Wednesday, January 31, 2018

The “Cash on Hand” Dilemma: How Much Is Too Much?

The idea of having “cash under the mattress” has a lot of appeal to many people. After all, cash is king and having some cash around in a quick pinch can solve a lot of problems.

An older friend of mine used to have a coffee can full of cash that he kept hidden away somewhere in his house. I’m not sure where he kept it, but I saw it produced a time or two and I couldn’t help but notice that it contained a large quantity of cash. He used it to take advantage of opportunities and to take care of things in emergencies.

A professor at the college I attended kept a false bookend in his office. It had a removable bottom and he kept about $1,500 in cash in there in $100 bills – I kid you not. He trusted me enough once to dig into it right in front of me and give me some cash to help me out in a desperate moment, an act that I still appreciate to this day because of the unquestioning generosity behind it. (I was almost completely broke and couldn’t afford the book for his class; I showed up to his first two office hours and he produce a $100 bill for me to buy the class textbook with. That’s just extraordinary generosity.)

Simply having a pool of cash around to tap into at a moment’s notice when a great opportunity appears or when disaster strikes is very worthwhile. Cash is king, after all – it solves problems.

Still, it’s hard to ignore the downside of a practice like this. Cash is untraceable, and once it’s gone, it’s gone. If you lose that cash, it’s gone. If someone steals it from you, it’s gone. If your home or apartment or car is broken into and the cash is taken, it’s gone. If your home or apartment or car burns to the ground, the money is gone.

So, there’s some risk and reward when it comes to holding onto cash. The risk is that risk of losing the money and, theoretically, the small amount of financial gain that might come from investing it elsewhere. The reward is the flexibility and opportunity that comes from having cash on hand at a moment’s notice.

Where’s the tipping point between those factors?

For me, the tipping point is enough cash to make sure my family is fine for three days during a complete natural disaster. I want enough cash to ensure that I can get my family at least 100 miles from home, feed them for three days, and house them for three days and nights. I might tap that cash for other purposes in the heat of the moment, but I replenish back up to that point.

I decided that I wanted to have enough cash available to simply handle this kind of major emergency with no questions asked. I simply produce the cash and we’re on our way.

So, how much money does that represent? I tried to imagine what would happen if there was a giant earthquake along a fault line that knocked out phone and internet and cellular traffic – no cell phones, no credit cards, and lots of destruction and fires. What do I do? I drive away from there and use cash for lodging until services start coming back up.

The exact number, then, depends on personal calculations – where you live, what things cost near your home, and so on.

In my area, and using my own calculations, that amount is $500. I keep that exact amount in cash – 5 $100 bills – hidden away at a point on my property that I can easily access in a pinch if need be.

What about you? What should your amount be? Spend some time assessing the type of emergencies you would want to be able to address with that money and what that emergency would cost you. Everyone has a different scenario that presents worry, so consider what that scenario is for you. What scenario presents you with enough concern that you would want to have cash in your house to cover it, even given the relatively small risk of possibly losing the cash to disaster?

The reality is that the tipping point comes down to your own perception of risk. Cash stored in your home for an emergency is, more than anything else, a tool that will bring peace of mind and help you sleep at night. It presents a solution to a scenario that pops up in your head and presents concern and worry into your life, and by having that solution in hand, that source of concern and worry – and perhaps other concerns and worries – melt away.

Cash stowed away in your home should be a net reliever of stress. If you find that stowed away cash is creating more stress in your life than it alleviates, then you should consider not having that much cash in your home and evaluate different plans for solving those emergencies or taking advantage of those opportunities.

Where exactly does one store that money, though? I would suggest avoiding many of the common places listed online for storing money. Burglars know about those places and will often check the obvious ones. Don’t keep it in a portable safe. Don’t keep it under your mattress or in a sock drawer. Don’t stick the bills between pages of the family bible.

Instead, think of a place in your home that you’ll remember but isn’t immediately visible and wouldn’t likely be targeted in a burglary and put it there. Mundane is usually better than super-creative. A home invader simply does not have the time to investigate every mundane and non-obvious place in your home.

If you’re still not sure, think of a few mundane places in your home, then search Google for places to stash cash in your home and use none of those places. Cross any overlapping places off of your list and use only other ideas that you may have.

Should you bury it? I consider literally burying money in a box or a glass jar to be overkill. While it is extremely unlikely to ever be burgled by someone who doesn’t already know the exact location and it’s unlikely to be damaged in a fire, it does run the risk of being completely forgotten and it takes some time and a digging tool to be able to access that money. This may be a scenario that appeals to you, but I want to have that money in a place that I can access with just a moment or two’s notice without needing any tools to access it.

What about gold or other precious items? The problem with such items is that they’re generally not items that you can directly trade for the goods and services that you want. If you’re in a situation where you’re running down the street with a gold coin hoping to swap it for a loaf of bread or a ride out of town, you’re likely already facing hardships far beyond that which you haven’t anticipated yet. Outside of those extremely rare at best and impossible at worst apocalyptic scenarios, gold and precious metals and rare coins and other such things are strictly worse to have around than cash because you have to find someone who will give you cash in exchange for them and usually at a very bad exchange rate if you’re doing it on the spur of the moment.

Remember, the purpose of having a supply of cash on hand in your home is to have easy access to it as a medium of exchange in an emergency. Items that can’t easily be exchanged in most situations are items that you shouldn’t have on hand.

Small bills or large bills? It’s likely that you already have some change and some small bills – $1s and $5s – in your possession most of the time anyway, so there’s no real need to have an emergency store of them. Plus, the more bills you have stowed away, the more space they take up and thus the easier they are to discover. Stick with larger bills – $20s at a minimum, and preferably larger ones. Yes, you may have some difficulty with change in some narrow situations if you ever have to use it, but having a smaller number of larger bills minimizes the risk of discovery.

What about keeping everything in cash? Some people have deep concerns about the banking system and want to keep all of their money in cash. My response to that is that if the banking system is ever in such complete collapse in the United States that you can no longer access any funds in your accounts and FDIC insurance has failed, there’s an extremely high likelihood that dollars are now worthless. That scenario is extremely unlikely in any case. Thus, having your money in cash is a pretty unnecessary safety risk; unless there are additional factors, you should be using banks or financial institutions to keep your money more secure than you can keep it at home.

So, let’s summarize. I think it’s a good idea to have a relatively small amount of cash on hand to handle emergencies that genuinely worry you, but not enough so that your concern about the cash is greater than the emergency you’re trying to cover. Your goal should be to minimize worry and stress by finding the right balancing point for you. If you do have money at home, store it in a mundane but uncommon place, a spot where burglars won’t immediately check; if you’re unsure, search Google for lists of common hiding places for money and avoid those entirely. Don’t keep all of your money in cash unless you have an exceptionally good reason to do so!

Good luck.

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Understanding This Marketing Trick Can Help You Avoid Impulse Buys

A few times per year, Adidas releases a new version of rapper Kanye West’s signature shoe, the Yeezy. Whenever this happens, sneaker fans everywhere lose their collective minds. Social media blows up, people wait in line for hours to secure a pair, and soon after the release, the shoes might command thousands of dollars on the secondary market (yes, there is a secondary market for brightly colored athletic slip-ons).

To the layperson, the Yeezys look like any old shoe. They don’t give you the ability to run faster or jump higher, nor do they unlock the secret of happiness.

So, what exactly is going on here? The answer is that Adidas does a brilliant job of leveraging an age-old sales tactic: scarcity marketing.

What Is Scarcity Marketing?

Scarcity marketing is a broad term that covers any instance in which a seller highlights the fact that an item is either rare, expiring, or in high demand. It’s a way to encourage a customer to make a purchase in a hurry, and usually at a premium price.

Scarcity marketing can involve capping how much of an item is produced, marking items down for a limited time, putting an expiry date on an offer, adding a timer to a checkout page on a website, and many other variations along those lines.

All of these tactics are based on manipulating the supply of – and, to some extent, even the demand for – a given item. All marketers know Economics 101: When supply is low and demand is high, prices go up.

Also, when something feels exclusive, hype builds, further driving up the perceived value. That’s part of the reason the latest iPhone or the hottest video game system always seems to have a production shortage just when people want them most.

To be clear, I’m not implying that these tactics are devious or underhanded. There are quality goods out there that can’t be mass-produced, and they should be priced accordingly. My aim is simply to make you aware of this specific and highly effective way that companies try to get you to part with your hard-earned money.

The Psychology of Scarcity Marketing

Scarcity marketing is effective in part because it plays on our innate sense of loss aversion. Most of us hate to lose something more than we like to win, a point famously proven by Nobel winning psychologists Amos Tversky and Daniel Kahneman.

I recently found out just how powerful loss aversion can be when my wife and I were searching for a home to rent on Airbnb.

After perusing the site for a while, we located a house we liked and started the process of checking out. Once we reached the final page of the checkout process, we paused, considering whether to put down a hefty deposit or keep searching for a better rental.

That’s when we noticed a pop-up message: “22 other people are currently viewing this property for these same dates.”

