I’ve examined my spending triggers individually in a couple of different posts (i.e., “Reigning in the Dining Out Budget” and “The Economics and Psychology of a Spending Trigger”), but around a year ago I started to put together a list of more general ways to curb impulse spending. For me and for you (because we all dig lists, amirite?), here’s that list.

1. Journal – privately, this time. This helps you to explore what you want and why you want it, and it helps you to “think on paper” about how you can avoid it. Every time I find myself spending too much on perfumes, I return to my journal and remind myself of the basics (i.e. “you already have more perfume than you can possibly wear,” “trying all of them is becoming a burden,” “every dollar you spend on perfume is a dollar you have less for your goals,” etc).
2. Journal – publicly, through a blog or the like. In addition to the above benefits, you also gain a bit of accountability. My favorite strategy, when I’m tempted to spend inappropriately these days, is to ask myself, “How would I feel admitting this to the readers of my blog?” If that fails, I opt for “How would I feel admitting this to Jacob of Early Retirement Extreme?” someone I admire for his thrifty lifestyle that aligns very well with his values.
3. Impose a waiting period. I can’t claim this idea is limited to me – search “frugality blog waiting period for purchases” and you’ll see it in a lot of places. Some recommend the waiting period should be based on the cost. I have to say, this is not a technique I use a lot. There’s a little of it in my wishlist recommendation (see below), in putting dates on items on my wishlist.
4. Shop with an accountability partner. If you have someone like this in your life, you know who it is. I’m very lucky to have a few. My friend Viktoriya probably wouldn’t describe herself as frugal, but she grew up in the Soviet Union and has a different mindset towards materialism. When I go shopping with her, she sees it as her job to dissuade me from buying things, reminding me of all the negative aspects. “It’s a nice scarf,” she would say, eyeing something I was considering buying at a fleamarket, “but do you really wear scarves?” (Very little). My friend Jess, too, is quite frugal, and even though we enjoy trips to Marshall’s together, she’s very good at reminding me of the possible drawbacks of any purchase.
5. Practice gratitude. Let’s face it, I – and probably you – have mostly middle-class problems. If the biggest thing we have to worry about is whether or not we should have breakfast out a couple of days a month, then we’re doing pretty good. I find I want to spend less when I remind myself, on a daily basis, of what I have and am grateful for.
6. Question yourself. If you don’t have an accountability partner, you can try being your own. Some of the questions I ask myself are:
   • Could I borrow this?
   • Could I “shop” my family and friends for this?
   • Can I get it on Freecycle?
   • Can I get it used?
   • Do I have something at home like this?
   • Is there a coupon? (Most effective for online shopping, as you can search for coupon codes)
   • Most importantly – Is this a need or a want?

   Along that line, New American Dream provides this wallet buddy (PDF download).

7. Keep a wishlist. In addition to the Amazon wishlist that nearly every middle-class person has, I keep a wishlist in Google Documents. Here I list the item I’m interested in and the date I added it. When I’m considering a purchase, I prioritize by what’s been on the list longest that I still want. One thing I’ve tried to do – but I have to admit, hasn’t succeeded – is to use this list when considering a reward for completing a goal or reaching a milestone in my life. Unfortunately, I usually end up treating myself whether or not I’ve reached the goal :)
8. Avoid places that encourage you to spend. For me, this means avoiding the perfume forums I frequent, or the websites of certain etailers. It means that when I go to deposit a check, I don’t go to the Big Lots next door – because I will almost certainly buy things I didn’t know I needed until I saw them. For some people, this might mean staying out of the mall, or certain stores.

I won’t lie – avoiding spending unnecessarily is still a struggle for me. Part of the reason I’m writing this is a reminder to go back to my values to determine what I need, what I really want, and what’s in line with the kind of life I want to lead.

Post from: Frugal in the Fruitlands

8 Ways to Curb Impulse Spending

On the other hand, this year has brought me many joys. In not having full-time employment, I’ve found ways to fill my time productively. I spent most of this year free of addictive gaming. I picked up new hobbies. My various freelance jobs taught me much about web design – those much-needed ‘best practices’ that I’m ignorant of, since my way of learning everything web-related is just to jump in and make things work.

In measuring the success or failure of my goals this year, I’m using two things as a yardstick – both my 101 Goals in 1,000 Days list, as well as my more specific 2009 collage.

