Category Archives: money

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.

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!

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 pets.com 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.

how a ‘regular person’ can make passive income


Wikipedia has a rather tortured entry on passive income. The entry begins by categorizing all income as either earned (wages), portfolio (income from market instruments such as shares) and passive (income from rental properties, royalties, etc.). I think a clearer definition might be to define all income as either earned or passive. Earned income is income arising from a continuing exchange of labor or time for money. Passive income is income arising from an exchange of money for the same unit of labor or time. That’s a confusing way of saying earned income is when you must continue the activity to keep getting money, and passive income is when you do the activity once and then keep getting money. So if I work for wages, I have to show up 8 hours a day to get paid 8 hours’ worth of wages. That is earned income. If I have passive income, I show up and do some work for 8 hours and then get paid that day, and the next day for the prior days’ work, and so on.

My definitions are fairly vague but the general idea is that earned income requires continuing work and passive doesn’t. If you buy a house, fix it up and rent it out, theoretically it could earn rent for the lifetime of the house, making it passive income. If you buy a house, fix it up and sell it, you are earning money for the time spent buying, fixing and reselling, so it’s earned income.

So why doesn’t everyone just forget earned income? Earned income is much easier to come by, for starters. I sell my time at a very specific rate to clients to perform consulting services, and in doing this I’m only doing the same thing 200 million other Americans do. If they have an 8 month project, they pay me my rate times 8 hours a day times 5 days a week times 4 weeks per month times 8 months. They don’t pay me any more after that. However, if I wrote a blog post, and someone comes to my page via a search engine and I get an ‘impression’ from Google Adsense, then the initial hour spent writing that post could potentially generate income for 8 months if people keep visiting the page. But it is hard to imagine that I could ever get to the point where the one hour spent writing a post might equal one hour spent doling out my consulting wisdom, earned through 15 years of experience and a master’s degree. That would be the goal, though.

I do have a fair amount of passive income which I have purchased with my earned income: stocks and mutual funds. Once I buy a stock, the dividends continue to come even though the earned income used to purchase that investment was capped out. If I worked enough hours to earn $100, then bought one share of a stock that earned me $1 per year in dividends, that passive income would (in theory) truly start after 100 years. Up until then it was just a deferral of my earned income in a sense.

I have given a good deal of thought as to what a ‘normal’ person like me, a wage earner, can do for passive income. I only come up with a few areas that are realistic:

  1. Owning dividend-paying stocks, interest-bearing cash accounts or other market-related investments.
  2. Owning and renting property.
  3. Creating original content (writing, art, music, etc.) and selling it.

The first two present the problem that you need at least some earned income to ‘kick off’ the passive income stream. You have to buy a stock or a house. Sure, there’s leverage, but still, some sort of earned income has to be there to initiate things. The third item is where the possibilities are.

This blog is original content. It may not be good original content, but it’s definitely my own work. Selling an original MP3 would be, too. If I can create good enough content, people will want to read/listen/acquire it, and they will pay for it, either passively through advertising or directly by paying me for it.

The goal, therefore, is probably to work on increasing your creativity, which is free of cost but can generate income. Of course the time spent in generating creative thoughts has to be retroactively paid for once the income comes in, but at some point - like the stock example above - you reach a break even point and move into true passive income territory. Once you have reached that point, the need for earned income decreases and you can stop selling your time for money.

This is nothing new to readers of Kiyosaki or Steve Pavlina or Lazy Man and Money or dozens of other blogs, who have covered the same ground in more depth and precision than I. But I think the challenge for many people is how exactly to recognize passive income generators. Owning and renting property and stocks is far and away the easiest way, but still require an initial payment of earned income (and again, many people would argue you can borrow money to generate that, but no-one will lend you money if you don’t have some sort of earned income ‘background’). Creative content, however, does not require an intitial payment of earned income, but a retroactive payment once it is created. So I continue to try to think of things to create, so I can generate more passive income and quit selling so much of my time (a limited commodity) to other people rather than using it myself.

IQ and wealth

I read an interesting article, “A high IQ is no financial guarantee”, on MSN Money today. There were a couple of key takeaways I got from the article, but you should read it before continuing. The author, Karen Aho, points out that you can’t draw any broad conclusions from the study… but I will! The study focused on baby boomers, since they can, for the most part, be looked at retrospectively in terms of savings and income.

My key takeaways:

  1. Saving money has nothing to do with IQ: “[people] with average and low IQs were just as good at saving money as those with high IQs.”

