Wednesday, June 20, 2018

The Snowball Effect of Retirement Savings

If there was one financial move that I executed well during my first few years of professional life, it was my decision to save heavily for retirement right off the bat. My first post-college employer offered a great retirement plan and offered robust matching and my mentor, whom I trusted deeply, told me I should go in there on the very first day and contribute enough to get every drop of that matching money, which I did. Thank goodness.

At first, the decision to contribute felt like a monumental one, one where I had total control over the situation. My total contribution was about 20% of my salary and that felt like a lot.

I started contributing right at the end of the recession of 2002 and, for the next six years, I contributed steadily to my retirement plans (across two different employers), receiving matching at both places.

In 2008, I stepped away from that career path and moved to my own, starting a Roth IRA and contributing to that without matching because I’d seen the power of those contributions.

Over the years, I’ve watched those initial contributions grow and shrink and grow again. I can’t add more to those accounts at this point, but I can certainly watch them grow like a terrarium inside of a glass bottle, and I’ve learned a few things along the way.

For starters, for most of the last several years, those investments have grown more each year than I ever contributed to them in a single year, without me putting a drop in there. I personally contributed between $5,000 and $7,000 a year to retirement in those early years and those accounts grew by more than $7,000 a year on their own most of the past several years. This is a function of the power of compound interest.

Another interesting note: I’ve contributed more to my Roth IRA than I ever did to those accounts, yet the balance of my Roth IRA is lower in total than those older accounts. This is, again, a function of the power of compound interest, and taken together, it should be clear to anyone that it makes a ton of financial sense to contribute as much as you can as early as you can to your retirement savings.

However, that’s not really what I’m writing about today.

As you progress down the road to retirement, the contributions you make have less and less of an impact and the ins and outs stock market has more and more of an impact.

Let’s say, for the sake of convenience, that you have an investment account that returns either 10% per year and -20% per year. You have five years of 10% returns and then a sixth year of -20% returns and then the cycle repeats itself.

You contribute $10,000 at the start of year one of this cycle, and that’s all.

At the end of year one, where you earn 10%, you’re left with a balance of $11,000.
At the end of year two, where you earn another 10%, you’re left with a balance of $12,100.
At the end of year three, where you earn another 10%, you’re left with a balance of $13,310.
At the end of year four, where you earn another 10%, you’re left with a balance of $14,641.
At the end of year five, where you earn another 10%, you’re left with a balance of $16,105.10.
At the end of year six, where you lose 20%, you’re left with a balance of $12,884.08.

As you can see, over those six years, you earned $2,884.08. You could have altered that return a little by contributing to a different investment – something that returned 7% a year every single year would have earned you $5,007 over that timeframe, for example. That’s a solid difference, but it’s not a huge one. The investment you choose will definitely make a difference early on, but the difference isn’t enormous. Your earnings difference over six years on that $10,000 initial investment will probably range by a thousand or two if you’re comparing similar investments.

Now, let’s look at a different example.

At the end of year one, where you earn 10%, you’re left with a balance of $11,000. You invest another $10,000 at this point, so your new contribution makes the balance go up 90.9%.

At the end of year two, where you earn another 10%, you’re left with a balance of $23,100. You invest another $10,000 at this point, so your new contribution makes the balance go up 43.3%.

At the end of year three, where you earn another 10%, you’re left with a balance of $36,410. You invest another $10,000 at this point, so your new contribution makes the balance go up 27.5%.

At the end of year four, where you earn another 10%, you’re left with a balance of $51,051. You invest another $10,000 at this point, so your new contribution makes the balance go up 19.6%.

At the end of year five, where you earn another 10%, you’re left with a balance of $67,156.10. You invest another $10,000 at this point, so your new contribution makes the balance go up 14.9%.

At the end of year six, where you lose 20%, you’re left with a balance of $61,724.88.

What’s the point of this illustration? Early on, your contributions make an enormous difference to your balance, but as time goes on, your contributions gradually become less and less important. After several years, most of the time the ins and outs of the stock market will have far more effect on your savings than your contributions. Your contributions have a smaller and smaller impact in terms of percentage, but the impact of the market stays the same in terms of percentage. Eventually, your contributions by percentage are substantially below the impact of the return on your investment.

In other words, once you’ve contributed for several years, your investments, if put into something reasonably aggressive, will start to grow so fast that in a typical year they’ll earn more on their own than you contribute. This gets more and more and more true over time, because as your investment grows, the annual returns grow.

What this feels like to me is pushing a snowball down a hill. At first, you have to really push and push and push a snowball around to make it sufficiently big, but there comes a point where that ball starts to have momentum on its own and it starts to roll on its own without you having to keep pushing it. You can keep pushing it, but you’re adding less and less and less force to that snowball rolling down the mountain and it’s picking up more and more and more steam on its own.

It’s at this point that making a good investment choice becomes increasingly important. When your balance on your account is $1,000, the difference between a 9% return and a 10% return is just $10. When the balance on your account is $100,000, that difference jumps to $1,000. Furthermore, that difference accelerates over time because that return is reinvested.

What’s the lesson here? The absolute most important thing you can do for your retirement savings is to just start contributing now. Don’t worry about choosing the perfect investment option. Just start contributing as soon as humanly possible. The earlier you start, the quicker you can get your retirement savings snowball big enough that it starts rolling down the mountain on its own momentum.

Later on, it will make sense to start looking more carefully at your investment options, not so much because a strategy change is in order, but to make sure you have your money in an option that charges low fees. I have every drop of my retirement savings in index funds for this purpose – they’re low fee investments that basically just match the overall stock market.

However, you don’t have to worry about that right now if you haven’t even started saving. The most important thing, by far, is that you get started right away. That’s far more important than what investment you choose. You can sit there blindfolded and choose one at random and as long as you eventually get around to figuring out which one you want in the next several years, you’re going to be in far better shape than waiting.

Start now. Start your snowball. Contribute something to retirement and start doing it consistently. Don’t worry about the specific investment that much, at least not right now. You’ll never regret this.

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Should You Remodel or Move?

If you’re feeling like you’ve outgrown your current home, you might be considering a move. And with housing markets around the country heating up with the weather, it’s peak house hunting season.

