Category Archives: Frugality

How to Follow Your Bliss

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It is no secret that I am a fan of the late Joseph Campbell. My book adheres closely to his concept of a monomyth. I do not pretend to be an expert on the subject matter that so fascinates me. I consider myself a student and will always be one. Comparative mythology studies the myths that people live by. It is as much concerned with paleolithic cave drawings as it is with modern middle eastern strife. The breadth is staggering. With our big brains and our assorted accoutrements of modern life it is easy to forget how closely linked we are to our rich mythological past.  While there is an anthropological slant to many of the approaches I have studied, Joseph Campbell brings passion and more than a little dramatic flair to his chosen life-work.  We all live by a myth, this is our personal story, our personal narrative. Sometimes this is a part of a larger worldview as in the case of membership in one of the great world religions. Sometimes we try to find our way by other means.

Joseph Campbell used to like to say “mythology is referred to as other peoples religion“ and that “religion is simply misunderstood or misinterpreted mythology“. He felt that the emphasis on the historicity of religious texts often got in the way of the spiritual message. While many people get caught up on both sides of the fence trying to either prove or disprove a finite act of religion, trying to tie a religious event to a real historic place, date or person, I believe that it is the abiding, guiding message that matters most in our lives. For example, flood myths preceded the Bible by many centuries. Deucalion of Greek myth was the son of Prometheus and Pronoia. Pelasgians were the neolithic culture that preceded the greeks and the story goes that Zeus let loose a heavy rain, the rivers swelled and the seas rose. Deucalion and his dad Prometheus built an ark and was saved from the deluge. Noah and the Sumerian Xisuthros are both heroes of the same myth, the same story. There are strikingly similar stories in the Koran, in China,  in Aboriginal Australia and even with the North American Indian tribe the Menominee. These stories hint at both a universal threat of flood on the ancient world stage and the need for humans to mythologize about it. Our shared stories and ritual bring order out of chaos and help us relate to each other in meaningful ways. We destroy these relationships when we throw out the story and the ritual and instead cling simply to the historical vessel that carried them.

Any of Joseph Campbell’s densely academic books require dedication and commitment to thoroughly absorb. Among his pantheon of wisdom regarding comparative mythology he states that one needs to follow their bliss in order to live a fulfilling life. It is the history of the world as seen through the eyes of the great story tellers that bind us all together and in that vein Campbell drew heavily on the Hindu Upanishads to form his belief on this subject. Earlier, both  Ralph Waldo Emerson and Henry David Thoreau espoused transcendentalism as a kind of personal mythology.

I try to view Campbell’s admonition within the scope of his greater body of work. He seemed to firmly believe that we are all intrinsically connected. We all share a common background that reaches back far beyond recorded history might suggest. The roots of the human condition dig deeper than many of feel comfortable admitting. Despite our apparent differences we all share a closely held need to help others. Our bliss is a reflection of that.

Another way of saying follow your bliss could be to follow that which holds you in rapture, that which arrests your soul. It is imperative for us to define our purpose in life and get to the business of following our bliss. Your bliss takes you by the hand and pulls you where you’ve always wanted to go but were afraid to tread there yourself.

What is my bliss?


What draws you forth?

What would you gladly do for free if your bills were paid and you had no obligations?

Imagine that after you die, there is a giant brass plaque erected in your honor…What would you like it to say?

In the ceremony, the great mayor of the city gives a speech in your honor…What does he say about your life, your contribution?

What does your family say?

To follow your bliss is to do what you are.

To follow your bliss is to help others with the gifts you were given, the skills you acquired and all the strength you can summon.

Write a one-page plan on how to follow your own bliss.

please comment

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Should I Stay Or Should I Go?

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If I go there will be trouble
An’ if I stay it will be double

-The Clash

A short while ago, John Courson told the Wall Street Journal that underwater homeowners “should not walk away from lawful debts”. He went on to ask “What about the message they will send to their family and their kids and their friends?”

Five Years ago I would have heartily agreed. Fulfilling obligations, I believe, is a mark of one’s character. While I still firmly believe that every person should strive to fulfill their obligations, my definition of what constitutes individual responsibility has changed in the realm of home ownership. The unrelenting greed of mortgage lenders and the abject failure of our government to regulate them has severely harmed the average U.S. homeowner. It is true that a subset of homeowners could have been more aptly described as ‘speculators’ during the run-up to the crash but I still am convinced that the vast majority just wanted a nice place to live and raise their families. These ‘innocents’ were directly harmed by the collateral damage from a war that they did not sign up for.

