This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Monday, March 31, 2008

Do You Need An Accountant?

Posted By Paul

As the tax deadline approaches many people are faced with the question of whether or not they should do their own taxes or hire an accountant.

My view on the subject is that you should do your taxes for as long as you can possibly stand to.

Here is the basic progression I took with my taxes:

1) The EZ form. Ah those wonderful days of getting your taxes done in an hour. If you qualify for the EZ form, then by all means do your taxes yourself. I would say that ANYONE can do the EZ form by themselves or with a little help from a friend or relative.

2) Turbo Tax. When I no longer qualified to do the EZ form I moved to using Turbo Tax. I think Turbo Tax is a great product, it served me well for many years. For those of you who are unaware of this product, it's essentially a piece of software that asks you a bunch of questions and based on your answers it fills out your tax forms for you. If you no longer qualify for the EZ form but your taxes aren't THAT complicated then I would highly recommend this product.

3) The accountant. I remember very well what made me switch over from Turbo Tax to an accountant. It had been a year with a lot of crazy tax events (stock sales, buying my first house, etc.), and I had decided to try Turbo Tax once again. The first problem I ran into was I was unsure of what info Turbo Tax wanted. Turbo Tax would ask me for some value related to the closing costs for my home and I would look through my stack of home buying forms trying to figure out which value(s) it wanted. I made it through Turbo Tax with my best guess as to what it wanted and I ended up with a tax bill that was over $10000 (the biggest I'd ever had)! That was enough to get me to give the accountant a try. I got a recommendation for an accountant sent them my forms and had them do it (case in point, they came up with the exact same number that Turbo Tax did).

At that point I kept planning on going back to Turbo Tax as soon as I had a 'simple tax year', but that just never seemed to happen. Every year since had some significant tax event (house sale, marriage, starting a business, etc.) that made me willing to pay for an expert.

Now that my wife has her own business we pretty much involve the accountant every year. Our finances have evolved to the point where paying an expert is worth it to us.

One other point, is that this last year I switched accountants. Why? I was happy with the service that my accountant gave me, but they had sold their practice to a larger downtown firm and over the last few years their tax prep fees had gradually increased to the point where they were almost double what I had originally been paying. I started shopping around and quickly found an accountant that also gave good service (which for me means good communication via email and phone) and that was almost half the price.

How did I find an accountant? Well I just started asking around. I was lucky to have friends and coworkers that were all similar to me from a tax standpoint, and that were willing to tell me how much their tax preparation cost and how happy they were with their accountant.

So do your own taxes yourself for as long as you can do them with confidence and without driving yourself crazy. Once you decide to get an accountant, ask around to get an idea of price and recommendations, and don't hesitate to shop around if you ever feel like your accountant is getting overpriced.

Travel with a friend on National Train Day

Posted by Matt

Do you travel much? Do you take a lot of short distance flights? If your answer is "yes", consider train travel!

I have a lot of fond memories of the excitement of air travel when I was younger, but these days I mostly dread flying. Actually, the FLYING part is still pretty cool; I'm just not so jazzed about security checkpoints, baggage hassles and spending hours sweating on the tarmac while waiting for takeoff.

I had to take a trip to Seattle last year (I live in Portland) for work and thought it would be a great chance to experience train travel again. I remember childhood train travel even more fondly than air travel (because my father was a railroad engineer and I got to ride in the locomotive sometimes), but was pleasantly surprised to discover that, unlike air travel, very little has changed about the experience in the last three decades.

If you want to try it out, now is a good time. May 10th is National Train Day and you can bring a friend along for free! If that isn't enough to convince you, check out plenty of other incentives (highlights from my trip) below.
  • The round-trip ticket was SUPER cheap: $68!

  • Parking at the train station was cheaper than airport parking and right across the street from the station.

  • The ticket counter lines were very short.

  • No security checkpoint. I got to keep all my clothes on the whole time I was in the station!

  • Not knowing what to expect, I arrived about 30 minutes prior to departure. I probably could have made it onto the train even if I had cut that to 15 minutes. I walked a total of about 300 feet from my car to my seat on the train.