But what if the idea of moving stresses you out? What if you like your yard and your neighborhood, but just not your house? In that case, you may want to consider an alternative option. Moving isn’t the only way to get a larger home or upgrade your living space, after all. You could also remodel what you have — a move that has become increasingly popular as housing prices continue to surge and available inventory remains surprisingly low.

Moving vs. Remodeling: Pros and Cons

Remodeling may not be as exciting as buying a new home, but it could be a more cost-effective move in the end. This is partly because moving itself is costly — as is selling your existing home.

But it’s also because home prices have been rising dramatically. Real estate data firm CoreLogic’s home-price index shows that, nationwide, housing prices were up 6.9% in April 2018 compared to the year before, and they’re expected to climb another 5.2% through May 2019.

Obviously, rising prices are a huge consideration for anyone considering moving. Sellers may receive a higher sales price for their home, but they’ll likely pay more when they go to take out a mortgage for a new property. Plus, there are other costs to be aware of. Surging sales prices can also mean higher prices for other essentials, such as homeowners insurance and property taxes. All of those expenses can and will add up over time.

Should you move, or should you remodel? Experts we spoke to say you should consider the pros and cons of both options before you take steps in either direction. Here are some of the advantages and disadvantages to consider:

Advantages of Moving:

  • You can physically move your location. John Bodrozic of Home Zada says one of the biggest advantages of moving is the fact that you get to select a new location to call home. This can mean looking for a considerably larger or smaller home based on your preferences, but it can also mean choosing a better neighborhood or a lot in the country if that’s what you want. You could even move to an area with better schools, which is something you don’t get when you remodel your existing home.
  • You don’t have to live in a construction zone. If remodeling your home would require an invasive project like a bathroom or kitchen remodel, moving could save you from dealing with the mess and the stress. A major kitchen overhaul could leave you without a place to prepare food for months, after all. This can be inconvenient and costly.
  • You don’t have to deal with contractors. While remodeling your home could seem ideal, dealing with contractors is rarely stress-free. There are always hiccups when you remodel or build, and not everyone wants to deal with the drama or the expense.
  • You can purchase a home that’s 100% turnkey. Earl Correll, president of Texas-based On Point Custom Homes, says that moving gives you the option to buy a home that’s been remodeled and upgraded to your specifications. If you buy a home that’s in great condition already, you can pack up your stuff and move right in after closing.

Disadvantages of Moving:

  • You may not get exactly what you want. One major reason home prices have been rising is the lack of inventory – and that means you may not have a ton of options in your desired area. According to Correll, it’s pretty common to find homes that check off some of the boxes you want — but not all of them. “This means you’ll probably have to compromise on a few wish list items,” he says.
  • You may have to leave an area you love. If you love your current neighborhood and can’t find something bigger in your area, leaving the area to get what you want can be a major disadvantage. You may love your new house, but what if you don’t love your new neighborhood or your child doesn’t like their new school?
  • Buying a home and moving can be time-consuming and stressful. Bodrozic says that dealing with finding a new home, getting financing, and closing on the new home while selling your current home can be a huge hassle. Timing can be especially tricky with homes flying off the market in an average of 34 days — the fastest rate in years, according to Redfin.
  • Moving is expensive. While you might find a “deal” on a new home that brings it within your price range, don’t forget the costs of selling your home and moving. You’ll likely need to pay around 5% to 6% of the sales price in real estate agent commissions when you sell your existing home. You may also have closing costs on both homes, moving costs, and the costs of upgrades (paint, new carpet, etc.) for your new home.

Advantages of Remodeling:

  • You can plan a remodel to meet your exact specifications. Ethan Vickery of Triplemint Real Estate in Manhattan says that remodeling lets you choose exactly how everything is created and finished to suit your needs and tastes. This is a big contrast to selling your home and moving since your new home won’t be designed just for you.
  • You may be able to use home equity to pay for the renovation. If you have a lot of home equity, a home equity loan or HELOC would allow you to use your home as collateral and borrow against its value to pay for the remodel. Borrowing against home equity can be less costly and less of a hassle than taking out a new home mortgage as well.
  • If you love your neighborhood, you don’t have to move. Remodeling lets you stay where you’re at, which can be a huge advantage if you love the local schools, your neighborhood, or the area in general.
  • You can avoid the costs of moving and selling your home. While remodeling isn’t cheap, you can avoid the realtor commissions, moving costs, and the money you’d likely spend getting your new home exactly how you want it.

Disadvantages of Remodeling:

  • You’ll probably face some surprise expenses. Correll says it’s extremely common to run into unexpected issues during a remodeling project. “This is especially true if you are taking on a large-scale project that includes tearing down walls, moving plumbing, adding gas lines and so forth,” he says. Unfortunately, these surprise expenses can cause your remodeling budget to surge.
  • Remodeling can be a pain. Bodrozic says that the home improvement process can be mentally tough, especially when you’re dealing with budgets, contracts, contractors, product selections, and potential delays. Depending on how intrusive the remodel is, you might have to live in a construction zone for months or even stay with family or in a hotel during the worst of it.
  • You may not get your money back out of your remodel. While remodeling your home can be cost efficient, most remodeling projects cannot offer a 100% return on your money. According to the 2018 Cost vs. Value Study from Remodeling Magazine, a minor kitchen model brought an 81.1% return on average nationally last year — meaning a $20,000 kitchen remodel would only increase a home’s value by about $16,220. However, those who paid for a major kitchen remodel only recouped 59% of their costs during resale.

Other Issues to Think Through

In addition to the considerations above, there are financial implications that come with both choices. Bozrodic says you really have to run the numbers on how much equity you have in your current house, the price point of what a new house will cost, and whether either option will leave you better off financially.

It also makes a difference whether you got a great deal on your existing home or not. If you bought low and housing prices are currently high where you live, you may not want to start over with a bigger house and a bigger mortgage. You may have lots of equity in your current home, but you’ll deplete it if you sell and buy a home at a much higher sales price.

On the flip side, there are times when you don’t have much of a choice in terms of what to do. Vickery notes that remodeling isn’t always an option, since there are times when even a full remodeling project won’t address the biggest problems with your home. If you live in a condo, for example, you probably can’t just add a room for more space.

Finally, don’t forget that moving may have tax consequences that could be either good or bad. For that reason, it may be wise to consult your financial advisor or accountant to see how selling your home or moving could impact your bottom line.

