Saturday, March 11, 2017

How to Write a Great Simple Business Plan for a Small Side Business

Several weeks ago, I wrote an article on starting a side business as part of my larger 31 Days to Financial Independence series. In that article, I advocated strongly for writing a business plan for even a small little side gig:

“Develop a real business plan for each idea. Take each of those three ideas and flesh them out into a business plan. This seems like a painful formal process to many, but there’s a very good reason for making a business plan: it helps you see the potential problems in your idea before you start running with it, which means you can think of ways to get around those problems so that you’re more likely to have success right off the bat. […]

I did this with The Simple Dollar (back then, I used a business plan book from the library rather than [the] great SBA resources that exist today) and with many other small businesses I’ve dabbled in. The process of writing such a plan has almost always helped me see obstacles and helped me figure out how to deal with them before they become disasters that I’ve invested many hours in. I’ve walked away from many ideas after writing a business plan, and for good reason – they would have turned into black holes of time and money, slurping away all of those resources and giving me little in return.

Once you’ve written up a business plan using these ideas, pass them around to some trusted family members or friends or mentors. Send each one to a few people and get their feedback. Send them to people you trust and whose advice you trust and take their comments seriously. They might be really negative on an idea that you think is great, but rather than just brushing it off as “jealousy” or something, stop and listen to what they’re saying. Often, the good people in your life are critical of something you’re doing for a reason – they may be seeing something you’re not seeing due to your own blind spots.

Often, this can turn into a feedback cycle, where people give you comments, you improve the business plan, and then you send it to people for a second reading or to new people for a fresh reading. The goal is to develop a plan as well as you can so that you have a strong plan going forward when you start.”

This section seems to have touched on the imagination of quite a few readers, several of whom sent in feedback wanting to know more about writing a plan for a small side gig. A couple of readers even sent in business plans for their side gig for me to look at.

The clear consensus among these readers is that they saw the value of the idea of a business plan for their side gig, but that they wanted more guidance. What should they include? What should they be thinking about? I wrote a few personal responses, but then I quickly realized that it made more sense to put together all of the information in one single article to share with everyone.

What follows is a guide to assembling a business plan for a small side business. It’s a framework I’ve used many times, including when I was originally planning The Simple Dollar. The value in writing such a plan is that it forces you to think about these issues before you even start so that you don’t throw yourself into a plan that’s doomed to fail. Remember the goal of a small side business: it’s all about creating another revenue stream for you, giving you more income while you still have a main career and possibly giving you something to fall back on if you decide to move away from that main career.

First, we need to cover a few ground floor assumptions.

By its very nature, a small side business is one that doesn’t require a lot of initial funding. Whatever funding is required initially is something you’re investing out of pocket.

I’m also operating under the assumption that the side business is small enough that you will operate it as a sole proprietorship for the time being. This is what people tend to do when they’re tinkering around with solo side business ideas; when something seems to be promising, then they put a business structure around it. If you’re reaching the point where something more robust is in order, you should take a serious look at the business planning resources available from the Small Business Administration, which will guide you through the steps of actually setting up a proper business structure for your activities.

This guide is intended for people with a small idea that they can execute on their own without any outside investment and in their spare time – things like starting a Youtube channel, making jewelry or artwork to sell on Etsy, or writing a book. The reason for making a plan for this is to eliminate potential roadblocks up front and thus increase the chances that this microbusiness will grow to a point where you should start considering a full business structure, outside investment, loans, and so forth.

Ready? Let’s dig in.

The basic framework
A business plan is simply a document that outlines what you intend to do to make your business succeed over the next three to five years. It looks at potential obstacles in your path and helps you think through solutions to overcome them now so that you’re prepared for them when they arrive.

A business plan is not a guarantee of success. What it does instead is increases the chances for success to occur. You have a greater likelihood of having a hit on your hands if you created a business plan up front.

A business plan is actually just the formalization of a lot of healthy thinking about your business ideas before you start sinking a lot of time and energy (and potentially money) into it.

Remember, with a business plan for a side business, your focus is primarily on turning spare time and energy into money. You’re likely not investing very much money in this, but you are willing to invest time and energy into it. Because of that, most side businesses tend to involve a significant period of very slow and small growth until that cumulative time and effort begins to bring benefits. Keep that in mind as you plan.

So, what basic ingredients should you have in your business plan?

A summary should be a one page description of your overall business plan, condensing everything down into one page. This should be the first “real” page of your plan (you may want to have a title page and a table of contents first, particularly when you start sharing it with others for review.)

A market analysis should include a serious look at who your customers might be, who’s already serving them, and what gaps are available to you in that market. What are you going to provide that isn’t already being provided to your potential customers? Who are those customers? Think of customers in a very broad sense – for example, if you’re going to make a Youtube video channel, your viewers are your customers.

Service or products should include whatever it is you intend to make and sell or whatever service it is that you intend to provide. What exactly are you going to make or offer? What features does it have that makes it distinct? How do those features meet the unmet needs of customers as identified in the market analysis? What is the cost to you to produce this product or service and what will you be charging for it? Remember, starting a business of any size is a waste of your time if you’re not creating something that meets a real unmet need in the customers you want to serve.

Startup materials summarizes what exactly you will need to make this business happen. For a microbusiness, you likely already have most of those materials, but you should still include them here. Assume you have nothing – what do you need to make this business happen? Where will you be acquiring those things?

Organization is basically a description of the time and energy you’re going to put into making this a reality. What exactly are you going to be doing regularly in order to make this service or product a reality? Are you going to be spending three evenings a week on it? One full weekend day each week? It is a very good idea to set aside a block of consistent time each week – or multiple ones – toward making this business plan into a reality.

Marketing (and sales, if needed) is pretty straightforward, at least on the surface. You have identified customers with a particular need. You have identified something you can make that will meet that need. Now, how do you make those customers aware of your product or service? Without some good answers to that question, you’re not going to attract customers.

I honestly recommend starting a Google document for this business plan so that you can access it easily from anywhere and add ideas from anywhere as they occur to you. Remember, one of the main values of a plan like this is as a tool to collect your thoughts and organize them into something sensible, which is very likely to increase your odds of success.

Market analysis
This section really boils down to three questions. Who and where are your customers? What needs or desires do they have that aren’t being fulfilled? What will they give to have those needs or desires fulfilled? In answering them, more information is good, particularly when that information is based on actual data and conversations with potential customers. Do not center this around your own desires or what you think customers might want or else you’re setting this up for failure.

The first step, then, is finding your customers. Who are they? Who are the people you’re hoping to target? Where are they? Where do they spend their time? Do they have time or money available to spend on your product or service?

The next step is to look at the needs that these customers have that aren’t being fulfilled right now. What are they looking for that they’re not finding? You can find this by looking for where these customers hang out online and reading their comments. What things are they talking about that aren’t being fulfilled? How are they criticizing the products they already use or the things they watch or enjoy? Is anyone fulfilling that need?

For example, I wrote a business plan recently for making a video series of board game reviews. In doing customer research, I went to where potential viewers hung out and looked for the things they said that were missing from review videos. What things did they want to see that no one was really doing? Those comments provided the backbone of my plans for the videos.

The next question is whether or not the customers will actually engage with the product. Would they watch videos like this? Would they read books like this? Would they buy these products? Would they listen to this podcast? The best way to figure this out is to talk to customers. Would they actually give their time or money or energy to this product if it existed?

Services or products
You’ve identified something that people want that they’d be willing to devote their time and energy toward. The question is how you’re going to fulfill that need. What are you going to make that matches up with that need?

This is where you sketch out your actual product in detail. What are you going to make? What would individual items look like? How would you actually make that product? The more detail you go into here, the better.

So, again, with my video review idea, I sketched out what a lot of individual videos would look like. I identified a review system that I would use, laid out the contents of a typical review video, and made sure to highlight which bits were really distinctive and potentially of real interest to the customers identified in the market research section.

The focus here is on the end product that you’re going to create. Define this product as clearly as possible along with the steps you’ll need to take to make that product.

Startup materials
Naturally, you’ll probably need some things to make that production happen. Even for virtual things, you’ll still need a computer and a digital camera of some kind and likely some kind of internet connection. For other things, you’ll definitely need more things.

Think through this carefully. What do you actually need to make this product? Assume you have nothing at all. What’s needed to move from nothing to the finished product you want?

Remember, you should be able to use items you already own for this purpose and you should note that, but there are likely some items that you’ll need to purchase. Make sure that the expense is low – after all, this is intended as a side business with no outside investment. If the expense is in any way a challenge to you, you may want to rethink things and perhaps define a simpler initial product without as much startup expense.

