Thursday, November 29, 2007

"The Automatic Millionaire" (Chapter 5)

NOTE: I'm sorry it's been so long since our last update in this series. I really don't have any excuse for the delay, and I apologize.

Chapter five of David Bach's book is entitled "Automate for a Rainy Day." As you might expect, this chapter deals with building an emergency--or "rainy day"--fund. The chapter even contains a purpose statement: "This chapter answers two basic questions: How much money should you put aside in order to protect yourself from the proverbial 'rainy day,' and where should you put it?" (pages 135-136).

Nearly every financial planning book contains this step, because, no matter how much planning we do, things go wrong. There are emergencies. Sadly, these emergencies often sidetrack people's financial goals and lead them back into, or further into, debt. If we have a plan, though, we can avoid such a serious setback.

Bach, as Dave Ramsey does, uses "months" instead of "dollars" to figure out a rainy day fund. On page 136, he writes a short "sleep well at night" test. Here it is:

My monthly expenses currently total $_________.
I currently have $___________ saved in a money market or checking account.
This equals _______ [insert number] months' worth of expenses.

The numbers can be estimated, because most of us have a pretty good idea how much those are. Tragically, for many of us, the second number is $0!!!

The next step, after realizing that you need money to handle emergencies is to follow Bach's "Three Rules of Emergency Money."

1. Decide how big a cushion you need. Bach sets the minimum bar at 3 months' worth of expenses. He goes beyond Dave Ramsey by suggesting that some people may even need as much as two years' worth! The main thing is that it is enough (1) to cover a certain number of months, and (2) to help you sleep at night.

2. Don't touch it. Bach mentions that many people start saving their fund, only to have an "emergency" all the time! Notice what Bach says, which is worthy of reading and remembering:

What's a real emergency? Be honest with yourself. You know what a real emergency is. A real emergency is something that threatens your survival, not just your desire to be comfortable. (140)

3. Put it in the right place. While Bach doesn't think we should put the money in something like stocks or bonds (because it has to be liquid), he also points out (with a GREAT story, I might add) that we don't need to bury it in our backyard or stuff it under our mattress. You should earn at least some interest on this fund, because you need at least a small hedge against inflation.

Bach's suggestion is to "shop for a rate like you'd shop for a car" (143). His primary location for a rainy day fund is in a money market account, but some pay terrible interest and others have a lot of fees. If you are frugal, you will shop for a car very carefully, trying to get the best deal. The same should be true of a money market fund. Just a small percentage difference, over time, can pay off in a large way.

Over the next several pages, Bach walks the reader through the process of setting up an account and answers several important questions which are worthy of your reading. He even lists several places that have money market accounts that are fairly easy to use.

He then mentions using US Savings Bonds as a possibility. I disagree with him here. While buying bonds has become easier (you can do it online), they have a terrible rate of return and, in my mind, you are helping the government use debt!

Finally, Bach mentions the question, "What if I'm in debt?" In other words, if you aren't debt free, do you need to build up an emergency fund. Bach differs from Dave Ramsey here slightly, bu the principle is the same. Whereas Ramsey says you should start off with $1000 in your emergency fund, Bach says you should work toward building up one months' worth of expenses, then go back to paying off debt aggressively. To me, either is acceptable and both are reasonable.

Of course, Bach says over and over that you should automate the savings into this account. In other words, when you set up your rainy day account, make sure you set it up to automatically come out of your paycheck (or your checking account) at a specific time each month.

With these steps out of the way, Bach has you paying off your debt and building up your emergency fund at the same time. While that's not my favorite way of doing it, the benefits are there, if you can stick with the program.

Tuesday, November 27, 2007

It's THAT Time Again

Last week we had the greatest holiday of the year: Thanksgiving. For many, the day after Thanksgiving begins a frenzy that won't end until December 25, as shopping lists are filled to buy gifts for loved ones and friends.

However, when people are in debt (or saving for another financial goal) how does that family not get side-tracked during the buying frenzy of Christmas? Here are some suggestions.

1. Have a limit and stick with it. The best way to do this, in my mind, is to discuss ahead-of-time with your family how much you can spend on each member of the family. We have done this in my family and it is already helping us stick to our Christmas budget.

2. Look for sales, but don't get duped by every "sale." Just because Store A has a shirt for 25% off does not mean that the shirt is quality. Make sure that the price is good for the item you are purchasing. Some retailers truly believe in volume instead of quality this time of year. I would rather pay a couple of dollars more for a quality item. Also, make sure the "sale" is really a SALE. Sometimes prices are marked up, then marked a certain percentage "off," and you are right back at the original price!

