Is landlording profitable?

Is landlording profitable? The answer is yes. Where people disagree, I think, is on the timing, and perhaps to a lesser degree, on the strategy.

My wife read an article yesterday on real estate investing that made her mad. I’d link to it, but I can’t find it today–maybe it was pulled. But the premise was that you shouldn’t invest in real estate, because being a landlord isn’t a quick way to get rich.

I agree with the second part. But the first part doesn’t logically follow. In fact, I don’t care who you are, probably the best thing you can do for yourself is forget about trying to get rich quickly. I speak from experience. Read more

How to invest without a financial adviser

I’m not a big fan of financial advisers. Their job is to sell you financial products, not to look out for your own best interests. I learned that the hard way, after sending most of what I made in my early 20s to one. He doubled my money in a year or two, but erased the gain and then some just as quickly. So I had motivation to learn how to invest without a financial adviser.

There’s a pretty easy formula you can use to outperform 90-95% of financial advisers.
Read more

401(K) Paperwork

So I’m filling out 401(K) paperwork. I don’t like everything I see, but can live with it. I guess it’s what I don’t like that’s important. Or why I don’t like some things I see, that is.

Then again, some people may be wondering why I’m even investing at all.I wish I had a nickel for every time I heard someone say, "I’m going to reduce my 401(K) contributions because I’m not getting anything for them right now."

It’s when the market isn’t giving anything back that you want to be buying. Eventually it’s going to bounce back. Nobody knows when, or how high. This is a simplistic way of looking at it, but right now stocks cost about 2/3 what they cost a couple of years ago. There is no historical precedent for stock prices staying where they are now forever. Eventually they’re going to come back.

So we might as well enjoy being able to buy stock at 1997 prices while it lasts, then enjoy the big gains even more, when they eventually come.

The biggest quick gains are probably behind us, given that the Dow rallied about 50% already earlier this year. Fortunately, I was making 401(K) contributions at the time, so I got in on some of that action.

So the first question is when to invest. The answer is, continuously. Trying to time the market is a fun game, but you’ll be right just as often as you’re wrong–if you’re lucky. The problem with most investors is trying to be smarter than the market. The reality is that somewhere in the neighborhood of 90% of people who try to outsmart the market end up underperforming the market over the long term.

So if you’re willing to settle for average returns, you’ll automatically be in the 90th percentile. That’s not a bad place to be.

So, buy when you have money. Don’t worry about whether the market is up or down on payday when your contributions get deducted from your paycheck. Some days it’ll be up, some days it’ll be down, but you’re in the game. You’ll be right more often than you would be if you were trying to time things.

The second half to getting average returns is choosing what to invest in.

Most mutual funds are run by managers who are trying to outsmart the market. Some of them can give very good results in the near term. But they can just as easily lose your shirt for you.

Index funds mimic the market. Index funds invest in precisely the same companies that appear in the major market indexes, so they do whatever you hear on the news. As such, they need no managers, so none of your investment goes towards paying managers. That saves you money. And there’s a 90% chance those managers wouldn’t outperform your index fund anyway.

I invested my money in four funds: an index fund that tracks the S&P 500, a second fund that tracks the other 4,500 or so stocks that aren’t big enough to be in the S&P 500, an international fund, and a bond fund.

My best performer? The fund with the 4,500 pipsqueak companies. But next year it could be completely different.

The international fund is there to give me some aggressiveness. For most of my lifetime, the biggest growth has been happening outside of the United States, and that gives me a chance to benefit from it. Some years I’ll get big returns from it. Some years I’ll lose my shirt.

The bond fund is there for balance. Bonds are boring. They usually give slightly better returns than parking your money in CDs in the bank. The idea is that in years when stocks are down, having some money in bonds ensures you’ll get some growth. How much to put in bonds depends on how conservative or aggressive you want to be. The younger you are, the less you should park in bonds.

The next trick is to rebalance the portfolio. It’s only something you should do once or twice a year. But the idea is that you should decide how you want your investment to be allocated. 25% S&P 500, 25% other 4500, 25% international and 25% bonds may not be the ideal mix but it keeps things simple for this example. They’re not all going to perform equally. If you rebalance them, then you’ll end up naturally buying low and selling high. This builds in profit and keeps your portfolio from becoming too conservative or too aggressive.

This is a good thing, because our natural tendency with stocks and other investments is to buy high and sell low.

Rebalancing means you can benefit from volatility in the market. You’ll never be able to predict which is going to be your best investment and which will be your worst, but if you’re rebalancing, it doesn’t matter.

Follow this strategy and you aren’t guaranteed to double your money in roughly 7 years, but the odds are very much in your favor. You may even do it a little bit faster.

My dad had a very different philosophy. He tried to outperform the market, and took pride on the years that he did. But there were two problems with that. He spent hours every night watching investment shows and reading investment newspapers. It was like having a second job. Even Warren Buffett says you’re better off spending your time doing things that increase your earning power, so that you have more to invest, rather than trying to eke out a slightly higher return on investment.

The second problem is that he didn’t outperform the market every year. I don’t know all of the details and nobody does, but Dad had at least a couple of catastrophic losses in the years just before he died. I don’t know all of the details because it would be inappropriate–I was 17 years old when one of the losses happened. What I do know is that Dad wouldn’t let me invest in whatever he was investing in. That tells me he really knew better.

Settle for average, and you won’t make dumb decisions when you really know better.

I made my dumb decision in my 20s. A friend of Dad’s introduced me to a money manager soon after Dad died. At first the guy looked like a wizard. I sent him pretty much every spare dime I had for the first three years of my career. It wasn’t much, because I wasn’t making much, but the guy doubled my money in less than three years. I was convinced I would be a millionaire by 35.

The bottom fell out sometime in 2000. I didn’t lose it all, but I lost enough. Unfortunately, along the way he parked what was left in something that tied it up until age 59, and the returns don’t keep up with inflation. Swell.

The state of Missouri took away his license.

So I’m done trying to get better-than-average returns.

So what is it that I don’t like about my new company’s 401(K)? The investment options are more limited, and my pipsqueak 4500 fund isn’t one of the choices.

So I just do the best I can, mixing it up between the S&P 500, a bond fund, and an international fund. They’re paying me more than my former employer did, so Warren Buffett would approve.

How does the live-within-your-means movement apply to the current recession?

