Here is the story of what pushed me over the edge and ignited an unquenchable fire that will burn hot until that glorious day when our last debt obligation is finally met…

The backstory

Already four months into our Debt Free Adventure, I was working tirelessly to gain control over our monthly cash flow. I was angry at our debt, and consumed with the idea of establishing disciplined management over our monthly expenditures. This was not easy.

Because neither my wife nor I were experienced budgeters, getting a handle on ‘where every dollar was going’ was not something that came naturally to us. Maybe you can relate.

Being sick of our paycheck-to-paycheck lifestyle gave us a lot of motivation, but we needed more. We were committed to budgeting, but I knew it would be hard to sustain the necessary level of intensity and passion. After all, changing our relationship with money was akin to reinventing your golf swing.

Regardless, we knew it was essential if we were ever going to master our money. So I set off in search of the necessary motivation. Then one happy day in April, I found it!

I discovered how much my debt cost

I’m not talking about how much my payments were. I’m talking about how much my debt was costing me. How much I was paying each and every month for someone to lend me money. What if that money was no longer vanishing into the silk pockets of banking geniuses? What if it was going straight into my pocket and staying there?

To find and sustain the necessary passion, all I needed to do was calculate how much money I was paying in interest every month, print the amount off in HUGE NUMBERS, and stick it on my fridge. Every month it makes me mad. Every month I strive to make that number go down as much as possible.

Want to know what’s even better? This simple exercise will help bring the whole family on board. Show the number to everyone, and explain how this amount can be yours every single month if you can just buckle down get out of debt. From that day forward, everyone will see that number on the fridge — every month.

This simple idea helped us develop a lasting financial philosophy to apply to our family finances. A financial mission statement of sorts to embody the spirit of our Debt Free Adventure — “sacrifice now to benefit later.” Think of it kind of like the more popular but less cool, “Live like no one else, so you can live like no one else.”

Your homework

That’s right… I’m assigning homework. Don’t worry, it’s easy, and it won’t be graded. Well, I won’t be grading you… I can’t promise the same for Nickel.

Do yourself a solid and set aside 30-60 minutes to complete the following:

1. Write out a list of all debts on which you are paying interest (or will be paying interest, like that six months “same as cash” couch that you bought). For whatever reason, the simple act of writing it down and having a physical copy is much more powerful than creating a spreadsheet.
2. Identify the interest rate of each debt and record them on your list. You shouldn’t need this for the calculation, but it’s good to see those numbers staring you in the face.
3. Record the actual amount of interest paid last month for each and every one of your debts. In other words, separate the principal from the interest and record the latter.
4. Add all of your interest payments together to discover exactly how much your debt is costing you.
5. Get mad at how much your debt is costing you. The goal here is to inspire a lifestyle change resulting in increased financial discipline.
6. Repeat this exercise every month and watch your progress. This will help remind you of how much your debt costs you, and watching that number shrink will help you stay motivated.

Although I started this exercise in April of 2009, I didn’t realize how powerful it was until I did it again six months later. I now intend to do this every month until I am completely debt free.

I know that I told you do this by hand, and you should — at least at first. Over time, however, you should be able to transition to a spreadsheet to more easily track your progress. If you have any clever ideas for a spreadsheet template, please let me know. Better yet, whip something up and drop me a line.

Spread the word

If you already have a handle on all of this stuff… Awesome! Now go help someone else see the light. I know you know someone who needs your help. You’re probably thinking of them right now, so… Go help!

My goal is to get each and every debtor that I run into to complete this exercise as soon as possible. I’m going to be like that annoying buddy of yours who sells Quixtar or Herbalife and will never let a conversation go by without bringing it up. Why? Because I know it will help people.

Make no mistake about it… I want this to become the next personal finance phenomenon. Hopefully, this article and simple homework assignment will inspire you to pursue a debt free life. It worked for me, so please give it a try.

It’s already catching on!

Here’s a quick list of others who have already experienced the power of this exercise:

• Interest Amount Paid – Establish a Proper Relationship with Your Debt – My attempt at working this calculation
• How much Interest are YOU Paying? – My second calculation, sixth months later… Notice how it is $58 less!
• Do You Know How Much Interest You Are Paying Each Month? – Patrick says you should, “get ready to be shocked!”
• How Much Interest Do I Pay? TOO MUCH! – MyJourney said his calculations made him “sick to [his] stomach!”

Now it’s your turn… If you just want to go through the exercise, print off your amounts, and stick them to your fridge… Great. Please let us know about it in the comments. If you are a PF Blogger, go through the exercise, and write a post about it… Maybe I can talk Nickel into adding your post to the list above.

However you do it… Just make sure you do it.

In closing

Think of it this way… That money can either flow out of your wallet OR into your pocket. Which do you prefer? The choice is yours!

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» Debt Reduction on a Grand Scale

I actually contacted Ally on the renewal date and was thus able to get the money back out without any penalties. I did, however, notice that our “available balance” was lower than our actual balance.

When I asked about the discrepancy, I was told that we hadn’t sent in our signature cards, and were thus subject to backup withholding. Backup withholding? I wasn’t even sure exactly what that is.

I’ve seen the term many times over the years, but have always checked the box saying that I’m not subject to it. I’ve always known that backup withholding is a special form of income tax withholding, but I never really knew when it applied.

What is backup withholding?

Investment income is not typically subject to regular income tax withholding, but it may be subject to backup withholding to ensure that the IRS gets their money. In general terms, most payments that are reported on Form 1099 are potentially subject to backup withholding.

The backup withholding rate is currently 28%, which means that Ally withheld 28% of our interest earned. This amount will be sent to the IRS on our behalf, and will be reported on our 1099-INT at the end of the year.

Since it’s relatively late in the year, and the amount in question isn’t huge, this isn’t a big deal. Sure, we’ll lose the ability to immediately reinvest our interest, but it will be applied to our tax bill when it comes time to file 2009 taxes.

Who is subject to backup withholding?

According to the IRS (but boiled down into plain English) backup withholding applies if any of the following apply:

• You have not given the payer your Tax ID number,
• You have not certified to the payer that this number is correct,
• The IRS has notified the payer than the number is incorrect,
• The IRS has notified the payer to begin withholding because you have not reported all such income in the past, or
• You have not certified that you are not subject to backup withholding

I’m guessing that it’s this last point that tripped us up. I have no idea what the Ally Bank signature cards look like, but I’d be willing to bet that they have a checkbox to certify that you’re not subject to backup withholding.

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Assuming that you max out, this means that you’ll be the proud new owner of bonds in two forms. Yuck. The good news is that you can convert your paper bonds into electronic form. The TreasuryDirect website explains how. In short:

1. Open a TreasuryDirect account (if you don’t have one)
2. Notify them using the “Contact Us” that you want to convert paper bonds
3. Wait for an e-mail saying your account has been prepared for conversions
4. Login to your TreasuryDirect account and click “My Converted Bonds”
5. Click “Manage Direct” and then select “How to Convert My Paper Bonds”

From there, just follow the instructions and you’ll be home free. I’m still not sure why they have separate limits for paper and electronic bonds, but it is what it is. At least you don’t have to hang onto the paper bonds if you don’t want to.

Note that I haven’t completed this process myself (yet), but I will be doing so soon, and will post more details when that happens. In the mean time, if you have any tips, please weigh in.

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Even if you’re looking at new construction, however, you should hire an inspector to make sure everything was done correctly during the construction process. Don’t rely on the codes inspectors, as they’re often in a hurry and might miss something important. Paying for a home inspection is a small price to pay for peace of mind.

Finding a home inspector you can trust

I’m a big fan of calling around for recommendations as it’s hard to gauge a home inspector from an ad in the phone book or online. You can start by asking your realtor for recommendations and/or comments on home inspectors. Also check with any friends that have bought a house and find out how they liked their inspector.

I’m primarily interested in how thorough the inspector is and whether or not they’ll take the time to explain the results to me. If your friends are open, you might also consider asking them about the price. While you’re not necessarily looking at the lowest price, you don’t want to overpay for your home inspection and break your budget.

Home inspection prices vary according to region and building size. I’ve found that estimated costs in my area are typically $300-$450.

Ask questions

After you have a list of names, go ahead and call the inspectors. While making small talk, ask questions concerning the inspection and their qualifications. Any qualified professional will expect these types of questions and won’t be offended.

If you’re looking for solid questions to ask the potential home inspector, the Department of Housing and Urban Development has a nice resource. I found the questions helpful when calling.

• What does your inspection cover and how much does it cost?
• Are you specifically experienced in residential inspection?
• Do you maintain membership in a professional home inspector association?

Some states, such as North Carolina, have a license for home inspectors, but others don’t. If your state doesn’t have a license requirement, ask the home inspector if they’re a member of the American Society of Home Inspectors. Verify by check with the association yourself. It pays to be diligent.

Be there during the inspection

It’s always a good idea to be present during the inspection. That way the inspector can not only review the results, but they can also point out any particularly problematic areas. Just don’t get in the inspector’s way.

What does a typical home inspection include?

The standard home inspector’s report will cover the condition of the home’s heating system; central air conditioning system (temperature permitting); interior plumbing and electrical systems; the roof, attic and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement and structural components.

Source: American Society of Home Inspectors

Make the most of your time by taking notes and paying attention during the inspection. When you receive your report from the inspector, review anything that you don’t understand. You may not have the technical expertise, so take advantage of the fact that you’re paying them to help you.

Have you been through a home inspection?

If you’ve had a home inspected, how did it go? Was the inspector helpful? Did the inspector help you avoid a costly repair? Do you have any tips to share?

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What is a Series I Savings Bond?

Series I Savings Bonds (also referred to as “I Bonds”) are a low-risk, inflation-indexed savings instrument issued by the Federal government. Unlike CDs, which have a fixed interest rate, I Bond rates are adjust semi-annually based on the prevailing inflation rate, in May and November.

The I Bond rates is actually made up of two components, a fixed rate that sticks with the bond over its lifetime and a variable rate that changes every six months based on the Consumer Price Index (CPI).

How to Purchase I Bonds

You can purchase I Bonds in one of two forms: electronic or paper. Electronic purchases are done via TreasuryDirect, whereas paper bonds can be purchased (with no fee) from most banks.

The primary limitation with I Bonds is that you can only purchase $5k worth of them (per format, so $10k total) per calendar year per social security number. The good news is that you can convert your paper bonds into electronic format following the purchase.

Electronic I Bonds can actually be purchased in any amount between $25-$5k, whereas paper bonds are issued in denominations of $50, $75, $100, $200, $500, $1000, and $5000.

Advantages of I Bonds

Aside from providing inflation protection, I Bonds offer some tax advantages, as well. For starters, the interest accrues within the bond itself, so you are not taxed on the proceeds until you choose to redeem the bond (more below).

A second tax advantage is that I Bonds are not subject to state income tax, such that the tax equivalent yield is actually higher than that of an equivalent, fully taxable investment.

Note: Jim also made the excellent point in the comments that interest on I Bonds (as well as EE Bonds) is tax-free if used for college tuition (with some restrictions; details).

Redeeming I Bonds

I Bonds have to be held for a minimum of one year before they can be redeemed, and they cannot be transferred through market sales. In other words, once you buy one, your money is locked in for 12 months. Period.

You can redeem your I Bonds between 1-5 years after purchase for a three month interest penalty. After five years, you can redeem your I Bonds without a penalty. If left untouched, your I Bonds will continue to earn interest for up to 30 years.

Are I Bonds right for you?

The answer to this question will depend on your circumstances, but I’m of the opinion that I Bonds can be a great alternative to CDs. The reason for this is that they provide inflation protection and they also offer a few tax advantages (noted above) as compared to CDs.

Look at it this way… If you buy one today and have to break it in a year, you’ll have earned a little better than 2.5% after paying the three month penalty (assuming rates remain the same). In the mean time, if inflation kicks up, so will your interest rate.

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» Alternatives to High Yield Online Savings Accounts
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Is the homebuyer tax credit retroactive… or not?

