Free Money Finance

Money Commandment #7

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #7 as follows:

The old-school rules: Not everybody needs a college degree to get ahead. There are plenty of good-paying, secure jobs for people with high school diplomas.

The bubble economy rules: Get the best education you can, regardless of the cost. Student lenders will give you as much money as you need.

The new rules: You need at least a two-year degree to get ahead, but limit how much you borrow for any education.

I'm still sorting out my thinking on this subject as my kids start to approach college age. Here's my take as of now:

• I don't think that everyone needs a college education or that everyone is "college material." There are still good jobs out there that don't require a degree, but these seem to be a lot fewer than in days past.
• It was never my opinion to get a degree "regardless of the cost." That's what gets you $97,000 in debt, $120,000 in debt, or $200,000 in debt. Ugh.
• The key to getting an education is the same as any financial purchase: Will it pay off? Is it worth the cost? Are expected income gains greater than the cost?
• There's a clear way to get the most out of college. I believe if you follow it, you'll be more than fine when it comes to getting an education.
• I'm not sure about the two-year degree recommendation. I'll need to do a bit more research before I have an informed opinion on it.

The book also shares a couple pieces of compelling information in favor of college degrees. The first is the poverty rate for persons in the workforce for 27 weeks or more. It's from 2006, so a bit dated. The results:

• Less than a high school diploma -- 13.8%
• High school graduate, no college -- 6.3%
• Some college, no degree -- 5.0%
• Associate degree -- 3.3%
• College graduate -- 1.4%

They also list the unemployment rate as of February 2010 as follows:

• Less than a high school diploma -- 15.6%
• High school graduate, no college -- 10.5%%
• Some college or associate's degree -- 8.0%
• College graduate -- 5.0%

Very interesting, wouldn't you say? What are your feelings on this issue?

What to Do When Retirement is Closing In

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists what you should do as retirement approaches. They break it out into time-based groups -- what to do 20 years from retirement, 10 years from retirement, five years from retirement, and so on. The ten and five year plans are the ones that interest me most since they represent the closest options to when I hope to retire. Here's what each of them suggests:

Ten Years Out

• Think about where you'll live.
• Imagine what you'll do.
• Review your retirement contributions.
• Consider paying down your mortgage.
• Cut your risk (cut back on percentage invested in stocks.)

Five Years Out

• Find out what income you can expect.
• Think about health care and long-term care expenses.
• Create a tentative budget.
• Run your plans by your planner.

Here are my thoughts on each of these:

• Where to live -- Great question! The book says that most people "age in place" -- meaning they live in the same host post retirement that they lived in before retirement. It also suggests that some people could save money by moving to a lower cost-of-living community during retirement.

This is an issue my wife and I will need to discuss in detail. One factor we'll want to consider is where our kids end up. Another is what options we have in other (warmer) states and countries. We have friends here in Michigan, but no family, so we could move quite easily. Perhaps we'll downsize to a condo here (assuming our kids stay in the area), live here from April to November, and move somewhere warmer for December through March. That would be my best guess at this point, but it's anyone's guess what we'll eventually end up doing.

• Imagine what you'll do -- Another great question!!! What would I do all day if I didn't work? Volunteer? Hobbies? Work part-time? 7 am to 5 pm is a looooonnnnnnggggggg time to fill up every day if you have nothing to do.
• Review retirement contributions -- I review my finances in general every month and in detail once a year, so I have no issue with this.
• Pay down mortgage -- I've got this covered already. We paid off our mortgage roughly 15 years ago.
• Cut your risk -- Of course. There needs to be a movement from stocks to more "safe" investments over time, though stocks will likely be part of them mix throughout retirement.
• What income you can expect -- Now that I have my retirement savings/net worth estimate by year, I'll be tracking my progress annually.
• Health care and long-term care expenses -- Huge issues. Health care will especially be an issue since it's likely that I'll retire early. So I'll need to find coverage. Long-term care? That's something I need to begin investigating.
• Tentative budget -- As the time gets closer, I'll most certainly create a post-retirement budget. By then I'll have 20 years of data on Quicken, so I should have a decent estimate for many categories.
• Run plans by planner -- I will certainly get advice for others (successful friends, my CPA, perhaps my readers if I'm still blogging then and anyone is reading.) But as you know, I don't have/need/want a financial planner.

Any thoughts on these plans?

Star Money Articles and Carnivals for the Week of April 25

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:

• Totally Money Blog Carnival - New Thoughts on the 4% Retirement Withdrawal "Rule"
• Carnival of Personal Finance - Save 97% of Any Windfall
• Carnival of Wealth - How to Make the Case for a Pay Increase
• Wise Bread lists signs you shouldn't be a business owner.
• The Simple Dollar prefers living rural.
• Consumerist hates Sears.
• Money Smart Life says not to join Angie's List.
• The Digerati Life lists property renovations that affect home value.
• The Sun’s Financial Diary discusses coupons.
• Lazy Man and Money has an investment pay off.
• FrugalDad lists money-saving vacation websites.
• BripBlap tells how to kill creativity.
• My Dollar Plan has pics of her new cabin.

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.

Five Retirement Myths

MSNBC lists five retirement myths as follows:

1. Medicare covers all important health care costs. Medicare covers a portion of your medical expenses once you turn 65, but far from all of them. The program was designed to pay for major health care needs, not routine dental or eye care, many prescription drugs and home-health or nursing home care. Retirees should consider purchasing a Medicare Supplement (Medigap) policy for roughly $200 a month to fill in the gaps. And pre-retirees should consider buying long-term care insurance in their 50s or early 60s.

2. Retirees spend much less. About half of retirees surveyed by the Employee Benefit Research Institute in Washington, D.C., said they spend as much or more in the early years of retirement than before they retired. Because retirement spending habits vary so widely, many financial advisers frown on the traditional rule of thumb that you need 70 to 80 percent of your pre-retirement income to maintain your lifestyle. To be safe, they say, you should plan on needing 100 percent.

3. Bonds are the best place for your money in retirement. Sure, bonds are generally reliable and less volatile than stocks. Although retirees need to protect their savings, there is such a thing as playing it too safe. Bonds aren't a great place to stash cash for the long haul. And their outlook has soured lately.

4. Social Security is going away. The fear that Social Security will disappear is overblown. Although some fixes need to be made, you shouldn't worry about losing this key linchpin to retirement security.

5. You'll be in a lower tax bracket when you retire. Federal income tax rates, now low by historical standards, are likely to increase as the government addresses its nearly $14 trillion debt. And states are suffering similarly. Many are expected to follow the lead of Illinois, which raised its income tax rate this year from 3 percent to 5 percent.

Here's where I stand on these:

1. I'm fairly far from retirement (at least complete retirement with Medicare), so I haven't started to review my Medicare options. But I'm guessing that I will get both a Medigap policy and long-term care insurance.

2. It's not really "100% of your pre-retirement income" (or whatever the percentage is), it's "100% of pre-retirement spending." Now for many people, they are the same (unfortunately), so I guess that's why they use these terms. But I spend about 1/3 of what I make, so I'll estimate a bit high (maybe 40% of what I make) as my post-retirement spending. Then I'll build in some additional cushion just to be safe.

3. Given that today's retirees live so long after they quit working, inflation is a big concern and one that bonds alone aren't able to deal with. So most people will own some stocks well into retirement.

4. I will be THRILLED if Social Security pays me anything. It better -- I've given it a TON of money over the years.

5. Good point on the tax rates. Everyone always assumes they will stay the same and that because income goes down, so will taxes. Point taken. 

Anything else to add or something I should consider?

When to Ask and Not Ask for a Raise

US News lists the following as times not to ask for a raise:

1. When you haven’t been on the job for long.

2. When you haven’t been performing well.

3. When the company is struggling financially.

My comments on these:

1. You should negotiate aggressively up front and therefore not need to ask for a raise soon after you are hired.

2. No one is going to give a raise to someone who's a poor performer. In fact, I'd have a hard time not laughing at a sub-par employee who asked for a raise.

3. If you're a great/vital performer, you still can get a raise when the company is doing poorly. Whether or not you want to ask then is up for debate. You'll need to balance your needs with those of the company and consider that you may be able to negotiate more later.

And here are their thoughts on when it's ok to ask for a raise:

1. When you have a sustained track record of accomplishment that you can point to.

2. It doesn’t hurt to have just done a great job on something.

Let's face it -- those who perform get raises, promotions, extra benefits and the like. Why? Because they deserve them. It's that simple.

I've taken a bit different approach in my career, but similar to what they're discussing above. I have only once asked for a raise after delivering some great results for a company (and I was getting promoted for it, so I felt a raise was in order.) This was despite the fact that people were getting laid off at the company. But I had some pretty big accomplishments, was getting promoted, and thus asked for a raise. And I got it.

But more often (three times) I've parlayed success at one job into a new/better/higher-paying job at another company. Each of these times my results were good enough to get me an award of some sort. These added validity to my success (outside recognition) and gave me something to talk about (during the interview/selling process) and point to (during salary negotiations.) Twice, in fact, I was able to push high enough that I was just a few thousand dollars below what my direct boss was making. ;-)

If you want to read more on asking for a raise, check out my posts titled How to Ask for a Raise, How to Ask for a Raise, and How to Ask for a Raise. I'm pretty creative with those names, aren't I? ;-)

The Three Worst Reasons for Buying a Home

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists the three worst reasons for buying a home as follows:

1. It will be a good investment.

2. I'm tired of throwing away money on rent.

3. I need the tax deduction.

Here's my take on these:

1. A home may or may not be a good investment, but I don't look at it as one. Among the few homes I've owned, I have lost money on two, broken even on one, and made money on one (enough to balance out the losses.) If we were to sell our house today, we would have lost money over the years. So I agree -- don't buy a home because you think it will be a good investment unless you have some compelling reason (and perhaps data) for thinking so.

2. The rent versus buy debate seems to go on and on. All I can say here is that you have to compare costs of renting versus owning to see which is the best deal. You also need to consider the other pros and cons with each option. For instance, renting usually requires a lot less upkeep on your part while owning a home often provides more room and a place you can tailor to your specific needs/tastes.

3. I never understood people who were willing to spend $1 to get 20 cents back. Seems like a bad deal to me. ;-) Yes, the tax deduction on mortgage interest will make the price of your home less costly than it would be without the deduction, but it's still an expense.

Any thoughts to add?

25 Ways to Save Money

Wise Bread lists 25 ways to save money. I've covered all of these one way or another over the years, but I thought I'd list their suggestions along with what I think (and what I do) about each suggestion. Here goes:

1. Reduce/Eliminate Daily Luxuries - You know I'm all about this. Yes, there's certainly room for the occasional treat, but I keep a pretty tight grip on small spending. Fees too.  

2. Carpool - I have never carpooled for a long period of time (I have for short periods when I or friends needed extended rides) and I've also taken the bus. There's just a HUGE convenience issue associated with being tied to another's time schedule. I'd be willing to cut out a lot of things before I started carpooling.

3. Prevent Repair Costs - IMO, maintenance is worth it's weigh in gold. That's why we always keep on top of it for our cars, mower, snow blower, appliances, etc.

4. Share Toys - Our kids are past the toy stage, but we certainly did pass along our share of them through the years -- though I don't recall us receiving many used ones. But we never spent a lot on toys, grandparents took care of that. ;-)

5. Shop on a Full Stomach - Or shop at Costco during sample time! ;-)

6. Share Baby Clothes - Did the same here as with toys.

7. Purchase Generic - We've been buying store brands for years. I even went to the trouble of comparing costs between Costco and Walmart, and store brands were much less expensive in both.

8. Buy in Bulk - You just need to calculate the per size/per use cost because buying in bulk isn't always the best deal. And if you don't use it all because it's too much, buying in bulk is almost always a worse deal.

9. Turn off the Lights - We run hot and cold on this one. We do well for awhile, then we'll have a few nights where every light in the house seems to be on.

10. Purchase Used Items - We do this all the time -- mostly on clothes (Goodwill). That said, we do buy new cars.

11. Cut Food Costs - My wife is the coupon/sale/rebate queen. I think we could cut our food costs a bit, but not much.

12. Reduce Reoccurring Costs - We've added and deleted from this category over the years. We have eliminated all magazine subscriptions but we do have cable and internet service (in addition to phone service, of course).

13. Save Your Spare Change - I put all of my silver coins in my car (for miscellaneous expenses.) I give all my pennies to my daughter. She thinks they are still worth something. ;-)

14. Shop Online - Two tips: 1) Amazon and 2) always look for a coupon code. For example, there's no reason to ever buy from GoDaddy without a discount of some sort.

15. Drive Steady - Ha! Good luck with this one!

16. Start Bargaining - Probably my favorite money saving tip of all time: asking for a discount. I f you need some help in this area, I've discussed how to do this at a chain store, when you're embarrassed about it, and when you just can't muster the courage.  

17. Eat Steak at Home - I think everyone knows it's cheaper to eat at home, right?

18. Pre-Drink at Home - We don't drink, so we save even more! ;-)

19. Use Coupons - Coupons can save you $30 to $120 per hour. Not a bad payback at all.

20. Watch the Game at Home - I actually prefer to watch a game at home rather than at a sports bar or at the actual venue. More comfortable IMO.

21. Fix It Yourself - If it's an easy and quick repair, I do it. If it's hard and long and there's a good chance I'll make it worse, I have someone else do it. If it's somewhere in the middle, I weigh the cost of the repair versus the time it would take me to do it and decide from there. For instance, if something takes five hours to do and costs $50, it's a no-brainer since I'd pay $50 to save 5 hours.

