Article: To act like the rich, be frugal

Posted By Paul

I'm a big fan of the book 'The Millionaire Next Door' as you can see by the previous posts:

The Millionaire Next Door Pt 1: Big Hat No Cattle

Millionaire Next Door Review Pt. 2: UAW or PAW

Millionaire Next Door Review Pt. 3: Economic Outpatient Care

There is an article with the author where they ask him about trends in purchasing of certain "status" items. His findings and opinions are interesting. Here is an interesting excerpt from the article:

"For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires. Yes, people with very high incomes, high levels of wealth are more likely to drive status automobiles. But in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other."

Here is the link for the full article:

To act like the rich, be frugal

HSA? HRA? FSA?

Posted By Paul

So just when you thought medical insurance couldn't get more confusing they added even more types of health related accounts for you to puzzle out. I've been trying to figure out what they all are so I thought I would share what I found.

Let's start with the FSA. For that I'm going to refer people to an earlier post which describes them in detail:
Are FSA's worth doing?

So then what is a Health Reimbursement Account (HRA)?
An HRA is an account setup by your employer that you can use for medical expense reimbursement. It's essentially your company telling you: "We're going to give you X dollars to help you pay for your health care costs this year."

Generally you have to submit proof of medical expenses to your company for reimbursement.

So what's the downside? As near as I can tell there really isn't one. However, the HRA might not be for everyone. For example, one thing I've seen are things where a company has two plans that you can choose from:

Plan A: Costs you $1000 a year and you don't get an HRA.
Plan B: Costs you $2000 a year and you get an HRA of $1500.

If you assume Plan A and Plan B have the same coverage, which one should you choose?

Well, if you are healthy Plan A might be better since you might have health care expenses that are so low that you might never even USE your HRA. However if you have some known health issues that makes you certain that you'll end up using that $1500, then Plan B becomes the better option.

Okay, so then the final account to cover is the Health Savings Account (HSA)

The first thing to know is that not everyone is ALLOWED to get an HSA. You only qualify for an HSA if you are in what is considered to be a High Deductible Health Plan (or HDHP...sigh all these abbreviations). If you are enrolled in an HDHP (your employer should let you know) then you are allowed to open an HSA.

So what does an HSA do? Well first lets cover how money goes INTO the HSA. Contributions come from YOU (not your employer like in the HRA), and contributions go in pre-tax (which is cool).

While in your account your money can be invested (the investment vehicles depend on the financial institution that holds your account usually a typical set of funds and a money market).

So how does money come out? You use it for reimbursement of medical expenses (by submitting paperwork to whoever is administering your HSA).

Now one cool thing about the HSA is that the money doesn't "expire" at the end of the year like it does with an FSA, it remains yours so if you have a lucky year you have that money saved up for the following year.

If you withdraw money from your HSA that isn't for a medical expense then you take a penalty, but from what I've read, this penalty disappears when you turn 65, so if you whatever money you don't use become yours without penalty when you turn 65, so in a way you can consider it part of your retirement funds.

Also, if you leave your job or change health plans such that you are no longer in a HDHP then your money doesn't disappear. If you leave your job your account remains yours. If you end up switching to a health plan later that ISN'T an HDHP then you're not allowed to contribute to your HSA any more, but you can still withdraw money for qualified expenses.

It seems to me that an HSA can be a good choice for people who are in a situation where they don't have many health expenses currently, but expect to in the future. They can put money in their HSA and if they are lucky enough to have a year without any significant medical costs then they have those contributions saved in case it happens the following year. If you manage to go several years without any significant medical costs then you could build up a pretty nice little rainy day fund for when something does happen.

I found a link to a pdf that did a nice comparison between the three accounts:

HRSFSAHSA.pdf

I also recommend the wikipedia entries as they all do a good job of explaining the accounts in further detail:

Wikipedia Entry - FSA
Wikipedia Entry - HRA
Wikipedia Entry - HSA

Tips For Open Enrollment

Posted By Paul

If you're like me then November means open-enrollment. It can be a hard to squeeze in enrollment along with the holiday season, but the choices you make now are some of the most important ones that you'll make for the year.

Here are some tips I thought I'd share on navigating the open enrollment process:

1) Go to the informational sessions - companies almost always host some sort of meeting where they give an overview of your choices, be sure to go to this meeting.

2) Come to the session informed - this can be a tough one since it's easy to want to come to the session and get the information you need there, but I've found that it's REALLY helpful if you can at least try to understand your options BEFORE you go to the meeting. That way you can listen in the meetings to see if your understanding of the plans jives with the info the presenter describes. You can even come prepared with questions, which is a great way to clarify the ins and outs of your various choices.

3) Understand your choices - often with healthcare plans it's not as simple as "the plan that costs me the most is the best". Often the "best" plan is a matter of the size and health status of your family. Which brings me to item 4...

4) Have an honest understanding of the health care needs of your family for the year - it's hard to predict what kind of health issues you will face in the upcoming year but you can at least make an effort to identify things that you KNOW will be coming up.

5) Discuss with your family - The decision you make will have an impact on all of them for the year, so bring them into the discussion early. Go over the information with them. Not only does it make them more informed about their health care plan but going through the pamphlets and literature with someone else makes the process slightly less mind-numbing.

7) Discuss with coworkers - For me this is often the most useful thing to do. Your coworkers are making the same sort of choices you are so it's a great way to discuss pros and cons of plans and maybe learn something from a coworker that you missed or misunderstood.

8) Consider the worst case and prepare for it - One thing I like to consider when comparing plans is the "worst case for the year" by that I just mean the annual out of pocket costs for a plan. If a plan says that the most you'll have to pay in the year is say....$10,000 then if you have that amount in your rainy day fund it helps me sleep a little better. If the maximum out of pocket for a plan you are considering is $10,000 and you only have $2000 in the bank then I might want to rethink your plan choice or try to add more to your rainy day fund.

9) Check the networks. There are so many plans that only pay benefits when you go to a health care provider in a particular network. It's easy to just assume that your doctor is in the network, but definitely take the time to check, it usually only requires a quick phone call or web page search.

It seems like health care choices are getting more and more complicated each year, so use every information resource available to you when making your decision.

Links: Good info sources for annuities.

Posted By Paul

As I did my research on annuities I found some links that I wanted to pass on:

AnnuityTruth.org - specializes in info for annuities for seniors

Ultimate Guide to Retirement: Annuities - A great page from CNNMoney with all kinds of info about the different types of annuities. A must read for anyone thinking of purchasing an annuity.

Useful info to find out more about annuities.

What the heck is an annuity part 4: Variable with Life

Posted By Paul

This is going to be my next to last posting in the annuity series (my final posting will be a collection of useful info sources I found on annuities). I'm going to talk about the most controversial member of the annuity family, the variable annuity with life.

This is a very strange investment vehicle in that it is a mix of life insurance and fund investment. Essentially you put money every month into the variable annuity, part of that payment goes into the insurance component of your account (essentially like a life insurance premium) and the other part goes into "sub accounts" (mutual funds that you can choose from a family).

So what is the appeal? Well a common argument is that you get life insurance AND a retirement vehicle. You often hear of the idea that down the road you borrow against the cash value of your annuity which means you get your money tax free. I've heard of financial advisers presenting this idea as if it were something they had thought of.

What is the downside? Here are two of the most basic arguments against variable annuities with life insurance:

1) If you want life insurance, just go and buy life insurance - my research into this mentions that generally if you compare the money you pay for life insurance through a variable annuity to just getting a normal life insurance policy you'll discover that the life insurance through the annuity is MUCH more expensive.

2) Just as with regular variable annuities, watch out for fees. Brokerage fees, fund fees, commissions, maintenance fees. They can eat up your investment quickly.

I also found in my research that when you hear about "life insurance scams" that most often it is in the form of a variable annuity with life insurance product. This doesn't surprise me since the whole variable annuity with life insurance is a great product if you want to confuse and deceive someone since you have a variable annuity (which is already a complicated and poorly defined product) and you toss in life insurance (which is a complicated thing unto itself). A variable annuity with life insurance takes these two complicated things and mashes them together into a product that is almost impossible to understand, and makes it VERY easy to hide fees.

