I just took a call from a client grieving for her husband of 42 years.

She’s understandably under tremendous emotional stress.  Frankly, I was amazed at the efficiency with which she was approaching her situation.

Within a few weeks of his death, she had already calculated how much her income would be reduced.  In fact, that was why she called me. Her money and marriage were inextricably meshed.

She was distraught over the loss of her husband….and at the same time…very concerned when she calculated that her income would be reduced by $35,000.  In fact, she sounded worried sick about it.  She was even talking about selling a prized antique car that she loved dearly in order to make up for the short-fall.

I’ve known this woman (a Ph.D.) for about 20 years and I can vouch for her warmth, high intelligence and rational behavior.

That’s why I found it odd that she completely overlooked the fact that her expenses were about to drop more than her income.  We went through everything together and calculated a monthly savings of over $4,000 due to reduced medical expenses.

Also, my client completely overlooked the fact that her husband had an insurance policy that she could make a claim on.  (This was a universal life policy my client’s husband had purchased more than 40 years ago.  Of course, I can’t stand whole life or universal and this was an example why — my client’s claim would mean she’d get a whopping 1.96% return on her money.)

Why am I bringing this up?

First, while my client was fortunate enough to have time to prepare for her spouse’s death, we all don’t have that luxury.  I strongly suggest that you write out a “survivor’s plan” today.

You can take your time to improve it.  Tweak it. Whatever.  But put something together today.

Second, calculate reduced income and expenses. Have a realistic scenario of what it would cost your survivor to live on and what resources will be available.

Third, and perhaps most important, expect to be in shock and incapable of making rational decisions.  Expect it.  Know that you (or your spouse) are going to have to face this situation sooner or later. When it happens, you will simply be incapable of making smart decisions.  Honor your marriage and money.  Have a backup person and don’t make it your adult children.  I strongly suggest you use a non-relative because it would do no good to rely on another person equally impacted by the loss.

If you have ever read my story, you know that my parents did none of the above.  The result was the complete destruction of my immediate family.  I take this stuff really seriously as a result.

While the worst that could have happened to my client was that she would have sold her car when she really didn’t have to and worried over nothing, I know the results can be much more devastating. Take a few minutes right now and take care of this.

Post by Frugal Dad

We all have those friends that always want to head out on the town and spend. Whether it’s taking large vacations or wanting to eat out every week, they just seem to be made out of money. So, how do you tell someone who likes to spend that you are on a strict budget?

My wife and I have friends that like to spend and it’s hard to tell them no when they ask us to tag along. We don’t want to alienate them to the point that they don’t want to see us again. So, I thought it would be beneficial to think of a few ways to handle the situation if it should every arise again. Here are some strategies that I thought might be useful:

Learn to Say “No”

You might think that saying no is an easy concept but it’s not. When that person is standing right in front of you and you are thinking of ruining their plans, it’s hard to just say no.

It’s probably not best to just say “no” and then leave it at that. Try saying something like, “I’d love to do that, but right now we are really trying to watch our spending.” If they don’t understand that then maybe it’s time to find some new friends.

Tell Them Your Financial Goals

If they are still giving you a rough time after you said no, maybe it’s time to tell them your financial goals. If you are trying to get out of debt or saving for a down payment on a home, tell them. It may actually even inspire them to create their own financial goals.

You don’t want to get too personal with your goals though. In other words, don’t tell them that you are $150,000 in debt and just can’t afford to do anything for the next 7 years. That just might scare them off a bit.

Invite Them Over and Control the Situation

This is a strategy my wife and I use. When all else fails, invite the couple over to your place. If you are in your own domain, you can control the expenses a lot better. Cooking a meal for your guests can be a lot cheaper than eating out. Since your guests originally wanted to spend money on going out, have them bring over the drinks. Even those are cheaper when bought at the store vs. a restaurant.

Go to Places or Do Things For Free

Another great solution is to do things with your friends that are free. My wife and I live really close to Washington DC and there are a ton of things to do there for free. Whenever we have relatives or visiting friends in the area, we recommend heading into the city. There are a ton a free museums and monuments to check out. You can pack a picnic lunch and take mass transit.

