Monthly Archives: July 2007

quitting the rat race, the easy way

I notice a lot of articles like this at CNN’s personal finance site. I have to admit a certain amount of irritation at the gloating tone of ‘people who have managed to quit the rat race’ as that’s interpreted by whoever is doing this work at CNN.

In this article, a childless couple, both working at apparently lucrative jobs, decide to ‘live frugally’ and take the big step for one of them to ‘quit the rat race’ and start working for a non-profit. At age 42 the wife used $20,000 of their money to start a nonprofit.

Starting a non-profit that does what theirs does (working with abused children) is admirable, don’t get me wrong. For CNN to portray an executive couple who drop one salary as daring, bold and risky is annoying. They still have one executive salary. They have no children to support. They have health insurance. They only used $20,000 to start the nonprofit, so if they were making ‘mid-six-figures’ – both of them – prior to starting it, that’s hardly a massive amount. I doubt, for example, they were cashing out their retirement savings or raising money on their almost-maxed-out credit card.

To me, a truly impressive feat is when you read about a single mother doing something like this. My wife ‘quit the rat race’ to raise our son, and we did it living in a very expensive area. She was not an executive before quitting, and I was not either (I was senior management). We managed to do the same thing this couple did, effectively, and we’ve managed to live well enough to accumulate $20,000 if we needed or wanted to start a not-for-profit. We wouldn’t, since then Bubelah would have to juggle child-care with the not-for-profit work and we’re not prepared to do that at this point. Yet we could.

I guess my point is that once you introduce children into the mix doing something like this (quitting the rat race, running a marathon, going to do charitable work in Nepal) becomes exponentially more difficult, both financially and organizationally. I have to be honest and say that I don’t find it impressive if a childless couple decides that one of them should drop out of the rat race. Admirable, sure. Impressive, no. If they share a home and don’t spend like average Americans one salary should be plenty. If you add kids to the mix, balancing the money becomes very difficult and finding the time becomes nearly impossible – unless you plan to ditch your kid in day care 10 hours a day.

So again, I’m not knocking the aspect of starting a not-for-profit at all, but painting it as some sort of heroic achievement against the odds is a little bit irritating to me.

ye olde carnival

See, I did it English-style since the latest Carnival of Personal Finance is being hosted at plonkee.  My post about automatic enrollments in 401(k)s is featured.  There were several other good articles featured, too.  Just a few:

how your occupation, education, income and net worth determine your social class @ the digerati life, (very interesting read)

choosing a 529 plan @ lazy man and money (very practical read)

wait! don’t pick Harvard just yet @ financial dominance (very surprising, to me at least)

Go check it out!

you are reading the work of the greatest writer in the world

OK, that may be jumping the gun but humor me and read on. Writing is something almost everyone does, but seldom have I taken a step back and considered how it is best done. Almost everyone writes an occasional letter or email or report at work. I started to note how many times in a day I write something and it is far more often than I might have thought. Can you really learn about your own abilities by stepping back and analyzing your likes and dislikes towards certain activities? I think you can. I know that my own personal prejudices about writing are fairly easy to define. Here are a list of my writing observations from blogging.

I hate writing stuff out longhand. I am part of the last American generation to have grown up writing longhand at school and in day-to-day life. I remember working through legal pads in high school, trying to write a report on the causes of the Civil War or a biography of George Washington. I would use index cards to write paragraph lead sentences, then move them around until I felt an outline emerge. I hated every minute of it. I took typing in high school, and I realized that writing didn’t have to be a cramped, dull scribbling exercise. For me, manual typewriters were a discovery, electric typewriters were a pleasure and computer keyboards were a revelation. My personal handwriting has deteroriated to an eleven year-old’s block printing because I so seldom write by hand. At work, my notes from meetings are painful to look at, and I usually transcribe them instantly into a word processing program so I can actually read them.