The organization section should define your workflow. What are you going to be doing each day in order to make this product a success? What are the steps in creating each product? What time are you setting aside regularly to make this happen?

For a larger business, the organization section is more about figuring out roles for various people and outlining what their roles would be like, but in a side gig, you’re the only person involved and you’re filling all roles, so the organization section is all about thinking about the work that needs to be done, how you’re going to do it, and how you’re going to find the time and energy to do it.

Don’t be afraid to consider a point in the future where you may need some assistance with the business, but that shouldn’t be the focus. The focus should be on how you are going to get the products made in the short term.

The marketing section is all about making sure that your target customers actually hear about your product in a way that won’t alienate them right off the bat. Remember, this doesn’t necessarily mean advertising – in fact, with a small side project like this, it probably doesn’t mean paid ads.

Instead, you should focus on things like becoming a part of a community of fans or people with shared interests and sharing what you made when the opportunity sensibly presents itself. Almost all communities resent it when someone from outside comes in and pushes their new thing or even if a regular member incessantly pushes something, but if it’s from a regular member who has consistently provided good input, a little self-promotion is usually welcomed and even celebrated a little bit.

This is a great way for you to get your product known to customers. Get deeply involved in communities where your customers reside. Be a helpful, positive member of those communities. When you have a good product, share it, but do it in a context that’s actually meaningful to the members of the community and serves an actual purpose, like responding to a question or adding a resource to a collection of resources, rather than pushing that product on its own. A single announcement is fine, but you can create backlash if you overdo it.

Finishing up the plan
When you have all of these sections written, write the summary, which basically sums up each section in a single short paragraph so that the summary of the whole thing fits on one page and put that at the front.

Then… let it sit. Just save it and don’t think about it for a week or two. Don’t even look at it.

After that time, open it up and start editing it. Clarify things that are unclear. Fix up any big flaws in your thinking that are now apparent because you gave it some time to rest. Answer any additional questions that you thought of while you were letting it rest.

You may find that doing this in a few cycles is really useful. More importantly, you’ll probably feel your plans getting better and stronger, and the better and stronger the plans, the more likely those plans will result in success.

The feedback loop
Once you’re happy with your plan, take that plan to a trusted mentor or friend, someone who you trust deeply and will respect what they have to say, even if it’s critical. Ask them to read the plan and give you any feedback they might have. You can “repay” them by taking them out to lunch and hearing their critiques there or finding some other small way of thanking them, especially when they provide extended feedback.

This may turn into a feedback loop. You may end up going back into your own cycle of revisions to improve things as you think about their feedback. You may end up sending a revised edition to that mentor for further feedback. You may end up taking a revised plan to a second mentor.

The goal of all of this is the same: you’re trying to identify as many flaws in your plan as you can before you start so that you don’t get sidelined by those flaws later on. The more effort you put in here, the greater your chances for success.

Trust your gut, though. There will come a point where the plan is pretty good, both in your eyes and in the eyes of the people who review it. When that happens, it’s time to launch and get the process started. Go put that plan to good use and start earning a healthy side income!

Final thoughts
Let’s be clear: this process takes a while. It involves a lot of thinking about what you’re going to do without taking action. Many people don’t want to invest that time.

Those people have a much higher rate of failure. They throw time and effort and money down dead end streets. They spin their wheels and never really achieve the things they want to achieve. Why? They didn’t think first.

Abraham Lincoln once said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Writing a business plan is the “sharpening the axe” part of the equation. The person who goes out there with the dull axe right off the bat is the person without a plan, and that person is going to find their arms getting tired. They’re going to be frustrated by their lack of progress. They’re going to get blisters. And they’re going to quit.

Sharpen your axe first by writing a plan and every move you make based on that plan will have a real impact that will move you forward.

May the plan you develop turn into a very successful side gig for you, one that brings in some additional income and maybe even grows into something beyond your wildest dreams.

Good luck!

The post How to Write a Great Simple Business Plan for a Small Side Business appeared first on The Simple Dollar.

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Friday, March 10, 2017

The Observer Effect and Your Money

Recently, I’ve been trying to carefully track my working time in order to get some sense as to how I spend my time, what times of the day I focus best, and so on. The goal is to make my work as efficient as possible.

What I’ve found, though, is that the simple act of tracking my time is actually causing me to be significantly more efficient in my work. Since I know that I’m tracking my work, I have this subtle tendency to be on my “best behavior” regarding work.

This phenomenon is known in physics as the observer effect, something that’s familiar to anyone who’s taken a high school physics class or even anyone who has checked the pressure in a car tire. Here’s Wikipedia’s summary of the observer effect:

“In physics, the term observer effect refers to changes that the act of observation will make on a phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner. A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure.”

This effect is also known as the Hawthorne effect, particularly when applied outside of the field of physics, which I mentioned briefly in a similar context several years ago.

It doesn’t take much of a leap of the imagination to see how the observer effect shows up pretty strongly in personal finance. In fact, we can actually use the observer effect to great benefit.

Imagine, if you will, that you have some piece of software that records every transaction you make and then, once every day or two, you have to go in and mark each transaction as “read,” to show that you reviewed it, akin to how you read your email. You’d not only want the number of transactions to be nice and low, but you’d probably also not want to look at really wasteful transactions. The idea that you’re “observing” your transactions adds another little element to the decision to buy and provides some pushback.

This exact thing happens for anyone who uses a software package like You Need a Budget. I’ve felt that “observer effect” myself when using it.

That effect is even stronger when you’re manually recording your expenses in a pocket notebook. I really don’t like writing down silly expenses in my pocket notebook. In fact, I try my best to completely avoid doing so, and I’m not alone in doing it. The same thing is true for any journal that records your behavior; if you’re keeping track of what you eat, fore example, there’s real resistance to writing down that you just knocked back a pint of Ben & Jerry’s which can guide you instead to just eat a little or eat something else entirely.

This is why careful logging of your actions is a vital part of turning around any negative life habit, but it works particularly well for personal finance. The simple act of having to write down every mis-step keeps you from making as many mis-steps. The data from such a log is still useful as a record of what you’ve done, but the act of creating the log pushes you in the direction of good behavior.

Here are some specific ways to make this “observer effect” work well for you.

The first, of course, is to write down each and every expense in a pocket notebook. If you spend a dime, write it down in the notebook. It doesn’t matter how big or small the expense is, it should be written down in that notebook. If you get a receipt for a bunch of items at once – like a grocery receipt – you can just slip that receipt into the notebook, though writing down each item can be really powerful, too.

I highly recommend writing down not only the item itself, but where it was purchased and what it cost, including tax. That way, as you’re looking back through it, you can not only see what it was that you bought, but where you bought it and how much you paid for it.

If you feel resistance in terms of writing things down in that notebook, use that as a sign that’s telling you that the item you’re about to buy is not a good use of your money. If you dread the thought of writing down an expense and then having to see it again later, that’s almost always because you know on some fundamental level that the expense isn’t a smart one and that you should be doing something else with your money. The resistance is your guide; it’s a way of translating a questionable purchasing decision into another action that really shows you when you’re making a mistake.

Once every day or two, then, review the recent entries in that notebook. For each entry, ask yourself whether this purchase still makes sense. Was it a good choice? Could I have done something better with my money (and time)? Was there a more efficient way to achieve the same ends?

Don’t be afraid to recognize that you didn’t make the best decision in the moment. We all do that. I do it all the time. The value here is that you see that you didn’t make the best decision and that you see a better decision that you could have made, something that you know you can do going forward. The big “win” is that you’re starting to shape a better instinct and life pattern for yourself, one that pops up when that situation or something similar to it occurs again. That’s a good thing.

The value of the “observer effect” doesn’t fall away after just that quick review a day or two later, either. You can take all of your spending logs and use them later down the road to get a broader view of your spending.

So, for example, at the end of the month, you might take all of your spending logs and categorize all of the expenses, sorting everything into neat categories that you can evaluate separately. How much did you spend on tea? How much did you spend on scrapbooking supplies? How much did you spend on meals at restaurants?

That broader observation can actually be pretty powerful, too, in terms of creating an “observer effect” in your daily living. Knowing that this kind of broad review is coming can push you toward thinking about your spending in a full category over a period of time. If you’ve bought tea four times this month, do you really want to buy more and see that total amount spent on tea reach ridiculous heights? If you’ve gone to restaurants several times this month, do you really want to toss another one on the list and see that restaurant total add up to a number you’re really uncomfortable with? This is that same observer effect, just pulled out to a broader scale.

