Lower my cable bill, please?

Posted by Matt

I finally got around to one of the items suggested in an article that Paul mentioned in a recent post, and this is one I'm glad I made time for. I called my cable/Internet provider (Comcast) to let them know that I had been checking out the Dish Network and noticed that the prices there were lower. The rep gave me a long list of reasons why satellite is bad, but finally agreed to give us a discount on both sets of monthly fees. Thanks Money Magazine!

This was a few days ago, so I can't remember how temporary the offer is, but we're moving in a few months anyway. Maybe it will be time to give the Dish Network another look then....

Internet Savings Accounts: the honeymoon is over.

Okay, not really. I'm still in love with my Internet savings account with HSBC. But I just got this notification from them that I thought would be helpful to share:

We are writing to let you know HSBC Direct has adjusted your Online Savings Account interest rate to 4.50% APY*.This rate remains among America’s highest, at 10× the national savings average**—so you can continue to maximize your
savings growth with HSBC Direct, recognized as the “Best Online Savings Account”
by Kiplinger’s Personal Finance.

It was a good reminder that even savings accounts have variable return and that everyone should keep a close eye on ALL of their investments.

Two True Stories Of Living Beyond Your Means

Posted By Paul

I had a friend who was living with his parents and was planning on moving into his first apartment. This friend was a few years younger than me and he had a decent job that certainly earned him enough money to live on his own.

He had done some apartment hunting and found a great place that he really liked. He started telling me about it. He described how each apartment unit had marble countertops and its own security system.

As my friend described all of the cool features of this aparment I started to notice that it sounded considerably nicer than MY first apartment. In fact it sounded considerably nicer than the apartment I had at the time. Out of concern I asked my friend what the rent was.

He told me the price (which was twice what I was paying for rent at the time), and I couldn't hide my gasp of shock at the rent he quoted, so he explained his plan.

His plan was to continue to live at home for about six months and save up a lot of money so that he had a year's worth of rent saved up in the bank and then he'd get the apartment.

This totally blew my mind. I explained how this made very little sense, as all it did was provide a way for my friend to temporarily live beyond his means.

He ended up getting the apartment, stayed there for almost a year, and then had to move because the rent was becoming far too much of a burden. He found a new place, but it was a difficult process because every apartment he looked that was in his price range looked so shabby compared to his super cool, super expensive place.

I had another friend who experienced a similar situation from a different source. When he first started living on his own he didn't make much money (as most of us don't at that time in our lives), so his parents sent him about $500 a month to help with expenses. The problem? After 5 years he was much further along in his career and was making a much better salary but he was still dependent on that $500 a month. When he got a raise instead of maintaining the same frugal lifestyle and weaning himself off of the money from his parents, he would use the money from the raise to get a slightly better car/apartment or whatever.

In essence his parents were letting him get used to always living $500 a month beyond his means. When that money finally ended it was REALLY difficult to do without it even though he was making a perfectly decent salary at the time. After all, who couldn't find use for an extra $500 each month?

So the lesson from all of this is to ALWAYS live within your means. Living beyond your means not only creates a financially unstable situation but it makes it so much harder to actually go back to a "normal" lifestyle once you've gotten used to the one that you can't afford.

Once you get used to that $2000 a month apartment that you can't afford, it's hard to live in the $600 a month apartment that you CAN afford, so just don't do it. Live in the $600 a month apartment you CAN afford and be proud of yourself for really surviving on your own, or if you feel up to it, get the $550 a month or the $500 a month apartment and take pride in the fact that you are consciously being frugal by getting by with a little less space or a few less frills than you need to, and save the extra money for a rainy day.

Amazon makes music easy (finally!)

Posted by Matt
I just found out about the latest (and greatest) music download service from Amazon.com. I can now download:

• single music tracks for 89 cents each or albums for $8.99
• in the mp3 format
• WITHOUT DRM (digital rights management)

If you don't have any firsthand experience with DRM, let's just say it's a pain in the neck. The recording industry wanted it to prevent copyright violations (illegal file sharing), but it ends up really restricting what you can do with your music. For example, I had a large number of music files that I lost access to after I copied them too many times (the DRM-imposed limit was 3 copies and I exceeded it in moving from old computers to new and to a new hard-disk after one failed). I was able to get the files unlocked eventually with help from the companies I purchased the songs from, but it was a messy, painful process.

DRM-free music is long overdue. It's my guess that most of the music downloading population doesn't want to be pirates; I know I don't want to waste time uploading/downloading music with peer-to-peer software at the risk of infecting my computer with viruses/spyware or, worse yet, getting sued by the RIAA. I just want to be able to easily buy songs (not whole albums) and be able to play them whenever and wherever I want.

Getting back to Amazon...I haven't downloaded anything yet, but they appear to have a pretty large (2 million plus songs) and diverse (alternative, jazz, rock, country, classical, opera, hip hop, family, Broadway, etc. etc. ) collection.

So, how is buying music this way frugal, you might ask? Especially since the article referenced by Paul's last post warns you about the costs of filling up your music player with songs? The advantages are:

1. that I don't have to buy a whole album if I only like a few songs from it
2. I don't risk buying an album that I won't like because I can preview the songs before I buy them.

So, if you have a digital music player (and mp3 formats should be compatible with any type), check out Amazon.

An Interesting Article On Hidden Costs

There was an interesting article today on The Dollar Stretcher talking about the hidden costs of purchases:

http://www.stretcher.com/stories/07/07sep24b.cfm

I thought it was a good point to not only consider the actual cost of a purchase but also consider the additional costs related to maintaining or "making the most out of" whatever you buy.

A Web Page On Net Worth

Posted By Paul

There has already been a posting on tracking your net worth. So I won't rehash why I think tracking your net worth is a good idea.

There is an interesting web page based on this idea. It's called Net Worth IQ:

http://www.networthiq.com/

It's a page where you can sign up, enter your financial info, and use the page to track your net worth. You can also choose to make your net worth info public, and you can browse the public profiles of other people.

