Free Money Finance

Avoid the Blame Game—Take Responsibility for Your Financial Affairs

The following is an excerpt from Your Life & Your Money.

We must become the change that we want to see in the world.—Mahatma Gandhi

We live in an age of delusion. It seems to be the inherent nature of mankind.

Our biggest delusion is a sense of entitlement. It permeates our country. People delude themselves into believing everything is fine while engaging in behavior that’s definitely not fine. Then, when something goes wrong, they stand there blankly and do nothing about it, expecting somebody else to pick up after them! Everywhere you turn, people are blaming everybody else for their problems.

Look around. It’s everywhere—in our neighborhoods, schools, big business. There’s the chain smoker who sues the tobacco company. Or the overweight, overfed cheeseburger eater who sues the hamburger chain, claiming that their food made him fat. Or the guy who drank too much, left the bar and then crashed his car, who blames the bartender for serving him too much alcohol.

Are you kidding? The next thing you know, the government will be bailing out all the homeowners who double- and triple-dipped into their home equity and are upside down, plus the brokerage houses that bought lousy loans and the banks that accepted those loans. Oh, wait—that’s happening too!

Worst of all are our politicians. They believe they can print money and manufacture prosperity.

I’m not making this up, it’s true. What in the heck is happening? And why is it happening? The answer is simple: it’s much easier to blame others than to take responsibility for yourself.

The Delusional Trap

We delude ourselves when we’re uncomfortable with accepting things the way they are as opposed to the way we want them to be. When we act on the way we want things to be instead of how they actually are, we make bad financial decisions and create painful problems that often end up hurting many others.

People become ensnared in the delusional trap when they create financial trappings in their lives without noticing or acknowledging or, even worse, deliberately ignoring reality. They’re afraid to face their financial lives head—on with brutal honesty. They’ll do anything to avoid the consequences, often at the expense of other people or businesses, and when it’s too late, they take down a lot of innocent people with them.

Every time someone claims bankruptcy, overspends on credit cards and repeatedly refi nances their home, they are lying to themselves and being negligent and disrespectful of their fellow humans.

As my dear friend Willy M. Nieman put it, delusional thinking is defined as:

1. Telling yourself a lie
2. Believing in that lie
3. Acting on that lie

The Sub-Prime Debacle

For a vivid example of how our entire society is ensnared in a delusional trap, look at the sub-prime debacle. As I write this, we are seeing millions of foreclosures nationwide, and it’s probably going to get a lot worse before it gets better. How did this happen? Let me give you my version:

In response to considerable housing discrimination against minorities and the poor, Congress over the years has been trying to make amends. It passed the Equal Credit Opportunity Act (ECOA) of 1974 which made it unlawful for any creditor to discriminate against any credit applicant on the basis of race, color, religion, national origin, gender, marital status or age. The Community Reinvestment Act (CRA) of 1977 further mandated that no lending institution could discriminate within various low-income and minority neighborhoods nationwide. Failure to comply subjects a fi nancial institution to civil liability for actual and punitive damages.

Talk about the road to you-know-where being paved with good intentions. Banks were accepting loan applications that in ordinary times they would have thrown in the trash. The reason was that as soon as the banks issued the loans, they could package them up and sell them to brokerage houses, which in turn packaged the loans and sold them as mortgage-backed securities.

The banks and securities fi rms were making so much money that they fell into a delusional trap themselves, believing the less-than-stellar securities they were manufacturing actually were sound. Nevertheless, the euphoric mood allowed many people to buy a house for the first time despite less-than-ideal (or sub-prime) credit.

To buy what most times were properties they could not afford by any conventional yardstick, many fi rst-time homebuyers of primary residences and rental properties used adjustable rate loans, which had low fixed rates for the fi rst two or three years of the mortgage. After that, their monthly payments increased signifi cantly.

What happened next shook the world—although anyone not deluding himself could have predicted the mess: those sub-prime adjustable loans started adjusting. For example, people paying $2,700 a month for their mortgage were receiving new mortgage payments at $3,400 to $3,600. And the monthly payments kept rising.

Borrowers began to default. Eventually, so many of these loans went into default that the capital structure of many brokerage firms, banks and hedge funds worldwide became questionable. The financial soundness of the world’s banking system and the ability to create the credit needed for the world’s daily economic functioning was being called into question.

Governments around the world had to bail out troubled financial institutions, leading to credit cutbacks and the recession we’re in now.

Everyone was deluded: the government, banks, loan brokers, securities firms and the sub-prime borrowers themselves. The problem spiraled out of control because there was so much money to be made in believing that a fantasy—taking on more debt than anyone could afford—somehow would work out.

A Solution

When you lose, don’t lose the lesson.—THE DALAI LAMA

The mortgage mess can teach us valuable lessons.

First, we must take responsibility for ourselves. Once you get the hang of it, it’s liberating. Yet taking complete responsibility for yourself is tough, which is why most people would rather blame others or deflect responsibility.

If you get anything from this book, it’s that taking responsibility for your own actions is the key to success and fi nancial and emotional well-being.

You will become empowered by taking full responsibility for your actions and for your role in all situations. If you blame and judge others without looking at your own actions, you will lose the essence of authentic accountability. It takes courage and practice to look at yourself first and foremost in all of your affairs, but it builds character in you and goodwill for your family, your friends, and your community. That’s what I call making a positive impact in your life!

Once you start taking responsibility, you’ll start noticing positive changes. You will feel empowered. You won’t waste time and energy on what someone else should have done. You will stay consistently focused on your role in all of your affairs.

By taking responsibility, you may be surprised to discover that you weren’t as much of a victim or as innocent as you initially believed. That realization is both humbling and enlightening, and it’s where your inner awareness takes place. Can you imagine how much better the world would be if all of us were accountable and took responsibility for our actions?

Let’s start wiping out the cobwebs of delusional thinking by asking a few questions. Do you overspend? Do you have a savings account that will last for three to six months in the event of an emergency? Do you know what your monthly expenses are? Do you know what you are invested in and why?

You probably don’t, and we’ll be giving you the tools to answer those questions over the course of this book. The fact is we all suffer from delusional fantasies, just some more than others. Notice how I use the word “suffer.” Suffering is usually the result of delusional thinking in any financial aspect of our lives. Some psychologists might say that this behavior is a necessary mechanism to cope with certain situations. They might be right. But when it comes to your financial affairs, nothing could be further from the truth. If you don’t meet your financial affairs head-on, you will eventually suffer. The more honest we are with ourselves in all of our affairs, not only the financial ones, the better off we will be, because we will always know who we are, what we are, and what we stand for.

It takes courage and bravery. But the rewards are worth it. If you don’t take care of your financial affairs, who will?

Cars Driven by Millionaires (And Me)

Here are some thoughts from the author of the Millionaire Next Door on car-buying habits of millionaires:

86% of those who drive prestige makes of motor vehicles are not millionaires [having an investment portfolio of $1M or more]. Also, I mention the median price paid for the most recent motor vehicle purchased by a millionaire was $31,367 [for decamillionaires-$41,997].  It is understandable why so many people relate wealth with the price tag of a motor vehicle.  In a study of more than 2,000 respondents, The Wall Street Journal  found that 35% believed that in order to qualify as being rich a person must drive a car that costs $75,000 or more.  If I applied this $75,000 threshold to the millionaires whom I surveyed, more than 90% would fail to qualify.

A few thoughts on this issue as I start looking for a new car in the next month or so:

1. Leaves you with a different conclusion when you now see people driving a Lexus, Mercedes, or BMW, huh? ;-)

2. $31k is still a good amount to spend on a vehicle. I'm looking at all-wheel drive SUVs (to handle the Michigan winters and have room for our growing kids and friends) and I'm not sure I'm going to get that high. So people buying $40k vehicles would still be getting something "prestige" in my book.

3. I thought people reading the Wall Street Journal were smarter than that. $75k? Yikes!!!

4. I know that many of you are "buy quality used cars" buyers. Personally, I like a new car every seven years or so (100k miles) and I can afford it, so consider it one of the ways that I choose to spend/enjoy my hard-earned money. ;-)

And just to throw fuel on the flame of this issue, how about this as a debate question: should I buy, a Honda Pilot, Toyota Highlander, or something else? ;-)

What to Do on a Home Final Walkthrough

The following is an excerpt from Buying a Home: The Missing Manual.

Weeks—or sometimes months—can pass between the time you make an offer on a house and the day you take possession of it. In between, things can happen that affect the home's condition—an appliance might go kaput, the owners' toddler could dump a half-gallon of grape juice on the white living-room carpet, the roof could spring a leak. That's why you put a final walkthrough contingency in your purchase agreement—so you can check for last-minute problems before the house becomes yours.

If the home has been sitting vacant, problems might go unnoticed and unrepaired, until you have the bad luck to discover them after closing. You don't want to find that a burst pipe has flooded the house or that the seller has removed appliances or fixtures that were supposed to convey with the sale. If the seller is still living in the home or has recently moved out, check to make sure no recent damage has occurred—walls and floors can get pretty banged up when the seller moves his furniture and personal property.

What to Look for on the Final Walkthrough

Although a "walkthrough" sounds like a quick, casual check, dispel that notion. Take your time. Don't get distracted by deciding whether the sofa should go against the far wall or under the window—you'll figure that out later. Your priority is to make sure the house is in the condition you expect. If the seller made repairs and you haven't inspected the work, you might want to ask a professional to walk through with you, to make sure the repairs are complete. Also, bring a camera so you can document any problems.

Tip: If you took photos when you toured the home or during the home inspection, take them along to the final walkthrough. Use them to compare the condition of the home when you made the offer with its current condition.

In all likelihood, the next time you walk through the house, it'll be yours. Make sure it's in the shape you expect by doing a thorough check of all areas of the home, inside and out. Here's a summary of what you're looking for:

Outside the home

• Visually inspect the home's exterior, including the roof, siding, shutters and trim, and so on, looking for any changes since you signed the purchase agreement.
• Inspect the driveway and walkways.
• Check the grounds—are the trees and landscaping the same as when you made the offer?

Interior rooms (general)

• Open, close, and lock/unlock all doors.
• Open, close, and lock/unlock all windows, and check for missing or damaged screens.
• In each room, inspect the ceilings, floors, and walls for physical damage (such as dings, gouges, or scuffs that the seller may have left when he moved out) and water damage (stains, dampness, soft spots).
• Check the cleanliness of any carpets.
• Make sure closets are cleaned out.

Kitchen

• Open the fridge to make sure it works.
• Turn on all the stove's burners and oven.
• Test the light and fan in the range hood.
• Turn on the dishwasher.
• Run the garbage disposal.
• Test any other appliances.
• Run both the hot and cold water in the sink; check for clogged drains and in the cabinet underneath for signs of a leak.

Bathroom

• Run water in sink to check water pressure.
• As the water runs, check under the sink for leaks.
• Turn on faucets in the tub/shower.
• Check for clogged drains.
• Flush toilet.
• Turn on the exhaust fan.

Utility room

• Turn on the washer and dryer.

Garage

• Test the automatic door opener.

Attic and basement

• Look for areas that are damp, wet, musty-smelling, or show visible mold.

Electrical system

• Turn each light switch on and off.
• Turn on ceiling fans and exhaust fans.
• Test electrical outlets.

Heating/cooling system

• Turn up the thermostat a few degrees and make sure the heat comes on.
• If the home has central air conditioning, turn down the thermostat and verify that the air conditioner comes on.

Miscellaneous

• Confirm that all conveyances remain in the home.
• Make sure there's no trash or debris left behind.
• Check that the seller removed all his personal property.
• Check that the seller has made all agreed-upon repairs. Tip: Bring along a list of issues that the home inspector found that weren't serious enough to require repairs. Check that these problems haven't gotten worse since the inspection.
• Ring the doorbell.
• If there's a security system, test it. Tip: Before the final walkthrough, make sure the security service has your phone number as the designated contact. You don't want to set off the alarm and have no way to stop it.
• Make sure you have the owner's manuals for all major appliances (furnace, central air conditioner, and so on).
• Test railings on stairs, decks, and porches to make sure they're firmly attached.
• Check that any built-in shelving is stable.
• If there's a fireplace, make sure it's clean; open and close the flue.

Tip: If the seller has left junk behind on the property, find out how much it would cost to have it hauled away. Ask the seller to put that amount of money into an escrow account and get a written agreement that the seller will remove the junk by a certain date—if not, you can use the escrow money to pay someone to take it away.

Big Difference Between Average and Median Net Worths

Here's an interesting post from Thomas Stanley (the Millionaires Next Door author) that sheds some interesting light on average versus median net worths in the US:

The average net worth of an American household is $434,782. However, there is a major problem with this wealth figure.  When it comes to expressing the net worth/wealth of a household the average figure is very misleading.  The presence of high net worth households, billionaires like Buffet and Gates, for example, highly skews the distribution and thus the average in an upward direction. 

The median measure of household net worth paints a much more accurate picture of the character of wealth in America than does the average.  The median is that of the typical household, the mid point range of all of the more than 115,000,000 households ranked from bottom to top along the net worth scale. 

Today the median net worth of an American household is $91,304.  It now costs more than this amount for a one year stay, drugs excluded, in a high grade nursing home. Therefore, less than one half of the households in this country do not have enough to pay for such a service even if they sold everything they owned and worked for.

The $91,304 net worth figure also is indicative of something else.  The typical American worker who becomes unemployed today has only about two years of wealth to live on before he hits economic ground zero.

Most American households are nowhere near being financially independent.  Nor will most be able to retire in comfort.  Yet there is more bad news.  What if the equity in homes and motor vehicles is factored out of the median net worth figure?  Then the median figure is about $34,000 or about 2/3 of the annual median income generated by a typical American household today.

A few thoughts on these points:

1. Ugh. $34,000. I am almost speechless...

2. Not surprising to me. I've quoted various stats/research showing that net worths in the US were low (though specific data is sometimes hard to come by). And you know what I think of the average American's ability to save/invest. This just confirms it.

3. As one commenter pointed out, it's not that Americans don't have high incomes, it's just that we spend too much of it. We've discussed previously that there are reasons why high incomes don't translate into high net worths. Yep, overspending. And overspending is the worst money move anyone can make.

4. The numbers are for the total population and are not age-adjusted. I'm guessing that older people would have higher median net worths and younger people wouldn't be as well off. That said, the numbers are so low that no one age group is likely to be doing that well even when separated from the pack.

5. Personally, I'm way above these net worth numbers (both median AND average). I'm sure many of you reading this today are as well.

6. As the post goes on to say, these numbers have huge implications for our country. Who takes care of an aging population that's living longer but doesn't have the financial resources to pay for their own care? It's a big, big issue for our country and one that's likely too big for the government. The author's solution? We all need to save and prepare to take care of ourselves and our own families -- and not leave it to others.

Best of Money Carnival

The Best of Money Carnival is now up. Congrats to all participants and especially the winning post, How I Run My Home-Based Business.

Enjoy!

Withdrawing Money During Retirement

The following is an excerpt from Personal Investing: The Missing Manual.

After you spend decades living off a paycheck and saving money for retirement, selling investments so you have spending money can be downright unsettling—it's the exact opposite of what you've done your entire life. In addition, you worry about having to sell investments during a down market and hurting your portfolio. Meanwhile, you have enough on your mind wondering whether you'll get to the local diner in time for the early bird special. You can balance withdrawing cash from your portfolio and making sure your money lasts. This section tells you how.

Figuring Out What You Can Spend Each Year

The whole point of a retirement plan is to save enough money so you can live the way you want during retirement. However, when you retire, you have to be realistic. If you want your money to last, you can spend only a certain amount each year. That amount depends on the sources of income you have:

• Social Security benefits.
• Pension benefits, if you qualify for a pension.
• Part-time work.
• Income from your portfolio.
• Withdrawing principal from your portfolio.

