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The Simple Dollar

The floor of the New York Stock Exchange is shown in this file photo. Hamm offers basic guidelines on how to invest your retirement savings. An early start is the best policy, he advises. (Richard Drew/AP/File)

Investing 101: How to invest your retirement savings

By Guest blogger / 02.29.12

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.

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. 

An Occupy protester is taken into custody by a California HIghway Patrol Officer following a clash between Occupy members and a pro-white group at the Capitol in Sacramento, Calif., Monday, Feb. 27, 2012. According to Hamm, most career stereotypes, like negative assumptions about law enforcement, are unfounded and wrong. (Rich Pedroncelli/AP/File)

The cost of career stereotypes

By Guest blogger / 02.28.12

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.

A drop of fuel hangs from the tip of a gas nozzle after Nicholas Cramer put gas in his car in Philadelphia. The price of gasoline, has soared as oil prices rise. Hamm sees it as an opportunity to make some permanent lifestyle changes that reduce your dependency on gas. (Alex Brandon/AP)

How to cope with higher gas prices. Permanently.

By Guest blogger / 02.27.12

I’m lucky. I don’t commute to work, unless you consider a stroll across the house to be a commute. I don’t put daily miles on a vehicle, though I do need to travel to the library and the post office for different work-related tasks.

My wife, Sarah, does commute to work, though. She drives about 35 minutes each way every weekday. Even though she’s driving a Prius that gets her nearly 50 miles per gallon, the price of fuel adds up, as does the price of car maintenance and other concerns.

It’s not exactly a secret to know that gas prices are inching upwards. The nationwide average is $3.67 a gallon as of the writing of this post.

So, let’s say you have a commute similar to Sarah’s (say, 20 miles) and you’re driving a typical automobile that gets 25 miles per gallon. If you drive to work five days a week, forty eight weeks a year, you’re going to gulp down 384 gallons of gas a year. Under current gas prices, that’s $1,400 a year just to commute to work – and that’s just for gas. It does not include maintenance, parking costs, or insurance.

If you compare this to gas prices even a few years ago, you’re talking an extra $700 a year just for the commute. If you’re making an average salary of $35,000 a year, that’s 2% of your salary gone. That’s the real cost of higher gas prices for the average person.

There’s also the secondary cost, which pops up (for example) in the form of increased prices at the store as companies pass along the increased price of shipping to you, the customer.

The “Band-Aid” solutions for this problem are well known. Carpool. Use public transportation if you can. Buy a more fuel-efficient car. Ride a bicycle to work.

What are the long-term solutions to the problem, though? To me, high fuel prices are a good motivation to start considering some other changes in your life.

For starters, consider job opportunities or career shifts that require less commuting – or none at all. Telecommuting works in some professions, but not nearly all of them. For many jobs, a more local option is well worth investigating.

One of the motivations for my own career switch to self-employment was the cost of the daily commute. I estimated that between the fuel costs, the maintenance costs, the parking costs, and the vehicle depreciation, my daily commute to work was costing me about $3,000 a year. That was after-tax money, too, meaning that the actual impact on my salary was around $4,000 per year.

In other words, I could get a job paying $4,000 less per year that was very close to home and see no negative impact in my financial life. I would see a positive impact in terms of my daily time, though, because I would no longer be investing the time in my commute.

One effective way to do this is to start developing a side business right now that can supplement your income, but don’t give into lifestyle inflation.

When I started The Simple Dollar in 2006, it slowly built itself into a side business that I channeled into debt repayment, a house down payment, and other needs. Our lifestyle did not inflate at all – if anything, it deflated. It was because of this reasonably strong income stream from a side business, our vastly improved debt situation, and our lack of additional spending that I was able to start working from home. Nothing more, nothing less.

Working from home has made our family feel the pinch of the gas price increases far less than other families. We’re affected by it, sure, but the impact is pretty small. We have one person who commutes and that person commutes in a very fuel-efficient car. We have the effort put into building a side business to thank for that.

Another option is to consider moving closer to your place of work. If you’re living in an apartment, this move is actually rather easy, as you just need to find a rental unit closer to your workplace.

Flipping the calculations above on their ear, if I found a place near my work, I could actually spend $300 a month more on my monthly housing bill and still break even because of the savings due to the minimized (or eliminated) commute. This likely would have resulted in much improved housing, particularly if I liked the area, plus it would have meant less time commuting.

The only thing that held me back from this solution is that our housing location was central between my workplace and Sarah’s. We commuted in opposite directions, so a reduction in my own commute meant a direct increase in the length of her commute.

In the end, the best financial solutions are the ones that leave you less reliant on the fluctuations of prices around you. The less driving you do, the less you’re impacted by changes in fuel prices. The same is true for other things: the less heating and cooling you do, the less you’re impacted by fluctuations in home energy prices, for example.

Carpooling, using mass transit, and telecommuting are strong steps you can take immediately, but don’t disregard longer-term solutions like these. They provide savings in terms of both money and time, and those savings often last for much longer.

Victor Gutierrez rushes out of Domino's Pizza in Turlock, Calif., to make a delivery. (Bart Ah You/AP/File)

Are you an entrepreneur or an employee?

