Friday, February 29, 2008

Secrets of My Modest Success

As I start this blog, I am 27 and have a net worth of about $25,000. It's not a huge nest egg. I know of several people around my age who have net worths of several hundred thousand, or even a million. My little chunk of money isn't even enough for a down payment on a condo on my city. However, it is a good emergency fund and it's not bad for someone who just recently started making over $35,000 a year.

If you're just starting out, my modest savings might seem more achievable and less intimidating than the huge net worths of others. The steps I've taken to get here are also perhaps more accessible to the average person. Much of what I've done was luck, or dumb luck, and can't be replicated, but if you're not as far along the savings path as I am, I hope that explaining my history will help you come up with some ideas that will work for you.

1. I was brought up frugal. I was born in a town of 80 people. My parents had a garden where they grew vegetables and fruit. All our food was made from scratch. My father made four loaves of bread every week--two white and two cinnamon. He didn't have a bread maker. My brother and I were two of the few children in town, so we got lots of gifts from the crafty women in our church. When I was born, I received 27 baby blankets. I also remember handmade clothes, handmade quilts, and a homemade Cabbage Patch doll. My parents also used cloth diapers, and I suspect our "baby food" was just mashed up adult food.

Later, we moved to a bigger town. We bought some, though not all, of our clothes from thrift stores. I got hand-me-downs of the latest eighties styles from a slightly older neighbor. I remember looking at unit pricing while grocery shopping with my mom--I could pick out any juice as long as it was 100% juice and less than 3 cents an ounce. My brother and I got the things we wanted at Christmas and our birthdays, but other than that we paid for things like toys, craft supplies, and gifts out of our allowance. Starting at 12, I also got a clothing allowance, and tracked my clothes spending in a little notebook, which I assume was my parents' idea.

When we traveled, we camped. We even camped outside London. On vacations, instead of fast food, we ate MREs (a type of military rations). My father got ridiculously excited whenever there was an advance in MRE technology. He even brought MREs to some Norwegian relatives we visited (I don't think they appreciated it).

I always knew we weren't poor, and I never felt poor. When I thought about my parents' frugality, I thought of it as them being "strict" rather than poor or cheap. They spent their money in areas that were important to them--I may not have had as many Barbies as my friends, but we bought our first computer in 1982 and by the time I was fourteen I'd been to about a dozen countries. (We lived in Europe for part of that time, but my friends in Europe didn't travel nearly as much as we did.)

2. I made my credit card mistakes early. One summer in college, I racked up a balance of about $500 on a credit card. Later that year, I went on a vacation and added another $500 to it. I paid it off as I could, about $100 every month. Then one month I didn't get paid for my student work job and so had no money. No money at all--during that same month I needed $5 to replace my student ID and had to borrow it from an acquaintance. So I didn't pay my credit card bill that month. I just thought I would have to pay a fee or something (hey, I was young), but instead they canceled my card. It was a couple of years before I got another card, which luckily left me without a credit card during the financially dangerous post-college years.

3. I set financial goals. Since the age of 18, I've almost always been saving for something, usually either a big trip or an upcoming move. Most of these goals had timelines: for instance, one February I set a goal of having $2000 and being able to move out of my parents' house by August. I think having a deadline is important. The deadline can always be changed later on, but it gives you something concrete to work towards. "I want to save $5000 this year" is a lot easier to achieve than "I want to save $5000."The second statement could mean you want to die with $5000 in the bank.

I also think it's important to build up your savings skills by starting with small, tangible goals. If you're getting out of debt, I'd recommend starting with trying to clear the smallest amount of debt, so that you have an accomplishment to build on. If you don't have debt but also don't have any money, I think starting with a goal like "I want to buy a plane ticket to California," or "I want to buy a new bed," is probably better than starting than with something abstract like building up an emergency fund. The emergency fund is important, but I think you're more likely to succeed at building an emergency fund if you have the experience of successfully saving for something you want.