From everything that I’ve heard, the answer is that it will not be made retroactive. While this might not seem fair, the undelrying logic makes sense… Since the goal is to stimulate sales going forward, it makes no sense to hand out credits to people who have already bought. The likely effective date of the new credit will be December 1, 2009.

The bigger question is whether not the $6500 tax credit will be enough to push existing homeowners into the market for homes and mortgages. Even if it does, I’m not convinced that it will have much of an impact for anyone other than realtors. After all, for every homeowner that goes looking for a house, there will be one more house on the market.

Can you use the $6500 credit to buy a second home?

The only exception to this one-for-one swap will be if people want to use the credit to buy a second home. The primary limitation here is that the new home has to serve as your primary residence. I’m not sure how they’ll enforce this, but it seems like you could buy and move into a new home while keeping your old one as a rental property.

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Extending the $8000 credit, adding a $6500 credit

According to the NY Times:

The bill extends an $8,000 tax credit for first-time home buyers that was due to expire on Nov. 30, making it available to those who have a contract before May 1 on a primary residence priced at up to $800,000. The bill also creates a new credit of up to $6,500 for existing homeowners who buy a new residence if they have lived in their current one for at least five of the last eight years.

The income limits for the homebuyer tax credit are also going up, from $75k/$150k for individuals/couples to $125k/$225k. Beyond that, the credit phases out. This extension/expansion is projected to cost nearly $11B.

Extending unemployment benefits

This bill also extends unemployment benefits, as follows:

The measure [also] provides up to 14 weeks of additional assistance to unemployed people who have exhausted their state and federal benefits, but up to 20 additional weeks to those in about 26 states with unemployment rates exceeding 8.5 percent.

The President is expected to sign this bill into law as early as tomorrow (Friday). Also if you’re in the market for a mortgage, you can compare current mortgage rates here.

Thoughts?

Source: NY Times

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Even with that delinquency, however, my “High Risk” portfolio is back in the black, as I’ve earned more than enough in interest to cover the loan that I lost. Assuming things keep going as they are, that one bad loan will soon be a distant memory.

During October, a couple of borrowers paid off their loans early, so I’ve re-deployed that cash (along with some additional funds that I’ve added to my account). At the end of the month, I had 148 active loans with a net annualized return of 11.82%.

From here on out, I’m planning more of the same… I’ll be steadily adding money every month, and reinvesting the repayments as they come in. If you’ve been investing with Lending Club, I’d love for you to share your experiences in the comments section, below.

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The cost of owning a car

Here’s a look at all the budget categories you may want consider when attempting to nail down your auto expenses:

1. Purchase price – payment (cash and/or financing and interest) to acquire the vehicle
2. Taxes – paid when you buy or sell the vehicle
3. Fuel – the gasoline/fuel you need to make the vehicle run
4. Insurance – all levels auto insurance including personal liability, collision, comprehensive, roadside assistance, etc
5. Tags and registration – state vehicle registration, license plates, and renewal tags
6. Repair and maintenance – tires, oil changes, and all other repairs and maintenance necessary to keep your vehicle operational

Today we’ll set aside the first five categories and focus solely on budgeting for repairs and maintenance.

Benefits of controlling these costs

Many of the benefits of controlling your auto maintenance costs are similar to those you experience when gaining control over any area of your money, so let’s focus on those that are specific to the topic. Proper budgeting for auto repair and maintenance will allow you to:

• Have a better relationship and better communication with your auto mechanic
• Prepare/plan better so you don’t have to race to get oil changes before your next trip
• Reduce your maintenance expenses going forward
• Relax in the knowledge that you’re prepared

You can achieve all of these things simply by setting aside enough money to cover your expenses. That way you won’t have to stress or worry about where the money is coming from — if it can be found at all.

A simple, average amount

Before we try to determine specific dollar amounts for your individual situation, let’s talk about a simple, average amount that people can start with. If you want a detailed break down of costs for your exact vehicle and situation… Scroll down to the next section.

Earlier this week, I spoke with my trusted auto mechanic — Sam — about how much the average person should budget for auto repair and maintenance. These are the numbers he gave me:

On average $1,200 per year per vehicle, is a great place to start. This means $100 per month for each vehicle.

Remember that these numbers are averages, so… While there will always be exceptions to the rule, this amount should cover “typical” maintenance expenses. Of course, it’s important to actually have this money set aside so you can spend it in a lump sum if necessary.

Robert Espe, a frequent DebtFreeAdventure, says the he budgets $2,000/car per year, and also reminds us that although there is no exact answer that will work for everyone.

Figure out your total cost of ownership

For all you fellow geeks out there who want to nail down costs to the exact penny… This section is for you! Rather than guessing at or estimating monthly amounts, use this information to figure out exactly how much it will cost you to purchase, own, operate, and maintain your vehicle over the entire life of ownership.

Here are a few tools to help you figure out exactly how much you are spending to help you get an idea of how much you need to budget:

• The Total Cost of Ownership Calculator from Edmunds
• The Car Operating Cost Calculator

The Edmunds tool is only for current car models, whereas the other one works regardless of your situation. Also note that these tools are very comprehensive, even taking into account depreciation. I recommend setting aside some time and playing around with these calculators so you can nail down the real cost of owning and maintaining each of your vehicles.

What about you?

Do you budget for automotive expenses? If so, how much do you set aside for these expenses each month?

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In the mean time, I’ll just say this… The interest rate on Series I bonds is made up of a fixed rate component and an inflation component. Rates are updated twice a year, in May and November.

The latest update saw the fixed component increase from 0.10% to 0.3% and the inflation component went from 0% to 3.06%. In other words, they’re now offering a total return 3.36%, which compares favorably with prevailing CD rates.

For a bit of background, Series I bonds can be cashed in after a minimum of 1 year. If you break them between 1-5 years, there is a penalty of three months of interest. After five years, there is no penalty. More info here.

Source: TreasuryDirect and Bargaineering

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» Making Sense of Tax Efficient Money Funds
» Investment Performance: Stocks vs. Bonds
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As the founder of a website about credit cards, I’m sometimes asked by financial reporters what advice I’d give to people trying to get out of debt. This used to stump me a bit, because the only true answer is “spend less than you earn and pay down your debt.” But of course, it’s not that easy.

Just as weight loss requires a certain psychological change that goes beyond “burn more calories than you eat,” so too does debt reduction. In fact, when climbing out of debt, you can adapt many of the same strategies used for successful weight loss. Let’s look at a few to see how you can put yourself on a financial diet that will lead to debt loss:

• Take it slow to build new habits – If you’ve ever heard the term “yo-yo dieting,” you know that it’s common for people to lose weight quickly, then put all that weight back on again once the “diet” is over. Why? Because it was a short-term fix, not a permanent change in behavior. The same is true of debt. You can put yourself on a complete financial sacrifice program to pay down your debt quickly, but once the debt is paid, you’ll feel deprived and you won’t have new habits to sustain you over the long haul. So, take it slow. Create a debt reduction program that requires real change in financial behavior but not a program that is such a shock to the system that you’ll never be able to maintain it.
• Make it public (at least somewhat) – A common goal-setting tactic for weight loss (and other goals as well) is to tell someone about the goal you’ve set. Doing so achieves a few worthy objectives: (1) friends & family understand changes in your behavior, (2) they encourage you toward your goal, and (3) you feel more committed because you want the praise that comes with success (or want to avoid admitting failure, depending on what motivates you). It may not be fun to tell of your debt, but people that care about you want to help you reach your goals. So tell ‘em.
• Cut down on sweets – Weight loss isn’t without sacrifice, and neither is debt reduction. If you want to lose weight, you have to lay off the cupcakes (or at least cut down on them). If you want to get out of debt, you have to lay off the new purse or new cell phone or new whatever-it-is-that-you-LOVE-to-spend-money-on (or at least cut down on them). Obvious, but still worth mentioning.
• Exercise – Obviously it’s good for losing weight, but getting out of debt? Yep. You’re more likely to be overweight if you’re in debt, and vice versa. Why? We could talk about endorphins and depression and all sorts of possible reasons, but in the end it doesn’t matter. Exercise is good for everything. Don’t believe me? Here’s at least one study that backs up the positive effects of dieting, which include increasing wealth.
• Use small rewards – Whether it’s losing weight or getting out of debt, it’s hard to wait until you reach your ultimate goal to celebrate. So, don’t wait. Set small goals along the way and reward yourself for staying on the right path. Just don’t make your reward a big money splurge that defeats earlier efforts. One suggestion: coffee with a friend who supports your efforts and will give you the pat on the back you need.

Like weight loss, debt reduction ain’t easy. It takes sacrifice, there’s no way around it. But using small strategies to support your larger goal will help you through the slog and to the other side — where you know a happier life is waiting for you.

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And now… Eight recent articles that caught my eye…

• Conduct a Financial Fire Drill
• Seven Zen Principles to Guide Your Money and Your Life
• The Good, the Bad, and the Ugly of Annuities
• Our Journey to Debt Freedom: Cresting the Hill
• Create a Home Inventory and Save Your Stuff
• Can You Buy Your Way Out of the Rat Race?
• Ten Tricks for Staying Warm This Winter Without Huge Energy Bills
• How to Budget for Lump Sum Payments

That’s it for now. Have a great week.

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Planning ahead and looking at the total costs of going on vacation can help you control your spending. Some people spend frivolously on vacation and then wonder where their money went. Like everything, prioritize your spending.

My husband and I like to have memorable trips, and love taking pictures as our main mementos. Some people like grabbing gifts and other like to spend money on food. Pick one or two areas where you want to splurge and cut back on the rest. It is possible to have a good time on vacation and not spend a lot of money.

While I share some things that have worked well for us and our friends, see if you can add some more tips in the comments. I’d love for everyone’s next vacation to be both fun and frugal.

Getting a car rental for the trip

We usually have a rental car for the trip. We’d like to avoid wear and tear on our cars since we usually drive some distance. We also like the option of turning in the rental car if there is a problem and exchanging it for another. It’s less hassle than finding a shop while out of town and getting a repair made.

Last year we tried renting a car through Priceline, and it worked well for us. We started low with a bid of$11/day. We then slowly raised that number until we got an offer. We ended up getting a mid-size car for $14/day plus tax.

Before going to pick up the rental I checked with my car insurance company to see if they provide rental car coverage. Our policy, like many others, will transfer all our liability and collision coverage to a rental driven in place of our own car.

If you’ve ever priced insurance at the rental counter, you know free insurance coverage is a huge savings. If you’re planning on renting with a credit card, you should also check to see if the card issuer offers any sort of insurance coverage.

Eating on road trips

If you’re driving to destination, I suggest packing plenty of snacks and drinks for the trip. This will save you from impulsively buying expensive snacks at gas stations and also cut down on stopping for breaks on the road. We also estimate our trip time and plan for a longer lunch stop to eat and relax. Using Google Maps, we can usually find a nice local spot that’s affordable.

Saving money on airfare

Friends of mine recommend using Kayak to compare airfares. It saves them time aggregating the best fares from several top sites at once. One friend is currently out in Oregon visiting family and friends — she got two cross-country tickets for $149 total! Her tip is to plan ahead and check repeatedly as prices change constantly.

If you’re also considering smaller, budget airlines, Nora Dunn (a world traveler) suggests using Which Budget to see if you can find better rates.

Packing for a vacation

If you’re flying, pack light to avoid luggage fees from the airlines. Call your airline ahead of time to find out about their baggage policy and fees. Travel expert Anne McAlpin’s “Pack it Up” has some wonderful tips on packing your carry on bag and for airport security.

• Keep your clothes basic and choose outfits that work interchangeably with your shoes and accessories. If you’re traveling during the winter season, bring items to layer. If you’re traveling during warmer weather, McAlpin suggests getting some clothes made of natural fabrics.
• Take inexpensive jewelry with you when you travel. Leave your nice pieces at home. The exception, of course, is your wedding ring.
• Go easy on shoes. Make sure you have comfortable walking shoes, dress shoes for nice dinner, and possibly sandals.
• Bring dryer sheets to de-static your knit items and help keep your luggage smelling fresh.
• Take a photo of what you’ve packed in case the airline loses your luggage. It can be hard to remember who’s bag had what.
• If you like to pack lots of clothes, consider getting compression bags. They can save you space and reduce your luggage count (but not weight).
• Don’t stress out over getting luggage insurance. You may already be covered by the airline, your credit card (if you bought the tickets with it), or your homeowner’s insurance.