I find the “observer effect” to be really valuable for any habit I’m trying to establish, whether it’s finance related or not. If I’m trying to get in shape, for example, I’ll track my step count or the number of days in which I do a Darebee routine, and I don’t like recording low step count numbers or not marking off days of exercise. Near the end of a month, I push myself to really get that step count up so I have a number I can be proud of and I find myself pushing really hard not to miss a day of exercise. I use it to encourage myself to read by keeping a “reading log” and I feel good when I add books to that log, so having that log – which definitely counts as observing – often becomes a subtle nudge for me to read more to make sure I can keep adding books to that log.

How can you get started? The easiest way is to just start carrying a pocket notebook and a pen or pencil with you in your pocket everywhere you go, then jot down every time you do a particular thing – spending any money at all is a really good one for personal finance. Review it once or twice a day just to make sure you really are writing everything down. Then, once every few days, review that notebook. Go through every entry and make sure it’s something that makes sense and that you’re proud of. Ask yourself if there was a better way to achieve the goal of that entry. Then, once a month or so, tabulate the results, look for patterns, and see if those patterns are telling you anything.

This simple technique takes the observer effect and puts it to work for you. It will encourage you to make better decisions in the moment about your spending or about whatever habit it is that you’re trying to improve. Good luck!

The post The Observer Effect and Your Money appeared first on The Simple Dollar.

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Thursday, March 9, 2017

31 Days to Financial Independence (Day 30): Getting Your Family and Friends on the Same Page

“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 looked at what you can do when your goals change, even in the midst of working toward a major personal finance target. Today, we’re going to look at a much different but also incredibly vital part of personal finance change: getting your family and friends on board.

Up to this point in the series, we’ve mostly treated personal finance change as something that a person can choose for themselves in a bubble. However, anyone who is in a long-standing relationship or has children – or even anyone with a tight-knit social circle – knows that such choices have an additional social impact. Your choices do involve the people around you and they’re not always going to be fully on board with the changes you’ve decided upon for yourself.

If you’re single, you have a bit of an advantage when it comes to making major life changes. You don’t have anyone in your life that’s directly dependent upon you other than yourself. Your major financial initiatives don’t alter anyone’s life other than your own. The biggest impact that others will have on you come from your extended family and your social network, and although there are certainly challenges in those areas (which we’ll discuss near the end of the post), you do get to skip over one major area of personal finance challenge.

On the other hand, people in long-term committed relationships face quite a different challenge when it comes to fixing their finances. Almost always, their individual personal finance choices are deeply connected to the personal finance choices of their partner. If a person has children, the personal finance choices of the parent often impacts the child as well; though children are a more passive part of the equation, they are still a significant consideration.

The challenge, of course, is that your partner and your children might not instantly be on the board with major changes in spending habits, even if it’s something that you’re deeply excited about at the moment. Different people have different financial goals and desires and even if you deeply love those people they form a core part of your life, that doesn’t mean that they will instantly share your changing financial goals.

How do you resolve these concerns? Let’s take a look.

Exercise #30 – Getting Family and Friends on Board with Your Money Changes

If you’re reading this, it’s very likely that the financial principles you now hold in your heart are different than the ones that your friends and family abide by. Those differences will manifest themselves in many ways, some big and obvious and others small and subtle. The biggest factor is how big of a stakeholder those people are in your decision, which basically adds up to how much you value that relationship and how big the differences are in your financial perspectives.

First and foremost, compromise is likely going to be a part of balancing your financial changes with your personal relationships. No matter how excited you are about personal finance, no matter how confident and sure you are about your financial path going forward, you are not the only stakeholder in your life and to respond to the uncertainty of others as if they have no input whatsoever will damage a lot of relationships. This is particularly true with your partner, but it remains true to a smaller extent with your children, social circle, and extended family. You can’t expect everyone to come to you; you have to meet in the middle, at least a little.

Let’s look at four classes of relationships and how your financial changes will impact each of them.

Your Spouse/Partner

If you’re in a long-term committed relationship, this relationship is undoubtedly the one in your life that will be most impacted by changes in your financial mindset. It’s also, for many people, the single most important relationship in their lives, the one that matters above all others. Thus, whenever you find your values changing, you’re opening the door to potential conflict in the most important relationship in your life. That’s something that needs to be handled with extreme care.

The first and most important tool you have in your relationship when one of you is changing in some way is communication. You need to sit down together and talk face-to-face about these changes, because when one of you is changing in some significant way, that changes the dynamics of the relationship and, often, the dynamics of the household.

This can be a difficult conversation, and it’s often the start of a long series of conversations about how your change in financial perspective affects other aspects of your lives – your spending choices, your career choices, and so forth. Talk about all of these things, openly and without fear. Explain where you’re coming from, but at the same time, listen to where your partner is coming from, too. Listening doesn’t mean just sitting there formulating what you’re going to say next while your partner is saying something that you’re not really paying attention to. It means actually focusing on what your partner is saying and doing your best to put yourself in your partner’s shoes.

Your partner might be on board with this overall change and most of the little changes that it represents. If that’s true, then you have a very easy road ahead of you. Your conversations with each other about money will largely be supportive and positive and the only real conflict will be in resolving minor issues. That’s the “best case.”

However, in many relationships, the two partners have differing views on financial change. Often, you’ll find one partner committed to change while the other partner pays “lip service” but isn’t really committed to changing anything other than the minimum needed to keep their partner happy. In other situations, you’ll find a partner that’s absolutely opposed to the changes and doesn’t want to change their lifestyle at all.

In the first case, where the partner wants to keep you happy but isn’t internally committed to financial change, compromise can be really effective. Your partner will likely agree to some changes that are relatively low impact for him or her while preserving some aspects of his or her current life that are highly valued. That’s compromise. Don’t expect your partner to fully change tons of aspects of his or her life just because you’ve changed your mind; at the same time, your partner shouldn’t expect you to betray what your goals are or what you believe in with regards to all areas of life, either. Find areas where each of you can change things to the way you want them to be.

One valuable compromise that many couples use is the idea of a “free spending account.” It’s a separate checking account for one spouse (though each spouse can have one) where money can be spent freely without question on hobby and entertainment expenses. A certain amount goes into that account each month.

However, if your partner is openly against the idea of financial change, you have a much harder road to travel. Your best strategy is to implement changes that have minimal lifestyle impact, which means you’ll have to step up and take charge of many aspects of household finance. Start making purchasing decisions on behalf of both of you that are smarter ones and then start diligently putting away that saved money for future goals – debt repayment and so on. That means taking over things like grocery shopping and household supply shopping and vacation planning and so on. Bargain hunt for those shared expenses, then put aside the money you saved through that bargain hunting. Implement a lot of low-impact savings strategies around your house, such as switching to LED bulbs and sealing up air leaks in the windows, and then automatically start saving the amount you’ve cut your energy bill with.

You should be able to convince your partner to change somewhat in some areas simply because it’s something that’s important to you, but there will be conflicts as you find that fine line between compromising and demanding.

In the end, communication is still the key here. You have to discuss these things openly without fear of reprisal or attack. If you feel you can’t discuss finances openly with your partner, then there is a deeper relationship problem going on that’s outside of the scope of mere financial issues. Money problems in marriages usually come back to a root problem of being unable to communicate well with each other and without that key communication part, differences can grow and grow until a marriage falls apart.

Your Children

When your children are young, significant financial changes aren’t really going to have a major impact on them. They might notice offhand that they don’t get as many new toys or that you’re not going out as often, but it’s not going to have a major impact on their life.

As children grow older, the impact of your financial changes will be felt more and more. Teenagers and young adults will definitely notice it when you make financial decisions that impact their daily life and, usually, the reaction will be a negative one because it means a reduction in some treat or other element that they value. If your vacations move from luxury to camping, for example, they will probably voice some pushback against that.

My recommended approach is to simply talk to your older children frankly about the changes. Treat them as adults, but also voice the changes in terms of the impact on their lives. You are making these changes so that over the long term there is much less risk of you becoming a financial burden to them later in life. They might not have a fancy vacation right now, but when they’re in their forties, you’re much less likely to have to move in with them or accept financial help from them out of financial need. In other words, make a conscious effort to voice these changes in terms of cost and benefit for your child as well. Your financial change is going to have a short-term cost for them, so what’s the benefit for them?

One big financial change that parents make when their children are adults is to cut off “outpatient financial support.” In other words, you simply stop giving them money to help them “get started” in adulthood. The response to this from your children depends a lot on their maturity and their reliance on that financial stream. If they’ve made smart choices along the way and are not dependent on that money, then this won’t be a problem – they’ve anticipated that this would eventually happen. Some adult children, however, make financial choices that rely on those changes. If that’s the case, give them a deadline when the financial support will stop so they can make necessary changes in their life.