4. I invest.
Starting when I graduated from college, whenever I had an amount of money I knew I wouldn't need for a few weeks or months, I put it somewhere where it could earn interest. Since I was saving for short-term goals, I put it in very safe places. I have an interest-bearing savings account. I have a money market fund. At one point I was buying a lot of 90-day CDs. None of this made me tons of money in interest, but it got me into the mindset of expecting my money to make money and got me familiar and comfortable with financial products other than a regular checking account.

5. I saved too much. The start of my current nest egg came from saving for a series of moves I made in my early twenties. I saved for moves to London, Austin, Chicago, and New York. For each move, I had increasingly ambitious savings goals. Each time, I didn't have to use as much of my savings as I thought. I got lucky in finding jobs--I've never been out of work for more than a month. After the move to New York, I moved back to Chicago and still had $4000 of my New York fund.

Last year, I built that $4000 to $10,000 so I could qualify for the good high-yield savings account offered by my bank. I'm convinced that the only reason I was able to save that $6,000 was because I had a goal in mind. After I got the $10,000, my savings stagnated. I only started saving again after I set a monthly goal for my retirement savings. It's possible that once I've saved all this money, I still won't be able to retire at 35, or my goals will have changed and I'll have something entirely different in mind. For now, the important thing is that I'm working towards achieving something that I really want.

The best advice I can give to someone who's starting from scratch is this: No matter what else you do with your money, always have a goal in mind. The more defined this goal is, and the more regularly you review this goal and what you're doing to achieve it, the more likely you will be to get there.

Thursday, February 28, 2008

“If I didn’t work, I’d get bored.”

"If I didn't work, I'd get bored." I hear that sometimes, usually after the speaker has just spent several minutes complaining about his or her job. Or, "It keeps me from being bored."

Not me. Indeed, work is the sole aspect of my life that occasionally does bore me. Talking to my boyfriend? Not boring. Reading? Nope. Watching a movie? Could get boring for a few minutes, but then I just turn it off. But during a conference call with one of my committees, the danger of boredom is high.

The thing that has always irritated me about working, and before that going to school, is that I never seem to have enough time to do all the things I want to do. My passions aren’t expensive, but they are time-consuming. I manage to spend a lot of time on the things that I love to do, but it never seems to be enough!

Ten things I’d like to do today if I didn’t have to work:

  1. Write a new chapter in my novel.
  2. Read the entire archives of ProBlogger. I don't care about making money blogging, but he has a lot of good tips about blogging well.
  3. Mess around with my camera and take a picture for the header of this blog.
  4. Go thrift shopping.
  5. Work on the biography I’m researching on this woman.
  6. Take the train to Canaryville and walk around. This Chicago neighborhood has a lot of houses with interesting yard decorations.
  7. Hang out with R.
  8. Rethink how my Roth IRA is invested.
  9. Work on my delicious new freelance project.
  10. Speaking of delicious, make a cheesecake.

If you didn’t have to work, what would you do today? If you don’t work, what are you doing today?

Wednesday, February 27, 2008

Spring-Clean Your Tax-Advantaged Savings Plans

Tax-advantaged savings plans like Health savings accounts (HSAs), 529 educational savings plans, medical savings accounts, and flexible spending accounts (FSAs) are all great ways to shelter money for particular expenses. Are you making the most of these plans? I just spent five minutes looking at mine and found a way to save $75.

First, find out which plans you’re eligible for.

  • 529 plans, which come in two forms and can be used to “prepay” tuition or to save for future college costs, are open to everyone regardless of employer or employment status.
  • Depending on your employment status and how much you pay for healthcare, you are probably eligible for one of the three types of tax-advantaged healthcare savings accounts: a health savings account (for people with "high-deductible" health insurance), a medical savings account (for the self-employed), or a flexible spending account (for many employed individuals).
  • Flexible spending accounts are offered through your employer. Dependent care (day care and elder care) and healthcare are the most common uses for these accounts, but my employer also offers me an FSA for reimbursement on commuting costs.

