Sushi Money

Okay, let’s be honest. How many of us have little quirks or habits that we use to save money? I was thinking about this the other day while doing a cost-benefit analysis in my head over some purchase. Then I realized I do this everyday almost unconsciously. So I began to wonder- how “normal” is it to think of saving money in various ways as a routine habit or way of life? After all, many of our friends and acquaintances enjoy spending money and living like there’s no tomorrow.

For those of us interested in personal finance and growing our wealth, does frugality just naturally go along with our goals? Or is something we pursue and challenge ourselves about? Somehow I believe we develop our own financial knowledge and strategies because it meets the values that are important to us. And how many of us wish we learned these values, or lessons, at a far earlier time in our lives?

But do you know any people who don’t even seem to care about saving money? I’m not sure I could go that far, it’s more likely that some people are just not aware of why it’s so important, or that they are spending much more of their income than they should.

So after I thought about it a while, I realized I do a lot of things to try and save money. I say “try” because I may not always be saving money, but just believe I am. And I have various habits or quirks that to try and find ways to become more efficient financially. Maybe it’s a disease… the same one that had me running around changing lightbulbs the other day after realizing I didn’t finish all the bulbs in the house last year. By my accounting, it saves us $5-$10 a month on our electricity bill.

So here’s my short list of strategies for saving money at home. These are things I do, or we focus on as a family:

1. Installed and use programmable thermostats for the house… but I still fiddle with the thermostats everyday to optimize the settings if we don’t need the heat or cooling. I even shut doors/vents to rooms that we don’t use, and are colder in winter, and circulate the fans where possible in living spaces.
2. Installed 40 compact flourescent lightbulbs instead of using the traditional incandescent bulbs throughout the house.
3. When putting gas in the car I hold the pump hose up to drain as much gas out of the line as possible… if it’s possible!?
4. Try not to drive excessively fast, but try and maintain constant speeds (a little higher than Grandpa..), and I coast as much as possible, especially going downhill and between stoplights. Also saves on brake wear.
5. Try not to shop for groceries when we’re hungry. I’ve proven that I’ll buy all kinds of useless junk if I’m hungry! We use coupons if it fits our lifestyle, but don’t clip that many. We minimize junk foods, and pre-packaged processed meals.
6. Pay bills online for free instead of using stamps and checks if possible.
7. If we go out for fast food, I’ll order from the value or dollar menu, and often order water instead of soda. But in general we eat out a lot less these days. We splurge on dining out once or twice a month at a decent restaurant.
8. We buy groceries and dry goods in bulk where possible, especially if the item is on sale.
9. Make our own coffee in the morning; having coffee out is a rare treat.
10. Prepare brown bag lunches for work/school, instead of eating out.
11. Eat and stay healthy… avoid the doctor and look for alternative health ideas for common ailments.
12. Use the library for books and videos. Find free recreation and activities for the kids.
13. Use the least expensive cell phone, land-line telephone and internet service plans as possible. But we do have broadband internet- it makes life so much more pleasant. We also keep land-line telephone service because we live in a semi-rural area and it works during electricity outages, or else we’d ditch that too.
14. Avoid bank and credit card fees in all ways possible. Find another bank if the current one charges too many fees.
15. Cut the kids hair at home. Pets are also bathed and groomed at home. Not that kids and pets are the same mind you…
16. Carefully research larger purchases (greater than $50-$100). When ready to buy, we purchase quality items that will last. Often we’ll shop online after finding a lower price, and save on taxes as well.
17. Pay off credit cards each month unless financing a temporary item at very low rates, or 0%. Don’t carry a balance.
18. Do most of our cleaning, landscaping and auto maintenance needs at home when possible.
19. Grow a garden to eat our own vegetables.
20. Don’t shop for more clothing and shoes than absolutely necessary, and purchase items on sale.

Oh… one more I just realized. Use the same old computer until I can’t stand it anymore! I’m typing on my second laptop- the first lasted almost three years. This one has just passed two years and still going strong, but I would really like to get a bigger desktop… some day.

So what things do you do to save money? I’m sure there’s a lot more… does this seem normal to you, or do you live carefree and not worry about it? I’m not sure I’ll ever be able to do that…

Great article out this week from Laura Rowley.  She says Don’t Fiddle Away Your Financial Independence and uses the analogy of the old fable about the Ant and the Grasshopper to describe the current financial challenges we face.  Even more interesting are the comments from many folks across the country.  Real people share their stories and feelings about saving and investing, the economy, bailouts, mortgage and foreclosure issues, etc. 

