Chapter #1

Living Within Your Means

Although it seems so completely obvious that it hardly bears repeating, many people seem to have forgotten that in order to save money you must Live within Your Means. You must spend less than you earn. It is also very important to remember that the earlier you start to save and the more you save, the faster you will accumulate wealth and achieve financial independence. These principles are the basis for every idea in this book. Later chapters will provide assistance on how to do this, and explore the possibilities and opportunities that these principles make possible.

Because you will be seeing the terms accumulated wealth and financial independence a lot, if you decide to read this book, I will define them here. To me, financial independence means you have sufficient income from other sources that you do not have to work. As used in this book, accumulated wealth is the sum of your savings and investments. It is your accumulated wealth that will generate a significant portion of the income required for your financial independence.

My wife, Janet and I were married in 1969. We owned two cars and very little else. We also owed several thousand dollars in low-interest education loans. I had paid for my car out of my earnings as a graduate research assistant and Janet had paid for hers from her first-year’s salary as a teacher.

My starting salary, in 1969, was $12,000 dollars a year. Since Janet could not find a job as a teacher, she elected to go back to graduate school. I would like to say that we sat down and determined our financial goals and developed a plan to achieve them. The truth is we developed our formula quite by accident.

We were not sure exactly how much it was money we were going to need to live on. So we decided make contributions to the company credit union, via payroll deductions, so that my take-home pay was equal to half of my gross pay. They were already deducting a significant amount from my paycheck for taxes and benefits anyway. We knew that if we had to start taking money out of the credit union to pay our bills we would be spending more than half of my salary. By tracking the withdrawals we would even be able to estimate how much more. As it turned out, we found that we could pay most of our bills with just one of my two monthly paychecks. The other monthly paycheck was deposited in a savings account to be used for large expenditures such as car insurance, vacations, furniture and, if possible, additional savings.

Because we had no car payments or children, and were living in a small one bedroom apartment, this was relatively easy. Our only major purchases during our first four years of marriage were: a sofa bed, a Hollywood frame, a box spring and mattress, a stereo system, a used piano, and a black-and white television. I estimate that we were able to save roughly half of my total salary. Our total annual saving during this period was approximately $6000-$8000/year.

I know that may sound like a lot of money, even now, but a lot of two-car families spend more than that today on monthly car payments. Eliminating car payments of $200/month (or more) on each car would generate an $4800 a year to save or invest. (See Chapter Seven, Everyone Drives a Used Car)

As my salary increased we continued to use this formula, increasing the savings portion of my payroll deductions to keep my take-home pay equal to 50 percent of my salary. As our savings grew, we switched to certificates of deposits and mutual funds. We started utilizing individual retirement accounts and 401k savings plans when they became available. We also controlled our spending so that our daily expenses could still be covered by one paycheck a month. It required planning and sometimes it meant waiting for a while before making a purchase.

For those of you who are just starting out, it is extremely important to not increase your standard of living too quickly. A luxury once obtained tends to become a necessity. It can be extremely hard for a two-car family to go back to being a one-car family, to go from a house back into an apartment, or to be satisfied with a black-and-white television once you have owned a color television.

I recognize that not all of you will be able to achieve the same degree of savings that Janet and I were able to obtain. Some of you married earlier than we did, had children earlier than we did, or have other financial obligations that we didn’t have. Also some of you are not blessed with a partner who shares your desire to accumulate wealth and achieve financial independence. Do not become discouraged. Consider the principle described above as a goal for which to strive, not as an absolute prerequisite for success. Read through the rest of the book and pick out the ideas that appeal to you and your partner and adapt them to your situation.

At the risk of being overly repetitive, I feel compelled to state the obvious one more time. If you take nothing else away from this book, please, remember the concepts that you must Live within your Means and the earlier you start to save and the more you save, the faster you will accumulate wealth and achieve financial independence.

Later in the book, I have included a lot of math to support my conclusions. If you have trouble following the math, don’t worry. Understanding the math is not as important as understanding the concepts and putting them into practice.

I like the story about the man who showed up at his high-school reunion driving a fancy car, wearing expensive clothes, and accompanied by a wife dripping with furs and diamonds. His classmates were shocked, because he had been voted least likely to succeed. When asked, he explained that after high school he had joined the Navy and had noticed that the Navy used thousands of widgets. When he got out of the Navy he found that he could make widgets for dollar and sell them to the Navy for five dollars and to use his words--"That five percent sure adds up fast."

In order to increase your savings, you will need to control or reduce spending. For most people, housing is their biggest expense, followed by transportation and food. I will be addressing these areas and other spending categories later, but first, let’s take a look at the effects of saving early and saving often.

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Chapter #2

The Importance of Saving Early

Although it seems extremely unfair, the biggest rewards for saving normally come at a time in your life when you can least afford it--when you are just starting out. The sooner you invest a dollar the longer it will have to grow, and the larger it will become. You can use the Calculator to demonstrate this fact. (Click for Calculator)  In the left-hand column enter amount ($1), the number of years until retirement or other end date, your expected rate-of-return (8.4% - Between 1926 and 2006 Stocks averaged 11.5% and Bonds averaged 5.3%. A 50/50 mixture would have generated this percentage),and an inflation rate (If you disagree with the historical rate of 3%). The right hand column shows the Future Value($)and the Future Income($/year)in both inflated dollars and Today's $. The Future amounts are the actual dollars you will have at the end.  You can use Today's Dollars and current prices to see how much you will be able to purchase with those future amounts. 

Let’s look at three individuals of three difference ages and see what effect saving a dollar has on their future wealth and income. Bill is 18 years old. He will most likely work until he is 68. Every time he spends a dollar for cup of coffee or a lottery ticket, instead of investing it at 8.4%, he is reducing his accumulated wealth at retirement by $56.42 which would generate  $4.74/year in retirement income for the rest of Bill’s life. In addition, since Bill would not be touching the principle, he would be leaving his wife or children $56.42 when he dies.

This isn't quite as good at it looks because in 50 years coffee will cost more than a $1/cup. That is why the calculator includes the Future Value($)and the Future Income($/year)in Today's $. In 50 years Bill's $56.42 will only buy 12.87 cups of coffee. Bill's Future Income of $4.74/year is equivalent of having an income of only $1.08/year today. Still this means that Bill can buy a cup of coffee today or be able to buy a cup of coffee/year after he retires for the rest of his life. As the time frame get shorter, the difference between Future Income and Future Income Today's $ become less.  

Mary is 35 years old and wants to retire at 65. Every time she spends a dollar to use an ATM machine, or to buy candy bars instead of investing it, she is reducing her accumulated wealth at retirement by $11.24 and her retirement income by $0.94 per year ($0.39/year in Today's %).

Sam is forty years old and wants to retire at 50. Every time he spends a dollar instead of investing it, he is reducing his accumulated wealth at retirement by $2.24 and his retirement income $0.19 per year($0.14/year in Today's $). 

To generate $10/year of income at retirement Bill will have to save $2.11 at 18, Mary will have to save $10.64 at 35 and Sam will have to save $52.63 at 50.

Every time you make a purchase, you are deciding to reduce your accumulated wealth at retirement and to reduce your retirement income. The amount of this reduction is a factor of the cost of your purchase, the number of years until you retire, and the rate-of-return expected.

By giving you the opportunity to see the effect of a purchase on your accumulated wealth at retirement and your retirement income I hope to increase your motivation to try to save more.

If Bill buys a CD by his favorite music group for $20, he has reduced his accumulated wealth at retirement $1,128.48 and his retirement income by $94.79/year ($21.62/year in Today's $) . If Bill was aware of the magnitude of this impact on his future financial security, it might influence his purchasing decisions. He might decide that the CD is not worth the lost in accumulated wealth, or that he can borrow a CD, wait until he finds it on sale,split the cost with one of his friends, or record some of the songs off the radio.

How much financial security are you giving up? Is it worth a little extra effort to find a cheaper alternative? Use the Calculator to determine the impact of any purchase you make this year on your accumulated wealth at retirement and your retirement income.

Remember that not making a purchase or using a cheaper alternative is only half the battle. Unless the un-spent money finds it’s way into your savings or investment accounts, it will very likely be spent on something else. When you elect not to make a purchase, immediately deposit that amount in your short term savings account. Then you will not be tempted to spend it.

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In the previous chapter we talked about the importance of starting to save early and the effect of a single purchase on accumulated wealth and income at retirement. In this chapter we will be looking at the effect of frequent saving over time. Many of our spending decisions commit us to recurring expenditures. This type of expenditure includes any frequently repeated expense, such as a monthly cable bill, a weekly movie, or a daily newspaper. The cost for many of these items may seem quite small but if these expenditures are repeated frequently enough, over time they can become significant. If the costs of these expenditures are invested over a period of years, they can result in a sizable amount of money.

Suppose when you were 18, someone came up to you and said "Boy, do I have a deal for you. I will provide you with a cup of coffee every working day until you retire for only $269,000."  What would have been your response? (If your response would have been affirmative please contact me, we might be able to work out something.) But that is exactly the effect of purchasing a single cup of coffee every working day for the next 50 years. You can use the Calculator at Repetitive Future Wealth and Income to verify this.

If our young friend, Bill, from the previous chapter decides that he will get up five minutes earlier every day and make himself a cup of coffee at home rather than buying a cup on his way to work, he will be able to save $1/day, 250 times per year. At 8.4% for 50 years at an inflation rate of 3% he would end up with $269,000. (Note that the price of coffee and therefore the amount available for Bill to invest would go up by 3% each year)  His retirement income from that accumulated wealth would be $22,956/year. At a 12 percent rate-of-return, his accumulated wealth would be $912,000 and with a retirement income of $109,450/year.

If Ms. Mary decides to make her own morning cup of coffee and also decides to give up that daily lottery ticket, she would have an extra $500 a year to invest. With 30 years until retirement and a rate of return of 8.4%, Mary’s accumulated wealth at retirement from these decisions would be $91,138. Her retirement income would be $7,756/year. At a 12 percent rate-of-return Mary would accumulate $176,454, which would provide an income of $21,275/year.

Our buddy, Sam, wants to retire in ten years and he has already been making his own coffee and never plays the lottery. His company recently stopped subsidizing the cafeteria and he is now spending close to $4 per day on lunch. He figures he can save $3/day by packing his own lunch. This would give him an extra $750/year to invest.  Sam has only ten years until retirement. At 8.4% Sam’s decision would create an extra $13,854 in accumulated wealth at retirement and an extra $1,105/year in retirement income. At a 12 percent rate-of-return, Sam would accumulate and extra $16,948 with an extra income of $2,023/year.

As you can see a small repetitive saving can result in significant accumulated wealth. You can use the Calculator mentioned above to do your own calculations, using your own assumptions.

As I have said, many of our expenditures are recurring. They are small daily, weekly, or monthly costs. But over a time they can be significant and over a lifetime, they can have a tremendous impact. We saw in the first example in this chapter that elimination of a cup of coffee per day would result in Bill having an extra $269,000 at retirement. You do need to remember that at an inflation rate of 3%, a cup coffee will cost two bucks in 25 years and over four dollars in 50 years. So Bill will need to adjust his saving accordingly.

Had I been less conservative, I could have sub-titled this chapter Coffee.......$912,000

Every time you consciously, or unconsciously, establish a habit or make a decision to incur a daily, weekly, or monthly cost you are deciding to reduce your accumulated wealth at retirement and your retirement income. Just how much it will be affected is a factor of the annual cost, the number of years until you retire, the rate-of-return, and the inflation rate. By using the Calculator you can determine the impact of any recurring expenditures.

How much financial security are you giving up? Is it worth a little extra effort to find a cheaper alternative? Remember that not making an expenditure or using a cheaper alternative is only half the battle. Unless the un-spent money finds it’s way into your savings or investment accounts, it will very likely be spent on something else. When you decide not to start making a recurring expenditure, or to discontinue an existing one, make arrangements to deposit an equivalent amount in your short-term savings account on a periodic basis. Then you will not be tempted to spend it.

Chapter #4

Determine Your Financial Goals

If you don’t have a target or goal to shoot for, who knows what you will hit. You are liable to shoot yourself in the foot. The first requirement, then, is to establish a goal. Perhaps the best way to estimate how much income you will need to achieve financial independence is to start by determining what you are spending now. If you already have a budget and keep records comparing actual expenditures to that budget, this will be easy. If not, I suggest that you estimate these numbers as best you can for now, You can use the form in the Budget Calculator to aid you in this task. Eventually you will want to establish a budget, keep records for the next year or so, and then come back and revise this estimate. Go to Budget Calculator

I have include an example to serve as a guide. I think that most of the categories are self-explanatory see the notes at the top of the Budget Calculator for additional clarification.

I have broken the categories into roughly equal segments that correspond roughly to later chapters in this book, separating out car and house payments, because I hope you will be able to eliminate them.

The next step is to revise this budget for conditions as they will exist when you plan to retire.

The calculation are to be done utilizing today's dollars so you do not need to worry about what things will cost in the future. In determining your Retirement Budget, only make changes where an actual change in conditions justify them.

In the example:

1. House Payments were eliminated because the house will be paid off.
2. The Food and Children's Miscellaneous Items were reduced because all the kid will have left home.
3. Health care went up because the family will no longer be covered by an employer, It goes up with age and health-care cost are rising faster than inflation.

 

Once you have completed the previous step, you have an estimate of what it will cost you to live at retirement in today’s dollars. You can now use the Calculator to determine the amount of accumulated wealth you will need to retire, and the amount you need to save per month this year in order to reach that goal.

First enter the Retirement Budget you calculated previously or from other source as long as it is in today's dollars in the right-hand column above Line 16.

You can Go to Social Security Website to estimate your Social Security Income for Line 16.

Your employer(s) should be able to help you determine your pension income and if it will be adjusted for inflation (cost of living) or not. If it will be increased each year after you retire enter it on Line 17. If not enter it on Line 19. If you will taking a lump sum you need to include it's current value on Line 27 and leave Line 17 and 19 equal to zero.  

In the example the family will have $15,000/yr in Social Security Income and $15,000/yr in Un-inflation Adjusted Pension Income, It will need $11,000/yr in income from it's investments to achieve the required $41,000/yr.  In addition it will need $780/yr in investment income to keep up with inflation of 3%/yr.

You must calculate  Current Investment Required by trial and error using the Calculator in Chapter #2. Enter years to retirement and expected rate of return (example = 8.4%). Then enter a "Cost" and click the Calculate Button. Look at the "Future Income Today's $" and compare it to Line 25. Raise or lower the "Cost" until the "Future Income Today's $" and Line 25 agree. Then enter the "Future Value Today's $" on Line 26.

Estimate the current value of your investments and savings including Cd's, Stocks and Bonds, Traditional and Roth Ira's, 401 an 403's and lump sum pensions. Enter it on Line 27.

You must calculate your monthly saving rate by trial and error using the Calculator in Chapter #3. Enter a Frequency of 12  your years to retirement and your expected rate of return (example = 8.4%)and inflation rate. Then enter a "Cost" and click the Calculate Button. Look at the "FV Today's $" and compare it to Line 28. Raise or lower the "Cost" until the "FV Today's $" and Line 28 agree. The "Cost" at this point is the dollars per month you need to invest this year to reach your goal. If you are are already saving or contributing or your employer is contributing to your various investment those amounts can be subtracted from this figure to determine the additional savings required. Make sure that contributions are in $/month not $/year. Also be aware the your required saving needs to increase each year by 3% or whatever inflation rate you used. 

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Chapter #5

Getting Started

Most of the principles we followed to achieve early financial independence were demonstrated in the first chapter. The primary one being Live Within Your Means.

I hope that I have convinced you that if you want to have a comfortable, possibly early, retirement you will need to save as much as you can, as often as you can. If you have done the calculations in the previous chapter, you know how much you will need to save to reach the goal you have established. The rest of this book is intended to provide assistance in helping you to do that.

Before we begin, I think it is important to define exactly what I mean when I talk about saving money. Saving money is not paying less than full price for something. It is not getting a great deal. It certainly is not buying something with delayed payments or at a fictitiously low interest-rate.

Saving Money is taking money that you have not spent because you didn’t buy something, or chose a less expensive alternative, and putting that money into an interest bearing account or an investment. Unless you complete the second step you haven’t saved a cent. You have just changed where your money got spent. We have all heard the stories and jokes about people who have saved so much on bargains that they ended up broke.

Benjamin Franklin once said: "A penny saved is a penny earned." I think Old Ben grossly underestimated the power of compound-interest. A penny saved is worth at least a nickel, and, depending on how it is invested, may be worth a dime, or even a quarter.

There are a number of concepts that have already shown up or will show up in the following chapters including:

1. Save first, then budget and spend what is left.

    

2. Delay purchases until you can pay cash.

    

3. Delay increasing your standard of living as long as you can.

    

4. Separate your needs from your wants and budget your needs before spending money on your wants.

    

5. Save money for retirement.

    

6. Minimize Debt.

    

7. Evaluate the effect of each discretionary purchase on your potential accumulated wealth and retirement income to determine if the expenditure is worth the negative impact on your financial security.

I will discuss these concepts in more detail but I think the simplest and most useful way to present the information is to go through the various spending categories, describe what we did, explain why we did it, and offer additional suggestions. The ten spending categories I will be using are:

1. Housing
2. Transportation
3. Utilities and Services
4. Food
5. Insurance
6. Taxes
7. Charitable Contributions
8. Spousal Miscellaneous
9. Children Miscellaneous
10. Household Miscellaneous

These are almost the same categories we used for budgeting purposes in Chapter #3.

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Chapter #6

Housing

Why would you want to?

For most people the largest single expense during their life time is the cost of providing a place to live. There are a limited number of options in this category. You buy can a house, rent an apartment, or crash with relatives or friends.

History Section

As I mentioned earlier, we lived in rented apartments for the first four years of our marriage. When I was transferred to Texas for the second time, we decided to purchase our first house. Ordinarily we would not have done it that soon, especially since we expected to be in Texas for only a few years before being transferred back to Pennsylvania. But the company I worked for had a transfer policy that included the payment of all closing costs at both ends. They also guaranteed to buy your house at the price you paid for it or it’s appraised value, if higher, if you couldn’t sell it. We bought a small house and were able to put 20 percent down. This made our mortgage considerably less than the recommended two and one-half times one’s salary. This is a good rule of thumb and should be used to determine the maximum you can afford regardless of what the lender's tell you.It was therefore fairly easy to maintain our budget and to continue to save. As it turned out, we were extremely lucky because we were able to sell the house three years later for 50 percent more that we paid for it.

Upon moving back to Pennsylvania in 1976, we purchased the house we are living in today. Although this house was twice the cost of the house in Texas we were able to put almost 50 percent down and obtain a mortgage that was less than one year's salary. About a year later we became dissatisfied with the bank holding our mortgage. So we paid it off. Half of the money came from savings and the other half we borrowed from my father at the same interest rate we were paying the bank. In three years we paid off the loan from my father and so we haven't had a house payment since 1980.

Over the years we have made several improvements to the house, the most expensive was adding a car-and-a-half garage to the existing one-car garage. Other improvements included: additional insulation and flooring in the attic spaces, replacement of the single pane widows with energy-efficient windows, installation of vinyl exterior trim, expansion of the upstairs bath, refurbishing of the kitchen, re-carpeting of most of the house, addition of a stone patio, additional landscaping, and replacement of the roof. Where possible we made these changes ourselves, but some of them were done by a contractor.

