What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Defining frugal goals and projects
2. What is a “savings rate”?
3. Enjoying life without going out
4. Tiered accounts at Ally
5. Personal finance acceleration
6. Repackaging generics at home
7. Life-Changing Magic of Tidying Up
8. Uses for old laptops
9. 4% withdrawal rate question
10. Everyday carry and identity theft
11. Kitchen needs in the city
12. Collectibles and getting ripped off
Many readers have asked for updates on the health of our daughter. She’s recovering well from her ordeal. As you read this, she should be returning to school with some limitations on her activity and might possibly be doing only a half day today depending on her energy levels. The school has been great to work with on this matter, as have her doctors.
Honestly, she’s doing about as well as we could have hoped at this point. I was pretty certain early last week that there would be little chance of her returning to school already, but she has just done tremendously well the last few days and we think she’s ready for it.
Thank you so much to all of the readers who ed me in various ways. It means a lot.
In March while doing my taxes I came to the realization that I needed to fix some things financially in my life. I had little savings and when I came up with some taxes owed I did not have the means to pay them. I had zero progress toward retirement or any other goal I had for the future.
Six months in and things are going well. I have a savings plan in place for retirement hopefully early and for replacing my car. I have eliminated about half of my credit card debt.
I am a very planning and project and goal oriented person and those things fit well with that. What is harder is finding projects that center around cutting my spending. It seems to me that frugality is mostly “tactics” in that it is how you make it possible to save more and move toward your other goals.
For the most part, you’re correct. Frugality, at least in terms of the money it saves you, is often “tactical,” meaning that it is a very immediate move you make that will contribute to your bigger plans, like saving for retirement or paying off your debts. Choosing to not go out for dinner and instead make something at home is a tactical choice as part of the overall strategy of paying off your credit cards.
However, there are most certainly larger projects and goals that one can set that are purely frugal. I often have frugality-related projects and goals in the works. Right now, for example, I’m working on a project to fill up all of our Gladware containers with frozen make-ahead family meals and individual meals. That’s a big project, one that will easily take a couple of weekend days to pull off and a few weeknights of planning, too.
Another example of a project is the roughly annual purging of my closet. I often pick up things on sale or at Goodwill that I think I can easily flip for a profit and I stick those in the closet. Every so often, I go through that closet, pull out a ton of items that should be sold off, and then conduct those sales. To me, that’s frugal – I’m maximizing the value that I get from various sales.
There are many things like this that you can do. Go through all of your clothing, get rid of what’s worn, and also get rid of stuff you’ll never wear. Clean out your pantry and reorganize it to be as convenient as possible for food preparation at home. Learn how to prepare your, say, ten favorite dishes at home, and learn how to do it so well that it seems silly to go out to eat in comparison.
What do you mean when you talk about saving 10% of your income? Before or after taxes? Do you include things like investment gains in that number?
Personally, when I talk about my savings rate, I am talking about the percentage of money that I put into savings and investments as compared to my gross income as reported on my taxes before any deductions.
So, let’s say, for example, that Sarah and I made $60,000 per year combined gross from our work. (After taxes, that might be something like $48,000.) If we contributed $6,000 per year to our investments and savings, I would simply divide $6,000 by $60,000 to get our savings rate – 10%.
Now, let’s say that we earned $3,000 in dividends and interest from our investments. That means our true gross income was actually $63,000. Of course, we just chose to roll those dividends and interest over into the accounts they were in, so we actually saved $9,000 this year – our $6,000 in cash contributions our $3,000 in rolled-over interest and dividends. Our savings rate then would be $9,000 divided by $63,000, which gives us a 14.2% savings rate.
I do not count any changes in balance within tax-advantaged retirement accounts or educational accounts when looking at these things, and the same is true for things like 401(k) matching from an employer. Once our money is in a Roth IRA or a 401(k) or a 529, I don’t consider any growth in there to be part of our savings rate. My savings rate consists of the portion of my taxable income that I choose to save or invest, and Roth or 401(k) or 529 earnings are not taxable income as long as it’s in that account.
When I look at the fun things I do with my wife they’re all straight off of your list of things that are giant money wasters. We go out to eat and enjoy delicious varied foods. We go to bars and have a few drinks and actually have fun. There isn’t much else to do in this relatively small college town. I guess we could sit at home and be bored but what is the point of life if you’re just sitting around waiting to die?
