Saturday, January 14, 2017

Frugality, Freedom, and Peace

A few days ago, my oldest son flushed the toilet on the main floor. When he did that, two things happened.

First, the chain attaching the lever to the flapper became disconnected and the chain fell straight down under the flapper, so when the tank emptied, the flapper didn’t fall back in place. In other words, this meant that the toilet kept running, trickling a steady stream of water into the tank.

Second, the toilet became blocked.

You can guess what happened next. The bowl of the toilet overflowed and water started pouring out on the floor. My son had already turned off the light and left the room at that point.

The main floor bathroom is directly above the laundry room in our basement, so the water found a crack or two to seep into and the water ran directly down into the laundry room, dripping and basically pouring from the ceiling in various places. The basement laundry room is all concrete, but there were many loads of clothes in there, both clean and dirty.

About twenty minutes after this – yep, twenty minutes – I came downstairs to make breakfast for the kids. As I walked over to the pantry, I suddenly noticed that my feet were wet.

The entire bathroom was flooded, with water starting to run out into the kitchen. This was mostly a very slow buildup because the water was coming out of the toilet just a little bit faster than it was pouring down into the laundry room.

I immediately ran over and turned off the water to the toilet and then assessed the damage. The water in the bathroom almost immediately receded, as it poured down into the laundry room, but the entire floor needed to be mopped and dried, the closet needed to be cleaned out, and a bunch of items were simply trashed.

The laundry room was a different story. Almost all of our laundry – probably ten loads worth of laundry – was drenched in toilet water. The excess water ran across the room and down into a grate, ruining a bunch of items along the way.

It wasn’t a complete disaster, but it was a pretty big mess, the kind of mess that no one really wants to see in their home. It meant quite a few hours of cleanup work.

Here’s the thing, though. Other than the initial shock and a bit of disheartened feelings about the amount of time cleanup would take, I didn’t get upset at all about the mess. There are two big reasons for that.

One, if there was any permanent damage to anything, we could afford to pay for it. We aren’t pushed up against the wall financially. We have money in the bank for emergencies like this. (Thankfully, nothing seems to be permanently damaged.)

Two, my career flexibility enabled me to be home to catch the disaster quickly. My career flexibility is the direct result of life choices in which other things besides pure income were prioritized. If I did not have that career flexibility, the water would have ran all day, likely flooded our whole kitchen and living room, and water likely would have also been in our basement family room, our daughter’s basement, our basement bathroom, and other spaces. Also, the flooring in many areas likely would have warped and ruined due to prolonged water exposure.

Our choices over the last several years, from being careful with our spending and buying used cars and spending way less than we earned to making entrepreneurial moves and bolstering our careers with further education without increasing our spending, have led us to a point where we have financial flexibility and time flexibility. It’s that very flexibility that turned something that could have been a giant disaster into something that could pretty easily be handled.

If we had not made those choices, we would have splurged on a lot of things. We probably would have traveled to different places, though we do have a summer vacation each year. We likely would have replaced our vehicles at a faster rate, though our current vehicles are still completely reliable. We would have eaten out more.

To afford that, we would have to be walking a tightrope, one where a bad event or a mistake causes us to fall into disaster. This would have been one of those disasters, where a large portion of our house would have required cleanup and the costs would have been tremendous, and if we were living paycheck-to-paycheck, that would be a very stressful situation, indeed.

Being frugal and financially responsible made what could have been a full blown five alarm family disaster into what amounted to a day of cleanup we could handle ourselves and a few days of consistently running loads of laundry. It saved us an incalculable amount of stress. It saved us an incalculable amount of time. It saved us a lot of money, too. It didn’t negatively impact either of our careers.

To me, that’s the big secret of frugality and being smart with your money: it takes away so much stress from your life. Life’s disasters are no longer apocalyptic. You don’t have to be afraid to check the mail. If you lose your job, it’s not the end of everything. You don’t have to stay in a job where you feel absolutely miserable. You can feel free to take some career risks. You feel healthier and more energetic (I’m not kidding). Retirement doesn’t seem like a comical impossibility.

Let’s spell out some of these benefits in detail.

Life’s disasters are no longer apocalyptic. That’s the take-home message of the story I shared at the start of this post. That situation would have been utterly disastrous if we weren’t in the financial and professional situation that we’re in, and that financial and professional situation is built on the back of being frugal and not spending every dime we bring in.

If an appliance breaks, you can roll with it. If your water heater starts making bad noises, you can shrug it off. If your oldest child breaks a toilet and causes flooding in two rooms, you can groan a bit about the cleanup time and that’s it.

That’s a big stress reducer. I don’t have to freak out about every little click or funny noise in my house. I don’t have to be reduced to tears if the washer gives out. It’s water under the bridge. I can deal with it calmly and move on with life.

You don’t have to be afraid to check the mail or answer the phone. If you’re living a little above your means and finding that it’s difficult to keep the bills paid, simple things like answering the phone or checking the mail can become fraught with worry.

It doesn’t have to be that way. Making sound financial choices throughout your life can eliminate the fear of bills, the fear of debt collectors, the fear of unexpected news. Almost everything begins to fall into the realm of things you can easily deal with.

Not being afraid to answer the mail or pick up the phone or open a particular envelope has such a positive impact on one’s stress level and life outlook.

If you lose your job, it’s not the end of everything. I know many, many people who work at jobs where they’re at least somewhat afraid of the dreaded pink slip. If that pink slip comes, then they’re in a world of hurt unless they immediately find a good replacement job.

That puts you in a situation where you’re hypersensitive at work. You’re afraid to rock the boat. You’re afraid to do anything at all that might draw any attention to yourself, whether it’s too little work or taking on a task on your own or anything like that. You second-guess yourself a lot more.

In short, you’re walking on a high wire with your career, without the safety net of having financial resources in the bank. Yes, almost everyone is walking a high wire with their career to some degree, but with a net in place, it’s much easier to focus on success than when you have to worry about maintaining perfect balance with every step.

You don’t have to stay in a job where you feel absolutely miserable. Another complicating career factor is job misery. Many people find themselves in a job where they feel trapped. They don’t feel as though they can easily find another job like theirs with similar pay, but their current job is filled with misery for any number of reasons: a horrible boss, horrible co-workers, questionable working conditions, and so on.

Because of the overriding fear of the pink slip, many people in these situations really can’t fight back against the negative aspects of the job, either. You’re putting your job at risk if you talk to people up the ladder about such workplace problems and if you don’t have a backup plan, that’s a risk that people often decide not to take.

So people suffer. A miserable job often pushes people to just walk through the paces of life with no real joy, as a significant portion of their working hours are spent in misery. That’s not living.

You can feel free to take some career risks. Even if you feel like your job is fairly secure and not too miserable, there’s still some significant additional risk in making a career move. You still don’t want to rock the boat too hard, so you’re not going to volunteer for an interesting challenge. You’re not going to push any issue at work very hard.

If you do that, of course, it becomes much harder to make a name for yourself at work. You’ll likely get a lot of “good” performance reviews, but it often takes “great” performance reviews if you want raises and performances, and you’re probably not getting to “great” without taking at least a few risks.

This means that living paycheck to paycheck can actually hamper your career growth, leaving you in a position where you’re not making as much money as you otherwise could.

Retirement doesn’t seem like a comical impossibility. Part of the nature of living paycheck to paycheck is that you’re putting very little, if anything, away for retirement. This means that a person’s retirement planning centers almost entirely around Social Security benefits, which is often not enough to make for a comfortable retirement for most people.

What’s the solution? The solution is to not retire. The solution is to keep on working until medical issues or frailty force you to stop working and then you struggle mightily for the remaining years of your life.

It’s a pretty painful future, but it’s a future that many have ahead of them. Rather than having a bright light at the end of the tunnel of their working years, there’s no end to the tunnel at all.

You feel healthier and more energetic. Almost everything I’ve mentioned above points to how living below your means is a stress reducer, but what impact does lowered stress have on your life? You feel healthier. You sleep better. You have more energy. You don’t feel “on edge” all of the time.

Those are tremendous benefits, ones that I feel almost every single minute of every day. I rarely get a cold. I rarely feel sick at all, to tell the truth. I feel energetic most days. I don’t feel overwhelmed by life very often, even though I’m juggling a lot of things. Unexpected events don’t bring me to a meltdown. My blood pressure is low.

I just feel better than I did when we were financially struggling. I used to get colds all the time; I haven’t had a cold in years. I used to wake up and absolutely dread getting out of bed, and when I did I felt devoid of energy; that’s just completely gone. I don’t feel burnt out in the evenings like I once did; I just hit a “cliff” at some point around 10 PM and I go from being very energetic, tackling problems all around the house, to going straight to bed. I don’t sit around in a half-awake state in the evenings. I have a really strong relationship with my kids and with my wife, where everyone communicates and feels good about one another.

I attribute all of that to low stress, and I attribute the low stress to having very few financial worries, and I attribute having very few financial worries to the frugality and smart spending choices that we’ve made. Frugality pays off.

All of these benefits might sound great, but they’re always followed by another question: isn’t living frugally just swapping one misery for another one? The assumption here is that, sure, living below one’s means might bring those benefits, but to get it, you have to go through the misery of giving up lots of life’s pleasures.

Frankly, that’s not true at all.

