The Simple Dollar
Newborn. Three months. Six months. Nine months. Twelve months. Eighteen months. Twenty four months. 2T. 3T. 4T.
Children go through clothes sizes incredibly fast. I’ve watched my own children blaze through all of the above clothes sizes in three to four years.
That means children simply aren’t going to wear out the clothes you buy for them. Assuming you have at least a few different outfits for them, they’re simply not going to wear a given set of clothes more than ten times or so before they outgrow them. Unless you’ve got incredibly hard water or some other mitigating factor, the clothes that they outgrow are mostly going to look very good when they outgrow them.
What do you do with children’s items that no longer fit? You either sell them or give them away. For a lot of people, that means a yard sale or a garage sale.
Virtually all of the shirts, pants, dresses, and other such outer items worn by our children come from three places: grandparents who can’t resist buying a cute outfit for their little grandchildren, yard sales, and secondhand stores.
If you drive through a suburban neighborhood on a warm spring or summer weekend, you’ll inevitably find some signs posted directing you to local yard sales. Many of those sales are hosted by beleaguered parents who are trying to unload clothes that their children have outgrown, often nearly new and often at impressively low prices.
Here are a few tactics to really maximize your dollar when buying children’s clothes at yard sales.
Don’t be afraid to make a bulk offer. When we were at a yard sale in a very nice neighborhood a few years ago, Sarah saw a large number of dresses and girl’s clothes that she thought would be perfect for our daughter, ranging from the size she was currently at up to what we estimated she’d be wearing in two years. Rather than just picking out the items individually (they were marked $1 each), Sarah counted up all of the items she wanted and offered a single amount for all the items equal to about $0.40 per item. They happily agreed. We had a pile of girl’s clothes at a very nice price, they had something they didn’t need out of their house, and they had a little pocket money, too.
Don’t be afraid to buy bigger items than you currently need. We had a large number of 3T and 4T clothes stowed away in boxes for our children before they reached that size. Right now, I have several youth medium baseball replica jerseys I got for almost nothing saved for my sons in a few years. Just keep some diaper boxes (that’s what we use), slap a piece of masking tape on the side, and identify what’s in the box, then check the clothes boxes whenever the kids are about to transition to a new size.
Wash the items when you get them home. Yes, this seems like common sense, but it’s such a vital move. Although the items you pick up at yard sales are usually clean, it’s hard to tell how long they’ve been in storage or what condition the storage was like. Give them a cleaning before you have your children wear them.
Go to yard sales in nicer neighborhoods first. Whenever I go to yard sales in really nice neighborhoods, I’m often stunned at the high quality of the items being sold for a dollar or two. I’ve found clothes with their tags still on them, video games that were still sealed, and all kinds of wonderful home furnishings and kitchenwares on sale for almost nothing. Quite often, you’re finding neighborhoods where people spend money at a very high rate and have a lot of item turnover, and that’s something you can take advantage of.
Always remember that you can be picky. If something doesn’t suit you, don’t buy it. Go to a different yard sale or start over with sales in a different neighborhood.
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.
Over the years, Sarah and I have used two different approaches to cut down on the cost of baby wipes. Both of them save significant money over buying wipes at the store.
For our first approach, we simply took a roll of paper towels, cut them in half in both directions (so we had four pieces of the roll of equal size), and removed the roll in the middle. Then, we put one of those “quarter-rolls” into a baby wipe container.
After that was done, we mixed together 2 cups hot water, 2 tablespoons of baby bath soap, and one tablespoon of baby oil. We mixed it slowly so it didn’t cause a lot of bubbling. Then, we just poured this mixture into the baby wipe container.
After that, the paper towels were moist and worked perfectly for cleaning up our children during a diaper change.
While this approach worked really well and was far less expensive than buying baby wipes, we were still filling up our trash can with waste. That’s when we moved on to our second approach.
Sarah picked up a large piece of flannel cloth at the local fabric store, then we cut the flannel into a bunch of four inch squares. These made for perfect baby wipes. We also took an old spray bottle and filled it with a liquid mix identical to the one described above. A couple of sprays on the baby and a wipe with the cloth and we were ready to go.
This second approach worked really well with cloth diapering, as we just tossed the cloth baby wipes in with the cloth diapers and washed them.
This simple move eliminated the need to buy any wipes or paper towels for the purposes of cleaning up our children, but it did have the startup cost of a couple square yards of flannel cloth (about $3). We also found that having a bit of sewing skill helps, as putting an edge on these pieces of cloth greatly increased their lifespan (we’re still using them, actually).
So, how much are these moves actually saving you? A wipe that actually does the job well costs about $0.03 per wipe. During an average diaper change, you’ll use about 2.5 wipes (that’s based on my own experience). Over the two and a half years an average child is in diapers, you’ll change an average of six diapers a day. So, you’ll multiply $0.03 times 2.5 times 6 times 2.5 times 365, giving you a total cost of $411.
