Sunday, December 31, 2017

Is Dave Ramsey Wrong About Credit Cards?

Personal finance guru Dave Ramsey has long had a cult-like following, and it’s easy to see why. Through his website, radio show, and Financial Peace University program, he preaches an array of strategies that improve lives and help people build wealth.

Pay off your debt and avoid future debt like the plague, he says. He also suggests you pay cash for everything and save a large percentage of your income. Meanwhile, Ramsey stresses the importance of avoiding the trappings of consumerism and forging your own path.

With advice like this on the table, what’s not to like? I mean, if most people followed Ramsey’s advice, they would be a lot better off – at least in a financial sense.

Five Ways Dave Ramsey Is Wrong About Credit and Credit Cards

But, when it comes to Ramsey’s advice on credit and credit cards, that’s where things start to get wacky. Not only is some of his advice less than optimal, much of it is too simplistic and not that feasible for people living in the real world.

Avoiding debt is always good — I’m a big advocate of living a debt-free lifestyle. But never using any credit is a recipe for disaster. Here are five sayings Ramsey repeats about credit all the time — and why I think he’s wrong.

‘You don’t really need a credit score.’

If you read Ramsey’s words or listen to his radio show, you’ll notice his disdain for the FICO score is palpable. This score is not much more than an “I love debt score,” he says repeatedly. And in some ways, he’s right.

Because of the way your FICO score is determined, you can be rewarded for carrying some debt. As Ramsey notes in a blog post, 35% of your FICO credit score is determined by your payment history (late or missed payments drag it down) while another 30% is based on your credit utilization ratio, or how much of your available credit you’ve used up. That means someone with a $300 balance on a card with a $500 credit limit will fare worse than someone carrying a $2,000 balance on a card with a $10,000 limit. These factors also don’t take your savings or net worth into account – just how you handle your debts.

I get all that, but then Ramsey goes off the rails. Basically, he says that, if you follow his plan, you’ll eventually pay off all your debt. Your credit cards, your car loans, and even your mortgage will be gone. At that point, your credit score will be “indeterminable,” he says.

Ramsey says this is good news because, if you’re doing it right, you’ll never borrow money again anyway. “By this point in your life, you haven’t taken out a loan in years, you’ve saved a ton of money, and you’re paying cash for everything,” he writes on his website. “So you don’t need a credit score, anyway, since you don’t plan on using credit!”

Sorry, but no. No matter what Ramsey says, you absolutely do need a credit score. Ramsey suggests renting a home until you can pay for a home in cash or at least put down 20%, but he fails to mention you will likely need a credit score to rent an apartment. And let’s not forget that your credit score may come into play when you apply for a job or sign up for auto insurance.

Not only can your employer ask for a modified version of your credit score before they hire you, but auto insurance companies look at your credit profile to determine how risky you are. If you don’t have any sort of credit history left, you may not get approved for a rental or be forced to pay higher insurance rates. And these are just a few examples of the many, many times having a good credit score works to your advantage.

‘It’s feasible to buy a home without a credit score.’

In an ideal world, people would save up 20% of the price of their home before they purchased. They would buy only as much house as they could afford, and they would get a fixed-rate mortgage with predictable payments they could swing no matter what.

In Ramsey’s world, they may even save up the total amount for their home in cash, and then pay for their property in one fell swoop.

Without a credit score, however – and a pretty good one, at that – you will have trouble getting a mortgage. Ramsey, realizing this, suggests that you can still get a mortgage without a credit score via manual underwriting.

With manual underwriting, Ramsey says you’ll need to be able to display 12 to 24 months of bills and payment history using rent stubs, utility bills, daycare payments, insurance payments, and any other bills you have. You also generally need to save up at least a 20% down payment to get a mortgage with this strategy, he says.

Unfortunately, his strategy may only work with people with no credit score. If you have a low credit score, you probably won’t qualify for a mortgage with any lender via manual underwriting.

While it may be possible to get a mortgage via manual underwriting without a credit score, this is a much tougher hill to climb. Not only do you need to save up 20% of your home purchase, but you need to find a lender willing to jump through all those additional hoops. In a hot housing market, you could also easily lose the home you want if you don’t get preapproved.

In the real world, it may make more sense to get a low-cost, fixed-rate mortgage with a traditional lender. If you have a low credit score, you can also get an FHA loan with a low down payment, low closing costs, and easy credit qualifying.

‘You will spend more if you use credit cards.’

According to Ramsey, nobody in the world has the discipline to use credit cards like cash. “You will spend more if you use credit cards. When you pay cash, you can feel the money leaving your hand,” he writes. “This is not true with credit cards. Flipping a credit card up on a counter does nothing to you emotionally.”

Ramsey waxes poetic about the fact “there is no such thing as responsible credit use.” The thing is, he can’t possibly speak for everyone.

Studies have shown we do spend more freely with plastic than cash. But like it or not, there are plenty of people who use credit responsibly, and to their advantage. Despite the high levels of credit card debt Americans accumulate each year, millions of them use credit wisely while paying their bill on time and in full every month.

Ramsey may be right that certain personalities – and a good share of American consumers – struggle with the responsibility of credit cards. But not everyone needs to stay away from credit cards altogether.

‘Credit card rewards are never worth pursuing.’

Part of Ramsey’s gripe with credit cards is the idea of people pursuing rewards. You have to spend thousands of dollars to earn a meaningful amount of cash back, he says. And if your credit card charges an annual fee, then chances are good you’re paying a ton in fees to score “free travel.”

While there are definitely instances where Ramsey is right, it’s also very possible to earn rewards and use them to your advantage. If you get a no-fee, cash-back credit card, only use it for regular purchases you’d make anyway (like gas and groceries), and faithfully pay your balance in full, for example, it’s hard to argue that you’re worse off getting a free 1% to 2% back in cash rewards on those purchases.

Admittedly, an annual fee makes it somewhat harder to come out ahead. But premier travel cards that charge annual fees also tend to offer juicier rewards. So if you travel a ton, and often take advantage of the card’s benefits, it can make sense to pay an annual fee.

The bottom line: Only you can decide whether travel rewards or cash-back cards leave you better off – or if you should skip them altogether. Ramsey can’t decide whether your efforts are worth it.

‘Debit cards are just as safe as credit for online purchases.’

While we’ve already shown how Ramsey’s credit advice may be less than stellar, there is one situation where he is absolutely, unequivocally wrong. He says that debit cards are just as safe to use as credit online, and this is false.

From his website:

You’ve told yourself paying with a credit card online is safer, so that’s a “good enough” reason to keep the card. But did you know a debit card offers the exact same fraud protection as a credit card? There’s really no excuse not to use it. Just remember to always check your budget first, and before you make a big purchase, sleep on it. Things have a funny way of looking less tempting in the morning.

Let me be clear: Debit cards do not offer the same fraud protection as credit cards, and it’s not even close.

A very cursory look at the Federal Trade Commission (FTC) website will show that you credit is safer than debit.

Here’s what the FTC has to say about credit cards:

Under the FCBA, your liability for unauthorized use of your credit card tops out at $50. However, if you report the loss before your credit card is used, the FCBA says you are not responsible for any charges you didn’t authorize. If your credit card number is stolen, but not the card, you are not liable for unauthorized use.

Debit cards, on the other hand, come with a lot more risk. Sure, you’re not liable for any unauthorized charges if you report your debit card stolen before someone uses it. But, it’s all downhill from there.

If you report your card lost or stolen within two business days of learning of the theft, you can be on the hook for $50. If you report the loss within 60 calendar days after your statement is sent to you, you’re on the hook for up to $500 in fraudulent charges.

If you don’t report the fraud within 60 days of your statement being sent to you, you could be on the hook for all fraudulent charges, including any money the thief can drain from your bank accounts.

The Bottom Line

While Dave Ramsey’s advice on debt-free living is superb, it might be wise to take his credit advice with a grain of salt. Life without any type of credit score won’t be as easy as he likes to portray on his website and radio show, and there are plenty of instances where you do need a credit score, whether he likes it or not.

The best way to approach credit is to do it conservatively. Only use credit cards to make purchases you can afford to pay off, pay your bill in full every month, and make sure you’re not overspending just to earn rewards.

With some self-discipline and positive habits, you can use credit responsibly and to your benefit.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at

Related Articles:

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Saturday, December 30, 2017

15 Things I Did This Year to Save Money

As we’re about to close the books on 2017, I thought it might be interesting to look back over the year and see what things I did differently this year in order to save money.

Some of these strategies were simply all-around wins, saving money while not negatively altering my life in any way. Some of these things turned out to be time savers as well as money savers, while others set me up for saving money down the road, and still others turned out to have additional benefits.