For starters, I don’t actually find either of the things you mention to be particularly enjoyable. I vastly prefer preparing my own meals at home rather than going out to restaurants because I have far more control over what I’m making, from the ingredients to the flavor. I find it deeply engaging and enjoyable and satisfying to make meals at home. I also don’t enjoy the bar scene unless I’m drinking a craft beer with some friends, in which case I’d still rather be at my home or their home because it’s cheaper, not nearly as noisy, and there’s space available to do other things like play a game.
For another, I don’t know what “bored” is. I haven’t been bored since I was a teenager. Right now, I feel like there are more interesting things that I want to do than I will possibly have time for over the rest of my natural life. There are books to read, trails and wilderness to explore, friends to make, things to learn about, games to play, projects to tackle… my list of things I’d like to do would fill up a book. I haven’t spent a moment of my life “sitting around waiting to die,” and I don’t plan to.
I can’t make you want to spend your free time on things besides going out to eat and going to bars. That’s your own choice. But to say that the only other option out there is to “sit at home and be bored” while “waiting to die” is ludicrous and childish. Just because you chose to pass on the tens of thousands of other things you could be doing with your time without spending much money (or any money) is your choice.
I got an email notice from my bank (Ally) that talks about moving to tiered accounts. I use Ally for savings and a local bank for checking and earn 1% on my balance there which is way better than my local bank. This tiered account thing has me worried as it sounds like it’s just an excuse to cut interest rates and make more money for them and not for me. Thoughts?
I’m pretty sure James is talking about this announcement from Ally Bank where they discuss moving to tiered savings accounts. A key quote:
“At Ally Bank, we’re committed to banking in your best interest, including offering consistently competitive rates. As part of that commitment, we’re introducing the following balance tiers on November 7, 2015.
Our new balance tiers reinforce our commitment to adding value to customers’ online banking experience and enhance savings. For dedicated savers, balance tiers may help you earn more as your balance grows.
What are balance tiers, and what does this change mean? A tiered rate account is an account that may provide a different interest rate based on the balance of an account. Ally will offer three tiers:
account balances less than $5,000
balances from $5,000 – $24,999
balances over $25,000
Our rates are determined by several factors, including conditions in the marketplace and the competitive environment. If rates eventually rise, balance tiers will provide Ally Bank with the flexibility to potentially offer customers a different rate based on account balance.”
If this change is in any way comparable to the tiers offered by other banks, what it means is that the interest rate you have on your account is now tied to the balance you carry in that account. Typically, that means that accounts with a higher balance will earn a higher interst rate – I’ve never seen it work differently than that.
Since they don’t provide any specific information in this notice, my guess would be that the lowest tier – balances below $5,000 – will see a drop from the current rate offered on Ally savings accounts. The middle tier and higher tier remain to be seen, but my guess is that the middle tier will likely be fairly close to the current rate and the top tier will either match the current rate or be a bit higher.
So, is Ally still a good online bank? I think it won’t make much difference to people with a balance over $5,000. For those under $5,000, I expect Ally won’t be as good as it once was, at least in terms of a competitive interest rate.
However, I generally find that the most valuable thing that a bank provides is customer service, and Ally has a pretty good track record in that department. I’ve had some miserable experiences with banks in the past, so I am happy to forego a little interest to have a bank that has great customer service.
If you have a low balance, you may want to start shopping around and watch what the specific rates are when they are announced. If you have a higher balance, this probably won’t mean much of anything for you.
I would encourage you to tell all of your readers about how one’s finances start to accelerate as you start turning things around. Your net worth goes up so slowly at first abut as time goes on it goes up faster and faster and faster. For me that’s really motivating seeing it go up faster now and knowing that it will keep speeding up as I stick with the plan!
This is something that often comes as a surprise as people are turning their finances around. It all accelerates! At the start, you might only see your net worth improve by $100 a month or so, but it won’t be long before it’s jumping upwards by thousands a month even if you don’t add to your income.
How? Every time you pay down a debt, you’re being charged less interest in future months. That reduction in interest basically means an increase in your net worth because you’re sending less to the bank in the form of interest (and theoretically more as a payment on your actual debt principal).