Goals Attained This Year

• I finished League of Extraordinary Hogwarts Students, the LARP I was writing, for Intercon I in March 2009, and ran it again at Festival of the LARPs in April 2009. (collage)
• In August 2009, I finished reading the last of H.P. Lovecraft’s fiction. “The Whisperer in Darkness” was the last story I read, and it became one of my favorites. (collage/101 goals list)
• In November 2009, I successfully completed NaNoWriMo, writing the first (very rough) 50,000 words of Viktory Empire, a new novel. (101 goals list)
• I successfully built my emergency fund up to my goal of $5,000. In fact, I had close to $10,000 in it before I lost my job in May. Sadly, it has since been diminished, but it did its part in getting us through some of the toughest months.  (101 goals list)
• I finally established a compost pile. You would think that creating a pile of rotting food waste wouldn’t be very difficult, but I was plagued by uncertainty about the best way to do it. I really didn’t want to build a structure to contain the pile, so I ended up repurposing a large plastic tote for the job. So far, it works great! (101 goals list)
• I completed a paid freelance web design/development project. Several, in fact. (101 goals list)
• In transitioning from full-time to contract employment for most of my income, I reduced my work week to less than 30 hours. It’s a bittersweet accomplishment. (101 goals list)

Goals Attempted But Not Attained This Year

• My husband and I did not attend WorldCon, due to finances, and as a result we did not finish the costume we intended to make for it. (collage/101 goals list)
• The whole “losing my job” thing meant that I didn’t make an additional $10,000 this year, despite my best visualization attempts. (collage)
• My habit of daily exercise – and my “personal best” of 19 out of 30 days of a month with exercise – was not bettered during this year, despite getting a Wii Fit for Christmas 2008! I’ve found that I most enjoy outdoor activity – but I live in a place with frequent inclement weather, so I often use the weather as an excuse not to exercise. (collage/101 goals list)
• Biking around town is still a faraway goal. By a combination of walking and riding my bike, I managed to top the Hill o’ Doom (in October 2009), but doing so is still a major undertaking. (collage/101 goals list)

Goals of Questionable Status

• Do I have a new career? Here in the last days of the year, I’ve started another contract position which has the potential to turn into full-time. When I think back, a lot of the work I’ve done to pay the bills during this six months of semi-employment has been web development-related, rather than research related. So in some sense I have a new career, even if I don’t have a full-time job will all the benefits I want… yet. (collage/101 goal list)

I’m working on putting together a 2010 collage, and I’ll share that as soon as I finish it. In the meantime, how did your year-long goals or New Year’s resolutions turn out?

Post from: Frugal in the Fruitlands

Year-End Goals Check-In

I will admit that my first exposure to Suze Orman was positive. Those “super simple mantras” that Scurlock mentions do initially point one toward fiscal responsibility. Even Scurlock praises her 2001 book The Road to Wealth as “comprehensive and useful.”

But I would venture the guess that the Suze Orman franchise has, like the Fonz, jumped the shark.

When Super Simple Goes Too Far

I think I started to lose faith in Suze right about the time I read Women and Money. Here’s what I wrote in my Livejournal about it, many moons ago:

On the other hand, If you like Suze Orman, and have already read The 9 Steps to Financial Freedom, stop right now, because everything she says in the first book is said again in Women and Money, only about eight grade levels lower. I think she makes the mistake of thinking that if women are ignorant about money, this means that they are really sloooow. Take her explanation of IRAs, for example. She never really explains why someone should have a Roth IRA versus a traditional IRA. She basically says that, “You have more flexibility with a Roth! And you pay tax up front! So your $200,000 at retirement doesn’t become $150,000. So fund a Roth! It’s unequivocally the better option!” Uh… While there are good reasons to pay into a Roth versus a traditional IRA, she doesn’t explain that the primary deciding factor in choosing one is what you expect your retirement income to be – which I think is a frightening omission.

Besides the fact that I felt patronized by the entire tone of that book, the discussion of retirement planning took a complex issue and made it unfortunately simple. I suppose, if you’re the kind of person (male OR female) who hesitates too much over any decision, putting money in a Roth IRA on Suze’s blind advice is better than not saving anything for retirement. But, unfortunately, Orman tries to simplify things that have no business being simplified further:

“But it is not Suze’s hypocrisy or even her intellectual laziness that really bothers me;” Scurlock writes, “no, that would be something Suze ‘loves’ called ‘dollar cost averaging,’ which involves buying the same stock over and over again as it falls.”

Okay, now Scurlock is simplifying (or rather, misrepresenting) the definition of dollar-cost averaging. Quoting About.com on on dollar-cost averaging, “Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts.” DCA is a basic precept of value investing, embraced by financial analysts more respected and reliable than Orman, too – such as Benjamin Graham, the author of the classic The Intelligent Investor, and one of Warren Buffett’s greatest influences.

… with a proviso, that is: that you are never paying more than a particular security is worth. This is something Orman ignores; perhaps because it is very hard for the average person to know if they are paying more for a stock than it is worth. Graham handles this with a 500+ page book on how to value stocks; Suze Orman stops there.