A typical roll of paper towels will produce about 160 wipes. You can get a good roll of paper towels for $1.22 a roll. You’re likely spending another $0.05 on the wipe solution per roll. So, your cost per wipe is $1.22 plus $0.05 divided by 160, or a bit over 3/4 of a cent per roll. Over the diapering lifetime of a baby, you’ll have a total cost of $108, saving you $303.
If you go the cloth route, you’re investing about $3 in the initial cloth. You’ll toss the wipes in with your regular laundry, so there’s no upkeep cost. You’ll likely spend about $5 preparing the spray solution over the lifetime (I’m estimating high). Thus, you’ll be saving $403 over the lifetime of the child.
Even if you’re comparing these options to incredibly cheap wipes (that won’t do the job very well), you’re still going to save money with either of these two options.
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.
When Sarah and I first started cloth diapering, quite a few of our family and friends thought we were completely crazy. Rather than focusing on the mountain of benefits (it is incredibly less expensive if you have multiple children, it’s far better for the environment), they focused on one of the drawbacks, which is actually fairly negligible. It does take more time, on the order of two or three extra seconds per diaper change.
The thing is, when we started showing people the system we had set up along with the numbers on how much we were saving over the lifetime of our three children, they began to pay a lot more attention.
Cloth diapering is a big money saver. It puts less material into landfills. It can take a bit longer, but it doesn’t take very much longer if you have a sensible system in place.
There are a lot of different types of cloth diapers out there. We’ve tried several, ranging from the very inexpensive low-end (which I don’t recommend) to some of the higher-end diapers that function just as well as a disposable, such as BumGenius.
The calculations we used revolved around the fact that disposable diapers average about $0.20 a pop, so we would have to divide the cost of the cloth diaper by 0.2 to see how many times we’d have to use it before it would become less expensive than disposable diapers. The one linked above, for example, costs $17.95, so you’d have to use it about 90 times for it to be less expensive per use than cloth diapers.
We estimate that our children would use one of the cloth diapers about every three days while on diapers (up until about two years old), so, per child, a single cloth diaper would get about 240 uses. In other words, we would reach a point where it was cost-effective to cloth diaper with just one kid. Over three kids? Let’s just say we’ve used some of the diapers hundreds of times and they’re truly ready for the rag bag, but we got a lot of value from those diapers. One cloth diaper replaced multiple jumbo boxes of disposable diapers. We saved hundreds of dollars – no exaggeration – by cloth diapering.
So, what did our system look like? We simply had a single hamper in which we tossed the dirty cloth diapers after changing the baby (we also used cloth wipes). Then, once every three days or so, we would wash those diapers in a single load. Some of the particularly foul ones would get a pre-wash over the toilet basin. We’d then fold up the clean ones (usually while watching a movie or something after the kids were in bed) and put them in the usual places where diapers were needed (in the diaper bag and so on).
With disposable diapers, we still had to toss them, but we would also fill up our trash quite a bit more quickly, which meant more trips taking out the trash, which does add up to some significant time and cost (more trash bags, the potential for “extra garbage” fees), never mind the environmental impact.
One of the challenges of cloth diapering is the startup cost. Buying enough diapers to start a cloth diapering routine can be a daunting cost, particularly if you’re not sure you want to do it.
If you’re considering trying this, ask for cloth diapers at any baby showers you might be having. Specify a good brand that’s easily available via Amazon (like BumGenius) and use those as a starting-off point.
Also, you can mix cloth diapering and disposable diapering, something that many cloth diapering parents do because of the challenges of travel with cloth diapers. Use disposable diapers on occasion and use the cloth diapers while at home or at child care.
A single cloth diaper can easily save you $50 in disposable diapers if used consistently over multiple children. I’m speaking purely from experience as well when I say it’s nowhere near as difficult as you might think it would be, particularly if you get a system in place to handle the diapers.
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.
Let’s say you’re running a bank. You need to get some new customers signed up for checking and savings accounts so that you have more money to lend out for mortgages and the like. How do you get those new customers?
Well, one option would be to offer better interest rates, or perhaps lower your fees, and then advertise those things. However, those things are going to cost your business at least $30 a year (and likely more).
Another option? Promise everyone who signs up for an account a shiny new toaster! Or a blender! Or something else like that! It costs you maybe $20 a pop, and if they accept the offer, you can throw on another restriction where they have to keep a certain balance for a while or pay a fee.
If you go that route, you’ll get some new customers and some of them will stick around just because your bank is now the bank of choice for them. You don’t have the “upkeep” cost of no fees (which would cost you some every month) or better interest (which would require you to pay out more every month). Your cost – the cost of a toaster – is already paid for.
To put it simply, banks don’t give away freebies for signing up for their account just because they’re nice and want you to have a cool item. They do it because it gets people in the door and signing up for that account, and it’s often cheaper to do it that way than it is to actually improve the account in any significant way.