I have never written well on schedule. I am prone to floods of ideas. Once I get an idea to write about, it just keeps tumbling out until I am finished with it. If I sit down at 9 am and tell myself “start writing,” I usually struggle to start and allow myself to be distracted easily. But if I start writing on what I call a “burst,” the biggest challenge I have is to get it out of my head, through my fingers and onto the screen fast enough. My bursts aren’t even necessarily related to what I’m writing about in most cases. The way my thought process works is similar to the index card method I mentioned above. I have lots of little ideas that float and wander about – little square ideas, little triangle ideas, and so on. At some point, they find their little triangle place and so on, and the overall picture of the writing coalesces. That’s the beginning of the burst. It doesn’t guarantee quality writing, but it does mean a lot spills out. However…

I started this blog partially as a tool to try to force myself into writing on a schedule. Unless you’re already a highly-sought-after writer you can’t really get away with posting once or twice a week if you want to have any sort of readership on your blog. And for every post you see here on my blog, there are probably 10 or more lengthy comments I’ve written on other people’s blogs. I’m trying, sporadically, to work on another blog. I’m even considering launching a blog related to my professional life (audit and Sarbanes-Oxley Act consulting). And before this blog existed, I kept up a furious and detailed political blog for almost four years, which suffered from my ‘burst’ style. There would be twelve posts in a day and then nothing for two weeks. All of this is because I realized that I have the time to write, but often don’t for lack of a purpose. Writing in a blog gives you a great outlet for your ideas, but it also forces you to open your eyes and mind to receiving those ideas and turning them into writing on a daily basis.

After thirty plus years of reading, I still discover new ‘art in words.’ I love to read and the subject matter is sometimes secondary to the style. A tremendous example of this is William Faulkner. I have never cared for his stories, to be honest. Most are too gothic and some (Sanctuary, for example) are horror stories to match Stephen King’s work. But if you ever want to see words flow off the page like liquid gold, pick up a Faulkner book. His writing makes the English language sing. His Nobel Prize acceptance speech is a great short example of his writing. Even the blogosphere has some compelling writers. Blogs like The Simple Dollar, for example, are not building huge readerships by simply throwing out random ideas, but taking some original ideas, mixing in some assimilated/compiled knowledge and writing it into a compelling narrative that makes you want to read more.

Don’t read the news. I have found that since I quit paying attention to the news my reading has picked up. I don’t think your average person – myself included – has the ability to read nonstop 24 hours a day. Eyes get tired, for example. So I was expending a significant amount of my limited ‘reading attention’ on articles about Iraq or Paris Hilton or the stock market. None of that writing really helps me improve my own, because it is often formulaic and static. There are a few ways news writing is helpful: brevity, catchy headlines and descriptiveness. But in general putting down the paper, for me, has meant picking up a book.

I don’t like to revise. Maybe it’s because of my typing skills, combined with the magic of spellcheckers to catch typos, but I hate to revise. Once the words spill out, I don’t like to go back and re-read and edit. I do… but not because that’s my normal style. I recognize that what may sound good in my head may not sound natural if read out loud, or read after a good night’s sleep, or read without hearing the background narrative that’s rolling around in my head (yes, I just said I hear voices in my head, but they are friendly voices, people). So I usually write something, then set it aside and re-read it a day later to see if it still looks good after the ink dries, so to speak.

I am the greatest writer in the world. That’s a bold statement, isn’t it? I thought for a long time no-one would ever be interested in my writing, or that I had much interesting to say. I think now that almost everyone has something interesting to say, but not everyone takes the effort to put it in writing. I decided that there was no reason I couldn’t be a great writer. I may not ever achieve that goal, but I see little harm in imagining that I will. I think of it as a win-win: there may not be a single greatest writer in the world. Maybe there are many, and maybe if the motivation is right anyone can be the greatest in their world.

If you are a writer (blogger, IM’er, or even a traditional pen-and-paper scribbler) what can you say about your own writing?

your commute is the worst commute

Different types of commuting must have different sorts of effects on the psyche. I know that personally driving makes me mental. I don’t enjoy it because the risk of accidents is far greater than almost any other form of transportation. I am unable to stretch or move around or relax, and particularly at night my eyes get tired. However, you can listen to the radio quietly, you can adjust the temperature to suit you and in general you are in a private space.

