Robert Reich reported on Marketplace today that home foreclosures were up 42% last year resulting in over a million families losing their homes. Many of these people had signed up for adjustable-rate mortgages or interest-only loans with no down payments and sometimes 100% financing.

Rough Times Ahead
The bad news for families that borrowed with adjustable rate mortgages is that these rates are projected to climb. According to estimates by the Mortgage Bankers Association, this will affect over $500 billion worth of mortgages in 2007. The easy money of the real estate boom years has dried up and people that overextended themselves are going to struggle as rates increase. Reich projected further struggles for families based on a recent report.

“According to a report issued last month by the Center for Responsible Lending, 1-in-5 sub-prime loans made in past two years will end in foreclosure. That’s about 2.2 million borrowers who are likely to lose their homes.”

Lessons Learned
Reich points out that the millions of families are the big losers here. While mortgage lenders and investors may lose money, they’ll still have the properties to resell. The families will be out of a place to live.

What can we learn from this tragic, yet inevitable outcome? Don’t overextend ourselves to pay for anything, let alone the home we live in. Eventually interest rates or the economy will catch up with us and we’ll regret our actions. The second thing to think about is how the increase in foreclosures will affect the availability of discounted housing in the market for investment opportunities.

Get Rich Slowly recently told Flexo’s story of how he’s become the Chief Financial Officer of his own life. Flexo tracks his finances with the same financial statements that businesses use, net worth and income/expense worksheets.

Financial Ratios
So as the CFO of your own life, how can you measure your financial progress against other people since everyone’s financial situation is a little different? Corporations have a similar challenge comparing their success against one another because no two businesses are exactly alike. Corporate executives and Wall Street use financial ratios to distill the numbers down to help compare apples to apples. We can use similar ratios in our personal finances.

Key Ratios
My wife and I sat down with a financial advisor a few years ago and she pointed out 5 key ratios to keep an eye on. Below I give the formula, an example calculation, and a recommended target for each ratio.

Liquidity Ratio
Formula: Liquid Assets / Monthly Expenses
Our Example: $68,070/$6,892 = 9.9
Target: 3-6 months

Housing Payment Ratio
Formula: Monthly Housing Costs / Monthly Gross Income
Our Example: $825 / $7585 = 10.88%
Target: Less than 28%

Solvency Ratio
Formula: Total Assets / Total Debt
Our Example: $265,570 / $146,654 = 1.81
Target: Greater than 1.0

Savings Ratio
Formula: Savings per Year / Annual Gross Income
Our Example: $18,000 / $91,000 = 19.78%
Target: 8-25% depending on age

Debt to Income Ratio
Formula: Annual Debt Payment / Annual Gross Income
Our Example: $9900 / $91,000 = 10.88%
Target: Less than or equal to 30%

Why Measure?
As we read about other’s situations we often find ourselves comparing our finances to theirs. If someone else has a huge net worth it may seem intimidating, like you’ll never get where they are. If you’re ahead of most other people you might have a tendency to slack off financially. Rather than comparing yourself with others, measure your finances against these target ratios to help keep yourself on track.

Compute these ratios periodically and keep a record of the results so you can see your trend over time. I haven’t done a good job of this; the numbers I use in our examples are from 2003. In my defense, our expenses/debts haven’t gone up much since then while our salaries and savings rates have increased so our ratios should be the same or better. However, as we move to a one-income family a lot of things will change financially and I’ll need to stay on top of our ratios to make sure we’re still headed in the right direction.

If these ratios will help you keep better track of your finances, subscribe today for similar helpful tips.

Update, Flexo has started a series on personal finance ratios. Check out the first ratio in the series, the Working Captial Ratio.

I’m a little late getting this one out but I wanted to say thanks to the hosts from last week.

The Simple Dollar put together a great Festival of Frugality where I talked about How To Get a Free Car Wash.

I lamented my procrastination on dealing with a dud mutual fund, TWCUX, in the Carnvial of Investing over at Journey To Financial Freedom.

Last but not least, I shared some tips for helping to forget about the stress of money from time to time in the Carnvial of Personal Finance hosted by Blueprint for Financial Prosperity.

Why do we shop on eBay? Oftentimes it’s because the price is right. A common business model on eBay is to sell a large amount of products at a low price. This low margin, high volume business model can also be applied to our personal finances.

The Pennies Add Up
Think about how many financial transactions you’ll take part in over the course of the next week, month, or year. If you can save a little money on each of those transactions the cost savings will add up over time.

