The Simple Dollar

This road in County Kerry, Ireland, is typical of the nation's hilly, narrow roads with spectacular views. (Jake Coyle/AP/File)

Hope in the future

By Trent Hamm, Guest blogger / 04.04.13

When I first graduated from college, when people asked me about my future, I would fire off a few vague statements about what I wanted. I wanted a great career! I wanted to have kids! I wanted a nice house!

All of those ideas were nebulous and vague. Sure, they echoed sentiments that I held in my heart, but they weren’t anywhere close to being authentic goals. A house? A child? A “power” career? Those weren’t things I envisioned happening any time soon. I didn’t even have any idea as to how to build a path to them.

It took a few years for pieces to fall into place. I got married. We had our first child. I began to seriously re-examine my career path.

Those changes pushed me to start re-examining all of those visions for the future. I started to ask myself what I really wanted for the rest of my life and how I’d get from where I was at to where I wanted to be. ( Continue… )

A money changer shows some one-hundred US dollar bills at an exchange booth in Tokyo. Some banks offer savings accounts that offer bonuses in exchange for regular contributions. Hamm argues that it's a good idea, provided you can easily keep up with the payments. (Issei Kato/Reuters/File)

Do 'savings club' accounts really work?

By Trent Hamm, Guest blogger / 03.30.13

Carol writes in:

My local bank offers an interesting account each year. It starts on the first Saturday in January and the deal is that if you deposit the same amount each week for 49 weeks, they will make the 50th deposit for you and give you the money at the end of the year just before Christmas. You can’t take the money out of the account and if you miss any payments you don’t get the free 50th payment but they do set it up so you can pay in automatically out of your checking account. It seems worthwhile, but is it worth it?

I’ve heard of this type of savings product before. It’s also been called a “Christmas club,” among other things. Let’s walk through this step by step.

I calculated the interest rate on this account as being roughly 4.15% I calculated this based on an account that you deposit money in each week and that compounds weekly, and on the fiftieth week you don’t make a payment and instead receive the total value of the account at the end of the week. In other words, the money you put into this account earns interest at a rate that’s pretty close to 4.15% per year.

That amount blows away pretty much every savings account available right now. There are some catches, however.

First, this account has a lot more in common with a CD than with a savings account. The biggest difference between a CD and a savings account is that you can’t withdraw the balance of a CD before it matures without suffering a penalty. The same thing is true here – if you withdraw the money before it matures (after fifty weeks), you lose that “free” payment at the end, which reduces the interest rate you earn down to 0%.

There’s also the caveat of having to make a payment every week. If you can’t make that payment each week, then you suffer the same penalty as an early withdrawal – your interest rate essentially drops to 0%.

Not only do you have the money tied into the account, you essentially have to have the next payment tied to the account at least a day or two in advance (and even longer unless you’re really micromanaging things).

What about the return on your money, though? Given the restrictions on deposits and withdrawals, you should expect a return that’s similar to a CD and substantially better than a savings account.

Right now, savings accounts are earning at a rate below 1% in most places. You can find accounts that pay out 1% or, in a few cases, even a bit better than that, but they’re unusual cases.

12 month CDs, on the other hand, pay out somewhere between 1% and 1.5% at the moment, depending on the exact CD you find.

Naturally, both savings and CD rates vary over time. In a few years, when overall interest rates begin to rebound, the rates on both savings accounts and CDs will go up, making this type of “savings club” a bit less lucrative.

For now, though, it’s a very good deal. If you have the chance to get into one of these clubs and can easily afford the weekly contribution, it’s definitely worthwhile. In future years, you’ll want to compare the return to savings accounts and checking accounts to be sure you’re getting your money’s worth, though.

The post Does a “Savings Club” Account Work? appeared first on The Simple Dollar.

If your “income” is just the amount coming home from one wage earner, then your lifestyle will shrink to fit it, Hamm writes. (Beawiharta/Reuters/File)

Can you live on one income?

By Trent Hamm, Guest blogger / 03.28.13

For the last few years, Sarah and I have established a very simple goal. We live entirely on the larger of our two incomes and sock the entirety of the other salary into savings. So far, we’ve basically been able to pull this off.

Why do this? There are three big reasons.

First, it establishes a very clear baseline for our savings for the future. We know that one of our income streams is going entirely to savings, which means we can essentially exclude that from our living budget. There’s no questions about how much we should save and how big of an element it should be in our budget. Instead, our budget involves a very tiny amount for savings (mostly just growing our emergency fund).