So what should you do as a potential bank customer? Ignore the freebies. Instead, compare the bank offerings based on other things, such as monthly fees, ATM network size, availability of online banking, bank hours, and interest rates. The only time a giveaway should matter is if you’re looking at two virtually identical accounts.
This giveaway rule is true for any kind of financial account.
When I was in college, there were always credit card companies on campus trying to get people to sign up for a card. They’d offer t-shirts, sweatshirts, frisbees, and countless other things to get people to sign up for their credit cards.
Twice, these tactics drew me in. I signed up for one in exchange for a t-shirt when I was first starting college (in fact, it was my first credit card). Later, I signed up for one in exchange for a frisbee. Thankfully, with the latter card, I never used it (much). The first one, though, started me down the path of credit card trouble that would haunt me for a decade and leave me paying bills for years after that.
If I wanted a credit card, my approach should have been to study various card offers and sign up for the one that offered the most benefits to me as a college student, perhaps one that offered me a discount on gas or maybe a discount on my textbooks in some fashion. Instead, I wound up with cards that offered no benefits. But I had a frisbee and a poorly made t-shirt!
Just ignore the freebies. Very rarely does the freebie have any significant value at all, at least not in comparison to the relative quality of the account you’re signing up for.
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. Is more retirement savings necessary?
2. Netflix streaming series
3. Imminent financial disaster
4. Student loans vs. house purchase
5. Paper books or e-books?
6. Mixing and matching investment firms
7. Quit claim deed and taxes
8. Starting a professional support group
9. Roth tax imbalance
10. Lethargy after the sale
I spend significant time each day (at least a couple of hours) engaged in personal projects. I’ll work on learning about something new, reading a really challenging book, or building something.
Yet, I find that my list of “projects to be done” grows longer rather than shorter. I have so many things I’d like to try or like to spend my time doing that I never find time to do them all and instead discover more I’d like to do than I have time to do them in.
When I was a teenager, I would often be bored. I don’t think I’ve been bored in years.
Q1: Is more retirement savings necessary?
I am 25 making a little over 40k a year. I was very lucky my parents were able to pay for my college education, have no reason to get a car, and am not looking to pick up a mortgage right now. I have a very healthy emergency fund and everything is looking pretty rosy. My employer contributes 5% to a traditional IRA regardless if I put anything in. I am currently putting in an additional 12%, but worry that I should be putting money into a separate Roth IRA, while I am being taxed at a lower rate than what I anticipate later in my life. Any advice?
I agree with you, Charlie. You should be putting at least some of your money into a Roth IRA to supplement the traditional one.
However, I don’t think a person should just go all Roth or all Traditional/401(k)/403(b). The reason for that is that we simply don’t know what tax rates are going to be like in the future. If I were in your shoes, I’d hedge my bets and have money in both.
One final note: I would make absolutely sure you’re not bumping up against any contribution caps. My quick math based on what you said above indicates that you might be very close to your IRA contribution cap.
Q2: Netflix streaming series
You talk a lot about how the most television you and your wife watch are series on Netflix streaming and how that’s enough to make you strongly consider dumping cable. Can you give me some examples of what you’re talking about?
OK, here’s forty series well worth watching on Netflix streaming. Remember, these are series, making up many hours worth of viewing each. I tried hard to mix up genres here so there would be something for everyone.
30 Rock. Archer. Arrested Development. Battlestar Galactica. Bones. Breaking Bad. Cosmos. Doctor Who.Downton Abbey. Eureka. Family Guy. Firefly. Friday Night Lights. Ken Burns: Baseball. Ken Burns: The Civil War. Ken Burns: The War. King of the Hill. Life on Mars. Lost. Mad Men. Man vs. Wild. Mythbusters. The Office (U.K.). The Office (U.S.). Parks and Recreation. Portlandia. Rescue Me. Sherlock. Sliders. Sons of Anarchy.South Park. Stargate SG-1. Star Trek. Star Trek: Deep Space Nine. Star Trek: Enterprise. Star Trek: The Next Generation. Star Trek: Voyager. Torchwood. The Walking Dead. The X-Files.
If you have a good internet connection, you already have access to news and weather. Add this mountain of good programs (and more) for $9 a month on top of that and the reason for having a cable box and internet access begins to seem questionable.
Q3: Imminent financial disaster?
I am due in a few days with our first, a little girl. I am the major bread winner in our household I make about 48,000 and my husband makes about about 22,000. There are days where i have no clue how we can spend all that money… Now we are not huge spenders and we avoid credit cards unless we can get 0% for a year, like we did with our range and washer/dryer.
Our major bills are the mortgage $706, my leased Prius $280 and my husband truck $330, and our grocery bill… but I’ve been working hard on our grocery spending because at times I think we were spending 1000 a month on groceries, and takeout…
Two days after we bid on our now home we found out that we were pregnant… and all of our savings went into our down payment. We haven’t been able to save what we need to cover my salary when I’m out on maternity leave…. we live in ny so I will get 170 a week for 3 of the 4 weeks I’m out on disability. we have been able to save 1800 so I’m so worried about not being able to pay all are monthly bills. I plan on working right until i go into labor, Ive been feeling pretty good at this late stage, so we’ve been lucky.
