Lately my husband has been spending huge amounts of time researching investment strategies.  While we’ve both been committed to long-term savings goals for years, he’s really been getting into the nuances of it lately, and it’s made our retirement portfolios much more interesting to look at (of course they haven’t been much fun to look at this week, but that’s how it goes).  Between our various savings accounts and the extra principal payments we make on our mortgage, way more than half of our income goes into savings, and the new things we’re learning about investing just make us more motivated to keep it up.

We were talking today about how so many people with incomes similar to ours end up spending most of what they earn each month.  It would be easy to do, with payments on two newer vehicles, a more expensive home with a larger mortgage, several meals/movies out each month, some new (as in, not second-hand) clothes here and there… we started tallying up the money that an average middle class family could easily spend each month and it got high very quickly.

Then I started thinking about why people spend so much of their income rather than saving it.  For us, a healthy IRA balance is FAR more exciting than a new car, but I know that this isn’t the case for a lot of people.  In addition, a lot of people really don’t like their jobs, and feel huge amounts of stress over trying to balance work, family, fun, and all the rest of it.  But those same people might have brand new living room furniture, top of the line kitchen appliances, a new car, and a house with lots of custom upgrades.  The disparity between what they own and how they feel is striking.  Many of them are working at a job they don’t really enjoy, just to pay for all the things they own.

Some things are worth the money.  If a thing brings you great pleasure or gets used all the time, it was probably worth the money you spent on it.  My VitaMix blender is a good example.  It cost nearly $400, but I’ve used it at least twice a day (sometimes a lot more) ever since I got it in 2008.  It came with a 7 year warranty, and I can’t imagine my kitchen without it.  Each of us have things like that – a super comfortable piece of furniture, an outfit we feel great wearing, a vacation that created awesome memories… But a lot of us have things that we bought because we figured they would be impressive.  And often times, it wasn’t ourselves we were trying to impress.

This made me start thinking about my friends, and our relationships with each other.  I have friends with a wide range of incomes.  Some have fancy houses filled with fancy stuff, and others have apartments with futons that they’ve had since college.  And I can say for sure that I don’t care at all about any of it.  They’re my friends because I enjoy spending time with them.  They make me happy, and that doesn’t have anything to do with whether they have impressive “stuff.”  Think about your own life and the people you love.  Chances are, your friends and family don’t care about your stuff either.  When they come over to visit, it’s to see you, not your new living room set or big screen TV.  If you had to choose your five favorite people, my guess is that they would be the people who make you the happiest, who make you laugh, who provide a shoulder to cry on when you need it.  And whether or not they have a new car or a house with granite countertops probably has nothing to do with it.

Just food for thought for the next time that the urge to buy something impressive strikes (and yes, it strikes me sometimes too, although I’ve gotten pretty good at recognizing it for what it is and moving on).  The people who love you will love you regardless of what possessions you own.  The people who would like you better if you had more fancy stuff probably aren’t worth keeping around anyway.  And a secure financial future will get you a lot further than anything you can buy at the mall.

Ok, I’m stepping down off my soapbox now.  Hope you all have a good weekend!

My husband and I started our business in 2002, and have been growing it ever since.  The first few years were pretty rough financially.  We incurred a lot of debt, were earning very little, and basically had a life of forced frugality.  Eight years later, things are quite a bit different in terms of debt (only a mortgage) and income.  But our lifestyle has changed very little.  We still drive the same old cars (my husband’s is 20 years old, mine is 19), still buy all of our clothing and household stuff at thrift stores, still cook nearly all of our meals from scratch… We did have a big splurge in terms of entertainment a few months ago, when we signed up for Netflix – now we spend $9/month for movies.

As our income increased and our business grew stronger, we could have started spending a lot more money.  We could comfortably fit car payments and other doo dads into our monthly budget now.  The reason we don’t is because we are focused on the big picture and our long-terms goals.  Without those goals, there would be little to keep us from just spending our money as we earn it.

Our goals involve paying off our mortgage in order to be truly debt-free, saving as much as we can for retirement, and getting ourselves to a position of financial flexibility within the next 15 years or so.  By flexibility, I mean that we might not be quite to financial freedom at that point, but we’d like to be to a point where we can work less and be able to focus more of our attention on things that don’t necessarily bring in money.

