No Debt Plan

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I’ve been aware of Skype for quite some time. It’s a very interesting idea — making phone calls from your computer to land line phones and cell phones.

However, I never truly paid it any mind. It requires a Skype phone, and you have to sign up for service. I’m in the target demographic — 20-30 somethings — but I have a cell phone. Why would I pay for another phone and another service?

Wait, did you just say $2.95/month unlimited calling in the US and Canada? Woah. Now I’m paying attention.

Again, let me restate I doubt I would use the service. But it sounds like a darn good deal.

Compare to…

• Vonage $24.99 per month
• Typical phone service $15-20 per month plus long distance charges
• Cell phone (roughly 10 cents per minute)

…then $2.95 per month (roughly $36 per year) and you get unlimited calls within the US and Canada. If you do a lot of desk work or call from your home phone a lot, that seems like a stellar deal.

Maybe I’m missing something. You tell me. Skype — too good to be true or simply awesome deal?

Update: Comments from the Readers

Some readers have pointed out that Skype to Skype calls are absolutely free if both users have Skype and a microphone for a computer. So if everyone was using Skype, you wouldn’t even have to pay the $3/month charge. However, $3/month for unlimited calling to non-Skype users is still a great deal.

(Photo by ToastyKen)

I got my first Walgreens EasySaver gift card in the mail last week. I decided to try the EasySaver plan a try after reading about the program at BeingFrugal.

My first purchase was a 6 oz. tube of Aquafresh toothpaste. The transaction ended up where my toothpaste paid me 17 cents to buy it even after tax. Not bad, right?

The giftcard with the 10% bonus came in the mail, full of $3.84 worth of spending goodness. The new month kicked in with a new list of items that you can get for free after rebate. Most of them were not of any interest to me, but there was an Oral-B toothbrush for free after rebate at a cost of $4.49.

Here’s how the transaction will play out:

• Toothbrush cost: $4.49
• Tax (5%): $0.22
• Total: $4.71
• Use Gift Card ($3.84): $0.87 paid with AMEX card
• Rebate w/10% bonus to gift card: $4.49 x 1.10 = $4.94
• Rebate minus cost: $4.94 - 4.71 = $0.23

Again, it doesn’t seem like much and I did have to invest an additional 87 cents to get the toothbrush. This brings my total investment to the cost of the toothpaste and toothbrush, or $3.66 plus 0.87. Total investment thus far is $4.53, and for that money I’ve gotten a toothbrush and toothpaste. On top of that, I’ll end up with $4.94 in money to spend at Walgreens on the next item.

It’s only one item a month that I am currently buying. Next month there may be nothing of interest to me to buy, and that’s fine. As I mentioned last time, this isn’t going to make me rich. But the mentality to go out and find a deal on simple every day items will add up over time.

(Photo by MShades)

The pet industry is a multi-billion dollar industry in the United States. We really like to take care of our pets.

Of course, we got a puppy two Saturdays ago. We have incurred expenses as you might expect — adoption fee, collar, leash, food and water bowls, food, toys… the list goes on and on.

We were in PetSmart the other day looking at dog food. The Humane Society gave us a 5 lb. bag of Science Diet for Puppies, which they recommended. We found the location of the Science Diet and did some investigation. Just like you might check the per ounce cost at the grocery store, we did the same thing with the dog food.

The per pound cost of dog food

This is what we found:

Small bag, 5 lbs.: $11

Big bag, 40 lbs.: $40

Woah… wait a second. Do the math. The small bag is $2.20 per pound. That’s practically chuck round ground beef! The big bag is only $1 per pound.

There is a significant bulk discount to buying the bigger bag. If you buy the smaller bag you pay a 120% premium. I could understand charging a little bit more for the smaller bag, but 120% seems a bit over the top.

Long story short, if you have a pet make sure you’re checking the per pound or per ounce cost of the food. Compare it to other bags from the same brand. I would imagine that generally the more you buy, the cheaper the food is.

When our free small bag runs out, we’ll definitely be getting a big bag of the dog food.

Thanks to our American Express Blue Cash Card, we’ve earned $327 in cash back so far this card year. The card year is dependent on when you signed up for the card, so ours runs August-July. Last year we earned over $430 just by using our card as we would a debit card.

This is why I believe in credit cards. They are a tool. They can be misused.

We don’t pay an annual fee. We don’t carry a balance. And we get cash back from 1-5%.

But you tell me… would you like to have essentially a free $327?

I think we all would. Feel free to correct me.

(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 think most people buy more clothes than they can possibly use. So you wore the same shirt to work two weeks ago… who cares?

Then again, some people push the limits of frugality and let clothes become worn down and tattered. That is pushing it too far, looks unprofessional, and can seriously damage your career.

We all need to buy additional clothes at some point. With a little forethought and planning, you can get incredible deals online and in stores by simply waiting:

• In spring and summer, buy winter clothing.
• In autumn and winter, buy summer clothing.

It’s April 17th. If there are any sweaters or winter coats left at the store, now is a great time to buy.

It’s a simple idea, no doubt. Timing is critical for this strategy to work. If you wait too long into a new season, you may not be able to find things in your size or style. If you go too early, the heavy discounts may not be applied just yet. It may be too late to find a decent winter coat in stores these days. Maybe you can find something online instead.