22. Romance on a Budget - My wife is more frugal than I am, so we don't have a problem here.

23. Be Debt Focused - Don't have any debt. Don't need to focus on it. ;-)

24. Do Your Own Taxes - I think this is an area where some people can be penny wise but pound foolish. That's why I use a CPA to do my taxes.

25. Learn More about Frugal Living - Learn about it? I'm living it!

What's your take on these suggestions? Any of them stand out as particularly good or bad?

Money Commandment #6

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #6 as follows:

The old-school rules: You can count on a good pension to get you through your golden years.

The bubble economy rules: Even if you don't save much, you can rely on stock market returns and rising home prices to fund your retirement.

The new rules: Start saving early for retirement, save as much as you can and don't stop.

My thoughts on these:

• We've discussed previously the fallacy that "everyone" had a pension to fall back on in the "good old days." The book adds some specifics to this with the following that lists the year and the percentage of workers covered by pensions (source: Employee Benefit Research Institute):

1940 -- 15%
1950 -- 25%
1960 -- 41%
1970 -- 45%
1980 -- 46%
1990 -- 43%
2000 -- 39%
2010 -- 37%

So not only did "everyone" NOT have a pension historically, but there was never a time when even half the population had a pension (unless there was a spike between 1960 and 1990 someplace that then fell back down on the decade mark -- but that seems unlikely). Furthermore, I find it interesting that even today more than 1/3 of workers are covered by pensions and more are covered today than were prior to 1960.

• I think we all know by now that you can't count on the stock market and rising home prices to fund retirement. The market can help and be a part of your overall plan, of course, but if your strategy is to make 15% (or even 10%) returns to catch up on 30 years of not saving, that's not going to pan out well for you.
• I'm with the book 100% when it says to save early and save often. As I've said, these are the keys to making sure you maximize your investments and, ultimately, the steps you need to take to become wealthy.

Anyone have anything to add?

Examples of How to Become Wealthy

My post titled Details on Millionaires generated a couple of comments from readers who I know are doing well financially. I thought I'd share their comments with you all since they were full of great advice.

Here's the first one:

At age 38 in approx 1998, I hit $1M~, then a divorce took $400K+ in 2000 and the '01 and '03 markets took some more. I worked HARD again, kept investing when others said "the times are bad" (dollar cost averaged in bad years) and saving too (those early '00 decade I bonds are priceless!) and retired in 2007~ w/ $2.85M.

Paid taxes, spent some and (I only count my house at tax valuation, not market plus CASH/investments, no STUFF in my net worth), still have 2.2~ to $2.4M. My income from pensions (about $40K~ since I have no mortgage and a VERY tax efficient portfolio) covers my living needs. $4k a month (!) more in guaranteed annuity at age 60 (minimum, could be more) means I better SPEND!

Early Retirement and financial freedom allows me to make up for some lost years of my 30's and 40's but, I'm doing well at it! It's discipline; I started a plan at age 22 and stuck to it. Only debt EVER in my life was a 48 mo car loan for $7K I paid off in 19 months and a trailer loan as a young AF officer that at $350~ a month (26 months) I recovered when I sold it. NEVER any other debt! THAT is the secret, ALWAYS live BELOW (well below) your means. Forget saving 10%, 15% minimum to up to 50% (after taxes) when you make the big ($500K+) income makes it happen!

Let's see: live below your means, don't go into debt, grow your career so you make a great income, and save a ton. Hmmm, sounds like I've heard those tips before. ;-)

Seriously, take it from this reader if you don't from me -- this stuff works!!!! And here's living proof that it does!!!!

Here's the next comment from another millionaire reader:

I can attest to the logic of Dr. Stanley.

You need to really focus on minimizing your expenses, especially when young to become a PAW... like most of the millionaires next door.

I remember when I was 23 and took my first job as an Engineer making $42k a year. $3500 a month gross paycheck, after taxes and 401k contributions take home was around $2600 / month. Besides giving my first paycheck to my parents to thank them for paying for college for me, I was paying $780 per month rent for a 1 BR apt, plus food, phone bills, and car insurance. Roughly saving $1000 -$1200 a month out of my income or 30 - 35% of gross salary.

Instead of spending more I actually found ways to cut my rent by living with 2 other guys in a very basic small house (2 BR, 1 BA, the 3rd guy slept in the basement!). This was in Northern Indiana. My share of the 'rent' (covering mortgage only) was $120 per month! It was great to live so cheaply, my friends from NYC were blown away at how cheap this was, and I got a chance to live with people who were very blue collar but interesting people. It took me out of my comfort zone, and I enjoyed that. No doubt it is much easier for a man to do this than a woman but I was watchful not to get into a dicey living situation.

My savings rate jumped by $660 / month or 20% of my salary, and I started to invest a bit with the extra savings.

I kept up that same attitude throughout my career and that is why my wife and I are living in a 2BR / 2BA condo that is worth less than $300k...even though peers of mine are living in very large houses with 5 bathrooms, swimming pools, etc.

I can personally vouch for the research done at MND, it has been very close to my own experience.

It's not what you earn, but what you keep.

Again: earning a good income, keeping expenses low to make your gap as large as possible, and saving a ton. It's a simple formula, and if you follow it over many years, you WILL become wealthy.

BTW, I have to echo the comments made by this last reader. I also read The Millionaire Next Door early in my post-college life. I started to apply its principles soon thereafter and the rest, as they say, is history. That book has made/saved me hundreds of thousands of dollars and that's why it's at the top of my best personal finance books of all time list.

Reader Profile: Mark

The following is the latest post on my new "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email.

Next in the series is FMF reader "Mark". Mark sent in his profile as follows:

About Me:
 
I'm a 40 year old  gay male with a boyfriend but we're living separately, so financially speaking, I'm single. Neither of us has previous marriages or kids (Yes, this is more common for gay men than a lot of people realize).
 
I live in the high cost San Francisco Bay Area and work in the public sector earning about $52,000 per year, plus benefits.  
 
Financial Situation:
 
Current net worth: ~$195,000. Breakdown: $165,000 in retirement accounts (government 457 plan, Roth & Regular IRAs), $3200 in taxable stock mutual funds, $16,200 in savings bonds and taxable bond funds, $10,800 net cash (after subtracting out $1300 in credit card debt at 0%). No debt other than the CC debt.
 
I got serious about my finances at age 26, when I got my first decent paying job in the public sector.  I made about 27K that year but had around 14K in student loan and credit card debt. I have had some help from my parents over the years, but only about 10K of my net worth has come from parental cash gifts. 

I came from a comfortable middle class family with parents who always saved (paid cash for cars, paid the mortgage off early, etc).  In my late teens and early 20s, I got involved in a realtionship with someone who was terrible with money. I kept thinking I could get him to see the light. It never happened. Long story short: I declared bankruptcy at age 21 and there were about 3 times between the ages of 18 and 24 where I was very close to being homeless.
 
Current financial issues/concerns:
 
I work in the public sector and we had layoffs last year and will have more this year. Layoffs are not imminent for me this year, but are a possibility in upcoming years. I have a generous pension plan that will pay out as early as age 55, but I have always tried to save as if the pension plan didn't exist. That turned out be a good idea, as there is now serious talk of freezing the pension plan so that I'll only get what I've accured for the last 14 years of service, but not any more in the future. I will also likely be taking some kind of pay cut come July, probably around 10%, but possibly more.
 
I admit to being a little lazy and not terribly ambitious; so while I agree with FMFs advice in investing in one's career, I haven't really done it. I'm not really interested in working full time and going to school at night to get another degree and/or working a second job on the side.
 
I'm somewhat worried because a lot of jobs in my field are being automated away, although I don't see them going away completely. If I lose my job, I will need to change careers in order to earn the same or higher pay, and that will likely prove to be an expensive and time consuming proposition, so I'm hoping to have at least 2 years' worth of living expenses saved in cash or savings bonds in the event this would happen. I'm only about 1/2 of the way there at this point.
 
I'm also going to need a car at some point, since the one I have is 15 years old. It's in decent shape, but it's not going to last forever, so my current focus is try to maintain my retirement savings rate while stashing away some cash. I may be forced into reducing my retirement savings or into getting that dreaded second job.
 
Plans for the Future:
 
As for future plans, that is tricky.  If I maintain my current contributions of $12,700 per year for the next 15 years and if the funds in my retirement accounts get the same rates of return that they have in the previous 15 years, I should be on track to hit $1,000,000+ by age 55 (not including cash and investments in non-retirement accounts). That, plus my pension payout should set me up nicely. However, my pension is in jeopardy, so I may have to work longer than anticipated.
 
Ideally I'd like to do some volunteer work with some local non-profits such as being a docent at the local art musem or working with the local tree planting group.
 
If I lose my job, I plan on leaving California and starting another career in a lower cost Western state. A big wild card is whether or not my boyfriend & I will eventually move in together and merge our finances. We've been together a year and we both seem to prefer to take things slowly, as is often the case, I think, when people get in relationships later in life. My boyfriend earns a lot more than me, but I have better benefits (for now, at least). I live as if I have no one to fall back on.
 
I know this will sound overly pessimistic to many, but I have grave concerns about the prospects for the US economy over the next 15 years. I fear we will have a Depression that will make the Great Depression of the 1930s seem like a walk in the park. At the rate we're running up government debt in the US as well as in many other so-called developed countries around the world, things don't look too good. Since I don't need a lot to be happy, my approach has been to save a decent amount but to not get too attached to any possessions I may have, be they financial assets or "stuff". This is also part of the reason why I haven't knocked myself out career-wise. Why knock yourself out when the rug can so easily be pulled out from under you even in a normal economy, let alone a really bad one?
 
General Philosophy & Advice:
 
My strength is that I am good saver. This year I should sock away just over $12,700 in my retirement plan, plus a few thousand toward my cash stash.  I might have to reduce this amount if I take a pay cut but I think I can sustain this with some cutting of expenses in other areas. (Fingers crossed!)
 
I think the biggest thing you can do for yourself is to keep your housing and car costs low. Don't tell me it can't be done. It can. It's worth the sacrifice to have roommates in order to save money. For most of the last 14 years, my housing costs have been at or below 20% of my gross income (Having several brushes with near homelessness made me realize the importance of keeping housing costs low!). I rented rooms for 8.5 years so that I could get ahead financially and then upgraded to a studio apartment at age 35. I finally did get sick of roommates, but you have to realize you can't have it all like the people on TV and in the movies do. And by the way, I lived for quite a few years without a TV. I haven't had cable TV in almost 20 years. I've always thought it was a rip off to pay for TV and still be stuck watching a ton of commercials, especially now that you can get DVDs free from the library or pay $20 a month for a Netflix subscription.
 
Same thing goes with cars. Pay cash for a reliable used car and drive it into the ground. Don't buy more car than you truly need. Most people don't really need those huge gas guzzling SUVs and pickup trucks. I'd also say it's generally better to live in a smaller place closer to work than in a larger one with a long commute. Commuting has a lot of hidden costs that people don't consider. The stress of commuting gets worse the longer you do it.
 
It's also very important to not compare your lifestyle to the lifestyle of your friends and peer group. At least half of the people in your peer group are broke or going further in debt. If you feel like being around certain people puts you under pressure to constantly spend, then you need to find new friends. I'm an introvert and tend to not care what other people think, so this one is fairly easy for me.
 
Besides blowing too much on houses and cars, I think the biggest financial killers for most Americans are having kids out of wedlock and divorce. Those are just huge obstacles to financial success. I learned the hard way that attraction/being in love is important, but never enough reason, all by itself, to go to bed with someone or to marry them. At the very least, it's important to be religious in the use of birth control! While frugality isn't the only iimportant trait, I do think that the chances of a long lasting and happy marriage/partnership are increased when both partners are frugal. The emotional skill set required for someone to be good at managing money is transferrable to other realms of life, such as maintaining happy long term relationships. People who aren't good at managing money are more likely to have underlying emotional problems that take a toll on their relationships as well. Good money management skills are very much emotional/psychological in nature. 

One final point -- I also believe in giving to one's favorite chuch, charity, or cause and have done this for the last 14 years. Some years, as much as 10% of my gross. More recently, it's been a lower percentage, more like 2%, but I'm looking for ways to increase that amount.
 
My One Piece of Investment Advice:
 
Put most of your retirement and long term investments in a solid "balanced" mutual fund with low expenses (.75% or less) that invests ~60-75% stocks and ~25-40% in bonds and cash. I wouldn't look at any fund with less than a 10 year track record. Most of us can't handle the volatility of a 100% stock fund and will buy and sell out at the worst possible times. For those who love index funds, like FMF, I'd mention that Vanguard has a decent balanced index fund; although there are several moderate to low cost funds in this category that have consistently beaten the balanced index over short and long time periods.
 
If you want to buy individual stocks, or any kind of mutual fund that invests 100% in stocks, do it only when you truly have extra money to spare, after you've got a year's supply of cash, money for your next car, and any other upcoming expenses (college tuition), etc. The better balanced funds have matched or beaten the returns of the stock market over long periods of time with less volatility.  If I had known this when I first started investing, I would probably have a net worth 50K higher than I currently do. Live and learn, I guess.

Money Commandment #5

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #5 as follows:

The old-school rules: You should stretch to buy a house and pay off the mortgage as quickly as possible.

The bubble economy rules: Buy as much house as your lender will allow; don't worry about paying down your mortgage; remodel for maximum resale; keep trading up.

