If you asked me about the key figures of 2011, Justin Bieber and Charlie Sheen would be the last names to come out of my mouth. And yet, according to the 75% of us who use social media, these two are this year’s most important figures. Check out my new graphic illustrating our surprising social media addictions and what they say about us:
Did you indulge in a few too many purchases this Christmas? Between sales for pre-Black Friday, Black Friday, early-bird Christmas, and the day after Christmas, it was almost hard not to overspend, unless you possess an iron frugal will.
We made it through the spending season mostly within budget, but there are a couple areas I’ll need to review in planning next year’s budget, and the corresponding contributions to our Christmas sinking funds.
In years past, we often blew through the budget and financed the remainder of our gift purchases on a credit card. Judging from the amount of swipes I saw in the check-out lines, I can assume we were not alone. Even in what most consider to be a fragile economy, there didn’t seem to be a shortage of shoppers willing to finance Christmas on their credit cards this year.
Assess the Damage
I’ve found the best cure for a holiday spending hangover is to address the damage head-on. No avoiding the bills until January 30th. No pretending it didn’t happen.
Between now and January 1st, figure out where you stand – how much damage was done. Did you blow through your budget and now find yourself low on cash? Did you rack up more credit card debt than you intended? Maybe a little of both?
Use Mint.com, or even a homemade spreadsheet, to take an updated inventory of your household finances. If you are able to transfer some money from savings, without jeopardizing your emergency fund, consider paying off your credit card debt before the New Year – debt free is a great way to start a new year!
If you don’t have enough cash around to pay off debt in one fell swoop, now is the time to devise a debt repayment plan for the coming year. How much will you have to pay each month to be debt free by April? Don’t let holiday debt hang around; it winds up becoming permanent debt, and two years down the road you’ll find yourself still paying interest on Christmas 2011 purchases. Not fun.
Update Your Plan for Next Year
Once you have addressed the damage done this year, consider updating your holiday spending plan next year. We underestimated our budget a bit for presents to extended family members and friends for which we wanted to give a gift. We also underestimated our “giving” budget, as we felt compelled to help beyond that for which had saved.
I don’t regret either decision, but I do want to build it into next year’s budget, because the earlier you start planning for a big expense, the easier it is to save for it.
Consider the following example:
Let’s assume next year’s Christmas shopping budget will be $600. If we start saving now that looks like $50 a month for the next year. If we wait until July, we’ll need to save twice that amount, $100 a month, to hit our goal. That’s a big difference. And it isn’t like Christmas sneaks up on us; it comes around every December 25th.
If you haven’t already created a separate savings account for these types of annual (or nearly as infrequent) expenditures, I highly recommend it. We have an online savings account that allows us to create a sort of subaccount where we save for infrequent expenses like car tag renewals, Christmas shopping, quarterly estimated self employment taxes, etc.
The sinking funds are funded by small contributions all year long, and when the expense is due, we simply transfer the money to our checking account and pay for it with cash. This has a way of smoothing out large budget blips, and reducing the likelihood of a spending hangover the next time around.
Before the New Year has us back in “holiday mode,” take a few days to reflect on this year’s holiday season. Hopefully, gifts will play but a small role in those memories, and instead you have happy memories of time spent with loved ones.
I accumulated a good bit of debt when I went to college. Initially, I attended a school I really couldn’t afford, but it was by far my favorite school, it was relatively close to home, and I went with my heart instead of my head.
Unfortunately, that emotional decision required me to get student loans for the first couple years so I could finance tuition costs. I scraped up enough other money for incidentals (books, utilities, pizza, football tickets – you know, the bare necessities), and my mom managed to cover my housing – even my apartment rent when I moved off campus my sophomore year.
I eventually returned home and bounced around some before finishing my degree online. Over the years I worked full time, took advantage of a tuition reimbursement program (which eventually went away in the months following 9/11, when the economy went south), and finally managed to graduate with minimal debt.
Upon graduation, one of my life goals became helping my kids finish college debt free. I knew I had to start planning, and saving, early. We have opened 529 plans for our kids and try to sock away some money as we can.
We also plan to use a combination of the following strategies to help them reach the goal of a debt-free education.
5 Ways to Minimize Debts While in School
1. Choose your school wisely. Unless you plan to study a very specific field with minimal offerings from most schools, it probably makes sense to consider an in-state school, where tuition is usually a fraction of that at an out-of-state school.
2. Consider a 2-year degree path at a local college for core requirements. Looking back, I wish I had stayed home the first couple years, attended a local school and worked to save towards my four-year degree costs. If you go this route, first verify that your ultimate school choice will accept transfer credits from the local college or university you plan to attend.
3. Work while in school. In a perfect world you would not have to work while in school. You could devote 100% of your efforts into getting your education. But let’s face it; this is not a perfect world. Few parents can afford to send their kids to school and cover 100% of the financing.
Your education is ultimately your responsibility, so if you want it bad enough, you can get a job and subsidize some of your costs. You’re building your resume and developing work ethic – two things you can’t get from school anyway.
