In secular terms, an “epiphany” is a sudden perception or insight into reality or essential meaning of something.   Usually, an epiphany is prompted by some simple thought, experience, or event in your life.

Mr. ToughMoneyLove experienced an epiphany of sorts this weekend about the future of our individual and collective financial affairs.  It was actually triggered by something that Scott Burns wrote in a recent column titled “Home Preparedness and the $50 Billion Straw.”    This is what Scott said that really affected me:

What can we do to feel safe again?

Should we push the politicians for fundamental reform?

No way. They simply aren’t qualified to provide it. Neither party has shown any willingness to stop promising benefits that have to be paid for by our children and grandchildren. Their Ponzi scheme, more politely known as Social Security and Medicare, is far larger than the alleged fraud of Bernard Madoff.

The tough answer is that we have to change. The moment we ask the politicians, regardless of party, we’re disempowering ourselves and empowering them.

That is the opposite of what we need to do.

The key phrase is we have to change.  Many of us have long distrusted politicians and resigned ourselves to their propensity to spend our money on pork, entitlements,  and on other things that get them re-elected.  But we continue to vote with hope for yet another candidate who offers ”change we can believe in.”   But, as Scott Burns says, the politicians are simply not going to change.  Instead of principled leadership being provided by men and women with knowledge, wisdom, and common sense in matters of money and finance, we get goofballs like Arnold Schwarzenegger, George Bush, Barney Frank, Charley Rangel, and now Al Franken.   Can you believe it - “Senator” Al Franken spending our money?  

It seems that there is an endless supply of people who can get themselves elected into positions where they have power over our financial lives but are completely incompetent to exercise that power.  Unfortunately, there are also millions of voters willing to put and keep those people in power.  As just one example, Franken is being foisted upon us by the same voters who turned a professional wrestler (Jesse Ventura) into a governor.  Thanks Minnesota!  And you voters in Illinois- aren’t you totally embarrassed?  You’re going to need to build a new prison just to house all of your corrupt politicians.

So my epiphany is that not only should I resist any hope that our government will do the right things with my money and our financial institutions, I must acknowledge that it never will.  But I should not simply despair.  Instead, to survive economically I will have to be the one making the changes.

Last November I wrote about adopting a survivalist approach to our economic crisis.  In his recent column, Scott Burns is thinking the same way and offers some tips for becoming an economic survivalist on a more or less permanent basis.  (Check out the books he recommends.)  There are lots of other like-minded folks out there, including the conspiracy theorists and armageddon predictors who say buy gold and guns then hunker down. 

I’m not interested in gold and guns as a survivalist strategy.  But I am going to try even harder to build up a variety of assets - including some very hard, paid-for assets - that will allow my family to survive economically without depending on a traditional income. That is a change that I can make to keep as much economic power with Mr. ToughMoneyLove and away from those in our government who just want to abuse their power over my money as well as the money of my children and grandchildren. 

I have a lot of thinking to do about what being an economic survivalist really means.  Having an epiphany provides realization but not necessarily solutions.   Who knows, I may become an evangelist for an “economic survivalist” movement.  (I even registered the economicsurvivalist.com domain name just in case!) 

So now I am wondering if any of you have ever had a financial epiphany.  If so, what was it?  Maybe I am late to the party with mine.  If so, tell me about it.

Image credit:  Daniel Wildman

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Mr. ToughMoneyLove has spent a good part of the past five months being critical of others who use poor judgment in matters of personal finance.  Many of my targets have been politicians, Wall Street investment bankers, and disciples of the almighty credit score.  Depending on your own attitude about these subjects, I may come across as an arrogant know-it-all.  There is no question that I infuse my writing with heavy doses of skepticism and sarcasm.  However, none of my targets have been you personally.  When I write, no offense is intended to any of you and, I hope, none taken.  (There have been a few obnoxious comments left but I use the ultimate weapon on those folks:  I delete their comment.) 

Because I have offered up a number of opinions about what everyone else should be doing at the beginning of 2009, I think it is only fair that I do some of those things myself.  In particular, I wanted to generate an accurate picture of our current net worth so that I could compare it to our net worth at the end of 2007.  To do this, I needed to estimate the present market values of our real estate (permanent and vacation homes.)  I obtained this data online then entered it into Quicken, which is what I use to keep track of all of our finances.

I then took the painful step of running an analysis of the 2008 performance of all of our investments.  To be honest, until the market started its dramatic fall in September, I did a portfolio analysis at least once per week.  Since that time, I have looked at all of our investments individually (and made a few moves that I will talk about in a minute) but I have put off until now looking at the yearly performance of our entire portfolio.  Frankly, I knew it was bad but I didn’t really want to know how bad.  Now I know.  We actually did better than I anticipated.   Take a look at the data.  Now is your chance to critique me.

