HuffingtonPost.com

In the home-buying process, the first question you must answer is “how much house can I afford?” And in an effort to determine that amount responsibly, you may have googled for a calculator like this one on CNNMoney.com, which will tell you that you can spend between 28% and 36% of your gross income on a mortgage.

But just how realistic is that advice? Let’s run some numbers.

Say the Smith family earns $52,029, the median household income (in 2008, the most recent year for which data is available). They have saved a 20% down payment on the median home price – which currently rests at $140,000 – for a down payment of $28,000. The national average interest rate for a 30 year fixed mortgage is 5.01% right now, so we plug that in as well. And we’ll also assume the Smiths are making $300 monthly payments on student loans, car notes, and credit-card debt.

The calculator reports the Smiths can buy a house valued between $192,162 and $217,016. That’s up to 55% more than the average home is selling for right now.

Surprised? We are. The lending guidelines on which this calculator and its copycats are based tell people they can afford to spend more on housing than they really can.

For example, if you’re spending 36% of your gross income on a mortgage, another 25% or more on taxes, and then you’re responsible for other monthly expenses like debt repayment, groceries, utilities, healthcare, home maintenance, and transportation, what exactly is left over for a rainy day? If you followed that advice, saving anything would be basically impossible for the average household. It’s a recipe for falling behind.

At Econ4U, we often talk about “living within your means.” But to figure out what that really means for your household, you may have to ignore commonly accepted rules of thumb and use your head instead. After all, that’s where your brain resides.

ABC.com

Desperate Housewives star Eva Longoria has filed a Chapter 11 petition in bankruptcy court on behalf of the restaurant and nightclub she owns in Las Vegas.

Beso and its upstairs nightclub Eve opened in the CityCenter at the MGM Resort in December 2009, but a little more than a year later, the property lists $2.5 million in assets and $5.7 million in debts. The Las Vegas Sun reports that the restaurant faces projected ongoing losses of $76,000 per month.

Likely compounding the problem is the accusation that Longoria has been lending her own business venture money at an usurious interest rate, according to one of her business partners. Mali Nachum claims that in 2006, Longoria loaned Beso $1 million at an 8 percent rate over 2 years. In addition, he says Longoria received a 23.3 percent share of Beso in exchange for the loan, which would violate California usury laws.

Normally for Famous Financial Flubs, we like to provide a moral to the story, but the only one in this case seems to be don’t shoot yourself in the foot by charging your own business venture an usurious interest rate. (Or alternatively, choose your business partners wisely.)

Instructables.com

Are you still sticking to your New Year’s resolutions? Good for you! You’ll hit your financial goals for 2011 even faster if you break these five common money-wasting habits.

1. Fully fund an IRA. Every year you wait to open an individual retirement account (IRA) is a year you’re missing out on compound interest. And if you already have an account, make sure you’re contributing the max every year. Make it easy on yourself and deposit $416.67 into it monthly so you don’t have to come up with $5,000 in one lump sum at year’s end.
2. Use your own bank’s ATM. One resolution that a friend of mine made was to always use her own bank’s ATM. For convenience’s sake, she had been using the corner cash machine by our apartment building every time she needed cash; she got dinged $3 from the owner of the ATM, and another $3 from her bank — every time she went. What a ripoff. Over the year, it added up to a ridiculous amount of money. Keep it in your own pocket!
3. Shop around on interest rates. If you’re financing a car, it pays to call a few different lenders before you head to the car lot. Credit unions often have the best deals even on both new and used car loans, and they’ll assuredly be lower than anything the dealership can offer you. Likewise, before you open a new savings account, see if you can’t suss out a better deal by comparing interest rates on Bankrate.com.
4. Know when your bills are due. If you take out a payday loan to solve a short-term budgeting problem, make sure you pay it back within the allotted time. Payday loans can be one of the cheapest ways to get access to cash instantly, but only if you keep your end of the bargain by paying it back within the allotted time (usually two weeks).
5. Plan all purchases, big and small. Whether it’s writing down a grocery list or buying a plane ticket months (instead of days) in advance, you can save money on everything when you think ahead. Companies profit on convenience and impulse buys, but planning gives you control over your spending. It also gives you time to save up for major expenses so you don’t have to put your purchases on credit.

