The Art of Frugality

My apologies for my 2 week absence. Hopefully I'll prepare some worthy content for you, in teh meantime here is an excellent Financial Toolbox article from the people at Kiplinger: click here.

Ok, to be fair, I've never read Robert Kiyosaki's books (I know, half of America has..I just never got around to it). The more I hear about the guy the more I really don't like him or his teaching principles. This is a guy who claims the way to make money is through debt?? Granted it's all in building your real estate empire but how relevant is this today given the whole Frannie Mae, Freddie Mac, Bear Sterns dibacle?

Most of the reputable personal finance bloggers out there recognize Kiosaki as little more than a guy who can write a pretty word or too with no real sound financial basis. Take for example this great article calle Let's Read Some of Robert Kiyosaki's Drivel at allfinancialmatters.com. The author dissects an article by Kiosaki which claims that mutual funds are no better than playing the lottery. Someone...please explain.

I guess the issue with Kiyosaki is his "win big," "get rich quick" attitude. It's off putting for those who know the road to riches is paid in patience, steady investing and common sense not in finding "the next big thing." Though I do believe risk is a big part in getting pay offs I'd much rather take caluclated risks and follow the advice of someone like Andrew Tobias then take out 70,000 to buy an apartment complex a la Kiyosaki advice. call me crazy....

If you're tempted by the promise of Kiyosaki just check out John Reed's Analysis.

Hey all! Wide Open Wallet hosted Finance Fiesta: The Olympic Edition. Some excellent articles to check out so be sure to stop by and enjoy.

Ready to Be Rich is a man after this girl's heart when he took on Ways to Save Money on Hair.

Looking to make a little cold hard cash on the side? Check out Your Finish Rich Plan where an article tackles this in Making Money Online, Ten Things I wish I knew as a Beginner

An excellent article at Physician Entrepreneur delves into investing: Investing in Bonds-The Basics

Debt Smackdown discusses the concepts and feelings that are often connected with amassing money at What Do You Believe About Money?

For those of you who have ever tried to lose weight (and assuming that most of you have at least read articles about losing weight), you're probably familiar with the concept of writing down everything you eat. This tactic has proves time and time again to aid the individual in lsoing weight, the underlying principle being that you think twice about what you eat if you have to write it down. I found the same goes for trimming down your budget.

In May I began to not only live by a budget, but to also record everything I spent within the same budget to see what the delta would be in my proposed spending vs. actual spending. My first month I proposed a $2,3000 monthly budget. This budget included all the mandatory bills and entertainment, books, clothes, shoes and so forth. What did I clock in at? $2,600. The great thing about having tracked this? I not only saw that I went over my budget, I knew what it was exactly that tipped me over (the answer is spa treatments). So in June, I kept at it, then July and now into August. After looking at the three months of data I have compiled, I've managed to shave my monthly budget down to $1,800. That's nearly a 70% decrease!

In getting my monthly expenditures within reason, I did make some cuts along the way. I reduced my cable/internet bill by getting rid of cable completely, I haven't been to the spa in a few months and new clothes have become a thing of the past. But what did I find? I found more money to finally pursue cake decorating and yoga, more time to spend reading and satisfaction knowing that I can treat myself to a spa indulgence without feeling guilty. I found that writing down everything you spend works quite similar to writing down what you eat. Several times I found myself tempted to plop down forty bucks for some shoes but when I realized I'd have to be writing that amount down and subtracting from my monthly budget....well that urge sort of fell by the wayside.

Although constructing a budget is the first step in living within your means, it is only of great use when you apply it to your everyday spending habits, particularly in the beginning stages.

Great article I stumbled upon while trolling around bogleheads.com. You can check it out here at Seeking Alpha: Investment Discipline in the Year of Capitulation

Essentially, it discusses the importance of investment discipline in a bear market. Check it out and let me know what you think

Ok so I'm a tad less than brilliant and thought yesterday was Thursday and so I posted my Thrift Find Thursday on Wednesday. Oops. So to (sort of) make up for it here is a bunch of awesome quotes from reputable peeps. Found them on CNN and wanted to share the wealth. I'd also like to "dedicate" this post to my good friend, and amazing mentor Scott. It's totally something he would appreciate.

