This post will probably sound like I’m bragging, but I’m not. Instead, I’m realizing how wonderful it is to have breathing room in the budget. To be able to pay for things and not worry about it.

Two examples from last week:
My husband was driving home from the hardware store the other day and pulled his car charger out of the lighter socket. The socket came with it! So, to the shop we went. He also needed his 90,ooo mile service, and they discovered the lighter had blown a fuse. The bill came to $544. We put it on our Goodyear card to take advantage of the six months same as cash deal, because we like to do that when we can, but we could have paid cash for the bill right then. It was nice to have a choice.

We realized that we’d surpassed our emergency fund goal without meaning to. So, we took a look at the budget. We also discovered that we won’t need to dip into the fund to pay upcoming insurance and property tax bills. So, now we can start contributing to Roth IRA plans! It is so nice to have that cushion.

The Beauty of the Cash Surplus
We’re still pretty frugal, but we like having a surplus. It gives us freedom. Now, we’re not likely to run off to Paris for the weekend because we can, but it does allow us to buy living room rugs without worrying about how we’ll pay for it or saving up for months. When my husband finally decides which iPod he wants to replace his dead seven-year-old iPod, we can just buy it.

How We Got Here
It didn’t happen overnight. We started by paying down $40,000 in debt. We still have a hefty pile of student loan debt, but that’s amortized over 30 years and we prefer to focus on retirement savings instead of paying down low-interest loans that can be deferred if necessary.

It also required a change in habits. My husband is less likely to buy stuff than he used to be. I bake less than I used to. We don’t go out very often (partly because we have very little interest in most of the movies that come out these days, and partly because dining out is hard for me, and partly because we’re so busy doing house stuff!)

Tax credits (like the homebuyer credit) and tax refunds helped boost our emergency fund and windfalls helped pay off that debt. We’ve streamlined expenses where we can.

Finally, we got there through income growth. Our income has grown by 600% from the year we got married when we were both grad students and I was only working part time. That’s no doubt the largest contributor to our surplus, but we wouldn’t have it if we’d let our spending increase with our income. Instead of applying for the largest mortgage we were told we could afford, we opted for something we knew we could comfortably afford. Instead of going on a spending spree when we moved in, we shopped carefully and found a good mix of high-quality affordable pieces that will last a while. Instead of rushing out to landscape the front and back yards, we did it over time.

We still budget our expenses each month to make sure we can cover them and plan for large purchases, but I haven’t run out our costs recently to see where we need to cut. I should, I’m sure there are areas where expenses have crept up, but I’m not as worried about it as I used to be. And that’s the real joy of having breathing room in the budget – peace of mind. You can’t buy that.

2010 is nearly over, and I am thrilled. 2010 was easily one of the worst years of my life. I’m eagerly looking forward to 2011. With that in mind, I’ve outlined six things I need to do prepare for the new year.

Set New Goals
Because this year went so badly, I don’t think I met any of my goals for 2010. I’ll check tomorrow. So, it’s time to set new goals for 2011. Most of them will carry over from 2010. I will also determine the steps I need to take to reach each goal. I did that last year, but life interfered and I couldn’t do any of them.

Gather Financial Documents
I like to do my taxes early in February. It gets them out of the way and I’m expecting a sizable refund because my husband was on disability (non-taxable income in California) for so long that our tax bracket dropped! So, I started by making a list of all the financial documents I need to have in hand before I can prepare our taxes. I keep the list in my notebook and mark the items off as they come in. They must all arrive by January 31, 2011, but I’ve already received one of them.

Assess Personal Finances
While you’re gathering your financial documents, this is a good time to review your assets. Review your portfolio to see if you need to do any rebalancing. Review your savings account balance to see if you need to shift any of it into higher-return options like CDs. Review your emergency fund to see if it needs to be replenished. Review your spending to see if you need to cut back in certain areas.

Say Goodbye to 2010
Whether your year was horrible or happy, it’s time to say goodbye to 2010. I do this by thinking back on the year and writing down everything important that happened and how I felt about it. It’s a nice record of the year that was, so you’ll know what it was really like twenty years from now when you’re telling the grandkids about the blizzard of 2010. It only takes about thirty minutes, but it lasts forever.