Before that pop-up, I could take the house or leave it. After I saw that message? I had to have it. I mean, this was a busy tourist season we were talking about. What if we didn’t get the place, and we ended up at a dingy motel on the outskirts of town?

If 22 other people were on the same page as me, one of them could book at any second! Then, I’d lose! The fact that so many others were interested in the property made me think it had to be a truly excellent house.

I entered my credit card information as fast as possible, happy to be “beating” those other folks.

I hope you can see the lunacy at play. One second, I didn’t even know there was competition. The next, I felt like I was in a race with 22 strangers to secure the vacation spot of my dreams.

While not everyone is hyper-competitive, I think the example elucidates just how effective a simple marketing tactic can be.

This same principle comes into play when buying just about anything online. Amazon will tell me that an old novel I’m interested in “only has two copies available!” When I book flights, Delta is constantly reminding me that the plane “only has three seats left!”

These little nudges create a subtle anxiety, pushing me to act just a bit more hastily then I might otherwise. As Harvard economist Sendhil Mullainathan says, “That’s [the] heart of the scarcity trap. You are so focused on the urgent that the important gets waylaid.”

Finally, perceived or real scarcity is a contributing factor in getting people to make ill-advised bets on financial bubbles.

Anyone with an interest in investing has witnessed the white-knuckle ride that bitcoin has been on lately. The once-obscure cryptocurrency rose in price by 1,800% last year.

A big factor in the rise was scarcity. Because only a finite amount of bitcoin can ever be made, some people treat it like digital gold. New money poured into bitcoin because people wanted to stake their claim on the scarce resource. The folks selling cryptocurrency-related services were more than happy to play up the scarcity aspect in order to whip people into a buying frenzy.

By all means, invest in bitCoin if you feel it has inherent value as the currency of the future. But investing just because you want a piece of something scarce makes little sense. My old Teenage Mutant Ninja Turtles sitting in my mom’s attic are scarce, but that does not make them valuable.

How to Stay Strong

In order to get better at making poised, rational, spending decisions, I highly recommend reading Trent’s post, “10 Questions to Ask Yourself Before Any Purchase.” In it, he lays out a strategy that is pretty much tailor-made to combat scarcity marketing.

The key is to carefully consider each and every purchase, as opposed to acting on impulse. Asking yourself questions such as “Have I looked for lower-cost alternatives?” and “Can I delay this purchase?” forces you to calm down and look at the situation in a more measured way.

If you run through a checklist of questions before making a purchase, you’ll be less likely to make a poor decision. Waiting 30 days can also be an effective way to sort fleeting urges from stuff you truly want.

Budgeting can also be very helpful. Just pick a budgeting style that works best for you and stick to it. If you’re diligent about buying only what you need or have saved up to afford, it’ll be easier to resist the siren call of the next great thing.

Summing Up

Scarcity marketing is real, and it’s powerful. But if we recognize its existence and do our best to make deliberate decisions when we encounter it, we can save some serious money.

The next time I feel pressured to buy an airline ticket because of seat availability, I will take the time to remind myself that there are 87,000 flights taking off in the U.S. every day. If I can’t find one that meets my specifications, I’m probably not trying hard enough.

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Tuesday, January 30, 2018

The Power of the 30 Day Challenge: Ten Challenges That Can Improve Your Finances This Month

One of my favorite practices to undertake in my life is a thirty day challenge. It’s something I do almost every month in an effort to regularly find better ways of living, whether it’s a more efficient way to work or a healthier habit in my daily routine or something else entirely. The goal of a thirty day challenge is to give a trial run to a new idea to see whether or not it makes my life better.

So, how exactly does it work? A thirty day challenge is a commitment to a new personal habit or routine for thirty days. The purpose of that challenge is to simply find out if this interesting new habit or routine is something that really works well in your life.

For me personally, I usually start a new thirty day habit or two each month. For the month of January, my thirty day habit was to practice Three Morning Pages, which basically means that as a part of my morning routine, I simply sit down with a pen and brain dump onto paper until three pages are full. I found this to be a really amazing practice and plan to keep it up.

Usually, if I find that a thirty day challenge really clicks, I only try one new challenge in the coming month and try to keep the previous one going. So, for February, I’m only going to start one new thirty day challenge and keep the morning pages going.

Why? Thirty days is not quite long enough to burn a new routine in as a new personal habit or routine that you do naturally. The science varies on this and it does vary from person to person, but a new habit takes somewhere around 80 to 120 days to feel completely natural. However, thirty days is long enough to figure out whether this is a habit that you want to continue and it’s long enough to start seeing at least some benefits (or drawbacks) from that new habit or routine.

That’s why, after a really successful thirty day challenge, I generally try to spend the next two or three months trying to nail it into a completely natural routine that I’ll just continue as a normal part of my life, and that means generally starting only one new challenge for the next month. If I’m not trying to continue anything, I might start two new thirty day challenges.

As you may nave noticed, thirty days also matches up really well with a calendar month (except for February – I usually “cheat” one day on each end of February). You can start one at the start of a calendar month and it’s over before the calendar turns to the next page. If you’re a Christian who practices a discipline during Lent or practice another faith-based discipline, a thirty day challenge can also work during that period of reflection.

Over the years, I’ve used thirty day challenges as experiments in my life. They’re trial runs to see if a particular idea actually works (for me) and to see whether or not it’s a new pattern I have time for or want to keep up with. I tried being vegetarian for a thirty day challenge and it stuck; I later tried being vegan for thirty days and it didn’t stick. I jogged/ran a 5K each day for thirty days and eventually decided that daily running is not something that my knees wanted to sustain. I’ve read a book for two hours a day for thirty days, a practice that I largely kept (I block off an hour and a half for daily book reading, seriously; I find that time by basically not watching any television.) I tried drinking a morning cup of black coffee each day for thirty days, and that one stuck.

I could fill up page after page with different thirty day challenges I’ve tried. Most faded away, but a few stuck in my life and, in my opinion, changed things for the better.

Of course, personal finance is absolutely loaded with great ideas for thirty day challenges. There are many, many lifestyle changes and routine alterations which save money that you can try on for thirty days to see if they fit for you. When I first started making big financial changes in my own life, I used thirty day challenges to make them click into place and several of them became the norm.

Here are ten great 30 day challenges for personal finance, including all the ones that locked into place in my own life.

Challenge #1 – For 30 days, make all of your meals at home.

The idea here is to take advantage of the fact that cooking at home is far less expensive than eating at a restaurant or consuming delivery food or takeout. It’s just cheaper to make food yourself.

The thing that keeps people from jumping on board with this is that cooking is often perceived as difficult and a big time gobbler. Often, people eat prepared food because they’re either intimidated by cooking or intimidated by the cleanup.

Committing to a thirty day challenge related to preparing your own food lets you experience the savings while, at the same time, honing your cooking and cleanup skills so that the threshold seems far smaller. It’s about saving money, sure, but it’s also about building skills in the kitchen and learning that it’s not really that hard to prepare several dishes that you quite like.

My own passion for cooking at home was really launched with a thirty day challenge very similar to this one. The simple act of going into the kitchen and doing basic food preparation tasks over and over again over the course of a long string of days not only showed me how much money it could save me (literally hundreds of dollars a month), but also showed me it wasn’t as hard as I expected it to be. We now rarely eat anything that wasn’t prepared in our own kitchen.

Challenge #2 – For 30 days, buy no name brand items.

The goal here is to introduce yourself to the store brand version of a lot of the products you buy so that you can evaluate for yourself how well they work for your needs. By committing to avoiding name brand items, you’re going to be filling your cart with a lot of store brands instead.

I virtually guarantee you that if you take on this challenge, you’ll realize that a lot of name brands are basically identical to the store brand version and that you’re paying a pretty healthy premium for nothing more than a name written on a box, which is just silly.

I would suggest two minor alterations to this challenge. First, obviously, if you need an item and the only version available is a name brand, you can still buy the name brand. Second, if you are making a major planned purchase, do the appropriate research and make the right long-term purchase. Remember that this challenge pertains to ordinary purchases like groceries and household supplies, not buying a generic television or HVAC system.

We buy store brand versions of most things – the only big notable exception that comes to mind is garbage bags, because that’s something we’re particularly picky about. You’ll probably find one or two things yourself (which may or may not include garbage bags) where the store brand just didn’t live up to expectations, but for everything else, you’ve now witnessed that the store brand fulfills your needs for less money, so there’s no reason not to stick with it!

Challenge #3 – For 30 days, don’t use a credit card for any purchases.

Credit cards are something of a double-edged sword. They make purchasing way more convenient which saves time and money management hassle, but at the same time, they make purchasing way more convenient, which means it is far easier to make spending mistakes and buy things you can’t afford or have forgotten about.

By taking on a thirty day challenge to financially survive without a credit card (and, ideally, without debit cards, too), you’re forcing yourself to be more conscious of every financial transaction that you make. Your transactions will be done entirely by check or by cash, which means you have to actually reflect on the money leaving your account with each purchase rather than simply swiping a card and forgetting about it.