Subway travel is unpleasant to me, but not as frustrating. The lack of fresh air can be appalling at times. The sheer rudeness you see on a subway car is staggering sometimes. People will push and shove to get a seat, or throw their bags onto empty seats. Many riders appear to be highly dismissive of the concept of hygiene. The positive aspect is that you can instantly close your eyes and drift off until you reach your destination, or read or even just play a handheld video game. Time passes much more quickly on public transportation.

I have endured other commutes: near daily shuttle flights back and forth from New York to Boston for work, ferry rides and long rides on the Metroliner up and down the East Coast. For one wonderful year, I was close enough to my office to walk; so close that there was really no other possibility but to walk.

Right now I suffer through a part-driving, part-train-riding commute. I wonder if the type of commute affects happiness. Statistics show that a commute over 45 minutes decreases your overall satisfaction with your life. But what about the type of commute?

I would personally say a long car commute in heavy urban traffic is the worst. My sister-in-law, who detests public transportation, would disagree. My parents, who lived most of their working lives in a small town, think any commute over 20 minutes is unbearable. I have met plenty of people in New York who have two hour train rides between Long Island and Manhattan and don’t seem to mind because they can read the paper from front to back. Other coworkers spend four to five hours a day in their cars because they can’t bear to be in such crowded environments as a MetroNorth train or Long Island Railroad car.

What do you think?


What if you had nothing? No home, no DVD player, no car, no skills, no money and couldn’t even speak the language? What if you had nothing except a suitcase full of clothes and a few photographs? Welcome to the outlook for many immigrants.

Politicians roll out the immigration debate all the time, but what most people don’t realize is just how frightening the prospect of being an immigrant is. I have been a temporary immigrant once in my life, when I moved to Russia. I came with the full-fledged support of an international firm that provided housing and help with the inevitable paperwork, and I still was overwhelmed, arriving with nothing except a suitcase full of business suits.

Imagine, however, showing up in New York City or Washington DC or Los Angeles with no knowledge of the language, no unique skills and no real savings. Imagine that hours before you landed at JFK or Dulles or LAX you were in the midst of a country at war, or a country where you were no longer welcome because of your race or your religion. Your only hope is to come to a country – ideally the US – where you will be allowed to work hard, raise a family, live in peace and practice whatever religion or custom or culture you choose.

I find it hard to believe that so many people make this drastic choice. It’s easy to flee a country, maybe, when staying means you’ll be killed or raped or maimed. But it’s less easy to imagine fleeing a country where your family has roots, you are a respected member of a community and you have a cultural or religious tradition stretching back hundreds or even thousands of years.

Yet every year someone does. In New York you see huge, thriving, vital immigrant communities. It is not uncommon to meet people in New York who don’t speak English well yet. It is not uncommon to meet a former doctor working as a janitor, or a teacher working as a clerk. And it is not uncommon to see immigrant family after immigrant family succeed against these terrible odds and pass on their work ethic and almost feverish belief in the American dream to the next generation.

I find it really inspiring, and when I look around my workplace I see America made more vital when I have one colleague who’s Russian, another Dominican, another African, another Australian, another Bosnian, and on and on. One of the things I truly dread when I consider leaving New York is a more homogeneous life – fewer ethnic communities, less exotic music piping out of shopfronts, vanilla accents. I know being an immigrant doesn’t make anyone a more interesting person, but I believe being around all of these different cultures and beliefs and cuisines and languages makes me a more interesting person.

I hope that the anti-immigration forces remember that immigrants are desperately hoping to come to America, not for a free ride, but exactly the opposite – to pay their fare and reach the same destination as the rest of us, financial and personal independence.

wooden nickels

The topic of loss has been on my mind since I read this, and now I just lost a close family member. After a couple hours of feeling pretty numb I am very saddened by my loss and my family’s loss. This is the second loss of a member of our immediate family in the last year.

It is amazing that thoughts of personal finance, corporate politics, taxes, savings, etc. just leave your mind when faced with the finality of mortality. I hope that I’ll keep this in mind in the future, and remember that at the end – especially if you’re not terribly religious – there is nothing more precious than the time spent together, and preparation for the future has to include protecting those you love.