The new rules: Buy less house than you can afford; pay down the loan the smart way; remodel with cash; don't move if you can help it.

I've been advocating the "new rules" from the get-go. Funny how a recession can demonstrate the soundness of good financial advice, huh? ;-)

A few comments:

1. Over five years ago I published my formula for buying a house. I stand by the thoughts in that post today, which are basically buy something you can afford and then work to pay it off quickly.

2. I'm not sure what "pay down the loan the smart way" means, but if it means pay off other (usually more costly) debt first as well as make sure you're saving for retirement, etc., then I agree with it. That said, if you work to make your gap as large as possible, you won't need to sacrifice other goals while paying off your house.

3. We ALWAYS remodel with cash. Things we've done lately: paint, get new furniture, get a new furnace/AC, and landscaping. All were paid for with cash (charged to a credit card to get 2% back and then paid off completely when due.)

4. We flirted with moving a few years ago and were a week away from actually doing so when the new house's inspection came back lacking in one area we couldn't live with. Since then, we've simply stayed put and done a bit of remodeling to our place, as noted above. In the end, I'm glad we stayed. Our current place is smaller and easier to take care of and is MUCH less expensive than the new place would have been.

What's your take on these "rules" regarding home ownership?

The Best of Money Carnival

The Best of Money Carnival is up. Congrats to all participants and especially the winning post, How Stock Options Work.

Enjoy!

How Millionaires Become Millionaires

After sharing Millionaire Facts, I ran into this piece from Yahoo Finance titled Wealth Is What You Save, Not What You Spend that talks about how millionaires became millionaires. How could I not post on something with this title? ;-)

Some of the quotes from the piece I just have to share (with my thoughts added in):

Most of those folks with a net worth of $1 million or more have earned it themselves.

Many people mistakenly think that most millionaires have their wealth handed to them from either their relatives or some stroke of luck (like winning the lottery, being gifted with amazing abilities/talent, etc.) This is completely false. Most people with over seven-figure wealth got it the old-fashioned way, they earned it.

Most of those with big bucks live well under their means and they put their money instead toward investments that help them stockpile more wealth.

This is why spending less than you earn is my best piece of financial advice. It's also the reason that over-spending is the worst money mistake anyone can make.

"It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes," the authors wrote. "Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline."

Some related FMF posts that you might like to read that support these claims:

• The Wealth of Farmers
• Intelligence Still Linked to Income, Not Wealth
• How Most Millionaires Become Wealthy

Income alone does not make one rich. It helps, of course, to build wealth, but the financially independent look to their salaries as a means to an end, which is that pile of cash.

Simple math tells us all that it's easier to become wealthy with higher incomes (that's why I recommend growing your career and offer other money making suggestions as well.) But those who make more often spend more -- either treading water or even going backwards financially.

Among the biggest differences between those flush with cash and those wishing they were is in how they pay for things. Millionaires tend to use cash for most of their purchases, including cars, homes and boats.

We paid for our last car with cash (and several before that), our last home with cash (from the sale of our previous home), and we don't want/need/have a boat. Of course I prefer to pay for anything by credit card, get the cash back, and pay it off immediately. ;-)

And they're patient, willing to invest in the long term and wait it out. "They stick with their investments and are more likely to have a financial plan," said Sanjiv Mirchandani, president of National Financial, a subsidiary of Fidelity Investments. Many take the long-term approach to investing because they're working at being financial independent.

They "just so happen" to take advantage of the #1 way to grow their investments: time.

When it comes down to it, becoming wealthy is pretty simple: make your gap as big as possible and invest it for a long, long time.

Anyone working on this plan? I know you're out there. ;-)

Does a Smartphone Save You Money?

Here's an interesting piece from Yahoo Finance that details what gadgets you do and do not need. Their summary:

• Desktop computer: Lose it.
• High-speed internet at home: Keep it.
• Cable TV: Depends.
• Point-and-shoot camera: Lose it.
• Camcorder: Lose it.
• USB thumb drive: Lose it.
• Digital music player: Lose it (probably).
• Alarm clock: Keep it.
• GPS unit: Lose it.
• Books: Keep them.

I was struck by the number of times where they said that a smartphone offered a good version of one of the above, so you didn't need to purchase anything extra. Specifically, they said that a Smartphone could save you from buying a point-and-shoot camera, a camcorder, a digital music player, and a GPS unit (it could also be an alarm clock, but they like the simplicity of the original.)

So this got me to thinking -- is a Smartphone actually a money saving purchase? That's a question you don't hear often, but it seems legitimate in light of the information above.

What's your take on the issue?

My Retirement Plan (Updated)

Almost five years ago I did some basic calculations to set my retirement number. Recently I decided it was time to update those projections as well as get a bit more specific. After all, I am five years closer to retiring. ;-)

So here's what I did:

• I started by setting a baseline -- where my assets were at the end of 2010. I did this for every major asset group -- retirement accounts (401k and IRAs), personal investment accounts (taxable), 529s, house, savings accounts/cash, and so on. Since I have no debts, these numbers summed make up my net worth.
• I then assumed a given return/growth rate for the next 14 years (when I hit 60) for each group. For investments, I assumed 8%. For house, savings and so forth, I assumed 0%. These numbers give me an estimate of what my current assets will be worth in any given year.
• I then selected a savings goal for each year -- what I can add to my net worth out of current income (as you know, I'm a pretty big saver). I estimated that the amounts saved would earn 8% every year after I saved them. This then gave me a value each year for the worth of my additional savings.
• I then subtracted extraordinary expenses in certain years. The only ones I really have (other than saving for retirement) are college costs for my kids. I added in a healthy amount even though I have 529s for them. If anything, I think I may have too much saved for college. Then again, it's better to have too much than too little IMO.

When all of the above are put together, I get an estimate of what my net worth will be in any given year. If I had access to all the money (much is in retirement accounts that I can't get to for some time), I could retire without having to work AT ALL by the time I'm 52 (the year both of my kids will be in college). But I don't have access to it all -- unless I want to initiate a SEPP plan. I need to investigate this more before I have an opinion one way or the other. It may prove to be a valuable way to help me transition into retirement.

Anyway, now that I have a decent guess of what assets I'll have at various points in my life, here are some options I can consider:

• I could retire completely at 52 with the aid of a SEPP plan. Then I could volunteer, start my own business, or do any one of a number of other things I enjoy (or find some new things I like to do.)  My annual income from my savings (not having to dip into the savings at all -- just live off the earnings) would be about $30,000 higher than my annual expenses even assuming conservative earning rates. Inflation will eat into this a bit, but I have a cushion.
• I could take early semi-retirement at 52, working part-time until I'm 59 1/2. At that point, I could keep working or retire altogether. I'm confident that I could earn enough even while working part-time to cover our annual expenses, so our nest egg would continue to grow for the seven "in-between" years. My wife could start working as well at this point since the kids will be out of the house.
• I could work until 59 1/2, then retire. I could either work part-time or not at all. If not at all, I'd have enough savings (not having to dip into the savings at all -- just live off the earnings) to replace my current income. Inflation will eat into this too, of course, but there's a huge gap between what I earn and my cost-of-living.
• I could work as long as I can, probably well into my 60's. At that point, Social Security would be available when I retire (assuming it's still around), but I wouldn't really need it.

These are just a few of the options my wife and I will need to consider. An additional one is that I could ramp up some side business interests for the next few years that would super-charge our savings and make retiring (either full or partial) at 52 much more comfortable.

So, anything you think I'm missing or that I should consider? I know health care is a major factor with not working. Anything else? Or perhaps you have some suggestions. What would you do in a similar situation?

Happy Easter!

No post today -- just wanted to wish you all a very happy Easter!!!!

Hope you all are having a blessed day!!

Where in the World Should You Invest?

The following is a guest post from Marotta Wealth Management.

Finding countries where you can plant your investments in fertile soil may be one of the most important asset allocation decisions you make for the next several years.

In 2002 I coauthored a column with my father, George Marotta, entitled "Will the US Go the Way of Japan?" in the "Charlottesville Business Journal." Our answer to the question was no. We argued that when the United States has an Enron go under, there isn't a too-big-to-fail syndrome. But when a large Japanese company is in danger of failing, the government comes to the rescue. The company becomes a drag on their economy for the next decade or more.

In that column we wrote, "The ruthless culture that allows large companies to go bankrupt in the US hurts less in the long run than the Japanese style of business subsidies. In the US, the government keeps hands off business; in Japan the government interferes with the operations of business and commerce."

My, how times have changed. Now, unfortunately, the United States is going the way of Japan.

Now Japan is struggling to recover from a devastating earthquake. I was asked recently if that tragedy would stimulate its economy. Regrettably, nothing could be further from the truth.

I would suggest that everyone read Henry Hazlitt's classic "Economics in One Lesson." In Chapter 2, "The Broken Window," Hazlitt debunks the fallacy that a hoodlum throwing a brick through the window of a baker's shop is somehow good for the economy.

Certainly the baker has to pay to have his window repaired, but now he only has his window back and no money to buy a new suit. The community is poorer one new suit that could have been made and in exchange simply got its window back. But the community doesn't see what is never made.

The broken window fallacy may seem obvious, but it comes in many forms. Some pundits are mistakenly arguing that the earthquake and tsunami will be just the economic stimulus Japan needs to pull out of its malaise. This conclusion confuses need with demand.

In our country we print stimulus money and believe we have created wealth. Stimulus money may increase government spending, but the growth of government is a negative in the equation of economic prosperity. This fallacy mistakenly equates purchasing power with money.

Economic fallacies like these are "so prevalent," Hazlitt writes, "that they have almost become a new orthodoxy. . . . The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consist in tracing the consequences of that policy not merely for one group but for all groups."

The politicians in many countries focus instead on the short-run effects on a special-interest group and ignore or belittle the long-run effects on the community as a whole.

Japan wasn't the best place to invest even before March 11. Its economy is smaller now than it was in 1992. The MSCI Japan Index averaged an annual total return of -0.29% from March 1996 through February 2011. Japan dropped another 9% this month as a result of the earthquake. Most of Japan's troubles have been self-inflicted by its own government. Freedom matters.

Japan scored 72.8 out of 100 (mostly free) in the Heritage Foundation's Index of Economic Freedom. Since 1994, the Heritage Index has systematically measured economic freedom in countries worldwide. The foundation defines economic freedom as "the ability of individuals to control their own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state."

Overall Japan is the 20th most free country, which isn't bad but is not great either. Not when 9 of the top 11 countries have large markets with easy ways to invest in them directly. In two important categories, Japan's scores are particularly poor. It ranks 145th in fiscal freedom. The top corporate income tax rate is 41%, the highest in the world. Even Japan realizes this is too steep. Next month they are cutting that rate to 36%. The U.S. top corporate tax rate is 35%, rising to 39.5% in 2013.

Japan also ranks 114th in government spending. Japan has some of the highest sovereign debt and deficit. Their ratio of outstanding gross debt to gross domestic product has risen from 68% in 1990 to about 230% in 2010.

Freedom matters. You can't afford to plant your investments in anything but fertile soil. If you simply invest in the MSCI EAFE foreign index, 22% of your investment is in Japan. What's worse, about 65% is in countries with low economic freedom and a high debt and deficit.

This isn't a reason to keep your investments here, however. Last year the United States lost its place in the list of countries with the most economic freedom for the first time in the 15-year history of the index. Part of the lower scores was a result of the U.S. debt and deficit exploding. If 65% of foreign investments are in countries with a high debt and deficit, then 100% of U.S. investments have the same problem.

Today, perhaps more than ever before, may be the time to overweight very specific foreign countries with low debt and deficit and high economic freedom. Put your investments in fertile soil where they can grow unimpeded.

How to Sell Your Boss on Telecommuting

In my post Reader Profile: Steve, Steve said this about his current working situation:

One of my most important financial (and quality of life) moves was when I informed a supervisor that instead of a pay raise, I wanted to telecommute.  I thought it would be a tough sell, but the reply was basically “you had me at no pay raise…”.  I realized later the sell was already made by years of dependable good work and being a good value.  I moved to a rural area to be near family and away from city life, which I had never liked.  I bought an older 4 bedroom house on 2 acres for $150K in a fantastic school district.  Using “high cost city” average pay to buy “low cost area” average expenses leaves quite a bit of leeway.  I eventually built enough contacts to start my own consulting business.  This allowed me more control over my hours (the long days were getting to my health) and has greatly renewed my interest in my work.

This comment received the following response from a reader:

Steve - Your idea of proposing telecommuting is an interesting one to me. I may have to try that at some point. I would love to live in my hometown 2,000 miles away and still be able to have my job, and my employer does have a history of allowing for that, to people who have proven they are valuable, which I believe I have. All in all, I am very impressed with your financial situation.

So imagine this: you can keep your current job (and your current salary) and move wherever you like -- to a lower cost-of-living city (saving you thousands of dollars each year), to a place near family and friends, or to a warmer/better climate location. Sounds pretty good, huh? But just how do you actually make this happen? Here is Steve's response:

Plan on how to show you can do your job without physically being there (best one being a "trial period" in which you just work from home and don't actually move) and show what's in it for your employer ("instead of a raise" that you deserved is a nice straight forward one). Then think about what you would do if you did move and eventually lost your job (would you move back? are there other opportunities in the new town, etc?). Then DO IT!

