With less than 200 days (185, to be exact) until Christmas it is comforting to know that our budget debacles of previous years will not repeat themselves. For the last several years, the weeks leading up to Christmas were often spent hunting last-minute gifts while trying not to disrupt the delicate balance of our household budget. In the early years of our marriage we frequently turned to credit cards to foot holiday bills, but fortunately we recognized that was not a sustainable habit for financial success. For the last few years we have budgeted small amounts from the paychecks leading up to Christmas, but that means several trips to stores or rounds of online buying, and doesn’t exactly help spread Holiday cheer.

Christmas Savings Fund to the Rescue

A couple days after Christmas last year we decided to do something that up to that point we had never been able to do–save for an event and not touch the money for another purpose. We opened a savings account at our bank (I have since moved it to ING Direct), and scheduled transfers in the amount of $25 per paycheck, or $50 per month, to our “Christmas Savings” account. Next year, when we are ready to do our Christmas shopping, we will transfer the money to our primary checking account and take care of all our Christmas gift purchases at once.

What About Left-Overs?

If you are as frugal with your gift purchases as you are with your own purchases throughout the year, you will likely have some amount left over in your Christmas savings account. With these surplus funds you could get a head start on funding next year’s Christmas savings account, make an extra payment on debt, send a little to the kids’ college funds, or my personal favorite–give it away to someone who needs it more than you.

After reading the inspiring book about the life of Larry Stewart, Santa’s Secret, our family is beginning a tradition of giving away $100 to a complete stranger during the Christmas season. This year, we are planning to go out for breakfast on the morning of Christmas Eve and leave a $100 tip to our server. You never know what kind of impression such a random act of kindness may have on someone, and their family. Imagine a struggling single mom working at a Waffle House on Christmas Eve, wondering how she will fill the stockings for her little ones at home. That $100 could mean the difference in her kids continuing belief in the spirit of Christmas, or disappointment on Christmas morning. For us, that is what Christmas is all about!

When the temperatures outside is approaching 100 degrees it is hard to even think about Christmas some six months away. However, now is the perfect time to start planning for the expense! By spreading out the costs of presents and gift-giving throughout the year, you will feel less of a pinch around the holidays and be able to enjoy a debt-free, worry-free Christmas season.

photo by: krisdecurtis

One of the nice things about maintaining a blog is that it creates sort of an online journal to track the major milestones in your life. I imagine in the coming months and years that I will share many goals with readers, and you will share a few with me. Hopefully, we’ll celebrate together the accomplishment of a few of those goals and reflect on how far we’ve come. So here is a post from my future self, twenty years down the road. Technologies will likely change many times along the way, so this might be a good one to print off and slip in a keepsake folder.

Dear Frugal Dad:

The year is 2028 and here you are, 50 years-old, a little wiser, a little wealthier, but certainly not any better looking. You’ve made some progress along the way, and hit a few bumps in the road on your journey (thank goodness for that emergency fund, huh?). Back in 2008 you identified a few areas of your life you would like to change, so let’s see how you did.

I’m So Glad You Became Debt Free

Next to marrying your soul mate and having kids, this might be the best thing you ever did! You’ve been living credit card and student loan debt free since about 2009, and you finally paid that mortgage off early in 2018 (it took a little longer than you planned). So for the last nine years you have been living a totally debt free lifestyle. Fun, isn’t it? Just the other day you sat down to pay bills. Let’s see, there was the cable bill, the wind-farm cooperative bill (I think you guys used to call this the “power” bill), cell phone payment, and insurance. Am I forgetting one? No, that’s it. Budget in a little for food and fun and you are living well under 50% of your $220,000 earnings (don’t get too excited, remember those years of inflation after 2009 - whew, rough times).

If You Bought that House, I’d Still Be Broke

Remember back in 2013 when you were thinking about upgrading the family to the all-brick two story around the corner with the pool, finished basement and huge corner lot? I know it was a sweet deal, but good thing you didn’t follow through. The next year you lost your job when robots took over the software industry (who knew?), but between the emergency fund and that little blog you started up a few years earlier you were fine until you landed on your feet a few months later.