Those conversations might be difficult, but they go right to the source of the one true solution for almost every familial crisis: communication. When you talk freely, openly, and frequently with your loved ones about these issues and make sure that they know you’ll respond to their comments without judgment or negative emotion, it becomes much easier to talk through these problems together. You can even build a stronger relationship through such challenges if communication is healthy.

Your Social Circle

Your financial changes will also have an impact on your social circle, mostly due to the changes that will occur in terms of your social interactions. Things like going out for a night on the town or going out for dinner or going to a movie are suddenly different value propositions for you and may not be “worth it” any more.

So, how do you explain that change to your social friends? You have a number of options.

The easiest option is to simply not explain it at all. If you follow that route, you can simply avoid it by cutting back on your expensive social obligations and suggesting different low-cost obligations. So, for example, you might choose to reduce the number of times that you go out to eat with some of your friends by half and instead replace some of those dinners with potluck dinner parties at your house.

Another option, of course, is to talk openly about it. You’ll probably find this easier in a series of conversations with individual friends or couples. Simply lay out the fact that you’re making some financial changes to your life. You don’t have to directly describe the changes going on, but you’re giving them some context that will explain some of the things you’re doing.

Some of your friends will be fine with this. Others might not be and you may find a bit of distance growing in that friendship, in which case you can either talk frankly with them or accept that change in friendship.

If you find that many of your friends aren’t on board with your changes, you’ll find that changing your financial strategies and spending choices opens the door to many new opportunities for building friendships. For example, my own spending changes as I went through a financial overhaul resulted in spending less time with my previous circle of big-spending friends and more time at lower-cost activities in the community (found via Meetup and the community calendar). I retained some of my earlier friendships, but many of them simply drifted away over time and were replaced with new friendships, a transition that wasn’t all that painful as we didn’t end our friendship and we’re still on good terms.

To summarize, make the changes you need to make and be open to new friendships and social opportunities as you try new things. Your strong social bonds will remain, while the ones that weren’t all that strong to begin with will slowly fade.

Your Extended Family

During a period of financial change, many people with tight-knit extended families struggle with those relationships as well. Those relationships often include conversations about topics that might be more personal than you would expect from friendships or professional relationships and thus you can wind up in some pretty awkward situations when it comes to family occasions.

For those types of families, here are three key pieces of advice.

First, be open about the changes in your behaviors if they come up, but don’t bring them up and don’t talk about dollars and cents specifically. Some of your astute family members may be noticing the personal changes you’re making to achieve your financial goals and they may come up in conversation. Don’t hide those changes, but try your absolute best to not discuss specific dollars and cents with anyone. Just state that you’re trying to spend less money in order to achieve other goals, which brings us to the second piece of advice.

Second, don’t emphasize that these changes are intended to build wealth. You’ll find that people who are perceived to have money in the bank are often targeted by financially struggling family members for help or loans (more on that in a bit). You can avoid a lot of that interaction by couching your financial changes in terms of the goals you hope to achieve with it. You need to clear out debt. You’re thinking of a career change. You’re thinking of having children. Your financial changes are simply steps to make your life ready for other changes.

Finally, don’t loan money to family members. If a family member comes to you for money, either give that person non-financial help in some fashion or give that person a one-time financial gift. You do not want to wind up in a situation where you’re the lender and they’re the borrower, because if anything goes wrong in that lender-borrower relationship, you’ve suddenly poisoned a lot of family events and relationships. It’s not worth it. It’s never worth it.

Remember, these people may be loved ones, but they’re not a part of your day-to-day life and they do not have the right to pass judgment on your decisions (unless you come to them privately for advice because you view that person as a mentor, but that’s a one-on-one relationship that you chose). If they criticize you, just let it roll off your back and remind yourself that they’re passing judgment based on their own financial experiences and choices, not yours. If they want to know specifics, just avoid the conversation because it’s none of their business.

Next time, we’ll wrap up this series with some final thoughts, along with a full directory of all of the entries in the series.

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14 Savings Hacks That Don’t Always Work

Have you ever jumped through hoops to save money, only to find you paid more – or, wasted a bunch of time?

Maybe you misread the terms on a coupon, signed up for a fake or deceptive promotion, or just made a poor decision. Either way, it’s frustrating when you discover your money-saving efforts weren’t worth it, or that you were purposely misled.

Despite the fact I can read and count, I’ve been there more than once. But there’s one incident in particular that still stings.

When my husband and I were first married, we were invited to a cookware presentation with the promise of a free $300 travel coupon. All we had to do was sit through the presentation to earn $300 off travel, they said. And no matter what, we didn’t have to buy anything.

We were young and dumb at the time, so we assumed the $300 voucher would come in the form of a gift card. We sat through the entire high-pressure sales pitch feeling extremely uncomfortable, only to find the “$300 voucher” was only good toward a small list of crazy, overpriced vacation packages we would never want in the first place.

So basically, we wasted two to three hours of our lives for nothing, all under the guise of “saving on travel.” Lesson learned, and I know I’ll never do that again.

Unfortunately, these types of things happen all the time. Whether it’s because we fail to read the fine print or we make a short-sighted decision based on few facts, there are plenty of savings hacks that just don’t work.

If you want to avoid wasting your time and money, it’s smart to explore certain money-saving hacks ahead of time to see if they’re legit – and if they’re actually right for you. Here are some other savings hacks that don’t always work the way you think they will, according to more than a dozen financial bloggers.

#1: Investing in actively managed funds without taking fees into account

Paying more for an actively managed mutual fund instead of an index fund in hopes of better returns usually doesn’t work out, says Larry Ludwig of Investor Junkie. “Statistics show that after five years, 80% of actively managed mutual funds don’t beat the index. In addition, the amount you pay in fees is typically equal to or greater than the return the mutual fund generated above the index,” he says. “It’s a fool’s errand trying to figure out which mutual fund will be the best performing fund.”

#2: Using coupons to save money without a plan

“I loved using coupons and for years they helped us get out of debt,” says Lauren  Greutman. “They became a problem when I started buying things that I didn’t need just because I had a coupon for them. The result was spending more money.”

#3: Taking advantage of introductory deals without watching the post-promotion terms

“We recently switched our electricity supplier to take advantage of a very inexpensive six-month fixed rate, which resulted in immediate savings,” says Jim Wang of Wallethacks.com. What we didn’t realize was that after six months, the rate would be variable and it ended up being twice the regional average!”

#4: Working too hard for too little

“In an attempt to earn us some extra cash, I signed us up for this home scanner that will earn you gift cards after you’ve made a certain amount of scans every month,” says Jessi Fearson. “It was ridiculous of me to think that, as a mom of three kids under three years of age, I’d have the time or the energy to scan every single thing that we purchased to earn a measly $10 in gift cards. I was putting in way more time and effort than that $10 gift card was worth.”

#5: Using travel deal sites without checking prices

“I’ve signed up for travel alerts in order to find good deals on hotel stays. Rather than uncover great deals, though, the sites typically don’t offer prices better than basic searches deliver and end up wasting time,” says Julie Rains of Investing to Thrive. “For me, it’s generally easier to book cancellable reservations directly with a hotel. If my travel plans change, I don’t owe money; and if prices fall, I can rebook to save money.”

#6: Paying off a mortgage early to save money on interest

“I paid off my mortgage early because it reduced the total interest costs on the loan. However, the next year my investments doubled and then doubled again after that,” says Todd Tresidder, wealth coach at FinancialMentor.com. “I would have been far better off investing the money and just paying the mortgage interest according to schedule.”

#7: Falling for a wonky rebate

“I saw an ad for an electronic device that had a reasonable price (about $200), plus they gave vouchers of $90,” says Assaf Katzir, co-founder at CreditPilgrim.com. “Sounds like a great bargain. Only later when I wanted to use the vouchers, I found out that the vouchers were split over six months – meaning each voucher had the value of $15 and could be used only in the specified month on the voucher.”

#8: Justifying a purchase because it’s on sale

“I think we’ve all been guilty of this at least once in our life. We decide to purchase something we really don’t need and justify it because it was such a great deal we couldn’t pass it up,” says Kansas City Financial Planner Clint Haynes. “Well, just because you saved some money doesn’t take away the point that you actually just spent money as well. Remember, even when you purchase items are on sale, you’re still actually spending money.”

#9: Trying a new type of budget without assessing your needs

“The best example of a savings fail was using the envelope system. This was for the son of a friend of mine,” says Neal Frankle of  WealthPilgrim.com. “The young man was a chronic spender. The problem was, once he had the envelopes for the variety of expenses, he’d invade them all and use up the money long before the month was over, and of course then he was unable to pay his bills. What he needed instead was a daily allowance – not monthly.”