Goals like that only work out if you break them into smaller steps that you can focus on regularly – otherwise, you wake up one day and realize that the 15 years have gone by and you’re still treading water.  So we’re paying extra on our mortgage every month – a concrete step.  We put 20% down on our house when we bought it last summer (thanks to the equity we had built up in our first house by paying extra on that mortgage for six years).  We got a 15 year loan with a 4.625% interest rate, and like knowing that every month, when we put additional money towards the principal, we’re cutting time off of that 15 year term.

For the retirement aspect, we’ve both been maxxing our our IRAs for a few years now (in the early years of our business, we could only afford $100/month in each account).  We also have an HSA that we’ve been contributing to since 2006.  Hopefully we’ll never need the money for medical bills and can use that account for retirement too – but it’s nice to know that the money is there (tax free) if we ever do have a medical emergency, since our health insurance deductible is $5000.

Since paying off our mortgage is a huge priority, there is very little temptation to spend our money on other stuff.  Having our IRAs, HSA, emergency fund, and our son’s 529 plan forces us to diversify and make sure that we’re working towards our other goals too, but the mortgage keeps us focused on the big picture, which is to be free of all debt.  It’s much more satisfying for us to see the balance dropping on our mortgage than to have a new pair of jeans.  Yes, the amount it’s going down each month is relatively small compared with the total balance, but over time, it adds up.

For us, big picture goals are what make frugality fun and exciting.  What keeps you frugal?  What are your big picture goals?  I’d love to hear your stories and what motivates you to make frugal choices every day.

Recently I got an email from a long-time reader, asking me if we still keep track of our monthly expenses.  I guess the answer is both yes and no.  We do pay close attention to what we are spending, and I check our bank balances and credit card transactions on a daily basis.  But we no longer keep track of every penny, nor do we break our spending down by category anymore.

We paid off the last of our non-mortgage debt in 2007.  Our income has slowly increased over the years without an increase in our living expenses (actually, as we paid off debt, our expenses went down).  And neither of us liked keeping every receipt for every purchase.  It was interesting to keep track of our expenses, and it did provide some motivation for keeping our spending down.  But we’re pretty far along on our frugal journey at this point.  Frugality is second nature around our house, and we never spend money mindlessly.  We ponder our purchases, buy used whenever possible, and avoid buying much of the time.  We use homemade cloth diapers, prepare pretty much all of our food from scratch, ride our bikes instead of driving, read books from the library, and we don’t even have a TV anymore.  Our cars are nearly 20 years old (no payments, and very inexpensive insurance and registration fees), and everything we wear comes from thrift stores.  We’re spending so much time trying to turn our little plot of land into a mini farm that we don’t have time to go out and spend money (we have spent money on things like fruit trees and berry bushes, but we planned for those expenses).

So we stopped keeping track of every penny spend quite a while ago.  Instead, we use a pay-ourselves-first approach that we like better.  Our only debt is our mortgage.  That means that each month our bills amount to current living expenses plus the mortgage.  In addition to that, we’ve created “bills” for several savings accounts.  Some are automated, some are not, but they are all priorities.  We have our son’s 529 plan, our HSA, our IRAs, and our emergency fund.  We also pay an additional amount towards our mortgage principal each month (it varies, but we try to make sure that each month we pay a little more than we did the month before).  Once we pay all of those “bills” we can use whatever is left over for current living expenses.  If there is a higher-than-usual amount left over, we tend to stash it in one of our savings accounts – we don’t spend it just because it’s there, but that’s probably a result of being frugal for so long that the habits are ingrained.

This is what works for us.  It guarantees that we keep making progress with our savings goals, but it also allows us some flexibility with how we spend our money.  Now that our checking account is paying more interest than our on-line savings accounts, we’ll be keeping more money in checking.  This means that we’ll have to do a little more keeping track, since money that is in our checking account will technically count as savings, and thus be untouchable for day to day expenses.  I do like having our savings in a separate place (out of sight, out of mind), but the extra interest in the checking account is enticing, and we’ll make it work.

What about you?  Do you prefer to keep track of every penny? (my mother started doing that in the early 70s, and still does to this day, even though she and my dad don’t need to anymore)  Do you use the pay yourself first method?  Do you have a budget at all?  Have you started keeping more careful track of your money since the economy headed south last year?  I’m curious to hear what other frugalites (and not-so-frugalites!) do.