Second, it means we’re saving a lot for the future. We decided long ago that we were going to strive to “retire” as early as possible, which essentially meant that we would follow some life goals that didn’t revolve around earning income.

We want to spend quite a few years doing volunteer work while we’re still physically able and mentally sharp. I’d like to spend some significant time focusing on fiction writing, which isn’t a real lucrative path if you’re needing a strong income stream. Our savings plan enables us to work toward this goal very effectively.  ( Continue… )

A money changer displays one-hundred US dollar bills at an exchange booth in Tokyo. Fixing a short term problem by pillaging your long term savings is never a good idea, Hamm writes. (Issei Kato/Reuters/File)

The financial mistake 25 percent of America makes

By Trent Hamm, Guest blogger / 03.26.13

What mistake? According to the Arizona Star, more than 25% of Americans are raiding their 401(k)s to stay afloat.

The only way this even looks like a good idea at all is if you’re looking only at the very, very short term. If you look beyond that, making this move is pretty clearly worse than using a high-interest credit card to pay your bills. In fact, if we’re comparing disastrously bad financial moves, I’d actually prefer to use a credit card cash advance to pay a bill than pull money out of my 401(k) early.

Why is it so bad to tap into your 401(k) early? Let’s use this 401(k) early withdrawal calculator to see how big the disaster is.

Let’s make a few reasonable assumptions first.  ( Continue… )

A staffer checks a column of lockers at a mini storage service provider inside an industrial building in Hong Kong. If you’re using some square footage for storage, then you’re spending a lot of money just to store stuff, Hamm writes. (Bobby Yip/Reuters/File)

Want to save money this spring? Lose the storage space.

By Trent Hamm, Guest blogger / 03.25.13

Storage space is one of the biggest money drains that people have.

Think about it for a second. What do you do with storage space? You fill it up with stuff that you don’t have any consistent use for. If you had a consistent use for it, it wouldn’t be in storage.

Most of the stuff that people have in storage should actually be sold on Craigslist or eBay or put in a yard sale to generate some funds instead of taking up space. Sure, there are always a few things that make sense to put into storage – Christmas decorations, older tax documents – but those items take up perhaps one closet.

That’s only part of the equation, though. You actually pay for storage space.

Storage space counts toward the square footage of your home. The greater the square footage, the greater the cost. If you’re using some of that square footage for storage, then you’re spending a lot of money just to store stuff.  ( Continue… )

A credit card user displays her cards in Washington. If your finances are out of control, Hamm recommends that you take credit cards out of your wallet and stop using them immediately, at least for a little while. (Kevin Lamarque/Reuters/File)

Digging out of debt: the first step

By Trent Hamm, Guest blogger / 03.24.13

Financial meltdowns often start with a small thing – the figurative straw that breaks the camel’s back.

I’ve read stories from readers about the many small things that have caused them to start reassessing their lives. They had a credit card rejected at an inopportune moment. They didn’t have enough cash to pay for the groceries in their cart. For me, it was facing a stack of bills that I didn’t have the money to pay.

For some, that figurative back-breaking straw can come with the first real sign of financial distress. For others, it takes something much more severe, and sometimes nothing will make them change their routines.

When people reach that back-breaking point, though, whatever it may be, their first instinct is usually to get their short-term finances in good shape. In other words, they want to do things so that they know they’re going to make the rent this month and that their bills are paid. Once that’s under control, medium and long-term planning can begin to take priority – how can we get out of this mess, in other words.

Today, let’s focus on that first step. What do you do when you finally reach a breaking point, realize that your finances are a disaster, and need a plan to help you get rid of some late bills and still make the rent? ( Continue… )

Sales consultant James Field adjusts the tie display at bespoke Savile Row tailors Anderson & Sheppard in central London last month. Hamm recommends asking co-workers for tips on building a new, work-appropriate wardrobe on a budget. (Andrew Winning/Reuters/File)

Dress for success without breaking the bank

By Trent Hamm, Guest blogger / 03.23.13

Monica writes in:

At my new job, everyone dresses incredibly well. Everyone is wearing expensive – or at least expensive-looking – suits and other businesswear. My wardrobe is simply not up to snuff. Catching my wardrobe up to the level of everyone else is going to be really expensive. Do you have any suggestions? 

First of all, I view it as a completely reasonable thing to dress at an appropriate level in the workplace. If your workplace has a dress code, whether informal or formal, then you should measure up to that dress code.

That being said, I don’t think it’s realistic nor expected that you immediately have a $10,000 wardrobe if you’re new to the environment. There may be a subtle expectation that you eventually reach that level, but I don’t think you need to go out tomorrow and get thousands of dollars in debt to play catch-up.

