Due to a glitch at the blog carnival site, I was only able to submit to one blog carnival this week, so Broke Grad Student gets all the glory. He hosted the Carnival of Personal Finance #167. In addition to my post about preparing for a depression, you might also enjoy $aving to Invest’s A-Z of personal finance.
Judging by the light traffic this week, a lot of people have gone on vacation already, but if you’re one of the people staying home this Labor Day, here are a seven frugal activities to keep your family entertained and your wallet full.
Attend a Friend’s Barbecue
The barbecue is one of the most popular and traditional Labor Day activities. You probably know at least one person hosting one. Although you should bring a bag of chips or something as a contribution, attending a barbecue hosted by someone else is a very frugal way to enjoy the day.
Host a Barbecue
If you like to be the host, then pick up some packs of chicken breasts, kosher hot dogs, and hot dog buns from the local warehouse store. Ask your friends to bring the drinks and sides. I’d avoid burgers, because they usually end up flat, dry, and charred unless you’re an experienced griller. Use my other party planning tips to prevent an end-of-the-summer budget buster.
Attend Community Events
Like July 4, Labor Day is a popular day for community events. Check your local online calendar or Sunday paper for free live music events or low-cost street fairs. Pack a picnic in order to avoid the over-priced food they often sell at these events.
Go on a Picnic
Labor Day is usually nice day; not too warm, but not too cold. It’s perfect picnic weather. Pack some healthy foods that can be eaten semi-chilled or slightly warm, then head to the beach or park for some fun in the late summer sun.
Go on a Hike
Summer is too brutal for some hikes, but Labor Day is a great day for a hike if it’s started to cool off in your region. Pack water, snacks, and sunscreen for an early start on the trail, then head home afterwards for sandwiches and chips. After all those calories you burned, you earned them!
Eat All the Berries You Can Stand
Berries are the quintessential summer fruit, which unfortunately means they’ll soon be disappearing from both bushes and markets. Stock up now if you want to have berries in mid-winter. Lay them out on freezer trays, then drop frozen berries into freezer bags. If you like to stick to in-season fruit, then buy enough to serve over shortcake or with cream this weekend. Yum.
Pick Your Own Fruit
Apples are coming back into season just as other fruits fade. This Labor Day, give the farmers a break and pick your own fruit. You’ll be amazed how good it tastes fresh off the tree. You can also bake it into a pie or cobbler. Nothing says Labor Day like fresh fruit pie. Visit PickYourOwn.org to find a farm near you.
Learn How to Can
Canning is a lost art. When I was growing up, we had several fruit trees in the yard. Canning, making jam, and dehydrating were regular activities during the summer. If you’ve brought in your last harvest or went overboard at the You Pick farm, borrow a book about canning from the library. Once you’ve made your own fresh jam, you may never want to go back to the store-bought kind again. You’ll also love being able to eat peaches in the middle of winter without having to buy imported fruit.
These eight frugal activities ought to keep your holiday weekend pretty full. You won’t even want to go near the mall sales. Avoiding big spending is probably the best way to celebrate Labor Day.
As you’ve no doubt seen on other personal finance blogs, the Roth IRA is a wonderful and powerful retirement savings tool. It’s also a wonderful and powerful tool for covering necessary expenses right now, tax and penalty-free. However, there are certain Roth IRA withdrawal restrictions. Here’s how to make sure you do it right.
Roth IRA Withdrawal Period
You never have to withdraw funds from a Roth IRA, but you can withdraw funds anytime. Converted assets and earnings can only be withdrawn after a five-year waiting period, but there is no waiting period for contributions. The waiting period begins on January 1 of the tax year of your first contribution. Note that it’s tax year, not calendar year. If you contributed on April 15, 2008 for the 2007 tax year, then the five-year clock started on January 1, 2007 and you can start withdrawing on January 1, 2012. If you contributed on April 15, 2008 for the tax year 2008, then the clock started on January 1, 2008 and you can start withdrawing on January 1, 2013.
Tax and Penalty-Free Roth IRA Withdrawal Limits
Annual contributions can be withdrawn tax and penalty free anytime, for any reason. You can withdraw earnings tax-free and penalty-free if any of the following applies:
- 59 ½ or older
- Deceased (distributions to beneficiaries)
- Up to $10,000 toward purchase of first home.
