A disturbing report came out last week in an article on Yahoo Finance in regard to state income tax refunds being delayed. In Cash-Strapped States Delay Paying Income-Tax Refunds it was reported that several states will be delaying the issuance of refunds this year in response to budget issues.

The article said [...]]]> By Kevin M

A disturbing report came out last week in an article on Yahoo Finance in regard to state income tax refunds being delayed. In Cash-Strapped States Delay Paying Income-Tax Refunds it was reported that several states will be delaying the issuance of refunds this year in response to budget issues.

The article said that the delays represent “…essentially an involuntary no interest loan from the taxpayer.”

Projections indicate that this is a trend will continue into the foreseeable future. The Christian Science Monitor reported in December that (What recovery? Budget deficits get worse for states) 48 states face budget deficits for fiscal 2010, and at least 41 are projected for 2011.

There’s an almost comfortable tendency these days to blame all bad-isms on the state of the economy, and while the recession has certainly had a negative affect on state finances, budgetary overreach shares the blame in at least equal measure. As an example, a shocking story has recently been in the news that state and local pension plans for public workers are facing something on the order of a collective $1 trillion shortfall in funding for future benefits. This is just one example, but I think it confirms that state budget problems may be longer term than we like to think.

If that’s the case, we might expect refund postponements and other budgetary shell games to continue well into the future and some strategy is now the order of the day.

2009 is a done deal, but NOW is the time to prepare for April 15th, 2011

It’s virtually ironic that owing will actually give you more control of your money in this particular situation.

The ideal is to have a very small refund on both your federal and state returns, that way you aren’t giving the government an interest free loan, but you’re also not writing a check on April 15th. Unless you’re a CPA it probably won’t be possible to have your withholding come within a few dollars of your final liability, but we should all be looking to get as close as possible and, failing that to actually owe at least a little to the state.

You can do a rough projection of your tax situation for 2010 and get an approximation of your state tax liability, then adjust your withholding taxes accordingly. Withhold no more than will provide you with a small state refund, or even better, a small liability. Add up income from all sources, subtract KNOWN deductions, calculate the tax liability on the remaining income, then set your payroll withholding or quarterly estimates to come in slightly below the calculated liability.

Here in Georgia, the Department of Revenue includes an easy to use “Schedule For Estimating Georgia Income Taxes” form at the back of the state income tax general instructions booklet, and I’d be willing to bet a similar form can be found in other state tax instruction books as well.

If you’re unsure or if your legs get wobbly…

Be careful however in using the do-it-yourself approach if you live in California, New York or other states with notoriously complicated tax codes. If that’s the case, a projection shouldn’t be undertaken by anyone other than an experienced, computer-armed CPA or tax preparer. There’s more to know in some state tax codes than ordinary people have time to learn.

If your tax situation is fairly straightforward, the problem may be solved simply by adding an extra exemption or two on your state withholding through the human resources department at work.

If your tax situation is fairly complex, or if the idea of projecting your own tax liability freaks you out, by all means, pay a few extra dollars to have it done by a professional.

Tax codes are more complex than they were just a few years ago, even at the state level and unless you work in the field you may not know the various nuances of your state tax code or of pending changes that could affect your liability. Most tax preparers charges far less for an income tax projection than they do for preparing your return, and it could be money well spent.

Pick a number between zero and 500

While the preferred situation will be to owe a little money on your state return, you don’t want to get over-aggressive in owing here. State tax authorities will impose penalties if your final liability exceeds a certain threshold, typically $500. As such, you’ll want to owe some number greater than zero, but less than $500, otherwise your overall liability will be higher than it would be otherwise. We’re looking to avoid having our money tied up for an indefinite period of time here, not to get stuck paying more than we should.

It’s too late to fix the situation for the tax year just past, but we have plenty of time to prepare our tax liabilities so that we don’t end up providing an “involuntary no interest loan” to our respective states next spring. I’m OK with “rendering unto Caesar that which is Caesar’s”, but I’d like to keep that which is mine, if it’s all the same.

How about it, any CPA’s, accountants, tax preparers or good old-fashioned concerned citizens want to weigh in with some ideas on this?

By Kevin M

Some argue that if you’re in debt the priority needs to be to payoff your debts before attempting to build a savings account. Many call for the establishment of a small emergency fund—typically $1000—to handle contingencies, and then to pour all [...]]]> Newsflash: You can’t get out of debt until you stop being broke!

By Kevin M

Some argue that if you’re in debt the priority needs to be to payoff your debts before attempting to build a savings account. Many call for the establishment of a small emergency fund—typically $1000—to handle contingencies, and then to pour all extra funds into the pay down and eventual payoff of debt. Only when your debts are paid will you have the cash flow to truly build substantial savings.

While there is some merit to that advice, I believe it fails to address the basic reason a person might get into debt in the first place: a lack of savings, forcing the use of credit as a savings substitute.

Until that cycle is broken, it’s doubtful you’ll ever payoff your debts or accumulate substantial savings. Life has a way of throwing contingency after contingency at us and unless we’re fully prepared to deal with that reality, getting out of debt is little more than a fantasy.

The vicious cycle of debt

I think most people underestimate the deep power debt holds over the debtor, and we often assume it’s simply a matter of a) stop borrowing, and b) payoff your debts. If only it really were that easy!

If you’re experiencing credit problems, either in the form of increasing debt levels or more frequent delinquencies, you’re probably also aware of one or more of the following:

• You probably don’t—and maybe never did—have any substantial savings
• Your credit lines function as your savings account
• Your debt levels have risen steadily over the years, despite the fact that your income has also risen
• You’ve generally been overly optimistic in your thinking, tending to assume higher income and lower expenses than has usually been the case
• The parade of “unexpected expenses” seems to be intensifying
• You may have developed a syndrome I refer to as “debtors optimism”—much like a gambler, the debtor assumes luck will be his savior
• You’re making the minimum monthly payment on your credit cards, promising yourself you’ll get more aggressive with payments later when…

Now a fat savings account won’t make all of these issues magically disappear, but it is a fact that a cash rich position does tend to make the ride in life a good bit easier, and this is at least in part because of the discipline having savings imposes on us. Just learning to live beneath our means—what ever those means may be—can be life transforming.

