Saturday, February 28, 2009

Learn About Your Hobby Online

Saving Money Tip #79 - Learn About Your Hobby Online – Many of us have hobbies that we are passionate about – collecting teaspoons, fixing antique cars, baking bread, etc. And back in the day when I, and probably most of you, was growing up, we were lucky if we knew another person in real life who had the same passions. Today, with the advent of the computer, we are fortunate because on a daily basis we can “talk to” other people who have the same interests as we do. And the best part is, it often doesn’t cost us any money. Granted, finding a kindred soul in real life who likes the same things as we do is much better than “meeting” someone on the computer. But what are the chances of finding someone who also collect Russian nesting dolls in your small town? Pretty nil. And that’s when the World Wide Web becomes a very useful tool.

So if you have a topic that interests you, go to Google or a similar search site (I’ve actually been using Swagbucks to search lately so I can collect points to redeem for Amazon credit, but that’s a post for another day) and type in your hobby. Let’s say you are passionate about 1960’s Fisher Price toys. Do a search of “Fisher Price Toys collectors” and right away a site comes up for collectors of these vintage toys. You can view pictures of the toys, meet the owners who have them, and learn about the ins and outs of these vintage playthings.

There are literally thousands of collectors clubs or hobby groups online from quilting groups to train enthusiasts to clubs whose members are passionate about old highways. In fact, there is even an association for collecting clubs. Of course, the more obscure your hobby, the less likely you will be to find an online group, but you might find a forum whose interests are at least similar to your own. And even if you don’t, you can always start your own online group. By joining an online hobby or collectors' group you will find like-minded individuals who share the same passion as you. You can discuss methods of collecting or how to improve your skills in your hobby. You may be able to trade or buy things for your collection. And sometimes you can attend a real life meeting or at the very least you may find a member who lives near you!

In Real Life (IRL) – I am a pretty social person in real life. However, there are certain hobbies that I enjoy, but I have few friends who like the same things. Because I sell things on eBay, one activity I like to do is frequent yard sales. Almost every weekend in the spring and summer I can be found scouring the yard sales in my town. And while I have met a few people while I am out at sales and have a couple friends who enjoy yardsaling once in a while, I don’t know anyone personally who likes going every weekend. Fortunately a couple of years ago I found an online forum called where I have found other like-minded individuals. On an almost daily basis I can talk about my finds at yardsales and hear about others’ scores. We can discuss how to hunt down the best sales or which ones to avoid. We share tips about selling on eBay and even discuss topics unrelated to sales. It’s a fun hobby, it helps my small business of selling, and I enjoy “meeting” others like me who have similar interests.

My daughter and I have an American Girl doll collection and I also sell them pretty frequently online. While trying to learn more about the dolls, I found an American Girl Doll Collectors Site. By joining the group I am privy to important doll collecting information. I find out about coupon codes for buying the dolls and have learned how to spot a fake. While my passion is nowhere near the level of other members (did you know some dolls have their own blogs? Seriously!), I still like checking in there once in a while to see what is new in the world of American Girl Dolls.

One last in real life scenario. Recently, I have been doing a lot of cooking and baking and one of the foods I am determined to master is the homemade pizza. I have made a lot of them over the past year but frankly, all of the pizza recipes I have tried taste very Midwestern (no offense to you folks from the heartland, but there is no pizza like a New York pizza). Guess what I found a few days ago? An online pizzamaking group! With a whole section devoted to how to make a New York pizza. You wouldn't believe the passion for pizza by some of these members. I tried a recipe out last night on my family and it was a huge improvement over the other pies I had been making.

There is so much information out there on the Internet. And once you find a group who is passionate about a topic, you can learn a lot from them. People are very generous with sharing their knowledge online. So if you have a topic that interests you, check for a forum online. You may learn some new information, find some new friends, or improve your skill. Finding an online group can provide you with many benefits. Why not check one out?

Friday, February 27, 2009

Shop At Natural Food Stores

Saving Money Tip #78 - Shop at Natural Food Stores. Natural food stores are not always more expensive, and in fact can sometimes even be cheaper than traditional stores. In today’s climate of tainted milk in China, hormone-fed cows, and peanut butter with salmonella, many of us would like to shop at a natural food store, but the general impression of these stores is that the food is more expensive than at traditional supermarkets. It is true that some foods at natural food stores can be more expensive than their traditional counterparts. And some of them do not accept coupons or do not carry products that normally have coupons. But, there are many foods there that are equivalent-priced or even less than at traditional markets. And most of us live in an area with at least one natural food store chain nearby.

It used to be that natural food stores were small specialty stores, probably operating with large overhead. But nowadays, as they have become more popular, they have grown into larger chains, which seem to have brought the prices down. The three big natural supermarket chains in the US are Whole Foods, Fresh Market, and Trader Joe’s. And while many big supermarket chains now seem to be carrying their own line of natural foods or organic foods, the natural foods store chains seem to beat traditional stores in their prices for organic or natural products.

At natural food stores products are made without chemicals, additives, hormones, high corn syrup, etc. Not everything is organic, which comes with stricter guidelines, but most everything is made naturally, meaning there are not preservatives or chemicals added to the product. Many natural food stores have their own brand products, and they are often equally priced to typical brands at the traditional market. Furthermore, if you stick with certain items, you will not spend much more (or may even spend less!) than at traditional stores. In general, if you stay away from prepared foods and specialty items, you will do okay cost-wise. And buy natural products rather than organic ones. You will still get the health benefits of a natural product.

When shopping at natural food stores, try to buy produce that is on special for the week. Milks and cheeses, made without hormones are often comparable in price to that of regular supermarkets. Breads without chemicals or preservatives often cost less than a premium brand made with preservatives found at a regular market. Jellies made from only fruit or with natural sweeteners often have a competitive price to big brands found at other markets, which are made with high fructose corn syrup. Natural food stores’ pasta, sauces, and soup broths often have fair prices, too. And frozen fruits and veggies often have comparable prices, too. In fact, looking at that list, it seems that staple items seem to be the items that are priced fairly at natural food stores.

Of course, not everything natural food stores is competitively priced. I suggest checking out your closest natural foods market and making a price list of items that you normally buy and compare it to what you would pay at a traditional market. Once you make a list of items that are competitively priced at the natural market and fit into your food budget, it may be worth it to do a weekly or monthly stop at the natural food store to stock up on such items.

In Real Life (IRL) – In our area, we have Trader Joe’s and Whole Foods. I shop at Trader Joe’s monthly and I go to Whole Foods weekly, since it is walking distance from my house. I have a regular list of items that I buy at each of these stores. Most of the items are natural but not organic, which tends to be more expensive.

In general, I buy milks, shredded cheese, and cream cheese at Whole Foods. Milk is the same price as at Safeway or Giant, the two biggest grocery chains in the DC area. Yet, they don’t have hormones in it! A 12-ounce bag of shredded cheddar is $4 and a 16-ounce bag of mozzarella is $4.99. It’s not a bargain, but it’s actually a better price than Giant’s shredded cheese prices when they are not on sale. Again, it is made with no hormones. A block of cream cheese is about $1.49. Vegetable or chicken soup broths in the carton at Whole Foods are $2, and they are organic. You can’t get those prices at Giant. I also buy all-fruit jelly at Whole Foods for $2.29. I love that there is no high-fructose corn syrup in it. It is cheaper than the comparable Polaner all-fruit at the regular market (unless I have a coupon and it’s on sale). I generally only buy produce at Whole Foods if it is on sale, because their produce can be pricey. But they often have pretty good sales on one or two items each time I visit. And much of their produce is local, which has a better impact on the environment. I regularly buy sandwich bread there as well – it’s $2.29, which is similar to a sale price on Pepperidge Farms or Arnold breads at a traditional store.

Trader Joe’s is an experience if you have never been there. It is a completely "fun" environment with their nautical decorations and attire. Their prices are often lower than at other natural food stores because they avoid the middleman and market many products under their own label. They do not run sales ever – so the prices are consistent each time you visit. Many of their foods are very tasty, and if you don’t like something you buy there, you can return it for a full refund! I tend to buy all of my frozen veggies at Trader Joe’s. They have competitive prices and the flavor is always delicious - especially their sweet corn. I also buy some frozen fruits there, as well if they are out of season. And I always buy a container of hummus every time I visit, too becuase it has the cheapest price around ($3.49 for 16 ounces). Their bananas are 19 cents per banana and their bags of apples can often be bought for under $1 per pound. I also stock up on bagged pasta, which is 99 cents per bag and imported from Italy. Their tomato basil pasta sauce at $1.79 per jar is cheaper than the regular price of Ragu at the supermarket, and is twice as good! Even their ground beef has fair prices. In general, I have a whole list of items I buy at Trader Joe’s for a monthly stock-up visit. Their quality is good, and the prices for most items are very fair.