To me, the keys to making this work are probably:

• The job you are doing has to be able to be done remotely (kind of goes without saying.) You can crunch numbers and distribute them to others from afar, but it's hard to be a nurse from home. ;-)
• You need to be at least a good performer (if not excellent.) IMO, most employers won't want marginal performers off-site because 1) they don't "deserve" the perk and 2) they need to be supervised. On the other hand, employers want to retain good/exceptional workers and telecommuting may be one way to do this. Here's a real-life example of a good performer getting an unusual work request granted: an FMF reader switches from full to part-time work.  
• The company needs to be open to the idea. Let's face it, many companies don't allow telecommuting for one reason or another. The most common reason seems to be "if we did it for you, we have to do it for others."
• It helps if you give something back to them. Some examples: you could forego a pay bump, you could pay for all the equipment/services it takes to set you up remotely, you could take an extra project that the company wants you to take, and so on. If you do something for the organization/your boss, they/he is more likely to grant your request.

Anyone out there actually made the move to telecommuting? If so, is the list above correct? Or are there other tips that should be followed? Please share your advice with the rest of us.

Money Commandment #4

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #4 as follows:

The old-school rules: Don't gamble in the stock market with money you can't afford to lose.

The bubble economy rules: There's no real risk if you stay diversified and invest for the long term.

The new rules: Risk is part of life. While you can't avoid it, you can make sure the risks you're taking are appropriate for your goals.

I actually think all of these are still true today -- at least in part.

For instance, do I think "don't gamble in the stock market with money you can't afford to lose" is good advice? Yes, I do. (The only thing I might disagree with is the word "gamble", but that's being a bit picky.)

Next, do I think it's true that "there's no real risk if you stay diversified and invest for the long term"? I think there's risk (did anyone ever think that there's no risk in investing?), but I think that if you are diversified and you are investing for the long term that the risk is reasonable and worth taking.

And finally, do I think that you simply need to accept risk as part of investing? Sure. But is this really a "new rule"? Isn't this what most of us (if not all of us) have thought all along?

Get $150 Back with a Chase Freedom Credit Card

Note: I've updated my thoughts on this post. Follow this link to find out what I consider to be the best cash back credit cards.

Just wanted to share the news that the Chase Freedom® Visa is now offering a $150 cash back bonus (ugh! I "only" received $100 when I got my card a few months ago.) I usually don't highlight credit card offers, but since this card is one I use personally as part of my three-card get-as-much-cash-back-as-possible plan, I thought it was worth a note for those of you looking to adopt a similar strategy.

Box of Books #11

The box of books giveaways through my giveaway newsletter have been very popular, so below I'm detailing another set of them that will be up for grabs this month (if you want a chance to win, be sure to sign up for my newsletter here.) For now, here are the books I've received from publishers and a bit about them (from Amazon):

• The Personal MBA: Master the Art of Business - (FYI, this is an advance copy) - Getting an MBA is an expensive choice-one almost impossible to justify regardless of the state of the economy. Even the elite schools like Harvard and Wharton offer outdated, assembly-line programs that teach you more about PowerPoint presentations and unnecessary financial models than what it takes to run a real business. You can get better results (and save hundreds of thousands of dollars) by skipping B-school altogether. The Personal MBA distills the most valuable business lessons into simple, memorable mental models that can be applied to real-world challenges.
• Financial Jiu-Jitsu: A Fighter's Guide to Conquering Your Finances - In Financial Jiu-Jitsu: A Fighter's Guide to Conquering Your Finances, financial advisor and Jiu-Jitsu enthusiast Scott Ford shows how mastering your finances—like mastering a martial art—has nothing to do with perfecting thousands of exotic, technically challenging moves. Rather, mastery is as simple as performing a handful of basic moves thousands of times.
• Make Every Second Count: Time Management Tips and Techniques for More Success With Less Stress - Make Every Second Count goes beyond the usual time-management books to bring you a broad range of strategies and tactics dozens of proven methods to get more done in less time. You'll discover how to maximize your time by setting priorities, create useful schedules, and overcome procrastination, how to boost your energy level and productivity with proper diet, exercise, and sleep. You'll also learn how using the latest technology can enable you to manage information and communicate more effectively and efficiently.
• First Generation White Collar: A practical guide on how to get ahead and not just get by with your money - First Generation White Collar is for young college graduates that are the first in their family to graduate from college and enter the white collar profession. Being the first means young adults may or may not have the financial education to correctly handle a new income. This is a practical guide that guides young graduates step by step on how to get ahead and not just get by with money. This book is about getting ahead with your finances and not just getting by.
• Generational Wealth: Business & Investing Guide to Building an Empire - Generational Wealth: Business & Investing Guide to Building an Empire offers detailed information in an easy-to-read format on various business subjects, including stock investing, bonds, real estate, mortgages, economics, entrepreneurship, marketing, human resources, accounting for investors, and mergers & acquisitions.
• Christ-Centered Contentment - Jesus claimed that He came to give abundant life. Is this how you would describe your life? If we are honest, most of us would admit that we are far from living life to the full. Don't go another day missing out on the richness of God's promises to His people. Christ-Centered Contentment will teach you: God's definition of contentment, the emptiness of worldly consumption, how to find peace, fulfillment, and satisfaction, how to live life with inspiring conviction, the secret of overcoming difficulty, the beauty of simplicity and gratitude, and the joy of choosing infinite gratification. Begin learning how to thrive instead of survive!
• It's About More Than the Money: Investment Wisdom for Building a Better Life - In It’s About More Than the Money, award-winning financial advisor Saly A. Glassman shows you how to regain control over your financial life–and stay in control. Glassman brings together 21 fundamental investment principles, illuminates them with actual investor experiences, and guides you through putting each one to work. Drawing on everything she’s learned working with a broad cross-section of investors, Glassman teaches you how to plan your finances strategically, place money in broader context, and make your most important dreams a reality. You’ll focus on what you can control and let go of what you can’t…apply investment rules that work…recognize when to do nothing…assess your progress objectively, and much more. Glassman also helps you decide whether you need professional advice–and, if you do, she shows how to find an advisor who will add real value. Packed with insightful investor stories, this book will help you make wiser, better financial decisions–whatever your goals, whatever your age, and whatever the economy does next.

New Thoughts on the 4% Retirement Withdrawal "Rule"

A standard rule of thumb has been that retirees can safely withdraw 4% or 5% a year from their investments and in almost all cases have enough savings to last the rest of their lives. So if you had $1 million saved for retirement, you could take out $40,000 to $50,000 per year for the rest of your life. Supplement this with Social Security and other earnings, and you'd probably be doing quite well.

But perhaps the 4% or 5% rule isn't really that accurate and can't be counted upon. Here's what the NY Times says about a new analysis on this subject:

The inexact science of withdrawal rates was featured in an analysis published by Vanguard Group in November. While a withdrawal strategy "is important, the key ingredient in a long-term spending plan is flexibility," the report said.

If investors are relying on either gains in the stock market or bond-market yields to make their money last, "then investors must either accept continuous, relatively smaller changes in spending or else run the risk of having to make abrupt and significantly larger adjustments later," the report said.

Rather than take out a steady 4% or 5%, the Vanguard report suggests many investors would generally stand a better chance of not running out of money were they to adopt a strategy where the percentage of withdrawals was designed to rise and fall between 2.5% and 5% of the prior year-end portfolio, depending on the market's ups and downs. In short: After a good year, take out more, and following a bad year, less.

However, one challenge this approach presents is that a 2.5% to 5% band represents a huge amount of variability in income for a retiree relying on savings to help pay the bills.

Uh, yeah. There's a HUGE difference between taking out $25,000 a year and taking out $50,000 -- especially when you don't have many other income options and fixed expenses.

The piece goes on to tell how the 4%/5% "rule" won't work in many situations these days:

Investors had an overall success rate of 95% at a 4% withdrawal rate adjusted over time for inflation. But that success rate fell to 76% for those who retired when stocks were in the top 20% of the historical valuation range.

The numbers were starker for a 5% withdrawal rate. For retirees starting out when stocks are in the highest 20% of valuations, the probability of success plunged to 41%. Only when stocks were in the bottom 40% of their valuations did retirees stand a better-than-90% chance of not running out of money.

The bad news for today's retirees: on this metric, stocks today are in the top 20% of their historical valuations.

So what's the solution? A few options:

• Save more. Don't retire until you have enough saved so you only need to withdraw 2.5% per year to meet your needs.
• Get additional sources of income while in retirement. The most common here is working longer, but you can't always count on doing this.
• Be able to cut expenses. If some of your retirement costs are variable, you can cut them when income goes down so you'll be fine.

So it looks like the 4%/5% "rule" isn't the standard any longer. For me, it never really was. I have always been working on saving much more than what the "rules" say (I'm just conservative with my finances like that, as you know.)

How about you? What are your retirement withdrawal plans?

Who Cries For Apollo?

The following is a guest post by MasterPo from the PoFile.

As debts and deficits soar on both the national (nation debt has just past the $14 trillion mark as of writing this) and state levels (CA has a $9 billion dollar debt as of writing this) once again the great villain of it all is “the rich” and their “greed”. Never mind the other 90-99% of the population (depending whose statistics you reference as to what income or wealth level constitutes “the rich”).

Never mind the laws, regulations and policies enacted over 40 years by politicians – most of whom themselves are rich by anyone’s definition! – and the impact those have had on growing this crisis. And never mind the same politicians and pundits who, with a spine of unset Jell-O, refused to stand up and say this or that social trend was self-destructive, childish whining,  or just plain wrong but instead catered in full to those trends and destructive behaviors.

And, as sure as the sun rises in the East (do we need a law for that too?) more and more the talking heads are calling on retribution – that’s the only way to describe it – on “the rich” for being “rich”. With phrases like “income inequality” and “hoarding wealth” being the table talk of the day on so many opinion shows and in editorials (and editorials disguised as news stories).

Now stop and really think: What would America be without “the rich”?

Besides all the businesses, industry, inventions, and services that have been created and distributed by “the rich” who own these businesses, “the rich” are also the ones who contribute the most philanthropy (i.e. charity). All the hospitals, schools, neighborhood centers etc funded at least in part by “the rich”.

Why do you suppose every major (and a lot of smaller) hospitals have dedications such as ‘Joe Smith Cancer Center’, ‘Mary Jane Rehabilitation Facility’, ‘The Goodwin Family Pediatric Trauma Center’, and so on??

How many ‘Congressman Jackson Burn Center’, ‘Senator George Kapslin Geriatric Care Wing’, or ‘President <whatever> Infectious Disease Research Department’ have you seen? The names sometimes show up on airports, highways, bridges and tunnels but rare if ever on hospitals.

Same for schools. There are places such as “The Carnegie School of Technology”, “The Cohen Children’s Hospital” and “Ann Scheiber School Of Nursing”.

Why?

Because these people willingly gave their own money – often earned and saved over an entire life time – for the benefit of others. It was not confiscated because someone in a legislative chamber or administrative office decided to take it from them for the betterment of someone else.

And, just as equally, as it was their choice to give their earned wealth it is their choice not to give it. That does not constitute “hoarding”. It’s their money!

But who is going to stand up for “the rich”?

What PAC or grass roots effort will stand for “the rich”?

How many people will bleed tears for whoever is defined as “the rich” based on some arbitrary income or wealth level of the day?

No one.

They are an easy target.

And as such it is the height of tyranny to rob some person’s fruit of hard labor to give to someone else just because the former has more than the latter. A nation that adopts this social policy is doomed to slide quickly from greatness to mediocrity or worse.

By the way, Star Trek fans may recognize the title of this article. It didn’t end well for him either.

Money Commandment #3

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #3 as follows:

The old-school rules: All debt is bad. Pay it off as fast as possible.

The bubble economy rules: Don't worry about paying off debt. You have better things to do with your money.

The new rules: Pay off toxic debt and use "good" debt to get ahead.

Here are my thoughts on all of these suggestions:

• Again, I'm a mix of old-school and new rules.
• To clarify the book's position, they define "good" debt as "debt that helps you get ahead in your financial life." Examples of what they consider "good" debt: home mortgage, student loan debt, and small business loan.
• My take is that we all should be debt free for most of your life, with a limited time in debt for an education and a house. The small business loan suggestion -- I would say take one only if you had a great reason to believe it would be worth it (like orders in hand that you need the loan to fulfill.)
• Personally, I'm ok with a mortgage as long as the house is purchased correctly and paid off within a decade or so. And yes, you can pay off your mortgage in a decade.  
• I'm also ok with education loans. They worked out great for me. But you should borrow based on what your post-graduate career will earn you. In other words, don't get an education "at any cost" and thus doom yourself to massive amounts of debt that you'll never be able to pay back.
• I recommend getting out of any debt you incur as soon as you possibly can.

What are your thoughts on debt and borrowing?

How to Decide Whether to Drive or Fly

Money magazine says the following when it comes to deciding whether to fly or drive on a trip:

Drive if you're in the "radius of efficiency." In part because of surcharges and taxes on airfare, you'll almost always save money by driving if your destination is within 400 miles and you're traveling with more than two people.

This seems like a pretty good rule of thumb to me. But does it mean that for every additional person you should add 200 miles? For instance, we have four people in our family, so does that mean we should drive as long as our destination is within 800 miles?

We always drive to see my parents each year. It's about 500 miles. Even if we apply the 50 cents (or so, it could be a few cents higher) per mile fee that my company pays me when I travel for business (which is supposed to cover gas, maintenance, etc.), that's $500 cost round trip. There's no way we could fly for that amount. And if we did fly, the nearest big airport is still two hours away. So we'd need to rent a car or have someone pick us up (then drop us off), which would leave us without a car while there. So it's a no-brainer to drive.