To give a personal slant to this, I had a variable annuity/life insurance policy for a short time. I opened it and then later closed it and luckily I didn't lose much.

So what did I learn from my brush with variable annuity/life insurance policies?

-They are confusing. When I first invested I THOUGHT I knew how it all worked but only after watching it closely did I see the fees and how the affected my return on investment.

-There is inertia and psychology involved. For example when I opened my annuity I put in a small amount of money and I watched it closely. I shudder to think what would have happened if I had put my whole nest egg in there and just stopped checking it and figured it was doing fine.

-They have all kinds if little ways to keep the money rolling in. With my annuity I would get a letter every few months saying that I had been offered an increase in my life insurance death benefit, and that for just X dollars more a month I would get an additional coverage of Y dollars in death benefit. The worst part was that the letters said that unless I contacted them they would assume I wanted the increase in benefit (and premium). It got to be annoying to have to write or call them every few month and tell them NOT to raise my premium. Imagine if I had just ignored the letters? Then every few months my premium would have gone up a little and who knows where it would have ended up.

It sounds like I'm pretty down on this type of product, and I would have to say that for the most part I am.

If you read my previous article on variable annuities you may recall that I suggested going into it ASSUMING it's a bad investment and then see if you can be convinced otherwise. For the variable annuity with life insurance it's so complicated and easily prone to hidden fees and catches that I would take my warning even further.

For a variable annuity/life insurance product I would suggest the following rules:

1) If you aren't taking full advantage of 401k/Roth IRA options then don't even think of looking at this product.

2) If someone offers you an annuity life insurance product, find out what it would cost to get the equivalent death benefit with out the annuity part.

3) Take some time to find the fees. They are in there, so see where they are and how much they are, ask about broker commissions, fund fees, maintenance fees and so on.

4) Do not invest in this product unless you can get an impartial knowledgeable person to think it's a good idea. When I say impartial I mean someone who is not making or losing money based on whether or not you invest in this product. This is NOT the type of product where you should trust the person who is selling you the product.

5) Do the research. This is also NOT the type of product where you should think: "well my aunt has one and she likes it, so mine's probably okay". There is so much variety among these products that your aunt could have a totally different TYPE of product, and maybe your aunt has one but doesn't really understand how it works either.

6) If anyone suggests that you invest in this type of product, ask yourself: "Would this person make money off of my investment?" If the answer is yes, then take EVERYTHING they say with a huge grain of salt.

There might be people in situations where this type of product is a good idea, but I would predict that this type of investment is probably the most commonly owned "bad" investment.

If you are someone who has this type of product and you don't really understand it I would do some serious research into your product, just some basic things like:

1) Find out what your death benefit is and do a little research to see what it cost you to get the same benefit from a reputable insurance company without all of the annuity stuff.

2) Check your subaccounts, find out what their maintenance fees are, compare them to mutual funds at Vanguard.

If you are at all worried after doing the above, then consider finding a financial adviser that is paid by the hour and seeing what they think, or perhaps just find a trusted friend or family member that is "into investing" and have them look over the account and see what they think. The worst thing to do is to be in a bad investment and continually paying month after month.

What the heck is an annuity part 3: Variable

Posted By Paul

As I go through the various types of annuities I seem to be gradually moving towards the more controversial types of annuities, and that brings us to one of the more controversial members of the annuity family, the variable annuity.

So what's a variable annuity? Here are the basic characteristics of a variable annuity:

1) Tax deferred - gains are only taxed when you withdraw them.

2) Fund based - your money is going into some sort of mutual or bond fund that you select (generally an annuity offers 6-12 funds that you choose from).

The variable part just means that your money is going into an investment, your return is based on how well those investments do. There is no guaranteed return.

I'm guessing that a lot of you are thinking: "This sort of sounds like a 401k." and you're right. It is SORT OF like a 401k, but that SORT OF is important.

In my research the main thing to watch in this sort of annuity is the fees. There are often high management fees, commissions for the agent who sold it to you, and other little fees like that. The fees may seem like a minor thing, but imagine if the fees end up being 2% of your total investment, you need to make 2% to just break even, and even more to beat inflation.

It seems that these fees are what typically give these types of investments a bad name. Even if you don't see any specific up front fees, the funds themselves might have a very high expense ratio. To see what that means go to my earlier post:

A Few Quick Tips On Mutual Funds

The question now is, are variable annuities something to avoid at all costs? Well I'd say that you should ONLY look at a variable annuity if you are already taking full advantage of your allowed contributions for your 401k AND Roth IRA.

If you decide to look into a variable annuity I would be VERY careful. I hate to recommend paranoia but this is one of those situations where I would suggest going into the situation with a very skeptical eye. Assume that the variable annuity is of the "bad" type (high commissions, high fees, etc.) and only invest if you are convinced this isn't the case.

Also, I would suggest that you observe the agent you are dealing with very closely. If they seem to be trying to conceal or downplay various fees and commissions, I would be VERY careful.

Finally, if anyone tells you that you should take your IRA or 401k and roll it into a variable annuity, consider this a HUGE RED FLAG! I found several articles that said that this sort of suggestion is essentially like saying:

"Hey let's take your big pile of money in a low fee environment and roll it into an investment with high fees and commissions without any added tax benefits."

If you have money in a variable annuity, I would suggest that you take a very hard look at it and see just how much you are paying in fees and then see how that is affecting your investments.

What the heck is an annuity part 2: fixed deferred

Posted By Paul

I came across another major annuity type called the "fixed deferred" or "fixed interest deferred" annuity that I wanted to talk about.

A fixed interest deferred annuity is kind of like a savings account, so I'm going to assume we all know what a savings account is and describe the annuity in contrast to that.

1) Like a savings account a fixed annuity gives you a known return on your money. In fact with fixed annuities you generally "lock in" an interest rate for some amount of time (like 5 years) and then after that interval has expired you "lock in" a rate again. One example is that Vanguard has a fixed annuity where if you open today you get a rate of 2.65% for the next 5 years. Note that this isn't a bad rate, in fact it's better than most CD's you can find right now.

BEWARE: I read about places where you get some awesome rate for the first year and then after that it resets to something lame, only now they have your money and you have to go through all kinds of hassle to move it.

2) Unlike a savings account, any interest you get is tax deferred. You don't pay taxes on it until you take it out.

3) Unlike a savings account, you can't just deposit and withdraw money whenever you feel like it. They vary, but it seems like most places have rules about how and when you can withdraw your money. The one through Vanguard for example says you can take out 10% of your savings in a year without penalty (but be careful, as with all tax deferred vehicles there can be tax consequences for getting your money out early). From my research it also seems that in most cases to add money you have to open a whole new annuity.

The above points generally capture what this type of annuity is. It's sort of like a 401k (you get the tax deferred part) and kind of like a savings account or CD (guaranteed interest).

So what are the pros and cons? Here is what I was able to come up with:
Pros: You get all the perks of a savings account PLUS tax deferral.
Cons: This is money you shouldn't plan on touching until the terms of the annuity are met. If you needed to "break open the piggy bank" early then tax and penalties could eat in to your money fast.

Overall, I think that this sort of annuity isn't a bad thing to consider if you've already given all you can to your 401k AND Roth IRA and still have money to sock away. When considering this sort of annuity BE SURE TO READ THE FINE PRINT and make sure you know what you're getting. Key questions to ask are:

1) What is my rate and how long does it lock in?
2) Is this rate an introductory rate?
3) How can I withdraw my money and what kind of withdrawal limits/penalties are there?
4) Is there any way to deposit additional money?

One interesting point is that when you compare this to my previous post:

What the heck is an annuity? Part 1

You'll see that this type of annuity is VERY different from the type I describe in my earlier post. As I mentioned before (and will mention again) that's one thing I REALLY don't like about annuities, it's such a broad term.

