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Missing Tax Paperwork?
3 Feb 2012 at 4:09pm
Have you started thinking about doing your taxes yet? I haven’t. Rather, as I do every year, I’ve just been tossing all of our tax forms in a pile as they arrive, and I haven’t paid much attention to what’s here vs. what’s missing.
But now that we’ve moved into February, you should have everything you need to file your taxes, as most everything is supposed to be in your hands by January 31st.
Here’s a quick rundown of forms that you might be expecting:
- W-2 (for wages earned)
- 1099-DIV (for dividends received)
- 1099-INT (for interest earned)
- 1099-MISC (for miscellaneous income)
- 1099-B (for proceeds of broker transactions)
- 1099-C (for cancellation of debt)
- 1099-G (for government payments, including unemployment)
- 1099-OID (for certain investment income)
- 1099-R (for retirement distributions)
If your W-2 form is missing, you’ll need to check with your employer. If, on the other hand, you are missing a 1099 form, keep the following in mind:
For starters, a 1099-MISC is only required if you earned more than $600 from a given source over the course of the year. You might still get a 1099 even if you earned less than that amount, but if you don’t get one, don’t worry.
In contrast, 1099-INT and 1099-DIV forms are required for earnings in excess of $10. That being said, it’s quite possible that your bank or other financial institution has switched to electronic delivery, such that you need to login and download the forms.
You should also be aware that payments made to a corporation don’t require a 1099, regardless of the amount. Thus, if you’re self-employed and have incorporated your business, it’s quite possible that you won’t receive any 1099 forms related to your work.
Of course, you are still legally required to report all income whether or not you receive a 1099, so be careful? And if you do get a 1099, but don’t report the income, you’re just begging for an audit.
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Is Your Investment Allocation Right?
3 Feb 2012 at 5:00am
Here’s an interesting thought experiment from Carl Richards over on the NY Times “Bucks” blog?
Imagine that your investment portfolio somehow got liquidated overnight, such that when you wake up your holding are 100% in cash. If you were give the opportunity to buy back into the market at no cost, would you re-create the same portfolio that you’re currently holding?
If so, great. But if not, then why aren’t you already making changes? Perhaps your portfolio is too risky, or maybe it’s not risky enough. If that’s the case, then you should be taking steps to correct your allocation.
Sure, there are costs associated with re-configuring your portfolio. But there are ways of minimizing these costs. And there are also potentially huge costs association with hold the wrong mix of investments.
I would argue that a big reason that people don’t make changes is inertia, and Richards agrees. It takes time and effort to evaluate your goals and determine whether or not your portfolio fits your needs. It’s far easier to ignore your portfolio than it is to re-evaluate it.
But just because it’s easier to maintain the status quo doesn’t mean that’s the right decision. Do yourself a favor and take some time to reconsider your options. Sure, you may find that you’ve already dialed in the perfect solution. Then again, maybe not.
Source: NY Times Bucks via MyMoneyBlog
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Chase Freedom Experimenting With Quarterly Rewards Auto-Enrollment
2 Feb 2012 at 12:00pm
While flipping through the mail, I recently ran across a missive detailing a test of a new cash back feature for the Chase Freedom card.
As you’re likely aware, many credit cards (including this one) have adopted a rotating bonus category model, where you get 5% on purchases in certain categories for a limited time, and 1% on everything else.
In the past, you’ve had to re-enroll each and every quarter to get 5% cashback on the select categories. Annoying. But that’s (hopefully) changing?
Because I’m a “valued Chase Freedom cardmember,” I’ve been invited to participate in a test of a new auto-activation system. In short, I just have to sign up and agree to receive text reminders.
The text reminders (no more than one per month) sound fairly non-invasive; they simply remind you of the reward categories. In return, you’ll be auto-enrolled in the bonus categories each quarter for the remainder of 2012.
If you discontinue the text reminders (which you can do at anytime) you’ll also lose the auto-activation, so you can’t easily game the system.
If you’re interested, you can sign up at chase.com/freedomoffer — but hurry, you have to do so by February 10th to qualify.
Note: According to a reader (thanks Jonathan!), this is a targeted offer, so you may not be eligible. But if you’re interested, it can’t hurt to try signing up.
Don’t forget the $200 bonus…
And don’t forget? If you don’t already have the Chase Freedom card, you can get a $200 cash bonus by applying for one, getting approved, and spending $500 within the first three months. There’s no annual fee. Technically, you’ll get 20,000 points, but you can easily redeem these for a $200 check.
For what it’s worth, we’ve had this card for years and have never had any problems getting Chase to hold up their end of the bargain. You just login, request the check, and it shows up in your mailbox within a week or so.
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Income-Based Repayment Plans for Student Loans
2 Feb 2012 at 8:25am
No one can argue that college costs have become exorbitant. Even during the recent recession, schools continued increasing tuition. Student loan repayments are thus taking even longer to pay off, as college graduates are having trouble finding a decent job, or any job at all.
Amidst this gloom and doom, there is some positive news. President Obama seeks to accelerate changes to Income-Based Repayment, a student loan repayment program available for many federally-guaranteed student loans.
Geared for low-income families, the unemployed, and people with lower-paying, public service jobs in education or non-profit organizations, this program caps monthly payoff amounts at affordable levels relative to your income, family size, and the state in which you reside.
Currently, the IBR program forgives debt still owed after 25 years of consistent repayment, and caps payments at 15 percent of discretionary income. Under the President’s proposal, students who took out their first loan during or after 2008 and opened at least one additional loan during or after 2012 will see the cap drop to 10 percent and the forgiveness period reduced to 20 years.
This change would not only expand the number of people who are eligible for this program, but also make it even more useful to qualifying students. Is this a program that will benefit you? Here’s what you need to know.
Who is eligible for IBR?
This program is available to federal student loan borrowers in both the Direct and Guaranteed (FEEL) loan programs, and covers most student loans, with the exception of those made to parents.
This includes all Stafford, PLUS, and Consolidation Loans, but not ParentPLUS or Consolidation Loans containing Parent PLUS Loans. Private student loans don’t qualify for IBR. Bottom line: to qualify for a reduced payment, you must have enough debt relative to your income.
How are payment amounts determined under IBR?
This program uses a sliding scale to determine how much students can afford to pay. For example, if you have a family income of $40,000/year with four family members, you would pay 2.4% of your income towards student loans. That amount jumps to 8.9% if your household has only one family member.
If your income is $100,000/year and you have a family of four, you would pay 10% of your family income versus 12.5% if you were in a single-person household. Under this program, you are required to submit updated income documentation each year.
Obviously, the repayment amount will increase if your income rises.
What about interest under this program?
IBR typically extends the loan’s term, so be prepared to pay more interest than you would with a traditional 10-year payoff period. You should also be aware that, in some cases, the IBR payments may not cover the interest on your loans.
If this is the case, the government will pay interest on Subsidized Stafford Loans for your first three years in the IBR program. After this period, and for other loan types, interest is added to the total amount owed. Keep in mind that loan amounts still owed after 25 years of qualifying payments (or 20 years when the President’s IBR changes are implemented), are automatically forgiven.
What are IBR’s qualifying payments?
According to the Department of Education, payments that count toward IBR’s forgiveness period include payments made in the Income Contingent Repayment (ICR) plan before July 1, 2009; all payments made on or after July 1, 2009 in the IBR, ICR, and Standard 10-year Repayment plans; if your income is at or below 150% of the poverty level and you have calculated a payment of zero in IBR or ICR; and periods on or after July 1, 2009 if you have been granted an economic hardship deferment.
What are the advantages of IBR?
Not only will monthly payment amounts be less under IBR than under a 10-year standard repayment plan, but the government will pay your unpaid accrued interest on Subsidized Stafford Loans for up to three consecutive years from the date you began repaying your IBR loan.
In addition to having your loan forgiven after a period of time, if you work in public service, the IBR payments will count toward the required monthly payments for you to receive loan forgiveness through the Public Service Loan Forgiveness Program.
What are the disadvantages of IBR?
It’s important to note that you may pay more interest under this program, since it typically extends your repayment period. Also, you are required to submit annual documentation about your income and family size to qualify. If you don’t provide this, annual payment amounts will change to a 10-year standard repayment plan based on the amount you owed when you began repaying under IBR.
Your student loan servicer can provide additional information about IBR, including whether you qualify and how to apply.
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Will the IRS Disallow Backdoor Roth Contributions?
1 Feb 2012 at 5:00am
I’ve talked quite a bit about making “backdoor” Roth contributions if you’re over the income limits for contributing to a Roth IRA. In short, you can make a non-deductible contribution to a traditional and then immediately convert it into their Roth.
This strategy has become so popular that mainstream publications such as Forbes have started talking about it. But is it legal? That was the topic of a recent discussion over on the Bogleheads forum.
This discussion was prompted by an article by Michael Kitces, who is a financial planner extraordinaire and the Director of Research for the Pinnacle Advisory Group.
According to Kitces, while the individual steps of the backdoor Roth maneuver don’t run afoul of IRS regulations, these contributions could be disallowed under the step transaction doctrine.
The step transaction doctrine is a legal principle that essentially allows the IRS to look at the overall effect of a multi-step transaction and treat it as a single, integrated event.
In other words, rather than looking at the legality or tax treatment of individual steps, the IRS is free to look at the overall result of the transaction — i.e., that an individual over the contribution limits was able to make a Roth IRA contribution — and tax (or penalize) it accordingly.
So? The question is whether or not the IRS would balk at backdoor Roth contributions. I’m not particularly concerned about it, in part because the removal of income limits for converting funds to a Roth IRA appears to have been specifically intended to allow high income individuals to do just that, but?
It seems at least theoretically possible that the IRS could view this as an over-contribution, which comes with a recurring penalty of 6%/year (albeit with a 3 year statute of limitations), and these transactions could be messy to unwind.
At the same time, it’s worth noting that IRA expert Ed Slott weighed in on this issue last spring, arguing that the step transaction doctrine is a non-issue for backdoor Roth contributions.
My pal TFB has also tackled the subject. The short version is that he’s recharacterizing his recent conversions, and will re-convert at a later date to reduce the odds of his conversions being viewed through the lens of the step transaction doctrine.
What about you? If you’ve been making backdoor Roth contributions, are you concerned about running afoul of the IRS?
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Four Hidden Dangers of Leasing a Car
31 Jan 2012 at 7:57am
For some people, there is an appeal to leasing a car vs. purchasing it outright. Leasing a car is one way for many would-be car owners to be able to finance a more expensive car with a lower monthly payment than they would have otherwise been able to afford.
This low monthly payment is not all it is cracked up to be, though. In fact, there are several hidden dangers when you lease a car that you do not typically find when making a purchase.
With the popularity of leasing on the rise and new commercials hitting the airwaves every week, it’s important to understand how these hidden expenses can wind up costing you more money in the long run than if you had simply purchased the car.
Here are four of the biggest hidden dangers that people face when leasing a car instead of buying a new car.
Lack of equity
While most financial experts are quick to point out that your new car loses value as soon as you drive it off the lot, they also often fail to mention that you will eventually have some sort of equity in the car.
When you finish making payments on your car loan — if you are a buyer — there is still a residual value to your paid off car. This is the value that you can sell the car for in the end. Granted, your car’s value may just be a fraction of what you paid for it initially, but it still has some value.
If you had leased the car instead, that wouldn’t be the case. When you lease a car, you agree to return the car at a predetermined point in time, typically three years after signing the lease. At the end of your agreement, you simply return your car and are left with nothing but memories.
Also can be the risk that if you wreck the car or have it stolen, your auto insurance will only cover the market value – which may be less than you owe on your lease.
Mileage limits
When you lease a car, you are typically limited to driving between 10,000 and 12,000 miles/year. If you want the best deal on a new car lease, you may find yourself stuck at the low end, with a 10,000 mile annual limit.
Many lease agreements charge 18 cents per mile or more when you go over your limit. So, for example, if you drove 15,000 miles each year during a three year lease that only provided you with 10,000 miles annually, you could be looking at an extra $2,700 in charges when you your leased vehicle to the car dealership at the end of your agreement.
Damage fees
A car lease requires that you return your car in good shape, and dealerships can vary in terms of what they consider to be satisfactory condition. What you may view as simple dings and chips from normal wear and tear may be unacceptable to the dealership when you return your car.
One friend of mine found himself penalized thousands of dollars for damage thanks to stains on the carpets of his car from coffee spills. ProTip: You may be able to take your car to the dealership for a pre-inspection before returning it, thereby allowing you to fix/clean it up before being charged.
Lots of legalese
Both leasing and buying a car can both be tricky, and car dealerships don’t make things easier on their customers with all their legalese.
You’re bound to hear terms such as money factor, residual value, capitalized cost reduction, and capitalized cost when you look at leasing a car. One of the most important figures to focus on is the money factor, which is essentially the interest rate on your lease.
You have to multiply the money factor by 2,400 in order to find the annual interest rate that the dealership is charging you. For example, with a 0.002 money factor, the interest rate is 4.8%.
Closing thoughts
Leasing a car is starting to make a big comeback in mainstream America as more consumers are looking for new cars while trying to minimize their monthly payments. According to the Automotive Lease Guide (ALG), which tracks industry leasing trends and residual values of cars, the popularity of leasing is expected to continue to increase over the next four years.
ALG estimates that leasing will grow to over 17% of the mainstream car purchasing market by the end of the year, with 43% of all luxury cars being leased. Leasing a car may be a viable option for many consumers, but you need to go into the transaction with an understanding of all the requirements, potential fees, and hidden dangers that lie ahead.
Have you ever leased a car? If so, did you run into any unwelcome surprises?
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How to Save Money on Plane Tickets
30 Jan 2012 at 10:01am
Are you looking forward to a nice Spring Break vacation? Or maybe a summer trip to visit family? If so, and if you’re planning on flying, then read on?
According to a study by Airlines Reporting Corp., which is company involved in ticket transactions between airlines and travel agents, the best time to buy a plane ticket is six weeks before your intended travel date.
This study, which was based on millions of transactions over the past four years, found that passengers buying tickets six weeks in advance paid roughly 6% less than the overall average fare.
The study also showed that ticket prices can rise dramatically about a week before the departure date, and can be as much as 40% higher if you try to buy the same day you travel.
This isn’t to say that you’ll always get the best deal by booking six weeks in advance but, all else being equal, that’s when you’re most likely to score the lowest price.
As an aside, a colleague once raved to me about the Bing travel predictor, which tells you whether you should by now or wait (along with a percent confidence indicator) based on whether they expect fares to rise or drop.
While this sounds great in theory, my experience has been that the predictions aren’t particularly accurate, even when their confidence is high.
As I’ve noted in the past, another good trick for saving money when you travel is to consider alternative airports. This won’t work for everyone, but some airports are consistently more expensive than others.
Source: LA Times via The Consumerist
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Does the IRS Accept Scanned Documents?
27 Jan 2012 at 9:46am
I’ve spent a good bit of time digitizing paperwork over the past couple of years. My primary weapon in this battle has been a sheet-fed scanner, though I sometimes snap pics with my iPhone and turn them into “scanned” pdfs using JotNot.
While it feels to good to be working toward a paperless financial world, however, the issue of whether or not these scanned documents would be acceptable has always bothered me. Having a store refuse a return because I didn’t have the original receipt would be annoying; having the IRS reject my documents could be a disaster.
So… Does the IRS actually accept scanned documents?
As it turns out, yes… They’ve actually accepted electronic documentation since at least 1997, when they issued IRS Revenue Procedure 97-22, which states:
This revenue procedure provides guidance to taxpayers that maintain books and records by using an electronic storage system that either images their hardcopy (paper) books and records, or transfers their computerized books and records, to an electronic storage media, such as an optical disk. Records maintained in an electronic storage system that complies with the requirements of this revenue procedure will constitute records within the meaning of § 6001 of the Internal Revenue Code.
Section 6001 of the IRC essentially requires you to keep and make available sufficient records to show whether or not you’re liable for taxes. It further states that such records must be retained “so long as the contents thereof may become material in the administration of any internal revenue law.”
The general requirements of the “electronic storage system” referenced in the quote above are that it:
…must ensure an accurate and complete transfer of the hardcopy or computerized books and records to an electronic storage media. The electronic storage system must also index, store, preserve, retrieve, and reproduce the electronically stored books and records.
There are some additional requirements, but the essence is that you can digitize your documents as long as they’re clearly legible (both on-screen and in hard copy) and easily retrievable. Just be sure to keep your data safe. In our case, we maintain both local and online backups of our data, so our digital documents are probably safer than hard copies.
And don’t forget to secure your files to protect them from prying eyes. The last thing you need is for your cache of sensitive data to fall into the wrong hands.
Of course, I’m not a tax pro, so I suggest that you check out the details and decide for yourself. The relevant guidelines can be found in this document from the IRS. The pertinent section (Rev. Proc. 97-22) starts on page nine.
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E-Filing Saves the IRS $3.10/Return
26 Jan 2012 at 1:32pm
As January winds down, you should have received most of the paperwork that you’ll need to file your taxes. If you’re like most FCN readers — and most Americans in general — you’ll be e-filing this year.
Sure, e-filing is convenient. But guess what? It’s also much cheaper for the IRS to process your return if you file electronically. As it turns out, it costs the IRS $3.29 to process a paper return vs. $0.19 for an electronic return — a savings of $3.10 (or nearly 95%!) per e-filer.
Looking back at last tax season, more than 100M individual federal tax returns were e-filed. Thus, the e-filing program saved well over $300M last year alone — not to mention an awful lot of paper waste.
Source: GAO via Don’t Mess With Taxes
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Home Economics
26 Jan 2012 at 5:00am
I have long contended that, at its most fundamental level, keeping a household’s finances in the black has much in common with operating a profitable business. In both cases, you have to try to generate the greatest revenues, while at the same time keeping expenses in check. It’s not rocket science or brain surgery. In both worlds, success boils down to making – and keeping – more money than you spend.
These thoughts were percolating in my mind last fall, when I covered one of the printing industry’s largest conventions, the Graph Expo Show at Chicago’s McCormick Place. The show is both a showcase for printer manufacturers and suppliers, and an opportunity for printing companies large and small to learn about the latest technology.
On day one, I sat down to take notes at a presentation billed as “Heidelberg Presents the State of the Industry with Andy Paparozzi.” As vice-president and chief economist for the National Association for Printing Leadership, Paparozzi had been called on by printer maker Heidelberg to offer attendees an hour of well-chosen economic illumination.
If you ever get a chance to witness a talk by Andy, don’t miss it. Knute Rockne could have taken lessons from Paparozzi in exhorting listeners to greater glory. As impressed as I was by Andy’s gifts at a microphone, however, I was even more taken by the universal nature of his insights.
While Andy’s talk was geared to an audience of printing company honchos, it could just as well have fit virtually any other industry. Beyond that, almost every lesson he imparted to business held some parallel for those trying to hold household budgets together.
Let’s take a look at a few of Andy’s key points, and see how effectively they translate to the American household of Joe and Jane Sixpack and their 2-1/2 precocious youngsters.
Managing uncertainty
Paparozzi started by noting that as he talked to printing industry professionals, he sensed an aura of uncertainty from each. They didn’t know what to expect next.
“I’ve never seen that in my 28 years in this great industry,” he said. “Recovery has been maddeningly slow, irritatingly sporadic and uneven. But recovery is nonetheless occurring. This recovery is not what we want it to be, but what we make it. That requires making smart investments, managing uncertainty, and learning from the last recession.”
Translation: We’re not happy with the bounce-back from the economic abyss of 2008, but why waste time and effort complaining about it? We can still exert some control over how we recover, and that in itself is energizing. We’re not helpless pawns in the recovery, but masters of our own ship. We can put extra time and consideration into what we spend, and manage uncertainty by husbanding our household savings and avoiding risky purchases. We can also avoid mistakes made last time, which for many centered on assuming good times would last.
“Nothing is more important to the future than getting capital investments correct,” Andy went on. “We can’t pass inefficiencies on to our clients. The industry’s too competitive.”
Translation: One of the “capital investments” any family can make is in education and training. Being good is no longer good enough in the workforce of 2011. A struggling economy may be the best time to invest in training, because as the economy improves, it stands to make us more marketable in an ever more competitive employment landscape.
“We must stay lean,” was Andy’s next message. “Recovery no longer provides a margin for error. And you can’t let being busy be an opportunity for not getting better. We’re getting better or falling behind. Retain multi-taskers and release those who can’t or won’t multi-task. And set up a cost-watch task force on the production floor.”
Translation: Let’s excise the fat from our household budgets, while also seeking an opportunity in our spare time to improve our financial circumstances. Let’s look at landing a second, part-time job, selling some unneeded camping equipment, clipping coupons or taking in a boarder. Let’s find a way to convert some of our relaxation time into productive use, and while we’re at it, set up a reward program for the kids when they identify places to cut costs.
“If we learn, we win,” Andy next exhorted his listeners. “If we don’t, the Recession wins. If you aren’t doing things differently, you’re not in business. You can lose it all quite easily if you aren’t prepared to change your business model. We can do more with less. We have to keep our costs light, even in the good times.”
Translation: There’s nothing like tough times to force agonizing appraisals on any household. This is probably one of those times for re-examining. Can we find a lower-cost place to buy groceries? A more cost-effective phone plan? Can we trade in our car on a more fuel-efficient model? Can we scan the Internet for Deal-of-the-Day offers? We can do more with less. We have to keep our costs light, even in the good times.
“Create a ‘Recovery Manifesto,’” Andy urged in conclusion. “Improve continuously. Challenge your own success. Never use being busy as an excuse for not improving. Be adaptable and flexible, because those who are get stronger.”
Translation: You may be tired of the slow recovery, but that’s no reason not to embrace principles that make businesses successful, in printing or any industry.
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High Deductible Health Plans and Major Medical Bills
25 Jan 2012 at 10:06am
I spent yesterday at the hospital. Don’t worry, it sounds a lot worse than it was… Our oldest son had to have his tonsils and adenoids removed, so my wife and I were camped out in the outpatient surgical center for the better part of the day.
In the end, everything went smoothly, and he’s on the road to recovery. But this isn’t a parenting or medical website. This is a financial website. Thus, I thought I’d talk a bit about the financial side of such things.
As you know, we’ve been participating in my employer’s high deductible health plan for the past couple of years. In other words, we’ll be facing a whopping bill once the dust settles. Actually, it will be multiple whopping bills… The hospital, the doctor, and the anesthesiologist all bill separately. And then there will likely be some lab tests, etc.
The good news is that we’re protected on the upside by our $3,000 deductible. The bad news is that, since it’s January, we’ve paid almost nothing toward it thus far, so we’ll be paying that out-of-pocket. In our case, that really just accelerates the inevitable. With four kids in the house, we usually hit our deductible bill mid-year whether or not we have a major medical procedure.
But still, a $3k medical bill to start the year is something that could really set a lot of people back. Fortunately, we have short term cash in the bank, and we also having a well-funded health savings account (HSA) in case we need it.
Truth be told, we’re planning on continuing to use our HSA as a tax-advantaged investment account, so we’ll be paying for this from other sources. But if we weren’t, we could always fall back on that HSA.
As I’ve noted in the past, the lower premiums of our particular health plan more than make up for the higher deductible. But if we hadn’t been planning ahead, a relatively major medical procedure could’ve created a short-term cash crunch. If you’re considering a high deductible health plan, just be sure that you’re aware of, and prepared for the worst case scenario.
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Should You Buy Travel Insurance?
24 Jan 2012 at 5:00am
If you’ve booked a vacation for your family lately, or sent your kid off on a school-sponsored field trip, you’ve probably considered trip-cancellation insurance. These offers generally promise to reimburse you for the vacation or field trip if you need to cancel. Are these plans worth the cost? It depends on your own personal risk calculation.
What does it cover?
Trip cancellation insurance comes in several flavors. Basic coverage reimburses you if you can’t make your trip because of certain reasons, such as if you get sick, a hurricane rakes the island you were going to visit, or terrorists attack your hotel. The insurance covers non-refundable expenses, so if the tour operator cancels your tour and they refund your fee, for example, the insurance does not pay.
The basic coverage also generally provides benefits if your trip is delayed or interrupted. It also pays for lost or delayed baggage, some medical benefits if you’re injured during your vacation, and emergency evacuation if something horrible happens during your vacay.
You can add to the basics. For example, for an extra fee you can add “cancel-for-any-reason” coverage, which reimburses you for at least part of the non-refundable portion of your trip if you cancel for any reason not covered by the usual terms. Other common upgrades are rental car insurance and accidental death insurance at higher amounts than the basic package offers.
Needless to say, read the terms carefully before you buy so you fully understand what is covered.
What does it cost?
How much does all of this cost? Prices vary, of course. In a comparison of four leading providers, basic coverage for a family of four on a $4,000, week-long, domestic vacation ranged from $82 for a policy from Travel Insured to $275 for a policy form HTH Worldwide.
Those two plans differed mostly in the amount of coverage. For example, the HTH plan included $500,000 in health coverage, while the Travel Insured plan offered $10,000; and the HTH plan offered $1 million emergency medical evacuation coverage, while the Travel Insured plan provided $100,000 coverage for that service.
In addition to the two firms mentioned above, popular trip cancellation insurance firms include American Express, Travelguard, and Access America. Insuremytrip.com is a site that allows users to compare rates from about 20 providers.
Furthermore, many trip providers, such as school field trip organizers, offer their own policies. As do some credit cards — be sure to see if your card provides this coverage before spending money on a separate policy.
But do you need it?
This all sounds good, but you should evaluate this kind of insurance the same way you would evaluate any kind of insurance. Rather than thinking, “Wow, I’d love to get reimbursed for our vacation if my kid gets the flu the night before,” think, “Hmmm, what are the odds my kid is going to get the flu the night before our vacation?”
Use the $4,000 family vacation above as an example. Let’s say you’re considering a plan that costs $200 and will reimburse you for the full $4,000 if someone in the family gets sick and you have to cancel. Forget about the rest of the coverage — emergency medical evacuation, health insurance, death benefits, etc. — for the moment and focus on the real reason you might get this insurance: to refund your purchase price.
If you buy this policy, you are essentially gambling $200 against a potential pay-out of $4,000. What are the odds that you will “win” this gamble? You’ll win if one of you gets sick or a big storm hits the vacation site or whatever. So what are the odds of that? One way to calculate those odds for your family is to look at history: How many vacations have you had to cancel in the past few years? If you have taken ten vacations over the past five years, and cancelled one of them because of a covered reason, you could assume that the odds of you having to cancel your current, $4,000 vacation are one in ten.
So think about it: If your neighborhood bookie put $4,000 on your kitchen table and said you could have it if you drew the right card out of a stack of ten, would you pay him $200 for that one draw? Probably not, unless you’re really into taking risks.
But here’s another way to think about it: If you bought the insurance every time, you would come out even if you were able to collect on the insurance once for every 20 trips. Now it doesn’t sound that risky, especially if you travel a lot.
Obviously, many factors play into your personal risk calculation — maybe you are not traveling with any accident-prone children or maybe you know the tourist destination you are headed to frequently has hurricanes (hmm, maybe you want to rethink this vacation!). The point is, whatever the circumstances, make a rough guess of your odds of using the insurance before you plunk down the money.
Insurance companies do this with highly trained actuaries using sophisticated algorithms and databases full of historical information, but you can make an educated guess without any of that.
That way, whether you get the insurance or not, you will rest easy knowing that you made an informed decision.
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Thoughts on Kids and Gift Cards
23 Jan 2012 at 5:00am
Ahhh, gift cards. The gift we all love to hate. Sure, they’re convenient (for the giver) and they seem (again, to the giver) like they’re more thoughtful than cash, but they’re not all they’re cracked up to be.
Don’t get me wrong, I’m always thankful when I receive a gift, and I do recognize the ease of grabbing a gift card when I need to buy a gift on short order, but I still have mixed feelings when it comes to gift cards.
Over the weekend, our (now) ten year old son had a birthday party, and he made out like a bandit. He got a number of great gifts, as well as some cash and several gift cards. He was thrilled, but those gift cards often cause headaches.
They frequently require an extra trip to a store we rarely visit, and they often require a bit of extra spending to spend them out in a single visit. And don’t forget about the risk of losing them while hauling them around waiting for a chance to spend them.
To combat these problems, we’ve developed a system for helping our kids make the most of any gift cards they receive. For cards from mainstream retailers like Wal-Mart, Target, or Amazon, we usually make them a deal… They give us the card, which we’ll use while going about our daily business, and we give them cash.
In this way, the cards get used in a timely fashion, the risk of loss is reduced, and our kids get flexibility to make use of the gift however they want. Sure, one could argue that we’re subverting the giver’s wishes, but I’m more interested in making sure that the gift gets used.
Of course, this doesn’t really apply to cards from places like GameStop, where we rarely shop on our own. But when it comes to places we shop on a regular basis, this works out quite well.
Oh, and for the record, if we don’t have time to shop for a proper gift when our kids are invited to a birthday party, we’ll often secure a bunch of dollar coins inside the birthday card rather than giving a gift card. This is a much more flexible gift, and it’s unique enough that it makes an impression on the recipient.
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Thoughts on Kodak, Bankruptcy, and Investing
20 Jan 2012 at 5:00am
Over the past couple of weeks, there have been rumors swirling about Eastman Kodak’s financial (in)solvency. And then it happened. They filed for Chapter 11 bankruptcy protection yesterday. Not surprisingly, their stock dropped 35%. But really, that’s just the tip of the iceberg.
Kodak actually traded at an all-time high of just under $93/share in February 1997. And now? It closed last night at $0.36/share. That’s a stunning decline of 99.99% over the past 14 years. Yikes!
As of right now, they owe a total of $6.75B (yes, billion) to more than 100k creditors. At the same time, they have around $5.1B in assets. Thus, even if they liquidated everything, they’d still be in a $1.75B hole. Not good. Not good at all.
And guess what? Back when we first started getting interested in our finances, we almost invested in Kodak. This was back in the mid-90s, and their stock (like many others) had been on a tear. They were also seemingly well-positioned to take advantage of the transition to digital photography. What could go wrong?
Well… They wound up struggling to make the digital transition and their business suffered.
This was before we had discovered the wonders of broad-based index funds — and before we had enough money for the then-steep investment minimums in most mutual funds. Thus, we were busy filtering through blue chip companies in search of dividend reinvestment plans (DRIPs) that would allow us to directly invest our hard-earned dollars.
We were enamored with such household names as 3M (MMM), Campbell’s Soup (CPB), Coca-Cola (K), Intel (INTC), Merck (MRK), Procter and Gamble (PG), and yes, Eastman Kodak (EK). Over the years, some of these have performed reasonably well and others haven’t. But none have imploded like Kodak.
Truth be told, our DRIP investing phase didn’t last very long. We soon discovered the wonders of indexing, and built up enough cash to get over the minimum investment barrier. We ultimately liquidated our individual stock positions and haven’t looked back since.
If nothing else, our near miss with Kodak should be taken as a cautionary tale about diversification. At the time, we were only holding five or six companies — in part due to a lack of capital — so taking a major hit on any one company would have really hurt.
Of course, it’s not like they lost that 99.99% overnight, but still… I certainly sleep better at night knowing that we own literally thousands of companies. Yes, we still have market risk, but there’s little in the way of company-specific risk.
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Make the Most of Your Pay Raise
19 Jan 2012 at 4:58pm
Despite high unemployment and lingering financial turmoil from the recent recession, American workers continue to earn pay raises each year. According to the Bureau of Labor Statistics, the typical worker earned an average pay raise of 1.9% last year, and they are on tap to earn a similar raise in 2012.
These annual pay raises will help wages keep up with inflation. While a 2% to 3% raise may not seem like a lot of money at first glance, it can equal $1,000 or more per year for a family earning $50,000. But the real question remains, what should you do with your new pay raise after you earn it?
If you do not take an active role in putting the money to good use, then you are more inclined to simply find it disappearing into your monthly budget before you can even realize the money is gone. Below are five ways to help you put your new pay raise to good use.
Pay off high interest debt
Using a new pay praise to pay off high interest debt is typically a wise move. Having credit cards that charge you 18% or more in annual interest can quickly start to add up. Paying off credit cards with a high interest rate with a pay raise is like earning the same amount from an investment.
If you were paying 18% each year in interest on a credit card and paid off that card with your new pay raise, it is just like having earned 18% annual rate of return on your money. While the stock market zigzags like a roller coaster, paying off your high interest debt can be as sure a return as possible.
Build up your emergency fund
One thing that I personally struggle with is having a fully funded emergency fund in place. Most financial experts recommend that you have three to six months of living expenses set aside in an emergency fund. What many people do not often realize is that six months of expenses is actually quite a large amount of money in many cases. It can quickly equal $10k-$20k for some families. Living on your previous income and saving your new pay raise is a great way to help boost your emergency fund if have not quite reached your goal of six months of living expenses.
Boost your retirement savings
Using your pay raise to build up your retirement savings can be a great plan. You have until April 15th of each year to finish contributing to an IRA. If you receive a year-end bonus or a pay raise at the beginning of the year, you can put that money to good use by finishing up maximizing your retirement account contributions.
A pay raise is also a great way to build up to maximizing your 401(k) retirement plan contributions. In 2012, you can contribute up to $17,000 to your 401(k). That is a lot of money, especially if you are just starting out in your career. But, you can incrementally increase your 401(k) contributions each year until you reach your maximum contribution level. If your small increase is timed with your new pay raise you won’t even notice the difference.
Double check your insurance coverages
Do you have enough insurance coverage? Far too many people find themselves underinsured in many aspects of their lives. Do you have umbrella insurance to protect yourself from being sued? Do you have flood insurance on your house? According to FEMA, over 30% of all home damage from flooding occurred on homes that are not in a federally designated flood zone. Purchasing flood insurance if you live outside of a flood plain is very inexpensive. Spending money now on the proper insurance coverages can help you save on insurance in the long run.
Splurge on yourself a little
I am not talking about spending your entire pay raise by purchasing things for yourself. But, you did earn the money, and you should enjoy it. Many financial experts recommend taking a small portion, such as 10%, of your raise or any year-end bonus you earn and spending it on something for yourself. Doing so will help you stick to your other plans for the rest of the money. This is similar to having a cheat day on a diet. If you are too strict with yourself and how you spend your money, you will be more inclined to fall off the wagon and be resentful to your new financial goals.
Are you one of the lucky ones that will receive a pay raise this year? What will you do with your new pay raise? Will you just absorb it into your monthly budget, or will you use it to increase your financial wellbeing? Living on your previous year’s income and using your new pay raise to accomplish your financial goals is a great use of the new money. What do you like to do with a pay raise?
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401(k), 403(b), and 457(b) Contribution Limits for 2012
18 Jan 2012 at 12:00pm
Do you have a workplace retirement plan such as a 401(k), 403(b), or 457(b)? If so, then you might be interested in knowing that the contribution limits for these account types has increased for 2012.
This means that individuals under age 50 can contribute up to $17,000 to their 401(k) account this year, up from last year’s limit of $16,500. And if you’re over age 50, you can contribute an extra $5,500 toward your retirement this year.
Beyond the above, the aggregate limit (employer + employee contributions), which is specified by Section 415(c)(1)(a) of the Internal Revenue Code, has increased to $50k/year. This is the so-called 415(c) limit and, while it doesn’t affect many of you, it does have an impact on some people (especially if you’re self-employed and have a high incomes).
Note that 403(b) and 457(b) plans, as well as the Thrift Savings plan, are subject to the same contribution limits, so those of you in the non-profit, educational, and public sectors will likewise be able to save a bit more this year.
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Contribute to Your Roth IRA, Even if it Stretches Your Budget
18 Jan 2012 at 7:41am
Your 2011 taxes are due in just under three months. That also means that you have just under three months left to make any 2011 IRA contributions that you might have been putting off.
But what if you’re neglected to contribute to an IRA because you’re not sure you can afford it? Maybe the only cash you have on hand is earmarked for emergencies, and you’re not willing to risk the 10% early withdrawal penalty that comes with a traditional IRA.
Well, I’d like to encourage you to think twice about that stance and consider making a Roth IRA contribution. As I noted the other day, Roth IRA contributions can be withdrawn at any time and for any reason without penalty. And if you don’t believe little old me about this, you can check it out for yourself in IRS Publication 590.
While I’m not crazy about this flexibility to the extent that it encourages (or at least allows) people to raid their retirement to buy shiny things, one huge benefit is that it gives you the flexibility to make a contribution even if you’re not sure you can afford it.
This flexibility is very valuable because you’re only allowed to contribute a limited amount to IRAs each year. In other words, if you fall behind on contributions now, you won’t be able to make up for it later when you can (hopefully) better afford it.
If you make the contribution now and fate smiles upon you, you’ll be able to re-build your emergency savings “on the outside” while having more money stashed away inside your Roth IRA. And if things go awry, you’re free to yank that money out (up to the amount that you’ve contributed) and use it to take care of whatever emergency you’re dealing with.
Some issues to be aware of:
This rule applies to Roth IRAs only, so don’t try this trick with a traditional IRA.
The usual contribution limits still apply, so don’t try to sock more money away than is allowed.
Roth IRA conversions are subject to a five year waiting period before they can be withdrawn without facing a penalty.
Make sure a Roth is right for you. If you expect to pay the same or higher taxes in the future, then a Roth might make sense for your situation. But if you expect your tax burden to fall in the future, a traditional IRA might be better — but remember, only Roth IRAs qualify for the penalty-free withdrawal of contributions.
Given that this is money that you may need to withdraw at any time, be sure not to put it at risk once inside the Roth. Instead, plug it into a money market fund or something similar until you’ve re-built your emergency savings.
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Far-Out Investment Strategies
17 Jan 2012 at 1:10pm
There’s no time like the recently-passed 10-year anniversary of the Enron wipeout to revisit some solid pieces of investment wisdom. And one of those nuggets is of such all-encompassing sagacity that it can be easily summarized in a single word.
Diversify.
If you’ll remember the Enron affair, so insightfully captured in “The Smartest Guys in the Room,” as the fraudulent energy giant teetered on disaster’s brink mere days before crashing and exploding in a spectacular fireball, CEO Ken Lay and his minions exhorted employees who had placed their life savings in Enron stock to avoid selling their shares.
I’m sure you know the rest of story… When Enron immolated, those workers had nothing left to show for years and years of faithful toil and investment. As we marked the decade anniversary, some former Enron workers who once enjoyed nice nest-eggs still struggled from the catastrophe that befell them in 2001.
I don’t claim to be an investment guru. But I have spent a lot of time chatting with financial oracles and savants, and have no reluctance passing along their guidance to investment novices. What I hear from the experts is that too many people invest too close to home for their own good. While they ought to be casting a wide net, their investments are about as far-flung as the confines of a toddler’s playpen.
In other words, diversification isn’t just about investing in diverse asset classes. It’s also about investing in a geographically diverse assortment of equities.
Doubly dangerous
The tendency of many to invest close to home begins with backing their own employers with their hard-earned dollars. They figure it’s a vote of confidence in their own futures to buy shares in the firms employing them. Nothing is further from the truth, as the “little people” at Enron discovered.
When their company died, not only were their jobs wiped out, but most or all of their portfolios were as well. Had they invested no more than four percent in any one stock, a figure often suggested, at least 96 percent of their stock investments would have been saved from the conflagration.
If it’s wise to ensure your portfolio is well diversified outside your own firm, it’s almost as brilliant to avoid investing heavily in companies in your home city, state, or region. Years ago, I spoke on that topic with Larry Swedroe, the St. Louis-based author of “Investment Mistakes Even Smart Investors Make and How to Avoid Them.”
“People make the mistake of confusing the familiar with the safe,” he told me. “Take a guess what people in Georgia own a disproportionate percentage of stock in. Coca-Cola. Guess what people in Rochester, N.Y. have traditionally owned more of. Not only is stock in Coca-Cola not a safer investment for people in Georgia, it may be a riskier investment. Because if something major happens to the company, what will happen to home values and job opportunities in Georgia?”
Imagine a regional economic shock impacts your neck of the woods. Your home turf is locked in a slump, affecting your job security and likely your home’s value. But it’s not just those items impacted, it’s also your portfolio, because you invested disproportionately in area firms. You need ready cash, but to get it, you may have to sell stocks in regional companies at the worst time, when their prices is low.
Adopting a world view
Taking this approach to the next logical level, does it also make sense to avoid having all your stock holdings in U.S. companies? You bet it does, and for many of the same reasons. Virtually any Yank is going to be tempted to feel the all-American firms he or she grew up with will be the ones that pose the least risk. But that’s just again confusing the familiar with the safe. “People in the United States think U.S. stocks are the safest,” Swedroe remarked to me. “And guess what people in France think?”
Gaining international diversification is like buying insurance that covers potential problems here in the United States, he noted. “Some years you collect, and some years you don’t,” he said.
“But you don’t complain in years you don’t collect on your insurance, because you didn’t die or your house didn’t burn down. Owning international stocks is like that. In years when they do poorly, that’s the price of insurance.
“But you get a smoother ride over the whole period.”
If you’re invested only in American companies, you’re ignoring a world of opportunity. More than half of all investment opportunities lie outside the borders of this country. And many of those in emerging economies have more upside than opportunities here. Some experts suggest even firms in other developed countries have more room to run than U.S. companies. That means you may be getting in on long-term growth potential by investing internationally.
All about correlation
What it all boils down to is you want low correlation in the stocks you own. When stocks are not correlated, they’re diverse. Stock holdings in many countries around the world? Lower correlation. Stock holdings only in the U.S.? Higher correlation. Stock holdings just in your city or region? Still higher correlation. And stock held only in the company in which you’re employed? If it could accurately be called correlation at all, that would be correlation on steroids.
If someone at the publicly-traded company that employs you suggests you place most of your investing bets on your own employer, keep this in mind. They’re likely not the smartest guys in the room. But they may be the most sinister.
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Roth IRA Withdrawal Rules: How to Get Your Money Out Early
16 Jan 2012 at 9:48am
As a followup to Friday’s post on contributing to a traditional IRA and converting to a Roth IRA (i.e., funding a “back door” Roth) I wanted to spend a little time talking about Roth IRA withdrawal rules.
This post was actually inspired by a comment from a reader named John who is interested in using IRA funds to buy his family’s farm in about five years:
If I convert traditional, previously-deducted IRA funds to Roth IRA funds and then pay taxes on it, can I then withdraw the taxed contributions at a later time in order to purchase the investment property? I would not be withdrawing earnings, only the initial contribution.
The short answer is yes – with some restrictions.
Unlike the situation I talked about in my previous post, where you’re making a non-deductible contribution and then converting it, John is correct that he’ll have to pay taxes when he converts his deductible contributions (and any subsequent earnings). The reason for this is simple: you’ve never paid taxes on this money, so you have to do so before you can stick it in Roth IRA (since you pay taxes up front with a Roth).
The real question is whether or not John can pull this money out without consequences at some point in the future — but presumably before he reaches retirement age. Of course, if he waits until age 59.5, then all bets are off. He’s free to withdraw whatever he wants, whenever he wants.
But before that time… Can he make a penalty-free withdrawal to buy the family farm?
For starters, we need to talk about the order of distribution. As with others types of IRAs, the IRS views all of your Roth IRAs (assuming that you have more than one) as a single pot of money. And when you withdraw, you are assumed to first be accessing your original contributions. After that money is depleted, you are assumed to be accessing dollars that you converted. And after that, you are assumed to be accessing earnings.
For original contributions: This would be money that he contributed straight into his Roth IRA, subject to annual contribution limits. As it turns out, you can withdraw your Roth IRA contributions at any time without paying any taxes (you’ve already paid taxes on this money) or penalties.
For conversions: Conversions (money converted from a traditional IRA into a Roth IRA are treated similar to contributions, with an important difference. If you withdraw money that you converted into your Roth less than five years after the conversion, you have to pay a 10% penalty. This stops people from simply converting their traditional IRAs into a Roth to gain immediate access to the money. But once the five year rule has been met, you can withdraw your conversions at any time without paying any taxes (you’ve already paid taxes on this money) or penalties.
For any subsequent earnings: Finally, what about any investment earnings/gains that have occurred inside of you Roth? Let’s say you contributed a total of $10k over the years, and it’s now worth $12k. The last $2k that you withdraw would be the earnings. For starters, any earnings that are withdrawn less than five years after you opened your Roth IRA are subject to income taxes. Moreover, if you are under 59.5, the withdrawal will be taxable unless you meet certain exceptions, and you it will also be subject to a 10% penalty. Once you reach age 59.5 and your account has satisfied the five-year rule, you can withdraw your earnings free and clear.
So what about these exceptions that I mentioned above? There are several things that will make a distribution “qualified,” and thus not subject to taxes or penalties. One is reaching age 59.5 (and having satisfied the five year rule in the case of earnings). The others include: distributions made to a beneficiary after your death, disability, or using the funds to pay certain costs associated with being a first-time homebuyer.
So…. The short answer is that yes, John can convert from a traditional IRA to a Roth IRA, pay any taxes that are due (just be careful about getting bumped into a higher tax bracket!) and then withdraw the conversions in five (or more) years without paying any additional taxes or penalties.
Note that I’m not saying that this is necessarily a good idea — that depends on the details of John’s circumstances, and that’s a decision that he’ll have to make for himself after considering a number of factors. Rather, I’ve just focused on what’s possible, and when the penalties will (or won’t) kick in.
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Contribute and Convert: Funding Our Roth IRAs Through the Backdoor
13 Jan 2012 at 10:00am
As a followup to my post earlier this week on Roth IRA income limits, I wanted to highlight how we typically make our Roth IRA contributions. For background, we’re in a relatively high (and variable) income tax bracket. Because of this, we flirt with the Roth income limits on an annual basis, and it’s hard to know for certain whether we’ll be above or below the line until late in the year.
While we could wait until the end of the year, or even early the following year, to determine whether or not we can contribute, I’d rather get it knocked out right away. Thus, we make what others have termed “backdoor” Roth IRA contributions.
For background, the income limits for converting from a traditional IRA to a Roth IRA went away back in 2010. Beyond this, there are no income limits for contributing to a traditional IRA. Yes, there are income limits for determining whether or not you can deduct your traditional IRA contributions, but you’re free to contribute no matter how much you make.
The workaround, then, is to contribute to a traditional IRA (this will be non-deductible if you make enough to be ineligible for a Roth) and then convert it to to a Roth IRA. And that’s exactly what we do every January. For those of you that invest with Vanguard, I’ve outlined the steps below to show you exactly how it’s done…
For starters, you’ll need to make your traditional IRA contribution. There are a variety of ways to do this, with the easiest be funding your IRA from a linked bank account. For now, I’ll assume that you’ve already done this.
Once your traditional IRA fund are in place, simply log in and select “Exchange (Sell funds to buy funds)” option from the “Transact on this account” pulldown menu.
