photo by chrisbb

This is a guest post from The Happy Rock @ The Happy Rock, a personal finance blog dedicated to changing our behaviors to change our wealth.  You can subscribe to his feed here.

Most financial plans include some amount of cash savings to help get you through life’s unexpected events.  2 of the first three steps of the Dave Ramsey baby steps revolve around the emergency fund.   I know Frugal Dad has already covered what an emergency fund is, but I want to share what having an emergency fund has meant to me.

First let me share a little bit about my background.  My wife and I followed a slightly modified Dave Ramsey plan as we got rid of $70,000 in 4 years.   We had the initial $1,000 in the bank quickly and luckily never had to use it during our debt elimination.  Building up 3-6 months expenses took what seemed like an eternity, but since that time we have never looked back.

Now that you know relevant history, let’s explore seven things that our $1,000 and fully funded emergency funds ‘bought’ us:

1. Protection - First and foremost a cash savings is designed to be a buffer so that you can avoid debt when bad/unexpected circumstances show up at your door step.  With a cash savings you can avoid using the credit card for things like unexpected car or home repairs.  It can tide you over in the event of a job loss or income shortage.  Frugal Dad just recently shared about the importance of his emergency fund and how it protected them against a few unexpected expenses.  We were lucky, since the only time we had to dip into our emergency fund was when our second adoption happened quicker than we had planned, but we were able to quickly replenish it since we had a hefty cash flow from not having any debt.
2. Success - The idea behind the $1,000 mini-emergency fund that Dave Ramsey recommends is not only to create a little barrier to keep you out of debt, but also to get your positive energy flowing by being successful at saving.  When people realize that they can meet a small goal and be successful they begin to have faith that they can conquer larger goals.   I can also attest that getting a full 6 months expenses in the bank was the point at which I finally felt my finances were a success.
3. Lower Stress - It is amazing how much having protection that will carry you through most of life’s curve balls reduces the amount of energy that you spend thinking about your finances.  Worry starts to melt away and is replaced by a sense of security.
4. Freedom - With 6 months expenses in the bank a whole new realm of possibilities opens up.  You can now consider taking a leap and quitting the job that you hate or by cutting back some hours to pursue a side business or volunteering.  You have the freedom to invest more for the future without sacrificing the present.  Things that were impossible just months or years earlier now seem a lot more feasible after accomplishing a fully funded emergency fund.   Your financial system now frees you to focus your energy on things that are more important than money.
5. Motivation - The motivation is driven by the removal of stress and the reclaimed mental energy.  You can now turn your attention towards goals and opportunities that excite you, rather than being caught up in just making sure your financial house of cards doesn’t crumble.
6. Giving - Instead of feeling like you need to cling to ever dollar, you can begin to loosen your grip on those precious dollar bills.  Instead of clenched fists, you can great life with open hands ready to accept what comes your way and give back to those around you.
7. Passive Income - Finally, 3-4% interest on 6 months expenses isn’t going to help you quite your day job, but there is something quite satisfying about collecting almost $400 a year in passive income that adds another layer of satisfaction to having an emergency fund.

I can honestly attest that having a fully funded emergency fund marked an amazing switch in focus for my life.   I suspect those of us with fully funded emergency funds have had similar experiences. Hopefully those that are just getting started and those that are in the midst of their debt elimination can use this list as inspiration.  It really is as great as it sounds.

photo by jslander

Have you ever known someone who preached frugality at every turn?  They were always eager to tell you how much money they saved, or how much you could have saved, or how frivolous your purchase was?  I’ve caught myself being “that guy” sometimes, and it is not a character trait I want to develop.

