ou might notice that I don’t have as many articles this month. I hope to add some in a few weeks. The reason, and I like to use the word reason and not excuse, is that I somehow got mold in my lungs and have been ill for a MONTH now! I was sick and I’m still coughing up nasty stuff now.

Of course, I would be better sooner if say…I went to the doctor as soon as the cough started. Nope. Not me. It’s just a little cough, I said, no need, I said. Two weeks later, doc said I had mold in my lungs. Grrrr.

The moral of the story here is: Take care of your health! It’s generally less expensive that way in terms of medical bills, loss of school and work time, and just less fun.

I probably won’t take my advice, but it doesn’t hurt to put the idea out there.

 

• Eat healthy: Follow the usual health guidelines. Eat your vegetables, minimize meat consumption, cut out the salt and sugar, etc. Don’t eat fast food. Snack on fruits. Healthy food doesn’t require a lot of time to prepare. A fresh salad is a simple toss, toss, as opposed to deep-frying chickens. Are healthy food more expensive? Probably not if you are careful what you buy. Instead of a pre-washed, pre-cut, pre-packaged tub of apples at $3, just buy an apple for $0.50.

• Excercise: Even I in my utter laziness occasionally get of my buttocks and walk for my health. You don’t need an expensive gym membership. You school probably has a gym for free, just use it. Or jog on school grounds with friends. or swim in the school pool. Or play basketball or tennis with friends regularly.

• Sleep well: I know, I know. It’s silly to think that college students get time to sleep. Try to. A regular regimen of a good night’s sleep alleviates stress and illness. Study earlier in the day instead of waiting until 8 or 10 p.m. Don’t loaf about, just get to work. Then relax with friends after you are done and then go to sleep. Wake up earlier instead of waiting till 11a.m. and you’ll have a full day to enjoy. Of all the tips, this is probably the one that’s least followed, but for anyone who’s serious about his or her health and serious about school, this is a key advice.

 

Good luck people! In the meantime, I’m going to swig down some more nasty medicine. Grrr!

Frugal living comes in five steps:

1. Spend wisely now
2. Save for your needs
3. Save for your future
4. Save for your wants
5. Spend for fun

Notice the order? It’s specific and purposeful. First, you spend money wisely (the opposite of randomly buying a shirt here, a movie there, and black lights ‘cause they look cool). Then, you save a bit of money for things that you know you will need (those textbooks that you need in three months). Next, you save money for your future (your retirement, your wedding, your house, or your graduation trip to Africa). After all that you get to save money for your wants (that new laptop you’ve been eyeing). Finally, you get a bit of money for fun.

That’s all to it. If you follow these five general guidelines, then you would be living a frugal, financially smart life. Some people already know this and follow these guidelines without needing any further instructions. I’m not one of these people and if you are reading this, then chances are, neither are you. So for this month, let’s take a closer look at Step 1, Spend Wisely Now.

A lot of our debt and financial problems come from our inability to spend wisely.

Spending is very easy. Even now, after years of living frugally, I still spend money frivolously and uncontrollably. I don’t do it as often as I used to, granted, but I have to constantly fight the urge to just “pick something up at the store.”

So how do we spend wisely?

First, know your wants and needs.

Here’s your first exercise for today. Make a chart of your wants and needs. Go all out. Write down everything that you can think of. Use pencil and paper or an excel sheet.

Needs are things that we have to have to survive. Food and shelter are obvious needs. Transportation is another need. Good health is not a luxury, it is a need.

Wants are things that we want to have. These are things that we want, desires, demons if you will.

Frugal living means we spend money on our needs and prioritize our list of wants. We then spend money on our wants ONLY when we have money left over. Ideally, spending money on wants comes after Step 4.

The funny thing is many people confuse their wants with their needs. They then go ahead to spend a lot of money on their wants, all the while patting themselves on the back for spending wisely and insisting that they don’t have enough money to live on. Hah!

Let’s examine your list of needs and how you are spending your money on it.