When we were looking for a house, we considered the following criteria:

1. Within 30 Minutes of Work. If you have to drive to work--even if it is only a couple of miles--it’s going to take 15 minutes to get your car ready, drive there and park. An extra half hour each day (15 minuets each way) away from my family was the maximum time I was willing to pay. With today's gasoline prices we may have chosen to live closer to work.
2. Low Taxes. We ended up almost exactly 30 minutes from my work place. Our house is a mile north of the Allegheny-Butler County Line. One of the reasons we were able to pay-off our mortgage was low property-taxes. A friend of mine bought a house for nearly the same price in Allegheny County and his county and school taxes were three times the amount we paid.
3. Decent Schools. Because we already had a child, and were planning to have more, we wanted to live in a school district that would provide our children with a decent education. As an individual who started out in a one-room school house, with one teacher for grades one through three, and ended up with a master’s degree in chemical engineering, I questioned the need for my children to go to the best school in the area. On the other hand, you do want to make sure that the schools are adequate. A friend of mine chose to buy a home in an area with extremely low taxes and schools so poor that he ended up paying to send his children to private school. The cost of his children’s education was a lot more than the taxes he saved.
4. Low Maintenance. We were looking for a low maintenance house to minimize the time and money we would have to spend on upkeep and repair. We selected a brick house, and later changed the trim and the exterior of the windows from painted wood to vinyl.
5. Efficient Use of Space. A well-laid-out house gives you more net living space and allows you to buy a smaller, less expensive house. One of our neighbors in Texas had a house with almost 50 feet of four-feet-wide hallway. That is a space equivalent to a 14 by 14 foot room. A room that they had to purchase and pay to heat and cool but couldn’t use effectively. With a different lay-out they could have saved around ten percent on the initial cost and still had the same amount of usable room.
6. No Formal Living Room. My wife and I both felt that we did not want the expense of a formal living room that would hardly ever be used. Therefore we love the 18 by 30 room that serves as our living/family room.
7. Large Lot. This was a personal preference. It probably increased our initial cost, our taxes, and cost of upkeep of the grounds. It did, however, allow us to plant a large garden (2800 square feet) that reduced our food budget.
8. A Two-Story House. Another personal preference, but I think that a two-story home is slightly cheaper to build, and to heat and cool. We, did however, look for a house with versatility. The first-floor of home we selected has a kitchen, dining room, living room, bathroom and two rooms that can be used as bedrooms. When not in use as bedrooms, either of these two rooms can be use as an office, a music-room, or sewing-room. The second-floor has a bath and two bedrooms. We have a full basement with a finished room that we used as the toy room when our daughters were small. Later it became the bedroom of choice for two of our three girls. (I think the fact that is was more private and came with its own telephone had something to do with that.) When we get too old to climb the stairs, we can live quite nicely on the first floor; and if things get desperate, we could easily convert the upstairs into an apartment.

Comments Section

In general, I think a lot of people buy more house than they need, sooner than they have to, and stretch out the mortgage payments much longer than necessary. To illustrate this point let’s look at three cases. In Case 1, the Jones buy a house with a 30 year mortgage. In Case 2, the Smiths wait 10 years and then buy a comparable house with a 15 year mortgage. In Case 3 the Renters decide that they prefer to rent.

You can go to Rent vs Own Example

Obviously, the savings realized are a the result of many factors including:

1. Rental Costs
2. The Cost of the House
3. Mortgage Rate
4. Rate of Rise in Real-Estate Values
5. Rate-of-Return on Investments and Savings
6. Property Taxes
7. Maintenance Costs
8. Utility Costs
9. Insurance Costs
10. Furnishings

 

Based on the assumptions I used, from a purely financial stand point, renting would be the best option with and incremental savings of $406,000 over owning a house with a 30 year mortgage. In addition, waiting an additional 10 years while investing the difference between renting and owning and utilizing a 15 year mortgage would result in an incremental savings of $98,500. 

There are many calculators on the web to help you do your own comparison using your own data and assumptions. Rent vs Buy Calculator  

I would be the last one to tell someone not to buy a house. I have thoroughly enjoyed owning my home. There are a lot of intangible advantages for owning your own home--privacy, pride of ownership, a sense of security, and freedom to make changes. But, as I have shown above, there may be some significant costs associated with home ownership.

While we were in our first apartment, a young couple moved-in next door. They had sold their house to move back to an apartment. They didn’t like the extra work and worry of owning their own house. This was the first time I had met someone who didn’t have the Great American Dream. It seemed almost unpatriotic. But on reflection, it made sense for them. If you don’t enjoy puttering around the house, working in the yard and/or garden, making minor repairs, calling plumbers and electricians and various other repairmen, then maybe renting is not such a bad idea.

Another consideration in your decision of when to rent and when to buy is how much flexibility you need. There are significant costs associated with selling a home. It is a lot cheaper to move from apartment to apartment than from house to house. If there are a number of moves in your future, renting is probably preferable, unless your employer or someone else is picking up your closing costs.

In the first paragraph of this comments section I said: "People buy more house than they need, sooner than they have to, and stretch out the mortgage payments much longer than necessary." We’ve talked about the possible advantages of waiting a little longer to purchase a house and paying it off as soon as possible. Now I’d like to share my thoughts on the size and characteristics of an economical house.

A few years ago I heard a story about a man who was planning to retire to New England. He hired the best architect in New York to design his retirement home, but because he wanted to be accepted in the his new hometown, he hired a local contractor to build it. After the contractor reviewed the plans, he brought them back to the man saying that there was a mistake in them. The man took the plans back to the architect, who grudgingly reviewed them before stating emphatically that they were correct. When the man presented the plans to the contractor again, he still insisted that they were incorrect. This time the man demanded that the contractor build the house according to the plans. Reluctantly the contractor agreed, "Well, O. K. but you realize that if I build this house, according to these plans, you’re going to end up with two bathrooms."

As with all good stories, there is a kernel of truth in this gem. When you read or hear about how much the price of the average home is going up remember that part of that increase (and not a small part) is because people expect more features in a house today. Both Janet and I grew up in a three bedroom, one-bath house, without a family room, air conditioning or a garage. Janet and I were not immune to this escalation. We ended up with a four bedroom, two-bath house with a two-and-one-half car garage. (At least we resisted the dubious advantages of a formal living room and, so far, have not added whole house air conditioning.) Many of the homes I see being built today have four or five bedrooms, extensive hallways, huge living-rooms and family-rooms with cathedral ceilings, large entry ways, three-or-more baths, three-(and sometimes four)car garages and full house air conditioning.

If you can afford it, I guess there is nothing wrong with buying such a house. I guess, if you can afford it, there is nothing wrong with building a bonfire with hundred dollar bills. I suspect that there are few people who would derive sufficient pleasure from the act to really burn hundred dollar bills. On the other hand, there seems to be an almost unlimited number of people willing to throw money away on housing space of limited tangible value.

There seem to be two schools of thought on the intrinsic value of an object. One school holds that the value of the object is related to its function. The other school is less concerned with function and more concerned with aesthetics. I, obviously, belong to the first school. To me, the best hammer is the one that drives nails and extracts them the best. If I don’t plan to use it very often, I might even settle for one that doesn’t drive nails or extract them quite so well, if it costs less. I would not spend additional money for a hammer with a mahogany handle and a gold plated head because I don’t think those things would improve its performance. (Since I sometimes misplace it, I might, however, pay a little extra, if they ever develop one that will come when you call.)

I feel the same way about a house. The best house is the house that best performs the functions of a house. For instance, the best kitchen is the kitchen that permits the most efficient preparation of food, storage and access to food and utensils, and facilities for clean-up.

Remember, however, that the human factor (the cook) is part of the efficiency equation. An easy-clean floor that gives the cook leg pains, a windowless kitchen, that is uncomfortably hot, or the lack of space to sit and have a cup of coffee while waiting for a pot to boil, may limit the efficiency of any kitchen. On the other hand, unneeded space, decorative touches that are difficult to clean, and seldom-used appliances not only increase costs but make the cook's job more difficult.

You may get back all, or some, of the money that you invested in aesthetics, if and when you sell your house--but I wouldn’t count on it. Aesthetics is in the eye of the beholder. If the current trend continues, many people may soon consider the best kitchen to be one that contains a small refrigerator, a microwave, and a trash can.

The money spent on functionality, however, will provide you benefits for as long as you own the house and is more likely to increase the value of your home when you go to sell it.

Earlier I used the phrase, "If you can afford it...." Too many people make their buying decisions by asking the question, "Can I afford it?" By "afford" they mean, "Do I have sufficient money, or can I borrow sufficient money, to make the initial purchase or payments?" A much better question to ask is, "Is it worth it?" Just because you can afford something doesn’t mean it makes sense for you to buy it. The cost of house, like a lot of other things, is only the initial cost. When you purchase a house you commit yourself to many additional continuing expenses--property taxes, utilities, insurance, and maintenance. In addition, you make a commitment to clean the house, take care of the yard, and other time consuming activities (unless you are going to pay to have those things done also). The larger and more expensive the house, the bigger commitment in future time and money you are making. The bigger the house, the less time and money you will have to spend on vacations, hobbies, cars, and your children’s education. The bigger the house--and let’s not forget the whole point of this book--the less money you can save and the longer you will have to work to achieve financial independence. Is the extra cost worth the sacrifices you will have to make in other areas?

There are significant costs associated with selling a house. Commissions will be five to ten percent of the selling price. Taxes could eat up another 28 percent, if you don’t buy another house of greater or equal value or use your over 55, onetime, exclusion. You will probably be better off to make your first house purchase be your last, at least until you retire.

This is, in fact, what most people do. The problem is people tend to buy a house based on their perceived space needs for those five or so years from when their oldest child becomes a teenager until he or she leaves home. Although they will be spending 20 or 30 years, or longer, in the house, they select their house base on their space needs for just a few years. It might be more economical to give up your den, move your computer to the living room, or convert part of your basement into a bedroom for those few years. Do you really want to buy and pay to heat a room you don’t need for those other 25 years?  Despite living in a four-bedroom house, our three daughters shared a single bedroom until the oldest became a teenager. With only one daughter left at home, we never used the fourth bedroom as a bedroom and, except for about four years, the third bedroom was a guest room.

Another argument against buying an excessively large house is attachment. If you live in a place long enough it is easy to become attached to it. Everywhere you look you see old couples and widows or widowers living in huge old houses, scrimping on other things so that they don’t have to give up their home. It may make financial sense for them to move on, but it is important for their emotional and mental stability to remain with the familiar, in a place with many happy memories. You very well might end up in the same situation and might want to consider reducing the financial burden of these years by minimizing rather than maximizing the size of the house you purchase.

Summary and Conclusions

1. For most people owning a house is not an investment; it is a cost of living.

    

2. Renting is a financially viable option if it fits your lifestyle.

    

3. Do not rent more apartment than you need.

    

4. Do not buy more house than you need.

    

5. Do not buy a house until you need to.

    

6. Pay off your mortgage as quickly as you can.

    

7. Almost anyone can take advantage of the suggestions above. If you have some special talent or flexibility you might want to consider the following:
   1. Buy a house that needs work and fix it up yourself.
   2. House sit.
   3. Ask a relative or friend to move in and share expenses.
   4. Live with your parents. (Note to my kids: Don’t even think about it.)
   5. Share a dwelling and expenses with an older person. (some localities have organizations to assist in finding "partners".)
   6. Rent a room not an apartment.

    

8. Do determine the un-spent amount of money and make arrangements to save or invest it!

  Go to Index

Chapter #7

Transportation

The second largest expense of your life time could very likely be transportation. For most people this means the costs of owning or leasing a car. Next to marrying an extremely thrifty woman, and paying off our mortgage a quickly as possible, I attribute our saving success to having never made a car payment.

History Section

My attitude toward cars and driving was set at a very early age. I drove for the first time when I was four years old. My Dad and I were home alone. He had been plowing with the tractor and ran out of gas, so he walked to the house for lunch. After lunch he loaded a couple cans of gas on our truck and we drove out to the tractor. This truck had running boards, no doors, and a start button and kill switch instead of a key. After filling the tractor with gas, he pointed the truck toward the barn, and put the truck in low gear. He then slid out and stood on the running board, while I stood on the seat and grabbed the steering wheel. He told me to hit the kill switch when I got to the barn and went back to his plowing.

By the time I was six, I was driving a six-ton truck through the tomato field so others could load and stack it full of hampers of tomatoes. This wasn’t easy. Granted, others would turn the truck around at the end of the field, and Dad would holler directions if I started to drift too far to the left or right. But it required both feet for me to hold in the clutch and if I jerked the truck and toppled the load I was in big trouble. (Later, Janet would say my father was the only man she knew who could swear by intonation.)

In my early teens, we started loading hampers of un-shelled corn on the back of the pick-up truck and driving into the hog pasture and dumping them. This was an extremely stressful situation because on wet or snowy days, stopping in the pasture could easily result in a stuck truck. To make matters worse, the hogs soon learned that the truck carried good things to eat and came charging toward the truck from every corner of the pasture to get their share. I often wondered why my father always made me drive while he rode in the back and dumped the hampers. I finally concluded that subconsciously my father knew this wasn’t the smartest idea he ever had and he wanted to have someone to yell at, if things went wrong. This is a trait he shared with some of my not-so-favorite bosses in later years.

With this background, you may understand why I did not look forward to getting my driver's license with as much anticipation as many of my friends. It meant that I would have to do my share of on-the-road driving as well as the off-the-road driving I was already doing. Despite watching thousands of car commercials, for me driving is merely a method (and not always the best method) of moving people or things from one place to another.

In 28 years we purchased a total of eight cars, three of which we still own. The average age of our cars, including those we still own, is nine years. This average would have been higher; but two cars had to be retired prematurely when they were totaled. In both cases, I was hit from behind while stopped in traffic. Of the eight cars, three were purchased used, two were automatics, and two had air conditioning. One, a diesel, was purchased with an extended warranty. We currently have a 1983 pick-up truck (14 years old), a 1987 Vista (10 years old), and a 1993 Expo (4 years old). For reliability, we have always tried to have one car under five years old.

We prefer cars with manual transmissions. They are inherently more efficient, which allows the purchase of a smaller, less expensive, more fuel efficient engine. Manual transmissions are less likely to need repair and less costly to repair. It’s easier to coast-start a car with a manual transmission. And finally, we felt our children should know how to drive a car with a manual transmission.

We lived in Houston, Texas for three years without an air-conditioned car before we purchased a car with A/C. This is not a practice I would highly recommend, but it is survivable.

When we got back to Pennsylvania, we resisted this luxury until we purchased our last car.

In 1981, just before the government raised the fuel tax on diesel fuel for passenger cars, we purchased a car with a diesel engine. Since this was the first model year for the car we bought, and the technology was new, we purchased an extended warranty for the first and last time. It proved to be a wise decision because the repair costs, for the first six months, exceeded the cost of the policy by a considerable margin.

All of the other cars we purchased used a regular grade of gasoline. High performance cars, requiring premium gasoline are more expensive to operate. We followed the recommended maintenance schedule through-out the warranty period. After the warranty has expired, I have the oil and oil filter changed, the car lubricated, the fluid levels, filters, belts, hoses, spark plugs, and brakes checked once a year when I have the car in for its annual state inspection. I monitor the oil level, coolant level, battery and tire pressure and occasionally perform a second-oil change. Except for routine maintenance, I operate on the principle "If it ain’t broke, don’t fix it." For example, even though I live in Pittsburgh, the pothole capital of the world, I have my alignment checked only if I notice handling problems or excessive tire wear.

In recent years all of the cars we have purchased have had front-wheel drive. With a manual transmission and good all- weather tires on the front wheels, we find that these cars provide adequate traction without snow tires. I do not remember the last time I got stuck in the snow. I remember only two times when Janet got stuck. Once she backed into the ditch at the end of our driveway. The other time she was eight months pregnant and parked on the side street. She tried to walk across the ditch and got stuck in some waist deep snow. Since she wasn’t in a car at the time, this one really doesn’t count. In the storm of ‘93, we were the only members of a church with a congregation of over a 1000 to make it to the service.

Twice, I have had tires fall apart after about five years with plenty of tread left. The rubber apparently deteriorated due to oxidation. If you don’t put much mileage on your car, you might not want to pay for extra-long-life tires. Your tires could fail before you wear them out.

Comments Section

As with houses, I believe that a lot of people spend more on cars than they have to and compound this mistake by using much more debt than is required. Although many people may buy a more expensive car than is necessary for safe, reliable transportation, a more frequent error appears to be rapid turn over. By that I mean they trade in their old car for a new one every two or three years or they lease a new car every few years.

The table below shows the annual cost in today's dollars to have an average priced car bought or leased new or buying the same make and model but 3 years old.  As you can see you can:

1. Cut the cost of owning a car by approximately 50% by keeping it until it 10 years old instead of getting rid of it after 3 years.

    

2. Cut the cost of owning a car by approximately 50% by purchasing 3 year old used cars instead of new cars.

    

3. Save approximately 10% by paying cash instead of making car payments. Note: There is no such thing as a low or no interest car loan. Car companies and dealers have to make a profit to stay in business. They merely adjust the price upward to cover the costs associated with the "deals".

    

4. Leasing a car every 3 years is 5 times more expensive than purchasing a 3 year old car with cash and keeping it until it is 10 years old.

    

5. In the table I use a cost of $30,000 which is the current (2008)average price of a new car. The least expensive new car (2008) is around $10,000. All of the annual costs in the table would be reduces by 67% if the least expensive car were purchased.  This would make the minimum cost $442/year.

    

6. These costs do not include maintenance but maintenance costs would have to average at least $1,200/year more for keeping a car for only 3 years to be more economical. 

 You can do your own calculations by going to Comparing New & Used, with/without Loans vs Leasing Cars and clicking on Lease vs. Loan Calculator

The table below shows the annual saving for the various options and the saving that would accumulate over 20 years if invested. Note that you will actually own a car or two for maybe 60 years of your life. So the actual saving would be 3 to 6 times greater than shown.

If you think about it, a car is only new until it is driven the first time. Then it becomes a used car. Hence the title of this book and this chapter--"Everybody drives a Used Car". Your neighbor drives a used car. Your boss drives a used car. The CEO of the company drives a used car. Billionaires are being driven around in used limousines. Our society, encouraged no doubt, by the auto industry, has placed a stigma on buying a used car. This stigma has become so strong that we don’t refer to them as used cars anymore, we called them, "previously-owned automobiles."

Whatever you call them, used cars can be an inexpensive, reliable form of transportation. So you have a choice. You can follow the multitudes who strive to outdo one another with always newer, always more expensive cars or you can purchase used cars, maybe even moving up a notch or two in quality and extra features, run them into the ground, and laugh all the way to the bank.

My father liked big luxury cars, every six or eight years he bought a two-year old, top of the line, Chrysler. He usually was able to get one that had been "previously-owned" by the local millionaire who bought a new car every two years. With only a high school education and a 60 acre farm, he managed to raise a family, see that his three children went to college, provide for his and his wife’s later years, and drive a big old Chrysler.

I like the story about the rabbi and the priest who lived across the street. They were always trying to outdo one another. If one of them bought something, the other went out and bought a more expensive version. Carrying this concept to the extreme, the priest came home with the most expensive car he could find completely loaded with every option available. The rabbi, unable to outdo his neighbor, bought a car identical in every detail. When the priest saw the rabbi’s car, he put on his finest robes and went out and blessed the car. In response, the rabbi put on his finest garments and went out and ceremoniously cut three inches off the tailpipe of his car.

Before I leave the topic of car buying, one more word of advice to those of you who still feel justified in buying new cars, "Watch out for the options." Just as fast-food restaurants make as much profit on their soft drinks as they do on the rest of the meal, and ice cream stands make as much profit on the sprinkles as they do the cone, car dealers make as much profit on the options as they do on the car. I’m not talking percentage profit, I’m talking dollars to dollars.

If a dealer makes a $1000 profit on a car he can double that if he gets you to add air conditioning and a top-of-the-line sound system. His mark-up on accessories is usually much higher than on the car itself. Did you ever wonder why you can by a room air conditioner for $300 but it can cost over a $1000 for a car unit that is cooling a much smaller space and doesn’t even need a motor?