It’s also true with investments. The bigger your balance is, the more money you gain when there’s a 1% increase in the value of that investment. Also, you gain more when there are dividends if you own more of it. Let’s say you buy one share a month, for example. After three months, three shares will produce dividends; after six months, six shares will, meaning you’ve doubled the money you’re earning in the form of dividends.
It all starts to accelerate. Even if you don’t change a thing about your earnings or about how much you’re spending, your net worth will start going up at a faster and faster rate the longer you stick with it. It’s just barely noticeable at first, but it slowly gets faster and faster and faster. It’s invigorating!
When I was a little girl my mother used to buy a lot of store brand products and we used them at home without any problem. Recently, in order to save a little money and get rid of our student loans a little quicker, I bought a bunch of store brand items (Up and Up, Archer Farms, Market Pantry from the Super Target down the block). My husband got really upset and said that he wasn’t going to feel poor in his own house. I think the reaction is silly but you’ve got to pick your battles. So, my idea was this – why not just save some packages of name brand items and refill them with the generics? He eats Cheerios a lot of mornings, so I could just buy store brand Cheerios and replace the bag inside the box.
It’s kind of a silly game to play, but it would save you a bit of money. I think most of it comes down to subconscious brand preferences drilled into our heads by a lot of years of advertisements. If it’s a simple tactic that allows you to “pick your battles,” then go for it.
When I was a kid, I had a friend whose mother did this exact thing. She would buy a lot of generics at the store and either refill blank containers at home (she had flour jars and past jars and so on) or actually store stuff in name brand containers even if it was generic. I think she was self-conscious for some reason about having generic brands in her house.
At our house, we don’t care. In fact, we sometimes actually point this out to our kids when we’re buying them at the store. “Look at these two boxes of cereal. Can you tell the difference other than the box art? Well, here’s the difference – this box is $2 cheaper. Now which one should we buy?” Our kids always choose the cheap one because we strive to eliminate their brand preferences.
Have you read The Life-Changing Magic of Tidying Up by Marie Kondo? I was reading it and thought that most of it could be an article on Money360! The idea that really stood out to me from the book is that you should look at each item you own and ask yourself whether or not that item gives you a spark of joy in the here and now (not just the memory of a joy that you’re repeating). It’s like something you would write!
Someone sent me a copy of that book shortly after it was published, and while I couldn’t really think of how to incorporate it too much into Money360, the ideas in there really did strike a chord with me.
The “spark of joy” idea has a deep connection with how I decide what possessions to keep and which ones to sell off when clearing out my closet. While I follow more of a “have I used this in the last year?” philosophy when deciding, I’ve found that I sometimes bend that rule both ways based on my sense of a “spark of joy” from that item.
If you really take that book seriously, though, it can really become a strong call to minimalism. If you truly get rid of everything in your life that doesn’t bring you a “spark of joy,” I think you’ll wind up with a surprisingly small set of possessions. I know I would.
A local university sold some old used laptops to the public recently for $100 each. They were in really good shape and I bought one but it turns out that there is nothing installed on them whatsoever. It starts and shows a Dell logo and asks for a disc. I am wondering what your recommendation is for this. I would like a machine to do nothing more than look at websites and do email. Thanks in advance!
I would install Ubuntu on it. Ubuntu is a free and very user friendly version of Linux, which is an free and open source operating system. Using Ubuntu is actually a lot like using Windows, provided you don’t dig in too much.
To do this, you’ll need a bootable CD. If you have another computer and a blank CD, it’s pretty easy and this page will explain how in the “Easy ways to switch to Ubuntu” section.
I have an old laptop that I’ve installed Ubuntu on not that long ago. It’s great for doing things like web surfing and it’s pretty much impossible to get spyware on there. It is a little different than Windows and there isn’t nearly as much third party software available, but it’s free and it has everything you need for things like web surfing and email.
For several years now I have been planning to retire when I can live off of a 4% withdrawal rate from my investments. I figure that when Social Security kicks in later it will be enough all together to get me through the rest of my years. Lately though I have become worried about that 4% number. Do you think it is enough?
Mark is sharing a number of ideas here all at once, so let’s spread them out a little bit.
