food + money: rising food costs

a little late, but a very interesting article in slate on the disjunction between rising food costs and the fiscally unrestrained foodie industry. class discussions about fresh, organic food vs. processed food are commonplace now, but still foodie-centric blogs make a bigger deal about seasonal ingredients and fancy meals than cheaper alternatives. why?

and more importantly, why are we so unwilling to enjoy our food while thinking about costs at the same time? even personal finance bloggers, when asked, admit to splurging on food expenses more than anything else. is it not possible to enjoy your food AND be frugal about it? especially with organic food costs rising to astronomic highs!

i admit, i'm not exempt from culpability here- i just mentioned that my dinner at momofuku ko was the highlight of my dining this year. and yet, it also just happened to be the most expensive. coincidence? perhaps you could make an argument that price correlates with quality in food, but if you've ever gone to a taco truck, or queens, for that matter- you know that it is not true. i think it must be that we're motivated to value things that are highly valued around us; my memories of dinner at momofuku ko have only heightened since reading the dizzying reviews. but what about creating a culture around valuing cheap, but good, food? after all, as the slate article says "we rhapsodize about la cucina povera—that is, "poor food" like polenta, beans, and braise-worthy cuts of meat like short-ribs and pigs trotters—but we rarely talk about cooking in terms of dollars and cents."

in this vein, i was encouraged to see the nytimes, that bastion of rampant foodie worship, review suburban chain restaurants, like applebee's and outback. and, much to their shocked surprise, they found the food to be pretty good.(i actually found their surprise to be a little condescending and offensive, but that's another story) conversely, i found it disheartening to see a major foodie outlet, serious eats, pick up the story of rising food costs with little discussion. the few comments made revolved around blaming the larger agricultural system and encouraging people to grow their own food. while growing your own food is a wonderfully worthwhile and satisfying endeavor, so is making a grocery list/budget, which is much, much easier.

as someone who enjoys food, it's a good exercise for me to understand the financial implications of my eating- which is why i've started posting the costs of each of the recipes i make. food and money, as we see from this more in-depth economist article are much more intertwined in the macro global system than in our everyday grocery-shopping lives. it would benefit us all to remedy that.

huh? mortgage-backed securities explained

image courtesy of here

okay, this gets a little more complicated, so hang on.

when housing prices were rising in the late 90’s, many people purchased homes with sub-prime loans due to a confluence of factors: 1. they believed housing prices would continue to rise and they would be able to re-finance at a more favorable rate in the future 2. banks realized they could charge much higher origination fees for sub-prime loans and so encouraged people without adequate education to apply for a sub-prime loan 3. everyone got a little greedy.

the goal of homeownership is basically the bedrock of the american dream, so it’s hard to really blame anyone for allowing more americans that experience. regardless, when the percent of sub-prime loans skyrocketed, financial institutions realized they could spread the risk of defaulting around by packaging the sub-prime loans into mortgage backed securities.

let's break it up to explain. a security is an instrument of financial value; stocks and bonds are securities. a mortgage backed security is where a bunch of mortgage loans are grouped together to create a large pool of debt. this debt is then sold to investors the same way a bond is; you buy it at a discount and rely on the mortgage payments for the payout. it was supposed to be a relatively safe investment, partly thought so because of these odd rating rules for bond insurers (i’m sure you’ve heard about this), and because some of these mortgages were structured so that people ended up paying MORE than they were borrowing, it sounded like a great deal.

the primary holders of these mortgage-backed securities (and there are also these other very complicated things called collateralized debt obligations , or CDO’s, which are made up of various types of mortgage related securities) were corporate and institutional investors and investment banks like Bear Stearns, who bought them in droves during the height of the real estate boom, often touting them as “undiscovered gems”.

tomorrow we'll look at the fallout and how the government is getting involved.

a very good place to start: interpreting financial news

there’s big news in the markets this week. to understand what is happening to bear stearns, and the implications of the federal reserve’s actions, let’s start at the very beginning.
(in my head i hear maria’s voice from "the sound of music"- anyone else?)
sub-prime mortgages/sub-prime loans
these buzzwords have been at the root of much of this financial turmoil; but do we really know what they mean? here’s the straight story.

