Most personal finance blogs advise people to find less expensive options for having fun, i.e. go camping instead of taking a full-fledged (and expensive vacation).  While this is good advice, it can be very easy to turn what should be an inexpensive trip into a not-so-inexpensive-anymore trip.

I’ll give you an example from my own life.  Mr. Savvy likes to camp.  Me, not so much but I make the best of it which means I must camp ‘in style’.  We headed to our local sporting goods store recently in preparation for our trip.  The only thing we actually needed was a new propane tank for our grill. 

What did we leave with?  We got the propane.  I got a spelunker hat (it’s actually called a headlamp but spelunker hat sounds more fun) for me because it’s dark in the woods.  Then Mr. Savvy said it doesn’t actually provide that much light so I got a lantern too.  Common sense would have said get one or the other but not both but I think my spelunker hat is cute.  Of course, I had to get batteries, lots of batteries - can’t chance running out of power in the woods.  Then we got a super-duper warm sleeping bag.  Yeah we already have a sleeping bag but it’s not super-duper warm and I get cold easily.  I did resist the urge to buy a handy-dandy all in one spice bottle though.  I would be oh-so-convenient to not carry five different bottles into the woods but I had to draw the line somewhere.

I’m not sure how much all that stuff cost (though I did have a coupon of course) because I stuck Mr. Savvy with the bill since he’s the one who likes to camp, hahaha.  However, we easily spent $50 on things we didn’t need and have survived without when camping in the past.  So beware of inadvertently turning an inexpensive activity into a costly activity.

It’s very easy to get complacent in life as well as with your finances.  I’m definitely guilty of this.  Therefore, i’ve decided to give myself a challenge.  I hope you’ll join in and create your own challenge.

I currently save ~20% of my gross income for retirement.  My challenge will be to increase that amount to 25% for this year.  I think it may prove difficult (I’ll be honest, I like my standard of living and don’t want to cut back) but I’m going to try it anyway.

For the purpose of this challenge, gross income will be my gross salary and any bank account interest received as well as any miscellaneous or side income.  I will not be including interest or dividends paid to retirement accounts as I have no access to those.  Retirement savings will be defined as my 401(k), IRAs and taxable brokerage account NOT any general savings accounts.

I usually do a month-end financial statement so sometime this week I will add a status bar as of April 30th and then update monthly after that.  What are YOU going to challenge yourself to do?

People often ask in what order should they utilize the various retirement accounts/options.  Below is my take on the matter.

Stage 0 - Have an e-fund (at least 3 months’ expenses) in place - This should be your first priority so that when (not if) the unexpected happens, you don’t have to accrue debt.

Stage 1 - 401(k) up to the company match - This is typically the most beneficial because you get ‘free money’ (the company match) as well as tax savings.  Each dollar you put into your 401(k) reduces your taxable income, saving you between 10 and 35 cents (depending on your tax bracket) for each dollar.

Stage 2 - Traditional IRA, if you’re eligible - Depending on your AGI, you may get a full or partial tax deduction for your contributions.  There is also a saver’s credit for those deemed low-income (under $26K for singles, $39K for head of household and $52K for married filing jointly).

Stage 3 - 401(k) to the maximum ($15,500 for 2008 unless over age 50, then $20,500) - Once again, you are able to reduce your taxable income (and therefore your taxes) by contributing to your 401(k).

Stage 4 - Roth IRA if ineligible for a traditional IRA - While you won’t receive any tax deductions for your contributions, you are using after-tax dollars.  Therefore once you retire, qualified distributions are not taxed.

Stage 5 - Taxable Accounts - I only recommend utilizing taxable accounts for retirement once you have exhausted your other options.  It makes fiscal sense to take full advantage of all the tax-deferred and tax-advantaged accounts that are available to you.

Of course, one size does NOT fit all when it comes to retirement planning.  If you’re self-employed or employed by a company that does not offer a 401(k), then you will need to seek out other options but there are several to choose from.

I recently read The Number by Lee Eisenberg.  In it, he defines four different types when it comes to retirement planning - the procrastinator, the plucker, the plotter and the prober.  (Click here for definitions.)

Personally, I think I fall somewhere between plotter and prober.  I’m definitely a number-cruncher.  I get a great deal of enjoyment (maybe TOO much - LOL) from creating spreadsheets and planning my path to my own “number”.  However, I have defined what I want retirement to look like and I think I have a pretty balanced lifestyle in terms of living for today vs saving for tomorrow.