Once again I'll close with a quote from Warren Buffett about business investing, but it applies just as well to investment vehicles:

"Never invest in a business you cannot understand. "

The 100 Rule For Investment Allocation

Posted By Paul

Have you ever heard of the '100 Rule' for asset allocation? The idea is that you subtract your age from 100 and the result is the percentage of your investments that should be in stocks (as opposed to less aggressive bond funds or the like).

Well I'd heard of it and recently decided to see if I was adhering well to that rule. Well imagine my surprise when I saw that my Vanguard fund (designed to automatically transition to more conservative funds as time goes by) wasn't even close.

A little research took me this article:

Money Savvy Rules of Thumb

Which specifically mentions the '100 Rule' (rule number 3) and says that this formula is too conservative considering the current longer lifespans of people. They suggest using a '120 Rule' which is right in line with my Vanguard fund, but unfortunately not as catchy.

What the heck is an annuity? Part 1 - Single Premium Fixed Immediate Lifetime

Posted By Paul

As I try to become better at understanding the financial world, one word that pops up every now and then is 'annuity'.

I realized recently that I really don't have any idea what one is. I have this vague sense that I'm not interested in them, but that's not really based on anything rational, so I thought I'd do some research and share what I've found.

Here's what I've learned:

First of all, annuity is a REALLY broad term. To define it in terms that apply to all of the different flavors you end up with something like:

An annuity is an agreement (generally with an insurance company) to pay out money for a period of time.

Pretty general huh? Well it is, and that's probably why annuities get such a bad reputation, there are so many different flavors of annuity (not to mention many providers) that it's really easy to end up with a bad one.

So I'm going to start off with what I consider to be the simplest type of annuity: the single premium fixed immediate lifetime annuity.

Quite a long name, but the terms make sense if you take them individually:

Singe Premium - means there is one premium (essentially you buy it with a lump sum)
Fixed - means the payments don't vary
Immediate - means that the payments start immediately
Lifetime - means the payments continue for as long as you are alive

This type of annuity is essentially a policy that you buy with an insurance company that says that the insurance company will pay you a certain amount of money for the rest of your life.

A hypothetical example, if I were an insurance company, I might say that if you pay me $50,000 today then I will pay you $100 a month for the rest of your life.

I found a very simple web annuity quote calculator and asked it the question:

If I were age 40 (the calculator had 40 as the minimum age) and wanted an annuity that paid me $200 a month until I died, what would it cost me?

The answer? About $41k. So the question then is, is it worth it? If I just took my $41k and stuck it under the mattress and took out $200 a month, how long would that last? The quick math says I would run out of money in about 17 years. So from that calculation it seems like a pretty good deal since I plan on living longer than 17 years.

But of course if you didn't buy the annuity you probably wouldn't just put the money in your mattress, so how best to compare that?

That gets difficult, but luckily I found a savings calculator that you can use to see how long savings will last assuming a certain APR and monthly withdrawal.

If you're curious the savings calculator is here.

Using this calculator, if I start with $41k and take out $200 a month then the amount it will last depends on the APR, but for a few values comes to:

24 years at 3% interest
28.8 years at 4% interest
38.6 years at 5% interest

Interesting. At this point you start to see the trade off between having the annuity and keeping the money for yourself. Here are some of the pros and cons of the annuity:

Pros:
1) Takes some of the uncertainty out of retirement savings, with this sort of annuity you know exactly how much you'll having coming in for the rest of your life.
2) Low risk, assuming the insurance company stays solvent, you'll get your money.

Cons:
1) It's possible that you could meet or beat the returns by just managing the money yourself.
2) If you die an early and untimely death, no money is paid to beneficiaries the money is just gone (note that there ARE annuities that include a death benefit but they cost more).
3) Your lump sum is gone, so if something happens where you wanted that lump sum back, you're out of luck.

Overall, this type of annuity doesn't seem like a terrible thing from an investment standpoint, but remember, this is just ONE type of annuity, there are so many types of annuities out there that you REALLY need to be careful to make sure you're getting what you're expecting.

I'll close this (and probably all my annuity related posts) with a quote from Warren Buffett (he uses it to refer to investing it in a particular business, but I think it applies just as well to any investment vehicle):

"Never invest in a business you cannot understand. "

Article: Teaching Kids About Money

Posted By Paul

As a new parent I'm thinking a lot about how best to deal with money and my child. I'm planning on going with an allowance system when they are old enough. I remember that when I was a kid that all of my neighborhood friends had the system where if they wanted to do something they had to ask their parents (e.g. "Can I have money to go to the movies?"). I enjoyed having my own money so that I didn't have to track down my parents and ask for money for each little thing I wanted to do.

I also remember that with my friends that if they were given $5 to go to the movies (which of course back then was ample) they would make an effort to spend every nickel, since every bit they didn't spend just had to go back to their parents. They would pay for the movie, and also get a soda and candy (and maybe a video game or two). I would just pay for the movie and skip the expensive snacks so that I could keep my velcro wallet a little fuller.

I liked the fact that this article encourages the parents to let the child aware of the family finances and also highly discourages the parents from bailing out their child when they want something but have already spent their allowance.

Click on the link below to read the article. Are there any other great ideas for ways to teach children money lessons?

The Four Terrible Money Mistakes We Make With Our Kids

Article: Back To School Shopping On A Budget

Posted By Paul

I was reading an article in the newspaper talking about how many children and teens are developing frugal shopping habits because their parents are encouraging them to stretch their back to school budgets.

There were kids talking about how they were avoiding clothes that had the brand name right on them and were focusing more on trying to get as much for their dollar as possible by checking out the clearance rack and so on.

It was exciting to hear about children developing good spending habits early, and I noticed that the common thread among the children in the article was that they were given a spending limit by their parents and therefore were motivated to stretch their dollars as far as they could.

As a new parent I think a lot about how I might instill good values (including good spending habits) in my child. When I was in my tween and teen years I was never told: "You can only spend $100 on back to school clothes this year." I was told something like: "Let's go to the store, we need to go and get you some shoes and a winter coat."

Of course I remember that I really disliked clothes shopping (still do) so if my folks had told me something like "You have $100 to spend on back to school clothes." I probably would have just asked to wear my ratty jeans one more year so I could spend the money on comic books.

However, many teens are more concerned about clothes than I was, so I think it's a great system to provide your child with a spending limit so they can start to understand the benefits of making their dollar go farther.

Here is the article in full:
Frugality is cool in back-to-school shopping

Cool Info About the Roth

Posted By Paul

I read an article that made a point about the Roth that I thought was interesting.

For those of you not familiar with the Roth IRA you can read up on some earlier posts on this topic:

Roth IRA: A tax shelter for your golden years
-and-
The Roth as a College Savings Vehicle

I put money in a Roth with the basic idea that the more money I can save towards retirement the better. The article made the additional point that any money you put into a tax-deferred retirement account (like a 401k or IRA where you pay taxes when you take it out, presumably during retirement) has the added wrinkle that you really have no idea what the tax laws will be like when you retire.

The changes in the tax rates for a particular income bracket can have a dramatic effect on your retirement situation. Let's say theoretically that when you retire the tax rates are much lower...well then your retirement money will go that much farther and the opposite situation if tax rates end up being much higher.

When talking about a retirement that is probably decades away, it's VERY hard (perhaps impossible) to predict and plan for this.

However, the Roth sidesteps all this. You pay the taxes now so you don't have to worry about what the tax laws will be in the future.

Not to say you should dump your IRA or 401k, but I thought it was a cool little point about the Roth that hadn't occurred to me.

Here is the full article:

New Ways to shelter your retirement

Get Frugalized!

Posted By Paul

Remember the time Matt and I "frugalized" a friend? We were discussing that recently and both agreed that, while our friend already had some respectable spending and saving habits, she really benefited by getting an additional perspective on a few things that she was unsure about. Not "expert" perspective; we certainly don't claim to provide that, but we talked about all the same things we write about on the blog as they pertained to HER finances. Because many people are still nervous about discussing money matters in anything but an abstract sense, they sometimes have difficulty turning information into action.

