Retirement Advice from an Expert (NOT Me)

I read an article today that rocked my world and I want to share it with my vast audience of literally TENS of readers. 

If you’re like me, you want to retire as early as possible.  It doesn’t matter how much I enjoy my job; there will always be a long list of other things I’d rather be doing.  Planning for retirement is intimidating, and I always feel like I’m not as far along as I should be.  My goal, and it’s a bit of a stretch, is to semi-retire at 55.  By “semi-retire”, I mean I would be perfectly content to work for, say, ten years in a low paying, low stress, part time job that helps supplement my income.  Then, at around age 65, I’d like to embrace full retirement, devoting 100% of my time to my worthy hobbies, which include traveling, drinking wine, and napping, among other things. 

*Side note:  In a perfect world, I would embrace full retirement at age 55 and earn supplemental income from passive sources like rental properties.  We’ll see how that plays out.  Thinking about how to create passive income streams is an intimidating and confusing topic for another day.

Retirement planning seems a bit simpler today after reading an interview with investment advisor William Bernstein on the CNNMoney blog.  Mr. Bernstein has managed to make retirement planning seem a lot less like rocket science and a lot more like common sense.  I’m not even going to try to summarize the main points here because I don’t think I could possibly be as clear and concise as Mr. Bernstein is in his own words.  Just click through and read the interview.

Viva la frugal!

I Am the 1%

Don’t worry; this isn’t a political article. 

I recently discovered a thought-provoking website called the Global Rich List.  This website allows you to enter your income to see where it falls in relation to others globally.  As it turns out, if you are an American earning at least $47,500 per year, you are among the top 1% of the world’s earners.  

There is a link at the bottom of the site explaining how the calculations are made.  The data is derived from the World Bank Development Research Group, so I believe the information to be reasonably accurate.

The site’s creators state that their goal is to help people recognize that they are richer than they think and to feel more wealthy.  In turn, they hope that people will contribute more to charitable causes once they gain perspective about their place among the world’s earners. 

I love it.  One point that the Global Rich List site drives home with subtlety is that those of us who are “rich” but feeling poor are likely living beyond our means.  Yes, the United States has a much, much higher cost of living than most parts of the world.  We also have many more product choices and shopping opportunities that tempt us to spend.  If we can avoid being sucked into the consumer lifestyle, it is very possible to build wealth on a salary that is considered modest by American standards (and rich by the world’s standards).  We will even have some money left over to help those who are less fortunate.

How lucky I am to have been born in a prosperous country and to parents who had the resources to provide me with a healthy and stable childhood and educational opportunities.  Sometimes it’s so easy to forget how good I have it.

Viva la frugal!

P.S.  The currency default on the homepage for the Global Rich List is the British Pound, so be sure to change it to U.S. Dollars (unless of course, you’re British).

You Say Tomato, I Say F-You Fund

Source: Federal Reserve
Credit: Lam Thuy Vo / NPR

The NPR Planet Money Blog had a recent post about Americans’ “rainy day” funds.  The post references research conducted by the Federal Reserve to determine why Americans save and how much they think they should be saving. 

At first, I was shocked by the research findings.  The research found that on average, Americans think they need only one month of salary in savings for a rainy day.  Remember, this is how much they think they should have, not how much they actually have.  I wouldn’t be at all shocked to find that most Americans have very little in their savings accounts, but I am shocked to know that they think they need so little.

As a homeowner, I always have a nagging fear in the back of my brain that I could be hit with a major, unexpected repair bill.  One month of my salary is far too little for a proper safety net if something like that happens.  I have friends who suddenly had to replace their HVAC system at a cost of nearly $10,000.  Unfortunately, one month’s salary for me isn’t anywhere near $10,000. 