So Scurlock is right that Orman’s techniques are too simple for something which is inherently complex – the stock market – and that it is likely to lead her readers to “buying the same stock over and over again as it falls,” but that’s not a fundamental part of DCA any more than puppy mills are a fundamental part of having a dog.

Blaming the Victim

Scurlock writes of Orman, “She has less patience for statistics. Although study after study has shown that personal bankruptcies are caused primarily by catastrophic events like divorce, job loss and, above all, medical bills, and that most of us are struggling with a gap between our income growth and the soaring cost of necessities like housing, Suze tends toward psychological causes that invariably blame the victim.”

Absolutely true. Telling us to not run up credit card bills is one thing; but it ignores the basic economics conditions that actually cause insolvency. In reviewing The Two-Income Trap I talk about these in greater depth; how rising costs but lagging salaries have created a perfect storm for the middle class. Additionally, a 2005 study by Himmelstein, Warren, Thorne and Woolhandler published in Health Affairs suggests that up to 55% of bankruptcies have a medical cause – over two million Americans annually.

And Downright Duplicity

One thing we all can say about Suze Orman is that she hates leasing cars, right? I remember an episode of Kathy Griffin’s reality show My Life on the D List where she invites Orman to give financial advice to her staff. Orman then proceeds to go off on one of those staffers for leasing a car. (Oh, how I wish I could find this video, but apparently all Youtube wants to show me is Kathy’s crush on Anderson Cooper).

Well, apparently Orman only thinks leasing is bad if she’s not getting a cut of the profits. Scurlock points out one of Suze’s biggest contradictions:

She has also hawked for GM, claiming that leasing a luxury car — you know, the kind that people drive to impress other people — is a terrific financial decision: “If you ask me, that’s smart money!”

In Closing

“Her previous book promised us that we would never be financial victims again,” Scurlock writes. You know who else says that? Abusive boyfriends.

In the immortal words of Dan Savage, DTMFA.

Post from: Frugal in the Fruitlands

Should You Break Up With Suze Orman?

“What does this mean for me?” you might say, as a parent of a college-bound student, or as a prospective college student yourself.

In times like this, many students decide to attend public schools over private schools due to the apparent price difference. But a little-known fact is this: at the end of the day, private colleges are still affordable – maybe even more affordable than publics.

My Background in College Affordability

I’m a graduate of a private college – Vassar College, one of the Seven Sisters. At the time I applied (1999), the “sticker price” of tuition, room, and board was $28,000 a year. At the same time, my mother brought in around $14,000 a year from her tax business – that, combined with child support from my father, was all the money I had to put towards college (hey, it was Plattsburgh, NY in 1999 – you could live cheaply).

You would think, looking at the sticker price, that there was no way I could afford to attend Vassar. And yet here I am, 10 years later, not only a Vassar graduate – but paying off a grand total of only $12,000 worth of federal student aid.

The secret: there’s a huge gap – that most people don’t recognize – between the sticker price of a school and what one actually pays. Furthermore, in the case of private schools, many are committed to reducing economic inequalities and providing amazing education to people who wouldn’t otherwise afford it. It isn’t even via loans, but by grant aid – money which will never need to be paid back.

To give you an idea, I received over $10,000 worth of grant aid in my first year at Vassar. The rest was paid by New York’s Tuition Assistance Program, Perkins and Stafford loans, a New York state merit scholarship, my work study dollars, and, of course, my long-suffering parents.

Vassar President Talks About College Affordability

And this is why I love Catharine Bond Hill, the current president of Vassar. She wasn’t my president – mine was Fran Ferguson for my entire tenure at Vassar – but everything Bond Hill has done in her time at the College has impressed me.

Her first order of business? She returned Vassar to need-blind admissions status. This surprised a lot of people – not necessarily because it was innovative, but because most people never knew that the need-blind policy had been quietly repealed.

Now that challenging economic times are upon us, Bond Hill has strengthened her commitment to college affordability. This year, she committed $1 million more to financial aid at Vassar – currently Vassar provides $35 million in aid annually, which is 25% of its total operating budget.

Bond Hill’s also been in the news, using her expertise as a higher education economist to inform people about their college options. She was quoted in the NY Times article I linked above; and she’s appeared on NPR to talk about how colleges are responding to the conomic decline.

She even wrote a piece for Business Week: “Look Beyond College ‘Sticker Prices’”

What Bond Hill urges parents and college-bound students to realize is that one’s final costs may look very different than the sticker price. Most private colleges base their financial aid packages on a simple model:

Need = total cost of the school – parent/student contribution.

With the “need” figure calculated, the college will then try to match that need with financial aid. Many need-blind schools are committed to filling 100% of financial need, as Vassar did for me.