Be a Frugal Leader

In many areas of our lives leading by example is the best way to encourage others to follow.  Being frugal is no different. One of the quickest ways to turn people off of frugality is to tell them how they should live their lives, and how they should spend their money.  This is especially true with spouses and children.  Here lately I’ve noticed that I have become overly critical of my wife’s purchases, and get too easily upset if my kids want something I think is frivolous.  Instead of telling them that I don’t think they are being frugal, it would be better if I kept my mouth shut, stuck to my own frugal habits, and let them come to that conclusion on their own.  Sometimes it is hard for us guys to keep our mouths shut, and when I fail to take this advice I usually wind up with a foot in it.

Be Frugal for the Right Reasons

Many of us with kids worry that our frugality won’t rub off on them, or worse, that it will backfire and they will grow up to be mega consumers.  I personally believe much of a child’s future personality is cultivated by the attitudes of their parents.  If parents complain about frugality as a side effect of being “poor,” and constantly compain about the price of things, and what little money they have, then kids will likely grow up to resent anything to do with frugal living.  However, if parents discuss finances with their children and explain that they live frugal because it makes them better stewards of their money and resources, and do it with a generally positive attitude, then kids will be more likely to adopt the behavior as their own.

Black and White

Writing about family finances has helped me see more gray areas.  I used to only see things in black and white.  Either you were frugal or your weren’t.  You were good with money or you weren’t.  Now I realize that everyone has their own tolerance for living frugally, and that’s okay–we can all still be friends.  Some people like to cut coupons, while others see it as a waste of time.  Some people cut their own hair, and others visit high-end salons.  Some people skimp on clothing, drive old cars and refuse to eat out, but take an annual cruise.  None of these people are necessarily doing anything wrong.

I started out this post knocking people too eager to give advice, but I will close with some for myself.  Be more tolerant of others.  Many times people are doing the best they can with the resources they have to work with.  We may not know the whole story.  We may not understand what psychological factors they are dealing with.  Don’t be quick to look down upon people who don’t live the same way we do.  Now, go be a frugal leader!

Gone are the days of thirty year careers and an anti-climatic send-off with a gold watch.  Increased labor competition, an economy shifting away from manufacturing and towards service, and a basic impatience from Generations X and Y have just about done away with the idea of retiring on a pension from a working lifetime with one employer.  Add the Enron fiasco to the mix and most people have given up on the idea of “job security.”  With all the uncertainty, creating multiple streams of passive income is a great way to hedge against the risk of unemployment.

A Shift in Thinking About Earnings

To fully appreciate the idea of passive income, one must shift their previously held assumptions on earning income.  Most people, myself included, think of earning money as something we get in exchange for some amount of work.  In its most basic form that is a pretty good definition of “earnings.”  Some people refer to this as “dollars for hours” thinking.  However, the part about exchanging some amount of work, or life energy, is not necessarily a requirement in the income-earning equation.

Passive income refers to income that is generated without any (or very little) additional effort on our part.  Some effort may be put in up front, but the payoff from passive income can last for years.  A few examples of opportunities to earn a passive income are:

Royalties on books. Royalties represent passive income in that the author of the work puts in all the work up front, but does not have to do much work to continue to receive payment for his or her work (with the exception of self-promotion, etc.).

Real Estate.  Passive income from real estate can be derived in two ways, primarily.  Homeowners may choose to rent out their property in which case the rental income is mostly passive, although basic landlord duties do require time to manage.  The appreciation of real estate also has a networth increasing effect without requiring any additional work from the homeowner.

Interest.  Interest income is passive income in that it does not require any additional work on the part of the recipient.  The money invested may have been earned through work, but the residual interest and dividends received is passive income.

Why is Passive Income Important?

Every dollar you earn in passive income is a dollar you didn’t have to earn by working.  In this way, passive income puts you closer to financial independence, a stage of life where you no longer have to sell hours for dollars in order to earn an income.  A simple example assumes you have $1,000 saved in an interest-bearing account earning 3% (the current interest rate on ING Direct’s Orange Savings Account).  Over the course of a month that $1,000 capital is working to earn you roughly $2.50 in passive income. If you had $100,000 in that same account it would bring $250 in passive income each month.  Of course, money parked in investments earning an even higher yield, such as CDs, would bring in even more monthly interest income.

