Thursday, March 29, 2007

how to save money

i read all the time about how to save money -- just skip your morning coffee, brown bag your lunch, quit smoking -- but, to me this advice is good for a week, maybe two, and then you fall back into your old habits. it's a lot like new year's resolutions or dieting or other things that are bright and shiny when they are new, but get old fast.

the only real way to save money is to make it a priority in life. ha! that's definitely one of those things that is easier said than done. look, i bring my lunch to work, i drive a used car, i eat out only once a week, but it took a long time for me to realize and prioritize these things in my life. what it really took was for me to understand that the pleasure or convenience of these things was not really worth the money because the cheaper alternatives were not sacrifices: my lunches are just as good as the food i could get around my office, my car is nice, but not too nice, and my one meal out is usually a great one.

there's more to saving than just saying it, of course. i have several accounts where money is taken out of my check automatically. i also use electronic transfers to move money out of my primary checking account. it makes it easier to avoid spending if the money is already spoken for, but i do leave a good amount in my primary checking account, but i don't consider all of this money spending money. it's just way too hard for me to budget exactly what i am going to spend from month to month. that means some of my savings spills over into my spending accounts. how do i resist the temptation to go and spend all of it? honestly, i just do. there's no magic to it, unfortunately, but at some level learning how to do that is probably a good exercise. again, it's like dieting. back when i had a weight problem, i tried a lot of things -- low carb diets, counting calories, packaged meals -- but what eventually happened on all of them is that i would start craving something and crack and never get back on track. what worked for me was finally learning about nutrition and exercise and applying those concepts to my life. instead of depriving myself, i would allow myself a taste of this or that. i think the same concepts can be applied to your financial life.

if you feel like you're depriving yourself, it's never going to work, so relax a bit and learn about financial matters. don't corner yourself into the low-carb equivalent of a financial diet. learn how to spend and save your money and you'll be better off for it.

Sunday, March 25, 2007

millions made simple

i was thumbing through men's health today and came across some financial advice by ben stein, an article entitled millions made simple. i consider myself a fan of mr. stein -- i think he's a smart guy who has probably done pretty well for himself -- so, i dove in and read the article.

for the most part, everything he says is true, but what it really tells you is what to do, not how to do it. for instance, he mentions that if you are 30 and making 50k a year and you expect to live until you are 80, you'll need 270k a year between 65 and 80, or $4,000,000. that sounds like a lot of bucks. of course, he's adjusting for inflation -- 50k in today's dollars will be roughly equivalent to 300k 35 years from now. fair enough, but it's really hard to come to terms with those figures. but, how the heck can i get my hands on 4 million dollars?

i guess the advice in the article that is closest thing to a 'how-to' is his 5th step -- keep on buying. what he is refering to is, of course, buying broad index funds, consistently and essentially forever. based on a 8% average return, this is the way to take part in compound interest and have your money work for you.

hey, it's great advice, and it'll even turn you into a millionaire if you have enough money and enough time, but $4 million still sounds like a lot of dough, and i'm going to need more help if i'm going to make it.

Saturday, March 24, 2007

who wants to be a millionaire

i just read an article in the paper that indicated that there are roughly 2.9 million millionaires in the united states today. that translates roughly to 1% of the us population and puts you in some decent company, especially considering the awful savings rate of us americans. now, a million bucks is a good deal of money, but it doesn't mean that you can simply go hog wild and forget about your finances.

i once estimated (in my younger days) that i would need about 2 million dollars to retire -- i could easily live off the interest and not have any financial worries. i don't remember what i used as a rate of return or rate of inflation, but it still seems like something that would be easily doable. heck, if you're making a relatively safe 5% on that, you'll have 100k in spending cash each year without having to tap into your nest egg, though to be honest, i probably estimated earning closer to 10% on it.

i've come to my senses, though. while having 2 million dollars available to fund my retirement would be nice, it certainly is not a goal of mine. my goal in retirement is to have an account that i can safely make withdrawals from for the rest of my life. how large this fund needs to be depends on my expenses. if i could live off of $25,000 per year, a fund of $500,000 might be what i need. if i needed $100,000 per year, i'd need a significantly larger account to start from. the bottom line is that i won't be living off interest entirely. my retirement account will continue to earn interest, but i'll also likely be eating away at the principal, so i'll have to have some solid data about how much i spend to know how long my money will last.

to that end, i've had to break out of the typical paycheck to paycheck mentality. fortunately for me, i was able to break out of that mold many years ago and start building something for my future. now, how about you?

