Is grad school worth it in This Economy?

It's not breaking news that (in general), if you get a higher education degree, you make more money. But a writer over at Slate decided to test this theory recently by taking her reporting to the masses of 20-somethings who are contemplating whether or not going to grad school is worth it in This Economy. What she found is that though more school is usually an unbeatable bet in the long term, it is not looking that way to a lot of students in the here and now. One respondent, in particular, wrote to her with:

"I have a B.S. in sociology, and its value bears a strong similarity to its initials."

Ouch. Then again, what do you expect when you major in sociology? (Kidding, kidding.) According to the article, it seems plenty of students appreciate school as a refuge from the dreaded job market but are wary of the immediate payoff.

Look at student loans, the opportunity cost of taking two (business) or four (law) or eight (medicine) years off of your working life, add in a horde of other people with the same qualifications as you who are competing for a handful of available jobs and it's easy to see just how much the job market in these professions looks like a bubble that is about to burst. [Actually, law school is three years.]

To be fair, the story does mention that economists across the board dispute these points. "When things recover, it's going to be the highly skilled who are still in greatest demand (as has been true for the last three decades)," David Autor of the Massachusetts Institute of Technology tells Slate. "So, for someone considering engineering, medicine, computer science, economics, law, biology, etc., I would say 'go.' ... The recession makes education look like a better deal than ever because the opportunity cost of investing in your human capital has not been this low in quite some time."

But even the traditional safe havens in the job market, like becoming a lawyer, aren't so safe anymore. (Love complains about legal layoffs across the U.S. on a weekly basis, and let me tell you people, from all the info he shows me, it's a scary, scary time to pursue a legal career.) According to the Slate reporter, she "also heard from law school graduates with $200,000 in debt who wonder what they were thinking as firms downsize and implode." MIT's David Autor response? "As for the law degree being underwater: Lawyers may get their shoes wet during the recession, but high school grads can't even see the surface they are so far down," he says.

So the question remains: Is higher education still worth it? I'm of the mind that education cannot hurt you. I have my Master's and although I'm sure I could have gotten as far as I am in my career now without the higher education I traversed through, my degree is an added perk on my resume and in the training that's gotten me to this point; therefore, I have no regrets. It may be harder to find a job now for someone with, say, an MBA (students on a budget can consider an MBA online to an affordable degree) or degree in a tech-related field, but once This Economy turns around, I do think the highly skilled/educated folk will be the first to cross the threshhold into the new job landscape.

Do any of you have your graduate degrees and wish (at this point) that you could just give them back? If you went on after college, did you think grad school was a waste of time? If you opted to not pursue a grad program, what was the biggest reason?

Learn the Lingo: Balance Sheets

It's not breaking news that most stocks have gone to hell in a Marc Jacobs handbag. With General Motors now trading for under $2 per share, and Citigroup trading under $1, sometimes it feels like this is The End, beautiful friend. (Thanks, Jim Morrison.) Eventually though, whether it be next year or 5 years from now, stocks will rebound and there will come a time when you may *gasp* actually consider investing your money in the markets.

And when that time comes (fingers crossed), you'll be happy you know all the lingo surrounding stocks and trading, right? If you're ever going to invest in the market, you'll need to know the basics. Trust me, you don't want to be stuck at a cocktail party, nodding along cluelessly as those around you discuss balance sheets and debt-to-income ratios. It's not a pretty sight.

That vacation house in Acapulco will always be a pipe dream if you aren't willing to put in the work to get there. Fortunately for you, the work is piece of chocolate ice-cream cake (zero calories, of course).

Not understanding the nitty-gritty in finance (such as what a stock is) would be like trying to do open heart surgery without knowing which heart valve connects to what. Imagine your pot of money as your patient, and you are the doctor. Do you want your patient to live longer and grow, or do you want it to disintegrate and fall apart? I don't know about your neck of the woods, but in mine, it's just considered poor form for a doctor to operate without understanding the fundamentals. This analogy should extend into your fiscal life. Ok, so maybe the stock market, money market funds, CDs, etc. aren't as complicated as open heart surgery, but a gal needs to keep her wits about her when money is involved, which means learning working knowledge of the basics, or terms.

And the term du jour is balance sheet, or a statement of what a company, let's say Google, is worth on the date it's printed. Balance sheets are typically divvied up to you, the shareholder, about four times per year, or every quarter.

Still with me? If you see anything about a "Google's Q1 2008 profits," for example, that means the profits were reported in the first quarter of 2008 balance sheet. Q1, Q2, Q3 and Q4 all relate to which quarter is being reported, and is usually followed with corresponding year. So if you hear about predictions for Google's Q3 09, that would be their third quarter of 2009. Pretty snazzy.

What's on a balance sheet, you ask? Simple. There are three key elements to a balance sheet you should worry about. These include:

Assets, which is another way of saying the financial value of a company. Assets can include anything that could be converted to cash, such as property the company owns, office equipment, etc. On balance sheets, though, assets are usually the sum of liabilities (more on that in a sec -- stay with me!), stock and "retained earnings" (aka earnings that are reinvested in the core business or used to pay off company debt).

Liabilities, or debt the company has.

The Net Worth of a company, which is just the assets minus the liabilities. It gives you a clearer picture of how much said company is really worth.

Whew, that wasn't too hard, right? I know it all sounds dreadfully dull, but you can't increase your savings and buy that Birkin bag without knowing the facts!

Now that you're a whiz when it comes to all things asset- and liability-related, balance sheets are usually split into two parts:

• The first part lists what the company's current assets and liabilites are.
• The second part shows how these assets and liabilites were paid for. The totals for each of these parts have to be equal.

One warning, though. Before you start thinking that all you need is a company's balance sheet before you decide to invest in them or not, you also need to look at the company's income statement, which discusses revenue and expenses. But that's a whole other post unto itself.

The balance sheet is simply one of the many statements that gives you, the shareholder, a better understanding of what you're getting into with a company. For example, if you're considering buying stock in a company with a massive amount of liability (or debt) on their balance sheet, you probably don't want to place your chips on the table with them just yet. After all, every brunette on a budget needs to know when to hold 'em -- and the balance sheet is a great first step in telling you how to play your cards, or savings, accordingly.

And with that, chickadees, I'm off to the warmer pastures of Las Vegas for a long weekend of free drinks, blackjack tables, and possible K-Fed sightings. Arrivederci!

Economy rocks it like it's 1997

Stocks went into freefall mode again today (this is becoming so cliche), dropping to levels last seen in 1997 -- the same year we were awkwardly coming out of our "ugly duckling" phase freshman year of high school, obsessed with unattainably hot guys and thought "Daria" was the coolest show, like, ever.