  • There was an electrical outlet next to my seat where I plugged in my laptop and I was not asked to turn off any of my electronic devices or cell phones at any time.

  • Roomy seats! (I had a whole row to myself)

  • I was able to wander the length of the train to stretch my legs.

  • The dining car has a menu of cooked-to-order food.

  • The air on a train is much fresher than the air on a plane (except for when you occasionally smell the brakes) and you can step outside whenever the train stops.

  • The train ride itself was only 3.5 hours; a little longer than the flight, but less overall time spent for the whole trip.
It's a great experience and my wife and I actually decided to repeat the trip to visit a friend in Seattle. If you're still not convinced about how great train travel can be, you just need to talk to my two-year-old son.

Friday, March 28, 2008

The upside of paying two mortgage payments

Posted by Matt

I felt bad about posting the bad news about falling interest rates on a Friday, so let me redeem myself with a positive story about falling interest rates.

My wife and I have been making two mortgage payments each month for the last five months. No, that's NOT the good news. It's painful, no doubt, but could get worse...I spoke to a friend of mine who paid double mortgage payments for almost a year before he was able to sell his last house. He's smart with his finances and so he's always had good credit scores, but making double payments on time paid off by pushing him past the 800 mark! As a result, he is refinancing his mortgage and expects to drop his interest rate by between 1.5 and 2 percent.

I was already looking forward to selling the house and rerouting that mortgage payment into my savings account, but suddenly the light at the end of the tunnel just got a tiny bit brighter.

Savings account rates are down again

Posted by Matt

I received another notification from HSBC that the interest rate on my savings account has dropped again (like it did not once but twice in January). Paul's choice to lock in rates with CD's is looking better and better.

At HSBC Direct we are committed to helping you with your savings goals by providing the best rate we can. As you are undoubtedly already aware, there has been a general trend of reducing interest rates in the U.S. market over recent months....We have reduced our Online Savings Account rate by 0.50% to 3.05% APY effective 3/20/2008.
I'm grateful that HSBC at least notifies me of the rate changes; my primary bank does not.

At HSBC Direct we are committed to a direct and open relationship with you, even if we have to pass on news about reductions in our rates. We think this is fair to our customers and simply the right thing to do. The good news is, you're still getting a competitive rate — 7x the national savings average.
I just have to remind myself that this is my emergency fund, so I shouldn't really think of this as investment that needs to bring in a great return. The most important aspects of this account are that it is easily accessible and safe.

Thursday, March 27, 2008

What are you really paying for advice?

Posted By Paul

I don't want to come out as the guy who says "you're being robbed if you have an adviser" because it's really not true. I know people who have been with their advisers longer than they have been with their spouse, and trust them totally, and that's great.

HOWEVER, I wanted to lay out a little scenario so that people know HOW you're paying for advice and how much it might cost you.

Let's say that you have $10000 and you want to put it into a mutual fund. We'll go through it step by step, and cover the cases where you have an adviser and one where you don't.

Step 1: Opening the account
With an adviser: You tell your adviser you want to invest $10000 in a mutual fund, and they open an account for you, most no cost advisers work for a specific brokerage company, so you'll get an account with that company (for this example, I'm going to use Black Rock as the family of funds).

Without an adviser: You create an account somewhere by yourself, the advantage is that you can pick from ANY broker you want. So let's say you decide you like Vanguard funds so you open an account with them.

Time advantage:
With the adviser you probably save the time of picking a brokerage. You probably fill out more or less the same forms either way.

Money advantage:
None. Either way it's easy to find a place that will let you open an account for no cost.

Step 2: Picking the fund

With an adviser: Your adviser will probably ask you a few questions and say something like you want to invest in a "Mid Cap Value" fund (this is just an example) and present you with a fund from their brokerage company. In this case for this adviser it would be BlackRock Mid Cap Value fund (BMCAX).

Without an adviser: You would have to decide what type of fund you want, this could take some time but would probably come down to how much you are willing to risk loss of your investment versus potential returns.

There are tools that help you with this, such as this asset calculator.

For the sake of this illustration I'm going to assume that you ALSO decide that you want a "Mid Cap Value" fund. I did a quick check in Vanguard for their Mid Cap Value Fund (VMVIX).