Shelter is usually the first thing on the list of needs. However, what kind of shelter do you have? You need a place to sleep and rest, but do you really need an apartment at the beach? The difference between the minimum that you need and what you are actually spending is luxury and luxury belongs in Step 5, meaning that if you still have money after you spend for your needs and save appropriately, then you can certainly afford to have an apartment at the beach. If you don’t have money after you spend for your needs and save appropriately, then you CAN’T afford that apartment at the beach and if you continue to spend money on it, then you are spending unwisely. Move to a cheaper apartment in a relatively safe neighborhood, get a roommate or two or three, or move in with a relative for free. Find shelter that meets your minimum need.

Food is also on the list of needs. However, we all know that you don’t need to eat out three times a week and have McDonald’s for lunch every day. Your food needs can be met by cooking at home and making sandwiches to bring to campus. You can read more about how to manage your food expenditure elsewhere on this website.

How about clothing? You do need to wear clothes, but does it have to be brand new, straight from Banana Republic? No. You can get your clothes from thrift stores, vintage shops, and garage sales. To be perfectly honest, you don’t even need that much clothing. If your closet is tight, then you have too many clothes and don’t need to buy new ones till the old ones wear out.

Transportation is another need. That’s not to say that everybody needs a car. No, everybody needs a means of getting around. Your feet are a means of transportation. Bicycles another. Buses are great for getting to far away places. College students generally don’t need a car but if you do, does it have to be the latest model or can it be five years old?

Do you get the general idea? Spend only the least that you need to and not a penny more. That’s the first step to frugal living. However, everybody’s minimum needs are different. I am small and don’t take up a lot of space. A small one bedroom apartment is more than enough for me. However, you might have pets, boyfriends, girlfriends, and need a space for painting. Your housing needs would be greater. Just know your needs and wants.

Does it all sound harsh, terrible, and completely undoable? Yes, but please keep in mind that this is only the first step. This is the foundation of your financial life.

Did I say that you can never spend money frivolously? Of course not. You can spend money, as much money as you want…when you have it. That comes with Step 5 where you spend for fun.

For this month, think about your needs and wants. Think about how you are spending money on them. And of course, think about how you view your needs and wants. Examine your spending habits. Start to make changes.

There are ways to save on taxes that can fit into a financial plan.  Home ownership can help, especially if you buy in a good location at a good price, and stay put, at least for several years. You can deduct the interest you pay on your mortgage loan.

Financial advisers encourage investing in retirement plans, especially those offered by employers. If you are saving for retirement through an Individual Retirement Account (IRA) and/or work retirement plan (tax-sheltered annuity, 401(k), 403( b) , or 457) you get the triple advantage of tax-deferred compounding: the interest and dividends earned on your principal, the interest you earn on those interest and dividend earnings, and the interest you earn on the dollars you otherwise would have paid in taxes. These all grow and compound tax-free over the years. Taxes are due upon withdrawal in your retirement years when your tax bracket is likely to be lower.

The interest earned on municipal bonds is totally exempt from federal income taxes, and often state and local taxes as well. Congress has allowed this type of tax- sheltered investment opportunity to encourage investors to support the development of local and regional infrastructure – schools, roads, hospitals, libraries, sewer and water systems. Investors can buy into diversified pools of tax-free municipal bonds through mutual funds. As always, it’s best to consult a professional tax or financial adviser when considering tax-sheltered investments.

There are many ways to donate investments to your favorite charities and social change organizations that can provide tax deductions for you and allow you to continue to receive interest and dividends from the principal, or that will reduce the estate tax burden on your heirs.

Whatever your situation, you can be a responsible investor and let your values guide your investments. You can withhold money from businesses whose products or practices conflict with your values, and direct it toward low-income housing, minority-owned enterprises, renewable energy – whatever you want to support. Financial professionals can help you build a responsible portfolio.

Here’s a story I wish someone had shared with me a long time ago. It’s the hypothetical story of twins. Let’s make them young women with a passion for fashion, food, and world travel. (Why fashion, food, and world travel? ‘Cause they’re costly.) Both girls have the same taste, the same wants, and since they are twins, they like to have the same things. They are only different on the timing of their purchases.