We will miss you, all of us, terribly, but we’re happy that you’re free now. And don’t worry, I won’t take any wooden nickels.

why is it called the Garden State?

New Jersey has done it again. New Jersey’s government has ‘discovered’ that the guaranteed health benefits for its retired public workers are underfunded by $58 billion according to the New York Times. Leaving aside any political implications, there were a few comments I had to pick out of the article:

  1. “New Jersey officials say the state simply cannot afford to create a reserve at this time, given its debt. Instead, they plan to pay each year’s retiree benefits out of revenues and work to control future costs.”
  2. “When New Jersey stopped funding its retiree health plan 13 years ago, it also stopped trying to keep track of the cost. That created the illusion that the long-term obligation was zero, not billions of dollars, and made it easy for the state to enhance its already rich benefits.“
  3. “From 1987 through 1994, New Jersey was one of only a handful of governments that went to the trouble of setting aside money for retiree health care. Gov. Christine Todd Whitman stopped the practice the year she took office, along with cutting back on pension contributions. The official explanation was that inflation in health costs had subsided and that setting aside money could create a bigger reserve than was needed. Also, her administration noted, the Clinton White House was working on a national health plan.”

What parallels can be drawn between this situation and your personal finance situation?

  1. Failing to build up adequate emergency savings can really derail your personal finance plans. New Jersey’s tax burden is already enormous. “Containing future costs” is a code phrase indicating that there’s simply no more revenue to be squeezed from the taxpayers of the state. However, as health care costs continue to increase, keeping these year-to-year costs in check will be increasingly difficult, and will almost inevitably result in borrowing. If you don’t have the savings to meet an emergency, the first place most people will turn is back to their credit cards or home equity lines of credit.
  2. If you don’t prepare for the future, things will get worse, not better. New Jersey decided that if no-one reported the problem, maybe it would just go away. It never does. If you fail to prepare for your financial future, you are inviting disaster. Make sure that when you plan, you take into account worst-case scenarios. What if the market has a sudden downturn? What if I am disabled and unable to work? What if my company goes under and I have no health benefits anymore?
  3. Don’t count on someone else to bail you out. If the statement is true that New Jersey’s governor in 1994 was counting on health cost inflation to ‘subside’ and on the Clinton administration to take care of universal health care, she was far more incompetent than a governor has any right to be. Whatever can be said of the Clinton administration’s attempt to fix health care, it was most certainly never a “sure thing” by even the most optimistic measure. If you are hoping to collect Social Security, or get 18% returns in the market year after year you are putting your future in danger. If you think that your employer will always provide you with health benefits, or that you’ll never need that emergency fund so you might as well cash it out for your new home down payment, you should pause a minute and reconsider.

State governments always have one advantage individuals don’t. If I were to go to my clients six months after beginning work and say “you know what? I know we agreed on an annual rate, but my kid’s braces are really expensive, so I’m raising your rates by $5000 per year” most would respond by firing me. If the state government has runaway expenses, though, they can raise property taxes or state income taxes and require you to pay them, by law. Sure, you can “fire” your government at the next election, but that may not be for up to four years. I would love to be able to build in a four-year contract with my clients that said “no matter how often I raise my rate, you can’t fire me until four years after I start working with you.

So speaking as a proud resident of the state at the end of the tunnel, let Jersey’s woes be a warning to you. And if you’re wondering about the title of the post – it’s called the Garden State because it’s covered in manure.

your investments will return 6% annually, probably

There’s a common assumption that I noticed was being used at Sun’s Financial Diary that the stock market returns 10% historically. I don’t think this is an uncommon assumption. This rate is usually used when making assumptions about how money will grow in the future, and how people should invest their money now. I am not going to suggest hiding your money under the mattress or keeping it all in high-yield savings accounts, but if you choose to invest in stocks, you should consider that your rate of return may actually not ever really approach 8%.

