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May 2013 - Posts - Live Like a Mensch
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Live Like a Mensch

May 2013 - Posts

  • If I Had a Million Dollars

     "I'd buy you a green dress. But not a real green dress. That's cruel."

    I have been thinking quite a bit about how I would spend "extra" money lately, partially because of this interesting post from Crystal on the blog Budgeting In the Fun Stuff. If you don't get a chance to read through Crystal's post, she talks about how even if you're making enough, there will always be some wants that are out of reach. She concludes that it's really important to find happiness where you are and with the life you have, rather than always focusing on what you don't have.

    J and I were discussing this the other day, having one of those fantasy "If we had a million dollars" type conversations.

    Unfortunately, we seem to be as boring as Samir from Office Space, who, if he had a million dollars, "would invest half of it in low risk mutual funds and then take the other half over to my friend Asadulah who works in securities..."

    As much I wracked my brain, I came up with bubkes during our million dollar conversation. Yes, there are expensive things I want to do: travel extensively through Europe, see Machu Picchu, go to Hawaii, visit Israel. But even money wouldn't make those trips doable right now considering the fact we've got a toddler and a baby on the way. And other than traveling, I honestly can't think of any extravagances that I would want from my life that are currently missing.

    As for J, in addition to his travel dreams, he came up with the idea of taking a year off to go back to school for a Master's Degree...and that was about it. Neither of us could come up with much in the way of tangible things that would improve our lives.

    On the one hand, I sort of feel like we're the world's most boring couple. We can't even come up with the idea of eating lots of Kraft Dinner with gourmet ketchups in our plans for hypothetical riches. Surely there's something I could do with a boatload of money that I'm not currently doing.

    But, on the other hand, it also feels like a kind of freedom that our "extravagant" plans include nothing more than travel, education, and funding our retirements and the kids' college accounts.

    After all, wanting stuff can really weigh you down. And I know for a fact that owning stuff can become a job in and of itself. It can almost be said that your stuff owns you, since you have to take care of it, maintain it, and secure it. Bigger houses mean more rooms to clean. More expensive cars mean more systems that could go wrong. Expensive jewelry has to be secured. Beautiful furniture has to be protected from baby spit-up and dog slobber. A lot of work goes into owning a great deal of stuff.

    Even just having more money means more money management. Once you start banking more than the amount that is FDIC insured (which is currently $250,000), you either have to have your money spread out over several banks or have it invested and have to keep track of it and take care of it. As much as I love playing with money in our accounts, at a certain point, that much management just sounds like a chore--one that I would either have to do myself, or one that I would have to contract out to someone else, which means doing the work to find someone I could trust.

    Don't get me wrong--these would be good problems to have. It's unlikely that I'd turn down a million dollar book contract.

    But I completely understand why there are some multi-millionaires (like Keanu Reeves) who give away a great deal of their money. Having less makes it easier to live simply and it probably feels really good to help people in that way.

    So, I guess it comes down to the realization that J and I are in a good place. We have enough for our needs and some wants, and we're satisfied with our lives.

    We're really *really* lucky.

    Maybe one day, we'll have enough money to afford a tree fort, and a tiny little fridge to put in there. Until then, it's nice to dream about the low-risk mutual funds we'd spend our million on...

    Do you ever dream about being wealthy? How would it change your life?

  • I Paid Off My Student Loan!

     

    As of Thursday, May 23, 2013, my student loan is officially vanquished!

    To pay this bad boy off, I sent a double payment (a little over $1200) electronically last Monday to wipe my debt slate completely clean (except for our mortgage). I chewed my fingernails all week while I waited for the payment to process. (I love how the money was deducted from my checking account promptly on Tuesday, but it took until Thursday for MOHELA to acknowledge the payment. Where exactly was the payment for those missing 48 hours?)

    My Student Loan History

    I graduated from Kenyon College back in May, 2001 with somewhere around $18,000 in student debt. (My numbers from the early years will be fuzzy, because I don't have the records still available, and in the beginning, the amount of money I had to pay off was so much I simply didn't pay attention to the specifics). I frankly have no idea what my initial monthly payment amount was back in the day. I know that I started making payments (using an actual coupon book, because 2001 was apparently a LONG time ago) in November 2001. By June of 2005, when I enrolled in the graduate English Education program at OSU, I owed somewhere around $13,000.

    My entire graduate program was financed by a federal student loan, so I finished up at OSU with an M.Ed. and a grand total of $33,000 in student loan debt.