When asked what you want to sell, choose the traditional IRA holding(s) that you wish to convert out of. When asked what you want to buy, choose the Roth IRA holding(s) that you wish to convert into.
Once you click to review, you’ll be warned that “A conversion is a taxable event. Generally, you’ll owe taxes on the amount you convert from your traditional, SEP, or rollover IRA into a Roth IRA.”
Assuming that you made a non-deductible contribution, that you don’t have any untaxed gains in the account you’re converting, and that you don’t have any other non-Roth IRA IRA accounts in your name, however, there will be no tax liability*. It will be as if you had contributed directly to the Roth IRA in the first place, except you’ll have circumvented the income limits.
Given the above, I selected the “Do Not Withhold” option when asked about tax withholding and then submitted the order.
That’s it. We’ve now fully funded our Roth IRAs for 2012 and don’t have to think about whether or not we’ll finish above/below the income limits.
*Note: If you have previously made tax-deductible contributions to a non-Roth IRA, even if they’re in a different account, making a conversion like this will generate a tax liability. The reason for this is that the IRS views all of your IRAs as one big pot of money, and they don’t let you pick and choose which dollars you convert.
The good news is that money in “qualified” plans, such as 401(k) or 403(b) plans, is not included in the tax calculation, so you could conceivably move all of your pre-tax money into a Solo 401(k) to effectively hide it before doing the “contribute and convert” thing.
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The High Cost of Convenience
12 Jan 2012 at 12:00pm
The other night while on my way home from work, I was reminded of the high cost of convenience. We were in the mood for margaritas, so I stopped by the liquor store to pick up some tequila and mix. As it turns out, they were out of the mix I was after, but I made a mental note of the price.
I then stopped off at the grocery store (a bit out of my way, but not too far) to grab the mix there. When I arrived in the right aisle, I was quite surprised at the price difference… What had been $7.99 at the liquor store was $4.09 at the grocery store. This was for identical items — same brand and same size.
I always assumed that you’d pay a premium to buy the “extras” at the liquor store, but I’d never paid attention to how big the difference was. That extra $3.90 for a bottle of margarita mix equates to a 95% markup at the liquor store vs. the grocery store. Sure, there are instances when it might be worth the added cost, but with a bit of planning you can avoid these extra expenditures most of the time.
Of course, the same can be said of a huge number of items. For example, a gallon of milk costs at least 30% more at our nearest convenience store/gas station as compared to the grocery store. In other words, it (literally) pays to be organized and informed, and to plan ahead.
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Eight Ways to Save Money When Eating at a Restaurant
12 Jan 2012 at 10:02am
Eating out is fun, relaxing, tasty…and darn expensive! The current tough economic times have forced a lot of people to trim their dining budgets, but it’s a hard thing to give up altogether. So in the spirit of indulgence — but within a budget — here are eight tips for saving money at the restaurant:
Split a meal
Most restaurants offer portions that are larger than a person would normally eat at home, so save the price of one whole meal by splitting an entree with your partner. Same goes for the kids — if you know neither little Sammy nor little Janey will eat a whole chicken fingers dinner, why buy two? Some restaurants charge a fee to split the meal, but it’s way less than another whole entree would cost.
Don’t split the bill
If you go out with a group, ask for your own bill. That way you won’t have to subsidize your buddy Buster’s six Dutch imports while you sip a Diet Coke. Everyone has a story about spending way more than planned because someone in the group overindulged (or worse yet, forgot her money). Even if everyone else in the group is sharing a bill, beg off by saying you need to leave early or something. You’ll be glad you did when you see the rest of the group struggle over that giant bill.
Drink wisely
Drinks can add up to a serious part of your dinner tab if you’re not careful. Four options: 1) certain restaurants, especially those without liquor licenses, allow patrons to BYOB. They may charge a “corkage” fee to open and serve the liquor you bring in, but you’ll still save a ton of money; 2) drink specials are often worth it — a bucket of Bud Light for $15 is a much better deal than buying six separate imports; 3) bottomless drinks? Yes please!; and 4) water is almost always free, and everyone knows how healthy it is, so drink up.
Stick with the specials
Restaurants promote specials, such as buy-one-get-one-free deals, to get you in the door. They hope you’ll buy drinks, appetizers, dessert, etc. to make your visit profitable. But they won’t complain if you just take the special without the extras (and guess what, they’re still making more money than if you didn’t show up at all). So take advantage of those deals. Same goes with Groupon and those other seemingly amazing “daily deals.” You’re saving money, the restaurant’s making a little money, and everyone is happy in the end.
Become a regular
Regulars are treated better, get the best tables, and generally have way more fun than the customer who shows up once a decade. But how do regulars save money? A couple of ways. First, no one cares if a regular comes and nurses one beer for two hours. So if you just want the restaurant experience without spending much money, go to your regular joint. Second, regulars get clued in on the best deals, get offered the most lucrative loyalty cards, and sometimes get free stuff. They get all this because the owner values loyalty, and if he gives you a free dessert tonight you’ll tell your friends how great it is tomorrow. So soak up the pleasures of being a regular, including a slightly fatter wallet.
Use the doggie bag
Don’t be embarrassed to take your leftovers home. You paid for them, right? If it was great for dinner tonight, it will be nice for lunch tomorrow.
Go for lunch instead of dinner
If your schedule allows, enjoy the restaurant experience at lunch rather than dinner. The prices are almost always lower…sometimes even on the same dishes! Plus many restaurants have quick lunch specials that beat any dinner special, because they know most workers on lunch break are on a tight budget and tight schedule.
Don’t stiff your server
No matter what you do, don’t think the tip is a place to save money. Servers work hard for you, so if the service is decent, give them the full 20 percent. Trying to save a buck by paying a measly tip will only bring you bad mojo. If you just can’t stomach paying the tip, go to a restaurant that doesn’t have table service. You’re not limited to fast food — every town has a decent cafeteria-style or counter-service restaurant.
Dining out is a major social event, and even the thriftiest tightwad wants to enjoy a restaurant now and then. If Scrooge follows these tips, he can have his fun and still have a fat wallet.
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Roth IRA Income Limits for 2012
11 Jan 2012 at 10:06am
I recently wrote about Roth IRA contribution limits for 2012, which are unchanged from 2011. Today I want to talk about the current income limits for contributing to a Roth IRA. Here goes:
Married Filing Jointly: Contributions phase out from $173k-$183k
Single or Head of Household: Contributions phase out from $110k-$125k
Married Filing Separately, Living Apart: Contributions phase from $110k-$125k
Married Filing Separately, Other: Contributions phase out from $0-$10k
(Note that these numbers all refer to modified adjusted gross income, or MAGI)
The good news is that even if you exceed the income limits, there is a workaround for funding your Roth IRA. Indeed, as of 2010, the income limits for converting from a traditional IRA to a Roth went away, so if you earn too much, you can make a non-deductible traditional IRA contribution and then convert it to your Roth.
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Restaurant Tricks That Make You Spend More
10 Jan 2012 at 11:40am
Casinos, grocery stores, and shopping malls are no longer the consumer outlets that are trying to use psychology to make consumers stay longer and buy more merchandise. Now restaurants have gotten in on the action, going to great lengths in order to use consumer psychology, menu engineering, and behavioral tricks to help separate us from more of our hard earned money.
Whether it’s the setting at the restaurant or the layout of the menu, restaurants have been hard at work trying to understand what makes people spend more money on each visit. Understanding how consumer psychology plays a part in our shopping decisions can help you save money while eating at a restaurant.
Menu design and spending
No dollar signs on menus. There are very few dollar signs on menus in a restaurant. This is especially true for national chain restaurants. Using casino chips instead of real dollars makes you less cognizant of how much time you are actually spending at the casino. The same is true for the lack of dollar signs on the menu next to the items’ prices. Dollar signs can make you aware of how much these items are truly costing you. Leaving the dollar signs and often times even the decimal and cents off the restaurant menus help keep the prices more abstract and seem less threatening.
Descriptive names. The names of products on the menu also matter to consumers. Have you ever noticed patriotic or funny names for food on the menu? According to a Cornell University study, people are 27% more likely to purchase an item from a restaurant’s menu that has a descriptive or creative name than one with a more normal name. The study also found that restaurants typically charge a premium of 10% or more for these items.
Prices are staggered. Have you ever noticed that the price of items on a restaurant’s menu is often staggered as you look down the page? This menu trick is done on purpose by the folks who practice menu engineering. Restaurant owners don’t want to you to be able to simply look straight down the page and easily compare prices from one item to the next. Staggering the items breaks up the flow of your eyes as you look down the page.
Boxing money makers. The location on a restaurant’s menu for specific items can be a big influence on how often patrons will purchase an item. Restaurants tend to put their most profitable item in the upper right hand corner of the menu where our eyes have a natural tendency to be drawn to first. A box on the menu screams for our attention, as well. You will often see high profit margin items being called out in a box on the menu as well.
Restaurant setting and spending
Background music. The level of music that a store plays over its loudspeakers and how that affects customers’ shopping habits has been studied for decades. Reserch has shown that when slower music is played in grocery stores and restaurants, customers spend more time and money there. One study from Loyola University estimated that restaurants and stores which play slow music see a 38% increase in sales over stores that choose to play loud or fast paced music. Restaurants tend to see longer wait times at tables and higher bills when slower music is played.
Size of your drinking glass. According to studies conducted by the Food and Brand Lab at Cornell University, people consume a larger amount of a drink when they are given a short, wide glass instead of a tall, narrow glass. We have a vertical bias over horizontal objects which explain our tendency to focus on an object’s height. So, the illusion in a restaurant is that you receive more of a beverage when it is served in a tall glass. Bartenders have also been found to pour more than the set limit of drinks in a short, wide glass.
Size of your plate. When restaurants offer two sizes of the same item, they often want you to purchase the smaller one contrary to typical thoughts. For example, many restaurants may hope that you purchase two small salads that costs $9 each instead of buying a large salad that costs $12 and splitting it between two people. The cost of extra ingredients for the larger salad is negligible, and the extra money spent on the wrong size item is pure profit for the restaurant though.
Take home lessons
So, what does this mean for you, the average consumer, who is trying to save his or her hard earned money? Like G.I. Joe used to during the Saturday morning cartoons, “Knowing is half the battle.” Now you know a few things to look for when you enter a restaurant. Simply walking into a restaurant and ordering without giving much thought is a recipe that could cost you a lot of money in the long run.
Now it’s up to you to use that knowledge and not to be fooled by simple psychological tricks that are designed to separate you from your money. By understanding a little of the consumer psychology used against you, you can be a much better shopper who enjoys a night out while still saving money.
Do you think that simple things such as leaving the dollar sign off a menu or staggering the prices make you spend more at a restaurant? What other psychological and behavioral tricks have you seen retailers use against consumers?
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Discover More Balance Transfer: No Fees, 0% APR for 12 Months
9 Jan 2012 at 1:54pm
Was one of your New Year’s resolutions to pay down your credit card debt? If so, then you might be interested Discover More’s newest 0% balance transfer offer. This card offers 0% APR on both purchases and balance transfers with no transfer fee and is thus far one of the best balance transfer credit cards of 2012.
The 0% APR promo rate applies for 12 months following the date of your transfer, and the transfer(s) has/have to be made by July 10, 2012 to qualify for the no-fee treatment. After that, there will be a 5% fee with a $10 minimum, but that’s six months away so you should have plenty of time to make the transfer. Also note that there is no annual fee.
This card pays up to 5% cash back for purchases in rotating categories, though (if I had high interest credit card debt) I would personally use it for the balance transfer and nothing else.
Here are the details:
- Limited Time Offer – $0 Balance Transfer Fee!*
- 0% intro APR on purchases and balance transfers for 12 months, then the variable standard purchase APR of 10.99% – 19.99%*
- 5% Cashback Bonus® in categories that change like gas, restaurants, department stores and more. Limitations apply*
- Up to 20% Cashback Bonus at popular retailers when you shop online through Discover.com
- Discover is ranked #1 in customer loyalty–15 years in a row! (2011 Brand Keys Customer Loyalty Engagement Index report)
- 24/7 access to a U.S.-based Account Manager within 60 seconds
- Great rewards with no annual fee, no rewards redemption fee, and no additional card fee
- *Click apply to view rates, fees, rewards, limitations and other important information
If you’re interested, then by all means…
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When are 2011 Taxes Due? Hint: It?s Not April 15, 2012
9 Jan 2012 at 10:19am
Believe it or not, it’s already time to start thinking about filing your 2011 income tax return. In the coming weeks, you should be receiving your W-2 form(s), a variety of 1099 forms, etc. And if you pay estimated taxes, your 4th quarter payment is due next week (on January 17th).
So… With that in mind, I thought I’d post a quick reminder as to when your 2011 federal income tax return is due. As you’re likely aware, the filing deadline is April 15th of each year. But when the deadline falls on a weekend, it’s pushed to the following Monday. And when the deadline falls on a federal holiday, it’s pushed to the next business.
This year, like last year, is a bit different. This time around, April 15th falls on a Sunday, and Monday is not a federal holiday. And yet, your taxes are due on Tuesday, April 17th. Why?
The funny date is due to a April 16th being Emancipation Day, which is a holiday in Washington, D.C. Emancipation Day marks the anniversary of the signing of the Compensated Emancipation Act by President Lincoln in 1862, which freed the slaves in the District of Columbia.
Emancipation Day has been an official public holiday in D.C. since 2005, and it’s been responsible for shifting the 2006 and 2010 tax filing deadlines (in 2007 and 2011, respectively).
Oh, and don’t forget that you technically get one more day than you might otherwise think this year — 2012 is a Leap Year, which means that February has an extra day. In other words, you have no excuse for missing the deadline this time around. 
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Citi Bonus Cash Back Reward Categories for Winter 2012 ? Plus a $100 Bonus
6 Jan 2012 at 11:11am
As a followup to my recent post about Chase Freedom bonus categories for 2012 (and their $200 signup bonus), here’s some info on the bonus categories for the Citi Dividend Platinum Select Visa credit card…
As you’re likely aware, many credit card companies have switched to a model where they offer a base level of rewards (typically 1%) plus bonus rewards (usually 5%) in certain categories. Citi is amongst those who now use this model and, unfortunately, you have to re-enroll each quarter.
The categories just switched on January 1, so it’s time to re-enroll. Here’s the deal:
Earn 5% Cash Back when you use your Citi Dividend Card in the following categories from January 1, 2012 through March 31, 2012*, after you accept this offer:
? Health Care
? Fitness Clubs
? Utilities
Within 2 business days of when you accept this offer, or January 1, 2012, whichever is later, you will earn an additional 4% cash back on eligible health care, fitness club and utilities purchases from January 1, 2012 and March 31, 2012.
The healthcare category includes physicians, dentists, medical facilities, etc. Thus, if you have a high deductible health plan like we do, this could come in quite handy during the early part of the year before you’ve satisfied your deductible.
To enroll, simply login to your account and look for the 5% banner along the left edge of the screen. Click it, agree to the terms, and you’re done.
Don’t forget the $100 bonus…
If you don’t already have the Citi Dividend Platinum Select Visa card, you can get a $100 cash bonus by applying for one, getting approved, and spending $500 within the first three months, and there’s no annual fee.
As with the Chase Freedom card, we’ve had this card for years and have never had any problems getting Citi to hold up their end of the bargain. You just login, request the check, and it shows up in your mailbox within a week or so.
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Five Fiscal New Years Resolutions for Families
6 Jan 2012 at 10:32am
New Years resolutions usually involve losing weight, quitting smoking, etc. Instead, this year use your resolutions to help put your financial house in order. Doing that won’t help you fit into that pair of skinny jeans or improve your breath, but it will fatten up your wallet and improve your financial outlook. Here are five potential resolutions you can make for your family:
Go Without One Thing
Have each person in your family resolve to give up one indulgence in the coming year. These don’t have to be big things, but they need to be things that cost money. Examples might include chewing gum, an expensive brand of hair conditioner, the second daily cup of Starbucks coffee, driving to a destination that is easily walked to, playing the lottery, etc.
The sky is the limit here. The idea behind giving up one thing is that psychologically it is more effective when you can focus on your sole sacrifice rather than generally resolving to spend less money. And it’s easier to keep track — if you pack a lunch for work rather than going to McDonald’s one day each week and it saves you $3 to do that, it’s easy to calculate that you’re saving $150 a year.
Shop Slowly
Shopping slowly involves several concepts. First, it means that you plan your shopping trips, which helps prevent expensive impulse purchases. Second, shopping slowly means that you comparison shop, clip coupons, and otherwise get the best deal possible. Finally, shopping slowly means you resist using credit for purchases that can wait. Sure, you want to buy all new accessories for your bathroom this minute, but if you wait a month, you may be able to pay cash.
Inventory Your Financial Life
Resolve to sit down once or twice in the new year to seriously consider your financial life. Start your financial inventory by writing down all your sources of revenue and all of your major expenses. Then examine each one in turn. Here are some questions you might ask:
- Are you getting the best price on the various types of insurance you carry?
- Is your phone/internet/cable plan exactly what you need and can afford?
- Do you really need three cars?
- Are there some tasks you are paying others for, such as lawn care, that you could do yourself?
- Is it time to ask for a raise or promotion, or to seek a new job?
- Is your 401K allocated properly?
Find savings or new money in just a couple of these and you could end the new year with a healthier bank account.
Teach the Kids About Money
This year, focus some of your parental effort into teaching your kids about money. If your children are young, you might give them their first allowance and show them the importance of saving 20% each week. If they’re preteens, help them become entrepreneurs by suggesting jobs they could do in the neighborhood or items they could create and sell. If they’re teens, get them involved in your family finances by explaining how you budget, make major purchase decisions, save for college and retirement, etc. These three suggestions are only the tip of the iceberg — there are tons of other ways to teach kids about money.
Set Some Specific Financial Goals
Being vague about financial improvement is lazy and ineffective, so instead set some clear goals. For example, consider ending each month with $250 more in savings than you had the previous month. You can accomplish this by either saving that much, earning that much more, or some combination. Exclude things you can’t control, such as the stock market (that is, if your stock portfolio drops by $100 in a month, you’re not really $100 further behind).
Some other possible goals: Find one specific area in your budget each quarter that you can trim by at least 10 percent; set aside exactly 10 percent of each paycheck for savings; end the year with zero balances on your credit cards. The key is to be specific, because specificity breeds discipline.
So when the New Year’s noise makers are put away and the streamers are cleaned up, take an hour to consider these potential resolutions. Even if you choose just one or two, the new year will end more financially stable than this year did.
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2012?s Twelve for Twits
5 Jan 2012 at 8:34am
Back in 2011, I wrote that many Americans appear to follow a “Goof’s Guide to Money Management” in most of their monetary transactions. In the column, I posited this loony approach to dealing with earning, spending, saving and investing that nearly guaranteed a lifetime saddled with back-breaking debt.
There may be something uniquely American about the indifference many display to their own financial illiteracy. Indeed, legions across the nation seem to take a kind of perverse pride in their standings as dollars-and-cents doofuses. So for those Goof’s Guide adherents who would like to lift their fiscal fumbling to new heights, elevating themselves to masters of money management mopery, I propose for the new year the following “12 for ‘12″ money resolutions.
Avoid the saving habit. Most people who pile up substantial savings do so through the habitual tendency to “pay themselves first,” routinely banking a portion of their earnings. Like any other habit, this one can be avoided! Any time you feel the tendency to save coming on, fight it by lying down, closing your eyes and repeating the hypnotic mantra, “Don’t wait! Buy now!”
Make blowing cash a daily routine. Opportunities exist each day to let money ignite a hole in your pocket. Don’t pass them up! Shop convenience stores for groceries, pop for $6 cups of frothy liquefied caffeine at coffee houses each morning, and lay rubber as you rocket away from every stoplight.
Sidestep personal responsibility. Folks who accumulate nifty nest eggs invariably take personal responsibility for their own financial futures. This doesn’t have to be you. Assign full responsibility to the government or your employer. Your later years can be made more enjoyable by constantly repeating your belief you were gypped out of a secure retirement by forces beyond your control.
Equate possessions with happiness. Embrace lock, stock, and barrel the idea that the purchase of vehicles, homes, clothing and toys will ensure a happier life. On TV commercials, you’ve seen luxury SUVs crowned by giant holiday bows heal marital strife, calm surly teenagers, and put grins on the faces of family members from Granny to Fluffy. Why shouldn’t the same work for you?
Remember, it’s not who you are, it’s what you buy. Resolve to base your sense of self not on what you do, who you are, or how much you give back to your community, but on your showy acquisitions.
Be the first to acquire every new electronic device, from smart phones to wall-sized TVs. And for goodness sake, don’t bypass the opportunity to charter a stretch limousine to ferry you and your friends to the priciest concert events in town.
Steer clear of stocks. Should you come into some money, do not invest it in the stock market! Ignore the fact a broadly diversified portfolio of equities held over long periods of time offers some of the best assurances of solid gains.
Should a trading day end with indexes lower, proudly proclaim, “I’m sure glad I never took the risk of getting into the stock market!” Then pooh-pooh the idea that by socking your money away in a “safe” instrument paying a fraction of one percent, you’ve traded market risk for greater purchasing power risk.
Develop a booze or drug problem. Have you seen the pricetags affixed to bottles of liquor these days at your local stores? Routinely having to replenish your liquor cabinet can be one of the best ways to erode earnings, while helping ensure you face additional health care costs down the road. Ditto for drugs.
Make the prescription slip your permission slip. Speaking of drugs, there’s nothing like prescription pharmaceuticals to flatten your wallet. Assume you’ll have no option over time but to take on a substantial regimen of meds, each generating side effects requiring still more pills.
Every prescription shall be your permission to avoid exercising, eating well, or caring for your health. For confirmation, look to the pro-pill messages dispensed by major media. The fact those very media outlets reap giant revenues from pharmaceutical advertising? Sheer coincidence!
Make a casino your home away from home. No money management miscue promises greater excitement than dumping most of your paycheck at the roulette wheel or a slot machine. So proceed frequently, if not daily, to one of those glittering palaces chockablock with flashing lights and annoying sounds.
Don’t give a thought to the term “one-armed bandits.”
Play the lottery every day. You say you don’t live close enough to a casino to venture there every day? Don’t despair; you still have options. You can plow a huge chunk of your earnings into your state lottery. Over time, the winnings add up. Why, after decades of lottery playing, you should be able to boast of several $50 payouts to offset the tens of thousands you’ve pissed away.
Live for retirement. Don’t give a thought to finding a vocation you like well enough to work beyond retirement age, or even well beyond. Instead, spend your days in a dreary job, dreaming of that golden day you can retire. After retirement, you’ll be able to spend a lot more time watching TV, and also fretting about the precipitous decline in purchasing power of your meager bankroll.
Ignore this posting. Fearing they might hit close too home, never, ever read opinion columns lampooning Americans’ daffy dalliance with dollars.
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Savings Bond Purchase Limit Increased to $10k in 2012
4 Jan 2012 at 10:44am
If you’re a fan of savings bonds, then I have some good news for you… The Treasury has increased the TreasuryDirect purchase limit from $5k per bond type (I or EE) per year to $10k. This change offsets the loss of over-the-counter sales of paper savings bonds, effective January 1, 2012.
From the press release that I just received:
The annual purchase limit for online United States Savings Bonds is $10,000 per series, effective January 4, 2012, the Department of the Treasury announced today. The new limit applies to Series EE and Series I savings bonds purchased through TreasuryDirect at www.treasurydirect.gov. Under the new rules, an individual can buy a maximum of $10,000 worth of electronic savings bonds of each series in a single calendar year, or a total of $20,000.
Since 2008, investors could buy a maximum of $5,000 in each series and in each form (paper or electronic). So a single owner could buy $20,000 in one year. As of January 1, 2012, paper bonds are no longer being sold through financial institutions. With today?s announcement, the total amount an individual can purchase in online savings bonds in one calendar year is $20,000. An investor still can purchase up to $5,000 annually in Series I paper savings bonds using his/her tax refund and IRS Form 8888.
So, in effect, they’ve increased the Series I Savings Bond limit from $10k ($5k electronic + $5k paper) to $15k ($10k electronic + %$5k paper) so long as you’re willing to jump through the hoop of buying paper bonds with your tax return.
From my perspective, this is very welcome news. While the fixed rate is still a disappointing 0%, these bonds provide a degree of inflation protection, and also have tax advantages, especially if you redeem them to cover educational expenses.
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Mighty Bargain Hunter
The magic of compounding has left the building?
3 Feb 2012 at 1:56am
You’ve heard of the magic of compounding, right?
If not, here’s a quick version. Let’s say you have a savings account that earns 1% per month. (Don’t laugh too hard. My dad had one that paid this rate at one point.) Let’s say also that you put in $1,000 at the start of 2012, and never add anything more. According to the Rule of 72, after about 72 months, I’ll have about $2,000. In another 72 months, I’ll have $4,000. In another 72, $8,000. The amount in the account doubles each 72 months it sits there. This happens because the amount that I’m basing the 1% earnings on increases a little bit each month, until some day, it gets really fun. Almost like magic.
The amount of magic depends on the amount of the rate
Are you still laughing about when I proposed an account that earns 1% per month? I wouldn’t blame you. Some of the higher interest rates for checking accounts now are about 1% per year. About all we can say about these kinds of rates is that they’re better than nothing. (If you’re earning nothing on your money, try to earn something on it.)
At rates of 1% per year (or less) the magic still happens, but the magic isn’t exactly making-a-jet-plane-disappear magic. The doubling would still happen, but it would be almost the end of the century before that happened. And to boot, your $2,000 might only barely buy a nice suit. Break out the champagne!
Banks are scared to lend now. They’re reeling from the shakeout in 2008. As a result, interest rates on savings accounts and checking accounts goes down as well. And the fees get tacked on. It’s just not a magical time to be a saver.
What’s the key to building wealth, then, if it’s not through saving money?
Putting money in the bank is low-risk, but it’s also low-reward. Now, it’s extremely low-reward.
The key, I think, is to take calculated risks, and work to produce something. Find a need, and serve customers to fill the need. If you can deliver on time for the price agreed on, that’s a lot more than many businesses do.
This isn’t “stick money in a bank account and it grows while you watch Twilight” easy, but that’s what the times demand. There’s barely any reward for doing it this way today.
Maybe the magic will come back into compounding, but until then, make your own magic.
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How to save money on gifts for your spouse
26 Jan 2012 at 1:53am
Next week I’ll have been married ten years to the best woman in the world. (Yeah, I know — I’m biased.)
We’ve gotten into the habit of letting each other know before we’re about to purchase something big — something that costs in the neighborhood of $150 or more. When I tipped my plans to get a rather expensive 10th anniversary gift, my wife thought that we had better uses for the money at this time.
This leniency extends to other gift-giving occasions like Christmas, birthdays, and even Valentine’s Day.
She lets me off the hook. But there’s a catch
One of many tricks that master copywriter Bob Bly shared with the readers of his newsletter was with regard to giving holiday gifts to clients. He doesn’t feel pressure to give his best clients a gift each year. These are people who spend five and six figures (or more) a year for his services. If anyone should get a gift at the holidays, it would be these folks.
How does he get away with it? His trick is to give gifts at totally unexpected times. He might send a book to a client on June 13th as a gift. “Just because.” This gets him off the hook for a slew of Christmas gifts because there’s no expectation of one. He gives gifts that are more memorable for the recipient — and he gets to give them when he wants or when he’s inspired.
I’ve adopted that trick a bit. I’ll bring home flowers, just because it seemed like the right thing to do. $10/year around once a month buys a lot of slack around Christmas, anniversaries, and Valentine’s Day.
So it’s not that I don’t get my wife gifts. I just get them at different times, when they’re not marked up horrendously.
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Reusing paper towels?! Hmmmm ?
16 Jan 2012 at 1:50am
We don’t watch a whole lot of TV — and we only have basic cable anyway — so I’m not a regular watcher of Extreme Cheapskates on TLC. The first time I had heard of the show was through a video on MSN.com.
This particular one-minute clip features four extreme cheapskate tactics:
- Cutting open toothpaste tubes to get at the last bit of toothpaste
- Sharpening the blades from disposable razors on the striking surface of a box of matches
- Pulling apart two-ply toilet paper to get two one-ply rolls
- Hanging up paper towels to dry
Life is a giant exercise in opportunity cost
Learning how to do more with less, and how to get by with less, is a great skill to learn. What happens most of the time with doing more with less, though, is that it takes precious time to do more with less.
TLC ends this clip with Roy, the money saver featured in the clip, saying the following:
“Toilet paper is a lot like life in general. The closer you get to the end, the faster it seems to go.”
I’ll give him clever points for that statement, but am I the only one who thinks that this statement drips with irony? There is an opportunity cost associated with every activity we do. The time that we spend doing one activity we can’t spend doing another. The time we have is irreplaceable, and is consumed at the alarming rate of twenty-four hours each and every day, never to be consumed again.
Or, put another way: You can make more money, but you can’t make more time.
To apply this to the activities in the clip, there’s a point of diminishing returns for these activities. Cutting a tube of toothpaste open when the tube is almost empty is probably all right. It takes two seconds to cut the tube and another ten to wash the toothpaste off of the scissors. Sharpening a disposable razor on a matchbox is probably fine if you do it right. Keeping it in a glass of mineral oil probably works too. Splitting up a roll of two-ply toilet paper is borderline too much. I mean, it works, but … ?
Reusing paper towels, though, seems way more trouble and time for the potential gain. Roy says that he’s saved $2,000 over the past ten years on paper towels alone. Let’s take this at face value and call it $200 per year. First off, that’s a lot of paper towels anyway. We buy maybe two big packages a year for $40 total. Secondly, what about a package of shop rags? Those would last for years and they’re meant to be re-used. (Isn’t the purpose of paper towels to throw away the germs?) Or go even cheaper and use old cut-up shirts. Lastly, and most importantly, it looks like a part-time job wringing out and hanging that paperware on that makeshift drying line in the living room. Just the time spent squeezing another three to five uses out of a paper towel means that he’s working for about 1.4 cents per hour. (Approximately.)
“Making it do or do without” is fine, but doing so shouldn’t fly in the face of common sense, should it?
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My two cents on Suze Orman and her prepaid card
11 Jan 2012 at 2:03am
Suze Orman needed to upgrade her leather jacket to a flak jacket tonight in a personal finance scrap match with personal finance bloggers over her new self-branded prepaid debit card. The Approved Card is her own personally-branded prepaid debit card with what appears to be a decent package of tools and features. The downsides, as pointed out by PT Money, are a $36/year minimum fee and a less-than-clear path to using it for building or rebuilding credit.
Some of the more outspoken posters got tweets back from Orman’s Twitter account. 20 and Engaged has a history of the interactions here.
Am I a Suze hater?
People don’t reach prominence by trying to please everyone. Suze Orman has been in the financial realm for a long time — certainly longer than any personal finance blogger I’ve met — has nine consecutive bestselling books under her belt, as well as successful radio and TV gigs. She has a wide following mainly because she gets in people’s faces about the soft spots in their financial lives. This doesn’t resonate with everyone, and that’s to be expected.
But for the record, no, I’m not a Suze hater. She’s helped many, many people get on the right track with their finances through direct advice and education. It’s clear that she engages with people, listens to them, and genuinely wants to help them. This can’t be taken from her: She’s done well for herself on this earth by helping a lot of people.
Now, back to the prepaid debit card. Piece of junk?
Suze Orman’s message is clear, but what’s also clear is that she is a sharp businesswoman and a tireless self-promoter. (She’s the latter because she’s the former.) She’s in a position to use the leverage of her large audience to spread her message, help even more people … and sell more products. The Approved Card is the newest product. Is it better than cash? Maybe. Is it a good long-term solution for managing personal finance? Possibly. For people who need a shorter leash for a season, a prepaid debit card with a healthy dose of Suze could be part of the solution. Is it without risk? No, but nothing is.
Regardless, I certainly don’t fault her for offering this product. She should be free to do so, just as people should be free to sign up or not. Time will tell whether it was a good product or not, and the market will decide whether the $3+/month is worth the value that Suze Orman adds.
Postscript: Are my blogging colleagues idiots?
Absolutely not. I’ve met many of them personally, thanks largely to Phil’s work. (Phil was the closest recipient of this barb from @SuzeOrmanShow.) But since we all just live in Clay Shirky’s internet. and since now consumers of the media have not only the ability to talk back easily but also to talk with each other easily, repercussions from bad PR can be swift and long-lasting. Ticking off bloggers in one’s niche is rarely a good idea. 
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Yet another reason that lottery tickets are a waste of money
7 Jan 2012 at 2:08pm
It’s often said that the lottery is a tax on people who can’t do math. It’s virtually guaranteed that you’ll lose money playing the lottery regularly, because the more you buy, the closer you’ll be statistically to the intended winning probabilities (i.e., losing more than winning). Even casting lottery tickets as an investment is flawed; Powerball tickets generate about am 80% loss, which dwarfs any year-over-year loss of the S&P 500 or the Dow.
Let’s throw good financial sense to the breeze
Let’s say that for whatever reason, you still buy lottery tickets. It could be ignorance of the above, or because you feel deep down in your heart that this is the week for the big payout. Or, more reasonably, you could buy lottery tickets as an entertainment budget item, because you enjoy it. Whatever the reason, those lottery tickets are in your hands.
Now let’s say that lightning strikes and you beat the odds. You win. A lot of money. As in a life-changing lot of money. You turn the ticket in, and get a picture with the state lotto commissioner holding a giant check as a capstone to your fifteen minutes of fame. Congratulations.
Let’s say now that you’re concerned about having that giant lump sum beckoning you and all of your new-found “friends,” so you instead opt for periodic payments for 10 or 20 years.
Would you expect your lottery payment to bounce?
That would really suck, wouldn’t it? Well, that’s exactly what happened to dozens of people who won prizes in Illinois over the tail end of the 2011 holiday season. The checks bounced for a brief period of time due to a computer file being sent late. The oversight has since been fixed, and the affected people even got free scratch-off tickets as part of the apology.
This situation taken by itself is probably nothing more than “oops, sorry” and was easily fixed. But let’s not forget that this is Illinois – a state that is developing a reputation for not paying its bills. Organizations are going bankrupt due to missed payments from the state, legislators are being evicted by their landlords, and the state Department of Corrections is needing to pay up front for the bullets that help to protect their officers.
When will the deadbeat philosophy creep over to the lottery? Lotteries are sponsored by most state governments, after all. The fact that this mishap occurred in Illinois is merely convenient, though: Illinois is certainly not alone with its fiscal problems. The risk of having promised payments go away presents itself in any state where there is a lottery.
The way around this is to take a lump sum payout if it’s offered, but that introduces a whole new set of risks — the biggest one being that the people managing the lump sum are usually ill-equipped to do so. But it’s hard to argue that this is better than being stiffed.
I guess if you get enjoyment out of scratching the lottery tickets, so be it. But the promise of “$1,000 a week for life” is little more than that: a promise. A promise that rests on the solvency of the state government that runs the lottery, and its willingness to honor that promise.
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How much is my gold chain worth?
28 Dec 2011 at 10:46am
I received a question in a comment on one of my more popular posts that describes how to figure out how much gold jewelry is worth. Here’s the question:
What is the dollar worth of an 18?, 14-karat, 14.38 gram weight gold chain? No formulas please.
Before working out the answer, it’s important first to discuss the sentence that follows her question.
She doesn’t want me to giver her formulas. She just wants an answer to her question. Customers in general are more than welcome to ask for whatever they want. I don’t fault her for just wanting an answer. I don’t even assume that she is intellectually lazy for just wanting an answer.
Therein lies the time-vs.-money tradeoff of obtaining a valuation
If I were a pawn shop owner and she brought it in to me to see what she could get for it, I’d probably look at the chain for the purity marking, put it on a balance, check the spot price of gold, whip out my calculator, figure out what the gold content was worth … and offer her $100. If she accepted the offer — if she had walked in expecting that it was worth about $50, she might jump at $100 — then I’d buy it, and sell it to a melter for at least three times that. But first, I’d try to sell it for $500.
She might find a cash-for-gold place on the web, and send it there. They may have a calculator on line that accepts the numbers she gave me, and spits out an answer right there. She might get a pretty good deal, or she might not. If she just takes their word for it, how will she know? She won’t. She’ll know only if she took the time to try to answer the question herself.
But whether she goes that far depends on how much money is at stake. She wouldn’t go into the same depth of analysis to sell a used coffee maker that she bought a year ago. If she could sell it for $3 instead of $2, she’s already invested too much time worrying about it for it to matter.
The main point of all of this is that if you don’t understand how a valuation is calculated, you’re doing the deal in a position of weakness rather than strength. The cost of this can be great or small, and itself is a tradeoff of money vs. time.
OK, great. Just tell me what the darn chain is worth.
The gold content of this chain is worth about $430. Here’s the math. The fractional purity of 14-karat gold is 14/24 = 0.5833. For a 14.38-gram chain, this means 14.38 times 0.5833 = 8.4 grams of gold. (The length of the chain doesn’t factor in.) One troy ounce of gold is worth about $1,600 now. There are 31.1 grams in a troy ounce, so this translates to $51.44 per gram of gold. Multiply this by 8.4 grams to get $432 and change.
There’s the answer. Now you can enter deals from a position of strength. And hopefully the reasoning was clear.
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Is community-supported agriculture a bargain?
25 Dec 2011 at 11:18pm
When it’s time to cut back on family expenditures, a prime place to start is with the food budget. Once the “easy” savings are implemented — first by eating out a lot less, then by buying store brand or bulk, and then by preparing meals more from scratch — then it becomes more of challenge to cut further.
One possible opportunity for further savings, especially if you enjoy fresh produce, is through community-supported agriculture. The way this works is as follows:
- A farm offers shares of his production for sale, ahead of the production and growing season.
- People buy shares for a set price. This offsets the farm’s operating expenses prior to the production season.
- As the crops are harvested (or the products made) each person receives their share(s), usually over several months.
There are some advantages of getting produce through community-supported agriculture arrangements. First, the food is fresh. It doesn’t get much fresher. Second, there is the opportunity to understand exactly what goes into the food: what kind of fertilization, what kind of feed, what kind of pest control, what kind of irrigation methods, etc. This creates confidence that the food is wholesome because the growing method is transparent. Third, it supports the local economy through job creation and maintenance.
All well and good, but is community-supported agriculture a bargain?
This arrangement is certainly good for the farm. A share might give a lot of produce, or only a little produce, or possibly nothing, depending on weather and other acts of God. That’s an inherent risk of the purchase of a share. Regardless, the farm gets the money. It’s a bit like the farm selling a futures contract, but the quantity is left undetermined.
But let’s say that the weather cooperates, and the crops grow well. Some other factors come into play:
- Are the crops what you like to eat? You might end up getting eggplant and turnips at 3 cents per pound, but if you can’t stand eggplant or turnips, you’re out of luck. Check into what the typical crops are.
- Is the typical amount of food too much? Your share is your share. Can you go through all of the food that you’ve already bought? If not, then it may be more economical just to buy it in the store.
- Is the typical amount of food too little for what you pay? A CSA arrangement should be able to give information about what was delivered for a share in previous seasons. Check out what was given, and see if the typical quantities are worth the price.
- How far do you have to travel to pick up your share? One CSA arrangement we looked at was from a farm about 45 minutes away. The farm wouldn’t deliver the food; we would have had to pick it up. The gas would have nearly doubled the cost of the produce. If the farm were nearby, then this wouldn’t have been an issue. With gas north of $3 per gallon, this can be a significant consideration.
Buying a share in community-supported agriculture may be a bargain, but it can just as easily not be. In either case, though, there are the indirect benefits that come from supporting a local farm that might be very important to an individual. Then, cost may not be the big consideration.
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$25 Restaurant.com dining voucher for $0.65 through Christmas Eve 2011
20 Dec 2011 at 11:23pm
The price cuts of price cuts is back! Normally Restaurant.com sells their $25 dining certificates for $10. Through December 24th, 2011, you can get 90% off this price on most of their $25 certificates using coupon code JOY. (I’ll help with the math: that’s one dollar.)
But that’s not all! Head over to Mr. Rebates, sign up, and score an additional 35% off cash back when you click through to Restaurant.com over there! That makes 65 cents for a $25 voucher for qualifying purchases at thousands and thousands of restaurants nationwide.
(Too much work? There’s nothing against heading straight over to Restaurant.com to get one for a buck. No-sir-ee!)
Just double-check the terms and conditions which will be clearly visible next to your chosen restaurant.
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Bargain shopping without the mobs ? even now
18 Dec 2011 at 12:57am
Some of my wife’s Facebook friends posted some pictures the bumper-to-bumper traffic into the local mall / retail area today. It’s definitely not the best time to run in and out of stores for a few things, being a week before Christmas and all that.
So we stopped at our local antique mall this afternoon. It was more crowded than usual, but nowhere near the traffic level at the typical retail outlets. That, and since many antique malls have a large variety of sellers, there is a similar large variety of types of merchandise. It’s more part antique mall, part flea market, part craft mall / boutique shop. We found the standard assortment of antiques: depression glass, occupied Japan figurines, washboards, pump organs, old advertising signs, etc. But others had hundreds of books both old and new, CDs, DVDs, and more. One seller had fossilized shark teeth (which we got for our daughter). Another had dollhouse furniture. And of course there were plenty of booths that had a mishmash of unusual items. We found a painted gourd for one of my relatives that would go great with their decor.
Heading to an antique mall can mean making an end run around the holiday crowds. As an added bonus, the gifts that you find for your friends and family can potentially mean more since the gifts from these places are a little harder to track down than ones that can be bought at Amazon. If you get them at a steep discount, so much the better!
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Christmas dinner on a Scrooge budget
12 Dec 2011 at 11:12am
It?s that time of year again when the only thing that?s stretched tighter than our budget is our nerves. Christmas shopping can put a huge financial strain on the average family, but it’s even worse if you are the one pegged to cook the Christmas family dinner.
It?s natural to want to put on a flashy looking meal that looks and tastes delicious, but by the time the big day rolls around, most of the budget has already been blown on filling little Johnny?s stocking with awesome electronics. The good news is that Christmas dinner can be done on the cheap, and none of it involves stealing or shooting the neighborhood pigeons.
It?s human nature to want to wrap the presents in sumptuous paper with a massive bow on top, but that type of packaging doesn?t come cheap. The same can be said for food makers, all of whom put their products in packages that are designed to catch your eye and make you buy. But the packaging is no indication of the quality of the food inside. You can save yourself a fair amount of cash, simply by ditching the gold trimmed paper, and buying a less extravagant looking package of the same food.
Oftentimes the dinner party gets started with some little snacks or finger food, and while most of those are available in the frozen, pre-packaged section of the supermarket, you can save a ton by just making them yourself. Canapes are a perfect example of a food that?s expensive to buy packaged, but cheap to make at home. Your dinner guests will love that you made the effort to do a little cooking DIY. It?s also smart to keep in mind that your guests will be doing a lot of eating throughout the course of the day, so keep the dinner fairly simple and stick with a couple of sides, rather than offering all the trimmings.
Try not to go too overboard when you are buying the food you need. Avoid pre-packaged food as much as possible, and don?t go for an ostrich-sized turkey when you know that a good portion of it will end up in the trash, or as permanently uneaten leftovers. It?s understandable to want to make sure that your guests get enough to eat, but allowing a Tiny-Tim-sized amount of common sense to prevail will leave your wallet thanking you for weeks to come. The same rule applies when it comes to drinks and desserts, as in most countries it?s expected that guests will bring a bottle of wine or some sort of candy treat with them. By all means pick up a couple of items, but let your guests do their share too.
Christmas is a time of giving and sharing, but you can easily do that without having to take out a second mortgage on your home. Guests are usually always friends and family, and they will be delighted with the effort that you have made to feed them, even if it means they don?t get both mashed and roasted potatoes.
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Free Money Finance
Reader Profile: JR
3 Feb 2012 at 3:29am
The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.
If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.
Next in the series is FMF reader JR. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I live in Delaware and I am 26 years old and single. I graduated from the University of Delaware with a sport management degree (no student loans thanks to mom and dad as well as a cheap tuition). Currently I hold a part-time job as a soccer coach at a local soccer club and coach at another high school. I also started my own business over 2 years ago, a filming company that films sporting events with a state of the art camera that films from 30 feet in the air. I am also am a part time poker/sports gambler. Currently my parents and I both "own" the house I live in. We both purchased the house 7 years ago and I lived here throughout college and still live here with 3 roomates.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
My parents are very good with money, own a few properties of their own, and have taught me how to handle money. Thanks to them I have no debt besides a Jeep I purchased a year ago. I owe 15k on it but could have paid for it in cash. I couldn't pass up 0% interest for 36 months so I didn't pay for it in cash. I net about 25k per year coaching soccer, net 7-8k from my filming company, and netted 30k in each of the last two years from poker/sports gambling. I'm a little bit different then most here as my income really fluctuates depending on how my gambling does - also soccer depends on weather with how much I coach so each month I don't make the same. Not for everyone but it works for me.
My expenses are as follows:
- $400 for rent/cell phone/ car insurance - once again I own this house and live with 3 roommates so I save a bunch here.
- $130 health insurance
- $630/month for 26 more months on my Jeep
- $125 for groceries (certainly could be lower)
- $100 utilities
- $250 on gas (Jeep goes through gas and I drive quite a bit).
- $100 a month for my dog.
I save the max per year in my roth $5,000. I don't work for a company that offers a 401k so that is out. My spending fluctuates because I still live like a college student a bit much, but I am working on spending $150/month on drinking a month, and also am trying to eat out way less. I also save $600 per month into an emergency fund that has 20k in it.
With that, my overhead costs are around $1,750/month (rent, cell phone, etc). I save $1,200 a month (roth and emergency fund). I spend around $225 per month on going out - drinking, eating out, various other things. I don't make a certain amount per year as it really fluctuates, but I know I am saving money. I never have to tap into my savings/emergency fund, despite putting $600/month into it.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
Currently I am looking to save as much money as possible for a home purchase. I have a nice home here but it's not where I want to raise a family. And speaking of family, I do envision marriage in the future with kids, so saving as much as possible for that shall it come. I don't have any debt besides my Jeep and pay it off every month. I put most everything on credit cards (for the points and cash back) and pay them off in full every month.
I have around 125k in net assets - 10k roth, 45k individual stocks, 8k in two other funds in Vanguard, 15k cash, 20k emergency fund, 20-25k in online poker/sports accounts.
What are your plans for the future (retire early, build your career, etc.)?
Starting next month I am starting grad school for counseling. This program will take about 2 years to complete and 16k total (but may get financial aid). At this point, I will look for jobs in our current school systems being a guidance counselor. Currently I am being courted for a head coaching job at a very prestigious school in our state and they want me to try to teach, but I am not sure I want to teach. Once I find a decent counseling job for around 40k, I can coach soccer on the side for another 30k, and another 10k from my business. This doesn't even count gambling which I don't know what the future holds there, whether I continue with it or give it up remains to be seen.
Haven't put too much thought into when I'd like to retire but I know I do want to retire so I am saving the max per year in Roth - wish I would have known about this earlier though!
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
No debt, no debt, no debt. Pay off all credit cards at the end of every month and start an emergency fund as quickly as possible. I live with and have lived with younger college students and it's crazy to see them using a credit card, having to pay student loans (thanks mom and dad for paying for college), and not building an emergency fund. These are all obvious things for the people who frequent this site. Starting this year I am going to track what I spend on eating/going out. I know it's too much, but I can afford it and I do live within my means. Doesn't mean I won't ever go out and have fun but will do it a bit smarter and a bit less frequently.
   