So who’s John Courson? He is president and C.E.O. of the Mortgage Bankers Association. A group with an enormous vested interest in folks paying their home loans, no matter how big and unwieldy they happen to be. You see, Courson represents the very people who created the meltdown and even profited from the cleanup. The MBA members demolished the value of your home but refuse to reduce your principal balance. He does not want you to default, this would send the property back to bank ownership and they would be forced to sell it for what it is actually worth. Courson also pointed out on a separate occasion that “defaults hurt neighborhoods by lowering property values“. This was before, of course, before the Mortgage Bankers Association stiffed their lender in Washington D.C. to the tune of 25 million. Read the -Wall Street Journal Article

Here is the bottom line: corporations aren’t immoral, people are. The Banks and the MBA were  just doing the job of any corporation, to make as much money as they possibly could. Their perceived responsibility to shareholders was to get as many heartbeats into the funnel as quickly as possible so they could slice the ensuing mortgage up into Mortgage Backed Securities. After all of the qualified home buyers had homes, banks went after people who weren’t qualified to buy. Since these loans were sold almost immediately, the original lenders did not assume the risk of a loan default. That’s how an unemployed person could buy a 4 bedroom, 3 bath house with cash out at settlement. The bank simply did not care if they defaulted. The loan would go into the slicer with thousands of others and be a part of the CDO pool.

The question comes up then. Should the individuals who were not ‘qualified’ have bought these homes in the first place? Probably not. Individuals should know their financial situation but when Real Estate Agents, Appraisers, Lawyers and Banks are all using their professional influence to convince people that buying a home is the best course of action, it would take the strongest of the best of us to resist that kind of pressure.

The crash affected everyone, qualified or not. I would imagine that the first wave of foreclosures happened to those with the least ability to pay their mortgage. Then, as the recession continued, some people lost their jobs and then their homes. Now, those  qualified individuals who still have a job find themselves punished for their responsibility. They kept their jobs, their loan costs more and now their job is less secure. What’s more, the value of their home has dropped so much that they are severely underwater on their mortgage.

No good deed will go unpunished.

So what are the options for these folks? What about “Making Homes Affordable”?

The HAMP program is completely inadequate for a number of reasons. First, It does nothing to address the extreme loss of value homes have suffered because of the banks unrelenting greed. It simply tries to get people to take on a new loan for a house they still cannot afford. The principle is not touched. Secondly, It is aimed at people with financial hardship. How evil can banks get? They want to preserve their earnings by roping in the least capable of protecting themselves. The folks who are still financially solvent pay an egregious penalty. Their good judgement and strong financial discipline are the very values that they are being punished for exhibiting.

Why am I punished for being responsible?

If you bought a house with a reasonable loan, good credit and find yourself 30, 40 even 50% underwater you have every right to be angry. With such a big meltdown and so many bad actors within the circle of responsibility it’s hard to assign blame. Even worse, the President of the United States is out there urging homeowners to take the moral high ground and continue paying their mortgages. Now, even your sense of civic duty comes into question. I understand the dilemma from a macroeconomic perspective. Are home values too high? In a word, yes! The only reason home values shot up so far and so fast was because the law of supply and demand was so hideously tampered with by these influential financiers.

Strategic Foreclosure

Some homeowners are making the decision to walk away from their loans. Good people. Hard working, morally upright people. How could they do this? It’s simple really. They found themselves $100,000 underwater on their home with no help from the Feds and no help from the banks, they made the decision to walk away from their mortgage. They know their credit score will be devastated but are not overly concerned. They can stock up on things they would ordinarily use credit to purchase (For instance, They could get an auto loan before default at a low interest rate and have a reliable car for the next 7-10 years). They know that even when the economy fully recovers, home prices will not reach the astronomical levels we saw from those artificially inflated prices.

Should I cool it or should I blow?

Brent T. White, a University of Arizona law school professor wrote a 55 page academic article called “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis”. He said that a shame and social control agenda that extends all the way to the White House has been underway to keep people paying the mortgage on their underwater properties.

Laws differ from state to state on what you are responsible for after a default. Check your situation. If you remove the social manipulation coming from Wall Street and the White House and make the decision to strategically default a rational one, short term pain may result in a much more sustainable situation for you and your family.
Donald Bisenius, a Freddie Mac VP said on May 3rd “Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy. That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.”

Allowing Wall Street to profit by manipulating home prices, converting mortgages into worthless strips of paper and even betting on the failure of this entire system is perhaps the worst social policy of all.

This indecision’s bugging me
If you don’t want me, set me free

Are you underwater on your mortgage?

What are the moral or ethical issues that would prevent you from strategically defaulting?

Should people who can pay their underwater mortgage be obligated to?

Please post your comments.

