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The Simple Dollar

A woman carries shopping bags on Oxford Street in London. To avoid being saddled with a pile of regrettable impulse buys, Hamm recommends taking ten seconds to think about each purchase. (Finbarr O'Reilly/Reuters)

To avoid impulse buys, count to 10

By Guest blogger / 01.10.12

I’ve been going to the same barbershop most of the time for the last fifteen years or so. We grew up in the same area, so it’s rather fun to catch up with him on things that are happening in our hometown area.

He’s a good barber, so he’s also pretty busy. He also operates almost entirely on walk-in business, so when you show up, you get on a list and have to wait for about thirty minutes or so.

When I go there to get my hair cut, I’ll often wander around the small shops nearby – and there happens to be a shop that sells board games about four doors down. Board gaming is one of my biggest hobbies, so I’ll often walk in there to browse the shelves.

That’s when I have to be careful.

When I’m in that store, there’s a lot of temptation for me to pick up and buy a new board game. I’ll think about playing it with my wife and with my friends and recall the many great experiences we’ve had around the table. I’ll think about playing it with my sons and my daughter in the future.

I’ll be sorely tempted to just buy the game. After all, I can afford the sticker price. Why not just buy it and make those dreams a reality?

That line of thinking leads to a lot of unnecessary spending. It rides the emotional wave of impulse buying right to the conclusion, where you’ve got an item you bought open in your home and you’re realizing that maybe buying it wasn’t the best idea. With those board games, for example, I often realize that we have quite a few games that we love playing already on our shelves.

My first line of defense against these types of impulsive purchases – the ones where I know I could afford the unnecessary item – is the ten second rule, which I’ve talked about before.

Whenever I’m considering making a purchase of any kind, I simply stop for ten seconds and ask myself whether this is really a worthwhile purchase. Do I actually need this item? Does it cause any sort of fulfillment in my life that isn’t already achieved by the things I currently own? Could I not put the cost of this item to better use?

I don’t watch the clock on this or anything – I just do it for roughly ten seconds or so.

At the end of those ten seconds, if I’m still convinced that making this purchase is the best idea, then I’ll go ahead and buy it without guilt or remorse.

However, I’ve come to find that the ten second rule frees me from making a lot of unnecessary purchases. By facing the doubts I have about the purchase before I make it, I often end up making the right decision rather than a decision that I’ll regret.

Doesn’t this eliminate spontaneity? Sure, it does. However, the only time I really want spontaneity that results in me spending money is when I’m with other people, and when I’m engaging in a social event, I make up my mind how much I’m going to spend on that event before I go. Spontaneity when I’m by myself is mostly just an excuse to spend money on things I don’t really need.

If you’re having trouble keeping control over your impulse spending, try practicing the ten second rule. Whenever you’re tempted, stop for ten seconds and ask yourself whether you’ll regret this purchase in the morning. If you find yourself putting the item back, you’ll end up feeling good about yourself and you’ll still have that money in your pocket.

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.

In this file picture from August, students attend graduation ceremonies at the University of Alabama in Tuscaloosa, Ala. With more than $50,000 in student loans, should a couple pay them down aggressively, build an emergency fund, or both? (Butch Dill/AP/File)

Student loans: Pay them down or start an emergency fund?

By Guest blogger / 01.08.12

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. 
1. Investing in light of default
2. Debt eradication
3. Loans or emergency fund?
4. Repetitive questions
5. What’s next on my path?
6. Time for a financial advisor?
7. Polite hygiene advice
8. Wedding and financial planning
9. What are readers like?
10. 2012 predictions

How long does it take for you to stop dating checks and other documents with the previous year after the calendar flips?

I’ll admit that it will probably take me most of January to get used to writing 2012.

Q1: Investing in light of default
I have a small IRA, with half in a mutual fund, which has topped out, and the other half in two stocks which are near to bottoming out, from a lag factor associated with recession and reinvestment.