Here are a few more things you can do with friends for free:

• Hiking and biking
• Picnics
• Volunteering
• Game night
• Pick up a team sport
• Much more!

How do you handle situations where you friends want you to spend but you don’t have the money?

Post by Frugal Dad

These are the types of bills I remember my mom paying:

• Rent
• Car payment
• Power/Gas bill
• Home telephone
• Cable television
• Car Insurance

Admittedly, our situation was somewhat simplified because my mom rented, but it seems everyone’s situation was much simpler back then. Compare her monthly bills to the list I came up with:

• Mortgage (including property taxes and homeowners insurance)
• Power bill
• Home telephone
• Cable television
• Car insurance
• Internet service
• TiVo
• Netflix
• Gym membership
• Cell phone
• Onstar

In addition to those recurring bills, you could expand the list of modern conveniences (that cost additional dollars) even further. Divorced Dad did just that in his post listing what he calls, The New “Necessities” of Modern Life. From his list, I’m reminded that things like bottled water, cell phone texting, gourmet coffee, and $200 iPods were not around when I grew up, and certainly not around when my mom was young.

A number of these modern “necessities” do add value to our lives, but they do not come without costs. Because of this larger monthly outflow, most families have to work more, and more members of the family have to work more, to cover these expenses. And that phenomenon has brought about even more “situational” expenses such as the need to for two vehicles, two professional wardrobes, additional childcare expenses, increased commuting costs, etc. Makes you yearn for a simple time, doesn’t it?

So who’s to blame for this lifestyle inflation that led to higher expenses and less time with family? Marketers could certainly share some of the blame, as their artificial hype leads many to products they wouldn’t normally buy. I’m not immune. Those Onstar crash commercials replay in my head every time I consider canceling the service. What if my wife is in a crash and can’t call for help and the kids are with her and…panic sets in. I instantly rationalize the monthly fee.

If marketers are to blame for a portion of the lifestyle inflation we’ve experienced, then we need only to look at ourselves for the remainder of the blame. Let’s face it; we’re a spoiled people in many ways. We strive for the bigger and better, never content with good enough. Over the last few decades, the size of our homes has doubled from 1,400 square feet in 1970 to 2,330 square feet in 2004 (National Association of Home Builders). We build bigger homes just because we can, not because we necessarily need to. Or maybe we do need to. After all, where would we put all our toys in a small home?

These bigger homes come with bigger mortgages, and more expensive furniture, and the need to fill a two-car garage with, well, two cars. You see where this is headed.

In an era where people are beginning to share concerns over inflation (or maybe more accurately, currency deflation), thanks to exorbitant government spending, perhaps we should first consider our own lifestyle inflation. Perhaps we should start voluntarily moving towards simplicity, before we are forced to.

In my own life, I’ve decided to draw a line in the sand. I have nice things, and am perfectly content with them. My desire to have the latest thing will not override the contentment I have with my current thing, and the fact these “things” are paid-for is even better. We plan to stay in this home, keep driving our current vehicles, look at the same television, use the same cell phones, and keep the same basic expenses regardless of what others do, or try to convince us to do.

If you are like me, and have been “unfrugal” at times in your life, you don’t have to sell all your possessions and live the life of a pauper. Simply be happy with what you have now, and let that mantra guide future spending decisions.

Post by Frugal Dad

Larry and Abby are in their late 60’s.  They are broke, about to lose their home and there is nothing they can do about it.

But it didn’t have to be this way.

10 years ago, they had over $500,000 saved on top of the two rental units they inherited when Larry’s mother passed away.  At the time, Abby owned a successful small business and had a comfortable income.  Everything looked like peaches and cream.

So what happened?

Patrick happened.

Pat is their son.  He borrowed money from his parents seven years ago to open his auto repair business.  Pat was a great mechanic but a horrible business person.