If you're lucky and frugal, you may receive enough money from the first four sources to pay your living expenses. However, most people have to withdraw principal from their portfolios to make ends meet. If you fall into this category, here's how to figure out how much you can withdraw from your portfolio in income and principal each year without worrying about running out of money:

1. Figure out the real return you expect from your portfolio between now and when you die.

The real return is the investment return you expect, reduced due to the effects of inflation. For example, if you expect to earn 7% and inflation is 3%, your real return is 3.9%. (To calculate the real return for yourself, use this formula: (1 + investment return)/(1+inflation rate) – 1, and then multiply by 100 for a percentage.) For simplicity, this example assumes the real return is 4%.

2. Use the real return you calculated to figure out how much you can withdraw during your first year of retirement.

Say your portfolio is $500,000. Multiplying your portfolio balance by the real return ($500,000 x 4%), you see that you can withdraw $20,000 the first year.

3. Calculate the withdrawal for each subsequent year by multiplying the previous year's amount by the inflation rate.

In this example, you'd increase your second-year withdrawal by 3%, making it $20,600. You'd withdraw $21,218 in the third year of retirement.

Note: If you opt to withdraw only the income from your portfolio, you may be tempted to weight your portfolio heavily on the bond and REIT side of things. Although you'll be able to withdraw more each year, your portfolio won't grow fast enough during retirement, and you'll run out of money sooner.

Creating a Retirement Paycheck

The withdrawal strategy in the previous section assumes that the annual return is the same each year. But you know that the market has good years and bad years. That's why you set up a cash reserve to cover several years of living expenses. That way, you won't have to sell investments at a loss to pay your bills. As long as you have a cash reserve, you can set up automatic withdrawals to act as a replacement for the paycheck you grew accustomed to.

Using the $20,000 first-year withdrawal from the previous example, here's how you use your cash reserve to set up a retirement paycheck:

1. Set aside a cash flow resesrve for 5 years of living expenses.

To keep things simple, multiply your first year's withdrawal by 5 (totaling $100,000 in this example).

2. Put 1 year's worth of expenses ($20,000) in an ultra-low-risk savings account, like a money market account.

You don't earn much interest, but you don't lose any money either.

3. Invest the second year's living expenses (another $20,000) in a low-expense, short-term bond fund.

Invest in high-quality bonds to keep your risk low (see Section 7.2.1.1). You'll earn a better return than you do in the money market account without much additional risk. If you invest in municipal bonds, your taxes on the income will be low, too.

4. Invest the remaining 3 years of living expenses in short- and intermediate-term bond funds.

These investments are still relatively low risk, but provide slightly higher returns than the rest of your cash reserve, which helps protect your money against inflation.

5. Set up a monthly transfer from your money market account or savings account (the one in step 2) to your checking account so it acts as your retirement "paycheck."

You can live on this money just like you did with your paycheck while you were working. In this example, the monthly amount starts at $1,667. Each year, you increase your monthly withdrawal for inflation, so the monthly amount in the second year is $1,717.

6. Every year, replenish your cash reserve.

Remember, your cash reserve has to increase for inflation. So, if you started with $100,000, the next year's reserve would have to be $103,000.

Because you have to sell investments to refill your cash reserve, choose what to sell wisely. If you can sell some investments without taking a loss, sell the investments that also keep your overall asset allocation on target. You can also use these sales to get rid of investments that aren't meeting your expectations. If stocks and bonds are both in the toilet, sell short-term bonds first (they drop the least of any duration bond, as explained on page 138). That way, you give the rest of your portfolio time to recover.

Because you have 5 years of expenses in your cash reserve, you have time to wait out a bear market. If all your investments have lost money, you can wait before replenishing your cash reserve. For example, you may choose to delay adding to your cash reserve for a year. Then, when the market recovers, you can sell investments to top off your reserve.

Tip: If you have money in traditional IRAs or 401(k)s, you have to take required minimum distributions. When you refill your cash reserve, be sure to withdraw your RMDs first. After that, it usually makes sense to withdraw the additional money from your traditional IRAs and 401(k)s, so money in Roth IRAs can grow for as long as possible. (Roth IRAs don't have RMDs, so you can leave the money in as long as you like.)

The First and Last Times that Money is Mentioned in the Bible

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Ok, I'm on a Bible quirk kick. Lately I've been finding interesting tidbits about the Bible and Money (such as last Sunday's post on the cost of Roman citizenship). Today, I'm going to share something else I found interesting along these lines.

A couple years ago I bought a new Bible. I then read through it and highlighted every verse that had to do with money in some form or fashion. As you might imagine, there's a lot of yellow in this book -- because the Bible talks a lot about money.

I use the Bible often to easily find verses for my Sunday posts. While looking through it recently I wondered what was the first set of verses where the Bible addressed the issue of money (want to guess before I tell you?). Here's what I have as the answer (let me know if you find something that appears earlier):

When they grew up, Abel became a shepherd, while Cain cultivated the ground. When it was time for the harvest, Cain presented some of his crops as a gift to the Lord. Abel also brought a gift—the best of the firstborn lambs from his flock. The Lord accepted Abel and his gift, but he did not accept Cain and his gift. This made Cain very angry, and he looked dejected.

“Why are you so angry?” the Lord asked Cain. “Why do you look so dejected? You will be accepted if you do what is right. But if you refuse to do what is right, then watch out! Sin is crouching at the door, eager to control you. But you must subdue it and be its master.” Genesis 4:2-7 (NLT)

Most of you know what happens from here. Cain is mad and ends up killing his brother. Then God asks him where his brother is and Cain answers in what is still a phrase used now and then these days: "Am I my brother's keeper?"

Of course God knows what happened and punishes Cain, banishing him from the area and cursing his efforts to grow crops. Cain goes to live in a place "east of Eden." Some of you may remember that this became the title of a popular John Steinbeck novel, a 1955 movie (James Dean played the lead), and a 1981 TV mini-series.

I often wondered why Cain's offering was not accepted and Able's was. I've heard it taught that the reason was because Cain offered "some of his crops as a gift to the Lord" while Able offered "the best of the firstborn". Notice that Cain just gave "some" while Able gave "the best and first." What implication does this have for us today? Think about it in context of our own giving and, in particular, whether giving should be done on gross or net income. It certainly conjures up some interesting thoughts. ;-)

Anyway, see how these mini-tidbits can be so fascinating. Ok, maybe it's just me. ;-)

Next I wondered what the last time was where the Bible mentioned money (again, correct me if I'm wrong). I found these as the last money-mentioning verses (FYI, they are talking about a wicked city, though in Revelation everything seems to have two or three different symbolic meanings):

“The fancy things you loved so much are gone,” they cry. “All your luxuries and splendor are gone forever, never to be yours again.”

The merchants who became wealthy by selling her these things will stand at a distance, terrified by her great torment. They will weep and cry out, “How terrible, how terrible for that great city! She was clothed in finest purple and scarlet linens, decked out with gold and precious stones and pearls! In a single moment all the wealth of the city is gone!”

And all the captains of the merchant ships and their passengers and sailors and crews will stand at a distance. They will cry out as they watch the smoke ascend, and they will say, “Where is there another city as great as this?” And they will weep and throw dust on their heads to show their grief. And they will cry out, “How terrible, how terrible for that great city! The shipowners became wealthy by transporting her great wealth on the seas. In a single moment it is all gone.” Revelation 18:14-19 (NLT)

BTW, you could say that Revelation 22:12 was about money because the Lord said he'd "repay" people for their deeds, but that's a stretch IMO.
 
What strikes me is the phrase, "In a single moment it is all gone." I know it wasn't "in a single moment", but the recent collapse of the US economy seemed like it was pretty fast. So this phrase really hit home with me.

And I wonder -- is this a real city the Bible is talking about? And if so, what city is it (Revelation is forward-looking, so it's either a current city or one yet-to-be.) The Bible calls it "Babylon", but what's the name in current times?

Again for this week, no spiritual thoughts -- simply some things I found interesting and thought you might as well. ;-)

Different Types of Real Estate Agents and What They Do

The following is an excerpt from Buying a Home: The Missing Manual. At the end I've included two sidebars (in red) on related topics.

In your quest for a new home, the person you'll interact with most is your real estate agent. She's a lot more than a smiling face in the classifieds, hovering over pictures of homes for sale. She's a licensed professional, authorized to negotiate and carry out the sale of real property on behalf of a buyer, a seller—or sometimes both simultaneously. Read on to learn the different roles real estate agents play, how they make their money, and—most importantly—how you find one who works well with you.

Agents and Brokers and Realtors

Every state and the District of Columbia require real estate agents to hold a license, but not all licenses are the same. Most states define two types of real estate professionals: broker and agent. But you may come across several other terms as well. Here's the lowdown:

• Real estate broker. This is an experienced real estate professional who has met state requirements to own, manage, or operate a real estate company. Licensing requirements usually include experience in the industry as a sales agent, advanced coursework, and passing an exam. (In some states, attorneys can become real estate brokers, even if they've never worked as real estate agents.) The broker in a real estate firm is its "boss," the person who takes responsibility for all the agents who work there. Depending on where you live, you may hear real estate brokers referred to as principal brokers or qualifying brokers.

Note: Some licensed brokers choose not to run their own firm but to work as agents for another broker in that broker's firm. These people are called associate brokers.

• Real estate agent. This is someone who's taken classes and passed a state-administered exam to get a license to sell property. The educational requirements cover the specific state's real estate laws and practices. Real estate agents are associated with a real estate broker and act under that broker's authority. Depending on where you live, real estate agents may be called subagents, sales agents, real estate salespeople, or, confusingly, brokers.

As you look for a home, you'll probably work primarily with a real estate agent. Real estate agents can represent the seller of a house, the buyer of a house, or both:

• Seller's agent. Also called a listing agent, this person works exclusively for the seller. Most often, you'll deal with the seller through the seller's agent. Except in cases where you have a specific agreement with an agent to represent you as a buyer (see the next item on this list), you should assume that any agent you work with is a seller's agent. Even if an agent didn't personally list the seller's property, any agent involved in the sale of a property is considered a subagent of the listing agent—unless that agent has a contract to represent only you, the buyer (see "Buyers' Agent" below).

Note: Agency means representation, and an agent is a representative. If you enter into an agency agreement with someone, it means that you've both agreed that that person will act as your representative.

• Buyer's agent. A buyer's agent works solely for you the buyer, and represents your interests throughout the real estate transaction, from initial house hunting through closing the deal. Buyer's agency is a formal agreement, signed by you and a particular real estate agent, saying that the agent represents you and your interests in buying a home.

Tip: In a transaction, the buyer's agent is called, confusingly enough, the selling agent. To keep from being muddled by the terminology, think of agents' roles this way: In transactions that have both a listing (seller's) and a buyer's agent, the listing agent puts a home on the market and represents the current owner; the selling agent facilitates the sale by representing the buyer who makes that sale possible.

• Dual agent. This is a single agent who represents both the seller and the buyer in the same transaction. In most states, dual agency is legal so long as the agent gets the consent of both the buyer and the seller. But as the box on Section 4.1.2 explains, dual agency can lead to conflicts of interest.

Note: Dual agency can also occur when two agents who work for the same broker represent both parties in a real estate transaction. The box on Section 4.1.2 tells you more.

As a homebuyer, you should work with a buyer's agent. You want to be sure that your interests are represented in negotiations and that your agent keeps your confidential information to herself. Later in this chapter, you'll find out how to choose a good buyer's agent.

Note: If a real estate agent fails to let you know that you're in a dual agency situation—that is, the agent represents both you and the seller or both your agent and the seller's agent work for the same firm—you may be able to revoke the purchase agreement you signed and sue the agent for concealing the relationship.

What a Real Estate Agent Does

Real estate agents are experts in local real estate: They monitor the market daily and look for housing trends (in prices, inventory, location, and so on). An agent tells you about available houses in your price range and takes you on tours of homes that interest you. Much of an agent's day is taken up by phone calls, meetings, and home tours.

For sellers, a listing (seller's) agent:

• Researches recent sales of comparable homes to help determine an asking price
• Helps sellers prepare their homes for sale
• Lists the home with the Multiple Listing Service (known in the trade as the MLS, a searchable list of homes for sale within a particular region)
• Advertises the home through various channels, which may include the Internet, classified ads, real estate magazines, and on-site advertising (the latter usually comprising a "For Sale" sign on the lawn and takeaway information sheets about the home)
• Takes other real estate agents on a walkthrough so they can tell their clients about the home
• Hosts open houses
• Presents offers from interested buyers
• Negotiates the terms of the sale

As a buyer, you can expect a real estate agent (either the seller's agent or your own) to work with you in these ways:

• Listen to your priorities in looking for a home, including your price range
• Contact listing agents to check availability and schedule showings
• Show you suitable properties
• Notify you as new properties appear on the market
• Suggest sources of financing. Tip: You're not bound to work with any lender recommended by an agent. Section 8.2 has tips for finding the best mortgage.
• Help you write a purchase offer and present that offer to the seller
• Negotiate with the seller on your behalf
• Write a purchase-and-sale agreement (Section 10.2.1)
• Set up and attend the home's appraisal and inspection
• Review disclosure statements and let you know about problems with a property. Tip: Agents know what to look for in disclosure statements and other documents. Although it's important to find an agent you like, the most important quality an agent has to offer is his expertise.
• Deal with contingencies (Section 10.2.3)
• Provide information to your mortgage officer, real estate attorney, and escrow officer
• Coordinate with other parties to schedule the closing
• Attend the closing

Note: There are some things a real estate can't tell you by law. If you have questions about a neighborhood's character, diversity, crime rate, or schools, you have to look elsewhere for the answers. Federal fair housing laws prevent real estate agents from "steering" clients toward one neighborhood or away from another one. The idea behind the law was to prevent discrimination—to prevent real estate agents from deciding whether a client is a good or bad fit for a particular neighborhood. Despite the law's good intentions, it can be frustrating to have basic demographic questions go unanswered. Chapter 3 suggests ways to find those answers.

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Sidebar #1: Frequently Asked Question: Real Estate Agent vs. Realtor

What's the difference between a real estate agent and a Realtor?

REALTOR® is a registered trademark of the National Association of Realtors. Any real estate agent who claims this title must be a member in good standing of the NAR. To join the NAR, agents agree to abide by a code of ethics that includes honesty, putting clients' interests ahead of their own, and disclosing all relevant facts about a property.

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Sidebar #2: Up To Speed: Dual Agency

You're just starting to look for a new home and haven't yet selected a real estate agent. One weekend afternoon, you drive through the neighborhood where you want to live and see an Open House sign. You stop to take a look. Inside, everything is perfect. The house has the right number of bedrooms and bathrooms, the kitchen is a cook's dream, and the place is in move-in condition. "I love it!" you tell the smiling real estate agent who's hosting the open house. "I want to make an offer."

"Great!" she replies. "Let's write up the paperwork."

She looks nice. She's friendly and helpful. She's eager to help you buy the home. But there's just one problem. She's already representing someone: the seller.

Real estate agents have a fiduciary duty to their clients. That means that a real estate agent—whether a seller's or a buyer's agent—is legally bound to represent your best interests in any transaction. But when you start negotiating with a seller's agent, your best interests don't always line up with theirs. Yes, you want to buy the house and the seller wants to sell it. But you want to buy the house for the lowest price possible, and the seller wants to sell it for the highest price possible. See where the conflict comes in? In that situation, how can the same agent have the best interests of both of you at heart?

