create your own extended warranty

Extended warranties are almost always a bad idea.  An extended warranty is the protection plan offered to you when you buy some gadget or other.  Relative to the cost of the gadget, the extended warranty is pretty expensive, and you almost never get the opportunity to take advantage of it.

In other words, your gadget almost never breaks in the period of time covered by the extended warranty.  It may break early on, due to a manufacturing defect, in which case the plain vanilla warranty that comes standard will cover the repair.  Or it may break due to old age, which will be after the extended warranty period is expired.  Result?  You gave the company a bunch more of your money and didn’t get anything for it.

The problem is, declining the extended warranty makes you nervous.  What if it does break during the extended period?  Won’t you be upset you didn’t buy the warrant?

Try this.  Next time you are offered an extended warranty, ask what the cost is, but then decline the plan.  When you get home, take that amount of money and set it aside in your own “extended warranty” fund.  Do this every time you are offered a plan.  Eventually that fund will be really big, because you won’t ever need it.  You’ll save yourself the expense, you’ll earn interest, and if you ever do have a covered accident, you’ll have plenty of money to just buy yourself a new one.  Beauty, eh?


defining “paycheck-to-paycheck”

There has been much written on the concept of living paycheck-to-paycheck, and the noble cause of trying to escape that rat race.  Here’s a good article, in case you want to read up.

My question is, what does “paycheck-to-paycheck” mean?  Is there anybody who doesn’t live paycheck-to-paycheck?  If a person’s checking account is low on the day before payday, is he living paycheck-to-paycheck?  How large would his checking account balance have to be on the day before payday to NOT be living paycheck-to-paycheck?

I suppose I’m only talking about people who hold down jobs to pay their bills.  Someone who lives on a trust fund or endowment, for example, doesn’t depend on a paycheck to pay their bills.  On the other hand, such a person still cannot spend without regard to their checking account balance.  It’s just that deposits into their checking account come from a different source.  Maybe I’m talking about them, after all.  So does a trust fund baby also live paycheck-to-paycheck?

bucket o' money
bucket o' money

I use a bucket system for managing my money.  Every time I get paid, I put a predetermined amount of money in each bucket.  My buckets are labled, “Auto Insurance”, “Household”, and “Medical”, for example.  After distributing to these buckets, any leftover money goes into a bucket called “Available” to be used for other expenses, like food and gas.  Every time I have to spend some money, I look for an appropriate bucket, and if none can be found, I use the “Available” bucket.

My “Available” bucket is usually pretty empty.  So empty that we often put off buying food until the next payday.  Sometimes we forgo car trips because we only have enough gas for a couple errands.  Occasionally, I even pay the cell phone bill a little late, for lack of funds.  And when the next paycheck arrives, we breath a big sigh of relief, because now we have more money to do things with.

That last paragraph sounds exactly like someone who is living paycheck-to-paycheck, if I understand the term correctly.  At the risk of puffing up with pride (and please don’t take this as pridefull), I can tell you that our checking account has thousands of dollars in it, even at times when we put off purchase decisions due to lack of funds.  Most of that money is sitting safely in other buckets, waiting patiently for the day we’ll need it.  It’s just that there isn’t much in the “Available” bucket.

All in all I think this is a good system – voluntary deprivity, I call it.  (Not to be confused with depravity, which is a very, very different thing.)  I even wrote a newspaper article about it. By creating individual buckets for individual goals, I’m meeting those goals on a limited income, but also tricking myself into not spending much because it always seems like I don’t have much left.

So, what do you think?  Is that paycheck-to-paycheck?  If so, is paycheck-to-paycheck bad?

volutary deprivity

I know something about you.  I know you don’t have enough money left at the end of the month.  There are things you wish you could do, but you don’t have the funds to do them.  If you had just a bit more money, everything would be fine.  This is true whoever you are, whatever your income.

Think about it.  No matter how much money you make, it isn’t enough.  If you make $20,000 a year, don’t you wish you made $30,000?  If you make $200,000 a year, don’t you wish you made $300,000?  This is a near-universal experience.  But rather than whine and moan about it, I wonder if there’s a way we can use this to our advantage?

Let’s say you’d like to be saving 10% of your income, but you haven’t started yet because you don’t know how you’d get by without that money.  Things are so tight right now – there’s no possible way you could survive on less.  But we just established that ALL income levels feel inadequate.  If you earned 10% less than you earned right now, would that really feel any different than what you make now?  Yes, your checkbook would notice, but would you feel any different?  My guess is you’d only notice the difference for a week or two.

Try this experiment.  The next time you get a paycheck, put 10% away somewhere – anywhere, under the mattress if you want – it doesn’t matter.  Then try to make the rest last until your next paycheck.  If you’re like me, just the thought of 10% less scares you to death, but I bet you’ll make it to the next check without much difficulty.  If you’re successful, you’ll be living on less, AND you’ll be saving up for a rainy day.  And you’re doing it EVEN THOUGH you don’t have enough!

