Money To Live

September 30, 2008

A 2 day gap

Filed under: spending — by moneytolive @ 5:00 am
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Between when my student insurance expired and my employer’s insurance started, there was a two day gap.

Being what I consider to be responsible, I bought 30 day short-term coverage with the intention of canceling it after a few days. I tried canceling it, but between my work schedule and the hours the office was open, I could not get through to a person, and the automated computer system would not me cancel the policy. When I finally did reach a person (after two weeks), I could not cancel my policy.

Of course, I had to go to the doctor in September, and I paid about $200 out of pocket for a 5-minute doctor visit and 7 days of antibiotics (I got a cut, which got infected … it was gross and painful!). If I had not gotten the short-term coverage, I would have been reimbursed for these expenses. But, since I have the short-term policy, I cannot be reimbursed by my new policy.

In the end, having emergency coverage for September cost me $230 more than it would have cost to go two days without coverage and then join my employer’s plan.

Doing it over again, I would still get the short-term coverage. But, I would read the policy more carefully in order to understand the cancellation policy. I still might have the problem with reaching a human at the insurance company to cancel the policy.

Today is my last day of coverage on the short-term plan and tomorrow I get corporate benefits! Yay!

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September 29, 2008

Reader Question: Thinking about money

Filed under: savings — by moneytolive @ 5:00 am
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Reader Question: If you met someone who only feels stressed & burdened by thinking about money, what would you say to rope her in?

Try thinking about money differently.

I have a friend who, though she does not care about money,  is very good with her money. Her financial goal is to not worry about money. If she has enough to pay the bills and save a little, then she is happy.

Not to “go Oprah” on you, but think about why money is stressful or burdensome and figure out a way to mitigate the cause.

If there is a fear of not having enough, find a part time job. From previous conversations, I know that the reader who submitted the question can easily pick up hourly work starting at $35/hour. That adds up very quickly!

I used to get stressed out that I was not saving enough for retirement. Looking at growth projections, I am in good shape. But as a fraction of total retirement savings, I am only at the 3% mark. 3% out of 100% is not very much.

When I started thinking about my dream lifestyle, I realized that I could support myself for 3-4 years without working (or longer if I were to move to a cheaper town in the South or Midwest).
Realizing what I had already accomplished gave me some perspective, and now I think much less about my net worth.

September 26, 2008

Review: A Tree Grows in Brooklyn by Betty Smith

Filed under: savings — by moneytolive @ 5:00 am
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Betty Smith’s novel A Tree Grows in Brooklyn is the coming of age story of Irish-American Francie Nolan set in Brooklyn in the early 20th century. The book is wonderful, and has lots of details about how Francie’s mother deals with money.

The Nolan family is poor, and when there is not enough food, Francie’s mother tells the children that they are explorers at the North Pole and they have to ration their food. It is very sad when Francie is old enough to realize the “game” is not much of a game.

When Francie is born, her maternal grandmother tells her mother, Katie, to start saving money to buy a piece of land. By saving 5¢ a day in a tin can, it will take about three years to save $50. They talk about ways to save the 5¢: bargain for groceries, burn less coal, and turn the lamp off.

Katie’s mother saves up $50 and thinks that she buys a piece of land. Since she cannot read, though, she does not realize she is given a fake land deed. She saves up again, and her husband spends the money on chickens, which are all either killed or stolen.

Katie saves up as much as she can, in part by asking her children for pennies they get from selling junk. Katie makes withdrawals a few times (to cover medical and transportation expenses), but always requires the amount be repaid with interest. At one point, the bank is emptied to cover moving expenses, and Katie starts saving again.

Eventually, Katie buys a piece of land with the money, but under sad circumstances. I will not say more than that because I do not want to give away the plot.

The Bureau of Labor Statistics provides a CPI infation calculator. CPI is the consumer price index, which represents prices of goods and services purchased by urban households. The CPI has been calculated since 1913, so the calculator only goes back that far. These would be Katie’s savings goals today:

  • 5¢ in 1913 is $1.11 in 2008 dollars — a reasonable amount to save on a daily basis.
  • $50 in 1913 is $1,110.93 in 2008 dollars — not nearly enough to buy land anywhere near Brooklyn

I highly recommend this book. It is a great piece of literature with insight into the struggles of a family trying to make ends meet.

September 25, 2008

Flexible Spending Accounts

Filed under: spending — by moneytolive @ 5:00 am
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With my new job comes my first non-student health plan (yay!) and my first opportunity to open a Flexible Spending Account (FSA). Pre-tax money can be put into an FSA, and the money can be spent over the course of a year to pay for medical expenses, dental expenses, and some OTC items (i.e., Clearasil).