    (Since I only taught for four years, I have wondered if I made the right decision back in '05 to get a degree on credit. But, teaching was an invaluable experience that I know I could not have had without the degree, and it really has made a difference in my writing career--which is what I used to pay off nearly half of what I owed. So if I were able to have a conversation with my 26-year-old self, I doubt I would advise her to do anything different. Other than avoid the disastrous hair cut of 2007).

    I was able to consolidate my loans at 4.5% in '06, just barely missing the June 30, 2006 cutoff for the really really really good consolidation rate. (I think J was able to consolidate at something like 2.9% in the years before I went back to school. Sigh.)

    My initial monthly payment for the loan was $358 and change, so I set my automatic payment to pull $400 per month from my account. That way, I'd be a month ahead every nine months. On occasion over the next four years, I would return the payment back to the minimum for a few months (to help with bills or to add to savings), but it always made me feel twitchy, so it would go back to $400 soon enough.

    Then, a lot of things happened all at once. J and I learned that LO was on his way, J took a new job in Lafayette, Indiana, we moved, I decided to stay home for a year, and it took us nearly a year to sell our house in Columbus. Sometime around August 2010, J and I both put our loans on forebearance. At the time, I owed around $21,000.

    When we finally sold our Columbus house in May 2011, we were lucky enough to get a great deal of equity out of the place. Once we had funded/saved/replaced/otherwise used the equity for necessary home related expenses, we had enough left over to pay off J's (much smaller) student loan and send $5000 towards mine. That left me with $16,466.86 as of May, 2011.

    My Debt Payoff Philosophy

    As I've mentioned several times before, my view of debt is not entirely rational. The difference between my minimum payment and the amount of money I have been sending to MOHELA is enough to make a nice cushion to my retirement savings. I was only paying 4.5% on my student loan, which is certainly low enough to argue that I could get a better interest rate on an investment. And if you add in the big jumps you see on my debt payoff thermometer above (those jumps represent the extra money I'd send along to MOHELA from things like selling my Mazda, from tax refunds, and from other found money), that's even more money that I could be using for savings and the magic of compound interest.

    But my feelings about debt really come down to my psychological makeup. Basically, I need things to be DONE.

    As it turns out, I'm very much like my grandmother Ruthie. She used to handle the books for my mother's business. For each entry, she would need to categorize the income/spending, and if she didn't know what the category of a particular line item was, she'd call/interrupt my mother to find out. Then, she'd get to the next line item, realize she didn't know that category either, and would call/interrupt Mom again. This would go on over and over again, with Mom wondering aloud (with increasingly ill-feigned patience) why Ruthie couldn't just wait until she'd gotten to the end before calling for all of the categories at once.

    Ruthie wasn't built that way. She couldn't continue on to line 2 of her bookkeeping until she'd completed line 1. She couldn't complete line 1 without calling Mom...and so it went.

    I feel much the same way when it comes to my money management. I couldn't throw myself into retirement savings (although I have certainly been saving for retirement), until my debts were cleared. I feel better knowing my money can go farther each month now that I don't have to earmark any of my income for debt repayment. And I feel much more comfortable earmarking a certain amount for retirement or other savings now that I know that everything else I make isn't owed elsewhere. Now that my student loan is crossed off my mental to-do list, I feel as though I have more brain energy available to think about other intelligent uses for my money. I'm not trying to work on lines 2-10 without having completed line 1.

    It makes a huge difference for me.

    What Now?

    About six weeks after J and I got married (and more than 5 years into our total relationship), J made a post-wedding confession to me.

    He likes pro wrestling.

    I'm not sure how he knew that this was the kind of deal-breaker that he needed to keep to himself until after he'd gotten a firm, Ketuba-signing and ring-wearing commitment from me--but he was pretty darn lucky that he did keep mum about his love for pro-wrestling for all that time.

    Since we were sharing, I decided to let him in on my dirty little secret that I'd been keeping from him.

    I like chain sit-down restaurants.

    J groaned when he heard it. He not only wants to support local businesses when he dines out, but he also prefers the "realness" of a local restaurant ambience and menu. Chain restaurants could be anywhere, so why bother going there?

    After these confessions, J and I looked at each other as if we were meeting for the first time. You think you know someone!

