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The Simple Dollar

Occupy Wall Street demonstrators protest against the rising national student debt in Union Square, in New York in this file photo. Hamm offers his advice on the most important single step towards getting out of debt. (Andrew Burton/Reuters/File )

What's the first step to get out of debt?

By Guest blogger / 04.30.12

When the bills from my debts were coming in fast and furious, the last thing I wanted to do was to think about them. At all.

I would avoid the mailbox like the plague. If I had to check the mail, I’d take all of the bills and put them somewhere out of sight and out of mind.

When I finally had to pay bills once a month or so, I cringed, pushed through it all as fast as possible, and tried to forget about the huge amount of money I’d just paid to the banks.

I knew it was bad, but I really didn’t know how bad. I didn’t want to face it, so I just pushed it out of my mind.

Doing that didn’t actually help. It actually made things worse because by avoiding the facts I was allowing myself to dig a deeper and deeper debt hole. By not knowing how bad the situation was and just blindly making the minimum payments and hiding, I was allowing myself to continue a cycle of overspending, one that created a very, very deep hole for myself.

Sitting down and actually looking seriously at my debts was the key step in getting my financial house in order.

Rather than hiding from all of those bills, I took them all out at once and looked at the giant mess as a whole. It was bigger and scarier than I thought and the realization of how bad it was shocked me. It made me realize that things needed to change, and I used that picture of my debts as the foundation for that change.

This advice goes out there to everyone who has a big pile of debt that they don’t want to think about. Perhaps a relative or a friend sent you this article, or perhaps you yourself are worried enough about your debt situation that you’re Googling for information and getting a sick feeling in your stomach.

Here’s what I recommend that you do.

First, take out the most recent statement for every single debt that you have. Some of them might be online, others might be stashed away somewhere. Get out all of them. If you’ve got any that you’re “hiding” (like a credit card bill you’re hiding from a spouse or something), you have to include that, too.

Then, total up the current balance of all of those debts. Add them all up. Don’t worry about interest rates or anything else. What you’re looking for now is the true situation when it comes to your debt.

When you see that total, it’s going to be painful. It should be. That number is the truth. It’s not hiding anything. From now on, you shouldn’t hide anything, either. Make it your mission to drop that number down to zero. Over the next few weeks, we’ll talk about how to do just that.

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. 

A "Price Reduced" sign is displayed on a home for sale in northern Virginia suburb of Vienna, outside Washington, in this 2010 file photo. If renters want to save for a down payment on a home, should they borrow from their 401(k) plans? (Larry Downing/Reuters/File)

401(k) plans: A way to save for house down payment?

By Guest blogger / 04.28.12

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. Career change conundrum
2. Teaching children chess
3. Home alarms
4. Developing a savings plan
5. Financial advice media
6. 401(k) plans as mortgage savings tool
7. Book deals
8. Headaches
9. Home buying and retirement saving
10. Handling minor legal issue

My youngest, who is well into his second year of life, has officially decided that he is capable of climbing everything.

Last night, I asked his six year old brother to play with him on the floor while I went into the next room to find pajamas for them. When I returned, the two of them had climbed into the top bunk of their bunk bed.

When I chided the older one for letting him climb, he just said, “It’s okay! I was behind him!” Not exactly a comfort, to tell you the truth.

Parenting seems to involve nightmare visions of children falling on their heads.

Q1: Career change conundrum
My partner (27) and I (26) work in IT management jobs (his is consulting, which he travels for). I make just under 70k, he makes 85k, usually gets at least a 10k raise each year. For the purposes of conservative planning, let’s say he’ll make more or less 85k indefinitely. We both fund our 401ks, he has about 20k in savings, I have about 15k. We live in NYC, so our cost of living is high.

My job used to bring me day to day satisfaction, but no longer does. I cannot get behind the overall goal of my company (retail), and I am very unmotivated to be successful here, although I know I could be. The corporate atmosphere is suffocating. I have health insurance through my partner as my benefits aren’t great, and I have had numerous health issues throughout my 20s that have taken years and upwards of $25,000 to ‘sort out’ (took me a few years to pay off my medical debt, but we have been completely debt free as of Sept 2011). Through this process, I was turned on to oriental medicine. The quality of care is amazing, and helping people change their diets and lifestyle to create lasting health is exciting.

After thinking about it for a few years, I finally applied and was accepted to a great school for oriental medicine in Texas. I am excited about the idea of doing something for others, with others, as my job, something where I am on my feet more (not in front of a computer all day), where I interact with people, a career that could be flexible with a family down the line (most practitioners open their own practice). Additionally, I feel like working in health care is not only an investment in my future health and that of my family, but a reasonably sound business decision with the aging baby boomer population. Here’s the deal: school costs $50,000 (total), plus living expenses, and the program is 4 years long. Additionally, when starting a practice, a few years of hard work is needed without much pay.