At this rate, it wouldn’t take long to earn enough in interest alone to cover your basic life expenses, especially if these earnings are reinvested (or compounded) until income from the fund is required.

How are you creating a passive income?

photo by artfulblogger

I try to keep things positive here at Frugal Dad, but admittedly even I do occasionally get down.  I grow weary from the coming and going of the corporate rat race.  At times I get down about so much of my income going towards becoming debt free (it is a noble goal, but there are other things I’d rather be doing with money than paying off banks!).  And every now and then I just get bummed for no apparent reason.

However, in memory of the indomitable spirit of Randy Pausch, who passed away last Friday after losing his battle with pancreatic cancer, I’m dedicating today’s post to ways to get fired up about life!  Since I was a kid I’ve always found inspiration in movies, books, music, and particularly in the inspirational stories of others.  YouTube has sort of provided a combination of two or three of those mediums, and I have a few favorite videos bookmarked to help lift my spirits when I get down.  Maybe you have been feeling a little blue here lately, and could use a boost as well.

The Last Lecture.  Randy Pausch, a professor at Carnegie Mellon and husband and father of three, was diagnosed with pancreatic cancer last August and only given a few months to live.  He gave this last lecture on September 18, 2007, just a month after his diagnosis.  Pausch was interviewed on Good Morning America on May 19, 2008, nine months after his diagnosis, and the day of his surprise return to Carnegie Mellon’s graduation ceremony.  His story, and in particular this final lecture, are a powerful reminder of the strength of the human spirit.  Randy Pausch died July 25, 2008, just a few days removed from the time of this post.  I followed Pausch’s story after first seeing his “Last Lecture” some time ago.  He will be missed.

Life Lesson:  There is always someone out there going through something more difficult than you, and many times doing it with a better attitude.  Remember, sometimes we can’t control the things that happen to us, but we can control how we respond to them.

Perseverance, and a Father’s Love.  The stage was the 1992 Barcelona Olympics.  Sprinter Derek Redmond was picked to win gold in the 400-meter event, but he tore a hamstring about half way through the race.  After taking a knee for a moment, the injured Redmond began to hobble around the track in an effort to finish the race, long after the winner had crossed the finish line.  He is greeted by his father after the last turn, who helps him cross the finish line, waving off help from trainers and track officials.  It was a beautiful moment.

Money Lesson:  The journey towards financial freedom can be a long one, especially if you are starting out in a significant hole.  But every single step forward is a step towards the finish line.  Don’t be afraid to accept help from loved ones along the way.

Where is Matt?  I included this one because it is such a unique video, and an interesting example of the power of internet marketing.  Matt is a 31 year-old, self described “deadbeat’ from Connecticut who quit his job a few years ago and spent time just wandering around the world.  While traveling he recorded himself doing a dance at various destinations, and put the video online when he came home.  A few people found the video, it got passed around and soon Matt was the owner of a popular video.  Stride Gum contacted him and asked him to take another trip around the world, this time on their dime, and recreate the dance with other people.  A video sensation was born. At the time of this writing the month-old video has received nearly 8 million views on YouTube.  (found this one via Brip Blap)

Another Life Lesson:  Sometimes things that seem silly to us may resonate with others.  Sure, the dance is a little goofy, but the message behind the dance is inspiring.  I asked my daughter what she thought the video meant and she said something profound.  “I guess it means that no matter where you are if you are happy and start to dance then others will dance with you.”  Well said.

Do you have any personal favorites you’d like to share with others?  Feel free to drop it in the comments below.

photo by OiMax

Welcome to Sunday Conversation #11! Just one question this week, but it is a deep topic and is probably deserving of its own post.  If you would like to participate in next week’s Sunday Conversation, simply ask your question in the comments section of today’s post and I will respond next Sunday. Remember, any subject is on the table (but keep it family-friendly).