Thursday, March 22, 2007

emergency fund

ask any number of people about an emergency fund and you are likely to get just as many responses. some say that you need 3-6 months of living expenses in your emergency fund, others say a year of take home pay, and others will tell you something entirely different. don't even ask about where you should keep your money, because you'll get an equally confusing array of suggestions.

here's my take on the whole thing. an emergency fund is a fund that you need in the event that you lose your job. period. end of story. it's not something that you would tap into if you incur a sudden unexpected expense. it is used only in the event that you lose your job and you need to pay your bills. that's it. people will tell you that it's okay to use for this or that or the other. a popular one is medical emergencies. sorry, bub, that's what insurance is for.

now, on to the specifics of your fund. your fund should be based on your total monthly household pay (you need to consider your spouse's earnings) and you should fund it so that in the event that you lose your job you have the equivalent amount of money available to you as you would while you were working. so, you would need to have however many months stashed away as you think it would require to find a new job. in some cases that may be 1-2 months. in others, it may be a full year. a rule of thumb is that for every 10k you make, it will take a month to find a job. so, if you make 40k, you should budget for 4 months to find a job, and, as such, 4 months in your emergency fund.

where should you keep this fund? personally, i keep it in a series of staggered CDs that mature every month. that way, it is almost exactly like getting paid -- the money is available to me at a specific time each month, and if i have a job, i just let it roll over. for example, let's say i make $60,000 a year ($5,000 per month). i need an emergency fund to cover 6 months of pay, or $30,000. i divide that 30,000 into 12 CDs, each maturing at the beginning of every month. in this case, i would have 12 $2,500 CDs. now, if i lose my job, i'll be able to tap into my emergency fund at the beginning of the next month . . . but wait! i don't have my full pay available to me! that doesn't bother me, but if it looks problematic to you, you may want to put your money into a more liquid account. to me, the $2,500 is fine because it's an after tax versus a pre-tax (gross) figure, and i won't be overly concerned with contributing to a 401k or putting money away into savings while i am unemployed. i'll probably want to cut back on some expenses, too. so, to me, the $2,500 is roughly equivalent to my $5,000 monthly gross pay.

Tuesday, March 20, 2007

what you need to retire

i was perusing a money magazine over the weekend and happened to stop on an article about retirement. it suggested that you strive for an income in retirement that was 85% of your pre-retirement income, so you could continue your current style of living.

my first reation was: WHAT!?@!? why would i need such a high income stream? that's ridiculous!

after thinking on it for a bit, i came to the same conclusion.

if i could achieve an income 85% of my current income, i'd be retired now! no, i'd say what you need in retirement is largely dependent on the size of your nest egg. if i had 10 million dollars that i had saved over the course of my working life, i could probably get by without any income -- i could put that 10 million in my mattress and simply make withdrawals from it whenever i needed to buy something.

the only reason i could imagine that i'd need a high income stream would be is if i had little or no savings and did not own my primary residence.

i don't know who writes this stuff out there in the print media, but some of that stuff sounds just plain crazy to me.

Monday, March 19, 2007

retire early

i was talking to my mother-in-law over the weekend about retirement. she had been looking over the obituaries in the paper and was just mortified to see how young people are passing away. all the time i've known her, she's always been working at 100 mph, but this weekend she expressed a desire to retire early. mainly, she came to this conclusion by looking at it from a very pragmatic angle -- if you live until you are 70 and retire at 65 and spend 2 years bedridden at the end of your life, how are you going to enjoy your 3 years in retirement?

i think it's a fine point. if you suppose that you enter the workforce at 25 and use the age of 70 as potentially stopping point, i'd say retiring at 50 would be pretty worthwhile. that would give you 25 years working and 25 years to enjoy the fruits of your labor.

based on this conversation, i'd like to be able to retire within the next 10 years, at which point, maybe i'd change careers or do something part-time. it just doesn't make sense to work so long into your life.