To be honest, I don't really recommend this page. The net worth tracking system in the web page is fine, but nothing you can't do just as easily in a spreadsheet.

The ability to look at the net worth info of other people is kind of interesting, but I don't find it very useful. We all come from different financial backgrounds, so comparing net worth seems like a pointless exercise. I know it sounds cliche, but when dealing with your net worth you're only in competition with yourself.

But if you're the kind of person who isn't comfortable with spreadsheets, then this sort of web based system might be the right thing for you.

On a personal note, I happened to browse a net worth profile of a user who had essentially no savings, a car loan, and a huge student loan. I realized that was EXACTLY where I was when I first graduated from college. That realization made me proud of how far I had progressed from that time. It also made me feel slightly nostalgic for the days when it was a hugely satisfying accomplishment to have an extra $50 that I could put into may savings account at the end of the month, and balancing my checkbook was an exciting and novel experience.

Budget for fitness without a contract

Posted by Matt

My goal in posting this article is to dissuade at least one person out there from joining a health club. I've belonged to at least three or four different health clubs and have never been happy with any of them. I'll shoulder some of the blame for not doing enough homework to find the right kind of club, but I usually just wanted to find whichever one was closest to my house, figuring that that would make me more likely to stick to my regimen. Given that the larger club chains have the most locations, I usually ended up with one of those and the terrible contracts that came with them.

Most of you probably know how they operate already:

• You pay a huge upfront fee
• You pay a sizable monthly fee (usually around $30/month)
• You are required to pay this membership fee for a period of one or two years (or pay another exorbitant fee to terminate the contract).

Congratulations to the clubs for coming up with such a great business model. Most people gripe about it, but the clubs still seem to find LOTS of people to join. I joined a club several years ago that was just down the street from my house, but I hope it will be the last time I ever make that mistake.

My contract period ended in 2006. Since then, I've been getting letters from the club asking me to come back at a greatly reduced rate; $8.25 month! Why couldn't I have been paying that all along? This is another example of their deviously effective pricing. Obviously, they want you to pay as much as possible, but considering that they are not getting ANY money from me right now, they are trying to bargain with me a bit. If you really decide you want to join a gym, I'd suggest you negotiate the terms. They often run specials where they waive the upfront payment and my experience shows that their pricing is arbitrary and contains a lot of wiggle room.

That being said, I STILL don't think most people should join a gym. If you are like me, you might go regularly for a few weeks or months and then lose interest. Unfortunately, you are locked into that contract and have to pay whether you go or not! Such a waste; I always hated that.

Don't get me wrong, I see the value in keeping active, so here are some alternative suggestions:

1. Find an active hobby. This is what I did. I play indoor soccer now and love playing so much that I almost never miss a game (and I NEVER regret the cost).
2. Clean up your house. This is a two-for-one. Could your house use a little picking up anyway? (If you're spending money on a housekeeping service, shame one you.) I don't know about you, but I often break a sweat when I'm doing a whole house cleaning.
3. Play with your kids (if you've got them). My young son has me running up and down the street with him almost every afternoon.

Another option you might be thinking about is purchasing some fitness equipment for use at home. I know a very small number of people who actually use their home equipment. Take a quick look at Craigslist and count how many treadmills and stair climbers you see listed as "Great condition; hardly used!"

I'd be willing to wager that most expenditures on home equipment are a waste of money, but if you do want to try it out, consider testing yourself first. Try to come up with a comparable exercise that you can do at home without equipment and see if you can stick with that three times a week for a month or two. If so, then a machine might be a safe investment in your health. Or you may just find that you are happy exercising without equipment; win-win.

Just don't join a gym!

Frequent Flier Accounts

Posted By Paul

A simple little tip for everyone when traveling is to always sign up for frequent flier accounts. Even if you don't travel very often it never hurts to sign up for the frequent flier club for an airline.

Why do I recommend this? Well for years I traveled so rarely that I never bothered to sign up for any frequent flier accounts. Then out of nowhere my work needed to send me on this trip to Asia. I was running around crazy getting packed and getting my passport updated so I didn't really get time to sign up for the frequent flier accounts.

My plan was to sign up for the frequent flier clubs after my trip, and then apply the miles, but that ended up being a big pain. I've heard that some airlines specifically won't let you count miles for flights that were taken prior to creation of your account (even if you sign up for the frequent flier account at the gate when you just got off the flight).

In my case I was able to get credit the miles, but this was several years ago and I've heard numerous airlines have become more strict about this.

Now that airlines let you sign up for frequent flier accounts via their web pages, I recommend doing that. Signing up for the frequent flier clubs at the airport can be a hassle if the terminal and gate agents are especially busy.

To be honest I still have yet to fly enough to earn a free frequent flier ticket, but I figure that all I'm out is the few minutes it took to create the account, and I'm ready to reap the rewards if I ever get sent on another big unexpected trip.

How to make an audit pay off.

Posted by Matt
The moving saga continues. We've finished most of the big projects to get our house ready for sale and I've started working on prioritizing our to-do list for the new house. Our housing inspector had a whole list of recommendations (he was VERY thorough), but we only asked the sellers to take care of the major expenses like sewer line replacement and chimney repair.

As I went through the rest of the list, I noticed a number of the items involved insulation. Given that we are entering the cooler months, I think it makes sense to take care of these soon. I'd recommend that every homeowner put their home through an energy audit so that you can find out how to "frugalize" your energy bills (and so that you can do your part to be "green", like everyone else is finally getting around to doing these days).

If you don't feel like you need a full house inspection, look around for free energy audit programs. Our gas company used to provide these and we had one done in a previous home. (I tried to find the link to that old program and it looks like the gas company is now referring to a local energy non-profit called Energy Trust of Oregon.)

When you sign up for an energy audit, an auditor will come out and inspect your house and then give you a detailed report on actions you can take (e.g., adding insulation around pipes), how much they should cost and how much money you can expect to save annually as a result. Amazing. Did I mention this is free? If that's not enough to motivate you, the inspector will also provide free compact fluorescent bulbs (there is also a CFL promotion going on right now) and information on how you can receive significant cash bonuses to offset the cost of the recommended actions. You really don't need to be that handy for many of the recommendations like weatherstripping, pipe insulation, attic insulation, etc.; even hanging a set of heavy drapes can help!