I do almost everything that I want to do, but the key thing here is “do.” I love books and reading, but that doesn’t mean I have to go buy tons of books all the time. I get books from the library, and I get joy from curling up with them. I love a good meal, but that doesn’t mean I go to restaurants all the time; I make most meals at home. I love board games and have a nice collection, but at this point, my joy comes from taking the time to actually play them rather than acquire them. I love going on hikes in state and national parks, but that’s extremely cheap. I don’t go without anything that I actually want.

At the same time, I don’t spend much money on the things that I’m not interested in. We buy a lot of store brands for most of our household supplies and staples. I often make my own laundry soap out of basic ingredients. Having a jug that says “Tide” on it has no value to me; all I care about are getting clothes clean. I drive a thirteen year old car that I bought off of Craigslist; I keep up with the maintenance and it gets me where I want to go, which is all I want from a car.

I have minor impulses and desires, but I don’t pay much attention to any of them because I recognize they won’t bring me any lasting joy. A shiny car might be fun for a while, but it quickly just becomes a more expensive way to get from here to there. An expensive trip might be fun, but I eventually return to everyday life and it’s not worth disrupting the low stress of everyday life for it. Even little things like a morning coffee simply don’t give me enough lasting value to be worth my money or time or attention. If it’s not going to bring me lasting joy, I don’t really bother with it.

So, what kind of basic steps can you take to get to this point?

First of all, start automating some savings. The first step is to simply build up an emergency fund, which is a wad of cash that you have in a savings account that you can tap in case of an emergency. Simply see if your bank can start transferring a small amount each week into your savings from your checking account. Try $10 or $20 a week to start with.

You likely won’t even notice that little amount, but what you will notice in a few months is that you have hundreds in savings. That money should just sit there until things are in crisis mode in your life, at which point that money will be a godsend. In fact, just knowing that money is there can be a powerful de-stressing agent.

Experiment gently with frugality. It’s not realistic to do a complete 180 with your spending habits. There are so many habits and routines and psychological barriers built into how we spend money that to make a radical switch and expect perfection and joy and no misery is just a mistake.

Instead, step into it slowly. Try making a few more meals at home. Swap out light bulbs for LEDs. Buy store brand items at the store instead of name brand items and see how they work. Make a meal plan and then make a grocery list from that meal plan. When you shop for a car, look for a late model used one from a reliable manufacturer first. When you shop for housing, look for a smaller house rather than a bigger one. Spend some time shopping around whenever you buy anything of significance or sign up for any service. Those changes aren’t going to drastically affect your day to day life, but they will show you the power of being frugal, and you’ll find that you’re emboldened to try more and more new things. Some of them won’t click, and that’s okay; don’t force yourself to stick with things that bring misery.

Start planning for big expenses you know are coming. Is a car replacement coming in the next few years? If so, start making a “car payment” now, except put that money in a savings account. When you actually do need to replace that car, you can use that money to either make a huge down payment or pay for the car entirely.

The same is true for almost any big expense you know is coming. Start paying for it now. Put cash into your savings, a bit at a time, and then when the expense does arrive, it’s not a crisis. You have the money.

If you follow that general plan and stick with it over the long haul (it’ll take a while for results to show), you’re going to find yourself in a much better place in almost every dimension of your life.

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Friday, January 13, 2017

Does ‘Spending Pennies to Make Dollars’ Really Make Sense?

You come home from work. There’s a big pile of laundry that needs to be sorted and washed. You also need to make dinner. You have dreams of using evenings to start building a business, but with tasks like this (and many other things) interfering with that plan constantly, it’s very hard to get a business rolling.

What do you do?

Well, you could just leave the laundry and eat the absolute simplest meal you can possibly prepare, then get cracking on your business plan. Eventually, though, you will be facing Mount Laundry and it will become a crisis.

Another option is to prepare a well-rounded and inexpensive meal, but that’ll take a while, and then do the laundry, but then you’re left with little time for doing things that will earn more money.

The third option, of course, is to outsource those simple tasks. Hire a laundry service. Order food to be delivered. That way, you’re not spending your time on those tasks and can devote your time to getting that small business running.

Many entrepreneurs, both successful and otherwise, follow that last strategy. Their philosophy is simple: They believe that they’re spending pennies to make dollars. In other words, they believe that the money that they pay for services like laundry or food delivery or other things that save them time in their personal lives allow them more time for entrepreneurship activities, from which they can earn far more money than they would save by doing those personal activities themselves.

As someone who went through a period in life where I was building a successful small business (The Simple Dollar) at the same time that I was trying to maintain a career while also married with a newborn at home, I can really understand that temptation. If you truly believe that you’ve got a great entrepreneurial idea and that it will earn you a ton of money if you’re able to launch it, the cost of laundry service or food service or some other time saver will indeed seem like a great investment.

But is it a good investment?

The Small Business Administration estimates that two-thirds of small businesses utterly fail within two years. Many more only become marginally profitable. For each small business success story that you hear, there are several that outright failed and a few that are modest successes.

That’s not to say that entrepreneurship is a mistake; it isn’t. For hardworking focused individuals, it can be an incredibly powerful way to earn money. It can turn an idea that you cultivate in your spare time into something utterly life-changing.

But it’s risky. Most of the time, you’ll fail at it.

The real question isn’t whether it makes sense to turn pennies into dollars, but when is the right time to turn pennies into dollars. Here are my thoughts on the issue.

Have your personal finances in order before you start “spending pennies to make dollars.” If you do not have your finances in order, you should be focused on taking immediate action to cut down your debts and install some good personal spending practices. That needs to take priority over any sort of entrepreneurial activity.

It’s simple: if you don’t have pennies to spare, you shouldn’t be spending pennies, even if you believe that those pennies will make dollars. Put yourself in a position to have pennies to spare by relying on frugality and more straightforward employment methods and use your excess money to cut down your debts.

This doesn’t mean that you shouldn’t bother with entrepreneurship if you’re in a financially difficult situation. It just means that you shouldn’t invest money in the idea. Instead, proceed slowly. Use the time to think through your entrepreneurial ideas.

Which brings me to my second point…

Have a plan. If you want to launch a small business, write a business plan. The Small Business Administration has some wonderful tools to help you through the process of writing a plan for your business idea.

The process of writing a business plan is invaluable. Although I started The Simple Dollar on a whim (mostly as an outlet to journal and evaluate my own financial success), I soon wrote a business plan for the site, evaluating various risks and costs and thinking about how I could market the site to attract new readers. Without that plan, the site would have floundered in anonymity and likely have been forgotten many years ago.

The same thing is true if you’re trying to launch a strong career. Often, the early stages of a career require tons of time, tons of learning, tons of work, and tons of networking. Write a plan for that, too. How will you build connections to people in your field? What education and skills and resume lines do you need to advance to the next rung on your career ladder? How will you get them? How can you build a name for yourself in your field? Think about those questions. Come up with answers for those questions.

Never, ever throw yourself mindlessly into work without a plan. If you’re starting a side gig without a plan, it will almost always fail. If you’re dreaming of great career success but don’t have a plan for how to achieve it, it will almost always fail.

If you’re not setting yourself up for success from the get-go with a smart plan in place, spending pennies to make dollars is the equivalent of throwing money down the drain.

Don’t put all of your eggs in one basket. If there’s one truism in your professional life, your personal life, every aspect of your life, it’s this: You’re going to fall down again and again, and the only way you’re ever going to succeed is by picking yourself up, brushing yourself off, figuring out how you stumbled, and then moving forward again in a way that avoids that mistake. I failed at more than a dozen side gigs and microbusinesses before The Simple Dollar took off – no joke.

Here’s the thing: you need to be in a life situation where if you fall down, it is possible for you to stand back up again. If you’re putting yourself in a situation where failure means complete financial disaster with no direct route to continued income, you’re making a giant mistake.

It has nothing to do with “walking the edge” in order to “push yourself to greater success.” That’s a myth. The truth is that many entrepreneurial ventures succeed and fail based on things outside of your control. Many career advancements succeed and fail based on things outside of your control. You can have the perfect plan, but sometimes perfect just isn’t good enough.

If you put all of your eggs in one basket, even if you execute perfectly, sometimes you’ll drop that basket and find yourself with nothing. Never, ever put yourself in that situation.

Instead, make sure that you have other secure sources of income before you start diving into entrepreneurship. Have a steady job in place or a skill set that allows you to easily find employment if things don’t work out.

Multitask unimportant things. One strategy that I was forced to employ during the early days of The Simple Dollar when I was balancing a full-time job, a marriage, an infant at home, and launching the site was multitasking unimportant tasks. Things that did not require my full focus became opportunities for multitasking, even if it looked crazy.

Take my example above, where a person is facing entrepreneurial needs, a big pile of laundry, and dinner that needs to be made. Prepare something quick for supper, sort laundry while it’s going, and use a voice recording app on your phone to brainstorm while doing it. I did this very thing many evenings (using a whiteboard instead of a voice recorder) back in those days.

Rather than trying to balance exercise, child care, and a need to get groceries sequentially, I’d strap a large bag on my back and walk with the stroller to the grocery store 3/4 of a mile away, load up on groceries, and walk back home at a very brisk pace with the weight on my back and the stroller to push in front of me. I’d get home panting and wheezing from the exercise, have the grocery shopping done, and I’d have taken our baby outside for some fresh air… and he was usually napping when we got back home. Heck, I’d even brainstorm during this activity by having a little pocket notebook on the stroller to jot down brief notes.