Don’t worry… I’m not going to do it.  Not now, anyway.  But I am thinking about it.

Ever since I found out that my credit score wasn’t as perfect as I thought, I’ve been pondering changes I could make to improve it.   I know my score is still really good, but it’s not excellent.  My payment history is spotless, my ratio of available credit to credit in use is very high, and I’ve had credit established since about 1997.  I have a mortgage, credit cards, and a couple store credit cards.  The one thing I’ve never had is a car payment.

My husband’s credit score does fall into the “excellent” category.  For the most part, we have the same credit history for about the last 6 – 7 years, as we started combining our finances in 2002.  But he had a car loan when I met him, and it still shows up on his credit report.  He hasn’t had a car loan since the summer of 2002, so I assume that will be coming off of his credit report sometime this year.  But for now, we think that is what is giving his credit score a boost compared with mine.

I’ve always been proud of the fact that I’ve never had a car loan.  We bought my 1991 Civic with cash ($2300) in 2003, and it’s still cruising along.  Before that, I had a 1989 Hyundai Excel, which my sister still drives.  I just can’t get my head around the idea of paying interest on a depreciating asset like a car.

But I’m wondering if having a car loan might be worth it in terms of boosting my credit (our credit, since we would get the loan together, and I think that my husband’s old car loan won’t be on his credit report much longer).  We’re currently putting money aside so that one day when we need to replace one of our cars, we’ll be able to afford it.  Both of our cars are closing in on 20 years old, and we know they won’t run forever.  Our plan had been to just pay cash for another car one day.

But now I’m thinking about perhaps getting a loan instead.  We would pay it off quickly – perhaps making a total of 10 or 12 payments.  This would minimize the amount of interest we had to pay, while still building an auto loan segment of our credit history.  If I look at the interest as a fee paid to increase my credit score, it doesn’t bother me as much as the idea of paying interest on a car normally would.  If we went this route, we would still only finance as much car as we could afford to buy with cash.  But instead of paying cash, we would make payments for a while.

Right now, both of our cars are running just fine, and we have no intention of replacing either of them until they aren’t running at all.  We put very few miles on our cars, and don’t anticipate having to buy another one for at least a few more years.  So there’s plenty of time to mull this over (and build up our car replacement savings account).  And who knows – maybe there will be zero percent interest offers again by the time we need another car.  One of my girlfriends bought a car in 2002, paid it off in 2007, and never paid a dime of interest.  A deal like that would definitely make me reconsider my “never finance a car” stance.  (Although I think that those offers were limited to new cars, and we would only be interested in used vehicles).

Any thoughts on this?  We don’t often need our credit score, since we rarely apply for credit.  But since we’re preparing to sell our house and buy another one, it’s been on my mind a bit lately.  Anyone have any experience with changes in their credit score following a financed car purchase?

This year – for the first time ever – we met all of our financial goals for the year.  This makes us all the more motivated to stretch further in 2009 and see what we can do.   Here’s our list:

• $5000 into my IRA
• $5000 into my husband’s IRA
• $5950 into our HSA
• $200/month into our car savings account
• $300/month into our solar panel savings account
• $100/month into our son’s 529 plan
• $100/month into our emergency fund
• decrease our mortgage principal by $20,000

The first seven things on the list are pretty much just a continuation of what we’ve been doing.  We put $5000 into each IRA this year, and put $5800 into our HSA (the IRS increased the limit for 2009, so we will increase the amount we contribute).  We have been putting $100/month into our emergency fund for two years, and have been contributing to our solar panel fund, our car savings account, and our son’s 529 since the middle of 2008. 

It’s that last item that will be a stretch.  I am not sure if we’ll be able to reach that goal, but what’s the point of setting goals if you know that you can get there easily?  Having such a large number in our minds will force us to live very frugally next year.  And even if we don’t get to $20,000 (I can’t even type it without swallowing hard), we’ll be a lot closer to owning our house by this time next year if we make this a major focus for 2009.  Right now our total mortgage balance stands at $154,861.  If we live very frugally (which we’re pretty good at), I think we can make a major difference in that number over the next year.  We won’t be spending much of anything on things that aren’t on the goal list, but that’s ok – we like it that way.