if you are interested in buying a house, you usually need a couple of things: 1. a good credit score (usually above 650 FICO score) and 2. a down payment that is usually between 10%-20% of the purchase price of the home. if you don’t have either of these things, you can still buy a home, but since you don’t qualify for a prime mortgage rate (this rate fluctuates, but has been around 5% for the past 5 years), you have to get a sub-prime loan. a sub-prime loan will have higher origination costs and a higher interest rate than the 5% you would get as a prime borrower, because you are more of a risk to the bank to lend to.

this is a really important lesson for us twenty-something’s who don’t really understand the importance of a credit score. in the financial world, your credit score is the single most important factor people look at when making financial decisions about you. take care of it! (i’ll post about credit soon)

many of these sub-prime mortgages take the form of adjustable rate mortgages, which is probably another term you’ve heard a lot about. an adjustable rate mortgage adjusts its rate (duh!) over time, so you may start out with a 5% mortgage that shoots up to 10% after 4 years. These can mean the difference between paying a $750 monthly mortgage payment for a couple of years and one day opening your mail to find out your monthly mortgage payment has shot up to $3,500. there is obviously great risk that the borrower will default in this situation, which the banks soon realized and created the derivative product of mortgage backed securities to spread the risk around.

this brings us to mortgage-backed securities, which i will unpack tomorrow. hopefully, by the end of the week we will all have a much better understanding of what is going on and more importantly, how this is going to affect us.

saving #1: money in the matress

yes, yes, we all hear it- the mantra of our parents to "save, save, save". like much of the advice we get as children and teenagers, it is vague and virtually useless. no one tells you how, or how much, or where. if you try to do a google search, you'll turn up a million different companies that want your money to do who-knows-what with. well, that's all changing now. in the next couple of weeks, i'll lay out the various strategies you can employ in saving money, how to determine how much (and where) to save, and most important, EXACTLY how to do it. it's going to be a long haul, so be warned.

high yield savings accounts

right now, you've probably got a checking account at a regular bank that is linked to a regular saving account. mostly likely, your savings account is earning around 2% interest and that checking account is earning less than 1%. (you can check these numbers by calling your bank) currently, the inflation rate is around 3% on average (actually, right at this moment it is higher, but i'll explain this another time), and with the markets tanking, this is likely to rise soon.

what does this mean for you?
well, #1 is that volatile goods like food and gas are going to get more expensive. and #2, if you're currently earning less than the rate of inflation in your bank accounts, you're actually *losing* money; that is, over time your money will buy you less goods. people are encouraged to put their money in the bank instead of under their mattress because in return for giving the bank your money to invest, the bank pays you interest on your balance; basically you earn money just by having money- like the old saying goes "the rich just get richer". but if what you are earning in interest is lower than what you are having to pay in rising inflation, you are still theoretically putting your money under the mattress- i mean, it is safer in the bank because it is insured against loss and you can use online bill-pay and you don't have to sleep on a huge lump and you're making an teeeeensy bit of money, but it's basically the same.

so, what to do?
in subsequent posts we'll figure out how to craft your financial goals and your saving and investment strategies to match those goals. creating and keeping a budget is a important first step in the process. but right now, a good idea would be to open up a high-yield saving account, which is a regular FDIC insured savings account with a higher interest rate than average. with the Fed cutting interest rates left and right, opening one up now means you might still be able to take advantage of higher interest rates before they drop. you can transfer the money out of the account to a brokerage account or a CD, or even back to your checking account if you want, but having a chunk of money earning more than inflation is a good way to hedge your bets against the rising prices to come.

how to do this:
first of all, determine how much money you can put into this account. you can determine this by figuring out what you're comfortable with having in your regular checking account to cover all your budgeted expenses. i'm fine with just having $1,000- all the rest of my money is other accounts. other people might be comfortable with a different number; grace needs at least double mine to feel secure. this doesn't mean she spends more than me, just that she more comfortable with that number. money is inextricably tied to our psychology, like it or not. next, determine your liquidity needs. do you often have emergencies where you need to dip into your savings (and i don't mean that really expensive and delicious triple cream french cheese you saw at whole foods, andrea!)? if so, you might want to consider opening up this account with your current bank- most major banks offer these accounts as an add-on option to your regular accounts. always always always check about addition fees and minimum balances however! if you are the kind of person who, if they know they can walk to the nearest atm and hit the 'savings' button, will buy that really expensive (and truly delicious!) triple cream french cheese, then you should probably opt for an online-only account. this gives you a layer of protection from yourself, as you have to wait 2-3 days for the money in the account to be transfered to your regular bank, but it also means you have less liquidity. (confused about that word? don't worry, i'll explain it another time)