#10: Investing your emergency fund for short-term gain

“A few years back I had several thousand dollars saved for a big move I was making across the country. I figured it may be a good idea to invest that money (which I wouldn’t be spending for a few months) in a portfolio of ETFs that looked great at the time,” says Seattle-based financial advisor Josh Brein, author of The Art of a Plan.

“‘I’ll just stash the money here and let it grow until I need to take the money out in a few months’ was the rational I used to justify this idea,” Brein says. “My plan didn’t work out so well. We hit a volatile patch in the market shortly after I invested, and by the time I needed to take my money out to spend it, I had lost about 20% of my savings for my cross country move because of market volatility that I could have avoided by not being greedy and trying to grow my emergency fund in the stock market.”

#11: Using Coinstar as part of any savings plan

“My wife and I had a saving plan to keep all our spare change in a paint can, and we successfully saved over $300. We found out that our bank and credit union wouldn’t accept the change unless it was rolled. So, we took our spare change to the Coinstar machine,” says Jose V. Sanchez of LifeInsuranceToolkit.com.

“The fees are incredible – you pay $11 for each $100 you save,” says Sanchez. “To avoid the fee, we accepted the eGift Card, spent some of the money, and the rest (six years later) has expired. Net result, we saved zero.”

#12: Speculating about government laws and currency

“In college, I got into saving pre-1972 pennies because they were made of more than 90% copper. The plan was to amass a large amount of copper pennies and then one day melt them down and sell the copper (the copper inside a penny is worth more than $0.01),” says Nick True at Mapped Out Money.

The trouble is, it’s currently illegal to melt pennies and nickels. “I was spending hours sorting through thousands of pennies by hand all in hopes that it will one day be legal to melt discontinued pennies,” True says. “It was a major waste of time on a very unlikely policy change.”

#13: Saving money by performing tasks you’re not qualified to do

When I launched my business, I did everything I could to cut corners and reduce expenses. One of those corners was doing things on my own instead of outsourcing them,” says Taylor Schulte of Stay Wealthy San Diego.

“For instance, I figured I could save around $200 a month by doing the bookkeeping myself. While technically I was ‘saving money,’ the time I spent playing bookkeeper (and graphic designer, and editor, and administrator) was taking me away from actual revenue generating opportunities. It used to seem backwards, but I’ve now learned that spending money to create more time for things I’m good at makes a much bigger impact on my bottom line.”

#14: Price shopping without considering value

“When my wife and I got married, we were naturally looking to consolidate our auto insurance. She had the same agent for years who was captive with a major auto insurer. Being a ‘wise’ financial planner, I figured this wasn’t the best we could do,” says David Wilson of FinancialTruths.net.

“I matched hers against the cheap car insurance I bought online; her agent’s price was better – and still is. His agency now handles all our stuff,” Wilson says. “When I call, someone answers. When I buy or sell a car, or add a teenager (yikes!), it’s never a big deal. I recently needed info on my homeowner’s policy. I emailed, and the declaration page showed up in my email box within five minutes.”

At the end of the day, Wilson says, value is more than just price. “If you’re getting great service and a fair price, don’t waste time and energy price shopping like I did!”

The Bottom Line

It’s a crazy world out there, and we’re bound to make mistakes. Fortunately, most small money mishaps won’t know your entire financial plan overnight.

Still, it’s important to stay diligent out there. Not all “deals” are worth it, and some are even predatory. Before you employ a new strategy to save money, make sure to run the numbers and read all the fine print.

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

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Have you ever tried a savings hack and failed miserably? Please share in the comments below!

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Wednesday, March 8, 2017

The Real Costs of Dog Ownership

In the summer of 2015, our family collectively decided to get a pet dog. I was by far the least enthusiastic about the idea at the time, as I’ve never been a real enthusiastic pet owner, but after a lot of discussion, we made the choice to get a family dog.

We decided to adopt a rescue dog with a history that would not indicate any reason for the dog to not be around children and we wound up with a little Maltese-Yorkshire terrier mix named Dexter who had spent most of his life up to that point in a small kennel. He was owned by a couple that traveled a lot and, while they treated him reasonably well during the fraction of the day when he was out of the kennel, he spent about 10 hours per day in the kennel during the day when they were working and about eight hours in it at night when they were sleeping, giving him a grand total of six hours a day when he wasn’t kenneled up. The family recognized that this wasn’t a good situation for the dog, so they moved him on to a dog rescue service and then he found his way to us.

Over the past two years, most days you’ll find me working from home with Dexter. He barks sometimes. He has to go outside to do his business. He wants attention sometimes and brings a ragbone into my office if I leave the door open and waves it around wanting to play. In other words, he’s a minor distraction during my workday.

On the other hand, he knows when the children are going to arrive home and so about three in the afternoon, he curls up to wait for them and then there is much celebration and petting and playing when they come in the door.

Let’s be honest: I’m not a pet person, and I know that about myself. However, given the joy that he brings to the other people in the house, I consider his presence to be a net positive, even for me.

Since Dexter joined our family, I’ve been carefully tracking the multitude of expenses that the pet has been responsible for, not to make some kind of “case” against the dog itself, but out of a curiosity as to how expensive the dog really is. What I’ve found is that he’s surprisingly expensive.

Let’s take a look.

Food: Dexter doesn’t eat a whole lot of food. He’s very good at self-regulating what he eats, so we just put food in his bowl when it’s running low. He eats about a cup of dog food a day. We discussed options for food with his vet and follow his recommendations, buying that food in bulk (he told us several brands to avoid and gave us three or four recommendations, of which we chose one that Dexter seems to like and agrees with his digestive system).

A bulk bag of his food costs about $50 for a two-month supply. So, the cost for food for him is $25 per month. We could probably reduce that cost by simply getting a lower cost brand of dog food, but we do want him to be healthy and have a long life, so we follow our vet’s advice. It’s as simple as that.

Equipment: We have a bunch of equipment for Dexter: a food bowl, a water bowl, a bed, a kennel for emergencies (he’s rarely in there with the door shut, but he hangs out in there a lot with the door open, which we assume is an artifact of his previous life), a collar, a couple of leashes, a few harnesses (you can’t leash a dog of his type around the neck or it can injure him), and a few other odds and ends.

Most of these things were one-time purchases. However, he has this tendency to damage his leashes as he’ll bite at them sometimes when we’re walking – it’s a quirk of his – and thus we’ve gone through several leashes and a few harnesses. Stretched out over Dexter’s lifespan, we’ve spent roughly $10 per month on gear for him. I expect that number to slowly slide over time.

License: In our town, there’s a $10 annual license fee to have a pet. With that $10, you get a small metal tag that dogs are required to wear. So, in order to have the dog outside of the house, we face an additional cost of $10 per year, or $1 per month rounded down. It’s not a big expense, but we’ve paid it three times now, as you have to pay the full fee for partial years.

Vet Appointments: Dexter has regular vet appointments to keep up on his shots and to make sure he’s in good health. He typically has a normal examination, a fecal test, a heartworm test, and his booster shots. The cost for this visit has been around $120 a year, or $10 per month.

He got very sick once – we think he ate something that he shouldn’t have – and we took him to the vet in an emergency visit, which cost us $50. The vet checked him over and seemed to think that he was constipated and recommended some dietary changes that we were able to do on our own (he recommended mixing some things into his dog food). That definitely fixed the problem and Dexter was back to his normal self in a few days. So, it’s worth noting that there are additional irregular vet costs with a dog.

Dog Door: Last year, we made the decision to replace the French door that faces our deck for reasons unrelated to our dog. It needed some significant repairs anyway and we didn’t like the functionality of the door (it came with the house and I’m pretty sure they had their home arranged differently than ours), so we decided to replace it entirely.

We decided to choose a door that included a dog door on it. The additional cost was negligible; it really didn’t make a bit of difference in terms of the cost.

However, what has made a difference is that the presence of the dog door has created a huge air leak in our home, one that I’ve tried various means to reduce but haven’t figured out how to stop it completely. During the summer and winter months, it’s been adding about $20 per month to our energy bill, according to my best estimates.

Supervision While Traveling: Sometimes, we travel to visit family or just on a family vacation. Sometimes, it’s okay if Dexter goes with us; at other times, we’re just not going to take him along and thus must find a dog sitter for him.

We have a great regular sitter for him who absolutely adores him. She has a few Yorkies already and Dexter is just another fun one in the bunch for her. We just take Dexter to her house and she’ll watch him for $20 a day (including partial days), which is a solid price.

If we assume we’re traveling for two weeks per year without Dexter, that adds up to $280 per year, or an average of $23 per month. This year will probably be below average; other years may be above average.