Look at this chart (PDF file). It shows the rate of return of stocks, bonds and treasury bills from 1926-1999. This is a long period of time and covers both bull and bear markets many times over, so it should be useful to form an assumption. The chart also assumes a 31% capital gains tax rate. As recently as 1978 the capital gains tax rate was almost 40%. Only in the 1920s, the early 1930s and the last five years has it been below 20%, so 31% is probably a fair assumption.

Inflation has ranged from a high of almost 9% in the 1910s to a low of 2% in the 1950s (that is the low except for periods of deflation during the Great Depression). The chart uses a 3% inflation rate over time as a rough average.

The end result is this: after inflation and taxes, these investments result in the following returns:

  • US Treasury Bills: -0.05%
  • Long-Term Government Bonds: 0.4%
  • Common Stocks (the S&P 500): 4.7%
  • Small Company Stocks: 5.6%

So given these numbers, using a 10% return on your investments for long-term financial planning is optimistic. Investors should also consider that there have not been any recent massive pullbacks in the market similar to the Great Depression or the extended doldrums of the 1970s, but anything could happen. Imagine, for example, a terrorist attack on a financial center in New York happening again.

I am sure that the numbers can be manipulated in various ways, and many assumptions can be changed regarding taxes and inflation and bull/bear markets.

Keep this in mind, though: during the 20th century the US market was one of the single safest places for your money to be, whether or not you were American. During two brutal world wars that crushed most of the Western world, the US was untouched with the exception of Pearl Harbor. The US will probably never again have that competitive advantage over other markets. New regulatory pressures and a weak dollar have made the European markets attractive again, and even newer exchanges in Russia and the Far East will continue to lure people away from the US markets with wild gains (and wild risk).

Keep in mind, too, that these are broad market investment assumptions. If you try to time your investments, or you invest heavily in individual stocks, you can do far better or far worse. But if you are investing in broad index funds over a 30 or 40 year period for retirement these are good numbers for planning.

So when you are considering investing choices, keep in mind if anyone tells you that the US market has historically returned 10%, or 8%, they are definitely using a ‘best case’ scenario if they want to apply this to future returns. Prudent financial planning requires that you always assume the worst and hope for the best.

Why automatic enrollment in 401(k)s might not always be for the best

In August 2006, Congress passed the Pension Protection Act of 2006, which included a provision to allow automated enrollment in 401(k) plans (as well as similar plans like 403(b) and 457 plans). With nearly 30% of employees failing to sign up in 401(k) plans, many Americans are failing to adequately prepare for a pension-less retirement and often even missing out on ‘free money’ in the form of employer matches. So a law that allows companies to automatically enroll employees at a pre-set level (say, 3%) and then may (or may not) increase that contribution over time. The employee can usually opt-out within 90 days of being enrolled and get that money back.

So why would this be a bad idea?

  1. Automated enrollment gives people a false sense of confidence. Because of the lack of financial education in this country, a lot of people may not be aware that saving 3% of their income will not be enough to fund their retirement. If an employee who’s generally unaware of finance issues is told that there’s a default rate of withholding for the 401(k) program, I think they would be likely to “let it ride” and assume that 3% was a reasonable amount.
  2. Too many companies don’t offer an automatic increase. Currently only 17% of companies offering automatic enrollment also increase the rate of savings, usually by 1% per year. Since companies typically match some or all of the contribution up to 6%, I consider that a cynical move to “do something” but not to go the extra mile.
  3. Automatic enrollment forces some people into an arena they don’t know much about, the market. While many companies will use lifecycle funds or index funds for their 401(k) programs, others offer company stock or expensive managed funds. I have seen some terrible choices offered in 401(k) programs, with annual fees up to 3% (compared to the sub-1% fees charged by most Vanguard funds). An employee who isn’t fully educated on the effect of fees and who doesn’t understand how that could eat up gains is likely to take a quick, 5 minute glance at funds and throw money at the one with the highest return – which is almost never, ever shown net of fees. No-one expects you start betting your life savings on a poker match if you don’t know how to play poker, so why should you expect yourself to bet your life savings on investing if you don’t understand the market?
  4. Automatic enrollment continues our nation’s long-standing (and bad) habit of requiring employer-specific remedies for individual problems. My personal opinion is that an employee’s savings should be completely separated from an employer’s control. If the employer isn’t willing to take the responsibility to set up a pension program and pay for your retirement, why should they have control over where you invest your money? Wouldn’t it be simpler to eliminate 401(k)s and increase the amount anyone can contribute to an IRA, tax-free, to $20,000 per year? Then you could control where your money was held, what it was invested in and when you invested it. Most IRAs allow you a very broad range of investment options, and some even let you go outside the stock market and use IRAs for real estate or foreign currencies if you desire. A 401(k) typically locks you into a very limited set of choices determined by the employer or the employer-chosen plan administrator. Once you leave that employer, you can roll your money out into an IRA, but as long as you stay with that employer, your investment choices are determined by your employer, not you.

