Wednesday, 30 November 2016
Balancing Your Financial Success and the Luxuries of Your Friends
We’ve all been there at some point or another.
We meet up with a friend and discover that he or she has acquired some sort of luxury good or had some sort of expensive experience. Maybe that person has a brand new car that’s shining in the sun. Maybe that person has the latest smartphone. Maybe that person just got back from a trip to Rio.
Whatever it is, they’ve just enjoyed some luxury, one that’s well outside the borders of your budget.
And you’re jealous. At least a little.
It’s not a question of whether or not their luxury is something you’d actually want for yourself. It’s that a friend of yours has a luxury in their life. They have access to something luxurious that they personally desired at a time when you don’t have anything luxurious yourself.
You look at your ordinary routines and then look at the luxurious item or experience that your friend has and you simply feel jealous of it.
It’s at that point that you’re primed to make some awful financial choices. You might instantly decide that you need some sort of luxury for yourself and then, within the next day or two, find yourself making a purchase that you wouldn’t have otherwise made. You might dwell on that luxury, letting it swell in your mind and convincing yourself that your current life is denying you so much that you just abandon your financial principles for a while and start splurging. You might even begin to doubt the entire reason that you make good financial choices.
After all, if you can’t have that luxury, what good is it?
Here are some vital things to think about if you find yourself in that mindset.
First of all, you’re actually in the process of buying one of the best luxuries in the world. You don’t have the latest smartphone or a shiny new car, but you do have financial stability in your life and you’re probably building to a state where you can quit working many years before your friends and family while enjoying all the free time in the world to do whatever it is that you enjoy most in the world.
To me, there is literally nothing better that I could be doing with my money. I cannot imagine anything else I’d rather have in this world than endless amounts of free time with enough financial security to not have to worry about day-to-day needs. There are so many things I’d love to explore or try or dig deep into, and the only way to be able to do that is to maximize my control over my time, and the best way to do that is to build a financially secure foundation for my life.
What I often do is transform that luxury item into that free time. My friend might have that shiny car while I have a fourteen year old SUV that I bought off of Craigslist (seriously, I drive an old Honda Pilot that I bought off of Craigslist), but when I look at that shiny new car, what I actually see is about a year‘s worth of days where I have the freedom to choose whatever I want to do with my time. I would way rather have that year – and I think a lot of people, if they really thought about it for a while, would prefer that year, too.
Second, you probably don’t want that luxury anyway. There are many “luxuries” that I have witnessed my friends purchase that I honestly wouldn’t own if I had a billion dollars. It’s just not me. Although I can see that the item is clearly a luxury item, it’s not something I would want.
I have a friend who purchased a Jaguar several years ago. I genuinely have zero interest in owning a Jaguar. I can appreciate that it’s beautiful and so on, but that doesn’t mean I want to own it or use it as something to get back and forth.
That doesn’t mean that I view the person who bought that item with disdain. I understand why someone would want a particular item, but I simply recognize that it’s not for me. I understand why my friend wanted a Jaguar and I understand that my friend is likely to get a lot of enjoyment out of a Jaguar, but I recognize that I wouldn’t get nearly the same enjoyment out of owning one.
Third, you have a friend in front of you that’s probably very happy about this luxury, so share in that joy! Even if you feel immensely jealous of that item that your friend just acquired or that experience that your friend just had, check that jealousy for a moment and switch shoes with that person. Imagine that you just bought something you’ve always wanted or taken a fantastic trip or something and you can’t wait to share it with a friend. How would you want that friend to react? With joy? Or with jealousy, bitterness, and negativity?
Be the friend that you want in your own life. Even if you feel insanely jealous of the purchase. Even if it’s clear it’s something that you wouldn’t buy for yourself. Even if you think the purchase was financially disastrous. No matter what, check the negative feelings and be happy for your friend.
It can be really tempting as well to swing into judgmental talk about finances. Don’t. You can save the financial talk for later. Even if you can’t muster a single ounce of joy related to the item, focus instead on the joy of your friend and be a part of that.
What I’ve found, almost every time, is that by sharing in the joy, my own desire to get something luxurious actually fades away. I begin to realize that it’s not about the luxury item, but about my friend doing something that brings my friend joy. The luxury item could be anything – it doesn’t matter.
Fourth, you likely have things already in your own life that bring you joy, so make sure you always have room for them. I’ve found, over and over again, that I become more jealous of the luxuries that my friends have when I’m feeling negative about the state of things in my own life. If I’m unhappy with some big aspect of my own life at the time my friend shows up with a luxury, I’m going to end up with negative feelings of jealousy. Negativity feeds on negativity, after all.
What’s the solution, then? The solution, for me at least, is to do my best to maintain a life balance. If I feel negativity creeping up in my life, I do everything I can to address it head on. For me, addressing that negativity usually comes in the form of consciously setting aside time and energy for things that are important to me that I’m currently neglecting. Whether it’s a relationship or a hobby or something else, I make sure that I’m setting aside time for that thing, giving it the attention that it needs so that it is no longer a negative.
Letting a bad situation limp along in your life because you believe “it’ll get better soon” or “I can deal with it next week or next month” isn’t a solution because those outcomes never happen. If there’s something in your life that’s bothering you, deal with it now because the longer you let it sit, the more likely it is to become a lasting pattern that you just can’t get rid of.
Finally, give it time. Many of the solutions I describe here require time more than anything else. You might still feel jealousy in the moment, but if you don’t do things in response to that jealousy and instead give yourself some time to reflect on the state of your own life, why you feel that jealousy, and what areas of your own life are feeling negative right now, you’ll probably end up coming to some valuable conclusions that don’t involve spending a dime.
For me, a strong jealous response to something means that something is out of whack in my current life. Those things can be hard to figure out, especially in the moment. So, if you feel jealous, recognize that jealousy, but don’t act on it. Give it time. Try to figure out why you’re feeling jealous.
You may just find that the answer you needed was right there all along.
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What Are My Student Loan Repayment Options?
Graduating from college takes determination, hard work, and fortitude — but so does paying for your education. Picking the right student loan repayment option is so hard because you often enter into the process before you have a real idea of what your future will hold. And while you can change the terms of your loan down the road, you can’t change the amount you borrowed.
“Many students just borrow loans without thinking about what the payments will look like, what their job prospects will be, and how they will handle their finances in the future,” said Betsy Mayotte, director of consumer outreach at American Student Assistance, a Boston-based nonprofit. In other words, if you’re drawn to a career that typically pays $35,000 a year, it may be unwise to take on $200,000 of debt to pay for a private school education.
And when it comes to private loans, tread lightly! It’s important to remember that unless you have a well-established credit history, you’re going to need a cosigner to take out a non-federal student loan — private lenders won’t take on the risk. And private loans don’t come with the protections and flexible repayment options of federal student loans: Once you have a private loan, your only real option for changing the terms of it is through refinancing.
Federal Student Loan Repayment Options
Don’t panic, though: When it comes to your federal student loans, you have options. The Department of Education’s (DOE) website lists a number of federal loan repayment options meant to cater to borrowers’ needs. There’s also the Federal Student Aid Repayment Estimator, a great tool for estimating repayment for all of the federal plan options available, including how much you’d pay per month, overall, and if there is any forgiveness available.
But while you’re here, let’s take a look at the two primary types of federal loan repayment plans: Basic and Income-Driven Plans (IDP), and what they encompass.
Basic Repayment Plans
Basic loans are not driven by your post-graduation income. There are three types of Basic plans: Standard, Graduated, and Extended.
Standard Plan
- Definition: This is where you start, a 10-year plan at a fixed amount. If you’re consolidating with other loans, be sure to review this repayment schedule, as your term may be longer.
- Who should consider: Those who are confident that a lucrative post-college career will allow them to pay down their loans without trouble.
Graduated Plan
- Definition: Same style as the Standard plan, except your payments start small and grow every two years.
- Who should consider: People entering into careers with regular promotions that lead to increasingly larger paychecks.
Extended Plan
- Definition: Similar to Standard, with lower monthly payments spread out over a longer period of time. The borrower must have $30,000 in outstanding direct-loan debt, and no outstanding debt from previous loans; check here to see if you qualify.
- Who should consider: People who need longer periods to repay their debt, but don’t necessarily want their repayments to be calculated based on their income.
Income-Driven Plans (IDP)
Most of us fall into the income-driven spectrum. There are a few different flavors of Income-Driven Plans, but they all share many of the same traits:
- Repayment is based on a percentage of your discretionary income—usually 10% to 20%. Discretionary income, according to Mayotte, is “your adjusted gross income minus 150% of the poverty line for your family size.”
- The loan periods are longer than basic plans — 20 or 25 years.
- More money is paid in the form of interest over the life of the loan.