We'll be scheduling our audit for shortly after we move in (I'll try to post our report if I can).
In the meantime, check out these simple ideas for saving energy (and money!) around your house.

Update: 10/05/07: I just read some important warnings about dealing with broken CFL's that I thought I should share, having recommended them above. It was news to me, honest!

Are you still PAYING for software?

Posted by Matt
I'm one of those lucky people that everyone seems to come to with computer and software questions, and it sometimes makes me wonder how computers and software ever became so ubiquitous. I think that maybe 1 or 2% of the population is making the miracle of personal computing possible for the rest of society.

In an attempt to head off one of the more common types of questions I hear and hopefully ease the burden on my techie cohorts, I thought I'd post today with some good software suggestions that can also be big money savers (because they are all free!)

OpenOffice: Productivity software. This is a big one and should be considered as an alternative to Micro$oft. It is free because it is open-source. It contains:

• Writer - word processor; similar to MS Word
• Calc - spreadsheets; similar to MS Excel
• Impress - presentations; similar to MS Powerpoint
• Base - relational database; similar to MS Access
• Draw - graphics and diagrams; similar to MS Visio

Google: everything software. If you know any Mac or Linux users, you know how enthusiastic they can be about their respective environments. So far, I don't know of many Google enthusiasts who approach that same level of religious fervor, except for myself. Now obviously everyone knows by now about Google's search engine, but there are a few other applications you might not have heard of yet.

• Gmail - great email software. Very simple to use and plenty of storage space. If you are still using Outlook Express or (yikes) AOL for email, the time has come to move on. Shhhh, it's okay...Google's here now.
• Picasa - this is billed as "the software that should have come with your digital camera" and rightly so. If you take digital pictures and have not installed Picasa yet, stop reading this and do so now. I consider myself fairly organized but still found it a nightmare to try to manage all of my photos in the Windows folder system. Picasa solved all my photo handling problems and then some (editing, emailing, posting online albums, ordering prints, etc.).
• Docs and Spreadsheets - hosted productivity software; word processing, spreadsheets and presentations. These applications are not nearly as feature-rich as their Microsoft or OpenOffice equivalents, but have the advantages of 1) not requiring installation, 2) not requiring backups and 3) allowing you (and others you trust) to access your files from any machine with Internet access.
• Calendar - Shareable and can be configured to send appointment reminders in pop-ups, email or even to your cell phone.

I could go on and on about lots of other Google apps, but this covers most of my favorites. Before we move on, let me quickly suggest Google Page Creator and Blogger if you need a free and easy way to put up a website or blog, respectively.

AVG Antivirus - Antivirus software used to be the one application you had to just break down and buy from one of the big name software companies like Norton or McAfee. Well, not anymore. AVG is free and automatically updates itself to watch for all the latest threats.

AdAware - if you need an anti-spyware application, Lavasoft's is one of the best free ones I've found, but I also have to add that you really shouldn't need these types of applications if you are careful about where you click and what you download.

ZoneAlarm - An extra layer of security for your machine, for those of you who haven't secured yourself behind hardware yet. This product started small a while back, but has matured into a full-fledged suite of products. If you want the free, basic edition, make sure you click the right link at the bottom of the ZoneAlarm download page.

This page should serve as fair warning for people who know me: If you ask for help with other brands of software, the first thing I will likely do these days is suggest you migrate to one of the applications above first. Working with bad software wastes time and energy, and wasting is not the Frugalize way.

Downsizing the house BEFORE retirement.

Posted by Matt
As I've mentioned in previous posts, my family is moving to a new house soon. Almost without exception, everyone who I speak to about our new house is shocked to hear that it is around 1200 sq. ft. smaller than our current house. Of course, these were the same people that were shocked when we told them that we were buying our present 3400 sq. ft. house for just three people (me, wife and toddler).


The next house will be our 4th in four years, though, and so we've gotten some exposure to the pluses and minuses of different house styles and sizes. Our new (and hopefully long-term) house is just on the cozy end of our ideal range at around 2200 sq. ft. It has the right number of rooms at the right sizes (large master, a medium room for our son and two small rooms we will use for a guest room and shared office.) We're very excited to be scaling down for several reasons:

• My wife wants a "cozier house".
• We both want less house to clean and maintain.
• We want to live more efficiently. I can't think of a better way to say this, so let me just give an example: I won't have my own office, but I also won't have to communicate with my wife via IM anymore, and I won't have to run up and down the stairs every time I want to print something.
• The frugalize factors: reduced heating/cooling costs (unless there is a loss in efficiency when moving from a two-story to a single-level?), reduced property taxes (because the house is older than our current one) and a smaller mortgage!

The last benefit we're looking forward to, and the one you should keep in mind if you are home shopping, is that buying smaller lets us afford better quality!

Look how much I saved on groceries!

Posted by Matt

I sometimes give my wife a hard time about how often she goes shopping, but hopefully she knows I'm kidding. The good news is that it's almost ALWAYS grocery shopping and she turns everything she buys into delicious and healthy food for our family. Even better, she's a die-hard frugalizer. Most grocery stores these days will show you how much you've saved at the bottom of your receipt and her receipts usually show 30 or even 40+% savings. (I hear the title of this post probably once a week.)

That always amazes me. I considered myself a pretty frugal shopper when I was single, but I didn't eat nearly as well as I do now. I usually just compared prices on the shelves of whichever store was within walking distance, but refused to clip coupons. I never thought saving 25 cents at a time was going to add up to much.

So, how does she do it? It takes a lot less effort than I would have imagined.

1. She checks through the big stack of grocery store coupons and advertisements that our local newspaper publishes every Tuesday.
2. She is willing to go to multiple stores if they each have several good deals.
3. She shops at bargain places like Winco and Costco.
4. She sticks to the list.
5. She belongs to every store's membership program for extra savings.
6. She knows the regular prices of all the things we routinely buy and stocks up whenever the price drops substantially. She even found a "buy 2, get 3 free deal" once; that's 60% off!