Joseph brought up some good points in the comments for the previous entry, and I don’t think a short response does them justice. He wants to know what the personal finance experts have to say about the current economic crisis.

Suze Orman actually went on TV a few weeks ago and called it an opportunity of a lifetime. I’ll explain.Joseph says this feels different from other recessions. I think it’s because it is. It’s more like 1929. The major difference is what people were investing in.

The biggest problem in 1929 (besides the crash) was that Herbert Hoover didn’t realize until it was too late that we had a big problem on our hands. That’s not the case this time. Although Bush and McCain were denying it for a long time, both readily admit now that we have a problem.

The cause of our problems today is twofold. One, we should have had a recession in 2000-2001 and we didn’t have much of one. The Fed lowered interest rates to stave off recession, and the result was something of a boom. Both political parties blame the other for this, but basically, under their encouragement, everyone and his uncle was willing to loan people way more money than they could realistically pay back. (Republicans liked this because it was deregulation; Democrats liked it because minorities who previously couldn’t get loans suddenly could get them in spades.) Then, when too many people failed to pay those loans, the banks ran out of money, so now we have banks failing.

I remember seeing Suze Orman come on TV on Sunday morning years ago and warn this was coming. The reason was simple: Too many people were in over their heads in debt, and eventually it was going to catch up with us. She even had the timeframe about right.

It didn’t take a prophet to see it. We started having problems when large numbers of adjustable rate mortgages started resetting. One month, people could make their payments on everything. The next month, their mortgage skyrocketed and there wasn’t enough money left to buy a day’s supply of Ramen noodles, let alone make car and credit card payments.

Soaring gas and food prices didn’t help either, of course. Then again, that’s all interconnected too. Back in 2001, Ford and GM started offering 0% financing, and their primary products were big gas guzzlers. Increased consumption raised fuel prices, which in turn raised the price of everything.

But for those who are able to pay their bills and keep their jobs, the opportunity of a lifetime is nigh.

Stock prices are down. Nobody knows if they’ve hit bottom yet or not. But they came back after 1929, and they’ll come back after this crisis too.

My grandfather was a wealthy man. He started his medical practice sometime during the Depression. He died in 1980, long before I could have a meaningful conversation with him about money. I can only speculate how he made his money, because the living relative who might have firsthand knowledge isn’t especially honest or reliable. I believe he bought stock in the 1930s at depressed prices sometime after he graduated from medical school. While those investments certainly didn’t pay off immediately, by the time the ’50s and ’60s rolled around, he still owned that stock, which he’d bought at Depression prices. At those prices, he might as well have stolen the stock.

I believe the same opportunity exists today. This isn’t the time to cash out your 401(k) accounts–it’s time to max out your yearly contributions, if you can afford to.

A similar situation is beginning to exist in real estate. If William Nickerson (the original make-a-fortune-in-real-estate guy) was still alive, he’d be having a field day. Nickerson made at least $5 million in his lifetime by buying distressed properties and turning them around. Before this crisis is over, there’s going to be a lot of distressed property that needs fixing up.

The bottom line is that the people who have no debt, or who have a reasonable amount of debt under control don’t have anything to be afraid of right now as long as they’re able to stay employed. They have numerous opportunities, in fact.

For one, they’re in an ideal position to convert pre-tax retirement plans into Roth IRAs, which are tax exempt on the back end. You take a tax hit when doing that, but this is the time to take that hit–prices are down.

Two, they can buy stocks and/or real estate at depressed prices, hold on to those assets, and in 20 years they’ll be rich. Once again, let’s go back to 1929. The Dow Jones Industrial Average peaked that year at around 380. If you take the worst case scenario, buying at the peak and then crashing, it took 25 years (1954) for the DJIA to get back above 380. But once it did, it stayed above that level for good.

But aside from that extreme scenario, it’s very difficult to find any 10-year period where stocks didn’t make money.

About a year ago, the DJIA was near 14,000. Today it’s below 9,000 and threatening the low 8,000s. There’s no historical precedent for it to drop lower and stay lower, and there’s no historical precedent for it to stay stuck at any level either. There’s every historical precedent for it to reach 14,000 again, and it’s much more likely for it to do it in less than 7 years than for it to take 25 years like 1929. Between now and then, individual companies will go under, but that’s why you don’t invest solely in one company. Buying an index fund that tracks the S&P 500, for example, spreads your risk over 500 large companies. If General Motors evaporates, you lose a little. But if GM gets its act together and the stock soars, you share in the gain.

Finally, when it comes to real estate, all those people who had bad mortgages have to live somewhere. It’s a terrible market to sell, but if you’re inclined to buy properties and rent them out, the environment is ideal for that and will be for a very long time. People who have enough saved up to pay cash can pretty much monopolize this game for a while, since loans are hard to come by.

There’s a positive for the country as a whole too. Did you get sick of the rest of the world buying up our companies because their economies were booming while ours stagnated? Now everyone’s in the same boat as us, so we’ve probably seen the end (at least for a while) of ruthless international conglomerates buying U.S. companies and then slashing everything that moves.

Overall, I do think this bust is a net positive for society, and not just for the reason I just mentioned. I read not long ago that many people under 40 consider the American Dream a birthright, not something that takes work and ambition. Society as a whole has been using borrowed money to artificially raise lifestyles up into the next-higher income tax bracket. Today’s crisis may put an end to that, and ultimately, that’s good for everyone, although it will be painful in the short term.

How to become a millionaire in 10 years (safely)

I saw a blog post today called How to become a millionaire in 10 years. The majority of commenters dismissed it outright.

I don’t like that attitude. The plan makes some assumptions that aren’t always true. But having the plan is an important first step. What’s impossible now might not be impossible in a few years, so it makes sense to do what you can now.The plan, in brief, is this: Invest $996 a week, get a 12% return, and in 10 years, you’ve got a million bucks.

Let’s look at the first objection. It is optimistic. Unfortunately, the guy who floats that figure the most frequently is exaggerating. But you can come close by tweaking your strategy a bit. Twelve may be a bit optimistic, but it’s probably close enough. If you’re pessimistic, use a figure of 7% and adjust the rest of your math.

It may be tempting to try to do better. I suggest not. Average returns are all you need. Warren Buffett has said repeatedly that it’s better to spend your energy increasing your earning power rather than trying to outperform the market.

The second objection was that the numbers were just too unreasonable, so how do you become a millionaire in 20 years?