Move or Stay Put? Here’s How to Decide

While there are no hard and fast rules to determine whether you should sell your home or stay put, realtor Don Cramer of Urban Nest Realty in Las Vegas says there are plenty of questions you can ask yourself that will help you decide.

For starters, you should ask yourself what your housing goals will be in the next five to 10 years. If you like your home and it works for your job and your family, then it can make sense to remodel and work with what you have. If you plan to move in a few years anyway, then you may want to consider staying where you are and not remodeling, on the other hand. Since it’s unlikely you’ll get all your money back out of a remodel when you sell, spending a ton of cash on a huge project may not make financial sense.

Also consider how your lifestyle will come into play — both today and tomorrow, says Cramer. Are the kids now out of college and starting families on their own? If they are or soon will be, you may not need a larger home at all and could benefit from a simple remodeling project to improve your home’s flow or make it more comfortable.

Also consider your finances. Moving can be extremely expensive, but so can remodeling. Before you choose either option, make sure you can truly afford it. Money you borrow will ultimately need to be paid back, so you should be prepared to pay for your dream home for the long haul.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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Have you ever had to decide between remodeling and moving? What criteria did you consider? What did you decide to do in the end?

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Tuesday, June 19, 2018

How an Impulsive Personality Can Find Financial Success

Alex writes in with a great question:

I have a very impulsive and addictive personality. I find it really difficult to stick to things and I’m constantly distracted by the cool new thing or the quick snack and that makes it real hard to make any financial progress. I need some help in overcoming this side of me so I can have some kind of financial future. Trying to be “less impulsive” isn’t helping.

Impulsive behavior – particularly that which causes financial damage – is a problem that many people deal with.

To some extent, it’s a challenge for me, too. I’m often attracted to impulsively buy books and interesting food items and sometimes that can get me into a bit of financial trouble as I overshoot my budgeted hobby money without realizing it because I acted on impulse.

Those impulses can sometimes feel like the spice of life, but at the same time, they’re utterly disastrous to a healthy financial situation. Thus, over the years, I’ve had to develop several strategies to get around my impulsiveness. As Alex notes, impulsiveness itself is a hard customer to defeat, but you can work around it and divert it into healthier channels. Here are some tools for doing just that.

Automate As Much of Your Financial Planning as Possible

Rather than relying on yourself to constantly decide to make good financial decisions, automate as many of them as possible by having automatic withdrawals and automatic transfers into and out of your various accounts.

For example, if you know you want to save for retirement, sign up for a Roth IRA and instruct that investment firm to automatically withdraw an amount from your checking account every week to fund it. That way, there’s never a choice about whether or not to save up for retirement – it just automatically happens.

If you want to have an emergency fund, set up an automatic regular transfer from your checking account to your savings account. For example, you might want to transfer $20 a week into your emergency fund, so you just have your bank automatically move $20 a week into your savings account from your checking. Again, there’s never a choice about doing this – it just happens automatically, so you never have to think about it.

These types of automatic transfers take the decisions out of your day to day hands. It removes the possibility of the “whim of the moment” decision to simply spend that money on something else – it’s saved automatically for you, so you don’t even have to think about it.

Nuke Your Credit Card from Orbit – It Is the Only Way to Be Sure

A credit card is a dangerous tool for an impulsive person. It enables you incredibly easy access to fairly unlimited funds at an instant’s notice, and if you’re impulsive, that can lead to all kinds of unnecessary purchases that you’ve almost forgotten about as soon as you make them.

My solution? Nuke the credit card entirely for a while. Cut it up, delete your numbers from any online sites that store it, and learn to live on cash and/or a debit card for a while.

Simply not having access to a credit card forces you to think more carefully about many of your worst financial impulses. You can’t simply go into a bookstore and buy three new books without directly and immediately impacting your checking account and your ability to keep bills paid. That type of immediate consequence is far more likely to stick around with an impulsive person than the lack of immediate consequence that a credit card represents.

Just go away from credit cards for a while – a long while. You can always start using them later once you have a much better grip on your impulses, but for now, just stop using them. They represent too much of an easy temptation to be financially impulsive, which is the exact opposite of what you want.

Shape Your Choices So That the Financially Responsible Choice Is the Enticing Choice

I’m a big believer in the idea of the path of least resistance. To put it in simple terms, the path of least resistance is whichever option before you is the easiest way to get a sufficiently high quality return on your experience. For example, a fast food burger is reasonably tasty and fast and convenient, so many people eat fast food, even though it’s definitely not the best quality food and it’s expensive for what you get.

You can use the idea of the path of least resistance in your own efforts to curb your impulsive spending. Simply set up situations in advance so that you’re reducing the resistance against the more financially sensible choice.

A great example of this is make-ahead meals. Let’s say you like to eat a quick breakfast before starting your day, so you often stop at a drive-thru to get an egg sandwich and a cup of coffee because it’s too much effort to make a savory hot breakfast during the busy morning. Now, let’s say you had a whole bunch of breakfast burritos in the freezer that you could pull out and quickly microwave before you left, taking a hot breakfast with you. You’d likely do that at least some of the time, and thus you’d likely cut down substantially on your breakfast costs (a drive-thru coffee and sandwich probably costs $7 – a breakfast burrito and a coffee from home is probably around $1.50).

If you’re impulsive about stopping for supper on your way home, start making meals in the slow cooker by getting it going in the morning so that all you have to do is walk in the door and supper’s ready. Alternately, you could just prep some of the ingredients for dinner in the morning before you go to work so that you know that a lot of the work for a great dinner is already done for you. Eating at home is a far less expensive routine than eating out.

If you like to read but your desire as to what to read changes rapidly, just go to the library and check out several books at a time. Pick out five or 10 books on different topics or in different genres and leave them all out on the table. That way, when you get a desire to read, you already have a bunch of choices there, so you don’t have to start looking in the Kindle Store for options.

Can’t stop smoking? Get rid of all of your cigarettes and start learning how to solve the Rubik’s Cube. Can’t stop drinking? Get rid of all of your alcohol at home and fill your fridge with water bottles you’ve filled yourself. Tempted to stop somewhere each night after work? Consciously figure out a better path for commuting home that doesn’t take you anywhere near the tempting area – it’s probably a better route, anyway.