This post originally appeared in the January 16, 2008, edition of the Greenhorn Valley View.

unexpected debt

This year we had an unexpected debt come up: $2600.  Other than mortgage debt, we don’t have any other debt, so this is a large amount for us.  We paid it off in seven months, which is good.  Really good, in fact.  I’m pretty proud of the way we pulled our money together to get this debt paid off quickly and with as little interest charges as possible.

Nevertheless, a couple of questions are haunting me.

What were we going to do with that money if we hadn’t incurred the debt?  I’m sad to say, probably nothing.  We probably would have lost that money through the cracks.  Cracks like extra meals out, more expensive meals in, extra do-dads and trinkets for the kids or ourselves.  None of which would have any meaning or purpose.  (Contrary to what you might think if you observed my dining habits, I don’t really think eating out enhances our lives.)

If we hadn’t incurred the debt, and we didn’t lose the money through the cracks either, what could we have done with the money?  I think we could have done a lot.  We could have taken a fairly nice vacation in the mountains, saved for the kids’ educations, made some repairs to the house or car we’ve been meaning to get to, or done something meaningful for charity.  I think the possible meaningful uses for that kind of money are legion.

Here’s the million dollar question.  How many $2600 blocks of cash do we regularly throw away?  And by extension, how many great and meaningful things are we not doing because we throw that money away?  As our experience paying off the debt shows, it really isn’t that hard to come up with that kind of money.  We weren’t hurting because of the debt.  But I think we may be hurting ourselves by not being more deliberate with our money.  This year, I’m going to look for another $2600 in our spending, and redirect it to something I can be proud of.

This post originally appeared in the December 19, 2007, edition of the Greenhorn Valley View.

beginning investing, part 1

Hopefully, if you’ve been saving long, you’re starting to build up a tidy little sum in your savings account.  Before too long you’re going to wonder what to do with all that cash.  You know there are investment options available, but you’ve also heard that some people have lost their shirts with their investments.  Should you get involved?  Maybe it would be best to stay out?  What, exactly, can you do with a little extra money, and what are the risks?

You could continue to what you’ve always done, i.e., leave the money in your savings account.  This is possibly the safest option, since all bank deposits are insured.  Even if your bank should fail (as mine recently did), your money would still be safe (up to $100,000).  The downside of this strategy is that you’ll be earning fairly low interest rates.  My new bank is currently paying 4.2% on a money market savings account.  While that’s pretty good for a savings account, it’s only a tiny bit above the inflation rate, which means it would take an excruciatingly long time to grow your nest egg.  This type of savings account would be a great place to keep your auto insurance premium, for example, if it was due three months from now.

A bank Certificate of Deposit (CD) is an option with an attractive feature – it earns a higher rate than a savings account.  My bank is currently paying 4.8% for a six month CD, and this money is also fully insured.  The downside is you have to tie up your money for six months.  If you need this money before the six months are up, you’ll have to pay a fee to get the money out.  Because of this limitation, CD’s are great places to keep money you don’t need right away, but will definitely need in the near future, like the money you’re saving for your vacation next summer.

But what about stocks, bonds, and mutual funds, that’s where the big money is made, right?  Yes, but big money can be lost here as well.  These types of high-octane investments can be thrilling and depressing, sometimes all in the same day.  Tune in next week when we discuss the advantages and disadvantages of each.

This post was previously published in the November 14, 2007, edition of the Greenhorn Valley View.


I’ve talked a lot before about how debt robs you of your future. To go into debt is to presume that you will have the money at some later point in time, a point at which you would probably rather have that money for other things. But here’s another twist on that same idea: any time you buy anything, even if you pay cash and incur no debt, you are robbing yourself of that same future.

I hear many complaints from people who don’t like being advised to live a frugal lifestyle. “You have to have some fun now,” people say. “I don’t want to live like a miser just so I can go to the grave with a big bank account,” others moan. “Mr. Smith” enjoys reading, double tall sugar free vanilla breve lattes, and eating out. In a typical week he spends $25 on a book, and $75 in lattes and restaurant meals. Mr. Smith complains that he’ll never be able to retire and feels bound to his job. But every week his bank account bleeds $100. Because Mr. Smith wants to “have some fun now,” he is deliberately postponing the day when he can leave his job behind.

What are your dreams? Do you want to buy a house? Do you want to take a big vacation? Do you want to retire early? Do you want to start a business? Whatever your goal is, ask yourself if this latte is worth putting in another hour at work. Or how about this question: “Is being frugal now going to help me reach my dream sooner?” If so, is that a trade you’re willing to make?