High Margins, Low Volume
Walter Updegrave argued in a recent article in Money Magazine that reducing spending on big ticket items was a more efficient way to save than cutting out the little expenses. I’m a lazy person; I like to do the least amount of work for the largest amount of gain. That being said, I tend to agree with Flexo and Jim that focusing on the biggest savings will get you the biggest bang for the buck. My sales approach on eBay reflects this; I typically sell fewer items for higher margins. From a personal finance point of view, I like to put more effort into reducing my biggest costs, than I do saving a little on all items.

Low Margins, High Volume
However, a simple eBay search will turn up many people that opt for the low margin, high volume approach that are making decent money. I think you’ll find the same with personal finances. Clipping coupons, scouring for deals, and pinching pennies can save you significant amounts of money over time. Different approaches work better for different people and the financial circumstances they find themselves in.

Never Enough Time
I guess the main question in our busy lives is how much time you have. I find it hard enough to arrange my family, friends, job, and sufficient sleep all into my schedule. If you have enough room in your schedule to focus on cutting the big costs, all the little costs, and still have time for “living” then you may have found the best of both worlds.

We work hard to earn our money and grow our net worth. Watch out for the silly mistakes listed below to help avoid losing your money. In each case, a simple act can save you lots of cash:

Mistake: Leaving your curling iron or iron plugged in.
Cost: Bye-bye house.

Mistake: Backing up without looking behind you for cars, garage doors, or people.
Cost: Expensive bodywork, new garage door, or lawsuit.

Mistake: Not checking your blind spot before switching lanes.
Cost: Big insurance bill. Big hospital bill.

Mistake: Not updating your anti-virus software.
Cost: Potential identity theft. Hours or days of lost productivity.

Mistake: Ignoring check engine light.
Cost: You think parts are expensive, wait until you see the labor bill.

Mistake: Not backing up your data.
Cost: Family memories and financial records lost forever.

Mistake: Locking your keys in your apartment.
Cost: Large locksmith bill.

Mistake: Paying your credit card bill late.
Cost: Outrageous late fee.

Mistake: Running with scissors.
Cost: Bodily Harm. Didn’t your mother teach you better

I just received the best letter from my insurance company that I’ve ever seen. Here’s what they said:

“In a few days, you’ll receive your homeowners policy renewal packet. We recently changed the way we price homeowners insurance to ensure your premium reflects the risk your policy presents to us. As a result, your policy premium has decreased.”

No calling and haggling was required. I typically think of insurance companies as looking to collect the highest premiums they can and then deny as many claims as they can. This action proves that not all insurance companies fit that description.

What’s the Secret?
So how can you convince your insurance company to lower your home insurance premiums? Below are the reasons they listed for the drop in price.

• Previous property insurance claims.
• The age, location and construction features of your home.
• Your coverage selections, such as limits, deductibles and special endorsements.
• The fire protection of your property.
• The length of time we’ve insured you.

Of course, the closing paragraph of the letter made me wonder if I have sufficient coverage.

“Know your coverage and make sure you’re adequately insured. As a policyholder, it is critical that you periodically review your policy to make sure you have enough coverage to rebuild your home if a loss occurs. Without adequate coverage, damage to your home could mean significant financial hardship.“

This could just be a marketing ploy in disguise. Lower the rates a little to make customers happy, and then make them worry they’re under insured so they increase their coverage. I’ll assume I’ve just been reading a lot of cynical stuff lately, that this move is on the up and up, and enjoy the lower premiums!

Related Link: Free Homewoners Insurance Quote Online. Free Compare Homewoners Insurance Quote and Get Low Homewoners Insurance Quote in Your State.

A company called RecycleBank will give you credit (RecycleBank Dollars) at participating vendor stores when you recycle paper, plastic, glass, tin, and aluminum.

Once you sign up with RecycleBank you place your recyclable items in a bar-coded recycling container that is read when the truck picks up the “trash”. Each item earns a certain number of RecycleBank Dollars that accumulate in your web-accessible account. You can use the RecycleBank Dollars to save money at participating stores, the ones below caught my eye:

• Starbucks
• ProFlowers
• Staples
• PETCO
• Target
• Bed Bath & Beyond
• Dicks Sporting Goods
• RiteAid
• Whole Foods
• Timberland

I called to sign up but discovered it’s only offered in the Northeast part of the country. Apparently landfills are a big problem in that area because there is just no space left to store the junk! The customer service lady said that the farther you go west, the more available space there is for landfills so the cost of disposal goes down and along with it the financial incentive for business and governemnt to participate.

She did let me know that I could keep track of RecycleBank developments with their newsletter.

If you called into the Suze Orman show and she asked if you were frugal how would you answer? Below are some questions that can help you figure out how thrifty you really are.

