Creating Your Own Three Legged Stool of Retirement

Posted on July 2, 2009 // 10 Comments

You may have heard the term “three-legged stool”, taken from the idea that a stool needs three legs to maintain balance. (Photographers use tripods, no duopods or quadrapods. Even a four-legged chair will likely wobble.)

Old Three-Legged Stool of Retirement

Traditionally, the components of the three-legged stool of retirement have been presented as Social Security benefits, Pensions, and Personal Savings (401k, IRA, and other assets).

stool
image via Michigan.gov

This is partially supported by data from the Social Security Administration:

pie chart
image via Pbs.org

The Qualified Retirement Plans slice combines pensions, 401ks, and IRAs together, making it hard to see the breakdown. The Other Assets include income from other investments like capital gains or dividends from taxable accounts and real estate. We observe that a quarter of all income in retirement is still from working for a paycheck.

Shaping Your Own Retirement Legs

These are just averages, and each of us will have their own path to retirement. If you’re planning on retiring early, you won’t have Social Security yet. For people born after 1960, the full retirement age for benefits is already 67, and expect it to rise even further the younger you are. I think some form of SS will still be around when I’m 70, but who knows.

1. Flexible, reliable, part-time income
We already saw that lots of people over 65 still work. Even though I want financial independence early, I’ve also come to realize that I’ll never stop working. Ask yourself what are you really going to do in retirement? In addition, I think it would be stressful to stare at a big pile of cash and think to myself – “Crap, I hope this lasts for 30+ years!” Maintaining a part-time job and the related skills would help my cashflow, and also ensure that I could return to the workforce if disaster strikes.

I would want a part-time job that could provide some socialization and a sense of improving your community or helping others. Most of my imagined jobs involve teaching, coaching, sporadic technical consulting, or something tourism-related. It can’t be 9-5, and I’d want to be able to take months off at a time. This won’t be easy to find, so I need to start developing more “fun” skills as well as personal relationships now.

2. Personal Savings: Accumulate 30 times annual (non-housing) expenses
Without a pension or Social Security, you’ll need to live off your own savings. If you invest in a balanced portfolio of 60% stocks and 40% bonds, studies have estimated that you can have a “safe withdrawal rates” of about 4% per year. By being a bit more conservative than that, this means accumulating 30 times your annual expenses.

For example, if your annual expenses are $30,000, then you need to save $900,000. This is a very general rule of thumb. Taxes are tricky, but if your income is only $30,000 per year, you won’t be paying very much income tax. Check out the historical effective tax rate over a past 25 year timespan:

For reference in 1995, to be in the bottom 50% (safely in Q1/Q2) your adjusted gross income had to be under $31,000. And this even includes payroll taxes of about 9%, which you won’t have to pay on investment income. The result: very low taxes (possibly under 5%) if you keep your expenses down! Which brings me to…

3. A Paid Off House
I don’t think everyone needs to own a home. However, I happen to enjoy many of the intangibles of owning a home, I love my house and neighborhood, and plan on staying here a while. The cost of this leg can vary widely, from a $1,900 house in Detroit to… where I live, so choose where you want to live carefully. 😉

Financially, owning a home protects you from future inflation and rising rents. You are still subject to property taxes and maintenance costs.

In addition, not having to pay rent means you need less income from savings, reducing your needed nest egg in #2 above. You also pay less taxes. Withdrawing additional money from an IRA, for example, will mean subjecting them to your marginal tax rate, which could be 25% or higher. So to pay $750 in rent, you’d have to withdraw $1,000. Not very efficient.

So there, you have it, my three-legged stool. Yours may be very different – you may like renting, have a pension, own investment property, or have some other sources of income. I still worry about health insurance, but I’m still hopeful that some positive health care reform will occur that will create affordable health insurance for individuals under 65 not covered by an employer group plan.

* You can read more about the last two legs in my related post A Quick & Dirty Plan To Reach Financial Freedom.