By Guest blogger / 02.26.12

I was digging through some old bookmarks recently when I came across this post from Afford Anything on the entrepreneur mindset. I’m going to quote a bit from the middle of the post where she’s discussing a guy who wants a job laid out for him on a silver platter, but the whole thing is worth a read.

There’s nothing wrong with having a job. The problem is conceptualizing yourself as “stuck delivering pizzas” when no one else creates a job for you.

Having an “employee mindset” is different than being an employee. Loads of employees have entrepreneurial mentalities — and that’s precisely what makes them such great workers. They understand their bosses’ perspective.

They’re also happier at work. Their job satisfaction comes from their confidence that if they got laid off tomorrow, they could fend for themselves.

But this guy isn’t confident. He’s insecure — that’s why he wants job security so badly. He doesn’t believe in himself. He wants other people — smarter, richer, and probably better-looking people — to create a job and bestow it upon him.

You disempower yourself when you believe that someone else must create your job.

The author of this post makes the solution to career problems seem obvious. Just make your own career and you’ll be fine.

I’ll be honest. I do understand where she’s coming from. What she’s describing is almost exactly what I did in creating The Simple Dollar. I more or less created a job for myself.

I could write a lot about the skills I utilized building The Simple Dollar – the ability to manage time, the ability to draft posts quickly, and so on – but there was one simple factor that trumped all the rest of them. I wanted to do this for myself. I had an innate desire to want to build things. I also had help from a lot of people to make it happen, particularly my wife.

It’s something that almost every entrepreneurial person I’ve ever met has as a basic trait. They want to build things for themselves.

The problem is that this is not an innate human trait, and it’s not a bad thing not to have the trait.

I can use my parents as a perfect example of this.

My father has that inherent “builder” trait. He can’t sit still. He’s constantly wanting to build things. His idea of retirement is to run a bunch of small side businesses and build up his incredibly broad social network. He does these things on his own because he’s driven to build things. When he was employed by others, he took such control of the task at hand (and other related tasks) that his managers just left him alone to do his thing in his own way.

My mother doesn’t have this trait. She’s happiest when someone wants her to help them do something. Whenever I call her up and ask her for help with something, she’s ecstatic. She’s constantly offering assistance to the people in her life with whatever they need. It was through her efforts that pretty much all of my grandparents were able to live independently for as long as they did, and she’s pretty much the “go-to” person for help on almost anything you might need. She doesn’t have the inherent desire to build like my father does, but she’s incredibly valuable because of her willingness and passion for finding ways to help others.

They make a wonderful match for each other. My mother often makes my father’s wild tangents work because she’s there to help, and they both feel fulfilled and happy.

The thing is, without my mother, many of my father’s plans would fall apart (I’ve seen this at times). Without my father’s plans and energy, my mother would be rather directionless (I’ve seen this at times, too).

The author above who wrote about “the entrepreneur mindset” makes the assumption that everyone is like my father. Clearly, she is, and in many ways I am, but there are a lot of people out there whose skills revolve around being detail-oriented and handling specific tasks with competence and skill.

As I was writing this post, I showed the section above about my parents to several people and asked them who they identified with. I got back a mix of responses, which is exactly what I expected. Some people are wired to build and lead, and others are wired to help and execute.

Still, the author of the post about the entrepreneur mindset makes a great point. If you’re wired to build, you’re going to find it easier to find employment because you can make a job for yourself.

So, what do you do if you don’t have that mindset? What career advice would I give to my mother, in other words, if she were ready to start a new career?

I’d simply tell her to build a skill set that people will pay money for, preferably one that seems enjoyable to you. I immediately thought of a friend of mine who has a burgeoning career as a lab technician. This friend might not have the attributes necessary to lead a laboratory, but give him a task – particularly a technically demanding one – and he will shine. He has the skills and the focus necessary to succeed. Contrary to the quoted section above, his pleasure in his job does not come from a sense that he could just make his own job tomorrrow. It comes from knowing how to do something that others can’t (or won’t) do and knowing how to do it well.

I’d argue that the key to success for those without the entrepreneur traits is education. Why? People with the entrepreneurial mindset will always pair well with the people who have the specific skills and focus to make those plans succeed.

In the end, I keep coming back to my parents. For every crazy idea or plan that my father had, my mother was so often the perfect complement. He would never succeed without her, nor she without him.

Builders can only go so far. Eventually they need the detail-oriented person to take care of things. There’s money to be made on both sides of the equation. The first step is to know which side of the coin you’re on and making sure you’re preparing for that path.

Sheep Dog Hollow after renovations. One of the author's dreams is to own a large house in the country, and he is willing to forgo smaller luxuries like trips and new electronics to achieve that dream . (Joanne Ciccarello/The Chrsitian Science Monitor/File)

Which is more important: Your dream house or a Disney trip?

By Guest blogger / 02.26.12

“Your house is paid off and you have some money in savings. Why not live a little?”

A friend of mine asked me this the other day when I said that our family vacation this summer was just going to be a camping trip in a national park, shortly followed by a mention of the fact that I loaded up my Kindle (that I received as a gift last year) with public domain novels for free, particularly Charles Dickens novels.