Make savings the priority

Why is it in your best interest to establish your savings before tacking your debts?

1. No one can be effective in carrying out any plan while being broke
2. While we’re trying to focus on paying off debt, bills are still rolling in, each one having the potential to force us to abandon the payoff effort in favor of putting out the immediate fire
3. Savings give you room to breath! Unless you have margin to fall back on when unexpected bills come in, you’ll panic. Panic is fear, and fear is in no way solid ground from which to conquer your debt problem or even to live life
4. Accumulating savings requires living beneath our means, banking windfalls and developing additional income sources—all of which will help in the later effort to pay off debt
5. In order to save, we must develop a more a realistic assessment of our finances; debtors optimism (or any form of optimism) won’t get the job done

Three to six months of living expenses in the bank should be the goal. I’m sorry, but the $1000 emergency fund won’t cut it—that’s little more than a nasty car repair bill today, and how unusual is that? One “emergency” and you’re back to being broke.

Once you have three to six months put away it’ll be time to tackle the debts. But even once you do, you should continue to increase your savings if only at a slower pace. After all, the same contingencies that put you in debt in the first place also have the potential to drain your savings.

Maybe it’ll take longer to pay off your debts this way, but if you have a cash balance to fall back on in emergencies you’ll have the time you need. In fact, one thing you may want to consider is a divide-and-conquer strategy in which you ignore your debts beyond making minimum payments in favor of maximizing savings.

Once you have the minimum put away (three to six months living expenses) continue saving until you have enough excess to pay off one of your loans entirely. You can continue this strategy of picking off one loan at time until all are paid—and throughout the process you’ll never have been broke!

If you agree that savings is the place to start before paying off your debts, please read Start and Grow Your Nest Egg Even If You’re Broke for some ideas on how to get started. Once you have a few months worth of living expenses stashed safely in a savings account you’ll begin to feel better about your whole financial situation, because it will be better!

Which way do you think is the better way to get control of your finances, build your savings first then attack your debt, or go right for paying off the debt and build savings later?

Last Saturday night, we decided to go see Avatar, a highly acclaimed movie that lived up to its billing. It was the first time we’d been to the movies this year, and I’m almost embarrassed to admit that the reason we decided to go at all was that our daughter was at [...]]]> By Kevin M

Last Saturday night, we decided to go see Avatar, a highly acclaimed movie that lived up to its billing. It was the first time we’d been to the movies this year, and I’m almost embarrassed to admit that the reason we decided to go at all was that our daughter was at a weekend sleepover, which meant that only my wife, my son and myself would go, saving us money on the fare (OK, she wasn’t really excited about seeing the movie anyway).

Now we live in the Atlanta area, which is a region nearly famous for having a very reasonable cost of living. Despite this, here’s the run down of what it costs to take in a movie in these parts:

Movie ticket: $10.50 per person (seems to go up a dollar every year)
Medium popcorn: $7
Medium soft drink: $5
Box of candy: $5

I can only imagine what it costs to go to the movies in “high cost” areas.

If each person in the family goes for the “full package”—movie, popcorn, drink and candy, the cost is an astonishing $27.50 per person, or $110 for a family of four (a 12 year old is an “adult” at the ticket window)! And we haven’t even added dinner!

The movies weren’t always this expensive

My parents said that back in the 1940s, a quarter got them into a movie house where they would watch a double feature plus “shorts”—newsreels, cartoons and the like. Popcorn, Coke and candy could be had for a nickel or a dime each. A full afternoon or evening of entertainment—3, 4, 5 hours—for about 50 cents! Same deal today: $27.50 for the 1.5-2 hours for a typical single run movie—then we’re back out on the street looking for something to fill the rest of the time.

Back in the 1970s I remember paying a dollar and change for admission, and maybe the same amount in total for popcorn, candy and soda. It would be even less expensive at a drive-in theater, where a car full of people could watch a movie for the single price of admission for one car. Another drive-in bonus was that you could bring in your own snacks to save even more. Are there even any more drive-ins around anymore?

Let’s take a closer look at a family of four today, at the above cost of $110 for one night at the movies. If the family heads to the movies at least once a month, in the course of a full year, the family has spent upwards of $1320 on a single entertainment category, and all for something which seems so normal.

How to save money at the movies

The most typical suggestion for fighting back against high movie prices is to rent DVDs through a local movie rental store, Netflix or some other in-home viewing option. But let’s be honest, there’s something special about going to see a movie at the movies, especially for a fresh-release blockbuster. Raising a family in an era of not-so-cheap movie outings, we’ve been forced to come up with ways to do the things we enjoy, but to do them for less money.

Employer theater discounts. Sometimes theater chains will offer discount packages to large employers to encourage attendance. My wife worked for such a company, but for some reason the company didn’t publicize it. We were able to save $2-$3 per ticket, and with four tickets per movie, it made a real difference. Bug a few people in the HR department; even if they don’t have such an arrangement, maybe you can contact local theaters and see if any are willing to create one.

Matinees. You can typically save $2-3 per person by attending afternoon matinees. For a family of four, this alone will save $8-12.

Avoid combo packages. Theaters usually offer some sort of combo packages on snacks, but if you do the math (and I have while standing in some very long lines) you’ll find that you’ll typically save only a dollar per order versus the same collection purchased a la carte. The kiddy packs are appealing to small kids, but are close to a bona fide rip off: $6 for two handfuls of popcorn, a SMALL drink and a candy strip that’s just enough to tick your child off. There are better ways to handle this…

Popcorn. We typically buy the biggest size popcorn and share it, rather than buying smaller individual servings for each person. Not only will this cut popcorn costs roughly in half, but at some theaters buying the biggest serving entitles you to free refills. Ask for small popcorn bags at the counter so you can fill them for your kids, or bring some bags from home. If you want to make it really fun for your kids, you can also buy a jumbo pack of movie theater popcorn bags at Sam’s Club, and use those to divvy up the main supply.