Make a 2011 To Do List
I make a major to do list of all the projects I need to do around the house or in my personal life at the start of each year. Things like organize the shed, build closet shelves, etc. By the end of the year, my list is marked up and scribbled all over. Start fresh by making a new list, with all the incomplete tasks copied over. You don’t have to put dates on them, but remember to bring the list with you when you’re going to the hardware store so you can pick up some of the small items on the list, like push lights for the dark closets. (Are you sensing a theme?)

Buy Some Champagne
Be sure to grab a bottle of champagne to toast the new year. It’s the best way to get the year off to a good start, and then hope things only get better from there. Make sure to buy a decent bottle. This isn’t the time to go for the cheap stuff.

Tomorrow I’ll assess my achievements for 2010, and then the next day I’ll review my 2011 goals.

For most of the summer, I’ve been eagerly following the story of Diana Nyad as she strives to achieve the goal she first conceived of over 30 years ago. It’s definitely been a struggle, and at this point, she may not achieve the goal this year, but we can learn a lot from her.

Have a Big Goal
Diana’s goal is to swim 103 miles from Cuba to Key West in open water. No shark cage, no wet suit. She’s doing this at the age of 60, after having failed to complete the goal 1978. It’s not an easy goal, but that’s the point. Having a big goal, whether it’s a record-breaking swim or paying off all your debt, gives you something to strive toward. A focus.

Be Prepared for Setbacks
Prior to deciding to attempt this swim at the age of 60, Diana hadn’t set swum a stroke in over thirty years. She was burned out. But then, with that milestone looming, she realized she was in the best shape of her life and now was the time to try.

Of course, there are many challenges. First, the money. This outlandish swim requires a lot of training, an extensive crew, and assistance from experts. She’s been raising money for this dream from the beginning. Second, the logistics. The biggest challenge there was getting the necessary permissions from Cuba and the U.S. Even with the help of the Secretary of State, that took longer than it should have. The last challenge is the weather – she missed a key window in July and August because of the visa issue. Now she has to outwait hurricane season.

We’ve all been through similar, if smaller, experiences. My husband and I were starting to build our nest egg back up when he had to have surgery. We made it through that struggle and now we’re back on track again. Life slowed us down, but it didn’t stop us.

Never Give Up
Diana hasn’t given up on her dream, even as the window of possibility shrinks. She keeps training and preparing for this swim. And that’s the key – even when all seemed lost, she found the focus to keep going. It will be the same with your goal. Emergencies will come up or life will get in the way. Once you deal with that, reclaim your focus on your goal and you’ll quickly catch up to where you were.

Create Steps Toward Your Goal
Diana didn’t just decide to do this on day one and then jump in the ocean on day two. It took time. She had a plan. First, she had to start training again. Then she had to gather her experts and crew. Then she had to start raising funds. Then she had to apply for the necessary visas. Then she had to start training with her crew. First, there was a 24-hour swim as a test and several other long test swims. All of that will make this possible.

You have to do the same for your goals. Don’t just say, “This is my goal” and hope you’ll figure out how to get there. Make a plan. Write it down, step by step, and establish deadlines for those steps. Then hold yourself to the steps.

I hope you’ll follow Diana Nyad’s dream, too. It’s truly inspiring.

So, it finally happened. I committed the most unfrugal act of getting a smartphone. However, I still managed to squeeze a bit of frugality into it, even though it’s a big budget change.

Not only did I buy a smartphone, but I had to break my current contract and pay a $70 termination fee to do it! However, buying my husband a replacement phone for four months would have cost $40, so it’s really only a net loss of $30. It’s worth it to get our phones now.

Why I Got a Droid
As you’ll recall, my old phone broke back in January, right before my husband’s surgery. Although I had wanted an iPhone, AT&T made me cry, so I vowed to abandon them when my contact was up. Until then, I bought a cheapie phone that got me through.

Except, that both my husband and I were experiencing work-related reasons as well as personal reasons for needing smartphones with email and web access. Still we waited.

Then his phone broke. In the exact same manner as mine. Note to AT&T – when phones of the same model break in the exact same place for multiple users, this is a design flaw and you should issue a recall, not ignore the issue. This is why you lost a customer for life.