EDIT: I noticed that The Simple Dollar just posted an article which has developed into an excellent discussion on the same topic

-WR

( lyrics are from the song“Should I stay or should I go” copyright 1991 The Clash)

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What’s your ‘Minutes Per Dollar’ rate?

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Huh?

How can we ensure that we are making the best decisions with our money? What does a product or service really cost us as individuals. We naturally assign the value of something based on how many dollars it costs for us to purchase it. The truth is that the real value or our real cost changes over time.

Money is loosely coupled to value. In this sense it is an arbiter of value. You need to translate this ubiquitous, generally acceptable measure of value into a specific, locally interesting one. Minutes per dollar is one way to do this. There are others but I think you’ll have fun with this one.

MPD - Minutes Per Dollar

Understanding this concept could be the key to getting a grip on your spending. We mentally assign cost and value to any purchase we make. Sometimes it is conscious, other times not so much. If the price is high, we sometimes conjure up our mental judo master to ‘talk ourselves into it’. We use quantifier words to soften the impact and we use universal arguments akin to these:

You only live once.

You can’t spend it in the grave.

What good is it if you’re too old and gray to enjoy it?

We also use cost definitions. These are more specific to the purchase at hand. What are the cost definitions many of use to assign value to a particular purchase? I have a few:

It’s just $20.00 a month

It’s just $350.00 a year.

It’s only $500.00

First off, the word just in this context is a very dangerous modifier. Saying just or only are persuasive words that tend to limit the impact of a potentially bad decision.  Let’s take a look at the $500.00 item from above. How much is it really?

Let’s see. $500.00 + 6% sales tax = $530.00 actual cost.

but wait, there’s more…

How much do you have to earn to be able to spend $530.00?

Let’s say you earn $67,480 per year. This is $35.00 per hour (based on a full year with 20 days of leave approx. 1,928 hours)

If you make $35.00 per hour that would be 15 hours, right? not quite.

What is your after tax earning rate? take a look at your paycheck and follow along

A typical single filer pays about $14,000 in taxes (Federal, State, Social Security and Medicare). This means you take home closer to $53,480. Your Net hourly wage then is $27.00.

* Obviously some states have higher or lower tax rates and some taxpayers can claim certain deductions which will lower this figure. For the sake of this discussion, lets keep it simple.
but wait, there’s more…

What does it cost you to work where you work? do you commute? pay a toll? pay for parking? Childcare? Get your clothes dry-cleaned? Eat lunch at a restaurant? (where you would not otherwise).

What do these costs translate into?

If you have a 25 mile one way commute to work and you work 261 days a year that (at 35 cents a mile) this comes to about $4500 per year in commuter cost. We’ll ignore the lunch, tolls, parking, childcare and dry-cleaning for this example but be sure to calculate these things in when you try to arrive at your “minutes per dollar” rate. Lets subtract that from our modified wage:

( 53480 – 4500 ) / 1928 = $25.40

What does this mean for your purchase? You don’t work 15 hours for that $500.00 item but closer to 21 hours.

Are you willing to work 21 hours for this ? That’s two and a half work days not counting the cost of your commute.

That is 2.36 minutes to earn a dollar (60 minutes / 25.40)

2.36 is our minutes per dollar multiplier in this example. (This is 2:21. Just multiply 0.36 * 60 to get the seconds component) How can this help us make good decisions? Understanding our real cost, that is the number of hours we need to actually work in order to buy a particular item will ultimately help us assign the proper amount of pain & effort to a purchase. Advertisers make it their job to assign pleasure and joy to making a purchase (or pain to not making one). Have you seen the SNL Broadview commercials?

Lets look at a couple of real world examples:

IPAD: A 16GB Ipad from the Apple store is $729.00.

729 * 2.36 = 1720.44 minutes.  1720.44/60 comes to 28.67 hours worked for this item (not including apps).

Dinner out: Dinner out vs. backyard BBQ: 75.00 (Dinner w/ tip) – 15.00 (Burger & Buns) comes to a delta of $60.00

( 60 * 2.36 ) / 60 = 2.35 hours worked to make up the difference between a BBQ and a dinner out. Might be worth it on occasion.

In general, It Costs $500.00 vs. It Costs me 18 hours of work may produce different answers to the common question:

Is it worth it?

Could this be helpful in making purchasing decisions? Is this just plain tedious and dumb? Please comment either way.

-WR

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Sometimes You Need Money to Save Money

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The rich get richer, and the poor get poorer. Is this true? Well yeah, sometimes. You don’t necessarily need to be rich to take advantage of smart savings, though. You do have to organize your financial life in such a way that you have a bit more cash on hand than the average Joe Taxpayer.  Once you have funded your contingency fund , are on the road out of debt and have set your wealth plan to “semi-auto”, it’s time to look at how you can accelerate your savings without changing your lifestyle one iota.

