Monthly Archives: March 2011

Ideas to Trim (or Slash) Vacation Costs

Posted on by  at  12:00 pm
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Spring break season is already upon us and summer vacation will be right on its heels, so now is a good time to start thinking about ways to cut costs on your next vacation.

Kings Dominion by AshBash! on Flickr

Travel in a Pack

It can be difficult to make travel arrangements for a group of friends or family due to conflicting work and school schedules, but if you can manage it, the benefits can be huge. My family has perfected the art of pack-travel, sometimes migrating in groups of up to 30 people of all ages. There are several advantages to this type of travel: saving on lodging, saving on meals, privacy, and companionship.

For example, on numerous occasions we have rented houses for our travels instead of a block of hotel rooms. Each family’s share of the house works out to be much less than a hotel room for the same number of nights. Having a kitchen at our disposal allows us to eat in and reduce or eliminate trips to expensive tourist restaurants and also to prepare foods for those in the group with special dietary needs. Lastly, having a house to ourselves affords privacy (at least from strangers) and allows us to share a new adventure with familiar faces.

Most rental houses are not residences and can be booked online like regular hotels. But today more and more people are renting their homes on craigslist.com and other sites, especially when there is a big local event, such as the Master’s Tournament in Augusta, Ga. Some states and municipalities restrict the renting of private residences, so check carefully to ensure the rental is legal before committing.

Groups may qualify for discounts on transportation, meals, park or museum fees, souvenirs, and more, further reducing costs.

Travel Off-Peak

Sure, April in Paris sounds grand, but you might wind up paying through the nose if you elect to travel at times of peak demand. For example, hotels in Costa Rica normally have three room rates: green (low) season, high season, and peak season (Dec 15 to Jan 15). Rates for high season are typically 50% higher than green season, and peak season rates can be more than double the low season rates. Weather during most of the green season is glorious, so it doesn’t make much sense to book during high season, much less during peak.

Airfares, like hotel rates, are also subject to peaks and valleys depending on demand. You may be aware that Fridays and Sundays are the most expensive days to travel domestically, but did you know that Wednesdays are cheapest? When you are researching fares online, be flexible, and always try out several departure and return dates to capture the combination that results in the lowest fare.

Dare to (Gasp!) Skip Disney

I know it borders on heretical, but consider skipping Disney for your family’s big vacation. Disney World and Disney Land and all the Disney-related parks do an amazing job on the collective consciousness of the American public, making us nearly powerless to say “no thanks” to their relentlessly marketed attractions. Children have a near-universal expectation that they will be taken to Disney at some point, and peer pressure reinforces this expectation.

Once, and with great dread and foreboding, I caved in and took my children to Orlando. I found it to be overpriced, overcrowded, and full of unhealthy food—in short a poor value for the money. I know the Magic Kingdom is dear to many hearts, but for my family one visit was more than enough.

Instead of shelling out money for steep entrance fees, expensive hotels, and bad food in Orlando, we now opt for an amusement park (Kings Dominion) that is closer to friends and family in our home state of Virginia. The entrance fees are a fraction of the cost of the Florida theme parks, the rides are as good or better, and the lines are much shorter, especially in the afternoon and evening hours.

By watching out for special deals online, we were able to snag deeply discounted tickets last year. We stay with friends and family and turn the trip into a mini-reunion. What is really nice is that my children (now 8 and 10) understand the value of this choice, and even feel empowered by it. They frequently make comments about how “our park” is better than Disney.

Editor’s note: I have to agree with Laurel about Disney World. Our family went last year and it was fun, but been there done that! If you decide to go, be sure to check out our list of Disney savings tips and lessons learned. Lots of good reader tips in the comments there, too.

Vacation Locally

Rather than fly to an exotic vacation destination, investigate local options that you can reach by car. Many of us are guilty of never visiting the major attractions that are in our own backyards. Sometimes these less-frequented spots provide the most memorable vacations. For example, the Lost Sea in Tennessee is an impressive cavern system with the largest underground lake in the United States.

There are thousands of similar attractions all over the United States and Canada. Go to state tourism board websites or local Chamber of Commerce sites to find visitor info for your state and neighboring states. Many of these sites also have special packages and discounts that will make planning a local vacation even easier on your wallet.

This article was written by contributing author Laurel Gray.