It’s all about putting a different path of least resistance in your way.

Ask for Help in Curbing Your Worst Impulses

This one’s easy. Just sit down with one of your most responsible friends, explain that you’re trying to curb your worst impulses, and ask them to give you a nudge in a more responsible direction in the heat of the moment of your worst impulses.

I have a friend who has always done this for me, almost naturally. He just nudges me in a more responsible direction almost without effort, causing me to think more responsibly about my choices. I’ve learned, over time, to just kind of let him lead and suggest things when we’re hanging out because, although he chooses interesting things to do, he rarely comes up with situations that trigger my worst impulses.

It can be hard for a friend to do this, especially if you’re a persuasive person or one who will react negatively toward someone nudging you away from your worst impulses. This is a tactic only to use if you have a very close and trusted friend who can just roll with it. Not all of us are lucky enough to have such a friend, but if you do, ask that person for help.

Most importantly, if you do ask for help, there are going to be moments where it’s tough for that person. You’ll probably react negatively toward that person in the heat of the moment, even though at a calmer moment you were strongly encouraging that person to help you curb your impulses. Remember that this friend is doing a hard thing to help you and show your appreciation when you’re in a less disruptive mindset.

Engineer Who You Spend Time With

You may find that you don’t actually have any friends in your regular circle who are responsible or trustworthy enough to ask for help in curbing your impulses. If this is true, it’s likely due to the fact that most of your social circle – the people you spend time with – are actually enabling your impulsive decision making.

If that sounds familiar to you, you’re going to have a very hard time overcoming impulsiveness and becoming financially responsible without making some significant changes to your social life. You need to consciously spend time around people who you enjoy spending time with who also happen to curb your worst impulses because they don’t engage in those things.

Let’s say you’re a big impulsive shopper with a social circle that loves to engage in retail therapy. There’s a good chance that any time you do something social, you’re going to wind up in a situation where you’ll impulsively shop and none of your friends are really going to do anything to curb it, and that’s a disastrous recipe for your financial health.

The solution here isn’t to dump all of your friends and become a hermit. The solution is to spend some time looking for new social situations within which you can build new friendships that won’t provide an easy path to your worst influences. This doesn’t mean abandoning your old friends, but simply widening your social circles.

There are many ways to do this. Join a civic group – you can usually find out about these on your community’s website. Join a church or other religious group. Check out Meetup and see if there’s anything interesting for you. Stop by the library and see what regular events they have going on. Go to some of those events, give them some time to unfold, and consciously make an effort to get to know some of the people there. Get involved with the groups that click, and invite specific individuals you click with to do other things outside of the group. If things don’t click, move on to another opportunity.

This doesn’t mean that you should start turning down invitations to do things with your old friends, but it’s simply about opening up new opportunities – and those new opportunities will point away from your worst impulses.

Figure Out What Triggers Your Worst Impulses and Remove Those Triggers

Most impulsive people find that their worst impulses tend to happen in certain kinds of situations. Perhaps it’s triggered by a mood (like boredom) or the presence of a certain friend or being in a certain place. Whatever it is, it’s well worth your time to figure out what that trigger is for your impulses and find a way to avoid that trigger going forward.

Here’s what you need to do: sit down and think carefully about the last several times you made a really bad impulsive decision that you now regret. What do those situations have in common?

Did they happen at a particular place, or a particular type of place (like a store or a bar)? Did it happen with a particular person present, or a particular group of people present? Did it happen when you were sad or when you were happy or when you were lonely? Did it happen in the day or the night? Did it happen before work or after work?

Try to identify patterns in your impulsiveness. If you can see particular circumstances that cause you to engage in the worst excesses of your impulsive behavior, strive to cut those circumstances out of your life or at least reduce their frequency.

For example, I’ve learned that I shouldn’t go into bookstores because I will often impulsively buy books without even a second thought. What do I do instead? For starters, whenever I have the desire to go to a bookstore, I make a conscious effort to go to the library instead. That keeps me away from a known trigger for impulsive spending.

Consciously Reflect on the Downsides of Your Worst Impulses

Many people don’t want to give up their impulsiveness. Often, they think positive thoughts about their impulses – they remember the fun they had or the best outcome they ever had from an impulsive moment.

A person reflecting on their impulsiveness at a club might think of a really great time they had. A person reflecting on their impulsiveness at a bookstore might think of the great book they bought at a bookstore in the past.

What they don’t remember is all of the mediocre times at the club, nor do they remember the bad times, nor do they remember the aftermath of spent money and regret and hangovers.

They don’t remember all of the impulsive and truly mediocre books they bought and barely even remember. They don’t remember all of the money spent on books that they essentially dumped at the used bookstore a year later for a penny or two on the dollar at best.

In both cases, they don’t think about the opportunity cost – what they could have done with that time and that money instead of spending it at the bookstore or at the club.

When you think back to your impulses, don’t think about the best times that you had. Think instead about the many mediocre times and the bad times and the aftermath and the costs and the lost opportunities. Think about what being impulsive so frequently has really cost you, and ask yourself whether it’s really a net positive in your life.

Such thinking isn’t meant to kill all impulsiveness, but rather it’s meant to make you second guess it a little bit so that you’re not dealing with the negatives while being blinded by the positives.

Have an ‘Impulse’Part of Your Budget and Keep That Money Separate

A final strategy that I’ve found really useful is to partition one’s budget so that there’s a chunk of money left behind each month for impulsive spending. I call this my “hobby budget.”

Each month, I withdraw a certain amount of money from my checking account for my various hobbies. I turn some of it into cash and put the rest into PayPal for online purchases. Then, during the month, I do my best to stick to that amount. (If I make an online purchase without PayPal, I just move money from PayPal back to my checking.)

If I want to buy something impulsive offline, I have to pay cash for it. I don’t carry around an ATM card most of the time, so if I don’t have the cash, I simply don’t do it. If I want to buy something impulsive online, I use PayPal for it, or if I can’t, I transfer enough for the purchase out of PayPal and use a credit card.

It’s not a perfect system. The biggest mistake I make is an occasional online impulse purchase that I forget to pull out of PayPal, or when a friend pays or repays me for something via PayPal and I forget to pull it into checking and treat it as hobby money. Still, it does put a pretty strong cap on my online and offline hobby spending and definitely gives me a measure of control.