If we don't accomplish anything else with Frugalize, we hope to at least get people talking about personal finance. It's amazing how helpful it was to our friend to just get a fresh perspective, and so we wondered, "Are there other people out there who would appreciate free input on their finances by two guys who think a lot about this stuff AND can guarantee that we're not trying to sell them an insurance policy, mutual fund, or get rich quick scheme?"

If you're interested in seeing what we think, just email us at frugalize@gmail.com. We'd have a discussion over email where we talk specifics about income, expenses, debt, and so on. We don't want to know specific account numbers or anything like that, but for our advice to be valid you need to be as honest as possible.

As it says in our disclaimer above, we're not financial advisers so we won't recommend stocks or specific mutual funds. We also won't recommend specific banks, brokerages, or insurance companies. What we WILL do is give you a critical and honest look at your financial state and offer unbiased free advice that you can take to heart or ignore.

We'll give you the best advice we can for free and all we ask is your permission to discuss the process we went through together in a future Frugalize article. We'll have you look it over before publishing to make sure that you feel comfortable with it, and obviously would not include any specifics about your identity.

If you're interested, drop us a line.

Article: Stop paying for things you don't need

Posted By Paul

This article reminded me of an earlier post on Frugalize called:

Stuff to look at when it's time to cut back

It was an article that suggested ways to avoid spending money when you don't have to. I especially liked their suggestions for avoiding bottled water (which I mention in an earlier post: Save On Drinking Water) and also their suggestion to avoid buying a bunch of ring tones and apps for your cell phone.

The second suggestion reminds me of a friend that bought a new cell phone but wasn't aware that there was a charge involved when it came to downloading ring tones. My friend happily updated their ring tone at least every day and ended up with a giant cell phone bill at the end of the month.

Here is the article in full:
Stop paying for things you don't need

An easy way to recycle electronics

Posted By Paul

If you're like me you have accumulated a fair amount of electronics that are broken beyond repair, but that you just don't feel right tossing in the trash.

Well there is a great service that Office Depot offers where they do tech recycling. The basic idea is that you go to a store and purchase an etech recycling box. They come in small ($5), medium ($10), and large ($15) sizes and you take them home and fill them with allowed electronics and then you bring them back in and Office Depot takes it from there, sending your electronics to various recycling sites.

It's not free, but it's pretty affordable (especially if you share a box with 2 or 3 friends) plus you don't have to drive all over town finding places to take your various recycled items.

Here is the brochure for the program:
Office Depot Tech Recycling

I bought the large box and I am filling it up now.

Article: 5 scams spreading like a virus in recession

Posted By Paul

I read an article today about scams that proliferate during a recession.

Here is a quick summary of the scams they describe:

1. Government grants scam - all this talk of the stimulus makes it easy to think there is free money for the asking. Be wary.

2. Instant credit repair - you pay for services you never get plus leave yourself open to identity theft.

3. Cash for gold - I've seen TV commercials for this. Apparently a common scam is that they send you a check that is much less than the worth of the gold but delay sending it to you so that by the time you get it the 'refund window' has already closed.

4. Mystery shopping scam - you get a check for a lot of money you are asked to cash it, secret shop and then send the cash to an account...later you discover the check is a fake.

5. Social networking scams - someone posing as a loved one on a social networking site needs money for an emergency. You send it and never see them again.

Here is the full article:

5 scams spreading like a virus in recession

It seems like a common thread in scams is the sense of needing to get your money quickly for some reason or another. Always beware when you are asked to do something that involves money with an urgency that keeps you from really seeing what's going on.

Transaction rearranging for overdraft fees.

Posted By Paul

I read an article that stated how many banks will rearrange the order of transactions as a way to charge you overdraft fees.

Here is a hypothetical example. Say you have $50 in your account and then you use your debit card that day:

8:00 AM $10 Breakfast.
noon $25 at the grocery store.
6PM $50 dinner

So you figure that the 6PM transaction should be considered an overdraft, you feel stupid but oh well it's just one time.

Instead the bank decides to process the transactions for the day in this order:

6PM $50 dinner
noon $25 at the grocery store.
8:00 AM $10 Breakfast.

So now you've overdrawn your account twice, causing you to incur the penalty twice.

If this sort of thing happens over the weekend you can end up with multiple overdraft penalties that easily add up to $100 or more.

You may call this unfair, maybe even think it's the banks setting you up so they can steal more fees from your account, but at the time of this posting this practice is perfectly legal.

My take away from all this? This is all just one more reason to avoid living paycheck to paycheck. The scenario I drew out above becomes a non-issue if you just put a buffer in your checking account to avoid this sort of thing.

Back before online banking was common I knew people that would subtract $100 from their balance in their checking account ledger. That way they always had a $100 buffer in their checking account just in case.

That system or the equivalent is still a great thing to do today. If you find yourself in a place where you are constantly worried about overdrawing your account then you are probably living a paycheck-to-paycheck lifestyle. Overdraft fees are just one more symptom of a problem that comes down to how you handle your money. I would suggest in the short term to make a real effort to build up a checking account buffer (this can be as easy as cutting out Starbucks or Netflix for a while and putting the money towards your checking account).

In the long term, you should look over your financial life and see how you can improve it. Maybe one of my really early posts:

My Financial Philosophy

Is a good place to start.

Avoiding mortgage modification scams.

Posted By Paul

A friend of mine got a letter in the mail giving a contact number and suggesting that they could help lower his mortgage payment.

He decided to call and they essentially said they were lawyers who would re-negotiate his mortgage at a lower rate. This service would cost $3000. They asked him who his mortgage was with and when he said bank X they said that they had worked with them before to negotiate 30 year fixed mortgages at a great rate.

Being smart, he called his bank next and asked if they had ever heard of this law firm. They essentially said:

1) They had never heard of this firm.
2) They don't offer a 30 year fixed mortgage.
3) They would be happy to renegotiate his rate directly.

Based on this he decided to not call the lawyers back. He discussed the terms of his mortgage with his bank, and they gave him some options that he is considering.

Then just today I saw an article on avoiding mortgage modification scams. It sounds suspiciously similar to what my friend experienced. I wonder what would have happened IF he had decided to go forward and give them the $3000. Maybe they would have just disappeared with his money, or perhaps done some hand waving to make it look like they did a bunch of work to get him the same rate and terms that he got by just calling the bank directly. My friend gave them his email address and they sent him the list of info he would have to gather for them to proceed on his behalf and it was an identity thief's dream (tax returns, pay stubs, etc.).

I suppose it's possible that this people were for real, but I think you really can't be too careful these days, especially when calling someone that sent you a random letter in the mail.

Here is the article on avoiding these scams:

Avoiding mortgage modification scams

Also here are two stories I read about people who fell for these scams and how they ended up losing their homes:

Mortgage scam snags Idaho couple

Chicago owner loses home in mortgage scam

Article: Do the right thing in a recession

Posted By Paul

This is an article I found on CNN Money that I thought did a great job of addressing the "moral hazards" of money. There is lots of info out there on how best to deal with your money from a fiscal standpoint, but this article addresses what you should do from a moral standpoint.

I liked the fact that the article highlights the idea that you shouldn't feel too guilty about the financial impact of dropping a service (housekeeper, landscaper, etc.) if it's a service that you can't afford right now. I also liked the fact that it specifically calls out that when making choices your first obligation is always to the loved ones that you support.

I also liked the fact that it mentions the idea that helping someone out of a financial bind isn't always helpful in the long run. This reminded me of a previous post:

Millionaire Next Door Review Pt 3: Economic Outpatient Care

The idea that by helping someone out of a financial bind you are shielding them from a lesson that perhaps they needed to learn.

Here are some highlight quotes from the article:
-----------------------------------
Where should your budget ax fall?
But there are three principles to keep in mind. One is that sacrificing is a necessity, not a punishment. It's to be expected of everyone, and you can't feel guilty about not underwriting what you can't afford. Second, family comes first. As concerned as you may be about your housecleaner -- or your favorite charity -- your first obligation is to the loved ones who depend on you.

