Investment Lesson #1

I think one of the hardest things about saving and investing is the pace of it. I don't know how many times I heard my dad say, "If I only had $10,000 to invest..." We all think that way sometimes, at least those of us who grew up hand to mouth like I did. $10,000 seemed like an impossible sum of money. I remember my mom saving $3,000 to put into an IRA (which they lost most of, selling when it hit $500 and putting it all into bonds) and it was like, wow, $3,000!

Saving takes patience. Investing, it seems, also takes patience, except more of it. I now have $150 in my investment account, but I can't make my first trade until I hit $350. Ho, hum. I'm waiting. I want to live on mac and cheese and put half my paycheck in so I can get started. I'm ready! To invest! Now!

Yet even I, as the greenest of green investors, know this is not the way to do things. It is best to start slowly and approach with caution. I have a deferred compensation account with a little money in it (now almost $3000 between two accounts) and it has gained, then lost, then gained again. I know this is how it works (by the way, I made $135 last quarter -- yippee!). Plus, I hardly know what to invest in yet.

So this is lesson number one, according to all the books I've looked through to date:

Invest in What You Know
Reading this was a huge relief, because pretty much 90% of investing is what I don't know. Maybe 95%. I've been looking around at what I use and know ... Target? New Balance? Eddie Bauer? It is surprisingly easy to find products that I know and use that can be invested in. Next is the hard part:

Research the company so you know it
Sure I "know" about Hormel chicken, but is it a company I want to invest in? What about Cargill? Is it publicly traded? What are their labor practices? Are they conducting shady deals in Mozambique or supporting schools and small farms? Sometimes things aren't what they seem; Cargill, on the one hand, is big, evil agribusiness. On the other hand, they are doing an amazing job of helping African farmers by paying a fair trade amount for cotton. It's a mixed bag.

Predict the Future
Ha ha ha, just kidding. Nobody could predict the future to see if a company would be profitable, but there are some red flags that crop up when you stay familiar with the business world. For example, Starbucks offers benefits to part-time workers, and is expanding quickly. Coffee is an extremely profitable business. But, I am thinking of the downside too -- Starbucks products are high-calorie items, so they could run into the same issues as McDonald's and other fast-food restaurants, with impending lawsuits for misrepresentation. They are also very aggressive, and some people see them as predatory. So, by reading what is happening in the business world, I can make an educated guess as to possible problems that can effect a business.

Invest in what matters to you
In my mind, a business that provides a good product and is fair to their workers is probably going to keep expanding and doing well. I feel better about investing in that kind of business, and after all, it's my money. I want to spend it on what I want, and that includes investing in companies I think are doing good business and contributing to the community. Maybe that's the woman and mother in me, but who cares? I might make a quick profit on some unknown company that provides a product unknown to me, or I might lose my shirt. I'd rather reward the companies that matter to me and to my life.

Take your time
This is the hardest part for me. I have been saving so aggressively, I overdrew on my checking account. I want things to happen, and I want them to happen now! But saving and investing is not a race. Most investments lose money from time to time. I am in it for the long haul, and losing $29 to the bank in overdraft fees is not the way to make money! I am learning the lessons the hard way. It's like dieting, but for your checkbook; slow and steady wins the race. I am trying to let go of my parents' ideas on money and save that $10 or $20 when I can. Maybe it will be this summer before I can invest, but it certainly gives me plenty of time to research my favorite companies and decide what I want to buy.

I am reading books and subscribing to financial RSS feeds. Hopefully, when I do invest, I can do so wisely. And, if when I lose money, I can't blame myself (a woman's curse!) but can step back and say I did my best...and hope for a better quarter next time.

Re: Kids Do Cost

Recently Boston Gal blogged about the cost of having a child, and there were a lot of comments, particularly about the reality of expenses. Some said $30K a year; others said $20/month. I think both are kind of a stretch, at least in my opinion.

It is hard to pin down the expense of having a child, because there are those who think that Baby Gap and matching furniture is an absolute necessity, while others get by on hand-me-downs and yard sale furniture. However, there are a few real expenses that do crop up. My husband and I were taken by surprise after our son was born; I had driven a Ford Festiva for years and suddenly we realized that a) It wasn't safe, b) It was hell getting a car seat in and out of it, and c) It rode so bumpy he cried the entire time whenever we went anywhere and made us both crazy. So, a new car had to happen, to the tune of about $10,000. With the new car came triple the cost of insurance. Oh, and maintenance costs changed: we paid $110 for four new tires on the Festiva, but the cost of one new tire for our new compact was $60-80, more than doubling the price. The cost of registration for the car went up by 1000%, and I'm not kidding. And that was just the car.