We have begun looking at apartments near the school, and the financial implications of going back to school have really sunken in. We like to travel and are lucky enough to have the time and money to do so now. We will need to spend a large chunk of change moving and buying a used car, and after that we will primarily have to live off my partner’s one income. I am overwhelmingly worried about ‘making it work’ under these circumstances. We have been reading Smart Couples Finish Rich for help, and I plan to roll my 401k over into an IRA that I will contribute to as often as possible. We plan to get married in 2013, so I should be ok on the benefits front, provided my partner maintains a job with health insurance. I know I will have to take on loans to do this, but I am so worried about the stress debt will bring in the future. I am so happy debt free and while I know we will likely eventually have a mortgage, I would like to keep our finances as strong as possible, yet at the same time, my job and my attitude towards this kind of work are greatly bringing down my overall motivation and confidence. Do you think I can pursue this career change without greatly jeopardizing our livelihood in our 30s (when we would like to have a family)??
- Dave

For the next decade, you guys are going to be living leaner than you were. There’s no question about this. You’re simply not going to have the funds to live the life you were previously accustomed to, when you look at the addition of school costs and the subtraction of salary.

Having said that, it’s not impossible, and if this is a route you’re passionate about, it will be well worth it. You will still have enough money to eat and have a roof over your head, which is what really matters. One key suggestion: find a mentor. Find someone who is actually doing this for a living and ask them for advice regularly.

As for having a child, you’re just going to have to wait and see where this path leads you. Just remember that there is no truly bad time to have a child if you and your partner are both deeply yearning to have one. You will make it work, as billions have families have done before you.

Q2: Teaching children chess
I’ve been trying to teach my five year old how to play chess. Playing chess with my father is one of my best memories of childhood and I am looking forward to experiencing it with my own child.

However, I’m having a lot of trouble making it work. My son is just overwhelmed with what’s going on with the game.

How do you teach your kids how to play games? I know based on other things you’ve said that you’ve taught your children how to play a lot of games.
- Leon

I started teaching my son chess and arimaa (a chess-like game) when he was four. The key is to break it down into little pieces.

The first time we played chess, we used nothing but a king, a queen, and two pawns apiece. Seriously. We played a bunch of games with just those pieces.

After that, I kept adding pieces to the left and right. One day, we added two bishops and two pawns to the game, and we took that slowly. After several more games, we added two knights and two pawns, then, later, we added two rooks and two pawns to each side.

Doing this step by step made the entire process far less overwhelming for him and now he loves playing both chess and arimaa.

Q3: Home alarms
My husband’s store, which had an alarm system, was recently robbed. This got me thinking about our own home and whether we should invest in an alarm system. I don’t feel like safety is a factor in our neighborhood, but there is always the “what if?” Do you have an alarm system for your home? Why or why not and what was your reasoning? By the way, I’m pregnant. So does having a young child in the home make it our responsibility to get an alarm system if we can afford it? Right now, I’m thinking it’s a want versus a need, so I wanted your input.
- Charity

My feeling on a home security system is that it’s mostly there to make the homeowner feel more secure. A home security system will not completely prevent your home from being robbed, though it does make it more difficult for the less enterprising thief.

In other words, it won’t stop the careful individual who will know how to meticulously clear out your valuables. It will stop the individual who will stumble into your home, grab the two or three valuable things he/she sees right off the bat, knock over a few things in the process, and run out the door.

I think the biggest benefit is that it enables people who really worry about any form of home intrusion to sleep a little better at night, and that’s worth the cost.

Q4: Developing a savings plan
I graduated from Nursing school this past December 2011. I work at a hospital, 36 hours a week (full time). Every two weeks my take-home income is roughly $1,400. I have 4% invested in my employer’s retirement plan (2% employer match) — pre-tax of course. Also pretax is a contribution to my Health Savings Account. My living expenses are roughly $600/month (rent, electricity, cable (which my roommate wanted and never uses), food and fuel). My auto loan is roughly $16,000. Monthly auto payment is $368. My school loans (payments begin this July, but I’ve been making payments since I began my job this February) total roughly $15,000. Monthly payments will be $150 between the two different student loan organizations. Therefore, every two weeks, I make an auto loan and a student loan payment. My budget at this point is set up for every two weeks and I am still getting use to living with my new budget. My problem is, I am having problems paying myself (meaning putting money in my savings ha!) because I want to be debt free as soon as possible. As of right now, I have roughly $4,000. My other financial short-term goal is to live alone (my roommate is bugging me at the moment and my friends are telling me that my emotional happiness is more important than my financial happiness. She’s not bugging me to the point that I am actively looking at apartments. I do plan to stick it out for a while…at least till the end of summer and then reevaluate the situation. But until then, I’d like more in my savings so I can purchase quality products (used is great) the first time. I’d also like to save up to purchase property at some point and go to graduate school (not till about 5-10 years from now).