Drinks. Same idea here, buy the biggest drink you can, and get separate straws. Variety may be a problem, as it is with my family. Me, my wife and daughter like Diet Coke, but our son won’t drink it. But rather than buy him a separate drink of his choice, and because he’s the lone dissenter, we get him a bottle of his favorite soda at the grocery store for a fraction of the cost.

Candy. The same boxes of candy they sell for five dollars can be purchased at the grocery store, chain pharmacy store or big box discounter for around a dollar! If candy for four people is purchased at the store and brought into the theater, you’ll save an average of $4 per person, or $16 for a family of four.
 

The theater wants you to buy their concessions and may discourage bringing in food, so be careful how you do this. We always buy our popcorn at the theater (and usually a drink too), in part because the movies aren’t the movies without it, but also because we want the theater to make money—just not so much!

Of course the easiest and most obvious way to cut back on the cost of going to the movies is to reduce the number of times you go. Instead of going every month, go every other month, or only when a blockbuster movie that everyone wants to see comes out. It may be that you need to cut movie attendance back to special occasions only.

Breaking up that most traditional of nights out, dinner and a movie, is another way. With our kids being teens, a night at the movies means dinner in.

Incomes aren’t rising, but the cost of just about everything else is–how do we continue doing the things we enjoy, without spending a fortune doing them? Do we cut activities out entirely, do less of them or find less expensive ways?

Kevin M

At the risk of personal safety I’m going to take aim today at an “expense” that may be sacrosanct for some, but that’s exactly why it needs to be discussed.

Jimmy Buffet’s 1977 sentimental favorite Margaritaville tells a tale of a carefree life lived on a [...]]]> The Local Watering Hole as a Financial Bottomless Pit

Kevin M

At the risk of personal safety I’m going to take aim today at an “expense” that may be sacrosanct for some, but that’s exactly why it needs to be discussed.

Jimmy Buffet’s 1977 sentimental favorite Margaritaville tells a tale of a carefree life lived on a warm beach in a perpetual state of inebriation. As appealing as that can be at times, when it’s romanticized into a regular activity at a local bar, the costs can be steep, and we aren’t just talking about money.

For the purpose of full disclosure, I’m a light drinker. I’ll indulge in an occasional beer or glass of wine (or two or three), most frequently with dinner guests, but consumption of alcohol has never been a priority in my life. I can go for months without drinking or sit in a bar for three or four hours nursing soft drinks, surrounded by people drinking the hard stuff. I don’t know if that status disqualifies me or gives me the vantage point of an objective outsider, or if it even matters.

Bars—separating us from our money while we’re doing other things

The venerable “watering hole” has for thousands of years been a common meeting place for folks of all types, and in a society which is rapidly becoming starved for community and human interaction, that’s not a bad thing at all. But at least from a financial standpoint, there are few places worse than a bar!

If you’re going to a bar to literally have a drink—that’s singular, as in one drink–with one or more friends, that isn’t a problem; where else can go to a public venue and have a good time with other people for about five dollars? The problems come in when you get beyond one drink, a very easy thing to do when you’re in a group. Consider the following:

Bars are in the business of selling drinks. If no one in your party orders any after the first round, the bartender and management may not welcome your continued patronage. Purely from a financial standpoint, this could be the most favorable outcome.

Impaired judgment raises the tab. After two drinks, judgment becomes impaired and resistance to ordering more drinks or incurring other expenses weakens as the time in the bar increases. Two drinks can easily lead to three, and then to four and so on. At some point food may be added to your order and by then the finances are out of control. Then some of the boys (or girls) may also want some coffee to counteract the affects of the liquor; you get the picture. Four or five people sitting in a bar for a few hours can easily run a tab of several hundred dollars.

Paying for The Group. In a group setting with people drinking, one of the first things to go is anything which resembles an accounting function. After a few drinks, no one is keeping a record of who ordered what, and you can easily get stuck paying for part of your buddy’s eight drinks in addition to the two that you ordered for yourself.

You’re in a friendly group setting, so you’ll quietly pay your “fair share”—and part of everyone else’s–and smile while you’re doing it, because that’s the unofficial but universally recognized bar protocol. The point is that in a bar setting with other people, though you may carefully regulate your own consumption, you will have little control over how much money you will dole out by the end of the night. The last thing you need to do when you’re on a budget is to get yourself into a position of bankrolling the excesses of others!

The effects of going too far. Inebriation is always a distinct possibility in a group setting, which can lead you to do things you’ll later regret. We become bolder when we consume alcohol, so the likelihood of making unwanted advances or of picking a fight with someone who bumps into us or says the wrong thing are heightened considerably. In addition to the humiliation or injury you risk, there are also the longer term consequences of facing legal action or even criminal charges.

A few hours of letting loose can cost you for years or for a lifetime. If you’re already in a financially weakened position, and maybe drinking to release stress, you’re even more vulnerable to a bad outcome. This is because you will have fewer monetary resources available to clean up the mess you made on a drinking binge. There’s a good reason why poor people are more likely than rich people to go to jail and its spelled m-o-n-e-y, or more precisely, the lack of it. An attorney friend of mine used to say “never create a $1000 problem that’ll cost you $100,000 to fix.” Good advice?

Tell it to the judge. Finally, there’s the obvious threat of a DUI charge. Ever since DUI laws were put on the books, the blood alcohol level at which the charge applies has been getting progressively lower. In some jurisdictions, two drinks consumed are enough to put an adult man in trouble with the law, and as little as one drink for an adult woman (since women are typically lighter in weight). This isn’t something to be taken lightly.

We’ve now moved from dropping $50 or $100 at a bar, to potentially thousands in court. And in addition to fines and insurance surcharges, you could lose your license or even face jail time. In either case, your ability to earn a living would be impaired—can we even put a price on that?