Thank You for Leaving the Stressful Job

It wasn’t easy changing gears after the software industry debacle, and you really jumped from the frying pan into the fire joining that square foot gardening kit startup company that promised to solve world hunger for only $149.95 a box. I know they offered a sweet deal, but you didn’t really think that would take off, did you? Thankfully, you recognized the worldwide sales calls and time spent away from the wife and kids wasn’t worth a six-figure salary. After your resignation you made a smart move writing about the whole process and inking your second book deal. After that interview on the Larry King show (yes, the man is still alive, and still hosts a show!) things really took off.

Good Thing You Started Working Out Again

I know you put this down as a stretch goal, but we ought to mention it here. You said you wanted to lose 50 pounds and get in better shape. Well, you finally did it, but not until you gave up Coca Cola and those late-night scavenger hunts for Little Debbie snack cakes. In fact, you lost closer to 60 pounds, and now you are in the best shape of your life. You don’t have a problem keeping up with your grandkid’s soccer team.

This summer you and the family will retreat to that cabin you bought in the Smoky Mountains. If it weren’t for the kids and grandkids you would probably just move there. After all, now that you are financially independent it doesn’t really matter where you live. What a far cry this lifestyle is from the one back in 2008!

Not much else to report from 2028. Oh, there is one more thing. Your team finally won the national championship playoffs five years after they got rid of the BCS. I know you aren’t a gambling man, so I feel comfortable telling you this news without fear of you blowing your life savings on such a safe bet (hint, hint). See you in twenty years.

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I don’t have many regrets from my first thirty years on Earth. However, there is one that makes me wish I had a “mulligan,” or do-over, to relive a decade of my life with a new goal in mind. I read about a 50% savings plan at The Simple Dollar and the concept really intrigued me. According to the plan I would have five years of financial independence banked if I had started when I began my career at twenty years-old.

The 50% Savings Plan

Under the 50% plan workers sock away 50% of their income and live on the remaining 50%. Sounds pretty aggressive, doesn’t it? Could you live on half of your earnings now? How about when you first started your career? There are several benefits to such a plan. First, to live on half of your income you would be forced to make some very conservative decisions regarding major expenses such as housing and transportation. Not much room in this plan for a $1,500 mortgage payment, or a $400 a month new car lease. Second, by saving such a large amount of money so early you would benefit from the compounding growth of that money over a longer period of time. Many times, new workers opt out of contributions to 401(k) plans and other retirement vehicles because they can barely afford their living expenses. It isn’t until they hit thirty or thirty-five that they finally realize they need to be saving for retirement, and at that point they have lost 10-15 years worth of compounding growth.

Path to an Early Retirement?

One of the most exciting aspects of this plan is that for every year you work and faithfully put way 50% of your income, you are “buying” yourself a year without work. In my case, if I had implemented this from the beginning I would have five years worth of 50% earnings in the bank, meaning I could theoretically quit or take a five year sabbatical if I so desired. Of course, to do that the money would have to be saved outside of retirement accounts, so it may make sense to max retirement accounts first and then save the remainder in low cost index funds in taxable accounts. This way some of the money will be accessible before I reached the required age for withdrawal from retirement accounts.

Is It Too Late?

It’s never too late to start the 50% savings plan, but it is so much easier in the beginning. As we get older we get more and more trapped by things like debt, lifestyle, etc, making the very idea of saving 50% of our income seem impossible. Implement this plan early on, before you have the opportunity to acquire such expensive trappings. What if you are like me and find yourself unable to live off half of your earnings? Start paying off debt like a crazy person! Imagine if you didn’t owe a dime to anyone - no car payment, no mortgage, no credit cards, and no student loans. Could 50% of your income provide for food, utilities, medicines, and a few fun purchases each month? Absolutely! And just imagine how much brighter your financial future would be after socking away half of your earnings for the next couple decades.

So what about you? Could you afford to save 50% of your current income?