This quote from the Business Week article illustrates the concept nicely (emphasis mine):

With Harvard’s new pricing structure, a family making $100,000 will pay about $10,000 for total charges (tuition, room and board, and fees). This compares to the average charges at public four-year colleges and universities in 2008-09 of $14,333, as reported in the College Board’s newly released Trends in College Pricing, 2008 (BusinessWeek.com, 10/29/08). Not every student can or wants to go to Harvard, of course, but prices at the other privates can be competitive as well.

At a set of selective private colleges and universities that I’ve researched, the actual price paid by U.S. families with incomes at the national median, $62,355 in 2007, was about a third of the full sticker price, very close to the average of total cost at the four-year publics. Many privates also offer merit aid, further reducing the net price for deserving candidates, independent of their financial need.

This article does not even mention that Harvard currently offers a full ride to anyone whose annual household income is $68,000 or below. It also does not mention that even schools that are not 100% need-blind are often need sensitive, and this fulfills much of the same purpose. An article in Vassar’s Miscellany News shows that even schools that call themselves “need sensitive” – such as Hamilton College – end up awarding about the same amount of financial aid as need-blind schools.

Of course, Bond Hill’s got business in mind – she of course wants to encourage higher enrollment at Vassar. Preferably among the subset of people who read Business Week and can afford to pay full price!

But still: someone is telling Americans that sticker prices don’t mean much. This is information that so many people I know never got. I know many, many smart people who “settled” for a public school education for financial reasons, who ended up paying MORE in loans at the end of their four years than I did.

But What If I Can’t Get Into An Ivy League School?

I can hear you now: “But I’m not Harvard material! I’m just a hardworking B student!”

It may seem like all the schools that offer need-blind or need-sensitive admissions are highly prestigious, selective institutions. While there is a correlation between selectivity and need-blind admissions, I would argue it’s not a causative relationship. The schools that are most likely to offer need-blind admissions are those with the money to give out: i.e., those with large endowments – like Harvard or Vassar. Many of these also happen to be very competitive schools.

But consider some of the less competitive schools on Wikipedia’s list of need-blind or need-sensitive institutions:

• Beloit College – 50% of freshmen have ACT scores between 25 and 29; admits 60% of students who apply
• Smith College (all women) – 50% of freshmen have ACT scores between 26 and 32; admits 52% of students who apply
• University of Richmond – 50% of freshmen have ACT scores between 27 and 31; admits 40% of students who apply

Compare this to a school like Harvard, where only 9% of those who apply are admitted, and where half of incoming freshmen have ACT scores between 31 and 35.

Statistics are courtesy of the National Center for Education Statistics’ College Navigator.

In short: you don’t have to be a genius to get into a need-blind school, but you do need a strong, consistent academic record.

My Advice to Prospective College Students and Their Parents

• Be open-minded about college costs.
• Be honest about what you want in a college, even if you don’t think you can afford it.
• If possible, try to stay within your state. Many states and individual colleges offer financial incentives for students to stay in-state.
• Don’t rule out any colleges until you have a financial aid package in hand. (This comes with your acceptance letter).
• If you feel really ambitious, you could even try to negotiate your financial aid package with a financial aid counselor – colleges are businesses, too, and nobody says dickering isn’t allowed.

Post from: Frugal in the Fruitlands

College Costs in Challenging Economic Times: Why Sticker Price Means Nothing

The reason I don’t save more is simply there’s no more room in my budget. Housing takes up a huge chunk of our budget, and everything left over must account for electricity, oil, maintenance and gas for two cars, phones, internet, TV, and a small slice for entertainment. I feel like we continue to cut where we can, but we’re living pretty narrowly as is.

Maybe I just need to be making more money.

Several months ago Millionaire Mommy Next Door (please note the new address) did a series of “abundant life” visualizations where she imagined how she would acquire that extra money and how she would spend it.

So I’m doing what MMND did: I’m inviting extra money into my life. Today, the amount I’m imagining is $10,000 a year extra, or a gross income for myself of $55,000.

The Power of Creative Visualization

Wikipedia defines “Creative Visualization” as “seeking to affect the outer world via changing one’s thoughts.” Lest this seems like nonsense to many of you, let me assure you I’m a hardcore empiricist myself. I have been personally involved in visualization experiments where there was a significant main effect of visualization on final performance.

But don’t take my word for it – one of the best-known studies of creative visualization involved Russian athletes (as mentioned in the Wikipedia article above). Over four conditions, those athletes who spent 25% of their training time doing creative visualization outperformed all other groups, including the 100% physical training group.

On a similar note, I’m reading T. Harv Eker’s Secrets of the Millionaire Mind. Eker makes the point that millionaires think differently than us lower class schlubs about money. This changes how we act around money, which affects how much of it comes into our life.