(If you haven’t figured it out, one of the best secrets of entrepreneurship is to brainstorm and think through your plans whenever you have mental downtime.)

By layering together tasks like this, you get far more value out of your time and you’re freeing up a lot of time to use in other ways, like entrepreneurship. Look for ways to layer three or four low-focus tasks together into one continuous activity and you’ll find yourself with extra free time without having to pay for it.

Here’s the moral of the story: Spending pennies to make dollars addresses a real problem with an overly simplistic solution. Rather than creating value, you’re mostly just swapping one resource for another unless you do it in a smarter fashion. Don’t toss aside smart personal finance management in an effort to earn more money, because you’ll often find that you’re not improving your financial state at all.

Good luck!

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Thursday, January 12, 2017

31 Days to Financial Independence (Day 22): Using “the Gap” and Avoiding Lifestyle Inflation

“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!

Last time, we finished up our series of discussions on strategies for increasing your income with a look at starting a side business and dabbling in entrepreneurship. Today, we’re going to step back from that perspective and see how an increase in income intersects smartly with frugality.

Let’s assume that you’re a person who is essentially living paycheck to paycheck. You make $50,000 a year and you spend $50,000 a year. You’re not building anything for the future.

Over the course of this series, we’ve covered a ton of strategies for cutting spending. Let’s say you used just some of them and managed to cut your spending by 10%. You’re now making $50,000 a year and you’re spending $45,000 a year.

Now, let’s say you used some of the money-making strategies we’ve discussed in the most recent portion of this series and managed to improve your income by 10%. You’re now making $55,000 per year and spending $45,000 per year.

That difference between income and spending – $10,000, in this case – is a number that I like to call “the gap.” It’s the gap between your spending and your income level. In general, any activity that causes a noticeable increase in the size of your gap, whether it’s cutting spending or earning more money, without adding misery to your life is a good thing.

Financial success boils down to building up a gap through frugality and hard work and then doing smart things with that gap. In other words, once you’ve managed to create that $10,000 gap in the example above, you then use $10,000 a year on top of your normal bills to eliminate debts, save for retirement, save for your children’s education, and invest in yourself.

The big enemy of the gap is lifestyle inflation. Many people will adopt frugal strategies to get more bang for their buck, but then they’ll spend the money they save on different stuff. Many people will also see a raise at work or some other bump in their income as a reason to start spending more.

They’ll start buying nicer cars. They might move to a nice place or move to a bigger house. That sounds great, but the fundamental problem is that you’re still stuck on the same treadmill, just with shinier baubles.

The entire purpose of the journey to financial independence is to get off that treadmill entirely, giving you time and energy and freedom to do almost anything with your life. That’s the big goal. If you use the gap to build your personal wealth rather than nicer stuff, you become less and less controlled by things like the whims of your boss, the negativity of a bad workplace, work that doesn’t fulfill you, and so on.

Exercise #22 – Using “The Gap”

What follows are several strategies for ensuring that the “gap” that you’ve built up is used to give yourself the maximum number of options in terms of how to use your time and energy in the future, as well as many strategies for avoiding lifestyle inflation.

As your “gap” grows, adjust slowly. When you first start seeing an increase in your “gap,” either due to an increase in income or a decrease in expenses, don’t immediately make any changes at all to your life. Instead, put that money into a savings account or use it to make extra debt payments and give it some time to sink in.

The key here is to make sure that every change you make to your life as a result of your improved frugal choices and your improved income is done in a smart and thoughtful way, and the best way to encourage smart and thoughtful money decisions is to take them slowly.

So, if you find yourself starting to build up a little “gap” between your income and your spending, take the changes slowly. Do smart things with the money and don’t immediately give into temptations to spend it before you’ve given yourself time to consider the new options that are now before you.

Be conscious and aware of lifestyle inflation. It is very easy to simply not think about lifestyle inflation when you’re making purchasing decisions. If you’ve managed to build up a “gap” through some sustainable frugality strategies and/or an increase in income, it is incredibly easy to convince yourself that you can afford a new “treat,” and then that treat turns into a routine that raises your expenses. That treat might be a nicer car than you would have bought before or an expensive coffee in the morning or something else entirely.

Whenever you start to think about buying yourself a “treat,” think seriously about whether you would have bought this thing before you had a “gap” and whether that treat is really better than what you will gain from using your gap smartly. Sometimes you might decide to go with the treat anyway, and that’s fine, but by simply thinking about that question, you’ll find yourself preserving the gap and making good long term decisions regularly.

Give yourself a monthly “splurge budget” and cap it tightly. One great way to avoid lifestyle inflation but give yourself some breathing room to buy things spontaneously and have a little fun is to give yourself a monthly “hobby/splurge/entertainment” budget, from which you can spend however you like. Use it for a morning coffee at the coffee shop or a new book or a new board game or a night out on the town.

However, when you hit that cap each month, stop spending. Don’t spend frivolously until the start of the next month.

What this does is it allows you to enjoy some treats and splurges, but it keeps them firmly in the department of treats and splurges rather than letting them grow into routines. It lets you indulge in hobbies, but keeps those hobbies from turning into endless funnels of money. It lets you be spontaneous, but still keeps your big financial goals in mind.

Remember that every non-essential purchase comes right out of your long-term goals. Thinking about buying a pair of $300 shoes? Maybe a $500 video game console? Those things come right out of your long term plans, whatever it might be. It means you’re going to be working just a little longer.

It’s often hard to “feel” that impact, so what I like to do is calculate my true hourly wage, something we talked about earlier in this series. Your true hourly wage is simply the amount you earn in a year minus all work-related expenses (like wardrobe, workplace socializing, lunches eaten out, etc.) divided number of hours you devote to work, meaning your work hours plus your commute plus any time spent on professional activities outside of work.

That hourly wage is a very powerful tool. You can use it to examine the cost of a splurge and translate it directly into the number of working hours you’re going to have to add to your life just to have that treat. If your true hourly wage is $10 and you want a $500 item, are you really willing to add 50 hours of work to your life? That’s what the true cost of that video game console is. Is it really worth that? Would you be willing to sacrifice fifty hours of freedom and fun and instead work during that time in order to have that $500 item?

That simple thought experiment talks me out of purchases all the time. It’s a powerful thing when you really sit down and think about it. It would be great to be able to always work on my terms, or to simply not work at all and spend days reading or working in the garden or playing a game or volunteering. I’m giving up a lot of that time in order to have an expensive item.

Use your “gap” only as extra debt payments, not for minimum payments. One of the smartest strategies for using one’s gap is to eliminate debt as fast as possible. If you can throw your “gap” money straight into debt repayment, you’re going to burn through that debt nice and fast (if you’ve put in the work to build up a nice gap, that is).

However, it’s a good idea to continue to budget for the minimum payment out of your normal expenses rather than just buying fully into the idea that your “gap” is taking care of all debt payments. Your “gap’ should be treated as a bonus. For example, imagine if, instead, your goal was to save for retirement with your “gap” money. You wouldn’t even have it available for things like making bill payments.

I highly, highly recommend making minimum payments on your debts just like you normally would, then drawing extra debt payments out of your “gap” money. This will cause your debts to go down even faster than before and it will also leave you in the right place for determining what your true expenses are in the event of a life change.

Go small, not big, with your housing. Regardless of whether you choose to rent or buy, the bigger your living quarters, the more expensive it’s going to be. That money comes straight out of your savings for the future.

The truth is that when you buy a large home, it’s mostly just empty space that you’ll eventually fill with stuff. The smartest thing you can ever do regarding your living space is to minimize the space that’s there just for storing stuff. If you want to have a big room for entertaining guests, that’s great, but don’t spend valuable housing money on having more closets or bedrooms you won’t use. Minimize the extra space.

Not only will minimizing the extra space save you in terms of the cost of your living quarters, it will also force you to spend less on the simple accumulation of stuff. You’ll have to think more carefully about acquiring possessions simply due to space, which means you’ll approach purchasing decisions with a more discriminating eye. (There’s also the issue of moving, which is substantially more expensive and time consuming if you’re moving out of a large home with a lot of accumulated stuff.)

Make cooking at home the norm in your life. Yes, this is a tip that came up earlier in this series in the section on trimming your food spending, but I’m mentioning it again here because it’s so important in terms of maintaining lifestyle control. Get in the habit of preparing food at home and make that the normal routine. Make eating out the rare exception to your plans.

This can be intimidating for a lot of people, but it need not be. Cooking at home really isn’t hard at all. It just takes breaking through to a strong familiarity with what’s in your kitchen, and that’s really only done by cooking a lot, starting with simple meals.

So make yourself spaghetti. Make some mac and cheese from scratch. Fry some eggs and some chicken breasts. Make a soup in a slow cooker. Repeat all of those things several times until you can do them almost in your sleep. When you’re at that point, most recipes won’t seem intimidating and simple meals seem easier to prepare than dealing with restaurant hassles and waiting and mixed-up orders, let alone all of the extra expense of it.

Don’t engage in a cycle of brand new cars. One common element of lifestyle inflation is the shiny new car that many people often talk themselves into buying. Then, when that car gets a little older, they replace it, and replace that one, and that one.

Regardless of whether you’re taking out a loan or paying in cash or even leasing, that’s a very expensive cycle. As was discussed in the earlier section on trimming your transportation costs, the most cost-effective strategy for buying and selling cars is to buy a late model used car from a reliable company, drive it into the ground (doing proper maintenance along the way to extend the lifespan), and then replace it.

