The Simple Dollar

Vanguard Group's CEO Bill McNabb is pictured in the board room at the Vanguard headquarters in Valley Forge, Pa., in this 2010 file photo. It may take some time to save enough in a bank account to open a Vanguard Roth IRA, but the fees are quite low. (Tim Shaffer/Reuters/File)

Roth IRA: Use ShareBuilder or Vanguard?

By Trent Hamm, Contributor / 02.15.12

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Budgeting with bi-weekly paychecks
2. Gross or net income?
3. Investing in this economy
4. Car trade-in time?
5. Blogging workflow
6. Using money before pay cut
7. Sharebuilder for Roth IRA?
8. What is a dependent?
9. Major car decision
10. Long haul relationship

Most days, I spend some time working on a novel. It’s been an interesting experience.

The biggest thing I’ve found is that I can get sucked into novel writing for very, very long periods. With a post for The Simple Dollar, there’s a reasonable length I have to stop with. I generally try to keep the articles short enough so that they can be read in a quick burst.

With a novel, well… it’s a completely different story. I can get sucked in for hours and hours and the words just fall onto the page in a flood.

Q1: Budgeting with bi-weekly paychecks
My husband currently has a paycheck every 2 weeks, NOT bi-monthly, but every 2 calendar weeks. This is very frustrating when budgeting as each paycheck happens at a different time and different bills come out of each paycheck every 2 weeks (as the months aren’t arranged in 28 days, which would be nice). We also has extra income sporatically (he’s in the National Guard, so this is from training on the weekend and flying in the middle of the week) that we DO count on. Our main focus right now is paying off a loan that we used to pay for his truck (NOT an auto loan). Any help in getting us ahead in this would be awesome!
- Kelly

What I would do is have some bills come out of the first paycheck of each month and the rest of the bills come out of the second check each month. Pretend as though you only receive those 24 checks in a given year.

Now, you are going to receive a third check during two months out of the year. I would use those checks entirely for irregular bills – insurance premiums, property taxes, and the like.

I would probably pay all bills with a due date after the 15th out of the first check each month, then pay all bills with a due date before the 15th out of the second check each month. That way, you’re never running late on a bill.

Q2: Gross or net income?
When trying to determine how much of your income you save each month, do you look at your gross income or your net income?
- Angie

I would never look at net income for the purposes of saving for the future, especially when saving for retirement.

In retirement, you’re going to be responsible for your own taxes. Unless something unusual is going on, a large portion of your income is going to be taxable income, which means that a chunk of it is going to go to Uncle Sam. Your calculations should always reflect that.

THe easiest way to do it is to just keep all of your calculations based on gross income, and assume that tax rates are going to be nice and high when you retire. You’re always better off having more money in retirement than less, after all.

Q3: Investing in this economy
I was wondering if you had a moment to give some advice on what might be good investment ideas at at this state of economy. I know that may seem like a loaded question, but I’am really curious what you might be thinking. 
- Marcus

The best place to invest in an uncertain economy is to invest in yourself. Education. Training. A small business. An emergency fund. Debt elimination. Medical visits.

If these bases are well covered and you still have money to invest, I’d probably put it in very stable blue chip companies that have been around for a long time and are incredibly stable. These companies aren’t going to make you rich, but they will steadily pay you a nice dividend over time and they won’t go bankrupt. I’d look at companies like those in the Dow Jones Industrial Average.

Another option is to just invest in a very broad-based index fund, like the Vanguard Total Stock Market Index. Choose one with very low fees. It also won’t earn you a mint, but it’ll be pretty stable and pay you a healthy dividend.

Q4: Car trade-in time?
I’ve worked hard (after some hard lessons) and I have $5,500 savings toward whatever car thing might be needed next. We also have about twice that in joint savings and our only debt is a home equity mortgage that we can now comfortably pay off. We are not exactly wealthy but our financial life is in good working order and we continue to save some each month.

I drive a 2003 Hyundai with 104,000 miles on it. Runs great. Will do the extensive tune-up soon but my question is about the paint job. The paint is burning off from sun exposure so there are more & more ugly bare metal “bald” patches, and I wonder if I should invest in a paint job.

I’ve heard horror stories about terrible paint jobs that only look good for a year or 2, and the best deal I could find from someone recommended to me was $2,000 to just repaint the center of the car from hood & top to hatchback, leaving the doors untouched & just buffing them since they are not where the bald patches are. Any recommendation I can get just comes from my oil change place or other business; I’m sure everyone just recommends each other because they know each other thru business or socially, and the recommendation wouldn’t guarantee a great job. (Speaking of guarantee, it looks to me like repaint shops only offer 1, 2 or maybe 3-year agarantees on the work, which is not encouraging. I happen to know a couple of antique Porsche collectors/aficionados, who tell me you get what you pay for & it’s a mistake to get any car repainted for cheap. As if $2,000 were cheap, anyway…)

Is it worth the $2K for a repaint or should I look at trading my car in for something with similar mileage that looks better? I hate to get rid of what has been an awesomely reliable car.