I am not too familiar with Fresh Market, although I have visited the chain a few times when I was traveling. It reminded me of Whole Foods, and I am guessing that the prices would be comparable. If you live near one of their stores, please check it out and report back!

Overall, if you get to know the products that natural food stores carry and the prices they charge, you will find that some of the things are worth buying there on a regular basis if you care about not eating preservatives, chemicals, hormones, etc. There are many items that are competitively priced, especially their store brand products. By shopping smartly at natural food stores for certain items and still picking up bargains on other items at traditional stores, you should be able to stick to your food budget and eat more healthily, too.

Thursday, February 26, 2009

Prepare Your Own Taxes

Saving Money Tip #77 - Prepare Your Own Taxes. At least try to do them. It is a great lesson in how taxes are computed. And you might just find out that yours aren’t that difficult to do. By doing them yourself you may be able to save yourself hundreds of dollars. And if you are not confident in your ability to calculate your taxes properly, why not give it a try before handing them over to your tax preparer? You may come up with the same calculations as your tax preparer does. And then you know that you have the ability to do your own taxes and can do them yourself next year.

If you want to take a stab at your taxes, you can do it primarily one of two ways:
1. By hand on paper, using a calculator and your head to do the arithmetic.
2. You can use one of the popular tax preparation software programs.

Personally, I think doing them by hand the first time is a great lesson on how to do your taxes. But I’m weird that way. I like math. Most people would probably bypass the “by hand” method and go right to the electronic or computer method. If you don’t want to try them by hand, then go online and look at the different types of software available to do your taxes. The three most popular types of tax software are TurboTax, TaxCut, and TaxAct. TurboTax is the biggest tax software program. TaxCut is produced by H&R Block, and TaxAct appears to be a free tax software program for those with simple taxes. I have always used TurboTax so I will mostly talk about that program. But if you want, you should look into the others to see if they are more appropriate for you.

If your finances are relatively straightforward and simple – income from your employer and some money in a savings account and no itemized deductions – then you may be able to get away with doing the 1040EZ form. You can go to the store and buy the TurboTax (or Tax Cut) 1040EZ package or you can do any of the three online tax programs for free! If your taxes are more complicated, go into your bank's or financial institution's website to buy the TurboTax program. By going through your bank, credit union, or mutual fund company's website, you will often get a discount of at least 20% on TurboTax. Make sure you check each one you have an account with because some financial institution's discounts are better than others.

The first time you do your taxes will generally be the hardest. You have to figure out where everything goes and sometimes the IRS jargon that is used may not be very clear. If this year is the first time doing it, make sure you pull out last year’s taxes to compare it to. That will make the job much easier. After completing your taxes the first time, it becomes much even easier in the future. For the most part, you can look at which lines you completed in previous years and fill them in with updated numbers. And when doing them online most of the information is already pre-filled for you. And you will see a line-by-line comparison of this year to last year. So if something looks out of whack, then you can spot it pretty easily.

If your taxes are complicated because you own a business and have employees or have inheritances and other complicated matters, then it may be wise to use a tax preparer who is knowledgeable on which deductions to take or how to keep your taxes the lowest within the guidelines of the law. However, I still think it is a good idea to at least try doing your taxes yourself. You can start your taxes for free with Turbo Tax even if you don't follow through and file them yourself. If you have a business then you know best what is going on there so why not attempt it? But I especially think you should try doing your taxes if your income and investments are straightforward. Try taking a stab at them this year. You might find that your taxes are not complicated to do at all.

In Real Life (IRL) –
I have been doing my own taxes since one year after I graduated from college. While I was in college, my dad still claimed me as a dependent. And my first year out of college, my dad’s accountant did my taxes for me. That was the one and only year the IRS sent me a note that there was a mistake!

Since then I have done my taxes myself. I’ve had it somewhat easy because each year my taxes have become progressively more complicated. It started out with straight income and a few investments. And then progressed to calculating capital gains and losses from stock purchases and sales to itemizing deductions from mortgage interest, adoption credits, and having a small eBay business. Fortunately I was able build on the knowledge that I already had from previous years. If I started doing my taxes when they were already somewhat complicated then I may not have finished. But as mine got progressively harder, I’ve been able to learn each year as I go along.

The first year I did my taxes, I did them by hand. And because of that experience I felt like I got a full understanding of where the numbers are pulled from on the various forms. After that I started buying TurboTax in the store. I started with the EZ edition and as the years went by, I moved up to the deluxe edition. A few years ago, I started doing the TurboTax online by going through Vanguard or similar websites. This year Vanguard offered me the best package for the deluxe edition for only $19.45. By doing them online, it's not only convenient, but the refund (if you're getting one!) is often directly deposited faster than if you mail in the return. In general, my taxes are more difficult to complete than those who don’t itemize their deductions or have investments with capital gains (or losses as is mostly the case this year). But they are not as complicated as others who have their own businesses with employees.

I think there are people out there who have very simple taxes to do but are too scared to do it themselves. And they are willing to pay several hundreds of dollars for someone else to do them for them. I say this because recently someone in my Mom’s Club asked for recommendations for a tax preparer. She was looking for someone cheaper than she used in the past. She said her taxes are pretty simple and that she paid $600 last year! That sounds like an awful lot to me for simple taxes. That’s why I think everyone should at least try to do them themselves. If you have nothing complicated, TurboTax or a similar program walks you through the steps. And you can save a lot of money while you are at it. And if your tax situation is more complicated, then doing them is still a good exercise even if you don't file them yourself. Try it!

Tuesday, February 24, 2009

Why I Blog

Lately, I’ve been searching through blogland looking at the various personal finance blogs out there. Some are about living frugally, while others detail which investments are the best ones to get into. As I read these blogs, it occurred to me that I’ve never really spelled out the purpose of my blog. And, truthfully, that’s probably because when I began writing it, I’m not sure that I even knew. But I will share with you how this blog came about. It started out about a year ago. I think I was looking online for some coupons or something on frugal living. I stumbled upon some “Mom” blogs that talked about frugal living. This concept wasn’t new to me. I had read Amy Dacyczyn’s “Tightwad Gazette” many years earlier and still own a copy, even though I am not a complete adherent to total frugality. Many of the blogs I read showed how to keep your grocery bill down and how to get free or very cheap items from various drugstore chains. Somehow I got caught up in reading them, and although I never really pursued the direction of getting free things at the drugstores, I did enjoy reading about the various ways people plan their monthly menus, how they bake their own bread, and the way they make their own laundry detergent.

The more I read some of these women’s blogs and the comments on them from the mostly female readers, the more I realized that a lot of these blogs are great detailing about savings in the kitchen and in other parts of the household that are traditionally run by females. However, I thought that maybe I could write a blog that went beyond savings on groceries and on living frugally. I thought about all the things I’ve done in my life to save up the amount of money that I have – a combination of living below my means and investing money on a monthly basis. And I thought that perhaps there would be an interest in tips of this sort as well as how these financial ideas play out in real life. Besides, it was 2008 and it seemed like everyone had a blog.

And that’s when, 5 months ago, I started this blog. Honestly, I don’t know much about blogging. I’m not sure of some of the “rules” and I don’t know how to do some of the fancy technology that everyone else seems to know. I blog relatively anonymously because I think I’d feel funny if people I know in real life read this blog and learn all about my personal finances. In fact until a month ago, my husband was the only person I knew who knew I have a blog. I’ve since told my parents and siblings and one friend. By keeping it relatively anonymous, I feel more comfortable discussing my financial status.

In the past few weeks, I decided to look into the larger blog world beyond the mom blogs that I had been reading to see what other “personal finance” blogs are out there. And it looks like there are quite a few good ones. Although, what I do notice is that most of these are written by men – some giving financial advice on which mutual fund is better than another and others about whether to invest in t-bills or stocks. The other thing I notice is that many blogs are written about how to get out of debt. It seems that most are written by people who have been or are currently in debt and are trying to get out and help others get out. Since I have never been in debt (other than my mortgage), my blog is not geared toward getting out of debt. I truly have no experience in this area. And while I am not a financial expert by any stretch of the imagination, my hope is that I can bring a woman’s perspective to saving money – not just on how to reduce ones bills and live frugally, but also how to put away money on a regular basis for retirement, for your children’s education, and for your future living expenses. My goal is to show that anyone can live below their means to attain financial security and financial freedom just as I did. I appreciate those of you who have been reading and commenting on this blog so far.