In my quest for financial simplification, I have hit more than a few minor speed-bumps. The long version goes like this: I canceled a few of my checking accounts. They had ACH debits attached to them for various things. One of them was for my voip phone service and after a full month the account was past due. Short version: Vonage called and they want their money!

I explained my situation and since I was an early adopter of their service (2002), they gave me a pass on the late charge. I checked their website to enter my new payment method and found that they offered a big discount if i paid for the full year upfront. So I thinks to myself “What a great topic for discussion on me blog”. It did not take long to find a few more excellent examples of this.

Here are a few that I can point to recently in my life:

1. Vonage: They offer a 20% discount if I pay the year up front.

I have used this service for 8 years now. It’s good and has already saved me a ton (vs. a landline). Bonus: I bring the adapter with me on long vacations sometimes and have my home phone with me. Also brought my phone number along when we moved. It is not a perfect service, it piggybacks your Cable or DSL internet connection and will fail if the power goes down or your internet drops. We both have mobile phones so 100% uptime on the house phone is not critical. I’ve been very happy with it overall. It’s a solid service at a great price that just happens to now be 20% cheaper.

2. Car Insurance: If you pay the annual policy premium in full you can save a bundle.

Insurers tack on administrative fees and interest charges for premiums that are considered “fractional”. These can be monthly, bi-monthly or bi-annual. See what the penalty is for you if you are on a fractional plan.

3. Investments. Vanguard offers some of the industries lowest expenses for their mutual funds in exchange for a sometimes higher minimum investment.

I am a big fan of Index Funds. Why? Read my review of The Elements of Investing. If you share my enthusiasm for the slow road to wealth, let’s take a look at how fees affect our returns.

First, for even the most basic of index funds there is a $3,000 minimum investment. Most have have very low expense ratios and fees.

Second, if you have $100,000 to invest, the savings are even greater. In some cases the expense ratio is 50% lower than their standard offering. These hidden savings really add up (as do the hidden costs on the flip-side).

Lets take a look at Vanguards Extended Equity Market Index Fund, This is a rather aggressive index fund that tracks the Standard & Poor’s Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies.

The Investor Shares are called Vanguard Extended Market Index Fund Investor Shares (VEXMX) . These have a $3,000 minimum investment and a .30 expense ratio.

The Admiral shares are called Vanguard Extended Market Index Fund Admiral Shares (VEXAX) . These have a $100,000 minimum investment and a .15 expense ratio.

With a 100,000 investment, held over 20 years, assuming the exact same investment and returns, you will have about $20,000 more in your Admiral fund. Expenses add up and should always be considered when choosing an investment. (to be fair, Fidelity has very low ratios, some as low as 10 percent. I personally don’t like the 90 day redemption fee that many of them also carry. If you are going to hold for a long time, take a look at Fidelity.)

There are lots of other examples out there, Moolanomy has a great article on how to save money on your mortgage.

What are some of the things you already pay for that could save you money if you prepay or buy in large quantities?

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Go Big or Go Home!

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Don’t let the title of this post deceive you. Its not about being aggressive in business or investing. Its about being aggressively frugal.

I have a somewhat similar approach to this topic that Ramit Sethi of “I Will Teach You to be Rich” fame has. We differ on some of the details but his ‘09 April fools joke lampooned the practice of majoring in petty savings and struck me as a novel way to get the point across. Saving a few dollars on coffee or clipping coupons to save a quarter on baby wipes can be downright demoralizing if it is not part of a grand plan. It is like filling a giant hole one cupful at a time. The cup at a time method has its place only after the hole has been mostly filled with an earthmover. We are going to focus today on being a Dozer, not a Teacup.

Dozer vs. Teacup

Which method has more impact?

Extreme Frugality is not for the faint-hearted.

I must admit that I have not always approached frugality in the unapologetic way I do now. When first starting out, it was easy to be a little embarrassed with my10 year old car and my ‘free with a cheap plan‘ motorola flip-brick, especially when colleagues are zipping around in brand new $60,000 cars, talking on their brand new $500.00 phones. Once my debt was gone and my investments really started to compound the embarrassment gradually morphed into big-headed pride before settling down to a more quiet sense of ease and confidence. I was able to get to work, run my business and talk to my customers with the old car and the old phone just fine. The difference in cost, I found, was staggering.

So why doesn’t everyone do this?

I think there are several reasons most people don’t approach money and belongings this way and are hesitant to change.