So, with the iPhone off-limits (not to mention that the recent news about iPhone 4 troubles didn’t make me lust for one), I looked around for the best alternative. Enter the Droid. Folks, it is awesome. I did my research and settled on Verizon phone service. We went to the Verizon store to look at the various Android phones. We then waited until July 15 to look at the Droid X, because if we’re going to do this, we might as well get the best available at the time.

As it turned out, a Droid X barely fits in my hand, so that was out. The HTC Incredible was unavailable for at least three weeks and I needed the phone by the middle of next week for an upcoming trip.

How I Made My Unfrugal Purchase Slightly Frugal
There was one other reason we opted for the Droid by Motorola rather than the Droid X or Incredible – it was buy one get one free. This was a savings of $250 over buying two Xs or Incredibles.

We also opted for a family plan with a minimal texting plan rather than the full talk and text plan. We studied our minutes and determined that we use more than 700 minutes, but less than 1400 minutes a month. We previously only paid for 700 because we had tons of rollover minutes with AT&T, so we were sad to lose that deal, but the 1400 minute plan does come with unlimited calls to 10 Friends and Family designees, so we can make it work.

So, our phone cost is jumping from around $95 a month to $189 a month, however, we still get $90 in reimbursements from our employers.

And folks, I’m not sorry I did it. I love this phone. Seriously love it. It will make my life easier in so many ways.

Another interesting post from LearnVest this week: What should be in your wallet?  This will, of course, vary by person, but they offer a few pointers for paring down your wallet. You don’t want the exploding wallet a la George Constanza!

However, I had to disagree about some things they suggested for wallets, because I either don’t need them or keep them in my purse instead. If I kept everything in my wallet, it wouldn’t close.

What’s In My Wallet
My wallet has slimmed down significantly since most of my store cards have been cancelled, but it’s still got quite a bit of stuff in it:

License/ID: Obviously my driver’s license needs to be in there because I drive. Even if you don’t drive, you should always have ID with you because it could be needed in an emergency. Behind it I have my organ donor card and a change of address card because California doesn’t issue a new license when you move.

One point of contention with the LearnVest article though. They said, “Stores have the right to ask for an ID when you use a credit card, so you need to have one ready to show them.” Although some state laws do permit the request, it’s a violation of the store’s merchant agreement with Visa and Mastercard to require ID. They can request, but can’t make showing ID contingent on completing the transation. Requesting ID protects the store, not you. The signature is considered your ID for the transaction.

Emergency contacts card: My husband and I printed emergency contact cards that we keep behind our licenses. In case we’re in accidents and are separated from our cell phones, any emergency workers who find our wallets will know how to reach our spouses/relatives in an emergency.

Credit cards: LearnVest recommends only carrying one, but I carry three. One Amex, one Visa, one Mastercard. I mostly use the Amex, but I rotate the other two at stores that don’t take Amex. Their recommendation is to use a Visa or MC branded debit card if a store won’t take your primary Amex, but that really wouldn’t have worked when I had to buy $1400 worth of furniture! I recommend carrying at least two cards, just in case a card is rejected for credit card security reasons, as happened to me at Cost Plus while buying furniture.

Debit cards: Again, I carry two. One for my regular checking account, one for my business account. I could probably stop carrying the biz account card since I only use it to deposit infrequent checks, but I know I’d forget to bring it when I did finally have to deposit a check.

Retailer Cards: I’m down to Goodyear at this point, so that card stays with me. When your car has 150,000 miles on it, a service emergency can happen at any moment!

Membership Cards: I keep my Blockbuster card and my Costco card in my wallet, but other cards have a different home. I also keep my library card in my wallet in a prominent pocket because I use it almost every week.

AAA/Roadside Service Card: Another must carry. If you’re a member and drive a car, you should always have it with you. You can’t use it if you don’t have it! AAA members can also use it if they’re a passenger in a non-member’s car, so there’s no reason to remove it for a road trip where someone else is driving.

Health Cards: One more must carry. Actually, for me, it’s three cards. Medical insurance, dental insurance, and FSA debit card.

Business Cards: One of mine and one of my husband’s.

