Tightening the Belt: Are You Measuring the Wrong Things?

Tightening The Belt

This morning, I ran into a problem-- the kind of problem it's nice to have.  I put on my belt and found that it didn't work...  I tightened it up all the way and buckled it, but it wasn't doing anything.  It was time to tighten the belt.

I stepped out into my woodshop and removed my belt.  My cordless drill was standing ready for just such a situation.  I popped a drill bit in and laid the belt on a scrap of 2x4.  I picked just the right spot for a new hole so I could tighten the belt, and after a slight hesitation, I pulled the trigger.

Here's How I Made My Belt Smaller With A Drill

An interesting thing about tightening the belt:  you might think I have lost weight and this resulted in the need to tighten my belt.  But I weighed myself first thing this morning before I even put on the belt and my weight has not changed lately.  So why didn't my belt fit anymore?

Measuring weight and measuring your waist size are not measures of the same thing.  I have been riding my bike (both my free 1972 Schwinn Super Sport and my EVO CX indoor exercise bike).  I have been crawling around my attic working on some projects.  Last weekend, I dug up a tree and moved it around to the front of my house.  This weekend, I dug into the side of a hill to install some terraced landscape timbers.  With nice spring weather coming in, my dogs have been insisting on longer and faster walks every day.

The reason I needed to tighten my belt isn't that I lost weight, it is that I lost some fat and gained some muscle.  I still have the same amount of weight, it has just moved around a little bit.  So my belt size is telling me more about my fitness right now than the weight reading on my scale.

This made me think about ways that people measure money and the progress they are making.  People tend to pick a number and focus on improving that number.  For example, if you are attacking debt you will focus on your debt balance.  If you are trying to build an emergency fund, you will focus on your savings account balance.  If you are trying to hit an investment goal to reach retirement, you will focus on your investment account balance.  If you are trying to reduce expenses, you might focus on your spending totals.  The reason I was focused on weighing myself is that my doctor "helped" me set a goal for my weight.

The problem with picking one number to monitor and improve is that it may be a precise measure of something that doesn't tell the whole story.  That is why my smaller belt size confused me at first.  I was thinking that my weight on the scale was the metric that mattered.  Tightening the belt reminded me that there are lots of measures of my health and fitness that matter as well, even things that go beyond numbers at all.

The most revealing personal finance number to focus on is your net worth, which is a measure of your total assets minus your total liabilities.  But even a comprehensive number like this may not tell you everything you need to know about your financial health.  Focusing on a number may be keeping you from thinking about how you are really doing.

Are you stressed out, or is your life satisfying?  Are you growing and on a path to reach your goals, or are you just trying to survive until something changes?  No matter what scale you are using to measure progress in your financial life, financial success only really matters if you are successful in life, whatever that means.  "Success in life" is hard to measure, so people tend to measure and track financial success instead.

So when my doctor asks me to set a goal at my next physical exam, instead of throwing out an ambitious number for a weight goal or blood pressure reading, I'll tell him I want to take my dogs for walks so long and so fast that they can barely keep up.  I want to ride my bike to reach remote places that few people will ever see.  I want to do whatever landscaping projects that my wife dreams up without even thinking about hiring younger guys to do the hard work instead of doing it myself.  To me, these goals matter more than tracking numbers.

Tracking your net worth and other key metrics can provide useful insights into your financial well-being.  But are you focusing too much energy on numbers that are easy to measure instead of appreciating the things that really matter to you?

Penny Pincher Journal

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Why You Should Use Credit Cards...

Is Using Credit Cards a Good Idea?

Yes, if you do it right...

Why Using Credit Cards Is a Good Idea

One of the most controversial topics I have covered on my blog or in my books about saving money is credit cards.  Apparently suggesting that people use credit cards seems like bad financial advice!

I agree that using credit cards to buy things you can't afford can lead to financial disaster.  Even if you can make the minimum payment on a credit card balance, it can take around 20 years to pay off a credit card debt!  Over this time, the interest charges keep on piling up and you end up paying a very high price for whatever it was that you charged 20 years ago...

But that is not how I suggest using credit cards as part of a smart personal finance strategy.  I merely suggest taking advantage of the perks of using credit cards without paying anything.  How can you do this?  Easy- just pay your balance in full every month (or actually more like 25 days with most cards now).

For example, I was at Target with my wife buying some grocery items.  My wife had enough cash in her purse to pay for the items.  I had enough cash in my wallet to pay for the items.  But I whipped out a credit card to pay.  Why!?

Because I could save 5% off my purchase by using my Target card.  When the Target bill comes, I will pay the balance using the electronic bill pay feature from my credit union.  The result is that I just saved 5% and it didn't cost me anything.

I do the same thing at Lowes by using my Lowes credit card to save 5% on everything I buy there.  As long as you don't buy more stuff than you otherwise were planning to buy and pay your balance every billing cycle, you really do save 5%.

I sometimes use a credit card with rewards to make other purchases.  With the rewards on my credit card, I can get pretty much anything I want from Amazon for free.

So when I say to use credit cards, I mean to use them to save money- not to spend money!

Here is one of my statements about using credit cards that caused a kerfuffle:
Tip 15: Use Credit Cards

Penny Pincher Journal

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Are You Headed For A Debt Crisis?

Guest Post

Today I am excited to introduce Gary Foreman who is the creator of The Dollar Stretcher.com.  The Dollar Stretcher is one of top personal finance sites on the internet in terms of traffic and prestige and has been running since 1996, which is basically forever in internet years!  Thanks to Gary for providing this wisdom on avoiding a debt crisis and finding the way out of debt.