I took a gander at the comments people made on the NPR post to see if I was the only one who found the research so surprising.  Interestingly, many of the comments centered around the definition of the term “rainy day fund.”  One commenter noted that he has both a rainy day fund and an emergency fund.  His emergency fund is for major unexpected expenses or liquidity if he loses his job, while his rainy day fund is just a cushion in case his regular spending ticks up one month.  Another commenter said that her rainy day fund is some cash in a jar that is literally used for rainy days, i.e. ordering pizza delivery while she stays dry watching TV or reading a book (she sounds like my kinda gal).

The comments have made me hopeful that many people responding to the Federal Reserve’s study simply misunderstood what the researchers meant when they asked about rainy day funds.  Or perhaps more likely, the researchers misunderstood how people think about and classify their savings.  After all, how likely is that the Federal Reserve asked about F-You funds? 

Does anyone else have a pet name for their emergency savings accounts?

To the Class of 2012…

Graduation season is winding down, and I’ve been thinking a lot about the college graduates who are now entering the “real” world.  The transition from college student to independent adult is mostly awesome, though it does entail some new challenges.  All you new graduates out there now have the freedom (and responsibility) to manage many more areas of your own lives, including your finances.  Even if you are still searching for that first job that will launch your career, you can and should begin to develop a relationship with money that is healthy and positive.

In the ten years since my own college graduation, I’ve learned a few things about money.  I continue to be a student of personal finance, but I hope you will allow me to share with you the most important things I’ve learned so far:

The way you spend your money is a direct reflection of your values and priorities in life.  It’s very easy to mistake success for “stuff.”  Wearing a tee shirt with a designer logo does not mean that you are successful; it means you are susceptible to marketing.  If you looked at your spending as a snapshot of who you are, would you like what you see?

Experiences make you much happier than “stuff.”  Experiencing something is truly living.  You and your college friends will be separated in the future by time and distance.  Spend less of your money on “stuff” so that you can afford to meet old friends for dinner, or even vacation.  Remain connected with people you care about by experiencing things together.

You will never, ever regret starting to save sooner rather than later.  Albert Einstein said, “Compound interest is the eighth wonder of the world.  He who understands it, earns it.  He who doesn’t, pays it.”  Personal finance can seem complicated, but the most important principal is easy enough for a child to understand: Save as much as you can as early as you can, and you will build wealth.  It really is that simple.

If you want to live a free and independent life, avoid debt.  You must give up your time and energy to earn money, so having debt means that someone else owns a piece of your life.  Sometimes debt is necessary, but be honest with yourself about the significance and gravity of obligating your time and energy to someone else.

You don’t need to have personal finance figured out all at once.  Slow and steady wins the race.  Small successes in managing your finances will make you feel incredibly proud.  Congratulate yourself on every small victory.  Use that positive momentum to learn more and to create new goals for yourself.  In a very short time, you will feel confident and in control of your finances and your future.

We all have our own definitions of success and our own ideas about what makes for a happy life.  Regardless of what your ambitions are, always remember that the lead role in your life should be played by YOU.  Money should never play anything other than a supporting role. 

Congratulations, 2012 Graduates, and best of luck.  Viva la frugal!

HotFrugal Goals: Where Are They Now?

Until recently, it had been a year since I had written a HotFrugal post.  I’d say it’s time to take stock of my current financial situation and goals.  This is the type of post that is interesting if you’re nosy (I certainly am, so don’t feel bad), but it’s definitely long and detailed.  So dig in and join me, won’t you?

Savings Accounts

F@!# You Fund:  This is what I like to call my Emergency Savings Fund.  I censored it a bit since my mother reads this blog.  Basically, I want to have enough money saved so that I can say a big “F@!# You!” to any major unexpected expenses that crop up (major home repair disasters, car maintenance fiascos, etc.).  I also want to be in a solid financial position if I lose my job, and I’d even like to have the option to quit my job if it ever becomes really, unbearably horrible.  Goal:  $25,000.  Current balance:  $12,313.