Larry and Abby just wanted to help their boy.  They convinced themselves that the money their were forking over was just a loan.  They were sure Patrick would pay them back some day.

But as the days passed, the likelihood of seeing that money again grew smaller and smaller.

He slowly drove the business into the ground.

But each time he feel deeper into the hole, Larry and Abby were there to bail him out.  They were sure that all Pat needed was a little more working capital.

Of course, this enabled Pat to amass even greater debt.  Within three years he exhausted all his parent’s savings.  They had to sell all the real estate they inherited and they refinanced their home as well. Even after going through all that, Pat was left with debts of over $300,000 including $150,000 to the IRS.

He was much too proud to close the business.  He was determined to make it successful – even if it meant spending every last dime his parents had.

So was Patrick to blame for Abby and Larry’s financial destruction?

Not in my opinion.

Abby and Larry volunteered to become an ATM machine for Patrick.  Nobody put a gun to their heads. But that wasn’t really the root problem.

You see, the reason they wrote blank checks to Pat was because they didn’t take the time to think about what impact their decisions would have on their own financial future.

They were very mindful about their spending – except when it came to supporting their kids.

Pat needed money.

They wrote him a check.

It was automatic – and it was ridiculous.

Abby and Larry put their heads in the sand. They didn’t pay attention to their own financial plan. In fact, they didn’t have one.

Sure they had assets and income. But even though their estate was worth over $2.5 million at the high point, it didn’t last long once they started writing checks for $50,000 every other month to keep their kid in business.

I know this is an extreme example.  You might not be sending huge amounts to your children….but the amounts don’t matter.  And it also doesn’t matter how your kids spend the money you give them.  I don’t care if they use your money to open a successful business or go to Harvard.  If you can’t afford it then you can’t afford it.  Period.

How do you know you can afford the support you give to your kids? Have you ever said “no” to your kids when they asked for financial help?  How did that impact your relationship?

If you are on the receiving end of this, do you have an obligation to your parents to discuss the ramifications of their support?

Post by Frugal Dad

“Sadness” by Eric Perrone

While all those factors have conspired to affect motivation in several areas of my life, what has really suffered is my writing. Thanks to a number of close blogging friends, I have had no shortage of guest posts to present here at Frugal Dad (Neal from WealthPilgrim.com is sharing another great one with us this Friday!) since they learned of my mom’s passing. These breaks in the action are welcomed, but I do feel a little guilty for not cranking out material at the pace I once did.

Just yesterday I missed my first Monday post in nearly two years of blogging. I wasn’t motivated to write. I had an incredibly busy weekend of packing and moving boxes, etc, and when I finally sat down late Sunday night at the keyboard there was nothing left. No witty budget concepts. No rants about self-reliance. No new reviews to tell you about. Had I finally run out of things to say?

Fortunately, not yet. I had simply run out of steam. I was losing focus, and not just with my writing. I am not sure if it is depression or just the normal grieving process, but after losing a parent (who also happened to be my best friend, besides my wife), you sort of go through a period of just going through the motions.

I wake up, eat a quick breakfast, kiss the wife and kids and drive to work. I check my email, my to-do list, keep busy, leave in the evenings, play with the kids a while, work on the blog and go to bed. But when I go to bed feeling completely exhausted I can’t recall the specifics of the day. Did I even ask my kids how their day was at dinner? Did I remember to send that status email on the big project at work? Did I remember to pay the utility bill online? And for just a moment, just a split second, I don’t even care. I just want to go to bed to put this day in the books and do it all again tomorrow.

The problem is when you find yourself in one of these funks the days just start to slide by. Life starts happening to you, instead of you being in control. The budget gets relaxed. Old, bad spending habits come to the forefront again. You stray from healthy eating and start refueling on crap from fast food restaurants and vending machines. You distance yourself from loved ones. And the worst part? When you are going through it, you aren’t even aware it is happening.