- With Income-Based and Pay-As-You-Earn plans, it’s your discretionary income at the beginning of the payment schedule that counts. These loans will never become more expensive per month than the Standard Plan. With Revised-Pay-As-Your-Earn and Income-Contingent Repayment plans, your monthly repayment schedule changes based on your income. These loans could get more expensive per month than the Standard Plan. More information is available on the DOE website.
- IDPs feature loan forgiveness at the end of their terms — however the forgiven balance is treated as taxable income. That means if you have $50,000 in student loans after 25 years for an Income-Based Repayment loan, that balance will be forgiven — but will be considered taxable income.
Speaking of forgiveness, check to see if you’re eligible for Public Service Loan Forgiveness (PSLF), which wipes out your balance after 10 years of governmental or accredited non-profit employment. PSLF is not taxable.
Income-Based Repayment Plan (IBR)
- Definition: Your monthly payment is limited to 15% of your discretionary income (10% if you have no outstanding Direct or FFEL loan balances). There are income level and family size requisites, so check to see if you qualify. Outstanding balances are forgiven after 20 years.
- Who should consider: People not earning enough based on their debt to pay off a loan under the Standard plan. With this plan, married borrowers should file their taxes separately.
Pay As You Earn Plan (PAYE)
- Definition: Repayment is capped at 10% of your discretionary income. There are income level and family size requisites — check here to see if you qualify. Outstanding balances forgiven after 20 years. The main difference between IBR and PAYE is that with IBR, you pay 15% of your income if you aren’t considered a new borrower.
- Who should consider: People with high debt-to-income ratios. As with the IBR plan, married borrowers should file their taxes separately.
Revised Pay As You Earn Plan (REPAYE)
- Definition: Like PAYE, payment is capped at 10% of your discretionary income. Outstanding balances are forgiven after 20 years (undergrad loans) or 25 years (grad school loans).
- Who should consider: Pretty much everyone qualifies for this plan. People interested in but not eligible for the PAYE plan usually consider REPAYE.
Income-Contingent Repayment Plan
- Definition: Monthly payments will be either 20% of your discretionary income or the amount you would pay based on a 12-year fixed payment plan, whichever is less. Outstanding balances forgiven after 25 years.
- Who should consider: Any borrower with an eligible loan can access this plan, including parents.
When it comes to student loans, remember to consider the “long game,” as Mayotte says. “It’s not about paying the least amount per month–it’s about paying the least over time,” she says. If you take a close look at the DOE’s website, talk with your loan servicer, and consider your future career, you’ll make the right loan choice for you.
Related Articles
- Ultimate Guide to Paying Off Student Loans
- Nine Employers That Will Help You Pay Off Your Student Loan
- What I Wish I Knew Before Taking Out Student Loans
- Federal Student Loan Forgiveness: Four Ways to Wipe Out Your Debt
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Tuesday, 29 November 2016
The Four Seasons: A New Way to Look at the U.S. Economy
Today’s article is from William Cowie, a staff writer at Get Rich Slowly and the brains behind Drop Dead Money. I’m not a fan of micro (day-to-day) market timing, but think Cowie makes an interesting case for timing the larger “seasons” of the U.S. economy.
Other than when the stock market crashes or another ten thousand people get pink slips, you never hardly hear anyone mention the economy, do you? Most people (you, perhaps?) view the economy as some external force over which nobody has any control. You feel like a victim of this capricious force and you can “only hope for the best”.
Wrong on both counts.
The economy “happens” whether the news mentions it or not. No, it’s not capricious. And no, you needn’t be a victim.
In fact, being aware of the economy and how it moves can help you put tens (or hundreds) of thousands into your pocket, and help you prevent what you have from being sucked out of your pocket.
The good news is you don’t need a degree in economics, nor do you need to understand those people who usually dress in black, or any of the gobbledygook they speak. The main thing you need to understand is that the economy goes up and down. It moves in cycles.
The Economic Cycle
Different people use different measures of the economy, so I figured why not create another one? Here’s how I track the economy’s cycles:
The exact numbers and scale used for this chart don’t matter. All we need to know is (a) there are ups and downs, and (b) when those turning points are.
The chart teaches us a couple of things.
First of all, the economic cycle repeats. The economy always recovers from even its worst recession or depression, and it always crashes just when things look wonderful. Each bottom is followed by an uptick, which in turn leads to yet another crash.
Second, the cycle’s wavelength is surprisingly constant. One measures any cycle or wave from one top to the next top, or one bottom to the next. Given that most people focus on recessions when they think about the economy, I choose to measure bottom to bottom. The dates in the chart show past economic cycles’ bottoms — more or less. (And if you’re dubious about my custom measure, you can check those dates with the Federal Reserve. They match. Again: exactness isn’t a requirement here; as you’ll see later, for the purposes of your net worth “close enough is good enough.”)
What surprised me the first time I saw this picture was how short every cycle is: ten years or less, bottom to bottom.
That’s not a long time.
Since World War II, we’ve had a recession every 7-10 years, almost like clockwork. When I mention this to people, almost everyone is surprised. (I was surprised too the first time I figured it out.)
Finally, the ups, downs, and turning points of the economy are inevitable. The cycle has peaked and bottomed, within its regular cycle, regardless of who was in the White House, or any other extraneous circumstances. For some reason, people love to blame whoever is President, or whichever party rules Congress, but recessions have occurred under every party’s watch. No force or political party has interrupted the cycle, up or down.
The economy moves to a rhythm of its own.
So what?
It’s probably not news to you that the economy goes up and down. On some level, we all know that. Here’s the problem: this knowledge didn’t prevent millions from getting slammed when the Great Recession hit a few years ago. Perhaps you got caught in the downdraft, too.
Why is that? I can think of two reasons.
First, the economy moves at the speed of a glacier — slower than grass growing, paint drying or any other slow-moving part of life. When our attention span these days is measured in milliseconds, it’s impossible to discern any movement. But make no mistake: the economy moves.
The second (and most important reason) economic downturns take folks by surprise is that few people understand how you can make subtle changes to your financial strategy depending on where we are in a given cycle of the economy.
And that’s what this article is all about.
Let me say at the outset that nothing here changes the fundamental financial wisdom. You’ll still need to earn more, spend less, get rid of debt, and invest. But what follows could potentially help you do all four of those things better than before.
The Economic Seasons
The key insight which will help you benefit from any given economic cycle is understanding that every complete cycle, bottom to bottom, has four phases, which I liken to the four seasons of a year:
- The spring of the early recovery.
- The summer of growth (everyone’s favorite season).
- The fall season of harvest.
- The winter of recession.
You can begin with any season, but most of us are used to thinking of spring as the start of each year, so let’s just go with that. I use this little diagram to visualize the four seasons of the economy:
There are, of course, a few notable differences between the seasons of nature and the seasons of the economic cycle:
- Duration. The four seasons of nature span, well, one calendar year. The seasons of the economic cycle cover 7-10 years.
- Unevenness. Every climatic season lasts three months — equal time. In the economy, summer is by far the longest season — almost half the entire cycle is taken up by summer. Fall is usually the shortest. Moreover, no two cycles have seasons the same length as the previous one.
- Fall. In nature, temperatures cool when fall comes along. In the economy, we see the opposite. Economists call it an overheating economy. More about that later.
Despite the differences, natural seasons and economic seasons share one key similarity: they follow a fixed sequence. We’ve never seen spring followed by fall or winter, for example.
This is a key piece of information, because once we know where we are in a cycle, it gives us a clue as to what’s coming next. The biggest reason people get hammered in a recession is they don’t expect it. And the reason most people miss out on the terrific opportunities springtime brings is they’re afraid of another winter around the corner.
There’s enough of a resemblance to nature’s season in the economy that most people understand the concept. But the question still remains: How can I apply this insight to my finances?
To find the answer, let’s look at someone who makes his living from the four seasons of nature: a corn farmer. Let’s call him Farmer Fred.
In spring, Farmer Fred plants his corn. In summer he tends to his crop, and in fall he harvests. Then, in winter, he pretty much does nothing except get ready for the next year. And that’s where we get our cues for how to plan our moves for each season of the economy.
In the following examples, we’ll also look at Fred’s neighbor, Claude. He’s not so successful. In fact, the neighbors call him Farmer Clod. We will too.
Let’s see how our two farmer buddies work their way through a year.
Spring
It’s impossible to tell the moment when winter turns to spring. Not even Punxsutawney Phil can do that. It’s still cold and dark out in the mornings. Farmer Clod wakes up, sees there’s no change from winter, so he pulls the covers over his head and snuggles back into his warm bed. Fred, though, has a calendar. He knows you can’t go by what you see or what you feel. It’s time to plant, so he bundles up, grabs a cup of coffee and gets to work planting.
Farmer Fred knows that the size of your crop at harvest will never be more than what you get into the soil now.