Cash: I’ll be honest. There are times when I run out of cash. Before my husband had surgery, he went to the bank each week and then I’d take enough money for the farmer’s market out of his wallet. Any leftover went into my wallet. I rarely spend cash, so after a while, the total will get up there. Other times, I’ll spend all the farmer’s market money at the market and not have any leftover. After a while, my wallet starts to empty out. I have to remember not to let myself be cashless! Fortunately, there’s an ATM for my bank in my office park, so I can replenish if I’m going to a team lunch or happy hour.

What’s Not in My Wallet
LearnVest recommends a few other items that aren’t relevant for my life, or that I’ve found a different solution for.

Frequent Flyer Cards: Rather than put them in my wallet, I put them in my address book so I can look them up when I’m booking travel. I also registered at each airline’s website. All you have to do is sign on to the website to get your number. You can always go back and add your number to the flight record later if you forget.

Club Cards and Gift Cards: Rather than keep my CVS card, Ralph’s card, Vons card, and all manner of gift cards in my wallet, I keep them in a zipped pocket in my purse. That way I can easily access them, but can still close my wallet. Actually, I keep my grocery store cards in my coupon folder because I can use my phone number to get the discount if I need to run out for one or two items. The card isn’t really necessary unless you want it to print out the points you’ve earned.

Are you a keeper of a slim wallet or do you let it fill up with junk before finally emptying it?

Before my husband went on disability, we stopped spending money in order to increase our savings. We’ve found that our spending has actually been much lower while he’s been out of work, but we also had a few unexpected events develop where the savings has come in handy.

Delays in Disability Pay
The first issue is delays in processing disability pay. We were prepared for it to take up to a month to get the first check, so we needed to have at least one month’s expenses in the bank. As it turned, we got the first check in two weeks, but it gave us peace of mind anyway.

Being on Disability Longer than Planned
We initially planned for my husband to be out of work for two months. Due to a complication, that timeline stretched out to three months. We reached that point, and another small issue arose. My husband won’t be returning to work until three and a half months after he went out, and he may not be full time at first. Fortunately, we still have savings to cover any gaps, because our spending will start to rise again once he returns to work.

Gaps in Disability Pay
The initial disability application had an end date of April 1. At the end of that period, the state sent us an extension form, but it took a month to restart the payments from that point. We received back pay, but our check account got a little low during the gap period because we also had a plumbing emergency and some work done on the kitchen. Again, because we’d saved up, we were able to cover the gap without a great deal of stress. We were close to transferring money from our savings, but the checks arrived just in time.

So far we haven’t had to spend any of our savings, although we will when the plumber finally asks to be paid. We were very fortunate to be able to plan for disability, but this is yet another reason you need an emergency fund. California provides state disability pay (funds come from employee payroll taxes), but most other states do not. If you don’t have disability insurance, or your disability coverage is taxable, make sure you have enough money to cover a three-month shortfall. You’ll be glad you did you or a family member suffers an accident or illness.

I’ve been on a slow burn for a few weeks over something my husband said. First, a little backstory. We helped found a small non-profit about ten years ago. For several years, we had to provide loans to the org to get it through some shortfalls. We’re actually still owed about $300. So, the other day my husband was speaking to one of the other board members about a current shortfall and said, “They expect Aryn and I to cover it, because we’re rich.”

Folks, I hit the roof. We are NOT rich. In comparison to the other board members, we’re certainly well-off, but we’re not rich by any stretch. The mere suggestion that we’re rich, or that he was telling someone we’re rich was infuriating. If we lived in Kansas with our income, we’d be rich. In LA? Not so much.The very idea that we’re rich makes me stabby.

What Is Rich?
In my mind, rich people earn more than $500,000 a year. According to Obama, it’s families earning more than $250,000. I know people in both camps, and neither would say they’re rich. Again, it’s partly location. In Kansas, that would be rich. In California or New York? Most definitely not.

Stretching the Middle Class
According to Wikipedia, the middle class starts at $65,000 for a family, and maxes out around $166,000. Of course, these are squishy numbers. The upper middle class is defined as a family earning more than $100,000. In my view, that upper threshold is low – in coastal states you can be well beyond $166,000 and still be upper middle class.

Why I Consider Us Upper Middle Class
I grew up upper middle class, so that’s a comfortable spot for me. I feel like we’re there. My husband was more staunchly middle class, so being upper middle class feels rich to him. We earn a comfortable income with two higher degrees between us. We also budget carefully, because we have many of the expenses associated with upper middle class families, like a large mortgage and student loan bills. We hope to start a family, so day care would also join that list eventually.