At some point you snap out of it; like a fog lifting in the middle of the morning. Things start to become meaningful again. It is at this point that you recognize the days have been sliding by, and you start grabbing for moments before they can get by you. Yes, I’ll be at my son’s next football game, and instead of watching alone at the fence down from the bleachers, I’ll be among the other fans cheering for our kids’ team. Yes, I will again be my former productive self at work. Yes, I will balance my checkbook and take a stab at a new budget for the next month. I will re-engage life.

This was really just a long way to say thanks for sticking around during this tough time. I have some exciting ideas for the blog in the coming months, including a few spring projects I think you will enjoy (mostly related to square foot gardening, living off the grid, etc.). I’m going to rededicate myself to getting back to my frugal roots over the next few weeks, and hopefully my writing will reflect that focus.

Finally, if you are reading this and feeling blue, or more than blue, I suggest you talk to someone. It doesn’t have to be a professional, though I would certainly recommend one if you are experiencing signs of depression. Go out to lunch with a close friend and open up about what you’ve been feeling. Sometimes it helps to simply get things off your chest, and let someone else know what you are going through. Whatever you do, don’t ignore the symptoms and let too many days slide by.

Post by Frugal Dad

People often can be successful in the business world but clueless when it comes to managing their own finances. A business-minded strategy is a great way to manage and organize your household finances.

“Business advice can translate into wise decisions for your personal finances,” said Heath Tudor, consumer liaison for Resqdebt, a financial health management company in Allen, Texas.  “Using simple business practices, you can easily make your house more profitable and efficient.”

Tudor suggests these steps for managing your household finances:

Create a Plan - All businesses begin with some sort of a plan, both short term and long term. Plans help guide decisions and direct you where you want to be in a certain amount of time. Build a plan around your goals. Budget for everyday expenses, emergencies and long term plans.

Track Spending – Businesses often use spreadsheets to track income and expenses. This lets them know the state of the company’s finances at anytime. Tracking your finances will help you visualize your situation and make better decisions. However, you don’t need an expensive or complicated bookkeeping program to track your finances. Check out free online bookkeeping tools, such as Quicken or Mvelopes or create your own spreadsheet. Record everything that you bring in, spend and owe.

What comes in must be more than what goes out- In business you want to bring in more than what you are spending; the same should apply at home. As you track your finances, look at your income and your spending habits. If you are coming up short every month or using your credit cards to cover purchases, you need to adjust your income-to-spending ratio.

Cut Down on Expenses - Businesses want to keep expenses low so that overhead does not cut into their profits. You can’t always change how much money you bring in but, you can change what you pay out. Examine your bills and find places where you can cut down on monthly expenses.

Conduct Reviews - Review your plan weekly, monthly and yearly. Make adjustments and track your goals.

Overall, the most important thing for your household finances is to stay organized. Know what you are spending and always remember the bottom line. These steps will help you become more profitable and the CEO of your house.

Post by Frugal Dad

I know it may seem strange to some that I’m even at a keyboard, but Mom’s now gone, the house is quiet with sleeping kids, and I’m turning to the activity that has always been therapeutic for me: writing.

Strange that through blogging we feel compelled to share life’s highs and lows with 10,000 complete strangers, but I don’t think of you as “complete” strangers. Over the last couple years I’ve made “virtual” friendships with many of you, and I enjoy sharing bits about my life with you all – the highs and the very, very lows.

I hope you’ll understand that I need a little time away from the blog to help settle my mom’s affairs, look after my grandfather, and grieve. I’ve lined up a couple guests posts for the week, and there may be a day or two between posts.

Thank you for all the thoughts and prayers expressed over these last 13 months.

I wrote a bit more about my mom in this post, The Path to Contentment

Post by Frugal Dad

The big expenses that managed to sneak up on us are what really gave us financial fits. That unusually high power bill two summers ago compliments of a prolonged heat wave. The annual car tag renewal I completely forgot about, even though it is due on my birthday every year. And each month it felt like we were always needing to replenish groceries and household items that were not on sale, or that we never had a coupon to use.

In an effort to sort of smooth out these financial highs and lows (well, mostly highs), we implemented the following relatively simple steps.