This is an inconvenience, to be sure, but it forces you to start thinking about your unconscious spending habits. You’ll see again and again throughout this month how you take a credit card for granted and how easy it is for you to use it to just buy things that you almost immediately forget about, which is a very bad financial habit to get into. Breaking that connection for a while forces you to look your bad habits in the eye.

During the month, it’s almost a guarantee that you’ll spend less money, but you’ll still be able to buy the things you really care about. What will really matter is how often you notice that you’re not able to just buy things out of reflex, and that will help you to start really rethinking your overall spending choices. This is, surprisingly, a very reflective thirty day challenge.

Challenge #4 – For 30 days, don’t turn on the television.

This might seem like a surprising thirty day challenge for financial reasons, but bear with me. Doing this challenge has a number of financial benefits.

For one, it can show you that you can live a happy and healthy life without television as a part of it. The default state of just watching some television in the evening is eliminated, so you have to find other things to do. At first, that might seem tricky, but after a surprisingly small number of evenings, you start finding lots of things to do. My thirty day television challenge led me to reading a lot more, giving a few hobbies some more undivided attention, and going to sleep earlier and getting better rest, all of which improved my quality of life.

For another, not watching television virtually guarantees a lower exposure to advertising. Most television programming is buoyed by advertisements. Almost all television programming features product placement within the shows, whether it’s a sponsorship of a segment, a character using a product in an obvious fashion, or a breathless “news” story selling a product to you. The less exposure you have to those things, the less desire you have for a constant stream of more stuff and more experiences in your life.

For yet another, many Americans have expensive cable or satellite packages. If you demonstrate to yourself that you’re fine without such a package, then what’s the purpose in keeping that package? You can always reduce your television use at home to an over-the-air antenna that picks up local stations for free and to going to social events for big sporting events or other big moments.

Eliminating television from your life can be a really big benefit in a lot of ways, and a thirty day challenge is a perfect way to give it a trial run.

Challenge #5 – For 30 days, sell or get rid of one item from your closet each day.

Many of us have closets in our home that are filled to the brim with stuff – half forgotten or completely forgotten purchases and gifts that were placed in there with the best of intentions of getting around to it someday, but the fact is that someday isn’t coming. They’re just not things that are a part of your daily life.

The end result for many people is that they have shelves and racks in their closet full of things that they’ve barely used and are likely never going to use, put back there with good intention but a lack of time and opportunity.

All of that stuff gobbles up storage space in your home. All of the items stored in there are things that someone else might actually put to some kind of productive use. Perhaps even more important, all of the items stored in there have some amount of secondhand value, which means you can turn them into money in your pocket or charitable gifts for a deduction on your taxes or simply give them to someone because it will lift up their life.

For thirty days, dig into your closet and pull out one item each day to sell or to give away. If you’re going to sell it, head over to Craigslist or a local Facebook group or eBay or Amazon Marketplace and put up a listing. If you’re going to give it away, figure out a friend or a charity that could really use it and unload it there.

The goal is to remove thirty things from your life, whether it’s articles of clothing or books or games or something else entirely. Not only will it clear out some space in your home, it’ll also clear out a bit of space in your psyche while also producing a bit of money or a bit of goodwill.

Challenge #6 – For 30 days, keep your thermostat 5 degrees cooler than normal.

This is a great challenge during the winter months; for the summer months, shoot for keeping your thermostat five degrees above normal.

In either case, the goal here is to keep your air conditioning or your furnace from running nearly as much for a month, which will save a lot on seasonal heating and cooling costs. It’s going to put money straight in your pocket.

However, beyond that direct change, it’s also going to be an opportunity to push yourself to find little strategies for making those new heating and cooling settings work for you.

In the winter, you might want to try things like wearing a sweatshirt and thick socks around the house or running the ceiling fans in a direction so that they pull air upwards rather than blowing it downwards. In the summer, you might try opening the windows and wearing minimal clothing inside and making sure the ceiling fans are all blowing downwards. There are lots of strategies for both seasons to make the temperature more tolerable.

Even if you end up deciding, at the end of the challenge, that a particular temperature is too extreme, you’ll probably find that your original setting is probably unnecessary, too, and you’ll end up at a happy point somewhere in the middle – something that you now feel completely comfortable with that also results in lower heating and cooling bills.

Challenge #7 – For 30 days, make your morning coffee at home and take it with you in a travel mug.

This is surprisingly easy to do, even if you don’t have a coffee maker at home. (If you do, obviously, just brew a couple of cups or a pot before you leave the house and fill up a travel mug to go.)

If you don’t have a coffee pot, don’t sweat it – just get a simple cold brew coffee maker like this one and start making it in your fridge with ease. All you do is put some coffee grinds in the filtered portion, fill it up with water, and let it sit overnight. The coffee’s ready to go in the morning and you just heat it up in the microwave as you wish.

You can try a bunch of different additives and sweeteners to get it just how you like it each morning. Trust me, the cost of buying a few bottles of sweetener and a bag of ground coffee is far less over the course of a month than the cost of buying coffee every day at the coffee shop.

If you can find a mix that you like, then let it become a permanent replacement. The ongoing cost of making your own coffee at home versus buying a big cup at a coffee shop every morning isn’t even comparable – you will save money doing it yourself assuming you’re aiming for something comparable. Plus, you may just find a mix that you like even better than what’s sold at the coffee shop.

Challenge #8 – For 30 days, don’t purchase any unnecessary possessions.

Over the course of thirty days, don’t buy anything that’s not something you need for basic living. Buy the basic food you need, buy store brand household items as needed, and cover your bills. Beyond that, make no extra expenditures for hobbies or interests or anything else. Lock it down.

Obviously, this will save a lot of money, but won’t it be miserable? Surprisingly, it really isn’t that miserable at all. Knowing that it will end makes it far more palatable.

Even better, along the way, you’ll almost always discover some interest or passion that you’ve overlooked lately, something that you really love that you’ve whittled out of your life because of the convenience of spending money.

When I first did this challenge, I really rediscovered hiking and bicycling. I spent a lot of time going on some really great nature walks in my area, hiking into some beautiful backcountry, and going on a few amazing bicycle rides along Iowa’s many great bicycle trails. It really reminded me how much I loved those things, especially nature walks and hikes, and I’ve made them a much larger part of my life ever since.

What will you discover? You won’t know until you try this challenge and see what unfolds in your life when you commit to not spending any unnecessary money for thirty days. At the very least, you’ll save some significant money during the challenge, and there’s a good chance you’ll discover or rediscover something wonderful that fills a place in your life after the challenge is long over with.

Challenge #9 – For 30 days, brainstorm each day ten gift ideas you could make for a person in your life.

This is an unusual challenge. How could you possibly interpret this as a financially wise move?

It’s simple. By the end of the challenge, you should ideally have a list of ten good ideas for everyone in your life that you ever have to buy gifts for – relatives, friends, coworkers, everyone.

Now that you have those lists, you now have ideas for all upcoming gift occasions with a ton of lead time between now and then. This means you can start searching for those very items to find huge bargains on them.

Let’s say you have ten ideas for someone you always exchange gifts with each Christmas. She loves sweaters, so at an end-of-winter sale you find an amazing sweater that’s her size at a huge discount. Boom! You buy it and stow it away somewhere for Christmas.

You think your nephew would love a good pair of binoculars, so instead of buying one at high prices near his birthday or at Christmas, you start subtly shopping around now for them. Thanks to tools like CamelCamelCamel, you can just sit around and wait for a great price on a few models, maybe choosing one with a normal price just a bit above your price range but one that will save you a lot when it’s on sale. Your $50 gift turns into a $75 pair of binoculars that you bought for $25 because you had so much lead time – an amazing gift and money in your pocket.

That’s the advantage of preparing gift lists like this, and forcing yourself to brainstorm now outside of the auspices of the season gives you tons and tons of lead time.

Challenge #10 – For 30 days, track every single dime you spend.

Keep a little pocket notebook with you and every time you spend even a penny, you write it down in that notebook for thirty full days. Everything. If you spend a dollar in a vending machine, write it down. If you swipe your credit card to buy a sandwich, write it down. Write everything down. Stick receipts in there for every swipe you make – grocery receipts, gas receipts, everything.

What does this do? First of all, it will give you just a moment’s pause with every purchase and will nudge you just a little against silly and unnecessary ones. That’s a valuable nudge to have in your life.

The second benefit is a bigger one, though. At the end of the month, you can take all of that info – along with credit card and bank statements to back it up and fill in blanks – and group all of those purchases together however you like.

You can – and should – parse grocery receipts and separate things into sensible categories, like necessary food and frivolous food, necessary household items and frivolous household items. Do this for everything. Make as many categories as you can, but try to make ones that separate needs from wants and impulses.

Then, when you’ve separated everything, total each grouping and see where your money went.

The thing to remember here is that it’s not a problem that you have some frivolous expenses, but the sheer amount that’s the problem. If you’re shocked by the number, you should be, and you should use that experience as a driver for shaping your future spending habits.

Final Thoughts

Thirty day challenges can mold your financial habits – and your other life habits – in countless different ways. A simple month devoted to a new way of doing things can create profound and lasting change in your life.