Most states allow dual agency, on the condition that the real estate agent tells both you and the seller that she's representing you both—and all parties sign a document agreeing to that. But before you agree to dual agency, think long and hard about whether you want the seller's agent representing you, too. For example, you might tell your agent confidentially that you've been preapproved for a mortgage of up to $250,000, but you don't want to bid more than $230,000 on a particular home. The agent knows that the seller wants to get at least $245,000 for that same home. Although a good agent always keeps your confidential information confidential, it may be tempting in this situation to try to convince you to raise your offer.

Dual agency also comes into play when a homebuyer and seller are represented by two different agents who work for the same broker. This kind of dual agency may be called designated agency, and if your state allows it, you'll probably have to sign a statement saying you agree to have the same agency represent both you and the seller. Some agencies pay agents a bonus for selling in-house listings because the agency makes more money in such transactions—conflict of interest, anyone? If you want to buy a home that's listed with your buyer's agent's brokerage, make sure that your interests come before the broker's.

Understanding Investment Risks

The following is an excerpt from Personal Investing: The Missing Manual.

You can't avoid risk no matter how you invest your money. You worry that your nest egg will spoil from stock price gyrations or mayhem in the markets. At the same time, you know inflation is picking away at your boiled nest egg every moment. Some risks decrease over time, while others get worse. Here's a quick review of the different types of investment risk and how you can manage them:

• Inflation risk. Chapter 1 showed just how dangerous inflation (the steady increase in prices) can be. It's the one investment risk that gets worse with time. The higher returns of owning stocks long-term are the sure antidote to inflation risk.

• Economic risk. This is the risk of losing money in investments because the economy tanks. The economy tends to cycle up and down every 5 years or so. The down cycle, known as a recession, can last from a few months to, occasionally, a few years. As with inflation, owning stocks for longer than the typical economic cycle helps overcome economic risk. You can also avoid economic risk by keeping near-term spending money in safer investments like short-term bonds or a savings account.

• Market risk. Sometimes, perfectly good investments go down in value just because the market as a whole goes down. And sometimes, mediocre investments go up because the overall market goes up. The key to managing market risk is researching the investments you buy and sticking to your plan as long as those investments are still fundamentally sound.

• Equity risk. Many investors are afraid of losing money on a bad investment, which is called equity risk. True, companies can go under, taking your investment with them. But equity risk is easy to manage by diversifying your portfolio, that is, by buying several different investments to dilute the effect of one underachiever.

• Holding period risk. This is the risk that you have to sell an investment when its price has fallen. It's a good idea to keep some money in short-term investments so you don't have to sell long-term investments when their values are down.

• Reinvestment risk. When you invest in bonds, bills, or even certificates of deposit and hold them until they mature, you face reinvestment risk, the risk that interest rates are lower when your fixed-income investment matures and that you have to reinvest your money in a new investment with a lower interest rate. Unfortunately, reinvestment risk is a fact of life with any kind of fixed-income investment you hold to maturity.

• Interest rate risk. If you buy a bond and sell it before it matures, you face interest rate risk, the risk that the bond price drops because interest rates rise.

• Currency risk. If you invest in foreign stocks or bonds, currency risk comes into play. If the dollar falls compared to your investment's currency, your investment loses value. Currency exchange rates work in your favor when the dollar is strong compared to other currencies.

Tip: When your portfolio grows large enough or you're well ahead of your plan, you may yearn to gamble on higher-risk investments, such as micro-company stocks or high-yield bonds. As a rule of thumb, the average investor shouldn't invest more than 10% in high-risk investments.

Carnivals for the Week of Aug 23

Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.

Here are some of the carnivals Free Money Finance was in this week and my posts that were included:

• The Wealth Builder Carnival - Three Myths About Earning More Money 
• Carnival of Personal Finance - How to Hire a Home Inspector 
• Festival of Frugality - Where You Buy Something Makes a Big Difference in Cost

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

Talking about Deflation

The following is a guest post from Squirrelers. It's a bit heavy on the economics side of personal finance, but I know many of you like to discuss those sort of topics, so I'm going with it. For those of you who prefer only true personal finance posts, stay tuned -- a new one will be up shortly, as usual. ;-)

Many of us who take an interest in personal finance understand the concept of “a dollar today is worth more than a dollar tomorrow.” We realize that the present value of money today exceeds the present value of the same amount of money at some point in the future. This is due to inflation, which erodes the purchasing power of money over time. Looking at it another way, if you buy a cup of coffee for a dollar today, it might cost you more next year – say, $1.05.

Lately, the financial news has brought us discussion of a completely different concept: deflation.

When you first think about it, deflation sounds like a good concept, in that it’s the opposite of inflation. A dollar tomorrow will be worth more than a dollar today, even if stuffed under the mattress. Pretty good deal, eh?

No. In reality, deflation is not good for the economy, and the effects can wreak havoc with the ordinary investor’s portfolio.

Downward-trending prices may seem great initially, but this leads to pressure on businesses. The response is often a reduction in workforce, which in turn causes a reduction in demand as incomes drop. That’s not good for stocks. Thus, the spiral begins.

Governments may try to lower interest rates to stimulate spending and counteract these deflationary effects. Looking at our current interest rates, they are at remarkable lows compared to long-term averages. The issue is that there is only so far these cuts can go.

Japan saw remarkably low interest rates for years, as it has been in a longer-term deflationary cycle. That country was rocked by a sharp decline in real estate prices about 20 years ago. Does that part sound somewhat familiar to those of us here in the U.S?

Now, I can’t predict whether or not this will be long-term economic cycle we are in. Who knows, we could very well be headed for an inflationary period after a few years. 

Regardless, I suspect that while extended deflation may not by any means be a sure thing, it’s certainly a real possibility at this point.

In light of this, it’s interesting to consider what would be a good hedge vs. deflation. Some people are proponents of gold as a hedge; I had a recent discussion with a friend who suggested gold. This same friend correctly called the real estate collapse, despite many people – including me – thinking he was way off base. I’ll give him credit – he was right. The thinking is that if the money supply increases, inflation could be around the corner. In that case, gold would be a hedge.

That said, my take is that thinking purely about deflation, the following are good defenses:

1. Cash. 

2. Short-term Government Bonds

My questions are as follows:

1. Do you think we are beginning a period of deflation that is at least short-term, if not greater – or are these fears unfounded?

2. If deflation takes hold of the economy, how would you reallocate your investments? Would you hedge with cash/short-term government debt, gold, or other vehicles?

Save Money by Donating Things You Were Going to Throw Away

As I noted in Update on Our Shopping List, we recently got a new door. We went through quite a process to shop for the door and the company to install it that we felt worked best for our family, home, and budget. It took us several months from start to finish, but in the end we completed the process with a door we love (and it makes the front of our home look so much better!)

When the installers were set to come and place the door, my wife got a brainstorm -- why not call Habitat for Humanity and see if they could use the door? It wasn't in the greatest shape, but it still had some life in it. In addition, it was a nice, glass, double door that someone could get for a steal because it was used.

Unfortunately, the local Habitat for Humanity chapter didn't even return our calls (my wife did finally speak to someone who said she'd have a contact call us, but we never heard from anyone.) But my wife talked to the guy we got the door from and he told her about a local charity that accepted and needed door donations. My wife called them, and the day after our old door was taken out, they stopped by our house and picked it up.

My wife asked for and they gave us a tax receipt for the contribution. She then asked our door person what he estimated as the value of our door since we had no clue. He said $400.

If we were, say, in the 28% tax bracket, the simple act of finding a charity that wanted, needed, and would take the door saved us $112 in federal income taxes. Not a fortune, of course, but it's $112 we didn't have before and that we earned for little effort. I'll take it!!!!

Lesson for today: before you throw anything out as trash, ask yourself if there's a charity that might want it. If so, make it a contribution, get a receipt, and save yourself some money by reducing your taxes.

Deciding When to Sell a Mutual Fund

The following is an excerpt from Personal Investing: The Missing Manual.

If a fund is performing badly, investors are prone to making one of two mistakes. Some sell in a panic, while others hold onto the fund hoping it will turn things around. Most funds give a few warning signs before they crash. If you learn to spot those warnings, you can review a fund that looks like it might be headed for trouble, make an educated decision about selling, and possibly sell before the fund hits the skids. Here are fund red flags to watch for:

• Departing manager. If you own an actively managed fund, the fund manager delivers the fund performance. If the longtime manager is leaving, but co-managers or the management team is staying in place, don't sell just yet. If brand-new managers are coming in, check out their track record to see if their experience is on par with the old manager's reputation. If it isn't, consider replacing the fund.

• Proposed fund merger. Fund companies get rid of their dogs by merging those funds into other funds. If you learn that your fund is merging with another, evaluate the new fund as you would a brand-new fund purchase to make sure it's right for you.

• Changing investment strategy. Review your funds' investment objectives and the securities in their portfolios. If you notice that a fund has started to invest differently by, for example, buying large-cap stocks instead of mid-cap stocks, you may want to replace the fund with one that fits your financial plan.

• Big increase in assets. Really successful funds rake in oodles of new money. That's not necessarily good for future performance, because the fund managers may have a hard time investing all that cash. Small and mid-cap stock funds are especially vulnerable, because it's hard to find enough suitable investments to deliver the same kinds of returns they've produced in the past. If the fund management closes the fund to new investors, don't sell. They're watching out for your best interests by keeping the fund at a manageable size. If the fund continues to accept new investments, watch the fund's performance closely, and get out if it starts to falter.

• Bad long-term performance. Don't sell a fund because of poor performance for a short period like 3, 6, or 12 months. The fund may do better in up markets or down markets, or may have gotten temporarily derailed. But if performance falls behind the comparable market index and the competition year after year, look for a replacement.

• New or higher fees. Higher fees take money away from your investment returns, so they're never good. But, if the amount's small (less than 0.1%) and the fund is doing well, it's usually worth staying put. If a fund makes large increases in fees or increases its fees regularly, start looking for a new one.

• Turmoil. If a fund family is bought or sold or a star manager leaves (taking staff with him), that chaos can distract fund managers from their jobs and drag returns down.

• Rising turnover rate. If the turnover rate increases and stays at higher levels, your expenses and tax bill are likely to climb as well.

Tip: Never trade in a fund based on a hot tip you heard around the water cooler at work, at the gym, or from your landscaper. Don't automatically replace funds just because your broker gives you a suggestion. Always do your homework first.

Even if red flags aren't waving, you may decide to sell for other reasons:

• You need the money. Selling a fund because you need the money for something is perfectly OK. That's why you invest in the first place.

• Balance your portfolio. When you review your portfolio and find that your asset allocation is slightly out of balance, you should sell fund shares in the areas that are over-allocated and buy more in the areas that are under-allocated.

• Changing goals. If your life changes, so will your goals. If your child earns a big honking scholarship, you can look at reinvesting the college savings you've amassed into something else.

• Sleep. If you're losing sleep over your investments' performance, it's time to make some changes. Ratchet down the risk until you sleep comfortably at night.

• Taxes. If you sell a fund that generates capital gains, you may decide to sell a fund with losses to offset the gains.

Tip: You can find out how much you'll pay in taxes and fees when you sell by running your fund numbers through AOL's Wallet Pop "Should I sell my funds now and invest the money elsewhere?" calculator (http://tinyurl.com/yl8bn7s).

Help a Reader: Retirement Saving

Here's an email I recently received from a reader:

My wife may start earning self-employment income from some contract work a few days a month on her days off from her full-time job. We’re considering putting all of it away for retirement. What would be the most advantageous vehicle for this? Do any other types of retirement accounts offer any benefits in this situation superior to increasing the amount I save in my employer’s 401k plan?

I work full-time for a large company with a good 401k plan and save well beyond the company match, in part because the plan offerings at my wife’s employer, a non-profit, are poor, and provide no match. We also fully fund a Roth IRA every year.

What's your advice for him?

My Comcast Saga Continues

Here's the latest on my dealings with Comcast. For background, see this post and work your way backwards through the links.

My annual promotion with Comcast ($19 including tax for basic service plus sports package) was set to expire in early August. Here's the process I went through to deal with the issue (since I didn't want to pay the "regular" rate they wanted to move me to):

• In mid-July I called Comcast and asked for the best deal they could offer me. I didn't call "cold" but used a person that "my contact" (the guy who has been giving me Comcast's version of customer service for the past few months -- BTW, there was a mistake on EVERY bill they sent me) set me up with. I told the person I was direct to that my offer was expiring and that I was looking at options and pricing from various carriers. She was very nice and said the best she could do for me was $40.85 per month.
• I told here this was too high and she said that's the best she could do since she was only in "sales". But she could forward me to the "customer retention" (or whatever she called it -- something similar) department and perhaps they could help me. ;-)
• The customer retention person was less helpful than the sales person. She told me that the best she could do was $40.85 (the same thing I'd just heard!) and that was that (and she did it in a surly tone.) I said that was in no way acceptable and I set up a cancellation notice with her so that my service would end the day before the "new" rate "automatically" kicked in.
• I went so far as to have them send me a pre-paid box mailer so I could send back all my equipment. I was either going to go with satellite, antenna and web combo, or potentially give up TV altogether for awhile.
• I called DirecTV because I had a special offer through AAA (more on that in a future post), but by the time I added in a DVR (technically the DVR was "free" but I had to pay $5 a month for the DVR "service") as well as the soccer channel I wanted I was up to $45 a month for the first year. And I had to sign a two-year deal with them -- with the second year being around $70 a month. Plus I didn't want a satellite dish hanging off my house, so I decided to pass.
• At this point I started thinking about alternatives. I thought about getting an antenna for the local stations I wanted, then using a friend's satellite service and DVD recorder to record the soccer matches I wanted to see. This along with the web would certainly get me the programming I wanted to see most.
• But when I really thought about this option, I realized that the hassle wasn't worth it. It would take lots of time and effort to tape/transfer the soccer matches I wanted to watch. And without a DVR we would spend a lot more time watching the programs we would get (we can watch an hour show in 40 minutes with a DVR by skipping the commercials). In addition, we'd have to watch the shows when they occurred (unless we bought a DVD recorder) versus when we wanted to with the DVR, making TV viewing even less convenient. At this point, I decided I would stick with Comcast if I could get a decent deal from them (which I defined to be somewhere in the $30 per month range). In reality though, I may have paid the $40.85 per month at this point since an hour of my time is worth more than $40 and I would be wasting much more than an hour each month with my alternative arrangement.
• So I went to Comcast's online chat in early August (a few days before my current deal was set to expire). I had seen on other blogs how this could be a useful strategy at getting better deals than by calling in. After an hour online with someone who didn't speak (write) very good English and had a bad connection (he kept getting bumped off our chat), the rep told me that the best he could do was in the $50 per month range. Yikes! I asked if that was the best he could do. He said it was because I had a cancellation notice on the account and all he could offer me was the going rate. He suggested I call back to what he called a "local number", get the cancellation notice removed, then someone could help me online. I asked if the local number was really local since it was a toll free number. He said it was -- to call it and they would transfer me to the local branch.
• I called the number and, as I had suspected, it was a national sales number. That's the bad news. The good news is that the guy who answered the phone both knew what he was talking about (when he looked at my records) and was helpful. He told me that there was a one-year promotion on the package I wanted (Limited Basic plus Sports Entertainment package) of $27 per month. Not bad. Better than the $41 price and closer to my bargain-bin $19 one-year deal I had snagged previously. He also said that if I wanted substantially more channels that I could get the Digital Economy package plus Sports Entertainment package for $32 per month ($35 with tax. FYI, this is a savings of $15 per month, at least according to the guy on the phone. BTW, this includes HD and DVR as well.) Sold! I got what I wanted, a good number of extra channels, and a few channels the kids wanted (namely Disney) for less than what I was originally going to pay just for the basics. Plus I'd be saving time versus my alternative plan and I didn't need to do anything (including having equipment installed) -- Comcast was already hooked up at my house.
• I still had two days on my old deal (with the 300 channels Comcast had given me for free for messing up my cable previously), but by that evening the new package was implemented -- the new channels were on and the old channels were off. It's funny that it changed so quickly. Remember when Comcast had to ADD channels to my service? It was a two-week process and we had to be home for a service tech to do the work. But when it was taking off channels -- POW, it happened right away! Anyway, I didn't call to get my two days back. I figured it would be more hassle than it was worth and they'd probably mess it up anyway.