The Dow fell 3.4% to close at a staggering 7,114.94. For those unfamiliar with this hodgepodge of numbers, last year the Dow was at a healthy 8,000+. At 7,500 last week, the last vestiges of still-employed investment bankers were retching into their cubicle trashcans. At 7,114, well, let's just say it ain't pretty -- and word on the streets is there's still room for it to get worse.

Enter the Treasury Department. Today the Treasury announced it will launch a new, revamped bank bailout program that would include the option of allowing the government to increase its ownership in financial institutions. Translation: The government wants more of a say in how banks are run, because they are (obviously) doing a crappy job thus far. As you can see by today's steep stock market slide, this news did little to bolster investor confidence.

But there's a difference between the government running a bank, and the government having a say in how it runs itself. The first would be nationalization (which was a hot stock market rumor last week, but turned out to be false when the Obama administration said there would be no bank nationalization and that "private banking is the way to go").

The Treasury said today that beginning on Wednesday, the 20 largest U.S. banks will be required to undergo a new “stress test," which will determine whether each institution has enough capital to survive any further economic spirals.

More details surrounding the stress test will be released on Wednesday by the Treasury, though it did divulge today that if any banks fail the test, the government will require it to raise capital from private sources. If any bank is incapable of raising the money, the bank will be required to swap out the government’s existing, non-voting preferred shares and replace them with new preferred shares that are convertible to common stock with voting rights. Um, what? Basically, as I said earlier, this will give the Obama administration a say -- and not complete governing power -- in the business of each bank, if it comes down to that.

Compound Interest and the Rule of 72

It's rumored that Albert Einstein once said that "the most powerful force in the universe is compound interest" -- a bold claim, considering most are unaware of the virtues of such a phenomenon. But to truly understand this "8th wonder of the world," or so Einstein called it, you need a basic understanding of what it is, like everything else in finance!

If you're saving, compound interest is literally your best friend. Granted, you may not be able to call it on the phone to grab the occasional lunch with or gossip with it over a manicure about a pair of shoes you saw at Bloomingdale's, but in terms of your money, compound interest really is your new BFF. It's like the Ethel to your Lucy, the Robin to your Batman, the Nicole Ritchie to your Paris Hilton. Okay, enough with the examples (especially that last one).

According to the Merriam-Webster Dictionary, compound interest is defined as "interest computed on the sum of an original principal and accrued interest." Zzzzzzzz (cue crickets chirping in background). "What in God's name does that mean?" you ask -- either that, or you're already nodding off with boredom at your computer, and if the latter is the case -- snap out of it.
Compound interest is a simple and painless way to make tons of cash back on your savings. How? Well, it's simple. Compound interest is money that you gain not only on your initial investment, but also on the interest that's already accumulated on it. If it sounds confusing, here's an example to assuage your "huh?":

Say you have two 22-year-olds . . . let's call them Simon and Garfunkel. Simon makes the most of his 20s and saves and invests $2,000 each year until he's 31, then stops. Lackadaisical Garfunkel, who enjoyed his 20s spending money instead of saving, starts investing $2,000 per year starting at 31 until he's 65. Both have identical rates and both allow interest to grow. Forward-thinking Simon will earn $50,000 more than Garfunkel by the time he's 65, even though Garfunkel will have put $50,000 more into the account over an added 25 years.

You know that saying "a rolling stone gathers no moss?" Well in the case of compounded interest it does, and it's a good thing. Compound interest acts like the moss your savings accumulates throughout the years. Shine on, you crazy diamond!

The two most important factors to remember when daydreaming about compound interest on a sunny afternoon, are:

• Time -- The younger you start saving, the more time your money will have to grow, or compound. Time really is on your side, or so said the Rolling Stones.
• Rate of Return -- What kind of rate of return is your investment giving back to you? Historically, the stock market yields about 11% per year, savings accounts give you about 3% per year, and so on. Rate of return is important because with the total amount that your money grows each year, the amount that is added from interest grows along with it. So it comes as no surprise that the higher the return rate, the faster your money grows.
  Unfortunately, finding a good investment with a high rate of return isn't as easy as looking into the underbelly of a Magic 8 ball for the answer. But there is a trick called the The Rule of 72 that you can keep up your cashmere sweater sleeve next time you're determining how good or bad a potential investment will probably be.

If you want to figure out how many years it will take to double your money at a certain interest rate, all you have to do is divide the rate into 72. Say you want to see how many years it will take to double your money with a 6% interest rate -- you'd just divide 6 into 72 and get 12 years time to double your money. Come for cocktails, stay for the deviled eggs, chickadees!

The Rule of 72 also works in reverse. If you want to see what kind of interest rate you'd need for a set amount of years to double your money, you'd take the number of years (let's say 8), divide that number into 72 and poof! You'd need a 9% interest rate to double your money in eight years. The Rule is fabulously simple yet timeless, just like a Chanel suit. As long as the interest rate is less than 20%, it's generally quite accurate.

With compound interest, just remember that the name of the game is to invest young and often (time is a key player here), in an investment with a high rate of return. Picture your money as a snowball you start patting together in your 20s. The older you get, the more snow gets patted onto it that by the time you're ready to retire, the snowball is so big from years and years of fresh snow, that it's more of an igloo than a snowball. And it will be ready for you to call it home!

And now, a word from the economy

Investors have waited with baited breath the last few days to hear of what will become of the bank bailout plan. A go? No go? Give us something, government! All eyes were on Treasury Secretary Timothy Geithner this morning, when he took the podium and delivered the highly anticipated bailout details.....aaaaaand the stock market plunged. Watching the indexes alternate between tiny rises and lower drops as Geithner spoke was like watching a heart monitor tied to an ailing pulse. Just. beat. harder. It turns out there is no quick fix or bandaid, and the fact that the process -- like most processes, actually -- won't be fast and easy dented the market today. If you missed Geithner's press conference, or started spacing out on his pointy, elf-like ears about three minutes into the speech, here's a quick runup of his solutions:

• The creation of a "bad bank": A joint Treasury and Federal Reserve program, insured by the FDIC and financed by private investors, that will buy up cruddy mortgage-related assets from banks.

• Expanding the Federal Reserve's existing $200 billion program to between $500 billion and $1 trillion in order to unfreeze the credit market. I smell higher taxes!

• Using the remaining $350 billion from the Troubled Asset Relief Program to inject ailing banks with capital, which, while it seemed like a bad idea on the first go-round, has become necessary since the banking system is basically insolvent.

• A $50 billion initiative aimed at stemming home foreclosures, the details of which will be announced later in the week. [Reuters via Daily Intel]

All of a sudden my "crazy" idea of moving to Italy and selling flowers out of a cart doesn't seem so crazy after all, hmm??