Rather than diving into buying a sequence of brand new cars, instead use your “gap” money to move yourself away from using car loans to finance cars and pay for them out of pocket instead. This will save you a ton on interest.

Automate your investments and other financial moves. If you’ve decided to use your gap money for investing, make it automatic. Set up automatic transfers to take some amount of money directly out of your checking and into your investment accounts on a regular basis.

Automating investments is actually very easy. Almost every investment firm makes it possible to fill out an online form that will give them permission to automatically withdraw whatever amount you designate from your checking account in whatever pattern you wish and have that money put into your investments. You never have to lift a finger again except to turn it off.

The reason for this is simple: it takes the decision to save or invest each month out of your hands. It’s already happening. You won’t have to think about it. You don’t have a window to talk yourself out of it. You won’t be able to tell yourself that you can invest next month but this month you want a treat. The investment just happens.

This is the equivalent of “paying yourself first,” a personal finance maxim that you’ll hear repeated all the time. When you “pay yourself first,” what you’re really doing is investing before you worry about all of your other ordinary expenses so that you know that money will be there for you down the road. Using your gap in that way is a very smart move.

Splurge with time, not with money. One of the most powerful techniques that I’ve ever found with keeping lifestyle inflation at bay is to simply teach myself to splurge with time rather than with money. The reason is this: there is almost nothing I can buy that is as valuable to me as an uninterrupted block of time to devote to a hobby I enjoy or to quality time with someone I care about.

So, rather than spending my time looking forward to a future purchase, I spend my time looking forward to a Sunday afternoon and evening spent with five of my best friends playing a board game around a big table. I spend my time looking forward to a Thursday evening curled up with a book I’m really excited to read.

I find those blocks of time by scheduling them in advance and also by not wasting time on things that are low value. I simply don’t spend time channel surfing or web surfing (at least not very much). If I’m doing something, there’s purpose behind it, and if I don’t have enough energy to do anything with purpose, I go to bed so that I can rest up and do things with purpose the next day.

I get far more value out of a “time splurge” than I get out of almost anything else.

Build and maintain friendships with people who have similar values. If you fill your social life with people who find value in splurging with time rather than money and who make conscious choices about their spending, you’re going to find it far easier to do that yourself. Seek out those people in your life and build up friendships with them.

Most of our social life involves potluck dinner parties, game nights, and volunteer events. It’s a rich and engaging social life. Many of the people who come to our dinner parties and game nights are financially stable and spend money in a responsible way. We’re all living in relatively modest homes, drive relatively modest cars, and don’t spend money extravagantly.

Because of that, our social cues are all about not spending excessively. They’re centered around not inflating our lifestyle and instead working toward big lifelong goals.

To paraphrase Jim Rohn, you are the average of your five closest friends. Are your friends also committed to avoiding lifestyle inflation? Do they have big, lifelong financial goals? If they don’t, try to develop new friendships with people who do share those values.

Next time, we’ll take a look at specific strategies for investing for retirement.

The post 31 Days to Financial Independence (Day 22): Using “the Gap” and Avoiding Lifestyle Inflation appeared first on The Simple Dollar.

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Four Things a Hiring Manager Could Find Out About You

Few of us love looking for a new job. In addition to the stress of worrying about making a good impression, and the financial pressure of negotiating a fair salary, there’s the fact that interviewing can leave you feeling pretty exposed.

The hiring manager learns an awful lot about you during the process – and not all of it is stuff you necessarily want them to know. Depending on where you live and what the employer’s individual policies are, that might include:

Your credit history.

In most states in the U.S., hiring managers can ask you to authorize them to pull your credit report, but the version they see is not the same as the one lenders view. They can’t see your three-digit credit score, for example, or your birth date. Still, if you have a history of delinquent payments or other blemishes on your financial record, prospective employers might be able to see that – and pull an offer based on that information and your perceived irresponsibility.

Here’s where it’s important to know your rights. If you live in one of the 11 states that prohibit employers from asking to see credit reports – for example, California, Illinois, or Vermont – their request might be illegal.

If your state currently allows credit screening during the job search process, you still have rights. The Fair Credit Reporting Act requires employers to get your written consent before pulling your credit report and notify you in the event that they decide to rescind an offer based on what they find. In fact, they have to notify you twice: once before taking action, and once after. The “pre-adverse action disclosure” is intended to give you the opportunity to check for errors on your report before a prospective employer sees them. In one FTC study, 5% of consumers were found to have inaccurate information on their credit reports, so it’s worth checking yours for errors.

Whether you’ve committed a crime.

Twenty-four states and over 150 cities have enacted “ban-the-box” legislation, which makes it illegal for employers to ask applicants about previous convictions. However, that means that there are still plenty of places in the U.S. that allow companies to screen applicants based on a criminal record.

If you live and work in one of these states, don’t despair: A 2012 CareerBuilder survey found that over half of employers have hired applicants with a criminal record. The hiring managers they surveyed recommended being honest about the conviction and the reasons behind it, staying positive, and being willing to work your way up.

And then there’s this: A more recent CareerBuilder survey found that one in four employers didn’t conduct background checks, so there’s always the chance it’ll never come up.

Your salary history.

Massachusetts is the first state in the nation to announce that it will ban the salary history question during the interview process, but other cities and states are following suit. For now, however, it’s still legal for most employers to ask you how much you were paid at previous jobs. Some even back up their request by asking for W-2s or pay stubs to verify your statements, making it impossible to stretch the truth. (Not that you would.)

If the question is optional, your best bet is still to defer, and try to get the hiring manager to specify a budget for the role. Failing that, it’s a good idea to try to base negotiations around the market rate for the role, not your prior earnings. After all, there’s no guarantee that you were being paid fairly at your last job, especially if you’re female, not a confident negotiator, or working in a low-paying industry.

Whether you know how to use social media responsibly.

Let’s be real: If hiring managers restricted their searches to candidates who had never enjoyed an adult beverage or attended a party, their pool of applicants would be vanishingly small. That’s not why many will object to seeing your beach body draped on someone’s fishing boat while you practice drinking out of one of those hilarious beer-holding hats.

No, the real objection is that you don’t know to safeguard those photos better – and that’s why being too open on your accounts might keep you from getting a job. Think about it from their perspective: If you can’t manage your own personal brand, why should they let you gamble with the company’s?

Clean up those feeds and profiles, or lock them down so that a casual viewer can’t see how much fun you’re having on your own time. It’s only your business, and no one else’s, after all.

Related Articles: 

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Wednesday, January 11, 2017

How to Plan a Great, Low-Cost Valentine’s Day Surprise

Some of you are going to see the topic of this article, check the calendar, and be completely confused. Valentine’s Day? That’s more than a month away! Why write about it now?

The reason I’m writing about it now is because, with sentimental holidays like Valentine’s Day, some prep work can help you create a very low-cost gift that’s incredibly meaningful for your partner.

Why? Time is almost always the most valuable ingredient in a great, thoughtful, meaningful gift. When you invest your own time into something, you make something into more than the sum of its parts, and that’s almost always the key to something unforgettable for a day like Valentine’s Day.

Here are seven things you can do to create a wonderful Valentine’s Day surprise for the special person in your life, even if you don’t have a lot of money.

Write a good love letter. This actually isn’t as hard as you might think. Just go to the store, pick out a small pack of good paper, and get a good wide-lined pen – it’s all you need.

Instead of just sitting down and writing, spend some time drafting the letter in a computer program. Start off with your partner’s name, then simply state that your partner means an incredible amount to you, in whatever words feel the most comfortable. Then, simply list several little things that you notice about your partner that you really love. Try to mix it up – mention a physical trait, but also mention a kindness and other character attributes. Mention things you’ve seen that person do that have stuck an arrow in your heart. List six or eight or ten of them – the ones that really stand out – and then close by simply stating that for all of those things, and countless others, you love that person with your whole heart, and sign it.

Write the letter, then let it rest for a few days and edit it again. Then do it again. And again. Give it several drafts until it sounds wonderful. You can even ask a friend who can write well to give you a bit of polishing help, but don’t let them change very much. Keep your voice in it.

Once you have a draft on your computer that you like, pull out that nice paper and transcribe it in your own best handwriting. Take it slowly and make every letter look as nice as you can. If you mess up, start over. Give it time so that it looks good. (I’ve had to redo such letters several times before.)

Then simply fold it and deliver it, perhaps along with a very small additional gift. The letter will mean an incalculable amount.

Plan an amazing meal at home, down to the last detail. What is your partner’s favorite meal in the world? Is there a way that you can possibly prepare that meal at home in a presentable way?

Research recipes and techniques. Figure out how to make that recipe like the back of your hand, then also figure out what foods accompany it. A salad? A particular wine?

Spend some time thinking about details. Where could you sit that would be romantic? Do you have a nice tablecloth? What about a candle and a candle holder? Most of those items are either laying around your house or can be had very inexpensively, but the key is to think about it and come up with lots of little nice details.

Spend the time between then and now continuing to think about details and making sure you have those little details ready. Plan for when you’d prepare the meal, how you’d get the ingredients, and make sure you have all of the little elements ready to go.

One great way to do this is to do it as a surprise, and perhaps have that love letter sitting at your partner’s place before the meal.

Make some personalized soap. It’s actually very easy to make personalized soap with a wide variety of scents and colors. Just visit the soapmaking section of your local hobby store and look for “melt and pour” soap options.