Penalty-Free Roth IRA Withdrawal Limits
You can withdraw earnings without penalty for specific reasons, but you’ll have to pay regular income tax on the distributions. The penalty-free reasons are:
- Higher education costs
- Medical insurance premiums following a job loss
- Medical expenses more than 7.5% of your adjusted gross income
- Distributions are part of a series of substantially equal payments
- IRS tax levy
- Qualified reservist distribution.
If none of the above apply, you can withdraw earnings, but you’ll pay an additional 10% early withdrawal tax on top of the regular income tax.
The Order of Distribution
The first funds you withdraw are considered your contributions, even if you had gains between contributions. Once you exceed the amount you contributed through annual deposits, you can next withdraw money from IRA conversions. The final withdrawals come from earnings.
When Should You Withdraw?
Even though you can withdraw funds from your Roth IRA, that doesn’t mean you should. Don’t treat it like an emergency fund. Remember, even if you don’t have to pay taxes or penalties, withdrawn money no longer earns gains.
I used my Roth IRA (that had no gains after seven years) to cover a portion of my grad school expenses. Because I had no gains or losses, and the other option was more credit card debt, it was a good deal.
However, you should always look to your emergency fund, then your savings, then maybe even a home equity loan or other sources of funds before you use your retirement funds to pay the bills. Once you get in the habit of poking into your retirement, it’s hard to stop viewing the money as a piggybank. Of course, sometimes the situation is desperate. If you can do it tax and penalty-free, then you shouldn’t feel bad about using the money to put food on the table or pay your medical bills when you have no other options.
See IRS Publication 590 for more information.
A couple months ago I discovered the Budget Hero game from American Public Media and thought it would be great if we made McCain and Obama play it. Then we could see how they really stack up. Now we’ve got something close! Each candidate provided the game’s creators with the costs or benefits of some of their proposals, which are now included in the game. You can play it to see how your views stack up against theirs.
How the Game Works
The game first lets you choose three “badges,” which are platforms you try to work toward. The badges cover broad issues like Health and Wellness or National Security. Now they’ve added one badge for Obama and one badge for McCain.
Once you choose your badges, you get to play a series of cards in different categories. Although you can’t make sweeping changes, you can increase or decrease spending on a variety of programs. Once you’re done with spending, you can then increase or decrease taxes. If you double-click a card, it shows you the pros and cons for each card.
The game starts with a 2018 budget. As you play, it tells how you much longer it will be until you “bust the budget,” meaning expenses outpace revenues. It also tells you the level of national debt, the interest on that debt, the size of the government, and the amount of the budget surplus or deficit.
My Original Scores
The first time I played the game, I got the budget to 2055, shrank the government, created a $4 billion surplus, and lowered the debt to 20% of GDP. Then I read a few of the card descriptions and discovered they weren’t what I thought I was. That cut my budget to 2047, but kept the surplus and debt the same. I earned badges for Health & Wellness, Green, and Efficient Government.
Obama vs. McCain
I wish the game would show you all the cards associated with each candidate, but it doesn’t. The Obama campaign provided more information, so there are more cards associated with his policies in the game than there are for McCain. To choose the cards I played for each candidate, I visited their websites to review their policies. Where I couldn’t find information, I Googled it until I found a few statements that seemed to be in agreement and went with that.
First I chose the Obama badge. There were a lot of spending increases, but also some big tax changes. I earned Obama’s badge with a 2036 budget bust, a smaller surplus, and a higher debt than my original scores. The size of the government remained about the same.
Next I started over with the McCain badge. On my first pass, I couldn’t earn his badge, so I went back and added more tax cuts and a couple more spending cuts to earn it. Unfortunately, McCain’s badge also busted the budget in 2033, raised the debt to more than 40% of GDP, massively increased the size of the government, and blew the surplus.
How to Use the Game to Choose a Candidate
You can take two approaches to playing the game: review each candidate’s policies and then choose the cards you think he would play to see where he winds up (like I did above), or choose both badges and then play the cards the way you think they should be played. At the end, see if you earned either badge. If you did, that’s your candidate. If you didn’t, go back and tweak until you find a match.
Is the Game Perfect?