3. Shop online before shopping in person. You can find great deals online, but you can also find out what things are really selling for. Many times, when you shop online, you end up paying more for the item because you have to pay for shipping. Factor that in! If the item is going to be more with shipping, go to the store, but make sure you know what you could have paid online. Sometimes, for bigger-ticket items, stores will bargain a bit.

4. If you find a deal, don't spend more just to reach your limit. For example, if you have $50 set aside for your sibling and you find "THE BLOUSE" that she has been wanting for $30, don't feel obligated to spend the other $20 on another gift. Take that money and pay down a debt, or use it for gasoline on your Christmas gift-giving. The people you are buying for already know you love them, and they will never know that you got a good deal.

5. Remember your goals. I can't overstate this. If getting out of debt is a high priority--truly a high priority--you will not overspend on Christmas. This is a time of year that will really test your dedication to your financial goals.

Enjoy Christmas shopping. Be kind to those in the stores. Don't ruin their experience. But make sure you don't lose focus of your goals when it comes to your finances.

Tuesday, November 20, 2007

WYTI Links: 11/21/2007

Here's a mid-week set of links to go around...have a great holiday week!

10 Easy Ways to Save Money Without Much Effort (via Consumerism Commentary) Thanks to Adam for submitting this link last week...

What If You Make Maximum Retirement Contributions For 20, 30, 40 Years? (Roth IRA, Traditional IRA, 401k, 403b) (via No Credit Needed)

Organization 101: A Visual Guide to How I Manage the Information in My Life (via The Simple Dollar) Trent uses a system very closely akin to David Allen's "Getting Things Done" philosophy. Here he spells it out...and includes pictures.

Would Jesus Have an Emergency Fund? (via ChristianPF) This addresses an interesting thought we probably have all considered about the balance of saving for the future and using our blessings for God's good.

MP3 Players for Nine Year Olds? Whatever Happened to Simple, Inexpensive Fun? (via Money, Matter, and More Musings) In the holiday shopping spirit...

Friday, November 16, 2007

Don't Pass Up Free Referral Money

We've all seen the DirecTV commercial with the play on 'Speed Dating.' "Do you want to make 50 bucks the easy way?" While the commercial was annoying long before the 100th time I saw it, the point should not be forgotten. When I signed up for DirecTV I knew at least 10 families who had DirecTV service. Many of them knew I was planning to get DirecTV. It was only after I was a customer that I found out about the referral program. Had I simply stated when signing up for service that I was referred by my friends with account #: xxxxxx, we both would have received a total of $50 in bill credits. Instead, since no one mentioned this to me, we all passed up on free referral money. It is really quite sad to see how many companies offer free referral money, and then to know how many times service is obtained without anyone getting a referral bonus.

When you are planning to sign up for new service with a company that a friend or family member already has service with, check to see if the company offers referral bonuses. Some that definitely do:
I have personally taken advantage of the offers through DirecTV, Cingular (now AT&T wireless) and a Citi card. So, using this frugality tip may benefit you, or at least a friend. Don't pass up free referral money!

Oh, and by the way, if you need someone to refer you to DirecTV, AT&T residential, or AT&T Wireless let me know, I'd be glad to give you the referral info needed to get the credit!

Photo: Sufi Nawaz via stock.xchng.

WYTI Featured

James's article on Life with Pets was featured this week in the Carnival of Financial Planning.

Adam submitted the article, so they accidentally credited him with the writing.

Enjoy the entire carnival (James's article is 3rd) here.

"The Automatic Millionaire" (Chapter Four)

"Now make it automatic."

That's the overriding theme of this chapter, and the idea from which the book gets its name. David Bach is a firm believer in putting as many things on "autopilot" as possible. In fact, for the rest of the book, nearly every step includes the idea of making it automatic.

If you work for a company that will move money from your paycheck before you ever see it, get in touch with them and enroll in a 401(k) plan, but make it automatic! As we mentioned in the last chapter review, Bach also says that, whatever percentage you think you can put away, add one or two percent to it. After just a couple of weeks, you won't miss the money, anyway!

The chapter also contains a very easy-to-understand comparison of the traditional IRA (Individual Retirement Account) and the Roth IRA. As with most financial gurus, Bach teaches that, if at all possible, one should work in a Roth, but only after taking a company match in a 401(k) plan.