Part of me says I shouldn’t care how the car looks, but when I go to an interview I kind of cringe hoping the potential employer won’t see what I drive. I do some freelance jobs that involve meeting new people on a regular basis, and I’m not sure *I* would hire someone if they drove up in a really beat-up car, as in some way it is a reflection of the person’s taste or lifestyle or something. In some way my car is like showing up in dressed cheaply & shabbily for an interview.
- Jeff

For starters, if someone drove up to a job interview with me and was driving an older beat-up car, but they paired that with a good resume, I’d be more inclined to hire that person. Someone who drives such a car tells me that they understand the concept of value and bang for the buck. One of my good friends who made a much better salary than I drove a 20 year old car with rust spots and a bumper made out of a discarded 2″ by 4″.

Now, if you’re asking yourself whether the paint job is worth it or not on your car, the people you’re talking to are telling you the truth. You get what you pay for when it comes to a paint job on your car. The cheaper you get, the more likely it is to quickly wear off and put you back in the same situation you’re in.

The problem is that if you buy a really nice paint job on a ten year old car with mileage into the six figures, the paint job will probably far outlast the usable lifespan of the car. I wouldn’t go down that route.

If I were you and I decided that a car with a decent paint job was a requirement, I’d either trade it in now for a replacement or get a cheap paint job that would last for a couple of years, then trade it in at that later time.

Q5: Blogging workflow
I am constantly amazed at how much content you come up with for The Simple Dollar. How do you make that all happen? What does your daily workflow look like?
- Sean

I’m usually constantly brainstorming post ideas. I write them down in a pocket notebook no matter where I’m at. I let inspiration come from anywhere, and whenver I even have the vaguest idea, I jot it down.

The first thing I do is filter these ideas. 90% of them get discarded before I do any research or write a word. The ones that survive that first test get a basic outline and/or a bit of research on the topic for notes. I usually kill about 50% more of the potential posts at this point, and this takes up about half of my actual work time.

The rest of the time is spent turning these nascent post ideas into posts. I usually have the key ideas in place already, so it’s just a matter of transforming that into something readable.

I just do this over and over and over and over again.

Q6: Using money before pay cut
My husband and I are wrestling with the question of how to use our money wisely before I take a massive pay cut. Together, we currently bring in about $110,000 before taxes. However, I got accepted to a PhD program (yay!) with full funding (yay!) of about $14,000 a year (yeesh). So that will cut us down to about $74,000 a year. We have a mortgage that runs us $1700 a month, student loans (from his law school and my undergraduate studies) of about $70,000 at a low rate, and then all of our household expenses. We are already cutting back on going out to eat, which is our #1 vice. I’m planning on selling my car, which will free up about $3,000 in cash. We have two savings account with about $12,000 saved up, and $15,000 in investments.

I’ve been reading your blog for long enough that I know how to cut my budget down and live frugally. My student loans will be deferred and we’ll cut our car insurance and payments in half. What we really need to know is how to manage our money wisely for the next six months before I leave my job. I’ll be responsible for my books, and I’ll need to professionalize my wardrobe. We are finishing up all the necessary household repairs now while we can still afford it. What can we do to spend the money we do have wisely and still save up for any emergencies that come up while I am in school?
- Linda

Very few Ph.D. paths require what I would call a “professional” wardrobe. I know graduate students in a lot of fields and the vast majority of them dress extremely casually almost all of the time. Know the culture of your program before you buy a bunch of clothes.

Aside from that, I think you’re already making the right choices. You know where your biggest money leak is and you’re fixing it. You’re cutting enough from your monthly bills that I don’t think you’ll be in trouble, as your effective tax rate is also going to drop because of this life choice.

You’re doing the right things.

Q7: Sharebuilder IRA?
I currently have an online savings account through ING Direct, and they recently just sent me an e-mail offering an extra $50 if I open up a ShareBuilder IRA account and deposit $200 by March 1st. I’m a 22 year old student and have been wanting to start a Roth IRA account for several years to kickstart my retirement savings; this seems like a good way to start and a pretty good deal to me, since other Roth IRA accounts I’ve looked into opening require, like, several thousand dollars to start (that I don’t have the moment). I have an emergency savings of $1500, hope to pay off my student loans by the end of this year, and feel as though I could easily handle the $200 contribution. Do you know anymore about ShareBuilder accounts or have you heard any feedback from anyone regarding these accounts? I’m just wondering if I’m missing the small print and will end up finding out that I need to contribute several thousand dollars a year…. 
- Chris

While Sharebuilder does offer a nice low starting amount, Sharebuilder charges a $25 annual fee just for having the IRA and charges you $4 for each automatic transaction. Those fees are high enough that they just completely decimate your returns.

If I were you, I’d start saving that IRA money in a savings account. Set up an automatic savings plan to transfer, say, $25 a week into that account.

When you get to $1,000, open a Roth IRA at Vanguard (which is pretty much fee free) and buy into their STAR Fund, which has a minimum balance requirement of $1,000. Switch your automatic investments to that fund. Then, when you reach $3,000, transfer that money (and the automatic transfers) to whatever fund you think is best.

Q8: What is a dependent?
I have a question about taxes. Specifically, who can qualify as a dependent. I am a full time student and under the age of 24. My parents claim me as a dependent on their taxes. I was wondering if this is correct. My college is paid for through scholarships and student loans taken out in my name. Last year I worked a campus job and and an internship to cover my living expenses (apartment for a whole year, food, utilities). The IRS has a test to see if a person counts as a dependent, and one of the provisions is the dependent has to provide less than half of their own support. Can my parents still claim me even though I do not live at home (at any point during the year) and I pay my own bills? To be fair, they do pay for my insurance and cell phone bill, and own the car I drive.
- Shane

It’s hard to tell specifically from this example, but it’s likely that you are providing for more than half of your own support, in which case they cannot legally claim you as a dependent.