Here's what I learned in this process:

1. Don't cancel your service unless you REALLY want it cancelled. Doing so may limit the deals you can get. I thought it would be the opposite -- that they'd know I was serious and would deal with me -- if I cancelled. But this was not the case at all -- at least with Comcast and according to the guy online.

2. Saving by using the chat could work, but I don't think it's a slam dunk. I think it depends more on who you get to deal with -- either on the phone or online -- that makes the difference.

3. Keep trying if you want a better price. It could have been that the promotion that eventually saved me money wasn't available in July when I called. But I called back in August and it was. So if you don't get a price you like, wait a week or so and try again. Perhaps they'll be having a promotion on the service you want at that time.

4. Consider cost of time/quality when deciding what to do. I could get almost all of the programming I want and save a good amount of money if I went with my antenna/web/friend plan noted above. But is all that time and hassle worth saving a few hundred dollars a year? Not for me. Time/convenience is worth something after all, and in this case I was willing to pay a bit extra for it.

So I have another year-long deal with the devil. We'll see how it goes and whether or not I re-up next year at this time. A month into it, all is well. But I have a feeling the year won't be smooth sailing. ;-)

The Best Way to Spend College Savings

The following is an excerpt from Personal Investing: The Missing Manual.

As you learned at the beginning of this chapter, a college education provides plenty of opportunities for spending money. The trick is spending the money you save in a way that stretches your savings and increases your child's financial aid. Here are several steps that help you do just that:

1. Start by spending assets held in your child's name, because these assets reduce your child's financial aid eligibility.

These assets include Uniform Gifts to Minors Act accounts and other savings accounts in the child's name. For example, you can use these assets for college-related costs that occur before you fill out financial aid forms, such as application and testing fees and college visits.

2. Divide your college savings by 4 (the number of years you hope your child will take to complete college), and spend a quarter of the savings each year.

This approach ignores the unfortunate tendency of college costs to rise faster than inflation. For "extra credit," you can use the average rate of college inflation (about 6%) to calculate how much to spend each year.

To calculate the first two years of spending, multiply the one-fourth by the college inflation rate. For example, if you have $5,000 to spend each year, the first year's spending is $4,450, and the second year's is $4,717. To calculate the third and fourth years' spending, increase the one-fourth by the college inflation rate, $5,300 and $5,618, in this example.

Tip: If you use current income to pay some expenses during your child's first two years of college, you can postpone tapping into your college savings. That delay leaves more money to cover the last two years and also gives your savings more time to grow.

If what you've saved isn't even close to what you have to pay, you're not alone. Most parents have to dip into income, take out loans, or do both to make up the difference between savings and actual costs. Here are some steps to take to fill in the gap:

1. Get your child to sign up for what he qualifies for in federal Stafford loans, a government-funded loan program that he doesn't have to repay until he graduates.

The federal government increased loan limits in 2008. See http://tinyurl.com/yd5hedm to find out more.

2. Ask your child to help foot the bill.

He can pitch in savings from a summer job, work-study programs, or a part-time job during the school year.

3. Make an emergency appeal to the college's financial aid office.

You may get more financial aid, especially if you or your spouse has lost a job or had any other major financial setback. Call the financial aid office, explain your situation to a financial aid counselor, and ask whom you should talk to. Then write a letter to that person explaining your situation.

4. Decide whether to take on debt.

Additional debt should be your last resort. PLUS loans are federal loans parents can take out to help pay for a dependent child's undergraduate and graduate tuition and expenses. If you qualify, a PLUS loan isn't cheap. In 2009, fixed interest rates were 7.9% to 8.5% with up to a 4% origination fee. And you start repaying the loan right away. Find out more at http://tinyurl.com/q4pr7j.

Banks, savings and loans, and credit unions offer private student loans, which come as loans or lines of credit. Most come with high up-front origination fees, variable interest rates, and require that you start repaying right away.

Help a Reader: When to Tell Someone You're Dating About Your Finances

Here's a reader comment/question left on my post titled Who Do You Share Your Financial Status With?:

I don't share my financial info with anyone except with my professional financial advisor. Oh, and I guess my divorce lawyer got a look at it a few years ago!

My brother asked everyone in the family for $ several years ago, but it was for such an ill-advised investment that it was easy to just refuse based on the investment being such an awful idea. I'd be happy to help out my Dad if he needs it, but so far he hasn't. I'd avoid lending to my siblings because they're all highly educated and employable.

But I'm considering sharing my financial information with my boyfriend--we've been dating over a year and are getting more serious, and mainly I'm so curious to hear about his financial situation! I can guess his salary (high), but he lives very modestly. On the other hand he's not at all cheap when we go out. On yet another hand, I know he pays alimony and he also supported 4 kids through college. Any advice about when it is appropriate to begin sharing this kind of information when dating?

So, any advice for her? When is it appropriate to share personal financial information with someone you're dating?

Is Pet Insurance a Rip Off?

Wise Bread recently featured a story on pet insurance. A quick overview:

• The dog was injured by another dog biting it
• The treatment for the injury was $545.53
• The owners had VPI per health insurance
• The VPI website shows all sorts of examples of where people are reimbursed a good portion of their expenses (65% was the lowest example covered)
• Based on these, the owner thought he'd get back at least 50% (being conservative)
• The owner submitted his expenses to VPI
• He got reimbursed for $135 (less than 25%)
• He downloaded the bill reimbursement forms and "they read like quantum physics" ;-)

Here's his conclusion:

As I tried to make any kind of sense of this, I realized something: I wasn't supposed to make sense of it. This is made as complex as possible so average Joe's like you and I don't know what we're expected to receive or how to fight it.

Ha!

A few thoughts from me:

• If you're a regular reader, you know that I've covered how expensive pets are many times. This is yet another example.
• When I looked through all the VPI case studies, I realized that there are many more (expensive) ways for a pet to need health care than I had imagined. Ugh.
• We all know that an insurance company's business is to take in premiums and pay out as little of those premiums as possible, right? So why is it a shock that they make it hard to get anything back.
• FMF readers that have said they are counting on pet insurance to help them out in case of trouble might be in for a rude awakening. As the author of the Wise Bread piece said, "In this case we were lucky. 76 percent of $545 is something we can afford right now. But what if it was 76 percent of $7,000?" Yes, 76% of $7,000 would be trouble for many people.

And a few thoughts from commenters to the post (and my take on them):

• "I personally put that amount away in a bank account just for such an emergency & not even mess with their insurance."

Good idea -- self-insure. I've mentioned several times that people getting pets need to ramp up their emergency fund as a result.

• " 'We were considering canceling VPI, but we figure 24 percent is better than nothing.' Actually it is worse than nothing. You paid $14 a month for 18 months. So you paid them $252 to reimburse you a measly $135. With no insurance you would have been out $545.43, but instead you're out $662.43."

Pointing out the (painful) truth.

• "Similar to your experience, when I made a claim after over a year I found that the amount reimbursed on a small claim was about 25%. There's the deductible and then some things aren't covered... When I read the policy more carefully I realized that coverage could be changed unilaterally by the insurance company depending upon the amount of claims in that area generally. Or that only one knee would be covered not two in dogs prone to knee problems."

Seems like the system is rigged in favor of the insurance company, huh?

• "I plan on discontinuing insurance and (as others have suggested) contributing the amount I would have paid to the insurance company each year to a dedicated savings account. This is why: No matter what level of coverage I buy, I'm contributing that amount each year to my cat's health. If I buy insurance, the money is gone. It may or may not be reimbursed substantially in an emergency. If I set it aside, it's there until it's needed. I can then use all the money to pay my vet instead of gambling on an insurance company."

Good point!

There are many other comments -- some pro pet insurance but most against it -- as well. Nothing exciting enough to re-post here.

So what's your take? Is pet insurance a good deal? Or is it better to save the money yourself? Or perhaps there's another alternative?

Best of Money Carnival

The Best of Money Carnival is now up. Congrats to all participants and especially the winning post, How to Graduate from College without Student Loan Debt.

Enjoy!

Help a Reader: How to Grow an Income

Here's an email I received recently from a reader:

I have been reading your blog for a good while now and one important topic you write on is growing your income.  As I see it, there are two general ways to do this. One is obtaining income outside of my career job (as your soccer referee job) or by growing one's career job (as with obtaining an industry award). 

I am at a point where I could grow my IT type career by obtaining certifications and attempting to gain more responsibility at work but the rewards will not be as instant as obtaining income outside of work.  Also, I feel that to succeed at one, I would need to devote my attention to one or the other.  I understand that building the career will have a longer impact but I want grow my net worth now (by paying down debt and saving) rather than later. 

So, I ask: is it wiser to grow my income through my career job or outside of my career job (or somehow do both)?  (FYI, I'm 25 and married.)

What's your advice for him?

A Creative Way to Give

Here's a comment that a reader left on my post titled Something I Like: Applebee's 2 for $20:

We went to Applebees last night and got the 2 for $20. My wife couldn't finish the steak (so I finished it for her) and I got the Riblets. We also passed on the dessert and instead decided to pick up the tab for the young couple sitting beside us.

We do this often and it is a great feeling and a way of "giving" that has no strings attached as we don't let them know that we are paying their bill (including tip).

This is a GREAT idea -- and would probably be a TON of fun! I'm going to have to try it.

As regular readers know, I am a big fan of making giving part of your overall financial plan. And I especially like new and creative ways to give, and this is certainly one of them.

Of course, there are issues with it such as how do you know the people are really needy (maybe picking young people makes it more likely that they are "just getting started" and could use some help?), but I don't think that's really the purpose here. In this example, the givers aren't trying to change the world by eliminating hunger, they are simply trying to brighten a couple's day a bit. And personally, my hat is off to them.

How about you? Have you ever tried something like this? What happened? Or maybe you have a different way to give creatively. If so, please share it with the rest of us.

Keep an Open Heart and a Critical Eye

The following is an excerpt from Buying a Home: The Missing Manual.

Buying a home is an emotional experience. To buy smart, you need to engage heart and head alike. Although you should fall in love with the home you buy, you also want to be sure that you're getting a house that's a good value and will suit you and your family for the years you live there. These suggestions will help you see homes clearly as you tour them:

• Don't be distracted by nice touches. Smart sellers make their homes look as welcoming as possible. They take down family photos (because it's harder to imagine yourself living in a house with smiling strangers on the wall), remove pieces of furniture to make rooms look bigger, put out fresh flowers or bowls of fruit, and hang mirrors or position lamps to brighten dark rooms. This is called staging, and its purpose is to direct your attention away from a home's less attractive features through the use of props. Don't spend the tour admiring the dining room curtains or feeling tempted to relax on a pillow-covered sofa. Focus on the house, not its contents.

Note: Professional stagers make a living by helping sellers transform ordinary houses into showplaces to impress buyers.

• Walk through the house as though you already live there. No, that doesn't mean taking a quick nap on the owner's bed or putting your feet up on the coffee table as you watch TV. But do think about how you use your home and see whether this home fits the way you live. For example, imagine yourself preparing a meal as you look around the kitchen. Is there sufficient counter space? Where would you keep pots and pans? Is the dishwasher convenient to the cupboard where you'll store dishes and glassware? How about the bedrooms? Are they conveniently located relative to the bathrooms or will you have to walk halfway through the house in your bathrobe to get to the shower each morning?

• Put on your home inspector's hat. You'll hire a professional to do a complete home inspection and you'll do a thorough walkthrough if you decide to buy the house, but on this first look, simply keep your eyes peeled for potential problems. Here are some things to watch for:

• Light switches. Flip them on and off to make sure they work.
• Water pressure. Turn on faucets in sinks and tubs to check water flow.
• Toilets. Flush toilets to make sure they empty and refill completely.
• Floors. Do they squeak (that's a sign of loose nails)? Are they level or slanted? Are there soft spots next to the toilet or tub (that indicates water damage)?
• Walls. Do you notice any cracks or bulges? They might be a sign of structural problems.
• Doors and windows. If they stick or don't close squarely, you may need to repair or replace them—or they could be a sign that the foundation isn't stable. Check exterior doors to see whether light gets through around the edges when the door is closed; if so, you may need to add insulation or refit the door.
• Sills. Look for signs of water damage, such as mildew or mold. Also check for peeling paint; in older homes, the paint may be lead-based. Note: Federal law requires that sellers of homes built before 1978 give buyers a lead disclosure statement. See Section 5.3.6 for more information about this form.
• Drafts. Check around windows and doors and along exterior walls. If the house is drafty, you'll probably have to add insulation.
• Ceilings. Are there any stains or signs of water damage?
• Heating/cooling system. If it's winter, is the ground floor warm or chilly around the edges? If the weather is warm, is the upstairs too hot?
• Appliances. Is the refrigerator cold? Do all of the burners work on the stove? If appliances come with the house, you'll want to do a quick check that they're in working order.
• Cabinets. Do the doors open and close easily? Are their shelves in good condition?
• Odors. If the house smells funny, you may have trouble getting rid of that odor after you move in.
• Basement. Are there cracks in the foundation? Those can indicate a need for expensive repairs.
• Roof. From the outside, check the roofline. Is it straight or does it appear to sag anywhere? Scan the roof for missing shingles or sagging areas. (Binoculars can help here.)

• Remember that selling a home is an emotional experience for a homeowner. If the seller is present as you tour, don't make disparaging remarks about decorating choices or funny smells (but do make a note of any odd odors in your notebook). The seller doesn't have to agree to sell to you—and if she takes a dislike to you, she probably won't. On the other hand, don't gush over the home, either. If you come across as desperate to buy the place, you'll put yourself at a disadvantage when it's time to negotiate. Finally, if the seller seems particularly proud of some aspect of the home, you can make a favorable impression by complimenting the seller on it. For example, if the home has beautiful landscaping, you can admire it and talk about how you'd maintain it if you owned the home.

• When you're thinking about making an offer, visit the home again. Try to visit on a different day and time. Write down any questions you have or things you want to double-check to make sure you don't forget any concerns during the second tour. Bring along your checklist and notes, and compare your impressions on this visit with the first.

Tip: Sometimes, you'll know that a home isn't right for you as soon as you set foot inside the front door. If that happens, you can go ahead with the tour if you want—maybe the property is a diamond in the rough—but don't feel obliged to tour a home you know you won't buy. Doing so is a waste of time, yours and the agents' alike.

Help a Reader: My Computer Purchase

Last week I shared an update on our shopping list. I noted that a computer is on my list and I had started to narrow in on a purchase. Then through a series of discussions, comments, and so on from a variety of people, I started thinking of making the leap to the darkside (Apple) -- or maybe that's the light side and PCs are the darkside. ;-) Anyway, for various reasons, I started considering a Mac computer.