Sign up for levelized billing with your utility company. This was as easy as a phone call to our utility company and the completion of  simple form. “Levelized billing,” as it is commonly referred to, involves the utility company averaging your last 12 months of utility bills and using that average amount as your next bill due.

The beauty of this system is that your utility bill hovers around the same amount each month, even in the extreme highs and lows of summer and winter. A particularly high-usage month averaged against eleven previous months has little impact on the new amount due.

One note about levelized billing plans, utility companies require at least one year of history, and often require no late payments within that time.

Use a sinking fund for large annual expenses. We use sinking funds for those large, annual or semi-annual expenses, such as insurance premiums, taxes, etc. Rather than being hit by a $600 insurance bill at the end of the year, sock away $50 a month in a sinking fund at your favorite online savings account, and when the bill is due simply transfer the full amount to checking and pay the bill.

Watch for cyclical coupons and sales and stock up when prices are low. Coupons tend to run in cycles of 12 weeks or so, and often times grocers match sales to available coupons in an effort to attract shoppers.

For instance, a monthly P&G coupon circular is included in our newspaper around the first of every month. Flipping through the store sale ads you’ll likely find sales on P&G items to match up with those coupons.

It might also help to keep a price book. Jot down the price of items your household routinely purchases. Start tracking the cost each time you purchase, and soon you will be able to determine if that “sale price” is really a bargain. If it is, stock up, refuse to buy when prices are high, and wait until the price drops or a cyclical coupon is available again.

Post by Frugal Dad

Finding that peace is an uphill battle thanks to entities like the media. I’m willing to bet none of us can go through an entire day without hearing about swine flu, a terror plot, identity theft, an airplane crash, a horrific car accident, a celebrity death, or a nefarious government conspiracy.

Traditional media does a great job of perpetuating their own motto, “If it bleeds, it leads,” but they aren’t alone. New media is getting in on the act, too. One of the hottest trends on the web the last week or so involved a website that shares death risk rankings. How inspiring.

This fixation on the negative has left us all in a constant state of worry. We live in a perpetual state of fear – of dying, of going broke, of losing our freedom, of losing a loved one, and on and on. Don’t believe me? Why do you think pharmaceutical companies, especially those with leading drugs for anxiety and depression, advertise heavily during the nightly news?

I’m not just picking on pharmaceutical companies. There are a number of industries whose main purpose is to sell consumers products that make them feel more secure. From life insurance, to identity theft protection, to those make-your-own last will and testament software providers, many companies exist to help alleviate your fears.

Those companies are not necessarily bad, and most of us in and around finances generally agree their products are a necessity (at least when it comes to insurance and wills). However, this fear bleeds into other areas of our financial lives.

How many of us are terrified of applying for a new credit card, or canceling our current credit cards, because of the impact it might have on the great FICO gods? It’s sad when we allow our behaviors to be dictated to us by some secret, highly-protected, highly-complicated algorithm dreamed up to dummy down lending decisions.

This thought occurred to me the other day as I paid off yet another old credit card account, from a company that had provided horrible customer service over the years. We had already introduced the credit card to our sharpest pair of scissors, and now I was ready to call and cancel the card.

As I’m dialing the customer no-service number I remembered the same advice I’ve given here at Frugal Dad before – don’t close your oldest credit card because length of credit history is an important factor in calculating your FICO score. Same for credit utilization, which would also be affected if I canceled this card with a high credit limit.

Thankfully, at that moment my common sense kicked in and I said out loud, “Screw FICO.” Blasphemous, I know. I’m not going to carry around this old account from a company I can’t stand just because it might affect my credit score. I’ll do business with whoever I want to, and for as long as I want to. I dialed the remaining numbers and canceled the credit card.  Good riddance!

I’ve also spent too much of my life obsessing over my finances. I’ve stayed awake at night counting credit card balances instead of sheep. I’m afraid of something happening to me, leaving my wife and kids without enough to survive. Do I have enough life insurance? Do I have enough in emergency savings? Do we have enough saved for the kids college plans? Will I ever be able to retire? The list of financial worries is endless.