Finally, remember: Opportunity is priceless. Sell your jewelry, sell your car -- whatever you need to do to be able to invest in your child's future.
-----------------------------------
What do you do about budget-busting friends?
There is absolutely no disgrace in looking a friend in the eye and saying, "I'd love to do that, but right now I can't afford to." If your pals aren't understanding, shame on them.
-----------------------------------
Who should get your bailout bucks?
As for others more worthy, try to help them (a) if you can and (b) if their request seems reasonable -- reasonable to ask of you and reasonable in that the situation genuinely merits intervention.

The quotes make more sense in context of the full article:

Do the right thing in a recession

Article: Car Dealer Tricks to Watch For

Posted By Paul

I read this article and thought it was interesting. I thought the one about Eavesdropping was actually kind of clever.

Car Dealer Tricks to Watch For

Has anyone caught a dealer trying any of these?


For a related article see an earlier posting:

Article: 6 Things You Should Never Tell A Car Salesman

Article: Get your spouse to stop overspending

Posted By Paul

Here is an article I enjoyed that was talking about managing a spouse who is more free with spending than you would like.

It's a short article but it reminds me of what one married couple I know did as a way to manage their money. They had a fairly common system where one spouse (in this case the wife) handled most of the day to day money issues (she wrote the checks for the utility bills and mortgage, etc.). The husband was sometimes prone to overspending and that frustrated her.

What she did was that she made sure that the husband helped with the check-writing (she wrote the checks and he entered them into the checkbook), so that he could see and realize that they were spending too much money. By actually seeing the checkbook balance shrink (and sometimes go negative) he was able to see the consequences of his actions. Prior to that his spending was something he would hear about through his wife but it never sunk in until he got involved in the process.

Here is the article:
Get your spouse to stop overspending

Cash incentives for saving water

Posted by Matt

This post is targeted to my local readers; if you're not a customer of Tualatin Valley Water District, you can stop reading here or check with your own local water provider to see if they offer a similar program.

Tualatin Valley Water District has several rebate programs designed to provide additional incentives for their customers to reduce their water usage (assuming you haven't been swept up by the "green" wave already). I discovered that the lawn aeration that we were considering is encouraged by the water district because it allows you to use less water on your lawn. If you're not familiar with the process, aeration looks much like lawn mowing, except that the machine has a roller with cylindrical spikes on it to take plugs of soil out of the lawn. It is especially helpful for lawns with very hard-packed soil. This is something I did as a child with a pitchfork, and I'm glad to pay the $35 that our aerating service charges to do both the front and back lawns.

Of course, now I'll only end up paying $10 after the $25 rebate! We may also buy some hose bib timers to simplify watering; those have a rebate available also (as do rain sensors and pressure regulation service). If you don't have a lawn, you can also find rebates for efficient appliances and even toilets here. All any of the programs require are forms and receipts.

Link: How to figure out the value of donations

Posted By Paul

I recently donated some old furniture and other items to a charity organization and I thought I would look into the possibility of taking a tax deduction on the donation.

I was immediately perplexed by what amount I should use for the various items. I vaguely remember what we paid for the items originally but I'm not sure what their fair price is now.

I did a little searching and found this great guide for the value of donated items. It's provided by the Salvation Army:

Salvation Army Donation Value Guide

I am going to try to keep track of all the various items we donate to charity and see how it affects my taxes this year.

PGE wants to send us all a check

Posted by Matt

Portland General Electric's latest newsletter just informed me that I may be eligible for a refund of money that I paid for the Trojan nuclear power plant. I don't really remember buying a power plant in the October 2000 to the September 2001 timeframe, but I'll take their word for it.

If you were a PGE customer during that time, visit http://www.trojanrefund.com/ to apply for a refund. You HAVE to apply to be eligible. It only took me about two minutes, and residential customers are expected to receive about $23 each.

Article: 8 Things Parents Don't Need

Posted By Paul

As a new parent I was happy to run across this article listing things that you DON'T need as a new parent.

8 Things New Parents Don't Need

I especially liked the author listing the expensive burp cloths and how cloth diapers work just as well. In fact a friend of mine went to a baby shower where as a game they had each guest decorate a cloth diaper in permanent marker for the parents to use as a burp cloth. The parents use them for various baby related cleaning and it's cool to see the funny and creative designs that the guests put on them.

Also the fact that they mentioned the baby wipe warmer was excellent. I saw one listing for a baby wipe warmer that said something like:

"the baby wipe warmer saves you money by being able to use any type of wipe in it."

What saves you even more money is to not buy the warmer in the first place. I looked on Amazon and read customer reviews of warmers and several people swore that their baby didn't like cold wipes and that buying this device improved their life considerably. Our baby actually thinks the cold wipes are kind of ticklish and using the cold wipes will often turn his crying into laughing. I guess it goes to show that all babies are different.

Any other suggestions for things new parents SHOULDN'T buy, or at least shouldn't ASSUME they need?

Store Credit Cards: Know What You're Signing Up For

We have a guest post from Matt's wife Leah today. Enjoy!

-------------------------------------Posted by Leah

One of the major department stores (who shall remain nameless) recently hooked us with a “save 15% right now if you apply for a store credit card” offer. Normally we wouldn’t even consider it, but we were making a pretty large purchase and the savings totaled about $30, so my frugal nature won out and I convinced Matt to go for it.

There were several people waiting in line behind us, so I was feeling rushed during the application process. It was very quick, though, and only required a few taps on the buttons of the credit card swiper. Voila! We were approved in about one minute, and I walked out feeling pretty smug about my $30 in savings.

Fast forward to about a week later. We got a letter from the store thanking us for purchasing an additional plan that would help us pay off our balance should hard financial times strike. This plan would cost us $1.60 per $100 of our balance each month. That adds up to an extra 1.6%, added on to an already sky-high interest rate (Matt and I never carry a balance, so we don’t worry too much about interest rates on credit cards).

The letter stated that we could cancel this plan within the first 30 days and wouldn’t be assessed any charges. Of course I did this immediately, and filed a complaint with the company about this automatic enrollment. The representative informed me that I had agreed to this additional charge during my rushed application process, although I had no memory of doing so.

Ok, so it was my bad. I shouldn’t have applied for the card without reading all the small print, but what makes me mad is that the store knows that nobody is going to stand there, holding up the line, while they read through all the terms of use on that tiny screen. They also know that the majority of people, for various reasons, won’t get around to cancelling their membership in the plan within the first 30 days. I believe this is the store’s sneaky way of sticking it to the customer and squeezing that little bit extra out of us.

So what’s the moral of this story? Don’t apply for credit cards? No. Used wisely, credit cards have all sorts of benefits. Don’t apply for a store credit card while being rushed through a checkout line? Maybe…although most people don’t take the time to read the fine print even if they have the time. Be aware that this kind of stuff is happening, ask questions, and read your mail? Definitely!

E-cycling revisited

Posted by Matt

It's been nearly a year since my post about the costs of e-cycling, in which I complained about having to pay to recycle my computer monitor. For those of you in Oregon who decided to hold on to your monitors until now, I have good news!

I just read an announcement from my garbage service company that the Oregon Department of Environmental Quality implemented the Oregon E-cycles program in January with the intent of providing free recycling of computers (desktop and laptop), monitors and televisions.

Visit http:/www.oregonecycles.org to learn more about the program or to find local drop-off facilities. I was pleased to learn that my previous recycler of choice (Free Geek) is participating in the program and that all participants are required to follow environmentally sound management practices.

Now, if you've made it this far, I'll give you the full disclosure about the costs here. The recycling isn't really free, right? Someone has to pay for it, right? Electronics manufacturers who sell their products in Oregon have been funding the E-Cycles program (whether they like it or not) since 2007, which probably means that those costs were been passed on to YOU the consumer when you purchased these types of products. But considering that we're all paying for the program anyway, let's at least use it to our full advantage.