What is your advice? How much do you suggest I put into savings every two weeks?
- Connie

I think that once you have a healthy emergency fund – meaning you have enough to cover two to three months of living expenses for yourself – you should focus on removing that debt. As long as you still have those debts hanging over your head, you should be focused on getting rid of them.

So, what I would do if I were you is calculate your living expenses and bills for three months, then target that amount as your savings goal. Make minimum payments until you reach that much in savings.

After that, target your debts. Don’t put anything into savings (unless you need to replenish after an emergency has claimed some of the money). Instead, just focus on paying off the highest interest debt as quickly as possible.

Q5: Financial advice media
Do you watch any television shows or listen to any radio shows for financial thoughts and advice?
- Megan

I listen to NPR’s Planet Money and Marketplace from American Public Media pretty regularly. I also sometimes listen to Dave Ramsey’s radio show.

I’m pretty selective as to the media I listen to or watch. Often, I feel like the things I read or hear or watch are just trying to sell me things that I don’t really want, like overpriced mutual funds or luxury goods.

I usually stick to books, because in those instances writers usually have to make the full case for what they’re talking about. On radio and television, they usually don’t.

Q6: 401(k) plans as mortgage savings tool
After renting for the last 4 years, my wife and I recently decided to start saving for a down payment on a house or condo. Since we intend to stay in our very expensive city, it will take 2-3 years to reach our goal. This savings will be in addition to our retirement savings. Our marginal income tax rate including federal, state, and city taxes is approximately 35%. My 401k program (actually the federal TSP) allows me to take a loan out against the balance.

I’m trying to determine whether it would be more beneficial for us to: (1) save my portion of the down payment in my 401k, and take a tax deduction now, but eventually have to repay the loan back into the account (I have an investment option in the 401k that is very similar to a savings account with a 2.5-3% return); or (2) just save the money outside and not have to pay it back, but not receive the tax savings up front.

I know there is some risk to #1 – if I lose or leave my job, I would need to pay back the money within 60 days, or it would become subject to tax and early withdrawal penalties.
- Kenny

I would not use a 401(k) as a savings tool for a down payment. There are too many chances that you’ll wind up having to pay a stiff tax penalty or not have adequate retirement savings, neither of which is an outcome that you want. The risk-reward ratio is pretty bad.

I would save the money outside of the 401(k). Don’t worry about tax benefits when you’re saving for something like this, because the tax benefits aren’t going to add up to a whole lot and have some risk of costing you more than they’re helping.

Don’t worry – you’ll get there.

Q7: Book deals
Have you ever talked in-depth about the process of getting a book deal, being paid, and things along that line?
- Lawrence

My experience has been a bit different, actually. For each of the books I’ve published, I’ve been approached by publishers who were interested in signing me to a book deal because of The Simple Dollar. In each case, I had a friend in the legal business help me with negotiations for a very nominal fee, resulting in deals I was very happy with.

I have not started trying to sell any of my fictional works. When I move forward with that, I will be seeking out an agent to help me sell it, as I don’t already have a foot in the door.

That’s really the challenge of it, I think. You need to have a foot in the door to begin with. What sort of special attributes do you have that would be appealing to a book publisher? Do you already have some sort of audience? I think things like this help greatly with selling a book.

Honestly, I am looking more and more at self-publishing as an option, using the Kindle store and other e-book stores as a starter and perhaps progressing to print publishing from there.

Q8: Headaches
I get headaches about twice a week. They’re incredibly annoying and usually wind up with me going to bed really early and wasting an evening. Do you have any frugal tips for dealing with headaches?
- Jennifer

Whenever I get a headache, I drink a bunch of water. I drink at least one tall glass of water and sometimes two tall glasses. I usually eat something small along with the water, but nothing too much. This solves the majority of my headaches, as they seem to be brought along by mild dehydration.

If that doesn’t work, I take a nap. Sleep deprivation can also cause headaches for me, and a nap or an early bedtime takes care of the majority of the remaining headaches.

If these tactics don’t work, try a couple aspirin. If that doesn’t work with any consistency, I’d talk to a doctor.

Q9: Home buying and retirement saving
I am 21 and will graduate this May with no debt or loans. I have accepted a full time job in Delaware for $60,000. I am looking to buy a starter home/townhome/condo around March 2013 since rates are so low right now and since where I live is not a “renting” area. As an added benefit, I will be living at home (most meals included), until I purchase a house.

While I am still researching, I have found that a house around $250,000 fits my budget ( What is your advice on this). Thanks to interning through the school year and summers, I have around $37,000 in savings, $5,000 in mutual funds, a $5,000 emergency fund and a Roth IRA that I am currently contributing $2000/year to, but I will contribute more when I work full time. In addition, my company 401K matches up to 6% plus an additional 3%, which I currently and will continue to max out.