Here are some other numbers:
Daycare for Tucson (1 child): $350-700 a month, $650/month minimum for an infant.
Daycare in a metropolitan area (Washington DC) for one infant: $1400 a month.
Car seat: $50-350, and usually multiple versions must be bought as the child grows.
Crib: $175-? as much as you want to spend, to buy new.
Changing Table: varies, usually $50-$100. We got a $250 dresser with a top that converted to a changing table, killing two birds with one stone.

Bassinet: $50 and up, with moses baskets the cheapest at $50 exactly.

This brings up an issue: this time around (2nd kid) we bought a mini co-sleeper ($125) and a crib that fully converts into a toddler bed and then a regular bed ($325). We kept the mattress from our first child's toddler bed to use, but new mattresses are about $40 and up. The reason we did this is that we wasted a lot of money and time trying not to buy a crib for our 1st child and really didn't save much of anything. Here's what we bought: moses basket, $50; full-size co-sleeper (that eventually was broken), $225; extremely on-sale toddler bed, $50 + $60 mattress (also broke over time); twin bed, used, $100 (we got the mattress for free from a relative). Total: $485 and a lot of broken or worthless furniture, versus $550 for some beautifully made new furniture. We spent the extra $65 to save the headache. Okay, back to expenses.

Diapers and formula: $75-100/month. If you breast feed, it's free, but if you breast feed and want to work it's $250 for a double electric pump (I have to have one, as I don't have the leisure time to spend 45 minutes pumping at work) and $5 for a box of breastmilk bags. I go through about one box every two months. If you breastfeed for more than 6 months you break even.
Clothes: $40/month minimum unless you get a lot of gifts.

Total minimum cost for the first six months of a child's life: $1005 without daycare, $4905 with daycare. I didn't include things like blankets or a diaper pail, as we got a ton of free blankets from the hospital and you can always just tie the diaper in a plastic bag and throw it in the garbage. This is a very conservative estimate. In reality, my husband and I saved $5000 for my son's birth in 2002, and we spent all of it within 3 months. I tried to be very frugal, but the cost of a first child is high. I will say that it wasn't so bad for my second child, because we had everything. I am not embarrassed to dress her in her big brother's blue outfits either; it's ridiculous to not use perfectly good clothing because it's blue.

There was much discussion in the post about this article -- 6 ways to be grown-up about debt -- because the couple was going to spend $500 on a birthday party. Is $500 excessive? Yes, it is. But it is not unusual. I have been to a birthday party where the child had so many gifts, he actually got bored opening them. Now that is a family that is not spending the $167.50 a month I just discussed -- or even the frugal amount of $817.50 a month for a child in daycare -- but yes, it is pretty common. A lot of people work long hours away from their children, and the equation seems to go like this: number of hours away x guilt = extravagant gifts. My husband and I do a lot of trading to keep daycare costs down (see below -- they are still more than my mortgage) and have our children in care a mere 20 hours a week (full-time is actually 50 hours a week -- imagine driving time, fighting traffic, dropping off before work, etc.), so I don't have any qualms about calmly telling my child "no" when s/he wants a new something. And this year, my son is getting hand-me-down (but very nice!) wooden toys for his birthday, plus a Chuck-e-Cheese party (he's been asking for a year, after all). I still expect to spend about $150.

Am I spoiling him? I really don't think so. Last year we spent $75 and provided his class with cupcakes and some party favors. It's just the cost of having a party, period. And while I love being frugal, some things are just worth the money.

Anyway, that's my two cents on the cost of having a child. What about you? How much did you spend? How did you cut corners and save money? I'd like to know.

On a local scale...

I read A LOT of personal finance blogs, and several of them recommend putting bills and such on credit cards to reap the rewards offered. So, I thought I would try it with my American Express card. I mean, I get 1%, 2% or 3% of my purchase back, right?