Summer
Summer is growing season. Everything is green. Clod feels the warmth and figures this is the perfect time to do some planting. The new crops will have good sunshine and warmth to grow, right? Wrong.
Someone once said the secret to skeet shooting is you have to aim not where the target is, but where the target will be. Same with the seasons. Fred planted when the days were short, so that the crop would be above ground when the warm days of summer arrived. By the time Clod’s crop sticks its neck above the soil, it’ll be too late to benefit from all that sunshine!
In theory, all you need to do in summer is sit on the porch, drink iced tea and watch the crops grow. In practice, we all know that’s not how it works. A farmer has to take care of irrigation, fertilization, and pest control. The word we use to cover all that activity is tending. Fred tends the crop he planted in spring so he can maximize his harvest in fall.
Fall
Fall is my favorite season. The weather gets cooler, the leaves turn pretty, and football fills the weekends. Farmer Fred fancies fall because that’s when the year’s hard work comes to fruition. Harvesting is a time of furious activity, all with an eye on the weather: got to get that crop into the silo before the cold comes! But once pumpkin pie season arrives, the work is done and the loads delivered. The checks start rolling in.
Clod, once he sees the trucks rumbling by with loads of harvest, looks at his fields and just sees green, immature stalks. Nothing to harvest. He panics. But, fortunately for him, he runs into Banker Bob at the overpriced coffee shop. And guess what? Bob is anxious to lend Clod mountains of money. So Clod grabs the money, builds a new barn, buys new equipment and seed…and plants like crazy. Got to get in on this furious and profitable activity, you know?
When Thanksgiving rolls around, everyone is in a mood to give thanks — Fred for the crop and Clod for those loans which set him on the right track.
Winter
How you experience winter depends a lot on where you are.
Farmer Clod sits at the coffee shop and bellyaches with his cronies about the inept crooks in Washington, the fat cats on Wall Street, and the one percenters who hog the entire economy and stiff the little guy. The way he tells it, he got stiffed too. Both the immature and the new crops got frozen to the ground when winter came. Circumstances beyond his control, you understand. Banker Bob just has no heart. He foreclosed when Clod couldn’t make his payments. Clod even lost his new (leased) Lexus with seat warmers. For Clod, winter sucks.
Farmer Fred and his family, on the other hand, spend their winters in Arizona. Or hanging out in Cancun or Barbados. Because they went by the calendar, and not by their feelings or other people’s opinions, they did the right thing at the right time.
Fred accomplished this with the same inept politicians in Washington, greedy crooks on Wall Street, and harsh Banker Bob in town. Halfway through the winter, in fact, Fred got a call from Banker Bob. Was Fred interested in buying Clod’s farm for half price? Bob the banker was in trouble. He’d given himself a nice bonus after signing Clod up for that loan, but now the default is coming out of his own pocket. If Fred takes Clod’s farm off his hands, Bob can survive to make more bad loans next time around.
Because Fred has no debt and lots of cash, you see, he’s in a perfect position to scoop up the bargains winter always brings.
You know the rest of the story: Fred lives happily ever after while Clod is consigned to writing a blog telling everyone how to learn from his mistakes.
The Difference
What set apart Farmer Fred from his clueless neighbor? Clod acted according to what felt right, while Fred acted according to what the calendar said, regardless of how it felt.
Most of the time the right thing doesn’t “feel right”. These days, many people are buying bigger homes because “it feels right” — just as in 2005-06. In the depths of the recession, nobody wants to buy anything. The news is laden with depressed stories.
I thought of buying some property in 2010. I was made to feel like a serial killer, so irresponsible was that. “Why would you buy something that’s falling in value?” I allowed myself to be talked out of it. With hindsight, you can see I was stupid because I allowed feelings to dissuade me from a smart investment. (Don’t worry, I made other investments at the time which turned out very well, thank you.)
More than 90% of the population make otherwise good financial moves at the wrong time. Those that follow the “calendar” of the economy just do so much better.
The Economic Seasons and YOU
“Great,” you might be thinking. “Nice story, William. But what does this cute little fairy tale of your have to do with Real Life?” Let me count the ways! Actually, there are too many to include in this (already very long) article. But here are a few examples.
Your Job
When you pick an employer, look at how they treated their employees in the last recession. Were there mass layoffs? Or did they find a way to keep their people busy (end employed)?
Think twice about making a job change late in the summer of the economic cycle — or in fall. That’s usually when employers are hard pressed to find enough good workers, so that’s the time they make those juicy job offers. However, when the recession comes, it’s the newest workers that usually bite the dust, especially if they make more than the old timers. If you’re planning on a change, try to make it as early in the cycle as you can.
In a recession, if you keep your job, you can’t rest on your laurels. When other workers have been let go, job descriptions become very fuzzy. Workers are expected to do more for less to keep the ship afloat. Instead of whining, realize it’s the perfect time to sow your seed for the next season. Volunteer to do any extra work, especially outside of your department. You get wider experience, you make new contacts, and your actions get the word out that you can be relied on to go the extra mile. Once winter is over, budgets will expand (yes, even the state of California is running a surplus this year) and that’s when opportunities for promotion are at their best. Who gets the most promotions? Those who went the extra mile in the tough times.
Your Home
Millions who bought their homes in 2006 and 2007 learned the hard way: Late summer and fall in the economy is not the time to buy a home. On the other hand, those who buy in the winter inevitably get great deals and reap the benefits for the rest of their lives.
Debt
Winter and spring are the only good times to take on debt. But you have to keep your eye on the cycle. You may not get hit by the next downturn, but you never know. Either way, you have to be sure to be out of debt by the time the fall of the economy arrives.
Cash
You know ahead of time there’s a recession coming — you just don’t know when. Summer and fall are perfect seasons for earning more money, be it from overtime at work, raises, bonuses, and/or side jobs. If you avoid lifestyle inflation and simply save the money, you’ll have a cash hoard to pounce on the terrific bargains only available in and after a recession. Want new carpets for your home? If you wait till the next recession ,you can get them for 50% off. That cruise you’ve been eyeing? 40% off — and free upgrades too!
Investing
There are boo-birds out there who tell you to never “time the market”. Don’t scoop up the bargains winter brings. Poppycock.
Warren Buffett, the one who loudly preaches we should never time the market? Well, he’s also the circus barker in every recession who yells: buy, buy buy, because prices are low, low, low. He doesn’t practice what he preaches.
I look at what people do more than what they say.
If you want to buy rental property, a recession is the best time. Same with anything else of value. I borrowed in the last recession to buy investments at historic lows. After they quadrupled, I sold them, paid the taxes, and paid off the debt.
Please note I’m not advocating the bad half of market timing: Selling when you think prices have peaked. That’s a fool’s game. I’m only talking about saving up cash to scoop up some once-in-a-cycle bargains.
Business
Springtime in the economy is the best season to start a new business. It’s pretty much the only season, really. Around 80% of new businesses fail, so it’s wise to stack the odds in your favor.
If you already have a business, spring is also the best time to expand. A friend tells of a businessman here in Denver who was looking for floor space downtown during the last recession. He found a landlord desperate for tenants (as all are), who offered an entire floor for the price of half a floor. Oh, and about $100,000 worth of office furniture, left by the previous tenant who expanded in “the good times” (fall) who went under. When else will you score $100K worth of assets for free? Only in spring. To do that, though, you have to resist the (strong) temptation to expand in the good times and save your cash instead.
Think this is just theory? Quick! Name America’s largest airline! If you answered America West, give yourself a gold star. What about United, Delta, Southwest and American? Wrong.
America West, see, was a tiny regional carrier based in Phoenix. Two recessions ago Doug Parker’s company bought U.S. Airlines out of bankruptcy court (i.e. for pennies on the dollar) and renamed itself U.S. Airlines. Then, in the Great Recession, they repeated the trick. They bought once mighty American Airlines out of bankruptcy court, and adopted the name of their larger victim. But underneath the American logo and veneer beats the heart of tiny America West (and its smart CEO) who used the economic cycle to grow his company from nothing to the largest. A friend of mine did the same in a more regional industry.
This stuff is real. It can have a profound impact on your net worth…if you can be patient enough to think in decades, not days.
Timing Is Everything
When it comes to big financial moves, timing really can make a big difference. It’s not what you do but but when you do it.
Incurring debt makes sense in one season and not another. Changing jobs and buying homes, to name two examples, are good in and of themselves. But do them at the wrong time and they can set you back severely. Do them at the right time and everything will be coming up roses.
It’s not enough to just do the right things. You also have to do them at the right time.
I know.
I was Clod.
I did the right thing at the wrong time, and lost a lot of money, all because I wasn’t aware of the economic seasons. I knew the theory, but I was too impatient to wait and do things at their proper time. It was only after I turned 50 that I became patient enough to wait and take the long term view. Now I’m seriously old, and retired, and (like Clod) I can blog about all the things I learned.