Time advantage:
You saved the time of picking and researching the fund, which could be a lot depending on how much time you like to research that sort of thing.

Money advantage:
At this point, none.

Step 3: Investing the money.

With an adviser: You give your check to your adviser for $10000 and they deposit it in your account and buy the shares. HOWEVER, advisers generally sell loaded funds that have loads or fees involved. In this example BMCAX has a 5.25% front-load. So of your $10000, $525 comes off the top and the remaining $9475 gets invested in the fund (there might even be an additional transaction fee depending on your adviser).

Without an adviser: You give your check to Vanguard and they deposit it. VMVIX has no loads so your whole $10000 goes into the fund (I'm pretty sure Vanguard doesn't charge a transaction fee).

Time advantage:
None really. Putting the trade through is easy either way.

Money advantage:
The adviser route has cost you $525.

Step 4: Fees associated with the fund.

With an adviser: There will be fees associated with the fund.

Without an adviser: Again, fees associated with the fund.

Time advantage:

Money advantage:
While your money sits there, some percentage of your investment goes to administrative fees. For our Vanguard fund it's .26%, for Black Rock it's 1.25%. As far as the fees associated with the fund the Black Rock costs almost five times as much.

Step 5: Fund performance.

With an adviser: You sit back and hope your fund goes up.

Without an adviser: Same thing, fingers crossed.

Time advantage:
None, you sit back and wait.

Money advantage:
Well that depends on how well your fund does. Here are the two funds for the last six months. Notice how similar they are? Maybe in some cases the fund your adviser suggests will dramatically outperform a similar fund, but I'd say most of the time it won't

Step 6: You sell it.

With an adviser: You ask your adviser to sell your fund.

Without an adviser: You contact the broker directly and put the trade through.

Time advantage:
Essentially none, contact your adviser vs. contacting the broker directly.

Money advantage:
In this case none, but be aware that many adviser based funds also have a deferred or "back end" load, which means that a percentage of your investment is taken out as a fee when you sell.

Total difference:

In my example for our $10000 investment, by using an adviser we paid $525 up front, about 5 times the annual fee percentage, and the same fee (zero) at the end. Fund performance was essentially the same.

For that money what we got was the suggestion of the fund category.

If the fund recommendation is worth the money to you, then by all means pay it. In general I would recommend that everyone go through this exercise with their funds and find out:

1) Are paying a lot of front and back end loads for their funds?
2) Are the fee expenses for their funds unusually high?
3) Are the funds performing better than similar funds that don't have the fees?

If you read my previous post:
A Few Quick Tips On Mutual Funds

You'll see how easy it is to use web resources to check your funds.

If you know the answers to these three questions then you can really decide if the money you are paying to your adviser is worth it.

Tuesday, March 25, 2008

Frugalizing a friend.

Posted by Matt and Paul

Recently we were asked by a good friend of ours to go over their finances and see what we thought.

In exchange for our advice, our friend said that we could post any lessons learned to our blog. So here goes:

Generally our friend was a breeze to Frugalize, mostly because they were already there. Here are some of the highlights we saw:

-They were totally aware of their monthly expenses. They couldn't quote their monthly expenses for car insurance from memory, but they were able to put their hand on the right document within minutes. The key point here is that THEY KNEW WHERE THEIR MONEY WAS GOING.

-They had a great emergency fund in place.

-They had medical insurance.

-They were saving.

-They had zero credit card debt.

-They were living within their means (which you could probably assume from the fact that they had no credit card debt and had been able to save).

This person had the kind of finances that I HOPE every American does, but everything I read suggests that they are by far the exception.

So to be honest we could have stopped at this point and said to our friend that all was good, but we kept looking for small details that might be helpful. Here's what we found:

1) Since they drive an older car, and plan to drive it into the ground, we suggested that they reevaluate their car insurance, and possibly drop their comprehensive and collision coverage (see previous article from Matt: The diminishing returns of comprehensive auto insurance coverage ). If they didn't want to drop the coverage entirely we suggested that they at least increase the deductibles to save some money on their policy.