Monday, February 23, 2009

Check Out Kids' Consignment Sales In Spring And Fall

Tip #76 - Check Out Kids' Consignment Sales Each Spring and Fall. Every spring and every fall in many areas across the USA, preschools, moms groups, churches, civic groups, and private organizations hold kids' consignment sales. These are not yard sales or rummage sales, and they are not consignment stores. They are seasonal sales put on by a group, usually associated with children. Here's how they work:

In advance of the sale, members of the group or from the general public bring children's clothing, toys, baby gear, outdoor play equipment, etc. to sell. The owner decides on the price she wants for the items; she tags them as such, and leaves them with the consignment sale staff to be sold.

Then on a given weekend, the consignment sale is held. It is usually held on a Saturday, but some are also held on Sundays or on Thursdays and Fridays. Some sales may be a week-long. Buyers from the area shop at the sale, buying items that are tagged from all different sellers. Usually items are 50% to 75% below the original retail cost. Real bargains can be found as some sellers tag their items far below retail value. The great benefit for the buyer is having all of these children's items in one location. A full season of clothing, toys, and gifts can be purchased from one or two consignment sales.

After the sale is over, the seller collects the money from the consignment sale staff for all of her items that sold. Usually, she splits the sale price with the group sponsoring the consignment sale - often a 50-50, 60-40, or 70-30 split. The group cleans up their sale location and they don't hold another sale until the following consignment sale season - usually in the fall and spring. The seller goes home happy because she made some money on thing her children don't use anymore. The buyer goes home happy because she bought things she needs for far below retail value. And the consignment sale sponsors are happy because they have made some money for their group.

If you have never been to a kids' consignment sale and are interested in either selling at one or shopping at one, there is a site called Kids Consignment Sales that has a general list of seasonal sales in different parts of the country. There is also The Bargain Watcher site. Click on your state and city in either site to find sales in your area. These sources are not comprehensive, but they are a good place to start. In the DC area where I live, there is a site called Our Kids that has a pretty accurate list of sales in Northern Virginia, DC, and Maryland. I'm sure other cities have local lists, as well. Sometimes when you are attending consignment sales you can talk to other shoppers and find out what other sales are in the area or which ones are bigger, have better prices, have more items, etc.

As a seller, seasonal kids' consignment sales are a great place to make a few dollars on things you don't use anymore. You can usually price things higher than you would at a yard sale. While you have to split the proceeds that you make, you will often get many more targeted buyers so you should sell much more than you would at a yard sale. Also, you might be able to sell with a group whose cause you believe in or to help out a local preschool.

As a buyer, you will find that prices are often higher than at yard sales. But rather than spend every Saturday all summer long looking for bargains, you can find thousands of items under one roof. Typical items at kids' consignment sales include: strollers, clothing from infant to teen, outdoor toys, highchairs, bouncy seats, board games, dolls, sheets, sports equipment, shoes, books, videos and dvds, computer games, baby toys and items, maternity clothes, puzzles, etc. The prices are generally cheaper than at consignment stores. Also, you will often find a large price range for items since items are priced by various individuals. Furthermore, many of these sales will have a 1/2 price day the last day of the sale or a 1/2 price hour for the last hour of the sale. This is often a good time to snag some bargains on items that didn't sell.

If you have never been to a kids' consignment sale before and if you have children, I urge you to check out the sales in your area. You will find them to be a great place to make a little extra money or to save some money on items you need to buy.

In Real Life (IRL) - I love, love, love kids' consignment sales. Every winter I look forward to the spring time when I can start attending them again. They are already marked on my calendar. My husband knows that Saturday mornings in March and April are mine (as well as Saturdays in September and October). Sales in my area usually start at 8 or 9 AM. I try to get there very early to get the best things. And if I can't get there early I will often wait to go to the 1/2 price sale if there is one. While the large ones have a great selection. I find that the smaller ones often have better prices.

I have been attending these sales for about 5 years and in the past I have bought name brand dresses such as Gymboree and Little LuLu. I have bought American Girl doll clothing and accessories. I have bought vintage toys. I have bought Daisy and Brownie uniforms as well as the handbooks for my daughter. I have purchased a whole season's worth of clothing for each of my children. I have found a vintage Little Tikes Dollhouse filled with dolls and accessories. I've bought crib sheets and a changing pad, socks, jackets, and shoes. I've bought board games and toys. The list goes on and on.

During the fall sales, I usually buy things for the upcoming holiday season and my daughter's birthday. In the spring I look for outdoor play things and for my other daughter's birthday. In both seasons I also look for things to resell on eBay. Each sale has a wide variety of things that I rarely leave empty-handed. If you want to see a picture of one of the sales I've attended in the past, check out this website for Dani's Duds. They are one of the largest sales in the DC area. And while they now have an entrance fee to attend, most sales do not. But it will at least give you an idea of what types of things are sold and the scale of these sales (remembering that this sale is bigger than most). If you get a chance, check out a kids' consignment sale this spring. I think you'll enjoy it.

Sunday, February 22, 2009

Put Away Money and Forget About It But Remember It, Too

Tip #75 - Put Your Money Away And Forget About It, But Remember It, Too. As you start building up your savings, you will need to manage your money. Did you put it in the right investment? Are there different accounts out there that are better? Are there the same types of accounts out there that earn more money?

There are some people who become so enamored with their money that they check their accounts each and every day. They check the balances of their savings accounts; they check the prices of the mutual funds they own; and they calculate their net worth (what you own minus what you owe) more often than some people shower. Then there are others who take a financial advisor’s advice on where to save money. And they put money in various investment accounts and do not bother to look at their statements ever. They don’t keep track of how much is in each account. And they may not even remember or quite understand where their money is located.

Which way of these is the better? Should we track our savings every day? Or should we put our money away and forget about it until we need it? Of course the answer is both.

First, we should be knowledgeable about where we put our money. If you are taking a financial advisor’s advice about where to park your money, make sure you understand every last bit about the investment – the risks involved, how much you are earning, what fees there are with the investment, and any penalties it has for early withdrawal. If you are investing your money yourself, then you should know all of these things as well. Once you understand the investment and are comfortable with the type of investment it is (money market account, mutual fund, CD, etc.), and you believe you have shopped around gotten the best rate for that type of account, then put your money in it and forget about it.

But re-evaluate it, too. Not every day. Not even every month. The most often you should be re-evaluating your accounts is once every three months. Every six months is fine, too. And at minimum, you should look at them at least once per year. It really is not necessary to look at these accounts everyday. If you do, you will end up micromanaging the accounts and second-guessing what investments you made when you were investigating where to put your money. By micromanaging them, you may get caught up in the daily fluctuations of the market and make bad decisions based on that. However, If you don’t manage the accounts at all, you may become so ignorant of what is going on in the economy and how your accounts are faring, that you may not be taking advantage of opportunities out there.

For example, suppose Joe Worker, age 32, after talking to some knowledgeable people at work decides to buy a stock mutual fund for his retirement account in a 401(k). He makes this decision because retirement is about 30 years away and he’s comfortable taking some risk with this money since it will be put away for the long term. He commits $1,200 in it per year. After he puts the money in this mutual fund, he gets a bit nervous because he’s never invested in an account that could lose money before. So what does he do? He checks the newspaper every day to see how the mutual fund is performing. Or every morning he goes online and signs into his account to see how much money is in it. And on the days he sees that there is more money in it than the day before he is happy! And on the days it is less, he is tempted to move that money out of this ‘risky’ account and put it in a money market account. What is wrong with this behavior is that Joe is now being influenced by the daily fluctuations of the stock market and is not thinking long term anymore. Remember, when he was level-headed and making the decision of where to put the money, he realized that he will not need this money for 30+ years. He knew at that time that what is important is how the stock market will do over 30 years’ time, not what it is doing on a daily basis this year. But now Joe is looking too closely at his account.

On the other hand, Susie Homemaker, age 40 put money away for a new car she plans to buy in 3 years. She put her money into a money market account earning 2% interest. She was advised by her friend that this was a safe place to put money that she will need in the relative short-term. She looks into two banks in town and picks the one with the better rate. She puts her money there and forgets all about it because she’s not really interested in investments. She’ll get the money when she needs it. A year later, however, interests rates have gone up, and while her money market account’s rate's have gone up, too, the bank across town is offering new customers an even better rate than Susie is getting. But Susie misses out on this offer because she has no interest in investments and in her mind she has put her money away to not be seen again until 3 years down the road. Susie is not actively managing her account at all and missed out on a good opportunity to make more interest on her account while having the same risk.