I anticipate a currency devaluation as an effect of renegotiation or default on national debt limits. Would overseas money markets be a safe place to stash funds from the sale of the mutual while I wait for it to drop so I can repurchase it? If you believe that our debt problems will negatively impact overseas money markets, what is an alternate spot, exclusive of index funds, which will drop as the market does?
- Monica

I don’t think I would trust overseas money markets more than domestic ones, as I think a lot of economies are facing some sort of currency devaluation due to the ongoing economic conditions.

I also wouldn’t bank my entire plan on market timing, particularly when you’re making moves based on a sense of a fund having “topped out” or “bottoming out.” If I were you and I moved forward with this plan, I’d set some thresholds on when to buy back in. For example, you might want to say that you’ll buy back in after three months if either the value of the fund is down, say, 15% or it matches the value you sold it at.

Don’t worry about what the absolute top of the market is or what the bottom is – worry about making money for yourself.

Q2: Debt eradication
I’m a 22-year old student who will graduate with a B.A. in December. I took out some federal and private loans to pay for school. I saved for the past year and paid off the private loans while in school. I’ll be left with $16,000 at 6.8% when I graduate. I have no other debt and a 3-month emergency fund ($6,000). I plan to make payments well over the minimum to pay this balance off in 2 years or less.

Is this a good thing? The more I research credit and credit scores, it seems that a relatively low-balance loan isn’t a bad thing to keep around for ten, even fifteen years. However, having a positive net worth is my #1 priority. Should I be making aggressive payments or simply using that money to pad my retirement and savings while keeping the loan around? While paying the loan aggressively I’ll still be contributing 15% of my net income to an IRA. I have one credit card with a $500 limit; never carried a balance. I pay bills on time every month. I currently rent. A house isn’t on my to-do list, and I’ll buy a car outright if I get one in the future. Is it enough to build my credit without a credit card balance, mortgage, car payment, and (soon) no student loan?
- Belinda

I don’t think the value of having a 6.8% student loan (in terms of your credit score) is worth the financial cost of having to pay 6.8% interest on the balance every year. If it’s within your means without causing other financial troubles, I would pay it off sooner rather than later.

Given that you do have a continuing line of credit in the form of your credit card, your credit report won’t go completely empty after you pay off the student loan. I would consider using the card regularly (and paying off the balance) and being open to moderate raises in your credit limit.

You’re doing very well. Keep along your current path and you’ll continue to do very well.

Q3: Loans or emergency fund?
I’ll graduate from grad school this May with $25,500 in federal subsidized loans (spouse and I also still have $27k combined undergrad debt at 5.3%). I haven’t technically needed these loans for the last year of school but because they’re subsidized I’ve been storing the money in a rewards checking account earning about 3%. It will be around 12,000 total in November when the subsidization ends and 6.8% interest kicks in. This is the extent of our short-term savings/emergency fund right now (my spouse and I are also saving for retirement). So, since we are looking to save for life’s big things in the next few years (car, family, and house, probably in that order), and we don’t have a defined emergency fund amount, I wonder how much of that 12k should we pay back immediately? We’re currently steadily employed though I’m seeking new full-time work in my desired field instead of my current part-time job. We have roughly $1000 extra/month to put to good use on student loan repayment and savings (we’re a pretty frugal couple), but I’m not sure what the best combination would be. We have to pay minimum $400/mo on our student loans. Is it best to pay more on student loans and postpone more emergency/car/baby/home savings? Is it best to pay back the entire $12k “savings” (which is really borrowed money) and start our “real” savings from scratch? I’m lost and confused and would be interested in your and your readers’ opinions. 
- Danika

If I were you, I would establish a new emergency fund and fund it with enough money to provide three months or so of living expenses for you and your partner. I would then use the remainder to pay off your highest loan and then use the subsequent $1,000 per month toward minimum payments and whatever loan has the highest interest rate.

I would count that 6.8% loan as already having that rate and make “payments” on that debt to a savings account. Then, when the subsidization ends, I’d pay the entire balance of that savings account to that 6.8% loan.

In terms of balancing emergency protection and a path toward debt freedom, I think this is a very good plan.