Contribute the right amount. If you set up these accounts through your employer, you were probably told about them in your first week of work when you were still figuring out how to use your e-mail and had little time to calculate your average yearly daycare costs. Tax time is a great time to review how much is in these accounts, how much you used last year, and whether you’re contributing too much or not enough. Double-check your contributions. When I signed up for my transportation FSA, I simply divided my monthly transportation costs by two. A few days ago, I realized that since I get paid biweekly (26 times a year) rather than twice monthly (24 times a year), I’m overcontributing by $75.00 a year. I changed my contribution to the quirky-but-accurate $34.61 per paycheck.

Keep your contributions current. Review tax-advantaged savings plans regularly to allow for changes like new prescriptions, changes in copay amounts, rising transportation costs, or that baby-sitter you hired to keep you sane after your father-in-law moved in.

When you’re done with that chore, some frugal inspiration (pro-anorexics have “thinspiration.” Perhaps we can have “frugspiration”? Much healthier and less creepy!):

Stacking Pennies talks about free things she loves.

Donna Freedman at MSN money blogs offers tips for staying frugal over the long haul.

If, like me, you’re under 40 and already antsy for retirement, check out the Young Dreamers forum at Early Retirement Forums. Check out the other boards, too, while you're at it. The people on this board know everything there is to know about early retirement. Many are spreadsheet junkies who are happy to help you find the flaws in your plans and figure out how to correct them.

Tuesday, February 26, 2008

Guest Post: Early Retirement Extreme

If you're one of the three or four people who found my blog without linking from Early Retirement Extreme, please check out my guest post from yesterday and the rest of Jacob's excellent blog.

Poor by Choice

When I was 21, I lived with a friend in London for a while. We lived in the East End, which is still about as unsavory as it was when Jack the Ripper was picking off his victims there. I never saw any prostitutes, but there was a Bangladeshi teenager who made drug deliveries on a bicycle and towards the end of my time there a man was murdered about 25 feet from our front door.

I moved in with her in September. We had little money. She was a student and worked part time. I worked in a bookstore for minimum wage, and then had sporadic temp work for not much more. We ate peanut butter and jam, salami sandwiches made with salami her parents gave us, and the fried chicken her boyfriend brought over.

One day I dropped my toothbrush out of the window onto dirty ground and didn’t have money to buy another. A few weeks later there was a Tube strike, and I had to walk the four miles to work. On the second day, my shoes broke. I wore my only other pair of shoes, which were too tight, and cried the whole walk home because of the pain. I had no money for new shoes, or a cab.

But we lived this way by choice. For the three months we were struggling, we had a purpose. In January, we went to Egypt. It cost 300 pounds each, and in spite of the privation it required, I still think it was some of the best money I’ve ever spent. Our apartment was not heated, and we didn’t have money for the electricity to run space heaters, but as we shivered under multiple blankets we told each other we were going to Egypt in four weeks, three weeks, two weeks and then we would be warm.

A few months after the Egypt trip, I had to leave London, and my friend left her unheated apartment for a richer lifestyle.

Poverty for a purpose, as long as you really believe in that purpose or want your goal, is bearable. Poverty without a goal or without an end in sight is much more difficult.

A few years later, my friend’s father lost his business. She left an apartment and neighborhood she loved and sold her piano. She began supporting her parents and her younger sister. She was only 25. They lived in one room in an apartment shared with college students. They ate tuna and canned ham. When her bike was stolen, she couldn’t buy another.

I watched her grow bitter and angry and start to seem old. Her purpose—taking care of her family—was much less tangible than a trip to Egypt and much less her choice. Neither of us knew whether her struggle would ever end.

I can save 70% of my salary, I can make a game of trying to live on $1000 a month, because I remember the sweetness of Egypt, remember finally being able to buy a bed in my first U.S. apartment after saving for weeks, remember the joy of moving to Chicago and not having to worry about money because I’d saved enough. Every time I’ve lived below my means, I’ve had a goal to work towards. All I’m doing now is stretching it a little longer.

And when I think of my old friend, I remember that being poor by choice is one of my many luxuries.

Monday, February 25, 2008

Two Expensive Mistakes

I have foot-in-mouth disease today. The day after I gushed in public about how the way R. and I split expenses works so well, it turns out the accounts are now balanced in his favor and it's my turn to pay the $200 gas bill. Ick. Perfectly fair, but ick. Clearly, we need to communicate more regularly about finances if I'm going to make accurate budgets.