I feel like we’re in such a rut. I can’t imagine what one month of no pay is going to be like. It seems like every time I project our costs I’m still spending more than expected so we won’t have as much savings as I expect to have…
Please your advise is greatly needed
You just explained why an emergency fund is vital. Sometimes life just knocks you for a loop.
If I were you, I’d rely on that $1,800 for an emergency fund to get you through that month. In the run-up to the baby’s arrival, don’t buy a bunch of stuff. Keep your purchases to the minimum. Don’t buy random things like wipe warmers that you basically don’t need. Buy clothes for the baby at a secondhand shop. Don’t be ashamed to have a baby shower or two and tell the person that’s hosting it that you really need functional stuff like diapers.
You’ll make it through. You just have to be on the ball with smart choices between then and now and you also have to not be down on yourself.
Q4: Loan debt and house purchase
I am a graduate student with $25k in subsidized Stafford loans. I am still in school; thus, the loans are not accruing interest and I don’t have to pay them back yet. I recently got a full-time job and have been able to save up the full $25k to re-pay the loans. However, my husband and I are hoping to buy our first home by April 2013. I am due to finish school in another couple of months, so taking the six-month grace period into account, the loans will start accruing interest in November.
The money I have saved for the loan repayment would be a big help in our house savings fund, because it could make the difference between us having to rent for only one more year (April 2012 thrugh April 2013) versus having to sign on for another full year after that in order to save up a minimum of 20% down payment (we are in a relatively high cost-of-living area).
1) Since my loans are not accruing interest and are not due yet, can I put my savings (or part of my savings) into our housing fund? This would necessitate accruing some interest on the loans since we won’t be ready to buy until spring of 2013 and the loans will start gaining interest in November 2012. The interest rate on the loans (after the grace period) is about 6%.
2) Which option is better for our mortgage application? In the banks’ eyes, is it better to (a) have less money in savings, but no debt or (b) have more money in savings but with student loan debt?
Other details: My husband and I have no debt other than my student loans and we both have excellent credit scores (over 750); we also have our emergency savings account funded (only for about three months’ worth of expenses though…we’re still working on it) and are contributing 15% of our salaries in retirement.
A person’s first job out of college often doesn’t wind up being their permanent job. In fact, if I were in your shoes, I would anticipate some career changes in the next five years as you find what really clicks with you.
Because of that, I wouldn’t buy a house just yet. It’s great that you saved for it, but I would hold off. The last thing you want to do is buy a house early next year just to have your department cut and you find yourself being the lowest person in seniority, or to discover that you actually don’t like your job situation. Then you’re stuck in your current location with a house and don’t have the flexibility to move.
Hold off on the house for a year or two, rent, and save up some more money. I’d pay off that whole loan when the interest starts just to get it out of the way. You’ll find that doing these things gives you the life and career flexibility you’re going to want in the next few years.
Q5: Paper books or e-books
My lovely wife Amy gave me a Kindle for Christmas along with a bunch of credit to Amazon to buy some books. I really like the reading experience on the Kindle and I’ve read several books on there already.
You’ve owned a Kindle for longer than I have and so I have a few questions for you. Do you buy many books on your Kindle? Do you buy more than paper books? How do you decide which to buy? Has having a Kindle made you spend more on books?
Most of the books I buy on the Kindle are from the Kindle Daily Deal or from the discounted Kindle book list. I also have it loaded up with classics and other items from the Kindle free book collection. Most of the relatively expensive books I buy for the Kindle are from gift cards that people sometimes give to me as gifts.
I still use the library for most of my new releases – and often for older books, too. The library is just an enormous bargain.
I don’t buy many paper books for reading at this point, though I do buy them for reference. For instance, if I see a great cookbook, I’ll add it to my collection. It just functions really well in the kitchen.
Q6: Mixing and matching investment firms
Wondering your thoughts in investing in a simple firm – stocks, mutual funds, roth ira, savings account, 529, etc. all in one firm – such as Schwab, Vanguard, TRowe, HSBC – or mix and match depending on the firm – TRowe for roth IRA, HSBC for online savings, USAA for insurance, Schwab for brokerage.
I think it comes down to what you’re comfortable with. There is no right answer, and there are pros and cons with each option.
The pros for having consolidated accounts are that you have all of your info in one place under one login, so you don’t need lots of passwords. It’s much easier to manage everything. It’s also usually much easier to transfer between the account types.
The pros for having accounts spread across multiple firms include the fact that you can find the “best” firm for each of your specific needs instead of hoping that one firm offers the best value in all areas.
I don’t think there is a right answer here.