The solution is, as with any investment problem, simple but requires self-motivation. If your employer offers a 401(k), either automated or not, how should you approach it?

  1. Calculate how much money you’ll need for retirement on your own. Don’t rely on your employer’s default rate. At a minimum, you should always contribute enough to receive an employer match, if it’s offered. If possible, you should max out your contributions, particularly if you’re in a high-tax area.
  2. Study your choices, and not just the literature they give you. If your plan offers you a choice of funds, study them all. Go beyond the historical returns, which don’t tell you much about future returns. Consider the fees, particularly, because although the returns may vary, those fees won’t! If a fund charges a 3% fee, you’re going to be charged that whether the fund return is 28% this year or -8%. Go to Morningstar or use Yahoo! Finance to study the funds.
  3. Diversify. If your fund offers company stock, don’t put all of your eggs in one basket. You have already locked up a significant portion of your net worth – YOU – by being an employee of that company. Use the same approach you would use if you were moving a large set of china plates. Would you pile everything in one huge box and hand it to the movers, so if they drop it you lose the whole set? Probably not – you’re going to put it in several smaller boxes, well padded and light enough to carry easily.
  4. Monitor your investments. I am as guilty as everyone else in this category – I check the accounts I “control” such as my IRAs and brokerage accounts on a regular basis, but I tend to let my 401(k) ride. If you are enrolled in an automated plan, you are doubly required to carefully watch your money – what is the contribution rate, where is it being put, how much matching money are you leaving on the table, what are your returns? Be careful, and don’t automatically assume that your employer is watching out for YOU.

Just remember that whether or not a 401(k) is automated, you should always consider investing in a 401(k) before almost any other form of investment for this reason: it takes money away from you before you ever see it (the “pay yourself first” concept), it is tax-advantaged and typically gives you “free money” in the form of a contribution match by your employer. Just make sure that you keep an eye on automated investments, and don’t let this be one more thing that you let your employer control for you rather than with you.

how to use an FSA account

An FSA can be a valuable way to save money, but you may actually be wasting your money if you aren’t careful. A Flexible Spending Account, or FSA, is a tax-advantaged account that allows individuals to set aside portions of their earned income for certain purposes: public transportation, parking, dependent care and the most common type, health care expenses. Simply put, you set aside an amount you choose, pre-tax, each month in a pre-funded account and then withdraw it when you need it. My plan, for example, gives me a benefits Mastercard that is essentially a pre-paid credit card.

Most FSAs are “use-it-or-lose-it” accounts. Any money unspent at the end of the year (or sometimes the end of the quarter after the end of the year, depending on the plan) just disappears, presumably into the pockets of your plan administrator. So let’s look at how an FSA can be a bad investment.

I will look at a fairly extreme example based on my own situation. Let’s assume a federal tax rate of 28%, a state tax rate of 6.37% (thanks, New Jersey), and FICA of 7.65% for a whopping total of 42.02% (we’ll round off to 42%). If you set aside $2000 for medical expenses at the beginning of the year, you would be saving $840 per year. So as long as you spend at least $1160, you’ll break even.