Star Money Articles and Carnivals for the Week of Jan 30
3 Feb 2012 at 3:19am
Here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week:
Enjoy!
P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.
 
Box of Books #22
2 Feb 2012 at 2:45pm
The box of books giveaways through my giveaway newsletter have been very popular, so below I'm detailing another set of them that will be up for grabs this month (if you want a chance to win, be sure to sign up for my newsletter here.) For now, here are the books I've received from publishers and a bit about them (from Amazon):
- What Color Is Your Parachute? 2012: A Practical Manual for Job-Hunters and Career-Changers
 - This year?s edition of What Color Is Your Parachute? has been vastly rewritten, because job-hunting has increasingly become a survival skill. Career expert Richard N. Bolles describes the five strategies most needed to survive, and explains how to incorporate social media tools such as LinkedIn, Facebook, and Twitter into your job-search.
- Joy Compass: How To Make Your Retirement The Treasure Of Your Life
 - Why are some people joyful, vibrant, fulfilled at 50-plus? Is it because they have money? Or are they just lucky? Neither. Julia Valentine condenses thousands of interviews into an astonishing two-hour read on the real secrets of being joyful and fulfilled at any age.
- The Eternity Portfolio (Generous Giving)
 - All too often, Christians give out of guilt or legalism instead of joy and purpose. Even those who have a biblical perspective on giving rarely have a strategic plan for carrying out their beliefs. In The Eternity Portfolio, respected CPA and financial advisor Alan Gotthardt combines biblical teaching with modern investment-portfolio theory and offers fresh, practical how-tos for strategic, satisfying giving.
- Congratulations You Aced the Interview The must read Interview Guide to land the job of your dreams, College Edition
 - Practical career guide to help you map your true career track for the future, work through the questions to help you discover what your direction is and what you need to do to bridge any gaps that may be there blocking your way. Get the scoop... the inside secrets shared with only a select few college students until now. Why take the long route? You can take the fast lane by using this invaluable advice from a top HR Director... the person who is making the hiring decision! ...Myths are busted. Easy, clear-to-follow, advice is given and you are led along 5 roads to avoid barricades and get you to the fast lane towards your destination. You will create your own road map as questions are asked along the way to pave a path that is right for you. Know where you are, where you are going and how to get there!
- The Sound Mind Investing Handbook - A Step-By-Step Guide To Managing Your Money From A Biblical Perspective 5th Ed
 - Investment adviser Austin Pryor has carefully created the "next step" guide that helps you put Godly principles of finance into motion. Whether you're a beginner or an experienced investor, you'll benefit from stepping across this bridge between "theory" and "action". Each user-friendly lesson is written in everday English and filled with helpful visual aids.
- Living Smart, Spending Less: Creative Ways to Stretch Your Income...and Have Fun Doing It
 - The indulgence of the '80s has left people with a mindset that has a difficult time adjusting to the frugal '90s. The practical tips in this timely guide will help readers discover what they can do without, how they can take charge of certain areas in their lives, and how they can channel resources to enhance their overall lifestyles.
- Moms Saving Money
 - Old book with two reviews -- both five stars!
FYI, a few of these have my handwritten notes in them and/or are old books of mine, so if you eventually win the set, don't expect completely new books.
 