Making the most of your hotel

We again used Priceline to bid on a comfortable hotel near Disney World and ended up paying 1/3 of their regular prices. When we placed our bid, we requested a three star or higher property, and low-balled our price. We got accepted on our first bid (maybe we should’ve bid lower!) and wound up near both Universal Studios and a friend who lives just outside of Orlando — knowing a local person can be an invaluable resource.

When you get to the hotel, be pleasant with the staff and ask them for some local recommendations for places to eat. I use to work as a front desk clerk while in college, and I loved to help tourists discover local spots. Doing this can both save money and help you find a memorable place to eat. I would also ask the concierge (if they have one) for some smaller events that are happening around town.

Cutting your expenses home

If nobody will be in your house when you’re away, go ahead and unplug some appliances such as your microwave, toaster oven, computer, and stereo. Our electric company, Progress Energy, notes that “up to 75 percent of the energy used in home offices is consumed when the electronics are plugged in, but not in use.” You might also want to change your thermostat you’re out of town.

Your thoughts

Do you have any further suggestions for planning a fun and fugal vacation?

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Looking at overall brand reliability, Japanese imports clearly rule the roost, whereas domestic brands are generally well down the list. Here’s the rundown:

• Scion
• Honda
• Toyota
• Infiniti
• Acura
• Mitsubishi
• Lexus
• Hyundai
• Porsche
• Mercury
• Saab
• Subaru
• Suzuki
• Kia
• Mazda
• Ford
• Nissan
• Volvo
• Buick
• Lincoln
• Volkswagen
• Pontiac
• Mercedes-Benz
• Audi
• Chevrolet
• BMW
• Mini
• GMC
• Saturn
• Jeep
• Dodge
• Cadillac
• Chrysler

Of course, these rankings are based on the average predicted reliability ratings of all models for each brand. It’s thus important to keep a couple of things in mind here…

First, the reliability ratings might not be entirely accurate, as there isn’t a whole lot to go on when making predictions for new models. In some cases, these predictions are based on data from just a single year.

Second, companies at the high end aren’t immune from producing a dud, whereas some at the low end actually have a decent model or two. For example, the Toyota Tundra is (slightly) below average despite coming from the 3rd best maker, whereas the Dodge Caliber is (again, slightly) above average despite coming from the 3rd worst maker.

CR points out that, “as a group, inexpensive small cars and midsized family sedans are the most reliable.” They also made clear that the difference between the best and worst models is dramatic. In fact, the Volkswagen Touareg (worst) is 27 times more likely to have problems than the top-ranked Honda Insight.

Interestingly, five of the top eight most reliable family cars were hybrids. The NY Times “Wheels” blog inquired about this surprising (at least to some) result, but CR held their ground.

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Here’s the scoop:

New customers are eligible for this special offer after opening a new OptionsHouse account with a minimum of $3,000. You must apply for the commission-free trade offer by inputting promotion code FREE100 when opening the account. New accounts receive 100 commission-free trades for each stock or option trade executed within 60 days of funding the new account.

Pretty easy… New customers, $3000 minimum, use promo code FREE100. Once you use up your free trades, you can make stock trades for just $2.95/each and options trades for $9.95/each.

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I am one of those people.

What caused the current credit crisis?

Did banks overextend credit and employ substandard lending practices? Did individuals get carried away and accept more credit than they should have accepted? Maybe we just plain lost our way and let our abundance get the better of us across the board.

Regardless of cause, many feel the financial sector is hanging them out to dry. While taxpayers bailout failing financial institutions with their paychecks, banks have been raking them over the coals in preparation for the CARD Act of 2009. So much so that our elected officials are stepping in to bump of the date of its passing.

Has the credit crisis changed the rules we have to play by? Has it changed the rules we have to live by?

Who is responsible?

Are we as individuals personally responsible for our behavior today? Many contend that, over the last few decades, our principles have deteriorated. Is this same general lack of personal responsibility spilling over into business, resulting in corruption… Or has it always been this way?

What about the banks? Banks have received a tremendous amount of bailout money, but have done little to help restart the economy. Instead, they’ve been holding the money and posting huge quarterly profits. As more and more homes go into foreclosure, their profits increase.

Is some of this bailout money filtering back down to the taxpayers? Not really. As banks profited, loans dropped. Have they refunded the bailout money with all of these profits? Not entirely. Some banks have refunded in full, some have refunded in part, and others have not refunded at all. Here is a great resource to help you track which banks have refunded and which have not.

Personally, I’m amazed at what’s happening. The public has been called upon to fund the unprecedented bailouts of private industry and maintain high levels of consumption to sustain the economy, all while being asked to live with ever-increasing credit card rates, fees, and an inability to refinance troubled mortgages.

As far as I’m concerned, the banking industry must be absolutely brilliant to have pulled this off. I am truly in awe as I watch all of this unfold before my eyes. Banks have definitely not been making friendly with the American public, and people have just been taking it. Perhaps the American public is finally be ready for a change!

Can we live without credit cards?

Given all the unfriendly changes in the credit card world, what about living without credit cards altogether? Can we possibly do it?

People are resilient. I think you’d be surprised by what you could do if you absolutely had to. If things spiral downward, and we find ourselves facing a devalued dollar and ever-increasing unemployment, how would we react?

My best guess is that most of us would react just like folks did back in the 1930s. We’d band together and do what needs to be done to get by. And perhaps most importantly, we’d start living within our means. So why put some pressure on ourselves and take those steps regardless?

I think this pressure is good for us.

There are many examples in nature where pressure provides us with a precious bounty. Coal left under pressure gives us diamonds. When certain fruits are exposed to pressure they yield precious oils. And history shows us how pressure and fear of failure are some of the best motivators in the financial matters of both businesses and individuals.

And since we (as individuals) aren’t going to a bailout… Let’s focus on bailing ourselves out!

Real world ways to curb the use of credit

• Are you borrowing for wants or needs? Did you need that 2,500 square foot house, or could you have made due with 1,500 and a much lower mortgage payment? Did you need that brand new Chevy Silverado, or should you have gone with a 3 year old truck in solid shape? Did you need that Jet Ski? How about that new 50″ plasma HDTV? If you truly need to borrow money, then borrow it… I’m just asking you to reevaluate your needs against your wants.
• Reduce your available credit. How much credit do you have at your disposal? And how much do we really need? Get a free credit report from AnnualCreditReport.com. Next, go through your report(s) and figure out your total credit limits. I’m betting you’ll be surprised by the high amounts. If you cannot stop using credit, or just plain don’t want to, try cutting back to just one or two cards. Do you really need more than that?
• Change the way you think. If I asked how you would buy a car, most would answer, “Get a loan.” If I asked how you would buy a house, most would answer, “Get a mortgage.” What about TVs? What about furniture? What about college? Loans. Loans. Loans. Why do we automatically think we have to borrow money to buy things? Is this a trained response? We need to reduce our standard of living so we can get out of debt and save for future purchases… Then pay cash. Change the way you think. Start today.
• Reduce your standard of living. Live below your means. Spend less than you earn. You may be sick of hearing these phrases, but they work. Maybe it’s time we start living them. Doing so will eventually allow us to save pay down debt and save.
• Pay down debt. Once you’ve brought your standard of living back into check, follow through on that spirit of discipline by paying off your existing debt. Doing so will empower you. Don’t believe me? Try it out for yourself.
• Save Money. Now that you’re spending less than you’re earning and paying off debt, you’ll be able to save more money for future purchases. Pretty soon, paying cash for your next car will be a reality. Remember, by saving money, you reduce your risk. The more money you have saved, the better buffer you have against emergencies… Which means you’ll no longer need a credit card for an emergency!
• Use your debit card. If you are used to using your credit card for everyday purchases, start using your debit card instead. I promise that you’ll hardly notice a difference, but you’ll become more deliberate in your spending. Many will argue the superiority of credit over debit for reasons like purchase coverage and rewards. In my experience, however, these things hardly make a difference in everyday life. In light of the pros and cons of each, I would choose debit every time.
• Pay cash. Now that you’ve saved up some money, start using. Paying in cash has been linked to reduced spending rates. In fact, it’s argued that handing over cash actually elicits brain function that mimics pain. Paying with cash will also give you better deals when you go to purchase goods and services. For example, medical bills paid with cash can often be reduced because it eliminates the practitioner’s need to file an insurance claim or pay credit processing fees. Also… When you spend cash, you can only spend what you have!

In closing…

Remember… If you don’t agree with industry and/or business practices, your best course of action is often to simply stop using their products. The same is true for the financial industry. Reevaluate your priorities, change the way you think, pay down debt, save your money, and start using cash and/or debit for more of your purchases. You have a voice, don’t be afraid to use it!

No one makes changes for us… We must make them for ourselves, and go from there.

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When we first started our CD ladder (Novemeber 2008), we bought a one, two, three, four, and five year CD. Rates topped at out 5.15% for the five year CD, and our overall average was 4.66%.

Fast forward to today… We’re now looking at 3.35% APY for a five year CD at the same bank — nearly 2% lower. On the surface, we should probably run away kicking an screaming, but when you dig deeper, the situation isn’t too bad.

If we roll that lowest rung into a new five year CD, the average rate will dip to a bit under 4.50%, which still isn’t too shabby. The big concern, of course, is that interest rates will spike and we’ll be locked in at a low rate. Then again, we can escape with “just” a six month interest rate penalty.

In other words, if we can hang on for a year or so, our effective interest rate would be roughly half the current rate (around 1.70%). If we make it for 18 months, we’d take home 2/3 (just under 2.25%), and so on.

When viewed in that context, the situation isn’t nearly so bleak. If rates jump, we can simply break the CD and re-deploy our cash. Sure, we’ll give up some interest earnings, but our money will still have performed on par with prevailing high yield savings rates, so we’re not risking much.

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While Congress ultimately acted, it was a classic case of too little, too late. What I mean by this is that they did wind up suspending the RMD, but they did so for 2009 instead of 2008.

What is the RMD?

Just to remind you, the RMD is the minimum amount that retirement account holders must withdraw from their tax-deferred accounts when they hit the age of 70-1/2. Your RMD is based on what was in your account on the last day of the previous year, so…

If the market tanks, you’ll need to withdraw a disproportionately large amount from your account

Should you skip your RMD?

To me, the issue of whether or not you should skip your RMD in 2009 hinges on your circumstances. If you need the money to get by, then you don’t have much of a choice.

If, on the other hand, you don’t have a compelling need, you should seriously consider leaving the money in place. Tax-deferred retirement accounts are powerful tools. By leaving your money in place, you’ll avoid paying additional taxes this year, and your investments will have even more time to recover.

If you’ve already taken your RMD in 2009 and wish you hadn’t, you might be in luck. As long as you get the money back into your IRA within 60 days, you can “undo” the withdrawal.

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Of course, we don’t all face this dilemma. After all, access to Roth IRA accounts is limited by income (but see here and here), and access to a Roth 401(k) or Roth 403(b) is limited by whether or not your employer offers one. Many don’t, even if they offer tax-deferred versions of these accounts.

But what if you do have access to Roth accounts? How do you decide where to put your money? What follows is a quick overview of the major issues.

The tax deferred option

One of the biggest arguments in favor of using tax deferred accounts is that you’ll get your tax savings up front. These guaranteed savings can help those with limited means save/invest more money than they might have otherwise.

Taking an immediate tax break might also be a good option if you’re in a relatively high tax bracket. After all, if your income falls in retirement, you’ll have dodged higher taxes during your earning years in favor of lower taxes in retirement.