    I tell this story to explain why we will be celebrating my debt payoff in the particular manner we have chosen. Our friends Rick and Carla have similar feelings about debt payoff and have been big cheerleaders in my quest to be done with my student loan. They also know our dirty little post-wedding confessions and find them hilarious. They have offered to take us out to a chain restaurant of my choice (I'm waffling between Applebee's and Olive Garden) to celebrate. (No doubt they will offer to take us to a pro-wrestling match the next time J gets a promotion.)

    No matter what restaurant I choose for the celebration, I'm sure that will be one darn tasty meal. (And if I ply J with enough beer, he might even agree with me--although I'm not holding my breath).

  • All About Cars

     

    My apologies for not getting a post up yesterday. We were all too exhausted after a day at the Indianapolis Motor Speedway to do much more than lie around on our sofas before an early bedtime last night.

    LO, of course, was quite blase about the entire experience:

    "Yeah, I'm riding along on the world famous Indianpolis Motor Speedway. What of it?"

     

    In any case, our immersion in car culture yesterday dovetailed nicely with my last post on living below your means. Regular readers and commenters Haverwench and frugal_fun had a very interesting comment discussion about the affordability vs. snob appeal of the Dodge Caravan. I wanted to talk a little bit about their discussion, particularly because it started an interesting conversation between myself and J.

    In her original comment on the living below your means post, frugal_fun wrote:

    We have driven cars until the wheels fell off and the body was falling apart. We did just buy new, but instead of a Honda Odyssey, we bought a base Dodge Caravan. We're in the low brow mini-van of our neighborhood. *gasp* :) But without the power "family" do-dads, our Caravan gets the best mileage in class and domestic cars are cheaper to repair. Yes, it will be more prone to repairs as it grows older, but I can buy many repairs with the $10K difference of base price.

    Haverwench asked for clarification regarding the relative cheapness of repairing domestic cars. Frugal_fun responded:

    Generally the parts [for domestic cars] are cheaper and I've been told by our mechanic they are less prone to having proprietary repair codes. Domestics (as I understand it) usually publish all the codes, which means you're not forced to the dealership for certain repairs. That saves money as well.

    Domestics usually are not as well made as foreign cars, but I've found they are "good enough" for our purposes.  Even if I have to replace the parts that I wouldn't on a better made car, the parts themselves are cheaper and I've got more options in who does the repair.

    I read the comments to J over breakfast the other morning and I was really interested in his insights as an automotive engineer and all-around car guy, who also happens to be frugal.

    First, I asked him about the proprietary codes on the on-board diagnostic (OBD) systems that frugal_fun was referring to. As it turns out, OBD codes are mandated by the U.S. government to be standard across all vehicles. For example, a code PO171 means that the engine/air fuel ratio is wrong. (J told me something way more complex than that, but that's what it boiled down to. Not that the boiled-down explanation made it that much more clear for me, but that's why he's the car guy.)

    While the codes are federally mandated, if there is any additional information that OBD sensors can detect in order to help a mechanic to diagnose a problem, that information could be proprietary. (Even J did not know if OBD sensors can/do provide extra information above the mandated codes).

    So, for example, if you have a Porsche that provides a PO171 code when the check engine light comes on, your friendly neighborhood unaffiliated mechanic might have to do some additional diagnostic work in order to figure out what is causing the engine/air fuel ratio to be off, but a mechanic at the Porsche dealership might be able to look up the additional information that the OBD sensors are providing in a handy-dandy book that is not available to the public and know immediately what needs to be fixed. (I use Porsche as an example because J worked as a Porsche mechanic at a dealership when he was in college, and we still have a Porsche wheel that we mounted to the outside of the house and wind our garden hose around to prove it).

    This means that if your car's manufacturer does have proprietary repair codes/information above and beyond the mandated standards, then you're one of those inevitable car repair Catch-22s. The dealership will be able to diagnose the problem quickly, meaning there will be less labor involved in your total cost of the repair--but they'll otherwise charge you through the nose. Your friendly neighborhood mechanic might have to dig a little to diagnose the issue, meaning you might have to pay for more labor hours--but they'll be cheaper labor hours.

    All that said, J was not able to confirm nor deny the existence of these kinds of proprietary repair codes. OBD is federally mandated. If there is anything extra, J does not know about it. (Some electronic procedures, such as anything having to do with the security system, do tend to be proprietary. So if something in that part of your car breaks--like your remote lock, for example--you'll likely have to go to the dealer, whether you have a foreign or a domestic car. That's because the manufacturers don't want to publish the information that would provide anyone and everyone with a universal key to their cars).