Q4: Repetitive questions
I’ve noticed that there are a lot of consistent shall we say themes in your reader mailbag questions. Student loans come up a lot for example and so does retirement. Why repeat so much?
- Shaun

The reason these stories show up so often is because they’re the type of concerns that cause people to really start thinking about their finances and because they are so common among people. A lot of people leave college with student loans and they worry about paying them off.

I use a lot of these types of questions because there are a lot of variations in the story and because it’s a genuine concern that a lot of people out there have.

I try to choose questions that reflect the whole of the questions that I receive. I do often pick out specific interesting ones, but I also see from my email inbox that I get a LOT of questions about student loans, so I cover those questions.

Q5: What’s next on my path?
I’m now fortunate to be in a position where I’m (finally) earning a great wage at a company I have no intention of leaving anytime soon, living in a city (NYC) that I love, and living well below my means.

It’s been drilled into me for years that paying off your credit card(s) and building a healthy emergency fund are the first foundation steps to a healthy financial life. I’ve accomplished both (finally!), and have $0 credit card debt (only one credit card), and $11,000 in savings. I still have outstanding student loans, which I’m paying back and contributing more than the minimum on each month – these are at a very low interest rate, and the total repayment each month comes to $350. Paying off one would save me about half of that amount as the payments are pretty much equal between the loans.

I’m also putting $12,000/year into a 401(k), and am planning on continuing to contribute $1,000/mo into my savings account for the next 9 months – until it reaches $20,000. Since I live in NYC, I plan on renting for quite a few more years and I’m planning ahead for when I’ll want to move (moving into a new apartment here typically costs $4-5,000 upfront in costs for my price range – first month’s rent, last month’s rent, possibly a broker’s fee and a security deposit). 6 months of my bills (if I were laid off) comes to about $15,000, and that’s my emergency fund savings goal since I don’t have close family in the area and wouldn’t want to have to move due to prolonged unemployment. The $20,000 goal for this year assumes that I’ll want to move within the next year, which is a possibility (but not set in stone).

I’m not in a hurry to change my plans right now as I still have a bit of time left to contribute to my savings account, but I’d like to have some solid steps in place when I get there.

So – what comes next? It seems like after the savings account, credit card and retirement account are all healthy (or being contributed to healthily), that any number of options open up. I don’t get an employer match on my 401(k), so it’s 100% my own money in there, and I’d like to max it out for a few years, due to not being able to contribute anything in my younger 20′s (4 years of working w/o the spare $$ to contribute). But, I’ll still have a good amount of money that I’m now putting into savings left over after maxing out my 401(k), and I want to make sure I’m investing it wisely, if that’s even the right first step after this.

Are there any recommended steps after this point, or does it depend on the individual and their goals?
- Jill

It really comes down to goal-setting more than anything else.

Simply put, there is no general right way to invest. There are only good ways to invest to help you reach a specific goal. If you don’t know what you’re saving for, you’re probably going to save in an inopportune manner.

Let’s say, for example, that you decide to start investing in stocks because you heard they have a great return, not because you had any goals in mind. Let’s say you make this decision in January 2008. In December 2008, you decide to buy a house because you got pregnant and you decided you needed a house for that child. Your money has now lost 40% of its value.

You would have been far better off in a savings account had you incorporated the idea of buying a house in the next one or two years into your plan.

Spend some time thinking about where you want your life to be in five years or ten years. Where are you headed? Your investment choices should really follow that.

Jill also had a follow-up question.

Q6: Time for a financial advisor?
At what point does a financial advisor become wise? I’ve never had the need of one before, but is there a certain point that someone should start thinking about consulting with one, if only to make sure they’re on the right track and not missing anything they should be doing?
- Jill

I’m of the belief that given all of the amazing tools available to individuals online, most people don’t need a financial advisor. You would have to have a lot of money in the bank in order for the benefits that an advisor can provide to make up for the amount you’d be paying this person for advice.

For most people, particularly those without a ton of money in the bank, doing it yourself is a much better option.

