From Get Rich Slowly – Talking About Money with Family and Friends

What does a blogger’s spouse do while the blogger is out of town? Hang out with other bloggers and their spouses, of course! While Chris Guillebeau was off playing with the tigers in Thailand, his wife Jolie spent some time with Kris and me. Last Friday morning, we picked peaches (and then Kris and Jolie canned them). In the evening, the three of us had dinner with Erica (from erica.biz) and her husband Richard. As you might expect, the conversation had a tendency to stray toward personal finance. Because I’d just published my article about life in the third stage of personal finance, we talked a bit about that. Third stage frugality “How does frugality work when you have more money?” Richard asked. I was confused. “What do you mean?” I said. “Well, when your income increases, how do you stay frugal when your expenses go up? How does frugality scale?” “Ah,” I said. “Well, frugality works pretty much the [...]

Here’s something you need to learn how to do.

From Get Rich Slowly – Why Are Interest Rates So Low Right Now? (and Where Should You Put Your Money?)

I’ve been plowing through my e-mail lately in my never-ending quest to reach inbox zero. As a result, I’ve been answering tons of reader questions. And when I can’t answer them (or when I think a colleague can do a better job), I try to refer the question to somebody else. Over the weekend, for example, LP wrote: I’m a college student and have started saving up and setting aside money, and I feel that the time has come to consider a high-yield savings account, a certificate of deposit, or something similar. It would appear to me that in the time that’s passed since you wrote articles on these types of things (and also helpfully comparing some, thank you), the interest rates have dropped from 4-5% on average to 1-2% on average. Why is that? Is it the economy? Should I sign up for interest rates this low, or should I wait and hope that they increase? Though [...]

This post originally appeared on The Simple Dollar and is reposted here with permission. If you’ve had trouble making and keeping a budget before, you need to read this.

by Trent Hamm

When I reached my financial bottom in April 2006, one of my first responses was to simply start reading a lot about personal finance. I checked out a pile of books from the library on personal finance and tackled a lot of different suggestions from those books, along with some of my own ideas that I came up with as I went along.

One idea that was repeated over and over was how incredibly important and valuable having a budget was. I tried several different budgeting approaches and stuck with them for short periods, but the idea of a budget just never really stuck with me. The constant recording of expenses and estimates of spending in the future and so on always seemed like a bunch of busy work that never really went anywhere at all for me.

What did I do instead, then? I focused mostly on just watching what I spent. I did find a lot of value in simply jotting down every dime that I spent in a pocket notebook and, soon, I began to resist spending because I didn’t want to write it in that notebook any more. I began to really focus on how I spent my money in a few key categories – books being the big one. I set up some automatic transfers to take care of specific bills and to start saving for specific goals. Perhaps most importantly, though, I began to really change my behaviors and how I spent my time.

There are two big things to recognize from this story.

First of all, the actual personal finance choices I made were budgeting. Writing down my expenses, setting up automatic payments and savings, focusing on problem categories – those are exactly the type of things that make up budgeting.

More importantly, however, they led me to the same theoretical goal that budgeting has – a more responsible relationship with my money. That’s the destination of budgeting – a relationship with your money that enables you to have the freedom to effectively not worry about the money too much and just get on with your life.

If that’s the case, then why do so many people fail at budgeting – and why is it still recommended so often in personal finance books and on personal finance sites? I think the answer to that question explains why budgets are so often described in personal finance books – and also explains how people can get real value from “budgeting” their own way.

Budgets, Budgets, Budgets: Why?
Take a look at the people who are typically authoring personal finance books. They’re CPAs, CFAs, and other folks who deal with finances for a living. They’ve likely always been strong with math and never been afraid of dealing with large chunks of numbers – it always came natural to them.

I’ve always enjoyed math – in fact, I was just a few credits shy of a minor in mathematics in college – but I’ve never been much of a fan of business or accounting math. Large rows of financial figures have always caused my eyes to glass over. I enjoy chasing down a problem, but adding up figures and making estimates is not something I enjoy or naturally want to do with my time. I can do it, but it doesn’t feel natural to me.

The important distinction here is that the traditional way of doing a budget is something that comes from people who are financial planners and accountants – people who are naturally gifted with working with lots of numbers and spreadsheets. That’s great, but it doesn’t accommodate how many people look at the world.

Not everyone is as comfortable with numbers as a CPA or a CFA. That’s not to say they can’t do it, but numerical analysis isn’t as easy or natural for many people as it is for a person naturally drawn to accounting and financial fields. The advice given on budgeting in personal finance books often comes from those folks who are naturally gifted with numbers and thus their budgeting advice is often challenging for others to follow.