    The other aspect that frugal_fun brought up was the relative cost of parts when comparing foreign to domestic cars. That is, that parts for domestic cars will be much cheaper than those of foreign cars. This has long been the conventional wisdom, and J again told me he wasn't entirely sure if it's as true in 2013 as it might have been in the 20th century. (He suggested I look up the most popular makes and models of various classes of cars, and call around local parts departments to ask about the cost of common parts, like alternators, to compare. While I may do an investigative report of that kind at some point, I simply don't have the time today and I was hoping to get this posted before June).

    (Of 2014).

    However, based on J's own experiences, there have been some trends:

    1. German cars (J owned a Volkswagen Jetta TDI, a diesel) tend to eat parts after a few years.

    2. Those parts are SPENDY!

    3. Despite my love for them, J has made it clear that if I ever want to own a new Beetle, I will be on my own for taking care of repair and maintenance issues because he's not going to touch it.

    4. Even extremely well-engineered cars that shouldn't otherwise require parts/repairs can have serious design flaws. For instance, my 2002 Honda Accord is a fabulous car, but the engineers fell down on the job when it came to designing the transmission. That means we have a ridiculously expensive repair bill in our future, because transmissions are not cheap to replace. And that replacement will only buy us so much time before we wear out the new one, because the replacement will necessarily have to be of the same flawed design.

    5. Cars that maintain similar platforms throughout the years (like the Ford Crown Victoria, for example) can have basically interchangeable parts from one model to the next. If you're J and my uncle Arnold, you can go to junkyards to get parts for next to nothing.

    For the rest of us, there are websites like car-part.com.

    In any case, the issue of the cost of parts is another Catch-22. What I will save in owning a Honda that doesn't (generally) need parts/repairs, I will end up having to spend on the transmission--and I would have spent on the purchase price of the car had it not been a family sale.

    So, I asked J how one should go about deciding on the best financial course of action when it comes to car ownership. Being a car guy, I didn't exactly get a straight answer. (It's like living with Click and Clack sometimes.)

    He told me that things make him crazy about cars in descending order:

    1. Expensive cars that are poorly engineered make him tear his hair out in comical ways. Land Rovers, for example, are ridiculously expensive to buy, and they are shoddily designed and built.

    2. Inexpensive cars that are not well engineered get more of a pass from him. In order to keep the price low, they have to let something give. The Dodge Caravan is one of his examples of this kind of car. (Sorry, frugal_fun). J drove one of these about 500 miles on a business trip, and there were many issues that drove him up the wall on it. However, he's got a very specific skill set that allows him to notice issues that most of us mortals would completely miss, even if he pointed them out. (For example, J can tell that my transmission has limited time left, but I can't feel a difference between it any other car I've driven. It's still okay and safe to drive, but like the dogs that detect earthquakes a week before they happen, J can feel the slight issues that indicate the difference between a healthy and unhealthy transmission).

    When talking about the Dodge Caravan, J reminded me that a friend of ours with three kids (who had also worked with J at Honda) bought a Caravan rather than an Odyssey when he needed to replace his old mini-van. The friend said he needed transportation that could handle the whole clan, and he didn't need to spend the extra $10K. J admitted that if we were in the same position--kids outnumbering adults, a need for a van that would simply get the carpooling job done, and the ability to think of other uses for $10,000, he'd possibly make the same decision. (And then make me be the one to drive the Caravan).

    3. Expensive and well-engineered cars. These cars can be worth the money, but they're expensive. Add in the fact that even well-engineered cars (we're looking at you Volkswagen and Audi) can still need parts down the road, which is part of the reason why they depreciate like rocks. There's a saying among car types that there's nothing more expensive than a cheap Mercedes. This is part of the problem that frugal_fun was referring to with the Honda Odyssey. Those are fabulously well-engineered vehicles (with J's signature on the current incarnation's engine, I may say with pardonable pride). But you're paying for that engineering and for peace of mind, as well as the snob appeal. (Honda specifically wants the Odyssey to be the high-end mini-van. Remember the "Respect the Van" campaign?)

    The important thing to remember is that the peace of mind you get by spending the extra moola isn't necessarily real, as even well-engineered cars will break and will need some TLC.