Filed Under: Frugal Living, Real Estate, Retirement, Taxes //

5-Step Guide to Finding The Lowest Rate For Hotel Rooms

Posted on June 24, 2009 // 26 Comments

Whenever I’m not traveling on the company dime, I usually run through a checklist to find the lowest price on hotel stays. Let’s say you’re like me and need to find a room in New York City for a few nights, checking in August 30th. I’d like to stay somewhere near Times Square in Manhattan, close to all the sights and action. I’m also leaning towards something reliable and not bargain basement – this is NYC and I don’t want a Hotel Carter experience involving bed bugs, roaches, and urine smells. (Note this for later: At their website, they charge $99 a night.)

1. Check the hotel’s direct website.
If you have some favorite chains due to corporate agreements or loyalty points, then this narrows your search down and you can try and check directly with their website. For example, there is Hilton.com, IHG.com, and StarwoodHotels.com for Sheraton/Westin/W Hotels. Here are some quotes (all prices not including taxes):

Hilton Times Square, $195
Hilton New York, $169
W NY Times Square, $272
Westin NY Times Square, $232
Sheraton Manhattan Times Square, $189
Four Points Midtown, $157

This gives me a benchmark to work from. Another benefit here is that they usually have some form of “Best Rate Guarantee”. Starwood will beat a competing vendor’s price by either 10% or give you 2,000 Starpoints.

2. Try to use loyalty program points.
An extension of the above, at times it is better to redeem your points, or some combination of cash and points. For example, the Westin NY Times Square would only cost 12,000 Starpoints per night, or 48,000 points for 5 nights (avg. 9,600/night). Keep in mind the point redemption even covers taxes, which would turn the $232 listed above to $268 per night. Too bad I’m low on Starpoints after visiting Madrid.

You can earn Starpoints faster and get up to 25,000 bonus Starpoints with the Starwood co-branded American Express card.

3. Use the travel search engines. Expedia, Kayak, Hotels.com, etc.
You know the drill. Actually, you can search most of these all at once through Kayak.com. Sometimes one site like Expedia may have special rates for a block of rooms that aren’t available on other sites.

From Kayak, I note that the prices for the Starwood and Hilton hotels were basically the same. After sorting by price, I see that the Holiday Inn NYC is slightly cheaper at $160/night + taxes. A bit farther away in Midtown East there is the DoubleTree Metropolitan at $149. Not too bad. Oh look, Hotel Carter is discounted at $67. Too bad it doesn’t include the cost of burning your clothes afterwards!

4. Use opaque sites like Hotwire and Priceline.
Finally, there are what are called “opaque” travel sites, because you don’t know the name of the hotel until you’ve paid for the non-refundable room. You must decide only based on the star quality rating and general neighborhood of the hotel, which means you can’t look up reviews easily either. Priceline is done using a reverse auction format, while Hotwire just gives you the price.

On Hotwire, I find that I can get 2-star hotel (examples given are Comfort Inn, La Quinta, Days Inn) for $93+tax ($112 total) in a large and vague area that basically covers everything south of Central Park.

5. Using database sites to reverse engineer the hotel information. Sites like BiddingForTravel and BetterBidding gather information from successful purchasers to remove some of the mystery.

For example, what exactly might be a 3.5 star hotel in the Midtown area? Does Hotwire call the Westin Time Square 4 stars, or 3.5 stars, or 4.5 stars? What if Priceline disagrees? What one site calls Midtown West might be Midtown Central to another.

Well, here is a list of hotels in NYC that Hotwire and Priceline has sold rooms for, complete with star rating and neighborhood. From this list, the only 2* in Central Park listed is WooGo Lincoln Center. Of course this might not be the hotel you end up with, but it is a good possibility and you get a sense of quality (mixed reviews).