I got my final paycheck from the library yesterday.  It was a good one, because I had more than 200 hours of vacation time saved up, and they cashed that out on my last check.  After taxes I ended up with over $2000, which is a good windfall.  Over the last year, I didn’t take any vacation time at all – I worked every shift I was assigned, and I also volunteered to be the person who goes in and empties the book drop and checks in books on holidays.  Every single holiday for the last year.  So instead of having to take vacation time for holidays, I was getting paid to work.  I did that because while I was pregnant, we weren’t sure if I was going to quit my job or not.  If I hadn’t quit, I wanted to have plenty of vacation time saved up for maternity leave and to be able to take days off to stay home with our baby after I went back to work.  Since I decided to quit instead, I just got a check for all the vacation time.  Makes all those holidays when I went in to empty the book drop seem very worth it now!

Anyway, I put $1000 of the money into my Roth IRA.  That’s the first money I’ve put into that account this year.  We plan to max it out, so we still have $4000 to go, but it feels good to have made a start.  The rest of the check will be going into our HELOC.  I’m really looking forward to getting the HELOC balance under $20K, and I’m hoping that will happen within the next couple months.  This will help.

We got our $1200 economic stimulus payment today.  We put the whole thing into our HELOC, since we have decided to make the HELOC a priority for the time being.  We’ve already maxxed out the HSA and my husband’s IRA for the year, and instead of moving straight to my IRA, we’ve been focusing on stashing some extra money in the HELOC first.  We’ll probably do that for the next few months, and then go back to our original goal list and tackle my IRA in the fall.  Paying off part of the HELOC principal was part of our goal list for the year anyway, we’ve just changed up the order of things.  We decided to work on the HELOC for now because the money is very liquid in that account.  Hopefully we won’t need it for anything, and can just pay down the principal on the loan.  But if we do need the money, the HELOC is linked to our checking account, and we have instant access to the money.  We have our ING account emergency fund, which is up to about $1600, and of course there’s the HSA in case of a medical emergency.  But with a brand new baby, it would be nice to just have some extra money in the HELOC just in case. 

I called our health insurance carrier to add our son to the policy, and it’s going to be $158/month.  Ouch.  We were expecting about $100 – $120.  But our policy has a family deductible, which we already met this year when my husband had knee surgery, so if our baby does happen to need anything medically for the rest of the year, we don’t have to pay anything for it.  So the HSA money should be safely locked up at least until next year. 

I’m going to start checking out college savings options, and I hope to have a 529 plan set up by next month.  We don’t plan to fully pay for college for our son, since we think that it’s important that the student have a part in the financial outlays of getting an education.  But we do plan to put aside $100/month from now until he graduates from high school, which should make at least a dent in whatever college costs in 2026.

So for the time being, our expenses will increase by $258/month for sure, just for insurance and college savings.  After that, we don’t anticipate a huge amount of additional expenses for now.  We have everything we need and then some as far as baby stuff goes.  Our homemade diapers are working great, we won’t have any additional medical expenses until at least 2009, and we’ll be staying far far away from Babies R Us.  If the last few days are any indication, our other expenses should go down for a while, since we’ve barely left the house since he was born.  Our already small entertainment and eating out budget will probably actually get smaller for a while, since it’s so much easier to just stay home and have family time.  And since all we want to do it sit and stare at him, that works just fine.

We maxxed out our HSA today.  $5800, done and done.  That feels so good.  A whole lot better than shopping sprees and dinners out.  We maxxed out our HSA last year too, but we did it in the last week of the year, and it was a struggle.  I much prefer having it done in April!  I got the idea to focus on one financial goal at a time from NCN.  I remember reading about how he tackles each goal until it’s finished and then moves on to the next, and I decided to give it a try for our goals this year.  So ever since the first of the year, we’ve put everything we could scrape together into the HSA.  There’s been a little trickle devoted to other goals – we pay a little extra each month on our mortgage; we put $100/month into our ING account for emergencies, and we put $200/month into my husband’s traditional IRA.  I like the automatic nature of these payments, and they’re small enough to be manageable, while still big enough to make a difference at the end of the year.  So we kept those, but put everything else into the HSA.  I would move money into the HSA as soon as we got paid, so that we weren’t tempted to use it on anything else – if it’s not there, you can’t spend it.  Anyway, it feels great to be finished with the HSA for the year.  And we shouldn’t have to take any more money out of it, since we’ve already met our health insurance deductible for the year. 