Here is a summary our 2008 financial performance:

Net Worth:  -3.9%

Investment Portfolio:  -21.8%

It is sad that I would be content with a 21.8% yearly drop in the value of our investments but considering that the Dow fell 34.3% during 2008, I’m somewhat encouraged that our asset allocation allowed our overall portfolio to outperform the DJIA.  

Our biggest loser was in our emerging markets ETF (VWO) which was down 51%.  So much for the theory that emerging markets are non-correlated with the Dow! 

A nice performer was our international treasury bond ETF (BWO) which was up 2.27% for the year.  That non-correlation did come through as planned, probably because of currency fluctuations since this fund is non-hedged.  I have to credit Scott Burns for this suggestion and for creating his Ten-Speed portfolio which is what we use in our self-managed 401(k) account.

We made several moves during 2008 which helped support the performance of our overall portfolio:

First, when I became concerned about prospects for inflation at the beginning of 2008, I tripled our allocation in an inflation protected securities fund (VIPSX).  We have not yet experienced the ravages of inflation but this fund (which holds TIPS) performed relatively well (-6.65%) because of the rush to safety by other investors.

Second, I sold all of our shares of Citi early in 2008 when it became apparent that it was going to cut its dividend.  That saved us from a lot of future market devaluation.  We only own a handful of individual stocks and most of those were purchased for their high dividend yields.  I also sold our Bank of America stock but I did that at the end of 2008 to harvest a tax loss.   I made the mistake of holding this stock too long. 

Third, we accumulated 401(k) contributions in a stable value fund (+3.71%) throughout 2008, in anticipation of using that money to rebalance our portfolio at the end of 2008.  When Obama was elected and announced plans for tax hikes and massive stimulus spending, I made the decision to postpone that rebalancing until I see what Congress actually does when he takes office.  Some experts would say to go ahead and put this money into equities at sale prices.  This baby boomer has decided to watch and study for a little bit longer.  Everything - and I mean everything - has to be looked at differently in this new era of investing.

Fourth, a significant piece of our investment portfolio is in I-bonds which we bought from 2001-2007.  All of our investments are intended for use in retirement.  The I-bonds (+4.98%) are part of our retirement emergency fund that we will use as a buffer so that we will not have to sell any other investments during a market downturn.

I am even more encouraged that our net worth only fell 3.9% during 2008.  I attibute that primarily to two factors.  First, our real estate holdings held their own.  Because of their somewhat unique and favorable locations, their estimated market values did not measurably decrease (according to Zillow and HomeGain) during 2008.  Second, during 2008 we made a concerted effort to accumulate cash so that we could pay-off at least one of our mortgages.  That was going to happen last month but to be honest, things were so hectic I didn’t make it happen.  This will be the month.

So there you have it, the Mr. ToughMoneyLove year end review.  I am looking forward to a better 2009 for all us.  And starting tomorrow, a return to our regularly scheduled programming.

How was your 2009?  Have you dared to look?

The Tough Money Love blog is now five months old.  I want to sincerely thank all of you for reading and commenting here.  It means so much to have you enjoy and contribute to the views being expressed.

I also want to thank all my fellow personal finance bloggers for teaching me the ropes and supporting me as I try to learn what this is all about.   The veteran bloggers at Smart Spending, The Simple Dollar, Consumerism Commentary, and Free Money Finance were particularly nice in accepting guest posts from me and/or sending a lot of new traffic my way.

Photo credit:  Steve Woods

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We’ve all been avoiding the scary task of checking on the current market value of our home.

Mr. ToughMoneyLove thinks it’s time for all homeowners to face the music and find out what has happened to our own home valuations.  The numbers won’t get any better if you avoid looking at them.  I promise.

Hopefully, more and more Americans will come to realize that net worth is a much better indicator of financial health than a credit score.  Keep in mind that credit score is always a moving target.  The rules get changed on us often, by credit industry monopolists who have no interest in our money health and therefore want us focused on doing things that feed our credit score.  Net worth is meaningless to them. 

Home equity is often single largest component of a family’s net worth.  Therefore, it is in our best interest to learn if we have any equity left and if so, how much.  Then we can use that information to see how our personal balance sheet is looking.  The beginning of the year is a logical time to do this.

So how do we estimate the value of our home without actually selling it?  Well, you could ask a Realtor to do a property valuation analysis for you.  But actually, you can use the same information and do it yourself, in the comfortable glare of your own computer screen.