I also logged into my PayPal account for the first time in months to change my e-mail address. I had $479.78 sitting in there! It has been there for over a year. How was I not aware of this?

Actually, I know exactly why I wasn't aware of this at the time--I was in the middle of a huge and unpleasant fight with a friend, quitting my job, and moving--but there is no excuse for an additional fourteen months of ignorance.

I was very proud of myself for continuing to track monthly how much money is on the international phone card that I rarely use (currently a balance of $25.42), and it turns out I had twenty times that just hanging out in virtual space.

Two questions for readers:

What's your most recent (or most memorable) financial mistake?

Do you keep track of stray pockets of money in online or seldom-used accounts? If so, how?

Ten Ways to Save Big on Groceries

In any spending category, there are a few big ways to cut costs and many, many small ways. Here are the top methods I used to save on groceries, organized this list from most to least potential savings.

1. Shop at Aldi. Shopping at Aldi allows me to spend about half of what I would pay elsewhere. They carry all the basics plus some fun stuff and the potential for savings is huge. Some of my favorite finds at Aldi are cheap cereal, cheese (several different kinds), and artichoke hearts. If there’s one in your area, even if it’s a bit of a drive, you must check it out.

2. If you can’t shop at Aldi, buy store brands. Store brands tend to be at least one-third cheaper than name brands and are often made in the same factories. Make it a habit to automatically buy the store brand.

3. Compare the costs of equivalent foods. Instead of finding the best price on T-bones, find the best price on any kind of beef, or any kind of meat, or any kind of protein. Take it as far as you can until you start to feel deprived. Beans are cheaper than steak and can taste just as good, especially if they mean you get to keep an extra $10.

4. Give up convenience foods. Convenience foods aren’t just microwave dinners. Granola bars, cold cereal, Ragu instead of plain tomato sauce, carrots already cut into convenient spears, and even boxed pudding—in all of these cases, you are paying for convenience. Cut down or eliminate these foods. Cutting your own carrots or adding Italian spices to a few cans of 33-cent tomato sauce takes no time at all.

5. Eat in season. Berries in the summer, apples in the fall.

6. Give up the obsession with freshness. We’ve been told over and over again that fresh foods have more nutrients than frozen or canned foods. But is a hot-house January strawberry really better for you than strawberries picked at the peak of the season and then frozen? Are the environmental costs of buying that strawberry worth any small difference in nutrients? I’d argue no.

What about other fresh foods? I’d challenge anyone to tell the difference between fresh and frozen chicken in a chicken casserole. Fresh herbs are horrendously overpriced and are sold in quantities too large for most of us—if you like them, grow them in your window at home.

When produce is in season, its price is often comparable to the usually cheaper frozen and canned versions. At those times, it’s worthwhile to buy fresh for the superior taste and quality. But out of season and for items other than produce, consider cheaper frozen or canned goods.

7. Chase sales for specialty foods. Even tightwads have a few food luxuries we’re loath to give up. Look through sales flyers or track grocery prices at a site like Grocery Guide to find the best prices on splurges like asparagus, Stouffer’s lasagna, or ice cream.

8. Drink water. Don’t buy drinks that don’t offer any nutrition, like soda, Kool-Aid, and juice that’s not 100% juice. If you love them, find the best price and then limit them enough to make them real treats.

9. Eat less. Eat a little less at lunch or go to bed a little hungry instead of having a 10:00 snack.

10. Shop less often. If you’re not in the store, you can’t spend money. It’s hard to quantify the savings here, but it will definitely save you time. DH and I shop once a month with an occasional run to the neighborhood grocery for produce or milk, more because we’re lazy than because we’re cheap.

More ways to save on food:

Cheap Healthy Good: Her frugal recipes include a very detailed accounting of costs

The Tightwad Gazette
Always my first reference on any frugal topic; particularly good for saving on food. Amy Dacyczyn and her newsletter readers figured out dozens of ways to save on grocery shopping and published cheaper recipes for everything from hot chocolate to Worcestershire sauce.

