What would you do?

You're shopping at the grocery store, and you get to where one of your favorite lunches is stocked. You love this pre-prepared meal, but you know it's not a very healthy choice, so you've been trying to cut back on eating it. Lately you've tried to only have one or two of these on hand at a time, for those days when you're really craving it, because you know if you have more around you'll inevitably eat more. But you can't get yourself to stop buying them altogether, since they taste so darn good.

Now you see that they're on sale. 50% off. You know they only go on sale once or twice a year.

I bought six.

I keeping telling myself it's a matter of self-discipline. I was surely going to buy more than six of these eventually anyway, so why pay twice as much for them at a later date? I don't want to let myself eat them more often than I would've otherwise, but that's a mental thing that remains entirely in my own control, right? Right? Still, I can't help but feel that my health and my pocketbook were facing off, and I chose the money. I kinda wish I hadn't. What would you have done?

Question of the Day, 8/28: Your Money and Your Values

Hi everyone!  I've been enjoying this month's Question of the Day marathon, and I hope you have, too.  Now it's my turn, so without further ado, here's today's question:

Do you involve your values in your money decisions?  If so, what are some examples?  If not, why not?

Define "your values" however you'd like; I'm asking about the principles that are important and meaningful in your life in a broad and general sense, and whether and how you bring those into your financial/money-related choices.

Thanks so much in advance for stopping by, and I'm so excited to read your answers to this question! 

Question of the Day Marathon links-- check 'em out!

As I've posted about before, there's a Question of the Day marathon going on this month, organized by JLP at AllFinancialMatters. I'm hosting on Monday, so please stop by and share your answer; in the meantime, here are links to the fantastic questions asked so far. (The links to the first 8 are here.) Go ahead and see what answers I and others gave, and add on your own answer. There's no shame in answering late! (Okay, maybe a little shame, but not as much shame as in not answering at all!)

Day 9 Young Finance Guy - What do you consider an expensive night out?

Day 10 Money Dummy - What’s the most unusual, quirky, or bizarre thing involving money that’s happened to you personally?

Day 11 Steve Braun - What percentage of financial success comes from “financial skills” and what percentage comes from “character?”

Day 12 Mighty Bargain Hunter - What’s the best deal that you’ve ever gotten in a store?

Day 13 Journey to Financial Freedom - Do you have any side income other than your paychecks?

Day 14 PennyFoolish - What are your vices?

Day 15 Consumerism Commentary - While growing up, what were you taught about personal money management by your immediate family and surroundings?

Day 16 No Credit Needed - What was the very first thing you purchased using credit? What was the very last thing you purchased using credit?

Day 17 mapgirl's Fiscal Challenge - How much of a balance do you leave on your checking account(s)?

Day 18 Chipping Away - If tomorrow you were to suddenly find yourself unemployed, what would your action plan be and how much trouble do you feel you'd be in?

Day 19 Udandi & the Craft of Money - What is your hobby and how much money do you spend on it?

Free stuff for the designated driver

At sports arenas (most of them, in my experience), festivals and events where alcohol's served, and at many bars and clubs, you can identify yourself as a designated driver and receive free soda(s) and/or other perks.  Often it's not well-publicized, but keep your eyes out, and when in doubt it doesn't hurt to ask.  A "guest services" booth is typically the place to go.

The restrictions on this sort of thing are usually pretty lax (at least at big events or arenas; I imagine bars would be more observant)-- show your drivers license, get a free drink ticket-- so there's lots of potential to stretch the system.  There's kind of a spectrum: from the genuine designated driver who'd certainly be drinking along with his/her friends if he/she wasn't the DD this time... all the way to the group of friends in a single car who all register as designated drivers, get their sodas and/or other loot, and then go ahead and drink alcohol anyway.  Figure out what you feel comfortable with ethically.  (The way we usually do it is that only the driver of the group signs up-- but it's okay for him/her to do it even if he/she wouldn't've been drinking in the first place.)

So that's my tip of the day. It's a nice freebie that's easy to miss-- let your conscience be your guide.