I am proud to have one of the top personal finance publishers on the internet write a guest post for my blog.

Without further ado, here's Gary:

“I don't really have a debt problem. Right?”

Do You Have A Debt Problem?
Image Source: https://pixabay.com/en/photos/download/frog-1367440_1920.jpg

We all know the story about the frog and boiling water. If you turn up the heat gradually the frog won't pay attention and will eventually be boiled. The same thing is true of debt. You'd never borrow $10,000 with nothing to show for it. But adding $100 or so to your credit card balance each month doesn't seem like a problem. Until the water starts to boil...

So how can you tell if like the frog, you debt is slowly killing you? We've come up with a list of indicators that it's time to be concerned about your debt. Review the list below and see if any of these apply to you:

• If your credit card balance is over $10,000 and rising
• If, after paying your bills, you don't have enough for your day-to-day living expenses (i.e. food, gas, etc)
• If you've been late paying your rent or mortgage more than once in the past 12 months
• If you're afraid to total up all your debts because you don't want to know how much you owe
• If you've been hiding some debts from your mate
• If the amount you owe on credit cards and personal loans is increasing each month
• If you use a cash advance on one card to make a minimum payment on another
• If the interest rate on your credit card increases to the upper teens or higher
• If you have to choose which bill you'll pay late this month
• If your credit card balance is more than 50% of your credit limit
• If you've been rejected lately when you applied for a new credit card or personal loan
• If you've paid overdraft fees twice in the last 3 months
• If your credit score has dropped more than 25 points in the last 6 months
• If the total that you pay in credit card minimum payments, student and personal loans totals more than 10% of your take home pay
• If your mortgage is more than 30% of your take home pay
• If car payments are taking up more than 15% of your take home pay
• If you find that you don't have any money left at the end of the month to add to an emergency fund or retirement account

The Price You Pay for Being In Debt

Before you decide to do something about debt, you need to recognize what that debt is costing you. We've listed a few of the prices you pay for being in debt.

• Higher interest rate for credit cards and personal loans
• Some loans are not available to you
• Higher auto insurance rates
• Money spent on interest cannot be used for other things
• Higher rate for home mortgage or home equity line
• Lower credit score
• You can't control how much you spend for past purchases each month

Is It Time to Take Action?

If you checked any of the problem indicators or find that you've suffered any of the costs of being in debt you have a choice to make.  You can continue to pay an ever increasing price for your debt and hope that eventually you don't lose everything in bankruptcy. Or you can take action to free yourself from it.  You can improve your penny pincher skills, and prioritize your bills. The choice is yours.


About the Author:
The Dollar Stretcher has been helping people "live better...for less" since 1996. Their free Dollar Stretcher Debt Course will introduce you to the tools you need to get out of debt. Sign up for their free weekly newsletter “Surviving Tough Times”. Each issue will show you ways to save money that can be used to reduce your debt burden. You'll also find at least one article specifically related to getting out of debt.

Penny Pincher Journal

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A Dishwasher For Billionaires

A Dishwasher Fit for a Billionaire?

Dishwasher for Billionaires
Image Source: Dr. Penny Pincher

Yesterday, I was loading my dishwasher just after dawn on a beautiful August morning.  Light was streaming in from the sunrise, and my stainless steel dishwasher was glistening.  I have a bit of history with this dishwasher...

This is a dishwasher that I installed myself.  We tore out the old cabinets and removed the old plumbing- all that was left was 2 copper pipes and a drain pipe sticking out of the floor.  After installing a new sink base, I used a torch to sweat on new shut-offs and installed a new dishwasher all by myself.  I was so relieved when I turned on the water and in my plumbing installation was not leaking.

Then trouble struck.  After only running one load of dishes, the dishwasher would not turn on and reported an error code.  Not only that, but the tub of the dishwasher was leaking too.  The appliance repairman subtly suggested that we get a different one instead of trying to repair this brand new unit with so many problems.  If you want the whole story about the lemon dishwasher, I wrote an article about it at HubPages.

Anyway, I hauled the carcass of the faulty dishwasher back to Lowe's and got my money back.  I decided to go with a different brand from a different store.  I got an awesome Bosch dishwasher from an independent appliance shop.

The new dishwasher has worked perfectly for over 7 months now.  It is super quiet, has a stainless steel interior, a nice third rack for small items, and the middle rack is also adjustable.  I ran a lot of loads to "test" it before sharing it with the rest of my family.

So what does this dishwasher have to do with billionaires?  As I was loading it and it was glistening at me, reminding me of how it came through when I really needed a dishwasher, I thought to myself,

"Even if I were a billionaire, I wouldn't want a different dishwasher."

Below is a link to the dishwasher I got on Amazon.  Some of the reviews complain about the drying capability, but this is an energy efficiency feature.  You cam just crack the door while the dishwasher is still hot after running, and the dishes will dry without using any energy.  I would rather save money on my electric bill than pay to get the dishes dry quickly.

Bosch SHP65TL5UC 500 24" Stainless Steel Fully Integrated Dishwasher - Energy Star

What Else Is Fit for a Billionaire?

This thought of keeping the exact same dishwasher even if I had billions of dollars and could easily get any dishwasher I wanted to replace it made me think- what else would I keep, even if I suddenly became a billionaire?