It’s an interesting question, and it’s one that left me thinking for the last few days. I’ve come to the conclusion that the spending path we’re on is still the right path, regardless of how our financial picture has changed due to our debt paying diligence and careful spending over the past few years.

First of all – and this is the biggest reason – Sarah and I don’t have an aching desire to buy a lot of expensive things. Sure, we could fly our family to Disneyworld or something for a summer vacation, but it’s not what we want to do. We’re looking forward to camping with our children for several days.

We are aware of some of the things we could buy, but we don’t really strongly want any of those things. Honestly, I can’t even think of a remotely expensive purchase I want to make in the next few years beyond unplanned replacements for things we currently use.

Instead, when I think of what I want to do with our current debt-free financial state and our savings, I just have to look around our house and think about the future.

As I write this, my three children are going to sleep in the bedroom that they share. We choose to have them share a bedroom for now to build up stronger sibling relationships, and it seems to be working. Almost every night, I can hear our two oldest children talking together for a while before they go to sleep.

I read them a book this evening about different places around the world. There was a page about Paris and France, a page about Egypt, a page about Japan, and pages about many other interesting and beautiful places. We talked a bit about the places we wanted to see, but right now, they’re in there talking about those places some more.

My son has a strong burgeoning interest in martial arts. My daughter loves to sing and dance and is showing some beginning interest in playing music. All three of my children are inquisitive. It’s hard for fifteen minutes to go by at our home without a barrage of questions about various things.

Equipment. Lessons. Travel. Education. These all cost money, but they don’t cost money today.

On top of that, we’re also watching the property listings and looking for the perfect piece of land in the country upon which to build the house we’ve always dreamed of.

Spending our money on things that we don’t strongly want today sacrifices the things that we do strongly want tomorrow.

It is really easy to allow the temptations of today to drown out the bigger things we want in our lives. Eat out a few times a week, stop for Starbucks a few times a week, drive a new car on payments, go grocery shopping without a list and buy unnecessary things, have the latest and “greatest” cell phone, and you’ll find yourself wondering how on earth the family down the block can afford to go to Norway on their vacation this year.

Well, the answer is that they don’t eat out a few times a week, stop for Starbucks a few times a week, drive a new car on payments, go grocery shopping without a list and buy unnecessary things, or have the latest and “greatest” cell phone. I know that this actually describes us.

I recently saw a person standing outside a new Lexus in the parking lot and shouting into their iPhone at a bill collector. I’d far rather drive my eight year old fully-paid-for Pilot and talk into my freebie cell phone while knowing that I am going to have the freedom to dance with tomorrow.

In this file photo, former New England Patriots wide receiver Randy Moss, right, discusses online banking with a teller during the Capital One Invisible Bank Kick Off in Boston. Hamm argues that online banking can only make banking easier. and it's so commonplace that it's almost a necessity. (Bizuayehu Tesfaye/AP/Images for Capital One Bank/File)

Online banking? Don't be afraid.

By Guest blogger / 02.25.12

When I wrote 365 Ways to Live Cheap in 2007, online banking was a feature that was far from standard, yet well on its way to becoming a standard. I often recommended to people that they seek out banks with online banking because it was a useful and valuable feature to have.

As I write this in 2012, if your bank doesn’t have at least some level of online banking, it’s definitely an outcast.

Still, I have many readers who do not use online banking as part of their normal money management routine.

The biggest hurdle for many is technophobia. They hear of internet scams and it convinces them not to use the service. Others simply aren’t all that adept at computers for various reasons.

Another hurdle is lack of convenient internet access. They don’t have internet access at home, so they don’t use many of the incredibly valuable online tools that can really save them money.

Falling into either group, unfortunately, means that you’re simply leaving money on the table. Online banking is an incredibly valuable resource.

For starters, it makes balancing your checkbook and checking your balance incredibly easy. This simple step alone can prevent many overdrafts. Many of the overdraft stories told to me by readers result from a misplaced digit in their checkbook ledger. Online banking largely eliminates this risk by making it very easy for you to always be aware of your balance and your transactions, both posted and otherwise.

For me, the biggest value in online banking is online bill pay. If I pay a bill online via my bank, I’m not using a stamp. That’s $0.45 saved on every bill I pay using online banking instead of paying via check. It’s also more secure, as I’m not passing my check (with my name, address, signature, routing number, and account number) through the postal service which relies on trust of postal employees (they are trustworthy, but it’s still a security risk).

Also, if you’re willing to bank online, many more banking options become available to you. Many banks, such as ING Direct, operate almost entirely online. To make up for the lack of a storefront, they often pay great interest rates and offer other features that make them quite tempting (like a very robust online bill pay). If you include these banks in your survey when you switch, you’re likely to end up with a bank with lower fees and higher interest than you would have found otherwise.

Online banking is one of the services that pays for my internet connection. Without it, I would most likely mail in my bills and I most likely would have savings and checking accounts with lower interest rates. I’d also be devoting more time to banking practices.

If you’re a technophobe, don’t be afraid to ask for help. Online banking is pretty easy to use, and if you avoid a few basic security pitfalls, you’ll be fine. My quick suggestions: never click on links in your email, use a password with lots of numbers and upper and lowercase letters, and always make sure you’re visiting the correct URL for your bank. Those three steps alone take care of the vast majority of paths to internet fraud.