So I'm now going to let you all weigh in on the topic -- should I consider getting a Mac or stick with a PC? A few things that might help guide your advice:

• I have used only PCs for the past 20 years. I am vary familiar with how they work and how to use the major software packages that run on them (Word, Excel, etc.) I am NOT familiar with how to operate a Mac.
• I want a machine that can allow me to easily take files from home to work and vice versa. I have a PC at work.
• I need a new machine to primarily run the basics -- word processing, spreadsheet, web surfing, and email -- but I'd also like a machine good with photos and movies (and editting each.)
• I want to be able to move the machine around the house and maybe take with me on some trips, so I'm looking at laptops.
• My kids will be using the machine and I'd like for it to be a valuable education resource for them (something they could learn from that would benefit them in the future.) In a PC world, can a Mac do this?
• I have been told that Macs have some "cool" advantages like they surf the web faster and turn on quicker. True?
• Macs are more expensive, by far. We can afford it, but is it a good value? Consumer Reports rates them as the best laptops on the market, but it's certainly top dollar for top performance (though they are offering a free iPod Touch if we buy in the next couple of weeks, so that keeps me from buying one for my kids.)
• Is there anything else I should consider? If so, please tell me.

Let me know your thoughts. I'm sure all of you out there can provide some great insights.

How Much Did It Cost to Become a Roman Citizen?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

If you're a Bible reader, you've probably come across this exchange in Acts 22:27-28 (NIV):

The commander went to Paul and asked, "Tell me, are you a Roman citizen?"

"Yes, I am," he answered.

Then the commander said, "I had to pay a big price for my citizenship."

"But I was born a citizen," Paul replied.

I read this the other day and wondered what the "big price" was for Roman citizenship. Was it a year's salary? A decade's salary? Something else?

So I got online to see if I could find out. Unfortunately, I couldn't. It seems that Wikipedia has covered Roman citizenship (benefits of being a citizen, etc.) and in the process said:

"One could also buy citizenship, but at a very high price."

Then every other site I found quoted Wikipedia. Ok, so we know that it was a "very high price." But what EXACTLY was that price (in modern dollars.)

Does anyone else find things like this interesting or is it just a quirk of mine? ;-)

It just strikes me that as our country debates immigration policies, here we have an example of how citizenship was up for sale (though many could not afford it, I'm sure.) Maybe this is a solution for the US. Perhaps we should start charging $50 million to become a citizen? (FYI, I'm JOKING -- don't get all upset.)

Anyway, if anyone has an answer regarding the actual cost of becoming a Roman citizen, I'd be interested in it.

How to Improve Your Chances of Getting a Mortgage

The following is an excerpt from Buying a Home: The Missing Manual.

Before you apply for a mortgage, improve your chances of approval by putting your financial house in order.

• Improve your FICO score. If you've got a blot on your credit history that's pulling down your score—or if you just want to bump up a "good" score to a "very good" or "excellent" rating—take steps to improve your score well before you apply for a loan. Because your FICO score reflects your behavior as a borrower over time, it can take months or even years for a score to improve. Follow these tips to move up the FICO scale:

• Pay your bills on time. If you tend to forget exactly when each bill is due, set up automatic withdrawals to make sure payments get made when they should.
• If you're behind in your payments, get caught up as soon as possible—and then pay on time. The longer you keep your accounts current, the more your score improves.
• Reduce your credit card balances. High balances on revolving accounts pull down your score. If you're carrying a high balance on one or more cards, pay down the amount you owe.
• Reestablish a good payment record. If you've run into trouble with credit accounts in the past, open a new account and be meticulous about using it responsibly—don't borrow too much and be strict about making payments on time. It takes time to rebuild good credit, so be aware that it may take years for your score to recover.

• Don't quit your job. Lenders look for income stability. If you're a job-hopper, or if you leave a job shortly before you apply for a mortgage, you may look like a higher risk than if you've been employed consistently for the last several years.
• Reduce your overall debt. As Section 2.3 explains, lenders don't like total monthly debt that exceeds 36 percent of your gross monthly income. If you carry a lot of debt, the bank will scale back the amount of money it's willing to lend you. Reducing your debt makes you look like a better risk, and the debt won't squeeze your monthly PITI too far below its 28 percent ceiling.
• Spend small. The flip side of reducing your debt is making sure you don't increase it. For at least six months before you apply for a loan, avoid buying big-ticket items, such as a new car or a washer/dryer set or anything else you need to buy on credit.
• Boost your down payment. As you'll see in Chapter 6, lenders like to see hefty down payments, because the greater the investment you make out of your own pocket, the less likely you are to default. If you can put down more than 20 percent toward the purchase of your home, you'll find it easier to get a loan than with a lower down payment.
• Don't apply for a lot of new credit. As Section 2.3.4.1.3 explains, lenders look at how long you've maintained your accounts and want to see responsible repayment over time. Opening a lot of new accounts at once may make you look desperate for some quick cash. It also affects your debt-to-income ratio (Section 2.3).
• Don't cancel existing credit cards. Lenders are interested in how much money you currently owe in relation to the credit you have available. This is called the credit-utilization ratio. Say you've got three credit cards, each with a $10,000 credit limit. That means you've got $30,000 in available credit. If you have a $7,000 balance on one of those cards, a $2,000 balance on the second, and a zero balance on the third, you're using 30 percent of your available credit. But if you cancel the zero-balance card, your available credit drops to $20,000, which makes your credit-utilization ratio soar to 45 percent. Using a higher percentage of your available credit makes you look riskier to lenders.

Help a Reader: House Payment Options

Here's an email I recently received from a reader:

Here's our background and financial information.

• Married with a toddler and another baby on the way -- live in the metro NYC region. Wife and I are are in our late 20s.

• Have about $30,000 in cash (savings).

• Have about $75,000 in 401(k). I try to max my annual contribution.

• Have about $15K in various divended yielding stocks

• Current salary is $94,000 annual. Bonus between $10K-$25K. All in $104K to $119K. Monthly take home is around $4,600. Job is very stable.

• Wife does not currently work. She may return to work when second one goes to pre-K (this would be in a couple years)

• We own a $450K condo. It's a 1BR + 1Den. It's big enough that we can have family of 4 (tight but doable).

• We put down 10% on the condo in 2007. Loan of $400,500 at 6.25%. Including taxes of $7,226 annually, our monthly payment is $3,086. Plus common charges of $350. So monthly carrying costs of ~$3,400. Doesn't leave a lot leftover given monthly take home pay (wife used to work before we had our first, so things are tighter now)

• Approximately $387K left on the mortage now. My unit was appraised at $385K, meaning I have no equity in the condo.  

• No other debt (we pay off credit cards monthly, following FMF's advice to pay in full and reap rewards!). I do have a student loan of around $20K at 3.25% that is about $130 a month. I can deduct this in my tax return though

• We are gospel believing Christians and tithe generally between 5-10% of our gross income annually

Here's our situation:

I am exploring a refinancing on my unit. Due to the new gov't rules, despite my condo having depreciated (say 20%), I can take advantage of refinancing.  I can probably get a new rate between 5 and 5.25% (current rate is 6.25%). Closing costs of around $3,000 (says my mortgage guy).  I'm probably 95% going ahead with this because it would allow me to save around a few hundred dollars a month.  We plan to stay in our condo for another 2 years, at which point we'll need to move (more space as well as looking at better schooling options).

Here's the kicker --> about to receive an inheritence/gift of approximately $150K (coming from Asia - not sure if this is taxable in US on foreign gifts?).  I'm not sure whether I should use this cash to help pay down my principal (there is no prepayment penalty).  If this were a house and town we'd be staying in for the long-term (ie, raise our kids through college etc) -- then it's a no brainer to pay down the mortgage and be debt free faster.  However, since we are planning to move in 2 years or so (possibly to West Cost or a more suburban town in tri-state NY area), I'm not sure if there's value in paying down principal, only to sell our place and it's possible that with a double-dip recession -- prices could be depressed.  Another option is maybe just investing the money?  Or do I do some type of paydown + new refinancing?

What is your advice for him?

Star Money Articles and Carnivals for the Week of Aug 16

Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.

Here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:

• EDITOR'S CHOICE! Carnival of Personal Finance - Are Tattoos at Work Really That Acceptable?

• The Wealth Builder Carnival  - Two Mind Hacks to Lower Your Expenses 

• Festival of Frugality - Save Money by Teaming Up with Your Neighbors 

• Carnival of Money Stories - Something I Like: Applebee's 2 for $20 

• Carnival of Financial Independence - Saving: The Most Fundamental Element of Wealth 

• Lazy Man and Money comments on the recent JetBlue "resignation".

• FrugalDad tells how to prepare for an economic collapse. 

• BripBlap offers advice on developing good habits. 

• My Dollar Plan asks if you have a Foodsaver. 

• Money Smart Life likes free moving boxes.

• The Digerati Life says to own stocks over the long run. 

• The Sun’s Financial Diary discusses transformation. 

• Wise Bread wants to make personal finance fun. 

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

Help a Reader: Writing a Will

Here's an email I recently received from a reader:

My mother is updating her will to be more specific about how to divide her property. There are 3 children, and the primary assets include 2 houses and some land. Her goals are to divide the property equally and fairly, and to keep the property in the family. For example, she doesn't want an heir to sell the property to an outside party unless the family agrees, and when her children passes away, another child or grandchild should get the property, not the child's spouse. Is it possible to write place these kind of restrictions in a will, and if so, how would it be worded? Or is there some other way to do this, for example a contract or something in the property deed?

Also at this stage of our (the children's) lives, it's not clear who would get the most use from the two houses so we want some flexibility in that area, and are considering some sort of joint ownership arrangement for the two houses.

Any advice from the readers on these questions and goals?

What's your advice for him?

Update on Our Shopping List

In January I gave you all an update on our shopping list. Now that a few months have passed, I thought it was time to give another report. Here goes:

• Car -- I'm planning to begin my car-buying process in the next couple of weeks and have a new vehicle by the end of October at the latest.

• Vacation -- We're off to Chicago (hopefully, we've had to postpone a trip here twice) in September and looking at going somewhere warm in the winter. I'm thinking Hawaii at the end of January.

• Laptop -- Still postponed. I'm wondering if an iPad will be a better option for what we need.

• Furniture -- Closing in on a table for our "study." Still need two new chairs, a coffee table, and an end table for the living room.

• Glass replaced in two windows -- Ordered. Should be in and installed soon.

• New front door -- Got it. Love it. It changed the look of the house (both inside and out), but for the better IMO.

• Patio area -- We took advice from our landscaper and decided to wait on the brick or stamped concrete patio area in our backyard (he said, "That's expensive and how do you know you'll like/use it?" Good point.) Instead we bought a fire ring and to see how much we would use it. Found out soon thereafter that there are rules on having fires in our neighborhood, though the mayor's office and the fire department seem to differ on what they are exactly. Still deciding how to proceed.

• Landscaping -- We had several overgrown trees (and one bush) taken down, a good part of our "woods" cleared and mulched (we did much of this ourselves, saving us some good money), plants added around the yard, the area under our deck leveled and rocked, and a French drain installed to help with drainage away from our house. We still have more to do and may get some done yet this year. No matter what, we'll still have a list for stuff to do in "phase 2" next year.

• Lawn mower -- Got one. Love it. So does my son, who does most of the mowing.

And just in case anyone is wondering, let me repeat that NONE of this stuff, either stuff we've already purchased or will purchase, has been paid for by borrowing money (nor has it been taken from our basic savings plans -- 401k, 529s, etc.). We have made and will make purchases either out of current income that's budget for the purpose or out of savings. Of course we will pay with our credit card when we can (getting 2% back all the time) but we'll always pay the amount in full when the bill is due.

I'll give you another update at the beginning of the year so you can keep tracking our progress. ;-)

Making the Most of Tax-Advantaged Accounts

The following is an excerpt from Personal Investing: The Missing Manual.

Tax-advantaged accounts come with a variety of features, but the most common characteristic is delaying the time when you have to pay taxes. Tax-deferred means your money can grow unfettered by taxes, which come due only when you withdraw from the account. You can reinvest the full amount of interest, dividends, and capital gains you earn to compound for years without a dollar going to taxes. Only when you withdraw money during retirement do you pay taxes; at that time, your tax rate might be lower.

Chapters Chapter 10, Chapter 11, and Chapter 12 give you the full rundown on different types of tax-advantaged accounts, but here's a quick introduction:

• 401(k) and 403(b). These tax-deferred accounts (Section 10.2.1) have become the mainstay for employer-sponsored retirement savings, with the majority of employers choosing to offer them over traditional pension plans. You contribute a percentage of your paycheck before paying taxes on it, so your tax savings reduce how much you pay out of pocket for your contribution. For example, if you're in the 25% tax bracket and contribute $10,000 to your 401(k) or 403(b), you save $2,500 in taxes, so your net out of pocket is only $7,500.

In 2010, the maximum annual contribution is $16,500. (If you're over 50, you can add a catch-up contribution of up to $5,500.) You must start withdrawing from your account when you're 70 ½.

Tip: If your company matches a portion of what you contribute, that match is like an immediate 100% return on the portion the company matches. It's unlikely you'll find a return that good elsewhere, so if you can't afford to contribute the maximum amount to your 401(k), at the least, contribute enough to get the full company match.

• Traditional IRA. Anyone with earned income (salary, wages, tips, bonuses, and so on) can contribute to a traditional IRA, another tax-deferred account option. If you've contributed the maximum to your 401(k) or 403(b), a traditional IRA is one way to get more money into retirement savings. In 2010, you can contribute up to $5,000 (plus an additional $1,000 catch-up contribution if you're over 50). Your contributions might be tax-deductible depending on your income. For example, if you're single and your adjusted gross income is less than $56,000, your entire contribution is tax deductible.

You must be younger than 70 ½ and have earned income to contribute to a traditional IRA. As with 401(k) plans, you must start withdrawing when you reach age 70 ½.

Note: If you switch jobs and don't want to keep your retirement funds in your employer-sponsored retirement plan, you can move your money into a rollover IRA to continue the tax deferral.

• Roth IRA. Similar to traditional IRAs, 401(k)s, and 403(b)s, you don't pay taxes on interest, dividends, and capital gains in a Roth IRA (Section 10.2.2.2). What gets everyone's attention is that you withdraw from these accounts tax-free after the age of 59 ½. The catch is that contributions to a Roth IRA aren't tax deductible. That is, you pay taxes on the money before you contribute to the account. With some income limitations, Roths have the same contribution and catch-up limits as traditional IRAs.

Roth IRAs have other features that make them attractive for saving for your later retirement years. You can continue to contribute after you reach 70 ½, and there's no mandatory annual distribution at any time. Because you contribute after-tax money, you can withdraw your contributions at any time without paying taxes or penalties.

Note: Because you contribute after-tax, you can withdraw your contributions without paying taxes or penalties. Before you can withdraw earnings tax-free, you must be 59 ½ and have converted or contributed to the Roth at least 5 years earlier.

• Roth conversion. If you convert a traditional or rollover IRA to a Roth IRA, you have to pay taxes on the tax-deferred contributions you made to the original account. Section 10.2.3 helps you decide whether a conversion makes sense for you.

• Inherited IRA. A beneficiary of an IRA can transfer the money into an inherited IRA to keep the tax-deferral going until the IRS requires distribution. The tax rules for inherited IRAs make Einstein's theory of relativity look like a piece of cake, so consulting a tax advisor is a good idea if you inherit an IRA.

• SEP-IRA. For small businesses or self-employed individuals, the simplified employee pension IRA (SEP-IRA) is the easiest pension plan option. You can contribute up to 25% of your income each year (to a maximum $49,000 in 2010). You can set up a SEP-IRA for a side business even if you already have a 401(k) at your day job.

Note: See Retirement Plans for Small Businesses to learn about other retirement account options for small businesses, such as Keogh and SIMPLE plans.

