No Debt Plan

No Debt Plan is a blog about living a debt-free life. If you're new here, you may want to subscribe to my RSS feed (e-mail subscription also available). Learn more about me, or read some other popular articles. Thanks for visiting!

I’ve been out of it for a few days and am still not caught up. These are some articles I’ve seen thus far in my RSS reader and elsewhere that were really enjoyable.

PFBloggers.com:

• Living Almost Large wants to know what we would do if we came into $1,000,000. I’d love to expand on this post in the future. Long story short? We would pay off the house
• Girls Just Wanna Have Funds has an excellent guest post from Master Your Card about stretching your food budget during hard times.
• Pinching Copper wants us to calculate how much our purchases are actually costing us. We pay for our groceries in about 7 hours worth of work per month.
• Savy Saving calculated her net worth and has cracked the $100,000 mark — congrats!

Elsewhere:

• Darren Rowse knows that PR is being updated, but has a key reminder for all us aspiring blogging millionaires.
  • If some of the toolbars I’ve seen are correct, No Debt Plan has jumped from Page Rank 0 to Page Rank 3! Awesome!
• FIRE Finance has updated their list of the Top 100 Personal Finance Blogs. I’ve finally made the list at #91 overall, and #41 via Site Meter. Woohoo!
• Wal-Mart is going to offer free rebate cash checking and discounts on specific groceries. I think this is a brilliant business move. Bring those customers into your store, give them something for free, put money in their hands, and have them go spend it in your store.

(Photo by Refracted Moments)

Yesterday we discussed why the government thinks giving you and I “free money” is a good idea. Today, I’ll show you three superior alternatives to spending that money on a flat-screen TV.

Pay down your debt

This is by far the absolute best thing you can do if you currently have debt. Spending this money is good for the economy, but you going bankrupt isn’t helping anyone. The faster you pay down debt, the faster you will be free to do as you please with your finances (to a point, of course).

Let’s say you have credit card debt at an interest rate of 14.9%. Your principle amount is $10,000 and you pay $200 per month towards your principle and interest. If you just paid $200 each month, it would take 78 months (six and a half years) to fully pay it down. You will also pay $5,717.39 in interest, or 57% of the original value of whatever you charged on your credit card.

If you pay down the principle with your $600, you will finish payments in 70 months and only pay $4,798.60 in interest. Interest saved? $918.79.

Start or Continue Saving

You need to have an emergency fund for those rainy days where you go to bed thinking “What else could go wrong?” Having money saved up for those days when everything goes wrong — your transmission dies, the cat needs surgery, and your washer started leaking heavily.

Use this rebate for that purpose. Open up an online savings account — we used to call them high yield until all of the rate cuts slashed interest rates down to pitiful levels — and don’t touch the money until you absolutely have to. I recommend ING Direct. If you already have an emergency fund saved up, start saving for that next big purchase like your next used car or the down payment on a house.

Even though the fed is going to cut the rate today and online savings account isn’t a bad place to have the money. I prefer savings accounts to CDs because if you are just getting started with saving it makes the money accessible for when you do have an emergency. You don’t sacrifice interest with a savings account. If your funds were in a CD — well, most CDs anyways — you have to give up 30, 60, or 90 days of interest if you pull the money out before the maturity date. Savings account general accrue interest daily, and there is no penalty for withdrawing some or all of the funds.

Start or Continue Investing

If you’re to this option, congratulations. You should be living debt-free and you’ve saved up an emergency fund. Maybe you’re just getting to this stage. Maybe you’ve been investing for the past ten years. Either way $600 may not seem like much.

However, invested in a broad diversified portfolio that earns just 8% for 30 years that $600 turns into $6,037. Earn 12% annually and you end up with almost $18,000.

Stick that money into a Roth IRA and see what happens when you retire.

Long Story Short

The government wants you to blow the rebate check on things that will boost the economy. They want you to spend, spend, spend. Don’t buy that. Use this “free money” as an opportunity to get speed up your No Debt Plan. If you’re still in debt, pay it off. If you have no debt, build an emergency fund or save for something else. If you’ve done all of the above, then consider investing it.

It’s all about the mentality where any extra money that comes in — tax rebates, bonus checks, or raises — doesn’t lead to lifestyle inflation. It isn’t easy, but it is worthwhile.

(Photo by Fleur-Design)

Starting this week, millions of Americans will be receiving tax rebate checks ranging from $600 to over $1,800 depending on how many kids are in your household. The government is hoping that you and I will take those ‘free’ checks, run out to Best Buy, and buy a LCD flat screen television. Today I’ll discuss why the government thinks that is a good idea. Tomorrow I’ll tell you what we’re doing with our check, and show you options of what you can do with yours.