With most challenges, the worst possible outcome is that you realize that something didn’t fit for you but you have an interesting story to tell about it, and you probably made a minor positive change in some area of your life. It only gets better from there.

Start trying a thirty day challenge in the coming month. You might be surprised at what you find.

Good luck!

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What Can Debt Collectors Do If You Don’t Pay Them? (A Lot)

This is an attempt to collect a debt and any information obtained with be used for that purpose.” If you’ve ever read or heard this phrase, you’ve likely been contacted by a third-party debt collector.

Debt collectors are strictly regulated at both the federal and state level. They’re not allowed to just do anything they want to pressure you into paying your debts. The Fair Debt Collection Practices Act (FDCPA) contains a list of rules that debt collectors must follow whenever they attempt to collect a defaulted debt.

In fact, the statement at the beginning of this article is a disclosure that the FDCPA requires debt collectors to make the first time they contact you. It’s informally referred to as the “mini Miranda.”

While the FDCPA and several other state and federal laws do exist to protect you from unfair collection practices, there is still a long and scary list of actions that a debt collector can legally take against you if you default on a debt. If you fail to pay, a debt collector is completely within its rights to do any of the following.

A Debt Collector Can Report to the Credit Bureaus

One of the most common actions that a debt collector may take when you fail to pay is to report your collection account to the three major credit bureaus. When a collection account is added to your credit reports, the consequences can be serious. Collection accounts can remain on your credit reports for up to seven years from the date of default of the original account.

And, it’s possible a collection can lower your credit scores. When your credit is damaged by collection accounts, this can also cause quite a few troublesome side effects, such as:

  • Denial of loan and credit card applications
  • Higher interest rates if you are approved for financing
  • Difficulty getting hired if an employer performs a credit check
  • Higher insurance premiums

A Debt Collector Can Call and Write You

Collection agents are hired and trained to collect debts. Calling and writing to you are two of the primary methods they will use to try to persuade you to pay.

Believe it or not, debt collectors can even call your friends and family (to locate you only), and may call you at work unless you inform them that you’re not allowed to receive calls at your place of employment.

If you’re on the receiving end of these collection calls and letters, the experience can be downright stressful. Unfortunately, until you pay your debt, you can count on the string of collection calls and letters to continue.

The FDCPA does prohibit debt collectors from contacting you before 8 a.m. or after 9 p.m., and it even gives you the right to request (in writing) that the debt collector stop contacting you altogether. However, be aware that if you take away a debt collector’s right to contact you, then the only recourse you may be leaving them is a lawsuit.

A Debt Collector Can Sue You… and Maybe More

Some of the scariest things that a debt collector can do occur when the courts get involved. When you ignore a debt collector, they may resort to a lawsuit in an attempt to collect on your defaulted debt.

If the debt collector sues you and wins the lawsuit, or you fail to respond thus losing by default, the court will enter a judgment against you. Depending upon the state where you reside, a judgment might also open up the following possibilities:

  • Wage garnishment
  • Tax refund garnishment
  • Bank account levies

The moral of the story is this: If you default on a debt and a debt collector attempts to collect it, then it’s in your best interest to work with them rather than ignore them. Offer a smaller amount as a settlement, and then pay it and move on with your life.

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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit-related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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Monday, January 29, 2018

Questions About Rice Cookers, Government Shutdown, Toys R Us, Lasagna and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Handling increase in income
2. Comparing pre-tax and post-tax contributions
3. Putting a windfall into stocks
4. Filing jointly or separately?
5. Retirement savings in up market
6. Low end rice cooker recommendation
7. Tired of fear, uncertainty & doubt
8. Cheap version good enough?
9. Going out of business sale?
10. Training my replacement at work
11. Oven ready lasagna noodles
12. Government shutdown panic

One of the most important things that I’ve found for my own work is the use of ambient noise and ambient music to help me focus on what I’m doing. It’s really amazing how much of a difference that it makes in terms of keeping me focused.

I’ve become so used to using ambient noise and music over the last few years that I began to actually doubt how much of an impact that it had, so as an experiment, I went for a week without using it. What I found was that I felt like I was working at half speed on every intellectual or creative task I was doing, from reading and learning to writing and brainstorming and outlining. I got about 40% less work done over the course of an entire week from working in silence or listening to pop music or podcasts versus listening to ambient noise or ambient music. Seriously. I measured it by finished word count, potential ideas produced, articles read, and a few other ways that I track things. I just worked at a much slower pace without it.

I use two different tools for ambient noise and music, and I alternate between the two to mix it up. For ambient noise, I just turn on this Youtube video, which consists of ten hours of the audio of an icebreaker ship. When I want ambient music, I use Brain.fm, which I also sometimes use while meditating, too.

I hope these resources help you out when you’re trying to study or do creative work! They certainly help me out!

On with this week’s questions!

Q1: Handling increase in income

With the implementation of the new tax law, between my husband and I we are bringing home an extra $200/month. Woo hoo! We both have WI pension plans. I have a pension from the state of MN as well, a 403b which I currently contribute 3%. I plan on taking my state raise this year (4% increase) and applying it all towards my 403b so I will be contributing 7% total. My husband is planning on opening a deferred comp plan within the next month as well. We have no credit card debt. We have a mortgage, 2 car loans ( one is almost paid off), and about $13,000 in student loans. We are 35 and have one kid and no plans for more children. Should we take this extra money and contribute more for retirement or use it pay down debt?
– Dana

If you have any high interest debt, I’d pay that off first and foremost.

Once that’s out of the way, I would sit down and think about what your plans are and how stable your life is right now. Are your jobs strong and stable? Are you spending less than you earn even as you pay down those remaining debts? If so, I’d put it into retirement.

If you’re struggling to make ends meet as it is, then I’d lean more toward using that money to get rid of a few of the debts for now. Treat them as extra debt payments and aim for the one with the highest interest rate.

Q2: Comparing pre-tax and post-tax contributions

Hey Trent, was hoping to get your opinion on my way of looking at retirement savings percentages. I believe that the most common montra out there now is to save at least 10-15% of your income towards retirement. If you are using a Traditional 401K or IRA that is a fairly simple calculation because it’s based on pre-tax dollars. So essentially if you make $50K per years, then 10% towards a Traditional account would be $5K. But my question is what if you are contributing to a Roth IRA or 401K where you are using after-tax dollars to fund the account. Do you look at your contributions as a percent of your gross salary like you do with a Traditional account or do you look at your contributions based on actual taxable/take home dollars? Same $50K salary with 20% taxes removed means take home pay is $40K. I’m maxing out a Roth with $5500 a year. Am I contributing 11% based on gross or am I contributing 14% based on after-tax?
– Jim

In general, the safe way to calculate this is to use gross income and gross contributions. You’ve already paid the taxes on Roth contributions and won’t have to pay them later, so that is, in effect, retirement savings as well.

However, that means you’re looking at ALL contributions through the filter of gross income. This means that you calculate it as gross income, but you also count the taxes you paid on any after-tax contributions you paid. So, you’d add the $5,500 to the 401(k) contributions plus the income tax you paid on that $5,500.

Again, all of this is just for guidance. If you’re at 14% one way or 11% another way, you’re fine. I think the goal should be that you’re saving at least 10% no matter how you calculate it and you’re doing that.

Q3: Putting a windfall into stocks

Normally, we put money into our Vanguard account (all stock index) on paydays when we have extra to deposit, regardless of what the market is doing. However, we happen to have a pretty large lump sum to put in right now (money set aside for something it no longer needs to be set aside for), and I’m thinking about waiting until the inevitable recession after all of these constant record highs the last few years.
I’m normally a pretty anti-“play the market” guy, for many of the same reasons you reiterate frequently, but in this case it makes sense to me because this isn’t money I’m going to be taking out and putting in constantly, it’s going to be staying in for the long term; I won’t be worried about hitting right on a true minimum, I just feel a bit odd dumping this much in at once when I can be about 99.9% sure the market will fall noticeably past this point in the future. I don’t necessarily need to wait until it hits a true minimum anyway, Normal bi-weekly/monthly paycheck deposits will continue to dollar-cost-average by going in immediately as normal. Thoughts?

– Donald

I think the absolute first thing you should do is sit down and decide what your goal is with this money. What are you intending to do with it?

If this is purely a “when something comes along” type of fund, it should be in something very low risk, because that “something” could come along tomorrow.

If you have another kind of goal that you’re thinking of, whether it’s retirement or something else, you should invest according to how far out it is. If it’s more than ten years out, you should put it in stocks no matter how the stock market is doing.

If your goal is less than ten years out but not in the super near future, then I’d probably still keep it in something pretty secure, but there’s an argument to be made here about splitting it up a little between safe investments and aggressive ones.

To summarize, figure out what you’re going to be doing with it first. If you’re certain that it’s for something that’s more than ten years out, put it in the market regardless of what it’s doing. If you’re very unsure or using for something that’s less than ten years out, keep it in something safe.

Q4: Filing jointly or separately?