Q7: Quit claim deed and taxes
My father in law bought a duplex outright that my husband and I live in and manage. What we are trying to figure out is what kind of tax implications are there if he quit claims deeds the duplex to us? (In English please :)) Do we get dinged for the amount the duplex is worth as income? Also what are you required to claim as income as far as the rents?
A quitclaim deed is a simple way for someone to transfer their interest in a property to someone else. No money changes hands.
Instead, the property is considered to be a gift from the original owner to the new owner. This triggers the gift tax. That basically means the value of the house will be taxed to the new owner at the same rate as normal income tax. Now, there is an annual gift tax exclusion of $13,000. So, if the duplex is worth $100,000 and he gifts it to your husband, you would be hit with a bill for a gift tax on $87,000 – probably around $20,000 in taxes. As a married couple, you can pool your exemptions and reduce the bill by $2,000 to $3,000 more. Your best bet will be to take out an equity loan on the mortgage to pay for the bill if you don’t have the cash on hand to pay it.
Rent paid to you on a property you own is reported as normal income. You may want to consider forming a corporation to own the property instead of you, however. I would contact a property lawyer about these matters.
I have a side business that involves woodworking and I’d love to get a small group of woodworkers going in my area, but I have a couple of concerns. First, how do you make sure no one is stealing customers from you? Second, how do you even get the ball rolling on such a thing?
On some level, you have to trust that the people in the group aren’t going to actively poach customers from each other. If you don’t trust each other on that level, it’s going to be hard to trust each other enough to share techniques and challenges with each other. I think you either have to accept this risk and just live with it or not bother with the group.
If you want to get the ball rolling, the best bet you have is to simply post about it in any local businesses that woodworkers might use as well as online. Start a Facebook group and invite people you think might be interested. Set up a meeting in your shop and tell everyone to bring a woodworking question they might have (a great way for this type of group to get to know each other).
Eventually, you could work on group projects together for charity or other such things, as a way to build skills and reputation while helping out the community. There are a lot of possibilities with this type of group.
Q9: Roth tax imbalance
How do you balance out the problem of being able to put $17,500 a year in a 401K – which will be taxable in the future – and only $5,000 in a ROTH IRA – which will be tax exempt? It concerns me that my husband and I have easily 5x the balance in our 401Ks than we do in our ROTH accounts.
Are there any options we are missing here, to hedge the future taxation problem, other than converting a big chunk of our 401K into a ROTH and paying taxes now? That seems like a bad gamble, as we are a fairly high tax bracket now, and we don’t know if tax rates will go up or not. Personally, I think they will, but its a risk I’m not comfortable betting several hundred thousand dollars on.
You are diversified at least a little bit. You do have money in pre-tax and post-tax investments, though it’s not perfectly equal.
You’re actually not betting several hundred thousand dollars on this – that’s a bit of an exaggeration. In retirement, you’ll be withdrawing an amount each year to live on, some from the Roth and most from the 401(k). The WORST case scenario is that you put all of your eggs in the wrong basket from a taxation perspective and had to pay 10% (or so) more in taxes each year. Assuming you’re withdrawing, say, $100,000 a year, you’re talking about perhaps $3,000 per year in extra taxes due to your mistake. Unless you’re withdrawing millions of dollars per year, that type of mistake is not going to cost you hundreds of thousands of dollars. In a worst case, it might cost you tens of thousands, and you’re not in the worst case. You’re at least somewhat diversified.
Not only that, this is all guesswork. We do not know what the future holds when it comes to taxes. For all we know, the 401(k) might end up being the better bet with regards to taxes.
If I were in your shoes, I wouldn’t worry about it too much. The key thing is that you’re saving plenty for retirement, and if your main problem is that you’re hitting the contribution caps, then that’s really a great problem to have.
Q10: Lethargy after the sale
When I sold my business in 2006, I felt good about it at first. After that, though, I sunk into a bit of a funk. It was almost like a mild depression and I felt like a big aim in my life had suddenly vanished. I felt empty. Have you felt like that since selling The Simple Dollar?
What got me out of it was finding things to do. I eventually realized that I was just wired to keep busy doing something.
I’ve gone through the same thing. It was exhilirating right after I sold The Simple Dollar, but I went through a rather deep funk for a while right after the sale.
Part of it might have been my seasonal affective disorder – the winter blues always get me down. Still, I know that at least some of it was mixed feelings about having sold something that I put countless hours into over the past several years.
Much like you, I dug myself out of it by working on lots of projects. I am happier when I’m busy.
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.
When I wrote "365 Ways to Live Cheap" in 2007, a person could easily find a bank CD that offered a 6% return. All you had to do was lock up your money at the bank for a year or so and they’d give you back six cents on every dollar.
That’s a pretty good deal. In fact, if it were available today, I would have a lot of my money in such CDs.
Unfortunately, since 2007, rates on CDs and savings accounts have dropped through the floor. Today, you’re hard-pressed to find a CD that will return 2%, let alone 6%.