The funny thing about FSAs, though, is that whatever money is not spent is forfeited. At our benefits information session, I asked where the money goes … because really, isn’t it odd that the money just disappears? Whenever something is “forfeited,” it has to be forfeited to someone. The companies overseeing the accounts keep all the leftovers, which was estimated at a total of $210 million in 2004.

Because the money is pre-tax, consumers may still come out ahead. On average, 3% of deposits are forfeited. So, instead of paying 10%+ in taxes, people are paying about 3% for the FSA.

I ran through the numbers and calculated that I could potentially save $60 by using the FSA. But, I would have to file a lot of forms (5-10 annually) and would have to wait several months to be reimbursed. Some FSA plans give debit cards so that the expenses can be paid for directly (without the reimbursement step). I would be more inclined to use the FSA if it came with a debit card.

Do you use an FSA? What has been your experience?

September 24, 2008

Scrimp/splurge: cushion-free shoes

Filed under: scrimp/splurge — by moneytolive @ 5:00 am
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Scrimp: $2.49 Old Navy flip flops (on sale)

Splurge: $99 Vivo Barefoot ballet flat (on sale)

September 23, 2008

Business trips

Filed under: career,travel — by moneytolive @ 5:00 am
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Today is the start of my first business trip. I’ll be gone the rest of the week, returning home on Saturday.

In training, we were told a few things about business trips:

  • Business travel should be cost neutral. All meals and reasonable expenses (i.e., taxis) will be reimbursed. I appreciate this because if it were on my dime, I might walk a mile to the metro station to take the metro into DC to catch a train; since I can expense it, though, I will be more comfortable taking a taxi to the train station.
  • Expenses should pass the “red face” test. If my face turns read telling my manager about a business expense, I should just pay for it myself. I guess that means no mani/pedi on the expense account.
  • Carry cash, and do not count on management to pay for cabs.

One rule of thumb for carrying cash when traveling is to take $1 for every mile away from home. On this trip, I will be 450 miles from home. $450 seems like a lot of money to carry!

To figure out how much cash to carry, I estimate my expenses:

Taxis: $200-$300
I will be traveling with three other people, so we might take turns paying for cabs. But, I would hate to run short and will budget for paying for all of the taxis myself.

Meals: $70
For the most part, meals can be paid for with a credit card, and I can put the tip on the credit card. If I buy something small or from a street vendor, it may be easier to use cash. If we go out to a bar, I will pay for drinks with cash because I am hesitant to open a tab with a credit card.

Hotels: $0-30

Hotel arrangements have already been made, and the only cash hotel expense I foresee could be tipping.

Everything else that I can think of I can pay for with credit card (and I have a separate credit card for business expenses).

That puts my cash expenses at $300-400, which is not too far off the $450 estimate based on miles-from-home.

September 22, 2008

Teaching Financial Literacy

Filed under: education — by moneytolive @ 5:00 am
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In general, I am a big supporter of financial literacy programs, but some new research has me questioning the usefulness of financial literacy. Lauren Willis contrasts financial planners with doctors and lawyers. While you can buy thousands of books that claim to tell you how to manage your finances, there are not nearly as many telling you how to become your own doctor or lawyer. In a paper, Against Financial Literacy Education, she says

For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions.

Ouch.

This reminds me of a conversation a friend recounted to me in college. My friend was a math major and was talking to a humanities student, who had taken a special humanities-math class the previous semester. When the math major told the humanities student that she was taking topology, the humanities student said, “You spend a whole semester on topology? We finished it in two weeks!”

In the humanities-math class, the high point of the topology unit was tying one’s feet together with a rope and turning one’s pants inside out without removing the rope. (If you are familiar with advanced math, you know that topology involves much much more than turning your pants inside out.)

Willis’s article about financial literacy reminds me of the humanities-math class because in each case, the students were learning a little bit, but importantly, they were not learning what-they-were-not-learning (Rumsfeld might say there are “unknowns unknowns,” but the students may not even know the existence of “unknown unknowns”) .

A criticism of financial literacy education is that the information can be outdated. As new types of loans (i.e., subprime) come onto the market, consumers need to be re-educated about their options. A different approach to financial education is to teach people to evaluate financial products so they are comfortable asking questions and getting information from multiple sources before making a decision. Really, this would be more like “general critical analysis” training.

September 19, 2008

Review: Pay It Down by Jean Chatzky

Filed under: credit — by moneytolive @ 5:00 am
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Jean Chatzky’s book Pay It Down is a great personal finance book. It is full of ways to reduce monthly expenses in order to pay down debt. Even if you are not trying to pay down debt, the ideas can be used to free up more cash.

My favorite part of the book is a script to use with a credit card company to negotiate a lower interest rate (starting on page 67). Chatzky quotes a 2002 study that calling and asking for a rate reduction results in a reduction 56% of the time. I like it that Chatzky gives a script because the people on the other end of a line have a script.