Mellody Hobson, President, Ariel Investments

When I was 22, a friend who is very successful explained to me that no one
ever got rich through earned income. "Look at all the great wealthy families,"
he said. "From Carnegie to Rockefeller, it was never how much they made at work
that made them wealthy - it was their investments." And that made me shift from
thinking about a paycheck to thinking about building equity and long-term
wealth. And it has helped me a lot. Instead of a raise, I ask for more
stock.

Whitney Tilson, Founder and managing partner of T2 Partners and the Tilson Mutual Funds

About 12 years ago I was trying to learn more about personal investing.
My good friend Bill Ackman, currently a hedge fund manager for Pershing Square
Capital Management, told me, "Read all of Warren Buffet's Berkshire-Hathaway
shareholder letters. That's all you need to know."

I've been reading them voraciously ever since. They teach the
principles of sound investing: Buy a stock only when you can purchase it at a
large discount from what any rational cash-paying buyer would pay per share to
own the whole business.

Abby Joseph Cohen, Senior investment strategist at Goldman Sachs

The best advice I was given was to "ignore the noise." Financial
markets are, by nature, volatile and messy. Successful long-term investing
emphasizes the fundamental underpinnings of the economy and companies. These
building blocks rarely shift quickly, although market prices can change
frequently and dramatically even during the course of a single trading session.
Wise investors make their decisions based on a few essential elements and
are not easily deterred by market gyrations. But wise investors are also willing
to adjust their views when the critical variables shift or do not play out as
expected. The source of this advice was my father, Raymond Joseph.

Timothy Ferriss, Author: The Four-Hour Workweek

Professor Ed Zschau at Princeton University gave me a short but
powerful piece of advice. I had volunteered for the second time to clean erasers
and place name placards on desks before class to get to know him.

He said with a smile, "Don't get too good at the little things" and
explained that if you excel at the menial tasks, those are the responsibilities
people will associate you with and give you. Get noticed for doing things that
help the big picture, not for fetching coffee, and your financial picture will
grow just as fast as your reputation.

Robert Frank, Professor of Management and Economics, Cornell University; Author: The Economic Naturalist

Back in some early grade at the Riverside Elementary School in Miami,
the teacher asked the class to imagine that we put one paramecium on one square
of a checkerboard and then it had two daughters that occupied the second square,
and the two daughters each had two daughters who occupied the third square and so on. How many would you have by the time you got to the 64th square?

A lot. If you lined up all the paramecia end to end, they would
reach the sun and back 6,000 times over. That lesson easily translated into
money: If someone had put aside $1,000 the day I was born, with a 9.5% annual
return it would be worth almost $210,000 today.

Gus Sauter, Managing Director and Chief Investment Officer, Vanguard

I got my number-one piece of financial advice in an investments course
at the University of Chicago business school in 1979. It may sound a little
self-serving: Index investing is a great way to gain exposure to the
marketplace.

The second-best advice I ever received came from a friend of my
parents. He said, if you think investments are going to do something within a
certain time frame, double that time frame. It could be anything from growth
stocks outperforming value stocks to the dollar strengthening. That kind of
advice gives you a dose of humility: It acknowledges that trying to exploit a
trend is very difficult, even if you're right about it, because your timing may
be all off.

Dan Fuss, Manager, Loomis Sayles Bond fund

I worked at the bank in Wauwatosa, Wisconsin, where I grew up, shortly
after I got out of the Navy in 1958. The president of the bank, Art Kohaske,
used to say, "Know your borrower." Mr. Kohaske drilled that into me: You had to
know the people, know the business. And I admired him greatly.

I translated that lesson into "Know your issuer." In other words -
to put it in CFA talk - know the specific risk that you're taking with a
particular investment. You can apply that advice to government agencies, munis,
corporate bonds, stocks - it applies big-time to stocks. That is really very,
very good advice. If you really know your companies, really know them, you have
a phenomenal advantage, particularly in markets like this where you get rapid
movements up and down that aren't related to individual companies.