• Section 529 college savings plan. Investments grow tax-deferred in these popular college savings plans. Withdrawals are tax-free as long as you use them for qualified educational expenses (Section 11.2.1). The contribution limits are high, sometimes as much as $300,000. Whoever contributes to the account is the owner, who can then name a family member as the beneficiary. That's good news for two reasons. First, colleges don't take the 529 investment into account when they calculate a student's financial aid, because the account isn't in the student's name. Second, if the current 529 beneficiary ends up getting a big scholarship, you can change the beneficiary.

• Section 529 college prepaid plan. Prepaid plans lock in future tuition costs at today's rates (Section 11.2.2). They aren't as popular as 529 savings plans, because they make it harder to roll over into another plan or switch to another beneficiary.

• Coverdell education savings account. Investments in these accounts grow tax-deferred, and withdrawals are tax-free if you use them for qualified educational expenses. The big drawback to these accounts is the $2,000 annual contribution limit, a drop in the bucket for college costs.

• Health savings account. If you have a high-deductible health insurance plan, you can set up a health savings account (HSA), described in detail on Section 12.4. In 2010, an individual can contribute up to $3,050 pre-tax with a $1,000 catch-up if you're 55 or older. Unlike with flexible spending accounts, you don't have to use the money you contribute during a specific year. You can invest the money in the same kinds of options you have with an IRA. Withdrawals for health care are tax-free.

Note: Medical savings accounts (MSA) work like health savings accounts, except that only self-employed people or employers with 50 or fewer employees qualify for them.

Vote for Your Favorite Name

I announced awhile ago that Moose Tracks ice cream (one of FMF's long-time sponsors) was having a "Name a New Flavor" contest on Facebook. They have now selected five options and are allowing fans to vote on the winner (one finalist is even an FMF reader. No, I'm not saying which one.). If you'd like a chance at making ice cream history (ha!), then go to their Facebook page and vote away!

Kiss The Old Method of Retirement Planning and Saving Goodbye! (MAYBE)

The following is a guest post from Forex Traders.

The 2008 Global Credit Crisis has changed things. The world we live in is different. In the spring of 2008 it became apparent the economy was slowing down and the housing sector was going to lead the economy into a recession. But it definitely was not clear how bad it was about to get. During the spring of ’08, the talking heads on financial news networks, and even economists at the height of power at the Federal Reserve, were beginning to agree that America was about to hit a small economic road bump, but most of them assured the public that economic growth would rebound toward the latter part of 2008, and the economy would, of course, continue in its ascent to higher ground. Oh, how wrong we were. That small economic road bump ending up being a pothole the size of Texas. When the bottom fell out in September of 2008, the entire global financial system nearly failed. And, as a result, a “reset” button has been hit.

This “reset” button that was hit during the global economic recession of the last two years has changed the global financial landscape forever. A great shift in the balance of economic power is currently transpiring, and it will continue to transpire over the next 2 decades. In March of 2009, equity markets in the U.S. hit a low of 6,000 points. At this point, many Americans had suffered drawdowns of 30%-60% of their retirement accounts. Then, suddenly in March of 2009 the economy appeared to begin growing again. The equity markets rebounded and began rising. Unemployment slowly began to peak out and economic reports started to show improvement in the U.S. economy. So, from March to November of 2009, it looked as though the worst of our economic problems in America were now behind us, and growth was again before us. But then things got bad again. Really bad.

Currently, the Federal Reserve is once again raising the possibility of implementing further quantitative easing measures, which basically means they foresee very difficult times in the very near future for the U.S. economy. The Fed recently downgraded U.S. growth prospects for 2010, and they have communicated to the American public that they believe it may take 4-6 years to fully recover from the current recession. That means that economic growth will continue, but it will be very sluggish, unemployment will be stubbornly high, and general economic conditions will be less than optimal. So how has this changed the way Americans may have to plan for retirement?

For several generations in America, people were able to graduate from college, get a good paying job, and begin saving for retirement by investing in U.S. equity markets. Then, after 30-40 years of faithful service in the work force and careful retirement planning, a middle income American was able to retire with quite a bit of money. In fact, most Americans who held average paying jobs over the last 30 years and saved properly could have built a nest egg of $300,000 or more. Not bad. And a good paying job made it possible to save over $1 million. But the ability to grow a retirement account is dependent on the stock market increasing. What if the stock market doesn’t increase over the next 30 years as it has over the previous 30 years? That would make it very difficult to build a retirement nest egg, and this very possibility is why the old method of retirement planning may be dead.

Let’s break down the global economic recovery a bit more. Currently, the United States, England, and the EuroZone are all struggling significantly. Growth is expected to be very slow and general economic conditions in all three regions will be less than optimal for an extended period of time. So, these guys are running very slowly.

Then, you have China, India, Brazil, and other emerging market economies (China is a bit past emerging market at this point. They are a bona fide world power.) These economies are growing at blazing fast speeds. So, over the next decade, if the U.S. and Europe move forward at a very slow pace, and these emerging market economies move forward at a blistering hot pace, what’s going to happen to the economic balance of power in the world? It’s going to shift.

And this is why retirement planning may have to change. If the real growth over the next 20 years is going to be in China and India, then the average U.S. worker may have to be much more proactive about investing in those regions. In fact, only time will tell for sure, but investing in China and India may be one of the best decisions to make over the next 20 years.

So, how can the average investor position himself or herself to take advantage of this global economic power shift? It has been common practice in retirement planning over the last few decades to expose a small amount of one’s investment capital to overseas markets. One practical measure a person could take would be to sit down with a registered financial advisor and allocate a higher percentage of one’s portfolio to overseas exposure. For example, if the average aggressive model currently allocates 5% of capital to overseas markets, an investor may want to possibly increase that percentage to 10%, 15% or even 20%.

Another practical step an investor can take to take advantage of this global shift is to invest in an investment fund managed by a Commodity Trading Advisor that specializes in trading foreign markets. This type of investment vehicle can be thought of as a hedge fund for smaller investors. 

There are numerous other ways to profit from this potential shift in global economic power, but these are two very practical ways to begin investigating possible investment opportunities. Before making any major financial investments, especially with retirement capital, make sure to always consult a registered financial advisor for additional perspective and guidance.

FMF Reader Shares His "Help a Reader" Results

Here's an email I received from a reader a month or so ago:

Last Spring, 2009, I was contemplating how to finance a purchase of a second home in Colorado and asked you to post my preferred route for comment.  You were kind enough to do so and the comments were mostly positive, with a few questions or concerns which mostly were related to a lack of specific information.  Your reader’s responses were appreciated and provided me with just a bit more confidence to move forward with my plan.

This Saturday will mark the culmination of my plan.  I will be debt free again, and the owner of a fabulous second home that I have already enjoyed greatly.  I would like to share the plan again and how it was accomplished.

First, I borrowed $51,000 from my Home Equity Line of Credit on my primary residence, at a variable 2.99% interest only rate (the interest rate did not vary over the 15 month term).  My primary house was fully paid off at the time of the loan (in fact I was debt free at the time of the second home acquisition).  I then borrowed against nine existing ladder CD’s at the credit union at 1% above the paid interest rate, totaling about $21,000.  The balance of the purchase was cash.

The CD’s were the easy part.  I put a lump sum of cash, around $400, into the credit union and they froze that money and the CDs, using the frozen cash to pay the interest.  Easy enough.  The last CD matures in two months at which time all nine are paid for, although I don’t have that nice cash cushion any more.

The harder part was the HELOC.  My work bonus, paid in April in cash and restricted stock grants and restricted stock options, helped with $10,000 going toward the HELOC (the balance of the bonus paid our Roth IRAs).  Most of the rest was month-by-month, with some months being zero and others being as much as $6,000.  This Saturday I am receiving an unexpected $7,000 after-tax payout for a special bonus for exemplary performance at work.  That money will pay the HELOC off.

Where am I now?  I have little in the form of an emergency fund, a fully intact net worth (no investments were touched in the purchase process), retirement very possible in ten years (I am 43 years old), and a very solid job.  I will pay this year’s Roth IRA in the next few months, build up a car fund after that, and hope the car will last long enough (it’s a 1999 Honda Accord with 249,000 miles) to use the car fund money as emergency fund money until I have both.

What were the risks in this financing strategy?  I had no emergency fund other than around $5,000 a month in free cash flow.  Not too bad, but not what I should have had.  I suspended all after-tax saving for 15 months, but kept my 401(k) and Roth IRAs going.  I have older cars, but they are well-maintained and have held up so far.  Employment was a fear since I bought the second home in the depths of the equity market and real estate implosion, but I felt as good as possible going in.  In short, all the facets of the strategy worked out.

The benefits of this strategy have been large.  Due to the low interest rates I have only paid a little more than $1,800 in interest costs, with no closing costs at all (with no traditional mortgage, and its attendant costs, I did not need a survey of around $2,500 and I had the title insurance paid by the seller).  This helped me make around $16,000 in improvements to the property which I did on my own with significant help from my father.

I appreciate your posting my initial inquiry on your blog.  Your readers offered helpful advice and my family is now further along on our financial journey.

Good for him -- I'm glad it all worked out. And good for you, readers -- your advice helped someone improve his finances! Kudos to you! (And a thought: when you answer a "help a reader" question, you never know the good impact you could have on someone's life.) :-)

How to Hire a Home Inspector

The following is an excerpt from Buying a Home: The Missing Manual. And remember, there are certain things home inspectors don't do -- be sure you know what these are and handle them as needed.

In the movie The Money Pit, a young couple buys what looks like a beautiful home at a bargain price—until the house starts to fall down around them. A home inspector makes sure you don't meet the same fate.

When you tour a home, it's easy to notice the cosmetics—you like the carpet in the living room, but the kitchen cabinets have got to go. But how do you know whether the home's foundation is solid and the central systems (electrical, heating/cooling, plumbing) work the way they should? No matter how well maintained a home appears, it can hide problems that require a trained eye to spot.

A home inspector gives your prospective property a thorough going-over, from roof to foundation, checking the structure and its systems. Chapter 12 shows you what a home inspector does, step by step.

The purchase offer your real estate agents writes up should include a contingency that tells the seller the offer is valid only if you're satisfied with the results of the home inspection. Typically, this contingency gives you 17 days to withdraw your offer or move forward with your purchase: 14 days to conduct a home inspection and 3 days to make your decision. You should interview inspectors and choose the one you want to work with before you make an offer on a house. At busy times of the year or in areas where the real estate market is hot, you may find your preferred home inspector has a waiting list. So find an inspector and call her as soon as your offer is accepted.

Tip: Some sellers have a home inspection done before they put their home on the market. Even in that case, you should still hire a home inspector to look over the property. The couple of hundred dollars you'll spend is worth it to get a second opinion.

As with the other real estate professionals on your team, you should interview home inspectors before you choose one. Ask these questions:

• Are you a full-time home inspector? This isn't a guarantee of competence, but it shows that the inspector is in enough demand to make a living at it and suggests dedication to the job and (perhaps) better availability.

• How long have you been inspecting homes professionally? You want an experienced home inspector, especially one who's familiar with your area and the problems that commonly occur there. Look for one who's been in the business for at least a couple of years.

• Do you have training in home inspections? Many home inspectors have a background in construction, but inspecting homes is a specialized discipline that requires specialized training. It's a good sign if the inspector has taken classes in home inspection.

• Are you a member of any professional associations, and do you have any special certifications? Some of the professional associations for home inspectors are the American Society of Home Inspectors (ASHI), the International Association of Certified Home Inspectors (InterNACHI), and the National Association of Home Inspectors (NAHI). Each of these organizations has standards of practice and a code of ethics that members must follow.

• Do you have up-to-date professional liability insurance? Sometimes called errors and omissions insurance, this policy covers the home inspector in case there's a mistake or oversight in the inspection report. If things go wrong and you end up having to sue the inspector over a faulty report, this insurance means you'll get paid if you win a judgment.

• What does your inspection cover? May I see a sample report? The inspector should assure you that your inspection meets state criteria (if applicable) and complies with the standards of practice and code of ethics of one of the major home inspectors' associations. Look for a report that goes into a lot of detail instead of a quick checklist. 

• How many residential home inspections did you do in this area in the past year? Look for one to two per month at a minimum.

• How long does a typical inspection take? A thorough home inspection takes two to three hours for a single-family home. If the inspector whizzes through it in less time, he may miss problems.

• May I attend the inspection? If you're on site during the inspection, you can ask questions and see potential problems for yourself. If the inspector doesn't want you around, choose someone else.

• How quickly will I get the report after the inspection? Most inspectors deliver a report within 24 hours. And find out how the inspector gets the report to you as well—via email, fax, or in print.

• Can you give me the names and contact information of at least three references? Homeowners know for sure how thorough a home inspection was only after they move in. It's a good idea to talk to previous clients to find out whether the inspector missed something important.

When you get a list of references, check them out. Here are some questions to ask:

• When did you work with the home inspector?
• Did the inspector show up on time and deliver the completed report promptly?
• Did you accompany the inspector? If so, did he explain what he was doing and answer your questions?
• How much time did he spend going over the property?
• Was the home inspection report thorough, easy to understand, and supported with photos and/or documentation?
• Have any problems arisen that the inspector should have pointed out but didn't?
• Would you choose this home inspector again?

Watch out for inspectors who rushed through the inspection or who missed issues that later turned into problems for the buyer.

Help a Reader: Military House Options

Here's an email I recently received from a reader:

My wife and I are both 28.  We have no kids but in 2-3 years will have our first and eventually hope to have 3.  My wife will be a stay at home mom.  We are currently stationed in the DC area.  Being in the military we will be moving around every 2-3 years but there is a high likelihood of coming back to this area for later assignments.  My biggest goals right now are making it to a 20 year retirement (I have 15.5 more to go) and owning a house outright when I retire, whether that means making payments for the next 15 years or saving for an all cash purchase as I retire.  We will more than likely not retire in the DC area but that could change 15 years from now.  Also, as with every other job out there, a 20+ year career is not a guarantee but it is my goal.

• Income: ~$100K/year (~$80K is my income, ~$20K is my wife's income. My income should continue to go up with pay raises and promotions so that by the time we have kids and my wife stops working we will be in the ~$100K range again)
• Expenses: ~$50K/year (~$1500/month rent, $1,000/month tithing, $750/month food/gas and $750/month taxes/utilities)
• Retirement Funding: $26,500/year (full maxes for my TSP but no match, my Roth IRA and my wife's Roth IRA)
• Debt: ~$1,100 for a truck that will be paid off by end of August
• Retirement Funds: ~$80,000 (~$55,000 in my TSP, ~$20,000 in my Roth IRA, ~$5,000 in my wife's Roth IRA)
• Savings: ~$21,500 in taxable mutual fund specifically for a house
• Emergency Fund: essentially zero (had to use the $2,000 to go to a funeral earlier this year)
• ~$2,000/month left over for savings goals

Financial goals:

1) Continue maxing out retirement funds NON-NEGOTIABLE

2) Build up emergency savings to $20,000

3) Begin regular savings plan for house fund or contribute towards mortgage for next 15 years

Housing options:

1) Continue saving on our own until we have a sufficient emergency fund and a significant housing fund to buy outright

2) Buy something cheap now on a 15yr loan ($150,000-200,000 for $1,128-1,504/month at 4.25%) and then rent out when we move; own outright when we retire

3) Buy something expensive now on a 30 yr loan ($300,000-400,000 for $1,610-2,147 at 5%) and rent out when we move; sell when we retire if market appreciates

What is your advice for him (in particular -- which of the house options should he pursue)?