Why Only $10,000?

“If visualization is so great,” you might say, “why limit yourself to $10,000 extra? Why not visualize yourself as a millionaire?” After all, Mr. Eker says that the non-wealthy tend to think in terms of “thousands rather than millions.”

There’s a simple reason: it’s a big step to visualize yourself as a millionaire if you’re just managing to pay the bills and stash aside a little each month. Just ask those people who have become instant millionaires via the lottery: within a few years, most are back to their previous standard of living, no wealthier and no happier. (This Google Answers thread links to some relevant studies). If one doesn’t know what to do with a million dollars, there’s no use inviting it into your life.

$10,000 extra dollars… that, I know what to do with.

Brainstorm Ways to Bring More Money Into Your Life

Here’s my list:

• My company is being acquired by a larger company, which may mean higher pay and better benefits. Being more proactive rather than reactive at work may go far in this situation, though it’s hard to quantify how far.
• If all else fails on the J-O-B front, there’s always changing jobs to software/web development. That’s about the entry level pay for such a job, if not more.
• Hang my shingle out for the various “side hustles” (that’s a popular word in the blogosphere right now) I can perform. Some of these include:
  • Web design. I will need to finally put together my web portfolio to get this going!
  • Tutoring. I can tutor French and statistics. An ad on Craigslist and sign in my library would be cost-free ways to advertise.
  • Teaching. I can submit a proposal to teach non-credit courses in web design and/or blogging at my local community college.
  • Housesitting/petsitting. I think after housesitting for the head of the Objectivist Society and getting locked in his bathroom in the middle of the night in my pajamas, I can handle anything.
  • I can work harder to monetize this blog, or I can work on other topics I would feel more comfortable monetizing. I’ve considered, for example, starting a costuming blog, and using my expertise there to sell fabric through affiliate sites. Something like Kyle’s Learn Spanish On Your Own might be valuable as well, using French, the other language I speak.
  • I can sell stuff I don’t need or want anymore (Kung Fu DVDs, I’m looking at you)

Obviously I don’t want to do all these at once – the hunter that hunts two animals catches only one, to use a PETA-unfriendly metaphor. The idea is that the path to $10,000 is wide open.

Now, What Would You Do With This Money?

This visualization is not complete without a vision of how the extra money will be spent.

An income of $55,000/year would boil down to $2,115 every two weeks (I’m using my current pay schedule for simplicity’s sake). Adding this income won’t move me up a tax bracket, so I’ll be paying the same tax rate.

We’re in the 25% bracket, but according to my paycheck, I only withhold 22% in tax (Matt must make the rest up on his withholding). 22% of $2,115 is $465, so my “take home pay” will be $1,652 – approximately $307 more than my current take-home pay.

Now, if I add some of that extra money to my 401k I’ll be changing my taxable income, but let’s simplify this and assume all that extra money comes after tax.

• I’ll contribute $130 extra ($225 total) to my emergency fund until I have at least six months of mortgage expenses saved up.
• I’ll contribute $140 extra ($196 total) to my retirement fund
• I’ll contribute $37 to my “fun” fund, to be saved for things like my yearly vacation with my mom.

A Simple Visualization

In addition to the techniques above, I’m imagining myself counting out a pile of 10 $100 bills – $1,000. Then I’m imagining 10 piles just like that.

How about you: what amount of money are you comfortable inviting into your life? How would you get it? What would you do with it?

Post from: Frugal in the Fruitlands

Visualizing $10,000 Extra In Your Life

Why Should I Support This Bill?

As we review The Two-Income Trap we’ll talk about how deregulation of the lending industry is one piece of the middle class insolvency puzzle.

While some are eager to point fingers at irresponsible consumers, I think Warren and Tyagi have shown that American overconsumption is largely a myth. What people are spending money on today, it turns out, are the necessities of life – not plasma TVs and Prada bags, but housing and related costs.

It follows that if you’ve bled the rock dry, those expenses end up on credit cards – and credit card companies are eager to punish consumers for the privilege.

One of the major differences between 1970 and today is how deep a hole one can dig under oneself with credit. Previously, for example, the limit of credit card interest rates was set at a federal level. With deregulation, these limits were set at a state level, and were only enforced on lenders within the state, no matter where their customers were.

So what happened? Credit card companies just moved to states whose rates favored them (have you wondered why so many credit card companies are based out of Delaware? That’s why).