But what if tax rates increase dramatically between now and retirement? Even if you fall to a lower bracket, the applicable rate might wind up being higher. In that case, you’d have traded lower taxes during your earning years for higher taxes in retirement.

Another downside to tax-deferred accounts is that they effectively convert capital gains (currently tax at a favorable rate) into regular income. This is a very important fact to consider when deciding where to hold certain investment types.

The Roth option

Roth accounts make the promise of completely tax free withdrawals in the future in return for paying your taxes right now. This is a particularly good option if you expect to be paying higher taxes in retirement than you are right now.

Another risk that you’re running by using a Roth account is that Congress might change the rules. I currently view this as rather unlikely, but consider (for example) what would happen if we would adopt something like the Fair Tax between now and when you retire…

In such a case, you would have paid full income tax on your Roth contributions, and then you would be taxed again in retirement when you spend this money. Double taxation. Yuck.

What are we doing?

So how have we solved the problem? As with all things that involve uncertainty in the investing world, we’ve decided to diversify our risks. I honestly have no idea what will happen with tax rates going forward, and I can only project what our income might look like in retirement.

In view of these uncertainties, we’re taking advantage of both tax-deferred and Roth investment accounts. In doing this, it’ll be impossible for us to be 100% right, but we also won’t be 100% wrong. Given that we have both account flavors (not to mention a taxable investment account) at our disposal, we’ve given a lot of thought as to optimal asset locations.

In short, we keep our most tax inefficient investments in retirement accounts, with those with the highest expected rate of return in Roth accounts. Our taxable account, on the other hand, is loaded up with tax efficient investments.

What about you? If given the choice, how would you proceed?

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I thought it might be helpful to share our to-do list for others that are planning to move. I’m sure many of you have some moving tips of your own to add in the comments. I’m used to moving, but it’s still a bit of an adjustment for my husband.

Things to do before we move

Notify landlord/leasing office of the move date. Our yearly lease was up in September and we’ve been going month-to-month with the apartment complex. We gave a date for moving out, and we have some leeway to extend it if necessary mainly due to apartments being empty.

Notify current employers to take some time off. Since I work from home, this isn’t a huge issue. My husband has plenty of time saved to take off from work, and his manager knows about the move. Once we get a solid schedule, he’ll inform the company. He’ll probably just take a day or two off.

Get a few estimates from truck rental companies. Since this will be a local move, it’s going to be much cheaper than some of my past moves. We got rate quotes from different moving companies to get an idea of how much to set aside. I estimated using the truck for an entire day.

• U-Haul: They charge $19.95 plus $7 for a hand truck and $0.89/mile for a 10′ truck.
• Penske: This was the most expensive company, with a quote of $79.95 plus $10 for a hand truck and $0.99/mile for a 12′ truck.
• Budget: They charge $19.99 plus $15 for a hand truck and $0.89/mile for a 10′ truck.
• Ryder: They charge $54.00 with 500 miles included for a 12′-14′ truck. No estimate for the hand truck.

Go to the post office. I need to go grab a change-of-address package to have our mail sent to the new place. I’ll do this 2 weeks before the move to see if I can get a coupon for the move.

Get started with packing. I usually pick up some boxes from a local grocery store. We’re off to a great start and our goal is to do two boxes/day until we’re done.

Clean apartment to get deposit back. I’m enlisting my sister-in-law to help me clean the apartment from top to bottom. I’m hoping (but not counting on) getting some money back so we can add it to our emergency fund.

Switch our utilities. We have to schedule disconnection of all utility services at our current apartment and have them hooked up at the new place when we move. We’ll also have to open an account with the gas company for the town house. While we’re at it, I’m going to check and see if we can get a better deal on our cable TV.

Closing Thoughts

That’s our plan for now. We’re hoping it will be simple and smooth. Am I forgetting anything major? Do you have advice on how make this move go smooth?

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While it’s no secret that I’m a huge fan of The Vanguard Group, I thought I’d point that Schwab has reduced the minimum initial investment on their mutual funds to $100 each. Their expenses ratios are also very competitive. For example, the S&P 500 and Total Stock Market Funds weigh in at 0.09%

If you’re looking to get started investing, but the high minimum investments have been scaring you off, then you should definitely check out Schwab Funds. And no, they didn’t pay me to say this.

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Lets face it, one of our biggest expenses outside of our mortgages is the cost of keeping our bellies full. Unfortunately, eating is a necessity. We have to get food, and most of us aren’t willing to eat other peoples garbage.

There are tons of ways you can save money on groceries like growing a garden, clipping coupons, buying bulk, and tracking cyclical prices. While these are all great ways to reduce your costs they should all be parts of a bigger plan.

Plans are the keys to success in just about everything we do. Football teams plan for the next game, architects draw up plans to build a skyscraper, and you should plan your meals in advance to save you time and money.

Here are the steps you should take weekly or monthly to maximize your savings and save some time.

Plan your meals

This is the first and most important step. Sit down and plan out your meals for the next week, two weeks, or month. This should include both the main course and the side(s). If you make your lunches every day and cook breakfast, make sure you include those meals in the plan.

By the time you are finished you should have a list of at least seven days of meals that should look something like this:

Make a list

Now you need to sit down with your plan and write down every ingredient you will need throughout the week to make you meals. Be sure to include any staples you may need like bread, milk, orange juice, or cereal. This is why planning your meals in advance is so great. You can easily make a list of everything you need for the week and not have to worry about forgetting anything.

Check it twice

Now that you have a list the first thing you should do is go through the list and determine what you already have. Go through your fridge, freezer, and pantry. Mark off every item you already own and don’t need to buy. This will help you eliminate duplicate purchases.

Find the deals

For the remaining items on your list start researching the best prices available in your area. This usually means looking through the Sunday circulars to find the best bargain for your buck. Once you have located the best deals, circle them and stack your circulars up. You won’t need to drive all over town to get the best deals, just take the circulars to Wal-Mart and have them do a price match.

Hunt for coupons

This might take you a little bit of time, but coupons are free money so get to work. Online coupons are all the rage these days, and both stores and manufacturers are getting in on the game. I like to sit down with my list and find as many coupons as possible. I scour the internet for any coupons related to those products, print them off, and take them with me.

Go alone, shop swiftly

Now you just need to load up your coupons, circulars, list, and money. Head off to the store, but go alone. You already know what you need, and bringing another person will only distract you. Move swiftly through your list picking up only those items you have identified as needs. I say swiftly because the longer you linger, the more time you have to be tempted by ads and wandering thoughts.

Once you get to the checkout line, put your stuff on the belt, but leave anything you want to price match until the end. Put the circulars on these items so your intentions are clear. Finally, pay your bill and get out of Dodge.

Closing thoughts

If you actually take a bit of time to sit down and go through each of these steps, you’re guaranteed to save yourself both time at the store and money in your pocket. An added benefit is you get to prevent the inevitable question… “What are we going to have for dinner tonight, dear?”

Do you have any tips for planning meals in advance?

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What’s a “safe” withdrawal rate?

While there are no easy answers, the stakes couldn’t be higher. If you pick a number that’s too high, you’ll run out of money before you run out of time. If, on the other hand, you pick a number that’s too low, you’ll wind up leading an unnecessarily ascetic lifestyle, ultimately dying with a huge pile of cash.

If you ask around you’re get a variety of answers. By far the most common one that you’ll run across is the 4% rule. In short, this rule holds that you can “safely” withdraw an inflation-adjusted 4% of your nest egg from the year that you retire onward.

Of course, the topic of safe withdrawal rates is very complex, and the reality is that “it depends.” In other words, it depends on your time horizon, the composition of your investment portfolio, whether or not you retire into a collapsing stock market, and so on.

The only thing that we can say for certain is that higher returns will better support whatever withdrawal rate you settle on. But how can you boost your returns without appreciably increasing your risk? Well… What would you say if I told you that the average investor can easily increase their returns by 1% per year while taking on virtually no additional risk?

Maximizing returns by minimizing expenses

Sounds too good to be true, right? After all, 1% can make a huge difference in the size of your nest egg, but there is (typically) no such thing as a free lunch. Well, consider the following.

The average expense ratio for actively managed mutual funds is in the neighborhood of 1.5%. On top of that, numerous studies have revealed that the majority of actively managed funds underperform their target indices, sometimes by a lot. Why? Mostly because of the added expense of the fund manager.

In contrast, index mutual funds (or equivalent ETFs) have dirt cheap expense ratios (often in the 0.1-0.2% range), thereby allowing them to essentially match the returns of their target indices.

So how can you increase your returns without taking on more risk? Simple. Keep a close eye on expenses. Instead of overpaying for underperformance, focus on constructing a portfolio with using high quality, low cost investment vehicles. Of course, this is often easier said than done.

For example, you might have a fee-laden 401(k) with limited options. Sure, you could lobby your employer for changes, but they might resist. In that case, your best option might be to simply contribute enough to get your employer’s match and then focus on investing outside of your 401(k), where you’ll have complete control.

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In doing so, I ran across the ten day CD rate guarantee at Ally Bank. In short, if you open a CD with Ally and the rates go up within the first ten days, they’ll automatically increase your rate to the higher level.

When you fund your CD within ten days of opening or renewing your Ally account, you automatically get the best rate we offer during that time period.

This isn’t a huge deal, but it’s nice to know that you won’t have any regrets about locking in your rate a few days before they raise them. Since our CDs are already at Ally (formerly GMAC Bank), and since their rates are still near the top, we’ll be leaving the money in place and just changing the term.

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It should come as no surprise that planning for the future and saving for retirement can bring a great deal of peace to those who do it. Unfortunately, many Americans are so mired in debt that they can’t make any progress toward their long term goals.

You don’t have to have $500k in the bank to achieve financial peace. All you need is a solid financial plan. This will serve as a springboard for eliminating debt, building your savings, and getting you back on the road to a comfortable retirement.

“A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”

-Brian Tracy

Financial peace may be closer than you think…

When I say “financial peace,” what comes to mind?

You may have answered with one or more of the following:

• No more creditors calling
• No credit card debt
• A paid off mortgage
• Freedom from overdue bills
• A bunch of money in the bank
• Maxed out retirement contributions
• A diversified investment portfolio, etc., etc., etc…

While all of these are necessary pieces of the financial peace puzzle, most of them will probably take awhile to achieve. Wouldn’t it be cool if you could gain a great measure of financial peace in just a week or two?

Actually… If you follow the simple outline below, you will very quickly find yourself on solid footing and on your way to increased financial peace and prosperity.

The uneasiness of financial uncertainty

Only a fool thinks he can properly plan for everything. Much the same, it is foolish for us to walk through life with no financial plan at all.

“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing… Those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.”

-Noel Whittaker

Consider the runner. Though he can never prepare for all the “what ifs” a race may bring, there are a few things that he can be certain of. For example, he cannot control the weather, but he can be prepared for different types of weather. He cannot control the length of the race, but he can know how long the race is and prepare accordingly. He can pace himself based on his knowledge and preparation and, at the very least, save enough of his energy to reach the finish line.

It’s much the same with our finances. We can never plan for every situation that may befall us, and only a fool would try to do this. What we can do is start with a few basics, take inventory of what we have, decide where we want to go, and develop a plan to get us there.

Once you finish planning, you still have to execute your plan to reach your goal, but… Once you have that plan, you can rest easy knowing that now it’s just a matter of follow through. There is peace in planning!

A simple plan for achieving financial peace

Does planning overwhelm you? Then start simple and refine things over time. Remember that “a journey of a thousand miles begins with a single step!”

