My husband and I have been reading the Bogleheads forum for a few months now, and have found a lot of the discussions to be fascinating.  We’ve also gained some great ideas in terms of strategies for maximizing risk while minimizing expenses with our own investments.  If you’re not reading Bogleheads yet, check it out – there’s a topic for just about everybody on that site.

We haven’t decided what we will ultimately do, but for now, we’re working through the process ourselves.  Just as with our taxes, we want to really understand the whole plan, rather than just hand it over to a lawyer.  The first step we took was to pay $14 for the Suze Orman protection package, which is teaching us a lot.  We’ve already used it to do my healthcare power of attorney and advance directive (still need to get it witnessed and notarized), and will do my husband’s this weekend.  That alone is worth more than the $14 we paid for the program.  We’ll go through the whole program, paying attention to the details and figuring out what questions we need to ask ourselves, and what the answers will be.  We may end up using a lawyer for the will and/or trust paperwork, but I want to understand all of the details before we show up in the law office – if we do at all.

One of the issues to which we hadn’t ever given much thought was inheritance in general.  I guess we had both just assumed we’d leave our estate to our son, but we hadn’t thought about it beyond that.  Once we started to consider it, we decided that we don’t like that idea at all.  In general, we’re both relatively opposed to the idea of people inheriting large sums of money.  Right now, our net worth isn’t much.  But it’s growing at a fairly good pace, and ten or fifteen years from now (to say nothing of fifty), it could be a considerable sum.  We have known several people who are aware that they stand to inherit large estates, and to be perfectly honest, we feel that the knowledge of the future inheritance has had a negative impact on those people.  Some even get irritated when their parents spend money, as they feel entitled to the money (?!?!)  Some don’t put much effort into saving or planning for the future, as they are simply counting on the inheritance to fund their retirements.  To each their own, but our opinion is that large inheritances are often more of a curse than a blessing.

We want to give our son the tools he’ll need to be successful in life.  We’re saving to help pay for his college education, but only $100/month, and we have no plans to fully fund his education – we want him to take an active part in that process too.   In general, we want to give our son the things that money can’t buy.  We want to teach him the value of money, and how to manage it responsibly, but we want him to earn his own money and make his own way in the world.  As soon as we had a conversation about this, it was an a-ha moment for both of us.  We didn’t want a will or trust that simply left everything to our son.

For now, our son is not even two yet.  If we both die, he’ll need a guardian, and he’s also the contingent beneficiary on our life insurance policies.  The guardian we’ve picked is just as frugal as we are, and the life insurance money would be more than enough to raise our son to adulthood and pay for college.  But what about the rest of our estate?  These are the questions we’re looking at now, and there are no easy answers.

We did take a first step earlier this week when we opened our SEP IRA accounts.  We each listed each other an our primary beneficiaries, but rather than listing our son as the secondary beneficiary, we each picked a favorite charity.  The nice thing about retirement accounts is that beneficiary designations make it very simple to transfer assets without a will.  The Vanguard forms we filled out just required us to check a box and list the charity of our choice – couldn’t have been easier.

Hopefully we’ll both live to be 110 and spend our last dime the day before we die.  But just in case, we’re working our way through this process.  I gotta say, I’ll be glad when we’re no longer pondering our mortality!

But time has passed and our business has grown, and we decided to revisit the retirement account question.  We looked at three options: the Individual 401k, the SIMPLE IRA, and the SEP IRA.  The 401k option would have allowed us to contribute a larger amount of money, since the contributions aren’t based on salary (we could each put up to $49,000 into a 401k).  The SIMPLE would have allowed us to contribute $11,500 of our salaries, plus up to a 3% match from our corporation.  The SEP allows our corporation to contribute up to 25% of our salaries into our accounts.

We debated the relative merits of each option, and discussed it with a representative at Vanguard, where we had decided to open our accounts.  The 401k allows the highest contribution, but is also the most complicated to set up and maintain.  And neither of us is going to come anywhere near having $49,000 to put into the account.  So the higher limit would pretty much be a waste at this point.  That narrowed the choice to the SEP or the SIMPLE, and we liked the simplicity of just having the contributions come straight from our corporation, without having to mess with paycheck deductions and contributions from multiple sources.  We’re an S corporation, so all of the money our business earns above expenses goes to us one way or another – either by salary or by distributions.  Now we’ll just have lower distributions and the the company will put money into each of our SEP IRAs each month – and the company will get a tax write off for doing so.

We’re still working at paying off our mortgage as quickly as possible, and we will continue to max out our IRAs and HSA, and keep contributing to our emergency fund and our son’s college account.  With all of that, I think that the restriction on the SEP that limits our maximum contribution to 25% of compensation will be more than enough.

It feels great to be opening our new SEP.  We completed all of the paperwork yesterday, and things should be on track for initial contributions in March.  After eight years of self-employment, our business is finally starting to be all grown up.