What’s the dividing line? I think some of it comes down to your gut, but if you’ve got enough money that a percent or two of it is a significant amount of money itself, that’s when I’d get an advisor.

Q7: Polite hygiene advice
How do I politely tell a coworker that they have really bad breath? It’s bad enough that it’s distracting in the workplace. I don’t know how to properly approach it.
- Anna

Unless the relationship with that person is poisonous, I’d quietly bring it up with that person directly. There’s a very good chance that the person does not know this and the vast majority of the time that person will be very glad to have that advice as it helps their career chances.

If you have a bad relationship with this person, then you might want to consider going to their supervisor. I wouldn’t register it as a complaint, but instead encourage that supervisor to have a chat with the employee about it.

The purpose of all of this is to improve the office environment on the whole. Candor without negativity or snark is almost always a good way to go.

Q8: Wedding and financial planning
I am 28 and currently in the process of saving for a house with my fiance who is 25. We both currently work at the same company where I am a full time employee, and he started this year as an intern working 30 hours a week. We are looking to buy a house next year after we come up with the necessary 20% down payment for up to a $200k house. So our goal is to have $40k + closing costs saved by early next year.

When it comes time to purchase, unfortunately the mortgage will be in my name alone since he has bad credit; whereas mine should be immaculate by the time next year rolls around. I have no debt, and pay off my credit card balance every month. He has about $5.2k in subsidized student loans that are currently in deferment until he graduates at the end of 2012. All his other delinquent accounts have been more or less settled.

Right now we have $11k saved in our emergency fund and have $9.7k in the down payment fund. I’ve set the ambitious, but attainable goal to set aside at least $2.5k a month. We would be projected to have saved just about $30k by the end of the year. My mother has offered to additionally gift me $10k which I can use as my “new” emergency fund if I have to dip into my current one.

I earn just under $50k a year, and he is set to make $25-$27k depending on if he works the full 30 hours a week. So our net income is about $4.5k-$5k a month depending how many business days there are in a month. My company matches 75% of my 401k contribution up to 7% of my annual salary which I am currently taking full advantage of, but since he’s not a full time employee, he does not get the same benefit.

Right now all his income (lesser $200/month into another account that will be for when the student loan comes due) goes straight into the down payment fund, and we live off about half of my gross salary. We have a few things in the pipeline that would be advantageous for us to have a house by first quarter of next year. Our wedding is slated for the end of May 2012, and our goal is to have the wedding reception at home with just family and a few friends. This would be about 30 people at most, and the total wedding costing less than $2000 (I hope).

Should I set up a Roth IRA for him and myself now? I had planned on waiting until we purchased the house. But the best contribution for retirement is time, right? Starting a Roth IRA would set back the time frame of when we would purchase our house.

We likely will have additional expenses such as furnishing and/or appliances for the house. Should I use my emergency fund to buy appliances? Should I save for longer, so that when we close, we can pay for furnishings in full? Or should I live using our existing, aged pieces until we save up enough to buy those new furnishings later? My mattress is over 10 years old and is due for replacing.
- Jean

You’re currently contributing about 12% of your salary to your 401(k) including match, which is a very good number given your age. I don’t think you need additional retirement savings when you have other such pressing financial goals. It might be worthwhile for your husband to have one, which could just be routed from the money he’s contributing to the down payment fund. $500 a month would get him past the annual Roth cap. Given his salary, I would probably shoot for about $200 a month, giving him about 10% of his salary toward retirement.

When we bought a house, we used a lot of the furnishings we had at our apartment at first. Supplement that with whatever low-end furniture you need to fill out, then slowly begin replacing it as you need to. This is exactly what we did and we were quite happy about it.

If your mattress needs replacing, replace it, particularly if it’s interfering with your sleep in any way.

Q9: What are readers like?
Do you ever get visual images of your readers or add in more details in your mind than what they give you in their emails?
- Connie

I imagine details about readers all the time.

I usually do that so that I can see them as a person rather than as a dry question. I try to imagine the best picture I can of the person asking the question so that I want to help them.