Use the following outline to start forming your plan to gain control and peace over your financial situation:

• Get to know your debt and get angry. You’re never going to formulate a plan until your establish a proper relationship with your debt. One of the best things I ever did was to figure out how much interest I was paying on my debt. Simply take an inventory of your loans, and calculate how much interest you pay toward your debts each and every month. Once you figure out how much money you’re paying in interest, you’ll be motivated to move on to step two.
• Focus on needs and stop spending foolishly. Sure, you’ve made bad decisions in the past, but that’s behind you now. Start differentiating between needs and wants, stop buying things you don’t need, and focus your available funds on true necessities. Take it one step further by applying wisdom to your necessities. Food is a great example. Instead of simply buying everything you want, employ these grocery hacks to help cut corners.
• Start an emergency fund. Sell unneeded items, stop going out to eat, use your grocery savings from step two and save at least $1,000 as quickly as possible. This step can be accomplished much faster than you think, and will bring you a great deal of security and peace all by itself… And it only gets better from here!
• Keep a spending journal. Do this. Don’t skip it. I’m serious. If you’re like me, then even now you’re probably making excuses as to why you don’t need to do this. Knock it off. Keeping a spending journal is the cornerstone of living on a spending plan (a.k.a., a budget.) The cool thing about a spending journal is that it’s way easier to start than a budget. A budget is a living document that will take months to get into working order, but you can successfully implement a spending journal right now! Stop making excuses, get a small notebook, and keep it on you at all times. I carry mine in my man purse. Yeah you read that right… I carry a man purse – get over it.
• Start budgeting. As I mentioned above, this is something that will take time, so don’t feel like you need to master it in your first go-round. Now that you’ll be keeping a spending journal, this will be much easier than you think. Begin with a very simple budget and tweak it both in accuracy and completeness as the days go by.
• Repay high interest debt with your new found excess. Trust me. If you’ve followed the steps from above you will have quite a bit of extra money each month to help repay your debt much faster than expected. Whatever you do, don’t be tempted to spend it! Instead, use it to repay your debt ASAP. If you’re like me and you find it necessary to save while focusing on debt repayment then you can follow the 75/25 debt repayment and savings plan. Die hard Dave Ramsey fans will disagree, but this has proven to be a wise choice for my wife and I several times over.
• Build your emergency fund to 3-9 months worth of expenses. Now that your high interest debt is gone, you’ll want to build up your emergency fund. My wife and I plan to save enough to cover 6 months worth of expenses. You’ll want to keep this money in a place where you can easily access it, like a high yield savings account. This money is not an investment. Rather, it should be viewed as personal emergency insurance against unexpected events.
• Begin saving for retirement. Once consumer debt is gone and you’ve built up your emergency fund, use your newly developed financial discipline to begin saving for retirement.

There… Doesn’t that feel good?

“A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”

-Brian Tracy

Even though you haven’t saved a dime more than you had before creating your plan, you can walk away from this article with confidence, optimism, and a new found measure of financial peace concerning your future.

One last piece of advice – make sure you follow through!

Now that you have proper direction, all you need is determination, patience, and a little hard work. It’s amazing how a simple plan can have such a huge impact!

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Why all the hate?

So just what is it that Time hates about 401(k) plans? For starters, 401(k) plans were never intended to replace traditional pensions. Rather, they were created as an executive perk. Over time, however, their existence allowed many employers to kill off their pension plans.

401(k) plans have also come under fire because:

• Not enough people participate in their employer’s 401(k) plan
• Of those who do participate, many don’t contribute enough
• Many participants invest too conservatively
• Others invest too aggressively

The problem here is that these things aren’t unique to 401(k) plans. Rather, criticisms such as a lack of participation, saving too little, and inappropriate allocations can be leveled at most investment vehicles, including traditional and Roth IRAs, taxable investment accounts, etc.

Beyond this, people choose whether or not they will participate, they choose how much they will set aside, and they choose their investments. If some people wind up making bad decisions, should everyone be forced to give up their 401(k)? Not in my book.

Don’t get me wrong, there are certainly a number of bad 401(k) plans out there. Some of these have very limited investment choices, others have exorbitant fees, and so on. But advocating that we should “retire the 401(k)” is throwing the baby out with the bathwater.

What are the alternatives?

Yes, it sucks that juicy pension plans have largely disappeared, but that’s the reality. With traditional, employer-run pension plans out of the picture, what other options do we have? Well…

The article advocates for guaranteed investment accounts that would essentially function as “retirement insurance.” Every pay period, you’d contribute a fixed percentage of your paycheck and, upon retirement, you’d collect a guaranteed monthly check based on your final salary.

An advantage of such plans, whether they are backed by the government or a private entity, is that they would follow you from job-to-job. You would also be free to invest in addition to these plans, though (presumably) things like tax-deferred 401(k) plans would be off the table.

Setting aside the possible disadvantages of such plans, it’s important to keep in mind that there’s nothing stopping private companies from introducing these sorts of things whether or not the 401(k) still exists. In fact, there are great many annuity products already out there that fill a similar need.

In the end, I’m trying to figure out why killing off the 401(k) is a good idea. Yes, I realize that not everyone has access to them, and that some people can afford to contribute more than others. Given all the challenges associated with saving enough for retirement, however, it seems to me that taking options off the table would be a step backward.

What do you think?

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With that in mind, here are three great books that would make an excellent “short course” in investing for the future:

The Bogleheads’ Guide to Investing

Written by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf, this is an excellent introduction to investing which is broken in two main parts. Chapters 1-16 comprise Part I (Essentials of Successful Investing), which covers topics such as:

» Leading a sound financial lifestyle
» The importance of starting early and investing regularly
» The ins and outs of stock, bonds, ETFs, mutual funds, etc.
» Protecting yourself against inflation
» Asset allocation (in simple terms)
» How to invest for college
» How to manage a windfall
» Whether or not you need a financial planner

Chapters 17-23 comprise Part II (Follow-Through Strategies to Keep You on Target), which covers topics such as:

» Tracking your progress and rebalancing
» Mastering your emotions and ignoring the “noise”
» Making you money last longer than you do
» Protecting your assets with insurance
» Estate planning

All in all, this is a very well-rounded book on investing.

The Four Pillars of Investing

Written by William Bernstein, this book turns things up a notch when it comes to educating you about investing. The content is broken into five sections, including:

» Pillar One: The Theory of Investing (Chapters 1-4)
» Pillar Two: The History of Investing (Chapters 5-6)
» Pillar Three: The Psychology of Investing (Chapters 7-8)
» Pillar Four: The Business of Investing (Chapters 9-11)
» Investment Strategy: Assembling the Four Pillars (Chapters 12-15)

For those that aren’t familiar with him, Bernstein is an excellent writer who manages to make otherwise dry topics quite interesting.

The Intelligent Asset Allocator

This is another book by William Bernstein. What can I say? I’m a fan. In truth, “Bogleheads” and “Four Pillars” will provide you with rather thorough coverage of investment-related topics, and might be plenty for the average investor. If you’ve read both of them and are looking for more, then…

“The Intelligent Asset Allocator” isn’t a light read, but Bernstein once again keeps things interesting. This book drills down into portfolio theory, tackling such issues as risk vs. return, asset class correlations, how to properly construct an investment portfolio, how to implement and maintain your plan, etc.

Other options

There are, of course, many other excellent books about finance and investing out there. For example, if you’re more interested in the psychological side of the equation, and getting your head straight when it comes to longer term goals, you might be interested in “Your Money or Your Life.”

Another books that looks promising is “The Bogleheads’ Guide to Retirement Planning.” I haven’t read it (yet), but the reviews are excellent, and it appears to delve into a number of retirement-specific topics.

Finally, I’d be remiss if I didn’t point out Bernstein’s latest book, “The Investor’s Manifesto.” While this books isn’t due out until November 2009, you can pre-order it through Amazon. You can also check out the first couple of chapters for free via Bernstein’s website.

What are your favorite books about finance/investing?

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We did, however, realize that we needed to be more informed when it comes to taxes, and to (legally) maximize any tax breaks we can get. If you’ve read much about taxes, you’ll no doubt have seen the terms “exemption” and “deduction.” Today, I’m going to talk a bit about what these terms mean, and why they matter.

Exemptions vs. deductions

First off, exemptions and reductions both reduce your taxable income, which is a good thing. Exemptions are specified amounts by which you reduce your taxable income — just for being you! For 2009, federal income tax exemptions (either personal or for dependents) are $3,650 each.

There are adjusted gross income (AGI) limits beyond which the exemptions are phased out. The specific limits vary depending on your filing status.

• Single: $166,800
• Married (Filing Separately): $125,000
• Head of Household: $208,500
• Married (Filing Jointly): $250,000

Income tax deductions, on the other hand, are actual expenses that you’ve paid during the tax year that you can claim against your taxable income. Some examples of expenses you can deduct are alimony, moving expenses, and charitable contributions.

Personal exemptions vs. dependent exemptions

As you may know, you can claim one exemption for yourself as long as you’re not claimed a dependent on someone else’s taxes. You can also claim an exemption for your spouse if you file a joint return.

Beyond this, you can claim an exemption for each person that you claim as a dependent — provided you meet the requirements. If you claim a child as a dependent for your taxes, then the relationship must pass a five part test:

• Age: Are they 18 or under? If they are a full time student, that increases to 23 or under.
• Relationship: They should be a member of your family such as your child, stepchild, sibling, or decedent of any of them.
• Support: The child cannot provide more than half of their own support.
• Residency: The child being claimed must have lived with your for the majority of the year, with some exceptions.
• Special test: Only one person can claim a qualifying child. You can’t divide the tax exemption. The IRS has rules to determine who gets the exemption if the parents can’t agree.

Besides claiming a child, there is an exemption for a qualifying relative. There are 4 tests that must be met to claim this exemption:

• Not a qualifying child: This simply means they can’t fall under the qualifying child rules if you are to claim the relative exemption.
• Member of household/family member: This is a residency based test to determine if they’re a member of your household. In some cases, such as relationships created by marriage, the relative may not have to live with you to qualify. Check with IRS Publication 501 for more details.
• Gross Income: The qualifying relative must have less than $3,500 in gross income during the tax year.
• Support: You have to provide more than half their total support. There are special rules if multiple people contribute more than 50% of the total support in aggregate, but no one individual does so.

Be honest with your answers and you’ll be able to claim the exemptions to which you’re legally entitled.

Standard vs. itemized deductions

When it comes to income tax deductions, you can either claim the so-called standard deduction, or you can itemize your deductions. You cannot do both. Obviously, you should choose the option that results in a lower tax bill.

In short, you should claim the standard deduction if you don’t have much in the way of itemized deductions. The standard deductions for most people are:

• Single/Married (Filing Separately): $5,700
• Head of Household: $8,350
• Married (Filing Jointly): $11,400

You can qualify for a higher standard deduction if you’re 65 or older or blind. Check IRS Publication 501 for more details. If you’re considering itemizing your deductions, take a look at Topic 500 – Itemized Deductions on the IRS website. It covers possible deductions for the following expenses and more:

• Medical and dental expenses
• State and local taxes
• Home mortgage points
• Interest expense
• Charitable contributions
• Business expenses
• Educational expenses

Closing thoughts

I’ve done my best to ensure that the above listed amounts are current (for tax year 2009), but you should always double-check to make sure that you’re working with valid information. You should also check with the IRS itself, or a qualified tax professional, to get answers relevant to your specific circumstances.

With that said, I’m curious to see how many of you file your own taxes. We did it ourselves last year, and we’re plan on doing it again this upcoming tax season.

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» Retirement Withdrawal Strategies

The Roth IRA vs. Traditional IRA question gets a lot of press, and that makes sense. By choosing correctly, you can significantly reduce the total taxes you’ll pay over your lifetime.

In a similar fashion, you can reduce your overall tax burden by planning your withdrawals strategically. That is, once you’re retired, how should you order your distributions? Should you take money out of your Roth first? Your 401(k)? Some combination of both?

The strategy: fill the lower tax brackets

The overall goal with planning your withdrawals is to take sufficient distributions from tax-deferred accounts to fill up the low tax brackets. The reasoning is that it’s better to pay 10% or 15% in taxes now rather than wait, take all the money out over the course of just a few years, and have the distributions bump you up into a higher tax bracket.

In fact, it can sometimes make sense to take distributions even if you don’t need the money to cover living expenses. (If that’s the case, it’s likely a good idea to use them for a Roth conversion, if you’re eligible.)

How about an example?