There is a fine line between how much managing of your accounts is too much and how much is not enough. You want to make smart decisions based on what is going on around you, but on the other hand, you don’t want to be influenced by day-to-day fluctuations. You have to find the right balance between being aware of what your money is doing, but not making decisions based on a temporary change. Strike the right balance on how much time to devote to reevaluating your investments. If you made good decisions in the first place (safe investments for the short term, investments with more risk for the long term), then I think between every 3 months to once a year should be often enough to re-evaluate where you parked your money.

In Real Life (IRL) – I relayed my story of how I first got involved in mutual funds. I was in my early 20’s and was convinced by my dad and brother that this was the way to go for my long-term money. What I didn’t tell you was that I became in love with this mutual fund. This was the early 1990’s and stocks and mutual funds were performing through the roof. At about the same time that I investment in my first mutual fund, a friend at work invested in one, too. We had so much fun checking our accounts. Everyday at work we would check the newspaper to see how our accounts performed. We made spreadsheets predicting how much money we would have if our accounts continued to perform at 15% per year for the next 20 years (ha, don’t we wish!). We both became obsessed with our accounts and the competition of which would do better. Fortunately, because it wasn’t going down, I wasn’t tempted to take the money out. But I was evaluating my investment entirely too often. How the money did on a daily basis was inconsequential. The money was long-term money, and all I really needed to be concerned about was whether this investment was right for a 30-year ride. I really didn’t need to reevaluate it more than every 6 months or every year. But I was new to investing and that’s what I did.

I’d like to say I've grown up since then, and maybe I have. But the truth of the matter is I just got too busy. With three young children, I very rarely check on what my investments are doing these days. Yes, I know the stock market has tanked in the past year. Yes, I know the economy stinks and that we are in a ‘recession”. But it truly hasn’t affected where I put my investments so many years ago. I hardly ever check them, mostly because I’m too busy rather than because it’s the right thing to do. But it is the right thing to do. I am only 41 years old. What the stock market is doing today should not bother me because I am not retiring for about 20 years. I know I made the right allocations for my retirement fund based on my age and years until retirement. And I do look at those allocations at least once a year, usually twice. But that’s it. I forget about them for the most part. Overall, I don't pay attention to daily fluctuations in my accounts (okay maybe I peeked once or twice on particularly bad stock market days). In the end re-evaluating your investments just a few times per year is the best thing you could do for your money.

Friday, February 20, 2009

Take Inventory

Tip #74 – Take Inventory Of What You Have. You can probably cut back on buying many things if you just go around your home and write down exactly what it is you have on hand. You may have purchased plenty of an item a long time ago that you have forgotten about. Or your house is cluttered with so much stuff that you don’t know what you have or where it is.

How about taking a piece of paper and listing all of the items that you use on a regular basis? Then take stock of the things you have in the house. It will give you a good idea of what you do not need to buy and what you need more of. You may not use everything on this list, but here is a sample list I wrote up:

shampoo, lotion, tissues, toilet paper, nail polish, razors, bandages, feminine protection, diapers, wipes, cotton balls, cotton swabs, toothbrushes, toothpaste, mouthwash, nail files, Tylenol or similar medicine

Office Supplies:
pens, pencils, paper, markers, tape, staples, paperclips, rubber bands, glue, envelopes

socks, pantyhose, underwear, undershirts, hats, gloves

batteries, film, blank DVDs, video camera tapes

washcloths, laundry soap, bars of soap, dish soap, dishwasher soap, household cleaners, sponges

Food Staples:
canned goods, flour, sugar, ketchup, cereal, salt, pepper, spices, bottled water

Kitchen supplies:
napkins, paper cups, paper plates, paper towels, trash bags, baggies, aluminum foil, plastic wrap

Do you have your list made up? Good! Now go around and put down a count of how many you have of each item. Then estimate how long it will be until the supply you have will be used up. For example, suppose you counted 26 tubes of toothpaste. If you estimate that you normally use one tube per month, then you have more than a two years’ supply. If you are one of those people who likes to have a one-year supply of things, then there is no need to buy any more toothpaste – regardless of how good the deal is. You have more than enough on hand. However, if you only have three pairs of pantyhose and you know you go through about 12 pairs in a year, then you need to add it to your list of things to buy.

If you are like me and thousands of other Americans, you will probably find that you have way more of many items than you originally thought. And because of that, you can probably hold off on buying things for a while. Use what you have on hand and save some money.

In Real Life (IRL) – I was reading a blog the other day with a link to some super environmentally-friendly sponges that are available called Skoy Cloths. Since I am pretty environmentally conscious and they got good reviews, I considered buying them. Then I thought to myself, the best thing to do for the environment and for my pocketbook is to use what we have on hand before I buy something new. I remembered that when my mother-in-law had visited her sister in Germany last year, she brought us back some dishcloths. I put them away in the closet and forgot about them. So I went on the hunt in my house and found the package of 6 reusable cleaning cloths, along with a few sponges. No need for me to buy those environmentally-friendly cloths right now (although I might try them out in the future).

That got me thinking about other things in the house that I have laying around that I can use up before buying more. I looked in the medicine cabinet and counted 12 bottles of nail polish! I am not a nail polish kind of gal; therefore many of them have been sitting in the medicine cabinet for years. However, my girly girls like to have their nails polished. I think the supply that we have in the medicine cabinet will last them 5 more years, at least.

I then moved on to paper party plates. I don't use paper on a regular basis, but I do if I throw a big party. I counted plates and figured I have enough for the next two or three parties we hold. Of course some say "Welcome Baby" and others have Dora on them. But it will make for some interesting conversation at the next party, and I’d much rather use up what I have before I buy more. I haven't finished taking inventory, but it's been interesting to find what we have stocked up in this household, and I'm not a person who necessarily stocks up much.

I have a friend who is constantly shopping, and her house is pretty cluttered. She and her husband have been on a cleaning spree lately. The husband told me the other day that he is happy that they are finally cleaning up, because they be able to find some of the stuff they have ‘lost.’ He said they have bought so many duplicate things because they couldn’t locate the one they owned. Now that’s a topic for a whole other post! But the waste is the same if you are buying stuff you already have, as some it may never get used or could go bad before it does. And there is really no need for duplicates of certain things.

Of course I know that many of us like to stock up on things when they are free or a great deal. And I agree that it is a great practice to save money if you will use all of it. But once you have a year’s supply of something, you should be able to stop buying it no matter how good the deal is. The bargains will always be there. So take stock of what you have, and if you have plenty of something (a year's supply or a three-month supply, whatever you are comfortable with), then save yourself some money and don't buy any more.

Thursday, February 19, 2009

Buy An Umbrella

Tip #73- Buy An Umbrella. An umbrella insurance policy, that is. If you have any significant amount of assets or sometimes even if you don't, make sure you also have an umbrella insurance policy. Insurance is one of those products that is often described as a “necessary evil” – something you don’t want to buy but feel that you have to. In addition to health insurance, some of you have life insurance, car insurance, and renters or homeowners insurance. But how many of you have an umbrella policy? An umbrella policy does what it sounds like it does, it covers you over and above your other policies, like an umbrella. In this recession, the last thing I like to write about is how to spend more money. However, just like the famous saying that it takes money to make money, it also takes money to protect your money. And that’s what an umbrella policy does. It protects your money.

For example, you may have car insurance with coverage of $100,000/$300000, which means the car insurance policy will cover $100,000 per person for liability up to $300,000 if you cause a car accident. But what if the accident you cause sends someone to the hospital with life threatening injuries? Will $100,000 cover their hospital stay? Probably not. And even if it does, the person will likely sue you for compensatory damages, in other words, pain and suffering. And that could go into the hundreds of thousands or even millions of dollars.

Or suppose someone slips on the ice on your walkway while coming over to visit you? He breaks his back and can no longer work. He can sue you for loss of wages for his lifetime. That will surely go into the hundreds of thousands of dollars. Your homeowner’s policy may only cover $100,000 of that and they could go after your other assets.
If someone causes an accident and you are hospitalized for a long time with extensive injuries, then if the other driver doesn't have enough insurance or assets, your umbrella policy will cover you after you have utilized the maximum amounts on your other insurance policies.

For either of the first two cases, if you have an umbrella policy, the person who sues you will probably try to get the maximum out of your policy. And he/she will most likely be happy with that. If you have no umbrella policy, the person will go after your homeowners or car insurance policy and if that isn’t enough, he/she could go after your assets – such as the money you have saved in a bank account or even your home. Unfortunately, lawsuits are increasing in this country. And that is pretty scary. It’s so scary that I think it’s worth the $150 per year to have an umbrella insurance policy covering you for up to $1 million dollars. It’s money that you wish you didn’t have to spend, but will be happy you did if you need it. ***

In Real Life (IRL) – I want to relay a sad and scary story that happened to some friends of ours last week – a husband and wife with three young children. They called us up a few days ago and told us they had just been on vacation. While they were on vacation, they rented a car. The husband was driving and he turned his head for a moment and he crashed into the car in front of him, which hit the car in front of him, which hit the car in front of him. All told, I believe four cars were involved in this accident that my friend caused.