  2. Earning money does have something to do with IQ: “subjects earned an average of $234 to $616 more per year for each added IQ point, meaning someone with an IQ of 120 (top 10%) made $4,680 to $12,320 more than those crowded in the middle of the bell curve with an IQ of about 100.”

  3. Earning money has nothing to do with saving money: While those with above-average IQs were three times more likely to have a high income as those with below-average IQs, they were only 1.2 times more likely to have a high net worth.

  4. Nobody is really good at saving money: No IQ group had built up "a significant financial cushion." The median baby boomer’s wealth equaled 18.6 months of income, while the highest-scoring group, those with an IQ of 125 or above, had little more than two years of income saved.

  5. Money is not the only measurement of wealth: The colleagues of the study’s author, university professors, told him “We are incredibly ‘wealthy.’ We don’t work many hours, and we get to work on whatever projects we want [despite lower salaries and net worth]."

So to address each point:

Saving money has nothing to do with IQ

People are often confused about what IQ really means. From Wikipedia: An intelligence quotient or IQ is a score derived from one of several different standardized tests attempting to measure intelligence. IQ tests are used as predictors of educational achievement. Note that these tests are used as predictors of educational achievement. They do not, for example, test discipline, or creative ability or personality. Someone who has a low IQ but is highly disciplined, for example, might be a better student of engineering or mathematics than someone with a high IQ who doesn’t focus. Someone who has a great knack for spotting real estate deals though intuition might not have done well in biology class.

Saving money is more about temperament than educational intelligence. Since our education here in the US pays absolutely no attention to financial education, a high IQ might even work against financial education. People with high IQs might continue their education longer, deferring their entrance into the real world where they have to learn about managing their finances. I didn’t get my first real job until I finished my graduate degree at 24. People I know who didn’t go on to college had already been in the workplace for six years, dealing with all that entails.

Earning money does have something to do with IQ

Study after study shows that you can earn more money with a college education, which you are more likely to obtain if you have a higher IQ. Corporations and other large employers will tend to pay more to a college graduate, meaning earning potential is higher if your IQ is higher. I am not sure this is such a great thing. Are you better off working at a fixed salary as a manager for The Corporation with 5% raises over the course of your life, or being this guy who didn’t manage to graduate from college, but had a clever idea about selling software?

Earning money has nothing to do with saving money

I earn a lot of money. I spend a lot of money. Because I live in the most expensive part of America, my above-average salary gets swept away pretty quickly by my way-above-average-costs. I don’t spend unnecessarily, although as with everyone I could cut back in certain areas. But my ability to save is a function of my efforts to cut back on expenses where I can, not due to the fact that I make a huge salary. I maxed out my 401(k) deductions (which is a set amount, not a percentage of earnings) 15 years ago when I was living in a much cheaper city, making about 1/5th of what I make today. So I saved just as much when I was earning much less. That has more to do with my interest in saving than it does with my earning ability, because as a percentage of my overall income my savings rate is drastically lower than it was – my savings rate has declined as my income has increased.

Nobody is really good at saving money

This goes without saying, almost. The US has a terrible personal savings rate. I think the statistics bear out that although certain individuals are better than others, as a whole our nation is not good at saving money, regardless of one’s social status, intelligence, hair color or favorite TV show.

Money is not the only measurement of wealth

I don’t think this point can be repeated enough. There are other measurements. Is someone who works 100 hour weeks his whole life until he drops dead of a heart attack at 60 truly wealthy? Is a painter who loves to paint but can’t afford the newest iPhone really poor? These are philosophical questions, of course. But a person who has a pension guaranteed for life is in many ways wealthier than a person who has all of their savings for retirement in the stock market. The pension, of course, can go bust, but assuming it doesn’t I’d rather have a small guaranteed payment rather than a wildly fluctuating amount. Peace of mind is priceless, isn’t it?

It’s a good article. I don’t think there’s anything surprising there – street smarts have trumped book smarts plenty of times throughout American history – but it’s interesting to see those study results in one place. There’s hope for all of us!

free cool stuff

I thought in this post I would highlight a few products that have made my web experience a lot more productive and fun.  They are in no particular order, and it’s certainly not an exhaustive list.  I know I have many Google products on the list, but they are quite dominant these days in terms of very useful free software.  If you are looking for ways to save money – and you always should be – these are a few ways you can quickly and easily jettison your expensive applications from companies like Microsoft and Norton.