If I were in your shoes, I’d actually use this situation as an opportunity. You are in a great position, being new in the workplace, to establish some relationships in the office, and your clothing situation is a great opportunity to do so.

Look around your office and identify a few people that you consider to be very sensible and potentially compatible with your personality. If you pay attention, you’ll be able to find people who are more sensible than others. What people use mass transit for their commute? What people drive more sensible cars? What people are solid and reliable in the workplace and are liked by everyone? Look for those people.

Then, approach those people individually and privately and ask how they put their wardrobe together. Where did they shop? How do they seem so well put-together? Don’t be afraid to add some compliments when you ask, as everyone likes to be flattered.

Be honest about your financial situation. Make it clear that you’re new and that you don’t have a lot of accumulated money.

I have approached people – and been approached by people – in situations very much like this one. Each time, it has become the source for a good relationship. Most of the time, people like to help others, and they particularly feel flattered if you’re coming to them specifically for advice. That’s a great first step for a good workplace relationship and/or friendship.

Another point of advice: buy modular clothing, especially at first. Buy clothes that can be easily mixed and matched to give the appearance of different outfits so that you’re not having to buy as many articles of clothing at once.

I’ll openly confess that I find this pretty easy to do for my own dressy clothing, but I am rather unfamiliar with the specific needs of professional clothing for women. My only experience in that department is through Sarah’s clothing, and she seems to indicate that mixing and matching works reasonably well for her, too.

For myself, anyway, I have a suit and several pairs of dress pants, but I have several shirts and a number of ties. Most of the permutations of shirt, pants/suit, and tie work well together, so it can appear like I have a lot of dress clothes when I actually have very little. Since there are clearly some combinations that don’t work well, I don’t wear a combination unless both Sarah and I think it looks good.

The result of this is that I don’t have to invest in lots of different clothes to make a variety of nice clothing work. I just have to maintain compatible clothes and replace the individual pieces as needed (which isn’t too often – I rarely have to “dress up” for professional or personal purposes).

If you use that clothes-buying strategy along with the tactics and tips suggested by your new workplace acquaintances, you’ll not only build a solid wardrobe at a very passable cost, but you’ll also build a much stronger professional network.

The post Dressed for Success appeared first on The Simple Dollar.

A vault in the lower level of the First National Bank building in Richmond Va. There are several factors that can help you figure out how big your emergency fund needs to be, Hamm writes. (Mark Gormus/Richmond Times-Dispatch/AP/File)

Emergency funds: How much should you save for a rainy day?

By Trent Hamm, Guest blogger / 03.21.13

I consider an emergency fund to be an essential part of financial preparedness for every person. If you or your family doesn’t have one, you need to start building one now.

Let’s start off with the basic idea of what an emergency fund is. I like Dave Ramsey’s definition of an emergency fund: An emergency fund is a rainy day fund, an umbrella. It is for those unexpected events in life: a job loss, an unexpected pregnancy, a car transmission going out, and so on. This is not an investment or a Bahamas fund!

Dave goes on to suggest that a person have an emergency fund of $1,000 while they’re paying off high interest debt (any debts above 8% interest or so), but grow that to an emergency fund of three to six months of living expenses when they’re focused on their lower interest debts.

Those are reasonable numbers, but where do they come from? Honestly, I think those numbers are just good, rough approximations of the needs that a typical American will have from their emergency fund. 

I think there are several factors that can help you figure out how big your emergency fund needs to be.  ( Continue… )

A Panera employee restocks pastries during the lunch break at Panera Bread bakery-cafe in New York City. If you stop eating out for lunch and cut other extra expenses, you have more to save or to put toward debts, Hamm writes. (Ann Hermes/The Christian Science Monitor)

Where has all your money gone? Into small, daily purchases.

By Trent Hamm, Guest blogger / 03.20.13

Let’s say you make $45,000 a year – that was the median income for a male in the United States in 2007. You pay 25% in taxes each year between federal, state, and local taxes of various kinds, leaving you with $33,750 in money you bring home each year. Reasonable, right?

Let’s say you’re paid weekly. Your paycheck, then, is $679 per week.

Now, let’s look at some hypothetical expenses.

You go out with coworkers for lunch each day, costing you $10 per lunch. That’s $50 per week. Right there, you’re blowing 8% of your take-home pay.

You hit Starbucks each morning for a pick-me-up. It costs you $5 each time you stop, or $25 per week. Right there, you’re blowing 4% of your take-home pay.  ( Continue… )