Now here is the sad and scary part. Four people had to go to the hospital as a result of this accident. And one of them was a child. And the child needed a plate put into his skull. It is sad beyond belief that this child’s life is changed forever. And it is scary for this family that we’re friends with because he only has coverage on his automobile insurance for $100,000 per person up to $300,000 total. And I’m pretty sure a hospital stay for a person getting a plate put into his head is going to run more than $100,000. And I can pretty much guarantee that this child’s family will be suing someone for pain and suffering that this child will endure for the rest of his life. This does not even take into account the other people who were also injured in the crash and the cars that were damaged.

My husband works in property/casualty insurance so our friend was calling for some advice. The first thing my husband asked was whether our friend has umbrella insurance that will cover him once his automobile insurance is maxed out. The answer was, “No.” After giving him some advice, my husband hung up the phone and said, it’s possible that one or all of these people might go after our friends’ assets, including their house. Depending on whose name is on the house, a lien could be put on it (which means it wouldn’t be taken away until this couple sells the house or they die) or it could be taken away. Of course there are other scenarios, too. The people injured could go after the car rental place or any of the other cars that hit them. Or as my dad says, they will probably go after whoever has the deepest pockets. Who knows how it will play out? What I do know is that if our friend had an umbrella policy, he would have fewer worries.

***As is true with all of my posts, what I write here is my opinion only. I am not a financial advisor or an insurance agent. Speak with your insurance agent and/or financial advisor to see if an umbrella policy is right for you

Wednesday, February 18, 2009

It's Usually Cheaper To Take The Car

Tip # 72 - It's Usually Cheaper To Take The Car. If you own a car, then you might as well use it for vacation. It's generally cheaper than taking other forms of transportation - even long distances. If you are going on vacation, the car is almost always the cheapest method to get there, unless you are traveling alone. Taking a family of five on an airplane and then renting a car at your destination will often cost at least twice as much as driving your car.

Let's look at some examples. Driving to Florida from the Mid-Atlantic is about 1,000 miles each way or 2,000 miles total. Assume that gas costs $2 per gallon and that you get 25 miles to the gallon. You will be putting approximately 80 gallons of gas in the car for your trip (2,000/25) for the cost of $160 ($80*2) in gas. If your car only gets 20 miles to the gallon then your trip would cost $200 in gas.

Let's look at the cost to fly. For five people, the airline rates to Florida are usually about $250 per person round trip or $1,250 total. But remember you need to get to and park at the airport. The parking at the airport for a 7-10 day trip will be about $100 plus the gas to get there. And then when you get to your destination, you will need to rent a car, which will cost another $200 for a total of $1,550.

So you can lay out $1,550 for airline tickets or $200 for driving. Now of course, each situation will be different. For a family of 3, the cost of flying will be much less. Or you may get a special airline rate of $200 per ticket which brings down the cost of flying. Or you may not need a car at your destination which brings down the flying cost. Or you may have to spend a night in a hotel which brings up the cost of driving. Or you may have a family of 6 which brings up the flying cost. Or the price of gas goes up to $4 a gallon which also brings up the driving cost.

Of course some may argue that the cost of driving is much more than the price of gas. There is wear and tear on the car and depreciation. They would be right. The car would need an oil change sooner. It will need the tires rotated sooner. And you are devaluing it faster by putting more miles on it. However, if you already own the car and the car has a significant number of miles on it, then the additional mileage won't have much of an effect. And the cost of regular car maintenance shouldn't add significantly to the price.

In general, the more people you have traveling with you, the cheaper the cost of driving becomes. And as an added benefit, it makes the family appreciate their destination that much more. As in my post yesterday about saving for something you want, the longer the build-up is to something, the more it is appreciated. The buildup from cold weather to warmer weather to tropical weather that you experience when driving is in sharp contrast to the "magic" of getting on a plane in 30 degree weather and arriving in your destination 2 hours later in 75 degree weather. In some ways, the airplane ride is like a credit car in that it is instant gratification. And taking the car is like saving for something and paying cash. You appreciate the end result so much more.

In Real Life (IRL) - I will say right off the bat that I am biased. I do not like to fly. No scratch that. I HATE to fly. So maybe this whole post is a justification to my husband about why I make us drive to Florida each year. :-) Seriously, though, one must consider if the cost of flying to your vacation is worth it from a financial point of view.

I will give you a real-life compare and contrast example. We drove to Florida in January to visit our family. Gas prices were between $1.69 and $1.89 per gallon the whole way down, and we put 900 miles on our car getting to our destination. Loaded down, our van probably got 20 miles to the gallon as we did all highway driving at night in no traffic. So we used 45 gallons of gas at an average of about $1.79 per gallon for a total of about $80 each way. For a round trip car ride this would be $160. (We took the train home.) We needed a car when we got to our destination. We obviously used our own. We changed the oil in the car before we left for a cost of $20. The total cost of driving: $180 for a family of 5.

Our friends decided at the last minute to go to Florida when we did since there was a school holiday. They are a family of 3. They were able to secure pretty inexpensive airline tickets for only $200 per person. They took a taxi to and from the airport which cost about $80. And they rented a car when they got to Florida which cost about $200 for the week. They spent a total of $880 for a family of 3.

Driving cost $180 for a family of 5. Flying cost $880 for a family of 3 - adjusted to family of 5 it would have been $1280. That is a huge difference. Yes, their trip was quicker and if that's important because you are short on time, then flying will always win. If you have to take a day or two off from work to drive and you lose pay, then you will need to factor that into the equation. But from a purely straightforward comparison, driving is usually cheaper than flying. And now I'm off to show this post to my husband. :-)

Tuesday, February 17, 2009

Save For What You Want

Tip #71 - Save For What You Want. In today’s “I want it now” mentality, try to take time the time to budget and save for something you want badly. For each person this "want" will be different - whether it be a car, a vacation, or a new dress. The point is to work hard and save up for a purchase. Don't just put every want you have on your credit card. If everything you want is bought instantly without having to work for it, then it’s usually not very appreciated. That is part of the evils of credit cards. We are able to get instant satisfaction from something that we have not necessarily worked hard to acquire.

Instead of spontaneously buying something you want, put money away each week or each month faithfully in anticipation of purchasing something in the future. As you are in the process of saving the money, think about what you will be buying, how you will put it to good use, and the enjoyment you will get out of it. Then when you have saved up enough, you will savor the moment that the item or the experience it is yours. You will appreciate what you bought because you will remember all of the work and dreaming that went into saving up for it. And you will treat the item or the experience very carefully, with the honor and respect it deserves.

In Real Life (IRL) – Ever since I was a child, I have always liked to travel – whether it be to the Jersey Shore, on car trips up and down the East Coast, or to faraway places in Europe. I still remember the buildup to some of those trips. My dad would pull out the large roadmap to plan our travel route. I would look at all of the names of the small towns we’d pass along the way and wonder what it would be like to live there. I would pore over travel books we had in the house to try to figure out what sights we would see in our destination. And I would look at colorful pictures in coffee table books and dream about people in far off places and how they lived. The build-up to my vacation was often half the fun.

When I was a senior in high school I was given a fabulous opportunity to travel to France with the foreign languages department, something I had wanted to do since I had learned in my sophomore year that our school would be going to France when I was in twelfth grade. For three years I looked forward to going there. And months beforehand, I counted down the days, literally, to that trip. I dreamed about being in France. I went to the library and read up on sites that we would see in the country. And I practiced my French that I had been studying since eighth grade. And when I got to France, I enjoyed every minute of it. It was a trip that had been in my heart and soul for so long that I truly cherished being there. Even though my parents paid my way to go, I appreciated it immensly because I was living something I had dreamed about for three years.

Because of my love of travel, I have always made room in my budget to go on vacation yearly. I could live without fancy dinners in restaurants that a few families enjoy, designer clothes that other women covet, or a big house the some feel are necessary. To me, travel has to be part of my life as long as I can afford it. I am not talking about spur-of the moment vacations to all-inclusive resorts at a Caribbean Island, I am talking about trips that I plan and save for each month. Ever since I have been in my twenties, I have put about $200 monthly into a savings account so that I can travel somewhere for a week or two. It isn’t necessarily somewhere exotic (I actually dislike to fly). It may be a car trip to Florida, a vacation around the National Parks out West, a tour of New Orleans, or a visit to New England. Our country is varied enough to experience a variety of topography and lifestyles that I can still get an over-the-top experience without leaving our shores.