Starbucks to the rescue

If getting together with friends or coworkers for camaraderie and conversation is the true objective, getting together at coffee shop will be far easier on the finances. Consider the advantages:

1. Coffee is a lot cheaper than liquor
2. It won’t impair your judgment
3. You can meet with the same friends and have a good time
4. No one will ask you to leave if no one in the group is buying more drinks
5. There’s zero chance of incurring a DUI when you drive home

Also, if you or your friends need the booze in order to enjoy one another’s company, you may not be as fond of each other as you think.

So which would we rather spend, $10 at Starbucks or $100 in a bar with the risk of $1000 in court?

Redeeming Riches has been running a truly good series, 10 Money-Saving Tips to Help You Stash $10,000!, which includes tips in each post on how to accumulate such a pile of cash, one expense at a time. The initial post in the series ran back on February 22nd, and took aim at cutting [...]]]> By Kevin M

Redeeming Riches has been running a truly good series, 10 Money-Saving Tips to Help You Stash $10,000!, which includes tips in each post on how to accumulate such a pile of cash, one expense at a time. The initial post in the series ran back on February 22nd, and took aim at cutting back on going out to eat as the first tip in the quest.

It’s almost standard fare on the personal finance blogging circuit to take aim at eating out as a rich source of savings, either to build up a bigger bank balance, or to reign in a runaway budget. But how much money can we save by cutting back on this expense?

Running the numbers on eating out

Let’s do some quick calculations to illustrate just how much money we’re talking about.

It costs about $25 for a family of four to buy a meal at a typical fast food restaurant. Averaging just two trips per week totals $50; continuing the pattern each week over the course of a full year comes to $2600.

A daily fast food lunch runs at least $5; in a typical five day work week, that’s $25. Over the course of a year, $1300. Just for lunch. Just for one person. How many people in your household might be doing that?

At mid-priced restaurants—Appleby’s, Ruby Tuesday, etc–$40 for a couple is pretty standard. Done weekly over the course of a year exceeds $2000. For a family of four it double to $4000. That’s starting to look like an annual grocery budget for a typical family, and all we’ve satisfied is one meal per week.

Some households eat dinner out two or three times per week, so we can multiply accordingly and see that thousands of dollars can be spent with little effort or concern.

Look at those numbers and consider how much of that spending might actually be better spent or invested elsewhere.

Do we really like restaurant food, or are we just bored?

Driving home from work one day a few years back, I flipped on the radio to hear an interview with a nutritionist who said the fundamental problem with eating home is that most of us get caught in a rut where we rely on preparing the same 7-8 meals all the time. We do this largely out of habit, but it becomes boring and the craving for something different typically leads us to a restaurant, where the food is anything but healthy.

I think that describes the situation in most households, mine included. Following this pattern we quickly reach the point where eating at home becomes nothing but functional, something we mostly tolerate but seldom enjoy.

Thrift is almost always a matter of trading time for money, and that seems especially true when it comes to eating out. If we want to save money by not eating out then we have to make eating at home more compelling. That will require an investment of time.

I often wonder if eating out is properly classified as “food” expense in a budget, or would it be more appropriate to think of it as entertainment? Since we mostly use it for diversion, to experience something different, it probably really is a form of entertainment.

Observation: go to restaurants enough, and eventually they get boring too.

Maybe it’s time to spice things up a bit…

It won’t be enough to say “we’re not eating out anymore”; unless we have alternatives that will make eating at home something more than functional, we’ll risk turning back to the cultures default setting of “getting something out”. It’s a matter of replacing bad habits with good ones, and yes, that will take time.

1. Take a survey.

Eating meals that we like shouldn’t be something we do only in restaurants.
Find out what everyone likes, or would like to try, write it down and then do it. If we want to eat fewer meals out, we need to satisfy more preferences at home.

2. Do some experimenting.

Part of the reason people go out for dinner is because they want something different, maybe even exotic, but you can and should do this at home too. We all have a repertoire of meals that we prepare, but we can gradually work in new meal plans over time. My wife and I try to add a couple of new recipes to our meal plan each month so that we’re rotating our dinner selections continuously.

3. Avoid defaulting to packaged meals.

Packaged (or pre-prepared) meals are the idiot cousin of restaurant meals, often seen as a happy medium between eating at home and eating out. However, by price, many packaged meals are about the same as what you would pay in a restaurant, but not nearly as good. They’re more like take out and have nothing in common with home cooking. Think of them as appetizers for restaurant meals that will set you up for a return.

4. Side dishes can make a difference.

Even if you hate cooking and don’t consider yourself up to the challenge of preparing different meals, you can still make your meals more enticing. Adding homemade bread (bread machines are really easy to use), fresh fruit or a nice dessert can make an otherwise ordinary meal into something special. You’re not breaking your food budget here, just adding at the fringes.

5. Get some cookbooks.

Unless you’re one of those people who are naturally creative in the kitchen, you’ll need inspiration in order to keep fresh ideas coming. Cookbooks help immensely in this regard. Get one or two, but don’t overwhelm yourself with a small library. One I highly recommend is The Backyard Barbecue Cookbook. It’s filled with user friendly recipes, especially for fish and chicken.

6. Change the atmosphere.

In many households dinner gets too routine. Try changing the atmosphere by turning off the TV, turning on quiet dinner music, lighting a candle or two or making whatever changes necessary to make eating at home a more positive experience. Dinner shouldn’t be just about eating; when it is, restaurants begin to beckon.

7. Bring in some company.

When I was a kid “going out” to dinner meant eating at someone else’s house, and we frequently had guests at our house for dinner as well. The camaraderie we enjoyed as a result made eating at restaurants mostly unnecessary. It’s possible we’re going to restaurants today mostly in search of that camaraderie. Be more purposeful about getting together with others for dinner—it adds a dimension to an everyday meal and eliminates the need to pay for a restaurant. Though it does cost more to have company for dinner, reciprocal eating arrangements and pot luck suppers can easily offset that.

8. Make cooking a creative endeavor.

Do you watch cooking shows on TV? Stop watching and start imitating! Cooking is very much a creative endeavor, and we tend to miss that in our drive for convenience. In fact, many of us complain that our talents aren’t being properly used on our jobs, and while that may be true, there are opportunities to spread our creative wings at home, and one of the places to do that is in the kitchen. Engage in creative cooking they way you might if you decided to paint, sculpt or compose music. Make cooking an art form, and it’ll seem less like a chore.