Twin 1 (Ms. C.C. Shopper) can’t stand to wait for anything so she buys first and think later. Most of the time, she doesn’t have the money right away so she uses her credit cards and pays for her purchases a couple of months later down the line. Of course, she ends up paying premium prices AND interest on her credit cards.

Twin 2 (Ms. Savy Shopper) can’t stand the thought of giving her money away to credit card companies, so she saves her money in an interest bearing savings account until she has enough to buy what she wants. Of course, by the time she has enough money, the item is usually on sale, so she gets a great deal. She also gets to accumulate interest on the left-overs in her savings account.

Now, C.C. feels bad for her twin because Savy always seems to be a bit behind the fashion. Savy feels a bit sad too, but she figures it’s a small price to pay to stay out of debt.

Graduation day comes and they both decide to head off to Europe to celebrate. C.C. puts the entire $3000 trip on her credit card, really pushing her limits to the max while Savy pulls out the savings that’s been growing for the last 4 years. She is mildly surprised to find that she still has a bit of money left over. They both have a great trip and come back to start their working lives.

What’s the score so far? Well, both girls have the EXACT same STUFF because they enjoy buying the same things. However, C.C. is already burdened with thousands of dollars in debt while Savy already has a small nest egg started.

The decision that you have to make for yourself is: are you going to spend first and pay later or are you going to save first?

Take the time to post your comments and thoughts here.

Savvy retirement planning starts with your first job and never ends. The security in Social Security is slipping and pensions are shrinking as employers re-examine benefit packages. No matter what your age, figuring retirement income into your financial plan is vital. How much you set aside for retirement depends on your age, your income, how much you want at retirement and when you plan to retire. Remember, saving early and often allows the magic of compounding to work for you.

Open an Individual Retirement Account (IRA) if you can. No tax is paid on any of its dividends, interests or gains until you withdraw. If you’re employed, you can contribute up to $2,000 a year while claiming a tax deduction for that amount, depending on your income level, marital status and participation in a company pension plan. Upon retirement, your tax bracket will likely be lower.

IRAs can be invested in many securities including bank certificates, mutual funds and money market funds which offer professional management of your investment. You can also choose a self-directed IRA for which you or your financial planner buy and sell securities and manage your own investments.

Since the purpose of IRAs is retirement saving, withdrawals are subject to heavy penalties before age 59¹/₂, unless you become disabled. If you’re over that age and still earning, IRAs make an ideal savings account since you can enjoy the tax advantages and be free from penalty withdrawals. You can contribute to your IRA up to the age of 70¹/₂. Then you must start taking distributions, but you can still contribute if you are earning wage income.

For guaranteed monthly income for life, consider an annuity. Annuities are purchased from insurance companies with a single or periodic payments. As with an IRA, the income accumulates tax-free until you begin withdrawals.

Annuity payout options available at retirement:

• A straight life annuity pays income monthly from retirement through death, with no benefits to anyone at your death.
• A life annuity with “installments certain” pays you income for life, with a specified minimum number of years, so that if you die the balance of the income promised to you goes to your beneficiary.
• A refund annuity pays you for life or until the payouts equal the premium paid. If you die before then, your beneficiary receives a refund.

When choosing an annuity plan, compare companies for service charges or loads. Since income payments on annuities are fixed, they won’t keep up with inflation. An annuity is an investment, so keep in mind the minimum interest rate guarantee, the current interest rate, and penalties for withdrawal.

Check with your employer about employer-sponsored 401(k) for “for-profit” companies and 403(b) plans for people working for nonprofit organizations. Both allow savings to accumulate and compound tax-free until retirement.

Self-employed people can have an IRA as well as a Keogh plan that allows them to save up to $30,000 or 25% of their income, whichever is less, on a tax-deferred basis.