Retirement Planning in Your 20s (& Beyond), Part 3: Figuring Out the Nest Egg Needed

So once you estimate what retirement income you'll need, how do you figure out the nest egg that'll produce it? A tricky question for anyone, especially for those of us who are decades and decades away. But I'll give it a try anyway; be warned that this post contains a lot of details, numbers, and statistics!

For starters, who knows how much inflation will occur over the next decades? None of us, obviously. Inflation has varied widely over different periods in history. Some years it's been over 10%; some years it's been negative (deflation). Over the last 80 years as a whole, inflation has averaged about 3.1%, but in recent years it's been higher. Most retirement planning advice I've seen suggests assuming inflation rates anywhere between 2% and 6%, with 3% or 4% (or something in-between) being most common. So given how arbitrary this number is going to be anyway, I'm going to go with 3.5% as my inflation rate.

Great, what does that mean? Well, it means I can figure out what dollar amount I'll need when I start retirement (for me, I'm going to say it's 2050, when I'm 68). I've yet to find a good simple calculator to do this process (tell me if you know one!), but I do know a handy shortcut called the Rule of 72. Basically, if you divide the number 72 by your interest (or inflation) rate, the result is how many years it takes to double at that rate. For example, if you have $100 at 6% interest, in 12 years (72/6) you'll have $200.

So the question is, how many years does it take inflation to double the amount of money you need? I divide 72 by 3.5 to get a little less than 21 years (you can do the same if you want a different inflation assumption). So by 2047 inflation will have caused my income needs to quadruple (double twice), from $16,500 to $66,000. Three more years at 3.5% would bring it up to $73,000. So I need $73,000 in 2050 dollars to retire on. (Another tool you can use is this table-- scroll down.)

And how do you get $73,000 a year (or whatever your amount is)? Well, it depends on whether you want to leave your nest egg intact and live only on the interest (the safest approach, and one that preserves your savings for your heirs), or are planning to use up the savings over time. For me, it's certainly not a priority to leave money behind for my kids-- especially if accumulating the wealth to do so affects my ability to make the family happy when I'm alive-- and as we've established, I'm trying to be realistic but not overcautious here.

So, most advice I've seen suggests that withdrawing somewhere between 4% and 5% of your portfolio in the first year of retirement, and adjusting for inflation thereafter, will likely keep your nest egg alive for 30 years. 3% is the ultra-conservative choice; some people do 6% or 7% or more, but that seems too risky. So I'll pick a 4.5% withdrawal rate. (The table in this article says that's 95% safe over a 30-year retirement.) If I withdraw 4.5% in 2050 to get my $73,000, that would make my number $73,000 / .045, or (drumroll please...) $1,622,222.

Wow. I need almost two million dollars. Granted, that's in 2050 dollars, which is the equivalent of less than $500,000 today, but that's still a sizable hunk of change.

The good news? I'm 24, and I have decades to take advantage of compounding interest, so it's easier than it looks, and if you're near my age you're probably in the same boat. What do I need to do to get my $1,622,222? How can you reach your retirement goal? Check in next time and see!

Locally-Owned Businesses Vs. Corporate Chains

One of the important ways I try to involve my values in my financial decisions is by supporting locally-owned small businesses over corporations.  I try to do this in my personal spending (although I'm not as consistent as I'd like), and I am very proud that my $20K+ savings are in a community development bank that, among other things, supports locally-owned businesses in low-income neighborhoods.

There are a number of reasons I feel strongly about locally-owned businesses.  For example, studies have shown (PDF) that when a dollar is  spent at a locally-owned business, about half (or more) stays and recirculates in the local economy, which is twice or three times as much as for chains.  Part of this is because locally-owned businesses are more likely than corporate chains to purchase their supplies and products from other local businesses.  (Which is also good for the environment-- less transportation!)  Also, since the profits go to the owner who lives in the community, the owner spends much of his or her earnings in the area and pays taxes which stay in the community.  Corporate profits mostly go to national-level management and to shareholders, dispersed all over the country.  Because stock is disproportionately held by higher-income folks, higher-income communities benefit most from this system.  That's one reason why I think this is a problem in general and an especially big problem in low-income communities.