Now that you know my background, I was hoping you could give me advice on a few questions.
- What should I do with the $37,000 in cash that is sitting in my savings account. Since I am planning on using a majority of this towards my down payment next March, I don’t want to tie up the money for too long. I was considering a short term CD may be my best bet.
- What price range of house do you think I should be looking at? I am planning on this being a 5-7 year home, and will likely not marry or start a family in it.
- How much of a down payment should I consider putting down?
- Given my financial situation, how much of my salary do you suggest I contribute to my Roth? This is in additional to my company 401k 
- Jim

The cash is probably in a pretty good place right now. If you’re going to put it in a CD, I would study the CD rates of a lot of different financial institutions before I made that move, and I wouldn’t do it unless I was getting a substantially better return than any of the savings accounts. Right now, CD rates are just about as low as savings account rates.

If you’re going to be single, you should look for a small home, particularly if you’re not going to live there long. You’ll be impacted less by swings in the local housing market, you won’t have space that you’ll just fill up with stuff you don’t need, and it will be far easier to move when the time is right.

I would stick with a 20% down payment, as that will help you to avoid mortgage insurance (an unnecessary expense often pushed onto people with less than a 20% down payment).

I usually suggest people contribute 15% of their income to their retirement. Your current contributions total 9%, so I would contribute another 6% to a Roth IRA. In your case, that’d be $3,600 a year, or $300 a month.

Q10: Handling minor legal issue
A few years ago my husband and I purchased a home for my mother-in-law to live in (in Michigan 250 miles from where we live). We made the down payment and she makes the monthly mortgage payment. However she has recently been in poor health and can no longer live alone. My brother and sister-in-law have moved in with her and have said they would like to purchase the home from us. Their credit is not good so they can not get a mortgage to purchase the home outright. Since we still carry a mortgage on the house can we legally offer a land contract? Do you have any suggestions? I was thinking of Legal Zoom instead of spending the money on a lawyer.
- Jenny

I am extremely wary of this. I would never, ever sign such a long term contract with any family member, let alone one with questionable credit. You’re pretty much begging for a family disaster to happen where no one speaks to each other etc. etc. I have watched such disasters happen multiple times with my own eyes, where previously close relatives resort to communicating solely through their lawyers due to the financial situation.

If you are serious about doing this, I would contact a property lawyer in Michigan and discuss the options available to you. You’re going to want to protect yourself as much as possible here. There may be a rent-to-own type of arrangement that you can work out with them that will reduce your risk (but still includes a lot of risk for hurt family relationships).

This is just a situation I would avoid. Families are more valuable than land contracts.

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.

In this March file photo, old houses, some dating from the 1800s, are seen in Stanley, Falkland Islands. Hamm argues that you shouldn't move into a bigger house just because you have too much stuff. (Michael Warre/AP/File)

A bigger house isn't an excuse for more junk

By Guest blogger / 04.27.12

When we were first married, Sarah and I lived in an extremely small apartment. It was (very) cozy for just the two of us, but it worked.

When we had our first child, we converted a small area into a spot for the bed and the crib for our baby. We literally did not have room for even a small desk in our apartment at this point.

When our second child was on the way, we finally realized that we had to move. Our older child was simply not old enough for being on top of a bunk bed and we couldn’t come up with another way to give everyone adequate space to sleep.

So we moved into a larger home, one that works great for us now. We have plenty of space for our family of five and more than enough space for every possession we have.

Now, let’s say we kept accumulating stuff. It fills every excess space in our home. Everywhere you look, you see clutter.

Eventually, our home would start to feel a bit cramped. We might eventually find ourselves considering a new, larger home simply for the stuff we had accumulated, at a tremendous cost.

The problem with that scenario is if we have so much stuff that it fills up our home, we can’t possibly have time to use or enjoy all that stuff. That’s why we employ the “one in, one out” rule most of the time. Too much stuff means not enough time to enjoy it.

Let’s say, for example, that you collect movie props. For a while, you’ll have plenty of space for them, but at some point, they’ll begin to crowd your living quarters. At that point, you will have a lot of movie props, but if you have a lot of movie props, you have less and less time available to enjoy and care for each one of them. If one movie prop takes five minutes a month to dust and clean, a hundred movie props take eight hours a month to dust and clean. If you can spend fifteen minutes a month enjoying and showing off one movie prop, you’re suddenly dumping 25 hours per month into enjoying and showing off the props you have.

Now, if movie props are your primary hobby, that might still be okay, but you wouldn’t want your collection to grow too much larger than that or else you will have little time or space for anything else.

In other words, if you don’t have time to enjoy an item, why do you have it at all?

If you find yourself in a situation where you have so much stuff that you can’t even recall the last time you looked at most of it, it’s not time to move or get a bigger house. It’s time to go through a lot of clutter and have a giant selloff.

There are situations where moving makes sense, like when you are having difficulty finding adequate sleeping space for your family. When you’re moving just to house your stuff, you might want to rethink your choice.

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.