Why does the government want me to spend $1,200?

I’m currently enrolled in an economics class in my MBA program. We discussed the rebate checks during the macro economics portion of the class. I will try not to get too technical and leave things easy to understand. For you economists out there, cut me some slack as this isn’t a lecture!

In an economic sense, any economy’s output runs off of these three things: consumer spending, investment, and government spending. Consumer spending is where you and I spend our hard earned dollars. It is affected by taxes and income (higher taxes or lower income = less spending = less output, and vise versa). Investment isn’t the type of investment you and I discuss regularly. This investment is capital investment. In a business sense, building factories, buying equipment, etc. Government spending is… where the government spends money.

Increasing spending in any way induces varying levels of a multiplier effect, dependent on what the increase was based off of.

For example, imagine the government decides to repave every single interstate in the country. They borrow (or tax) money, and jobs are created. Perhaps a new department is formed, which employs people. Workers are brought in to do the repaving. They earn money, and spend it in the grocery, video game, and hardware store. Those stores employee people, who get to keep their jobs and earn money because of the spending of the repaving workers. They go to the grocery store… etc.

As I mentioned earlier, consumer spending is affected by income and taxes. The rebate checks are essentially a form of lowering taxes by giving money back to the population.

All of this hinges on the marginal propensity to consume…

What is the marginal propensity to consume (mpc)? Essentially it is how much of every discretionary dollar you will go out and spend. If I gave you $100 and you would normally spend $95 of it, your mpc is 0.95. So mpc is on a scale of 0 to 1.

Right now America’s mpc is very high. We are spending more than we are earning and end up with a negative saving rate. Our mpc is very close to 1.

So, the government is trying to boost the economy by giving you and I some extra money. An equal amount of boost could be given by increasing government spending, but tax breaks are far more politically popular. Because our mpc is so high as a country, if most people spend the money then the economy will be given a boost.

That’s a big if…

If America becomes fearful of a recession and instead saves a majority of the tax rebate, it will be a lot less effective. This would bring down mpc (at least for this transaction); the lower it falls, the less boost the economy gets.

So if you want to be a proud American, play along with the government and go spend that check. If that just doesn’t seem right to you, stick around.

Tomorrow I’ll show you how to be a smart American.

I didn’t get a chance to write anything up for Saturday or Sunday. I think that’s the first time in a while where I haven’t had a post ready to go. I don’t think I’ve ever gone two days in a row. My apologizes. Hopefully you can forgive me…

Holy cow we got a dog!

Yup, Saturday we set out to do the following things:

• buy some car tools from Harbor Freight
• visit the humane society
• go to a local discount home decoration store
• go to Lowe’s to buy garage storage and perhaps some patio furniture

Here’s what we ended up getting done on Saturday:

• adopting Maggie from the Birmingham Humane Society

What can I say? She stole our hearts…

Why We Got Her

It’s been in the cards for quite some time that we would get a dog of some sort at the beginning of summer. My wife is a teacher and will have all summer to train the new addition to the family. I had a cat growing up, and her parents still have the family dog. We’ve been wanting to have a companion for quite some time, but managed to push it off until the summer of this year.

Dogs are Expensive

As Free Money Finance consistently tells his readers, having a pet is not only a serious emotional and time commitment — they’re expensive too. I completely agree. The cost of owning a dog on average is $1,200 or so per year.

We went into this with eyes open… an understanding of the cost and time required of us to take care of any dog we adopted. We have the money available, we have built up two months worth of an emergency fund, and “dog expenses” is an actual category in our budget. We felt not only emotionally ready, but financially ready too.

How It Happened

We got to the Humane Society around 11 Saturday morning. We looked at two dogs. The first was a one year old Shepard mix named Camey that was very, very timid. The adoption counselor said she hadn’t been abused, but was just very nervous and probably not good for a home with kids. She said she would warm up.

The second was this little furball named Lima Bean. She was also very shy and kind of skitish, but also very cute. Of course, this is a puppy. Not many puppies lack the cute factor. We spent some time with her, left to discuss the options, and ended up deciding on Lima Bean. We signed the paperwork and went home to puppy-proof the house as well as get the leash and collar we had already purchased (Tennessee Vols garb, no doubt) before coming back to get her. We walked out with her at 4pm, ready to face a new adventure.