Also, locally-owned businesses involve local decision-making.  The owner of the business lives in the community, and (at least to some extent) cares about the interests of the area.   They are more likely to make local charitable donations.  They're also more likely to pay higher wages to their employees, people they interact with on a regular basis and who are often their neighbors.  And they are more willing to stay in their own community for their own convenience and to serve local needs, as opposed to chain stores which may close their doors because they see a more profitable opportunity three towns away.

(See this site for links to studies across the country documenting how local businesses keep more money in the community, or this PDF summary.)

There are other benefits, too.  There are important social and psychological benefits to having successful small business owners in communities, especially in low-income areas.  Long-time local businesses may be in the center of downtown while chain stores often contribute to urban sprawl.  And of course, a multiplicity of smaller local businesses owned by individuals leads to more creativity and variety than the repetitive standardization of corporate chains.

I don't mean to suggest that all local business owners are saints.  Obviously that isn't true.  Many are just as profit-driven as corporate honchos, sometimes more so.  Yet they have a lot more freedom to shape their businesses as they wish.   They have the choice to say, "I want to make a good profit for myself, but I also want to pay my employees what they deserve, and make choices that protect our local environment, and support a Little League team and the local soup kitchen.  A good balance is more important to me than making the absolute maximum profit."  No, not everyone will take that route-- but they can, unlike in the corporate model with its tremendous pressure to maximize profits and externalize costs.  (There are some corporations that are exceptions to the rule, at least to some extent, but it involves a great deal of swimming against the tide.)  Preserving the breathing space for local businesses to make these kinds of decisions seems like a worthy goal to me.

Despite all of this, I still struggle to support local businesses with my spending as much as I'd like.  I'm still lured by cheaper prices, more convenience, knowing exactly what to expect.  But it's a goal of mine.  And in the meantime, I'm glad that ShoreBank is using my savings to help local businesses grow and thrive in low-income areas.  (Also, when I post links to books on this blog, I use BookSense.com, which connects people to local bookstores, instead of Amazon.  I encourage you to check out their affiliate program.)

What do you think? How do you approach these issues?  What are your experiences with local businesses versus chains, as a consumer, an employee, and/or an owner?  And if you disagree with my arguments, I'm all ears!

Free Auntie Anne's Pretzel Today!

Yum, I love food freebies! Today, August 19th, Auntie Anne's is giving away a free original or cinnamon sugar pretzel to anyone who stops by one of their stores between 10am and 4pm. Visit their website to find a store near you. Enjoy!

(I dug this info out of the Free Stuff forum at Fatwallet, if you're interested. That place is a little like mining for gold in a pile of dirt, but the gold is there!)

Retirement Planning in Your 20s (And Beyond), Part 2: Consider Social Security

Welcome back as I continue to try figuring out what I'll need for my (long-distant) retirement. Part One was on estimating retirement expenses. Today's topic: should I consider Social Security in my planning, and if so, how?

I'm guessing most people are making plans assuming you'll get nothing from Social Security. That's certainly the safest route. But on the other hand, I'm in my 20s. As I try to come up with this estimate of needs, I'd like to try to be as realistic as possible. If I turn out to be unnecessarily optimistic, I've got decades to course-correct. (And besides, I'm not planning to change anything about my savings at the moment-- so this estimate is just informational.)

Of course, at first I thought that "$0 (or very little) from Social Security" was the most realistic estimate. But reading up on it, it looks like Social Security isn't predicted to go broke until I'm 60 or 70-- and broke only means that the trust fund will be depleted and inflows would have to cover outflows, which means benefits would fall to about 75% of their promised levels. 75% isn't great, but it's way, way more than 0%. (And that's if no action's taken to improve the system so benefits don't need to be cut.)

The Social Security calculator projects my benefits would be the equivalent of $17,000 a year in today's dollars (after adjusting the earnings projections to make them more conservative). 3/4 of that is $12,750. Heck, even if benefits get cut in half, it'd be $8,500. That's certainly not enough alone for me to live on-- but it's not peanuts.