That’s easy. Save less. According to this handy calculator, $1,100 a month for 20 years at 12% more than does the trick.

Or you can save $2,000 a month for 15 years and pass the million mark.

So the math is sound. Let’s tackle that really big objection: How in tarnation do you come up with $996 a week to save? (And no, you don’t have to already be a millionaire in order to do it.)

The key is the same as paying off debt quickly. Don’t try to do it all at once. Take some baby steps. If the best you can do is half that, you still reach the goal in 15 years. Start by saving what you can, then ratchet it up when you can.

I set out to find a large number of common ways that people can save $996 per week (or more). Step one is the big kahuna, which will save most people a cool $24,000 a year right off the bat.

Step one: Pay off your cars and your mortgage. Between a house and two cars in the driveway, it’s safe to say most families are spending $2,000 a month. Some are spending a little more, others a little less. The trick here is the debt snowball. Look at your statements, pick the car you can pay off the soonest, then scrape together whatever extra cash you can and pay that much extra every month until you have that car paid off. Then take what you were paying on that car, and apply all that money to the other car. After that, apply all that money to the house.

Chances are very good that you can pay all of that off in less than seven years. The biggest reason why is because banks generally won’t loan you more money than you would be able to pay off in that timeframe. The reason for the subprime mortgage crisis was because banks started ignoring that rule and giving loans to pretty much anyone.

If you are a middle class family that manages to pay the bills somehow, some way every month, I’m reasonably confident in saying that you can pay off all your debt in seven years, then dump that car and mortgage money into an index fund and be a millionaire in another 20.

What about cars in the meantime? Drive the paid-off cars as long as you can, then replace them with the least expensive vehicles that are practical. Given a choice between driving a Lexus and looking like a millionaire, or driving a Toyota Corolla and being a millionaire, personally, I’d choose the latter.

So this gets you roughly halfway there. Let’s see if we can nickel and dime our way to the other half.

Step two: Live off one salary. If you’re married and your spouse works, try as much as possible to live off one salary and bank the other. This was the strategy my in-laws used to pay off their debts (rather than the debt snowball). If one of you brings home $26,000 a year or more after taxes, that gets you the other half immediately. Congratulations.

If step two is impractical or impossible, or doesn’t quite get you there, here are some smaller steps to get you there.

Step three: Put your raises and windfalls towards savings, rather than lifestyle changes. Someone I know was talking just yesterday about a job opportunity that paid a cool $30,000 more than he makes currently. “Lifestyle change!” he said excitedly.

Personally, I’ve never been able to make that kind of a jump, although I’ve made a couple of much smaller jumps since 2006.

Unfortunately it’s often difficult to get much of a raise from a current employer–the money comes when you change jobs. If you’re able to, say, move to a new employer and get a raise of around 10 percent, that takes care of a few of your 52 weeks. Do that every 2-3 years, and you can work your way towards the goal.

This strategy can take care of about four weeks.

Step four: Bank your tax refund. If you get a tax refund every year, instead of using that money to buy something, put it towards the goal.

In most cases, I would think the tax refund takes care of anywhere from 1-3 weeks.

Brown-bag your lunch. Early in my career, I ate out pretty much every day. My day started with a cup of coffee and a doughnut in the cafeteria ($2), and on a good day, lunch cost another $5. Eventually I realized these habits were costing me almost $1,400 a year. Brown-bagging isn’t free, but I figure brown-bagging every day costs less than $400 a year.

That’s another week, or possibly two.

Cut the cable and phone. My local cable provider charges up to $70 per month for some of its packages. Basic cable costs $40, which is still outrageous. If you can live without cable altogether, you can get anywhere from half a week to 3/4 of a week right there. If not, cut back as much as possible.

So how do you live without cable? My wife and I rent movies from Red Box about once a week. It costs a dollar. Other than that, we watch over the air TV. Sometimes there’s nothing on, but when I visit people who have cable, a lot of times there’s nothing on at their house either. The DTV changeover means there’ll be more local channels–many PBS stations are broadcasting on several frequencies, and DTV stations have a range of about 120 miles, so there’s a decent chance you’ll be able to pick up stations from nearby cities that you couldn’t get before.

So try it. If you can’t live without it, cut back as much as you can.

The same goes for your phone line. Are you paying for Call Notes? Cancel it and get an answering machine. Call waiting? Cancel it unless you can’t live without it, but in this day and age when everyone has cell phones and e-mail, I’ll bet you can. Call forwarding? Cut. If you buy everything Southwestern Bell tries to sell you, you can easily pay $50 or more per month for your phone line. When I ordered phone service, I asked for just a dial tone, and repeated the request every time they tried to upsell me. I pay just a shade over $20 a month for my dialtone. I can receive all the calls I want for free, and make all the local calls I want for free too.

By cutting back on cable and phone, most people should be able to save another $996 a year.

Take a long, hard look at the cell phone. Do you have two cell phones with $99 ulimited talk plans? Do you really need two?

Cricket offers an unlimited talk plan for $35 a month. But you may be able to save even more by cutting down the number of cell phones you have, or just getting pay as you go phones for emergency use and sharing phones as much as possible.

And keep in mind that a landline lets you make all the local calls you want. Ditching the land line and going all cellular may be trendy, but it’s not always economical.

My wife and I have one cell phone with a plan that costs us $30 a month, plus a pay-as-you-go phone that we refill as needed, for $25 a pop. It ends up costing us $10 a month, on average.

I can see how someone could potentially save another week’s worth by getting stingy with the cell phones. Maybe more.

Save on your utilities. Buying a programmable thermostat and setting it to not work as much at night and to minimize heating/cooling during the hours when we’re not home saved us a bundle. To the tune of $100 a month.

Weatherproofing the house helps too. Put film on the windows during the winter, and put weatherstripping on all the doors. I also went into my basement, where the utilities come into the house, and found a number of holes for wires that are much larger than they need to be. I filled those in with putty to keep the elements out.

If you really want to be a stingy Scottish miser, invest a few hundred dollars in a whole-house fan. These fans can replace all the air in your house in a matter of minutes. So in the morning when it’s coolest, you can open some doors and windows, run the fan for a few minutes, then shut off the fan, close the house back up, and give your air conditioner a big head start.