2) They had a universal life insurance policy that had a death benefit of $15k and cost them about $90 a year. We suggested that they cash out the policy. If they wanted to have life insurance then that's fine, but since they were single and had no kids we didn't see the need to pay for life insurance. The way the policy is written, if something tragic did happen to our friend, their parents and siblings would split the $15000, which is a pointlessly small amount in relation to the rest of their estate.

3) Since their income varies somewhat we suggested that they increase their rainy day fund.

4) We helped them clarify their savings goals. They were doing a great job of saving so we just had a quick discussion about what they were saving for. The rainy day fund and retirement came up immediately (which is great), and they were also interested in saving up for the purchase of a new car someday. We suggested that they open a dedicated "new car" savings account. Separate savings accounts facilitates tracking progress toward each goal.

5) We suggested that our friend could simplify by getting rid of some credit cards that they never use (keeping a few for convenience). It's possible that this could negatively impact their credit score, but their credit was already good so we felt it would not be a problem.

One final thing that we learned from this experience is that good intentions are important, but thinking about and talking about personal finance are part of the equation too. Not everyone finds personal finance as interesting as Paul and Matt do, obviously, but it seems that the American public's reluctance to discuss personal finance could really be holding us all back. We (Paul and Matt) found it immensely valuable to be able to bounce ideas off of each other and I hope our friend feels that they have gained from joining the conversation as well.

Monday, March 24, 2008

How much life insurance do we need?

Posted by Matt

Every once in a while I'll stumble upon the topic of life insurance in a personal finance article or book and have a moment of panic when I realize that I carry way less than what the publication recommends. I read one "rule of thumb" that indicated that I should carry life insurance coverage equal to ten times my income. Another said I should have enough to pay off our entire house mortgage and all expected college and marriage costs for all children. Wow. Maybe insurance agents are writing these articles. Sounds like the authors want my heirs to essentially win the lottery if I die.

But how much do we really need? Well, my employer recently sent out an announcement about some new policy options, so I decided to dig into that question. The easiest decision was to choose what is known as "term life insurance", mainly because I've never read anything compelling about any of the other types of insurance. Some insurance options, for example, include an investing component, but I'll do my investing elsewhere, thanks.

I already get term coverage equal to 2.5 times my salary for free, sponsored by my employer. That used to seem like a fair amount of money, but now that we have a son and have settled into a house that we want to stay in, my wife and I decided that it would be a good idea to at least cover the mortgage.

The good news is that the additional coverage is not very expensive, which surprised me. Each additional unit of annual salary that I add only costs around $5/month. Adding more than one unit requires a physical exam, so I decided to only add one (call me lazy, but I just had a physical two months ago). That brings me up to 3.5 times my annual salary in coverage ON TOP of what I have in my retirement and savings accounts.

With funeral costs and the mortgage covered, my family should be able to get by with even modest income, so I'm pretty happy with this strategy. It might not be available for everyone, so I wanted to share one final point about providing for those left behind: the best "insurance" I can provide is being financially responsible while I'm still alive. I spend less than I make so that I can build up savings and won't leave behind a burdensome debt. Once we eventually pay the mortgage off, I shouldn't need life insurance at all!

Thursday, March 20, 2008

Article: When A Deal Isn't Worth It

Posted By Paul

I found this article on CNN Money that I thought had some great information.

The article is "When A Deal Isn't Worth It"

It reminds me of something I read in my favorite financial book:

Where it talks about the idea that people who think they're being good with money but aren't often spend a lot of time saving money on things they don't need.

This article goes even further to say that you need to make sure that the time you spend finding a great deal is in line with how much your time is worth.

I had never given this idea much thought until my new job where I can be paid overtime under certain conditions. This made me aware of my hourly pay rate, which makes it easy for me to keep this in mind.

Of course if looking for a good deal is something you classify as fun, then I say bargain hunt away, but I thought it was interesting to view time spent in terms of an hourly return.

Bulk Up On Savings!

Posted By Paul

If you've read my post:

Financial Choices: Good Vs. Better

Then you know that I don't make saving pennies here and there a big priority.

However, I recently discovered a grocery store that sells items in bulk, and I couldn't help noticing how much money we were able to save.