But what about a longer trip?

When we went to Disney several years ago, it would have been 1,200 miles each way to drive -- for a cost of $1,200 to drive round-trip. Instead, here's what we did (and what it cost):

• Drove to and from a hotel in Detroit (flights from there were cheaper): 300 miles round-trip, cost: $150
• Hotel in Detroit: I'm not counting it since we probably would have needed a hotel room driving to Florida too -- maybe even one on the way back too
• Flights to Orlando plus rental car (I don't have the expenses broken out -- they are both included under "transportation" here): $699
• Total cost: $849

So we saved $350 by flying. We also saved a TON of time and exhaustion by flying. So it appears the "rule" above holds up.

Of course, it always pays to check your airport options. If we had flown from Grand Rapids, tickets were something like $350 each for four people ($1,400 total). BY driving to Detroit, we saved a bundle (and our hotel room stay allowed our car to be parked in a secure lot for free while we were gone.)

So, what do you think of Money magazine's drive or fly "rule"?

How to Make the Case for a Pay Increase

CNN Money gives some thoughts on how to make the case for a pay increase as follows:

Before the recession, for several years running, the average annual merit raise for salaried employees was about 3.5%, with emphasis on the word "average." These days, you have to "exceed expectations" to get that, Towers Watson reports. Last year, just 25% of employees at the companies surveyed met that standard.

"Companies now have raised the bar. The days when you could count on a merit raise, even for putting in lots of extra energy and effort, are gone," says Ford R. Myers, founder and president of executive coaching firm Career Potential.

Myers adds, even more ominously: "The phrase 'far exceeds expectations' is really a big loophole, with some employers. It's often not based on any objective performance criteria. The 'expectations' are not clearly defined. So, even though the category exists on paper, managers know not to put anyone in it."

"You have to be your own best advocate, and build a persuasive case for why you are worth more," he says. A big mistake he often sees people make is "assuming that higher-ups already know what you've contributed. Wrong! Your bosses may have a vague idea, but their attention is usually on so many things at once, it's up to you to be your own marketing department and spell it out for them."

"You need to point to measurable results," says Myers. "Make a list of very specific items, like 'Sought 10 new customer accounts, landed 12' or 'Increased production line efficiency 22%.' Think back carefully and include anything you've done that has boosted revenues or profits, cut costs, or enhanced productivity.

"Once a week, or even every day, make an appointment with yourself to sit down and update your list," Myers advises. "Every 30 days, send it to your boss, without necessarily expecting an immediate response."

Lots of thoughts on these:

• Is this new news? Did anyone ever get 3.5% raises simply for hanging around? Ok, I guess they did (in the old "glory" days.) But as the piece says, those days are long gone now.
• That said, you have ALWAYS needed to deliver results/show accomplishments/whatever you want to call it to make more than the average Joe. I've discussed this in several posts like How to Get a Raise or Promotion and How to Demonstrate that You Deserve a Raise. 
• What are "results"? Depends on what your company needs. But in most cases they are things like growing revenues, decreasing costs, etc.
• For those who do not work directly in areas where revenues or costs are concerned, you need to look at what accomplishments are getting others in your area promoted/paid more, and copy what they do.
• If you settle for "average" rates of pay increases, you are limiting yourself big-time and you're potentially giving away millions of dollars.  
• I "promote my work" by doing a weekly update via email to my boss. I  keep a copy of each of these emails as well, then when review time comes along, I review them and select out the most important accomplishments for discussion. You'd be surprised at how many things you'll forget if you do not have a system like this. This past year I saw some of the accomplishments in my file and they were almost complete "surprises" to me -- I had forgotten all about them.

In the end, it comes down to increasing your value to your employer. Those who are valuable, get jobs and get paid. Those that increase their value, get better jobs (promotions!) and get paid more (pay increases!) So stop expecting (or even wanting) a measly 3.5% and begin working on your plan to get a 5%, 7%, or higher pay increase next time your review comes around (and for that's too long to wait, deliver now and ask for a raise now.) ;-)

Is $250,000 Really Not Enough to Live On?

We've discussed how $100,000 a year, $250,000 a year, and even $1 million a year is not enough to live on in the United States. Until now, the examples we had were simply individuals complaining that they didn't make enough to make ends meet -- even though they made much more than most Americans. But now there's a new "analysis" that attempts to see if any of this belly-aching is actually legitimate. A summary of the study:

The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public schools, using national data on spending.

The analysis assumes that this hypothetical couple -- let's call them Mr. and Mrs. Jones -- both have professional positions at their companies. They take advantage of all tax benefits available to them, such as pretax contributions to 401k plans and flexible spending accounts for medical care, child care and transportation. They have no credit card debt, but Mr. Jones racked up $40,208 in student loan debt in undergraduate and graduate school, and Mrs. Jones borrowed $22,650 to get her undergraduate degree (both amounts are equal to the national averages for their levels of education). They also have a car loan on one of two cars, and a mortgage for 80% of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.

Here are the results:

The bottom line: It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast. Even with an additional $3,000 in investment income, they end up in the red -- after taxes, saving for retirement and their children's education, and a middle-of-the-road cost of living -- in seven out of the eight communities in the analysis. The worst: Huntington, N.Y., and Glendale, Calif., followed by Washington, D.C., Bethesda, Md., Alexandria, Va., Naperville, Ill., and Pinecrest, Fla. In Plano, Texas, the couple's balance sheet would end up positive, but only by $4,963.

Ok, so this is the headline finding -- that "$250,000 is not enough for people to live on in many cities." But come on. We all know this isn't true -- at least for someone that knows anything about managing money. After all, a $250,000 household income is six times the national average and just 2.9% of couples earn that much or more. If these people can't make it, then who can?

So I decided to dig into the numbers a bit. (You can too if you like -- they can be found here.) Overall, here's what's dragging them down: they are spending too much. Surprised? I'm not. After all, how else could someone making $250k not make it? They have enough income, right? So the problem has to be the spending. Here are some specifics:

• Let's start with the fact that they really aren't in the process of going bankrupt as the headlines imply. They are saving money -- $41,000 per year ($33k for retirement and $8k for college.) They are probably also getting an employer match on some of the retirement funds, so they're doing quite well here. That said, they should get their budget to balance and have a surplus even after these savings are accounted for. And there's plenty of room to do this...
• Taxes are a big killer, and mostly unavoidable. But why is there a separate line for sales tax? Sure, we all pay sales tax, but isn't it added into the cost of an item in another area? Of course it is. For instance, if I bought a basketball, I'd put the total cost (of the ball plus any sales tax) under "working out" or some similar category in Quicken. I wouldn't put the cost of the ball in one spot and the sales tax on the ball in another spot. Who would do this? Answer: no one. Therefore the costs for sales tax are included in the categories below, so this line can be eliminated completely, saving them a couple thousand dollars a year.
• Their homes are too expensive. The mortgages, property taxes, and associated costs are killing the couples in almost every city. What they should have done is buy a house they could easily afford. This move alone could balance the budget for many of them.
• They spend a lot on medical bills -- insurance, out of pocket, and dental. They spend $13,000 a year for a family of four. My family of four spends about $2,000 a year -- $5,000 in a "bad" year with braces for one of the kids. Even if they "only" spent $7,500 a year (still a good amount), they'd be almost $6,000 a year better off.
• Day care and after-school activities are $19k per year. These costs are hard to reduce if both parents are working. But they need to make sure that it's worth it for both of them to work. For instance, if each person earns $125,000 a year, then financially, it's good for both to work. But if one earns $200,000 a year and the other earns $50,000, it may not be worth them both working (at least financially.) They might be able to re-coup that $50,000 by eliminating work-related costs (including day care, taxes, etc.) if the parent making the lower amount quit working. For specifics on how to do this, see Real-Life Example of Going from Two Incomes to One and How to Become a One-Income Family.
• They have $10k per year set aside for maintenance and cleaning of their home. Really? Really? The $5k for cleaning can mostly disappear if one parent quits working. And I would have thought that the homes they purchased were good enough that they didn't suck up an extra $5k in maintenance each year. Perhaps this includes some services that the at-home parent could do (like mowing the lawn.)
• Don't get me started on the car loans. Over $7,000 a year. Ugh. They need to cut expenses, pay off the car loans, start saving for their next cars, and pay cash from here on out. They may need to sell one car and buy an older one for the second car. Again, pretty easy to do if one parent is at home.
• Parking is a killer in a few cities. More savings here if only one parent works.
• They are spending almost $14k on food and household supplies. This should be $10k at the most IMO (based on what we spend -- and we're way below this) and could easily be $7,000.
• Student loans are $6,000 per year. If both parents earn about the same amount, it looks like the loans were well worth the cost. If one makes the lion's share of the income, the lower-earner didn't do a great job of matching college debt with potential post-college income.
• They need to reduce the number of days they eat out at work. That $5,000 a year can be easily cut in half (and even more if they need it to be) by taking their lunches a few days a week.
• The family trip of $4,000 isn't excessive IMO, but if they are underwater, they'll need to cut it.
• Their gift budget is $3,000. It's a bit high, but not totally out of line. Then again, if they're struggling, this can be cut to $1,000 or so.
• Between eating out, entertaining, entertaining at home, and their dog, that's $8,000 per year. These people need to make some choices! Sure, they can enjoy themselves however they want, but they need to be more selective and set priorities. In other words, they can't have/do everything they want to have/do.
• Another thing this illustrates is the high costs of living in some cities. The swing is $30k per year from high to low. And as we've shown, you'll save much more in cost reductions than you'll lose in earning potential when you move to a less expensive city. Even better, keep your income high AND live in a low cost-of-living city. That's what I've done, and it's been great. ;-)

Here's the tally of what they could save every year if they simply managed costs (even if both parents kept working):

Sales tax (already counted in other categories): $2,000
Downsizing to a reasonable house, lowering their mortgage (my estimate): $7,000
Medical costs (conservative savings): $4,000
Interest on car loans (estimate): $1,000
Food and household supplies: $4,000
Eating out at work: $2,000
Family vacation: $2,000
Eating out, entertaining, etc. : $2,000

Total: $24,000

This $24k more than balances their budget and gives them plenty to save (for new cars, for instance.) And it leaves plenty in their budgets to enjoy life IMO. If they wanted to go on my plan, I think I could squeeze out another $15,000 a year. ;-)

In addition, they could have one parent quit working (depending in the income split) and likely break even on that (the cost reductions would offset the loss of income), still saving the $24k per year and probably leading a much less hectic life to boot.

So in the end, the "answer" is that $250,000 is more than enough to live on (of course, what did you expect the answer to be?) But people need to control their spending. If they don't, then sure, they can spend all they make and then some no matter how much they make.

Really, this isn't new news to anyone here, is it? ;-)

Being an Active Investor is a Lot of Work

Here's a quote I love from the book The 10 Commandments of Money: Survive and Thrive in the New Economy:

Being an active investor is a lot of work, I'll warn you. You'll have to do extensive research, monitor your investments carefully and be disciplined about when you buy and sell. You will pay more as well: active management simply costs more in trading commissions, fees and taxes. I think most of us are better off acknowledging that we don't want to do all this work, particularly when the odds are so stacked against us. Fortunately, there is a better way: index funds.

Wow, lots to comment on here:

• I agree 100%. Let's start with that.
• Yes, it does take a lot of time and effort to be an active investor -- time and effort that most of us don't have (because we work and have lives.) Want a glimpse at the time and effort it takes to be a good active investor? Check out Why I Invest Like I Do. 
• Even if we did have the time and effort to be good active investors, many people don't have the education, skills, and temperament to do so. Simply anyone with enough free time can't be a great investor -- you have to have another set of unique skills that the vast majority of people don't have.
• Even if you have the time and the skills, that doesn't guarantee success. Mutual fund managers have all the time in the world, great skills, and a vast amount of resources -- and most of them can't beat index funds over time once expenses are accounted for. So why would you be any different?
• Costs play a HUGE factor in how well your investments perform. Thus, you want to minimize them. Active management doesn't do this. Index funds do. That's why index funds outperform the vast majority of actively managed funds after expenses.  
• Instead of focusing so much time and effort on return rate (which is what this conversation is really about), why don't we focus on the factors that are most important when it comes to whether or not your savings/investments will do well in the long term? And what are those? Saving as much as you can for as long as you can. So instead of talking about how we can spend an extra 20 hours a week to try and beat an index by 0.02%, let's instead focus those 20 hours on learning how to make and save more money. Then we can increase the amount we save over time -- something that will have a far greater impact on our investing performance than return rate will.

Yes, of course, some people can beat the averages even after expenses. But just because some people can do it, doesn't mean most (or even many) people can (some people can run a four-minute mile too, but most others can't; some people can write great works that sell a gazillion copies, but most can't, and so on.) So I recommend instead focusing on the priorities of saving as much as we can over as long a period of time as we can and leave our return rate in the hands of index funds (which will beat 80% or more of active managers over time anyway -- which is pretty good.) Try it for 40 years and you'll see why I recommend this plan. ;-)

Millionaire Facts

CNN Money has a piece that lists facts about millionaires. I thought I'd list some of their findings (in red) and my thoughts on them. Here goes:

About 7% of households have seven figures.

Whenever I write a piece about trying to become a millionaire, someone always makes a comment similar to, "Having $1 million is no big deal these days." Oh yeah? Well having $1 million puts you in the top 7% of net worths in the U.S. That sounds like a big deal to me.