Also, for some reason society says we should keep our houses at 70 degrees in the summer and 80 degrees in the winter. Why? We keep ours at about 75 during the summer and between 70 and 75 in the winter. Once you get used to it, it’s comfortable. The savings aren’t exactly peanuts.

Using fans can help keep the air moving, making those temperatures more tolerable.

Squeezing the utilities ought to take care of another week or two.

Go out less. I know some people who easily spend $100 a week going out on Friday nights. Rent a movie from Redbox, have a couple of drinks at home, and save the difference, which is five weeks’ worth.

Cut the Starbucks habit. Do you start off your day with the stereotypical $5 cup of coffee at Starbucks? That’s $1,050 right there. Bank $996 to cut off another week, and you have $54 left to buy a coffee maker (if you don’t have one) and a year’s worth of reasonably good coffee.

Cut the bottled water habit. If you drink three bottles of water a day, that’s commendable because it’s healthy, but you’ve also fallen for the biggest scam in recent memory. Cut the bottled water, buy a water filter, and bank a thousand bucks.

Cut back on expensive hobbies. I’d rather not think about what I used to spend on my Lionel train habit. I know some people spend five figures a year on theirs. I was never that bad, but at its peak I know I was spending more than $1,000 a year on it. I’ve cut back, and the last two or three years I’ve probably spent a couple hundred.

I think it’s safe to say that most households have at least one or two expensive hobbies that could be cut back and still be enjoyable. Buy less and try enjoying what you have. Or buy used instead of new.

Or perhaps they could (gulp) be eliminated, for the time being at least.

Call this one another week’s worth.

Use the library. I know someone who is a voracious reader, which is admirable. She reads a couple of books a week, easily. That’s admirable, but the problem is she buys all these books at retail. A book collector might perk up and call it an investment, but there’s very little collectible interest in Nicholas Sparks and Nora Roberts. She buys the books, reads them once, and then they sit on the shelf until she gives them to someone.

She probably could save $1,000 a year by using the library instead.

Eat out less. Eating out once a week at $20 a pop easily works out to $1,000 a year. Cut that back, whether it’s by eating somewhere less expensive or just eating out one less time, and you’ve got another week’s worth of $996.

Use public transportation to go to work. The average person commutes about 20 miles a workday. That’s $2,436 a year if you go by the IRS standard mileage rates, which factors in depreciation and maintenance on top of gas. The savings wouldn’t quite get me a full two weeks’ worth due to the cost of a monthly pass, but it would get me close. Call it two weeks.

Buy used and generic when possible. I’ve read that the poor are less likely to buy generic than the wealthy, out of fear of being ripped off. The fear is usually unfounded. Generics usually are made in the same factory right alongside one of their brand name competitors, and the only difference is the label that gets put on in the end.

But let’s talk used. Last week my wife and I bought my son about $80 worth of toys, but we paid $4 for them. They came from a church rummage sale. They were a bit dirty, but we ran them through the dishwasher to clean and sanitize them (they’re plastic). The swing was missing the strap to strap him in, but we replaced it with a belt from a thrift store, which cost another dollar. It fits perfectly.

At the same rummage sale, I bought myself a button-down shirt for a dollar. It looked new. I remember paying $20-$25 in a store for something comparable.

I bought the shoes I’m wearing right now at an estate sale. They didn’t look like they’d ever been worn, and I checked the fit before I bought them. I’ve been wearing them for more than a year now. I paid $3 for them. They would have cost me $50 in a store.

Most people buy a new computer every three or four years. I buy off-lease business computers every three or four years instead. They’re better built so they’re less likely to break (I’ve never had one break on me), and a $100 business PC that’s a few years old will be about as fast as a new computer that costs about $500. So I figure this practice saves me about $400 every three or four years.

I once saw someone in line ahead of me at a department store try to drop a thousand dollars on new clothes. He had several nice shirts, some nice pants, socks, some nice ties. I was pretty impressed with his haul. The problem was he tried to buy them on credit, and was denied. My work clothes mostly come from secondhand sources. They don’t look as nice as what that guy had, but what good does it do to look nice if you can’t pay your bills?

I figure it’s pretty easy to save a thousand or two a year by buying generic and used stuff.

Be careful with the flex-spend account. Back when I was single, I was annoyed because every year HR made us attend a meeting trying to coerce us into signing up for a Flexible Spending Account (also known as a cafeteria plan). These plans made no sense for me whatsoever. Some years my medical expenses were $100. Some years they were $200. Other years they were $20. So if I put $1,000 in, as they tried to convince me to do, I would have been wasting a lot of money. Being in the 14% tax bracket, at best I stood to save $28 if I had a $200 year. But if I put in $200, then I might turn around and have a $20 year and waste $180.

Now I’m married and my wife is diabetic. In this case it’s a no-brainer. We sat down and figured out how often she goes to the doctor, and what she spends on supplies in a given month. Her expenses are predictable, and high enough to make it worth doing. Between her expenses and having a son, I put the maximum in, since babies are always needing various FSA-eligible things, and they go to the doctor on a regularly scheduled basis.

If you’re in the 28% tax bracket and you put $3,000 into an FSA, being able to use pre-tax dollars for those medical expenses saves you about $840 a year. Not quite a week’s worth, but close. You can probably scrape up the other $156.

But if your medical expenses are always really low, you can save a bundle by not putting anything in such a plan. Employers love these plans because people frequently don’t track them very well, and anything left in the kitty at the end of the year goes to the company. It’s a great way to steal from your employees, frankly, and that’s why HR departments push them so hard. If you don’t need one, don’t put the money in, and pay yourself instead.

I think it’s safe to chalk up judicious use (or non-use) of an FSA as another week’s worth.

Be careful with AFLAC. AFLAC is a similar thing. My employer’s HR loves to push AFLAC on us. “I have three kids. I know I’m going to make at least one trip to the ER every year, and that pays for my AFLAC,” the pitch goes.

Think it through. I have a peculiar talent for injuring myself with sharp objects. But I’ve found that my best bet is to go to urgent care when it happens and put it on my FSA. Urgent care always gets to me faster than the overburdened ER, and it costs half as much. I did the math, and AFLAC just didn’t make sense. One trip to the ER didn’t cover a full year’s worth of AFLAC.

Maybe when my son gets older and starts playing sports and stuff, AFLAC will make sense. I’ll revisit it then. But do the math yourself, rather than just taking HR’s pitch. They’re salespeople. Their job isn’t to help you, their job is to make the company money by taking back as much of your salary as possible.