The thing is, with a gift like this, you can personalize like crazy. Look online for soap molds, different colorings, and different scents. You could make a sandalwood soap in the shape of the logo of his favorite baseball team. You could make an evergreen scented soap in the shape of the Millennium Falcon. You could make a raspberry scented soap that’s colored in a reddish-purple with a bit of oatmeal mixed in, cut into simple rectangles. You can basically do anything.

The key is to think of a pairing of shape, color, and additive that would make the soap really feel personalized for your partner. Think deeply about those options and what’s available, and give yourself plenty of lead time to acquire the small number of items you need.

Remember, you can always use the excess as soap or for other gift-giving occasions.

Transcribe a poem or quote and present it well. If you like the idea of a love letter but are scared of your own ability to write creatively, instead look for a meaningful poem or quote for your partner and hand-transcribe it on nice paper.

Take your time and read a lot of poems and quotes. Consider some of your partner’s favorite writers or people and look for quotes or poems by that person.

Also, take your time to transcribe the poem beautifully. Take it slow, use your best penmanship, and don’t be afraid to start over if you’re unhappy with the result.

For an extra touch, consider a fountain pen and a bright ink, but only if they’re available to you. I have a small number of fountain pens, so I’m likely to choose a colorful ink when I do this type of thing, enabling me to make nice crisp lines in an ink color that my wife would love.

Make your partner’s favorite snack, personalized and packaged. If your spouse has a particular snack that they really love that can’t easily be found or bought, take the time to make a large quantity of that snack for your partner.

One year, for example, my wife made me a large bucket of handmade krumkake that she rolled herself with her grandmother’s krumkake iron.

Another time, I made a large quantity of homemade marshmallows with just a hint of a favorite flavor in them and wrapped them beautifully in cellophane.

Prepare a photo collage. Perhaps you have some photos of your partner at their favorite places, or the two of you together at various places. Take those photos to a photo store, have them touched up a bit, and have high quality prints made of them. Then arrange them in a photo collage.

There are a lot of ways to do this. You can either simply buy a multi-paned collage photo frame. Another option is to simply lay them out yourself in a larger frame, say an 11″ by 17″ or even a poster-sized frame. If you use a larger one, integrating a handwritten poem or note in it can be a great personalized touch.

Again, this gift is all about time. It’s about choosing photos, getting prints made, figuring out how to arrange them well, and so on. You need real lead time to pull this one off, but you can turn your shared memories into a very beautiful gift.

Make some personalized bathtub bombs, then set up a nice bath. This one does take some prep work, but it can make for a really nice experience for a partner.

All you have to do is follow this easy bath bomb recipe, substituting your own color choice here. Make a bunch of them – you’ll find the recipe ingredients to be very expensive.

Then, plan for a wonderful bath for your partner. Buy a bottle of tasty table wine and put that wine next to the tub. Draw it nice and warm and then have a couple of the bombs ready to go beside the tub, along with the others wrapped in a bit of cellophane. Put on a bit of quiet music. Hang up a towel and a bathrobe for their convenience.

Then, when your partner arrives, just let them wile away their worries in a warm bath. You can have your partner soak for a bit while you perhaps prepare the finishing touches on that dinner.

The best strategy? Combine them. Have a bath ready with a few bath bombs when your partner gets home, then finish setting up a romantic dinner while they soak, with a romantic letter on their plate when they come to the table. The cost for all of that? A few household supplies, the basic foods needed for a dinner, and a sheet of paper. Your partner, however, will love it.

It just takes some planning and some time, so get on it now. You can create a mind-blowing Valentine’s Day without spending much money, just some time and thought.

Good luck!

Related Articles:

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Can the GM BuyPower Card Help You Save on a New Car?

We’ve all heard of earning cash back, airfare, and hotel stays with credit card rewards, but what about a new car? The GM BuyPower card won’t let you earn new car per se, but it does let you save up rewards to make a hefty down payment. How? By rewarding you for every dollar you spend.

If you’re a GM enthusiast who is always trading up, this card probably sounds like a good deal. Like anything else, however, the devil may be in the details. Keep reading to learn how the GM BuyPower card works, who it’s good for, and why a different rewards card might work better.

GM BuyPower Card: How it Works

The GM BuyPower card works similarly to other rewards credit cards in that it doles out points based on how much you spend. With this card, you’ll earn 5% cash back on your first $5,000 in purchases every year. After that, you earn a flat 2% cash back on everything you buy, with no limitations or earnings caps.

So, if you managed to spend $10,000 on your card the first year, you would rack up $350 total – $250 during the 5% phase, and another $100 thereafter. If you spent $20,000 on your card during a single year, on the other hand, you would earn $550.

The good news is, this card lets you earn 5% back on your first $5,000 spent every year – and not just the first one. So, if you signed up for the card and spent $20,000 per year ($1,667 per month) for three years, you’d have a total of $1,650 in rewards – or about a 10% down payment on a Chevy Sonic or Cruze.

Beyond its lucrative earning structure, another great part about the card is that it doesn’t charge an annual fee. If you were to use it for regular purchases and pay it off every month, the rewards you earn would be truly “free.”

However, the kicker is that your rewards won’t really benefit you at all unless you’re planning on buying a new Chevrolet, Buick, GMC, or Cadillac vehicle.

Unlike other cash back cards, the BuyPower card doesn’t let you redeem points for cash back or gift cards. You can only redeem your points for a discount off a new car, and only through a licensed GM dealer. Plus, you can’t stack BuyPower card earnings with fleet vehicle incentive programs or the GM Employee discount.

You can, however, stack your rewards with some regular dealer incentives such as special financing deals. Is this a good deal? Well, it really depends.

Where the GM BuyPower Card Shines

If you’re especially loyal to Chevrolet, Buick, GMC, or Cadillac vehicles and expect to buy a new one in a few years, the GM BuyPower card could be an amazing addition to your wallet. In terms of cash back, I can’t think of any other card that offers 5% back on your first $5,000 spent followed by an unlimited 2% back with no limits. And since the 5% cash back “bonus” rolls back around every year, it’s almost like earning the signup bonus more than once.

With no annual fee, the GM BuyPower card becomes even more valuable. Better yet, this card offers 0% APR on purchases for your first 12 months. So, if you needed to make a large purchase and pay it off over several months, this card is a good option for that, too.

Where the GM BuyPower Card Breaks Down

While the GM BuyPower card makes sense for someone who’s in the market for a new GM vehicle, it makes almost no sense for anyone else. If you need a new car but aren’t decided on an exact make and model, for example, being tied down to a GM model, and particularly a new one, could leave you with limited options.

Speaking of that, it’s important to note that you can only use your rewards on a new vehicle. If you decide to buy used to save money, the rewards you earned would be basically useless.

And really, that’s the biggest drawback of this card; it lacks flexibility. With most traditional cash back cards, you can redeem your points for money in your bank account, a check in the mail, gift cards, or even merchandise. With the GM BuyPower card, you’re stuck with a discount on a new car — and that’s basically it.

Speaking of that, buying a new car may not be the smartest move anyway. According to Edmunds.com, the typical midsize sedan loses an average of $7,419 in value the first year. So, even if you build up a considerable amount in rewards, buying new means you’ll probably lose a considerable amount of money or equity in your car upfront regardless.

Who Should Get the GM BuyPower Card:

  • Someone who definitely wants to purchase a new Chevrolet, Buick, GMC, or Cadillac vehicle in the future.

Who Should Pass:

  • Someone who wants flexibility in how they spend their credit card rewards.
  • A person who’s interested in different car models and brands.
  • Anyone who might want to buy a used car instead of new.

Final Thoughts

If your heart is set on a new Chevrolet, Buick, GMC, and Cadillac vehicle, then the GM BuyPower card can help give a boost to your next down payment fairly effortlessly. By signing up and using the card for regular spending, you can earn hundreds of dollars per year good toward the purchase of a brand new GM car or truck.

If your car plans are up in the air, however, the GM BuyPower card could be more of a hindrance than a help. If you think you might buy a used car to save money, earning rewards that are only valid toward a new model won’t help. And who knows, you may wind up finding a better deal on a different make of car, too. With the GM BuyPower card, you’d be out of luck if you came across a stellar deal on a new Ford or Toyota, for example.

At the end of the day, most people find they’re better off the more options they have. And if you want a card that offers more flexibility, a regular cash back card is probably your best bet. Many of the top cash back cards come without annual fees, and some make it possible to earn anywhere from 2% to 5% back on nearly every purchase you make. And if you just so happen to use that cash back on a brand new GM vehicle, that’s perfectly okay, too — but at least you won’t be forced to.

Related Articles:

What’s your favorite way to earn rewards? Would you ever use credit card rewards to buy a car?

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Tuesday, January 10, 2017

Finding the Line Between Frugality and Deprivation

Frugality is a spectacular tool for immediately seeing positive financial results in your life. Whenever you find ways to get most of the same value in your life for a lower price, or you find a different avenue completely to fulfill your needs and wants without the same sticker impact, you’re managing to still enjoy life while spending less than you have before.

There’s a catch, though. At some point, you’re going to cross a line where the frugal strategy is no longer enjoyable. You’re going to give up something you care deeply about and find yourself feeling miserable about it.

The reaction to that state is usually a bad one. People who dig deep into frugality and then find themselves miserable often respond by undoing most of the frugal changes, even many changes that have little or no life impact for them. When they cross that line where they feel a sense of deprivation, that’s it. They’re done with frugality for a while.