Treats: We buy Dexter occasional treats. He absolutely loves rag bones and will play with them endlessly until they fall to pieces. He also really likes peanut butter flavored dog treats (something we find ourselves in agreement on, since I’m a big fan of peanut butter, too). He also seems to quite like baby carrots.

My estimate is that we spend around $10 a month on such extra treats for Dexter, on average.

Total Costs: So, what does all of this add up to? My best estimate is that Dexter costs our family about $100 per month, on average. There are certainly some months that are higher and some that are lower.

It’s worth noting that Dexter is a very small dog, which means that his food consumption is low and thus relatively inexpensive. It’s also worth noting that we have a pet sitter who is a real bargain compared to other options in the area, which also reduces our costs related to our dog.

My feeling is that $100 a month for good care for a small dog is what you should expect as a minimum. This assumes no emergency medical costs or exceptional kenneling costs or anything else, but it also assumes that you’re feeding the dog high-quality food and keeping up with his care and are also occasionally hiring someone to watch the dog.

If you have a larger dog, the costs will go up from there. If nothing else, food costs will go up substantially with the size of the dog. We have close friends with two Saint Bernards and their food costs are substantial.

So, what’s the lesson of this story? If you get a family dog and expect to treat that pet in a humane fashion, the expenses will add up. Unless you start cutting substantial corners, $100 per month across all expenses is something that is a reasonable expectation.

Does that mean you should or shouldn’t get a family dog? Absolutely not. I feel that our family gets a great deal of joy from having Dexter around. He is a very nice companion dog, friendly and loyal. He’ll curl up beside you in the evenings, celebrate wildly when you come in the door, alert you when people come to the door, and be a constant joyful presence. However, the value of these factors depends on everyone’s desire to have a pet and whether or not you want to take on the additional time and effort that is required for dog care.

Good luck!

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Three Common Credit Mistakes and How to Fix Them

If credit was easy, then everyone would have a VantageScore or FICO score of 850. But it’s not easy, and mistakes happen. Your challenge as a consumer of credit is to be smart enough to distinguish between what’s right and what’s a mistake, so you can avoid them at all costs.

Credit Mistake No. 1: Co-Signing

No, no, no — don’t ever do it. Co-signing is one of the biggest mistakes people make when it comes to protecting their credit reports and scores. When you co-sign for a credit obligation, you’re taking on responsibility for the debt just as if you were the primary borrower. Additionally, the loan or credit card for which you co-signed will almost certainly find its way onto your credit reports within a few months after the account is opened.

When you co-sign, the odds of getting burned by your generosity are disturbingly high — 40%, according to a survey performed in 2016. Point being, if you’re willing to guarantee payment on a loan or credit card for which the primary borrower couldn’t qualify on his or her own, then you better set aside funds to make the payments — because you may be called on to do so. And you can’t simply hide behind the fact that you’re “only” a co-signer, because the co-signer is just as liable as the primary borrower.

The Fix: Unfortunately, there are no easy fixes when your credit has been damaged due to co-signing gone bad. Sometimes you can ask your co-obligor to refinance or pay off the debt, but this could be a tall order unless they’re willing and able to do so.

If they can’t pay off the financial obligation or refinance the debt out of your name, then your remaining options include (a) assuming the payments yourself, (b) convincing your co-obligor to sell the asset in order to pay off the debt, or (c) in the worst circumstances, perhaps even considering bankruptcy. This is why I always advise people to just say no when it comes to co-signing.

Credit Mistake No. 2: Closing Credit Cards

Closing a credit card certainly has the potential to damage your credit scores. You will not lose credit for the age of the account once it is closed (that is a myth), but you could negatively impact what’s referred to as your “revolving utilization ratio” — basically, how much of your available credit limit you’ve used up — by closing an unused account.

Credit scoring models pay special attention to this ratio when calculating your scores. When you close an unused credit card, you can potentially cause your ratio to climb into unsavory territory, because you lose the value of the unused credit limit. The ratio itself is calculated by dividing your aggregate credit card debt by the aggregate credit limits on your open credit card accounts.

For example, let’s say you have four credit cards with a $5,000 limit on each, and your outstanding balance between all four cards is $5,000. If you close one card, your available credit limit shrinks from $20,000 to $15,000, and your utilization ratio would immediately leap from 25% to 33%.

The Fix: If your credit card account was closed due to a mistake or even your own request, you might be able to convince the credit card issuer to reopen the account. Admittedly, this solution is a long shot, but it never hurts to ask.

If your card issuer is unwilling to reopen a closed account, you could still potentially undo any credit score damage caused from a higher debt-to-limit ratio by paying off the balances on your remaining plastic. In the event that you can’t afford to simply write a big check, you may be able to mitigate your damages by asking your existing card issuers to increase the limits on your accounts.

Credit Mistake No. 3: Applying for Retail Store Credit Cards

As a rule of thumb, it’s best to apply for and open new accounts only when you really need to do so. So, when the holiday season rolls around and you agree to open a retail store credit card in order to get 15% off your transaction, that could very likely be a mistake. The mere act of applying for and opening a new retail store card could potentially drive your credit scores downward because of the new credit inquiry and the restrictive credit limits on retail cards.

Retail store credit cards are notorious for sporting high interest rates and low limits. As a result, it’s easy to over utilize a retail store card — and, as mentioned above, when your debt-to-limit ratio climbs, your credit scores generally fall.

The Fix: If you’ve already made the mistake of opening an unnecessary retail store credit card, you shouldn’t necessarily rush out to close the account — see Mistake No. 2 above. Closing the account will not undo the impact of the inquiry, and will not remove the account from your credit reports. Point being, the damage has already been done.

However, it is important to keep any retail store credit cards paid off in full each month. Revolving a balance from month to month will almost certainly damage your scores to at least some extent. Even a small $300 balance on a retail store card with a $300 limit could potentially have a significant impact (and not in a good way) on your credit scores.

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Tuesday, March 7, 2017

Finding and Handling Your Money Boundaries

Everyone has boundaries. If you find yourself doing something that makes you bitter, it is time to reconsider. – Peter Singer, The Most Good You Can Do, p. 29

It’s going to happen at some point in your financial journey.

At some point, you’re going to try a frugal tactic or even read an article about a frugal tactic that just doesn’t sit well with you. The practice of doing it – or even the thought of doing it – feels very wrong, as though you’re abandoning a value that you hold dear or giving up some element of your life that’s very important to you.

This is a money boundary. A money boundary is simply a point where a financial tactic comes into contact with something connected to another strongly held value and the other value is simply more important to you.

Some people press through this anyway. They force themselves to take on this change that they’ve been told is very important and do everything they can to make it work for them. This strategy is akin to a cork in a champagne bottle – it’ll either hold things in place under pressure or it’ll erupt suddenly and violently.

Other people simply balk at this point. They start rejecting not only this individual tactic, but wide groups of tactics. They’ll read one tactic that they disagree with in an article or a book and decide that the whole article or book is inherently flawed and often spread that to everything the writer has ever done (believe me, I’ve received plenty of emails like this). They’ll try one frugality tactic that doesn’t really click with them and they’ll just abandon the wide array of tactics that are working well and rebound back to the way they used to do things.

I don’t think that either tactic is smart and that both will lead to outcomes you don’t want in your financial and personal life.

Instead, here’s my strategy for discovering and properly handling your financial boundaries so that you continue down the road to success even in the face of such boundaries.

Strategy #1 – Recognize a financial boundary when you see it
At the very start of this article, I offered up a quote from Peter Singer which I think fits very well here. “Everyone has boundaries. If you find yourself doing something that makes you bitter, it is time to reconsider.”

If you find yourself being unhappy or bitter about some change you’ve made in your life, then you’ve probably touched upon some kind of a boundary between different values that you hold dear, even if you don’t completely see that boundary yet. Your gut is a very strong guide for personal change, as it will tell you loud and clear when you’ve changed something that you probably shouldn’t be changing. Often, it’s that subconscious discomfort that’s a sign that you’re stepping over the edges of some kind of life boundary and trampling over some value that’s more important to you, even if you’re not really seeing it yet.

In general, a life change that’s worth making should make you, on the whole, happier with your life. That does not mean that all areas of your life become universally more joyful; most changes are a tradeoff where you sacrifice a little bit in one category to gain a lot in another category. A sense of bitterness and negativity comes in when some part of you begins to sense that the tradeoff isn’t actually that good, that you might actually be sacrificing more than you think or getting less than what you think in return for that change.

I’ll give you a concrete example from my own life. For several months, I was an extremely avid coupon clipper. I would go find old copies of the Sunday Des Moines Register (usually early in the morning on Monday) and harvest copies of the coupon flyers, then take them home and cut out tons and tons of coupons. I’d find more of them online, print them out, and clip them, too. I maintained a coupon binder, which was a repurposed photo album, and I kept all of those coupons carefully organized.