I would keep my current house and vehicles.  The vehicles are well-maintained and do everything I want from them.  My wife's car absorbed the force from being rear-ended by a big Dodge Ram pickup truck and kept her safe.  My son really likes his first car, and I am just getting started owning my 10 year old Toyota Highlander.  I would replace the windows on my house and upgrade the floors, but the location and yard is great.  I can think of lots of nice places to visit, but I can't think of a nicer place to live.

One advantage of keeping my same stuff if I became a billionaire is that it would help me blend in and avoid attracting unwanted attention.  Being a billionaire does have some down sides.  I have always thought that fortune would be much better than fame if you could choose one.  Now you know why I use a nom de plume.

Sure, I might do some traveling and maybe even get a vacation home somewhere if I really had billions of dollars, but I already have pretty much everything I want.  OK, I would also get a Class A motorhome.  Not that I have thought about this much, but it would be 40 foot diesel pusher with 3 slide-outs and an outdoor kitchen.  Plus, I would go ahead and put in a swimming pool at home.  But I don't think I would buy that much more stuff.

I think the biggest change I would make would be how I spend my time- I would no longer be concerned about making money... or would I?  If I had billions of dollars, I would probably be working hard at keeping track of all of that money and trying to invest it wisely.  I could hire people to help manage all of that money, but I would still need to keep track of my people.  So, I suspect that I would actually spend a lot more time thinking about money as I do now.

Maybe being a billionaire wouldn't be that much better than my life now.  When I'm loading my dishwasher, I can't tell the difference.

Penny Pincher Journal

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Personal Finance Quotes to Help You Save Money

Personal Finance Quotes

Seneca
Image Source: CC-SA-30

I decided to start collecting personal finance quotes and quotes about life in general that I think can be useful to people on their personal finance journey.  I plan to keep adding to this page as I come across useful quotes to add to my collection.  After each quote, I will make some comments about where I heard the quote and how this can help inspire penny pinching.


"It is not the man who has too little, but the man who craves more, that is poor." Seneca

This quote really covers the ideals of living a frugal lifestyle pretty well.  Some people who have a lot of wealth choose to live simply, spending little money and having few possessions.  Many people who have adopted simpler lifestyles report that they are happier living with less.  The difference between what you have and what you want is a big factor in happiness, more so than how much stuff you have...

Seneca was a Roman philosopher who lived from 4 BC to 65 AD.  Clearly, people have been thinking about possessions and happiness for a long time!


"You loan your friend your money, you gonna lose your money and your friend."  Buddy Guy

Buddy Guy is a legendary American Blues musician.  I heard this quote from him during an interview on NPR.  He said he has a sign in his club with this quote on it.  Sounds like great advice to me!  Speaking of great advice, here's some advice from someone who has a lot of success following simple principles:


"It is not necessary to do extraordinary things to get extraordinary results."  Warren Buffett 

This quote seems to apply to a lot of advice on saving money- it does not really take extraordinary effort.  If you work at it, you can find ways to cut expenses and end up with a little extra money to invest every month.  The extraordinary part is the results- even someone with a modest income can become a millionaire over time.  If you could save $500 per month from your budget every month and invest it, you would be a millionaire after 33 years with a historical average return from stock market investment.

"Someone’s sitting in the shade today because someone planted a tree a long time ago."  Warren Buffett

Another one from Warren Buffett.  Obviously he is talking about the power of growth over time for investments.  The sooner you can start investing, the more time you have to benefit from growth, and maybe you will have plenty of time in the future to relax in the shade of a tree and not worry about money.

"Life is full of contradictions and strange things."  Yossi Kuperwasser

I heard this one on a news story about strange alliances in the Middle East.  The guy being interviewed, an Israeli Defense expert, was speaking with a very heavy accent, and the reporter asked him a question in English.  He responded with this quote, which I think is great.  I figured it was a famous quote and tried to look it up, but apparently he came up with this on the spot.  Impressive.

One example of a contradiction that comes to mind for me- breaking my budget and buying a very expensive puppy a couple years ago.  As a result unplanned expense, I started writing about ways to save money- and I have made many times more money from my blog and books than the cost of the puppy!


"Normal is getting dressed in clothes that you buy for work, driving through traffic in a car that you are still paying for, in order to get to a job that you need so you can pay for the clothes, car and the house that you leave empty all day in order to afford to live in it."  Ellen Goodman

I think this quote describes life for a lot of people.  Why do you need the car- to get to work.  Why do you need to work- to pay for the car...  The good news is that if you do things right, eventually you can pay for the house and the car and even have time to do what you want.


"Well done is better than well said."  Benjamin Franklin 

This is well said...  Ben did a lot of things well too.  I don't need to add anything to this one.


"The future depends on what you do today."

Mahatma Gandhi

I don't know if Gandhi was thinking about personal finance when he said this, but it certainly applies to taking control of your budget and achieving financial independence!



"When life gives you lemons, take them.  Free stuff is awesome!"  Dr. Penny Pincher

Of course I had to put in some of my own quotes....  The example above of turning an unplanned expense into the inspiration to make extra money is a good example of taking the free lemons.  What else can you do?


"The easiest way to get money is to spend less."  Dr. Penny Pincher

Maybe 2,000 years from now people will be quoting this...  I think it is true that the easiest way to get more money is to cut spending.  Most people can easily identify expenses they can cut and immediately have more money in their pocket.  The downside of getting money by spending less it that there is a limit to how much less you can spend.  I said it was the easiest way to make money, not the way to make a lot of money.