Saturday, February 23, 2008

All-Time Lows

In order to meet my retirement goal, I need to cut my spending by about $400 a month. When I look at the numbers, it seems like it should be possible. I have very few fixed expenses, yet every month I'm mystified by how I manage to spend so much. I tell myself things like, "I won't spend anything on entertainment this month," or "I'm going to eat out as little as possible," but these vague restrictions don't seem to do anything to make my spending fall.

A few nights ago I was playing around with my Excel spreadsheets and decided to graph how much I'm spending by category. For example (click graph to enlarge):

You'll notice there's a big difference between the highest month, average months, and the lowest month. In every category, there's been at least a month or two when I've spent very little. If I can manage it in those months, why not every month?

So for the next few months, I'm going to try to beat my all-time lows in several categories. When I beat an all-time low, the amount I spend that month will become my new all-time low.

The numbers to beat are:

Food (including groceries and eating out)....$97.41
Should be possible. I used to spend $80 a month on groceries when I lived alone, and I was shopping at a more expensive store back then. My grocery bill now includes my boyfriend R, but doesn't include his lunches out or the frequent gifts of food his dad brings over. With almost a hundred dollars, I may even be able to splurge on a hamburger or two!

The actual low in this category is $0. Given my recent track record, that's expecting a lot. In addition, I have a sort of urgent need for new pants as I've been losing weight and all my old pants are hanging off me. I'll allow myself $75, to be spent only in thrift stores. I'm anticipating losing more weight, so better to buy a few "disposable" pairs at thrift shop prices until I get to my permanent weight.

Books.....$0, or $17.43
In the previous post, I challenged myself to not buy *any* new books until I've read all the ones I already have. I'm sticking to that. For the record, or in case I unexpectedly plow through all my books, the all-time low to beat is $17.35.

This'll be tough. Netflix costs $15.33 per month, and that's not going anywhere, which leaves me with only $6.00 to play with. I've been treating myself to the ballet and the opera lately, obviously not possible on a $6.00 budget. Guess I'll hit free museums, gallery openings, and author readings instead--but not buy the books.

In my budget, miscellaneous includes any category that I don't spend in every month, such as recreational travel, office supplies, household, makeup, and gifts. In January 2008, I spent $45.70 on all these things. That was freakishly low--my average is closer to $200. Since just one printer cartridge could make short work of a $40 budget, I'm going to give myself a little leeway for March and budget $100. If that's easy, I'll bring it down to the ATL in April.

March Budget Based on All-Time Lows

Rent $625
Food $ 97.41
Wardrobe $ 75
Books $ 0, or $17.43 if I finish all my to-be-read books
Entertainment $21.45
Spa Treatments $80 (a decided luxury, but for now it's staying)
Prescriptions $40
Miscellaneous $100

Total $1038.86

You'll notice a few important budget categories missing. R. and I split our joint expenses evenly, but we pay different categories, so I don't usually pay for electric, gas, or Internet. We track this and when it ends up uneven, he'll pay something towards the grocery bill or I'll pay for his half of a dinner out. It works well so far.

Thursday, February 21, 2008

Rule #1: No New Books

Have you read every book you own?

I used to be able to answer that question yes, but for the past two years I've had a stack of books I own but haven't read perched on top of my bookshelves. Last June, I went to the American Library Association meeting and brought home about sixty free books. I still have about twenty books left in my stack, all of which I still have significant interest in reading. I just haven't gotten around to it yet. Nonetheless, in the last nine months I've spent an average of $50 per month on books. Clearly, this is silly.

Rule: 1. I may not spend any money on books until I have read all the books I already own.
2. I may use my paperbackswap credits (I typically get a few of these a month and use them mainly for series books).
3. I may check out books from the library (no point in depriving myself).

Potential savings: Approximately $50 per month

Estimated length: 3-5 months. I read about a book a day, but this stack includes a lot of heavier reading. Epics like Midnight's Children will take a while.

Stay tuned for weekly updates on this rule!

Wednesday, February 20, 2008

Why Retire Early?