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photo by Victor Geere

This is the fourth article in a series on Life Skills for the New Graduate by The Life Skills Network. All week we’ll be featuring tips for new grads. See the bottom of this post for details and the rest of the lineup!

The tassels have been turned, the diplomas distributed, and the caps tossed in celebration. It’s the morning after graduation, the pomp and circumstance is over, and reality is setting in. Thoughts of job offers and relocation may be dancing through your head. You are probably looking for a place of your own close to a new job, but not too far from your mom’s cooking. It is an exciting time for new graduates. However, it is also a dangerous time, financially.

New Digs

Next to getting a car as a teenager, few things are as liberating to young adults as moving out and finding a place of their own. Unfortunately, the temptation to prove your independence usually leads to overspending on things like new furniture, decorations, and electronic gear. I remember when I moved into my first place. I had a perfectly good television with a little entertainment center capable of holding my small collection of DVDs, my TV, and my beloved Xbox. However, my new living room was larger, so I would need a larger television. And if bought a larger television I would need a larger entertainment center to hold it. Since the new entertainment center had a place for a stereo I’d need one of those, too, and a few more DVDs to fill in the space around the stereo. You get the idea.

I’ll Just Charge It

While I had all my expenditures mapped out pretty well, going so far as highlighting them in catalogs and printing out their order page from retailer’s websites, I had done a particularly bad job of saving up for the occasion. That’s fine - I have a credit card! Big mistake. I charged a few things here and there, and made minimum payments on the balance. When a new movie came out, or I needed a recliner, or a new mattress, I charged those, too. Pretty soon I had accumulated a fair amount of debt in the name of “upgrading” my new living space.

Save and Spend Plan

Ten years later, and a lot of heartache and hard work to pay off those post-college debts, I can honestly say it’s a struggle to even remember what that credit card balance represented. At the time it was very important to buy a new futon, or a new welcome mat with my alma mater’s logo, or a new surround sound system, but now I realize all that was just stuff. Stuff comes and goes, leaving behind only a trail of guilt and credit card debt to be remembered by.

If I had it do over again I would have made up the same wish list (although it probably wouldn’t be quite as glamorous now) and prioritized the items 1-10, well, more like 1-30. I would open a new subaccount at ING Direct and label it “Wish List.” In this account I would set aside a specific amount of money each paycheck until the balance was enough to buy item number one. I’d transfer the money to my primary checking account and pay cash for whatever was my top priority. Once that was safely in my new house or apartment I would do the same for item number two, and so on.

This concept of saving for specific items forces two habits that are worth taking with you into adulthood. First, it gets you into the habit of saving a portion of your early salary, something you should also be doing for long-term goals, like retirement or a downpayment on your future home. Second, the delayed gratification forces you to scrutinize your list and decide if the new refrigerator with ice through the door is really worth $100 for the next twelve paychecks. Chances are, there are things you would rather do with your money than tie it up for six months waiting to buy a refrigerator. Suddenly, opening the freezer and grabbing a few cubes doesn’t seem like such a chore.

Resist Temptation

As a new graduate you will be subjected to every marketing ploy in the retail furniture book - 0% financing, 90-days same as cash, no payment until 2012. Don’t believe the hype. None of these creative financing options will leave you feeling as good as spending hard-earned cash and owning your new furniture, appliance, or electronic gadget the minute you leave the store’s double doors. There’s no feeling like owning something outright. If you really want to be successful in financial life this is a must-learn lesson, and unfortunately, one you probably didn’t get from your college experience.

Here is the rest of the lineup for the Life Skills for the New Graduate series:

• Monday: 10 Financial Tips for New Grads at My Dollar Plan
• Tuesday: 7 Common Interview Questions For The New Graduate at The Wisdom Journal
• Wednesday: Inexpensive Tips For A Greener Life After College at The Good Human
• Thursday: Tips for Furnishing Your First Place at Frugal Dad
• Friday: 5 Do’s and Don’ts Of Living The Good Life For New Grads at My Super-Charged Life

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photo by Oi Max

In response to my review of ING Direct and emergency funds James asked a question in the comments, “How close should they be?” That’s a great question, and one I have asked myself since turning to online banking. A few online banks offer ATM card access, and a couple even reimburse ATM fees for withdrawals. However, the ING Direct Orange Savings account offers no such features. Transfers are handled online and take two or three business days to show up in either account. This presents a dilemma - what if I need access to my emergency savings today?