Before you buy the car with accessories, check out the price of getting add-ons installed at a specialty shop after you get the car. You might be able to save a few dollars.

1. Mileage - $3.00 a gallon and 12,000 miles/year
   1.  20 miles/gallon = $0.15/mile = $1,800/year.
   2.  30 miles/gallon = $0.10/mile = $1,200/year.                                  

    

2. Premium gasoline can cost you $300/year more than Regular Gasoline.

    

3. A less expensive car will reduce your insurance costs.

    

4. Depending on the number of members and the number of work miles vs total miles, car pooling might save you up to $1,400/year. Not count any savings in tolls and parking fees.

    

5. If you have the option of working at home or working 4 days a week instead of 5 you might be able to save a significant portion of the costs in Item 1.

    

6. If you have a 25 mile commute it is costing you $7.50/day for gasoline plus tolls and parking fees. It may be worth your while to consider public transportation.

    

7. If car pooling or public transportation (also walking, biking or kayaking) can eliminate the need for a second car, not only would you save the cost of gasoline ($1,800/year) plus tolls, parking and insurance but also somewhere between $440/year and $6000/year in ownership costs.

    

8. It may be cheaper to rent a vehicle for a vacation (if your worried about the reliability of your older car)or other short duration activities (like hauling Aunt Bertha's Statue) than purchasing a bigger or newer one(read more expensive).

    

9. If you find yourself constantly making short trips, you may be able to save a number of miles every week by a little planning and combining of trips. If you invest your savings, for every two miles you can reduce your weekly mileage,  you will accumulate over $2,500 in 30 years.

    

10. You can save money by performing as much routine maintenance as you feel comfortable with and by not over-maintaining your car.  When it comes to safety considerations, please err on the side of caution, but if your car is still getting good mileage it probably doesn’t need a tune-up. If your tires are wearing evenly and your car doesn’t drift or shimmy, you probably don’t need a front-end alignment.

Summary and Conclusions

1. Keep your cars as long as you possibly can.

    

2. If you must get a loan for your first car, buy one that will allow you to save and pay cash for the next one. 

    

3. Pay cash for your cars.

    

4. Don’t keep more cars than you need.

    

5. Don’t buy a more expensive car than you need / Consider buying used cars.

    

6. Minimize the options you add.

    

7. Consider car pooling, using public or alternate transportation, and working out of your home as much as you can. 

    

8. Plan your trips to reduce total mileage.

    

9. Almost anyone can take advantage of the suggestions above. If you have some special conditions or flexibility you might want to consider the following:
   1. Consider renting a vehicle to cover short-term needs.
   2. Consider performing your own routine maintenance.

    

    

10. Do determine the un-spent amount of money and make arrangements to save or invest it

 Go to Index  

Chapter #8

Utilities and Services

Another large and ever increasing expense category is Utilities and Services. In my budget, this category includes not only basic utilities such as: electricity, gas, water, sewage, and garbage pick-up; but also services: telephone services, cable TV services, computer on-line services, lawn services, diaper services, security services, cleaning services, maid services and even newspapers and magazines. Many of the items in the service category are relatively new, and there are additional ones popping up all the time. We are, after all, living in a service economy.

History Section

When we lived in an apartment, most of our basic utilities were included in the rent and many of today’s services had not been invented. After we bought a house and realized the hit our budget was taking, we began to do what we could to minimize our utility usage.

Since we live in Pennsylvania, one of our biggest utility expenses is heating. We have a gas, hot-air furnace, approaching its 45th birthday. I will replace it with a high-efficiency model when the existing one bites the dust, but there is no economic pay-out in replacing it now.

To reduce our heating bill, we insulated the portion of the attic that wasn’t insulated, added six inches of insulation to the existing three inches in the other parts of the attic, and insulated some of the walls, when we replaced the paneling. We also eventually replaced our single-pane aluminum windows with good-quality energy-efficiency units.

Our biggest savings were a result of turning the heat off in the bedrooms and unused rooms and keeping the thermostat set between 62 and 65 degrees Fahrenheit in the cooler months. In order to be more comfortable we have made a number of small concessions. Although we enjoy sleeping in cooler rooms, we keep the doors to the bathrooms closed so that we have someplace warm to get dressed. We have a couple of small electric-heaters that we use occasionally, when we are doing some sedentary activity that precludes the use of an afghan. Our middle daughter, Emily, had trouble keeping warm at night, so we bought her electric blanket.

We do have a fireplace, which we have used in the spring and fall, when the furnace isn’t running, but only when we can get free firewood. During the winter, we use the fireplace only for special occasions. Since a fireplace draws in so much cold air to replace the combustion air going up the chimney, it actually costs money to use it when the furnace is running.

The house came with insulated drapes that could be drawn across the sliding glass door in the dining room and the picture window in the living room. We close these at night and when we are going to be away to minimize heat loss.

One spring, I turned off the gas to the furnace trying to save the $5-$7 per month it required to keep the pilot light going. Unfortunately, our basement was so damp that I ended up having to replace the thermostat in the fall because of corrosion. This was not a wise decision.

Since your comfort is dependent on the relative humidity as well as the temperature, it is important to try to maintain the moisture level in your house in the winter time. (The drier the air, the more rapidly moisture evaporates from your skin and the colder you feel.) Air holds more moisture when it is warm than when it is cold. In the winter, your furnace and/or fireplace constantly pulls warm moist air out of your house and up your chimney. This air must be replaced with cold dry air from the outside.

We have tried to keep the moisture level up in our house by hanging our laundry in the basement, minimizing the use of kitchen and bathroom exhaust fans, and redirecting the clothes dryer vent to the inside. This last item not only adds moisture to the air but provides warm air to help heat your home. Why not recover as much heat as you can, rather that blowing it outside? You will need to put a filter (an old stocking) on the end of the dryer vent or you will have lint everywhere. If you have air conditioning you should redirect the vent outside when it will be running.

We tried an ultrasonic humidifier, (one of those stupid-husband presents) but it created so much fine dust that we found it unacceptable.

One final word about heating: our house has a minimal number of windows on the west side which is good since the prevailing wind comes from that direction. It has large windows on the south side, protected by overhangs. The overhangs are designed to shade the windows in the summer, when we are trying to keep the house cool, and to not shade the windows in the winter, in order to maximize the solar heat gain on sunny days. These are good features to look for in a house.

In our locale, cooling is less of a concern. We have a two-speed attic fan that we bought at a flea market and I installed on hinges in the doorway between our bedroom and attic. In warm weather we turn on this fan about 10:00 am, open the upstairs windows, and close the door between the upstairs and the downstairs. This keeps the attic from heating up, without drawing warm outside air into the cool downstairs. In the evening, when it starts to cool down, we close the upstairs windows and open the door and the downstairs windows. This pulls the outside air through the entire house, cooling it down. Sometimes the house is cool enough to turn off the fan when we go to bed. Otherwise we let it run until morning, unless one of us wakes up cold.

There are usually a total of about 14 days a year when this system is inadequate (Nights when it doesn’t cool off sufficiently for good sleeping). A few years ago, we purchased a window A/C unit for our bedroom. Since our electricity billing rate is based on maximum draw during the month, I installed the air conditioner so that we can run the electric clothes dryer or the A/C unit, but not both simultaneously.

If I had it to do over, I would have installed the A/C unit in the other upstairs bedroom (The one without the attic fan). The problem is that we can’t run the A/C unit to cool the bedroom and the fan to cool the rest of the house at the same time.

While not enough moisture is a problem in the winter, too much moisture is a problem in the summer. (The wetter the air the slower the moisture evaporates from your skin and the hotter you feel.) Therefore we try to minimize heat and moisture-producing activities in the house in the summer time. We hang the laundry outside more, try to do more cooking outside and try to use the exhaust fans in the kitchen and bathrooms more to remove the heat and moisture. In general, we try to minimize the use of electricity in the summer. Every device that uses electricity generates heat. When you are trying to keep cool, these devices pack a double whammy. Not only do they cost money to operate but they also increase the burden on your cooling system.

On the one or two hottest, most humid, days of the year, we may close up the house and use portable fans to move the cool, dry air downstairs. Our window A/C unit is not large enough to cool the whole house down to shopping mall temperatures (Janet always takes a sweater with her when she goes shopping). However, the small reduction in temperature combined with the effect of the moving, dry air makes a big difference in our comfort level.

Another big energy consumer is hot water. We have lowered the temperature setting on our gas hot-water heater to cut down on heat losses, but the best way to save money and energy is to not waste hot water. Here are a few ways I heard about:

1. Do not drain the bath tub until the water has cooled. (This allows you to recover the heat that would ordinarily go down the drain and put a little humidity into your home at the same time.)
2. Wash your hands with cold, instead of hot water.
3. Do all of the activities that require hot water as close together as you can. (Every time you turn on a faucet and wait for the hot water to warm-up you are wasting several gallons of hot water that has lain in your pipes and cooled off.)

Cooking also can be a significant part of your energy consumption. In the summer, we like to cook outdoors over a wood fire. We do have a microwave oven that we use mostly to heat left-overs and a gas stove with an electric oven. Janet uses these appliances efficiently. For example, if she will be using the oven to prepare a meal, she will try to plan the meal to cook everything in the oven or use the pre-heated oven to bake a dessert, etc.

Another category of energy consumption is all of those electrical appliances. The list is almost endless. Just off the top of my head, in addition to those I have already mentioned, we have: electric lights, two refrigerators, a freezer, several power tools, an electric treadmill, two computers, three color and one B/W TV, two stereo systems, a washer, an electric clothes dryer, a dehumidifier, a sewing machine, a toaster, a coffee maker, a coffee warmer, an electric fry pan, an electric grill/waffle iron, a popcorn maker, a clothes iron, a hair dryer, a curling iron, a water pump, several radio’s, several electric clocks, several sets of Christmas tree lights, an electric train, a battery charger, two VCR’s, two garage door openers, an electric weed eater, a heating pad, a vacuum cleaner, and an electric tooth brush. I’ll bet your list is almost as long.

We don’t have an automatic dishwasher, a trash compactor, a garbage disposal, a big screen TV, an answering machine, an electric can opener, an electric pencil sharpener, an electric charcoal starter, an electric shaver or, that all time favorite of the conspicuous consumer, a salad shooter.

We, of course, attempt to turn-off all of the appliances when we are not using them. Sometimes turning-off an appliance isn’t enough, many of them, particularly the TV’s, stereos, computers, etc. have a power draw even when they are off. These we have to unplug when they are not going to be used for an extended period of time.

We located our freezer in the basement on the principle that it was cooler and there would be less heat gain from the surroundings.

In a related area, we tried to minimize the purchase of items that require batteries. For those devices that require batteries we use rechargeable batteries, transformers and inverters so that these items can be run off house current or the car battery.

As far as the other utilities go, we have our own well, but pay a flat rate for municipal sewage and garbage pick-up. Now that our children are grown I should investigate if our sewage bill would be cheaper if I installed a water meter. I should also investigate if it would be cheaper to use my truck to transport my own trash to the dump or recycling center.

Over the years we have utilized very few of the services that have become available. We have the basic telephone service, subscribe to two magazines (Newsweek and Consumer’s Report) and the Sunday newspaper, and a computer on-line service.

Comments Section

There have been tons of books and articles written on how to reduce utility and service costs. I do not intend to go into a lot of detail in this section. Below are some of the highlights and some ideas that I think have been under reported.

Depending on where you live, heating or cooling your house is very likely to be your biggest utility and service expense. For us heating and cooling runs about $1000 per year (about one third of our utility costs).

This expense is directly proportional to the size of your house. In general, the cost of heating/cooling a 3000-square-foot house will be twice as much as heating/cooling a 1500 square foot house. An individual with a house twice as big as ours would have to pay $2000 a year to heat and cool his house. If I invest the difference, I could accumulate $182,000 in 30 years. It is important to remember that when selecting the size house you wish to purchase.

Some of the other features you may want to consider when purchasing a house are: the amount of insulation, an attic fan, the efficiency of the furnace or A/C unit, the quality of the windows and doors, zone heating/cooling, awnings or overhangs on south-facing windows, and minimal windows facing the prevalent wind. A reduction of ten percent in heating/cooling cost could free up $100 to $200 a year, resulting in accumulated wealth of $18,200 to $36,400 in 30 years.

It is important to note, if you have to replace items related to the utilities because they are worn out, etc., it probably makes sense to replace them with the most energy-efficient ones you can find. The incremental cost should be minimal. But it has been my experience that it rarely makes economic sense to replace a perfectly good item just to achieve an energy savings.

In order to save money, when paying extra for an energy saving device it must save you enough to pay for the item and the loss of income had you invested the price of the item. A good rule of thumb would be to not spend over $20 for an item, for every dollar-per-year it will save you in utility costs. For example, for it to make sense to purchase a new efficient furnace based on a ten percent energy savings ($100/ year) I would have to spend less than $2000 to purchase and install the new furnace.

Along these same lines, I recently saw an ad for a kit to insulate my hot-water tank. Since my hot-water heater and furnace both run on gas and, for most of the year, any heat loss from my hot water tank is heat that my furnace does not have to supply, there is really very little incentive for me to make such a purchase.

If you were playing close attention, you are probably saying: "The dufus, a little bit ago he was telling us to wash our hands in cold water to save money and now he just got though telling us it doesn’t." The fact is there is no cost to washing you hands in cold water but there is a cost associated with purchasing a hot-water-tank insulation kit, which must be justified. Your furnace is slightly more efficient in providing heat than your hot water heater and in the summer the heat loss will not be balanced by a savings in heating costs. So there would be a slight savings by reducing heat loss from your hot water system--enough to justify washing your hands in cold water but not enough to justify purchasing an insulation kit.

It also might pay you to verify that an old appliance is not worth repairing before buying a new one. Recently our 25-year-old dryer died and we got a used one for free by answering an ad. The seller expressed concern that the dryer was on it last legs, which was why she was giving it away for free. We brought it home and installed it, and it worked perfectly. When I put their discharge chute in the trash, I discovered it was plugged with about ten-pounds of lint. I am positive that this was the cause of the dryer’s poor performance. Who knows how long the previous owners tolerated a dryer that took too long to dry things, and wasted electricity, before they went and spent a lot of money to buy a new one. So always Make sure your dyer vent isn’t plugged.

The simplest, most effective way to reduce utility costs is to turn off the heating/cooling in rooms that are not being used. Tape over air vents and returns and closing of doors will perform admirably.

Be very careful about turning off the heat in a room if you live where the temperature drops below freezing and there is a possibility that there are water pipes in the floor, walls, or ceiling of the room. You don’t want them to freeze and burst.

There will be some heat gain or loss from or to such a room but if you close off a 10 by 15 foot room (150 square feet) in a 1500 square foot house you ought be able to save around ten percent of heating/cooling costs. If you are building or renovating a house you may want to consider insulation in some interior walls, floors or ceilings to improve the effectiveness of this technique.

Another effective method is to set your thermostat down in the winter and up in the summer. With outside temperatures of 20 degrees in the winter and 100 degrees in the summer you will save about two percent in heating costs and three percent in cooling cost for every degree below or above 70 degrees you set your thermostat. As I mentioned in the previous section, you can increase your comfort level by adjusting the amount of moisture in the air.

Ceiling fans make sense if your predominate cost is cooling. They allow you to inch your thermostat up another degree or two. In cold climates, unless you have very high ceilings, the cooling effect of the moving air will result in a higher thermostat setting and negate the savings of trying to move the hot air from the ceiling down to the floor.

If you live in a temperate climate, I strongly suggest the installation of an attic fan. This type of fan can significantly reduce the use of air conditioning and may eliminate the need for it altogether.

Most of the time, it actually costs money to operate a fireplace. The heat required to warm up the outside air that is drawn into the house to replace the combustion air that goes up the chimney exceeds the amount of heat produced by the fireplace. A fireplace can be used effectively in the spring and fall instead of running your furnace. When your fireplace is not being used, a lot of heat can escape up your chimney. Make sure you close the damper and consider purchasing doors to seal off the fireplace opening when it is not in use.

A friend came up with an interesting method of effectively using a fireplace. He built an addition on his house that he uses mostly for entertaining. Because he sealed the room off from the rest of the house with a set of double doors, and the fireplace is the only source of heat, it now becomes economical to use the fire place to heat that room all the time.

Finding ways to save electrical costs may not be as difficult as you think. Here are a few suggestions.

Make sure you have a billing plan that minimizes your cost of electricity. We qualify for a load meter, which means that we pay four-cents-per-kwh for all usage over 750 kwh per month instead of nine-cents-per-kwh. My sister-in-law’s hot water tank is on a separate meter and a timer that prohibits operation during peak hours. She pays much less for this electricity. It might be a good idea to check out the alternatives that your power company offers. While you’re at it, if you are on a budget plan for gas or electricity, you might want to review if you would be better off putting the money in the bank and collecting interest and paying the bills as they come due, rather than giving the money to the power company ahead of time.

Make sure that you use the lowest wattage device you can and turn off all devices when not in use. Some devices like stereos, TV’s, and computers should be unplugged when they are not going to be used for an extended period of time, because they continue to use electricity even when they are not on. For example, my printer draws two watts when it is turned off. Here are some ways to save five dollars or more per year in energy costs:

1. Turn off a 15-watt night-light during the day.
1. Watch an hour-and-a-half less TV every day.
2. Replace a 100-watt bulb that burns six hours per day, with a 75-watt bulb.
3. Line-dry two clothes-dryer loads per month.
4. Air-dry your hair three times a week instead of using a hair dryer.
5. Drop off your gas and electricity bills in person.
6. Wash your hands in cold water rather than cold hot water twice a day.
7. Let your bath water cool to room temperature before draining, three times-a-week during cool weather in order to recover the heat.
8. Buy:

   a) A multiple voltage adapter to plug into your car's cigarette lighter.

   b) An AC to DC converter to use at home.

   c) A battery charger.

   d) Rechargeable batteries to run your battery powered devices and toys.

9. Plan your activities to minimize wasted energy.
1. Use your warm oven for baking to save a pre-heating.
2. Let your ironing build up a little to minimize energy wasted in heating up the iron.
3. Let food cool before placing it in the refrigerator or freezer.

You may not be able to or want to take advantage of all of the suggestions listed above. On the other hand, you may have more than one 100-watt light-bulb you can change, or more than two loads of clothes a month to dry, etc. All this may seem like small change, but if you could save $100 (ten percent of a $1000 a year heating bill) by closing off a room, $50 (2-3 percent) by adjusting your thermostat by two degrees, and another $50 by implementing some of my suggestions you would have an extra $200 a year to save and invest. At the end of 30 years you would have an extra $36,400.

Today we live in a service economy. Everybody, and his brother, has some type of service to offer to make our lives easier, better, and more expensive. It is quite easy to spend several thousand dollars a year on services.

Our phone bill runs a $1000 a year. We don’t have call waiting ($24/year), call forwarding ($24/year), speed dialing ($24/year), three way calling($24/year), voice mail ($24/year), return call ($42/year), call blocking ($60/year), caller ID ($72/year), a beeper($100/year), or a cellular phone($240/year).

In the past year, we did subscribe to an on-line computer service ($240/year). Primarily to keep in touch with our two daughters at college via e-mail and reduce our phone bill.

We don’t have cable TV (a savings of $250 per year). We do, however, have a VCR. We can rent 100 movies and view as many videos from the library as we want and still come out money ahead compared to cable.

My wife has always cut my hair and most of the time she does the same for herself and our daughters. At $10 to $15 a pop this can easily add up to $100 a year in savings.

