payout machine.

They spent lavishly over this system glitch for years. They bought vacation homes, jetskis, traveled to New York for an expensive jewlery trip, gambled in Las Vegas, and opened a cookie business. They portrayed a very successful image.

Eventually, all "too good to be true" things must come to an end.

Greed was ultimately their downfall when the sisters inadvertently submitted an order twice in error. The order was for a $0.38 screw and they charged a whopping $998,000 as the shipping cost.

Up until now they were able to escape human detection until this machine declined their request due to a duplicate entry. This was when authorities were called in and they found the sisters had scammed them close to $21mm worth.

It wasn't long until the FBI knocked on their door. This was too much for one of the sister. She eventually took her own life while the other one was sent to jail.

Retirement Mistakes

Investing in your future especially in a retirment account takes time and discipline. You most likely won't see the money grow too fast anytime soon. Remember that slow and steady wins the race.

I've been contributing to my 401K since the age of 22. However, I made a costly mistake to cash it all out to use as a downpayment towards our first home. Since then, I've gotten back on track and is now contributing 15% of my paycheck towards my golden years.

Here are some other costly mistakes that people often make to detriment their retirement accounts. Are you one of these people?

1) Blowing retirement savings early
This happens when people switch jobs and are forced to decide on whether to roll their 401K into an IRA or cash it all out. And guess what the majority ends up doing?

2) Turning down free money
That's right, you heard me. The money is FREE and is waiting for you to collect it. But what do you do, you end up turning this free cash away. You do this by not participating in your company's 401K match.

I've seen this all too many times happening to friends and even current coworkers at my workplace. I ask them why not get a few hundreds to thousands of dollars for free each year. They reply with being lazy = lame.

3)Saving without a goal
Unfortunately, many of us get this magical retirement number wrong. We end up miscalculating the wrong retirment age and not meeting its goal by socking away the correct amount every month. Then when it comes time to retire, you just don't have enough to last you through.

4)Ignoring your investments
Your retirement assets require regular upkeep just like your house and your car. Ignore them and they could fall apart. Be sure to review and rebalance your investments at least once a year to make sure you're comfortable with the level of risk in your portfolio.

Getting a late start is just as bad. For proof, look at the following examples.

Let's say a 25 year-old begins saving $3,000 a year, but stops after only 10 years. Over the next 40 years, she could expect that $30,000 investment to grow to more than $472,000, assuming an 8% return.

If the same investor waited until age 35 to begin saving and stashed $3,000 a year for 30 years, she could only expect to have about $367,000, assuming the same 8% annual return.

By waiting 10 years to start saving, you lose out on the benefits of time and compounding returns, not to mention over $100,000!


How much money is enough?

If you happened to see the recent lists of 2009 compensation packages for CEOs or hedge fund managers, you may have found yourself trying to wrap your head around some staggering numbers.

Larry Ellison made an estimated $84.5 million last year while hedge fund alpha-dog David Tepper took in about $4 billion.

What do those numbers mean? Was Tepper 473 times more "successful" than Ellison in 2009? And how do they compare to you? Let's say you're a Bay Area resident with a median individual income of around $50,000.

Ellison's compensation was about 1690 times yours. Does that sound about right for the respective jobs you did last year?

Leaving aside the arguments about whether or not such ratios are logically or morally out of whack, let's consider the meaning of this money from another perspective: what does a $4 billion or an $84 million, or $50,000 income mean in terms of personal satisfaction?

In other words, if you were making $4 billion a year, would you be happier? If so, how much happier? What if you (you, median Bay Area person, with a $50,000 a year income) were making $100,000 a year? Would that be enough? What about $200,000? $2 million?

Is there a point of diminishing returns -- an income level after which happiness stops increasing along with income?

Marty Nemko, a Bay Area career coach and radio host says his clients put "too much" emphasis on money when considering their career choices.

"I just saw a client who makes $500,000 a year, and he's pissed off that his peers are making $700,000. Like it's going to affect his quality of life!

There are legitimate cases in which more money does make a real difference in well being, Nemko says if you can't afford health care, for example but too often, he says, he sees people pursuing careers they would "never in a million years have chosen" simply because those jobs feed a consumptive, "designer-label lifestyle."