Open Office:  What can’t you say about Open Office.  I used to fork over hundreds of dollars for various Microsoft apps every couple of years when they upgraded their buggy operating system.  No more.  Open Office has word processing, spreadsheets, presentations, databases and more.  It is very stable and very similar to the Microsoft Office suite.  You may have to relearn a few keystrokes if you’re a keyboard person like me – instead of Ctrl-K to insert a hyperlink it’s Alt-I-H.  But these are easy to overcome, and Open Office works very smoothly.  It seems to crash far less than Microsoft’s products.  They can save anything in Microsoft format or a million other formats, including PDF.  I can’t see why anyone would choose to use the Microsoft product after using Open Office for a day or two.

Google Documents and Spreadsheets:  I have to be honest, these are a bit buggy for me, and the features are still very limited.  I can imagine eventually these will become stronger, and the online aspect is great as long as you can access them. I only use them for very basic files that I might need to access from anywhere.  I keep a copy of my phonebook in here, for example.  I keep a few ‘goals’ documents here, too.  However, an annoying number of my clients block Google docs so I don’t rely on it for my primary word processing and spreadsheet needs.  I probably would if I could, though, just for convenience’s sake.  I suppose the possibility of shifting confidential information around on the Internet worries some companies, although I’m sure a million sensitive documents get copied onto USB drives and sent by email to personal addresses every day.

Gmail:  I recently shut down my Yahoo! Mail account after using the same email address for almost eight years.  Yahoo! Mail has a lot to recommend it – unlimited storage, a neat little Outlook-like interface and a nice RSS reader.  However, the new mail beta crashed too often for my taste, and the new interface seemed like a step in a very unimaginative direction.  They basically said “let’s take Outlook and put it online”.  The web is moving in a different direction – tagging, what I call “light touch” interfaces and simple, pleasant design.  Yahoo is getting away from their original simplicity and creating a feature-heavy, complex interface for mail.  Gmail, on the other hand, allows multiple tags for emails to help keep them organized, and the search function has rendered any need for folders obsolete.  Need to check that email you received four months ago from what’s-his-name about the meeting at the Starbucks on something street on June 26?  Just search on “Starbucks” and there it is.  I have been using gmail for several months now and the tagging and search functions are incredibly useful.  I know it has other features, such as integration with Google Calendar and Google Maps, but I don’t use them as much.

Google Earth:  A massive timewaster and not terribly useful, but this is a sure crowd-pleaser.  I love to sit and ‘fly’ from one remote location to the next; from Miami to Red Square to the Forbidden City to the South Pole to Ulan Baator.  Try zooming in on your home, or your office, or even looking for famous landmarks.  It’s a lot of fun, although the practical application eludes me.

Firefox:  I tried using Internet Explorer for a while when version 7 came out.  It was an improvement, but Firefox has one tremendous advantage over IE:  it is open source and therefore anyone can develop add-ons for it.  It also works better with sites like Brip Blap.  I use a dozen different add-ons, and every one of them has greatly enhanced my web browsing experience.  LeechBlock is a great add-on, as are THIS and THIS.  Firefox is less susceptible to hacker attacks (for now) and if you aren’t using it, you really should give it a try for a while.

Picasa:  Unless you are a professional photographer, this photo editor/organizer is all you need.  It has a very easy-to-use interface, and the basic fixes like cropping and red-eye removal are simple to use.  I find that it’s the only photo editor I need 99% of the time.  Occasionally I might like to do something a little fancier, but not at the price of buying Photoshop.  I have heard of a free photo editing software (open source) called gimp but I’ve never tried it so I can’t speak to it.  It’s quite popular, though.

Miniclip.com:  Who needs a Wii when you have this site?  I am no gamer.  For some reason that whole lifestyle just passed me by.  I played Doom II and Quake when they came out, and I enjoy Strategic Commander on my Palm, but for the most part I’m not that ‘into’ video games.  This site, though, has a few simple Flash games that I find really entertaining to blow off steam for ten minutes.  Try Samurai Sam or On The Run.  Simple and fun and most importantly, free.