How to Replace Your Income, One DRIP at a Time

Posted on by  at  12:06 pm
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“The best time to plant a tree is twenty years ago. The second best is now.” Chinese Proverb

Over the last few months, I’ve changed my investment strategy for the little bit of after-tax money I have available to invest outside of retirement plans. It’s worth noting before going any further that it almost always makes more sense to put available money in tax-deferred or tax-free retirement savings vehicles, such as the Roth IRA, before investing outside of these plans.

Drip by nekidtroll on Flickr

I take sort of a dual approach, recognizing that I may in fact need access to some of my savings and investments before I reach 59 1/2. Roth IRA contributions are available to withdraw any time since they represent investment dollars that have already been taxed. However, I’d like to let the Roth IRA grow as long as possible without removing contributions.

Investing Money in Taxable Accounts: The Options

When it comes to investing money in taxable accounts, the options are endless. Here’s a short list:

  • Mutual funds
  • Individual stocks
  • Bonds/Treasuries
  • CDs
  • Money Markets
  • Cash
  • Metals

Each of these vehicles offer different degrees of risk and potential investment reward. Obviously, in a low-rate environment like the one we are in today, cash-based investments don’t offer much in the way of return. Most money markets are hovering around 1.5% APY, and regular savings accounts and short-term CDs are even worse.

I’m generally a fan of mutual funds, and have most of my retirement in Vanguard funds. However, after dabbling in mutual fund investing for our taxable accounts, I’ve found they don’t offer the element of control I like to have over that money (deciding when things are sold to take the tax hit, etc.).

Individual stocks can also be promising, but on the risk scale these are near the top. I’m won some and I’ve lost some, and in all honesty, I’ve done well just to break even on most of my trades over the last few months. Any small gains I earned were eaten up by broker fees, the rest in capital gains taxes. Seemed like a lot of work for a relatively small reward (in most cases).

Dividend Reinvestment Plans

I still like the idea of investing in particular companies that I believe will do well over the long term. Companies that have been around for a few decades, cranking out profits and returning some of them to shareholders.

These large, blue-chip growth companies can typically withstand a market meltdown, and often experience modest gains in bull markets as well. But their real beauty lies in their dividend. It is that dividend that spins off consistent income to investors quarter after quarter that makes them so attractive.

Many of these companies offer a direct purchase dividend reinvestment plan, meaning you can buy stocks directly from a plan administrator, often for much lower commissions than you would find at brokerage.

After an initial purchase you can set up an automatic withdrawal from your checking or savings account to purchase shares (even fractional shares) of the company. Dividends earned may be reinvested to purchase more shares, providing a compounding effect that can quickly grow the number of shares owned.

Many years down the road, once we’ve accumulated a large number of shares in a particular company, we may opt to start receiving dividend payouts in cash. Most transfer agents allow a direct deposit to your checking account.

A Working Example

Imagine you are 55 years old, and 30 years ago you dropped a couple thousand dollars into a stock like Procter and Gamble (PG). That single investment would be worth more than $123,247 today. You would have started with 27 shares, but by reinvesting dividends, you now would have over 1,980 shares. *I found that example on the Fool.com website, a great source for dividend investing info.

Proctor and Gamble currently pays shareholders an annual dividend of $1.93 per share, or roughly $0.48 per share each quarter. That means every three months you would be receiving a check for $950. Doesn’t sound like much?

What if you had invested a couple thousand back in 1980, and then decided to add $100 a month to your holdings all along. The math is a little tricky, so we’ll just use some very rough estimates. Let’s assume that continuing monthly investment allowed you to add another 3,000 shares, so you now own 5,000 shares of Procter and Gamble. Each quarter, you would receive a dividend payment of $2,412.

Now imagine you took the same dividend investing approach with a couple other favorite holdings…maybe something like Coca Cola and Exxon Mobile. You can see how a sustained investment in a handful of high-yield dividend stocks could spin off a comfortable income down the line.

What are the Risks?

I certainly don’t mean to present this as a zero-risk investment, because there are risks. One of these companies could go bankrupt and you could lose your investment. The company could cancel its dividend, as many bank stocks did during the recent recession, or BP did after the Gulf oil spill.

If one of these stocks abruptly cancels its dividend, and you are counting on it for income, you may be forced to sell all of your shares and move them to another investment, which could result in a realized loss or a sizable tax event.

There is also a political risk in the form of higher taxes. Qualified dividends are currently taxed at the long-term capital gains rate, but there is a move to count these earnings as ordinary income, which could significantly increase the tax liability – hitting those relying on dividend income the hardest.