If you want a smart way to use these tips, consider using them to fuel your frugality list.

I started meal prepping in earnest. Meal prepping simply refers to the process of making several homemade meals in advance, freezing them until you’re ready to use them. This provides a number of benefits, but the three big ones are that you’re able to synergize a lot of the meal preparation tasks (like cooking a ton of rice or a ton of pasta at once instead of in smaller batches and assembling meals in an assembly line style), you’re able to buy ingredients in bulk, and you have homemade meals on hand for convenient cooking on busy evenings.

I started experimenting with meal prepping last year, but really dug into it in earnest early this year, when I wrote a guide to successful meal prep strategies and a step by step guide to a simple meal prep of rice and beans. I’ve done meal preps for quite a few meals since then, filling our freezer with soups and lasagnas and casseroles that can easily be cooked later on when things are busier.

I also made a number of fermented foods and stored them. Last year, as a holiday gift, I received a large fermenting crock, which made it possible to make larger batches of things like sauerkraut, pickles, and kimchi. I dove into fermented foods this year, preparing all kinds of different things in the large crock and in smaller bubble-locked jars.

My best output was a small batch of radish sauerkraut, which consisted of about 90% cabbage and 10% radish, all shredded, and soaked in a brine for a few weeks in a container with a bubble lock with weights holding the vegetables down below the brine to keep them from turning bad. This stuff was so good that it didn’t even make it to the freezer. I think I ate it on everything for the next few weeks. Considering that it required only a head of cabbage, a few radishes from the garden, and some salty water, it was extremely cheap sauerkraut, too.

Late in the year, I made a sourdough bread starter in a smaller jar. I just put a cup of flour and a half cup of water into the jar, mixed it, put a loose fitting lid on it, and let it sit for 24 hours. Then, I threw away half of the mix, added a cup of flour and a half cup of water, mixed it, and put the lid back on. I repeated this for about two weeks, during which it smelled fairly bad (think dirty socks) but after the dough became more acidic and “sour,” it began to smell like a mix of bread dough and sourdough – delicious! We used this as the basis for some mind-blowing bread this year.

I started making cold brew coffee. This was another splendidly successful food experiment this year. I received a small cold brewing coffee kit for Father’s Day and started using it in earnest.

Basically, the kit consists of a fine metal sieve that sits in a pitcher of water. You put a certain amount of coarsely ground dark roast coffee into the sieve, close it up, put it in the water, put the pitcher in the fridge, and wait about sixteen hours. Boom – you have cold brew coffee.

This eliminates the need for coffee filters and the need for an expensive coffee pot. It also uses less electricity, because the water is usually cold to start with and it doesn’t add much load to the refrigerator at all compared to the energy use of heating the water in our old coffee pot.

I actually prefer drinking the coffee cold and black. It’s very mellow, so it goes down smoothly without needing to be heated and without having to add a bunch of stuff to mask the sharpest flavors.

I switched almost entirely to a discount grocer for our food. Prior to this year, there wasn’t a truly convenient discount grocer for our shopping needs. The three closest grocery stores were ones with an amazing selection but without great prices. I would sometimes shop at a discount grocer about fifteen minutes away from home, but that was an irregular occurrence. It was just very inconvenient to do so.

Late last year, a discount grocer opened fairly close to our house, close enough that it became our routine grocer over the course of a few months. During this past year, approximately 70% of our grocery spending was at that store, and according to my quick math, that saved us a few hundred dollars.

We started preparing many meals with low cost household staples. The real genesis of this switch was our acquisition of a high quality rice cooker (a Zojirushi) at a very deep discount. Once we actually opened the box and started using it, we found it to be really simple and friendly to use, so we started using it all the time.

Over time, we found that we were eating more meals with rice in them, which is a very low cost meal, plus we were often making steel cut oats for breakfast, which makes for a low cost breakfast for our family if bought in bulk.

It’s hard to really estimate exactly how much money we saved by adding more rice and oatmeal to our diet, but it was definitely a reduction in food cost. I now often buy rice and oatmeal in bulk, which means that many meals are falling below $1 per person per meal for our family.

I expanded my library use and turned it into a weekly appointment. In the past, I visited the library irregularly.

In the past year, I’ve changed that routine dramatically. I now go to the library every third Wednesday with my children in order to pick out books for us to read for personal enjoyment and enrichment; I return the previous books each visit. This is penciled in on the calendar.

In addition, almost every Thursday, I actually work at the library. I take a notebook and a pen to the library with me, gather up piles of books, and start taking notes from the ones that seem interesting with an eye toward practical things I can try or information that might fuel future Simple Dollar articles. I find that having a straightforward brainstorming session, where the output is a bunch of article ideas and several article outlines, is a great tool.

On each of those visits, I dig deep into the free resources available at the library. On Wednesdays with my family, we hit the fiction pretty hard and often walk out with an armload of teen and YA and adult novels. We also often check out movies, and if there’s a road trip coming up, we usually snag an audiobook, too. On Thursdays, I plow through piles of magazines and nonfiction works, taking notes left and right, and I usually use the library’s free wi-fi extensively.

The free books, movies, audiobooks, and other resources have added up to substantial savings this year, primarily because we’ve made them into such a routine.

I cut down on my computer gaming hobby (almost eliminating it) and replaced it with self-improvement and reading. This year, I have cut my computer gaming spending by 92% compared to last year. I purchased exactly one computer game, which was on sale, compared to the dozen or so I purchased last year.

What changed? Two things. First, I made a commitment to play some of the less-played games that I already had. Second, I spent less time – significantly less, actually – playing computer games, replacing that time with other things that have less of a cost and actually get me moving around more.

I continued last year’s trend and used my clothing budget on a small number of very long lasting items. This year, the only clothing I purchased was a replacement pair of denim jeans and a few pairs of socks. However, in the case of the socks, I purchased Darn Tough Socks, with the intent of not having to replace any socks for many years.

As time moves forward, the goal is to have a minimal wardrobe, something akin to Project 333, but I’m not moving there radically. Instead, I’m just wearing out items as I go along and not replacing them until I need them within a smaller wardrobe. This was the case with the socks, as I finally purged a lot of old socks that were well worn and developing holes.

The end goal is to have a very small wardrobe with clothes that are well made and will last. This year was a great step in that direction.

I planned our least expensive (per day) summer vacation we’ve ever taken as a full family. This year, our summer vacation was a camping trip to Yellowstone, and more than ever our efforts in planning a low-cost trip paid off.

Some of the tactics used on this vacation include:

+ We relied on travel guides from the library for all of our trip planning.

+ We camped every single night of our trip (excepting a single emergency night when we were blocked from our campsite by a blizzard so we had to find emergency lodging).

+ We used a free National Parks pass that was acquired through the Every Kid in a Park program. This enabled entrance to several national parks and monuments.

+ We drove the entire trip in a single vehicle.

+ We packed much of our food for the trip, and what we didn’t pack was purchased from grocery stores away from the parks.

+ We chose almost entirely free activities, leveraging that park pass for all that it was worth.

Combined together, our family vacation cost around $85 per day. That includes fuel, feeding five people three meals a day, lodging, and all activities. It’s pretty difficult to have a fun family vacation on less than that.

I used our social network to get a few things we were looking for as freebies, and gave away a few things we didn’t need anymore to people who wanted them. During the year, rather than searching for items that we might have purchased, we simply asked for them on social media by asking if any of our friends happened to have such an item for sale or available to borrow for a while. In each case, a friend popped up and simply gave us the item. We acquired a bread maker and a few tools this way.

This started a mini-trend in our social circle of friends doing the same thing, and we ended up passing along some unused items from our garage. We passed along some toys for toddlers and some sporting goods.

Not only did this practice save us money and save our friends money, it gave us a convenient excuse to actually see a few friends. The items were all exchanged during a dinner party at someone’s home, which turned the exchange into a social perk, too.

We built stronger sharing relationships with our neighbors. We repeatedly shared child care tasks with the family across the street from us, who have two children roughly the same age as ours. We shared countless tools and other items with them. We made each other food when our families were ailing. We took each other’s children to countless practices and performances. Every single one of those things saved the other family time, energy, money, and headaches.

Not only that, we began to really expand that sharing to other families in the area. We took lots of children to lots of practices, and our children were ferried around by others. We gave away tons of produce and received quite a lot back, along with some canned goods.

What we found is that every time we took the effort to be helpful for a neighbor or a parent of one of our children or just someone in the community, we were usually paid back in spades. Not directly, of course, but in returned favors and easier relationships down the road.

We chose to keep using things. Rather than replacing several expensive items, we came up with creative ways to continue to use them.