That being said, even a little extra money can add up to big money over time.  If you can cut your spending and invest a little money very month instead of spending it, you could end up with real wealth.  Here is an investment calculator you can use to see how long it would take to reach your goal if you can find a little money to invest every month.


"Most people drink bad coffee, and pay too much for it.  I'm not sure which is worse..."  Dr. Penny Pincher

I could go on for a long time about how to make great, world-class coffee really cheap at home.  In fact, I have even written a book about this!  We all know you could improve your financial situation by saving the money you would normally spend on coffee.  I don't mind spending 60 cents a day to get a cup of really good coffee that I make at home.  Buying coffee at a coffee shop is expensive enough that I almost always avoid this- plus I can make better coffee at home.  Buying expensive BAD coffee at a convenience store or fast food place is the worst case scenario...

Penny Pincher Journal

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Top 3 Ways To Build Wealth With FREE MONEY

Yes, There Really Is Free Money!

The other day I was paying a bill for a visit to the doctor's office.  The bill was unexpected and was for over $100, so this was painful.  I set the bill in front of me as I had my morning coffee.  I wanted to examine the bill to see if there were any extra charges included that I could ask to have removed, but there was almost no information on the bill other than the amount that needed to be paid and the due date.  After thinking about the bill for awhile, I realized that I could use my Health Savings Account (HSA) to pay all of it instead of taking money from my very limited checking account.

I had forgotten about my HSA.  My contribution comes out of my paycheck every time and I don't even see it.  My balance had reached nearly $2,000.  This is a nice cushion for health care expenses.

This got me thinking about free money and how I am using free money to build my wealth.

Health Savings Account- Get 34% Free Money

The Health Savings Account is a program where you can put pre-tax money into a dedicated savings account and use it for health expenses.  The "pre-tax" part is where the free money comes in.  The Federal income tax rate is about 25% and the state income tax here in Iowa is about 9%.  This means that I gain about 34% on money that I put into the Health Savings Account- not bad.  So if I put in $1,000, about $340 of this is free money- it would have gone to taxes otherwise.  My HSA plan even allows you to invest the money in the HSA into investment funds so it can grow until you need it for health expenses.

401k Plan- Get More than 50% Free Money

There are some other sources of free money that I am using to build wealth.  The big one is my 401k program at work.  My employer will match retirement contributions at 50% up to 4% of my salary.  So if I put in $2,000 and my employer will put in $1,000 of free money.  I like free money and always contribute enough to get the maximum employer matching funds.

The other free money aspect of the 401k plan is that you contribute pre-tax money, and the money invested grows without taxes, at least until you take it out.  Unfortunately, you have to pay taxes on the gains when you withdraw from a 401k fund.

I also contribute to a ROTH IRA investment using post-tax money.  This is money that I have already paid taxes on, but I will not need to pay taxes on my ROTH IRA funds when I take them out someday.  I like the idea of not paying taxes on my gains, so I have some ROTH retirement investments in addition to my 401k investments.

529 Plan- Get Free Money For College

Another way I am using free money to build wealth is my 529 plan contributions.  A 529 plan is a way to save for college that provides some significant tax benefits- more free money.  Gains on investments in a 529 plan are not taxed.  In addition, Iowa and many other states offer state income tax offset for contributions.  This is a great way to save money for college and take advantage of free money for college.

It Takes Money to Make Money...

All of these ways to get free money require investing your own money to get the free money.  For the Health Savings Account, you need pre-tax funds to contribute.  For the 401k plan, you also need pre-tax funds to contribute, and for the ROTH IRA you need post-tax funds to contribute.  And for the 529 education program you need post-tax funds to contribute.

Where can you get money to contribute to take advantage of the free money?  You may need to pinch pennies in your budget to free up funds to contribute to these programs.  One of the reasons that these programs provide free money is to encourage people to save and build wealth.

Find ways to save money on things you don't really need and put this toward saving and investing- and get your free money.  You can start small, with only a few dollars each month.  The important step is to get started and watch your account balances grow over time.

If you need some ideas on how to get money to invest, here is my free book: 101 Ways to Spend Less Money Now.

Penny Pincher Journal

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The Trouble with Having an Emergency Fund

Emergency Fund- Bad Advice?

I have read on many personal finance blogs that the way out of debt starts with building a cash emergency fund, with a goal of being able to cover several months of expenses using your emergency fund.

Although this may work well for some, for me there are several problems with this approach.

First off, I don't want to park this kind of cash in a savings account making 0% interest!  Let's say several months of living expenses amounts to $10,000.  If you keep this in savings account for 30 years at 0.85% interest, you'll end up with $12,903.  If you invest this money instead and get an 8% return, you'll end up with $109,357.  So having the cash emergency fund would cost you around $100,000!  You can run the numbers yourself on my savings calculator.

Not everyone who recommends having an emergency fund recommends keeping $10,000- I just wanted to pick out a number to make my point.

The next problem I have with building a cash emergency fund while you have credit card debt- if you have credit card debt at 20% interest, paying that down seems to me to me to be the best use of any available funds.  It would be hard for me to look at money sitting in a savings account and not pay down high interest credit cards.