For these reasons, it makes sense to make this only a part of your overall investment strategy. I would still invest in well-diversified mutual funds, bonds or bond funds and consider owning some assets outside of the market (real estate, farmland, silver, etc.).

How to Pick a Dividend Stock

In terms of stock picking, I recommend checking out listings such as the Dividend Aristocrats, a collection of S&P 500 companies that meet strict criteria to be included on this list, such as:

  • Companies must be a member of the S&P 500.
  • Companies must have increased dividends every year for at least 25 consecutive years.
  • Companies must have a float adjusted market capitalization of at least US $3 billion as of the rebalancing reference date.
  • Companies must have an average trading volume of at least US$ 5 million for the six-months prior to the rebalancing reference date.

Source: S&P 500 Dividend Aristocrats factsheet

You may have additional screening criteria to add, but this is a good starting point. The members of this list represent large, stable blue-chip companies, often with world-wide operations and a solid history of producing profits. Many of them are somewhat recession-resistant (think of Proctor and Gamble’s product line – people still buy detergent and cleaners and batteries and paper products in a recession).

Where to Get Started

Most company websites have an “Investor Relations” area with information on shareholder services such a dividend reinvestment programs, direct purchase plans, etc. Most DRIPs are handled through an administrator, such as BNY Mellon Shareowner Services or ComputerShare.com.

If the company you are interested in investing does not offer a DRIP or direct investment plan, there are other cheap ways to buy dividend stocks. You can always use a discount broker such as TradeKing, Scottrade or Sharebuilder. Sharebuilder even allows fractional share investing so you can purchase a specific dollar amount of a particular security, rather than being forced to buy whole shares (which can be costly for many of these larger companies with high stock prices).

Be sure to consider the various fees charged by a broker versus direct investment plans (a few of these can be costly as well, so don’t just assume a DRIP is cheaper).

If you don’t have thousands to invest, or even if you do, consider starting a DRIP and adding any extra dollars you can squeeze from your budget towards and income-replacer later on. If twenty years from now you could live a frugal lifestyle on passive dividends you’ll be glad you started.

Disclaimer: At the time of this writing, I do not own the individual stocks (PG, KO, XOM, BP) mentioned in this article

Spent – The Game of Life, 2011 Edition

Posted on by  at  9:36 pm
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I ran across a great exercise (via the article The Harsh Reality of Living with Next to Nothing) called Spent. It’s a website that challenges visitors to make it through an entire month living on very low wages. I made it to the end of the month once or twice, but only after making some very tough decisions. This certainly helps prioritize expenses (and makes you grateful for the things you can afford).

The Frugal Roundup

This is Why You Can’t Make Money in the Stock Market. Perhaps this is why it pays to be a contrarian investor. Sell when everyone else if getting in at the top and buy when everyone is selling at the bottom. Takes a lot of fortitude.

How Anyone Can Retire In 10 Years (or less). I really enjoyed this one because it is very thought-provoking. Often we focus on making big  bucks to become financially dependent, but the expenses side of the equation are just as important. (via The Daily Crux).

Cheap Ways To Buy Dividend Stocks. High quality, high-yielding stocks with a long history of increasing dividends may be the safest play of all over the next couple decades.

Clutter-Free: The Zero-Accumulation Household. I like the idea of one-in-one-out. That’s sort of how we handle monthly subscriptions, etc.

Putting Food on the Table When You Can’t Make Ends Meet. Unfortunately, this post will be relevant for far too many. My best advice to those facing a real hardship: do your very best to be self-sufficient, but don’t be too prideful to ask for help if you truly need it.

How to Make a Bug Out Bag: Your 72-Hour Emergency Evacuation Survival Kit. I always enjoy getting a look at others’ bug out gear. I just about always find some inspiration to add to our collection.

Should You Use an Inheritance to Pay off Debt? I say pay off your debt and move on with your life. Make the inheritance a true blessing by avoiding the behavior that led you into debt in the first place.

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Why We Crave More Stuff

Posted on by  at  3:00 pm
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Have you ever known someone who hoarded tons of stuff? They have collected a small mountain of things, often spending a small fortune acquiring and storing their goodies. We’ve probably all suffered from “stuff-itis” at some point in our lives. So where does this compulsion to accumulate come from? To understand the roots of our material obsession you have to go way back to childhood.