Usually in the case of college students, the IRS does not really bother to figure out dependency status as long as you’re not being claimed by both yourself and your parents, so I don’t think there’s a real problem here.

You need to sit down and have a chat with your parents about dependency status. Present them with the IRS test you’re mentioning here and talk about where to go from here. The best thing to do is probably for you to claim yourself in the future.

Q9: Major car decision
I drive a Honda CR-V. It’s six years old, 130,000 miles on it. I was just told by two different mechanics (one dealer, one independent) that my engine is dying a slow death (it’s burning oil at the rate of 2 quarts every 3,000 miles.) I owe approximately $8,000 on the car to my credit union. (Note for your readers, NEVER refinance credit card debt to a vehicle even if it gets you a lower interest rate, that is why I owe money on the car, and now I’m stuck with a messy situation.)

Here are my options:
1. Keep the car, keep making payments on it, and keep filling it up each month with an extra quart of oil on top of plus regular oil changes (I get oil changes every eight weeks as is, because I put a lot of mileage on my car, and the car starts malfunctioning when I hit 3,000 miles between oil changes.) According to those who looked at the car, my car could last years doing this, or it could start burning oil faster, which means a faster death. Crapshoot in terms of how long I can make it last this way.
2. Buy an engine. It would be used, cost around $3,900 for an engine with 95K miles on it and a 1-year warranty. Crapshoot in terms of whether the engine is a good engine or not and unknown on how long the rest of my car’s parts will work (i.e., What if I have to replace the transmission, etc.) Independent mechanic says he wouldn’t buy a used engine unless it had less than 60K miles on it and those are hard to come by. And I would have to finance this as I don’t have that kind of cash laying around (although if I started with Option 1, and then saved up for a year or two, I could get there with cash.)
3. Trade my car in to the dealership and get a used car (from the dealership) for around the same price as what I owe, which means my debt is paid off, and I have another car, with probably over 130K miles on it. Crapshoot in terms of what I would end up with – was it well maintained, am I going to have additional problems, with more than 100K miles on it, am I going to end up spending a ton of money on it anyway, etc?

Other considerations:
1. I LOVE my car. I know it seems so superficial, but I do love it. I bought it at one year old, and the intention was to drive it until it’s old and rusty and questionable to have out in public (and even then, keep it around to use as a “farm car” as I live on an acreage.) It’s 4 wheel drive, which has helped out numerous times in Iowa winters. We also use my car as the road trip car. From a functionality standpoint with my family, it would be a loss. Our other car is a 13-year-old two-door Accord which just doesn’t have the room we need.
2. I have a fair amount of consumer debt (I’ve reduced my debt by more than half in the last two years, but still have a ways to go.) Getting rid of this car would definitely help, but I don’t know if the risk is worth the potential zeroing out of this particular debt..
3. I can’t sell my car via private party without disclosing the engine issue so that option is out as I would get less for the car that way than what I owe on it. A dealership, in this case, will at least get me out with a zero at the end.

I’m leaning towards Option 1 and seeing how far it will get me. And basically deciding between Option 2 and 3 as the situation presents itself. Right now, the used car market is slim pickings. I don’t necessarily want to buy an engine either, but if I could fine one with less than 60K on it, I would be more comfortable with that option. By the way, the dealer told me their recommendation is to just keep up on the oil indefinitely. The Independent mechanic told me to keep it going until summer, then trade it in.

So I guess my question is, what would you recommended? Is there anything else I should be considering here? 
- Ralph

I think you’ve covered pretty much everything you can do at this point. I don’t see any other options.

If I were you, I’d go for the first option. I’d keep putting oil in it and keep driving it for as long as I could.

I would also use this as a wake-up call to start getting serious about my finances. Start saving right now. Put away as much as you possibly can each month for the inevitable replacement of this car.

Q10: Long haul relationship
What relationship advice can you offer to young couples? What have you learned from your marriage to Sarah? (You seem to have a very strong relationship, based on what you write.)

I know you write about finances, but hey, divorce is expensive! How do you keep a relationship going for the long haul?
- Monika

My experience has been that a marriage works best if you put time into making it work. If you just assume your partner will always be there no matter how you act when you’re together, you’re probably going to be disappointed.

Both of us make some effort every single day to show the other that we care. It might be something small like taking care of a sink full of dirty dishes. It might be something like a note stuck inside someone’s bag. It might be the surprise of a wonderful dinner prepared without any prompting. It might just be holding hands for a moment and saying “I love you.” It might be a serious discussion about our shared future.

Every single day, we both try to do something. Often, we do multiple things. It’s a constant reminder that the other person cares.

Got any questions? Email them to me or leave them in the comments and 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 hundreds of questions per week, so I may not necessarily be able to answer yours.

A bird holds a yuan collected from a tourist as it prepares to drop it into a piggy bank, in Houhai district, in Beijing, China, in this file photo. According to Hamm, a compound interest savings account will take a while to pay off, but once the momentum picks up, the money gained will be worth it. (Muhammed Muheisen/AP/File)

Compound interest is great, but there's a catch

By Trent Hamm, Guest blogger / 02.15.12

One of the first topics covered in almost any personal finance book you read is the power of compound interest.