Start Local and Expand Later

We have decided to save $1,000 locally in a bank savings account, and anything we save above that we transfer to ING. The interest on a bank savings account these days isn’t enough to buy my kid a pack of chewing gum, but I’m more concerned with accessibility. Keeping a portion of your emergency fund locally provides quick access to at least the first $1,000 of our emergency fund in the event of a real emergency. This would be enough to cover the initial costs for most repairs, out-of-pocket medical care, etc. The remaining emergency funds would show up a couple days later for larger emergencies that required more than this “local emergency fund” could cover.

Select a Comfortable Level for You and Yours

I mentioned that I am not overly concerned with the interest rate on this local emergency fund. However, I do want to maximize any interest income potential with the larger, online emergency fund, so it makes sense to limit our local emergency savings fund to a specific amount. This minimum amount should be decided on by you and your family, not based on a recommendation from someone else. Around $1,000 works well for our family, but it may or may not work for yours, and that is fine. In uncertain times it makes sense to save a little more. When your checking account has a healthy balance, perhaps you could save a little less. The point is to have something liquid, easily accessible, and local so you can avoid turning to credit cards in an emergency.

Couldn’t I Just Use an Emergency-Only Credit Card?

Sure, assuming you have the discipline to identify real emergencies, and pay off the bill using emergency fund savings when the bill arrives. I have fallen into the trap of using a credit card to finance an emergency with the self-promise to pay it off when I get the bill. The bill arrives, and I am reluctant to use such a large chunk of savings to pay if off in one payment, so I rationalize that I will pay it off over time since the credit card’s interest rate is low, or because I like having the safety net of cash in reserve. Now I am stuck with a revolving balance that with interest is causing that emergency to become more and more expensive with each billing cycle. The only way to get off the never-ending hamster wheel of debt is to stop using credit cards and loans to finance life events. Create a local emergency fund to catch the small stuff, and a larger, fully-funded emergency fund online to save for life’s curveballs.

The other day I read an excellent article that provides some ideas for things to do with a tax refund. I enjoyed the list because it was outside of the normal, “pay off debt, start an emergency fund” standard listing of things to do with the upcoming tax rebate checks. One item in particular really caught my eye - “add it to your sunny day fund.” What a refreshing concept. I think way back in the annals of personal finance journalism someone first wrote that we should all save for a “rainy day.” It is one of those timeless axioms that we hear repeated over and over from anyone identifying themselves as a financial expert. But what about saving for sunny days, too?

photo by: NZ Alex

Starting a “Sunny” Day Fund

If rainy day funds are for negative life experiences, it only makes sense that sunny day funds are for the good times. Maybe you save in a sunny day fund for some tickets to a place you have always wanted to visit, or for that cruise you have been promising to take your family on for years. Maybe it is something small, like saving up to take your kids to the zoo, or to take a pottery class. Whatever it is, the sunny day fund doesn’t have to be limited to just material items.

I’ve been reading The 4-Hour Workweek by Tim Ferriss and in it he advocates taking planned sabbaticals at regular intervals. A sabbatical basically involves walking away from your career for an extended period of time, usually six weeks to three months. At one time it was a growing perk, particularly in highly competitive industries with high burnout rates. The thought was that offering employees a chance to take a break made them less likely to take a permanent one.

It is hard to imagine taking an extended break from work on purpose! Most people who receive a pink slip desperately need to be re-employed because they typically have a stack of bills, and very little in savings. Imagine that same scenario if you had very few bills, and a large amount saved in a sunny day fund. No worries, right? You could live off the severance package, take an extended break to do some traveling, or whatever your heart desires, and take your time finding a new job. It is an exciting concept, but one that most people find unattainable because they continue to live paycheck to paycheck. If this is you, start thinking about ways to reduce your expenses and/or increase your income to fund a “sunny day” account.