Still, the value of a CD isn’t why I put this advice in the book to begin with. The point of this entry is something else entirely.
We all have windfalls. A relative suddenly dies and leaves us some money. We win a big drawing or contest. We have an opportunity for some side work that puts some one-time cash in our pocket.
When we have a windfall, there’s a temptation to splurge. A big temptation.
The last time I had a nice unexpected windfall, I was really tempted to go buy several smaller items that I had wanted for a while but hadn’t bought because, honestly, I didn’t really need them. I had my eye on a new board game, a pair of shoes, and a couple items for our kitchen.
Willpower kept me from doing it. I put the money in our checking account quietly and went on with life.
However, I know that I wouldn’t have had that kind of willpower a few years ago. I I would have had have those new items in our house faster than you can blink.
That’s the reason I suggested putting the money in a CD. If you put money in a CD, it’s essentially locked away for a while. You can’t withdraw it without losing some of that money. This provides you a period of “cooldown” where you can think rationally about what to do with the money instead of making a spur-of-the-moment (and likely poor) decision about how to use the money.
A CD, in other words, is something of a lockbox that, at the time of the writing of the book, paid a pretty good interest rate.
Now that CDs aren’t paying as good of an interest rate, is the advice still valid? I think it is, but it’s not as strong as it once was. A CD will still pay you a better return than a savings account. It will still keep your money locked away until you’re ready to make the right decision with it. It’s also convenient, because you can handle all of this at the bank you already do business with.
If you’re really worried about return on the money, there are other investment options, of course. You could open a brokerage account and put it into stocks, for example. However, stocks have risk (meaning you might lose money), you have another entity to do business with, and they’re still liquid (meaning you can essentially pull out the money without penalty whenever you want).
If you’re still struggling with willpower when you find yourself with a windfall, a CD is still a pretty good place to put it.
Personal finance articles often state “rules” of various kinds for people to follow when it comes to their money…
You should be saving 10% (or 15%) of your pay for retirement.
Don’t buy a home unless you have a 20% down payment.
Don’t sell when the market is going down, and don’t buy when the market is going up.
You get what you pay for.
If you want to get a good paying job, you have to go to college, and preferably the right one.
Those are just five examples, but you get the idea.
These kinds of “rules” are easy ideas to swallow. You don’t have to think about them very much at all. You just have to follow them and, in theory, your finances will turn out just fine.
Here’s the catch: rules are rarely right in all situations. A person who is 50 needs to be saving more than 15% for retirement. A 10% down payment can be the right choice in some situations. Buying and selling often has more to do with personal situations and diversification than market timing, and there are many examples where buying during a market increase and selling during a market decrease can work out. Some bargain products are the best in their class, and other items are way overpriced. I know two people who make six figures with less than an associates’ degree of college education.
Rules exist to summarize the vast majority of situations and turn them into an easy-to-understand statement. They can be really useful for general guidance for many of the decisions you make in life, from buying a car to choosing life insurance.
However, rules tend to be summaries of a lot of facts and observations. They don’t match every single situation. They just match a lot of situations.
Let’s dig into the “you get what you pay for” rule.
Anyone who has read The Simple Dollar for a while knows that I’m pretty particular about my kitchen implements. I love to cook, and I love to do it well. I’ve gone to many cooking demonstrations and lessons, tried countless techniques and recipes, and read about a thousand articles and magazines and cookbooks.
Over time, I’ve come to realize that I really only use three knives in the kitchen. I use a paring knife for coring and peeling, I use a bread knife for cutting bread, and I use a chef’s knife for everything else.
One might think that simply getting the most expensive of each of these would be the best solution, right? Well, that’s not the case.
The best paring knife I’ve ever used in my life is an ordinary $20 paring knife that is no longer made. The best paring knife I’ve ever used that can easily be bought is a $7 Victorinox paring knife.
Superbly constructed paring knives sell for hundreds of dollars. They feature unbelievably sharp blades and are artisan-crafted out of incredibly pure metals. But, in the end, none of them that I’ve tried does the simple job of coring a bell pepper quite like that $7 Victorinox knife.
For the majority of items I’ve owned or experiences I’ve had in my life, the maxim “you get what you pay for” is true. However, sometimes it simply isn’t true, and spending the time to learn whether or not it’s true for the thing you’re interested in is usually worthwhile.
These kinds of rules are sometimes overthrown by the facts. No rule is set absolutely in stone, and the reality of different situations often leads to different conclusions.
Use rules when you’re in the heat of the moment and have to make a snap decision. Otherwise, spend the time learning the real facts of the situation you’re faced with and make a sensible decision. Many times, the “rule” and the facts will agree, and that’s great – you’re sure that you made the right choice. Other times, the “rule” and the facts will disagree, and that’s also great – you’re going past the rule and making the right decision.