What are you doing to cut back on eating out?

This week opens voting on the Plutus Awards in the personal finance blogging world, which makes it the perfect time to launch OutOfYourRut’s first ever Friday Round Up. There are some great sites out there, with many brilliant posts, but here are the ones that really caught my interest this week…

Jason at [...]]]> By Kevin M

This week opens voting on the Plutus Awards in the personal finance blogging world, which makes it the perfect time to launch OutOfYourRut’s first ever Friday Round Up. There are some great sites out there, with many brilliant posts, but here are the ones that really caught my interest this week…

Jason at ***Redeeming Riches brings the Sermon on the Mount to Main Street in the 21st Century with Overcoming Anxiety – How Worry Reveals What We Worship. Worry enough, and you’ve elevated your problems to the level of idols. Don’t think it’s possible? Read the post!

Craig at ***Money Help For Christians has produced quite possibly the most comprehensive single post on the entire topic of personal finance with How to Afford to be a Stay at Home Wife or Mom. He makes the case for the mechanics of enabling a wife and mother to stay at home, but the advice in the post will help anybody improve their finances. If you have time to read only one personal finance post this week, this would be the one.

Be sure to check out The March 2010 “Manage Your Money” Challenge: Featuring Pocketsmith – Are You In Or Out? Brad at ***Enemy of Debt offers an open invitation to participate in a money management program beginning this Monday, March 1st, and it’s generating some real excitement. Free programs and prizes any one? Seriously, check this one out!

Sam at ***Financial Samurai has made an art form of provocative personal finance blogging—if such a thing were ever possible. And I guess it must be because it’s what he does in all of his posts. In The Government Is Sexist And Nobody Seems To Care, he offers his own view from out-of-the-box on why the so-called “marriage penalty” still exists. No other site on the web could put such an edge on something as dull and complicated as the tax code.

Clare at Money Energy is quite possibly the very best strategic thinker/planner on the web. In Five Things You Should Have In Your Emergency Cash Stash at Home she focuses that thinking on the question of “what if” in the case of a lost wallet—from someone who lost hers. She makes a convincing case that a lost wallet is about a whole lot more than just money. Don’t wait until you lose yours to read this post.

Paul at Provident Planning has a series following his progress in the trials, tribulations and costs of raising “Bambi” the calf in Raising a Cow for Beef: Month 6 and it’s predecessor Raising a Cow for Beef: Month 5. Title aside, there’s an even more compelling reason he and his wife have taken on this project, but you’ll have to read the posts to find out what it is. (Hint: it’s even more compelling than home grown beef.)

Many bloggers have tackled the buy vs. rent debate (including me), but few can do it with the depth and clarity that Matt at ***Debt Free Adventure does in Is It Better to Buy or Rent? Also check out Matt’s Feb. 17 post, One World Currency – New World Order. It’s not for the faint at heart, but Matt writes from heart and doesn’t sugar coat his posts. Which is why Debt Free Adventure got my vote for Blog of the Year (see Shameless Self-Promotion below.)

Nickel at Five Cent Nickel takes on an issue with increasing importance in an environment of high unemployment and uncertain careers. With so many now involved in non-traditional work arrangements, Independent Contractor vs. Employee: What’s the Difference? is especially relevant.

Shameless Self-Promotion…

This past Wednesday, voting began on the Plutus Awards. If you’re not familiar with the awards (I’m new at this too!), it’s kind of like an Academy Awards set up for personal finance bloggers. This site has been nominated as one of the finalists for Best Kept Secret Personal Finance Blog.

If you like what you’ve seen here on ***OutOfYourRut, I’d appreciate your vote. The category is way down near the bottom of a very long list of various other categories.

Also, the sites listed in the Round Up above are among the very best the personal finance blogoshere has to offer and some are also Plutus Award finalists in different categories—please show your appreciation with your vote for them as well.

***Plutus Award finalist—please support with your vote! Thank you!

Last week in New Car or Used Car – Which is the Better Deal? we talked about the many virtues and monetary advantages of buying a used car.

One of the common objections to buying a used car is the higher cost of repairs and maintenance. Well, we may have at least a partial [...]]]> By Kevin M

Last week in New Car or Used Car – Which is the Better Deal? we talked about the many virtues and monetary advantages of buying a used car.

One of the common objections to buying a used car is the higher cost of repairs and maintenance. Well, we may have at least a partial solution to that problem.

Car-Part.com–“Used Auto Parts Market”—provides access to salvage dealers across the United States and Canada. Car-Part.com isn’t a salvage dealer itself, but a database of hundreds of dealers in nearly every state and province across North America. Per the site “about us” description, they’ve been operating since 1998, so they’ve had time to work out any system bugs.

Quick, simple and very user friendly

All you need to do is enter relevant information in the main page search box—year, make/model, the part needed, your state or province and zip code—and you’ll have access to salvage yards all over the area. You can choose the closest yard or the least expensive, but you’ll have that choice. If none of the providers are close by, you can have the parts shipped to you. I didn’t venture this far, but you could also buy a part from an out of state dealer if the price is right and you have time to wait for delivery.

Many prices are listed, so you know what you’re paying before you place an order, but some do require that you call for a price. Each provider lists its name, address and phone number with the part so you know who you’re dealing with at all times.

One of the real advantages to the system is that there are multiple dealers listed. They’re independent businesses, providing the advantage of competition. If you don’t like the location or price of one dealer, you can shop for another.

I didn’t try it, but they also have a “Live Chat button” where you can “instantly connect to the recycler and ask any more questions or arrange a purchase”; that’s a feature that could come in handy in a pinch.

My experience with Car Part.com

I learned about this site completely by accident. Just last week, I broke the tail light on our 1998 van. It’s an embarrassing story, but yes, I broke it with a run in with…our garbage can.

Our garbage pick up occurs every Wednesday morning. We put the dumpster out on Tuesday nights, and when we do, we put it on the lawn to the right of our driveway, just behind our car so we can see where the garbage men leave it after they’ve emptied it.