Compound Interest 101
 You can skip this section if you’re already familiar with compound interest and how it works. I’m including it for people new to the idea.

Let’s say you have access to a savings account that pays 5% interest. You decide to put $1,000 and let it sit for future emergencies. For easy math, we’ll say it compounds annually (meaning you only figure up the interest on it once a year).

At the end of the first year, that account has $1,050 in it. You have your original $1,000, plus you have 5% interest on it – $50.

At the end of the second year, the account now has $1,102.50 in it. You have the $1,050 you had in it after the first year, but this year it earned more interest – $52.50. Why? The interest earned during the first year is now itself earning interest. You didn’t just earn interest on the first $1,000. You also earned it on the $50 in interest from the first year – an extra $2.50.

At the end of the third year, the account now has $1,157.63 in it. You have the $1,102.50 from the end of the second year, but this year it earned $55.13 in interest.

Now, from the first year to the second year, your interest grew from $50 to $52.50 – an increase of $2.50. From the second year to the third year, your interest actually grew even more – jumping from $52.50 to $55.13 is a $2.63 increase in interest. Not only is the amount of interest growing from year to year, the amount that it grows each year is actually increasing.

At the five year mark, you’d have $1,276.28 in the account.

At the ten year mark, you’d have $1,628.90 in the account.

At the twenty year mark, you’d have $2,653.30 in the account. Your money has more than doubled without you lifting a finger, and every single year, the money has grown more than it did the year before.

That’s the power of compound interest. It’s not impressive at first, but if you stick with it, it becomes a locomotive.

Compound Interest Is Great, But There’s a Catch
 What’s the catch? In order to really enjoy the power of compound interest, you have to let your money sit for a long time.

In the example above, your money has doubled at around the fourteen year mark. Sure, it’s awesome that your money has doubled, but it took fourteen years for it to do so. That’s a long time. Think about where your life was fourteen years ago.

I was a college sophomore. I was dating the woman I would eventually marry. I had only met one of the large handful of people who would help me build my first career. My life was completely different.

The seeds of a success today were planted in that completely different life.

Compound Opportunity
 If you really want your money to have an impact on your life, you shouldn’t start with the investments.

The first thing you should do when you have some money to set aside for the future is to assess your goals. What do you want out of your life? What are your dreams? Your hopes for the future?

If things were to fall reasonably well, where would you really like your life to be next year? In five years? Ten years? Twenty years? When you’re 65? Those are the questions that should underline how you handle much of your money (outside of your basic bills).

Sure, we do spend some of our money for today, but spending all of your money for today means that you’re ensuring your tomorrow won’t be much better than today.

So, how do you most effectively turn that little bit of extra money today into the better life that you want tomorrow? There are lots of ways to do that – and they aren’t all found on the pages of a financial magazine.

Do you want a better – or at least different – career? The best way to get there is through education, and the best way to prepare for that is by putting your money into a 529 college savings plan for yourself for a few years, then making that leap.

What if you want something that doesn’t seem as directly related to finances, such as better physical fitness? That requires an investment of time and energy, not so much finances. Those are investments, too.

What if you want freedom from debt so that you don’t have the monthly bill stress and your boss doesn’t have as much power over you? That requires an investment, but it’s in the form of living lean and making extra debt payments.

In each case, the first little step you make doesn’t make a big difference. One day of exercise does not change your fitness level. One extra debt payment doesn’t rock your debt situation. A small amount in a 529 does not alone make for a new career.

Much like with compound interest, it’s the continuous steps that begin to build on themselves. Exercise several times a week and it becomes easier and more rewarding. Make an extra debt payment every month and the debt begins to melt faster and faster. Regular money in a 529 starts to build on itself, turning a dream of a new career into reality.

You can build the life you want. You just have to figure out what you want, then take steps every day to make that life happen, whether it’s a money step, an energy step, a time commitment step, or something else. The more steps you take, the easier they become and the more your efforts begin to reap rewards beyond what you expected.

Almost every success you have in life is an investment. Almost every success in life builds on the little steps you’ve put into it, growing beyond what you ever expected from them. A dollar in savings every day, a half hour practicing a skill every day, an energy-burning workout every day.

It all starts with the commitment to take those little steps and see a very small reward from those steps at first. Do it over and over again and those successes begin to compound. Stick with it and that investment begins to pay off in ways that change your life.

In this file photo, a couple strolls past shop windows in downtown Portsmouth, England. Your retirement saving plan should vary, depending on what you see yourself doing later in life. (Melanie Stetson Freeman/The Christian Science Monitor/File )

How to find a retirement saving plan that works for you

By Trent Hamm, Guest blogger / 02.13.12

My parents and Sarah’s parents are roughly the same age. Their retirement-age experieces are much different than each other.

My parents are both retired in the traditional sense. They have a limited fixed income made up of Social Security and some pension money. Their house and vehicles are long since paid for, and since their house is relatively small and older, insurance and property taxes are low.

Sarah’s parents are a completely different story. Her father will probably work until he can’t, partially for income reasons and partially because I think he deeply enjoys his work on many levels. Her mother had a “pseudo-retirement” but couldn’t stand it, so she returned to work. Thus, their income level is significantly higher, but their expenses are higher, too. They have nicer cars and travel regularly.