Grand Central:  I am a very light user of this service, but so far it has blown me away.  If you aren’t familiar with it, it is a “unified number” for all of your phone numbers – home, work, office, even your hotel or temporary conference room.  If someone rings your GC number, all of your other phones ring – but that’s not the really amazing feature.  I can also set certain phones and certain voicemails to activate if certain people call.  If John from work calls, GC will ring my work and mobile phones from 9 to 5 but send him straight to voicemail after 5.  If Bubelah calls, every single phone I own will ring.  If someone I’m trying to avoid calls, I can have all of his calls sent straight to voicemail.  The possibilities are endless.  I’m sure that in the future I’ll have one number, my GC number, and all of my other phone numbers will be completely irrelevant.  There are rumors that Google is acquiring GC, which is great – one more way to give myself and all of my information over to Google.  Google has acquired Grand Central.  I figure as an early adopter they will spare me and my family when they seize control of Earth (not in an evil way, of course).

eVoice:  I have been using this service for years.  They give you a free number, although if you want a specific area code you’ll have to pay for it.  I use this number every time I apply for something:  an account with a random web service, a credit card, even an account with a job board.  This helps me screen calls and keep non-personal phone traffic from hitting my cell phone minutes or disturbing Little Buddy when the home phone rings.  You receive a small attachment in your email account and you can play it with their proprietary player or with QuickTime.  I wouldn’t recommend using it for anything you need to check quickly, since you have to be able to receive emails to hear your voicemails, but it’s great as a ‘second’ phone number.

Grisoft Anti-virus:  I have been using this free anti-virus software for years.  It is non-obtrusive and has – knock on wood – provided complete and flawless protection for several PCs over the last few years.  I don’t know how they do it, to be honest, but it’s a very good little program that does exactly what it advertises.  In my experience paid anti-virus programs (I’m thinking of Norton’s products) often had trouble performing self-updates and occasionally struggled with new viruses as they appeared.

 

On a final note:  when I first set up Brip Blap, I noticed that I couldn’t get my ads for Google AdSense or Amazon.com or blueeyetree.com to show up.  I tinkered with the code for a day before I suddenly remembered that I had an adblocker running.  I hate pop-up ads and noisy flashing motion ads, but I realized that by blocking static text ads I was only hurting myself.  The way sites like the New York Times remain free is through advertising.  If you want to continue to read sites like those, or enjoy Google apps, you probably should suffer through the ads, or else they will have to start charging someday in the future.  Personally I’m still blocking pop-ups.  I wouldn’t want a pop-up on my TV, obliterating my show until I hit a button on the remote.  Ads between segments of the show, fine.  Text ads to the side and around content on the Internet, fine.  But consider that advertising keeps these sites free when using any of the services above.

So what did I forget?  There are many others, of course - Remember the Milk, WordPress, Poisson Rouge, Wikipedia, etc. etc.  You could go on forever.

 

how to save money on air conditioning

In 1997, the average home in the Northeast spent approximately $1,700 per year on energy. In the Department of Energy study, this spending was broken down into four categories: Space heating, electric air-conditioning, water heating and appliances operation. I was surprised by the ratios, since my original thought for this post was to talk about keeping air conditioning costs low. According to their study the percentages for these categories broke down like this:

Now my idea for this post was going to cover ways to reduce your air-conditioning costs, but this study started me thinking (always a dangerous undertaking, because once I emerge from days of introspection, reading and agonizing over this data I’ll be ready to make a tentative decision and then the trouble starts). My thoughts on air conditioning reduction are still valid, I think, as a lifestyle choice, and later I’ll give my thoughts on researching things before leaping into action.

Air conditioning

I have found that air conditioning is one of the simpler things to ease out of your life. During the winter in the Northeast air conditioning is a non-issue. The temperature even at its most freakish won’t climb into a range requiring any air conditioning for six to seven months out of the year. Spring and autumn are usually mild and don’t require air conditioning, either. We live about 50 feet from a river, and the breeze coming off the river is usually quite brisk year round, especially during the day. It usually gets very still as the river cools at night, and that’s one of the few times air conditioning might be needed, particularly if the tide is ebbing out.

During the summer, usually about three to four months, air conditioning may be necessary. We have the same breezes but temperatures rise into the mid 80s; seldom higher, but occasionally we’ll get some 90s. Three years ago the summer was so mild it seldom reached the 80s. Last year we had a few terribly hot weeks. In general, though, we don’t have the extremes of temperatures you find further inland or south.

Our house is a townhouse, but we’re lucky in that we have a corner unit and therefore windows on two sides. This provides a cross-breeze, which is very useful. We have a large green space across from us rather than more townhouses, so the breeze is not impeded.

Even with all of this considered, my first instinct has always been to crank the air conditioning to 68 or 70 all summer long. Despite the fact that I would love to have temperatures as high as 74 or 76 in the winter, I inexplicably want colder temperatures in the summer. Bubelah wants it warmer in the winter, warmer in the summer. Little Buddy so far doesn’t seem to care, but for a toddler’s sake you don’t want to keep the house at 62 (although I suppose if you wanted to dress him up you could).