Janet does our laundry and we try to avoid acquiring garments that require dry cleaning. We used cloth diapers when the children were small (except on trips) and avoided the cost of disposal diapers or a diaper service.

I take care of my own lawn, but I am not into the perfection thing. Lawns are for playing on. They are not to be picture perfect, especially if it requires costly, environmentally-dubious sprays and fertilizers. I have acquaintances who have hired someone to mow their yards ($250/year), or have bought riding-mowers for postage-stamp yards, so that they have time to workout at the gym. The logic of this escapes me.

As far as home security systems go, they need to be commensurate with the level of crime in the neighborhood in which you live and your attractiveness as a target. If you are reading this, I will have upgraded my system in consideration of my new found fame and fortune.

Another of type service, that almost all of us use (or think we do) could be labeled information services -- magazines, newspapers, book clubs, record/tape/CD Clubs, etc. Many of these services are rarely used and could be discontinued. Many are available for free at your local library or could be shared with a neighbor or relative. Are you spending money on newspapers and magazines you don’t read; telephone services, you don’t use; books, you could get a the library; or other services, you could do yourself? I’ll bet that many of you could save a couple-of-hundred dollars a year fairly easily.

Summary and Conclusions

1. Consider future utility costs in purchasing your house.

    

2. Consider utility costs in making initial and replacement purchases. <

    

   LI>Consider no and low cost methods to reduce utility costs.

    

3. Make sure that the savings in utilities justifies any purchase made solely for the purpose of reducing utility costs.

    

4. Consider turning the heating/cooling off in infrequently used rooms.

    

5. Set your thermostat to the lowest comfortable setting in the winter and the highest comfortable level in the summer.

    

6. Consider ceiling fans if you live in a warm climate

    

7. Consider an attic fan if you live in a cooler climate.

    

8. Operate your fireplace only when your furnace isn’t running.

    

9. Close the damper and seal off you fireplace when it is not in use.

    

10. Verify that you are using the most economical payment plan for gas and electricity.

     

11. Minimize your energy usage.

     

12. Critically review all the services to which you subscribe and eliminate any which are unnecessary.

     

13. Make effective use of your local library.

     

14. Determine the un-spent amount of money and make arrangements to save or invest it

 Go to Index  

Chapter #9

Food

Another large expense category is food. In our budget, this category includes not only food but anything that you might buy at the supermarket.

History Section

Shortly after we bought our first house, we bought a freezer and canning supplies. Not only did this allow us to save by putting-up the food we grew ourselves, but it also permitted us to take advantage of seasonal pricing, sales, and to reduce the number of trips to the supermarket.

Janet is an excellent shopper. She makes very effective use of comparison shopping and coupons. She buys non-perishable items (paper products, soap, etc.) and even some long shelf-life food only when they are on sale. She hardly ever buys convenience foods, checks out the dented can and damaged good bins for bargains, and will buy day-old bread and dated goods if she can use them immediately.

Janet nursed our children and made almost all of their baby food. Later on, we never required our children to eat everything, but we did not fix special meals for them. They always ate what we were having.

For the last 20 years or so we have had a 2800 square-foot garden. About ten years ago, I built a small 48 square-foot greenhouse to start all of my own vegetables and flowers.

I do some hunting and fishing. Maybe one year out of three, I contribute 50-75 pounds of venison to the freezer. (I need to work more on the shooting and catching.)

When my former employer stopped subsidizing the company cafeteria and the cost of lunch jump from two to four dollars, I started packing my lunch.

We enjoy eating out but try to minimize it. Even when we are on vacation, we take along a cooler and make our own meals once or twice a day.

Comments Section

The easiest way to save money in your food budget is to be a smart shopper.

1. Know what things cost so that you can determine when a sale is really a sale.

   My wife is amazing. She knows the price of everything. Whenever she sends me to the store (which isn’t very often as I tend to add things to her list) she can tell me the upper limit to spend on every item on the list. If you can’t remember what things cost, start a list to take with you and update it every time you go shopping. It is important to determine which partner is the better shopper and to let that partner do the bulk of the shopping.

    

2. Take advantage of sales. Stock-up on non-perishable items and long shelf-life items. Paper products, soaps, canned goods, frozen foods and such should be purchased only when they are on sale.

    

3. Take advantage of seasonal pricing. You are going to pay a lot more for things that are out of season or just coming into season. You may pay double or triple for the first sweet corn or strawberries. Buy what is in season.

    

4. Take advantage of coupons and rebates. Personally, I find this to be a pain in the neck. I wish that this sales gimmick would go the way of green stamps. Theoretically, if this practice was discontinued, the cost savings could be passed on to us in the form of lower prices. But until then, there are substantial savings to be earned.

    

5. Take advantage of dented cans. Many stores have dented cans and damaged packages at greatly reduced prices. If the integrity of the package has not been violated, these can be terrific bargains.

    

6. Take advantage of expiration dates. Many stores reduce the price of items as they approach their expiration date. If used shortly after they are purchased, there is absolutely nothing wrong with these items and they can result in substantial savings.

    

7. Buy in bulk and stay away from convenience foods. 

   A convenience food is any item that is completely or partially prepared, or packaged in such a manner as to eliminate some effort on your part. I am convinced that for many people the single biggest, unnecessary drain on their food budget is the use of convenience foods. Two prime examples are single serving size bags of potato chips and cans of ice tea. In single-serving-size bags, potato chips cost around $9.00 a pound. That’s twice as much per pound as you’d pay for a good steak. You can buy three one pound bags of potato chips or 50 pounds of potatoes for under $9.00. If you buy a can of Ice tea, you are probably paying ten times as much as it would cost you to make it yourself. Maybe the previous two examples aren’t your cup (or should I say can) of tea, but, if you look closely, I think you’ll find several regularly purchase items that would be much cheaper if you made them from scratch, or re-packaged them, yourself. Other items that fall into this category include macaroni & cheese, snack-meals, frozen dinners, cakes, pies, candy, chips, and pretzels.

    

8. Remember, it doesn’t pay to buy things that you or your family doesn’t like. Regardless of how cheap they are there is no savings if they just go to waste.

How you raise your children is a very personal decision, but you can spend a fortune on formula and baby food. Janet says that breast feeding is healthier, more convenient, and, of course, cheaper. Commercial baby food can be expensive, but it is very easy to make your own. Just make sure you cook it well, do not salt or season it, and smash it with a fork.

Baby juice is another big rip-off. We used regular fruit juices (not fruit drinks that are not 100 percent fruit juice) and strained the orange juice when the kids were very young.

Many of our friends had children who became very picky eaters. This resulted in extra work, and costs, when two or more different meals had to be prepared. We insisted that our children eat whatever we were serving. They didn’t have to eat everything. If they didn’t like the meat, they could fill up on potatoes.

If you take the cost of your time into account, even at minimum wage, having your own garden will not pay. But if you enjoy gardening as a hobby, or want to have the best tasting vegetables picked at the peak of perfection, then a garden can put a sizable dent in the amount you spend on food.

I spend about $50 a year on seeds and fertilizer and about another $50 a year on depreciation of my garden-tiller, electricity to heat my greenhouse, and other miscellaneous supplies. I’ve never determined the total value of the food the garden produces, but in a typical year we get:

1. All the fresh asparagus we can eat for two months
2. 10-15 dozen ears of sweet corn
3. All the fresh strawberries we can eat for a month plus a few pies and one or two batches of jam
4. All the fresh spinach we can eat for a month
5. All the fresh lettuce we can eat for the summer
6. Enough broccoli for the entire year
7. All the fresh cabbage we can eat for about three months
8. Enough onions for the entire year
9. All the fresh snow peas we can eat for a month
10. About three months worth of carrots and beets
11. Enough wax beans for the entire year
12. Enough green beans for the entire year
13. Enough tomatoes to eat fresh for about three months and all of our tomato, chili, and spaghetti sauce and ketchup for the entire year
14. All the fresh peppers we can eat for two months plus enough for the sauces
15. All the fresh cucumbers we can eat for two months plus two or three batches of pickles

When I say we get all fresh food we can eat, I mean we have them at least two or three times a week when they are in season. Also, we’ll make a meal of creamed asparagus on toast, or strawberry shortcake, or cream of broccoli soup, when they are in season. Without pricing out the individual items listed above, I think it is fair to say we average $30 worth of each item for a total of at least $450 a year. Subtracting the $100 in costs, we save approximately $350 dollars a year on our food budget.

When my daughters were younger, in addition to the vegetables, we planted Indian corn, pumpkins, and gourds. They were responsible for these and were permitted to sell them to the neighbors. What they didn’t sell, we sold at church, giving the proceeds to the charity. Several years we were able to donate close to a hundred dollars.

I also have a 30-foot row of red raspberries, 100-foot rows of blueberries and concord grapes, and several apple and filbert trees. This year I got ten quarts of red raspberries. At $3.50 a pint that’s $70 worth of berries. Since I don’t spray, the apples aren’t too good, but we usually get enough to make all the apple sauce and apple butter we can use. The filberts and blueberries don’t perform too well but some years we get enough berries to make jams and pies, and some years we get enough filberts for our own use and to give some away as gifts. We get more than enough grapes for pies and jam.

Some crops provide more than just food. The grapes make an excellent summer privacy screen. Last year I used about half the grape vine trimmings to make and sell $60 worth of wreaths to the local florist shops. Another way to make a little cash is to sell the corn shocks, at two dollars per dozen, for Halloween decorations.

In order to make sure we get enough for our own use, I always plant more than we need. If a crop does really well, we end up giving a lot away. This year, for example the beans did very well and we ended up giving almost two-thirds of them away.

You do need to be careful, though. I love the story about the woman who went to visit her neighbor. She found him sitting on his front porch next to a basket of zucchini. They chatted a while and he offered her a zucchini. She looked through the basket and selected one. Seeing that she had selected a smallish one he said, "Ah, take two I have plenty." When she selected the second, he told her to take a third. Finally he said "Take as many as you want." So she put them all back.

In addition to vegetables, I start a number of flowers from seed in my greenhouse, thus saving the cost of buying plants. I built the greenhouse out of a couple sheets of polycarbonate and plywood. Since I only use it about two months out of the year, I take it apart and store it in my garage when it is not being used. I lined the bottom with Styrofoam and use a little electric heater for temperature control.

If you enjoy gardening, love fresh vegetables, or just would like to save a few dollars, I strongly suggest planting a garden. Almost everyone has room for a small garden. We had one in our first apartment, right next to our patio.

Many communities have places where you can rent a plot. My brother-in-law, who lives just outside Philadelphia, rents a 900 square-foot plot for ten dollars a year. The organization plows the field in the spring and provides him with ten dollars worth of seeds.

For most of us hunting and fishing is not an economical way to put food on the table. The cost of licenses, gear, travel and processing far exceeds the value of the food produced. If you enjoy hunting and fishing you are going to have to attribute the costs associated with them as an entertainment expense.

If you are going to hunt and fish anyhow, I do have a few suggestions:

1. Take your kids fishing for pan fish. Pan fish can be a pain to clean but your kids probably don’t need a license and will enjoy catching their own dinner. I learned a valuable lesson in perspective, the first time I took my kids fishing. They caught a number of sunfish that I threw back because they were too small. I was telling the kids that when I was a kid I used to catch sunnies that were as big as my hand and these didn’t come close. Then I noticed that the fish I was throwing back were as big as their hands.
2. Purists will look upon you with disdain, but if the big ones aren’t biting, spend an hour or so to take home a mess of pan fish. They are great tasting, if bony, and at least you’ll have something to show for your efforts.
3. For better tasting meat, remove the skin of the animal as soon as possible and remove or have all the bones removed when the meat is butchered. You will be amazed at how much better your meat will taste.
4. Don’t be afraid to try butchering your own animal. If I can do it, you can too. I just read a book and did it. If I couldn’t figure out how to make a particular cut, I cut the meat off the bone and ground it up for hamburger.

If you want to save some real money and you are in the habit of buying lunch, snacks and/or soft drinks at work, packing your own can be a gold mine. During my last year at work, a small lunch in the company cafeteria ran around four dollars. I figured could pack my own for less than dollar for a savings of $750 a year. Invested, these savings would accumulate to $137,000 in 30 years. If both spouses pack, the accumulation would double to $274,000. Many companies now supply refrigerators and microwaves so you are not even limited to sandwiches anymore.

If you frequently buy candy bars, chips and/or soft drinks, you might be able to accumulate a significant fraction of the amounts indicated above by bringing snacks and drinks from home. On the other hand most school lunches are heavily subsidized so I doubt that you can save very much by packing lunches for your children.

It sure is a lot of fun to eat out or to order out for food, but it can be very expensive. Here a few suggestions to reduce the money you spend in this manner:

1. Take your own drinks or drink water. At some places, the soft drinks cost as much as 25 percent of the meal and alcoholic drinks can be even more.
2. If you like to eat out, go out for lunch or breakfast. It will be much, much cheaper than going out for dinner. My wife and I frequent a restaurant where you can get an egg, two strips of bacon, hash browns and two slices of toast for $1.90.
3. Put your own toppings on your pizza after you get it. I bought a stick of pepperoni and froze it in individual packages with just enough for one pizza. A minute or two in the microwave and you’ll never know the difference.
4. Take a cooler along on vacation and buy enough food every other day to make one or two meals every day. We really enjoy having breakfast in our hotel room and I can’t think of anything better than a picnic lunch in Yellowstone or the Grand Canyon.
5. When traveling with our children, we would order one or two fewer meals than there were people and split them up. If that wasn’t enough we might add an appetizer. We found it cheaper than ordering children’s meals.
6. I have heard that people even sneak their own snacks into the movies and ball games.
7. I always need a snack to get to sleep. When I traveled on business, I took along a jar of peanuts. I found them to be a compact and satisfying way to avoid room service or hitting the vending machines late at night.
8. Take home what you don’t eat. The restaurant is going to throw it out. At least, I certainly hope they are! You might as well save a few bucks and enjoy a second meal at home. You can even extend this principle to include those little condiment packages which are great for packed lunches and plastic utensils and straws that can be washed and re-used for picnics, etc.

A substantial portion of our food budget goes for non-food items that can be purchased at the supermarket--things such as toilet paper, paper napkins, aluminum foil, over-the-counter medicine, cleaning products, grooming products, etc. Many of the suggestions for shopping for food apply to these items as well. Here are a few additional tips.

1. Did you ever notice that on TV commercials, they always use a whole handful of shaving cream and an inch-and-a-half of tooth paste? Do you think that they are subtly trying to influence you into using more of their product than you actually need? I do! It’s more profits for them and less savings for you. I find that a quarter inch of toothpaste and a nickel sized dollop of shaving cream are completely satisfactory. If you can save a penny a day on each product by using the appropriate amount of shaving cream, toothpaste, shampoo, conditioner, soft soap, and mouth wash, you could save over $20 a year for each member of your family. Any product you use everyday or almost everyday should be suspect, from dishwashing detergent to laundry products. The recommended amounts should be a starting point. Gradually reduce the amount until you find the minimum that provides satisfactory performance.
2. Companies spend a lot of advertising dollars trying to convince you to pay a premium for their product. A majority of the time the only difference between their product and a competitor’s is the label. If the ingredients are the same, why pay more for the name? It’s quite possible the product was manufactured by the same company and sold to another company to base load their factory and participate in the low-end market. I believe I am correct in stating that there are only three companies that manufacture all of the aspirin sold in the United States, but there are certainly many more than three brands of aspirin. If you like the sentiment and the picture and the quality of the paper, does it really matter whose name is on the back of the greeting card?
3. Many advertisements attempt to prey on our fears, or create new ones--fears of offending others, fears of non-acceptance or not fitting in, fears of illness, to name a few. The list of products introduced over the last few decades to combat these fears is astounding. If you watch TV, you would swear the male-pattern baldness, diarrhea, and heartburn are the biggest problems facing society today. I don’t question that most of these products address real concerns for some people, some of the time. What bothers me is that in an attempt to sell their products and make more profits, these companies encourage people to use their product when they don’t need them or to use them more often than necessary. Is it really healthy to:

1. Slather chemicals all over your body to prevent sunburn or a possible mosquito bite every time you might be exposed?
2. Stop stomach acid production before every meal?
3. Use an anti-bacterial soap every time we bathe, killing off the beneficial, as well as, the bad bacteria, and possibly developing resistant strains of bad bacteria that are more difficult to kill in the process?
4. Does everybody in America have bad breath, body odor, and smelly feet to the extent that they need to treated on a daily or more frequent basis? All I am saying is, don’t let these advertisements stampede you into buying products you don’t need and that might jeopardize your health.

Substitution and recycling are time honored ways of saving money. Here are a few methods that we use:

1. Paper Napkins can serve many of the same uses as paper towels and they can be cheaper.
2. Lunch bags and sandwich bags can be recycled. Plastic silverware, straws, water bottles and aluminum foil can be washed and reused.
3. Many margarine, cottage cheese, etc. containers can be used as freezer boxes.
4. Small jars can be used for jam jars, provided you cover the jam with paraffin.
5. Cans or small jars can be used to organize the flotsam and jetsam on your workbench or craft area.
6. Used computer paper can be reused to print drafts or as note paper.
7. Outdated business cards are excellent for messages or flash cards.
8. Six bricks and an old oven rack makes an excellent wood-fired barbecue, eliminating the need for an expensive grill, charcoal and charcoal lighter. A small concrete slab is an optional improvement.
9. Newspaper is an excellent fire-starter and garden mulch.
10. Newspaper logs can be burnt in your fireplace.
11. Paper grocery bags make good hand-decorated wrapping paper and book covers.
12. Old cards make good gift tags
13. You can get at least two cups of tea from a single tea bag.
14. Sun tea saves the cost of boiling water.
15. Composted garbage makes great potting soil.
16. Many times general cleansers can be used in place of specialized, possibly toxic, expensive cleansers.
17. Water from a dehumidifier is a good substitute for de-mineralized water.

In many of the other budget categories it is fairly easy to keep records. They are usually paid only once a month, and often by check, so you just have to look at a few checks or bills to determine what your spending is.

Food purchases are often weekly or bi-weekly and often in cash, making it more difficult to track. The simplest, easiest way to keep track of these expenditures is to use the method my mother-in law used. She had an envelope for each budget category. Each payday she would put the budgeted amount in each envelope. Every time she made a purchase she would pay for it from the appropriate envelope. In this manner she always knew how she was doing without keeping detailed records. If you use this method, you might want to set your food budget slightly higher than you anticipate spending, let an extra $50 or hundred dollars accumulate to take advantages of bargains, and then transfer any excess to savings at the end of the month.

Summary and Conclusions

1. Comparison shop.
1. Take advantages of sales and stock-up.
2. Buy what is in season.
3. Take advantage of coupons and rebates.
4. Take time to check out the dented cans and damaged packaging.
5. Check out items approaching their expiration date.
6. Buy in Bulk. 
7. Minimize or eliminate the purchase of convenience foods.
8. Avoid purchasing things you or your family doesn’t like or use.
9. Consider breast feeding and making your own baby food.
10. Plant a garden.
11. Pack your lunch and snacks.
12. Minimize dining and ordering out.
13. Avoid using more of a product than is necessary.
14. Avoid paying a premium for brand name products.
15. Avoid being stampeded into buying products you don’t need.
16. Substitute and recycle materials to take advantages of savings.
17. Track what you are spending on food.
18. Determine the un-spent amount of money and make arrangements to save or invest it!

  Go to Index  

Chapter #10

Insurance

Life is a gamble. Insurance is a method you can use to reduce your risk. For example, when you buy life insurance you are betting that you are going to die, and the insurance company is betting that you are going to live long enough to make a profit on your policy. In reality, most of us hope they win.

