From the monthly archives:

December 2009

How many times have you heard that you can save millions of dollars over the course of your lifetime by cutting out your morning coffee at your favorite local coffee house? Ever since David Bach made his Latte Factor famous in his best selling book, “The Automatic Millionaire“, we all have been going without our favorite nonfat vanilla lattes or have been feeling guilty about our pack-a-day smoking habit and the money that these vices cost us.

Bach’s math is very sound unfortunately. The average fancy cup of coffee with your local neighborhood barista can cost you up to $5 per cup of Joe. And, that is assuming that you do not have a muffin on the side to go with it every morning. You can do the math, but a $5 coffee every morning on your way to work will cost you $25 per week, $100 per month, or $1,200 per year. $1,200 invested at 8% ever year over the course of your working life can equate into over $365,000 in lost savings and investments. And, don’t get me started on smoking. At $4 per pack in many locations around the United States, a pack-a-day smoking habit will cost you $1,460 per year or $444,000 invested over a lifetime, and with smoking, you don’t get to even take the weekends off like you theoretically do with fancy coffee on the way to work.

But, I love my peppermint lattes at Starbucks during the holidays darn it! And, I’m not going to give them up. So, if you are not going to quit, how do you budget for your vices?

Gift Card Approach.

One interesting idea is to buy a gift card for your purchases. Buy a $100 Starbucks gift card at the beginning of every month, and only make your purchases using that card, not cash. When the card is out of money, you are out of luck for your daily cup of coffee. This will help you curb your splurging on that muffin or bagel in the morning. Maybe some days you might have to buy regular coffee or brew a cup at home instead of having the best.

You can even do the same for your smoking habit as well. Buy all of your cigarettes at a retailer that offers a gift card such as Wal-Mart. Buy a $120 gift card every month ($4 x 30 days), and only use that to buy your cigarettes. You can use this method to track all of your spending on your vices. You might be surprised at how much money you spend on them if you are accurately keeping track of your vice spending. Most people just run into the store a throw down some cash for their purchases, but you will be able to tell right away how much you are actually spending on them when it is registered on a gift card balance.

Cutting Back.

After you get the hang of routinely using this gift card method, you can begin to cut back on your vice spending if that is a goal of yours. After a few months, start cutting back on how much money you put on the gift card. Start reducing your coffee budget from $100 a month to $75, and keep whittling it down. Eventually, you can break your bad habit and really start saving your money for your financial goals.

Photo: (jpovey)

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One of the biggest problems facing the world today is our lack of patience. I am just as guilty as everyone else. It seems we are incapable of exercising patience and waiting until we can actually afford to purchase something before we pull the trigger and get it. By afford I mean actually pay cash for the object or service we desire. We want gratification and we want it now! Not next month, not next week, not tomorrow, we want it now. This requirement to be immediately gratified costs us thousands in interest and lost opportunity costs.

We make attempts to justify our impatience like how much more productive we will be with that new iPhone, or how much easier it will be to pick up the kids if we had a third row seat. In either case there is no reason why you can’t save the money up and pay cash for the iPhone or even a new car. The only obstacle in your way is time and determination. If you are determined to make the purchase and you really think your life will benefit from it then you shouldn’t have any problem socking the money away to make the purchase.

The easiest way to do this is to set a specific monthly goal amount to put aside for the purchase. If you want to have a new, well new to you anyway, car then take the estimated amount of the car and split it out into monthly payments which you make into your savings account setup specifically for this purchase. You really need a separate account so you don’t get confused or tempted to use other funds for your purchase. In this manner you are actually earning interest on your payments as opposed to paying it, you can get your car and make money in the process. Like I said the only thing standing your way is time and determination.

Lets say you want to buy a used car worth $25,000.00 that is a lot of money and you probably don’t have it right now. If you need a new car immediately get something you can afford to pay cash for and then immediately start saving for the car you actually want. Instead of making the car payments + interest and carrying the debt you will be on your way to doing something most people only dream of.