No, it’s not. Both candidates would make changes that aren’t in the game, or do things a little differently. Since Obama provided more information, the game may also be more skewed toward his programs. Still, it’s a good way to see not only where you stand on spending issues, but how closely aligned you are with either candidate. You may even find that both of them agree with you on some issues.
Have you played the game? How did you do?
No. Sorry to burst your bubble, but anyone who guarantees that your average stock market return will be 8% is lying to you. Even most of the experts touting that figure are merely repeating the claim made by other experts. Except that it’s not the whole story.
The Average Stock Market Return Depends on the Period
A few years ago, a magazine (probably Money) demonstrated that you can make the average stock market return be any number you want, depending on the period you choose. You could choose a decade with an average 20% return, which would certainly prove that the market is a winner. Some people say 8% since World War II. Many cite 1926-2000. Other cite 1980-2007.
The Average Return Depends on the Stocks
In addition to the chosen period determining the average return, so do the stocks chosen. Some experts cite the S&P 500, others look to the total US market, some include international stocks, too. Whatever number you want, you can find some segment of the market to provide it.
According to Money, the Vanguard Total Stock Market Fund returned 3.5% for the last ten years. The S&P 500 index returned 2.9%, or zero after inflation.
The Average Return Isn’t Based on Real Investments
Of course, all of these averages are determined by computer models. You’d have to hold each stock in the chosen category with equal weight, no expenses, and for the exact same period. No buying or selling in between. Real people can’t possibly hope to achieve that. Partly because most people who could have started investing in 1926 are dead. Many of the people who could have started investing immediately after World War II are now drawing down their investments.
The Average Return May or May Not Include Expenses
Some experts tally the return with expenses, but most don’t, for the simple reason that computer-based charts don’t have any. Plus, how do you decide what those expenses are? If you look at one mutual fund for a specific period, then you can calculate that, but if you look at the stock market from 1926-2000, it can’t be done. Broker fees vary, as will your returns once expenses are factored in.
The Market Moves in Cycles and You May Not Hit the Right One
Finally, and this is the real kicker, the market moves in large cycles. You may have a couple high-flying years, followed by a few negative years, with a few middling years mixed in. If you were to buy in during the high-flying years, and then have to retire during a major negative turn, you’d wind up with pretty poor returns. Many people who retired in 2000 found themselves with dismal savings despite having million dollar portfolios just a year or two earlier.
So What Should You Do?
The first thing you should do is recognize that experts can cite all the statistics they want, but no one can promise you that you’ll see the same return. Usually, that statement is followed by the one that “past performance doesn’t predict future performance.”
The second thing you should do is invest anyway. Even the most paltry portfolio should at least keep pace with inflation, which is more than a savings account can do. You should also diversify your portfolio with international investments, real estate, bonds, and several classes of U.S. equities. That will help shield you from wild swings in any one segment. Although the major global markets are increasingly moving together, certain elements (like stocks and bonds) do still move opposite each other.
When planning for the future, I envision a 4% average stock market return. If I get to 8%, that’s fantastic, but I’m not going to count on that. I’d rather be conservative in my estimate and then be pleasantly surprised. I’m sure my future heirs won’t mind a slightly larger inheritance either.
Most people are aware of the importance of diversifying their portfolios. What they aren’t clear on is how to do that, and then how to proceed once that’s done. It’s not enough just to choose the right balance of investments. You also need to rebalance them once a year to ensure that your investments are on track with your goals.
How to Diversify the Portfolio
The first step to investing is choosing a diverse portfolio of investments. You can take several strategies to find the right asset allocation:
- Follow an age-based chart
- Follow a risk-based chart
- Invest broadly by asset class
- Invest broadly by sector (this link is an example of what one person did, not a recommendation)
If you choose a risk-based chart, you should decrease the risk as you age. The closer you are to retirement, the safer your money should be.
You’ll find a wide range of options within each of these categories, so research carefully to compare expenses, performance, and the type of investments they hold. Then allocate your money accordingly. If you have a 401K, you may be able to allocate your money automatically every month, but you’ll have to choose a method for carving up investments in taxable and personal non-taxable accounts.