I'll give only the short answer here--you don't need to know all of my political, educational, and personal finance views right up front. Basically, I've spent way too much of my life following a schedule. A friend once said my parents probably scheduled my conception in their Day-timers, and it's entirely possible. I'm not and have never been terribly busy, but almost every day of my life (the exceptions being vacations and short periods of unemployment), I've had somewhere I was supposed to be. First it was daycare, then school, then college classes, then work. I've never had a big break between commitments--since age 17, the longest I've ever been unemployed was a month.

I have a lot of interests and a lot of things I want to do before I die. I want the freedom to explore these things. Most of all, I want my time to be my own. I've never had enough time to devote to my interests. I read several books a week. I work on my novel almost every day. I send emails to people who know about my interests and I get emails back and I surf blogs and websites until I get eyestrain. It's not enough, and I don't think it can ever be enough when most of my waking hours are spent working, getting to work, or thinking about work.

I want to have time to explore my interests, and I want to be able to wake up in the morning and decide what to do with my day. I want to be able to sleep until 9:00. I want to be able to spend the entire day at the library or at a thrift shop. I want to be able to take a vacation without having to calculate my vacation time and get it cleared with my boss and make sure it doesn't conflict with anything important at work.

Self-employment would give me a lot of those things. A few months ago, I had a choice between trying to grow my freelancing business into a full-time income and taking the job I'm in now. I decided the job offer was too good to pass up (my title includes the word "director," and I'm 27), but I still freelance and feel pretty confident that I could expand it into a full-time gig with a minimum of effort. But ultimately, I don't want to be spending forty or more hours on that every week either. I want to be free of having to spend my time earning or trying to earn money.

I could also be a Bohemian. Squat in abandoned buildings with a group of friends. Sing on the street. Sell vintage clothes on eBay. Dumpster dive. Actually, a lot of that is appealing to me, and some of it I hope to explore as part of my early retirement. But I don't burn my candle at both ends, I want to live to be old, and I don't want to be poor and old. There's no romance in living without heat and health insurance when you're 60. (There's not much romance in it now. I like telling stories about the unheated apartment I lived in, but it sure wasn't fun when I was wearing my hat indoors and couldn't afford to put my clothes in the dryer at the laundromat.)

I don't want to quit my job at 35 and never earn another cent again. My goal is to be able to quit full-time employment in my thirties and never have to work again--to have enough investment income to meet my basic needs. The authors of Your Money or Your Life call this financial independence (FI). I like Charles Long's idea of "casual income"--earning money from things like selling off extra possessions or doing an odd job for someone when the opportunity presents itself. I also have some business ideas I'd like to explore--starting a publishing company, freelance writing, a decluttering service--all of which could potentially earn me extra money post-FI. But these are things I'd do mainly for fulfillment rather than pay. That's what I want my life to be about: exploring my interests and finding fulfillment. And if pinching my pennies until they squeak earns me the time to do that, it's more than worthwhile.


I'm 27, and I want to retire by the time I'm 40.

Sound impossible? Other people have done it. Other people are doing it. I want to give it a damn good try.

My name's not Rachel. In the Bible (this blog won't be about religion, but I do know my Bible), Jacob (father of Joseph of Joseph and the Amazing Technicolor Dreamcoat) falls in love with his kinswoman Rachel one day at the watering hole. He goes to Rachel's father, Laban, to make an offer of marriage. Laman says sure--but Jacob must work for Laban for seven years in order to earn Rachel's hand. Jacob works for seven years and gets married, but just after the ceremony, he finds out he's been tricked into marrying Leah, Rachel's older sister, instead. He has to work an additional seven years in exchange for making Rachel his wife.

Jacob lived to the ripe old age of 147, but as far as we know he only worked for hire for fourteen years. If Jacob could retire after only 14 years of paid employment, I figure I should be able to do the same--personal finance has come a long way since 2000 BC. And I don't have twelve sons, two wives, and a bunch of livestock to support.

I hope to get my Rachel--the reward of early retirement--in about seven years, at the age of 34
or 35. Until the day when my time is my own, I'll be working for Rachel.