As with any financial ideas that you read on a blog, please don’t think that what works for us is the best option for you.  If you’re looking at setting up a retirement account for your business, do your research and talk with an accountant if you have questions.

In other news, my article was an editor’s pick in the Festival of Frugality today.  Thanks RC!

Jacob lives in an RV, and leads a very simple – and happy – life.  My family has a house with 3/4 of an acre of land, but we also lead a simple, happy life.  Our expenses are quite a bit higher than Jacob’s, mainly because of the house.  But we have a 15 year mortgage with a fixed 4.625% interest rate, and we’re working hard to pay it off in less than half of the scheduled time.  Once we do, our expenses will drop considerably, since our mortgage accounts for about half of our monthly expenses.

We’re also working towards our goal of growing most of our own food, which will further reduce our expenses (food is our highest expense after the mortgage).  Buying a house with a large yard was a big part of our long term plan, and it feels great to make extra payments on our mortgage every month, knowing that we’re working towards owning our own mini-farm someday.

Right now, we’re saving about 50% of our after-tax income (I include the extra we pay toward the mortgage in this figure).  I’m so impressed by Jacob’s story, and inspired to keep focusing on our long-term goals.  Retirement means different things to different people, but I think that everyone would appreciate more time to devote to things that they love rather than things that they must do in order to earn money (for a small percentage of people, these are one and the same, but for most people, there are plenty of things they would rather do than whatever it is they do to generate an income).  If you’re interested, check out Jacob’s blog and get inspired to start saving for your own independence day!

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!

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.

But while Wells Fargo was relatively convenient at our old house (about a 20 minute bike ride), it is much less convenient here.  The closest branch is about 13 miles from here – not a quick bike trip that I can squeeze in between all my other tasks during the day.  That sealed the deal, and convinced us to go ahead with a change.

We are now the proud owners of business and personal accounts at our local credit union.  So far, we are thrilled.  The personal account pays 5.01% interest on all funds up to $25,000.  That is more than three times what ING is paying us right now, and was a huge selling point for us.  In addition, the credit union rebates ATM fees that other banks charge (automatically, no need to keep receipts), offers free bill pay (which our WF account did not), and delivers exceptional customer service – we’ve been blown away by the level of service we’ve received during our account set up process.

The credit union is about a mile from our house.  It’s in the local grocery store, which we can see in the distance if we look out our back door.  It takes just a few minutes to bike over there, and is also a nice walk with the dog.

Now I’m plowing through the switching process, which is not much fun.  That is the main reason I waited so long to do this – I knew it wouldn’t be fun.  I’ve started making a list of all the places I need to notify about the change, and there are 23 items on the list so far.  Plus bill pay setups, which I haven’t gotten to yet.  We had been with Wells Fargo for a long time, and our entire financial life is linked to them in one way or another.  It will take me a while to untangle all of that, but I know that this is worth the effort.  It will be nice to be earning such a good rate on our money, and it’s nice to feel like a valued customer.

Some of my readers had mentioned credit unions back in January when I detailed our troubles with Wells Fargo, and that was part of what inspired me to look into the idea – thank you!

We’ve got our final numbers on both sales now.   We’ll net just over $42,000 from the sale of our house, and we need to show up at closing for the new house with about $45,000.   So that works out just about perfectly.  We decided to go with a 15 year mortgage on the new house, and we got a rate of 4.625%.  The shorter loan term means that our monthly payments will be about $300 higher than our current mortgage payment.  We debated for a while on that decision, but in the end the lower interest rate won us over.  The HOA dues at the new house are only $50/year, as opposed to the $80/month that we pay now.  So that reduces the difference in mortgage payments down to about $225/month.  And for the last several years, we’ve made additional payments on our mortgage, ranging from $100 to $1000.  So we feel comfortable with the slightly higher payment, given the lower interest rate and the shorter loan term that we’re getting in trade.  We don’t have any debt other than the mortgage, which helped make the decision a little easier.

We’re going to focus on our emergency savings account for a while, just in case.  But given the relatively small difference in mortgage payments, it was worth it to us to go with the 15 year loan.  Our goal is to pay off the mortgage in about seven years, so for now we intend to pay quite a bit more than the required payment each month.  But we feel confident that even if our job situation were to change, we could handle the new payments without too much stress.

I don’t know many people with 15 year mortgages.  Have any of you opted for higher monthly payments in trade for a lower interest rate and shorter term?  Are you glad you did, or do you wish you had taken out a 30 year loan?

I think it’s time for a round up of my favorite posts from the Frugal Blog Network and around the blogosphere.

Frugal Zeitgeist has a very detailed first quarter checkup of her 2009 goals.  It’s inspiring to read, and a good reminder that yearly goal-setting is great, but in order to be successful, it’s probably a good idea to keep track of your progress every few months.