Why don’t more people and businesses capitalize on the myriad opportunities a fluctuating economy brings? Two reasons. First, they don’t no any better. They aren’t aware of the info you just read. Second, they have a life. They don’t have the time to track something that moves at the pace of a glacier.
I try to address both those problems at Drop Dead Money, where I cover these ideas in greater detail (and provide strategies for you to follow during each season).
I watch the the slow crawling glacier for you. Once per quarter, I send out an email to subscribers with an update about which season our economy is in at the moment, and what you can do about it. That’s all. When you’re watching something as slow-moving as the economy, even once a quarter seems too much at times.
Everything is free. There’s no hidden agenda or sell, and unsubscribing is a one-click affair. No questions asked. I hate veiled sales pitches and come-ons, so you won’t find any of that there. J.D. has been a subscriber for a while — ’nuff said.
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Figuring Out a Great Life on a Limited Budget
About a week ago, Sarah and I sat down and took a look at our finances, something we do on occasion. We’re mostly just looking for things we can be doing better, as we’ve found that, for the most part, we’re on a very good financial path that we don’t want to upset.
For kicks, we decided to see what our day-to-day financial life might look like if we suddenly both decided to quit our jobs. What would happen to us if we were both unemployed by choice for a long period? We ran the math on our retirement and other savings and found out that we would be living somewhere close to the poverty line if we stuck with a 4% withdrawal rate on our savings and added in residual income that we would earn with no additional working effort.
This was an unusual moment for us. It was the first time that we felt like we could actually do this. We could, if we really wanted to, walk away from our jobs and just fill our hours however we wanted on the backs of the careful spending and saving and professional choices we’ve made over the past decade.
But what would that life really look like? Could we live an enjoyable life on that income level?
We concluded, after some discussion, that if we gave up some of the things that we value, we could in fact pull this off, and that it’s the relative value that we place on those things that would maintain our professional focus for the ensuing years. (Mostly, we’d have to give up some well-loved hobbies and we would seriously axe our travel plans in coming years.)
We could live a happy life on about $22,000 a year, in other words. This does include having our home paid off in full, though we would still have to pay insurance and property taxes on it.
What would that life look like, though? How can someone with modern tastes enjoy life on such a limited budget? Mostly, it falls right in line with the way we already live our lives, with a few significant alterations.
Cut almost every subscription bill right down to zero or as close to it as possible. We’d eliminate our cable bill and switch exclusively to Netflix and over-the-air channels (with Netflix being chopped, too, if necessary). We’d keep our internet bill, but go down to a lower speed, and the same would be true for our cell phone bill (less data, mostly). We’d cancel basically every other subscription that we have – things like Amazon Prime would vanish.
The thing is that we mostly use television for unwinding from a stressful professional day and without that daily stress, neither one of us would have much reason to watch television at all.
Is this a big loss? See, the thing is, it seems like a big loss given our day-to-day routines right now. I need a stable internet connection for professional purposes (as does Sarah at times), but without that… what real purpose does it serve? My main hobbies don’t involve the internet and none of Sarah’s do. I almost never watch television and Sarah usually only watches it in the evenings to de-stress, and without professional stress there’s really no need for anything beyond over-the-air channels. Most of the Prime packages I get are work-related (books for research, etc.) so that could easily go away. It’s easy to see how many subscriptions and ongoing bills are mostly necessary thanks to our careers, and eliminating most of them and reducing some of the others would not strongly negatively impact our day-to-day life.
Eliminate a vehicle. With both Sarah and I no longer chasing professional goals, we could easily eliminate one of our vehicles, reducing ourselves down to one vehicle that could transport our whole family if necessary. We’d sell or trade both cars and replace them both with the most fuel-efficient minivan that we could find.
This elimination cuts out insurance costs, registration costs, the cost of replacing a car, and so on. There’s no need to own and maintain a second car if we can get by with the other transportation tools available to us to meet our needs.
Is this a big loss? Again, it’s not a loss at all if Sarah is no longer commuting to work. Our biggest real need for vehicle redundancy is to ensure that Sarah can make it to work in all circumstances (nasty weather, a car breakdown, etc.). If that’s no longer a need, one vehicle can meet our family’s needs almost all of the time, as redundancy is far less vital. Our day-to-day quality of life would barely be impacted by the elimination of a vehicle.
Improve the fuel efficiency of your remaining vehicles. Taking little steps to make your current automobiles a bit more fuel efficient can save you a surprising amount on fuel costs, making each and every drive a bit less expensive. Naturally, using your cars as little as possible is the best strategy, but when you do use your car, it should burn as little gas as possible.
You can improve fuel efficiency by keeping plenty of air in your tires, by minimizing the weight you’re carrying in the vehicle (except under winter weather conditions, where extra weight can sometimes help with traction), by driving at the speed limit, and by driving in a fuel efficient manner by not overly accelerating and coasting and minimizing brake use when possible and reasonable.
Is this a big loss? Most of these strategies result in no real change whatsoever in a person’s day to day life. It simply means that when you do drive, your car isn’t eating as much gas, which is going to end up saving quite a bit of money over the course of a year.
Use alternative methods of transportation. Even better than using less gas is simply using no gas at all. When you have to do something outside of the house, consider using other methods of transportation to get there such as walking or riding a bicycle.
Take our current situation, for example. We live within a couple of miles of a grocery store and a library. It might be tempting to just drive there, but the truth is that riding a bike to both places doesn’t take much longer, gives me some exercise, and doesn’t burn any gas at all. I can hit the library, hit the grocery store, and get back home in not too much more time than I could in a car and it’s basically free.
Is this a big loss? It does require some changes in the types of transportation that you choose to use and if you’re not used to walking or biking a mile or two, it can be challenging at first. However, most alternative transportation methods at short distances don’t take significantly longer than using a car, provide some exercise, and have virtually no cost associated with them.
Strongly consider moving. While our current home is paid for, we are still facing a significant property tax and insurance bill each year. A smaller home – one that eliminates a bedroom, for example, and perhaps eliminates one of our “family rooms” and has a more efficient layout – would serve our family perfectly well.
Making that move would create some revenue from the home sale, enough to buy the new home and leave us with some leftover money. It would also cut our property taxes and insurance costs, which would lower our annual burden.
Is this a big loss? Honestly, it’s not that big of a loss. We essentially have two living rooms in our home, making one of them practically redundant, and we could easily trim a bedroom and reorganize our sleeping arrangements. I would no longer need a home office, which frees up even more space. While a move wouldn’t be a guarantee, I’d describe it as fairly likely if we were on a limited budget. Our day-to-day quality of life wouldn’t be significantly reduced by a move to a smaller home.
Eat mostly at home. We already eat mostly at home, but this would become even more frequent. Our biggest reason for eating out at this point in our lives is our need to stack a bunch of family appointments and activities together onto the weekends which sometimes leaves us out and about during a mealtime. With more flexible scheduling, which is what would happen with one or both of us stepping away from our careers, we would rarely find ourselves in that position.
For many families, this can be a steep threshold to climb. As I’ve noted in other recent articles, the average American family eats out more than they eat at home and the primary reason for that shift is a growing lack of comfort in the kitchen. Many people resist making food at home – even though it’s incredibly obvious how much money it saves – simply because they’re intimidated by how much time and effort it will take as an addition to their busy lives. The truth? Cooking at home actually isn’t that hard, especially with tools like a slow cooker, and the amount of money it saves is tremendous. Plus, if you start cooking and get more comfortable cooking at home, it starts to seem easier than going out to eat (I’m not kidding in the least – I’d rather make a simple meal at home than go out most days, even if the cost were the same).
Is this a big loss? For our family, it’s not a major change, so I wouldn’t describe it as a major loss. Eating out would become even more of a treat, of course, and we’d make almost everything at home (and plan picnics for our excursions). For other families, this might be a tougher challenge, but it’s one that becomes easier the more you eat and prepare meals at home.
Find free or extremely low cost hobbies and sources of entertainment. When I look at three of my primary hobbies – reading, playing tabletop games, and walking on trails – all of them could easily fold into a completely free hobby. I can fully sustain my reading hobby at the library. The hiking hobby is already basically free. The tabletop game hobby could be sustained by playing what I already have and trading for other games and attending community game nights. So, luckily, if our income were suddenly sliced, I would not have to make major changes to my hobbies, though I would have to cease many of my hobby purchases.
This might not be true for others. Many hobbies, like golfing and hunting, have a constant upkeep of expenses. Any hobbies that constantly require new supplies (golf balls, ammo, etc.) or constantly require entry fees (like greens fees) are naturally expensive hobbies and should be looked at very carefully for anyone struggling to find financial success on a tight budget.
Is this a big loss? For us, it’s not a big loss. Sarah’s primary hobbies largely overlap with my own, so we’d just utilize the library all the time for books and movies and we’d hit all of the local parks for trails. For others, it might be more of a challenge.