While I did enjoy those times when I could go to the grocery store and pay for $50 or $75 of my purchases with clipped coupons, I often had this sense in the back of my head that this wasn’t the best use of my time, a sense that grew and grew and grew over time. What I was hitting on was the fact that the time I was investing in couponing was taking away from other things that were more important to me, even figuring in the money I was saving with the effort.

I was easily spending several hours a week cutting out coupons, organizing them, and finding more coupons online, which was time that I wasn’t spending taking my son to the park or making meals or building up a side gig. All of those things were more important to me, but it wasn’t obvious for a while what was making me feel negative about the couponing, especially since it was saving me money.

It took a while for me to figure out that couponing – at least the way I was practicing it – was hitting upon a boundary in my life. I wasn’t using my time most effectively in terms of my values. Saving money was – and still is – quite important to me, as I view it as a path to personal security and personal freedom, but it’s not worth losing out on the freedom today to take my kids to the park or to have at least some time for hobbies and personal interests or even for things like building up successful side businesses. Those things are things that I value more than saving a relatively small amount of money every week or two on a grocery trip; the savings from couponing were not making up for what I was losing due to the invested time.

Strategy #2 – Don’t overreact; throwing the good strategies out with the bad is a poor solution
Whenever you recognize that you’ve hit a boundary, it can be very tempting to rebound strongly from it. Some people might do this by simply giving up on their progress, tossing out most of the good strategies they’ve been using that are actually effective on their own, and reverting to their old methods. Others might take a long list of strategies they’ve learned from one source and reject all of them because one of the strategies is something that they disagree with.

Both of those reactions are a big mistake. They can cause you to overlook and eliminate a lot of good strategies that actually fit your life while trying to undo a single bad strategy that doesn’t fit. That usually ends up causing more problems than you’re fixing.

Whenever you hear about a strategy that doesn’t seem to click for you, don’t throw out all of the strategies around it. Instead, isolate that one strategy and discard it. If you’re still in doubt, try to think about why that one strategy bothers you so much. What value is it conflicting against?

I’ll again look at that couponing strategy I mentioned above. My initial gut reaction was that couponing in itself was a giant waste of time, so I basically tossed out the whole concept. I stopped even looking at coupons and stopped clipping them at all. Instead, I moved to a much less time intensive strategy of buying store brands for most items, which was, on the whole, a strategy that saved almost as much money as couponing.

The problem was that, in doing so, I missed out on some very, very easy ways to save money. If I was somewhere reading the Sunday paper and they had a coupon section, I wouldn’t even bother to look at it. If a friend offered up a link for a $3 off coupon on something I normally bought, I wouldn’t even click on it.

I had adopted a new rule that all coupons were a waste of time and money, and that rule was nearly as flawed as the couponing strategy I once used.

The truth is that I overreacted in my cutbacks on coupons. The truth is that if worthwhile coupons find their way to me with minimal effort and time invested, I should clip and use sensible ones because they basically amount to cash.

Today, we have a coupon envelope on our fridge that we check whenever we’re assembling a meal plan or a grocery list from a store flyer. If we happen to need anything that matches a coupon, especially when it also matches the flyer, I put it in my wallet next to the card I usually use to pay for groceries. I toss out any coupons that I notice being expired. If an easy source of decent coupons falls on my lap, then I’ll add them to the envelope; otherwise, I won’t.

Why did I reach this “middle of the road” technique? The next strategy explains why.

Strategy #3 – Figure out what exactly the boundary is and what value it represents
So, you’ve identified a specific strategy that’s bothering you. Why is it bothering you? What exactly is causing you to discard that strategy (or, at least, why are you not happy with that strategy)?

There are a few reasons why this is really useful and important. First, it helps you figure out what in your life you view as more important than the strategy you’re discarding, which is really worthwhile in filtering other strategies that might cross the same line. Second, it might help you to quickly see that there are alternatives to your strategy that will fit the bill quite well and have much less of a drawback for you.

Let’s go back to my couponing strategy. As I mentioned, we now have a “coupon envelope” on our fridge that we toss in easily-acquired coupons, and we use them when we’re making a shopping list or a meal plan.

I arrived at this solution by asking myself why couponing bothered me so much. What I quickly realized is that it wasn’t the coupons themselves, but the time I was investing in couponing that really bothered me. I didn’t have any objections to taking a coupon into a store and using it to make my bill a little smaller; my problem came from the fact that in order to save a notable amount, I was investing a lot of time into it.

This meant, of course, that I had zero objection to easy-to-acquire coupons; it was the hard-to-acquire ones that were causing the problems. If I happened to find a coupon flyer and could leaf through it during complete spare time, or if a friend gave me a coupon, or if someone shared a great one on Facebook that I could print in about five seconds, I actually was glad to have that coupon. Mobile apps that just hand me coupons when I’m in the store are great, too, especially when they line up with what’s already in the cart.

My objection to couponing wasn’t couponing itself, but to time spent couponing. When that time was minimal, even if that meant the savings went down drastically, I didn’t mind it at all. In fact, I kind of liked taking a few coupons to the checkout and then finding that my bill dropped by $5 or $10.

This actually revealed something of a bigger truth for me: I don’t like frugal tactics that require a constant infusion of time to make them really work. I am strongly predisposed toward strategies that either require only one burst of time up front to cause regular savings (like installing a bunch of LED light bulbs in our house or installing weatherstripping) or else manage to also save time (or at least break even in terms of time) in the process (like making meals in bulk or using smarter driving practices on the road).

For some people, the time issue may be less important than it is for me. My parents, for example, have a lot of free time and they clip coupons far more than I do. They also do things like washing out freezer Ziploc bags, something that also falls into the “too much time for too little reward” trap for me.

It’s about what you value in your life and what the constraints are in your life, and everyone’s lives are different.

What do you do if you’re not sure about a strategy? Do you just skip it and go for only the obvious wins?

Strategy #4 – Use trial runs to figure out if your first impressions are wrong or not
Unless I am absolutely sure a strategy won’t work for me, I’m almost always willing to give that strategy a trial run of some kind. I usually find that the practice of trying a frugal strategy – or another life improvement strategy – usually reveals some kind of method for making my life better, even if it’s not the exact strategy that I started out trying.

Another advantage of committing to a thirty day challenge with a tactic you’re unsure about is that it gives you time to really refine it. Almost always, the first time you try doing something new, you flail and stumble around and just don’t do it all that well. I still remember the first time I chopped a green pepper on my own and almost cut off the tip of my thumb – I still have a little scar there. If you keep trying something, you will get better at it, and you’ll find that after a trial run you can really assess how useful a strategy is when you’re used to it, rather than judging it by your initial flailings.

I usually do this with a “thirty day challenge,” in which I commit to doing something a certain way for a month. I usually do two or three of these each month in various aspects of my life, and then at the end of the month, I spend a bit of time reflecting on that challenge to see if it added anything of value. For example, right now I’m in the midst of three different 30 day challenges, one centered around food intake, another centered around exercise, and a third centered around work and building income.

Let’s jump back to the couponing example we’ve been talking about throughout this post. When I realized that I had overreacted by rejecting all couponing, I decided to try a “thirty day challenge” where I tried out something pretty similar to our envelope strategy. My challenge was simple: keep a coupon envelope in which I save any coupons that I come into with no extra effort, then use that envelope whenever I write up a meal plan or a grocery list.

This thirty day challenge worked really well and I basically kept doing it. It takes almost no time and saves about $10 or so on a typical grocery store visit. I find coupons in old copies of newspapers lying around or when someone shares one on Facebook or when my parents give me any extras that they find, and I also use in-store apps like Cartwheel to find coupons that match up with my grocery list. Going through that challenge helped me to refine some very low-effort ways to get coupons – for example, I’ve found that if you see a Sunday newspaper that someone has abandoned on a table, there’s usually a coupon flyer in it and it takes about five seconds to grab that flyer. I’ll look through it for coupons when I happen to have a minute or two of downtime, like when I’m waiting for a microwave meal to finish or I’m watching a live television program with commercial breaks.

Strategy #5 – Focus on positives, not on negatives
In the end, money boundary issues always come down to comparisons. You’re comparing the merits of doing things one way versus the merits of doing things another way.

Usually, such comparisons wind up with a pros-and-cons list, where you list all of the pros of doing things a particular way versus all of the cons of doing things that way.

I’ve found that, when you’re comparing two or three ways of doing things, a much better approach is to simply list all of the “pros” of each option and see which one adds up to the best result. If one of them has an obvious negative, then that’s actually a “pro” for the other options.