The Tight Fisted Miser writes about tracking his activities to figure out where he’s wasting time.  I know what he means about the internet… Since I’m online most of the time for my job, it’s easy to get distracted and find myself out and about in cyberspace (twitter, anyone?).  I make an effort to keep my non-work online time to a minimum.  But then I find stories like this one, and before I know it I’ve spent 20 minutes reading through the article and comments.  Ah, the internet.

Almost Frugal has 7 money saving ideas that might seem crazy – but give them a chance.  Definitely worth a read.  And I’m sure you can add a few more to the list if you try.

Not Made Of Money has a post about keeping laminate floors clean, without spending a bunch of money or using nasty chemicals.  I’m a big fan of vinegar as a cleaner.  This is pretty much the same way I clean our floors (wood and laminate).  I have a mop with a washable microfiber cloth attached to it.  I rinse the rag in the sink, spray it with vinegar, and that’s about it.  Works great, and there’s no worry about chemicals on the floor.

The Frugal Duchess has an article about mistakes she made with her emergency fund, and what she’s learned.  I like her idea about having multiple savings accounts, each with a specific purpose.  We have a college savings account for our son, IRAs, an HSA (for medical expenses, but it doubles as a retirement fund if we don’t need to use the money for medical expenses), and three accounts at ING that each have a different purpose.

Elsewhere in the blogospherse, Alissa at On Purpose Living had a baby boy last week!

Sheri at Green and Crunchy made kale popsicles and kale ice cream!  I make green smoothies every day (sometimes two or three times a day) and kale is a favorite around here.  I don’t have popsicle molds or an ice cream maker, but I often make very thick smoothies that are the consistency of soft serve ice cream, pour them into bowls, and freeze them for a while.  And lately I’ve been making chocolate pudding in my blender: cocoa, bananas, avocado, a few dates, some pumpkin seeds, chia seeds, ice cubes, and water.  Blend, enjoy!

Frugal Trenches has posted a very comprehensive list of ways to save money.  She’s recently made some amazing changes in her life, leaving her job and finding a much more peaceful, relaxed existance.  But to do so required an ability to live on a lot less money.  So check out how she did it, and be inspired.

Hope you’re all having a good Friday!  It’s a no-spending day around here… anybody else with me?

My dad pointed out that it would take several financial blows to knock my parents down.  They’ve already withstood a few, the biggest being the autoimmune disease that struck my dad without warning in 2001 and caused kidney failure.  He had to retire at 55, several years ahead of schedule.  Even with health insurance, his medical expenses eat up a huge chunk of money every year.  It’s not an ideal situation, but it would be much worse if they had been in debt when he got sick.  They’ve always planned carefully, and while they’ve never had a great deal of money, they stretch what they do have farther than anyone else I know.

My parents would never in a million years put in granite countertops or buy a big screen TV.  They drive a Hyundai that they paid for with cash.  They taught me everything I know about shopping in thrift stores and at yard sales.  They are the king and queen of do-it-yourself, and make frugal into an art form.  Years of living like that put them in a position where a pretty significant financial blow wasn’t able to topple them.  And they could withstand several more if necessary.

That is our goal.  My husband and I are working to get ourselves to that point.  When we bought our house six years ago, we were far from it.  Our mortgage was a stretch for us, and starting our own business at the same time made things even tougher.  We worked our butts off, but we were also lucky.  We had the various financial hiccups that go along with starting a business, but we didn’t have any major catastrophes.  We’ve gotten ourselves to the point where we could withstand some financial difficulties without too much of a problem, but we still have a long way to go.

These days our income is more than it was when we bought our house.  But we won’t be upgrading to a more expensive neighborhood, buying new cars, or abandoning the thrift stores where we do our shopping.  Upgrades are fine, as long as your financial situation stays the same or gets better.  But what if it gets worse?

I look at every month where our income exceeds our expenses as a gift that should not be squandered.  It’s an opportunity for us to build up a wall around our family to shield us from whatever life might throw at us around the next bend.  That’s why we’re so focused on saving and living frugally.  A few years ago, we had to be frugal because there simply wasn’t enough money in our budget to live any other way.  Now, we choose to be frugal because we don’t know what the future will bring.  Our income isn’t huge, and it could easily be eaten up if we chose to upgrade a few aspects of our current lifestyle.  But carefully considering every purchase means that we’re able to put money aside every month instead of spending it.

I hope that we’ll continue to have smooth sailing for many years to come.  And we’ll be careful and do our best to make that happen.  But sometimes life throws curve balls that are tough to anticipate.  Insurance (life, health, liability, etc.) can help with some of those, but avoiding debt and building up savings will make it much easier for us to weather whatever storms might lie ahead.  And to me, that brings more comfort than anything we could spend our money on right now.