There are many types of insurance you need to consider to provide for your family and protect your assets. Life, health, disability, home, and automobile insurance probably head the list. While it is important to buy the most economical insurance you can, it is also important to be adequately insured. Failure to have adequate insurance can seriously deplete your accumulated wealth if a disaster occurs.

History Section

The primary, and in my opinion, the only purpose of life insurance is to provide income for the family should a wage earner die. Therefore, the only type of life insurance we considered was term life insurance for the major bread winner. I purchased approximately half of it though work and half through professional organizations that I belong to. We didn’t purchase all my life insurance through my employer’s plan because I wanted to have some insurance if I became un-insurable and/or left the company.

Term life insurance is least expensive type, especially when you are young. Most people will do better if they purchase term life insurance and invest the difference in cost between term and any other form of life insurance. We decreased the amount of life insurance as our accumulated wealth increased, our vested pension benefits increased, and money was set aside for our children’s education. If Janet had contributed a sizable portion of our income, we would have bought term life insurance for her also.

Until I retired, we had our health insurance through the company where I worked. We stayed with the traditional plan despite pressure to go with an HMO. One of the biggest hassles I had when I retired was finding economical health insurance. If you plan to retire early, this is one area you should investigate thoroughly ahead of time. You need to shop around for the best deal and remember that you and your family must qualify for the most economical plans, and that you may have to change plans if you move.

About the only way to save any money is to take a large deductible. My current plan has $1000 deductible. This means that I will have to pay the first $1000 for each member of my family. If I had taken the $250 deductible plan I would have had to pay an additional $1000 per year in premiums and been responsible for only the first $250. To pay an additional $1000 a year for an additional $2250 worth of coverage seemed a bit excessive. In years when each of us medical bills of $250 dollars or less, I save a $1000. In years when one of us has bills of over $1000 I’ll save $250. If all three of us would have medical bills over $1000 in the same year it will cost me an extra $1250.

We had purchased disability insurance to provide income should I become disabled and be unable to earn a living, but discontinued it when I retired.

We have insurance on our house and contents that we review and update every few years.

We, by law, have to have automobile insurance. I carry over ten times the state mandated minimum liability insurance. I start out with $500 dollar deductibles on both collision and comprehensive. When the value of the car drops below approximately two thousand dollars I discontinue them.

Comments Section

The major purpose of life insurance is to provide income to the rest of the family should the insured die. The amount of life insurance you need will vary considerably throughout your life. A young couple whom both have decent potential earning power but no children or any major debts, may decide they don’t need any life insurance. (If the couple has a large debt load from their education, a mortgage, etc. they may want to consider sufficient insurance to cover the debt.)

A family, with young children to rear and little savings, needs to have the most life insurance. As the family accumulates wealth for the children’s education and the parent’s retirement, the need for life insurance is reduced.

The cheapest, simplest form of life insurance is called term insurance. You pay a monthly, semi-annual, or annual premium and if you die during that period of time the company pays your beneficiary the amount you have contracted for. These policies are usually guaranteed renewable, but as you get older the premiums will increase or the amount of insurance will decrease. This probably works to your advantage because it gives you the cheapest insurance when you are young and need it the most.

All other forms of life insurance, that I know of, combine life insurance with some sort of investment strategy. As with most tools designed to perform multiple functions, they are not as effective as a single purpose tool. As life insurance, they are expensive, as investments, they provide a poor rate-of-return. You would be well advised to purchase term insurance to cover you life insurance needs and invest the differential savings yourself.

How much life insurance do you need? Ideally you would like it to generate an income equivalent to the amount that the insured would have provided, but few of us can afford that amount. At a minimum, you should have enough insurance to allow the surviving spouse to prepare and enter the job market or to provide a livable income, when combined with the spouse’s income.

Every few years you will need to re-evaluate your life insurance requirements. Many factors effect the amount of life insurance you should have.

If you have a large increase in debt you may want to increase your life insurance so that your heirs will not be burdened with the debt. Sometimes lenders include life insurance to cover your debt in the paper work associated with the loan and the cost for this insurance will be in your loan payment. In this case you will not have to purchase additional insurance.

If the size of your family increases you may want to increase your life insurance to provide for their care and education. As your income from investments, vested savings and pension plans grow you may be able to reduce your life insurance.

Once the cost of rearing your children and educating them is past, you may want to reduce your life insurance.

One thing to remember is that you can almost always reduce the amount of life insurance you carry; but, if you develop heath problems, you may not qualify for additional insurance.

Please review your life insurance situation, get the cost of term insurance for any other policies you have or are considering and compare the value of the these policies at retirement to the value you would have at retirement if you bought term insurance and invested the difference. You can use the Calculator at Repetitive Future Wealth and Income to determine the future value of your savings. If you decide to switch make sure you purchase the replacement insurance, and are accepted, before you cash out an existing policy.

Health insurance is an extremely complicated issue. Variations in coverage between polices, in quality of service received, and in policy costs that are based on age and subject to change, make it extremely difficult to compare apples to apples.  If both partners have health benefits and you have options make sure you are not paying for more coverage than you need. (If your spouse is covered by their own plan don’t include him/her in your plan.)

If you have, or know you are going to have, uncovered medical expenses and do not itemize deductions for your income tax, take advantage of a health care spending account. 

If you elect a traditional medical plan, as opposed to an HMO, check out how much additional insurance you actually get by choosing a low deductible and how much extra it costs. I think you will find, as I did, that the extra coverage is not cost effective.

I would be extremely cautious when considering any add-on health-insurance policies for a specific disease or limited benefits. The ones I have seen seemed to be of minimal value.

Probably the only thing worst than dying without adequate life insurance would be becoming permanently disability without any disability insurance. Not only do these individuals lose their ability to produce income but they continue to generate expenses. In many states workmen’s compensation will provide some relief if the injury or illness is work-related. This insurance, however, does not cover injuries or illnesses that occur outside the workplace. If your company does not provide an adequate long-term disability package you need to consider obtaining one yourself.

Most people are probably under-insured rather than over-insured with respect to their house and its contents. They fail to increase the value of their insurance as fast as the cost of their house grows and the number of their possessions multiplies. The one exception is when you first buy the house. You need to subtract the cost of the lot and the closing costs from the insured value. Make sure you know what your policy covers and doesn’t cover. You may have to buy additional flood insurance or mine subsidence insurance in you live in areas prone to these hazards.

Automobile insurance is mandated in many states. You will want to have good liability coverage to protect your accumulated wealth if you cause a serious accident. A significant percentage of the cost of insurance is for collision, which pays you to repair or replace your car if it is damaged in an accident and comprehensive, which pays you to repair or replace your car if it is damaged or stolen. You can reduce the cost of these coverages by raising the deductible amount. The higher the deductible the less your insurance will cost but the more you will have to pay if your car is damaged or stolen. If you keep your cars for as long as possible, as suggested elsewhere in this book, at some point you will want to consider elimination of these coverages all together. To determine that point you will need to look at the current value of your car minus the deductible and compare it to the cost of your collision and comprehensive insurance. You also need to take the probability of your car being damaged or stolen into account.

As I mentioned in the Utilities and Services Chapter, you will want to evaluate the various payment options. While I was reviewing a friend’s insurance policy I notice that this company charged $3.50 for each payment over two-per-year. By making semi-annual payments instead of monthly payments this individual was saving $42 a year (almost 10%). If she had borrowed the money to make these monthly payments this $42 dollars would have represented an interest rate of 35%.

There are two other types of insurance you may want to consider--long-term-care and blanket liability policies. More and more people are spending their final years in nursing homes and more and more people are being sued for a variety of reasons. Both of these situations can wipe out the wealth you have taken a life-time to create. If you can afford them, you should review the costs and benefits of these types of policies.

Summary and Conclusions

1. Periodically review your life insurance needs and adjust your coverage.
2. Consider using term life insurance and investing the difference.
3. Consider a higher deductible health insurance.
4. Make sure you have thoroughly investigated health insurance before you retire.
5. Take advantage of a health care spending account.
6. Be wary of add-on health insurance policies.
7. Periodically review your disability insurance needs and adjust your coverage.
8. Periodically review your house insurance needs and adjust your coverage.
9. Consider higher collision and comprehensive deductibles on your car insurance.
10. Consider elimination of collision and/or comprehensive coverage altogether as the value of your car decreases.
11. Evaluate any insurance payments options offered and select the most effective one.
12. Consider the value of having long-term-care and blanket liability coverage to protect your accumulated wealth.
13. Determine the un-spent amount and make arrangements to save or invest it.

 Go to Index

Chapter #11

Taxes

It is said that, "Nothing is sure except death and taxes." There is no doubt about it. You are going to pay taxes, a lot of taxes. What is not so sure is the type of taxes you are going to pay and how much you are going to pay. It seems like every year our lawmakers, in their infinite wisdom, have to fiddle with the tax laws. There are many different taxes that individuals may have to pay including: federal income taxes, social security taxes, medicare taxes, federal gift taxes, federal estate taxes, state income taxes, state estate taxes, state sales taxes, local income taxes, local sales taxes, and local property taxes. The only way to reduce social security and medicare taxes is to reduce your income. Estate taxes are a once in a life time occurrence and beyond the scope of this book. That leaves us with income, property, and sales taxes.

History Section

Since we first got married we have tried to minimize amount of sales taxes that we have had to pay by minimizing our expenditures. One of the advantages of purchasing items at flea markets and garage sales is that these items are generally not taxed.

We also minimized our property taxes by taking the tax rate into account when deciding where and how much property to purchase.

The other big category is income taxes. We were more successful in finding ways to save money in this area. The first way we saved money was to prepare our own tax returns instead of paying someone to do it. I have always done my own tax returns and I’ve always found it advantageous to itemize my deductions. When my daughters turned 14, I taught them to prepare their own tax returns.

The second way we saved money was to not pay our taxes until they were due. The IRS allows you to pay up to ten percent of your taxes due, when you file your return. Each year we adjusted our withholding rate so that we owed just under ten percent of our income tax due and didn’t file until the deadline. We put this money in the bank so that it could earn interest until the taxes were due.

When our children were born, we put aside money for their college education in accounts in their names. At the time these accounts were established, the income from this money was taxed at the child’s tax-rate. Under the current tax laws, children have to pay taxes on the income from these accounts at their parent’s tax-rate until they are 14. After that, they pay at their own tax rate, which is usually considerably lower than the parent’s.

We have always been able to put the maximum allowable into IRA’s for both my wife and myself and into my company’s 401k plan. Not only is the income from these investments not taxed until it is withdrawn but we didn’t have to pay income taxes on a significant portion of what we invested.

One year when the tax rates were to be lowered, we doubled up on our charitable contributions. By giving our next year’s charitable contributions early we reduced our taxable income in that year. Of course the next year since we didn’t have any charitable deductions and our taxable income went up. Because the tax rate was lower in the second year, our combined tax for the two years was reduced.

Comments Section

When most people think about taxes they usually focus on federal income taxes, but there are a lot of other taxes out there that take almost as big a bite out of your paycheck as the Internal Revenue Service. Let’s look at some of the other tax-rates and compare them the federal income tax rate.

1. Federal Income Tax - 15 to 40 percent of your taxable income. This seems high but, since the government allows you to take some sizable deductions and exemptions, your federal income taxes end up being a much smaller percentage of your gross income. Although I was in the 28 percent tax bracket my taxes generally ran under 12 percent of my gross income. A family of four with a gross income of $34,000 is probably paying less than seven percent of their gross income in federal income taxes.
2. Social Security - approximately seven percent of the first $90,000 in gross income earned by each member of the family.
3. Medicare - approximately one-and-one-half percent of your gross income.
4. State Income Tax - This varies from state to state. In Pennsylvania it is 3.2 percent of your gross income.
5. State Sales Tax - This varies from state to state and in some cases it even varies within the state. In Pennsylvania it is six percent of all purchases except food and clothing, unless you live in Pittsburgh where it is seven percent. For the average person it probably represents about three percent of gross income.
6. Local Income Taxes - This varies from state to state and in some cases it even varies within the state. In Pennsylvania it is one percent of your gross earned income. Unless you live in Pittsburgh, where it is three percent or Philadelphia, where it around 4 percent. For the average person we will say it is one percent of gross income.
7. Property Taxes - This varies from municipality to municipality. I would say that typically it runs about two percent of the value of your property. If a typical family owns a home worth about two-and-one-half times their annual income, then their property taxes will be about five percent of their gross income.

If you look at the following table you will see that, for the average person, federal income taxes makes up only one-third of the taxes they pay. When you are trying to save tax dollars you need to look at all of the various taxes.

Taxes as a Percentage of Gross Income

The above table is not all inclusive. In addition to these taxes, there are a lot of other taxes hidden in the purchase price of the things you buy. The company I worked for targeted a 20-percent-before-tax profit, with a ten percent profit after taxes, on new investments. This means that ten percent of the cost of goods sold went to pay the company’s income and property taxes.   Approximately fifteen percent of the cost of labor included in the price of goods sold goes to pay the company's portion of Social Security, Medicare, unemployment insurance, and worker’s compensation taxes. Assuming that labor accounts, on average, for 50 percent of the cost of goods,(and the cost of raw materials is also 50% labor)it is fairly safe to say that over 25 percent of the price of everything you buy goes for taxes that are paid by the company. Adding this 25 percent to the 30 percent paid by individuals puts the total amount that goes to taxes at around 55 percent.

In addition federal and state excise taxes increase the tax burden of many items. 54% of the cost of gasoline, 60% of the cost of liquor and 82% of the cost of cigarettes are taxes.  No wonder you are having trouble saving. But I digress...let’s look at the taxes we have some control over.

Different communities have different taxes and different tax rates. Sales taxes, non-federal income taxes, and property taxes are usually location dependent. The amount of property taxes you will have to pay is dependent on the tax rate and the assessment value of your property.

Assessments are usually a percentage of the fair market value of the property. Some communities keep the tax rate low by using a higher percentage to calculate the assessed value of the property, so you will want to look at both.

Taxes are probably not going to be the deciding factor in choosing a job or a place to live, but they definitely should be considered when you are making those decisions. When we first got married, we looked at two apartment complexes owned by the same company within a mile of one another. Identical apartments were cheaper in the complex located inside the city limits. Because the city had a higher earned-income tax rate, at my salary, the lower rent was just offset by higher taxes. If I had been making more money, it would have actually cost us more to rent the cheaper apartment.

If you are changing jobs or being transferred it may be to your advantage to compare the tax consequences. Not only might it affect your decision, but it might give you some ammunition to negotiate a salary increase to cover the cost of additional taxes.

Besides selecting the best location and minimizing your expenditures there are not very many ways to reduce your property, sales, and other local taxes. You might be able to appeal your property assessment and get it reduced. If you live in a locale with a sales tax you should try to buy as much as you can from places that don’t charge sales tax including: flea markets, garage sales, private newspaper ads, etc. Alternatively, you may be able to make some of your purchases in near-by communities that don’t have, or don’t have as high, a sales tax. Note: This may not work for large purchases such as a car or a boat. For example, when you bring a car or boat into my state you have to pay the Pennsylvania sales tax on it.

For most people, the biggest single tax bite, after social security and medicare, will be federal income taxes. If you pay to have your tax returns prepared and you usually get a big refund check, the best way to save a little money is to do your own taxes and to adjust your withholding so that you pay the maximum allowable amount when you file your return.

Learning to do your own taxes not only saves you the cost of having your tax forms prepared but forces you to become more familiar with the tax laws and may point out additional ways to save money. I have found that the hardest part of doing my taxes is collecting all the information that I need. Since you have to do that any way, even if someone else prepares your return, you might as well save a few dollars. It may be difficult the first time you do it, but it becomes easier when you can use last year’s return as an example. At one point, I was filing eight separate returns. Federal and state returns for Janet and myself and for each of our three children. Based on a quote I got from a tax preparer, I saved over a $170 per year by doing my own taxes. My children started preparing their own returns when they turned fourteen. If they can do it so can you. It is a lot less intimidating after you have done it a few times. So start early, dig out last year’s form, and take the plunge. If you run into problems, there may be volunteers in your area who can help. If you’re still not sure, do it yourself and then have it done and get a professional to explain any differences so that you can do it yourself next year.

A lot of people end up getting a big refund check after they file their return. In effect, they are loaning this money to the government interest-free. I applaud them for their patriotic zeal, but I would rather collect the interest on this money myself. By law, you are allowed to pay $1000 or ten percent of your tax due (whichever is greater) when you file your return without incurring a penalty.

For example, Bob and Mary get a refund check for $1000 every June. This means they were paying $166 a month more in taxes than they needed to. If they had invested this amount, paying the $1000 owed, in April, when they filed their return, they would have earned an extra $86 a year. Over 30 years this would accumulate to $15,675.

You can adjust the amount of taxes withheld by changing the form you file with your employer. If you don’t owe close to $1000 (or ten percent of your taxes) when you file your return, ask your employer for a W-4 form and adjust your withholding so that you do. Make sure you put your extra take-home pay away so that it is earning money for you, and so that you will have the money to pay your taxes on April 15th.

If you are sure that you will have covered child-care and health care expenditures, and your employer offers them, make sure you take full advantage of these spending accounts. Even if you are in the lowest tax bracket.

As the standard deduction has grown over the years (and the allowable deductions have been reduced) fewer and fewer people find it beneficial to itemize deductions. Still, it may pay you to periodically calculate your taxes both ways, particularly if you have a change in your deductions (state and local taxes, mortgage interest, charitable contributions, and out-of-pocket health care costs). If it turns out that your itemized deductions are fairly close to the standard deduction you may be able to save a significant amount of taxes by time shifting your deductions. The simplest way to do this is to make last years or next years charitable contributions in the current year.

This is a little complicated. maybe this example will make it clearer. Bob and Mary tried itemizing their deductions last year, but since they only came up with $6,500 worth of deductions including $2000 worth of charitable contributions they elected to take the $6,700 standard deduction. They know their deductions this year will be approximately the same. If in December they pay out next year’s charitable contributions, their itemized deductions for this year will be $8,500 and they will still be able to take the standard $6,700 deduction next year. Over the two year period they will increase their deductions by $1,800. If they are in the 15-percent-tax bracket they will save $270 in taxes ($135 a year). If they are in the 38-percent-tax bracket they will save $680 ($340 a year).

The same effect could be achieved by waiting until next year to make this year’s charitable contributions but, at least to me, it doesn’t seem fair to penalize the charitable organizations by making them wait for their money.

You may be able to time shift other deductions, but it will be a lot more difficult and you will have to watch out that you don’t incur penalties that wipe out any savings you may achieve. One area you might want to monitor is un-reimbursed medical expenses. If you are going to exceed the seven-and-a-half percent threshold and you usually don’t, this might be the year to catch-up on or get ahead on your dental or vision program or get that nagging health problem taken care of. If your itemized deductions are extremely low, you may have to wait for a year when you have unusually high deductions to take advantage of this method.

Another way to reduce your taxes is to make investments in tax-free funds. The rate-of-return on these funds is lower than taxable funds so you have to be in a high tax bracket for them to make sense. These funds are usually very conservative with a low risk and a corresponding low rate-of-return. Unless you are in a fairly high tax bracket, I don’t recommend them.

If you are going to contribute to you children’s education you should definitely consider a 529 Plan. The earnings on the money in these plans is not taxable if used for eligible education expenses.  If you put $12,000 into a plan when your child is born and for each of the next two years (for total investment of $36,000) you should have around $140,000 for your child's education when he or she turns 18. It will take a monthly investment of $275 for 18 years ($60,000 total)to generate the same $140,000.

Up to now I have been talking about actually reducing the amount of taxes you will pay. Over the last decade or so the government has provided ways for you to defer paying your taxes. No one knows for sure if deferring your taxes will actually save you money in the long run. It depends on your current tax rate and the tax rate you will pay when the money is withdrawn. Most people will probably be better off if they defer as much of their taxes as they can. But if you are in a low-tax bracket now, and will be in a higher one when you take your money out, it may not be such a great idea. If the government doesn’t index the tax rate to inflation, cost-of-living adjustments to your income could push you into higher and higher tax brackets.