To be frank, we thought the name Lima Bean sucked. So Lima Bean is now known as Maggie. Maggie is a Labrador Retriever mix… they thought mixed with Shepard. Only time will tell. She will get big, and we have a relatively small yard without a fence. We have made a commitment to exercising her twice daily, rain, snow, or shine. It is a monumental task, and we understand she won’t be a puppy forever. She is likely to get very large. It should be fun.

So! That’s the big news for us. Regularly scheduled programming comes back tomorrow. Too tired from

I missed having a post for today, and it is doubtful I’ll have one ready for tomorrow.

But I have some exciting news to share on Monday morning.

More later! Appreciate your understanding.

Chris commented on my post, One Simple Step to Retiring with $1,000,000, with a question about Roth IRA minimums.

You say the max is $5,000 is there a minimum? If I can’t afford to do the $416.67 per month, what is the lowest that I can go without any kind of penalty. Or can you go without putting anything in for a year or two, not that you would want to do that. Just curious, I’m not completely familiar with the way the Roth works. Thanks Kevin!

The best answer? It depends.

There could be a few different minimums: minimum to invest in a mutual fund, minimum amount required to open the account with the firm, or minimum amount you can add additional funds to your account with.

There are a multitude of places you can setup your IRA/Roth IRA. A bank, brokerage firm, or directly investing with a mutual fund/investment firm are a few options that come to mind. Each is going to have different requirements of you to open up an account.

For example, we use Vanguard for our Roth IRAs. To invest in Vanguard’s mutual funds — through Vanguard or a brokerage firm — you need $3,000 as a minimum to invest in that mutual fund. The only exception is the Vanguard STAR fund with a minimum of $1,000. Everything else you need $3,000 to get started. However, after that the smallest amount of money you can then add to that fund is $100 if I remember correctly. You don’t have to save up $3,000 at a time unless you want to use multiple funds. We are currently invested in a Target Retirement Fund to get started, so we have no need for another fund right now.

If you setup an account with a bank or brokerage firm you would have an array of options to invest in. Some would have higher minimums than others. Some of the firms may even require you to have a certain amount just to open the account regardless of how much you invest in each mutual fund or stock.

It really does all depend. We have been completely satisfied with Vanguard in the short time we’ve been with them. We didn’t have $3,000 saved up initially, but just set aside money each month until we reached the minimum.

My advice? Just get started today. Do whatever it takes. Set the money aside in an online saving account like ING until you have enough to start investing. Step by step you will get there. Just remember the first step is always the hardest.

The weeHouse by Alchemy Architects is by far one of my favorite prefab green homes on the market. The weeHouse can be built in several forms ranging from a 341 sq. ft. studio to a 1,230 sq. ft. two story “tower”. Everything is built within the factory and placed on a truck to be taken to your site. The truck arrives, offloads the house onto your foundation, and you hook up utilities. Bam, you’ve got a house.

Pretty impressive. The photo above doesn’t do the house or the website justice. Some very nice photos of actual installed homes (again, people are actually buying these) are shown.

Info from Fab Prefab:

• Complete factory-built dwellings that arrive on trucks ready to live in.
• Available as studios, one- and two-bedroom, kitchen/living, sleeping, and stair models.
• Can be customized or combined to fit any need: House, Cabin, Office, Addition, Rooftops etc.
• On-site work includes the foundation, utility hookups (sewer, water or electrical supply), and simple fitting of the modules.

Pricing for Your weeHouse

Costs vary from market to market and on size of your weeHouse. Some examples below.

• Studio: $70k
• Small: $80k

The website is unique, not very proper “architect” which I guess you might expect from a group called Alchemy Architects. The only hiccup I had was some of the links did not work in Firefox. An example is the very nice brochure. Clicking in my version of Firefox gave me nothing, clicking in IE gave me the brochure.

I’d love to drop one of these off out in the middle of some vast land if I could get a complete off-grid setup going. And buy off-grid I mean internet, cell phone access, solar/wind power, clean water source, etc. And for the price you really could do that.

I’ve told you about the experience my wife and I have had learning how to tend to our lawn and plants at our new home. We’ll continue to share stories of our rookie mistakes like how we bought weed killer on clearance as our lives progress.

I’ll get to the plants that pay dividends in a minute, but a brief background on our landscaping and gardening abilities:

We did some more landscaping a few weeks ago. It seems every time our parents come to visit, we put them to work in the yard. They seem to enjoy it though — they have green thumbs. We have brown. They are doing everything they can to get a hint of green in our thumbs.

Our parents tend to love saying “Oh, with this plant you just can’t kill it.”

A few weeks later and all we have left is brown, crispy, crunchy, ruined plant. It never fails. Brown thumb strikes again.

