Monthly Archives: September 2011

Forums and Blogs: Your Connection to Like-Minded Frugal Folks

Posted on by  at  8:11 am
20

Remember how in some of the classic self-help books the authors advise you to surround yourself with winners? The idea is that if you want to be successful, you should avoid hanging out with losers. That theory holds true when it comes to personal finances as well, but it doesn’t necessarily mean you have to hang out with rich people.

Over the years I’ve discovered that the more I hang around people who are successful, the better the chances I’ll be successful. Conversely, hanging around people who are largely unsuccessful, has a negative effect on my own motivation, and I often wind up griping about my circumstances.

One of the great things about social media, and the Internet in general, is that while we were once limited to our immediate community, now there are tons of sources of inspiration available. From blogs to community forums to podcasts, each offers the opportunity to engage with others on a similar mission – to turn around their finances.

Some of my favorite sites specialize in very specific topics around finances, such as dividend investing, early retirement, survivalism, or frugal living.

During our own financial turnaround, I also used a number of online tools to stay motivated.

My Total Money Makeover

The online community that ties in the book, The Total Money Makeover, the plan, the tools, and the personality, Dave Ramsey. I have been a member here for several years, initially joining to find tips for getting out of debt, interact with others on the same mission, and to listen to The Dave Ramsey show podcasts commercial-free during my commute.

Even after our family got out of debt (all but the house), I decided to stay on as a member to continue interacting with people in my situation. As I’ve mentioned at Frugal Dad a time or two, being recently debt free is a dangerous place to be. There is much temptation to go back in that you need the occasional reinforcement you are doing the right thing.

It’s also nice to occasionally help someone else just beginning the Baby Steps, and show them living proof that it can be done with enough perserverance.

Dave’s team is offering up a very special deal to Frugal Dad fans - join My Total Money Makeover now for only $49.95 a year (regularly $120).

Personal Finance Blogs

Hopefully you find this blog somewhat inspiring. There are plenty of others out there as well. The first two blogs I subscribed to were The Simple Dollar and Get Rich Slowly. I also added Bargaineering in the early days.

More recently, I find great inspiration from fellow members of The Money Writers network, and have discovered a couple lists of the top personal finance blogs to help discover more inspiration.

Some of the most inspiring sites I’ve discoverd have come from you. Please use the comments below to share your favorite personal finance sites/forums/blogs with other readers.

Can You Save Too Much for Emergencies?

Posted on by  at  11:14 am
20

The question sounds a little silly. I mean, can you ever really be too prepared for something? I believe you can, when the resources you’ve allocated to preparedness mean you can’t afford to do something else with your money.

Take emergency funds as an example. While I advocate most people save one year of basic living expenses in a liquid emergency fund, many others advocate living on much less. The old standard 3-6 months is still often touted as the way to go.

In this economy, with the average length of economy ranging from several months to a year, it just seems prudent to put away a year’s worth of household expenses – to keep the lights on, a roof over your head, gas in the tank and food on the table. In my opinion, anything less puts your family at risk of financial hardship should you lose your primary source of income.

Some people don’t get that message, and instead squander every penny the have that could go towards savings on something they want now. I get that. For a long, long time we operated our household at the edge of a very steep cliff, with no emergency fund, and we are lucky nothing serious like an illness or a job layoff came along and wiped us out (it wouldn’t have taken much).

The Extreme Saver

There are others who go too far in the other direction – allocating every single dime in their portfolio to cash savings. These folks often have several years worth of mortgage payments and expenses saved in cash.

That’s fine if it helps you sleep at night. However, consider the opportunity cost of simply parking that money in a cash-based investment vehicle earning less than inflation (which unfortunately is still the case even at the best online banks). Over time, inflation, and the further cheapening of the U.S. dollar, will conspire to erode your savings.

With our one-year emergency fund I largely ignore interest rates, because I don’t have money set aside to work for me. Rather, I have it set aside to be there if it hits the fan.

Rather than keeping three or four years of savings in cash, consider dropping down to a year, or two, as a compromise. The remainder can be invested in a variety of vehicles depending on your appetite for risk.

Five Places for Your Surplus Emergency Fund

Keep in mind, I’m only suggesting the following locations as options for money you’ve saved beyond your one-year emergency fund. I do not recommend these savings vehicles serve as your primary emergency fund because they are often exposed to more risk, and/or fees for withdrawal, etc.

Dividend stocks. Investing in dividend stocks with a 25-plus year track record of increasing dividends may be a good spot to park a portion of this money. By reinvesting those dividends of the long-term you can take advantage of compounding to grow significant wealth.