But we did realize that we could keep it much warmer and accomplish five things:

  • Reduce our costs. This was the obvious benefit, although as I mentioned in this post the benefit was less than I imagined it might be. However, the spending on keeping the house icebox cold was pointless, and every little bit saved helps.
  • Reduce our energy usage and help the environment. We don’t participate in wind energy programs (yet) so presumably our energy comes largely from non-renewable sources. We have a fairly energy-efficient air conditioning unit, but it still requires a substantial amount of energy to run constantly.
  • Keep fresh air in the house. This is sometimes debatable, since the river can get funky, and we do live close to New York which sometimes produces odd smells all its own. For the most part, though, outside air is constantly flowing through the house rather than being constantly recirculated through an air conditioning system. This makes us feel better, although I suspect it’s largely psychological. Since we have a high-end ionization filter on our central air pump (or whatever it’s called) the air is probably technically cleaner when the air conditioning is functioning than when the windows are open. I still seldom meet people who prefer the closeness of shut windows when there’s fresh air to be had.
  • Reduce noise. The air conditioning is downstairs but it does whoosh out of the vents when it runs. We trade that rushing noise for outdoors noise – birds, street noises, children and other suburbia background buzz. It makes you feel more connected to your neighborhood.
  • Make ourselves generally more comfortable outdoors. The transition from indoors to outdoors or vice versa can be rough if you have massive temperature differences. Everyone knows how nice it feels to walk from the 90 degree street to the 70 degree room. This feeling lasts for a few minutes, then it feels uncomfortable as your sweat chills and your lungs struggle with dry, air-conditioned air. If the air humidity is slightly less and the temperature is slightly less indoors, the transition isn’t immediately as pleasant but in the long run it is much nicer. The reverse is true, because when we go out with Little Buddy there’s not the same sense of being blindsided by humidity or heat when you step outside. I find I enjoy sitting on the balcony much more even when it’s hot.

We did all of this by following a few simple steps:

  • Buy a programmable thermostat. If you have more than one thermostat, get a programmable replacement for each. Our house has two, and we can keep the upstairs air-conditioned while keeping the downstairs windows open, which is convenient when Little Buddy goes to sleep and needs cooler air to relax.
  • Put up light-blocking shades, backed by thin sheers. The sun can rapidly heat up your house, so having heavy drapes on southern and western exposures really helps deflect the worst of a hot day’s sun.
  • Keep the temperatures reasonable. Don’t try to sit out an 89 degree day. Use your air conditioning, but keep it at 76, not 72, because you can “re-addict” yourself.
  • Keep all of the windows open. This might seem obvious, but throw open windows everywhere, even in rooms you won’t be in. This keeps the air flowing throughout the floor or the house. If you keep windows closed in just one room, that one room will get stuffy and unpleasant, and tempt you to turn on the air conditioning to “pump it clean”.
  • Take a shower before sleeping. If you take a cool, soap-less shower before sleeping it washes off sweat and cools your body down, making it easier to sleep. This is still my toughest time with the air conditioning, because I am used to sleeping in an arctic chill with heavy blankets. Taking a quick cool shower makes it easier for me to sleep in a warmer room.
  • Keep the lights off. This goes for other appliances, too. Appliances use 40% of your household’s energy, so that generates a lot of heat. Some, like the refrigerator, have to stay on, but consider whether lights and TVs and whatnot need to stay on. Even CFLs generate some heat, although far less than incandescents.
  • Don’t backslide. Don’t think one day, just for a break, you want to sit around in the 60s. If you want cold, go to a movie or a mall. But if you start pulling the temperature back down in your home, you may get lulled into inaction sitting around in a freezer!

Don’t forget if you have a toddler to ensure that all of the windows are proofed against falling out and that any balconies or patios are secure. We are lucky because our two balconies have railing that makes it impossible for a toddler to squeeze through, so Little Buddy is free to come and go on the balcony while we sit a few feet away in the living room.

This is one of those win-win changes you can make. You will feel better, save money and help the environment. The only possible downside is if you’re a sweaty person (like me) you may have to go through more than one shirt per day.

things I learned from my grandparents about money, part 1

Most of my relatives have some very different ideas about money, and by relatives I am including the wide range from my wife to my parents to my in-laws, etc. I realized a long time ago that it is very easy to pick out the flaws in other people’s philosophies or actions while failing to recognize them in your own thoughts and actions. However, I still find it a fairly useful exercise to try and determine where people make good decisions and bad decisions. Even more important is trying to understand the ‘why’ behind those decisions.