How to Rebalance the Portfolio
As the market moves, different sectors or asset classes will zoom while others lag behind. Mark a date on your calendar each year to rebalance your portfolio to your intended allocations. That reduces the risk of steep slides and climbs. Using a calendar date to rebalance also prevents you from trying to goose your returns by delaying the rebalancing. I did that once, and watched the stock collapse the day before I planned to sell it. If I’d gotten out when I should have, I would have made $18,000. Instead I made $6,000.
If you’re rebalancing 401Ks and IRAs, then compare the performance of your current holdings with your targets. If one has zoomed up, sell a little and use the proceeds to buy more of something that’s below your targeted allocation. This is also an opportunity to adjust the risk level or asset allocation classes if your needs have changed.
If you’re rebalancing a taxable investment, it gets a little more complicated. When you sell high-flyers, reduce the tax impact by selling a loser. Be hard-nosed about this – don’t let your emotions prevent you from selling a stock that’s going in the tank. The odds of it recovering are not good. Trust me. I rode Lucent all the way down. You can use losses to write off all your capital gains, plus $3,000 (in other words, you can have a capital loss up to a maximum of $3,000.)
Don’t Hold the Same Assets in Multiple Accounts
If you’ve saved the max in your retirement accounts and still have money to invest, don’t just duplicate your protected holdings. Instead, branch out to cover more sectors or asset classes. According to Money, you should hold your taxable bonds in your retirement accounts and keep your stock funds in your taxable account so you can harvest the losses.
Once you choose a diversification plan, select your investments, and set a date to rebalance, you can let your money grow without worrying about it day and night. I use a combination of asset classes and risk for my asset allocation. What’s your approach?
The news likes to bandy about the $2 million figure when predicting the amount the average American will need for retirement. These one-size-fits-all predictions don’t really work, though. $2 million could last a person in low-cost area quite a long time, but run out quickly for someone who previously earned a high income and lives in a high-cost area (like, say, Los Angeles.)
How Do You Determine the Amount You Need to Retire?
What’s the right number then? According to Money you shouldn’t worry about the number, so much as saving a good amount every month. I tried to use both their tool and the Fidelity tool they recommend and got wildly different answers.
The Money tool said I would need just under $2 million. The Fidelity tool wants me to save $4.5 million. That’s a pretty big difference. So which one is right?
It’s hard to say. Both tools allowed me to input annual raises, but those are hard to predict. Unless you plan to stay at your current job until the day you retire, you don’t know how much your income will increase from year-to-year. If you work for a generous company, you could see bumps of 10% a year. Another company might only give 4% bumps. And what if you change jobs? What sort of increase does each job change come with? My husband’s last job change came with a 28% raise. Will that continue to bear out?
Savings are a problem though. Both would only let me input a flat figure of additional savings. I couldn’t get it to adjust to always be 10% of my income, which means my final total always lagged behind.
These tools are probably only good if you’re about 15 years away from retirement and have a better idea of what you can save. If you’re looking ahead 30-35 years like me and my husband, it’s all up in the air.
Use a Percent as a Goal, Rather than a Number
Since the numbers I get from different tools are so different, I’m going to ignore the hard number. Especially since inflation changes the picture. Is that $2 million in today’s dollars or $2 million in 2039 dollars?
Instead, my goal will be to save a minimum of 10% of our income every year. That way, our savings automatically increases as our income increases. In years we can save more or get nice bonuses (we both have good opportunities for that), we’ll do so.
As our income grows, we may even be able to increase that number to 15%. Or maybe we’ll have employers who match our 401K investments (they currently don’t.)
A hard number, especially one like $5 million is scary. With all the variables and potential changes to Social Security, tax laws, etc., I’d rather focus on a percentage I can control than a fixed number that loses meaning with each passing day.
Do you target a hard number or focus on a percentage? What’s your retirement strategy?
This week I bring you five, count ‘em five, blog carnivals. Since we have so many, let’s dive right in.
First, the Carnival of Personal Finance #166 at Daily Finance and Marketing News. In addition to my post about deciding when to pull money from a bank, you might also enjoy Tough Money Love’s 10 warning signs you have the wrong money attitudes. If you see yourself in this list, maybe take a look at your bank, too.
Third, the Money Hacks Carnival #26, also at Our Fourpence Worth. If you liked my strategies for double coupons despite cutbacks, you might also like Mighty Bargain Hunter’s explanation of Amazon Prime.