I suspect a large part of the population falls into the two first two categories - procrastinator or plucker, which can prove troublesome.  I can’t imagine how it feels to wake up one day at age 50 or 60 and realize I have no idea on how to retire.

So which type are you and if you’re one of the first two types, what are you going to do about it?

Over the past few months, I’ve noticed that I’ve started succumbing to what some call ‘lifestyle creep’.  My finances are on auto-pilot and doing well so I’ve stopped paying attention.  I don’t always take the time to search for a frugal solution and I’ve started spending money on things I previously haven’t.

As of late, I’ve been valuing my time much more than money (and not necessarily wrongly).  I was on travel last week and got home late Thursday evening.  I was off on Friday and the last thing I wanted to do was clean house.  So I didn’t.  I paid a housekeeper to come in and do so.  I’m also seriously considering having someone come in once a month to clean.  Sure, I could do it myself but I really don’t want to and why else do I work if not to have the freedom to decide how to spend my time and energy?

So while, lifestyle creep is always a bad thing, it’s something to be aware of.  The key is making well-thought out decisions and not just spending blindly.  So while I’m going to keep the housekeeper, I will be sure to plan/shop better in order to avoid buying takeout (an increasing and undesirable trend) instead of preparing food at home.

Have you noticed that you spent more once you got to a comfortable financial place?

I apologize for neglecting my faithful readers.  However, I’ve been out of town on business travel.  So, what do YOU want to know in regard to personal finance?  Ask your questions in the comment section and I will try my best to answer them.  Thanks!

Ok, so there’s a game of tag going around the blogosphere. Bloggers who are tagged are asked to to write a six-word memoir, link to the person who tagged them, tag five more blogs, and leave a comment with five more blogs to play. The Frugalista tagged me.

My memoir is….

Living my life like it’s golden.

This is from a Jill Scott song.  I try to make the most of each day because I realize that tomorrow is not promised.  While I do save and try to be frugal when I can, money is nothing but a tool.  My goal is financial freedom but that doesn’t mean I shouldn’t stop to smell the roses along the way.  I’m not going to tag anyone but feel free to tag yourself.

 photo credit: Kecko

A few weeks ago, Mr. Savvy and I decided that relying on the kindness of friends was getting old when it came to transporting/hauling stuff.  So this past weekend, we bought a pickup truck (no, that’s not our truck).  Now, one could argue that it would have been cheaper to simply rent a truck for the occasions we need to haul something.  However, that’s not really convenient.  So let’s see if convenience is costing us.

Around here, you can rent a truck from Home Depot for $19.99/hour.  Let’s assume each rental would be for two hours.  That gives a cost of $42.38/rental (including tax).  Our cost of ownership of the truck for the first year will be $967.20 (purchase, insurance, registration).  That means we would have to use the truck 22 times in the first year to break even on our purchase.  I’m quite sure that we will use the truck at least that much this year because we have a couple of landscaping projects we’d like to complete.

For subsequent years, the cost of ownership will drop to $367.60 (insurance, registration) which will only require 9 uses to break even.  Once again, I believe we’ll use the truck at least that much.   Note that I didn’t include the opportunity cost (cost of using funds to purchase the truck upfront vs saving or investing).  I didn’t want to overly complicate the calculations.  I also didn’t include gas or maintenance.  These costs will be neglible since the truck won’t be driven much (in terms of mileage) and can be considered the ‘cost of convenience’.  So it seems that financially and otherwise, it was worth it to purchase the truck.

This type of calculation can often be useful when decided whether or not to make a purchase or when evaluating various options.  Of course, it would be wise to make this calculations BEFORE you actually make a decision 

photo credit: PPDIGITAL

People often wonder how they should go about making a budget.  In my opinion, CREATING a budget is easy.  It’s STICKING TO the budget that can be hard.  Here are the simple guidelines I used when I created a budget.  Of course, you can tweak these percentages as need be.

tithes or charity - 10%

retirement savings - 20%

savings (e-fund) - 5%

taxes (estimated effective rate) - 15% for homeowners, 25% for renters

housing - 30% (mortgage/PITI and maintenance) for homeowners, 20% for renters

everything else - 20%

I’ve found that using these amounts as a guideline will have you well on your way to financial stability/independence.