Making the right decision on AFLAC isn’t going to save you a full week’s worth, but it can make up for a shortfall.

Get a side gig. I’ve come up with more than 26 week’s worth of common ways to save $996, but not all of them will necessarily apply to everyone. Having a side gig is a good way to make up the shortfall. I can tell you to mow lawns or fix bicycles or make quilts, but I’d rather let you find something more ideal, since the best thing for you to do probably isn’t the best thing for me. Here’s a series of questions to ask yourself to help you find a side gig.

What do you enjoy?
Is there some service that you can provide at a better value than your potential competitors, whether it’s because you’re cheaper, or because your work is higher quality?
Is there some product that has resale value that you know how to find and then resell some way, after making any necessary repairs?

Basically, you need to find a product or a service that you already know well and enjoy that allows you to add value to it. Don’t quit your job to do it; do it on weekends or evenings with the goal of making a bit. If you can make $50 a week, that works out to $2,500 a year. That’s a reasonable early goal, then build it up from there. Some side gigs grow into full-time jobs but others don’t. Your chances of succeeding are much better if you don’t try to rely on it as a full-time job.

Start small, then let it grow (hopefully) to fill whatever number of $996 shortfalls you have in a year. And as you gain skill and experience, it could potentially grow beyond that, either allowing you to reduce some cutbacks, or achieve the ultimate goal more quickly.

So there you have it. Not everything in this list applies to everybody. But I would say the majority of these things do apply to anyone who can call themselves upper middle class. Such a family can take this list, find 52 things, and join the ranks of the wealthy in a decade or two, if they’re willing to let savings take priority over keeping up appearances.

But I also suspect that pretty much anyone who owns a home and two vehicles can probably take this list and find lots of things they can cut. They might not be able to find a full $996 a week for all 52 weeks of the year. So it will take them longer, but it’s possible. Making some sacrifices now in order to have financial independence later is worth it.

The most important thing is to put everything on the table. The year 2005 was my turning point. I lost my job, and it seemed like everyone who needed IT people couldn’t afford them. Stretching the pennies was necessary for us to stay afloat when I was in between jobs. Eventually I found one. The cutbacks that allowed us to make ends meet while my best source of income was doing odd computer jobs also allowed us to pay off our house early after I regained steady employment.

With the house out of the way, financial independence certainly is my next goal. I’m not sure that this formula is precisely what I want to follow in order to get there. But it’s important not to dismiss such formulas immediately just because they seem difficult or nearly impossible.

The key to success, financial or otherwise, is to take difficult problems and find solutions, rather than dismissing them immediately as impossible. One strategy is to break the problem down. This problem conveniently breaks down into 52 smaller problems. I’ll admit I had to sit and think a very long time to come up with 52 smaller answers.

I just have one more thing to say. Please try. I’m currently reading a financial book written in 1975 that said the average U.S. household headed by someone aged 24-34 had $2,500 in savings. In today’s dollars, that’s a shade over $10,000. Today, the average household has zero savings and around $10,000 in credit card debt, on top of car payments and rent or a mortgage. That has a lot to do with why our economy is such a wreck right now. We can’t buy any more stuff because we’re paying too much in interest.

It’s not too late for one or two generations to rise from these ashes and buy our country back. So let’s do it.

Don’t fall for get-rich-quick schemes: Check out the claims before you sign

The pitch sounded too good to be true. While most bank accounts in the United States are paying a piddly 4% interest, and rates are more likely to go down than up, there’s another country whose economy is booming, is one of the safest places in the world for your money, and routinely pays 9, 10, or even 14 percent interest on three-month CDs.

I clicked the banner ad. I read what the guy had to say. But I didn’t sign on the dotted line. Here’s why.First, there’s no shame in checking out what the guy has to say. Maybe he does know something nobody else knows. That’s fine. What’s wrong is signing up without checking out the claims in more detail.

In this case, the sales pitch was for 3-month CDs in Iceland. Icelandic banks offer tantalizing interest rates, but there’s a catch.

The salesman said the reason is because Iceland’s economy is booming. Do some more research, however, and you’ll find the real reason for the outlandish interest rates is because the Icelandic Krona isn’t a very stable currency. They offer these tremendous interest rates in hopes that foreign investors will pump their currency into the Icelandic economy.

I did some more digging, and the value of the Krona versus the dollar varies wildly. In the same year, it can be as high as 80 Kronas to the dollar, and as low as 50. Doing a little math, if your timing is perfect and you buy low and sell high, your $10,000 investment could be worth more than $17,000. You make about $900 off your interest, and $6,000 off market timing. But if you time it badly, your $10,000 investment could drop to $6,800 in value, in spite of the high interest rate.

This is what my dad used to call a "Las Vegas investment." If it wasn’t inherently risky, they wouldn’t be paying these kinds of interest rates. And it’s pretty clear to me why everyone isn’t doing it.

But here’s another problem: The U.S. banks that sell Icelandic CDs charge you a 1% fee on the front and back ends. So they charge to convert your dollars into Kronas, and then when you pull your money, they charge you again to convert back to US dollars. In effect, that 9% CD immediately becomes a 7 percent CD.

The other problem is there’s a $10,000 minimum. You should never tie up more money than you’re willing to lose in a risky short-term investment, and for the average person, 10 grand is a lot of money.

If you’re looking for a safe place to store money for a short period of time and get a good interest rate, a lot of banks and credit unions have started offering so-called "extreme checking" accounts to attract new customers. These accounts often pay in the neighborhood of 5.5 to 6 percent, have a small minimum and a $25,000 maximum, and usually have a few other requirements you have to meet, such as making a certain number of transactions per month with your debit card. But otherwise it just acts like a plain old checking account that lets you add and withdraw funds at will. The rate isn’t that much lower than what you can get in Iceland once you pay the conversion fees, and you have easy access to the money in case of emergencies, and best of all, there won’t be any unpleasant surprises in three months if the exchange rate isn’t favorable.

Unless you can afford to tie up $10,000 until some random, future date when the dollar happens to be low against the Krona and your CD is eligible to be cashed in, I can think of a lot of better ways to invest. If you’re looking for a long-term investment, this is a good time to buy stock index funds because stock prices are in the toilet right now. The long-term returns will be good, and you don’t have to be nearly as precise about your timing. For a short-term investment, a high-interest checking account looks better to me. You don’t need as much money and there’s much less commitment.