    4. Inexpensive and well-engineered cars are J's holy grail. (Well, to be fair, I suppose they're everyone's). This is why he drives a 20-year-old Volvo. This thing is a tank and could potentially live long enough for LO and Thing 2 to learn to drive on it. But cars of this caliber and price range are few and far between and will often need a mechanic in the family to be sure you're getting the excellent car that you want. As frugal_fun pointed out, not everyone can be lucky enough to marry J, so buying something like a Volvo 240 really isn't practical for most folks.

    So, if you have to decide between an expensive and well-engineered car, and an inexpensive, not-as-well engineered car, it really is a toss up as to which will serve you better. If you're able to put aside the difference in purchase price and prepare for inevitable repairs, I would probably recommend the Caravan. Spending the extra money on the Odyssey doesn't guarantee that you'll have a repair-free ride for years.

    To put it another way: Buying car is a lot like parenting. Ultimately, any decision you make will (at some point) seem to be completely WRONG.

    What compromises have you made in car-buying? How have you decided which car is going to give you the most bang for your buck?

  • Post Coming Tomorrow

    Greetings Dollar Stretcherians!

    I owe you a post today, but today was also my deadline for getting the first chunk of my book to my editor, which means my brains are currently slowly leaking out of my eyeballs. I'm hoping to be able to find and replace all the various brains by tomorrow, at which point you'll have a new post from me.

    Until then, I need to bathe my brain in something mindless.

    (Also, tomorrow J, LO and I will be heading to the Indianapolis Motor Speedway for Community Day, during which time we will be allowed to drive the Volvo 240 around the track. Not to worry, there will be pictures and video of this incredible ridiculousness).

  • The Secret to Living Below Your Means? Lowering Your Standards!

     

    Picture of an automobile I could realistically imagine J trying to talk me into buying/restoring courtesy of the unfortunately-named Fornax.

     

    It is full spring now, which means J and I have been hit with the home improvement bug. We have been planting some perennials in the garden, removing some of the ugly pavers left over from the previous owners' landscaping attempts, weeding and fencing in the strawberry patch in the hopes that we'll actually get to eat some of them this year rather than just having the happiest rabbits in the greater Lafayette area, painting the picnic table in our back yard, and pruning hedges. We've also got plans to paint the exterior of the house this summer and finally get to work on the downstairs bathroom, which has been on the back burner for about a year and a half.

    I was mentioning all of this work to my mother when she suggested now might be a good time to fix the foot moulding in the upstairs hallway.

    You see, back when we moved into our house in 2010, we pulled up the upstairs carpet and refinished the lovely hardwood floors underneath. Unfortunately, at some point in our home's history, the original foot mouldings were spirited away, possibly to make room for the world's ugliest Pepto Bismol pink carpeting which we gleefully ripped out. While the company that handled the floor refinishing could have easily made new floor moulding to match our gorgeous floors, it would have put us over the budget we'd set aside for it. So, we let it be.

    Other than the time I dropped an earring that got lodged in the space between the floorboards and the wall because there was no foot moulding to cover such a gap and thereby prevent such an earring loss, I haven't given a single thought to our missing flooring pieces in the last three years. (We were able to get the earring out with a pair of tweezers and some patience, and then soaked the earring in a 100% alcohol solution to kill whatever crawlies it might have picked up during its short floor-bound incarceration. So no harm, no foul.)

    While J and I could certainly have the floor fixed at any time--we just need to set the money aside--it doesn't bother us enough to bother with. We have other places we want to spend our money (like on our garden) and other places we need to spend our money (like on our exterior paint), so we just let little things slide.

    And that, I've realized, might just be the reason why we are able to live as far below our means as we do. For instance, J drives a 20-year old Volvo 240 station wagon for which he receives a great deal of ribbing from friends, co-workers, and family. But the car runs great, has the Volvo level of safety, and J is happy to do the work on it. Even though J's boss teased him about the giant blue brick recently when J drove a group to lunch, we ultimately know that it doesn't matter in the slightest what other people think of the car. It's an inexpensive (and fun) car to own, and it fits our needs. (J's boss also found himself reluctantly impressed with the car by the time he'd ridden in it).

    In addition, I'm still wearing the same maternity tops that I bought three years ago that are getting a tad worse for the wear. While it would be lovely to have some clothes that don't have tiny stains on them, I also know that I don't have to look professional (or even pulled together) at any point during my day, so I save my money for other issues. I'm happy to wear out my clothes until they've fallen below even my unfastidious standards of what constitutes something you can wear in public.

    You, too, can pare down your list of necessities to a much more affordable tally if you simply lower your standards!