At some point you just have to live your life. I’m not advocating throwing caution to the wind, burying your head in the sand, or not taking basic steps to secure you and your family’s future adequately. But I am advocating that we try to sort of put things on autopilot so we can stop worrying, and obsessing over our finances.

Over the last couple years, simplifying our financial life has been a big goal for us. We’ve consolidated accounts, set up automatic transfers where possible, put retirement savings on auto pilot. Besides periodic checks on balances or fund performance I rarely look at the “big picture” stuff. I focus on winning today, and being “present” for my kids. As long as we keep winning the daily battles with money, the “big stuff” will take care of itself in time.

Post by Frugal Dad

The concept of a financial fire drill is based on the idea behind a real fire drill. It allows you to run through a real emergency before you have to act with smoke and flames. In the case of a financial fire drill, this means you will simulate a “what if” scenario so you’ll know what to do, and what things need to improve, before a real life financial emergency strikes.

Steps to Planning a Financial “Fire Drill”

1. Include the entire family. My family has a pretty good emergency plan. We all know where to meet in case a fire separates us in the middle of the night. We have a rendezvous point established for larger-scale emergencies, and even the kids are aware of actions to take based on various types of disasters. Similarly, the entire family should also be involved with a financial fire drill.

2. Gather a list of necessary expenses. These expenses are absolute necessities, so things like mortgage payments or rent, basic utilities like water, power, etc. (cable and Netflix memberships don’t count), and other basic expenses related to food, shelter, prescriptions, etc. Nothing else matters at this point.

3. Determine how much is in your “extended emergency fund.” A basic emergency fund is a pile of cash stored in an online savings account or local credit union. A typical goal for emergency funds is to save six months of household expenses just for emergencies. However, in a large emergency such as a job layoff or medical disability, you could likely tap other resources. Be sure to include any stocks or mutual funds not held in retirement, CDs (even if you had to pay a penalty), bonds and any other assets that could be converted to cash quickly. This total amount will represent your “extended emergency fund.”

4. Determine your maximum survivability (in months). Divide the amount of your extended emergency fund by the total expenses identified in step 2. This number represents the months you could survive without an income. For instance, let’s assume an average family of four needs about $2,000 a month to cover their mortgage, basic utility payments and food. If the same family has a $17,000 extended emergency fund, they could expect to make it about 8.5 months on savings.

5. Adjust for increased expenses. Unfortunately, expenses don’t always go down in an emergency. In fact, they rarely do go down, despite your best efforts to cut expenses to the bone. Things like continued health insurance premiums under COBRA, or other medical expenses, can cause spikes in spending categories otherwise in check. Make adjustments to your prediction based on these estimates. To show how much impact these “surprise expenses” can have, in our example above the same family could only survive five months or so with a $1,000 COBRA premium added to their $2,000 in household expenses.

6. Conduct a financial fire drill regularly. Armed with all the facts and figures required, it’s time to pull the alarm and practice getting out safely. Since laying yourself off is not exactly a smart idea, it is sufficient to simply pretend you just received your last paycheck. What expenses would you immediately target to be cut? Write them down, along with customer service phone numbers and terms. Repeat this exercise once a quarter or so and update your list accordingly.

The day you are laid off you may grab your list and make phone calls to the newspaper subscription department, your gym, your lawn service guy, Netflix, and the cable company. These moves alone could save you a couple hundred dollars a month in expenses not necessary to your survival, preserving precious emergency funds. Keep this list handy, and only break it in an emergency.

None of these steps will happen on their own. You must be proactive. Force yourself to sit down and run the numbers. If you don’t know how much COBRA might cost, find out. If you don’t know how much your health insurance plan’s deductible is under a major medical event, find out. Don’t wait until your exit interview to discover these new costs. Doing so would be like waiting until smelling smoke to map out an escape route.

This article appeared in the Frugal Living Blog Carnival on 9/4/2009

Post by Frugal Dad