My own “retirement” plans involve a mixture of working on my own side projects and doing volunteer work. Much like my in-laws, I don’t feel happy unless I’m working on large projects. When I find myself without such large projects, I tend to drift and feel depressed.

As for Sarah, I expect her to very oriented toward volunteerism and any grandchildren we might have to take care of.

It’s pretty clear from just a simple survey of my own life that everyone has a different life plan for their 60s and 70s. Some people intend to enjoy leisure and volunteer work. Other people are wired to be productive in various ways.

Think about it for a minute. What do you plan to be doing in your 60s and 70s? Is it the same thing that you expect all the people around you to be doing?

Given how varied the plans people have for their later life are, why is it reasonable to think that everyone should plan for retirement in the exact same way? 

For example, let’s say my dream is to switch to a career path as a novel writer as soon as I possibly can, living off of my investment income starting at the youngest possible age. This means that I’d be choosing to live very lean in my 40s and 50s while I get some novels published, then enjoy more income from the combination of investments and book income in my 60s and 70s.

In that scenario, traditional retirement savings would serve a relatively small role. I might want to fund a Roth IRA or something to guarantee a bit more late-in-life income if needed, but most of my saving for the future wouldn’t be in retirement investments. I would focus instead on investing outside of retirement accounts to fund my dream.

On the other hand, a person like my father-in-law, who fully intends to work until he’s unable to do so, won’t need to live for twenty five years off of his retirement accounts. Much like my earlier scenario, the “traditional” use of a retirement saving plan doesn’t really fit his plans. It’s worthwhile for him to have some money in his retirement savings, but does he need to save for twenty five years of retirement?

I don’t have the ultimate answer as to how the people in the two above scenarios should be saving for retirement. However, it’s pretty clear that these scenarios don’t simply follow the “save 15% for retirement each year” plans that are often simply prescribed for people.

So, what does this mean for you?

First of all, thinking about your plan for your whole life pays off. We don’t always know exactly where our life is going to lead, but I’ll say that the general idea I had for my life when I was in my early twenties is more or less coming to pass. I envisioned having children and having a career that I had creative control over.

Naturally, big unexpected things can always derail those plans. I could get sick. Something else unforeseen could happen. In the vast majority of those scenarios, though, I’m not helped by having a lot of retirement savings, though I am helped by having assets on hand.

Second, understanding how to translate those plans into a financial plan is key. This might involve the aid of a financial planner, but at the very least, it involves some significant time studying investing options and knowing in what situations they’re most useful.

Finally, and this is key, just because you’re not saving for retirement doesn’t mean you’re not saving. If you have a future, it’s valuable to spend less than you earn and save for that future. No matter what your future self will be doing, he or she will be better off if he or she has money in the bank.

Retirement savings, in the form of a 401(k) or a Roth IRA, has certain advantages. However, those advantages only really matter if the direction of your life allows you to take advantage of them. Your life is not dictated by your retirement investment plans. Your retirement investment plans, if they’re needed at all, are dictated by how you live your life.

Spend less than you earn. Use retirement plans to help you for whatever you’ve got planned for your 60s, 70s, and later. Don’t assume that’s enough, particularly if you have a plan for your future.

Justin Smith, fills up his van at a gas station in west Los Angeles in this file photo. Keeping a consistent speed and using your breaks sparingly are good ways to save on gas. (Nick Ut/AP/File)

Good gas conservation habits pay off

By Trent Hamm, Guest blogger / 02.13.12

One of the fun things about my wife’s car is that it has a constant readout of the miles per gallon on the dashboard. It lets you know what your miles per gallon over the last five minutes is, the mpg of your entire trip, as well as your estimated miles per gallon right at that moment.

The data it produces is really accurate. We’ve measured this ourselves by checking the gas mileage manually by calculating it from the odometer and gas receipts and comparing it to the data in the car.

It’s often a competition between Sarah and myself to see who can get the best gas mileage over a given trip. Not only is it a bit of friendly competition, the reward for it is that we save money over the course of that trip.

For example, I managed to drive an entire three hour car trip while keeping the fuel economy average over 50 miles per gallon. I did this by utilizing lots of little tricks along the way, and doing so saved us several dollars in gas while only eating up a few more minutes of driving.

Sarah, on the other hand, managed to drive about fifteen miles while keeping the fuel economy average over sixty miles per gallon. She was aided by wind, which was blowing strongly in almost the perfect direction for her route, but it was still quite impressive. It added maybe thirty seconds to the drive but saved her about $0.50 in gas.

If this sounds like hypermiling, you’d be right. Although we don’t go to the extreme measures often advocated by hardcore hypermilers, we do try out the techniques.

The real impact of doing it is that several techniques for improving our fuel economy have become completely second nature for our driving. Here are some of those techniques that you can easily translate to your own driving. They might add a minute or two to your drive, but they’ll save you enough money along the way to make up for it.

Stick close to 55 miles per hour on the open road. This seems to be the sweet spot in terms of speed. If you go much faster than 55, your fuel efficiency starts to decrease. If you get much above 65, it decreases rapidly, somewhere in the realm of about 1% fuel efficiency lost for every mile per hour you’re going over 65.

When going through stoplights, accelerate slowly and coast. Rather than accelerating strongly out of a light, racing up to the next light, and then hitting the brakes, instead accelerate slowly out of a light and when you see the light turning red half a block in front of you, let off the accelerator and just coast until you need to stop. This minimizes your gas usage and gets you to the stoplight with plenty of time to spare.