It’s a lot like binge dieting. People do really well on a diet for a while, then suddenly they find themselves giving up something that they don’t really want to give up. The “rules” they’ve adopted for their diet don’t allow them to have some occasional treat and they begin to feel deprived and miserable, and when a person starts to feel that way, it’s not long before the inevitable diet backlash occurs where they undo most of the positive and non-miserable habits they’ve developed.

I’ll use myself as an example. I gave up a lot of hobbies when I decided to strongly commit to frugality. I gave up golf. I gave up almost all drinking, cutting it from a regular thing to a highly irregular thing. I gave up several of my collections. The thing is, I didn’t mind most of those changes, really.

There were two major cuts that did bother me, though. One, I completely swore off buying books. Two, I completely swore off buying board games.

Those two things were the hobbies I was most passionate about, and it didn’t take long for both changes to really chafe at me. I felt deprived. I had thoughts like, “If I can’t even buy myself a book when I want it, what good is a financial turnaround?”

On more than one occasion, I went through short periods where I just gave up on the whole financial turnaround and spent money to my heart’s content, only to regret it deeply a few days later.

What I gradually learned over time is that when you cross that line into feeling deprived, you’re usually going to end up causing serious long term damage to your financial plans if you stay there very long. Sticking with something that makes you feel miserable, even for a while, is going to eventually result in a nasty backlash.

The truth is that frugality is not about feeling deprived. It’s about finding situations where the value that you give up is much less than the money you’re saving, and deprivation comes from situations where the value that you give up is more than the money you’re saving. In my eyes, frugality is the opposite of deprivation. Frugality is about getting maximum value out of every transaction, and you’re not getting maximum value if you’re feeling deprived.

In my eyes, the best state of frugality is one where you’ve explored many frugal tactics and stick with all of the ones that don’t cause a sense of deprivation or loss. That sense of deprivation and loss comes from an underlying gut feeling that you’ve given up more than you’ve gained, and if you’ve done that, you’re not being frugal any more.

Everyone’s line is different. Rather than giving you specific guidelines to follow, all I can do is give you some great strategies for finding your own line, pushing right up to it, but not overstepping it, so that you’re getting maximum value out of every dollar you spend.

Let’s dig in!

Figure out the handful of things that really matter to you and box them off. I’ve found that the surest route to a sense of deprivation when you’re trying to be frugal is to cut back too hard on the handful of core things that you truly care about in life. The truth is that most people have a small handful of things upon which their day-to-day sense of contentment rests, and when you cut into that sense of contentment, that’s when people feel miserable.

For me, cutting into my core hobbies – mainly reading and tabletop gaming – form the one big area of that sense of deprivation. I need to have some outlet into those hobbies, whether it be time to practice them or money to spend on them. If I have more time, I need less money; if I have more money to spend, I don’t need quite as much time. Regardless, I need to devote some time and money in my life to those core hobbies.

For my wife, good coffee is one big area that forms deprivation for her. She grinds coffee almost every morning and is very particular about her coffee. Two or three cups of good coffee in the morning are vital to her, and without that good coffee, she can feel really deprived.

We know those areas in our lives. We understand those areas. It’s far better to let us have our breathing room in those areas than it is to cut back on them, because if we cut back on them, we begin to feel deprived and when we feel deprived we tend to make irrational spending decisions in those areas and in other areas in life.

Figure out the two or three things that really bring a ton of value to you and that leave you feeling deprived when they’re cut and leave those areas alone. Don’t cut back in those areas. (You can obviously do things like bargain hunt, but don’t cut back on the things you value.) Leave them alone and cut back strongly in other areas where you don’t feel that sense of deprivation.

Experiment with frugal tactics, but don’t overcommit right off the bat. Most of the time, when I’m trying out a new frugal strategy, I do it as a pure “trial run.” I rarely commit in a large way to a new frugal strategy unless I can see for myself that it works and that it doesn’t lead to a frugal backlash.

A great example of this comes from meal prepping. By meal prepping, I mean the strategy of preparing lots of copies of the same meal at once and saving the copies for later, usually in the freezer, for easy meals later on. At first, I was concerned that this would be a lot of extra work for not a whole lot of savings, so I committed as little as possible to a trial run.

I bought a couple of very cheap freezer-safe soup containers and tried it with a big batch of soup first, and what I found was that it actually didn’t take that much longer to make a triple batch of soup in a big pot than a single batch in a bit smaller pot. I’d then just ladel the extra soup into the containers, label them, and pop them in the freezer so that later all I had to do was defrost them to prepare soup for supper. It actually saved time overall, because it made meal prep on later nights much shorter, and it made eating at home more convenient on busy nights.

After that trial run, I gradually scaled up. I bought some freezer-safe pans with lids and made lasagna in them, then a tuna casserole. Before long, our freezer was stacked with made-ahead meals.

Here’s the thing: if I had found that meal prep was something that was too much effort, that it didn’t give enough value for the extra effort, I would have stopped. Even more, I would have stopped before I invested very much in it – just a few freezer-safe soup containers and a bit of time making a big batch of soup.

Try new frugal strategies. See if they work. If they don’t, roll back just that strategy. Don’t decide that cutting back is terrible and that all of frugality is horrible and undo all of your progress. Just cut the specific tactic that isn’t clicking in your life.

If you feel miserable or deprived, focus on finding the single tactic or two that’s making you feel that way and roll back just that tactic. The “honeymoon period” that many people go through when they first start turning things around is a wonderful thing. It gets people to try a bunch of new tactics all at once and they often see a bunch of great results.

However, after a few months, that “honeymoon” period wears off and people sometimes find themselves feeling mildly deprived. You might find yourself with a sense that you’re missing out on things and you don’t really know why, and without a specific idea of what’s dragging you down, you’re often very prone to just rolling back lots of frugal tactics (save the ones that you’ve already embedded deeply into your life).

That’s usually a huge mistake. If you ever find yourself feeling a mild sense of being deprived, don’t blame frugal tactics in general. Almost always, that sense of deprivation is coming from a specific tactic or two that took a while for the downside to really click with you.

Instead, try to figure out specifically what’s making you feel deprived. When you think about your life, what specific thing is now missing that was once there? It may take time to figure this out, and that’s okay. Give it time. It’s far more important to get the right answer here than to get the fast answer.

When you figure it out, roll back just that specific tactic (or two) and you’ll find the malaise going away.

For me, this sense of deprivation really came from completely cutting myself off from bookstore visits. I went from stopping by twice a week to basically not stopping at all. Today, I stop at a local independent bookstore (specifically, Plot Twist Bookstore in Ankeny, IA) about once every three weeks on average. That’s enough for me. I don’t need to stop every week, but if I don’t ever visit a bookstore, I feel like something’s gently missing. Three weeks is about right for me, and I usually set aside a few dollars to spend there when I visit.

Try lots of free or very low cost things, even if they seem way outside your comfort zone. Often, a sense of deprivation from frugal tactics comes from eliminating something from your life without anything to replace it. You realize that shopping trips with your friends are expensive and you cut them out… but then you’re just sitting at home some Saturdays. You realize that golf outings are pricy, but then you find yourself sitting at home sometimes.

You’ll feel deprived if you do that! Don’t do that!

Instead, fill that time by diving into other things you could be doing. I recommend simply dabbling into lots of new things and seeing what clicks with you. Here are eight extremely frugal activities I deeply love that fill a lot of my hours. If you want more, here’s a list of 102 free things to do. Need more? Head over to your community’s website and see what organizations are in town and what activities are on the community calendar. Need even more? Visit Meetup and see what groups are meeting on a regular basis.

Try new things. Try things that you aren’t sure if you’d like. Try things that you think you might even actively dislike, but you’ve never tried before. Give them all a shot with an open mind and see whether any of them click with you.

With me, what often happens when I do this is that I end up with more interesting possibilities for things to do than I ever will have time to complete in my life. I genuinely have more things now that I want to devote time and energy to without spending money than I ever did when I was spending money like it was water. Time is the challenge now, not money.

Figure out the things that bring you peace and emphasize them in your life. One valuable thing that I’ve learned over the years is that even if I feel a little deprived in one area of my life, if it is counterbalanced with a strong sense of contentment or peace in another area of life, I end up barely noticing that sense of deprivation.

If some of the areas of my life are very good, then it pulls up the rest of my life.

Thus, it’s well worth your time to cultivate a sense of happiness and peace and contentment in many areas of your life. Work on building a good marriage and a good relationship with your children. Work on building a robust social circle.

More than that, work on finding a hobby or an aspect of your work that allows you to find a “flow state.” That’s the surest path to contentment I’ve ever found in my life.

What do I mean by “flow state”? It means when you’re working on something in a physically and/or mentally engaging way and it becomes so engaging that you lose track of time and even of the place you’re at. It’s when you’re engaged in something really interesting or really intense and then you look up at the clock and two or three hours have passed. That state feels good, as does the aftermath of it. Being in a flow state is absolutely the most content feeling that I’ve found in life, and if I can find it regularly, then I can overlook a bit of discontent in other areas of life.

I try to make those things central in my life. I consciously try to put in time every single day to strengthen my relationship with Sarah and with my kids. I put in time pretty regularly to strengthen relationships with my closest friends. I wall off blocks of time for my hobbies so that I can get into that flow state with them, and I do everything I can to encourage a flow state when I’m working.