A Better Solution: Focus on the Goals
Instead of focusing so intently on the exact process of budgeting as shown in a personal finance book – and, even worse, viewing yourself as a failure if you can’t keep it up – focus instead on the goals of all of this.

Why are you thinking about budgeting in the first place?

Most of us try budgeting because we simply need more breathng room in our monthly and yearly finances, for various reasons: repaying debt, saving for a big goal, building an emergency fund, or something else entirely. We know that the route to this is getting our spending in check.

The solution, of course, is to trim a little spending out of a lot of areas in our life.

The usual way of doing this is to sit down, sort our spending into a lot of different categories, and make estimates and targets for monthly spending – a very number-heavy process.

But, really, all that budgeting is doing is saying “I need to cut spending in these specific areas.” It’s difficult to cut spending in a lot of areas, but those are great areas to cut back in.

Because of this, I wound up with a solution that worked really, really well for me. I like to call it zero-sum budgeting.

Let’s say, for example, that I have $200 a month set aside for our energy bill. I’m on the “budgeted” energy plan that averages out the energy costs for the year. I also have $100 a month budgeted to spend on whatever I want, so one month I use $50 of that to install a programmable thermostat and also on some caulk. I program the thermostat to turn off the heating and cooling when I’m asleep or at work and I use the caulk to air-seal my home. Next year, the energy bill gets reduced because you’re using less energy – now it’s just $165 a month.

Here’s the key part. Instead of just spending that extra $35 a month, I start putting $35 a month automatically into savings. Since I was already making ends meet with the $200 energy bill, It makes no difference in my day-to-day life if I just put $165 towards the bill and $35 into savings instead of just $200 into the bill.

You can do the same thing with any category of spending once you have a good estimate of how much you spend in that area. Let’s say, for example, you spend $50 on media purchases a month – DVDs, books, and so on. If you decide to “budget” just $25 a month for that, start off the month by automatically putting $25 into that account.

You can also do the same thing with “found money.” If you come into a small windfall, just stick some or all of it into the account. If you find a great way to save some cash as a one-time opportunity, put that saved money into the account.

What can I use the money in that account for? If I’m building up an emergency fund, I just let it keep building until it’s an amount I’m happy with – a few months’ worth of living expenses. If I’m paying off debt, I clean out the account each month and use it as an extra debt payment. If I’m saving for a goal, I just put that money towards whatever goal I’m saving for.

Two points.

First, this doesn’t work if you’re already spending more than you make. That type of behavior is not sustainable. If your credit card balance is going up each month, no amount of budgeting or planning matters until you’ve reached a point where that credit card bill goes down each month.

Second, it works best if you focus in on a specific area or two. Budgeting is a lot like dieting. If you go cold-turkey crazy, you’re going to have a very high likelihood of rebounding and undoing all of your good work. Instead, focus on one or two areas for conscious spending cutting and, at the same time, look for “one shot” opportunities to save money now or reduce ongoing expenses.

Any time you commit to financial change, willpower is required. However, it doesn’t require an accountant’s head for numbers. It requires a focus on goals, a willingness to actually make some behavior changes (one step at a time), and a desire for real change in your life.

From Get Rich Slowly – High Interest: How to Choose Between Checking, Savings, and CDs

In a rocky economy, high interest rates are the holy grail of conservative investors, especially those who don’t want to to invest in bonds. But in this rocky economy, “high interest” hasn’t really meant much: High-interest savings accounts are returning below two percent! Get Rich Slowly readers are just like everybody else. A couple of times a week, I get e-mail from somebody looking for higher interest rates, but puzzled about where to find them. So, inspired by a recent article in Consumer Reports Money Adviser, I’m going to run down the top choices for finding high interest rates. First, I want to remind you all of one thing: Interest rates aren’t likely to rise until the economy improves. ING Direct doesn’t hate you. Ally Bank isn’t trying to rip you off. We’re just not in a high-interest rate environment right now. The government is keeping rates low because they don’t want you to save — they [...]

From Get Rich Slowly – Living on (a Lot) Less

This post is from staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com. I spent last weekend at a lake house in Maine with a broken water pump. For three days, we had no running water. Being beside the lake gave us ample access to water, but nothing flowed from the taps. To get clean, we swam in the lake or bathed with damp cloths. To flush the toilet, we carried buckets of water up from the lake. We did the same for washing dishes, boiling the water before washing our plates in it. Drinking water became a precious resource. We were careful to drink what we needed without waste. We hard-boiled half a dozen eggs in the same pot we cooked pasta in, and steamed a basket of veggies over it. We made every drop count. When you have limited water, you’re highly motivated to figure out what [...]