now you know where you want to open up the account (either your bank or online) and how much you want to put into it. by the way, this doesn't mean you have to close your savings account- you can still leave some money in there if it makes you more comfortable. here is the really hard part- go and open the account. if you take a look at this chart, you'll see all the different rates for various banks. note that these rates are for TODAY only, they often change (but not by a ton) everyday. to give you some perspective, when i opened my ING Orange account at the height of the market, the rate was 5% and there were even some banks offering 5.5% returns. you won't find that now, but growing your money at the 4% they are offering you now is still far better than what it will probably be in a couple months, and is obviously much better than the 2 or so % you make at your regular bank- so start today!

by the way, it is very easy, and safe to open one of these accounts, just make sure it is FDIC insured and don't put more than $100,000 (yea,right!) into one account. it takes maybe all of ten minutes and you can set up automatic transfers every month, which we'll get to next time.

if you have any questions, feel free to email me.

ps. i had to post this cute picture of wally so that you would be implored to read this post. if you got this far down, congrats!

pear budget

when i started this blog i envisioned it to be primarily about food; the places i ate out at and the things i made, plus the recipes that excite me. sort of like a cross between the girl who ate everything, smitten kitchen, and design sponge(but for food). but, as i'm thinking of blog posts, i realize that i have other things i want to share about besides food. and other than the occasional "things to do", i mostly want to share about money.

money is not a topic that most people outside of the profession of finance want to talk about, and it is not something that a twenty-something liberal arts major non-profiteer usually wants to talk about either. but, BUT- (and here's the super secret) it is one of the most important tools you will ever have in your life, and the sooner you figure out how to use it and make it work for you, the easier everything else will be. i am only saying this because i was the last person on earth to take up the "suze orman" cause- until i realized the ramifications it could and WOULD have on my life. at some point i'm sure i'll share my story from bumbling checkbook balancer to super anal budgeter, but that's not for now.

so, i'll be sharing personal finance tips from time to time. take what works for you and don't worry about the rest.

here's #1:

easy budgeting

budgeting is such a dirty word to some people- it evokes denying yourself things you really want. i've heard it be compared to dieting over and over again. i guess it is a little like dieting, in that it can be crazy "grapefruit and cottage cheese" strict, or it can be "changing the way you think about food" flexible. i'm of the second opinion.

budgeting helps you change the way you think about money.

think about it: before budgeting, you didn't know how much money you had in your bank account, you didn't know how much you were going to need for the month, and inevitably there were times when you got that little slip from the ATM and went "huh? why is my balance so low/high?"

once you begin to budget, things start to make a lot more sense. before i started seriously budgeting, i was always wondering where all my money went- i don't buy clothes, i don't drink, i'm not a book/music junkie. but, as this blog is a testament, i love to eat. i didn't realize exactly how much that was costing me and when i did- oh wow. wow. i had to seriously re-think the way i eat out/cook.

you're in luck. the old school (and cheap) style of budgeting required you to be pretty savvy in excel (luckily something i do in my day job). or you could go the more expensive route and buy quicken or MS money. however, i just recently found a great web-based tool that has become my new budgeting partner: PearBudget .

think of it as budgeting 2.0- a free service (while it is still in beta, at least) where you can upload all your receipts and compare them to your budget. for the first few months, when you still don't really understand where your money goes, your preliminary budget will be way off, but as you continue to track all your expenses, you'll start to see patterns. budgeting is not like dieting in this way- you can't know what to spend your money on without first knowing where you spend your money, while in dieting someone can just tell you what you should eat. you're going to first need to track all your expenses. i teach a personal finance class and i always tell people to keep a little plastic bag in their purse/coat pocket (winter is the best time to try this out!) and stuff all their receipts into it- then, at the end of the week, you can enter it all into PearBudget. it is amazing what you find out about yourself- i already knew i ate a lot, but this really confirmed it!