This quite lengthy chapter (it's 54 pages in length) also takes the time to show you the names and contact information for some companies that can help you get started with an IRA.

There is one major "plus" to this chapter. Bach takes quite a bit of time to share with the reader the importance of compound interest and of getting started as soon as possible. As you, no doubt, know, compound interest, over time can make thousands of dollars worth of difference if the same amount is invested. A chart on page 97 shows what investing just $100 per month will grow into. If you invested $100 at 10% for 20 years, you would have 76,570. However, if you invested that same $100 and only got 9%, but started 10 years earlier, you would have $184,447! That's almost twice as much, despite making less in interest!

I feel there is one major "minus" to the chapter, too. Bach is a firm believer in the "pyramid" way of investing. He says that, over time, one should move money from investment to investment, getting a little more "safe" (or conservative) as time goes by. For my money, I agree more with Dave Ramsey on this one. If you will take you time and do your research, you can keep your money in good stock mutual funds for your entire life and still be quite safe.

This chapter is long, but it is informative. While I feel that Bach gets off the subject just a bit (or, maybe, he just tries to explain too much about investing in one chapter) the overarching theme is still to pay for your retirement automatically. If you decide that you can write out checks every month, if you are like me, you will fail. "Something" (whatever that is) will "come up," and keep you from putting money away regularly. Save yourself from yourself and make it automatic.

Tuesday, November 13, 2007

"The Automatic Millionaire" (Chapter Three)

If you think the "Latte Factor" is used several times in David Bach's book, the principle introduced in chapter three is used even more. In many ways, this step in his "automatic" plan is the basis for everything else.

Now that you have found something (or several somethings) in your budget on which you "nickel and dime" yourself into the world of being broke, you can change that. Stop (or greatly curb) your spending on that item. Now you have freed up some money to pay down debt, and build wealth.

The key, according to Bach, though is not just to cut out those small expenditures, it's to make sure you "Pay Yourself First."

By "first," he means "first!" Even before the government. If you work for a company that will help you by putting money out of your paycheck where ever you tell them to, you can easily do this. Simply call or email those in charge of this and ask them to put a certain percentage of your check into a retirement account.

Notice that Bach recommends a percentage, not a specific amount. The reason is really quite simple. If you get a raise, the amount you are putting away for retirement goes up proportionately with that raise.

You may say, "I'm already in debt and living paycheck-to-paycheck! How can I possibly put even 1% into retirement." The answer is this: you have cut your spending by finding your latte factor. Now you can live on less. Also, after just a couple of weeks of doing this, you will be amazed at how you don't even miss the money.

Finally, Bach recommends putting away more than you think you can. Challenge yourself. If you think you can only put away 2%, make it 3 or 4. If you think you can do 5%, make it 7 or 8. Again, after a few weeks, you won't miss the money anyway. And you will be taking advantage of compound interest over time. Also, if your company matches your retirement, make sure you are putting at least the amount they match away. If you fail to do so, you will be missing out on "free" money!

MY TAKE: Obviously, this "order" of doing things is not the same that Dave Ramsey would recommend. We have not even starting getting out of debt (officially) yet. Bach believes in doing both at the same time so that you will see little victories in both categories. While I agree with Ramsey on this one, Bach does make an interesting argument.

Monday, November 12, 2007

Life with Pets

I've had a dog since I was in 4th grade. Charcoal is now about 15 years old, half blind, mostly deaf, seems to have arthritis, and gets bad skin allergies. The last problem means several visits to the vet each summer. The summer after Stacey and I were married, we decided to get a pet, and decided on getting a cat. Along comes Dora (pictured). Then this past summer, Stacey called with a pitiful plea. In a home visit (she's a social worker) she found a stray kitten that was rubbing all against her legs, and would probably die if someone didn't take it in. We now have our third pet, Buster. Poor little Buster has had a hard life. The morning after taking him in, we found him near death in the bathroom he was in for the night. He couldn't stand up, wouldn't open his eyes, and was hardly breathing. We had to take him to a vet other than our usual one, because he was closed. Buster had to go back to the vet a couple weeks later because he was constipated. We've now had both cat's declawed due to getting new furniture. So we've spent about $300 on Buster...and still have to get him fixed.