These are the home valuation sites that I like:

Zillow allows you to enter in your home address.  If you live in a reasonably sized town, city, or suburb, it will find and map your house, pull up publicly available information about its size and prior sales transactions, find comparable sales in your area, and generate an estimate of its value.  You will also have the opportunity to “claim” your home and customize information by editing or adding details of the size and design of your home.   This can be important.  For example in our case, Zillow had our home listed with 6 bathrooms and no bedrooms.  (I think this is because we had the house built from custom plans.  Therefore, the only prior sale of record was for the bare lot.)  When we corrected that information to 5 bedrooms and 4.5 bathrooms, the valuation changed accordingly.

Home Gain is similar to Zillow although it provides a valuation range instead of a single dollar valuation estimate.  It has a very clean user interface and includes lists of comparable sales and recent sales in your neighborhood when it displays the valuation range.

Trulia does not provide individual valuation estimates.  However, it does contain extensive data on market trends for home sales and valuations in your geographic area.  This would be helpful if your home was not identified in either the Zillow or Home Gain databases.  I would supplement the data from Trulia with comparable sales information from Realtor.com.  I would then use that sales data to arrive at a valuation range based on actually selling prices per square foot. 

So it’s time to put on the big boy (or big girl) pants and find out what has really happened to the real estate portion of our financial empires.  If it helps, avert your eyes when the number first pops up but finally take a look.  Then resolve to do it again in 3-6 months.  Actually, when that home value number starts climbing, it may give you a better feeling about the rest of your financial life.

Image credit:  Svilen Mushkatov

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Unfortunately, I have been reading articles in my local paper and elsewhere that some people are saving money in ways that are shortsighted and financially risky.  That got me thinking that maybe someone should point out those mistakes and perhaps prevent others from doing the same things.   So I appointed myself - Mr. ToughMoneyLove - to do that job.  

1.  Don’t save money by cancelling you car insurance.  Yes, I’ve read that there is a big upsurge in people dropping their automobile insurance.  There are several very good reasons not to do this.  

First, many states require that owners of vehicles registered in their state carry liability insurance.  In fact, some states will not even register a vehicle without that proof.  At the least, if you are pulled over for a traffic violation and are not insured, you will get an extra ticket and fine.  

Second, most lenders and lessors require that you carry insurance covering any car that is financed or leased.  If you breach the loan or lease agreement, an aggressive lender/lessor can call the loan or cancel the lease.  

Third and foremost, you need at least liability insurance to protect your assets in case of an at-fault (or alleged at-fault) accident.  Even if you are not at fault, just having to hire an attorney on your own to defend you can cost you thousands.  You also need to keep your uninsured motorist coverage to protect yourself in case an uninsured driver hits you.

If you want to drop collision coverage (if your loan or lease agreement permits) and/or raise your deductibles, fine.  But do not cancel your insurance altogether.  

2.  Don’t save money by cancelling your disability insurance.  If you are employed, and particularly if you have dependents, long term disability insurance is critical.  You are much more likely to experience a period of disability than you are to die.  If you become disabled, who will pay the mortgage, pay the rent, or buy food for you and your family?  If you have a substantial emergency fund, perhaps you can reduce the premiums on your disability policy by increasing the waiting period.

3.  Don’t save money by cancelling your life insurance.  This admonition applies only if you have dependents who will suffer financially if you die.  Do not sacrifice their long term future to save a few bucks now.  If you have whole life insurance, see if you can convert it to term.  Alternatively, if you cannot qualify for a new term policy, see if you have enough cash value in your existing whole life policy so that your premiums can be paid from policy dividends.  Sometimes your agent won’t let you know that this is an option.  It is for many policies.  If not, then perhaps you can borrow against the cash value to get the money you need.  This keeps the protection for your dependents in place.

You can probably see a pattern here.  Most insurance is intended to help you manage financial risk.  In many cases, if you don’t have those financial risks under control, your Plan B is bankruptcy (for you and/or your dependents.)  In this age of economic uncertainty, risk management should be right near the top of your routine planning agenda.

This week my writing appeared in the Carnival of Personal Finance.  You should have a look at all of the excellent articles.

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To be more specific, 2009 would be a good year to become friends with the person(s) who control your job destiny.  Whether you call them boss, supervisor, manager, owner, or commanding officer, having that person as a friend can go a long way towards keeping you off the layoff list.  That can mean the difference between having a good financial year in 2009 and a poor one.

I’m not talking here about merely sucking-up or phony stuff.  For most people, that sort of behavior is rather obvious and will likely backfire.   Instead, be interested in their families, hobbies, and personal lives.  Start small by asking about those things - what did they receive as a gift that they really liked, what college team did they follow during bowl season, etc. 