Well, on this day, they put it behind the van, and a van isn’t as easy to see around as a car. When I backed out I heard a thud, stopped the van, and saw that I had pushed the empty dumpster about 10 feet. Now curiously, even though I had moved it, the dumpster was still on the driveway, which would indicate that the garbage men most likely put it just a few feet behind the van as opposed to on the street or at the edge of the driveway where they usually leave it. Maybe it was a trainee, but I’m speculating. Anyway, as bad luck would have it, the handle of the dumpster—the one part of it that could actually do any real damage—hit square on the tail light and snapped it open.

Now in a previous life, I would have grumbled, hollered at my kids and my dog, but ultimately I’d have paid the going rate to get it fixed, what ever it was. But that’s not my life now. Experience has taught me, what ever the expense, to stop, take a deep breath and spend some time seeing if there’s a less expensive way to handle it.

I don’t know much about a lot of things, and cars are one of them, so I’ve come to rely on the opinions of people I trust to provide direction. Fortunately, I have a couple of friends who do know a good deal about cars, and they both heard from me that day. In fact they hear from me anytime I have a car problem. Both recommended looking into a salvage yard; one recommended Car-part.com.

Everyone should have a panel of experts.

Saving a small fortune

I don’t know how other people handle it, but when ever anything goes wrong with one of our cars, I get a sharp shooting pain deep in my gut, knowing that it will cost, and probably cost big. The car world just seems wired that way.

But not this time.

The last time I had to replace a tail light, the cost to replace it was close to $200—and that was over 15 years ago. Surely it must have doubled since then, maybe tripled. Thankfully, I never had to find out.

$25 through a dealer on Car-part.com. That was what it cost. Two screws and a sticky socket were all it took. I probably saved several hundred dollars just for asking a question!

Car repairs can bleed you dry, especially if your car is more than five years old. But Car-part.com offers a way to trim those repair bills. If you know someone who is skilled in car repair, and you can get parts cheap, you won’t need to go to the mechanic and pay the $500-$1000 charges that seem typical every time you bring your car to the shop.

How do you handle car repairs? Have you ever done anything like this? Car repairs are one of the biggest variable expenses we deal with and they seem to hit us at the worth possible times. Can you offer other ways to save money on car repairs?

Kevin M

Most articles on the subject of retirement planning focus completely on growing tax sheltered retirement savings plans like 401k’s and IRA’s. It’s an effort to build a large capital base as a way of creating a strong retirement income to enable us to maintain [...]]]> Low Cost/Debt Free lifestyle as part of retirement planning

Kevin M

Most articles on the subject of retirement planning focus completely on growing tax sheltered retirement savings plans like 401k’s and IRA’s. It’s an effort to build a large capital base as a way of creating a strong retirement income to enable us to maintain the lifestyle we’ve become accustomed to during the course of our lives.

Few pundits ever deal with the flip side of that effort—establishing a low cost/debt free lifestyle early in life. For a generation addicted to McMansions, late model cars, eating out, vacations at five star resorts and the like, no amount of money salted away may ever be enough.

Adopting a low cost/debt free lifestyle

In Will A Million Dollars be Enough to Retire On? we discussed the very real possibility that even a seven figure retirement portfolio may be insufficient to guarantee a secure retirement. Inflation, both leading up to retirement and continuing after, will steadily erode the future value of large portfolios leaving greatly reduced spending power in real terms. But perhaps even more significant, relatively few people will attain a retirement portfolio of that size.

If this is the case, then perhaps the single best plan we can have will be a plan for a low cost/debt free lifestyle. There’s a tendency to believe that this is something we can do later when we’re actually in retirement. For a number of reasons, that thinking misses the mark:

• A low cost/debt free lifestyle will enable faster and greater accumulation of savings throughout life.
  

• It will mean less income will be required in retirement.
  

• Many spending decisions are structural and long term in nature. For example, what type of house you buy early in life is a decision that will impact your spending patterns for decades. See the next section.
  

• A high cost lifestyle is intimately connected with debt.
  

• Frugal living forces us to think and work around challenges, rather than following the herd and paying the shelf price for everything. If this approach is valuable during our working lives, it will be even more so when we’re older and retired and options are constrained.
  

• Frugal living is a habit, a lifestyle; the sooner it’s adopted, the easier and more complete the acceptance. If you have expensive tastes throughout your life, you’ll carry that and it’s associated costs into retirement.

This is something that needs to be done now, not when we’re 65. Frugality isn’t an age thing. If you’re old enough to be funding a retirement plan, then you’re old enough to adopt a low cost/debt free lifestyle.

The mechanics of a low cost/debt free lifestyle

It’s easy enough to talk about the theory of living a more frugal life, but what does that mean in practical terms?

Housing. Buying a high end home locks you into a high mortgage payment, high maintenance and repair bills, high utility costs, and another major expense we don’t think about: a high end house requires high end toys to fill it. That’s a treadmill that once we’re on, it’s almost impossible to get off. Retirement strategy: buy less house than you can afford, and be purposeful about paying off the mortgage as soon as possible.

Cars. We can spend a lot or a little on cars, and while the ego gratification of having an expensive model can be substantial, so too is the drain on finances. The classic pattern of trading up to a more expensive car every five years locks you into the never ending cycle of bigger-is-better as well as a state of perpetual debt. An average monthly car payment of $500 made continuously from age 25 to 65 totals $240,000! Can you at least cut that in a half? Retirement strategy: either switch to buying used cars, or plan to buy new, payoff quickly and hold the car for at least 10 years.

Credit. One thing none of us needs to be carrying into retirement is debt. But many in our culture have become too comfortable with it. We need to think of debt as a parasite. It represents a reduction in cash flow; every dollar paid into debt service is one more that isn’t going into savings or some other productive capacity. Retirement strategy: stop borrowing and begin paying off existing debt. Debt is a bad habit, a lifestyle, so get control of it now. The less debt we have the more control we have over our incomes, and the less income we’ll need in retirement.