“I have an 8 year old daughter who is very… uh.. materialistic. I’m ashamed that she loves her “things” A lot of people say it’s her age. Is there any way to curb this obsession? (I know turning off the TV is probably a good start).”

-Dana

Dana, this is an issue every parent struggles with at some point.  You’re correct in your assertion that the media certainly isn’t much help.  One of the reasons we decided to live with only basic cable was because of the constant advertising barrage children are subjected to, especially on channels dedicated to children’s programming.  The Disney Channel, for instance, is seemingly benign, but a large majority of their programming incorporates advertising for their own products, or plugs for other products, and most of their shows promote a never-ending message that rich is cool, and designer clothing is always “in.”  I equate most of their shows to soap operas for kids.

But television is not the only contributor to influencing a child’s level of materialism.   Parents are ultimately responsible for helping kids develop a frugal approach to life through their own example.  How many times have you heard parents bragging about their car, or their home, or their fabulous vacation in front of their kids?  How many times have you seen or heard parents making fun of an old beat up car, or a run-down house.  Over time these examples mold kids’ attitudes towards material things, and they incorrectly think anything less than the best is not good enough.

Sometimes, despite our best efforts, children develop an unhealthy level of materialism on their own.  How do we change these attitudes once they develop?  I personally believe the best way to cure kids of material desires is to make them humble.  Let kids volunteer with you at a local soup kitchen, or ride with you to donate items to the Salvation Army.  Make it a teachable moment by taking some time during the ride to and from to explain that some people have no beds, or bikes, or toys, or even clothing.  Do so not in the spirit of making them feel guilty for having nice things, but in the spirit of developing your kids into becoming “givers.”

Another idea is to allow your children to spend some time talking to others who have sacrificed, or done without, especially older generations who grew up in the Depression era.  My grandfather was born and raised in the Depression era, and often times went without shoes in the summer, and at times went without lunch or dinner when there was no money for food.  There were no electronics, no toys, no cars, no computers, no televisions, and much of the time, no power.  It is hard for kids in today’s environment of abundance to comprehend living with so little.  We are fortunate that my grandfather is close to both of our kids and has shared many stories of his youth with them.  I know it has had a profound effect on me, and as my kids get older it will on them as well (especially as I retell many of these stories to them).  If you don’t have a “Papa” to talk with at home, visit a retirement home, or church, or even consider picking up a kid-friendly book on the subject.  Children of the Great Depression is a great introduction to the history of the Depression era for young readers.  Welcome to Kit’s World is another great title, and aimed specifically at young girls.

Do you have ideas for helping to raise “frugal” kids?  Please share in the comment below, and remember to ask a question if you would like to see it addressed next Sunday.

 
 photo by destinelee

There is no shortage of places to go out to eat in our country.  I’m continually amazed at how much food is incorporated into all forms of entertainment. You can’t go anywhere without a hotdog stand, a concession stand, or even a full-blown restaurant stuck inside a discount store.  We recently took our kids to a popular indoor play place (think of a gym for kids with inflatable equipment), but didn’t think to eat before we went.  Like all kids, it only took about twenty minutes of play and the scent of pepperoni pizza wafting through the building before they were begging for a snack.

Snack Savings

I think our lunch cost us about $12.00 that day.  It consisted of two pieces of thin-crust pizza for each of us, and three small drinks (my wife and I usually share, but kids and germs don’t mix well so they get their own cup).  We could have bought an entire pizza with all the toppings we wanted from our local Kroger grocery store, baked it ourselves, and had drinks at home for less!  Lesson learned.  When planning activities away from home it is a good idea to eat a small meal before leaving, else the activity is bound to cost significantly more with food purchases.  I recently wrote about the decision to sneak food into movie theaters instead of buying from the concession stand.  Assuming you simply ate a meal or snack at home you could easily survive a two-hour movie without buying a $5.00 tub of popcorn and a $3.00 drink.