I was worried about the cost of subscribing to the newspaper at first, but the cost is usually more than paid for by the savings of one trip to the store. Also, I'm personally not crazy about driving to more than one store to shop, but it works for her. So mostly, I think the techniques boil down to just giving a little extra thought and effort to the process.

I recently have been seeing a lot of discussions about the Grocery Game, although we haven't tried it yet. With the kind of savings my wife racks up, I didn't think we needed to, but I just checked the site and saw a picture of a receipt with 97% savings. I hope she's reading this......

Redecorating the Frugal Way

Posted By Paul's Wife:

If you are starting a new household, or just want a fresh, new look to your home, here is a helpful guide for you.

Before you buy a single item to redecorate your home, take stock of items you already have and how they can be better utilized. I learned how to decorate each room around a focal point such as a fireplace or a large piece of artwork. I learned these techniques in a book I highly recommend called “Use What You Have Decorating” by Lauri Ward. In this book I learned to use what we already had to decorate and furnish each room and then decided on what items would complete the look depending on our budget. Also, I learned to rotate our artwork based on the seasons and to pack away or give away things we didn’t want to display all the time.

Later on, after we remodeled our kitchen, main floor and stairs by adding hardwood floors and new cabinets we decided it was time to update our furniture. We made a list of items we needed to update our house which included a larger dining room table, chairs, china cabinet, sofa, two club chairs, an entryway table, some outdoor furniture as well as rugs.

We didn’t go out and buy all of our furniture as once. We took our time to find good prices at a variety of places so that we could get the best value for our money.

First, we bought a dining room table, eight chairs and a china cabinet through a coupon at Costco.com. I also look extensively at consignment shops. You can get a lot of good quality furniture this way. I waited and continued looking until I found two club chairs that were exactly what we wanted at the price we wanted to pay.

If you live in the Portland, Oregon area I highly recommend Upscale Consignment.

We have also decorated and furnished our home with items friends and family have given us. If someone you know is getting rid of furniture or decor items don’t be afraid to look. You may find a treasure. We have a bed frame, dresser, rug, side table and wooden screen that were given to us. We are also very fortunate that my Dad is an excellent woodworker and created a coffee table and two bedside lamp tables for us as well. I believe that if you are a creative decorator you can fit in many different styles of furniture and add your own personal touches.

The only items we ended up buying new were a sofa at Dania, a rug and two lamps at very good prices at Tuesday Morning, and two outdoor umbrella tables and eight chairs at the Grocery Outlet. It pays to look everywhere and often because you never know where you might find something. Months later I also found our entryway table at a little consignment shop in Hillsboro, Oregon connected to the tea shop called The Stratford House.

Other places to find furniture and decor items are auctions. Auctions such as O’Gallerie in Portland, Oregon offer auctions on specific items such as rugs at certain times of the year. We were able to purchase a very nice rug at this auction at a price we could afford. The important thing to remember when buying items at an auction is to stay within your budget. Make sure you know about how much these items are worth and set a spending limit when you bid on items.

Finally, the most important thing to remember is that patience and persistence are the keys to decorating your home within a budget.

Start your own bank!

Posted by Matt
So far we've written articles about lots of things to do with your extra money: savings accounts, retirement accounts, education accounts, Berkshire-Hathaway stock, CDs, savings bonds and gold. Most of this is pretty conservative stuff that a financial adviser would probably endorse.

But let's say you've already got the basics covered and are looking for something a little more exciting. Maybe you'd like to use your extra cash to help people in need instead of giving it to a bank to invest. Why not start your own bank?

Ok, not literally. I doubt most of our readers have tens of millions of dollars in start up capital, but I did find a website that facilitates private lending. Check out http://www.prosper.com/. The site essentially brings together people that have money with people who need it.

I haven't actually used this site yet, but I'd love to hear from someone who has. My initial response is mixed; on one hand I think it is great that people who can't get help from regular financial institutions now have a new option. On the other hand, I'd feel guilty charging the high rates that some of the riskier borrowers are offering. Many of them are in financial trouble and have limited options and obviously the lenders have to justify the risk they are taking.

If you decide to give lending through this site a try, just remember that the potential for high returns always comes with higher risk. I'd recommend diversifying within the site by partially funding a large number of loans.

A simple tax is a Fair Tax.

Posted by Matt

Dear government bean counters:

Thank you for the Roth IRA, 401ks, 529 education savings plans, mortgage interest tax deductions, deductions for charitable donations, dependent care flexible spending accounts and all the other things you have done to ease our tax burden. But it seems to me that these things all add up to a TREMENDOUS amount of paper-shuffling for everyone (me, my employer, my accountant, the IRS, etc.) and my loophole list above is probably only the tip of the iceberg.

I understand the value of providing incentives for Americans to do the right things with their money, but we need to go about it more efficiently. How much of my tax money is spent to help the IRS gather tax money? They are not a small organization, to put it mildly.

Here's an idea (and I only wish I could get the credit for this): let's just skip the income tax altogether and have a flat national sales tax on spending. A great group of people have already done the legwork to put together a plan for us; check it out at http://www.FairTax.org.

[Readers: if you want a more efficient government, check out FairTax for yourselves and show your support to Congress!]

How sure are you that your child will go to college?

Posted by Matt
I've been looking into 529 savings accounts again and I keep coming back to that question about whether we are really sure we will need it. But before we explore that, let's start off with the basics.

A "529 plan" is an education savings account named after the section of the IRS code that defines it. I first researched them in 2006, shortly after my son was born, and decided against them because the tax advantages were originally set to expire in 2010. I just discovered that the Pension Protection Act of 2006 has made them permanent and decided to take another look.