The key is to spend some time really learning about every decision you make, from the enormous ones like choosing a career path to the little ones like choosing a blender. The more you know, the better decision you’ll make. The better the decision, the more likely you’re going to wind up with money in your pocket over the long run.
If you’ve been following the advice of the last few days, you should have a retirement plan in place. Now comes the hard part: contributing to that account.
When it comes right down to it, retirement contributions are another bill. Contributions reduce the pool of money that you have with which to pay your bills and live your day-to-day life. For many people, that’s an obstacle that’s hard to overcome, particularly if you’re in a state of living paycheck to paycheck.
Fortunately, it’s not really as challenging as it sounds.
Let’s say you’re 25 years old and earning $40,000 per year. You’ve decided to start contributing 10% of your salary to your 401(k). How will that actually affect your take-home pay?
To make this easy, we’ll just assume that the only deduction from your paycheck is your income tax and your retirement. We’ll also assume you get paid twice a month.
So, beforehand, you pay $6,030 in income taxes over the course of the year, or $251.25 per paycheck. Your take-home check twice a month is $1,415.42.
Afterward, you put $166.67 into retirement each paycheck. As a result, your income tax goes down to $5,030 over the course of the year, going down to $209.58 per paycheck (that’s $41.67 less in income taxes per paycheck than before!). Your take-home check twice a month is $1,290.42.
So, your take-home pay goes down $125, but you’re putting $166.67 into retirement each and every paycheck. The difference is taxes – your taxes went down $41.67 per check because of your 401(k)/403(b) contributions.
The point is your take-home pay won’t go down as much as you think. If you contribute $140 or so to retirement, your take-home pay will only go down $100 or so.
That still leaves the challenge of living on less income. There are a few strategies worth mentioning.
First, you probably won’t notice it as much as you think. It’s a lot easier to spend money on things that you forget about if you have money in your checking account. If you have a bit less money, all that will change (for many people) is that they spend less money on things they forget about.
One way to demonstrate this to yourself is to just spend a month or two keeping all of your receipts. Keep receipts for everything. Then, at the end of that period, look through them, particularly for the things you’d forgotten about that were completely unimportant. For most people, it’ll add up to far more than you thought.
Another tactic is to simply live more frugally. It doesn’t take many changes to shave 5% or so off of your spending. Things like air sealing your home or eating at home more often will likely do it. In fact, this entire “365 Ways to Live Cheap (Revisited)” series is loaded with ways to shave a little bit off of your spending, and retirement savings is a brilliant way to utilize the money you’ve saved.
Start saving now. You won’t notice it as much as you think you will and you’ll be incredibly glad you did it in a few years.
When people sit down with their retirement advisor to sign up for their 401(k) or other retirement plan, they often think it’s just a matter of signing a few documents and deciding how much to have held out of their check each pay period.
Then, when the advisor shows them a plethora of investment options, they lock down. They’re unsure which one is the right one and, often, they have a sense that if they choose the wrong one, they’re either going to get ripped off or that they’re going to have really poor investment returns.
Often, they go into lockdown. They put the papers aside for “later,” then never return to it.
I’ve known several people who have followed this exact path (one of them is pictured below), and had hundreds of readers email me with a similar story. It’s a financial mistake to not start saving for retirement immediately, but in this situation, it’s a bit understandable.
Fortunately, there’s a simple recipe you can follow that will help you pick at least a very good retirement option among the ones offered, if not the best one.
The first thing I’d do is look for a “target retirement” fund. These are special investments that are specifically designed for people who are aiming to retire in a specific year. For example, you might see a “Target Retirement 2040″ fund, designed for people who are aiming to retire in or near 2040.
The way these funds work is that when the “target” year is far away, the funds are mostly invested in stocks. Stocks earn a very nice return over a long period of time, but can be very volatile, meaning you don’t want to hold many of them if you’re going to need the money soon because the price might rapidly drop in the short term.
As that target date edges closer, the people who run the fund slowly move investments out of stocks and into more stable things like bonds and cash. Your money won’t earn as big of a long-term return, but it won’t lose much value, either.
These plans work really well for retirement savings and, as a general rule, I recommend them to everyone as their default choice for retirement savings. If your retirement plan has one, choose this.
What do you do if they don’t have target retirement funds? Much like with the target retirement funds, you don’t want to have everything in stocks and, as you move towards retirement, you want things to gradually be safer. Here’s how I handle my own retirement savings in my account that doesn’t have “target” funds.
First, I looked at the investment options and identified the investment in stocks and the investment in bonds with the most diversity. What you’re trying to do here is find investments that have fingers in lots of different industries but aren’t overloaded in any one particular industry. Usually, these are called something like a “total stock market” fund or a “total bond market” fund.
Next, I figured out my retirement age and the number of years until retirement. I was 25 at the time and I wanted to retire at 65. Thus, I had 40 years until retirement.
After that, I doubled the number of years until retirement. Since I had 40 years to go, the number I wanted was 80.