Maybe for some the difference is easily seen.  But I wonder how many of us have been both at times?  I know I’ve hopped around like a spendthrift Grasshopper many times in my life. The older I become, the more I appreciate the steady, disciplined approach to saving and investing.  

The Ant and the Grasshopper

     In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content.  An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

“Why bother about winter?” said the Grasshopper; “We have got plenty of food at present.”  But the Ant went on its way and continued its toil.  When the winter finally came the Grasshopper had no food, and found itself dying of hunger, while it saw the Ants distributing corn and grain every day from the stores they had collected in the summer.  Then the Grasshopper knew:

 It is best to prepare for the days of necessity.

     Are you a confused investor?  I think we all are sometimes… in the world of money there is always something to learn.  Economics, finance and investing are not static topics, especially as countless laws change every year.  But if the research we read about is true, then as many as half of all Americans find the investing process confusing.   In this Bankrate article, they ask “is the other half lying?“  It’s an excellent point, and probably close to the truth.  Many people don’t realize how complex investing and retirement planning really is, and take much for granted throughout their lives, all the while paying a lot more than they should in fees and other charges.  No surprise, I’ve done the same thing for years.  

     But at some point, in order to acheive any degree of tangible retirement security, you have to start asking questions and begin finding the right answers.  While so many Americans stay confused, guess who benefits?  The financial services industry.  I’m all for businesses making a fair profit, but not at the expense and ignorance of the people the industry supposedly serves!  And who benefts the least?  Those who least understand what they are getting into.  The segment of the population that is at the lowest socio-economic levels.  Is that surprising? Probably not… education is the key to so much in our society, and it’s no different where investing and saving for retirement is concerned.

“In short, it is the lower- to middle-income segment of American society that is in the greatest need of financial planning and investment advice; however, the industry is simply not equipped to deal with this population of underserved people.”  John Grable, Kansas State University

     It’s really all about financial literacy.  Just as reading, writing and arithmetic are the fundamentals at elementary school for our children, financial literacy can serve as leverage for understanding and succeeding in the areas of investing and retirement planning.  Can you do it alone?  Certainly.  But it’s not a simple proposition.  It requires regular education and research, as well as age-old discipline to stay with it.  Some statistics in the article above cite that only 32 percent of investors in America have an IRA.  And only 23 percent have both an IRA and a 401(k)!   According to the Employee Benefit Research Institute (EBRI), the Individual Retirement Account is the single most popular retirement savings vehicle in the country.  Just not enough people are using one, or starting soon enough if they do!  

     When you look at the numbers, it’s actually somewhat scary.  People are starting to realize that they must take charge of their financial future, but we’re not saving nearly enough.  It takes a great many years to accumulate sufficient retirement assets to provide a self-sustaining source of income.  Social Security is counted on by far too many for far too much.  It will probably be around during our lifetimes, but it’s not going to give someone a secure retirement without something else to supplement the income need.   Take a look at this 2007 chart from the EBRI:

 

    Nearly half of all U.S. workers report savings and investment totals of less than $25,000. And almost 25% of U.S. workers and retirees report having no savings and investments at all!  Admittedly, many of these numbers are skewed to the younger population with older workers normally having more savings assets.  But it’s still not pretty.  We can do something about that… take charge personally and start planning for our future today.  Read and learn, share knowledge with family or friends, and think about the vision you have for the years ahead.   Besides, what is it really about?  It’s about investing in ourselves.  Getting there financially  just takes knowledge, time and a little discipline along the way.  Of course, if you read this far you’re probably way ahead of the pack.  But as we take a few more steps to secure our retirement, maybe we can help someone else learn to do the same.  

It’s often been said that experience is the best teacher, and that’s a very appropriate axiom when it comes to managing money. Jonathan Hoenig from SmartMoney.com might agree in his article Trading, Not TV, Offers Best Investing Lessons. He makes an excellent point in terms of investing in the market and how learning to trade stocks can provide an understanding that we won’t get anywhere else. It’s a good read with some valuable insight, but it’s not for everybody. There are plenty of investors out there who have never set foot in the world of brokerage accounts, and don’t intend to. Many investors have a 401(k), Roth IRA, and a host of taxable mutual funds. Do they need a brokerage account? Not unless they want to trade stocks on their own.

Sometimes I think many of the Wall Street gurus think that trading in the stock market is a necessary practice for achieving wealth. Perhaps surprisingly it’s not- many people enjoy building a business and working at a career that provides long-term growth and opportunity. Many other people invest patiently without trading. Some folks think the market is just too complicated, and don’t want to risk any money trading. I can empathize with that, but at one point in my life I felt a strong desire to learn what trading is all about. My story is pretty much like Mr. Hoenig’s, except perhaps that I didn’t make as much money and don’t trade for a living now.