Buying used stuff is risky

Especially with cars and as I mention later on, lawn tractors. Furniture on the other-hand, If you work at it, can be almost risk free. A pre-owned leather sofa won’t leave you stranded on the highway. Even with some of the complex things such as vehicles there are ways to lessen the overall risk. Choosing a known reliable model, learning how to inspect the things that matter and getting a vehicle history report are just a few.

Making big changes in our lives is stressful.

Trading down to wealth is hard. You have to believe it will make a difference (it does). You have to be willing to go without something you may have thought you needed (you don’t). We need water, shelter and food (some of us need a lot less food, me included). that’s about it. Everything else is gravy. When you decide replace short term pleasures with long term financial independence, you have more joy in your life, not less. Once the initial stress of change has passed, the benefits of living below our means will start to affect more than just our finances.

Sometimes you need money to save money.

In order to buy pre-owned and invest the difference, you need to be able to buy pre-owned in the first place. Some people are on a treadmill that almost forces them to finance new stuff. I own a big property and unless I get a goat or two it will not mow itself. paying someone to mow it is an option but, at least in my area, a very expensive one. (Don’t tell anyone but I actually like the few hours I spend on the tractor. I listen to podcasts and music off in my own little world)
A new, quality lawn tractor is several thousand dollars. Many people finance it like a car and end up paying even more. I found a nice used one on Craigslist a few years go for less than a quarter of new price. It still runs great, it still cuts grass and it is still 100% paid for.
Thing is, I had to be in a financial situation where I could pay cash for a used tractor. For many people, unfortunately, $80.00 a month is still a better option than $1,000 cash even if they will likely pay just in interest more than I paid total for the used tractor. It may be that you need to start at the beginning and get your contingency fund in place.

Sometimes our need for approval just can’t be swayed.

Especially if we have projected a particular lifestyle out to the world. It is hard to cut the shoes, the dinners out, the BMW or the iPhone from our public persona. It is in precisely these big areas where the equally big savings are to be found. We need shoes, food, transportation and communication in our lives but maybe we can find these things at a fraction of what we are currently shelling out. Remember too that the Joneses don’t concern themselves with what you wear and what you drive, most of them are too broke to care.

Where do I start?

For most people, the three places to look for where to go big are where you live, what you drive and what you do for fun.

The Home category is just where you live and the costs associated with that. You could be an owner or a renter, does not matter. Your Mortgage, utilities, insurance,taxes and upkeep are all in here.

The Auto category is how you get around. If you don’t have a car and take the subway, bus, bike to work then hats off to you. You’re ahead of the game. Most of us have a car(or 2) and pay for fuel, maintenance, insurance, taxes and loan interest.

Entertainment is not so easy to define. There is a line where our needs cross over to wants and therefore become entertainment. Food is one example. When is food not food but entertainment? In my opinion food is only Food when you prepare it yourself in your own home. When you have it delivered to you by another human you are paying for the experience, not the nutrients. Pizza delivery is entertainment. buying the dough mix, sauce and toppings and making a few pies with the kids is food (and fun…and cheap!).

Everyone is in a different stage of life and live in quite different circumstances. I am certain that most of experience category creep: Things that once were frivolous but are now perceived as necessities.

When are shoes entertainment and not clothes?

What gadgets are needs and not wants? (ipad anyone.)

Where do we draw the line between transportation expense and unnecessary opulence in our garage ?

The point is not to bicker over which X fits in Y category but to understand these are places you can attack head on and make a huge financial difference.

The top 5

I think there are 5 places we can focus that will make a huge impact on our net worth.

1. The Housing Factor

Are you in a house that is less than 2X your annual income? How much house do you really need? When was the last time you shopped for the best insurance rate? If you rent, are you really using the accoutrements and space that got you to sign the lease in the first place? The pool & the fancy business center for example. If not maybe a cheaper apartment or rental home is in order. Seth Godin wrote an excellent piece on How to think about buying a house. If you are in the market to buy a house, Go read it now. (It is a better article than this one). Favorite line from Seth’s post: “When you buy a big house or an expensive house, you are making a statement to your in-laws, your family, your neighbors and yourself. Nothing wrong with that, but the question you must ask yourself is, “how big a statement can I afford?“

2. The Chariot

What percentage of your annual income makes up the total cost of your car? 50%? 60%? How much interest are you paying over the life of the loan? Does your luxury ride need expensive dealer servicing, high octane fuel and synthetic oil? The ongoing maintenance cost of some high end cars can average to hundreds per month. Get a copy of consumer reports and go pay cash for a reliable used car. You can find some nice ones that you will fall in love with. This is more closely linked with your home than you think. The social pressure to upgrade the family ride is much higher when you live is a neighborhood with a Rover or a Ranger in every third driveway.