Sometimes, that can backfire because I’ll put more positive details with the person than there really should be. Most of the time, though, I find that if you make an effort to look at a person’s best side, they’ll step up the plate.

Q10: 2012 predictions
What do you think 2012 holds in store for our world? Got any big 2012 predictions?
- Kenny

I think Barack Obama will win re-election, not because he’s done a stellar job, but because he’s done a “good enough” job compared to what the competition is. I think we will see a significant third party impact in this election, too, because the Republican party’s coalition of social conservatives and fiscal conservatives is becoming more and more frayed.

I think the American economy will show continued signs of rebounding and will look comparatively stronger (economically) than Europe throughout the year.

I think that December 21, 2012 will pass without any significance other than perhaps a few reactionary people overreacting to a quirk in the Mayan calendar.

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

In this file photo, the sun rises over Nantucket Sound as seen from Popponesset Beach in Mashpee, Mass., on Cape Cod. U.S. (Julia Cumes/AP/File)

When dealing with financial problems, you're never alone

By Guest blogger / 01.08.12

When I first reached my financial bottom, I felt desperately alone. I wrote about the pain of that financial bottom a while ago:

In short, even though my mind kept searching for a way out, another saving grace, part of me began to realize that there was no way out this time. I began to feel completely sick to my stomach and disgusted with myself, so I walked back home. My wife was there on the couch, flipping through a magazine, and my son was in his room taking a nap.

I went into my son’s room, closed the door behind me, and sat down in the rocking chair across from his crib. He was so tiny laying there, less than six months old, and he was sleeping so peacefully there without a worry in the world.

At first, I envied him. I wanted so badly to be in a situation without responsibility, to have my life in a place where I could just lie there in innocent sleep, without a worry troubling me.

But as I watched him lay there, gently breathing, another set of emotions began to take over. Guilt. Shame. Embarrassment. Pain. I was failing this wonderful little boy, this child who had already brought incalculable joy into my life. He looked to me and relied on me for everything, and because of my poor decision making and my selfishness, I was throwing it all away.

I closed my eyes and imagined the future I wanted for him, and then watched it dissolve into the future that he would have if I didn’t change things immediately. And I cried, almost uncontrollably.

I had my son that I loved so much. I had my wife, too. In the end, though, I felt alone. I felt like I had let everyone down because of my own inability to handle my money. I alone knew how bad the financial situation really was, and I alone knew that it was largely my own fault.

The thing was, I wasn’t alone. I’ve never really been alone.

For one, there’s God. I’m not going to enter into a debate about what that means, whether it’s really a spiritual force or just my subconscious talking, but I know that when I spend time meditating and praying, I find answers to the questions I seek, or at least directions to those answers. There’s something there, something I have always been able to rely on, and whether it’s a deity or my subconscious or something else, it’s a real thing that has consistently been able to guide me.

My wife, Sarah, has been by my side as either my steady girlfriend, my fiancee, or my wife for the last sixteen years. I can talk to her about anything going on in my life and get a sensible, steady, reliable answer.

I have three children that bury me in hugs every time they see me. Their good cheer is a constant mood lifter and their requests for help make me realize that I am of value to the people around me.

My parents have been around since the day I was born. Both of them have offered me help in almost every way I could ask for throughout my life.

My extended family is constantly supportive and willing to offer advice and assistance to me whenever I ask.

I have a circle of friends who provide constant good humor, companionship, and help, no matter what I’m going through in life.

I participate in several online communities, full of people who are always willing to share advice and encouragement.

I am not alone on this journey – or any other journey that I have in my life.

You are not alone, either. Your sources of strength may be very different than mine, but you are never alone unless you willfully choose to be. There are always people who are concerned about you and want to help you. There are always people who will step up to the plate alongside you and walk with you on any journey that you may take.

Often, all you have to do is ask, and that’s often the hardest part.

The one thing to keep in mind is this: almost everyone respects and wants to help someone who is trying to make a positive change in their life, particularly when they already care about that person. If someone in your life doesn’t do that, then that means they only valued you for the negative trait you’re leaving behind, and that’s not a good foundation for a relationship.