Some things are discounted throughout the year at seemingly random times or simply don’t get put on a severe discount. Men’s dress shirts would be an example. There isn’t a typical “dress shirt season” as there is winter coats. For these items, just doing your research and buying when a deal comes around seems to be the best option.

What about you? Do you just buy clothes whenever you feel like it, or do you plan ahead?

Christine recently commented on one of my posts with a question about The Concept That Changed Our Financial Life.

I am trying to wrap my head around this concept but can’t. Can you possibly explain it to me in a little more detail? Is this an emergency fund or is it in addition to an emergency fund and how do you not use the money?

I’ll be glad to try and explain it better. Sometimes I’m not the best with examples.

To answer the question, no this is not a use of the emergency fund. It could be, but we prefer the “safety” of having additional funds set aside in case of emergency.

Below I contrast how the average Joe earns, spends, and saves money to what we do. Average Joe is living paycheck to paycheck. Money comes in on payday and lasts the next two weeks — just in time for that next paycheck.

Joe finds it hard to plan or save any money because he is constantly worried about paying his current bills. If he lost his job, he would be in quite the pickle because more bills would be do soon.

We do things a little bit differently. We saved up a monthly “buffer” in our checking account. That buffer is equal to the amount of money you spend consistently each month. If your rent, utilities, food, etc. is budgeted to cost you $2,000 per month then you’ve got $2,000 sitting in your checking account. So on Day 1 of the month, you’ve already got that money sitting in your account ready to be deployed for this month’s expenses.

Throughout the month when you get paid, you don’t spend that extra money. You keep it in the account, but it’s as if you’ve put it into an envelope that says “Next Month” on it. You can’t open the envelope until the first of the next month. Any additional income you earn over your monthly expenses goes into your savings. Any money that you don’t spend on your expenses (say your utilities cost $17 less than you expected) also goes into savings.

How about another visual?

Step 1: The Beginning of the Month

You’ve got your $2,000 in the account ready to be spend on your expenses. The expenses are listed below, sort of like an envelope system. If you write a check on April 2nd for your electric bill, you lower the amount in the “utility” row. If you buy groceries on April 7th and April 21st, on those days you would lower the “Food” row by whatever amount you spent at the grocery store.

As you earn income throughout the month, it is “deposited” into the “Deposits for April” row. Remember, you’re not spending that money. You’re spending the $2,000 you already had saved. And you don’t have anything in the savings row yet either. That comes at the end of month.

Step Two: The End of the Month

At the end of the month your Excel spreadsheet might look like this:

1. You’ve earned more than you spent on the month — a good sign. You earned $2,500 this month, but your budget from last month’s money was $2,000.

2. Some of your costs were lower than expected. You saved $38.63 on a combination of spending less on food, utilities, and whatever else you had in your budget.

3. Note you still haven’t spent a dime of the money you earned in April. That $2,500 is sitting up in “Deposits for April” ready to be turned into next month’s budget.

Step Three: Re-fill the Budget Categories

Now all you have to do is distribute the money you earned in April for May’s budget, as seen to the right.

1. Note that the total amount of money in your checking account hasn’t moved. You are just moving it from one place to another on a spreadsheet.

2. You’ve taken $2,000 out of your April deposit money (originally $2,500) and distributed it throughout your budget. $800 here, $300 there, etc. This leaves you with $500 left over from the previous month — a healthy amount.

3. You’ve also dropped that extra money you didn’t spend in April — $38.63 — to the To Be Saved line. You would add the $500 income left over as well to this amount, and apply it towards your savings goals.

And that’s that. You just went through a whole months worth of budgeting.

The hardest part of this whole concept is getting a month’s worth of expenses saved up. It could take a while to save $2,000. In the example above, it would take 4 months if you consistently earned $2,500 per month. Once you’ve got the money saved up, keep it in your checking account (we use ING’s Electric Orange, so we earn interest on it). As money comes in, it doesn’t touch the budget until the next month.

Following this concept will also make your life a lot more simple, at least in my humble opinion. We no longer have to time our bill payments based on when our paychecks will hit the bank account. We just pay the bill out of this month’s budget.

Christine, I hope this makes it a bit clearer to you. To use this concept, you’ve got to have a budget. You’ve got to know how much you can spend each month (the budget is the monthly maximum). Of course, if you spend less money, all the better. It drops to savings.

Readers, let me know if you have any questions. I’ll be glad to answer them via e-mail or, with your permission, use them on the site.

Patrick over at Cash Money Life put up an article today titled Spend $10. It’s Worth it! Long story short, he bought his wife some flowers and chocolates out of the blue and completely surprised her. Patrick, you are absolutely right.

Don’t let your frugality get in the way of maintaining or furthering your relationship. Yesterday was kind of a blah day for my wife and I both, so after dinner we went to Bruster’s ice cream. Two cones came to around $6 after tax. Unhealthy and unfrugal — not good. But we treated it like a date and it was awesome.

Frugal is good. Relationships are more important. However, that is said with a caveat. Just because your husband wants to buy a $3,000 TV doesn’t mean you should relent just because of the relationship. That’s a dumb decision if you are climbing out of debt. $6 ice cream every so often? I can let that slide.

(Photo: Chocolate Raspberry Truffle Ice Cream Cone by Bethany L King.)