In addition, you can find a list of winning bids posted by users, and BetterBidding even has a calendar for easy searching. Here are the applicable ones for my situation:

Hotwire Winning Bids
4*, Central Park, Empire Hotel, $139
3.5*, Midtown Central, Sheraton Times Square, $119
3.5*, Midtown East, Millennium UN, $116

Priceline Winning Bids
4*, Midtown Central, Sheraton NY Towers, $125
4*, Midtown West, Sheraton NY Towers, $115, $110, $126
4*, Times Square, Westin TS, $169

Putting things together, if Hotwire is offering me a 3.5* hotel in Midtown Central on these dates, it is most likely be the Sheraton Times Square. Or, in the same price range, I could likely get the Sheraton NY Towers. After reading some reviews, I chose the Times Square location. The prices keep fluctuating, but when I was searching it was at $113. That’s a pretty good price for a solid hotel.

To be the most aggressive, I would go onto Priceline and bid about 20% below the Hotwire price for a 3.5* hotel in the Times Square region, say $95. I don’t want to bid too low, because each time I get rejected, I must change a search parameter (star rating, neighborhood) to bid again. Also, I run the risk of getting another 3.5* hotel that I don’t like as much.

So I held my breath, used Hotwire… and got it. Whew! In the end, I got what I wanted at 40% off the “guaranteed” low price, $113 vs. $189 per night at the Sheraton Times Square.. Over few nights, that’s hundreds of dollars in savings.

To think, if you did no research, you might end up with the Hotel Carter for $99/night! If you have tips to improve this process, please leave a comment below! I know I could try hostels or even couchsurfing and such, but that’s not what I was looking for on this trip.

Filed Under: Frugal Living, Travel //

The MPG Illusion: Comparing Fuel Efficiency Can Be Tricky

Posted on June 16, 2009 // 20 Comments

While researching the benefit of swapping one of my 21 mpg cars for a 31 mpg Honda Fit, I came across a site called the MPG Illusion. The easiest way to illustrate their point is via a quick quiz.

Pop Quiz
The full quiz and explanation is here. But the very core of the argument can be summed up below. Assuming that both cars are driven 100 miles per week:

Without breaking out the calculator, you might think that having 50 mpg and 10 mpg together might average out to about 30 mpg, beating out the two 20 mpg cars. The problem is that using miles per gallon is not intuitive. Why?

Miles per gallon (MPG) is more useful for things like calculating the range of your vehicle.

Gallons per mile (GPM) would be better for estimating the actual cost of driving your car, since gallons is directly proportional to dollars spent.

Okay, a little math. Getting 10 miles per gallon is the same as saying you use 10 gallons every 100 miles. 20 mpg means 5 gallons every 100 miles. 50 mpg means 2 gallons every 100 miles. So in one week, the Option 1 uses 10 gallons per week. Option 2 uses 12 gallons per week. Option 1 wins!

If you remember gallons = $$, this chart below shows (also from MPG Illusion), the savings you get from going from 10 mpg to 20 mpg is a lot greater than going from 30 mpg to 40 mpg. In fact, going from 16 to 20 mpg can save as much gas as the shift from 31 to 50 mpg.

Higher mpg numbers are still better, but the benefit is diminishing. Going for the hybrid might get you the most “green” points, but you might be getting most of the benefit for a lot less money by simply switching to a more affordable car with a decent mpg bump. Is it almost used Honda Fit time? Run the numbers for yourself at this GPM calculator.

(Does this make the “Cash for Clunkers” program more palatable? I don’t know, they could still raise the minimum improvement amounts.)

Filed Under: Frugal Living //

Does My Car Qualify For The Cash For Clunkers Program?

Posted on June 15, 2009 // 73 Comments

You’ve probably heard about the new “Cash for Clunkers” bill that is offering up to $4,500 towards the purchase of a new car. The idea is to stimulate demand for new cars as well as raise overall fuel efficiency by promoting the trade-in of “clunkers” for new and more efficient vehicles. It is officially part of the Consumer Assistance to Recycle and Save (CARS) Act, which recently passed the House and is currently in the Senate.