Great Places to Retire in the US

We've discussed five places to retire on Social Security alone -- five foreign locations where you can live completely on the average SS payment of $1,200 a month. But what if you prefer to stay in the US? If you're still strapped for retirement funds and want to retire in America, MSN Money lists five cheap places to retire in the US. I've listed these below along with their cost-of-living index (100 is average -- anything below 100 is good -- the lower, the cheaper) and the nearest big city -- which still could be an hour or so away. The list:

• Rogers, Ark. -- 86 -- Springdale and Fayetteville
• Moon Township, Pa. -- 92 -- Pittsburgh
• Noblesville, Ind. -- 92 -- Indianapolis
• Gainesville, Fla. -- 90
• Mount Vernon, Wash. -- 109 -- Seattle

BTW, they include Mount Vernon despite it being more expensive than average because it's "less expensive than Seattle." Huh? Is "less expensive than nearest big city" the criteria we should be using?

And if you don't like any of these, they tell you how to find your own low-cost retirement paradise as follows:

• Consider the economy.
• Look about an hour outside an urban area.
• Consider a college town.
• Beware of too much isolation.

But let's say money is no object -- or at least that you've saved enough that you don't have to be Polly Pennypincher in deciding where to retire. You just want a great place to spend your golden years. Well, Kiplinger lists five great cities for retirees as follows (again along with cost-of-living index):

• Charlottesville, Va. -- 108
• Dothan, Ala. -- 89
• Palm Bay-Melbourne-Titusville, Fla. -- 100
• Pittsburgh, Pa. -- 92
• San Francisco, Calif. -- 162

I'm not sure what we'll do when we retire. I may take a "partial retirement" early where I work at a non-profit, so obviously we'd need to be in the location where the non-profit was. But out of any of the cities listed above, Pittsburgh (or Moon Township) would be a possible move for us. We've lived in Pittsburgh before (I met my wife there), loved it, and we have family living both there and in Erie, Pa. (two hours away.) Then again, if I was to move I'd probably want a better climate and Pittsburgh isn't that great on the weather front. Gainesville is looking pretty good, though. ;-)

Help a Reader: Retirement or Mortgage?

Here's an email I recently received from a reader:

My husband recently started a new career.  He is finishing up a second Bachelor's degree and thankfully, found a job almost immediately in his new field (in Michigan!).  For most of this year he has been not working, focusing on completing the degree and taking care of our six-month-old son.  During that time we've been living off of my income, with a planned deficit that we had saved for.  We planned on his being out of work until at least the end of this year but now we're back to two incomes.

His new job is a great opportunity, but it is with a very small company that offers no retirement fund.  From his previous job, he has a 401(k) now worth about 20K (rolled over) and we have about 7K in a Roth IRA.  He will be making $38K to start, with profit-sharing bonuses after a year.

I make $45K and I have 23K in a retirement fund with my employer.  I put 5% of my salary away, with my employer putting an additional 12% in.  I also have about $6K in a Roth IRA.  In total, we have currently a little over $50K saved for our retirement.

Our debt load includes only our home and old student loans (17K) from my husband's first degree (we paid cash for this most recent one).  We bought our home in 2005, and owe 152K on a fixed-rate 30-year mortgage and 20K on a HELOC.  Thanks to the market, we are slightly upside-down on the house, but we love where we live and plan to stay there for a few years more at least.

The HELOC is the bane of our existence, and we plan to pay that off as soon as possible.  We don't have the final figures yet, but after bills and childcare, we're probably looking at about $1000 extra each month.  We currently have $15,000 in an emergency fund, $1500 in "regular" savings, and $6500 in a new car(s) fund.  We also have a small 529 account for our son.

My question is this: should we focus on putting our extra cash toward retirement or toward paying off the house?  We will continue to save, obviously, into my employer retirement fund.  Our options right now for my husband include opening an IRA and/or maxing out his Roth every year.  Would it be worth it to just fund my retirement account for now and use everything possible toward paying off the house (at least the HELOC, anyway), and catch up on his retirement later?

A few additional details . . . we are both in our late 20s and I've left off discussion of paying off his student loans right now because they're at a ridiculously low interest rate.  We're content to let those sit for the time being to pay off higher-interest debt.  One of our goals is for me to be able to go to part-time work after a year or two so that I may care for our son and any future children.

What is your advice for her?

Three Myths About Earning More Money

The following is a guest post by Ramit Sethi, founder of I Will Teach You To Be Rich and a new course on earning more money. Ramit is a personal finance blogger and author of the NYT bestseller I Will Teach You To Be Rich. For a free mini-course on how to start your own side business, visit Earn1K.com.

Whenever a friend tells me they wish they could earn more money, I'll ask what's stopping them from doing it right now. The resulting conversation usually goes something like this:

"I can't," they say, "I have a job."

"Okay," I say, "so start it in on the side."

"But I don't have enough time."

"How much time can you spare each week?"

"Maybe only 10 hours."

"Perfect, that's plenty. Do some brainstorming and come up with next steps - I'll check in on your progress in two weeks."

"But... but... it's just not that simple! Waa..."

But be honest with yourself: Think about something you've gotten good at by sustained practice. Let's say you've lost 20lbs in the last 12 months. What would you say to yourself from a year ago? "It's really as simple as eating less and exercising more."

That doesn't mean it's EASY, though. It's HARD to try new things and to admit what you don't know. It's a lot easier to make excuses, procrastinate, and dream about how things will be different some day. Unfortunately, most people take the easy route, and that's why they'll never start the businesses they keep talking about.

FMF readers might remember that I posted a guest post here last year called "Trying to earn more money? Stop wasting your time."

If you want to be different and really start earning more money, you'll need to be able to identify and overcome three big myths of entrepreneurship:

Myth #1. "I need a lot of money to start a business."

I call this the myth of resources, where people claim they'd start a business if only they had more time, money, experience, or contacts. In fact, there are LOTS of ways to start a business on just a shoestring budget and a few hours a week, especially if you focus on providing a service (like consulting, tutoring, or dog-walking) instead of selling a product.

The simplest way is to directly email a person you'd like to work for and offer them your services. Every one of you reading can try that today, and it would take you ten minutes, zero dollars and no website.

(In fact, I pay someone on my staff over $10,000/month and he has no website or significantly social media presence. He's a highly valued consultant who simply solves my problems.)

Of course, there are some businesses that do require lots of time and money to start. But even if this type of business is your ultimate goal, you need some sort of plan to get there. I'm strongly in favor of starting any business you can with the resources available to you, and using your first business as a launching pad for your next.

Myth #2. "I don't think I'm a big enough risk taker to do it."

This is the myth of type. Wishful entrepreneurs often have a habit of convincing themselves that they're just not cut out to do business. Maybe they're just too risk-averse, or they don't like promoting themselves. Or maybe they weren't born smart or creative enough. In fact, if you say this, you've just selected yourself out of the pool!

Our own popular culture is partly to blame for perpetuating this myth. We always hear stories about entrepreneurs who risked everything and ended up with billions, and never about the ones quietly running safe, "boring" businesses.

Don't fall for that. For every supposed must-have entrepreneurial personality trait, I could find you plenty of success stories of someone who's the exact opposite. In fact, one of my program members who teaches violin told me she was afraid of being "financially illiterate" and would be my "worst student ever," but she ended up making $80,000 in 8 weeks (for the free in-depth case study, visit Earn1K.com).

You don't have to have been born an entrepreneur to start thinking entrepreneurially.

Myth #3. "I just can't think of any lucrative ideas to go after right now!"

This is the myth of opportunity. You've all seen this phenomenon - it's the crazy uncle living in the attic, still working on patenting his million-dollar invention. Or the guy who says he'll do it when the economic conditions are perfect, or when he finds the perfect mentor or business partner.

Of course, the timing is never right. The perfect mentor or business partner doesn't really exist, and of course, great ideas are vastly overrated. What you end up with here is a really bad case of procrastination - and not much more.

The truth is, there are opportunities all around you. There are people starting businesses every day. EVERYBODY has skills and the ability to learn something new. And it's always a great time to make money. So what's holding you back?

So what's the biggest barrier?

In my research, the biggest barrier is finding the right idea. People often think their idea has to be unique ("I can't just be another freelancer writer / IT consultant"), when in reality, the more competition you have, the better. Others think the idea has to come from within, when really, nobody cares about your initial idea -- almost everyone should be looking to the market to see how you could combine your idea with what people will pay for. If it helps, I've put together a free Idea Generator Tool that will show you how to identify and test a profitable idea.

When you start earning money, you'll find the myths that held you back will slowly melt away. This is true of losing weight, improving your career, managing your time, and...earning money.

NOTE FROM FMF: The post Ramit wrote for FMF last year on not wasting time was a big hit. Lately he's been talking about earning money and he knows his stuff. So if you're interested, I encourage you to check out his free preview course on earning money. And no, I wasn't paid for this post or for recommending his program. ;-)

Best of Money Carnival

The Best of Money Carnival is now up. Congrats to all participants and especially the winning post, 5 Lessons From a Homeless Entrepreneur.

Enjoy!

Should You Rent or Buy?

The following is an excerpt from Buying a Home: The Missing Manual. For more on this subject, see The Eternal Question: Rent or Buy?

Home ownership is a big step, and many people worry whether they're ready to take it. If you currently rent your house, you may wonder if you can even afford to buy a home. Just looking at real estate listings online or in the Sunday paper can make you break out in a cold sweat. Yes, homes are expensive. But they're also an investment—and for many homeowners, it's one of the smartest investments they'll make. Depending on how much you currently pay for rent, how expensive homes are in your area, what your credit score looks like, and how long you plan to live in the house (among other factors), buying a home is often less expensive than renting in the long run. After all, when you rent, you just pay for a roof over your head. When you buy, you become the owner of that roof—and everything beneath it.

Renting does have its advantages. Here are some:

• Renting offers more flexibility. If you like knowing that you can pack up and move at a moment's (or a month's) notice, it may make more sense to rent. Depending on the terms of your lease, you're not tied to a residence for more than a year or two at most. When you own a home, on the other hand, you need to sell the property or find a suitable tenant before you can move—or else you'll end up paying a mortgage on an empty house.

Tip: If you know you're likely to move within three or four years, you're probably better off renting than buying. That's because you won't have time to build up much equity in your house (its cash value as you pay off your mortgage's principal) or break even on your closing costs.

• Maintenance is someone else's headache. When you rent, you call the landlord if a pipe bursts or the furnace quits. He sends someone to fix it—and takes care of the bill. When you own, all the maintenance—from keeping everything in good repair to mowing the lawn and shoveling snow—is your responsibility.
• You can move in faster. Buying a house takes time. If you're in a hurry to move to a new neighborhood, you might want to rent for a year and look for a place to buy during that time. Renters can usually move in soon after getting their rental application approved. Buying a home, on the other hand, takes months. You'll be living in your new house for years, so you want to take your time finding just the right home. Then you may spend a couple of weeks negotiating with the seller before you agree on a price and conditions. And getting financing and preparing for the property transfer can take 30 days or longer.
• Your move-in costs are lower. Renting a house usually involves no more up-front costs than two months' rent and a security deposit. Buying a home is far more expensive. You need a down payment of anywhere from 3.5 to 20 percent—or more—of the home's purchase price and thousands of dollars more for the fees and costs associated with getting a mortgage (Chapter 9 gives you a rundown of what those are).
• You can keep your money in the bank. Being a first-time homeowner frequently means scraping together all the money you can find to afford a down payment and closing costs. Once you buy a house, your money is tied up in your home. After you built up some equity (cash value in the house as you make principal payments), you can tap into it with a home equity line of credit (Section 1.1.2.2). But if you want your money readily available (especially within the next few years), or if you want to invest in something other than real estate, it may make more sense for you to rent.

If you're thinking about buying a home, you're already aware that buying has its own advantages. Here are some major ones:

• Say goodbye to your landlord. It irks some people to pay good money each month and not get anything more in return than the right to live under someone else's roof. When you own your home, each mortgage payment builds up your equity in the house—not much at first, but it increases with time (Section 1.1 explains how that works). Some landlords are great, but others are slow to make repairs—and quick to raise the rent. If you want to feel like your home is your own, you might be ready to buy.
• Take advantage of tax breaks. You can deduct mortgage interest, property taxes, and some closing costs from your federal income taxes. (For the tax savings to make a difference the deductible items must add up to more than the standard deduction—and you'll have to itemize all deductions to claim this tax break.)
• Beat inflation. As the cost of living goes up, the cost of rent goes right up with it. If you use a fixed-rate mortgage (Section 7.3) to buy a home, however, your principal and interest payments stay the same for as long as you live in the home. The longer you stay there, the more pronounced this benefit.
• Build equity. Renting is pay-as-you-go; as long as you pay your rent and abide by the terms of your lease, you can live in your home. But if you buy, as you make mortgage payments and as home values rise, you gain equity in your home. You can treat your home's equity like a savings account, cashing out when you sell the home and using the money for a down payment on your next home. Or you can borrow against it using a home equity line of credit (Section 1.1.2.2).
• Have your own place. For many people, the main reason to buy a home is to have a place that's truly their own. You're not paying off the landlord's mortgage—you're investing in a home with your name on the deed. That's a great feeling, whether you buy a one-bedroom manufactured home or a many-roomed mansion.

Do We Favor the Rich?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Here's an interesting piece of Scripture I was reading the other day (James 2:1-9, NLT):

My dear brothers and sisters, how can you claim to have faith in our glorious Lord Jesus Christ if you favor some people over others?

For example, suppose someone comes into your meeting dressed in fancy clothes and expensive jewelry, and another comes in who is poor and dressed in dirty clothes. If you give special attention and a good seat to the rich person, but you say to the poor one, “You can stand over there, or else sit on the floor”—well, doesn’t this discrimination show that your judgments are guided by evil motives?

Listen to me, dear brothers and sisters. Hasn’t God chosen the poor in this world to be rich in faith? Aren’t they the ones who will inherit the Kingdom he promised to those who love him? But you dishonor the poor! Isn’t it the rich who oppress you and drag you into court? Aren’t they the ones who slander Jesus Christ, whose noble name you bear?

Yes indeed, it is good when you obey the royal law as found in the Scriptures: “Love your neighbor as yourself.” But if you favor some people over others, you are committing a sin. You are guilty of breaking the law.

Ouch.

Is he talking to me? Unfortunately, I think so.

Our society as a whole tends to favor the rich over others. People with nice cars, big homes, and the finer things in life get extra perks and privileges. They get the better seats and all that goes with them. They are different (in a good way) and thus given preference.

The poor, on the other hand, are often despised and ignored. They are often seated in the back or aren't even invited to events. They don't get the nicer seats and extra perks. They are different (in a bad way) and thus shunned.

This is the standard all across America. Even in our churches. Maybe "especially in our churches" since such organizations survive on donations. It's not supposed to be this way and those in authority (pastors) generally don't want it to be this way -- but it often is.

And, like I said, it's true in my life as well. Just like most others, I judge books by their covers and give preference to those who are perceived to be more "well off" or "like me." Sure, I give to organizations that help the poor, but when it comes to actually meeting and dealing with poor people, they get to play second fiddle.

I don't have a solution for this issue other than I need to try and love my neighbor as myself -- with "neighbor" being anyone, no matter their financial situation.

I know it's an introspective post, but it's meant to be that way. Maybe you're in a similar situation to me. If so, perhaps the Scripture above will inspire you to better things. If you're not in a similar state as I am, then good for you. Keep on loving and honoring people no matter how much they make or own.

Do We Favor the Rich?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Here's an interesting piece of Scripture I was reading the other day (James 2:1-9, NLT):

My dear brothers and sisters, how can you claim to have faith in our glorious Lord Jesus Christ if you favor some people over others?