Now we can move on to my husband’s traditional IRA, which is our second goal for the year.  Since we put $200/month into it automatically, we only have to come up with another $2600 to max it out for the year.  Our tax refund should get deposited tomorrow, and we’re planning to put $2600 of it into the IRA.  That will be two of our goals met for the year, within 24 hours of each other.  The refund is obviously not a normal part of our income (and not something I want to make a habit of – I’m hoping to get back to our usual refund of a couple hundred dollars next year), so it almost feels like cheating to hit the IRA goal so soon after the HSA.  But I suppose we could be going to the mall tomorrow night to buy a big screen TV instead of putting the money into the IRA…

I’m debating where to go next… we had planned to start working on my Roth IRA as soon as we maxxed out my husband’s IRA, but with the baby due next month, part of me wants to pad the emergency fund a little more instead (we’ve only got about $1500 in it, which is a lot less than a month’s worth of expenses for us).  Maybe we’ll deviate from our one-at-a-time method and work a little on both for a while. 

Our insurance business is doing really well lately.  After four years of working on our website, my husband’s efforts have paid off, and the website is ranked number one on google for the keywords he targets.  Business has been good, although we’ve both been busier than ever…

A happy result of all the extra business is that our paychecks and dividends from our corporation will be higher this month than they have ever been.  So what to do with the extra money?  Since we laid out our financial goals for the year back in December, we don’t even need to wonder about what we’ll be doing with any extra paychecks.  We’re still working on goal number 1, which is to max out the HSA, so that’s where the money will go.  And once that’s finished, we’ll be moving on to my husband’s IRA… I suppose if we managed to max out the HSA and both IRAs and put an extra $5000 into our HELOC before the end of the year and still had extra money (not likely…) we could look for other things to do with it.  But since we have such concrete goals that are already a bit of a stretch for us, there isn’t any temptation to go on a shopping spree when we happen to end up with more money than we expected in a given month.

It’s definitely helpful for us to have our goals so clearly laid out, and to have them be such a large percentage of our total income.  For us, this works much better than just saying “we’ll save as much as we can” or something like that. 

We had a prenatal visit today – everything’s still going really well with the pregnancy, and the days seem to be flying by.  We paid another $1000 to our midwife – we only owe her another $650, which we’re scheduled to pay in mid-April.  I remember when we were thinking about having a baby and we knew that the midwife’s fee would be $3000.  That’s a lot of money for us, and we knew we’d be paying ourselves, since health insurance doesn’t cover home birth expenses.  But by putting whatever we could into our HSA throughout 2007, and then really focusing on the HSA this year, we’ve had the money in the account each time we’ve had a payment due, and it hasn’t felt like a strain on the budget. 

I’ll be putting another $500 into the HSA tomorrow, which will bring our total contribution for 2008 to $3200.  That’s more than half way to the maximum allowable contribution, and we’re only two months into the year.  It’s still a strange feeling for us to be able to talk about maxxing out things like our HSA and IRAs.  During the years we were in debt, that was never a possibility for us – it was a stretch to put $200/month into our IRAs back then.  We did max out our HSA last year, but just barely – I think I made the final contribution after Christmas.  This year, it will be nice to have it done in the spring so that we can forget about it.

Having our financial goals laid out in black and white is very helpful for me.  I met some girlfriends on Saturday for a day of shopping and girl talk, and we had a great time.  I spent $15 on lunch, $8 on a gift for my husband, and 68 cents on a folder to hold our tax receipts from 2007 (it cost about $6, but I had a gift card worth $5.20 that I got when we returned a Christmas gift we didn’t need).  I walked around with my friends for an entire day at a major outlet mall without buying anything.  It helps that we were in clothing stores all day and I’m almost seven months pregnant – so I couldn’t have tried anything on even if I had wanted to.  But I really didn’t want to.  I have a closet that is jammed with clothes, and I really don’t enjoy shopping for clothes unless I’m in a thrift store.  In a mall, all I can think about is how much money I would be wasting if I were to buy anything.  I was thinking instead about how good it would feel to make a $500 HSA deposit this week.  I got the best of both worlds – I was able to spend time with my friends and still have money to put towards the goals that we’ve decided are priorities for the year.  And I’d much rather have a maxxed out HSA than a few new shirts.