However, if your tax situation is different, you might have a very different break-even point. Let’s assume a federal tax rate of 15%, no state tax (Florida, for example) and FICA of 7.65%. In that case, if you set aside $2000 in your FSA, you would save $453. As long as you spend $1547, you’ll break even.

Sounds great so far, doesn’t it? The problem comes if you don’t have $1547 or $1160 in medical expenses. We did our best to estimate how much our insurance wouldn’t cover the year we had Little Buddy, and missed by a couple of hundred dollars. We did our best to use our card whenever we could, but still ended up wildly buying a huge supply of allowed over-the-counter medicine and other items just to use up our remaining balance. It’s all usable, and eventually we will use it, but we probably spent money we wouldn’t have spent so quickly otherwise.

The situation is even worse if you have commuting-related savings plans, because if you’re like me and move from location to location you may not know for sure whether you’ll need “public transportation” or “parking” day to day. In addition, the funds for these plans accumulate each pay period, rather than all at once at the beginning of the year like a medical FSA (although both are withdrawn from your paycheck each month). I overestimated public transportation last year. The end result of that was that I bought over $100 in Metrocards (the New York city subway pass) in late December. That was OK, since I could use them well into the next year. If I had overshot parking, though, that money would have been lost; my parking lot only allows day-by-day payment for spaces.

So a few key tips for pre-paid tax advantaged accounts:

  1. Estimate, then reduce. I think you should make a reasonable estimate of what you intend to spend at the beginning of the year, then set your account at about 90% of that. Don’t get into a situation where you have to buy a large amount of stuff you don’t need just to use up your balance. That money might have been useful elsewhere – for investing, emergency savings or even just day-to-day expenses.
  2. Make sure your type of payment is accepted. One of our doctors doesn’t accept credit cards, making reimbursement a long painful process of copying bills, filling out forms and sending in check copies. While there’s no reason this means you still can’t use the account, realistically it increases the chance that you’ll have disputes with your plan’s administrator (I did) or that you simply won’t get around to filing it (particularly for a small co-pay, for example).
  3. Keep track of your balance. If you are getting closer to the end of the year and haven’t spent much out of your account, start looking around for items you might need that are eligible for purchase. We waited too long and had to scramble a bit, and probably could have used our money better.

These accounts are still a great deal – anything that lets us wage-earners avoid a little bit of tax is helpful!

ways to control expenses at work

Working in a cubicle farm, you learn that there are a few key behaviors and habits that really make the day go better. A quick run to Dunkin’ Donuts? A package of Doritos from the third floor vending machine? A coke? A newspaper? Before you know it, you’ve managed to waste time, money and your health, all for the sake of making the day go by faster.

So how do you control these bad habits? I’ll lump all of the answers into a list:

Keep track of your spending. I do this sporadically, to be honest, but every time I put together a spreadsheet that show my net earnings after taxes (I’m a consultant so my pay varies depending on how many hours I work) and then subtract everything I spent during the day, it provides a very powerful motivation not to spend so much. A dollar fifty for coffee doesn’t seem like much, nor does seventy-five cents in the afternoon for a quick little pick-me-up granola bar from the vending machine, but when you total that up over a week it can be a lot. I was horrified one week when, without thinking, I spent $53 on ‘stuff’ – a bottle of water in the morning, a cup of coffee, a salad, a banana in the afternoon.

Bring food to work. Every time I buy a banana from the convenience store I like to think I’m doing a good job for my health, and compared to buying a Snickers I am. But I am not helping my financial health, because that $.69 banana is expensive. A bunch usually costs less than $2 for 7 or so bananas from the market. You do the math. Bringing an old spring water bottle filled with filtered tap water saves $1 per day – double that if you fill it up before heading home.

Drink tea at work instead of coffee – and quit drinking soda, period. Black tea has just as much caffeine as coffee. Buy a 20-pack of premium tea bags like Tazo or Yogi and you’ll get 20 cups for $4, versus a cup of joe from the corner store for $1 (or more if you prefer Starbucks). If you have 20 workdays in a month, you’re saving $16 (or more) per month.