For example, suppose someone comes into your meeting dressed in fancy clothes and expensive jewelry, and another comes in who is poor and dressed in dirty clothes. If you give special attention and a good seat to the rich person, but you say to the poor one, “You can stand over there, or else sit on the floor”—well, doesn’t this discrimination show that your judgments are guided by evil motives?

Listen to me, dear brothers and sisters. Hasn’t God chosen the poor in this world to be rich in faith? Aren’t they the ones who will inherit the Kingdom he promised to those who love him? But you dishonor the poor! Isn’t it the rich who oppress you and drag you into court? Aren’t they the ones who slander Jesus Christ, whose noble name you bear?

Yes indeed, it is good when you obey the royal law as found in the Scriptures: “Love your neighbor as yourself.” But if you favor some people over others, you are committing a sin. You are guilty of breaking the law.

Ouch.

Is he talking to me? Unfortunately, I think so.

Our society as a whole tends to favor the rich over others. People with nice cars, big homes, and the finer things in life get extra perks and privileges. They get the better seats and all that goes with them. They are different (in a good way) and thus given preference.

The poor, on the other hand, are often despised and ignored. They are often seated in the back or aren't even invited to events. They don't get the nicer seats and extra perks. They are different (in a bad way) and thus shunned.

This is the standard all across America. Even in our churches. Maybe "especially in our churches" since such organizations survive on donations. It's not supposed to be this way and those in authority (pastors) generally don't want it to be this way -- but it often is.

And, like I said, it's true in my life as well. Just like most others, I judge books by their covers and give preference to those who are perceived to be more "well off" or "like me." Sure, I give to organizations that help the poor, but when it comes to actually meeting and dealing with poor people, they get to play second fiddle.

I don't have a solution for this issue other than I need to try and love my neighbor as myself -- with "neighbor" being anyone, no matter their financial situation.

I know it's an introspective post, but it's meant to be that way. Maybe you're in a similar situation to me. If so, perhaps the Scripture above will inspire you to better things. If you're not in a similar state as I am, then good for you. Keep on loving and honoring people no matter how much they make or own.

Seven Good Jobs that Do Not Require a College Degree

Now that the general opinion seems to be that any college degree is better than no college degree, here's a list of great paying jobs for which no college degree is required:

1. Freelance Photographer: $47,800 median salary
2. Private Detective or Investigator: $50,600 median salary
3. Elevator Mechanic: $61,500 median salary
4. Nuclear Power Reactor Operator: $79,100 median salary
5. Personal Trainer: $37,500 median salary
6. Director of Security: $62,400 median salary
7. Air Traffic Controller: $60,200

If you read the piece they note for many of these that while a degree is not required, it's often an asset.

That said, a winning financial strategy without a college degree might look something like this:

1. Avoid the four-year sacrifice that most people put into getting their college degree. Instead, get a job out of high school and earn money for those four years. At $20k per year, you're ahead of the game by $80k when the college student graduates.

2. Avoid the associated college debt (because you didn't go to college.) If this is $20k, you're now ahead by $100k even if you pay it off in one lump sum (which most people don't.) In the end, that $20k will cost you a lot more than $20k when interest is added in over five to ten years or so.

3. Get a high-paying job like the ones above. Many of them are better than what you'll earn in other fields with a college degree.

All this said, I think it's a tougher path to pull these off and hence going the "traditional route" of getting a college degree is the better option for most people. But not getting a degree can be a better financial move -- if it is done in the correct manner.

Are You A Secret Spender?

The Wall Street Journal asks if you are a secret spender -- if you're hiding purchases from your mate. Apparently, many people do:

According to a recent American Express Spending & Saving Tracker of more than 2,000 adults, 27% of respondents have “misrepresented the amount of a purchase” while 30% said they have hidden purchases from their partner.

But wait, it gets humorous. Check this out:

To keep spending under wraps, consumers responding to American Express’s survey have gone as far as:

• burying their purchase in the backyard
• pretending that goods came from Goodwill
• hiding purchases in grocery bags to bring them home
• arranging for items to arrive while their partner was away
• sneaking out and bought an item in the middle of the night

Ha! I love the Goodwill ploy!!!! ;-)

For the most part, everything I buy is known about by my wife as I purchase it or soon thereafter. I have, on occasion, hidden a purchase in a grocery bag to bring them home, but I tell her about the item(s) soon thereafter (you know, when the moment is "right".) ;-)

In addition, these are small purchases -- in the $50 range at most. $250 or so is the max I'd spend on something without talking to my wife and it would have to be a GREAT deal. $100 is more like the top end amount for regular purchases.

Now whether or not my wife is a secret spender, well, I guess that could be a secret. But since I see the checkbook and credit cards (and there's no way to get cash except through our checking account), I would say she is not.

How about you? Are you a secret spender?

Carnivals for the Week of Aug 9

Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.

Here are some of the carnivals Free Money Finance was in this week and my posts that were included:

• EDITOR'S CHOICE! Carnival of Money Stories - How Going the Extra Mile Can Pay Off

• The Wealth Builder Carnival - How to Ask for a Raise

• Festival of Frugality - Secrets of Extreme Savers

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my

weekly roundup.

15 Insurance Policies You Don't Need

Yahoo lists 15 insurance policies you don't need as follows:

1. Private Mortgage Insurance
2. Extended Warranties
3. Automobile Collision
4. Rental Car Insurance
5. Car Rental Damage Insurance
6. Flight Insurance
7. Water Line Coverage
8. Life Insurance for Children
9. Flood Insurance
10. Credit Card Insurance
11. Credit Card Loss Insurance
12. Mortgage Life Insurance
13. Unemployment Insurance
14. Disease Insurance
15. Accidental-Death Insurance

The only one of these I have is #3. My "old" car is still worth $9,000 or so according to Kelly Blue Book, so I have it covered. Now if it was worth $2,000 or less, that would be different.

I'm sure there is someone (or several people) out there who will disagree with one or more items on this list (arguing that people SHOULD have a type of insurance), so let's have at it. If you disagree with the list, let your thoughts be known below.

Are Tattoos at Work Really That Acceptable?

MSNBC says that tattoos are becoming more acceptable for potential employees. Their thoughts:

While more than 14.5 million Americans are out of work, tattoos are becoming less of an obstacle to finding employment, according to a Challenger Gray Christmas report released earlier this week.

Tattooing has become so common employers are increasingly forced to choose between rejecting inked employees or having a severely limited job candidate pool, said John A. Challenger, CEO of the outplacement firm.

“Today, even in this tight job market, most companies are not going to view tattoos too harshly,” he said. “One reason is that with everyone from soccer moms to MIT computer science graduates sporting tattoos, preconceptions about tattooed individuals are no longer valid. Secondly, and more importantly, companies have a vested interest in hiring the most qualified candidate.”

Human resource workers have been seeing more job applicants with tattoos, including more with prominent art placement such as on the face, said Sue Murphy, association manager for the National Human Resources Association.

Tattoo-friendliness often depends on the position, employer and industry the worker is in, she said. Employees having frequent face time with customers are more likely to be forced to cover up than those working a cubicle desk position, according to Murphy.

Here are my thoughts on this issue:

• These two set of comments don't make sense to me:

• "While more than 14.5 million Americans are out of work" and "this tight job market"
• "Tattooing has become so common employers are increasingly forced to choose between rejecting inked employees or having a severely limited job candidate pool."

It seems to me that employers can be as picky as they want to be these days. No?

• "Preconceptions about tattooed individuals are no longer valid." Really? Most of the people I know (in middle to upper management) might not think tattoos reflect gang activity or biker stereotypes, but most would say they do hint at poor judgment. Why? Because most (not all mind you) employers and most (not all mind you) hiring managers are more conservative/older, and this group generally frowns on tattoos in my experience.
• "Human resource workers have been seeing more job applicants with tattoos, including more with prominent art placement such as on the face." On the face? Really? To me, that's the kiss of death.
• "Tattoo-friendliness often depends on the position, employer and industry the worker is in." I agree. And while it may be more acceptable these days to have a tattoo, I think the percent of employers and hiring managers willing to overlook them is still small.
• Here's my question: in today's tough job market, why make it tougher on yourself by getting a tattoo? For the same business reasons that I wouldn't get a nose ring or paint my hair blue, I wouldn't get a tattoo. Why make life harder on yourself -- especially when you're putting your #1 financial asset (your career) at risk?
• Here's my advice: don't get a tattoo. If you MUST get one, put it somewhere easily concealable -- on a spot where you normally would wear clothing in a work setting.

Maybe I'm just showing my age. What's your take on the issue?

Where You Buy Something Makes a Big Difference in Cost

While I was on vacation in July (plus a couple side events) I had several experiences that reminded me again that where you buy something makes a big difference in how much it costs. These can be boiled down into two categories as defined below.

Category #1: Soda Pop

Here are my experiences in trying to quench my thirst:

• I try not to drink much pop, but while I was on vacation I did a lot of yard work/landscaping. On one trip to the local Menard's for mulch, I decided that I wanted a cold Diet Coke. It was $1.29 for 20 ounces. Yikes! I knew I could get a 2-liter bottle for 99 cents (on sale) or so at the grocery store. But I wasn't at the store and this one was cold, so I bought it.
• The next day, I found myself at the gas station between more yard work and again I was thirsty. They had Diet Coke for $1.29 for 20 ounces but also had fountain drinks -- $1.39 for 32 ounces. I went with the fountain drink.
• A week later, I was at a professional baseball game. It was sunny, hot, and humid. By the 6th inning I could take it no longer and went to get a Coke. $4.25 for (I'm guessing) 32 ounces. Ugh. (But it was tasty.)
• A week after that, I bought my kids a soda at a concert -- $2 for 20 ounces. Not bad considering it was a concert venue.

Same product, but WIDELY different prices based on where you purchased it.

Category #2: Ice Cream

As you all know, I'm a Moose Tracks ice cream fan and somewhat of an ice cream "expert." so consider the various options we have when buying ice cream (and related) products:

• While eating out, we noticed that a piece of cake and a scoop of ice cream (with fudge over them both) was $7.99. It was supposed to feed a whole family, but I could have eaten one by myself.
• We sometimes go to the local ice cream shop and get a cone or a sundae. It ends up costing us in the neighborhood of $2.50 for 16 ounces or so of ice cream ($10 total for our family).
• Most often we opt for the local store brand (which is very good) ice cream. On sale it's $2.50 for 56 ounces. Buying this we get several desserts from one purchase.

Again, these are the same products (for the most part) but widely different costs depending on where you buy them.

So consider this a reminder for you as well: the price of a given product can vary widely depending on where you buy it. Hopefully, you're making most of your purchases where the lower prices are.

Help a Reader: Buying Small Numbers of Shares

Here's an email I recently received from a reader:

I am working with my daughter (almost 7) to understand basic money concepts such as saving, planned spending, donating, and investing. 

We have some good plans in place for the rest of it, but investing is harder.  She has a portion of her total allowance that gets set aside for investing, and I match it.  As she accumulates funds, I am planning to use it to buy some stock that is relevant to her - Disney, Mattel, McDonald's, Wrigley, or something similar.  Once I know what the options are, she'd get to pick the stock so she more clearly understands that she chose to own a piece of the company.  We would only be investing about $240 initially, and then probably not more than $100 a year after that for now. 

I looked at some DRIPs but most have a requirement of purchasing an initial share of stock somewhere else first, and I am not sure what the best way to get that initial share is.  Most places I saw seemed to charge at least $30 for getting the initial share, on top of the cost of the stock, or to require regular automatic investing which isn't practical with this small an amount of money.  I would prefer to have the stock in her name if possible as well since it is money she saved. 

Does anybody have any experience with stocks owned by minors, buying individual shares, DRIPs, or suggestions on better ways to invest for young children?  If there is a better option than buying stock I am open to it.  This just seemed like the best way to give her an intro with a small amount of money.

What's your advice for her?

Saving: The Most Fundamental Element of Wealth

The following is a guest post from Marotta Wealth Management.

Everything in wealth management begins with savings. All wealth comes from producing more than you consume. Unfortunately, most Americans are better at consuming than producing.

Have you ever met people who always have enough money to do what they want? Their peace of mind and confidence is no accident. Nor is it luck. It comes by carefully planning their spending and savings. They deny themselves some desires now in order to enjoy financial security later.

The character Mr. Micawber from Charles Dickens's novel "David Copperfield" offered a kernel of wisdom learned the hard way, now popularly known as the Micawber principle. He said (numbers updated), "Annual income $50,000, annual expenditure $48,750, result happiness. Annual income $50,000, annual expenditure $51,250, result misery."

Surplus income is wealth. Deferred consumption is the textbook definition of wealth, which can be used as a capital investment to produce additional wealth. Although by itself money certainly does not guarantee happiness, wealth can enable us to accomplish many goals in life. Without such a surplus we experience Micawber's misery.

Mr. Micawber is memorable for trusting that "something would turn up" to solve his financial problems. Americans are perennial Micawbers. The savings rate in America is abysmally low, and those who do try to acquire wealth are chastised by a punitive tax code. Micawberism, in contrast, has been rewarded so much, it is considered patriotic to shop until you drop simply to boost the economy.

Unfortunately, economics doesn't really work that way.

Most families who become mired in credit card debt do so because they fail to plan for emergencies. These unexpected events swamp their cash flow, and they have to resort to plastic. But cars break down. Roofs leak. And children need braces. We recommend saving 10% of your take-home pay just to meet these unanticipated expenses.

Saving fuels the financial engine that makes the rest of wealth management possible. Whatever your life goals, saving is most likely required to achieve them.

Saving is the logical choice if you have upcoming major expenses. Some families need to save small amounts to meet modest needs. Others have elaborate and expensive plans that require more complicated strategies.

One of the most important purposes of saving is financial independence or retirement. There isn't a simple dollar amount that will be sufficient. What matters is that you have saved enough to support your lifestyle. Having $1 million at retirement doesn't help if your lifestyle requires $200,000 per year. Dying young is never a good retirement plan.

Saving too little or too late requires more extreme adjustments in savings or lifestyle later in life. Worrying about how to meet your financial objectives should not haunt you. You will know if you are on track only if you know what that track looks like and you adjust your course regularly as needed.

Saving is powerful, but it is only half the story. If you do not invest your savings, inflation will erode your purchasing power every year. In contrast, savings that are invested grow and appreciate.

You should know how much to save today to exceed the needs and priorities of tomorrow. At a 10% rate of return, your savings will double every seven years. So for every seven years you delay saving, you are cutting your ultimate lifestyle and net worth in half.

All of this wisdom about saving can be summed up by the suggestion to "Start saving now." Beginning early in life is certainly the most significant factor in building real wealth.

Saving a million dollars isn't so difficult. Investing just $16.20 a day at a 10% rate of return grows to $1 million in 30 years. This phenomenal rate of growth comes simply by having $16.20 more in income than spending each day. By saving $162 a day, you could accrue $10 million after 30 years.

The most successful way to save is to automate your saving plan. Make savings your default setting. Establish an automatic electronic funds transfer from your checking account to your investment account the day after each paycheck is deposited. You won't miss what you don't see.

Making these decisions explicitly is much better than failing to plan and then being forced to take whatever options are still available late in the game with little time left for course corrections.

Comprehensive wealth management comprises many different elements. But saving is the most fundamental. It is like hydrogen, the first and most basic element. By its energy the sun gives us light and warmth, making all life on earth possible. Harness the energy of saving and put it to use for your life goals.

Most families with significant investments are simply the millionaire next door. They live well below their means and save and invest the difference. They grow rich slowly and steadily. Wealth is what you save, not what you spend.

Take control of your savings today. It is the cornerstone of your wealth management plan.