Here are the benefits:

• Earnings grow tax-free
• Contributions are deductible from state income taxes (up to $2000 for Oregon) in some states.
• The funds can be used for qualified expenses at any accredited public or private post-secondary institution in the United States and abroad (this can even include online education).
• When the government assesses a student's need for financial aid, the value of the 529 plan is assessed at an expected family contribution rate of 5.6% (assuming the parent is the account owner). Other college savings that are in the name of the student are assessed at a much higher rate of 20%.
• You must designate a beneficiary, but the beneficiary can be changed within the family.
• If the beneficiary receives a scholarship, you can withdraw funds from the account up to the amount of the scholarship without penalty. The earnings portion of this withdrawal will be subject to federal and state income tax at the account owner's rate.

This all sounds great. We started a regular savings account for our son already, but I like the idea of getting it into a mutual fund (which is one of the typical options for 529 accounts) for better returns and letting it grow tax-free. The state tax deduction is also a great bonus.

My concern is around what happens to the money if our son doesn't go to college. If I just had to pay the back taxes on the earnings, that would be fine. Unfortunately, if you end up withdrawing the money for anything other than education expenses, you ALSO have to pay a 10% federal tax penalty. Which brings me back to the question, "How sure are we that our child will go to college?"

I'll chalk it up as another one of the great uncertainties of financial planning, but we will be pushing our son towards at least SOME type of post-secondary education, so I think a 529 does make sense. It's not my favorite place to put our money, and I've often read that education should not come at the expense of other types of saving (i.e., "there are no scholarships for retirement"), so I'll probably make sure we get our Roth IRAs maxed out first (especially considering Paul's last post).

My final caution is to (as always) shop around. 529 plans are administered by states, but you don't necessarily have to pick the plan for the state you are living in. The expenses for some plans could outweigh the benefits, as described in this article from Slate. Luckily, that great article Paul found yesterday had a link to a 529 guide that can help you get started.

Update 10/3/07: Here is another great article on 529's.

The Roth as a College Savings Vehicle

Posted By Paul
There are many options out there when it comes to saving for college. I had heard that some people use a Roth IRA as a college savings vehicle and this idea intrigued me.

The article Matt wrote already outlines the basics of the Roth IRA. So I was interested in how this applies to college savings.

So with a Roth you put post-tax dollars into an account and earnings that you make are tax free. You can withdraw your contributions at any time for any reason without taxes or penalty, but if you withdraw earnings early (before age 59 1/2) then you pay a 10% penalty tax AND you have to pay taxes on the earnings.

So how does this become a college savings vehicle? Well the answer is that if you withdraw earnings early and use them for higher education expenses then you avoid the 10% penalty tax but you still have to pay taxes on the earnings.

One reason this appeals to people is because the Roth sort of provides a savings vehicle that can be used to save for a child's college, but also can serve as something else.

For example, if you save all of this money in a Roth, but then out of nowhere your grandparents offer to pay for your child's college education (this is a VERY hypothetical case for most people) your Roth can still serve as your retirement account.

Another cool trick is that you can use your Roth as a combined college savings and retirement account. Let's say for example that you reach a point where you decide you can save $500 per year for college and another $1500 for retirement. You can take the whole $2000 and put it into a Roth IRA.

So now fast forward to the future. Let's say that over the years your $2000 became $3000. That means that the $1500 for retirement has grown to $2250 and the $500 has grown to $750.

Now you decide that you want to take some money out for college expenses. If you can take out the $750, and as far as the IRS is concerned you're still taking out less than the total money you have contributed, so this money is yours, tax free and penalty free.

There is a great article on college savings through the Roth here. The idea of using a Roth for college savings is interesting, but I think I'm going to keep looking around. I plan on researching (and posting articles) about other options in the future.

Article: 41 Tips For Saving Money

Posted By Paul
On CNN Money there is this great article on saving money. It's presented as a list of 41 tips that you can follow:

http://money.cnn.com/galleries/2007/moneymag/0709/gallery.35minutes.moneymag/index.html

I plan on going through the tips one by one and discussing them in the coming weeks.

What happens to your 401k when you leave?

Posted By Paul

I had someone ask me recently what to do with their 401k when they leave a job. I thought I'd take a moment and list the options and my opinion on each:


Option 1: Cash it out.

This means just that, you take your money out of your 401k and get a check and it's yours to do with as you please. DO NOT DO THIS! When you cash out your 401k you get taxed on it, which really defeats the purpose of why you put the money in there in the first place. There may be a situation where doing this makes sense, but it would have to be a VERY extreme and dire situation before you start considering this.



Option 2: Leave it there.

As far as I know all 401k plans let you leave it in your company plan even if you are no longer an employee there (I think a lot of places have minimum balances you have to meet before you can do this, but usually they're pretty small). This option is fine, especially if you really like the 401k plan at the company you left. However, it also means that your 401k is in a company plan that you're sort of out of the loop on. Since you don't work there you don't get the nice annual presentation on the 401k program, and there may be other inconveniences. Generally I don't think this is all that great of a choice.



Option 3: Roll it into your new company 401k.

After leaving your old job you will probably end up at a company in the future that has a 401k plan of its own. You can then just roll the money from one to the other. It's a pretty simple process that takes a little bit of paper work, but your benefits representative at the company can help you with this as it is VERY common. I usually do this when I switch jobs but once I did try option 4.


Option 4: Roll it into your own IRA.

You can just open up an IRA and roll the money into that. Where you manage it yourself. When I did this one think I liked about it was that I rolled the money into my IRA and then any new money went into my new company 401k, so I haven't made any contribution to that IRA for several years now. It's kind of cool because I can actually watch and see how well my investment is doing. That's sort of harder with a 401k since you're constantly putting more money into it, but with my IRA I can easily tell you what percent increase I made in the last year, which is nice.



These are the only 4 options that I can think of. I think most people go with option 3 when they switch jobs, which I think makes sense. As long as you don't cash it out then I think any of the other choices is fine.

Buying to Cheer Yourself Up

Posted by Paul
A common problem I've seen with various people I've known who are in financial dire straits is the fact that they seem to buy things as a way to cheer themselves up.