    For me and J, floor moulding, a car built in this Millennium, and clothing free of stains/holes are simply luxuries that we consider completely unnecessary. Our lives wouldn't be appreciably better with those things, so we do without them.

    What do you do without/consider a want rather than a need/no longer consider as standard, in your quest for frugality? What kinds of teasing do you get from others who just want you to fix the dang floor!?

  • Your Retirement Questions Answered, Part I

    Photo of the world's coolest retired couple courtesy of Alex Proimos

     

    I mentioned several weeks ago that I will be spending my May semi-hiatus from blogging doing research and writing a book about retirement. I also invited you all to pepper me with retirement questions that you've always been afraid to ask.

    I have to tell you, reading your questions produced small animal noises of terror from this researcher/writer. I went into this project with a sense of unwarranted confidence. I know money stuff, I thought to myself as I signed the contract to write AN ENTIRE BOOK. This will be a piece of cake.

    Then I read through your questions, and I realized there's a reason why people make a living advising people on how to retire. This stuff is complimicated!

    So after a few days spent hiding under a desk emitting high-pitched anxiety noises, I started doing my research. I'm still not feeling like an expert, but I feel much more confident about my ability to know where to find answers. (I'm still waiting for the tax code to make sense to me, particularly vis-a-vis retirement, but I suspect I'll be waiting a long time for that one.)

    In any case, I wanted to get started answering your retirement questions today, and I thought I'd start off with the excellent question from maggie.glos:

    "As a younger person, I am always confused with whether it is better to put my retirement money into one of the funds based on my age and how many years to retirement or if I should be trying to put it into certain stocks. Which is wiser?"

    Part of the reason why this is a tough question to answer is because the answer depends somewhat on you and your personal investing style and risk tolerance. Specifically, if you want to personally play the stock market and you have a high risk tolerance, then you'll be unhappy putting money into a mutual fund based on how far you are from retirement. But if you're somewhat risk averse and a set-it-and-forget-it type of investor (which definitely describes me), then mutual funds will be the way to go.

    However, since there are very few people who fit that first descriptor, I'll answer Maggie's question as if she's more like the second type of investor.

    One of the reasons why it may seem wiser to pick certain stocks is because of how they have historically performed. But if you visit any financial adviser or read any prospectus, you'll see the words "Past performance is no guarantee of future returns" written somewhere, spoken aloud, embroidered on a pillow, or tattooed on a forehead. Any stock that has gone gangbusters can't promise that it will continue to do so--just ask anyone who invested in dotcoms in 2000 or real estate in 2007.

    So, historical performance is not a way to pick a stock. That means you're left with other metrics, like the soundness of the company, the performance of the market as a whole, or your gut, which are equally imperfect methods for choosing a particular stock.

    That's why most investors mitigate their risk by buying into mutual funds. These funds diversify the investment by buying into many different securities (securities is a term that includes stocks, bonds, and derivatives)--and mutual funds include professional management of the investments.

    Basically, Maggie, it's going to be wiser for 99% of workers to choose a fund rather than pick specific stocks.

    However, that doesn't completely answer your question. I was under the impresson that you also weren't sure how to go about choosing funds. This is a common problem, and in fact, it is the stumbling block for many many people and can often be the reason why workers don't buy into their company 401(k). They just can't bear the thought of having to read through all the information and make choices.

    Thankfully, it's not as difficult as you might think.

    Start by determining your risk tolerance. Bankrate has a "fun" version of the usual risk tolerance quiz that can help you determine how secure you can feel with your money in volatile investments.

    Once you know how conservative or aggressive you are, you're ready to start determining which fund is best for you. Look at the investment objectives of your available options. These objectives will be stated clearly in the prospectus for each of your options.

    As a young person still decades away from retirement, the best objectives will be growth or capital appreciation (either of these terms might be used). If you are particularly conservative, you might temper those growth assets with more balanced assets. For example, you might choose to put 50% in an S&P 500 Index Fund and 10% in an international stock fund, both of which would provide you with a growth objective, and the remaining 40% in a bond fund that would provide you with more stability. A more aggressive peer might change those rations to 60% S&P, 20% international stock, and 20% bonds. But in either case, a young investor needs to make capital appreciation a priority.

    As you get closer to retirement--within ten years, let's say--you'll want to start transitioning from an accumulation mentality to rebalancing. This will be when you start scaling back on the aggressive allocations (which are generally stocks) and amping up your balanced allocations (funds that are a combination of stocks and bonds).