As I discussed in Part 1, I'm estimating my annual retirement living expenses at $25,000 (in 2006 dollars). So a reasonable estimate (although obviously not fool-proof) is that Social Security would cover between 1/3 and 1/2 of those expenses. Not too shabby.

I'll use the 50%-of-promised-benefits estimate to be on the safe side, which suggests I'll need $16,500 a year (in today's dollars) from my investments. Check in next time as I try to estimate how to produce that.

In the meantime: how do you handle Social Security in your planning, and why? I'm personally trying to come up with a reasonable, realistic estimate here, not the most ultra-safe one. But I guess you can't go wrong assuming you'll get nothing and being pleasantly surprised when/if you do (unless it leads you to make sacrifices in the present which on balance you'd rather not make). So, folks, do you count out Social Security entirely? If so, is it because you believe you'll get nothing from it, or do you figure you might/probably will get benefits but it's just safer to focus on your own retirement savings?

See Plays and Concerts for Free-- Be an Usher!

A friend was telling me recently about some great plays and performances she's been seeing.  When I chimed in with my typical, "Yeah, I'd like to see more shows, but they're so expensive!" (well, some are not that expensive, really, but we've established I'm cheap).  "Oh," she said, "I'm not paying to see the shows.  I volunteer as an usher and then I can watch them for free."

"Really??!?!"  My eyes opened wide and I promptly grilled her for everything she knew.

It's actually one of the things I've been regretting lately: being in the heart of Chicago, with easy access to so much great theater, music, etc, and rarely taking advantage of it.  But since it's not really a high priority per se, just something that'd be nice to do more, I a) procrastinate and b) go into sticker shock, leading to more a).  Well, this won't cure the procrastination, but it sounds fantastic!  My friend says you  just get there a little early and stay a little late, but in between you can watch the show no problem.  And naturally I'm more willing to spend a little extra time rather than a little extra money!

My understanding is that at some of the more desirable theaters, the slots fill up very quickly.  My friend is actually a member of a group called the Saints, which has $55/year dues, informs members about dozens of ushering opportunities at once, and gets them preferential sign-ups.  But most of the theaters also take people who sign up with them directly for free; you just have to be more on top of things.  I think I'm going to pick a theater or three to start with and contact directly.  I'll update you on how it goes, but this was just too good an opportunity to keep quiet before testing it.   And I'd like to hear if anyone else has tried it!

From what I can tell, there are lots of these sorts of opportunities all over, from big cities to small cities to smaller towns.  Check out the website of your favorite theaters, or just Google volunteer usher free <your city/town> and things'll start popping up.  I stumbled across a couple links with lists to start you off:

Seattle: http://www.volunteerusher.com/
New York:  http://www.newyorkmetro.com/guides/cheap/ushering/
Chicago:  http://www.saintschicago.org/

Retirement Planning in Your 20s (& Beyond), Part 1: Estimating Annual Retirement Expenses

It seems like most advice for young people planning for retirement consists of "save as much as you can now, and figure out how much you'll actually need later." Your 20s is a great time to save and take advantage of the wonders of compounding interest-- and there are so many variables involved in predicting future retirement needs-- so this is quite good advice, if it satisfies you.

The problem is, it doesn't satisfy me! I really like having goals, targets, an idea of where I'm going and how well I'm doing. So as challenging as it seems, and even though it's probably an unnecessary step at my age, I still want to come up with "my number," even if it's one that gets revised many times in future years.

That's what this brief series of posts will be about: me stumbling towards an estimate of how much I need to accumulate for my retirement, and hopefully finding it a little simpler than those crazy calculators that always ask questions I don't know the answer to. Feel free to play along at home, but please note that I am not an expert, and in fact would absolutely love any suggestions or information from you to help me along in this process. (Also, these steps should work just as well for people in their 30s and beyond; it's just that it seems like you've all done this already!)

For starters, I want to try to estimate how much income I'll need in retirement. (All numbers will be in 2006 dollars for now, and we'll adjust for inflation later.) I see so many people talking about wanting six-figure retirement incomes: $100,000, $200,000, sometimes even more. When you run the numbers, the amount you need to save to produce those amounts seems astronomical and overwhelming. (Although doable for some people, I'm sure.)