My husband and I were married in September 2017. How do we figure out if we should file our taxes this year as married filing separately or married? Also how do we both go about updating our W-4 withholding, considering each other as dependents?
– Janelle

Without a full picture of your finances, I can’t give you a good answer. What I can tell you to do is either get a good software package for calculating your taxes – my personal preference is TurboTax, but most well-known packages are fine – and let it figure it out for you.

The reason for a software package is that it will automatically do the math on both methods of filing and tell you the right way to do it that’s both legal and saves you the most money, which is the way you want to file.

If you don’t fully trust a tax software package, then you should take your taxes to a tax preparer. Doing them by hand is very time consuming, especially when you’re probably going to want to prepare it both ways to see which has the best results.

Q5: Retirement savings in up market

I retired in 2010 with a nice healthy severance package and about $400K in my 401(k) plan. I was 63 then and 70 now. I have lived off the severance package and proceeds from home sale since then without touching the 401(k) and left it almost entirely in stocks. I was hoping to live out my life off of the savings account and still have 5 years more or so.

Right now I don’t know what to do. My 401(k) is approaching $1 million. I spend about $30K per year and I have about $145K in savings. My 401(k) is very aggressively invested almost all stocks. I am 70 years old. Should I make my 401(k) less aggressive or leave it there?

I am a widow with one child who is just wonderful and I want to leave all assets to him, his wife, and their kids.
– Maryanne

My thinking is that any portion of your 401(k) that you think you may need in the next ten years should be in something conservative, and everything beyond that should be in something aggressive. Assume you’re living forever.

So, what should you do? If I were you, I would move about $150K of the 401(k) into something much safer (that’s five years of living expenses, plus the five years you have in savings, adding up to ten total years of living expenses in something safe), like bonds or cash, and let the rest sit. Each year, move about a year’s worth of living expenses from aggressive investments into something safer. Social Security will definitely help here, but I’m not 100% sure what kinds of benefits you receive from it, so I’m ignoring it. You’re probably safe moving a little less into conservative investments, but this plan will keep you quite safe.

Ignore what the market is doing. The market will go up sometimes and it will go down sometimes. It is very difficult to tell where it is going in the future, especially in a timeframe longer than ten years.

I’m assuming, of course, that any and all dividends from your aggressive investments are being rolled right into more of those investments. I’d leave that in place, too.

You will have to live to an absurdly old age for this plan to ever run dry unless the US economy completely falls apart in an unprecedented way. My belief is that the best thing you can do for your son is to make sure you are never a financial burden to him and his family, and this plan should essentially insure that.

Q6: Low end rice cooker recommendation

I have been following your recent suggestions and watching the local Goodwill and SA for a rice cooker but I haven’t found one yet. I love eating rice but rarely make it because it’s not convenient in my life but a rice cooker would really help with that. I have a $50 Amazon gift card I received for Christmas and have decided to just buy a new one. What do you recommend in that price range?
– Kathleen

So, confession here: we are lucky enough to have an amazing Zojirushi rice cooker, one that does an incredible job on rice of all kinds and oatmeal and we highly recommend, but it is significantly outside of your budget. It’s a few years old and I can’t find an exact match for it on Amazon (it appears to be an older model). Before that, we literally used a Salvation Army rice cooker – I think it was a Panasonic.

Since I don’t have specific experience with rice cookers in your range, I went and looked at a few of the resources that I trust regarding such things – Consumer Reports and Cooks Illustrated. I checked out some of their recommended models, particularly ones they both liked, and sought one that comes in below $50.

My recommendation, then, is the Aroma Housewares ARC-914SBD 8-cup rice cooker. It seems to get good reviews all around and is a nice size for a single person or even a small family. Plus, you’ll still have $20 on that Amazon gift card!

Q7: Tired of fear, uncertainty & doubt

I am getting really tired of reading articles about people panicking because the stock market is “too high.” It’s always the same thing! It’s been going up for X years and that’s just too long! And the advice is either just stay the course or ridiculous panic! I think it’s all politically motivated anyway. Please don’t include questions like this in your mailbag.
– Jerry

Jerry, the reality is that a lot of the mailbag questions I get right now have to do with how high the stock market is. I actually filter out quite a lot of these types of questions because they are kind of repetitious, but if I don’t have one in my last mailbag or two, I’ll get a good half-dozen questions about it in the ensuing week. I try to answer what people ask.

Besides, I think the current stock market is a great illustration of the concern that many people have about investing in the stock market. It’s a scary place. It’s a place where you can ride a run of several years of 15% gains only to see the bottom suddenly fall out like what happened in 2008. That’s scary to a lot of people.

I don’t advocate for market timing, but I do advocate that people not put their money into the stock market if they can’t emotionally handle that kind of a drop and if their investment isn’t a long term investment. A person in their thirties should absolutely have a lot of their retirement in the stock market because it’s a long term investment, for example, but a person in their sixties, particularly a person who is skittish, might not want to do the same depending on their specific situation.

In other words, the decision about whether to invest in stocks shouldn’t have anything to do with the current market, but with the timeframe of your investment and your personal risk tolerance (because poor risk tolerance can lead right to locking in a bunch of losses). This is a moment in time where that point can really be hammered home, and a lot of people are thinking about it.

Q8: Cheap version good enough?

When do you know if the cheap version of something is “good enough”? A friend had a horror story recently about how their cheap baking dish exploded in the oven ruining dinner and making for a big cleanup. That wouldn’t have happened with a good baking dish. But if you buy everything high-end you go bankrupt. How do you know what to do?
– Olivia

For me, if it’s something inexpensive with a relatively low risk involved if it breaks, then I try the cheap version first. I use store brand versions of a lot of household supplies, for example.

If it’s something expensive or something that could cause a real problem if it breaks, I usually invest the time to do some real homework on it. I look at Consumer Reports as my first line of defense and often dig deeper into reputable publications within that specific niche as well. This usually means a trip to the library for me – I almost always have a thing or two to look up in their magazines each time I visit the library!

As a general rule, I tend to trust Consumer Reports‘ “best buys” for a particular product. I’ve found that those items almost always do the job above and beyond what I need with little risk involved, and they tend to save quite a bit off of the highest end items.

Q9: Going out of business sale?

There is a Toys R Us about 1/4 mile from my apartment that’s going out of business. How can I take advantage of this and either save some money or maybe make a little?
– David

Making money off of a Toys R Us going out of business is tricky unless you know the value of toys in your head or are willing to invest a lot of time in there wandering around checking eBay values. Buying random toys at a 30% off rate isn’t going to be a big money maker.

Having said that, a toy store going out of business can save you money in a few easy ways. It might be a great time to do a little bit of super early holiday or birthday shopping for a child in your life. If you have children or nieces or nephews or grandchildren, especially young ones, this can be a great opportunity to snag some gifts for them. (Just be sure to let their parents know what you’ve snagged so you don’t end up with a duplicate non-returnable item.)

Another approach is to talk to any parents/grandparents/aunts/uncles/guardians in your life who may actually have a use for this sale and offer to be their “mule” as a nice favor or for a few bucks. They can give you a list of things to look for and you can go in there and buy them at a nice discount to save them some money. If nothing else, this would be a great appreciated help for some of the busy parents you know.

Q10: Training my replacement at work

My company is downsizing and my position is disappearing. I’m supposed to spend my last three weeks training this guy who is supposed to now do my job and frankly I don’t [care]. What can they do to me if I just show up and sit there and do job searches instead of helping him?
– Charlie

They’ll probably still pay you, but any recommendation you get from them will probably be a bad one, which will make it harder to find your next job. If you’re planning to stay in this field, the reputation hit you’ll take from doing this will probably cost you far more than you’ll gain.

A better approach here is to do your best to train this guy. It’s not his fault he’s in this boat with you. In fact, he’s probably disgruntled that he’s being handed these extra tasks and isn’t thrilled with this either. Rather than hanging this guy out to dry, commiserate with him. Do what you can to get him into a good spot when you’re gone.

Not only will this make you look really good in this person’s eyes, it will also reflect positively in any recommendations you get from the company and might even open doors for you. You may just find that if you’re doing this well, they may end up finding another position for you or else help you find a new one. If nothing else, you won’t have burned bridges here and you’ll definitely have at least one career ally moving forward.

Q11: Oven ready lasagna noodles

I love making lasagna but it is such a time consumer that I don’t make it very often. I thought the no boil noodles would help so I tried them and it made everything gummy. Is there some trick to making them work? Thought you might know as a kitchen efficiency whiz!
– Ella

I wouldn’t remotely call myself a kitchen efficiency whiz, but I do enjoy cooking at home.

I have tried no-boil noodles myself in lasagna and I generally find them to be gummy, too. The rest of my family seems to like them just fine, but I vastly prefer the texture of regular noodles.

Now, I have found that they get a lot better if you just partially boil the no-bake noodles. I did this on accident once and boiled them for just a couple of minutes before realizing what I had done and then decided to use them anyway, and they were just fine. At that point, though, why not just use regular noodles?