14% of millionaires say their parents were wealthy.

In other words, the vast majority of millionaires didn't inherit their wealth.

My family was lower-middle-class for much of my young life (just me and my mom on a minimum wage salary), then middle class once my mom get remarried. But we were never, and they aren't now, "wealthy".

42% say they don't feel wealthy themselves.

I wonder what it takes to feel wealthy. I'm guessing a few million more than whatever you have. ;-)

How they got rich:

• 95% Hard work
• 83% Smart investing
• 81% Frugality
• 67% Risk taking
• 41% Luck

If I was listing these for my own life I would say:

• Hard work/education (see How I Made Millions Off a $5,000 Investment) which led to a great career  
• Saving early and saving often (see Time, Time, Time)
• Frugality/spending less than I earned (which really leads back to saving)
• Luck (mainly not having any major sickness and being "in the right place at the right time" a few times in my career)

90% college grads and yet only 5% law degrees and 3% medical degrees.

Think the MBA is bigger than the other post-grad degrees? I'm thinking so.

Median price of car: $31,400

Almost the exact price of the last car I purchased.

$39,300 -- the amount they save or invest annually.

This seems a bit low to me, though perhaps it's still a good percentage of their income. I save a good amount more than this each year.

61% say they "still have a great deal to learn" about investing.

I've condensed investing down to this: save as much as I can as soon as I can for as long as I can. Get decent returns on these savings by using index funds. So, is there a lot I don't know about investing? Sure. Do I really need to know anything more about it to be successful? Nope.

$13,000 average annual amount millionaires with up to $5 million give to charity.

Seems really, really low to me. Even someone with "just" $1 million should give more than this, shouldn't they? Then again, many of them likely pay high taxes and would say they "give" that way (though I don't buy that argument.)

How to Stay Relaxed During (And Make the Most of) a Job Interview

US News shares some thoughts on how to stay relaxed during a job interview. It's an "ok" piece in my opinion, but they leave out the BEST way (again, in my opinion) to stay relaxed during a job interview: rehearse.

Yep, you heard it correctly. If you rehearse the job interview in advance, you will be much more relaxed. You'll also perform better and be much more likely to get the job offer.

Here's what I mean when I say you should rehearse a job interview:

• You need to list every question you think a potential employer might ask you (including the "dreaded" tell-me-about-yourself question). Do a web search, you should be able to find the most common ones in about 1.3 seconds. When I was interviewing several years ago I think I had 50 or so questions listed.
• Write out your responses to each question. I literally typed up several pages of question, then answer, question, then answer, over and over again. Be sure your answers include quantifiable accomplishments. If you need examples of what these should look like, read How to Write a Winning Resume (of course, your answers will be longer than a bullet-point, but this post will show you what you need to include) and How to Make a Minor Accomplishment into a Major Resume Success.  
• Practice your responses out loud, editing them to make sure they are "smooth". We speak/hear much differently than we write, so it's likely your initial answers will need to be changed a bit to reflect the fact that they will ultimately be spoken.
• Edit the responses so they are concise. Don't take 10 minutes describing what you can get across in two. If you are to-the-point in your answers, this will reflect positively on the employer's perception of your communication skills.
• Rehearse, rehearse, rehearse. Literally read the question and give the answer out loud. Initially, you'll need to read the answers, but ultimately you'll begin memorizing them and won't need to look at the pages for your responses. I used to rehearse for two to three weeks this way (going through all the questions once per day) until I got really good.
• Make it human. Once you get the answers down cold, start to inject actions that make them more realistic and natural. Add in hand motions, voice inflections, laughs/smiles, specific facial expressions based on the topic, and so on -- things that people put into conversation naturally. And in case you're wondering, yes, I did do this and yes, I am recommending rehearsing what many people consider to be unrehearsable traits. They are NOT unrehearsable. Just ask actors...
• If you like, you can rehearse with a friend to better simulate an interview. Have the friend ask the questions and you give the answers. This allows you to practice the answers, your natural actions, eye contact, and much more.
• If you want to take this to the next level, go out and do some practice interviews. Apply for jobs that you don't really want simply to get in the interview practice. Afterwards, evaluate how you did and make adjustments in your answers and mannerisms accordingly.

If you complete all of these steps you'll be as prepared as anyone for interview success. And someone who is prepared is much more likely to be relaxed. Why? Because he knows he's ready for almost anything. And no, this process won't cover every question/situation/interviewer that you might run into, but it will certainly cover 90% or so. Using these methods I don't think I was ever caught off-guard in an interview. And as a result, I was much more relaxed during the entire process.

And let me mention something people often bring up: that rehearsing will make you appear stiff. No, it won't. If anything, it will make you seem more natural (because you will be more relaxed and you've practiced being natural.) It will make you seem to be a great communicator (whether you are or not) -- someone who has "just the right answer" and who is concise. It will make sure you don't forget to mention any of your many, substantial accomplishments. Again, consider actors. Do they appear stiff because they rehearse? No, they are more believable and "natural" because they rehearse. This is the same result you'll get with the steps above.

I've been interviewed hundreds of times over the past 20 years and have interviewed hundreds more to boot. I know from practical experience that this method works. As I said in an earlier post, I think I've received all but maybe 10% of the job offers I've ever interviewed for using this method. Not a bad result at all. And believe me, you can tell when someone is not prepared. Ever interview a person and have them respond with something like, "Wow, that's a good question. Umm...ummm...umm..." or fumble over a meaningless response that did more to damage their chances for the job than help them? It's not pretty. And it makes them more nervous than they already are. These are negative results you can avoid if you simply rehearse your interview questions.

If you're getting ready to go out on some interviews, there's much more you need to do than what's listed above. For specifics, see my post titled An Interview is a Test You Can Study For. But if you're looking to relax in an interview, go no farther than the suggestions in this post.

The Best of Money Carnival

The Best of Money Carnival is now up. Congrats to all participants and especially the winning post, How often do you wash your jeans?

Enjoy!

How to Make the Most of an Internship

We recently talked about how students can build their resumes. After I posted that piece, which included a suggestion that internships were one of the ways to grow experience, I found this piece from U.S. News discussing the one thing you want to be sure of before applying for an internship as follows:

The key thing to consider? What are the specific learning outcomes and skills you want to gain on the job? It’s especially important to identify these goals if you’re considering a volunteer internship; if you aren’t earning money, you certainly want a specific return on your time investment. While you may be able to secure an internship at a brand-name organization to impress your friends and family, if you’ll be doing nothing but making copies and greeting visitors, it won’t help you succeed in the long run.

In other words, you want to make sure the internship is going to benefit you in some major way. To me, the key benefits boil down to these two in most cases:

1. Giving you hands-on/practical/worthwhile job experience in your chosen field (or at least meaningful enough work in some field that can ultimately get you a job in the field you want.)

2. Exposing you to a potential career option to let you see whether or not you actually like it.

For point #2, any internship (in the right field) will most likely work, but for option #1, you need to make sure ahead of time that you're actually going to do meaningful work. Otherwise, you're wasting your time (and possibly a future hire.) Let me give you a couple examples.

I used to work in the music business. Every man and woman from age 18 to 22 that is breathing wants to work in the music business. So every summer we used to hire interns. Their job: doing all the administrative tasks we needed done. We didn't have to hire temps to do this work and the interns were not paid, so it was a great deal for us. The interns were happy as larks as long as they got to meet "new artist A" every now and then. Yes, they got some work "experience", but it wasn't worth much, believe me.

On the other hand, I had an internship between my two years of grad school where I worked on a major pricing model for a local phone company. They were highly regulated and needed a way to justify (to the regulating officials) various prices (and, in particular, proposed price increases.) I spent the whole summer working on a spreadsheet that performed calculations to do the work with a few, simple inputs. It was meaningful work that resulted in a strong accomplishment. Though I didn't go back to that company when I graduated, I did use that experience to get me my first post-grad job with a name-brand company in my selected field. And from there, I was off to the races.

So my advice to those looking at internships mirrors what U.S. News said: be sure the internship accomplishes what you want/need it to accomplish. And if it doesn't, move on to the next one.

The Bible Says to Spend Less than You Earn

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

Here are some verses from the Bible that relate to spending less than you earn as well as my take on each of them:

I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want. Philippians 4:12

Contentment really is at the heart of spending less than you earn. If you're content with what you have, you can control your spending no matter what you make (as long as you make enough to cover true needs.) But if you're not content, you'll want more, more, more and will overspend no matter how much you earn. That's why we see people making $1 million a year (or more!) spending more than they earn -- they are not content with what they have so they keep buying even though they are out of money.

Keep your lives free from the love of money and be content with what you have, because God has said, "Never will I leave you; never will I forsake you." Hebrews 13:5

Again, contentment is key. But this verse also adds in "the love of money." I'd call this greed. Greedy people are very rarely content people IMO.

But the fruit of the Spirit is love, joy, peace, patience, kindness, goodness, faithfulness, gentleness and self-control. Against such things there is no law. Galatians 5:22-23

Along with contentment, we all must have self-control if we want to spend less than we earn. We need to spend only what we can afford based on our other priorities. Those who can't control their spending get into a lot of financial trouble (think credit card debt.) 

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has. Proverbs 21:20 

So, would you rather be wise and have plenty (because you controlled your spending) or would you rather devour all you have (and be a fool)? Seems like a pretty easy choice to me.

What are your thoughts on the verses above?

Save 97% of Any Windfall

The following is a guest post from Marotta Wealth Management.

Surprisingly, studies show that onetime windfalls can actually impoverish you. They make you feel rich, which inevitably leads to overspending. But wealth is what you save, not what you spend.

With large windfalls, people tend to spend about 40% of the money. So if you get $20,000, you might spend $8,000. But if the amount is small, you will squander a greater percentage, often more than you received. Thus if you win $75, you may actually spend an additional $125 before you stop celebrating.

Either of these scenarios will make you poorer. One goal of wealth management is to increase the amount you can spend each year rather than adopting a lavish lifestyle followed by thrift and austerity. A lifestyle is defined here as everything you can do with money, including generous donations to the charities of your choice. The goal of an ever-increasing lifestyle is not to consume more each year but rather not to allow your choices to outpace what you can continue to maintain. A year of living extravagantly is foolish if it isn't sustainable.

Consider this extreme example to see why spending even 40% of a onetime windfall breaks this principle. Imagine that instead of an annual salary you receive all your lifetime earnings in one $2 million lump sum at age 20. Spending 40% the first year is neither maintainable nor advisable. After blowing $800,000 the first year, you have reduced your potential standard of living by 40% for the rest of your life. Getting $1.2 million at age 21 is barely half as good as the original deal. Not only is your future spending severely diminished, but your expectations after a year of an $800,000 lifestyle are extremely inflated. You will struggle not to spend at least $400,000 the next year and may still feel slighted.

It is easy to expand your lifestyle and spending but very difficult to contract. Even if you give most of the $800,000 to charity, the organizations will want those funds again the following year. Prudent spending, even charitable giving, often involves continuous annual spending over a long period of time.

If your windfall is a once-in-a-lifetime event, only spend a very small percentage of it. If you are young, 3% would be reasonable and sustainable indefinitely. Saved and invested in a diversified portfolio, you should be able to earn at least 3% more than inflation.

Imagine inflation is running at about 5% and your investments are making 8%. So after a $2 million windfall, you can spend 3%, or about $60,000. Your $2 million portfolio will grow 8%, appreciating to $2,160,000. After spending $60,000, you will have $2,100,000 left. You may think you have more money, but you don't. Because this is only 5% more than you had originally, the increased amount will have the same buying power after adjusting for inflation.

The second year you can again spend 3% of the increased $2,100,000 amount, or $63,000. This will offer you the same lifestyle because prices are now 5% higher. As your portfolio increases 8% each year, you spend 3%. The other 5% simply keeps up with inflation.

Most people believe they are doing well when they save 60% of a windfall and contain their celebration to only 40%. Don't be fooled. It's like saying because it is OK to have a glass of wine every night why not just have 150 in one night and then not drink for the rest of the year. Moderation matters. You can't restrain your lifestyle and still spend 40% of a large windfall.

If you don't adjust your lifestyle spending, you will jeopardize your retirement plan. Progress toward retirement is measured by how many multiples of your standard of living you have saved. At age 40 you should have about 10 times your annual spending saved. If you spend about $60,000, you should have $600,000 saved.

You might think a windfall of $400,000 could only help your retirement plan. Now you have $1 million! Surely you should be able to spend more now that you are a millionaire.

You are better off, that's true, but only if you don't spend any of the windfall. If you do, you will have increased your lifestyle. That translates to increasing the amount you should have saved by age 40 as well as the amount you need to save each year to stay on track toward retirement.

Spend just $40,000 of your $400,000 lifestyle and your lifestyle balloons from $60,000 a year to $100,000. So by age 40 you should have ten times your standard of living or a full $1 million in savings. But because you spent $40,000, you are now $40,000 short.

Increasing your retirement goal also means increasing your annual saving toward that goal. You should be saving an additional 15% of your lifestyle each year. At $60,000, saving 15% meant saving $9,000 a year. But with your lifestyle now at $100,000, you ought to save $15,000 a year. Sustaining that increased level of savings will mean a lower standard of living in future years.

Escalating your lifestyle anything more than slightly can ruin your retirement plan. You can increase your spending each year by just 3% of any windfall. There are really few exceptions to that rule. Only a small number of families are sufficiently disciplined to rein in their celebration and save 97% of a windfall. Be one of those few. Build real wealth by saving and investing. In the end, your investments will be a dynamic engine of wealth creation and you'll enjoy financial peace of mind.