Fourth, Finance Fiesta #12 hosted by Living Almost Large. In addition to my post about book rental sites, you might also enjoy Fiscal Liberty’s 3 dumb ways to waste money. Renting books if you have a very good library is pretty dumb, too.
And now for something completely different: The Living with Food Allergies carnival at No Whey, Mama. If you were curious about food allergies after reading my post on saving money despite them, I recommend Fiona Veitch Smith’s explanation of the differences between allergies and intolerances.
Less than a month ago, I wrote a series of posts about eating well for less and frugal grocery shopping. Now, I’m wondering if my goal really should be to spend less on food. I recently read In Defense of Food and Animal, Vegetable, Miracle, both of which made me wonder if America has its priorities screwed up when it comes to food.
How Much We Spend on Food
Recent studies show that the average American family spends about 4% of their income on food for the home, and another 3-4% dining out (despite the NYT graph claiming we spend 15%, when all sources are combined.) My husband and I are right in line with those statistics.
When I wrote my series about groceries, I felt almost apologetic for spending a whopping $80-100 a week on food for the two of us. Like I was doing something wrong! Now I realize I was wrong to feel guilty for spending a little more on good food.
Pollan compares our average spending to that of the French, who spend 14% of their income on food. This despite the fact that countless books and studies have noted that they’re generally healthier and have fewer obese people.
Are Our Priorities Backwards?
What’s behind this American resistance to paying a decent price for food? Why do we feel that we have to get meat for less than $2 a pound, otherwise we’re wasting money? I think it’s related to the Great Depression, when everything had to be economized, followed by WWII, when food was rationed. We never learned to love food again. Instead we learned to turn food into product to be improved (made cheaper) through our industrial might.
True, it would be difficult for the average American to spend 14% of their income on food – our incomes tend to be higher, for one thing. They also eat better, lingering over meals for hours at a time. Meals are a part of their culture, not a fast energy fix as they are for us Americans.
Will Spending More Reverse Our Dire Trends?
Scientists recently announced the current generation of children is the first to have a shorter lifespan and greater obesity and illness than the previous one. Has our focus on cheap food, quick meals, and trusting food science over common sense produced a generation of sick kids?
I came up with this analogy for our attitude:
If you could spend $1.50 a gallon for a new kind of gas, but that gas would accelerate the build-up of gunk in the engine, decrease performance over time, and eventually cause your car to break down in the middle of street, would you buy it? Most people would say no. A car is expensive! You have to maintain it properly.
Why then don’t we treat our bodies the same way? You can buy another car. You don’t get another body. If you clog your arteries to the point that you drop dead of a heart attack, no repair can bring you back to life.
As we’ve introduced more additives to our diets, swapped out whole grains for refined flours, replaced sugar with high-fructose corn syrup, fed cows corn rather than grass so they’d marble better and grow faster (thereby removing the healthy fats from their system), destroyed the good bacteria in milk in the name of safety, and followed the dietary advice of every new food study any scientist came up with, we just keep getting fatter and sicker.
Try to Spend 10% of Your Income on Food
I’m with Michael Pollan: I’m going to eat Real Food. For the most part. I can’t part with potato chips, but I only eat 1/8 ounce a day, so I think that’s a fair compromise. And the occasional junk food treat is okay, but that should only be a small portion of my diet.
For the rest of it, I’m going to focus on eating as much food as possible in its evolved state, not its scientifically produced state. I shouldn’t be afraid to spend $4 on pastured eggs instead of $1.49 on mass-produced eggs, or $8 on a pastured chicken instead of $4 on a caged chicken. Note: Cage-free and free-range don’t mean pastured. In most cases, the chickens are still kept in giant, darkened pens with no or limited access to the outdoors so they stay docile.
If I did all of that, I could probably increase my household food spending to 10%, without buying junk food or eating more calories than I actually need. Spending more would be better for my health, better for my local farmers, and better for our culture.
Does that mean I won’t use coupons or try to find the lowest-cost options for dry goods? No. I still want to economize on packaged and canned goods, because that frees up more money for real food. I don’t foresee Cargill and Del Monte changing their current processing methods because a few people like me decided to eat real food.
What do you think? Is it worth spending a little more to treat your body as well as you treat your car?