To buy or not to buy is the question

If you any of you read my interview on FiLife last week, it's no secret that I'm simply salacious about real estate. It's up there on my shelf of "favorite things," along with shoes, fondue and Mad Men. One of the reasons why I can't wait till Love graduates law school next year -- aside from us moving back to California -- is that we can start saving to invest in said real estate. I want to own apartment complexes, office spaces, downtown buildings in San Francisco. I want to be Donald Trump (minus the horrible hairdo and gold-plated cufflinks), and even coming close would make me happy. This insatiable appetite for real estate is what keeps me addicted to HGTV -- especially shows like House Hunters and My House is Worth What? -- and what fuels my late-night searchfests on Zip Realty, bowl of sugar-free chocolate pudding in hand.

It appears that MarketWatch, as much as they share my love of real estate, seems torn on the issue of whether to buy in or not. They've written two lengthy articles: one trumpeting the merits to buy and the other explaining why not to. The dichotomy proved to be an interesting case analysis.

Reasons for buying a house:

• Affordability is better than ever
• You have a large inventory to choose from
• Builders are offering big discounts
• Mortgage rates are historically low
• You can get a federal tax credit

Reasons against buying a house:

• Prices are still dropping
• This sale will be on for a while
• You may not stay put
• Your job could be the next to go
• Your cash reserves will be eaten up

Within the personal finance blogosphere, there seems to be two camps of people: Those who are on Team Home and those who aren't. As much of a pessissimist as I make myself out to be, I'm still pro-real estate -- bad market be damned! Do you agree or disagree? More importantly, are you, too, addicted to HGTV? Don't lie!

I've been interviewed!

I'm very excited to announce that FiLife.com interviewed me this week and posted the Q&A on their website last night. I know I don't divulge much personal information about myself on my blog, but hopefully you can get to know me more through my interview and learn why I started my website and what I hope to accomplish with it.

I have to say that I really appreciate having a loyal base of readers -- you're what keeps me writing! :) To read my interview, click here!

Bad economy? It's worth a laugh

Today the stock market was hit hard by a batch of horrid economic reports that were released this morning. If you didn't follow the news today, here's an abridged run-up of what happened:

• Unemployment claims rose to 588,000 (slightly above the forecast).
• Really troubling was the number of Americans forced to file for continuing unemployment benefits because they can’t find a job. That number grew to 4.77 million, the highest figure on record. Um, yeah. Aaaand we haven't seen the worst of the jobs situation yet. Just sit tight.
  
• "New home" sales dropped 14.7% to an annual rate of 331,000 – way below the forecast of 400,000. This was the worst "new home" sales reading in more than 40 years of data compilation.
• Many argue that the housing crisis started this economic meltdown and that we won’t pull out of it until the housing market turns around. Today’s report on new home sales did not reinforce the hope that we might be pulling out of the maelstrom.
  

Now that we have that bad news out of the way, what better way to deal with the crisis than by having a good laugh? If you haven't already seen this E*Trade "outtakes" reel from the baby commercials they've been running, you must watch -- it's hilarious. I just had to post. My favorite part is when one of the babies asks: "What did I think of the economy in 2008?" and commences to vomiting all over himself in response. Priceless:



(Thanks Julie over at Beef Up Your Piggy!)

How to open an IRA account (and other goodies)

Now that you know almost everything there is to know about IRAs (well, almost), there's one little problem standing in the way of your post-retirement dreams of lounging in a Parisian cafe, partaking in brie, baguettes and Bordeaux: How do you sign up for an IRA?

Simple! If you thought IRAs were a piece of cake to understand in my last post, the process of signing up for one is even more straightforward -- think cake with all the calories taken out of it. All it takes to sign up is a little time, your social security number, employment information (again, you can only contribute earned income to an IRA), bank account info and money to deposit (obvi).

Unlike 401(k) accounts that employers generally set up for their employees, an IRA is usually something you need to do on your own. I can already hear you panicking, eyes glossing over at the thought of tables and tables of complicated numbers you couldn't possible begin to understand. Scratch that visual right now. I take it most of you have filled out student loan forms? Well, filling out an IRA form is even easier -- much like filling out a credit card or job application. No hand-holding needed!

The hardest part of opening an IRA account is choosing which brokerage firm you'll want to sign up with. These include many big names that I know you've heard of: TD Ameritrade, Sharebuilder, Vanguard, Fidelity Investments, E*Trade Financial and T. Rowe Price are all prominent in the IRA world. I can't advise which place is the best to go with (as I'm not a financial adviser), but when researching each firm, make you sure you watch out for how much trading commissions are and if there are any annual fees. Many places have no fees (rock on!), but may have higher trading commission costs (i.e., fees charged for every trade made with your money). Also, be cognizant of what the minimum IRA contributions are for each, as you'll want to be able to make them on a monthly basis. Do your homework when choosing who will be the lucky firm to house your money.

Once you've found who you want to sign up with, you can download forms off their website, fill out the info (very straightfoward questions are asked, trust me), either include a check or direct deposit from your bank account, and plop in the mail. Or, if you prefer doing it digital, many places allow you fill out all forms online. And that, chickadees, is how you sign up for an IRA.

Again, just putting your money into an IRA doesn't mean it's accumulating much of anything. Think of it as a glorified savings account. Yes, you've taken the necessary steps to put money aside every month for the good of your golden years, and yes, the tax benefits are nice, but you have to invest the money once it's in the account. Use it as a vehicle to reap big rewards for your future. You have the ability to tell your brokerage firm how you want them to invest your monthly cash. Are you more of a mutual fund maven? Stock sistah? Or an index .... well, you get the idea. Generally, if you don't know much about the stock market or don't have the time to learn and do research, mutual funds and index funds are a fabulous option as they pad your portfolio with diversification.

Don't worry if you decide you want to change the kind of IRA you are enrolled in. Once you sign your name on the line, it's not written in blood. If you sign up for a traditional IRA, for example, and realize you'd rather be in a Roth (or vice versa), it is possible to make the switch, just be aware that it may have a large impact on your taxes when it's time to withdraw the money from your account. (Because, as I've mentioned before, one of the main differences between the two IRA accounts comes down to when and how you are taxed on your contributions.)

And, if you've found a dazzling new job opportunity and the only thing standing between your current job in hell and climbing the corporate ladder to paradise is confusion over what to do with your IRA account, don't fret. You can transfer your IRA funds to different IRA accounts (such as from Roth to Roth), but the transfer has to happen between plans, meaning you (as the retirement account holder) don't get to touch any of the money ... yet. Think of it as something to look forward to when your hair begins to gray!

What is a Ponzi scheme?