I noticed that many of the items that I keep at work for snacking can be purchased in bulk at the grocery store. For example, I like to keep a stash of breakfast bars in my desk for when I get hungry at work and I discovered they that actually sold them individually wrapped in the bulk food section of my local grocery store. The price of the bulk brand was about half of the price you would get if you bought the normal box of 6 a few aisles up.

Spaghetti, granola, rice, trail mix, and all kinds of things can be purchased in bulk for pretty decent savings. We're actually experimenting now with buying cereal in bulk since we found a bulk cereal that we like.

I know buying foods in bulk to save money isn't exactly a secret, but those half price breakfast bars really drove the point home to me.

Buy reliability, not a warranty

Posted by Matt

Here's another chance for you to learn from my mistakes. I'm embarrassed to admit it, but the first time that I bought a car (used) from a dealership, I got talked into buying an add-on warranty. It was an unusual one in that it required that you apply some kind of treatment to the car, but ultimately that helped me because I was able to return the unopened box of chemicals when I came to my senses a few days later. Anyway, I was young and naive.

Thanks to a recent newsletter from Clark Howard, I found a great Consumer Reports article to back up what most people already know: extended warranties are a horrible deal. In case you are part of the 25% of their survey respondents who BELIEVE in extended warranties, let me hit you with some highlights:
  • Only 1 in 5 people in the survey who purchased extended warranties achieved a net savings.

  • 42% of the extended warranties were not used AT ALL, in most cases because the vehicle didn't need repairs or the standard manufacturer's warranty sufficed.

  • The car brand that required the most warranty claims was Mercedes-Benz, but still, only 38% of those owners came out ahead.

The numbers weigh heavily against extended warranties, so instead of spending your hard-earned money on one, put it towards a more reliable car! After all, a warranty AT BEST can only reimburse you for repairs; wouldn't you rather stay out of the shop altogether?

Wednesday, March 19, 2008

Estimate Your Economic Stimulus

Posted By Paul

I would imagine that many people out there are anticipating their economic stimulus check, and people are probably curious to know how much it will be.

If you go to this link:

Economic Stimulus Payment Calculator

You can enter some simple information from your 2007 tax return and get an estimate of how much to expect.

I tried it and found that it was really easy to do with your tax forms (you tell it which tax form you used and it tells you the exact lines it wants you to enter).



Posted By Paul

I've never specifically talked about this but as I talk all the time about living a frugal life I feel like it's worth mentioning gourmet coffee specifically.

I hope I don't sound too preachy, but recently I've noticed a lot of people that are on a tight budget but get Starbuck's (or the equivalent) every single day.

I really like several of their drinks (I tend toward the ones that are warm and frothy and end with 'ucino'), but I choke every time I realize how much they cost.

So for me those fancy coffee drinks are like a beer or an ice cream cone. It's something I get after work with friends, or when I want to go out for a little treat. I can't believe people who get one of these big $5+ drinks EVERY DAY on the way to work. If you can afford it, then go for it, but I have actually heard people say that they need to cut back on their spending but their daily coffee drink was a necessity.

That to me is just crazy (and more than a little irresponsible). If you need a caffeine buzz (or just like a hot drink in the morning), well most workplaces have coffee for free, and even if the coffee is bad there's no reason you can't just make a cup at home in the morning and fill a travel mug.
Or even better, try to kick your caffeine addiction.

Folks who list Starbucks as a necessity when doing their budgeting are in conflict with the first rule of

My Financial Philosophy

That rule being: Never confuse "need" with "want."

Monday, March 17, 2008

Credit just got tighter - FICO 2008

Posted by Matt

If you enjoyed my latest post about credit scores, you'll probably also be interested in what I learned about upcoming changes to the Fair Isaac scoring algorithm. The algorithm is proprietary and exact details about the changes aren't available, but here's what I was able to learn in general:

  • Updated FICO scores should start appearing within a few months
  • The score range is the same (300 to 850)
  • The same input criteria are used (indebtedness, payment history, number of recently opened credit accounts, type of credit used). See Credit Mantra's nice pie chart.
  • The model will more accurately identify risky credit behavior and is projected to reduce credit default rates by between 5 and 15 percent.