First of all, he’s referring to a 4% withdrawal rate from his investments to live on. In other words, he’s saying that if he withdraws 4% of whatever the balance of his investment is on the day he retires, and he withdraws that same exact amount each year, he plans on living out his years on that amount. So, let’s say he retires on the day his investments add up to exactly $1,000,000. His plan would be to withdraw $40,000 a year, every year, for the rest of his life, and his investments would hold out.
That 4% rate is backed up by a very well known study called the Trinity Study, which says that if you use a 4% withdrawal rate, your investments are pretty much a mortal lock to last at least 30 years and quite likely to last longer than that.
Mark is also taking note of Social Security benefits. Let’s say, for instance, that Mark gets $10,000 a year from Social Security. In that case, he would only need to withdraw $30,000 a year at that point from his investments, which means that they would last even longer.
But is that enough? For me, it depends on how close you are to starting Social Security benefits and also whether I intend to do anything that might earn some income after “retiring.” The closer I was to Social Security age – say, 58 rather than 40 – the better I’d feel about making the leap. Similarly, the more likely I was to earn at least a little in “retirement,” the better I’d feel about making that leap.
If I were far away from Social Security (say, 40 or 45 years old) and didn’t have any good prospects for earnings post-“retirement,” I would not feel confident in “retiring” with a 4% withdrawal rate. I would want 3% at the bare minimum, and probably closer to 2%.
I’ve been rethinking all the stuff I carry in my wallet like my ID and credit cards and stuff. I recognize that if I lost it or it were stolen, I would be in a real pinch for a while. What is the best practice for choosing what to carry every day to balance identity theft risk and daily ease of use?
Personally, I carry just my driver’s license and one single credit card most of the time. I usually leave my bank card at home, along with almost every other card I have. I keep them all in a fairly well hidden place in my home where my risk of losing them is extremely minimal. With just those items, it’s easy to keep them in a front pocket, which means that pickpocketing, while not impossible, is pretty tough.
Regarding things like customer rewards cards, I’ll grab them if I know I’m going to use them, but most of the time I leave them at home. If there’s not much chance I’m going to that particular store, I just don’t bother with the card. Most of the time, there’s not much “reward” to them anyway.
I guess I’m just a minimalist in terms of everyday carry. Most of the time, all you’ll find in my pockets are my driver’s license, a credit card, a pen, a tiny notebook, my keys, my phone, and a pocket utility knife.
I am about to move from the suburbs to urban living. My girlfriend and I are planning on renting a townhouse or apartment. The things that I do presently for recreation (gardening, hunting, fishing, hiking, etc.) are obviously going to change significantly. What amenities should I be looking for in an apartment or townhouse to keep our recreation bills down so we don’t just go out to eat or drink all the time?
The first thing I would do if I were you is look at your food preparation situation at home. What space do you actually use for food preparation? What equipment do you use? A stovetop? Oven? Microwave? Do you have a refrigerator? A freezer? Then, look for an apartment or townhouse that has those features that you use so that you’ll feel fine prepping food there.
As for food sourcing, I’d look primarily at things like discount grocers (like Aldi) and farmers markets for your food. Again, it doesn’t sound like you go out to eat very much right now and that you source a lot of your own food through gardening, hunting, and fishing, so you’re mostly just going to replace your sources of ingredients more than anything else.
There is a large jump in price from buying food staples to going out to eat all the time. While you will be losing the advantages of food from gardens and hunting and fishing expeditions, those weren’t exactly expense-free either.
How does a person avoid getting ripped off when it comes to collectibles? It seems to me that if you just take them to a dealer to sell them that the dealer is going to lowball you as that’s just good business practices for the dealer. The only other option I see is to invest a ton of time researching which reduces the value you might get from them.
The best route is to hire a dealer or some other expert for appraisal of your collection. Make it clear that you are not going to sell, but are simply appraising for insurance purposes. I’d usually suggest getting multiple appraisals just to be clear.
Once you have a clear appraised value of a collection and perhaps some appraisals of individual items, then you can move on to deciding what to sell and how to sell it.
It’s worth noting that some collectibles, such as comic books and trading cards, have professional grading services that will help you accurately determine the condition of high-value items, making it easier to trade and sell them. This is good for establishing the actual value of a great item, as many people won’t buy them without a very clear indication as to the condition.
Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.