By now, the news of the carefully brewed Ponzi scheme concocted by Bernard Madoff (the old bear) is so 2008. But, in case you haven't followed this stock market soap operetta play out, Bernard Madoff -- who many refer to as a decades-old force on Wall Street -- was charged in December for running a $50 billion Ponzi scheme, the biggest fraud case ever. How? Let's break it down in an abridged form of the 3-act Shakespearean tragedy that it is:

Act I: Enter one Bernard Madoff, 70, a prominent mover and shaker in the stock market world. Madoff is a former chairman of the Nasdaq Stock Market, founded Madoff Investment Securities LLC in 1960, and ran a hedge fund on the side. He was the chairman of Madoff Securities until Dec. 11, 2008, when the merde hit the fan (more on that in the next act). When you think of a life of excess, Bernie comes to mind. Vacation homes around the globe, private yachts and lavish day-to-day living were Madoff's modus operandi. How very 1980s of him. I can just picture he and his wife partying it up on Carnival Cruiselines in the thick of 1986, he donning a white Miami Vice suit and she in an ill-fitting Bea Arthur-esque dress replete with shoulder pads, both dancing to whatever Lionel Ritchie Top 40 hit was in at the time. But just how did he amass such significant wealth? Onward, to Act II!!

Act II: The day before he was arrested by the FBI, Bernie told his senior executives -- which included his two sons -- that his hedge fund was "all just one big lie" and that it was "basically a giant Ponzi scheme." His sons immediately went to police and the next day, Madoff was arrested and charged with a single count of securities fraud. Prosecutors say he faces up to 20 years in prison and a fine of up to $5 million. The SEC (government watchdogs of all things stock market-related) filed other civil charges against Madoff.

Act III: Although Madoff is currently holed up in his $7 million Manhattan penthouse after posting bail, his life will be missing that je ne sais quoi it once had. I'm not sure how drastically different Bernie's relationship must now be with his two sons (who I've affectionately dubbed "the narcs"), but there's no doubt -- even if he eludes jail time -- that things will be different going forward. The SEC said it appeared that virtually all of the assets of his hedge fund business ($50 billion) were missing. Yup.

The next logical question is "What the heck is a Ponzi scheme?" (Not be confused with anything related to "Fonzi" a la Happy Days.) Hey, it's okay not to know -- what's not okay is to pretend to know what people are talking about, nodding cluelessly in agreement with those around you as they discuss current events.

The term Ponzi scheme comes from one Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s, according to the SEC.

Translation: A Ponzi scheme is essentially an illegal pyramid scheme. Charles Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons, the SEC says. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Um, right. Well people bought in to the pyramid, hoping to make bank by giving Ponzi their money. At one point, Ponzi took in $1 million during one 3-hour period, and this was in the '20s, people!

The SEC says that a few early investors were paid off to make the scheme look legitimate, but an investigation found that Ponzi had only bought about $30 worth of the international mail coupons.

Illegal Ponzi schemes are everywhere, from small outfits to frauds that are historic in proportion (case in point: Bernard Madoff's ... situation). Eventually the schemes collapse, which is where Madoff is currently at.

So just where did that $50 billion go? It may be a while until we get a legitimate breakdown, but in the meantime, an angry ex-office manager named Julia Fenwick who worked in the Madoff Securities London office, divulged to the Daily Mail just how much Bernie would drop on various decadent delights:

• Madoff collected vintage watches ($2,900 to $72,000). He also bought wedding bands to match the color and design of each watch ($525 to $1950). During his two or three visits a year to the London office, Madoff would often take advantage of his office's proximity to Savile Row by asking his tailor, Kilgour, to see him in the boardroom (average of $6,000 per suit).

• According to Fenwick, he purchased a black and gray Brazilian-built private jet last year for $29 million. "There were sofas and beds behind curtains at the back of the plane," she said. "He'd installed a cappuccino machine [$1,650] and under all the seats were pockets full of biscuits and sweets. Bernie's initials were on the front of all the crockery." In London, Madoff liked to stay at the Lanesborough Hotel (up to $11,600 a night). Madoff also refurbished the London office last year for $726,000, including handmade desks and a new IT system, for $116,000.

• Madoff enjoyed Davidoff cigars (around $160 a box). Last year, Fenwick attended a barbecue at Madoff's home in Montauk, a million-dollar party with about 400 guests. "There was an oyster bar. And you'd dine on either lobster or fillet steak," she told the Daily Mail.

• Fenwick also went on a golfing trip to Mexico with Madoff and a dozen of his friends for his 70th birthday this past May. "We were all given hooded sweatshirts to mark the occasion. His initials and the year of his birth — 'BLM 1938' — were stitched on to them."

Achieve your financial goals

It’s no secret that women – an important segment of the financial marketplace – face different financial realities than those of men. In fact, the vast majority of today’s women, as well as the next generation of women, will be responsible for their own and their family’s finances at some point in time.

Women & Co., a division of Citigroup, recently published a study that found 63% of women today currently serve as the “Chief Financial Officer” of their households. Impressive! Of those women, 75% believe that in the future, their daughters will be the CFO of their own households. (Can I get a collective "awww"?)

When it comes to all things women and money, Women & Co. CEO Lisa Caputo and CFA Linda Descano invariably know their stuff. According to them, in times like these it’s essential to tune out "the noise," stay focused and empower yourself with the knowledge and resources you need for long-term financial well-being:

Here are their top tips:

• Assess your financial situation. Every woman’s financial situation is as unique as she is. It’s important to talk with someone who understands your personal situation – your goals, time frame, and risk tolerance. First, make sure you have a financial support network in place – they recommend an attorney, accountant, and a financial advisor. Unfortunately us normal people usually don't have the access or funds to hire this small army of expert financial advice. If that's the case, ask your family and friends for recommendations. Women & Co. found that 72% of women are using a financial advisor for information, guidance, or a second opinion. Remember – there is no single answer that will work for everyone. Find a plan and support network that works for you.

• Plan for ‘time-out’ periods. Many women take time out from the workforce to care for children, aging parents, or spouses. Often, these time-outs result in reduced retirement savings and Social Security benefits. Meanwhile, with the average life expectancy for women being 80.4 years and that of men being 75.2 years, 90% of women find themselves outliving their spouse. Women can prepare for the unexpected by maintaining appropriate insurance coverage, and keeping their will, beneficiary designations, and other legal documents up to date. Start saving early, save more, and of course, plan carefully!

• Be a role model. Women & Co.'s study found that 85% of women feel they would have been better off if they had known more about finances and investing earlier in life. Make sure your daughters and granddaughters get an early start by talking to them about money and saving now! According to the study, 94% of women today are talking to their daughters about money compared with 52% who discussed money with their own mothers. Money is the #1 topic of discussion between mothers and daughters today, more than drinking, drugs, sex, and politics. Join the conversation! 92% of today’s women believe they are positive financial role models for their own daughters. Help raise a more financially educated, powerful, confident generation of women by talking to them about money issues early on.

• Stay informed. It's no surprise that information is an important component of financial security. As circumstances change, we need to re-educate ourselves based on whatever new realities we face, in order to make informed financial decisions. The study found that the top 3 most important resources for women are: a financial advisor, a spouse or partner, and research. Women also reported in that study that hard work and discipline are more important than education and luck when it came to financial success. Continue to seek out trusted sources of information that will provide guidance and tools, as well as the ongoing support you need to work toward your long-term financial goals.