You are not alone.

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.

Euro coins are seen next to U.S. Dollar bills. Before creating a budget, Hamm suggest keeping track of every cent you spend in a given month. (Michael Probst/AP/File)

To create a budget, record every (yes, every) penny you use in a month

By Guest blogger / 01.07.12

One of the most generic personal finance suggestions is to “create a budget.” The advice usually revolves around setting aside money from your paycheck for all of your known expenses, then making smarter choices with what’s left over.

Here’s the problem with that suggestion: a lot of people who are in financial trouble have no idea where their money is going from month to month.

I’m speaking both from my own experience and from the mountains of emails I’ve received from readers who are struggling to get control of their own finances. Between impulse buys, credit card purchases, debit card purchases, purchases made with pocket money, and so on, it can be extremely difficult for a person without at least some exposure to personal finance to understand where their money goes.

Without knowing where your money goes, a budget is useless. It’s nothing more than a guess about the reality of your financial situation.

The first step, then, in creating a budget and getting your financial life under control is to understand as completely as you can where every dime of your money is going.

I suggest doing this for a period of at least one month. This allows you to get through one billing cycle on your utilities and your debts. While it does not cover irregular bills (like insurance), it can at least provide the foundation for regular monthly budgets.

So, how do you get started?

What I did is I designated a shoebox in which to collect receipts for every dime I paid out for a given month. If I bought gas, I saved the receipt and put it in the box. If I bought groceries, I did the same. The same goes for all of my silly incidental expenses.

If I paid cash for something and didn’t receive a receipt for it, I would write down that expense on a piece of paper and toss that paper into the box.

My regular bills also went into the box after I paid them. If I paid the bill online, I would write down the bill name and the amount on a piece of scrap paper and toss it into the box, much like my cash expenses.

At the end of the month, I would also take my bank and credit card statements and use those as a basis for comparison to make sure I didn’t miss anything, like an automated payment that I forgot about.

What do you do with all of this information? Simple. You take all of it out and sort it into groups that make sense for you. For example, you might have a group for essential bills (like electricity and rent or your mortgage payment), a group for non-essential bills like Netflix, a group for groceries, a group for eating out, a group for entertainment and hobby expenses, and a group for everything else.

Then, go through each of these groups and total up the receipts in that group.

Once you have those totals, you can spend some time asking yourself whether that spending level needs to stay in place (for example, with essential regular bills) or it can be cut a little bit (as with entertainment expenses or eating out).

What do you have after you’ve done that? A budget. That’s the end result of all of this work: a budget that actually matches how you spend your money and provides realistic guidance for your financial future.

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.

In this file photo, customers pump gasoline at a Costco gas station, in Winter Park, Fla. Hamm argues that when figuring out your salary, you should subtract job-related costs like gas for a daily commute. (John Raoux/AP/File)

How much money do you really make?

By Guest blogger / 01.06.12

One of the most painful realizations I had when I started getting my financial life in order was that my job didn’t really earn me as much money as it seemed.

My salary at the time of this realization was about $40,000 a year, so let’s use that as a baseline.

Now, on the surface, that’s really good money. If I worked 40 hours a week for 50 weeks a year, I would be earning $20 an hour, right?

Well, that’s not entirely true.

First of all, we have taxes. Federal income taxes, state income taxes, and FICA taxes. Federal taxes would eat about 11% of my paycheck, state taxes would eat about 4% or so, and FICA would eat about 2%.

Second, I had to pay for my commute. This was about ten miles each way, and it was the primary reason I owned a vehicle. So, let’s tack on top of that a monthly car payment of about $200, about $40 a month in gas, about $30 a month (prorated) in maintenance expenses, and about $40 a month in insurance, just to keep that car on the road.

I also had to wear a nicer wardrobe. I spent $200 a year to make sure I dressed appropriately for meetings, conferences, and the like – and that’s a low-end estimation.

There were at least two meals eaten out a week, costing $10 each. There was travel about three times a year where many of the expenses would be challenged, meaning each of those trips set me back about $100 out of pocket.