I know that a week’s vacation can be considered a frivolous purchase to some people, and I do know that it is a luxury that not everyone can afford. But because I save for it each month, I appreciate this opportunity that I can take advantage of, just like someone else might appreciate a $2,000 purse that they have saved up for over the course of a year. Whatever it is you hope to acquire or experience, the more time you spend saving for your desire, the wiser your purchase will be and the more you will appreciate it.

Monday, February 16, 2009

Entertain At Home

Tip #70 - Entertain At Home. One of the cheapest ways to entertain or to be entertained is to do it at home. You don’t have to live in a fancy home or have the latest kitchen appliances to entertain well. All you need is a warm manner and welcoming attitude. The main purpose of entertaining is to have fun, to enjoy your company, and to socialize – whether that be over dinner, games, snacks, or a movie. No one is inspecting your house for cleanliness or expecting the trendiest furniture. And if they are, then you probably don’t want to entertain those people anyway.

Most people today are thrilled to be invited over someone’s house. Nowadays it seems like whenever people want to get together, they suggest eating out at a restaurant, drinking at a bar, or shopping at a plaza. I suggest taking entertainment back to the home. It not only is a warmer atmosphere, it is cheaper as well. The cost for two couples for dinner at a regular run-of-the-mill restaurant can easily be $80 or more. For this price, you may be talking over loud music, rushing through a meal, sitting on uncomfortable seats, or eating a dish that is not to your liking. By inviting a couple to your home, you can make a nice meal for 4 people for $20. You can sit in the comfort of your own home, have the music and atmosphere just the way you like it, and take as long as you want to eat. If you don’t want to go to the trouble to cook dinner, you can invite a couple over for coffee and dessert, drinks and appetizers, beer and cards, or a movie and snacks. All of these cost a fraction of what even a simple night out will cost you. And by entertaining in your home you may bet setting up a pattern of doing things in each other’s homes rather than out on the town. This will keep your entertainment budget to a minimum.

If you have children, invite their friends over for a game night, movie night, or a mock sleepover. It is always a thrill for children to have their friends over in the evening. And for pennies on the dollar they will have a great time, while you get some cleaning or relaxing done in the house. Oftentimes the other parents will be thrilled with the “night out” that you are giving them, and they may even return the favor sometime.

In Real Life (IRL) – One of my favorite shows is House Hunters on HGTV. I love looking at the houses others are considering buying. And I like to critique the homes they select. One statement, however, stands out in my mind that I hear repeated over and over again by these potential homebuyers. It is, “This room (or house) will be great for entertaining.” I hear this statement so much, that I always think, “Are people really entertaining so much that they're buying their houses based on its layout for company? And if there is so much entertainment going on in each others homes, how come I’m never invited?” ;-)

Seriously, I hear that repeated over and over again. Now I know there are people out there who are entertaining others every weekend, but they are few and far between, I’m sure. More of us should start entertaining in our homes. Some people have spent thousands of dollars upgrading their kitchens to be showplaces, and then go out to eat. Or they buy the house based on its open floor plan which will be great for company, and then they hold their parties outside the home. I am trying to change that trend, at least in my neck of the woods, even though I don’t have a gourmet kitchen or an open floor plan.

On Valentine’s evening we invited a couple over for dinner. We had benefits many times over from this small gesture. It forced my husband and me to straighten up the house. I made a good, healthy meal. I pulled out and used my bread machine – an appliance that hadn’t been used much in the 9 years we’ve been married. Our children were able to go to bed while we were ‘out’ having fun. My husband’s friend gave him some ideas on how to fix a something that had puzzled my husband. Most importantly, we got to spend a nice, relaxing evening with friends we don’t see very often. All of this cost about $10 plus a bottle of wine that we already had in the house.

The next night I had five of my daughter’s friends to our home for a movie night, since there was no school the following day. (I figured since the house was clean, I should continue inviting people over!) The girls came over for three hours for pizza, popcorn, brownies, and a movie. Each and every mom was grateful that I invited her child over for the evening. Seriously, it was so easy and inexpensive. I used the bread machine (again!) to make pizza dough. I used a brownie mix to make some brownies, and I air popped some popcorn with my 20-year old air popper. I set up the basement with blankets and pillows and popped in the DVD that my daughter got for Hanukkah. Judging by the laughter and squealing, I think the girls had a good time. Afterwards they acted out the movie until it was time to go home. The whole evening cost me about $7 to entertain five girls plus my two daughters – or a dollar per person!

I’m going to try to continue to do this at least once per month – inviting friends over for an evening in. I love using the things in my home that people have given us as gifts or getting use out of something that is just sitting there. I enjoy having people in my home – it’s not the biggest house (only about 1800 square feet), the most modern (think 1950's!), or have an open layout (very separate rooms), but it’s warm and comfortable and people seem to enjoy spending time here. And it doesn’t hurt that it forces us to straighten up the house. :-) Why not invite some of your friends over sometime soon for an evening in?

Sunday, February 15, 2009

Don't Be Afraid of Investment Terms You Do Not Understand - Part 3

Tip #69 - Don't Be Afraid Of Investment Terms You Do Not Understand - Part 3. In the first two parts of this series we talked about not letting investment terms scare you. I explained some basic investments terms that may sound overwhelming until you learn what they mean. Now that we all know what these investment terms mean, when do we invest in all of these different investments? In general, the greater risk you are willing to take on, the greater potential you have for reward and greater possibility for loss, as well. Also, take into consideration that at lower rates, your interest may not keep up with inflation. In general, it’s best to start out putting your money in the safest investments, such as savings accounts, money market accounts, and CDs. And then as you acquire more money or become comfortable with investing, then you can start to invest in things that have potential for a greater return such as bonds, mutual funds, and stocks.

If you are just starting out with putting money away, then open up a savings account to put your money into each month. Current rates are pretty low – about ½%. As you accumulate a large amount – maybe $1,000 or $2,500 depending on your bank’s rules, you can consider opening a money market account. Remember to follow the bank’s rules about number of withdrawals and keeping the minimum balance. Money market accounts are currently paying about 1% on your money. It’s not a lot, but these types of accounts are perfect for parking your emergency fund. If you are saving money to buy something down the road, then when you have a large enough amount – usually about $1000 - you can open up a CD. Remember, with a CD you are locked into a term such as 1 year or you get penalized, so only put money into a CD that won’t be needed until the term is up. I have touted credit unions before and I will again. Usually their rates are more generous and they have fewer fees so it may be worth it to try to join one for all of your accounts. My credit union actually lets you open an account similar to a CD with as little as $100 that’s currently paying 4%. So you can see the big difference in interest rates with a CD versus a savings account.

As far as investing in more complicated accounts, bonds work almost like CDs in that they are usually done for a longer term. If you see favorable terms for a government bond, then it’s worth investigating. Remember, there are some tax benefits to investing in government bonds, in addition to their relative safety. Unless you are comfortable taking on a lot of risk, mutual funds and stocks are best used for long-term investing such as retirement, if it’s at least 10-20 years away. The percentage that you invest in mutual funds depends on how much risk you are willing to undertake and how far away you are from retirement. Until you are a sophisticated investor, I don’t think there is a place for individual stocks in your portfolio. You can get the same returns from stock mutual funds, and then all of your money is not hinging on how one company performs.

Overall, a lot of what you do with your investments is what you are comfortable with. If you are comfortable losing some of your money in the hopes of a greater return, then invest in mutual funds. If you are only comfortable with risk-free investment at the expense of missing out on potential great returns, and the possibility that inflation is greater than your return, then stick with CDs, money market accounts, and government bonds. As my dad always says, only invest in things that will allow you to sleep at night. ***

In Real Life (IRL) – I shared with you how I got started investing in mutual funds. It was scary to me to think that I could lose my initial investment. But once I was investing in it for some time I got comfortable. And of course at the time mutual funds were doing well, so there was no reason for me not to be comfortable. About two years into my mutual fund investing, someone at my work started up an investment club. The idea was that a few of us would contribute $50 per month to and buy a new stock a few times per year as a club, sharing in the investments equally. Each of us had a turn to research some stocks and present which ones we thought were a good buy. After a couple of years we owned about a dozen stocks. It was a great first introduction to me to buying individual stocks. And after several months I started buying stocks on my own and also became the investment club’s treasurer. This club lasted for about 4 years and we did okay, mabye a 7-8% return. I know we didn't lose any money. Frankly for me, more important than the return was the education I got on researching and buying stocks. And it was a good way to ease into them.