The point of this tactic is to wall off your impulsive spending from the rest of your finances. Success in this regard goes a long way toward protecting the rest of your finances, so it’s well worth your time to experiment a little and find a system that works well for you.

Don’t Give Up!

Virtually everyone messes up sometimes on the road to financial freedom, and this goes doubly true for people with an impulsive streak. The key thing to remember is to never give up. If you make a mistake, pick yourself up, dust yourself off, figure out where you went wrong, make an effort to correct things so that it doesn’t happen again, and keep moving forward.

This is a long journey with many obstacles. Impulse will sometimes deter you a little. Don’t let it deter you a lot.

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Your Car Probably Doesn’t Need as Much Maintenance as You Think

Your car definitely needs maintenance — but it doesn’t need as much of it as you’re being told it does.

I didn’t used to think about routine maintenance a whole lot. For most of my driving life, I drove older, second- to third-hand vehicles and did maintenance myself when I could. My rule of thumb involved changing the oil and oil filter every 5,000 miles, replacing the air filter as soon as I bought the car, replacing fluids, and bringing it into the shop when there was a strange sound or light.

I learned what a dying universal joint sounded like, what a bear head gaskets were to replace, and how many $100 to $500 problems would eventually kill a car’s value. It wasn’t until I began leasing vehicles that I learned about actual routine maintenance and how to ward off some of those costlier issues before they cropped up.

I currently lease a 2017 Subaru Forester and adhere to a fairly straightforward maintenance schedule. Subaru requires a check-in every six months or 6,000 miles. It’s supposed to be whichever comes first, but I work from home and really only use the vehicle for store runs and longer trips. My annual mileage allotment is 10,000 miles a year (which cuts the cost of both my monthly payment and car insurance premiums, but that’s another story), but I’ve only driven about 7,500 in my first 14 months of ownership.

While I think of that 6,000-mile checkup and oil change as generous — and my lease agreement and warranty offer some leeway on it — it turns out that such a stringent schedule may be unnecessary for the average driver. Though the folks at AAA advise following your vehicle’s factory-recommended maintenance schedule, they acknowledge that there’s wiggle room.

AAA notes that, for low-mileage drivers, most automakers recommend an oil change every 12 months (or basically half as many as my maintenance schedule recommends). Modern lubricants can extend the time between oil changes to up to 7,500 miles, while vehicles that use full synthetic motor oils may not need an oil change for 15,000 miles. Over the course of a two-year, 24,000-mile lease, that’s all of one oil change.

Consumer Reports puts that oil-change figure at 5,000 to 10,000 miles, but also recommends following the service indicator on newer dashboard displays for a better indication of when you need maintenance.

Also, as it turns out, you should just about never need to use nitrogen in your tires (at an extra $5 per tire) or flush your transmission fluid (most manufacturers now use 100,000-mile or “lifetime” fluid). Meanwhile, modern coolant and antifreeze is also meant to last for the life of the car and save you about $50 to $100 in changes, according to Consumer Reports.

Automotive pricing and analysis site Edmunds.com, meanwhile, points out something that becomes all too clear to most car owners after a visit or two: Dealership service departments and chain oil-change shops value their bottom line over the needs of your car. Considering the recommended mileage on most of the more modern vehicle maintenance guides listed in Edmunds’ database, may vehicle owners could get away with roughly half of the maintenance visits that chains like Jiffy Lube emphatically suggest (though don’t mandate anymore).

Insurance companies and even some dealerships suggest that you shouldn’t have to take a vehicle in for more than a routine oil change or tire rotation every 15,000 miles or so — though the items you’ll be taking them in for change with age. However, as J.D. Power points out, those who use their cars far more roughly under adverse conditions will have to give their vehicles a little more attention. That makes pre-paying for a dealership maintenance plan a dicey proposition.

While those up-front maintenance plans promise to lock in pricing over the life of the plan and are convenient for folks, they also don’t cover “wear-and-tear” items like brakes and wipers. Not only that, but Edmunds points out that they make a whole lot of money for dealerships by scheduling more service than is needed and charging more than the average cost of service.

So what should be a vehicle owner’s more realistic rule of thumb? Consult your maintenance manual, determine just how much you use your car, and follow the manual’s recommendations. Even if you lease a vehicle, the folks backing your lease just want to see that you’re following the manufacturer’s maintenance guidelines. In the meantime, you can check your tire pressure and tread, fluid levels, oil, timing and serpentine belts (40,000 to 60,000 miles), wipers, and air filters on your own without expending much energy doing so.

The good news about automobile maintenance is that improved technology has made it a whole lot less necessary than it once was. The bad news? Even if you’re doing much of it yourself, someone is always going to try to talk you into paying for more of it than you need.

Open the glove box, crack the owner’s manual to the maintenance section, and save yourself some money and aggravation.

Related Articles:

The post Your Car Probably Doesn’t Need as Much Maintenance as You Think appeared first on The Simple Dollar.

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Monday, June 18, 2018

Questions About CSAs, Tires, 401(k)s, Allowances, and More!

SUBTITLE – Reader Mailbag

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. What to unplug while traveling
2. CSA plan worth it?
3. Struggling in expensive metro
4. Moving emergency fund into stocks
5. Should I touch my 401(k)?
6. Allowance update
7. Tire buying strategy
8. What blender should I buy?
9. Beans and illness
10. Transitioning to self employment
11. Heat pump question
12. Frugal sailing?

In the last few years, we’ve been sending our children to different weeklong summer camps. We’ve let them be involved in choosing which camps they attend and have sought out ones that cater well to their interests.

The first year, only our oldest child went to camp. His fun was somewhat soured by homesickness and I think he found the camp experience overwhelming.

The second year, both he and his sister went to camp. They chose to go to the same camp and my oldest sibling spent a lot of time talking to his younger sister about his experience, in both conversations overheard and unheard by the parents. That year was a smashing success – our oldest thoroughly enjoyed himself, while our middle child experienced a small amount of homesickness that she got over due to a couple of quick visits with her brother.

This year, they were both so excited to go to camp that it felt like we were looking at brochures for months. Their youngest sibling was also swept up in the summer camp idea, so he’s attending a smaller partial week camp – he’s younger than his siblings were when they first went.

