Personal finance lessons from Disney

I just returned from a family vacation to Disneyworld. Vacations are an easy way to run into personal finance trouble through overspending, and Disneyworld is the ultimate test. Threading my way through the jam-packed "World of Disney" gift shop--which someone told me has higher annual gross sales than any single store in its category in the world--I couldn't help but notice all of the overflowing shopping baskets and wonder: "How many people can't afford a quarter of the stuff they are buying?" (as well as, "Should I be investing in Disney?")

Tallying up the vacation bill for my own family, I was relieved to learn that we spent roughly what my wife M and I expected--though we did exceed our spending plan by more than $200. Here's what I think contributed to our "success," and where there was room for improvement.

Having a plan
M and I decided on Disneyworld for the family vacation back in March. Once the decision was made, we set a rough spending plan that not only covered the "fixed" expenses of airfare and park tickets (a week at a timeshare condo M's father gave us for Christmas covered our lodging), but also "discretionary" expenses like meals, pocket money, parking, etc. That proved helpful in several ways.

First, it set our expectations for what the trip probably was going to cost ahead of time, helping us avoid the unpleasantness of "sticker shock" after tallying up what we spent when we got back home. Second, planning months ahead gave M and I time to come together on how much we were going to spend on what things ("We're going to eat out how many times?"). Third, it gave us an incentive to save money in the months before we left to make sure we could afford the trip. And finally, it set up some boundaries on our spending that helped us make decisions when faced with Disney's overwhelming choices for food, fun, and merchandise.

Setting limits for the kids
Controlling the spending of my 12-year-old stepdaughter and the friend she brought along proved to be both a success and our biggest headache. Each child had a specific amount of pocket money for the week, which M and I set beforehand (in conjunction with the friend's mother). That, at least, allowed us to know exactly how much spending was going toward fun money for the kids, and gave us leverage to say "No" to one more stuffed Pooh doll when the money ran out.

However, to prevent the kids from spending all their cash in one or two days, M and I served as their personal "ATM," dispensing money as needed. Bad move. That was the biggest source of friction for our family on the entire trip, as well as a hassle to track and manage. Next time, I'd divide the pocket money up by the number of days on the trip and give the kids a per-diem amount before we left for the park. If candy and frozen drink purchases leave them tapped out by 10 a.m., oh well.

Tracking what we spent
I'll be honest: I had little idea of how much we were spending during the vacation. I brought a notebook and had every intention of keeping track as we went. However, juggling a two-year-old while checking the time for our next Fastpass ride and serving as an ATM machine was more than enough to handle at once. M was great about pushing us to sit down and discuss each day's spending back at the condo, but I was usually so tired--and perhaps a bit disappointed for not being a better recordkeeper--that my heart wasn't in it. I feel fortunate we stayed close to our spending plan overall.

Money aside, our Disneyworld trip was an investment that paid dividends in some truly wonderful family memories and experiences. And for two parents working hard to knit together a blended family of children and stepchildren, you just can't put a price on those.

Coin Jar "Finance Find": FTC.gov

I'm starting a new feature at The Coin Jar: "Finance Find." Occasionally I'll feature an interesting website or resource I come across in my travels that offers sound advice on personal finance or can help you better manage your own finances.

If you read my last article on co-signing, you saw I referenced an article on the Federal Trade Commission's website. Poking around the site a bit, I found that the "For Consumers" area is actually more helpful than I realized. It provides a lot of good--though unspectacular and basic--information on a variety of topics. Want tips on how to use less gasoline? Looking for facts on Lasik eye surgery? Wondering if prepaid phone cards are really a deal? FTC.gov can help.

The FTC's purpose, generally, is to prevent unfair methods of competition in business and provide consumer protection. They are the federal agency that requires businesses to do things such as put care labels in clothes and warranties on their products. They hear from consumers who get ripped off, and help write the laws to prevent it. So they are a good resource to become better informed as a consumer. And if you've been ripped off, they want to hear from you.

Here's an interesting tidbit from their website that I didn't know: If you buy something from a salesperson at your home you have three days to "cool off" and cancel the sale for a full refund. I wish I'd learned about this earlier. A friend of mine recently had buyer's remorse after a crafty carpet salesman pushed her into buying a carpet she couldn't afford.

So check it out when you get a chance: www.ftc.gov.

It's okay to say no to co-signing a loan

During my first marriage, my wife once asked if she could co-sign a lease for a friend of hers that was having trouble getting an apartment. I thought about it, then said I didn't think it was a good idea and not to do it. Naturally, that sparked a pretty loud argument between us about the merits of helping out a friend in need versus the merits of protecting one's own financial interests. In the end, I refused to budge and my wife was respectful enough of my feelings to tell her friend, "Sorry."

At the time I wasn't sure I was doing the right thing. I knew the friend and felt bad that she needed a co-signer, due to circumstances which weren't entirely her fault. And she seemed genuinely trustworthy, a "good person."

Co-signing is poor judgment
As my knowledge and experience in personal finance has grown, I've learned that my first instinct was right. Co-signing for the debt of someone else, whether a friend or (as in most cases) a family member, is not wise. In fact, Proverbs 17:18 says, "It is poor judgment to co-sign a friend's note, to become responsible for a neighbor's debts." (New Living Translation).