Mad Money Fund:  This is a phrase I’ve borrowed from my mother.  Mad Money is fun money that can be spent on any kind of Want.  Typically, I use this fund for vacations, though more recently, I tapped it for a tattoo (!!).  There is no specific amount I try to keep in this fund; it just depends on the timing and types of vacations I have planned.  Current balance: $995.

Triumph Motorcycle Fund:  No, I don’t know how to ride yet.  But I know I want to!  I’m saving as though I’d buy a new bike and all necessary accessories (helmet, saddlebags, etc.).  Goal:  $11,000.  Current balance:  $568.

Roth IRA Starter Fund (formerly known as iPad Fund):  It’s time to kick this one into high gear.  Once I have enough saved, I will open an account with Vanguard and then track future contributions and growth in the Retirement section (see below).  Goal:  $3,500.  Current balance:  $40.

Retirement Accounts (Vested Balances)

Old 401(k) from Former Job:  (At some point I need to roll this over to an IRA.)  $43,750

401(k) from Current Job:  $9,003

TOTAL:  $52,753

Debt

Mortgage:  My house is worth $165,000.  I’m not working to pay down my mortgage more quickly because I’m not sure how long I’ll live in this house.  Remaining balance:  $128,096.

Car:  Yup, I bought a new car at the beginning of the year.  The old one needed more costly repairs, and I was able to get 0% financing.  I won’t make any effort to pay this off early since I’m not being charged any interest.  Remaining balance:  $13,964.

Net Worth

A rough calculation based on the above info puts me at $104,609.

So there you have it.  My number one priorities are the F@!# You Fund and the Roth IRA Starter Fund.  It’s going to take a long, long time before I’m able to buy a motorcycle, but I’ll get there eventually. 

Viva la frugal!

The iPad: Meh…

Obviously, it’s been a looooong time since I last posted here.  There’s no real reason why I stopped writing on HotFrugal…  Life just kinda happened and I got busy with a new house, new job, new involvement with several local organizations, etc.  Things have calmed down a bit, and I really miss writing, so I’m going to start up again.  I’ll just go ahead and dive right in…

 

Used with permission from Debbie Ridpath Ohi at Inkygirl.com

For a long time, I have been absolutely green with iPad envy.  Two of my coworkers have iPads with fancy keyboard cases, and they (my coworkers) always make me jealous by showing off all the fun things they can do.  Even my mother has an iPad, and she’s not exactly someone I would consider to be an early adopter of new technologies.

So, a few months ago, I started an iPad savings account in true HotFrugal fashion.  I have an online checking account with ING Direct, and I also have several targeted savings accounts with ING.  My emergency fund is kept totally separate with another online bank.  I love ING because it literally takes about 30 seconds to open a new savings account, and you can have dozens of accounts at any one time.  With a few clicks, I had a savings account named “iPad” with the goal to save $800 for the mid-range model and the keyboard case.

But then a funny thing happened… Over the past five months since I opened the account, I’ve only put $40 in it.  Whenever I have extra money to save, I never seem to want to put it in the iPad account.  Instead, I find myself wanting to put the money toward my general savings fund or toward one of my other “just for fun” funds.  Today, it finally occurred to me that maybe I don’t really want an iPad all that badly, or rather, there are other things that I want more. 

There’s a good lesson in this experience that I hope I will remember in the future.  If I had just gone ahead and bought an iPad without deliberately saving for it, I never would have realized that I didn’t even want it that much in the first place.  Fortunately, ING makes it easy to change the nicknames for savings accounts, so the iPad account is now called “Roth IRA Starter Fund.” 

Viva la frugal!

An Obligatory Tax Season Post

I am the Queen of Procrastination, so it’s quite surprising that I have already completed and filed my taxes.  This is the first year I’ve ever finished my taxes before the very late hours of April 14^th (seriously!).  But I know a lot of folks probably aren’t done with theirs yet, so I wanted to share a great article from one of my favorite personal finance blogs, Get Rich Slowly.