I’ve also tried just cooking the lasagna using ordinary noodles that are completely uncooked and just smothering them in sauce on both sides. This seems to work reasonably well – I like the texture better than “no-boil” noodles, anyway. You might want to try this. Just make your normal lasagna, put the dry noodles on top of a layer of sauce, then do another sauce layer right on top of any dry noodle layer. Bake as normal, because the boiling sauce will cook the noodles right inside the pan.

Q12: Government shutdown panic

I currently work for the DoE as a technical assistant. I make a very nice salary that should be more than enough, but when the government shutdown happened I took a look at my money and realized I was going to hit a major problem if things didn’t get back up and running in like two or three days. That’s obviously bad and it set me into kind of a panic. I started reading about money and searching around and came to your site. I don’t know what to do next or where to start.
– David

So, I received three different variations on this question. It appears as though the government shutdown and the specter of more of them in the near future shocked a few people into thinking about their finances.

So, where can you start? The absolute first thing you should do is start building an emergency fund. An emergency fund is simply money stowed aside in a savings account somewhere that you don’t touch until there’s an outright emergency – like, say, a prolonged government shutdown. The easiest way to build this is to get an online savings account from a reputable online bank like Ally and set it up so it does an automatic transfer each week from your main checking account into this emergency fund. $20 is a good number to start with; a little more is nice. Then, just forget about that account entirely until an emergency happens.

That’s a great first step, but it’s just that – a first step. The most important thing that people should be doing with their finances is a much bigger and, often, much harder step. You need to spend less than you earn. Every month, every year. The only time that you shouldn’t be spending less than you earn is when an emergency occurs, at which point your emergency fund is there to help.

If you’re doing this, your credit card balances will no longer be going up – they’ll be going down. As will your other debts. Eventually, they’ll go away, at which point it becomes trivially easy to start saving for big long term goals like retirement.

How do you mechanically do that, though? The most important step in that process is to sit down and really look at your spending. Where is that money going? Get out your most recent credit card bills and bank statements and start looking through them. How many of those transactions do you just not remember at all? Or, you see it and you sort of remember it, but not in any clear memorable way? Most of that spending is a giant waste. You’ve essentially tossed money away on completely forgettable things and because of that found yourself utterly panicking right now. That’s a very, very bad trade.

So, if you’re seeing a lot of transactions where you don’t even remember where the money went or it seems completely dumb in retrospect, start intentionally cutting out most of that stuff. Do you really need to stop at the convenience store? Will you really care about this purchase two days from now? Start asking yourself that about everything you buy.

There are lots and lots and lots of steps you can take to start mopping things up. That’s why the personal finance section of the library and of your local bookstore is loaded with books on getting your money straight. Go to the library and pick out one that speaks to you and check it out. The core advice in most of them is pretty good. If one isn’t clicking, go back and try another one. The one that clicked for me was Your Money or Your Life by Joe Dominguez and Vicki Robin. Avoid any book that talks about unrealistic-sounding results, like “You Too Can Be a Millionaire By Age 30!”

That should be enough to get you started.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

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When It Makes Sense to Scale Back Retirement Savings

A lot of financial advice is laser-focused on retirement. You hear it in commercials. You hear it on the news. You read about it on blogs and in books.

You need to be saving for retirement. Actually, you need to be saving more. What you’re doing now isn’t enough. You need to save more money and invest it smarter. Retirement is the ultimate financial goal and you can only reach it if you step up your game.

It’s been this way for a long time, but in the past few years there’s been a new trend that’s only added to the urgency: FIRE, which stands for “financial independence/retiring early.” This idea has gained steam as more and more people have started sharing their stories and strategies that have either allowed them to retire early – sometimes as early as 30 or 40 – or put them on the path to do so.

And while all of this focus on retirement and financial independence comes from a good place, sometimes we get so caught up in the rush to save more that we lose sight of the fact that scaling back is occasionally the right thing to do.

Here’s the thing: This isn’t a race. There’s no trophy for retiring early. There’s nothing inherently good about reaching financial independence sooner rather than later. “Retirement” in of itself is a bit of an empty goal.

What does matter is the life you want to live, both now and in the future. The things you want to do. The people you want to be with. The places you want to go.

Your financial plan should be geared toward making those things possible. And while that absolutely includes saving for the future, it should also include a focus on your present needs and aspirations.

With that in mind, here are a few situations in which it makes sense to scale back your retirement savings.

Starting a Family

Many of us, myself included, view starting and raising a family as one of their highest priorities. It’s a source of pride, joy, love, and fun.

It’s also hard. And expensive. And for many families some of the biggest expenses, like childcare, come at a time when you’re still early in your career and therefore haven’t yet reached your full earning potential. Or, if you or your spouse or partner decides to stay home with your children, you may be living on significantly less income than you’re used to.

Quite simply, starting a family is a big financial challenge. It’s just the reality of the situation. Financial sacrifices often have to be made.

Now, you can obviously cut back on discretionary spending like eating out, shopping, and traveling. And some of that is often a good idea.

But sometimes there still isn’t enough money to go around, and in that case it may make sense to temporarily scale back your retirement savings. Because again, the goal isn’t to retire. The goal is to create a life you enjoy both now and in the future.

And if having a family is a part of what that life means to you, making room for it is absolutely worthwhile.

Pursuing Meaningful Work

One of my pet peeves with the whole idea of retirement is the focus on quitting your job.

Look, I understand that not every job can be enjoyable. I also understand the responsibility to provide for your family and that sometimes that means taking a job you’d rather not have to do.

But you shouldn’t aspire to work just as long as you have to in order to stop doing a job you hate. You should aspire to do work you love. Because work that’s fulfilling, work that aligns with your values, is an incredibly enjoyable way to spend your life.

Unfortunately, pursuing that kind of work often means taking a financial step backwards. Whether it’s going back to school, changing careers, or starting a business, there’s often a loss of income and/or an increase in expenses that comes with it.

Which means that, sometimes, pursuing work you love now might require some kind of compromise on your ability to retire later.

It’s up to you how much of that tradeoff you’re willing to accept. Maybe the idea of retiring sooner is more appealing than the idea of doing work you enjoy.

But I wouldn’t assume that staying in a job you hate is the smart move simply because it allows you to save more for retirement right now. There are many situations in which taking a step back to do something you love is the right thing to do.

You Can Afford to Save Less

I’ve had clients who came to me because they were worried about their retirement savings, only to run the numbers and find out that they were actually ahead of where they needed to be. That they could, if they wanted to, save a little less and still be on track.

This is obviously a good place to be, but it’s not always an easy situation to adapt to. Because again, we’re so conditioned to save more, more, more, that the idea of voluntarily saving less feels weird.

And saving less isn’t always the right move. Life can change quickly and saving more money gives you more room to weather whatever storms come your way.

But if you do find yourself in this situation, it’s worth considering what you would do with the extra cash flow if it wasn’t going toward retirement savings. Would you travel more? Work less? Spend more time with your friends and family? Take up a hobby?

Sure, continuing on the path you’re on now might allow you to retire sooner. But scaling back might allow you to enjoy more of your life in the meantime.

Planning for a Lifetime

None of this is to say that you should neglect saving for retirement. Whatever your goals are, there will come a point at which you are either no longer able to work for money or no longer want to, and it’s important to prepare for that.

But retirement should never be the only goal. You have a lot of life to live before retirement and lot of life to live after it, and your biggest financial goal should be filling all of those years with as much happiness as possible.

Sometimes that means saving a little less for retirement, at least for a little while. If you do it right, both your present and future selves will thank you for it.

Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.

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Sunday, January 28, 2018

Seven Life-Changing Ways to Use Your Tax Refund

In 2017, the average individual who received a tax refund for the year before got a cool $3,050 of their federal taxes back. That’s a lot of money, and perhaps a life-changing amount of cash in some instances. On the other hand, what people do with that money determines whether it helps them build wealth — or simply scratch a fleeting consumer itch.

Think about it: With $3,050 in the bank, you could splurge in ways that don’t really affect your bottom line either way. You could buy a basic hot tub for your back deck, pay for an all-inclusive vacation to the Caribbean, or piss it away on clothes and whatever else you desire.

On the flip side, you could spend your tax refund in ways that actually leave you worse off. You could put $3,000 down on a brand new $35,000 truck that saddles you with a $600 monthly payment, for example. You could put that money down on a boat you always wanted – a boat with costly repair bills and a value that literally sinks overnight.

Seven Ways Your Tax Refund Could Leave You Better Off

If you want to gain some real momentum with your finances in 2018, it’s smart to start thinking about your tax refund early. With several thousand dollars potentially coming your way, what’s the best way to make that money count?

Instead of spending that cash infusion in a way that leaves your finances neutral or even worse off, consider these tried-and-true savings strategies that will improve your finances no matter what:

#1: Pay off high-interest debt.

High-interest debt is one of the biggest hurdles to overcome if you want to build wealth. When you owe money on credit cards or carry personal loans with high interest rates, it’s difficult to get ahead when so much of your payment goes to interest only.

Here’s the good news: Throwing $3,050 (or whatever your tax refund amounts to) toward high-interest debt will always leave you better off. Making an extra payment toward the principal of your credit card or loan balances will help you save on interest automatically while moving your debt payoff date that much closer.