If you can’t afford home internet access, don’t be afraid to use community resources for internet access. One local bank, for example, has a computer available there that people can use to access their online banking and bill pay features. If your bank offers that, use it. Every bill you pay online saves you $0.45, after all. Just take your bills there a couple times a month.

Online banking is nothing but a value for the customer, as long as you’re careful and use basic security precautions. It provides extra savings, better services, and more convenient access.

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. 

Howard and Kathy Powell fill out questionnaires as they meet with Alan Wardyga, a certified financial planner, in Lincoln, Rhode Island. After examining your particular banks' fee structure, Hamm argues it's usually a good idea to skip the overdraft protection plans. (Melanie Stetson Freeman/The Christian Science Monitor/File)

Do yourself a favor. Avoid courtesy overdraft protection.

By Guest blogger / 02.24.12

A lot of banks offer what they call “courtesy overdraft protection.” On the surface it seems like a good program. After all, they do cover the bad check you wrote, right?

Actually, most “courtesy” overdraft protections can end up putting you in a worse situation than just dealing with a returned check.

Most courtesy overdraft programs work in a very straightforward fashion. If you write a check that exceeds your account balance, they’ll cover that check for you, but it will cost you.

First of all, the bank will ding you with a fee of varying size. A common number that I’ve seen is $35 – most initial fees are somewhere in that range.

After that, you’re typically charged a daily fee until you come up with the cash to bring your account to a positive balance. This can range from $2 to $10 a day, depending on the bank. Let’s call it a $5 average.

So, let’s say you had a $50 check returned and you couldn’t cover it for five days until payday. You’d be hit with an initial fee of $35, plus $25 for the daily fees. You’re paying $60 in fees just to cover a $50 check!

Even worse, a few overdraft protection plans charge you a monthly fee on your account, ranging from $1 to $3.

My recommendation is usually to opt out of these plans, even if you’re not getting dinged with a monthly fee. Obviously, you’ll need to examine the exact fees charged by your bank, but almost always the consequences of “courtesy” overdraft protection are worse than a normal overdraft.

First of all, the financial pain of an actual overdraft has a strong likelihood of being less painful than the overdraft protection. The bank will often just return the check and charge you a small fee, leaving the resolution to the business you passed the false check to. That bank fee is usually smaller than the courtesy overdraft initial fee, but you’ll want to check to make sure.

Furthermore, if you’re not a serial overdrafter, you can usually resolve the consequences of the bad check with a phone call or a visit along with an apology. Simply contact the business you wrote the check to, apologize for your banking mistake, and pledge to make it right. If they have a returned check fee (some businesses do), ask for it to be waived. As always, if a business treats you well, reward it later with good word-of-mouth (as we want good businesses to thrive and customer-unfriendly businesses to die out).

I haven’t been close to an overdraft for a long time, thankfully. I’m very careful with my balances and leave a nice buffer in place. Even given that, I took the time to remove courtesy overdraft protection from my account. If I mess up, I’m quite sure that it will cost me far less to resolve the check on my own than letting the bank ding me hard for my mistake.

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. 

This file photo shows customers in line a Bank of America ATM in Hialeah, Fla. If a bank isn't catering to your needs, Hamm argues, it's time to switch. (Alan Diaz/AP/File)

When it's time to find a new bank

By Ternt HammGuest blogger / 02.23.12

Over the last few days, we’ve talked about several features your bank should have: compatible hours, few (or no) fees, solid interest, and a large ATM network. On top of that, I’d add robust online banking as well.

The question then becomes what do you do if your bank doesn’t offer these things? I’d suggest shopping for a new bank. Here’s how.

First of all, I’d check out local banks. After all, access to a real person when you’re trying to straighten out an issue can be valuable. Investigate all of the banks in your area and find out some key information about them. What are their account offerings? What kinds of interest rates do they offer? Do they have a lot of local ATMs? Do they have reasonable hours? What kind of monthly fees are charged to their accounts?

That doesn’t mean that you should leave online-only banks like ING Direct out of the loop. While they don’t have the advantage of an actual location near you, they do offer strong features in other areas – strong interest rates, virtually no fees, very robust online banking, and usually a large fee-free ATM network. If you find your local banks are lacking in some area or another, investigate some of the online options.

I actually use multiple banks. ING Direct has served me very well for aiding with banking related to the finances of The Simple Dollar, as well as some personal banking. Their online banking is very robust and useful. I also use a local bank for many services, as I can conveniently stop there and almost every ATM nearby is fee-free for that bank. This two-tiered approach allows me the best of both worlds.

Switching banks can be a pain. I suggest following a simple four-step plan.

First, open up the new account at the bank you’ve selected. This is usually straightforward.

Next, transfer your direct deposits and automatic bills to the new account. Do not transfer the balance in the old account. You should leave some significant amount of cash in there so that if automatic bills are deducted from that account, you aren’t hit with overdraft fees.

Then, check your old account regularly to watch for deductions. You will probably forget one or two of them if you have any automatic bills set up. When you see one go through, switch that transfer to the new bank.

Finally, after several months, close out the old account. Transfer the money from that account and have the account closed. You want to hold out for at least a few months to make sure that you’re not forgetting any automatic transfers.