The article is called “The Truth About Tax Deductions” and it’s a guest post submitted by a CPA.  The author, Greg Braun, does a great job of explaining how our drive to finagle every possible tax deduction can actually be counterproductive.  Braun sums it up nicely by stating, “The problem is that saving on taxes usually amounts to spending cash, or worse, signing up for debt.”

Even if you’ve already filed your taxes, the article is worth a read for next year.  It really makes you think about tax management and spending in a new way.

And just in case you’re wondering… I’m getting a tax refund of just under $1000 combined from my federal and state returns.  If anyone else told me they were getting a tax refund, I would encourage them to save or invest the money.  But I’m going to be a bit of a hypocrite and not follow my own advice.  I have an empty bedroom in my house that I would really like to turn into a fully functioning home office, so I’m going to use my refund to buy a desk, bookcase, filing cabinet, and wall shelves.

Should I be saving the money instead?  Yeah, there’s really no way to deny that my emergency savings fund is pretty meager at the moment.  But I’m desperate for a quiet, dedicated workspace in my home.  I know I will be more productive (and hopefully my HotFrugal posts will be much more frequent!) if I can sit down with my laptop somewhere other than on the couch in front of the TV.

I guess I should mention that I also tend to be the Queen of Rationalization, though usually it’s in the area of dessert.  (Most people don’t understand that chocolate is a vegetable because it comes from a bean, so I have to explain that to them.)  Anyway, it’s pretty difficult to live a HotFrugal lifestyle if you rationalize and make excuses for your spending.  I’m going to go ahead and buy my office furniture, but I’m going to do it fully acknowledging that it is probably not the best financial move I could make.

C’est la vie.

(Hopefully the next post will end with the usual “viva la frugal!”)

Monthly Update: August 2010

I’m a few days late getting my monthly update posted, but that’s because July was a crazy busy month.  I got a new job, am moving, and might be buying a new house.  All of which should make for some good HotFrugal topics over the next couple of weeks.  Stay tuned.

In the meantime, here is the update as of yesterday, August 3^rd.  The great news is that I have more than reached my emergency savings fund goal.  Of course, I may be eating into this soon if I do decide to buy a house.  I’m not sure if it’s actually wise to use part of my emergency fund to buy a house, so I need to do some serious number crunching in a rent vs. buy analysis.  Naturally, all of you HotFrugal readers will see how this plays out. 

For now, let’s move on to the update…

Net Worth

I made a good recovery on my net worth this month, bringing it up to $70,508 from $64,888 the month before.  This increase is completely attributable to saving aggressively.  The refunds I got on home insurance and my escrow account following the sale of my house went straight into savings. 

The cool thing about this is that I didn’t feel the least bit tempted to spend that money.  This is a huge mental shift from where I was a year ago.  You know how you occasionally get some unexpected cash (a larger than expected tax refund, a bonus at work, etc.)?  I always thought of this as “free money” that I could spend guilt-free on anything I wanted.  I actually still think that this is a legitimate option and that there’s no need to feel guilty about spending money like that, especially if you have your financial basics in order.  But if there isn’t anything that you truly, genuinely, deeply want or need, why spend it? 

Assets		Liabilities
Emergency Savings	$25,680	Nada!!
Mad Money Savings	$2,366
Checking Account	$841
Health Savings Account	$1,557
401(k) (Vested Balance)	$34,939
Car Value (per KBB)	$5,125
TOTAL Assets	$70,508
Net Worth (Assets – Liabilities):  $70,508

 

Spending

Spending over the past six months has averaged $2,498 per month, which is right on target with my goal of $2,500. 

My always challenging grocery and dining out budgets were really wonky in July.  I think the spending in these categories is a good reflection of how busy July was.  It was a very fun and social month with lots of going out and meeting up with friends.  As such, my dining out expenses were quite over budget.  On the other hand, my grocery expenses were WAY under budget.  As a combined total, I was under budget but it’s probably not too healthy to eat out as much as I did in July.