4. Take a year off after high school. This is a controversial idea, and I know there is a risk if you take time off you may never return. I get that. However, I left for college when I was still 17 (had a late birthday). I still had lots of growing up to do, and looking back I probably would have benefited from another year to mature.
I also could have worked that year and cash-flowed my first year of college, giving me a head start towards a debt free education.
5. Take classes during the summer and graduate early. If you can swing it, plan to stay on campus during the summer and take a couple classes. You will graduate a semester or two early, which translates to less meal plans, less rent for that off campus apartment, etc. In my experience, I also found relaxed professors and graduate assistants and an overall more relaxed environment than the hustle and bustle of fall semester.
Three years ago I wrote about the coming bubble from student loan debt, and I still believe graduate indebtedness will be one of the larger financial problems for the next generation. In a small way, I’d like to help reverse that trend.
Introducing the Frugal Dad Scholarship 2012
That’s right; we’re offering a Frugal Dad Scholarship ($5,000) twice annually to a deserving student. For full details, requirements and an application, visit the Frugal Dad Scholarship page. I look forward to reviewing your submissions and awarding our first scholarship!
It’s always strange to realize just how much we spend on things that we don’t consider regular, heavy expenses. American pet care is a $50 billion dollar industry and growing. As infrequently as vet visits seem to come up for my family, the bill for most any procedure is at least $200. Pets are a part of the family, and I’m certainly not one to cut corners, but some of our spending is very unnecessary.
Check out my latest infographic to see where you fall on America’s spectrum of pet obsession:
One of the major benefits of a 401k is it allows you to divert taxes on today’s income to your retirement years, when ideally you will find yourself in a lower tax bracket.
Of course, that benefit is not always a given. Tax rates could increase, or your income needs could increase in retirement. Either way, you might find yourself paying more in taxes than you planned on earlier in life.
For me, the tax advantages do not outweigh the other problems/limitations of a 401k. Of course, much of this is very personal, as the company I work for chooses the plan administrator, and the administrator controls the investment options. Your options may or may not be significantly better.
Your employer may also offer a match to your contributions, which would be very hard to pass up as it essentially “free money” towards your retirement.
Having said all that, I chose to not participate in my employer’s 401k for a variety of reasons, but it largely comes down to freedom.
I prefer to invest in things that give me the most freedom – freedom of investment choice, freedom to tap my money if necessary, and freedom to have more control over taxable events now and in the future (sale of stock, withdrawals, etc.).
Roth IRA – An Alternative to the 401k
My wife and I both invest in a Roth IRA. Here, our contributions can always be withdrawn for any reason without penalty, which in effect makes this an extension of our emergency funds – not necessarily a dedicated emergency fund, but additional dollars we could withdraw if it really hits the fan.
The earnings will grow in our Roth IRA accounts and may be withdrawn tax free upon reaching retirement age (59 1/2). If we need money from the Roth before that, we can withdraw contributions without penalty.
Contributing to a Roth IRA also allows us to have more choice with our investments. Rather than being limited to a few mutual fund options with what I believe to be questionable allocations to particular segments, regions, etc, I can invest in something I feel reasonably sure will do well over the next three or four decades. I can speculate with some of my retirement money, or be ultra-conservative, whatever my appetite for risk happens to be at a particular life stage.
Outside of the Roth IRA I prefer to invest in taxable investments, again where I can control taxable events, income, withdrawals, etc. I’ve previously mentioned my strategy to build a portfolio of dividend growth stocks. I would like to eventually own real estate that produces rental income.
I also plan to tap investments before the government-scheduled retirement age of 59 1/2. I don’t know exactly when that will be, but I imagine I will stop working for full-time pay well before 60. I may work part-time, or start my own business, or change careers – who knows. But I’d like to be able to use some of my own money according to my own time table.
Potential Drawbacks to Stopping Your 401k
I am not advocating people stop contributing to their 401k without strong consideration, I’m just sharing my personal strategy. This is how I would allocate funds after getting out of debt:
1. Invest in a 401k up to an employer match. If no match, go to step 2a.
2a. Save a one-year emergency fund in all cash.
2b. Max out Roth IRA contributions.
3. Invest in taxable investments with a low turnover, including single stocks (don’t forget diversity), tax-advantaged mutual funds, hard assets (gold, silver, real estate), certain types of tax-friendly bonds or Treasuries, etc.
One of the benefits of a payroll deduction to a 401k is that the money is siphoned directly out of your paycheck and into your investment accounts. It’s like putting retirement savings on auto-pilot.
Those lacking the discipline to save on their own may benefit from the level of automation a 401k plan provides. I prefer to take a more hands-on approach with our investments, but that doesn’t mean everyone else does (or should).
I’m not one to put out a lot of disclaimers, but I would remind you that you should never do something, or not do something, with your money just because someone on a blog, or TV, or the radio, advocates it. Do your own homework. Talk with a professional. Make your own informed decision.
I’m interested to hear more from readers on this subject. Do you currently invest in a 401k?