Why? Co-signing means that you accept total responsibility for repaying the loan if the primary borrower fails to. Many times lenders want a co-signer for understandable reasons--a borrower is very young or hasn't established a credit history, perhaps. But often it's because the person has been irresponsible in paying back borrowed money in the past. You are essentially taking on risk that the lender--which probably has more assets and resources than you do--won't.

You really could pay
Additionally, co-signers pay back someone else's loan more often than you probably think. The Federal Trade Commission says that "studies of certain types of lenders show that for co-signed loans that go into default, as many as three out of four co-signers are asked to repay the loan." (View the full article.) If the loan goes into default, it shows up on your credit report as well as the primary borrower's. And it also counts as your own debt, which could prevent a lender from loaning you money directly.

Family members are often the first to ask you to co-sign, and are often the hardest to turn down. But there is no guarantee that a son, daughter, brother, or sister would be a better borrower. A father I know co-signed a loan for his son, then was surprised to get a collection notice from the bank. The son had never mentioned he had been unable to make the payments, and the father ended up paying the balance.

You can still be supportive
If someone asks you to be a co-signer, consider it carefully. Ask yourself if you could afford to step in should the borrower fall behind on payments, and if you're willing to assume the risk. If not, your answer should be a firm "no."

Instead, offer a cash gift to help the person if you can. Collect money from friends or family members on the person's behalf. Contact your church about possible financial help.

If a friend or relative is hurt or offended by your response, empathize with their feelings, but keep the guilt at bay. Ultimately, you could be helping them. You may be keeping them out of a loan that they in truth may not be able to pay back, which would worsen their situation overall.

Become your credit card's nightmare customer

Here's a fact you probably know, but is still sobering to see in black-and-white.

"Credit-card companies make most of their money by charging interest to customers who don't pay off their balances each month." (The Wall Street Journal, "Credit-Card Firms' Problem: People Are Paying Their Bills," May 25, 2006)

Times are tough for credit card firms these days, the article said. More people, in fact, are paying off their balances, shrinking the companies' revenues and profits. To make up the difference, card firms are increasing late-payment fees and raising rates. They are also launching new technology designed to get you to use your card more often.

The bottom-line: Your credit card company makes more money when you spend more than your income. They have a strong incentive to get you into debt, and keep you there. Now that's "priceless."

Be wise. Instead of doing your part to help the poor, suffering credit card firms, be like Jim Raley. Jim, a 34-year-old from Atlanta, once racked up $14,000 in credit card debt and paid hefty interest. Now he pays his balance off each month, keeping more money in his pocket instead of the card companies'."I am one of their nightmare customers," he said in the WSJ article. (Note: credit card issuers aren't completely hurting; they still rake in transaction fees from retailers every time customers use their card.)

More people paying off their card balances is news that isn't necessarily as good as it sounds. Many pay with cash from a home equity loan, where interest is tax-deductible, or transfer balances from high-rate cards to those with temporary 0% interest. While that helps save a few dollars, it's still borrowing from Peter to pay Paul. And Paul is smiling all the way to the bank.

How long could you last on a "job furlough?"

A budget dispute has shut down the state government in my home state of New Jersey. About 45,000 state workers have been sent home and face an indefinite time period without paychecks. Which raises an important question about your own personal finances: How long could you go without getting paid?

Financial planners recommend having three to six months of living expenses set aside in a savings account or money market fund. Unfortunately, the emergency savings of many people would only last them three to six days.

Parking a few months of living expenses in a bank or fund account is one of the best and easiest ways to stay out of financial trouble. While few people get furloughed--as New Jersey's state employees have--just about anyone can be laid off, or fired. A sizeable emergency fund at least gives you some time to find out where that new paycheck will be coming from, without racking up the credit cards or hitting up family members for a loan right away.

Here are a few tips about building an emergency fund:

Just start. Does three to six months of expenses seem like an impossible savings goal? It can be, especially if you let that thought prevent you from trying. So start small: commit to putting aside $5 or $10 a week and let it become a habit. Once you see the total start to grow, you'll be more motivated to increase the amount.

Keep it handy... You want to put your savings where you can get it quickly and easily, like a savings account or money market that offers checkwriting. Despite the fact they pay a little interest, certificates of deposit (CDs) are not a good choice because you pay a penalty if you withdraw the funds before the CD's term expires.

...but not too handy. At the same time, weigh whether you are likely to dip into your savings when you overspend, instead of just in emergencies. If you can't avoid the temptation, then go with a money market over a savings account. Having to write a check can be a stronger psychological deterrent than tapping a bank's ATM.

Take your situation into account. Do you really need to save six months of living expenses? It depends on your job stability. M and I have saved about three months, which I'm comfortable with because she had tenure as a schoolteacher (i.e., it was unlikely she'd lose her job) and my employer has resisted layoffs even in industry downturns. Now that we're down to one income, I'd like to increase the amount to six months--but I have to make sure we meet our current monthly expenses first.

Remind yourself: Those savings aren't doing nothing. Once you achieve your emergency savings goal, it might be hard to see all that cash sitting there, especially when you're driving an old car or haven't been on vacation in years. But remember, those funds could give you some much needed peace of mind in a stressful time. Instead of worrying about how to pay the bills, you can focus on sharpening your interviewing skills and landing that next great career opportunity.