I have included the following two examples to show you the effect of tax-deferred savings. If Bill invests a pre-tax dollar at six percent, in a tax-deferred investment, for 30 years he would have $5.58 before taxes. If he stays in the 15 percent tax bracket when he retires he would have $4.74 after taxes. If in 30 years his income has pushed him into the 40 percent tax bracket he would have only $3.37 after taxes. If he invests the 85 cents left after taxes and pays the 15 percent taxes on the income from it each year, he would end up with $3.58.

On the other hand, if Sam, who already is in the 40 percent tax bracket, invests a pre-tax dollar at 12 percent, in a tax-deferred investment, for 30 years he would have $28.35 before taxes and $17.12 after taxes. If he dropped to the 15 percent tax bracket he would have $25.10 after taxes. If he had invested the 60 cents left after taxes and pays 40 percent taxes on the income from it each year he would end up with only $4.50.

Unless the government drastically raises the tax rates you will want to maximize your tax deferments. In the worst case you will essentially break even and you stand to increase your after tax savings by a factor four or more.

There are two simple ways to defer your taxes. You can open individual retirement accounts (IRA’s) for you and your spouse, and you can participate in your company’s 401k program. Of the two, the 401k is preferable for four reasons. First, you can put more into a 401k. Second, more people can put more pre-tax dollars into a 401k. (Many people have to pay taxes on the income, before they invest it in an IRA.) The third reason is that many companies match at least a portion of your contributions to a 401k. Finally, contributions to a 401k can be deducted from your paycheck, which will prevent you from spending it before you can get it saved. If you can, I recommend that you maximize your contributions to both your 401k’s and your IRA’s.

There are, however, limitations and/or penalties for withdrawing your money from these plans early. You will need to build up your non-deferred savings. Many experts recommend that you have savings equivalent to six-months income set aside for emergencies. You need to be saving up money for large expenditures, your children’s education and possibly early retirement.

Even if you plan to retire at the normal age do not assume that if you contribute the maximum to these plans that it will be sufficient for your retirement needs. Although we contributed the maximum allowable to these plans, almost one third of the accumulated wealth we needed for me to retire was not in these plans. Remember that you will have to pay income taxes on most of the money you withdraw from these plans and there are restrictions and possible penalties for early withdrawal. Refer to Chapter Four and Appendix C to determine how much you need to save.

For those of you who are considering early retirement, do not be too concerned about its effect on your Social Security benefits. You, of course, will not be able to get them until you're are at least 62 years old, but retiring early may not reduce them very much. You will need to check out your own situation. If I had continued to pay the maximum Social Security tax for the next 14 years, my Social Security benefit would have only gone up by only $800 a year. By the way, early retirement will reduce your Social Security and Medicare taxes. If you don’t have any earned income you don’t have any Social Security and Medicare taxes.

***Summary and Conclusions***

1. Consider taxes in selecting your jobs and a place to live.
1. If transferred or changing jobs, evaluate tax consequences and, if applicable, use them to negotiate a salary adjustment.
2. Reduce sales taxes and property taxes by minimizing your purchases.
3. Buy as much as you can from places that do not charge sales tax or have a lower sales tax rate.
4. Prepare your own tax returns.
5. Adjust your withholding deductions to eliminate any large refund and try to end up owing close to the maximum allowable amount. (Make sure you save the increase in your take-home pay so that you will have enough money to pay your taxes.)
6. Take advantage of child-care and health-care spending accounts.
7. Consider time-shifting deductions.
8. Carefully evaluate tax-free investments before you commit to them.
9. Consider setting up educational accounts for your children as early as possible and have them file their own returns starting at the age of fourteen.
10. Consider the use of educational IRA’s.
11. Maximize your contributions to 401k plans
12. Maximize your contributions to IRAs.
13. Accumulate additional savings for emergencies, so that you won’t have to borrow money or pay penalties, when disaster strikes.
14. Do not assume that maximizing your contributions to 401ks and IRA’s will provide you with sufficient retirement income. Check out Chapter Four and Appendix C.
15. Determine the un-spent amount and make arrangements to save or invest it!

Chapter Twelve

Charitable Contributions

In one sense, since charitable contributions are completely voluntary, there is very little to discuss, with respect to saving money in this area. I do, however, have a few things I would like to say on the subject. Because charitable giving is a very private matter, I am going to skip the history section in this chapter and go directly to the Comments Section.

***Comments Section***

How much you give to charity is your decision. Whatever the amount, you have worked hard for that money. You owe it to yourself to make sure that it is used as effectively as possible.

The most important thing to do is to find out how your money is going to be spent, before you donate it. How much of it goes to the organization hired to conduct the fund-raising campaign? How much is going to be plowed back into future advertising? How much goes to the company supplying the item being sold, if there is one? How much goes for staff and administrative costs? Most importantly, how much is actually used for the purpose it was given? If an organization won’t provide this type of information in writing, I would be extremely suspicious.

We never make contributions based on telephone solicitations. We explain this policy to the caller and tell them that if they care to mail us information about their cause and organization, including the answers to the above questions, we will consider making a contribution.

If you make sizable donations to a church or other charitable organization, get involved in the budgeting process of that organization. Make sure that your money and the money that others have contributed is being spent wisely. If you are dissatisfied, you may be able to designate that your gifts be used in a particular area that you feel is not being adequately addressed by the organization.

We rarely buy or sell fund-raiser items. We prefer to make a direct donation. That way we know that all the money we donate is going to the organization conducting the fund raiser and not into the pockets of the owners of the company supplying the item.

For those of you who would like to give more to charity but are strapped for cash here are a few suggestions.

1. If your company provides matching funds to certain charities you can increase the effect of your donation by contributing to those charities.
1. Many organizations are desperate for volunteers. If you don’t have the money, consider donating your time.
2. Make and sell something and donate the proceeds. As I’ve mentioned before, we have grown pumpkins, etc., sold them, and donated the profits to charity.

   You may question why I consider this acceptable when I have recommended that you do not buy or sell fund-raising items. The difference is that, with most fund raisers, the item sold is only worth a fraction of the donation required and the charity gets only a fraction of the donation. With this method you control the price, so that buyer gets an item that is worth at least as much as he or she paid and the charity gets 100 percent of the money collected. The buyer gets a bargain, the charity gets the extra money, and you get the satisfaction.

3. Let people know that what you want for your birthday or Christmas is a gift to your favorite charity. Consider giving similar gifts, (This may be the perfect gift for that person in your life who is so difficult to buy for because they have everything). I used to e-mail all my business friends a holiday greeting, with a note indicating that the money I had saved by not buying and mailing cards was being donated to charity.
4. As discussed in the previous chapter, you may be able to save a considerable amount of taxes by time-shifting your charitable donations.

***Summary and Conclusions***

1. Investigate how much of your charitable donation will be spent for the purpose it was intended.
1. Do not make commitments for charitable donations over the telephone.
2. Minimize the purchase of fund raiser items; make a direct contribution instead.
3. Take advantage of any matching donations that are available to you.
4. Consider donating your time, as well as your dollars.
5. Consider a project to raise money and donate it to charity.
6. Consider receiving and giving charitable contributions as gifts.
7. Consider time-shifting charitable contributions to take advantage of tax savings.

Chapter Thirteen

Spousal Miscellaneous

These two budget categories, Husband’s Miscellaneous and Wife’s Miscellaneous, are for the personal expenditures of each individual. Each couple needs to decided which types of expenditures fall into these categories and which expenses come out of other budget categories. Typically these accounts would include clothes, hobbies, organizational dues, beer and cigarettes, personal grooming products and services, etc., but they could include almost anything that one partner wants more or derives more pleasure from than the other partner.

***History Section***

Money has never been a major problem in our marriage. Almost from the beginning Janet has had her own bank accounts even though I can’t ever remember her making a purchase of which I disapproved. I am equally sure that I have bought several items that did not meet with her approval, although she has never said anything. I think that it is important that both partners have some funds that they can spend however they wish without fear of censure from their spouse.

Because Janet and I are in extremely close agreement on financial matters, our approach was rather informal. When I was working, Janet handled our day to day finances. I gave her my paycheck and she deposited it and paid the bills. Major purchases and investment decisions were made jointly. When I was working, my reimbursements for mileage and other business travel expenses provided most of my spending money. Now that I’ve retired, I write myself an allowance check every two weeks and have set up a checking account of my own. My wife is still working part time and deposits a portion of her pay into her individual accounts.

How each of you will use these accounts will vary significantly from how Janet and I spend ours. Therefore I feel there is little to be gained by providing a detailed account of the history of our spending in these categories.

***Comments Section***

In order to avoid marital strife, especially in cases where the spending habits and financial philosophies of the partners are considerably different, it is important that each partner have money that can be considered his or her own. Setting up a budget category for each spouse and defining which type of expenditures are to be paid for from these categories fulfills this requirement, and establishes spending limits that both parties can live with. To be fair, these accounts should be roughly equal.

Since these categories represent primarily discretionary spending (they are for purchasing things you want, not things you need), the budgeted amounts should be determined after you have subtracted the amount you intend to save from your net income and established budgeted amounts for all other categories.

If possible, they should be large enough to cover the spouse’s everyday personal expenses with money left over so that the individual can save up for that exotic dream vacation (which only one of you wants to take) or that bass boat (which only one of you will use) or that designer dress (which, presumably, only one of you will wear).

If a disagreement arises over an expenditure in another budget category, the partner desiring the more expensive option may decide to use some of his or her funds from these categories to make up the difference and thus avoid a conflict.

In a way these categories are different from the previous categories. It is not as important to save money on individual items as it is to limit the overall amount that is spent. Once the limit is set, how this money is spent should be left up to the individual. If one partner wants to spend his share on clothes and the other want to use her’s for wild parties, the other partner should not object on financial grounds. You must give yourself (and your partner) the freedom to pamper yourselves a little bit in this one area so you can have the discipline necessary to control your spending in the other areas.

Now that I have explained the overall concept, I would like to discuss some of the individual items that might be included in these categories. My apologies in advance if I miss yours.

Although it could be argued that clothes are a need and not a want and should not fall into this category, it is my impression that most people spend considerably more than is required to protect their bodies from the elements. It wasn’t that many years ago that the average person had one or two sets of everyday clothes and one set of Sunday-go-to-meet’n clothes. When my father was a kid he went barefoot in the summer, which was typical back then. Parents didn’t waste money on shoes that their children would quickly out-grow.

We have come a long way since then. The number one complaint about most houses today is "Not enough closets." I am not suggesting that we revert back to the practices of our ancestors. Showing up at work in the same clothes five days in a row might slow down your career advancement.

My family, however, has stayed away from buying expensive designer brands and tried to purchase clothes that will wear well and that can be worn in many different ways. For example, I usually purchase suits with two sets of pants or sports coats and slacks. That way if a pair of pants wears out or gets damaged I don’t have to buy an entire new outfit. I also have a down coat I purchased about ten years ago. I wear it when it is really cold for everyday, for skiing, and occasionally for hunting. I may not look really good on the ski slopes (There are those that say I could spend a $1000 on clothes and still not look very good on the ski slopes.) but at least I’m warm, and I have enough money to go skiing.

We have also limited the number of outfits we own at any one time and have made extensive use of secondhand stores, flea markets, and garage sales to increase our wardrobe. A lot of our children’s clothes came from friends and relatives and were passed on to other friends and relatives when we were finished with them. We are not above wearing mended clothes.

I am really proud of my daughters. They have each chosen to make their own fashion statement by selecting the clothes that they truly like and that are comfortable, rather than trying to conform to the whims of their peers. They have all received compliments on the way they dress from many adults, as well as their friends. When asked, they seem to enjoy the look on their friends’ faces when they tell them that the object of the compliments was purchased at a Goodwill store or a garage sale. My oldest daughter, Sarah, appropriated my fathers old Woolrich hunting coat for everyday winter wear. My middle daughter found hers in an Army/Navy Store for $20. My youngest seems partial to one of my outgrown, lined, denim coats. We saved over $1000 (our single biggest savings on clothes) when Sarah purchased a beautiful used wedding gown for her wedding.

If you spend a lot of time outdoors in cold weather I have three suggestions.

1. The first is to buy your outer garments a few sizes larger than you normally would and used a layered approach as the weather gets colder. Looser is warmer and adding long underwear, shirts, sweaters, and sweatshirts under an outer coat are cheaper than buying a coat for every temperature range.
2. The second suggestion is to get yourself a good pull-over,(no zipper or buttons, please) hooded sweatshirt. Elimination of the gap around your neck seems to make a significant difference in your comfort level.
3. The final suggestion is to get yourself a set of silk underwear, glove-liners and socks. I buy factory seconds since only a select few people are ever going to see them. You will be amazed at how warm silk is. Even in below zero weather I wear only a pair of silk underwear and a pair of silk socks under my ski boots and pants. Since I started wearing silk glove-liners I have never had to quit skiing to go in and warm up my hands.

Here is a final trick to keep warm that I’ve learned over the years. It won’t save you any money but it may save you hours of being cold and miserable. I used to work up quite a sweat walking the two-and-a-half miles up-hill to my deer stand. Then, because my clothes were damp, I would stand around and freeze for several hours. Now as soon as I get to my stand, while I’m still warm from the exertion, I remove or loosen most of my clothes for a minute or two so that they can air out. The warm clothes dry quickly in the cold dry air and these dry clothes do a much better job of keeping me warm when I put them back on.

Finding clothes that I like, particularly shoes, seems to be increasing difficult. Too many times when I’ve gone back to buy replacements I have found that the item I wanted has been discontinued. Now when I find a pair of shoes that I really like at a good price I will buy two or three pair. Not only can this save future hassles but sometimes I can negotiate a slight discount on the extra pairs.

Making your own clothes and repairing or mending store bought clothes are excellent ways to save money. If you can find a good shoe-repair shop you can get several more years out of a pair of shoes at one third the cost of a new pair.

According to History of Erie County which was published 1884, my great, great, great grandfather practiced what I consider to be the ultimate in recycling. It’s sort of long story, but I think you will enjoy it.

Revolutionary War General "Mad" Anthony Wayne was sailing back from Detroit. He got sick and when he landed in Erie, Pennsylvania, he sent for a doctor. Before the doctor arrived, General Wayne died and was later buried in Erie at what is now called the Wayne Blockhouse.

In 1808, his daughter, who was living on the family farm in Eastern, Pennsylvania, became ill and felt that she was going to die. She decided that her father should also be buried on the family farm, so she asked her brother to go to Erie and bring his body home. When they disinterred the body and opened the coffin, they found that the body was petrified except for one foot and leg which were partly gone. Because the remains were to be transported through the wilderness, a doctor separated the body into convenient parts which were boiled. The flesh was then removed, the bones placed in a small box, and given to the general’s son. The flesh and tools used in the procedure were placed back in the coffin and re-interred.

General Wayne’s sound boot was given to my great, great, great grandfather, James Duncan, who found that it fitted him, had a mate made for it and wore the pair until they could no longer be used. I think that this story proves where I got my tendency to be thrifty.

In addition to clothes, another type of expense that I would include in these categories is the cost of what I would term vices (tobacco, alcohol and gambling). I will confess up front, that I have, to some degree, all three. Whether you choose to challenge your spouse’s habits with respect to these vices for health reasons or on moral grounds is certainly beyond the scope of this book. From a financial perspective, I believe the setting of spending limits and voluntary conformance to those limits has the best chance of minimizing the financial impact of these activities.

If you smoke, you can save a significant amount by buying generic brands and even more if you roll your own. There are machines available that make this fairly easy.

I think most of our tastes are acquired, especially with respect to alcoholic beverages. As a teenager I didn’t like the taste of coffee but wanted something warm to drink when I was out hunting. So I learned to drink coffee black. When diet soft drinks first came out, I didn’t like the taste of any of them, but I wanted to cut down on calories so I started drinking Diet 7-up. Now these are two of my favorite drinks. It took a long time before I really enjoyed the taste of any alcoholic drink. If you are going to have to acquire a taste for something, why spend a lot of money to acquire taste for expensive booze? Why not spend a lot less and acquire a less-expensive taste? If you drink for effect and not for taste then you should pay attention alcoholic content. For example, lite beer has fewer calories and less alcohol than a regular beer. It will take more lite beers, and cost more, to produce the same effect.

In no other area is it as important to set limits and stick to them as it is in the area of gambling. Many people advise that you should not bet more than you can afford to lose. I prefer to consider gambling as a form of entertainment and to lose no more than I am willing to pay for other forms of entertainment. Since many forms of entertainment, from movies to miniature golf, cost $5-$10 an hour, I have no trouble paying (losing) $25 for two or three hours of gambling.

Most state lotteries are a sucker’s bet. Only 50 percent of the money bet is paid out to the winners. The casinos pay off better than that. I like the bumper sticker that says "The Lottery -- A Tax on the Stupid." 99.999 percent of the people would be better off, if they put their lottery dollars in a jar every day and when their number hits, break open the jar and party hearty. You won’t even have to pay income tax on your winnings.

The list of items that you or your spouse may want to include in these budget categories is endless, but the last topic I want to discuss in this chapter is hobbies. Hobbies can be a real source of enjoyment and satisfaction. They can also be a real drain on your family’s financial resources. As with the other items in these categories, the value of the expenditure is extremely variable and depends entirely on the individual making the purchase. What may be a great deal for one individual, would be a complete waste of money for another. What is important is that you set an overall limit and control your spending.

I have always wanted to do more fishing. Now that I have retired I finally have the time, so this year I purchased a canoe. Eventually I want to get an electric trolling motor and a fish-finder. They will have to wait until next year or the year after. There are other items I want to purchase, and there isn’t enough money in my Husband’s Miscellaneous Account for everything. Not only does this approach control my spending to the desired level, but it also provides an opportunity for the fates to intervene and put one of these items at a garage sale at a greatly reduced price.

In addition to fishing, I hunt, garden, downhill ski, read and sing. My wife’s major leisure activities include walking, attending flea markets and garage sales, and reading. Downhill skiing and, to a lesser extent, fishing are the most expensive. Walking and, with the use of the local library, reading are the least costly. Whatever your hobbies here are a few suggestions.

1. Go Slow! - Be sure this is something you really are going to devote a large part of your leisure time to before making a major purchase. One of our neighbors has an in-ground pool but about the only time I see them near it is when they are maintaining it. A friend bought a sailboat and trailer and has used it once since the first year. He hasn’t even registered it for the last ten years.
1. Rent or borrow before you buy! - Not only does this allow you to make sure that you really enjoy the activity before you make a purchase but it permits you to become familiar with the equipment and to make a more-informed decision when you are ready to make a purchase. If you realistically expect to participate in the activity only once or twice a year it may make more sense to continue to rent. If your choice is to buy a $1000 worth of ski equipment, or continue to rent equipment for $15 a day the three-times-a-year you go skiing, you would be better off continuing to rent.

   We were fortunate that my oldest and youngest daughters chose instruments (clarinet and trombone) that we already had, and my middle daughter was able to borrow a baritone from the school. In this manner our children where able to become acquainted with their instruments of choice at no cost to us. After we were sure that they were serious we bought each of them a significantly higher quality instrument. Owning two instruments saved wear and tear on the more expensive instruments because it minimized carting the newer one back and forth to school and older ones were used when they would be exposed to the elements or other dangers.