"Good" LTC Insurance is All You Need
2 Feb 2012 at 9:45am
Smart Money has a piece on why some long-term-care (LTC) insurance is better than none. The post basically boils down to two points:
- It's likely that we all need some LTC insurance.
- Just having a "good" plan is good enough. Don't forego LTC insurance in search of the perfect plan (which is often elusive and probably not affordable for the masses anyway.)
Their summary:
Which brings us to Voltaire. His notion -- that the best solution can make a good solution seem less beneficial than it actually is -- explains why many people turn their backs on long-term-care insurance. (Nearly 15 percent of individuals over 60 have coverage, according to a recent report.) Typically, financial advisers and insurance agents push us to buy the best coverage possible: policies with hefty daily payouts (at least $200) that will cover years (and years) of care. Their intentions, for the most part, are good -- but the "best" option is expensive. Depending on your age, annual premiums can easily reach $4,000 or more. The result: We decide against buying any protection at all.
Don't let your search (or an adviser's clamoring) for perfect coverage prevent you from considering policies that are simply good. Indeed, we choose good frequently in our lives -- in cars and investments, to name two. When it comes to long-term-care insurance, options other than the so-called best can do more for you and your family than you might realize.
The point is not just that some coverage is better than none. It's better only if it can meet your particular needs when the time comes. And that's the point: designing a reasonable and affordable policy to meet your specific needs.
I'm still sorting through what I'm going to do regarding LTC insurance, but after reading Toileting and Retirement, Should I Purchase Long-Term Care Insurance? there's no question I'll be doing something. The Smart Money article was freeing to me. I don't have to be concerned with "the best" policy -- I simply need to find a good one that covers my needs. This should be a lot easier to find (and much more affordable) than the perfect LTC insurance policy.
I was recently traveling with a friend from work and he was sharing with me his plans and thoughts on LTC insurance. He's about 10 years older than me, and it was insightful to hear what he had considered and ultimately decided to purchase concerning LTC insurance. I'm going to try and talk to more people a bit older than I am this year and see how they are dealing with the issue.
How about you? Anyone out there recently purchased LTC insurance (or are you planning to)? Any insights for the rest of us?
 
FMF March Money Madness Brackets Set
2 Feb 2012 at 8:25am
At the end of this post is an Excel spreadsheet that contains the brackets for the 2012 version of Free Money Finance March Money Madness (if you're wondering what I'm talking about, click here.) A few things to note about the competition:
- The games will begin on Monday, February 6 and new ones will be posted every other day through the initial round. Each set of games will be up at least a day and a half, but after that, I'll probably cut them off and name a winner. Some may go longer (especially those posted on Fridays), but not much longer than three days. I will send you an email shortly after your post goes up to remind you that you're in a game.
- The winner will be named in a comment left at the bottom of each post. I'll note that this set of games has now concluded and tell which posts won. If you need an example of what this looks like, look at my comment near the end of this post.
- The some of the included posts earned automatic bids since I judged them to be the best from 2011's Best of Money Carnival winners. That is why some blogs will have more than one post included -- these entries do NOT count against the one blog/one post limit (this is one major benefit of winning a weekly Best of Money Carnival competition.)
- If your post is in the competition, you are allowed to vote for yourself. Others will do it, you might as well too. But you can only vote once per game, just like everyone else.
- If your post is in the competition, you're allowed to ask your readers to vote for you. Again, others will do it, you might as well too. If you feel it's too promotional to ask people to vote for your post, you can simply point them to the competition and ask them to vote for the best post. ;-)
That's it for now. Good luck to all!
Download FMF 2012 March Money Madness
 
MBA Application FAQs
2 Feb 2012 at 3:29am
The following is an excerpt from Your MBA Game Plan, Third Edition: Proven Strategies for Getting Into the Top Business Schools , © 2012 Omari Bouknight and Scott Shrum. It is reprinted with permission of the publisher, Career Press, Pompton Plains, NJ. 800-227-3371. All rights reserved. These FAQs are from chapters 2 and 3.
How important is the strength of your undergraduate/graduate school?s brand to the admissions committee?
Overall, what you did in college and what you?ve done since then are more important than what school you went to. Still, business schools do take your college?s brand name into consideration, especially when considering your grades. Some schools are known to pay more attention to this than others. However, this should not be a major consideration when you apply. For every Princeton and Yale grad prowling the halls of top business schools, there is also a student from a lesser-known school. All schools love to brag about the number of undergraduate institutions that are represented by their classes (the numbers generally range from 80 to 200). You definitely shouldn?t spend all of your time trying to sell your school if it is not a well-known one. You should, however, be able to explain why you decided to attend the schools listed on your transcripts and discuss their merits. Beyond that, however, keep the focus on you. At the same time, if you did go to a college with a great reputation, don?t rest on your laurels and expect to gain admission based on reputation alone. It?s an asset, but one that will quickly fall by the wayside if your other application components are mediocre.
What if I have been laid off from my job?
First of all, don?t panic! Getting laid off does not squash your chances of getting into a top business school. There are several things that you need to do. Most importantly, you need to convince the admissions committee that you?re not simply applying to business school because you?re out of work and have no better option. If admissions officers sense that this is the case, then you will have squashed your chances. You can combat this perception by highlighting your career goals and how business school fits into the picture. Also, while you absolutely should not dwell on the fact that you were laid off, acknowledge that it happened and be prepared to explain why (hopefully it?s something out of your control), and move on. Admissions officers understand that even great employees sometimes lose their jobs.
Also, you will need to work extra hard to weave professional success stories throughout your application, to make it clear that you are a ?winner? who just happened to get caught up in bad circumstances. Recommendations are especially important here, particularly if they come from your ex-boss who regrettably had to let you go. Showing that you were a positive contributor and that you left on good terms will help a great deal. Finally, show that you?ve been productive in your time off. A Tuck admissions officer once commented that she couldn?t believe how some laid-off applicants were content to do nothing for a year. Even things outside of your career such as pro-bono work or volunteering can show that you?re not someone who?s content to just sit back and take it when life deals you a bad hand.
What if the nature of my job makes it difficult for me to draw upon any useful leadership or teamwork examples?
This is a common question from people coming from a number of careers. If you feel like you can?t come up with any pertinent examples from your experience, try broadening your definitions of leadership and teamwork. You may not have led a group to achieve a major breakthrough, but maybe you spotted and acted on a huge cost-savings opportunity that no one else bothered to tackle, even though you received no credit for it. This is a more subtle example of leadership, but one that business schools will still appreciate. Think of leadership as any instance when you had a positive impact on those around you, especially those instances that wouldn?t have happened if you hadn?t been there. Similarly, don?t think of teamwork as just stories of you sitting in close quarters with a few of your peers, working all night to solve an impossible problem. A good teamwork example could be much broader, such as how you went out of your way to help someone in another department tackle a problem. Think about every person or group with which you?ve interacted, and consider using instances where you made a difference in helping someone else succeed.
If in my previous job I had a high-flying title, and now I?m applying to business school, won?t that look weird?
It can certainly raise some eyebrows, but context is everything. This problem is most common during a recession, when some former vice presidents have to explain why they suddenly aspire to become junior consultants. If your fancy job title came from financial services, you don?t have too much to worry about. Remember that admissions officers review thousands of applications from bankers every year, so they know the score. If your high-level position came because you were a founding member of a business, then in admissions officers? eyes you are an entrepreneur. This is good, although, as do all other entrepreneurs, you will need to present a convincing argument for why you want to go back to school now. Also, whether or not your business was a success, keep your application story focused on you. You will ideally have a good number of stories to tell about building a team or a product from scratch, so use them. Focus on your achievements and tie them together with where you want to go?and how business school will help you get there.
How much does my employer?s brand name matter when applying to business school?
Having a well-known brand on your resume certainly helps, and business schools do tend to value two years? of experience at Goldman Sachs more than they do experience at an unknown investment firm We won?t try to convince you that these brand names mean nothing to admissions officers; they know that these companies have rigorous hiring standards, and coming from one of these firms is a signal that you?re a strong performer. But the advice that we give regarding your undergraduate school?s reputation applies here, too. If you come from a relatively unknown organization, spend enough time explaining what the company does, but then move on. You don?t need to impress admissions officers with your company?s five-year compound annual growth rate. Then, spend the vast majority of your time explaining what you did at the company, because that?s what admissions officers really care about. Similarly, if you do come from a well-known company, don?t plan on coasting on the company?s reputation. In fact, if the company is known as a mill that turns out business school students, you will need to work hard to set yourself apart from the pack by selling your unique contributions. Two years ?on the beach? at McKinsey isn?t going to get you in anywhere, so focus on what you did that makes you different.
I?ve done something really unique. Do you think that will get me into business school?
The short answer is ?not by itself.? The fact that you did something unique, whether it was professional or personal, will certainly help in setting you apart from the crowd. But that alone will definitely not get you in. Think hard about what your unique achievement says about you, and how it fits into your overall application theme. Spending two years in South America helping locals build a farm is a great story, but it doesn?t help you much if you can?t relate it to the rest of your story. Also, just like every other experience that you draw upon, simply saying that you were involved in something is not enough. You need to show how you specifically contributed. Finally, a string of interesting experiences can actually hurt you if it is hard for admissions officers to see the connections between them. It is up to you to present your experiences in a way that makes sense to someone who only has your application (and hopefully an admissions interview, if you get to that point) as a way to get to know and fully understand the real you.
 