Barn Wonderland 1 by fyunkie on Flickr

Quantity vs. Quality

Explaining the value of something to kids is a difficult task, especially when they are very young. Kids do not inherently understand the values we place on things, and instead instinctively desire things that are pleasing to them. For instance, if you asked a toddler to choose from three coins, a dull penny, a new nickel and a shiny dime, they would likely choose the nickel. Why? Because the nickel is shiny, and bigger than the dime.

Kids don’t understand that the dime is worth twice as much. Now ask them to choose between a quarter and ten pennies. They’ll usually take the pennies simply because there are more of them.

We take these same lessons with us into adulthood. Sure, we’ve all heard that good things come in small packages, but for the most part we want bigger and better (and more). A bigger house, a shiny car, more money, and newer gadgets. Most people crave these things without stopping to think about their real value. It’s not entirely our fault.

Since the time of hunters and gatherers humans have always valued quantity. Whether it is storing berries for the winter, or adding to our expansive collection of DVDs, human beings perceive a larger quantity of something to be more desirable. However, if you stop and consider the stress the accumulation of these things creates in your life, you may be able to reverse this thinking.

“More is the Mantra of the Ego”

Dr. Wayne Dyer had a great line in one of his PBS presentations, Change Your Thoughts, Change Your Life:

“Our ego tells us that who I am, my identity, is with what I accumulate. So we become accumulation masters. More is the mantra of the ego.”

He went on to explain that the more we accumulate, the more we worry about our possessions. We worry that they may become stolen, or lost, or coveted by someone else.  We worry about their storage, and their insurance, and their maintenance. All these worries create stress in our lives. So how do we go about ridding ourselves of this stress, and our possessions accumulated over the years of feeding our ego?

Give It Away

Dr. Dyer recommends something drastic – giving it all away. Or, if not “all,” deciding what your most prized possession is and giving it away.

I’m a little more practical, even though I understand the psychological benefit of simply giving away your stuff. As a compromise, I recommend selling some of it first, either in a yard sale, on eBay.

Use the proceeds to pay off debt, or add to your emergency fund. What you don’t sell can then be given away to family members, your church, a charity, or to a complete strangers.  Imagine how good it would feel to hand over your prized DVD collection to a shelter, or to donate your Xbox 360 and 10-game library to a local Children’s Hospital.

A few years ago I sold my prized possession, a Chevy Silverado truck that I had fallen in love with at a local car lot. I could not afford the truck at the time, and was sacrificing in other areas just to make the truck payment and increased insurance costs. The experience forever cured me of car fever, but the profoundness of that experience did not stop there.

As the new owner handed over the cashier’s check (with a loan attached) I could literally feel the stress transferring from me to him. He even looked a little anxious about completing the purchase, probably because of the new loan he just took on with his bank, and knowing that his insurance, property tax, and gasoline expenses were all about to increase.

On the other hand, I was the one eliminating a car payment, reducing my insurance expense, and dropping the cost of an annual car tag.

By the way, three years after selling that truck I became debt free and bought another truck – this time with cash. So just because you give up something to sacrifice for a period of time, it doesn’t mean you have to part ways forever. It was a temporary solution to help us win with our finances.

Whether you ultimately decide to sell your excess things, or give them away, the value of having less “stuff” to worry about is worth far more than your collection of things. I challenge you to look around your own home and find things adding stress to your life. Free yourself from these burdens and enjoy the benefits of a much simpler existence.

Buying a Car for Your Teenager

Posted on by  at  5:00 am
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The following post is from contributing author Laurel Gray.

If the thought of your teenager on the road fills you with dread, you are probably not alone. And if the prospect of texting teens behind the wheel isn’t chilling enough, there’s the financial aspect to consider as well.

Driving Already by plasticrevolver on Flickr

It seems like kids go from this view to the real thing in a few seconds, not 16 years!

About ten years ago, I drove by a modest home on the morning of the local high school graduation. Out front, in the driveway was a brand new red sports car with a huge bow on top. The sight made me uneasy on many levels.

For starters: What message was this sending to the graduate? Could the family really afford that car? Who would make the payments? Would the car be wrapped around a tree by midnight?