CenturyNovelty.com

After losing weight and getting fit, going on a financial diet is one of the most popular New Year’s resolutions that people make come January 1. But rather than bite off more than you can chew — a sure recipe for giving up by January 2 — here are a few financial tune-ups you can make to reap the benefits all year long.

1. Re-examine your budget. Did your income change in the past year? Did you buy a home or have a baby? The budget that worked for you going into 2010 may not pass muster in 2011. Take an afternoon and go over your fixed expenses to see if you can improve how your paycheck is allocated.
2. Diversify your savings. If you keep all of your money in one savings account (or under the mattress), this advice is for you. Interest rates on savings accounts are pretty pitiful coming into 2011, so consider breaking up your savings into cash, certificates of deposit (CDs), and low-risk bonds to put your money to work and guard against inflation.
3. Curb your impulse to spend using this trick. Take a minute to think about what you would like to accomplish in the coming year. Would you like to buy a car, or pay off your student loans? Now make something related to that goal the password you use when you shop online. Having to type in NEWBENZ or DEBTFREE when you’re tempted to buy something you don’t need may be the reminder you need to put the ice on impulsive spending.
4. Boost your retirement savings by 1%. If someone gave you $100 right now, it wouldn’t hurt too much to save a dollar for a rainy day, would it? Apply that principle to your retirement savings. If you’ve been putting off that Roth IRA, open one today and see if you can save just 1% of every paycheck. Once you’re comfortable with that, add a percent every month until you’re maxing it out — up to $5,000 if you’re under age 50 in 2011.
5. Set up automatic bill pay. Talk to your bank about setting up an automated bill paying service and arrange to have your bills paid automatically every month out of your checking account. You’ll never get slapped with a late fee again.

From Econ4U, may 2011 be your most prosperous year yet!

BusinessWeek.com

When you’re a little short and need to come up with some cash within 24 hours, what are your options? We look at the five most common scenarios and analyze which ones are better than others.

1. Sell your stuff. Start here if you have anything worth selling. Do you have old DVDs you never watch anymore? A snowboard you haven’t used in a few seasons? Paintings or photographs you could unload? Get cracking on Craigslist to generate some fast cash in a jiffy.
2. Get a payday loan. Perhaps surprisingly, a payday loan is one of the cheapest options available. A $100 short-term loan typically costs $15 and gives you two weeks to pay it back, plus it’s excluded from your credit report.
3. Visit a pawn shop. You won’t get much for your valuables but it’s another fast option. One tester for HowStuffWorks.com was offered $10 for a solid gold wedding ring, and given 30 days to pay the loan back (plus fees and interest) or else the pawn dealer could sell the ring at a markup. The risk you take is that someone will buy your valuables before you have the money to buy them back.
4. Obtain a cash advance on your credit card. Using your credit card as an ATM is one of the most expensive ways of getting cash. Advances come with an upfront fee of up to 4 percent, plus they carry  higher interest rates than other purchases. Also, there’s no grace period: Interest is assessed as soon as the money’s in your hands on not just the cash withdrawn but on the rest of the balance you carry on that card. All in all, not a great deal.
5. Write a bad check. The worst option of all: In addition to a guaranteed ding of up to $60 per check (from both your bank and the merchant who’s cashing it), you could be reported to ChexSystems, which could mean you’ll lose your checking account and be denied a new one in the future.

BBB.org

Welcome to this week’s edition of our Tuesday Top 5, Econ4U’s weekly tips post to help you manage your money in five easy steps.

You’ve heard of “good debt” and “bad debt,” but if your end goal is to be debt free, you have to just say no to any and all loans. That means you’ll need to choose your priorities in how you repay your bills. Not sure whether you should pay off your mortgage before paying down your credit cards? This primer aims to help you figure out a plan.