Your Portfolio Needs Rebalancing
1 Feb 2012 at 2:45pm
The following is a guest post from Marotta Wealth Management.
Most investors do not have a balanced portfolio. They look for investments with little to no risk that still provide great rates of return. And by chasing this elusive chimera they miss the easy money they could make from having a good asset allocation in the first place and rebalancing it periodically.
To have a balanced portfolio, you must know your asset categories and what percentage of your portfolio to put in each one. Without such a plan, your portfolio is automatically out of balance.
It is like trying to coach football without knowing the purpose of the various positions on the team. So you send in three quarterbacks, two halfbacks, four wide receivers and a couple of field goal kickers. All too late you realize you have no one in your offensive line to block.
Many investors try to pick a few specific companies in the hope that these companies will do well. This risks picking too many famous quarterbacks. Any position over 15% of your portfolio significantly increases its volatility without increasing the average return. It is best not to put all your eggs in one basket. But again, that makes it critical to know what constitutes a basket. Here are four ways to make sure your portfolio is well diversified.
First, look at what percentage of your investments you put in each country. Putting all of your investments in the United States could be just as risky as putting them all in Greece. Countries are divided into developed countries, emerging markets and those even less developed, sometimes call frontier markets. Countries can also be divided by those with a high sovereign debt and deficit and those with better financial affairs. Countries have also been ranked in 10 categories of economic freedom.
Stocks can also be divided by company size. Larger companies are often less volatile, but smaller companies can provide higher returns. Company size is categorized by their capitalization, calculated by taking the current share price and multiplying it by the total number of shares outstanding. In other words, what would it cost to buy the entire company at the current share price?
Companies with a capitalization greater than $10 billion are considered large cap. Companies smaller than $2 billion are considered small cap. Between those two numbers is the midcap category. Companies over $100 billion are sometimes called mega-cap. And companies smaller than $300 million are often called micro-cap.
Third, stocks can be divided on a scale of value to growth. Value stocks have a high book-to-market value. They are priced reasonably in relation to the company's assets. Value stocks often have a low price-to-earnings (P/E) ratio. These are all indicators that the company is a good buy when considering its intrinsic value or its current stream of earnings or dividends.
Growth stocks are not as reasonable. They have a low book-to-market value. Often they have little or no earnings and usually pay lower dividends if they pay them at all. Growth stocks are overpriced because the market is anticipating that the companies will have exceptional growth. They may not look like a good deal on account of recent earnings, but often earnings are growing at 40% or more every year. A few years of exponential growth often gets priced into growth stocks.
The higher prices for growth stocks are reasonable if they experience a few years of 40% earnings growth. But if one year only delivers 35% growth with a lowered expectation, the stock price can drop dramatically. Growth stocks have a higher P/E ratio because they expect earnings to continue to grow. Diversifying across the spectrum of value and growth stocks can help balance your portfolio's volatility or boost your expected return.
Finally, stocks can be grouped by sector of the economy and industry. Morningstar divides the economy into three sectors and eleven subsectors. Sector rotation tracks nine different categories that tend to do better than average at different times of the business cycle. Value Line uses over 100 industry categories. The industry classification benchmark classifies every stock by industry, supersector, sector and subsector.
Your portfolios can be out of balance based on any of these groupings. Most of us are prone to invest in what we know. Experience with one type of investment makes you more likely to pick similar investments. You may have all U.S. large-cap stocks, the most common out-of-balance portfolio. These are the companies that everyone is familiar with.
A portfolio of Apple, IBM, Google, Microsoft, Oracle, Qualcomm, Amazon.com, Intel and Verizon is unbalanced in multiple ways. They are all U.S. stocks. They are all mega-cap. They are all growth stocks. And they are all in the information/technology industry.
These are all categories that are easily diversified. In fact, you can get the entire world stock market roughly in its current allocation simply by buying two exchange-traded funds (ETFs). The first is Vanguard Total Stock Market ETF (VTI). It contains over 3,000 stocks representing more than 99.5% of the capitalization of the U.S. equity markets.
An investment in VTI is about 71% in large cap, 20% in midcap, and 9% in small cap. It is roughly half value and half growth. And its largest sector is 19% in information technology. These mimic the ratios in the U.S. stock market. And the cost of owning this ETF is extremely low with an expense ratio of only 0.07%. If you wanted to invest according to the world's stock allocation, you would put 44% of your money in this fund.
With your remaining money you would invest in the Vanguard Total International Stock ETF (VXUS). This fund has about 6,700 holdings from 44 different countries. It represents 98% of the world's non-U.S. markets. Europe is about 43%, Japan 15%, Canada 9% and emerging markets 23%. It also has a low expense ratio of 0.20%.
With these two funds you would own the world's stock market in exactly the proportions of global capitalization--all for the low average expense ratio of 0.14%. Any investment philosophy that deviates from this asset allocation should have a good reason to do so. Limiting your investment to 100 or so stocks in a typical mutual fund and paying a 1.2% expense ratio in the process is often a losing proposition. There are reasons to tilt your asset allocation, but the stock-picking expertise of a mutual fund manager is rarely one of them.
Not every categorization is worth diversifying. Only diversify your portfolio across the spectrum of the best investments. Investors make a mistake when they spread their money across whole life insurance, annuities, hedge funds, private placements and other investments with high fees, lockup periods, illiquidity and no public pricing. Many investment products are not on the efficient frontier of investment choices. Avoid them altogether.
 
Earn Extra Money as a Pet Sitter
1 Feb 2012 at 9:45am
US News has an interview with a woman who started her own pet sitting business after she was laid off. To her it's a way to earn some extra money -- not really a business (she has other interests), but she is supporting herself on it and other odd jobs.
If I had the time and inclination, I'd start a pet sitting business. Why? Because I think it could offer a decent side income. People spend a fortune on their pets and their vacations. Unfortunately, it's often difficult to take Fido on vacation. Voila! A built in need for someone to watch him while you're traveling.
And the options aren't good. After all, do you want Fluffy caged up in tight quarters all week at $25 per day? Or would you rather have her home where she has the run of the house for $15 a day. Oh, and the person checking on her can also get your mail and do a quick security check of the home -- extras that pet-boarding-in-a-box can't offer you.
And then there are all the extra services you can add on (walking the pet, multiple checks per day, chores/tasks around the home, etc.) Don't get me started...
My daughter does some pet sitting (though she's not really interested in growing it like I want her to) so I know a bit about it first-hand. But there are probably some readers out there who have more experience than I do, so feel free to leave your pet sitting tips in the comments below.
Anyway, I think I'm adding pet sitting to my list of potential retirement/semi-retirement options for a side income. Just look how the numbers can add up:
- Five pets watched per day for $15 each: $75 per day
- Number of days: 200 per year (just a bit over half the year)
- Annual income: $15,000
And that doesn't include sales for things like walking that you could add on. With a couple jobs like this and some retirement savings, you could be looking at a faster-than-expected early semi-retirement.
 
Naming a Guardian for Your Kids
1 Feb 2012 at 3:29am
One of the hardest parts of drafting a will for many parents is naming who will be the guardian of their children. It's a terribly difficult decision (after all, who could do a better job of raising the children than they could? No one, right?) So instead of making a tough choice, they simply put it off and make no decision, and forego getting a will.
This, of course, is a horrible move. Because by deciding to NOT draft a will and name a guardian for your children you've done so by default. And the default choice is the court. Oh yes, make no mistake about it. If you do not select a guardian for your children, one will be selected for you. And you will have zero input in that selection (because you'll be dead and left no instructions behind.)
Believe me, I understand. My wife and I agonized over the options when we had our last will completed. What about this couple? No, not them because of _______. What about this other couple? No, not them. They __________. And on and on.
Finally we realized that we were never going to find a perfect choice and that we simply had to make the best choice available. We did that, talked to the couples (we named one primary and one backup), got their permission, and drafted our will accordingly.
I share all of this because the Wall Street Journal recently wrote about the topic of naming a guardian for your children. And they offer some advice that I think will help some of you get over the problems noted above and make a decision on guardianship. Their thoughts:
A guardian isn't forever, or even for a set period of time. If you decide later that the person you designated isn't the best choice after all, you can always make a switch. It isn't hard or expensive to do?the changes can be outlined in a codicil to the will.
It may help to think in terms of the next three years, advisers say. While Grandma and Grandpa may be just the ticket when the kids are four and five, they may not be the best guardians for kids heading into their teenage years.
I think this is great advice. We got stuck trying to make a 10-year decision, when we knew we'd be revisiting the will in three years anyway (regular review to check if updates are needed.) We knew A & B would be great choices for the next few years, but would they be in the next 10? Who knew? No one could know. So we'd go araound and around, wondering about this or that when there was no way of knowing what the best choice was. If we had simply looked at a shorter time horizon I think it would have made the decision much easier.
One thing I want to do this year is to review our will and other estate planning documents. I think we'll likely change our guardians at that time too. The people we named several years ago have moved and we no longer keep in much contact with them. Plus, our kids are in a different place physically and emotionally, and the best situation for them three years ago is probably not the best for them now. And the good news for us is that this is probably the last will where we'll need to name guardians for our kids. They'll be over 18 by the time we need to re-vamp the wills again.
How about you? How did you make the tough decision of who to name as guardians?
 
Applying for an MBA: Taking the GMAT (And Thoughts on the GRE)
31 Jan 2012 at 2:45pm
The following is an excerpt from Your MBA Game Plan, Third Edition: Proven Strategies for Getting Into the Top Business Schools, © 2012 Omari Bouknight and Scott Shrum. It is reprinted with permission of the publisher, Career Press, Pompton Plains, NJ. 800-227-3371. All rights reserved.
A Conversation With Chad Troutwine
Chad Troutwine is co-founder and CEO of the Veritas Prep, a global GMAT preparation service. Prior to starting Veritas, Chad received his MBA from the Yale School of Management and his JD from the University of Missouri. Chad?s position within Veritas makes him intimately familiar with the GMAT exam. We had the opportunity to sit down with Chad and get his perspectives on the examination that gives so many applicants sleepless nights.
What exactly is the GMAT supposed to measure?
Business schools seek the best students possible. In an effort to evaluate candidates from a global spectrum of undergraduate institutions, the Graduate Management Admissions Council (GMAC) created an objective measure of the verbal and quantitative abilities of their applicants. While many have roundly criticized the SAT for its racial and socioeconomic biases, the GMAT has remained relatively unscathed for more than 50 years. Contrary to popular belief, the GMAT has also proven to be a highly accurate predictor of a student?s academic success in graduate business school. Still, the GMAT is not a valid proxy for the rest of the application process. Specifically, the GMAT is not particularly helpful in the ultimate task of any admissions committee?assessing an applicant?s managerial prowess or leadership potential.
How much of this is innate, and how much can be learned?
Because the GMAT is a test of analytical skill, rather than a subject-based exam, a mythology developed that a test-taker could not dramatically improve her score. Kaplan, and other pioneers in the test preparation industry, exposed the myth?and Veritas has completely shattered it. Applicants who have a history of scoring well on standardized examinations will almost certainly do well on the GMAT. On the other hand, those who do not innately possess those skills can still acquire them. All standardized examinations have patterns. We have completely deconstructed the GMAT and created proven strategies to help our students exploit those archetypes.
What GMAT-related weaknesses do you most commonly see in applicants?
Applicants commonly design flawed preparation strategies. Specifically, we often see industrious students who are convinced that the secret to achieving a high score on the GMAT is simple: grind through as many practice questions as possible. They are misinformed. The ideal way to prepare for the GMAT is to learn a multifaceted and proven strategy first, then perfect that strategy with lots of sample questions. Students who jump right to the second part of the equation typically repeat the same errors, reinforcing their bad habits instead of correcting them.
What are some of the more correctable weaknesses for an average applicant who is preparing for the GMAT? What weaknesses tend to be harder for a typical applicant to correct?
Poor time management is prevalent, but easily corrected. Some students race ahead, leaving valuable minutes unused. Other students move too slowly, sacrificing precious time on early problems and leaving far too little time for later, often more difficult, questions. We offer several practice exams and pacing strategies to help alleviate both weaknesses.
Reading comprehension takes time to master. Students develop reading skills during a long period of time, particularly non-native English speakers. Other students struggle with esoteric rules of grammar. Still others have rusty (or non-existent) probability skills. The key for any student is to accurately diagnose weak areas and address them during the course of study.
What?s a reasonable level of improvement (from an initial diagnostic score to the actual GMAT) for which an applicant should shoot?
Improvement is a function of several different factors, so expectations should vary. If a student starts with a lower score (a 400, for instance), he could reasonably expect a 150 to 200 point increase. Conversely, if a student starts with a higher score (a 650, for example), she might be thrilled with a 60- to 100-point increase. A student who has previous exposure to the GMAT will likely begin with a higher diagnostic score, but may not have the same growth potential as her unexposed classmate.
Formal preparation should raise expectations, too. Students who prepare on their own suffer with stunted scores (when compared to those who take a full preparation course). Moreover, students who attend more comprehensive prep courses gain more insight, and typically earn higher scores, than those who settle for shorter programs. Nearly one-third of all Veritas students ultimately score a 700 (the 92nd percentile) or higher on test day.
Do you find that applicants who take the test more than once are able to significantly improve their scores?
GMAC statistics indicate that students do not improve much from one test to another. However, we are convinced that many of those repeating students do not take active steps to radically improve their prospects, and their results reflect that apathy. On the other hand, our repeaters are encouraged to adopt Veritas methods before retaking the test. As a result, our students (who previously took the GMAT ) still average a nearly 100 point-increase, far more than the average for all test-takers.
It seems as though top schools? mean GMAT scores keep creeping up. What do you think that?s all about?
We have three related theories. First, the pool of test-takers has improved. Raw quantitative scores have surged in the last decade, and the standardization of the GMAT has not kept pace. More students than ever are taking prep courses, so more arrive equipped to score well. Additionally, the number of international applicants has ballooned. According to GMAC, students in several international locales achieve higher average scores than their North American counterparts, particularly on the quantitative section. Tellingly, raw verbal scores have remained relatively flat for the same period. Second, GMAC has verified the predictive ability of the GMAT in several studies with many graduate business schools. Consequently, schools may be relying more and more on the GMAT, shading their means ever higher. Third, the scores began to climb steadily after GMAC switched the GMAT from a paper-and-pencil format to an exclusively computer-adaptive test in 1997 to 1998. Any test that consistently relies on reusing questions is vulnerable.
We?ve heard that GMAC has increased the number of combination and permutation problems featured on the GMAT over the years. What?s your perspective?
We hear the same rumors, and they may well be true. Another plausible theory is that, as quantitative scores continue to rise, more students than ever are receiving difficult questions. ?Perm/combo? questions typically come from the pool of very difficult questions, so they may be appearing more frequently because the relative skill of the test-takers is rising. We take no chances in our commitment to provide the best GMAT preparation available. Veritas is the only major GMAT preparation company to devote an entire lesson to perm/combo questions and other advanced statistics. Our dynamic instructors teach proven Veritas strategies, and our lesson booklets include hundreds of practice problems to help students hone their skills.
Some schools have begun to accept GRE scores in place of GMAT results. Do you believe that the GRE is an adequate surrogate? Do you think more schools will jump on the bandwagon?
The GMAT and GRE General Test are superficially identical: Each measures verbal and critical reasoning skills, quantitative ability, and analytical writing in a timed, computer-based format. The GRE is less expensive than the GMAT, so using it presumably increases the number of potential applicants, however slightly. In addition, applicants to other graduate programs that require the GRE will only need to take one test if they also apply to graduate business school. On the other hand, the primary argument for utilizing the GMAT as an evaluation tool is that it uniformly measures the aptitude of all applicants. This standardization creates a level playing field across all applicants. Accepting multiple test formats would jeopardize the one standardized aspect of the application. As such, I?m confident that admissions officers will continue to primarily use the GMAT to obtain an objective measure of quantitative and verbal abilities.
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GRE General Test
We?d be remiss if we didn?t at least mention the GRE General Test in this chapter. Over the past few years Educational Testing Service (ETS), the organization that runs the GRE, has made impressive progress in getting top business schools to accept the GRE as well as the GMAT as the standardized entrance exam for applicants. Since 2005 Stanford, Harvard, Wharton, MIT, Dartmouth, and Duke (among others) have started to allow applicants to submit GRE scores in lieu of GMAT scores.
Much has been written in the press about the GRE?s progress in the realm of top business schools, but few business school applicants have adopted it as a true GMAT alternative. In fact, for the 2010?2011 application season, every top business school that shared such data reported that the percentage of applicants submitting GRE scores was in the single digits. Although it?s not a long shot to assume that this number will rise over time (especially with ETS rolling out a revised GRE in August 2011), it doesn?t look like the GRE will displace the GMAT as the business school entrance exam any time soon.
How Does the GRE Differ From the GMAT?
At first glance, the two tests are quite similar. Each has a Verbal and a Quantitative section. Each has a writing section in which you submit two short essays. Both tests are computer-adaptive. Each test give you an overall score that can go as high as 800. Just knowing this, you?d be forgiven for thinking that the two tests are almost perfect substitutes for one another.
Where they differ most is in how they test each of the sections. Although the GMAT?s verbal section features reading comprehension and critical reasoning, the GRE puts a great deal of emphasis on vocabulary, testing you on analogies and antonyms in addition to reading comprehension passages. In this way, the GRE looks a lot more like the standardized tests that you probably took to get into college.
In the Quantitative section, though the GMAT?s data sufficiency problems are legendary, the GRE has no exact counterpart. Instead, the GRE features two problem types of its own: Quantitative Comparison and Data Interpretation. These problems are rarely terribly difficult, but they do combine some of the ?see what you can do with a limited amount of info? ideas that go into the GMAT?s Data Sufficiency (and Integrated Reasoning) problems. The GRE?s problem solving questions are similar to those that you will find on the GMAT, however, so if you?re good at one you should be good at the other.
The most important practical point to be made here is that many test-takers consider the GRE to be much easier than the GMAT, particularly on the Quantitative side. In fact, a perfect score on the Quantitative section will get you in no higher than the 94th percentile, meaning that a perfect score only means that you?re in the top six percent of all test takers. Make one mistake, and you?ll drop down to the 89th percentile.
Though you may already be thinking, ?Great! I?ll take the GRE!? keep in mind that this actually could make your job harder, particularly if you?re a terrific test-taker. Why? When everyone else does well, you need to be perfect in order to stand out from the pack. If you have an off day while taking the GRE, you (and admissions officers) may be disappointed by your percentile scores. At least right now, the GMAT is a more effective instrument in separating the great test-takers from the merely good ones.
Note that, as this third edition of Your MBA Game Plan goes to press, ETS is rolling out a new version the GRE General Test. We expect that the changes (which ETS hasn?t described in great detail) will make the exam more similar to the GMAT. So, many of the differences here may go away. However, for the time being, we expect that the GMAT will continue to be the most commonly used test for business school admissions, by far.
 
The Simple Dollar
Buy the Cheap Gas (33/365)
3 Feb 2012 at 2:00pm
I’ve turned the regular fluctuation of gas prices at the gas station fairly near our home (the one mentioned yesterday) into a game of sorts with my oldest son.
Simply put, we’ve started tracking the data.
We watch for the price of gas on that sign each time we drive by it, then we mention whether it has gone up or down recently.
We remember the record prices we’ve seen (sadly, he’s so young that the lowest price he can ever remember is $2.97 a gallon – I remember my parents getting almost hysterical when prices inched vaguely near a dollar a gallon),
We also talk about whether or not the price is low enough right now to stop in and fill up.
We’ve even started tracking and recording this data a bit.
We do the same thing when we see gas stations in other towns, comparing them to the prices at home.
It’s a fun little economics game, but it has some real value, too. I’m cluing him in on many of the things he needs to know in order to maximize his value at the gas pump when he’s old enough.
If you can save $0.10 per gallon of gas, filling up a typical sixteen gallon tank saves you $1.60. Do that consistently and you’re talking about a significant difference in your annual fuel bill.
So, how do you shave off that $0.10? There are a few things you can do to make sure that you’re putting the least expensive fuel option into your tank.
For starters, know what your car needs. Very few cars need the premium fuel or can even utilize it to any degree of effectiveness. Take a peek in your car manual (see, there it is again – your manual is really useful) and see what type of gas is suggested. Most modern cars simply suggest using 87 octane gasoline, which is the “cheap” stuff at the pump in many states. Choose the gas type that’s cheapest at your pump that meets the minimum suggestion from the manual.
Never drive significantly out of your way to get cheaper gas. My rule of thumb is that I have to be saving at least a dollar in my tank for every mile out of my way that I drive. Since my vehicle has a sixteen gallon tank, I’m looking for a savings of at least $0.07 a gallon for every mile out of my way that I drive. Why? Even in perfect traffic, that’s still two miles (one each way) of driving in town, which will take at least five minutes with the risk of significantly more time, plus the gas you use to make that extra jaunt, just to save $1. You’re quickly getting below a rate of $10 per hour in savings.
Don’t be brand loyal until you’re familiar with the prices in your area. For the most part, the gas stations in your area are going to be pretty consistent with each other. If there are one or two stations that are a bit lower, they’re going to consistently be a bit lower. Spend some time studying the prices in your area, particularly along your commute, so that you know what the prices are, and consistently visit the station with the lowest prices.
After a while, you’re going to regularly find yourself using a single station or two, so get a rewards credit card associated with that station. Use it only for gas there. Typically, rewards cards associated with gas stations have really nice rewards, but only on gas bought at the stations in that chain. So, don’t use the card for anything but gas, and pay the balance in full each month. This will often get you a very nice price on gasoline.
You should also check your local warehouse club for gas offerings. The local Sam’s Club in our area offers gas prices substantially below other chains if you’re a member. Since we are, we often utilize Sam’s Club for gasoline.
If you’re a commuter, shaving a bit off of the price of a gallon of gas can help a surprising amount over the long haul. It’s one of those little changes you forget about until you find yourself breathing easier with regards to your finances.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
     
Figuring Out What?s Really Important (As a Foundation for Your Decisions)
3 Feb 2012 at 8:00am
Whenever I spend time thinking about my life, I get caught up in a lot of ideals. I think about writing a great novel. I think about some volunteer projects I’d like to work on. I think about the house I’d like to build and the great travel I’d love to do in the next ten or fifteen years. I think about my own physical fitness and I think about riding in RAGBRAI.
These are wonderful dreams. I enjoy taking little steps toward them because, honestly, I usually enjoy the process.
Yet, when I step back and look at the broader scope of my life, that’s not what’s really important to me.
First and foremost, my family (and I consider my closest friends a part of that) is the single most important thing in my life. Bar none. Secondary to that is learning new things and, hand in hand with that, sharing what I’ve learned.
Almost every other interest and passion I have in my life is secondary to those things.
I’ll give you some examples to illustrate what I mean. Anyone who has read the site for very long knows that one of my favorite pastimes is playing board games and card games. I love playing games with other people across the table from me.
Yet, when I dig deep into it, it’s not really about the games. I do enjoy them, don’t get me wrong, but what I love about them is that it gets people I care about around a table engaging in a shared experience.
If you asked me what my favorite memories of board gaming are, they revolve around people. I think of playing Old Maid with my children. I think of playing Risk Legacy with my wife and three of my closest friends in the world. I think of sitting in my friend John’s living room, playing Descent with him and another of my closest friends.
Another great example comes from reading. If a friend or family member really enjoys a book, I’ll almost always give it a read. Why? Beyond merely being a good book, it becomes a shared experience with that person.
So let’s bring this home: what does this have to do with personal finance?
Personal finance is all about goals. If you’re not selecting a goal – whether it be freedom from debt, saving for an abundant retirement at age 70, or something else entirely – you’re either already incredibly rich (and you probably got there due to goals) or you’re spinning your wheels. Progressing toward a better and more secure financial state is something that pretty much every reader of The Simple Dollar shares.
However, goals are useless if you don’t feel completely motivated to move forward with them. You might desire a change in your life, but unless you’ve reached a point where that change feels vital to your future existence, it’s not going to happen. If you’re not getting out of bed with the feeling that today you’re going to move toward that goal, you’re probably not going to move toward that goal.
So, what is it that’s truly important to you? There is no right or wrong answer. It’s a matter of simply figuring out what’s truly important to you.
Here’s an example. I have a friend who dreams of being a sports announcer. He talks about it a fair amount. However, he also has a wife and a child at home. Recently, he told me that he thinks his sports announcing dreams are going to go on hold for a while. I asked him why, and he told me that chasing that dream requires a level of time and commitment that he can’t give to it right now. He had realized that his family was more important to him and he was sticking with the things that motivated him deeply every single day.
Does that mean that he’s abandoning the dream? Not entirely. Instead, he’s finding new ways to channel that passion that’s more in line with the rest of his family. He’s gotten involved with youth sports, assisting with the production of videos and other materials for other parents. This allows him to follow his passion while also being involved with his children. In fact, he’s starting a small video production company as a side business, where he creates professional videos highlighting a team and sells them for a reasonable fee. Several youth sports leagues are going to partner with him, so all he has to do is hire a few people to film the games, then edit them at home. He can film his own child’s games himself and involve the family in the production process at home.
Spending time with his family is the most important thing to him. Because of this activity, he’s spending time with them, earning some money on the side, and showing his children an entrepreneurial spirit along the way.
I can tell a very similar story about The Simple Dollar. My motivation to change my financial habits came from my oldest son. My motivation to write about it was many-fold: I enjoyed writing (value #2), I wanted to share some ideas with my friends and family (value #1), and I hoped to earn some money on the side to make our financial journey better (value #1), plus I would be able to involve my wife and my children in the process (value #1).
My dreams of making a living from writing didn’t start happening until I oriented them around what truly mattered to me. The same thing is true of my sports announcing friend.
So, what’s important to you? I think the easiest way to identify those core things that are important to you is to evaluate what you actually do over a long period of time. I’d focus on activities outside of the workplace, because we all need to earn a living, unless you’re already doing a job that’s key to what you value.
What do you spend your spare time on? I spend mine with my family and close friends as much as I can, and when I’m alone, I read and learn things. I bridge the two by finding ways to express what I’ve learned. This is what I enjoy doing.
My personal finance success came entirely from those things. My family inspired me to make changes with my money. My desire to read and learn educated me on how to do it. My desire to share what I learned launched The Simple Dollar.
You can follow a similar path with what you value the most. The key thing is to always remember that, no matter what your goals are, a solid personal finance foundation makes it all much, much easier to achieve.
   