As I write this, the two older ones are both away at camp, leaving us at home with just Sarah and our youngest child and I. The house is quiet. I sometimes view these moments, when some or all of our children are away, as a preview of what our house will sound like when they grow older. I will miss their sounds.

On with the questions.

Q1: What to unplug while traveling

We are going on an eleven day family vacation. What devices should we unplug before leaving to save energy?
– Andrew

The main electrical draws that you might actually consider unplugging are your electronic devices that often stay in a “standby” mode, like your cable box or your television or your desktop computer. You should, at the very least, consider turning those off.

The big appliances generally need to keep running while you’re gone (refrigerator, freezer) or else use so little power when on standby mode as to not be worth the effort (washer, dryer). Obviously, all light should be turned off unless you have some sort of light cycling pattern to prevent theft.

The big thing you should consider is your heating and cooling. I would turn it off entirely during the vacation. If you have a programmable thermostat that allows it, turn it back on several hours before returning home if you want to come home to a cool house, or have a neighbor turn it on for you.

Q2: CSA plan worth it?

Are CSA plans usually a good return on investment? My husband and I joined one in our area and the first few bundles have been underwhelming to say the least. I am pretty sure this won’t be cost effective by the end of the year.
– Karen

In most CSAs, if you add up the total value of what you get over the course of the year in terms of supermarket price, are a good deal. However, some are much better deals than others, and you really have to listen to word of mouth to determine whether one is worthwhile.

The quality of a CSA is almost entirely dependent on the farmer you’re dealing with. Some farmers put a tremendous amount of value in those CSA shares, while others only put moderate value in them. Sometimes the value is shaped by the quality and quantity of the harvest; at other times, farmers will only put in a certain amount of vegetables no matter how good the crop is.

The CSA I used had a significant patch of ground that was for the CSA program, period. They had another smaller patch for other sales. Each week, they’d simply harvest everything harvestable out of the CSA side and put an equal amount in each CSA share. This seems to be a fairly standard, though not guaranteed, practice.

My point? It really depends on the CSA. My guess is that you’re getting positive value from it by the end of the year.

Q3: Struggling in expensive metro

My husband and I both have law school loans (total about $190k). We pay about $1700 per month for the loans. We are federal govt workers and don’t make a big salary. We also have a son in day care (in the DC area, so they are all ridiculously priced – $1500 a month). Our mortgage is $2500/month, and we put money into our TSP (retirement acct) religiously and have a 3% match from the employer. It seems as though we are scraping by, which is embarrassing for two attorneys. My husband especially gets burnt out from his attorney position and needs a vacation desperately, but we can’t afford to go any where. Is there any way to save money here? Do we just have to wait until our son is out of daycare and in public school to finally take a vacation? Are there things I am not seeing?
– Jana

I think this comes back to a bigger question about priorities. Right now, you both have relatively solid and secure federal jobs. The wages aren’t amazing, but the job is secure. However, part of that federal job choice is that you are also choosing to live in one of the most expensive areas in the nation.

The reality is that because of that high cost of living, you’re actually living an equivalent lifestyle to someone earning far less in another part of the country. For example, if you were in Iowa, you’d have a far lower child care cost, probably substantially more than the difference in salary, plus your housing cost would be much lower along with many other costs.

You seem to be unhappy with the high cost of living where you’re at, so you have a decision to make. Should you relocate to a lower cost of living area or not? Is it possible to transfer your job to a lower cost of living area while still keeping a somewhat comparable salary? Should you quit your job and simply get something different? Or should you just wait it out?

I can’t answer those questions for you, but they are all options on the table.

Q4: Moving emergency fund into stocks

I have a system of automatic investments, where every paycheck money is transferred into retirement accounts, my emergency fund, medium term savings, and a taxable investment portfolio (I use Wealthfront for this). However I think my emergency fund has gotten larger than it needs to be, so I’m considering moving some money (probably between 10-15k) into my taxable investment account. My question is: should I do this right now, or wait for a market drop? In general I don’t believe in market timing, but it feels somewhat unwise to push a bunch of money into a stock market that feels ripe for a correction.
– Jerry

Don’t worry about market timing. Instead, ask yourself what your goal is for having that money in a taxable investment account. Why are you putting it there? What’s the goal?

If you don’t have any sort of goal or any sort of timeline for that money, why not use that money to fully fund a Roth IRA? Or, if you’re already doing that, fully funding a 529 if you have kids?

Putting money into a risky investment like the stock market without some sort of goal in mind is usually a decision that will backfire on you. Figure out why you’re going to invest that money and then, from there, figure out what your timeline is for that goal and how much risk you can tolerate. If your timeline is long (10+ years) and your risk tolerance is high, put it in the stock market. If your timeline is short or your risk tolerance is low (or both), look for something else like bonds or money markets.

Understanding your goal is far more important than any twists and turns of the stock market.

Q5: Should I touch my 401(k)?

After I split from my ex-fiance in 2011 I found myself with $80,000 in debt (credit cards, student loans, and a car loan). In 2012 I got serious about paying off my debt and in 4 years I managed to bring that debt down to $50K. I am now married (to a new man) with a baby. My husband is wonderful and has accepted my debt as his. He listens to Dave Ramsey on the radio quite frequently. Recently Dave spoke to a gentleman who used his 401(k) to pay off his debt. My husband suggested it as something we should do but wants me to think about it. I was under the impression that you should NEVER Touch your 401k until you retire but Dave seemed to be OK with it. What are your thoughts?
– Alice

I think you may have misheard the story. Dave Ramsey is pretty adamant about not cashing out a 401(k) to pay off debt (see here), and I wholeheartedly agree with that stance.

The amount of extra taxes and tax penalties that would come from cashing out your 401(k), plus the drastic reduction in retirement savings, makes this a choice that’s very much in the “not worth it” camp.

Do not cash in your 401(k), ever, unless things are truly apocalyptic. You can cut your contributions for a while to help get things in a better place (though I don’t think that’s ideal, either), but please don’t tap that 401(k). Just leave it alone to do its thing.

Q6: Allowance update

I’m preparing to start an allowance with my oldest later this year (when she turns 4). Do you have an update on your allowance scheme since you last talked about it last October?
– Adrian

Right now, we give our children a small weekly allowance with which they can do what they wish with no conditions attached. It’s a very small amount – $2 a week. It takes a long time to save more than that.