I usually don’t strictly write down these lists of “pros” – though I do it sometimes for big decisions – but instead I do this as a mental exercise. It’s something to think about while driving somewhere or when you’re waiting at the dentist.

For example, with couponing, I simply compare the “pros” of three options: my old full couponing strategy, my much quicker envelope strategy, and just not bothering with coupons. Clearly, the “not bothering” has the best time advantage, but the quicker strategy shares most of it. The full couponing strategy saves the most money, but the quicker strategy shares some of it. The no-couponing strategy takes up the least space, but the quick coupon strategy only requires an envelope that’s attached to the fridge with a magnet. Basically, I quickly realized that the “quick” strategy had a pile of “pros” that wasn’t matched fully by the other strategies, so I stuck with it.

Strategy #6 – Give yourself time to reflect
Ideally, you want to reach a point where you can make these kinds of good choices very quickly, and that requires a very deep and strong understanding of what you value. That type of deep understanding itself takes time and reflection, so give yourself time to reflect.

I’ve found that, when I give myself time each and every day to reflect on my life and on any challenging choices I had to make that day and what my values actually are, my snap decisions in life become better and better and better. That reflection time is basically time spent sharpening an axe, to borrow from Abraham Lincoln’s famous quote.

Lincoln once said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” That’s exactly what time spent reflecting on your life is – it’s time spent sharpening the axe that is your decision-making process in life. That decision instinct is a tool that you use constantly every single day, so making that tool as sharp and accurate as you can possibly make it is bound to improve your life. Reflection is how you sharpen it.

Take some time each day to really think about the rough edges of your life. Think about the choices you made that are troubling you and ask yourself why you made them, and why you came up with that answer, and whether there was a better way to handle it. Think about situations that are coming up in your life and what the best way to handle those decisions are.

That type of thinking will sharpen your thinking, and sharp thinking will result in better decisions throughout each and every day, and better decisions throughout each and every day results in a better life.

Final Thoughts

Knowing your money boundaries – and the boundaries of other values in your life – makes it much easier to quickly figure out which money strategies will work best for you in your life. Not everyone has the same money boundaries, because not everyone has the same values and the same lifestyle restrictions. Strategies and tips that work well for some people might not work at all for others.

The best thing you can do is have a sharp understanding of what works and doesn’t work for you so that you can quickly take a list of tips and cut it down to the ones that are very likely to produce positive results in your life. That requires knowing your money boundaries quite well.

Good luck.

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The post Finding and Handling Your Money Boundaries appeared first on The Simple Dollar.

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An Advanced Degree Can Help You Earn More Money – and Spend It All, If You’re Not Careful

For many college graduates, an advanced degree is a one-way ticket to earning more. By working beyond a bachelor’s degree, new graduates can climb the corporate ladder, move into middle or upper management, and perhaps score a higher-ranking position at a new firm.

While not all jobs that require advanced degrees pay enough to justify the cost, the difference between median earnings by educational attainment is truly staggering. As the U.S. Bureau of Labor Statistics (BLS) notes, median weekly earnings for professionals with a bachelor’s degree worked out to $1,137, and that number increases when you add more letters after your name: Individuals with master’s degrees earned a median of $1,341 a week, those with a doctoral degree earned $1,623, and those with a professional degree (such as a medicine or law) earned a median of $1,730 a week.

While a higher income is almost always a good thing, earning more doesn’t necessarily mean you’ll do better financially. And in the words of Notorious B.I.G., mo’ money sometimes means mo’ problems – whether in the form of student loans, overspending, or unnecessary debt.

A recent study from LendEdu illustrates the fact that individuals with advanced degrees tend to spend more on big-ticket items and rack up more credit card debt along the way.

For example: Those with a Master of Business (MBA), Doctor of Philosophy (Ph.D.), Juris Doctor (JD), or master’s degree had the most credit card debt among college degree-holders in 2016. Here’s how those numbers played out, according to LendEdu:


Individuals with advanced degrees also took out the biggest car loans in 2016 as well, with Doctor of Pharmacy degree-holders leading the way and Ph.D. graduates right behind. Amazingly, individuals with a Doctor of Pharmacy degree or Ph.D. borrowed nearly twice as much for a car as those with bachelor’s degrees.

degrees-with-biggest-auto-loansLastly, those with advanced degrees took out much larger mortgages than their less educated peers last year – and it’s not even close.

degrees-with-biggest-home-loansEven though individuals with a master’s degree earned only slightly higher median wages than graduates with a bachelor’s degree in 2015 ($1,341 vs. $1,137 weekly, respectively), MBA graduates borrowed more than twice as much for housing last year. Perhaps they’re simply more likely to live in expensive cities where Fortune 500 companies are headquartered – but there could be more to it.

Five Ways Advanced Degrees Can Lead to More Spending

An advanced degree might lead to a higher income, but that alone doesn’t mean you’ll get rich. Since a high income, steady job, and good credit score gives you more access to cheap credit, earning more can easily lead to a lifestyle that requires more debt and spending than most people can handle.

At the end of the day, there are myriad reasons high earners and those with advanced degrees justify spending more and taking on more debt. Here are a few of them.

You want to ‘look the part.’

When you worked hard in school to become successful, it’s only natural to feel the need to prove you’ve “made it” once you’re able to. This is especially true for advanced degree-holders who work among other high-earning peers. Landing a prestigious job working alongside other overachievers makes it far too easy to think you need the big house and the expensive car right away.

Some careers may even require you to look successful. If you’re a lawyer who deals with high income clients, for example, it’s only natural to want to upgrade from your college-grade Toyota hatchback so you can look the part. If you’re a financial advisor, on the other hand, you might feel like you need to have a nice suit, big house, and fancy car just to show you’re living the dream you sell.

Earning more makes debt less scary.

A higher salary has a way of obscuring the constant strain debt places on our lives. The more you earn, the easier it is to accept that you can’t quite cover that $4,000 credit card bill yet – or that your new car payment is well over $600 a month. You’re good for it, right?

Earning more makes it seem perfectly reasonably to borrow four to five times your salary for a home, and to spread your mortgage out over 30 years or more. With a high income, you’re confident you’ll be able to pay it off eventually. So, why worry?

You feel more secure in your job.

One huge benefit of earning an advanced degree is that you’re less likely to be unemployed. When you’re fairly certain you’ll never be without a job for long, it’s much easier to spend without fear – and without limits.

In 2015, the unemployment rate among adults with a doctorate was just 1.7%, according to the BLS, compared to 8% for those without a high school diploma. Professional degree holders were even less likely to be jobless, at 1.5%, and more education generally correlated with lower rates of unemployment at every level.

Unemployment Rate by Education Level (2015):

  • Professional degree: 1.5%
  • Doctorate (Ph.D.): 1.7%
  • Master’s degree: 2.4%
  • Bachelor’s degree: 2.8%
  • Associate’s degree: 3.8%
  • Some college: 5.0%
  • High school diploma: 5.4%
  • No high school diploma: 8.0%

You want to enjoy the rewards that come with hard work.

Earning an advanced degree can take a decade or longer, so it’s no wonder many new graduates count down the days until they can enjoy the spoils of their hard work. Maybe they’ve watched their friends build huge homes, book luxury trips to Bora Bora, and buy designer furniture for years. With their brand new and upgraded incomes, they believe it’s finally their turn to splurge.

An advanced degree doesn’t necessarily mean you’re savvy with money.

The final reason many people with advanced degrees overspend might be the most important: The fact that you earned an MBA or a Ph.D. doesn’t mean you’re good with money.

There’s a reason neighborhoods with expensive luxury homes still have their share of foreclosures, and even those who earn six figures or more still file for bankruptcy. Earning a big income doesn’t mean you have the first clue about how to save money, budget your income, or invest for the future. And in many ways, a high income can exacerbate any financial problems you do have.

Final Thoughts

If you have an advanced degree and a high income, you’re probably aware of the challenges you face when it comes to growing wealth. On the flip side, earning an average or lower income might make it feel like you’ll never get ahead.

Fortunately, the basic financial principles that help people build wealth are the same for everyone. To create a prosperous future, you should spend a lot less than you earn, pay yourself first, and try to avoid debt when you can.

No matter what your paycheck looks like, these basic financial principles will help you grow wealthier over time. But with a high income and an advanced degree, you have the potential to reach your goals even faster – as long as you don’t blow all the extra money on stuff you can’t afford.

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

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Do you think more money leads to more problems? How do you overcome lifestyle inflation as your income grows? 

The post An Advanced Degree Can Help You Earn More Money – and Spend It All, If You’re Not Careful appeared first on The Simple Dollar.

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