Healthier Food Choices

Things made at home are typically much better for you than food purchased on the road.  Even the choices are significantly better.  It’s rare to find a grilled chicken salad on the menu at eateries tucked away inside amusement parks.  Most menus here resemble fast food restaurants where the most popular items are hamburgers, french fries and hotdogs.  Eating at home saves both dollars and calories.

An Annual Exception

I can easily live with this rule but for one major exception–the fair.  When the state fair comes to a city close to us once a year, part of the experience is fair food.  I’ve often joked that if a place opened and only sold “fair food” they would rake in money!  Funnel cakes, corn dogs, fried candy bars, turkey legs and homemade ice cream are all part of the experience at the fair, and we budget a stomach-ache-inducing binge into our entertainment budget just this once.  After all, what’s the point of living frugal if you can’t have the occasional treat?

How do you avoid food expenses while visiting entertainment venues?  Eat before you go, pack a picnic, or just budget in the food costs?

 
photo by Lisa Andres

Frugal Dad appeared in Thursday’s edition of the Chicago Tribune!  My thanks to Sandra Jones for taking the time to talk with me about my blog, and for mentioning it in her article, Even Now Retailers See a Blue Christmas.  If you haven’t had a chance to read the article, go check it out–it is a great read.  I agree this could be a tough Christmas, especially if another round of stimulus checks doesn’t make it out of Congress in time for the holidays.  Actually, that might be a good thing, but I’ll save my commentary for another post coming out next week.

Who Are Your Personal Financial Heroes?   I always enjoy reading who inspires others.  I’ve had a few people I would consider financial heroes, but none of them outrank my grandfather, who I’ve referred to here before as my “frugal mentor.”

RSS Subscription Options Explained in Plain Language.  An excellent overview from Simple Mom explaining the ins and outs of RSS.  I’m never good at explaining this myself, so I think from now on I’ll just point people to this post.

What Everyone Should Know About Selling Hours for Dollars.  I have been thinking a lot about this subject lately, and Marc and Angel’s post is sort of the condensed, blog-post version of Your Money or Your Life, my all-time favorite personal finance/frugal living book.  If you aren’t maximizing your remaining life energy by living life to the fullest, you need to read this.

20 Ways to Train Your Brain for Peak Performance.  I really need to incorporate more of these into my daily routine.  Like I mentioned in the comments on Jeff’s article, I’ve been trying to convince my wife #10 was legitimate, but I still don’t think she’s buying it.

The Ups and Downs of Buying a Home.  Lynnae over at Being Frugal is buying a new home, and chronicled some of that process here for her readers.  Lots of ups and downs in the process, and a good read heading into a real estate transaction so you’ll know what to expect.

What Will Your Children Inherit?  My take on this great read from Ron (of The Wisdom Journal):  If we lead frugal lives because we are poor, broke and feel generally unlucky then our kids won’t find much appealing about this lifestyle, and will likely react to it the first time they have money by spending wildly. However, if we live frugally because we choose to, because it makes us better stewards of our money and our resources, and we do so with a positive attitude, then our kids will be much more likely to repeat our behaviors.

I Quit.  Looks like Madison is joining the ranks of probloggers who’ve left the rat race in their dust!  I suspect the great work she is doing over at About.com Kids and Money helped her make this move.

Is it Ethical to Walk Out on a Mortgage?  This conversation-starter is closing in on 200 comments, with some passionate discussion happening.  For what it’s worth, I don’t think it is ethical to walk out on any debt assuming you have the means to repay it.  There are justifiable reasons for bankruptcies, foreclosures, etc, but simply not wanting to pay your debt is not one of them.

Carnivals/Festivals

I participated in the Festival of Frugality #135 where I was selected as an editor’s pick.  Some great reads over there!

I also joined in the fun at the Carnival of Debt Reduction #149.  Plenty of motivation here to get out of debt!

That wraps up this edition of the roundup.  I hope everyone has a great weekend and stops by to checkout my Saturday post, and the Sunday conversation.