FMF May Newsletter

Welcome to the May 2011 issue of the Free Money Finance e-newsletter!!!!!!

Two Simple Money Makers

Before we get to the giveaways this month, I want to highlight two simple credit card money makers I've written about recently.

• The first is the Chase Freedom® Visa - $150 Bonus Cash Back offer. It's a great deal (free money!) on a great card. I wrote about how you can earn up to 3.1% cash back using the card in How to Get 55% More Rewards (and 3.1% Cash Back) with Your Chase Freedom Credit Card. Check out the post for details.


• The second is the Chase Sapphire? Preferred Card. I talked about it in How You Can Make Over $600 for Very Little Effort. Personally, I'm not a fan of points-based cards. But for those of you who are, this seems like at least a decent deal.

Check out either of the cards if you're interested in them.

Newsletter Giveaways

I have three newsletter exclusive giveaways this month. Below there are links to each of the giveaways (made known only to readers of this newsletter). Click on the link(s) of the giveaway(s) you want to enter and follow the directions there. Prizes include:

1. Copy of Quicken Premier 2011

2. $50 SmartyPig gift card

3. Box of Books 

Good luck!

A Favor for Me

Would you please consider doing me a favor? I'd certainly appreciate it if you'd tell your friends, family, co-workers -- anyone you know that wants or needs personal finance information -- about Free Money Finance.

Simply let them know that if they would like to receive free, daily suggestions on how to grow their net worth, they can subscribe to Free Money Finance using their feedreader and this link. Or to get daily email updates, they can use this link.

Thanks for subscribing to this newsletter and good luck in the giveaways!

Win a Box of Books!

Welcome FMF newsletter readers! Here's a chance for you to win a box of personal finance books (the books included are here).

Here's how it will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. In a week or so, I'll select the winner at random and announce the winner on this post.

3. I will email the winner, get their contact information, and arrange for them to receive their prize.

As always, the standard rules apply.

Good luck! Post a comment below for your chance to win!

Win a Copy of Quicken Premier 2011!

Welcome FMF newsletter readers! Here's a chance for you to win a copy of Quicken Premier 2011.

Here's how it will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. In a week or so, I'll select the winner at random and announce the winner on this post.

3. I will email the winner, get their contact information, and arrange for them to receive their prize.

As always, the standard rules apply.

Good luck! Post a comment below for your chance to win!

Win $50 from SmartyPig!

Welcome FMF newsletter readers! Here's a chance for you to win a $50 gift card from SmartyPig -- given either as a credit to a current account you have with them or as credit to a new account that you'll set up.

Here's how it will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. In a week or so, I'll select the winner at random and announce the winner on this post.

3. I will email the winner, get their contact information, and arrange for them to receive their prize.

As always, the standard rules apply.

Good luck! Post a comment below for your chance to win!

The Five Worst Pieces of Financial Advice

MSN Money lists the five worst pieces of financial advice as follows:

1. Pay off your debt before saving for retirement.
2. Don't borrow for an education.
3. Pay off your mortgage as fast as you can.
4. Buy a home as an investment.
5. Make an emergency fund your financial priority.

My take on these:

1. Grow your career/income as much as you can and control your spending. This will make your gap as large as possible. Then you won't need to choose between paying off debt and saving for retirement, you can do both.

2. I don't think many people are suggesting that it's unwise to borrow for an education. They are suggesting that you don't borrow too much for an education. The key: be sure that your expected post-graduation income is more than enough to easily pay back your college debt.  Borrowing a modest amount for college worked out for me and I believe that if done properly, at the right levels, for the right student, and for a degree that can repay the debt that borrowing for college is a good investment.

3. The caveat they place here is that there are other priorities above paying off your mortgage. I say look at my point #1 -- why can't you do it all? I had an emergency fund, saved fully for retirement, AND paid off my mortgage at the same time. So it can be done. Ok, I see where you have to make priorities, especially early in your financial life, but is this really one of the five worst pieces of financial advice?

4. I don't think anyone should buy a home thinking they will get rich off of it. But I also don't think you should consider it a money-loser either. Compare the cost of renting versus buying as well as the pros and cons of each option. Then look at your finances and decide what to do. In other words, buying a house is NOT one of the five worst money decisions people can make. Viewing it as an investment? Maybe, maybe not.

5. I think a minimal emergency fund ($1,000 or so) is a financial priority. It keeps you from borrowing when emergencies come up. But saving six months of income does need to be looked at with the other financial issues you may be facing. That said, the biggest reason people can't tackle multiple financial objectives is that they simply over-spend.

As you can tell, I'm not 100% in line with the thinking that these are the five worst pieces of financial advice.  So what do I think the worst suggestions/moves are? Check them out at The Ten Worst Money Mistakes Anyone Can Make.

Star Money Articles and Carnivals for the Week of April 11

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 - Personal Finance Insights from HGTV  
• Wise Bread might prefer Roth IRAs to 401ks.  
• The Simple Dollar gives some thoughts on dividend-bearing stocks.  
• Consumerist tells why not to yell at a Walmart greeter.  
• My Dollar Plan tells how to report taxes on bartered items.  
• Money Smart Life covers disability insurance.  
• The Digerati Life discusses stock trading rules.  
• The Sun’s Financial Diary gives last minute tips for tax filers. 
• Lazy Man and Money offers tax strategies.  
• FrugalDad discusses money savvy kids.  
• BripBlap says to clean your workspace.  

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.

Win Free Online Tax Prep from TurboTax!

According to TurboTax, 27% of taxpayers wait until the last two weeks of tax season to file their returns. All I have to say to those people is "Tsk, tsk." ;-)

But sometimes procrastination has its rewards. This is one of those times.

TurboTax has given me three codes good for free federal and state tax preparation and e-file with TurboTax Premier Online 2010. Since taxes are due on Monday, this giveaway will have a tight turnaround. Here's how the giveaway will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. This afternoon, I'll select the winners at random and announce them on this post.

3. I will email the winners (be sure you put in the correct email address on your entry!), get their contact information, and arrange for them to receive their prizes. If you leave the wrong email (or no email), you win, and I get a bounceback, you forfeit your prize and I'll immediately move to the next person on the list.

As always, the standard rules apply.

Good luck! Post a comment below for your chance to win!

An Easy Way to Save Over $1,000 a Year

The March issue of Kiplinger's contained the following suggestion with a list of money saving tips:

Brown bag it. According to research by Harris Interactive, 45% of U.S. adults packed their lunches last fall. No wonder: A 12-inch turkey-breast-and-ham sub with chips and a drink runs about $8 at Subway. Buy a loaf of bread, lunchmeat, cheese, and fruit of chips for the week and you'll spend a much more palatable $3 or so a day. Annual savings (packing four days a week): $1,040.

I haven't talked about this money saving idea for quite some time (it seems almost too "basic" to discuss), but since I saw the thoughts from Kiplinger's I thought I'd comment on them.

I have been brown bagging it for several years now (I'm guessing I've done it regularly for the past ten years). I eat at my desk most days, though two to four times per month I do go out to lunch, usually for a networking-related meal (got to keep that network alive and growing, right?) Yes, I enjoy the saving money aspect, but for me it's an issue of time too. I work a bit off the beaten path and to go somewhere, eat, and come back takes an hour and a half at best. Not exactly work-friendly, if you know what I mean.

I'm guessing that more people than ever have been taking their lunches to work over the past several years. A killer economy kind of has that sort of impact on people -- they look for all sorts of ways to save money. And an extra $1k in the bank pretty sweet!

How about you? Do you take your lunch to work? If so, how long have you been doing this? If not, why not?

Reader Profile: KH

The following is the latest post on my new "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email.

Next in the series is FMF reader "KH". I asked her some questions (in red below) and she responded accordingly. Here goes:

Please tell us a bit about yourself.

I’m a woman, 49 years old, divorced with custody of two almost teen-age children.

What's your financial situation (who works in your family, what your income is (general), how your expenses are, etc.)?

Currently I’m working full time doing research and teaching as a professor at a private medical school in the Midwest.  My salary is $100-200K plus excellent benefits and we also receive $16K child support from my ex which will stop when the kids start college in a few years.

What are the current financial issues you're facing (saving, paying off debt, etc.) and what are you doing about them?

My primary financial concerns are the impending kids’ college costs and my own eventual retirement.  In addition my family (parents, siblings) is not wealthy and I may need to help them out as they get older.

I’ve had a lot of “catching up” to do in terms of saving and investing because I’m an academic, and because of bad financial choices I made in my marriage (ie I paid no attention to what my ex-husband was actually doing with our savings).

Nobody goes into an academic career to get rich. It’s basically a life of hard work but relatively low pay for 20 years, and then if you’re successful, you can get a good job when you’re 40.  On the other hand, it’s very rewarding.  I like the independence and creativity of my job, and also the fact that I’m doing something worthwhile. I’ve always been more worried about being bored than making money and I wanted to do something interesting with my life.  My career has gone very well--I held multiple jobs while I was getting my education that not only paid the bills but helped give me a head start with extra experience, connections, presentation skills, and business & financial acumen that most of peers didn’t have--all essential in my current position and helpful life skills as well. I’ve worked at least part-time since I was 15 years old and all during undergrad and grad school. I had only minimal loans from undergrad and I spent 2 years working in biotech to pay them off before going to grad school for my PhD.  After 5 years in grad school, I spent 8 years in low-paid postdoctoral positions--typical in my field.  I’ve been a faculty member now for 11 years now and my job is as secure as it gets.

I married as a postdoc, and I had 2 kids during my first years as a professor.  Unfortunately, my ex left me for one of his students (he’s also a professor). The divorce was a big economic drain for me, not only in legal fees but also because I discovered that his “saving and investing” of half our combined salaries didn’t exist. Yes, I was stupid to not notice this, but in my defense I was busy with two small children and working at a challenging job, and you’d think you could trust your spouse!  Because some people think divorce is a big payday for women, I’ll include some details.  My ex makes the same as me, and when we married he had debts while I had savings. Our divorce after 12 years together split our assets exactly in half except the judge ruled I wasn’t liable for his credit card debt that I didn’t know about. I get child support until the kids turn 18 (they live with me), but no spousal support. So, not a “payday”.

After the divorce I was starting over economically, but at least I had a good job and no debt except the mortgage. On the other hand, I had only $60K in savings, college for the kids was looming, and it is unclear if their Dad could/would help. I decided to take my finances seriously. I set out to get myself educated and made a commitment to myself to follow through with what I learned. I read financial blogs, track all my spending in Excel, and try not to leave money on the table--I take advantage of my workplace benefits (health savings account, dependent care savings account etc), and of every rate or tax regulation change, and I meet with a financial advisor (fee-based) and my tax preparer once a year and I follow their advice. Over the past several years of doing this, I think I’ve gotten my financial house in good order.

I don’t have any debt except a $40K mortgage at 4.5%--too little to help with my tax bill so I prepay at $7K extra/year and it will be paid off in 2013.  After the divorce, I kept the inexpensive “starter” home that my ex & I bought when we got married instead of trading up--my kids have benefited from not having to move and I like the small mortgage.  It’s far from a Mc Mansion but very nice.  If I had moved I would have had to pay $200K more for basically the same size house just newer & in a different neighborhood--not worth it in my opinion.  My car is 3 years old and paid off--I bought it new for ½ cash and the rest financed but I paid it off right away--I just did the financing to keep my credit score up.

We currently live on about 40% of my after-tax pay and I save and invest the rest. Annually, I put $22.5K (the max) into a Roth 403b (this is a 401K for academics; there’s no match available for me unfortunately), $6K into 529 accounts (very conservatively invested) for the kids’ college, and $40-60K into other savings.

I never accumulated much credit card debt--not even when I was a grad student living on $10K/yr. If there’s no money, I’ve just gone without because going into debt just isn’t  worth it. I think that’s a benefit of growing up poor--you know you really don’t need much to get by, and you don’t expect to live a lavish lifestyle or strike it rich some day so you don’t spend in anticipation of that. There’s been many times when I couldn’t afford bus fare so I just walked everywhere and lived on ramen and vegetables for months--it’s not that terrible. 

I calculate that there should be $90K total in the 529s when the kids start college and I can contribute another $25-50K/year from my income, and hopefully their Dad will contribute some too but if he doesn’t it doesn’t matter. We make too much to expect financial aid, and, unlike at some universities, a discounted undergrad education for faculty children isn’t available at my institution. With scholarships (my kids do very well in school) and some minimal loans I think college costs will be covered without me having to dip into my other savings.  I also have $400K in life insurance and a will with an estate & trust plan--so if I die I know the kids will still get their educations. 

What are your plans for the future. (retire early, build your career, etc.)?

I’m a little behind with my retirement savings for my age, but my planned savings should catch me up. I’m lucky to have a partial fixed-benefit pension from my workplace (discontinued for new hires but I’m partly grandfathered in) that should cover 1/3 to 1/2 of my expected expenses in retirement plus a retirement health plan. I also have $150K in tax-deferred retirement and other accounts, that is half in a low-risk fund returning 4% (with my life insurance company) and the other half is invested in mid-risk mutual funds.  I don’t plan to retire until at least 67 probably closer to 70--I like my job and I can transition into administration and teaching that won’t be as intense as research if I need to.  I’m not interested in traveling--I’ve already traveled all over the world for work--but I do have lots of hobbies that it would be nice to have time to enjoy. 