    When you reach retirement, you will then want to move into allocations that will produce income in your retirement--things like bonds that offer income objectives. 

    The third investment objective you'll see is safety/stability of principle. You'll see that on cash equivalents like CDs, T-Bills and money market funds. These will not keep pace with inflation, which means that even though you theoretically can't lose principle with these, you are still losing money in the long run because your principle will be able to buy less and less over the years. Go for stability with money you need to keep liquid, but this is not a real investment strategy.

    So, to make a long story short, for most people it is wiser to choose funds based on your age/years to retirement.

     

    Phew. Is anyone else sweating? I feel like I just ran a 5k.

    Maggie, I hope this answered your question. For everyone else, please let me know if there is anything you'd like me clarify or if you have any other retirement questions you would like answered. The comment line is open!

  • Being a Life Insurance Beneficiary

     

    As I've mentioned before, my dear dad was a financial planner who got his career started by selling disability and life insurance.

    That means he was really well prepared for his regrettably short retirement and for his estate. One of the wonderful gifts he left for myself and my sister was a life insurance policy. My sister and I were named as both the owners and beneficiaries of the policy. He did this so that my sister and I would not have to worry about estate taxes on the benefits--which we potentially would have had to pay if Dad had been the owner of the policy. Dad was a smart cookie and taking care of us like this was one way he showed his love.

    I've never been a life insurance beneficiary before, so much of what I'm encountering has been a little confusing/new/tough to figure out. Working as I do in personal finance blogging, I feel like I know just enough about the subject to know just how much I don't know. Add to that the fact that I'm feeling a little weird about this money--I very much wish I could have my father back, but making plans for how to use the insurance money is undeniably intriguing--and dealing with the life insurance benefits has been a little strange.

    It started with knowing how to receive the benefits. My father was insured through MetLife, which offers something called Total Control Accounts, which they really try to sell the beneficiaries on. Basically, this settlement option keeps the money under MetLife's control (I like to imagine Snoopy is the one handling the accounting, with a pencil behind his ear and an old-fashioned paper-reciept calculator set up on top of his dog house). The money will continue to accrue interest, which will become part of my payout eventually, and I can write a draft for any amount up to the full benefit at any time. MetLife really wants beneficiaries to take this option, because it means that they get to hold onto/use the money for longer. According to their literature, the interest rate is calculated weekly, interest accrues daily, and it is credited monthly.

    The other option was to take a check for the full amount.

    Since I needed to talk to my financial adviser about where this money was going, I decided to go with the Total Control Account. As I told my sister when she and I were trying to figure out the best course of action, this was Dad's insurance decision, and he would have made a good one for us. It's possible the money won't stay in that settlement account for long as I start using it for various things, but I know that it's safe where it is and I have flexibility and options.

    Now, as I'm waiting for the paperwork to go through, I've had some time to consider what I want to do with the money. My sister told me she planned to give a portion of her share to a children's hospital, which I thought was a wonderful idea. My father loved kids. It took me until I was about 13 or 14 to realize that most of my friends' fathers didn't wave at little kids and flirt with babies. Dad was unabashedly happy to interact with little ones, in a way you rarely see in grown men. So I'm pleased to follow my sister's suggestion to give away a portion of the money in Dad's name to help children in need.

    As for the rest, I'm going to put the majority towards my own retirement and some towards LO's and Thing 2's* college funds.

    I like to think that Dad would approve of my plans for the money. He did once say he would get down on his hands and knees to scrub floors to pay for Harvard if that was where my sister and I wanted to go, and I feel similarly about my kids' college educations. (My feelings about college are evolving somewhat, considering the spiraling expense and the relative lack of return, as much as it pains me to look at education from a purely financial perspective. But anything I can do to take finances out of the education equation and that will allow my kids to follow the educational or life path that will bring them the most fulfillment and success makes me feel good.)

    It feels strange to suddenly have this money. J and I are doing fine without the money, and my retirement and the kids' educations would certainly be taken care of without it. That's part of the reason why I want to make a donation to charity that is larger than we could afford--because that is something that I know I couldn't do without this gift, and I'd like to pay it forward.

    I just hope to be worthy of this last gift from my dad, and I hope that I am responsible with it.

     

    *I have not yet announced to my Dollar Stretcher readers the big news that J and I are expecting baby #2, in mid-September. Before we knew that this baby was also a boy, J started referring to the baby as Thing 2 (as in, the second of the Cat in the Hat's two associates), and it stuck. So even though we've picked out a lovely name for our second son, I'll probably continue to refer to him as Thing 2 online.