They also have some chores around the house that they’re expected to do each week. Again, that’s not tied to the allowance – that’s simply an expectation of being part of the family. Discipline in this regard doesn’t involve allowance; it involves removal of some privileges, while good performance without any trouble over a period of time usually gets a small perk, like a trip to the local ice cream shop. Those small perks are utterly unplanned and spontaneous, in response to seeing a long period of good behavior and handling of their responsibilities.

On top of those things, we also have a job board that lists some extra tasks they can take on to earn a few dollars. These are tasks like doing deeper cleaning in the living room or kitchen or a bathroom, taking care of a small yard work project, or something along those lines. Sarah or I add these to the job board and if a kid wants to take on that job, they initial it and have a few hours to get it done. If they come back and it’s done, it disappears from the job board and they’re paid for it.

On top of that, we contribute to a 529 plan for each of them and remind them regularly of our contributions to that plan. This contribution is automatic; I usually make a point to remind them of that contribution when it’s made, and I’ve found that they consciously know that it’s happening and that it will help make college (or trade school or whatever) an easier option for them.

That’s our current allowance system, which is what has worked out best for us over a period of many years of trial and error.

Q7: Tire buying strategy

What’s your strategy for buying tires? Safety is important, but I’m skeptical that new (NOT used) ‘store brand’ tires are as dangerous and low quality as online comments make them out to be.
– Lester

Honestly, I trust Consumer Reports when it comes to buying tires. I check their most recent tire reviews when it’s time to replace tires, then check around town to see who has the “best buy” tires and what their cost is. (I find that I usually end up going to one of two places in the area for my new tires over and over again.)

I agree with you that I’m skeptical of cheap tires. However, I am not a tire technician and I don’t have the capacity to test tires in any way, nor would I really know how to do so. Thus, I trust an unbiased expert – Consumer Reports – who has been accurate in the past on almost everything I’ve asked of them.

I’d encourage you to do the same thing. Hit your local library and check out the latest Consumer Reports tire comparison. Check out some of the best buys on tires and see what shops carry them locally and what their cost is. This strategy has done very well for me over the years.

Q8: What blender should I buy?

Ever since my blender broke, I’ve been wanting to replace it. (The one I had was used, brand unknown, from a friend who owns a smoothie shop and was upgrading to new models. Since I didn’t have a blender at the time, I gladly accepted it.) I’m trying to decide whether to get a new one or a used one, and whether it makes sense to get a $300+ one if new (like the ones I see at Costco) or cheaper ones that are less than $100. I imagine I would use it about 5-10 times a month on average. What would you recommend? I’ve been told that for kitchen appliances that are motorized, it’s worth it to get a higher-end one, but I can’t get myself to fork up that much for an appliance that I wouldn’t be using on the daily.
– Kevin

If you are going the cheap blender route, I’d just go to Goodwill and grab one of the blenders you’ll find there. They usually have a few that are practically new, bought by people who thought they had lots of use for a blender and then it sat around and gathered dust and was eventually shipped out. You’ll spend like $10 on a blender and it’ll work just as well as any of the sub-$100 ones you’ll find at Target.

We have a pretty good blender (a Blendtec) that we’ve had for many years and it is an absolute workhorse for everything we throw at it. We make smoothies in it. We make guacamole in it. We’ve done scrambled eggs with it. We’ve done pancake batter in it. I’ve made nut butter in it. I’ve made hummus in it. You get the idea. It’s handled all of those things with zero problems.

With your use case, the question is whether you should go the $10 route with a blender that will probably do a mediocre but passable job at blending and struggle with some harder things, or go the $300 route and get an industrial strength blender. If I were you, I’d get the cheap blender and then see if it does all of the things you ask of it without problems. If it does, then you made the right choice. If there are a lot of notable problems with the cheap blender that would be resolved by having a more powerful blender with better blades, then upgrade.

Q9: Beans and illness

I’ve read that uncooked/undercooked beans can cause health problems (nausea from some beans, death from others if consumed in large quantities), but that boiling beans for some time breaks down the toxins. Does your slow cooker boil the beans when it’s on low?
– Keith

When I load up my slow cooker, it will eventually boil if it’s on the low setting, but it can take a few hours to get up to boiling. The low setting will usually maintain a very low simmer, while the high setting will maintain a somewhat faster simmer and reach that level quicker.

I think this depends a lot on the individual slow cooker model, however. Some slow cookers might do better with a pot full of beans on the high setting, which should bring things to a low boil on almost any model.

I have cooked beans on the low setting before in the slow cooker and had no real problems either with the seeming done-ness of the beans or with any gas or other issues.

Q10: Transitioning to self employment

I’m currently setting up my side gig, with a view to turning it into a full time business in three years (which is when my car will be paid off, the kids will both be in school so no more childcare, and I’ll be eligible for long service leave from work, which I can have paid out when I leave). I’m a single mum, so no partner’s income to fall back on, although we’re fortunate to have a decent welfare safety net here in Australia. So my question is, what in your opinion should I have in place before I make the leap? Is there anything you would have done differently when you moved to working full time on The Simple Dollar if you had your time again?
– Jane

Emergency fund, emergency fund, emergency fund. No matter how big you think is plenty, keep going. Things will happen when you least expect them. There will be things you haven’t accounted for.

I would also have a plan for returning to your previous career path and keep up with that plan. Maintain relationships with coworkers and employers and try to keep up with your field.

In other words, protect yourself against the unknown as much as you possibly can. That’s always the best thing you can do as an entrepreneur – protect yourself against obvious risks.

Q11: Heat pump question

Here in the south it is common to have an all electric house with a heat pump instead of a gas furnace. In the winter I have always turned the thermostat down at night to save money (with a programmable thermostat). However, when my parents got a new heat pump installed they were told it is more energy efficient with a heat pump to keep the temperature steady 24 hrs a day than to drop it at night and crank it back up in the morning. Is that true?
– Kelly

It honestly depends on a lot of factors. How well insulated is the home? What is the insulation made of? What’s the typical humidity level? How extreme are the temperatures?

Without knowing those factors, I really can’t recommend one way as being the best in your situation.

If I were you I would talk to a local heating and cooling technician. Their advice is far more likely to be accurate than mine.

Q12: Frugal sailing?