Pastimes. In today’s marketing driven world, we’re herded into participation in activities that come with a high price tag. A big chunk of many household budgets is squandered fighting boredom. Trips to the mall, the movies and fun parks are examples. Some others we don’t typically think of as pastimes include gambling, smoking, and excessive drinking, which are not only expensive but can also bring complications beyond finances. Retirement strategy: embrace simple pleasures. Often we spend money because we haven’t found those things that truly make us happy. But happiness is usually found in the things we do to connect with ourselves and with other people, and usually don’t cost much at all.

Eating out. In a true sense, this is probably the most superfluous expense we incur. It’s basically getting someone else to prepare our food, something we could do ourselves and for a lot less money. Apart from the cost, most restaurant food is not as healthy as what we could prepare for ourselves. As with pastimes, much of what drives us to it is boredom. Retirement strategy: embrace cooking as a pastime. See it as an opportunity not only to control expenses, but also to take charge of your health, and to improve connections with family and friends by having them over for dinner more frequently.

Addiction to stuff. How much stuff do you need to be happy? How many computer games, mechanical gadgets, jewelry, clothes, furniture, time shares and sports equipment will it take? Stuff rarely fills inner needs or brings us closer to other people—which might be what we’re really seeking just before we go on a buying binge. Retirement strategy: Shift from buying things to doing things. Life is what we do, not what we have. If we think we need a lot of stuff to be happy, there are probably a few things going on that we don’t want to face.

Maintaining good health and healthy living habits. This topic is almost never mentioned in any discussion of retirement planning, but its relevance should be self-evident. The biggest variable expense for the elderly is healthcare, and the best financial planning available may be of little consequence if we enter retirement in poor health, tethered to the healthcare community and dependent on multiple drug therapies. Not only will health problems soak up much or most of our resources, but they can also prevent us from being able to work to supplement retirement income, in addition to keeping us from living life to the fullest. Many of the ailments of old age are preventable with better choices early and throughout life. Retirement strategy: adopt a lifestyle of better eating habits, regular exercise and avoid activities that have a high likelihood of causing crippling injuries.

In the event that tax sheltered retirement savings end up being less generous than the financial media promises, and/or if Social Security and Medicare are reduced or eliminated, a greater emphasis on a low cost/debt free lifestyle may be the most effective counter plan we can have.

What other expenses can we cut now that might have a positive impact on our retirement planning?

How is it, that when we put money into commodities or raw land, we’re “speculating”, but when we buy growth stocks or growth stock mutual funds, we’re “investing”? Where’s the dividing line? Is there a dividing line, or is it all marketing spin?

In recent decades, investing in the stock market has [...]]]> By Kevin M

How is it, that when we put money into commodities or raw land, we’re “speculating”, but when we buy growth stocks or growth stock mutual funds, we’re “investing”? Where’s the dividing line? Is there a dividing line, or is it all marketing spin?

In recent decades, investing in the stock market has become common even and especially among the middle class. We’re routinely guided to “invest” money in stocks for future gain, and inundated with newspaper, magazine, TV and internet ads promising us double digit returns for placing money in this or that mutual fund—albeit with the caveat “past performance is no guarantee of future performance”. But exactly how do we process all of that? Do we process it at all?

In Investing Basics: What Is an Investment? Paul Williams at Provident Planning introduces the concept of familiarity blindness, a state in which “most of the basic questions don’t occur to (us) any more”. This is a valid observation of the human tendancy to avoid challenging assumptions once they’re fixed in our minds. Though we give lip service to the volatility of the stock market, do we also turn a blind eye to it’s clear speculative nature?

What is investing, and what is speculating?

Paul describes speculating as, “…often a zero-sum game, where someone else has to lose so you can win (and where) No wealth is created…it simply changes hands.” I’m on board with that.

Dictionary.com defines the two terms as follows:

Investing: to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.

Speculating: to engage in any business transaction involving considerable risk or the chance of large gains, esp. to buy and sell commodities, stocks, etc., in the expectation of a quick or very large profit.

The definition of speculating seems clear, but the description of investing is broad enough to be close to meaningless–I think what it describes is the popular connotation of investing more than anything else. Note the last part of that definition, “or appreciation in value”; isn’t that the very reason one would buy commodities or raw land? Why is that not considered investing as well?

The argument that commodities and land are speculations is typically based on the claim that they pay no interest or dividends. I fully agree. But wouldn’t growth stocks fall under the same category? Most pay no dividends, or even offer a promise of doing so in the foreseeable future, yet when we put money into them, we somehow believe we’re investing.

Let’s take one more shot at definitions. I was a finance major in college, and in a course called “investment theory and analysis” I had a professor (who actively worked on Wall Street) who said that you’re investing when you buy an asset that gives you a revenue stream (interest or dividends); you’re speculating is when you buy an asset with no revenue stream in the hope that it will be worth more in the future. This is also known as the greater fool theory–buying an asset at a certain level in the hope of finding a greater fool who will come along and pay a still higher price.

The only reason anyone sinks money into non-dividend paying stocks is the ***hope*** that they will either a) pay dividends in the forseable future or, much more likely, b) rise substanitally in value. How is that different than what one might hope to do in buying commodities or raw land?

From a practical standpoint, I think my professor offered a bankable distinction. Put this way, should we be looking at growth stocks in a different way?

Two stock market crashes in 10 years should have us thinking

The purpose of this post isn’t to advocate for commodities and raw land being similarly classed as investments in the way we label growth stocks, but to emphasize that all asset classes that offer no immediate revenue streams are speculations by their very nature. Marketing spin aside, they should be called what they really are and handled accordingly.

Would you put money into growth stocks if a financial advisor (or marketing pitch) recommended that you put your money to work “speculating in growth stocks”? No, put that way, it just doesn’t sound quite as appealing, as certain, or even as responsible as if you were told to put your money to work “investing in growth stocks”. One word changes everything.

If putting money into growth stocks is in fact speculating, how should that change our behavior?

• Make sure that most of your money is properly invested in income producing assets like CDs, Treasuries, bonds and dividend paying stocks.
  