Be conscious of what you're trading away in the quest for a higher salary, Nemko cautions. "Normally, the people who make big dollars are the people who are bringing in big dollars for some other entity," he says. "They're corporate lawyers, bond traders, or they sell insurance -- stuff that may or may not make the world much better, and that they don't even like that much."

If you're still convinced that an increased income will improve your well being, Nemko has another important caveat: "What counts is after-tax dollars. If you fight for an extra $20,000 a year but you're really only getting $12,000 after taxes, how much is that really going to change your lifestyle?" he says.

So is there a magic number that Nemko pegs as sufficient for getting by happily in the Bay Area? In a recent blog post he details a plan for living well on $20,000 a year, but Nemko says the income-satisfaction point will vary depending on one's choices of things like housing, cars, and whether or not one spouse stays at home.

"I can't give one number" for how much is enough, he says.


Jean Chatzky, the financial editor for NBC's "Today Show," did come up with such a number after conducting a survey of 1,500 Americans in 2003 for her book "The Ten Commandments of Financial Happiness."

Chatzky says the amount of money required to "live comfortably" varies by region, but her survey of Americans' attitudes suggested that "once you've got enough to put food on the table, gas in the car, go out to movies occasionally and go on the occasional vacation, more money doesn't make you happier."

She found the point of diminishing happiness returns was about $60,000 per household, annually. In other words, after $60,000, gains in income didn't bring corresponding increases in happiness.

Like Nemko, Chatzky emphasizes that making more money to meet basic needs can significantly affect well-being. "When you look at what has the ability to make people miserable, the leading factor is health. If your health is not good and you are so poor that you are struggling on a day-to-day basis ... that's an economic problem."

Beyond these basic needs, Chatzky says what makes people happier is "having greater control over whatever money they have." Her survey reflected higher happiness ratings from people who "set goals for themselves and benchmarked those goals; people who paid their bills as they came in instead of saving up their bills to pay all at once; and people who saved something."


Nemko's and Chatzky's conclusions may come as a relief: forget keeping up with the Joneses (or the Ellisons and Teppers). The sacrifices aren't worth it.

As Chatzky puts it, "Measuring up doesn't help anybody. If you can get yourself to a place where you are really focused inward instead of outward, you're going to be significantly happier."

That may have been the end of the story, had I not called Justin Wolfers, associate professor of business and public policy at the University of Pennsylvania's Wharton School of Business.

In 2008, Wolfers and his Wharton colleague Betsey Stevenson published a study rebutting the so-called Easterlin paradox (the finding, in a 1974 paper by economist Richard Easterlin, that, while rich people within a country are happier than poor people, increases in a country's GDP do not correlate to an increase in national happiness).

(You can find a link to Wolfers' and Stevenson's paper, along with a good explanation of its context and reactions to it -- here.)

"I'm biased, of course," Wolfers told me, "but my sense is that most economists have gone from believing in that Easterlin hypothesis to believing it looks like income and happiness are quite strongly related."

OK, so maybe more money creates more happiness, but only up to a point, right?

Well, maybe not.

Wolfers says he and Stevenson are halfway through a new research paper investigating precisely that hypothesis, and so far, they've found it to be false.

"If you look for evidence that there's some level above which money is unrelated to happiness," Wolfers says. "You simply can't find it. Using American data, [from sources such as Gallup polls], it's true that people earning $50,000 are happier than those earning $25,000, people earning $100,000 are happier than those earning $50,000, and people earning $200,000 are happier than those earning $100,000."

So can we conclude then, that Larry Ellison is 169 times happier than you?

Well, not exactly. But Wolfers and Stevenson have, in fact, quantified the relationship between income and subjective reports of well-being.

"It's what we call a linear log relationship," Wolfers says. Translation: "At any point in the income scale, a 10 percent rise in income buys the same rise in happiness."

And the Wharton professors have found this formula holds cross-nationally, too. "A 10 percent rise in income for someone in Burundi buys about the same change in happiness as a 10 percent rise for people in the U.S.," says Wolfers. "That's the sense in which we say there's no evidence of satiation. There's no evidence of it running out at income level whatsoever."

(Wolfers' analysis spans multiple studies, but he says one of the recent Gallup polls he analyzed listed ">$500,000" as the highest income category.)

The upshot is that hedge fund honcho David Tepper would, in theory, need to earn an extra $400 million to see a 10 percent increase happiness. You, Bay Area median income earner, just need to find $5,000 more per year to make the same jump in your sense of well-being.