Expand gardening operations and consider raising chickens We currently have a small garden and that’s something I’d love to expand greatly with an increase in my free time. Our garden, as it is, is an income-positive hobby already, as we reuse seeds from previous years and plant them again for more produce. The only real cost is time and I find that time to be very meditative and valuable for my mental well-being.
When I was a child, my family raised chickens primarily for their eggs, though occasionally for eating. If you have a good location for it, chickens are actually pretty easy to raise. I would happily raise a few chickens again in order to enjoy the eggs they produce.
Is this a big loss? It would push gardening (and perhaps chicken raising) more to the front of my list of hobbies, but is that a big loss? I don’t think so. Gardening is already something I enjoy in a narrow timeframe, so giving it more time actually seems really appealing.
Buy almost exclusively store brands. This is something we already largely do, but perhaps not as universally as we could. What we’ve found is that for our purposes, most store brands are functionally identical to the name brands, with the only difference being that the store brands have a lower cost and the name brands have flashier packaging and a more familiar name. There are a few rare exceptions (trash bags come to mind), but this rule holds almost universally true for us.
Many people perceive a decline in quality when using store brands, but most of the time that decline in quality comes from not paying close attention to the name brand but suddenly looking for flaws when buying the store brand. Often, those same flaws exist in the name brand, too, but people aren’t looking for flaws in the name brand.
Is this a big loss? For the vast majority of products people buy, buying a store brand is going to have zero impact on their life versus buying a name brand. The only difference that it will make is in an occasional product where you’re already very sensitive to product performance. Most of the time, they’re truly identical, and in the cases where store brands and name brands aren’t exactly the same, you won’t notice a difference the vast majority of the time.
Cut vices down sharply. Many people have a vice of some kind that helps get them through their life. Alcohol. Tobacco. Marijuana. Maybe something else entirely. Vices often form a psychological crutch that people rely on to take the edge off of their stress and challenging feelings.
The problem is that vices are an expensive psychological crutch when a cheap one will do. Smoking might take the edge off of stress and create a brief bloom of good feelings, but so do many other practices in life (like meditation or vigorous exercise). Not only that, those alternative methods of bringing about positive feelings and de-stressing are often far cheaper than vices. There might be a case for occasional social use of vices, but when you’re using them when at home alone, there are better methods for de-stressing that are more effective, less expensive, and have much better long term health consequences.
Is this a big loss? Cutting a vice out of your life is hard, particularly when you have daily routines built around them or they’re physically addictive. However, finding new ways to handle daily stress and negative feelings, particularly ones without a constant financial cost, is going to reduce your expenses drastically while also making it easier to deal with those feelings.
Make your home as energy efficient as possible. Your home gobbles energy, as witnessed by your monthly home energy bill. One effective way to continue leading a great life on a low budget is to find every possible way to trim that energy bill, and one great way of doing that is to make your home incredibly energy efficient.
There are lots of methods for doing this. You can replace all of your light bulbs as they burn out with LED bulbs. You can air seal your home by caulking your windows and adding weatherstripping around external doors. You can add more insulation to your home, too. The list goes on and on.
Is this a big loss? Since you’ll essentially not notice any of the energy-related changes at all around your home, it’s a very big stretch to suggest that any such changes are a loss at all.
Maintain your home, your car, and your expensive appliances. One big expense that often hits many people when they’re trying to live a great life at a low income is the unexpected expense of something that you rely on breaking down. A car breakdown or an appliance failure at an unexpected moment can thrust a huge expense at you at a moment when you least expect it.
The best solution that a person can apply to this is to simply keep your stuff maintained. Follow the maintenance schedule for your automobile as closely as possible (you’ll find it in the manual) and do as much of the maintenance yourself as you can. Look into common steps for maintaining your home and your largest appliances and follow them on a schedule as well. Put things like replacing the furnace filter or vacuuming behind the fridge on your calendar and set aside a little time to do those things and your home, car, and appliances will last far longer and result in far less unexpected expense.
Is this a big loss? It takes time, sure, but it’s time that you’re not spending having to figure out how to deal with a broken-down car or a failed appliance. It’s time you’re not spending shopping for a new car or a new appliance. I’d far rather spend some time doing a little low-cost or zero-cost maintenance than to spend time shopping for a new appliance and dropping hundreds or thousands of dollars.
Final Thoughts
Almost all of the strategies above have little real impact on a person’s life, particularly if they have a bit of extra time available. I consider these strategies to be the key part of anyone’s plan to deal with life changes that result in a lower income, whether that change is by choice or otherwise. They can help you through adjusting to a period of unemployment, an early retirement, a lower-paying job, or any other shift that may lower the stress and challenge of life but decrease one’s income.
In the end, lower income is not a ticket directly to misery. Instead, it’s an opportunity to look closer at the life routines we all take for granted and adjust them in a way that enables us to skate right through the harder part of life’s changes and embrace the benefits.
Good luck!
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There’s a Right Way and a Wrong Way to Take on Holiday Debt
You probably know that taking on extra debt during the holidays isn’t the best idea. Newly incurred debt can be bad for both your wallet and your credit score.
If you can manage to pay for your holiday purchases without spending more than you’ve already saved up for the purpose, then, by all means, you should do so. However, if you’re definitely going to finance some of your holiday shopping, you should at least try to do so as wisely as possible. Here are some tips to limit the damage to your credit this holiday season.
Consider a Personal Loan
While any new debt has the potential to harm your credit scores, the variety of debt you choose can mitigate your damages. Certain types of debt are worse for your credit than others.
For example, revolving debt (aka credit card debt) can damage your credit scores significantly, even if you make all of your payments on time. Statistics clearly show that people who incur large balances on their credit cards are riskier borrowers than those who don’t. So the strategy, if it works for you, is to avoid this kind of debt by using a personal loan rather than credit cards to pay for holiday purchases.
A personal loan is installment debt – which means you pay it back in defined increments, like a car loan or student loan – which is the key to this strategy. Credit scoring models treat revolving debt very differently than they treat installment debt. A $5,000 personal loan will likely have no negative impact on your credit scores if you pay it back reliably. Conversely, a $5,000 credit card balance, especially if that balance uses up a large portion of your credit card limit, could be viewed very negatively from a credit scoring perspective.
For this reason, given comparable interest rates and other terms, it would almost certainly be better for your credit scores if you took out a personal loan to finance your holiday expenditures instead of taking on new credit card debt for those same purchases.
Map Out a Debt Payoff Plan
If you’re going to take on new debt during the holidays, map out a payoff plan first. Do you plan to wipe out the new debt within three months? Six months? Or longer? If you don’t know the answer to this question, then your holiday purchases are going to cost you considerably more because of the interest you’re going to pay while you carry the debt. Your goal is to determine how much extra you’ll need to pay each month to exhaust your newly acquired debt as quickly as possible.
Even if you intend to pay off the debt with a bonus or tax refund, put your plan in writing – this can make you more likely to stick with your budget.
Once you’ve paid off the debt, you might even consider starting a special savings account so that hopefully you won’t find yourself in the same situation when the holidays roll around next year. Paying 16% APR on your holiday purchases — the average interest rate charged on a general use credit card — is not the best money management decision.
Avoid Retail Store Credit Cards – They’re Even Worse
As a final word of advice, you should know that it can be a very bad idea for your credit to use new retail store credit cards to finance holiday purchases.
Just like traditional credit cards, large balances on retail store cards can lower your credit score. However, since retail store cards are notorious for their low credit limits (coupled with generally high interest rates), even a relatively low balance on a retail store card could max out or nearly max out your available credit limit.
When you combine the probability of a maxed-out card with a new credit inquiry (prompted by opening the account) and throw in a high interest rate to boot, a retail store card could be a trifecta of trouble for your credit in the new year.
Related Articles
- Four Ways Holiday Shopping Can Crush Your Credit
- This One Factor Affects Your Credit Score More Than Anything Else
- How to Handle Post-Holiday Debt
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.
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Finally, I cooked eggs right
Well, I finally did it.
This might be my greatest accomplishment of 2016
Sometimes I think the internet makes us feel bad about ourselves. If you’re not “hustling” and doing yoga and scaling a bazillion-dollar business, it feels like you’re not good enough.
But I think wins come in all sizes — big wins and small.
I feel good about my eggs. It took me over a year to get good. I don’t really care how many people made fun of me for those eggs (trust me, I know how horrible they look). I’m a little slower than other people at learning to cook, but I’m happy that I kept going and figured out how to make eggs.
Success came in the form of patience disguised as an egg.
I think about the business decisions I make now, the big ones. I never could have imagined making them years ago. And in truth, I wouldn’t have been able to make them — I wasn’t ready then. But it took baby steps to make them, to get to the level where I earned the right to make bigger decisions.
What are you proud of? It doesn’t have to be making a million dollars.