• Clarify your financial goals. Assess where you are now financially by reviewing your net worth, credit score and cash flow. Ask yourself, “Where do I want to be in 1 year, 5 years, or even 20 years?” (Ed note: For more on setting up your budget, read my post on it here.) Work toward your financial goals, including retirement, by reviewing your finances at least once a year and making sure your savings and investment strategies are aligned with your goals.

Wake up and smell the economy

"It's the end of the world as we know it," or so sang R.E.M. back in the heyday of the '90s -- pre-tech boom, credit crisis and the Pussycat Dolls. While Americans bought their first computers, CDs were still the way to buy music (iTunes, what iTunes?), and the ubiquitous Freddie Prinze Jr. was everywhere, was R.E.M. onto something with their prophetic lyrics?

Yes they were, according to a new paper soon to be published by Robert Seaberg, head of the wealth planning group at Citi Global Wealth Management, who hypothesizes that very few people believed the current financial disaster could actually happen.

In a recent New York Times article, Seaberg is quoted as saying that the rich were fixated in recent years on the great wealth-generating possibilities of concentrated stock positions; derivatives created from the very mortgages that, it turns out, others couldn’t pay; and hedge funds that locked up their money to take huge bets on the economy. The collapse of the housing, employment and financial markets, coming at once, was more than a shock to the system. Like so many others, many of the rich have gone back to the drawing board.

Seaberg’s new paper, entitled “A Flock of Black Swans,” (haha) says various advisers failed to impress on their clients the need to consider the possibility that highly unlikely events — so-called “black swans” — might indeed occur. The rich may not have done anything different, but at least they would have been aware of the risks they faced.

Seaberg's point is that because everyone was riding high, they didn't have to worry about "the basics," such as saving and budgeting, and instead had fun playing with high and ultra-high net worth. Although many of us know this is one of the reasons that led to the current fiscal crisis, it's always nice to get some affirmation from a legitimate economic source -- especially when that affirmation involves "the basics," which this blog knows and loves!

According to the Times, Seaberg has singled out four areas where investments were hit hardest and where they should be adjusted to ride out any future economic storms. Even though his points directly apply to those at the top of the wealth pyramid, I think people of all sized pocketbooks could learn from his tips:

Redefine a safe investment. Until this year, safe investments included U.S. Treasuries and bonds. Even though Treasuries are still safe per se, they aren't the greatests of investments right now because the yields (or money you earn back for making the investment) is almost nil. Translation: You could become that oft-posed cliche and stuff your money under mattress -- you'd get the same results.

Investment-grade corporate bonds, Seaberg tells the Times, are still trading but their yields are down, hit by the Lehman Brothers bankruptcy and AIG's struggles. Basically, this all means that the definition of a "safe investment" has become very narrow, mainly Treasuries.

Diversify more broadly. (Ed. note: If you're not sure what diversification means, read my post about it here.) Investments have increasingly shifted from just stocks to real estate, hedge funds and private equity, so-called alternative assets with higher returns for those willing to lock up their money for long periods of time. Seaberg says the problem is that many of these investments depend on borrowing, which means their values have plummeted as credit conditions tightened.

He says that in order to diversify your investments, you should look outside the U.S. and Europe to emerging and frontier markets, such as India or China. (These countries, global crisis aside, have begun to spend massive amounts on their infrastructure, so industrial companies benefit.)

Consider tax consequences. When the value of every investment was increasing, the portion lost to taxes on every gain wasn't a big deal. Gains far outstripped the tax elemtn. This isn’t the case anymore, Seaberg says. In an environment of lower returns, the after-tax piece is going to matter more. He points out that municipal bonds from cities and states that can meet their obligations are one lower-tax alternative.

Be more realistic on housing. Seaberg says that the era of the house as a constantly appreciating asset is over. In the last two years, the average house in America has dropped 20% in value, according to the Case-Shiller Home Price Index. This means people are going to be staying in homes longer, or will hold on to them longer as investments, versus selling property fast to make a quick buck. Seaberg says that should be a signal for homeowners to make sure they have the right insurance, i.e., theft, fire. and natural disasters such as hurricanes, floods and earthquakes. Although I see Seaberg's point about property owners holding on to their homes longer because of decreasing values, I don't fully agree that the era of the house as a good investment really is over. I think much of that depends on where you live (homes in rural West Virgina, versus say the Bay Area, obviously aren't congruent in value.) To make a broad-based assumption that it doesn't work anymore is too generalized. As a homebuyer who hopes to build equity in a home, you need to be realistic about the current and future states of employment, location, and property values in your individual zip code.

Seaberg tells the Times that in a recent internal memo, Wells Fargo gave its private bankers a checklist of questions that they should have been asking all along. The first question was, “Are you clear with regards to what is your true appetite for risk?” It is followed further down with, “No matter what, always live below or at your means” and “Are you saving enough?” Um, why were they not asking these questions in the first place? Oh wait, that would have saved us all this financial strife in 2008! Silly me.

Fortunately, there is an upside in all of this, according to article, in that it helps people understand the need to assess their true risk tolerance. That soul-searching, done amid the possibility of lower returns in the near future, could alter spending and saving patterns over the long term. That's a great thing. “Without a sense of abundance, people are going to be more careful,” Seaberg says.

Possible band-aids for your 401(k)

It's no secret that many who've counted on their 401(k) funds to kick in just as they began planning long-awaited, post-retirement trips to Acapulco have been handed bleak news: Due to the current economic climate, their accounts have dwindled to zero, or at least somewhere near the number. Translation? Not only will they have to put any retirement plans in Margaritaville on hold (just keep repeating: it's 5:00 somewhere), and -- wait for it -- they will have to continue working. You know, just to survive, much less for any lofty trip planning.

In our late 50s and early 60s, the last thing most of us want to hear is that we'll have to work another 10+ years. What's even worse? That all the scrimping and saving we endured in our resilient youth failed to amount to more than a couple movie tickets on a Saturday night in our early 60s.

Aside from pulling a Bonnie and Clyde to secure your financial future (they didn't have the most glamorous of endings, anyway), rest easy knowing that legislators know what you're going through and are currently trying to fix it with a legislative band-aid, of sorts.

There are a number of proposals being passed back and forth on Capitol Hill right now, it all comes down to which band-aid they choose:

Relaxed hardship-withdrawal rules: President-elect Barack Obama has proposed temporarily dropping the 10% penalty for hardship withdrawals from an IRA or a 401(k) for amounts up to 15% of your plan or $10,000.

Easing up on required distributions: For those age 70½ or older, Obama has proposed temporarily suspending required minimum withdrawals from traditional IRAs and 401(k)s.