So What’s in Our Sunny Day Fund?

I recently wrote about how much I was enjoying my new savings accounts at ING Direct. One of the best features is the ability to create “subaccounts” and give them a nickname. Our current list of subaccounts includes Emergency Fund, Christmas Shopping, Orthodontics, etc, all based on some upcoming expenses that we need to be saving towards. In addition to those accounts we also created a “Sunny Day Fund” where we are currently saving towards a vacation destination that we would like to take the kids next year. I think I’ll take Nickel’s advice, and use some of our upcoming economic stimulus payment to get a head start on the sunny day fund balance.

Ask the Readers: What kinds of things would be in your “sunny day” fund?

If you liked this article, please consider subscribing to Frugal Dad for free via RSS feed or email delivery.  Subscribers also receive my free eBook, The 7-Day Turnaround!

I consider myself fairly content. All of my basic needs are met, and there are very few things that I really want. I am a recovering techno-gadget guy who around the turn of the century enjoyed acquiring the latest toys such as a Walkabout pager, a Palm Pilot, and a laptop computer for home and travel use.  The only one I even remotely used was the laptop, but even it eventually wound up on an eBay auction to pay for a couple semesters worth of textbooks.

Guitar Hero III and Wii Sports Finally Convinced Me

I remember when the Nintendo Wii first came out. It was billed as an interactive game complete with flying remotes and Wii Nunchucks, I’m still not sure what those are for. At the time I was happy with my plain old XBox game system and exactly one game, NCAA Football 2007. Besides, with a full time job, a part time job, and two kids I found little time to play much of anything. And so the Xbox sits, collecting dust and becoming more and more obsolete each day.

Image credit: clipeuh94

As the Wii grew in popularity so did those who said it could be the next “family entertainment” device. Yeah right, I thought. They will never get kids and parents (and even grandparents) all playing the same machine. I was wrong. Today the Nintendo Wii is the center-piece of many family’s in-home entertainment. I have heard friends mention participating in Wii family bowling tournaments, burning calories punching some air with Wii boxing gloves and now you can even pluck away at a guitar playing Guitar Hero III. Nintendo Wii’s latest product offering is Wii Fit, which features a balance board and several body measuring metrics used to track your weight, BMI, etc. Playing Wii Fit games burns calories and helps to lower those statistics. Does this thing wash our cars, too?

Paralysis by Analysis

Over the next several months I read product reviews, customer ratings and played demo models of the Wii in Sam’s Club a few times (OK, more than a few times). After resisting the marketing hype for months I must now confess I am generally smitten with the Nintendo Wii, and I think our kids would have a great time with it. Perhaps we could even work it into our frugal family fun nights. A reader told me her family has Wii game nights instead of going out for food and movies and her family’s entertainment budget has dropped significantly. After all, it only takes a few visits to restaurants and movie theaters to pay for a Wii.

So Why Wait?

Worldwide shortage of Nintendo Wii units notwithstanding, I just don’t believe in rushing out and buying anything on first impulse. My grandfather has always given the advice to walk away from stores, car lots, etc. and sleep on it. Trent advocates a ten-second rule. Well, I’ve been sleeping on it for several months now.

I don’t think that’s what he meant! However, I do believe it is important to delay major purchases like a game console because it takes some discipline to save up and pay cash. We decided to open a subaccount at ING Direct labeled “Nintendo Wii” and automatically transfer $20 a paycheck, plus any extra money we scrape up, until we have enough to purchase the Wii and Guitar Hero III game. Based on current prices that means we’ll need to save around $300. At that rate it will take four or five months to be in position to buy the Wii, but that is fine with us because during that time Nintendo will probably solve some of their supply issues, and when demand slows down a bit, or when Sony or Microsoft put out a new product, Wii prices will be reduced. Sometimes it pays to move slow.