Now, I also see people who I consider financially resposible also treating themselves to something when they've had an especially long day, or perhaps as a reward for completing a project around the house.

The difference that I've noticed is that the people who are in financial jeopardy often buy themselves big dollar items while the financial responsible people buy more simple treats.

For example, I know one person who is working their way out of several thousands of dollars in credit card debt. After a rough week as a way to cheer themselves up they bought a $300 stereo.

On the other hand, I have a friend who is pretty together as far as his finances. They spent the whole day working to complete a major project on their house so at the end of the day they treated themselves to a DVD movie they wanted (I think it cost them $12).

I don't see any harm in treating yourself to something every now and then, but I've noticed that often a simple treat (a new CD, eating dinner out, a trip to the ice cream parlor) can be just as satisfying of a pick me up as a big ticket item.

I also noticed that the people who had a tendency to buy big dollar items as a way to treat themselves were often in a dangerous spiral. They'd be in a troubled financial situation, so they would be more prone to stress and depression, they'd go out and buy some big item to cheer themselves up, plunging them further into a bad financial situation, making them more prone to stress and depression, and so on.

I think people should train themselves to take pleasure in the little things. Not only will it help your financial situation, but I think it will probably make you a happier person in general.

Long-term purchasing.

Posted by Matt
I've found a helpful tip for making purchasing decisions, though I'm sure it is probably starting to bother my wife. Whenever I'm faced with a purchase (and I'm talking more like long-term items like housewares than groceries here), I try to remember to ask myself "Is this the last [blank] I'll ever buy?"

First off, it means I shop with durability and quality in mind, and am willing to pay a little more for those attributes if it means I won't have to re-purchase the item when it wears out or breaks.

Next, I try to think about how well the item covers all of our requirements and whether I think I might get sick of the style eventually.

Now, admittedly, long-term purchasing is easier when you can actually afford to buy quality and when you are in a stage of your life where it makes sense. For example: when I was young and single, trying to find the perfect dinnerware was very low on my priority list and I probably couldn't have afforded it anyway. When my future wife and I first moved in together, we bought an inexpensive set of plates that we later grew tired of. We next received a very nice set of dishes as wedding gifts, but later discovered that they were very difficult to fit into our dishwasher racks and they also chipped frequently. That's when I thought, "okay, let's just find what we need already." Someone recommended Corelleto us and I'm SO glad they did.

1. The stuff is practically unbreakable.
2. The design is plain, simple and classic (all white).
3. They fit well in the dishwasher and our cabinets.
4. The set was relatively inexpensive.

I NEVER want to replace this stuff. I will concede that all the other dishes I've owned or used in my life helped me define exactly what types of dishes I was looking for and there is definitely value in that. I'm just saying that I try to think ahead.

So far, I've got a fairly short list of things that I think I'll never buy again (my cast iron skillet, wedding ring, some furniture and some tools to name a few items), so I hope that other people will post suggestions in the comments.

Credit Cards Aren't All Bad

Posted by Paul
You often hear about credit cards and how they are the terrible, dangerous and potentially the quickest path to putting your financial life into a shambles.

Though it's true that credit cards can easily be misused, and that this misuse can easily put a person into dire straits, if used properly they can actually be a good thing.

For example I use a credit card quite a bit, since it's convenient to not have to carry around a lot of cash. I have a card that has no annual fee (you should never have an annual fee credit card, how absurd to actually pay a company to use their card), and I NEVER carry a balance on the card. Seriously, always pay off your credit card. As long as you pay off your card every month then you don't have to pay the crazy interest. If you ever find yourself with a balance on the card that you can't afford to pay off, STOP using your credit card immediately, pay it off as soon as possible and look closely at your life because you are almost certainly overspending somewhere.

So in addition to the convenience of using a credit card, I also have a card that gives me incentive points. For example one of my cards gives me 1% of my purchases in free Amazon merchandise. Books, DVD's, and CD's are items that I like to buy but that I really don't need, so I like to use my Amazon incentive points to buy fun stuff. It's a great way to use the "free money" from the credit card to buy fun stuff.

So as long as you can use a card and pay it off every month, I think it's a great idea to get one that has some sort of incentive that appeals to you and make use of the free stuff.

I like the idea that not only is the credit card company not making money off of me, but I'm getting free stuff by using the card responsibly.

New feature on Frugalize

Posted by Matt
I'm just posting a quick note to draw attention to a new feature here on Frugalize. Paul and I decided that it might be nice to keep a running list of whatever general financial rules we could agree upon. You can find them in the "Basic Rules of Finance" list in the column on the right. The list is short so far, but we will continue to update these rules as we go.

A Simple System For Saving Money

Posted by Paul
I wanted to share a little system my wife and I put in place that really created a nice way for us to save a little money here and there while still getting our bills paid.

We first chose a dollar amount for our checking account that we considered a "safe amount". Then we decided that if my wife or I view our account balance via our banking web page (which someone checks about 2-3 times a week on the average) and we see that our checking account balance is above the "safe amount" then we immediately transfer $100 to our ISA.

So the idea is that as we save a little bit of money here and there (by not eating out as much or just not buying stuff for a while) our checking account balance goes up, and eventually goes over the "safe amount", and when that happens we move some money over to our savings account. Whenever our savings account gets up to a significant amount we decide how we want to invest the money (or we may decide to use it for home improvements or even a fun trip somewhere).

Of course this plan assumes that you aren't living paycheck to paycheck (see Matt's article Stop planning your life around payday!), and provides a simple way to get a feel for how much you are saving vs spending.

For example my wife and I went on an out of town weekend trip which involved spending more money than usual, so our checking account dropped and it took a good while before it gradually crept back to the point where it reached the "safe amount", but when it did it was a nice signal that we were financially "back to normal".

It's also a nice general way to monitor your spending. For example, I can go back through my transfer history of my account and know how often I put a transfer through to my savings account, so I can get a general feel for how much we're spending (for example if we transferred to our savings account 14 times in 2006, but only 4 times in 2007, then maybe we need to figure out if and where we're spending more money).