Members of the Port Salerno Indians little league baseball team of Port Salerno, Fla., watch fly balls during St. Louis Cardinals batting practice before a spring training baseball game in this file photo. Some of Hamm's financial advice is inspired by baseball lessons he learned growing up. (Patrick Semansky/AP/File)

How to be content with your financial decisions

By Guest blogger / 04.25.12

When I was about ten years old, I dreamed of being a major league baseball pitcher. I got a book on pitching as well as some instructional videos for my birthday and I spent most of a summer learning how to properly throw a baseball.

That fall, I went back to school with my classmates. Several of us were out on the baseball field adjacent to the playground during recess, playing a pick-up five on five (or so) game of baseball.

I wanted to pitch. I wanted to show off what I had learned.

The first batter I faced was one of the slowest kids in the school and I struck him out swinging on three pitches. I felt good.

The next batter hit my first pitch far enough that he was able to walk around the bases.

The batter after that hit my first pitch even farther.

I was frustrated. I handed the ball over to someone else that could pitch better than I could and I manned the outfield. I stood out there and wallowed in my self-pity for a while.

Afterwards, one of the teachers who watched us play came over and talked to me. She told me that not everyone was meant to be a pitcher but that if I loved baseball I could find other ways to play the game.

It took me several years to really accept that idea.

Now, I can fully accept that there are some things that just aren’t going to work out for me. I’m not going to ever play major league baseball – that ship has sailed. I’m not ever going to be president of the United States.

That doesn’t mean I can’t be involved with baseball in some fashion if I wanted to. That doesn’t mean I can’t help with the campaign of candidates I care about.

It simply means I can’t do everything that crosses my mind – and I’m content with that. At some point, you have to choose among the things that you most want.

My life constantly deals me these choices, although perhaps in a less dramatic fashion.

Let’s say, for example, that I wanted to replace my desktop computer. As I’ve mentioned before, I play a few computer games with some old friends a few times a week. My old computer runs those games pretty slow – the animation of the games is pretty choppy at best.

Now, if I dove into a hardware replacement cycle that’s more frequent than my “get a new computer every half a decade or so” cycle, then I’d be spending more money on computer hardware. That would mean I would either (a) have to earn more or (b) have to incur debt or (c) cut back on essential retirement and education savings.

Honestly, none of those options appeal to me at all. I am content with a low frame rate because I know that I have lower stress in other aspects of my life and a solid path toward my financial future.

Other people might make different choices depending on what’s going on in their life.

The only thing that you really need to watch out for is when the choices you’re making lead to a less content life. You might have been able to choose to go out to eat twice a week for the last five years, but if you’re now facing mounting credit card debt, you need to ask yourself which option leaves you with a more content life: a credit card mountain that keeps growing or two more dinners at home each week?

For me, most financial choices come down to that. I take the path of least resistance every time. Most of the cost cutting measures I take in my life introduce far less displeasure than the worry and stress we had when our debt mountain felt insurmountable.

Do I wish I could have it all? Sure. It’d be great to have someone making me meals every single day, washing my laundry, and cleaning my home. It’d be wonderful to have every material thing I’ve ever imagined. However, if I lived like that for a month, I’d be under such bone-crushing debt that my life would be a nightmare.

I’m content with what I trade for financial security. I don’t drive a brand new car. I don’t eat out every night. I don’t have every little thing that my hobbies might desire.

What I do have is relatively low stress, a lack of debt, a secure home for my family, and plenty of time to spend with them. Those are the things that I have and that I cherish and that I don’t ever want to sacrifice.

I’m content with that trade.

Opening a print catalog is a surefire way to spend money on things you don't need, Hamm argues. Send them directly to the recycling bin. (Courtesy of Brittany Lynne)

Just say no to catalogs

By Guest blogger / 04.24.12

I’m a pretty tall guy with a particularly long torso. That means, unfortunately, I can’t walk into most clothing stores and find things that fit me well.

A few years ago, I needed a new suit for a particular occasion and I needed it pretty quickly. So, I went to a chain store that caters to tall men and found a suit that fit me really well. I was happy with my purchase.

Since then, on a monthly basis (or more frequently), I receive a clothes catalog from this company.

Most of the time, I do the sensible thing and immediately toss the catalog in the trash.

After all, a catalog mostly serves as nothing more than an opening to get you to buy things. It’s loaded with enticing pictures of things you don’t really need, often shot with aspirational touches that make you desire the item.

That’s why it’s usually a bad idea to ever even open up the cover of a catalog. If you get one, just toss it.

Sometimes, though, I’ll leaf through a catalog (we also get them from such places as Republic of Tea). Every single time I do, however, I find myself wanting something in the catalog that I had no interest in before I opened the pages.

That’s the primary purpose of a catalog. It’s essentially a giant advertisement, and like any good advertisement, the main reason that it’s been given to you is to convince you to buy some of the items inside.

The clothes look cool, clean, and crisp. The teas look delicious. The children’s items look intriguing and educational. Unless you’re wary, it isn’t long before you’ve convinced yourself that you need – or at least want – an item or two.