A Simplified Employee Pension Plan (SEP), a special type of IRA designed to be an easy-to-manage-retirement plan for small companies allows the employer or self-employed individual to contribute 15% of a worker’s income or $30,000, whichever is less, on a tax-deferred basis. The money can be put in any of the investment vehicles you would use for an IRA, and the withdrawal rules are the same. You can contribute as long as you are earning income even past age 70¹/₂.

A SEP can also include a salary reduction arrangement. Under this arrangement, employees can elect to have part of their pay contributed to their SEP-IRA. The tax on the part contributed is deferred. Your employer needs to sponsor this type of arrangement, but it is worth finding out if yours does, because up to $9,240 can be deferred each calendar year.

It’s best to check with a tax planner or investment adviser first because rules about these plans are complicated. However, as is true of all aspects of financial planning, the most important thing is to get started now!

Compounding. One of the easiest ways to make your nest egg grow is to reinvest dividends and interest. By simply rolling over these funds, you can make it possible for your investment to flourish. If you had invested $100 in a typical stock at the end of 1926 and spent all of the dividend payments, you would have ended up with less than $3,000 by 1990. If you had reinvested the dividends, you would have had more than $55,000 to your credit!

Asset allocation. This sounds complicated, but all it means is how you divide your investment funds between the three major categories: stocks, bonds, and cash or cash equivalents. (Checking accounts and money-market funds are considered cash equivalents because they are so liquid.) Younger investors will tend to have more money in aggressive stocks with strong growth potential.

Older investors, seeking to generate steady income and preserve their capital, will tend to have more in cash and bonds. One good rule of thumb: take your age and put a percentage sign behind it. Never let your cash holdings (the most conservative and, as a result, lowest-returning investments) exceed the resulting percentage.

Diversification. As is true in most things in life, it doesn’t pay to put all of your eggs in one basket when investing. You can cut your risk of suffering major losses by spreading out your investments across stocks, bonds, and cash, as well as across more than one mutual fund. You should also seek diversification among the types of stocks and mutual funds in which you invest.

Rather than putting all of your assets in high-tech mutual funds, you may also wish to have substantial portions of your nest egg in international funds and tax- free municipal bond funds. The idea is to decrease your exposure to risk and to increase your potential for profit by having at least some of your money in the right place at the right time.

Think of your investment strategy as a pyramid. The pyramid’s base is your foundation, the area where you store the largest portion of your resources. The base includes the money you want to keep safe (low risk with predictable return), and liquid, such as your emergency fund. It also includes the assets you hold for your security such as insurance policies or your home.

If you accumulate assets and feel confident about taking a risk with some of them, you can consider adding investments to the midsection of the pyramid. They can offer a higher return, and more potential for growth and income. You might add mutual funds or high quality stocks. The peak of the pyramid is reserved exclusively for money that you can afford to lose. There are higher risk investments that offer higher potential for return, such as aggressive growth mutual funds, stocks in start-up companies, and commodities.The Pyramid Approach to Investing

Think of your investment strategy as a pyramid…

The pyramid’s base is your foundation, the area where you store the largest portion of your resources. The base includes:

1. money you want to keep safe (low risk with predictable return) and liquid, such as your emergency fund
2. assets you hold for your security such as insurance policies or your home.

If you accumulate assets and feel confident about taking a risk with part of them, you can consider adding investments to the midsection of the pyramid. They can offer a higher return, and more potential for growth and income. You might add mutual funds or high quality stocks.

The peak of the pyramid is reserved exclusively for money that you can afford to lose. These are higher risk investments that offer higher potential for return, such as:

• aggressive growth mutual funds,
• stocks in start-up companies, and
• commodities.

Choosing your investments depends on your age, dependents, income, capital, tax bracket and your values. Compare the liquidity, rate of return, safety and tax benefits of each investment you consider, and view these with your situation and goals in mind. The most common investment vehicles are savings and checking accounts, certificates of deposit (CDs), money market funds, mutual funds, corporate stocks, government and corporate bonds, and U.S. agency or Treasury obligations (T-bills). Here are some of the major choices:

Checking and savings accounts are no-risk, low-yield investments used mainly for money that must be safe and available.