Air Up All of Your Tires (32/365)
2 Feb 2012 at 2:00pm
Every weekday, I drive my daughter to preschool. It’s a nice routine, one that gives me a chance to spend some time with her. I make breakfast for her, make sure she’s adequately dressed for the weather, brush her beautiful long hair, and then we’re off to her preschool.
Along the path from home to preschool is a gas station. That station has the lowest gas prices within about a ten mile radius, so it’s the one I tend to use regularly.
Right next to the gas station is a free air pump, which I use about once a month or so. After I fill up, I drive over to the air pump, pull out my air gauge, check the pressure in each tire, and fill it up to the maximum recommended pressure as suggested in my car’s manual (see – there’s that car manual mentioned again).
Quite often, I’ll stop there before dropping off my daughter. She’ll get out of the vehicle with me, talk to me while I’m airing up the tires (she doesn’t quite have the finger strength to actually air them up, though we’ve tried), and often she’ll help me pull the air tube around to the proper position so that I can air up each tire.
It’s a bit of father-daughter bonding, sure, but it’s also saving me some money and subtly teaching her about a really valuable tip for auto maintenance.
I actually learned about this tip the hard way, too.
I used to just get my oil changed at a full-service oil change place that would air up your tires for you each time. I always felt that was good enough.
In 2006, though, I started getting really into measuring my vehicle’s fuel economy and figuring out ways to reduce it. I got my oil changed on a very hot day late in that summer, and by early December I was due for another oil change.
On a very cold morning, one where I intended to actually get my oil changed and my tires inflated that evening after work, I started to pull out of my driveway when one of my tires went “pop.”
This caused me to spend most of an hour getting the spare tire on, which meant I was a bit late for work.
That evening, when I stopped by the oil change place, they noted that the spare tire was on the vehicle. They noted that the air pressure on all of my tires was almost dangerously low. They also looked at the other tire that was sitting in the back and told me that it was fine and that likely it had been pushed off by bumping into a curb or something.
That’s one way that airing up your tires can save you money and time, but that’s just one.
The biggest reason to do it is that adequately aired tires save on your gas mileage. It’s pretty clear-cut, actually.
Every psi that any one of your tires is below the recommended maximum costs you 1/8% of your fuel efficiency. So, if all of your tires are 4 psi below the recommended maximum, your fuel efficiency goes down 2%. If they’re 6 below, you lose 3%.
Let’s say your tires are running 6 psi below the maximum. That’s a 3% reduction in your fuel efficiency. Your 25 mpg car goes down to 24.25. Over just 1,000 miles, that means your car is using 1.2 gallons more in fuel than if you had maximized your tires’ air pressure. That’s $4 gone, right there.
If it takes you 5 minutes to air up your tires, that simple move is saving you money at a rate of $48 per hour of effort. That’s well worth it.
All you need is to keep a tire gauge in your glove compartment and know what the maximum PSI is for your automobile (it’s in your manual). Fill your tires up with air once every month or two – it’ll just take you five minutes. Doing so will keep your tires at the maximum recommended pressure, maximize your fuel efficiency, and keep your tires on the rims (although that only happens if you neglect it for too long).
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
Reader Mailbag: Super Bowl Celebration
2 Feb 2012 at 8:00am
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Repeatedly failing to achieve goals
2. Handling bill collectors
3. Rethinking mortgage payoff goal
4. Handling extra cash
5. Paying taxes at year end
6. Online business and credit cards
7. Buying home for parents
8. Heroes
9. Repair or replace used car?
10. Using emergency fund during schooling
What does our version of a Super Bowl party look like?
It’s a potluck dinner. The game is on in the background, but largely ignored. People sit around and play board and card games.
This year, my parents are actually going to babysit our children so we can do these things without children (meaning less distraction and less concern about child-unfriendly topics of conversation).
Q1: Repeatedly failing to achieve goals
All the time, I set these powerful goals for myself. I’m really inspired to get out there and start taking action on them. Then, about two weeks later, the fire just dies out and I stop making any progress on the things I want. I’ll sulk on it for a while, then set new goals and start off like gangbusters again, only to fail again. How do I break out of this cycle?
- Leon
First thing: stop making multiple goals. Focus instead on just nailing one goal at a time.
Second thing: stop making sweeping life changes to achieve your goals. Instead, focus on one manageable thing that will move you towards that goal. Work on nothing but that one specific thing for a while until it becomes second nature. Then, move onto the next specific manageable thing.
For example, if you’re trying to lose weight, pay off all of your debts, read a lot more than you were reading, and redo the entire interior of your house, pick one. Say that you pick weight loss. Focus wholly on eating no junk food for a month and replacing it with something healthy, like carrot sticks. Ignore the rest of it. Don’t even think of them as goals.
Q2: Handling bill collectors
I am working part-time (less than 20 hours a week) and currently seeking more gainful employment. I don’t make enough to get by and rely on help from others to pay my bills right now. I’m truly broke (like using coffee filters for toilet paper broke). I have debts that are in collections, and I can’t make payments on them. Is there something specific I need to do in regards to those accounts? Should I call the agencies and tell them there is no way I can make payments right now, or will that just encourage them to begin harassing me again (at the moment they seem to have given up on getting anything out of me)?
- Kevin
I’m not sure using coffee filters as toilet paper is a highly cost-effective solution unless you have a lot of coffee filters bought in bulk and no toilet paper on hand, in which case it’s a financial delay tactic of questionable hygiene.
The honest route is to contact the agencies and tell them that you can’t pay right now. Make it clear that you do not have adequate employment.
At the same time, however, I do encourage you to negotiate with them. Use your employment situation as a tool to play hardball. Tell them that you’re willing to pay a much smaller amount and suggest one. Debt collectors typically buy debts from large companies for pennies on the dollar, so anything they get from you is likely to be a profit.
Q3: Rethinking mortgage payoff goal
Our situation is this: We have ~153k left on our mortgage and we pay $320 extra each month. We also save $500 each month in a fund that we plan to use as a down payment for a new house. Our current house is pretty small. We have a toddler and another baby coming soon, thus the saving for the next down payment. The down payment fund has around 26k in it. In addition to the down payment fund, we have around 40k in cash.
The way I see it we have three options:
1) Continue on as we’ve been doing. Pay the extra $320 on the mortgage each month and save $500 for the next downpayment.
Disadvantage: Much more interest payments because of the longer loan. House not paid off until March of 2028.
Advantage: More liquidity, next down payment is not tied to current house.
2) Stop saving for the next down payment and divert that $500 to the current mortgage, so we’d be paying an extra $820 each month.
Disadvantage: The money isn’t liquid and if/when the value of our home continues to drop, the money is tied up until we can sell the house.
Advantage: Our house would be paid off in October of 2021, by my calculations, with far less interest payments.
3) Stop saving for the next down payment AND empty the next down payment fund to quickly lower our current mortgage down to 127k.
Disadvantage: Money tied up in the house AND we lose the liquidity of the next down payment entirely.
Advantage: The mortgage would be paid off 14 months earlier, August of 2020, with even less interest paid.
One idea in this whole situation is that if the mortgage is paid off, we don’t really need to worry about the next down payment. Once the mortgage is paid off, we can aggressively save for the next house and we would certainly have some equity in our current house, even in spite of the horrible market. What are your thoughts?
- Brian
It depends on whether or not you’re underwater on your current house, which I’m not exactly clear on. Do you still owe more than your home is worth?
If you do, then you’re going to have to get your mortgage down to the break-even point before you do anything else.
If you’re not underwater, then I would make minimum payments on the debt and start stockpiling for the next down payment.
Q4: Handling extra cash
I have a friend who I have sort of “taken under my wing” in terms of finances. He does fine with his money, he just isn’t very organized.
Background: He is single, early 30′s, base pay about $50k. He has no debt, old car, rents an apartment, probably has $30k in a cash cushion, and at least partially funds IRA/401k every year. He may move to another country in a few years, either with his job or to start a different career.
The question: He just received a gross bonus of about $140k, after taxes about $80k. He went ahead and fully funded 2012 401k with that (in his words, $13k to 401k), so that leaves about $65k to work with.
I am meeting him for dinner next week to help brainstorm about what to do with that $65k in his situation. He says he doesn’t want a new car at this point (he can walk to his job, weather-permitting, and I think he just doesn’t care about his car/cars in general).
- Andrew
Your dinner should be focused on what his goals are. What does he intend to do with his life in the future? Does he want to start a small business? Is there potential for marriage in the future? What about home ownership? These goals have different investment paths.
He may also want to consider using it to fund a Roth IRA for the next several years so that his retirement savings get a giant boost. That really depends on what other retirement savings he’s got to this point.
If he doesn’t have a goal, then he should sit on that money. Since he has a cash cushion, I would suggest that he puts most of it somewhere where he can largely forget about it for the time being, something that has some risk but also has some potential for a decent return. I’d probably put it in a very broad stock market index fund.
Q5: Paying taxes at year end
My husband did our taxes this year, and in the end, we owe the federal government money. It’s mostly due the unforeseen consequence of using an education award from my service with AmeriCorps, which pushed us into the next highest bracket. Is there any way for you to outline the process of repayment to the federal government? What are our options? Luckily it’s not an earth-shattering amount, and we’ll be able to cover it, but I am curious if there is a way to set up a payment plan or something like that. How would you avoid a windfall like this in the future, when we so often rely on a tax refund for extra “fun” money (to pay for vacations and incidentals)?
- Kelly
You certainly can set up a payment plan with the IRS. It’s easy to do and they’re pretty good about working with you if you’re clearly trying to pay your taxes.
My rule of thumb is that for every dime you bring in that isn’t already taxed, you should save a nickel of it for your tax bill. I do this with every dollar I bring in.
If you owe less than that (and you most likely will), treat the remaining savings as your tax refund.
Q6: Online business and credit cards
I am a small business owner. I have accepted credit cards for 15+ years, but only process a handful of credit card transactions per month.
My credit card processing company keeps raising their fees, raising their fees, raising their fees…..and lowering their level of service; they will no longer even send me a monthly statement, without charging me a “statement fee.” At this point, due to their fees, if I process NO credit cards, my annual costs are $500+! Add in the transaction fees (3% or more per transaction), and it’s just become outrageous.
I would like to be able to continue accepting credit card payments as a convenience to my clients, but these fees have become unbearable.
Besides Paypal, are you aware of any way to accept credit cards without these high fees?
- Shelley
My immediate suggestion would be to use Google Checkout, which seems to be just what you’re looking for here. It will handle your transactions easily, Google takes a small cut, and you move on with business.
I’ve been using Google Checkout for a while now on a project I’ve helped some other people with and it’s worked great.
Paypal is convenient, but as a seller, I’ve heard a lot of stories about frozen accounts and the like and that makes me fairly nervous. I’m assuming you’re wanting to avoid it for similar reasons.
Q7: Buying home for parents
My boyfriend Jim and I have been together for 4 1/2 years and are planning on marriage in the next couple of years. My question is about Jim’s parents. Their real estate business went bankrupt when the recession hit and they have been having a very difficult time making ends meet. Jim’s father is now underemployed doing factory work and looks for minor home maintenance work on his days off. His mother has been disabled for the last few years due to extremely debilitating arthritis. She cannot work. They’re making it, but barely. Jim has been helping his parents out financially since he started working – roughly the amount of their mortgage payment monthly. I know this is something we will need to do for the remainder of their lives unless we do something like buy them a home.
Jim and I are financially solvent enough to buy their home, due to a large inheritance I received – it would cost us less than 5% of our assets. We would like to keep it in our names, and we would let them live there, free. The reason we hesitate to put it in their name is because we do not want them able to take a loan out on the home. Jim’s father has been irresponsible with money in the past. If we bought their home, it would fix all financial problems they are having, barring catastrophe. They would be able to save for an emergency fund, retirement, have enough money to make ends meet, and have a little something left for themselves to enjoy. It would be a very large increase to their quality of life.
Do you think I should buy their home for them? If I buy it, should there be strings? Would “strings” of “forced savings for retirement/emergency fund” be unreasonable? I tend to think strings are a poor idea because of the way it would affect the relationship between us and his parents. I don’t want them to view us as their landlords. I badly want to turn their situation around, but I want to do it in a way that will allow them to remain self sufficient after we do so, and cause us to not need to intervene in their financial lives on a regular basis.
- Kathryn
If you buy it, I wouldn’t attach any “strings” on their behavior. You’re opening the door wide for future conflict.
If you can easily afford it, buy the home and just let them live there without rent. When they no longer use the home, you can fix it up and sell it, possibly turning a small profit on it.
One thing I would suggest from personal experience, though: make sure you establish who’s responsible for property taxes and insurance. Given the situation, it’s likely you’ll be responsible for it, but be sure you’re aware of that before you jump in.
Q8: Heroes
Who are your heroes? What people inspire you greatly?
- Charlene
Most of the people I think of as “heroes” aren’t famous. There are so many people out there doing things quietly in their community, changing lives in a positive fashion, and they never get lauded with celebrity or fame.
I admire the couple in our community that run the food pantry. They spend quite a lot of time on it, collecting food, keeping the doors open, and making food available to the needy in the community. It’s a constant commitment of time with no real reward. They don’t get fame from it. They barely get any recognition from it. Yet they do it, week after week, month after month, year after year, because people in the community need help.
To me, that’s a hero.
Q9: Repair or replace used car?
My wife and I plan to look for and hopefully purchase a house this spring. We have been pre-approved for a decent amount (~$400K). Although we are looking now, current inventory is lacking and we feel after the new reality season in our area (traditionally the week following SuperBowl Sunday) we should be able to find something we like and can afford. With the market being what it is, we are determined to find a house that we can easily live in for at least a decade.
In the meantime, we currently have two automobiles that eventually need to be replaced. We plan to replace them with newer used cars.
My 1997 Mustang needs $1200 worth of repairs to make it safe to drive. This includes brakes (~$400) and new tires (~$400). It would be a game of Russian Roulette to continue navigating Chicago Winters (read: snow) with my current set of tires. [I actually ended up putting in $400 in repairs to the clutch cable and a few other things the other day.]
My wife’s car, a 2002 Trail Blazer, is in better shape but has worse gas mileage than the Mustang. I currently drive her car 26 miles to work (one direction). Her transmission is starting to fail. Our future perfect world scenario would be to replace the Trail Blazer with an Element and the Mustang with a more fuel efficient car to be determined later, perhaps a hybrid or even an electric car if we have the infrastructure, though we’d likely replace the Mustang first and get an Element.
The question is, do we repair the Mustang or use the $1200 toward purchasing a new used vehicle. As I see it, if we invest the $1200 into the car, we reduce our emergency fund and/or downpayment fund (both separate at the moment). However, if we take on even a small auto loan, the interest rate we get for our house might be slightly higher than we could get otherwise and over the life of the home loan, even a quarter percent higher equates to ~20K extra interest paid.
- Ron
It really depends on the reliability of the Mustang other than the things you’ve mentioned.
Has it reached a point where you can barely go three months without something going wrong with the car? Or is this just a conflux of things that’s fairly unusual for an otherwise reliable car?
If the car can’t get you reliably to work and back, you need a different car. Yes, that might slightly postpone your house plans, but if the alternative is having your boss tell you to take a hike because you can’t consistently get there on time, then you don’t really have a choice.
Q10: Using emergency fund during schooling
I am a LPN in my late 40s who will be returning to school in the Fall pursuing the additional education to become a registered nurse. My children have completed college and are out of the house. My husband and I have a house payment of $850 (for another 4-5 years) but otherwise no debt. We have about 6 months of our monthly income in savings, and I have about $150k in a 401k.
When I return to school for the year, I hope to either quit working altogether or work no more than 20-30 hours per month. (I make $20 per hour). My husband will be changing his withholdings from his check once I stop/reduce working, as we both claim zero dependents and have additional money taken from each of our paychecks. So his checks will increase to some degree when I reduce my hours. I will attend a local community college, so educational costs will likely be $4000 -$5000 for the year, and I intend to pay out of pocket for this.
My question is this, if we are financially strapped during the course of my year of schooling, is it better to take out a student loan (since they are at such a low interest rate for 10 years) or potentially deplete/reduce our saved money? Should our savings be used only for “emergencies” ? or do you feel that is precisely what a “savings” is for? I have considered taking out a student loan and putting it in savings and only using it if we are strapped. If I don’t need it, then I’ll repay it immediately after I finish school and have returned to full-time work. (It isn’t always a quick process to obtain a student loan, which is why I have thought about doing it whether or not I need it initially. If I wait until I need it, it might take too long to obtain the funds needed.)
(By the way, I’ve been “couponing” for about 6 months and have nearly a year’s supply of all toiletries and paper products that we will use during the course of my schooling. I also garden and have a significant supply of frozen and canned produce to help us get through this time.)
I’d appreciate your thoughts and insight. I’m excited, but nervous, to be returning to school. RNs in our area typically make 10-15k more per year than LPNs, so it won’t take long to see a return on my educational costs, but more importantly, there are probably 10 RN job opportunities for every 1 LPN job opportunity, because so many facilities are no longer employing LPNs.
- Linda
Don’t even think for a second about what you might earn after this schooling. Betting on earnings that your future self might make is a route to financial despair.
Instead, look strictly at the difficult year. Make a budget for that year. What is your family income during each month? What are the required bills that are going to have to be paid?
If it doesn’t add up, delay this move for a year or two until you can save enough to make it work. Remember, this does not constitute an emergency, so you should not deplete your emergency fund for it. If you do deplete it and then something goes seriously wrong, you’re going to be in a desperate pickle.
Got any questions? Email them to me or leave them in the comments and I?ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.
   
Don?t Buy a Service Contract or an Extended Warranty (31/365)
1 Feb 2012 at 2:00pm
I don’t like high pressure sales situations.
Whenever I find myself in a situation where some cheesy salesperson is trying to give me the hard sell on some product, I find myself walking away. Even more so, I usually find myself getting a negative gut impression of the product being sold, one that’s usually reinforced when I go home and do the research only to find that the product is overpriced or underwhelming.
Case in point: when Sarah and I bought our Prius in 2009, most of the people at the dealership were friendly and hands-off, but there was this one guy who we interacted with that tried to do the hard sell on a service contract.
We were ushered into a small conference room by him where he attempted to do some kind of hard sell on us on a service agreement. It came off like one of those police interrogations on television.
After about a minute, we told him we weren’t interested. I got up to leave and he said, “Now, just hold on a minute…”
I told him, flat out, that I was walking out that door and if I was stopped from doing so, we were leaving the dealership without the car.
That’s how I often react to the hard sell. I just walk out of the room. I don’t trust the “hard sell” and I’m certainly not going to listen to it. If your product is so questionable that you have to resort to the “hard sell,” I’m not interested.
Of course, a big part of the reason I walked out is because, most of the time, that initial offer for a service contract or an extended warranty is way overpriced and does little for you. It’s a questionable product, which is part of the reason why they went for the “hard sell.”
For example, if you’re looking for a service agreement for your car, you’re going to want to make sure that the contract you’re being offered does not merely duplicate things that are already found in the warranty. You’re also going to want to carefully read over the exclusions, because things like “normal wear and tear” make the service contract nearly worthless (as they’ll claim almost everything is “normal wear and tear” and thus excluded from the contract). These two factors alone will eliminate most service contracts you could buy.
If you’re still interested in finding one, shop around. Check with various auto repair shops in your area and ask if they offer service contracts. If they do, ask for a copy and review it carefully. The vast majority of contracts that you find will have exclusions and restrictions that make them a pretty poor value.
What about an extended warranty? These usually just extend the terms of your car’s warranty. However, they’re not a particularly good deal, either, because most of the defects in a car show up before the end of the normal warranty and the warranty often excludes things like “normal wear and tear” (just like that service contract). It’s much like buying an extremely overpriced and very limited insurance policy for service on your car.
In my opinion, your best move is to take the money you would have spent on these things and put it into a savings account. Then, tap that money only when you actually need repairs to the car (repairs that the service contract wouldn’t have covered anyway).
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
The Simple Dollar Weekly Roundup: Human Edition
1 Feb 2012 at 8:00am
Recently, I found out that one of my favorite writers has cancer. That person will announce it in due time if it turns out to be untreatable, but that’s her (or is it his?) decision.
When you’re a fan of someone’s work and read it faithfully, it’s easy to get caught up in that person’s work. You want a new book. You want a new blog post. You want a new photograph. You want some detail to be corrected. I do this all the time. I can’t tell you how long I’ve pined for the next book in fantasy series that I’ve loved or waited for the next album from the artist I enjoy.
Sometimes, though, the curtain is lifted. There are human beings back there, trying hard to create useful things, handle the feedback they get, and still live some semblance of a normal life. They make mistakes. They have pain and regrets.
For every singer, artist, writer, or other creative person whose work you love, there’s at least one real person back there trying to deal with this complicated mess we call life. They deal with sick children, past regrets, relationships that aren’t going well, and illnesses of their own.
We are all human.
How to Choose a Good Bank as a Freelancer This is a really interesting perspective on choosing a bank, as not every bank account is perfect for everyone. (@ freelance switch)
Finding the Courage to Stay the Course Sticking to a long-term goal can be really hard, especially when you’ve reached a point where there’s a lot of work to do before the next milestone. This is some great advice for sticking to it. (@ dumb little man)
Seven Easy Menu Planning Ideas We do most of these things. These tactics really help with food preparation. (@ living richly on a budget)
Five Free Gifts for Valentine’s Day Don’t sweat over a perfect gift or a box of chocolates or something when a bit of thoughtfulness will do. (@ million ways to save)
   
Read the Manual (30/365)
31 Jan 2012 at 2:00pm
When my wife and I first got our Prius, we had a very difficult time getting the car to turn on.
Now, this seems like a completely simple issue. Put in the key, right?
Well, our Prius has a button on the dash that says “Power” instead of a key. Unfortunately, if you push that button without having a little keychain in your pocket, it won’t work.
Even stranger, if you push it with that keychain in your pocket and haven’t pressed down on the brake, you’ll just get the auxiliary power.
It took Sarah a while to figure it out. Then, a few days later, I spent more than an hour figuring out how exactly this worked. (It seems simple, but when you’re in the car with no idea how to do it, it’s a bit trickier – trust me.)
How did I figure it out? I read the manual.
Those of us who have owned a car for a while generally feel pretty confident about how the thing works. Put in the key, put it into drive, and go, right? Who needs the manual for that?
In truth, a car manual is loaded with useful things, particularly if you’re new to that model of car. It tells you how exactly each feature works on the car, for starters. After my experience with the Prius, I spent about an hour sitting in our Pilot after we purchased it, trying out all of the features just to see how they worked. Let’s just say I never found myself wondering how the emergency brake or the windshield wipers worked during the moments when I needed them.
The manual tells you lots of little useful facts, like the recommended tire pressure (invaluable for when you air up your tires) and the details of your warranty. It tells you the maintenance schedule (something I’ll talk more about in the next few days), where the tools for changing a flat tire are, and how exactly to turn on your flashers. It describes how to change the oil yourself, how to replace the windshield washing fluid, and how to change the transmission fluid.
Every single one of those things will save you time and money. Often, that time and money will be saved during a key moment when time and money are of the essence. All it takes is some time spent right now reading the manual and trying out the things described in it.
Your car manual is a giant recipe for relieving car-related headaches. Take advantage of it.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
Banks Are Not Your Friends
31 Jan 2012 at 8:00am
I believe that banking institutions are more dangerous to our liberties than standing armies. – Thomas Jefferson
Thanks to William Grootonk for the image.
Yesterday, I was stunned to read a news report about how Freddie Mac denied people the ability to refinance, then made investments that earn them more money if people are unable to refinance. “Freddie Mac has invested billions of dollars betting that U.S. homeowners won’t be able to refinance their mortgages at today’s lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom. [...] Millions of homeowners wish they could refinance, but their lenders tell them they can’t qualify for today’s low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.”
In other words, the investment arm of the institution is making investments that will profit if people can’t refinance while their lending arm is telling people that they can’t refinance.
They are not your friends.
Do we even need to go into detail about how banks, insurance companies, and lending institutions consistently work against the customer?
Citigroup?s main brokerage subsidiary, its predecessors or its parent company were considered by the SEC to have violated the law against purposeful or negligent fraud of customers under interstate commerce five times: in 2000, 2005, 2006, 2010 and 2011. In each instance, the firm undertook ?never to breach the law again?.
Bank of America, which now includes Merrill Lynch, was found by the SEC to have violated security laws some sixteen times and made similar pledges on each occasion.
JPMorganChase, which now includes Bear Stearns, was found by the SEC to have violated security laws some twelve times and made similar pledges on each occasion.
The scorecard for other big financial institutions is: UBS ?seven times; Goldman Sachs ?three times; Wachovia ?three times; AIG ?twice. The list goes on.
These businesses are not out to make your financial lives easier. They are out for profit. Sometimes, profit might be in line with what your financial needs are. At other times, the profit of the bank is opposed to what your financial needs are – and profit will win.
These banks are doing exactly what they were designed to do, which was make money for the shareholders. That does not include making money for you unless doing so happens to coincide with making money for the shareholders.
My point is simple. Do not rely on these institutions for your financial future. If you already do, make it a serious focus to reduce your reliance on them.
Every day you’re in debt, you’re handing money to these financial institutions because they loaned you some money in the past. If you put $1,000 on a credit card and wait a year to pay it off, you’re not only paying back the $1,000, you’re giving them $200 more for the privilege. Mortgages are even more painful. A 30 year mortgage for $200,000 at, say, 6% often has several thousand in closing costs right off the bat. Then, over the lifetime of that mortgage, you’ll not only pay back the $200,000, you’ll also pay back $231,676.38 more in interest just for the privilege.
Got a credit card? The terms will likely change on that card on a fairly regular basis as the companies find new ways to earn a profit from you holding that card. Often, that means you’re going to be paying fees on it or high interest rates on it or interest that starts accumulating very quickly or bonus programs that are difficult to use.
Every day, I receive emails from readers that have piles of credit card debt, piles of student loan debt, a big mortgage, car loans, and other forms of consumer debt. Others are thinking of getting deeper into debt because they want that house or that car now.
When you walk in the door of a financial institution, you play by their rules. They do not give you money because they want your dreams to come true. They give you money because they’re going to make far more money from you over the long run.
Your mortgage may be life-changing for you, but it’s just another profit-making revenue stream for your bank. The same goes for your car loan or any other debt you may hold.
What’s the solution, then? Debt freedom. It’s a very simple goal, but it’s a powerful one, and until you achieve it, you’re going to be simply handing money to financial institutions.
What’s the biggest part of debt freedom? Self-control. You don’t need everything, and you certainly don’t need it today. Your life will not be made whole or complete by having a big house or a shiny new car. Focus on having just the things you actually need and stand on your own two feet with them.
The best thing you can do if you want better behavior from the banks is to make yourself far less reliant on them and stand on your own two feet financially.
   