If you take the $25,000 car and assume your trade-in is worth $5,000 when you go to trade it in you are going to need $20,000 cash to pay for your car. The typical car loan runs for 5 years so you could take that $20k divided by 60 (60 months in 5 years) and you would need to make payments of $333.33 a month to get your $20k in 5 years. If you want it in 4 years it is $417 in 3 you need to pay $556 per month. Using this same scenario but getting a 36 month loan you would be paying around $2,300 in interest at 7.16%APR.

Using this method you would never have to get a car loan again. You can apply similar principles to any large purchase you plan on making in the future. If you are looking to buy a new TV but don’t have the cash, figure out how much you are willing to pay and how much the monthly payments would be and set aside that money in a savings account dedicated to that purchase.

Delaying your purchases until you can pay cash will not only save you in interest payments but could earn you interest income and reduce your stress brought on by looming debt payments.

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A recent article in USA Today caught my attention and made me think. The article, “Households take up challenge to be chilly” covers families who have taken up the challenge to see how long they can go without turning ontheir furnace. Partly for economic reason and partially for eco reasons families across the nation are having freeze outs. One interviewee who was trying to save money considers it a modern concept to heat the home saying “Over 120 years ago, people had a stove fireplace, and that warmed their homes to a point. They didn’t walk around in T-shirts and shorts all year long.” I agree with the statement but people 120 years ago weren’t sporting 3000 square foot houses either. The smaller your home the less there is to heat, the less windows/doors you have to leak heat out. I like the concept but it seems somewhat extreme, at some point these people end up turning on their furnaces but the article doesn’t really talk about what they heat their houses to when they give in.

One man in Maine even bought a house with no furnace at all. I am certainly willing to take some hits for frugality but at what point is the cost savings not worth the sacrifice to your quality of life. I think two of the biggest reasons people balk at being frugal are 1.) fear of losing their social status and 2.) thinking it lowers their quality of life. The majority of good, common sense, frugal practices should have no effect on either one of these. When people start reporting about these extreme cases of frugality or green living people start to associate the two things. That guy was nuts to save a few dollars so anyone saving a few dollars must be nuts right? Of course we know this couldn’t be further from the truth but it is these types of stories which make impressions on people.

Another good example of this was an episode of the TV show Wife Swap I saw one day. One of the wives was huge into coupons. I don’t mean your normal type coupon clipper, this lady had a coupon for everything. In addition to her collection of coupons it looked like she bought everything that was on sale. The impression was that she was sacrificing her family for the couponing and stockpiling. Coupons are good things when used properly and this was a case of coupons gone bad. People with little experience couponing might get the impression that coupons are either to much work or you have to go nutso to realize any savings. It is seldom you see a story of the average person doing little things to save money. Each of those little things adds up to something spectacular but it doesn’t make spectacular TV.

It seems whenever there is a good frugal tactic to save a little cash you are going have people taking it to the extreme, like freeganism and that gets the coverage. In regards to the home heating story, a good middle of the road type tactic would be to inspect your home for the winter and make sure it is as weather tight as you can make it. Utilize a programmable thermostat, or do it manually if you are diligent, to set the temperature in your home to be comfortable when you need it and cooler when you don’t.


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My First Foray into Investing

December 28, 2009
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One of the things I don’t talk about much on this site is investing. The reason being I am not much of an investor at all. I have a 401k where I am invested in some mutual funds but I don’t manage or select the funds I am in. My Wife’s mother is a financial […]

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Twas the Night Before Christmas

December 24, 2009
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Twas the night before Christmas and all through the pad not a blogger was stirring not even Matt Jabs. The stockings were hung by the monitor with care. In Hopes that Trent Hamm soon would be there. The Weakonomist was nestled all snug in his chair, while visions of Baker danced in the air. Mrs. […]

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