Martha and Mark are retired, and they’re both 60 years old (so they’re not yet receiving social security). Between interest income and Martha’s freelance writing work, they earn $13,000 over the course of the year. They only need $30,000 to cover their living expenses. They could take the extra $17,000 out of a taxable account, Martha’s Roth IRA, or out of Mark’s traditional IRA.

What should they do?

Without knowing the rest of the details of their situation, it’s impossible to say with absolute certainty what they should do. But the following analysis should provide a decent starting point.

Due to the standard deduction and personal exemptions, a married couple’s first $17,900 of income is free from income taxes. So it’s a no-brainer that they should take at least $4,900 ($17,900 minus their $13,000 of other income) from their traditional IRA because it’ll be entirely tax free.

They still need to come up with another $12,100 to pay their bills. If Mark and Martha expect their tax bracket to be above 10% later in retirement (e.g., due to social security or required minimum distributions from their tax-deferred accounts), it makes sense to take that from the traditional IRA as well, thereby paying tax at 10% now rather than at a higher rate later.

[Note: Because of the 10% tax, they'll have to take out $13,444 in order to have $12,100 left to pay bills.]

And by the same reasoning, it’s likely a good idea to take an additional $3,255 distribution from their traditional IRA in order to fill out the 10% tax bracket. They can then move that money into a Roth IRA, thereby paying tax at their 10% rate now and avoiding tax at a higher rate later.

In fact, if Mark and Martha expect to be in (or above) the 25% tax bracket later in retirement, it’s probably a good idea for them to take another $51,200 out of their traditional IRA and move it into a Roth, thereby filling out their 15% tax bracket this year as well.

Social security income complicates matters

Once an investor begins receiving social security income, things become more complicated, and the benefits of tax planning increase even further. The reason for the additional complexity is that, as your income proceeds through the 15% bracket, the portion of your social security income that is subject to income tax increases as well.

By strategically planning which accounts you take money out of each year, you can reduce the tax on both your retirement account distributions and on your social security income.

Takeaway lesson

Making small adjustments to your plans could potentially save you thousands of dollars in taxes each year. Unless you have a tax adviser who plays an active role in planning your finances (that is, he/she does more than just prepare your tax returns), it’s essential to have a solid understanding of taxation.

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While these stats include a lot of younger workers, we can do much, much better when it comes to preparing for the future. With that in mind, we’ll be featuring a good bit of retirement-related content here this week.

And now… Some recent articles that caught my eye:

• Money Tips I Learned From Poker
• How to Prepare for the Demise of the Dollar
• Ten Critical Money Management Skills Your Kids Need
• Why You Should Keep Contributing to Your 401(k)
• Living Below Your Means Does Not Mean Living Poorly
• Who Has the Time (or Money) for Deals?
• Fifteen Things More Important Than Money
• Why Dollar Cost Averaging is Popular

That’s it for now. Have a great week!

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Here are Money’s suggestions:

• Build up your emergency fund
• Spend five hours with a financial planner
• Buy a top-notch mutual fund*
• Upgrade your appliances
• Join a gym/hire a personal trainer
• Pay down credit card debt
• Update your estate documents
• Teach your kids about investing
• Invest in your career (training, etc.)

In our case, we’d either sock it away in our taxable investment account (we already max out our retirement accounts) or use it to pay down our mortgage. Other solid options that they didn’t list include charity, opening/funding an IRA, preventative maintenance on your house or car, planting shade trees around your house, and so on. Or maybe… Use it for something fun.

Now it’s your turn…

What would you do if $1000 fell into your lap today?

*Note: Money mentions several funds that have low minimum investments, including the Schwab index funds, whose minimums have been dropped to $100. I also like the Vanguard Star Fund for creating a diversified portfolio with as little as $1000.

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When is the last time you stumbled across proper techniques for negotiating your salary and increasing your top line? While frugality is an important component of a healthy financial lifestyle, salary negotiation is also an important skill to master.

Think about how much time, money, and energy you’ve spent earning a college degree, sculpting the perfect resume, seeking employment, and interviewing for countless positions. Given this investment, why not spend a bit of time properly preparing to negotiate your pay?

Consider the following scenario…

You walk into a prospective employer’s office. You’re dressed to impress, portfolio and resume firmly in hand. You meet Mr. Employer, make some small talk, and answer the typical cheesy interview questions to ensure you’re the best candidate for the position. And then…

WHAM! You’re asked, “So… What sort of salary are you looking for?”

What do you do?

Rather than freeze and stumble around for the right number you should follow the first rule of salary negotiations which states: there is one time and only one time to discuss your salary expectations, and this IS NOT IT! Sidestep the question like your life depends on it!

Jack Chapman, leading career consultant and author of “Negotiating Your Salary: How to Make $1000 a Minute,” suggests two essential rules.

Two must-follow rules for salary negotiation

1. Discuss money only after they’re ready to hire you.

This rule applies to the Human Resources screening interview, as well as the main interview(s). Anytime someone asks something like “What is your current/previous salary?” or “How much do you want to make?” — dodge them.

Why? If your past salary was too low, you run the risk getting a lowball offer. Conversely, if it was too high, you might blow past what they’re willing to pay. A premature disclosure of your previous salary undermines your bargaining power.

FYI: Focusing on salary during the interview process is the employer’s way of getting the most competent person for the least amount of money. Don’t relinquish key information early in the process.

In order to evade the question, you need to respond confidently, but remember… There’s a fine line between confident and cocky — make sure you don’t cross it!

Here are a few examples of what to say:

• “I’m sure we can come to a good salary agreement if I’m the right person for the job, so let’s make sure I am!”
• “Well, so far the job seems to have the right amount of responsibility for me, and I’m sure you pay a fair salary, so let’s hold off on the salary talk until you know you want me. What other areas can we discuss?”

Do this for the first and second requests alike, but if they continue to probe, you’ll have to defuse the situation. If things get tense or awkward, try softening your statements with one of the following:

• “I get anxious when talking about money.”
• “When we discuss money, I’m afraid that I’ll be screened out or boxed in so could we hold off on that?”
• “I’ve noticed that we’ve come back to salary again. While I’m happy to talk about money, I’m not sure why we need to discuss it now.”

If this doesn’t work, and they insist that you divulge your salary requirements, you can cave in, but it’s not recommended.

Now that you’ve positioned yourself for optimal negotiation by side-stepping their requests, you’ll want to make sure you follow the second rule…

2. Make them go first!

Because you’re so awesome, the job offer is now on table and — if you exercised your skills from above — your salary requirements are still unknown. After the job has been offered, the salary talk could come next, last, or somewhere in between.

Regardless of when the topic comes up, as soon as Mr. Employer asks “How much would it take to get you to come aboard?” Do whatever you can to avoid answering with a number!

Instead… Make them go first! Once again, why would you want to risk being too high or too low. You never want to price yourself out of the job, nor do you want to undercut your true value.

Nine times out of ten, they’ll already have a budget set aside for the position. In most cases, it will actually be a range, and you want to land at the high end. At this point, your goal is to find out exactly what that range is!

Reply with one of the following:

• “I’m sure you have something budgeted for this position, what’s your range?”
• “I have an idea of the market, so let’s start with your range.”

If you can get them to divulge their range, then you have them exactly where you want them. As soon as you know your target, start giving them solid reasons why you should be near the top of the range. And remember… If they’ve offered you the job, chances are they think you belong there too!

One final strategy

I’ll leave you with the most surprising and unnatural yet most effective tactic:

SILENCE.

For example: Let’s say they extend an offer, saying “We can offer you $XX,XXX/year and would like for you to start as soon as possible.”

What should you do?

NOTHING! Repeat the offer in a quizzical tone “$XX,XXX?” and sit in silence for 30 seconds or so. This could very likely make them squirm, wiggle, or feel uncomfortable enough to up the ante without your ever really responding to the first offer.

I actually gave this advice to my buddy Fred when he was on his way to an interview a few years back, and it worked! Fred was offered the job, but remained silent when the first number was given. He said that after about 10 seconds of silence, the prospective employer came back with, “Well, we could go higher if that isn’t going to work for you.”

Fred ended up getting $5,000/year more than originally offered! I’m still trying to get him to give me a cut of that since it was my advice that got him the money!

Closing thoughts

Remember… I’ve only highlighted a few of the most powerful concepts introduced in Chapman’s book. He actually covers much more, including how to get raises, and how to arm yourself with industry salary standards to justify the salary you deserve.

I highly recommend this book. It has empowered me tremendously, and I’m confident that it can do the same for you. It’s an easy read, and if you insist on working for other people, it will be a very helpful tool.

What are some of the salary negotiation tactics that have worked for you?

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Well… The Senate Finance Committee has just approved healthcare legislation that would dramatically reduce the value of this perk. More specifically, they’re talking about instituting a $2500 annual cap on FSA contributions that would not be indexed to inflation. As things currently stand, FSA contribution limits are determined by individual employers.

What do you think?

Is this a big deal, or much ado about nothing? My view is that, while standardizing the contribution limits across employers isn’t all that egregious, $2500 is on the low side, and I hate it when Congress fails to index these sorts of things to inflation.

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In his book “The Intelligent Asset Allocator,” Bernstein said the following about ETFs in general, and SPDRs (i.e., ETFs that track the S&P 500) in particular:

“They have both advantages and disadvantages relative to a conventional index fund. On the plus side, they can be traded throughout the day, as opposed to a conventional fund, which is priced only at the end of the trading day. SPDRs do not generate appreciable capital gains and are thus slightly more tax-efficient than conventional S&P index funds. On the other hand, the purchase and sale of an ETF incurs both commissions and spreads, and so is slightly more expensive to own. Also, ETFs reinvest dividends only quarterly, and thus will suffer a slight performance drag relative to a conventional fund, which continuously reinvests its dividends. On the whole, unless you are an active trader, ETFs hold no real advantage over a conventional index fund.”

Well said. One thing that I would add is that, while ETFs are subject to brokerage commissions, they typically have lower expense ratios, and thus have marginally lower ongoing costs to own.

As for us, all of our stock and bond investments are in an index fund of some sort. We’ve considered ETFs, but we got started back before they were widely available, and have decided to stay the course.

According to Vanguard, you can convert index fund shares into ETFs without incurring taxes, even if you do this in a taxable account. We haven’t bothered to do this, in part because we now qualify for Admiral shares (which have a very low expense ratio) in several accounts, and would thus gain very little by switching to ETFs.

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The bid-ask spread, sometimes referred to as the bid-offer spread, refers to the difference between the prevailing price at which you could sell a particular investment (the bid price) and the price at which you could buy it (the ask price). In other words, we’re talking about the highest price that a buyer is willing to pay for an asset, and the lowest price that a seller is willing to accept.

The difference between the bid price and the ask price is the referred to as the “spread,” and it goes to the so-called “market maker.” Market makers are firms that provide market liquidity and help to smooth out buyer/seller imbalances (and ultimately profit) by standing ready to buy assets at the bid price and to sell them at the ask price.

The reason that he bid-ask spread matters to people like you and me is that whenever you make a trade, you’re instantaneously “in the hole” by a small amount, even before we consider brokerage fees. It’s worth noting that the bid-ask spread is typically larger on thinly-traded (i.e., relatively illiquid) investments such as micro-cap stocks as compared to more widely traded (i.e., relatively liquid) investments.

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To be honest, I’ve been anxiously watching our lender’s site and counting the days until our closing date. I was worried that mortgage rates would go up before we locked. Fortunately they didn’t, so we have one less thing to stress over about.

What is an interest rate lock?

A rate lock is an agreement with your lender to fix your interest for a limited time period. Locking in your rate keeps the terms of your agreement consistent prior to close. Your lender won’t increase your interest rate for a limited period of time, though they also won’t decrease it if rates fall.

While I’ve read that some lenders charge a fee locking your rate, we found that pretty much everyone offered to lock our rate for free. If your lender tries to charge a fee, ask if they’ll waive it. And, as always, the terms of your should get the terms of your agreement in writing.

Why lock your interest rate?