Bring something to read. We have free ‘subway’ papers in New York like Metro and AM New York, but I used to grab a copy of the New York Post for $.50 per day because I liked the sports section. On the other hand, if I bring a library book (depending on my library) I can save money, read less pointless news and maybe even educate myself on the train and during my lunch break.

Drink a lot of water. Don’t laugh at my reasoning for this one: I drink a lot of water and consequently I go to the bathroom frequently. Not a ridiculous amount, but more than most people, probably. I think this has several good effects: drinking water keeps my appetite down, it keeps me hydrated in the miserably dry and dehumidified recirculated office air, and it gives me some exercise to wake up going back and forth. I don’t see a downside there.

Don’t ever go out for lunch unless it’s an “occasion”. Generally you should bring your lunch, or at least eat something from the cafeteria (or a nearby deli). Going to a sit-down place for lunch will relax you too much, it wastes time (critical if you charge by the hour) and generally it is more expensive and your tendency will be to buy something rich. Just avoid it – a salad at your desk, or a quick cup of soup with colleagues in the cafeteria, will keep you from getting too tired or wasting time or overeating.

Don’t keep change. If you are tempted to hit the vending machine but all you have is twenties, you probably will grit your teeth and move on. I used to keep a change cup on my desk so I’d have plenty of “chip money” but now I try to use it up when I buy lunch, or just take it home for the change collection.

Leave. If I have a really bad day, and I’m dragging late in the day, rather than going to buy some food or some coffee, I just leave. Go home. You may cut an hour or so of billing time off of your day, but at least in my case that’s why I became a consultant – to have that flexibility. If you have a salaried job, just slip out early. I promise you that you won’t get fired for leaving one hour early one time a month. If you do every day, maybe – but probably not. If you do your job and leave an hour early every day, you may hurt your chances at getting the ‘employee of the month’ award, but a boss isn’t going to fire someone who gets their work done and makes him look good. Trust me. It’s hard to do, but no-one gets fired for leaving early if they aren’t busy anyway.

Of course, the best solution would be to get a job where you don’t have to sit in a cubicle farm in a high rise building, but not everyone can be Peter Gibbons.

Equity harvesting

Over at CNN Money yesterday I read an article called “Betting your home against Wall Street” by Walter Updegrave. The purpose of the article was to answer this question:

I’ve been hearing a lot about “equity harvesting,” or the practice of taking equity out of my home and investing it the markets. Do you think this is a good idea? What are the pros and cons? – Rich, Tampa, Florida

Updegrave analyzes this question well, and very objectively, so read his article first. He points out that although financial ‘experts’ are very fond of the “10-percent return from the market historically” phrase, $100,000 invested in a NASDAQ index fund in 2000 would be worth $66,000 today. The market is full of risk, and I think too often people forget that. You can look at long-term returns but the reality is that if you suddenly get laid off or have health problems, you don’t want that money stuck out in the market at $66,000 when you have a home equity debt of $100,000 +.

I wish Updegrave had started his response with “First of all, this is a bad idea.” Your home equity shouldn’t ever be considered part of your investment portfolio. You need a place to live, and it’s unlikely that if you find out that your equity was squandered on stock that you can easily “cash out” your house and get a similar one in the same area for less money.

When we bought our house we took out a home equity loan, simply because interest rates were so low at the time it seemed silly to cash out the equivalent amount in stocks. But as soon as the rates started creeping up on our adjustable-rate loan, we cashed out a couple of stocks and paid it off, and to be honest I wish we had done it sooner. I still think that being debt-free is a cornerstone of relaxed finances.

I wish I could pay off my mortgage in one huge swoop, but I don’t want to sell off hundreds of thousands of dollars of stocks, empty my emergency fund, withdraw from our IRAs and pay a big capital gains tax next year; plus losing the tax deduction on mortgage interest. But if I get to a position where I have enough available money in easily liquidated investments to pay it off, I will. Even though there would still be expenses – maintenance, property taxes, etc. – I can’t imagine a better feeling than having absolutely no debt of any kind. I’m certainly not going to increase my debt just so I can maybe make a little bit of extra money in the long term, at the risk of jeopardizing my house.

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