It’s not finalized or sent to the President yet (don’t buy anything yet!), so there is still room for changes. However, here are the requirements in the House Bill:

Old Trade-In Vehicle Requirements

  • Must be in drivable condition.
  • Have been continuously insured to the same owner for at least one year immediately prior to trade-in. (You can’t just buy a $500 beater for the $4,500 voucher)
  • Manufactured in model year 1984 or later. (mostly due to EPA mpg data not going back that far), and
  • Have a combined fuel economy of 18 mpg or less. You can find your car’s combined EPA fuel economy at FuelEconomy.gov.

If you are trading in a “Work Truck”, defined as having a 8,500-10,000 pounds GVWR (gross vehicle weight rating), then your vehicle must be from model year 2001 or older.

Obviously, another common sense requirement would be that your car should be worth less than the $3,500 or $4,500 you qualify for, or else you could simply sell it yourself instead of going for the voucher.

Let’s check out our cars:

1995 Nissan Maxima
The first car I ever owned, which came to me in excellent condition in 2000. Besides the usual oil changes and stuff, I’ve replaced the starter and 3 out of the 4 power windows motors (annoying common flaw in this model). It is nearly 15 years old now and runs great. Edmunds says my car is worth about $2,500 (sold to a private party). $4,500 for it might tempt me.

My combined fuel economy is 21 mpg. Not quite gas-guzzly enough.

2002 Pontiac Grand Prix
Yes, I have a sad little orphan Pontiac. But I took advantage of its horrendous resale value and picked it up when it came off-lease at 3 years old at my workplace for cheap. The interior is really cheap-feeling, but you know what, it hasn’t run into any mechanical problems at all. The only thing that broke so far was a plastic air conditioner knob.

Edmunds says it is now worth about $5,000 Private Party, which means has depreciated less than $1,000 per year since purchase. My combined fuel economy is 21 mpg.

So I guess neither of our cars qualify, which makes me think that most “beater” cars won’t either. Think of the VWs, Hondas, and Toyotas out there. A 1985 Honda Civic gets over 30 miles per gallon! This law is mostly for SUV and truck owners, and you can qualify for a voucher with as little as 1 mpg improvement (for large trucks) to 4 mpg (for passenger cars). I don’t quite get it.

Indeed, just because you qualify, doesn’t mean you should necessarily go for it. You’ll get some fuel cost savings, but unless you pay cash you’ll also have a monthly auto loan payment. A new car also has higher insurance rates, and you’ll have to carry collision/comprehensive coverage.

Filed Under: Deals & Offers, Frugal Living //

20 Common Attributes Of People Who Improved Their Financial Situation

Posted on June 12, 2009 // 32 Comments

I recently received a review copy of Jean Chatzky’s The Difference: How Anyone Can Prosper in Even The Toughest Times, where she attempts to understand why some people easily move from barely getting by into a life of comfort and/or wealth, while others get stuck or even fall backwards. What are the attributes that set them apart?

From her research, she divided people into four groups: The wealthy, which have on average assets of $2 million, not including home equity. The financially comfortable, who save regularly and have a financial cushion. The paycheck-to-paycheck, who are getting by but are one unexpected expense away from stumbling into the last group, which are the further-in-debtors. Here’s how the population breaks down:

20 Factors

As you can see, plenty of people are living paycheck-to-paycheck. But what about those who only used to live that way? She found that 75% of the wealthy and nearly 100% of the upper-middle class originally came from middle class backgrounds.

Here are what Chatzky says are the twenty key elements of those people who improved their situations. You don’t need to have them all, but she says that you need, on average, ten factors to make your way to financial comfort.

Financial Attitudes
– feel stocks are worth the risk
– devote money to savings
– save regularly for emergencies
– invest for retirement
– reduced debt

Goals
– want to retire comfortably
– want to be financially comfortable during working years too
– always knew what they wanted to do for a career
– made it a goal to accumulate $1 million
– want to own a home

Personality
– are confident
– happy
– optimistic
– competitive
– leaders

Nonfinancial Behaviors
– have a college degree
– socialize with friends at least once a week
– exercise at least 2-3 times a week
– read newspapers regularly
– are married

Sounds simple enough, eh? I call some of these “duh” factors. The rest of the book tries to explore these factors and ways to actually get yourself to really believe and/or achieve them, since simple doesn’t mean easy. For one, there are many levels of “wanting” – do you have the resolve to make it happen? Or, how is exercise related to wealth?