Meals
Do you bring your lunch or go out to eat? Do you take home leftovers or leave them on the plate? Do you buy store brand or name brand at the grocery store? Do you buy food from vending machines?

Transportation
Do you take public transportation or drive your own vehicle? Do you combine multiple trips into one to save on gas? Does your vehicle get better than 24 MPG?

Entertainment
How big is your TV screen? How many channels do you have? When you go to the movies do you buy refreshments there or sneak in your own?

Shopping
Do you research your purchases for the best deal or do buy on impulse? Do you price items online at sites like froogle.com? Do you buy off-season?

Hygiene
Do you take baths or showers? Do you let the water run when you brush your teeth? Do you choose where to get your haircut based on the best coupon you have?

Clothing
Is there a name brand on your shirt? Do you pay the retail price for clothes? How many pairs of shoes do you own? How long do you wear your shoes before getting rid of them?

Scoring
This quiz will be graded on the honor system, common sense will tell you how you did. There are many more questions that could be asked but these should give you a general idea of how good you are at saving money. If you didn’t do so well, spend a few weeks or months making some changes then come back and take it again. Good luck!

We often think of lifecycle or target date mutual funds in terms of investing for retirement. A recent article by Mapgirl reviews a Kiplinger magazine piece about why these funds aren’t for everyone. One demographic that they might be good for are people under the age of 5.

Generous Parents
Parents that want to put aside some money now to help their kids get started out in their adult life can make use of lifecycle funds. The concept is the same as saving for retirement with lifecycle funds. More aggressive investments focus on growth early in the child’s life then become more conservative as they approach their early to mid 20’s. The difference is that the money in a “launch fund” may be used for a college graduation gift or down payment on a new house instead of world travels or prescription medication.

Time Matters
This strategy is best used when the money is invested while the child is at a very young age. If you deposit a few thousand dollars into a 20 or 25 year target mutual fund before their first birthday the money has time to grow.

An Alternative
One thing you may be giving up by using this approach is a higher return. An alternative is to invest in a much more in an aggressive fund for the first 15 years then pull out the money and put it in an investment with less risk. As wise investors know, along with the growth comes risk.

My wife and I have experienced the disadvantages of this alternative first hand. Her grandparents put some money in American Century Giftrust (TWGTX) when she was a baby. After getting married we figured the money into our future financial plans. Of course when the time came to use the money in 2003, TWGTX was at it’s lowest point since June of 1991. We were very grateful for the gift. However, had the money been in a lifecycle fund the capital gains from the previous decade and a half would have likely been largely preserved in bond funds.

A Family Affair
This strategy can also be used by your family members wanting to build a “launch fund” for your little one. For grandparents that want to leave a legacy for the newborn or aunts and uncles that want Christmas or birthday ideas, contributing to a child’s lifecycle fund can offer big returns down the road. Check out the lifecycle funds offered by Vanguard, Fidelity, and T. Rowe Price to give your young child a leg up in the future.

During a recent late night visit to the store I had a “deep thought” as I walked down aisles full of stuff and void of people. What would happen if the store was this empty all the time? If people stopped buying all this stuff what would happen to our economy?

No More Stuff!
In the personal finance arena we’re flush with the advice, stop buying crap. I happen to agree with this philosophy, I’m big on buying assets, not liabilities or “junk”. We’ve become a nation of debt because the need for this “stuff” has become ingrained into our society.

Looking For Growth
However, for every action there is an equal and opposite reaction. Consumers carried the economy on their back during the tough times after 9/11. What if everyone actually started listening to the advice and stopped overconsuming? What if the fuel of our hard-earned paychecks stopped flowing into the engine of economic growth?

You hear people talk of how they’re hoping for a “soft landing” for the economy. Corporate profits were great in 2006 but it’s thought they will be slowing in 2007. Economists may be looking to us consumers to mount up and saddle the weight of growth once again. Without our contributions to their profits the stocks of our country’s mighty merchandisers could take a plunge and set off an economic chain reaction.

How Will You Choose?
Who would you rather be? Are you going to be contributing to the net growth of our retailers while putting yourself into debt? Or are you going to resist the urge to buy and instead put the money you saved into the stocks of those same retailers through your S&P 500 index fund?

It’s sad you may be profiting from your neighbor’s loss but if they won’t listen what can you do? Maybe the government should create Debt Savings Plans, a kind of charitable contribution to help those in debt. You could contribute pre-tax dollars and the tax free capital gains from this investment account would go to fund the debt reduction of “the Joneses” next door when they hit rock bottom financially.