I bike to work whenever it’s nice, which is most of the time. I haven’t filled up my car in about two months. It feels good.

From Get Rich Slowly – In Praise of Paying Yourself First

Can you bear with me for one more labored metaphor? As I’ve mentioned a few times already, I’m in the midst of a successful fitness program. I’ve lost 20 pounds since the beginning of the year, and, more importantly, I’m exercising every day. This morning, for example, I pedaled 8-1/2 miles to my Crossfit gym; spent an hour practicing skills, doing body rows (pull-ups for people who can’t do pull-ups), and lifting weights (front squats); and then I biked 10-1/2 miles home. According to my handy body bug, I burned 1500 calories by 9 a.m., which means that I can spend the rest of the day blogging, working in the yard, and learning French, secure in the knowledge that I’ve already done 2-1/2 hours of exercise. This, my friends, is essentially the routine I’ve established lately. I get my exercise in first thing so that I don’t have it looming over me for the rest of the [...]

This article originally appeared on The Simple Dollar, and is reprinted here with permission.

Also, this is good advice when any change is overwhelming, not just financial change.

by Trent Hamm

Mark writes in:

I’ve been reading The Simple Dollar for a year or so and I’ve found it really inspirational. My problem is that I can’t get past the “inspirational” part.

Several times, I’ve started to try to implement your tips. I’ll make grocery lists and try out lots of free activities and give up my morning coffee and start watching less television and reading more. What I find, though, after a week or so is that I just get frustrated with all of it and I quit all of it and go back to doing exactly what I was doing before. How do you start changing if you can’t even tackle a handful of simple changes like this?

In order for change in your personal life to succeed, you need several elements. From what I can tell from your description here, Mark, you’re missing several of them.

First and foremost, you need a goal. Why are you doing this? Where do you want to be in five years? Will you be out of debt? What will you do with debt freedom? Will you have a family? A home? A better career?

Don’t spend your time worrying about specific money-saving tactics right now. Spend a week or so really thinking about your future and what you really want from it. Where do you want to be in a year? In five years? In ten years? What do you aspire to?

Flesh these goals out. Add lots of detail to them so that you can really get a sense of what it might take to get there.

Most importantly, write them down. Record these goals somewhere, along with all of the details you come up with.

Think of it this way: if you’re not working towards something better than where you’re at right now, why make sacrifices at all?

Once you have that goal in mind, you need a plan. What exactly needs to be done to get to the goal (or goals) that you’ve set for yourself?

One big part of this is often a debt repayment plan. A debt repayment plan basically organizes and orders your debts to maximize the effectiveness of your debt payments.

You might also want to come up with an educational plan or an exercise plan or a plan for improving yourself in some other fashion, whatever that might be.

Make the plan realistic. Never forget that the perfect is the enemy of the good. Your plan should be one that’s easily achievable, even if it means putting off your goal for a little bit longer. It should also allow you to go beyond the plan if you so choose on any given day.

Once you’ve done that, do a lot of “one and done” financial changes. Fill your spare time with these things. Install a programmable thermostat. Air seal your home. Clean out your closets and sell off the stuff that you don’t use that has value. Trim down your DVD collection.

Spend your spare energy doing these things for a few days. Better yet, as you do them, calculate the results. How much will they reduce your energy bill? When you sell off that stuff and throw the cash straight into your debt repayment plan, how muh is that plan accelerated? Do you pay things off a few months faster now?

This is the first taste of success, and it’s usually an inspiring one. You’ve got goals and plans for getting there. You’ve done something that directly helps your plan along and it wasn’t all that hard, either. You’ve reached some success.

Once you’ve done this, now’s the time to start with the behavior changes. However, I’m going to suggest that you not just do a bunch at once. Instead, pick out one change and focus on maintaining only that one change for thirty days. If you decide to switch to “office coffee” instead of stops at the coffee shop, do that, but don’t force other changes.

Again, figure up how much you’re saving from that one behavior change and roll that savings into one of your plans for the future. If you’ve simply made a change that saves $10 over the course of a month, that’s just fine – add $10 more to your next debt payment or put $10 into a savings account.

Take it slow. Every step you take is a real improvement, and it’s far better than taking thirty steps at once, stumbling, falling down, and rolling back down the hill.

Good luck.

From the Simple Dollar today: Convenience Foods: What They Really Cost

Best line from the article:

“Take a stand today. Slice your own vegetables.”