A certificate of deposit (CD) is a deposit made, usually to a bank, for a specified amount of time for a specified rate. Terms vary between one and 120 months, with penalties for early withdrawal. Because the interest rates are only slightly higher than a savings account, certificates of deposit are usually good for short- term investments only.

Treasury bills or T-bills offer a guaranteed return backed by the U.S. Treasury. Minimum purchases are usually between $1,000 and $10,000 and maturities range from three months to 30 years. You can purchase them through banks, branches of the Federal Reserve Bank or through stockbrokers.

Corporate or common stock is a purchase of a piece of a corporation’s net worth. When a corporation succeeds, so do its owners – and when it fails, so do its owners. It’s worth consulting financial advisers or stockbrokers when investing in stocks. But keep in mind that you should allow plenty of time for a return; quick profits are rare. Don’t buy individual stocks unless you can diversify by investing in at least five companies in different industries. And remember, it’s more economical to buy in “lots” of at least 100; the transaction cost you pay will be less. To diversify broadly and minimize costs, many investors use mutual funds instead of buying individual stocks (see below). Financial planners often recommend automatically reinvesting your dividends to purchase more shares of stock.

Bond ownership makes you a creditor of a corporation or a government. You loan money and receive a fixed interest rate for the use of it. At the maturity date, you receive all of your principal. However, before the maturity date, the market value is not guaranteed. The value of a bond may increase or decrease depending on changes in interest rates and credit quality. Corporate bonds are usually backed by collateral, or a promise to pay. It’s prudent to check the financial standing of the corporation before purchasing a bond, and the rating of a bond by a professional bond-rating service.

A money market fund is relatively safe, liquid and low-risk. Many offer check-writing privileges. A money market fund is a pool of money invested in high-yielding, short-term vehicles. They allow you to buy a share in a diversified mix of investments that you as an individual would likely not be able to duplicate. As an investor, you receive a share of the yield realized from the fund’s investments. The rate of return for money market funds is usually higher than for a checking account, but the minimum investment is higher, usually $1,000. Like all uninsured products, the yield will fluctuate with varying market conditions

Mutual funds generally invest in common stocks and bonds and offer automatic, broad diversification. Investing in a mutual fund is buying a share of the fund’s portfolio – its particular collection of stocks and bonds. Your investment entitles you to share any dividends or interest income earned by the stocks and bonds, as well as any profits or losses realized from the sale of these securities.

Mutual funds do not guarantee return and pose a higher risk than a savings or money market account. Your principal is at risk. However, investments in one or more mutual funds offer more diversity and greater potential returns than investing directly in the stocks and bonds of a small number of companies. They are generally suited to investors who are looking for diversification and professional management, but lack the resources, time or desire to deal with the research and paperwork that stock investments require.
Some mutual funds invest in a spectrum of securities while others focus on a particular industry or geographical area. Each fund has a stated investment objective outlined in its prospectus. Socially responsible mutual funds also outline their social and environmental criteria in their prospectuses.

If your objective is long-term appreciation of your investment, look for a growth fund. If you hope to use your return as current income, look for an income fund. A balanced or “growth and income” fund invests in high dividend stocks as well as fixed-income securities that provide for both.

When I was younger, the plan for my future was pretty straightforward. You go to high school to learn, get good grades, and get into a good college. You go to college to get good grades and then get a good job. After that, just circle the mouse wheel until retirement. OK, that last part about the wheel was my own addition but that basically was my “job” as a kid. That plan worked for me and it’s the path many people have walked with great success, but it’s not the only path.

With the government looking at additional regulation on the for-profit colleges, I started to wonder again whether college is “worth it.” In general, it is. However, recently with all these for-profit schools, a lot of people are going to college unnecessarily. They’re being promised things that the schools can’t deliver. They’re being sold something they don’t need, depending on what they want to do, and they’re only buying it because we’ve put “college” on a pedestal. In this Devil’s Advocate post, I explain why you might want to skip college.