3. The Gadgets

How much do you pay for subscriptions that you don’t even use? Do you watch all 400 satellite channels? Do you need all 3 Videogame Consoles? Is Blu-ray that much better? (alright, I have to admit here that I am kinda sold on the home theater thing. but there is a way to get a great result without breaking the bank. Remind me to tell you about the Onkyo 7.1 Surround HT system I found on craigslist.) One way to avoid spending to much in this area is to ask yourself “What service or subscription can this one replace?”. If I sign up for Netflix can I then go to basic cable? Can I get rid of cable/ satellite altogether and get an HD Antenna? For a single $40.00 one time cost, you could save thousands of dollars in just a few years. (a $60.00/month cable bill = $3,600 every 5 years)

I am a computer person. I have always put together my PC myself and am due for one soon. I take the time to find the price/performance sweet spot for each of the major components. Having said that, I have found that adding some memory and a nicer monitor can make more difference than you think. You can get a highly rated, 24″ widescreen HD LCD for about $220.00. This will change the whole experience of an older PC.

Oh, and before you buy HDMI cables or the Antenna I linked to on Amazon, check out monoprice. (no affiliation. i.e I don’t get paid if you buy stuff, they just have the highest quality, lowest cost cabling and wire I have found)

4. The Tax Factor

I think everyone should run their own business. There are several reasons for this. Entrepreneurship is part of the American Dream. Being the captain of your destiny brings more than money. Running your own enterprise can also a represent an enormous tax savings for you. Your business activities are taxed after expenses. These expenses can be applied to your entire income picture and effectively reduce your overall tax exposure. A business should not be considered soley for this purpose but this is a nice benefit.

Starting an enterprise should be lined up with your talents, passion and bliss. How can I do what I am is an appropriate question here..

Even if you decide to not go into business for yourself, there are tremendous ways to save money on taxes. Tax credits, 401(k), IRA plans. 529 college savings plans for the kids. Energy Credits and  education credits are all available. Also, keep track of your charitable contributions. Get a receipt from goodwill and track your church offerings as all of these are tax deductible.

5. Make More and be a Lifelong Student

I will attempt to combine these seemingly unrelated ideas.

Make more money.

Sell your stuff. Sell your service. Sell your ideas. One surefire way to make more money is to pay off your debt

“You want 21 percent risk free? Pay off your credit cards.” -Andrew Tobias

Aside from the tax advantages of entrepreneurship, you can actually make real money! What service can you provide to people? What are you good at? Do you like to create things, write things, build things, fix things or even destroy things? Successful businesses have been built doing all of these. (I am wholeheartedly better at ‘destroy’ than ‘create’, it just comes natural…)

Be a lifelong student.

Take classes at your local college. Study your interests and follow your bliss. Most of us can squeeze in 1 or 2 nights a week to attend class and study. As a side item: Does being a student there give you access to the Gym? The Pool? A Student Discount on Software? Bonus!

There is actually a number 6 in this top 5 list. Evan over a My Journey to Millions just knocked out a post called Regardless of your Financial Situation Don’t Forget to be Happy! Worth reading. Change can be exhilarating and stressful. Sometimes we need to slough off the serious stuff and dance like no one’s watching.

To sum it all up: Discover where the big money is to be saved in your life. Some of these changes can be drastic but the payoff will be huge. Make sure you are also looking for ways to become more valuable in the marketplace. Spend less, earn more!

For some of my favorite ideas on money, investing and frugality, check out Andrew Tobias’ book The Only Investment Guide You’ll Ever Need

I noticed that Jim over at Bargaineering has a similar post. Worth a read.

Where can you go big? Drop us a comment.


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Cult of frugality

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Frugality is a fad.

Fads of yesterday

Fads come and go

My father just happened to be in fashion every 15 years or so because the style he clung to would re-emerge like a comet that had been circling distant planets. He simply never changed his style of dress and ‘fashion’ caught back up with him. He did not keep up with current norms. He didn’t know the Joneses and if he did he would abhor the thought of ‘keeping up’ with them.

I remember vividly my teacher talking about recycling and the wonder of solar power back in my elementary school in 1979. One of my science projects was devoted to this theme (Give a hoot, don’t pollute?). Gas prices were through the roof, there was rationing and a mild state of panic in the air. Alternative energy was going to be our ticket out of this mess.

Flash forward 31 years. (doodle-a-loop…doodle-a-loop…)

What happened?