Focus on Reliability and Fuel Efficiency (29/365)
30 Jan 2012 at 2:00pm
The last two weeks have focused on appliances. Now, we’re going to shift directions and take a deeper look at automobiles.
Let’s take a look at two hypothetical cars.
You’re looking at a class of cars that, according to the data you’ve researched, get to 150,000 miles pretty reliably before significant problems set in. You drive 25,000 miles per year, so you’re hoping to get six years out of the car. Gas costs $3.25 a gallon. We’re going to assume that insurance among the models is equal and that maintenance costs are equal, too.
Let’s call one Model A. Model A costs $25,000. It gets 35 miles to the gallon. Based on the data you’ve seen, Model A is about 10% more reliable than the average car in the class you’re looking at.
The other one, Model B, costs $18,000. It gets 22 miles to the galoon. Based on the data you’ve seen, Model B is about 10% less reliable than the average car in the class you’re looking at.
(I’m using “Model A” and “Model B” because I’m not advocating a particular car make or model here, but simply trying to demonstrate how much of an impact on your wallet that fuel economy and reliability make.)
Both cars will sell for about $1,500 used.
Which one is the better bargain?
The one figure I care about above everything else is the cost per mile while you own this car. Usually, you’d figure things like insurance and maintenance into this cost per mile number, but since we’re assuming they’re equal, we’re only going to worry about the cost of fuel and depreciation.
So, with Model A, you’re going to lose $23,500 due to depreciation. Given that it’s 10% more reliable than the average car of that class, you’re going to get 165,000 miles out of it. You’ll have to put 4,714 gallons of gas in it over that timeframe, totaling a cost of $15,321.43, for a total investment of $38,821.43. Per mile, over those 165,000 miles, you’ll be putting 23.5 cents per mile into the car.
With Model B, you’re going to lose $16,500 due to depreciation. Given that it’s 10% less reliable than the average car of that class, you’re going to get 135,000 miles out of it. You’ll have to put 6,136 gallons of gas in it over that timeframe, making for a fuel cost of $19,943.18, for a total investment of $36,443.18. Per mile, over those 135,000 miles, you’ll be putting 26.9 cents per mile into the car.
To put it simply, reliability and fuel efficiency are worth a lot when buying a car. You would need Model B to cost about $13,000 to compete on cost with the Model A (with a sticker price of $25,000). Yes, reliability and fuel efficiency are making up for about half of the price of the car in this example. The difference is enormous.
Not only that, the more reliable your car is, the greater the time between car purchases. That means less time spent looking at and buying a car and more time spent enjoying life. In the above comparison, Model A is going to last the owner more than a year longer than Model B even though the owner is putting 25,000 miles per year on the car. Not only is Model A cheaper per mile, it’s going to last longer, too.
So, how do you find out about reliability and fuel efficiency numbers? My first destination for such research is Consumer Reports, which usually has solid information on a wide variety of car models in terms of both fuel economy and reliability. Your library likely has several years worth of Consumer Reports car issues. Beyond reliability and fuel economy, I also look seriously at safety information, which Consumer Reports also helps with.
FuelEconomy.gov is a great online resource for fuel economy data. It gives all kinds of details on the fuel economy of various makes and models of automobile.
ReliabilityIndex.com is another tool that can really help you identify which models have a history of reliability and which do not. I use their reliability index as one significant factor when deciding on what car to buy.
All of the luxury features you might want in a car should be completely secondary in your search. Most of those features can be installed later if you decide you can’t live without them, so don’t pay for them at the dealership. Focus instead on getting the best bang for your buck that you can get in terms of fuel efficiency and reliability, and you’ll find yourself happy at the lighter load that car puts on your wallet.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
Reader Mailbag: Early Mornings
30 Jan 2012 at 8:00am
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Paying off low interest debt
2. Refinancing question
3. Coaching youth sports
4. Building credit from scratch
5. Buying home without down payment
6. Breakfast question
7. What happened to WaMu?
8. Handling my first large paycheck
9. Collectible toys for kids
10. Retirement fund on low income
About three times a week, one of our children wakes up really early. It’s often due to a bad dream, but sometimes it’s due to a noise in the night or simply stirring to wakefulness.
Usually, the kids come into our bed for a while, but I don’t get any more sleep once they arrive due to their moving around and restlessness, so I’ll get up with them sometimes.
I’m writing this early in the morning. There are Legos all around me. One of our children has fallen back asleep on the carpet.
Welcome to parenthood.
Q1: Paying off low interest debt
Two sentence summary of question: What should I do with my money when I already have a significant amount of money saved and my only debt has a very low interest rate? Is it a bad decision to pay off low interest debt?
I am 30 and married. My wife and I hope to start a family this year. We are both lawyers and we currently make approximately $350k a year (combined). Once we have a child (God willing), my wife will attempt to work part time and we expect our combined income to drop to approximately $250k. We currently rent ($2200 a month) and we are looking to purchase a home in the next 12-18 months. We have $116k in student loan debt ($66k at 2.625%, 36k at 1.63%, 13k at 2.25%). We were fortunate to have low interest rates on this debt. We also owe 11k on one vehicle (.9% financing). So, we owe $1,110 a month for our debts (education and car). We have approximately 350k saved for a house in our ING account and I have 30k in a Vanguard account (investing in index funds). We both max our our 401k contributions.
For the past year, I have been making minimum payments on our debt. For this year, I am thinking about paying off one of my wife?s two remaining loans (the 13k one) in order to free up our cash flow when she no longer works full time.
We currently save $6k a month. Would you continue to make minimum payments on these student loans or would you start to aggressive pay them off. I know that I have a lot of money saved up for a house etc. I just do not know whether I should save more or get out of debt (even though the interest rate on the debt is low).
- Vince
It is never a bad decision to pay off debt, even debt at a low interest rate.
The best way to think about paying off low interest debt is to think of it as an investment that’s guaranteed to return that interest rate through the original length of the debt.
So, let’s say you have a car loan that is at 4.5% and it has three years left to go. If you pay it off now, you’re essentially doing the same thing as buying a three year CD that returns 4.5%, with the advantage that the returns aren’t taxable but with the disadvantage that it’s a bit less liquid than a CD.
Is that a good choice for your money? I think that most of the time, the positives outweigh the negatives.
Q2: Refinancing question
I currently have a mortgage with a rate of 6%, but I have seen rates offered as low as 3.5% to some of my friends when they refinanced. Because I was curious, I called up my current bank and they offered me two options:
1.) 4.25% on a 30 year loan. This would reduce my mortgage by about $60-$80 a month. But, I would lose the $12,000 that I already paid off on the house, which I don’t like.
2.) 4.00% on a 20 year loan. This would save me approximately $35,000 over the life of the loan, although my mortgage payment would go up about $25 a month.
The numbers above include the $3000 I would pay for closing costs and another $3000 I would have to pay off (from a grant i rec’d when I purchased the house). Both these would be wrapped up in the refinancing loan above.
SO, now the big question…should I choose #1, knowing that the extra money would help in paying off my $27,000 in credit card debt (which we are trying to dig out of now) and about $25,000 in student loans. OR, do I choose #2, even though I would like to move within the next 5-7 years (so I don’t know how much of a real savings I would get). My husband and I think #2 may be the better option but it will just take us that much longer to pay off our debt. Our budget is a bit tight at the moment – we have enough to live month to month, but extra spending like presents for Birthdays or Christmas, do put quite a burden on the finances. And, we have no savings or emergency fund to speak of – aside from taking a loan against our 401K.
What do you think?
- Eve
You should look at the results of a detailed mortgage calculator, like the one over at Bankrate.
I don’t know what your balance you’re hoping to get a mortgage on is, but let’s say it’s $200,000. At the seven year mark (the point at which you think you might sell), your balance would be $172,726.96 on the 30 year loan. At that same seven year mark, your balance would be $146,519.38. Simply put, at the seven year mark, you’ll have $26,000 more in equity in your house if you choose the 20 year loan over the 30 year loan now. The point is that taking the shorter-term mortgage will result in a lot more equity in your house in a few years when you choose to sell.
Is that the right choice to make? It’s really hard to tell. I think it depends on other factors such as job stability, the size of your emergency fund, and the career opportunities you have. The more stable you are, the more I’d lean toward the twenty year loan.
Q3: Coaching youth sports
Coaching youth sports seems like something really interesting to me. It’s a way to give back to the community and get myself outside, plus it’s a free form of entertainment. The only thing I’m unsure about is how to get started.
- Marvin
The first step is to contact your town’s parks and recreation department and find out if they have any openings for youth sports.
You’ll find, though, that if you’re not a parent, you’ll probably have significantly more luck serving in other roles, such as a referee. My experience in several communities has been that the coaches in many early youth sports are parents of some of the children involved and the coaches of more advanced youth sports are professionally trained to do so.
Regardless of what role you fill, there are few things better that you can do in the community. It means physical activity, lots of fresh air, and providing great opportunities for kids.
Q4: Building credit from scratch
My brother-in-law has recently turned 18, moved out of his home with his parents, and into a home with a school friend. He is finishing high school, and will graduate in May. At that time, he will be moving closer to us and attending one of the local junior colleges for at least a year. I am trying to give him some budgeting and credit advice but my own path in each of these areas was initially flawed at that age.
My question is this: being that his income is comprised of social security (until he graduates high school), and should have a job within a few weeks, what is the safest and smartest way for him to establish and then build his credit? His initial solution was to open a credit card, but I am afraid the allure of spending will be too much for him to control.
- Jenny
One option is to have him open a credit card, but give the card to you. Then, use that credit card for things like gas only when you’re with him, and have him give you the cash to cover it. This will build his credit without any risk.
Another option is to contact your card issuing company and ask about adding him as an authorized user on your own card. Make sure that such information is reported to the credit agencies and will benefit his credit before you do so.
A final key is to remember that he won’t be listening to a lot of the things that you tell him. The best thing you can do is make sure he knows you’ll be there for him whenever he needs you. While stuff about “credit” and “Equifax” will likely go in one ear and out the other, making it clear that you care and support him as he finds his own path will stick around.
Q5: Buying home without down payment
My husband and I would like to buy a house. This is our dream and we have been trying to buy but unfortunately prices were always too high for the places we wanted to buy. This time around I’ve finally convinced my husband to look in an area which he previously didn’t want to live in (no real reasons) and where prices are a bit more affordable. The houses are around $400,000 for something decent. This is a bit expensive for us, but I think we can do it.
The problem is he wants to put down a 20% deposit, which we don’t have. We only have about $50,000 and we can maybe reach $60,000. So he becomes stubborn and asks me to look for cheaper homes, which is impossible because for $300,000 we would get nothing or a house in a crime infested neighborhood. We have a 3 year old! My thinking is, let’s put down less. 10%. His thinking is let’s put down 20% or we don’t buy the house. Because of his thinking we still don’t own a house.
What do you think? If we both really want a house, how much is really PMI going to be in the long run and is it right to make PMI such an important factor. I understand that it would be nice to have the whole 20%, but if you don’t have it and if you know it would take at least another 5 years to get that money together, what would you do?
I have a toddler and I would like her to have her own backyard, her own home and such… Also, if this makes a difference, I am not planning on being in this new house for more than 4 years, so the PMI wouldn’t be as substantial as it would be in a 20 years home…
- Linda
I don’t think you should get a house at this point. Essentially, if you’re only going to stay in the house for four years, you’re basically going to be renting for that timeframe as you’re not going to build much equity given the current housing market.
That “rent” will include your mortgage principal, your PMI, your property taxes, your homeowners insurance, your lawn care costs, and increased energy bills, at the very least. That’s a lot of money each month for a home that your child will barely remember when they get older.
Rent as cheaply as you can for four years and sock every dime away for a down payment that you can. When you reach the four year mark, then you’ll be in a much better position to buy the house that you’ll be in for the long term.
Q6: Breakfast question
I need a breakfast of some kind in order to get going in the morning. However, most mornings, all I have time for is grabbing something through the drive-thru on the way to work and that adds up quickly (both in the wallet and around the waist). Any suggestions?
- Jill
Plan ahead for that breakfast.
My solution to this problem was to make giant batches of breakfast burritos on the weekend and store them in the freezer. Then, in the mornings as I got ready to go, I’d grab one from the freezer, wrap it in a paper towel, and microwave it. I’d grab this on my way out the door and eat it on my way to work.
The cost per burrito was much lower (helping with the wallet), the ingredients were healthier (helping with the waist), it was pretty tasty, and it actually cut five or ten minutes off of my commute time because I wasn’t stopping at a drive-thru.
Q7: What happened to WaMu?
I’m a college student that’s starting to look around at banks to see which one might be best for me. In reading some old articles, I discovered a bank by the name of WaMu that was very popular and apparently a fierce competitor to ING. However, when I went snooping to their website, I discovered that they were now becoming a part of Chase. Do you know if this has changed much about the experience of using WaMu?
- Mark
WaMu is short for Washington Mutual. Washington Mutual was a bank chain that failed during the banking crisis of 2008. It’s now out of business. JP Morgan Chase wound up with most of the assets and accounts of Washington Mutual.
Most of the features that made WaMu distinct – good rates, a very unique floor plan in the branches, aggressive and quirky marketing – have not really continued under the new ownership. It’s just a part of Chase.
WaMu made a lot of poor business decisions, but it made some good ones, too. More competition is always better for customers, so I’m kind of sad to no longer see WaMu in the mix.
Q8: Handling my first large paycheck
Taking advice from your blog and several others, I’ve recently quit a low-paying job in the education field (about $19K a year, September to June) to take on a position as an office admin assistant (for about $30K a year). I feel good about the move: while I’m not using the degree that put me into such debt, I enjoy office work, I’m good at it, and it both pays better and is far, far closer to home (hour commute compared to fifteen minute commute!). I’m looking forward to no longer living paycheck to paycheck within the next two months, and have a plan in place for getting rid of my debt a bit faster and creating a more solid emergency fund (it’s currently about $1,000).
While I know I’ll still be living on a tight budget for some time, I’m looking forward to having a bit of “breathing room” – no longer living paycheck-to-paycheck, having an emergency fund, etc. Talking with friends has raised what I think is a good question, even though it might not apply to me for several years. I’ve witnessed (and even succumbed to) the “first paycheck” trap: the “hey, look, I’m making a ton more money than I’m used to – that means I can splurge and treat myself to xyz!” Obviously, until I’ve paid down my student loans in the coming years, I won’t be able to fall into this trap, and I’m hoping that after my loans are gone I can begin saving for a house.
But I was wondering: what, if anything, do you consider worth splurging on once you’re comfortably making more money than you’re used to? Assuming debts are paid off, emergency funds are more than adequate, retirement is funded, and you’re already saving towards whatever goals you have in mind, etc. Obviously, the trap of just splurging on instant-gratification items isn’t the way to go, nor is pitching out everything you’ve “made do” with until this point to buy bigger, better, brand-new whatevers. But once you’ve achieved that leeway, what do you think would be worth spending that extra in your paycheck on?
- Ben
If I were you, I would focus your “splurging” on replacing items you already use with very well made and reliable replacements.
There’s not really an exact answer here, as it depends a lot on what you do with your time and the lifestyle choices you make. If you spend a lot of time preparing high-quality meals, for example, you may want to focus on upgrading your kitchen tools slowly. If you have a lot of guests, you may want to slowly upgrade your flatware and dishes.
Don’t buy “new” things – or, if you do, be wary. Instead, slowly upgrade the stuff you actually use to high quality and reliable versions.
Q9: Collectible toys for kids
How do you handle it when your children get into some sort of collectible toy that never seems to end, like Pokemon or Pokemon cards?
- Andy
They buy such things out of their allowance. Because of that, it somewhat limits itself.
My son got heavily into Pokemon cards for a while, as it was heavily spurred by a cousin who gave him several hundred cards and some older kids at school who played with the cards in the cafeteria. He received a few packs as stocking stuffers and bought some more with his allowance, but eventually the fad passed.
This isn’t really a problem if you don’t give into your children and constantly buy them things.
Q10: Retirement fund on low income
I am 24 years old and renting in NYC. I have roughly $11,000 in student loan debt, and only $1000 in an emergency fund. I don’t have any credit card debt because I hate the idea of spending money I don’t have. I am aggressively paying off the loans (5 separate loans, averaging a 5.5% interest rate) paying close to 3x the minimum payment. I hope to have it all paid off in 3 years. Even though I have a masters in social work, the field doesn’t pay too well. Luckily I do LOVE what I do. My job offers a 403b but I am afraid to invest my contribution because I know nothing about investing, however there is a savings account type option. Then I hear all about IRAs and other retirement fund options, which, again, I know little about. I feel like I don’t have too much disposable income to even begin to put towards retirement. I still feel like I’m so young, but I don’t want to struggle to catch up later in life. What type of retirement fund is appropriate for someone who potentially can only contribute $100 or so a month?
- Fred
Your best option is probably a Roth IRA, as you can set it up yourself quite easily, keep control of it yourself, and it’s pretty simple when it comes to taxes.
However, where you save your retirement money is less important than the fact that you’re saving it. You are better off saving $100 a month in a sock drawer for retirement than you are saving $0 a month in the perfect retirement account with the best possible choices.
Just save. That one right decision dominates any small wrong decisions you’re likely to make.
Got any questions? Email them to me or leave them in the comments and I?ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.
   
Start an Automatic Appliance Replacement Fund (28/365)
29 Jan 2012 at 2:00pm
Just a few days ago, Connie wrote in:
It’s been a real challenge turning our financial situation around. My husband seems supportive but he’s having a really hard time breaking his old spending habits and with our reduced income it is really a challenge every month.
I finally was able to get about $300 together for an emergency fund and I was really happy with my progress when our hot water heater died. We had to replace it and it not only ate all of our emergency fund but put us a few hundred deeper in debt.
It feels like every time we start to get ahead we end up further behind.
Connie nailed it. One of the most common reasons for the failure of short term financial plans is a key appliance failure. I’ve seen it happen in my own life, when our own hot water heater failed a couple of years ago and our washing machine failed about three years ago.
The appliances in your house are not infinitely reliable. An appliance failure is going to happen in the future.
There’s never a good time for an appliance to fail. It will always cause difficulties that eat up our time and energy and add to our stress level. However, it doesn’t have to add to our financial stress.
Our solution to this challenge is really simple. We simply automatically save $10 a week for appliance replacement.
That $10 a week turns into roughly $525 per year. That’s enough to replace a washing machine or a dryer with an economical model. Over multiple years, that money will grow to enough to replace even major appliances, like a central air conditioning unit or a furnace.
We started this fund after our hot water heater failure depleted a piece of our emergency fund. We’ve put in $10 a week as well as a bit of extra “found money” along the way. It has just shy of $1,000 in it.
What will happen the next time an appliance fails? We just go replace it, then take the money out of that account to cover it. It’s as easy as pie – no financial stress, no mess.
Appliances will fail. It may be an emergency, but it’s not something you don’t know about in advance and can’t plan for. You can plan for this, and it doesn’t take a whole lot of money each week to plan for it.
$10 a week is a few beers or a few morning coffees. It’s one dinner you make yourself instead of getting a pizza.
What does it transform into? It becomes not having to stress out if an appliance fails. It becomes not having a sick feeling in your gut if your washing machine begins to make a bad noise. It becomes not having to go into debt if your air conditioning unit bites the dust.
It becomes freedom, in other words.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
Review: The Money Saving Mom?s Budget
29 Jan 2012 at 8:00am
Every Sunday, The Simple Dollar reviews a personal finance or other book of interest. Also available is a complete list of the hundreds of book reviews that have appeared on The Simple Dollar over the years.
 I’ve had the blog Money Saving Mom bookmarked for years. In fact, it’s been a permanent mainstay on the list of 25 blogs I recommend that appears on every page of The Simple Dollar. The blog has a nice mix of couponing content paired with other articles on frugal living.
Unsurprisingly, I was glad when I heard that Crystal Paine (the woman behind Money Saving Mom) had written a personal finance book. Her tone is incredibly friendly and down-to-earth, an approach that appeals to many people and is really welcome among the personal finance books you’d find at the library and at the bookstore.
I knew the book was off to the right start as soon as I flipped past the table of contents. Immediately following that is a feature that should appear in most advice-oriented books: a single page summary of the advice within. Here, it’s a series of seven short paragraphs outlining “Money Saving Mom’s 7 Rules for Financial Success”:
1. Set big goals and break them down into bite-sized pieces
2. Streamline your life and cut the clutter
3. Set up a realistic, workable budget
4. Take the cash-only challenge
5. Use coupons
6. Never pay retail
7. Choose contentment
Each one of those is followed by a paragraph discussing that particular tactic, making it a great way to start the book.
If You Don’t Know Where You’re Going, Any Train Will Get You There
There are a lot of paths we can follow from where we’re at right now. We can spend like crazy. We can put all of our money into Zynga stock. We can invest very conservatively. We can pay off debt, or we can accumulate it. We can work hard to build a career, or we can count the minutes until “Schlitz o’clock” every day. The real question is where we want to be down the road. A few paths lead to that destination. Most do not. Knowing your destination will help you pick the right path.
Are the Chaos and Clutter in Your Life Keeping You from Financial Success?
It’s hard to be financially successful if you live a cluttered existence. Chaos and clutter make it hard to find the things you need when you need them. This results in things like late bills, missed opportunities, buying things out of convenience, and other financial mistakes. Over time, this adds up to a significant amount of money – and it also adds up to a pattern of living that makes it difficult to succeed.
Give Yourself an Instant Raise Without Increasing Your Take-Home Pay
How do you pull that off? Basically, Crystal Paine’s idea here is to build a basic budget, following more or less the same template that I described in this article about basic budget building. A budget doesn’t magically make you financially responsible, but going through the process of building a real budget often teaches you exactly how you can cut your spending without really altering your life.
Go Totally Plastic-Free – Temporarily
Paine advocates simply dropping all credit card use for a while – and even dropping debit cards for that time frame. Why? Doing that will force you to use cash, and making yourself use cash is a powerful way for you to get deeply in touch with exactly how your cash flows in and out of your life. When you actually see the dollars leaving instead of just swiping a card, each purchase becomes very tangible and very important. Do that enough and you’ve rebuilt (at least in part) your relationship with money.
Coupons Are Not Just For Junk Food
Paine splits the topic of couponing into two chapters (of the nine in the book), which seems to fit since her blog has a strong couponing focus. This chapter really focuses on the basics of couponing, addressing items such as where to find them (the internet, store flyers, etc.), how to organize them (binders, envelopes, etc.), and how to be selective about the coupons you find and use. Simply put, there are coupons for almost anything if you’re willing to look for them and organize what you find.
Beyond the Basics: Advanced Couponing Techniques
From there, Paine goes on to look at how to find a good store to use the coupons you’ve found at (does the store have double couponing? Does it have a customer rewards program?) and how to stack coupons to maximize your savings by finding store coupons, manufacturer coupons, and store sales all on the same item at once. I tend to find that the effort in seeking out such options isn’t worth it, but it’s well worth just keeping your eyes open for these types of bargains.
Twenty-Five Ways to Lower Your Grocery Bill Without Clipping Coupons
Don’t be married to your brands. Don’t be married to your store. Buy things in bulk. Make simple meals at home. Freeze meals that you make. Make your own household cleaners. The ideas in this chapter are great basic frugality tips that anyone can use to save money at home. They just simply work.
Going Out on the Town Without Going Broke
What you’re really looking at here is “bang for the buck.” For example, if you want to go out to eat with your family, try to look for restaurants that offer a “kids eat free” night. If you’re going out with just your partner or spouse, use programs like Restaurant.com to find steep discounts on a meal eaten out. Look for free or heavily discounted cultural events in your area, like family days or free days at local museums or free concerts in the park. There are a lot of things to do out and about that are quite fun but aren’t expensive if you’re willing to look for them.
Embrace Today
A lot of these tactics are filed away by people for “someday.” If you do that, then you’re just committing yourself to more and more of your life devoted to struggling with debt, tied to your job, and feeling that you’re never going to get ahead in life. Today is the day to start living life with more sensibility when it comes to your money.
Is The Money Saving Mom’s Budget Worth Reading?
The Money Saving Mom’s Budget is an absolutely spot-on introductory book to cutting your spending. It focuses much more on the “spend less” part of the equation than the “earn more” part, but that’s often the part of the equation that people find the most success with when they hit that realization that something needs to change in their life.
The title alone somewhat restricts the readership – I probably wouldn’t give a single guy a book called “The Money Saving Mom’s Budget,” after all. However, this would be the first book I’d give to a mother who is just starting to think about making financial changes – a realization that often comes to parents after having a child.
Great book, Crystal.
Check out additional reviews and notes of The Money Saving Mom’s Budget on Amazon.com.
   