When an advertisement creates an irrational desire to buy something, you’re on the verge of a financial mistake.

Beyond that, catalogs are clutter. They take up space in your mailbox, likely take up some space in your home at some point, and eventually take up extra space in your trash. If you’re like me and you have to pay extra for disposal of materials beyond your container size, this can add up (thankfully, catalogs can usually be recycled).

What’s the solution? If you can, cancel the catalog subscription. That way, you don’t have constant temptation in your mailbox and extra clutter to deal with. If you still get catalogs, just recycle them as soon as you get them.

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.

Birds fly by with a view of the Dames Point Bridge in Jacksonville, Florida, in this file photo. Hamm shares his philosophy for knowing how much money to save now for retirement. (Kelly Jordan/AP/The Florida Times-Union/File)

Retirement savings: How much is enough?

By Guest blogger / 04.23.12

Over the last few months, I’ve read several articles that center around the idea that people should be saving every possible dime that they can for retirement. For example, Daily Finance recently had an article entitled Forget the 4% Rule: Retirement’s Common Wisdom Is Obsolete:

The theory was simple: If you spent a maximum of 4% per year of your retirement funds, the decline in principle will be slow enough that your money would last as long as you did. Though the percentage seems modest and the reasoning sound, this 4% rule ignores two factors that have become increasingly, glaringly relevant: first, market volatility, which has battered retirement savings over the last decade, and second, inflation, the silent force that erodes purchasing power year after year.

What does that mean?

The other issue with basing your retirement plan on simple rules is that it can lead to complacency. But the idea that you can “set it and forget it” and everything will be fine is a trap.

“There are so many ‘experts’ telling people different things, that they’re not going to have to worry,” D’Arruda said. “A rule means something in writing, something enforceable. But in retirement planning, there’s a fluctuating source. You can’t take a guarantee.”

Let’s look at an example case from a reader that I’ll call Marvin.

Marvin has $800,000 put away for retirement, mostly in really conservative stuff like bonds and cash. Overall, he’s earning about 2% a year on his money. He was bitten by the stock market collapse in 2008 and doesn’t want his money in stocks. Marvin wants to retire in ten years, so he wanted to know how much money he should be putting away.

I asked him a few questions. How much does he anticipate spending (in current dollars) per year in retirement? He told me about $50,000. What will his Social Security benefits look like? He estimated around $1,500 a month (adding up to about $18,000 a year).

I told him that if he wants to retire in ten years, he should be putting away every single dime he can starting right now and that he should anticipate trying to earn at least some income during his retirement.

I don’t think Marvin liked that answer.

Why did I tell him that, though? The big reason is that his plans for retirement are riddled with uncertainty.

First of all, there’s inflation. Let’s say inflation grows at 3% a year for the next thirty years. If he’s estimating spending $50,000 in today’s money, during his first year in retirement, he’s going to be spending just shy of $70,000. During his eleventh year? $93,000. That’s more than 10% of his total retirement balance. His Social Security might go up a little, but it’s not going to go up that much.

There’s also the issue of fluctuation in investment returns. Right now, Marvin is very conservative and only earning a 2% return on his money. That’s not enough of a return to build substantial wealth. With that level of return, unless he contributes more, he’s not going to even crack $1 million for his retirement plans.

If he moves into stocks, he will likely get a higher long-term average annual return, but it will be highly volatile. He might average out to 5%, but one year might see a 20% loss while two other years might see 15% gains. Volatility at the wrong moment in retirement can eliminate years of living expenses and you won’t have time to see the market rebound save you.

There’s also the issue of uncertain lifespans. If Marvin retires at 65 and lives until 75, he’ll be fine. If Marvin retires at 65 and lives until 95, he’s going to be in big trouble. None of us know for certain how long we’ll live.

The article seems to imply that individuals shouldn’t be involved in planning for this and that financial advisors know better. I don’t really agree with that. All of these factors rely on knowing unknowable facts about the future. No financial advisor in the world can tell you how long you’ll live, how volatile the stock market or other investments will be in the next ten years, or what inflation will do in the future.

However, there’s one thing that almost no one can argue with. The more money you save for retirement, the more money you’ll have when it comes time to retire. The more you put in now, the more you get out later.

The solution is simple. You can either save as much as possible for retirement now so you don’t really have to worry about this too much. On the other hand, you can save less and accept that your final years will likely involve leaner living.

I am almost always of the belief that if I can make a minor sacrifice now, that’s far better than having to make a major sacrifice later. If I can squeeze out another $1,000 a year right now, that might add up to another $1,500 a year in retirement.

It might make the difference between never going out to eat with my wife or having a nice dinner out with her once a month.

What do I have to sacrifice today to get there? If it’s something small that I can give up and apply that savings to additional retirement savings, then it’s well worth it.

That’s how I look at retirement savings. I’m making little sacrifices now so that I can enjoy life more later on. If I can resist that new gadget that I don’t really need and probably won’t use very much today, I can have some breathing room and a little less stress and a little more fun later on.

