Frugal Friday March 6

Lots of good tips from the frugalosphere this week.

But first, I need to mention that I have just this morning read the 166th edition of the Festival of Frugality,  which came out February 24th.  Of the five “Editors Choice” links featured at the top, three were featured here in previous editions of Frugal Friday.  My first thought was, of course, that I was a victim of plagiarism, until I realized that the festival came out first.  I then realized that this is just the inevitable result of thoughtful people searching for the best and most practical frugal hints.

As a follow-up to last week, Heather at The Greenest Dollar continued her series on transport-themed alternative housing, this time discussing living in railroad cars rather than shipping containers.  But once again, she loses me when she discusses buying rather than finding the cars.  That’s just not in keeping with the latest trend in frugal-land, the Substance Abuser Lifestyle, or SAL.

Speaking of which, Queercents brings us news of the latest SAL development, gold parties.  It’s like a Tupperware party, only instead of the participants buying plastic containers, they all bring gold items they “own” to sell for cash.  This is especially important in suburban areas that often lack access to services city dwellers take for granted, like pawnshops and fences.

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Frugal Friday Feb. 27

Another quiet week in the frugalosphere.

In a follow-up to last week, I must report that Almost Frugal gave into temptation and bought a new dishwasher after all. This in spite of the dozens of encouraging comments she got, cheering her on in her efforts to live dishwasher-free. It almost makes you wonder why she bothers blogging if she’s going to lose her mind and spend money like a drunken sailor.

Speaking of blogging, today’s Little People Wealth has helpful post about how you can get some free cheese. All you have to do is review the cheese on your high traffic cheese-related blog. Finally, a tip we can all use.

As true devotees of frugalism know, being frugal is not merely a way to get rich, it is a lifestyle. Frugal posts this week explored taking this further and transcending the Frugal Lifestyle (FL) and living what might be called the Substance Abuser Lifestyle, or SAL.

Money Saving Blog brings us a list of 20 things in your house you can sell. This post begins with the commonplace observation that “the first thing that I do when I suddenly realize that money is getting tight towards the end of the month is to look around my home to see if there is anything that I can sell.” This is a good start, but I think that really living the SAL would mean looking around in other people’s homes for things you can sell.

Bargaineering suggests Dumpster Diving. The post is short on details, but apparently in some garbage heaps there are more things you can sell.

The Greenest Dollar picked up the SAL pace with a post on living in shipping containers. It’s an informative post, but the author lost my interest when she started discussing how much it costs to buy a container. Of course, a serious SAL practitioner would find one.

Not to worry. Tight Fisted Miser has an informative post, with a follow-up the next day, on what he calls “Extreme Frugal Housing Options.” His first suggestion is to live in a van, which he thinks he would really enjoy, but concedes that his “GF” would not. (I’m not sure what GF stands for. In context, girlfriend seems unlikely. Goldfish? Grandfather?) If not a van, he suggests an RV, which again he worries that GF would not like. Also, they’re hard to handle on the road and burn a lot of gas. But, then again, there’s no room for a dishwasher.

IRAs: Roth and the Other Kind

Poke around the blogosphere and personal finance punditocracy and you will find lots of positive references to Roth IRAs and virtually no nice things said about its dull older brother, the traditional IRA. If you didn’t know any better (and why would you?) you might assume that the younger and hipper Roth IRA was the way to go. After all, it is the cool new thing and the latest in retirement savings technology. Here’s a rundown of the differences and why you are likely to want to go with the unhip kind after all.

IRAs come in two basic flavors. There is the traditional old-style IRA, in which you put pre-tax money, i.e. your contributions are tax deductible, and then later in life pay taxes on your withdrawals as if they were income. And there is the relatively newer type, a Roth IRA, in which contributions are post-tax, i.e. not deductible, but withdrawals are tax-free.

Which is for you? Obviously, you want the one that will wind up making you more money. To tee that up, consider the following.

Tom Traditional and Robbie Roth have identical incomes, and so pay identical tax rates, and they both have $3,000 a year of that income that they wish to put in an IRA. Obviously, each picks the type that matches their name, so Tom puts in the full $3,000 each year and Robbie puts in $2,250 after paying taxes of 25%. The years pass, and they make identical investment decisions until they retire on the same day. Tom’s account is, of course, larger but he needs to pay 25% taxes on anything he takes out, while Robbie can withdraw tax free. Here’s the big question: after Tom pays taxes on his withdrawals, who has more money to spend?

The answer, which seems to surprise a lot of people, is that they have exactly the same amount of money. Assuming the tax rate going into the Roth is the same as the one coming out of the traditional, the financial benefit of the accounts is exactly the same. Fire up Excel and run the numbers yourself if you don’t believe me.