How to find motivation to balance your budget

This week I read a story on Get Rich Slowly about a couple who refuses to budget. The conversation ended when the person who needed to budget bragged about getting five shrubs on sale for $10 each. She didn’t need them, but the deal was too good to pass up.Consumerism is an easy trap to fall into because of easy credit, and the messages are all around us. Most people who know me probably categorize me as an extreme cheapskate. Certainly there are lots of things I could be doing that I don’t, but even by doing a few little things you can improve your financial situation immensely.

Watch less TV. I think this is a really big one, because TV is the primary source of marketing messages. It’s not just the commercials either. The TV shows give lots of messages about how you’re supposed to live. It’s not a realistic picture.

At one point in my life I was able to go a year without watching TV, just watching the World Series each year. I watch more now. I try to catch This Old House on Sunday evenings and sometimes I’ll watch a show with my wife, so I probably watch 3-4 hours a week now. But that’s a lot less than average.

My advice to someone who wants to watch more TV than I do would be to watch older movies (1940s-1960s), as that would make it harder to compare your life to someone else’s. Plus, there’s a lot less product placement and other marketing shenanigans going on, and if you watch it on video, no commercials.

Have realistic expectations. A lot of 20-somethings seem to think they have to have furniture as nice as their parents. That’s unrealistic and sometimes impractical. The previous generation didn’t always have what they have now. Walk into the home of a 50-something, and some of the furniture will be new, but some of it will be 10-15 years old, possibly more. The furnishings were bought over the course of many years. Plus, nicer things are impractical when you have kids running around. There will be spills and stains and dirt. Kids need to be taught to respect things, but what’s the point of ruining a $1,000 sofa to teach the lesson? It’s better to put something older and cheaper in harm’s way instead–much easier on the credit card and on your sanity.

Budget. A budget isn’t some mystical thing. It’s a simple list of your money as it comes and goes. It can be as simple as a spreadsheet. In one column, list all your sources of income–your paycheck, plus anything you make on the side. Add up that total.

In another column, list your monthly expenses. That’s everything–your car payment, rent or mortgage, credit card bills, utility bills, gasoline, food, and entertainment. You may have to save your receipts for a month to do this realistically. Add up that total. Hopefully it’s a smaller number than the first total.

I first did this in college when I was treasurer for my fraternity. We were in serious financial trouble but nobody knew why. I grabbed the checkbook, did the simple analysis I described above, and figured out we were spending more than $400 per member every month. We were only charging $380 a month for people to live there.

When we couldn’t raise rates, I started cancelling things. I cancelled the Super Bowl Party. I cancelled cable TV in the lounge. If it wasn’t a basic necessity of life, it went. It made me unpopular and it didn’t balance the budget, but it cut the shortfall.

I’m guessing most of the people who voted against me raising rates are having more trouble paying their bills today than they need to.

The expenses involved in a personal budget are different than for an organization, but the principles are identical. You still need to have more coming in every month than comes out, and if you can’t figure out how to make more, the only way to have more money is to spend less.

Reward yourself. Practically. A few years ago my budget was tight and I’d taken on an expensive hobby. Then I realized what I spent on food every day. It started with $1 for a cup of coffee and a doughnut. Lunch was $5 at the cafeteria. And usually I spent another dollar or two in the vending machine. I let my ego tell me it wasn’t worth my time to pack a lunch.

Then I did this math equation: (365-52-52-10-10)*7 and came up with $1,687. I was spending $1,687 a year on (mostly) bad food because I thought I was too important to pack my own lunch.

I was also making about $15,000 a year less than I make now. Dice.com tells me I’m slightly underpaid now, let alone then. Who was I kidding? That $1,687 was a luxury I couldn’t afford.

So I went to the store, bought a Thermos and a big can of coffee, bought some instant oatmeal and some breakfast bars and granola bars, and started packing fruit and sandwiches. What was left became my hobby budget.

I couldn’t motivate myself to cut that expense just to have more money, but being able to afford something I otherwise couldn’t was enough motivation for me. Eventually I shrunk the hobby budget and started using that money to pay down debt.

But had my situation been different I don’t think it would have been a bad thing, necessarily, to keep using that to fund a hobby. It’s easy to get discouraged when it seems like everyone else is passing you by, even if they’re passing you by on borrowed money.

Look at opportunity cost. Opportunity cost is about the only thing I remember from college economics. The theory goes like this: The cost of a new car isn’t $20,000. It’s what else I could have done with that money. So the cost of a new car is a plasma TV ($5,000), a high-def DVD player ($500), a nice computer ($1,500), a new high-efficiency furnace ($4,000), a nice vacation ($3,000), all three current generation video game systems (roughly $1,000), a new living room set ($2,000), and you’d still have $3,000 left to replace two or three appliances with high-end models, or all your major appliances with new low-to-mid-range models.

Would it be worth driving an older car for a few more years to be able to afford to go on a home-improvement binge like that?

Or here’s the way I prefer to look at it. I could invest that money conservatively, using a no-load index fund that just does exactly what the Dow Jones Industrial Average does. Historically, money invested in the DJIA doubles every seven years. Some seven-year periods are better than others, of course. If I dump $20,000 into that kind of a fund, it will be worth $320,000 in 28 years.

The sticker price on the Honda Civic sitting in my driveway was around $15,000, but that’s not what it cost me. It didn’t cost $16,500 either (I paid some interest on it because I didn’t have the cash to buy it outright immediately). It cost $264,000.

I know some people look down on me for driving what’s now a five-year-old car, but I can build myself a very nice nest egg just by keeping my cars two or three times as long as everyone else does. Will they still be looking down on me if I retire at 65 and they have to work 10 more years because they still have debt to pay off?

If the cost of a secure future is driving a car typical of what 16-year-olds drive, I’ll pay that price. It’s a bargain.

Don’t pay interest. If you have a choice between financing something and waiting a while and paying cash, wait and pay cash. Paying interest is like paying rent. It’s paying money off and having nothing to show for it in the end.

I do use interest-free periods to buy things because that gives me a little more time to get the money together. I financed a furnace earlier this year because they offered 6 months same as cash. I probably could have paid cash on the spot but it would have been less comfortable. Being able to spread my payments out over six months allows me to pay more on the mortgage, which does charge interest.