And that’s where the “we’re rich” argument breaks down. Day care, a pending increase in student loan expenses, and a car loan would eliminate our current monthly excess income. We still haven’t managed to boost our retirement savings, and we desperately need to. We’re frugal and budget carefully to afford our life. I’d be much more comfortable if we earned 20% more, but even then we still wouldn’t be rich. We’d just be able to save more.

Let’s Get Rid of the Term Rich
Why even bother calling people rich? Most people don’t define themselves as rich, even if other people think they are. So, let’s just dispense with the term, especially when discussing which portion of the population is rich enough to pay more taxes. At the very least, reserve the term for people for whom work is merely a hobby, not a requirement for living. People like Athina Onassis.

I’ve mentioned CD ladders as good options for tax refunds and emergency funds. They’re a safe way to earn a bit more in interest than the basic savings account. Currently, you won’t earn significantly more, but in the past I’ve seen CD rates go as high as 7% on a 5-year CD.

What is a CD Ladder?
Basically a CD ladder is five CDs, each with different maturity dates. Traditionally, the maturity dates are 1, 2, 3, 4, and 5 years. You buy them all at the same time. Then, when the 1-year CD matures, you roll it over into a new 5-year CD. After 5 years, you’ll have 5 CDs with the highest possible rate at the time of purchase, and you’ll always have a CD maturing within the next 12 months in case you need the funds.

Where Can I Create a CD Ladder?
Most banks offer CDs, so choose any bank or credit union. It’s best to get them all from the same bank or credit union to avoid future confusion. Before choosing a bank, read the reviews to make sure they don’t have issues with properly informing you about CD maturity. If you don’t notify them of your intention within the designated time period after maturity, they’ll automatically renew it into a CD with the same term.

Potential CD Ladder Earnings
Here’s an example of the interest you could earn with a CD ladder vs. a traditional savings account. We’ll start with $1,000 CDs. You may need more than this to open a CD at some banks, but it’s a nice round number for calculations. If you have a significant amount of money to invest, you can buy jumbo CDs, which have higher interest rates. These are Everbank rates. Even though I no longer love the bank, they have all the rates on their website, and they’re pretty generous.

1-year CD – $1,000 – 1.39%
2-year CD – $1,000 – 1.85%
3-year CD – $1,000 – 2.27%
4-year CD – $1,000 – 2.78%
5-year CD – $1,000 – 3.30%

After 5 years, you’ll have earned $768.40 in interest vs. $360 from a standard savings account. Of course, this assumes that interest rates won’t rise in the next five years. They will, because they move with the Fed rate, but CD rates will also rise with the Fed rate, so you’re renewed 5-year CD will earn substantially more than a savings account.

Of course, the more you can start with, the more you’ll earn. If you’re just starting, shoot for $10,000 total. Then, as each CD matures, consider adding more funds to each CD until eventually you have $25,000 in a CD ladder. The money is safe, it can be used for emergencies, and it’s earning a decent return.

My husband and I have been debating what to do with our emergency fund. Should we keep it all liquid in an online savings account currently earning about 1.22% interest or put some it in a CD ladder? There are pros and cons of both options, so really it comes down the size of your fund and how liquid you need it to be.

Fully Liquid Emergency Fund
Right now our money is in a savings account earning a piddling amount of money in interest. Because the Fed rate is 0%, savings interest rates are low. For a while, banks were offering high teaser rates, but those don’t last long.

However, we chose to keep the fund fully liquid for the time being so that we would have full access to it while my husband is on disability. We haven’t had to tap it, but it’s there if we need it.

So here are the pros of the liquid emergency fund:
Always available. If your roof caves in during a storm, the money is ready to go. No need to wait for the funds or get financing in the interim.

Easy to access. We just transfer it from our online savings account to our checking account. It takes about three days for the interbank transfer.

No fees for withdrawing. We can take our money out anytime we want and we can add money to it whenever we want.

There are also cons to the liquid emergency fund:
Low interest rate. If you want to make money off your money, then a savings account isn’t a lucrative way to do that.

Temptation to spend it on non-emergencies. If we had less self-control, we might use that money for other purchases because it’s so easy to access.