Once the pressure was lifted, the temporary solution went away. It all makes sense, we see it happen all the time. The fix was no longer necessary. In the case of energy, fuel became cheap and abundant which removed any need for alternative energy. Through it all, my father dressed the same and just happened to be out of sync with the world at the most embarrassing times for my sister and I. Being frugal can be a fad or a ritual. Frugality, in large part has been forced upon unwilling consumers like water rationing in a lifeboat. Once ashore, the deprived get to work making up for lost time. Once the veil of anxiety is lifted, we will see a consumer revival like no other. we must strive to make our frugality a permanent part of our life, not a temporary fix to a inconvenient problem.

It might not feel like it but we are exiting the great recession. Our family, friends and neighbors are going to go back to their pre-crisis levels of consumption very soon (if they haven’t already). We have all experienced ‘recession fatigue’ from time to time. The urge to splurge bubbles up more violently when we have gone without for extended periods. These are the welts we have on our waist from the tightened belt. It is the pang we feel when we see the 2010 Lexus beside us, all shiny and confident while we lumber along in our 93′ Oldsmobuick. It is I want breaking through our tired defenses.

The catch to all this is that frugality is the answer to our problem. When times are at their toughest, frugality keeps us from going under. When times are good, frugality pays! As our economy recovers and our earnings increase, diverting more of our income into our investments (rather than our lifestyle) will be the best decision we ever make.

There will always be a new Apple i-something begging for our money and time, it is when we devote both to our financial independence that we become truly wealthy.

Do you think the current emphasis on frugality will last?
What are your thoughts?
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Contingency Theories

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Do you have a well funded Contingency Fund? A Rainy Day fund? I would love to hear your thoughts on this subject.

Simply put, your contingency fund is money you have stashed away to protect you and your family from unforeseen circumstances (we all have these). This is usually the loss of a job but it could be a medical issue, legal issue or any other nasty thing that comes up from behind and bites you on your assets.

Having a contingency fund is the first step to building wealth. One of the major benefits I have noticed in my personal experience is that having a financial buffer actually helps me make better financial decisions. It’s as if just knowing there is a safety net helps me choose opportunities with clarity, take calculated risks and enjoy the process a bit more.

Now, you should not freak out and try to account for every awful possibility that could befall you but conversely you need to adequately prep yourself for life’s unexpected gifts.

Shouldn’t I pay off my credit cards or other consumer debt first?

No. (I am certain to get some hate-mail for this) Your contingency fund should be funded at the same time that your consumer debt is eliminated. You absolutely need to eliminate debt. That is a key component of any wealth plan. What is even more important is developing your Wealth Rituals. These are just habits that, over time, become part of the fabric of your life. Your financial success depends on the care and feeding of these habits. You should not have gotten into consumer debt in the first place but it will only be your rituals that get you out. Your ultimate goal is to form the rituals or habits that serve you and to eliminate those that don’t. If you have moderate debt (10% or less of your gross income) strive to go 70-10-10-10. That is, Give 10% to charity, pay down your debt with 10%, fill your contingency fund with 10% and live on the remaining 70%. Here is what I mean:

Adjust the percentages based on your situation. Maybe 97-1-1-1 is the best you can do at this point. Just make sure you do it. Lean heavily on getting your contingency fund up to your goal amount, though. maybe 70-20-5-5, with 20% Contingency.

Some questions that have come up in recent discussions are:

How much is enough?

This is obviously the crucial number. You want to have enough saved to pay your bills, fund your job search and possibly finance a bit of education if that makes sense.

The huge question here is for how long?  6 months?  12 months?  2 years? There is no single right answer to this. What is important to note is that you are not trying to replace your income. You are trying to stay afloat until you can regain full employment. Some things you spent money on while on the job are no longer necessary (Tolls, Parking, Gas, Lunches out) while some things might go up (beer, resume printing, beer). Up until recently, 6 months was proffered as a sufficient time-frame. I believe 6 months is still great for most people. Some executive level folks may need to have more of a buffer since the air is a bit thinner up there and it could take longer to land a comparable job. At whatever level we are, we need the assets in place to be able to bounce back from misfortune.

Here is the magic formula: My Monthly Expenses X 6 = My Contingency Fund

How much is too much?

After the bubble burst, for those who have been steadily employed and have drastically reduced their expenditures (mostly out of fear that they could be next in the unemployment line) They are finding themselves with huge bank account balances (an enviable position for many). Now that the recovery appears to be imminent, they want to make sure they are not missing key opportunities. Now is the time to max out your 401(k) and begin to fund a Roth IRA. I Recommend a mix of Extended Equity Index funds (Both domestic and international) and Bond funds in your 401(k). If you have some dough left to invest after the $16,500 maximum contribution, Call T Rowe Price or Vanguard and open a Roth IRA.