Here are just some of the ways credit cards currently cheat Americans:

• Universal default: even if you’re in good standing with that credit card, the company is permitted to raise rates related to behavior on other lines of credit – without notice. There is currently no limit on how high they can raise these penalty rates, either.
• Two-cycle billing: your finance charge is calculated based on balances you’ve already paid off.
• Sending bills out late and dinging customers for late fees as a result (even if the payment is postmarked by a certain date).
• Distributing payments first to lower-interest debt. This will prevent you from paying down high-interest rate balances until you’ve paid off low-interest ones first.
• Targeting young people who don’t have established credit

I would argue that as many as 90% of credit card companies engage in these practices. I know when I was in the market for a new credit card I struggled to find one that didn’t do two-cycle billing.

It may surprise many people (although it shouldn’t) to learn that credit card companies make more off you when you struggle to pay and rack up late fees then when you pay on time. Some would call this “business.” I call it exploitative.

All of this is made more challenging by the fact that a credit card contract is what’s called an adhesion contract – it’s a “take it or leave it” proposition. Since so many credit cards offer these terms, it’s not like a consumer can just go elsewhere. People who put this burden squarely on the shoulders of consumers forget this.

What Can I Do About This?

Consumer Reports’ publisher and advocacy group, Consumers Union, offers advice on protecting yourself and your credit.

If you’re in the market for a new credit card, I recommend using a site like Card Trak to find a card with the terms most favorable to you. Money magazine also does a regular feature on the lowest card interest rates. As a warning, some credit card rate searches are just there to shill for certain card companies – I was dismayed to find that bankrate.com, who I used to recommend, has started doing this. If you don’t find banks you’ve never heard of (like “First Tennessee” or “Pulaski”) in the first page of search results, then it’s probably not legit.

Most importantly, you need to urge your senators to pass this act. Consumers Union has established CreditCardReform.org to tell the story of this legislation. Here they explain a little bit more about the history of the legislation and invite you to take action by sending a letter to your senator to support S. 3252. I encourage you to individualize the message, especially if you have a personal story to share. Stories can be more powerful than facts.

Also, I apologize for the terrible picture on the CreditCardReform.org main page. It looks like that poor woman is about to be assaulted.

Post from: Frugal in the Fruitlands

Support the Credit CARD Act of 2008

The Advantages of Prepaying a Mortgage

Recall that my house is financed in the “piggyback” route, with two mortgages. The second of those is the one we pre-pay. It is the smaller debt ($75,000), but it has the higher rate of 8.9%. We have currently paid off $15,000 of that debt in the first two years of ownership, for a current balance of ~$60,000.

Functionally, putting money into that is equivalent to investing in a product that pays 8.9% interest. Given the current financial state, this is a much higher rate than we would see anywhere else. We have been doing this since we bought the house, but it makes especially good sense right now.

There’s also the fact that the second mortgage balloons at 15 years (~13 years from now) – meaning that it will be need to paid in full at that time. This is another compelling reason to prepay. Admittedly, we could refinance at any point before then, but that’s just shuffling debt around. Paying $500 extra a month, we are on track to pay this off in less than 10 years.

Once the second mortgage is paid off, we will turn our attention to the first ($302,000). It has a fixed rate of 6.6%, but the payment amount increases at 10 years – at which point we will have paid off the second.

But the biggest advantage, to my mind, of prepaying the mortgage is decreasing the period of your life you spend paying for housing. If retirement is as difficult as it seems, then the freedom of owning one’s house outright is immense. With both mortgages paid off, that frees up ~$3,200/month for us – about half of our current income. Yes, there will be maintenance; and we would still have to pay for oil and electricity, but that is manageable on a more limited income. This would give us the freedom to be more mobile. I could, for example, spend three months of the year working at my mother’s tax business, pulling down about $20,000, and then go spend six weeks in Argentina learning intensive Spanish (one of my many dreams!).

This lifestyle would lend itself easily to mini-retirements, rather than the typically depicted Orlando-dwelling, shuffleboard-playing Retirement with a capital “R.” I could live with that!

I just need to stop telling myself this would be even more feasible if I had never bought a house to begin with… that train has sailed, to quote the immortal Austin Powers, and I’m not about to sell my house at a loss.

The Disadvantages of Prepaying a Mortgage

Well, really, there’s one big one: If we suddenly weren’t able to make our monthly payments, all the money we prepaid wouldn’t make much of a difference. The primary way this would happen would be a job loss.

This is why it’s so key to build oneself a safety net: an emergency fund and appropriate insurance coverage.

This is still something I’m working on. I’m building an emergency fund, but I worry I’m not building it fast enough. The figure to aim for is three to six months living expenses, which for us is $15,000-$30,000, on the generous side – but more like $8,000-$15,000 if we just want to cover the mortgage.

… I currently have $1,600 in there. I contribute about $150 a month, but it seems like every time it gets to a decent value, we have an emergency. Oh, only little disasters – car repairs, or vet bills – but it does continually deplete the fund.