Is it spending time with your family last week? Or welcoming a friend who needed a place to stay? Or working hard on your business over the weekend?
Let me know in a comment below. I’m curious.
Finally, I cooked eggs right is a post from: I Will Teach You To Be Rich.
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A Loan to Build a Dream On: Where to Find Small Business Funding
You want to start a business. And you have more than a wisp of an idea. You know what you’re selling, and how you’re selling it, and who you’re selling to. You’re ready to go.
Well, almost ready. You need cash, and as the saying goes, it takes money to make money. And you don’t have it. So where can you get a business loan? You have several options, from the conventional and fairly obvious to something resembling a Hail Mary pass.
Go to your bank – or a credit union.
This is often not as easy as it sounds. Sure, banks lend money for businesses all the time, but you need to have good credit, and preferably excellent credit, and even that may not be enough. It helps if you already have a business – and if you don’t, a loan officer will want to see a business plan. A really, really detailed business plan.
All of that said, it’s best to go to the bank first, without a business plan, and it’s fine if you haven’t written it yet, says Hal Shelton, author of “The Secrets to Writing a Successful Business Plan.”
Shelton says that when you’re approaching the part of the process where you know you’ll need revenue to start your business, you should set up a meeting with your bank’s small business loan officer (and it’s always best to start with the financial institution you currently bank with, since you’re a known entity, Shelton says).
“I encourage my clients to go in with no business plan,” says Shelton, who is a mentor at SCORE, a well respected national nonprofit that offers business education and free mentoring. (In fact, if you’re still stuck on how to get small business funding after reading this, I highly recommend meeting with an advisor at SCORE and getting whatever advice you can. I’ve been writing about small business issues since the 1990s, and I’ve interviewed numerous business owners over the years who have sung the nonprofit’s praises.)
But back to meeting with your bank’s small business loan officer: Shelton suggests that you explain that you’re still working on your business plan, and that you’d like to know if there are any pertinent details the bank would like to see in the plan that you’ll eventually give them.
This way, while you work on your business plan, you’ll be tailoring it to your bank lending department’s tastes and requirements.
Now, if you develop your business plan, hand it over to the loan officer, are still turned down, Shelton recommends hitting up other banks.
Or you could try a local credit union, which are virtually indistinguishable from banks but have a reputation for being more community friendly, easier to deal with, and more willing to lend than a giant corporation.
“Ultimately,” Shelton says, “the bank wants you to demonstrate that your loan can be paid back, with interest, on time and without hassles.” That’s true of a credit union, too, of course.
If your bank or credit union won’t give you a loan, there are other ways to get money from a bank. But that would require overpowering a guard and getting past the alarm system, so, uh, no, I wouldn’t recommend that. But in all seriousness, try this next idea…
Apply for an SBA loan.
You might be able to get a small business loan through the U.S. Small Business Administration (SBA). You can get more information on what you need to do to apply for a loan here.
SBA small business loans range from the fairly small microloan of $5,000 to as much as $5 million, according to the SBA website. The average loan, however, is $371,000.
- Related: Small Business Guide to SBA Loans
As with approaching a bank for a loan, you’ll want a business plan and a solid credit history (if your credit score is something of a dumpster fire, you aren’t likely to be handed a huge check).
And if this doesn’t work either…
You might try crowdfunding.
This crowfunding practice – of asking people, from family members to strangers, to give you money to get your business going, sometimes by offering them a reward, pre-ordered merchandise, or piece of the company – is definitely worth considering.
You’ve likely heard of Kickstarter, the best known of the crowdfunding bunch. But there are many, many crowdfunding sites for all different types of businesses and industries and entrepreneurs. “Nobody knows how many crowdfunding sites there are,” says Shelton, who hazards a guess that there may be 500 to 800 of them.
He suggests that before you jump into the first crowdfunding site you find, you check out CrowdsUnite, a comprehensive crowdfunding education site and directory.
You could apply for a loan from an online lender.
Please be careful here. Some lending services, like peer-to-peer lenders, have solid reputations. (Shelton is generally a fan of peer-to-peer lending sites.) Lending Club and Prosper Marketplace are two of the biggest names in peer-to-peer business loans, if you’re drawing a blank at where you might go.
But there are also plenty of online alternative lending services that are little more than payday loan stores online, and if you’re starting a business, the last thing you need is to have a high-interest-rate debt on your books.
Here are some other small business funding ideas.
I’m just going to toss out a number of ideas, quickly. Otherwise, we’ll be here all day. If you’ve already looked into everything I mentioned above, you could also:
Raid your retirement account. I wouldn’t. You’d better really believe in your business, and if you believe in it that much, you’d think someone would be willing to invest in your company. So why am I bringing this up as an option? Because it is an option. I didn’t say it was a good one.
Take out a home equity loan. Rather than my retyping that last paragraph, you can simply read what I said about raiding your retirement account. It’s an option, not a good one.
Enter a business plan competition. Some universities do that, and then you end up winning funding for your business. See, writing a business plan can help you out in a lot of ways (it’ll also help you determine exactly how much you need to borrow).
Apply for a residency in a business incubators. These are often hard to get into, but many communities have them. You generally get, if not funding for your business, a cheap place to set up your business and, often, access to things you’ll need to run your business, like free phone and internet service.
If none of those ideas are working for you, you could try working piecemeal. That is, as Shelton puts it, “You could work as far as you can on your business without the money you need, far enough to get some more traction and then go back to your bank and ask for a loan.”
In other words, if you can’t get a loan, don’t give up. You’ll likely get it. But it may take awhile. And that should be okay with you. It’s that patience, persistence, and passion you have for your business idea that will eventually inspire a lender or investor that you’re worth lending money to.
Related Articles
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Monday, 28 November 2016
Questions About Eating Out, Keurigs, Juicing, Hobbies, and More!
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Locking in gains?
2. Trustworthy sources of information
3. Giving up on old car
4. Making money from a hobby
5. Eating out is normal?
6. Preparing for automated workforce
7. Having control over your life
8. Frugal Keurig for the holidays?
9. Musical instruments for children
10. Starting a Roth IRA
11. Cheap juicing?
12. Preparing for presidential change
Based on some recent reader feedback, it’s probably worth taking a look at The Simple Dollar and who writes for it.
I’m Trent Hamm, the primary writer for The Simple Dollar. The majority of the content that comes out on The Simple Dollar in a week is written by me. I founded the site in 2006 and have been writing for the site ever since.
In 2011, I sold the site, mostly because management of the site was taking up so much of my time that I was no longer able to write, which was the part of The Simple Dollar that I enjoyed the most. Part of the arrangement was that I would stick around over the long term as the primary writer for the site.
However, it’s a pretty poor idea to have me be the only writer for the site. What happens if something happens to me and I’m no longer able to write? I might get sick or get hurt or just outright quit. So, naturally, they want to have other writers in place to take up the reins if something unexpected or undesirable were to happen.
(I’m not unhappy in the least with the owners of the site. They give me almost complete free reign to write about whatever I think is useful and productive personal finance advice. The only guidance I’ve ever received from them are some vague word count targets. They’re completely hands off in terms of editing or content of my writing.)
Sometimes, people read the site and aren’t aware that two different articles on the site are actually written by different people. Although the other writers and I tend to agree on most points, you’ll occasionally find some areas of disagreement, such as whether or not it’s a good idea to buy used furniture (I wouldn’t buy anything upholstered unless it came from a very reputable place, for example). You also might find changing viewpoints from the same writer over time – I know that I don’t fully agree with every personal finance perspective I had several years ago.
So, if you find a specific point that doesn’t seem to match up with something else you read in another article, make sure who those articles are written by and also whether they’re written on similar dates.
Q1: Locking in gains?
My brother was insisting over the weekend that everyone should be locking in their gains because the stock market is so high. He was telling everyone that they should move their investments into bonds and cash and real estate and keep them out of stocks until they’re quite a bit lower than they are right now.
This makes a lot of sense in the “buy low sell high” way but you have always advocated for “sit and forget it” strategy. What do you think?
– Terence
Timing the market – the “buy low, sell high” strategy, in other words – only tends to look good in the rear view mirror. With the power of hindsight, we can point to the “highs” and “lows” of the stock market and know when we should have bought and sold, and when you make calculations based on those optimum dates, yes, you’re going to make more money than you would have following almost any other strategy.
The problem is that it’s essentially impossible to predict the “bottom” and the “top” as they are happening. Yes, the stock market is at or near all-time highs right now, but that doesn’t mean that it won’t continue going up from here. It might do that. It might go down. It’s essentially impossible to predict.
The best thing an ordinary investor can do is buy stocks and hold them for the long term and then sell them only when they actually need the money or when they’re following a long-term strategy to move that money into something less volatile. Unless you are a day trader or someone deeply focused on the daily shifts of a market, you shouldn’t be making moves based on the ups and downs of that particular market. In fact, the day-to-day values shouldn’t matter much at all to you.