But those don't feel right to me. One common suggestion to calculate your retirement expenses is 80% of current expenses. 80% of my current expenses (not counting student loan payments) would come out to about $12,000 a year. Which sounds really, really low. Maybe my current style of living is way off from what I'd want in retirement; even though I bet I'll continue to be frugal, there are probably some inconveniences I'll no longer be willing or able to put up with to save a buck or two.

Then I found this data from a study of older Americans. It finds that the average expenses of a married person over 65 was $14,762 in 2001. Maybe I'm not so far off! And even for couples in the top 20% of income, average expenses (per person) was $25,567, spending about 1/4 of that on entertainment and gifts. (There's all sort of interesting data in the report to help you think about what you might end up spending; all the tables in the appendix are a great place to start.)

Based on these numbers, I think I'm going to go ahead and use $25,000 as my yearly expenses/income-needed number (in 2006 dollars; I promise I'll adjust for inflation later!). If it's (almost) enough for the average person in the top 20% of income, it ought to be more than enough to cover a frugal-minded little old lady like me. And it's more like 160% of my current expenses, rather than 80%. I feel like my expenses might actually end up lower in reality, but I might as well play it on the safe side in these estimates.

For those of you who've done this step, would you be willing to share what you came up with as your annual retirement income, in dollars or as a percent of current income? Or maybe just talk about the process you used to come up with it? I don't think I've ever seen anyone talk about a number in the ballpark of my $25K; is yours anywhere near it, or do you think I'm crazy? And for those of you reading who've never tried this-- play along at home! What do you come up with?

Spending money on friends and family (or, money can't buy me love?)

One thing that frustrates me is the association of being "cheap" with being stingy and un-generous with the people around you. For me personally-- and, as far as I can tell, for many or most of my fellow blogging frugalites-- those things certainly don't go together. When I'm treating a friend who's a student to dinner, paying for my younger sister's plane ticket to come visit me, or buying gifts for friends and family at the holidays, those are some of the only times that the little "frugal voice" in my head stays quiet. Treating people, giving gifts, lending money interest-free... sharing with people I care about makes me happy and is totally worth it to me.

I think it's definitely good that I'm not as cheap in relation to others as I am for myself. But I've been thinking that if I want to be frugal and responsible, I need to have some limits on what I spend on others, too. When my sister comes to visit on the plane ticket I bought her, do I pay for all her restaurant meals and museum tickets too? Should I give pricey holiday gifts to my parents every year or just every once in a while? Do I cover starving-student friends' dinner bills every time we eat out together?

These questions are really hard for me, because I really want to be generous, and I try to be extra-vigilant of my tendency to stinginess. It's like once I let things past my personal cheapie threshhold, they can just keep adding up indefinitely because I can't figure out where more reasonable boundaries lie. I feel like, well, none of these things are a significant burden on my well-being, I've got plenty of money in savings for my age, so it's selfish of me not to do things if I can. But on the other hand, I do sometimes look at how much I've spent on others (and the effects on my bank account) with regret and a sense that I have to reconsider my go-with-your-gut, whatever-feels-right approach.

The best way to navigate this that I've come up with is to try to find meaningful, appreciated things to give and share that don't cost money. Cooking dinner with or for my friends instead of going out to eat. Finding things to do with my sister in Chicago that are fun and also cheap or free. Investing a lot of time, thought, and creativity into gift-giving-- but not necessarily a lot of money. And the (maybe-not-so-) ironic part is that these sorts of things tend to turn out better than the kind of generosity that's measured in the dollars and cents I spend on people. Yet there's still a degree of reluctance, nevertheless-- while I take pride and satisfaction in spending less money on myself, I can't shake the feeling I'm a cheapskate when I hesitate to spend on others.

So am I crazy, or are other people like this too? Do you set any sort of guidelines or limits for yourself on gift-giving, treating, and other generosity towards your loved ones, or do you just have better instincts and/or habits than I do about this stuff?

Check out the Question of the Day Marathon!