	Budgeted Amount	Actual Spend (July)	Variance
Dining Out	$160	$211	$51 over budget
Groceries	$238	$110	$128 under budget

 

Summary

Another good month, which has brought me to an interesting new place in my financial life.  I’m currently debt free and I have my emergency savings established.  So what’s next?  I’ve never before been in a position where I have “extra” money for investing.  I’m not quite sure what to do!  It’s a confusing (but completely fantastic!) position to be in.  Stick with me while I figure it out…  I’ll be needing the support and advice of all my fabulous HotFrugal readers!

Frugal Fun, or How to Avoid Boredom on a Budget

In my very first HotFrugal post, I calculated that I earn only $6.45 per hour in true discretionary income.  That’s not a lot, so I want to be sure I stretch my entertainment dollar as far as possible.  There are quite a few frugal activities I enjoy that keep me entertained and on budget. 

Frugal doesn’t necessarily mean cheap; an activity may be expensive, but if it provides a high level of enjoyment over a long period of time relative to its cost, it gets the HotFrugal seal of approval.  Naturally, everyone’s lists of high value experiences will be different.  For example, someone else might gain a lot of satisfaction and value from $200 tickets to a World Cup soccer game.  I, on the other hand, would probably fall asleep immediately due to the sheer boredom that is soccer, and $200 seems like a high price to pay for a nap.  You know a sport is boring when a field full of hot guys can’t hold my interest. 

 Anyway, here is a list of my favorite frugal activities.  Are there any others that I should add to my list?  What are some things you enjoy doing that provide a good bang for your buck?

Playing tennis:  I absolutely love playing tennis.  Getting started in the sport wasn’t cheap.  New shoes, two good rackets (on sale), and new clothes ran about $500.  I also spent about $300 on lessons.  But after this initial expense, the sport has been very affordable.  There are free public courts in the towns where I live and work.  I’m planning to join a league and to take more lessons, but these costs will be worth it.  I mean, I’m not quite ready for my Wimbledon debut, but another lesson or two should do it. 

Unsolicited interior design:  If I had it to do all over again, I would have studied interior design in college.  Instead, I have to settle for being an HGTV addict who gives people unsolicited interior design advice.  For example, my mom recently made the mistake of telling me that she would like to update the look of her guest bedroom.  I don’t think that this is something she plans to tackle anytime soon as she and my dad already have a number of home improvement projects in the works.  But I wasted no time in creating a totally new design for the bedroom, complete with a shopping list of all the items I had picked out.  I scoured the internet for new furniture, bed linens, artwork, etc.  I put pictures of all of the items I selected into a spreadsheet and printed it out for my mom. 

This little project took about five hours to complete and it was totally free for me, although it will not be so free for my mom if she decides to move forward with the design.  I enjoyed working on this so much that I may start designing rooms for other hapless friends and family members.  So don’t tell me if you have any impending redecorating plans, or I might just show up at your door with a shopping list.  Shopping by proxy is frugal fun for me, but it could be hazardous to your wallet!

Watching movies & TV shows from Netflix:  As an avid reader of other personal finance blogs, I have seen many writers advise people to cancel their Netflix memberships as a way to save money.  I totally disagree!  At $14.95 per month, I definitely feel that I get my money’s worth.  In my current living situation, I don’t have to pay for cable.  But if I did, I wouldn’t.  Netflix gives me access to all the TV and movies I need at a fraction of the cost of cable.  Sure, I’m always a season behind on my favorite shows, which does have some disadvantages.  A friend who watches Showtime in real time accidentally blurted out a major spoiler for my very, very, very, most favorite show, Dexter.  That sucks, but the savings I get from watching through Netflix and not having to pay for cable makes it well worth it.  The only real downside of Netflix in lieu of cable: Netflix can’t feed my HGTV addiction.  But maybe that’s a good thing.