My mother’s parents (my grandparents), for instance, have always been very frugal. They were both raised on farms in the 20s and 30s and suffered through the Depression. My grandfather left home to join the Army pre-World War II, serving in the horse cavalry (hard to believe the US still had a horse cavalry less than 70 years ago, isn’t it?)
Here are some of their views towards money that I think are interesting, both good and bad, and my take on them.

  • Investing, a good habit. My grandfather was an early fervent believer in investing. Coming from a rural background and suffering through the Great Depression you might expect him to be very wary of investing, but he was quite the opposite. He invested heavily in the market, and on a schoolteacher’s salary did very well over the years. He did this although he had a state pension and could have chosen to spend that money. From him I learned a very conservative study-buy-and-hold approach. Although I didn’t know it at the time I learned it from him, his approach was basically the same as Warren Buffet’s. While it didn’t make my grandfather a billionaire, it did make him a huge ‘extra’ retirement fund on top of his pension and my grandmother’s.
  • Never selling, ultimately a bad habit. My grandfather maintained an almost emotional attachment to some of his stocks and held them year after year, even in times of declining prices, shrinking dividends and their own advancing age and deteriorating health. They saved these stocks thinking they could pass them on, but as they have moved into more and more expensive housing (nursing homes are much more expensive than regular apartments, obviously) it has become obvious that all of that money will be gone soon, regardless. Had they moved it into a savings account paying 5% ten years ago they could have been earning steady income.
  • Never really spending, good and bad. Although they amassed such a gigantic fortune (relatively speaking) on retirement my grandparents never really spent much. They constantly talked of wanting to pass it on to my mother (an only child) and my brother and myself. They never traveled, although my grandfather dreamed of returning to see a peaceful Germany. They did ‘live large’ in some senses - they ate out almost ever day, they bought new cars for cash every few years while they could still drive and they were almost insanely generous to my parents and my brother and myself. They gave us stocks, cash and other gifts for years. However, it is hard for me to look back on their 20+ years of retirement and think that they never really did much after retiring. I know that part of that is my perception, since I love overseas travel, but I am not sure retirement was meant for watching TV and eating out. That’s a judgment each person has to make individually, I guess. But when my mom was younger and living at home they were very frugal, and even late in life my grandfather’s frugality could be amazing. A heavy, heavy smoker for his entire adult life, he quit cold turkey one day because he thought cigarette prices had finally gotten to high - and hasn’t smoked in 15+ years now. He never worried about the health aspect as far as I know, but paying $3 for a pack of cigarettes instead of $2 was apparently one dollar too much.
  • Avoiding debt, extremely good. My parents and grandparents gave me one gift that I realize is invaluable after I read many personal finance blogs: the fear of debt. I have been convinced since an early age that going into debt is practically a mortal sin, a stain on your character, a flaw. While I think it may have been overstated a bit, this philosophy has made me somewhat unique in a sense: I have never carried a balance on a credit card, EVER. I have had only two debts in my life: a car loan one time and a mortgage on my current house. Other than that, I have never bought anything I couldn’t pay for with my existing funds. So debt has never been a headache for me, which is a great gift.
  • Charity begins at home, mixed. I know this may run counter to many people’s beliefs, but another closely held belief of my grandparents was to take care of themselves and their own before others. This philosophy meant that there was no ‘automatic giving’ to charity until everyone in the family was taken care of. They gave (and still give) to their church every week, but I am sure without ever having seen it put to the test that had I been in need for some reason they would have given that money to me, instead. I know this is a somewhat selfish approach, but I think it’s right. Give when you are able. I do not subscribe to the Christian teaching that I should give ALL I own to the poor, and apparently from the number of Mercedes I see in church parking lots I’m not alone in rejecting that teaching. It doesn’t mean you can’t give to charity - I certainly give to several children’s charities - but take care of your family first.

Those points are really just highlights. The important lesson to remember is that anything your family or your friends teach you about finance is valuable. Sometimes you may learn by avoiding their mistakes, sometimes you may learn by taking their advice to heart - but it’s all learning. From my maternal grandparents, I learned to save and to avoid debt but also that sometimes you need to spend money, too, because there ARE things and experiences in life worth the money. The truly important thing was never the money, it was the security the money bought, and being able to give back to their family, that mattered to them.

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