If you haven't noticed, there's a Question of the Day marathon going on this August, organized by JLP at AllFinancialMatters.  I'm hosting on August 28th.  I need to catch up on answering the questions at the hosts' blogs (this work trip is taking up way more of my time than I expected, unfortunately), but in the meantime, here's a list of the questions so far.  Click through and see what dozens of bloggers' and commenters' answers were-- and if you haven't yet, go ahead and answer now!  (It'll make me feel better about answering so late!)  

• What is the weekly average cost per person for food in your household, including groceries, snacks, and dining out? at Caustic Musings
• What was the last thing that you splurged on that you didn't really need? at The Investimist
• How many credit cards do you have and what's their combined credit limit? at Experiments in Finance
• Which is more important to financial success: saving money (spending less than you earn through cost cutting) or making your income as high as possible (earning more money)? at Free Money Finance
• In terms of your annual gross salary, what percentage do you save? Are you happy with that amount or do you think you could do better? at Single Mom &
  Money
• If you had $10,000, one day, and one store to spend it in, what store would you choose? at Young and Broke
• If you had to pinpoint the one financial decision (good or bad) that put you on the path to where you are now, what would it be? If you could do it over, would you change your decision? at Savvy Saver

They're so interesting, diverse, and thought-provoking!  Many kudos to JLP for the idea and all the hosts for their great questions (and everyone who's participating in answering, of course)...

My (supposed-to-be) monthly financial update/net worth

I know it's not the most interesting topic, but I'm so overdue that I've got to do this before writing other posts.  So without further ado:

 

Savings: $21,351 (up $3,310 or 18.3% since June 1)
Retirement: $13,098 (up $987 or 8.1%)
Debt: $15,195 (down $100 or 0.1% )
Net worth: $19,254 (up $3,222 or 20.1%)

Year-to-date giving as percent of 2006 goal: 39%
 

A couple of notes: 

• I'm adding a new category to my (supposed-to-be) monthly updates: the percentage of my yearly giving goal reached so far.  I think this is a good idea for a few reasons.  First and foremost, hopefully it'll help keep me accountable to actually reach the goal by the end of the year.  (As you can see, I'm way behind, although I'm actually doing better than in past years.)  I also want to include it because it will help give a better picture of the changes from month to month; one month my savings may increase more and the giving total may increase less, and the next month vice versa.
• The reasons the increase in savings is bigger than the increase in net worth is because I got back the last $1,100 of my "accounts receivable," which boosts my cash on hand but is neutral in the net worth column.
• My savings increase is higher than usual while my debt decrease is lower, which is because about half of my debt is actually owed to my parents (by mutual agreement to help them pay back loans in their name they took out to pay for my college).  I've been paying them $250 a month, but back in May we decided that I'd give them a lump sum of $2,000 of it and then stop the monthly payments for a while.  So my only debt decrease has been my little $70 ($50 principal) monthly payments on my consolidated 2% interest student loan. 
• I think I'm on track for a $25,000 net worth by the end of the year!  Yay!

I've been podcasted!

I recently had the honor of being interviewed on the Money Blogger Podcast. Well, the interview with me is now up. I'm a little embarassed, since I don't interview well, but Scott did a terrific job of making me come off as reasonably presentable. Anyway, it's just another reminder of why I'm better off using the written word rather than the spoken word, and better off as a blogger than a podcaster!

Scott, on the other hand, is a wonderful podcaster, and he has a ton of great interviews up with all your favorite pfbloggers, so I highly recommend checking out the archives and keeping up with his new interviews. If you're a little technologically challenged, like me, you can just listen to them all straight from the website, but if you want you can subscribe.

Thanks again, so much, Scott!

I'm Back! What'd I Miss?

I've returned from my vacation... What did I miss? Have there been any great posts you enjoyed (or wrote!) in the last week or so that I should check out? Any memes going around? Controversies? I'll browse through the carnivals to help catch some good posts, but recommendations are great, too... there's so much that gets written, and so hard to fully catch up!

This was my second week-long vacation of the summer, and it was great. (I'm enjoying the bump from 10 to 15 vacation days after my two-year anniversary at my job!) I don't have much time to settle in at home, since I'm traveling for work this week, but I should have some internet time while on the road, so I won't just disappear again.