Roth IRA. If you are not contributing to a Roth IRA, use the first $5,000 to open one. And remember, Roth IRA contributions can be withdrawn at any time, so you may consider them an extension of your emergency fund, but with some additional risk exposure if invested in equities.

Real estate. If you have ever been interested in investing in real estate, now might be a good time to put some of that surplus to use. Rates are near an all-time low, and housing prices have not yet rebounded in many markets.

Gold and/or silver. I’m not one to push gold and silver often, but the case could be made for putting 10% or so of your savings into one or both of these investments. Personally, I like silver because it is still cheap enough for me to buy the real thing, rather than a certificate or exchange-traded fund that tracks the price of silver.

CD ladders. Creating a CD ladder is a smart way to boost the earnings on your cash savings without locking it all away under the threat of penalty for early withdrawal.

The bottom line is this, it is smart to save for emergencies, but do not allow an irrational fear drive you to only save for emergencies. There are other savings objectives that must be met to have a healthy portfolio such as college savings, retirement, rainy day funds (and sunny day funds, too!).

The Household CEO: Protecting Your Cashflow

Posted on by  at  8:35 am
23

Ever known anyone who was great at business, but stunk at personal finance? I’ve often wondered why more people don’t operate their household finances in the same manner they operate their business.

Of course, the reverse of that is true as well. I have known quite a few business people much more willing to spend company money than their own. In my opinion, that is just as bad, because someone has entrusted you with those earnings (shareholders, business owners, etc.) and it is your responsibility to be a good steward of it.

I digress.

Over the years, I’ve tried to implement this approach in the Frugal household. One of the things I’ve been most adamant about is protecting our cashflow. That is, I try to avoid entering into arrangements that could offset our future income. I take this approach for a variety of reasons.

1. Future income is not guaranteed. Just like in business, especially a seasonal business, there is no guarantee of future cash flow. Contracts can be canceled. The local economy can tank. Customers’ appetite could change for your product.

2. Increased monthly obligations rob money to set aside for growth. Just like a business likes to reinvest a portion of their profits to grow, I like to “reinvest” a portion of our income into income-producing assets: dividend stocks, and eventually rental real estate.

3. The higher my monthly obligations, the more I have to work. By paying off our mortgage early, refusing to add new debts, and living frugally, we are hopeful that we can retire earlier than most people because we won’t need as much investment income to cover our basic living expenses.

Skip Toys and Luxuries, Unless You Can Pay for Them

Ever hear the saying, “He who dies with the most toys wins.” Maybe so; unless he also dies with a lot of debt for those toys.

I don’t begrudge anyone for wanting to collect a few toys along the way, but I do think it’s best to acquire them with cash, rather than obligating a portion of your paycheck over the next 60 months to pay for them.

This means you may have to:

  • Drive an older car until you can pay cash for a newer one.
  • Not trade up in house, but stay put and pay off the one you’re in.
  • Buy modest gifts for friends and family for Christmas, rather than maxing out your credit card and struggling to pay it off before the next Thanksgiving shopping season.
  • Take one or two reasonably priced vacations each year rather than a lavish get-away every other weekend financed by American Express.

Again, nice vacations, cars and houses are not necessarily bad things. It is the debt attached to them that steals from your future paychecks.

Some will say that debt is a tool to acquire these things, and in some cases their values do go up (then again, maybe not, as we’ve experienced with housing lately). However, for us the debt represents added risk, and we are all about reducing the amount of risk exposure in our lives.

Bottom line…I’d rather own my stuff than it own me.

The Light Bulb Dilemma: Incandescent, CFL or LED

Posted on by  at  10:37 am
58

After receiving yet another ridiculously high energy bill, I began performing sort of an informal energy audit of our household. As I suspected, we have become complacent when it comes to energy savings because Frugal Dad hasn’t been sounding the alarm as often as I once did.

  • The kids (and even us adults) often leave lights, televisions and games on when moving from room to room.
  • The miserably hot summer forced our air conditioner to run nearly continuously, even through the night as night-time temperatures hovered in the high 80′s with high humidity.
  • We were not selecting optimal times to run appliances like the dishwasher, stove and oven, and were contributing to the heat build-up in the house.
  • Lots of phone and game charges were sitting around trickle-charging a nearly full device, but still using enough vampire power to add to our utility bill.

So, we decided to make a few changes. First, I was going to once again research replacing incandescent light bulbs with a more energy-efficient variety. But here’s my dilemma – I like incandescent light bulbs. I like the light they produce. I like the fact they don’t have to “warm up.” I like their price.