Just how much can you save? Imagine you have a $3,050 credit card balance at 18% APR and you have the opportunity to pay it off in one fell swoop. If you used your tax refund to repay this debt, you would save yourself almost four years of monthly minimum payments, and a whopping $1,210 in interest payments alone.

#2: Save an emergency fund.

Whether you carry some high-interest debt or live a debt-free lifestyle, building an emergency fund is essential for your financial health. Without an emergency fund, you’re prone to struggle if you face unexpected financial emergencies like surprise medical bills, expensive home repairs, or a layoff.

Ask yourself how long your money would last if say, you lost your job this week or you could no longer work due to an injury or illness. With no emergency fund, your savings would likely dwindle and you might even need to use credit to stay afloat. With a healthy emergency fund, on the other hand, you’d have time to figure things out.

While most experts suggest you stock an emergency fund with at least three to six months of expenses, even a smaller amount is a good place to start. Saving $3,050 now can even turn out to be life-changing later on if you find yourself in a situation where you’re suddenly desperate for cash.

If you have a savings account, consider adding your tax refund to the pot. If not, open a high-interest savings account and start funding it today.

#3: Contribute to a health savings account (HSA).

A health savings account (HSA) is a tax-advantaged savings account set up specifically to pay for healthcare costs. Once you open this account, you’ll be able to deduct contributions up to a certain limit, watch your money grow tax-free, then use your funds for qualified healthcare expenses on a tax-free basis. And if you don’t use up your HSA funds by the time you turn 65, you can withdraw funds for any purpose – even to pay for retirement.

The myriad tax advantages this account offers are the reason it’s commonly referred to as the best retirement plan you’ve never heard of. HSAs are helpful when it comes to saving for healthcare expenses, but they may be even more advantageous for retirement.

Either way, individuals can contribute up to $3,450 and families can save up to $6,900 in an HSA account in 2018, provided they have a high-deductible healthcare plan. The IRS defines high-deductible plans as those with a minimum deductible of $1,350 for singles and $2,700 for families. Maximum out-of-pocket amounts on qualified plans are also limited to $6,650 for individuals and $13,300 for families in 2018.

#4: Contribute to a traditional or Roth IRA.

Even if you contribute to a 401(k) or another type of employer-sponsored retirement account, you may also be able to add money to a traditional or Roth IRA. Both traditional and Roth IRAs are easily opened online and simple to use and understand.

The big difference between them is that traditional IRAs allow you to contribute pre-tax dollars and deduct your contributions if you meet certain income requirements. Roth IRAs, on the other hand, let you contribute after-tax dollars and allow you to take tax-free distributions when you retire. Roth IRAs also have income limits that make it harder for high earners to contribute.

If your emergency fund is in good shape and you don’t have a lot of high-interest debt, opening one of these accounts or adding to an existing account could be a smart move.

Just keep in mind that, for 2018, your total contribution to both a traditional and Roth IRA cannot exceed $5,500 (or $6,500 if you’re ages 50 and older).

#5: Start several savings buckets.

If you have competing financial goals and want to save for all of them, starting several different savings accounts can be a smart move. Maybe you want to update your kitchen within the next few years, but you also want to save up for a newer car and a summer vacation. By starting a few different accounts, you could give yourself a head start toward achieving everything you desire.

You could spread your tax refund across several accounts for starters, then commit to weekly or monthly contributions so each savings bucket will grow. Just make sure you stash your cash in a high-interest savings account so you can earn at least a little interest on your deposits.

#6: Invest your refund.

Maybe you’re already invested in your workplace retirement plan or an IRA, and want to try something new. There are many other worthy to invest, so you could always open a brokerage account and invest separately from your retirement funds. The best online stock brokerage firms for 2018 make it easy to learn investing basics online, start investing with small sums of money, and do it all without excessive fees.

Beyond opening a brokerage account, there are other investing avenues to consider as well. If you’re saving for college, a 529 plan is an obvious choice. Riskier alternative investment options might include investing in peer-to-peer lending with a company like Lending Club or Prosper, in real estate notes with a firm like Fundrise, or even in small amounts of cryptocurrency if you can handle the volatility.

At the end of the day, any way you can learn more about investing while also growing your wealth is probably a good thing.

#7: Invest in yourself.

Finally, don’t forget about the most important asset you’ll ever have – yourself. If you receive enough cash in your tax refund to invest in anything, spending that money to improve yourself or your life may pay off more than anything else.

Fortunately, there are a ton of ways to invest in yourself – and some of them don’t cost a dime. You could invest in your mental and spiritual health by meditating, getting a good night’s sleep, or exercising regularly, for example.

In terms of financial investments, there are a ton of ways to use $3,050 (or any other amount) to your advantage. You could pursue an advanced certification that makes you more valuable to your employer, for example. You could take a course in a subject that interests you, purchase the start-up equipment or software needed for a side business, or invest in continuing education that could leave to higher pay and better job security in your current career path.

Any investment you make in yourself will likely pay off in the short term and over the course of your life and career. So, once your other financial ducks are in a row, don’t forget to spend your money where it counts – on self-improvement.

The Bottom Line

Whether you receive $500, $3,050, or considerably more in your tax refund this year, it’s up to you to put this cash to good use. You can use it to splurge on something you’ve always wanted, or you could invest it in a way that could make you richer in the long run.

And, if you can’t decide which way to go, maybe you should do a little of both. Buy something you want for sure, but stash the rest of your cash away for a rainy day. While it’s hard to do the right thing when you receive a windfall, your future self will thank you.

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 ClubThrifty.com.

Related Articles:

How do you plan to spend your tax refund this year?

The post Seven Life-Changing Ways to Use Your Tax Refund appeared first on The Simple Dollar.

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Saturday, January 27, 2018

Books with Impact: Walden

The “Books with Impact” series takes a deeper look at specific books that have had a profound impact on my financial, professional, and personal growth by extracting specific points of advice from those books and looking at how I’ve applied them in my life with successful results. The previous entry in this series covered Voluntary Simplicity by Duane Elgin.

I was first introduced to Walden by my high school English teacher, who told me more than once that it was something I should revisit throughout my life because it would read much differently at different stages in my life experience and intellectual growth. He was completely right.

Walden is a book written by Henry David Thoreau and first published in 1854, in which Thoreau describes his experience of spending two years, two months, and two days living in a small house that he built himself on the shore of Walden Pond, near Concord, Massachusetts. He spent that time in near-solitude, rarely seeing another living person and doing most life tasks for himself.

Walden compresses that experience, for narrative purposes, into a single year, and the book’s overall purpose is to make the argument that being close to nature, being comfortable in solitude, and spending a lot of time in contemplation combine together to transcend the “desperate” existence that most people feel in their day to day lives.

So, why is this a “book with impact” that’s being discussed on a personal finance site? Walden essentially boils down to an argument for the benefits of self-reliance and minimal spending, of spending time in contemplation and enjoying nature rather than in the artificial environments we create for ourselves. In an era where people spend hours upon hours daily staring at screens and being constantly distracted, in a world where money woes bring untold stress and the vast majority of Americans live a paycheck to paycheck existence, Walden‘s message is a powerful one.

Having said that, let me forewarn you that reading Walden is a slow process. Thoreau writes in a very dense fashion and sometimes will rapidly hop around from serious analysis to sarcasm and flights of fancy. He also uses somewhat dated language; while I personally find him much easier to read than other authors of the 19th century, it’s not fully written in modern language. I consider the effort to be worth it, but this is one of those books that deserves to be read slowly with a little notebook open beside you to jot down interesting ideas and thoughts, which you’ll find constantly while reading it.

The full text of Walden is freely available via the Project Gutenberg website; you can simply click here to start reading. If you prefer to read it in the Kindle app on your phone, you can open the mobile page for Walden and, in most mobile web browsers, just click on the Kindle link and it’ll automatically open in your Kindle app so you can read it like any other e-book and your place will be saved.

What follows are some of the interesting ideas that I took note of during my most recent reading of Walden, ones that I felt were particularly relevant for the modern challenge of spending less, finding personal independence, and being in control of our resources and of our mind.

But men labor under a mistake. The better part of the man is soon plowed into the soil for compost. By a seeming fate, commonly called necessity, they are employed, as it says in an old book, laying up treasures which moth and rust will corrupt and thieves break through and steal.

Thoreau’s point here is that we sacrifice a lot of our lives working in order to earn external rewards, and those external rewards fade quite quickly.

Think of the many, many things we buy, use for a while, and then discard, or the things that we buy and don’t even use at all.

Think of the piles of stuff stowed away in our closets that we don’t use and will likely never use, that we’ll probably eventually throw away or sell for a pittance or let our children deal with.

What is the good in working for all of that stuff? Why not work for the internal things? Why not work instead to have a great sense of peace and security? Why not work so that you have the time to understand the world more deeply and feel at peace with the big questions in life?

The thing is, working primarily for those internal things often means that you don’t have to work nearly as hard. You don’t really need much to provide basic care for yourself, and if you then spend most of your energy on finding true inner contentment… well, isn’t that a pretty good life?