1. Knock off your credit card with the highest interest rate. Plastic typically carries the highest interest rate of any of your debt, which means it gets top priority in your repayment plan. If you can afford to spend $1,000 per month to attack your credit-card debt, make the minimum payments on the cards with the lowest interest rates and put the rest of that chunk of change toward the card with the highest. Once it’s paid off, reassess which card has the next-highest rate, and repeat the process.
2. Get rid of your car loan next. Don’t pay interest on a depreciating value for any longer than you have to. Ideally, you should be able to pay off a car loan in 36 months or less. If refinancing under those terms would make your monthly payment unaffordable, consider trading the car in for something less expensive.
3. Third, try to negotiate on your medical bills. If you’re uninsured or underinsured and need medical care, knowing how much procedures should cost can be a useful bargaining chip. The Healthcare Blue Book can give you an idea of what you can expect to pay out of pocket for anything from bloodwork to a hospital stay. Already stuck with a bill you can’t afford? Ask your medical provider for a discount or to waive certain fees — it works more often than you might think.
4. Student loans get the next priority. Benjamin Franklin once said, “If a man empties his purse into his head, no man can take it away from him.” Unfortunately, that’s also why student loans stay with you for life, even if you declare bankruptcy. The interest you pay on qualified education debt is tax deductible under certain conditions, but it counts against you when you apply for other loans (like a mortgage). So pay it down before you try to buy a house.
5. Save the mortgage for last. If you borrow $200,000 on a 30-year mortgage that carries a 4.75 percent interest rate, it adds up to $175,600 in total interest you’ll pay over three decades. But if you get a 20-year mortgage instead, you can save about a quarter of a percentage point in interest in addition to paying it off sooner, which means you’re out only $103,670 in interest over the life of the loan. While mortgage interest is tax deductible, wouldn’t you rather have nearly $72,000 in your pocket?

EngineeringDaily.net

Welcome to this week’s edition of our Tuesday Top 5, Econ4U’s weekly tips post to help you manage your money in five easy steps.

For the first time in history, total student loan debt exceeds total credit card debt in the United States. Borrowers owe almost $850 billion for education, compared with $826.5 billion on credit cards. That’s an increase of 25 percent from 2009 and it has many analysts worried that the country is in for another credit crisis brought on by education debt.

You can make some decisions to protect yourself from falling down the student-loan rabbit hole. Here are some suggestions.

1. Know what you owe. It may seem obvious, but lots of people keep their heads in the sand about the amount of their debt. If you don’t know the full total, you can’t come up with a viable plan for whittling that balance down. Make a date with your paperwork to analyze the big picture — and remember to check your balances regularly.
2. Avoid overspending for an undergraduate degree. A recent New York Times article discusses a woman who racked up $170,000 in loans for a bachelor’s in photography. While there’s value in following your dreams, dreams shouldn’t make you take on debt that will take a lifetime to pay off.
3. Pick a major with foresight. Unless you are guaranteed high-paying work by virtue of getting an advanced degree, your student debt should not look like a mortgage. It’s up to you not to take on more debt than you can realistically pay back in 10 to 15 years, if not sooner. Check the average salaries in your field in this handbook published by the Bureau of Labor Statistics.
4. Consider a less-expensive school. If graduating from a top-tier private school is your goal but you don’t have family money or scholarships to pay for it, spending your freshman year at an in-state public school and transferring the next year will save you thousands in the long run.
5. Do what it takes to pay at least the monthly minimum. Federal loans offer an income-based repayment (IBR) option that caps your monthly payment at a percentage of your discretionary income. While it will take longer to pay off the total, taking advantage of such programs allows you to stay out of default. And remember: Even if you declare bankruptcy, you’re still on the hook for student debt no matter what.

There are 246 million cars owned in the United States, so chances are good you have one of them. But next to a house and an education, a car may well be the most money you ever spend on anything. And the costs don’t end after you leave the dealer’s lot. Want to keep your ride budget friendly? Here are a few things to avoid if you want your car to serve you well for years.