When going down a hill, lay off the brake. Let your car accelerate a bit naturally, then use that extra acceleration to coast for a while when you get to the bottom of the hill.

When going up a hill, lay off the accelerator. Many people hit the accelerator when going up a hill. Don’t do it. Instead, let your speed go down as you’re climbing the hill, then slowly bring it back up when you get to the top. Often, hills link into each other, so you’ll often use the speed from the previous hill to climb the next one or get your speed back from the previous climb when going down the other side of a hill.

Things I don’t recommend that you might see as gas mileage tips include rolling through stop signs and overinflating your tires. The former is simply begging to get into an accident, while the latter tactic makes it very easy to blow out a tire.

Making a few little changes to how you drive can save you a surprising amount of fuel without adding much time at all to your trip. I’ll happily arrive a few minutes later if I’m saving a few bucks in gas.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere.

Once it thaws out, using a bike for short trips will help you save money and lose calories. (Leif R Jansson/AP/FIle)

For short trips, use a bike

By Trent Hamm, Guest blogger / 02.12.12

The winter is easily my least favorite season. It is very difficult to be outside for a long period of time when the temperature is approaching 0 F, as it often is in Iowa during the winter. You can put on a lot of clothes and do okay out there, but you’ve eliminated the possibility of doing anything that requires significant agility.

But spring, oh, the glorious spring.

One of the first things I do when the weather starts to turn warmer in March is get out my bicycle, oil up the chains a bit, air up the bicycle tires, and go for a ride. I’ve had this bike for a dozen years now and I expect to have it for at least a dozen more.

I’ll be wearing a backpack with some mail in it that needs to be mailed at the post office. I’ll stop by the small general store in our town if I need anything. I’ll ride out near the new construction in town just to see what’s going on.

I’ll get home, finding my legs just a bit sore and my lungs full of fresh air. Considering that I also usually spend that first really nice day mixing compost into the garden and playing soccer in the yard with the kids, the combination of fresh air and lots of exercise leads me straight into a deep and refreshing night of sleep.

I get exercise, I got fresh air, I got some errands completed, and it costs me virtually nothing. It’s something that I try to repeat as often as possible during the months of pleasant weather.

The thing to notice here is that I’m not using my car to get to the post office or the general store. I’m using my bicycle. Rather than using gas and putting more mileage on my vehicle (contributing to depreciation and maintenance), I’m simply using my trusty old bicycle to get the job done.

To make a trip to the post office and the store is just shy of three miles, round trip, on the roads. I could do the driving portion of that trip in about eight or nine minutes (the speed limit is about 35, after all, and there are several stop signs I have to go through, and there are always things like pedestrians and bicyclists and other cars that further reduce my speed).

On my bicycle, the distance of the full round trip is about a mile and a half, because I can cut through a park and also utilize a trail that connects a street to the lot on the back side of the post office. I can do this round trip in … about ten minutes.

So, I save about a minute using the car. However, every mile I drive in that car costs me at least $0.50 in fuel, depreciation, and maintenance, giving me a total of $1.50 for the trip.

Add in the fact that the bicycle trip gives me some moderate aerobic exercise (improving my health and my life span) and the bicycle trip is an enormous win.

What’s the message here? It’s simple. Use a bicycle instead of a car for short trips. If you’re just going a mile or two from your home, bicycle there and back, provided the weather is good. Used bicycles can be found at very low rates if you look around and the maintenance cost of a bike is nonexistent. Meanwhile, every mile you drive in a car eats up $0.50 and does nothing to help your health.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

Traffic stacks up on the highway south of Atlanta in this file photo. Hamm estimates that carpooling can save you $1600 a year. (Ric Feld/AP/File)

Why carpooling is cool again

By Trent Hamm, Guest blogger / 02.11.12

Yesterday, I wrote about how taking public transportation can save you money even if you just let a car sit in the driveway while taking the bus.

For quite a lot of us, though, public transportation isn’t an option. Even those who have a public transportation line near their home often find themselves without a place to depart that’s anywhere close to their place of work.

That leaves the door wide open to another option: carpooling. It’s one Sarah used for several years with great success.

When we moved to our current home, both Sarah and I had about a thirty minute commute to our respective jobs. The house we selected was pretty close to a midway point between our places of employment.

Both of us looked for coworkers who lived near us that we could carpool with to save money. I didn’t find one. Sarah did.

Sarah started carpooling with a much older fellow who was very close to retirement, and they carpooled together almost every day for the last two years of his working career.

After the first year, Sarah sat down and calculated how much money she saved due to carpooling. According to her best estimates, she saved about $1,200 a year.

Not only that, carpooling saved her time, too. She would spend a significant portion of most of the rides doing additional work, which would free her to spend more time with the family at home. Every other day, she could get an hour of work done that she would otherwise be doing at home.

That time would often result in better meals prepared at home, preparation of leftovers for lunch the following day, more effective creation of grocery lists, and other such little things that would save us additional money beyond mere carpooling.

If you can find three or four people to carpool with, even better. That reduces your driving time (and wear on your vehicle) even more and adds more “backup driver” redundancy to your carpool.