If I feel content and joyful about many areas of my life, a little bit of discontent elsewhere flows right under the bridge.

Extract as much joy from anticipation as possible. As I mentioned earlier, I go to a bookstore about once every three weeks. It’s a ritual that I enjoy deeply – browsing the shelves, finding so many that I want to read and own and leave on my bedside table for a while, smelling fresh print on a page and the sawdust-like aroma of a new book, holding a book in my hand as I leave the store and knowing I’ll be reading it soon.

A few days before I go, I start thinking about it. I start anticipating that visit.

I used to think that the anticipation was terrible. I just wanted to cut to the chase and jump ahead to the pleasure of the event itself. I was so impatient before Christmas when I was younger, for example.

Now, I’ve come to realize that the anticipation is half of the fun. The simple act of thinking about going to the bookstore soon lifts my mood. I’ll think about particular titles that I’ll look for, or what type of book I’m wanting to read next. I’ll wonder whether they’ll have any of that good, free coffee available.

Those thoughts flutter through my head for days and they consistently lift my mood. Sure, if I let it go on too long, I might get frustrated, but what I usually do is wait until just about the time when the anticipation might turn and then I’ll go. For me, that’s usually three or four days.

In other words, I milk anticipation for joy, not just the event itself. As soon as unfulfilled anticipation begins to turn into a sense of frustration or deprivation, that’s when I go, but I’ve usually already made the decision that I’m going to buy the book. I’m just enjoying the anticipation.

I do the same thing with family vacations, when I’m planning them out. I do the same thing with holidays. I do the same thing with Gencon, my one big splurge of the year, which is a giant convention for tabletop gaming that I attend with several old friends. I enjoy the anticipation and let it lift me up, and that lift is very, very good at keeping a sense of deprivation at bay.

Give yourself a “free spending allowance” each month. In the end, though, I do spend money on my hobbies and interests. I do buy books. I do buy board games. I do buy the occasional other item for a hobby or interest of mine.

I don’t feel guilty about it, either. Those things are a big part of why I work. They make me tick.

Instead, I just give myself full permission to spend a certain amount each month. I have a dollar limit for hobby spending, and within that dollar limit, I can spend without question or concern. If I want to buy something really big, I let it build for a few months.

By doing this, I don’t have to feel guilty about indulging occasionally in my hobbies. I don’t have to have a sense of deprivation by choosing not to spend on my hobbies, either. It keeps both a sense of deprivation from underspending and a sense of guilt from overspending at bay. It’s peaceful and joyful instead.

Final Thoughts

The goal of all of these strategies is to encourage people to dig deep into frugality and to cut back on all of the unimportant areas of their life, but to ensure joy and peace in the areas that really do matter. We all work for something – don’t throw away that something or else the entire journey will be undermined.

Good luck!

The post Finding the Line Between Frugality and Deprivation appeared first on The Simple Dollar.

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Monday, January 9, 2017

Questions About Matching Funds, Light Bulbs, Library Book Sales, and More!

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. Roth IRA for down payment?
2. Employer matching funds question
3. Buying short term
4. Free light bulbs cost-effective?
5. Finding quality clothes
6. Goal rewards and financial success
7. “52 week money challenge” question
8. Library book sale strategy
9. Why Roth IRA?
10. Old photo albums
11. Children early or late
12. Goals for 2017

One of the challenging parts of being a parent is watching nice familiar routines with your children slowly fall away as they get older.

Our youngest child used to love to climb into our bed at about 6 in the morning and doze between Sarah and myself for about an hour. He did this for years and years. It was kind of fun waking up next to the little guy and either whispering with him for a bit if he was awake or covering him up if he was still asleep.

Over the last few months, that little routine has faded away. He just simply grew out of it.

There are times when you finally figure out the routines and thoughts and patterns of your child, only to find that they’re changing almost as fast as you can figure them out, so those things you’ve just figured out slip right through your fingers.

I now understand why sometimes, when I was younger, my parents would make guesses regarding what I would enjoy and undershoot my age, buying me things or doing things for me that I felt were “baby-ish.” They loved me and they were doing something for me that I would have absolutely flipped over not very long before, but I was growing up.

Now that I’m on the other end of it, I see how slippery it can be, as your children grow and their interests and passions change. I want to be aware of who they are now and not get it mixed up with who they were six months ago, to the absolute best of my ability.

It can be really hard to watch your children grow up.

Q1: Roth IRA for down payment?

In 2014, my then-fiance and I both received raises due to new jobs. We wanted to save the extra funds rather than spend them, and we already had emergency funds, personal savings, and were contributing significantly to our 401ks, so we both chose to open Roth IRAs. Later that year we married, and while we realized we failed to consider our future high joint income when opening our Roth IRAs, I assumed it would still take us several years to exceed the Roth IRA joint income contribution limit. However, we have been very fortunate in our careers and our Roth IRAs were only open for 2 years before our joint income prohibited us from contributing to them further. Our Roth IRA accounts only have about $9500 each and are now just sitting there. Today, we have an emergency fund, a car replacement fund, my husband is maxing out his 401k contributions and I am contributing 16% of my salary to mine, so I feel we are in good shape financially now and will meet our retirement goals later.

In a few months, we will pay off the last of my husband’s six figure student loan (making us debt free), and our next plan is to redirect the money we used to spend on loans to save a 20% down payment for our first home, which in our neighborhood will likely take a few years. I’ve noticed that there is an option for first time homebuyers with Roth IRAs more than 5 years old to use the money towards a down payment without any kind of penalty. I am 31 and my husband is 39; while I know that our Roth IRAs will grow over the next 20-30 years, I wonder whether the growth will be that significant with the sums being so low and without our being able to contribute to them further. In this scenario, might it make sense for us to consider including our Roth IRAs as we save for our down payment for our first home? Or should we leave them alone?
– Melanie

Ordinarily, it’s a poor idea to use retirement savings for other purposes. However, in your situation, you’re saving a lot for retirement outside of your Roth IRAs, which is a great thing.

Obviously, the best overall move would be to leave the Roth IRA alone, save even harder, and get the 20% on your own without tapping the Roth so you can use it in retirement. What you’re really weighing is whether or not it makes sense to empty out your Roth IRA contributions now so that you can get into a house a year or so earlier than you otherwise would.

Since you already have retirement savings well in hand and the amount in your Roth is relatively small compared to what you should be building in your 401(k) plans, I think using your Roth contributions is a completely reasonable idea. It’s not something I would do unless I were contributing a lot to retirement in other forms, which you are.

Q2: Employer matching funds question

I left a job a couple of months ago at a large corporation where we had an amazing 401k plan through Fidelity. I took a job at a small company of eight people and they also offer a 401k plan. Unfortunately, the options seem terrible. The plan is through American Funds and no available investment has an expense ratio below 1.38%. I used to max out my 401k and my Roth, but now it doesn’t seem worth it to continue maxing out the 401k. I should also mention that the new company matches up to 4% of my contributions. Do I just put in enough for the match, continue maxing out my Roth, and invest the rest in a taxed fund through Vanguard? I’d probably want to do a Target Date fund if I did invest in the new 401k, but that has a ratio of 1.54%.
– Marcus

Even with the terrible expense ratio, it’s still worth your while to get the matching funds from your employer. That’s still free money on the table.

As I pointed out in an earlier article, over a period of 40 years, a 1.5% expense ratio will devour about a third of your overall investment. However, if you get matching funds on your investment, that effectively doubles it right off the bat. That more than makes up for it.

Imagine, if you will, that you have a dollar to invest. You can invest it in an investment with no expense ratio, or you can double it immediately putting it in a 1.5% expense ratio investment. After 40 years, you’ll still have about 25% more in the 1.5% expense ratio investment than you would in the zero expense ratio investment, just because that initial matching is so good.

I’d contribute up to the match, but not a penny more.

Q3: Buying short term

I will be soon relocating for work to Raleigh, NC. I am interested in purchasing a row house/condo instead of renting. This is mainly due to being able to buy a nicer place for a lower mortgage than I could afford to rent and because I like the idea of paying into equity.

I could put down a 13% down payment on a $150,000 condo but would aim to find something closer to $125,000. I know that if I stay there more than 7 years this is likely a good move, but what if I am relocated for work? There would be a significant chance that I need to move in the next 2 years to move up. Would relocation benefits make it worth it?
– Anna

It is almost never worth your time or money to buy if you’re going to move in two years. Your property will rarely gain much value and you’ll have to pay costs on both the purchase and the sale, along with two years of property taxes and insurance, without gaining much equity. The cost per month for that is almost always going to be higher than renting.

You’re absolutely correct, though, in observing that the equation changes if you stretch it out to seven years or so. It’s those years when you’re just making a mortgage payment like clockwork and are slowly contributing more and more to the principal of the mortgage over time that you begin to build equity and the value of buying a home comes to the forefront.

Over a two year period, the time and expense of both buying and selling are so crushed together that they smother any potential equity growth that comes in those two years. I wouldn’t do it if there’s a strong chance you’re going to move in two years.

Q4: Free light bulbs cost-effective?