It is hard to have a Southern overseer; it is worse to have a Northern one; but worst of all when you are the slave-driver of yourself.

This is a quote that marks the timeframe in which Thoreau wrote Walden. While he is unquestionably an abolitionist, he’s also aware that slavery does exist and talks of it as an ongoing human condition in widespread use, which is true for his time.

However, his core point here is that we are often the worst of all masters to ourselves because we can never escape that slavery. Wherever we go, we’re there. If that voice in our head is a cruel, critical master, full of nothing but contempt for the people that we are, that’s perhaps the cruelest outcome of all.

It is hard to find joy when your internal voice is constantly criticizing you.

It’s also easy to fall into situations where we’re tempted to find easy solutions to that criticism. If the voice in your head is shouting at you that you’re not good enough in some way and then a product comes along telling you how it will improve that very thing, it becomes incredibly tempting. The marketer and that foul voice in your head are working in tandem to empty your pockets.

The mass of men lead lives of quiet desperation. What is called resignation is confirmed desperation. From the desperate city you go into the desperate country, and have to console yourself with the bravery of minks and muskrats.

From the debts we owe to others to the critical voices in our head, from our desire to keep up with the people next to us to our desire to find pleasure because we “deserve” it, we’re often rushed along through life, through a series of hard choices that we sometimes feel stuck in.

The thing is, those chains never really go away. I can find temporary peace when I go on a long hike in the woods, but the internal monologue comes with me, as do many of the worries of life.

The only escape from it that I have found is to turn away from materialistic aims and try to soothe the feelings within to the best of my ability, to eliminate as many sources of stress and worry from my life as I can, and to drink deeply from the natural world (those long hikes, for example) and from great books.

Those things don’t cost money at all, but they do require some realignment of life’s priorities, often in an uncomfortable way.

For more than five years I maintained myself thus solely by the labor of my hands, and I found that, by working about six weeks in a year, I could meet all the expenses of living. The whole of my winters, as well as most of my summers, I had free and clear for study.

This is the culmination of what Thoreau’s earlier points are. He essentially works for about six weeks out of the year and earns enough in those six weeks by his own effort to pay for his expenses for the year. The other forty six weeks, he spends it in “study,” which, as we learn later on in the piece, means spending time in nature, in reading, in contemplation, and in the company and worthwhile conversation of people of his own choosing.

This is a very true expression of the often-quoted saying “work to live, don’t live to work.” Work is a necessary act for him, providing just enough so that he could get on with living.

He didn’t work to accumulate material possessions. He didn’t work to acquire property or to appear better than the neighbors. He didn’t work to acquire the latest gadgetry.

He worked so that he could spend his life doing things that brought him peace and contentment – spending time in nature, reading, contemplating, and having good conversations with thoughtful people.

What things do you do that truly do bring you peace and contentment? You’ll probably find that, if you take this seriously and back away from what you think you’re supposed to say, your answers involve very simple things, too. Mine involve reading and spending time in nature, just like Thoreau; I also find a ton of contentment in playing challenging games (like chess, for example) and in time spent with my family, teaching my children life skills and sharing experiences with my wife and with my children.

These aren’t activities that require tons of activity or tons of possessions. A lot of my possessions are centered around things that have little to do with the things in my life that provide the most peace and contentment.

As I preferred some things to others, and especially valued my freedom, as I could fare hard and yet succeed well, I did not wish to spend my time in earning rich carpets or other fine furniture, or delicate cookery, or a house in the Grecian or the Gothic style just yet.

In the end, Thoreau valued freedom above all else – freedom to spend his time in the way that he most saw fit, in the things discussed above that brought him peace and contentment.

What keeps you from doing this? Why is your life not centered around investing the bare minimum time needed to enable you to spend the rest of your life engaged in the things that bring you the most peace and contentment?

It is so, so easy to come up with weak answers to that question, justifications for why we don’t live this way. Instead of listening to and following those justifications, perhaps our lives would be better off if we ignored those justifications a little and strove for freedom instead.

In short, I am convinced, both by faith and experience, that to maintain one’s self on this earth is not a hardship but a pastime, if we will live simply and wisely; as the pursuits of the simpler nations are still the sports of the more artificial. It is not necessary that a man should earn his living by the sweat of his brow, unless he sweats easier than I do.

When I read this, I am reminded of the fact that when I am not pressed up against the wall with financial demands and workplace issues, work is often quite enjoyable. There are few things I’ve enjoyed more in my life than being deeply engaged in a project, calling forth my whole mind and spirit to really accomplish something challenging, and feeling great when it happens.

Work is joyful in that context. It becomes drudgery when we have to earn certain high levels of money in order to pay our bills and pay off our debts, which usually means that in order to earn enough to make that happen, we have to submit ourselves to doing a lot of things we really don’t enjoy. We often end up facing a lot of stress and anger, both from our coworkers and from ourselves.

The best route out of this that we have at our disposal is to be minimal in our spending. What do we really need? Is going beyond that worth exposing ourselves to more of the stressful and negative aspects of work? Is it worth earning less to have more joyful work?

Every morning was a cheerful invitation to make my life of equal simplicity, and I may say innocence, with Nature herself.

By choosing a life of minimal need and want, Thoreau found a deep peace that caused him to awake cheerful at the promise of the day ahead.

He didn’t have much in terms of wealth or possessions, but he had what he needed and valued most: freedom. He had basic shelter, food, nearby access to clean water, clothing, a warm place to sleep, and he was surrounded by opportunity to engage in the things that really lifted his spirits.

What more does one really need in life? What are we chasing that’s more than this?

We must learn to reawaken and keep ourselves awake, not by mechanical aids, but by an infinite expectation of the dawn, which does not forsake us in our soundest sleep. I know of no more encouraging fact than the unquestionable ability of man to elevate his life by a conscious endeavor.

Thoreau was strongly encouraged by the ability of a person to improve themselves by their own continuous and conscious effort. We are all capable of being more than we currently are if we choose to direct our efforts in that way.

We can be better people. We can find contentment. We can be healthier and more virtuous. It’s up to us.

There is no magic machine that will do those things for us, either. In the end, it is our own choice that will make us better. You can have all the workout machines in the world, but it is still up to you to choose to exercise. You can have the best alarm clock in the world, but it is still up to you to rise out of bed in the morning.

What will you make of yourself? Remember, you don’t need stuff to do this – you already have everything you need.

With a little more deliberation in the choice of their pursuits, all men would perhaps become essentially students and observers, for certainly their nature and destiny are interesting to all alike. In accumulating property for ourselves or our posterity, in founding a family or a state, or acquiring fame even, we are mortal; but in dealing with truth we are immortal, and need fear no change nor accident.

Thoreau is making a subtle argument here for being a lifelong learner. If we spend at least some of our time learning new things and contemplating those new things into a deeper understanding of the world, and then we share at least some of the truth that we uncover, we’re doing something truly timeless, far more than collecting wealth.

Think about it this way. What will have a more profound affect on the world – buying a latte at Starbucks, or spending an hour learning about something new that unlocks understanding in your head which you’re able to share with a few people? Which will have a more profound and lasting effect on you?

His argument that ideas are timeless and things are far from it is one worth thinking about.

I learned this, at least, by my experiment: that if one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours. He will put some things behind, will pass an invisible boundary; new, universal, and more liberal laws will begin to establish themselves around and within him; or the old laws be expanded, and interpreted in his favor in a more liberal sense, and he will live with the license of a higher order of beings. In proportion as he simplifies his life, the laws of the universe will appear less complex, and solitude will not be solitude, nor poverty poverty, nor weakness weakness. If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.

In this final quote, Thoreau is making the point that if a person rushes toward their dreams, that person is in danger of losing them if there is not a firm foundation underneath them.

What is that firm foundation? Well, certainly, a financial foundation is part of that. Knowing that your meals and shelter is secure for the foreseeable future is undoubtedly going to help make things more secure in your life.

It’s more than that, though. Another part of a foundation is that you have a good character and good values to rest your life endeavors upon, so that your own personal failings don’t undermine everything you’ve worked for. Yet another part is the things you’ve learned, and another part is the core relationships you have.

It is easy to strive for great things in life – a beautiful house, a booming career, a wonderful partner. However, if you ignore the foundations under them – a strong character that won’t fail you, good values, a firm sense of your finances, strong and healthy relationships, a good understanding of the world – the great things you build won’t suddenly fall apart underneath you.

It is worth pointing out that I took note of many other things while reading Walden – thoughts on human relationships, on morality, on appreciation of nature, on doing things for myself, on the power of reading challenging books. Walden is far from one-dimensional; in fact, it reads more like a series of essays that are interconnected by the overall narrative of life on the shore of Walden Pond.

This is not the easiest read in the world, but it offers up a great deal of value if you take it slowly, read it in pieces, jot down a few notes, and reflect on them. It will open up some very deep thoughts about one’s direction in life and how one should participate in the modern world and what one owes to themselves. Those are weighty questions, indeed, but they form the true foundation of personal finance.

The post Books with Impact: Walden appeared first on The Simple Dollar.

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