The conclusions I came to were born on the winding road of countless gains and losses, and the realization that, for me, trading stocks is no way to make a living! Naturally, if you are a professional or have a passion for trading, then more power to you. But to be quite honest, I realized that unless I was going to focus on trading full-time, or become a professional in the investment and trading world, I really had no business being there. It takes a lot of time and focus to get it right, and you can’t be very successful on a part-time schedule. Maybe there are exceptions- I’d love to hear about them. Trading just doesn’t get me there… but saving and investing does!

I would offer that most of us need to be a little more patient and disciplined over time, and instead of trading- focus on investing. Once I accepted that I wasn’t going to spend a lot of time trading stocks, I became a long-term investor, and focused on companies, stocks and mutual funds that would help grow my portfolio. Much of that means dividend paying stocks that return something for the risk I take when holding them over time. I also became someone who looked for opportunities to save money in every facet of life. Little costs add up to big dollars over the years. Something that David Bach calls “The Latte Factor” or how People Magazine says “A Latte spurned is a fortune earned!” Don’t see it? Let’s say you give up three latte’s per week at $3.50 each. That’s $10.50 per week, or $42 per month. Or if you cut back somewhere else and save $20 per week, or $80 per month? Take a look at a comparison:

That’s just from some extra savings each week, with monthly compounded interest. Maybe it looks like a paltry sum of money to some people, but it’s just a minor example. Imagine what we can achieve by saving more! It also shows how a little more interest can go a long way. And it presents an opportunity for us to look for saving money in everything we do over time. At home, at the grocery store, at the bank, when using credit cards, etc, etc. There are countless ways to become more frugal, efficient, thrifty… whatever you want to call it. Just doing it is the hard part, but once you get started- it becomes kind of fun.

Overall I think we can achieve a balance between needs and wants… taking care of ourselves and our families, treating ourself to good things now and then, and being proud of our savings and investing habits over the years. We can end up with a lot more than we ever dreamed of, if we just do our part each week. And by the way, that axiom about getting experience? Well, experience is pretty darn important, no question about it. But it’s not the only place we can learn. Learning from the mistakes and wisdom of others is often more important. There’s a quote I like from Benjamin Franklin, someone who long recognized the value of money throughout his life:

“Experience keeps a dear school, but fools will learn in no other.”

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     How many coins do you have laying around at home?  Confession time:  I’ve got about 2-3 gallon size jars full of them.  Which is strange because it’s contrary to my goals and habits for earning interest on savings!  In some ways it’s a habit I picked up from my father long ago.  When I was very young, I was enthralled with the coin jars and cans my father kept around the house.  He commuted often for long hours, riding trains and working in various cities.  He ate lunch and other meals on the road, paid tolls, and ended up with lots of change.  And he rarely took his coins to the bank.  Instead we would hand roll them every couple of years, and after many rolls of pennies, nickels, dimes and quarters were all piled up, he would finally take them to the bank and use the money for something fun.

     I don’t have nearly the number of coins laying around that he did.  And I really want to do something with them rather than allow them to sit, wasting away over time as their value may slowly erode with the inexorable march of inflation.  A few years ago I tried to do just that… and the bank refused the coins!  I had not rolled them, and was hoping the bank would use their machine to sort them.  They said they didn’t have time and I had to roll them manually.  Ugh.  Hence Coinstar arrived on the scene in supermarkets and other stores to fill a consumer need.  I refused to use the Coinstar machines however because they charge such high interest, often over 8%.    But they have a new approach these days where you can receive a gift card back from Amazon or another company without paying the interest charge.  As often as I use Amazon that’s a pretty good approach.   And now the banks are finally on board too it seems. Many of them have their own sorting machines and will accept loose change. 

     Either way, I feel like I should take the pennies and do something with them… but for some reason I just like to see them fill up the jars.  And so does our 7-year old.  We have a savings game while the jars fill up, and we’ve been planning to use the money for a neat fishing trip.  Maybe it makes it more tangible for him, and in some ways is the reason I like to have them around.  And maybe that’s not a bad reason after all.