A friend of mine saw on some television show that you should remove all incandescent bulbs from your home and replace them with LED bulbs. She did this and then gave me all of her old incandescents. I’ve been switching to LED bulbs as each incandescent burns out. Is it cost effective for me to use these free incandescents?
– Chloe

Let’s assume that the bulbs you received are halfway through their lifespan on average and have 500 hours of use left. Let’s also assume that they’re all 60 watt bulbs, and that the equivalent LED bulb is 12 watt (which is roughly accurate). Over those 500 hours of use, your incandescent bulb is going to use 30,000 watts of power, or 30 kW. With electricity prices around $0.13 per kilowatt-hour, it’ll cost you $3.90 to power that incandescent over those 500 hours. In comparison, the LED bulb will use about 6 kW of power, which will cost you $0.78 to power it.

Even with the bulb being free, it’s actually not cost-effective to stick it in your socket.

What about the environmental concern of throwing away a bulb? It depends a lot on what’s producing the power that goes to your light socket. If it comes from a typical coal plant, you’re burning coal in order to use that extra energy if you put the incandescent bulb in the socket and use it, and it’s still going to wind up in the trash.

I’d not bother with the free bulbs. They’re not going to be cost-effective and you’ll still need to get new bulbs before too long.

Is it a good idea to run through your home and replace all incandescents with LEDs? If you do everything all at once, it can save you both a little time and a little money over the long run.

Q5: Finding quality clothes

How exactly do you tell if an article of clothing is well made or not? Are there things you can look for? I go to clothing sales sometimes but can’t tell what’s worthwhile.
– Sam

There are a LOT of things you can look for. For starters, if it feels flimsy or fragile or that it could tear easily, avoid it. You should never be able to see through a fabric, ever. Make sure there is no polyester or acrylic in the fabric, as that stuff wears out faster than a shaggy dog joke. Look for any sign of threads hanging loose from seams or any snags that you can notice and avoid all of that.

You can get a little information from where the item is made. Generally, items made in the US and European nations are usually pretty well made, as are items from South America (Peru is often an origin of well made clothes). Items made in China are very much a mixed bag – that isn’t a sign of cheapness in itself, but can appear on cheap items. Items made in South Asia are usually made as cheaply as possible and best avoided; those nations tend to have labor practices that encourage sweatshop labor and extremely rushed production to get items out as cheaply as possible and with quality to match.

This really could be a post all on its own, but those guidelines alone should help.

Q6: Goal rewards and financial success

My husband and I are trying to lose weight in 2017. We have agreed that if we both meet our weight loss goals, we’re going on a trip we’ve talked about for a long time. We will book it on the day we both reach our goal. My concern is whether or not we can really afford going to a resort in Jamaica. It is an amazing carrot out in front of us but the cost of it is intimidating. Should we be using a different “reward” for achieving our goal?
– Sammi

There’s nothing wrong with using this goal as your “carrot” to encourage you to make healthier choices.

The thing to remember is that once you reach your goal, there is nothing forcing you to book that trip. You can decide then and there whether or not it makes sense for you to actually go on that trip to Jamaica. You may decide that it doesn’t make sense and instead substitute a different weekend getaway or some other reward, or entirely forego the reward.

You haven’t invested that money yet. I don’t think there’s anything particularly wrong with having that kind of a dream. The only concern I’d have is what you do when it comes time to actually put the money down.

Q7: “52 week money challenge” question

A lot of my Facebook friends have been sharing a 52 week money challenge the last few days. If you haven’t seen it, it’s a chart that helps you save $1,378 over the course of a year. The first week you save $1, then the next week you save $2, and then so on so that the last week you save $52. That adds up to $1378.

Does this really work? I know the numbers add up but it seems to me that you get into June or July and you’re putting away $40 a week or whatever and you’re still a LONG way from your goal and you’ll just quit. It’s like a weight loss goal except the effort required keeps going up.
– Emily

This question pops up every once in a while, usually around the turn of the calendar year.

The “52 week money challenge,” as you describe so well above, actually does work. If you follow along with it, you will wind up with $1,378 in the bank. The problem, as Emily so astutely points out, is that the big contributions occur later in the program. It’s easy to put away $1 or $2 early on when you’re excited. It’s much harder to put away $38 in the middle of August when you have lots of other things going on, you’re not as excited, and the goal seems very far away still.

I offer a different suggestion. Instead of just following that plan week after week, at the end of each week, choose one of the dollar amounts and put that much in your savings. During a week where you have plenty of money left over and you’re really excited, put away $50 or $52 and knock off one of the big numbers. On a week where things are challenging, save $1 or $2 or $5. Whatever number you choose, put that money into savings and cross off that line on the challenge.

That way, you can get rid of some of the big numbers now when the enthusiasm is strong and then later when things are tougher, you can contribute a small number and still be sticking with the challenge.

Q8: Library book sale strategy

My local library has what they call a “progressive” book sale of donated books and books they no longer want. It goes over four nights. On the first night, it costs $2 to get in and all books cost $2. The second night, it’s free to get in and all books cost $2. The third night, it’s free to get in and all books cost $0.50. The last night, it costs $1 to get in, you bring canvas bags with you, and a canvas bag full of books costs $1, and you can bring as many bags as you want. Later nights are obviously cheaper per book but they’e picked over. What do you think is the “bang for the buck” night?
– Thom

First of all, do you have any idea of what books might be on sale? If the sales look good and you can see yourself buying several books that might be in demand, you should go on the first night. If you see yourself buying just a book or two but there are lots you might buy, go the second night. I would probably skip the third night unless I was the first person in the door. If you want to pick up lots of books to read and many of the ones you want aren’t ones you think will be in demand, go the last night.

Given that I’m a big fan of local libraries and I’m also a voracious reader, I’d want to support my library. I would personally go on the first night and try to buy five books or so, spending $10 or so, then I might go back on the last night and fill up one or two bags with books of moderate interest, spending $2 or $3.

Our local library has a similar sale, actually, and almost every day is crowded. I think the different price levels attract different people.

Q9: Why Roth IRA?

If you think your tax rate now is higher than what it will be in retirement why would you ever use a Roth IRA? I make more money now than I think I will ever bring in retirement. So paying taxes now to avoid them later seems silly.
– Derek

There are a number of reasons.

First, no one knows what will happen to tax rates in the future. Everyone seems to forget that current tax rates are very close to post-World War II historic lows. Especially during the 1950s, 1960s, and 1970s, income taxes were far higher than they are now. We’re also in substantial debt and the baby boomers are leaving the workforce. It is completely reasonable to think that tax rates will go up in the future, and that’s one of the big protections that a Roth offers.

Second, an avid retirement saver might end up with as much income in retirement as they have while they’re working. Sarah and I anticipate very little change in income when we retire, for example.

Third, and finally, Roth IRA contributions can be used for other purposes. Once the money has been in place for five years, you can use your contributions for anything (you just can’t touch the growth without penalty). You can’t touch anything within a 401(k) without penalty. This makes a Roth a lot more flexible as a savings vehicle.

It has a lot more to do with your assumptions about the future than anything else. That’s why I encourage most people to balance Roth and non-Roth retirement savings.

Q10: Old photo albums

Do you know of a cost effective way to digitize old photo albums? My mom has a bunch of old family photo albums many inherited from grandma and we want to preserve all of this stuff digitally. But every time we are quoted a price it seems astronomical. HELP!
– Nina

This is another question that I get somewhat regularly.

The truth is that digitizing photos is simply an expensive process if you want it done with any quality. There’s no way around it. It takes a lot of time and some equipment to scan each photo, touch them up at least a little, keep them all organized, save them properly, and return all of the original materials to you. There is no way to do that cheaply. There is equipment to scan large quantities of photos very quickly, but the industrial sized equipment is way more expensive.

If cost really is prohibitive for you, the best option you have is to get a low cost scanner and start scanning them yourself into your home computer. This will take a lot of time, but once you figure it out, it’s pretty easy to do it, so easy that you can do it while doing other things on your computer. Scan 10 pictures while you’re checking websites or 15 while you’re answering email and soon you’re through thousands of them. Just make sure you back them all up somewhere. I recommend using an external hard drive for backup or a cloud service like Dropbox or Carbonite.

Q11: Children early or late

Is it better to have children early in life (early 20s) or later? In terms of career, cost, ease of parenting, etc.?
– Penny

I’m glad that we had our children in our late twenties and early thirties. It felt like the right time for us. We had time to finish our education and get a career started before we had children, but we also didn’t wait so long that risks like birth defects or aging became a factor.

Honestly, though, I think it has a lot more to do with when you’re ready than any markers put in place by anyone else. You’ll know. If the thought of parenthood sounds terrible or scary, then you’re not ready to do it and shouldn’t do it. If it sounds far more exciting and fulfilling than anything else and you’re really looking forward to it, then you’re ready.

Don’t let anyone push you into having kids if you’re not ready to have them. You will regret it forever. Make the choice on your own terms, period.

Q12: Goals for 2017

What are your goals for 2017? You usually write a “goals” post but I didn’t see one this year!
– Tim

I have two goals for 2017.

The first is to track my calories carefully for the entire year. If I put something in my mouth, I have to record the calories first. I don’t have any weight loss goals or anything, but I think it will inevitably happen as I become more aware of the caloric content of my typical meals and the foods I commonly eat.

The second is to launch a Youtube channel I’ve been planning for a while. I want to get a lot of videos in the can before I launch it, though, so I’m actually just making videos, establishing something of a routine for making them, and posting them privately to Youtube so I can begin making them public later on.

I feel good about both goals so far!

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 Matching Funds, Light Bulbs, Library Book Sales, and More! appeared first on The Simple Dollar.

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