Even though some people give flashy new cars to teenagers, most of us would think long and hard before doing so. A better approach might be to plan the purchase of a car with your teen, laying out ground rules for the selection, purchase, insurance, maintenance, and fueling of the vehicle. During the discussion, keep a few facts in mind:

Cars Can Kill

The numbers don’t lie: According to statistics from the CDC’s National Center for Injury Prevention and Control and the Insurance Institute for Highway Safety, car crashes are the number one killer of teenagers in the United States. Nearly 5,000 teenagers die every year in motor vehicle crashes and nearly 375,000 are injured. A teen may be more careful with a sensible car they worked for rather than a souped-up one that came with a bow on top.

Think Safety First

An older Volvo station wagon may not thrill your teenager with its style, but it will stand up a lot better in a crash than a tinny compact car. Determine ahead of time what safety standards the car must have (crash rating, airbags, anti-lock brakes) and only look for models that meet the criteria.

Minimize the Insurance Whammy

There is a reason insurance companies charge teenagers more for insurance: they have more wrecks. A lot more. According to the CDC, “Per mile driven, teen drivers ages 16 to 19 are four times more likely than older drivers to crash.”

A MSN Money article  on insuring teen drivers warns that your auto insurance bill can rocket up by 50% to 200% when you add a teen driver to your policy. To trim costs, try the following:

  • Talk to your agent— Find out how your insurance carrier assigns drivers to cars to ensure that the least expensive car is linked to your teen driver. Some policies let you assign the driver to each car, others assign the youngest driver to the most expensive car whether you like it or not. Shop for other car insurance (check out quotes at Esurance.com) policies if you cannot designate car/driver pairings yourself.
  • Buy a beater— Some parents feel that new cars are safer, but new cars are generally more expensive to insure. Opt for a sturdy older model with a good safety rating.
  • Stay low— Google “teen rollover accident” if you want a good scare. Teens tend to exceed the speed limit, and as a result may lose control and roll over. According to the US National Library of Medicine, “From 1999 to 2003 in the United States, fatal rollovers were significantly more likely per mile driven for teen drivers of both SUVs and pickups compared with passenger cars.” The website safeteendriving.org warns against the false sense of security an SUV provides, and offers an alternative: “When choosing a car for your teen, think late-model, large, and solid. Ideal choices include either station wagons or full-size sedans with small engines and air bags.”
  • Hit the books— Some policies offer discounts to teens with good grades or discounts for teens who complete a driver’s education program. Check with your agent to take advantage of these programs.
  • Jack up the deductible— Newly licensed drivers are likely to have accidents. By increasing your deductible you can lower your monthly premiums significantly, while accepting the likelihood you will have to pay for a few fender-benders along the way.

Get Buy-In

Most teenagers eagerly anticipate the day they will have their own car. This enthusiasm makes for a great teaching opportunity, allowing parents to introduce long-term strategies for meeting financial goals.

Estimate the value of the car to be purchased and then set up a target amount to save each month. Teens with part-time jobs will be able to sock away extra cash for a car. Even teens without regular employment can help raise money through a range of creative endeavors.

Kids can have side hustles too! Encourage teens to sell their unused gear on eBay, mow lawns, walk dogs, tutor, babysit, or offer computer support to stone-age neighbors.

There are several ways you can help your teenager get on the road.

  • Dedicated Savings Account—Help them find an account with no fees, a decent rate of interest and no minimum balance requirement. ING Direct has offers a simple savings account for minors that can be set up with a few clicks. Agree that the account is strictly “hands-off” and will not be tapped for other items until the goal is met.
  • Matching Funds—Make a deal with your child that you will match what they save (or a percentage of what they save). Just as with an employer matching program, the carrot of those doubled dollars is a powerful incentive toward saving.
  • Direct Purchase—Some parents can and do purchase cars for their children outright with the caveat that grades remain high or with other stipulations, such as using the car only to go to work or attend classes. In some cases the parent will buy the car but require the teen to cover expenses such as maintenance, fuel, and insurance by themselves. This can still provide a valuable lesson in responsibility.

You will note that taking out a loan is not on this list. Teens with a few months of credit history may be able to secure a car loan, or parents or other adults may be able to co-sign a car loan. Expecting a teenager to cover the monthly payments is wishful thinking, as many do not have the financial or emotional wherewithal to stick to a payment plan. Missing payments on a car loan is a great way to ruin a teen’s brand new credit history or stick the co-signer with an unwanted bill.

The thought of buying a car for your teenager may make you uncomfortable, but think of it as an opportunity to teach your child financial discipline that will pay big dividends later in life.