Thursday, March 15, 2007

wasting away in . . .

well, i just returned from a week long vacation in manuel antonio, costa rica. it was a really relaxing and beautiful vacation. it's easy to overspend on vacation, but my wife and i were able to only spend about $100 on souvenirs and by taking advantage of the kitchen in the place that we were staying, we were able to save a ton on eating out -- i think we only dined out three or four times that week!

we vacationed with a group and rented out this amazing house for the week. it was pretty expensive, but once it was divided 10 ways, it ended up being really affordable, and it was a lot of fun vacationing with all of our friends.

we hiked, played on the beach, surfed, and enjoyed the natural beauty of costa rica without spending a ton of money.

Wednesday, March 7, 2007

buying vs renting

i had a conversation with a buddy of mine yesterday about saving . . . he asked me what i thought my savings rate was and i said, it probably varies between 30% and 50%, but what i didn't take into account was home equity. every month a good portion of my take home goes toward paying on my mortgage, and while it is technically not the same as saving, it is going toward an asset that i could convert to cash at some point. not only that, it is probably earning 'interest' in the form of appreciation.

you can make a good argument on the benefits of renting versus buying. there are a lot of nice things about renting -- you get a good deal of flexibility, you don't have to put a lot down, and, if you rent a place cheap enough, you can really put your money where you can do better than in your home. on the other hand, if you are buying, at the end of it all, you can own your home and/or take some equity out along the way. you get some tax benefits from owning and if your mortgage is around what it would cost to rent, you're really using your home as a great vehicle for saving (it's an asset versus liability thing, if i remember from accounting).

look, i'm not saying one is better than the other, but for me, it's the way to go.

Sunday, March 4, 2007

living well is the best revenge?

a co-worker of mine pointed me to an interesting article on forbes site on how much it costs to 'live well' in various parts of the country. they define living well as paying on a 30 year mortgage on a 4 bedroom house in an upscale neighborhood and a vacation spot in a likewise upscale place, owns 2 nice cars, travels, sends their kids to private school . . . basically all the trimmings. i was shocked to read the article.

for one, i punched in a pretty nice salary into the calculator -- $200,000 (and, this is a net income figure!) -- and selected what is renown as one of the cheaper big cities in which to live, houston, texas. well, i was floored to find that i was nearly $100,000 shy of being able to live well! absurd!

i think the premise of the site is a bit ridiculous. not only would i be able to live very well on $200,000 after taxes, i could easily have all the things they mention and still be able to put some away for savings. forbes points out, however:
"Our family saves very little (1%) of its income. This may not be the most fiscally prudent way to behave, but it is the norm in this country. In fact, we were even a little generous, as according to the Department of Commerce, American households save less than 1% of their income these days."
well, at that rate, it would take you nearly 30 years to become a millionaire -- and that would only be because you'd be building equity in your million-dollar home.

who can really afford to live like that? anyway, i'd much rather live how i am living now than 'well' by those standards.

Saturday, March 3, 2007

live (debt) free or . . .

i was driving in to work the other day and heard an ad on the radio about living debt free and how great it is. i understand the allure of carrying no debt, there are some forms of debt that make a lot of sense.

i mean a mortgage, for example, affords me the opportunity to build equity in my home versus spending money on leasing. what this amounts to is that with a mortgage, i get a vehicle for saving money rather than spending it.

the same cannot be said for most other forms of debt, which is where i agree with debt free community. i currently carry debt in the form of home and car loans, but their rates are very reasonable and in the case of the car loan, i can take the cash that i would have spent and invest it. if i can at least break even on it, i prefer having the flexibility of having the cash.

anyway, living debt free may be nice for some, but if the plan involves me selling everything and living on the street, aren't i better off living with some debt?