That number is the percentage of my savings I put into the stock fund. I put 80% of my savings when I signed up directly into the stock fund. The rest I put into the bond fund.
Every five years after that, I rebalanced things. I re-did the calculation (at age 30, that meant I had 35 years until retirement, which meant that I wanted 70% in stocks and 30% in bonds), and then I moved my retirement savings and contributions around until it matched the percentages I wanted.
Here’s an example. Let’s say at age 25, I started putting $80 a week into a stock fund and $20 a week into a bond fund. At age 30, the stock fund had $27,456 in it, while the bond fund had $6,344 in it. This was due to the gains earned during the five years of investing.
The total amount I had saved for retirement, then, was $33,800. I wanted 70% of that in stocks – $23,660 – and 30% in bonds – $10,140. The reason is that I was slowly making my retirement savings more conservative and less prone to stock market risk.
So, to make this change, I simply requested that I move $3,796 (the $27,456 I had minus the $23,660 I wanted) from the stock fund to the bond fund and changed my contribution to be 70% in stocks and 30% in bonds.
At age 35, I’ll do it again.
The key thing is to not be afraid to invest. Don’t put off investing because you’re not sure what to invest in. Instead, make a sensible choice (using the guidelines I mention here) and start saving now. If you don’t like the choice, you can always change it later, but you can’t get back the months and years of not saving.
An email I received from a reader recently left me thinking. Be aware, this person describes some stereotypes that may be painful, and I’m going to talk about them below:
When I was growing up, the adults I knew made fun of lots of different career paths. My dad was a lawyer and my mom was a corporate vice president. They and their friends would make fun of factory workers by calling them unwashed and lazy people. Basically, if you weren’t a lawyer, a doctor, or a businessperson, you were pretty much an idiot with a lot of negative traits.
I went to law school mostly because of those stereotypes, but what i was really passionate about was working on car electronics. I was in a club in college where we built computer controlled solar cars and it was the most fun I think I’ve ever had. I didn’t tell my parents about it though.
I hated law school. I hated every second of it. I got through it, passed the bar, and started working at a large firm. A year in, I hated everything about my life, but especially my job.
I quit. I went back to school, got some more specialized training, and now I work at a car manufacturing plant. I actually troubleshoot a wide set of problems on the line. I make almost $70,000 a year doing this and I couldn’t be happier. Yet my parents still ridicule factory work.
I wish you’d write a post telling your readers to ignore the stereotypes that jobs have and just focus on what they want to do. Factory workers aren’t lazy and they aren’t idiots. Construction workers aren’t crude and fast food workers aren’t stupid. The conditions in these places at least in the United States aren’t terrible. My workplace is cleaner than my own home, in fact.
This reader, who we’ll call Adam, grew up in an environment where he was exposed to a lot of stereotypes, virtually all of which were either based on the past or were never true to begin with. Believe it or not, this kind of stereotyping actually has significant negative economic impact, as described in this article over at CNN.
For one, you should always strive to do something you at least enjoy. You might not be able to get a job that relates to your burning passion, but there is no doubt that some jobs are more enjoyable than others.
The thing is, the job that’s enjoyable to one person might be misery to someone else. I know that my father deeply enjoyed much of the work that he did throughout his life, but many of the jobs and side businesses he took on are things that I simply would not enjoy. On the other hand, he told me that there wasn’t enough money in the world to keep him in front of a computer writing code – something I once did.
Of course, Adam’s email left me with some introspection. What stereotypes about jobs did I hold? Was I passing along any of those stereotypes to my own children?
There is this innate desire for parents to want “only the best” for their children, but what does “only the best” really mean? Does it mean that I should steer my children away from some career paths and toward other career paths? Does it simply mean that I should support them in whatever career path they express interest in? I lean toward the latter.
Beyond that, what stereotypes and preconceived notions am I giving to my kids? I’d prefer that they make up their own mind about things, of course, but there is also a need to give them basic information with which to understand the world. Where’s that fine line?
I will say this: I’d rather my children have a positive impression of career paths and of work than a negative one. For example, I could easily create a negative stereotype of, say, a police officer, but what good does it do for anyone to create or perpetuate that stereotype. The vast majority of police officers are good, brave people who do a powerful public service that’s often thankless.
By doing this, perhaps my children will have respect for all types of careers – and thus feel much more free to choose a career path that makes them happy rather than one that they associate with a bunch of negative stereotypes.
What about career paths that I know I hold a negative stereotype about? I can think of one career path in particular that I’ve always had a poor impression of, one that I associate with lying and unethical behavior. The best way to fix a negative stereotype is with knowledge, so I’ve spent time studying the reality of that particular career and met some people involved.
As with almost all legitimate and legal career paths, it’s filled with good people doing good work.
The next time you think about passing on a negative impression of a career path, you might just be shaping more than you think. Most career paths aren’t the negative stereotypes that we often see passed along.