Then gradually move up to standard friendly gestures like inviting them to lunch or to join you for a drink after work.  I know from personal experience how nice it feels to have employees that you supervise ask you to join them for a meal, just to shoot the breeze.  Eventually, you might ask for their advice on some small personal matter, showing that you value their input on things that are not work-related.

When you have a chance to have a one-on-one conversation with your manager, talk about stuff that friends talk about.  You know how to do that.  It’s just that most of us don’t bother to do that with people who control our job destinies.  It can intimidating.  But you should do it anyway.

Real friendship brings many perks in life.  Building friendships at work can bring perks to your job as well.  If that friendship is with someone who can help you keep your job, that can be the ultimate work perk.  Just think about it.  If your boss is instructed to cut costs in his or her department, that may mean assigning you or a co-worker for termination.  Who do you think your boss will want to keep?  It’s human nature.  The hard truth is that, all other factors being equal or even close, we want to help those whom we consider to be our friends.

So give it a try in 2009 - start today.  It will be good for your state of happiness because having more friends is always beneficial.  If that friend is your boss, that friendship may keep your paycheck more secure as well.

Are you friends with your boss?  Can you be?

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Mr. ToughMoneyLove has been informally surveying New Year’s Resolutions posted by various internet users, particularly in the personal finance world.  Even the federal government has published a list of the most popular New Year’s Resolutions.  Second on the list is “Manage Debt.”  That’s outstanding.

Based on their recent market behaviors, banks and other consumer lenders have also made resolutions of their own.  The question is, who will do the best job of following through on their personal finance resolutions, consumers or lenders?

I am concerned that the lenders have a big headstart.  Clearly, mortgage lenders and credit card companies have blazed a trail back to lending basics.  Credit underwriting is actually being used again, with verification of income, careful review of debt-to-income ratios, and increased credit score requirements.  This is a good thing.  In one sense it’s unfortunate that the lenders had to intervene in this way because it reflects the reality that consumers would not police their own borrowing behavior.  But someone had to do something to break the consumer debt addiction and it’s better that the market do it rather than the government.

The reaction of many consumers and government policy makers to the tightening of consumer credit standards has me concerned.   Instead of congratulating banks and other lenders on taking positive steps to insure that people who borrow money have the ability to repay it, folks are demanding a return to the free-flowing credit days of old.  I am in favor of opening up the business credit pipelines.  But what is so horrible about asking consumers to follow the lead of the banks and move back to old school lending and borrowing practices?

Here is one piece of recent evidence that supports my argument that the lenders may do better than the borrowers with their resolutions.  According to this post in the Wall Street Journal, Congress is upset that the government’s “Hope for Homeowners” foreclosure avoidance program has done virtually nothing.  It seems that the reason for this failure is that for a borrower to participate, he or she must certify that the borrower did not make any false or misleading statements on a prior loan application.  Oh-Oh.  Busted.  It also seems that there were more “liar’s loans” than we thought.  So many borrowers (perhaps aided by greedy mortgage brokers) were fabricating income information on their initial loan applications that now they cannot participate in the loan workout program.  If they did, they would be compounding the lie.

This is the consumer credit mindset that we need to eliminate.  Lying to borrow money can no longer be accepted by anyone.  I’m no fan of lenders in general but if tightening of credit standards by lenders forces consumers to “manage their debt” better, then more power to them.  Indirectly, that helps everyone’s personal finance resolutions.

Image credit:  CJLUC

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My Dad lives in The Villages which has to be the largest retirement community in the world.  It has grown tremendously since our last visit.   I have decided to spend some time over the next few months writing more about it as well as a different retirement lifestyle that my mother enjoys. 

Regardless of your age, retirement planning is something that should regularly appear on your personal financial planning agenda.  If you are a baby boomer like me, retirement planning is near the top of the agenda. 

Part of retirement planning is learning about the different retirement lifestyles that are available.  Thus, learning more about communities like the Villages is part of that process.  I think it helps to receive information about retirement communities from folks who do not work or even live there.

One initial observation I have about the Villages is that it may be the most environmentally friendly community in the country when it comes to transportation.  This is a golf cart community, with thousands of residents doing their shopping, visiting, and carrying out other daily routines of life in totally electric vehicles.  It helps that the community was designed for that purpose and that the weather accommodates it.  Nevertheless, there is much that can learned from the people who live here about living without gasoline.

Time to catch a plane back to the unretired world.  Happy New Year to each and every one of you.

Photo credit:  Randy Rowe

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