• Have only a minority percentage in growth stocks (speculations). View them in the same way you would commodities. A famous investor (but not famous enough for me to remember his name) recommended “investing down to the sleeping level”. Sound advice!
  

• Tune out the investment chatter from the media. Besting market averages requires outperforming the market consistently over decades and extremely few ever master that.
  

• Structure your investments to be relatively worry-free. Unless you’re independently wealthy, keep your mind free and your time clear to concentrate on your occupation where the real money will be made.
  

• Paying off debt is a true investment. Not only does it offer a guaranteed return from the interest not paid, but it also improves your cash flow and opens up options in life that you can’t have as a debt serf. This needs to be a priority.
  

• Adjust your retirement savings projections to fit reality. In Will A Million Dollars be Enough to Retire On? we covered the absurdity of perfect world retirement portfolio projections. Workable retirement planning should incorporate a combination of good health, a debt free position, the ability to live beneath your means, and work you can do for the rest of your life.

I believe most people should have at least some of their money in growth stocks. The potential payoff is real, but just as real is the risk that’s being taken on in the process. Make sure you understand that risk fully, and have taken steps to minimize it’s impact first.

Based on the way you have your “investments” configured, are you investing, or are you speculating?
 

Question: is a car an asset or a liability?

That was a theory question in a sophomore level accounting course I took in college way back when. After some debate among the class, the professor confirmed what we all knew, that the technically correct classification is “asset”, but felt compelled to add, “Of course, [...]]]> By Kevin M

Question: is a car an asset or a liability?

That was a theory question in a sophomore level accounting course I took in college way back when. After some debate among the class, the professor confirmed what we all knew, that the technically correct classification is “asset”, but felt compelled to add, “Of course, in the real world, we all know that automobiles aren’t assets at all, they’re liabilities that cost money and continually drop in value from the moment you drive them off the dealer lot.”

Most of us know this to be true intellectually, but does that reality guide our decisions at buying time?

Cars represent a structural expense, that is, an expense that’s mostly a consequence of an underlying cost structure created at the time of purchase. Once we’ve made the initial purchase, we’re largely stuck with the expense level over a period of years. It’s in our best interest then to make the most intelligent decision at the time of purchase.

With that thought fresh in our minds, I believe used cars are the better choice for most people in most cases.

The new car trap

Buy or lease a new car every 3-5 years and you’re guaranteed of one thing: you will never get out of debt. You will always…

• pay the new car premium,
• have monthly payments to make, and
• dedicate a disproportionate amount of your income for auto expense, since debt service, insurance and ad valorem taxes are higher on newer vehicles.

Cars always decline in value and you can never come out on top in this game because the deck is fully stacked against you from the start. According to Buying Advice, the average new car will lose up to 20% of it’s value in the first year and 10% of it’s value in each of the next four years. That’s a 60% decline in value within the first five years of ownership.

In 10 Ways to Buy a Car Without Getting Ripped Off we discussed another dilemma often afflicting frequent car flippers: being “upside down”—or—owing more on the car than the car is worth.

Many owners of late model cars are in this situation because of extremely low or non-existent down payments, immediate and continuous depreciation of vehicle value, and dare we say it, cutting a bad deal on a car in the first place. Still another cause is the possibility that an owner may have bought a new car while still being upside down on the previous one. The hole only gets deeper when the process is repeated!

Used car advantages

Let’s face it, buying a new car is a rush! The newness, the cutting edge design and technology, the idea of being the original owner, the new car smell; alluring, all of it!

However, if we’re going to talk dollars and cents, buying used comes out as the solid better deal.

1. Since there’s no manufacturer to pay, used car prices are more negotiable
2. If you’re not particularly savvy when it comes to cars, the ramifications of making a bad deal on a $10,000 purchase price are likely to be far less severe than on a $25,000 car
3. The possibility exists to purchase direct from a current owner which can produce an even better price than working with a dealership
4. Since much of the depreciation on new cars occurs in the first two to three years, used car prices are closer to book value (Car Price has a good tool to estimate depreciation)
5. Since used cars can be bought closer to book value, and depreciate more slowly than new cars, it will be easier sell and cover the attached loan, should that become necessary
6. The relative size of a down payment from a $3000 trade in will be proportionately higher on a used car at, say $10,000, than on a new car at $25,000 or $30,000
7. On average, depreciation slows after a car hits five years old
8. It can be more cost effective to buy a better quality used car than a cheap new car
9. Loan balances will be smaller due to the lower purchase price
10. A lower purchase price holds the possibility of paying off the loan early, or for buying the vehicle for cash, eliminating the need to carry debt
11. Do you really want your 16 year old cutting her teeth in a new car???
12. The lower overall cost structure of a used vehicle will afford more options at a future time when income may be in doubt

And here’s one we don’t often think about: even if you buy a car brand new, after a year or so, it’s not new anymore!

The bottom line

The average new car today costs roughly what it cost to buy an average house in the 1970s. One of the problems with the price structure is that there’s little room for people of modest/middle class means to buy a new car, or at least to do so without taking on an outsized debt. A $20,000 debt on a mid-priced car is hardly unusual, and that’s a debt on a depreciating asset!

Assuming a five year term and a rate of 10%, the monthly payment on a loan that size is about $425 per month. Some families have two of them, or $850 per month—that’s not a car payment, that’s a small house payment.

Just because the bank says you can “afford” to carry such debt, doesn’t mean it’s in your best interest to do so. $850 per month is over $10,000 going out the door each year to cover debt service, and that doesn’t even include the costs of fueling, insuring, maintaining and repairing the cars. Can you really afford that?

Given that there’s very little selection available for new cars for under $20,000, the better option for many people will be to buy a used car. A two to three year old car can have many of the benefits of a new car, but can be had for 30-40% less. On a $25,000 car purchased brand new, that’s a savings of $7500 to $10,000.

How might it impact your future financial position to have that much more money in your bank account than in your car?

Can you think of any other reasons a used car would be a better choice than buying new? Do you hold the opposite opinion, that new is the way to go?