Of course the checking account balance fluctuates day to day as checks clear and paychecks get deposited, but by using this simple system I can get a rough feel for how we're doing financially.

Plus it's fun to try to save a few bucks here and there and watch your account balance gradually creep up the "safe amount." It keeps you from running into that situation where your frugality only results in a checking account balance which is huge but earns you no interest, and also avoids the trap of accidentally transferring a huge amount to savings only to discover that you didn't have as much extra money as you thought when the mortgage check bounces.

Is there such a thing as "good" debt?

Posted by Matt
As I've mentioned previously, I'm not crazy about debt. Who is, right? Wouldn't we all love to be debt-free? However, most people make an exception for that one special kind of "good debt": the home mortgage.

Now, I'll stipulate that mortgages are definitely better than other kinds of debt like credit cards, car loans or (shudder) payday loans, but I don't think that I can bring myself to call my mortgage "good". So, why do I have one?

We COULD have saved up and paid cash for a house, but that could easily have taken a decade or more and meanwhile we would have had nothing to show for all the money we'd be plowing into rent (gotta live somewhere). Plus, we're getting great tax deductions on the mortgage interest we pay. So, maybe I can classify mortgages as one of life's necessary evils.

What I'm still trying to figure out is how comfortable to get with the mortgage. We are lucky enough to have a little extra money each month and we're trying to decide whether to aggressively pre-pay the mortgage or not. It pains me to think of how much our house is actually going to cost with 30 years of interest added to the price if we stick to the standard schedule.

On the other hand, most financial guides I've read suggest that it only makes sense to pre-pay your mortgage if the interest rate you are paying is higher than the rate of return you could get if you invested the money. I see the logic at a high level, but I'm working on a spreadsheet to test that theory that incorporates lots of the little details and variables that sometimes get ignored when people try to come up with general guidelines (and yes, ignoring wind resistance did bother me in physics class).

I think that even if the numbers dictate that we are better off investing, I'd probably only do so until the investment account balance was higher than the mortgage balance and then I'd pay the mortgage off.

I WILL be completely debt-free SOMEDAY and I'm really looking forward to it!

Tracking Your Net Worth

Posted by Paul
One of the most valuable steps I have taken in recent years as I try to become more financially responsible is setting up a system where I can track my net worth.

This may seem like something that only an extremely uptight person would do, but I actually think that tracking your net worth is simple, useful, and (dare I say it) fun!

So why bother tracking your net worth? If you're interested in things like saving and investing and the accumulation of wealth, then your net worth is an excellent way to see how things are progressing.

So how do you determine your net worth? It's very simple:

1) Determine all of your assets. These are all of your retirement accounts, savings accounts, savings bonds, CD's, precious metals, as well as the value of your house. Pretty much everything significant in your life that has some worth.

2) Determine all of your liabilities. These are all of your outstanding debts. They include things like the remaining debt on your house, all credit cards balances, student loans, car loans, and essentially any other debt in your life.

3) Your networth = your assets - your liabilities.

A few interesting points when gathering all of this info:

a) I would recommend not bothering to include any account that changes a lot (like your main checking account for example). If most of your money is in your main checking account, then you have a problem.

b) Don't include your car as an asset (but do include your car loan as a liability). The only exception is if you have some sort of collectible car that you actually plan to have increase in value.

c) Do include the value of your house as an asset, but also include the money you still owe on your mortgage as a liability (in other words, you should only count the equity in your house as part of your net worth).

d) Don't include things like TV's, computers, furniture, etc, as your assets. As nice as they are, it's nearly impossible to accurately judge their value and it's probably falling all the time anyway.

Here is an example net worth calculation (with totally fictional data):

Assets:
401k balance $10000
Savings Account $3000
Savings Bond Values $1000
House Value $300000
Total Assets = $314000

Liabilities:
Credit Card Debt: $2000
Car Loan Debt: $8000
Mortgage Debt: $272000
Total Liabilities = $282000

Networth = $314000-$282000 = $32000

Once you start tracking your net worth, you can do some interesting things with it like:

1) Make sure your net worth is positive. If your net worth is negative this is a BIG problem. It means you owe more than you own, and that is definitely not a place you want to be.

2) See how your net worth changes over time. The hope is that over time your net worth should be trending upwards.

3) See how different things relate to your net worth. For example if you finance a new car, your net worth will probably drop significantly at the beginning (the loan will be a large liability) but over time as your pay off the debt it will be less of a factor in your net worth.

4) Does your net worth fluctuate more than you would like from day by day? Then perhaps you need to change your investments to less volatile investments.

Hopefully this will motivate you to calculate your net worth if you don't already. After all, most financial decisions are based on increasing your net worth, so if you don't track it how do you know how well you're doing?

Your vacation is not a savings account

Posted by Paul
Over the years I have been surprised by how many people I've met that use their vacation time as a savings account. The idea is that many companies will pay you for any accrued vacation when you leave the job.



Because of this some people specifically avoid taking vacation so that their accumulated time piles up, giving them a nice fat check when they leave the company.



I think this mindset can be a huge mistake especially when I see people using their accrued vacation as an excuse to not build up an emergency fund (figuring that their vacation time pay can be their emergency fund).



If you don't take that vacation, then after a while you'll miss having that recharge time and you'll probably start burning out at work.



Setting aside the issue of your own happiness, I think that taking your vacation makes sense from a purely long term financial standpoint. Ever see those coworkers who let themselves get burnt out? They're crabby, pessimistic, and generally not very productive, right? Do you think these people are the ones who get promotions or raises come review time?



When you see that you have a bunch of vacation time saved up, don't start calculating how much money that'll be when you leave. Instead take some time off and recharge! No one says you have to spend a ton of money on some jet-setting vacation. If you want to be frugal, then go camping, or even just stay home and have fun by seeing movies or going to your local museum.

The Roth IRA: A tax shelter for your golden years.

Posted by Matt

I hope I wasn't the only person who took advantage of the free financial advice opportunity I mentioned last week. I spoke for about ten minutes with a financial adviser who essentially told me that my wife and I should have a higher proportion of our portfolio in retirement accounts.