1. Don’t bother with maintenance. Skip a brake job here, ignore a “check engine” light there, and you’re risking serious mechanical problems down the road. A $30 oil change at least once a year could save you the trouble and expense of having to replace your whole engine. When it comes to car maintenance, an ounce of prevention is worth far more than a pound of cure.
2. Lease a new vehicle every 3 years. There is a very narrow set of circumstances under which leasing makes financial sense (namely, if you absolutely have to drive a new car all the time and you don’t put a lot of mileage on it). But otherwise it’s a bum deal. For example: A lease on a brand-new BMW 328i sedan runs $459 a month for 36 months, which totals $16,524 over the term agreement. But if you were to buy it new, at the end of three years the car would still be worth $27,600, according to the Kelley Blue Book. In other words, you’re spending more than $100 per month for the privilege of not owning your ride.
3. Trade in Old Faithful for a hybrid. Fueling up is just about the cheapest part of owning a car. Despite the touted gas-mileage benefits of driving a hybrid, you have to drive more than 200,000 miles before you recoup the extra cost of buying a Honda Civic Hybrid over the less expensive conventional model — and even more when gas is cheap. Instead of the Prius, it should be called the Premium.
4. Owe more on your car than it’s worth. A lot of people who carry massive car loans try to roll over their debt for their next car, but it’s a recipe for disaster. This could even be the newest iteration of the subprime mortgage crisis. A rule of thumb: Don’t take on a car loan that you can’t pay off in under five years (or three years, if you really want to be conservative).
5. Speed, run red lights, and otherwise draw police attention. Many states are hurting for tax dollars so much right now that they’ve increased traffic fines across the board. In California, not coming to a complete stop at a red light before turning right will now cost you $381. If you get caught once, you’ll never do that again.

When things get really tight, it’s important to know what your options are to get you through a bumpy ride. This week, we help you make a plan for how to make the best of a tight financial situation.

1. Use your car as collateral. Many banks and credit unions will let you refinance a paid-off vehicle with a used car loan (assuming the car is worth enough). With interest rates under 3 percent at a lot of financial institutions, it essentially gives you a personal loan at a discounted rate. This could be your ticket to pulling cash out of a car you own outright without having to sell it.
2. Know your best short-term loan options. Bouncing a check can be much more expensive than a short-term option like a payday loan, through which you can get an advance on your next paycheck for a fee as low as $15. Just be sure to pay it back as soon as you can.
3. Negotiate your medical bills. According to a 2005 poll, two-thirds of people who asked their doctor or hospital for a discount were able to negotiate a lower medical bill or even get the cost of some services waived. If you don’t have insurance, try to pay for your care up front to save 10 percent or more. And check this website run by the Pharmaceutical Research and Manufacturers of America (PhRMA) for assistance in getting discounted or even free prescriptions.
4. Stretch your grocery bills. Foods like lentils, rice, ground beef, and canned goods go a long way for pennies per serving. And waste not, want not by using meat and veggie scraps in making hearty soups and stews. (Between roasting it, shredding the leftovers, and boiling the carcass for stock, a whole chicken can make several meals for less than a dollar per serving.)
5. Learn to barter. You don’t always have to spend big to get a service you need if you can make use of the skills in your social circle. Barter with a mechanic friend by swapping babysitting services for an oil change, or save on clothing repair bills by offering to run errands for a friend who’s handy with a needle and thread.

Student loans are intended to pay for your education, but I’ve known a few people who took liberties with exactly how they used that money. Here are some of the worst ways you can spend those checks:

1. Getting a degree in the arts or humanities. This is the sad truth: More than 23 percent of humanities students owe more than $30,000 in student loans, but hiring in that sector is down 40 percent since 2008. Make sure that you can find work that utilizes your degree, or else those student loans will be with you for a long, long time.
2. Paying your mortgage. Student loans include stipends to cover your living expenses, but renting is preferable to buying a house and using the student loan to pay your mortgage. If you plan on moving away from the area after school, houses tend to be poor short-term investments. Maintenance costs may pop up unexpectedly, leaving you short. And in general, it’s a bad idea to take on new debt to pay down old.
3. Funding your discretionary purchases. This one almost goes without saying, mostly because it’s illegal to misuse federal loans. Look into part-time work to buy clothes, dine out, or go on vacation. The reason is simple: Stafford loans carry an interest rate of up to 8.25 percent, and private loans can be even steeper. You’d be better off putting such purchases on a low-interest credit card or taking out a personal loan, rather than assuming more education debt than you need.
4. Paying off credit cards. Speaking of consumer debt, should you ever declare bankruptcy, credit-card debt would be forgiven but you’d on the hook for those student loans until death do you part. Don’t exchange unsecured debt for a loan that is with you for life.
5. Not learning how to budget. While you’re getting your degree, you’re also presented with a great opportunity to learn to budget your money on a fixed income. It is a valuable lesson that will serve you long after you leave the ivory tower.

To end on a happy note, congratulations to all the recent grads!