It is never a bad move to save more for retirement. 

A customer carries shopping bags at South Park mall in Charlotte, North Carolina in this file photo. Hamm offers an easy rule for managing how much stuff is coming in and out of your house. (Chris Keane/Reuters/File )

Easy ways to trim your stuff

By Guest blogger / 04.20.12

I have about two dozen shirts, all told, in my wardrobe. They have various levels of wear on them, from a few that look practically new to a few that look like they’re approaching “rag bag” level.

Whenever I buy a new shirt, I don’t just toss it in my drawer and go on with business. I make sure to transfer a shirt to the rag bag (or to the “sell later” pile) at that point.

If I didn’t make that transfer, it wouldn’t be long before my shirt drawer and closet were overflowing with shirts, making it difficult to find the shirt I wanted. I’d also be putting money into clothing that I didn’t really need.

This same philosophy works well with almost everything that you have a “collection” of that takes up physical space, whether it be DVDs or home decorations or vintage soda bottles. When one comes in, one goes out.

There are a couple reasons why this tactic really works.

For starters, if you stick to that rule, the overall volume of your stuff won’t expand very much. Often, it is the expansion of one’s “stuff” that makes a home upgrade desirable, so that you have room for all of your stuff (and, eventually, much more). A home upgrade is an enormous expense, one that can often be postponed or avoided by simply having a firm grip on your acquisition of items.

At the same time, a one-in, one-out rule like this one makes you carefully consider purchases. Is that new shirt really better than any of the shirts you already own? Is this DVD more essential to own than any of the ones already in your collection? If you can’t answer yes to those reasonable questions, you don’t buy an item. This keeps money in your pocket instead of in the coffers of retailers from which you purchased something you really didn’t need.

We use this tactic with quite a few of our collections.

For example, I’ve long instituted this rule with my video game collection. This led me to not directly buying games, but instead trading games I had played through at a local used video game store, replacing them with new ones to play.

We’re even starting to introduce this to our children as a tool for reducing the growth of toys. Sure, they receive several toys as gifts from grandparents and parents on their birthdays, but that means it’s time to re-evaluate the toys that they already have.

This tactic reduces clutter, reduces the growth of one’s stuff (saving on potential housing costs), and saves money on purchases. That’s a victory in three directions.

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.  

In this Thursday, March 29, 2012, photo, from left, Chris Overbey makes his way up the ladder as Josh Holtackers and Thomas Lefrod hold the ladder steady to rescue a cat in Tampa, Fla. Hamm argues that borrowing items you rarely use, like ladders and power tools, is a good way to save money and get to know your neighbors. (Carolina Hidalgo/AP/The Tampa Bay Times/File)

Borrow first, buy later

By Guest blogger / 04.19.12

Last year, one of our younger neighbors was having some difficulty with her bicycle. She got on it, rode for a little bit, and would hop off, telling everyone around that there was something wrong with her bike.

I walked over to her bike and examined it for a bit, then I told her I had something in our garage that would fix her bike quickly and she could borrow it for a bit.

I went into our garage, retrieved an air pump, and brought it out to her. I showed her how to use it and I told her that if she needed it again, she could just ask.

A few days ago, she knocked on our door and asked if she could borrow “that tire thing-ey.” I let her borrow it and within fifteen minutes, she was happily riding her bike through the neighborhood.

Our bicycle pump is a scarcely used thing, even in a family with four people on bicycles. In that girl’s house, she may actually be the only bicycle rider, so owning a bike pump is a pretty superfluous expense, especially when there’s one right in the neighborhood that she can use.

There’s no reason for them to invest money in a bicycle tire pump if there’s one available that can easily be used. The same is true for a lot of items one might rarely use, from hand saws to drills, from wet-vacs to tall ladders.

Borrow such items from a neighbor (or a friend) and let that neighbor (or friend) borrow freely from you. When you need an item, just check with a neighbor first instead of buying or renting the item.

Of course, this requires having a relationship with your neighbors as well as your own strong social network. It takes relationships for this to work.

So, the first step toward saving money in this regard is simply getting to know the people around you. Introduce yourself to your neighbors. Have a conversation with them. Chat with them a bit when you see them around. If you hit it off at all, invite them over for a meal.

Once you’ve done that, it’s not too much of a stretch to simply knock on their door if you find yourself in need of a particular item.

Similarly, if you see a neighbor in need and have an item that can help, don’t hesitate to offer. The outcome of that situation is almost always going to be a positive one and will often open the door to your future borrowing, which will save you money. The cost for you doing this will usually be negligible (a tiny amount of wear on an item that you almost never use), but the reward can be tremendous.

Borrowing items is a great way to save money, provided you’ve got the relationships to tap.

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.