Filed Under: Book Reviews, Career, Frugal Living //

Revitalize Your Aging PC With a Fresh Installation of Windows

Posted on May 28, 2009 // 41 Comments

I apologize for the recent lack of posts, I’ve been having some computer issues. I’ve been experiencing the usual sluggishness that happens after you’ve had Windows for a while, but recently it had been unbearably slow. Even after running multiple anti-virus and anti-malware software, defrag utilities, registry cleaners, I just gave up and had to re-install the operating system. Of course, I’m bad and only make sporadic backups so it took me a while to organize my files and make proper backups.

Although not directly related to finances, I found that re-installing a fresh copy of Windows on your computer can make a huge difference in speed and usability, so much so that you can delay buying a new computer for a while (within reason). This post is somewhat specific to Dell laptops since that is what I have, but much of it is still applicable to all Windows PCs.

According to this How To Restore or Reinstall Microsoft Windows page at Dell, I had a few choices after backing up all my data:

System Restore
This is a Windows OS feature, so it should available across all PC laptop brands. It allows you to revert back to certain setpoints in your system’s past, hopefully back to a date in which everything was running smoothly. But I had been experiencing a slow and gradual decline, and none of the dates I picked improved my situation. It might work better for other folks. The good news is that you can also switch back to your original state.

Restore From Hidden Partition
Most recent Dell laptops have a hidden partition on the hard drive that contains a backup copy of your computer’s original factory software. The official name is Dell PC Restore by Symantec. You just have to hold Ctrl+F11 during start-up. I’m sure this would be great for most people. Unfortunately, my attempt failed. “Your installation was unsuccessful. Please call Dell Support”. Grrr.

Most other companies have a similar setup. For example, I did a successful factory reset on a family member’s Acer computer with Alt+F10. All I had to do was backup their pictures, and I was done in under an hour.

Restore from Recovery OS Disc
I was then left with the final option of manually re-installing the operating system with my Windows XP CD. Two houses and three years ago, I probably had it. Now, it’s nowhere to be found. (Side note: Some computer have you make the recovery CDs yourself. Do it before it crashes!) Luckily, I found that you can request a new recovery CD from Dell:

Dell Customers can now request a set of backup discs containing the factory-installed operating system as well as the device drivers and utilities specific to your system. Requests are limited to one (1) set of backup discs per system purchased.

There was no mention of needing a warranty, which made me hopeful since mine had already expired. After submitting my request, I received an e-mail saying that they would send me a Recovery CD for free, though they did make it very clear they didn’t have to since my warranty had expired. Still, they did FedEx it to me overnight at no charge, so I was very pleased with the service in this situation. Other brands may charge a nominal fee.

Final Result: Laptop that feels like new. Total Cost: $0. 🙂 I am now back up and running, and it is amazing how much difference a fresh install makes. The cobwebs and grimy buildup is gone! I did spend hours on the backup and everything, but even if I bought a new laptop, I’d still have to spend hours reinstalling new apps and transferring files.

More Links
HP Notebook PCs – Repairing or Reinstalling The Operating System

Filed Under: Frugal Living //

Personal Finance Ratios: Savings-to-Income, Debt-to-Income, and Savings Rate-to-Income

Posted on May 22, 2009 // 24 Comments

There was a recent post on how much savings one should have at age 30 over at the Bogleheads forum. Being 30 myself, I was intrigued, but I am in the camp that believes that there is no right answer at 30. You’re still so young that you could just be out of school for a few years, and at that time it’s mostly up to how much student loan debt you racked up. Most important might be your ability to live under your means, and that you’re learning a valuable skill of some sort.