Another interesting fact that I learned (and that many people may not realize) is that income is NOT a factor in determining the score. In other words, borrowers are judged on their willingness to repay (as determined by their past behaviors) and not their ability. I can validate this with our recent experience in trying to rent out our last house; we've encountered several applicants who were scored as untrustworthy, despite having very large incomes. It was surprising and a bit depressing.

Bottom line: An improved scoring model is great for everyone. Borrowers will have less opportunity to get themselves into trouble, and scores for people with good credit behavior are expected to go up! Good news for Frugalizers!

Friday, March 14, 2008

The "R" Word

Posted By Paul

So the word recession is being tossed around a lot recently, mostly with a lot of speculation as to whether or not we're in a recession, or headed into one.

So what exactly is a recession? I don't want to go into the definition of recession too deeply (here is the link to the wikipedia definition), but for me when I start hearing the word recession tossed around a lot it means that I get a little nervous.

So what do I do to try to assuage my nerves a bit?

The first thing I do is check my savings account. When people start talking about a recession it's nice to know that my emergency fund is in place.

Then I try to decide if I want to bulk up my savings a little bit. Like my wife and I can decide to skip a few dinners out so that we can put an extra $50-$100 in savings. This helps me feel confident that I can weather the economic storm.

Next I look at everything on the purchasing horizon and decide what can be put off. I'm not talking about canceling your plan to have dinner with friends next Saturday, more like your plan to buy a new big screen TV. Not to say that you can't buy that TV (provided you can afford it) but take a moment and decide if you might want to have the money in the bank for now and buy it when the economic landscape is a little more cheery.

I also look at ways that I can save money if things get extreme (like I lost my job). This is pretty easy for me to do right now since I did lose my job just two months ago (so it's all fresh in my mind). You don't have to implement the extreme measures, but it might help with peace of mind to have them planned out in case it comes to that.

Finally I thank heaven that my wife and I don't have a back-breaker mortgage or a bunch of credit card debt. It's good to know that in case of a rainy day my wife and I can tighten the belt and get by pretty well for a long time if we need to.

Also by living a frugal lifestyle things like an increase in gas prices or the cost of milk doesn't hurt us as much as it would if we were barely making ends meet.

If you plan your finances well then a recession will hopefully just be a minor annoyance as opposed to a rocky time in your life.

Thursday, March 13, 2008

No More Movies

Posted By Paul
One thing I've noticed as the years go by is that I gain new pet peeves on an almost daily basis.

Okay, maybe not daily, but certainly things annoy me more than they used to, which I believe means I am right on schedule for 'grumpy old man' status some day.

But my point is that in the last few years it has become more and more difficult for me to go the movie theater. Why? I don't like the crowds, and more often than not I end up in a theater with a talker, loud food eater, etc.

So now I rarely go to see movies in the theater (maybe once or twice a year). Recently my wife and I went to the theater with some friends, and I was amazed at the prices. The tickets were up to $9.25 per person! Assuming my wife and I both go I'm looking at almost $20 for a movie!

The cost of a movie in a theater is getting crazy, especially considering that I was annoyed by Blockbuster online raising their monthly fee $2 per month.

So it turns out that my gradual grumpiness has paid off to the point where my wife and I have become "social movie goers" only. When it's just the two of us we just watch a DVD. We have a 14 year old TV, but the picture quality is good, and several years ago I bought a home theater speaker system (nothing fancy, but it's good), and for me and my wife we've noticed that once we got the decent sound system a DVD at home is even better than a trip to the theater.

Now when we watch a movie on DVD we don't have to deal with lines, crowds, and so on. We can watch the movie over dinner or a dish of ice cream (MUCH cheaper than buying the snacks at the theater), and our comfy couch beats any theater seat. Another bonus is that we can pause the movie if we want to get a snack, or need a bathroom break. Plus we've noticed that by the time a movie comes out on DVD we've often heard recommendations from people if it's good so we RARELY see a bad movie anymore.