My third major problem with advising people to build up lots of cash and keep it around- it would be tempting to spend it!  Even if you have credit card debt, if you have $10,000, or even $2,000 sitting in a savings account, I think many people would be tempted to spend it if the right opportunity came along.  Maybe a fun project car to fix up, or getting in on a special vacation offer, etc.  If you have $0 savings and mostly maxed out credit cards, it is harder to spend more money and you won't forget that you are in debt.  If you have money sitting around not being used, I think it would be at risk for unplanned spending.

In Case Of Emergency...

So, what if you don't have an emergency fund and a financial emergency comes along?  No matter how much you have in an emergency fund, something could happen that would take more money than you have saved up.  In this case, you would end up using credit or borrowing from your retirement fund to pay for the emergency.

This is not good, but I think most people would be further ahead focusing on paying down credit cards and building investment funds rather than parking cash in an emergency savings fund.  Hopefully that emergency won't happen, but if it does happen while you are still paying down credit card debt, you'll have some funds build up in investments and some credit cards paid off that will be resources to get through the emergency.

Is Putting Money In an Emergency Fund Bad Advice?

I discussed my concerns about emergency funds with a popular blogger, Chris Peach at Money Peach.  He replied that from the math perspective, my objections to advising people to set up an emergency fund make sense.  But from a behavioral perspective, getting people to develop the discipline to save money and watch that savings account grow is powerful and can change behavior.  Plus having a cushion can help people avoid charging more on their credit cards.

I think Mr. Peach had a nice comment when he said I can be right on my blog and he can be right on his blog.  Nicely said.  From my perspective, setting up an emergency cash fund when you could be paying down high interest debt or investing with a historical average return of around 9% doesn't make much sense.  But if you are trying to change your behavior and get away from depending on credit cards, maybe setting up an emergency fund could help.

Even with my reservations about putting a lot of cash in an emergency fund, I do keep cash around.  What if the electronic networks go down and credit cards don't work for some reason?  I like to have enough cash to cover a couple weeks of food and gas at least in case of a disaster.

In conclusion, having cash at home or in a saving account has a cost.  If you have credit debt, you could be getting a 20% return on the money.  If you invest in stocks, you could be getting a 9% historical average return over the long run.

From the perspective of optimal financial results, I would recommend people with credit card debt to pay into an emergency fund only if this will help control credit card spending.  Otherwise, use all available funds to pay down the high interest debt and at the same time invest some money in stocks.   I would suggest saving up enough cash to cover basic expenses for a few weeks to survive a disaster.

Penny Pincher Journal

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25 IS THE NEW 65: How To "Retire" Outrageously Early And Do Whatever The Heck You Want

Book Review- 25 Is The New 65 by Travis Hornsby

I recently stumbled across Travis Hornsby's book 25 Is The New 65: How To "Retire" Outrageously Early And Do Whatever The Heck You Want while it was free on Amazon for a 3-day promotion when it was launched.  This book is about how Travis (aka TMONEY on his blog) was able to get through college with a respectable amount of savings and lived a very frugal lifestyle while working full-time a few years.  Travis clearly did not enjoy his time working in the corporate world and decided to get out and go a different way.  Living a frugal lifestyle allowed Travis to save and invest enough after working only a few years to "retire" at a very early age.

In this case, "retirement" does not mean never working again, but instead means working part-time or working on things that he enjoys and wants to do to continue to make some money.  Also, this sort of retirement will require living a very frugal lifestyle, living on about $16,000 per year.

This is clearly not the path for everyone.  There is a trade-off between having time to do whatever you want and having money to experience things that cost money.  I am fortunate that I have a career that is interesting, so I don't see working as a form or torture.  Of course, I would like to retire someday, but for me I don't mind the lifestyle of having a professional career and making lots of money for awhile.

This book does have some good examples of how you can live frugally to minimize expenses and boost your savings and investment contributions.  I liked his examples of "typical" spending by young people out of college and how this could lead to working for a very long time to pay off debt.

Many people do not learn to control spending until later in life, this book provides an example of what is possible with extreme financial discipline early in life.  If you are dealing with debt, this book can provide some motivation to cut expenses, boost savings, and get rid of that debt to find your path to freedom.

I enjoyed the exercise of thinking about how frugal I want to be and what trade-offs I am willing to make to have time available to pursue my interests.

Penny Pincher Journal

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The Bridges We Cross on the Road to Debt: Guest Post @ Modest Money

The Bridges We Cross on the Road to Debt

The Bridges We Cross on the Road to Debt
Image Source: Public Domain Image Courtesy of Wyncliffe

My guest post went live today at Modest Money, which is one of the top 5 personal finance websites on the internet!

The post is about how people get into debt, why being in debt is bad, and how to get out of debt- all in 1,000 words.

Here is my favorite quote from the guest post:

"There are bridges you cross on the road into debt. These bridges make it easy to go further into debt. When you decide to turn around and leave debt behind, you realize that there are no bridges on the way out. You have to swim across."

-Dr. Penny Pincher

I write about my experience on the road to debt and crossing the bridges of student loans, credit cards, car loans, and mortgage loans on the way in.

The quote above reflects how easy it is to sign your name and cross another bridge going into debt, but there is no such easy way to get out of debt!  Getting out of debt takes hard work to find ways to spend less money and make more money if you can.