Well, 30 days into this experiment, these are the numbers:

Previous Balance: $618.99 (from last month -- and was paid off)
Payments: $-1,268.99
New Charges/Adjustments: $2,243.49
Outstanding Balance: $1,593.49 (after paying $650.00)

The amount of money in my checking account: $831.00. $150 of that will go into various savings account (can you hear the sounds of pain? This saving thing is really, really hard). So, I'm taking $800 from a 0% credit card and applying it to my American Express card. Now, before you say, "Oh, yeah, well why did you spend $2200 in a month?" remember that $1200 is daycare. Yes, daycare. We had to pay the first month, plus $300 registration, $30 for key fobs, etc. etc. So, it all went on the card, primarily because sexy husband works for a university and didn't get paid for 10 days over the holiday. So let's see how the numbers stack up, reward-wise:

$2243.49 x .01 = $22.43

The cost of not being able to pay it off the end of the month, in interest:

$1593.49 compounded daily at 17.21% (.0472 daily interest rate) = $26.14 a month. So, if I can't come up with the rest of the money the end of this month, I will lose 3.71. If I can come up with the money, I will have cost myself a lot of stress for...$22.43. Is it really worth it?

And on a global scale...

Most notably, one of the farmers featured in this article from the New York Times saved $300 in a year -- more than twice his annual salary. Whether it's a homestead mentality or the mentality of those in the developing world and/or immigrants, clearly saving is the way to financial stability. Here's an except:

“Part of the good news is that the Dunavants and the Cargills will be in Africa for a long time,” says John Baffes, an economist and cotton analyst at the World Bank. “Those guys are willing to invest a lot of money and to buy in good years and bad years.”

In parts of Africa where farmers have been rocked by instability of various sorts — from H.I.V. to civil war to abusive, government-run farm corporations — consistency is a welcome virtue. “For Africans who have struggled with globalization,” Mr. Baffes added, “this is a validation.”

IN his small shop, Mr. Okelo knows nothing of global developments in the cotton trade even though he is a direct beneficiary of them. He started farming during the lean years in Uganda, after the ouster of the country’s notorious dictator, Idi Amin, when the cultivation of cotton lagged so badly that production nearly ceased and farmers treated the crop like a weed.

A few years ago, as Uganda’s production began to revive, Dunavant’s trainers taught Mr. Okelo to grow cotton in straight rows and to use a string to measure precisely the distance between rows, to maximize plantings. Mr. Okelo’s new methods are basic, but in a part of Africa where farmers work the land chiefly with a hoe — and tractors, fertilizer and pesticides are rarities — even basic improvements can lead to large gains in production.

“Cotton is the crop that gives farmers the best money,” Mr. Okelo said. “I want Dunavant to be even closer to me.”

I have marked Dunavant and Cargill as companies to investigate for investment purposes; I like the fact that they are supporting thousands of small farmers in Africa. If only our society still supported small farms!

Our First Investment: Sweat Equity, Part II

This picture shows how we started this project: by removing the awful siding. I was surprised to find that the guesthouse was very well insulated, which explains why it doesn't get terribly hot in the summer (I can work in there without dying of heat). The siding was nailed, screwed down, and otherwise made impermeable, so it took us forever just to get the siding off this one side, and I was covered with an uncomfortable amount of dirt, spider webs and termite droppings (yes, ewww!!!).

In Tucson termites are ubiquitous. We are currently ignoring the termite problem in our own house until we have enough money saved we can pay to get it treated outright. That might take a couple months, but since they've been eating my house for more than 2 years, 2 months probably won't make all that much of a difference (I may retract this when/if the roof falls in on our heads). Since the main house is made of cinderblock, and we are planning to replace the roof in the next two years, we decided to let the termites finish their lunch rather than cut their lives short with the power of American Express.

In this photo to the right, you can see that grass was growing into the insulation. In Tucson, bermuda grass is another ubiquitous pest. I gave up my back yard to bermuda grass after our first year here; an arroyo runs behind our house and I would have had to poison the very ground to stop the grass from coming in from under and over the fence. It just goes to show how invasive it is, that it is invading the guest house itself!