2. Purchase used equipment! - Not only were my children’s’ first instruments used, but two out of three of the second instruments were purchase used. This allowed them to have instruments equivalent to the best owned by their classmates at third to half the cost. All of their ski equipment was handed down from daughter to daughter or purchased used. All of my guns were purchased used. There are cases where I would not advise the purchase of used equipment (primarily, where the condition of the item is not readily observable). I would, for instance, hesitate to by a used computer or camera because you won’t know until it is too late if they work or not.
3. Joint-Ownership! - This is an excellent, very cost effective, way to gain access to expensive, infrequently used equipment. You can go about this several different ways. One way is to join or start a club. Europeans seem to prefer this method. They have clubs for everything from sculling to sailplanes. The club purchases the equipment and makes it available to the members.

   Perhaps the simplest approach is what I call reciprocal-use. In this method, one friend or relative buys an item, say a table saw, another buys a drill press. They then agree to allow each other to use the equipment they each own. Since ownership is clear it is easy to dissolve the relationship, if necessary.

   Another method is for two or three people to go together and purchase a piece of equipment that they all will use. For example, I went together with a couple of neighbors to buy a lawn sweeper. If you choose this method make sure you establish up front, preferably in writing, how scheduling conflicts will be resolved and how the property will be handled when one or more of the partners dies, moves or no longer desires to be part of the arrangement.

4. Money Making Hobbies! - For most people, most of the time, this phrase is an oxymoron. It just doesn’t happen all that often. From raising puppies to collecting whatever, the deck is stacked against the amateur. The professionals, those who earn a living catering to hobbyists, have a vested interest in painting a rosy picture and pointing to the one-in-a hundred or one-in-a-thousand amateurs who, due to luck or a unique set of circumstances, actually make money. It is extremely difficult to make money by buying retail and selling wholesale, but that is exactly the position that many hobbyists find themselves in. Duncan’s Rule with regard to this subject is "The probability of making money from a hobby is inversely proportional to the investment required." If you enjoy hobby, I would encourage you to pursue it, but do so within the limitations of your budget and with realistic expectations concerning its profitability.

***Summary and Conclusions***

1. Establish individual, roughly equal, discretionary budgets for each spouse.
1. Try to buy clothes based on need, practicality, and versatility, not desires.
2. Don’t substitute a designer label or the opinion of your friends for your own good judgment about what you wear.
3. Consider purchasing used clothing, recycling clothes, and mending slightly damaged clothing.
4. Stock-pile clothing when you find items you really like at a good price.
5. Consider silk undergarments and layering as an economical way to keep warm.
6. Set limits on your spending for vices (tobacco, alcohol and gambling).
7. Budget the amount you will spend on your hobbies.
8. Don’t rush into a hobby. Make sure you are in it for the long haul before you spend a lot of money.
9. Consider, at least initially, renting or borrowing hobby equipment.
10. Consider purchasing used hobby equipment.
11. Consider some form of joint-ownership to gain access to hobby equipment.
12. Don’t expect to make money from your hobby.
13. Determine the un-spent amount and make arrangements to save or invest it! (This savings should be credited, at least initially, to the partner who saved it and not lumped in with your joint savings.)

Chapter Fourteen

Children’s’ Miscellaneous

This category includes child rearing expenses not included in the more basic categories such as food, insurance, etc. as well as money from your income that you or your children will spend on them for personal items.

***History Section***

Despite the fact that we have three daughters, purchasing clothes for the children was not a big expense for us. With hand-me downs, flea markets and garage sales, we spent a minimal amount on clothes for them.

A lot of toys came from the same sources. Although the children did get one or two new toys for their birthdays and at Christmas, we also made a number of them ourselves. We put together a collection of oddly shaped scraps of wood. They spend hours and hours building imaginary cities or boats with these blocks. My third year medical student almost cried when she learned that Mom had finally pitched them. The cardboard box my garden tiller came in was another big hit. I made Sarah a set of wooden stacking rings and car; Emily, a wooden truck and a name puzzle; and Rachel, wooden Noah’s Ark. I built them a sixteen-foot-high swing set and tree house with old timbers from a barn that had fallen down. Once I rigged up a water slide with our sump pump and some sheet plastic.

In the winter, we had a lot of fun sledding, tobogganing, downhill skiing, and hunting. In the summer, we swam, fished and went horseback riding. With the exception of downhill skiing and horseback riding the cost of these activities was minimal.

In Pennsylvania, children under the age of 16 don’t need a fishing license. A stick, some line, a bobber, a small hook and some worms or grasshoppers are all that is required.

I always borrowed or used existing hunting equipment, so the license was the only additional cost for this activity.

We minimized the cost of horseback riding and skiing by limiting the number of outings per year. In addition, we bought used skiing equipment and tried to ski during reduced-rate time-periods. As all of our children did well academically, we usually took full advantage of the three days of illegal absence allowed under Pennsylvania law to go hunting or skiing in mid-week.

Music and books played a big role in the lives of our children. Our single biggest expense, other than college, was a combined 30 years of music (piano, trombone, and voice) lessons. My daughters each got her own library card when she was in first grade. It was not unusual for there to be 15 library books, at various stages of completion, scattered around our house.

As my job involved a good bit of traveling during the week, on Saturdays I would take the girls out for breakfast. This permitted their Mom one day to sleep in. It also allowed me to spend some time with my daughters and still get the things I needed to do around the house done, later in the day. As I’ve mentioned before, if you are going to eat out, breakfast is the cheapest meal.

In addition to family vacations (which I’ll discuss in Chapter Fifteen) our children might spend a week with relatives, or at church camp, or both during a typical summer.

Two of my daughters participated in an exchange program through the company I worked for. For the price of a plane ticket they spent three weeks in Germany, a week in Berlin and Washington, and had the pleasure of a German guest at our house for three weeks.

There were an annual Labor Day weekend, father/daughter trips to the hunting camp to do a little fishing and get the camp ready for hunting season.

When I was in ninth-grade my father took me to the Canadian Exposition. Since ninth-grade may be the last time your teenagers will be willing to be seen with you in public, (as long as they are fairly sure they won’t run into anybody they know) I continued the tradition. My oldest daughter elected to take a long weekend ski trip to Colorado, the other two chose a long weekend in New York City with, among other things, two or three Broadway shows.

There are a lot of arguments for and against giving children an allowance. We elected not to do so, but we did try to provide opportunities for the girls to earn money. We never paid them for things that they were supposed to do. We only paid them for optional tasks like polishing shoes, washing or cleaning the cars, or helping me in the garden. The choice was theirs. If they didn’t want to do these things and earn some money they didn’t have to. They were also permitted to keep any money they got from peddling excess garden produce around the neighborhood. At around the age of twelve, they started baby sitting and when they got their drivers' licenses they were allowed to get jobs if they wanted to. Within limits, they were allowed to spend this money, and any money they got as gifts, anyway they chose. We tried to encourage savings by matching any money that they put away for college.

They never had their own cars but there was usually one available when they needed it. Once they started driving, they were expected to fill the cars with gasoline once in a while. Our oldest daughter, Sarah, bought her first car between college and medical school using part of what was left of her college fund.

Insurance didn’t cover all of their medical expenses. Fortunately our children were fairly healthy. Still, all three needed glasses or contact lenses and one needed orthodontia.

***Comments Section***

Many of the costs of rearing children we have already included in other categories like food and medical insurance. This category is to cover the cost of their clothes, hobbies and other personal expenditures. Most of the discussion in the previous chapter, on spousal miscellaneous expenses, applies to these expenses as well. It is my personal belief that parents need to spend money on their children in a manner that reflects the value system they wish to instill in their children. I am not sure if it is a good idea to spend a small fortune on toys and clothes even if you can afford it. If you cater to their every whim they are liable to grow up seeking happiness in material objects, demanding instant gratification, and following the dictates of the masses or fashion magazines. A more prudent course, which teaches the value of a dollar and encourages critical, creative, independent thinking should lead to a wiser lifestyle and better purchasing decisions later in life.

Having said that, I also think it is important that your children have spending money of their own. Giving them an allowance, especially if it is too much too soon, is liable to teach them to be irresponsible rather than responsible. I feel the best approach is to make sure they have an opportunity to earn some money of their own. This can be inside or outside the home, but they should not be paid for tasks that you expect them to perform like getting A’s or brushing their teeth. These activities have their own rewards (like knowledge and fewer cavities) and should not be cheapened by monetary rewards. Shining shoes, cleaning cars, weeding, baby sitting, newspaper routes and lawn mowing are some jobs that come easily to mind.

Sometimes we agreed to help the children out with a purchase, exercising a sliding scale depending on how frivolous we felt the item to be. We always maintained veto power, even if they were planning to purchase the item entirely with their own money.

To emphasize the importance of long term planning we encouraged savings by matching any money that our children put away toward college. This money was kept in separate accounts so that they could watch it grow and have a sense of ownership.

Several weeks ago, my youngest daughter Rachel came home rather disgusted with some of her friends. They wanted to go to the movies and she said that she was a little short on cash and wouldn’t be able to go. One of Rachel’s friends remarked that she didn’t understand how someone who had enough money to go to college could not have enough money to go to the movies. As Rachel told me "They just don’t get it. They can’t make the connection. I have enough money to go to college because I don’t have enough money to go to the movies."

It was gratifying to know that my daughter understands that people make choices every day and that those choices may have long term consequences. If a person has enough money to buy a five-bedroom house with a four-car garage and keep it full of new cars, they might not have enough money to send their children to college and/or retire early and in comfort. Conversely, if you don’t have enough money to keep up with the Jones’s, you just may end up having enough money to send your kids to college and to retire when you wish.

The real topper is that last night I saw a TV commercial for a new model car that to me represented a new low in advertising. It actually said "Paying for their own college education will build your child’s character. At $30,000, our car is less than one year’s tuition." Not satisfied with encouraging you to spend your money rather than save it, this car company has taken the next logical step and is trying to get you to spend the money you were saving for your children’s education on a new car!

For us, making sure our children had an opportunity to go to college was a top priority. Also near the top of our list (certainly more important than owning new cars or the largest house on the block) was to make sure they had the opportunity to develop their talents and explore a variety of experiences. That doesn’t mean that we rushed out and hired a coach the first time they expressed an interest in gymnastics, after watching the Olympics on TV. It does mean that there was money available for musical instruments, music lessons, summer camps concentrating on an activity of interest, and for family outings to explore the possibilities (horseback-riding, downhill-skiing, whitewater-rafting, water-skiing. fishing, hunting, hiking, swimming, tennis, concerts, plays, etc.).

Most children are not destined to be superstars. It is an exceptional child that has the talent and dedication to excel at that level. My advice is to encourage and support your children at a level commensurate with their ability and desire.

Summer camps are an excellent way to expose your children to a variety of activities. Many churches have excellent, fairly in-expensive camp programs that are usually open to children of non-members.

Family outings and vacations can also be used to explore areas of possible interest. I’ll discuss tips on vacations in Chapter Fifteen.

***Summary and Conclusions***

1. If you are not giving your children an allowance, consider providing them with opportunities to earn money instead.
1. Encourage your children to save by matching any funds they put away for college.
2. Don’t allow your desire to save money to deprive your children of a wide variety of experiences, or to limit the exploration of their interests and talents, but proceed slowly and as economically as possible.
3. Encourage low cost activities and don’t try to substitute money for time spent with your kids.

Chapter Fifteen

Household Miscellaneous

This category includes almost everything not covered in the previous categories. It includes furniture, appliances, car repairs, home improvements and repairs, family vacations, health care deductibles & co-payments, car insurance deductibles, and gifts. This is a very difficult category to budget. Many of these expenses vary greatly from year to year. Some years they will be minimal and the next year you may have planned a big vacation, have to replace the furnace, have health or dental problems, and significant car repairs.

***History Section***

I’ve talked about our approach to purchasing furniture and appliances, car and home repair, health care and insurance elsewhere, which leaves vacations and gifts. Like most people just starting out, initially I had a very limited amount of vacation. What I didn’t use for hunting was usually spent visiting relatives or friends, which is probably the cheapest vacation there is. By the time my oldest daughter was five years old I was entitled to four weeks of vacation every year. So we finally had enough time for hunting, visiting and taking a family vacation.

When our youngest daughter was five years old we decided that she was old enough to begin to appreciate more expensive vacations. We had always wanted to take a trip out West. We also had a friend who had moved to Colorado and was planning to come to Pittsburgh. With a little planning and careful attention to scheduling each family was able to maximize the length of their vacations and minimize their travel costs. Here is how we did it:

1. He and his family flew to Pittsburgh.
2. A week later he flew back to Colorado.
3. The week after that his family and my family drove our car out to Colorado.
4. Four days later I flew to Colorado and joined my family.

If we hadn’t cooperated he would have had to purchase round-trip tickets instead of one-way airfare tickets for his family or travel by car and limit their time in Pittsburgh to a couple of days. My wife would have had to drive across the country with three children by herself. (If I had accompanied them in the car, we would have had four days less to spend in the West.)

In addition to this 7000 mile trip to Colorado, Utah and Wyoming, we took a 11,000 mile trip around the perimeter of the United States; a 12,000 mile trip to Coldfoot, Alaska; and a 9000 mile trip through New England and Canada. We made these trips every other, or every third, year. Other years, we spent a week at the Jersey Shore, Niagara Falls, New York City, or Washington plus an additional week or so at the hunting camp. During some years I was unable to schedule all of my vacation because of the nature of my job. Fortunately I was able to get permission to carry some of it over to the next year which allowed me to take the four or five week vacations mention above and still have enough time left to go hunting.

The final topic in this chapter is gifts. I last we come to an area where Janet and I disagree. I am not sure whether it is due to nature or nurture, but she has the mistaken idea that underwear is a perfectly acceptable gift. You’ll be happy to know that we have resolved our differences by compromise and agreeing to disagree.

If you haven’t guessed by now, when it comes to gifts, I’m in the "It’s not how much it costs but the thought and effort" camp. My best gift ever, was a photo album Janet put together for me with a page or two devoted to each Christmas for the last 28 years. If you can’t come up with anything else I’m perfectly happy with a couple of books and a box of chocolate covered cherries or a can of cashews. "They’re very nice, that’s why I like them.^" Operating on the chocolate ice cream principle (I like chocolate ice cream, therefore, everybody likes chocolate ice cream) I tend to give the same kind of gifts.

One year I gave my brother and sister little wooden, glass- covered boxes I had made. I filled the three sections of these boxes with corn, oats and beans from my father’s farm. A few years later he stopped farming and about ten years ago he passed away, but we each still have these little momentos.

Another year I made up certificates awarding each of my aunts the title of "Aunt Extraordinaire" with a list of reasons why I felt they deserved this "honor". I printed them in color on parchment type paper and framed them. They looked pretty good if I do say so myself. The aunts seemed to appreciate them. In any case, they all have them prominently displayed in their homes.

My wife regularly includes jams or pickles or other home-made goodies in our gifts to other people. I think that an unusually thoughtful touch is to strain the seeds out of the strawberry or red raspberry jam for those who should avoid such things.

While I’m on the subject of food I should mention that we like being on the receiving end too. For a number of years, two of my aunts have given us ten pounds of Smith’s Natural Casing Wieners for Christmas. We don’t have access to them, it’s easy for the aunts to buy, and we enjoy the wieners throughout the year. Maple syrup is so expensive we rarely buy it ourselves, but as a gift we enjoy it immensely.

Lest you think that I am the world’s tightest tightwad, frugalest fellow or cheapest chap, I want to close this section by saying that every once-in-a-while you have to splurge. If you watch your Ps and Qs you can splurge every so often without going into hock up to your neck. One year we invited all of my relatives to our house for Thanksgiving. As an a Christmas present, we bought a block of tickets to "Starlight Express", my all time favorite musical, which was on tour in Pittsburgh that weekend. It wasn’t our least expensive Christmas, but it sure eliminated a lot of hassle shopping for my relatives.

The other example I want to share was my wife’s 40th birthday present. I rented a limousine and with her best friends we attended the opening night of the Pittsburgh Symphony Orchestra and had dinner at the best restaurant in town. We still laugh about all those ladies in their diamonds and furs trying to get into "our" limousine after the concert.

On the other hand, at my wife’s request, we spent her 50th birthday on a picnic and tour of the Allegheny Cemetery. I am not sure which birthday she enjoyed the most.

***Comments Section***

About a third of this budget category is to take care of un-anticipated expenses like car or home repairs, uncovered medical expenses, etc. Another third is to take care of major expenditures such as furniture and appliances, or home improvements. The final third is for everything else including vacations and gifts.

Hopefully you have saved or are saving to pay for your children’s education and for the cost of caring for an aging parent, if that is a real possibility, so you will not have to pay these expenses out of current income. If you are paying for these types of expenses out of current income or if you have any other large expenditures that I haven’t covered you can budget them in the Other budget category.

Since part of this household miscellaneous spending is planned and part of it isn’t, you might be well advised to delay the planned spending until you are sure you won’t need the money for an unplanned expense. In other words, you might want to put off buying that big screen TV until you are sure your car is going to make through another year without major repairs. An alternative would be to put aside enough to make substantial car repairs and buy the big screen TV before making the purchase.

I really don’t have very much to say about un-anticipated expenses except to urge you to have some money set aside to cover them so that you don’t have to go into debt when they occur. Similar advice applies to major expenditures. Don’t make them until you have the cash on hand and apply the principles described in other chapters of the book. That leaves us with vacations and gifts.

The cost of vacations can vary considerably depending on the type of vacation you like. I would not presume to tell you how to spend your vacations, but you might want to review the following ideas to see if any appeal to you:

1. As I mention in the chapter on food, eating in restaurants is expensive. A family of five can easily spend $100 a day for food if they eat three meals a day in restaurant. That's $1,400 for a two week vacation. You could probably save a third to half of that by purchasing groceries and making one or two meals a day yourself.
1. Take advantage of friends and relatives who live near your destination or enroute. Not only does this give you a chance to renew your relationships, but hotel/motel rooms can cost $65+ a night.
2. Take those exotic vacations to places half-way around the world before you have children or after they leave the nest. By the time they are old enough to appreciate them, they are not going to want to be away from their friends, or with you, for that long a period of time.
3. I’ve been to Europe on business several times and I know there are a lot of interesting places to see overseas. Janet and I plan to see them just as soon as we see everything in the United States and Canada that we want to see. For those of you who would like to experience the flavor of Europe without leaving the continent, I suggest visiting Quebec, Canada. They speak a foreign language, they have a Walled Old City, and open air restaurants, etc., etc. In short, if you didn’t know you were in North America you would think you were in France.
4. Although we have taken vacations where we spent the entire time in one location, we prefer those where we move on every day or two. Not only did we enjoy this type of vacation more, but, despite the extra transportation cost, I believe they were less expensive. The longer you stay in one place the more likely you are to become bored and the more likely you are to spend money to entertain yourself and your family. For example, If you spend a day and a night at Niagara Falls you can easily fill the time walking around the parks, viewing the falls and taking pictures. If you stay a second day you’ll probably end up on the "Maid of the Mist" or the "Cave of Winds" or both. A third day and you’ll start to hit some of the hokey tourist traps that cater to you, the bored tourist. My motto is get in and get out with as much of your money left as possible.
5. Speaking of Niagara Falls, the closer you get to the falls the more your room is going to cost, even in the same hotel. One hotel, where we stayed, charged $100 a night more for a room facing the falls. I’m not sure what you do in a hotel room, but most of my activities involve a bed and you can’t see the falls from there. So thank you very much, but I’ll keep my hundred dollars and view the falls from outside my hotel room.
6. You may have noticed the absence of any reference to Disney or other theme parks. This was not an oversight. We intentionally stayed away from such places. With so many natural wonders to see in this great country, we didn’t want to waste our time and money on man-made novelties. We did occasionally take our kids to smaller amusement parks, like Waldameer in Erie, Pa. or Conneaut Lake Park. Because the kids had not been exposed to the larger parks and the visits were infrequent, they had a great time at these less expensive parks. By the way, we found that attendance at this type of parks is way down on the day after a major holiday, which makes July 5th an excellent day to go. Speaking of Independence Day, as a kid growing up I was allowed to shoot caps only on the July 4th. Even if I had caps left over they were put away for next year. Mom said that it made the Fourth special and she was right. Many experiences will be lessened if they are repeated too frequently.
7. In recent years there has been a lot of talk about "Quality Time." The problem is "Quality Time" isn’t something you can plan. It usually occurs while you are doing something else. It’s sharing a scant meal of crackers and soda pop in a June snow storm in Yellowstone because we arrived late after everything was closed. It’s singing songs and making up games to pass the time on a long drive. It’s teaching the kids to play Canasta, while drinking hot chocolate and eating apple pie, warmed on a wood stove at Jake’s Crystal Palace in the Yukon Territory. It’s getting a late start so we could take a second dip in hot water at Laird Springs. It’s visiting a horse cemetery we stumbled upon somewhere in New England. It’s driving through a forest fire, waking the children to see the Northern Lights, or rowing a boat across a walk-in lake with sticks in Alaska. It’s having a family buffalo chip throwing contest at Teddy Roosevelt National Park. It’s watching a thunder storm pass beneath you from a mountain top in Jackson Hole, Wy. It’s tasting buffalo burgers, caribou stew, and even Rocky Mountain Oysters for the first time. It’s discovering and exploring an un-named waterfall. It’s eating the panfish the children caught for breakfast. Finally, it’s going skinny-dipping in an ice cold stream on a hot July day in the middle of a Pennsylvania forest.