Seriously, buy plants that pay dividends

Honestly… in general, I like plants. Green, yellow, red… they’re all fine to me. You might go as far to say I find them aesthetically pleasing (just don’t tell me group of guy friends). Take the plant to the right here, Dianthus deltoides. We have some form of dianthus that my Mom brought from home planted in the back. Apparently it should spread over the years and take over the area it’s in. We’ll see — we’re just trying not to kill it.

Now if I could only buy plants that money would grow on, I’d be set!

Until I am able to breed that plant in my laboratory (what, I haven’t told you about my laboratory?), I’ll stick with other plants that pay dividends.

We’re not talking about public corporations that make plants. Or plants that earn you 3% cash dividends. No, I’m talking about perennials.

For those like me (the uneducated gardner): There are two types of flowering plants: annuals and perennials. Annuals are plants that you have to plant annually. You plant them once, they bloom then seed themselves, and die. I used to think it was the type of plant that came back (without needing to replant) annually. “Annuals come back annually, right?” Not so.

Instead, perennials are flowers that you plant once and they reappear every year* with minimal effort. Of course minimal depends on your definition of the word. Plants need water, proper soil, and maybe a bit of fertilizer so it isn’t necessarily a no-work required deal. But it’s a lot better than replanting annuals every year.

* = Perennials can apparently be short lived as well, but usually live up to two years. Some can last eons.

It’s a bit of a stretch to make this comparison, but what the heck: buying perennials is kin to investing in a stock that pays a consistent dividend payment.

1. Buy once.
2. Plant once.
3. Enjoy multiple years of flowers.
4. If you’re lucky and have a green thumb, your plants might even spread and grow extra plants. This is equivalent to reinvesting your dividends in a DRIP plan. Your plant DRIP plan will work better if you use water. Ha-ha.

What do you think? Are you a fan of annuals-only, perennials-only, or a mix? And stick around, tomorrow I intend to have an article up about a modern pre-fab green home that I’d move into today if I had the chance.

April 22nd is Earth Day. Have you made any drastic changes to your life style today? Will you make changes because of this ‘holiday’?

We do our best to live as green a lifestyle as possible. We have CFLs in our heavily used lights. When old lights burn out, we replace them with CFLs. We let the temperature rise inside the house during the warmer months, and drop in the colder ones. We try to turn off lights when we leave rooms.

I’ve promised more ‘green’ oriented articles here, and I have failed to deliver. For that, I apologize. I’m trying to do better and crank out some interesting stuff.

(Photo by aussiegall.)

What steps are you taking to be more green?

Update #2: I also answered a question from the comments below in a different post. It addresses Roth IRA minimums.

Update: Hello StumbleUpon users! Learn more about me or read some more articles. Thanks for all of the up votes! Please leave comments on your thoughts. We had a bit of discussion over at Stumble Upon with some of the reviews, so check those out, too.

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I’ve got a keen interest in learning more about how changing one thing in your life can have a huge impact further down the line. More on that in the future.

The Roth IRA is one of those changes. One simple decision that can truly change your life.

The government allows you as an individual to set aside $5,000 (as of 2008) per year of after-tax money for your retirement. I decided to use the Roth for this example because it eliminates taxing gains on your investment, which makes the example a lot more simple.

So what happens if you start early and set aside just $5,000 per year?

Let’s run the numbers.

Using Excel, you can calculate what amount of money you would end up with based on the following criteria. I’m using myself as an example because, well, I know everything about me.

• Age: 24
• Retirement: 66 (I would rather retire earlier than this, but am willing to work this long)
• Annual Contribution: $5,000 after-tax dollars
• Annual rate of return: This can vary greatly. We’ll stick with a very conservative 7% per year.

You can make changes and run your own calculations with my Roth IRA calculator (in Excel).

Long story short? If you start early, you can retire as a millionaire by just using one investment vehicle. No need for five different accounts with three different brokers. A simple Roth that through whatever investments you chose earns 7% per year, nets you $1.2 million (give or take some due to rounding error). You can see a chart of your cumulative contributions compared to the balance in the account. See how much you are earning at the end without having to put more money in — the beauty of compound interest. (You can click on the chart to see the full size.)

For those who like easy steps:

• Pay off debt, live a debt free life.
• Commit to putting away $5,000 after-tax money into a Roth IRA. That’s $416.67 per month.
• Invest in index funds like Vanguard’s Total Stock Market, Total International Stock Market, and Total Bond Market. Lower fees = higher returns.
• Earn a ‘measly’ 7% return on your investments each year until retirement.
• Retire with $1.2 million.

Want to run your own numbers? I’ve uploaded the handy Excel workbook for you.