An automatic IRA: Under this plan, designed by a nonpartisan group and endorsed by Obama, small businesses without 401(k)s would have to enroll workers in a payroll-deduction savings plan (you could opt out), but no matching contribution would be required.

A new national savings plan: Proponents of a government-backed retirement savings account that would guarantee an inflation-adjusted return of 3% initially got little support. But recently one of its biggest backers was asked to testify on Capitol Hill - a sign that the plan is getting serious attention. [CNN Money]

If you're a newbie to all things 401(k), read my post "The 411 on 401(k)," to learn how they work.

Beware of hidden fees

There's nothing worse than feeling swindled, especially in matters of money. One of the worst ways I can think of being ripped off -- aside from being all-out robbed (thank God I've never had to experience that) -- is to suffer the horrors of hidden fees.

You sign your name on the dotted line ... perhaps you've been uninformed, uneducated or are just plain naive, truly thinking you're paying a certain amount for a new credit card or car loan. Twelve months later, you're standing slack-jawed and in shock over an obscene bill, so confused that not even an Appletini could put you right. After that first wave of adrenalin washes through you, completely nixing the calming European facial and full-body massage you just got (hey, a girl can dream), now is the perfect time for a plan of attack going forward.

The number one cardinal sin of a girl on a budget is enduring repeated hidden fees that always seem to hide in long lists of terms and conditions or other fine print that many fail to fully read or even bother to understand. You want to save money? Now is the time to stop glossing over the fine print. As you've witnessed over the last year, the erstwhile Wall Street conglomerate may score a government bailout (if they're lucky), but no one will there to bail you out just because you didn't "think you needed to read all that." You've got take to take matters into your own hands. Don't be afraid to ask questions of anything you don't understand, and make sure to never, ever sign your name (and while you're at it, your bank account) to something that you don't fully comprehend in entirety. After all, it's your money we're talking about here.

Where do the most common hidden fees lurk? I found some great tips from Suze Orman on Oprah.com, highlighting where and what to watch for in these typical areas:

Retirement savings: Do you know how much it costs you to invest in the funds in your 401(k)? The difference between paying high and low fees can add up to tens of thousands of dollars. Call your plan provider to make sure your funds don't charge sales commissions (called a "front-end load" or "deferred-sales charge") and that the annual expense ratio is no higher than 1 percent. If your plan doesn't offer lowcost options, you and your colleagues should make a ruckus—the law is clear that 401(k)s must be operated for the employee's benefit, and high-cost funds are of no help to you. The same goes for your Roth IRA—no-load funds and low-expense ratios are the surest way to boost your bottom line. Fidelity, T. Rowe Price, and Vanguard all offer many low-cost funds.

Credit card: If your monthly payment isn't on time, you'll be slapped with a late fee as high as $39. Do that three times a year, and you've donated nearly $120 to the credit card company. Late payments also hurt your FICO score. And never, ever take out a cash advance on your credit card. The cost is often 3 percent of the amount borrowed, and the interest rate can be higher than 20 percent.

Bank account: It's easy to be hit with fees of $3 or more when you use an ATM—a charge from your own bank plus the one from which you withdraw cash. Do that twice a month, and you're spending at least $72 a year.

Recurring payments: Some bills, such as your insurance premium, allow you to choose between making one big annual payment and a series of installments. If you can afford the one-time deal, you'll avoid the $5 or so service charge levied when you pay quarterly or monthly—that's $20 to $60 a year. It's easy to save $200 annually by eliminating these types of fees. Invest that $200 a year for 20 years, earn an annualized 8% gain, and you've got nearly $10,000. It pays to be a fee fiend.

Women and money, revisited

There's a stereotype that's been perpetuated through the years and it goes a little something like this: Women are fickle and tend to spend more than their male counterparts.

Not only that, but women tend to rely on men more for financial planning -- I don't necessarily mean shacking up with a sugar daddy, but statistically we lean on the men in our lives (our fathers, husbands, etc.) to help plan our financial matters. Many of whom could have been financially savvy dolls often find themselves not peddling through the Napa vineyards with their Loves, but rather sitting across from a personal accountant after being widowed or divorced, scratching their fabulously coiffed heads and wondering how they got there. Even if your future is void of divorces or deaths (fingers crossed), if you don't save now, you could still find yourself 40 and penniless, all because you failed at coming up with a pre-game strategy, and well, figured all those lunches out with friends and errant shopping trips wouldn't really matter.

Guess what? In the long run, they do:

• At some point in our lives, 9 out of 10 women will be solely responsible for their finances.
• The average age of widowhood in the U.S. is 56.
• On average, women live 7 years longer than men.
• Women live more than 19 years in retirement.
• The median income for elderly women is $8,198.
• Women collectively earn more than $1 trillion a year.
• Nearly 70% of women say they have no idea how much money they'll need for
  retirement.
• 53% of women are more likely to spend rather than save for their future.

Ladies, let's be serious -- for many of us, shopping is not only a hobby, it's a way of life ... an addiction, if you will. But $1 trillion is a lot of potential savings. There have been many times in my life when I just think "oh, it's just one shirt . . . just one pair of heels," but all those "justs" add up to what could have been a substantive amount to retire (hopefully early!) on. You can't make a pair of killer Christian Louboutins make money for you, but when invested right, you can make killer returns off your savings.

Now I'm not advising to go cold turkey and wean yourself off the bottle completely -- every stylish woman needs a cocktail once in a while and perhaps a cute handbag ... or dress ... or, well, you get the point. But you need to set limits and know that before you buy anything, you need to pay yourself first, which means setting aside a money after you get paid (and after your Roth is paid), that you can put into an investment vehicle such as a CD.

The stats I mentioned prove that while us women are bringing home the bacon, we have no ... er, bacon ... to divy up at the end of the day. Here's why:

• We often don't set a monetary goal for where we need to be at retirement.
• We start saving and investing later in our lives and don't have as many working years as men. The average woman spends 15% of her career out of the paid workforce, aka the "sandwich generation" -- caring for children, then elderly parents.
• 76% of women are too conservative when it comes to investing, where only 64%
  of men consider themselves conservative investors. Women often pass up excellent investment opportunities because we are too afraid to take the leap.
• Just 53% of women, versus 82% of men feel confident in their investment know-how. That often stops us from making necesarry decisions, also limiting our returns.

For all us money honeys out there, this is a wake-up call to begin planning our financial futures. Don't know the first thing about investing? For a fabulous "how to" on all things investing, visit http://www.fool.com/school/basics/basics01.htm and educate yourself.

And here's a good start for now: Make a list of what you own (bank accounts, stocks and investment, real estate, retirement plans). Then figure out how much you owe (include all bills, i.e., car payments, credit cards, school loans, house payments, etc.).