   That’s not to say that we didn’t enjoy the horseback rides, raft trips, waterslides and other more expensive amusements we occasionally included in our itinerary. It is just that these relatively inexpensive things are the ones that brought us closer together and that we remember with special fondness.

8. If you are going to fly somewhere for your vacation, do your homework. Use your frequent flyer miles if you have them, check out any and all special discounts and fares. It may pay you to change your schedule or itinerary to take advantage of these deals.

   I once saved a considerable amount of money on a hunting trip by purchasing a one way ticket from Pittsburgh to Denver and a one way ticket from Denver to Missuola, rather that a one way ticket from Pittsburgh to Missuola.

   A friend of mine once saved over a thousand dollars by driving his family to New York City from Pittsburgh to fly to California. The round-trip tickets were $1500 cheaper to fly out of New York City, compared to Pittsburgh, but he had an extra $500 in car rental and hotel costs to get to and from New York.

9. If you are going to take a driving family vacation, here are few non-economic tips:

1. Start planning early and get everybody involved. We made extensive use of the information available from AAA. We got the books for each state we would be passing through and we each made lists of things we would like to see. We then agreed in advance on which attractions were must see and which were maybes.
2. Don’t try to schedule every minute. Give yourself as much flexibility as possible. We made hotel reservations only for the nights we would be near major attractions (from a third to half the time). That way, because we didn’t have to honor a hotel reservation every night, most of the time we could stay a little longer if we found something interesting or move on if the attraction didn’t live up to our expectations.
3. Try to make every third or fourth day a light-travel day, no more than 50 miles. This will give you a chance to catch-up if you fallen behind or relax and rest if you are on schedule.
4. Try to schedule one or two major activities each week -- a horse back ride, a rafting trip, a half or all-day hike, a guided tour, etc.
5. You are going to be spending a lot of time together. If possible try to include some solitary activities. If your children are old enough, it can be as simple as taking a walking-tour separately rather than all together.
6. Travel light. Take along only enough clothes for a week and only clothes that can be washed at a laundromat. Take along a small suitcase that can be packed with a change of clothes for everyone. On nights when you drag all your luggage into the hotel, pack this suitcase. The next night you can leave most of your luggage locked in the car and take only the small suit case in.
7. Take along plenty of diversions -- books, CD’s, tapes, travel games, song books, etc. We usually chose one book, usually one connected with the area we were traveling through, which we took turns reading out loud. We also encouraged the children to keep diaries of the trip.
8. Make sure to keep some food and drinks in the car at all times for emergencies and comfort, and take along any medication you think you might need. Don’t forget the bug spray, sun screen, and Dramamine. Be prepared to spend a night in your car, if necessary.
9. Don’t forget your sense of adventure and your sense of humor. You will probably need both of these when things go wrong and they will.

Many of my friends and acquaintances have purchased recreation vehicles, trailers or campers. A lot of them have discovered that they do not used them as frequently as they anticipated they would. This failure to save travel cost, the reduction in interest-income from the initial investment and the cost of insurance, maintenance, and storage combine to make these purchases very questionable. You need to make a realistic assessment of your long term frequency-of-use and cost savings. Also, you should factor in the loss of income or cost of debt service, insurance costs, maintenance costs and storage fees when deciding to make such a purchase. A final consideration is that such a purchase may restrict the types of vacations you can take in the future. If you have a lot of money tied up in a recreation vehicle, it maybe hard to justify or come up with the money for a vacation that doesn’t utilize it. If you still think this might be a viable option, you may want to consider renting for a trial period before making a purchase.

The final topic in this chapter is gifts. In a way, this is one of the most difficult areas in which to economize. We want to give nice presents to those we love and they certainly deserve the best we can give them. On the other hand it is easy to fall into the trap, both as a giver and as a receiver of gifts, that the cost of the gift is a measure of how much we value the relationship. We all tend, at times, to try to substitute money for thoughtfulness and creativity. There are times when an expensive, luxurious gift is appropriate; but I think that, most of the time, a less-expensive, more thoughtful, and creative gift is better appreciated. Maybe we are unique, but I am sure that Janet appreciated the weekend I put a floor in our attic to provide her with more storage space, or the stone patio I built with rocks we found in new developments more than she would have appreciated a tennis bracelet or a diamond necklace. I know I appreciated the picture album she made for me more than anything I can imagine. The trick is to give the individual something that you know they will like. Sometimes that may mean spending more than you normally would and other times that may mean spending very little money but a considerable amount of time and/or thought.

If you want to reduce your spending on gifts you may want to consider the following:

1. You may want to agree to stop exchanging gifts or set spending limits with friends, acquaintances and distant relatives. This must be done tactfully.
2. Consider homemade gifts or gifts of time and yourself instead of money.
3. While I personally draw the line at underwear, I see no reason why a gift can’t be a little bit practical. You may be able to use part of the money you set aside for gifts to save money in other budget categories. If your spouse needs new hobby equipment, or clothes, or your child wants a new musical instrument, or to go to horse camp, I see no reason why you can’t make that their big birthday or Christmas present, even if they need the gift several months before the event. With small children it may be advisable to re-give the gift on the day of the event and provide several small gifts to make the day special.
4. There has been a lot of play in the Sunday comics in recent years over covering the lid and body of a gift box with wrapping paper separately so that it can be opened without disturbing the paper and be reused year after year. They can joke all they want to, but what could be more practical? Why not start a tradition that saves trees and a little bit of money?
5. Along those same lines, consider making your own wrapping paper. Hand-decorated, brown-paper bags can be beautiful.
6. Also, consider reusing old cards as name tags.
7. When making up your own gift list consider asking for gifts that will save your family money in other areas. Do you love maple syrup on your pancakes, but your food budget is a little tight? Why not ask for a pint for Christmas?

***Summary and Conclusions***

1. Set aside money each month to cover un-anticipated expenses and accumulate a sufficient amount to pay unexpected medical expenses, car and home repairs, etc.
1. Set aside money each month for major purchases and don’t buy them until you can pay cash.
2. Reduce vacation meal expenses by purchasing groceries and making one or two meals a day rather that eating every meal in restaurants.
3. Consider limiting your vacation time in any one location to prevent boredom and reduce over-spending.
4. Stay with friends and relatives, if you can, to avoid hotel expenses.
5. Concentrate on the wonders and stay away from the man-made amusements designed to separate you from your money.
6. Look for deals and special discounts on travel costs.
7. Thoroughly evaluate the advantages and disadvantages of owning an RV, trailer, or camper prior to purchasing one.
8. Don’t be afraid to make agreements to set or reduce spending limits on gifts.
9. Consider homemade gifts or gifts of your time.
10. Consider giving semi-practical gifts.
11. Consider adding semi-practical gifts to the list of presents that you want.
12. Consider recycling wrapping paper and cards.

Chapter Sixteen

Overview

***Credit***

In my opinion, under normal circumstances, there are three and only three legitimate reasons to borrow money. One is for education, the second is to buy a house and the third to pay medical expenses. Even in these cases it is important to borrow as little as possible and to make re-payment as rapidly as possible.

The purchase of almost everything else can be delayed until you can afford to pay cash. There will be exceptions -- you need a car for your first job, your furnace blows up before you have accumulated enough to by a new one out of savings, etc. If you have had a job for a while, borrowing money for every little emergency, not paying off your credit cards monthly, and/or buying your cars on time are indications that you are living beyond your means. To borrow money for non-necessities is just plain stupid. To borrow money to pay for necessities, because you have spent all your money on non-necessities is just as stupid. Remember that the more money you have going out every month for debt service, the less money you will have to spend or save.

The big new service is debt-consolidation loans. Their big argument is that by consolidating your debt you can reduce your monthly payments and have more money to spend. If you spend this money and don’t change your spending habits you will soon be in bigger trouble than before. Debt-consolidation does make sense; but the focus should be to use it in a plan to reduce your debt, not to free-up more money to spend. By eliminating your debt, you can eliminate that portion of your monthly payments going to debt service entirely and have even more money to spend or save.

I heard on the radio that the average family has $6000 worth of credit card debt. Let’s say that your credit card balances are hovering around the $6000 average. At 18 percent interest, that means that you are paying in the neighborhood of $1080 a year ($90 a month) in interest. You are probably spending an additional $6000 each year on new stuff. If you could eliminate this spending for a single year you could pay off this debt. You could then resume spending a $6000 a year on stuff, paying cash, and put that $1080 a year into savings. At the end of 30 years you would have $174,000, instead of $180,000 worth of stuff, but would have an additional $82,200 in savings. What a difference a year makes. May be you should wait till next year to buy that new TV?

***Cash***

It is an unfortunate fact that in our society the cash customer gets the short end of the stick. The only way a merchant can offer special deals on financing, (read low interest rates or delayed payments) is to jack-up the selling price. The merchant offers these deals in hope in attracting more customers and increasing sales. If a merchant offers zero percent financing or no payments for a year, he incurs the cost of having his money tied up not earning interest. He has to raise his prices to cover these costs. If you pay cash, the merchant doesn’t incur these costs and should be willing to offer you a small discount. You are saving him money. So don’t be afraid to ask for one, but be prepared for rejection. In today’s climate the merchant may fear offending his credit customers (of which there are unfortunately far too many), by treating his cash customers, (of which there are far to few) fairly. If enough of us start to demand fair treatment, occasionally taking our business elsewhere when we don’t get it, maybe merchants will start listening to us.

The same principle applies to establishments that accept credit cards. There seems to be a conspiracy of silence concerning the fact that a merchant pays a percentage of each credit card purchase plus a transaction fee to the credit card company. Even if you use a credit card with no annual fee and pay it off monthly with no interest charges the credit card company is raking in the bucks. I understand that the reason American Express Cards are no longer accepted at a number of establishments is that they charge the merchants more than the other cards. Even though there is a significant cost associated with credit-card transactions, merchants rarely offer a discount for cash. The one exception is that many gas stations will knock a nickel off the price of gasoline, if you pay with cash rather than by credit card. Did you ever wonder why the gas stations give you a four percent discount for cash but all the other places that accept credit cards don’t? Again, I think the answer has to do with fear of offending the credit card customers and pressure on the merchants from the credit card companies. These companies would be the big losers, if customers used cash. So whenever you make a purchase in an establishment that accepts credit cards, ask if they will give you a discount if you pay cash. If they won’t, and you pay off your credit card bills monthly, then pay by credit card or go somewhere else. You might as well earn interest on your money for the month or so it takes for the credit card bill to arrive and be paid. If enough customers asked for a discount when paying cash, eventually the merchants will wake up and treat the cash customer fairly.

***Saving***

As I said earlier, I am not a financial expert, but here are the priorities I would suggest in targeting where to direct your savings:

1. Establish an emergency fund in a savings account or money market account to handle unexpected expenditures. (Approximately six-month's income)
1. Pay-off all debts, except for low interest loans costing less than your investments are earning.
2. Contribute the maximum amount allowed to your company saving plan, 401Ks, IRA’s, etc.
3. Establish a college fund for each of your children
4. Establish a major expenditure fund to pay for your next vacation, car, etc.
5. Establish an early retirement fund. There are many restrictions on the money in 401Ks and IRAs. If you are going to retire early, you will need money to live on until you are 59 1/2 and/or you can start to draw your pension and social security.

As to where you should put your money, I would suggest the following:

1. Keep as little as possible in your checking account. They usually pay little or no interest. Deposit or transfer enough each month to cover the checks you will write that month. Make sure you keep a cushion so that you don’t drop below the minimum balance and incur a service charge.
1. Use savings accounts only to accumulate savings. In general, the interest they pay will barely cover the cost of inflation.
2. Use money market accounts for funds that you may need on a short term basis. They pay a decent rate-of-return but you are usually limited to two or three withdrawals a month. They can also be used to store money between other investments.
3. Certificates of Deposit (CDs) are among the safest investments you can make. They are insured for up to $100,000 per account. (If you have CDs in two institutions each will be insured up to $100,000.) You can select how long you want to have your money tied up in a CD -- from three months to ten years or more. Usually the longer the term of the CD the higher the rate-of-return, but there are usually are penalties if you cash the CD before the term is up. I suggest that you divide the amount you want to have in CDs by five and purchase five CDs each maturing in a different year. Alternatively, you could buy a five-year CD each year for five years. Eventually you will have five CD’s each with a term of five years with one coming due each year. That way, if interest rates go up you will have some money to invest at the new higher rate and if they go down you will have some money invested at the old higher rate. If interest rates really jump you may want to take the penalty and re-invest at the higher rate. Since you have a CD maturing each year you can adjust you have the amount you have in CDs up or down as necessary on a yearly basis.
4. The final savings category I want to discuss is mutual funds. There are two basic types, stocks and bonds. Historically, these funds have out-performed CDs, with stocks doing better than bonds, but they both involve more risk. Although stocks are riskier than bonds, in both cases you may, particularly over the short term, lose money. However to get a really good return on your money you need to invest a portion of your savings in this category. Experts recommend that the percentage of your investments that you have in stocks should be no more that 100 minus your age. They also recommend that you don’t have money, that you are going to need within ten years, invested in stocks. Both of these recommendations are probably good advice. One thing to remember is that the baby boomers have reached their peak earning power and are socking away billions of dollars each month into mutual funds. This may partially account for the recent great performance of these investments. By the same token, when the boomers reach retirement (2010) and begin to withdraw funds rather than contribute, the market might be adversely affected. If they get nervous as they approach retirement age and shift their investments to more conservative areas, this effect might be seen even earlier.
5. You should put as much as possible of your savings for retirement into tax deferred savings (Roth IRAs, IRAs, 401Ks, etc.) unless you plan to be in a higher tax bracket when you retire than you are in now. Do not invest any of your IRA or 401k money in tax-free investments. Withdrawals from regular IRAs and 401ks are taxable even if they came from tax-free investments. Withdrawals from Roth IRA’s aren’t taxable even if they come from taxable sources. So there is absolutely no advantage to investing this money in tax-free investments.

***Working***

Although the focus of this book is financial, it really is about being able to do what you want to do. I think the luckiest people in the world are those who are able to find a job that they really, really enjoy. No amount of money is worth going to a job that you hate day after day after day. If you hate your job and you are young enough, get out now. Find something else to do. It won’t get any better. If you feel you are too old for a career change, hopefully you can use this book to hasten the day when you can tell them to, "Take this job and shove it." Even if you love your job, don’t let it interfere with the really important things. Never in recorded history did a man on his death bed say "If only I had spent more time at the office."

Now might be a good time to talk about the financial impact of having both spouses working full-time outside the home. If you both love your jobs and enjoy working, congratulations! If, however, either of you is working solely for the money, you might want to review if it really makes economic sense for you both to work.

1. What is your net take-home pay after taxes?
2. Does it cover the cost of:

1. Getting to and from work? (Including purchasing and maintaining an extra car with insurance. Could you get by without it, if one of you didn’t work?)
2. Extra child-care?
3. Extra housekeeping or lawn services?
4. Extra phone services required because you both work?
5. Work related dues and periodicals?
6. Extra personal grooming products?
7. Purchasing and cleaning "work" clothes?
8. Extra laundry services because you are too tired or don’t have enough time?
9. Buying lunches?
10. Eating out or using more expensive pre-prepared foods more often because you are too tired or don’t have enough time to prepare something?
11. Buying gifts instead of making them?
12. Any other purchases you make, attributable to the fact that you both work?

***Advice***

You are constantly getting advice. You get it from your relatives, your friends, your neighbors, the people you work for, the people who work for you, sales people, books and magazines, from the radio and television and, if you have read this far, from me. My advice on advice is to consider the source.

When I was a young boy, my cousin and I were throwing a red rubber ball up on the barn roof one day. On a particularly hard throw it went over the barn and into a field. We looked for it for a while and then gave up. A month or two later we were walking thought this field about 20 yards apart. Did I mention it was a tomato field? Anyhow I picked up a tomato and said, "Hey! Cuz! You know that red rubber ball you lost?" and threw the tomato at him. The throw was perfect. It was arching directly at his head. When it got about half way there I said, "This isn’t it!" The timing was perfect. You could tell from the look on his face that he knew exactly what was going to happen but had absolutely no time to react. His problem was that he hadn’t considered the source until it was too late. If you are standing in a field of tomatoes and someone picks up something red and round and throws it at you, it is likely to be a tomato.

I think most people are smart enough to recognize deception in the marketplace most of the time and have even come to expect it. But advertisers keep coming up with more subtle approaches, some of which I’ve alluded to in other parts of this book. You need to always consider the motives of the advisor when judging the value of the advice.

Even when you are absolutely sure that your advisor has your best interest at heart (like yours truly), he can be completely wrong. People do not like to admit, even to themselves, that they have made a mistake. Once a decision is made, especially a big one, they will actively look for evidence to justify that decision and, consciously or unconsciously, discount evidence to the contrary. They want to convince themselves that they made the right decision, and part of that is convincing you that they made the right decision. That’s part of the reason it is hard for people to change. To change forces them to admit to themselves that they were wrong.

I’m probably just as guilty of this practice as the next guy. I’ve included a lot of information in this book to support the principles that I feel contributed to our success. I may have unintentionally suppressed facts that do not support my beliefs. Please examine my definitions of success to make sure they agree with yours and look at my motives before accepting my advice. Ask yourself, "What did he leave out?" and "Is that really true or is that a rationalization on his part?"

Remember, there are almost always reasons besides those stated or obvious as to why we do things. For example, one of the reasons for this section is that I really wanted to include the "Tomato Story" in this book. When I was just about finished with the book, I saw that I hadn’t found a place to include it, so I came back and added this section. I hope you enjoyed the story. Remember also, that people occasionally do the right thing for the wrong reason. Conceivably, someone might find that this section is the most helpful section in the entire book.

Chapter Seventeen

Conclusion

It is a sign of the times that our society likes to see everything reduced to a top ten list. I am not sure that a list is a very effective way to try to communicate but here is my best shot.

I hope you have found my book interesting, informative, and useful. I really appreciate that you taking the time to read it. I wish you the best of luck in achieving your goals

Everybody Drives a Used Car 

By Larry Duncan

It is a sign of the times that our society likes to see everything reduced to a top ten list. I am not sure that a list is a very effective way to try to communicate but here is my best shot.