However, there was mention of a paper the the FPA Journal called Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement, where the author presents a variety of ratios as a rough benchmark to help clients determine whether they are on track to retire by age 65. These include Savings-to-Income, Debt-to-Income, and Savings Rate-to-Income.

The actual numbers depend on how you believe your investments will perform annually after inflation. (5% on the left table, 4% on the right.) Definitions below.

Savings include the current value of one’s investments, such as a 401(k), IRAs, brokerage accounts, investment real estate, and the value of any private business interests. The home is excluded as an investment. Debt comprises all debt, including mortgage, student loans, car, and consumer debt. Savings rate refers to the percentage of pre-tax income an investor is saving each year out of their total income.

A Hypothetical Example
Let’s take a look at a hypothetical 45-year-old individual to see how he might use the ratios to assess his financial circumstances. This person has the following financial statistics:

Salary $110,000
Mortgage $125,000
Auto Loan $25,000
Investments $260,000
Annual Savings $10,000
Employer 401(k) Match $3,000

Based on these statistics, the hypothetical individual ratios are as follows:

Savings to Earnings: $260,000 / $110,000 = 2.36
Debt to Earnings: ($125,000 + $25,000) / $110,000 = 1.36
Savings Rate to Earnings: ($10,000 + $3,000) / $110,000 = 11.8 %

As for us, we’re doing okay according to the table for age 30 regarding the savings-to-income ratios (0.5) and savings rate-to-income ratios (50%+). Our debt-to-income ratio is a bit high though, at around 2. Of course, this is highly dependent on our income number, which might change if we downshift with kids. I guess that’s another reason to wait until we’re a bit older to really start benchmarking like this.

One thing I don’t like about the ratios is that home equity is never included, because the author says that it’s hard to extract home equity. Okay, I agree on that point, but there is no mention of compensating for renters in the analysis. If I have no debt at age 65 + a paid-off house, that’s a lot different than no debt at 65 + still paying rent forever. My largest expense by far is housing (greater than all other expenses combined), and having that taken care of changes my retirement outlook drastically.

So… should we be using these ratios as a benchmark?

Filed Under: Frugal Living, Investing, Retirement //

Mini-Recession Gardening: Growing Our Own Herbs

Posted on May 15, 2009 // 25 Comments

During World War II, victory gardens were small gardens in civilian homes started in order to support the war effort. Now it looks like the new term is “recession gardens”, as people try to reduce costs and increase their green factor. So many trendy names for a backyard garden!

We started out with rosemary, oregano, and thyme growing in a little planter that came with the house, which basically grows wild without any help from us. In addition, my wife started a little container garden on the back porch, and we’ve been eating the tasty results for the last month.

According to this CNN article on recession gardens, we are not alone:

W. Atlee Burpee & Co., the largest seed and gardening supply store in the country, says it has seen a 25 to 30 percent spike in vegetable seed and plant sales this spring compared with last.

The National Gardening Association expects 43 million American households to grow their own fruits, vegetables, herbs and berries this year. That’s up 19 percent over last year, according to a 2,559-household survey the group conducted in January.

How much money can you really save with a garden?

Last year, Burpee released a report saying a family will get an average 25-to-1 return on its investment in a garden. So, by that count, a family that spends about $200 on a medium-to-large garden, as Michelle Obama reportedly did, will save $5,000 in grocery bills over the course of a year.

That statistic is inflated, said Mike Metallo, spokesman for the National Gardening Association. Metallo’s group says a $70 investment in a garden will yield $600 in produce for the year. To get those savings, a gardener has to know what to plant, when to plant it, where to plant it, how to deal with different soil types and how to care for the garden.

Keeping It Simple: Basil and Tomatoes
I don’t know about all that, but we started small by only devoting one old medium-sized pot to this effort. We thought about our favorite vegetables, and I figured that the most expensive ones were always tomatoes and fresh sweet basil. We love making our own pesto, caprese salad, and bruschetta topped with olive oil, tomato, and fresh basil.