I just saw on Twitter that Experian, the giant credit reporting agency, sent out a tweet with a link to the "great guest post by @Dr_PennyPincher on @ModestMoney"

Great Guest Post by Dr. Penny Pincher!
Image Source: Dr. Penny Pincher

Thanks to Modest Money for featuring my guest post.  This is my first guest post, so I'm pretty excited!  You can read the entire guest post here:

The Bridges We Cross on the Road to Debt

Penny Pincher Journal

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Interview with Dr. Penny Pincher on Debt Discipline

Personal Finance Blogger Interview Series: Interview with Dr. Penny Pincher

Blogger Interview: Dr. Penny Pincher
Image Courtesy of Equationaudio CC-SA-30

My interview on the personal finance site Debt Discipline went live today!

Check it out on Debt Discipline at:
http://www.debtdiscipline.com/interview-series-dr-penny-pincher/

Penny Pincher Journal

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Buying a Car for Your Teen Driver- How to Minimize the Damage

Why It Makes Sense to Buy a Car for Your Teen Driver

Find the Right Car for Your Teen Driver
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I am careful with money, but I recently bought a third car for our household.  Since cars are expensive to purchase and depreciate rapidly, why would a penny pincher like me do such a thing?

My son is 15 years old and is learning to drive.   Here in Iowa, teens can get an Instruction Permit that allows them to start driving with their parents in the car at the age of 14.  My first thought was to simply start teaching our son to drive using one of the existing cars in our household- either my 12 year old Honda Civic, or my wife’s newer Ford Fusion Hybrid.   Using a car we already own wouldn't cost anything.

My Honda Civic is an old car and has a book value of about $2,500 according to kbb.com.  I wouldn’t be too worried about this car getting a few more scratches and dents, so in some ways it would be great for training a teen driver.  But my old Honda Civic has a manual transmission.  Back in the early 2000’s, you could get better gas mileage driving a stick shift instead of an automatic transmission.

I didn't want to start driving lessons for my son on a stick shift.  For someone who is new behind the wheel, it takes plenty of concentration to be aware of your vehicle’s position on the road, scan for obstacles, and so on.  Adding a clutch pedal and shifting on top handling the brake, accelerator, steering wheel, and turn signals would be a lot to handle.  Not to mention the challenge of stopping on a hill in traffic the first time when learning to drive a stick shift.  If you have learned to drive a stick shift, I’m sure you know what I am talking about.

Since the Civic doesn't work well for teen driver training, we started a few driving lessons using my wife’s Ford Fusion hybrid.   There are a couple issues with learning to drive in a newer hybrid vehicle.  First, the Fusion hybrid behaves differently than a conventional vehicle.  The braking on a hybrid is different than standard brakes since the regenerative brakes recharge the batteries during braking.  As a result, the brake pedal responds a bit differently.  I didn't want my teen to get used to this type of braking, only to switch to conventional vehicle braking later.  Second, I was nervous thinking about how expensive even minor damage such as a parking lot fender bender would be for the good car.  Even a minor mishap could cause thousands of dollars of damage. 

I decided to buy my son a car and let him keep the money he has saved up for college so far.  Spending money is always painful, especially on an expense like a car, but I decided that the benefits outweighed the costs:

• Reduces extra mileage and wear and tear on our “good” car.
• Reduces potential expense of scratches, dents, and fender benders during the early months of driving practice.  Cosmetic repairs are optional on older cars…
• Allows our teen driver to learn to drive with the same car that he will be driving in the future.
• Allows the parents to pick out a good, practical car that will last long enough for our teen to drive off to college and beyond.

How to Choose the Right Car for Your Teen Driver

Is Fuel Economy or Safety More Important for a Teen Car?
Image Source: Dr. Penny Pincher

Safety

If you are thinking about sending your 16 year old driver out into traffic alone, safety is the probably the first thing that comes to mind.  I was impressed by how many safety features modern vehicles have compared to my first car- a 1974 Plymouth Valliant.  Front shoulder seatbelts were state-of-the-art.  Now cars come with safety features including air bags, anti-lock brakes, and traction/stability control.  You can also check crash testresults for vehicles you are considering at the National Highway Transportation Safety Administration website.

Reliability

There are two types of reliability to consider.  One is the general reliability of the vehicle you are considering- is it in good mechanical condition, or is it likely to break down on the road?  It can be very expensive to tow a vehicle to a shop and have it repaired, not to mention the stress of breaking down on the road.  The other reliability consideration is the historical reliability of the model you are considering.  This can help you determine if expensive repairs are ahead.

Cost

The big cost drivers for buying and owning a vehicle are purchase price, repair costs, insurance costs, and fuel cost.  Insurance cost can make a huge difference on the cost of ownership of a car for your teen.  Check with your insurance agent to get an estimate for insurance cost for the makes and models you are considering.  Your choice of vehicle could change your insurance cost by $1,000 per year or more!

Utility

A two door coupe looks cool and sporty, but what about hauling the trombone, backpack, and little brother to school in a year or two?  Thinking even further ahead, imagine what kind of car would work well for loading up with weeks’ worth of dirty laundry for a visit home from college.

Style

I put style last on the list of criteria for teen cars, but a first car is a once in a lifetime experience.  This experience can be enhanced if you can involve your teen in the buying decision, looking at cars together and try to get a vehicle or features that your teen is excited about.  This can also serve as an opportunity to teach your teen about money and negotiating.

Best Cars For Teen Drivers

The sites below offer some ideas on makes and models of cars that are well suited for teen drivers:

The Best Used Cars for Teenage Drivers from Forbes:

http://www.forbes.com/sites/jimgorzelany/2013/06/24/the-best-used-cars-for-teenage-drivers/

Best Cars for Teenagers from Bankrate.com:

http://www.bankrate.com/finance/auto/best-cars-for-teenagers-1.aspx

These lists feature newer cars in the $15,000 price range.  My budget is in the under $5,000 price range in order to avoid making car payments.   I had to do a bit of work to find a reliable used car in this price range.