Though it can be intimidating to call and ask for a rate reduction or for fees to be waived, nothing bad can happen. The worst possible scenario is that nothing about the account changes.

A few years ago I paid a credit card bill a few days late. I was busy and forgot to pay the bill, but I had the money and was able to pay the balance in full as soon as I remembered. When I remembered, this is what I did:

  • I paid the entire balance online.
  • I set up an automated payment plan. On the day the payment is due, the entire balance is withdrawn from my checking account. In general, I am cautious to set up automatic withdrawals from my bank account (as are a lot of people). But since I already had a problem remembering to pay the bill and late fees can be steep, I pay this one automatically.
  • I called my credit card and asked that the fees be  waived. The account had been open for several years, and I never made a late payment or carried a balance. The first customer service agent I spoke to said that there was nothing she could do. I asked to talk to her supervisor; she said that her supervisor would not be able to do anything for me. When I talked to the supervisor, though, she immediately waived the fees.

September 18, 2008

Defining Moments: It starts with a credit card

Filed under: defining moments — by moneytolive @ 5:00 am
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Defining Moments is a series about how we remember money and how it has shaped our lives.

Fellow PF blogger, Trent Hamm, tells his story of financial recovery at The Simple Dollar. Trent has shared two defining moments in his life.

Trent first took on consumer debt with what he calls “The Single Biggest Money Mistake I’ve Ever Made”:

So I got up and went to the local department store, which had the game in stock. I stood there looking in the case, mulling it over … and then I called over a clerk to get the items out for me. Not just an N64 and not just GoldenEye, but a second controller and two other games as well. I plopped about $400 on the credit card and walked out of the store.

His life changed eight years later when he reached what he calls his “Meltdown”:

One night, I came home from work and found five bills in the mail that added up to more than I had or would have for the next two weeks. I literally didn’t have the money to put food on the table at that point. I walked into the house and down the hallway to my son’s bedroom, where I saw my infant son bundled up in his bed taking a nap. I looked at him and realized that everything that I was doing was setting things up to make a very difficult childhood for him, not the wonderful one I wanted. I was worried all the time about money and I had learned that all he really needed from me was my love and attention.

I looked at him and I decided to change things, right then and there.

Trent’s story in college is so common. He wanted something he could not afford and had a credit card, so he charged the purchase. I like the story because it shows the long-term impact of such a small decision. In isolation, making a purchase on a credit card is not a big deal, certainly not the end of the world. But it marked the beginning of a pattern that led him to a difficult place.

Thanks, Trent, for sharing your story and all your tips for reaching financial security.

The mathematician in me will take this opportunity to tell you about an concept in advanced mathematics: a stopping time. The formal definition of a stopping time is very complicated, but the informal definition can be understood by anyone. An event is a stopping time if you know it is happening exactly when it happens (and it is ok if it never happens). For example, the time that the first person walks into the grocery store every Friday is a stopping time. If instead you wanted to talk about the time that the last customer enters the grocery store on Friday, this is not a stopping time. Another “last customer” could always walk in 1 second later. In Trent’s story, the beginning of his financial troubles (buying a video game system on credit) is not a stopping time because he did not know it happened until later.

September 17, 2008

Roth vs Trad 401(k)

Filed under: investments,retirement,savings,taxes — by moneytolive @ 5:00 am
Tags: , , ,

There are two kinds of employer sponsored defined contribution retirement accounts: the Roth and traditional 401(k). These two options are analogous to the Roth and Traditional IRA accounts:

  • With a Roth 401(k), taxes are paid on the contribution, and withdrawals in retirement are tax free.
  • With a traditional 401(k), contributions are not taxed, but withdrawals in retirement are.

In Money Magazine, Walter Updegrave compares the two types of accounts:

Investing $11,625 in after-tax dollars in the Roth 401(k) is the equivalent of making the maximum $15,500 contribution of pre-tax dollars into a regular IRA. But you’re not limited to contributing $11,625 in after-tax dollars to the Roth.

Which means that as long as the dollar amount you can contribute to a regular 401(k) and a Roth 401(k) are the same, the Roth 401(k) effectively gives you the chance to sock away more money on a tax-advantaged basis for retirement, assuming you’re willing to part with the extra bucks. [emphasis added]

At my new job, I have the option of opening a retirement account of either type. Last summer I worked out my budget assuming that I would open a traditional IRA (because I did not know the Roth was an option). The immediate benefit of the traditional 401(k) is the tax savings, leaving more money in my pocket each month.

But since a Roth 401(k) is available and it allows me to ultimately save more money for retirement, I am going with a Roth. That makes my take home pay a bit smaller, but in the long run I will appreciate having more money in retirement.

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