My cell phone is now several years old, and I intend to keep using it until I literally can’t update it. I replaced the battery myself.

We didn’t replace either vehicle, even though they’re approaching 200,000 miles each on their odometers. Instead, we stuck to the maintenance schedule on each one. We’re sticking with them until our trusted mechanic tells us that there are serious problems coming down the road.

I’m using a six year old desktop computer for most of my work, and, again, I’ll continue to use it until I can no longer update it or there’s a hardware failure.

Our only television has a noticeable screen flaw. Rather than replacing it and dumping a bunch of cash on a new one, we’re simply living with it until it becomes unwatchable.

Rather than replacing something for a minor issue, we regularly chose to keep on going with what we had this year.

I cut my own hair. Rather than going to the barbershop once a month and dropping $15 or $20, I simply pulled out the clippers and followed the same pattern that the hairstylists used – very long clippers on top, short ones on the side, and an edger near the separation between the two.

I did this for almost every haircut I had in 2017 and no one noticed. I simply did it out in the yard and picked up most of the hair when I was done, depositing it straight into a garbage bag.

I saved somewhere around $150 doing this. Again, no one noticed the difference.

We cancelled most of our print magazine subscriptions. We simply started keeping an “unread” pile of magazines on our side table and if a renewal notice arrived and we saw more than one issue of that magazine on the table, we cancelled the subscription.

That simple move saw our current subscriptions drop from six to two (Consumer Reports and Smithsonian remain), although we do subscribe to a couple electronically.

We estimate that this shift saved us about $50 this year and cut down on our quantity of mail as well.

Many gift-giving occasions within our immediate family involved lots of handmade items or experience items. When our family gave gifts to each other this year, they were often of the homemade and handmade variety, with individual effort and thought going into the gifts.

Art, food, confections, and other such items were gifted amongst our family members this year, as were well-planned “days together” that involved doing things like going on a hike in a favorite state park together or going to a local free art exhibit together. We gifted each other “coupons” for shared experiences and many of them were used.

Perhaps the best gift of all was a handmade “travelogue” from our children to their mother which involved lots of pictures and thoughts as they tried to find a great birthday gift for her. The gift turned out to be individual days spent with her, largely inexpensive but carefully considered.

In other words, rather than just buying things for each other, our gifts took on a more thoughtful and homemade approach, which not only added meaning but also reduced the cost of just acquiring more “stuff.”

These tactics collectively saved us thousands of dollars over the course of the past year. Each one was a little move on its own, not something that really upset the course of our life in any meaningfully negative way, but quietly put money back into our pockets.

That’s the power of frugality. It’s not about making your life worse just to save money, but to find a genuinely better way of doing things. It’s not about going without, but about figuring out what abundance really is. That, for me, has been the real lesson of frugality this year.

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Friday, December 29, 2017

The Frugality List

Not too long ago, I sat down and tried to figure out how much time each week I spend on things that are primarily done to save money.

Honestly, it’s kind of tricky to figure out what the exact line is. Is cooking a meal at home primarily done to save money? I decided that it wasn’t. However, is spending time on prepping a bunch of meals at once primarily done to save money? That’s tougher… I eventually decided that it was, because those meals are often used only on nights when we would otherwise eat out due to time constraints.

Anyway, what I eventually concluded is that I spend somewhere between five and ten hours a week on things that are done primarily to save money. In all honesty, that type of steady commitment of time is not too different from a small freelancing gig or a part time job.

I don’t spend that time in a conscious job-like way. I don’t block off hours for “frugality,” though I do sometimes plan my days for larger money-saving tasks (like meal prepping). Still, the hours do add up over the course of a week.

This realization led me to another one: when Sarah and I were first diving into our financial turnaround, we did treat it like a serious freelancing gig. During the first few months of our turnaround, I would estimate that we spent about 25 hours a week on money-saving tactics. This lasted for a few months, at which point the time investment dialed back to something like our current five to ten hours a week.

The first question people might ask is why.

Why would a person sacrifice that much of their spare time? To put it simply, most of these activities are ones that we do with our family or do on a lazy afternoon or early evening when the kids are playing and supper is in hand. In other words, these tasks fill in the low-hanging fruit – time we would probably spend playing a smartphone game or channel surfing or web surfing. If you contribute half an hour here or an hour there, it adds up pretty quickly to 5-10 hours per week (or more).

Why not use that time to earn more money instead? This is a bit trickier question. First of all, the returns from frugality are bigger than you expect because the savings is post-tax. If you improve your earnings, it’s a pre-tax increase, meaning you have to pay income taxes on it. You don’t owe income taxes on the savings from cutting your own spending – that savings goes straight in your pocket. Second, the impact of frugality is typically immediate; you can spend ten hours this week doing things and immediately see the savings in your checking account. When you put that time toward improving your earnings, you usually don’t see any return on that money for a long while. Even if you work at a part time job, you have to wait for the paycheck.

To tell the truth, my threshold for frugal tasks these days is that the activity needs to be saving me at least $10 per hour (or providing some other benefit) or it’s not worth my time. Remember, that’s post-tax savings, so it’s the equivalent of making $15 an hour or so, depending on one’s tax situation.

It’s also nice because I can choose when I spend time on frugality and what specific tasks I choose to take on. For example, if I don’t feel like washing freezer bags and drying them out right now, I don’t have to; they can wait. I can choose a different task for the moment. Similarly, if I want to play a game with my kids after school today instead of taking on a frugal task, I can do so. If I happen to suddenly have a spare hour, I can fill it with money-saving tasks. (Honestly, in some ways, it’s not that different than how I write.)

Here’s a nice workflow for getting into the practice of treating frugality like a freelancing gig.

Have a Frugality “List”

The first step in this process is to start creating a big list of frugal tasks that you might take on. Any task you might do to save money should go on this list, whether it’s something you might do every day or once a year or one time only, or whether it takes one minute or five minutes or an hour. If it’s an idea you have for a frugal task that would actually fit in your life, it should go on this list.

I maintain my frugal “list” in Evernote. It’s just a single note with a ton of ideas listed in it for frugal tasks I might do, one per line with a blank line between them. Because it’s in Evernote, I can easily retrieve it almost anywhere that I happen to be.

Don’t worry about the order or about anything else. Just make this a collection of things you could do to save money.

Here are 100 ideas to get you started. Just copy and paste that whole list into Evernote, then start deleting the descriptions and the ones that aren’t relevant. You’ll likely wind up with a list of twenty or so items that really match your life.

Once you have this list in place, whenever you come upon a nice little frugal project, just add it to your list. If you’re reading an article on The Simple Dollar and think to yourself, “That’s a good little idea,” just stick it on your frugality list and it’ll eventually come up.

When You Have Downtime, Turn to the List

Whenever you find yourself with a free moment, just fire up that list and look at the top item on the list. Is it something that makes sense right now? Do you have what you need to pull this off?

If this is something you can handle right now, do the task immediately. Maybe it’s something like making a batch of homemade laundry soap, which will take about ten minutes or so. Maybe it’s something longer, like air sealing a window. Maybe it’s something shorter, like making a batch of cold brew coffee.

Whatever the task is, do that task, then either delete that task (if it’s something you can just do once or can’t do again) or move that task to the bottom of the list.

If the task isn’t something you can handle right now, do whatever you need to do to make it possible to do that task the next time it comes up, then move that task to the bottom of the list.

For example, let’s say “make homemade laundry soap” comes up and you find yourself without borax. You just add borax to your grocery list, then move “make homemade laundry soap” down to the bottom of the list.

If a really big task comes up, like a “meal prep day,” schedule it. Pick an upcoming day where you could devote a few hours to that task and literally put it on your calendar. In the current moment, take care of any prep tasks that might need to be done to pull it off, such as putting together a plan and a grocery list for the meal prep day.

Just keep repeating this, over and over, as long as you have time to devote to these tasks. Whenever you find yourself out of time, just set the list aside for the moment and come back to it during your next window of free time.

In all honesty, this isn’t all that different than how I handle my own freelancing work, except that I devote several hours a day to it. I have an ongoing list of things to work on – article drafts, brainstorming, and so on – and I work on that list in time chunks that flex around other things in my life, like getting my kids ready for school or greeting them at the end of their school day.

Final Thoughts

This simple little strategy – creating a “frugality list” and processing it during your free time – makes time devoted to frugality very, very effective. If you’re selective about the tasks that you add to the list, it can be pretty lucrative, too. Just make sure that the things that you’re adding are tasks that produce a lot of value compared to the effort – things like airing up your car tires or air-sealing your window or doing a meal prep day. Those things are big wins and can save you much more than $10 per hour of effort. That way, whenever you process the list, you know you’re getting good value for your time.