  

How to Buy a Used Car for Your Teen

How To Buy A Car For Your Teen Driver
Image Source: Dr. Penny Pincher

Set a Budget

As with most smart shopping, the first step should be to set a budget.  It is too easy to zero in on a car that is too expensive if you don’t set the budget up front.  My budget of $5,000 was set by the amount I could spend without needing to get a car loan.

Select the Make and Model

With the budget set, take some trips to car lots with your teen and see what features and styles are appealing.  The goal is to select a specific make and model that you want to pursue.  Next, read up on your target car’s features, options, reliability, and book price range.  If you are still impressed, look at vehicle listings on craigslist and other internet sites to find promising candidates.  I would recommend test driving several cars to get a feel for vehicle condition and options available in your price range.

Get a Vehicle Inspection

When you find the car you want, get a vehicle inspection before you make an offer.  For under $50, you can take the car to a mechanic for inspection and get an estimate for any repairs that are needed.  It is painful to spend money on a car that isn’t even yours, but this can save you a ton of money on unexpected repairs.  The first car I had inspected had a repair estimate of $4,000 on a car priced at $3,650.  Getting a vehicle inspection saved me thousands of dollars!

Link to Vehicle Inspection Tips

http://pennypincherjournal.blogspot.com/2013/10/used-car-inspection-vehicle-inspection.html

Negotiate Like a Pro

Use your research on book price from sites like Kelly Blue Book (kbb.com) to make sure you are getting a fair price for your vehicle.  You should expect to pay more at a dealer than from a private seller since dealers invest money buying and preparing vehicles for sale.  Your vehicle inspection report is a great bargaining tool- I got the dealer to throw in about $1,000 of repairs and reduce the price as well.  The total price of the car turned out to be $4,150 plus title and registration.

A Good Teen Car Experience

So far, the experience of finding a car for my teen and starting driving lessons has been a lot of fun.  I find it much less stressful driving with my teen in the older car that we picked out together instead of driving my wife’s newer car.  I think my teen will benefit from a few months of practice driving the same car that he will one day drive by himself.  And I have enjoyed working on some simple car projects together such as restoring the headlights and applying special car wax for black cars.

Penny Pincher Journal

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Should I Refinance My Mortgage?

Should I Refinance My Mortgage?

Should I refinance my mortgage?

If you can get a lower interest rate, you should refinance your mortgage- right?  Not necessarily.  Refinancing a mortgage costs money.  The bank that issues the loan to refinance your mortgage charges origination fees that can amount to thousands of dollars.  If you don't end up staying in your home long enough, you can easily end up losing money on a mortgage refinance.

Another unexpected cost of refinancing is that it can extend your payments further into the future, increasing the amount of time you are paying interest.  For example, if you have been paying on a 30 year mortgage for 3 years and then get a new 30 year mortgage in a mortgage refinance, you'll be paying interest for 3 more years than if you kept your original loan.  Even if the interest rate is lower, this can still add up to more total interest payments over time.

When Can I Save Money If I Refinance My Mortgage?

Whether or not you will save money by refinancing comes down to the details: how much lower is the interest rate?  How much are the loan origination fees?  How long will you stay in your house?  A mortgage refinance calculator can help you decide if you should refinance your mortgage.

Mortgage Refinance Calculator
Image Source: Dr. Penny Pincher

Using a mortgage refinance calculator will let you determine how much money you can save over the life of the mortgage.  The calculator above adds your refinance loan fees to the refinance mortgage amount- which is how most people cover the refinance loan fees.  You can see the affect of the lower interest rates on a refi in the form of lower monthly payments.  These lower payments save you money every month- until you reach the point where your original mortgage would have been paid off.  The calculator above calculates the total cost of your original mortgage and your refinance loan, so you can check the total cost of each and see if you would save money overall by refinancing.

You can also learn how long it will take for your savings on interest every month to cover the refinance loan fees.  For example, if it would take 24 months for your monthly savings to cover your refinance loan fees, you would need to stay in your house at least 24 months for a refinance to make sense.  If you sell your house before you reach the point where your interest savings have covered your refinance loan fees, then you would loose money by refinancing.

Reasons to Refinance a Mortgage

The main reason people refinance a mortgage is to get a low interest rate and save money on interest payments.  If you can pay less and get the same house, why not do it?  If you can get a lower monthly payment, you can use the money to pay down high interest debt, such as credit cards.  Or, you can keep the same payment and pay off your mortgage years earlier with a refinance.  These are good options to have.

Another reason people refinance a mortgage is to get out of a variable interest rate mortgage, or balloon mortgage.  Some mortgage loans have interest rates that can change over time.  You can sometimes get a lower interest rate in the short term, but there is a risk that interest rates will rise and you will end up paying more.  Most people who plan to stay in their home for a long time prefer the security of a fixed rate mortgage.  This means that your principal and interest payment will never go up.

I Decided Not To Refinance My Mortgage

I recently investigated refinancing my mortgage, but it turned out that it would pretty much be a break-even proposition.  It wasn't worth the effort to complete the mortgage application and pay fees to refinance.  My mortgage interest rate was already very low, so refinancing would not improve the rate by much at all.