David Laibson, Professor of Economics, Harvard University

Back in the early 1980s, at the beginning of the bull market, I had a
high school teacher who was a stock picker, and he was very bullish on a housing
stock, Kaufman & Broad. I was an impressionable teenager, and I invested my
very limited wealth in this stock. It went through the roof. I concluded as a
consequence of this experience - during a bull market, of course - that I was a
brilliant investor. I start buying and selling stocks, going long, going short,
going nuts.

This went on until I was in college. I made some money, and then I lost
a lot of it. The real cure was the 1987 crash. It's easy to trick yourself into
thinking you can outplay the market. In watching my confident investments go
sour, I learned that I don't know more than the market and, thankfully, I
learned that with only a few thousand dollars. Now I buy diversified portfolios
through mutual funds and ETFs.

Ed Zore , President and CEO, Northwestern Mutual

I started out as a stock trader in Northwestern Mutual's investment area. I
was very young and eager to learn everything I could. I remember looking through a list of stocks in the company's portfolio and wondering why we didn't buy more of the highest-yielding stocks.

When I asked the portfolio manager, he informed me that when a stock offers a dividend that's high for its category, it can mean that the dividend is in jeopardy. That's when I learned that if a stock looks like it's offering you a free lunch, you should find a different restaurant.

Don Phillips, Managing Director, Morningstar

Tom Mathers, founder of the Mathers Fund, shared these words of wisdom
at an early Morningstar Conference: "If you find a great growth company, don't
sell it just because it gets a little pricey - you may never get back in again."
He told a charming story about how he and his wife were redecorating their home
in the 1960s and wanted to buy a piano.

Tom held some shares in Disney, and while he liked the company, he
thought its stock price was a bit rich at the time, so he sold the Disney stock
to fund the purchase of the piano. Tom never got back into Disney and instead
watched it rise and rise. Years later Tom would walk through his living room,
see the piano and mutter to himself, "That's the most expensive damn piano on
the face of the planet!"

Bill Nygren, Manager, Oakmark Select Fund

Back when I was in college, I remember watching Johnny Carson interview
Andrew Tobias, who was giving personal financial advice. Johnny asked: "What's
the best investment for someone who has only $1,000?" Mr. Tobias said,
"Nonperishable consumer staples."

Of course, the audience roared. But Mr. Tobias was being serious
and said that if you purchase nonperishables when they are on sale, the return
on investment is enormous. That answer focused me on the idea that investing
wasn't only about stocks and bonds but rather was a mind-set for making sense of
all of the transactions a consumer engaged in.

aaaaand discuss.

I subscribe to Get Rich Slowly's blog, in which everyday articles are sent to my email. Often times, in reading what J.D has posted I get great ideas for my own blog. Additionally, he makes me feel better about those times when I wish I could spend every last dime I posess. So it isn't a shock that I read a particularly noteworthy entry on his blog, one in which I feel I should also spread. It's the art of living simply.

In reading many personal finance blogs and books, I often find their stance on spending to grow tiresome. I feel like spending money on frivilous items is a waste and I should be saving every last penny. While I do agree with the concept of saving as opposed to spending, I still believe I deserve to get a massage one month or splurge on that dress I've been coveting. My guilt is entirely self-imposed, but yet, I have not found an escape for it. Reading Get Rich Slowly's article "Five Tactics for Pursuing Voluntary Simplicity" actually eased this stress a bit. In this article, another article from Wise Bread is drawn upon, which actually originated the train of thought regarding this matter.

So, what is voluntary simplicity? It's choosing to live a life of simplicity as opposed to a life focused on money. Instead of choosing a career based upon salary, you're choosing a position in which you truly enjoy; a position that is, perhaps, more fulfilling regardless of pay. Wise Bread goes on to say,

Choosing to live simply doesn’t mean that you have to give up all the cool
stuff you want. It means, rather, that you have to focus on a small number of
wants — the ones that matter the most to you.