At the supermarket, one tiny little packet of fresh basil (0.66 ounces) cost $2. Instead, we went to a local nursery and bought an entire basil plant for $2. Add another $10 for some potting soil and some recommended chicken manure as “organic” fertilizer that may last us years, and we were all set. A few months later, and I was amazed at the results. We just ate most of our (small) tomatoes, but here is our basil plant:

The neat thing is that this could be done inside, or on the patio of a small apartment. The savings won’t be enormous, but neither was our effort. Most importantly, the basil is both fresher and better tasting. Now we can expand our garden-inspired menu beyond rosemary roasted chicken and potatoes. All the credit goes to Mrs. MMB, who did all the work and also discovered that you can crumble in some egg shells for added nutrients and to keep out slugs (that’s the white stuff).

Update: Salon.com also has an article on recession gardens.

Filed Under: Frugal Living //

Costco Membership Certificates – Free Chicken, Coffee, Photo Prints, & More

Posted on May 14, 2009 // 34 Comments

Update: Costco is no longer allowing me to sell these certificates. Sorry!

See Is Costco Executive Membership worth it?

Filed Under: Deals & Offers, Frugal Living //

Internal vs. External Frugality: Different Ways of Saving

Posted on March 29, 2009 // 19 Comments

So I am trying to kick off one of my planned 2009 projects, which is to methodically go through each major expense area and explore ways to save money there. I started out last week with on housing costs (here and here), and still have a few ideas left. But while brainstorming an outline of future posts, I noticed that there seemed to be a divide in the types of strategies out there.

One set of ideas usually has to do with reducing the amount paid for a specific item or service. I call this external frugality, because you aren’t changing anything about yourself, just the price tag. For example, to save on what you pay for your house, you could look for a buyer’s agent rebate to save something like 1.5% of the purchase price, or carefully shop for mortgages with the lowest combination of closing costs and interest rate.

Another set of ideas usually involves either changing the type, amount, or quality of something. I call this internal frugality, because you are changing your consumption habits. An example of this would be realizing that you don’t necessarily need to same house as everyone else. You could look in more “up-and-coming” neighborhoods, or live in an older house with less square footage.

There are plenty of other examples out there:

External: Calling a cable company and asking for a lower rate.
Internal: You cancel cable completely. You could read more, watch episodes on your computer, or use a low-cost Netflix plan.

External: You find a cheaper long-distance plan, or switch to VoIP.
Internal: You get rid of your landline completely.

External: Learn ways to haggle down the price of a car.
Internal: Don’t own a car. Use public transportation.

I don’t think either or worse, but they are different. In general, it would seem like external frugality is at least initially easier to implement, as you don’t have to actually change your habits. However, I can also imagine that in many situations using internal frugality would lead to both greater absolute savings and also more enduring lifelong savings. But changing habits is really tough.

Next time you think you’re being frugal, examine if you’re doing it externally or internally.

Filed Under: Frugal Living //

Save Money on Housing: Move To a Lower Cost-of-Living Location… Like Austin, Texas?

Posted on March 25, 2009 // 49 Comments

As you may know, I own a house in an expensive area of the country. I love my house, and I love where I live, but I also admit that I occasionally daydream about moving somewhere with a lower cost of living.

In my experience, many people don’t like the idea of moving elsewhere because it involves something unknown and unfamiliar. However, if you ask people to think back to the places they have been, they’ll speak fondly of those places. Specifically, I think about moving back to a place that I spent several childhood years in – Austin, Texas.

Now, there are many things to consider before moving besides costs. These may include:

  • Can you find a job there? If so, how will the pay change? Will it offset the change in cost of living?
  • Do you enjoy the local culture? Can you easily participate in your hobbies and interests?
  • Love, family, weather, traffic, nightlife, cultural diversity, etc.

I think a lot of people who haven’t lived in Texas (and most other areas) may have a misconception or stereotype of what it’s like to live there, and that is especially true of Austin. What I like about the area includes the relatively temperature weather, a large university center, a strong tech industry, and of course a low cost of living and tax burden. As for the financial details, I grabbed some graphs from the Austin Chamber of Commerce website, which were based on independent data.