As for insurance, I tend to hold the minimum coverage in just about everything. I have only liability insurance on the Tercel (admittedly, it’s almost 15 years old). I have what life insurance comes free at work (which won’t help a lot if I leave my job). Matt and I have the health policy that’s available to him at his job. We have whatever homeowner’s insurance is required by law. It may be time to reexamine this particular way of doing things, for maximum emergency preparedness.

In conclusion: we’re choosing to pay down our mortgage rather than contribute more to our retirement. I believe it’s the best choice for us right now, but I need to construct a better safety net for the “somedays” as well as the now.

Post from: Frugal in the Fruitlands

Pre-pay for today? The pros and cons of mortgage prepayment

I’ll blockquote the benchmarks he blockquoted, just for the sake of discussion:

Assuming you want to retire at age 60 and plan to have no pension and no job in retirement, you need to have…
1.6 times your salary in savings at age 35
3.5 times your salary in savings at age 40
5.8 times your salary in savings at age 45
8.5 times your salary in savings at age 50
11.9 times your salary in savings at age 55
16.0 times your salary in savings at age 60

A lot of other stuff is figured in here: retirement at 60 with 80% of your current salary withdrawn each year, Social Security kicking in at age 62, an annual real rate of return of 4%, and 4% withdrawn every year.

Trent uses the example of Joe (the Plumber?) with a salary of $50,000. Joe needs to have $80,000 at age 35 to be on track with these benchmarks. Trent goes on to say that Joe needs to save $5,000 a year at 9% interest annually (This is how we can tell it was written in 2007!), or around $100 each week, if he starts saving at age 25, to reach this goal.

Okay, well, that’s great for Joe. I asked myself, what about me?

Right now I’m 28, my salary is $45,000 per year and I have about $10,000 in my 401(k) and IRA (I’m not counting my husband in any of this, just to simplify). I’m currently putting $56 per pay period x 26 paychecks per year = $1456/year into my 401(k). That means at 35 I’ll need a total of $72,000 to be on track.

I’m not going to assume a 9% annual return. But I’m not going to be a total pessimist, either. My money will need to grow at least 3% annually to keep up with inflation. I can earn 3.5 – 4.0% sticking it in a savings account (though that’s not tax-protected, of course). Since I’m investing every other week, I’m going to assume I have the power of dollar-cost averaging on my side. So let’s go with a more conservative 5%, and let’s take that number over to a compound interest calculator.

Here’s how it looks with the current amount I’m putting in per week (I’m assuming six years to grow because I only have about six months to my birthday):

Okay, $23,799 is a leeeeetle far off benchmark.

So how much extra WOULD I need to put away every pay period in order to meet this benchmark?

I would need to be saving $8,205 annually in order to meet my age 35 benchmark. That’s $6,729 MORE than I’m saving now in my retirement. That means I need to be putting away $316 per pay period, or $260 more than I currently am.

Can anyone be expected to save this much? That’s functionally a 16.9% savings rate. The average savings rate in the U.S. currently is less than 1% – not that I condone that, but let’s be realistic.

This is why I’m starting to think that Retirement, with a capital R, is not the answer. Maybe mini-retirements, a la Tim Ferriss, are, however.

And here’s the next part, for me: instead of putting $316 a month into my retirement, my husband and I are putting $500 extra/month towards our mortgage. Is this a smart choice? I’ll talk about that next time.

Post from: Frugal in the Fruitlands

The question is “retirement?” The answer is no.

Being a research analyst by trade, these results are not as clean as I would have liked, since many of the questions were open-ended, but there are still interesting findings to be gleaned.

Including myself, 21 readers took the survey – 6 men and 15 women. This uneven gender balance is pretty standard in survey research, I’ve found, as women are much more likely to respond to surveys than men.

The professions of the participants varied tremendously, but many were technical in nature (i.e. research associate, technical writer, systems analyst). There were also several graduate students who participated.

Responsibility level was hard to judge – I divided it into “low,” “medium,” and “high,” but this was basically a judgment call on my part. If you wrote down “manual labor” or “delivery driver” I judged your level of responsibility to be low; whereas if you wrote “working attorney” or “booking agent” I judged it to be high. For some I could not even make a guess – how would you judge “personal trainer?”

Clothing: I asked how much each participant had spent on clothes in the past six months. The overall mean was $286. For men, the mean was $240, with a range from $11-$600. Women spent more overall, ranging from $60-$1,000 with a mean of $305. (I did not test significance on this, or any, numbers, as the N was too low). The highest spending participant was a woman, and the lowest spending participant was a man.