Invest in a Deep Freezer (27/365)
28 Jan 2012 at 2:00pm
One of the most critical appliances in our home when I was growing up was our chest deep freezer.
We kept it in the attached garage, just a few steps out of the garage door that opened onto the kitchen. That freezer would store bag after bag of frozen fish caught by my father, lots of venison and beef that my family would trade for (or, in the case of venison, occasionally hunt for as a food source), frozen vegetables, and countless other food items.
It was pretty much a daily routine to retrieve something out of the freezer in the morning to thaw for the evening’s dinner. Whether it was fish, vegetables, or meat, our meals were often acquired when they were cheap and thawed when we needed them.
My wife, Sarah, had a very similar experience growing up. Their deep freezer resided in their basement and contained the key ingredients of most of their meals.
In both cases, our families were not rich. They had to find creative ways to stretch a dollar. Given that food is a big part of any family’s budget, stockpiling food is definitely a strategy worth investigating. A deep freezer makes it easy to stockpile freezable food (in other words, most food) and keep it from going bad.
In other words, the presence of a large home freezer makes it possible to capitalize on discounts on perishable foods.
It was unsurprising, then, that one of our first purchases when we owned a home of our own was our deep freezer, which, like the freezer at my parents’ house, resides right out in our attached garaged, near the garage door. It’s always got some food in it, and at times it has quite a lot of food in it. It all depends on the opportunity – and when opportunity strikes, we’re able to hit it hard.
I’ll give you an example of this. Recently, a local grocery store had a sale on bags of flash-frozen vegetables. I don’t remember the exact price, but it was very low, something on the order of $0.79 per bag or something, limited to ten per customer. Given that a bag of flash-frozen vegetables is often a key side dish for our family’s dinner as well as our lunches the following day, that’s an attractive sale for us.
If our only freezing capacity was the freezer atop our refrigerator, we would have had to stop at four or five bags. Simple space issues would have kept us from capitalizing. Instead, Sarah went to the store and bought the maximun number of bags, then I went to that same store and bought the maximum number of bags.
Another example: a friend of ours offered to sell us a quarter of a cow, processed and packaged, at cost a few years ago. This meant that our cost per pound for the meat was about 40% or so of what we would have to pay for it in the store, but we would be receiving a lot of it. On the order of 150 pounds of meat.
Thankfully, we had our deep freezer, so we were able to make it all fit. We were able to knock 60% or so off of approximately 150 pounds of beef. Not only did we enjoy it ourselves, we also traded packages with friends, family, and neighbors.
I can go on and on with these examples: fresh food from our garden (or from the gardens of friends), quadruple batches of casserole, frozen breakfast burritos, frozen vegetable stock – it’s an endless list. In each case, we’re taking advantage of the economy of scale by producing a lot of something (reducing the cost per item) and then saving the rest for later.
The only drawback of this plan is the cost of a deep freezer. You can get one for $300-500 or so, and the annual energy cost varies, but is usually somewhere around $50 a year. To break even, you’re going to need to be saving about $60-70 a year on your food costs.
For our family, we can sometimes save that much in a month due to our deep freezer. Between the flash-frozen vegetables bought at a discount, the frozen casseroles prepared ahead of time, the breakfast burritos made at an incredibly cheap rate per burrito, the produce from our garden socked away for later, and countless other little things, the deep freezer saves us money almost every single day. It’s a key element of our family’s food frugality.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
Ten Pieces of Inspiration #57
28 Jan 2012 at 8:00am
Each week, I highlight ten things each week that inspired me to greater financial, personal, and professional success. Hopefully, they will inspire you as well.
1. Rodin on what’s worth doing
Everything is worth doing if you approach it right.
“Nothing is a waste of time if you use the experience wisely.” – Auguste Rodin
The challenge always is figuring out ways to actually use the experience wisely. If you view the world from this perspective, life itself is a constant path toward self-improvement.
2. Gayle Tzemach Lemmon on female entrepreneurship
I have sent this video to a lot of people this week.
No one should ever be afraid to show the world what they can do.
3. Dale Carnegie on perseverance
The number one ingredient for succeeding at anything is simply sticking with it. That’s where the vast majority of people who try something fail.
“Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no help at all.” – Dale Carnegie
The Simple Dollar would have never succeeded if I did not stick with blogging for years and years, through thick and thin.
4. The Yellow Flowers (1902) by Henri Matisse
I love how impressionist paintings are much like a faded memory. To me, they elicit something much deeper than a photograph.
![[ M ] Henri Matisse - The Yellow Flowers (1902)](http://farm7.staticflickr.com/6139/5978422659_e1295e399a.jpg)
It feels like the closest I’ll ever get to seeing the world through another’s eyes.
5. Criss Jami on passions
If you want to channel something you’re passionate about into something that can carry your whole life, the recipe is pretty simple.
?Persistence. Perfection. Patience. Power. Prioritize your passion. It keeps you sane.? – Criss Jami
It takes a lot of time, a willingness to constantly improve, and a lot of focus. It brings joy, too.
6. CodeAcademy
Ever wanted to learn about computer programming? This is probably the best tool I’ve ever seen for learning about it completely from scratch, even if you know very little about computers.
I’d love to see the same approaches used for learning about other topics, too. The ideas they have for learning going on at CodeAcademy have wider applications than just code, I think.
7. Nelson Mandela on going home again
When I was younger, I used to wonder what had changed in my home town.
“There is nothing like returning to a place that remains unchanged to find the ways in which you yourself have altered.” – Nelson Mandela
Now, I know that most of the change was me.
8. Mass Ascension
One thing I want to visit someday is a hot air balloon festival, like this one.
There is something deeply appealing to me about hot air balloons. I can’t put my finger quite on what it is, but whenever I see one, I want to stop and watch it.
9. Brian Goldman on experts and fallibility
Goldman focuses mostly on doctors, but this is true of everyone that you listen to and value their opinion. Humans are fallible. They make mistakes. That does not mean they’re evil or out to get you.
This is why multiple sources are always a good idea for anything you want to know. Generally, people aren’t trying to give you bad information, but humans are fallible and imperfect.
10. C.S. Lewis on childishness
This past week, I got an email from a reader chiding me for reading and writing fantasy and science fiction, calling them childish. This was my response, a simple quote from C.S. Lewis.
“Critics who treat ‘adult’ as a term of approval, instead of as a merely descriptive term, cannot be adult themselves. To be concerned about being grown up, to admire the grown up because it is grown up, to blush at the suspicion of being childish; these things are the marks of childhood and adolescence. And in childhood and adolescence they are, in moderation, healthy symptoms. Young things ought to want to grow. But to carry on into middle life or even into early manhood this concern about being adult is a mark of really arrested development. When I was ten, I read fairy tales in secret and would have been ashamed if I had been found doing so. Now that I am fifty I read them openly. When I became a man I put away childish things, including the fear of childishness and the desire to be very grown up.? – C.S. Lewis
   
Set Your Refrigerator to the Warmest Setting (26/365)
27 Jan 2012 at 2:00pm
Let’s cut straight to the chase. The sweet spot for any refrigerator is between 39 and 40 F. This is the temperature at which bacterial growth is inhibited but the difference between your refrigerator and the ambient temperature outside of your refrigerator is minimized.
In other words, keeping your refrigerator’s internal temperature at about 39 F will keep your food safe while minimizing your energy costs.
Simple, right? Well, not quite so simple.
Your refrigerator is one of the biggest power guzzlers in your house. Over the course of a year, a modern refrigerator sucks down about 350 kWh of energy. That adds up to about $50. With a few simple one-time changes taking just a few minutes, though, you can cut that by about 20%, saving you $10 a year for as long as you own the fridge.
First of all, most refrigerators have a terrible internal dial that doesn’t indicate actual temperatures. I loathe this design “feature.” It doesn’t tell you a thing about the actual internal temperature of your fridge. It merely compares it to other settings.
The simple solution? Get an inexpensive thermometer and stick it in your fridge. You can get a small digital thermometer at your local hardware store for a pittance. Just tape it somewhere to the inside of your refrigerator. I just rolled up a bit of duct tape and stuck it to the back of one for placement inside of the refrigerator.
Then, start playing with that dial. I suggest moving slowly downward, then checking the temperature every day. What you’re looking for is a temperature close to 38.5 or 39, at which point you’re going to want to stop on that setting for a while. For most refrigerators, this temperature coincides with the lowest setting or one of the lowest settings.
It’s important to remember that the temperature isn’t an exact thing. A refrigerator works just like your home. It tries to keep the temperature within a degree or so of the ideal temperature. This is why you should stop adjusting the temperature dial for a while if you observe a temperature around 38.5 or 39 degrees, as this may be a “low” temperature, a “high” temperature, or an average one. Do some observations over time and see what the average is.
I would shoot for an average of around 38.8 to 39 F, so that the “high” temperature doesn’t break 40 F very often.
Also, pay attention to where the fan is in your refrigerator. The air coming in there is going to be cold air, so the items near it are going to be colder than items elsewhere in the refrigerator. We generally keep items that we worry the most about spoiling close to the fan (items such as milk and eggs) and other items further away. I placed the temperature gauge on the other side of the refrigerator interior from the fan to try to get more of an ambient temperature. Also, never block the fan. Always make sure the fan can blow cold air into the interior of your refrigerator. If you block it, you’ll have one frozen item and a bunch of warm items in your fridge.
If your refrigerator is really full with items, lower the temperature a bit. Lots of items means poor air flow inside of your refrigerator, which is the key to keeping things cool. Lowering the temperature means you’re going to be using a bit more energy, but all of your items are cold. We do this when we’re prepping for a party or something similar.
What about the freezer? You want your freezer to be low enough so that temperature variation does not allow anything to melt in the freezer. I suggest keeping the freezer at a temperature around 5 F – and a bit lower than that if your freezer is jam-packed with stuff, blocking the air flow. You can check this with a thermometer taped to the side away from the fan, just like with the refrigerator.
Another useful tactic is to thaw frozen foods in the fridge instead of on the counter. As frozen foods thaw, they cool the air around them. This is a good thing in a refrigerator that you want to keep cool internally. It’s a bad thing most of the time outside of the refrigerator, as it’s not going to provide a significant enough effect to keep your air conditioner from running any significant amount and it’s going to work in a small way against your furnace.
Once the temperature is set correctly on your refrigerator and freezer, and you’re using the device sensibly (not blocking the air flow, thawing foods in the refrigerator, etc.), your refrigerator is going to use less energy. It’s also not going to have to work as hard, extending its lifespan. Both of these save you money, as your monthly energy bill is reduced and the time until your next refrigerator replacement is extended.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
What?s Next After Debt Freedom?
27 Jan 2012 at 8:00am
Thanks to Forest Wander for the picture.
Every new beginning comes from some other beginning’s end – Seneca
As I write this, Sarah and I are completely debt free.
We have no mortgage. We have no car loans. We have no student loans. We have no credit card balances. We have no consumer loans of any other type. We have a healthy emergency fund that will keep us from falling back into debt very easily. We have a healthy amount of savings for our next car and for our next appliance replacement or two. We’re saving for retirement, for our children’s college education, and for our dream home. We both have steady incomes for the time being, incomes that exceed our monthly expenses.
Our monthly bills right now, taken as a whole, are lower than they’ve been at any point in our married lives.
So, what’s next?
It’s a question that Sarah and I have been struggling with for the last few weeks. What is our next step?
Up to this point, there’s been a clearly-defined path to follow. Build up an emergency fund. Get rid of your high interest debt. Build up a bigger emergency fund. Start saving for retirement and for your children’s education. Pay off your lower interest debt. In most cases, own – meaning without any debt – your living quarters, whether it’s a home or a condo or something else.
It’s a long and difficult journey. It took us almost a decade to follow that path, and that’s with us living rather frugally and me working a lot of hours, both at my full-time job, on The Simple Dollar, and on countless freelancing gigs over the last several years (Sarah made this route possible with her spectacular efforts with household concerns.)
In a lot of ways, it required us to change who we are. I don’t have the motivation any more to spend money in the way I did a decade ago. It’s not something I even want to return to, and Sarah feels almost exactly the same way.
Now, though, there’s no clear path for us to follow. We’ve reached the point in our financial journey where th advice begins to diverge heavily.
Some people say that when you have a good foundation, you should “live a little” and do things like travel or own a nice car. Others suggest investing aggressively so you can move towards a life where you no longer have to work for a living. Some point toward entrepreneurship. Others simply say to keep things nice and steady until opportunity knocks.
As different as those paths seem, there are a few fundamental things they all agree on.
First, you need a goal. Without a goal, you’re going to simply spin in place and, as the saying goes, the devil finds work for idle hands to do. The multitude of ideas above are all goals, they’re just different ones that require a different path to get there.
Second, you need communication. Sarah and I have no interest in going down different roads at this point. We’ve travelled this far together and we want to keep going together, wherever that path may lead. However, left to our own devices, we would have somewhat different visions for that path. Without communication and discussion – a great deal of it, actually – we could easily find ourselves going in different directions at this point.
The fundamental question is whether I want to be setting my goals or our goals. I’d far rather set our goals, even if that doesn’t mean having things perfectly my way. We agree on a lot of things, and the value of resolving the other parts together is much greater than what we would get out of addressing them separately and drifting apart.
So, what do we want? What’s next for us?
We’re establishing a list of things for the future that we both agree on. This is in addition to our dream home. We both want to travel a significant amount with our children when they’re older and can appreciate it and grow from it. We both want to increase our giving to charity. We both want to retire as early as we can so we can focus our energy on charitable work.
These are the things we want from our lives. They’re simple things. They are what makes us happy.
We’re not going to move until we can build our dream home out of pocket. We are not going to return to indebtedness again. If that means slow progress toward the house we want to someday build, so be it. Debt introduced an incredible amount of stress to our lives, and there’s no material thing that’s worth bringing that back into our lives.
The same holds true for any of our other plans. We’re not going to do anything that leads us anywhere close to debt ever again for any non-essential reason.
We have a home.
We have what we need.
We have no debts.
Most importantly, we have each other.
Everything else will follow.
   
Don?t Install Your Refrigerator Next to Your Dishwasher (25/365)
26 Jan 2012 at 2:00pm
Your dishwasher gets hot. Your dishwasher also gets moist, meaning it’s harder to cool down the air around it. Your refrigerator gets cold. So does your freezer.
Why would you put a device that gets hot next to a device that gets cold? No insulation is perfect, after all, so they would both be using energy to fight the effects of the appliance next door.
So many elements of frugality and personal finance come down to paying attention to the details. This is one of those little detail things that so many people will overlook, but over time it just continually costs you money.
When we moved into our current home, one of the things that annoyed me about it was the relatively small kitchen. It wasn’t much larger than the kitchen in our small apartment, having only a small counter that the other did not have.
Even worse, the refrigerator was installed next to the dishwasher, and the only way to fix it would involve an extensive reworking of our kitchen, as the cabinets are all formed around slots for the appliances.
There’s no doubt that energy is lost in this process. The dishwasher, while running a cycle, puts off a tremendous amount of heat, some of which you can feel on the side of the refrigerator. I often hear the refrigerator kicking on just a minute or two after starting a dishwasher load due to the rise in internal temperature of the refrigerator. It’s actively costing us money.
So, what can we do about this? At the moment, not much. Other than the side-by-side appliance issue, our kitchen is laid out fairly well for its size. Although we’ve looked at alternate arrangements, none of them have provided enough value to be worth the cost of rearranging things.
One short-term fix we’ve done is to insert a piece of thin insulation between the two appliances. There was just enough room for a small piece of insulation to fit between the two, so we purchased a piece of heat-resistant insulation. While this isn’t a perfect fix, it does reduce the heat directly transferred between the two devices.
We also try to make an effort to keep the refrigerator door closed while the dishwasher is running. Opening the refrigerator door while the dishwasher is running causes the cool and dry air to rush out and the warm, damp air to move in, making it that much harder for the refrigerator to do its job.
However, we do plan to build a new house in the future. When we do that, we’ll make sure to avoid having a “hot” appliance next to a “cold” one. In fact, in our latest design sketches (a fun project that Sarah and I work on sometimes in the evenings is doing sketches on the computer of what our dream house would be like), the refrigerator and dishwasher are pretty far apart, with a large counterspace between the refrigerator and the sink and the dishwasher on the other side of the sink.
Another thing to watch out for: avoid having your refrigerator or freezer next to an air vent, particularly if you live in northern climates. During the winter, your air vent will be blowing out hot air, which you don’t want blowing directly onto your refrigerator. This is something else to consider when designing or re-designing a kitchen, as it’s all about the energy efficiency.
Will this save you a lot of money or a little? It’s really hard to measure, as it depends on the modes you’re running in your refrigerator and dishwasher, the amount of insulation between the two, and countless other factors. However, I’d have to be oblivious to not hear our refrigerator kicking on and running almost contiunously when our dishwasher is running. If a simple kitchen design decision will make a real difference in how much your refrigerator is running, it’s well worth keeping in mind as a principle.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.
   
Reader Mailbag: Unfinished Business
26 Jan 2012 at 8:00am
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Strange credit card fee
2. Handling sudden income increase
3. Great job, next financial move?
4. Children’s movies
5. Keeping papers
6. Determining ownership percentages
7. Taking control
8. Stuck in a condo?
9. 529 plans and multiple children
10. Saving old magazines
On my desk, I keep a stack of papers that reflect “important but not urgent” tasks I need to get taken care of, like submitting an invoice for some work done or cancelling a subscription we’re no longer using.
About once a week, I take a few hours and clear out that “important but not urgent” stack. The day I do that usually ends up being one of the best days of the week because I feel as if I’ve accomplished a lot.
Q1: Strange credit card fee
I have Mastercard credit card linked to American Airlines miles rewards. I’ve had this card for about 15 years, and over the years the available credit limit has gone up to $54,000. We never used up even remotely that much, and currently the card has $2,000 on it which will be paid off by summer if not before. It’s a 0% transfer sum, so no interest is being paid on this amount presently. We have not charged anything to this card in over a year.
Anyway, this months’ statement is the second where I noticed a small fee added to it, 50 cents. It is not a late charge or anything related to a purchase (since there hasn’t been one made). I wonder if this is an “inactive” fee, meaning that they aren’t making money off of us since we are not buying anything and therefore aren’t paying any interest, and the card company needs to get some money out of us and thus is charging this kind of fee. I wouldn’t be surprised if this is one of the card companies work-around to get additional money out of people who pay their bills on time…
I am annoyed by this fee, of course, but am reluctant to cancel the card (we really don’t use it, and once the current amount is paid off, it’ll basically just be laying there in its file.) It is my oldest credit card and with the high available credit limit, it is good to have on my credit report, right? I do pay an annual fee of $50 because it’s a mileage reward card….
I know I can call the card company and complain about this extra fee, but I was wondering if other readers/people have the same fee appearing on their statements. My only other credit cards are a corporate AMEX credit card that I use once or twice a year and pay off promptly and a Discover card that is paid off every month and only has very few dollars charged to it every month (gas). Both these cards are relatively new, less than 3 years and the available credit limits are less than $10,000.
- Bill
You should call your credit card issuer and ask them what the fee is for. It’s hard to tell what it’s for, though an “inactivity fee” is probably a good guess.
However, if the card is often inactive, I’m not sure I would want to pay a $50 annual fee for the card. I would only pay it if I were clearly getting more than $50 worth of value from this card beyond the cards I could get for free.
If it is an “inactivity fee,” I’d assess whether or not you’re going to need spectacular credit in the next couple of years. Do you have a car loan or a mortgage coming up? If not, cancel the card. If you do, hold off until the big purchase is finished, then cancel the card.
Q2: Handling sudden income increase
I have something of an unusual question, particularly during these times. After college, as well as several years of alternating unemployment and minimum-wage jobs, (we’re both 27) my fiancee and I are now both employed in extremely well paying (six figures each) positions for the foreseeable future. We are incredibly lucky to be in this position, especially in the current economic climate and given our lack of debts (we both attended college on full scholarships, and each bought our cars used for cash). We’re already setting aside enough for our 401ks to max them out by the end of the year, and have been fortunate enough to give sizable amounts to several charities we favor. The only problem is… what else should we do? Besides filling up an emergency fund, should extra money just go into a savings account? Should we look at CDs and IRAs?
Most of all, are there any books you would recommend that are more tailored to our situation? Personal finance seems split between getting out of debt and playing the stock market, neither of which really apply to us; since we don’t really have problems with overspending, I feel like we’re sort of left adrift. Adrift and extremely extremely lucky and fortunate, but adrift nonetheless. Thanks for any help you might be able to offer.
- Ron
You need to sit down together and assess your goals. Do you want to buy a house? Do you want to have any children? Where do you guys want to be in five years? In ten years?
Your plan for the extra money should follow the answers to those questions. If you’re saving for a short-term goal (less than, say, five years), I would just keep all of the money in cash or in CDs, as the volatility of other investments probably isn’t worth it.
For a book to read, I’d suggest The Bogleheads’ Guide to Investing, which is my favorite book on investing I’ve ever read.
Q3: Great job, next financial move?
At 25 I landed my dream job. Its fun flexible and has a great six figure salary. When I finished school in May of 2011, I racked up a few thousand dollars in credit card debt to bridge me over to my first paycheck, which came in September. As of January this year, I’ve paid off all credit card debt and have 54,000 left on my student loans (at 6.7% and 7.6% interest) and about 1,000 in emergency funds. I’m still living like a poor college student and am planning to pay all my student loans by January 2013. I haven’t been able to invest in a 401(k) because my employer only offers it after you’ve been with the company for 6 months. Because I only worked several months last year, I am in a smaller tax bracket than I will be in 2012. I’d like to invest some money in an IRA or Roth IRA before I file my taxes for 2011. Basically, I’d like to take full advantage of being in a lower tax bracket while I can (for instance, next year I won’t be able to claim up to 2,500 plaid toward student loan interest) and was wondering if I should divert money I’m intending to pay toward my student loans to open an IRA or Roth IRA and which type one would would be the wisest choice for my 2011 income.
- Lana
If you qualify for a Roth IRA based on your income, I’d choose a Roth IRA. I think it’s a good idea to diversify your retirement money in both pre- and post-tax retirement accounts since no one knows what the future will hold.
As to whether you shoud divert loan repayment money into a Roth, it’s really an apples-and-oranges decision. There are good arguments to be made both ways on it.
If I were in your shoes, I’d probably fund the Roth fully before making extra payments on the student loans. The big reason is that, if push came to shove, I could always withdraw the contributions from the Roth at a later date if I so chose.
Q4: Children’s movies
What movies do you let your children watch on your “movie nights”?
- Alex
If it says “Pixar” on the label, we’re generally okay with it. Many of our family movie nights involve Pixar films.
We also often watch Studio Ghibli films, but we’re a bit selective on those as some can have scenes that might frighten really young children (like the fate of the parents at the start of Spirited Away).
These two categories give us about 25 movies to choose from, so we just rotate them. We also have a few additional Disney movies in the mix.
The thing to remember is that movie night with my family isn’t about the move so much as it is about the whole family cuddling up under blankets together, laughing together, and enjoying time together.
Q5: Keeping papers
I’ve got a well controlled financial situation, but I’m overwhelmed by the paperwork. I get statements from multiple bank accounts, investment accounts, 401ks, etc. I get bills for the utilities and my credit card and such. I’ve got my tax returns. Some of these “papers” are actually digital, but most of them are paper still. I’m planning to get a house in the next year, and I imagine there will be a ton of paper involved with that as well.
How long do I need to be hanging on to the various paper and digital copies of all of this paper work? Do you have a preferred method for handling the onslaught of papers?
- Alan
If you’re just keeping paper copies, I’d keep most of them for seven years. I would keep tax returns and other truly key documents forever.
However, I think the best solution is to just make digital archives of everything. Scan all of the paperwork onto your computer using a document scanner. Then, just keep them forever on backed-up hard drives and other formats.
This can take up some serious hard drive space, but then you have an archive of all of your documents. It takes some time, but I think it’s really worth it.
Q6: Determining ownership percentages
My fiance and I are getting married next fall. We will most likely be purchasing a home before we get married. I currently make about 70k per year and she makes about 26k per year. We will be looking to purchase a home in Southern California in the price range of 365k-400k. I will have roughly 80k saved for a down payment/closing costs and my fiance will have roughly 8-10k saved for the down payment/closing costs. She is currently working on paying off 8k of student loans. My question is, what is a fair way to determine percentages of home ownership with the varying amounts of money that we have available for a home purchase and considering our difference in annual income?
- Mike
I would be extremely wary about taking on a mortgage that’s more than double your combined salaries, even with low interest rates. Such a situation is practically begging for Murphy’s Law to take effect.
I don’t think there is one fair way to determine ownership percentages in this situation. It has far more to do with your relationship than anyone else’s ideas of fairness.
My wife and I have had income inequality since the day we were married, but as far as we’re both concerned, everything is a 50/50 split. We’re in this together for the long haul and we’re constantly helping each other in terms of emotional support and other assistance, so it just makes sense to have a 50/50 split.
Q7: Taking control
I recently turned eighteen and my parents are slowly turning over control of my finances to me. However, I have no idea what to do or where to start! Do you have any suggestions for getting started on the right track to ensure financial stability in the future?
- Shawn
I would start with a basic personal finance book. I’m not sure exactly what experiences you’re going through right now, but I would guess that college is either a current experience or one that’s in the near future for you.
If that’s the case, I’d probably suggest Please Send Money by Dara Duguay. It’s a great “getting started” personal finance book.
On the other hand, the book that had the single greatest impact on my thinking with regards to my money was Your Money or Your Life by Joe Dominguez and Vicki Robin.
I feel both are well worth reading in your situation.
Q8: Stuck in a condo?
When housing values started to slide we started making larger principle payments on our condo to stay above water. Eventually the value was going down so quickly we couldn’t keep up. We borrowed $340,000 in 2004 and the current value of our condo is around $200,000 on a good day. We still owe $250,000. Two years ago we stopped putting money toward paying down the principle and started living even more frugally and managed to save up $100,000. The plan was to pay down the principle and refinance into a loan that allows us to rent out the condo then save a down payment to purchase a house. This is due to our family doubling in size since our condo purchase. Now that we have saved up the $100,000 and lived so lean to make it there the idea of throwing it away for a place we have grown out of anyway is pretty painful. Short Sale or Foreclosure don’t seem to be options since we can afford our payments. What other choice do we have?
- Randall
Sadly, your options are fairly limited.
You can just hand your keys to the bank, which will severely damage your credit and make it difficult to borrow anything for the house you want for quite a while.
You can keep living where you’re at and keep saving until you can simply pay off the condo. If you do this, I’d start making extra payments on the condo mortgage rather than sticking the money into savings. Then, you could save for a down payment for a house while trying to sell the condo.
You can also just pay down your condo right now so that you’re at a break-even point on it, then start focusing on your next house immediately.
I don’t know which is the right choice. The second one is probably the safest and most conservative option, which is what I’d go with because that’s how I usually react to such situations.
Q9: 529 plans and multiple children
We have two kids but only 1 529 account setup. Should we increase the contribution to that one account or open another one for the 2nd child? I am not sure if it matters or quite frankly if two kids can even share one account – but I know I didn’t find the answer easily on the web page for the Iowa 529 plan.
- Espen
You would simply open up a new 529 account with your second child as beneficiary.
With many college savings plans, you’d basically manage them together, as they’d appear under the same login name online and they’d send paperwork together. This is exactly how Iowa’s plan works.
I have three seperate 529 plans, one for each of my children. They’re easy to manage together.
Q10: Saving old magazines
I have this tendency to save old magazines, particularly cooking magazines and project magazines. The problem is that my closet is starting to get full of them. How do I get rid of this clutter without losing that information?
- Jill
I have this exact same problem with food and project magazines. They tend to really build up over time!
What I do is once a year or so, I go through the magazines and look for things I’m actually going to use. In a food magazine, for example, there might be five or ten recipes I actually want to save. I actually cut out the pages, scan them onto my computer, then throw all of it away.
It takes some time, but I have this wonderful archive of pages on my computer to browse through. I give the files sensible names so I can easily find them again.
Got any questions? Email them to me or leave them in the comments and I?ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.
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