Now how much money goes toward your List of Woes, I mean, Owes? It's not as easy as simply counting the big, reoccuring payments every month. What makes or breaks many woman's 10- or 20-year plan is that they don't budget for the basics. Can't live without getting your nails done? (This frugal saver would tell you do your nails yourself, but that's a different matter). Need your Starbuck's fix every morning? How much do you drive on average per month and what is that costing you in gas money? What's your monthly budget for clothes? It's these kind of dollars that hold many back from achieving their financial dreams because they aren't budgeted for in the present, therefore they quickly add up. I don't know about you, but I really want those routine trips to Italy, and I want to be able to retire early enough to enjoy them!

What are you thankful for?

As I prepared our turkey this morning -- well, technically I made Love prepare it, I can't stand touching raw poultry -- I realized that another year has come full circle. And what a fast year it's been. Although it's hard (at least for me) to concentrate on being all warm, fuzzy and giddy over cranberry jelly, what with what's happening in India right now, it's still important to ruminate on the past year and reflect on what you're thankful for. Perhaps some spiked cider would help.

Ever since the beginning of this summer, most of us have been bruised by the limping economy, by either losing our jobs or seeing friends who've lost jobs (I've seen 4), struggling to pay back debt (whether it be credit cards, student loans or house payments), or perhaps even seeing our homes foreclosed. Those of us who were frugal to begin with now just find our "talent" at finding the best deal or best coupon that much more in demand. All of sudden, a personal finance blog is the trendy must-have accessory in 2008, like a BMW or "it" bag was to 2005. Google searches for such terms as "Bahamas cruise" or "2008 Audi" have tapered like an out-of-fashion 80s jean, now more people Google "how to save my 401(k)," "tips to beat the current recession," and "save money on food." Ah, it's like 1929 all over again. (Cue big band music.)

At least there's solace in the fact that we're going through these damaged financial times together, and (hopefully) learning from them. Like I've said before, we're not alone in the struggle and we're all affected by some degree. Case in point: My love affair with free samples and coupons? Never would have been lit without the kindling of current fiscal malaise.

That's one thing I'm thankful for -- that I've learned the full value of being frugal and routinely using store deals to my benefit. Sure, I've always shopped around before to find the best bargain, but now my searches are more magnified and more well-researched.

Other things I'm thankful for:

• That I'm very healthy, and everyone I care about is also healthy. (Except my grandfather, but I learned he just opened his eyes from his coma-like state yesterday, which is very promising.) No amount of bargain-hunting, coupons or money can buy you good health.
• I'm married to a fabulous guy who wants the same things out of life as me, shares my sense of quirky humor, and balances me out in a way that no other guy could. Where I'm emotionally impulsive, he's solid and rational, where I'm "crazy," he's even-keel and sensible. We bring out the best in each other and feed off one another's energy. It's all so "Barefoot in the Park."
• I have a marvelous job that I love, am paid very well for and allows for somewhat flexible hours. (I get to work from home in the mornings and come in around 10:30 am everyday.) I feel like I have good job security and am rewarded well with solid raises.
• Love and I don't have to worry about money that much. Granted, we are living solely off my salary while he is in law school, and we do watch our spending to a certain degree, but I don't feel like it's a struggle. When I want something I usually buy it without having to save up (lavish trips and cars aside), and I can still buy as much two-ply toilet paper as I want, which I've amusingly gathered is a good gauge as to whether one is "struggling."
• We don't have that much debt to tackle, except for Love's law school tuition, which won't be knocking at our door till after he graduates and gets a litigation job, which should quell any strife over paying it back.
  
• Now is a fabulous, I repeat, fabulous time to get into the stock market if you're a newbie to the investing scene. We have not seen these kind of discounted prices since, well, the good ol' Great Depression, and might not see them again in our lifetime. For someone who wants to retire early (read: me), now couldn't be a better time to carpe diem and plan for a luxe life where I can plant the seeds of early retirement in discounted stocks, take my earnings later and invest in the greatest of investments: real estate in the Bay Area.

What are you thankful for this year?

What we've learned from the economic crisis

In an open letter to two his two daughters published this week, Money Magazine assistant managing editor Pat Regnier recently mused on what the current economic crisis has taught us, and how his children -- and really all of us -- can benefit by learning from the mistakes that were made before it all came crashing down. I love this letter because it's simple, reflective and neatly summarizes how current sentiment came to fruition.

What we're experiencing now is indeed a historical event -- one that we may not see again in our lifetimes, at least to this degree. It's important for us, like Regnier, to pass on any reflective wisdom we've managed to pull from the situation so we can educate future generations to not make the same mistakes. Granted, it's normal for the economy to go through recessions and experience both ups and downs, but this is a "down" moment we can all learn from:


Dear Lucy and Emile,

You are both too young to read this letter now. But in a decade or so, I suspect you'll be hearing about the events of autumn 2008 in your history class. You might wonder what it felt like to live through a global crisis. And when you learn about the years just before the crash -- the houses that magically doubled in value, the no-questions-asked mortgages -- you'll surely ask what all of us crazy old folks could have been thinking. I'd like to take a stab at answering those questions today, while the events are still raw and before we know how this story ends. Your mom and I are learning some big lessons right now, ones we might not recall so well after the good times return.

First let's talk about the hardest question: Why didn't people see this coming? Well, we sort of did. Talk of a real estate bubble was common by 2003. But bubbles do funny things to your head -- you'll see that when your generation's bubble comes along. You may read in your textbooks about the euphoria and optimism of boom times, but what I remember most was the worry.

In 2005, a year when home values in our neighborhood jumped 25%, your mother and I would talk anxiously about not having a giant mortgage. We didn't want to stretch for a loan before we had saved for a big down payment. That conservatism hurt: Our chances of joining what was called the ownership society seemed to become more remote with each uptick in real estate prices. We were worried that our new family would never be financially secure. Or even truly at home.

So this is how you'll know when a strong market has turned into a bubble. If you stick to prudent rules you learned before the market took off, you are bound to feel at least a little bit stupid for a while. Learn to regard that sinking feeling in your gut as a sign that you are doing something right.

Another thing we're discovering is how quickly the rules can change. For years the good jobs were in construction, real estate and, of course, financial services. All those industries are shrinking right now. And for Dad, who has spent most of his adult life either working in or writing about finance, this is...uncomfortable.

I wish I had a few more tricks up my sleeve. Unfortunately, it's hard to fully hedge your career bets -- there are a lot of struggling actor-waiters, but I know only one money manager-neurologist (my magazine's own William Bernstein).

At least educate yourself to be flexible. Try to hone a couple of concrete but transferable skills, such as writing plus some basic science (and not just the "rocks for jocks" courses). Keep learning after 21, and take some career risks -- but stretch for experience, not just money. Do this especially early on, when the cost of failure is low.