Nickel and dime your way to prosperity

An old friend and I have been talking a lot about debt elimination these past few weeks. With any luck, both of us will be completely debt-free by age 45 at the very most, and probably sooner.

The trick is to dump as much money as possible into debt retirement. As recently as November, the interest on my Honda Civic was costing me $1.40 a day. Think what you could do with that $540 a year you’re paying in needless interest.

The challenge is finding the money to use to retire debt.Some of these tricks will only save you a few cents. You must get yourself over the it’s-only-25-cents mentality. That quarter can either work for you or against you. A quarter paid at the beginning of a 30-year mortgage saves you more than a dollar by the end of the loan. Can you find a safer way to quadruple your money? I doubt it.

If and when you have no debt, dump those pennies, nickels, dimes, and quarters into an index fund. An index fund just buys you the same stocks that are in the Dow Jones Industrial Average, or some other index. Historically, these funds double in value every seven years. Great Depression, Schmeat Schmepression. Dump a quarter into an index fund and don’t touch the investment, and in 28 years, it’s $4.

So let’s find some creative ways to get some quarters.

1. Pay your bills online. This potentially does more than save you the 37 cents in postage. My gas and electric companies both have arrangements with checkfree.com to allow online payments free of charge. I was invariably late in paying them, which subjected me to interest payments. The other nice thing about Checkfree is that it schedules the payment for the due date. So if by chance you have an interest-bearing checking account, that money can work for you until the last possible day. You probably won’t save more than a couple of bucks a month this way, but that’s $25 over the course of a year. If someone offered you $25 without any strings attached, I doubt you’d turn it down.

2. Make car and mortgage payments as soon as possible. I may be showing my ignorance here, but interest paid to me on most accounts I’ve had is calculated monthly. Interest on my car is calculated daily. So, making that payment as soon as my paycheck shows up in my checking account reduces the principle, thus reducing my interest payments by a few pennies a few days early. It’s only pennies? I’d rather they be my pennies than Honda’s.

3. Use credit wisely. I remember one day a few years ago, I was at the grocery store and instead of pulling out my debit card, I pulled out a credit card accidentally. I thought how awful it would be to have to pay for life’s necessities on credit.

But if you’re disciplined, and you have a credit card with rewards–and we should be talking cash here, not merchandise–then it makes sense to pay for life’s necessities on credit. Take a look at my Discover Card bill, and you’ll see the bulk of it is things like gasoline, groceries, my telephone bill, and $20 trips to Kmart, which means I was probably buying stuff like toothpaste and deodorant and other household necessities. I pay the balance in full every month, so the result is essentially some bank paying me to buy the things I’d need to buy anyway. This nets me about $80 a year. I never see a dime of it–I apply it directly to the card’s balance.

4. Buy a programmable thermostat. The cheapest programmable thermostats cost about $30. They can easily save you that much in a month. During my 8-hour workday, my thermostat only heats the house to 56 degrees in the winter time. It cools it to 82 in the summer. During waking hours and on weekends, it keeps the house at 70 degrees in the winter and 75 in the summer. During sleeping hours the temperature raises or lowers by 5 degrees depending on whether it’s summer or winter. I used to have $300 heating bills in the winter months. Now I have $175 bills. That’s still ridiculous, but it leaves me money to actually do something about it.

5. Cut out the sodas and snacks. I used to routinely spend $1.50-$2.00 a day at the vending machine and the cafeteria at work, buying coffee, soda, and snacks. Over a 240-workday year, well, do the math. The 34.5-ounce can of coffee in my fridge (it lasts longer when stored there) is marked 9-26, the date I bought it. I expect it will last me until the end of the month. So that can of coffee will last me five months. I buy the off brand, so I can sometimes get one of those cans for between $3 and $3.50. So my morning coffee costs me 2.3 cents. I quit drinking soda entirely and I pack a granola bar in my lunch. Over the course of the past year I am sure I’ve saved $300.

6. Pack your lunch. Lunch at a sit-down restaurant almost always costs you $7. Fast food usually costs at least $5. The cafeteria at work is usually $3-$4. Sometimes I pack leftovers that would otherwise get thrown away, so they’re essentially free. It’s fairly easy to pack a lunch for $2. Again, do the math over 240 days. Do you want to spend a house payment on lunch every year, or do you want to spend a car payment instead?

7. Eat out less. A couple of years ago I was dating a girl who had to eat out 3-4 times a week, at least. Usually it was places where I was lucky to get out for under $20. I always paid, of course. I couldn’t figure out why I didn’t have any money. But with a little creativity, it’s entirely possible to make dinner for two for $4. You can make a fairly impressive dinner for two for $10.

8. Shop the cheap stores. St. Louis has five different chains of grocery stores. At the top of the ladder is Dierbergs, followed by Schnucks. A third local chain, Shop ‘n’ Save, generally beats the Schnucks and Dierbergs prices by a few percent. But now I do most of my shopping at two stores that white-collar professionals rarely visit: Aldi and Save-a-Lot. In most cases the quality of the product is the same. But when I can get a loaf of bread for $.99 versus $1.59, the difference adds up quickly. For the things Aldi and Save-a-Lot don’t carry, I still go to Dierbergs, but I rarely spend more than $10 at Dierbergs now, unless they’re running a big sale on something.

8. Buy generics. A lot of people are afraid of generic products because they feel they might be getting ripped off. You’re actually a lot more likely to get taken with a costlier brand name. I’ve found the quality of most generics to be as good as the name brands. When it isn’t, I try a different generic the next time. Eventually I’ll find a generic that’s as good as the big name brand, and save a bundle. I’ll buy the name brands when they’re on sale, but aside from that, my pantry is full of generics and I don’t care who knows about it.

9. Don’t spend a dollar to get 14 cents. A common excuse for not paying down your house is that the interest is tax deductible. That may be, but you’re getting pennies on the dollar. My car payment was costing me $1.40 a day until I paid it way down.

It’s tax time. That means you have a piece of paper that tells you exactly how much interest you paid on your house last year. Are you paying $14 a day to inhabit a house you supposedly own? That tax deduction only reduces the net cost to $12. I can think of better things to do with $12, and I’ll bet you can too.

10. Don’t spend your windfall all at once. Are you getting a tax refund? Did you get a bonus? Have you been working a lot of overtime lately? It’s OK to reward yourself and/or your family. But don’t blow all of it indulging yourself. Spend 10 percent of it, tithe 10 percent of it, and use the rest to retire debt, and dream of the day when you have no mortgage payment and no car payment and every paycheck is a windfall.