Haircuts: I asked how often each participant had their hair cut, and how much it cost each time. On average participants cut their hair 4.7 times per year; the average cost was $31 (ranging from $0-$115). Several individuals cut their own hair or had a family member or partner cut it (one man and three women), for a net cost of $0. For men, the average number of haircuts per year was 5, and the average cost was $17 (ranging from $0-$30). For women, the average number of haircuts per year was 4.5 (longer hair does need to be cut less often), and the average cost was $36 (ranging from $0-$115).

Hair products: I asked how many hair products each person used on a regular basis, and how much each one cost. Keep in mind that measurements may be skewed here, as people buy products in different sizes, which thus determines how frequently they buy them. On average, participants used 2.3 hair products (ranged from 1-7), with a mean total cost of $17. Men on average spent $14 on 1.6 products (range of 1-3 products for a total of $3-45); women on average spent $19 on 2.5 products (range of 1 to 7 products for a total of $0-$50). The highest spending participant was female, as was the participant using the largest number of products.

Number of steps in routine: Reports varied tremendously here, depending on what people considered to be part of their routine. Many people did not include obvious steps, like “get dressed.” (I want to work in their office!) I discounted any steps that did not specifically have to do with hygiene, such as “check email” or “grab my iPod.” On average, participants’ routines included 5.3 steps (ranging from 3-10). For men, the range was narrower (3 to 5 steps) with an average number of steps of 4. Women’s routines ranged from 3 to 10 steps, with an average number of 5.8. The most detailed routines were those carried out by women.

Monthly hygiene expenditure: Not everybody knew how to answer this question, but I calculated responses from the nine people who did. The average monthly expenditure was $45, and ranged from $15-$100. For men, of whom there were only two, the average cost was $65 (range: $30-$100). For the seven remaining women, the mean was $40 (range: $15-$80).

Overall observations on level of responsibility: expenses did seem to differ as a function of the level of responsibility. The highest spending women, and some of the highest spending men, were in jobs with medium or high responsibility. Although I did not ask about office environment, this seemed to be predictive, with participants who worked in traditional environments, such as law firms or corporate offices, spending more on their appearance than others. Students – all of whom were female – were a low-spending group, unsurprisingly.

I urge caution in interpreting these findings, as always, because the N is so low – especially for the last items! But in most places this survey shows women spending considerably more time and money on personal appearance.

Women out there: what do you do – or what can you do? – to reduce the hold personal appearance has on your finances?

Post from: Frugal in the Fruitlands

The results: women spend more on personal appearance

Two other posts I noted from this edition included:

• Don’t Go to a Private University at Blueprint for Financial Prosperity. I seem to really enjoy arguing on Jim’s Devil’s Advocate posts. In this one I point out that the effective cost of a private college education, after financial aid is accounted for, can quite often be less expensive than a public college education, especially for low income families.
• Benjamin of Trees Full of Money writes about My Inexpensive Do-It-Yourself Geothermal Cooling System. Even though this isn’t a system I can implement in my own house, this article impressed me. It’s a novel topic that I haven’t seen addressed in any Festival of Frugality, and the author gives concrete advice that you can put to work today. All around, a rare find.

I’ve also entered Gender and Finance: How Much Do Your Spend on Hygiene? in a carnival, but that won’t be out for a few more days. I am hoping to get more exposure for that article so I can reap a greater “sample size” before posting the results.

I am heading off on vacation tomorrow morning, so in the meantime I present my own responses to the questions I ask in that post:

What is your gender? Female
What is your occupation and level of responsibility? I’m a research analyst for a market research firm. I have no employees for whom I’m personally responsible, but I do answer directly to one of the senior VPs.
About how much have you spent on clothing for yourself in the past six months? I bought about $80 worth of bras from Macy’s, a $45 shirt from Land’s End, a $20 dress from Target, and a $17 sweater from Target. Total: $162.
How often do you get your hair cut? How much does it cost each time? Approximately once every three months (sometimes more frequently; sometimes less) at $46 each time.
What products do you use on your hair (shampoo, conditioner, sprays, gels, mousse, etc)? How much does each one cost? Matt and I share bottles of Suave Daily Clarifying shampoo, $3.49 on drugstore.com. I also use V05 Detangle and Shine spray; $3.99 a bottle from walgreens.com.
Describe your morning routine on a work day (or a day where you have to “dress up,” if you’re not currently employed). Wake up, take a shower (involves shampooing, shaving, and using a scrub on my face), spray conditioner in hair, put contacts in, (optionally) style/blow-dry hair (it seems to look the same no matter what I do), brush teeth, put on perfumes, deodorant, get dressed.
If you have a similar category to “clothing/beauty/hygiene” in your budget, tell me your monthly expenditure for just you. Over the past five months, approximately $69 per month of our spending has belonged to this category. At least half of that is mine, if not much more.

Post from: Frugal in the Fruitlands

Carnivals and the Gender/Finance Question, Continued