Along with adopting Buster we received hundreds of extra pets....fleas. We tried everything. Flea collars, flea shampoo baths, carpet treatments, the liquid stuff from Wal-Mart that goes on their backs, etc. Finally, on my most recent trip to the vet, we purchased some flea medication from him. I would have gone to him first, but I was trying to save some money by not buying the prescription medication. In all, we've probably spent nearly $50 at this point on flea medication things...the treatment from the vet was $9 per tube that treats them for one month. We gave it to them, and within days saw an immediate difference.

The frugality moral of this whole ramble is twofold. 1) Call around to different vets. Our normal vet charges much less for seeing animals than the vet we went to in an emergency, which is why we have spent so much on Buster. And we don't care for him as much even! All vets do NOT charge the same! and 2) If your pet has fleas or needs some kind of can probably save money in the long run by taking them to the vet immediately.

That's life with pets in the Dalton home!

Thursday, November 8, 2007

WYTI Links: 11.09.07 -- High School Playoffs Tonight!

My Alma Mater--Walker High School in Jasper, Alabama--hosts a state playoff game tonight for the first time since I was a Senior (2001). One of our fine young men at Midway is a starter on defense. It'll be chilly out at the stadium, but it should be a fun night of football. Hope your area's teams do well also!

Friday links:

Quotables: Your Money or Your Life -- Chapter 1, Part 2

Here are some final quotes from the first chapter:
  • We haven't just borrowed from "the bank." We've borrowed from future generations... (p11)
  • And many of us are out there "making a dying" because we've bought the pervasive American myth that more is better. (p 12)
  • Americans used to be "citizens." Now we are "consumers"--which means people who "use up, waste, destroy and squander." (p 15)
  • Whoever dies with the most toys wins. Life, liberty and the pursuit of material possessions. (p 17)

Wednesday, November 7, 2007

The Automatic Millionaire (Chapter Two)

Most people believe that the secret to getting rich is all about finding new ways of increasing their income as quickly as possible. "If only I could make more money," they declare, "I'd be rich." (page 31)
Chapter two of David Bach's The Automatic Millionaire takes aim at our wallets; or, more precisely, how we spend what is in those wallets.

Maybe nothing from this book, or from Bach's entire system, is more famous than "The Latte Factor." Subtitled Becoming an Automatic Millionaire on Just a Few Dollars a Day, chapter two shows the reader how little decisions can cost us BIG when it comes to retirement.

Many times building wealth isn't about making more money; it's about avoiding spending what you already make. That's one of the reasons we have several articles on this blog about living a frugal life.

But, really, that $5 you spend on snacks every day isn't hurting you, is it?

To put it mildly, yes it is! If you saved $5 each day, instead of spending it on snacks (or cigarettes or coffee or whatever), and you invested it for 40 years, you would have around...


Still enjoying that Starbucks latte?

The simple point is that, if we will make decisions about the small things in our lives, the big things will usually take care of themselves. If you find yourself thinking, "I don't have any money left over to pay off debts [or invest for retirement]," then you need to look at your budget and really think about your spending habits.

Do you insist on having name-brand clothes? Must you have the name brand food items from the grocery store on all items? Do you buy a soda and candy bar at break time? Do you have the largest "package" on your cable or satellite TV?

If you do any of these (or other similar things), you may be costing yourself a huge retirement.

Near the end of the chapter, the reader is taught to track his/her spending for a day (or a week). Track every penny. You may be surprised where your money actually goes. Even if you have a written budget, this is a worthwhile exercise. It helps you truly understand if you are sticking to that budget, or if the budget--or your spending--needs to be altered.

What is your latte factor? How can you change it, so you can pay off debts and retire comfortably?

Tuesday, November 6, 2007

Getting Things Done

On my personal blog, I reviewed the book Getting Things Done. Many of you are interested in working and doing your job as best you possibly can. I thought you might be interested in David Allen's book.

Click here to read the review of Getting Things Done.

After starting the system, you may want a simple way to do it. I don't own a PDA, so I am just using a notebook right now. However, 43 Folders provides a "Hipster PDA" plan that I may begin using.

"The Automatic Millionaire" (Chapter One)

What a fascinating way to start the book! We all like stories, and this one is interesting and told quite well. David Bach's first chapter, "Meeting the Automatic Millionaire," may not contain a lot of practical advice, but it is the best chapter in the book. While I have read the book 3 times, I have read chapter one probably 4 or 5 more.

The chapter is simply a story. It is the story about how David Bach got the ideas for his plan; and those ideas came from a couple that he never would have expected them from.