Not only that, there were a lot of times where I would put in extra unbilled hours to meet a deadline. I easily averaged 50 hours a week there.

Plus, there’s the time spent traveling – another 50 hours spent places where I didn’t want to be per trip. There’s the time spent commuting – about 40 minutes per day. There were also work-related meals and other activities to attend, eating down another four hours per month.

When you start running the math on this, the equation starts to change.

After receiving my $40,000 salary, I’d pay out $6,400 in taxes each year. I’d pay out $3,720 in commuting costs each year. I’d pay out $200 in wardrobe costs each year. I’d pay out $1,000 in extra meals each year. I’d pay out $300 in extra travel expenses each year.

Suddenly, my $40,000 salary became $28,380, just like that.

Now, I’d work 40 hours a week, totaling 2,000 hours per year, right? On top of that, I’d add ten hours of unbilled work a week (over 50 weeks), three hours of commute a week (over 50 weeks), 150 extra travel hours a year, and 48 extra hours of activities a year. This would bring my total up to 2,848 hours, or an average of 57 hours a week spent devoted to my job.

My job is suddenly paying me less than $10 an hour.

Of course, there were other job benefits that had some significant value, but frankly, I wasn’t actually using them. My wife and I sat down and compared the health insurance offerings at our two jobs and her insurance was far better than my own, so we used her insurance. I had no use for their life insurance option, either, and their retirement plan wasn’t particularly strong. These things do have value when you’re comparing jobs in this way, but only if you’re using them.

Amazingly, I was actually earning more money that I could keep with my part-time job as an undergraduate. I earned $12 an hour. There was no travel costs, no wardrobe costs, no extra activities, no unpaid work (I kept a diligent timesheet), no commute (I worked really close to where I lived). I would be left with more than $10 per hour working at this job.

On a per-hour basis, my part-time job in college was more lucrative than my first “good” job after college. It was also certainly less stressful and far less intrusive on my time.

One of my closest friends at the time made $7.50 an hour working at the night shift at a local gas station right after college. The gas station was just down the block from his apartment, and he’d spend most of his time there reading or practicing his sketching, as he’d have a customer maybe once every fifteen minutes. He didn’t have a car and on the rare occasions where he needed to go somewhere, he would just take the bus for a quarter or two.

It often seemed that he had more money to spare than I did. At the time, I thought it was just an illusion, but when you start running the numbers this way, it’s not entirely surprising, particularly if he was paying lower rent and lower utilities than I was.

It was realizations like this one that convinced me to make a scary career leap and start working on my writing full time. Doing that meant that I no longer had a commute (saving on car maintenance and fuel and time), nor any wardrobe costs, nor any eating out costs. My time spent on work was actually spent on work. There was no more travel – I’ve only been tempted to travel related to it once, and that one time was cancelled due to a family illness.

On the surface, my salary dropped through the floor when I made this move, but when I started running the numbers like this, I began to realize that my hourly income really wasn’t going down that much.

Whenever you’re thinking about your next job or your next career move, you need to think through these kinds of things. Often, a job that looks like it earns you great pay or is a great opportunity really isn’t either, and a job that seems like you won’t be earning much actually leaves you with a lot of money in your pocket. When you take into account things like stress and schedule flexibility, sometimes the “low-end” job is just the job for you, particularly if you’re simply working to earn a paycheck and are focusing your energies on making a side business or another opportunity get off the ground.

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.

A woman carries shopping bags on Oxford Street in London, December 13, 2011. According to Hamm, earning a higher paycheck can lead to spending beyond your means, of you aren't careful. (Finbarr O'Reilly/Reuters/File)

How to live within your paycheck

By Guest blogger / 01.04.12

I can still remember how it felt to get my first real paycheck at my first real job after college. It came in the mail, and I stood by the mailbox at my old apartment building ripping open the envelope as soon as I realized what it was and holding that check in my hand. It was more money than I had ever seen at once in my life.

I splurged with it – and with the next check, too. I felt like I was celebrating actually becoming an adult with a real job and a real career path.