Good luck!

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Thursday, December 28, 2017

Avoiding the Trap of Financially Dependent Children

Over the past few weeks, I’ve had a number of conversations with parents of adult children, both independent and dependent. Since my own children are growing older, I wanted to know about their experience helping their children get ready for independence and also making sure that when they make that leap, they don’t eventually circle back into dependence.

Before we get too far down that road, let’s talk specifically about what I mean.

A financially independent child is one that does not demand any sort of financial upkeep. You may choose to give that child irregular gifts, but doing so is very secondary to securing your own financial situation and your own financial future. It is possible for financially independent children to live with their parents in a situation where those children are contributing in full financial equality to the expenses of the household.

A financially dependent child is one that does require some sort of financial upkeep. This may be a child that lives outside of the home but requires some sort of regular contribution of money to maintain their lifestyle. This also includes children that live at home with their parents without contributing equally to the expenses of the household.

Obviously, there are degrees of financial dependence, but our goal is to raise three fully financially independent children.

What’s bad about financial dependence, though?

First, it’s a persistent financial drain on the parents. Such a drain prevents the parents from adequately saving for retirement and directly extends their working life. It also reduces the likelihood that they’ll be able to care for themselves financially in their later years.

Second, much like training wheels on a bike, it does nothing to teach children how to survive on their own. Living a truly independent life is a powerful step, one that everyone eventually has to take. Financial dependence prolongs the lesson and often makes it harder to learn.

Finally, it alters the parent-adult child relationship into one of dependence. As long as a child remains dependent on the parent, that relationship is never allowed to mature into one of equals, a state that’s beneficial for both parties.

Financial dependence seriously hurts the parents and, surprisingly, hurts the child as well.

So, how do you avoid having dependent children? Here are the five strategies that seemed to come up most often in my conversations.

Strategy #1 – Ask the Big Question Frequently

The big question is “is this choice really moving my child toward financial independence?” You should be asking this about almost everything you do with your child, starting at a young age, but particularly when they reach high school age.

If you’re doing something that your child should be doing for himself or herself, is that choice moving your child toward financial independence? Rather than investing time and effort in doing their laundry, you should put that time and effort into teaching them to do that laundry for themselves.

If you’re giving your child spending money without requiring something in exchange for it, is that choice moving your child toward financial independence? Rather than handing your child $20 to buy something or letting them just toss it in your cart, make that money exchange dependent on chores or other personal efforts.

If you’re allowing your children to make life choices without considering the financial impact at all, is that choice moving your child toward financial independence? If you’re just paying for all kinds of extracurricular activities without your child considering that they all cost substantial money, you might want to reconsider that and use it as a teachable moment.

If you’re subscribing your child to an affluent lifestyle without commensurate responsibilities, is that choice moving your child toward financial independence? Consider whether your child really deserves luxury items without putting in at least some effort to earn them, whether it’s in the form of chores at home or effort in the community.

If you find yourself bucking back against those questions, are you actually reflecting on whether or not you’re helping your child reach financial independence or just resisting self-criticism without really thinking about it?

Start using that question as a filter for all of your parenting decisions, even at an early age, but particularly as they grow older. That question will nudge you toward more independence for your child and an expectation that they earn things rather than having things given to them, both of which are key lessons. It will also nudge you toward having them learn and practice basic life skills.

Strategy #2 – Offer Non-Financial Help

One of the best descriptions I’ve ever seen of what a good parent-child relationship can evolve into is mentor-mentee. A parent of an independent adult in a healthy relationship actually ends up functioning like a mentor, providing good life advice and insight and perhaps non-financial help on occasion, but not providing direct financial aid.

As your child grows, you should be already nudging yourself toward this type of role in your child’s life. As much as it can hurt, your child actually needs you less and less as they grow up, and you should strive to recalibrate your role as they grow, sliding away from the heavily hands-on parenting style that you had when they were very young to something closer to the mentor-mentee relationship that really clicks when your child is an adult.

How do you do that? The biggest tip I have is to start choosing to offer more advice and less direct aid as they grow. When they reach an age where they can earn money for themselves, roll back the money you’re giving them. When they struggle, choose to offer meaningful advice and help them to build a game plan to solve things for themselves rather than directly intervening. Start to have them make choices between things that they want or expect rather than just handing them everything, and over time dial it back more and more.

In other words, even when they’re still in high school, you should be dialing back your financial efforts for them and dialing up your mentor efforts. Don’t solve their conundrums by spending money or giving them things. Let them start to learn how to deal with unrequited desires and how to balance a relatively small amount of resources.

Not only does this type of support help your child develop independent skills while they’re still in the home, it also prepares them for a solid non-financial relationship in adulthood. In short, use their teen years as an opportunity for them to walk the tightrope with a bit of a safety net, rather than as an extended adolescence.

Strategy #3 – Communicate Expectations Clearly, Early, and Often

You should communicate to your children as early as possible and as clearly as possible what it is that you expect from them once they’re out of school, and it should be a conversation that’s repeated regularly. What is that relationship going to be like? What help are you willing to provide as your child get his or her feet on the ground? What are the restrictions? When will that help end?

This conversation needs to be extremely clear to your child and it needs to happen starting at an early age and repeated regularly as they grow up and begin to move on. There should be no question as to what will happen once they leave secondary school, and they should not leave school with some artificially inflated expectations.

What should be communicated?

Be clear about how much of their postsecondary education you’ll pay for. Will you help them pay for books? Tuition? Room and board? Will you co-sign on student loans?

Be clear about what support you will offer once they graduate and enter the job market. Can they live with you? Under what terms? Will you offer any financial assistance if they’re not working? (Hint: the answers here should be pretty easy and straightforward.)

Be clear about how you will help. Make it clear that you will always be there for advice and assistance, and that you will help if they’re willing to help themselves, too.

Although my parents were actually very good at the other parts of this list, this is the one area where I would do things differently with my own children. My parents weren’t clear to me about how much they would help with college or with my after-college life. I grew up under the impression that if I did well enough academically to go to college, they would make sure that I could go, a belief that turned out to not quite be true. This was mostly due to a lack of clear conversation, and knowing this would have altered a number of my choices. I did manage to earn scholarships that helped, but there was a period where postsecondary education was very much in doubt for me.

Clarity is king. Have clear conversations with your children as early as possible about what you will pay for when it comes to their education and what kind of support you will offer afterwards. Stick to that policy through thick and thin.

Strategy #4 – Establish That Any Adult Assistance Requires Action to Receive Help

Most parents feel uncomfortable with mandating independence from their child because they envision nightmarish scenarios in which the child is homeless or destitute and they can’t bear the thought of allowing their child to have to suffer in that way. Compounding the problem is the fact that conversations like these can end up with the child feeling as though their parents would not help them at the lowest point in their lives, which is rarely true.

Instead, make it clear to your children that you will help them if they are willing to help themselves. They can live with you if they demonstrate active effort toward finding a job or, in the case of a first job, they’re actively saving money toward an independent life. They can live with you if they’re dealing with an exceptional life crisis but are taking steps to move past it. If they are willing to climb up to the tightrope and give it a try, you’re willing to help, too.

This ties heavily into the communication strategy discussed above. Communication is vital, whether it’s making your expectations clear, articulating the advantages of independence, serving as a mentor for their difficult moments, or establishing that you will help them in times of true trial. The more you communicate – and the more you discuss the difficult questions – the clearer things will be for all involved.

The challenge is realizing that enabling is not helping. If you’re providing help that they’re just using to repeat the same mistakes and not actually work toward helping themselves, then you stop helping until they show that they’re willing to work for positive change in their lives.

As hard as it is, you need to not offer help if they’re not willing to help themselves. Otherwise, you’re just enabling a rapid self-destruction or a state where there’s no incentive to become independent. There’s nothing wrong with helping your child along a path to success as long as they’re trying to get there themselves.

Communicate this. Make it clear from an early age that you’re willing to help them if they’re willing to help themselves, and that their steps must be in a direction toward full successful independence.

Strategy #5 – Teach Independent Life Skills as Early as Possible

This final strategy points directly to me, as the parent of a preteen, another child that’s close to that age, and a slightly younger third child. If you want your child to be independent, start teaching them independent life skills as soon as you can.

Make them do dishes. Make them do the laundry. Make them clean up after themselves. Make them get the mail. Make them mow the lawn. Make them prepare meals. Make them keep an organized planner for school and activities. Make them budget their money and plan ahead for expenditures.

The point isn’t to simply work them, but to have them do things that adults typically do while they’ve got the safety net of their parents to help them handle their inevitable mistakes. That way, when they’re actually old enough to go out on their own, they’re equipped with the needed skills.