It's this statement I found, that resonated with me. AH HA! So living a life of frugal choices and maximum savings isn't about depriving myself of the things I hold most dear, but rather focusing on what I find most important (spa treatments, makeup and shoes) and eliminating or cutting back on the things that are not (cable, clothes, and expensive food). Obviously, different people are going to have different priorities and place their emphasis on other aspects and these priorities will likely change over time. I can not see myself still placing a large emphasis on shoes when I have a child to raise and food may become a high priority. But oh the freedom of wanting a few things instead of wanting everything!

Get Rich Slowly illustrated five excellent ways to pursue this life of simple living and, instead of paraphrasing and not doing the article justice, here are the steps verbatim:

1. Live intentionally. Decide what’s important to you and what you want to do
with your life. Set goals. Be aware of why you’re spending your money. Try to make conscious decisions, and not just react out of emotion.
2. Raise some capital. Personal finance isn’t all about saving, Brewer argues. It’s not all about living cheaply, either. It’s about finding a middle ground that works for you. But every goal will require some money to back it up. Prepare for
emergencies, invest for the future, and use your money to support your values.
3. Find your true calling. “Find meaningful work, so that you can spend your
time doing something that you care about,” Brewer writes. Saving and investing
don’t just yield financial benefits, he says, but they also allow you to choose a vocation instead of basing your job decisions only on salary.
4. Do it yourself. This notion has figured prominently in my thinking lately:
that whenever possible, I want to do things myself instead of paying to have
them done. (This probably has something to do with the fact that I just spent several thousand dollars on a re-wiring project.) There’s a lot of satisfaction to be derived (and often money saved) from growing your own food, repairing your own home, and maintaining your own car.
5. Value community and experiences over stuff. You are not what you own; you are what you do. It took me a long time (nearly forty years) to realize this. I still haven’t fully wrapped my mind around it. But like Brewer, I’m coming to understand that it is relationships and experiences that give life meaning.

For more on the philosophy of money check out Wise Bread's blog.

My parents have always been frugal. Not cheap, because when they splurged they really splurged, however, they do not live a lifestyle congruent with their positioning in the class system. My father is a vice president of an energy company and my mother works for a association that deals with trial lawyers. They do not live in the lap of luxury, and for the life of me I never understood this. Why wouldn't my mother go out and buy expensive handbags and big diamonds? Why doesn't my dad drive the latest model sportscar? And why are we living in the same house we've lived in since I was two?? As a materialistic (yes, I admit I am) and money-driven individual, my parent's lifestyle was inconceivable to me and I vowed I would not live the way they do: simply.

I've been reading The Millionaire Next Door lately and an intresting concept jumped out at me (actually, it's the fundamental concept of the entire book). The difference between a UAW and a PAW. What do those mean? Well according to the book, UAW stands for Under Accumulator of Wealth where wealth is defined as an individual's net worth. Don't be confused and assume this refers to how much one makes a year, but rather, how much does the indivudal have in investments, CDs, money markets and the bank. A PAW, as you may have assumed, is a Prodigious Accumulator of Wealth, or someone who has a high net worth.

This concept: the idea of being a UAW versus a PAW made me think about saving and living frugal in a whole new way. Turns out that typically, a UAW earns a rather large income but spends the majority of it, while the PAW may make a large amount a year (or not), but lives off only a fraction of this. The entire underlying focus is: living beneath your means.

Now I'm sure you're asking yourself, "Well, what's the point in working your tail off to not enjoy the fruits of your labor?" and I think that is an incredibly valid inquiry. One in which I am struggling to answer myself. I think the key to living this way is to a) not entirely deprive yourself and b) take solace in knowing that should you lose your job tomorrow you are able to sustain your lifestyle for quite some time. If you're living in a mansion, driving a Benz, how likely will you be able to support this lifestyle when you retire or lose your job? The answer is: you won't. Because you have very little in the bank, and a high consumption rate your lifestyle would change dramatically. You are now working in order to live.