So why do the advocates of saving seem to universally prefer Roths? It’s not about numbers, it’s about conceptual appeal. Saving is about sacrificing now for a benefit in the far-off future. With a Roth, you pay taxes now so you can not pay taxes later, and that has a big attraction to the savings crowd.

Symbolism aside, there are good reasons to choose one type of IRA over the other. Primarily, which one is better depends on the tax rate you pay now and the one you will pay when you are retired. Tom and Robbie came out equal because they always paid 25%. If the tax rate had been 25% when working but only 15% during retirement, then Tom would have wound up ahead because he would avoid the 25% and only pay 15%. Conversely, if the rates were 25% while working and 35% when retired, then Robbie would be better off.

Occasionally you see the pro-Roth argument that given the fiscal problems the government has now and is likely to have in the future, tax rates will inevitably rise. That sounds perfectly reasonable, but it is worth reflecting that the same thing could have been said for the past 30 years and so far it’s been wrong. Predictions of what Congress will do in future decades is hardly a sound basis for your retirement planning.

On the other hand, predictions of how much money you will be making in retirement, and so which tax bracket you will be in, are more practical. If you have a Roth, you are betting that your income, and your tax rate, will be higher in retirement than it is now. That’s some bet. (You do understand that in retirement you won’t have a job, don’t you?) Furthermore, choosing a Roth over a traditional is doubling down the bet on your own future prosperity. If you wind up being a rich retiree, you’ll be happy you have a Roth because you won’t pay high taxes on the withdrawals. But if you wind up a poor oldster you’ll wish you’d picked traditional, because you’d have more money, even after paying the (lower) income taxes on what you take out.

There are other factors to consider when choosing between the two types of IRA. (There’s a nice rundown here and here.) But they are all secondary to the tax rate issue and some of them are pretty esoteric. In the big picture, what matters are tax rates now and when retired. And for many, if not most, people that means that an old-school traditional IRA is a better choice, even if it lacks hipness and the frugal appeal of paying more now for a benefit far in the future.

Frugal Friday Feb. 20

It’s that time again! Here is this week’s highlights from the Frugalosphere.

Lots of questions, sublime and mundane, were asked and mostly answered this week. Lazy Man and Money asked if wine tasting was a frugal hobby. Why, yes, it is. Wine drinking, on the other hand, could set you back a few dollars. Free Money Finance asked Should Christians Have Life Insurance? Again the answer is yes, provided you do not buy more than you need, which apparently raises thorny theological issues. (Possible follow-up posts: Should Muslims Drive Volvos? Should Jews Own a Tivo?)

Frugal Friday the 13th of February

It was a quiet week on the frugal front. It seems like every blog had the same Valentine’s Day hints. The most common tip for saving money was to ignore the holiday entirely, but failing that, you could celebrate it late, when the candy goes on sale.

There was some mention of Lincoln on the occasion of his 200th birthday. There was no mention of Charles Darwin, a reasonably important figure in some places, who was also born on February 12, 1809. That Darwin doesn’t rate in Frugal Nation isn’t that surprising. According to The Economist, only 14% of Americans believe that humans evolved over millions of years. The scientifically minded can take heart in the fact that the trend is actually up. In 1982 only 9% believed in human evolution.

Of course, to the frugal, Lincoln is closely associated with that enduring symbol of saving really small amounts of money, the penny. Free Money Finance had an informative post of facts about the penny, including that 63% of Americans think we should keep using them. That’s actually not that high, if you think about it, and shows that at least 37% of Americans are insufficiently frugal. Imagine how much worse it would be if it was widely understood that it costs 1.2 cents to make a penny. (It takes a special kind of government to mint coins at a loss.)

According to Coinstar, which supplied the penny facts to Free Money Finance, the average American household has $90 in coins lying around. Based on the handy converter on their home page, that’s about half a gallon of change. What to do with this hoard of metal disks is of course a concern for the frugal. Dawn at Queercents suggests that you put it in a tin container rather than a glass one. Seeing the money will make you want to spend it. She also suggests other clever ways of hiding money from yourself, including inflating the values of the checks you write in your check register so that your balance is actually higher than you think it is. This has inspired me to convince myself that I belong to a high-end gym and to record imaginary large monthly checks for the membership fee. I think this will work as long as I don’t notice that I am not losing weight.

Speaking of losing weight, Frugal Living Tips suggests saving on food bills by foraging for things to eat in the woods. Not only will you save money, you will lose weight because of the exercise you will get and because you will find so little to eat, especially in February.

And finally, Tip Hero has a post about saving what must surely be many small copper disks with Lincoln on them by making your own half and half for your coffee. The recipe given is one quart light cream to one quart milk. No word on what to do if you need less than half a gallon of the stuff, but you can use that glass bottle you used to store loose change in.