Towards this end, I'm finally going to open a Roth IRA. I haven't thought about these in years, but I remember that when I first heard of them, they sounded like a really good idea. Everything I read this weekend seems to back that up.

So, what's my excuse for not having one already?

One, I consider myself a minimalist (meaning I'm mentally lazy and don't like to keep track of a lot of things) and didn't want to open a separate retirement account when I already had a 401k.

Two, I'm not maximally funding my 401k yet and thought I should do that before moving on to a Roth.

I explained this to the adviser, but he convinced me by adding a new consideration: If I put ALL my retirement money into a tax-deferred account (like the 401k), I risk pushing myself into a higher tax bracket when I withdraw that money in retirement. The Roth is funded with after-tax dollars, so you avoid taxes on withdrawals.

I like the theory around using the 401k to reduce my taxes while I'm working and the Roth to reduce them in retirement, but I could still imagine that a scenario might exist where I could retroactively crunch numbers and determine that it wouldn't have mattered which investment vehicle I chose.

So, given my laziness, why am I still going for a Roth?

Because another one of the great features of these accounts is that you can withdraw the full amount of your contributions without penalty (though early withdrawal of earnings is penalized) at any time. While I certainly don't advocate dipping into retirement accounts, I like the idea that the money is not as tightly locked away in a Roth as it is in a 401k (via penalties.) That might let me retire a few years early (if I'm lucky) or serve as a substantial backup to my emergency fund.

So yes, I'm finally going to open a Roth, but still have to figure out some details about the funding process as my wife and I also hope to make accelerated mortgage payments on our new house (we close escrow in two weeks). We're going to meet with a certified financial planner in the next few months for validation of our ideas.

I'll let everyone know the final plan as soon as I do!

Give your savings a "kick"!

Posted by Matt
It's that time of year again; today's Oregonian ran an article about the annual state income tax "kicker checks". For those readers outside of Oregon who've never heard of this, our state refunds all income tax revenue that exceeds projections+2%. This year, that came out to 1.1 BILLION dollars.

Lots of people debate this practice, but I think it is a good way to keep a lid on government spending. I assume that the government would find a way to spend every bit of money we gave them, but it is just important for them to stick to a budget as it is for us individual citizens. Also, as the article points out "...the state's current two-year budget is 20 percent higher than the last one," so I think it is good to have a limit on their spending. Heck, I didn't get to increase MY two-year budget by 20%.

So, I'm excited about the money (the checks should be mailed out in mid-December), but also want to make a suggestion: let's not waste it! The timing is terrible; people will probably take their kicker checks and use it to bump up their holiday spending. I'm going to put mine toward my new Roth IRA (which I plan to discuss in my next post).

I think the Roth is a great place to put "found money" like this, and we'll probably start putting our federal and state tax refunds away here also. The kicker law in our state constitution is in place to keep our state "on budget", so let's all do the same for ourselves. Send a "kicker check" of your own....straight to savings!

So you want to buy stocks?

Posted by Paul
That was me about 10 years ago. I was recently out of college and had just managed to save enough money that I could actually look around for interesting ways to invest it.

This was when The Beardstown Ladies were at the height of their fame, and it seemed like everyone was getting into the stock market.

As I started contemplating buying stocks, I decided to start by joining an investment club. These are simply groups of people who pool their money, time and knowledge to buy stocks together and share in the profits or losses. I joined a club at my work where people would individually present stocks to the group and we would vote on whether or not to purchase them. If you are new to investing in individual securities I would highly recommend joining (or starting) an investment club for the following reasons:

1) Smaller investment in cash. Many investment clubs require a small monthly fee that goes into the club's account and is used for buying stocks. This fee can be very small (like $10 a month), so you get to learn about the stock market with a very small outlay of cash.

2) Shared pool of knowledge. It's often more fun to learn about something with a group, and an investment club is a great way to do this.

3) Avoids speculative investing. If you are a member of a club that meets once a month, then it forces you to get out of the "time the market" mentality and forces you to think more long term with your investments which is generally thought of as the best way to view the market.

So maybe you can't find an investment club, or perhaps you just want to skip that step and dive in for yourself. Here are a few tips I can give you as far as how to invest in individual stocks:

Tip 1: Find yourself a cheap broker. There are many simple cheap online brokers (eTrade, Ameritrade, etc. ) where opening a brokerage account is incredibly simple. If you are getting into the stock market for the first time I would suggest going with something like this. I've used eTrade before and they were fine.

Tip 2: Avoid speculative trading. When you first buy stocks there is often this desire to want to check your stock every few hours and buy and sell constantly. This sort of timing the market mentality is generally not a good way to start off.

Tip 3: Never invest more than you are prepared to lose. In my opinion, buying and selling individual securities should only be done as either a fun little side hobby or a serious job where you spend a lot of time and energy researching and managing your stocks. Most of us already have serious jobs so I only suggest purchasing individual securities as a hobby.

Tip 4: Consider not doing it. I'm showing my bias here, but this was the conclusion I came to once I had played in the stock market for a while. The problem I ran into was that investing in individual company stocks doesn't allow for diversification. There are many success stories about people investing in securities, but there are even more failure stories. Before you start putting any significant money into individual stocks, I would highly recommend that you take a look at mutual funds or a simple index fund.

As I mentioned I started off by joining an investment club. I learned a lot, made a little money, and had some fun. Then I opened my open brokerage account and bought a few stocks. My few stocks did okay, but not great, and after a while I decided that individual securities were not for me so I decided to sell it all (and by sell it all I'm only talking about $1200 at the height of my portfolio).

Now I only invest in mutual funds (through my 401k and Roth) with the exception of Berkshire-Hathaway.

I've decided that individual securities is just too risky for me.

One last point, I know that there are various places on the internet where you can play "fantasy stock market" where you buy and sell securities with fictional money. If you have the patience, I would recommend doing something like this for a few months. It's another great way to learn about the highs and lows of the stock market without any outlay of cash.