When I tell people that I prefer to watch movies at home a common thing that I hear is that they can't wait for the movies to come out on DVD, they want to see them NOW in the theater. This was a problem for us for a while, but we discovered that after a while of staying away from the theater, all the movies we DIDN'T see in the theater started coming out on DVD, so now instead of looking forward to the new movies coming out in the theater, we look forward to the new movies coming out on DVD. If you can just suffer through that interval between a movie coming out in the theater and coming out on DVD, then you'll still have new stuff you want to see every week.

If you are one of those people who sees a lot of movies (like on average 4 or more a month) you might want to take a few months and do a quick tally of how much you actually spend on your movie outings (include things like parking, and snack bar trips). Assuming at least $7 per person per movie, it doesn't take long before the money spent on a simple home theater setup pays for itself (just don't put in your credit card).

Wednesday, March 12, 2008

How much is enough?

Posted by Matt

One of the most common questions I hear from people about saving is "How much is enough?" It is a question I've struggled with myself, although more so as I've gotten older. As is the case with many people, my salary was much lower when I was younger and I had to use almost all of it just to cover basic expenses. I wouldn't have believed that I would reach a point where I would have to ask myself "am I saving too much"?

Is there such a thing? Look to the case of Hetty Green for an extreme example. She was arguably the richest woman in the world when she died in 1916, yet owned only one dress, would not turn on the heat for her house or water and suffered with a hernia in her later years because she would not pay the $150 for surgery. What a saver! But she clearly went overboard.

To see the opposite end of the spectrum, let's examine...oh, I don't know, most of America. We have a BIG problem with people in this country living well beyond their income. So, we obviously need to find a middle ground.

The commonly-quoted benchmark for savings is 10% of income, but I often read that this is outdated and should be adjusted upward to accommodate for increasing lifespans. Insurance adviser Charles Farrell recommends 12% (including employer contributions) as the ideal level, but also provides some other handy benchmarks to let you know whether you are on track for retirement. After all, 12% is not going to cut it if you are 50 years old and have only just begun to save!

Check out Farrell's table to determine whether you are "on track". If you meet these recommendations, you should be able to safely retire when you are 65. Congratulations! The only question that remains is "Do you want to wait that long?" If you can increase your savings, it will just bring retirement that much closer.

Monday, March 10, 2008

Quick trick for funding the 529 college savings plan.

Posted by Matt

This tip might be coming a little bit too late (unless you have been postponing filing your tax returns like my wife and I have been), but I just got the notice in the mail last week.

The Oregon College Savings plan decided to make it just that much easier to save for your child's education by letting you route your tax refund directly to the savings plan. From the flyer I got in the mail:

Divert the refund to your Oregon College Savings plan 529 account by putting their routing (101000695) and account (1111538) numbers in the right boxes and marking the "Savings" checkbox. Follow the account number with your child's savings plan 10-digit account number (there are boxes).

Questions? Call Oregon College Savings plan customer service (866.772.8464)

My wife and I probably won't actually do this because we already contributed to the 529 during the year (to the full deductible amount and then some), but I still think it is a nice offering by the plan and a good idea. As always, remember to keep your other financial priorities in mind when considering a move like this. If you didn't contribute enough to retirement for last year yet, it's not too late, and that should come first.

Insurance: A Good Lesson From My Life

Posted By Paul
(this was a posting I wrote right before I got laid off and forgot to post it during all of the craziness)

Here is a story from my life about insurance specifically and finances in general.

Just last night my wife and I were talking about how much money we'd be able to save this month, and as part of that we wanted to see which bills were left to pay this month. Going through our bills we came across a bill for a liability umbrella policy. The document essentially said: "This policy is about to expire on Feb. 11, 2008. If you send us the $100 dollars by the date listed the policy will remain active for another year."

Both my wife and I were kind of puzzled simply because we didn't know what this policy was for. The fact that the annual renewal date for the policy was February 11 helped to jog our memories since our wedding anniversary is February 28. We remembered that when my wife and I got married the venue required us take out an additional policy to cover any liabilities related to the reception (I guess in case something happened like someone got drunk at our party, wrecked their car and decided to sue us and the venue).

We got the policy in place, and our best guess is that we've just been paying for the policy ever since.