Mr. Bach was teaching financial classes, but was still living paycheck-to-paycheck. He was what Dave Ramsey calls, "A broke finance teacher." One afternoon, though, that all changed. Jim and Sue McIntyre came into his office--not for advice as he had thought--but, rather, to show David that if he would just apply what he taught, he'd be rich.

These two people, nearing retirement, didn't make a ton of money (combined around $50,000 average), but owned two six-figure homes free and clear and didn't owe a dime on anything. In fact, as David looked over their stuff, it came to his mind that these two normal Americans had a net worth of just under $2million!

The rest of the chapter simply tells what they did to achieve such amazing levels of financial success. I won't go into detail because it really principles became the ideas for each chapter of the book.

Suffice it to say, if these two normal folks can be wealthy on a regular salary, anyone can! As I said before, this chapter is my favorite, and it is so motivational. If you don't have the book, this chapter is worth the price of the book. It will help us "normal folks" want to do what the McIntyres did.

Friday, November 2, 2007

WYTI Links: 11.02.2007 -- Productivity Edition

Being a responsible steward of God's blessings goes much deeper than just how we handle and view money. We must be responsible for all of the blessings He sends our way.

When we stand on judgment, we will be held accountable for how we used the time we were given. There is only so much of it to go around. No one has any more or any less than anyone else. Therefore, how we use our time goes a long way determining our success in all areas of life.

Here are some "productivity" links for this week. Remember, I'm not necessarily the most productive guy out there, but I did read about it on the internet/play one on TV/stay at a Holiday Inn Express last night...
  • David Seah. The subtitle for his blog is, "Better Living Through New Media." He has created many helpful applications for helping get things done more effectively and efficiently. Personally, I use the Compact Calendar for planning (right now, my 2008 version is covered in black, blue, and red ink) and the Desktop Flash version of the Emergent Task Timer (part of the Printable CEO Series).
  • Skrbl. I haven't really used this site, but it looks like fun and sounds interesting if you work in a team setting. It's an internet-based whiteboard. All you do is share the URL to your specific board, and others can log in and edit the notes and information written there.
  • Mozilla Firefox Cheat Sheet. If you're not using Mozilla's Firefox as your primary internet browser, you're missing out. Most importantly, it's more secure than IE. Additionally, it's far more customizable and efficient. Here's a comprehensive list of shortcuts and cheats for the browser.
  • Classic Tie Knots (via Brooks Brothers). Here's a "how-to" guide for several different tie knots. Since many of us wear ties on a regular basis, this might be helpful.
  • Building Strong and Memorable Passwords (via Corvus Consulting). You can't be too safe on the internet today. This is a helpful suggestion to creating unique--but memorable--passwords for each site you need login information. I've started using this technique for the various sites to which I login.

Thursday, November 1, 2007

Quotables: Your Money or Your Life -- Chapter 1 (part 1)

I've not fallen down on my reading of Your Money or Your Life...I've just neglected the opportunity to post interesting and helpful quotes from the chapters.

Today, let's begin looking at Chapter 1: The Money Trap the Old Road Map for Money.
  • "Your money or your life." If someone thrust a gun in your ribs and said that sentence, what would you do? Most of us would turn over our wallets. The threat works because we value our lives more than we value our money. Or do we?
  • Even the best of jobs have trade-offs. Midlife comes and we discover we've been living our parents' agenda. Or worse, we've been filling teeth for twenty years because some seventeen-year-old (was that really me?) decided that being a dentist would be the best of all possible worlds.
  • And they call [the modern career path] making a living? Think about it. How many people have you seen who are more alive at the end of the work day that they were at the beginning? Do we come home from our "making a living" activity with more life? Do we bound through the door, refreshed and energized, ready for a great evening with the family? Where's all the life we supposedly made at work? For many of us, isn't the truth of it closer to "making a dying"? Aren't we killing ourselves--our health, our relationships, our sense of joy and wonder for our jobs? We are sacrificing our lives for money--but it's happening so slowly that we barely notice.
  • Even if we aren't any happier, you'd think that we'd at least have the traditional symbol of success: money in the bank. Not so...The savings rate was 4.5 percent in 1990 [I have an older edition ;)]...The Japanese, by the way, save over 15 percent of their disposable income.
The book does an excellent job of living up to its subtitle, "Transforming Your Relationship with Money..." How we view money will determine how we treat money.

I'll post more quotables from chapter 1 later...

Check out the Prologue if you missed it last month...