11. Save your pennies. Coinstar, the makers of those change-converting machines in grocery stores, says the average household has $90 in loose change scattered about the house. A fairly painless way to save money is to dump your change into a jar at the end of the day, rather than spending it on frivolous things. At some point, convert the money into a more usable form, then apply the windfall rule to it.

12. Cascade your debt. I pay extra on my car every month. When the car is paid off, I’m going to start adding that amount to my mortgage payment every month, except in case of emergency. I estimate I can have my house paid off in about five years by doing this.

13. What will I have to show for this purchase? This is key. Before you spend even a quarter, consider what you will have to show for it by buying it. Just because you walk past a candy store in the mall doesn’t mean you have to go in and buy something. If you’re lucky, all it’ll do is rot your teeth and make you fat. You could have paid that quarter into your mortgage and turned it into a dollar.

Some purchases are unavoidable. In a couple of months, I’m going to need new tires. I can think of a million things I’d rather do with that money, but I need it. That’s OK. I’ll have it.

The trick isn’t to live in total self-denial, but to exercise restraint. Most of us live like millionaires, but the problem is that we’re spending our million dollars instead of letting it work hard so we don’t have to work as much. And it’s killing us.

How to get rich–the Biblical way

Money is a controversial topic in Christian circles. On the one hand you’ve got people who say money is the root of all evil. The other extreme says if you do the right things, God will reward you with health and wealth and who knows what else.(This was the topic of my Bible study last night, in case you’re wondering. And I’m short of material, so I’m recycling. I’m also mixing in some insights people shared.)

For the record, 1 Timothy 6:10 says money is a root–not the root–of all kinds of evil. That’s somewhat less of a strong statement than saying it’s the root of all evil. So, money causes problems, yes, but it’s not the cause of every problem in this world.

To see some other causes and symptoms of evil, see 2 Timothy 3:2.

Isaiah 55:2 asks why we spend our money on what is not bread (when the Bible says “bread,” it’s frequently referring to the necessities of life such as basic food, clothing, and shelter) and on things that don’t satisfy. The main reason we do it is because we’re surrounded by messages that say this product or that product will change our lives. And while some products have changed lives, let’s think about it for a minute: Those kinds of things tend to come along once a generation, if that. I’m talking about things like the airplane, the automobile, and before those things, the railroad. Computers belong in that category. But the soda we drink is not going to change our lives, at least not for the better. Drink soda instead of water and it could make your life worse–regardless of what that 7up commercial with the bear says.

The American Dream is to give the next generation things the previous generation doesn’t have. Some have said that dream is dead, because we’ve become so affluent that we can’t think of what the next generation can possibly get that we didn’t have.

But it’s not working. Our kids have entertainment centers in their room that give a more life-like experience than the movie theaters of 20 years ago. They’ve got videogame machines that play better games than you could find in an arcade a couple of years ago. They have everything imaginable, and yet they’re all on ritalin and prozac. Meanwhile, their parents are both working, to pay for those two luxury SUVs and the next big home improvement project and all the toys and all the drugs that are necessary to keep themselves and their kids afloat in the miserable life they’ve built together.

My dad wasn’t always there for me. It seemed like most of the time he wasn’t. But it’s safe to say that when we ate dinner together 5 or 6 times a week, it was unusual. Most weeks we ate dinner together 7 times a week.

My American Dream is for my kids to have two full-time parents. Screw the luxury SUVs and the $300,000 house in the suburbs. My Honda Civic has more ameneties than I need. I’ll drive it for 15 years so I can have more money when things that matter crop up.

I told you how the Bible says to get rich. And maybe you’d argue I haven’t answered that question yet. I think Isaiah 55:2 can lead one to wealth that’s very enviable, but, yes, the Bible also tells how to gain material wealth. Check Proverbs 13:11. It’s especially relevant in the era of dotcom billionaires.

You’ve seen stories of wealty people who nickeled and dimed themselves to the poorhouse. What Proverbs 13:11 says is that you can nickel and dime your way to prosperity as well.

What the Bible doesn’t say is how, so I’ll share the concept of opportunity cost, which is one of two things I remember from Macroeconomics. I don’t know how many other people in my class picked this up from the dear departed Dr. Walter Johnson at Mizzou, so I’ll do my best to make my examples clear.

Opportunity cost says a 13-inch TV does not cost $99. That’s the amount written on the sticker, but that’s not the price. The price is about 30 lunches at my company cafeteria.

The monthtly cost of driving a new car every three years is about half my mortgage payment. But my mortgage will be paid off in 28 or 29 years and my house will be worth more then than it is now. In the year 2031, I will have absolutely nothing to show for the car I’m driving today. Those people who buy a $2,000 used Honda Civic or Toyota Corolla every few years and drive it until it dies have more money than you think they do.

Assuming you work about 240 days a year, two cans of soda every workday from the soda machine at my employer will cost you $240. But not really. What happens if you invest that money in what’s called an index mutual fund, which follows one of the major indices, such as the Dow Jones Industrial Average? Historically, you’ll gain about 10% per year on your investment, which means you’ll double your money every 7 years investing that way. (That’s taking into account times of bad economy, like today, or worse.) Anyway, I just grabbed my calculator. If you take that $240 and dump it into an index fund, in 35 years you can reasonably expect it to be worth $7,680.

The real cost of a can of soda is sixteen dollars. Unless you’re not going to live 35 more years. But unless you’re going to die tomorrow, the real price is considerably more than 50 cents.

There are a total of 118 verses in the NIV translation that use the word “money,” and considerably more talk about the concept without using the word. Of those, Matthew 6:24-34 is poignant, as is Ecclesiastes 5:10-20. What I take from them is this: If you build your empire 50 cents at a time, you’ll never be as wealthy as Bill Gates. But you’ll have more than you need, and you’ll be happier than Bill Gates, and you’ll sleep a lot better.

And if your name is Jackie Harrington, I suggest you start selling autographed 8×10 glossy photos of yourself. Sign them, “Bill Gates just stiffed me for 6 bucks! Jackie Harrington.” Sell then for $10 apiece to people like me. Then put the money in an index fund. Then in 35 years, when you’re a millionaire, write a thank-you letter to Bill Gates.

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