Most Colleges Don’t Teach Skill Trades

Colleges are good at teaching things best learned in a classroom or a laboratory. Philosophy, chemistry, physics, mathematics, psychology, and such. They are not as good at teaching skill trades like being a mechanic or a welder or a fisherman. For skill trades, you are better off going the route of an apprenticeship or a vocational school that specializes in that skill trade.

If you go to college and get a degree in business only to graduate and become a fisherman, you’re wasting your money. That’s not to say a degree in business is bad for someone who is a car mechanic, but you don’t need to spend all that money and four years in a classroom when all the skills you need to learn are best learned hands on in a shop. A fisherman should, if he or she chooses to, go back to school for a business degree if it makes sense. But he or she should not go simply because everyone says he or she should go.

Not Everyone Finishes College

This entire post was inspired by this article in the New York Times that is advocating that some people skip college. One of the scariest bits of information they shared was a projection from the Department of Education. “Perhaps no more than half of those who began a four-year bachelor’s degree program in the fall of 2006 will get that degree within six years…”

Let’s say 50% of people complete the program within 6 years, that means 50% of people don’t finish and are paying for something that they won’t ever receive. That also means that a percentage of the people who do finish will be overpaying, since it will take them longer than the stated four years. What’s amazing about that statistic is that it screams one pivotal idea – not everyone is suited for college.

The problem is you can’t expect kids to know this because they haven’t been to college. They haven’t charted out their futures. That’s why you really need to rely on an honest and capable high school guidance counselor to help you decide what you should actually do.

Opportunity Cost of 4 Years

The average cost of college in 2009-2010 is $26,273 a year for a private college, $7,020 for a public college according. That means over four years you’ll have spent over $100,000 at a private school and $28,000 at a public school. When you consider the opportunity cost of not working for four years, coupled with the $100k/$28k actual cost, a college graduate is very much deep in the financial hole. Now imagine the value today!

According to data from U.S. Census Bureau, the average high school graduate makes $30,400 a year. The average bachelor’s degree makes $52,200. How long does it take for the college graduate to catch up considering they’ve paid $100,000+ and haven’t been pulling a salary for four years (totaling $121,200). It takes a long time.

You Can’t Afford It

Student loan debt figures are at all time highs. Why is it socially acceptable to tell people “you can’t afford that Maserati” or “you can’t buy a 10 bedroom home” when they can’t, but not OK to say the same about college? Why is credit card debt so bad when student loan debt is good? People are graduating with a hundred thousand dollar student loan debts, which can’t be discharged in bankruptcy, and saddling themselves with multi-hundred dollar loan payments.

You should not go to college if you cannot afford it. This would be different if we weren’t surrounded by horror stories of student loan debt. These are stories of graduates who can’t find jobs and must meet a small mortgage payment each month. You hear about a philosophy major with $50,000 in debt and no job prospects. The reality is that they shouldn’t have gone to that school to pursue that major… it wasn’t worth it and they couldn’t afford it.

If you’re choosing a major that has a low starting and low career pay, you will spend the next 30 years paying off loans. The only way how people I know pay off loans for education or social work degrees is through government assistance programs that forgive a certain portion for every year of “service.” It sucks, but it’s true.

You Don’t Want To

Remember when you were a kid and your parents told you to eat your vegetables? You probably fought them but you eventually ate them. You did it because your parents knew what was good for you and you, as a kid, didn’t. Perhaps they’re doing the same thing with college, telling you to go because it’s the right thing to do. They want you to go to college because it does, in many cases, give you an advantage in the workforce. They want you to go because they can tell their friends that you are going to college. But you should only go if you feel like that’s the best option for you.

You shouldn’t go to college because your parents want you to, or because your guidance counselor wants you to, or because your best friend is going and you want to be with him or her. You should go, and put yourself on the hook for tens or hundreds of thousands of dollars, if it’s the right decision for you.

(Photo: walkadog)