Finally, remember that it's not all about you. The next couple of years are going to be bumpy, and one of the odd consolations is that it's happening to everybody. A financial or career setback is slightly less ego-bursting when you can blame it on a bum economy. By the same token, though, that means you ought to be humble about your success when the wind is at your back. The practical lesson is to live a bit below your means in the flush years to give yourself some backup.

But more important, back up others. My deepest regret today isn't how much I saved or what I did at work but how little I've pitched in - with money, with time - in our community. It's obvious to me now, when I'm anxious about what's ahead for my own family, how important it is for people to pull together. Wasn't that just as true a year ago, when plenty of folks were already hurting? I've learned this year that I owe much more. And I'm writing this down so the two of you can hold me to that.

Love, Dad

I'm (finally) on Twitter!

Well, no matter how hard I've tried to resist it, I've finally succumbed and fallen down the rabbit hole: I have a Twitter channel! (Cue eye-roll of finally being peer-pressured into joining 21st century.)



Part of the reason I was so hesitant to sign up was because my addictive personality usually gets the best of me in more ways than one. Yes, watching marathons of The Hills for days at a time, spending sleepless nights looking for the best fashion deals online and studying my facial pores longer than the average person all fall under the "obsessive" category. Now I guess I can add "Twitterer" to the mix!


I think it's the perfect up-to-the-minute way to keep all you chickadees informed of the latest financial news, deals and tips. Plus, I just found out that "blogging is so 2004." God, I'm old.


Anyway, here's my channel: http://twitter.com/BrunetteOnABudg. I also put a feed in the right-hand column of my blog. (Yay for technology.)


I'd love to follow all you guys -- let me know if you have a Twitter channel!

What we learned (and didn't) from Monopoly

I love playing Monopoly. Not only does it make me feel like I'm filthy rich (I have an excellent imagination), it unearths the raw greed in the best of us and tests the boundaries of our patience (what's more fabulous than a boardgame that can go for days at a time?). Now we can add "symbol of our financial crisis" as part of Monopoly's mystique, or so says The Washington Post in an amusing op-ed today, which touched on why the Depression-era boardgame perfectly encapsulates current hysteria:

Loose money. Monopoly games start swimming in money, which is briefly mopped up as the players buy everything in sight. But then money starts to flood the system again, courtesy of the mysterious Banker who hands out cash to everyone who passes “Go”. The game is one big property boom, funded by an overly generous central banker – a diagnosis many economists would also apply to the sub-prime crisis. Alan Greenspan, the Fed chairman who presided over the boom, was nine when Monopoly was widely published. It is not known whether he played the game as a child, but he seems to have taken inspiration from it somehow.

Vague and constantly-changing rules. Most enterprising kids treat Monopoly the way enterprising investment bankers treat the financial system, quickly making up their own rules and striking side-deals insuring each other against catastrophe. These side-deals now add up to a nerve-wracking $596 trillion, more than forty times the size of the US economy.Monopoly’s rules on buying unwanted assets at auction are disturbingly vague – the Banker is simply empowered to run the auction. Perhaps Treasury Secretary Hank Paulson, who now has $700bn to spend in a similarly vague set of auctions, is also a Monopoly fan.

The endgame. For all Monopoly’s merits, fans complain about the way it tends to end in a slow capitulation, one player after another dropping out as ever greater sums of money slosh around unpredictably between an ever smaller group of people. Remind you of anything?

…and three reasons why a game like Monopoly -- just like our "real" system -- led us all astray:

Instant mortgages. Any Monopoly property can be instantly re-mortgaged to raise cash. The bank never refuses, and never frets about illiquidity or negative equity. The world of 2006 looked much like the world of Monopoly in that respect, but it is no longer quite so easy to persuade banks to hand out mortgages.

Indestructible banker. Monopoly’s rules note that the Banker cannot go bankrupt; they grant him the power to issue as much money as necessary “in the form of IOUs written on ordinary paper”. Sometimes the banks behaved as though that rule applied to them. It didn’t.

Unknown unknowns. Monopoly is a game of risk-taking, but a game in which the risks can be precisely calculated. Monopoly’s dice rolls are known unknowns, and skilled Monopoly players know the risks of landing on any square and take them into account when crafting their strategies (hint: buy the Orange properties). The wizards of Wall Street have to deal in unknown unknowns. As they crafted their credit derivatives, they thought that they understood the risk of a loss in the same way that a Monopoly player knows the risk of throwing three doubles in a row. They didn’t. They never will. [Washington Post]

Revenge is a dish best served cold

A compelling article in New York Magazine ponders whether its possible for the general public to ever trust the economy again. Like a newborn lamb suckling at the teet of excess, we charged this and bought that, overreached for our McMansions (or maybe our McCondos), and thought that our debt would somehow fade away, like a fleeting reality show on a D-list cable network. Not only did the debt stick around, though, it sat growing and festering like that lone, hormonal blemish that appears like clockwork, oh, every month or so.

Okay, so we were a smidge irrational with our loot back in the heyday of 2006, but is it irrational to believe that we're rational enough (say that 5 times fast) to trust those at the top to bail us out?

"One of the things I think that is most irrational is to assume that we’re rational,” says MIT behavioral economist Dan Ariely, author of Predictably Irrational: The Hidden Forces That Shape Our Decisions. Today, he thinks that the same groupthink mechanisms that caused our financial catastrophe are keeping us from getting out of it.

He argues that it’s all a case of peer pressure: banks and public policy made it easy—even socially necessary—for people to borrow more than they should, which inflated housing prices. Then banks felt compelled to buy the mortgage-backed securities everyone else was buying. That didn’t turn out too well.

The idea that the crowd is wise, Ariely told NY Mag, only works when everyone in the crowd is making an independent assessment, not when they are copying each other. He says the one thing the crowd is overwhelmingingly feeling is the need for vengance. Ah, that explains why the public roasting of the AIG and Lehman Bros. execs a couple weeks ago seems like aptly staged political theater.

Ariely say that in trust experiments, people are willing to expend their own assets to exact revenge on those who cheated them—even if they will just end up losing more money.

Would you pay to have a the Lehman Bros. ex-CEO hauled out so he could be pelted publicly with rotten tomatoes? That was essentially what happened with the Congressional hearings lambasting these top executives because of their decisions that led to the financial meltdown. And it was this kind of thinking -- the "off with their heads!" mentality -- that made the bailout of Wall Street fatcats proved so politically unsatisfying.

“When you think of $700 billion, the millions they made are not quite a drop in the bucket,” Ariely told the magazine. “But we’re willing to lose money to get these bastards.”

And that’s why the bailout hasn’t worked. “It didn’t answer the basic need of revenge. It could include future revenge—from now on, we’ll treat white-collar crime differently. Without that, I don’t see how trust is coming back.” [New York Magazine]

What do you think of the bailout, and does it buttress any faith you have in the economy, or encourage you to invest in the market?