Since spending some time in Cape Cod, I really want to do some sailing. It seems like a rich person’s hobby, though, and I’m not talking about buying a boat or anything like that. Is there a frugal way to get some experience sailing?
– John

The cheapest approach – and probably the best way to do it cheaply – is to go to your local marina and see if someone there needs a crew member. Make it clear what the situation is – you’re new and want to learn.

If you do that regularly and decide it’s really for you, put the word out that you’re looking for an older one person boat. If you have a good reputation at the marina, you’d be surprised ehat people have stowed away in sheds and will sell cheap to the right person – a passionate newer sailor with a small pocketbook, for example.

That’s the path I’d follow and the same general path works for any expensive hobby.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

The post Questions About CSAs, Tires, 401(k)s, Allowances, and More! appeared first on The Simple Dollar.

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Want That $10,000 Grant to Move to Vermont? How to Convince Your Employer to Let You Work Remotely

The governor of Vermont recently signed a headline-grabbing bill into law that provides $10,000 to people willing to relocate to the Green Mountain State and work remotely for an out-of-state employer.

Known as the Remote Worker Grant Program, the measure takes effect Jan. 1, 2019. The $10,000 grant can be used to cover the costs of moving and work expenses such as computer software, hardware, or broadband internet.

The new offer comes in response to the state’s aging population. One in six Vermont residents is over 65 according to a U.S. Census Bureau report and the population is getting older faster than most other states in the country.

Perhaps compounding the problem, Vermont has one of the smallest populations in the country. With just 623,657 residents, the only state with fewer residents is Wyoming, according to Census data.

The entire predicament seems at least somewhat surprising given all that Vermont has to offer when it comes to natural beauty and quality of life.

Yes, the state is mostly well-known for being a major producer of maple syrup and delicious ice cream (Ben & Jerry’s anyone?). But it’s also home to thousands of acres of mountain terrain crossed by hiking trails and skiing slopes, and one of the most stunning places in America to observe fall foliage.

With so few people living in the state (just 68 people per square mile) there’s plenty of room to move around. What’s more, U.S. News & World Report ranks Vermont among the best in the country for health care access (No. 4), and its public education system is also among the top 10 in the nation (No. 8).

So what if all of this sounds tempting and you might actually want to take Vermont up on its $10,000 offer?

The first challenge will likely be persuading an employer to let you work remotely from Vermont.

How to Convince Your Employer to Let You Work from Home

To begin with, Rebecca Knight at the Harvard Business Review helpfully points out that working from home increases productivity, efficiency, and employee engagement. Research supports all of this, so dig up those studies and keep them handy when speaking with your boss.

In one example, Stanford professor Nicholas Bloom studied two groups of call center workers at a company called Ctip over nine months, half of whom were permitted to work from home.

“Ctrip was thinking that it could save money on space and furniture if people worked from home and that the savings would outweigh the productivity hit it would take when employees left the discipline of the office environment,” Bloom told HBR. “Instead, we found that people working from home completed 13.5% more calls than the staff in the office did—meaning that Ctrip got almost an extra workday a week out of them. They also quit at half the rate of people in the office—way beyond what we anticipated. And predictably, at-home workers reported much higher job satisfaction.”

Knight also notes that you’re only likely to be given the opportunity to work remotely if you’re already a trusted and valued employee. In other words, be sure you’re in good standing with your employer before suggesting such a work arrangement.

It’s also important to reflect on your motivations for making such a request, Knight continues. Perhaps you feel like escaping from office distractions will allow you to be more productive, giving you the ability to concentrate more on what you’re doing. Or perhaps the reality is that you’d like more quality time with your children each day, or more time to exercise. Don’t assume those personal goals are irrelevant to your employer: Happier employees are generally more productive, too. Whatever the case may be, it’s important to be honest with your employer about why you’re seeking this arrangement, rather than pulling a bait and switch.

Before heading into your manager’s office to have a conversation about remote work, do some planning ahead of time, says Brie Reynolds, a senior career specialist with FlexJobs, a site devoted to remote, freelance, and part-time job listings.

“Think through the ramifications for your position, and the team that you’re on, because you want to present a good case to your boss,” Reynolds says.

And while you’re making your case for a life of remote bliss (hiking, skiing, planting a garden in your big back yard), keep your conversation business-focused, stresses Reynolds.

“Yes, you may want to move because of a lower cost of living and healthy lifestyle, but the main point to make with your boss is this will not hurt the team,” she explained. “But more importantly, this will help, because you’ll be less stressed, you’ll be healthier, and more productive.”

Think about other ways it might help your team, too. For example, if the move represents a time zone change from where you’re currently living and working, perhaps it will allow you to better serve clients in other regions, a point you’ll want to make to your employer or supervisor.

You also may want to make some concessions in order to secure the proposed arrangement. Would you be willing to come to the office for quarterly meetings, or even one day a week if it’s not too far away? (Brattleboro, Vt., is about a two-hour drive from Boston, and three and a half hours from New York City.)

One more bit of legwork to do before approaching your employer: Take a look at how much remote work is already being done by other staff members at your office. Then consider asking one of those remote workers to join you for a cup of coffee to discuss their work arrangement – to find out how they got started and what the parameters are.

The bottom line? “Managers understand that working from home is a great benefit for you, so you can touch on that fact a little bit,” says Reynolds. “But you really need to be prepared say, ‘Here’s why I really think it would be great for my role and for the team.'”

Other Places That Will Pay You to Move There

One last note: If you feel up for the task of convincing an employer to let you work remotely, keep in mind that Vermont is not the only place where such offers are available.

New Haven, Conn., is hoping to attract new home buyers with a $10,000 interest-free loan, which can be used as a down-payment on a home or to help with closing costs. To sweeten the deal even further, if you live in the home for five years, the $10,000 is 100% forgivable.

Meanwhile, Lincoln, Kan., is giving away free tracts of land to those willing to come and build their own home. Lot sizes range from 12,000 to 36,000 square feet and are not far from medical, educational, and recreational facilities.

And finally, for those who want to really get away from it all, Curtis, Neb., (population 896) is offering free lots to those willing to come and construct a home.

Related Reading: 

The post Want That $10,000 Grant to Move to Vermont? How to Convince Your Employer to Let You Work Remotely appeared first on The Simple Dollar.

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