Interest rates change constantly, so it’s possible that the rate you were first quoted will rise (or fall) between prior to closing. If rates increase and you haven’t locked, you’re mortgage payment will increase — perhaps to the point where you can no longer afford the payments.

On the flip side, you may have to settle for the locked rate even if the interest rates go down. Be aware, though, that some lenders offer the option to “float down” your rate if it drops significantly. In our case, our lender will split the difference if the interest rate drops to 4.5% or lower prior to closing.

When should you lock your interest rate?

There’s no concrete answer to this question. If you think that interest rates will rise in the near future, you should lock your rate. In our case, the interest rate was 5.25% when we first applied for our mortgage. It then went up a bit in the summer, but it’s now down to 5% for our FHA loan.

In 2008, the average rate was 6.1% for a 30-year fixed rate mortgage. Since no one can predict the future, you’ll have to weigh your options carefully before you decide. You can compare current mortgage rates here.

In case you’re curious about mortgage rate trends, ShopRate has a widget that track weekly average mortgages rates. You can also check prevailing mortgage rates at Money Rates. Since rates are pretty low right now, we went ahead and locked.

Closing thoughts

Personally, I can’t wait for this whole process to be over. I’ve never read so many forms and studied so many educational guides before. Did you feel like this as you were going through the home buying process? Do you have a rate-locking stories to share?

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“Surveys of married adults suggest that opposites attract when it comes to emotional reactions toward spending. That is, ‘tightwads,’ who generally spend less than they would ideally like to spend, and ’spendthrifts,’ who generally spend more than they would ideally like to spend, tend to marry each other…”

The reason for this, they say, is an innate tendency to prefer mates who possess characteristics that are dissimilar from those that we deplore in ourselves. Hmmm, interesting.

Since money is a frequent cause of marital discord, we all know where this is headed, right? According to the authors:

“In spite of this complementary attraction, spendthrift/tightwad differences within a marriage predict conflict over finances, which in turn predict diminished marital well-being.”

So… Back to the original question. Are you and your significant other on the same page when it comes to spending and saving? If not, has it created any friction in your relationship? And how have you dealt with it?

Source: UPenn.edu via MSN/Money

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The catch here is that you have to fund the CD with “new money” that is transferred in from elsewhere. And before you try to get clever and circumvent the rules, keep in mind that they are defining “new money” as deposits over and above your balance as of October 7th, 2009.

In other words… You can’t qualify by simply transferring your money out and then back in. Nonetheless, if you’re looking for a safe place to park you cash for the next year or so, you could do a lot worse than 2.25% APY at a bank like ING Direct. In fact, this ranks amongst the highest 12 month CD rates that are currently available.

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Unfortunately, credit card issuers have gotten increasingly stingy with their offers over the past year or so. Most of those twelve month offers have become six month offers, and pretty much all of them now come with fees attached.

While these offers have gotten considerably less attractive, they’re still a great deal when viewed in the context of prevailing credit card interest rates. So… What’s the best deal currently available?

Twelve month offers making a comeback?

A week or so ago, I got an e-mail announcing that the 0% promo period on the Discover American Flag has been increased from six to twelve months. While that sounds like great news, it’s important to note that they’ve also increased the balance transfer fee from 3% to 5%. Thus, it’s not quite as nice as it sounds. Nonetheless, depending on your situation, this could still be a worthwhile option.

Six month balance transfers abound (sorta)

It wasn’t too long ago that I had a list of over 40 great 0% balance transfer offers. That list has now dwindled to fewer than ten and, as noted above, the terms have deteriorated. Pretty much all of them are six month offers, and pretty much all of them have a 3% transfer fee.

Once again, this isn’t great, but it’s arguably better than paying 20% or more on your credit card debt. In case you’re interested, here are four such offers:

• Discover More Card
• Discover Miles Card
• Discover Monogram Card
• Citi Platinum Select Card (+ 0% on purchases!)

If you know of any particularly attractive 0% balance transfer offers, please share the details in the comments.

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“Yesterday it worked, today it is not working, Windows is like that.”

-Margaret Segall

Why take advice from me?

Though I do not speak of it often I am an Information Technology Manager (a.k.a. “computer guy”) by trade, and have been cleaning and maintaining desktop PCs, laptops, and servers for almost 10 years now. What have I learned? A ton…

But rather than bore you with a lot of useless information, today I will focus on one topic that you do care about: How to maintain the speed and cleanliness of your computer using nothing but free software.

As you may well know I carefully filter all of my spending decisions, so my preference for free software should come as no surprise. While there are certain programs that must be purchased, the ones needed to clean and maintain your computer do not have to fall into that category. In fact, I have found that free software is 100% effective when it comes to cleaning computers.

Today my goal is to give non-techies a quick, easy, and free way to clean and maintaing their own PCs. Who knows, this could even be the start of a new career for you!!!

All the cool kids use Firefox

I will start with a maintenance tip since prevention is always the best medicine — use Firefox as your Internet browser. This it is your single best defense against getting infected with viruses, spyware, malware, etc.

I recommend Firefox not only because the majority of spyware, malware, and viruses out there today are developed to exploit the security holes in Internet Explorer (IE), but also because it provides a superior browsing experience to that of IE.

If you are already infected to the point where you have time to go knit a sweater between mouse clicks, you can clean it yourself – for free – using the arsenal of geek love below.

Five free products you need

Here is a brief description of the products you will need as well as a link to each:

• Firefox – As noted above, this is a free Internet browser that has been taking market share from IE for years now. The majority of IT professionals use Firefox as their default browser, so be wise and use what the geeks-in-the-know use.
• MalwareBytes Anti-Malware – A free and extremely effective spyware/malware removal program that I install on every computer in my home and in my corporate network. Another free option (which I haven’t used, so I can’t vouch for it) is SuperAntiSpyware. Why not pay for one of the “professional” spyware removal programs? Because you don’t need to.
• Avast Antivirus – Hallelujah… A full featured antivirus software for free! The free edition is only intended for non-commercial and home use, so make sure you meet those requirements. Two other popular (and free) options are Grisoft AVG Free and Avira AntiVir.
• Ccleaner – This cool little freebie offers an easy way to clean unnecessary temp files and also provides a registry clean up tool. It does a lot of things that many PC technicians used to have to do manually, and has been an invaluable tool in my IT apps arsenal.
• Defraggler – Use this tool last… After you have already installed and employed all the previous programs. Made by the same company as Ccleaner, Defraggler will help speed up your PC by defragmenting the files on your hard drive. I use it because it is superior to the built-in Windows defrag utility. I suggest setting up a monthly automatic defrag (to run while you’re sleeping) for best results.

Don’t forget… Now that you’ve cleaned your PC, make sure you start using Firefox as your default browser!

Now don’t be selfish

If this post did help you clean up your PC, be kind and pass it along to friends, family, and coworkers, you computer technician, you. Heck, after awhile, you may even be able to start charging people to do this for them. Don’t say I never gave you any useful, income-generating ideas!

Happy cleaning!

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At the end of the month, I had 133 notes outstanding, and all but one are performing as expected. That one exception is the same note that has been problematic from the start. In fact, that borrower has yet to make a single payment, and the loan has now been sent to collections. Thankfully that note is only worth $25, so it’s won’t hurt my overall portfolio too much.

Speaking of collections… Lending Club is hosting a “Credit and Collections” webinar tomorrow (Thursday) evening at 7PM Eastern. If you can’t listen in live, you should be able to access the archive at some point in the near future.

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While I attended college on a mix of financial aid grants and scholarships, so far my siblings have been able to pay without resorting to loans (learning from my mistakes has some benefits).

Whenever I received money while attending school, I was in the habit of saving some of it and spending the rest frivolously. Looking back, I wish I had been more prudent with my money. It would’ve put me in a much better situation and I could’ve taken significantly less loans out.

That being the case, I wanted to share some better ways to use your tuition refund, or any other windfall.

Start or build up your emergency fund

If you haven’t done so already, establishing an emergency fund can be a smart move. Just because you’re in college doesn’t mean you won’t have emergencies. Keep your money in a high yield savings account to help it gain interest while you attend school.

Many college students have low necessary expenses, so even a small tuition refund can be a big help. Each semester, you can grow the fund with your refunds. An added bonus is that, when you graduate, you’ll have a bit of cushion to help you transition to the “real world.”

Pay off your credit card debt

I listed this second because I think an emergency fund is vital. If you’re like me, however, you probably have a couple of credit cards with balances on them. Instead of waiting, use the refund to pay down your debt. I’m all for using the debt snowball method, as knocking out those low balance debts can be a huge boost.

Unless you have a regular source of income and can handle them responsibly, you should then hide your credit cards. If you’re looking to build your credit history, consider setting up a small recurring payment ($40 or less) and pay it off every month.

Invest your money in an IRA

If you’ve saved some money and have no debts, you’re in a very good position. You should consider putting some of your tuition refund away in a Roth IRA. The benefit of a Roth IRA is that, while you pay taxes on the money before you put it in, you can withdraw funds without taxes or penalties once you’ve reached age 59-1/2 and held the funds in the Roth for at least five years.

I don’t think many college student get this much back, but I should mention that the annual contribution limit is $5,000 ($6,000 if you’re 50 or older). Since you’ll be starting young, you’ll also gain the advantage of compound interest. Let that compound interest to work in your favor by investing for your long-term future.

Set aside some money for fun

You’ve worked hard, so it’s not a bad idea to splurge a bit. Remember, though, to set a limit and keep it. For example, put aside some money in a savings account for a summer trip. That way you can have a wonderful experience to remember without worrying about debt. It’s really up to you as to what you consider fun.

Any other thoughts?

My view is that you should do whatever you can to establish good habits as early as possible. After you graduate, you’ll be thrilled that you started off on the right foot. If you’re still in college, you should apply for as many scholarships and grants that you can. Sure, it takes some work, but it’s well worth the effort.

For those of you that are out of college, if you could go back, what (if anything) would you change?

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Avoiding a cell phone ETF – in theory

What follows are six (possible) ways to break your cell phone contract without a penalty. Some are easier than others, but in any case you’ll probably have to work at it to convince your carrier to let you out.

• Cancel within 30 days. Many carriers have a 30 day trial period during which you can cancel without an ETF.
• If you have free roaming, use more than half your monthly minutes while roaming and your carrier might terminate your agreement to save money. Set your preferences to roaming only and make tons of calls using your free night and weekend minutes.
• Keep an eye out for notices of service changes. You typically have the right to cancel if your provider makes a “materially adverse” change to your agreement.
• If you have recurring problems with your service, call in and document the problems whenever they occur. Takes notes on your conversations and get the name and/or ID of the people you speak to. If you can document a pattern of problems, you might be able to get out of your contract.
• If you have a friend that needs cell service, and is willing to take over your agreement, ask if your carrier if you can transfer your line. If you don’t know anyone who needs a new phone, search the internet for cell phone swap programs.
• Move to an area without coverage (seriously?). If you can’t get reliable service at your home address, your carrier might let you out of your contract.

Avoiding a cell phone ETF – in practice

In our case, we had suffered through terrible coverage at home for a few years. We put up with it for so long because we were getting dirt cheap service through a pair of Sprint SERO plans. In the end, however, we decided to move on to greener pastures.

In looking at the Sprint coverage maps, I noticed that our house was outside of their coverage area, so I called to inquire about canceling. I was told by the phone rep that we could get out of our contract without the ETF. He said he’d notate our account and we could simply port our numbers elsewhere.

Fast forward about six weeks and we got hit with a $441 bill — two $200 ETFs plus a little over 10% in taxes. To make a long story short, I spend the better part of two weeks (and countless hours on the phone) getting this removed from our account.

We even had to go so far as providing proof of residence. Apparently the fact that we’ve been receiving (and paying) our bill at our current address for roughly three years wasn’t sufficient “proof” that we actually live here.

Lessons learned

I think the take home message here is that, no matter how strong your case, you need to be prepared to fight with your carrier. Take good notes whenever you call. Record the date and time of your call, the name and ID number of the rep that you speak to, and so on.