Cost of Living Index, 4 Quarters Ending Q2 2007

The index takes into account the combined costs of housing, utilities, transportation, healthcare, and other factors. According to this CNN calculator based on the same index, if you are earning $100,000.00 after tax in San Jose (CA), the comparable after-tax income in Austin is 61,217.

Average Home Price, Middle Management Housing, 2007

(For the chart, a “middle management house” is a single-family dwelling model with approximately 2,200 sq.ft., 4 bedrooms, 2 1/2 baths, family room, and 2-car garage.)

These might have changed a lot since 2007, but the median home price in Austin is still a shade under $200,000. If a house in California costs $600,000 that only costs $200,000 in Austin – how many more years of work would it take to pay for an extra $400,000 plus mortgage interest? Would you move to Texas if it meant you could retire an entire decade earlier? Hmmm…

Tax Burden: State & Local Taxes Per Capita, 2005

So not only do things cost less, but I can also earn a lower salary and still get the same after-tax results. In general, Texas ranks 45th out of the 50 states in terms of total taxes per $1,000 of income. With no personal income tax, the primary taxes in Taxes are property and sales tax. In Austin, property taxes are about 2.2% of appraised value per year.

Quick Summary
Going by the numbers, moving somewhere else can certainly seem attractive. For me, not only do things cost less as a whole, but my income would take much less of a tax haircut as well. Now, I don’t think everyone should move, and I have no plans currently to do so myself. But if you are re-examining your financial situation, it can be worthwhile to keep an open mind and consider the possibilities. Everything is a trade-off, and what you gain may be worth more than what you lose.

Filed Under: Frugal Living, Real Estate //

Save on Housing Costs: Renegotiate Your Rent With Landlord

Posted on March 23, 2009 // 35 Comments
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If you are are a renter in this market, you may be able to lower your monthly housing costs with a little research and courage. Mary Pilon of the WSJ Wallet Blog recently showed how she reduced her rent by 11% by writing a convincing letter to her building manager’s office. She even shares a form letter that people can use themselves. I reverse-engineered some of it to see what types of ammunition might be useful when negotiating with your landlord:

Provide local statistics. A quick Google News Search with the keyword of your city and “average rent” or “rental vacancy rate” should bring up some useful stats. For example, according to Forbes, Atlanta is the nations 3rd most empty city, with rental vacancy rate of 16.1%.

Provide concrete, real examples. Use rent-comparison tools like Rentometer or Zilpy to find out how your rent compares with local properties. (Zilpy also provides rental trends by zip code, as shown below.) Try to find places that are very similar or better than yours, but which are renting for less than you pay now. You could even provide the exact Craigslist page.

Of course, the best comparison is with another person in your complex. Ask what your neighbors what they are paying. That’s how Pilon found out her neighbors were paying $300 a month less than her. If you’re not that close to them, perhaps start up a conversation with “Hey, how’s it going. Isn’t it a bummer that our rents are going up?”. You might get a “Yours too?” or a “Really, mine’s still $XXX…” I don’t see people being overly uptight about sharing rents.

Show why you are attractive renters. Some landlords try to squeeze out every last penny of rent, and deal with the resulting turnover, but 99% of the casual landlords I know would gladly give a discount to low-maintenance tenants. I know some who literally haven’t raise rent in a decade because the renter pays rent like clockwork, takes care of the house, and never bugs them unless it’s really important. You’ll want to show why you should get a discount too.

Remind them that you have a solid rent payment history. Perhaps you have excellent credit scores, or maybe it has greatly improved since you first moved in. Point out any minor repairs or maintenance that you have done on the house, or offer to do some in exchange for a rent reduction. Provide reasons why you want to become a long-term renter, or even agree to extend your lease.

These tactics may not work in all areas of the country, but in lots of places it should at least be worth a shot. The worst thing they can say is no.

Filed Under: Frugal Living, Real Estate //
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