This does involve quite a bit of work – more work than just doing those tasks yourself. However, every task that they master on their own is one step in the direction of living with full independence from you. Not only will they feel much better about that particular skill, they’ll feel more confident overall about becoming fully independent.

A big part of this is to introduce these tasks properly, because they’ll often be met with resistance. Treat them as a step toward independence, not as a chore to be done. I’ve already found success with this approach with my own children. I simply reiterate the advantages of independence along with some of the responsibilities it entails, and then talk about their own growing independence and how it comes with some responsibilities. Their own nascent sense of teenage independence thrives on this kind of talk and thus far they’re relishing the tasks. This doesn’t mean that all children will thrive in this regard, but it’s working well for our children as we slowly teach them life skills.

Final Thoughts

Financially dependent children are an enormous financial drain on adults right at the time in their life when they should be focused on saving for their own future. Dependence is also an enormous emotional drain, both on the parents and on the child.

Parents owe it to themselves and to their child to find ways to encourage their child’s financial and personal independence. Parents need it in order to secure their own financial future and healthy retirement, while children need it in order to secure their own place in the world.

It’s not easy, however. The emotional bond between parent and child can make it very difficult to give a child the push out the door that is sometimes needed.

There are several approaches that work well in making this happen, the biggest of which is communication. Talk about this matter. Make it clear what’s expected, what you will do, and what you won’t do. At the same time, encourage as much independence as possible and teach your children life skills so that they’re ready to make it on their own.

This isn’t going to be easy, but if you eventually want to grow your relationship into a strong bond between adults with perhaps a bit of loving mentorship, then follow these strategies. They will help cement the kind of future you want for your children and you need for yourself.

Good luck!

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Wednesday, December 27, 2017

New Year’s Money Resolutions: Make Sure Your Homeowners Insurance Is Up to Date

The recent wildfires that devastated many U.S. communities illustrated the need for homeowners to make sure their insurance policies provide adequate coverage to repair or replace a disaster-damaged dwelling.

Too often, people buy a homeowners policy and then forget about it, never bothering to see if the payout amount has kept pace with construction costs, said Charlie Porter, an insurance agent in Menlo Park, Calif. “It’s something people generally don’t think about,” he said. “They think, ‘I have coverage, so I’m good.’ That is not true.”

In 2009, the California-based United Policyholders consumer group surveyed people who had been through wildfires that burned half a million acres and destroyed more than 1,500 homes in Southern California during 2007. About 70% of respondents said they were underinsured.

Don’t expect to be bailed out.

If your policy doesn’t provide enough coverage to fully restore your dwelling, you can’t count on assistance from the federal government. That’s because an increasing number of natural disasters has challenged the ability of the Federal Emergency Management Association to keep pace with the need.

If you’re left holding a large home repair bill, you won’t be able to convince your insurance company to bridge your coverage gap. It’s your legal responsibility to make sure your homeowners policy is adequate.

Sean Scott, a fire restoration contractor and the author of The Red Guide to Recovery, recommends having two contractors estimate what it would cost to rebuild your home before you choose a policy amount.

“I would also ask for an estimate of what building code upgrades might be required, along with an amount for debris removal and demolition,” Scott said. “Having this information will give you the ability to tell your agent how much coverage you want instead of the agent using some generic cost-per-square-foot formula that often leaves people underinsured.”

Don’t buy too much coverage, either.

While people tend to underinsure, it’s possible for people to buy too much homeowner coverage. Some consumers mistakenly assume that they should be covered for an amount equal to their home’s value on the real estate market. What they don’t realize is that the land the home rests on won’t need to be replaced after a fire. Your goal should be to have enough money to repair or your dwelling, not purchase another home.

To make sure your homeowners policy remains adequate over time, it’s a good idea to monitor construction costs periodically. Although building costs are more stable than home prices, they can fluctuate, based on the price of labor and materials. It’s a good idea to consult a local builder or restoration expert.

Find out what your possessions are worth.

It’s useful to know how much it would cost to repair or rebuild your home, but don’t forget about what’s inside it. In order to get a handle on what your stuff is worth, create a home inventory that includes items of value in every room. Write down approximately what each item cost. (A photo of each room – and its contents – is a good way to document these belongings for insurance claims. Keep digital copies somewhere you can access them away from home, such as a cloud storage service.)

A home inventory will come in handy if you ever need to file a fire insurance claim, said the Rocky Mountain Insurance Information Association. If you have valuables, such as artwork or jewelry, ask your agent about your need for an insurance rider to protect items whose value may exceed the limits offered by a standard homeowners policy.

Understand how policies work – and whom they’re protecting.

Standard homeowners insurance policies generally cover the replacement cost of your home and the actual cash value of your personal property. To determine actual cash value, adjusters factor in depreciation: A computer you bought for $1,200 five years ago may only be worth $600 now.

If you buy a full replacement policy, it will provide enough money to replace damaged possessions with ones of similar quality, without factoring in depreciation.

The Insurance Information Institute (III) says the price of replacement cost coverage for homeowners is about 10% higher than actual cash value, but it’s generally is worth the investment.

Finally, remember that if you have a mortgage on your home, your lender will usually require you to buy a homeowners policy — but you can’t rely on lending institutions to make sure your policy covers the full cost of repairing your home. Lenders generally require borrowers to carry only enough insurance to cover the amount of the outstanding loan.

Time for an annual insurance check-up.

The III recommends that at least once a year you make sure you have enough insurance to cover your dwelling and the possessions within it. It’s also important to keep your policy up to date after you’ve made renovations to your home, said J.R. Duren, a personal finance expert at

“If you’ve updated your kitchen and that update increased the value of your home, then get a new homeowners insurance quote that reflects that increase in value,” Duren said.

In the end, you can’t rely on anyone else to tell you how much homeowners insurance you should buy. The amount you need is a moving target that can change from year to year. It’s up to you to determine what your comfort level is and to keep your policy updated.

Related Articles: 

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Tuesday, December 26, 2017

More Than Just Wrapping Paper: How Post-Holiday Clearances Can Slash Your Budget All Year Long

Today is that special time of the holiday season: the beginning of deep discounts on all the stuff that’s red, green, or gift-oriented. Everything must go! (If only to make room for Valentine’s Day items.)

Every year a lot of holiday stuff goes unsold, and the stores don’t want to hold on to it. Turn the retailers’ loss into your gain by stocking up not just on cards and wrapping paper, but also on other things you’ll use for the next 365 days.

Think it’s all dented dolls and tired tinsel? Some of it might be. But if you pick your spots, you can stretch your giving and household budgets further than you ever dreamed.

The following tactics can help. Although the stores will be crowded, the savings can be worth it.

Buy some clothes.

Clearance prices will be available on both holiday-oriented and everyday winter fashions. (I know a woman who paid less than $4 for a dress in order to get its belt, since a new belt would have cost much more.)

If you have kids, buy clothes at least one size up, for next year. The longer you wait, the steeper the price drop – and the younger the child, the less the motif matters. Your five-year-old might think it’s awesome to wear a Jack Skellington sweatshirt in early March.

Buy next year’s holiday gifts.

Some people do the whole next year’s worth* of shopping on Dec. 26. That’s dedicated frugality.

And if that’s you, congratulations. Personally, I suggest looking for a few presents, as opposed to stressing out about it: I can’t go home yet – I still have people to buy for! Do what you can, rather than setting yourself up to fail.

But if you’re in the zone, then stay there and buy as much as is practical – of 2018 gifts and/or one or more of the categories below.

*During conversations about holiday preparations, you may encounter someone who did all her buying at the after-Christmas clearance the previous year. It took only a couple of hours and she paid an average of 47 cents per gift. Or so she says, somewhat loudly and smugly. Don’t be that person. She’s really annoying.

Get birthday gifts.

If you’ve got kids, assume they’ll be invited to parties in the year to come. Have games, stuffed animals, books, art kits, and such on hand, and you won’t have to make extra trips. Bonus: You paid rock-bottom prices.

Got nieces, nephews, or godchildren (official or honorary)? Buy toys for their natal day celebrations, too. If they were born in January, hit the calendar kiosk for a useful and potentially beautiful gift.

(Well, beautiful if they like horses or puppies. Those with odd senses of humor or nerdy tastes might be happier with Emily The Strange or “Star Trek” calendars.)

Stock an evergreen gift closet.

As noted above, parents who have toys on hand are ready for the inevitable birthday party invites. But grownups have birthdays, too, so look for items like hat-and-scarf sets, picture frames, books, and accessories.

Treat yourself.