0% return?!?! - Update on Series I Savings Bonds

Posted by Paul

(for more detailed info on savings bonds see previous posts on savings bonds: Savings Bonds 8/27/07 and Savings Bonds Revisited 8/22/08)

Those of us who have purchased or who have been following the Series I savings bond got to see some history as the interest rate for a new Series I bond went to 0% for the first time since the I Bond was created over 10 years ago.

What happened? Well the quick summary is that the I bond return is tied to the inflation rate, and for the first time since the bond was created the inflation rate (which is published twice a year in November and May) was negative (specifically -2.78%). If you do the math, this means that the return rate of your bond is negative (even if you bought I bonds when their rate was highest back in 2000 the calculation results in a negative number). Luckily it is made clear that when the rate of the bond goes below 0 it just gets set to 0.

So what does this all mean? Well there is a whole article talking about it here:

Yikes! Series I Savings Bonds paying 0.0%

To summarize some specific points from the article:
"That means your money is still safe from inflation, but you’re getting the same return you’d get by burying it in a coffee can in the back yard."

The article managed to find a small silver lining in all this:
"If you do decide to dump your Series I bonds, you’re in luck. Normally, if you sell a bond less than five years after you bought it, you have to pay a penalty equal to three months interest. Since you’re getting no interest, you’ll owe no penalty."(Hooray?)

For me, I'm just going to hold onto my bonds and see what happens when the rates reset again in six months.

What NOT To Skimp On

Posted By Paul

There seem to be two valid philosophies when it comes to being frugal:

"Save On Every Purchase"
The idea: when it's time to buy something, look for the cheapest option that will get the job done.

How it can go wrong: one time I wanted to buy a VCR and decided to buy the cheapest one that had the features I wanted. The result was that I got a VCR that worked so horribly that in a few months it was practically worthless. I decided to buy a VCR that was more than twice as much ($70 vs the original $30), but this one actually worked pretty well and has lasted quite a while without breaking.

"Every purchase should be viewed as the last one you'll ever buy"
The idea: if you are going to buy something, buy it with enough quality so that you will never have to replace it.

How it can go wrong: you end up buying something much nicer (and more expensive) than you need, or you end up buying something super nice that ends up becoming obsolete or useless quickly.

Being frugal is often a balancing act between these two ideas. Do you focus on purchasing quality or do you focus on saving money?

In this time where everyone is looking for ways to save money I decided to give some thought to things that you SHOULDN'T try to save money on.

Here are some of my ideas:

Things you use every day - if you're going to be using it every day, then buy some quality. If it's something that spends a lot of time in the attic or a back shelf, then skimp. For example, buy a good kitchen knife but buy a cheap fondue pot. On a personal note, my wife and I bought some cheaper kitchen knives several years ago. Now most of those knives are literally falling apart, and we're replacing them.

Things with lots of moving parts - this is my lesson from the VCR. If it has a lot of moving parts then if it's of low quality it will fall apart quickly. For me this includes things like power tools, and electric kitchen appliances.

One article I found sounded promising
Skimp Or Splurge

The article had a slideshow of 12 items they thought you should be sure to buy quality, which I thought was a pretty good list:

Sofa
Mattress
Bureau
Men's suit
Men's Dress Shoes
Men's Overcoat
Women's Overcoat
Women's Little Black Dress
Women's Slacks
Cooking Pot
Cooking Skillet
Chef Knife

Any other suggestions out there?

What I Learned About Disability Insurance

Posted by Paul

One of the things that I looked into when I become a Dad was disability insurance. Of course coming into it I had no idea what the different "flavors" of DI were and how it was priced, or how much it all cost.

I feel like I learned a little as I went through the process so I thought I would take what I learned and share it.

First of all, DI is generally defined by four characteristics:

1) Elimination Period
This just means how long you have to be unable to work before they start paying. Common amounts are 30 days, 60 days, 90 days, 6 months and 1 year.

2) Payout Amount
This is how MUCH they pay you per month while you are disabled.

3) Maximum Benefit Period
This is how LONG they will pay you if you remain disabled for a long time. Common amounts are 1 yr, 2 yrs and so on (you can also get a benefit period that says they keep paying until you turn 65).

4) Whether or not your premium is locked.
Some policies lock in your premium and they can't change it as long as the policy is active, others are allowed to change it based on your career (like if you become a skydiving instructor they can change your premiums), stuff like that.

5) Your current state of health.
If you have serious health problems then the premium they offer you will almost certainly go up or the company may choose to not offer you coverage.

What I learned is that these factors can dramatically change the premium you pay.

Here are some examples:
Shorter elimination period = higher premium.
One policy I looked at had a 90 day elimination period with a premium of $58 a month but if you switch to a 60 day elimination period the premium jumps to $115.29.

Longer benefit period = higher premium.
It seemed like generally to go from a 2 year to a 5 year benefit period it means your premium would increase an additional 50%. (the same policy I looked at for $58 a month was for a 2 year benefit period, changing it to 5 years made the premium go to about $90 a month).

Higher payout amount = higher premium.
No surprise there.

The more locked in your premium = higher premium.
There was an added cost to having a premium that was locked in for as long as the policy is active, though in my experience the extra cost wasn't THAT much.

More health problems = higher premium or denial of coverage.
I don't know the specific formula for coverage based on health but I do know that if you apply for personal DI assume that they will require a check up where they check your blood pressure, weight, and take a blood and urine sample, and also inquire into your medical history.

So given this information, how much should you get?

Well the choice is really up to you. If you want you can certainly have no disability insurance, and assume that if something horrible happens to you then you will live off of social security (or just assume that you'll never be disabled). Insurance is based on the fear of what MIGHT happen so it becomes a tricky question of how much you want to pay for varying amounts of coverage.

One suggestion I do have is to look into the policies that you work offers. Sometimes they can be good and super affordable. Also if your state of health is bad to the point where you can't get personal DI then getting it through your work may be your ONLY option.

But before you automatically sign up for your work plan I would also suggest that you shop around and see your other options. For example at my work they offer DI for a price, but there was only one choice of coverage. The policy they offered had the longest benefit period (it gave you coverage up to age 65 if you become disabled) and even though the cost wasn't bad for the coverage you got it was still a pretty hefty monthly premium. I decided to call an insurance company and see what kind of options I had (in fact I called the same company that handles the group plan for my work). I talked to an agent and got quotes on an individual policy with varying types of coverage and then I made the personal decision that I preferred a little less coverage for a lot less money.

My advice to people who are interested in DI is to first determine the cost of getting DI through work, and specifically noting the characteristics of the policy (or policies) that your work offers and the cost. Then call up an agent and find out the costs of policies for a greater spectrum of coverage and then make your decision.

Link: Unemployment Data Across the Country

Posted By Paul

So this isn't EXACTLY information about being Frugal, but I did think the info was really interesting.

There has been a lot of discussion in the news about the unemployment rate. This link takes you to a tool Google set up to let you view and compare unemployment rate data. You can view the rate for the country as a whole or view it at a state or even county level.

Google unemployment data

Article: Maybe you don't need a new computer after all

Posted By Paul

An interesting article on free tools that help you maintain your computer:

15 free downloads to pep up your old PC

Some of them sound really promising, I plan on giving some of them a try.

Article: Marriage And Money

Posted By Paul

A great article on The Dollar Stretcher about dealing with money in your marriage.

I liked the fact that it called out some specific points such as how money should be viewed as a "we" issue instead of a "me" issue. The author specifically mentions secretly hiding money from your spouse as an unhealthy way to deal with money problems in a marriage.

I also liked that he mentioned that you should try to appreciate the differences in the ways you and partner view money. Usually in these sorts of articles the partner who is more comfortable spending is presented as a problem that needs to be managed. I liked that the author says that:

"If you're a penny-pincher and you'd married another miser, you'd likely never enjoy the fruits of your hard work!"

I also really liked the fact that the author suggests that couples formulate financial goals together. That can take the form of a budget that BOTH people agree on, and that this budget can include fun things as well.