Currently for my family, our investments look like this – our money for emergencies and short-term expenses is invested in savings and money market accounts. We have about 60% of our retirement funds in mutual funds and the rest in CDs and other stable accounts. We have a mix of our children’s college funds in CDs and mutual funds. And we have some not-yet allocated money in a mutual fund and EE government bonds that are still earning a good rate from when I bought them years ago. This is money will probably be used in 5-7 years for expenses such as braces, a new car, etc. I sold my last stock this past year when we built a bedroom for our son. I don't forsee buying individual stocks anytime soon as I am more comfortable with mutual funds. This is what works for our family. What works for your family and what you are comfortable with will be different.

***I am not an investment advisor nor do I aspire to be one. The point of this series was to explain the different investments available to you and to give a general idea of when different investments are typically used. You should only invest in what you feel comfortable with. And it’s always a good idea to get the advice of a non-biased investment advisor or financial planner when investing.

Friday, February 13, 2009

Don't Be Afraid of Investment Terms You Don't Understand - Part 2

Tip #68 - Don't Be Afraid Of Investment Terms - Part 2. In part 1 of this series, we discussed how you should not be afraid of investment terms that you don’t understand. You just need to take the time to learn what they mean and invest in what you know. We discussed some simple ways to earn interest on your money: savings accounts, money market accounts, and certificates of deposit. All three of those are low-risk investments. You have no chance of losing your principal (or the amount you put into the account or certificate. And all three are generally insured by the FDIC). Now we’re going to learn some other terms for more complicated investments: stocks, bonds, and mutual funds. All three of these types of investments are riskier than the ones we discussed last time. None are insured, and there is a chance that you can lose all or part of your initial investment.

Stocks are the first investment we will talk about. A stock is essentially a part ownership in a company. On a simplistic basis, if a company is worth $100,000 and sells 1,000 shares of stock, each share is worth $100. If you buy 2 shares for $200 and hold onto them for a year, the worth of your stock can go up or it can go down. If the business is worth $300,000 at the end of the year then each of your shares of stock is worth $300 so now your total value is now worth $600. However, if the worth of the business goes down to $50,000 at the end of the year then each of your stock shares is now worth $50 for a total of $100. People buy shares of stock in a business whose worth they think will increase. They general buy stock from a stock broker. You should have some knowledge about the nature of the industry the company is involved in, how well the company is run, the state of the economy, etc. before buying stock in a company. It is possible to lose every last dollar that you have invested in a stock. And it is also possible to make a huge return. In general, buying shares of stock in one particular company is pretty risky. It’s like putting all of your eggs in one basket.

Bonds are the next investment that we will talk about. When you buy a bond, you are basically loaning money to the federal government, a city or town, or a corporation issuing the bond. It’s different than stocks because you don’t own any part of the company, town, or federal governmnt. If you want to invest in bonds, you buy a bond for a certain amount and you are promised a greater amount at a set date in the future. Like CDs, the risk with bonds is that the inflation rate will go up. Your interest rate on your bond does not go up with it and you are locked in until the term is up. Also, each bond carries its own risk – that is how likely the entity will be to pay off the bond when it comes due. The federal government is extremely likely to make good on its bonds so its bonds usually pay the least interest. Cities and towns’ bonds are called municipal bonds. These are pretty safe as well (and they are actually rated according to how risky they are. The higher the rating the safer it is, and generally the lower the rate of return is). The riskiest type of bond is a corporate bond because it’s possible that a corporation may not have the ability to pay you back when the bond comes due. Therefore, in general, corporate bonds’ returns will be greater than government ones. Corporate bonds are also rated according to their riskiness. It should also be noted that there are some tax advantages to buying bonds from the federal government and municipalities, which makes them an attractive investment to some people. In general, buying bonds are less risky than investing in stocks.

Mutual funds are the last investment that we will talk about. Investing in mutual funds are a way of buying stocks and bonds in larger quantity so that you are not invested in just one or two stocks or one or two bonds. This is called diversifying. As an individual, it is hard to buy hundreds of different stocks or bonds unless you are dealing with a very large amount of money. But the advantage to buying many stocks or bonds is that all of your eggs are not in one basket, so to speak. A good way to achieve this diversification is to buy a mutual fund. Mutual funds are administered by private companies and are run by investment managers. Essentially, the investment manager creates a fund by buying several stocks or bonds (or a combination of the two) that he thinks will do well. As an investor, you buy shares in his fund. Now instead of owning just one or two stocks, you indirectly own a small share in many stocks (or bonds). So if one company does badly, it doesn’t make your whole investment go down the tube. There are hundreds of types of mutual funds with a wide range of risk – some with a lot of risk (considered aggressive growth) and some considered less risk (conservative funds). However, all mutual funds carry risk because potentially you can lose all of your investment. On the other hand, they can provide a great investment return that far surpasses inflation. And they are a good alternative to investing directly in individual stocks.

Those are the last three types of investments terms that I will talk about. There are many variations of these investments and different investment products and financial terms that I haven’t mentioned. The basic investment choices you have for earning money on your savings are savings accounts, money market accounts, certificates of deposit, stocks, bonds, and mutual funds. Now that you have an understanding of some basic investment terms, in part 3 of this series we will discuss how to choose which investments you should put your hard-earned money in.

In Real Life (IRL) – I was given federal savings bonds as gifts from relatives and friends of my parents on special occasions. Those were not fun gifts for a child. They couldn’t be spent right away and the value on the face of the bond (such as $100) wasn’t really $100 for another 7 years or so. They were put aside to grow and turned in when they matured. These federal savings bonds were low-risk investments, but they were my first foray into an investment that wasn’t essentially an account from a bank. I did not invest in my first mutual fund until I was in my mid-twenties and I didn’t invest in an individual stock until my late twenties. I’ll share my story with you about my initial hesitation about buying into a mutual fund where I could potentially lose my initial investment.

I was in my mid-twenties sitting on the beach during our family vacation when I had a discussion with my father (a saver a person who enjoys investing money and discussing investments) and my brother (who is an accountant and financial planner and for the record, a much riskier investor than I was or ever will be). They were asking me where I was putting my money that I was saving each month. I told them it was going into some CDs and that I had bought some bonds. They both immediately told me that I should be investing in mutual funds – accounts that could potentially pay me a much greater return on my investment. No, I told them. I am scared. I don’t want to lose the money I invest into it. At the time – this was the early 1990’s - stock mutual funds were averaging 10% to 15% per year returns. They tried their best to convince me, but I was too scared to see my account value go up rather than down. I liked safe. I was used to safe, and I was happy with a smaller return as long as I had no chance of losing my money.

They persisted until finally my dad said, “If it goes down in value, I will pay you the money back.” Looking back, I actually think that’s a pretty succinct sentence to sum up my financial life – my dad would always be there for us if we needed help. That allayed my fears a bit so I said I would try it. They assured me that the mutual fund they were recommending was not too aggressive and that it would do fine. And it did. Each month I mailed off a check to the mutual fund company and each year at year-end I would evaluate the results. 12% increase one year, 10% the next. Fifteen percent after that. These were results I could get used to! This went on for several years and then the returns slowed down, and in recent years they have even turned negative (hmm…I wonder if that offer from my dad is still good?). I am much more comfortable with financial risk now. I have my investments diversified, so if one is not doing well, I at least have others that are. But it took me a long time to get to that point. And the first step to getting there is to learn some of these investment words you don't know. I’ll share in my next post how I started buying my own stocks!

Wednesday, February 11, 2009

Don't Be Scared Of Investment Terms You Don't Understand - Part 1

Saving Money Tip #67 - Don't Be Scared Of Investment Terms - Part 1. Some people hear financial words tossed around - mutual funds, CDs, money markets, stocks, bonds, compound interest, FDIC, brokers, etc. and they don't understand these investment terms and therefore think they should not invest money. This is not the case. I'm going to explain some of these terms so there is less fear and more understanding. Investing money is just putting money away to make more money. And as we have discussed in the past, everyone should be putting money away. As you put money away over time you will become more knowledgeable and learn first-hand what some of these investment terms are and become more comfortable investing in different things.

Savings account is the first investment term we will discuss. Most of us know what a savings account is. A bank or credit union holds our money for us and gives us interest (a percentage of our money) for the privilege of keeping it for awhile. A typical savings account today may pay 1%-2% interest annually (yearly). That means if you put $1,000 in a savings account on January 1, then on December 31 of that year you will have$1,020 if the bank is giving you 2% annual interest. The bank has given you $20 in interest for the year ($1,000*.02 =$20).