As a PAW, you may not be driving the nicest car, you may not have that yacht, or that Chanel suit, but the difference is: you can afford to if you really wanted. I believe that my position has changed after learning PAW and UAW and what it means to be either of them. My parents are a perfect example of a PAW: frugal, living off a fraction of their income and living a fulfilled life with nice things (albeit not extravagant). What a relief to be able to plop down a large amount of money when unexpected twists and turns leads to a financial obligation you weren't anticipating. When your kids need help financially, how comforting to know you can give them assistance without feeling the pinch in yoru purse. I have been extremely blessed with all that my parents have been able to provide for me, and now I believe it is my turn to become a PAW so I can live a life with financial independence. I finally understand their way of living and I plan to emulate it.....even if it means havign to tell my parents they were right ;)

So you've been saving your pennies and dimes and have built up a substantial amount of money. What do you do with it? Do not just let it sit in savings, even if it is a high yield Account. Why? Because when you're only earning 3.00%APY and inflation is 4%...well you do the math. Here is my (very non-professional) basic advice.

First off, you want to have an emergency fund which equals approximately 3-6 months of your monthly income. This chunk of money benefits you when you incur large, unexpected costs (and no, I'm not talking about that to-die-for Chloe handbag). This is also your safety net should anything happen to your job. Life is full of unexpected twists and turns and by having an account ready it minimizes the risk that you will turn to credit when in need. I recommend keeping this fund in your high yield account since these account allow easy use and transfer of money when you're in a pinch.

The key to building investments is to use passive income as your goal. Passive income is defined as income which is sustained through little work. Sounds like a dream doesn't it? Well it takes a large chunk of moolah to generate enough passive income to quit your day job and begin your dream of moonlighting as a professional karoke singer. However, you can use the passive income you generate, no matter what the amount, to either a) reinvest or b) use as a monthly supplement to what you are already making. (I say reinvest...oh did you guess that already?)

Learn the Basics
Ok, ok I hear you panicking now. You know nothing about investing? Well, my soon-to-be money savvy friends, that's what a library is for. Stock up on books such as The Lazy Person's Guide to Investing and Boglehead's Guide to Investing both of which come highly recommended and pack in a lot of great information for the investing novice. Learn key facts such as the difference between Small-, Mid-, and Large-cap funds. How do the funds classification correspond with your goals? And also learn when a stock, versus a mutal fund versus a bond is more preferrable (hint: none of them are a perfect choice, but some align more with your objective than others).

Utilize Your Advantages
An important factor to keep in mind is you're young! You have the golden nugget of time on your side and therefore have a greater ability to choose options that may carry more risk. Most trends show that in the short-term stocks come at a very high risk, but hold on to those babies and you can see significant returns. The longer you have to hold onto your investments the more risk you're able to take on since dips and valleys may very well hardly register 5 or 10 years from now.

Stop Being a Sheep (baaa)
There's a reason why the majority of people do not day-trade for a living. People often fall into the trap of buying a stock when it has hit big and selling the minute they see a decline. You can not get rich by following trend, but rather buying quality stocks at bargain prices (my good pal Warren Buffet said that). Buy low then hang in there for the further lows that may follow. You know your risk is fairly less when you invest in stock that isn't "the next big thing" but rather a steady earner throughout time.

Know your Aptitude

It's difficult managing a laod of individual stocks, which is why I would say stick with mutual funds. What are these? Well, a mutual fund pools money from multiple investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie. So how do you measure a fund's risk? It takes some analysis on your part:

1. What is the fund's biggest quarterly loss?
2. Measure the fund's volatility against the S&P 500 ("the mainstream fund" if you will)
3. Calculate the standard deviation: this will show you how much the fund bounces in its average returns.

Don't Dump a Loser
Ok, dump a loser if we're discussing your love life here. But with funds, any and all will have an off-year. This is why it is important to benchmark against the S&P 500 as well as check to see if it has trailed comparable funds for more than two years. If it hasn't, hang int here. Through benchmarking the rough patches, you can determine if this is an industry- or market-wide occurance or if you have a real stinker on your hands.

Remember the key to building your portfolio is not about getting rich quick but, instead, finding stocks and funds that match your goals and holding onto these guys.