Some Q&A might be appropriate:

Q. What is my risk tolerance?

A. Personally, I think this should be based on dependents. The more humans(or animals) you have depending on you for survival, the lower your risk exposure should be. period. Going solo? No Worries! Have 3 kids, 2 cats and a spouse? Not so much. Make sure you can support you and all those who depend on you for a full year.

Q. Where should I put the money?

A. This is cash or cash equivalent. Ideally you should put this money into a FDIC insured account. What we have found is that many jobs are tied to the overall economy. When the stock market drops, companies tend to lighten their load (i.e lay people off). that is also when more financial institutions close up shop. If your contingency fund is in the stock market, you can lose your job and your money.

How do I do this, Where do I find the money?

There are essentially two ways to deal with this problem:

  1. Increase your income.
  2. Lower your expenses by trading down to wealth.

Increase your income

  1. Sell your stuff. Especially the stuff you have stored in a rented facility.
  2. Start a business based on your passion.. Follow your bliss! Your own home-based business can be a great source of income as well as a huge tax benefit.

Lower your expenses

By lowering your monthly expenses you drastically lower your risk exposure. This is an often overlooked benefit of a frugal lifestyle. How can I do this?

Trade down to wealth

  1. Buy used and invest the difference. Go to yard sales and estate sales  in your area. Check out Freecycle and Craigslist. Above all remember that “New” is the most expensive adjective in the dictionary. What are you getting extra when you pay retail? A box? A tag? Not much!
  2. Eliminate debt. Consumer Debt is self-imposed slavery. Serfdom. No matter who you are it is stressful and painful. Get out of debt!
  3. Consolidate your fun. Stretch your entertainment dollar by looking at ‘experiences’ rather than ‘events’. A family trip to an historical park near you, for instance, is less expensive and MUCH more memorable than another trip to the multiplex. A little planning goes a long way.
  4. Be Healthy. Sounds silly, right? Walk, bike or jog every day or so and your outlook brightens while your medical bills go down. It’s a fact!
  5. Save on everything. The blogosphere is full of amazing resources to help you get the best deal on just about everything. Are you a mom? Check out Deal Seeking Mom. My favorite personal finance and frugal living blog has to be Wise Bread. Drive around your town on Saturday morning and take advantage of the yard sales & Estate sales going on. I have a very wealthy friend who loves doing this. Kind of like therapy.

Be joyfully frugal

Frugal living is not about sacrifice or pain, it is about wealth. You must free up your cash seeds to grow into cash oaks. Too many people eat the seeds! A reminder of what it is all about is probably in order:

Wealth is made up of the things that make life worthwhile

Only you know what these things are. These are the laughter of your kids, the smile of your spouse, the Saturday mornings with your family. These are the joy of a job well done or the feeling you get when you ‘nailed it’. Wealth is a personal, visceral, emotional experience that is unique to everyone. You must figure out your personal definition. Being disciplined with our money offers us these experiences. Frugality is money discipline and is the key to financial independence. Once we understand this and begin to see our seeds sprout into mighty trees, we can feel a sense of joy.

Frugality rule #1 : Spend money on things that go up in value. Be an investor, not a consumer.

Frugality rule #2 : The Joneses don’t give a rat’s nevermind what you drive or what you wear. Many are too self absorbed to notice. Buy, wear and do what is right for your family!

Having a 6 month fund based on conservative expenditures should be enough for most of us. If you are at the top of your earning pyramid, you should go for 9-12 months.

Building a 6 month contingency fund is the first phase of becoming financially independent.

-WR

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Welcome to WorthWild.net

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Glad you stopped by.

Within the walls of this blog we will be taking a sometimes unorthodox approach to financial independence. We’ll look at wealth not as an end-goal but as a truly sustainable lifestyle.

First a definition:

Financial Independence: Living on the income generated by the semi-automatic streams you have established.

Q. What are ‘semi-automatic streams’ ?

A. Besides a good name for a rock band (this marks my first homage to Dave Barry), semi-automatic streams of income include dividends from your investments, profit from your business or royalty payments from a creative work. All of these require substantial initial effort but usually minimal ongoing attention.

WorthWild’s tagline is “Financial Independence on your terms” and I hope I can live up to this lofty Ideal. Achieving Financial Independence is hard. Anything worthwhile usually is. It takes dedication, sacrifice and humility but I think you’ll agree it is well worth it.

One important thing to note is that everyone has a different dollar amount that represents their threshold for financial independence. The more frugal you are, the faster you’ll get there. Period. This is why frugality constitutes a significant focus of this blog.

In the posts that follow we’ll revisit this definition and refine it for our purposes…

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