How much can this save you? It depends on how you calculate this, but when you add up all of the little costs, every mile you drive costs you at least $0.50 in fuel, maintenance, wear and tear, depreciation, tolls, and other such factors. If you’re commuting 10 miles each way every day, for example, that’s $10 a day, whether you directly see it or not.

Carpooling spreads out that cost. If you’re carpooling with two other people, that cuts your annual commuting days down from 240 to 80 (approximately). If you’re commuting that ten mile stretch mentioned above, you’re saving $1,600 a year just by carpooling.

That can be an enormous savings. That’s half a year’s worth of car payments on a reliable used car.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. 

Making a goal of good personal finance will help you achieve other dreams, Hamm argues. (Cheryl Ravelo/Reuters/File)

The real importance of good personal finance

By Trent Hamm, Guest blogger / 02.10.12

Whenever I spend time thinking about my life, I get caught up in a lot of ideals. I think about writing a great novel. I think about some volunteer projects I’d like to work on. I think about the house I’d like to build and the great travel I’d love to do in the next ten or fifteen years. I think about my own physical fitness and I think about riding in RAGBRAI.

These are wonderful dreams. I enjoy taking little steps toward them because, honestly, I usually enjoy the process.

Yet, when I step back and look at the broader scope of my life, that’s not what’s really important to me.

First and foremost, my family (and I consider my closest friends a part of that) is the single most important thing in my life. Bar none. Secondary to that is learning new things and, hand in hand with that, sharing what I’ve learned.

Almost every other interest and passion I have in my life is secondary to those things.

I’ll give you some examples to illustrate what I mean. Anyone who has read the site for very long knows that one of my favorite pastimes is playing board games and card games. I love playing games with other people across the table from me.

Yet, when I dig deep into it, it’s not really about the games. I do enjoy them, don’t get me wrong, but what I love about them is that it gets people I care about around a table engaging in a shared experience.

If you asked me what my favorite memories of board gaming are, they revolve around people. I think of playing Old Maid with my children. I think of playing Risk Legacy with my wife and three of my closest friends in the world. I think of sitting in my friend John’s living room, playing Descent with him and another of my closest friends.

Another great example comes from reading. If a friend or family member really enjoys a book, I’ll almost always give it a read. Why? Beyond merely being a good book, it becomes a shared experience with that person.

So let’s bring this home: what does this have to do with personal finance?

Personal finance is all about goals. If you’re not selecting a goal – whether it be freedom from debt, saving for an abundant retirement at age 70, or something else entirely – you’re either already incredibly rich (and you probably got there due to goals) or you’re spinning your wheels. Progressing toward a better and more secure financial state is something that pretty much every reader of The Simple Dollar shares.

However, goals are useless if you don’t feel completely motivated to move forward with them. You might desire a change in your life, but unless you’ve reached a point where that change feels vital to your future existence, it’s not going to happen. If you’re not getting out of bed with the feeling that today you’re going to move toward that goal, you’re probably not going to move toward that goal.

So, what is it that’s truly important to you? There is no right or wrong answer. It’s a matter of simply figuring out what’s truly important to you.

Here’s an example. I have a friend who dreams of being a sports announcer. He talks about it a fair amount. However, he also has a wife and a child at home. Recently, he told me that he thinks his sports announcing dreams are going to go on hold for a while. I asked him why, and he told me that chasing that dream requires a level of time and commitment that he can’t give to it right now. He had realized that his family was more important to him and he was sticking with the things that motivated him deeply every single day.

Does that mean that he’s abandoning the dream? Not entirely. Instead, he’s finding new ways to channel that passion that’s more in line with the rest of his family. He’s gotten involved with youth sports, assisting with the production of videos and other materials for other parents. This allows him to follow his passion while also being involved with his children. In fact, he’s starting a small video production company as a side business, where he creates professional videos highlighting a team and sells them for a reasonable fee. Several youth sports leagues are going to partner with him, so all he has to do is hire a few people to film the games, then edit them at home. He can film his own child’s games himself and involve the family in the production process at home.

Spending time with his family is the most important thing to him. Because of this activity, he’s spending time with them, earning some money on the side, and showing his children an entrepreneurial spirit along the way.

I can tell a very similar story about The Simple Dollar. My motivation to change my financial habits came from my oldest son. My motivation to write about it was many-fold: I enjoyed writing (value #2), I wanted to share some ideas with my friends and family (value #1), and I hoped to earn some money on the side to make our financial journey better (value #1), plus I would be able to involve my wife and my children in the process (value #1).

My dreams of making a living from writing didn’t start happening until I oriented them around what truly mattered to me. The same thing is true of my sports announcing friend.

So, what’s important to you? I think the easiest way to identify those core things that are important to you is to evaluate what you actually do over a long period of time. I’d focus on activities outside of the workplace, because we all need to earn a living, unless you’re already doing a job that’s key to what you value.

What do you spend your spare time on? I spend mine with my family and close friends as much as I can, and when I’m alone, I read and learn things. I bridge the two by finding ways to express what I’ve learned. This is what I enjoy doing.

My personal finance success came entirely from those things. My family inspired me to make changes with my money. My desire to read and learn educated me on how to do it. My desire to share what I learned launched The Simple Dollar.

You can follow a similar path with what you value the most. The key thing is to always remember that, no matter what your goals are, a solid personal finance foundation makes it all much, much easier to achieve.