Reading blogs and online articles:  Another free activity!  I recently discovered Google Reader, which allows you to subscribe to blogs and online editions of newspapers and magazines in one place (including HotFrugal).  Anytime there is a new post on one of the sites you subscribe to, it will show up on your Reader homepage.  This is a great way to stay current on topics you care about.  It’s also a great way to stay current on delightfully snarky and shallow topics like celebrity fashion disasters. 

Managing my money:  Yes, I do consider this a hobby.  And yes, I really do enjoy it.  Tracking expenses and paying bills are not particularly fun activities, but tracking the progress I’m making toward a major financial goal is fun.  Imagining a financially secure future in which I’m free to pursue my interests is fun.  Heck, even budgeting is fun.  There’s something very satisfying about taking control of your financial life and seeing how it contributes to a better all-around life. 

Weekend getaways:  I love a mini-vaca!  Going away for the weekend provides a much needed break from reality.  If you have a great time, being away for two days can have the restorative effects of a much longer vacation at a fraction of the cost.  I haven’t done this yet, but I’ve always wanted to pick a weekend and leave the destination open so that I can take advantage of last minute deals.  Maybe this will be the topic of a future post…  Yes!  I will do this for my dear readers!  I will take a mini vacation because I care so much about all of you!  I shall do it for research!  (Rationalizing is really not supposed to be part of the HotFrugal philosophy, but we all slip occasionally…)

Dancing:  Going out dancing is a great time, although it can be expensive.  But turning up the speakers and dancing around the house in your pajamas is free.  It’s also private, which means you can dance like a COMPLETE fool.  It’s even more fun when you sing along into your microphone/hairbrush (and how frugal to have a hairbrush that doubles as a microphone!).

Viva la frugal!

Monthly Update: July 2010

Where the heck has the last month gone??  I lost the entire month of June somewhere between being crazy busy at work, selling my house, and enjoying the start of summer.  I have some new posts in the works, so I promise that July will be a more interesting month here at HotFrugal. 

Now, let’s get on to the June update.  The big news of the month is that I closed on my house and am now totally and completely debt free!  My net worth has gone down a bit due to the sale.  Closing costs and last minute repairs can add up quickly.  These costs ate into the proceeds from the sale, so that impacted my overall net worth.  No worries though…  I’m still doing quite well and continue to make progress toward achieving my financial goals. 

Net Worth

My net worth as of July 1, 2010 is $64,888.  Last month my net worth was $78,291.  My assets and liabilities are:

Assets		Liabilities
Emergency Savings	$23,063	Nada!!
Mad Money Savings	$2,362
Checking Account	$539
Health Savings Account	$1,646
401(k) (Vested Balance)	$32,153
Car Value (per KBB)	$5,125
TOTAL Assets	$64,888
Net Worth (Assets – Liabilities):  $64,888

 

Spending

Over the past six months, my spending has averaged $2,533 per month (my goal is to keep this around $2,500 based on my current living situation).  This excludes savings, retirement contributions, health insurance, and healthcare costs.    

June was a heavy spending month because I did a lot of shopping for new clothes in an effort to look less like a hobo.  I got some great deals, but I did spend a lot of money.  That means clothes and shoe shopping are off limits for a few months. 

I continue to struggle to stay within my Grocery and Dining Out budgets.  This is something I really need to work on because it’s not only affecting my bank account, but my waistline as well.  Not good!

	Budgeted Amount	Actual Spend (June)	Variance
Dining Out	$160	$187	$27 over budget
Groceries	$238	$272	$11 over budget

 

Summary

I’m very happy that I’m this close to achieving my $24,000 emergency savings fund goal.  I’m getting a refund from the balance in my escrow account for property taxes and insurance that will put me over my goal as soon as I get the check and cash it.  This will be the first major financial goal I’ve accomplished, and I’m a little giddy about it.  Viva la frugal!