Switching banks is often a financially strong move. It can get you away from constant ATM fees, maintenance fees, effort spent trying to get banking business done, and other such difficulties, saving you time, effort, and money.

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. 

This 2002 file photo shows mailboxes in New London, N.H. A question in this reader mailbag involves how to prepare for the financial hit when Social Security kicks your income tax up. (John Nordell / The Christian Science Monitor / File)

Social Security benefits: How to prepare for the tax hit

By Guest blogger / 02.22.12

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. Long term life insurance
2. Social Security and taxes
3. Dental challenges
4. Fear of switching careers
5. Money from selling household items
6. Haircuts and appearance value
7. Considering purchases again
8. Emergency fund and future
9. My business partner is lazy
10. Children and television

I’m often blown away by other people’s definitions of fun. For some, you have to have alcohol to have fun. Others seem to require spending lots of money.

I’m usually pretty happy doing almost anything as long as it’s with people I like. I’m always taken aback by people who loudly announce that the current event is boring and that booze or spending need to happen in order for them to be placated.

Q1: Long term life insurance
I have had life insurance through SBLI and through my employer for a long time. My questions aren’t about how much or what kind to have. My children are now young adults, so I don’t need to worry about providing for them, but I would like to leave them and any future grandchildren a good sum when I die. The only way for me to do that would be through life insurance, as I have no money saved or invested and no time left to accumulate even a small fortune. So my questions are, is it possible to continue a life insurance policy into old age? Would it be very expensive? How is a life insurance benefit taxed when it is paid to the beneficiary? Is there any way to reduce the amount of taxes the beneficiary will have to pay? Would it be better to leave money to minors than to adults?
- Chris

There are lots of different varieties of life insurance policies out there. Generally, ones that last a person for their entire life tend to have rather high premiums – after all, the insurance company isn’t in the business of paying out more than they’re bringing in. Benefits of most life insurance policies are free from income tax.

If I were you, I would probably hang onto a very small policy – enough to cover your burial expenses – and instead start putting money directly into college savings funds for your grandchildren. After all, you don’t seem to have any direct dependents besides yourself.

In terms of bang for the buck, this is probably going to give them the greatest benefit unless you were to die exceptionally young.

Q2: Social Security and taxes
My hubby and I were married last September. He’s been receiving retirement income for the last two years and started receiving Social Security benefits in August of last year. We were hit hard when figuring our taxes for last year. Because we’re filing as married, his SS benefits were taxable since his other income was over a certain amount. Should we have known about this? I’m wanting a way that we can prepare for the hit next year, as he will have received a full year of SS by next time. Should we just put a portion of that back each month for the tax bill?

Additionally, hubby cashed in some savings bonds last year and those were on our taxable interest statement. It seems that it kind of defeated the purpose of having them if we’re going to get hit with a huge bill because of cashing them in. Is there a way that we can make use of them without taking that huge hit? 
- Olivia

For starters, you’re not going to get hit with a huge bill for cashing in the savings bonds. Let’s say you bought bonds for $500 and are now cashing them in for $1,000. If you’re in the 20% tax bracket, your tax bill for that $1,000 you just stuck in your pocket is only $100. You’re only taxed on the gains, and even then, the highest federal tax bracket is 35% (and most people are far, far below that).

Whenever you earn income that doesn’t already have taxes taken out of it, you should put half of it in a savings account designated for taxes and forget about that money. When you do your taxes, pay your bill using the money in that account, leave behind a little bit for the following year, and withdraw the rest to do with whatever you want.

That’s how I do my own taxes. All of my income requires me to pay my own taxes in this way.

Q3: Dental challenges
I usually go to this great dentist, Dr. C., but this time around she was not available on the day that I needed to do the appointment so I went to a new dentist, Dr. L. Last time I saw Dr. C, in summer 2010, she told me specifically that I do *not* need to get my wisdom teeth out (I’m 26 and still have all of them. They’ve never hurt). Dr. L told me I absolutely *need* to get them out sometime this year. She referred me to a local oral surgeon.

I looked this surgeon up and he has horrible reviews…literally not even one review says anything positive about him. He does not work with my insurance so the estimated $3000 bill would fall on me. I called my insurance company and found out that they’ll only cover up to $1000 of any dental surgery…and the closest oral surgeons they work with are 60 miles away, in another state. So I’ll still have to pay estimated $2000, plus find somebody willing to take the day off to drive me because I won’t be able to drive myself back.

Dr. L had mostly good reviews but people did mention that she tried to do a lot of referrals for wisdom teeth, veneers, teeth whitening etc, and tried to push extra services on medicaid people. And looking back on it, she didn’t mention anything about wisdom teeth until after I had said I was a federal employee (USPS). What I did not mention, because this never comes up in conversation, is that I’m classified part time, and therefore don’t get all those sweet federal benefits. I just bought myself some cheapo dental and health insurance on my own because I’m paranoid. I’d think that if my wisdom teeth were so bad, she’d mention it right off, not wait until 10 minutes into the consult.

If Dr. L was my only dentist, I would’ve booked that oral surgery appointment today, but since the other dentist said I didn’t need it, I’m confused. Maybe my teeth have changed, and I do need it, or maybe I’m being ripped off! Or maybe it’s just a difference in opinion. I’m suspicious of Dr. L because she referred me to such a bad surgeon. My current plan is to make my next appointment with Dr. C and see what she says…if she thinks I need it now then I’ll do it. Plus she is very low-cost so maybe she knows a surgeon that is cheaper.

My question is, am I reacting rationally to this, or am I cheaping out on my health? Have you ever heard of a dentist trying to upsell? This is more money than I make in a month. I have the cash in the bank to cover it, but it would make a huge dent in my downpayment-on-a-house fund, plus surgery always has risks, complications, etc.

When I was a kid (7 or 8), my parents took me to a dentist that said I needed *all* of my teeth removed. The idea being that if all my baby teeth were removed, my adult teeth would come in straighter b/c nothing would be in the way. My parents could not afford this, plus they thought it was weird, so they took me to another dentist. He said that was totally crazy and I didn’t need that at all. Maybe this is the same situation?
- Chloe

Every time a medical professional suggests a significant procedure, you need to get a second opinion on it. In this case, your original dentist seems to be against it.

If I were you, unless there was an ongoing problem, I’d leave your wisdom teeth alone. I’d talk it over with my primary dentist, but it seems like there are other issues going on here outside of your teeth.

I’m not sure what’s going on in this story, but there are certainly some strange signs coming from the second dentist. I would not make major decisions based just on the words of this person.

Q4: Fear of switching careers
My husband would like to quit his unfulfilling job to spend some time working on a new business venture. Our only debt is $65,000 remaining on our mortgage (monthly payment about $1000), but it’s a little scary to think of cutting off our reliable source of income. Do you have recommendations or advice for us? We have three children and another on the way, and I feel a little overwhelmed about where to start looking for new insurance etc. We do have about $20,000 saved and will have a little more by the time he would quit his job. 
- Melinda

Unless he has a direct and very clear path to a steady income, he should not make this leap.

The only way I would ever recommend someone making such a leap is if there is going to be enough income coming in from the other person in the relationship to cover all of the bills or if the business is already earning enough income to pay the bills due to building it in one’s spare time.

If I were him, I would try to get the ball rolling on the business in his spare time before quitting the primary breadwinning job for the family.

Q5: Money from selling household items
My partner and I are currently working full time in well paid jobs. We are planning to leave New Zealand in six months for an indefinite period of time as we are going to travel around South America for 6-9 months, and then move to The Netherlands (where my partner is originally from) and try to live there for a year or two so that we can spend more time with his family and friends, and I can learn Dutch.

My question is to do with the money that we get from selling our joint house hold items. We have started to sell some stuff (mattress, garden tools, desk, etc) and so far have raised $400. Over the coming months we’ll sell pretty everything except for a few items needed to make a house a home, and the bare necessities needed to get started with which we’ll store at my parents house here in NZ. Aside from that most of our stuff will be sold via the NZ site TradeMe. We think that by the time we sell most of our household items we’ll raise about $3-4k. (This doesn’t include the car, or motorbike which is my partner’s so he’ll keep the money from the sale of that (fair enough!)).

I wanted to get your advice on what to do with the money we raise from selling our stuff. Our first idea was to put it towards our trip – so that we have to put in less money ourselves. Then I had an idea this morning that we could put it in a rolling term deposit, and use the money for set up costs when we finally come back to NZ. Another idea was to put it to one side, as we want to buy a house eventually and that could be the first bit of savings for us…

Anyway, what do you think? Should we just put it in the ‘South America’ pile, or maybe towards something else?
- Linda

I would keep it as an emergency fund that you would be able to access from New Zealand if necessary.

My first step, if I were you, would be to talk to my bank about international access to accounts. If that money were in a U.S. checking or savings account, could you access the funds easily in New Zealand? If not, I would seek out a bank that could make such funds available if necessary.

Given that, I’d just let the money sit until I returned. Ideally, you won’t have to touch it and you’ll have a cash reserve that will make your return to the United States quite easy.

Q6: Haircuts and appearance value
Almost since I’ve known him my husband has kept his hair cut very very short. He owns clippers and cuts his hair with the shortest setting about once a week all over his head. He works as a salesman. I am concerned that the haircut makes him look perhaps too aggressive to his clients and may be costing him sales and hurting our income. I’m not sure how to handle this situation.
- Emily

Clearly, something must have led you to this conclusion. I’d spend some time digging deep and figuring outexactly why you feel this way.

Then, talk to your husband about it if it concerns you. As his spouse, you do have a vested interest in the strength of his career. Be sure before you bring it up, though, that you truly understand where you’re coming from with this.

That being said, as long as his hair and appearance are kept, I think you’d have a hard time finding concrete evidence that short hair is damaging to the sales output of a competent salesperson.

Q7: Considering purchases again
Almost exactly a year ago I started reading your website while undergoing chemotherapy. At that time I had $4,000 of credit card debt and no savings. I have an excellent job as a scientist, but have had a hard time staying afloat after becoming a single mom about 5 years ago. After reading this site for the past year, tracking expenses, selling stuff on eBay, forgoing a few trips, and reducing spending I am happy to report that I am debt free, have $2,000 in an emergency fund, $500 in a vacation fund, and about $500 in an account for furniture! My question is on purchasing a couch. I’m at the age (35) where I’m starting to realize that replacing a couch will be a regular thing. The fabric couch I bought new from the store lasted 5 years with regular cleanings, the fabric couch I have now I bought off of Craig’s list 3 years ago and is increasingly uncomfortable/driving me crazy. I have wanted a leather couch for some time as I find them comfortable, easy to clean, and beautiful. They also seem to last longer (I would estimate 10 years+ instead of 5). However, I’m not sure if it’s a wise purchase and it’s a little ostentatious. 90% of my furniture is hand-me-downs / yard sales/ thrift stores. Another consideration is that as a single mom, obtaining couches second hand and getting rid of the last couch takes a lot of coordination and help from others. Is buying a leather couch wise or foolish? I have located a mid-price local furniture maker that seems to make quality products and has a few clearance centers for items with a little damage/imperfections. Also, is there a time recommendation after one finally escapes debt before one should start purchasing items again: a debtors “probationary period”?
- Billie

I’ll speak from experience with a leather couch that we bought ourselves from an “imperfection” store that they certainly do show clear wear and tear over time. We do have three young children, but our leather couch is certainly showing some significant wear at about the four year mark. The level of wear is comparable to and perhaps slightly more than the wear on the microfiber couch in our family room over the same period.

I don’t think a relatively wear-resistant couch is a bad purchase for a single mother. Just make sure you know what you’re buying before you do so. I would stick with either leather, vinyl, or microfiber with children in the house. Do your own research before you talk to a salesperson.

As for a “probationary period,” I don’t think that’s truly necessary. You just need to make sure you’re not buying things that will put you further in debt or reducing your ability to repay debt. If you have the cash in hand for this purchase and have been planning for it, then it’s a reasonable move.

Q8: Emergency fund and future
I have a really tight budget. Very little wiggle room and I don’t have much in the way of savings. However, I have finally managed to save $1,000 and, with my upcoming tax return, I will be able to pay off all of my credit card debt. However, I have one credit card that has 0% interest for 1 year. I have about 9 months left on this one year term. So, I was thinking about keeping the balance of what I owe in my ING savings account so I can collect interest and then pay the credit card off before I start getting charged a interest. What would your advice be on that?

Now that I am able to pay off all of my credit cards debt, the only debt I will have is my car loan. The interest rate is 8.24% and I still owe about $13,000. My question is, since I have my $1,000 emergency fund, should I:
1. Continue building my cushion. $1,000 won’t even cover my rent ($1,100) or daycare ($1,200) expenses. I am the single, full-time working mother of a three year old. I really have done my research and I can’t get a better deal for the hours I need.
2. Start investing. I haven’t started any savings for my daughter or for my retirement and I know how important both of those are.
3. Should I start saving for a house. It sounds far-fetched but I qualify for the VA home loan and would really like to provide my daughter with a home to grow up in.
4. Or should I do some combination of all of the above?

Here are some things to keep in mind:
1. I am currently working on refining a budget. I have one but I’m working on collecting receipts and such so I can track exactly how I am spending my money for the next couple of months and try to be even more responsible.
2. I am hoping to go back to school in the fall but it should only alter my income slightly as I will be receiving the post 9-11 GI bill which pays for school and gives me a monthly stipend.

My instinct is that I should continue building my cushion. However, I feel like it is very irresponsible for me to not at least consider to begin investing so I think I should start there. Then there’s also the fact that a good portion of my furniture is falling apart and will likely need to be replaced in the near future so I will have to figure out how to save for those items as well. I guess this is a lot to dump on you but I would really appreciate your help with setting my financial priorities.
- Kelly

Having money in a savings account is investing.

The idea that “investing” is this magical thing that will somehow make your money multiply like rabbits is foolishness. Investing simply means devoting one’s time, effort, or energy to a particular undertaking with the expectation of a worthwhile result.

When you invest in stocks – which seems to be what you’re pining for – you inherently take on some risk. Let’s say the next 12 months go like 2008 did and you lose 40% of your investment over that period, then you find yourself needing the money, then it was an awful investment.

An investment in a savings account, on the other hand, returns about 1% no matter what the economy is doing. If you find yourself needing your money back after a terrible year in the stock market, your savings account is a far better investment than the stock market.

You shouldn’t put a dime in anything besides cash unless you’re quite confident you’re not going to need that money at all for quite a few years. Most investments outside of cash are very volatile and shouldn’t be attempted unless you’ve got a strong cash supply to get you through emergencies and an understanding that there will be periods where you’re going to take an absolute beating on it.

Q9: My business partner is lazy
I work 40 hours per week at a regular job and also have a flourishing side business — so flourishing that I frequently make more money from it than from my regular job!!! My roommate lost his minimum-wage job several months ago so he is helping me out in exchange for room, board and cash here and there. We split up my profit evenly and that covers his share of the the rent, bills, some spending money etc. The problem is that he is not particularly helpful. There is no question that I couldn’t run the business — at least not to this extent — without his help, it’s just that he only does the bare minimum of work. I did the math one time and for the amount of work he’s doing it comes to something like I’m paying him up to $50/hour!