    Here’s a great article about saving and investing… and validates something that most of us know intuitively:  Your First Million is the Toughest.   The charts make an excellent point about how compounding works in your favor the more money you have.   So for someone saving $1000 per month, with an 11% return it would take 21 years to go from $0 dollars to a $1,000,000 dollars.  But if you’ve already got $2 Million in the bank, it only takes 3.5 years to get to $3 Million with that same $1000 per month at 11%!    I’m certainly not at my first million… but working towards it.  And as this article shows, spending a huge chunk of money to get married is like giving up a million dollars 40 years down the road.   Someone spending $35,000 on a wedding at age 25 could instead put that into an investment earning 9% for 40 years. At age 65 they would have over $1.1 Million dollars!  Makes you think a little bit. 

    Of course, if you just want to find out when you’ll be a millionaire based on your savings goals and assets, check out this calculator from Money.com

     Are you suffering from too much choice regarding saving and investing for retirement?  I know I have at times. Too many funds, brokerage accounts, stocks, and questions about our “portfolio”… especially the 401(k).  And we are not alone!  Barry Schwartz, in a talk on the Paradox of Choice, cites too much consumer choice as a problem in society today.  In one example, he cites statistics that show how, with a 401(k) for example, for every 10 funds offered as choices, participation rates decrease by 2%.  A 401(k) plan that offers a choice of 50 funds suffers from 10% less participation simply due to the complexity of choice!  (You can view the video yourself at the link below).

    How about another example?   Let’s say we’re in the market for an mp3 player.  We go to the local big box electronics store thinking we probably know what we want, but we want to see the choices.  Holy cow!  Many brands and versions, but which is the most popular?  Easy question, it’s the iPod.  We look at all the choices, and then head to the gleaming white and mutli-colored rectangle.  Why?  I think it’s because of simplicity.  Apple found long ago that if you do a few things very well, market it correctly, and remain consistent, consumers will respond.  I believe the iPod and many other Apple products are so successful because of their simplicity and the fact that what they do, they do very well.  With an iPod you know what you’re going to get for the most part.  It’s sleek, intuitive and Apple doesn’t reinvent the wheel everytime someone wants to do something new with it.  They let other manufactures complement Apple products with a variety of endless components. 

    In many ways, we can do the same thing with our financial management and retirement planning.  Instead of staying paralyzed by too much choice, we should make a few simple decisions and let it go.  That’s why so many “life cycle” or “life strategy” mutual funds have come along and continue to increase in popularity.  It’s a one-stop shop for saving and investing over time, with automatic re-balancing by the mutual fund company. 

• One of the most important factors for the consumer to decide is risk tolerance.  How conservative or aggressive do you want your savings to be invested?  (See the end of this post for some worksheets and more info about risk tolerance.)
• Another element of maintaining a simple approach to saving and investing is to automate the process.  If it’s a 401(k), simply sign up for payroll deduction, matching, etc. and let it work it’s magic.  If we’re investing on our own… do the automatic ACH transfer thing, and let it go.  Simple is good.  
• Many “target-date” retirement mutual funds offer simple choices.  You just pick a plan based on your approximate retirement years, e.g. 2025 fund or a 2030 fund, and you keep on investing.
• What’s the most important thing about saving for retirement?  1) Starting a saving and investment program and, 2)  Staying with it!  As the chart below clearly shows, Defined Benefit pensions (the old traditional pension) have continued to decrease over the years, and achieving financial security in retirement is now the responsibility of the worker.  We must save consistently for retirement. 

     Besides, so many employers provide matching funds for the defined contribution, or 401(k) type of plans these days that we are giving up free money if we don’t sign up!  We tend to think no one would do that… but average participation rates have remained around 55%-60% for many years.   The provisions of the Pension Protection Act of 2006 are intended to foster automatic enrollment of new employees, with the ultimate hope of increasing pension-based financial security for worker’s retirement years.  It looks like the PPA provisions are having a large impact because participation in 401(k) type of plans is increasing, as well as diversification by employees within the sponsor’s plans. 

     It used to be that most 401(k) participants invested primarily in company stock… not any more.  People are more likely to use a mutual fund or plan from a company such as Fidelity or Vanguard- especially the life-cycle or target date retirement funds.  If you have a choice, why put all your eggs in one basket and invest only in company stock?   But getting started and enrolled is still the most important thing.  Many people think they “can’t afford it” right now, or need the money for something else.  When it comes to retirement, I think we can’t afford to not save for the future.  No one else is going to do if for us.    Social Security, if it’s still viable in 20-30 years, will not provide an adequate income for retirement.  It is simply a supplement to retirement.  We won’t even talk about healthcare costs that retirees will continue to face.

   Here’s the link to a great video with Barry Schwartz on the Paradox of Choice: Why More is Less.  It’s pretty long- about an hour twenty minutes to watch, or you can read his best-selling book:

The Paradox of Choice: Why More Is Less