Now I have a confession to make. We spend $80 a month on a gardener and I have no plans to stop that anytime soon. I love our gardener. I want to marry our gardener. We lived with a "ghetto yard" for four years, and I cringed whenever anyone walked up our weedy, disorganized sidewalk, stepping over children's things, to get to our door. Finally I noticed an older gentleman who took care of several yards in our neighborhood, and asked what he charged. He actually charges $40 a month for just the front yard, but finally we asked him to do the back yard too. It's a steal. He seems to be perfectly happy charging a minuscule amount for what seems like a herculean task to me. I will give up fashion and lattes to keep my gardener. Some things are simply worth the money. This morning I found my back yard freshly raked, all the wood from the siding stacked against the fence, and several tools my sexy husband left lying in the yard (he is famous for this) stacked on a picnic table. Did I mention I want to marry my gardener? If only because now I can lovingly place those tools where they are supposed to go. Ahem! Good thing this is an anonymous blog. :)

This last photograph is sort of a before picture. It's not before before -- that picture is at the bottom, in another post. As you can see from this photo, however, we added the pathway and some trees. We also poured a real porch for the guesthouse (it was just cinderblocks, and there was no covered porch on the back of the house, when we first purchased this property). I think it is starting to look nice and our live Christmas trees we planted 4 years ago are getting big enough to look like real trees and not seedlings. I hope this makes a nice place for some starving student (and that all this work pays off).

Tips for Frugal Living

From Extreme savings 101:

Pat Veretto, editor the frugal living section at About.com, says that she was "born frugal," a skill later refined by single parenting. Frugal living, she says, is simply getting the most from the resources you have.

At another great site, I found these words of wisdom:

The women of the Great Depression in the 1930’s knew frugality. One of their battle cries was “Use it up, wear it out, make it do, or do without.” I use this simple rhyme as my frugal checklist with dealing with one of my wants or needs.

The Plan with a Capital P

This year we want to save money in an emergency fund, pay off our credit cards and reduce our debt by $10,000. In order to do this, we have had to make some changes in our lifestyles. Here are our major expenses in order of amount per month:

1. Eating out
2. Childcare
3. Mortgage (yes, childcare is more!)
4. Student loans
5. Credit card payments
6. Savings
   
7. Insurance (life, auto, medical)
8. Utilities
9. Groceries
10. Entertainment (other than eating out)

Did the "eating out" jump out at you, above mortgage and childcare? Yes, eating out. We usually eat out 3-4 nights a week, plus we have been eating at restaurants during lunch. SH and I each spent $50/week on restaurant lunches, plus another $150 a week eating out as a family. That's a monthly total of $1000 spent on restaurants. Not only have we packed on the pounds from constantly eating in restaurants, we have spent enormous amounts of money while running up credit cards. Why?

My parents always eat out. I don't like cooking when I get home from work. It's convenient. We're foodies, so we don't eat out at fast food -- it's a real restaurant or nothing. I feel guilty about spending money on nice clothes or shoes and can't bear to spend $25 to get my nails done but food is a staple, right?

Oh, the reasons. The reasons.

I have limited us to $75 a week for eating out, period. That means one reasonable family dinner and one lunch apiece.

This has been a huge and difficult change for us. I was up until midnight last night, chopping and sauteeing. I just can't eat Rice-a-Roni; when we do cook, we make it from scratch. But I guess I will have to get over that with this new Plan. Or figure out how to do it faster.

In this article about a family scraping by on $150,000 a year (couldn't we all be so lucky?) this author makes this comment:

Some cutbacks, of course, will be necessary to accommodate your now lofty savings goals. Most people trying to break the paycheck-to-paycheck habit focus, as the Schuetts have, on the "latte factor" - the little luxuries (like a daily dose of java at Starbucks) that add up over time.

Don't fool yourself. Small economies are just that: small. If you're really serious about getting a handle on spending, you need to identify the big-ticket drains on your cash flow - and there are always one or two - and do what you must to plug those holes.

If you're honest with yourself, you probably already know what you're spending a small fortune on.

Clearly, we're spending a small fortune on the restaurant business. To the tune of $12,000 a year. That's a nice little savings account if I do say so myself. We'll see how much we can keep by the end of 2007...

More Investing for Kids

I really liked this article by Kiplinger about kids and work. I started working at a very young age -- 9 or 10 -- babysitting or doing yard work. I even mowed lawns at that age, with a gas lawn mower, which makes me shudder. I loved saving my money, too, but I never knew how to spend it. And, like many women I know, my parents considered my money to be "family money" while my brother's money was "his money." Even now my parents tend to expect me to take care of the bill because my brother is "stingy" with his cash -- just one of many reasons I don't visit very often. However, my parents never taught me work/life balance. I was expected to work as much as possible, and to go to school and get straight A's. This expectation followed me into college, where the cost of a private school slowly began to bury me financially (I'm still extricating myself). My parents bemoaned the $80-100 they would give me every couple months while I put in 60+ hour weeks while going to school full-time. By the time I was 22 years old, I had had mono once and was facing chronic fatigue from working so much. I graduated from college, went home and slept for 6 weeks.