You should just sit tight with your current strategy, in other words.
Q2: Trustworthy sources of information
I’m feeling highly disillusioned with the media recently and find myself not trusting anything I read from any source. How do you find sources of information that you trust enough to actually use their information/advice for personal decisions?
– Mal
In general, I don’t trust the “news” much at all, especially in terms of making personal decisions. I’ve found again and again that news tends to be inaccurate. It’s often written in a high-pressure deadline environment where people are racing to get a “scoop” and to grab the attention of a particular audience. It’s often not factually correct and written from a particular slant.
Instead, I tend to trust long-term analysis with a lot of sources much, much more. I tend to trust well-regarded books that are well-sourced or books that make an argument that explains their reasoning in depth. I’ll trust a book like Your Money or Your Life or The Bogleheads’ Guide to Investing much more than I will trust an article hyping some “trend” at the Wall Street Journal. In terms of periodicals, I tend to trust the writing in feature articles much more than “quick takes,” as they’re usually much more in depth with a lot more research behind them.
Part of the reason for this is that I don’t make meaningful life decisions or make up my mind about issues without a lot of information, generally from several different sources, and I tend to trust books and long-form reporting more than anything else. If a source has a reputation of providing “news” and opinion that is slanted toward a particular political viewpoint, I tend to regard it less, to the point that I don’t bother reading it. Every news source has some biases, of course, but it’s pretty easy to eliminate ones that have excessive bias.
Q3: Giving up on old car
When do you know it is time to give up on an old car? I have a 1998 Mercury Sable with 190,000 miles on it. I use it for a 9 mile round trip commute to work. I have had several major repairs done to it but none recently. It seems to run fine. But I was talking to a mechanic recently and he told me without looking at the car that late 90s Sables rarely last that long and I should think about trading it. Seems like I should wait for warning signs from my actual car to do so. What should I do?
– Tammy
My honest suggestion is that you should either be confident enough about what’s under the hood of your car to do the maintenance work yourself or you should be taking your car to a trusted mechanic for all of your maintenance work (and that means not a “quick oil change” place). Following a maintenance schedule and paying attention to what you see under the hood and what you hear when you’re driving is the key to maximizing the life of a car.
You’re correct: there’s no real reason to trade off a car until there are warning signs of major problems or repairs in the future. A good repairperson will be able to tell you of those things in advance and you’ll be able to notice early signs yourself if you’re following your own maintenance schedule and listening and paying attention to your car.
Interestingly, my wife had a 1999 Mercury Sable that she drove to about 175,000 miles before trading it in on her current car, a 2009 Toyota Prius. It served her well until the last few thousand miles or so.
Q4: Making money from a hobby
My favorite hobby in the world is to go hiking on trails. What I love to do is go to a fresh new state park, hike on trails until I find somewhere out in the middle of nowhere, eat a lunch out of my backpack, read for an hour or two, and then hike back. It’s a great way to spend a Saturday.
While this is almost a zero-cost hobby, there are some expenses involved. I am trying to think of ways to cover those costs. Any thoughts?
– Jeff
One suggestion that immediately comes to mind is to get a GoPro camera and attach it to a hat that you wear while hiking. Record video of your entire hike (turning it off when you stop to read) and then, when you have a free evening, edit it into a ten minute video or so giving the highlights of your hike. You can use simple video editing software to add basic narration to the video and some video captions and the like.
You can then take this video and upload it to Youtube, enabling ads. Label it with the name of your video series along with the name of the park and trail that you walked.
You’d be surprised how many views this kind of video would get. I often look for Youtube videos of trails and things like that when considering a trip to a state or national park and would probably end up watching your videos. For you, the only thing that would change is that you’d have a tiny camera on your hat and you’d spend some free time on weeknight evenings editing videos.
You could even make some “meta-videos” covering all of the trails in a particular state park and giving recommendations to new hikers while videos from the various trails are running. I’d definitely watch this type of video.
Q5: Eating out is normal?
I used to think that your comments about eating at home to save money were kind of silly. I grew up eating at home and at my first job that’s what most people did. Everyone bought leftovers to work and we usually ate leftovers together in the break room.
Switched jobs in September and now everything is completely different. Everyone goes out for lunch every day. I bring in my leftovers most every day but I eat alone or with one old janitor guy.
It turns out that almost none of my coworkers ever eat at home. They eat out for literally every meal. The only time they eat at home is when they bring home some leftovers from a restaurant meal and microwave them. I suggested having a dinner party and they all looked around like I had suggested something insane.
Turns out that norms are different everywhere you go. I go out for lunch now about once a week just to talk to coworkers but I still would way rather eat leftovers and I do almost every day.
– Jane
I worked in two different office environments over the years. One of them was pretty mild in terms of going out for lunch – it was perhaps once a week and even those lunches were moderately priced. The other was somewhat more frequent, but even then, leftovers weren’t seen as anathema. Having said that, I hung out with a young professional group for a while and almost none of them ate at home ever. I don’t believe they even took home leftovers at restaurants. I often ate dinner with them during my earliest professional years (transitioning slowly to eating dinner with Sarah after our marriage).
In other words, I don’t think it’s unusual at all to find professionals – particularly younger professionals – who just don’t eat at home or prepare their own food. Quite often, it’s a revelation to young professionals that it’s way cheaper to prepare your own meals at home rather than eating out, but even then, the idea that cooking at home is somehow hard adds resistance to eating primarily at home.
It’s not hard. It’s actually pretty easy. Once you become practiced, it’s usually easier to make something simple at home than to eat out. I’d far rather make most simple things at home than to eat out.
The problem is habit. Many people get into a habit of eating out for every meal and thus moving away from that habit is hard. It’s like breaking any other habit. People are creatures of routine.
Q6: Preparing for automated workforce
I am 34 years old and currently work as a lab tech for [a large agricultural company]. I have been reading a lot about automation coming to more and more industries and it has me concerned in a lot of ways. I am worried to a small degree about losing my own job but in a much larger degree about what rampant unemployment in the future will bring about. What can I be doing now to prepare for an automated workforce?
– Ken
There are several things you can do.
One big thing you can do is get yourself into the strongest financial position possible while jobs are still prevalent. If you have a lot of money in the bank, you can handle societal changes that might have a negative impact on your potential employment. You can just walk away.
Another thing you can do is pursue careers in areas that are hard to directly replace with automation. Creative careers are definitely one area where this is true. Software engineering will almost assuredly remain a hot field. I would avoid any career where automation is clearly on the horizon.
You should also diversify your career options, if possible. Start a side gig in an area very different than your current career so that if one of them falters, you can rely on the other one. It’s great advice for anyone.
Q7: Having control over your life
I recently saw an interview somewhere where the interviewer asked the person what they thought success was and the person thought that success was measured by the percentage of one’s life that a person has control over. Made me think about financial success and how it gives you a lot more control over how and where you work, household chores, etc. Thoughts?
– Amy
I agree completely with that sentiment. Almost every major professional and financial choice I’ve made in the last decade has been to expand the amount of my life that I have control over.
Right now, I have a job where I can basically write whatever I want and I have no set “hours” other than meeting due dates and word counts. I can work in a coffee shop in the morning or in my sweatpants in the basement late in the evening or whatever else I want to do. I am able to be at home every day when my kids leave for school and there when they get home from school, with the ability to focus on them.
To achieve that, I had to give up income. There’s no two ways about it – I would be earning a lot more money if I sacrificed some of that freedom and control. It’s not worth it for me. We live a life that doesn’t require a lot of income, so it’s a trade that works. I might not have tons of stuff, but I have a lot of control over my life. That’s a trade I’m extremely happy with.
Q8: Frugal Keurig for the holidays?
So my mother has not subtly hinted that she wants a Keurig coffee pot for Christmas. Most days she only drinks one cup of coffee so having a full coffee pot seems like a waste. The thought of hundreds of more of those plastic cups in the landfills bothers me a lot as does the continuous expense (almost $1 per cup? at home? seems like a ripoff). Is there a better way to set up single cup brewing that’s easy for my mom?
– Nina
For starters, Keurig makes a reusable filter that works in their coffee pots called the My K-Cup. You just refill it with whatever coffee you prefer, pop it into the Keurig coffee pot like a normal pod, and then instead of tossing it when it’s done, you just wash it, let it dry, and reuse it. Keurig makes an official one and there are many unofficial options.
Assuming your mother lives alone and is only ever going to make one cup at a time, I’d get her a very small K-50 pot, which is very inexpensive and works with the reusable K-Cups. It’ll fit nicely in almost any kitchen and does work with the disposable K-Cup pods if you so choose.