I feel very blessed by my circumstances in life that give me such a big difference between income and expenses right now, but you never know if this will last so I plan to take advantage of it while I can. I’m comfortable investing with some risk but I don’t feel at this point that I need the high returns that would come from investing aggressively so I plan to keep risk/returns of my investments moderate. 

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

My financial philosophy is summed up in the phrase “it’s just money”.  I don’t think money is much good as an “end” in itself and I also don’t think a person’s life is necessarily miserable if they don’t have any. I grew up working class and I’m a child of  the 1960’s & 70’s.  Anti-materialism was cool back then--I’m an ex-hippie and those are still my values. Not being rich is not a problem if your ego doesn’t depend on possessions.  Our society today is different--everyone seems so obsessed with money, and many people apparently feel like their life is essentially over if they can’t afford a huge TV or a fancy phone or if they’re in debt or underwater.  I think money is functional--you need some, and you need to pay attention to getting what you need to live and enough to do what you want or take care of yourself & your family in case of disaster or old age.  But it won’t make you happy--I think your self-worth and happiness have to come from living with integrity and doing something worthwhile and from something inside yourself.

Money Commandment #2

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #2 as follows:

The old-school rules: Save for a rainy day.

The bubble economy rules: Who needs savings? Leverage to the max!

The new rules: Build both your cash savings and your access to credit for maximum financial flexibility in emergencies.

Here are my thoughts on all of these suggestions:

• Again, I'm old-school here since I favor the "save for a rainy day" strategy. Actually, my "rule" is to "save as much as you can as soon as you can for as long as you can." ;-)
• I understand the author's thoughts on needing both savings and credit in case of an emergency (you may HAVE to charge something if it truly is an emergency), but I think this is more of a beginning-level suggestion. Over time, you should be able to build your emergency fund to the point where it will be very unlikely that you'll need credit to see you through all but the worst of times.

Then again, many Americans are at the "beginning-level" stages of managing their money. The book shares the following about Americans' status when it comes to savings/emergency funds as follows:

• 43% of households have less than $1,000 in liquid savings.
• 28% live literally paycheck to paycheck with no savings whatsoever.
• Only 30% have a cash hoard that would tide them over for at least three months.

It's pretty bad out there. Some thoughts:

• Almost half of Americans don't have $1,000 in savings? Is that right? Then again, the average American could probably sell a ton of their junk and raise $1,000 if need be.
• I was surprised to see that 28% live paycheck to paycheck. The book The Difference (which was done based on a massive amount of research) listed 54% of people who are living this way (for details, see How to Be at the Bottom of the Financial Barrel).
• So 70% of Americans don't have enough saved to make it three months. That's sad -- in more ways than one.
• We have enough saved to last a year or so -- even without an income. But that has come over time (you can't expect a 22-year-old to have this much saved.) However, the average U.S. household isn't 22-years-old. And yet they have the savings of one. Ugh.

What's your take on this issue? And how many months could you live on your emergency fund?

Do You Use All Your Vacation Days?

The February issue of Money Magazine quotes the following:

Last year a whopping 37% of Americans didn't take all their available time off, up from 31% two years earlier.

They don't have a reason for the increase other than to suggest that times were tough at many companies and a lot of them were letting people go -- not exactly a great time to take a vacation.

I used most of my vacation last year, but I have been carrying over a week and a half or so for the past couple of years. My company has a policy that you can get paid for unused vacation time or can simply carry it over, which is what I've decided to do. If I ever think I'll never use it, I'll simply cash it out one year.

So I guess I'm in the 37% (but just by a day or so) who didn't take all their vacation last year. How about you? Did you take all of your available time off in 2010?

Help a Reader: The Right IRA

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

The age old question of Roth vs Traditional in a new/different twist.  My wife and I are both physicians, she is a resident making ~56k/year.  I am a physician in the Air Force making ~90k/year.  Right now we qualify for contribution to a Roth IRA (both would be new IRAs) based on our income but in 3 years when she is done with residency, we won't. 

Does it make sense to contribute to a Roth for only these three years and then start a traditional, or would starting and putting everything in a traditional help in the long run?

What's your advice for him?

What Americans Need

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists items Americans in 2009 felt they "needed" as follows (along with the percentage that felt this way and the change since 2006):

• Car -- 88% needed, down 3%
• Landline phone -- 68% needed (not asked in 2006)
• Clothes dryer -- 66% needed, down 17%
• Home air-conditioning -- 54% needed, down 16%
• TV set -- 52% needed, down 12%
• Home computer -- 50%, down 1%
• Cell phone -- 49%, even
• Microwave -- 47% needed, down 21%
• High-speed internet -- 31% needed, up 2%
• Cable or satellite TV -- 23% needed, down 10%
• Dishwasher -- 21% needed, down 14%
• Flat-screen TV -- 8% needed, up 3%
• iPod -- 4% needed, up 1%

And for those of you who want to know the details, the respondents were asked this question: "Do you pretty much think of this as a necessity or pretty much think of this as a luxury you could do without?"

Some thoughts from me on these results:

• Notice how many things are way down in being viewed as a necessity? Hmmm, I wonder what happened between 2006 and 2009 that made people change their minds so dramatically.
• Personally, our family owns at least one of all of the items above -- more than one in many cases (cars, TVs, home computers, cell phones, iPods). I don't consider them "needs" (more on that in a bit) but they certainly do make life more comfortable.
• Of these, here are the ones I consider true "needs" for our family: car, clothes dryer, and either home or cell phone. Yes, you could argue that we could make it without these as well, and we probably could. But life would be so impractical without them that they are near-needs IMO.
• Seems funny to me that they left out items that could have placed relatively high on this list: refrigerator, oven/stove, DVD player. Perhaps the first two were assumed to be needs by everyone (as were "toilet" and "home heating system" I'd guess) and the last isn't that important (through it could be in the 20-30% range.)

So what do you think of the list? And are they any items not here that you think should be?

How to Become a Millionaire in Three Easy Steps

CNN Money tells how to be a millionaire in three easy steps. It's a three-page post (or at least they've expanded it to that) that really boils down to making the most of these three factors:

• The time you have to save/invest
• How much you save/invest
• The return rate on your savings/investments

They go on to say that the longer you have to invest, the more money you invest, and the more aggressive (within reason) you invest, the faster you'll become a millionaire.

Wow, these guys are geniuses. ;-)

Yeah, pretty basic stuff. But they do make one point that I wanted to share with you all on a serious note -- this one about the impact of time on your investments:

When you think about getting rich, what jumps to mind? Saving more money? Getting that money to work harder for you? Sure, those are critical elements. But they're not nearly as important as time: How long you allow dictates how you pull the other two levers -- which is why you want to estimate your schedule before going on to the next sections.

I brought up the importance of time in investing in The Best Way to Maximize Your Investment Return, where I noted it was the one factor of the three that made the most difference in how your wealth would grow. BTW, #2 is how much you save. This makes return rate, the step most people spend the most time on, the least important of the group. So if people simply started saving more and doing it over a longer period of time (two factors they can influence much more than they can return rate), they would be much better off. Couple those with using index funds as your preferred investment vehicles (delivering you a good rate of return), and you've got a winning strategy.

CNN Money says (roughly) the same thing with this quote:

The single most important thing you need to know about building wealth: You're far better off being a dogged saver who's a mediocre investor than being a below-average saver who can knock the socks off the S&P 500.

Of course, if you can do everything well, then you're almost guaranteed to become quite wealthy.

The post does have an interesting chart that gives the odds of hitting $1 million in 20 years if you start with $250k and invest 60% in stocks and 40% in bonds given various annual savings rates. The results:

• Annual savings: $5,000; Chance of hitting $1 million in 20 years: 31%
• Annual savings: $10,000; Chance of hitting $1 million in 20 years: 43%
• Annual savings: $15,000; Chance of hitting $1 million in 20 years: 55%
• Annual savings: $20,000; Chance of hitting $1 million in 20 years: 67%
• Annual savings: $25,000; Chance of hitting $1 million in 20 years: 79%
• Annual savings: $30,000; Chance of hitting $1 million in 20 years: 91%
• Annual savings: $40,000; Chance of hitting $1 million in 20 years: 100%

With all this talk of saving $1 million, I know someone is going to say something like, "$1 million is not what it used to be" or "$1 million is not enough to retire on." So let me address these issues quickly:

• No, $1 million is not what it used to be. Nothing is what it used to be thanks to inflation. But $1 million still places an individual in the top few percentage points of all net worths in the US.
• Yes, $1 million is enough to retire on. Not a lavish retirement, mind you, but many people are retiring with far less than $1 million in the bank and are doing "ok."

Anyway, the key point here boils down to this:

If you want to become wealthy, invest as much as you can as soon as you can for as long as you can.

Yes, it's as simple as that!

Money Commandment #1

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #1 as follows:

• The old-school rules: Live within your means.
• The bubble economy rules: Live to the max, with easy low payments.
• The new rules: Use the 50/30/20 budget to know what you can really afford and what you can't.

To explain the last section the 50/30/20 budget takes after-tax income and divides it as follows:

• 50% goes to "must-have" expenses like food, housing, utilities, etc.
• 30% goes to "wants" like vacations, gifts, entertainment, etc.
• 20% goes to savings and debt repayment.

Now, here are my thoughts on all of this:

• I guess I'm old-school a bit because I still like to have "spend less than you earn" as the foundation for my personal finance advice.
• Next, I'd recommend anyone considering adopting a new budget to start with the 10-10-80 budget. It's simpler than the one above IMO.
• That said, the 50/30/20 budget does give more detail as well as encourages people to save more -- two things I like about it. So I'd say after a year or two on the 10-10-80 budget, a person could advance to 50/30/20.
• It all comes out of the same pot, so if you want to spend more in one area, you need to spend less in another. I just wouldn't mess with the last 20%. So, for instance, the 50/30/20 budget my morph into the 60/20/20 budget or the 40/40/20 budget based on your personal situation, but it shouldn't get to something like the 60/40/0 budget or 50/40/10 budget. The last 20% needs to remain firm -- especially for those who have had budgets for several years (and should now be out of debt.)
• And yes, you need to work giving into the first 80% of the 50/30/20 budget -- don't take it out of the last 20%. You'll need to work up to this over time (that's why I suggest starting with the 10-10-80 budget), but it can be done.

There's a lot of worthwhile stuff in this book and I'll be sharing much of it over the next couple of weeks. Stay tuned.

Festival of Frugality: All Messed Up Edition

From personal experience this past week (both as a carnival submitter as well as the person who runs the Best of Money Carnival), I know that Blog Carnival (the site most bloggers use to submit their posts) was all messed up. Entries weren't being forwarded for much of the week. So this week's Festival of Frugality was a bit lighter than normal. But it's still full of many great posts on how you can save money.

After weeding out the posts that weren't about frugality (nice try, some of you), I listed the posts into two groups below. First, here are the submitters who included a bit of information on their posts when they sent them to me:

• TLC's Extreme Couponing: If You Don't Use It, It Is Still Wasteful Even If It is Free - While I wish I could view TLC’s Extreme Couponing to learn more couponing skills myself, that appears not to be the focus of the show. Rather than helping other Americans who are struggling and would love to learn how to lower their grocery bills further with coupons, this show seems to be focusing on creating a freak show like atmosphere. Several of these featured couponers state that their lives are out of balance and that their relationships are suffering because of their dedication to extreme couponing.
• Laughter: The frugal survival tool - Looking on the sunny side will not automatically fix whatever's wrong with your life. But you do need a break from all that's dismal, even if the break lasts only a few minutes. Sometimes a funny video or a light-bulb joke will give you the boost you need to return to the fray.
• Build and Live in a Shipping Container Home - Don't want a mortgage? Give this idea a try. Build your own home out of old shipping containers. Many people are doing it and these homes are surprisingly nice.
• Our $117 Playstation 3 - A man will do so much for a game system!
• Spring Clean...Your Windows for just pennies - No need to buy expensive chemicals, when you probably already of this ingredient in your kitchen.
• 7 Ways To Control Your Spending - Ever wonder where your money went at the end of the month? Here are some ways to control your spending and to watch where your dollars are going.
• Is a House Cleaning Service Worth It? - It cost us a bit, but we sprung for a house cleaning service for the first time ever. Was the money well spent? See what we think in this article.
• Paying NO Taxes: How? - There are areas of life where you just shouldn't try to cut corners for frugality sake. Taxes aren't one of them! There are legal ways you can get out of paying taxes entirely!
• Sharing Joy: Ten Happy-Making Things to Do on a Sunny Saturday that Don’t Cost a Dime - Fun things to do whether you're single, coupled, or have a family.
• 5 Unusual Ways To Save On Your Apartment Rent - Rent is often one the biggest monthly expenses, making it even harder to save. Here are five ways to save money on rent for your apartment.
• Is it trendy to be frugal? - Frugality has become more socially acceptable. Too many people live beyond their means so it's great to see that ‘frugal’ has become trendy.
• 5 Top Tips for Cooking at Home - Cooking at home is generally less expensive than eating out and can be healthier as well. Use these 5 cooking at home tips to simplify the process.
• Reheeling Shoes - Reheeling shoes can double their lifespan at a fraction of the cost of new shoes. Plus, I show the results of taking my very worn out boots to a cobbler.

And here are the other submitters who didn't leave any explanation of their post:

• Four Audiobooks That Will Help You Get Out of Debt
• Save Money On Amazon By Watching Price History
• Spray bottles

Enjoy!