A man enters a New York City subway in New York's Times Square. The transportation system is operated by the Metropolitan Transportation Authority (MTA). Hamm argues that using public transport in lieu of your car could save you hundreds of dollars per month. (Mark Lennihan/AP)

Use public transportation. Save hundreds.

By Trent Hamm, Guest blogger / 02.09.12

When I was in college – and for the first several months of my post-college career – I was an avid user of public transportation. I would ride the bus to work every day like clockwork.

For many semesters, I would catch a bus at about 7:48 AM or so. It deposited me right in front of one of the buildings where I would have a class at 8 AM at between 7:55 and 7:58 AM, giving me just enough time to stroll into the classroom, sit down, and open my notebook just as the professor began talking.

Later on, I would stand outside of that apartment building to catch the 7:37 AM bus, which would deposit me about two blocks from my work at about 7:55 AM or so, causing me to walk in the door about 8 AM. On days where I got an early start, I would catch the 7:07 AM bus (getting me there at 7:30) or even, on occasion, the 6:37 AM bus (getting me there at 7:00).

The best part was that the bus ride enabled me to do things like read a book or listen to NPR or an audiobook on my way to school or work. I did this virtually every morning and evening. I’d just carry a book in my bag and when I got to the bus stop, I’d pull out the book and start reading. When I got on the bus, I’d stick my finger in place just long enough to show the driver my pass, then I’d keep reading until it was time to pull the “stop” cord and get off at my destination.

On my way home, the bus stopped right by a grocery store, so I could stop there and pick up food. The bus ran roughly every fifteen minutes in the afternoon, so I would return to the bus stop and there’d be a bus along pretty quickly to get me if I made such a stop.

It was also far cheaper than driving myself to school/work. I paid about $79 for a six month bus pass that covered all rides, which is less than I would have paid just for the insurance on a car.

Time passed, though, and when I found myself making a good income, I convinced myself I needed a good car, too. I “bought” a truck (I no longer really think of it as “buying” something if you’re carrying a big debt on it) and, soon after, moved to an apartment outside of the range of the bus system.

Suddenly, I was free. I could go to work whenever I wanted! I could come home whenever I wanted! Freedom!

That freedom cost me about $250 a month in car payments, about $40 a month following the vehicle’s maintenance schedule, about $50 a month in gas, about $70 a month for auto insurance, and another $12 a month for parking.

$422 a month, down the tubes. Compare that to the $79 every six months I was paying for that bus pass.

Even if I just bought the vehicle and let it sit there, driving it rarely, I would still have about $335 a month in extra spending. In other words, it would have been cheaper to buy the vehicle, let it sit in the parking lot, and ride the bus to work than it would have been to drive the vehicle to work.

Unless you’re in a very unusual situation, where the cost of public transportation is really high or the price of gas and parking is really low, riding public transportation to work is going to be saving you money over driving to work.

That’s not to say that you must take public transportation every day. Ride it four days a week, then take your car the other day and do all of your lunchtime and after-work errands on the day you take your car. That way, you save money from the public transportation on the days when you’re just commuting, but have the flexibility of the automobile on the other days.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. 

No matter how cute, hauling extra cargo in your car will cost you at the pump. (Nader Daoud/AP/File)

Want to save gas? Clean out your car.

By Trent Hamm, Guest blogger / 02.08.12

Depending on the specific model, your car loses 1-2% fuel efficiency for every 100 pounds of extra weight in the car. That’s a surprising amount that can really add up.

For example, let’s say you’re matching the extra weight that a friend of mine (who we’ll call Cathy) carries in her car. She consistently carries (mostly) unused car seats in the back seat of your car, plus she hauls around a box of books in the trunk along with a few other excess items. The sum total of that extra load is about 70 pounds.

That means, depending on the model, Cathy is burning an extra 0.7 to 1.4% in gas just due to this extra weight. Let’s say it’s 1%.

If her car gets 20 miles to the gallon with the weight in it and she commutes, putting 20,000 miles on it per year, she’s burning 9.9 extra gallons of gas per year just due to carrying the extra junk.

Say goodbye to $33 or so a year in just fuel costs, Cathy, never mind the additional wear on all of your car’s components.

Even a slight difference of just ten pounds can have a real financial impact. Let’s say you’re driving the same car Cathy is, where you’re getting 20 miles to the gallon and you’re driving 20,000 miles per year. That 0.15% in additional weight is eating up 1.5 gallons in gas per year, costing you about $5 in additional fuel along with slight additional wear on your car.

The message here is clear: get the excess weight out of your car.

How can you do that? Simply make sure that you’re not carrying anything unnecessary in your trunk or your backseat. Evaluate what’s in there and get rid of the things that you don’t need to be carrying back and forth.

I’m constantly amazed at the things people carry in their trunk, from huge assortments of shoes to large gun cases. These things add weight to the car and you pay for that weight directly at the fuel pump and indirectly whenever you get maintenance work done on your car or need a repair done.

There’s only one exception to this rule that I’ve found. If you’re seeing any chance of icy roads, it’s worthwhile to have extra weight in your car because it improves your traction and keeps you safe. I often carry that extra weight in the form of sand bags or rock salt, both of which can help you in a rough winter situation. The extra safety is well worth losing a few percent in fuel efficiency for a season.

Aside from that, you’re only saving money and helping your automobile’s lifespan by reducing the load you’re carrying. If you’re not hauling it around for a purpose, don’t haul it around.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere.