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A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this file photo. Interest earned from a checking account won't be much, Hamm argues, but it's basically free money. (Issei Kato/Reuters/File)

A checking account with interest means effortless money

By Guest blogger / 02.20.12

Interest rates are a funny thing. While interest is always a good thing to earn, predicting the exact rate you’ll get is far from an exact science.

When I first wrote 365 Ways to Live Cheap in 2007 and early 2008, many checking accounts – even entry-level ones – offered interest. I myself had a checking account that received something around 1.5% interest at the time.

As the book went to press, interest rates were dropping and checking accounts were the first to really see interest rate drops. I discussed the issue with my editor and we made the decision to suggest looking for a 1% interest rate, as it had been easy to find such accounts for years.

Today, a 1% interest rate on a checking account is a pretty good deal. They can be found, but they’re often available from local banks and are prone to change. In fact, I’d suggest that a 0.5% interest rate on a checking account, given the current state of interest rates, is something to be happy with.

Why is that so important?

Well, let’s say you maintain an average balance of $2,000 in your checking account throughout the year. Just for keeping that account open, the bank gives you $10 over the course of the year. You don’t have to do anything to get that ten dollars. Just keep your account open with that average balance and you’re good.

Now, that seems like a relatively small amount, but the key thing is that you don’t have to do anything to collect it. If you choose a bank that offers some form of interest checking, you’ll simply get the money slowly throughout the year simply for having the account open.

Interest on a checking account is a perfect example of what I think of as “effortless money.” It’s one of those things that, once you’ve made an initial decision or take an initial action, it continues to either earn you money or save you money in the future.

For example, if you air seal your home once, you’ll have a smaller energy bill thereafter. Set up your programmable thermostat to cause your furnace or air conditioning to shut off during your workday and at night and you’ll always spend less on energy.

The same is true for interest on an account you naturally use. It’s just money that you get without effort, and that’s the best kind of money.

That’s not to say, of course, that it’s the only factor to consider when choosing a bank. It’s one of many, like the ATM network (discussed yesterday) and other factors we’ll discuss in the next few days.

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


A Bank of America customer uses an ATM machine at a branch in Greenville, South Carolina in this file photo. ATM fees can add up fast, Ham argues, so it's best to have a free ATM that fits easily into your daily routine. (Chris Keane/Reuters/File)

ATM fees add up. How to get rid of them

By Guest blogger / 02.19.12

For the last few weeks, we’ve been focusing on how to save money on transportation. Now, we’re going to start looking at another potential money sink: banking and investing.

There are a handful of tips from 365 Ways to Live Cheap that felt really relevant to my life as I was writing the book in 2007 but don’t quite feel as relevant today, though still useful. This is one of them.

I found a few bank statements from 2005 and estimated that I made 108 ATM transactions that year (averaging 9 a month). If I made that many transactions outside my network, assuming a $2 fee for out-of-network ATM transactions, $206 vanishes from my wallet. That’s a car payment on a reliable used car.

So, why isn’t this tip as useful any more? The big reason is that I don’t use ATM machines as frequently as I used to. Mostly, I use them to withdraw cash for things like farmers markets or community festivals or for small incidental purchases.

There are a few reasons for this.

First of all, I make more of my purchases online than I used to. With the exception of groceries and household supplies, I actually do the vast majority of my purchasing online at websites such as

Second, my commute is much shorter. Instead of driving 20 miles or so to work, I now walk to my workplace without passing by a single business. The temptation to stop for a coffee, check out the new releases at the bookstore, or other similar things is much smaller than it once was. Many of those incidental things are paid for out of pocket.

Finally, I don’t buy nearly as many things as I used to. Not as much cash – in the form of cards or hard currency – flows out of my pocket as it did five or six years ago.

So, is this tip still useful?

I went and looked at my transactions over the last year. I used an ATM 23 times. Only two of those uses were on ATMs outside of my network, and those each cost me a $2 fee. If I had made all of those transactions outside of my ATM network, it would have cost me $42 more. While it’s not the much larger amount I would have saved in 2005, it’s still well worth keeping track of.

There are a few tactics you can use to make sure that most of your transactions are inside your network, thus saving you those fees that can sneak up on you.

First of all, identify a fee-free “home” ATM. There should be at least one ATM that doesn’t charge you a fee that’s convenient to your typical daily activities. I have one of these – I go near it several times a week during the normal course of activities. That’s just the default ATM I use for activities, and I never see a fee.

Second, plan in advance. There’s nothing wrong with being spontaneous, but even spontaneous events can be seen in advance. If you know you’re going out this weekend and will need some pocket money, get it now. Whenever you see a cash event coming up, get the cash now, not later. Later means that you’ll be limited in your ATM choices and will likely hit a fee.

Third, make sure your bank has a big ATM network. Most banks make their ATM networks clear on their website, often even mentioning ATM locations. Know the locations for your bank and, if their location list is a short one and doesn’t cover areas where you often find yourself, use that as a tip that you might want to be looking for another bank.

Finally, have some willpower. I used to be afraid to withdraw $100 or more from the ATM for future events because I was always afraid I would waste it on unimportant things. This would cause me to make more ATM trips than would be necessary, and because I was stopping so frequently, I would often visit ATMs that would ding me with unnecessary fees. Having enough willpower to not spend cash simply because it’s in your pocket not only saves you money from unnecessary purchases, it can save you money from ATM fees, too.

These tactics together will minimize your money lost to ATM fees, even if you’re not using them as much as you once did.

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 the dashboard of a 2005 MINI Cooper S Convertable in Beacon Hill, Boston. Future cars could offer customizable upgrade options that can change from customer to customer. (Mary Knox Merrill/The Christian Science Monitor/File)

The many fiscal wonders of cruise control

By Guest blogger / 02.18.12

A few years ago, I was pulled over for going 61 miles per hour in a 55 miles per hour zone. I mumbled and grumbled to myself as the officer went back to his car and wrote me a ticket. Instantly, over $100 went down the tubes, and that doesn’t include the bump in insurance rates.

Sure, the officer was probably filling a ticket quota. That doesn’t change the fact that you can get hit with a speeding ticket at any time if you’re going over the speed limit.

Add on top of that the fact that most cars use fuel most efficiency when going at about 55 miles per hour, and a plan for cost-effective driving starts to become clear. Stick to the speed limit as much as you can.

Let’s start with pure fuel efficiency. According to the link above, “You can assume that each 5 mph you drive over 60 mph is like paying an additional $0.28 per gallon for gas.”

So, let’s examine a car that gets 20 miles per gallon when you drive optimally. Let’s say you’re going on a 180 mile trip, meaning you’ll normally gobble up nine gallons of gas if you’re going 60 miles per hour.

Turn the speed up to 65 miles per hour and you save about 14 minutes. However, you’re eating up $2.52 in extra gas. You’re essentially saving $10.80 per hour – and that’s after taxes – by driving 5 miles per hour slower. That’s just counting the fuel efficiency part of the equation.

On top of fuel efficiency, you have the risk of getting pulled over if you’re going over the speed limit. Getting a ticket is something of a random event. You could speed with reckless abandon and not get a ticket for years, or you could get two tickets on a single three hour road trip (I’ve seen it happen). When you get a ticket, not only will it cost you a significant amount for the ticket, it will also have an impact on your future auto insurance rates.

On top of that, speeding puts additional wear and tear on your vehicle. From increased wear on your brake pads from having to slow from a higher speed to additional wear on your engine from the greater usage,

$10.80 per hour is a severe underestimation of your savings from keeping your speed under control.

The challenge I have with securing this savings is that… well, I tend to have a lead foot. If I’m driving along a boring two lane road or a long stretch of interstate, I tend to gradually go faster… and faster… and faster.

My solution for that is to simply use the cruise control. I turn it on for every flat and straight segment of road I’m on. I flip it off for significant curves or significant hills, as I slow down for the curves and uphill segments and allow myself to pick up that speed again when going downhill.

The savings I rack up from simply keeping my accelerator under control – the gas savings, the maintenance savings, and the avoidance of speeding tickets – makes it well worth the extra few minutes spent on the road.

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

In this file photo, car enthusiast Mike Clabough opens the door of his 1940 Studebaker in New Market, Tenn. Clabough, a retired Navy jet mechanic, is the fourth owner of the Studebacker which has all its original parts. For repairs on your average car, Hamm recommends doing research ahead of time on who offers the best prices and service. (Mike Clabough/AP/Knoxville News Sentinel/File)

Shop the block and save on car repairs

By Guest blogger / 02.17.12

This is one of those tips that you hear and immediately think, “Easier said than done.”

Why? Most of the time when you need a car repair, you’re pinched. Your car failed at a bad time, you need to get to work or school, and you’re willing to just throw money at the problem so you can get back on the road as fast as possible. You grab a phone book or search Google and just call the first reasonable number that comes up.

There are some times where you just can’t help this. I had a car failure on a long road trip and I was simply at the mercy of Google. I have painful memories of the overpriced towing and overpriced repair in that little town in Wisconsin.

Quite often, though, car repairs spring upon you when you’re near your home, and when that happens, a little bit of legwork in advance can save you a ton of time and cash.

The secret is to shop around in advance of a car problem. That way, when something does go wrong, you have a phone number or two already on your speed dial that you can call with confidence knowing that the prices will be fair and the work will be done well.

So, how do you do that research? Here’s exactly how I whittled things down to my repairman of choice.

First, I sent out a call to my local social network. I asked pretty much everyone that I knew who lived locally if they knew of any good car repair places in the area. People were glad to tell me what they knew. I got a wide variety of answers, but I kept hearing about four names come up time and time again as being places with good prices and really good service.

Next, do your homework on the leading names. Use a mix of the internet and your phone to find out if they work on your type of car(s), if they offer towing services, and what their rates are on some common repairs. I asked about brake replacement and transmission replacement on my model, just to get a feel of what they offered.

If you’re like me, you’ll find that these two steps get your list quickly whittled down to two or so entries. I put them both into my phone.

Now, when I am in a pinch, I can just pull out my phone and call one of those numbers. If they can’t come quickly, I call the other number. I know that in either case, they can handle what ails my car, do it professionally, and not charge me a small mint for the service.

I’ve come to rely on one of these places as my primary stop for significant maintenance (belt replacement, brake pad replacement, and the like) because their prices on these services were stellar and their service great.

Even better, when my friends ask for such a suggestion – and they have many times in the past few years – I have a couple great names and numbers that I trust that I can quickly give to them.

Homework pays off. I don’t know how much money and how much worry and even how much time I’ve saved by doing this in advance, but it’s been worth it a hundred times over.

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 photo, shows four posed MasterCard credit cards, in Surfside, Fla. According to Hamm, paying for expensive repairs with a credit card offers convenience and protection against certain types of fraud. (Wilfredo Lee/AP/File)

Why you should pay for car repairs with a credit card

By Guest blogger / 02.16.12

The usual personal finance advice tells people to avoid credit cards like the plague.

The reason for that is quite straightforward. Credit cards make it incredibly easy to get into debt trouble. When you use a credit card, you’re not directly spending your own money, and that abstraction is often enough to convince people to spend without thinking. After all, you don’t have to have the money in your checking account to cover it right now, do you?

I’m speaking from experience here. At one point in 2005, I had credit card debt that went well into the five figures while barely having enough to cover the bills in my checking account. One of the biggest reasons for this was the ease of using the credit card whenever I wanted something.

So why would I suggest actually using a credit card to pay for an expensive emergency like a car repair?

First of all, just because you use a credit card doesn’t mean you shouldn’t pay it off immediately. I use a credit card now for convenience, not because I don’t have the money in my checking or savings account to pay for the item. In fact, I’d go so far as to say that it’s not a good idea to use your credit card unless you do have the cash on hand to cover whatever you’re buying.

Credit cards are a tool of convenience, not something that enables an unsustainable lifestyle.

At the same time, however, credit cards do offer some additional protection against fraud and bogus repairs. For example, Mastercard offers several types of shopping protection that certainly cover a car repair bill, as does Visa.

I try to use my credit card for significant purchases like these so that if something goes wrong, I simply have another line of defense to protect myself against bogus practices.

One key step, though, is to know what protection your card specifically offers. The most effective way of doing this is reading through the terms of service on your card, though a more convenient way is to call the credit card company and ask them about the protections they offer for a car repair. Often, their basic protections will protect you against lemon repairs (though no protection is perfect and you might still find that something fails three years later and you have no recourse).

I have actually used this once, on a Visa card a few years ago. I had a repair done to the brake pads on my truck and the work was shoddy (I got the work done at an out-of-town shop because I was traveling). The first thing I did wasn’t to call the repair place, it was to call Visa. They told me exactly what to do, starting with contacting the repair place directly and calling them back if the repair place didn’t cooperate. They towed my vehicle, repaired the problem, and sent me on my way without an additional dime paid.

As always, pay off your bill in full each month. Using your credit card to pay for a repair doesn’t mean it’s a good idea to carry a balance on that card. Pay it off in full and don’t let a balance carry over unless you want to see your money start to vanish.

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. 

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

Roth IRA: Use ShareBuilder or Vanguard?

By Contributor / 02.15.12

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You’re doing the right things.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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

Compound interest is great, but there's a catch

By Guest blogger / 02.15.12

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to find a retirement saving plan that works for you

By Guest blogger / 02.13.12

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

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

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

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

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

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

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

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

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

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

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

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

So, what does this mean for you?

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

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

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

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

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

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

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

Good gas conservation habits pay off

By Guest blogger / 02.13.12

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For short trips, use a bike

By Guest blogger / 02.12.12

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

But spring, oh, the glorious spring.

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

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

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

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

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

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

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

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

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

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

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

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