The interest rate you have on your current mortgage is largely dependent on when you applied for your mortgage.  Mortgage interest rates move up and down all the time, and some years the prevailing interest rate is higher or lower than others.  If you got your original mortgage when interest rates happened to be low, there may be no benefit to refinancing.  However, if you ended up with a higher rate, you could save a lot of money by refinancing.

The only way to know if you can save money by refinancing your mortgage is to check current rates and see how much you could save.

Recommended Reading:
Credit Card Consolidation Loan Calculator

Penny Pincher Journal

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Mortgage Refinance Calculator

Mortgage Refinance Calculator

How much could you save if you refinance your mortgage?  A mortgage refinance, also known as a "refi", means that you get a new mortgage for your home at a lower interest rate.  This mortgage refinance calculator shows you how much you will save based on the interest rate of the mortgage refinance loan.

Enter the information for your current mortgage loan information and the interest rate for the mortgage refinance loan in the calculator below and click "Compute" to see how much you can save by refinancing.  Example entries have been filled in for a 100,000 mortgage balance with 30 year term, monthly payment of $537 that started 3 years ago.  The example mortgage refi has an interest rate of 3% and an origination fee of $2000.  Simply change the example information to the information for your mortgage.

Mortgage Refi Calculator by Dr. Penny Pincher Will you save money if you refinance your mortgage? Copyright (c) 2014. All Rights Reserved http://pennypincherjournal.blogspot.com

INPUTS

Enter Current Mortgage Balance ($):

Enter Term of Current Mortgage (years):

Enter Current Monthly Payment (Principal and Interest) ($):

Enter Time Since Current Mortgage Started (years):

Enter Interest rate for Refinance Loan (%): *This interest rate is for the new refi loan, not the current loan!

Enter Origination Fee for Refinance Loan ($): *This is the cost the bank charges to finance the new loan

Cost of Current Mortgage- now to end ($):

RESULTS- Analysis of Mortgage Refinance

New Monthly Payment ($):

Savings on Monthly Payment ($):

New Loan cost (now to end) ($):

Time to break-even on refi (mo):

Total savings over life of refinance loan:

Mortgage Refinance Calculator Instructions

• The current mortgage balance is the amount that you currently owe on your mortgage.
• The current mortgage term is the total duration of your current mortgage, typically 30 years.
• The current monthly payment is the amount of your principal and interest payments on your current mortgage.  Your total monthly mortgage payment includes Principal, Interest, Taxes, and Insurance.  For this calculation, you need the amount of principal plus interest only.  If you don't have this information handy, don't worry.  You can calculate your principal and interest payment if you know the mortgage amount and interest rate using the calculator below:

Mortgage Calculator by Dr. Penny Pincher Calculate your Mortgage Principal and Interest Payment Copyright (c) 2014. All Rights Reserved http://www.pennypincherjournal.blogspot.com

INPUTS

Enter Initial Mortgage Balance ($):

Enter Term of Current Mortgage (years):

Enter Interest rate for Mortgage (%):

RESULTS

Principal+Interest Payment ($):

You can use this mortgage calculator to calculate the principal + interest payment on your current mortgage using the original mortgage balance and current mortgage interest rate.

If you want to see how Principal, Interest, Taxes, and Insurance contribute to your monthly mortgage payment, check out this mortgage calculator.

• The time since your current mortgage started is needed to determine how much you can save by refinancing.  You can input decimal values, such as 3.25 years.
• The next entry is the interest rate for your new refinance loan.  You can look up current refinance rates in newspapers or on the internet.
• It costs money to get a mortgage loan-this is known as the origination fee.  The Mortgage Refinance Calculator determines how long it will take to break-even on a refinance using the origination fee and your monthly savings.  In this case, the break-even time means how long it takes your monthly payment savings to cover the refinance origination fee.  The refinance loan origination fee is added to the refi loan amount in the calculator.
• Check the bottom line of the calculator: Total savings over life of refinance loan.  If a negative value is shown for savings, you will loose money over the life of the loan by refinancing!  
• One way this can happen is if you nearly have your current mortgage paid off.  Let's say you are paying $500 per month and have 5 years left to pay off your mortgage.  If you refinance you could get a new 30 year mortgage and save hundreds of dollars per month on payments- but you will be making payments for 30 more years rather than 5.  
• So even if the refi interest rate is lower, continuing to make payments longer can still add up to more money paid on interest.  You can pay more by refinancing in a scenario where you have almost paid off your original loan.
• Note that the calculator assumes you will have the same term for the refinance that you had for the original mortgage.  For example, if the original mortgage was a 30 year loan, the calculator uses a 30 year term for the refinance loan.

Saving Money with a Mortgage Refinance

As you can see when trying out refinance scenarios, it takes some time to break-even on the refinance to cover the cost of the refinance loan origination fee.  Since your interest rate on the refinance loan is lower, you'll save money every month.  It will take months of interest rate savings to cover the refinance fee- perhaps even a few years, depending on interest rates.

Getting a mortgage refinance makes sense only if you will be staying in your current house for awhile.  You can use the calculator to see how long you would need to stay in your current house for a mortgage refinance to make sense.

Another good use of the calculator is to see how much money you would actually save by refinancing before going through the effort- and fees- to get a new mortgage loan.

If you are interested in how mortgage payments are calculated, the mortgage payment formulas used in the calculators are from the Mortgage Professor.


Recommended Reading:
How to Become a Millionaire- The Millionaire Calculator

Credit Card Consolidation Loan Calculator

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