Before long, though, I had established a pattern of normalcy that involved spending quite a bit of money. The ramen noodles I had eaten in college were no longer good enough for me. Eating the $3 special at the Chinese restaurant near where I lived no longer satisfied my desires. Used video games from three years ago were quickly replaced by the newest releases. My old shirts, accumulated over the years of college, quickly vanished and were replaced by crisp new clothes.

I was making good money. I had to live like it, right?

I established a pattern of spending enough so that I was living paycheck to paycheck. I was buying far more stuff than I actually needed, but it was all necessary for the standard of living that I had adopted.

Then my student loans went off of forbearance.

Then I needed to buy a vehicle and car payments began.

Then my wife and I had a first child and the costs of diapers, formula, and child care began.

The problem was that my lifestyle had inflated beyond what my paycheck left me with after these expenses, and it led us almost into disaster.

It was a long and difficult path to recovery from this situation, but I know now that it would have been far better off had I never allowed my lifestyle to inflate in the first place.

Over the past several years, we trimmed our lifestyle down so much that there has often been temptation to enjoy some degree of lifestyle inflation once again. For the most part, we’ve avoided that temptation. Here’s how we’ve done it.

We’re conscious of lifestyle inflation. It’s a phenomenon we’re aware of and one that we talk about regularly. We watch for examples of where our regular spending has gone up and we talk those examples to death, usually finding that we’re better off keeping our spending low.

We stick with the things we enjoy. If we have fun going on a family walk in the park, why do we need to suddenly be taking our kids to FunLand and drop $20 or buy them a bunch of stuff to play with at home? If we enjoy our home-cooked meals around the dinner table made with simple and tasty ingredients, why do we need to start going out all the time and dropping $50 per meal? If we love playing an old familiar board game with our friends after a potluck dinner, why do we need to add expensive options to our social schedule? If the eight year old car we bought off of Craigslist serves our needs quite well, why buy a new one?

We splurge with enjoyable activities, not things. I mean this with all seriousness: my biggest splurge nowadays is a free uninterrupted hour or two of reading or playing a game. If I find that my daily tasks are done and I have an hour to crack open a novel or play a game of League of Legends or something, I really feel like it’s a splurge. Time is truly the valuable commodity in my life.

Beyond that, when we do open up our wallets, it’s usually for a special activity, usually our summer vacation. I enjoy going to Gencon each summer, my wife often visits her family in Seattle, and we usually take a family trip, too. Those are our biggest annual splurges.

We keep a lot of options on the table. One thing I’ve found is that once you start inflating your lifestyle, you stop really looking at certain options. Usually, free and inexpensive things are immediately off the table because, after all, you’re above that, right?

When we’re looking for something to do, we don’t start with movie listings or expensive events. We look at things like our local community calendar or the parks and recreation schedule. We look around our house at the multitude of things to do at home, from board games and art projects to books and home improvement tasks. There are more cheap and free things to do than we ever have time to get done, so why spend a lot of money on expensive things?

We maintain friendships with people who have similar values. Our closest friends have (more or less) the same values on lifestyle inflation that we do. All of us make a solid income, but our social events together are usually potluck dinners with board games afterward.

Most of the rest of our social circle consists of people that we’ve come to know thanks to free activities through our local parks and recreation department, mostly parents of children of similar age as our own.

We also live in a neighborhood where most of the people seem to have roughly the same standard of living that we do. Yeah, a few people have nice cars, but of the families nearest us, I can quickly see a pair of used vans and an ancient compact car. None of the houses are particularly nicer than ours, either.

Simply put, we don’t have the social pressure to engage in lifestyle inflation, and we’re happy to keep it that way.

A lot of our income is automatically transferred away before it reaches our hands. We pay almost all of our bills automatically. Beyond that, we also transfer away money for each child’s college savings plan, savings accounts for many of our future goals, and accounts for irregular bills like property taxes. We simply don’t leave behind enough for us to inflate our lifestyles very much.

Avoid lifestyle inflation. You’ll be happy you did.

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