High-end skin care kits and gift sets are deeply discounted after the holidays, according to Helene Massicotte of

“It’s a low-risk way to try new products and save significant money per ounce,” she says. “And just a few kits can last you for months.”

Foodie baskets and spa packages are all over the stores until Dec. 25 – after which retailers can’t get rid of them fast enough. At half-price or less, treat yourself to something tasty or luxurious. Or you could…

Treat someone else.

Food and spa packages make nice gifts for others, too. Your first-time-mom sister might love to plan a long, hot soak with frou-frou scents and fancy lotions to follow. If you live nearby, offer to sit with the baby while she locks herself into the bathroom for her first alone-time since parturition.

Remember, too that Valentine’s Day is right around the corner. That basket of barbecue items or set of sybaritic potions might be perfect for Feb. 14.

Bonus: These things are experiences, not stuff, and will eventually get used up vs. becoming clutter.

Stock your household.

Sheets, blankets and throws. Candles. Bakeware. Dishes. Table linens. Towels for kitchen and bath.

Paper plates and cups can become part of your emergency kit. Or use them at your next party or barbecue. Teresa Mears of Living on the Cheap says great January deals on red and green products work fine for informal parties the rest of the year, as long as you don’t use them together.

Storage containers, sometimes marketed as “ornament storage bins,” are deeply discounted after Christmas. Doesn’t matter if they’re red or green, or printed with wreaths – they’ll be stuck in the attic or the crawlspace where nobody sees them.

Stock your pantry.

Holiday-printed paper towels, napkins, and storage bags and containers will be available at half-price or less.

Ditto certain baking supplies and food items, so check supermarket clearance bins for things like fancy coffee and tea, chopped dates and pecans, holiday cereal (yep, that’s a thing), eggnog-flavored pudding mix (not making this up), canned pumpkin, cranberry sauce, and black-eyed peas.

Even everyday products like coffee may be deeply discounted if it’s in holiday-themed packaging. And guess what, “Christmas blend” coffee tastes just fine in January.

(Pro tip: Add another layer of savings by using manufacturer coupons from sites like Coupon Mom and Coupon Sherpa.)

Don’t forget the drugstore.

Head for the “seasonal merchandise” aisles, advises Stephanie Nelson of Coupon Mom. You’ll see discounts of at least 50% the first few days, quickly followed by price cuts of 75% to as much as 90%.

Toys, gadgets, clothing items, and even small appliances will be remaindered. One year Nelson picked up a $40 blender for 75% off – and then sent in a $10 mail-in rebate attached to the box. “So my blender was actually free,” she says.

(Don’t need a free blender, or a free whatever? You could give it as a gift, sell it on Craigslist or donate it to charity.)

Linsey Knerl, who blogs at 1099 Mom, has five sons who use Old Spice body wash, deodorant, and other products. Last year she saved 75% on more than a dozen Old Spice gift sets. “I’m happy to go back again this year to stock up,” says Knerl, whose family owns a small farm in Nebraska.

Stockpile holiday supplies.

Wrapping paper, gift bags, and ribbon. Ornaments, strings of lights, wreaths, and trees. Holiday cards. If you have a place to store even a few such items, pick them up at a discount and next year’s celebration will be noticeably cheaper.

Stockpile holiday craft supplies.

Do you make your own décor or gifts? Buy the raw materials now, when everything’s being remaindered. Those snowman candy molds will cost lots more next November.

Look for open boxes.

Starting today, people will clog the stores to return gifts that didn’t work out. This, too, can work in your favor.

According to Erin Huffstetler, frugal expert for The Balance, some “open-box” electronics and other returned items can no longer be sold at full retail.

“One man’s Christmas return could become your next big bargain,” she says.

More tips from the pros:

  • Do a major inventory of what you have, and write down what you need. Pay attention to that list.
  • Well, most of the time: If a deal is just too good to pass up, get it. That $10-but-actually-free blender is a good example.
  • Get there early, because the good stuff might go quickly. But if you can, revisit the stores in early January. Those 90%-off sales should start kicking in by then.
  • If you’re apt to overbuy, bring only as much cash as you can afford to spend, and leave the plastic at home.
  • Know what things usually cost. If something was marked way up in anticipation of the holiday, then half-off still isn’t that great a deal.
  • As always, if you don’t need or can’t use it, then it’s not a good deal.

Related Articles:

Veteran personal finance writer Donna Freedman is the author of “Your Playbook for Tough Times: Living Large on Small Change, for the Short Term or the Long Haul” and “Your Playbook for Tough Times, Vol. 2: Needs AND Wants Edition.”

The post More Than Just Wrapping Paper: How Post-Holiday Clearances Can Slash Your Budget All Year Long appeared first on The Simple Dollar.

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Monday, December 25, 2017

Saturday, December 23, 2017

Situations Change. Principles Don’t.

In 1987, I was a child in upper elementary school. Believe it or not, I still have some journal entries from that year, the writings of an overly curious little boy that I think would fit right in with my own children. My best friend in the world was about to move far away and there was no interest; believe it or not, I managed to get back in touch with him in the last few years and we actually have quite a lot in common, though we live fairly far away from one another.

In 1997, I was a college freshman. I knew my wife-to-be, but wasn’t dating her or romantically interested in her. Most evenings, I read books or played video or computer games. My closest friends in the world lived on my dorm floor; one of them still remains my best friend (besides my wife), while I am still in touch with the other.

In 2007, my wife and I lived in a tiny apartment. I worked in a research lab doing data mining. We had one child, a toddler. We watched television together most evenings. My wife’s closest friend (who we’ll call Bee) used to come over regularly for wine tastings. My closest friend came over about once a month or so and I felt that friendship slipping away, at least in part because my friend wasn’t really sure what to do around infants; it would recover.

In 2017, my wife and I live in a nice mid-sized family home. I am a full time writer working at home. We have three children, and that toddler is now a pre-teen. We usually sit in the living room together most evenings, while we both either get some work done or read while cuddled up together. My wife’s closest friend now lives across the street from us; we haven’t seen Bee in several years. My closest friend is still the same person, but now I see him at least weekly – I worked to renew that friendship.

Lots of details changed, but most of the principles I live by stayed the same.

Spend less than you earn and do something financially productive with the difference. I picked this one up in the mid 2000s.

Unless there is a clear long term benefit to buying something, don’t buy it – figure out another way to achieve whatever you want to be doing. Again, I picked this one up in the mid 2000s.

If you must carry debt, make sure it’s low interest debt. I also picked this one up in the mid 2000s.

Having money in a savings account will help you in all kinds of emergencies. I’ve known this since I’ve had money.

Put aside focused time for your most valuable relationships, the ones you couldn’t live without but can easily take for granted. I’ve done this since I was a kid.

Treat others as you would like to be treated. I’ve also done this since I was a kid.

Treat wasted time as lost money or lost meaningful experiences. This was taught to me by my first real adult mentor, who showed me again and again how true it was.

Be the person you want to be around. I figured this out in high school and have stuck with it ever since.

Ask questions if you don’t understand, as it’s better to admit ignorance and grow over time than to feign knowledge and lose the respect of others. Again, this was another one taught to me by my mentor.

Most people don’t realize that they’re being cruel and don’t intend to do so, so don’t take minor slights personally. My college pastor taught me this one.

Take some time each day to appreciate all that you have and what other people have done for you. I figured this one out in my early professional years.

You can feel an emotion inside of you without having to display it. I spent a few years reading a ton of philosophy and this was perhaps the most valuable thing I picked up.

Laugh at yourself. I’ve known this one since I was very, very young.

I could list quite a few of these, but they give you a clear idea of what I’m talking about.

Those are principles that I live by. I don’t just say them; I try to do them, to the best of my ability. The vast majority of the time, I succeed; if I fail, I try hard to figure out why.

As much as my life has changed over the years, most of these principles have stuck with me through those changes. I didn’t always have all of them – many were taught by my parents or by my earliest teachers, while others came from my mentors or from things that I read and learned – but once they stuck, they stuck.

The thing is, collectively, choosing to live by these principles has helped me handle almost everything that has come up in my life, from the biggest life-changing things to the little pleasures and annoyances. It’s not just about saying those principles, but how they guide you toward how you should act and how you should react to things.

To put it simply, when you stick to principles, you usually get through situations with a reasonably good outcome; it’s when you abandon them that things go haywire. This is really easy to illustrate with personal finance principles, so let’s walk through a few.

Principles In Practice

Spend less than you earn and do something financially sensible with the remainder. If you stick with that principle month in and month out, year in and year out, you’ll find that your financial problems melt away. Your debt disappears. You start saving for big goals in life, like retirement.