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Magazines can easily start building up around your home. Hamm offers a few easy tips for managing the paper mess. (Brittany Lynne Photography )

How to manage magazine clutter

By Guest blogger / 04.18.12

I enjoy reading magazines. A well-written magazine article is a perfect way to learn something new about the world in a relatively quick fashion. A magazine article length is just about perfect for “family reading time” or for other brief opportunities throughout the day.

An aside: our family has a pretty regular “family reading time” in which we each read something (or, in the case of the youngest members of our family, have something read to us) for a set period of time. We’re usually all in the same room when we do this. I try to choose a variety of things to read during this period so that the children see me reading a variety of things. A big part of “family reading time” is to encourage reading through emulation.

I tend to prefer either magazines that focus strongly on well-edited and well-researched deep writing (like The Atlantic) or magazines that teach me how to do something new (like a good cooking magazine).

In our neighborhood, children are often selling magazine subscriptions to support their clubs and other activities, and Sarah and I tend to support them, particularly children that live near us and play with our own children. The result is that we end up subscribing to a few different magazines along these lines.

This leads to another problem: magazine bloat. If you subscribe to several different magazines, that means you’re getting the issues in the mail very regularly. That’s a lot of paper entering your home.

If you aren’t completely on top of reading those magazines immediately – and most of us are not – those magazines can start building up and cluttering your home.

If you hit a busy phase in your life, there’s a good chance that some issues will go entirely unread. I know that during particularly crazy weeks around here, we’ll miss issues of magazines, even ones that we love.

If you have “project” magazines and you want to hold on to some of them for future tasks, the magazines will start building up.

The end result of all of these things is clutter. Magazines, if not properly maintained, can easily grow into a cluttered nightmare.

The easiest solution is to simply trim your magazine subscriptions. Don’t resubscribe to the magazine (or two) that you read the least. This will save you money and reduce the number of issues cluttering your home.

Other useful tactics:

Have an organizing system for your “project” magazines. I love to hang onto issues of magazines that encourage me to do things, like cooking magazines or homebrew electronic magazines. If you don’t have a system for getting them out of the way and in a coherent order, they can cause a real mess. I simply have a closet shelf devoted to project magazines, where I keep all of them.

Tear out or otherwise record key tips, then toss the magazine. Don’t keep a full magazine just for one recipe or one idea. Tear out that page and save it, then toss the rest of the issue. Better yet, copy down that one piece of information you want to save in some electronic fashion, whether through scanning or typing it in.

If you’re talked into subscribing by a young salesperson, just extend a subscription to something you already get. If a child is on my doorstep and I’m looking at the catalog of magazines they have for sale, I always look for ones I’m subscribed to and intend to keep subscribing to. If the price is reasonable, I choose that one. This way, my subscription is just extended and I’m not facing any new magazines that I don’t really want coming in the mail.

Keep your magazines under control and you’ll keep one source of clutter well under control (and perhaps save yourself a bit of money, too).

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. 

Avoiding paper documents cuts down on the clutter and reduces your vulnerability to identity theft, Hamm argues. (Courtesy of Brittany Lynne)

Five easy steps to going paperless

By Guest blogger / 04.17.12

For us, one of the biggest sources of clutter is printed documents. While we make an effort to keep our important printed documents filed, the sheer volume of mail and other printed documents we’ve received in the mail can be overwhelming at times.

Obviously, the first step in this process is to have a good system for keeping documents filed. A filing system, where the documents are relatively out of the way and in some sort of coherent order, can certainly be a big step in the right direction.

Still, even with that solution, you have a large volume of papers taking up space if you’re careful about retaining documents.

The next step in the process is to move to an electronic filing system. You take your documents and scan most of them into your computer rather than saving them in paper form.

Even with this move, you still have some potential for clutter. To protect yourself against identity theft, quite a few documents you acquire need to be shredded and, if you’re not immediately efficient with the shredding, that can also create clutter.

The best solution I’ve found for avoiding document clutter entirely is to simply avoid printed documents whenever I have the option.

Whenever you have the opportunity, sign up for services that allow you to receive statements electronically rather than in paper form. This can drastically reduce the amount of paper flooding your mailbox.

Many services for which you are billed will happily distribute statements and bills to you electronically. Often, what will happen is that you’ll receive an email when there’s a new bill available, at which point you log on and check it, then pay it via check or online banking.

I usually make a point of saving the statements to my local computer, where I maintain my own file of electronic statements.

Of course, one key part of making this work is making sure that your computer is secure, but this is something you should be doing regardless of whether you transition to paperless methods. You should be running a strong antivirus package and an anti-spyware package. If you’re not running anything else, you should at least run Microsoft Security Essentials, which is free.

Another reason for doing this is that, if your computer is properly secured, you’re reducing avenues of identity theft. The fewer documents with personal information in your mailbox, the fewer routes for identity theft in your life.

The more bills you receive in paperless form, the fewer papers you recieve in your mailbox. That means less clutter and, most likely, fewer routes to identity theft as well.

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.

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