I am so swamped and have been working days 4 a.m.-9 p.m. while he works from about 2 p.m.-4 p.m. complaining the whole time! I want to start cutting back the side business as I am not ready to give up my full-time regular job. But taking fewer clients means that my roommate will have less of an “income” and might begin to fall behind on bills and rent. And like I said I really do depend on him to keep growing my business. There are just some things I can’t do because of my 40-hour/week office job and he is available to do those things. (This has been why I’m so willing to give up so much of my profit. Because it was worth it to me.) If he had a regular job then he wouldn’t be available to help me. Although honestly he’s so lazy that I don’t think he’d even get another job. So I might have him falling behind on bills and rent anyway. Sometimes I wish that I could just start over with a new roommate/helper, one who really wants to work and would appreciate the opportunity (it’s a really fun job) but I have been friends with this guy since high school and I really care about him. He’s been my roommate since college (10+ years.) And I think I am too old to go back into the old Craigslist roommate pool.

Will you help me sort this out? I am so tired and angry. I love both my jobs and also my friend so much.
- Al

This is a prime example of why friendships and finances rarely mix.

Your roommate is a freeloader. That person might be a wonderful long-time friend, but right now that person is leeching off your efforts.

You have to decide whether or not you’re okay with that. If you are, then swallow your displeasure and continue the arrangement. If you’re not, then you must have a talk with this friend about the business, and you need to separate your friendships and your business relationshps. I’d tell your friend that if I were in your shoes.

Is this person an employee/partner first or a friend first? That’s really the question here.

Q10: Children and television
My husband and I both have salaried careers that eat up at least 50 hours a week. We also have three children, like you and your wife.

How do you get anything done around the house without allowing your children to watch a ton of television? It seems like the only time we make significant progress on housecleaning, laundry, and home projects is when the children are focused on something that doesn’t undo the housecleaning.
- Fiona

For starters, we just accept that our house isn’t going to be perfectly clean while our children are young. With both parents working and with multiple young children, it is almost impossible to keep up with the wave after wave of chaos at all times.

Our solution is to allow them to watch limited television. We DVR programs that we’ve pre-screened and our children are allowed to watch thoes and nothing else.

During the week, we don’t watch any television. On the weekends, they’re allowed to watch a few programs, during which Sarah and I get caught up on things.

As the children get older, they do become better at finding ways to entertain themselves. They also become more useful with regards to the household tasks.

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.

Occupy LA activists rally outside the Bank of America Plaza in Los Angeles in this file photo. Hamm argues that any hidden fees that appear on your bank statement should have you calling your bank in protest as well. (Damain Dovarganes/AP/File)

Four bank fees you should never tolerate

By Guest blogger / 02.22.12

One of the surest signs that it’s time to switch to a new bank comes when you examine your monthly statement and see a lot of unnecessary fees.

About a decade and a half ago, I was a customer of a large bank chain (Firstar) that was later swallowed up by an even larger bank chain (US Bank). Firstar had locations that were really convenient for me at the time, so I used them as my primary bank.

During the year or two before they were absorbed by US Bank, I noticed that there were fees popping up all over the place. A maintenance fee appeared and a minimum balance began to be applied to my checking account.

At the time, I thought this was normal. What I should have done, though, is taken my business a few blocks away to a smaller bank chain that wasn’t introducing such money-siphoning fees into their accounts. I did eventually do that, but it wasn’t until after Firstar had absorbed far more of my money than they ever should have.

“Monthly” fees. Check cashing fees. Account “maintenance” fees. Minimum balance fees. These are just four of the most common fees that I’ve seen or heard about from readers. Banks are constantly looking for creative ways to get a few more bucks in their pocket, and one way to do that is to constantly ding their customers with small fees charged for extremely questionable reasons.

Just $3 in fees a month adds up to $36 per year. Three years of this and you’re talking well over $100, particularly when you consider that money could be earning interest on your behalf.

This is basically a rip-off. They’re taking your money for no good reason, particularly when there are many banks out there that charge no such fees. Thankfully, there are a few things you can do to keep those fees out of your account.

The first step is to check your monthly bank statement. For many of you, that means using online banking and examining the transactions over the last few months as well as the statements found there. There are no monthly fees that should be acceptable on your normal checking or savings account.

If you find any fees, call your bank. Have your statement in front of you when you call them so you can refer to specifics.

When you call, be polite and calm. First, ask why these fees were applied to your account in the past month, then ask to have them waived. If the bank refuses to do so, ask if they have any account offerings that do not include these fees.

Politeness and calmness will get you much further than anger and passive-aggressiveness on the phone. Most of the time, you’re talking to a customer service representative that has heard a lot of anger today and isn’t getting paid well for the punishment they receive. They’re not exactly going to want to go the extra mile for people who react with anger.

If your bank won’t budge on the fees, it’s time to start seeking out another bank. Unless they are offering features that make up for the fees – and these features would have to be tremendous – these fees are costing you.

One thing I’ve noticed is that the bigger the bank, the more likely they are to sneak in such fees. This isn’t an exact rule, but I’ve found that the giant banks seem to be the ones that most commonly stick fees onto their accounts. I did a brief survey of some of my friends just to find out if they had found any fees on their accounts, and the ones who had found fees were universally customers of very large banks.

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. 

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