I’ve hated my slipcovers for a few years. When I bought the couch and chair about 10 years ago, I bought a kind with sage velvet covers. Gorgeous, and dry cleanable. At least until I took them to a dry cleaner who machine-washed them and shrank them. I didn’t even think to sue them for the replacement cost. Instead I was miserable for two years.
This is the before: you can see the white stretches where the fabric is pulling and the bottom where it doesn’t quite cover. They also wouldn’t zip up the back.
When the covers became worn in the stretched spot, I got it into my head to make new slipcovers myself. Nevermind that I hadn’t sewed since I was 13. I could do it for less than $200! Pre-made covers wouldn’t work with my couch, and custom covers would have cost four times that. I’ve completed the process successfully and I’m thrilled with the price and the result. Here’s how I did it.
Following the success of my $14 kitchen makeover, I got ambitious. Even though I hadn’t sewed a thing in more than two decades, I figured I knew the basics and it wouldn’t be a problem. I think that over-confidence was key because it turned out to be way more difficult than I expected.
Locate a Sewing Machine
I don’t have a sewing machine, so I asked a friend to lend me hers for a month or so. If I hadn’t had access to that, making my own slipcovers wouldn’t have been as good a deal.
Measure Carefully – Three Times
I measured my couch and chair and got a rough idea of the amount of fabric, then I blocked it out on paper. I realized some measurements seemed too small, so I referred to the book. It turned out I’d mis-measured and forgotten key measurements, so I took them again and blocked it out on paper again. When I made the muslin, my figures were still too small, so I took them one more time.
Research Fabric Prices and Widths Early in the Process
The Los Angeles fabric district is huge, so I had an advantage there, but you can find affordable fabric online at places like Denver Fabrics. http://www.denverfabrics.com I found a sage twill for $5 a 66-inch wide yard. That’s a steal!
Make Little Pieces of Graph Paper
I cut up little pieces of graph paper to match my measurements and laid them over another sheet marked with my fabric width to determine how much I needed. Then I added what I thought was 10% for mistakes. I actually bought 5 yards more than I needed.
Make a Muslin
Next, I bought $1 a yard fabric in the same width (or close to it) to make a muslin. A muslin is a test layout that you can use as a pattern. You handstitch it together to test the fit. Since I’d under-measured, making the muslin first saved me a LOT of wasted fabric.
Make a Lot of Space
I tried to cut the fabric on a cutting mat on my coffee table, but the process went something like this:
- Lay out fabric
- Lay out pattern piece (the muslin.)
- Smooth fabric.
- Remove cat from bottom of fabric.
- Cut pattern piece.
- Tug next batch of fabric over mat.
- Remove cat from bottom of fabric.
As you can see, this would have taken hours. So instead I laid my cutting mat on the floor and then made space around it to stretch out several yards of fabric at once. The cat quickly got bored of laying on it when I wasn’t fighting with him.
Pin, Swear, and Dodge the Cat
Once you have all the pieces cut, you have to pin and baste them. At this point, I realized just how slow and tedious this process would be. I stuck myself and swore repeatedly. I also swore repeatedly when my cat decided that hiding under the section I was working on was a fun game. I did not agree.
Work in Sections
Rather than do all the pinning at once, and then do all the sewing at once, I worked in sections so we could use the couches in between. It slowed the process, but it worked. My sections were:
- Couch deck, back, arms
- Couch cushions
- Chair deck, back, arms
- Chair cushions
Finally, Start the Sewing
Once I’d pinned, basted, and checked the fit, trim the seams a bit, I stared sewing. It included more frustration and swearing. It also took longer than I expected. I also learned here that the sides don’t always match, so I had to pull the seatback seam repeatedly to finally get it to lay right when I turned it right-side out. That’s why they recommend fitting it right-side out and covering the seam overages with cording. Fortunately my backing is covered by a large cushion, so it doesn’t look bad.
Revel In Myr Success
The final step was putting down the cover and sitting on it. It was hard, but so worth it. I love my covers.
Total Time and Cost:
Muslin fabric: $24
Final Fabric: $130 (I ended overbuying by 5 yards)
Notions and supplies: $42
Time: 70 hours (weekends, some evenings, a holiday)
Cost for a custom slipcover from an online company: at least $800.
This is the after:
They’re not perfect, but they aren’t overstretched and they were cheap. They also brightened the room up because the old covers had become dingy.