I hear a lot about the value of a child working his/her way through life, and although I think that is true, I remember how much I envied those kids who didn't have to work all the time. Ironically, most of them are in jobs that make more than I do and, materially, are more successful. I have also opted for a job that doesn't require a lot of extra hours because I am still easily exhausted.

So, my sexy husband and I disagree about paying for our children's college education. If you can't tell, it's something of an emotional issue for me. We have not started a 529 account for either of them, primarily because my husband thinks they should pay their own way. I read that it is better to put money in retirement than in a 529, because loans and scholarships can pay for a child's education but there aren't any scholarships for retirement. Any comments out there?

My first investment: sweat equity

Like so many others, my goal for 2007 is to further extricate myself from debt and increase my net worth by $22,000. My plan? Use more of what I have, and use it better.

I started this financial blog after reading about Boston Gal's Open Wallet. Not only did she inspire me to start this blog, she inspired me to change the way I am investing in real estate.

Boston Gal is able to afford a home in expensive Boston because she rents out her basement. I planned to invest in real estate in 2006 and even went so far as to get the go-ahead from the bank to buy a small house to rent, but I was worried about the risk (and am now glad I didn't buy the house because the market later plunged). However, the house we now live in has a guesthouse. We bought this house five years ago before the housing bubble. It was right at the top of what we could afford and at the time I was a stay-at-home mom, so we talked about fixing up the little guesthouse in the back and renting it out for extra income. It never happened, and the guest house became a dumping ground for extra stuff. The main house is old and was rented out for over 10 years before we bought it, so the owner did minimum upkeep on it. The first two years were years of constant fixing, painting, shoring...you get the picture (we're still fighting a leaky roof and a termite infestation). We just kept fixing this and that and the little guesthouse fell into disrepair -- it doesn't even have electricity now. We upgraded to a new heating/ac system and the electrical box was too small, so we used the guest house breaker and still haven't gotten our electrical box upgraded. Consequently the little house has looked sadder and sadder. Today I decided I was ready to bring in the new year, and I officially began renovating it by walking outside with a hammer and a crowbar.

I asked my husband if the horrible, falling-apart pressboard siding would be a good place to start renovating and he replied, "As good as any." The little house is now a bit naked with its pressboard siding gone, but we can see some other problems that would have crept up on us now -- grass is growing in the walls! Whoever put on the siding didn't seal it, and we have to rip out the grass and in some instances the insulation. We will finish pulling off the siding and then put in a security door and new windows, along with fixing the grass issue and putting in a small kitchenette. Here is the budget for the guesthouse:

Replace electrical box on main house and restore electricity: $1200
New siding + paint: $500
2 new security doors: $300
Sheetrock: $200
Kitchen sink: $200
Stove: $250
Fridge: $250
Counter and cupboards: $400
Wood and plumbing supplies: $300
Insulation: $50
New swamp cooler: $350
______________
Total: $4000

We will try to pay for the cost of renovation outright and doing it ourselves should help with some of the cost. I have a potential renter for the summer, so we hope to get it done by then by doing the work on our weekends.

I probably won't get more than $350/month in rent -- after all, it's just a studio and doesn't even have parking -- but we are just over a mile from the university, so our location is in our favor. If we can rent for one year we will make back what we put into the guesthouse, not including the fact that fixing it will make our own property worth up to $15,000 more. Plus, a $4,000 investment is peanuts compared to buying another property -- we would have had to come up with twice that at least for a down payment on a small house. So, overall I am excited about our decision to invest in our own property and hopefully our potential renter comes through this summer, or we can find a suitable student to take her place.

This picture is of the guest house when we bought this property. We have since planted trees and grass has grown in all on its own, so it's slightly more scenic, but the guesthouse itself looks essentially the same. The only change is that the red door has totally disintegrated and is now just propped against the opening. I will keep posting pictures throughout the renovation and you can watch our progress -- and see if we can keep to our budget. Happy New Year!