Lately I've been coveting a high priced line of skincare known as the holy grail of facial products (well according to some of my favorite beauty blogs anyway). This product, Somme Institute, while effective and high quality, also comes at a hefty price. The following is a list of the products I want to purchase with their prices listed:

CLEANSER, 8 oz. $40

I don’t think I need to tell you that for the generations that will follow the Baby Boomers into retirement, Social Security will be a distant, quaint memory. The truth is, I believe young people recognize how important it is to invest in a 401(k), however, how many of these younglings recognize the value in saving now rather than later? According to a new report, "401(k) Plans Are Still Coming Up Short," from the Center For Retirement Research at Boston College, only 62% of people ages 20-29 participate in employee 401(k) plans.

Now I know what you’re thinking, “But I don’t make enough to contribute to my company’s 401(k)!” and my answer to you is this: you can’t afford not to. Most companies match fifty cents to your dollar for up to 6% of your contributions and that, dear friend, is what we call free money. When these contributions are deducted from your paycheck pre-tax, it’s hard to even miss what wasn’t there to begin with. Ya dig?

Money Crashes puts it in this respect:

if you started contributing to $100 a month to your retirement account at the
age of 25, and you were going to retire at the age of 60, then your account
would reach $379,000. If you started saving for retirement at the age of
35 with the same contribution, then you would have just $132,000.

And that scenario doesn’t even account for company contributions! Bottom line and common sense dictate: the sooner you begin to invest, the longer amount of time your money has to grow based upon your employer’s (or your own homegrown) portfolio mix. This has an impact on your bottom line when the gains from each year build upon the previous year’s balance (compounding interest at work).

Diversify
When you begin to invest at an earlier age, it also enables you to take more risk. The volatility of the market will have less negative impact on your balance, in the long run, and can actually work in your favor. In order to save enough money to live work-free, you will need the monetary growth that stocks are capable of providing. According to CNN:

From 1926 through 2006, stocks - broadly speaking, using the S&P 500 index
as a measure - have posted an average annual return of 10.4 percent versus just
5.9 percent for bonds, according to Ibbotson Associates.

However, before you rush out and put all your money on the company is providing timeshares for your dog (the next big thing, I swear). You should consider stock funds as opposed to individual allocation. Money Magazine provides an excellent allocation plan that diversifies and ensures stability (see left). Additionally, I recommend checking out this helpful tool Retirement Calculator, which can be incredibly eye-opening...and a little stress-inducing.


Different types of accounts:
Now that we’ve gone over the basics here are a few different accounts broken down to a very, very basic level.

401(k)- this is the plan offered to you through an employer
Traditional IRA- provides tax-deferred growth, which means you pay your taxes on the investment gains only when you make withdrawals. Furthermore, based upon your qualifications, your contributions may even be deductible.
Roth IRA- contributions are not tax-deductible but when you withdraw your gains, you don’t owe Uncle Sam any tax.
Roth 401(k)- provides no up-front tax deduction, so your contributions won't reduce your current taxable income. But all the money you withdraw is tax-free as long as the funds have been in the account for at least five years and you are at least 59½ years old.



No matter what you decide to do, all I can reccommend is extensive research and utilizing the tools that are offered to you. Best of luck dear friends and let me know if you ever buy that shiny black Aston Martin!

Wow, that phrase is a blast from my college business course past. With the housing market taking a turn for the worse I had an epiphany that perhaps, now would be an ideal time to buy. Especially since I am a young professional with nary a black spec on my credit report (well 0k there is the Cox Bill debacle of ’07 I still need to straighten out) nonetheless, I begin to ponder whether a mortgage of a slightly higher price is better than rent. After all, this money is going towards an investment, something that will only benefit me in the long run right? Wrong. Turns out, counterintuitive as it may be, that buying isn’t always the best option. First clue to this conclusion (excluding the lecture I received from my mother along the same lines) was a website I stumbled upon called TCalc a web based financial calculator that, among numerous other scenarios, can calculate how much money you save by renting or buying. You can see my results below:

According to the site I would save $11,360.31 over the next 5 years by renting.

So if you realize renting is your best option for the time being, how do you ensure you are paying a fair price for your area? Rest assured, my friends, I've got this one covered as well: check out RentoMeter. It'll give you the surrounding rents for your area and provide your rent on a Barometer scale. Mine ended up falling right in the middle. Share your thoughts on renting vs buying. I'd love to hear.