Savings accounts are easy to understand and most of us are familiar with them. The savings account should be the first place where you start putting your money away. The beauty of the savings account at your bank or credit union is that there is virtually no risk to putting money in them. The account you have there is guaranteed by the Federal Deposit Insurance Corporation (FDIC). In other words, if the bank your money is put away in goes under, the FDIC will still give you the money that is owed you. This is true if you have as much as $100,000 in your account. Savings accounts are your least risky investment, and most people are comfortable with them.

Compound interest is not complicated. Compound interest is essentially interest on your interest. And it is this compound interest that makes saving money grow so fast. Many people in the financial field talk about the "magic of compound interest" because compounding interest builds up savings more quickly. Let's look at our previous example. At the end of year 1 you have $1,020. Assuming you don't put anything else in your account, at the end of year 2 you will have $1,040.40. The first year you earned $20 on your savings amount of $1,000 but at the end of the second year you earn an additional $20 and 40 cents. That is you are earning $20 interest on the initial $1,000 you put in plus you are earning 40 cents interest on the $20 interest you earned the previous year. That 40 cents is the compound interest (the interest on your interest). If there was no compounding interest then you would just have $1,040.

At the end of year 3 you will have $1,061.21. That is, you earn an additional $20 on the initial $,1000 you put in. Plus you earn 2% on your interest. Your interest at the beginning of the year was $40.40. You multiply that by the 2% interest rate ($40.40*.02) and you get 81 cents (.808) interest on your interest. So now you have $1040.40 from last year + $20 interest this year from the initial $1000 + 81 cents interest this year from the interest on $40.41 for a total of $1,061.21. Without compounding interest you would only have $1,060 at the end of year 3.

As the years go by, the interest on your interest keeps building up. At the end of 30 years you would have$1,600 if there was no compound interest. With compound interest you will have $1,811.36, which is why many people say there is magic to compound interest. Results are much more dramatic at higher interest rates and with higher dollar amounts.

Money Market Account is a more sophisticated savings account. It requires a minimum dollar amount and offers a higher interest rate than a savings account. The limits on this account are that you usually must maintain a minimum dollar amount in your account. You are also limited to the number of withdrawals and the dollar amount of the withdrawals. Withdrawals are usually made via checks that you have with the account. The bank pays you a higher interest rate on this account than on a savings account because you are keeping a minimum dollar amount in it. Today the rates may be 2 1/2% or 3% on a money market account. This account is also guaranteed by the FDIC so there is virtually no risk to investing in a money market account.

Certificates of Deposit (CDs) are the last thing we will talk about today. A a certificate of deposit is when you put your money away for a specified term. A certificate of deposit pays more interest than a savings account and usually more than a money market account because you are putting a minimum amount away for a specified term. The bank or credit union that you open a CD with is counting on having a certain amount of money from you for a certain period of time so they are willing to pay you more interest for it. With a savings account you can put in $100 one day then take it out the next week or add $40 to the account the following month. You can essentially take out and add to it whenever you please. And whatever balance is in your account at a given time will earn interest. With a money market account you must maintain a minimum balance and a the amount of withdrawals on the account are limited.

With a CD you put in a certain amount like $,1000 for a given period of time such as 1 year. This means you are lending the bank your $1,000 for one year. You cannot add to the CD or take money out of it or you will be penalized. The bank will give you your $1,000 back at the end of 1 year with interest. Depending on the amount and the term, some CDs today are paying as high as 3%-4%. The certificate of deposit is also covered by FDIC, so you cannot lose your initial investment or the interest. There is virtually no risk to this investment except the risk that you may need the money before the CD comes due or that inflation goes up, and your CD rate is still locked in at a lower rate. However, if you know you will be putting money away for long-term (1 year or 5 years) and you have absolutely no need to touch it before then, a CD is a better option than either a savings account or a money market account as long as you don't think rates will be going up in the near future. There are even short-term CDs such as 6 month ones if you want to park your money there for the short-term for a slightly higher rate than a savings account.

In Real Life (IRL) - I've already talked about opening my first passbook or savings account when I was a kid. I was excited to learn that the bank would be paying me interest to hold my money for me. At the time - in the late 1970s and early 1980s, the rates on savings accounts were about 5% (aahh, the good old days!). As I accumulated more money, my dad convinced me to open up money market account to earn even more interest. I was saving this money for down the road so I really didn't need to access to it. And I still kept some money in a savings account for money I might need. The money market accounts in those days paid 6 or 7% if I remember correctly. This investing was fun! I was hooked.

At some point opened some certificates of deposit for 1 or 5 years, always keeping money in a savings account that I could access if I needed it. It wasn't until I was into my 20s that I started investing in more sophisticated places - such as mutual funds and stocks. We'll discuss those in my next post. Until then, figure out the best investment for the money that you have saved - starting with savings accounts, money market funds, and CDs. These are usually the best places to invest money for beginners. And don't forget to shop around. There can be wide variance of rates among banks and credit unions.

Monday, February 9, 2009

Concentrate On Saving, Not On How Much You Save

Tip #66 – Concentrate On Your Savings, Not On How Much You Save. Huh? Concentrate on your savings – or how much money you put away – rather than on how much you save on your purchases. The most important step to financial independence is having money saved or put away. How much you save on that pair of jeans is inconsequential. How much you save on your electric bill doesn’t matter. And how much you save on your trip to the beach isn’t that important. None of that counts if all of the money you save is being spent. The only way you will have financial independence is if you put money away.

Buying clothes at thrift stores for cheap may allow you to eat out once a week at a restaurant. Keeping the heat down to 55 degrees at night may free up some money for your daughter’s piano lessons. And saving money on a hotel during your beach vacation may allow you to put more money towards a new kitchen table. But if all of the money you save and all of the frugal things you do is freeing up money for other purchases and activities, then the only thing you will have to show for all of your savings is more things and more activities.

Now I am not saying you should not save money. You absolutely should. And I’m not saying that more experiences are bad or more things are necessarily wrong. All I’m saying is that until you take how much money you save and put it away in a bank or somewhere similar, you are still using up all of your money. And you will not attain financial freedom with these habits.

What can you do about it? Let’s suppose you have no money in savings at all. And let's assume that all of your current expenses are $2000 a month. You figure out a way to cut your grocery bill down by $100 per month. Then you need to put that $100 towards savings. Don’t put that $100 towards weekly karate lessons for your son. At this point, having money in the bank is a priority over your son learning karate. If you can cut your vacation expenses back by $300 this year, then put that $300 in the bank. Don’t use it to buy a desk for your office. The table you have in that room works just fine. And if you can live with the heat set 2 degrees lower than usual, you should put the money you save on the electric bill in the bank, not for new jeans and shirts. Unless the items or experiences you purchase are necessities – such as food to live on, clothes to wear because you don’t have any others, or activities the doctor recommends for the well-being of your child – then putting money away in the bank is more important.

Once you have savings built up – for emergencies, for your future retirement, and for future necessary expenses, such as a car, braces, or college, then you can start adding back extras into your everyday living – a new piece of furniture, dinners out, and dance lessons. Until that time, the important point to remember is to focus more on saving, rather than how much you save.

In Real Life (IRL) – I like getting a bargain as much as the next person. I love using a coupon on top of a sale for an item I normally buy at the grocery store, buying a present for my daughter’s birthday at a yard sale, and finding a toaster oven that I needed at a thrift store. But to me saving money on each of these things is a means to the end, not the end itself. I try to save money on groceries, clothing, gifts, electricity, vacations, etc. so I can put money away each month. That is the goal I am trying to work toward. I save money so I can put money away. Putting money away is the end I am working toward.

You know what is even more fun than saving money on things? Watching your savings grow in your bank account! When I was a kid I had a passbook account and I liked watching my savings grow. I would put part of my allowances and my birthday money in my bank account each month. And when I was in high school I would put money from my summer jobs in there, too. I knew I could take the money out at any time and do with it what I wanted. I dreamed of taking a trip to Europe with the money. By the time I graduated high school I had over $1,000 in that account. When I was in college, I did a winter semester abroad using some of that money I had saved.

When I got my first job after graduation, I started putting away money from each paycheck. And I would enter my savings into a Lotus spreadsheet (does anyone else remember Lotus?). I then transferred my entries over to an Excel spreadsheet. I would keep track of how much I had, what my earnings rate was (or what I hoped it would be), and how much I would have when I was 30, 40, and 60 years old. I was saving for a house and retirement.

When I got married, we bought a house with the $70,000 I had saved during the previous 10 years. My husband and I continue to put money away for retirement and other things we want and need for our family - college for our children, emergencies, a car, braces, vacations, etc. We do it by saving money – buying in bulk, cooking from scratch, using coupons at the grocery store, shopping at thrift stores, living in a modest house, and buying only what we need. We then use all the money we are saving and put it away for the future.