I don’t like the mercury found in the CFL bulbs, and I don’t like the look of the CFL curly-Q bulbs.

I have been reading over the last couple years about LED light bulb technology. As expected, I found them to be very costly. A quick research trip to our local home improvement store revealed the average 60w equivalent, soft-white or ambient lighting LED light bulb retailed for $40 per bulb.

It would cost $240 to replace the light bulbs above our bathroom vanity alone. That’s a little steep, I don’t care how much energy LED light bulbs save. Without doing a more formal calculation, I imagine it would take many, many years to pay for themselves, even if purchased with decent department store coupons.

So, I decided to compromise. For now, we’ll skip the LED light bulbs, and instead focus on replacing incandescent bulbs with CFLs (only a few dollars per bulb) in two specific locations:

  1. Lights we tend to leave on for long periods.
  2. Lights that have less chance of being broken (not the living room lamps, for instance, since my son and his dad occasionally like to toss a football in the house when Mom isn’t watching).

My kids like to leave a bathroom light on at night – nightlights just don’t cut it. So, I replaced the lights above the bathroom vanity with CFL decorative bulbs – they look just like the globe bulbs that were in there, but use only a fraction of the energy required to produce equivalent light.

I also replaced our kitchen’s six recessed floodlight-style lights with CFL bulbs that looks very similar to the regular floodlight style (the curly-Q is encased in a glass shell in the design of a regular, incandescent bulb.

Next up, the porch lights, which we occasionally leave on when expecting company. Hopefully, this move, along with being more conscious of our energy use in general, will help make a dent in that power bill.

Anyone else considering LED bulbs? At what price point would you consider it economical to replace with LED?

How to Create a Sinking Fund

Posted on by  at  4:34 pm
21

I recently celebrated a birthday. Our local tax assessor didn’t send me a birthday card, though. He sent me a bill for our car tag renewal. Fortunately, last year I began saving a little bit from each paycheck into a dedicated savings account for this very purpose.

It was nice to move the money from savings to checking and send the tax man a check without affecting our monthly cash flow. A few years ago, I probably would have been cashing a credit card convenience check to raise the cash to pay the bill.

This is the third or fourth annual (or semi-annual) bill we’ve managed to save for using sinking funds. Here’s the strategy we use:

How to Set up a Sinking Fund

1. Open a dedicated savings account at your local bank (or online bank) or credit union.
2. Determine the item(s) for which you wish to save for all year long.
3. Divide the annual expense by the number of paychecks you plan to receive before the next bill is due. For instance, a $500 annual expense would work out to about $20 per paycheck since I am paid 26 times a year.
4. Automate the process by establishing an automatic transfer from your primary checking account to your sinking fund savings account. If your bank doesn’t allow this, contact your payroll office and have the amount siphoned from each paycheck.

This can all be accomplished within a single savings account by adding up the total dollar amount of those once or twice a year expenses and dividing by the number of paychecks you receive.

You can use a ledger, Microsoft Excel, or some other tool to help keep up with the balance and which savings goal it applies to.

Some banks, such as ING Direct, allow you to open multiple savings accounts rather easily and you can even give them a “nickame.” Here, you might have four accounts labeled Property Taxes, Car Tags, Vacation, Insurance Premiums.

The bookkeeping is certainly easier with separate accounts, but some like the idea of just having one additional account. Do what works for you.

Other Uses for “Sinking” Funds

Our “sinking fund” has graduated over the years to represent a sort of first-line emergency fund, in addition to a fund to cover annual expenses. We have a “Car Repair” fund, where I occasionally dip into for those hard-to-plan-for flat tires, dead batteries, early-summer air conditioner servicing jobs, etc.

We’ve also created a “Christmas Shopping” fund to plan for annual Christmas shopping for our family. This helps to smooth out these large, once or twice a year expenses so as to not upset the budget in the month in they occur.

Around Thanksgiving each year, we make out Christmas shopping list, gather up any coupons and deals we can find, and do our Christmas shopping within the budget established by the balance in the Christmas shopping fund.

We usually just put it all on a credit card for simplicity, and because much of the shopping is done online to score better deals (and because I hate crowded stores!). When the credit card bill arrives in December, we pay it off electronically from the Christmas savings account and avoid the debt hang over that often carried well into the New Year in years past.

What used to be a budget buster, like a car repair or home air conditioner servicing, is now just a blip in the budget in the form of an online transfer and a check for payment of services.

For large emergencies, our larger emergency fund is there. However, psychologically, I enjoy being able to handle smaller emergencies without dipping in the fully-funded emergency fund.