CD Ladder Emergency Fund
You should always keep some money fully liquid. I’d keep at least one mortgage payment in cash – you never know when the bank will screw up (or when you and your husband will accidentally overpay the mortgage.) However, once the minimum is covered, you could move some of the emergency fund into CD ladders.

Pros of the CD ladder emergency fund:
Higher interest rate. Rather than 1%, CDs typically earn 4% or more. Not a huge amount, but a lot. When you ladder it into 1, 2, 3, 4, and 5-year CDs, interest rates climb with each year.

No temptation to spend it. If you want to break open a CD early, you usually have to pay a penalty. You can get no-penalty CDs, but the interest rate is lower.

Cons of the CD ladder emergency fund:
Difficult to access. If you need the money to fix your caved-in roof or overhaul the engine on your car, you either have to wait until the CD matures, and then wait for them to send you the money after you request it, or you have to break it open early and pay the penalty. In the meantime, you might have to get financing to cover the repairs, and that could cost more than the interest from the CD.

For now, we’ll stick with our liquid emergency fund, but we may start CD laddering as it grows. I’m thinking the right ratio would be 50% cash, 50% CD ladders. Then we would have enough to cover the initial emergency cost, and would be earning more interest on the rest in case a serious emergency (like a massive earthquake) develops.

Last Friday, NPR’s Marketplace had an interesting report on the true cost of all our modern necessities. Taken individually, we don’t really think about what all these things cost us, but taken together they add up to quite a bit of our budget. So, how did we get here and do we really need to be here?

Life in a Simpler Time
People like to hearken back to a simpler age, the 1960s, when talking about how a family could afford to live on one income, and yet they puzzle over the fact that a TV or refrigerator cost ten times more (when inflation is factored in). How could these families flourish on less income and still buy these things?

It’s simple – they didn’t buy as much stuff, and they didn’t have as many supporting expenses for that stuff. Back then a TV cost $300-$500 (more if you wanted color), which was a much larger chunk of the average $5500 income than a modern $300 TV. But, they only had one TV. And they didn’t have cable. So, they paid for the TV and the electricity to power it, and that was it. Since there were only a few channels, they didn’t watch as much of it, either.

Where the Money Goes Today
Household Incomes are ten times higher than the 1960s (although really, they’re only double when adjusted for inflation), yet TVs cost about the same as they did back then. The difference now, is that most families have two or three of them, plus cable, a DVR or two, and DVD player or two. Then you need stuff to watch on that, so add on a movie subscription, too.

Or, let’s look at telephones. Again, most families only had one. It had a cord and they probably rented it from the phone company. Long distance was expensive, so they didn’t make many of those calls. I can’t find an exact cost for the average phone bill, but let’s just go with “less than now.”

Flash forward to today. In addition to a home phone (if you have one), there are cell phones for every member of the family. Some of those have data or texting plans.

Of course, you also need to add in internet access and computers with which to access them.

Want music? Well, then, you’ll need an MP3 player and maybe a CD player.

What My Family Spends on New Necessities
Just as a real life example, here’s what my husband and I spend on our “necessities” for one month:

$88.40 for cable with DVR (one TV, one Premium channel, one upper tier package)
$66.33 for home phone and internet bundle (no long distance or other frills)
$95 for two cell phones (no data or texting plans)
$9.99 for Real Rhapsody (music)
$19.99 for Blockbuster Total Access (3 movies at a time)

Our total is $279.71 per month.

Of course, we get reimbursed $90 a month for our phones, although that’s taxed, so we’ll call it $75 a month. That brings us down to $204.71 a month.

Additional Costs of the New Necessities
Since we’re spending all this money to entertain ourselves and stay connected, we have to earn at least $2456 a year to pay for all of it, on top of our actual necessities like food and shelter. We probably need two incomes to pay for all our new necessities, so that also means daycare, extra commuting costs, as well as less time to enjoy all those modern benefits.

I’m not suggesting that we give up our cell phones and broadband access, I am suggesting however, that we all take a hard look at how necessary the things in our life are and what we can cut. If we had to, we could cut Real Rhasody and Blockbuster easily. We could also reduce our cable bill. The home phone I insist on keeping because we live in earthquake country and landlines/corded phones have never failed me in a major earthquake.

What could you cut?

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