If you abandon that principle, even some of the time, a much worse outcome occurs. Sure, you get to splurge in some way in the short term, but the debt persists. You’re unable to actually build a stable financial foundation.

Unless there is a clear long term benefit to buying something, don’t immediately buy it – figure out another way to achieve whatever you want to be doing. My tactic for achieving this principle is to live by the thirty day rule – if I’m tempted to buy something nonessential, I wait for thirty days before doing so. If I still want it at that point, then I budget for it.

This goes down even to very little things, like buying a morning coffee at the coffee shop. I’ll do so if there’s a clear long term benefit, like if I’m meeting someone at the coffee shop to discuss a business relationship, but if that extra reason doesn’t exist, I look for a less expensive way to have that item or wait for at least a month. My long-term solution for a morning coffee is to simply make my own cold brew at home, which basically means I soak coffee grounds in cold water for 20 hours or so. It’s about as inexpensive as coffee can get and the resulting beverage is delicious. It’s literally my favorite way to enjoy coffee.

The funny thing is, if I didn’t follow this principle of trying to find a better and more cost-effective way of doing things, I likely would have never discovered my preferred way of making coffee. I would have stuck with “good enough” – overpriced coffee at the coffee shop. By trying to find something that had a better balance of “great coffee” and “low price,” I found a better solution both in terms of quality and money.

That phenomenon repeats itself over and over in all kinds of buying situations, and I would never discover those things if I didn’t stick to this principle.

If you must carry debt, make sure it’s low interest debt. The best route is not to carry debt at all, but if you must carry debt, try to make that interest as low as possible through debt consolidation or balance transfers.

The thing is, if you truly live by spending less than you earn, debt should eventually be a pretty rare thing in your life. You might end up with a small amount in an emergency situation, for instance, but that’s to alleviate a very short term problem.

The only time where this should be relevant is if you’re just starting to discover financial principles in your life and are just getting used to them. You’re probably holding debts from earlier poor choices, and thus if you apply this principle, you’ll know that you should do all you can to consolidate them down into lower interest debts when possible.

Having money in a savings account will help you in all kinds of emergencies. I implement this principle by automatically transferring a small amount each week from checking to an emergency savings account. I never turn off that transfer. That way, if an emergency occurs that would blow apart my budget – say, an appliance breaks, for example – then I know I can just tap that savings account.

Plus, I look at that account like this: if I’m truly spending less than I earn and am not accumulating debt and that account has a positive balance, then I know I’m spending less than I earn over the long haul.

An emergency fund bails you out time and time again. It keeps big unexpected expenses off of credit cards, where they are likely to start accumulating interest that you’re going to have to pay back. An emergency fund makes that a non-issue – you handle the emergency via credit card, then pay it off in full as soon as you’re able, or else transfer the money into checking and pay by check. No debt, no muss, no fuss.

These principles remain the same and continue to work even as my life changes.

Principles Stay True

Spend less than you earn and do something financially sensible with the remainder. Ten years ago, that “financially sensible” thing was paying off debt. At that time, our only real debt was a house mortgage, but we were committed to paying it off quickly using what remained after retirement contributions and building an emergency fund.

We spent less than we earned – a lot less – and because of that, we had the money to make double and triple mortgage payments and fund retirement and fund an emergency fund, all while only making roughly the average American household income.

Today, we still spend less than we earn, but the remainder is dumped into saving for retirement and also saving for an eventual land purchase in the country. The same exact principle still applies, though. We’re spending less than we earn and doing something financially sensible with the remainder.

What will we do in the future? We plan on sticking to this until we’re able to retire and live off of what we’ve saved, but even then, we’ll both probably still earn at least some income. I want to write a series of novels that I’ve been outlining and modifying for most of my adult life. I expect that we’ll still earn some income, but without the day to day pressure of deadlines, and that’ll still all add up to spending less than we earn.

Unless there is a clear long term benefit to buying something, don’t immediately buy it – figure out another way to achieve whatever you want to be doing. Ten years ago, our action on this principle involved figuring out how to take care of infants and toddlers without breaking the bank. We were figuring out how much more cost effective cloth diapering was rather than buying acres of disposables, for example, and how much value one can get out of a good breast pump.

Today, one of our big foci is on the long term value of education. What extracurriculars are our children getting a lot of value out of? What about educational opportunities for myself and Sarah? What actually provides value? We’ve learned that too many extracurriculars have a diminishing return in terms of actually building character and excellence, but having none isn’t good either – a balance of a quality activity or two and unstructured free time to explore interests seems to be the right balance for growth and for finances.

Ten years ago, we were learning the value of preparing meals at home. This year, I used this principle to find a better way of making good low-cost coffee. Ten years ago, I used this principle to start figuring out how to save a ton of money on laundry by making my own laundry soap. This year, we dug deep into make-ahead meals, putting tons of them in the freezer instead of buying ready-made ones or buying takeout.

Over and over again, this principle comes through for us. What is the clear long term benefit of this purchase over a lower-cost alternative? We’ve asked that of our purchases for a very long time, and we keep asking it, because sometimes even better answers reveal themselves.

If you must carry debt, make sure it’s low interest debt. Back then, our goal was to eliminate our remaining debt. We spent much of 2006 and 2007 paying down debt, setting ourselves up to buy a home, and then hammering at that mortgage debt.

Today, our goal is to avoid debt. We’ve considered many of the big expenses that we have coming up – replacing one car, then replacing the other a year or two later – and already have saved for those costs.

If we have to carry debt for some reason, a low interest car loan is preferable to high interest credit card debt, so if we absolutely had to, we could tap our car savings if the other option was to throw things on a credit card. We’d rather avoid both.

Having money in a savings account will help you in all kinds of emergencies. Ten years ago, I added to our emergency fund manually and, over and over again, I found that we were happy to have that money. We had a major unexpected trip for a funeral. We had several unplanned expenses for our house. Our emergency fund handled all of those things.

Now? We have a very healthy emergency fund that’s funded automatically with a small checking account transfer each week. We have had a couple of emergencies in 2017 that were big enough to tap it, but nothing that really drained the account in any significant way.

Still, simply having that emergency fund is a huge relief. It reflects the fact that a pretty stiff crisis can hit our life and we can roll right through it without skipping a beat. This principle saves us cash, but it also saves us some significant headaches and some stress along the way, too.

Finding Your Principles

In this article, I’ve mostly hammered home how a handful of key financial principles go a long way toward governing a lot of our financial decisions, from what we buy to how we invest. Even as the tides of life change, we continue to live by those core principles and they continue to guide us in the right direction.

They’ve worked through the arrival of children. They’ve worked through life-altering illnesses. They’ve worked through career changes. They’ve worked through personal crises. They worked when I was a young adult, and they work as I approach middle age.

Why? When principles really make sense, when they make objective sense and align with your values, they work in lots and lots of settings and situations. You can rely on them to guide you through whatever you might be facing in the moment.

How do you find these principles? Honestly, it takes a while, but here’s what I’ve found to be true.

First, focus on things you care about that you aren’t sure that you’re handling well. Money, obviously, is one, but so are social situations, your career, your social network, and so on.

Second, think about the outcomes of those situations that would make everyone involved happy, not just you. It’s easiest to visualize a great outcome for yourself, but the true best outcomes are the ones where everyone involved sees a nice net benefit. Think of a good friendship – it doesn’t just run one way.

Third, look for trusted advice on how to get to those awesome outcomes. How do you build a good social network? How do you build financial independence? What exactly do you do? Seek out trusted advice on the process involved, either from people in your life that you trust or other resources that have built your trust over time. Seek out their key steps for getting to that desired outcome.

Fourth, adopt the things that all of those pieces of advice have in common that also feel right to you. A truly good piece of advice feels right because it resonates with your internal values. A piece of advice that both feels right and is agreed upon as a step to getting the great outcomes you want is probably going to become a principle.

Finally, apply that nascent principle over and over until it feels natural and you really understand it. For a while, you’ll probably have to remind yourself of this principle. One good way to do that is to keep the principles you’re working on front and center in your mind as you’re building them. Make it the lock screen on your phone or the home page on your browser. Put it on a Post-It note on your rear view mirror. Make it a four times daily reminder on your phone. Keep thinking about it and applying it and thinking about it more and applying it more until it starts to feel completely natural. That usually takes a while – three or four months – but when it does feel natural and you do it without even thinking about it, that’s when you’re living by principles. Then, repeat the process with new principles.

Discovering good principles is easy. Ingraining them into your heart and into your behavior is hard. It takes time. However, when you do finally build them and you do live by them, it makes life so much easier and so much better. Your natural course of action not only lifts you up, it lifts everyone around you. Not only that, you feel prepared to handle almost anything life hands to you. That’s a great place to be in.