A good article for newlyweds or anyone married couple that is struggling with money issues:

Marital Bli$$

Some Great Websites For Replacement Parts

Posted By Paul

For those of you who try to do your own repairs around the house, here are some great web pages I found:

AppliancePartsPros.com

RepairClinic.com

Both pages let you search for and purchase parts for various appliances. I was trying to find replacement wheels for my dishwasher rack and was able to find and purchase them no problem.

An added bonus is that both pages have pictures where the part is sitting on a 1 inch grid background so you can take a good look at it and make sure it's the right part.

Repair clinic even has a cool feature where you can search based on just the physical description of the part. They have a variety of search criteria that aren't based on knowing a part number, name or brand. For example you can do a search where you essentially say:

"I want to replace a part from a microwave that is between 2 and 3 inches long and is plastic and a single color."

I did the above search when I wanted to replace the part on my microwave that hooks into the motor and makes the turntable turn. Thanks to the page I found out that it's called a "turntable drive coupler", but I never would have guessed that. The above search gave me the part I needed and thanks to the photo I was able to confirm that it was the right size and it was exactly what I needed. It's great to have a page where you can find and order a part without even knowing what it's called or what it does.

I've used both pages and each time I got the correct part to replace the one that had broken.

A great resource when those mysterious but important parts on your appliances break and need to be replaced.

A way to save on home projects.

Posted By Paul

I recently completed a home project where I tiled the floor of one of the rooms in my house. At first I was worried that I would run out of grout or tiles, so I made a second run to the hardware store to get more.

Well of course I ended up with more than I needed. Luckily this time I made sure to save receipts and also keep my un-used building supplies (bags or mortar, bags of grout, and boxes of tiles) in good condition so that I could return them.

I had one extra bag of grout, one of mortar, and 3 unopened boxes of tiles. I contemplated keeping the grout and mortar in case I needed to do repairs, but ultimately decided that I could always get more, so there was no point in storing the bags in anticipation of needing it some day. I had one box of tiles that I had opened, but since I only needed 2 of the 12 tiles in the box there were 10 left which I figured was plenty to keep in case I ever needed to do repairs.

A quick trip to the hardware store with my receipt and they were happy to take back the unopened building supplies. I got my money back for those items, and saved a little storage room in the garage.

Saving By Simplifying

Posted By Paul

(This is an old posting that I forgot to publish).

Hi Everyone,

Happy New Year! Those of you familiar with the Portland area are aware that the week of Christmas was highlighted by an unusually heavy snowfall that made getting around town treacherous.

So I found myself sitting at home, unable to go anywhere. I decided to tackle cleaning out the garage. Well I ended up with a lot of stuff that I no longer needed, which I took to the recycling center or Goodwill as soon as the snow melted.

How is this frugal? Well my wife and I had been talking a lot about how we could increase the storage in our house (more shelving, etc.). Tackling the garage came at the perfect time because we discovered that many of our storage problems disappeared once we got rid of a lot of stuff that we didn't need.

Here are two prime examples:

1) Old infant car seats - they take up a lot of space, so I finally hunted down a place where I could recycle them (see my earlier post Recycling Child Car Seats).

2) Paint - it was only when I went through my garage and gathered up all of the cans of paint that I realized just how much I had. Can after can of paint that we kept in case we needed a touch up, plus several cans that came with the house. I was amazed when I piled it all together and found over 30 paint cans of various sizes, most of which were less than half full. With a little research I found a place where you could take them for recycling and safe disposal (if you live in the Portland area, the info is here). Once I got rid of all of that excess paint a third of the storage space in the garage was suddenly empty.

By just doing these two things we were able to free up a bunch of storage space in our house, so now we feel like we won't have to spend a lot of money on buying stuff for extra storage or worst of all, renting a storage space (see my earlier post Paying For Storage).

Article: 7 New Rules of Financial Security

Posted By Paul

A great article listing new rules for financial security.

You can read the full article at:
The 7 new rules of financial security

I also thought I'd summarize them here:

Rule 1: Risk
It essentially says that you need to be very careful to make sure that invested money is available when you need it. There have been many stories of people with college or retirement funds invested in high-risk stocks that collapsed right when they needed the money.

Rule 2: Cash
This talks about having a nice rainy day fund of cash available quickly when you need it. Matt and I talk about this all the time.

Rule 3: Human capital
This was interesting, the article suggests that you not only look at risk but also the stability of your job when considering investment risk.

Rule 4: Borrowing
It essentially says to borrow cautiously. View debt as a necessary evil.

Rule 5: Housing
Says to not fall into the trap of viewing your house as a no-risk investment.

Rule 6: Diversification
Suggest a really close look at diversification.

Rule 7: Retirement
Retiring early is NOT easy to do.

Article: Making Severance Last

Posted By Paul

As someone who has had to deal with living off of unemployment and severance pay I thought this article had some good tips:

Make your severance check last

I especially liked how they mentioned that you don't need to feel obligated to adopt an ascetic lifestyle since being unemployed is depressing enough. Very true.

CD rates lower than savings rate?

Posted By Paul

If you have been following Frugalize you've noticed that I watch CD rates and that I've set up some CD ladders as a savings vehicle (to read earlier CD ladder posts click here).

I was intrigued by the fact that at ING currently a 12-36 month CD earns an APY of 1.5%. Yes that's a pretty low number, but what really intrigues me is the fact that the current APY for a normal savings account is 1.65%.

I don't have a ton of experience but I've never seen CD rates go LOWER than a normal savings account.

My thought is that if you are expecting your savings account to drop even further, then locking in a CD at a lower rate might actually seem appealing.

I found an article on Get Rich Slowly that discusses this:

CD (Certificate of Deposit) Rates: Current CD Rates at Online Banks

One thing is for sure, these are very strange times.

Dave Ramsey

Hi Everyone,

I had some people mention Dave Ramsey to me, so I finally got around to going to his webpage:

www.daveramsey.com

and checking it out.

One of my favorite features was "The Stupid Tax" which is a feature on the page where you can write in and share your stories of impulsive or just plain stupid money choices. One of my favorites was about being offered 3 months free of a magazine in the checkout line at the store. This has happened to me and I never knew what "the catch" was. I assumed that they gave me the three months free and then if I didn't specifically cancel then I would automatically enroll for another year. This person share's a story where it is even worse. For them the fine print says that you are subscribing for a year and getting the first three months free, so an annual subscription fee actually gets charged to you. You can read the story here:

A Magazine Subscription I Didn't Want

I also liked his 7 Baby Steps though I'm not sure I'd agree with all of his specific decisions. He seemed to feel that you should ONLY have a 15 year fixed mortgage. I think going for a 15 year fixed is a great goal, but I also don't think it's bad to have a 30 year.

Generally I liked his view of debt=bad, certainly worse mantras to have when it comes to money.

Stuff to look at when it's time to cut back....

Posted By Paul

Hi Everyone,

It looks like there might be crazy times ahead for the economy, so I thought I'd start making a list of easy things you can cut if you need to tighten the belt.

Here we go:

Cable - if you ever need to save a few bucks, it's easy to either cut back on your cable package or get rid of it entirely.

Gym memberships - though I think it's good to exercise and stay healthy, a gym membership can always go if money gets tight. See Matt's earlier post: Budget For Fitness Without A Contract

Smoking - okay, I'm not a smoker and never have been, so I don't know first hand how hard it is to quit, but if you do the math, it's really hard to justify smoking when money is tight.

Newspaper and magazine subscriptions - when money is tight, you can always cancel your subscription (or just not renew it).

Home internet - unless you have a home based internet business, you can always cut your internet service.

Redundant phone plans - do you have cell phones and a conventional line? It might be possible to cut out one or more of the lines.

Expensive car washes - you can always increase the interval between car washes or wash your car yourself.

Expensive hair care - you can try out a cheaper haircut, or just go a little bit longer between haircuts.

Starbucks - see my earlier post: Starbucks

Spa stuff - I know that monthly massages/facials/etc. are awesome, but they're also expensive.