As long as you have a legitimate case, you should be alright — eventually. I do have to say that the frustration was totally worth it, though… I’m loving my iPhone, and we’re thrilled to once again be able to use our phones at home.

Source: Spend Less TV via Bargain Babe

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A brief history of the FDIC

For those that aren’t aware, the FDIC was formed following the signing of the Banking Act of 1933 (also known as the Glass-Steagall Act). Prior to that time, bank customers were at risk of losing all of their money if their bank failed, and bank runs were a common occurrence.

In the beginning, the FDIC was funded with “just” $289M in loans from the U.S. Treasury and Federal Reserve. While this has grown to tens of billions of dollars (currently $10B, but headed to $40B with the accelerated premium payments), they’re currently insuring $4.8 trillion in deposits.

Unfortunately, I couldn’t find any data on how much money the FDIC was insuring back in the 1930s. It would be very interesting (at least to me) to see how much the ratio of money on hand vs. funds insured has changed over the years. Anyway…

A brief history of FDIC limits

What follows is a list of historical FDIC insurance limits, accompanied by the 2009 inflation adjusted values (in parentheses; courtesy of the CPI Inflation Calculator).

• 1934 – $2,500 ($40,268)
• 1935 – $5,000 ($78,772)
• 1950 – $10,000 ($89,558)
• 1966 – $15,000 ($99,923)
• 1969 – $20,000 ($117,621)
• 1974 – $40,000 ($175,119)
• 1980 – $100,000 ($261,934)
• 2008 – $250,000 (current, expires at end of 2013)

As you can see, the limits have grown fairly steadily in both nominal and “real” terms over the years. That being said, the gap from 1980-2008 was by far the longest on record, and the adjustment to $250k was long overdue.

Indeed, that $100k back in 1980 was worth the equivalent of roughly $260k in current dollars. Conversely, by the time the 2008 adjustment rolled around, that $100k limit had effectively shrunk to only $38k in 1980 dollars. Gotta love inflation, huh?

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“The wise man plans and saves for the future, but the foolish person squanders what he has.”

-Proverb

Today I will outline two basic concepts. One will touch on saving for a “traditional spending” Christmas, and the other will challenge you to do what we do… Forget commercial Christmas and develop your own idea of giving for the season.

Because it makes more sense, I will spend most of my time on the latter.

Two very differing views toward Christmas

1. Participating in the modern gift exchange culture as we know it.

The following represents the “normal” point-of-view in our culture:

• Wait until December
• Go buy a ton of gifts for friends, family, and coworkers — on credit, no less
• Attend a bunch of Christmas parties
• Exchange gifts at each one

What’s my opinion? Don’t participate. Modern gift exchanges in our culture reek of binging, excess, and indulgence. If you must participate, make sure you start saving now… You’ll need it.

If you are firmly entrenched in this camp, then create a separate fund for Holiday spending and contribute to it for the next few months so you can fund your upcoming retail extravaganza. This will help you avoid using your credit card as much as if you did nothing to prepare.

Instead of simply following the status quo, why not start thinking outside the box. Here are some reasons why:

• You don’t really have any money. If you’re reading this, there’s a decent chance that you’re in debt. Stop pretending you have more money that you really do, and use any extra available funds to move toward financial freedom. Once you’re free from the bondage of debt, then go buy gifts with money that you actually have!
• Most Americans don’t NEED more stuff. In most cases, our needs our well provided for, so Christmas is (more often than not) all about want want want. If that’s the case with you or your family, consider using your money for something more useful this year — like paying off your debt.

If you’re still intent on giving gifts, read on…

2. Participating in gift exchanges on your own terms.

I’ve said it before, and I’ll say it again… Break free from a culture of temptation. Live outside the box and exercise the lost arts of creativity and resourcefulness.

Here are several ways for you to change your approach toward gift giving for Christmas 2009:

• Greatly limit your participating in gift exchanges this year. My wife and I have done this for the last several years. We give sensible gifts to our nieces and nephews, participate in one $20 gift exchange with each side of our family, and limit our spending on each other to $50.
• Communicate with your loved ones. We’ve made clear to our family and friends that we’re not planning on giving gifts, and that we expect nothing in return. Were they upset? No. Quite the contrary. Once we spoke up, it turned out that most everyone agreed. We all saved money and focused instead on simply spending time with each other.
• Make homemade cards and gifts. Instead of feeding the corporate consumerism monster, consider a homemade gift. Aside from being a great way to save money, boost creativity, and build your self-reliance, it’s also a great family-building exercise. Some of my best memories of Christmas-time are of making homemade Christmas ornaments, decorations, and gifts with my family when I was growing up. Give it a shot… I promise you won’t regret it.
• Offer your services as a gift. Don’t have the time to make cards and gifts this year? Make a few simple coupons for your services and give them away to loved ones. Often times they need your expertise way more than another tie, pair of socks, or a gift certificate. Are you a computer technician? Give people coupons for a free computer clean-up. Are you a massage therapist? Give people coupons for one free massage. Are you the ring master at a circus? Give people free passes to the show. You get the point. Not only will you be helping them out, but you’ll also create an opportunity to spend time together.

Don’t limit yourself

One more thing… Don’t limit your use of this approach to Christmas. Use it for birthdays, anniversaries, etc. To give you an example, my wife just made “Tub Crayons” as a birthday gift for our friends two year old. The recipe was pulled from the Dining on a Dime Cook Book: 1000 Money Saving Recipes and Tips (which we HIGHLY recommend). It was both inexpensive and simple to prepare.

Don’t be selfish… Share your ideas with us!

I’ve just offered up a few idea here, but don’t limit yourself to what I’ve mentioned. Consider your family and friends, and think about what you can do to make this year extra special for them.

I encourage you to save your money and be creative. Make people dinner, write them a song/poem, or offer to babysit. Instead of spending your time shopping for them, spend your time coming up with a creative way to show them that you love them. I can promise you this… They’ll remember it much more fondly than they would another $15 tie from Walmart!

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Being a search marketer and online entrepreneur, I am on the web approximately nine hours per day, seven days a week. It is safe to assume that Google search takes no less than three hours of that time daily. So let me tell you, I have had the opportunity to see and try in practice all the beauty of Google search.

And like in any area of your life, Google can be really helpful for saving money when shopping. Let me share a few tips:

1. Use Google to convert currencies

The simplest, yet one the most useful Google hacks is to just type something like:

[5 pounds in USD]

and you got it:

2. Use Google as a calculator

Can’t tell how much you save with the coupon? You don’t have to go anywhere — just type it in Google and you’re done:

3. Use Google to search through reviews and forum opinions

Google has recently introduced quite a few cool features to its interface, many of which help when it comes to shopping on a budget. The first feature I want to talk about is “reviews and forums”. Here’s what you need to do:

• Search for whatever you plan to buy
• Click “More option” below the search field
• Click “Forums” or “Reviews” to see what people are saying about that thing you need to purchase

4. Use Google to find recent product news and reviews

That’s another option within the left-hand pane that we discovered in the previous tip. As you may have noticed, Google sometimes (but not always) tends to rank old pages higher just because they are supposed to be more trustworthy. Oftentimes, however, you need to know what has just been said about some product you are considering. So:

• Click “More Options“
• Choose “Reviews” or “Forums“
• Click “Past 24 hours“, “Past week“, “Past year” or “Custom date range“

5. Use Google to compare prices

Yes, you heard me right! You can let Google show prices right on your search results page for quick comparisons:

• Click “More Options“
• Click “Prices from the page“

6. Use Google to compare prices from various brands

Say, you want to search for Sony laptops as well as Acer laptops to compare prices right within the results page. If you search [sony laptop acer laptop] you will only get results where all of these terms are used on one page. Instead, you want either of the pairs [sony laptop] or [acer laptop]. So what you need to type is:

[sony laptop OR acer laptop]

Now, just click “Prices from the page” to the left of the search results and you get the list of prices for both laptops on one page throughout various stores:

7. Use Google to search within any money-saving site

This one is actually my favorite. I am so used to Google search that I never care to even look for the search option on any site. All I need is to type site:sitename.com and search within any site using the above mentioned wonderful options.

Let me demonstrate this with an example. Let’s say you want to quickly search through Buxr.com (a coupon directory) for laptop deals. You could easily do this with the following search string:

[site:buxr.com laptop]

Not only will Google show you the most recent updates from the site, it will also let you know the exact time the deal was published:

Hopefully, you will be able to take advantage of these Google search tips!

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Simply enter promotional code ‘FinancialHelp25‘ to get 25% off your purchase. Thus, if you’re interested in something like FICO Standard, which gives you access to your TransUnion or Equifax FICO credit score, you can get it for $11.96 (vs. $15.95).

Also note that myFICO ScoreWatch still offers a 30 day free trial, complete with free access to your Equifax FICO credit score. Just be sure to cancel when you’re done if you don’t want to pay for the service. Of course, if you do want the service, then be sure to use the promo code.

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Under the just-announced plan, the FDIC will require banks to prepay their 2010-2012 assessments when they pay their Q4 2009 premiums. There will also be a three basis point (0.03%) increase in premiums starting in 2011.

From what I’ve heard, the increased cushion will amount to roughly $10B per year of accelerated premiums, or $30B total. Of course, this also means that the FDIC won’t be collecting any money from 2010-2012 unless they change the rules.

Thoughts?

Source: WSJ.com

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For background, we’re getting a 30-year fixed rate FHA mortgage for our town house. This means that our interest rate will remain the same through over the life of the mortgage. Since it’s an FHA loan, however, there are some differences vs. conventional loans.

FHA loans and the Mortgage Insurance Premium

With a conventional loan, if you make a downpayment of less than 20% of the purchase price, you either have to pay for Private Mortgage Insurance (PMI), or take out a piggyback loan to make up the difference. With an FHA loan, if your downpayment is less than 20%, you have to pay a Mortgage Insurance Premium (MIP).

For loans with terms longer than 15 years, the law currently requires your MIP to remain in place for at least 5 years, whether or not your loan-to-value (LTV) ratio drops below 78%. With a conventional loan, most lenders will allow you to drop your PMI, though you might have to make a special request.

Keeping that MIP in place — at a cost of roughly $50/month for 5 years — will take up money that we could use for other things. We had hoped to use my extra earnings to pay for it in advance and keep it from getting rolled into the mortgage, but…

I called the Housing and Urban Development (HUD) hotline for the FHA’s resource center (1-800-CALL-FHA) to asked about doing this and was told that we can’t. While that was a bit disappointing, we’ve decided to change our game plan a bit.

Our new plan for my windfall income

We’ve always been careful to avoid putting ourselves in a financially vulnerable position, so we’ve decided to continue down that road by putting using my extra income to increase our emergency fund.

We’re also going to put some toward a refrigerator for the townhouse (which doesn’t come with one). We were going to buy a friend’s fridge which still was under warranty, but it was too big to fit. So now we’re in the market for a new one. If you have any suggestions, they’d be greatly appreciated. Hopefully, this new appliance rebate program can work out for us.

Closing thoughts

The home-buying process has been very crazy so far. Hopefully, it’ll turn out alright when all is said and done. Have you ever had an FHA loan? If so, how was your experience? And do you have any tips to share?

Note: The good news is that MIP payments are, in many cases, partially refundable. If you have an FHA loan and are wondering if you’re due a refund, go to the HUD refund site and enter your loan details.

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At Chase, you’ll no longer be charged a fee if you overdraw your account by $5 or less. Similarly, Bank of America will forgo the fee if you overdraft by less than $10 on any given day.

According to Chase, these changes are being made:

“to make [their overdraft policy] clearer and simpler and to give customers more control over their debit cards and the fees they pay.”

For their part, Bank of America is hoping the changes:

“will help customers avoid excessive overdraft fees and better manage their finances.”

In reality, it looks like both banks are trying to get out in front of impending legislation that will mandate such changes. By doing it ahead of time, they get to claim the high ground vs. other banks that wait until their forced to make the change. Either way, change is good when it comes to overdraft fees.

Source: MarketWatch

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