  • What JC Penney Can Teach Us About Rational Behavior

     

    Photo courtesy of Dravecky

    By now, you've no doubt heard the news that JC Penney has fired their new CEO Ron Johnson after only 17 months on the job, and reinstated their old CEO Mike Ullman.

    I've been following this story about JC Penney with interest, because I was actually very heartened by the changes Johnson instituted. Rather than artificially inflating prices so the store could have sales and send out coupons to customers, Penneys had decided to go to a "fair and square" pricing system, where they just kept their prices reasonable and consistent. That meant you could stroll into a Penneys on any old day with no coupons whatsoever and know you were getting a good price.

    That, to me, seems like a great innovation.

    Unfortunately, I seem to be in the minority.

    What Ron Johnson didn't take into account was the fact that shopping is very rarely just about purchasing goods. For the bargain-hunting types who thrive on sales, coupons, special deals, and the like, shopping is actually a game, wherein you can "win" if you save more money than some other sucker who's paying full price. For many shoppers, scoring the cute blouse for just under $10 is more about the thrill of the hunt, and less about the blouse itself. This hardly makes sense if you're looking at shopping rationally--which I try to do and Johnson clearly did--but considering what we see once a year on Black Friday, it's probably safe to say that "rational" and "shopping" are not necessarily two words that can be uttered in the same breath for many American consumers.

    Basically, Johnson was under the impression that Penneys was selling consumer goods, when in actuality, they're in the entertainment business. By changing the pricing system to reflect the true cost of the items for sale, Penneys took out the entertainment value of bargain hunting, and completely eliminated many shoppers' reason for shopping there.

    As they're new ads have proclaimed, "Oops!"

    For me, I'm disappointed that things have gone the way they have for Penneys. (I'd like to think that if I had spent any time thinking about the new pricing system, that I would have had an inkling over a year ago that it wasn't going to work--but I don't think I'm nearly that smart). I would love to see shopping become a more straightforward transaction: you need a particular item, you search for said item and potentially compare prices, you purchase said item. End of story. But considering the fact that shopping (and even bargain shopping) is something of a national pastime, it's unlikely these kinds of games will be ending anytime soon.

    Too many of us enjoy the game for companies to start replacing it with rational pricing.

    What did you think about Penney's "fair and square" pricing strategy? Were you pleased or disappointed that bargain hunting was no longer possible? Are you more likely to shop there now that you can take advantage of sales and coupons again?

  • On Being Called Cheap

     

    Yes, I pinch pennies.

     

    It happens every once in a while. Being of a frugal nature, I look at things in the way that will avoid spending unnecessary money.

    Sometimes, that means someone will call me cheap.

    I hate it when that happens.

    Honestly, it's gotten better since the economic downturn. Being frugal has become something to aspire to, rather than something to be ashamed of. People can talk openly about their extreme couponing and the way they stretch their meal plans over a week, and it's now considered interesting conversation instead of proof of being both boring and a cheapskate.

    But still, from time to time, my frugal worldview will prompt someone else to decry "cheap!"

    I'm a little sensitive to this non-insult. I know that in general, nothing is meant by it. People who do not understand why and how I live the way I do have to find an easy method of comprehending my lifestyle. I know that I pay close attention to small amounts of money that other people simply don't worry about, which may make it seem as though I'm particularly parsimonious. (I'm not. I just like to pay attention). I also know that just because I make decisions that are different from others' doesn't mean either method is better than the other. I know all this, but it can be hard to feel it.

    I really admire the individuals who embrace the cheapskate image. They have a "Nobody bodders me!" kind of attitude that I wish I could emulate.

    But, personally, I don't want to be thought of that of as cheap. Careful with money, yes. Frugal even, sure.

    But cheap to me seems like the opposite of generous, which I truly hope is not the case in my life. Part of the reason why I am so frugal is so I can have money available to spend on things that are important to me--and that includes family and friends, the ability to stay home with my son, his future education, wonderful experiences, and charities I care about.

    Ultimately, I know it truly doesn't matter what other people think of me. (And no matter how often I might hear my name and the word cheap in the same breath, you won't see me changing my money habits. I wouldn't know how to, for one thing).

    But I do wish I knew better how to let this particular epithet roll off my back.

    Has anyone ever called you cheap? How do you deal with it?

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