Movies - read my earlier post: No More Movies

Dining Out - cut back or just try to find cheaper places.

Maid/Yard Service - If you have one or both, consider getting rid of them and do it yourself. View it as exercise (see gym membership above).

Storage fees - If you are paying for storage, take a moment and see if what you are storing is really something you can't bear to part with.

One idea that works pretty well for me is that if I decide I want to try to scale back, it doesn't mean I have to cut something out entirely. I can just find a cheaper option or maybe scale back on the frequency. For example make a plan to cut back on movies and rent DVD's instead. If you enjoy a monthly spa trip because you enjoy getting pampered as a treat, consider trying a cheaper treat like a manicure. You don't have to cut out treats, you can just make an effort to find cheaper treats that are still fun.

3.875 on a 30 year fixed? What's the catch?

Posted By Paul

This weekend I was looking in the paper and saw several ads offering 3.875% on a 30 year fixed mortgage.

Having just refinanced I was confused...since I know that at their best the banks were offering 4.3% for a 30 year fixed. I figured there had to be a catch.

Well after some research it looks like there is a catch....sort of.

This is called a 'builder buy down' loan. As with all mortgages there are all different types of builder buy down loans, but the basic idea is this:

Are you familiar with mortgage points? The idea is that a bank will lower your mortgage rate if you are willing to pay some money up front as a fee (1 point just means once percent of the loan as a fee).

So let's say your bank is offering a 30 year fixed loan at 5%, and you need to borrow $200k to buy your house. When a bank says they offer you 4.5% with one point, it just means that you pay 1% of the mortgage up front as a fee to get the better rate. So in this case you'd have pay $2k in fees to get the 4.5% rate.

So basically a builder buy down mortgage is where the builder pays the point(s) for you. Think of it from the standpoint of the builder.

Let's say you just built a house that you are trying to sell for $500,000. Maybe by paying $10,000 (two points) you might be able to offer a rate that will entice buyers. From the standpoint of the builder:

1) It gets the house sold - if real estate prices are falling then the builder probably want to unload the house before the value falls any more. Paying the $10k now is probably a no brainer if the builder is worried that in a few months the house will be worth $490k or less anyway.

2) The house is sold at its list price - you see this in the fine print of these loans. This is important because often the builder isn't just trying to sell one house, but many houses all in the same neighborhood. By paying the $10k to get you the lower rate, the house still goes on record as selling for $500k. This means that it will hopefully keep the appraised values of the other homes in the neighborhood higher. If instead of giving the bank the $10k to get the better rate the builder instead just knocked it off the price, and sold it to you for $490k then now every other similar house in the neighborhood could be viewed as being worth $490k. If you are the builder and you have 20 of these homes to sell a hit like that is something you'd like to avoid. It's much better to pay the points to the bank and keep the value high. It's kind of a sneaky way to make the value of the home SEEM higher than it is, but from the builder's standpoint it's a smart move.

So overall, a builder buy down is a sign that the builder is REALLY motivated to sell the property (this is no surprise in today's market). IF you want to get the house anyway then there's no harm in taking advantage of it, just keep in mind that:

1) A builder buy down of a mortgage is a sign that waiting could result in lower house prices.

2) The higher appraised value of the house could affect your property taxes.

3) There are all kinds of builder buy down loans some only lower the rate temporarily (like for the first few years) so make sure you understand the terms of the loan.

There is a great detailed article on builder buy down loans here:

Builder Buy-Down at Lendingtree

I thought that the article did a great job of summarizing how to view these offers so I thought I would quote the final paragraph of the article here:

"A buy-down can be very attractive, but it shouldn’t be the decisive factor in your home purchase. Regardless of the buy-down, you should shop around, compare loan products from different lenders and take care not to overextend your ability to make your mortgage payments after the buy-down expires."

An unexpected savings from driving less

Posted by Matt

This should be a quick one. I just had to share such an easy way to save money!

I downloaded and skimmed through Suze Orman's 2009 Action Plan last week and found a savings tip that I actually put to use:

Designate one car as your “low mileage” car; if you keep annual mileage below 7,500–10,000 miles, the premium discount can be 10% or so.

I already knew that driving less was a good way to save money: reduced fuel expense, less wear and tear, etc. But this was news to me. I did the math and, sure enough, I've been averaging about 6800 miles per year or so. I contacted my agent to let him know and he quickly agreed to update my policy.

Now I didn't have high hopes for the savings; I thought it would be a few bucks or so. After a few days of waiting for my online account to be updated, I was elated to discover that my 6-month premium dropped from $320 to $263.22!

You may not be able to reduce your driving to this level (it helps to telecommute occasionally and bike or ride my scooter in the summer time), but if you have, make sure you're getting the discount!

Is it time to refinance?

Posted By Paul

So you've probably been hearing about the historic mortgage rates, and maybe you have been thinking about refinancing.

Well since I've been looking into it myself I thought I would share what I've learned from the process.

Before calling up a lender, there are a few items that are good to get clear in your head:

1) Your refinancing goal: Do you want to pay less interest in the long run? Do you want to pay off your house more quickly? Do you want to lower your monthly payment? It's important to be clear on these questions since various refinancing choices (or for that matter whether or not you should refinance) often come down to your refinance goal.

2) The timeline for your house: It's so hard to predict, but if you can make a guess as to how long you plan on staying in your house it helps make various decisions easier.

So if you have these items clear in your head, now what?

At that point you can call a mortgage person and have them run some numbers for you. Keep in mind that usually the way the whole thing works is that you refinance (which includes fees) and the good news is that you get a the new rate, but the bad news is that you pay the fees. You can of course roll the fees into the principal of your mortgage, that means no out of pocket costs to you (which is good) but the amount of principal you owe on your mortgage just went up (which is bad).

There are lots of mortgage calculators out there, some of which are specific to refinancing. Here is a page with a lot of them:

http://www.mortgage-calc.com/

I like the 'Simple Mortgage Refinance Calculator'. It asks you for the basic numbers of your refinance and then calculates your payment change and the number of months before the interest savings offsets the closing costs.

Where I am personally coming from in this refinance is that in these uncertain economic times, I'd like to lower my monthly payment. The refinance is a trade off for me. By refinancing I reset the clock on my mortgage (I'm now scheduled to pay off my house in 2038 if I stick to the payment schedule), and the fees (which I am rolling into the loan) makes the amount I owe go up slightly.

However my wife and I talked it over and we decided that in these uncertain times the fact that our required monthly payment goes down is worth it. We figure that we can always pay extra to the mortgage. In fact our plan is to continue to pay the "pre-refi" amount every month and just apply the extra towards the principal. The nice thing is that if things ever get dicey (like I get laid off or some other big expense comes up), we can always stop paying the extra.

We toyed with the idea of refinancing at a 15 year mortgage, but even with the better interest rate our payment would go up a good bit, and that just isn't our priority right now.

Lots of choices in refinancing, it really helps to figure out a few basic questions to guide you as you run the numbers.

Recycling Child Car Seats

Posted By Paul

If you have read Matt's earlier post:

The Baby Gear Underground

The article talks about ways to save money on baby stuff. When we were expecting our first child we received all kinds of stuff from people (which was awesome). Among the hand me downs were a car seat and several bases from Matt. We took them to a free clinic put on by the police department showing how to properly install it.

We were surprised to discover that the car seat and the bases they gave us were too old to be considered safe (they were able to check the date of manufacture via an id number on the car seat).

So not only did we have to get a new car seat and base, we also had to dispose of the old ones.

I always feel bad when I take a big chunk of something and toss it in the trash, so I decided to look around to see if recycling was an option before tossing the seat and three bases in the dumpster.

Well there was some good news! There are a few places that accept and recycle infant car seats, and one of them was nearby in Portland.

If you find yourself with a car seat that your child has outgrown, instead of tossing it, try to find a place where you can recycle it.

For people near Portland you can contact:

Legacy Health Systems Recycling Program.

I took the car seat and bases to the recycling center and dropped them off with no problems.