I'm guessing that since the bill comes up once a year and is part of our homeowner policy that either my wife or I have been automatically paying the bill to keep a policy active that we haven't really needed for something like 4 years. The fact that the renewal notice arrives during the busy holidays probably also encouraged our mistake in that we probably didn't notice the oddity in all the holiday craziness.

So essentially my wife and I have been paying $100 a year to insure a wedding that took place 4 years ago.

Just goes to show you to not get too complacent about automatically paying your bills. Were it not for us happening to notice this bill we could have possibly been still paying this bill 50 years from now!

Saturday, March 8, 2008

One Nice Thing About The Layoff

Posted By Paul

Thanks again to everyone for their support during my time of unemployment. Now that I am back in the world of the gainfully employed I have been reflecting on my time without a job and I've found a silver lining that I wanted to share.

As you can imagine, once I was unemployed my wife and I put a very tight leash on our spending. It was actually a very refreshing experience to scale back to essentials, it was a good reminder of how many things fall into the non-essential category.

For example, while I was unemployed I cut back significantly on my meals out. Many of my restaurant meals were from work lunches where I ate out (so it wasn't hard to stop this when I didn't have a job). Now that I'm working again I'm trying to keep that tradition of not eating out often. I still go out to lunch with coworkers occasionally but I'm going to try to keep it down to once a week at most. Instead of running out to lunch I bring a book to work and try to find a quiet corner to eat my lunch and catch up on my reading (that's been great since reading is something that I enjoy that I never seem to find time to do).

Speaking of reading, while unemployed I decided to not buy any books and to instead catch up on books that I had bought, borrowed, or received as a gift (but never got around to reading). I discovered that this ended up being a large pile of books that I'm now going through. Being laid off was a great wake up call to force myself to not buy new books until I was done with the ones that I already had.

Also, those of you who have been unemployed can probably relate to the feeling I would get when I would think about buying something I didn't need when I didn't have a job. It's this sort of heavy feeling in your stomach when all of the financial anxiety gets stirred up again when you spend even a mere $20 on some non-essential. Well now that I'm working again I still remember that feeling which helps me think twice before I buy anything I don't need. I'm not trying to live the life of a monk, but it was a good reminder to watch the non-essential spending closely since that's always a place where you can save.

Most of all, being laid off was a great reminder of how the rules that I follow really help you weather a rainy day. I had my emergency fund to help me sleep at night, and best of all, I had a lifestyle that wasn't too expensive for me. Living the paycheck-to-paycheck lifestyle becomes a BIG problem when the paychecks stop, so I am very thankful that this wasn't me. During this time off I was so thankful for our lack of credit card debt, a tolerable mortgage, and lack of extraneous monthly expenses. I feel a renewed sense of having made the right choice by living a frugal life.

Monday, March 3, 2008

Pay raises and budget adjusting

Posted by Matt

I had my annual review recently and received the happy news that I would be receiving a 4% pay increase. Yippee. So I'm almost keeping pace with inflation. Okay, attitude adjustment...be thankful for what I have and get on with the info.

My family was getting along fine before my "bump", so I decided that we could just stick with that same income level. One of my financial goals for 2008 is to increase my savings rate anyway (especially for retirement), so I signed on to our H.R. website and increased my 401k contribution level from 15% to 19%. (For the detail-oriented among you, yes, I'm aware that contributing 4% of my new salary is going to cost slightly more than I actually get from a raise that is 4% of my old salary, but I figured I should stretch.) This should put me very close to maximizing my 401k contribution this year! Finally!

I just found out that my company automatically monitors my contribution level and if I do ever exceed the maximum, they will make the excess contributions from after-tax dollars to save me from having to take a distribution. The after-tax contributions can be withdrawn tax-free (since I've already paid tax on them, obviously), however, the growth on after-tax amounts is taxed.
Seems like yet another argument to open a Roth account, but I'm still holding out. Maybe I should work on exceeding the income limit so that I can just forget about them once and for all. How's that for a goal?!

For any of our readers that our interested in the benefits of my 20/20 hindsight, I wish I would have accelerated my savings rate faster than I did. Increasing the contribution rate when you get a raise is the least painful way I know of to do it; I probably just wasn't aggressive enough with the size of the increases.