In other words, a good gift idea for your mom is to give her a K-50 and a couple reusable K-Cup pods so she can fill them herself with whatever coffee she likes. If she chooses to use the individual pods, that’s her choice, but you’ve given her a path to less expensive and more environmentally friendly coffee options.
Q9: Musical instruments for children?
My oldest child started in band in the fall and got a “loaner” instrument for the first semester but now he wants to continue and we’re faced with buying or renting an instrument. The local music store rents out instruments for $40 a month which seems expensive. We have found several other options. We have found used instruments on eBay in the $200-300 range. We also found new instruments in the same range but they seem to be imports and have some reviews where the instruments broke easily. A new high quality instrument is really expensive. Are there factors we are not thinking about? What do you recommend?
– Stephen
If you’re confident that your child is going to stick with it for more than another year, then buying is obviously the better choice. It only takes about eight months of renting at those prices to exceed the cost of owning a used instrument or a new low-quality instrument.
My honest recommendation would be to go used here. Look for a used instrument from a reputable eBay reseller that’s from a reputable manufacturer, or else see what used instruments your local music store has in stock. Most used instruments are in surprisingly good shape – they often come from people who played an instrument in school for a while and then gave up on it, so they’re not heavily practiced.
We’ve had two success stories following just this practice (both flutes) and so our home has two wonderful used flutes that cost us far less than a year of renting a flute.
Q10: Starting a Roth IRA
My father announced at Thanksgiving that he’s starting a Roth IRA for each of the children for Christmas with $1000 to start. We are supposed to open an account before Christmas and then we will be gifted the $1000 for seed money. I have been thinking about a Roth for the 9 months or so I have read your blog. Recommendations for opening one?
– Tammy
In a word, Vanguard. They’re the investment house I trust the most.
I’m assuming that once you’ve opened your Roth IRA, you’re going to at least contribute a little to it. Even if you just contribute a tiny amount, like $10 a week or something, that money will build up surprisingly fast.
For a first investment with Vanguard, your choices are fairly limited with a $1,000 initial investment. If I were you, I’d put it into Vanguard STAR and then start contributing a little each week or month. When you get to the $3,000 mark, move it into either a Target Retirement Fund or into the Vanguard Total Stock Market Index (if you’re in your twenties, that’s a perfectly good choice).
Good luck. That’s a great gift from your father.
Q11: Cheap juicing?
My brother got me a juicer for our holiday gift exchange (a Breville). While I like the idea of juicing in concept, it seems to me that it’s just cheaper to eat the fruit, right? I sat down and did the math on what you have to put in there to get juice and it seems like you’re basically just removing the pulp. It seems antifrugal to “juice” an apple instead of just eating one.
– Axel
Choosing between juicing, blending, and simply eating the raw fruit mostly comes down to your preferred way of consuming it. Juicing fruits and vegetables makes for a juice – it’s going to be a relatively thin liquid that contains some of, but not all of, the nutrients in the vegetable or fruit. Blending means you’re drinking the fruit or vegetable in a smoothie form, often with enough water or yogurt or other things added to make it into a thick drink. Or you can just eat the raw fruit.
It comes down to personal preference. Personally, I prefer a thick smoothie versus juice, any day of the week. It’s more filling for virtually the same calorie count and I think it tastes better and feels better in the mouth. Some don’t like the thickness, though, and prefer juice. Others – like, perhaps, yourself – prefer just eating fruits and veggies.
Your brother probably gave this to you because he finds value in juicing or hopes that you’ll adopt a healthier diet than what he perceives that you currently have. Maybe it doesn’t work for your current dietary choices, but it is a caring gift.
Q12: Preparing for presidential change
I don’t want to turn this into a political shouting match but I am wondering what you think people should do to prepare for the upcoming change in presidency. Are there smart financial moves that people should be taking?
– Eldon
Regardless of your political feelings, the fact remains that we are about to experience a shift in personnel not only in the White House, but also in the House and Senate, and those shifts will have some impact on our lives.
The problem is that we don’t actually know yet what kind of impact those changes are going to have. We don’t know what bills will be proposed. We don’t know what laws will be passed. We certainly don’t know the long term economic impact of those changes.
My advicetoday is the same that it is after every major election: don’t change anything suddenly. Instead, wait and watch. See what kinds of actual changes are getting passed and assess for yourself if those changes warrant any personal finance changes for you.
I think that making financial moves in advance of what you think the next president might do is very premature considering that the new president has not taken any action yet and will not do so for more than a month. Be patient, stay with your current course of action, and only make changes if the changes in our nation’s policies actually warrant it.
Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.
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Should You Invest Your Short-Term Savings?
A lot of people hate the idea of keeping money in a savings account. They feel like it’s just sitting there, earning next to nothing, and that they’re missing out on getting better returns elsewhere.
Have you ever felt like that?
It’s a feeling that makes a lot of sense. After all, there really IS no reason to settle for worse returns when you could be doing better elsewhere. A better return means you reach your goals faster, and isn’t that the entire point of saving money?
Of course it is. But there’s always a trade-off.
Investing makes a ton of sense for long-term goals like financial independence because the downside is minimal and the upside is large. If you do the hard work of sticking with your plan through the ups and downs, you’re likely to come out ahead.
But it’s a lot murkier when you look at short-term financial goals, like the house down payment you’d like to make in a couple of years or the emergency savings you might need at any moment. Does investing make sense in those situations? How can you get reasonable returns without sacrificing the goals you want to reach?
Here’s my take.
Three Reasons Not to Invest Short-Term Savings
In most cases, a simple savings account or CD is the best short-term investment for money you’ll need within the next three years.
I know, I know. It’s not exciting, it’s not sexy, and it certainly won’t make you rich. There are three good reasons why short-term investments just aren’t worth it when your timeline is so short.
1. There’s Too Much Uncertainty
The big trade-off with investing is the uncertainty. Sure, you may find yourself up 10% for the year, but you could just as easily find yourself down 20% or more. And since you have no control over that timing, it’s very hard to make any definitive short-term plans. What if the stock market plummets a few months before you want to buy your house? What do you do then?
With a savings account, you know exactly how much you need to save and when you’ll reach your goal. You also know that the money will definitely be there when you need it. It makes planning your life easy and certain.
2. The Difference Isn’t as Big as You Think
Over short time periods, the amount you save matters MUCH more than the return you get. Even big differences in return likely won’t matter all that much.
Let’s say that you want $24,000 for a down payment on a house that you’d like to buy in two years. If you save $1,000 per month and earn 1% in a savings account vs. 8% in an investment account, after two years you’ll have:
- $24,231.41 in the savings account
- $25,933.19 in the investment account
That’s a difference of about $1,700. Or to look at it another way, you could save $65 less per month and still reach your goal if you get an 8% return instead of a 1% return. But there are a few words of caution:
- If you really need the extra $1,700, you could guarantee it by contributing an extra $70 per month to the savings account.
- If you save less each month and/or save for a shorter period of time, the difference between the two returns will be smaller.
- That 8% return is not guaranteed. You could actually end up with less money from investing if the market takes a tumble right when you need to withdraw those funds.
The bottom line is this: Yes, investing gives you the chance to have more money at the end of it. But we’re not talking about being rich versus being poor. We’re talking about fairly small differences relative to your financial goals.
3. You Can Avoid the Emotional Roller Coaster
It’s one thing to look at the numbers and think to yourself that the downside is worth the upside, but actually experiencing the ups and downs of investing is a whole other thing.
How will you feel if the stock market tanks and you see your down payment fund cut in half — potential postponing your dream of home ownership for years? What if your emergency fund suddenly loses $4,000 at a time when you’re feeling uncertain about your current job stability?
Remember, a better return isn’t the goal. The real goals are the things you want to do with your life, and investing means that you’ll constantly be worrying about whether or not you’ll be able to do them.
When Short-Term Investments Make Sense
With all of that said, it’s not like investing is bad. Investing is a fantastic tool in the right situations, and here are two cases where it can make a lot of sense to invest your short-term savings.
1. Your Timeline Is Flexible
Maybe you’d like to buy a house in two years — but it’s not a big deal if you have to wait three years. If your timeline is flexible and you’re okay with the possibility of having to wait longer to reach your goal, then the potential upside of investing may be worthwhile.
2. You Have More in Savings Than You Need
Let’s say that you need $30,000 to equal a six-month emergency fund, and you have $60,000 saved. In that case, you could invest the money, hope for a better return, and still likely have enough money in your account even if the stock market tanked right when you needed it.
In other words, if you can afford to lose a significant amount of your savings and still be on track for your goals, then the upside of investing may be worth it.
What Are You Saving For?
Whenever you’re making a decision like this, it’s helpful to step back and remind yourself of the specific outcome you’re actually hoping for.
In this case, you’re saving for a specific personal goal because you feel like it will improve your life in some way. THAT’S the outcome you’re looking for. The return you get is only relevant to the extent that it helps you achieve that goal.
Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.
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