Your homework? Pick a part of your life that you really want to improve. Imagine the kinds of outcomes you want in that part of your life, ones where everyone involved wins. Figure out how to get from the way you do things now to a state where those outcomes happen often – figure it out by talking to mentors and reading good advice. Figure out the one or two or three key principles that pop up again and again and just feel right. Practice those principles and keep them front and center in your mind until living by that principle feels natural. Doing so gives you a bedrock to live by, making things like being financially responsible feel like a completely natural behavior.

Good luck!

The post Situations Change. Principles Don’t. appeared first on The Simple Dollar.

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Friday, December 22, 2017

Eight Reasons to Ignore the Bitcoin Craze

If you’ve never heard of Bitcoin, here’s a serious question: Where in the heck have you been?

The digital cryptocurrency known as Bitcoin has been a hot talking point for months, mostly because it surged in value from several hundred dollars to more than $17,000 in a matter of months in 2017.

Imagine if you purchased five Bitcoin last December when each theoretical “coin” was worth around $766. If you held your $3,830 investment until Bitcoin surged over $16,000 early this December, you’d have turned your investment into $80,000. Not bad, huh?

But if, like most people, you didn’t buy Bitcoin? At this point, you might have a serious case of FOMO – or “fear of missing out.” Whether or not you had the cash to invest in Bitcoin when you first heard about it, you might have a serious case of regret.

While it’s easy to understand why you might feel like you missed out on something big, here’s the good news: A lot – and I mean a lot – of financial advisors and economists are suggesting we all ignore the entire Bitcoin craze altogether.

And these people are actual financial advisors and economic experts trained in the financial markets and how they work, not your neighbor Doug who invested $500 in Bitcoin and now thinks he’s a genius.

Eight Reasons You Should Ignore Bitcoin Mania

When experts who know a thing or two about financial markets and the economy talk about Bitcoin, we should listen. Here are eight reasons some experts say we should ignore the hype around Bitcoin and other cryptocurrencies – at least for the time being.

#1: Bitcoin is an obvious bubble.

A financial bubble, according to Investopedia, is “an economic cycle characterized by rapid escalation of asset prices followed by a contraction.” Remember that what goes up quickly very often comes crashing right back down, and that could very well include Bitcoin.

Some experts even call Bitcoin an obvious bubble. Recently, Nobel Prize-winning economist Paul Krugman shared his thoughts on Bitcoin with Business Insider. To say that Krugman thinks Bitcoin is a bubble could be the understatement of the year. In fact, Krugman says the Bitcoin bubble is “even more obvious than the housing bubble was.”

But if it’s a bubble, when will it crash? Like everyone else, Krugman doesn’t know. Since Bitcoin isn’t anchored by real estate, stocks, or anything of tangible value, Krugman says we’re waiting for a “Wylie Coyote moment.” At some point, Bitcoin will run off a cliff and look down. Only then will we all realize there’s nothing underneath.

Indiana Financial Advisor Tom Diem says Bitcoin reminds him a lot of Tulip Mania, a historic bubble that took place in the 1600s when tulips were brought to Holland from Turkey and introduced to the Dutch. The local population became so enthralled with the new flower that they started trading the bulbs like mad.

Where tulip bulbs had once cost as much as an onion, they surged to reach the price of an estate. Of course, the whole thing eventually came crashing down, and tulip bulbs were suddenly worth what you might expect to pay for a flower – not a lot.

#2: Bitcoin is mostly driven by FOMO.

While Bitcoin has some advantages as a currency — low fees, easy transfers, anonymity — many investors don’t really know much about it. Krugman says this lack of knowledge is a good thing for now as the price continues to surge. But eventually, we may all find that FOMO is the root cause of the currency’s sudden rise in value.

This is a problem, says financial advisor Anthony Montenegro of The Blackmont Group. Many investors driving the price up are doing so because they’re more scared of missing out on returns than they are of actually losing money, he says.

“They’ve succumbed to the fear of missing out,” he says, adding that you shouldn’t “believe the hype.”

As a financial advisor, Montenegro believes and has always believed that steady plodding brings prosperity and hasty speculation brings poverty. “Plan wisely and invest accordingly,” he says.

And perhaps remember the wise words of Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful.”

#3: Bitcoin isn’t backed by a country.

Financial advisor Michael Solari says one of his biggest worries is the fact that Bitcoin, like other cryptocurrencies, is not tied to a country. Without a national bank backing the currency, what will happen if the market tanks or something goes extremely awry?

Former hedge fund manager Todd Tresidder, who blogs at, also says that, while part of Bitcoin’s appeal is that it operates outside of government control, this is simultaneously disconcerting, because government needs to control currencies if they hope to implement policy.

Tresidder says there’s a real risk the federal government could choose to regulate and control cryptocurrency. “And, it’s not a big stretch to imagine them making all currency not originated from government illegal,” he says. “That would, of course, have a dramatic impact on price through its impact on supply and demand.”

#4: It makes more sense to invest in what you know and understand.

Financial advisor Stephen Rischall of 1080 Financial Group says one of the main reasons he isn’t suggesting his clients invest in Bitcoin is because they, like everyone else, do not understand it.

“If you don’t understand how it works, what it does, and how you can easily get your money back, then you probably should think twice before investing in it,” Rischall says.

Cryptocurrencies are highly speculative and unregulated, notes Rischall. “It’s the wild west of investing, where numerous cases of fraud and hacking thefts are hidden by greed and hyper marketing.”

#5: Bitcoin is extremely volatile.

While Bitcoin prices have surged steadily over the past year, the daily value of this currency has been all over the place. These huge swings can cause off-the-charts emotional reactions that will only be amplified the larger the movement, says financial advisor Brett Romero of SAS Capital Investment Advisory Group.

Imagine if you dove into Bitcoin when its value was at $16,000, then watched as its value plunged beneath $14,000 just a few days later — as it did early on December 22. You’d likely be extremely stressed out, and maybe even sell your investment to thwart off further losses.

Either way, volatility can easily cause us to lose our cool and make rash investment decisions.

#6: Investing in Bitcoin promotes gambling behavior.

Financial advisor and investment analyst Joseph Hogue of My Stock Market Basics says Bitcoin isn’t nearly as big of a problem as the investing behavior it creates. Making a lot of money on a short-term investment always turns into gambling, he says. And when you get accustomed to gambling, it’s hard to invest any other way.

“You’re going to be constantly looking for the next hot stock,” he says. “You might make money on a few but you’ll end up chasing your losers all the way down, throwing more money into them until you’ve given up your profits and then some.”

And let’s not forget that you’ll likely lose thousands to taxes and trading fees along the way. “True investing won’t make you rich overnight, but it will meet your goals if you stick to a long-term strategy,” says Hogue.

#7: Bitcoin is highly concentrated in the hands of a few.

As of earlier this year, just 1,000 people owned 40% of the Bitcoin currency, according to Bloomberg. You can see why this could be problematic. Imagine some of those investors, often called “whales,” decided to capitalize on their gains and sell their Bitcoin all at once. What would happen to the currency?

As the market floods, chances are good Bitcoin prices would drop with a thud, says financial advisor Christopher Clepp. Having so much Bitcoin in the hands of so few makes it “ripe for market manipulation by a relatively small number of people,” he says.

And if these owners decided to coordinate their movements to protect themselves from losses, they could. Since Bitcoin is a currency and not a security (a stock), there’s “no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes,” notes Bloomberg.

#8: Bitcoin may be especially susceptible to hacking and theft.

Because Bitcoin is a digital currency that is mostly unregulated, it may be especially susceptible to hacking. And this is already playing out. In early December of this year, for example, more than $60 million in Bitcoin was stolen through a trading site called, notes CNBC. And apparently, North Korean hackers had stolen upwards of $80 million in Bitcoin as of a few weeks ago.

But Clepp says this may just be the beginning. “The coming wave of quantum computing, which will accelerate greatly in the next two to four years, will render much of the cryptography of bitcoin near useless in preventing hacking and theft,” says Clepp.

In other words, it could all get worse before it gets better. And it may never get better.

The Bottom Line

Instead of racking your brain over how or when to invest in Bitcoin, most financial advisors suggest you focus on real, tangible financial goals. Boosting the amount you’re saving for retirement by a few percentage points, building up your emergency fund, and paying down debt can make a huge difference in your net worth over time, for example.

These tried and true financial moves may not be as exciting as Bitcoin, but they will pay off in the long run.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at

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Did you invest in Bitcoin? Are you planning on it? Please share in the comments below. 

The post Eight Reasons to Ignore the Bitcoin Craze appeared first on The Simple Dollar.

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